Mercer Capital's Value Focus: FinTech Industry | Q4 2013 | Segment: Payment Processors
Fourth Quarter 2013 Conference Call...Q4 and Full-Year Highlights 3 •Full-year segment operating...
Transcript of Fourth Quarter 2013 Conference Call...Q4 and Full-Year Highlights 3 •Full-year segment operating...
Fourth Quarter 2013 Conference Call February 13, 2014
Forward-Looking Statements
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; increases in the prices paid for raw materials and energy; 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; 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.
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Q4 and Full-Year Highlights
3
• Full-year segment operating income up 27% to record $1.6 billion
• Record Q4 segment operating income of $419 million, including Q4
record earnings in North America
• Free cash flow from operations reaches $1 billion in 2013
• Reaffirming 2014-2016 financial targets
Exceptionally strong Q4 and full-year earnings & cash flow
demonstrate sustainability of Goodyear’s strategy
Our Destination
4
$372
$917
$1,368 $1,248
$1,580
2009 2010 2011 2012 2013 2016
10% to 15%
growth per
year
Balanced
plan based
on growth
and cost
Our performance provides confidence in achievability of Destination
Reaffirming 2014-2016 financial targets
(a) See Segment Operating Income reconciliation in Appendix on page 31.
Segment Operating Income(a)
$ in millions
Strategy Roadmap
5
Where We Are
Key How To’s
Our Destination
Key Strategies
NA Adding Economic Value
Improving Volume
Pension Remains a Challenge
Executing Plan
Innovation Leader
Strong Earnings
Creating Sustainable Value
First with Customers
Innovation Leader
Leader in Targeted Segments
Competitively Advantaged
Profitable thru Economic Cycle
Cash Flow Positive
Investment Grade
Industry
MegaTrends
1. North America: Profitability
2. Asia: Winning in China
3. EMEA/LA: Continued Success
1. Market-Back Innovation Excellence
2. Target Profitable Segments
3. Operational Excellence
4. Enabling Investments
5. Top Talent/Top Teams
Successfully Addressed U.S. Legacy Obligations
6
Major milestone in long journey of legacy cost elimination
2007
2008
2013
2014
• Hourly plans (USW) closed to new entrants
• Froze salaried pension plans
• Addressed retiree medical obligations by
creating VEBA for USW retirees
• Capped salaried medical plans
• Fully funded and de-risked salaried pension plans
• Reached agreement with USW, giving Goodyear ability to freeze the
hourly pension plans before 2017 (assumes plans fully funded)
Goodyear fully funds & freezes U.S. hourly plans
Hourly U.S. Pension Plans Prefunding
7
• Goodyear fully funded hourly U.S. plans with approximately $1.15
billion of balance sheet cash in early 2014
– Fully funding plans consistent with previously announced strategy
– Strong earnings and cash flow allowed for full funding without issuing debt
• Funding unlocks value of the Company
– Paves way for greater transparency to tire business, as well as stronger
and less volatile earnings and cash flow
– Action drives long-term shareholder value as part of capital allocation plan
• Accelerates path to reaching 2.5x Adjusted Debt / EBITDAP target
Prefunding marks a new beginning for Goodyear
Other Highlights
8
• Goodyear remains disciplined in pursuing its targeted market
segments as global industry growth rates continue to recover
– Goodyear Q4 volume +2%; growth in 3 of 4 SBUs
• North America
– Strong business performance, excellent execution, consistent momentum
• Europe
– Amiens, France facility closure in Q1 2014, ~$40 million savings in 2014
– Executing profit improvement plan
• Latin America
– Working through challenges of volatile political & economic environment
– Introduced 3 new products to drive growth in profitable segments
• Asia Pacific
– Solid return on CapEx investment in China, driving share growth
Summary
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Our strategy works…and is delivering record results
Strong performance gives us confidence in 2014-
2016 financial targets and enables us to execute on
capital allocation plan
• Pension prefunding unlocks value of the tire business, creates
new beginning for Goodyear
We are staying the course on our strategy and
focusing our attention on execution
Financial Update
Fourth Quarter 2013
Income Statement
(a) See Segment Operating Income and Margin reconciliation in Appendix on page 31.
In millions, except EPS
11
December 31, December 31,
2013 2012 Change
Units 40.7 40.0 2%
Net Sales 4,791$ 5,045$ (5)%
Gross Margin 23.0% 18.7% 4.3 pts
SAG 736$ 707$ 4%
Segment Operating Income(a) 419$ 272$ 54%
Segment Operating Margin(a) 8.7% 5.4% 3.3 pts
Goodyear Net Income 235$ 7$
Less: Preferred Stock Dividends 7$ 7$
Goodyear Net Income Available to Common
Shareholders228$ -$
Goodyear Net Income Available to Common
Shareholders - Per Share of Common Stock
Basic 0.92$ -$
Diluted 0.84$ -$
Three Months Ended
12 12
Fourth Quarter 2013
Segment Operating Results
$ In millions
(a) Raw material variance of $172 million excludes raw material cost saving measures of $59 million, which are included in Cost Savings above (b) Estimated impact of inflation (wages, utilities, energy, transportation and other) (c) Other includes ($28) million incentive compensation, ($9) million advertising, ($8) research and development, and $14 million China start-up
$272
$172
$114
$55 $11 ($77)
($74)
($24) ($30)
$419
Raw
Materials(a)
Cost
Savings
Inflation(b)
Volume
Un-
absorbed
Fixed
Cost
Price / Mix
Other(c) Currency
Q4
2012
Q4
2013
+$147
(a) Working capital represents accounts receivable and inventories, less accounts payable – trade. (b) See Total Debt and Net Debt reconciliation in Appendix on page 32.
Fourth Quarter 2013
Balance Sheet
$ In millions
13
December 31, September 30, December 31,2013 2013 2012
Cash and cash equivalents 2,996$ 2,500$ 2,281$
Accounts receivable 2,435 3,254 2,563Inventories 2,816 2,944 3,250Accounts payable - trade (3,097) (3,084) (3,223)
Working capital(a)
2,154$ 3,114$ 2,590$
Total debt(b)
6,249$ 6,542$ 5,086$
Net debt(b)
3,253$ 4,042$ 2,805$
Memo:Net Global Pension Liability 1,855$ 3,522$
Free Cash Flow from Operations
$ In millions
14
(a) Pension Expense is the net periodic cost before curtailments, settlements and termination benefits as reported in the pension-related note in the
Notes to Consolidated Financial Statements.
(b) See page 33 for a reconciliation of “Free Cash Flow from Operations,” a non-GAAP measure, to the most directly comparable GAAP measure
2013 2012
Net Income 675$ 237$
Depreciation and Amortization 722 687
Working Capital 415 457
Pension Expense (a)
285 307
Other 75 140
Capital Expenditures (1,168) (1,127)
Free Cash Flow from Operations (non-GAAP) (b) 1,004$ 701$
Year Ended December 31,
Fourth Quarter 2013
Segment Results
In millions
15
2013 2012 Change 2013 2012 Change
Units 16.3 15.8 2.6% Units 14.4 14.2 1.2%
Net Sales $2,131 $2,314 (7.9%) Net Sales $1,631 $1,602 1.8%
Operating Income $199 $116 71.6% Operating Income $101 $38 165.8%
Margin 9.3% 5.0% Margin 6.2% 2.4%
2013 2012 Change 2013 2012 Change
Units 4.4 4.8 (7.8%) Units 5.6 5.2 7.7%
Net Sales $492 $541 (9.1%) Net Sales $537 $588 (8.7%)
Operating Income $52 $61 (14.8%) Operating Income $67 $57 17.5%
Margin 10.6% 11.3% Margin 12.5% 9.7%
North America Europe, Middle East and Africa
Latin America Asia Pacific
Pension Update
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• Global unfunded status improved from $3.5 billion in 2012 to $1.9 billion in 2013
– Improvement driven by 2013 contributions of $1.2 billion (including prefunding of salaried U.S. plans) and benefit of rising rates
– Prefunding of hourly U.S. plans has further reduced unfunded status to $700 million, primarily non-U.S. plans
• Reduction in global pension expense from Hourly US prefunding and freezing
– Total improvement of $225 million over next three years, including ~$50 million in 2014 when compared with funding only the required amounts
– Net increase in other related costs of $35 million over the same period, including ~$5 million in 2014
• Substantial increase in operating cash flow due to prefunding and freezing; annual cash contributions reduced $175-250 million in each of next three years
Action reduces leverage while minimizing pension-related financial risk
2014-2016 Financial Targets
17
• Annual 10-15% SOI growth per year through 2016
• Annual positive free cash flow from operations
• Targeting 2.5x Adjusted Debt / EBITDAP(a)
(a) Total debt plus global pension liability, divided by net income before interest expense, income tax expense, depreciation and amortization
expense, net periodic pension cost, rationalization charges and other (income) and expense
2014 Key Segment Operating Income Drivers
Fourth Quarter 2011 Segment Operating Income [slightly below/similar t]o]
2010 Level Note: All referenced USD figures relate to year-over-year impact on Segment Operating Income.
Driver 2014 FY Comments
Global Volume + ~2-3% -
Price/Mix vs. Raw
Materials Neutral -
Unabsorbed
Overhead ~$75-$100 million -
Net Cost Savings Neutral • Investments in advertising and R&D offset
favorable cost savings vs. inflation
Foreign Exchange ~($50) million • Assumes current spot rates
Other Tire-Related Neutral -
Start-up Costs Neutral • Brazil modernization costs offset China
start-up benefit
Amiens Closure ~$40 million • $75 million annualized savings, including
exit of EMEA Farm tire business
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2014 Outlook Other Financial Assumptions
Assumption Comments
Interest Expense $430 - $455 million
Income Tax ~25% of international
Segment Operating Income
Global Pension
$150 - $200 million pension
expense; ~$1.3 billion in total
contributions(a)
Working Capital Not a significant source or
use
Capital Expenditures ~$0.9 - $1.0 billion
Depreciation &
Amortization ~$700 million
19 (a) Includes $1.15 billion from Hourly U.S. pension prefunding
Appendix
2013 2012 % Change
Consumer
Units 37.0 36.5 1.3%
Sales $2,763 $2,808 (1.6%)
Commercial
Units 3.2 3.1 5.2%
Sales $1,042 $1,027 1.5%
Unit/Sales Mix
Fourth Quarter 2013
Tire Unit & Sales Summary
2013 Q4 Sales = $4,791
In millions
21
Consumer 58%
Commercial 22%
Other 11%
Retail 6%
Chemical 3%
2013 2012 % Change
Consumer
Units 147.5 149.2 (1.1%)
Sales $10,946 $11,429 (4.2%)
Commercial
Units 12.7 12.8 (0.4%)
Sales $4,113 $4,202 (2.1%)
Unit/Sales Mix
Full Year 2013
Tire Unit & Sales Summary
2013 Sales = $19,540
In millions
22
Consumer 56%
Commercial 21%
Other 12%
Retail 7%
Chemical 4%
$942
$207
$689
$2,356
$1,017
($321)
$712
($115)
$549
$1,822
$327
($985)
2008 2009 2010 2011 2012 2013
Price/Mix Raw Materials
Price/Mix Improvements
(a) Reflects impact on Segment Operating Income. Raw Materials include the impact of raw material cost savings measures. (b) Raw material variance of $327 million includes raw material cost savings measures of $249 million. (c) Raw material variance of ($985) million includes raw material cost savings measures of $228 million.
Price/Mix vs. Raw Materials(a)
$ in millions
(c)
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(b)
Fourth Quarter Significant Items (After Tax and Minority Interest)
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2013
• Rationalizations, asset write-offs and accelerated depreciation, $17 million (6 cents per share)
• Income and other discrete tax benefits, $41 million (15 cents per share)
• Gains from asset sales, $2 million (1 cent per share)
2012
• Rationalizations, asset write-offs and accelerated depreciation, $85 million (34 cents per share)
• Discrete tax charges, $9 million (4 cents per share)
• Loss resulting from a strike in South Africa, $6 million (2 cents per share)
• Charges relating to labor claims with respect to a previously closed facility in Europe, $5 million (2 cents per share)
• Insurance recoveries related to flooding in Thailand, $6 million (2 cents per share)
• Gains from asset sales, $2 million (1 cent per share)
$ In millions, except EPS
25
Fourth Quarter Significant Items (After Tax and Minority Interest)
Net Sales 4,791$ -$ (5)$ -$ 4,786$
Cost of Goods Sold 3,690 (8) - 3,682
Gross Margin 1,101 8 (5) - 1,104
SAG 736 - - - 736
Interest Expense 105 - (1) - 104
Rationalizations 17 (17) - - 0
Other (Income) / Expense (15) 11 2 (2)
Pre-tax Income / (Loss) 258 25 (15) (2) 266
Taxes 2 3 33 - 38
Minority Interest 21 5 (7) - 19
Goodyear Net Income 235$ 17 (41) (2) 209$
EPS (Diluted) 0.84$ 0.06$ (0.15)$ (0.01)$ 0.74$
As
Reported
Rationalizations,
Asset Write-Offs and
Accelerated
Depreciation
Asset Sales As Adjusted
Income and Other
Discrete Tax
Benefits
Fourth Quarter 2013
Liquidity Profile
(a) Total liquidity comprised of $2,996 million cash and cash equivalents, $2,726 million of unused availability under various credit agreements, and the additional $234 million committed under the Pan-European securitization program. Does not reflect Q1 2014 pension prefunding.
(b) Committed Pan-European securitization program of $620 million (€450 million) subject to available receivables. At December 31, 2013, the amounts available and utilized under this program totaled $386 million (€280 million) and $207 million (€150 million), respectively.
(c) Includes $443 million of cash in Venezuela denominated in bolivares fuertes at the official exchange rate of 6.3 bolivares fuertes per U.S. dollar at December 31, 2013.
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$6.0(a)
Cash &
Equivalents(c)
Available
Credit Lines
Liquidity Profile
Pan European
Securitization(b)
$ In billions
$3.0
$2.7
$0.2
December 31, 2013
Note: Based on December 31, 2013 balance sheet values and excludes notes payable, capital leases and other domestic and foreign debt. Details on all other actual
outstanding debt as of December 31, 2013 in Appendix on page 34.
(a) At December 31, 2013, the amounts available and utilized under the Pan-European securitization program of $620 million (€450 million) totaled $386 million (€280
million) and $207 million (€150 million), respectively.
(b) At December 31, 2013, there were no borrowings under the European revolving credit facility. Letters of credit issued as of this date totaled $5 million (€3 million).
(c) At December 31, 2013, our borrowing base, and therefore our availability, under the U.S. revolving credit facility was $470 million below the facility’s stated amount
of $2.0 billion. Also, $375 million of letters of credit were issued under this facility.
Fourth Quarter 2013
Maturity Schedule
$ In millions
27
$207
$1,539
$1,262
$900 $700
$150
2014 2015 2016 2017 2018 2019 2020 2021 2022 ≥ 2023
Undrawn Credit Lines
Funded Debt
$620 (a) $551 (b)
$2,000 (c)
28
a) Reflects discretionary contributions to fully fund U.S. pension plans in 2013 and 2014 (and freeze hourly U.S. pension plans in 2014)
b) Includes cash funding for direct benefit payments for 2012 - 2013 only
c) Excludes one-time charges; also excludes expense of approximately $13 million in 2013, $20 million in 2014, and $25 million to $30 million in 2015 - 2016 related to
transition to defined contribution plans from pension freeze
U.S. D.R. 3.71% 4.51% 4.51% 4.51% 4.51%
Impact of Pension Prefunding & Freezing
$684
$1,162 $1,275
$75 $75
$375 $300 $250
$-
$200
$400
$600
$800
$1,000
$1,200
$1,400
$1,600
2012 2013 2014E 2015E 2016E
$ in
mil
lio
ns
Global Cash Flow Impact(a) (b)
Assumes Fully Fund and Freeze Hourly U.S. Plans 12/31/13 Assumption
$3,522
$1,855
$700 $550 $500
$1,525
$1,225 $1,000
$-
$500
$1,000
$1,500
$2,000
$2,500
$3,000
$3,500
$4,000
2012 2013 2014E 2015E 2016E
$ in
mil
lio
ns
Global Unfunded Obligations(a)
Assumes Fully Fund and Freeze Hourly U.S. Plans 12/31/13 Assumption
$307 $285
$150- $200
$125- $175
$125- $175
$200- $250
$225- $275
$200- $250
$-
$100
$200
$300
$400
$500
$600
2012 2013 2014E 2015E 2016E
$ in
mil
lio
ns
Global Pension Expense(a) (c)
Assumes Fully Fund and Freeze Hourly U.S. Plans 12/31/13 Assumption
2012 unfunded of $3.5B reduced to $700M in 2014
2014 Full-Year Industry Outlook
29
NA EMEA
Consumer
Replacement ~ +1-2% ~ +3-5%
Consumer OE ~ +3-5% ~ +2-3%
Commercial
Replacement ~ +1-2% ~ +1-2%
Commercial OE ~ +2-3% ~Flat
Mandatory Convertible Preferred Stock Common Share Impact Upon Conversion
30
(a) Subject to customary anti-dilution adjustments (including in connection with the declaration of dividends on our common shares). Adjusting for the
cash dividends on our common stock paid on December 1, 2013 and payable on March 3, 2014, the conversion rate will be 2.7574 so long as our share
price is $18.13 or more.
(b) Assumes 248 million common shares outstanding as of 1/31/14
(c) Appreciation from Goodyear common share price of $14.57 on date of issuance of Mandatory Convertible Preferred Stock
Common
Share Price
Conversion
Rate (a)
Common Shares
Issuable upon
Conversion % Dilution (b)
Common Share
Price
Appreciation (c)
$14.57 3.4317 34,317,000 13.8% 0%and below
$15.00 3.3333 33,333,333 13.4% 3%
$16.00 3.1250 31,250,000 12.6% 10%
$17.00 2.9412 29,411,765 11.9% 17%
$18.00 2.7778 27,777,778 11.2% 24%
$18.21 2.7454 27,454,000 11.1% 25%and above
Reconciliation for Segment Operating Income / Margin
$ In millions
31
2013 2012 2013 2012 2011 2010 2009
Total Segment Operating Income 419$ 272$ 1,580$ 1,248$ 1,368$ 917$ 372$
Rationalizations (17) (108) (58) (175) (103) (240) (227)
Interest expense (105) (87) (392) (357) (330) (316) (311)
Other income / (expense) 15 (11) (97) (139) (73) (186) (40)
Asset write-offs & accelerated depreciation (8) (1) (23) (20) (50) (15) (43)
Corporate incentive compensation plans (29) (22) (108) (69) (70) (71) (41)
Corporate pension curtailments/settlements - (1) - 1 (15) - -
Intercompany profit elimination 9 (10) 4 (1) (5) (14) (13)
Retained expenses of divested operations (7) (2) (24) (14) (29) (20) (17)
Other (19) 2 (69) (34) (75) (47) (37)
Income before Income Taxes 258$ 32$ 813$ 440$ 618$ 8$ (357)$
United States and Foreign Taxes 2 39 138 203 201 172 7
Less: Minority Shareholders Net Income (Loss) 21 (14) 46 25 74 52 11
Goodyear Net Income (Loss) 235$ 7$ 629$ 212$ 343$ (216)$ (375)$
Sales $4,791 $5,045 $19,540 $20,992 $22,767 $18,832 $16,301
Return on Sales 4.9% 0.1% 3.2% 1.0% 1.5% (1.1)% (2.3)%
Total Segment Operating Margin 8.7% 5.4% 8.1% 5.9% 6.0% 4.9% 2.3%
Three Months Ended
December 31,
Twelve Months Ended
December 31,
Reconciliation for Total Debt and Net Debt
$ In millions
32
($ in millions)
December 31, September 30, December 31,
2013 2013 2012
Long term debt and capital leases 6,162$ 6,366$ 4,888$
Notes payable and overdrafts 14 44 102
Long term debt and capital leases due within one year 73 132 96
Total debt 6,249$ 6,542$ 5,086$
Less: Cash and cash equivalents 2,996 2,500 2,281
Net debt 3,253$ 4,042$ 2,805$
Memo:
Net Global Pension Liability 1,855$ 3,522$
Reconciliation for Free Cash Flow from Operations
a) Working capital represents total changes in accounts receivable, inventories and accounts payable – trade.
b) Pension expense is the net periodic cost before curtailments, settlements and termination benefits as reported in the pension-related note in the Notes to
Consolidated Financial Statements.
c) Other includes amortization and write-off of debt issuance costs, net rationalization charges, net (gains) losses on asset sales, Venezuela currency devaluation,
customer prepayments and government grants, insurance proceeds, compensation and benefits less pension expense, other current liabilities, and other assets
and liabilities. 33
($ in millions)
Dec. 31,
2013
Dec. 31,
2012
Net Income 675$ 237$
Depreciation and Amortization 722 687
Change in Working Capital (a)
415 457
Pension Expense (b)
285 307
Other (c)
75 140
Capital Expenditures (1,168) (1,127)
Free Cash Flow from Operations (non-GAAP) 1,004$ 701$
Capital Expenditures 1,168 1,127
Pension Contributions & Direct Payments (1,162) (684)
Rationalization Payments (72) (106)
Cash Flow from Operating Activities (GAAP) 938$ 1,038$
Year Ended
The amounts below are calculated from the Consolidated Statements of Cash Flows except
for pension expense, which is as reported in the pension-related note in the Notes to
Consolidated Financial Statements.
Financing Arrangements
$ In millions
34
Dec 31, September 30, June 30, March 31,
2013 2013 2013 2013
Notes Payable:
Notes Payable and Overdrafts 14$ 44$ 79$ 107$
Long-Term Debt:
Notes:6.75% Euro Notes due 2019 344$ 338$ 326$ 321$
8.25% due 2020 995 995 995 995
8.75% due 2020 267 267 267 266
6.5% due 2021 900 900 900 900
7% due 2022 700 700 700 700
7% due 2028 150 149 149 149
Credit Facilities:
$2.0 billion first lien revolving credit facility due 2017 - - - -
$1.2 billion second lien term loan facility due 2019 1,195 1,195 1,194 1,194
€400 million revolving credit facility due 2016 - - - 256 Pan-European accounts receivable facility due 2015 207 394 345 186 Chinese credit facilities 537 533 531 505
Other domestic and international debt 878 962 976 933
6,173$ 6,433$ 6,383$ 6,405$
Capital lease obligations 62 65 67 69
Long-Term Debt Total: 6,235$ 6,498$ 6,450$ 6,474$
Total Debt 6,249$ 6,542$ 6,529$ 6,581$