2017 deutsche bank global auto industry conference · 3 company overview goodyear is a tire...
TRANSCRIPT
2017 Deutsche Bank Global
Auto Industry Conference
January 11, 2017
2
Certain information contained in this presentation constitutes forward-looking statements for purposes of the
safe harbor provisions of The Private Securities Litigation Reform Act of 1995. There are a variety of factors,
many of which are beyond our control, that affect our operations, performance, business strategy and results
and could cause our actual results and experience to differ materially from the assumptions, expectations and
objectives expressed in any forward-looking statements. These factors include, but are not limited to: our
ability to implement successfully our strategic initiatives; actions and initiatives taken by both current and
potential competitors; foreign currency translation and transaction risks; a labor strike, work stoppage or other
similar event; deteriorating economic conditions or an inability to access capital markets; work stoppages,
financial difficulties or supply disruptions at our suppliers or customers; the adequacy of our capital
expenditures; increases in the prices paid for raw materials and energy; our failure to comply with a material
covenant in our debt obligations; potential adverse consequences of litigation involving the company; as well
as the effects of more general factors such as changes in general market, economic or political conditions or
in legislation, regulation or public policy. Additional factors are discussed in our filings with the Securities and
Exchange Commission, including our annual report on Form 10-K, quarterly reports on Form 10-Q and current
reports on Form 8-K. In addition, any forward-looking statements represent our estimates only as of today and
should not be relied upon as representing our estimates as of any subsequent date. While we may elect to
update forward-looking statements at some point in the future, we specifically disclaim any obligation to do so,
even if our estimates change.
Forward-Looking Statements
3
Company Overview
Goodyear is a tire industry leader with powerful brands, a broad product offering and global distribution
Note: 2015 revenue and unit volume excludes revenue of $531 million and 1.4 million units related to our Venezuelan subsidiary which was deconsolidated on December 31, 2015; OE = Original Equipment, OTR = Off the Road
Goodyear tires are sold
in two distinct tire markets...
(% of 2015 Units of 164.8 million)
...and serve customers
around the world
(% of 2015 Revenue of ~$15.9 billion)
…available in a diverse
selection of products...
(% of 2015 Revenue of ~$15.9 billion)
OE ~20% of 2015 Revenue
Consumer
20%
Retail
8%
Other
9%
Chemical
3%
Commercial
Includes:
OTR, Farm,
Race, &
Aviation
60%North
America
49%
Europe, Middle
East & Africa
32%
Latin
America
7%
Asia Pacific
12%
Replacement Market69%
OE Market
31%
4
Our Journey
Great progress delivering results and building capabilities(a) For information on our use of non-GAAP financial measures, including forward-looking non-GAAP financial measures, see the Appendix at page 21. See Segment Operating Income and
Margin reconciliation in Appendix on page 22. 2010 through 2012 have not been restated for the Americas consolidation.(b) Core Segment Operating Income is Total Segment Operating Income excluding the operating income from our Venezuelan subsidiary which was deconsolidated on December 31, 2015.
Our Progress
Reduced structural cost
• Pension & footprint
Reduced operating cost
• Net cost savings
Profitable growth
• Not chasing volume for volume’s sake; but right tires, right mix
$1.9
Core SOI
Continued SOI
Growth
(b)
5
Our Destination
Transformative plan with transformative targets(a) For information on our use of non-GAAP financial measures, including forward-looking non-GAAP financial measures, see the Appendix at page 21. See Segment Operating Income and
Margin reconciliation in Appendix on page 22. See Free Cash Flow reconciliation in Appendix on page 24. 2010 through 2012 have not been restated for the Americas consolidation.(b) Core Segment Operating Income is Total Segment Operating Income excluding the operating income from our Venezuelan subsidiary which was deconsolidated on December 31, 2015.
Transformative Targets
SOI of $3 Billion (2020)
Cumulative Free Cash Flow (2017-2020) of up to ~$5 Billion available for Shareholder Returns and Debt Repayment
$1.9
Core SOI
(b)
Continued SOI
Growth
Industry Growing and Mixing Up
>17" segment driving $9 Billion increase in profit pool
Strongly growing
>17” market segment….
…which is disproportionally
profitable
…has dramatic positive
impact on the profit pool
Source: LMC as of 9/15/16 Source: Internal Estimate as of 9/15/16 Source: Internal Estimate 9/15/16
6
7
Industry Growing and Mixing Up
On the right vehicles and supplying more of the right tires
OE Pull-thru
~20M tires
>17” Capability Additions
U.S.: Ford F-150
Goodyear Wrangler
17”, 18” and 20”
Brazil: Hyundai Creta (ix25)
Goodyear EfficientGrip SUV
17”
Germany: Mercedes E-Class
Goodyear Eagle Sport
18”
China: Ford Kuga
Goodyear Assurance
18”
Goodyear Response
8
Margins: Our Progress
Significant and sustainable improvement in profitability(a) For information on our use of non-GAAP financial measures, including forward-looking non-GAAP financial measures, see the Appendix at page 21. See Segment Operating Income and Margin reconciliation in Appendix on page 22.(b) Includes raw material cost savings.
9
Raw materials are ~40% of tire COGS
~65% of raw materials are influenced by oil
prices
- P&L impact lags spot rates by 1-2 quarters depending
on commodity
~60% of raw materials are purchased in USD
Customer agreements indexed to raw
materials
- OE customers
- Certain large Commercial fleets
- OTR customers
Raw Materials
Recent increases in commodity prices will be an ~20% headwind to 2017 raw material costs
Global Raw Material SpendFY 2016 Estimate
Natural Rubber, 19%
Wire / Other, 13%
Fabrics, 11%*
Pigments / Oils / Chemicals, 19%*
Carbon Black, 10%*
Synthetic Rubber, 28%*
*Petrochemical based
10
Margins: Our Confidence
History has shown that we are able to protect absolute margindollars during periods of rising & falling raw material costs
(a) Raw Materials are changes versus prior year and excludes raw material cost savings; all data excludes Venezuela.
Note: This is price only;
excludes thebenefits of mix
Note: This is price only;
excludes thebenefits of mix
11
Margins: Our Confidence
Favorable demand vs supply in >17” segment over next 5+ years supports strong margins
Today, the market is tight on supply of >17” consumer tires…
…and we see this tightness continuing into foreseeable future
(a)
(a) Demand based on LMC forecast and Supply based on Goodyear analysis of public announcements as of 9/15/16.
12
Margins: Our Confidence
Margin expansion comes from combination of favorableindustry (>17” growth) and cost reduction opportunities
(a) Source is LMC as of 9/15/16 and as previously shown on page 6.(b) Savings less inflation.
>17” industry margins/tire are ~$16/tire higher($25 vs $9) than <17”
Additional net cost savings of $500 million during 2017-2020
$150
13
Margins: More Room to Grow
Expecting ~1% improvement per year, although margins not the best measure of profitability due to raw material volatility
(a) For information on our use of non-GAAP financial measures, including forward-looking non-GAAP financial measures, see the Appendix at page 21. See Segment Operating Income and Margin reconciliation in Appendix on page 22.
~12%
~5%
14
Return on Invested Capital
Value creating and increasing economic profit
(a) For information on our use of non-GAAP financial measures, including forward-looking non-GAAP financial measures, see the Appendix at page 21. See Return on Invested Capital reconciliation in Appendix on page 23.
(a)
11.7%
2015 2016 2017 2018 2019 2020
Return on Invested Capital
~17.0%
Increasing at
~ +1% per year
15
Capital Allocation PlanSources / Use of Cash – Cumulative 2017-2020
Creating shareholder value through capital allocation(a) Not yet authorized by the Board of Directors, dependent on Company performance including achievement of financial targets. (b) For information on our use of non-GAAP financial measures, including forward-looking non-GAAP financial measures, see the Appendix at page 21. See Free Cash Flow reconciliation in Appendix on page 24.
16
Market growth in > 17” significantly
outperforming the total industry driving
volume and mix performance
Strength in Asia led by China
Strong net cost savings with focus on
manufacturing costs and SAG efficiencies
Restructuring savings from closure of
Wolverhampton and transfer of consumer
production from Wittlich
2017 Outlook: Considerations
Expect 2017 SOI growth in mid-single digit range
Other Factors
Continuation of unabsorbed overhead
costs related to US Commercial tire
business
Increase in raw material costs and timing
lag of contractual price increases
impacting first half
U.S. consumer supply constrained
EMEA < 17” market; potential for
continued pressure in summer segment
Stronger USD
Positive drivers
Appendix
18
Value Driven StandardizationDrive standardization across the end-to-end value
stream to provide quantifiable net benefits
Network OptimizationEnsure capacity to support growth, optimized footprint,
competitive cost structure, and economic cycle resiliency
Strategic SourcingDeliver strategy by category, security of product and
service supply, cost leadership, leveraged supply base,
and enhanced sourcing process
Competitive ManufacturingFoster safety as a value, deliver a high quality and
reliable manufacturing base, lower manufacturing costs,
deliver on customer demand, and produce more of the
right tires out of the existing asset base
Sales & Operations PlanningBuild end-to-end capabilities and leverage supply chain
in Goodyear’s value proposition with customers
Operational Excellence
Ca
pa
bilit
ies
Programs
Design Make Deliver ExperienceProcurePlan
One Goodyear Way
Lo
ss A
naly
tics
Org
an
izati
on
al
Develo
pm
en
t
Bala
nced
Sco
rec
ard
Info
rmati
on
Flo
w
Value Driven Standardization
Network Optimization
Competitive Manufacturing
Strategic Sourcing
Sales & Operations Planning
Net Cost SavingsOperational Excellence Programs
Relentlessly improving our efficiency and quality while delivering the right tire, to the right place, at the right time, at the right cost
19
Focused investments to take advantage of the >17” market opportunities
Major Growth Capital Projects 2015-2020
Americas
Lawton & Fayetteville Modernization
Capex: 2017-2018 ~$125M
Benefit: Increase capacity to produce2M consumer OE tires/year > 17”
San Luis Potosi, Mexico New Plant
Capex: 2017-2018 ~$200M
Start Up Costs (2017-2019): $90-$100M
Benefit: Capacity to produce 6M consumer tires/year > 17”
EMEA
South Africa Consumer Capacity
Capex: 2017 ~$20M
Benefit: Increase capacity to produce 1M consumer tires/year > 17”
HVA Capability Growth Projects
Capex: completed in 2016
Benefit: Increase capability to produce 3M consumer tires/year >17”
Asia Pacific
Pulandian (China) Plant Expansion
Capex: 2017-2019 ~$210M
Benefit: Increase capacity to produce 3M consumer tires/year > 17”
India Plant Expansion
Capex: 2017-2019 ~$115M
Benefit: Increase capacity & capability to produce 1M consumer HVA tires/year
20
Full Year 2015Tire Unit & Sales Summary
Consumer60%
Commercial20%
Other9%
Retail8%
Chemical3%
2015 Sales = $16,443
2015 2014%
Change
Consumer
Units 152.4 147.4 3.4%
Sales $9,907 $10,510 (5.7%)
Commercial
Units 12.4 12.6 (2.1%)
Sales $3,342 $3,849 (13.2%)
Unit/Sales Mix
Terms: US$ billions
21
This presentation contains historical and forward-looking non-GAAP financial measures, including Total Segment Operating Income and Margin, Core Segment Operating Income and Margin, Free Cash Flow and
Return on Invested Capital, which are important financial measures for the company but are not financial measures defined by U.S. GAAP, and should not be construed as alternatives to corresponding financial
measures presented in accordance with U.S. GAAP.
Total Segment Operating Income is the sum of the individual strategic business units’ (SBUs’) Segment Operating Income as determined in accordance with U.S. GAAP. Total Segment Operating Margin is Total
Segment Operating Income divided by Net Sales as determined in accordance with U.S. GAAP. Management believes that Total Segment Operating Income and Margin are useful because they represent the
aggregate value of income created by the company’s SBUs and exclude items not directly related to the SBUs for performance evaluation purposes.
Core Segment Operating Income is Total Segment Operating Income excluding the operating income from our Venezuelan subsidiary, which we deconsolidated on December 31, 2015. Core Segment Operating
Margin is Core Segment Operating Income divided by Net Sales excluding the net sales of our Venezuelan subsidiary. Management believes that Core Segment Operating Income and Margin are useful because
they represent Total Segment Operating Income and Margin from the company’s ongoing reported operations.
The most directly comparable U.S. GAAP financial measures to Total and Core Segment Operating Income and Margin are Goodyear Net Income and Return on Sales (which is calculated by dividing Goodyear
Net Income by Net Sales).
Free Cash Flow is the company’s Cash Flows from Operating Activities as determined in accordance with U.S. GAAP, less capital expenditures. Management believes that Free Cash Flow is useful because it
represents the cash generating capability of the company’s ongoing operations, after taking into consideration capital expenditures necessary to maintain its business and pursue growth opportunities. The
most directly comparable U.S. GAAP financial measure is Cash Flows from Operating Activities.
Return on Invested Capital is the company’s Return on Capital divided by Invested Capital, where Return on Capital is the sum of the trailing four quarters of Net Income, as determined in accordance with U.S.
GAAP (the most directly comparable U.S. GAAP financial measure to Return on Capital), as adjusted for certain significant items and after-tax interest expense, and Invested Capital is the average of the trailing
five quarters of total debt and combined shareholders’ equity, each as determined in accordance with U.S. GAAP. Management believes that Return on Invested Capital is widely used by investors as a means
of evaluating the company’s profitability and efficiency in using its capital.
It should be noted that other companies may calculate similarly-titled non-GAAP financial measures differently and, as a result, the measures presented herein may not be comparable to such similarly-titled
measures reported by other companies.
We are unable to present a quantitative reconciliation of our forward-looking non-GAAP financial measures, other than Free Cash Flow, to the most directly comparable U.S. GAAP financial measures because
management cannot reliably predict all of the necessary components of those U.S. GAAP financial measures without unreasonable effort. Those forward-looking non-GAAP financial measures, or components
thereof, would be reconciled to Goodyear Net Income, which includes several significant items that are not included in the comparable non-GAAP financial measures, such as rationalization charges, other
(income) expense, pension curtailments and settlements, and income taxes. The decisions and events that typically lead to the recognition of these and other similar non-GAAP adjustments, such as a decision
to exit part of our business, acquisitions and dispositions, foreign currency exchange gains and losses, financing fees, actions taken to manage our pension liabilities, and the recording or release of tax
valuation allowances, are inherently unpredictable as to if or when they may occur. The inability to provide a reconciliation is due to that unpredictability and the related difficulty in assessing the potential
financial impact of the non-GAAP adjustments. For the same reasons, we are unable to address the probable significance of the unavailable information, which could be material to our future financial results
Use of Historical and Forward-Looking
Non-GAAP Financial Measures
Reconciliation for Segment Operating Income / Margin (a)
Terms: US$ millions
22(a) Restated for the new guidance on the presentation of debt issuance and amortization costs. 2010 through 2012 have not been restated for the Americas consolidation.
2015 2014 2013 2012 2011 2010
Core Segment Operating Income 1,901$
Venezuela subsidiary operating income 119
Total Segment Operating Income 2,020$ 1,706$ 1,577$ 1,248$ 1,368$ 917$
Rationalizations (114) (95) (58) (175) (103) (240)
Interest expense (438) (444) (407) (385) (350) (335)
Other income (expense) 141 (286) (82) (111) (53) (167)
Asset write-offs and accelerated depreciation (8) (7) (23) (20) (50) (15)
Corporate incentive compensation plans (103) (97) (108) (69) (70) (71)
Pension curtailments/settlements (137) (33) - 1 (15) -
Intercompany profit elimination (3) 9 7 (1) (5) (14)
Loss on deconsolidation of Venezuelan subsidiary (646) - - - - -
Retained expenses of divested operations (14) (16) (24) (14) (29) (20)
Other (90) (50) (69) (34) (75) (47)
Income before Income Taxes 608$ 687$ 813$ 440$ 618$ 8$
United States and Foreign Tax Expense (Benefit) 232 (1,834) 138 203 201 172
Less: Minority Shareholders Net Income 69 69 46 25 74 52
Goodyear Net Income (Loss) 307$ 2,452$ 629$ 212$ 343$ (216)$
Sales (as reported) $16,443 $18,138 $19,540 $20,992 $22,767 $18,832
Sales (excluding Venezuela) $15,912
Return on Sales (as reported) 1.9% 13.5% 3.2% 1.0% 1.5% (1.1)%
Total Segment Operating Margin 12.3% 9.4% 8.1% 5.9% 6.0% 4.9%
Core Segment Operating Margin 11.9%
Twelve Months Ended
December 31,
Reconciliation for Return on Invested Capital (a)
Terms: US$ millions
23
Q4 14 Q1 15 Q2 15 Q3 15 Q4 15
Goodyear Net Income (Loss) (as reported) $224 $192 $271 ($380)
Loss on Deconsolidation of Venezuelan Subsidiary - - - 577
Rationalizations, Asset Write-Offs & Accelerated Depreciation 14 32 16 30
Pension Settlement - - - 86
Debt Repayments - - - 35
Charges for Labor Claims Related to a Closed Facility in Greece 4 - - -
Insurance Recovery - Discontinued Products - - (16) -
Transaction Costs and Net Gains (Losses) on Asset Sales - 3 13 (39)
Discrete Tax Items 5 2 (13) (20)
SRI Share Sale - - - (32)
Gain on Recognition of Deferred Royalty Income (99) - - -
Goodyear Net Income (as adjusted) $148 $229 $271 $257
Interest Expense 107 110 105 116
Tax benefit from Interest Expense (b)
(30) (35) (31) (7)
Total Return on Capital $225 $304 $345 $366
Long Term Debt and Capital Leases 6,172 5,924 5,704 5,550 5,074
Notes Payable and Overdrafts 30 23 36 41 49
Long Term Debt and Capital Leases due within one year 148 238 321 368 585
Total Debt $6,350 $6,185 $6,061 $5,959 $5,708
Minority Shareholders' Equity Redeemable 582 539 569 590 -
Total Shareholders' Equity 3,845 4,019 4,196 4,362 4,142
Combined Shareholders' Equity $4,427 $4,558 $4,765 $4,952 $4,142
Total Invested Capital $10,777 $10,743 $10,826 $10,911 $9,850
Return on Capital (sum of trailing 4 Qtrs) $1,240
Invested Capital (average of trailing 5 Qtrs) $10,621
ROIC % 11.7%
(a) Restated for the new guidance on the presentation of debt issuance and amortization costs. (b) Calculated using operating tax rate.
Reconciliation for Free Cash Flow Target
Terms: US$ Billions
24
2017-2020
Cash Flows from Operating Activities $8.9 - $9.5
Capital Expenditures ($4.6)
Free Cash Flow $4.3 - $4.9