Good morning, my name is Tony, and I'll be your conference operator today. At this time, I'd like to welcome everyone to the Goodyear Tire & Rubber Company's second quarter earnings conference call. [Operator Instructions] I would now like to hand the program over to Christina Zamarro, Goodyear's Vice President of Investor Relations.

Thank you, Tony, and thank you, everyone, for joining us for Goodyear's Second Quarter 2016 Earnings Call. Joining me today are Rich Kramer, Chairman and Chief Executive Officer; and Laura Thompson, Executive Vice President and Chief Financial Officer. Before we get started, there are few items we need to cover. To begin, the supporting slide presentation for today's call can be found on our website at investor.goodyear.com and a replay of this call will be available later today. Replay instructions were included in our earnings release issued earlier this morning. If I could now draw your attention to our safe harbor statement on Slide 2. I would like to remind participants on today's call that our 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 our 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. Our financial results are presented on a GAAP basis and, in some cases, a non-GAAP basis. The non-GAAP financial measures discussed on our call are reconciled to the U.S. GAAP equivalent as part of the appendix to the slide presentation. And with that, I'll turn the call over to Rich.

Thank you, Christina, and good morning, everyone. This morning, I will review highlights from our second quarter, provide an update on the industry and the key markets in each of our regions and give my perspective on our business for the remainder of the year. Laura will follow with the financial review of each of our businesses and an update to our outlook before we open the call for your questions. In the second quarter, we delivered segment operating income of $531 million, reflecting strong performance across the company. That's a second quarter record in our core segment operating income, which I'll remind you, excludes Venezuela from our 2015 base. Our operating performance helped drive a nearly 40% increase in our adjusted EPS of $1.16. Our second quarter was anchored by a 37% increase in operating income in our EMEA business unit. Our Asia Pacific business also continued its strong performance, with a nearly 10% increase in earnings. Combining this quarter with our record first quarter, our segment operating income for the first half of the year was $950 million, the highest first half ever for Goodyear. In addition, we delivered overall segment operating margin of 13.7% in the second quarter, an increase over last year. The Americas provided more than half of our SOI, and its underlying operations continue to remain solid. Furthermore, all 3 of our global businesses earned segment operating margins of more than 11.5%. Taken in total, our segment operating performance reflects the unwavering execution of our strategy, which has proved its strength even in volatile market conditions. Our consistent progress has resulted in steady earnings growth and positions us well for that growth to continue. I'd like to spend the next few minutes providing my perspective on each of our SBUs as well as my…

Thank you, Rich, and good morning, everyone. Today, I will cover our second quarter results and provide more detail on key income drivers in the quarter. I'll also provide an update regarding our full year outlook for 2016 before we open the call up for your questions. Turning to the income statement on Slide 8. You will see our results for the second quarter. Consistent with our presentation in April, we have provided call-outs that highlight the effect of deconsolidating Venezuela. Looking at the income statement items, as reported for the second quarter, the sales comparison to prior year was negatively impacted by the deconsolidation of Venezuela, which had $115 million of net sales in the second quarter of 2015. Similarly, other tire-related revenues were lower by $86 million, driven by the 2015 sale of the North American motorcycle business. Additionally, the strengthening of the U.S. dollar against foreign currencies reduced sales by $84 million year-over-year. Our gross margins were stable at 27.5%, and segment operating margin increased 50 basis points in the quarter. Excluding the impact of Venezuela, SOI margin increased 1 full point. Our earnings per share on a diluted basis was $0.75. Our results were influenced by certain significant items. Adjusting for these items, our earnings per share was $1.16. I'll note that our segment operating income in the quarter was impacted by a $24 million unfavorable, out-of-period adjustment related to the elimination of intercompany profit in the Americas region. The correction is related primarily to 2012 to 2015 prior-period financials, with the majority attributable to 2012. This amount is included as a significant item in the adjusted net income. Turning to the step chart on Slide 9, which walks second quarter 2015 segment operating income to second quarter 2016. After adjusting for the $36 million impact…

[Operator Instructions] We'll take our first question from David Tamberrino from Goldman Sachs.

Just a couple for us. I think the first one would be in Europe, the strength and the sustainability of the margin improvement that you're seeing within the region, a little bit surprising to us. I think it was about a 300 basis point increase in SOI margin year-over-year. As we progress through the remainder of 2016, are you expecting to continue those operational -- efficiencies to continue and really see double-digit margins in both the third quarter and the fourth quarter?

So, David, good question. I'm glad you focused on it, because we were pretty pleased with the way Europe delivered in the quarter. And I might take just 2 seconds to give you a view on how we think about Europe overall. We still view it as really a fantastic market despite some of the ongoing, let's say, unsolved economic issues that still linger over there. Remember, the market is growing there, particularly in 17-inch and above, particularly, that when you compare it to 16-inch and below, where you're not seeing nearly as much growth and sometimes, it can even be viewed as flat depending on the market. We see the market still demanding excellent technology, driven by the OEMs. We really love the carpark that still sits in Europe there. So we look at it as a great market and add to it than then seasonal market as you bring in winter tires and the winter tire -- the winter summer switch, really a robust market for us. The biggest headwind we still see there, as we've talked about in the past, is the ongoing sort of movement of low-end Asian tires, particularly in through Eastern Europe that has and probably will continue to cause a headwind and again, it's an example of when tariffs go up in one region, those tires typically move to somewhere else, you may remember in the past, they went down to South America as those economies slowed and currencies depreciated, tariffs are back in the U.S., now they're in Eastern Europe. So that's a continued headwind for us over there. But our goal is to continue to drive mix, continue to align our distribution consistent with our strategy over there. Our focus will be on new products and leveraging our brands, and to…

Okay. That's very helpful. Maybe just a follow up from there. I mean, post the British referendum, have you seen any changes in demand patterns by your dealers and distribution points within the U.K.? Or is it still too early to call?

I would say, it's too early. I would also say that before we went to the euro a number of years back now, obviously, the European market had a very sophisticated way, or not sophisticated as you might say, but they were very adept at dealing with a currency arbitrage on tires. We would expect to see a little of that, as this sort of cedes in. But given that production in U.K. has been diminished greatly from the period that I'm talking about, I don't think we see any significant disruption coming there. We like our business in the U.K., and we certainly think we can manage through this.

Okay, that's very helpful. And then just last one for me and I'll pass it over. On the cadence for price/mix less raw materials, obviously, we've seen oil somewhat creep up sequentially, but still be down year-over-year. As we think about the go-forward if raw materials do continue to hold the levels where they are and end up increasing year-over-year, how do you expect the P&L to flow for price/mix less raws as raw materials increase and then possible prices are passed on to consumers. Because -- the reason I ask is one of the larger questions or pushback that I'll get from investors is really just on the industry being able to be price-disciplined, and if there's going to be 1 quarter or 2, or 0.5 year to 3/4 of a year where the tire manufacturers are essentially caught with increasing raw material costs without adding in or passing on those price increases. And as you look at 2Q results with only a price/mix less raw materials of positive $5 million versus the first quarter of about $38 million and you start to question what's going to change in the back half of the year that's going to maintain that positive price/mix over raw materials if -- in the event that we had the second quarter really being eaten away in a favorable raw material environment?

Okay. So David, maybe I'll walk you through a couple of things to answer your question. So for the one short answer is price/mix versus raw, obviously a big piece of that is mix. And there are some things we're doing in the business that result in a much stronger mix as we get into the second half of the year. So that's one piece of it. Now similar to my opening remarks, as we look at the remaining price/mix net of raws benefit, we do see it flowing evenly across the back half of the year. So when you look at the third quarter and the fourth quarter, to get to our full year guide of the $75 million year-over-year, we see about a 4% decrease in raws in the third quarter, getting to more like down 1% or 2% in the fourth quarter. So about 4% in the third quarter, maybe down 1% or so in the fourth quarter.

I might just add to Laura's comments. I think in terms of the markets out there, as we look at high-end value we're getting in the market for high-end tires versus the value that the market is putting out for low-end tires is certainly based on the supply-demand equation as well. So we feel pretty good about that environment. The demand for those tires is really good.

Very strong

And that gives us confidence as we look to the back half of the year and out into 2017. David, the other thing I would just add more as sort of a historical macro comment. We have weathered both significant price increase -- raw material increases and certainly giving those raw material price increases back or having those raw material price increases decrease. And I think our track record is very good at managing both the pluses and the minuses, the increases and decreases, as we manage our business. And as we've said, you can have timing differences to catch up if you have significant movements in raw materials. But I think our track record speaks for itself, and certainly, we would plan to execute consistent with that track record.

Next, we'll move to Ryan Brinkman with JPMorgan.

Have you learned anything more since the last call about the prospect of U.S. tariffs on Chinese commercial truck tires? I think the proposed countervailing duties are running about 20% on average. And then there's the potential for, maybe anti-dumping duties on top of that. So when are you expecting more clarity on this? Have you run any scenarios yourselves? And do you think it has the potential to have a material impact to 2017 profits?

Ryan, I mean, we sort of follow the same things that are out there in the public domain, and I think that's about what we would just repeat to you in terms of where the processes are. There are certain dates that the government has given on the various steps that they're going to go through. We've dealt with tariffs before on consumer tires. We saw some of the impacts of those. I mentioned that a bit earlier in terms of how products flow and the like. But our view has always been, we're for free and fair trade as we importantly export around the world. So we will watch this and we will manage our business accordingly. We did that last time, and we would expect to do the same thing with our truck tires here. And as Laura, went through our projections, I think we'll stick with those. You don't see us highlighting anything related to that.

Exactly. I think and what we can be assured of is, if this goes into place, as it appears it might, we'll have a lot of distortion in the industry numbers, right ahead of that as it goes pre-buys and all that, that we'll have to work through. That we kind of know for sure.

A great point, Laura.

That's good, very helpful. Then just last question, it's another one on Brexit. Obviously, a lot of uncertainty, I think we've got a good grasp on currency translation. Is there anything special to think about relative to currency transaction? Just looking at your website, looks like you have 1 out of 20 plants in the EMEA region, maybe is in the U.K., but I don't know about the relative sizes of these plants. Is it fair to say you're a net importer of tires into the U.K? Are you able to somehow -- do you think this is not going to have a material impact because you can offset this, what, because of how you're moving tires around or because of price increases? Or does this have the potential to be material? I think you were saying earlier, maybe no.

Yes, you're exactly right. The short answer is that we do see it as immaterial. So we do not manufacture any tires in the U.K. any longer. In fact, we did some small amount of mixing, maybe a year-or-so ago, that we announced that we're shutting down. So we do not manufacture any there. Roughly, for us, the U.K. is maybe about 2.5% of our sales. It's primarily consumer tires -- and directly, we import all of the tires into that region. So again, not -- within the U.K., not a tremendous exposure, certainly like everybody, the larger question is still the whole impact on the euro zone and growth there over time, kind of yet to be determined.

And next we'll move to Itay Michaeli with Citi.

Maybe just starting off with cash flow balance sheet, Laura, maybe if you could kind of just bridge us on how to think about free cash flow second half of the year, and particularly, perhaps the bridge to get to the 2x to 2.1x gross leverage target you set out for the end of the year?

Well, sure. So as we look at the balance sheet, right, and our capital allocation plan, we still have -- let me just -- kind of the numbers here in front of me. We still have, based on achieving our targets this year, some debt repayment to come into play, potentially about $450 million. As we end the year and early next year, so we'll continue on that path, part of the capital allocation plan, you saw us make a debt payment last year. And again, as we achieve our targets, that's really the biggest movement I think on the balance sheet for the rest of the year.

Okay, that's helpful. Maybe shifting back to mix, you talked about the strength in light truck segments and SUVs. I think you've previously disclosed that your Goodyear products are represented on about 75% of the top 15 SUVs and light trucks in the U.S. So how do we think about kind of the replacement opportunity in these segments in terms of your market share and in terms of the potential incremental mix opportunities in the replacement market in the next few years, given the shift that we've seen in the OE market towards these light trucks?

Itay, I think I would say briefly we feel really good about it. And I would say what we're seeing today is that the benefit of the team that now our Americas' Head, Steve McClellan, and his team put together a number of years ago, looking at what was coming in the market, having what we called our OE selectivity strategy, which was really about being targeted and saying what are the fitments that we see coming out there. How do we bring our innovation and technology with those fitments working with the OEMs. And then looking at what the replacement cycle is, with a target as you know, on the early replacements. As we look at -- I think it was Slide 6 in our deck, you can see that the mix is moving up 17-inch and above from 49% up to 73% of total. And what it says is, most of those, maybe I shouldn't say most, that's maybe too specific. I don't have the number here. But those tires, those vehicles, I should say, out there with the high SAAR that we see still haven't come to first replacement yet. So we feel really good about those vehicles, those light trucks and SUVs, which, as you know, are the top-selling vehicles in the U.S. are going to be coming in for replacements as we look to the future. So not only do we feel good today and in the past relative to these, we feel pretty good about where that market is going to be in the future. So that's a gift that's going to keep moving for us as we move ahead, and I would say, very intentionally, our goal as you also know, is that we got to keep making those tires.

Next we'll move to Brett Hoselton with KeyBanc.

So, first kind of follow-on from a capital allocation standpoint. What are you going to do with the cash after you get your debt down to the level that you'd like to achieve. In other words, I don't see you as a company that's going to go a lot into a lot of M&A, you're kind of doing more divestitures than acquisitions at this point in time. It seems as though the reallocation towards share repurchase, may be in order here?

So Brett, that's -- it's a good and this is a lot about what you're going to talk about at our Investor Day, okay. But there is no doubt, right, just as I walk through on the debt repayment and certainly, the pension actions. As we look forward, we do expect the cash requirements for deleveraging, to go down, to diminish certainly, okay. As we get to that leverage target. We've taken the pension actions and the debt repayment actions then so we would have more cash available for other purposes. And that's really what we're going to lay all that out for you on September 15 as part of our Investor Day.

Along those lines, another 3-year plan is in order?

Well, we're working through that. You know what I mean, it's not for sure that it's 3 years. We've certainly, have a view 3 years, a view 5, all that. That's what we're working through at this point, Brett, but it will be a long-term view.

Very good. And then, switching gears here. As far as Europe is concerned, as I kind of look at European sales, they're -- right now, we've kind of got to running around 60 million units but back in the good old days, when -- before global warming, we used to do 70 million, 80 million tires. My question is, if we had a white winter, is there any reason why you can't get back to that 70 million to 80 million tire range that you used to be at, let's say, 3, 4 years ago?

Brett, I think you have a couple of things going on there. One, I mean you are correct, with a white winter, excuse me -- we, as well as the industry, would, no doubt, sell more tires, I think from our -- from a high we're down, I think, well over 20% from where a "white winter" would have industry volumes. So definitely that would be an increase to our volume. And our share in there, our tires, our products in there performed very well. So that certainly would help us in a significant way. I'll also remind you because we haven't had one of these in the while, there is a sell-in season that's going on now for winter tires, and we feel again pretty good about that because the channels are not as full as they have been in the past. But you also have a situation where you are making those tires early. So as we said, we're planning for a green winter, we're not planning for a white winter, that's for inventory and cost purposes. But we are keeping the ability and the flexibility to try to make more of those tires should we get into a white winter and be able to catch up those. So that's part of our strategy. I would say, the second thing, just in general on EMEA volumes, what you're also seeing there is sort of an intentional mix shift toward us not just going volume for volume but looking at how we concentrate on HVA tires in both the OE and the replacement markets as well as in certain geographic markets and by also doing that and making investments to do that, we are also then not pursuing aggressively, not volume-for-volume's sake, some low-end tires that are just not a place where the Goodyear Dunlop brands can add value and where our value proposition doesn't play well . We see in Europe, just like we used to see in the U.S. and still do in some cases, sort of 4 tires for $99, you see those same type of offerings in certain parts of Europe. That's not where we are going to play and it's not that where we can deliver the value that our investors -- excuse me, would expect from us. So that's playing into it as well.

And next we'll move to Rod Lache with Deutsche Bank.

It's actually Pat Nolan on for Rod. Two questions. First, just a follow-up on the price/mix versus raws. So you're getting -- looks like you're getting a little bit bigger benefit from raws than you were previously expecting. It still sounds like you're going to get positive price/mix. If I'm correct, I think the previous plan assumes that you needed to get some price towards the back hand -- end of this year? Is that no longer the case that you need to put through price to achieve the goal for the year?

Well, Pat, I think -- I think as we look around the world, the answer to that question is obviously, a complicated one, because markets are different. I would say, as we look to markets like Brazil or Latin America where we have significant currency devaluations and we've seen raw materials, not just natural rubber, dollar base raw materials go up. We are continuing to manage as you'd expect. We've announced price increases in Brazil, for example, from Q3 2015 all through to Q1 2016, because of the devaluation that we've seen in the currency there. So there's a market we will continue to be very active trying to get the value for our products in the marketplace. Other markets obviously have different stories. I'm not -- I won't go through everywhere like that, but I would say that the world around excess capacity, again I'll use Brazil in this example, where the OE business was down again about 20% in the quarter, we've got to be very vigilant in managing price/mix versus raw materials. So it's very hard to answer that question in one way. I would say, definitely we are going to continue down the path to do, that.

Maybe just to drill down on that. So it sounds like the inventory issues seemed to be more concentrated in the low end, particularly, in North America. Do you think that -- can the industry put through some upward movement in price based on what we've seen raws do for the past year?

Yes, that's -- we can't comment on what the industry can do, Pat. That's a tough one for us. I can tell you, our view is that we have a value proposition out there around products, around innovation, around brand, around promotion, around advertising, around bringing solutions to customers in both consumer and commercial, and that value proposition is what we try to win in the marketplace with.

And Rich, I was curious i you could give us your perspective on the North American volumes, if -- I mean, if you look at the RMA volumes, RMA member volumes based on your slide, down slightly year-to-date. But all the trends, as you guys have highlighted, whether it's miles driven, gasoline usage, all these trends point to what should be an improving demand dynamic? What do you think is restraining that -- the volume growth for the industry?

No, I'd tell you, it's a very good question as we think through this, Pat. I think there's a couple of things that are happening as we sort of dissect this. And if we think about it, what we're still seeing and what we have seen for a while is sort of that consistent sellout. Remember, sellout tends to follow GDP over time. There can be dislocations, but sellout and GDP tend to be a pretty correlated thing over a period of time. What we're seeing right now, again, as Laura alluded to it, is really how tariffs have disrupted some of the RMA figures that are out there. So if I could walk you through a couple of things very quickly, and you can, I think refer back to Slide 5, that is in our deck. But remember, in the second half of '14, you had a really big pre-buy ahead of the tariffs coming into the market. What that did was in Q1 '15, if you remember we said in the last quarter, we had a pretty easy comp, because if you think about just behaviorally, the channel stopped buying as they bought a lot in the second half of '14. What they did in the second half of '15 -- or excuse me, the second quarter of '15 will start to restock again. And as they did that, our Q2 '15 to Q2 '16 comp became tougher. So you see, on a gross basis, a little growth happening, but it's really again all because of imports coming in and the volumes at the low end of the market. And I think, Laura also made the comment, or I made the comment that you're going to see that continue in the month of July because it's actually the…

Next we'll move to Emmanuel Rosner with CLSA.

So first just a quick housekeeping questions on your adjusted income statements. There seemed to be $20 million other income in the quarter. And I was curious, if you just know offhand what this relates to and sort of a -- what kind of run rate we should be expecting for that?

So in the quarter, right, we had about $20 million in that other income and expense line. It includes $44 million of redemption premium related to those $900 million of senior notes that we did, I believe in June. It has -- it's offset slightly by that $4 million recovery at asbestos past cost, that we had in the quarter as well. And then the $10 million in kind of our change in assumptions related to the insurance recoveries for asbestos. So all of that kind of built in to that Q2 of about $20 million. Now, both the $44 million and the $4 million on asbestos for the recovery of the past costs, have been adjusted out of the net income in our presentation of the adjusted net income.

Right, so the adjusted $20 million income, excluding all these sort of unusual, is that something that's -- I mean, this other income adjusted, is that something that's sustainable?

I think, you have, like I said, the unusual ones are the $44 million and $4 million. So I think -- as you think about the other income going forward, normalize it for that.

Yes, okay. Understood. And I guess, sort of -- looking sort of at global SOI growth in the quarter, on a organic basis sort of trying to exclude Venezuela, for example. It seems like it was about up 8%, year-over-year, so little bit of maybe a deceleration versus Q1. How do you think about that sort of going forward in the context of your full year guidance of still in the 10% to 15%, and in particular, the ability -- what sort of factors would enable you to reach to reflect the higher end of the guidance?

So, Emmanuel, as we said we're sicking to our guidance, and we feel good about that. But, I can tell you that, the one thing about the tire industry is it doesn't move in a straight line. So while we feel good about where we're going for the year, we had some, as I think Laura mentioned, some incremental cost headwind coming in, particularly, in the Americas, in the second quarter. That's reflected in the numbers. Hey, look, those things can happen as we move ahead, we got to manage through those, that's what we're hired to do here and we feel confident about doing that. I don't think the 8% in the second quarter -- 8% adjusted as you just said, would -- it takes -- could give us any different view nor what I suggest to give you any different view about how we feel. That said, the markets are -- they're -- this is a tough economy, Latin America still hasn't recovered, that's tough now, upside later. So we're working hard every day to deliver these numbers.

And can you sort of just go back over these cost headwinds. I mean, I'm not talking about the -- sort of like unusuals, but sort of like, sort of on a clean underlying basis, x items. What sort of like extra spending is sort of happening in the Americas currently?

Yes, so I think all the details would be in the 10-Q as we go. But as I walked it through in my script, not -- so certainly, you go through taking Venezuela's $36 million out of the prior year, right, we had the divestiture in North America, the motorcycle business, GDTNA, that's about $19 million out of the second quarter of last year. And then, again as we talked about and guided to, frankly, for the second quarter, we did have in the Americas a cost headwind of just about $30 million, and we called that out so you could model for that for the second quarter, but going forward, it -- every -- all of the cost is just built into the guidance, right. The cost-savings versus inflation, okay? So that's kind of when you look at the second quarter, that's really, the extra that hit in the second quarter that isn't there for the full year on our 10% to 15% or $2.1 billion to $2.2 billion. Now, the $29 million as we said back in the first quarter is really some extra labor, it's engineering expense, it's really everything we've done to shift more and more to those more complex HVA tires, and that does add cost. But the margin with that, the benefit from that, more than offsets it.

And that is our final question. We appreciate your patience -- or we appreciate your participation. You may disconnect at anytime, and please have a great day.

Thank you.