Goodyear Tire & Rubber Co (GT) 2002 Q2 法說會逐字稿

Hello. My name is Janis and I will be your conference facilitator today. At this time I would like to welcome everyone to the Goodyear second 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 period. If you would like to ask a question during this time, simply press "*" then the number "1" on your telephone keypad. If you would like to withdraw your question, press the "#" key. At this time, I would like to turn the call over to Lora Thompson, Director of Investor Relations. Ms. Thompson, you may begin your conference.

Well thank you, Janis. Good morning and welcome to Goodyear's review of second quarter results. Our discussion this morning will be available by replay after 2p.m. ET by dialing 706/645-9291 and entering access code "4751788" or by listening to the webcast replay on www.goodyear.com under investor relations.

I'd like to remind you that our conversation this morning includes certain forward-looking statements based on current expectations and assumptions that are subject to risk and uncertainties that could cause actual results to differ materially. These risks and uncertainties include price and product competition, customer demand for the company's products, general industry and market conditions, and general domestic and international economic conditions. 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.

It is my pleasure to introduce to you the management team on today's call. Sam Gibara, our Chairman and CEO, Bob Keegan, our President and COO, Bob Tieken, our Executive Vice President and CFO, and Stephanie Bergeron, Senior Vice President and Treasurer. At this time I'd like to turn the call over to Sam Gibara. Good morning, Sam.

: Sam Gibara: Good morning and thank you, Lora. Good morning everyone and thank you for being with us this morning. As you know, we have just reported our net income for the second quarter of $29 million or at about 18 cents a share. This compares to net income of $7.8 million or 5 cents a share in the second quarter of 2001. Neither the second quarter this year or last year included one-time charges. However, I would to point out up front to you that our second quarter last year included the benefit of about a million times that Ford had recalled for the Firestone--for the Firestone projects--products that they were recalling. That recall had a $20 million impact on our operating profit as part of the Ford tire replacement program.

What I'd like to do with you today is follow the traditional outlook that we've used in the past. I'll start with a corporate overview of our results, and then I will have a business unit discussion with you by business unit. We'll then move on to balance sheet. And outlook for the third quarter will close my presentation. And then we'll open the meeting up for questions and answers.

Starting with the overview, and just to put things in perspective and set the stage, as you know, last year was a tough year for us, and market conditions were not good. We took a number of very tough decisions last year and the year before. We've rationalized globally--we've been rationalizing globally for a couple of years. We also have completed the integration of Dunlop. And as a result of these measures we expected to see the--our costs come down, and we have indeed in the second quarter seen our costs come down. And I will share that with you in more details. The reason the first quarter didn't reflect that is that, as we discussed earlier, the first quarter still had impact from some of the decisions we made in the last quarter of 2001. So this is really the first quarter that reflects the result of the actions taken in the last couple of years.

And as you can tell, six out of our seven businesses have made significant improvement over last year. And if the Ford recall of Firestone tires is excluded, all seven units would have improved over the prior year.

Total Company EBIT and net income in the quarter are the highest they have been in eight quarters since the second quarter of 2000. Compared to a year ago, our operating profit for the European Union business has almost doubled. Our Eastern European operating profit has increased by 500 percent. Latin America is over 30 percent or close to one-third of a year ago. Asia is up over 80 percent, Engineered Products EBIT more than doubled, and the Chemical Division operating profit was up 45 percent.

Looking briefly at the balance sheet, our commitment to cash generation continues to remain a priority and our working capital reflects that. Our working capital requirements at the end of the quarter were almost $700 million less than this time last year. And this is reflected in our interest expenses, which are $15 million down from a year ago. So that basically, in a nutshell, is what the corporation has delivered in the second quarter.

Looking at our SBU's, our business units, I'd like to start with North American Tire. The original equipment market in North American Tire, starting with the market and before getting to Goodyear, the market, as you know, the original equipment market was strong in Q2. On the other hand, the replacement market was very soft. It was down 7 percent from a year ago, and in June alone it was down 16 percent. The Ford recall started in June a year ago, and if that is backed out and excluded, June was still down 8 percent in 2002 compared to 2001.

So why this weak quarter? This weak quarter really is a correction of the first quarter. When we met in April you asked us about why Goodyear didn't, you know, do very well in the first quarter, and one of the reasons was we had implemented our price increase before our competitors. Our competitors had their price increases coming in in March and April, and as a result of that they shipped a disproportionate amount of tires in Q1. The second quarter really corrects the overshipments of the industry with the exception of Goodyear in Q1.

On a year-to-date basis we had predicted the market to be flat and it came in about half of 1 percent down. We'll talk a little bit more later about the outlook for the market in Q3 and Q4, but that is a market which we had to deal with in the second quarter. In that market, Goodyear market share was down. And it was down basically for three reasons. The first reason is the same reason that we have indicated to you in the first quarter and that is as part of our price parity program in the market and to maintain price levels where we want them to be, we had shipments to our large distributors came down because they had large inventory levels. And they still did sit on their inventories for part of the second quarter. But our shipments to large distributors increased in the second quarter from the first quarter. We believe that in the third quarter our large distributors will get back to buying about 75 to 80 percent of their normalized boasting levels.

That is the first reason. The second reason is the reason I mentioned before--the Ford recall, last year in June, had Goodyear supply 1 million units as part of the recall program, which was not available to us this year. And the third reason is that we were adamant, and still are, on having our price increases stick. As you know, we've passed three price increases and the last price increase was effective earlier this year and we have not--we have not reduced our prices and don't intend to do that. And that really is reflected in our revenue [both times]. When you look at our revenue both times, our revenue both times are up 2 percent overall. That 2 percent price increase includes all our sales to replacement NOE, truck and passenger. As you know, our price increases in the replacement market were primarily focused on the consumer products, and the consumer products are only a part of our total business. And in spite of that we are up 2 percent.

Our price increases in the consumer market were up significantly more. And our overall price increase was up 2 percent. I might add that this 2 percent compares with tires we supplied Ford last year, which, as you know, were a very rich mix for us. So, we are up 2 percent in spite of the sales to Ford last year. All of this has translated into a North American Tire operating profit of about $40 million, and that is $10 million below last year. But as I said before, if it--the $49 million we had last year includes $20 million for the recalled tires. That's the replacement business.

Now if we move on to original equipment, I just want to update you on our strategy with original equipment. I--when we got together in February and outlined for you our strategy for this year and beyond, we said that original equipment was a market that we didn't think was attractive enough for us and that if we couldn't make it attractive we would not continue to participate in at the levels that we had been participating in in the past. Halfway through the year, I'd like to tell you where we are at.

Basically, we've been discussing with original equipment a strategy based on three components. The first component is to increase our prices to them wherever possible. The second component is to desource--to be--to ask--we've asked our customers to desource Goodyear wherever we didn't think we could be sufficiently profitable. And we have been desourced in a number of cases and in a number of tires. And the third strategy is to supply a richer mix and higher value-added products to our original equipment. And we've been, as you know, discussing with our original equipment for the last six months--I can tell you that these things take time to fall into place because of the contractual agreements we have with original equipment. But by year-end we expect to see our original equipment business improve about $20 million in operating profit from a year ago. From a year ago, our profit this year in original equipment should be better by about $20 million. And obviously, we will continue this strategy and pursue it aggressively in 2003 and beyond.

Looking at costs, we had in Q2 a much lower cost than in Q1 due to raw material prices, but also due to the actions we have taken to reduce our manufacturing costs as well as our SAG expenses. Now clearly, we are not satisfied with our operating profit which came in at only 2.4 percent of sales. But we--the reason we couldn't offset--the reason the cost of reductions didn't show is because of the lower volumes. The volumes were not strong enough to offset the better costs that we had. If we, as we expect, continue to have better price levels and continue our cost reduction programs, volume is going to be what we need to return North American Tires to better levels of profitability. And, I promise you, we intend to do that by protecting our margins and protecting our price levels.

In the European Union. In the European Union looking at the market, the consumer market for the quarter was fairly stable with the industry being flat in replacement shipments, and 4 percent below in OE shipments. I might add that automobile sales in the months of June in Europe, Western Europe, were down 8 percent from a year ago.

In the European market, as you know, there are two segments that are really profitable for the industry. In the first half of the year, basically, is the high performance market, and the second half of the year is the winter market. In the first half, Goodyear has moved very aggressively in the high performance market to introduce new products. And we introduced the Eagle F1 tire in March, which has not only been selling well and has helped us improve our margins, but has also received special awards by leading European automotive magazines. Our strategy is to remain the leader in the high performance segment of the European market.

The truck tire market is another big opportunity for us in North America and in Europe. The truck tire market offers significant potential for improved profitability for Goodyear, and I can state that the first half for us in North American, and in Europe, has seen significant improvement in profitability in the truck tire market.

The industry replacement shipments were down to the truck tire market in Europe by 2 percent, and industry OE shipments declined by 8 percent. Our market share basically followed industry trends, but, as I say, our profitability has significantly improved.

Our EBIT as a result of the strategies in Europe came in at $34.5 million compared to $17.6 a year ago. And that's 4.3 percent of operating margin compared to a year ago, 2.3 percent. It's a 2-point improvement over a year ago. Our strategy in Europe and the reason for this improvement of--on the sales and marketing side, the focus on high performance style and the truck tire market. And on the plus side, the continued rationalization that is bearing fruit now, the completion of the Dunlop integration and a significant and sustainable improvement in our commercial business. Raw materials definitely helped, as did the Euro, especially in the month of June.

Looking at Eastern Europe, Africa, and the Middle East, despite economic and political turmoil in the Middle East and in many of the markets in which we operate in this region, the business--this business unit delivered $21.5 million operating profit compared to $3.5 million a year ago. And this is an operating margin of 11.1 percent compared to last year's 2 percent. Eastern Europe has delivered its best performance since 1998 and this improvement really has come from many different sources including increased volume, improved mix, and cost reduction programs.

Sales were very strong in Eastern Europe, in Turkey and South Africa, where we have gained market share in all these markets. And we are showing substantial top and bottom line improvements in this region.

In Latin America, in spite of severe currency devaluations in many Latin American countries, the region continued to demonstrate very good resilience and strong results. Our operating margin has improved from 7.7 percent in Q2 last year to 10 percent this year, which again is our best performance since 1998. In terms of operating profit, I should say that last year we had an operating profit of $19.4 million and this year we have $25.5 million. And I would like to add that this $25 million--$25.5 million does not include the $10 million that we suffered in Europe in operating income as a result of currency devaluations in Brazil, Venezuela, and Argentina in this quarter compared to a year ago. And if it hadn't been for the devaluations, our performance would have been even better by $10 million.

Our operating income has benefited from improved pricing and mix. In Latin America, the key for us is to stay ahead of the devaluations by trying to offset devaluations and inflations with price increases. And we've worked very diligently to do that, and we improved our mix. Our cost containment programs, like in other divisions of the company, is bearing fruit and low raw material prices have also helped the quarter.

In Asia, the Asia Region has registered its best operating performance since really the economic collapse of the region in 1997. Our EBIT is up from $6.7 million a year ago to $12.1 this year. And in terms of operating margin, we're up from 5.2 last year to 9 percent this year. Again, due to low raw material cost, cost containment programs, and clemencies have also helped us in that region.

Engineered Products. Engineered Products had an operating profit of $16.9 million up from $8.4 million a year ago, and an operating margin of 5.6 percent doubled last year's margin, and the best operating profit we've had in eight quarters. This improvement is due primarily to cost containment programs and improved productivity.

In the Chemical Division, as you know, we sold last year in the last quarter of the year our specialty chemical business. And the sales this year are down about $47 million from a year ago, the second quarter, and it's all-reflective of the sale of this chemical business. The sales reduction is all as a result of the low--of the absence of the specialty chemical business for us. But despite low sales, and the profit that we had from the specialty chemical business, low energy costs and cost reduction programs have helped us improve our operating income and our operating margin. Our operating income has increased from $12.9 million last year to $18.7 million, and our operating margin has gone up to 8.3 percent from 4.7 percent last year. And this, again, is the best second quarter this division has had in eight quarters.

That really rounds up our business unit review. Moving on to the balance sheet and our working capital, I'd like to take a few minutes and share with you where we stand at the end of Q2. Our commitment to cash generation and debt reduction continues to remain a priority for us in the company. We've said this repeatedly and we are repeating this today. And it shows in our working capital requirement, which at the end of the quarter was down almost $700 million from a year ago. Working capital as a percent to sales decreased from 24 percent last June to 19 percent this June. This is the best ratio to sales that we've had in five years and we believe that we are the best in class in our industry in terms of managing capital as a percent to sales.

Our inventories have come down $500 million from last year. And our goal, as you know, is to continue to reduce this balance further in the second half of the year and beyond. Our accounts receivables sold balance at the end of June was $886 million, essentially flat with last June, where the number was $881 million. At year-end, which, as you know, is a low point because this is the height of the selling season--June is. At the end of December the number was $853 million at the end of '01. So we've seen our receivables sold remaining rather stable over that period of time.

So despite soft industry shipments in most markets, supply chain initiatives, including improved demand forecasting and much lower SKU reductions, have translated not only in significant working capital reductions, but I can report that they are sustainable. And it has translated also, because it is a systemic improvement, it has translated into much better fill rates. Our fill rates are improving and our inventory levels are down.

So these were the comments I wanted to share with you on the balance sheet.

The outlook for the third quarter. Well, as you know, we are operating in a very, very volatile economic environment. And the outlook for the second half of the year is uncertain because of this environment. Soft replacement back markets in June in North America and in Europe are obviously a concern to us. Should they extend into the third quarter, they obviously will, by definition, limit our ability to see the substantial and rapid recovery in profitability that we've--we're seeking. We know, for example, that in North America we sold about 1.2 million units as part of the Ford recall in last July that we won't have this year. And in the quarter, we sold 2.9 million units in Q3 as part of the recall, and comps are therefore likely to be unfavorable for us in the quarter. But hopefully, the quarter will be up from Q2, which as we know was not a good quarter. So it depends what the comparison is made to. If it's made to last year, then we probably will be down. Hopefully, we'll be up from Q2.

The OE markets are also likely to be down from the first half levels in North America and Europe. But our business unit OE, both in North America and Europe, will continue to show improvement. The strategy that I've discussed with you for OE in North America, I should add here, is the same strategy that we are applying in Europe and with the same success and the same results.

On the other hand, on the positive side, higher sales levels to our large distributors, which has been an issue for us in Q--in the first half, should show improvement in the second half. We also are looking at a better product mix along with our commitment to hold prices firm and this should help our revenue both times as we move forward in the second half.

In Europe, winter's tire sales should also show favorable comps because of inventory--winter inventory levels in Europe with our--in our--in the industry and in distribution being at the low levels compared to a year ago.

Improving revenue both times in all our markets remains for us a strong objective. And on the plus side, we will continue to see the benefits of the rationalization programs and the cost containment programs that we have undertaken globally. However, raw material prices will probably increase in the second half compared to the first half of the year. We basically see them being flat with a year ago, up from the first half.

Our commitment to cost and SAG, as I have mentioned, is stronger than ever, as is our commitment to cash and to debt reduction. Finally, currencies are going to be another major unknown in Q3. We think and hope that the Euro's revaluation will continue in the third quarter. But we are concerned about Latin American major currencies, especially in this period of re-electable seasons in many Latin American countries.

So due to these very numerous uncertainties, especially the softness in the tire markets, at this point we will not give any guidance for Q3. But we will keep you up to date on a monthly basis through our monthly investor newsletters, which will help guide you through what--how we believe the quarter is unfolding.

Basically, that wraps up what I had to share with you today, and I'd be more than happy to take your questions along with Bob Keegan, Bob Tieken, and Stephanie Bergeron. So, we now will open this to questions.

: Operator: At this time I would like to remind everyone, in order to ask a question please press "*" then the number "1" on your telephone keypad. We will pause for just a moment to compile the Q&A roster. Your first question comes from Steve [Gerske] of Morgan Stanley.

: Jonathon Sienmetz: Good morning. Hi. It's Jonathon Sienmetz for Steve.

: Sam Gibara: Okay. Good morning.

: Jonathon Sienmetz: Good morning. A few questions. First off, on the pension plan, can you talk about your returns year to date, and give us an update on your funding strategy there?

: Sam Gibara: Yeah--Stephanie?

: Stephanie Bergeron: Yeah, our year--we have not yet gotten the final numbers for mid-year, and I'll preface our remarks by saying our pension plan is about a third fixed income and two-thirds equity, both domestic and foreign. So we've had good returns on the fixed income portfolio, I'd say market returns overseas, and better than U.S. market returns in the states. But I would tell you the plan is probably down about 5 percent so far this year.

In terms of funding, we have no near-term funding requirements. They really start out about a couple of years. But in all of our business planning outlooks that we're doing right now on three and five years, we have those funding provisions made.

: Jonathon Sienmetz: Okay. Can you talk about July sales? Are you seeing sort of a similar trend towards--from June?

: Sam Gibara: Well it's really too early to say because the month is not over. But the markets, as far as we can tell, are somewhat better than June. They are better than June. Whether they'll be as good as last year remains a question. They most probably will be down from last year. So, in a nutshell, at this point what I would say is better than June, down from last year, and the jury is still out.

: Jonathon Sienmetz: Okay. And the final one is on--in the third quarter on the Firestone or the Ford recall tires, should we assume it's a comparable level of profitability to what you referenced here in the release?

: Sam Gibara: I'm not sure I understand the question.

: Jonathon Sienmetz: You reference a $20 million operating profit on a million tires.

: Sam Gibara: Ah, yes.

: Is it fair to assume a comparable level in the third quarter?

: Sam Gibara: Yes. We reported the profit that we had last year in the third quarter, and--for the recall. And the number was $50 million was included in last year's profit.

: Jonathon Sienmetz: Great. Thank you.

: Sam Gibara: Yeah.

: Operator: Your next question comes from Rod Latch of Deutsche Bank.

: Rod Latch: Hello?

: Sam Gibara: Hello.

: Rod Latch: I have a few questions.

: Sam Gibara: Okay, Rod.

: Rod Latch: Are the distributors basically tracking at 75 percent of normal now? And what would the increment be in terms of units versus how they were doing in the second quarter?

: Sam Gibara: Well it is difficult to assign specific percentages, Rod. But let me--let me answer the question this way. Compared to normal purchasing--I mean--again, these are just broad indications. I would say the first quarter they bought about 25 percent of what they typically buy, 50 percent in the second quarter. We expect them to buy 75 to 80 percent in Q3, and by year-end they should get back to normal. The fourth quarter they should be back to normal. And again, this is just to put things in perspective. And in July we see some improvement over the second quarter. Now we don't know exactly whether it's 50 or 60 or 75. But we think that through the quarter they'll come in at 75 percent of their normal purchasing levels.

: Rod Latch: Okay. And also a follow-up on the pension costs. Assuming the pension were to be down about 5 percent, do you have an estimate for what the incremental pension costs would be in '03 versus '02?

: Stephanie Bergeron: Not yet, Rod. What we'll do is at the end of the year look at the discount rate, pension assets, and then the assumptions that we'll make on asset returns going forward. So it would be a little bit premature for us to speculate on that today.

: Rod Latch: Okay. And can you also comment on what exactly did raw materials do on a year-over-year basis? And, I also noticed that you billed finished goods inventory from Q1 to Q2. Is that going to reverse from Q2 to Q3?

: Sam Gibara: Yeah. Well, okay. Let me--let me first talk about Q1 and Q2 inventories--take the second question first. This is normal. We're down from a year ago, as I mentioned. There is a seasonality in our business, Rod, as you well know. And every year in Q2 we go up from Q1. And the answer to the question is we will obviously follow the seasonality and our inventories will remain in line and come down by year-end. I mean, they'll come down in Q3 and they'll come down--by year-end they will be--every quarter they have to be compared to a year ago because--a year ago quarter, because of the seasonality. So--a quarter of a year ago. So that's what we have.

In terms of the raw material prices, currency plays a major role in currencies, as you know. And the dollar revaluation has played a major role in Q3 compared to a year ago--in Q2, excuse me, compared to a year ago. The exact improvement is about $90 million from a year ago.

: Rod Latch: Okay. Thank you.

: Sam Gibara: Yeah.

: Operator: Your next question comes from David Bradley of J. P. Morgan.

: David Bradley: Good morning.

: Sam Gibara: Good morning.

: David Bradley: This strategy you've adopted, I guess, I think around the world it seems to be price is a big component of it. Increasing prices to those constituencies, those customers who haven't historically paid adequate prices to give you the return you need. I think that applies to private label--the distributor business and to OE's as well. And it looks like it's working well in some areas, not as well in others. But I think part two of the strategy, if part one was to raise prices potentially giving up some business along the way but maybe that's worth it in the long run, then part two would be to take out capacity to right size the capacity in line with the new demand levels that might be lower in a higher price point. Are you--what are you doing on the second front? Are you looking at capacity now and thinking about another round of rationalization?

: Sam Gibara: That's a--that's a very good description, David, of our strategy. That's exactly what we are trying to do. The way we are taking capacity out now--the reason, also, we are capable of implementing this strategy is what I mentioned and--after reporting Q1, and that is we now have agreements with our unions in North America and Europe to adjust supply to demand. We have what we call flexible manufacturing which allows us to lay people off and to adjust supply to demand so that we don't build inventories, so that we don't use capacity that we don't need, without incurring any cost. The key to this was to convert label costs, which, as you know, is about one-third of total cost, basically from a fixed component to a variable component. This to us is a much better way, now that we have it. We didn't have it before. It is a much better way and less expensive way to take capacity out than to take plants out all the time. But if we have to take more plants out we will. And at some point this strategy we are using will lead us to taking maybe plants out, but not in the immediate future. But we are going to take capacity out, yes, on a regular basis. How we take it out is either through staffing reductions or through overhead elimination by eliminating the plant. At this point, we've been successful with flexible manufacturing.

: David Bradley: Okay. And then a significant part of your improvement has been emerging markets, which used to be very strong for you. It got very weak for a while and now they're starting to come back. How confident are you that these, you know, relatively strong numbers you've seen in Eastern Europe, Middle East, Latin America, and Asia are gonna continue into the second half of the year and into next year? Is this an aberration? Is this the beginning of an uptrend? Is it gonna be stable from here? How do you see that?

: Sam Gibara: Maybe the aberration is what we went through last year. The--this is not an aberration. We see the second half continuing very strong. I think this is sustainable. I really believe this is sustainable and we'll report Q3 in three months and we'll--hopefully we'll be able to demonstrate that. So we--no--we--our plans call for improvement to be sustainable in the market that you have indicated.

: David Bradley: And Brazil, I think, Brazil has been looking pretty tough for a lot of people, and Argentina as well. Is there something you're doing in strategy that's allowed you to get better profits despite a very weak market? Is there share gains? Are there some cost issues? How do--are you managing that?

: Sam Gibara: I can summarize all of this in one word. Then I'll tell you what the strategy is. But the one word is "experience." We have people in Brazil who understand the market very well and know how to operate in an environment like the Brazilian environment. But this translates into--and I alluded to that in my presentation, is to make sure that we don't allow devaluation to hurt our profits. And the only way to do that is to stay ahead of the price increase curve to offset the devaluations and the corresponding inflation that goes with it. So we have been able to pass on price increases successfully. Secondly, we have a much better mix. And I want to emphasis mix, not only in Latin America, but everywhere. Another component of our strategy, to get better pricing we cannot only do it by increasing prices all the time. We do it also by going after the more profitable businesses. As you mentioned, we are going to go after better brands, better products, and that applies to Latin America as well. So basically, it's understanding the environment, the economic environment, and making sure that we have the better prices and the better mix in this market.

: Bob Keegan: David, you'll recall also that we closed down our manufacturing facility in Argentina a couple of years ago, and that's obviously been very beneficial to us. And probably one of the strongest assets we have in Brazil is we have a very strong distribution down there. So we--even though the economy has been weak, we've been able to participate very effectively in that market place.

: David Bradley: Thank you.

: Sam Gibara: You're welcome.

: Operator: Your next question comes from Wendy Needham of CSFC. Ms. Needham, go ahead with your question.

: Wendy Needham: Thank you. Hello? Can you hear me?

: Sam Gibara: Yes. Good morning, Wendy.

: Wendy Needham: Oh. Hi. Sorry. Good morning. A couple of questions. First, in the text, Sam, there was a comment on North America about replacement market mix had a negative change. Could you talk a little bit about that? Was there some brand repositioning going on?

: Sam Gibara: Well, yeah. Well the total replacement business was--our replacement business was down compared to our whole EBIT. That's the negative business mix. That is a negative business mix in the sense that we sold more to OE than we did proportionately--than we did to replacements. And the reason we didn't sell replacement as much as we would have liked to is because of this large distributors issue that we've been discussing in the first half. Our replacement business was depressed compared to OE relative to OE.

: Wendy Needham: But it--okay, but it said negative change in replacement market brand mix.

: Sam Gibara: Oh, yes. Yes. I see what you mean. Yes, because these large distributors buy--I'm sorry, I misunderstood the question. These large distributors are Goodyear buyers. So they buy only Goodyear. So--only Goodyear brand. So our Goodyear brand mix has suffered in Q1 and Q2 precisely because of that.

: Bob Keegan: Sam, we might also mention they also buy high perform--a large mix of high performance tires. So--.

: Sam Gibara: --Yes. See--.

: Bob Keegan: --So there's--there are several levels, if you will, of mix issues around the WD's or the distributors right now.

: Sam Gibara: The reason, Wendy, we were so adamant on fixing these price levels and price issues we had with them is they were really putting pressure on what is our most profitable segment, and that is the Goodyear brand and the high performance. These people, as Bob just mentioned, buy exclusively Goodyear brands, no private labels, and predominantly high performance. And they were buying them at much reduced prices. And we have adjusted these prices and our comment in the--our press release refers really basically to that.

: Wendy Needham: Okay. So what you are saying then is that they have been selling out of inventory?

: Sam Gibara: Correct. And these people sit on inventories. I mean, that's how they do business. They used to buy at depressed prices and large quantities, and they didn't mind having six to 12 months inventory. And they made money that way, especially when, you know, the cost of money is as low as it is these days. And that's what we changed earlier this year. We've now--we're now selling them at the price levels that we sell other retailers. We have this price panic [indiscernible]. Yes. But they are selling off inventory. That's correct.

: Wendy Needham: And then, I guess last quarter or maybe fourth quarter there was a lot of discussion about what was really going on with the retail tire consumer. Do you have a sense of how other than distributors the inventories are out there? Do you think that final demand is holding up better than shipments would suggest or is final demand just crummy right now?

: Sam Gibara: That's a good question. Yes. Consumer demand is holding us--is holding up better than shipments would suggest. And let me explain why. In Q1, we passed our price increases on January 1. Our competitors, as I mentioned in my remarks, increased their prices in March and April. That led them to ship a lot of tires and distribution bought a lot of tires in Q1. So Q1 shipments to dealers were really overstated. The market was very strong, but somewhat artificially. The consumer demand wasn't as strong, the result being that dealer inventories were very high in April and May, and that's the correction we've seen in Q2. In Q2 the reverse has happened where there has been some destocking and consumer demand has held up much better than shipments. So we're now at a point where there is a bit of inventory balance in distribution. We'll see what demand looks like in Q3.

: Wendy Needham: Okay. And then just one final question. You said that the--raw--the positive impact of lower raw material prices year over year was $90 million in the second quarter. And then I think you said raw materials will be flat in the third. So that $90 million advantage is sort of going away that we had in the second.

: Sam Gibara: Yeah. Well I don't--I don't know that--.

: Wendy Needham: --Year over year--.

: Sam Gibara: --Let me make sure. I don't want to mislead you. I don't think that--no, no. That's not so. I just--let me--let me try to--it's going to be flat with Q3 last year. We're comparing Q2 to Q2--.

: Wendy Needham: --Right. Was--and is that--.

: Sam Gibara: --Q3 to Q3 we'll still be better off. But we will not be better off maybe by $90 million.

: Wendy Needham: Okay. So you are saying third quarter versus last year we'll still be down?

: Sam Gibara: We'll still be better off. Yeah. I mean, versus last year, we'll still be better off.

: Wendy Needham: Okay.

: Sam Gibara: But we will be up from Q2 this year.

: Wendy Needham: Right.

: Sam Gibara: All right.

: Wendy Needham: Okay. Thank you.

: Sam Gibara: You're welcome.

: Operator: Your next question comes from Saul Rubin of UBS Warberg.

: Saul Rubin: Hello.

: Sam Gibara: Hi, Saul.

: Saul Rubin: Hello, Sam. I have a few questions here. First of all, another question on the pension side. Just to clarify, Stephanie, when you said the asset returns were minus five, were you speaking about the end of June?

: Stephanie Bergeron: I was speaking about the end of June and specifically about the domestic pension plans because we don't have the foreign plan information in. But you're right, that was at the end of June, Saul.

: Saul Rubin: Okay. Fine. And then, in your 10K you don't actually spell out, I don't believe, the U.S. plans from international. Could you just give us, let's say the end of last year, the actual liability and asset situation at the U.S. plan?

: Stephanie Bergeron: Saul, I'm sorry. I don't have that chart with me here. It is available and what we'll do is see if we can't provide that to you later. Just unfortunately, I don't have that particular data with me.

: Sam Gibara: --Well we can--let me--what we can confirm is that by the end of last year our total assets were $4.2 billion globally, and $3.5 for the U.S.

: Saul Rubin: Pension assets were $3.5 in the U.S.?

: Sam Gibara: Yes, and $4.2 globally.

: Saul Rubin: Okay. And what was the liability in the U.S.? Do you know that?

: Sam Gibara: No. We'll get you this information.

: Saul Rubin: Okay. Fine.

: Sam Gibara: It's better to do it that way.

: Saul Rubin: Sam, you talked about cash flow as a priority. Last year you committed firmly to cash flow, I think it was $350 million, through the course of the year, and then completed it quite nicely. Can you commit to a number once again for the full year 2002?

: Sam Gibara: Yeah. We are committing to continue to generate positive cash flow. We, at this point, would rather not commit to any numbers given the uncertainty of the markets in which we operate.

: Saul Rubin: Okay. And then to clarify your comment about the output, was I right in hearing that you said that Q3 would be--the comps would be unfavorable versus Q3 '01? So we may expect--.

: Sam Gibara: --No--.

: Saul Rubin: --No?

: Sam Gibara: Are you talking about the comment sheet on this?

: Saul Rubin: No. I meant in terms of the earnings estimate.

: Sam Gibara: No, no, no. The earnings estimate for Q3?

: Saul Rubin: You said something that the comps are likely to be unfavorable versus Q3 '01, but hopefully you would be up in Q2.

: Stephanie Bergerson: That was raw materials.

: Sam Gibara: No, no. That was for raw materials.

: Saul Rubin: Oh, that's just raw materials.

: Sam Gibara: That was just raw materials. We were just answering the question on the raw materials. I think Wendy had a question on the raw materials. We were answering just raw materials.

: Saul Rubin: Okay.

: Sam Gibara: Raw materials. We are talking only raw materials. As we said, we are not giving guidance for Q3, so we couldn't have said anything about Q3 to offer debate here. But for raw materials, we said the raw material prices in Q3 this year will still be favorable compared to a year ago, Q3, but will be up from raw material prices Q2 this year. That's what we said.

: Saul Rubin: Okay. Well the last question is on raw materials in that case, the further one there. You obviously benefit, or there's a lag between the prices and the stock market and then when you do the benefits, all the problems, I suppose, associated with them, assume you are benefiting from the lower prices and not from lower prices six to nine months ago. Today the levels are higher. But then if you went beyond Q3--if Q3 is favorable versus Q3 last year, by the time you get to Q4 or the first quarter of next year, will you expect the flat year-over-year--?

: Sam Gibara: Well, let me--let me answer this because I understand that raw material is a concern for you and it is to us. Let me answer the question on the raw materials just to make it clear so there is no confusion. We expect raw material prices in the second half of the year to be up about 2 percent from the first half of the year and to be flat with last year through the half, through the second half, and to be flat with last year.

: Saul Rubin: I see. So Q4 will be unfavorable--Q3, favorable for you, Q4, unfavorable.

: Sam Gibara: Correct. Correct. We also expect to stay ahead of the raw material price increase and as we've always done in the past, stay ahead of the cost curve by offsetting raw material price increases with cost containment and with whatever we--whatever else we need to do to protect our margins.

: Saul Rubin: Okay. Very good. Thank you.

: Sam Gibara: You're welcome.

: Operator: Your next question comes from Saul Ludwig of McDonald Investment.

: Sam Gibara: Okay.

: Saul Ludwig: Good morning. It's nice to see a quarter of the PT estimates.

: Sam Gibara: Well, thank you--thank you, Saul. Yes, and we'd like to make it a habit.

: Saul Ludwig: Okay. Just want to ask about this 18--16 percent drop in unit sales in U.S.--North America replacement. You know, going back through the newsletters, in April, the industry was up 3 percent. You said you were up about the same as the industry. In May, the industry was down 4 percent. I think you guys were down five or six. So for that--for the two months, first two months, you seemed to be fairly close to what the industry did. Then, lo and behold, for the quarter you are off double what the industry was off. How bad was June? Were you off 30 percent or 35 percent in the month of June?

: Sam Gibara: No, no, no. I just don't understand what--these numbers. No, no. In June, we did rather better than in May and April.

: Saul Ludwig: Yeah, but compared to the industry.

: Sam Gibara: Compared to the industry. Compared to the industry. If the industry was down--I don't--I mean, you quote the numbers here. I don't have them with me. But if the industry was up 3 percent and we were up two in April, whatever it was, and in May the industry was down four and we were down a little bit more. In June, if the industry was down 16 percent we were not off from the industry. We were in line with the industry.

: Stephanie Bergeron: We were below--in the month of June we were below the industry.

: Sam Gibara: Yeah, we were below the industry--.

: Stephanie Bergeron: --A couple of points.

: Sam Gibara: A couple of points. But not any different than April or May. We--.

: Stephanie Bergeron: --Right.

: Sam Gibara: June was no different than April and May in terms of how we compared with the industry.

: Saul Ludwig: Well I'm just trying to get into if your volume was down roughly 16 percent in the quarter and the industry was down 7 percent--.

: Sam Gibara: --Yeah, but the difference is forward.

: Stephanie Bergerson: Okay. And also, excuse me, Saul. Your 16 percent for replacement being down, that is consumer and commercial?

: Saul Ludwig: Right.

: Stephanie Bergerson: Okay. You're talking about--we're talking about just consumer.

: Saul Ludwig: Gotcha. Okay. Thank you for clarifying that. Next question, in the news release it said you had reduced factory utilization as a part of the reason for depression on earnings. Was unobserved overhead a cost factor in the quarter, and if so, to what degree?

: Sam Gibara: No. We say--yeah, we say that it was not a factor because we took people out. As we said, we have this flexible manufacturing now where we can have reduced factory utilization without suffering the penalty of a big unabsorbed overhead problem. We don't have to pay for fixed labor.

: Saul Ludwig: So there was no unabsorbed overhead cost in the--in the quarter?

: Sam Gibara: That is correct.

: Saul Ludwig: Okay. And then briefly, on the balance sheet there is an item that's called "long term notes and accounts receivable" that creeped up in the first quarter and then creeped up in the second quarter. It seems to--did that consume $40 or $50 million in cash?

: Sam Gibara: I'll have--I don't know. I'll have to turn this over to someone. Just--I'm not sure I know what--.

: Stephanie Bergerson: --There would be a little bit of increase in notes payable on the first and second quarter because we did use cash slightly to increase inventory since the end of the year, Saul. But it--.

: Saul Ludwig: --How about accounts receivable, long term accounts receivable and notes receivable?

: Stephanie Bergerson: I'm sorry. That would reflect your June sales, which were strong sales for us.

: Saul Ludwig: Long term?

: Stephanie Bergerson: No. That should be under "accounts and notes receivable." Oh, you're saying--oh, all right.

: Lora Thompson: He's looking at the 191.2 for June.

: Stephanie Bergerson: Just a second, Paul. Let me see if we can find that.

: Sam Gibara: Long term accounts here in notes receivable.

: Stephanie Bergerson: It's up 50 million from June--or from December, sorry.

: Sam Gibara: You want to get back--do you want to get back to Saul?

: Stephanie Bergerson: Yeah. We don't have it.

: Sam Gibara: We'll get back to you.

: Saul Ludwig: And then finally, did you buy--was this the quarter you paid out for the additional Sava equity? Did you consume some cash?

: Sam Gibara: That is correct.

: Saul Ludwig: How much--and how much did you spend there on that--that consumed some cash?

: Sam Gibara: Now but that--no, that was cash. No, no. It was $30 million in cash.

: Saul Ludwig: This quarter?

: Sam Gibara: Yes.

: Saul Ludwig: Okay. Very good. Thank you very much for the explanation.

: Sam Gibara: You're welcome.

: Operator: Ladies and gentlemen, we have reached the end of the allotted time for questions and answers. Mr. Gibara, are there any closing remarks?

: Sam Gibara: Well, yes. Thank you, Janis. And thank you all for being with us this morning and for staying with us for the hour and listening to our story. And we look forward to being with you again in three months. So, thank you.