The Goodyear Tire & Rubber Company
Q1 2014 Earnings Call Transcript

Published: 29 Apr 2014

[Operator:]

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 First Quarter Earnings Conference 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). I would now like to hand the program over to Tom Kaczynski, Goodyear's Vice President, Treasurer and Investor Relations.

[Tom Kaczynski:]

Thank you, Tony. And thank you all for joining us for Goodyear's first quarter 2014 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. I could now draw your attention to the Safe Harbor statement on Slide 2. I'd like to remind participants on today's call; and 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 on 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 now turn the call over to Rich.

[Rich Kramer:]

Great. Thanks, Tom, and good morning, everyone. Today, I will provide an overview of our record first quarter performance and offer my perspective on several factors affecting our business in the tire industry overall. Also I’ll talk about a few industry trends that continued in the quarter and how these trends aligned with our strengths. Then I’ll turn the call over to Laura for more detail on our first quarter results and to provide our outlook for the remainder of the year. Now in the quarter, we delivered record segment operating income of $373 million, an increase of 24% over last year’s strong first quarter result. This is a great result for us and a great start to the year. While our global presence exposes us to significant foreign currency fluctuation along with other economic volatility, the strength of our North American and European businesses more than offsets several headwinds in our emerging markets including the impact of Venezuela on our Latin American business. Our North American business was a major contributor to our success delivering a record quarter with $156 million in segment operating income, a 23% increase over last year. Our Europe and Middle East Africa business generated segment operating income of $110 million, more than three times last year’s first quarter as our profit improvement plan in the region continued to gain traction. Now, as we’ve discussed in our September investor meeting, our target of 10% to 15% annual increase in segment operating income is based on a balance plan of growth and cost. With that in mind I’ll first address our volume in the quarter and then discuss our progress on costs as well. Now as I comment on our volumes, I’d like to draw your attention to slide five. Our volume in the quarter increased by 1%, but this is not reflect our underlined volume run rate in the quarter as it was largely skewed by the impact of unusually cold January weather in North America. Additionally, first quarter volumes were negatively impacted by the disruptions in Venezuela including our labor contract negotiations which lingered for much of the quarter before being settled in early April. As the slide shows the run rate of our volumes in February and March are in line with our expectations and looking ahead, we feel good about our volumes in April. I’ll elaborate on both first on North America and then on Venezuela. In North America as you know by now the extreme cold weather had a severe impact on sales of many companies across numerous industries. This affected some of our biggest OE replacement customers as well and reduced our volumes by 9% in the month of January. Fewer new vehicles were produced then forecasted and many of our replacement customers were forced to close their stores. Distributors also were forced to close their warehouses and consumers simply stayed home because of bad weather. This situation improved throughout the quarter with March volumes increasing 5%. That directional momentum carried in to April getting back to the strength we saw in the later part of 2013. I’d also note that volumes were affected more than the industry given our significant business with OEMs and certain large retail customers who felt the effects of severe first quarter weather conditions on their business. Our streamline supply chain which is largely triggered by their sellout makes it difficult to recover the weather related volume reductions within the quarter. So we access volumes in North America, we believe the first quarter was simply a pause in what we see as improving tire demand in 2014. Not only did we see strong shipments in March, but we also saw Goodyear brand share growth in the quarter. Now regarding Venezuela the combination of volatile economic conditions and disruptions due to the labor negotiations had a negative impact of about 1 percentage point on our total company first quarter volumes. While the situation in Venezuela will remain volatile, we expect our volumes to increase in the second quarter given the conclusion of our labor negotiations. We are already producing tires to near pre negotiation levels and the demand for our tires is extremely robust substantially exceeding our supply at this time. More we’ll have details on our Venezuela outlook later on the call, the second quarter volumes will improve from the depressed first quarter levels. So overall we feel good about our momentum going in to the second quarter which is in line with our expectations we know the global economies don’t grow in a straight line and that new headwinds and opportunities may present themselves. That we remain firmly committed to our full year volume expectations of 2 to 3% growth. We’ll grow our volume with disciplined execution of our strategy winning in targeted market segments where we can add value for consumers, for our customers and for Goodyear as well. Now we’ll move on to costs which is the other pillar in our plan. We are very pleased about our progress in cost savings. In the quarter those savings were more than 100 million not including the benefits of lower pension expense from fully funding our US pension plans nor does it include the benefit of the closure of our Amiens France factory. Those savings are on top of the $100 million. I’m pleased with the fundamental changes we are driving in our operational excellence initiatives. From how we work with our suppliers to how we develop and engage our associates and how we maintain our equipment to significantly improve our assets and liability. The benefits of our global operational excellence initiatives will be seen in our improved reliability in operating efficiencies, our ability to produce more the right tires at the right time to most importantly improve our customer service. It’s much too early to declare victory, but we had good momentum and continued to gain traction. So in total having delivered record first quarter segment operating income, we continue to be confident in our strategy and our commitment to long-term value creation focused on our balanced plan of growth and cost. Looking back at the first three months of the year, we saw several overall trends they are welled into our business and contributed to our performance, including strong demand for high value added tires, growth opportunities in emerging markets and advanced supply chain to serve customers better and effective marketing that builds brand value. Each of these trends continues to be very robust and matches our strides. Demand for high value added tires continue to outpace the overall industry especially in our targeted market segments where we continue to set the industry pace with new innovative products. In North America, the new Wrangler All-terrain Adventure for light trucks and SUVs has been selling extremely well in their replacement market and we anticipate continued mix improvement when we assuring all season beings to shipping to customers later this quarter. The new assurance will join the already strong strung family of insurance ComforTred, TripleTred and Fuel Max products. Our customers tell us that they expect the assurance all season will become a high volume broad market tire, enhancing the value of our mid-tier offerings. In our EMEA business, we saw 6% consumer replacement growth. The increased volume reflected improved sell out and continuing recovery in the region as we are helping our customers grow their businesses by providing them more of our high value branded products. In Europe, Goodyear efficient grip performance, and Dunlop’s quarterly response for rank first and second in the German Automobile Club’s recent summer tire tests. The combination of impressive third party rankings and industry leading tire label grades across our portfolio has its very optimistic about the upcoming summer tire selling season. I can say confidently during my time at Goodyear, we have never had a stronger line up of Goodyear branded products around the world then we have today. Now another trend that remains strong is growth opportunities in emerging markets. Excluding the issues in Venezuela, our consumer replacement volumes increased 10% in the rest of Latin America during the quarter. Our investments to produce more high value added tires in our Americana plants in Brazil have resulted in a steady cadence of new product introductions across the region. Goodyear Assurance, Eagle Sport and Wrangler SUV tires were launched to consumers in Brazil during the first quarter and will be introduced to other country throughout 2014. These innovative products illustrate our commitment to winning in growth markets. Also we continue to improve our customer service as Goodyear was named the 2013 Supplier of the Year by Wal-Mart Mexico and Central America. Goodyear Mexico achieved it's recognition through its innovation strategies, customer excellence and service and production in customer support. This is a terrific honor for our team there. As the Latin America market continues its conversion to HVA tires, our investments, new products and distribution networks are helping build our brand strength, more and more will capturing the opportunities for growth that this region presents energizing our dealers and our associates are like. Our advantage of supply chain is helping us swim with customers in the share markets as well. During a recent visit to Europe, one of our major customers told me that Goodyear’s fill rates were at levels he had never experienced before and well above other suppliers. In fact, he asked his team to double check the date which of course proved to be accurate. This kind of real customer feedback is the proof for me that our initiatives are working. This is a specific on the ground example of the progress we’ve made in our EMEA business and confirmation that our focus on operational excellence is yielding results. We’re driving efficiency across the supply chain to reduce cost and working capital are improving customer service. We’re extending our value proposition beyond great innovative tires, we’ve made progress but have much more room for improvement and I can say that’s exactly what we’re intending to do. And finally, we’re helping grow the value of the Goodyear brand through increased marketing support, most visible in the United State. For example, this year marks the 60th anniversary of our supplier relationship with NASCAR. We often say that NASCAR drivers are our most demanding customers and superior performance on the track inspires confidence and trust in all of our products. Goodyear brand loyalty among NASCAR fans is as strong as ever. We’re also making great progress in driving consumer demand through digital platforms. Goodyear.com is now far and away the most visited North American tire manufacturing website. It’s driving an already high and increasing volume of purchase ready leads to Goodyear’s preferred network of dealers. Our marketing strategies to drive demand to our preferred dealers have been very effective in improving tire mix consistent with our focus on targeted market segments. I’m very excited about the progress we’ve made with innovative marketing technologies and again, I can tell you we’re only getting started here. Now in addition to that, we recently unveiled the next generation of our world famous corporate icon, the Goodyear Blimp. With nearly 90 years of equity built into this symbol of dependability, the new state-of-the-art airship will embody the innovation that has become synonymous with Goodyear. Starting this summer, you’ll see the first Blimp in our new fleet supporting our brand, our products and customers across North America. Our brand is our number one asset and you will us continue to leverage it more and more to drive growth around the world. Our first quarter results offer further evidence that we are solidly on the path toward being profitable through the economic cycle, one of the keys to our destination of creating sustainable economic value. We had many positives in the quarter that helped us offset the challenges and will service fuel to continue our momentum. The underlying industry trends remain strong and favor our competitive advantages. Clearly we’re pleased with our 24% year-over-year segment operating income growth. But as we’ve said repeatedly, we’re running our business for the long term and this is just one quarter in a multiyear plan. Our emphasis remains on executing our strategy and staying on track to achieve our 2014-2016 target of 10% to 15% annual segment operating income growth. We’re committed to our strategy road map and to our destination of creating sustainable economic value. Now before I conclude, I’d like to acknowledge an honor our company received last month when Goodyear was named the world’s most admired motor vehicle parts company by Fortune Magazine. This recognition is a testament to the hard work of all 69,000 Goodyear associates around the world and the progress we’ve made together in taking Goodyear to a new level of performance. It validates the success of our strategy roadmap and serves as a meaningful mile marker on our journey towards creating sustainable value. And with that, I’ll not turn the call over to Laura.

[Laura Thompson:]

Thank you, Rich and good morning everyone. First, I’ll start with the review of the first quarter and then I’ll provide an update on our outlook for 2014. We’ll then open the call for your questions. Let’s turn to Slide 11 and review a few key items on the income statement. As Rich stated, we are pleased with the start of the year. In the quarter, segment operating income increased 24% versus a year ago which is a great way to start the year. I’ll go into more detail later on each of the businesses, but strong performance from our more developed markets in North America and Europe offset weakness in emerging markets and Latin America and Asia. For the quarter, revenue was down 8% or $384 million and is primarily due to two items. First, lower non-tire related revenue of $202 million driven by a lower third party chemical sales in north America and second, the impact from unfavorable foreign currency exchange of $126 million driven primarily by the weakening of the Brazilian Real, Venezuelan Bolivar and Australian dollar. We generated growth margin of 21.3%, an improvement of 250 basis points versus the prior year. SAG increased by $22 million. This increase reflects higher incentive compensation cost, primarily driven by improved operating results and our higher stock price which has more than doubled since March 31 of 2013. We achieved $373 million in segment operating income and 8.3% in SOI margin. This marks the fourth consecutive quarter where SOI margin has exceeded 8%. Excluding the significant items listed on Slide 21, our first quarter tax rate as a percentage of foreign segment operating income was about 16%. Our earnings per share on a diluted basis for the quarter is net loss of $0.23. Our results were impacted by certain significant items including a change in the foreign currency rate at which we translate the financial statements of our Venezuelan operations. You saw this in our April 10th 8K filing. This change resulted in a foreign currency charge of $132 million or $0.47 per share. After allowing for those certain items our adjusted earnings per diluted share was $0.56. A summary of those significant items can be found in appendix of today’s presentation on slide 21, the step chart on slide 12 walks first quarter 2013 segment operating income the first quarter 2014 segment operating income. Higher sales volumes and higher fourth quarter production levels resulting in an improvement in unabsorbed overhead benefited our results by $50 million year-over-year. Strong costs savings for the quarter more than offset the negative impact of inflation for a net benefit of $36 million. Lower raw material costs more than offset reduced price mix for net benefit of $17 million. Our mix was negatively impacted in the quarter by a significant reduction in off-the-road tire sales, these tires are used primarily in the mining industry. Foreign currency translation had a negative impact of $16 million year-over-year. Overall our $71 million improvement in segment operating income demonstrates the ongoing success of our strategy, our ability to navigate to difficult political and economic conditions and our focus on controlling costs as a key element to our balanced plan for achieving 10% to 15% SOI growth per year. Now let’s turn to the balance sheet information on slide 13. Cash and cash equivalent at the end of the first quarter were $1.9 billion down from $3 billion at the end of the 2013 as we utilized almost $1.2 billion to fully fund the hourly U.S. pension plans in January. Our global unfunded pension obligations are now largely international pay-as-you go plan. Our net debt totaled $5.3 billion at the end of quarter an increase of $2 billion compared with the end of last year. The change is primarily due to three things, first the use of almost $1.2 billion in cash to fully fund the hourly US pension plans, second a seasonal billed and working capital and third the re-measurement due to the changes in Venezuela’s currency rate. As a final point, I also want to mention that we used approximately $23 million to repurchase 850,000 shares of Goodyear common stock during the first quarter. This repurchase is part of our shareholder return program announced last September. Free cash flow from operations is shown on slide 14. As expected during the first quarter of 2014, we used $513 million of cash, driven by working capital increase of $590 million. We typically see a seasonal working capital increase in the first quarter as the normal timing of winter tire collections in Europe drive fourth quarter receivable balances lower. Additionally, we build inventory in the first quarter to support our strong forecasted sales in North America in the second quarter. Moving now to the business units on slide 15, I’ll start with North America. Our North America business unit continues to deliver strong results. North America reported record first quarter segment operating income of $156 million over 8% of sales this is an increase of 23% year-over-year. Our volumes were down 1% in the quarter. As Rich described earlier we were impacted more in the industry given our significant relationships with OEMs and certain large customers who felt the effects of the severe first quarter weather conditions on their businesses. Strong consumer tire shipments in the month of the March contributed to the bigger branded share growth in the quarter. North America also released the raw material cost benefits of $61 million that is largely offset by lower price mix of $58 million. Price was impacted by reductions provided through raw material pass-through agreement with OE, fleet and OTR customers. Mix was negatively impacted by significantly less sales of off-the-road tires. Our manufacturing cost was $47 million lower than the first quarter last year and benefited from improved factory utilization, lower pension expense and lower profit sharing. North America’s segment operating income at 8% a sale result in a return on invested capital that generates significant economic value and makes growth in North America business and attractive investments. Europe, Middle-East and Africa delivered segment operating of $110 million in the first quarter, a significant improvement over last year. SOI margin increased to 6.6% from 1.9% in the prior year. The first quarter 2014 was the fourth consecutive quarter with year-over-year earnings growth. Volumes increased 7% year-over-year in the first quarter. Our replacement and OE volume increases were mainly driven by improved industry conditions, continued focus on targeting profitable volume growth and the progress that we have made on improving our customer service. EMEA’s performance in the first quarter also reflects continued success in the commercial business, where we had volume growth in our fleet business as well as in Eastern Europe. We also experienced positive price mix in our commercial business demonstrating our strong product and service proposition. Factory utilizations further improved in the first quarter and as previously announced, we closed one of our factories in Amiens, France. We continue to closely monitor the situation in Ukraine and Russia. Thus far the situation has not had a material impact on our overall EMEA business, as the scale of our Ukrainian operations in relatively small. In summary we continue to focus on our previously announced profit improvement plans to restore our Europe, middle-east and Africa business to historical levels of profitability. The significant improvement and the run rate of our profitability over the past twelve months is reflective of the economic recovery as well as the result of the actions we have taken thus far. EMEA is off to a good start in 2014, but of course we have more work to do. Turning to Latin America, operating income was $42 million for the quarter, $18 million less than the prior year. All of the year-over-year decline in earnings can be attributed to lower production and profitability in Venezuela as a result of labor disruption and the overall unfavorable foreign currency exchange for the business units. Positive price mix price mix and lower raw material cause offset the negative effects of inflation, lower volume and the ramp-up cost of our Brazil plant expansion. We saw 10% growth in our consumer replacement volumes in Latin America outside of Venezuela, driven by a strong response to our new product. This growth was more than offset by the temporary volume decline in Venezuela and the lower OE volumes in Brazil, where vehicle manufactures reduced productions significantly in the first quarter. As you may remember, we highlighted the slowdown on our year-end call and as expected it has materialized. In addition to the foreign currency change previously mentioned, we expected that the government price and profit margin controls and a reduced production during the first quarter to adversely impact Latin America’s segment operating income by $40 million to $60 million for 2014 with about $10 million of that impact having already occurred in the first quarter. We will continue to monitor the situation closely and adjust the changing circumstances as needed. Our Asia-Pacific business reported segment operating income of $65 million for the quarter, a $19 million decrease year-over-year. The decline in operating income is driven by unfavorable foreign currency exchange of $8 million and a significant decline in our off the road tire sales. Unit volumes of $5.2 million in Asia were about 2% higher than a year ago given strong growth in India and modest growth in China which more than offset the impact of weaker demand in Australia. Relative to China, we remain optimistic about the long term. But we anticipate more short term demand fluctuations as the Chinese economy continues to evolve. We have successfully navigated volatility in this market before and I am confident we will do so again in 2014. We realize growth in China will not be a straight line as the quarter demonstrated. The long term picture remains positive and we are committed to winning in China. In total, our four SPUs increased segment operating income by 24% year-over-year, a great way to start the year. Now looking at the full year, the key segment operating income drivers are listed on Slide 16. In line with our 2014 to 2016 targets, we continue to see sales volume growth of 2% to 3% for 2014, as the ongoing economic recovery in EMEA and growth in North America is expected to offset emerging market weakness particularly in Latin America. For 2014, we are assuming price mix and raw material cost changes will be slightly positive reflecting the first quarter benefit and continued lower raw material cost more than offsetting the negative mix impact of the lower OTR sales that are expected for the remainder of the year. Since we last talked on our year-end earnings call, we have seen demand and price for OTR tires decline as mine operators control their costs and work down inventories. We now see more moderate growth in OTR demand for 2014 based on the mining industry reacting to lower commodity prices. That said we expect increases in our tire production volumes will generate approximately $50 million to $75 million in benefits from lower unabsorbed overhead for the full year. While our overall production volumes are essentially consistent to what we expected at the time of our fourth quarter call, the weakness in the global mining industry is having an impact on the mix of production. Given that large OTR tires carry a much higher per unit unabsorbed overhead cost versus an average tire, we now see the remaining benefits of increased consumer and commercial production being attenuated by the impact of lower OTR units. We expect our cost savings initiative to fully offset the combined impact of general inflation as well as our further investments in advertising, marketing and R&D. While our level of advertising was essentially unchanged in the first quarter from prior year, we expect advertising and marketing investments will increase during the remainder of 2014 to support our growth plan. Based on current spot rates, we expect a negative foreign currency exchange impact of approximately $60 million for the year. This includes the headwinds due to the change in exchange rates for Venezuela, although it does not assume any further devaluation of the Bolivar. We expect that benefits from decreasing startup expenses at our new state-of-the-art plant in China to be $20 million to $25 million year-over-year. This benefit will be offset by the increased cost related to the modernization of our plant in Brazil which are also expected to be $20 million to $25 million in 2014. The closure of our Amiens facility in the first quarter will generate approximately $40 million of savings in 2014. And as a reminder, the annualized benefit of this closure and the related exit from the farm tire business in Europe will be approximately $75 million. We have included the pension expense savings on the key segments operating income driver slide to highlight that $80 million of the overall reduction in pension expense flows through SOI. Additional financial assumptions for 2014 are listed on Slide 17. For the year, we expect interest expense in the range of $430 million to $455 million and financing fees of approximately $60 million. Our income tax is expected to be approximately 25% of international SOI. As discussed on our last call, each quarter we assess current profitability and weather sufficient future taxable income will be generated to utilize existing deferred tax assets. The result of the analysis continues to lead us to believe that we maybe in a position to release all or a portion of the U.S. valuation allowance during the second half of 2014. If the valuation allowance is released in 2014, the expected increase in annual tax expense for 2015 and beyond will be approximately $150 million per year, although we do not anticipate any U.S. cash taxes for at least five years and significantly reduced rate for several years thereafter. Including the positive benefit on earnings, a prefunding and freezing the hourly U.S. pension plan, we expect global pension expense of approximately $175 million in 2014. We expect global pension cash contribution to be about $1.3 billion including the recent, almost $1.2 billion that was put into the hourly U.S. plan. For the year, we expect our working capital to be neither a significant source, nor a significant use of cash. And our capital expenditures and depreciation amortization outlook are unchanged from our last call. Our financial targets for 2014 to 2016 are listed on Slide 18. They remain unchanged and we remain committed to achieving these targets. Annual 10% to 15% segment operating income growth per year through 2016 delivered through a balance plan of unit volume growth and cost savings. Annual positive free cash flow from operations and adjusted debt-to-EBITDA ratio of 2.5 times by the end of 2016. Our first quarter performance confirms that our strategy is working and gives us further confidence in achieving our targets. As demand continues to improve, we are well positioned with quality products, highly technical manufacturing capability, our well established distribution network and a trusted and respected global brand to create incremental value for our consumers, our customers and our shareholders. Based on our strong 2013 cash flow and recent funding of our hourly U.S. pension plan, our board is in the process of reviewing the balanced capital allocation plan that we shared with you in September of 2013. We remain committed to a plan that will ensure we achieve our leveraged targets while continuing to invest in high return growth CapEx initiative and providing for shareholder return programs. As always, we will be balanced in our approach with a focus on growing long term shareholder value. We will present our updated capital allocation plan on May 29, as part of the Keybanc Automotive Conference in Boston. Now, we would be happy to take your questions.

[Operator:]

Thank you. (Operator Instructions) We’ll take our first question from Itay Michaeli with Citi. Please go ahead, you’re line is open.

[Rich Kramer:]

Good morning, Itay.

[Itay Michaeli:]

Good morning. There just couple of questions. One, may be you allude us to just now or few minutes ago, but on the financing fee of $60 million it seems like it’s a new item for the full year. Does that relate to this capital structure announcements that you’re planning for late May or is that something different?

[Laura Thompson:]

No, it does not relate to that in any way. It has always been an expense for us, it’s an addition to the interest expense we show you on the outlook pages, but it’s always above $15 million a quarter and we really just gave it to give more transparency, we’ve got some questions on it in the past.

[Itay Michaeli:]

Okay. It’s not like a new headwind, but just a little bit more detail on that – detail, okay.

[Tom Kaczynski:]

But, Itay, just to be clear, it’s Tom. Those are financing fees that are amortized the debt issuance fees and also factoring fees and they run 14 to 15 million a quarter so we’ve always have in other expense, but we wanted to provide just a little bit more transparency on that.

[Itay Michaeli:]

Great, thanks for that clarification, Tom. And then just hoping you can talk about the cadence for the rest of the year, both for SOI and also particularly for volume, given the short fall the headwinds in Venezuela because of labor disruptions, I think you mentioned maybe that was a point of volume and the catch up in weather, should we think about the second quarter volume maybe at the higher end of 2 to 3% or above, I hope you can help us kind of better model the cadence for volume and any thoughts cadence for SOI as well would be helpful?

[Rich Kramer:]

Yeah, Itay, I’ll start on volume and Laura can jump in on SOI as well. I would say the first quarter was as we said a pause we had a number anomalies and most significant where that the weather in particularly the January weather in North America which we try to pick for you in the slide included in the deck. That was a really an anomaly that really impacted the full quarter, but really wasn’t reflected indicative of the trend that we saw particularly in consumer replacement. So I think number one first quarter for North America really you have to look at the trend coming out of February and March, maybe I add even a little bit more color to that, we gave you sort of total reportable units on slide five in the deck, if I take that back to consumer replacement January was actually more severe it was down higher than the 9% about 11% and February, March were actually stronger than the total in consumer replacement, we’re up 3 in February and up 7 in March. So with the volume we had I think it makes our North America earnings really very impressive in terms of what the team put forward. But I think if you look at those run rates I think it get us back to the expected run rates 2% to 3%. In terms of Venezuela we will see second quarter units come back after we’ve got the team working back there in the factory I mean we literally have people stacked up at our stores to buy tires, so Q2 volume will improve in Venezuela. The Brazil OE volumes that Laura mentioned those will continue to be an issue for us probably for the balance of the year, you’re very familiar with what happening with the OEMs down there. And I might add even a little bit more color to China. In China what we’re seeing again we believe in a long-term for certain, but what were we really seeing there is a combination of a little bit weaker economy, and we see we’re going to tightening credits for reasons I think everyone on the call is familiar with and we see dealers holding back a bit because of decreasing natural rubber which flows to their inventory faster than other parts of the world. So as we look to the balance of the year we think that the China will also improve from a volume perspective. In terms of the 2% to 3% trend moving ahead I think that we really aren’t going to get any more specific in terms of the high end or low end of the range, there are so many things that we have to factor into it and I think we’re happy saying 2 to 3% is a best guidance we want to give on that.

[Laura Thompson:]

And as for the SOI cadence for the year, we are really pleased with the first quarter performance but as we look out right, you’ve heard us talk about headwinds really for us all we can say is that the SOI are, what we reaffirmed our target today is that for the year SOI will be up 10% to 15%.

[Itay Michaeli:]

Perfect, thank you both for all the clarification. Just last question on, good to see that the price mix versus raw was revised a slightly positive for the year, the spread in Q1 was $17 million, Laura is that good way to think about 17 a good way to kind of model what slightly positive would mean on a go forward basis for the full or there is puts and takes that maybe suggest Q1 might not be an indicative run rate for the full year?

[Laura Thompson:]

So, to answer to your question, Q1 would be indicative of how to look at the balance of the year and included in that outlook is sizeable negative impact from our OTR business on mix. But what we did in the first quarter is a good way to look at the balance of the year.

[Itay Michaeli:]

Terrific. Thanks so much for the detail, appreciated.

[Rich Kramer:]

Thank you.

[Laura Thompson:]

Thank you.

[Operator:]

Thank you. Our next question comes from Patrick Archambault with Goldman Sachs. Please go ahead.

[Laura Thompson:]

Hi, Pat.

[Patrick Archambault:]

Yeah. Thank you very much and good morning. I guess, the slide five was very helpful and where you go out there, you presented that to help us think about what sort of the undistorted run rate is, but I guess the question is this, in aggregate, right for north America you were down a little bit because January was so weak. Can you just help to understand like how that contrast to some of the quarterly data that comes out from things like the RMA and I guess Michelin also, I mean, I understand that those are not perfect metrics, some they may pull only certain members and have some timing differences, but you know maybe just a little color on that would be helpful.

[Rich Kramer:]

Pat I think it’s actually a very good question. I tried to allude to this in my remarks as well. So as we look at it, and I’ll focus on consumer replacements specifically, we would say the industry grew about 1% in the quarter and I think your rate reported point there is different views of that, so excuse me, 3% in the quarter not one, but there is rightly different views on that as you look at all those. So we would say consumer placement up three, our volumes obviously didn’t keep pace and in particular I would tell you that we were impacted more significantly by the January weather than the overall industry and that’s by in large because we have our both – our OE and our replacement large retail customers are really serviced in sort of a real time basis focused on sell out rather than stacking inventory if you will. So when they get in that and impacted by weather it impacts us more significantly than others. And let me give you maybe a couple of quick examples and I’ll start with OE because I think it’s a model everyone is familiar with, we shift really to a just-in-time cadence there, which our OEM customers obviously take our tires and put them on cars as they use them for sale or they put them out for sale immediately. When they shutdown which they did in the quarter, because of – they slowed down off late in the quarter because of the weather as well, we stopped shipping until they start again and there is not inventory buildup. And again I think you understand that model. So while this isn’t going to be a perfect analog, a similar situation happens to us with certain of our large retail customers, because to a significant degree, excuse me, we shift to them really with that every efficient supply chain, it’s really there to support and sellout. And if their sellout slowed down again because of the weather like it did in the quarter, we get that direct impact to our volumes and like the OEMs, we typically have a – I think a very important point, we have a large share of the OEMs as we do some of these large regional retailers or excuse large retail customers, so when they feel this impact, it impacts us disproportionately. And I would say we did feel this in the first quarter because of weather which frankly was the first time I’ve ever experienced that since I’ve been with the company, but for us this is great business, we serve it with an advantage supply chain that focuses on their sellout getting tires for them to sell to consumers and where we’re doing this bumper cause in Q1 because it’s really a better customer base for us to go forward and sell. We’d rather sell tires to go out to consumers than just get stacked up into inventory. So really a first quarter aberration I would tell you than a trend and I think you rightly pointed out focus on those sort of coming out trends of the quarter rather than the building in trend.

[Patrick Archambault:]

Thank you. Yeah, that’s definitely helpful. On slide 7, my follow-up question was just on Europe and specifically what you are seeing for the summer tire season. I think you had said that in the past sort of last year, you weren’t as well positioned competitively. On your slide 7, you highlight a couple of new products there. So maybe can you address a) what – how you feel your position for this year ahead of the summer season and also if you could give us some color on the level of inventories within EMEA for summer that would be helpful as well.

[Rich Kramer:]

Sure. I would say – I was – in fact I was just over there a couple of weeks ago and I would tell you in terms of our preparation for the summer selling season, our team over there including many of the people that have been with our company for a long period of time would say unequivocally that we have the best summer product line that they’ve had in their long ten year career is a good year. This gets to a combination of the industry leading [indiscernible] that we had as well as some of the new products that are out being graded by the summer magazines. As I’ve pointed out, we won a good year in Dunlop brand, we’re number one and number two slot in a very important German magazine test and remember – those tests are raided more than on just a label but on numerous other performance characteristics as well, so as we head into the season, absolutely well prepared to do that. And I would tell you that we referred to in the prior year let’s say with some customer service issues where we wanted to sharp on and I would tell you we have made very significant improvements in our customer service, our advantaged supply chain is working better, much better for us over there. In fact it’s why I tried to highlight one of the examples in my remarks earlier. So I do think we’re well positioned. I think Europe inventories are generally in pretty good shape over there. So I think we should be in good shape going into the quarter – into the summer selling season, we feel very good about it. And I would tell you we are also already as out as it seems and are getting ready for the winter season as well. And as you could imagine reporting a lot of effort to make sure we’re well prepared for that coming into 2014.

[Patrick Archambault:]

Okay. Terrific. Thanks for all the information.

[Rich Kramer:]

Thank you.

[Operator:]

Thank you. And our next question will come from Rod Lache with Deutsche Bank. Please go ahead. Your line is open.

[Rich Kramer:]

Good morning, Lache.

[Rod Lache:]

Good morning. A couple of things. It sounds like you are saying that the North American volume performance and market share of this quarter was an aberration, so just to clarify, going forward would you expect the demand for good year to track more closely to the industry and just broadly speaking obviously we’re seeing better data on replacement demands in North America and Europe both for light vehicle and commercial tires. Has there been any change associated with that in the level of discounting in the market or of course that fills in the market just as it would seem that their capacity utilization would begin to tighten up?

[Rich Kramer:]

Rod, I guess, the first thing is, as we came out of North America in the last few months, as we look at this, as we had very – a very strong growth in our targeted market segments and we had increase in our Goodyear branded share and I think those are two things to point out as we ask our volumes relative to the rest of the industry. Remember, we are focused on those parts of the market where we can add the best value for our customers, for our consumers, and for ourselves. And I think that’s absolutely the path that we’re going to continue to go on. We look at the market I agree with you, the market environment in North America remains very good. The underlying demand for our tires is very strong and should even get better as we look at the introduction of the assurance all season and to our new product line and our customer service continues to improve and be very good. So I think we feel very positive about how we feel versus the industry for the balance of the year. And relative to the notion of the supply, demand equation in North America. I would tell you maybe the best way to continue to say this is, we still see the demand and growth for HVA tires in many cases particularly when you bring OE into the picture being a bit tight for those tires in terms of the supply. So supply and demand probably are not equal yet in terms of where HVA growth is and we don’t think as we look for the long term that, that’s going to balance yourself out on global basis. And I think that’s true a bit in North America. I think you’ll see points in time where that may change, but over the long term I think the growth in HVA will still be very significant.

[Rod Lache:]

And could you just clarify you are thinking in terms of the outlook for raw materials going forward there is obviously lag between what we see in the stock markets and your P&L, you’re expecting some greater benefit on that line in Q2. And maybe also comment on the outlook for the other tire related businesses, obviously dragging down the results a bit in first quarter. How should we be thinking about that for the rest of the year?

[Laura Thompson:]

Okay. So I’ll take the first one on raw materials first. So in the first quarter, as expected, our raw material costs declined 6% year-over-year and based on current tire rates we do expect that to continue for the balance of the year fairly evenly across the quarters. And then as for the other tire related businesses, we have a neutral outlook as we put on page 16 of the presentation the impact of the unabsorbed overhead for OTR tires is already build in to the unabsorbed overhead outlook on that same chart.

[Rod Lache:]

Okay. So you’re saying down 6% per quarter the rest of the year for the raw materials and then neutral year-over-year for chemicals business just to clarify.

[Laura Thompson:]

Yes, exactly.

[Rod Lache:]

The last thing I didn’t hear you comment at all on the commercial truck tire business which obviously the much higher margin business for everybody, I seems like that business has been pretty strong here both in North America and Europe. Is that a meaningful tailwind for you at this point?

[Rich Kramer:]

Rod, I think you’re right to point out both things, one we didn’t focus on as much in our remarks today, but in Europe and North America coming out of 13 we’ve done very well in the truck business and I would say we have – it is the bit of tailwind and I think part of that’s driven by our product portfolio that is in very high demand as well as our service model particularly in North America. In fact you see more and more companies trying to get in to that service model sort of fleet solutions business and we’re in as well. And that’s really driving volumes in to replacement market as we put together cradle-to-grave value proposition that our fleets are really putting value on, so they’re looking at us we’re not just provide a tire but keep their up time moving and that’s been very successful for us. From an OE perspective we also see that the demand for new trucks continue to be strong and I would say that’s benefit to us as we look ahead as well. In summary Ron I think the truck business is something that’s been going very well for us, in mature markets and as we look at the introduction our truck products in China we continue to see very good growth there, remember we’re fairly small player but we put in equipment and make those truck tires we introduce multiple new products there is working very well for us. And finally in Latin America we had a significant truck presence there as well and those markets even in tougher economies particularly in Brazil our truck products are still moving very well.

[Rod Lache:]

Benefit from that not quite as large as the negative from the OTR is that why you focused on the OTR in your comments?

[Rich Kramer:]

Yeah. I mean, Rod, as an item OTR clearly given the mix that becomes in from those OTR tires, remember our revenue per tire for an OTR tire could be anywhere from couple thousand bucks to 50 or $60,000 so as you lose some of those 57, 63 inch tires there, they’re fairly significant to the mix item we thought that something that we needed to point out.

[Rod Lache:]

Thank you.

[Rich Kramer:]

Thanks Rod.

[Laura Thompson:]

Thanks Rod.

[Operator:]

Thank you and our final question will come from Brett Hoselton with KeyBanc Capital. Please go ahead.

[Brett Hoselton:]

Good morning.

[Rich Kramer:]

Good morning, Brett.

[Laura Thompson:]

Good morning.

[Brett Hoselton:]

I was just going to ask you this kind of conceptual question about Europe which will be with the assignment of Darren over to Europe there’s been some speculation I think in the events in the community is that, you might make some additional plans or announcements with regards to your strategy in Europe kind of over and above what you’ve already discussed is that a possibility or should we consider that assignment is execution on what your current plans or stated plans are at this point?

[Rich Kramer:]

Yeah, Brett, I would say from our strategic direction I would point you back to what we talked about in the September Investor Meeting there’s been no changes from that we’ve been trying to be very clear about that we’re committed to that. Our team across the globes and all our business units each have their roles as well as our functions and delivering that plan and I would say that’s what Darren’s focus as part of his assignment as well. So it’s really about us delivering the plan and frankly setting ourselves up for future growth beyond that.

[Brett Hoselton:]

Excellent, thank you very much.

[Rich Kramer:]

Thanks, Brett. Okay. Thanks every one. We appreciate it. And thanks for your attention today.

[Laura Thompson:]

Thank you.

[Operator:]

Thank you. This does conclude today’s conference, you may disconnect at any time. And have a great day.