Goodyear Tire & Rubber Co (GT) 2002 Q3 法說會逐字稿

Good morning. My name is Michelle and I'll be your conference facilitator today. At this time I would like to welcome everyone to the Goodyear third quarter earnings release 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 the star and then the number one on your telephone keypad. If you would like to withdraw your question, press the pound key.

Ms. Gould, you may begin your conference.

Good morning, and welcome to the Goodyear review of third quarter results. Our discussion this morning will be available through replay after two p.m. Eastern Time by dialing 706-645-9291 and entering access code 5447497 or by listening to the webcast replay on WWW.video.com in the investor relations section. In that section you will also find a slide presentation to go along with the conference call comments. I'd like to remind you that our conversation this morning contains certain forward-looking statements based on current expectations and assumptions that are subject to risks and uncertainties that could cause actual results to differ materially. These risks and uncertainties include price and product competition, customer demand for company's products and general economic industry and market conditions. The company disclaims any intention or obligation to update or revise any forward-looking statements, whether through new information, future events or otherwise.

On today's call we have Sam Gibara, Chairman and CEO, who will provide an overview of the market and earnings. Bob Keegan President and COO will discuss the operations, and Bob Tieken, Executive Vice President and CFO will discuss our tax rate in the quarter, pricing and liquidity. Also on the call will be Stephanie Bergeron, Senior Vice President of Corporate Financial Operations. I'd like to turn the call over to Sam Gibara.

Thank you for being with us this morning. We have just reported, as you know, our third quarter earnings and what I would like to do is take you through the income statement and the balance sheet for the corporation as a whole. As Bob has indicated, Bob Keegan will then discuss our operating results by business unit and Bob Keegan will review with you pension, liquidity and taxes. Then I will come back to share the outlook and we will take your questions after our presentation.

As a general overview, let me start by saying that the third quarter of 2002 showed good improvement over a year ago quarter in 2001. We certainly are willing momentum in six of our seven business units, and they are performing much better than they have. I think that the turnaround in these business units is clear now and will continue as we go into the future.

We are now focusing on improving our performance in North American tires, which has had, as you have seen, disappointing results in the quarter.

As for the balance sheet, we will discuss it in more detail, but we are focusing on having a well managed balance sheet, in keeping our working capital under control, and we are committed to generating significant cash flows in the fourth quarter, which will result in a positive cash flow position for the company for the full year.

So let's start with the income statement and let me try to walk you through our income statement to explain our operating improvement.

As you can see from the slides, the reported net income for the third quarter was 73.7 million dollars, and that compares with 9.3 million dollars a year ago.

We also had a pre-tax gain this quarter of $10 million primarily due to the sale of the land in Mexico. And we had net rationalization charges of $12 million which have more than offset the gain from the Mexican land sale.

Finally, the taxes have increased $2 million from $2 million last year to 22 million dollars this year.

So if you look at the slide, you can see the reported net income was 53. If you add back the tax, we get to 56.4 million compared to 11.3 a year ago. That would be our income before tax.

Now, if you back out the net gain on the sale of the Mexican land and the rationalization charges, we end up with an income from tax from operations of 58.2 million dollars compared to 11.3 million dollars, a year ago.

Now, this would be the income before taxes from operations.

And this number, we have this year a favorable foreign exchange currency of 26 million dollars, and last year that number was 2.6 million dollars.

So after the foreign exchange translation, we get to 72 million dollar profit this year compared to 8.7 last year.

The last comment I'd like to make about these numbers is that in last year's number, we want to remind you as we said in our press release that we had a 50 million dollar EBIT gain last year as a result of the Ford recall of Firestone tires. We saw last year's 2.9 million units as part of this program and obviously this volume was not available to us. And basically it is this volume that accounts for our units sales being lower this year than they were last year.

They're a significant factor.

So with that, we can move on to explain the SBU results. By business unit, North American tires last year had 88 million dollars profit in the third quarter of 2001. And we're reporting 10 million dollars this year.

In that 88, there is included the 50 million dollar operating income from the Firestone recall program.

Bob Keegan will discuss the operating results in a few moments, and he will explain the action plans we have in place to help turn North America around and get it to better results than we're seeing at this point.

Looking at the other business units, you will observe that the other six units had solid earnings improvement over last year, maintaining the profit from the second quarter of '02. And let me now walk you and on a comparative basis by business unit in this quarter compared to last quarter.

North America had 10 million dollars operating income, 10.1 compared to 87.9. That is an operating margin of point 6 this year compared to four and a half last year.

The European Union reported an operating income of 30.2 million. That was EBIT of 3.6 percent margin compared to an EBIT of 3.1 million a year ago, or point 4 percent. Europe and Africa reported 30.3 million dollars of EBIT or 14.3 percent margin compared to 6.2 million last year of 3.4 percent margin.

Latin America had 24 .3 million dollars operating income of 11 percent operating margin, compared to 19.3 a year ago of 7.8 percent margin.

Asia reported 11.9 million dollars operating income, of 8.7 percent of operating margin. And last year that number was 5.1 million, or 4.2 percent operating margin.

And engineered products reported 10.9 million dollars EBIT, or four percent margin. Four percent compared to 1.2 million dollar loss last year or .4 percent operating loss last year. And finally the chemical division had 22.2 million dollars EBIT of 9.3 percent margin compared to 16.4 EBIT last year and 6.3 respectively, operating margin.

So these are our results by business units. And that's really basically concludes the overview of what happens in the quarter in our income statement as I mentioned both Bob Keegan and Bob Keegan will expand on the discussion of the income statement in a few minutes.

Let me move on to the balance sheet.

And I want to offer a few comments on the balance sheet.

Cash and securities stood at 785 million dollars a year ago and 595 million dollars this year.

In last year's numbers, it included a number of over 600 million dollars that is the result of a bond issue we had in Q3 of 2001.

So we raised 600 million dollars, a total 600 million dollars, kept them in cash, and paid down debt in the last quarter of last year.

October 1st, as a matter of fact, last year we paid 258 - paid down 250 million dollars in debt a year ago.

Looking at accounts receivable, accounts receivable this year, a billion 774 million, down from a billion nine or eight a year ago and that is 174 million dollar improvement from a year ago.

As you know, we had an off-balance sheet account receivable program. Let me give you the respective numbers from last year and this year. The off-balance sheet accounts receivable a year were a billion 19 million dollars in September of 2001, at the end of September '01. September '02 that number was 896 million dollars, about 125 million dollars down from a year ago.

And that number at the end of September is substantially unchanged from the number that we had at the end of June, 2002. Bottom line, our receivables are down 5.6 days from a year ago in terms of cycle days we have 5.6 days few in receivables than we had a year ago. Inventories show basically the same story. Inventories are down from two billion 662 a year ago to two billion 394 this year.

And that is a 268 million dollar improvement from a year ago. And inventories are down 6.5 days from their level a year ago.

Payables. Payables are up from a year ago. They were a billion 279 last year and a billion 395 this year. And we used some of our cash to settle some of our accounts receivable.

So bottom line, working capital was three billion 291 million dollars in September 2001 and two billion 773 million dollars at the end of September '02. And that is a 558 million dollar reduction in working capital over half a billion dollars from a year ago.

As a percent of sales, our working capital a year ago was 23.2 percent of sales, and this year 90.8 percent of sales.

The net debt of the company was three billion 415 million dollars a year ago, and three billion and 79 million dollars this year. And that's a 300, almost 380 million dollar reduction from a year ago.

So the balance sheet continues to be a focus for us and continues to be managed efficiently so that we can continue to generate the cash to grow the company and improve our earnings.

And that basically concludes the remarks that I wanted to make initially in this conference call. I will now turn this over to Bob Keegan who will discuss our operating results.

Thank you, Sam. As Sam mentioned once again six out of seven businesses showed dramatically improved results year over year. But let's start with North America where you are all interested in how we're going to improve the business.

North American profit declined to 10 million dollars in the third quarter of 2002. Operating profit in North America in the third quarter of 2001 would have been 38 million dollars if the 50 million dollar profit from the Ford recall was excluded.

Now, we estimate that North American consumer replacement market, and here I'm talking the total industry, declined in Q3 approximately three percent compared with a year earlier. If I exclude the Ford recall units, the industry grew at five percent.

Goodyear had lower sales growth than the industry.

Goodyear also grew slower than the OE markets for tires which grew at almost 11 percent in the quarter.

The commercial OE industry continued to be strong up 30 percent given the prebuying and Class A trucks.

Now our growth was not as strong as the industry. And I wanted to comment here that our participation at our major or OE customers, international and map. Is not heavy in Class A trucks and that's hurt our market share here in the third quarter. Starting in the fourth quarter and in 2003, this will actually help our market share because we've had in this area a prebuy, we'll have a low buy or a no buy and trucks going forward because of the new EPA engine requirements.

In the commercial replacement market, growth was 16 percent. We're growing but lag the industry here and have an order backlog. We're increasing production to get at that backlog both here in the United States and offshore. In North America, I want to talk to you a little bit about our action plan going forward.

And these actions are clearly totally focused on turning our business around. Our plans are not finalized but the direction for these plans is solid.

We'll share more details with you in February.

We have placed a number of talented people in key jobs in North America to give additional focus on improving its profitability. Ted Fick has come in this year to head the commercial or truck business for us. Jack Witherton has come into to head our dealer sales organization and is bringing a focused commitment to improve both our relationships with our dealers and our profitability in that critical consumer replacement area and our most recent announcement was Kevin Kramer has moved to be our GM for driving improved profitability at OE.

Our second area of focus is to sell more tires profitably by increase productivity within our existing dealer channels. We have more touch points in the marketplace than our competitors, and we'll be able to leverage our position to drive more volume.

We've taken a fresh look at where our products compete and have right priced our products for the market segment. It may mean higher prices on some products and lower prices on others, but we will be competitively positioned.

In product lines where we've adjusted pricing we've already seen significant form man's progress to date.

Our wholesale distributors are back to purchasing at about the 75 percent level of where they were one year ago.

We feel that we've made significant progress here in mending our relationships with those distributors.

We're also adding more feet on the street, more salespeople, to better serve our important dealers.

Our third area of focus is we're developing a distribution strategy also to expand into new markets which we don't adequately serve today. We've identified by brand and by territory exactly where we want to expand and the volume and profit potential from that expansion. We're improving our product pipeline. The Eagle F1 has been extremely well received in that Europe and primarily indications that reception will be duplicated in North America. We're introducing a new spare truck tire which our fleet customers today have evaluated as an excellent excellent product.

Over the next year we'll have 20 major new products rolling out globally and a significant proportion of those will be in North America.

We have outstanding quality products and we're going to build on that. The Goodyear Eager Altered Rep and Dunlop SP winter sport, both snow tires, were rated number one and two in a leading U.S. consumer magazine this month.

In the touring area, the touring performance area, you can consider that the all season tire category, the Dunlop SP Sport A2 received the highest score.

Now, all of our competitors say they're going to focus on high performance and SUV tire lines.

Here we'll continue to drive growth in those markets with the Eagle F1, which I just mentioned, and our ProTara [ph] SUV tire.

Now we recognize that most of the market is comprised of a broad market segment and we have to become more profitable in that area. We are working to reduce our break even point. We will source more of the broad market tires in our lowest cost facilities, both offshore and here in North America. And we'll take advantage of our global footprint to be competitive in the marketplace. We've spoken before about flexible manufacturing and we continue to add to our flexible manufacturing initiatives which allow us fundamentally to reduce our labor costs. We're implementing systems to improve our forecasting for better fill rates and better fill rates with less inventory. And as we've indicated before, we'll be pursuing OE shipments select actively. We'll continue to desource from models where we cannot be profitable or seek price increases.

Now, at our February meeting with the financial community, we'll roll out the details of our 2003 action plans for Goodyear and particularly for North America where we know that a turn around is critical to our success. I'll now move to performance in the other business units.

European Union profit was up nearly 10 fold. Goodyear sales were in the European Union were up 1 percent to 847 million dollars, excluding the impact of exchange on three percent unit growth.

OE volumes increased four percent with strong sales at Rover Nissan, the BMW mini and GM replacement units increased two percent. Goodyear gained market share in the consumer OE market which declined approximately two percent in the quarter.

The commercial OE market declined four percent in and our sales declined slightly more than the industry. Consumer replacement market grew four percent. Commercial replacement was up about one percent over last year.

I wanted to mention two new product introductions of note. In testing by Automotive Enthusiast Magazines throughout Europe they confirm what our salespeople, and dealers have been telling us. That's the Eagle F1 is the best ultra high performance tire in the market today. We plan to capitalize on that.

The Wrangler HP was introduced for the SUV market which is growing rapidly in Europe today. Our tire performs both on and off road than the competitive tires.

For EU profitability improved 3.6 percent of sales a three point improvement over 2001. Now, this operating income benefited from lower conversion in raw material costs as well as improved volume. Lower conversion costs reflect the impact of moving product out of a European facility and here by moving passenger tires to other low cost facilities, including those in eastern Europe, we clearly get a boost in our profitability.

The European Union is seeing stronger snow tire sales in both September and October compared to the past two years. And that translates directly into improved profitability here late this year.

In Eastern Europe profit was nearly five times higher than the third quarter of 2001 we saw strong growth in Turkey Slavonia Morocco, as well as a series of successful promotional campaigns in Poland. Those fueled a 20 percent unit growth over 2001.

Replacement sales grew 24 percent while OE volumes decreased slightly. Sales overall were up 16 percent to 211 million dollars.

Profitability continued to improve in eastern Europe, operating margin increased to 14.3 percent compared with 3.4 percent last year. And 11.1 percent in the second quarter.

The improvement resulted in higher plant utilization, cost reduction programs and improved pricing and mix in their product lines.

Eastern Europe should also benefit from additional global sourcing opportunities utilizing their high quality and low cost production facilities.

Eastern Europe has succeeded by having an energized and focused management team. This team focused on increasing the distribution points, improving the truck sales and sourcing from low cost sources. They added distribution in North Africa. They expanded and improved truck line and selling extremely well, and snow and summer tires purchased from a lower cost Russian source are selling we're. The Russian market itself is a growth opportunity in itself obviously for us moving forward in eastern Europe.

Asia has more than doubled its profits in the quarter compared with last year. Operating margin here was 8.7 percent compared with 4.2 percent last year. They did that on the basis of seven percent unit growth and replacement and nine percent unit growth in OE.

Improved pricing and mix combined with lower raw material costs contributed six million dollars to the improved EBIT.

Latin America profits were up 25 percent. Our Latin American performance is an excellent example of how to be successful in a very turbulent market, despite adverse currency movement. Latin America was able to sustain volume versus last year, take advantage of cost initiatives and introduce new products.

Currency devaluations, especially in Brazil, Argentina, Mexico and Venezuela, reduced sales in dollars by approximately 74 million dollars. And EBIT by 14 million.

Lower raw material costs helped improve EBIT for Latin America.

Our chemical division, profits were up 35 percent. Chemical product sales were actually down nine percent due to our sale at the end of last year of the specialty chemical business. The higher volume in the core business was significant savings from the use of six sigma that contributed to the improvement in operating margins to 9.3 percent. And you'll see us carrying six sigma techniques into our other business units as we go forward.

Engineered products had the best third quarter profit performance since 1998, improving $12 million from a loss position in 2001.

Now, the improvement in profitability is due to strong military sales, continued cost containment actions and higher productivity.

The conveyer belt industry here continues to be weak and we're seeing the effect of that on our business here in the third quarter.

As an overall comment our operations showed improvement over 2001.

I'd like to turn the call over at this point to Bob Tieken, and Bob is going to give an update on liquidity, pension and tax.

Good morning. I have the interesting subjects to talk about this morning. So I'll move right into it.

The first is pension funding is clearly on the top of everyone's mind, and I give you an overview about where we are are on that. The markets move everyday but I'll talk about some possible year-end positions insofar as Goodyear is concerned, then we'll talk about the liquidity position and explain the tax provision that we recorded in the third quarter.

At the present time, we expect the unfunded amount of Goodyear's projected benefit obligation could be about two billion dollars at the end of the year. This compares with a one billion dollars that we reported at the end of 2001.

This reflects declines in asset values which were 17 and a half percent negative through September 30th, 2002, as well as this year's contribution that we made.

Next I want to comment on future contributions.

Dependent upon year-end market conditions and a different future rate assumptions Goodyear could be required to give somewhere between 350 and 550 million dollars by the second half of 2004. We will fund these contributions using operating cash flow, possibly market financing and the proceeds from any future asset sales that might take place. Finally I want to get some thought on pension expense for next year. Pension expense is expected to increase next year driven by three factors. First factor: 2002 asset returns. First, each five-point reduction in 2002 asset returns increases our pension expense next year by 25 million dollars. So if returns at the end of the year are at a negative 10 percent, about 20 points below the long-term return assumptions of 9.5, our pension expense next year would increase about 100 million dollars for 2003.

The next assumption, long-term asset returns.

Second, for each 50 basis point reduction in our long-term return assumption, our pension expense will increase 15 million dollars in the year 2003.

Discount rate. For each 25 basis point decrease in the discount rate, our pension expense will increase 15 million dollars in 2000. This should give you some dimension as to the level the impact pensions will have on Goodyear's earnings next year. While these expense calculations as well as the contributions and funded status calculations will affect our reported results in future periods significantly we believe that the impact on operations is in fact manageable.

Now I'll jump to the question of liquidity. Last year we focused on cash flow and refinanced our business anticipating weak markets. We continue to look at our cash and our balance sheet very closely, at the present time we have 1.2 billion dollars available to us on two recovering credit facility agreements.

We also have seven hundred million dollars of credit available in terms of short-term uncommitted bank agreements. That's almost 600 million dollars in cash at the end of the quarter, give us liquidity of 2.5 billion dollars because we believe our position is strong at this particular point in time.

Now let me talk a little bit about taxes. As you're very much aware, we're continually refreshing and adapting our tax strategy. And I think trackses are generally a subject that many of these meetings, because of the good job we do in terms of managing our tax rate, it's not a complex thing because of the international major of our company. But still principal focus of the company has always been to optimize its tax position.

The recognition that in the future cash would need to be returned to the United States in order to reduce debt and fund our pension plans was a critical part of our ongoing strategy.

The opportunity to take advantage of current U.S. operating results in light of tax laws, carry back rules and foreign tax are credits in the U.S. was not another consideration. Considering the number and complexity of changes, a number of decisions were made in the quarter that does in fact give us somewhat of a confusing picture insofar as our taxes are concerned. First let me talk about the 43 million dollars tax accrual for the repatriation of foreign earnings. Changes in a foreign tax jurisdiction caused us to relook at our historic tax planning initiatives. Additionally, we saw an opportunity to create foreign tax credits that could be used in future periods rather than to allow them expire unused.

Finally, we decided we would likely repatriate a portion of our international earnings to the US sometime in the future to meet debt and pension obligations. Historically, we have projected that these earnings to be [inaudible] Taxes but not US taxes.

With all these actions and decisions it was necessary to make a U.S. tax accrual on these redesignated earnings.

It was also on that credit in the quarter reflecting a nine month impact of other tax planning initiatives completed in the quarter. There are a variety of items that are included in the credit including taking advantage of tax loss carry backs, the finalization of several tax audits and the traditional provision of taxes of the current period in our international earnings. The net result of both of these actions was a 43 million dollar provision offset by a 20 million dollar tax credit.

There also have been some questions regarding foreign currency that I'd like to address.

Translation captures the impact of currency changes on income statement like sales and cost of goods sold.

Foreign currency expense is also displayed on the income statement and reflects the impact of changes on exchange rates on foreign currency assets and liabilities, or in our case U.S. bar denominated cash and accounts receivable in Brazil. Brazil is an exporter and holds significant dollar accounts receivable in cash.

This balance which are somewhat from historic levels is revalued at the end of the quarter and are devalued 30.Percent. This created a gain for us in the third quarter of 25 million dollars.

So these are the three subjects that I wanted to cover, the pension liquidity the tax statement and the foreign currency. Now I'll turn the call back over to Sam.

Thank you, Bob. Let me close this presentation by giving you our outlook for 2003. First let me say we're not going to offer you guidance. We didn't for the third quarter. We're not going to offer guidance for the fourth quarter given the uncertainty of the market and the volatility of the markets in which we operate.

But we know a few things we'd like to share with you. And we want to give you our perspective on what we see coming up.

Bob talked to you about the pension costs for next year. I'm not going to go back on that. But that's something that we clearly are going to have to offset and we are going to offset that, as Bob mentioned we don't expect that to be an issue that we cannot address.

We expect raw materials costs to increase to on average by five to seven percent in 2003 year-over-year.

As far as other conversion costs are concerned, the major cost coming up to us is the renegotiation of our labor contract which expires in the spring of 2003. And the issue in these renegotiates, in this renegotiation is going to have to deal with primarily health care costs and pension costs.

We are focusing on offsetting these costs through productivity in improvements and other cost saving measures and we're confident that we can do that.

In terms of how the markets are going to grow next year, I'd like to share with you the estimates as we have them from the RMA in the United States and the ERMC in Europe which are the official estimates from the industry.

And I'd like to say that our expectations in our own estimates are somewhat lower than the numbers I'm going to share with you which are the industry estimates.

We have a slightly more conservative forecast for each of these numbers.

So, in North America, the replacement market, the RMA numbers are based on an increase in the consumer business in the replacement market are five percent next year.

And the commercial market is expected to increase by four percent next year.

At OE, the RME estimates call for consumer market increase of one percent and a commercial market increase next year of nine percent.

Strong increase. In Europe, basically the estimates vary between one and two percent increase overall, whether it's replacement or O E and whether it's consumer or commercial. It varies from basically minus one percent for commercial replacement to plus two percent for consumer OE. But there's anywhere between one and two percent. And as I say, in both Europe and North America, we have somewhat more conservative estimates than these.

And that's what we're planning for in our plans for 2003.

And that basically concludes the remarks that we had for you and wanted to share with you. And now we'd be happy to take your questions. If you have any.

I would like to remind everyone, if you would like to ask a question, please press star then the number one on your telephone keypad.

Your first question comes from Steve Greskey.

I a couple of questions. First the pension, is that the total number you gave us, Bob, right?

Yes.

What's the U.S. piece of it, do you know?

Let me check that Steve and I'll get back.

And what's the discount rate change you assumed? Did you assume any change in the discount rate in that two billion number or would that sort of make it higher.

No, we assumed a change in the discount rate.

To what?

50 basis points down to seven and a quarter.

So that two billion number assumes a discount rate of seven and a quarter?

That's correct.

You said the funding has to be done by mid '04?

That's correct.

Question for Bob Keegan, on North American Tire, this plan, you've been here a couple years now and we've seen a few plans out of North American Tire. Could you tell me what's different about this plan versus the prior plan you developed?

I think, Steve, the differences would be in line with, number one, as I indicated, we've got a stronger leadership team down several levels in the organization than we've had before. Two, we did learn some lessons from the plan that we put in place at the beginning of 2002. And those are lessons around fundamentally dealers and how we're going to deal with both our existing dealers and new dealers.

And just a question on the - so the raw materials are up five to seven and I mean just my back of the envelope math says the raw materials are up, could be up a couple hundred million bucks and the pension costs could be up 150 or more. That seems like a lot of cost to overcome next year. Do you think you guys could still use productivity to overcome that stuff?

We're going to use productivity, Steve, to overcome whatever increase we have for labor and pension, yes.

That's the plan right now is to overcome the labor costs with productivity.

The raw material costs we need to overcome with pricing or something like that?

Yes.

Okay. All right. Thank you.

Steve, the U.S. piece of that two billion dollars was somewhere between 1.2 and 1.4 billion.

Great. Thanks, Bob.

Your next question comes from Rod Latch.

Good morning, everybody. A couple questions. Let me just clarify this. You've got 400 million at least of negative on your P and L next year between the pension and the raw materials. And are you saying that you do have - you anticipate 400 million dollars of cost savings or can you give us any kind of comment on what, in aggregate, all your cost savings initiatives could total? And also can you talk a little bit about the implications for pricing in the market? I assume that certainly some of these things, certainly the raw material costs are going to affect the whole industry?

This is Bob Keegan. On the pricing front, in North America, we will make an announcement this Friday. I mean that seems like a simplistic answer. But I'm giving you what I have flexibility to give you at this point.

Are you guys placing a higher priority on protecting the profitability and increasing the pricing, or is market share at this point in equal or greater priority?

This is Bob Keegan. I think clearly market share is important to us in terms of what it means in volume. I mean the high fixed cost businesses are very sensitive. So profitability in terms of being able to have higher volume running through the system is an important thing to us. Because the volume etched to the profitability and clearly taking pricing actions and tying off some of these raw materials costs. I'd also add that the five to seven percent in the terms of the way we look at it, that's the way we look at prices in terms of the way they're reacting in the marketplace. We generally think in terms of productivity in terms of factory productivity, but we also have productivity that is built into our purchasing processes, not totally dissimilar to what we did in connection with the ESR transaction. So that we believe that we can get purchasing productivity to offset some of the price increases. We think we might be able to get some price to offset some of the raw material increases, and then we have various productivity initiatives, including increased sourcing from offshore that we think will help offset some of these labor things. So I think if I were to try and characterize how we think we're going to deal with these rising costs, those are the buckets, those are the buckets that I would try and put them in. But clearly it's all focused on not market share for the sake of market share but getting volume into our plan so that we do in fact get more margin and reduce our costs.

That's at least the way I try and follow it.

Can I also ask about the revolver and the uncommitted bank line. Are you bumping up or you expect to bump up any covenants there, how protected are those facilities?

We're basically in compliant with our covenants at the end of the third quarter. We watch it very carefully. We manage the business in order to make sure that we maintain compliance with those covenants.

So you're expecting even as you look out to next year that won't be an issue.

Based on the way things work at any point in time I'm not going to make any forecast where we are we've remained compliant and it's our objective to keep focused on those issues and to continue to keep in compliance with those covenants.

Two last things, are you guys planning on any significant inventory reductions as we look out to over the next couple of quarters? Is that going to be a drag on the results? And lastly, what was the share count exiting the quarter? Did the 11 million share contribution, was that reflected in the share count here?

The share count at the end of the quarter is 175 million shares you'll see on it the face of the balance sheet. But the count for the end of the quarter. To are the end of the quarter for the EPS calculation there's an average of the view in September and I think that number is closer to 164 for EPS calculation.

And the inventory reduction, we're going to reduce inventory by the end of the year. Yes, we have plans to continue to reduce inventories by the end of the year. We don't think this is going to have an impact on our ability to sell the products that we have to sell. The fourth quarter is typically a quarter where it's a seasonally weak quarter. And every year we reduce inventories at the end of the year. So we expect further inventory reductions in the fourth quarter.

Okay. Thank you very much.

You're welcome.

Your next question comes from David Bradley.

I guess we've talked a little bit about next year. Maybe we can focus on what are the positives and negatives hitting you in Q4. I guess the pension cost won't hit you until next year. Have you if same pension cost in Q4. Inventory take out will you a little bit. Raw materials, how much of that is going to hit you in the fourth quarter and are there other pluses and minuses we should think about vis-a-vis third quarter?

Let me take this. What we are looking at, Dave, basically is our conversion costs in the fourth quarter are going to be substantially the same as they were in the third quarter. Conversion costs.

Raw material prices we're looking at an increase over third quarter of about three percent.

Okay. Any other pluses and minuses?

On the plus side, no. With some of the cost initiatives we have should help oust the cost side, yes. But these are ongoing initiatives, yes.

So should we think about earnings about the same as third quarter and fourth?

We're not giving guidance for the quarter, Dave.

Dividend, if given the big requirement down to pension, would you be looking to, is that under review?

The dividend is a decision that is made by the board every time we have board meetings we discuss our operations and the outlook and there's no, at the last board meeting we decided to maintain the dividend. There's no plans at this point to cut the dividends. And as we move forward, the Board will make these decisions.

With respect to the strategies you articulated at the beginning of the year, I think price increases in a number of markets was one strategy. If that wasn't going to, if that didn't turn out to be successful the back up line was to take out some North America capacity and rationalize to make a smaller but bit more profitable company I guess was the thinking. Some of these price increases in certain markets haven't been as successful. Are you now thinking of the fall back, which is capacity reduction in North America?

I would say, Dave, as we talk, we're continually looking at our pricing and it's not just a matter of price increases. It's how we play that out product by product, throughout our markets.

As I mentioned, we know that we have to take our break even point down and that's a comment that crosses all our cost categories, not just manufacturing but all our cost categories. Certainly all of our selling administrative and general expenses as well.

No plans right now to take capacity down in this North America?

We have a strategy, as you know, Dave, to increase our supply from offshore.

We've made some announcements.

We've made some announcements - yeah, we've made some announcements already on our capacity in North America is coming down. I don't know if you've seen it.

We've taken 450 people out of our Union City plant which has reduced our depend denies on that facility and we've been able to move some of those products into Latin America and we just recently announced a down sizing in the engineered products in Lincoln and we're going to be moving some of that production to Mexico as well. And as we sit here and put together our operating plans for next year as I think Sam and Bob both mentioned, increased utilization of these low cost supply sources in other parts of the world is going to be a very serious consideration as we try to offset some of the negative factors.

The answer to your question, Dave, is we shared with you that this was our strategy and we're going to implement it and we're implementing it.

Thank you.

Your next question comes from Wendy Needham.

Good morning. A couple of questions. First, you talked in the press release about negative mix in the after market and more, it sounds like the slight dequality might be over. Could you comment on what's going on with your mix and how long that's going to go on?

Markets are always moving in a lot of different directions at the same time. But we did state during the third quarter, in North America, in North America, a stronger mix in two areas. Clearly we saw more I'll call it low end custom and associate brand sales. And that's not necessarily a negative thing. But it's not what we counted on. So that is certainly taking place.

In terms of forecasting how long that's going to go on, I mean our assessment is to some degree that's a function of economic conditions right now in the country. But we're going to be doing everything we can in our forward planning to ensure that our mix is positive, while not ignoring that kind of the low end broad market tire.

Let me take this opportunity, also, Wendy, to address the question that rod asked earlier about whether we're going to go for profitability or market share. And I think we've answered that. But let me be more specific.

There is another opportunity for us. And that is to improve our product mix. Not our plan. I'm talking about our product mix, over what we've done in '02. I think that our product mix in '02 was not as good as it can be. And I think in '03 we have a significant opportunity to improve our product mix and therefore our margins in '03. And that is very much a part of our plan.

The other issue on our mix has been the OE business has been very strong as far as this year which is relative to the replacement. That has a negative impact on the calculation.

Okay. A couple of other things. The pricing announcement you're going to make on Friday, is that something that would be affective December 1 or January 1st? Circumstances.

We'll have to ask you to be patient on -

When is it going to be? (Laughter) I guess compared with the third quarter, I'm sorry, third quarter compared with second and your cash did drop. And there wasn't much change in working capital overall. There is the 140 million contribution to the pension fund. Were there any other big cash outflows in the quarter?

No, the contribution to the pension plan was clearly a stock one. So that did not have any appreciable.

Then what happened to the cash? Why did it go down so much in the quarter.

Wendy, there was a bank term repaid in the quarter and payables also came down in the quarter from June. Came down about 100 million.

It's primarily payables. I mentioned that in my remarks, Wendy. We paid our payables - we said those payables - our payables were up from a year ago.

So we've paid over 100 million dollars in payables.

Also Wendy there's points in times we make periodic payments bond interest payments that we would have made in the first quarter that you wouldn't necessarily have seen in the second quarter.

Thank you.

Your next question comes from Ron [inaudible].

Good morning everyone. You said I guess North American after market business, your business was down 6.6 percent excluding Firestone. Do you have a comparable number for the market, what you guys think the market did?

We said the market without fire stones was up five percent.

That was that number.

That's consumer replacement only. So is the six plus six you mentioned.

On pricing, what have you gotten year-to-date? Can you give us a total here? And what do you think the market has done? Are you above the market? Below the market?

You can see our revenue [inaudible]. The best way to express our pricing.

What we do, remember that in that revenue per tire calculation, what we give you is a mixture of both replacement and OE.

So your revenue per tire, if I take out Firestone was up a little. It was up like at least five percent in North America. But your mix was negative. So can I say -

Let me - our revenue [inaudible] For the year is up, if you take the number of tires sold, as Bob mentioned these are all [inaudible], our revenue per tire at the end of Q3 was 57.98. That is the same number as the end of Q2. And it is up from Q1 which was 55.40. So it was up $2.40, two and a half, for the year.

That doesn't include any mix, Sam? No mix changes.

That includes everything.

That's everything. That's OE. That's replacement.

That's replacement plus OE, consumer, plus commercial mix. It's everything.

So that's -

That's a total company number. So it also includes foreign exchange.

Total company number.

So it includes positive exchange and negative exchange, for example, in Latin America.

Do you have a number for North America?

We have the number for North America. The number for North America is up to 65.57. At the end of Q3 up from 64.30 at the end of quote and 63.11 at the end of Q1.

How much do you think mix hurt you from one Q1 to Q 2. Was it a buck or two per unit?

We don't have that, we'll have to give it to you.

It's not much more than a dollar or two, right.

Right.

And then your EBIT for North American business was down sequentially from the second quarter. Maybe you answered this. I didn't get it. But your units were flat roughly for sequentially from the second quarter. Can you just help me understand what's going on there in North America?

High volume low prices basically. It's high volume low price.

25 million it's all high raw material.

Most of it is raw material. It's a lot of items but most of it is high raw materials price.

Thanks a lot.

Your final question comes from Saul Rubin.

Good morning. A few things here, really.

First of all, Bob, on the pension contribution, you assume a 10 percent return through 2003. What would you expect to have to contribute for the pension fund before the middle of 2005?

I don't have that number here. We've just been focused on the first one which is 2004.

Could it be a number similar [inaudible].

I don't know.

We can get back to you. We don't know.

Okay. In terms of raw material costs, up five to seven percent next year on average, what is your estimate for '02 versus 2001? Full year?

'02, let me give you how we see this happening, really. We think that raw material prices in quarries will reach probably peak and will stay at that level in Q1. And then start coming down. So when we say it's five to seven percent, it's year over year, because the first quarter this year and the second quarter this year were much more raw material prices. So at the point today where raw material prices have come close to peaking the way we see raw material prices increasing, that level will continue into the beginning of next year and what we see is this number coming down later in the year. So year over year it will be five to seven percent up from this year.

Right. But you have, I presume you have an estimate what it is for this year, what is it this year versus last year on an annual basis?

This year it's down from last year, yes. This year it's down from last year.

It's down.

This year it's down from last year. We have that. This year it's down from last year because of what happened in the past. So that's why it's important to look at it by quarter. This year, let me give you the numbers.

This year -

This year, raw materials has been down about 260 million year-over-year. Six to nine months.

Okay.

Why did you expect to come down again after the first quarter of next year?

Because most of the increase is in natural rubber. We see signs of natural rubber prices will come down. STEPHANIE BERGERON: Saw, the number is 180. It's 180 year-over-year for this year.

For the first nine months.

Yes.

Good. Thank you. Looking at your working capital, in the fourth quarter of last year, you made a stunning improvement over the third quarter, generated around 800 million. If you do the same this fourth quarter, then working capital generates sort of 560 million dollars that you were talking about.

Is that what you're expecting?

We said we're expecting a strong cash flow in the fourth quarter. We expect a working capital, significant capital improvement in the fourth quarter but don't forget we started from a much lower number at the end of Q3 than we were at a year ago. So we are not going to see the magnitude of the reduction that we saw a year ago.

Yet. But still we'll see a significant improvement and a very firm positive cash flow in the fourth quarter.

So on a year-over-year basis, as of September, versus end of September last year 560 improvement for the full year is it still in the two to 300 million dollar range? Is that your expectation?

Our working capital is going to be down. We're going to have strong cash flows but to get back to your point, there's no way we're going to replicate the performance we had in the fourth quarter of last year but we're still talking about working capital coming down.

At the end of the year.

The balance at the end of the year is going to be less than the beginning of the year.

200 three [inaudible] In that range.

I'm not going to make a prediction we'll work it down to the lowest possible level particularly on the [inaudible ] Without losing our pill [ph] Rates.

In terms of the tax rate, you've managesed to keep that at a low level for a long time, 27, 28 percent range. With the changes that you're making, should we assume a higher rate going forward?

I think one of the things that you see is that the operating tax rate for the first nine months of the year is actually negative. That's where that 20 million dollars, that's where that 20 million dollar reduction is. But I think we're basically focusing on a ongoing basis, probably having around a 31 percent tax rate.

For ongoing planning purposes going forward.

Okay. About 31 percent. That's fine.

You've talked about productivity improvements. I think of labor productivity. You've gone a little more flexible system [phonetic]. Are you talking in general terms or can you be specific about the kind of productivity improvement you've seen through the quarter of this year and in what way might you be able to measure that.

I'm not sure I understand the question. What's the question again?

Have you seen productivity, productivity improvement through the course of 2002?

Yes.

A lot had to do with the flexible, some of the flexible manufacturing and rescheduling that we've been able to do at various locations in our plants, which have allowed us to basically rerespond to different volume levels by taking costs out of the plant simultaneously, plus the fact that we continue to see the benefits of some structural changes we've made in some of our manufacturing facilities.

Let me because the question of productivity has come up a number of times, Steve brought it up and David Bradley brought it up and you bring it up. And we are going to bring our break even point down next year. Our plan is productivity is coming, it is improving. Our conversion costs are coming down and our strategy to use low cost manufacturing plans plus the flexibility we have with our labor now are all factors that will result in better productivity. And substantial numbers.

Okay.

I have one more. In your bin market rate looks like you're losing market share there and is that correct? Talk about what's going on there from share. And also how strong is the snow tire market as we go into the fourth quarter?

I'll respond that we've lost a, in the consumer replacement market I think you're talking about in Europe, we've lost a little bit of share. Order of magnitude less than a share point. And but we've rep contained really good position on high profit margin products. So you can see that in the results.

And so that would be my response on the share position, generally.

Let me pick up on that. Yes, we have lost a little bit less than one percent market share. All of this was by design. Let me explain what it was. As you know, in Europe we've had a series of acquisitions. With these acquisitions came a lot of brands that were at the low end of the market, were not making any money for us. And we said in February of this year we made a presentation to you and we said we're going to exit eight [inaudible] And we did exit eight small brands that combined with less than one percent market share. So that is by design.

What is our profitability in Europe has improved as a result of that. We have a much better mix and that's the answer.

On the winter tires, Goodyear is leading the winter tire market in Europe. We are the leading and have been the leader and continue to be the leader in winter tires. And obviously it at all depends on the weather. But as Bob Keegan mentioned in his remarks, October was a strong month in Europe. And we have the leading position.

And our products are recognized in Europe and have been for ten years as the best products in the market. And every magazine that has winter tires in Europe in Germany or elsewhere has rated the Goodyear tires at the top.

We're not in a share loss position at all.

We're gaining market share in the wintertime.

I want to clarify this, because I've heard also and seen the suggestion that Goodyear doesn't have a good position in the wintertime market in Europe. That's not true.

We have a good position in volume, good position in price and we have the highest quality.

Thank you.

Thank you. Thank you for being with us today and we'll look forward to seeing you at the end of the fourth quarter. Thank you.