Goodyear Tire & Rubber Co (GT) 2013 Q4 法說會逐字稿

Good morning, my name is Tony and I will be your conference operator today. At this time, I'd like to welcome everyone to the Goodyear Tire & Rubber Company fourth-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, Treasurer, and Investor Relations.

Thank you, Tony, and good morning, everyone. Welcome to Goodyear's fourth-quarter 2013 conference call. Joining me today are Rich Kramer, Chairman and Chief Executive Officer; and Laura Thompson, Executive Vice President and Chief Financial Officer.

On today's call, Rich and Laura will discuss our fourth-quarter results, along with the outlook for 2014. However, before we get started, there are a few items I need to cover.

To begin, the supporting slide presentation for today's call can be found on our website at investor.goodyear.com, and 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 our earnings release. The Company disclaims any intention or obligation to update or revise any forward-looking statements, whether as a result of new information, 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 the US GAAP equivalent as part of the appendix to the slide presentation.

With that, I will now turn the call over to Rich.

Great. Thank you, Tom, and good morning, everyone.

Before we get started, I'd like to take a moment to welcome Laura Thompson to her first conference call as CFO. A few of you may know her from her role as Investor Relations Director about 12 years ago, and I'm sure some of you have had a chance to meet or talk with her the past two months. Laura has made a seamless transition into the CFO role, and I have complete confidence in her ability to help us execute our strategic plan and keep us on our current path, so officially, welcome, Laura.

Now this morning, I'll provide a few highlights for the quarter and discuss some key actions we've taken already in 2014. Then I'll touch on highlights from our four businesses, before turning the call over to Laura to review the financials in detail and review our outlook.

As you saw in our news release this morning, the fourth quarter was an outstanding conclusion to our record-setting year. Our segment operating income in the quarter was $419 million, up 54% from last year.

For the full year, segment operating income was up 27% to $1.6 billion, exceeding our October guidance and the highest ever achieved in Goodyear's 115 years of existence. It's also the third consecutive year we've delivered more than $1.2 billion in segment operating income, another first in our history. This outstanding performance contributed to free cash flow from operations that reached $1 billion for 2013.

Now as pleased as I am to report these results, I believe it's more important to view this as evidence of the soundness of our strategy, our ability to execute against that strategy, and outstanding performance by our teams across the globe. Slide 4 summarizes the progress we've made executing our strategy, resulting in study segment operating income growth and positioning us well for that growth to continue.

Our team has consistently met our goals, doing what we say we are going to do. Needless to say, I'm pleased and proud of the men and women of Goodyear for delivering this level of performance.

As I said many times, we are not measuring success by the quarter or the year, but by continued progress toward our destination of creating sustainable economic value. That theme has not and will not change.

As you look at our strategy road map on slide 5, you'll see we've highlighted our pension challenges. In my 14 years at Goodyear, our legacy obligations have been a constant source of underlying volatility to the business.

In 2008 we addressed our retiree-medical obligation through the innovative VEBA structure. Now I'm very happy to report that within the past three weeks, we have fully funded our largest US hourly pension plans. By doing so, we've paid off our biggest remaining pension obligation and successfully executed a plan that we've previously discussed.

Today the strength of our business is validated by how we met this responsibility. Rather than having to access the debt markets to fulfill our pension obligation, we funded the plans with cash. Our strong cash-flow performance in 2013 and our ample liquidity enabled us to fully fund our US hourly pensions using 100% cash generated from operations.

In addition, this action drives long-term shareholder value and is consistent with the balance capital allocation plan we unveiled in September. This is a major milestone in Goodyear's 115-year history.

For more than a decade, we've been dealing with the volatility associated with legacy obligations; even so, we've always maintained our commitment to meet these obligations. Now we are pleased to have fulfilled that responsibility.

This action marks the successful conclusion of a critical stage in our Company's evolution over the past 10 years: our turnaround efforts to span 2004 to 2007, we navigated the global economic downturn in 2008 and 2009, and we introduced and begun implementing our strategy road map in 2010. With our legacy obligations essentially behind us, we can devote 100% of our efforts to creating competitive advantage.

This year we are taking our next step toward creating sustainable value, achieving 10% to 15% annual segment operating income growth over each of the next three years, while generating significant free cash flow to execute our balance capital allocation plan.

As noted in our news release, we are reaffirming the 2014 to 2016 financial targets we spelled out at our Investor day in September. And Laura will have more to say on that in a few minutes.

During the fourth quarter, we saw industry volumes recover, but that recovery is mixed and not balanced globally. Our volumes grew 2%, in line with our guidance, and we saw volume growth in three of our four businesses.

Latin America was negatively affected by a couple of unique situations. We faced some headwinds in Venezuela related to labor negotiations, as well as lower volumes in Brazil, as OEMs reduced production there.

Growth continues to be strong in our targeted market segments, and we are confident that our brands and our value proposition will allow us to capture this demand in all regions. Remember we are not pursuing volume for volume's sake. Our team remains disciplined in our approach as we pursue profitable volume growth.

While we see signs indicating general economic recovery around the globe, we also remain vigilant with respect to the emerging markets and the related macroeconomic and currency concerns associated with these regions. As a global enterprise, we successfully operated in these markets for generations; our management teams have experienced and seasoned leaders.

We are fully aware of how quickly these markets can grow and contract, and while we may face some near-term headwinds in these regions, we have always taken a long-term view. We continue to hold our conviction that the emerging markets, particularly in Asia and Latin America, will lead global growth in the tire industry. Bumps along the way are to be expected, but will not deter us nor change our view.

Overall, as a total Company, we are confident in our ability to grow our volume profitably and expect about a 2% to 3% increase in volumes in 2014.

Now before commenting on our business units, I'll address what has been an ongoing matter, and that is the closure of our Amiens North factory in France. In January we ended tire production at the factory, which will close during the first quarter on terms largely in line with our expectations.

As we stated previously, this closure and the subsequent exit from the EMEA farm tire business is expected to result in about $75 million in annualized savings. Again, Laura will provide more details on the timing of these savings in a few moments.

Getting back to our business units, there was evidence of continued business improvement in the fourth quarter, even though there was market and economic volatility. Our North America business continues to deliver excellent results and has built strong momentum as we move into 2014. North America's 2013 segment operating income was a $1-billion improvement over 2009's full-year loss of $300 million. It's a remarkable accomplishment and a landmark achievement for Steve McClellan and his North-American team.

We expect continued moderate economic growth in North America, as many of the key economic indicators are trending positive. Employment levels, miles driven, and commercial fleet ton miles, just to name a few, are on the rise, which will provide the platform for OEM replacement industry growth.

I will note that the extreme cold weather in much of the US will undoubtedly affect volumes for the first quarter, as many retail locations had to close for several days. However, our dealers don't expect that full-year volumes will be affected.

Even with the positive trends, we are not resting on our laurels. With the changes North America has made to its business model, we believe these results are more than sustainable. And as we enter this post-pension era, we are focused on continued earnings improvement on delighting customers and creating competitive advantage.

I'd like to make a few comments about our annual North America Dealer Conference, which was held two weeks ago in Nashville. The event was one of our biggest ever, with the highest customer attendance in 10 years.

One of the highlights of the meeting was the enthusiastic response to our newest consumer replacement product, the Assurance All-Season. This tire was introduced for the largest segment of the market, the commuter mid-tier segment, where we believe it will be a winner with both dealers and consumers.

Overall, the business meeting and the reaction we've heard since reflect a high level of confidence and commitment to the strategy for both our associates and our customers in North America. The alignment between our team, our customers, and our strategy was the best I've ever seen. It really exceeded my expectation.

We've always believed that if you want candid feedback about your business, listen to a customer. We heard overwhelmingly positive comments about our strategy and our commitment to helping our dealers build their businesses. We are clearly on the right path, and we expect our positive momentum to continue in 2014.

In EMEA, our business made solid improvements in the fourth quarter, ending on an up-note with segment operating income over $100 million. Of course we have work to do, but our profit improvement plan adding to the Amiens closure, is beginning to deliver. Our disciplined approach to price, mix, and cost drove our fourth-quarter segment operating income improvement.

Winter volumes in the fourth quarter started strong, but lost steam as the weather in our key markets proved to be relatively mild. Weather has been more severe in some regions of Europe this year, but at this point, it largely affects dealers' sell out of existing inventories. Ideally, the late winter weather should bode well for the 2014 sell-in season.

Even so, our optimism at this point must be tempered by dealer caution after several mild winters in a row. We do for good about our competitive position and our product portfolio heading into the summer selling season, and are off to a good start in January.

Our new tire line up includes the Dunlop Street Response 2, adding to our established offerings of industry-best label grades. In addition to that we expect to have an improved winter product portfolio in advance of the 2014 winter selling season.

EMEA volumes will benefit from the economic recovery in the euro zone and we expect to see industry consumer replacement volume growth of up to 5% in 2014. The team continues to make progress on our profit improvement plan in EMEA. This plan, you'll recall, is focused on increasing share in targeted market segments, on accelerating growth in emerging markets, and driving productivity improvements in our operations.

We are seeing good progress in all three. So with Amiens behind us and continued execution of the profit improvement plan ahead of us, we look to return EMEA to its historical margins by 2016.

In Latin America, we continue to work through challenges of a volatile political and economic environment, especially in Venezuela and Argentina. Currency fluctuations also remain a factor in the region.

In Venezuela, the confluence of severe inflation, currency devaluation risk, price controls, and social unrest have increased the complexity of our ongoing labor negotiations. As a result, our production levels have been negatively affected.

We are confident in our ability to navigate these challenges, as we have a the past, but we expect the headwinds and volatility to continue during the first quarter. Still, and to be clear, the situation does not change our 2014 outlook for total Company segment operating income increase of between 10% to 15%.

As we look ahead, our Latin America business continues the process of repositioning its products toward more profitable targeted market segments and replacement versus original equipment. As in other regions, we will continue with our selectivity strategy, and we are confident that any short-term disruption will lead to improved profitability.

During the fourth-quarter the team launched three exciting new consumer replacement products: the Assurance tire the Eagle Sport tire, and the new Wrangler SUV tire, that were all enthusiastically received by our dealers in Brazil. We are competing in the right targeted market segments in this region, and we expect that the sales volumes for these new products will begin to ramp up in the first quarter. In addition to the new products we released, our Americana modernization investment is also on schedule to support our growth in these targeted market segments.

Our Asia-Pacific business continues to perform well and will benefit from solid growth in China and India. We continue to grow in China, where high-quality products from our factory in Pulandian are helping us gain share in targeted consumer market segments and grow our commercial truck tire business.

We are seeing solid returns from our Cap Ex investments in China, where our products are increasingly recognized as industry-leading. Our Goodyear S-200 truck tire line, our EfficientGrip SUV tire, and our Assurance TripleMax passenger car tire were each recently awarded tire of the year honors by leading magazines in China.

Looking ahead, we see depreciating currencies, continued weakness in the Australian economy, and further reduced demand for OTR tires in the region. We are prepared to deal with these headwinds, taking the requisite mitigating actions to deliver on our stated plan.

I'm very pleased with the results of the fourth quarter, and believe our 2013 performance should give you confidence in the targets we set for 2014 and beyond. As we look at the past year, we can be proud of what we've accomplished and the changes we have made to make Goodyear a stronger, more competitively advantaged Company.

We achieved record segment operating income of $1.6 billion; we generated free cash flow of $1 billion; we fully funded our major US pension plans, addressing this legacy obligation; we ended production at our high-cost facility in Amiens France; and we initiated a balanced capital allocation plan, including the shareholder return program.

As a result, Goodyear today is a stronger Company that continues making significant strides toward the destination of creating sustainable economic value, by being first with customers, by being the leader in targeted market segments, by being the industry's innovation later, and as a result, being a Company that will be consistently profitable and cash flow positive throughout the economic cycles.

For many years, we asked you to have faith in our strategy and trust our ability to lead Goodyear to new levels of performance. We believe we have done that. We've built credibility with our customers and our investors by living up to our commitments. Now we are ready to embrace the opportunities ahead with an even greater degree of confidence and commitment.

Now I'll turn the call over to Laura.

Thank you, Rich, and good morning, everyone. It is a pleasure to be here in my new role, taking over for Darren Wells, who occupied this chair for more than 40 consecutive quarterly conference calls, before becoming President of our Europe, Middle East, and Africa region last December.

While I have had many roles at Goodyear, I have particularly enjoyed those where I have interacted with the investment community. I'm looking forward to working with all of you more in my new position. I'm very proud of the many accomplishments we've achieved at Goodyear over the last several years, and I'm looking forward to continuing to execute on our strategy and achieving our targets.

Today I will cover our fourth-quarter results, which conclude a record-setting year and provide some specifics regarding our outlook for 2014. We will then open the call for your questions.

Let's turn to slide 11 and review a few key items on the fourth-quarter income statement. Volume in the quarter was up 2% within North America, EMEA, and Asia business units, showing increases year over year.

The growth we achieved was the right volume growth, that is, focused in the right segments and generating good returns. This marks the third consecutive quarter of volume growth for the Company and supports our belief that volumes have stabilized and have begun to recover.

For the quarter, revenue was down 5%, or $254 million, and is more than accounted for by two items. First, lower non-tire-related sales of $178 million, which is driven primarily by lower third-party chemical sales, which declined as raw material prices decline. Second, the impact from unfavorable foreign currency exchange of $102 million.

We generated gross margin of 23% and improvement of 430 basis points versus the prior year. Selling, administrative, and general expense increased by $29 million, reflecting an increase in advertising and marketing expense and higher incentive compensation. We achieved $419 million in segment operating income, or 8.7% in SOI margin, up from 5.4% in the fourth quarter of 2012.

Our earnings per share on a diluted basis for the quarter was $0.84. Our results were impacted by certain significant items, and after allowing for those items, our adjusted earnings per share was $0.74. A summary of those significant items can be found in the appendix of today's presentation on slide 24.

The step chart on slide 12 walks fourth-quarter 2012 segment operating income to fourth-quarter 2013 segment operating income. Lower raw material costs of $172 million more than offset reduced price mix of $74 million for a net benefit of $98 million.

Strong cost savings for the quarter of $114 million more than offset the $77 million negative impact of inflation. Higher sales volumes improved operating income by $11 million, while the improvement in unabsorbed overhead from producing almost 3 million more units was a benefit of $55 million. Overall, we feel very good about the quality of our earnings in the quarter.

Turning to the balance sheet information on slide 13, cash and cash equivalents at the end of the year were $3 billion, up from $2.3 billion at the end of 2012. However, post year end, reflected on the slide, we utilized $1.15 billion to fully fund the hourly US pension plan.

Net debt totaled $3.3 billion, an increase of $448 million, compared with a year ago. You may recall we fully funded our frozen US salary pension plan in the first quarter of 2013 by issuing $900 million of debt. That debt increase was reduced by more than $400 million of cash generated by the business.

Free cash flow from operations is shown on slide 14. During 2013, we generated more than $1 billion of free cash flow from operations. This is an improvement of over 40% from the $701 million generated in 2012. In addition to the benefit from higher earnings, working capital was a benefit of $415 million, driven by successfully managing our working capital throughout the year.

Moving now to the business units on slide 15, I will start with North America. North America reported fourth-quarter record segment operating income of $199 million, or 9.3% to sales. This is an increase of more than 70% and shows the strong momentum the North American team has built.

North America unit volumes were up 2.6%, with growth in both the consumer and commercial businesses. Our overall volume growth was predominantly driven by demand for our industry-leading Goodyear branded tires. The fourth quarter reflects our highest sales volume in the last eight quarters.

North America realized a raw material cost benefit of $106 million in the period. While our mix remained positive, price mix taken together was lower by $61 million, partially attributable to raw material pass-through agreements with OE, fleet, and OTR customers. Similar to prior quarters, our manufacturing cost benefited from lower USW profit sharing of $13 million and lower pension expense.

North America's full-year segment operating income total $691 million, the highest ever achieved in North America. The assiduous implementation of our key how-to's, including: targeting profitable market segments, mixing up in products through market-back innovation, and focusing on lowering our costs, helped deliver these record results.

North America's full-year 2013 segment operating income had almost 8% of sales result in a return on invested capital that generates significant and sustainable economic value.

Europe, Middle East, and Africa delivered segment operating income of $101 million in the fourth quarter, a significant improvement over last year's $38 million. SOI margin increased to 6.2% from 2.4% in the prior year. The fourth quarter was the third consecutive quarter with year-over-year volume and earnings growth.

European industry continued to show signs of slow but steady recovery, with 2% growth for both consumer replacement and commercial replacement, compared to the same quarter last year. Overall, market growth versus the prior year was below our expectations, due to a mild winter in Europe.

In our consumer business, our sales volume was up year over year. Volume growth was driven by continued strength in summer tires, where our success is based on industry-leading label grades and share gains in high-performance segments. This growth in summer tires more than offset the soft sales in the winter segment.

EMEA's performance in the fourth quarter also reflects continued success in commercial truck, where we had volume growth in our fleet business. Based on our strong product and service proposition, we continue growing share in an expanding industry. Factory utilization increased versus a weak fourth quarter last year, leading to unabsorbed overhead improvement.

As a final point on EMEA, we continue to make progress on our profit improvement plan that we announced earlier in 2013, and as Rich just discussed.

Turning to Latin America, operating income was $52 million for the quarter, $9 million less than the prior year. Positive price mix and lower raw material cost were offset the negative effects of inflation, unfavorable foreign currency exchange, and lower volume. Essentially all of our year-on-year decline in earnings can be explained by our investment in advertising and marketing to support the three recently launched consumer products in Brazil.

The lower volume in the quarter was attributable to two factors. First, labor negotiations with the union representing our associates in Venezuela occurred during the quarter. These negotiations continue today, and while there has not been a work stoppage, there has been a significant slowdown in productivity.

The reduced production impacted product supply and accounted for more than half of our volume decline in Latin America. These labor-related issues, if they were to continue through the end of the first quarter, could have a negative impact of up to $15 million to $20 million versus the fourth-quarter results. In addition, consumer OE volume declined, as the OEMs in Brazil reduced production.

Let's take another minute on Venezuela to emphasize a few points. First, while the current issues in Venezuela will certainly not make our task any easier, we do not see them limiting our ability to hit our 10% to 15% SOI growth target.

Second, in the event a devaluation would occur, for every 10% decline in the Venezuelan bolivar, there is a gross negative impact on our earnings of approximately $20 million. However, that is only part of the equation.

The other part is that we have demonstrated numerous times, and as recently as a year ago, the ability to offset this impact over time. We would work toward and expect a similar outcome if the currency devalued in 2014.

Third, we have an experienced team in Venezuela, and we are confident in their ability to work through these issues. And we remain committed to our business in Venezuela.

Our Asia-Pacific business reported segment operating income of $67 million for the fourth quarter, representing almost an 18% increase over the prior year. Positive price mix, net of raw material cost, higher volume, and lower startup expenses associated with our facility in China, were offset partially by unfavorable foreign exchange and reduced profits in Australia.

The SOI margin in the region increased to 12.5%, up significantly from last year's 9.7%. In Asia-Pacific, our volume of 5.6 million units was 8% higher than a year ago, as we continue to have strong growth in China and India.

Turning to slide 16, I'd like to spend a few minutes covering in more depth the impact of the recent pre-funding and freezing of our hourly US pension plan. Our global unfunded pension at the end of 2013 was $1.9 billion. This result reflected an improvement of $1.6 billion over the prior year, given contributions of $1.2 billion, and about a $400-million benefit from rising discount rates.

When adjusted for our $1.15 billion contribution in 2014, our unfunded obligation currently sits at about $700 million, which is primarily comprised of numerous international plans.

We expect total pension expense savings from pre-funding and freezing the hourly US plans of approximately $225 million over the next three years. This includes pension expense savings of $50 million in 2014.

Following the pre-funding, we have no required cash contributions into our US plans. The pre-funding improves our cash flow by $175 million to $250 million in each of the next three years.

Our financial targets for 2014 to 2016 are listed on slide 17, and they remain unchanged from our investor day presentation last September. These financial targets are: annual 10% to 15% segment operating income growth per year through 2016, delivered through a balanced plan of unit volume growth and cost savings; annual positive free cash flow from operations; and achieving an adjusted debt-to-EBITDAP ratio of 2.5 times by the end of 2016.

The key segment operating income drivers for 2014 are listed on slide 18. In the line with our 2014 to 2016 targets, we see sales volume growth of 2% to 3% for 2014, as recovery in EMEA and continued growth in North America offset the impact of macroeconomic and currency volatility in emerging markets, particularly in Latin America.

As you may recall, our quarterly sales volumes can fluctuate somewhat due to seasonality and macroeconomic conditions. That said, we expect increases in our tire production volumes will generate approximately $75 million to $100 million in benefits from lower unabsorbed overhead for the full year. We expect the first-quarter benefit of increased production to be similar to what we delivered in the fourth quarter.

For 2014, we are assuming price mix and raw material cost changes will offset one another. We expect our cost-savings initiatives to fully offset the combined impact of general inflation, as well as our further investments in advertising, marketing, and R&D.

Based on current spot rates, we expect a negative foreign currency exchange impact of approximately $50 million for the year, with most of that occurring in the first half. This $50 million is before any potential devaluation in Venezuela.

We expect the benefits from decreasing start-up expenses at our new state-of-the-art plant in China to be between $15 million to $20 million year over year. However, as we continue to make investments in HVA capacity, the increased costs related to the modernization of our plant in Brazil are expected to be $20 million to $25 million. If taken together, the combined impacts essentially offset each other in our 2014 outlook.

As was mentioned earlier, we will close one of our plants in Amiens France in the first quarter. This will generate approximately $40 million of savings in 2014. The annualized benefit of this closure and the related exit from the farm tire business in EMEA will be approximately $75 million.

Additional financial assumptions for 2014 are listed on slide 19. For the year, we expect interest expense in the range of $430 million to $455 million. Our income tax outlook is to be at a 25% rate of international SOI, which is similar to the 23% we had for the full year of 2013.

There is one additional item regarding income tax that I would like to mention, and this relates to our valuation allowance on our US deferred tax assets. Each quarter, we assess current profitability and whether sufficient future taxable income will be generated to utilize the existing deferred tax assets.

Profitable US results and a forecast of continued profitability lead us to believe that we may be in a position to release all or a portion of the valuation allowance during the second half of 2014. If the valuation allowance is released in its entirety in 2014, the expected increase in annual tax expense for 2015 and beyond would be approximately $150 million per year.

Although, we do not anticipate any US cash taxes for at least five years, and a significantly reduced rate for several years thereafter. The potential reversal of this allowance is further evidence that our business model in North America is sustainable.

Including the positive benefit on earnings of pre-funding and freezing the hourly US pension plans, we expect global pension expense of $150 million to $200 million in 2014. We also expect global pension contributions in 2014 to be $1.3 billion, including the recent $1.15 billion that was put into the hourly US plan.

Given the substantial improvement and working capital in 2012 and 2013, we expect our working capital to be neither a significant source nor a significant use of cash in 2014. Our capital expenditures and depreciation amortization outlook are consistent with the detail we gave in our September investor day presentation. Our 2013 performance confirms that our strategy is working and gives us confidence in achieving our targets.

Now we would be happy to take your questions.

Thank you.

(Operator Instructions)

We'll take our first question from Itay Michaeli calling from Citigroup. Please go ahead, you line is open.

Great, thank you. Good morning and congratulations.

Thank you, Itay. Good to hear from you.

A little more color perhaps, on the price mix outlook for 2014. Maybe Laura, if you could talk about what you're seeing both on the raw materials side and assumptions for price mix. And then what selling margins should we be assuming on your global volume outlook for growth of 2% to 3%?

Sure. So first of all, as you've seen from our results, we have demonstrated consistently the ability to manage price mix versus raws, whether raw materials are increasing or decreasing. We have a very disciplined strategy on pricing, and we price for the value proposition that we bring. The goal is to get paid for the value of our products, whether it's product performance, service, [fran] pool, or technology.

Over time, we still expect raw material prices to increase as global tire volumes increase. In fact, you've seen natural rubber quite low recently but lately butadiene has inched up, and is up I think 10% since the beginning of the year.

Nonetheless, at current spot rates, raw materials on an income-statement basis for us for the first half of the year would be down by approximately 6%, and that would be -- directly impact parts of the business, and some of which are contractual obligations, that have these raw material indexes, OEs, OTRs, and then our fleet business. But we remain focused on our very disciplined strategy on pricing for that value proposition.

Certainly, all of this is taken into account as we stick to those 10% to 15% SOI targets.

That's very helpful. Then two cash flow, balance sheet questions. It looks like with the pension funding being done with cash that you may even be able to get to your 2.5 times leverage target a bit sooner.

I also noticed that in the cash slide, you no longer call out $1 billion of minimum cash. Has anything changed there? Maybe talk about as you deleverage the balance sheet over the next couple of years, what are the other uses of cash potentially, as you get to that target?

Itay, it's a good question. I'm going to hand it over to Tom Kaczynski here to talk about that as well. Tom, why don't you go ahead and respond.

Yes, Itay. I think the way to think about that is a good question to hold up and it over to Tom Kaczynski to talk about as well, give a response back I think the way to think about that is we still do so require about $1 billion on the balance sheet to run the operations day to day.

We had about $6 billion of liquidity at the end of the year, and then you obviously have to subtract the $1.1 billion that we put into the pension. So that really gets us back to historic liquidity levels. We've been running about 4.7 billion over the last five years, so that's the way to think about the day-to-day cash required.

Perfect, and then lastly any guidance on cash restructuring in 2014? I think it was about $72 million last year

For 2014?

Yes

Primarily related to that Amiens France facility?

Right. Is there an actual number that you can guide to?

Yes, I'm sorry, about $200 million.

Got it, perfect

And Itay, the way to think about it, we've been -- we are very pleased to see the progress we've made in Amiens. I can't understate that. As we wrap that up and the actual cash flow timings, we will continue to update you as we go.

Over the long-term, I would bring you back to the capital allocation plan we talked about in September. And we did, as we think about the future, we also have money in our plan, if you will, set aside for future restructuring, as well.

I know that's not the particular question, but it's good to keep in mind as we think about other high-cost facilities around the globe. As we look to the future, we'll continue to be very disciplined in approach to that as well.

Thank you.

Thank you and next we'll move to Rod Lache with Deutsche Bank. Please go ahead, your line is open.

How you doing Rod?

Hi Rod.

Good, congratulations. A few clarifying things, the pension, $50-million savings was not listed on slide 18. Is that baked into one of those numbers or is that something that's separate?

Actually I think it's baked into slide 19. So see the $150 million to $200 million pension expense in 2014?

That number -- if your pension expense was $285 million, it seems like maybe that number might be more than a $50-million decline on a year-to-year basis.

Yes.

Am I missing something there or am I reading it wrong?

No that's exactly right. Right now, we are saying $150 million to $200 million for 2014 versus the $285 million. About half of that reduction, or if you use the range, $85 million to $135 million, about $50 million of that is from the pension pre-funding of the hourly plan.

Okay, all right so that was in addition, the $50 million was only part of the savings.

That's right; the rest is the discount rate

Okay. And I was wondering from a high level, volumes in certain markets like North America are running a little bit below what we would see from RMA or some of the broader industry sources. Is that something that is maybe some competitors becoming a little bit more aggressive in taking share? Or is that something that's harder for us to see imports from China and things like that, that you guys wouldn't really be affected by?

Rod, I think it's the trend that we've been seeing. And maybe I'll say one thing before I talk to that specifically. As a broad comment, not just in North America, but around the globe, we've seen volume increases. But we've seen the volume increases we are trying to get in the right segments, with the right brands, and generating the right returns.

And as you know, you've been following us long enough, it's a [sea state] change to where we were where we sold a lot of tires in the past, but at minimal profit and even losses, as you know. So we are sticking to the disciplined approach, and I think that's what you're seeing.

If you look to North America in particular, what you saw, again really driven by the third quarter, was that year-over-year change of the tariffs coming off saw a lot of low-end Asian tires, Chinese tires coming in. You still saw some of that in the fourth quarter, so as you looked at the industry, the low end drove those gross volume numbers.

But that said, as we look in the markets where we compete in, and as you know, that's not where we compete, I can tell you I am very, very pleased with the performance of the Goodyear brand, the performance of our new products, the demand for those new products, and the profitability on them. So I don't have a general concern, in terms of having the market go up in those parts -- those segments that really don't impact how we are driving the business. I

will add that I mentioned in my remarks that we, at our dealer conference, released a new product: the Assurance All-Season, to round out the Assurance family of tires. The All-Season goes in the commuter touring, mid-tier segment. It's a refresh for us; that's about one-third of the total -- a little under one-third of the total volume as you segment North America.

That tire was really accepted extremely well from our dealers. We got great orders out of the box; the price point is great.

So in addition to staying at the Assurance family of tires, the TripleTred, the ComforTred, the Eagle family, the high-end wranglers that were out there, putting the All-Season in that, refreshing the commuter touring, mid-tier is -- you can think of it as even expanding a little bit back into a part of the market, the high end of that market, where we want to play.

So I would say I feel pretty good about our volumes in North America. And we are going to grow, as Laura mentioned the numbers, but I'm feeling pretty good where we are.

And two quick data points, can you give us what you would expect your global weighted average tax rate to look like, if you were to experience that reevaluation?

And in the quarter was there a -- you mentioned 3-million-unit increase in production, and obviously the shipment increase was less. Was production in shipments more or less in line? Is it more of a comparison issue, or are you building finished goods in advance of stronger demand expected ahead?

That will happen more in Q1, Rod. Q4 there was a bit more balance, I would tell you. But in Q1, as you know from a seasonality perspective, we build more than we ship there.

So we built year over year, about 3 million more units in Q4. That will bring in the incremental, unabsorbed overhead into Q1, around about $50 million of the $75 million to $100 million that Laura talked about. But in Q1, you will see us building more than we are selling, but that's not an anomaly. That's pretty much how the business runs, as you know.

Right, and then for your income tax rate, Rod, 25% for 2014 of the international SOI.

Right, but once you go through that reevaluation, what would be the global weighted average?

Rod, we have not gone out that far in our analysis. There will be a lot of moving parts then, and as we get closer and closer to that, we will let you know.

Would be reasonable to expect something like 35 on the North America part?

Again, nothing related to 2014, and that may be in the ballpark. But again, we will keep you up to speed as we go.

Okay thank you

Thank you, Rod

Thank you. Next we will move to Patrick Archambault with Goldman Sachs. Please go ahead, your line is open

Thank you. Good morning, and congratulations on the good quarter.

On slide 15, you may have said this. It's just that there was a lot of information here. On Asia-Pacific, so your units were up, but your net sales were -- the revenue was down. Can you tell us how that works? Maybe it's an accounting thing.

And then the other aspect is a little bit more color on, despite the fact that net sales were down, obviously, you had a pretty substantial margin improvement there, and wanted to get a little bit more detail on that.

Pat, on the first point in Asia, our volume is driven largely by the growth we are seeing in China in general. I would say that drives our volume. Also we saw growth in places like India, and certain of the [Aussian] countries in the quarter as well. Volume, obviously, we still have headwinds in Australia.

But when you look at the volume numbers versus the sale numbers, it is basically the foreign-exchange impact. You know the numbers if you go look at what happened to the Indian currency, some of the Aussian currencies, I think that basically explains it. There's not a whole lot going on. Not a lot else going on other than that.

And again, for us, Asia is a growth market. We are growing faster than the market in China, and we see good traction in some of the other countries as well.

Australia is the headwind for us in the region. We've taken some restructuring actions there. I'm happy to say our share position is actually very good, but it's a tough market right now. I think it will be in 2014 as well. And of course, we've seen the devaluation of the Aussie dollar as well.

Okay, then on the -- can you go ahead and give us a little bit more on the margin improvement, which was considerable?

Pat, I think if you look at what we're doing, number one, if you look at the walk, certainly we did another disciplined job of managing price mix versus raw materials. But I would also tell you that we are focusing on our cost.

We talked about, at the investor meeting in September, and you've heard about me talk about in the past. It is driving our operational excellence initiatives, particularly around things in the procurement area and material substitutions, as well as the initiatives we are taking in the plants on conversion cost, and a more efficient supply chain across the business.

So as we are growing volume, we are growing in the targeted market segments. But we are also driving efficiencies in our business across the board. And you're seeing some of that come through in the margin as well.

Okay, and that commentary was probably true everywhere, but the question was Asia specifically

For Asia to get a little more specific, a lot of the same things Rich talked about, but positive price mix net of raw material cost, the higher volume, and then the lower startup expenses related to our new facility in China.

Okay, that's helpful. One other one from me, I just noticed that your free-cash-flow language changed a little bit from the what you provided at the analyst day.

I think there you had said free cash flow positive, excluding pension contributions. And here you've referred specifically to just operating cash flow being positive. On an apples -- I understand probably some of that has to do with the impact of the refi, which takes pension contributions out of operating. But on an apples-to-apples basis, has anything changed on the margin?

Not at all. Nothing has changed. And really, it is not about operating cash flow. For 2014 to 2016, as we described cash flow back in September at our investor day, really as we got to this conference call, just wanted to make sure it was clear what cash flow we were talking about. And right it is and remains free cash flow from operation.

And I'm being silly here, but free cash flow from operations then is cash flow from operations, minus CapEx?

Yes, pension is excluded from free cash flow, rationalizations or restructuring charges, and any asset sales, which are very small for us, regardless. And if you look at, I think it is page 14 in the deck, I think that will walk you through it.

So it's that exact definition then.

That's right.

That's helpful. And then my last one is I know that you talked about this a little bit, but in terms of capacity plans that you guys have that your competitors have, now that you have a read on volume of 2% to 3% for this year, how do you see this utilization environment playing out for the industry and for yourselves, given that unit increase you're contemplating?

Patrick, I would say from a global -- from an industry perspective, I think what you're referring to is a lot of the capacity coming online, particularly what we might call HVA capacity. And similar to the view we had in the past when we looked at the growth of HVA tires, which is not a specific, defined term amongst all the companies, but call it those higher-end, bigger-rim diameter, higher-performance type tires, we continue to see that the growth and demand for those will exceed the capacity coming on in a macro basis.

Now you might have points in time or locations where my comments don't fully come true, but by and large, we certainly still see demand being ahead of the supply of those tires. In particular, when we look at our plan, we think 2% to 3% volume growth, that 3 million to 5 million unit growth per year. When we look at that, we are fairly comfortable in terms of meeting that demand, given that the existing HVA capacity we still have in our factories, particularly in Europe.

We look at the investments we've already made and having those come online, such as the Americana modernization, as we look ahead to that coming in. In addition, as I mentioned a bit earlier the productivity coming from some of the operational excellence initiatives that we put in place.

And finally, again if we go back to the September investor day meeting, part of that use of cash we identified was growth capital initiatives that would be ultimately identified at adding capacity in the right places at the right times. So we feel like we are in good shape, certainly to meet our plan and to grow in the places that we want to

Terrific. Thank you, guys, and once again, great job on the quarter.

Thank you, Pat

Thank you and we will take our final question from Emmanuel Rosner with CLSA. Please go ahead. Your line is open.

Good morning, Emmanuel

Good morning, and thank you for squeezing me in.

A few points of clarification, first, on the SOI walk on your slide 18. To be completely clear, we spoke about your pension expense going down, potentially by $100 million or so at midpoint, but is not on the SOI slide.

So is that something that would come incremental to your net cost savings that are neutral? Or is that a benefit that helps you get to neutral net cost savings?

Emmanuel, if you would go to the next chart, which is slide 19. And we put both the pension expense and the cash piece of that together. So for 2014, we would expect pension expense of between $150 million to $200 million. And again, that's versus the $285 million that we had in 2013.

I appreciate that, but is that incorporated as part of your other bucket on slide 18 of net cost savings being neutral? Or is that something that you could do net cost savings neutral, and then on top of that, you will get cost savings from the pension expense going down?

That's right; it is on top of that.

Okay

On top of the cost savings, so in addition to the cost savings

Okay perfect. Now for more fundamentally, could you please comment on the environment you're seeing in the US for replacement pricing? Obviously in terms of your own fundamental operating performance doing a great job in the mitigating pricing pressure in the raw materials. But focusing nominally on the price without the raw materials, please, have you seen some improvement in the pricing of tires, the way it was suggested by the December CPI?

Emmanuel, I will tell you what -- how we look at the environment that we have to play in. Number one, clearly we look at -- I don't want to make it a raw materials discussion, but certainly look at the input costs that we have related to raw material. But for us, as we look at the market, we also really focus on the value proposition that we are bringing to the market, our brand pull, the technology that we're bringing in our products, the product performance, the service levels which are even more important, and marketing support as well, to make sure that our dealers are really competitive with the right products that they have in the marketplace.

We will continually and do periodically go back and look at that value proposition and adjust it to make sure that we are going to be competitive in the marketplace, and that's what we are doing. I would also point out that we've had a very disciplined approach to managing a price and mix over many, many years now. And I would say that's what you can expect from us as we go forward.

Raw materials, as Laura mentioned earlier, we see them going a bit down in the near term is what you see. We also see those other raw materials or other input costs going up. And I emphasize again, that over the long term, particularly as the industry recovers, our view is that raw materials are going to increase. And I think those are the data points I would give you in terms of how we think about price in the marketplace.

Yes we take into consideration what's happening, but we also look at the value we are bringing to the market as well, in our long-term view. So I think that's the color I would give you.

I appreciate that. And then on your volume assumptions for 2014, 2% to 3% growth. That is clearly in line with your long-term plan.

Now the long-term plan, though, from memory was obviously massively overweight in the emerging markets. And then only 1% in the developed market. When you look at what's in the environment is right now, would that, for 2014, would that be weighted somewhat differently? There was maybe some more growth out of the developed markets as we start this, what seems to be a recovery, and then maybe somewhat less from the emerging? So would it be the same overall, but maybe a bit more of it from the developed regions?

Emmanuel, I think it's actually an excellent question, and if I go back to the guidance we gave, you're exactly right. Over the long term, we see that the emerging markets are going to be the driver of the global tire industry going forward.

We also gave the broad guidance over the periods to take into account what is an industry that has a lot of cyclicality and volatility to it. And I think we're experiencing some of that right now.

So I think your point is correct: long-term, more emerging markets; near-term, as we look into 2014, the North American markets, and the European markets, particularly the Western European markets, the recovery in Europe in particular, are driving some of the growth that we see.

We remain optimistic on the emerging markets, but I do think as we look into 2014 we will see a little bit of inversion of that. But again I'll say that when we looked and we put our strategy forward and we put the goals out, particularly the 10% to 15% we said through the cycle, we wanted to deliver those rights -- those results, excuse me. We will deliver those results in view of the volatility that we are going to see in the industry. And I think 2014 starts out with some of it already

I appreciate all these comments. And a final one for me, would you care to comment about this news headlines this morning of Sumitomo saying that you're seeking to dissolve an alliance? I am not fully familiar with what they are actually talking about, but is that something that we should be looking into?

Sure, let me go through that a little bit. And many of you who have followed us for a long time have seen our disclosures related to our relationship with Sumitomo. So we have a global alliance with Sumitomo Rubber Industries, or SRI, and we've had that since 1999.

Among other agreements, many other agreements, we own 75% and SRI owns 25% of two companies: Goodyear Dunlop Tires Europe and Goodyear Dunlop Tires North America. We have learned that SRI has engaged in anti-competitive conduct in violation of applicable antitrust laws.

We concluded that warrants the dissolution of this global alliance. And on January 10 of this year, we began arbitration proceedings seeking the dissolution of that global alliance, damages and other relief that goes along with it. We don't believe the dissolution will have any material adverse impact on our customers, our operations, or our liquidity.

But as you know, arbitration proceedings are to be kept confidential. So you will see what I've said and a little more in our 10-K that comes out, but we really can't comment on anything more than that.

Great, well thank you. Thank you for all these clarifications

Thank you.

Thank you. I think that wraps up the call. As usual, we very much appreciate your attention today thank you

Thank you

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