Goodyear Tire & Rubber Co (GT) 2016 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 Goodyear's fourth-quarter and full-year 2016 earnings call.

(Operator Instructions)

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

Thank you, everyone for joining us for Goodyear's fourth-quarter 2016 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 our call are reconciled to the US GAAP equivalent as part of the appendix to the slide presentation.

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

Thank you, Christina. Good morning, everyone. This morning, I'll review our 2016 highlights and then ask Laura to walk us through the fourth-quarter results. Then I'll come back to discuss each of our business units and layout our 2017 plan in the context of our longer-term targets. Laura will finish with a detailed review of our 2017 segment operating income outlook before opening the call for your questions.

Our fourth-quarter and full-year results were highlighted by growth in core segment operating income. On a full-year basis, the Americas generated SOI of $1.2 billion and operating margin of 14.1%. Consumer tire margin in the Americas increased about 200 basis points in the fourth quarter and for the full year.

Europe, Middle East and Africa delivered $461 million of SOI for the year and margin expanded to 9.4%. Asia-Pacific generated SOI of $373 million, its highest ever and margin increased to 17.7%. In total, our full-year core segment operating income grew to a record $2 billion in line with our third-quarter guidance.

Slide 4 summarizes the progress we have made executing our strategy resulting in steady segment operating income growth and positioning us well for that growth to continue. Our team has consistently delivered year-over-year growth while building our capabilities for the long-term. This marks our fourth consecutive year and six of the past seven of delivering record core segment operating income.

Since 2013, our SOI has grown 25%. This improvement each year is rooted in our strategy and reflects our industry-leading value proposition which combines our innovation and technology leadership, our award-winning products, and the global strength of the Goodyear brand and the aligned and connected business model.

Our earnings growth, combined with the actions we have taken to address our pension obligations and to reduce our interest expense have translated to more than 40% annual compounded growth in our operating EPS. I'm pleased and proud of the Goodyear team for delivering this performance.

As we discussed at our Investor Day last September, our strategy is designed to take advantage of the long-term trends shaping our industry. Global demand for high value added, large rim diameter tires is increasing.

In 2016, the percent of growth in the larger than 17-inch tires was greater than that of the overall global growth in consumer tires. This trend will continue into the future and works in our favor as our portfolio of these products and our connected business model position us on a path to sustained growth and competitive advantage.

Our performance to date has enabled us to deliver on our 2014 to 2016 capital allocation plan, further validating our strategy. Within a high on our 2020 plan, this morning, we announced a $1 billion increase to our share repurchase authorization.

As we look at 2016, I'm very pleased with our fourth-quarter and full-year results. Achieving these outcomes is perhaps the best indication of the strength of our strategy and the changes we have made to Goodyear's business over the past several years.

Now with that, I'd like to turn the call over to Laura to walk through the fourth-quarter results.

Thank you, Rich. Good morning, everyone. Turning to the income statement on slide 5 and as in prior quarters, we have provided call-outs that highlight the impact of deconsolidating Venezuela. Our unit volume was down 2% year-over-year as growth in Asia-Pacific was offset by declines in Americas and EMEA. Our fourth-quarter sales were $3.7 billion down from $4.1 billion a year ago, with the decrease driven by the deconsolidation of Venezuela.

Our gross margin increased nearly 3 full points to 27.2% and segment operating margin increased 1 full point to 12.8%. Segment operating income of $479 million was up 5%, excluding the impact of Venezuela from our 2015 results.

Our fourth-quarter earnings per share on a diluted basis was $2.14. Our results were influenced by certain significant items. Adjusting for these items, our earnings per share was $0.95.

The step chart on slide 6 walks fourth-quarter 2015 segment operating income to fourth-quarter 2016. The negative impact of lower volume was $19 million. Lower production, driven in part by our US commercial truck business, was $27 million in the quarter.

Lower price mix of $66 million more than offset reduced raw material costs of $18 million for a net $48 million negative impact. The year-over-year decline is reflective of the declining raw material environment over the past one year and weakness in our US commercial truck business.

Sequentially, price mix was stable. The sequential decline in net price mix versus raw materials was driven by the lower raw material benefit versus the third quarter. Our third-quarter guidance for full-year net price mix versus raw materials included an expectation of potential price increases during the fourth quarter. With volatility around raw material costs increasing dramatically throughout the fourth quarter, we elected to implement pricing actions at the start of the year, impacting the price mix versus raw material outcome.

Cost-saving actions of $120 million, driven by our operational excellence initiative and SAG actions, more than offset the $37 million negative impact of inflation, delivering a net benefit of $83 million. On a full-year basis, our net cost savings was $190 million. Foreign currency exchange was a slight headwind of $3 million and other was a net benefit of $35 million, driven primarily by lower incentive compensation.

Turning to the balance sheet on slide 7, cash and cash equivalents at the end of the quarter were about $1.1 billion. Net debt was down more than $700 million from the third quarter. Our global pension unfunded liability at the end of the year was $669 million up slightly from the prior year.

Free cash flow from operations is shown on slide 8. For the quarter, we generated $1 billion in free cash flow from operations, driven by an $833 million working capital benefit. Additionally, cash flow from operating activities was $1.3 billion in the quarter and $1.5 billion for the full year 2016.

The strong cash generation during the quarter supported the repurchase of $300 million of our common stock during the fourth quarter or about 10 million shares. For the full year, we repurchased $500 million in common stock or 16.7 million shares. In addition, we repaid $200 million on our US second lien term loan in December, taking the remaining balance to $400 million.

Turning to slide 9, Americas generated record segment operating income of $295 million in the fourth quarter or 14.3% to sales. Excluding Venezuela, operating income grew by $33 million or 13%. The increase in income was driven by strong performance in our consumer tire business, which was partially offset by continuing weakness in commercial truck, which was down $32 million year-over-year.

Unit sales in the fourth quarter were $18.7 million, down 5% versus 2015. The negative impact of Venezuela accounts for about 300,000 units with a much weaker US commercial truck OE industry and consumer OE business driving much of the remaining difference. OE volume was impacted by the timing of new model changeovers and lower overall production at OE in the quarter.

Excluding Venezuela, replacement sales were about flat for the region. For the full year, Americas delivered segment operating income of $1.15 billion or 14.1% to sales. When excluding the impacts related to Venezuela and the sale of GDTNA, SOI continues to show solid growth.

Turning to slide 10, Europe, Middle East and Africa generated segment operating income of $81 million in the quarter. The year-over-year decline in SOI was due to negative net price mix versus raw material costs, which was primarily driven by timing associated with raw material indexed agreements in our OE contracts.

Overall, EMEA's fourth-quarter unit volumes declined 1% year-over-year. EMEA's OE unit volume was down 5%, primarily driven by choices we've made in our consumer business as we continue to focus on the more profitable 17-inch and larger rim size fitments.

Replacement tire shipments were up almost 1% driven by growth in the 17-inch and above segment of the consumer market, where our Euro pool volume increased 19% year-over-year. We continue to see declining industry demand and increased competition at the lower end of the consumer replacement business, particularly in the summer segment. For the full year, EMEA delivered $461 million in SOI and 6% growth for the year, with margin expanding to 9.4%.

Turning to slide 11 Asia-Pacific delivered record fourth-quarter segment operating income of $103 million, a $7 million improvement versus last year. The main drivers continue to be the benefits of volume growth and the positive impact from our operational excellence programs driving lower conversion cost. Our segment operating margin in the region increased to 18.8% from 17.2% a year ago.

Asia-Pacific's volume was 8.4 million tire units representing about a 1% growth versus last year, primarily attributable to our key consumer markets in China and India. Given its proximity to natural rubber production and relatively lower levels of inventory, Asia-Pacific began to feel the impact of higher raw material costs in the fourth quarter.

While we anticipate higher raw material costs and 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. On a full-year basis, Asia-Pacific delivered record SOI of $373 million, with margin increasing to 17.7%.

I'll now turn the call back over to Rich.

Great, thank you, Laura. We feel very positive about the progress in our business in 2016 and we remain confident in our ability to continue delivering on our long-term plan. Our strategy is clear and unwavering and despite significant headwinds, including raw material costs, we believe we are positioned to generate significant increases in SOI and cash flow over the long term.

While 2016 was strong for both Goodyear and the industry, we know there are trends that have your attention; they have ours as well. So I'd like to continue my remarks by offering some perspective on two key topics affecting the global tire industry going forward. The first area relates to industry growth, which continues to be a great story in the premium segment.

The industry saw robust growth in large rim diameter tire sizes in 2016. In the US market, the full-year growth in the 17-inch and larger segment was 9% and in EMEA, it was 10%.

As we discussed at our Investor Day, the 17-inch and above rim diameter tires are a good proxy for where the industry profit pool is going. With the increasing demand for these premium tires, we expect supply to remain tight.

The segment is growing in multiples of the total industry. Our strategy and our strength focuses on the increasing profit pool in that part of the market that is simultaneously growing and mixing up. We are focused on the part of the market where Goodyear can add value with our technology, with our brand, with our distribution and with all the capabilities that we bring to bear for the market. The trend towards larger more complex tires has been driven by the auto manufacturers. In 2017, we will continue to implement our OE strategy where we target profitable fitments that have high loyalty rates and pull-through in the replacement market.

While we continue to demonstrate a leading presence on successful vehicle fitments that were launched in previous years, we also have won a number of new fitments that will be rolled out over the coming year. As you would expect, these platforms depend on the performance characteristics of Goodyear's premium large rim diameter tires.

These are the type of platforms that we target with our OE strategy. They deliver strong returns at OE and lead to profitable growth in replacement.

The second area of focus is raw material costs. Turning to slide 13, you will see significant volatility in our key commodity costs including natural rubber prices.

Since our last earnings call, there's been a swing from a low of $0.67 per pound to a peak of $1.04 per pound as recently as last week, an increase of an astounding 55%. And the raw material cost story is about more than just natural rubber, with challenges coming in a broad cross-section of commodities. For example, prices of key commodities such as butadiene and carbon black have risen to 52-week highs in recent weeks. We expect raw material costs to remain at heightened levels in 2017.

I'm pleased with how our team has been aggressively responding in this environment. We are confident that we will continue to offset raw material cost increases as we continue to focus on price mix as a key component of our business.

As shown on slide 14, over the past 7 years, changes in raw materials have been largely offset by changes in price. This includes during 2011 when our commodity headwind was $2 billion and natural rubber reached a peak of around $2.60 per pound.

With that as a backdrop, I'd like to turn the discussion to address the year ahead in each of our business units, starting with the Americas on slide 15. As I mentioned earlier, the US market grew 9% in the larger rim sizes during 2016, outpacing growth in the overall market by more than 4 times. Our growth in these segments was on par with the market, which is a significant achievement given the supply constraints we've been managing through over the past several quarters.

The investments we've made within the US, including growth CapEx to increase our supply of larger more profitable tires, enabled us to sell 1.7 million more of the large rim size tires in the replacement market in 2016. In 2017, we're launching a number of new exciting products including the Goodyear Assurance WeatherReady in the commuter touring segment. The introduction of the WeatherReady at our recent America's Customer conference received an overwhelmingly positive response as did the new Endurance tire for trailers and RVs and the Endurance LHD commercial tire for long-haul applications.

At the conference, we also reinforced the value of the Goodyear brand and emphasize that our customer's alignment to our strategy has both fueled their growth and position them to win in the future. Every year our customers and associates leave this event energized and optimistic about Goodyear and this year was certainly no exception.

The investments we've made in our existing US footprint and the start of production in our Americas plant later this year will drive our volume growth in the premium 17-inch and above segment. We continue to be focused on increasing our capability and managing our production costs to increase our supply of the right tires for this demand in 2017. This remains our top priority.

The US commercial truck industry continues to be affected by weak OE volumes and the impact of anticipated tariffs on Chinese imports in the replacement market. The current industry environment in heavy truck, especially new truck production, continues to be challenging.

On the other hand, we began to see improvement in the replacement market in the fourth quarter, where our volume was up 5% year-over-year. We will continue to drive value in our commercial business through our exclusive end-to-end total solutions business model for fleets while leveraging our Goodyear and Kelly branded products in the mid tier.

While we expect the first half of 2017 for our commercial business will be weaker year-over-year driven by OE, we are building on that positive replacement market momentum and expect that the business will grow again in the second half. Outside the US, we expect both the consumer OE and replacement industry in Latin America to grow in the low single-digits in 2017, where we have successfully mixed up in a very, very tough environment. As an example, our team in Brazil has focused on expanding its aligned dealer and distribution network and building capabilities to drive value with these important customers.

I am extremely pleased with our progress, particularly in this very difficult environment. Our products are at the core of this improvement. Over the past four years, 100% of the consumer replacement product portfolio in Brazil has been refreshed and revitalized. The consistent strength of our Americas business is the result of our unwavering commitment to a strategy built on the alignment and integration of our industry-leading products developed from the market back, our aligned distribution network and the power of the Goodyear brand.

Turning now to slide 16, our EMEA business saw strong fourth-quarter growth in the greater than 17-inch rim size segment of 19%, which nearly doubles the industry growth rate. This performance is attributable to our award-winning winter tire value proposition, where we gained share in both the larger and the smaller rim size segments. In the summer replacement sector, however, we continued to see increased competition including from low-cost imports, which led to year-over-year volume declines in the less than 17-inch segment of the market.

Last quarter, I outline our plans to take the necessary steps to shift our resources and reduce our exposure to declining less profitable market segments in EMEA. This includes the previously announced footprint action in Philippsburg, Germany. In the current environment, we expect our volume declines in the less than 17-inches summer segment to continue throughout the course of 2017.

In addition, we're in the process of realigning our go-to-market model across the region, similar to the approach that we've successfully implemented in the US. Over the long term, this recalibration will strengthen and further differentiate our value proposition to our distribution and service network.

These actions, when coupled with foreign currency headwinds, will make for a very challenging year for our EMEA business. We believe these actions, while difficult, are necessary to position the business for sustainable long-term growth. We'll continue to seek opportunities to accelerate our mix up in the region. We're confident that our lineup of high value added large rim diameter tires will enable us to meet the increasing demand in the industry's most profitable high-growth segment.

Turning to Asia-Pacific, we're very pleased with our full-year results and are consistently building on our foundation to enable continued long-term growth in the region. In 2017, we see consumer replacement industry growth across the region in the mid single-digit range, driven by our key markets in China and India. We also see growth in the OE industry in the low single-digits.

We expect our momentum in 2016 will continue and lead to strong growth in China again in 2017. Our confidence is strengthen by multiple new OE platform wins in 17-inch and above rim sizes and continued expansion opportunities for consumer replacement in tier 3 and tier 4 cities. As an example, we expect double-digit volume growth in large rim size SUV tires in our consumer business and continued strong demand across our product mix.

In November, we broke ground on the latest expansion of our existing facility in Pulandian, China. This will enable us to produce an additional 3 million passenger and light truck tires annually, supporting our growth in the profitable segments of the market over the intermediate term. The ramp-up of this incremental capacity will be completed in 2019.

We're very optimistic about the long-term value proposition of our business in Asia-Pacific. Our new product introductions, OE pull-through and build out of our distribution network will be supported by increased premium tire capacity and gives us confidence that we will continue to be successful in this growing region.

Turning to slide 17, our next stage plan, as we discussed at our Investor Day, includes a target of $3 billion in SOI by 2020 and cumulative free cash flow of up to $5 billion over the next four years. The cadence of our earnings will certainly be affected by raw material input costs this year. With the recent increases in raw material costs, we are now expecting SOI in 2017 to be about flat compared to 2016.

While we expected raw material costs to increase over the period, the rise we are currently experiencing has been both faster and steeper than we anticipated. However, we have both the confidence and the demonstrated capability to recover our input costs over time. We remain committed to our 2020 targets and our plan to deliver 20 million more premium tires over the next 4 years.

We see 2017 as a foundational year leading to 2018 when we expect our earnings trajectory to accelerate. We believe there are four specific drivers of that growth. First, assuming raw material costs stabilize, we would expect a year-over-year tailwind from net price versus raw materials resulting from the approximate six-month timing lag related to our OE and fleet contracts.

Second, we will realize cost savings in EMEA, including the impact of the Philippsburg plant closure. Third, as I mentioned earlier, we expect our US commercial truck business to be stronger. Finally, increased production our new Americas' plant in 2018 will help offset ongoing plant startup costs. The combination of these factors should accelerate earnings growth in 2018 as we continue to mix up and implement cost savings initiatives.

As you think about our results over the next two years, it makes sense to think about 2017 and 2018 together. We remain focused on executing our strategy and we are confident that we will continue to deliver strong earnings and economic value.

I'm pleased with the state of the business as we look ahead. As I told our customers at a recent conference, the mix up opportunity in our industry is as good as it has ever been. For those who can also manage its complexity, this mix shift will be a tremendous opportunity.

As I frequently say, we're not running our business for one quarter or one year but for the long term. We know that because a variety of factors such as the unexpected steep increases in raw material costs, the tire business rarely grows in a straight line.

That's okay, that's the tire business. That's why we have a 2020 plan and not a one-year plan. The Goodyear team has the experience and knows how to manage through it and I have confidence we will.

I'll now turn the call back over to Laura to finish up with our 2017 outlook.

Thank you Rich. Turning to slide 18, with unabsorbed overhead and the impact of the timing lag related to our raw material indexed agreements occurring in the first several months of the year, the profile of our first half will be very different from our second half. We expect a softer first half, with accelerating growth in the second half of 2017.

So net-net, our full-year SOI is expected to be about flat based on our current planning assumptions. As the current raw material environment remains extremely volatile, we will update you again as part of our first-quarter earnings call.

Turning to slide 19, we have updated our full-year 2017 SOI drivers. Overall, we expect volume growth of about 1% for the year and an unabsorbed overhead headwind of about $70 million, driven by lower production carryover and lower first-quarter production. We expect raw material costs to be up 27% based on current spot prices and that equates to a $1.1 billion increase versus last year.

Looking at the net of these raw material cost increases and positive price mix performance, the outlook is about flat for 2017. The rapid increase in raw material costs will create a timing imbalance with our raw material index agreements that cover about 35% of our business. Strong mix over the course of the year will offset this temporary price versus raws imbalance.

As a final note to the price mix expectations for the year, we see global OTR industry demand in 2017 to be largely similar to 2016. As a result, we are expecting essentially a neutral impact to mix from our OTR business. We expect our cost-saving actions to exceed inflation by about $140 million in 2017, as our operational excellence initiatives continue to deliver strong results.

Looking at the impact of foreign currency translation at current spot rates, we estimate about a $50 million negative impact. The other line represents a combined headwind from plant startup costs, increased R&D and higher depreciation in 2017, partially offset by the adjustment during the second quarter of 2016. The outlook for these combined is a $50 million headwind. The outlook in total for 2017 is for full-year SOI to be about $2 billion.

On slide 20, we have listed the other financial assumptions for 2017. As part of those assumptions, we see working capital as a use of $200 million, as raw material cost increases along with start-up inventory at our new plant drive an increase for the year.

I'd like to cover the $1 billion increase to our share repurchase authorization briefly, before we open the line for your questions. We remain committed to our capital allocation plan, where our free cash flow is allocated both to debt repayment and returning capital to shareholders. In either case, will execute on our capital allocation plan over time and as we generate the cash.

Now, we'll open the line up for your questions.

(Operator Instructions)

David Tamberrino, Goldman Sachs.

A couple questions on my end, first on really price mix cadence as we were thinking about this, it sounds as if first half of the year clearly going to be down and maybe having that made up in the second half of the year. Can you help us think about the magnitude of the first quarter? Are we talking down triple-digits for price mix less raws in the first quarter at aggregate? I'll stop right there before the next one.

Okay. So, you're exactly right, David. We do expect for the first half of the year our price mix versus raws to be negative and turning positive in the second half of the year. Our raws specifically in the first quarter, we're thinking it's going to be down in just more like 7%, 7% to 9% or so, with that increasing more as we get into the second quarter. So more heavy weighted to the second quarter as you think about the first half. No, I don't see it as triple-digit, I think as you mentioned in your question.

Okay. Then from a pricing perspective, you've announced up to 8% in the US. You've seen a lot of fast followers. You've seen the other global big three follow you there with Michelin and Bridgestone announcing similar price increases. Are you expecting that amount to stick in its entirety? Do you think maybe that gets cut in half is realistic? Or -- really what have you been seeing so far because we're what, eight days into your price increase?

So David, I think it's a lot to cover there and if I could, I'm just going to maybe take one step back again because I think it's really important to look back at what we're trying to do in the marketplace, even in view of the significant raw material headwinds we have. I just want to go back and say, as you think about our business and what we built over the last, call it, plus 10 years and the like, the essence of our strategy has really been around trying to create value for our consumers, for customers and for ourselves.

If I could because it's so meaningful to us, even go back to our strategy roadmap, where we say our goal is to deliver sustainable revenue and profit grow, while increasing the value of our brands. That's what we're ultimately trying to do. I told our customers recently, there's lots of alternatives to go out there and buy a tire, just to go buy a tire from. You can find a lot of companies to do that, but we try to deliver more than that.

That's what we've built our business on. As we've moved ahead, our customers are getting right, our entire value proposition, getting technology, they are getting product innovation, they're getting our brand, our brand promotion, they are getting service, they're getting supply, they're getting quality that we bring and they're getting the partnership of our people. That's the competitive advantage we're doing.

Why it's so important is as we think about a headwind like we have on our raw material costs right now, it's not simply just about looking at one input cost and trying to manage that, it's ultimately about selling and getting compensated for that value proposition. So that's what we're ultimately doing. Now back to your question, in terms of what we have, we've gone out in the US and we've done that at 8%, we've done that in other regions of the world as well, including Europe, where we've done up to 8% for consumer and commercial to be effective as of March 1.

So we've put -- we've done this in other regions and our other countries as well. So our intention on that value proposition is to go capture that value, not simply as a function of only our input costs, but as a function of the value that we are bringing to the table. Now, if I could maybe one more thing. I think Laura touched on it. Remember, we have two things that are going on that are worth commenting on.

One is simply the lag of which these raw materials ultimately hit our P&L. For those that may be familiar, those who may not, there can be a six-month lag to when we actually purchase, let's say, natural rubber in Southeast Asia, when it's on the ship, when it ultimately gets to a dock, when it comes into our inventory, when it gets produced into a tire, to finally when it hits cost to sale. So we have this lag of the cost that comes into our P&L, Europe and North America being the longest, Asia it hits a lot quicker. So that goes into how we think about this.

The second element is the raw material indexation agreements we have that essentially resets every six months or so on average. Remember, we really like that. That came in when we dealt with big raw material headwinds in the past, where we were able to be compensated or essentially acknowledge the raw material increases we have. As they go up, we get a lag and the price goes up. As those raw materials go down, there's a lag and the prices come down.

So as we see this inflection point where raw material goes up, it will take longer to recover those raw material indexation customers around OEMs and fleets as well. So those are some of the things that will come into play as we think about how the raw materials hit us. Our intent, to be very clear, is to offset those raw materials over time. If you look back, our track record I think speaks for itself in our ability to do that and we approach this with the same confidence at this point. So David, hopefully that adds a little color to the question as well.

I think it does. Is there anything in the near term that you've been seeing that would lead you to believe that there's price increases that you've passed on would not stick? Or you are seeing a volume response as a result?

I think David, I'll go back and say, with the value proposition we have forward, this is just another element of it and we feel confident that value proposition is worth it in the marketplace and that we can pass that on.

Yes and if you look back, we have different time periods in our recent history where we've been able to do that. This is a lot of the same management team that's been able to accomplish that. It is over time, just like slide 14 shows you and that's all reflected in our outlook for the year.

Okay

David, just to maybe to go back and just build on Laura's point, if you go back in time, we had increases of: in 2006, $800 million of increased raw material; in 2008, we had $700 million; in 2010, we had $700 million; in 2011, we had $2 billion; and this year we are looking at about $1 billion. If you look back over time, we were able to offset that with price and mix. I think that's the best way to answer that question.

Okay. Then lastly on the overhead absorption, you're looking for $70 million for the full year. It seems like the majority that's the first half. You get a benefit from the San Luis Potosi plant ramping up in the second half of the year. How much of that is really driven by commercial vehicle? How much of it is something else that maybe I haven't considered, because that was a very large variance, at least we were thinking about for the full year?

No, I think you hit on the head, as we carryover, that's what we are bringing into the first half essentially is the bulk of that is, we had some certainly some consumer production cuts in that number as well but commercial particularly on a dollar basis was the driver of that number. You got it right.

Yes. The cadence is just like you said, it's primarily all going to hit in the first half.

Okay, thank you.

Thanks, David

Itay Michaeli, Citi.

Just on page 17, I appreciate the color on some of the potential of 2018 drivers, wondering if there any other buckets we should be thinking about at this point for 2018, particularly some of the other elements like R&D and depreciation? Just want to ask, if you think these are the main buckets for SOI growth? If there's any other factors-- potentially offsetting factors to think about as well for 2018?

Well, Itay, I'll start and Laura can jump in as well, I think as we look at this, we have managed through a lot of headwinds -- differing headwinds over time and I think one of the elements on here is the cost bucket. You see a line on there for cost but at the end of the day we will continue to manage our investments and our -- not on this page obviously this is an SOI page, but we will be prudent allocators of our capital.

We will certainly look at all our cost and our expenses, whether it's advertising, it's R&D and manage those in the context of -- prioritize those in the context of the environment that we're dealing with. So this isn't an all-inclusive bucket but this says -- these are some of the things as we think about 2017, 2018, sort of together as we look at what we need to offset over time here, these are the things to say they're going to be benefiting us as we look out into the future particularly into 2018.

I think if you look at our SOI walk chart for our 2020 target, some of your questions on some of the investments, so we did provide for investments as part of that target. To Rich's point, we also have the net cost savings, right, of $500 million over that time period as well and continued mix up and again, these 20 million tires as they come into play. But investments, as we think about 2018, again as Rich said, we will time those as we need them, certainly things like depreciation will increase as we go into 2018 as well.

Itay, one of the things that we've not built in to the 2020 plan and we've not built in on that page and I say this a little bit of humor, but it's got to snow again in Europe. Remember, our winter business is really an industry-leading business in Europe. To the extent that we ever get that coming back again, which I hope we do, that's an upside as well. But to be clear, we have not built any of that in, because we've been dealing with such warm winters now for five in a row or four in a row. That's in there as well

I think the OTR business falls in the same bucket. We're not assuming a big recovery in there, but at some point that will come back.

That's very helpful. Just a follow-up question just on slide 7, I think that your leverage ratio of 2.39 times, it looked higher than I think what you thought you come in at 2 to 2.1 times for the end of 2016. Maybe you should update us on how you're think about debt reduction versus buyback and that glide path to, I believe your 1.5 times leverage ratio by 2020?

Okay, sure. So I think, let's go through it maybe this way. As we think about our share repurchase, maybe I'll hit that one, certainly the authorization increase of the $1 billion is meant to go beyond 2017. That our share repurchase historically, you've seen us time those with when we generate the cash, which is normally concentrated towards the fourth quarter.

So I think now as you think about the 2016 impact that you pointed out, that certainly was impacted by the earnings decline related to the US commercial truck market frankly. As we think about our capital allocation plan everything still holds, nothing we saw in 2016 changes that. Our free cash flow is balanced between debt repayment as well as our shareholder return programs.

Great, that's very helpful. Thanks so much.

Thank you, Itay.

Ryan Brinkman, JPMorgan.

We've seen you and your competitors announce price increases in the US. I've not seen as many price actions being announced in Europe. Is that consistent with what you're seeing? Or more maybe it's just the cape that the increases there are made more stealthily or harder to track from the US? Do you think one region or another may have more or less difficulty in passing along price increases in 2017?

Ryan, as you would imagine, we manage our business market by market and you rightly pointed out that we had announced a price increases in North America of up to 8% in consumer and commercial effective February 1. As I mentioned just a bit ago as well, we announced as of February 1 in Europe again up to 8% on consumer and commercial effective first of March as well.

Again, we have market by market made announcements, I certainly won't go through them on this call, but we only can speak to our situation. Our situation again I would point back to our goal is to recapture or capture the value for the entire value proposition we put out there, input costs are one of them and obviously very significant at this moment as it has been in the past but our philosophy around the world is to put a value proposition out there that creates competitive advantage. That's what we're ultimately trying to accomplish.

Okay, thanks. I was just hoping, maybe to revisit a topic from last quarter's call on the impact to Goodyear of the China TBR tariff? So looking at some of the RMA import data, it shows that the imports of commercial truck tires, they've already started to decline maybe even sizably in the back half of 2016. Is it the case that you're seeing this too, but that there's still a volume headwind for you because of the distributors maybe being in a still overstocked position after a pre-buy? Then at some point, I imagine, this should turn into a nice volume tailwind for you on market share gain, when do you think that will occur?

So Ryan, it's a good question. I think to the first question of just on the tariffs itself, I think the issue that we still see and we did speak to it last quarter as well, is essentially there's a lot of inventory in the channels reflective of the big pre-buys they came as was the case with consumer as well. So the engines at channels have a lot of inventory still in them and our view is that it's still going to take the first half to work its way through the channels.

So that something is there, just like in the -- with the consumer side, our view is we have to look at the business and we do in a steady state trying to adjust for some of the aberrations of the pre-buys and then the significant stop buying of imported tires because of tariffs and look at it -- look at it, look at sell out over time because that's a more true picture of the market that we have to deal with.

Now, having said that, we're looking at about 1% to 2% growth in replacement in the US and still about a 6% decrease in OE, which is sort of a carryover from what we've seen in 2016. So we expect -- to your point, we expect the volumes even for OE to turn positive later in the year and we would expect the commercial industry to improve. From our perspective, look, we've got great products, we've got the best end-to-end fleet solutions in the business, we have got a great brand we supplemented with some Kelly product in the mid tier.

So, we are confident that we are going to -- that the industry is going to rebound and that we're going to benefit from that as we look ahead. That is an upside for us. But I will tell you, one of the things I learned early on, of our businesses, truck is probably one of the most cyclical businesses that we have. When it's great, it's really great and it booms and when it's not, you get, like I said, two years in a row of OE down and what have you. But that's okay, I mean, we know how to manage it. That's exactly what we're doing. To your point, there's no doubt that there is better days ahead in truck.

That's very helpful color, thank you.

Brett Hoselton, Keybanc.

Just a couple quick questions here. First of all, if I take your raw material impact about $1.1 billion divided by about $15 billion in sales, I get about a 7% increase necessary on the pricing side. Is that how you're thinking about, which would seem to imply that you don't need another price increase? Or is it possible that you might need another price increase given current raw material levels?

Ryan, we can only speak to the situation that we see at hand. So I can't comment on what's ahead. What I can say is that we have a demonstrated track record to deal with what's grown in front of us. That's what you can expect us -- from us going forward. What we're in -- what I can say is that clearly the input -- the raw material inputs that we've got have been very volatile and I would even say unpredictable.

We saw steep, steep increases in our raw material costs not only natural rubber, which you saw -- I'm sure many of you have seen or will look at, an article even in the Journal this morning that talks about one of the reasons being speculation in China and the like. We know we've had floods in Thailand relative to natural rubber. On butadiene, we've had some unplanned factory shutdowns and the like. So there's some causes for this but, our view is raw materials are going to stay at a heightened level as I said in my script. We have a philosophy here, play it as it lies. That's what were going to go do

Brett, since even since the Detroit Auto Show, right, we've gone up over $300 million in raw material cost increases just in the last three weeks, so it is quite volatile. Just to reiterate that point.

Then switching gears, how do we think about the pace of share repurchase? If I take a look at your $3.5 billion to $4 billion over a four-year period of time, that seems to suggest that you might be buying back in the range of about 10% per year on a constant basis. But is there some reason to believe that's going to be substantially lower in 2017 versus, let's say, 2018, 2019 and 2020.

So I think I talked about it earlier and we will keep you updated as we go throughout the year, Brett, but I think -- if you go back in history, as we generate the cash, we spend it whether it's debt repayment or things like share repurchases. So I think as we still look at the outlook charts that we have, we certainly expect strong free cash flows in 2017, of course. Given that, I think based on our history, we will time that as we generate the cash, which is really for us, concentrated in the fourth quarter. Now, just overall as a 2020 comment, the share repurchases are directly correlated to the growth in the earnings through that 2020 plan, absolutely.

Fair enough, thank you very much.

Okay. Thank you, Brett.

Paresh Jain, Morgan Stanley.

Just a couple of questions on the OE exposure, actually and slightly longer term. In the situation where the 17-inch supply basically falls short of demand, which is what you're forecasting, I'm guessing it would be fair to assume that your capacity would first address your OE customer demand before meeting replacement. Can you provide any color on how you're splitting that incremental demand between OE and replacement through 2020? In the event, US [SAG] continues to grow over the next two years for some reason, should I consider that as a headwind to your 2020 outlook?

So to the first question, Paresh, I would say what we have to do is manage the volatility or the changes in demand between replacement and OE. We do that being able to toggle that product back and forth between the two markets. Clearly, our strategy as we've indicated starts with getting on those high royalty fitments that succeed and first and second and maybe even third replacement as they get into the market.

So OE is something that clearly is a priority for us and it's really a prioritizing the sense obligations -- contractual obligations as well as we work with each of the OEs. But OEs change their production schedules and as they do, we need to go back and then figure out how to utilize our capacity the best we can. There's a big demand in the replacement market as well. So I would say there's no magic formula, it's really a strategic path that we follow and then we have to manage demand requirements as we go.

Then I'd just say, I think maybe what you're getting at Paresh is OE is very profitable for us, so it's not a headwind per se if that's your point in our 2020 plan, if the [SAR] goes up.

I mean relatively because replacement is expected to be $32 in profits for tire versus OE at $20.

Yes, that's an industry the first number is an industry number on that chart.

Paresh, I would say, our ROE business, we don't look at that as a headwind at all. We actually look at that as the seeds to drive our business into the future. Again if I could take you back, it really is about managing our OE business with our customers ROE customers to the point where we are adding value for them and being able then to get the benefit of those tires and the replacement market.

In the past, our focus was too much on just getting fitments and volume for volume sake and in that model I might suggest your thought process may have more relevance. But we're really very focused on making the right decisions for us; therefore, I think OE growth of larger and diameter tires is actually a good thing for us.

Understood. Thanks for the color.

Emmanuel Rosner, CLSA.

So, first just a quick housekeeping question on the quarter, the first-quarter SOI I think came in a little bit below the low end of your -- the guidance you had given in October. But I think the EPS was a bit above expectations. As far as I could say was basically the contributions from other income. Anything specific in that other income buckets? Whether that's something that we could expect to be recurring?

Okay. So first maybe just to make sure we have the numbers clear, our outlook for the fourth quarter was to be between $2 billion and $2.25 billion. We came in for the year at $2.9 billion, okay, so right where we think we should be, okay, overall. Now on the guide, I think Christina can walk you through that -- those pieces parts if you'd like?

Emmanuel, I would say, there's really -- Christina can walk you through the other items, there's nothing unusual in there to highlight for you. What I would say though is we focus our guidance a lot on segment operating income because that's the number that we manage. But I can tell you, we put a tremendous amount of effort as well on managing net income and EPS, whether it's tax planning, whether it's (multiple speakers) managing our financings and things like this.

So that is obviously to say -- obvious a priority for us, but as you look at that forecast -- again Christina can take you through all the elements, but I don't think there's anything in there that you're going to -- there's nothing in there that you would highlight to say, oh, that's a surprise we didn't tell you about, it's more of business as usual, normal course.

Okay. Then I guess more fundamentally -- so I was hoping you could go into a little bit more detail or quantification of the mechanism to recover some of these raw materials, especially the contractual part. If I look at your expectations for $1.1 billion in raw materials increase in 2017 at spot prices, how much roughly of that would be just be automatically, you will get back based on contracts? How much would we think where you would have to basically pass on a price increase on the market, in order to be able to get it back?

Yes, so Emmanuel, I will maybe try to answer that from a couple of different ways, we estimate about 35% of our business is covered by RMI agreements and the like. That again is primarily OEM or new, car factors as well as certain commercial fleets and mining fleets out there. By and large, that's what ultimately covers it. Those agreements are in there, so that mechanism normally resets roundabout every six months or so. It can change, it's on average, some are quicker, some are a little bit longer but on average, I think it's a reasonably good proxy.

For us, as I mentioned, and I think for our customers as well, it gives us good transparency and visibility into our costs and their costs as they move ahead. So I think it's a mutually beneficial type agreement that we put in there. Again, in a period of rising raw material costs, we're going to lag in terms of recovering those raw material costs because of that. That situation will continue until such time that those raw materials stabilize and we can catch up, of course that reverses itself as well as raw material goes down with that lag. So right now, as we see raw materials increase as they come into our P&L.

I think as David asked earlier, Q2 is going to be a really bigger hit of incremental year-over-year raw material cost increase as will then Q3 and Q4 as we look at the forecast here. So those RMI contracts have to catch up, that's why we have a lag between being able to offset everything in a really sort of finite period of time, if you will, a 12-month calendar year. So that's how the RMI contracts work, but I think they're very effective, they are good answer for us, and we believe that's ultimately will happen over the period of time. The others are just those are negotiated agreements with our customers that are out there.

Understood. Then finally, just on your some of the tax plans that are being considered for the US. Obviously, you are currently sitting in an incredible good position with your manufacturing being done basically in the US, but you're also working on that Mexico plant. Any initial thoughts in terms of the parameters of what would affect -- would you change to reflect the way or the place your future tires will be produced in case of some of these border adjustment taxes go through?

So Emmanuel, you are correct to state, it's clear around the world including in the US, our strategy generally is that we make the tires where we sell the tires and certainly like I said that the case for the US. So in that sense, you're correct in your assessment, but right and certainly might actual caveat all this with there's just a tremendous amount of unknowns and no details around a lot of the statements that are being made. But remember, we do import natural rubber from Asia into the US.

You can't get that in the US, so it's all imported so there would be a tax consequence opposite on that side. Bottom line is though because of that and like I said, especially if you look at 2016, we import very few tires into the US but we are a net importer when you think of it to the tune maybe of a couple hundred million dollars, driven by that natural rubber piece of the business. Now there's a lot of other things going on in these [Ryan] plans and taxes and so on so again hard to figure out not a lot of details.

Also kind of on the tax front for Goodyear at this time, we'd probably have to say somewhat of a neutral lots of pluses and minuses within there, but the tire industry imports into the US about 170 million tires and like I said, we're a very small part of that piece there so could be an impact as the industry looks at it but again from Goodyear from a tax perspective, it's hard to say, neutral though especially because that importing of those raw material natural rubber.

I would just add to Laura's comments just to emphasize what she made the point of, there's so many moving parts, I mean we don't know, our philosophy is, as I mentioned earlier, we will do the appropriate tax planning and other planning that we have to do. But we do it every day, right, there's rules around the world, we have to react to the rules and regulations and laws and manage our business accordingly. That's what we will do when and if -- when we see whatever comes out here. It's just too early to tell what the specifics are. We'll stay tuned, obviously let you know as we move ahead. But we're prepared to manage through that just like we do other places.

Great, thanks for the color.

Thank you.

[Ashit Kerman], Jefferies.

I just have one left on how to think about your volume and market share development factor into your 2020 plan, because if you look back your strong track record of driving mix and net neutral price have come during a period of very limited volume growth. Even in 2016, you flagged declining sales in less than 17-inch segment. Given that it's turnaround 60% of your portfolio, I struggle to think of volume growth and continued price mix that you have in your 2020 plan as mutually exclusive so, interested to get your thoughts and how you see your volumes developing from here?

No, Ashit, I think it's actually a very good question. I'll say first time, second time, third time, our focus is on those 20 million HVA 17-inch and larger rim diameter tires because that's where the profit pool of the industry is, that's where our growth is ultimately going to be. Just as we have in the past, we will also manage those parts of the market where we're not able to get paid for the value we put into those products, whether that's competitive environments, whether it's demand decreasing, whether it's whatever that might be we will take the decisions accordingly, but our goal is not -- to simply not focus on as you said that part of the market as well. We have a lot of profitable and attractive fitments in that part of the market, let's say 16-inch and below, and remember while we don't put it in that number, I just came back as an example from one of the capital investments we are making in India, and the 16-inch market there is a fantastic market for us. Certain countries in Latin America, it's still a fantastic market for us.

In fact we are growing our volumes in that in certain markets in Latin America. So I think it is something that we will manage but will manage it relative to hitting our profit goals and we will certainly preference those tires that are being sold where the profit pool is growing. So it's something where we'll managing, but I would say, we don't really -- there's no difference from what we said of September to that question

Just to follow-up if I can, is it fair to summarize that in your 2020 bridge, maybe volume is probably the least fixed of the buckets?

That's a difficult one to say because there can be volatility in a number of those buckets, raw material being one of them as we're going through here. But I understand your question, I think what I can say about that bucket is we will stick to our philosophy of not pursuing volume for volume sake but to drive as I candidly not to be repetitive, as our strategy roadmap says, our goal is sustainable revenue and profit growth. That's what we have to do and that's the context in which we'll make those decisions.

As we look at that, we know the market needs the greater than 17-inch tires especially in material markets. It's about us a lot of volume is about us also making those 20 million more tires a lot in our control in that sense and timing it. Our overall philosophy, as Rich always says, is just it's not volume for volume's sake, it's about profitable growth. That's what we see that greater than 17-inch market primarily giving us in that bucket for the 2020 walk.

Thank you.

Thanks, Ashit. Appreciate it

Paul Kratz, Berenberg.

I just had a quick question I think on what you said in the OTR markets that you see the develop this year being a bit flattish maybe a bit in the weekend. I think it's interesting because this is in contrast to a lot of the competitors who have been pushing I think a relatively bullish view of the market. Could you maybe give us an idea directionally where you see the OTR market? Maybe if you can confirm, is this primarily mining that's driving this sweetness in the OTR business for you guys or is it something else that maybe I'm not picking up on?

Right, so to answer your last question first, mining is driving that weakness certainly. We do see -- we would love for the OTR business to rebound. But we do see inventories out there, they're not any higher than they were, they're a little lower but people are also buying a few tires here and there, just smaller tires. So I think to your point, if mining picks up, that is about the larger tires, the mix comes back, and so on. Now, for us, we certainly are about $100 million off our peak earnings in the OTR business but again not building in a big rebound certainly for 2017 in that market at all. Now, again likely between now and 2020, there should be a rebound at some point or better than what it's been performing. But it's not the way we see it certainly for 2017.

Perfect, that's very clear. Thank you.

Okay. Thank you, Paul

I think that was our last question, so I just appreciate everyone's attention today. We thank you for that.

Thank you

This will conclude today's program. Thanks for your participation. You may now disconnect. Have a wonderful day.