Goodyear Tire & Rubber Co (GT) 2015 Q2 法說會逐字稿

Good morning. My name is Keith, and I will be your conference operator today. At this time I would like to welcome everyone to the Goodyear Tire & Rubber Company second-quarter earnings conference call.

(Operator Instructions )

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

Thank you Keith, and thank you everyone for joining us for Goodyear's second-quarter 2015 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 the US GAAP equivalent as part of the appendix to the slide presentation.

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

Thank you Christina, and good morning everyone.

This morning I will review highlights from our outstanding second quarter, provide an update on how the macro economics in our regions are affecting our business and give my perspective on our business for the remainder of the year. Laura will follow with a financial review of each of our businesses and an update to our outlook before we open up the call to your questions.

In the second quarter we delivered segment operating income of $556 million, a record for any quarter in the Company's history and a 21% improvement versus last year. Also if we exclude the impact of foreign currency translation, our operating performance improved by 28% in the quarter. These were simply excellent results for our team.

Combining this quarter with our record first-quarter results, our segment operating income for the first half of the year with $947 million, the highest first half ever for Goodyear. By comparison, that's higher than our full-year segment operating income in 2010. In addition, we delivered segment operating margin of more than 13% in the second quarter, despite significant foreign currency headwinds and regional macro economic challenges.

Leading the way, our North American business delivered record segment income and nearly a 16% segment operating margin, its highest in my 15 years at Goodyear, and likely longer than that. In addition, three of our four global businesses delivered operating margins of greater than 10% in tougher than expected economic environments.

Taken in total, our record second-quarter performance reflects the strength and disciplined execution of our strategy. We believe that strength comes largely from the integration of the key how-tos on our strategy road map: innovation excellence, sales and marketing excellence and operational excellent supported by an aligned and collaborative team. While each is a significant element in our plan, their value multiplies when they are integrated. Our current results reflect that value, and we've only just begun to tap into its full potential.

I'd like to spend the next few minutes providing my perspective on each of our SVUs, as well as my thoughts on the industry outlook for each for the remainder of the year. North America delivered $321 million of segment operating income, a record for any quarter. This performance was driven by positive price mix in raw material costs, demonstrating the earnings power of our value proposition in a strong market.

During the quarter, demand in our replacement business remained solid and we began to see the benefits of our new product launches such as the Kelly Edge. Early demand for these tires has exceeded our expectations as our market-backed innovation has allowed us to bring HVA attributes the mid-tier segments.

Similarly, we have increased our share in OE, which continues to deliver profitable results by selling HVA products such as the Wrangler All-Terrain Venture and the Assurance Fuel Max on some of the most popular vehicles, in line with our strategy. The results are paying dividends not only in our OE performance, but also in the Goodyear brand replacement pull-through as consumers visit our line dealers. The enhancements to our product mix have been an important enabler of North America's improved value proposition.

During the first half we also began to roll out our near e-commerce platform for consumer replacement tires. We developed our online sales strategy to reduce friction, or in other words to make the tire buying process easier for consumers. The program is still in the early stages, but it has met or exceeded our initial expectations, while providing many key learnings needed to implement it successfully over the long term as consumers change their buying habits. We remain confident that this program, with our industry-leading dealer network and more than 4000 locations enrolled to date, will drive profitability through the value chain.

Our commercial truck tire business also had a strong second quarter, based on the robust demand for our industry-leading products. In June we unveiled a new commercial tire project, the Endurance WHA for waste-haul fleets, which will be available later this year. Our total portfolio of commercial truck tire offerings has never been better, and combined with our feet service model that's the gold standard of the industry, that makes Goodyear the clear leader -- the clear industry leader in the commercial truck business.

Across all of our segments in North America, our value proposition has allowed us to excel at a market where drivers of demand have remained very strong. New passenger vehicle sales are at the highest in a decade. Miles driven for the first five months of the year was at an all-time record, and we project miles driven for the full year to be a record, as well. Year-to-date truck tonnage has increased 3% over the same period last year.

All are leading indicators for good tire markets, and we believe the underlying fundamentals will remain favorable for some time. We have consistently said that it was a question of when, not if, industry fundamentals would improve, and they have.

As I look at the success of our North American business and the industry fundamentals, our challenge continues to be meeting growing demand for our HVA tires. As we've outlined, in the short term we are investing in our factories locally and leveraging our global footprints to deliver more of the tires that our customers want. In fact, we broke ground yesterday in San Luis Potosi, Mexico for our previously announced new manufacturing plant, which will help satisfy demand and allow us to grow over the long term.

Shifting to Europe, our EMEA business unit delivered $108 million in operating income during the second quarter, down about 8% versus the prior year, which was more than explained by the weak euro. Excluding the impact of currency, EMEA grew 14% year over year. EMEA's performance was led by the successful execution of our strategy of growing in targeted marketed segments along with the strength in summer tire sales in Western Europe.

Goodyear branded summer tires, particularly the Goodyear EfficientGrip Performance and EfficientGrip SUV tires, claim the top spots in several important magazine tests which helped facilitate strong demand and growth in those segments of during the summer season. Industry sell-in for summer tires was strong during the quarter and helped offset the difficult year-over-year comparisons for winter tire sell-in.

You'll remember that last year winter tire sell-in started earlier in the second quarter. As we predicted last quarter, we did not see the same early sell-in this year. Heading into the second half of the year, we're taking a measured approach to winter tire sales based on the warmer than usual weather Europe has had over the past three years, the higher levels of inventory currently in the channels, and a wait-and-see approach by the dealers.

Customers may be reluctant to build large inventories of winter tires, and sell-in to retail channels may be delayed. Clearly the unpredictable winter weather will affect buying patterns, which remain difficult to gauge. Regardless, we are confident our award-winning winter products will position us to win in the marketplace.

In our commercial segment, our recent share growth has been fueled by our outstanding products and increased demand from fleets. For example, last month Goodyear was honored with the Luxembourg Green Product Award for its FuelMax S truck tire. The tire features IntelliMax Groove Technology, which was cited as a major breakthrough in the tire industry for fuel efficiency and operating cost reduction. It is this type of innovation that continues to enhance our value proposition and win with fleets around Europe. Like our success in North America, EMEA's end-to-end fleet service solutions and strong product lineup is during our year-to-date success and winning new customers.

Emerging markets in Eastern Europe continue to struggle with an influx of low-cost Asian imports. This is a trend we saw in previous quarters, and one that we believe will continue in the second half of the year.

Given the macroeconomic conditions in Europe, we have and will continue to take actions to better align our cost. In June we announced the planned closure of our mixing and retread operation in Wolverhampton, England and some other changes within our EMEA footprint. These actions will help facilitate a more competitive cost structure.

With the economic uncertainties in Europe surrounding currency, the situation in Greece, and the ongoing Russia/Ukraine conflict, we believe these are the appropriate and the prudent steps to manage our business. We do not foresee the economic situation improving during the second half of the year and expect the euro to continue to depreciate versus the US dollar. Through the remainder of the year we will stay focused on strengthening our value proposition, reducing our costs, and winning in our targeted market segments where the value of our brands differentiates us from the competition.

Latin America continues to be a very volatile region as well. Our business there delivered segment operating income of $43 million, down year over year because of the recessionary conditions in Brazil. I am pleased, however, with how our team has executed in this environment. There was double-digit growth in consumer replacement volumes in many of our Latin America growth markets including Mexico, Argentina and the Andean countries.

However, this performance was more than offset by the weakness in consumer OE, particularly in Brazil which remains in a recession. New vehicle sales decline 24% in the second quarter and are down 21% year to date versus 2014.

Venezuela's fluid economic and political situation continues to create challenges and volatility in our Latin America business. However, we are pleased our team has been very successful in continuing to operate profitably in the country while servicing the strong demand for our replacement products. Laura will elaborate on Venezuela in her comments in a moment. As I said last quarter with currency, economic and political instability at levels not seen for years, we expect the Latin America region to remain volatile, but we also remain optimistic about the region's long-term prospects.

Finally in Asia-Pacific, strong volume growth in China and India contributed to segment operating income of $84 million and operating margin of more than 17% in the second quarter. In India, our strategy has been a success as OE and consumer replacement volumes and share both increased, driven by new vehicle launches and strong branded retail performance.

During the quarter we launched the Assurance Triple Max tire for the mid-tier passenger segment in India. This is a product that has been very successful in other countries in the region over the past 18 months and we anticipate it will be in high demand here, as well.

In China we continue to have strong year-over-year growth in our consumer replacement and consumer OE businesses, but at a pace slower than anticipated. The slower growth is largely due to a combination of weaker new car sales, domestic stock market volatility and lagging consumer confidence.

While the macro economic environment in China is expected to soften relative to the first half, we are driving initiatives to support our growth goals. For example, we recently expanded our relationship with WalMart in China, and Goodyear also is now the exclusive tire brand available through Sam's Club stores and online. Going forward, we are focused on driving incremental replacement tire sales in Tier 2 and Tier 3 cities, taking advantage of additional opportunities to grow our customer base.

As we said in the past, China's growth may not be in a straight line, but it's the world's largest auto market. We expect continued growth over the balance of the year, but with stronger headwinds than in the first half. We remain confident in our long-term growth in China.

Looking back at our global businesses in the second quarter and over the first half, I am very pleased with the execution of our strategy, the focus on our targeted segments, and our team's commitment to maximizing value through the integration of our key how-tos. Our 14% segment operating income growth in the first half gives us confidence that we will reach our 10% to 50% growth target despite challenges in the global economy. Our commitment to those objectives is unwavering, but we will be flexible in how we arrive at our strategic destination of creating sustainable value.

Many of our markets are considerably more volatile than they were when we developed our plan. We will have additional bumps in the road, but we are not running our business for one good quarter or one good year. By running our business for the long term, we won't be distracted by the now familiar fluctuations in the marketplace or the expected headwinds in our industry.

Our strategy is solid. It's working and it delivered in the quarter, as evidenced by 21% year-over-year segment operating income growth and by a 13% operating margin.

We believe that we'll continue to drive strong results. I'll now turn the call to Laura.

Thank you Rich, and good morning everyone.

My remarks today will start with a review of our second quarter results, and I will then cover updates to our full-year outlook for 2015 before we open the call up for your questions.

Turning to slide 7, I would like to highlight a few items on the income statement. We are very pleased with our second-quarter performance, showing both volume growth and strong improvement in our segment operating income. Unit volumes increased 1% in the quarter, driven by solid growth in North America and Asia Pacific, partially offset by declines in EMEA and Latin America.

Looking at our net sales for the quarter, the impact of the strengthening of the US dollar reduced sales by $401 million year over year. In addition, other tire-related sales were lower by $81 million. The decline in other tire-related sales was driven by lower third-party chemical sales in North America, reflecting lower commodity costs.

Gross margin improved 3.3 points to 27.4%, improving segment operating income to a record $556 million with an SOI margin of 13.3% for the quarter. Our earnings per share on a diluted basis was $0.70. Our results were influenced by certain significant items, which are listed in the appendix of today's presentation. After adjusting for these items, our earnings per share was $0.84.

As a result of the release of our US tax valuation allowance at year-end 2014, our US tax expense increased significantly year over year. Consistent with our approach in the first quarter for year-over-year comparison purposes, we have provided an adjusted EPS excluding this incremental non-cash tax expense. For the quarter, the adjusted EPS on that basis is $1.13, up $0.33 versus last year. As a reminder, although we are incurring tax expense in the US today, we do not anticipate paying significant cash income taxes in the US for approximately five years.

The step chart on slide 8 walks second quarter 2014 segment operating to second quarter 2015. The positive impact of volume growth and lower unabsorbed fixed overhead cost was $8 million. Lower raw material cost of $108 million more than offset reduced price mix of $7 million for a net benefit of $101 million during the quarter.

While this performance is well ahead of our previous guidance for the second quarter of $25 million to $50 million, about half of the net price mix versus raw materials in the quarter was a benefit from our Venezuelan operation. Excluding Venezuela, our price mix and raw material performance came in at the high end of our guidance range.

Cost saving actions of $101 million more than offset the $71 million impact of inflation, which was driven primarily by Latin America. The highly inflationary environment in Venezuela significantly impacted our net savings in the quarter. Excluding Venezuela, our cost savings net of inflation would have almost doubled. Foreign currency exchange was a headwind of $35 million, reflecting the continued strengthening of the US dollar, particularly against the euro.

Turning to the balance sheet on slide 9, cash and cash equivalents at the end of the quarter were $1.6 billion and essentially unchanged versus the prior quarter and the second quarter of last year. This cash balance includes $304 million of cash in Venezuela. Our total debt and our net debt are effectively flat with our first-quarter balances, as well. Net debt is lower than the second quarter last year by $660 million following our strong free cash flow performance in 2014.

Slide 10 shows we generated $377 million of free cash flow from operations in the quarter. Working capital was a source of cash, and more than explains the $63 million improvement in free cash flow compared to the prior year. Looking over the last 12 months, our free cash flow performance has been strong, exceeding $1.1 billion.

Moving now to the business units on slide 11, I'll start with North America. North America had another great quarter with an all-time record segment operating income of $321 million. This is the 24th consecutive quarter of year-over-year earnings growth, and with a segment operating margin of 15.8%, the 5th quarter in a row of earnings exceeding 10% to sales. North America's $113 million year-over-year increase in earnings was driven by positive price mix and raw material cost, demonstrating our strong value proposition.

North America's unit volume increase was driven by growth in both OE and the replacement channel. Our commercial truck volume was also strong in the second quarter, driven by strong OE demand for our fuel-efficient tires such as the Fuel Max LHS Steer and LHD Drive tires. Remember, fuel is among the top two largest expenditures for fleets, and as such identifying the most fuel-efficient tire is a critical factor impacting fleet profitability. Through the first half of 2015, North America has generated SOI of $519 million equal to 13% of sales. This earnings power demonstrates the strength of our strategy and overall value proposition.

Europe, Middle East and Africa delivered segment operating income of $108 million in the quarter, a decrease of about 8% over last year's $117 million. The impact of foreign currency translation reduced earnings by $25 million, more than explaining all of the year-over-year decline. Our unit volumes decreased about 2% year over year.

And the volume decline was due to two factors. First, a continuation of increased competition concentrated within our economy segment in Central and Eastern Europe. This area is where we have seen additional pressure driven by an increase in Asian imports. Second, the discontinuation of our farm tire operations last year. Together these headwinds offset volume increases we saw year over year in the HVA performance and SUV segments in the region.

As Rich mentioned, strong summer tire sales during the quarter in Western Europe helped offset decline we saw in winter tire sell-in year over year. However, with our previously announced price increases in Europe taking effect in July, we see some of the volume benefit in the quarter as pull-ahead of third-quarter demand. In commercial truck we continue to experience a stable industry environment and we have gained share in replacement based on the strength of our premium-branded products.

Our EMEA business has delivered solid underline performance in the first half of 2015. While there will continue to be challenges with foreign currency headwinds as Rich mentioned, we are very confident in our winter product portfolio and we have taken a cautious approach on volume expectations for the back half of the year, given some summer demand pull-ahead and winter inventory remaining in the channels from last year's very warm winter. Even as we plan for a green winter, there is still some risk due to the unpredictable nature of the weather and the potential repeat of last year's warm temperatures through the fourth quarter.

Asia Pacific generated segment operating income of $84 million in the quarter, an increase of 11% over last year $76 million. The main contributors to the earnings growth were increase volume and favorable price mix versus raw material cost, partially offset by higher SAG expenses and the negative impact of foreign currency translation. Volume of 6 million units was 5% higher than a year ago, and was primarily driven by two of our largest and fastest growing markets, with double-digit growth in India and China.

In China, our volume growth in the quarter was driven by our OE business, where we have been successful in winning new business and gaining share, in addition to participating in the overall industry growth. We are also proud to report that in June we launched the EfficientGrip Performance tire for Chinese luxury consumers, offering best-in-class quiet and comfort.

As Rich touched on, although China's economic growth has recently moderated from the levels seen in the first half of the year, we are still excited about the long-term growth opportunities we see for our business in Asia. In addition on slide 16 in the appendix of today's presentation we have provided some further details on our operations in China. In India we enjoyed double-digit volume growth versus the prior year in both the consumer replacement and consumer OE businesses.

In Latin America our volume decreased about 4%. We again sold double-digit growth in consumer replacement volumes in Mexico, Argentina and the Andean countries. However, this performance was more than offset by weakness in Brazil, especially in the OE and commercial replacement segments, which are feeling the effects of a significant recession. We also saw year-over-year volume declines in Venezuela, as we have been operating at lower levels of production than last year.

Segment operating income was $43 million for the quarter, $16 million less than the prior year. Latin America benefited from positive price mix, which was more than offset by the impact of inflation of raw material and conversion costs, as well as lower volume.

For the quarter, operating income from our Venezuelan business was $36 million. Although the impact of Venezuela on our net income for the quarter was $24 million, which included $12 million of foreign currency exchange losses due to a weakening in Venezuela's [psychic] rate. While the macroeconomic conditions and currency controls remain challenging, the team has been able to obtain sufficient US dollars to purchase raw materials to support our operations, albeit at a lower than optimal level.

I'll discuss our latest thinking as it relates to Venezuela as part of our full-year outlook in a moment. Our Latin America team is continuing to work proactively to maximize market opportunities, while at the same time taking actions to address the cost structure to better match the lower volumes in this recessionary environment.

Slide 12 shows our updated full-year modeling assumptions or 2015. You'll notice that volume, overhead absorption, currency, and Amiens closure-related savings are all unchanged from our April call. We continue to see our full-year volume growth in the 1% to 2% range, with strength in North America, a cautious view on EMEA's second-half volumes, an increasingly challenging environment in Brazil, and lower growth expectations for China.

The updates to our outlook are due to Venezuela. The two changes to our 2015 SOI drivers are in the price mix versus raw materials and net cost savings outlook lines. As we were able to continue profitable operations in Venezuela throughout the first half, and at this time we have enough visibility to expect access to US dollars for raw material purchases that will enable us to remain at current production levels through the third quarter. As a result, we have updated our outlook to reflect the effect of Venezuela result to the various SOI drivers rather than including Venezuela as a separate line item.

Overall, Venezuela will meaningfully increase our price mix versus raw material expectation and decrease our net cost savings guidance. Both of these changes are a reflection of the highly inflationary environment in the country. Taken together, these changes incorporating Venezuela are a $70 million improvement versus our April outlook.

We now expect a full-year net benefit of approximately $330 million for price mix net of raw material changes. Raw material costs are expected to be 7% lower than last year before cost savings actions due to slight increases in underlying raw material costs since April, particularly for natural rubber in the second quarter. This also includes the negative impact of currency on raw material transactions in our international businesses.

The other significant change in the outlook relates to the net cost savings, where including Venezuela significantly increases the overall inflation headwind. As a result, we have reduced the net cost savings to approximately $70 million for the year. I want to be clear. This reflects simply the higher inflation related to including Venezuela results throughout the outlook. Our operational excellence programs are on plan and delivering as expected.

Additional financial assumptions for 2015 are listed on slide 13, and each is consistent with what we provided on our April call. In summary, as we look at 2015 our financial outlook has a few moving pieces, but in total has increased $70 million, reflecting the operating income improvement from our Venezuela operations. Excluding Venezuela, our full-year outlook is unchanged.

Our strong performance over the first six months gives us confidence that we will reach our SOI growth target of 10% to 15% in 2015. In addition, we continue to execute our capital allocation plan. And as part of that plan, we have an existing $450 million share repurchase authorization. And including the $50 million in repurchases during the second quarter, we've now repurchased $283 million under our 2014 through 2016 plan.

Now will open the line up for your questions.

(Operator Instructions )

Ryan Brinkman, JPMorgan.

Good morning. Congrats on the quarter.

Good morning.

I'm trying to think about how the model North America for the balance of the year, after this current 2Q. I think it's important to understand what's happening with price to mix -- price mix to rise. First question, can you break that out for North America now, like I think you will in your Q? Secondly, can you comment even directionally on how you expect North American price mix to track in 3Q or 2H compared to 2Q or 1H? I imagine with the sort of on again/off again preliminary tariffs in the first half being replaced with now permanent duties in the back half that pricing independent of raws (inaudible) could be stronger. Do you agree with that directionally?

And then regarding raws, should this too potentially get better at least in 3Q, given your [FIFO] accounting and the fact that prices seem to have bottomed out in 1.5 quarters prior to 3Q, which I think is roughly consistent with your traditional lag between stock prices and impact to the P&L?

Ryan, we'll try to tag-team. You had a lot of questions there here. I guess first thing is, we don't break out the difference between price mix, and we're not going to start doing that as we go ahead. I think as you look at where were at, obviously we're very pleased with the result of the business. I think as you think about Q2 and first half and then roll it into second half, I think the first thing that I would say is, what we are seeing is our goal of creating a business that can deliver sustainable value, sustainable results over the long-term. And the decisions that we've taken in the past around our fixed costs, around efficiency, around business choices, around our new product portfolio, around innovation, around putting a focus on the consumer and driving our strategy, those three elements of our strategy with the right team. You are seeing that take root and really delivering in this quarter. I would suggest it's been delivering over the last number of quarters, number of years.

So as we think about second half, I think that underlying business model certainly will continue. We also got the benefit now, as you know, we've got lower gas prices. We've got better unemployment. We see miles driven being up, I think, 15 reported periods in a row. That means more tread rubber is being burned on the roads. We see a stronger OE business in the US, the $17 million SR, and the work we did on our getting on the right [fitment] is certainly paying dividends as well. As we look into second half, I think some of that momentum will certainly still be there.

As we look at what we said earlier in the year, we said that we would have a strong second half as well in North America. We are also releasing some new tires again, part of the Kelly Edge Powerline. We have new tires going into Walmart. We have a new Assurance tire coming out. So certainly that is going to help our momentum as well as we move ahead. I'll tell you, we still have, as I mentioned in my remarks, we still have some supply constraints on some of the HVA tires that our customers want. We're still trying to work on that as we get into the second half and beyond, getting more tires out of the factories that we have and more out of the import plan that we have as well. All of that momentum, I think, does carry into the second half as we go. In terms of where raw materials will be, I would point you back toward the assumption page that Laura can talk to here. We really haven't changed much where we are. I think we said about, what was it, 8% reduction for the year.

Yes, exactly. On raw materials, while we expect it to be 7% for the full year there is a slight improvement to that in the second half over the first half of the year. And then real quick, just back -- no doubt as we think about North America and the price mix versus raws guidance, nothing has changed in the sense that we still, based on our results in North America, expect price mix versus raws to be weighted more towards the back half of the year versus what we saw in the first half of the year, if that helps (multiple speakers).

It definitely helps. Thank you. Just one follow-up, though, on the price mix [shiraz]. Did you not beat the 2Q guidance? Was it for $20 million to $50 million, comes in $107 million. So that's a $57 million improvement -- and then it seems that slide 12 is saying there is actually no change going to the full year, except for Venezuela. Why not an improvement to the full year? Is it because the spot prices ticked up a little bit through the quarter? How to think about that?

Sure. No doubt for price mix -- I'm sorry. For price mix for the first half of the year, our guide was -- I'm sorry -- for the second quarter our guide was $25 million to $50 million. When you back out Venezuela and the actual results for the second quarter, you will see that about half of that is Venezuela. And therefore we're at the very high end or so of our $25 million to $50 million range as we go.

Yes, you're right. That makes perfect sense. Final question. Basically on slide 22, it looks like one of the biggest improvements there was to commercial replacement in North America, which I think is disproportionally profitable for you. You talked about in your prepared remarks some of the freight industries that you look at, and we can see too. Can you talk about maybe what you think is driving the underlying improvement in freight or whatnot and the sustainability of that? Thank you.

Ryan, I think it's just the general economic lift that we're seeing in a broad sense. I mean, I know our US economy is not hitting on all cylinders, but it's certainly improved. I think there's certainly some pent-up demand out there that is going over the roads. In addition, the OE business is very strong as well. As truck builds, I know as you guys do, or your colleagues follow the trucking industry, you know what the boards look like in terms of new truck build. There's a market, I think a favorable market out there in terms of freight and in terms of demand for trucks and consequently demand for tires.

We also have built our business around not just, and I think this is really the most important thing I can say, it's not just about tires. It's about the whole fleet services solutions that we bring. And I think particularly in an environment where there's more trucks on the road, being a full-service fleet provider, meaning new tires, retreads, an ability to get truckers up and running when they have issues on the road and providing truck tires that have the fuel economy that really, as Laura mentioned in her remarks, can save trucking companies money on fuel. It's that whole value proposition, I would suggest to you, that drives our business results. That's important because that model will also be beneficial to us when the industry is not as strong as it is right now. That's really is, I would tell you, the underlying strength that we have. And I would say very proudly, I think we have the best business model in North America by far.

Okay, thanks. Congrats again.

Rod Lache, Deutsche Bank.

Good morning. Congratulations. A couple of things. First on the guidance, you are guiding to 10% to 15% SOI growth. I presume that is off the $1.7 billion last year. That's $170 million to $256 million. All those items that you provided, the price versus raws, the costs, FX and Amiens, that's about $220 million. And if you had volume growth of 1% to 2%, that might be $25 million to $50 million. All together you've got about $245 million to $270 million based on that. What do we need to think about to net down to that $170 million to $256 million?

Rod, we're trying to give guidance as best we see what is happening in the world today. I mentioned in my remarks that's when we put our plan together, clearly a lot of things have changed. Our job is to try to deliver the results that we set. So as we look at what is happening over the course of the second half of the year, we've got risk on currency in Europe with the euro. We've got the winter markets that we still have to work our way through. Does it snow, when does it snow in Europe? We have the recession in Brazil to deal with, and a bit of a slowdown in China. There are a lot of different things that we have to work our way through. What our guidance is intended to do is to be less of a point estimate, but to give you a view of how we see what we need to deliver over the course of the second half.

Okay, that makes sense. Also just a housekeeping thing. Typically the difference between SOI and operating income, your corporate overhead is $35 million to $40 million. This quarter it was $56 million. Is that an unusually high number, or is that a run rate that we should think about going forward?

Right. It isn't a run rate I'd say using going forward. We were a little higher in this quarter. We had some -- our inter-Company profit elimination as we moved tires around the world, some corporate incentive plans and so on moving around. Similar to 2014, each quarter, there's ups and downs in it. On average, we are still projecting to come out between $30 million and $35 million a quarter.

Great. Two other things. Market share questions. In North America, the RMA was up 4.8%. Your replacement volume was up. It was up 1%. Presumably the Asian imports would be doing less well. Maybe could you talk a little bit about what is happening here market share-wise? Is the new Kelly product expected to fill a gap that's outperforming?

In Europe, you explained the market share issued there with Eastern Europe and Western Europe. But it's a bit surprising that you're implementing a price increase, even though raw material costs are down. In Europe, is it basically just staying disciplined on pricing and foregoing that volume growth?

So Rod, from a North America perspective, I think the market is up because you had a non-Chinese imports come in, mostly at the low end of the market again. And that's not, as you know, a place where we play. That is really what drove that market up. As I've said in the past, we are sticking to our strategy. We are not just pursuing volume for volume's sake. We are pursuing those parts of the market where we can create value for ourselves and for our customers. And that's what we are doing. A lot of that bump comes at the low end. Exactly as you said, I think you hit it exactly right. With the Kelly Edge, with the Douglas Powerline, the Kelly Powerline, with another Assurance tire we're putting in, we're taking that HVA technology, as we said in one of our megatrends a number of years ago, bringing that down into the mid-tier where we can get value for the Kelly name and for the Goodyear name as we move ahead. That was our strategy. It is our strategy. And that bump really comes in places that doesn't affect us as significantly as the numbers might suggest.

And from a Europe perspective, I think when you look at our volume year-over-year, two things to keep in mind. One, we had a significant sell-in in winter tires in Q2 last year. That made it a tough comp because we didn't see that sell-in again this year. And also you are seeing the reduction in our farm business, which I think accounted for about one-third of our volume loss and our volume change year over year because we are completely out of the farm business now. That was sort of a one-time impact that you see there.

Those two things really say what volume is. We don't view it as a significant impact, a significant concern as we look at Q2 volumes. And your comment on -- obviously, Rod, maybe to just add to that one other quick thing. Winter in Q3 and Q4 is obviously something we are paying very close attention to because that is a significant item to the industry and to Goodyear.

Finally, in terms of raw materials, the price increase you mentioned that we had in Europe. Remember our raw materials, particularly natural rubber but other raw materials, are dollar-based. With the weakening euro our raw material costs are going up. I think that's the logic of what you've seen there.

Great. Okay. Thank you.

Itay Michaeli, Citi.

Good morning everyone, and congrats. Maybe I'll turn to China, and thanks for the detail on slide 16. Can you just remind us what you are assuming for China in the full-year guidance, maybe volume-wise, and how to think about sensitivities there if that market were to get materially worse?

Itay, I think it's a good question. Maybe I'll just start. I'll take a step back by saying we have what we feel is an excellent business in China. We've been there for a long time, since 1994 actually. And our business model there is largely focused in premium/HVA part of the market. We have low LVA-type tires that we make and sell over there. We have a very good business mix. And we supply that by and large with one of our most technologically advanced and really best-performing factories in Polandian where we have capacity of about 11 million consumer tires and about 0.5 million truck tires there. We've been there a long time. We've seen the bumps in the road. We get that.

As we look at our business, we still think China will be a growth market over the long term. Today it's about -- the industry's about a 50/50 split between OE and replacement. Remember, that's really different than the rest of the world or our mature markets. When we describe our Company, we say about 30% OE/70% replacement. China is a little bit different as that market matures and as cars get put on the road. So as you think about our business there, it's a little bit different mix. Obviously, there's a little bit different margin change 50/50 versus 30/70 in terms of how we think about the rest of the world as well.

That is sort of a picture of our business. Our focus there, Itay, continues to be on growing our branded business and expanding our distribution. We had a very good second quarter, both in OE and a strong quarter in replacement as well. As I mentioned, we are going to continue to focus on growing our business in places like Walmart and Sam's Club, where we are the exclusive tire, and just recently and Sam's Club as well. And we see opportunities beyond the Tier 1, Tier 2 cities we play into Tier 2 and Tier 3, and see a lot of growth opportunities for us there. That's the next phase as we move ahead.

We still feel very optimistic about the long term. Listen, all the things that everyone has been following, we've seen a lot of the OEMs take down their forecasts on the industry and on growth. And we see the same thing there. So we have -- we saw growth in the first half. We see that certainly changing in the second half, and be about flat as we look to the year is what we see there.

We will have some headwinds there. But we also have a plant, as I said, that has high technology. We import some from that today. You would be right to think that we are going to think about how we use that capacity in other ways, both in the Asia region as well as possibly in other parts of the world as well. So clear bump in the road, a clear headwind that we had to deal with. I'll just say, we can and we will. We are going to -- we do remain very optimistic about our prospects in China over the long term.

That's very helpful, Rich. Maybe just a second question on the full-year SOI guidance of 10% to 15%. It sounds like your second half outlook with respect to the European winter situation. China we just talked about. It's fairly conservative and you're clearly are trying to embed some of these potential risks in your guidance.

With that, is there any bias in the SOI range at this point, high end, midpoint, low end, given some of these risks? If not, maybe just talk about what some of the few things that can go right versus wrong in the second half of the year in your modeling.

I don't think there's a bias in there. There's a lot of volatility in global markets. As I mentioned, I think and I think you've seeing this as well, and a lot of the companies you are covering is the world changed versus all of our planning cycles a while ago, and we've got to react to it. And that's what we are doing. So there's really no bias in there, other than putting the gloves on every day and figuring out what we need to do to deliver the results.

In terms of headwinds, I won't repeat them. I think you actually touched on them again. Those are the things that we have to deal it. In terms of things going right, I would tell you we are focused on executing our strategy, our key how-tos and getting value for our brands, and making more of the right products and delivering them both in -- really, in all of our markets. I was going to say in Europe and North America in particular where we have still demand for those HVA products. But Itay, that's our focus. To make those customers that have who want more of our product happier customers by getting it to them. And if we do that, that's going to have goodness all around.

Terrific. Thanks so much. Congrats again.

David Tamberrino, Goldman Sachs.

Good morning, and congrats on the quarter. Just a couple of questions on our end, As we look at regional margins, I think this is probably hitting on Brinkman's questions earlier. North America was quite strong at about 16%. Wondering your thoughts into the back half. Is that sustainable, or do you see some slight compression sequentially into the third quarter because of the aforementioned increases in spot prices of raw materials?

David, I think I'd refer you back to Laura's comments where she said we had originally -- in our original planning assumptions that second half of the year we'd see stronger results because of the price mix equation. But also I'd just remind you that the way raw material flows, remember we're about six months from -- I think about six months from date of purchase until time it hits into our P&L, particularly for our raw materials. Lower spot prices today will turn up in our P&L down the road, six months down the road. I'd just remind you we have that lag in our, particularly our North American business, Europe as well. Asia obviously is a little bit differently as their proximity to the source of the raw materials, they see that flow-through much, much, much quicker.

Understood. I think that's fair. Moving on to EMEA. As I look at last year third quarter, you had pretty strong 11% margins. You've gotten back on the margin expansion path here with price increases being announced, it seems as if you'd probably see expansion in that region again. Are we thinking correctly on that, or is there something that we are missing?

David, I would say we still take a very measured and cautious view of Europe, and that's for a couple of reasons. One, as we look at the economy, there is still a lot of volatility. We said, I don't know how many -- it's for a number of years now that we saw Europe continuing to muddle along, and we still see that happening with injections into the economy to get it going again. We see the pressure on the euro. We see the Russia/Ukraine situation potentially popping its head up at some point. We certainly can't prognosticate there. We saw what happened with Greece. There's still a lot of volatility going on. That's always underneath us to think about what has to happen.

Frankly, it's why we are focused on our cost structure as well. You may recall we announced a restructuring plan in the UK to take out about 400 headcount and close our mixing and retread operations there. You'll see us focusing on our cost structure representative of that uncertainty in the market. I think that's one thing that remains in our thinking.

Secondly, the winter markets are determinative, and what's determinative in the winter markets is the weather. That will have an impact for us as we look to the second half of the year. Maybe to frame it for you again, I think we're coming off of, what, three warm winters in a row, green or yellow. What you see is you've got sort of a wait-and-see attitude from dealers who typically don't go long on inventory coming out of a warmer winter. You've got some inventory in the channel as it is. There's just a little uncertainty under there. We have taken a very measured approach, a balanced approach. We planned for a, quote, green winter, not a white winter. And we're doing that very consciously to manage our business and manage our factories and manage our inventories. So those things, I think, are going to come into play into the back half of the year. That's really how we think about it. Laura, I don't know if you'd add anything to that.

Yes, (inaudible) exactly.

That's fair. Pretty detailed as well. Lastly on the balance sheet, it looks like you have your 8.25% notes with a call date coming up. Is there any potential update there? You're might be reviewing that. Obviously you repriced your second lien not too long ago.

Yes, exactly. No doubt. In May and June both we took some actions out in the market. In May we amended and restated that European revolving credits facility and upsized it as well. In mid-June, right, we amended the second lien term loan, which did lower our borrowing cost by about 100 basis points. We are always monitoring our capital structure. We really can't say whether or when we plan to be in the market. But as you know, we have a long track record of being opportunistic in reducing our interest expense.

Helpful. Thanks again. Congrats on the quarter.

Thanks, David.

Brett Hoselton, KeyBanc.

First of all, you obviously didn't change your price mix versus raw materials with the exception of Venezuela. But I was hoping you could broadly talk about pricing trends in the different regions, North America, Europe, Asia, and South America. What are you seeing? Again, you haven't really changed your guidance per se, but are you seeing any acceleration, deceleration? Any differences relative to your expectations in terms of direction?

Brett, as you can appreciate, we can't speak on or comment on pricing specifically. And as you know, we think about our pricing, not just the price itself but the value we try to bring to the market. The brand that we bring which brings customers to dealers' stores, the products, the innovation we have in them, the customer service that we bring, the promotions that we put out in the market, all of those things go out into how we think about our price versus just a raw material or a cost input. So while I can't speak specifically on price, maybe I can just give you a little bit of flavor of some of the things happening in our regions. I'll start with EMEA, and really I'll be a bit repetitive here and say, I think it was Rod who mentioned that we had a price increase in the second quarter. That really was reflective of the fact that our raw materials are dollar-based. And as the euro weakens, it makes our costs go up. I think that's a headwind that we have to deal with as we think about Europe.

As we go to Asia, also there as raw material prices change, they move quicker through our P&L, as I just mentioned a while ago. As we see those raw material fluctuations, I would just point out that region gets hit quicker and it has to react quicker. And that's what that team does there. Also remember in places like Australia and India and other places like that, they too have the currency pressure while sourcing materials in US dollars as well.

And also we see a bit in Asia, and particularly in China, more of China-based products staying home versus being exported. So we see some of that capacity coming into the market in China as well. But I'd also tell you, most of that's on the low end. And as I previously mentioned, we particularly play in the premium segments or the HVA segments in China.

And in Latin America, I'd say the biggest thing to be aware of there is simply the slower OE production. As I mentioned, new car production was down about -- over 20%. So that over-capacity is certainly in the market there. And any situation where supply is ahead of demand has an impact. But also I would say with the real devaluing, what's happened is domestic manufacturers, certainly which we are one, have an advantage now. The opposite of what we had before, as a weaker real means less imports being purchased by our customers there. And that certainly helps us in terms of our market there. And I think our changes and what we've done in places like Brazil in terms of new products and engaging our dealers, all that has resulted in big market share gains for us in Brazil and volume increases in Brazil in 2015.

And in North America, I think we've probably covered that with some of the other calls. That's just maybe some color on what's happening in the market. I'll just say our goal is to continue to capture the value of our brands for our customers and ourselves. That's what we are focused on.

Changing gears, how do we think about the introduction -- not the introduction, I apologize. How do you think about your increased emphasis, let's say, on the Kelly brand relative to your long-standing strategy of moving towards higher value-added, higher-margin tires and so forth? Is this kind of in opportunistic move relative to the recent tariff introduction, or should we think about it differently?

I think, Brett, I would make two points to you. One, if you go back to when we introduced the Megatrends, we don't go back and talk to those as such. If you remember, we said that the trend would be the HVA or bigger rim diameter, a more complex constructed tires, better rolling resistance, so on and so forth, would migrate to the mid-tier. That's exactly what's happening. And you see that on new car fitments. So that was, I think, something we knew, we called that was going to happen. We saw happening, and it is. It says that mid-tier is the place to be with HVA tires.

Secondly, as we look at the market, we had to get our business model in line to get out of some of the private label business, which we did. And we moved up market where we could get value for the brand. And then we are, and we said we wanted to play in that mid-tier section, particularly mid-tier commuter touring because that is the single largest part of the auto market and the tire market, if you will. Playing in there with Goodyear brand in some cases and the Kelly brand in other cases really sets us up very well to get the value of our brand, to put the technology in there, and to do that as an alternative for dealers and consumers who, in most cases, would rather have that Kelly or Goodyear tire then an imported tire. That was, I think, a strategy we had planned and a strategy we are executing.

Thank you very much, Rich.

Emmanuel Rosner, CLSA.

Just first a quick housekeeping question. On your outlook slides, the net effect of all the changes related to Venezuela is a positive $70 million for the full year. How much of that happened in Q2? How much of the $70 million is something that helped your SOI this quarter?

It's about half. You are correct in the $70 million, and you'd say about half of that is Venezuela's second quarter.

And the break-up of that is about $50 million-plus on the price versus raw, and then a little negative on the cost saving?

Correct.

Okay. That's great for the housekeeping. And looking longer term, I know it's obviously too early to speak about -- in detail about 2016. At the same time I'm obviously impressed that as part of your [retreaded] outlook today, you are mentioning the 10% to 15% SOI both for 2015 as well as 2016. Directionally, a lot of your SOI growth in recent quarters [and periods] has come from positive in the price net of raw materials, which obviously is not your long-term strategy, it's more like neutral. So when you look at going into 2016, what sort of drivers should we expect that will yield this 10% to 15% SOI gross?

Emmanuel, I think what we talk about internally, and it's what I'll tell you very openly as well, we have to be focused on a balanced plan of growth, of volume growth, of revenue growth, and of cost reduction and efficiencies in our business. I think there are times when some of those will have a higher weighting than the others. As we think about our long-term strategic goal on our road map of creating sustainable value over the long term, we have to have a balanced plan of revenue growth, of volume growth, and of cost management and efficiency to drive that 10% to 15%.

Right. And as we move through the year, and especially on our fourth-quarter call, we'll walk through kind of the same formats and give you a lot more detail as we see it. As you can imagine, things continue to change by the day, as they have.

Definitely. Thanks for the color.

Ravi Shanker, Morgan Stanley.

Good morning, everyone. One housekeeping question on the FX guidance, which you've kept pretty flat. But now points to a heavier weighted second half versus first half. I would've thought the comps get easier in the second half versus the first half. Can you talk about any moving parts that shifted that, if at all?

The comps don't get easier in the second half as we go. Right now we've got the euro in our assumptions at about $1.09 as we go, But the comps do not get any easier as we go. We are only about halfway through the year, right? These are very volatile. We are really not changing our guidance at this time.

Ravi, I don't think there's anything to read into there, other than FX is a big headwind and a moving target.

Yes, very uncertain.

There's nothing (multiple speakers).

Understood. And just to summarize some of your comments on this call, when you look at the North American market today, and just look at the volatility around orders related to the tires and such, what's your feeling on the state of the market today, especially the state of the channel in terms of the channel being filled versus not?

Ravi, I guess maybe the way we look at it is, first of all, we look at market back from what's happening in terms of the consumers buying tire. I think what we still see is around a 1% to 2% sell-out. For us that is the key number versus just the sell-in number. That number has actually been pretty consistent. I think from a sell-in standpoint, the numbers are muted and have been on a comparative basis, as you've had big buy-aheads and then -- big periods of buy-aheads and then big periods of not buying. That can kind of make the sell-in numbers, which those share numbers are based on, a little bit more difficult to read. I would tell you, and I've said this consistently, we are on our plan. We're not going to get thrown off our game because there was a big sell-in ahead, let's say, by a buy-ahead for a tariff coming in where we look like we've lost share on a sell-in basis. And then have it reversed the next quarter where we look like we are up because the -- because dealers have stopped buying those imported tires because of the tariff. We are not going to get thrown by a big up and a big down. We are on our way to play on an industry that's growing sell-out 1% to 2%, and driving it on our strategy. I think that's the best answer I can give you.

Understood. Lastly on Europe, you said you aren't planning for a white winter, which is I think the right strategy, given what's happened last couple of years. How quickly can you adapt if the winter quickly turns yellow to white?

I think, Ravi, we can adapt to a certain extent. But even in winters where we had white winters, there will be, in effect, land grab for winter tires. I think even planning for a white winter if it would happen, there would be a land grab for winter tires because there hasn't been one in a while. I would tell you there's pent-up demand out there for it. Our view, though, is we have to approach this in a very measured way. We have to have balance, both in terms of our inventory and customer service. We'll strike the right balance. To the extent that we can supply more tires, we are going to go ahead and do that. But we are not going to stake our plan on a white winter at this point.

Great, thank you.

It appears we have no further questions. I'll return the floor to our presenters for any closing remarks.

Thank you. I'd like to wrap up our call by reiterating how pleased we are with our second-quarter and first-half results, particularly amid global economic challenges. We expect those challenges to continue in many of our markets, but we are confident in our strategy and teams. We are confident in our products and brand. And confident in our ability to reach our growth target deliver sustainable value. Thanks everyone for joining us, and we'll talk with you again next quarter. Thank you.

And this does conclude today's program. Thanks for your participation. You may now disconnect. Have a great day.