Goodyear Tire & Rubber Co (GT) 2014 Q3 法說會逐字稿

Good morning. My name is Tony and I'll be your conference operator today. At this time, I'd like to welcome everyone to the Goodyear Tire & Rubber Company third-quarter earnings conference call.

(Operator Instructions)

I would now like to hand the program over to Christina Zamarro, Goodyear's Vice President Investor Relation.

Thank you Tony, and thank you all for joining us for Goodyear's third-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, there are 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 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 participants on today's call that our 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.

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 US GAAP equivalents as part of the appendix to the slide presentation. And with that, I will now turn the call over to Rich.

Thank you. Good morning, everyone. Before we begin, I'd like to take a moment to welcome Christina Zamarro as our new Vice President of Investor Relations. Christina is a longtime member of Goodyear's Global Treasury team, and I know she's already met with a number of you. She's a great addition to our team. So welcome, Christina.

Now, today I'll discuss our strong third-quarter results. I'll also address the North America volume questions that are likely on your mind, and provide a brief look ahead to 2015. Laura will follow with a review of our other businesses, as well is the financials. By now, you've read the highlights of our press release. Record third-quarter segment operating income of $520 million and segment operating margin of more than 11%, the best in more than a decade. Segment operating margins of greater than 10% in all four of our businesses. An all-time record quarter for North American, with earnings of 30% year-over-year. Europe, Middle East and Africa back on track with a 57% improvement in segment operating income. And another strong EPS quarter.

These results are the outcome of taking actions that are consistent with our strategy and putting our best efforts into how we build the value of our brands and products for the long term. You've seen it now for four years. In addition, I believe that delivering record results for such an extended period of time validates our strategy, especially in an environment of headwinds created by persistent global economic volatility and political unrest. Now in that environment I'm pleased with our financial performance, but I'm even more gratified by how we achieve those results. For us, the how is sticking to our strategy. We're running our business better every quarter, becoming more efficient, and creating sustainable shareholder value, just as we said we would.

In regard to the third quarter, I can't recall a time when it was more critical for us to have the discipline and commitment to the execution of our strategy. It's easy to stay on strategy and deliver strong financial results in a robust economy, but the real value of a strategy can be seen when record results are delivered, even in the midst of volatile market conditions. That commitment in execution was tested over the past three months, particularly in North America, where I'll focus my comments this morning. I'll discuss what happened to volume, how we responded, the results of that response, and what we expect going forward.

During the quarter, the Rubber Manufacturers Association reported that US consumer replacement industry grew its sell-in, that is sales into the channel, by 3% year-over-year. At the same time, Goodyear's North America replacement volume declined 4%. These numbers don't tell the full story, so let's take a closer look at what's driving the numbers. Replacement volume in our North America business was impacted by two main factors. First, there was an early aggressive and distorted pre-buy of low-end Chinese tires in anticipation of another tariff on imports of these tires. And second, we face challenges meeting increased demand for some of our premium branded products.

The most crucial factor in the quarter was the distortive impact of the significant pre-buy of low-end Chinese tires on industry sell-in volume to dealers and distributors in anticipation of another import tariff. I referred to this on our last quarter call, anticipating that the market would be affected by such advanced purchases. In reality, it happened even faster and with more market impact than anyone could have expected. Though the potential tariff would not occur until Mid-2015, the pre-buy activity we saw this quarter, some nine months ahead of a possible tariff being in place, was more significant than what we saw just one quarter ahead of the tariff actually been implemented in 2009. This activity may also have been fueled by the possibility of the tariff's being made retroactive to October of this year.

To get ahead of the impact of the potential tariffs, dealers and distributors increased their purchases of Chinese tires in multiples of their normal purchase volumes and made significant investments to build inventory. In an unprecedented wave of speculative buying, many purchased a considerable portion of next year's tires this year, and now have stockpiles of low-end tires to sell. Now, a key point to remember, as channel inventories grow even larger, is that sell-out in North America, sell-out been what consumers are actually purchasing at retail, is only growing at an annual rate of between 1% and 2%. We expect to see similar increase in 2015 as well.

The distortions in third-quarter sell-in industry volumes make comparisons to shared market and industry growth trends especially challenging. On Slide 5 we provide some context for what we believe is behind the industry volume numbers and will help put our own volumes in better context. The 3% industry sell-in increase reported by the RMA was driven by a 25% year-over-year increase in Chinese imports. When adjusted for those imports, we estimate that the industry demand for other tires would have declined about 4% in the quarter. Well, as you know, we do not prioritize sales at the low end of the market. Chinese imports affected our sales. The quantity of these imports in the market did two things. They occupied an abnormal amount of physical inventory space, some of which is normally filled by our own economy and mid-tier branded products, and they reduced our customers liquidity.

Now as you would expect, our response to this anomaly was consistent with our strategy. We didn't over-react to distorted market conditions and the spike in dealer buying patterns. We didn't chase unprofitable volume. And we're not in the business of making tires to sit in customers warehouses for extended periods. And we didn't sell next year's tires at discounted prices today. Instead, we stayed focused in an environment that would have made it easy to divert from our strategy. That focus led our North America business to deliver record segment operating income of $210 million, a second straight quarter of more than 10% operating margin, and improved price mix versus raw materials compared to the second quarter.

Going forward, we will continue to offer a compelling value proposition to our customers and consumers that will continue to win in the marketplace. Staying disciplined in this environment not only proved to be value generating in the quarter, but also positions us well for 2015 when we expect to see solid demand for our products to continue. Needless to say, I'm very comfortable with the decisions we made in the quarter.

Now moving onto the second factor, I'd like to call your attention to Slide 6. Demand for our HVA products continued to increase, and at a faster pace than expected, which led to escalating backorders for some of our premium tires. Our high-value added branded products with the strongest margins continued to be in high demand. We can trace this back to one of our mega-trends: HVA tires moving onto mid-tier vehicles. That's happening quickly, and is putting pressure on our HVA replacement supply. The success of such products as the Assurance All-Season and the Wrangler All-Terrain Adventure has kept demand ahead of our capacity. This strong demand validates our strategy and the value of our brand, as consumers continue to seek out and prefer our tires.

While we believe we've gained share with our premium products this year, we continue to take steps to capture profitable growth in the segment in the future. As we head into 2015, our recent and planned growth CapEx investment in our North America factories will deliver more high-margin premium branded tires. In addition, we will leverage our global HVA footprint to supply North America, and looking ahead our recently announced new plant to supply the Americas will come online in 2017, and help us meet the robust demand for our high-value tires in the future. As a result, we will supply more HVA tires in North America to grow profitably in targeted market segments in 2015 and beyond.

As I discussed in my opening remarks, we are confident in our ability to deliver strong results across the entire Company because of our commitment to and execution of our strategy. We will not chase volume for volume's sake. We will compete for profitable growth in targeted market segments with the value of the Goodyear brand, our innovative quality products, our pervasive distribution and service networks, and the best team in the industry provide us with competitive advantage. We are achieving real cost reduction driven by operational excellence initiatives we are rolling out across factories across the world.

Two years into this program we have built a solid foundation to enhance the efficiency of our supply chain to help us get the right tire to the right customer at the right cost. And we're not running our business for one good quarter or one good year, but to create sustainable value for the long term. Through three quarters this year, our global business has generated nearly $1.4 billion in segment operating income. We will achieve a fourth straight year of more than $1.2 billion in earnings, something never before accomplished. That is what our strategy was built to do.

Looking ahead to 2015, we anticipate the challenging economic and political conditions will persist through next year. In light of the distorted marketplace in North America and continuing softness in many global economies, which Laura will cover in more depth, we expect our volumes to grow between 1% to 2% in 2015. In North America, the unusually high inventory levels of Chinese imports will likely have a negative impact on overall industry growth for at least the next 12 months. In this environment, and with increase supply of high-value Goodyear tires, we expect that we'll perform better than the industry.

We remain confident in our strategy and see demand for our products remaining strong. We are reaffirming with confidence our 2014 to 2016 financial targets of 10% to 15% segment operating income growth per year, and annual positive free cash flow from operations. For 2014 specifically, we expect earnings growth near the high end of our range. Having been through multiple cycles of the tire industry, I can say that Goodyear is better prepared than ever to handle the volatility of our global industry and come out of it stronger.

We've turned around our North America business. We fully funded, frozen and de-risked our largest US pension plans. We've addressed our high-cost footprint across around the world, and we've successfully launched a wave of innovative new products. All of this enabled us to put a balanced capital allocation plan in place, mindful of our shareholders, and reinvestment in our business to drive growth.

Our focus has shifted to sales and marketing excellence, one of the key how-to's on our strategy road map. Think of sales and marketing excellence as a companion to operational excellence, an initiative I outlined on of one of my early calls as CEO, and one that is starting to deliver measurable results. After successfully turning around our business, we must now pivot to growth, profitable growth. Our commitment to growth was demonstrated by the hiring of Richard Kellam as our new Head of Global Sales and Marketing. Richard has more than 25 years of global expertise in sales and marketing, and will help lead our efforts to capitalize on our value opposition and increase our consumer focus.

As I reflect on another record quarter, I'm extremely proud of our teams and our achievements. Our results are evidence that we have the right strategy in place, and we will not be deterred by volatility in any of our markets. This is how we run our business. Based on the commitment to our strategy, our execution to date, and the current share price levels, we plan to repurchase up to $150 million of our common stock in the fourth quarter. We're creating sustainable long-term value now, and are confident in our ability to meet the challenges ahead and continue to deliver outstanding results.

I'll now turn the call over to Laura.

Thank you, Rich. Good morning, everyone. My remarks this morning will start with a review of the third-quarter financial results. As Rich's comments focused largely on North America, I will go into more depth on our operating results of our other businesses. I'll then finish with some initial views on 2015. We'll then open the call up for your questions.

Let's turn to Slide 10 and review a few key items on the income statement. We are very pleased with our strong third-quarter earnings performance. Segment operating income for the quarter increased to a record $520 million, a 21% increase over last year, bringing the year-to-date growth to 17%. Unit volume in the quarter decreased 2%. Replacement volumes were down 1%, primarily driven by North America, as Rich just explained. Original equipment volumes were down 3%, primarily driven by Brazil, where the recessionary economy continues to negatively effect OEM production.

For the quarter, net sales were down $345 million. Third-quarter sales decrease by $137 million because of foreign currency translation and $72 million from lower volumes. Additionally, price mix reduced sales by $95 million, primarily because of the effect of lower raw material costs on pricing, including normal raw material indexed agreements.

Our gross margin was 24.5%, an improvement of 340 basis points versus the prior year. This reflects the value of our brands and products in the marketplace, and our focus on cost reductions that being a lead but by our Operational Excellence initiative. In the quarter, we achieved a record $520 million in segment operating income and 11.2% in SOI margin. Each of our four business units posted margins exceeding 10%. This is the first time in at least 15 years that we have achieved these margins.

Our third-quarter operating tax rate as a percentage of foreign segment operating income was 18%, lower than prior guidance due to better-than-expected profitability in lower tax countries. Our earnings per share on a diluted basis for the quarter was $0.58. Our results were impacted by a few significant items, which are listed in the appendix of today's presentation on Slide 25. After allowing for those items, our adjusted earnings per diluted share was $0.87.

The step chart on Slide 11 walks third-quarter 2013 segment operating income to third-quarter 2014. The impact from lower sales volumes was nearly offset by the benefit of higher second-quarter production levels in Europe, Middle East and Africa, resulting in a $2 million net year-over-year change. Price mix net of raw materials accounted for a net unfavorable impact of $14 million. The continued weakness in the off-the-road business once again fully explains the decline year-over-year.

Raw materials declined 6% during the quarter. Price mix versus raw material performance reflects an improvement over the second quarter. In addition, it is important to note that our revenue per tire, excluding foreign currency, remained flat sequentially. Strong cost savings of $135 million were driven by our operational excellence initiatives, more than offsetting the negative $75 million impact of inflation, for a net benefit of $60 million. Continuing along the items on the walk chart, foreign currency translation had a negative impact of $31 million year-over-year, primarily driven by the weakening Venezuelan bolivar and euro.

Now let's spend a few moments on the bar titled Other, given its magnitude and the progress we have made on several key strategic initiatives that we outlined to you previously. The first is the closure of our Amiens, France facility earlier this year, which delivered $16 million of savings in the quarter. We remain on track to deliver $75 million on an annualized basis. In addition, the actions we took on our US pension plans saved us an additional $14 million in the quarter. These were two significant areas that we committed to address as part of our strategy, and which we have delivered according to plan. Addressing the US pension was critical, especially given where interest rates are today. The remaining items within Other are shown in the footnotes of the chart.

Now let's turn to the balance sheet information on Slide 12. Cash and cash equivalents at the end of the third quarter were $1.7 billion, while net debt remained at $5.1 billion. During the quarter we refinanced our pan-European accounts receivable securitization facility, extending the term through 2019. This facility is one of our lowest-cost financings around the world, and will support the European region's top-line growth going forward.

Free cash flow from operations is shown on Slide 13. During the third quarter we generated $87 million of cash, which was an improvement over the prior year. We continued to demonstrate strong free cash flow performance, with nearly $800 million generated over the past 12 months. This level of cash generation is consistent with the funding required to support our capital allocation plan.

Slide 14 shows our focus on shareholder return programs. First, on September 1 we paid a $0.06 per share dividend, a 20% increase over the prior quarter. Second, under the existing $450 million share repurchase program for 2014 through 2016, we purchased approximately $30 million of our common stock during the quarter, and $83 million year to date. In addition, as Rich mentioned earlier, we plan to repurchase up to $150 million of our common stock in the fourth quarter. We believe our current stock price does not reflect the confidence we have in our strategy and our ability to achieve our targets.

Moving now to the business units on Slide 15, I will start with North America. In the third quarter North America reported an all-time record segment operating income of $210 million, and achieved an operating margin of greater than 10% for the second quarter in a row. The team in North America delivered a positive price mix, net of raw material costs, of approximately $22 million, despite industry market disruptions. Manufacturing costs were reduced by $32 million, and coupled with positive mix increased our SOI margins by 280 basis points year-over-year.

Rich covered the volume story, but I'd like to highlight a couple of key points. Over the last few years, we have been focused on refreshing our new product portfolio. The result in 2014 is very high demand for our new Assurance All-Season passenger tires and Wrangler All-Terrain Adventure light truck tire lines. These tires are winning with customers and consumers. In 2015, we will have several additional new mid-tier product launches as well. We will meet the demand for these new products through the CapEx investments we have made, and continue to make, in our existing factories. Additional capacity from our global footprint will help as well.

In our commercial truck business, our new Fuel Max Drive tire is already being enthusiastically received by our customers and transportation fleets. Our industry-leading cradle-to-grave fleet solutions business model is using technology to help keep the fleets on the road with increased uptime. It is clearly a competitive advantage for Goodyear, and will continue contribute to our profitable growth.

Turning to Europe, Middle East and Africa, we delivered segment operating income of $181 million in the third quarter, an improvement of 57% over last year's $115 million. The third quarter was the sixth consecutive quarter with year-over-year earnings growth. SOI margin increased to 11.2% from 6.6% in the prior year. Margin improvement in the quarter was driven by reduced manufacturing cost derived from the closure of our Amiens plant and improved factory utilization in our other facilities. We also benefited from positive price mix, net of raw material costs, of $26 million. The continued execution of our profit improvement plan across the region also has significantly increased our margin.

Our timing of early winter tire sell-in programs, which started during the second quarter, helped increased volumes by 3% year to date while causing a 1.3% decline in unit volumes in the third quarter. Strong magazine test results for our new Ultra Grip 9 winter tire confirm the strength of our total value proposition. We grew share in the commercial truck business in the quarter on the success of our premium products, despite difficult industry conditions. We are pleased to see our business in Europe approaching historical levels of profitability, even amidst a volatile environment.

Weakness in the overall European economy and the euro will continue to present headwinds as we complete 2014 and move into 2015. As a reminder, the winter tire segment accounts for a significant portion of the European tire industry, particularly in northern Europe. While we are planning on a green winter, we will continue to manage our production and inventory by closely monitoring sell-out.

Turning to Latin America, segment operating income was $49 million for the quarter, $40 million less than the prior year. The decline in our results is driven by the continued economic volatility in Venezuela and the recessionary economy in Brazil, including the significant decrease in new car production. We expect the headwinds to continue, including a volatile and weakening real, but we believe Latin America markets will be growth markets over the long term. We are prepared to stay the course and continue to invest in the region to support our growth.

We are seeing the benefits of our increased HVA supply, despite these current economic headwinds. In 2014 we have introduced seven new products in the region, and have strong volume growth in our consumer replacement business with double-digit growth in Brazil and Mexico. We are expanding our distribution and increasing our points of sale in both countries. We are implementing a growth strategy that leverages and expands the Goodyear brand and our distribution footprint.

Before we leave the Latin American results, I would like to provide a quick update on Venezuela. So far this year, Venezuela's results have negatively affected Latin America's segment operating income by $43 million versus 2013. We began to feel the impact of the challenges in Venezuela during the fourth quarter of 2013, so we expect the comparative results to improve next quarter. However, the environment remains volatile, and our outlook assumes no further significant devaluations or production disruptions.

Our Asia-Pacific business reported segment operating income of $80 million for the quarter, a $14 million increase year-over-year. Unit volumes of 6 million in Asia-Pacific were about 7% higher than a year ago. We are particularly pleased with our performance in China, where our consumer replacement volume grew by double digits, well ahead of the industry. Clearly the Chinese economy has slowed versus previous predictions, including our own. But the team continues to perform well by growing our business with new and existing customers.

Recently, our products were recognized by JD Power, ranking highest for customer satisfaction in both the luxury car and SUV segment. Goodyear also won the most influential tire brand by the China Auto Parts Suppliers Associations related to our S-200 commercial truck tire. As we've always said, the China market will not grow in a straight line. We are prepared for that, and we are staying on our plan.

Weakness remains in our OTR business in the region, which is influenced by lower commodity prices and the weak Australian economy. Looking ahead, we continue to see the Asia region as a key growth opportunity, and we are continuing to build our teams, our products, and our capabilities to drive future business and to win in our targeted market segments.

Based on the progress each of these four businesses has made through three quarters and our confidence in our strategy, we now expect growth in our segment operating income for the full year 2014 to be near the high end of our targeted 10% to 15% range. And we also expect higher unit volume will be flat to up 1%. We have included the 2014 SOI drivers and other financial assumptions in the appendix of today's presentation. As we think about 2015, let me first say that our strategy, our balanced capital allocation plan, and our target to grow segment operating income 10% to 15% each year through 2016 remain unchanged.

Slide 16 provides preliminary planning assumptions for 2015. We see volume growth of 1% to 2% next year, and positive price mix versus raw materials of about $50 million to $100 million. We expect raw materials to remain at current spot rates or to decline slightly. We expect another solid year of operational excellence savings. As you know, this program is a key element of our strategy road map. In addition, we expect to realize the remaining cost savings from the closure of our plant in Amiens and the exit of the EMEA farm tire business.

Our earnings growth is supported by our investments in CapEx. In 2015, we expect our Cap Ex to be about $1.2 billion, consistent with our previously announced capital allocation plan. Slide 16 also includes other factors that are contemplated for 2015. We will provide an update on our outlook items during our fourth-quarter call. In summary, our outstanding performance during another quarter of global economic volatility strengthens our confidence to deliver our targets and create sustainable economic value.

Now, we will open the call up for your questions.

Thank you.

(Operator Instructions)

We'll take our first question from Itay Michaeli with Citigroup. Please go ahead. Your line is open.

Good morning, Itay.

Good morning and congratulations everyone.

Thanks.

Thanks for the preliminary 2015 outlook. I was hoping we could talk a little more about the confidence level on the price mix versus raw material improvement there. I think Laura, you mentioned kind of flattish raw material assumption.

What's the split between kind of pricing mix? And maybe also if you could update us on the OTR business as well?

So Itay, just from a broad view on how we think about price mix next year and how we think, I think maybe to go back and look at how we're even looking at the global economy. And I think it's safe to say that there's a lot of headwinds as we look into 2015, given what's happening in Europe, both the economy and the euro and the like.

But that said, we feel confident in the new products that we have coming out into the marketplace. And we continue to do that region by region. Laura touched on a few of the products that are award winning in China. We've essentially refurbished our entire product line in Latin America.

We have new products coming out again in North America next year. It's on top of the products we have in Europe. So in terms of a portfolio driving the value of the brand and being compensated for that in the marketplace, we continue to feel very good about heading into 2015.

And from a raw material perspective, clearly we've seen a decrease in raw materials this year. We anticipate that we're not going to see big spikes going into next year. So I think you'll see some of that tailwind as well, as we go. So we remained pretty positive about how we think that we can bring price mix to the bottom line next year again.

Yes, no doubt. And then in addition to that, as we think about OTR next year, we're certainly not expecting any kind of a recovery, but for it to kind of remain the same. So it will no longer have a negative impact on price mix versus raws kind of year over year as we go out to next year.

Even though the raw materials are really, as we said, kind of the same or flat, we'll still have somewhat of a tailwind in the first part of the year from the raw materials. And then again, mix-driven by all the good products and the core consumer and commercial business results.

That's very helpful, thank you. And then just a question on cost savings. It looks like you're (technical difficulties) [accelerated] pace this year off of an already impressive pace a year ago, and probably into next year as well.

Could you talk a little bit about more about where you're seeing these incremental opportunities, and particularly where you're at, how much have you realized on the European productivity plan that you've previously laid out?

Itay, I'll start and Laura can talk to the specifics on Europe as well. We feel pretty good about, and I'm going to address that in the context of an umbrella of our operational excellence initiatives. And there's two type of cost savings that we go after. Certainly the ones that we need to and we'll continue to focus on, which is just better cost management by the Company quarter after quarter, year after year.

Then there's what we might call more efficiency or productivity, which really goes into the operational excellence initiatives we have, which spans both getting more efficient in our factories in terms of making more of the right tires at a lower cost by driving efficient programs across our global footprint.

And we're seeing the benefits of that, both in things like a better cost, or lower maintenance costs for our factories by having better uptime, by putting programs in around the world that are delivering results. We are seeing it in increased output in certain of our factories of the HVA tires that we want.

Frankly, I'm very impressed with some of the benefits that we've gotten on greater output of the tires the market wants, particularly in Europe. And we see that happening today. Our programs today are only in a number of plants around the world. We see that expanding to all of them. So there's a lot more of that efficiency and cost to get out of our factories.

And we also have significant programs around our raw material costs or our general purchases, if you like. Things that we call our supplier/collaboration programs where we work with them to try to create programs that are beneficial to us and to them, and to continue to get those cost savings to the bottom line. And that's been very effective for us this year.

So I mentioned in my script, I referred to operational excellence, I think on one of the early calls when I took this job as an area that we were going to -- we were going to drive and we're going to see benefits down the road. Patient execution to get the results. That's what you're seeing. And we expect to see more of that going out into 2015 and beyond.

Right. And Itay, on the -- I think we talked about $75 million to $100 million in a three-year plan for cost savings within EMEA, and that was to end the third year would be in 2015. We've not really split out or given a specific number related to this $75 million to $100 million. We just show it as part of the net cost savings for total Company.

But certainly as Rich mentioned, our stronger than expected cost savings did primarily come from Europe and is very much in line with achieving that $75 million to $100 million by the end of 2015.

Maybe just one quick one, if I could sneak it in, on pension expense. Just a point of clarification. Any impact at all from the mortality table, like any (technical difficulty) for you outlook for 2015 for pension? And that's all I had.

Right. We take a look at the mortality tables. Really, I think the last time we did it, we looked at -- we do it each year. I'm sorry, we look at the mortality tables each year. The last time we made a change based on the US life expectancy was in 2012.

As we go, we'll give you any updates we can to our liability for this. And certainly, as you know, it wouldn't impact cash in the near term and would have a small impact on expense as we see it going forward.

Itay, I'm happy to talk about the impact of mortality tables rather than discount rate, so.

Right (laughter) much better conversation.

(Multiple speakers) Absolutely, yes. Okay. That's all I had. Thanks so much

Thank you.

Thank you. Next we will move to David Tamberrino with Goldman Sachs. Please go ahead. Your line is open.

Hi. Good morning, David

Congratulations on the quarter. Just kind of following in that line of questioning on cost savings. I mean, the double-digit operating margins across the four regions was rather impressive, especially in light of not hitting double digits in Europe since, I think, 2005, one of the quarters there. Could you speak to the sustainability of those in North America, as well as Europe kind of going forward?

David, again I'm going to put into the bucket of the programs we have, under operational excellence initiatives. And I would tell you the programs we feel very confident will continue to deliver the savings and the efficiencies that we need to drive the business going forward, both in terms of cost reduction and in terms of incremental production of the right tires that we need as we head into 2015 and beyond.

I will tell you, the absolute amount of savings we will continue to clarify that, particularly as we look into 2015. Laura can comment on that, but I would tell you that we see a tremendous amount of opportunity for incremental savings across all those buckets within our operational excellence initiative.

That's right. And it's something, David, that's been on our strategy road map for several years. So it isn't a program we just started last quarter. It is one of those things to get it to be sustainable. You've got to create the right foundations for it. And it sometimes starts off slow as you build that foundation.

But I think that's -- laying that strong foundation, having the plans going forward, rolling it out in a methodical approach around the world is really what gives us that confidence in long-term sustainability, especially through conversion cost savings.

Okay. Just, I mean, just kind of looking sequentially from 2Q to 3Q, it seems as if a lot of it really came to fruition in the last quarter. So very interesting.

Yes, and David, I'm sorry. Let me help clarify for you. We did have $120 million through the third quarter. We expect for the full year $130 million to $150 million. And as we note in the comments to that chart on Page 19, there are some investments in our marketing and our R&D new product portfolio that do happen in the fourth quarter that somewhat offset it. The pace of the cost savings remain strong, but as we note, this is also where we offset some of our incremental investments in our products going forward.

Understood. That helps clarify it. Perhaps the next question.

There is a competitor in Europe that reported a week or so ago that sounded from them, it looks like they were going to continue to chase volume in the region by lowering price. I mean, how much of that have you contemplated in your forecast for 2015, and has that really affected pricing within the market?

David, I would tell you we certainly can't comment on what the competition's doing. But I would say we have a disciplined strategy on how we're going to approach the market. If we like at our results in the quarter and year to date, and if we look at revenue per tire taking out exchange and things like this, you would see, and Christina can walk you through the details if you like later on. Our revenue per tire is essentially flat when you adjust for exchange.

So we've been very disciplined in how we're approaching the market. And I talked a lot in my remarks about what we're doing in North America in what was a very unique market, to say the least. But those type of comments and the strategic direction that we're taking holds for Europe as well. And that's what the team, Darren and the team, are doing in Europe right now. And we would see that continuing into 2015.

David, I will say, as we always have, from time to time we do need to adjust prices. We have raw material indexes that relate to our OEMs and certain fleets. And we will adjust for those prices as we see fit. And we've see raw materials come down, and you've seen some of that as well as we've gone to do it. But certainly we expect to stay on our strategy, as I've described it.

All right. And then maybe just lastly before I jump. About $150 million in share repurchases outlined for the fourth quarter. How much of that has been done to date, if any?

$0.

Understood. Thank you.

Thanks, David.

Thank you. Next we'll move to Rod Lache with Deutsche Bank. Please go ahead. Your line is open

Good morning, Rob.

Good morning. A couple of things. Just first on the price mix versus raw materials, it was better in the quarter then you had been expecting during the -- at least based on your commentary on the Q2 conference call. Could you talk a little bit about the components of that $112 million, how should we be thinking about the pricing part and the mix part, what's changed?

Okay. So no doubt, and just to be specific, what I think you're referring to is on the second-quarter call we talked about price mix, net of raws. We expected it to be about the same, or about $44 million negative in the third quarter, and it actually came in $14 million negative in the third quarter. Really, that's primarily due to what I would say is stronger price mix, especially mix than was in our forecast, particularly in both North America and in Europe.

And when you listen to the volume story, you can hear that we, especially in North America, sold a lot less in the low end, which caused a nice favorable mix for us in North America. So that's really the primary difference, and it is $30 million. It's a difference, but on a very large revenue base somewhat small and hard to give exactly precise on a forecast.

Okay. Then on Slide 19 you suggested that price mix versus raw materials would become neutral in the fourth quarter. And then presumably positive again, then, as you look out to next year. Earlier you were thinking that there would be a positive comparison in the fourth quarter because the mix comps in OTR would be easier versus the fourth quarter of last year. So what's moving around there that would make that less favorable if this quarter was more favorable?

Yes, and it really is just timing, Rod, as we think about the two different quarters and the region. We saw a little bit better-than-expected this quarter, in the third quarter, and kind of feel like the fourth quarter would be a little worse. It is true that OTR kind of annualizes itself in the fourth quarter, so no big change there. But again, to your point, it is slightly different. But it's really just driven by timing.

Okay. And also kind of along the same lines, your guidance for cost savings versus inflation. If I remember correctly was that it would be a slight drag, and it came in [insignificantly -- significantly] better. How should we be -- is that also kind of a timing issue, what we saw this quarter?

Yes. I think, I mean, I think so, right. We had had full year at the second-quarter call net cost savings of about $50 million, and that increased as we went through the third quarter. But it is really essentially about the same for the full year.

Okay. Just lastly, look, the -- obviously I wouldn't expect you guys to be commenting on LBO and those kind of things, but it does underscore kind of the cash flow generative power of the business. And it certainly is positive that you're looking to allocate more capital toward share repurchases to sort of put your money where your mouth is on the valuation.

How should we be thinking about that kind of on a going-forward basis? Are you sort of suggesting that on a go-forward basis you are going to exercise more discretion and flexibility vis-a-vis share repurchases to take advantage of valuation? Because up until now, the primary message was just getting to investment grade.

Right. Really in essence there is no change to how we feel about the entire balanced capital allocation plan, including returning value to our shareholders. This is just like many of you. Based on the current stock price, we don't think it reflects the confidence we have in our results and our strategy going forward. So we're going to take this opportunity to buy up to $150 million in the fourth quarter.

Okay, but nothing prospective beyond this in terms of how you're thinking about capital allocation?

No, Rob. We put -- I'll jump in, Laura.

Sure.

We put obviously a lot of time and effort into putting together and articulating the capital allocation plan. And again, we see it very balanced in terms of being shareholder-friendly, if you like, in terms of dividends and share repurchases.

We see it -- hence, what we view as the right thing to do to invest in our business to get more of those HVA tires, which we need more of, and focused on our leverage metrics as well. So no change in how we look at that plan.

That's right. And it's based on a three-year plan that started in 2014. And we are three quarters into a three-year plan. So no change.

Right. Okay, thank you.

Thanks, Rod.

Thank you. Next we'll move to Ryan Brinkman with JPMorgan. Please go ahead. Your line is open.

Hi. Congrats on the quarter. Thanks for taking my questions. Just regarding the positive preliminary outlook for price mix/raw (inaudible) spread in 2015, a couple more questions on it. First, it seems like from one of your earlier answers that you're assuming the latest commodities spot prices straight line. Is that the case, rather than estimating the future trend?

I ask because I think there's some expectation that synthetic rubber prices could now fall due to the decline in oil prices? And then second, does the outlook assume any pricing benefit from US tariffs on Chinese tires, or would that be additive?

So just, and Laura can jump in as well. The thing to remember on how we look at raw materials, very hard to determine where raw materials prices are going. Our view has been over the long term that raw material prices would continue to increase. We haven't -- obviously we haven't seen that. We've seen it actually go the other way right now.

As we looked at to 2015, what Laura mentioned earlier is, remember we have a lag in terms of, and it can be as much as six months, when we buy raw materials to when it actually comes through cost of sales in terms of a tire being sold. So by virtue of that, we're going to see a tailwind going into 2015, just as the math works to get that. And that's something that will happen as we go.

And we don't make -- we don't have views on really where raw materials prices will end up. I'll point out that one of the corollaries that we had, frankly years ago that got a little bit disjointed when oil prices got so high, is that we saw a corollary between oil prices and natural rubber. That may be something that gives us a better indication of how natural rubber will move over the near term.

But we don't really --we're not setting a mark in where natural rubber in 2015. And relative to the tariffs, obviously we don't have a view on what will happen. That's a decision by the Department of Commerce and the ITC. And that's it for them to make and then we will deal with it.

Okay. And then regarding the oil price decline, at least that has already taken place, presumably that will result in a fall-off in gasoline prices. How do you think about that impacting miles driven and replacement shipments as we head into 2015?

Actually I think it ideally will be a bit of a tailwind for us. I think the last numbers would take us average through June, I believe it's about up 1.4%. But of course that's before we've seen the more precipitous drop in fuel prices right now.

So I think in general what we're seeing, and it's actually a good thing. I think is positive for us, positive for the industry, is that miles driven are trending back in the right direction. And it is positive because there was a time, I remember being in an investor meeting a number of years ago, Rod's probably would remember, and we had a long discussion about where mobility was for consumers because with gas prices high there was a view that people were going to stop driving, or driving a lot less. And then we hit the recession where we saw that happen again.

Now we're, what, multiple years out of the recession and we actually see that miles driven are trending back to where they were pre-recession levels after being flat for a long period of time. So I think it supports the fact that citizens in the US, drivers in the US value their mobility. And for us that's a good thing over the long term, and certainly lower gas prices help that as well.

Okay, thanks. And just last question on some of the cost drivers for savings overall, do you think you're in a position again where you sustainably drive cost savings in excess of general inflation?

And then on the so-called Other line, I see in the footnote there's a $23 million benefit from lower incentive comp. Is that kind of like stock indexed compensation tailwind that you might not continue if your shares hopefully rebound?

Yes. Yes, it does. It includes that. That is right. And then back to the net cost savings for our 2015, yes exactly. We expect to just similar to our track record in the past, to have our cost savings net of inflation be a positive number in 2015.

All right, that's helpful. Congrats again. Thanks.

Thank you.

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

Hi. Good morning, and thanks for squeezing me in. First question, and point of clarification on the 2015 pricing expectations. If I want to focus only on the pricing and not on the raw materials, I understand that raw materials can be a tailwind at the beginning of the year because of the lag. But just on the pricing, do you expect an improvement in pricing conditions in 2015 versus the trend that we've seen in 2014?

And in particularly related to that, you were speaking about stockpiles of Chinese tires because of a pre-buy. Do you think that in addition to an impact on shipment, this could have also an impact on industry pricing?

On the first point, obviously we don't comment on pricing. I would tell you our view has always been that we feel the value of our products is what we look to be compensated for in the market. The value of our products, the brand, the distribution, the service, the quality of the products is all what we tried to get compensated for in the market, and that's what we'll continue to drive in 2015. Again supported by new product, supported by the programs we have out in the marketplace to do that. And we feel very confident about that going into 2015.

And the impacts of the stockpiles of inventory I guess is a situation that's going to play out and will be impacted by the decision of the DOC and the Department of Commerce and the ITC. And whatever those decisions are, are what we will have to deal with. And I think what I would refer you to is to look back at what happened at the tariffs when the 421 tariffs were put in place.

Certainly there were other environmental things going on around there as well, like increasing raw material prices. But that's one way to potentially think about what could happen if they were to go in place. But again, the question of whether they will or not is one we don't have a view on. It's a decision by the ITC and the Department of Commerce

Right

Okay. And then on Europe, obviously very impressive margin performance in the challenging environment in general. Do you view these sort of margins as sustainable? Obviously you had some significant cost savings, but the challenges in the region seem to be -- not to be abating. Do you think these margins are sustainable in the long run?

We certainly do over the long run. I would say we do feel very good about the results in Europe in the quarter and year to date. We're doing what we said we would do. We've got the right portfolio. We've got a great winter tire product. We're dealing with our cost over there.

And we're really probably, most importantly, reestablishing our value proposition with our distributors and dealers out there and being more competitive in the marketplace in doing so versus where we were in the past. You're seeing that in our results.

Emmanuel, I have to just build on your point. Clearly what we are seeing in Germany in terms of the economic conditions there, certainly in the euro zone itself, and with the weaker euro, and with consumer demand being obviously challenged a bit more recently -- consumer confidence, excuse me. The headwinds clearly are in Europe, and that something we're going to have to deal with both with, again, winning in our targeted market segments but also focusing on cost in that environment.

I'd add one other thing for you to think about in Europe, particularly as we look ahead, and that's a comment Laura mentioned. That a large part of the tire market in Europe is the winter market. Right now we've, as Laura said, we've planned for a green winter as we look at it, but I'd also say that right now it is pretty warm in northern Europe. It's not snowing over there yet.

And while we've had a great sell-in to the market with our product, the question, as it always is, is going to be what happens on sell-out. So we'd certainly like it to snow a little more over there to help that profit move forward. But that will be something we need to deal with in the quarter as well.

Very helpful. And then just one real final point of clarification. A follow-up to Ryan's question on the benefits from lower incentive compensation. Could you maybe give us some of the drivers of what drove this benefit?

Is it really mostly the stock price decline during the quarter? Because it was obviously a large benefit. So how should we think about it as we model the future years and quarters?

Yes. It's really driven by the stock price, right, versus last year's change in the stock price is the way to think about it. Nothing more than that.

Yes, (multiple speakers) complicated than that.

Right, very simple.

Okay. Thank you very much.

Thank you

Thank you. Emmanuel. And thanks everyone for participating today. We appreciate your interest and attention. Thank you.

Thanks

Thank you. This does conclude today's conference.