Goodyear Tire & Rubber Co (GT) 2014 Q2 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 & Rubber Company's second-quarter earnings conference call.

(Operator Instructions)

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

Thank you, Tony. And thank you all for joining us for Goodyear's second-quarter 2014 earnings call. Joining me today are Rich Kramer, Chairman and Chief Executive Officer; and Laura Thompson, Executive Vice President and Chief Financial Officer. Before we get started, a few items we 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 the call will be available later today. Replay instructions were included in our earnings release issued earlier this morning.

I'd like to remind participants on today's call that our presentation includes some forward-looking statements about Goodyear's future performance, and 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. Our financial results are presented 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. And with that, I'll turn the call over to Rich.

Great. Thanks, Tom, and good morning, everyone. I'm very happy to report that we delivered record results in the second quarter. These results were driven by strong consumer replacement volumes in all of our regions, as the Goodyear brand and Goodyear's value proposition continues to be a competitive advantage in the marketplace. Our performance reinforces the confidence that we have in our strategy. In a quarter where we saw continued economic volatility, particularly in the emerging markets, we posted segment operating income of $460 million, a second-quarter record. We now have generated $833 million in segment operating income for the first half of the year, a 14% increase over the same period in 2013.

Achieving these results, even amidst global economic challenges, is perhaps the best reflection of the strength of our strategy and the changes we've made to Goodyear's business. This further renews our confidence in hitting our target of 10% to 15% annual segment operating income growth through 2016. The quarter included volume increases in consumer placement across all of our four global regions. Global volume is clearly a topic you've been focused on, and with good reason. However, I'll reiterate one of the core tenants of our strategy, and that is that we're not pursuing volume for volume sake. We're pursuing profitable volume growth in our targeted market segments. But the consumer replacement performance only begins to tell the story, so I'd like to acknowledge several highlights from the past three months.

First, let's look at our growing markets. In China, June was a record month for our consumer tire sales, and for the quarter, we continued to grow faster than the industry. Overall, our performance in China is especially rewarding as it followed a challenging first quarter, and in response to the more challenging China economy. Consistent with our strategic approach, we grew with the right mix of products and channels where the Goodyear brand has its greatest value. In addition, we earned new OE fitments that are consist with our targeted market strategy. Competition in Asia Pacific is still intense, and challenges remain in Australia in the OTR business, which affected our total results for the region when compared to the prior year. Nonetheless, in this environment, I'm very pleased with the team's execution in the region.

Latin America faced headwinds in the quarter, as OE production remained weak, the economic turmoil continued in Venezuela, and the Brazilian economic outlook deteriorated. Even so, our team in the region delivered outstanding performance, with double-digit percentage increases in consumer replacement over last year. This was particularly true in Brazil, where our ongoing rollout of new high-value Goodyear-branded products across the region is yielding strong results. I visited the region during the quarter and saw firsthand both the progress of our current efforts and the potential ahead. Goodyear dealers are excited about our new products, such as EfficientGrip Performance tires and Wrangler ArmorTrac for SUVs, available in more sizes and types than they ever have been before.

Our commitment to investment in the region excites our dealers, as well. And this includes the upgrades to our Americana plant that are providing them with more of the products that are in demand. And they're excited about our new and expanded sales and marketing tools focused on demand creation, as we've redoubled our efforts to help our dealers grow their business profitably. In total, our associates and dealers in Brazil are energized by Goodyear's leadership in an increasingly competitive environment.

Now, I'd like to spotlight the strong results in our mature markets. Our Europe, Middle East and Africa business delivered segment operating income of $117 million, more than doubling its results from a year ago. Its operating margin for the first half of the year was 7%, demonstrating progress in returning the region to its historic margin level. Our balanced approach of growth and cost control was especially critical in EMEA. Laura will provide details on this later on. And in addition, we're doing a much better job in the region of supporting our customers, thanks to a strong value proposition and product lineup. For example, in addition to our industry-leading labeled product portfolio, our winter tires won influential magazine tests, resulting in strong initial orders for these products.

You may recall that I referenced a concern in prior quarterly calls with the competitiveness of our value proposition in Europe. I'm pleased to say that we've made progress in this area with our key European customers, and our results reflect that progress. While the European economy has certainly stabilized from its low points, structural challenges remain, as well as volatility, particularly in emerging markets, including Russia. Now, in that environment, the EMEA business continues to execute its business strategy very well.

And finally, our North America business did more than simply maintain its momentum; it took its performance to a new level. North America delivered $208 million in segment operating income, its best quarter in history. Not just its best second quarter -- its best quarter ever. To give you some perspective, $208 million is more than the North America tire business earned for any full year from 2001 to 2010. In addition, the business surpassed 10% segment operating margin, its highest quarterly margin in more than 15 years. Some of you may remember when our next-stage metric for North America was 5% segment operating margin. Now our performance consistently exceeds that mark.

Driven by the Goodyear brand, our second-quarter consumer replacement volumes in North America were up nearly 6%, significantly outperforming the industry. For the first half, our consumer replacement volumes were up 3%. Again, we're very pleased with this performance. Our volumes were achieved by remaining consistent and true with our strategy of winning in those targeted market segments where we can add value for consumers, for our customers and for Goodyear. We won't be distracted by fluctuations in the low-end of the market, which can distort industry trends. That occurred a few years ago, before and after the implementation of the 421 Tariffs, causing extreme swings in both overall industry volumes and period-to-period comparisons. During these swings, Goodyear remained steady and true to our strategy, and we'll continue to do so should those distortions repeat.

Looking at our overall results, I want to quickly address price mix versus raw material costs in the quarter, which Laura will discuss in detail a bit later. The decline that you saw was driven largely by the headwinds in our OTR business, which we highlighted last quarter. I remain pleased with our price mix versus raw material strategy in our consumer and commercial businesses, as evidenced by strong volume, strong revenue per tire and gross margin in the quarter.

We believe our ability to overcome various headwinds and deliver record results in the quarter is the outcome of our commitment to continuous improvement, with a sharp focus on decreasing costs and improving customer service. We're targeting the most profitable market segments, pricing for the value of our products, and making continual progress on operational excellence. In sum, we are performing as we expected, with a commitment to building sustainable value over the long term.

Now, shifting gears, I want to quickly touch on a few of the elements of our capital allocation plan. As you recall, we shared this plan last September, and outlined plans for the use of the more than $3.6 billion of cash to be generated in 2014 through 2016 to enhance long-term shareholder value. Laura provided an update to the plan at the end of May. To date, we re-instituted quarterly dividends, which are now at $0.06 per share. We activated our stock buyback programs, investing $54 million in the repurchase of 2 million shares in the first half of 2014. We funded our hourly US pension obligations with cash generated from operations. And we identified areas of growth CapEx, planning investments to increase future value.

At the end of May, we announced that one of those focal points of the growth investments is the construction of a new state-of-the-art manufacturing plant for the Americas. This plant will supply our North American-Latin America replacement customers and OEM customers with high-value tires that they demand. In fact, we're already seeing demand outpace capacity for some of our high-end HVA products, and can foresee reaching our HVA supply limit soon. Our strategic focus will remain on these products, and we're looking forward to our new production facility coming online in 2017.

And just as we're not pursuing volume for volume sake, we're not adding capacity for capacity sake. This new plant will support profitable growth in our North America and Latin America regions. There are many companies that can increase capacity, but only a select few that have the combination of a strong value proposition to respond to the market, together with the manufacturing capability required to win in the marketplace. And at its core, what's required to win in the tire industry is not much different than in other industries. The companies with long-term success are the ones with the strongest value proposition, the ones who anticipate the needs of the marketplace and respond with high-quality products or services that satisfy those needs. And the ones with brands that their customers and consumers know and trust.

Goodyear's value proposition has many elements, including a trusted iconic brand that's known around the world, industry-leading products, diverse distribution channels capable of responding to customer requirements, strong customer relations -- particularly at the OEMs -- and an unwavering focus on the consumer. Taken individually, none of these elements is strong enough to create differentiating value in the marketplace. Our value proposition is rooted in our ability to integrate all of these elements better than anyone else. Goodyear's competitive advantage comes from the alignment of these individual parts multiplying their value. That alignment of strength, fueled by operational excellence on the supply and manufacturing side, is what we believe it will take to win in the evolving global tire industry. More importantly, we believe Goodyear is the Company that will deliver.

Now, the confidence we have in our competitive advantage is reflected in recent updates that we've made to our strategy road map. The changes are small and do not constitute a new strategy, for sure, but express where our business is now and help more clearly define both internally and externally how we will grow in the future. If you turn to slide 7, I will quickly take you through the updated road map. In the previous version, we noted in the top box where we are, that pensions remained a challenge. That has been changed, as nearly all of our US pension plans are now fully funded.

Moving to the key strategies on the left, we've adjusted each of the regional comments. On the original road map, we defined North America strategies as returning to profitability. Now that we've completed the turn-around in that business, our sights are set on profitable growth. While winning in China remains as a priority in Asia Pacific, we acknowledge the larger expectation of growing in the entire region. The performance of our Asia Pacific business relies on more than just China. And this update sends a more comprehensive message. In EMEA and Latin America, we're now focused on returning to historical profit levels, reflecting an appropriate strategic update for both of those businesses. It's a better description of our current priorities.

Moving to the key how-to's, we updated only one element. Targeting profitable market segments is now folded into a larger focus on sales and marketing excellence. With this addition, we've clearly aligned the key how-to's with more consistency, as sales and marketing excellence joins market-backed innovation excellence and operational excellence. Specific initiatives within sales and marketing excellence will start to take shape over the remainder of the year as we continue to position Goodyear globally for profitable growth. And finally, to be clear and transparent relative to our expectations of growth, we added a new first point to our destination. Top-line and bottom-line growth are now at the top of the list in our plan to create sustainable value.

So in summary, we're very pleased with our performance and segment operating income growth over the first half of the year. We're confident that volume will continue to grow over the long term, and remain committed to our strategy of pursuing profitable volume and share in segments, with the Goodyear brand as a differentiator. That confidence is supported by the value we can generate through our integrated business model, working from the market back, responding quickly and effectively to the needs of consumers. The evidence of that value creation can be seen in our products, our operations, and most importantly, in our results. Now, with that, I'll turn the call over to Laura.

Thank you, Rich, and good morning, everyone. My remarks this morning will start with a review of the second quarter and our first-half results. I'll then finish with an update on certain items included in our outlook for 2014's earnings and cash flow. We'll then open the call for your questions.

Let's turn to slide 9 and review a few key items on the income statement. We are very pleased with our solid second-quarter performance. Segment operating income for the quarter increased to a record $460 million. For the first half of the year, SOI has increased 14% over last year. This is firmly aligned with our expectation of 10% to 15% SOI growth for the year. Similar to the first quarter, strong performance in North America and Europe was able to more than offset weakness in emerging markets.

Sales volume in the quarter increased 3%, driven by strong replacement volume growth of 6%, partially offset by a 4% decline in OE volume. For the quarter, net sales were down $238 million. Our sales reflect the benefit of $106 million of higher volume, but that benefit was more than offset by lower non-tire revenue of $148 million. The lower non-tire revenue is driven primarily by lower third-party chemical sales in North America. We expect the impact to significantly lessen going forward. In addition, price mix reduced sales by $146 million, primarily due to two factors. First, the effect of lower raw material costs on pricing, including normal raw material indexed agreements. And second, a significant decline in our off-the-road tire volumes, which resulted in lower mix.

Lastly, foreign currency exchange was unfavorable by $52 million. We generated gross margin of 24.1%, an improvement of 270 basis points versus the prior year. SAG increased slightly, reflecting higher investments in marketing and advertising of $9 million versus the second quarter last year. In the quarter, we achieved a record $460 million in segment operating income and a 9.9% in SOI margin. This is a direct reflection of the sustainability of the strategies that we are driving across all of our businesses. Our second-quarter operating tax rate, as a percentage of foreign segment operating income, was 21%. Our earnings per share on a diluted basis for the quarter was $0.76. Our results were impacted by a few significant items, which are listed in the appendix of today's presentation on slide 19. After allowing for those items, our adjusted earnings per diluted share was $0.80.

The step chart on slide 10 walks second-quarter 2013 segment operating income to second-quarter 2014 segment operating income. Higher sales volumes and higher first-quarter production levels benefited our results by $40 million year-over-year. Strong cost savings for the quarter of $103 million more than offset the negative $69 million impact of inflation. Lower raw material costs only partially offset reduced price mix, for a net unfavorable impact of $44 million year-over-year. This unfavorable impact was primarily due to lower off-the-road tire sales. We are very comfortable with our price mix, as evidenced by our overall revenue per tire remaining the same in the second quarter as the first quarter, and gross profit margins that are at their highest in recent history.

Separately, we saw a reduction in price mix versus raws in the quarter, relative to our previous outlook that we provided in April. We indicated price mix versus raws would be a slight positive, or similar to Q1. There are two factors that caused a different result. First, we sold significantly more consumer tires and less commercial tires in the quarter, giving us a less rich mix than expected. And second, the raw material cost benefit was less than we forecasted, as raw material costs were down 4% versus the prior year, rather than the 6% we had anticipated.

Continuing along the items on the [walk] chart, foreign currency translations had a negative impact of $13 million year-over-year, primarily due to Venezuela. Other includes savings from the Amiens, France closure, and lower pension expense, partially offset by investments in advertising and R&D. Cost savings net of general inflation and after investments in marketing, advertising and R&D were a net benefit of $24 million for the quarter.

Slide 11 walks first-half 2013 SOI to first-half 2014 SOI. Given the unusual weather-related impact to volume in our first quarter and the rebound in the second quarter, the first half reflects a more normalized view of our performance. In the first half, higher sales volumes of about 2% and higher production levels resulted in a benefit of $90 million. Cost savings of $214 million exceeded the $144 million impact of inflation, for a net benefit of $70 million for the first half of the year.

Raw material costs were lower in the first half by $156 million, almost offsetting the reduced price mix of $183 million. The unfavorable $27 million net impact is more than fully explained by lower off-the-road tire sales, which negatively impacted our mix in the first half of the year. Lastly, foreign currency translation had a negative impact of $29 million year-over-year. Overall, we are pleased with our first-half performance of growing SOI by more than $100 million or 14%. We are equally pleased with how it was delivered -- a balanced execution of growth and cost initiatives.

Now let's turn to the balance sheet information on slide 12. Cash and cash equivalents at the end of the second quarter were $1.6 billion, down a little over $200 million from March. Total debt is down more than $350 million from March. And consequently, net debt fell to $5.1 billion at the end of June, compared to $5.3 billion at the end of March. I also want to mention that we used approximately $31 million of cash to repurchase approximately 1.2 million shares of Goodyear common stock during the second quarter. This brings our first-half purchases under the share repurchase program to $54 million or 2 million shares.

Free cash flow from operations is shown on slide 13. During the second quarter of 2014, we generated $314 million of cash. Over the last 12 months, our free cash flow from operations was $724 million. As we continue to generate cash, we remain focused on a balanced capital allocation plan that builds for our future with high-return growth investments, advances the path toward an investment-grade credit rating and provides for significant shareholder return programs.

Moving now to the business units on slide 14, I will start with North America. North America reported record segment operating income of $208 million, and achieved operating margins of greater than 10%. This is a significant achievement and reflects the sustainability of our strategy to grow profitably in targeted market segments. Unit volumes were up 3%, driven by increased sales in our replacement business, which was up 6%. Our growth was driven by strong demand for Goodyear-branded tires in our most profitable targeted market segments. While we are pleased with the volume performance in North America for the quarter, we would point you to the year-to-date performance of about 1% growth as representative of our trend going forward. As I mentioned, given the unusual weather-related impact to volume in our first quarter and the rebound in the second quarter, the first half reflects a more normalized view of this year's volume.

Similar to prior quarters, price mix was unfavorably impacted by reductions from raw material-indexed agreements, although mix remained positive in total, despite significantly lower sales in our off-the-road business. Manufacturing costs were lower by $9 million, due to improved factory utilization and lower pension expense, which was partially offset by increased profit sharing in our factories of $9 million. Our strategy of targeting profitable market segments, mixing up in products through market-backed innovation, pricing for the value of our tires and controlling our costs have enabled us to continue generating sustainable economic value in North America.

Europe, Middle East and Africa delivered segment operating income of $117 million in the second quarter, a significant improvement over last year's $51 million. SOI margin increased to 7.4% from 3.2% in the prior year. The second quarter was the fifth consecutive quarter with year-over-year earnings growth. Volumes increased by 3% in the second quarter versus last year. Industry conditions remained favorable, with year-over-year market growth in consumer tires. Our volumes in Europe were up by 500,000 units versus prior-year, mainly driven by those improving industry conditions and a propitious start to pre-season winter sales, driven by our new UltraGrip 9 tire line.

Our volumes in commercial trucks were impacted by weaker demand. This occurred primarily in emerging markets, driven by less transport demand and decreased fleet activity. We continue to leverage our success with new products, as well as our strong service proposition in this business. Factory utilization improved, based on increased throughput and the closure of our facility in Amiens, France. While our progress in Europe is substantial today, we have more work to do in this business as we take advantage of improving industry conditions and work to reduce costs further.

Turning to Latin America, operating income was $59 million for the quarter, $23 million less than the prior year. All of the year-on-year decline in earnings can be attributed to two factors. First, challenges in Venezuela. And second, the impact of lower OE volumes in Brazil, where, as you know, vehicle manufacturers continue to reduce production significantly. Positive price mix offset the negative effects of inflation and the costs related to our expansion of the Americana plant in Brazil. We continue to see a strong response to our new products across the region. And as a result, our replacement volumes grew 13% this quarter, almost completely offsetting the weakness in OE. Excluding Venezuela, our replacement volume increased 17% this quarter in Latin America.

During the second quarter, we successfully returned our Venezuela production to normal levels after completing our labor negotiations. However, we continue to face other challenges with our business, such as the lack of availability of US dollars to timely pay our suppliers for raw materials which are required to keep the factory running. Venezuela remains a challenging business environment, and we continue to monitor the situation closely and adjust to the changing circumstances as needed. We continue to expect Venezuela to negatively impact our Latin American SOI by $40 million to $60 million for 2014, with about $27 million having already occurred during the first half of the year. This assumes no further devaluation or meaningful disruptions to production, which could have a further negative impact to operating results.

Our Asia Pacific business reported segment operating income of $76 million for the quarter, a $15 million decrease year-over-year. More than all of the decline in operating income is driven by a significant decline in our off-the-road tire sales and unfavorable foreign exchange of $4 million. Unit volumes of $5.8 million in Asia Pacific were about 5% higher than a year ago, given strong growth in China, which was up 13%, and India, which was up 12%. These increases more than offset the impact of weaker demand in Australia. We are winning with customers in China, with double-digit volume growth in the second quarter, driven by strong sales in our targeted market segments. We remain confident in our strategy, and committed to winning in China.

Now looking at the full year, the key segment operating income drivers are listed on slide 15. In line with our 2014 to 2016 targets, we continue to see sales volume growth of 2% to 3% for 2014. For the full year, we are assuming the net of price mix versus raw material cost changes will be slightly negative. While we expect the second-half price mix versus raws to be essentially neutral, we do expect the third-quarter impact to be similar to the second quarter. Based on current spot prices and our forecasted mix of products, we expect raw material costs to be down 5% for the full year, a slight adjustment from prior guidance. We continue to expect approximately $50 million to $75 million in benefits from lower unabsorbed overhead for the full year, although we are now trending towards the high-end of the range.

As a result of increased cost savings, particularly from Europe, we are raising our full-year cost savings versus inflation outlook from neutral to about $50 million benefit after offsetting increased investments in marketing, advertising and R&D. The strong cost performance in Europe is consistent with the $75 million to $100 million of productivity benefits we described in 2012 as part of our profit improvement plan for Europe. Based on current spot rates, we expect a negative foreign currency exchange impact of approximately $60 million for the year. This includes the headwinds due to the change in exchange rates for Venezuela, although it does not assume any further devaluation of the bolivar.

We are increasing the savings expected from the closure of our Amiens, France facility to a range of $40 million to $50 million in 2014. The annualized benefit of this closure and related exit from the farm tire business in Europe will be approximately $75 million. Pension expense savings is increased slightly to $90 million, reflecting favorable plan experience versus our estimate.

Additional financial assumptions for 2014 are listed on slide 16. For the year, we now expect interest expense in the range of $415 million to $435 million, a slight improvement versus the prior outlook. Financing fees are forecasted to remain at approximately $60 million. Our full-year income tax rate is expected to be approximately 25% of international SOI. As discussed previously, each quarter we assess our current profitability in North America and whether sufficient future taxable income will be generated to utilize existing deferred tax assets. The result of the analysis continues to lead us to believe that we may be in a position to release all or a portion of the US valuation allowance during the second half of 2014. If the valuation allowance is released in 2014, the expected increase in annual tax expense for 2015 and beyond would be approximately $150 million per year, or a 35% tax rate. However, we do not anticipate any US cash taxes for at least five years.

The outlook for depreciation was increased slightly, to approximately $725 million for the year. We lowered the outlook for global pension expense to $150 million to $175 million in 2014. We expect global pension cash contribution to be about $1.3 billion, including over $1.1 billion that was put into the hourly US pension plans during the first quarter of this year. And for the year, we continue to expect our working capital to be neither a significant source nor a significant use of cash. And our capital expenditures outlook is unchanged from our last call.

In summary, our businesses have delivered strong results in the first half of the year and are on track to deliver 10% to 15% SOI growth in 2014. Our market-backed focus innovation has enabled us to launch 22 new products during the first half of 2014. And we are seeing strong demand for these products, as demonstrated in our consumer replacement results. Additionally, our cost savings initiatives continue to fall to the bottom line. Our first-half results give us confidence in our strategy, and that our strategy will deliver our 2014 to 2016 targets. Now we'll open the call up for your questions.

Thank you.

(Operator Instructions)

Patrick Archambault with Goldman Sachs.

Good morning, Pat.

Good morning, Pat.

Hello?

Patrick, your line is open.

Sorry, I had myself on mute there. I apologize.

That's all right.

My first question is on the pricing. Is it possible to segment out the impact of OTR? More specifically, what I'm trying to get at is just a little bit more color as to how the pricing environment is for passenger and light truck, and how you would assess the overall competitive environment.

Has there been any pressure in that segment as well? Maybe stoking fears that capacity coming back is causing a little bit of that good discipline to erode. Or would you really isolate the pricing pressure really on the OTR side?

Patrick, good question. I would tell you, if I look at it -- maybe I'll address it both ways, year over year and then sequentially. But year over year, it's essentially -- it's primarily all due to OTR, as we highlighted in remarks, and frankly, as you just said.

With that said, I can tell you that I'm satisfied with our price mix versus raw material equation for the core consumer and in commercial businesses. We see that in revenue per tire, in addition to the strong volumes that we've had and the strong gross margin that you saw in the quarter as well.

You know, maybe a simple way to think about this, to give you how we see it and how we think about it. We've given guidance in the past, or we've given a formula in the past that's 85% of our top line relates to our core tire business, if you will -- our tire business, and excludes chemical and some of the other things.

If you were to do that, take 85% of that number and calculate a revenue per tire, 85% of our sales number, what you would see is, sequentially from Q1 to Q2, you would see our revenue per tire basically flat at about $97. Actually, the math would say Q2 actually went up slightly from Q1. And if you take that all the way back to Q2 in 2013, you'd see that number was higher. It was about $107.

But when you look at the year-over-year change of the $107, let's say, down to the $97, the bulk of that is driven by FX, not by price decrease. Some of it is price decrease, but I can tell you that price decrease is less than the raw material decrease that we've gotten -- as we said, 4% in the quarter. So we'd say it's less than that.

So I would say as we look at this, we're not -- I'm not uncomfortable at all with where our price mix versus raw material equation is. From a trend standpoint, I'd say it's right in where we thought it would be. And again, along with the strong volumes and the strong gross margin we have, I think it's another proof point.

And finally, I'd go back to what we said back in September, and then I think what we reiterated at the end of the year, where we said price mix versus raw material would essentially be flat, to offset each other for 2014. Last quarter we said it would be slightly positive. Now we're saying it's slightly negative. We're really sort of working around the edges here, and the driver of that really is OTR.

And again, if I might add, the change in the forecast really is a mix change. We sold fewer truck tires, which are heavier; so we got less of that raw material benefit coming through. And we sold more consumer tires than we sold truck tires, than we forecasted; so we saw a little bit less of that price come through. Because obviously, a truck tire is a higher price point than a consumer tire.

So that change is really, I would just say, a temporal mix change, nothing really more than that. So hopefully, that gives you some color.

It does. Just to build on that, it sounds like the reason there's no real sequential change in per-unit price is that, [at least] I interpret it, that OTR is really stable at very low levels. And it's a year-on-year headwind, but it's not getting sequentially worse.

Yes, that's a fair way to look at it.

Yes.

Okay, and then just lastly, I know this was implied in what you just said, but it's then correct to interpret this as there really isn't any fundamental change in the level of aggressiveness on the passenger and light truck side, in your view.

No, I think what you see flowing through is the lower raw materials that we've seen come through year over year. And, Patrick, that said, I think -- I'll be the first to tell you, it was competitive last year; it's competitive this year. So it's no easy walk out there, for sure. But nothing beyond that that I'd tell you.

Okay, thank you. That's helpful.

I guess my other question was just on Latin America. You actually had pretty good margin protection, despite the environment there actually. I was happy to see that. Is there any -- for instance, in Europe, you've done a lot to address what has been a slower volume environment over the years, right? And we're seeing the fruits of that.

Is there any -- I think you used the word maybe structural issues, I think, when you were talking about the region. So I was just wondering, is there any kind of work to be done to take additional costs out of Latin America that could be a tailwind ahead of us?

You know, Patrick, I would say what's going on in Latin America -- and really driven in Brazil, but it's true in the other countries as well is -- I use the term redoubling. We have really revamped our product line there.

We've brought more sizes and types to the forefront. We're putting a lot more aggressive ad campaigns and marketing campaigns forward to help our dealers grow their business. They see that happening. They see the investments that we're making in our factory down there in Americana. They've heard about the Americas factory that we talked about to supply Latin America and North America. And frankly, we've got a lot of momentum down there.

So I would say we've taken costs out of there in the past. We continue to be very judicious on it. But at the end of the day, we're really working on our value proposition to help our dealers grow.

Laura said 13% total consumer replacement. The consumer business was actually higher than that. Our Brazil business was actually even higher than that. We had strong volumes in Mexico. We had strong volumes in some of the other countries.

So I would say this is really an effort we're making to grow our business profitably with our dealers down there. And that's more of the focus than structural costs, which, of course, we know we still need to work on in places like Europe.

Okay, thank you very much. Those were the two I had.

Thanks, Patrick.

Rod Lache with Deutsche Bank.

Good morning, Rod.

Good morning, everybody.

Good morning.

Just wanted to follow up first on the price mix versus raw materials. It was minus $27 million in the first half. And I think you said neutral for the second half and similar in Q3. So it's negative $44 million-ish in Q3, which would imply positive $44 million or so in Q4.

If that's right, what is in your high-level view that drives the positive as you get towards the end of the year? And you can maybe elaborate on how you see Q3 and Q4 raw materials playing into that?

Yes, sure. So first of all, following what you said, everything was exactly right. What you implied -- it is $27 million net, as we look at it through the first half of the year. And that is all driven by OTR.

And really what happens as we move into the fourth quarter is the negative effect year over year of OTR really stops happening. That's what starts to put us back on a path we're more used to in price mix versus raws.

Okay. Does the ITC investigation, in your view, matter at all in terms of the North America or the Asia pricing environment?

Rod, maybe I'll jump in.

You know, the first thing I'd have to say about that is that is as we look at the potential of the ITC, we continue to be in favor of free and fair trade around the globe. That was our position last time; it's our position this time.

So as you know, that's not the part of the market that we actually play in. It's not exactly in our sweet spot in terms of what happens. But we know that if those tires don't come here, they may go to other places around the globe. Tires move around.

So we don't know exactly what the implications of that are going to be at, as we move forward. I will tell you the decision from the ITC is out into the future. We don't know where it is. But we already actually saw some -- let's call it irregular order patterns of maybe people anticipating something happening, early stages of that. So I don't know exactly what we think is -- or what is going to happen if this thing moves forward.

I can tell you we're going to stick to our strategy of driving tires in our targeted market segments. And that's worked for us, as shown by our results. It's shown by what we did over the past few years when the 421 Act was in place. So we'll sit back and see what's going to happen.

Yes, and no doubt, Rich, the last time we had the tariff, we did see an impact in the lowest tiers of the market. But I'll remind you, that was in the environment of significantly lower raw material costs. They were dropping like a rock, right? So we'll see. We saw an effect last time in the lowest tier; we'll see what happens this time.

Rod, the thing I would add to Laura's comment is that, the things that we're paying attention to are just the distortions that will happen to the industry. Because we see people buying ahead. And then as tariffs came off, we saw people stop buying. And then once the tariffs came off, they started buying again. And this all happens at the low end.

So as you know, you get these big distortions in the marketplace that really aren't indicative of normal sell-in to the market, let alone normal sell-out to the market. That's as much on our minds as anything else.

Okay. And just two other quick things, hopefully. Can you just give any color on your outlook for the Asia-Pacific region in the second half?

And on corporate overhead, it's been running like $50 million to $66 million per quarter, as I go back for several quarters. And this quarter was about $35 million. Can you just give us any color on what drove that and whether we should extrapolate from that going forward?

So from an Asia perspective, Rod, I would tell you, as I mentioned in my remarks, China was quite difficult, as we saw in the first quarter. We saw that improve in the second quarter, and we see a little bit of momentum going into the third and fourth quarter at the back half of the year.

As I mentioned, we've performed very well in that market, particularly in the second quarter. So I'm pleased with that. And we certainly see a path to continue that going into the second half of this year. But obviously, we always say, China is not going to grow in a straight line; so we've got to be ready for everything.

From a region perspective, India continues to perform well. And we don't talk about it much, but our business there is performing very well. In the ASEAN countries, we see pretty good performance in places like Thailand, where we have some political uncertainty but the market is okay there. Malaysia, very similar.

The headwinds will continue to come from Australia; and as you know, we have a very big business there. And that's really the hangover of the slower mining industry that makes its way back into the general consumer in Australia. And that impacts us, given our retail footprint there.

The positive thing is, the OTR business will tend to get better as we start lapping the downturn of that business. And you'll start seeing that, I think, in Q4; we'll get a little bit of a benefit from that. So we remain bullish on Asia. But again, not in a straight line and not without headwinds. But long term, we continue to believe it's a very good market.

And in terms of corporate overhead, I don't think there's anything else that I would say. A lot of that in that corporate overhead is some of the incentive comp that moves with stock price and the like. What I can tell you is that our focus is going to continue to be on driving cost out of the business. And we know that that's something that we need to do, both in better times and not as-good times. And we're going to continue to put programs in place to do that.

Okay, sure. And no doubt, Rich, the other, I think, that corporate other did benefit in the second quarter versus the second quarter of last year. We had a little bit lower incentive comp. Last year, we had the big change in the stock price, which, it certainly does continue, but not as great degree as we had last year. So that is one of the drivers as well.

Thanks.

Thanks, Rod.

Itay Michaeli with Citigroup.

Hello, Itay.

Hello. Good morning, everyone. Just a couple of questions. One more on the price mix overall. Just given the improvement you expect in the fourth quarter as the year-over-year comps become less difficult, could the OTR piece become a bit of a tailwind in 2015?

Itay, I think it's too early to comment on that. You know, what we see happening -- you've heard this before, but the actual -- the mining industry, iron ore and the like in Australia is actually up year over year. The industry is up around about 5% and the like.

The issue that we see is not -- the mining service companies and the mining companies and the like continue to go through their inventory and are continuing to use that as they move forward.

So I think I'm not going to make any prognostications on where it goes. I think we're prepared for the industry to get a little bit better. But how and when that happens, I think we're going to remain cautious and manage the business accordingly.

Great. And then just a couple of housekeeping. The pension savings guidance was raised by $10 million. Is there any pull-forward in 2014 from some of the statements that you outlined previously for 2015? That's one.

And then secondly on that, I know that that gets bucketed into the Other -- in the SOI walk. And that looks like both pension and, I think, depreciation year over year should be tailwinds for you in the second half of the year. So should we expect that Other bucket to be a net positive into H2 versus last year?

So first of all, no -- to answer your first question, no. We don't see anything picking up as we go into 2015. Certainly as we look at the Other bucket, we expect depreciation to be up as we go into 2015.

I'm sorry, I was talking more about the second half. I think the full-year depreciation guidance actually implies a bit of a reduction year on year in the second half of 2014 versus 2013, and the pension savings perhaps accelerating as well. So if I take those two, should I expect the Other bucket in the second half of 2014 to be year over year higher versus last year?

Well, first of all, D&A -- we did increase the guidance from $700 million to $725 million as a full-year estimate. It's just improving our forecast as we go throughout the year. And then as we look at Other for the second half of the year, we do expect that to be really about what we saw in about the first half of the year -- fairly neutral.

Yes, Itay, I think the way I think about it, there will be some movements in there; but nothing significant that would drive it. That's the right way to think about it.

Right.

Great, that's helpful. And then just lastly, the North America OE volume down 4%, and production obviously was up in the quarter. Just wondering if you can help us reconcile what was going on there in the quarter?

Itay, I would say there's really nothing more in there, other than continuing to drive our selectivity strategy. We saw some decisions that we wanted to take relative to fitments that we were on. That's what we've done; that's what we've been doing. I think you also have to look at it in the context of the consumer replacement increase that we had. Our consumer placement business was up by about 6%.

So these are really a matter of choices more than anything else. I would tell you not to read into it beyond that. We've got some great fitments with the OEMs. We continue to build on that business. We have a lot of those OEM fitments that are going to start to come back into the replacement market in the next couple of years. I think it's nothing more than selectivity, and really no other strategic change other than that.

Perfect. Thank you for all that color. Thanks.

Thanks, Itay.

Thank you.

And at this time, we are out of time for questions. I'll turn the call back over to management for closing remarks.

Well, good. I just want to thank everyone for joining. We had a great quarter, and we're going to continue on with the same strategy as we head into the second half of the year. So thanks for the attention.

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