Goodyear Tire & Rubber Co (GT) 2002 Q4 法說會逐字稿

Good morning, ladies and gentlemen, and welcome to Goodyear’s 2002 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 star, and then the number one on your telephone keypad. If you’d like to withdraw your question, press the pound key. Thank you.

I’d now like to turn the conference over to Ms. Barbara Gould, Director of Investor Relations. Please proceed, ma’am.

Good morning, and welcome to Goodyear’s review of Fourth Quarter 2002 results. Our discussion this morning will be available by replay after 2:00 PM Eastern Time by dialing 706-645-9291 and entering access code 9550124, or by listening to the webcast replay on investor.goodyear.com -- no www needed, or it won’t work -- or, at our www.goodyear.com investor relations events section. The slide presentation to go along with the conference call comments is available on our website.

On March 28, the SEC implemented Regulation G, which has an impact on disclosures of non-GAAP financial measures. The Company is working through these new regulations. Given the fact that they have just become final, there’s a limited guidance available. Therefore, the Company is being cautious in its disclosures.

I’d also 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 the 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 as a result of new information, future events or otherwise.

Now, I’d like to turn the call over to Bob Keegan, our CEO and President of Goodyear Tire. Bob?

Well, thanks, Barb, and good morning, everyone. I can assure you that we are pleased to be able to speak with you today. It’s been quite a period of time.

The bank agreements are now complete. Obviously, they’ll provide us with breathing room and time, and we intend to use that time very productively to continue driving, first, the established momentum that we now have in six of our businesses. We’ll use that time to fix our core business in North America and also to pay down debt, to meet our pension obligations and to access capital markets.

But since our last call, I want you to know that we have not been standing still. We’ve made decisions to drive revenue and market share gains, we’ve cut our cost structure, we’ve made decisions to generate cash flow, all of these under the assumption that the refinancing would be in place, as it now is.

And I’ll just mention a few examples of those decisions that we’ve made. I would call them tough decisions. We stopped paying a quarterly dividend in February, as you know, for the first time since the 1930s. We also announced the possibility of a sale of our chemicals unit. We stopped matching contributions to employees’ 401K plans. We increased the premiums paid by employees for medical benefits, and we changed our vacation policies, and those are just examples of some of those decisions.

Now, joining Barb and me on today’s call are Bob Tieken, Executive VP and CFO, and Stephanie Bergeron, Senior Vice President, Corporate Finance Operations. And today, those of you that are looking at slides, you might reference the agenda slide, and I’ll just cover the flow of our agenda. Bob Tieken will discuss, first, our fourth quarter corporate results, then the details of our bank agreements, and a review of our tax and pension positions. And when Bob completes the financial section, I’ll return and discuss the operational performance for the fourth quarter of ’02, and then we’ll open the lines for Q&As.

I want to mention upfront on this call that since we’re already into April with the release of our fourth quarter earnings, we will not comment or give guidance on the first quarter of 2003. We plan to be in New York with many of you on April 30 to both release the first quarter 2003 earnings and hold an analysts’ meeting to discuss our turnaround strategy.

Now, before I turn the call over to Bob, a few highlights – and this is the next slide for those of you looking at slides.

The fourth quarter of 2002 for us showed good improvement over the fourth quarter of 2001 in operations. And, in fact, our segment operating income improved by $72m. We’re building momentum as six of our seven businesses are performing quite well, and I can assure you we are now intensely focused on improving our performance in North American Tire.

For those six businesses, excluding North American Tire, the segment operating income more than doubled in the fourth quarter of 2002 compared with 2001. And I just comment here, that’s good leadership; good leadership teams doing excellent work in their markets in those six businesses.

Also, our working capital continues to be well managed. Here in 2002, we built on the success that we achieved in 2001.

We also generated positive cash flow from operating activities in the fourth quarter, resulting in a positive cash flow from operating activities for the entire year.

And, now, I’d like to turn the call over to Bob for a review of our fourth quarter financial performance and comments on our refinancing and other key items of interest. So, Bob?

Okay, thank you, Bob.

First, let me walk you through our fourth quarter financials. We reported sales growth of 1.7 percent to $3.53b. Tire units declined in the quarter from the fourth quarter of 2001 by 1.6 percent to 53.6m units, driven primarily by the lack of 1m units supplied for the Ford recall of Firestone tires in the fourth quarter of 2001. Revenue per tire increased 2.4 percent to $58.32. Segment operating income improved to $79m, an improvement of $72m over the fourth quarter of 2001. The improvement was driven by six out of seven business units.

Taxes in the fourth quarter of 2002 included a $1.1b charge, or $6.17 per share in the quarter, compared with a benefit of $61m in 2001. The charge was due to recording a valuation allowance of $1.1b against our deferred tax assets, and I will discuss this issue in greater detail later.

We also reported a loss in the fourth quarter of 2002 of $1.1b, or $6.30 a share, compared with a net loss of $174m, or $1.07 a share, in the fourth quarter of 2001.

Now, on the next slide, we have our balance sheet. Our primary objectives in this area are to manage our working capital in order to free up cash for capital investments, debt reduction and pension funding. We have and we will continue to focus on maximizing our cash flows.

On the next slide, we point out that we’ve made great progress in reducing working capital during 2001, and we’ve continued this progress in 2002. Working capital was $2.3b, 16.8 percent of sales for 2002, compared with 17.6 percent a year ago. This will continue to be an area of focus for Goodyear.

Our gross accounts receivable ended the year at $1.5b, about the same level that they were at the end of 2001 on higher revenues.

Inventories were $2.4b, again at about the same level they were at in 2001. As we improve our logistics and forecasting systems, we will be able to reduce inventory levels even further while maintaining or improving our fill rates.

On the next slide, we talk about shareowners’ equity at December 31, 2002 and how it was reduced to $651m. The reduction from 2001 was caused by the increase in the minimum pension liability of $1.3b; the net loss of $1.1b, attributable to the valuation allowance on the deferred tax asset, partially offset by positive foreign currency translation of $61m and pension funding of $138m.

On the next slide, we talk about over the past five years since 1997, we have taken approximately $820m of rationalization charges resulting in reduced headcount of over 20,000 associates, and we have closed six factories around the world. We’ve reduced capacity by 13 percent since 1997 through 2002. Tires sold per associate increased almost 20 percent during that timeframe. The savings that we have realized have helped us offset rising wage and benefit and pension costs. Without these rationalization programs, it’s obvious that our financial results would’ve been significantly poorer.

The program in 2002 involved further consolidation of manufacturing capacity in Europe, closing a mold manufacturing plant in Ohio, and consolidating certain production operations in our Engineered Products business. The charges in 2002 totaled $27m, offset by reversals of prior programs of $18m. These reversals occurred after we determined that the cost of a given program, such as cost of leases and severance costs, may be less than we anticipated originally.

In 2003, we estimate that we will have cash requirements of $21m for severance and noncancellable lease expenses remaining from the program that we identified in 2002. The benefit expected in 2003 from this program is approximately $75m.

Now, I’d like to spend some time talking about our financing. Our objectives were pretty straightforward on these banking agreements. We needed time and flexibility in order to execute our North American tire turnaround strategy. These agreements meet those requirements. We have no significant debt repayment obligations for the next two years, but we will have the liquidity we need to meet our operating requirements and our pension and debt obligations. With all this, including a turnaround of North American Tire, we should be able to access the capital markets sometime in the future.

Now, let’s spend some time talking about these agreements. But before I talk about the details, I would like to recognize the efforts of Stephanie Bergeron, our Senior Vice President of Corporate Finance Operations, and Darren Wells, our Vice President and Treasurer, and their organization for getting this very complex transaction completed in a short period of time. Our banking partners, advisors, and a collective set of lawyers around the world also put forth a tremendous amount of effort. We had over 40 financial institutions that were involved in the execution of this transaction.

We have placed our existing U.S. term loans, including the $800m term loan and revolving credit facility, with four new facilities: the $250m European revolver and a $400m European term loan, a $645m U.S. term loan and a $750m U.S. revolver. The facilities mature in April 2005.

A new asset-backed loan for $1.3b, which can be upsized to $1.6b, replaces the $700m United States and a $63m Canadian accounts receivable off-balance-sheet facility. The new ABL facility has a term of three years. The total committed financing available to Goodyear is $3.345m, compared with $2.9b prior to this refinancing. The ABL provides the ability to add $300m of debt by agreement with new or existing lenders in order to give us what we need to grow the company.

We also had a European accounts receivable facility of about $350m at year-end. The bank agreements allow us to maintain these types of facilities in Europe, [indiscernible] new programs in Europe during the second quarter but must recognize the existing programs could be substantially reduced or even eliminated. The new arrangements provide more availability of money, more time, and with the flexibility to up side if necessary to turn North American Tire operations and grow our other businesses.

On the next slide, we talk about collateral. The collateral committed to the U.S. facilities are principally property, plant and equipment, 65 percent of the interest in certain foreign subsidiaries, 100 percent of certain domestic subsidiaries, intangibles, such as trademarks, and a second priority interest on accounts receivable and inventory. The ABL is backed by United States and Canadian accounts receivables and inventories.

On the European term loan and revolver, the Goodyear/Dunlop Tires’ Europe joint venture is the borrower. The collateral consists principally of cash, inventory and accounts receivable, excluding the receivables in Germany and France, property, plant and equipment in four countries, including Sava’s assets if they become 100-percent owned by the joint venture.

On the next slide, we talk about covenants. Minimum-interest coverage ratio of EBITDA, as reconciled on Slide 11, to interest expense of 2.25 to 1. Minimum net worth of $2.8b at March 31, 2003. It will fall to $2b by the end of the agreement, providing room if we were to sell businesses. The reconciliation of net worth is also shown on slide 11.

Secured – senior secured debt to EBITDA of not greater than 4.1. The U.S. and European term loans must be reduced by the proceeds of asset sales and capital markets’ issuance – 75 percent of any asset sales, except Engineered Products, 50 percent of any asset sales per Engineered Products if completed in this time period, and 50 percent of any capital market proceeds.

There are some limitations on expenditures. On capital expenditures, $360m is the limit in 2003, $500m in 2004, and $200m through April of 2005. The ABL has limits of $500m of capital expenditures for the full year of 2005 and $150m for the first three months of 2006. We believe that these amounts are adequate to meet our business needs. We have $100m over three years for acquisitions and new entities unless funds are available from asset sales and capital market proceeds. There can be no stock -- common stock dividends and no prepayment of public debt. As I said earlier, these facilities give us the funding, the time and the opportunity to turn around our North American Tire business while continuing to grow our other businesses.

Now, I’d like to spend some time looking at our pension plans at the end of 2002. At the end of 2002, we had global pension plan assets of $3.6b and projected benefit obligations of $5.8b. Our return on assets in the U.S. plans was a negative 14.7 percent in 2002.

Lower interest rates contributed to the rise in value of the obligations or liability. For 2003, we have lowered our discount rate to 7.25 percent based on the six-month average of corporate bond rate for the period ended September 30, 2002. This is consistent with past methodology. We lowered our expected long-term rate of return to 8.5 percent. And if you look at a 15-year average, the return was 8.3 percent, or 9.4 percent since the inception of the master trust in 1984. We’re in the range of many other auto manufacturers and suppliers.

Dependent upon the volatility of capital markets, Goodyear would be required to contribute between $375m and $425m to the U.S. pension plans in 2004 in order to satisfy ERISA minimum funding requirements.

And, finally, I would like to give you some ideas on our pension expense. Pension expense is expected to increase in 2003, and that increase is driven by three factors:

Two thousand and two (2002) asset returns. First, each five-point reduction in 2002 asset returns increases 2003 expense by $20m. Returns ended the year at about a negative 15 percent, or about 25 points below the long-term return assumptions of 9.5 percent. Therefore, this factor would increase pension expense approximately $100m in 2003.

Now, our long-term asset return assumption for each 50-basis-point reduction in our long-term return assumption, pension expense will increase $13m for 2003. Therefore, pension expense will increase by about $26m in 2003, compared with 2002, as a result of this factor.

Now, the discount rate. For each 25-basis-point decrease in the discount rate, our pension liability increases $100m, and our pension expense will increase $9m for 2003, resulting in an $18m increase in pension expense for 2003, compared to 2002, attributable to this factor. I hope this will dimension you for the level of impact that pensions will have on the company’s 2003 earnings.

So now we’ve covered pensions and the bank agreements, and now let’s turn to another subject, which are taxes for 2003. Due to the valuation allowance recorded against our deferred tax assets at the end of 2002, retained earnings have been reduced by $1.1b. The deferred tax assets are expected future tax benefits attributable in Goodyear’s case primarily to the booked pension and retirement healthcare benefit and to R&D that was capitalized for tax purposes. As these items are amortized, as in the case of R&D, or paid for benefits, the resulting tax assets will be available for use and will have value to reduce future taxes to the extent that we are profitable in future periods.

However, due to not generating income in the United States in recent periods, SFAS 109 required us to record a valuation allowance against our U.S. deferred tax assets. I might add that the allowance is a non-cash item, so it has no impact or had no impact on our cash flow in 2002.

Now, I’m sure you’re asking what impact this will have on taxes and earnings in 2003. The valuation allowance eliminates the current ability to recognize any future tax benefit on account of current U.S. financial losses. While we will continue to pay tax on foreign earnings and record the expense, we will not be able to show any tax benefit from U.S. pre-tax losses. Therefore, our overall tax rate will appear very high in 2003. I must add, however, that the valuation allowance can be eliminated as and when we show a trend of positive earnings in the United States. And as North American Tire continues to make money – or when it starts making money, those dollars will drop to the bottom line, dollar for dollar.

Now, let me turn the program back to Bob Keegan, who will discuss business unit operational performance in 2002. Bob?

Yeah, thank you very much, Bob.

I’m going to be on slide 15, for those of you that are looking at slides. We mentioned earlier that six out of our seven business units continued to show – and I will call this dramatically improved results year over year. Excluding North America, sales increased 2.3 percent for those other six businesses. Segment operating income, again excluding North America, increased to $456m, and that’s a 76-percent increase over 2001. We’re very proud of that performance and proud of these businesses, and I just ask you to remember, as we entered 2002, our plans, and certainly our market and financial turnaround goals for those six businesses, were very much, I think, in question, and all made good progress. They got the job done, and I’ll elaborate a little bit on each of those businesses in a few minutes.

But, first, I wanted the focus clearly on North America. That’s where our major problem is. And we’ll begin to talk about how we’re going to fix and turn around that business in North America.

In the fourth quarter of 2002, North American Tire had a segment operating loss of $34m, compared with a loss of $45m in the fourth quarter of 2001. Fewer OE tires and a better product mix within the replacement tire product line contributed to that improvement. The same factors drove a 1.5-percent increase in revenue per tire. Units in the fourth quarter in North America were down 9 percent, or two million units, over 2001, and I'll just comment on some of the drivers of that shortfall.

We had no end-of-quarter special deals on pricing in 2002, and we had a tough comparison with 2001. Remember that in December of 2001, our wholesale distributors bought significant volumes from us in anticipation of a price increase that was going to take place in January of 2002. Also in the fourth quarter of 2001, we supplied approximately one million units for the Ford recall of Firestone tires.

On slide 17, I’ll comment a bit about our plans going forward in North America. In North America, we are clearly not where we want to be, but I want to comment that we did make progress in 2002 in several of the businesses within North America. Our profitability improved in original equipment in commercial truck, and our retail businesses in 2002, and those were no small accomplishments. But we continue to work out a number of actions to turn our business around with focus on all of those business and intense focus on the consumer replacement business.

First, we’re stabilizing the business by winning back our dealers. The majority of the wholesale distributor problems that we faced last year as a result of a change in our pricing and discount policies, at this time, largely behind us. The leadership that we now have in place in North American Tire, under Jon Rich’s leadership as the President of that unit, I can assure you is very responsive to the dealers and distributors’ needs and is making a difference today.

Now, every channel that we serve is important to us, but I wanted to comment with you that dealers and distributors handle about 60 percent of our replacement tires, so it is absolutely critical that we win back their confidence. We’re intelligently addressing the major problem area that we had here in 2002. North American Tire is also implementing aggressive cost-cutting measures. By the way, we’re also doing that throughout the entire corporation. North America is reducing cost through headcount reductions, such as decisions made since we last talked and already made public, including 900 layoffs in Union City, Tennessee and 700 people in Akron that represent primarily white-collar staff people. And I want you to think of those cost reductions as a first phase of our activity. We’re also leveraging our purchasing capability by driving down both direct raw material and indirect goods and services costs.

I just comment here; we’re getting a lot of productivity out of our purchasing activity using all current Web technology. We’re also aligning capacity with demand. We’re making our factories competitive, or we’re looking at alternative sources for a product. The labor agreement, which we are currently negotiating with the steel workers, is critical here. We’re also capitalizing on the flexible manufacturing initiatives, which we worked with the steel workers to implement about a year ago which allows us to staff at the right levels in our plants and to then flex that manning as demand dictates.

We’re now treating our manufacturing operation as a global resource, so global sourcing decisions identify alternative sources or products. This includes for North America increasing the number of imported tires in 2003 to 10 million units approximately, up from approximately 4 million units in 2002. And we recognize that we simply have to be cost competitive here in North America.

Now, we’re also simplifying our business. We set up separate businesses responsible for profit and loss within North America, separate businesses for commercial truck, off-the-road tires, aviation tires, farm tires, OE business, retail business and consumer replacement tires. Now, each of those businesses is built around not only a P&L but built around a market and a set of customers, and that’s simplified how we go to market and how we run our businesses.

Our aim here is also clearly to become the easiest company to do business with in our industry by simplifying the entire sales and fulfillment process. It starts with the sales proposition presented by our sales people. It includes making it easy to place orders and receive the product on time at the correct cost. It involves making the invoice easy to understand, including what terms are and what discounts are expected. And I feel that if we do this right, we should improve our working capital turns and improve our fill rates.

Now, in North America, our most critical step is execution. I think in the past we’ve had good plans, but we failed to execute against them well. And I’ll make a few comments here in terms of execution.

Jon Rich, our new President in North America, believes in Six Sigma. He’s personally made that work during his career at GE, and he’s made it work here at Goodyear in the chemical business, and he plans to personally drive the same success in North American Tire.

We also must execute on the brand strategy for our key brands – Goodyear, Dunlop and Kelly. Dunlop for us is clearly the performance tire; Goodyear is luxury and mid-market; and Kelly addresses and focuses on the value segments. With that execution against positioning, our job is to support that strategy with the appropriate marketing and sales programs for all our channels. We are putting ads in place and planned sales program throughout the year, probably the most extensive in our corporate history, to build our brands and drive additional sales volume at the right pricing. We feel that our products are now right-priced against the competition, but we will continue to monitor the competition here to stay in line. We are committed to helping the dealers build their businesses. We have the market information that those dealers can use to identify opportunities working with our sales and marketing people by adding brands and improving product mix, etcetera.

Finally, we’ve focused our key corporate accounts and our plans to eliminate [productly][ph] unprofitable customers. The plans for the key accounts were developed during mid-year in 2002 and are being intensely implemented and closely monitored today. Obviously, we have a need to grow the business in North America. New products are going to be critical, new products such as our new truck steer tires, now in the marketplace, a new two-piece, an innovative off-the-road tire for our earthmover business; and we are developing new consumer tires, including a best-ever luxury tire under the Goodyear brand and a host of broad market lines. I’d comment here that Goodyear remains a market leader in run-flat tires, and we are focusing our development dollars on products clearly with the best opportunity for profitable market success. We’re very focused in that area and very selective.

As we have discussed several times previously, we will pursue OE fitness more selectively than we have done historically. We’ll continue to desource for models where we cannot be profitable. But, conversely, we’ll aggressively go after profitable fitness.

With regard to North American Tire and our other businesses, it’s absolutely critical that we have leadership in place, focused on the right things, and energizing both our associates and our customers. I’d comment here that Jon Rich has established himself extremely well in a very short period of time with our associates and our key dealers, and he’s restaffing and redeploying his leadership team during his several months in the business. And those of you who join us in New York City on April 30 will get to meet Jon.

I’d like also to talk about our six businesses that were so successful in 2002.

In the European Union, segment operating income increased fourfold in the fourth quarter over 2001, and that success that we achieved in Europe was driven by, I must say, similar strategies to those we are now driving in North America. Strong leadership, leadership that improved our product and brand mix by increasing our marketing, advertising dollars for consumer tires and making sure that those expenditures were effective, eliminating seven brands of consumer tires and focusing intensely on the Goodyear and Dunlop brands for Western Europe, the truck and farm businesses were organized into separate business units, meaning they had full P&Ls, and those reorganizations drove improved profitability in both truck and farm in 2002. In addition, the European Union took full advantage of low-cost sourcing opportunities and capabilities in Eastern Europe.

For the year in the EU, segment-operating income increased 79 percent – that’s 79 percent – on 6-percent sales growth and 1-percent unit growth. Replacement units were strong in Germany, our key market, and obviously a very demanding market, while OE units benefited from higher unit sales to Nissan and BMW.

In Eastern Europe – and this is slide 19 – in Eastern Europe, Africa and the Middle East segment, operating income grew more than 500 percent to 29.3 million in the fourth quarter, compared with the fourth quarter of 2001. Lower conversion costs, significant mix enrichment through more high-performance, ultra-high-performance and winter tires, plus focusing on premium brands drove growth in volume and generated strong earnings. Our business in Eastern Europe also benefited from increased global sourcing. And for the year, Eastern Europe’s operating income increased 360 percent on sales and unit growth of 15 percent, a terrific performance by that team.

Latin America, I think, did an outstanding job of improving segment-operating margins in the fourth quarter by almost one point on a sales decline of 12 percent and a unit decline of 4 percent during the period, and obviously this was a period of significant challenges from a macroeconomic standpoint in many of the Latin American countries. Latin America improved price and mix to offset translation in the fourth quarter and minimizing the impact of lower volume due to the national strike in Venezuela.

For the year, segment-operating income grew 14 percent at a 6-percent sales decline and flat units. Latin America to drive that performance had excellent cost control and cost-reduction programs, and they got ahead of the curve during 2002.

Latin America’s success is built upon sales growth through distributors, OE desourcing of nonprofitable lines, maintaining Goodyear’s brand leadership throughout Latin America, and I’ll mention here, accelerating success in key truck product area of MRT tires. Latin America also benefited from sourcing from North America, and as 2003 progresses, Latin America will supply a higher proportion of tires into North America for sale here.

Asia almost tripled its segment operating income in the quarter to $12m due to improved price and mix and lower conversion product -- cost. New products like the [Decarro GDI][ph], the [Forterra][ph] and the [Rangler Owl][ph] helped drive consumer tire sales growth in 2002.

Sales growth was also driven by a series of programs in Asia that expanded points of sale through, in some cases, channel expansion and in other cases increased business in multi-brand outlets, and the wholesale distribution network throughout Asia was reconfigured in a very positive way.

The commercial segment operating income improved due to reengineered older product lines and improved performance which allowed higher selling prices. Now, for the entire year, segment operating income in Asia increased 120 percent, an 8-percent sales growth, 6 percent unit growth, and, again, excellent cost control and cost reduction programs.

Slide 22 – Engineered Products had segment-operating income of $8m in the fourth quarter, improving $13m from a loss in 2001, driven by higher-volume improved price mix in the fourth quarter, as well as very aggressive cost-reduction programs.

For the year in Engineered Products, segment-operating income improved almost 300 percent on flat sales. Military products and industrial, automotive air conditioning and [break hose][ph] contributed to the earnings growth in 2002, and as we’ve said on previous calls, the conveyor belt industry continues to be weak.

Our Chemical business delivered segment-operating income increase of $400,000 to $14.9m for the quarter. Chemical product sales were down due to the sale of the specialty chemical business in December 2001. You’ll want to remember that. Early adoption of Six Sigma, driven by Jon Rich, who’s now moved over to North American Tire in Chemical Products, added approximately $40m to cost savings in 2002.

Now, we announced in March that the chemical business was being considered for sale, and, clearly, we’ll consider a buyer that will recognize the value that we feel is in the business, the solid performance of the chemical business, and will maintain our level of service to our current customers and clearly take our associates’ needs into account.

Slide 24 – to sum up 2002, I thought it would be useful to look back at our wins and losses during the year. The wins were, as we previously repeated, six out of seven business units showed strong performance and individual business units, frankly, performed from solid to terrifically in 2002. Pricing improved somewhat in the industry, and Goodyear benefited with a $0.47-increase in revenue per tire, as reported. We made progress in the sourcing at the OEMs. As I said, Six Sigma was initiated in the Chemical Division, driving $40m in sales in 2002. And I want to add here that Six Sigma is now spreading across the Company as one of my corporate initiatives for our company. And, finally, Goodyear’s Commercial Truck business profitability improved around the world, and that is absolutely key for our company.

Our losses in 2002 involve pricing decisions that we made at the end of 2001 in North America, which resulted in share loss and mix deterioration, as we’ve discussed before. We hurt our relationships certainly with our wholesale distributors and dealers, and we did not add significantly to the brand strength of Goodyear or Dunlop, and we’ll be rectifying those in 2003. Also, competitors were a bit more aggressive than we expected, and we lost market share in North American Tire.

External events that affected our performance were basically soft markets in Europe and Latin America and in Engineered Products, but you saw those businesses overcame those losses and had outstanding years.

And as a result of the events described, the credit rating agencies downgraded Goodyear to below-investment-grade status, and that is a loss for us in 2002.

Now, I wanted to just summarize here a little bit and say, clearly, the bank deal completion represents a critical first step in our forward plan, and we recognize it as a first step. We have more dollars. We have more time. We have financial flexibility to drive our turnaround. Clearly, we have also established solid improvement momentum in six of our businesses, which we intend to feed and build upon. And, clearly, we are making tough, focused decisions to fix North American Tire. So the time that Bob referred to that we’ve purchased with our refinancing, we intend to use very aggressively.

Now, we looked forward to sharing additional details about both our first quarter performance and our forward plans at the investors’ meeting in New York on April 30, and I know we’ll see many of you there.

I would just now like to open this up for us to respond to your questions.

[Caller instructions.]

Your first question is from [Steve Gerske][ph] with Morgan Stanley.

Hi, Steve.

Good morning. It’s Jonathan Steinmetz filling in for Steve.

Hi, Jonathan.

Hi. A few questions. It seems as if there was a larger-than usual discrepancy between the total segment operating income and the corporate total. I was just wondering if you could discuss what accounts for that?

Okay. Why don’t we take a shot at this? This is Bob Keegan. We’re going to have to reconcile that for you because, you know, we’re having to report on a different basis right now because of Regulation G. Let me get back to you with an answer to that question.

Okay. You sort of gave an aggregate figure for the FX impact on the operating income. I was just wondering if you could kind of decompose that by region?

Jonathan, we’re just searching our numbers.

Thanks.

We’ll find that for you.

Maybe, Jonathan, ask -- you said you had another question?

Sure, the final one. Did you have the A/R securitization balance in the quarter?

We have it for the end of the year.

Sure.

Hey, Jonathan, you have us scurrying here, I can tell you.

Jonathan, at the end of the year, the debt levels associated with the receivable securitization for [war][ph] was $624m.

Six twenty-four?

Right. And you’ll find that in the 10-K, which was filed during this call.

Okay.

And at the end of 2001, that same number was $580m.

Is that just the domestic or--?

That’s just the domestic.

Okay.

And beyond that, we would’ve drawn the Canadian facilities, also. But I believe those both would’ve been about $60m at the end of both those periods.

Okay.

Let’s go back to the other question.

All right. Jonathan, on the foreign currency exchange for the year, it’s about $10m, and that’s a deduct – or it would be a year-over-year deterioration that would happen principally – I’m sorry, it’s an increase – that happened principally in Latin America. You wouldn’t see any improvement in European earnings then, although you would start to expect that you’d start to see it as the Euro strengthens in 2003.

Right.

But you wouldn’t have seen it in ’02.

So you didn’t get anything in Europe in ’02 on the op income line?

No, because the Euro was stable through most of the period. What you would’ve seen for us in Latin America would’ve been driven by the fact that we hold, I believe, [indiscernible] U.S. dollars there, and that [indiscernible] the foreign currency impact on Latin America early in 2002 the first quarter.

Okay. And, Jonathan, we’ll have to get back on your first question as we become familiar with Reg G.

Okay. And one more quick one, and then I’ll let others get in. Do you have a number on sales to the military in the quarter?

No.

Okay. Thank you.

Thank you.

Your next question is from [Wendy Needham][ph] with Credit Suisse First Boston.

Hi, Wendy.

Hi, good morning. Do you expect that you can turn North America this year, get it back to profitability this year? And what are the volume and pricing assumptions you’re making for the North American market? And then the third part of this question is, longer term, what do you think your realistic operating margin target is in North America? Can you get back to 5 to 6 percent?

Wendy, let me comment on these, and others may want to elaborate. To your first question in terms of do we think we can turn North America, I'll answer that in two parts. We feel we’ll make significant progress in 2003 in North America. I mean the programs are solid. They’re aggressive. You know, we feel very confident there that we can start to turn. It is not a one-year turnaround to the point where we’ll get the margins that we’d like to have here or the ROIC that we’d like to have in North America in one year, okay? So that will be a multi-year process. Okay, so that’s my answer to your first question.

In terms of specific price and volume, I’ll just comment here that, as you know, we initiated price increases of 4 to 5 percent early in the year, back late in December, and are confident that at least a significant proportion of that will stick, particularly with raw material increases. Okay?

In terms of volume, yes, we intend to improve our share position in North America during the year, and that would be in both our replacement area in consumer and our replacement area in the truck business, as well as the OE business in truck. We’re likely to lose a bit of share in OE in the consumer replacement area, and that’s intentional, as you know –

Right.

We’ve talked about the selective strategy there, so that’s going to be intentional. As you know, the RMA is predicting for [’03 consumer replacement][ph] volume up about 4 percent. We are more conservative than that in our assumptions, and we have not quoted those numbers, and I’m not going to quote specific numbers, but we are more conservative than that. Yeah, [Bart Gould][ph] is indicating to me I shouldn’t quote specific numbers, so I won’t.

And then your third question –

Was it – do you think you can get to that 5 [or 6 percent margin]?

Well, in North America, it is our goal, yes, to get to that kind of level. But, again, do not expect that – and we are not expecting that we will get there in ’03, but I’m confident that as we move into ’04 and ’05, we’ll get up towards those levels in North America, and, clearly, we’ll continue to feed the businesses and build the businesses outside of North American Tire. I mean we’re already in those businesses, for the most part, as you know, well above that kind of return on sales.

I guess if I could just try to – can you [indiscernible] a little bit more. Are you going to make money in North America this year, do you think?

Yeah, our goal is to make money in North America, yes.

Okay.

The operating income or – I’m not quite sure with Reg G if I can talk about EBIT. Since I’ve been talking about EBIT for the past two years, I guess I probably [indiscernible], but from an operating income standpoint or whatever the appropriate definition becomes, yeah, our intention is to make money in North America this year.

As I said, remember, North America it’s composed of several pieces. We had significant turnarounds last year in the truck business, our own retail business, and the OE business. So we expect those to continue, and we’ve got to really get after the consumer replacement business here in ’03, and we intend to do that, and we’ve already started.

Thanks very much.

Thanks, Wendy.

Your next question is from [David Bradley][ph] with J.P. Morgan.

Good morning.

Good morning, David.

Give you a quick [check of a][ph] question first. A lot of companies in this industry have been using programs now offered by General Electric and some by the auto companies, you know, receivables acceleration, and they also have a payables extension version of that. Are you using any of those programs? And if so, are they included in your debt numbers?

David, this is Stephanie. No, what we’re using are just the five facilities that we’ve put in place starting April 1.

So you’re not doing accelerated receivables then?

No, we’re not.

Okay. Second question; this is kind of a longer-term question, but if you look at EBIT margins for your global competitors – Bridgestone and Michelin – they’re running about 8 percent. Yours are running between 1 and 2 percent. As you’ve done your benchmarking, obviously in prior years, you’ve been similar to them and at those higher levels, but as you look at your global benchmarking, what do you think accounts for that [gap][ph] and how do you – how will you go about closing that over time? I presume you think you can close it?

Well, David, that’ll be – I’ll tell you very directly, that’ll be a key item of focus for us on April 30. But let me give you some insight into how we approach that. If you look at our – if you look at our return on sales and you look at our businesses, our issue is quite firmly in North America, and we have a bit of an issue in Western Europe. And Western Europe now has momentum established, I think, to be able to get back up into the kinds of ranges that we’ve had historically there.

In North America, we’ve got to do several things. One, you know, we’re going to be working aggressively to drive top line, and I would say, and I think this is good news, a significant portion of our problem in 2002 was self-inflicted, okay? And our leadership today, you know, has a good view of what happened, why it happened.

The good news for us is it wasn’t because the competition did things that were significantly better than we could do and couldn’t be matched. We had a couple bad decisions, and we’re going to come back and build upon the strengths that we have. We still have strengths with our distribution channels. We still have, you know, the best portfolio of brands in the industry. We’re going to be, as we say, [indiscernible] being selective in the OE business, and that will help our profitability in the future, much as it did this year. We’re also going to have a truck business that we’re going to be very proud of in terms of not only its market position but its profitability.

So those are the kinds of things that we’re doing in North America, but it all starts with a leadership team that’s really focused not on improving year-on-year but getting back over several years to the point where they’re the leader in this industry in North America. And that’s our aim going forward.

We also have to take a lot of costs out of our company. We’ll talk more about that on April 30, but I gave you what I called a first phase in terms of some of those cost reductions, which will involve headcount reductions in some cases, purchasing productivity in other cases, [and then just][ph] a host of really good focusing on costs. So I mean those are the key things that we will do.

As you know, we’ll also consider, you know, appropriate asset sales, and I think that is well worth saying here because we believe cash is king, and we’ll look at, you know, opportunities as they present themselves there, and, in fact, initiate opportunities.

Okay. Thank you very much.

Thank you, David.

Your next question is from [Saul Ludwig][ph] with McDonald Investments.

Good morning, guys.

Hey, Saul.

Good morning, Saul.

I think in your press release you said that in North America you were even helped by lower raw material costs in the fourth quarter. That kind of was a little bit of a surprise. Could you talk about raw material cost impact in the fourth quarter and, more importantly, what the hit you’re going to have to overcome in raw material costs this year?

Yeah, we’ll do that, Saul. First, I’d say that I think that statement from North America in the fourth quarter is a year-over-year figure.

Right.

So if you were tracking that quarter by quarter, it might look a little – it would look different than that.

So you’re saying it was down year over year?

Yeah, yeah. Now, part of that – remember, we’re talking about not just pricing. We’re talking about productivity out of our purchasing organization as well when we state those figures. Those are both price and usage and our productivity that we built in in terms of relationships that we have with our suppliers.

So what do you think the raw material hit is going to be this year?

I’d say the comment there, Saul, would be, clearly, we’re seeing raw materials at this point that are running ahead of our assumptions although we had very conservative assumptions, meaning we – you know, we leaned into the – our annual operating plan with conservative raw material numbers. I would also say that we plan on offsetting. The goal of our purchasing people, working with our manufacturing people and other organizations, is to offset about 50 percent of the raw material pricing increases that we see, and they may not do that in a specific area. As you know, a lot of our increases are oil driven at this point, so I would simply say that, and in terms of the specific numbers, I won’t go into a lot of detail there, but you’re right. For the fourth quarter – guys, check me on the numbers – but for the fourth quarter, we had a favorable raw material impact globally, and certainly that applied to North America as well.

Looking at that North America in 2003, if you look at the headwind that you have, you’ve got the – whatever the raw material cost increase is, the huge increase in pension costs. You probably have some unabsorbed overhead carryover from the fourth quarter that’s going to hit you this year because of your FIFO accounting. Aren’t those enormous challenges to overcome even with – if you get your modest market share gains back and you get some pricing?

Saul, I would say that the only thing I would like you not to say to my people in North America is that it’s an enormous hurdle. You know, I want them to believe that it’s a large hurdle. That’s how we’ve described it. We’ve got headwinds, but the things that we’re doing, you know, we have to take significant cost out of the North American Tire system. You’ve seen –

Yeah, there’s that longer-term question –

Well, I’ll get to that if I can, but let me just – you said headwinds in 2003, so let me talk about that a little bit. No, we have to clearly reduce our costs. We’re going to have headcount reductions. You’ve already seen that. I mentioned here today about 1,600 people, both from our Union City plant and from the Akron facilities here. We’re looking at every cost we have in the system. You’ve heard me comment on employee benefits. Purchasing has significant goals for this year. We’re in the middle, frankly, of negotiations with the steel workers, and, you know, we have our goals from the arrangements and the negotiations with the steel workers. We just have to take our cost structure down and attack in ways that we probably have not done historically in North America. I think the other thing we’ve got to do is really focus on margin enhancement and focus on places where we can make money. And if we have – and if we have certain business today that is not profitable for us, that’s under intense scrutiny right now. If we have opportunities for margin enhancement -- new dealers, new products, etcetera -- we’re going after those opportunities. So we think –

Long-term question is you mentioned this past year that you underestimated the intensity of the competitive pressure.

Yeah.

When you look at the competitors, Bridgestone and Michelin, in particular, spending a billion dollars a year or thereabouts on capital investment, and you’ve had your hands tied with what you could spend on capital investment and being only allowed to spend $350m this year, how do you expect to be able to reduce your costs to become as efficient and automated as your competition when you’re not able to spend the money needed for low-cost manufacturing projects?

Okay, Saul, I would comment that capex goes to many different uses, and you’re right. I mean we have to be as we have been in 2002, we have to be smarter than our competition, frankly, in terms of how we’re spending our money, where we’re spending it. We’re very selective. We’re very focused on where we’ll get the best returns. And things that are nice to do and nice to have, we’re not spending money on. I actually think that’s healthy for us, and I feel confident that we can both add capacity where we need to add it, that we can build, you know, productivity into our system where we need to build it in. Clearly, [indiscernible] we’re focused on in low-cost plants and low-cost areas of the world, helping them with incremental capacity and with enhanced productivity. So we think we’re at a level where we can execute against the plan at those levels, but we’ve got to be very selective. And, frankly, Bob Tieken and I have to be very tough with where we’re going to spend the money as we go through our various budgeting and review processes, and we are. We think with that spend that we can execute against the plan.

Great. Thank you very much.

The other thing I’d say, Saul, is as we start to beat our plan, if we start to do better, you know, we’ll go back and revisit capex. But I think we’ve got numbers in there that are the right numbers for the current plan. I’m looking forward to being able to look at capex and say because we’re winning in a variety of areas, we’ll be able to enhance those numbers.

Great. Thank you very much.

Thank you, Saul.

Your next question is from [Rod Lache][ph] with Deutsche Bank.

Good morning, Rod.

Good morning. Got a couple questions. We’ve been getting a lot of piecemeal information about this turnaround plan. I know there’s been quite a bit written about Jon Rich’s presentation to the Goodyear dealers, you know, the $30-40m in savings from sourcing outside U.S., $200m from Six Sigma, and I think you guys also quantified the headcount savings at something like 190m bucks. You know, I’m hoping that – I know you guys are going to give us a lot of detail on the plan and the components and timing, but can you give us maybe a 20,000-foot kind of aggregate savings target, over what time frame, and what do you think it may cost to achieve these savings?

Rod, I’m not going to do that here this morning. As I said, we’re really looking forward to meeting with all of you on the 30th of April to provide our plan, where we can give you context, and because what we’re talking about is not just cost. You know, we’ve got to walk you through the elements of our business and talk to you about what we think that can drive and why we’re confident. And I’d rather do it in that context than just react here this morning. As I said, you know, and I trust that the story that we tell there will be a good one, a cohesive one, and it’ll be one, also, that’s honest, okay? We’re not going to over-promise, you know. My philosophy here is that we’ll talk about what we are confident that we can do. So, Bob, I don’t know, any other comments -- Bob Tieken?

I know. You know, we’ve talked about some of those items here today. You know, the fact that we’re going to be bringing more tires in from some of our low-cost sources of supply in 2002 is a critical part of that program, continuing to grow the truck business, more focused on the Goodyear brand, and then when we talk to you again at the end of April, we’ll be able to put more quantification and impact on those things. But it’s basically a lot of focus on cost, a lot of it addressing the issues [inaudible] brought up in terms of the headwind that we have to – that, you know, that we have to be willing to address. And the rest of it is basically, you know, focused on the brands of the products and also on the better utilization of our distribution. But that’s kind of the context in which everything has to go forward at this particular point in time.

Rod, you mentioned, and I think appropriately, that when we had our dealer meeting down in Orlando back almost two months ago – time flies, almost two months ago – that that was absolutely a critical milestone for us. I would say just like getting the refinancing in place in an acceptable way for us, and I think, you know, at that meeting, we absolutely had to reestablish with our dealers credibility, and I think we did that.

I would also just comment that a lot of what we’re going to be talking to you about at the end of April will be better execution. As I said, we had some self-inflicted damage in North America during 2002. We’re not going to do that again. Believe me, our people have learned from the experience, and so focus on execution is absolutely going to be critical for us. And we’ve mentioned many of those areas. One that I would just highlight, we talked about becoming easier to do business with, and I believe that we will drive an advantaged supply chain in this industry, and we need to, that we’ve got the capability to do that, and then when we do it, it will be a huge competitive advantage for us. And we simply must do that in North America. So that’s one thing we’ll talk and put some specificity around here at the end of April.

Can I also clarify, just on a separate issue, the liquidity that you guys have now? The $750m revolver, I assume, is unused?

No, at the end of March, Rod, $600m was drawn against all of our credit facilities.

So what is the aggregate liquidity between the revolver, the additional availability on the ADL and cash?

What I’d have you think through is think about total funds on $3.3b, and I [indiscernible] confirm for you that we did draw $600m against the revolver through the end of March. I don’t have with me what was drawn against the receivables at the end of March, so I can’t answer that question in its entirety, Rod. I’m sorry.

No, that’s a timing issue.

Right.

We just haven’t seen all the data.

Right.

Okay? Thanks, Rod.

I’d just allow one more question.

Your next question is from [Jeff Scoglin][ph] with UBS Warburg.

Good morning. It’s [Eric Brovagan][ph] for Jeff.

Good morning.

First, you talked about the initial covenant requirement from the [indiscernible] bank deal. I was wondering if you could comment on what the ratcheting schedule looks like?

Could I just mention, we’re having difficulty hearing the question.

I’m sorry. Can you hear me now?

A little better.

Okay. I’ll try to speak up.

Thank you.

You talked about the initial covenant requirements in the new bank deal. I was wondering if you could comment on what the ratcheting schedule looks like, and, in particular, does it tighten ahead of the pension-funding requirement in 2004?

Which covenant might you be speaking about? Are you speaking about net worth, or are you speaking about --?

Coverage.

The coverage?

Coverage, yeah. I think the senior secured, there was a test on that as well?

The senior secured is limited at no more than four times senior secured to EBITDA, and it is flat through the whole period. It doesn’t change.

Okay.

Minimum net worth does when you – in the 10-K that is filed today, you’ll see a summary of covenant descriptions. In the 10-Q when it is filed for the first quarter, you will see all the details, credit agreements, including the definition of the covenants and the timing in which they might change. But minimum net worth does step down during the three years; it is not flat, and interest coverage is flat at 2.25 to 1 through the whole period.

Okay. And there’s been some discussion on the raw material costs. I was wondering if you could put a number on the delta between 2003 and 2002?

No. I said that’s – you know, we’ve talked about before on the third quarter call that our costs were – you know, we expected costs to be at the 5- to 7-percent range in our raw materials cost. And now, obviously, they’re a bit up at the higher end of that number.

Okay. So that number has not changed from the Q3 call?

No, I mean I guess the range –

It’d be at the upper end of the range that we talked about [inaudible].

Okay. How far ahead do you lock in purchase contracts? Six months? Is that--?

Oh, you mean in terms of purchase of raw materials, goods and services?

Yeah, follow-up question.

Oh, it varies significantly – it varies significantly depending on the material, depending on the supplier. So I – this is one where I could not give you a – you know, any kind of across-the-board statement. And we just – you know, we deal with those things as effectively as we can with individual suppliers.

Okay. I think we’ve heard before that roughly $1 of oil price increase equates to a $20-25m decline to EBIT? Is that – does that still hold true?

Yes, it does.

Okay.

Now, with the only caveat being timing and flow-through and what we might be doing from a purchasing standpoint, but I think that’s a fair, rough approximation.

Yeah, we have about a three- to six-month lag in terms of how these things eventually work their way into our financial statements.

Okay?

Great. Thank you very much.

I just want to thank everybody for being with us this morning and look forward to just seeing many of you – I really do – on April 30, where we can talk about the future plans. So thanks a lot. Appreciate it.

Thank you, ladies and gentlemen, for your participation. You may now disconnect.