The Goodyear Tire & Rubber Company (GT) Q4 2017 Earnings Report, Transcript and Summary

Good morning. My name is Keith, and I will be your conference operator today. At this time, I would like to welcome everyone to Goodyear's Fourth Quarter and Full Year 2017 Earnings Call. All lines have been placed on mute to prevent any background noise. After the speakers’ remarks, there will be a question and answer session. [Operator Instructions] Thank you. I would now like to hand the program over to Christina Zamarro, Goodyear's Vice President, Investor Relations. Please go ahead.

Thank you, Keith, and thank you, everyone, for joining us for our conference call this morning. Joining me today are Rich Kramer, Chairman and Chief Executive Officer; and Laura Thompson, Executive Vice President and Chief Financial Officer. 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 the 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 the 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, everybody. Thanks for joining us today. This morning, I will review our fourth quarter and full year highlights and then ask Laura to walk us through the fourth quarter results. Then I’ll come back to discuss each of our business units and lay out our 2018 plan and our longer-term targets. Laura will finish with a detailed review of our financial targets and our capital allocation plan before opening the call for your questions. Our fourth-quarter results were highlighted by strong volume recovery in consumer replacement in the U.S. and EMEA. We were particularly pleased with our performance in 17-inch-and-greater rim size segment where we grew almost double the rate of the market. These results reflect the power of the Goodyear brand across all our regions. Our fourth quarter segment operating income was $419 million, which was strengthened by this volume performance. In addition, our runrate improved significantly during the fourth quarter with consumer tire margins increasing 250 basis points sequentially from the third quarter. Two of our three business units showed year-over-year growth in segment operating income despite continuing significant raw material headwinds. Moreover, our Asia-Pacific business unit saw all-time records in both volume and segment operating income in the quarter driven by our continuing strength in China. On a full year basis, we delivered more than $1.5 billion in segment operating income and cash flow from operating activities of $1.2 billion. Looking ahead, I continue to be optimistic about the opportunities for growth in our markets. Our strategy is designed to take advantage of the long-term trends shaping our industry, particularly in the larger rim size segments of the market, which we define as greater than or equal to 17-inches. This segment is growing in multiple to the total industry. Our strategy and our strengths focus on the increasing profit pool in that part of the market that is simultaneously growing and mixing up. This is where Goodyear can add value with our technology, our brand, our align retail and distribution network and all the capabilities that we bring to bear for the market. The combination of these elements drives value for our customers and consumers and is where Goodyear continues to demonstrate its competitive advantage. We have executed against that strategy and we have positioned the company in the right way and for the long-term. Over time, we have reshaped our business and we have rebuilt momentum in challenging environments. The future will be no different and my confidence remains undeterred. We feel very positive about the progress in our business during the fourth quarter and we remain confident in our ability to build on that momentum in the year ahead. Our strategy is clear and unwavering and despite challenges in our markets in 2017 including raw material costs, we believe we are positioned to generate significant increases in segment operating income and cash flow over the long-term. Now with that, I’d like to turn the call over to Laura to walk through the fourth quarter results.

Thank you, Rich, and good morning everyone. Turning to the income statement on Slide 4, our fourth quarter unit volume was up 2% year-over-year. Strong growth and consumer replacement driven by the U.S. and EMEA more than offset a 1% decline at OE. Our fourth quarter sales of $4.1 billion were up 9% driven by a 5% improvement in price mix and the benefit of increased volume. Our gross margin was 24% and segment operating margin was 10%. Our fourth quarter earnings per share on a diluted basis was a net loss of $0.39. Our results were influenced by certain significant items including a one-time non-cash charge that was driven by the revaluation of our existing U.S. deferred tax assets to the new lower tax rate. After adjustments, our earnings per share was $0.99. The step chart on Slide 5 walks fourth quarter 2016 segment operating income to fourth quarter 2017. The positive impact of higher volume was $19 million and unfavorable overhead absorption was $33 million. Increased raw material cost of $194 million more than offset improved price mix of $115 million for a net $79 million negative impact. Net cost saving actions were $20 million and foreign currency translation was a tailwind of $13 million. Turning to the balance sheet on Slide 6, cash and cash equivalents at the end of the quarter were $1 billion. Net debt was nearly $900 million lower than the third quarter. Our global pension unfunded liability at the end of the year was $656 million, down slightly from the prior year. Free cash flow is shown on Slide 7. For the quarter, we generated $1.1 billion in free cash flow, driven by a $950 million benefit in working capital. Cash flow from operating activities was $1.3 billion in the quarter and about $1.2 billion for the full year 2017. The strong cash generation during the quarter supported the repurchase of $195 million of our common stock during the fourth quarter or 6.3 million shares. Turning to Slide 8, in the fourth quarter, Americas reported segment operating income of $209 million or approximately 10% to sales reflecting an $86 million decrease from 2016. The impact of increased volume and positive price mix was more than offset by higher raw material cost and unabsorbed overhead resulting from third quarter production adjustments. Unit sales in the fourth quarter were 19.5 million tires, up 4% versus 2016. Our consumer replacement volume was up 5% driven by improved sell-out and strong performance in the 17-inch-and-greater rim size segment, which was up 17% in the U.S. I’ll note that we saw growth in the U.S. and all major replacement channels including some restocking in the wholesale channel. Consumer OE volume continue to be impacted by lower OEM production in the U.S. and was down 7% versus 2016. Our commercial replacement volume was up 5% and commercial OE unit volume was up 24% in the quarter. In Brazil, OE volume continued to show strong growth and was up more than 30% while we have not recovered back to the height of the market, Brazil’s healthy volume improvements give us confidence as we look ahead. Turning to Slide 9, Europe, Middle East and Africa reported segment operating income of $93 million in the quarter which represents an increase of $12 million versus 2016. EMEA’s increase in SOI was driven by improved price mix in the consumer replacement business, our continued focus on cost savings and a positive impact from foreign currency translations. These increases were partially offset by higher raw material cost and the impact of lower volume. Unit sales were $13.7 million in the fourth quarter, down 2% from prior year. The volume decline relates to the consumer OE business with unit volume down 14% driven by decreases in smaller size fitments. Replacement unit volume increased by 2% driven by our consumer business reflecting higher industry demand. EMEA’s 17-inch-and-larger rim size tires outperformed the market in both the winter and summer segments resulting in positive mix. EMEA’s commercial business grew volume overall in the quarter with commercial OE increasing volume by 8%. Turning to Slide 10, Asia Pacific delivered fourth quarter segment operating income of $117 million, a record quarter for the region. Asia Pacific's segment operating margin was strong at 19%. The year-over-year increase in earnings was driven by improved price mix and higher volume, which were partially offset by higher raw material costs. Unit sales were $8.8 million in the fourth quarter and a record, up 5% from prior year. The increase was driven by the improvement in our consumer OE business where unit volume increased 11% driven by robust growth in China. Our consumer replacement business was up 1% driven by a strong winter sales season in the northern part of the region. I’ll now turn the call back to Rich.

Great, thank you, Laura. Turning to Slide 11, we see our next phase of segment operating income growth coming from a balance of growth in unit volume with above market growth in the 17-inch-and-greater segment of the market and in net cost savings. We previously announced our 2018 target for segment operating income of $1.8 billion to $1.9 billion reflecting a continuing recovery and a significant improvement over 2017. By 2020, we expect our segment operating income to range between $2.0 billion and $2.4 billion. That level of earnings will enable us to deliver up to $2 billion in shareholder returns from 2018 through 2020. Let me take a moment to offer some context around our segment operating income range. As we see it today, our operating plan is balanced and fits at the midpoint of the $2.0 billion to $2.4 range. We have a very high degree of confidence in achieving the low-end of the range $2 billion in segment operating income given where we see the market trajectory today. We will work to capitalize on all opportunities to capture upside to our plan. The mid to upper-end of our range reflects supportive external conditions including relatively healthy SAR levels in North America and Europe consistent with current industry forecast, continued market shift to large rim sizes, continued successful execution on key initiatives including utilizing our leading distribution technology innovation and brand capabilities to gain market share in 17-inch-and-larger-rim size tires and sustained cost reductions. Our plan does not include a recovery from the price versus raw material dislocation that we saw in 2017, which equated to a headwind of about $400 million last year. Should markets improve, we will build these more favorable conditions into our range. Our plan also excludes discrete strategic initiatives such as the further footprint action which is consistent with how we presented our long-term objectives in the past. Stepping back and looking at the markets as a whole, industry growth continues to be an attractive story in the premium segment. The consumer replacement industry saw robust growth in larger rim diameter tire sizes in 2017. In the U.S. and EMEA markets, the full year growth in the 17-inch-and-larger segment was 7%. The trend towards larger more complex tires has been driven by OE. We will continue to target more profitable fitments that have high loyalty rates and pull through in the replacement market. Our 2018 fitment launches reflect that strategy. And as you would expect, these platforms depend on the performance characteristics of Goodyear’s premium larger rim diameter tires. With that as a backdrop, I’d like to turn the discussion to address each of our business units, starting with the Americas on Slide 12. We expect moderate industry growth in the U.S. as many of the key economic indicators continued to be positive. Consumer confidence is the highest that’s been in nearly two decades. Employment levels, miles driven and relatively low gasoline prices, all remain favorable and provide a productive platform for growth. We continue to expect strong demand in our replacement businesses, specifically in the larger rim sizes. While OE expectations in the U.S. market have moderated considerably, our OE selectivity strategy has continued to drive pull-through on first and second replacements. The unprecedented strength we have seen in the U.S. SAR over the recent past ensures a healthy first replacement cycle over the coming years. As first replacement cycle is typically around a three to four year mark, - excuse me – for a new vehicle, we expect several years of strong replacement demand. In 2017, our OE mix was about 65% light truck and SUV. Our share in OE over the past several years and share on the right fitments will drive pull-through and mix up opportunities. We are positioned to capitalize on the favorable trends in our industry through new product technology and innovative offerings. The recent launch of the Assurance WeatherReady in late 2017 was a tremendous success, in fact, our most successful premium tire launch ever. In 2018, we are launching many new exciting products including the Goodyear Assurance MaxLife and the Kelly Edge HP. The Assurance MaxLife includes technology to deliver more miles of all season traction and will offer one of the best tread wear warranties in the marketplace. The Kelly Edge HP, a new light truck and SUV offering completes our refreshed Kelly Edge Power Line. Both lines are predominantly made up of 17-inch-or-greater sizes. The power of the Goodyear brand in the marketplace is strong. Our growth and trajectory have not changed and we are energized by the opportunities we see in our markets. In U.S. commercial truck, we are building on the positive momentum that began to take shape in the second half of 2017. We expect double-digit growth in our OE business driven by both recovery and organic growth in the Class 8 markets. In addition, we’ve won multiple new national fleet accounts that will help support our OE and replacement growth in 2018 and beyond. Outside of the U.S., we expect both the consumer OE and replacement industry in Latin America to grow in the low single-digits in 2018. Our team in Brazil continues to focus on expanding its align dealer and distributor network and building capabilities to drive value in these – with these important customers. I am extremely pleased with our progress and we expect our volume in Latin America to outperform the consumer replacement market as the business has continued to build out its capabilities. As we look at our business today and in the future, our competitive advantage lies with our connected business model. This is the integration of multiple facets of our business that when combined, equal more than some of the parts. It includes our number one brand, our position and more importantly the right fitments with original equipment manufacturers, our outstanding industry-leading product portfolio, our unmatched align distribution including our company-owned and third-party retail and wholesale distribution and our leading interactive platform. Together, these elements position us to win with customers and consumers. Now turning to Slide 13, our EMEA business has outperformed the market in growth in the larger rim sizes and achieved year-over-year segment operating income growth in the fourth quarter despite significant raw material headwinds. We are seeing margin improvement in growth in replacement volumes driven by our award-winning product offerings across the region. In 2017, we took strategic actions to shift our resources and reduce our exposure to declining, less profitable market segments in EMEA. This included the closure of our Philippsburg, Germany facility in the third quarter. With this complete, we expect EMEA consumer replacement to drive unit volume growth and mix with above market performance in the larger rim size segments. EMEA is in the middle innings of realigning its go to market model across the region to strengthen its value proposition. This initiative is about creating a sustainable competitive advantage through executing a connected business model to make the tire buying process easier for customers and consumers. Part of these changes included our recent implementation of a PAN European structure for pricing programs and promotions. We are also increasing our focus on sell-out and demand pool within consumers. Looking ahead, we will pilot new programs in key markets to drive even higher brand awareness and build out our ecommerce programs to capitalize on this rapidly growing channel. We will also look to invest in our distribution capabilities where appropriate over the coming years. In OE, we are increasing our presence on ultra high-performance fitments with our most discriminating OEM customers. Our competitive advantage in this market is our ability to design and manufacture outstanding products that are recognized through tire labeling and magazine test scores. That remains a strong foundation of our business. We expect over the long-term, EMEA’s recalibration will strengthen and further differentiate our value proposition through our distribution and service network. We are looking forward to the continued execution of EMEA’s strategic plan with a focus on returning the region to its historical margin performance. Turning to Asia Pacific on Slide 14, we continue to build on our capabilities to capitalize on the long-term growth trends in the region. In 2018, we see consumer replacement industry growth across the region in the mid-single-digit range driven by our key markets in China and India with outsized growth in the larger rim size segment. Asia Pacific continues to be an exciting growth region for Goodyear driven by an emerging middle-class with aspirations for car ownership and an evolving car parts. Both trends set the stage for significant growth potential in our consumer business in the region. We have continued to focus on expanding our retail network in points of distribution to drive growth, particularly in Tier-3 and Tier-4 cities in China and in India. In 2018, our growth in retail distribution in these countries is expected to surpass 300 stores and we expect even more beyond that. We are also seeing the growing importance of ecommerce in China’s auto aftermarket. In December, we announced a strategic partnership that makes Goodyear’s products available on JD.com, one of the largest online retailers in China. Asia Pacific is also launching two important products this year with its introduction of the Assurance TripleMax 2 and the EMAX Comfort targeted towards the mid and premium segments of the market. These will also fuel our growth. Our CapEx in 2018 is weighted towards our growth markets in China and India. In India, we are focusing on increasing our capability to mix up to larger rim sizes and growing in the OE market. In China OE, we are also launching new premium fitments in the fast-growing EV segment where year-over-year sales grew 71% versus 2016. We are energized by our growth plans in Asia Pacific. Our plan is supported by investments in assets and capability for 2018 and beyond. We remain focused on our strategy and execution for each of our key markets to build the foundation for continued growth in the region. Turning to Slides 15 and 16, and looking beyond what we see over the next few years, we’ve been more excited about the opportunities we see in the new mobility ecosystem. As you know, that environment includes everything from the increased comfort list and preference for ride sharing to the advancing EV and AV landscape and all the effects they are having on today’s vehicles. I see these opportunities coming in three primary areas; first and foremost, an increase in miles driven, second, more demanding technical and performance requirements from OEs leading to differentiation and third, opportunities to leverage our existing fleet service business model with shared fleets for the future. First, I’ll just underscore the point that more miles traveled means more tread rubber used. That’s a good thing for tire demand and tire sales. Second, we found our sweet spot if you will with demanding but sophisticated customers who value the technology that we can bring to bear in the marketplace. These include the OEMs, major commercial fleets and even the airlines. The path to mix up in our business has been driven by these customers who increased performance requirements year-after-year and have their own product specialists and test engineers who understand the value that our products and services bring to their businesses. As the fleet market expands, our ability to deliver products that have a technological edge will, I would argue, allow us to increase our share in the marketplace. The third component driving growth with this trend is our commercial fleet solutions business. We are a trusted partner to several major fleets today and we expect to leverage our strength as the consumer fleet market develops. Our business, the tire industry and the entire transportation industry is in the process of being redefined. Those changes, while likely several years away, require that we put in place now the strategies, investments and capabilities to strive in that emerging new mobility ecosystem. That certainly won’t be done at the expense of delivering near-term results. Our strategy is balanced to both deliver today and position us for success tomorrow. Mindful of this, we will make our decisions in that context. Now I’ll turn the call back over to Laura to finish up with the details of our outlook. Laura?

Thank you, Rich. On Slide 17, we’ve shown our full year 2018 SOI drivers. Overall, we expect volume growth of about 3% for the year and an unabsorbed overhead tailwind of about $60 million. For the first quarter, we see volume about flat, driven by declines in OE in the U.S. and in EMEA, and a headwind in unabsorbed overhead. We expect our 2018 raw material cost to be about flat based on current spot prices. Following the adjustments we made late last year, we expect year-over-year pricing headwinds in 2018. In total, we expect our net price mix versus raws to be a benefit of $25 million. For the first quarter, we see a net headwind of $105 million due to raw materials. We expect our cost saving actions to exceed inflation by about $130 million in 2018. We estimate foreign currency translation at current spot rates to be about a $15 million positive impact. The other line represents a combined headwind from increased advertising, R&D, depreciation, and incentive compensation. The outlook for these combined is about $90 million. In the first quarter, we see other as a headwind of $35 million. On Slide 18, we have listed other financial assumptions for 2018 and I’ll comment on three of these items. We see working capital as a use of about $100 million, as start-up inventory at our new plant drives an increase for the year. We see our CapEx at approximately $1 billion and restructuring payments of $200 million in 2018 as a portion of the payments related to the Philippsburg closure rolled into early 2018. I’d like to take a moment to comment on capacity and demand on Slide 19, where we have updated our outlook for global industry supply and demand for 17-inch-and-greater tires. Based on our analysis of all Tier-1 and Tier-2 capacity announcements, we see incremental demand exceeding new capacity in the Americas and significantly exceeding new capacity in EMEA through 2020. We continue to remain confident in the underlying supply/demand dynamics in our regions. Turning to Slide 20, we’ve shown the SOI walk from 2017 through 2020. That brings us to our target of $2 billion to $2.4 billion. We see a cumulative improvement from volume of $385 million over the period in gross margin and unabsorbed overhead. Our unit volume will be more weighted in the 17-inch-and-larger rim size tires and includes up to 20 million more of these sizes in our sales plan. Our total volume includes a more conservative outlook on less than 17-inch units through 2020. The next category is the mix improvements from incremental volume in 17-inch-and-larger rim sizes. Our growth in mix is expected to be $150 million and includes the pricing headwind we expect in 2018. Looking ahead, in an environment where raw materials are increasing, our expectation is that we will also offset those headwinds with price. We continue to believe the headwinds we saw in 2017 are the results of a confluence of disruptive factors. We will continue to work on our cost structure through our operational excellence initiatives, and we expect about $375 million of cost savings above inflation. Research and development, advertising and depreciation will be a combined headwind of about $250 million. Net-net, a balanced plan focused on growth and mix up, as well as net cost savings. I am going to turn to the capital allocation plan beginning on Slide 21. This is a slide that we’ve used before to walk to the cash flow that we expect to maintain the business and to be able to allocate as part of our capital allocation plan. I won’t walk you through the baskets on the left except to make a couple of points. First on taxes, given the impact of tax reform, we do not expect to pay cash taxes in the U.S. through 2025. For the 2018, through 2020 time period, we see our book tax rate between 20% and 25% and a 15% cash tax rate. Next, we’ve set a good guideline for sustaining CapEx is around $750 million a year. Finally, we see a use of $100 million to $200 million in working capital over the next three years. Now that leaves us with $3 billion to $3.5 billion over the next three years that we can use to drive enterprise value. Turning to Slide 22, I’ll walk you through the details of our capital allocation plan. Our prioritization continues to be investing in the business, first through growth CapEx and restructuring, maintaining a prudent capital structure that can support the business, and then returning the excess to shareholders. We see growth CapEx at $700 million to $900 million over the three year period, which puts our annual total CapEx at about $1 billion. This level of spend, together with investments already underway, will support the growth in units needed to support our plan of $20 million more large rim size tires. Restructuring is about $400 million over the period. We have a strong track record of executing on our rationalization program to address our cost structure. Over the last five years, we have achieved about a two year payback on these programs. Debt repayment and pension are $400 million to $600 million over the period. We remained committed to achieving an investment-grade balance sheet over time. We believe we have significant underlying EBIT leverage in our business that together with this level of debt and pension reduction will drive us towards that goal. And finally, on shareholder returns, we continue to target a relevant dividend yield of about 2%. Any remaining cash in the shareholder return basket will be allocated through share repurchases. We’ve included our view of major drivers and risk to our plan on Slide 23. Our plan does not contemplate a recession in our key markets, the timing of raw material increases can also impact our plan as pricing tends to lag commodity cost increases. As Rich mentioned, the low-end of our framework for 2020 plan at $2 billion in SOI is where we have a high degree of confidence in our ability to deliver at least $500 million in additional income over the next few years. As we see it today, our operating plan is more balanced and fits at the midpoint of the $2 billion to $2.4 billion range and we will work to capitalize on all opportunities to capture upside to our plan. Now we will open the line for your questions.

[Operator Instructions] We’ll take our first question from Itay Michaeli with Citi. Please go ahead. Your line is open.

Good morning, Itay.

Good morning. How are you?

Good morning.

Good.

So just a couple questions. Just first want to make sure I have the pricing guidance, right, for 2018. So, in that $25 million price mix over raws, can you just talk a little bit more about the mix versus the pricing assumption, as well as in the U.S. to just kind of what you think the price components and the mix components of that are?

Yes, Itay, we don’t normally break out the price mix as such. But I think that, the comments to make are that, as we look at our pricing and we look at the adjustments that we made in Q4, that certainly ended up with positive volume and sort of a reestablishment of our core demand out in the marketplace. Our pricing coming into Q1 of 2018 is essentially back to the levels of Q1 of 2017. So, that’s kind of what we see and I think, as Laura mentioned, as we look particularly coming into Q1, we still got $105 million of raw materials coming in, that’s still about a 10% increase. So, we are still dealing with that and as we set for 2018, we are still going to be balancing off our price mix versus raw materials, thus the $25 million for the full year. I think we still feel very confident in terms of where the mix is going. As you can tell our confidence around 17-inch and above, and the growth rates that we have are still very good. So, 2018 will still be balancing off that price mix and raw material as we go.

Yes, and I guess, I would say, Itay, that, on the mix and as we’ve shown in the fourth quarter and historically and our focus with our CapEx and our plans going forward, mix will be similar to what it’s been running, up somewhat from that actually as we go through the year. I think, I mentioned it in my remarks earlier, don’t forget though in the first quarter, we won’t generally see any mix because of that first quarter of 2017 having such strong mix, because that’s when we sold all the winter tires in Europe, right, as opposed to the fourth quarter of the previous year. So, just to help you with your modeling as you go.

Great. And then just maybe to that, Laura, what – can you just size up what the historical impact of just the mix components has been, just order of magnitude on SOI?

If you want o say, we just don’t break it out. Our actual for last year was – you’ll see as it comes out 80 some million dollars, right. Now, that’s again driven by a lot of what happened last year in the price dislocation. But again you see us even more focused in our overall volumes on that greater-than-17-inch. So, take it from there.

Perfect. Thanks. And then, just on Slide 8, the up 8% volume in U.S. consumer replacements, can you just talk a little bit more about the channels that drove that in the quarter as well as what were kind of inventory levels are and kind of how sustainable that could be as we get into 2018 obviously, it was a sharp recovery in the fourth quarter?

Yes, Itay, I think the 8% up clearly was a bit of a restocking in the distribution channel. So just remember, we said that our channels, our retail channels, our own company stores, our tire and service network retailers that are closer to the customer and their buy-in or their sell-in, it tends to reflect more of sell-out. That was actually in relatively good shape last year. Where we had an impact was in the distribution channel where you have a little bit going on betting on inventory, going long, going short depending where tire prices are. So what you saw in the fourth quarter was clearly a restocking of those tires in our distribution and I think reflective of the external demand for those tires from their customers as well, remember they are servicing, retailers aren’t serviced directly by us. So that restocking is what you saw and that really was a restocking versus just the normal runrate. Having said that, we would say that, but, inventory levels for our products in those distributors still aren’t and let’s say historical levels. So there is still room to grow in there, but obviously that 8% growth was a restocking impact.

Okay, that’s very helpful, Rich. Just a last question, back to Laura on free cash flow, I think in 2017, it did come down, at least a few $100 million. I know you are guiding for higher CapEx this year and some cash restructuring. Any other puts and takes to think about free cash flow in 2018 at a high level?

Yes, and so maybe – so, yes, you have the CapEx at about $1 billion. As if I had to directionally give it, there is a lot of good work that continues on working capital, restructuring CapEx – I am sorry, restructuring cash spend is about $200 million as we look out to 2018 and I guess, I’d just say with all the puts and the take on an apples-to-apples basis, we expect free cash flow to be about double from what the actual is in 2016.

Okay, double, that’s very helpful. Thanks so much.

Thanks, Itay.

And we can take our next question from Rod Lache with Deutsche Bank.

Good morning, Rod.

Good morning everybody. I had a couple questions. One is, if you can elaborate, the low-end of your SOI target of $2 billion, basically you had a big jump from 2017 to 2018 and then moderating growth. But you mentioned that that does not include a downturn. So, can you just elaborate a little bit on what that scenario incorporates?

The – Rod, the 2.0 scenario, you are saying?

Correct.

Yes. So, listen, I think, what we try to do is put a range out of where we thought we could have a balanced plan going forward and I think, as we said, we think our operating plan is balanced at this point in time and as Laura indicated, we are about in the midpoint of the 2.0 to 2.4. So, I think, as we think about where we are, we have a lot – we have a high confidence level in that lower end of the range and, right, the mid to upper part of that, as I said in my remarks, reflects some positives – positive external, I’d say, things happening in the marketplace right now, a healthy SAR, continuing mix up of the business, the cost reduction efforts that we have in there. So those are real – I would say things that give us confidence to move ahead of the low-end of the range. Having said that, as we think about what’s not in there, which you could construe us to say these are things that we got to be mindful of is a recovery of price mix versus raw materials from what we didn’t recover back in 2017 and we didn’t build in any strategic things that we might do around capacity, which we normally don’t build in there. So, again, I would say, we are confident at the low-end of the range and we see upside, but we are mindful again of those external forces, particularly around the price mix dislocation we saw. We can’t predict that going forward and obviously, the SAR, really production last year of the OEMs had an impact on us. So we are mindful of those two things and maybe consider those at the low-end of the market, but obviously, our goal here is to put a more balanced plan forward.

And Rod, maybe just on volume, maybe if it helps, right, so, at the midpoint, we said about a 2% CAGR on volume. If you think of modeling the low, you might make it more like a percent and a half or so. On the high-end you might say, approaching 3%. And then, just the mix within there, right, on the low-end and that’s about 1.5%, we’d say this in more pressure on the less-than-17-inch and whether it’s OE volume, a little bit less than the greater-than-17-inch over that time period. Just to kind of give you order of magnitude, but those are the biggest really the drivers of the low to the high.

Okay, great. And on the capacity side, it looks like you are expecting a 9 million unit decline in the less-than-17-inch market, because you said, 11 million overall, but 20 million for the HVA portion of that. So, does the $400 million restructuring cash that you are budgeting basically, does that accommodate that decline in volume or would you need additional restructuring cash to accommodate that?

So, I think, - so first of all, there is a little – there is some excess in that bucket for things like that absolutely and if you kind of think of the timing of when you would actually make any cash payment, provided you made announcements even quickly, we just look at it as within our big strategic initiatives as Rich mentioned, aren’t in there as we normally model. However, there is a little bit of room in that bucket and that might suffice, it depends on the timing of any proposed footprint action.

So, if you, just to be clear, you’re targeting, sort of, $500 million to maybe $670 million per year of free cash flow, but, and that includes some additional for restructuring and maybe some additional needed, but you would see that as a source of upside?

Yes, yes, absolutely, yes.

Okay. And how – just broadly speaking, just given that, obviously you guys have very strong exposure to the 17-inch-and-greater market, but there obviously half the company is filled with is tied to the less-than-17-inch. How are you seeing the – just more broadly, the capacity being managed on the less-than-17-inch, do you think that that’s going to be similarly balanced in terms of the supply and demand? Or is that just going to be a challenging market going forward?

Rod, I think, by definition and what we saw last year, it’s going to be a challenging market going forward and particularly on, as we said, 16-inch rim size is our still very profitable in certain markets, particularly if you go down to 15, 14,13, very, very competitive as we look ahead and I think I’d put it in the context of your earlier comment about the $11 million growth and what happens to the 17-inch or the below 17-inch, we are still committed and we have in our plan growing the 20 million $17-inch-and-above with share gain involved in that. As we look ahead, we’ve reduced the outlook for the lower rim diameter tires and partly to your point, because, the profit pool for those tires given the price mix of raw material dislocation last year is nearly not as positive as it is, and as you know, our goal is really to have a plan where we are mixing up a plan that delivers shareholder value, a plan to sell tires where customers appreciate and pay for the innovation and technology that we bring, that’s the larger rim diameter market and to your point, those lower tires are continually, be it capacity, be it price mix, raw situation is continuing – continually going to be a less profitable market and that’s why we don’t believe that’s where the game is going to be played.

Okay, great. And just lastly, really quick, you said raw materials are flat, you have net price mix versus raws at $25 million. Can you just clarify, I missed, just in response to Itay’s question, are you saying that the pricing in that assumption is kind of flat and this is just mix?

Well, there is a headwind coming, right, into 2018 or here, in 2018 related to the adjustments we made in the fourth quarter, right. But net-net, right, we see ourselves at that $25 million net price mix versus raws, more just a first quarter of zero mix essentially, based on a really good first quarter of 2017 mix and winter tire sales. But again, we still expect strong mix as we move through the year especially and again, not expecting to recover any – and not build into the forecast recurring any of that price of raws dislocation from last year.

Right, so price down in the fourth quarter, you got the benefit from volume. You are expecting positive mix as an offset in 2018 and this essentially – it’s mix then it’s coming in.

Yes and the volume has not only a good impact in itself, but on overhead absorption with the guide of about $60 million positive for the year.

Okay, thank you.

You are welcome.

Thanks, Rod.

And we can take our next question from David Tamberrino with Goldman Sachs. Please go ahead.

Great, thank you.

Good morning, David.

Good morning.

Good morning. So, on the SOI guide and walk for Slide 20, just want to make sure I understand where this is being allocated? I think in Detroit, you spoke to another $50 million to $75 million of pension benefits annually going into your SOI, up from below the line. What bucket are you putting that in?

It seems like following it here. So, okay, so, let’s see, price – we are going – so, price mix versus raws of $150 million. So I’ll just make a jump following your question.

Yes, I mean, so for 2018 guidance, I believe there is a favorable $50 million to $75 million of pension benefit coming out moving below the line. I am trying to understand where that goes into the buckets from 2017 to 2020 SOIs?

Okay and I am sorry, I am not following, that was in cost, net cost save.

I am asking you, there was $50 million to $75 million of pension that was taken out of SOI for your 2018 guide at the Detroit Auto Show.

Yes.

And I am just wondering if that’s going to happen annually over the three year period to get to 2020 and which bucket?

Right, so that’s the bucket that it’s in on Slide 20, is in the net cost savings number of plus $375 million.

Okay. And then, it’s only, one-time, it doesn’t happen for all three years?

Yes, exactly, once we move it into there, forever it’s not in SOI. No adjustments going forward.

Okay. And then, just secondly, in the appendix, you’ve done a great job of showing as kind of your mix regionally for HVA tires both in replacement and OE, but looking at last year’s deck and looking at this year’s deck, it doesn’t look like it’s actually changed. So, I am wondering how concerned should we be that the mix upward isn’t necessarily occurring within your volumes?

Really, it’s just a – again, look at the fourth quarter, right, if you look back to the second and third quarter, that’s really where the impact came and it wasn’t driven by anything going on in the OE mix up in greater-than-17-inch or anything in the industry. It was just really driven by that dislocation as we work to get that up to $1 billion of raw materials forecasted in there. Okay? Now in the replacement column there, it is up 5% versus 2016, which is strong, right. And we see that continuing as we move, as you saw kind of in the capacity charge as well.

Okay, but the overall didn’t really change from 40%. Got it. And just lastly, Slide 19, really helpful putting this out there. What’s the assumption in terms of competitiveness from these new plans? Do you assume that they are going to, call it, play nice within the market and not really underprice in order to gain share or are you expecting this all just going to be import substitution that’s going in line with this growth – this nice HVA tire demand growth?

Yes, I think, excuse me, David. Sorry. I can’t get rid of this cough. Look, I think that, as we add these new plants coming in, our view is that the – you’ve heard me say before, just coming in and building a plant doesn’t ultimately going to end up as having an impact to meet the needs of the demands that are out there. So the capacity is coming in, yes, it’s more competitive, but at the high end of the market, what the OEMs need and then the ultimate ability to get those tires where they need to be through aligned distribution network and to be able to get the value to the consumers out there, it takes a lot more than just the capacity coming in. So, I see it – I see the plants coming in. I look at the level of imports that came in before it. I think that there is headwinds around that. Candidly, there is always been headwinds around that. They are closer to home right now, but at the end of the day, we got to win in the marketplace and what you are seeing is our technology, the 17-inch-and-above tires, you saw the demand come through in the fourth quarter. Yes, that was an adjustment to price, but what it also was pent-up demand in the marketplace for our tires in the replacement market as well as, our dealers out there wanting to stock those tires. So, it will come in. It will have an impact, particularly as the OE market flows down, but I don’t think it deters us in terms of where we think we can – what we think we can do in the 2020 plan. It’s not the primary concern; it’s another element that we have to manage.

Understood. And just following up on the slide, is there any ability for you to kind of elaborate on what Tier-1 and Tier-2 manufacturers are that are included within your analysis?

I think, David, I’d suggest, you maybe can go through with Christina, if you wanted to take a walk through, but I think the way you should think about is the way I think about it is, as if new capacity is coming online, the new capacity is going to have the capability to build large rim diameter tires. The question is then, what are those assets being used for and a lot of time those assets are being used for less-than -7-inch or for other reasons to keep the factories full. So, this question is, one that I’d say, you can go through by manufacturer, but you have to assume the capabilities there, the question then is, how does that capability turn up in the marketplace. I think that’s another nuance to the chart in my mind.

Understood. Totally fair. We’ve done our analysis to a more compare and contrast research. Thank you for the time.

Great, thanks, David.

Thanks, David.

And we can go next to Ashik Kurian with Jefferies. Please go ahead. Your line is open.

Good morning, Ashik.

Good morning. Thanks for taking my question. Just one on the balance sheet enhancement or capital allocation. So, I am guessing, you’ve given any plans to delever from where you are. Just I want to know in what areas is this targeted. Is this maybe more aiming to increase your presence on the distribution side, I mean, I think part of the troubles that you had in 2017 probably had a lot to do with the fact that you are maybe at odds with part of the distribution to, is there any increased effort from your side to maybe increase your presence on the distribution side and is that where this $400 million to $600 million could be targeted at?

Okay, so maybe I’ll start, Rich and then, you can jump in distribution if you’d like. So, the balance sheet enhancements on the capital allocation plan on Slide 22, is a combination, it’s not about necessarily investments like distribution, but it is primarily related to debt payment as well as pensions, okay. And we’ve got a 0.4 to 0.6 there. One of the appendix slides would walk you through the pension over this time period is, maybe $100 million or so each year, but – I am sorry, for the three years, okay, about $100 million for the three years. And therefore, it leaves money for debt repayment and really the way we look at debt repayment because it still is very important to us to get to where we need to, to run the business. In terms of our balance sheet, we took steps to derisk the pension in the past. Feel good about where we stand and we – as you see in the 2020 plan, the underlying earnings leverage in the business is still there and it’s significant and we are very confident in those earnings, and we think that paired with the debt repayment and pension funding that we’ve got in this bucket, again will drive the improvement to our leverage over the next few years. That’s how we think about that.

Yes, and Ashik, relative to distribution, I would tell you, we’ve been on a journey to form an aligned distribution network for a number of years, even going to back when I was in our North American business. We sort of rationalized distribution to make sure those parties out there are aligned with us and we’ll continue to work on that as we go forward. But our distribution network have served us very well. We would tell you particularly in the U.S., it’s the best distribution network in the industry and we are pleased with it. We did work through as we’ve referenced and as you know, a dislocation of that peak raw material and how we reacted to that versus how the industry reacted, that’s something that will work our way through. But, distribution is a key element of our strategy. It’s been what’s allowed us to drive the earnings that we’ve had and we’ve done that by focusing on making sure it as efficient as we can, particularly around servicing our interactive platform and our ecommerce sales and we’ll continue to make sure that that happens. So, it’s a journey, but, I wouldn’t say there is any big announcement there at this point.

And just one more question. You talked about the price adjustments you made at the end of the year and I presume, your price guidance for 2018 is a lot more conservative than, maybe what it is for, some of the peers. Just wondering, from your point of view, is there any reason now, based on where your pricing fits versus peers, as to why you should grow less than the market in – especially in the U.S.? Any reason why your market share could decline further in 2018?

No, Ashik, I wouldn’t think so and I would say, going back, and I guess, roof is in the pudding for last year, my fundamental belief and our belief is it’s our job to capture the value of everything we’ve put into our brand in the marketplace through price and mix to offset raw materials. So, that premise has not left us. To say the obvious, we had a headwind and we saw that dislocation last year. But I still firmly believe that we will offset price and mix – we will offset raw materials with price and mix over time. So there is no less than when it be clear, no less sort of commitment on our part to do that going forward. And from a share perspective, I think, we have – we see more stability out there for us right now. You saw that in the fourth quarter and in our view, we see that we are very competitive and our plan particularly as we go out to 2020 is to grow share in the larger rim diameter tires as we move ahead. So, I would say – I would say, Ashik, that there is no reason that that ultimately should happen. We are focused on winning in those parts of the market where we think we can drive value for our customers and make the returns for our shareholders.

Just, last on the, I mean, how – have you done any analysis on finding out what you need to do on the pricing side to regain the large share that you had in 2017? I mean, your guidance is probably based on more in line with the market growth, but there must be an aspiration to regain some of the lost market share and what is that you think you need to do, both in terms of pricing and other actions to maybe get to that point?

So, Ashik, I would say, we think about the lost share is big volume loss. Remember, it’s primarily in less-than-17-inch and it’s primarily below those even 16-inch tires. So, in terms of the value of that, particularly given the price mix versus raw environment last year, I think the profit pool for that part of the market has diminished. So, as I look at that and as we think about our 2020 plan, I think we remain sort of steadfast and focusing on the part of the market where we can drive value which is in that 17-inch and above. I’ve been through the notion of going after low-end unprofitable, or marginally profitable or variable cost profitable volume on the low-end and look, it feels good at the moment, the factory is a little bit more full. But it doesn’t generates the returns on the investments that we are making. So, we will absolutely make the right trade-offs from managing our factories and managing our volume, but ultimately our plan is going to be focused on growing in those areas that have the growth and have the profit pools in them and that’s what you see in our 2020 plan. It’s a mix up plan. We are still on selling 20 million more of 17-inch-and-above. That gives us a share gain in that part to the market and as I said, that’s where the profit pool is. That’s where the customers value what we do. That’s where Goodyear has competitive advantage and that’s where we can create shareholder value and I think our ability to grow in that part of the market is demonstrated again in Q4 where you saw both in Europe and North America. I’ll take a little bit of liberty, but we grew almost twice the market in 17-inch-and-above. So, that low-end of the market is something that we will manage, but it’s not where the game is going to be played.

Thank you.

Thanks, Ashik. Appreciated

Thank you.

And we’ll take today’s final question from Emmanuel Rosner with Guggenheim Securities. Please go ahead.

Good morning, Immanuel

Good morning, everybody.

Good morning.

Good morning. So just three quick questions for me. The first one is, as I am looking into 2018, volume guidance about 3%, I am little bit surprised about the indication of flat in the first quarter, in light of the momentum you seem to have in the fourth quarter of 2017 and exiting the year. So, can you just go over again what sort of like drive this volume outlook in Q1? And how it sort of accelerates from there to get to 3% for the full year?

No, I think, Immanuel, good question and thanks for asking. I think if you look at it, if I just go through Q1, but if you look at our volume, you’ll see that, we are not expecting a lot of volume in Q1, particularly because of continued weak OE. That’s a little bit continuation coming out of Q4 and out of 2017 on a production basis and that will ramp up as we go throughout the year. And I think you’ll find that’s fairly consistent as you look at production schedules, particularly around light trucks and other new fitments coming out. If you were to adjust for that, we’d see positive volume around our consumer replacement business as we go. So, I think that’s how we think about volume in Q1. And I’ll just very quickly, Laura and I touched on a couple of these, again, our price and the price mix if you will in Q1, essentially our pricing is back to Q1 2017 levels. And remember, we have our highest raw material quarter in Q1 as well. So our pricing sort of back, but our raw material is still high in Q1, that will level off over the balance of the year, where it becomes neutral for the full part of the year. And then mix, as Laura mentioned in Q1is a tough comp, because we had a stronger winter not in Q4 of 2016, but really in Q1 of 2017. So we saw really good mix in EMEA in Q1 of 2017. Think about that sort of repeating very good mix, just not getting better on a year-over-year basis. And then, as you look out to the full year, we do see our volume going up on that 3%, again, OE getting better, as well as our volumes in 17-inch-and above, we’ll get the overhead recovery benefit of that throughout the balance of the year. Raw material headwind will dissipate. It will go down. Everything being equal at this point over the back of the year, and we’ll sort of reverse the headwind as we look to the balance of the three quarters. And then on price mix, I think Laura talked to, driven by our 17-inch-and-above, but also we haven’t recovered that price mix versus that raw material on a full year basis. So, that’s how we kind of see Q1 rolling into the full year.

Yes, and you know, Immanuel, just as you look back to 2017, and see the volume impact, right, it would lead you to say that second quarter and third quarter of 2018 in terms of percentage increases year-over-year are the strongest quarters that equal us out to that about 3% a year.

Got it. Yes, and that’s a good call. Thank you. And then, just trying to get a better grasp on the mix impact in 2018, I know, you’ve spoken about it a lot during this call, it seems like that’s basically the main driver of the positive net price mix versus raw in 2018. I know in your fourth quarter walk for the SOI, you show a pretty decent positive contribution from price mix. But at the same time, when I sort of like calculate the average selling price for your Americas tires, it seems to have been sort of down maybe $5 or so on a year-over-year basis. So, can you maybe just sort of talk about how to reconcile that? So I guess, from a modeling point of view, positive mix should that translate into higher average selling price?

Yes, I am – Immanuel, and maybe this is something we can do offline, but our revenue per tire was up, total company 5% and North America was up a similar level in the fourth quarter on a year-over-year basis. So, maybe that’s something that we can reconcile. And I will tell you, we don’t break out price mix. I’ll just reiterate that our mix continues to be strong and will continue to be healthy as we go forward and as long as I’ve been doing this, our plan has been around mixing up and we’ve done a very good job and then I think we shared with you a chart, a number of – sort of detailing our mix impact, since, I think it was 2012. Laura, you can correct me if I am wrong. So mix is something that we’ve done. It’s been sort of a predicate of what we are doing and that will be consistent as we move forward. So I am not going to break out price and mix particularly as we go through this environment, but clearly mix is what our focus is.

Got it. And then, very finally, on your 2020 updated targets, if I am not mistaking, it looks like compared to, I guess, the initial expectation, so pulling back, maybe on some of the gross investments, first of all, is that the case and second of all, does that have any impact on sort of your expected growth over the next few years and even beyond 2020?

Immanuel, Laura can jump in, but I will tell you, none of the investments – we haven’t taken back any of the investments around our mix up strategy or 17-inch-and-above. So rest assured that’s in there. What we have done, as I said is the lower-end profit pool is diminished, as you would expect and as we have a track record of doing, we’ve gone back and revisited the investments that we were going to make and we’ve taken decisions that we think are appropriate in terms of delivering the results and delivering the returns for shareholders. But it’s not cut into what we need to do to deliver the 2020 plan. And again, that’s something that we’ve always done. We like to make sure we are judicious allocators of capital. I know, there is always lots of questions on what’s maintenance, what’s not. But I’ll also tell you, we pay very close attention to it and by the fact that we reduced that I think is another example of that.

Great. Thanks for the all the color.

Thank you, Immanuel,

Thank you.

Okay, I think that’s the last call. So, again, everyone, I want to thank you for your attention today. There has been a lot of information that we’ve put out in this deck relative to 2018 and certainly to the 2020 plan. So, please, I know you will please feel to reach back out to Christina and all of us and we’ll certainly keep the conversation going and answer your questions. So, again, we appreciate your support. Thank you for listening today.

And this will conclude today's program. Thank you for your participation. You may now disconnect and have a great day.