Goodyear Tire & Rubber Co Earnings Call Nuggets: Volume Expectations and Savings from the French Closure

Goodyear Tire & Rubber Co (NYSE:GT) recently reported its fourth quarter earnings and discussed the following topics in its earnings conference call.

Volume Expectations

Rod Lache – Deutsche Bank: Just a couple things. First on your volume expectations for North America and Europe, you said zero to 2% for replacement. I’m wondering, what does that imply for Goodyear? Is it similar or just over the course of this past year, you had some underperformance in both of those regions?

Richard J. Kramer – Chairman, President and CEO: Well, Rod, I think from our North American business, as we look ahead, we don’t see a robust industry in terms of what the economy is doing here, but we still see sort of the GDP type growth in the economy and that’s going to drive the volume forecast that we see.

Darren Wells – EVP and CFO: So, I guess Rod, if you look at our – I mean our view is that we’ll have low single-digit growth this year. So, I think if you match it up with the industry outlook, you’re going to find its pretty well in line.

Rod Lache – Deutsche Bank: Can you comment also raw materials, if spot prices stay where they are right now? How would you see that going forward?

Darren Wells – EVP and CFO: Yeah, so I think the answer on this is a little bit longer answer, Rod, because I think if we just said that raw materials remained flat for the remainder of the year. There would be raw material cost declined in the neighborhood of $800 million. The difficulty is that if we do – I mean we do see some recovery in industry volume this year. So, to the extent volume start to increase again, we would expect the raw market cost would start to increase also. That’s effectively what we’ve had to take into account as we look at what our performance looks like during the year. So, we are expecting some improvement in volumes at low single-digits us and the industry. And I think to go along with that we have to expect the raw materials are going to start to increase again as well and as you know our expectation over time is that raw material costs are going to continue to rise.

Rod Lache – Deutsche Bank: Just lastly a little clarification here on the pension funding, what discount rate are you using right now? What’s the rate of return on your assets that you are assuming? Is that current discount rate a good proxy for the underfundedness just given that you are planning to shift more towards fixed income? And could you just look lastly at a little commentary at why are you making this change right now, did something serve as a catalyst for that?

Richard J. Kramer – Chairman, President and CEO: I’ll start and I’ll let Darren go through the discount rate with you as well. But, I think, as we think about this, I’ll just personalize it a little bit. I’ve been here now about 13 years. In the early part of the last decade, we were about $2 billion underfunded. And after we’ve put in literally billions of dollars into our pension plans, we’re doing a lot of things like changing the benefit structures that we had moving to 401(NYSE:K) freezing the salary plans and the like, We end 2012 with an unfunded domestic pension plan of about $2.7 billion. In other words, after putting a lot of money in, it’s gotten even worse and we know why that is discount rates and the like. So, we take a step back and concluded ourselves that we need to address the volatility we have here. As you know, it’s volatile to our earnings, to our leverage, to our cash flow and ultimately to our stock price, and as we think about the strategy roadmap that we’ve put out as we think about the destination of where we want to go to create value over the long term to improve shareholder value, we think that this is very much consistent with that. So that’s sort of a view into the thinking of what we’re doing here. But Darren, you could – excuse me, you can elaborate on the discount rates.

Darren Wells – EVP and CFO: The end of the year, the average discount rate for the U.S. plans was about 3.7%, which compares to about 4.5% at the end of last year. Given movement in the bond markets discount rates have probably risen a bit early this year, but year-end it was 3.7%. While we continue to assume for the purposes of our pension expense estimate for 2013, we are assuming portfolio returns at 8.5%, so that has not changed. I will tell you that as we execute the prefunding actions we will adjust that. As we prefund, we will shift the portfolio more towards fixed income which means that assumed return will come down. But as we execute those actions there are number of assumptions that we will have to provide you to update for those funding actions. So, what you’ve got right now is two things; you’ve got sort of our normal pension assumptions going into the year, so you’ve got our required contributions which are around 300 million, you’ve got our pension expense assuming we don’t do anything beyond what we’ve done right now which is just the hedging transactions that we talked about. As we implement prefunding those assumptions are going to change. But since the prefunding is not done given the baseline assumptions, we will update you as we need to.

Rod Lache – Deutsche Bank: When you say fixed income – moving towards this fixed income I am presuming you are not assuming entirely fixed income. Do you have some ratio in mind what asset allocation should be?

Darren Wells – EVP and CFO: I think we will take a pass on that right now and we will come back as we execute that. But I think the closer we get to fully funded, the closer we are going to be – to being fully invested in fixed income. And I think the ultimate idea is that once the plants are fully funded that we would have an asset portfolio that would be made up of bonds that would closely mirror the bonds that are used to calculate our discount rate. So, that if there was move in the interest rate curve, the gain on the asset would offset any loss related to discount rate and vice-versa.

Savings from the French Closure

Itay Michaeli – Citi: Just sort of two classifications on Europe. One, any of the savings from the French closure to get $75 million contemplated in the 2013 SOI target or is that mostly a 2014 event?

Richard J. Kramer – Chairman, President and CEO: No, Itay, that is not going to be achieved in 2013. That’s one of the things, I think we concluded as we went through the fourth quarter is what the status of that situation is. Obviously, we made some changes to that – to what we’re on plan to do with our announcements in early January or late January I should say. And the impact of that sort of pushes out the benefits we’re going get beyond 2013.

Itay Michaeli – Citi: Then the $75 million to $100 million of additional productivity over the next three years. Should we think about that as a gross savings that could be offset with some inflation or is that sort of a net of inflation of savings on what we should be modeling?

Richard J. Kramer – Chairman, President and CEO: Our target is that’s gross savings. As we look at – the $75 million net savings, but the goal that we have is to drive those programs to take our European business back toward the historical profit margins that we’ve seen in the past.

Darren Wells – EVP and CFO: Yeah, so when you look at cost savings actions overall, Itay, you heard the view that, as we look at cost savings going forward, we’re going to at least offset inflation. But you should look at those – that $75 million to $100 million of productivity actions in Europe as being over and above inflation.

Itay Michaeli – Citi: Then, go back to volume, the Q1 outlook is still sort of weak and you do expect improvement throughout the year? Can you talk about what you are assuming for dealer stock situation, restocking and destocking in both North America and Europe throughout 2013?

Richard J. Kramer – Chairman, President and CEO: I think, Itay, as we talked about North America, we said now for a number of quarters that as we look at what we see, we see low inventory in the RMA manufacturing inventory, we see low inventory in the channels which continues to point towards an opportunity for a rebound. So, inventories are low as volumes come back. We think there is going to be an opportunity for restocking as we said. It’s not a question of if, but when. But as we plan the year, we see the opportunity before its happening, however as we talked earlier growth rates in North America continue to be in that low single digit rate. For Europe, we continue to see higher inventories. Still as we said in our remarks, because of the low weak economy there, dealers continue to — sort of take a wait and see attitude. The sort of weak start to the winter again resulted in dealers still having higher inventories than we’d like, so it’s very hard to get insight into exactly what inventories are across Europe, but I would tell you, our view right now is, it’s still higher inventory levels and that’s certainly played into our volume outlook and our adjustments to our outlook on Europe for 2013.

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