The Goodyear Tire & Rubber Company (GT)

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Goodyear Tire & Rubber Co. (GT)

2013 Investor Day Conference

September 20, 2013 9:00 am ET

Executives

Thomas Kaczynski - Vice President of Investor Relations

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

Steve McClellan

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

Stephen R. McClellan - Former President of The North American Tire Business Unit

Jaime Cohen Szulc - President of Latin America Operations

Analysts

Rod Lache - Deutsche Bank AG, Research Division

Presentation

Thomas Kaczynski

Good morning. Well, one more time. Good morning. For those of you that don't know me, my name is Tom Kaczynski. I'm the Vice President of Investor Relations here at Goodyear. And I'd like to welcome you to our 2013 Investor Day.

Before we get started, 2 pieces of housekeeping. We'd like to ask that no photography or recording take place during the presentation. And secondly, I will draw your attention to the Safe Harbor Act that we have posted on Slide #2, and this I will read but not the entire statement.

Our presentation this morning will include forward-looking statements based on our current expectations and assumptions. These statements are subject to risks and uncertainties that can cause our actual results to differ materially, and we have no obligation to update them.

The presentation also includes non-GAAP financial information, and reconciliations are included in the Appendix and are available at investor.goodyear.com.

And with that, I would like to introduce Rich Kramer, Chairman and Chief Executive Officer of the Goodyear Tire & Rubber Company.

Richard J. Kramer

Thanks, Tom. I appreciate it. I'd also take the opportunity to welcome Tom to the team. He's a great addition to us. So thanks, everybody, for joining us today. And as you saw in the press release -- there's copies in front of you at the tables here today -- we certainly have some exciting things to share with you today. So why don't we just jump right into it?

In terms of the meeting format, you'll see what's on the screen there. I'm going to start the meeting by giving you a business overview and also talking about the industry, and in particular, the industry in the context of the megatrends that we talked about the last time we were with you.

Second, we're going to have Steve McClellan join us here. Steve is the President of our North American Tire business. Steve is going to share with us today the progress he and his team has made in turning our North America business around.

And just to put that in contex for you, remember, this was a business which in 2009 lost $300 million and last year made over $500 million on the segment's operating income basis.

So Steve is going to talk about just how he and his team has done this. But I think what's important for you to listen to is really about why we're confident in the continued stability and our ability to keep that earnings trajectory moving forward, the sustainability of what we've done in our North America business.

And finally, Darren Wells, our Chief Financial Officer. Darren is going to join us and give us a financial outlook. And I know something everyone is interested in, he's also going to go through our capital allocation plan. So I think that will be of interest to everyone here as well.

And to close it out, as you would expect, we'll open up the session for questions here as well. So that's what we're going to navigate through the meeting here today.

Now I think before we get started, I want to review with you the highlights that you're going to hear today, the 3 things that I want you to keep in mind. And the first one is we're reconfirming our 2013 outlook at the high end of our guidance, what we said in the second quarter conference call. Secondly, we're setting new targets for the next 3 years, and we'll review those. And finally, we're announcing a $0.05 per share quarterly dividend and $100 million stock repurchase program.

And those actions in particular are reflective of the results we've delivered over the course of the past 3 years, the progress we've made over the past 3 years, as well as the targets that I just mentioned we're going to set for the next 3 years. So those 3 things I want you to keep in mind.

I also want you to understand that we also haven't lost sight of where our balance sheet is at and the need to improve that balance sheet going forward. We're very mindful of that.

Now that said, you should see today's announcement. Today's announced shareholder return program is confidence in our ability to generate cash flow in the future, and that's partly driven by our ability now to eliminate the pension volatility that we've had for so long. And that is the result of the terms and conditions of the recent union -- the United Steelworkers contract that we renegotiated.

And finally, in addition to the confidence, it's a demonstration -- it's a sign of our demonstration and our commitment and our focus on creating shareholder value, in line with the destination of our strategy roadmap, something that we put in front of you very, very often. So think of this as about confidence and a demonstration of our focus on delivering shareholder value.

Now before we get started, I thought I might just do a very quick recap and look back at the second quarter. Clearly, I'm not going to go through all the elements on the slide there. But I would tell you that we had a pretty good first half of the year, and that was accentuated by the second quarter, where we had strong segment operating income earnings -- segment operating income, excuse me, and strong cash flow. And certainly, we did that in the tough economy. And that first half and that second quarter gave us confidence to raise our guidance -- to raise it to the high end of our previously issued guidance.

So while we're certainly pleased with where we're headed in 2013, and we're also pleased and we're happy to be a dividend-paying company, I want to share with you one of the things that I constantly refrain from me to my management team and something you've heard me say often on our quarterly calls. And that's that we're not running our company just for one good quarter or even one good year. We're running our company -- our goal is to deliver results for the long term by creating sustainable shareholder value.

And on that journey, I will tell you, our guide is our strategy roadmap. It's our North Star. So what I thought I would do today is start with that -- to start with the strategy roadmap that you see on the page there and maybe walk you through the progress that we've made against it, starting with the first box up there in terms of where we are.

So if we think about where we are, remember, we were in front of you about 2.5 years ago and we made a number of commitments. And I'm happy to say, standing in front of you today, I'm happy and proud to say that we delivered on those commitments, and we did so certainly in a much, much tougher economy.

So if we can go back for a moment, let's just look at the environment that we talked about a couple of years ago. If you remember back then we saw a very robust industry. In fact, in the tire industry we actually saw demand running ahead of supply during that time. In addition to that, we saw increasing raw material prices you. I'm certain you all remember that. And we saw really what was a continued weak dollar in terms of what was happening around the globe.

Now I know I don't have to explain to this group that what we've seen since then is a much, much weaker macro environment that we had to deal with. But I have to say notwithstanding that environment, what you've seen us do, we've improved our segment operating income percentage from 4.9% in 2010 to an expected 7.5% in 2013. And again, we did that in a tough environment.

And during that period, you also saw us take our North America business from breakeven to where it earned over $500 million of segment operating income last year. And I know when I took the CEO job a number of years ago, one of the most common questions that I was asked was, when is North America going to turn to profit? I think as we look at the results, we certainly answered that question. And again you'll see -- you'll hear Steve talk about why we believe those are sustainable results going forward.

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Now in addition to that, we also made some significant structural changes. We've cleared the path to eliminate the unfunded pension burden that's been with us for so long. We've had sort of this tale of 2 companies. We've had our operating earnings in our core tire business doing very well, but only sort of they have the wind taken out of their sails by what's happening with our unfunded pension obligations, driven by things that aren't in our control, like reducing discount rates, lower interest rates as well as what happened in the stock market. Now we have a path to go forward to deal with that obligation, which will also put us on a different path into the future.

And also, during that period, you saw us construct the largest tire factory this company ever made in our Pulandian, China facility. That tire factory not only is on path but it really sets the stage for profitable growth in the right segment in our Asia and our China business, and I'll talk about that a little bit more when we talk about our Asia business.

And I would finally tell you, the other thing we did is we returned our company to a cash-generating position. And this obviously has a lot of virtuous effects to it. As a virtuous effect number one that you've seen in the announcement, the shareholder return program that we announced today, but also it has the benefits related to being able to deal with our balance sheet leverage and invest in the company.

So as we take a step back from where we were, I would tell you we made good progress. We're very proud of the progress we've made. And certainly we've done it in the environment that we really didn't expect when we started this journey a number of years ago.

Now the next item I want to talk about in terms of where we are is our North America business. Now Steve's going to talk about this, so I'm going to be very brief. But what I do want to say this is a business today that I'm going to tell you we've got the best product lineup that we probably ever had certainly in recent memory. Our Eagle products, our Wrangler products and our Assurance products, that lineup is the strongest we've had in recent memory.

In addition to that, we've got our OE business in a position that may be the best that this company has ever seen, certainly again in recent memory.

In addition to that, we've got tremendously strong dealer relationships. We've got a strong relationship with the United Steelworkers. And our Truck business, I would tell you, acknowledged by our customers, is the best service model out there in the industry, and it's driving value for us as we move forward.

So we have a business that's performing. But more importantly, it's a business that's creating value. And again that's the first time we've seen that happen in our North America business for quite some time. And the key to that, you'll hear Steve talk about it is they did that following our strategy roadmap.

And lastly, I'll just say we're not putting our pencils down. We've got an eye on the future related to some of the steps that we've taken. Again, you'll see the biggest one -- or one of the biggest ones, in line with dealing with the pension obligation that impacts our -- our North America business, but also our commitment to products, our commitment to cost reduction and most importantly, our commitment to improving customer service. So again, Steve will take you through that in a bit more detail.

Now the best -- next business is our Asia business, and this probably is really one of the most exciting businesses that we have to talk about today. As we look at that, today we sort of moved past from the startup cost and the disruption caused by the expansion and relocation of our factory in Pulandian in China. We've moved back from that. That investment, I'm going to tell you today is returning -- is providing us the return on investment that we expected and making the tires to help us grow profitably in China. We're very excited about that. Very big win for us.

As we look at our Asia business overall, we continue to record -- record segment operating income earnings there -- excuse me. But I will also tell you we're doing that today with a little bit of a headwind, and that headwind relates to our Australia business, where we certainly have exposure to mining. And as you all know, the Australian mining boom has slowed down a little bit, and the Australian economy, from a consumer perspective, has also slowed down a little bit.

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