first quarter 2015 conference call...highlights . 3 • record first quarter segment operating...
TRANSCRIPT
First Quarter 2015 Conference Call April 29, 2015
Forward-Looking Statements
Certain information contained in this presentation constitutes forward-looking statements for purposes of the safe harbor provisions of The Private Securities Litigation Reform Act of 1995. There are a variety of factors, many of which are beyond our control, that affect our operations, performance, business strategy and results and could cause our actual results and experience to differ materially from the assumptions, expectations and objectives expressed in any forward-looking statements. These factors include, but are not limited to: our ability to implement successfully our strategic initiatives; actions and initiatives taken by both current and potential competitors; foreign currency translation and transaction risks; increases in the prices paid for raw materials and energy; a labor strike, work stoppage or other similar event; deteriorating economic conditions or an inability to access capital markets; work stoppages, financial difficulties or supply disruptions at our suppliers or customers; the adequacy of our capital expenditures; our failure to comply with a material covenant in our debt obligations; potential adverse consequences of litigation involving the company; as well as the effects of more general factors such as changes in general market, economic or political conditions or in legislation, regulation or public policy. Additional factors are discussed in our filings with the Securities and Exchange Commission, including our annual report on Form 10-K, quarterly reports on Form 10-Q and current reports on Form 8-K. In addition, any forward-looking statements represent our estimates only as of today and should not be relied upon as representing our estimates as of any subsequent date. While we may elect to update forward-looking statements at some point in the future, we specifically disclaim any obligation to do so, even if our estimates change.
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Highlights
3
• Record first quarter Segment Operating Income of $391 million with
9.7% SOI margin
• North America sets first quarter earnings record of $198 million, up 27%
• Global volume growth of 2%; solid growth in three of four business units
• Strong HVA demand leads to Americas plant location announcement
• North America eCommerce program successfully launched
• Company reaffirms 2015 financial targets
North America Journey
4
Consistent and dramatic performance has turned North America from a “turnaround story” into a “momentum story”
-$0.4
-$0.2
$0.0
$0.2
$0.4
$0.6
$0.8
$1.0
Q4/
09
Q4/
10
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11
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14
Q1/
15
Segm
ent
Ope
rati
ng In
com
e ($
bill
ions
) North America Profitability
Terms: Trailing 4 Quarters
$1.15B improvement during past 5 years with
SOI margin now over 10% for past 4 consecutive quarters
0
50
100
150
200
250
300
350
400
450
500
2012 2013 2014 2015 2016 2017 2018 2019
Americas Consumer Tire Industry terms: Millions of Tires - Replacment & OE - North and Latin America
New Americas Consumer Tire Plant
5
403 421 432 443 455 464 475 484
2014-2019 Growth Total = +52M (~10M/year, ~2%/year) HVA = +90M (~18M/year, ~6%/year)
(a) • Goodyear to build previously announced tire plant in San Luis Potosi, Mexico
• Central location effectively supports strong and growing demand for HVA tires across both North and Latin America
• Annual capacity at ~6 million tires; first production planned for mid-2017
• Total Capex to be $500 to $550 million during 2015-2018, and funded within existing capital allocation plan
• High return project with IRR of 18%, and generating $100 million of free cash flow per year once fully operational
(a) Source: LMC International and Goodyear internal analysis
53% 58%
62% 65%
68% 70%
72% 74%
Low Value
Added (LVA)
High Value
Added (HVA)
HVA as % of entire industry
Goodyear building world-class factory to meet growing demand for high-value-added Consumer tires across the Americas
New Product Highlights
6
New products launched globally to capture consumer demand for high value added tires
EMEA launches Goodyear EfficientGrip Performance tire with highest label grade available under EU regulations
Latin America launches Goodyear EfficientGrip SUV tire to serve premium SUV customers
North America launches Kelly Edge All Season as a branded line to meet customer needs
Asia Pacific launches Goodyear Assurance DuraPlus engineered to go up to 100,000km, providing a long lasting tire
Strategy Roadmap
7
Our Destination - Creating Sustainable Value
Industry MegaTrends
Where We Are
Key Strategies Key How To’s
Executing Plan
Innovation Leader
Record Earnings
Value Creating
Investing for Growth
US Pension Fully Funded
Top Line / Bottom Line Growth
First with Customers
Innovation Leaders
Leader in Targeted Segments
1. North America: Grow Profitably
2. Asia: Win in China / Grow Asia
3. EMEA / LA: Return to Historical Profit
Market-Back Innovation Excellence
Sales & Marketing Excellence
Operational Excellence
Enabling Investments
Top Talent / Top Teams
Competitively Advantaged
Profitable thru Economic Cycle
Cash Flow Positive
Investment Grade
First Quarter 2015 Income Statement
(a) See Segment Operating Income and Margin reconciliation in Appendix on page 23. (b) See Adjusted Diluted Earnings Per Share and US Tax Adjusted Diluted Earnings Per Share reconciliations in Appendix on pages 18 and 19.
In millions, except EPS
8
March 31, March 31,2015 2014 Change
Units 40.8 40.0 2%
Net Sales 4,024$ 4,469$ (10)%
Gross Margin 23.8% 21.3% 2.5 pts
SAG 608$ 667$ (9)%
Segment Operating Income(a) 391$ 373$ 5%
Segment Operating Margin (a) 9.7% 8.3% 1.4 pts
Goodyear Net Income (Loss) 224$ (51)$
Less: Preferred Stock Dividends -$ 7$ Goodyear Net Income (Loss) Available to Common Shareholders 224$ (58)$
Goodyear Net Income (Loss) Available to Common Shareholders - Per Share of Common Stock
Basic 0.83$ (0.23)$
Diluted 0.82$ (0.23)$
Cash Dividends Declared Per Common Share 0.06$ 0.05$
Adjusted Diluted Earnings Per Share (b) 0.54$ 0.56$
US Tax Adjusted Diluted Earnings Per Share (b) 0.65$ 0.56$
Three Months Ended
First Quarter 2015 Segment Operating Results
9
1. Raw material variance of $46 million excludes raw material cost saving measures of $58 million, which is included in Cost Savings above. 2. Estimated impact of inflation (wages, utilities, energy, transportation and other). 3. Amiens savings and certain other non-recurring charges in 2014.
($ in millions)
Q1 2014
$373
Cost Savings
$46 ($29) $391
Volume Price/Mix Raw
Materials(1)
Inflation(2)
Other(3)
($29) $41
$68
$23
Q1 2015
$18
($62)
Unabsorbed Fixed Cost Currency
($40)
($6) $17 $6
(a) Working capital represents accounts receivable and inventories, less accounts payable – trade. (b) See Total Debt and Net Debt reconciliation in Appendix on page 24.
First Quarter 2015 Balance Sheet
$ In millions
10
March 31, December 31, March 31,2015 2014 2014
Cash and cash equivalents 1,613$ 2,161$ 1,853$
Accounts receivable 2,523 2,126 2,913Inventories 2,538 2,671 3,021Accounts payable - trade (2,612) (2,878) (3,112)Working capital(a) 2,449$ 1,919$ 2,822$
Total debt(b) 6,226$ 6,394$ 7,120$
Net debt(b) 4,613$ 4,233$ 5,267$
Free Cash Flow from Operations
$ In millions
11
(a) The increase in Provision for Deferred Income Taxes is primarily due to the accrual of US tax expense as a result of the reversal of the valuation allowance on our US deferred tax assets in the fourth quarter 2014.
(b) Gain on Recognition of Deferred Royalty Income is due to a one-time pre-tax gain of $155 million on the recognition of deferred income resulting from the termination of a licensing agreement associated with the sale of our former Engineered Products business.
(c) See Free Cash Flow from Operations reconciliation in Appendix on page 25.
Trailing TwelveMonths Ended
2015 2014 March 31, 2015
Net Income (Loss) 236$ (38)$ 2,795$ Depreciation and Amortization 172 183 721Change in Working Capital (569) (590) 20Pension Expense 36 50 144Provision for Deferred Income Taxes (a) 91 (21) (1,858)Gain on Recognition of Deferred Royalty Income (b) (155) - (155)Capital Expenditures (204) (229) (898)Other (21) 132 311
Free Cash Flow from Operations (non-GAAP) (c) (414)$ (513)$ 1,080$
Three Months EndedMarch 31,
First Quarter 2015 Segment Results
In millions
12
2015 2014 Change 2015 2014 Change
Units 14.8 14.6 1.7% Units 15.9 16.2 (1.6%)
Net Sales $1,858 $1,879 (1.1%) Net Sales $1,331 $1,676 (20.6%)
Operating Income $198 $156 26.9% Operating Income $73 $110 (33.6%)
Margin 10.7% 8.3% Margin 5.5% 6.6%
2015 2014 Change 2015 2014 Change
Units 5.7 5.2 8.8% Units 4.4 4.0 9.6%
Net Sales $450 $492 (8.5%) Net Sales $385 $422 (8.8%)
Operating Income $67 $65 3.1% Operating Income $53 $42 26.2%
Margin 14.9% 13.2% Margin 13.8% 10.0%
North America Europe, Middle East and Africa
Latin AmericaAsia Pacific
2015 Key Segment Operating Income Drivers
Driver 2015 FY vs 2014 vs Feb Outlook Comments
Global Volume +1-2% N/C • No change
Price/Mix vs. Raw Materials ~$200 million N/C • No change
Overhead Absorption Neutral N/C • No change
Cost Savings vs. Inflation ~$160 million N/C • No change
Foreign Exchange ~($200) million • Based on current spot rates
Amiens Closure ~$20 million N/C • No change
Venezuela ~($30) million
• Assume zero earnings contribution for remainder of year due to deteriorating macro environment; significant uncertainty regarding USD availability and FX rates
13
2015 Outlook Other Financial Assumptions
2015 FY Assumption
Interest Expense $415 - $440 million
Financing Fees ~$80 million
Income Tax Expense: ~30% of global pre-tax operating income Cash: ~15% of global pre-tax operating income
Depreciation & Amortization ~$725 million
Global Pension Expense $125 - $175 million
Global Pension Cash Contributions $50 - $75 million
Working Capital Not a significant source or use
Capital Expenditures ~$1.1 billion Memo – 2016: $1.2-$1.3 billion
14
2015-2016 Financial Targets
15
• Annual 10-15% SOI growth per year through 2016
• Annual positive free cash flow from operations
• Adjusted Debt to EBITDAP(a) ratio of 2.0 to 2.1x by the end of 2016
(a) Total debt plus global pension liability, divided by net income before interest expense, income tax expense, depreciation and amortization expense, net periodic pension cost, rationalization charges and other (income) expense.
Appendix
$689
$2,356
$1,017
($321) ($376) ($29)
$549
$1,822
$327
($985)
($553)
($104)
2010 2011 2012 2013 2014 2015 Q1
Price/Mix Raw Materials
(b)
(e)
Price/Mix vs. Raw Materials(a)
(a) Reflects impact on Segment Operating Income. Raw materials include the impact of raw material cost savings measures. (b) Raw material variance of $549 million includes raw material cost savings measures of $136 million. (c) Raw material variance of $1,822 million includes raw material cost savings measures of $177 million. (d) Raw material variance of $327 million includes raw material cost savings measures of $249 million. (e) Raw material variance of ($985) million includes raw material cost savings measures of $228 million. (f) Raw material variance of ($553) million includes raw material cost savings measures of $269 million. (g) Raw material variance of ($104) million includes raw material cost savings measures of $58 million.
$ in millions
(f)
17
(g)
(d)
(c)
$ (except EPS) and shares in millions
18
First Quarter 2015 Significant Items (After Tax and Minority Interest)
(a) US Tax Adjusted Diluted Earnings per Share excludes the effect of non-cash US tax expense as a result of the reversal of the valuation allowance on our US deferred tax assets in the fourth quarter 2014. The company does not expect to pay significant cash income taxes in the US for about five years. The company believes the presentation of this non-GAAP measure is important as it facilitates a consistent comparison of net income and earnings per share versus the prior year.
As Reported
Rationalizations, Asset Write-offs, and Accelerated
Depreciation Charges
Net Income and Other
Discrete Tax Items
Charges for Labor Claims Related to a
Closed Facility in Greece
Royalty Income
Related to the Termination of a Licensing Agreement As Adjusted
Tax Expense in excess of US
Cash Tax Payments
US Tax Adjusted Diluted
Earnings Per
Share (a)
Net Sales 4,024$ -$ -$ -$ -$ 4,024$ -$ 4,024$ Cost of Goods Sold 3,066 (3) (3) - - 3,060 - 3,060 Gross Margin 958 3 3 - - 964 - 964
SAG 608 - - - - 608 - 608 Rationalizations 16 (16) - - - - - - Interest Expense 103 - - - - 103 - 103 Other (Income) Expense (128) - - (4) 155 23 - 23
Pre-tax Income (Loss) 359 19 3 4 (155) 230 - 230 Taxes 123 1 (4) - (56) 64 (29) 35 Minority Interest 12 4 2 - - 18 - 18 Goodyear Net Income 224$ 14$ 5$ 4$ (99)$ 148$ 29$ 177$
EPS 0.82$ 0.05$ 0.02$ 0.01$ (0.36)$ 0.54$ 0.11$ 0.65$
19
First Quarter 2014 Significant Items (After Tax and Minority Interest)
$ (except EPS) and shares in millions
(a) – Weighted average shares outstanding – diluted for the three months ended March 31, 2014 excludes the effect of approximately 28 million equivalent shares related to the mandatory convertible preferred stock as their inclusion would have been anti-dilutive. (b) – Dilutive impact of preferred shares assumes the conversion of all 10 million shares of mandatory convertible preferred stock as of March 31, 2014. The conversion actually occurred on April 1, 2014. Also reflects 5 million weighted average shares outstanding for stock options and other securities not included in Diluted EPS-As Reported, as their inclusion was anti-dilutive.
As Reported (a)
Dilutive Impact of Preferred
Shares (b)
Net Venezuela Currency
Remeasurement Loss
Pension Curtailments
and Settlements
Rationalizations, Asset Write-
offs, and Accelerated Depreciation
Charges
Charges for Labor Claims Related to a
Closed Facility in Greece
Net Loss on Asset Sales As Adjusted
Tax Expense in excess of US
Cash Tax Payments
US Tax Adjusted Diluted
Earnings Per Share
Net Sales 4,469$ 4,469$ -$ -$ -$ -$ -$ 4,469$ -$ 4,469$ Cost of Goods Sold 3,518 3,518 - (38) (1) - - 3,479 - 3,479 Gross Margin 951 951 - 38 1 - - 990 - 990
SAG 667 667 - - - - - 667 - 667 Rationalizations 41 41 - - (41) - - - - - Interest Expense 105 105 - - - - - 105 - 105 Other Expense 168 168 (157) - - (7) (2) 2 - 2
Pre-tax Income (Loss) (30) (30) 157 38 42 7 2 216 - 216 Taxes 8 8 25 - 2 - - 35 - 35 Minority Interest 13 13 - 2 10 - - 25 - 25 Goodyear Net Income (Loss) (51)$ (51)$ 132$ 36$ 30$ 7$ 2$ 156$ -$ 156$ Preferred Dividends (7) - - - - - - - - - Net Income (Loss) Available to Common Shareholders (58)$ (51)$ 132$ 36$ 30$ 7$ 2$ 156$ -$ 156$
EPS (0.23)$ (0.18)$ 0.47$ 0.13$ 0.11$ 0.02$ 0.01$ 0.56$ -$ 0.56$
$1.6
$1.9
March 31, 2015
First Quarter 2015 Liquidity Profile
(a) Total liquidity comprised of $1,613 million of cash and cash equivalents, as well as $1,888 million of unused availability under various credit agreements. (b) Includes $295 million of cash in Venezuela denominated in bolivares fuertes at 12.0 bolivares fuertes per U.S. dollar at March 31, 2015.
20
Cash & Equivalents(b)
Available Credit Lines
Liquidity Profile $3.5(a)
$ In billions
Note: Based on March 31, 2015 balance sheet values and excludes notes payable, capital leases and other domestic and foreign debt. (a) At March 31, 2015, the total amount outstanding under the European revolving credit facility was $194 million (€180 million). There were no letters of
credit issued at March 31, 2015. (b) At March 31, 2015, our borrowing base, and therefore our availability, under the US revolving credit facility was $587 million below the facility’s stated
amount of $2.0 billion. At March 31, 2015, there were no borrowings outstanding under the first lien revolving credit facility. Letters of credit issued totaled $372 million at March 31, 2015.
(c) At March 31, 2015, the amounts available and utilized under the Pan-European securitization program of $409 million (€380 million) totaled $255 million (€237 million).
First Quarter 2015 Maturity Schedule
$ In millions
21
$194
$1,520 $1,266
$900 $700
$150
$154
2015 2016 2017 2018 2019 2020 2021 2022 ≥ 2023
Undrawn Credit Lines
Funded Debt
$430 (a)
$2,000 (b)
(c)
2015 Full-Year Industry Outlook
22
April Full-Year 2015 Guidance
February Full-Year 2015 Guidance
NA EMEA NA EMEA
Consumer Replacement (2)-(3)% ~Flat (2)-(3)% ~Flat
Consumer OE +1-2% +1-2% +1-2% +1-2%
Commercial Replacement +2-3% +0-1% +0-1% +0-1%
Commercial OE +3-4% +1-2% Flat-(1)% ~Flat
April full-year guidance unchanged for Consumer Improved Commercial outlook
Reconciliation for Segment Operating Income / Margin
$ In millions
23
2015 2014Total Segment Operating Income 391$ 373$
Rationalizations (16) (41) Interest expense (103) (105) Other income (expense) 128 (168) Asset write-offs and accelerated depreciation (3) (1) Corporate incentive compensation plans (13) (27) Corporate pension curtailments/settlements - (33) Intercompany profit elimination (6) (13) Retained expenses of divested operations (2) (4) Other (17) (11)
Income (Loss) before Income Taxes 359$ (30)$ United States and Foreign Tax Expense 123 8 Less: Minority Shareholders Net Income 12 13 Goodyear Net Income (Loss) 224$ (51)$
Sales $4,024 $4,469Return on Sales 5.6% (1.1)%Total Segment Operating Margin 9.7% 8.3%
Three Months EndedMarch 31,
Reconciliation for Total Debt and Net Debt
$ In millions
24
March 31, December 31, March 31,2015 2014 2014
Long-Term Debt and Capital Leases 5,965$ 6,216$ 7,047$ Notes Payable and Overdrafts 23 30 26 Long-Term Debt and Capital Leases Due Within One Year 238 148 47 Total Debt 6,226$ 6,394$ 7,120$ Less: Cash and Cash Equivalents 1,613 2,161 1,853
Net debt 4,613$ 4,233$ 5,267$
Reconciliation for Free Cash Flow from Operations
a) Working capital represents total changes in accounts receivable, inventories and accounts payable – trade. b) Pension expense is the net periodic pension cost before curtailments, settlements and termination benefits as reported in the pension-related note in
the Notes to Consolidated Financial Statements. c) Other includes amortization and write-off of debt issuance costs, net pension curtailments and settlements, net rationalization charges, net (gains)
losses on asset sales, net Venezuela currency loss, compensation and benefits less pension expense, other current liabilities, and other assets and liabilities. 25
Trailing Twelve Months Ended
($ in millions)March 31,
2015Dec. 31,
2014Sept. 30,
2014June 30,
2014March 31,
2014March 31,
2015
Net Income (Loss) 236$ 2,128$ 199$ 232$ (38)$ 2,795$ Depreciation and Amortization 172 179 182 188 183 721
Change in Working Capital (a) (569) 969 (362) (18) (590) 20
Pension Expense (b) 36 34 36 38 50 144
Provision for Deferred Income Taxes 91 (2,031) 62 20 (21) (1,858)
Gain on Recognition of Deferred Royalty Income (155) - - - - (155)Capital Expenditures (204) (289) (193) (212) (229) (898)
Other (c) (21) 103 163 66 132 311Free Cash Flow from Operations (non-GAAP) (414)$ 1,093$ 87$ 314$ (513)$ 1,080$
Capital Expenditures 204 289 193 212 229 898Pension Contributions and Direct Payments (26) (46) (35) (34) (1,223) (141)Rationalization Payments (26) (57) (50) (83) (36) (216)
Cash Flow from Operating Activities (GAAP) (262)$ 1,279$ 195$ 409$ (1,543)$ 1,621$
The amounts below are calculated from the Consolidated Statements of Cash Flows except for pension expense, which is as reported in the pension-related note in the Notes to Consolidated Financial Statements.
Three Months Ended