The Goodyear Tire & Rubber's (GT) CEO Richard Kramer on Q2 2014 Results - Earnings Call Transcript

Jul.30.14 | About: Goodyear Tire (GT)

The Goodyear Tire & Rubber (NYSE:GT)

Q2 2014 Earnings Call

July 30, 2014 9:00 am ET


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


Patrick Archambault - Goldman Sachs Group Inc., Research Division

Rod Lache - Deutsche Bank AG, Research Division

Itay Michaeli - Citigroup Inc, Research Division


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 Second Quarter Earnings Conference Call. [Operator Instructions]

I would now like to hand the program over to Tom Kaczynski, Goodyear's Vice President, Treasurer and Investor Relations.

Thomas Kaczynski

Thank you, Tony, and thank you, all, for joining us for Goodyear's second quarter 2014 earnings call. Joining me today are Rich Kramer, Chairman and Chief Executive Officer; Laura Thompson, Executive Vice President and Chief Financial Officer.

Before we get started, a few items we need to cover. To begin, the supporting slide presentation for today's call can be found on our website at, and a replay of the call will be available later today. Replay instructions were included in our earnings release issued earlier this morning.

I'd like to remind participants on today's call that our presentation includes some forward-looking statements about Goodyear's future performance, and actual results could differ materially from those suggested by our comments today. The most significant factors that could affect future results are outlined in Goodyear's filings with the SEC and in our earnings release. The company disclaims any intention or obligation to update or revise any forward-looking statements, whether as a result of new information, future events or otherwise.

Our financial results are presented on a GAAP basis and, in some cases, a non-GAAP basis. The non-GAAP financial measures discussed on the call are reconciled to the U.S. GAAP equivalent as part of the appendix to the slide presentation.

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

Richard J. Kramer

Great. Thanks, Tom, and good morning, everyone. I'm very happy to report that we delivered record results in the second quarter. These results were driven by strong consumer replacement volumes in all of our regions, as the Goodyear brand and Goodyear's value proposition continues to be a competitive advantage in the marketplace. Our performance reinforces the confidence that we have in our strategy. In a quarter where we saw continued economic volatility, particularly in the emerging markets, we posted segment operating income of $460 million, a second-quarter record. We now generated $833 million in segment operating income for the first half of the year, a 14% increase over the same period in 2013.

Achieving these results, even amidst global economic challenges, is perhaps the best reflection of the strength of our strategy and the changes we've made to Goodyear's business. This further renews our confidence in hitting our target of 10% to 15% annual segment operating income growth through 2016. The quarter included volume increases in consumer replacement across all of our 4 global regions. Global volume is clearly a topic you've been focused on, and with good reason. However, I'll reiterate one of the core tenets of our strategy, and that is that we're not pursuing volume for volume's sake. We're pursuing profitable volume growth in our targeted market segments.

But the consumer replacement performance only begins to tell the story, so I'd like to acknowledge several highlights from the past 3 months. First, let's look at our growing markets. In China, June was a record month for our consumer tire sales, and for the quarter, we continued to grow faster than the industry. Overall, our performance in China is especially rewarding, as it followed a challenging first quarter, and in response to the more challenging China economy. Consistent with our strategic approach, we grew with the right mix of products and channels where the Goodyear brand has its greatest value. In addition, we earned new OE fitments that are consistent with our targeted market strategy.

Competition in Asia Pacific is still intense and challenges remain in Australia in the OTR business, which affected our total results for the region when compared to the prior year. Nonetheless, in this environment, I'm very pleased with the team's execution in the region. Latin America faced headwinds in the quarter, as OE production remained weak. The economic turmoil continued in Venezuela, and the Brazilian economic outlook deteriorated. Even so, our team in the region delivered outstanding performance with double-digit percentage increases in consumer replacement over last year. This was particularly true in Brazil, where our ongoing rollout of new high-value Goodyear-branded products across the region is yielding strong results.

I visited the region during the quarter and saw firsthand both the progress of our current efforts and the potential ahead. Goodyear dealers are excited about our new products, such as the EfficientGrip performance tires and Wrangler ArmorTrac for SUVs, available in more sizes and types than they ever have been before. Our commitment to investment in the region excites our dealers as well, and this includes the upgrades to our Americana plant that are providing them with more of the products that are in demand. And they are excited about our new and expanded sales and marketing tools focused on demand creation, as we've redoubled our efforts to help our dealers grow their business profitably. In total, our associates and dealers in Brazil are energized by Goodyear's leadership in an increasingly competitive environment.

Now I'd like to spotlight the strong results in our mature markets. Our Europe, Middle East and Africa business delivered segment operating income of $117 million, more than doubling its results from 1 year ago. Its operating margin for the first half of the year was 7%, demonstrating progress in returning the region to its historic margin level. Our balanced approach of growth and cost control was especially critical in EMEA. Laura will provide details on this later on. And in addition, we're doing a much better job in the region of supporting our customers, thanks to a strong value proposition and product lineup. For example, in addition to our industry-leading label product portfolio, our winter tires won influential magazine tests, resulting in strong initial orders for these products. Now you may recall that I referenced a concern in prior quarterly calls with the competitiveness of our value proposition in Europe. I'm pleased to say that we've made progress in this area with our key European customers, and our results reflect that progress. Now while the European economy has certainty stabilized from its low points, structural challenges remain as well as volatility, particularly in emerging markets, including Russia. Now in that environment, the EMEA business continues to execute its business strategy very well.

And finally, our North America business did more than simply maintain its momentum. It took its performance to a new level. North America delivered $208 million in segment operating income, its best quarter in history. Not just its best second quarter, its best quarter ever. And to give you some perspective, $208 million is more than the North America tire business earned for any full year from 2001 to 2010. In addition, the business surpassed 10% segment operating margin, its highest quarterly margin in more than 15 years. Now some of you may remember when our next-stage metric for North America was 5% segment operating margin. Now our performance consistently exceeds that mark.

And driven by the Goodyear brand, our second quarter consumer replacement volumes in North America were up nearly 6%, significantly outperforming the industry. For the first half, our consumer replacement volumes were up 3%. Again, we're very pleased with this performance. Our volumes were achieved by remaining consistent and true with our strategy of winning in those targeted market segments where we can add value for consumers, for our customers and for Goodyear. We won't be distracted by fluctuations in the low end of the market, which can distort industry trends.

Now that occurred a few years ago, before and after the implementation of the 421 tariffs, causing extreme swings in both overall industry volumes and period-to-period comparisons. During these swings, Goodyear remained steady and true to our strategy and will continue to do so should those distortions repeat.

Now looking at our overall results, I want to quickly address price/mix versus raw material costs in the quarter, which Laura will discuss in detail a bit later. The decline that you saw was driven largely by the headwinds in our OTR business, which we highlighted last quarter. I remain pleased with our price/mix versus raw materials strategy in our consumer and commercial businesses, as evidenced by strong volume, strong revenue per tire and gross margin in the quarter. We believe our ability to overcome various headwinds and deliver record results in the quarter is the outcome of our commitment to continuous improvement, with a sharp focus on decreasing cost and improving customer service. We're targeting the most profitable market segments, pricing for the value of our products and making continual progress on operational excellence. In sum, we are performing as we expected with a commitment to building sustainable value over the long term.

Now shifting gears, I want to quickly touch on a few of the elements of our capital allocation plan. As you'll recall, we shared this plan last September and outlined plans for the use of the more than $3.6 billion of cash to be generated in 2014 through 2016 to enhance long-term shareholder value. Laura provided an update to the plan at the end of May. To date, we reinstituted quarterly dividends, which are now at $0.06 per share; we activated our stock buyback programs, investing $54 million in the repurchase of 2 million shares in the first half of 2014; we funded our hourly U.S. pension obligations with cash generated from operations; and we identified areas of growth CapEx, planning investments to increase future value.

At the end of May, we announced that one of those focal points of the growth investment is the construction of a new state-of-the-art manufacturing plant for the Americas. This plant will supply our North America and Latin America replacement customers and OEM customers with high-value tires that they demand. In fact, we are already seeing demand outpace capacity for some of our high-end HVA products and can foresee reaching our HVA supply limits soon. Our strategic focus will remain on these products and we're looking forward to our new production facility coming online in 2017. And just as we are not pursuing volume for volume's sake, we're not adding capacity for capacity's sake. This new plant will support profitable growth in our North America and Latin America regions. There are many companies that can increase capacity, but only a select few that have the combination of a strong value proposition to respond to the market, together with the manufacturing capability required to win in the marketplace. And at its core, what's required to win in the tire industry is not much different than in other industries. The companies with long-term success are the ones with the strongest value proposition, the ones who anticipate the needs of the marketplace and respond with high-quality products or services that satisfy those needs, and the ones with brands that the customers and consumers know and trust.

Goodyear's value proposition has many elements, including a trusted iconic brand that's known around the world; industry-leading products; diverse distribution channels capable of responding to customer requirements; strong customer relations, particularly at the OEMs; and an unwavering focus on the consumer. Now taken individually, none of these elements are strong enough to create differentiating value in the marketplace. Our value proposition is rooted in our ability to integrate all these elements better than anyone else. Goodyear's competitive advantage comes from the alignment of these individual parts, multiplying their value. That alignment of strength, fueled by operational excellence on the supply and manufacturing side, is what we believe it will take to win in the evolving global tire industry. More importantly, we believe Goodyear is the company that will deliver.

Now the confidence we have in our competitive advantages is reflected in recent updates that we've made to our strategy roadmap. The changes are small and do not constitute a new strategy for sure, but express where our business is now and help more clearly define, both internally and externally, how we will grow in the future.

Now if you turn to Slide 7, I will quickly take you through the updated roadmap. In the previous version, we noted in the top box where we are, that pensions remained a challenge. That has been changed, as nearly all of our U.S. pension plans are now fully funded. Moving to the key strategies on the left, we've adjusted each of the regional comments. On the original roadmap, we defined North America strategies as returning to profitability. Now that we've completed the turnaround in that business, our sights are set on profitable growth. While leading in China remains as a priority in Asia Pacific, we acknowledge the larger expectation of growing in the entire region. The performance of our Asia Pacific business relies on more than just China, and this update sends a more comprehensive message. In EMEA and Latin America, we're now focused on returning to historical profit levels, reflecting an appropriate strategic update for both of those businesses. It's a better description of our current priorities. And moving to the key how-to's, we updated only one element, targeting profitable market segments is now folded into a larger focus on sales and marketing excellence. With this addition, we've clearly aligned the key how-to's with more consistency, as sales and marketing excellence joins market-back innovation excellence and operational excellence. Specific initiatives within sales and marketing excellence will start to take shape over the remainder of the year, as we continue to position Goodyear globally for profitable growth.

And finally, to be clear and transparent relative to our expectations of growth, we added a new first point to our destination. Top line and bottom line growth are now at the top of the list in our plan to create sustainable value.

So in summary, we're very pleased with our performance in segment operating income growth over the first half of the year. We're confident that volume will continue to grow over the long term and we remain committed to our strategy of pursuing profitable volume and share in segments where the Goodyear brand is a differentiator. That confidence is supported by the value we can generate through our integrated business model, working from the market back, responding quickly and effectively to the needs of consumers. The evidence of that value creation can be seen in our products, our operations and most importantly, in our results.

Now with that, I'll turn the call over to Laura.

Laura K. Thompson

Thank you, Rich, and good morning, everyone. My remarks this morning will start with a review of the second quarter and our first half results. I'll then finish with an update on certain items included in our outlook for 2014's earnings and cash flow. We'll then open the call for your questions.

Let's turn to Slide 9 and review a few key items on the income statement. We are very pleased with our solid second quarter performance. Segment operating income for the quarter increased to a record $460 million. For the first half of the year, SOI has increased 14% over last year. This is firmly aligned with our expectation of 10% to 15% SOI growth for the year. Similar to the first quarter, strong performance in North America and Europe was able to more than offset weakness in emerging markets. Sales volume in the quarter increased 3%, driven by strong replacement volume growth of 6%, partially offset by a 4% decline in OE volume. For the quarter, net sales were down $238 million. Our sales reflect the benefit of $106 million of higher volume, but that benefit was more than offset by lower non-tire revenue of $148 million. The lower non-tire revenue is driven primarily by lower third-party chemical sales in North America. We expect the impact to significantly lessen going forward.

In addition, price/mix reduced sales by $146 million, primarily due to 2 factors: first, the effect of lower raw material costs on pricing, including normal raw material indexed agreements; and second, a significant decline in our Off-The-Road tire volumes, which resulted in lower mix.

Lastly, foreign currency exchange was unfavorable by $52 million. We generated gross margin of 24.1%, an improvement of 270 basis points versus the prior year. SAG increased slightly, reflecting higher investments in marketing and advertising of $9 million versus the second quarter last year.

In the quarter, we achieved a record $460 million in segment operating income and a 9.9% in SOI margin. This is a direct reflection of the sustainability of the strategies that we are driving across all of our businesses. Our second quarter operating tax rate as a percentage of foreign segment operating income was 21%. Our earnings per share on a diluted basis for the quarter was $0.76. Our results were impacted by a few significant items, which are listed in the appendix of today's presentation, on Slide 19. After allowing for those items, our adjusted earnings per diluted share was $0.80.

The step chart on Slide 10 walks second quarter 2013 segment operating income to second quarter 2014 segment operating income. Higher sales volumes and higher first quarter production levels benefited our results by $40 million year-over-year. Strong cost savings for the quarter of $103 million more than offset the negative $69 million impact of inflation. Lower raw material costs only partially offset reduced price/mix for a net unfavorable impact of $44 million year-over-year. This unfavorable impact was primarily due to lower Off-The-Road tire sales. We are very comfortable with our price/mix, as evidenced by our overall revenue per tire remaining the same in the second quarter as the first quarter and gross profit margins that are at their highest in recent history.

Separately, we saw a reduction in price/mix versus raws in the quarter relative to our previous outlook that we provided in April. We indicated price/mix versus raws would be a slight positive or similar to Q1. There are 2 factors that caused a different result. First, we sold significantly more consumer tires and less commercial tires in the quarter, giving us a less rich mix than expected. And second, the raw material cost benefit was less than we forecasted, as raw material costs were down 4% versus the prior year rather than the 6% we had anticipated.

Continuing along the items on the walk chart, foreign currency translation had a negative impact of $13 million year-over-year, primarily due to Venezuela. Other includes savings from the Amiens, France closure and lower pension expense, partially offset by investments in advertising and R&D. Cost savings net of general inflation and after investments in marketing, advertising and R&D, were a net benefit of $24 million for the quarter.

Slide 11 walks first half 2013 SOI to first half 2014 SOI. Given the unusual weather-related impact to volume in our first quarter and the rebound in the second quarter, the first half reflects a more normalized view of our performance. In the first half, higher sales volumes of about 2% and higher production levels resulted in a benefit of $90 million. Cost savings of $214 million exceeded the $144 million impact of inflation for a net benefit of $70 million for the first half of the year.

Raw material costs were lower in the first half by $156 million, almost offsetting the reduced price/mix of $183 million. The unfavorable $27 million net impact is more than fully explained by lower Off-The-Road tire sales, which negatively impacted our mix in the first half of the year.

Lastly, foreign currency translation had a negative impact of $29 million year-over-year. Overall, we are pleased with our first half performance of growing SOI by more than $100 million or 14%. We are equally pleased with how it was delivered, a balanced execution of growth and cost initiatives.

Now let's turn to the balance sheet information on Slide 12. Cash and cash equivalents at the end of the second quarter were $1.6 billion, down a little over $200 million from March. Total debt is down more than $350 million from March and, consequently, net debt fell to $5.1 billion at the end of June compared to $5.3 billion at the end of March. I also want to mention that we used approximately $31 million of cash to repurchase approximately 1.2 million shares of Goodyear common stock during the second quarter. This brings our first half purchases under the share repurchase program to $54 million or 2 million shares.

Free cash flow from operations is shown on Slide 13. During the second quarter of 2014, we generated $314 million of cash. Over the last 12 months, our free cash flow from operations was $724 million. As we continue to generate cash, we remain focused on a balanced capital allocation plan that builds for our future with high-return growth investments, advances the path toward an investment-grade credit rating and provides for a significant shareholder return program.

Moving now to the business units on Slide 14. I will start with North America. North America reported record segment operating income of $208 million and achieved operating margins of greater than 10%. This is a significant achievement and reflects the sustainability of our strategy to grow profitably in targeted market segments. Unit volumes were up 3%, driven by increased sales in our replacement business, which was up 6%. Our growth was driven by strong demand for Goodyear-branded tires in our most profitable targeted market segments. While we are pleased with the volume performance in North America for the quarter, we would point you to the year-to-date performance of about 1% growth as representative of our trends going forward. As I mentioned, given the unusual weather-related impact to volume in our first quarter and the rebound in the second quarter, the first half reflects a more normalized view of this year's volume. Similar to prior quarters, price/mix was unfavorably impacted by reductions from raw material indexed agreements, although mix remained positive in total, despite significantly lower sales in our Off-The-Road business. Manufacturing costs were lower by $9 million, due to improved factory utilization and lower pension expense, which was partially offset by increased profit sharing in our factories of $9 million. Our strategy of targeting profitable market segments, mixing up in products through market-back innovation, pricing for the value of our tires and controlling our costs have enabled us to continue generating sustainable economic value in North America.

Europe, Middle East and Africa delivered segment operating income of $117 million in the second quarter. A significant improvement over last year's $51 million. SOI margin increased to 7.4% from 3.2% in the prior-year period. The second quarter was the fifth consecutive quarter with year-over-year earnings growth. Volumes increased by 3% in the second quarter versus last year. Industry conditions remain favorable, with year-over-year market growth in consumer tires. Our volumes in Europe were up by 500,000 units versus prior year, mainly driven by those improving industry conditions and a propitious start to preseason winter sales, driven by our new Ultra Grip 9 tire line. Our volumes in commercial truck were impacted by weaker demand. This occurred primarily in emerging markets, driven by less transport demand and decreased fleet activity. We continue to leverage our success with new products, as well as our strong service proposition in this business. Factory utilization improved based on increased throughput and the closure of our facility in Amiens, France. While our progress in Europe is substantial today, we have more work to do in this business as we take advantage of improving industry conditions and work to reduce costs further.

Turning to Latin America, operating income was $59 million for the quarter, $23 million less than the prior year. All of the year-on-year decline in earnings can be attributed to 2 factors: first, challenges in Venezuela; and second, the impact of lower OE volumes in Brazil, where as you know, vehicle manufacturers continue to reduce production significantly. Positive price/mix offset the negative effects of inflation and the costs related to our expansion of the Americana plant in Brazil. We continue to see a strong response to our new products across the region and, as a result, our replacement volumes grew 13% this quarter, almost completely offsetting the weakness in OE. Excluding Venezuela, our replacement volume increased 17% this quarter in Latin America.

During the second quarter, we successfully returned our Venezuela production to normal levels after completing our labor negotiations. However, we continue to face other challenges with our business, such as the lack of availability of U.S. dollars to timely pay our suppliers for raw materials which are required to keep the factory running. Venezuela remains a challenging business environment and we continue to monitor the situation closely and adjust to the changing circumstances as needed. We continue to expect Venezuela to negatively impact our Latin American SOI by $40 million to $60 million for 2014, with about $27 million having already occurred during the first half of the year. This assumes no further devaluation or meaningful disruption to production, which could have a further negative impact to operating results.

Our Asia Pacific business reported segment operating income of $76 million for the quarter, a $15 million decrease year-over-year. More than all of the decline in operating income is driven by a significant decline in our Off-The-Road tire sales and unfavorable foreign exchange of $4 million. Unit volumes of 5.8 million in Asia Pacific were about 5% higher than 1 year ago, given strong growth in China, which was up 13%; and India, which was up 12%. These increases more than offset the impact of weaker demand in Australia. We are winning with customers in China with double-digit volume growth in the second quarter, driven by strong sales in our targeted market segments. We remain confident in our strategy and committed to winning in China.

Now looking at the full year, the key segment operating income drivers are listed on Slide 15. In line with our 2014 to 2016 targets, we continue to see sales volume growth of 2% to 3% for 2014. For the full year, we are assuming the net of price/mix versus raw material cost changes will be slightly negative. While we expect the second half price/mix versus raws to be essentially neutral, we do expect the third quarter impact to be similar to the second quarter. Based on current spot prices and our forecasted mix of products, we expect raw material costs to be down 5% for the full year, a slight adjustment from prior guidance. We continue to expect approximately $50 million to $75 million in benefits from lower unabsorbed overhead for the full year, although we are now trending towards the high end of the range. As a result of increased cost savings, particularly from Europe, we are raising our full year cost savings versus inflation outlook from neutral to about $50 million benefit after offsetting increased investments in marketing, advertising and R&D. The strong cost performance in Europe is consistent with the $75 million to $100 million of productivity benefits we described in 2012 as part of our profit improvement plan for Europe. Based on current spot rates, we expect a negative foreign currency exchange impact of approximately $60 million for the year. This includes the headwinds due to the change in exchange rates for Venezuela, although it does not assume any further devaluation of the bolivar.

We are increasing the savings expected from the closure of our Amiens, France facility to a range of $40 million to $50 million in 2014. The annualized benefit of this closure and the related exit from the Farm Tire business in Europe will be approximately $75 million. Pension expense savings has increased slightly to $90 million, reflecting favorable plan experience versus our estimate.

Additional financial assumptions for 2014 are listed on Slide 16. For the year, we now expect interest expense in the range of $415 million to $435 million, a slight improvement versus the prior outlook. Financing fees are forecasted to remain at approximately $60 million. Our full year income tax rate is expected to be approximately 25% of international SOI. As discussed previously, each quarter, we assess our current profitability in North America and whether sufficient future taxable income will be generated to utilize existing deferred tax assets. The result of the analysis continues to lead us to believe that we may be in a position to release all or a portion of the U.S. valuation allowance during the second half of 2014. If the valuation allowance is released in 2014, the expected increase in annual tax expense for 2015 and beyond would be approximately $150 million per year or a 35% tax rate. However, we do not anticipate any U.S. cash taxes for at least 5 years. The outlook for depreciation was increased slightly to approximately $725 million for the year. We lowered the outlook for global pension expense to $150 million to $175 million in 2014. We expect global pension cash contribution to be about $1.3 billion, including over $1.1 billion that was put into the hourly U.S. pension plans during the first quarter of this year. And for the year, we continue to expect our working capital to be neither a significant source nor a significant use of cash. And our capital expenditures outlook is unchanged from our last call.

In summary, our businesses have delivered strong results in the first half of the year and are on track to deliver 10% to 15% SOI growth in 2014. Our market-back focused innovation has enabled us to launch 22 new products during the first half of 2014, and we are seeing strong demand for these products as demonstrated in our consumer replacement results. Additionally, our cost savings initiatives continue to fall to the bottom line. Our first half results give us confidence in our strategy and that our strategy will deliver our 2014 to 2016 targets.

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

Question-and-Answer Session


[Operator Instructions] We'll take our first question from Patrick Archambault with Goldman Sachs.

Patrick Archambault - Goldman Sachs Group Inc., Research Division

Look, just on -- my first question is on the pricing. Is it possible to segment out the impact of OTR? More specifically, what I'm trying to get at is just a little bit more color as to how the pricing environment is for passenger and light truck and how you would assess the overall competitive environment. Has there been any pressure in that segment as well, maybe stoking fears that capacity coming back is causing a little bit of that good discipline to erode? Or would you really isolate the pricing pressure, really, on the OTR side?

Richard J. Kramer

Yes -- no, Patrick, good question. And I would tell you, if I look at it -- so maybe I'll address it both ways, year-over-year and then sequentially. But year-over-year, it's essentially -- it's primarily all due to OTR, as we highlighted in the remarks and, frankly, as you just said. With that said, I can tell you that I'm really -- I'm satisfied with our price/mix versus raw material equation for the core consumer and commercial businesses. We see that in revenue per [ph] tire, in addition to the strong volumes that we've had and the strong gross margin that you saw in the quarter as well. And maybe a simple way to think about this to sort of give you how we see it and how we think about it, we've given guidance in the past or we've given a formula in the past that sort of 85% of our top line relates to our core tire business, if you will, our tire business, and excludes chemical and some of the other things. If you were to do that, take 85% of that number and calculate a revenue per tire -- 85% of our sales number, what you'd see is, sequentially, from Q2 to -- excuse me, Q1 to Q2, you'd see our revenue per tire basically flat at about $97. Actually, the math would say Q2 actually went up slightly from Q1. And if you take that all the way back to Q2 in 2013, you'll see that number was higher, it was about $107. But when you look at that year-over-year change of the $107, let's say, down to the $97, the bulk of that is driven by FX, not by price decrease. Some of it is price decrease, but I can tell you that price decrease is less than the raw material decrease that we've gotten, as we said, 4% in the quarter. So I would say it's less than that. So I would say, as we look at this, we are not -- I'm not uncomfortable at all with where our price/mix versus raw material equation is. From a trend standpoint, I'd say, it's right in where we thought it would be. And again, along with the strong volumes and the strong gross margin we have, I think it's another proof point. And finally, I'd go back to what we said back in September and then I think what we reiterated at the end of the year, where we said price/mix versus raw material would essentially be flat to offset each other for 2014. Last quarter, we said it'll be slightly positive, now we're saying it's slightly negative. We're really sort of working around the edges here, and the driver of that really is OTR. And again, if I might add, the change in the forecast really is a mix change. We sold fewer truck tires, which are heavier, so we got less of that raw material benefit coming through. And we sold more consumer tires than we sold truck tires so -- than we forecasted, so we saw a little bit less of that price come through. Because obviously, a truck tire is at a higher price point than a consumer tire. So that change is really, I would just say, a temporal mix change. Nothing really more than that. So hopefully, that gives you some color.

Patrick Archambault - Goldman Sachs Group Inc., Research Division

It does. I mean, just to build on that, so it sounds like the reason there's no real sequential change in per unit price is that -- should I interpret it that OTR is really kind of stable at very low levels and it's a year-on-year headwind, but it's not getting sequentially worse?

Richard J. Kramer

Yes. That's a fair way to look at it.

Laura K. Thompson


Patrick Archambault - Goldman Sachs Group Inc., Research Division

Okay, and then just lastly. I mean -- and I know this is kind of what's sort of implied in what you just said, but is it then correct to interpret this as there really isn't any fundamental change in sort of the level of aggressiveness on the passenger and light truck side, in your view?

Richard J. Kramer

No, I think what you see flowing through is the lower raw materials that we've seen come through year-over-year. And Patrick, that said, I mean -- I think I'll be the first to tell you, it was competitive last year, it's competitive this year. So it's no easy walk out there for sure, but nothing beyond that, that I'd tell you.

Patrick Archambault - Goldman Sachs Group Inc., Research Division

Okay. That's helpful. And then, I guess, my other question was just on Latin America. You guys actually had pretty good margin protection despite the environment there, actually. I was kind of happy to see that. But is there any -- I guess, for instance, in Europe, you've done a lot to sort of address what has been kind of a slower volume environment over the years, right, and we're seeing the fruits of that. Is there any -- I think you used the word maybe structural issues, I think, when you were talking about the regions, so I was just wondering, is there any kind of work to be done to take additional cost out of Latin America that could be sort of a kind of a tailwind ahead of us?

Richard J. Kramer

Patrick, I would say, what's going on in Latin America and really driven in Brazil, but it's true in the other countries as well, is -- I used the term sort of redoubling. I mean, we have really revamped our product line there, we've brought more sizes and types to the forefront, we're putting a lot more aggressive ad campaigns and marketing campaigns forward to help our dealers grow their business. They see that happening, they see the investments that we're making in our factory down there in Americana, they've heard about the Americas factory that we talked about to supply Latin America and North America. And frankly, we've got a lot of momentum down there. So I would say, we've taken costs out of there in the past, we'll continue to be very judicious on it. But at the end of the day, we're really working on our value proposition to help our dealers grow. And Laura said 13% total consumer replacement, the consumer business was actually higher than that, our Brazil business was actually higher -- even higher than that. We had strong volumes in Mexico, we had strong volumes in some of the other countries. So I would say, this is a -- really, an effort we're making to grow our business profitably with our dealers down there, and that's more of the focus than structural cost which, of course, we know we still need to work on in places like Europe.


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

Rod Lache - Deutsche Bank AG, Research Division

Just, I wanted to -- just to follow up on, first, on the price/mix versus raw materials. So it was minus $27 million in the first half, and I think you said neutral for the second half and similar in Q3. So negative $44 million-ish in Q3, which would imply positive $44 million or so in Q4. If that's right, what is sort of in your kind of high-level view that drives the positives as you get towards the end of the year? And can you maybe elaborate on how you see Q3 and Q4 raw materials playing into that?

Laura K. Thompson

Yes, sure. So first of all, following what you said, everything was exactly right. What you implied, it is $27 million net as we look at it through the first half of the year and that is all driven by OTR. And really, what happens as we move into the fourth quarter, is the negative effect year-over-year of OTR really stops happening. That's what starts to put us back on a path we're more used to in price/mix versus raws.

Rod Lache - Deutsche Bank AG, Research Division

Okay. Does the ITC investigation, in your view, matter at all in terms of the North America or the Asia pricing environment?

Richard J. Kramer

Rod, maybe I'll jump in. The first thing I guess I'd have to say about that is that as we look at potential of the ITC, we continue to be in favor of free and fair trade around the globe. That was our position last time, it's our position this time. So as you know, that's not the part of the market that we actually play in. So it's not exactly in our sweet spot in terms of what happens. But we know that if those tires don't come here, they may go to other places around the globe, tires move around. So we don't know exactly what the implications of that are going to be yet as we move forward. I will tell you, the decision from the ITC is out into the future, we don't know where it is. But we already actually saw some, let's call it, irregular order patterns of maybe people anticipating something happening, early stages of that. So I don't know exactly what we think is -- what is going to happen if this thing moves forward. I can tell you, we're going to stick to our strategy of driving tires in our targeted market segments. And that's worked for us, as shown by our results, as shown by what we did over the past few years when the 421 Act was in place. So we'll sit back and see what is going to happen at this point.

Laura K. Thompson

Yes. And no doubt, Rich, the last time we had the tariff, we did see it impact, right, in the lowest tiers of the market. But I'll remind you, that was in the environment of significantly lower raw material costs. They were dropping like a rock, right? So we'll see, right? We saw an effect last time in the lowest tier, we'll see what happens this time.

Richard J. Kramer

And Rod, the thing I'd add to Laura's comment is that, the thing that we're paying attention to are just the distortions that will happen to the industry. Because we see people buying ahead and then, as tariffs came off, we saw people stop buying. And then once the tariffs came off, they started buying again. And this all happens at the low end. So you get these -- as you know, you get these big distortions in the marketplace that really aren't indicative of normal sell-in to the market, let alone normal sellout to the market. So I think that's as much on our minds as anything else.

Rod Lache - Deutsche Bank AG, Research Division

Okay. And just 2 other quick things, hopefully. Can you just give any color on your outlook for the Asia Pacific region in the second half. And on corporate overhead, it's been running like $50 million to $66 million per quarter as I go back for several quarters, and this quarter was about $35 million. Can you just maybe give us any color on what drove that and whether we should extrapolate from that going forward?

Richard J. Kramer

So from an Asia perspective, Rod, I would tell you, as I mentioned in my remarks, China was quite difficult, as we saw in the first quarter. We saw that improve in the second quarter and we see a little bit of momentum going into the third and fourth quarter at the back half of the year. As I mentioned, we performed very well in that market, particularly in the second quarter. So I'm pleased with that. And we certainly see a path to continue that going into the second half of this year. But obviously, we always say China is not going to growing in a straight line, so we've got to be ready for everything. From a region perspective, India continues to perform well. And we don't talk about it much, but our business there is performing very well. In the ASEAN countries, we see pretty good performance in places like Thailand, where we have some political uncertainty, but the market is okay there. Malaysia, very similar. The headwinds will continue to come from Australia and, as you know, we have a very big business there. And that's really the hangover of the slower mining industry that sort of makes its way back into the general consumer in Australia, and that impacts us given our retail footprint there. The positive thing is the OTR business will tend to get better as we start lapping the downturn of that business, and you'll start seeing that I think in Q4, we'll get a little bit of a benefit from that. So we remain bullish on Asia but, again, not in a straight line and not without headwinds. But long term, we continue to believe that it's a very good market. And in terms of corporate overhead, I don't think there's anything else that I would say. A lot of that in that corporate overhead is some of the incentive comp that moves the stock price and the like. What I can tell you is that our focus is going to continue to be on driving cost out of the business. And we know that that's something that we need to do both in better times and not-as-good times and we're going to continue to put programs in place to do that.

Laura K. Thompson

Okay, sure. And then no doubt, Rich, the other -- I think that corporate other did benefit in the second quarter versus the second quarter of last year. We had a little bit lower incentive comp. Last year, we had the big change in the stock price which, it certainly does continue, but not as great a degree as we had last year. So that is one of the drivers as well.


Next, we'll move to Itay Michaeli with Citigroup.

Itay Michaeli - Citigroup Inc, Research Division

Just a couple of questions, just one more on the price/mix over raws. Just given the improvement you expect in the fourth quarter as the year-over-year comps become less difficult, could the OTR piece become a bit of a tailwind in 2015?

Richard J. Kramer

Itay, I think it's too early to comment on that. I mean, what we see happening now, you've heard this before, but the actual -- the mining industry, iron ore and the like, in Australia is actually up year-over-year. The industry is up around about 5% and the like. The issue that we see is not -- the mining service companies and the mining companies and the like continue to go through their inventory and are continuing to use that as they move forward. So I think I'm not going to make any classifications on where it goes. I think we're prepared for the industry to get a little bit better, but how and when that happens, I think we're going to remain cautious and manage the business accordingly.

Itay Michaeli - Citigroup Inc, Research Division

Great. And then just a couple of housekeeping. The pension savings guidance was raised by $10 million. Is there any pull-forward in '14 from some of the savings that you outlined previously for 2015? And then -- that's one. And then secondly, on that, I know that, that gets bucketed into the other in the SOI walk, and that looks like both pension and I think depreciation year-over-year should be tailwinds for you in the second half of the year. So should we expect that other bucket to be a net positive in H2 versus last year?

Laura K. Thompson

So first of all, no -- to answer your first question, no. All right? We don't see anything as we go -- picking up as we go into 2015. Certainly, as we look at the other bucket, we expect depreciation to be up as we go into 2015.

Itay Michaeli - Citigroup Inc, Research Division

I'm sorry, I was talking more about the second half. I think the full year depreciation guidance actually implies a bit of a reduction year-on-year in the second half of '14 versus '13, and the pension savings, perhaps, accelerating as well. So if I take those 2, should I expect the other bucket in the second half of '14 to be year-over-year higher versus last year?

Laura K. Thompson

Well, first of all, D&A, we did increase the guidance from $700 million to $725 million as a full year estimate, right? It's just our -- improving our forecast as we go throughout the year, right? And then as we look at other for the second half of the year, we do expect that to be really about what we saw in the -- I don't know, about the first half of the year. Fairly neutral.

Richard J. Kramer

Itay, I think the way I'd think about it, there will be some movements in there but nothing significant that would drive it. I think that's the right way to think about it.

Itay Michaeli - Citigroup Inc, Research Division

Great. That's helpful. Just lastly, the North America OE volume, down 4%. Production, obviously, was up in the quarter. Just maybe help us reconcile what was going on there in the quarter?

Richard J. Kramer

Itay, I would say there's really nothing more in there other than continuing to drive our selectivity strategy. We saw some decisions that we wanted to take relative to fitments that we were on. That's what we've done, that's what we've been doing. I think you also got to look at it in the context of the consumer replacement increase that we had. Our consumer replacement business was up by about 6%. So these are really a matter of choices more than anything else. I wouldn't read -- I would tell you not to read into it beyond that. We've got some great fitments with the OEMs, we continue to build on that business, we've got a lot of those OEM fitments that are going to start to come back into the replacement market in the next couple of years. So I think it's nothing more than selectivity and, really, no other strategic change other than that.


Thank you, and at this time, we are out of time for questions. I'll turn the call back over to management for closing remarks.

Richard J. Kramer

Well, good. I just want to thank everyone for joining. We had a great quarter, and we're going to continue on with the same strategy as we head into the second half of the year. So thanks for the attention.


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

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