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The Goodyear Tire & Rubber (NASDAQ:GT)

Q4 2013 Earnings Call

February 13, 2014 9:00 am ET

Executives

Thomas Kaczynski - Vice President of Investor Relations and Treasurer

Richard J. Kramer - Chairman, Chief Executive Officer and President

Laura K. Thompson - Chief Financial Officer and Executive Vice President

Analysts

Itay Michaeli - Citigroup Inc, Research Division

Rod Lache - Deutsche Bank AG, Research Division

Patrick Archambault - Goldman Sachs Group Inc., Research Division

Emmanuel Rosner - CLSA Limited, Research Division

Operator

Good morning, my name is Tony, and I'll be your conference operator today. At this time, I'd like to welcome everyone to The Goodyear Tire & Rubber Company Fourth Quarter Earnings Conference Call. [Operator Instructions] Thank you. I'd now like to hand the program over to Tom Kaczynski, Goodyear's Vice President, Treasurer and Investor Relations.

Thomas Kaczynski

Thank you, Tony, and good morning, everyone. Welcome to Goodyear's fourth quarter 2013 conference call. Joining me today are Rich Kramer, Chairman and Chief Executive Officer; and Laura Thompson, Executive Vice President and Chief Financial Officer.

On today's call, Rich and Laura will discuss our fourth quarter results, along with the outlook for 2014. However, before we get started, there are a few items I 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'd like to remind you that today's 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. The financial results presented are 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 U.S. GAAP equivalent as part of the appendix to the slide presentation.

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

Richard J. Kramer

Great. Thanks, Tom, and good morning, everyone. Before we get started, I'd like to take a moment to welcome Laura Thompson to her first conference call as CFO. A few of you may know her from her role as Investor Relations Director about 12 years ago, and I'm sure some of you have had a chance to meet or talk with her over the past 2 months. Laura's made a seamless transition into the CFO role, and I have complete confidence in her ability to help us execute our strategic plan and keep us on our current path. So officially, welcome, Laura.

Now this morning, I'll provide a few highlights of the quarter and discuss some key actions we've taken already in 2014. Then I'll touch on highlights from our 4 businesses before turning the call over to Laura to review the financials in detail and review our outlook.

As you saw in our news release this morning, the fourth quarter was an outstanding conclusion to our record-setting year. Our segment operating income in the quarter was $419 million, up 54% from last year. For the full year, segment operating income was up 27% to $1.6 billion, exceeding our October guidance and the highest ever achieved in Goodyear's 115 years of existence.

It's also the third consecutive year we've delivered more than $1.2 billion in segment operating income, another first in our history. This outstanding performance contributed to free cash flow from operations that reached $1 billion for 2013.

Now 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.

Slide 4 summarizes the progress we've made executing our strategy, resulting in steady segment operating income growth and positioning us well for that growth to continue. Our team has consistently met our goals, doing what we say we're going to do. Needless to say, I'm pleased and proud of the men and women of Goodyear for delivering this level of performance. And as I said many times, we're not measuring success by the quarter or the year, but by continued progress toward our destination of creating sustainable economic value. That theme has not and will not change.

If you look at our strategy roadmap on Slide 5, you'll see we've highlighted our pension challenges. In my 14 years at Goodyear, our legacy obligations has been a constant source of underlying volatility to the business. In 2008, we addressed our retiree medical obligation through the innovative VEBA structure. Now I'm very happy to report that within the past 3 weeks, we have fully funded our largest U.S. hourly pension plans. By doing so, we've paid off our biggest remaining pension obligation and successfully executed a plan that we previously discussed.

Today, the strength of our business is validated by how we met this responsibility. Rather than having the access to debt markets to fulfill our pension obligation, we funded the plans with cash. Our strong cash flow performance in 2013 and our ample liquidity enabled us to fully fund our U.S. hourly pension using 100% cash generated from operations.

In addition, this action drives long-term shareholder value and is consistent with the balanced capital allocation plan we unveiled in September. This is a major milestone in Goodyear's 115-year history. For more than a decade, we've been dealing with the volatility associated with legacy obligations. Even so, we've always maintained our commitment to meet these obligations. Now we're pleased to have fulfilled that responsibility.

This action marks the successful conclusion of a critical stage in our company's evolution over the past 10 years. Our turnaround efforts that spanned 2004 to 2007, we navigated the global economic downturn in 2008 and 2009 and we introduced and began implementing our strategy roadmap in 2010.

With our legacy obligations essentially behind us, we can devote 100% of our efforts to creating competitive advantage. This year, we're taking our next step toward creating sustainable value, achieving 10% to 15% annual segment operating income growth over each of the next 3 years, while generating significant free cash flow to execute our balanced capital allocation plan.

It was noted in our news release we're affirming the 2014 to 2016 financial targets we spelled out at our Investor Day in September, and Laura will have more to say on that in a few minutes.

During the fourth quarter, we saw industry volumes recover, but that recovery is mixed and not balanced globally. Our volumes grew 2%, in line with our guidance, and we saw volume growth in 3 of our 4 businesses. Latin America was negatively affected by a couple of unique situations. We faced some headwinds in Venezuela related to labor negotiations, as well as lower volumes in Brazil, as OEMs reduced production there.

Growth continues to be strong in our targeted market segments, and we are confident that our brands and our value proposition will allow us to capture this demand in all regions. Remember, we're not pursuing volume for volume's sake. Our team remains disciplined in our approach as we pursue profitable volume growth.

While we see signs indicating general economic recovery around the globe, we also remain vigilant with respect to the emerging markets and the related macroeconomic and currency concerns associated with these regions. As a global enterprise, we've successfully operated in these markets for generations. Our management teams have experienced and seasoned leaders. We are fully aware of how quickly these markets can grow and contract. And while we may face some near-term headwinds in these regions, we have always taken a long-term view.

We continue to hold our conviction that the emerging markets, particularly in Asia and Latin America, will lead global growth in the tire industry. Bumps along the way are to be expected but will not deter us nor change our view.

Overall, as a total company, we're confident in our ability to grow our volume profitably and expect about a 2% to 3% increase in volumes in 2014.

Now before commenting on our business units, I'll address what has been an ongoing matter, and that's the closure of our Amiens North factory in France. In January, we ended tire production at the factory, which will close during the first quarter, on terms largely in line with our expectations. As we stated previously, this closure and the subsequent exit from the EMEA Farm Tire business is expected to result in about $75 million in annualized savings. Again, Laura will provide more details on the timing of these savings in a few moments.

But getting back to our business units, there was evidence of continued business improvement in the fourth quarter, even though there was market and economic volatility. Our North America business continues to deliver excellent results and has built strong momentum as we move into 2014. North America's 2013 segment operating income was a $1 billion improvement over 2009's full year loss of $300 million. It's a remarkable accomplishment and a landmark achievement for Steve McClellan and his North American team.

We expect continued moderate economic growth in North America, as many of the key economic indicators are trending positive. Employment levels, miles driven and commercial fleet ton miles, just to name a few, are on the rise, which will provide the platform for OE and replacement industry growth.

I will note that the extreme cold weather in much of the U.S. will undoubtedly affect volumes for the first quarter as many retail locations had to close for several days. However, our dealers don't expect that full year volumes will be affected.

Even with the positive trends, we're not resting on our laurels. With the changes North America has made to its business model, we believe these results are more than sustainable. And as we enter this post-pension era, we are focused on continued earnings improvement on delighting customers and creating competitive advantage.

I'd like to make a few comments about our Annual North America Dealer Conference, which was held 2 weeks ago in Nashville. The event was one of our biggest ever, with the highest customer attendance in 10 years. One of the highlights of the meeting was the enthusiastic response to our newest consumer replacement product, the Assurance All-Season. This tire was introduced for the largest segment of the market, the commuter mid-tier segment, where we believe it will be a winner with both dealers and consumers.

Overall, the business meeting and the reaction we've heard since reflect the high level of confidence and commitment to the strategy for both our associates and our customers in North America.

The alignment between our team, our customers and our strategy was the best I've ever seen. It really exceeded my expectation. And we've always believed that if you want candid feedback about your business, listen to a customer. We heard overwhelmingly positive comments about our strategy and our commitment to helping our dealers build their businesses. We're clearly on the right path, and we expect our positive momentum to continue in 2014.

In EMEA, our business made solid improvements in the fourth quarter, ending on an up note with segment operating income over $100 million. Of course, we have work to do, but our profit improvement plan, adding to the Amiens closure, is beginning to deliver. Our disciplined approach to price, mix and cost drove our fourth quarter segment operating income improvement. Winter volumes in the fourth quarter started strong but lost steam as the weather in our key markets proved to be relatively mild.

Weather has been more severe in some regions of Europe this year, but at this point, it largely affects dealer sellout of existing inventories. Ideally, the late winter weather should bode well for the 2014 sell-in season. Even so, our optimism at this point must be tempered by dealer caution after several mild winters in a row.

We do feel good about our competitive position on our product portfolio heading into the summer selling season and are off to a good start in January. Our new tire lineup includes the Dunlop Street Response 2, adding to our established offerings of industry-best label grades. In addition to that, we expect to have an improved winter product portfolio in advance of the 2014 winter selling season.

EMEA volumes will benefit from the economic recovery in the Eurozone, and we expect to see industry consumer replacement volume growth of up to 5% in 2014. The team continues to make progress on our profit improvement plan in EMEA. This plan, you recall, is focused on increasing share in targeted market segments, on accelerating growth in emerging markets and driving productivity improvements in our operations, and we're seeing good progress in all 3. So with Amiens behind us and continued execution of the profit improvement plan ahead of us, we look to return EMEA to its historical margins by 2016.

In Latin America, we continue to work through challenges of a volatile political and economic environment, especially in Venezuela and Argentina. Currency fluctuations also remain a factor in the region.

In Venezuela, the confluence of severe inflation, currency devaluation risk, price controls and social unrest have increased the complexity of our ongoing labor negotiations. As a result, our production levels have been negatively affected. We're confident in our ability to navigate these challenges as we have in the past, but we expect the headwinds and volatility to continue during the first quarter. Still, and to be clear, the situation does not change our 2014 outlook for total company segment operating income increase of between 10% to 15%.

As we look ahead, our Latin America business continues the process of repositioning its products toward more profitable targeted market segments in replacement versus original equipment. As in other regions, we will continue with our selectivity strategy, and we're confident that any short-term disruption will lead to improved profitability.

And during the fourth quarter, the team launched 3 exciting new consumer replacement products: The Assurance tire, the Eagle Sport tire and the new Wrangler SUV tire, that were all enthusiastically received by our dealers in Brazil. We're competing in the right targeted market segments in this region, and we expect that the sales volumes for these new products will begin to ramp up in the first quarter. In addition to the new products we released, our Americana modernization investment is also on schedule to support our growth in these targeted market segments.

Our Asia-Pacific business continues to perform well and will benefit from solid growth in China and India. We continue to grow in China, where high-quality products from our factory in Pulandian are helping us gain share in targeted consumer market segments and grow our commercial truck tire business.

We're seeing solid returns from our CapEx investments in China, where our products are increasingly recognized as industry-leading. Our Goodyear S200 truck tire line, our EfficientGrip SUV tire and our Assurance TripleMax passenger car tire were each recently awarded Tire of the Year honors by leading magazines in China.

And looking ahead, we see depreciating currencies' continued weakness in the Australian economy and further reduced demand for OTR tires in the region. We're prepared to deal with these headwinds, taking the requisite mitigating actions to deliver on our stated plan.

I'm very pleased with the results of the fourth quarter and believe our 2013 performance should give you confidence in the targets we set for 2014 and beyond. As we look at the past year, we can be proud of what we've accomplished and the changes we've made to make Goodyear a stronger, more competitively advantaged company.

We achieved record segment operating income of $1.6 billion. We generated free cash flow of $1 billion. We fully funded our major U.S. pension plans, addressing this legacy obligation. We ended production at our high-cost facility in Amiens, France, and we initiated a balanced capital allocation plan, including a shareholder return program.

As a result, Goodyear today is a stronger company that continues making significant strides toward the destination of creating sustainable economic value by being first with customers, by being the leader in targeted market segments, by being the industry's innovation leader, and as a result, being a company that will be consistently profitable and cash flow positive throughout the economic cycles.

For many years, we ask you to have faith in our strategy and trust our ability to lead Goodyear to new levels of performance. We believe we've done that. We've built credibility with our customers and our investors by living up to our commitments. Now we're ready to embrace the opportunities ahead with an even greater degree of confidence and commitment.

Now I'll turn the call over to Laura.

Laura K. Thompson

Thank you, Rich, and good morning, everyone. It is a pleasure to be here in my new role, taking over for Darren Wells, who occupied this chair for more than 40 consecutive quarterly conference calls before becoming President of our Europe, Middle East and Africa region last December.

While I have had many roles at Goodyear, I have particularly enjoyed those where I have interacted with the investment community. I'm looking forward to working with all of you more in my new position.

I'm very proud of the many accomplishments we've achieved at Goodyear over the last several years, and I'm looking forward to continuing to execute on our strategy and achieving our target.

Today, I will cover our fourth quarter results, which conclude a record-setting year, and provide some specifics regarding our outlook for 2014. We'll then open the call for your questions.

Let's turn to Slide 11 and review a few key items on the fourth quarter income statement. Volume in the quarter was up 2%, with the North America, EMEA and Asia business units showing increases year-over-year. The growth we achieved was the right volume growth, that is, focused in the right segments and generating good returns. This marks the third consecutive quarter of volume growth for the company and supports our belief that volumes have stabilized and have begun to recover.

For the quarter, revenue was down 5% or $254 million and is more than accounted for by 2 items. First, lower non-tire-related sales of $178 million, which is driven primarily by lower third-party chemical sales, which decline as raw material prices decline. And second, the impact from unfavorable foreign currency exchange of $102 million.

We generated gross margin of 23%, an improvement of 430 basis points versus the prior year. Selling, administrative and general expense increased by $29 million, reflecting an increase in advertising and marketing expense and higher incentive compensation. We achieved $419 million in segment operating income or 8.7% in SOI margin, up from 5.4% in the fourth quarter of 2012.

Our earnings per share on a diluted basis for the quarter was $0.84. Our results were impacted by certain significant items. And after allowing for those items, our adjusted earnings per share was $0.74. A summary of those significant items can be found in the appendix of today's presentation on Slide 24.

The step chart on Slide 12 walks fourth quarter 2012 segment operating income to fourth quarter 2013 segment operating income. Lower raw material cost of $172 million more than offset reduced price mix of $74 million for a net benefit of $98 million. Strong cost savings for the quarter of $114 million more than offset the $77 million negative impact of inflation.

Higher sales volumes improved operating income by $11 million, while the improvement in unabsorbed overhead from producing almost 3 million more units was a benefit of $55 million. Overall, we feel very good about the quality of our earnings in the quarter.

Turning to the balance sheet information on Slide 13. Cash and cash equivalents at the end of the year were $3 billion, up from $2.3 billion at the end of 2012. However, post year end and not reflected on this slide, we utilized $1.15 billion to fully fund the hourly U.S. pension plans.

Net debt totaled $3.3 billion, an increase of $448 million compared with a year ago. You may recall we fully funded our frozen U.S. salary pension plans in the first quarter of 2013 by issuing $900 million of debt. That debt increase was reduced by more than $400 million of cash generated by the business.

Free cash flow from operations is shown on Slide 14. During 2013, we generated more than $1 billion of free cash flow from operations. This is an improvement of over 40% from the $701 million generated in 2012. In addition to the benefit from higher earnings, working capital was a benefit of $415 million, driven by successfully managing our working capital throughout the year.

Moving now to the business units on Slide 15. I will start with North America. North America reported fourth quarter record segment operating income of $199 million or 9.3% to sales. This is an increase of more than 70% and shows the strong momentum the North American team has built.

North America unit volumes were up 2.6% with growth in both the consumer and commercial businesses. Our overall volume growth was predominantly driven by demand for our industry-leading Goodyear-branded tires. The fourth quarter reflects our highest sales volume in the last 8 quarters.

North America realized a raw material cost benefit of $106 million in the period. While our mix remained positive, price mix taken together was lower by $61 million, partially attributable to raw material pass-through agreements with OE, fleet and OTR customers. Similar to prior quarters, our manufacturing cost benefited from lower USW profit sharing of $13 million and lower pension expense.

North America's full year segment operating income totaled $691 million, the highest ever achieved in North America. The assiduous implementation of our key how-tos, including targeting profitable market segments, mixing up in products through market-back innovation and focusing on lowering our cost, helped delivered these record results. North America's full year 2013 segment operating income at almost 8% of sales results in a return on invested capital that generates significant and sustainable economic value.

Europe, Middle East and Africa delivered segment operating income of $101 million in the fourth quarter, a significant improvement over last year's $38 million. SOI margin increased to 6.2% from 2.4% in the prior year. The fourth quarter was the third consecutive quarter with year-over-year volume and earnings growth.

The European industry continue to show signs of slow but steady recovery with 2% growth for both consumer replacement and commercial replacement compared to the same quarter last year. Overall, market growth versus the prior year was below our expectations due to a mild winter in Europe.

In our consumer business, our sales volume was up year-over-year. Volume growth was driven by continued strength in summer tires where our success is based on industry-leading label grades and share gains in high-performance segments. This growth in summer tires more than offset the soft sales in the winter segment.

EMEA's performance in the fourth quarter also reflects continued success in commercial trucks, where we had volume growth in our fleet business. Based on our strong product and service proposition, we continue growing share in an expanding industry. Factory utilization increased versus a weak fourth quarter last year, leading to unabsorbed overhead improvements.

As a final point on EMEA, we continue to make progress on our profit improvement plan that we announced earlier in 2013 and as Rich just discussed.

Turning to our Latin America. Operating income was $52 million for the quarter, $9 million less than the prior year. Positive price mix and lower raw material cost were offset the negative effects of inflation, unfavorable foreign currency exchange and lower volume. Essentially all of our year-on-year decline in earnings can be explained by our investment in advertising and marketing to support the 3 recently launched consumer products in Brazil.

The lower volume in the quarter was attributable to 2 factors. First, labor negotiations with the union representing our associates in Venezuela occurred during the quarter. These negotiations continued today, and while there has not been a work stoppage, there has been a significant slowdown in productivity. The reduced production impacted product supply and accounted for more than half of our volume decline in Latin America.

These labor-related issues, if they were to continue through the end of the first quarter, could have a negative impact of up to $15 million to $20 million versus the fourth quarter results. In addition, consumer OE volume declined as the OEMs in Brazil reduced production.

Let's take another minute on Venezuela to emphasize a few points. First, while the current issues in Venezuela will certainly not make our task any easier, we do not see them limiting our ability to hit our 10% to 15% SOI growth target.

Second, in the event a devaluation would occur, for every 10% decline in the Venezuelan bolivar, there is a gross negative impact on our earnings of approximately $20 million. However, that is only part of the equation. The other part is that we have demonstrated numerous times and as recently as a year ago, the ability to offset this impact over time. We would work toward and expect a similar outcome if the currency devalued in 2014.

Third, we have an experienced team in Venezuela, and we're confident in their ability to work through these issues. And we remain committed to our business in Venezuela.

Our Asia-Pacific business reported segment operating income of $67 million for the fourth quarter, representing almost an 18% increase over the prior year. Positive price mix net of raw material cost, higher volume and lower startup expenses associated with our facility in China were offset partially by unfavorable foreign exchange and reduced profits in Australia.

The SOI margin in the region increased to 12.5%, up significantly from last year's 9.7%. In Asia-Pacific, our volume of 5.6 million units was 8% higher than a year ago as we continued to have strong growth in China and India.

Turning to Slide 16. I'd like to spend a few minutes covering in more depth the impact of the recent prefunding and freezing of our hourly U.S. pension plans. Our global unfunded pension at the end of 2013 was $1.9 billion. This result reflected an improvement of $1.6 billion over the prior year, given contributions of $1.2 billion and about a $400 million benefit from rising discount rates. When adjusted for our $1.15 billion contribution in 2014, our unfunded obligation currently sits at about $700 million, which is primarily comprised of numerous international plans.

We expect total pension expense savings from prefunding and freezing the hourly U.S. plans of approximately $225 million over the next 3 years. This includes pension expense savings of $50 million in 2014.

Following the prefunding, we have no required cash contributions into our U.S. plans. The prefunding improves our cash flow by $175 million to $250 million in each of the next 3 years.

Our financial targets for 2014 to 2016 are listed on Slide 17, and they remain unchanged from our Investor Day presentation last September. These financial targets are: Annual 10% to 15% segment operating income growth per year through 2016 delivered through a balanced plan of unit volume growth and cost savings, annual positive free cash flow from operations and achieving an adjusted debt-to-EBITDAP ratio of 2.5x by the end of 2016.

The key segment operating income drivers for 2014 are listed on Slide 18. In line with our 2014 to 2016 targets, we see sales volumes growth of 2% to 3% for 2014 as recovery in EMEA and continued growth in North America, offset the impacts of macroeconomic and currency volatility in emerging markets, particularly in Latin America.

As you may recall, our quarterly sales volumes can fluctuate somewhat due to seasonality and macroeconomic conditions. That said, we expect increases in our tire production volumes will generate approximately $75 million to $100 million in benefits from lower unabsorbed overhead for the full year. We expect the first quarter benefit of increased production to be similar to what we delivered in the fourth quarter.

For 2014, we are assuming price mix and raw material cost changes will offset one another. We expect our cost savings initiative to fully offset the combined impact of general inflation, as well as our further investments in advertising, marketing and R&D.

Based on current spot rates, we expect a negative foreign currency exchange impact of approximately $50 million for the year, with most of that occurring in the first half. This $50 million is before any potential fee valuation in Venezuela.

We expect the benefits from decreasing startup expenses at our new state-of-the-art plant in China to be between $15 million to $20 million year-over-year. However, as we continue to make investments in HVA capacity, the increased cost related to the modernization of our plant in Brazil are expected to be $20 million to $25 million. If taken together, the combined impacts essentially offset each other in our 2014 outlook.

As we've mentioned earlier, we will close one of our plants in Amiens, France in the first quarter. This will generate approximately $40 million of savings in 2014. The annualized benefit of this closure and the related exit from the Farm Tire business in EMEA will be approximately $75 million.

Additional financial assumptions for 2014 are listed on Slide 19. For the year, we expect interest expense in the range of $430 million to $455 million. Our income tax outlook is to be at a 25% rate of international SOI, which is similar to the 23% we had for the full year of 2013.

There is one additional item regarding income tax that I would like to mention, and this relates to our valuation allowance on our U.S. deferred tax assets. Each quarter, we assess current profitability and whether sufficient future taxable income will be generated to utilize the existing deferred tax assets.

Profitable U.S. results and a forecast of continued profitability lead us to believe that we may be in a position to release all or a portion of the valuation allowance during the second half of 2014. If the valuation allowance is released in its entirety in 2014, the expected increase in annual tax expense for 2015 and beyond would be approximately $150 million per year, although we do not anticipate any U.S. cash taxes for at least 5 years and the significantly reduced rate for several years thereafter. The potential reversal of this allowance is further evidence that our business model in North America is sustainable.

Including the positive benefit on earnings of prefunding and freezing the hourly U.S. pension plans, we expect global pension expense of $150 million to $200 million in 2014. We also expect global pension contributions in 2014 to be $1.3 billion, including the recent $1.15 billion that we've put into the hourly U.S. plan. Given this substantial improvement in working capital in 2012 and 2013, we expect our working capital to be neither a significant source, nor a significant use of cash in 2014.

Our capital expenditures and depreciation amortization outlook are consistent with the detail we gave in our September Investor Day presentation. Our 2013 performance confirms that our strategy is working and gives us confidence in achieving our target.

Now we would be happy to take your questions.

Question-and-Answer Session

Operator

[Operator Instructions] We'll take our first question from Itay Michaeli calling from Citigroup.

Itay Michaeli - Citigroup Inc, Research Division

Just a little bit more color, perhaps on the price mix outlook for 2014. Maybe if -- Laura, if it -- maybe talk about what you're see, both on the raw material side and assumptions for price mix. And then, what kind of selling margins should we be assuming on your global volume outlook for growth of 2% to 3%?

Laura K. Thompson

Okay, sure. So first of all, as we've -- you've seen from our results, we have demonstrated consistently the ability to manage price mix versus raw, whether raw materials are increasing or decreasing. We have a very disciplined strategy on pricing, and we price for the value proposition that we bring. The goal is to get paid for the value of our products, whether it's product performance, service, brand pool or technology. Over time, we still expect raw material prices to increase as global tire volumes increase. In fact, you've seen natural rubber quite low recently. But lately, butadiene has inched up and is up, I think, 10% since the beginning of the year. Nonetheless, at current spot rates, raw materials on an income statement basis for us for the first half of the year would be down by approximately 6%. And that would be -- directly impact parts of the business, and some of which are contractual obligations, that have these raw material indexes, OEs, OTRs and in our fleet business. But we remained focused on our very disciplined strategy on pricing for that value proposition. And certainly, all of this is taken into account as we stick to those 10% to 15% SOI target.

Itay Michaeli - Citigroup Inc, Research Division

That's very helpful. And then just 2 kind of cash flow balance sheet questions. I mean, it looks like with the pension funding being done with cash, that you may even be able to get to your 2.5x leverage target a bit sooner. I also noticed that in the cash slide, you no longer call out $1 billion of kind of minimum cash. Has anything changed there? And maybe talk about kind of as you delever the balance sheet over the next couple of years, what are the other uses of cash potentially as you get to that target?

Richard J. Kramer

Itay, it's a good question. I'm going to hand it over to Tom Kaczynski here to talk about that as well. Tom, why don't you go ahead and respond?

Thomas Kaczynski

Yes, Itay. I think the way to think about that is we still do require about $1 billion on the balance sheet to run the operations day to day. We had about $6 billion of liquidity at the end of the year, and then you obviously have to subtract the $1.1 billion that we put into the pension. So that really gets us back to historic liquidity levels. We've been running about $4.7 billion over the last 5 years. So that's the way to think about, I think, the day-to-day cash required.

Itay Michaeli - Citigroup Inc, Research Division

Perfect. Just lastly, any guidance on cash restructuring in 2014? I think it was about $72 million last year.

Richard J. Kramer

Go ahead, Laura.

Laura K. Thompson

$200 million, I think, yes, for 2014, primarily related to that Amiens, France facility.

Itay Michaeli - Citigroup Inc, Research Division

Right. Is there an actual number that you can guide to or...

Laura K. Thompson

Yes, I'm sorry. About $200 million.

Richard J. Kramer

And Itay, the way to think about it, we've been very pleased to see the progress we've made in Amiens. I can't understate that, I guess. The -- as we wrap that up in the actual cash flow timings, we'll continue to update you as we go. And over the long term, I would bring it back to the capital allocation plan we talked about in September. And we did -- as we think about the future, we also have money in our plan, if you will, set aside for future restructuring as well. I know that's not the particular question. But it's good to keep in mind as we think about other high-cost facilities around the globe, as we look to the future, we'll continue to be very disciplined in our approach to that as well.

Operator

And next, we'll move to Rod Lache with Deutsche Bank.

Rod Lache - Deutsche Bank AG, Research Division

Just a few clarifying things. The pension, $50 million savings was not listed on Slide 18. Is that baked into one of those numbers? Or is that something that's separate?

Laura K. Thompson

Actually, I think it's baked into the Slide 19. So see the $150 million to $200 million pension expense in 2014.

Rod Lache - Deutsche Bank AG, Research Division

Okay. And that number, I mean, if your pension expense was $285 million, I mean, it seems like maybe that number might be more than a $50 million decline on a year-over-year basis. Am I missing something there or am I reading it wrong?

Laura K. Thompson

No, that's exactly right. Right now, we're saying $150 million $200 million for 2014 versus the $285 million. About half of it -- half of that reduction, or if you use the range $85 million to $135 million, about $50 million of that is for the pension prefunding of the hourly plan.

Rod Lache - Deutsche Bank AG, Research Division

Okay, all right. So that was in addition. The $50 million was only part of the savings?

Laura K. Thompson

That's right. The rest is the discount rate.

Rod Lache - Deutsche Bank AG, Research Division

Okay. And I was wondering, just from a high level, volumes in certain markets like North America are running a little bit below what we would see from RMA or some of the broader industry sources. Is that something that is -- maybe some competitors becoming a little bit more aggressive in taking share? Or is that something that's harder for us to see, imports from China and things like that that you guys wouldn't really be affected by?

Richard J. Kramer

Yes. Rod, I think it's the trend that we've been seeing. And maybe I'll just say one thing before I talk to that specifically. As a broad comment, not just in North America but around the globe, we've seen volume increases, but we've seen the volume increases we're trying to get in the right segments with the right brands and generating the right returns. And as you know, you've been following us long enough, it's a C state [ph] change to where we were where sold a lot of tires in the past but at minimal profit and even losses, as you know. So we'll stick. We are sticking to that disciplined approach, and I think thing that's what you're seeing. If you look to North America in particular, what you saw, again, really driven by the third quarter was that that year-over-year change of the tariffs coming off. You saw a lot of low-end Asia tires, Chinese tires coming in. You still saw some of that in the fourth quarter. So as you look at the industry, the low end drove those gross volume numbers. But that said, as we look in the markets where we competed, as you know, that's not where we compete. I can tell you, I'm very, very pleased with the performance of the Goodyear brand, the performance of our new products, the demand for those new products and the profitability of them. So I don't have a general concern in terms of having the market go up in those parts of the -- those segments that really don't impact how we're driving the business. I will add that -- I mentioned in my remarks that we, at our dealer conference, released a new product, the Assurance All-Season, to round out the Assurance family of tires. The All-Season goes in the Commuter Touring mid-tier segment. It's a refresh for us. That's about 1/3 of the total -- a little under 1/3 of the total volume as you segment North America. That tire was really accepted extremely well from our dealers. We got great orders out of the box. The price point is great. So in addition to staying at the Assurance family of tires, the TripleTred, the ComforTred, the Eagle family, the high-end Wranglers that were out there, putting the All-Season in that, refreshing the Commuter Touring mid-tier is -- you can think of it as even expanding a little bit back into a part of the market, the high end of that market where we want to play. So I would say I feel pretty good about our volumes in North America. And we're going to grow, as Laura mentioned, the numbers. But I'm feeling pretty good where we are.

Rod Lache - Deutsche Bank AG, Research Division

And just 2 quick data points. Can you just give us what you would expect your global weighted average tax rate to look like if you were to experience that revaluation? And in the quarter, was there a -- you mentioned 3 million unit increase in production and obviously, the shipment increase was less. Was production and shipments more or less in line? Is it more of a comparison issue? Are you building kind of finished goods in advance of stronger demand expected ahead?

Richard J. Kramer

That'll happen more in Q1, Rod. I mean, Q4, there's a bit more balance, I would tell you. But in Q1, as you know, from a seasonality perspective, we build more than we ship there. So we built, year-over-year, about 3 million more units in Q4. That'll bring in the incremental unabsorbed overhead into Q1, the -- about -- run about $50 million of the $75 million to $100 million that Laura talked about. But in Q1, you will see us building more than we're selling. But that's not an anomaly. That's pretty much how the business runs, as you know.

Laura K. Thompson

Right. And then from your income tax rate, Rod, 25% for 2014 of the international SOI.

Rod Lache - Deutsche Bank AG, Research Division

Right. But once you would go through that revaluation, what would be the global weighted average?

Laura K. Thompson

Yes. You know what, Rod, we have not gone out that far in our analysis. There'll be a lot of moving parts then. And as we get closer and closer to that, we'll let you know.

Rod Lache - Deutsche Bank AG, Research Division

Would it be reasonable to expect something like 35% on the North America part?

Laura K. Thompson

Yes. Again, nothing related to 2014, and that may be in the ballpark. But again, we'll keep you up to speed as we go.

Operator

And next, we'll move to Patrick Archambault with Goldman Sachs.

Patrick Archambault - Goldman Sachs Group Inc., Research Division

I guess, on Slide 15, you may have said this. It's just that there was a lot of information here. Just on Asia Pacific, so your units were up, but your net sales were -- the revenue was down. Can you just kind of tell us how that works? Maybe it's an accounting thing. And then the other aspect is just a little bit more color on -- despite the fact that net sales were down, obviously, you had a pretty substantial margin improvement there, and I just wanted to get a little bit more detail on that.

Richard J. Kramer

Yes. Pat, on the first point, in Asia, our volume is driven largely by the growth we're seeing in China in general. I would say that drives our volume also. We saw growth in places like India and certain of the ASEAN countries in the quarter as well. Volume, obviously, we still have headwinds in Australia. But when you look at the volume numbers versus the sale numbers, it's basically the foreign exchange impact. I mean, you know the numbers. If you go look at what happened to the Indian currency, some of the ASEAN currencies, I think that basically explains it. There's not a whole lot going on -- not a whole -- excuse me, not a lot else going on other than that. And again, for us, Asia is a growth market. We're growing faster than the market in China. And we see good traction in some of the other countries as well. Australia is the headwind for us in the region. We've taken some restructuring actions there. I'm happy to say our share position is actually very good, but it's a tough market right now. And I think it will be in 2014 as well. And of course, we've seen the devaluation of the Aussie dollar as well.

Patrick Archambault - Goldman Sachs Group Inc., Research Division

Okay. And then just on the -- I mean, can you just go and -- go ahead and kind of give us a little bit more on the margin improvement, which was considerable?

Richard J. Kramer

Pat, I think if you look at what we're doing, number one, it's -- if you look at the walk, certainly, we did another disciplined job of managing price mix versus raw materials. But I would also tell you that we're focusing on our cost. We talked about it, the -- at the Investor Meeting in September, and you've heard me talk about it in the past. It's driving our operational excellence initiatives, particularly around things in the procurement area and material substitutions, as well as the initiatives we're taking in, the plans on conversion cost and a more efficient supply chain across the business. So as we're growing volume, we're growing in the targeted marketing segments, but we're also driving efficiencies in our business across the board. And you're seeing some of that come through in the margin as well.

Patrick Archambault - Goldman Sachs Group Inc., Research Division

Okay. And that commentary was, I mean, probably true everywhere. But the question was Asia specifically, right?

Laura K. Thompson

Sure. And for Asia, to get a little more specific, a lot of the same things Rich talked about, but positive price mix, net of raw material cost, the higher volume and then the lower startup expenses related to our new facility in China.

Patrick Archambault - Goldman Sachs Group Inc., Research Division

Okay, that's helpful. One other one for me. I just noticed that your free cash flow language just changed a little bit from the -- what you've provided at the Analyst Day. I think there, you had said free cash flow positive, excluding pension and contributions. And here, you've referred specifically to just operating cash flow being positive. Just on an apples to -- I mean, I understand probably some of that has to do with impact of the refi, which takes pension contributions out of operating. But on an apples-to-apples basis, has sort of anything changed on the margin?

Laura K. Thompson

Yes, not at all, nothing has changed. And really, it is not about operating cash flow. For 2014 to 2016, as we described cash flow back in September at our Investor Day. Really, as we got to this conference call, just wanted to make sure it was clear what cash flow we were talking about. And right, it is and remains free cash flow from operations.

Patrick Archambault - Goldman Sachs Group Inc., Research Division

And just -- I'm being silly here. But free cash flow from operations, then as cash flow from operations minus CapEx?

Laura K. Thompson

Yes, pension is excluded from free cash flow. Rationalizations or restructuring charges and any asset sales, which are very small for us is regardless. And if you look at -- I think it's Page 14 in the deck. I think that'll walk you through it.

Patrick Archambault - Goldman Sachs Group Inc., Research Division

Okay. So it's that exact definition then?

Laura K. Thompson

That's exactly right. That's right.

Patrick Archambault - Goldman Sachs Group Inc., Research Division

Okay. Yes, that's helpful. The -- and then just my last one is, I know that you've talk about this a little bit, but in terms of capacity plans that you guys have, that your competitors have, now that you kind of have a read on volume of 2% to 3% for this year, how do you see this sort of utilization environment playing out for the industry and for yourselves just given that unit increase you're contemplating?

Richard J. Kramer

So Patrick, I would say, from a global -- from an industry perspective, I think what you're referring to is a lot of the capacity coming online, particularly what we might call HVA capacity. And similar to the view we had in the past, when we look at the growth of HVA tires, which is not a specific debt defined term amongst all the companies, but call it those higher-end bigger rim diameter, higher performance type tires, we continue to see that the growth in demand for those will exceed the capacity coming on in a macro basis. Now you might have points in time or locations where my comments don't fully come true, but by and large, we certainly still see demand being ahead of the supply of those tires. In particular, when we look at our plan, we think 2% to 3% volume growth, sort of that 3 million to 5 million unit growth per year, when we look at that, we're fairly comfortable in terms of meeting that demand, given that the existing HVA capacity we still have in our factories, particularly in Europe. We look at investments we've already made and having those come online, such as the Americana modernization as we look ahead to that coming in. In addition, the -- as I mentioned a bit earlier, the productivity coming from some of the operational excellence initiatives that we put in place. And finally, again, if we go back to the September Investor Day meeting, part of that use of cash we identified was growth capital initiatives that would be ultimately identified as adding capacity in the right places at the right times. So we feel like we're in good shape, certainly, to meet our plan and to grow in the places that we want to.

Operator

And we'll take our final question from Emmanuel Rosner with CLSA.

Emmanuel Rosner - CLSA Limited, Research Division

A few -- just a few points of clarification first on the SOI walk on your Slide 18. Just to be completely clear, we spoke about your pension expense going down potentially by $100 million or so at the midpoint, but it's not on the SOI slide. So is that something that would come incremental to your net cost savings that are neutral? Or is that a benefit that helps you get your neutral net cost savings?

Laura K. Thompson

You know what, Emmanuel, if you would go to the next chart, which is Slide 19 -- and we kind of put both the pension expense and the cash piece of that together. So for 2014, we would expect pension expense of between $150 million to $200 million. And again, that's versus the $285 million that we had in 2013.

Emmanuel Rosner - CLSA Limited, Research Division

I appreciate that. But is that incorporated as part of your other bucket on Slide 18 of net cost savings being neutral? Or is that something that you could do net cost savings neutral, and then on top of that, you will get cost savings from the pension expense going down?

Laura K. Thompson

That's right. It is on top of that, on top of the cost savings, so in addition to the cost savings.

Emmanuel Rosner - CLSA Limited, Research Division

Okay, perfect. Now for more -- fundamentally, can you please comment on the environment you're seeing in the U.S. for replacement pricing? Obviously, in terms of your own fundamental operating performance, you're doing a great job at mitigating pricing pressure with raw materials. But just focusing nominally on the price, without the raw materials piece, have you seen some improvement in the pricing of tires the way it was suggested by the December CPI?

Richard J. Kramer

Emmanuel, I'll tell you what. How we look at the environment that we have to play in, number one, clearly, we look at -- I don't want to make it a raw materials discussion, but certainly look at the input cost that we have related to raw material. But for us, as we look at the market, we also really focus on the value proposition that we're bringing to the market, our brand pool [ph], the technology that we're bringing in our products, the product performance, the service levels, which are even more important and marketing support as well to make sure that our dealers are really competitive with the right products that they have in the marketplace. We'll continually and do periodically go back and look at that value proposition and adjust it to make sure that we're going to be competitive in the marketplace, and that's what we're doing. I would also point out that we've had a very disciplined approach to managing price and mix over many, many years now. And I would say, that's what you can expect us as -- from us as we go forward. Raw materials, as Laura mentioned earlier, we see them going a bit down in the near term. It's what you're seeing. We also see those other raw materials or other input costs going up. And I emphasize again that, over the long term, particularly as the industry recovers, our view is that raw materials are going to increase. And I think those are the sort of the data points I would give you in terms of how we think about price in the marketplace. Yes, we take into consideration what's happening, but we also look at the value we're bringing to the market as well in our long-term view. So that -- I think that's that color I'd give you.

Emmanuel Rosner - CLSA Limited, Research Division

I appreciate that. And then just on the volume -- your volume assumptions for 2014, 2% to 3% growth. That's clearly in line with your sort of long-term plan. Now the long-term plan though, from memory, was obviously massively overweight in the emerging markets, and then only 1% in the developed market. When you look at what in the environment is right now, would that -- for 2014, would that be weighted somewhat differently in which maybe some more growth out of the developed markets as we sort of start this -- what seems to be a recovery and then maybe somewhat less from the emerging? So would it be the same overall, but maybe a bit more of it from the developed regions?

Richard J. Kramer

Emmanuel, I think it's actually an excellent question. And if I go back to the guidance we gave, you're exactly right. Over the long term, we see that the emerging markets are going to be the driver of the global tire industry going forward. But we also sort of gave the broad guidance over the periods to take into account what is an industry that has a lot of cyclicality and volatility to it. And I think we're experiencing some of that right now. So I think your point is correct. Long term, more emerging markets. Near term, as we look into 2014, the North America markets and the European markets, particularly the Western European markets, the recovery in Europe in particular are driving some of the growth that we see. We remain optimistic on the emerging markets, but I do think, as we look into '14, we'll see a little bit of an inversion of that. But again, I'll say it, that when we looked and we put our strategy forward and we put the goals out, particularly the 10% to 15% we said through the cycle, we wanted to deliver those right, those results -- excuse me, we will deliver those results in view of the volatility that we're going to see in the industry, and I think 2014 starts out with some of it already.

Emmanuel Rosner - CLSA Limited, Research Division

I appreciate all this color. And then just a final one, really, for me. The -- would you care to comment about these news headlines this morning of Sumitomo saying that you're seeking to dissolve an alliance? I'm not fully familiar with what they're actually talking about, but is that something that we should be looking into?

Laura K. Thompson

Okay, sure. Let me go through that a little bit. And many of you who have followed us for a long time have seen our disclosures related to our relationship with Sumitomo. So we have a global alliance with Sumitomo Rubber Industries or SRI, and we've had that since 1999. Among other agreements, many other agreements, we own 75% and SRI owns 25% of 2 companies: Goodyear Dunlop Tires Europe and Goodyear Dunlop Tires North America. We have learned that SRI has engaged in anticompetitive conduct in violation of applicable antitrust laws. We concluded that warrants the dissolution of this global alliance. And on January 10 of this year, we began arbitration proceedings seeking the dissolution of that global alliance, damages and all the lease that goes along with it. We don't believe the dissolution will have any material adverse impact on our customers, our operations or our liquidity. But as you know, arbitration proceedings are to be kept confidential. So you'll see what I've said in a little more in our 10-K that comes out, but we really can't comment on anything more than that.

Richard J. Kramer

And I think that wraps up the call. As usual, we very much appreciate your attention today. Thank you.

Laura K. Thompson

Thank you.

Operator

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

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