The Goodyear Tire & Rubber Company (GT)

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Goodyear Tire & Rubber (GT)

Q4 2012 Earnings Call

February 12, 2013 9:00 am ET

Executives

Gregory A. Fritz - Vice President of Investor Relations

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

Darren R. Wells - Chief Financial Officer and Executive Vice President

Analysts

Rod Lache - Deutsche Bank AG, Research Division

Itay Michaeli - Citigroup Inc, Research Division

Aditya Oberoi - Goldman Sachs Group Inc., Research Division

John Murphy - BofA Merrill Lynch, Research Division

John M. Healy - Northcoast Research

Brett D. Hoselton - KeyBanc Capital Markets Inc., Research Division

Ravi Shanker - Morgan Stanley, Research Division

Presentation

Operator

Good morning. My name is Kevin, and I will be your conference operator today. At this time, I would like to welcome everyone to The Goodyear Tire & Rubber Company Fourth Quarter Earnings Conference Call. [Operator Instructions] I would now like to hand the program over to Greg Fritz, Goodyear's Vice President of Investor Relations.

Gregory A. Fritz

Thank you, Kevin, and good morning, everyone. Welcome to Goodyear's Fourth Quarter 2012 Conference Call. Joining me today are Rich Kramer, Chairman and CEO; and Darren Wells, Executive Vice President and CFO. On today's call, Rich and Darren will discuss our fourth quarter results, 2013 outlook and review the pension strategy we announced this morning.

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. A replay of this call will be available later today. Replay instructions were included in our earnings release issued earlier this morning.

If I can now direct your attention to the Safe Harbor statement on Slide 2. 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 the 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. Non-GAAP financial measures discussed in the call are reconciled to the U.S. GAAP equivalent as part of the appendix to the slide presentation.

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

Richard J. Kramer

Thank you, Greg, and good morning, everyone. Thanks for joining us today. Today I'll discuss our fourth quarter and full year results, elaborate on significant progress we have made, comment on the areas where we face challenges and discuss our plans to address these challenges. I'll also provide some perspective on the year ahead. But let me say upfront that overall, I'm particularly pleased with our fourth quarter and full year results and the execution of our strategy. The exception, however, is Europe as its economy continues to worsen despite some recent financial stability.

Now before I get started, let me provide some context. Industry volumes in 2012 were a challenge throughout the year, and in particular, mature markets were close to levels that we saw during the great recession. In the U.S., the economy improved, lifting OE sales, but replacement volumes remained depressed. In Europe, economic weakness continued, and consumer sales, which had been resilient in 2011, became increasingly weaker throughout the year. Though Latin America and parts of Asia were stable, growth was not robust, and some of our key markets, such as Australia, were extremely weak. That provides the backdrop for both our success and our challenges in 2012.

Overall, our segment operating income for 2012 was just over $1.2 billion, marking the second year in a row and only the third time in the company's history that we've reached that level of performance. Now in addition, we delivered strong cash results for the year as our progress on working capital helped generate $700 million of free cash flow from operations. These positive results were driven by strong performance in 3 of our 4 businesses.

In Latin America, we delivered solid fourth quarter results that reflect a stabilizing business. Investments in our operations in Brazil are helping reenergize the business in our most important market in the region. In addition, our businesses outside Brazil delivered historically strong results. Our focus on asset utilization and investment to increase our production capability in the region is aligned with our strategy to mix up in the faster growing premium market segments where our brand, our technology and our innovation have the most value.

Asia Pacific delivered record segment operating income of $259 million for the year. Weakness in Australia, our largest business in the region by revenue, created a challenge for both the top line and for earnings. Offsetting this weakness was solid performance in the ASEAN countries and strong growth in China. We're beginning to see the benefits of our strategic investments in China, which supports our focus on premium segments, where we continue to increase share by growing faster than the industry.

The highlight of our 2012 performance came from our North America business. A record fourth quarter pushed our full year earnings to $514 million, beating our 2013 target of $450 million a year early. In addition, the business delivered a margin of 5.3%, marking the first time in more than 10 years that North America has achieved that level. Also, we're recovering our cost of capital. Not only are we generating profit, but we are creating economic value.

As you know, returning our North America business to profitability is one of the key strategies on our strategy roadmap. We delivered these results in NAT through disciplined delivery against the key how-to's. For example, we focused on market-back innovation. By reenergizing our brands through the simplification and complete rejuvenation of our Assurance, Eagle and Wrangler product lines over the past 4 years, our product portfolio is the best in the industry. These are tires that consumers want to buy and customers want to sell. We targeted profitable segments. By making choices on where to play, supported by deep analytics, we identified those segments of the market that offer profitable volume growth and where our value proposition is a competitive advantage. As a result, we achieved improved price mix and grew share in these key segments.

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