Goodyear Tire & Rubber Co (GT) 2015 Q4 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 fourth-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 fourth-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'll provide a review of our fourth-quarter and full-year results and I'll then cover the highlights and provide context for each of our business units headed into 2016. I'll also provide some thoughts that look beyond this year before I turn the call over to Laura to review the financials in detail and review our outlook.

I'm extremely pleased with our outstanding results in 2015, as we delivered 18% growth in our full-year segment operating income, exceeding $2 billion for the first time in our 117-year history. Excluding the impact of currency on our results, our segment operating income grew 27%, which is a clear indication of the strength of our underlying business.

This is our third consecutive year of record-segment operating income. What stands out as most gratifying, however, is that these results were achieved amidst a challenging global economic climate. This outstanding performance contributed to free cash flow from operations that reached $951 million for the year. And as pleased as I am to report these results, I believe it's more important to view this as evidence of the soundness of our strategy, our ability to execute against that strategy, and outstanding performance by our teams across the globe who have consistently met our goals.

Our consistent progress has resulted in steady segment operating income growth and positions us well for that growth to continue. As I've said many times, we are not measuring success by the quarter or the year, but by continued progress toward our destination of creating sustainable economic value. That will not change. Evidence of our progress can be found in our stock-price performance, as measured by our three-year total shareholder return.

Goodyear is in the 94th percentile of the S&P 500 companies over that period. This is an outstanding achievement and demonstrates our focus on creating shareholder value. Our performance to date has enabled us to win with our customers in a competitive marketplace and execute on our 2014 to 2016 capital allocation plan, and today, we announced a $650 million increase to our share-repurchase program.

This announcement is very meaningful, considering the position the Company is in today versus where we were just five years ago. The consistent approach of executing against our strategy has allowed us to generate record earnings and strong cash flow. Not only have these results allowed us to continue to invest in our business for future growth, but they have allowed us to focus on strengthening our balance sheet while simultaneously returning capital to shareholders in dividends and share repurchases. The ability to deliver on this plan further validates our strategy.

Turning now to our business units, we had a record quarter in both North America and Asia-Pacific. Our EMEA business showed a strong recovery versus the very weak fourth quarter last year, and our Latin American business continues to grapple with the weak economic environment in that region. Our global volumes grew nearly 7% in the quarter, partly because of our acquisition of Nippon Goodyear in Japan in October.

Demand for our premium HVA products continued to be strong. We are confident that our brands and our value proposition will enable growth over the long term. Remember, we're not pursuing volume for volume's sake; our team remains disciplined in our approach as we pursue profitable volume growth.

2015 also marked a very strong year for our operational excellence initiatives and cost-savings programs, which made an important contribution to our earnings growth by delivering cost savings in excess of inflation. In each region, we succeeded through steady execution of our strategy, focused on increasing the value of the Goodyear brand for our customers and for Goodyear.

Our North America business continued to deliver excellent results and has strong momentum as we move into 2016. North America's fourth-quarter segment operating income was up 16%, continuing the trend of strong growth in 2015. This performance was the result of all aspects of our aligned business model working together.

We expect moderate industry growth in North America in 2016, as many of the key economic indicators continue to be positive. Employment levels, miles driven, and low gasoline prices all remain favorable and a productive platform for growth in 2016. We continue to expect strong demand in our OE and replacement businesses. While OE growth expectations in the US market have moderated considerably for the coming year, our OE selectivity strategy continues to pay dividends as we see strong ongoing pull-through on first and second replacements.

You'll recall that the SAR recovery began in earnest in 2010, and since then, we've seen six strong years of growth in OE. As first replacement is typically around the three- to four-year mark for a new vehicle, we can expect another several years of strong consumer replacement demand. This is the specific result our OE strategy was intended to have in the replacement segment. It's working as we expected.

And although OE growth may be moderating, overall increases in SUV and light truck are outpacing the industry. As you would expect, these platforms depend on the performance characteristics of Goodyear's premium high value-added tires, such as the Goodyear Wrangler All-Terrain Adventure, the Wrangler DuraTrac, and the new Wrangler Trail Runner AT, which we recently announced. These are the types of platforms we targeted in our OE strategy. In 2015, our products were on 75% of the 15 top-selling US SUV and light-truck platforms, including the bestselling Ford F-150, underpinning our OE growth and driving a richer mix.

Even with North America continuing to turn in record results each quarter, we still see many opportunities in the year ahead, including delivery of more premium HVA tires for our customers and consumers. To respond to the increasing demand, we delivered 1.1 million more consumer tires to our customers in 2015 and we're increasing our capability for 2016 and beyond. Some of that volume will come following investments we've made in our existing footprint and from units we're bringing in from our global facilities. Still more will be available with the start of production in our Americas plant in 2017. And though our North America eCommerce installer program is still in its early stages, I am extremely pleased with our thoughtful roll out and our very, very positive results.

We're connecting online shoppers who come to us through Goodyear.com to a preferred dealer who is part of our installer program. Our early data indicates that we're driving new business to our network of aligned dealers. Nearly 70% of consumers who bought on Goodyear.com were new to the installing dealer.

At our recent annual North America dealer conference, our customers made it clear to us that online sales are a huge opportunity for our retailers to grow their businesses. Their positive comments about the platform, our products, and especially Goodyear's total value proposition in consumer and in commercial and off-the-road, as well, energized our team in a way that we've never seen. In a larger context, the response from our customers at the conference was overwhelmingly positive to exciting new product introductions, to our sales tools and training, to our marketing support, and to our collaboration with them to execute our strategy and help them grow their businesses.

Our team, and more importantly our customers, came away from the meeting confident that Goodyear's total value proposition distinguishes us from competitors. Also, we believe that our customers left more aligned and more committed to Goodyear than ever before. We're clearly on the right path, and we expect our positive momentum to continue in 2016.

In early December, we announced the consolidation of North America and Latin America into a new strategic business unit, the Americas, beginning this year. With this move, our customers and consumers will be served better by the combined business and we will be a stronger partner and supplier in both regions over the long term. These benefits will be achieved over time by integrating the businesses to improve product supply and customer service behind the proven leadership of Steve McClellan.

All manufacturing plants in the combined region, including the new Americas plant, will be leveraged to serve all customers in Latin America and in North America. Though North America and Latin America approach their markets differently, there are increasing similarities, including the growth of HVA tires, and we'll use the key learnings from our North America turnaround and success to navigate the challenges in Latin America.

In the near term, our Latin America business continues to be challenged by the political and economic environment. This includes the recession in Brazil and ongoing challenges in Venezuela, which have led to its accounting deconsolidation this quarter. As such, we will continue to focus on our cost structure in the region, as we anticipate the recessionary environment in Brazil to continue through 2016. Laura will have more on Venezuela in her remarks.

In EMEA, our business made solid improvements in the fourth quarter, with segment operating income of $100 million and segment operating margin above 8%. Winter volumes in the fourth quarter started strong, but lost momentum, as the weather in our key markets proved to be relatively mild, as we expected. Winter weather has returned in some regions of Europe, but at this point, our dealers sell from existing inventories. Typically, late winter weather should support the 2016 sell-in season and inventories today are at more balanced levels versus last year. Even so, our optimism at this point must be tempered by dealer caution after several mild winters in a row.

We feel confident about our competitive position and our product portfolio heading into the summer selling season. Over the course of the year, we expect consumer industry growth to be about 2.5% for both OE and replacement. On the cost side, the team has made progress with the closing of our Amiens facility and with some capacity actions announced in 2015 in the UK and Germany.

EMEA is an excellent business for us and we remain positive about its future. However, we realize that the region faces several challenges. Three that are at the top of my list are the potential further weakening of the euro, the continued influx of Asian imports in Eastern European countries, and the fluctuations of our business due to the effect of weather on the winter tire market. Our competitive advantage in this market is our ability to design and manufacture outstanding products that are recognized through tire labeling and magazine test scores.

European consumers value the technology and performance of Goodyear tires. That remains a strong foundation to build upon. That said, we also have to continue to look at our cost structure and work to strengthen our distribution network to further differentiate our value proposition. In short, we are positive on EMEA's long-term potential and we believe stronger margins are achievable in the competitive EMEA market.

In Asia-Pacific, we achieved record fourth-quarter segment operating income of $96 million, an increase of more than 20% following strong volume growth of 38% in the quarter. Our unit volumes were up 12% excluding the impact of the new Japanese replacement business. We saw strong growth in our China and India consumer businesses, but again saw continued deterioration in Australia due to ongoing challenges in that country and a currency that depreciated 17% in 2015.

China had a very strong fourth quarter with our volumes increasing 30% versus the prior year. The increase was primarily due to consumer OE, where sales surged 43% year over year, triggered by local tax incentives on small cars, as well as our success gaining new Chinese OE accounts. Consumer replacement volume grew 10%, driven by strong execution of our sell-through programs.

While we expect continued volatility in the next few months, we remain confident in the long-term market outlook in China, with continued growth in the middle class fueling growth in the automotive sector. We are well positioned to benefit from this market growth, given our award-winning product lines and strong position in OE creating aftermarket pull. Most recently, our EfficientGrip Performance tire won China Auto News's Golden Wheels Award for 2015 as tire of the year for comfort.

With the acquisition of the Japanese business in the fourth quarter, I'm excited about the prospects for growth tied to this heavily weighted HVA market. We see significant opportunities to grow our Goodyear-branded products in this key market. In summary, we remain optimistic about the long-term growth opportunities within our business in Asia-Pacific. We'll continue driving new product introductions, OE pull-through, and expanding our retail network to support long-term growth in the region.

As we look at 2015, I'm very pleased with our fourth-quarter and full-year results. Achieving these outcomes, even amidst global economic challenges, is perhaps the best indication of the strength of our strategy and the changes we've made to Goodyear's business over the past several years. In 2013, when we set out our three-year plan, we established our target of 10% to 15% annual-segment operating income growth, which would have pegged our earnings around $2.1 billion to $2.2 billion in 2016.

Since then, the macroeconomic crisis in Venezuela has dramatically worsened with the decline in the price of oil. With its deconsolidation, we are committed to grow 10% to 15% in our remaining businesses in 2016 and to that same initial level of $2.1 billion to 2.2 billion. Over the past few years, we've been transparent with our level of earnings and cash balance in Venezuela.

From talking with our investors, we understand that many have been discounting that value for some time. We believe that's the right way to think about it. In the year ahead, we expect relative strength in our mature markets and, like this year, continued volatility in emerging markets. We are confident in our 2016 plan and remain committed to our strategy of pursuing profitable volume and share in segments where the Goodyear brand is a differentiator.

With the heightened concern about the state of the global economy today, we will continue to initiate adjustments to our cost base amidst changing markets. We also are working on plans for further actions on costs, including capacity actions later this year.

Looking beyond 2016, we expect our growth will continue. We will share our next-stage plan via an Investor Day later this year and we expect to provide more details on timing over the next few months. However, I can tell you much of the story will remain familiar. We are as focused as ever on being the industry's innovation leader, being first with customers, being the leader in targeted market segments, and as a result, being a Company that continuously drives sustainable value.

And now, I'll turn the call over to Laura.

Thank you, Rich, and good morning, everyone. My remarks today will start with a review of our fourth-quarter results, including points from each of our four strategic business units. I'll then cover updates to our full-year outlook for 2016, including the changes related to the deconsolidation of our Venezuelan business before we open up the call for your questions.

Our fourth-quarter results include the impact of the October 1 dissolution of our global alliance with SRI, which included several joint ventures. You'll recall the dissolution impacts several areas across the businesses, and as shown in our June 5, 2015 investor presentation, the total net impact is expected to be accretive to net income and adjusted EPS.

Turning to slide 7, I would like to highlight a few items on our income statement. In the quarter, we grew segment operating income by 33% to $476 million and our SOI margin increased 350 basis points to 11.7%. Unit volumes increased 2.6 million units, or 7% in the quarter, driven by strong growth in Asia-Pacific and a recovery in EMEA tire sales in this year's fourth quarter.

The net impact of the dissolution of the joint ventures on total volume was an increase of 1.2 million units, with Asia-Pacific's benefit more than offsetting North America's decrease in volume from the same overall transaction. The decline in our net sales for the quarter is more than explained by the strengthening of the US dollar.

Our fourth-quarter effective tax rate was significantly lower than we expected. This was primarily the result of the recognition of $55 million in foreign tax credits and research and development tax credits, following US legislative actions in December. Our reported earnings per share on a diluted basis was a net loss of $1.42.

The results were impacted by certain significant items, including a charge for the deconsolidation of our Venezuelan subsidiary on December 31, 2015. A summary of these items is listed in the appendix of today's presentation. After adjusting for these items, our earnings per share was $0.93, up $0.34 from last year.

Consistent with our approach in previous quarters, for year-over-year comparison purposes, we have provided a US tax-adjusted EPS. For the quarter, the adjusted EPS on that basis is $0.83, which includes the $55 million tax credit. As a reminder, although we are incurring tax expense in the US today, due to our significant US deferred tax assets, we do not anticipate paying significant cash income taxes in the US through 2020.

The step chart on slide 8 walks fourth-quarter 2014 segment operating income to fourth-quarter 2015. Year over year, SOI increased $117 million. The net impact of volume growth and unabsorbed fixed cost was a benefit of $73 million. The benefits of lower raw material costs and improved price mix combined for a net benefit of $108 million during the quarter, with continued strong performance in North America.

On a full-year basis, our price mix versus raw materials benefit was $356 million. Excluding Venezuela, it was $77 million. Our $80 million of cost savings was more than offset by the impact of inflation, driven by hyper inflation in Venezuela. I'll note that fourth-quarter cost savings included a $30 million favorable adjustment to our general and product liability reserve. On a full-year basis, our net cost savings were $29 million year over year.

Excluding Venezuela, our net cost savings were $227 million, reflecting the continued momentum of our operational excellence initiatives. Foreign currency exchange was a headwind of $21 million in the quarter, reflecting the strengthening of the US dollar, particularly against the euro. Other, a negative $36 million, includes an $18 million impact from our other tire-related businesses for the quarter, including the divestiture of our US motorcycle business as part of the joint venture dissolution.

Turning to slide 9, the balance sheet is presented on a pro-forma basis, reflecting the redemption of our euro notes that occurred on January 14, 2016. Cash and cash equivalents were $1.2 billion and reflect the derecognition of $320 million in Venezuela. Our total debt of $5.5 billion is down $910 million from the end of 2014, driven by debt repayments and currency translation on our overseas debt balances.

In December, we repaid $400 million on our second lien term loan, leaving a balance remaining of $600 million. Our global pension liability declined $72 million from last year's level, driven by contributions to our international plan. I'll also note that we continued to execute on our pension strategy. During 2015, we completed programs to offer lump sums to certain former employees in the US.

As a result, we recognized a non-cash pre-tax pension settlement charge of $137 million, which is included as a significant item on slide 21. This action had a small positive impact on our US-funded status, and it reduces our PBGC premiums and overall liability risk going forward.

Slide 10 shows we generated $951 million of free cash flow from operations in 2015. Working capital was a use of $42 million and our CapEx spend was $983 million. We also repurchased $100 million worth of our common stock during the fourth quarter, or about 3 million shares, bringing the total since the start of the program to $413 million.

Moving now to the business units on slide 11, I'll start with North America. North America continues to deliver strong results with another record quarter and segment operating income of $266 million. Operating margin for the quarter was about 14%, reflecting the seventh consecutive quarter of margin exceeding 10%.

North America's $37 million improvement in year-over-year earnings was driven by strong price mix net of raw material costs, reflecting the value of the Goodyear brand and our industry-leading products and services. North America benefited from improved factory utilization in the third quarter, as well as from cost savings, including favorable general and product liability costs, as I noted earlier, which more than offset higher marketing expense and the impact of the divestiture of our Dunlop-branded Japanese OE and US motorcycle businesses.

Excluding the impact of the joint venture dissolution, North America's consumer volume was essentially flat in the fourth quarter when compared with last year's very strong fourth quarter. You'll recall that our third quarter of 2014 had weak shipments as a result of the tariff pre-buy, which then benefited shipments in the fourth quarter of 2014, as distributors and retailers rebalanced inventory levels. North America continues to be challenged to fully satisfy market demand for our premium high value-added tires. We are working diligently to leverage our global manufacturing footprint and continue to invest in the Americas to meet this demand.

In the commercial truck business, fourth-quarter sales units declined 12% year over year. This decrease was primarily due to a decline in our commercial OE business and also reflects (technical difficulty) pressure in the replacement industry from an influx of low-end imported units. For the full year of 2015, North America earned record segment operating income of $1.1 billion, a year-over-year improvement of $305 million. We believe these results are further evidence that our strategy is delivering sustainable value.

Europe, Middle East, and Africa generated segment operating income of $100 million in the quarter, which was $70 million higher than the prior year. The increase in SOI was primarily driven by volume improvement and our cost-savings programs, which more than offset foreign currency translation and inflation headwinds. Despite another warm winter and continued pressure from Asian imports in Eastern Europe, our fourth-quarter EMEA unit volumes increased about 11% year over year.

The volume increase was driven by European winter tire industry sell-in, which grew 5% year over year, and our strong performance in consumer replacement, where year-over-year volumes increased by 13%. In commercial truck, we again saw strong performance in a stable industry environment. We saw double-digit volume gains in commercial OE and we continue to gain share in replacement.

Asia-Pacific generated segment operating income of $96 million during the fourth quarter. This sets a new record for the region and is $16 million above the same period the year before. The main driver was positive volume, which was partially offset by continuing currency headwinds due to the weakening Chinese RMB.

Our segment operating margin in the region increased to 17.2%. Our volume grew 38% in the quarter. Excluding the impact of our acquisition of the Japanese replacement tire business, our volume growth was 12%. Outside of Japan, volume growth came from our two primary growth engines, China and India. Despite the slowing Chinese economy, we grew double-digits in OE, as well as in our replacement business.

In India, strong market conditions and our ability to increase share have especially benefited our replacement business. While we anticipate slower growth and continuing currency headwinds for the region in the short term, we continue to view China and the rest of the region as a key long-term growth opportunity. We are investing in our teams, our products, and our capabilities to drive that growth.

We had a challenging quarter in Latin America, due to the persistent weak economic environment in Brazil and continued volatility in Venezuela. In the quarter, our volume decreased 11% versus 2014. The decline in volume was driven by three factors. First, our consumer OE business declined 29% due to a continuing recessionary environment, driven by a 36% decline in the industry in Brazil.

Second, our consumer replacement sales in the quarter were down 5%. This volume decline was influenced by some pull ahead of orders into the prior quarter due to an announced price increases effective in October. And third, commercial replacement industry volumes declined 12% year over year, primarily in Brazil. Segment operating income in the fourth quarter was $14 million, which was down $6 million from the prior year.

In the quarter, Latin America's results were negatively impacted by cost inflation and lower volume. For the quarter, operating income from our Venezuelan business was $22 million. This operating income excludes foreign currency exchange losses related to the Venezuelan bolivar, which were $5 million in the quarter. The economic environment in Venezuela continues to be extremely challenging.

We were unable to exchange bolivars for US dollars during the fourth quarter, which we require to purchase imported raw materials for our operations. These conditions, combined with other Venezuelan regulations, have increasingly limited our ability to make and execute operational decisions at our Venezuelan subsidiary. As a result, we concluded we do not meet the accounting criteria for control and we deconsolidated our Venezuelan subsidiary on December 31.

Despite this change, we continue to maintain operations in Venezuela and serve our customers there. Our Latin America team is continuing to work proactively to mitigate our exposure and maximize market opportunities in an increasingly difficult environment. We continue to focus on cost and we will work to leverage the Americas consolidation to improve capabilities, to improve processes, and to reduce costs.

Slides 12 shows our full-year modeling assumptions for 2016. We have included our 2015 results excluding Venezuela on the left-hand side of the chart for comparison purposes. Full-year SOI in Venezuela was $119 million. After adjusting for its deconsolidation, our 2015 SOI was $1.9 billion. We are committed to growing our SOI 10% to 15% year over year in our remaining operations and are targeting SOI of $2.1 billion to $2.2 billion in 2016.

We see sales volume growth of approximately 3% for the year from our revised base of about 165 million units, which excludes Venezuela. This volume will come from incremental growth in all of our regions and also includes the full-year benefit from the acquisition of Nippon Goodyear. I'll note that similar to prior guidance, we expect a volume benefit of about $15 per tire in 2016.

Our outlook for price mix net of raw materials is a full-year net benefit of approximately $75 million. For 2016, we expect raw materials to decrease about 5% year over year. This includes the negative impact of both the RMI index agreements with our OE customers and certain large commercial fleets, as well as the impact from currency on raw material transactions in our international businesses.

Unabsorbed overhead for 2016 is expected to be a benefit of approximately $50 million, reflecting the benefit of higher overall volumes. We expect cost savings versus general inflation to be a benefit of about $135 million in 2016 as operational-excellence programs from our core business continued to deliver. In line with the timing of some of our operational-excellence initiatives and our cadence in 2015, our cost-savings benefits will ramp up through the year.

While we had outstanding performance of $227 million in net cost savings in 2015 excluding Venezuela, there are a few reasons for the change in 2016. Our 2015 full-year cost savings included a $35 million benefit from general and product liability reserve adjustments, including the $30 million I mentioned during the Q4 SOI walk. In addition, as we have deployed a few central initiatives regionally, we will increase our allocation of these costs to the SBUs in 2016.

This will show as a headwind to cost savings with an offsetting reduction below SOI in other corporate costs, with no impact to EBIT. Lastly, pension expense in SOI for 2016 is expected to be $30 million less than 2015 with the benefit from the change to the spot-rate accounting method. These items are summarized in a slide included in the appendix to today's presentation.

Moving on to foreign exchange, we expect translation to be a headwind of $45 million for the full year based on current spot rates. With the sale of the North American motorcycle business, we will not have the associated operating income of about $30 million, with the majority of that impact in the spring and summer months. Finally, we have a combined $35 million negative impact from start-up costs associated with the Americas plant and projected increases in marketing investments.

Additional financial assumptions for 2016 are listed on slide 13. I'll cover a few key highlights from this slide. Following the refinancings and debt repayments in 2015, our interest expense is expected to be $350 million to $375 million, a significant reduction year over year. Our global pension expense is expected to decline from $135 million to a range of $65 million to $85 million, following a change to the spot-rate method of accounting for the calculation of annual interest cost.

The expected benefit in SOI from this change is approximately $45 million in 2016. This benefit will be partially offset by about $20 million from actuarial losses experienced in 2015. Additionally, our 2016 pension expense will not include expense from Venezuela, which had pension expense of $27 million in 2015. Working capital is expected to be a use of about $50 million and our CapEx outlook is $1 billion to $1.1 billion.

Finally, for 2016, we expect other corporate costs to be approximately $165 million. In total, our target range for SOI is $2.1 billion to $2.2 billion. From this range and the other financial assumptions we've provided in today's presentation, you can see we are also targeting another year with significant cash-flow generation. Our strong cash flow provides the ability to continue funding our 2014 through 2016 capital-allocation plan.

Now turning to slide 14, I would like to cover the increase to our share-repurchase program and other updates to our 2014 to 2016 capital-allocation plan. Growth CapEx is $900 million following choices we've made given weakness in some of our emerging markets. We've slowed down investments in Brazil and China, while maintaining our investments in the new Americas plant. The dividend and share-repurchase basket of $1.1 billion to $1.3 billion reflects a $650 million increase in the authorization for share repurchases.

We have spent $542 million through 2015. Given the seasonality of our cash flow, we would expect that the majority of our repurchases in 2016 will be completed in the second half of the year, in line with our cash-flow generation. As a final note, our debt-repayment and pension-funding basket is expected to be about $900 million in line with achieving our target ratio of 2 to 2.1 times adjusted debt-to-EBITDAP ratio by the end of 2016.

Now we'll open the call up for your questions.

(Operator Instructions)

And we can take our first question from Ryan Brinkman with JPMorgan. Please go ahead.

Good morning, Ryan.

Good morning. Obviously, the margin in the quarter in North America is historically extremely high and a record for any 4Q, right? But with that said, as I look at the past couple years, it does not look you have typically experienced a sequential deceleration in margin from 3Q to 4Q, at least to the same degree as this year.

Can you talk in some more detail about the puts and takes there, whether due to Sumitomo or any other factor? Then also, if you could share or at least directionally speak to the North America or now combined North and South America margin assumption that is embedded in the 2016 SOI guide?

Ryan, the North America margin, on a sequential basis, if you look at it, we were about 16.3% last quarter, down to about 13.9%, call it 16% to 14%. If you look at that, I would really highlight two things as impacting that. The one was just higher advertising spend than we normally do. If you look at the NCAA college football play-off series coverage, hopefully many on the call were watching that, we had a lot of coverage on that.

First time we really had that extensive of coverage. Obviously our spend went up, but as we look at it, it was well worth the cost of doing that and that did hit our margin for the quarter. In addition to that, we did see a little bit of just product mix changes as we saw our fourth quarter. Clearly, our consumer business margins continue to be very strong, based on a lot of the things we talked about in terms of our new products and our product mix in consumer.

However, we did see a slowdown of the commercial business, particularly the commercial OE business has slowed in Q4 and our assumptions for that even going out into 2016. So you take those two things, those are really the drivers that hit the margin as we look at the comparative period.

I would say, Ryan, in addition, and I know we're giving a lot of details here, but in addition, this year's fourth quarter didn't have about $7 million of earnings from that motorcycle business that we previously had in other, obviously in other years, in other fourth quarters.

And as we look, we finished the year at 14.3% for North America. We feel very strong about the success of that business and the direction that it's headed in. I remember talking to a number of you about when our North America business was going to get to breakeven, when it was going to get to a 5% operating margin, and now we're at a 14% operating margin. So we may have variations from quarter to quarter, but certainly we feel the underlying business is very strong.

Right. That helps a lot. My last question is just that I read recently the United Steelworkers were filing a petition for tariffs now on heavy truck tires imported from China, similar to the passenger car and light truck tires earlier. Can you talk about the likelihood that any tariffs might be imposed and what implications, if any, there might be to your business?

Ryan, as we've done in the past and we'll do again, we really don't comment on that. Our view as a global Company is we support free and fair trade. It's an underpinning of our businesses as we go, so we really won't comment on that. What I will say is, having seen the tariffs come on in the US before in the consumer business, I'll just remind everyone that if, in fact, it were to pass, remember what we saw in the past, we saw a lot of pre-buy activity and then sharp declines in buying subsequent to that.

So we see distortions in the industry and that potentially could happen in the truck business if these things were to ultimately pass. Additionally, what we would point out is, as we've seen in the past, those tires end up going to different places. So we saw consumer tires go down to Latin America a number of years back when the real was very strong. More recently, we've seen consumer tires go over to Eastern Europe, so tires will move around, and I just say that as a reminder of everyone as they think about this.

That's helpful, too. Congrats on the quarter. Thanks.

Thank you.

We'll take our next question from Rod Lache with Deutsche Bank. Please go ahead.

Good morning, everybody.

Good morning.

Had a couple of things. I was wondering if you could just give us a little bit more color on what drove the positive pricing year-over-year in the fourth quarter. This might be the first time that we saw positive pricing since maybe late 2012. I might be wrong on that, but what's happening there?

Then as we think about, going forward, net price versus raw materials, I would think that you're probably seeing gross raw materials of at least $275 million. You're assuming net benefit of maybe 75% of this, but at the same time, you're saying that you're experiencing some challenges in meeting demand in some of the higher-end tires. So maybe give us some color on the pricing dynamics and how Goodyear is affected?

Rod, from a broad perspective in terms of our price mix performance in the quarter and for the year, I would frankly go back to the track record that we've demonstrated over a number of years of managing a price mix versus raw materials very well in a variety of different environments. I know you recall we went through about a three-, four-year period where we had significantly increasing raw material prices and where we've now had a number of years, including going on into 2016 of decreasing raw material prices.

We managed very well our price mix on the way up dealing with those increased costs. Took us a while to catch up, if you remember. We're demonstrating an ability to manage price mix versus raw materials on the way down. If we can say what's underpinning that, I would suggest to you again this notion of how we've built a very aligned business model selling the Goodyear value proposition to our customers.

Not just built upon a product and a tire, but also built around the marketing that we bring, even the new eCommerce platforms that we're bringing, the sales tools and training, all those type of things. Our customers, our dealers, our distributors are seeing the value of that.

That is certainly competitively advantaging Goodyear and our goal always was for that to turn up in the value we bring to the dealers, and creating value for them and certainly creating value for us, so I would say that's in particular what I would say is driving it. Obviously, if we go around the world, we have a variety of different circumstances I can talk to as well, given devaluations of currencies and all that sort of thing, but maybe I'll stop there for a moment.

Okay, so as you look at this, it's a pretty impressive accomplishment to have positive pricing in a deflationary raw material cost environment. So I'm just wondering, do you feel like the current supply/demand dynamics that you see would support that continuing into maybe the beginning of this year, 2016?

Rod, again, I would have to answer that almost by region. On a macro basis, though, your point continues to be the right one that we've seen, and that's the demand for those high complex tires still we see being ahead of supply, and as a consequence, that's a positive dynamic for our industry as we look ahead. The rest of the world, I'll also say it's a tough place.

As we look at EMEA right now, very competitive environment, and with what has been the devaluation of the euro, I know we've seen a little bit of reversal of that as of recent, but certainly that makes our raw materials more expensive. So we're really working on our value proposition in Europe, as well, aligning ourselves with our dealers, putting new products out there, and trying to create value for them and for us, again.

With that, in Latin America, obviously, Brazil is in a very difficult situation. The real peaked at BRL4.20 and that's certainly putting a lot of pressure on our raw material costs there, as well. And we're obviously being very active trying to make sure that we can recover that.

In Asia, we've always demonstrated very good capabilities to deliver price mix versus raw material. Remember, that raw material hits us much quicker in Asia, but given where we play a lot in performance and SUV, our distribution in our business model there allows us to perform very well there.

If you add all of that up, we've got a lot of positives and certainly headwinds going into 2016, but if you look at the outlook that Laura [highlit], we're at about another $75 million of positive price mix versus raws going into 2016. But look, we have to -- we got to continue to work hard and make sure we're delivering that value for our customers, and as I said, it's been working.

And just lastly, could you just clarify when Mexico comes online for you in North America and the magnitude of the volume benefit you get there, and also a clarification on your free cash flow? If we take your operating cash flow, the $1.687 billion minus your CapEx, it's around $700 million, so when you present this, the table, could you just remind us what you're excluding from that? Are you excluding restructuring cash or some pension contributions from that?

I'll take the second one first, Ron. Page 10 of the deck walks through the net income to the free cash flow, but the short answer to your question is the exclusion of the restructuring and the pension.

Okay.

Okay?

Yes.

Then back real quickly to Mexico, we broke ground mid-year this year. We do expect to start producing consumer tires there early in 2017, second quarter-ish is where we're at. That will ramp up to full capacity by the end of 2019, so we'll have a slow start to test things, work through, and then that momentum will build. Certainly not expecting a tremendous amount of tires in 2017 to be saleable. It is, like I said, when we get to 2019, be on an annual rate of about 6 million consumer tires.

Great. Thank you.

Thanks, Rod.

We'll take our next question from David Tamberrino with Goldman Sachs.

Good morning, David.

Good morning and thank you for taking my questions. A few from me. On the cost savings versus inflation, ex some of the one-time things there that are shifting from 2015 to 2016, [like] the general product liability, where do you feel like you are in the run rate here? Are we still early innings? Are you middle innings? Or is it later stage? How much runway do you really think you have in generating that $176 million or $160 million underlying net cost savings going forward?

Yes, David. This is one of my favorite subjects, actually, as we go. So as you mentioned, page 16 is in the deck to try to walk through. There are puts and takes 2015 versus 2016, but that underlying net cost savings performance is still there. The fundamentals remain very strong so we laid the foundation for a lot of these programs back several years.

But really to answer your question, it's a little bit of a mixed bag. Short answer is there is plenty of runway left on operational excellence initiatives, but this plan, this cost savings, the beauty of it is in the early years, there were some initiatives that paid off quite quickly and others that needed to build momentum through our plants over time.

One aspect of it -- we haven't even on conversion savings or plant optimization, hasn't been fully rolled out in all of our plants yet and won't be quite finished even in 2016. So again, a lot of give and take, but feel confident, just like in prior years, in our underlying net cost savings programs as we go into 2016, especially versus 2015.

Okay. Is it something we should expect more detail from later in the year at the investor day, just as we think into the 2017-2018 time frame, if that $160 million is on repeat or if there starts to be diminishing marginal returns from the work streams you have?

Exactly. To be fair, we will talk about this much more in our investor day and give you a better handle on years beyond 2016 and how this investment will pay off.

Okay. I'll be looking forward to that. The second question is in the Latin America segment, which obviously will be within Americas now, but taking a look at that ex-Venezuela, it looks like it was negative SOI for the first time in the fourth quarter of 2015. What can be done in that region, ex-Venezuela that can make it a positive contributor for 2016 SOI, or are you contemplating for that to be, in the underlying, a zero or maybe even a negative for 2016?

David, we haven't given, obviously, specific guidance for that, particularly as we move to the Americas, but the question of Latin America, the number one thing I would point out, we've been there almost 100 years in Latin America and we've gone through periods of volatility not unlike this before and we have a lot of confidence, one, to work through it, and two, the confidence that the markets are going to come back.

That's the most important thing to say. We have staying power there and we believe it will come back. In terms of things that we are doing right now, I would point toward a couple of things, in particular, if you look at our consumer replacement volume, it's a very big bright spot for us in a difficult environment. We have been mixing up our business, the larger rim diameter tires.

We did that with some of the investments that we've made in the region and we're actually going out and expanding our distribution to grow our business there. This is happening in Brazil; it's happening in the Andean region; it's happening in Mexico. Our Brazil volumes started out very strong in consumer replacement. They weakened a little, but still very positive in 2015.

Our volumes in places like Mexico, the Andean region, were very strong double-digits and a lot of growth there. So as we're in a difficult environment, we're making sure that we're planting the seeds and growing our business for when that market ultimately comes back and that is working extremely well as we expand into the region there.

Look, that said, I'll echo your comments. Brazil is in a very, very difficult position. The OE businesses, OE auto manufacturers, you've all read the same things. I won't go through the numbers, but clearly they are in a very difficult situation there. That impacts us as well. Laura said our OE business was down fairly significantly. We also had, as an industry, a lot of capacity that went into Brazil. That means, in a weaker demand environment, we actually have more supply. That's certainly not helping things as we go.

So I have to echo your comments that Latin America will be tough certainly through 2016, but our belief is, hey, this is a long-term game, [we're playing] for the long-term and we're going to continue to make very cautious and thoughtful investments in this region as we go. We have, again, a good track record of doing that and the belief that what Latin America represents to us is upside in terms of our ultimate segment operating income. I might say, Venezuela obviously creates a headwind for us, but that's something we're going to deal with, as well, as we look to the future.

All right. That's very helpful. Thank you, both Rich and Laura.

Thank you.

Our next question comes from Emmanuel Rosner with CLSA. Please go ahead.

Hi, good morning, everybody.

Good morning.

Good morning.

First wanted to ask you about the North American volumes. Looks like they were down very slightly excluding the impact of the deconsolidation. Can you maybe walk us through the drivers of what's happening in North America?

Emmanuel, I would say, before I go to the volume, I would just say I am extremely pleased with our North America business's performance in the fourth quarter, as well as all of 2015, and certainly even the years moving up to that. As I mentioned earlier, our margin for the year was 14.3%, segment operating income margin, a record for us in a mature market in North America. We would put that up against any business anywhere.

So very strong and that business is really benefiting from the aligned business model that I mentioned earlier, that we've built over the number of years and you're seeing that come through. So we're very, very pleased. As Laura mentioned, we feel there's opportunities to continue to grow this business, particularly with the incremental HVA supply coming on.

As we look to Q4, a couple things. One, we had a pretty strong comp in Q4 of 2014 because if you remember, we had a lot of customers vying in Q3 2014 as related to the tariffs at that moment in time. Our results in Q3, if you remember, versus the industry, were a little bit low. Q4, in turn, was actually pretty strong for us in 2014 so we had a pretty strong comp in that period.

Secondly, this question of mixing up around HVA tires is very relevant. While we are improving our mix and our margin -- we talked about the SUV tires, the Performance tires, Wrangler tires, and the like -- what's also happening is while we're getting a higher margin, those tires going through our factories means our factories run a little bit slower, so we're seeing a little bit less volume coming through those factories where one doesn't equal one in terms of an LVA tire to an HVA tire.

Some of that impact is coming through. So we know that. We've talked about that. So even though we've had very robust margins, very strong demand, and very positive outlook, you saw a little bit of that impact Q4 as well. As we mentioned, we're getting more tires. We will again get more tires out of our North America factory in 2016 -- factories, I should say. We're bringing more tires in, taking advantage of some of the weakness around the globe to bring more of those tires and demand in.

Again, as Laura just mentioned, we have our Americas factory coming online, so we'll continue to build up to providing more of those high demand tires, as well. I have to say, having been on the side where we had too much capacity versus not necessarily enough of it, this is a better place to be than having factories with capacity to fill, so we're very comfortable with where we are and we need to -- we're going to continue to get more of those tires to our customers who were really asking for them right now.

Great. Thanks for the color. One on the price mix again, maybe a follow-up to Rod's question earlier. In the [fourth] quarter, you had a positive, which obviously an impressive accomplishment if we look just at the price mix bucket and I take very well your point in terms of improving mix. Yet the implied price mix bucket for your full-year 2016 guidance seems to be a negative, maybe to the tune of about $200 million or so. How do you see the environment both for pricing, but also your own mix as you move into 2016?

Well, we're very confident about our mix going into -- our price mix versus raw material equation going into 2016. If you look at the guidance that we gave on page 12 of the slides, we're saying price mix versus raws in 2016 is about $75 million year-over-year improvement. And Emmanuel, I would say, again, I feel very good about that and our business delivering that.

When you look at the goals that we put ahead from 2015 to 2016, the 10% to 15%, getting $75 million and that improvement coming from price mix versus raw material is something that we feel is doable, but is a very strong contributor to that year-over-year increase. Maybe a long way of saying $75 million price mix versus raw improvement, I'm very comfortable with in terms of a number that we're shooting for.

Then maybe finally for Laura, in terms of the cash flow outlook for 2016, you did very well in 2015, and then your guidance for 2016 is pretty broad, saying that it's actually positive. Can you just walk us through some of the big moving pieces when we compare 2015 with 2016? The CapEx seems to be up only slightly?

Sure. Granted, there's a couple of the items that are on Page 13, some of the other assumptions, but as you walk through, D&A is about the same as what it would have been before. Global pension cash contributions are down year-over-year pretty significantly, frankly, from a couple of different things. Interest expense, down dramatically year-over-year. So a lot of good momentum as we go into 2016.

Not a lot of changes versus 2015. We are projecting a small use of cash of about $50 million for working capital. Then you'll also recall that, with the dissolution of these joint ventures around the world effective October 1 of 2015, that we no longer have this minority interest either as part of it. Now, again, feel good about our cash outflows as we go. We'll give you more color on these details as we move throughout the year.

Great. Thank you so much.

Thank you.

And we'll take our final question from Anthony Deem with KeyBanc.

Okay. Good morning, Anthony.

Good morning. Thanks for taking my questions. I have two. I would like to double-check the share repurchase expectation. Your authorization increased to $1.1 billion as part of the three-year capital allocation plan. It looks like about $700 million left in that program after $400 million completed the past couple of years, so you mentioned the repurchase might be back-half loaded, so should we essentially assume $650 million to 700 million, model that into the back half of 2016 for share repurchase?

What I would say is, as we look at 2016, and was always the case, our repurchases are dependent on our performance and hitting our financial targets that we provide, we have a big seasonal use of cash earlier in the year. Given that, we would expect the majority of the repurchase to come in the second half of 2016 or very early in 2017, and we would at this point say about $500 million worth. Again, second half 2016, very early 2017 time frame.

Okay. Then just lastly, we saw higher than expected other operating expenses below the segment income line in fourth quarter, at least certainly relative to our model. Looking at it, maybe over 2% of sales, which is well beyond the typical 1% we see in our other operating expense line. I'm just wondering, is there anything out of the ordinary in the quarter in those expenses, and maybe can you give any guidance for next year on other operating expenses below the segment income line?

Yes, sure. I'll answer your last question first. Corporate other for 2016 on a full-year basis would be about $165 million. And you're correct, corporate other expense in 2015 was higher, higher than we expected, and there's a couple of different things going on, but one of them was really this piece we talked about related to cost savings.

Just to be very simple here, for better efficiency and standardization around the globe, there are certain programs that we develop on a corporate side or within one place, one way, and then as we feel confident in those programs, we begin to roll those out to the SBUs. So in 2015, that expense was in corporate other, causing it to be higher than you expected.

But that will get moved out into SOI, again no change to EBIT, and put into the regions in 2016. Okay? So that's one change year-over-year. Then no doubt, in addition to that, the strong performance we had in our financials in 2015 then led to an increase in incentive comp as well and that is booked in corporate other.

Okay. Thank you very much.

Okay. You're welcome.

Thanks, Anthony.

Ladies and gentlemen, this concludes today's Q&A session. I would like to return the floor to our presenters for closing remarks.

I just want to thank everyone for their attention today. We had longer prepared remarks, but hopefully those helped you understanding our business in 2015 and how we're thinking through 2016. So thank you for your attention.

And this does conclude today's program. Thank you for your participation. You may now disconnect.