The Goodyear Tire & Rubber Company (GT)

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Goodyear Tire & Rubber (GT)

Q4 2011 Earnings Call

February 14, 2012 8:30 am ET

Executives

Gregory A. Fritz - Vice President of Investor Relations

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

Analysts

Rod Lache - Deutsche Bank AG, Research Division

Saul Ludwig - Northcoast Research

Himanshu Patel - JP Morgan Chase & Co, Research Division

Patrick Archambault - Goldman Sachs Group Inc., Research Division

Christopher Reenock

Presentation

Operator

Good morning. My name is Tina, and I will be your conference operator today. At this time, I would like to welcome everyone to the Goodyear Fourth Quarter and Full Year Sales and Earnings Results conference call. [Operator Instructions] I will now turn the call over to Greg Fritz, Vice President of Investor Relations for the Goodyear Tire & Rubber Company. Please go ahead, sir.

Gregory A. Fritz

Good morning, everyone, and welcome to Goodyear's fourth quarter conference call. Joining me today are Rich Kramer, Chairman and CEO; and Darren Wells, Executive Vice President and CFO. Before we get started, there are a few items I would like to cover.

To begin, the webcast of this morning's discussion and the supporting slide presentation can be found on our website at investor.goodyear.com. Additionally, a replay of the call will be accessible later today. Replay instructions were included in our earnings release issued earlier this morning.

If I could now direct your attention to the Safe Harbor statement on Slide 2. Our discussion this morning may contain forward-looking statements based on current expectations and assumptions that are subject to risks and uncertainties. These risks and uncertainties, which can cause our actual results to differ materially, 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.

Turning now to the agenda on today's call. Rich will provide a business review, including perspective on our fourth quarter and full year results and how we are progressing toward our key strategic objectives. After Rich's remarks, Darren will discuss the financial results and outlook before opening the call to your questions. With that, I will now turn the call over to Rich.

Darren R. Wells

Thanks, Rich, and good morning. I'm going to cover the fourth quarter results at a corporate level, give you some perspective on our year-end balance sheet and then spend some time on our business unit results and our outlook for 2012.

While our results were not as strong as earlier in the year, given weaker industry volumes, our costs were also adversely impacted by previously discussed structural changes that we're making through our manufacturing footprint. These changes will support stronger earnings in 2013 and beyond.

Turning to the income statement on Slide 7. Our fourth quarter revenue increased 12% to approximately $5.7 billion on a 4.6% reduction in volume. Revenue per tire increased 19% compared with the prior year. Lower replacement industry demand across mature markets was the main driver of our unit volume decline. Our OE demand remains solid across most regions, however, consumer OE demand in Asia was unfavorably impacted by Thailand flooding, which disrupted production during the fourth quarter. We generated gross margin of 15.3% in the quarter, representing a little over a 2-point decline compared to the prior year. Nearly the entire decline is the mathematical effect of increasing both cost of goods sold and sales by the higher raw material costs. Selling, administrative and general expense increased $9 million to $724 million during the quarter. As a percent of sales, SAG declined 140 basis points to 12.7% in the quarter. Excluding discrete items, our fourth quarter tax rate as a percentage of foreign segment operating income was about 26%. Our reported tax rate included a $60 million favorable impact, primarily from the release of a valuation allowance in Canada, which reflected our consistent improvement and profitability there.

Fourth quarter after-tax results were impacted by certain significant items. A summary of these can be found in the appendix of today's presentation.

Turning to the segment operating income step chart on Slide 8. You can see the progression of segment operating income compared to the prior year. As you see from the chart, we had several items that are transitory in nature. First, our other tire-related results were impacted by the sharp decline in earnings from our third-party chemical sales. This decline resulted from contractual price reductions to reflect the drop in view of butadiene prices during the quarter. Our third party chemical business more than explained the $19 million year-over-year reduction in other tire-related earnings during the quarter. We expect other tire-related earnings to return to more normalized levels as the butadiene prices have stabilized. The other unique items relate to the flooding in Thailand and the Latin America farm tire sale, which reduced our segment operating income by $12 million and $9 million, respectively. The first quarter of 2012 will mark the final quarter before we have a negative year-over-year impact from the sale of our Latin America farm tire business. These 3 factors combined to reduce our segment operating income by approximately $40 million, which more than accounted for the year-over-year decline in total segment operating income during the quarter.

Turning to the other items. We continued to see good momentum from our price/mix actions, which had a favorable impact of $702 million during the quarter and exceeded the $631 million in raw material cost increases.

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