Goodyear Tire & Rubber Co (GT) 2003 Q1 法說會逐字稿

Hello. Welcome to the Goodyear investor meeting. I want to thank you all for coming today. I'm Barb Gould. It's nice to put faces with voices that I've talked to over the past nine months. I feel like this is, I'm giving birth to this meeting today.

I want to read you the Safe Harbor Statement so we can get started. Obviously, you know the information included in this presentation is subject to the disclaimers set forth. Our presentation materials contain certain forward-looking statements about the companies future performance, growth opportunities, outlook plan, alternatives, strategies, expectations and objectives. Such forward-looking statements are subject to uncertainties and could cause the company's actual results to differ materially from such statements. These are fully outlined in our 10K and also in the 10Q which will be issued later this week.

With that, I'd like to turn the program over to Bob Keegan. Bob?

Thank you, Barb. And good morning to everyone here in New York and also everybody that's on line with us here this morning, appreciate your attendance. And I can tell you, you're attending what for us is a very important meeting. And I guess that goes without saying.

As I said in our conference call earlier this month, the completion of the bank agreements was a critical step for us. And it allows us time to basically build our business and turn around our company. And I want to thank all of you who are here. I know there are a number of people here who were instrumental in helping with those bank agreements. And thanks again for your participation. Critical for us.

Now we have the hard work in front of us. We fully intend to use the time that those bank agreements allowed productively. And that means fundamentally taking what we're already doing and accomplishing in six of our business units, the momentum that we've established, and building on that momentum. Believe me, we do not think we're done in those six business units. We have a lot of work yet to do. We also plan on using that time productively in North America. To fix the business. And I chose my language there very directly. To fix the business in North America.

Now, today we're going to focus on the game plan for doing exactly that. And I wanted to mention to you, because I think this is a perspective you should have and I certainly have. If we go back in time, about 18 months, we couldn't have come to you and said, we have 6 out of 7 business units that have momentum.

In fact, you would have said to me, it looks, Keegan, like you've got to fix all of your business units. And you would have been pretty accurate with those comments. So our perspective today is, we have made progress, we've established momentum, a lot more hard work in front of us in those businesses. And Jon Rich will go into some detail today about North American Tire and his plan to, as I say, fixing that business.

Our plan incorporates significant changes in our cost structure, and we'll talk to you about specific dollar numbers there, over a period of time. It incorporates new revenue-generating activities. And, of course, it incorporates cash generation and what we're going to do to drive more cash generation that we have been doing historically.

Now, we don't underestimate the tough choices that we have in front of us, nor the degree of difficulty that we have in some areas. But neither do we underestimate the value of some of our assets, our brands, our technology, our channels, and our global scale.

So I'd ask you to recognize that those are significant assets, but they're only significant assets if we focus them effectively. And in some areas, we're doing that very effectively. And other areas we're not doing that as effectively. And we'll talk about that. When focused clearly, they have significant value. But we have significant refocusing to do in some areas.

I'd also mention that in that refocusing, speed is critical for us. Ours is not a company that historically has moved with the kind of speed that we're moving with at today, nor that we're going to move at in the future. So that will be a constant refrain as you hear from us today.

I wanted to mention, we'll talk as directly as we can today. We'll provide as much clarity as we can, and I ask you all to remember that we are in the midst of negotiations at this point with the steel workers here in North America. And that's going to lead us to probably being in some areas a little less precise than you would like us to be. And I just ask you to understand that, and as soon as we have an agreement, which we will have, we'll be able to lend some more precision to some of our future plans. And Jon Rich is going to talk about the status of those negotiations in his piece here of the agenda.

I'd like to just refer to the agenda. The introduction is comments from me, and you've just heard them. Bob Tieken is going to discuss first quarter results. I'll come back and talk about Goodyear's forward plan, corporate level. And then I'll turn it over to Jon Rich. Jon will talk about Q1 in North America, and he'll talk about the forward plan in North America, which is absolutely critical for the success of this company, as you know.

I'll come back for a -- I'll call it the fix, Jon. Jon will be up here to talk about the fix. Let's be consistent with that terminology. I'll come back with a brief summary and conclusion, and then we'll entertain your questions, as we do generally.

With that said, we have a lot to get in, very short period of time. I'd like to introduce Bob Tieken, our CFO. And Bob will talk about Q1 accomplishments, challenge and a view on the numbers. Bob?

Thank you, Bob. And good morning.

Before I get into the numbers, I'd like to spend a few minutes and give you some color on the first quarter. First of all, it's obvious we're not where we want to be in the first quarter in terms of our financial results. But we believe we are making some progress. And we're making some progress in the marketplace with our top-line programs. And we also believe we're ahead of schedule with some of the cost initiatives that we have to deal with the significant headwinds we're facing this year.

We're seeing positive market trends progress in both North America, Eastern Europe, and the European Union. In the first quarter we saw strong replacement volume and mix improvement throughout Europe.

Eastern Europe was very strong in terms of volume. Jon will talk about this later, but we saw improvement in terms of revenue per tire in our North American businesses, and I said, our cost initiatives are ahead of schedule.

It comes as no surprise, our competitors have talked about the same thing. The consumer replacement market in North America was weak in the first quarter. Higher raw material prices. We looked at natural rubber, a year ago was 27 cents and the first quarter of this year was 42. Butadiene was 16 cents a year ago, it was 32. Natural rubber -- or natural gas was 2.50, and it's up to 5.85. So significant cost headwinds we have had to deal with. And of course, as Bob mentioned, we are in discussions with the steel workers.

In terms of the numbers, you know, our revenue was 3 billion, 545, up from 3.311 a year ago. We're up about $234 million. Currency contributed $139 million to that improvement.

In terms of unit volume versus a year ago, our North American businesses were down about 1.4 million units. And our international businesses were up about a million. On a global basis, we saw our replacement business up about 0.7 of one percent.

Our O.E. business on a global basis was down about 3.4%. And I might add that in every strategic business unit, we saw a decline in O.E., with the exception of Asia. And Asia was basically driven by a very strong O.E. business in China.

Our cost of goods sold was upon to 2 billion, 924. Currency represented $112 million of that change. And raw material prices, the ones that I just talked about previously, were up $61 million from a year ago.

Gross margins, year ago, 16.6%. This year, 17.5. Our SAG expenses were up about $60 million year over year. Currency was about $37 million of that. Wages and benefits. We also had the addition of the Winston Tire retail chain into our numbers this year, and we had higher product liability expenses.

Financing fees were up about $14 million on a year-over-year basis, and that was driven principally by the fact that we had fees in connection with refinancing that we had to charge off to operations and were not capitalized and amortized over the term of the refinancing. A year ago, we had about a $13 million charge because of the devaluation of the Argentine peso. This year, we didn't have any such issue.

On our next chart, I talk about our rationalization charges in the first quarter. $68 million charge. That was related to a reduction of 950 associates in North America, Europe, and Latin America. The cash costs associated. Annually expect to see about $70 million, and we realized about $9 million of those savings in the first quarter.

An issue we'll have to deal with for a while is taxes. We had tax expense in the first quarter of this year of $28 million, compared to 2002 of $22 million. The problem is because of the decision we made in the fourth quarter of last year to make an evaluation allowance against our deferred tax that we cannot take a benefit from the U.S. losses. So that issue is going to be with us for a while.

Now, let's take a look at the segment data. If we look at our North American businesses, our O.E. business was off. Replacement was down about 6.4%. As I indicated in the beginning, our European businesses did very well. Our replacement is up 11.6%, O.E. was down about 7.5. Total was up about 4.8. And their segmented operating income was up. So clearly as Bob talked about on a turn around.

Replacement was up almost 11%. O.E. was down 11%. Their segmented operating margin was up almost 94%. Latin America was driven largely by a 16% decrease in O.E. Asia, as I said was up by almost 9%, driven by 35% increase in O.E. business.

Engineered product has stronger revenues, largely because of improvements in replacement business, but also we're selling more track to the military. And chemical revenues were up because they had higher prices that they were passing through to their customers.

Quick look at our balance sheet. We had $720 million in cash in the first quarter. Receivables were up, largely because of higher sales in our European Union, Eastern Europe, and Chemical. Currency obviously had an impact on that as well. Interrupted by higher raw material costs and currency.

Payables were up because we were able to negotiate longer payment terms, but also had costs. And versus where we were a year ago, our shareholders equity is down because of the pension liability we had to record in the fourth quarter, as well as the recording of the evaluation allowance on the deferred taxes.

We spent a lot of time refinancing our bank debt, and we got the bank debt refinanced on the 1st of April, rather than on the 30th of March. So the numbers we have here are basically on a pro forma basis. But on a pro forma basis if it had closed on the 31st, we would have this money. And just on one day we didn't have it. So we still have a lot of cash.

We had 230 million of undrawn foreign lines. Our liquidity situation following our financing is certainly a plus for us.

Just a quick look at our financial covenants, we have three of them. Minimum interest coverage, minimum net worth, and senior secured debt to EBITDA. We were well within the covenants at the end of March. And things don't stand still just because the accounting period ended at the end of March.

We had a lot of things that went on during the month of April. We sold 8 million shares that gave us $83 million of cash. And we paid down $64 million of our bank debt with that. We also transferred Goodyear's ownership. That was when the joint venture was put in place. It's part of our total European strategy. We just executed it now. When you have a successful joint venture, you want to continue with that.

We reached an agreement with Sri Lanka, essentially building on the good experiences we've had in Europe and North America. And we also completed the wing fit commercial transaction with a last payment of about $71 million.

So those are kind of the financial highlights I wanted to talk to you about this morning. Before I finish this, I want to finish up on what Bob said. We're not terribly happy with these results. But there is very good news when you look at these other six to seven businesses in terms of what they accomplished.

We went into 2002 with issues in every one of these businesses. But in the end of 2002, these businesses had earned $197 million more than they had the year before. They were up 76%. So that momentum had started.

You say, okay, what happened? Well, those same businesses are up 46 million in the first quarter of this year. So the momentum, the programs we're putting in place to address top cost, address top line, did in fact work.

And now Jon Rich will have the opportunity to talk about lessons learned. We have two years during the refinancing of our bank debt. And that's the time we think we need to turn around our North American Tire business. With that, Bob?

We're going to show you a chart here. I want to warn you ahead of time, this is the most complex chart that I'm going to show you this morning. But it's an important chart because this is the chart that we showed our associates. We showed our board of directors. And I thought it would be appropriate to show it to you in that same form to you here this morning.

Let me walk you through this, if I can. I want to start with the vision statement. And for those people in the company, they know, I'm not a big proponent of vision statements, but we needed one. We needed something that would get our people to focus on several things that are incorporated in that statement.

And I'm going to just use key words. Market focus. Our company has been too inwardly focused. We plan on being very market focused. And you'll see that as you talk to our people and see the kinds of things that we're doing in our company.

The word "superior" shows up, both in terms of products and services, and in terms of shareholder returns. That's important for us. It doesn't say good, it doesnt' say satisfactory, it says superior.

The word "tire" is critical here. We are fundamentally, and at our strategic core, a tire business.

And you also see two words, consumers and end users, absolutely critical to us. And we're thinking through both of our selling process to get the kinds of results that will lead to superior returns to our shareholders.

We'll quickly, in our company, move from that vision statement to translating it into actions, whether they're strategic or tactical, but translating that into action. And I wanted to start on the far right-hand side of this chart. If you look at just 2005, for me, this is fundamentally what we plan on looking like at the end of 2005.

We plan on being a company -- and I'll go down through the list of metrics here, where we gained share in North America. Jon Rich will note a little more share than in the rest of the world, 2 points. We've gained share, however, in the rest of the world, as well. Our revenue per tire is up 4%.

We're going to take out -- and I've used a range here, between 1 billion and 1 billion 5 of costs, out of our current cost structure.

Our return on sales and our return on invested capital. I'll mention here, the "R" here is EBIT. Just for definitional purposes. The "R" is EBIT. Return on sales is 6%. Return on invested capital of 15 to 20%. And our debt will be reduced.

Those are all significant changes from where we found ourselves at the end of 2002. This is the flow here from 2002 to 2005 with the various comments. It is very important. In 2003, we're really focused on stabilizing North America, and as both Bob and I have said, feeding the momentum, building on the momentum in those other businesses.

2004 becomes a year of traction, no pun intended, getting us to the 2005 metrics. So, from our standpoint, you've got to think of this as kind of a progression. It's a multi-year turnaround. And I want you to know that we feel that. We're not going to overpromise in terms of what we're going to do at the end of 2003 and 2004. We can get to these metrics and this performance, and we can look like this at the end of 2005.

We also recognize, even when we do that, we won't have obtained the vision. That's the reason why the vision is on this chart. So when we show this to our people and talk about this with our people, they know we have to go beyond that. And that's a key point for us to understand. We will have gained significant ground. But we will not have attained our vision.

I'm going to move into an area that you're obviously asking off that chart. Well, those are interesting numbers. How are you going to do it? How do you plan on getting there?

And we're focused in our company on seven drivers of the turnaround that we need, that are shown on this chart. And they really represent the core of our plan. They're being operationalized today. And we'll have comments, as I go through my remarks. And Jon Rich will elaborate.

They are being operationalized today in our business units. Some very successfully. Some we're struggling with. We have to fix them. But they're being operationalized. Every one of these brings significant changes. Every one of them brings significant changes. And what I'll do over the next several slides is I'll walk you through each of these and give you a fairly high level outline of what it is we intend to do and how we intend to progress.

Let me start with leadership. I put this in here as the first driver for, I think, obvious reasons. Those of you that are with us in New York -- and I can't say the same for the people that are online. But you've had a chance to interact if you're here in New York, with our leadership team. I invited the six business unit presidents, in addition to Jon Rich in North America, to be at this meeting. And I did that for the following reasons.

One, these guys are the foundation of this company. If they're talented, if they're committed, if they get the results, we're going to look very good. I also had them here because I wanted them to see you and look you in the eye. And I won't name the party, but I did have a comment this morning that when I asked, "So, what do you think of the SBU presidents, the comment was, 'They're very polite.'" So that's good, you guys have done well in the politeness category.

And I asked this individual, "Well, what do you think the SBU president's reaction is going to be to everyone else here?" And there was no comment. And I said, "Well, I hope the reaction is the same, that you were very polite." But I have my doubts.

This is serious business. These guys are the core of our company. I want them to stand up, if you would. I'm going to ask the SBU presidents to stand up so people get a look at you and know who you are. And I'd also ask Joe Gingo, our Chief Technical Officer, who is here. And Lowell Dunckel, who heads up Global Manufacturing, to stand up as well.

These are the people that I'm counting on, and frankly, you're counting on to drive a turn in this company. I have a lot of confidence in this company, and if you ask me why, I'd say because they have a track record of success in our company. By the way, so does Jon Rich. Jon Rich was very instrumental in turning around our chemical business in a short period of time.

Every one of these guys has a track record of success in our company. You have seen that play out now in the numbers. And if you asked me why, I'd say because they're leaders, they're not afraid of change. They're change agents. And they're business people, immersed in their markets, working back from their markets, and their people follow them. So thanks, guys, for being here. Thanks for standing up.

And for those of you in New York, if you haven't had a chance and you get a chance to communicate and talk to them, each one of the leadership team will be here after the session. I think it's important that you get to talk to them a bit.

I'd also mention off this chart that -- and I really didn't fully realize it until I made up the chart. Let's just take time and job. And I'll start at the bottom.

Joe Copeland, Chemical, less than six months. Tim Toppen, Engineered Products, less than two years. Hugh Pace and Chris Clark, long-serving guys, about three years. Jarro Kaplan, Mike Roney, both just under two years in their jobs. And as you know, Jon Rich, less than six months.

We've made significant changes in the leadership team of this company. I can guarantee you if you go down through their teams, you will see similar changes. More in some areas than others. But you'll also see a good blend of people who have grown up in the tire business, with Goodyear and in some cases, with other companies. But blended with some people outside who have had experience with other companies. And I think right now we've got the right leadership team as a foundation to start us on this path, and you're seeing those results today.

I wanted next to talk about costs. And I know it's a subject that is on all your minds. Believe me, it's on my mind every day when I wake up. Clearly we need a significantly lower cost structure. That's an imperative for us. We simply must be competitive in our industry. And my image here is that the clock is ticking. So what I have in my mind when I wake up every morning is the clock is ticking. And I think that leads to some pretty good behavior. Same for the rest of the leadership team, I know.

I wanted to talk a little bit about head winds. I mean, clearly, headwinds exist. Clearly they're with us today. Clearly, they'll be with us tomorrow. And we expect that and we assume that and we forecast that. So we need to take some big steps to address the competitive realities, the headwind reality. By 2005, we'll take out a billion to a billion five dollars of cost. And just to preempt probably a question that will be asked, yes, that's going to necessitate further rationalization and the funding of further rationalization steps.

Strategies for getting there. And I'll have to be very brief, but there's meat behind what I'm going to say. Simplification is absolutely critical for us because we've had an epidemic over the past many years of complexity. Complexity that drags with it a lot of cost and doesn't drag with it much value. And we're going to go after that.

That means we'll eliminate brands. We'll eliminate SKU products. We'll eliminate, in some cases, customers, and we'll eliminate staff. That's all part of getting our company focused on the things where the returns are significant. And we're talking about big changes here, in terms of order of magnitude.

Global sourcing, we made a change in the company in the last year that global sourcing is global. The strategy in our company for how we employ our manufacturing and supply assets, is resident globaling. This contributed to by the businesses. But we have to manage that globally. By managing it individually, by geography, we have suboptimized over time the asset.

Back to my comment earlier, that we have assets, if we focus them, we're going to do very well. If we don't, we're not going to do so well. So we plan to use our global scale much more effectively than we have in the past. More products will be flowing across business unit borders. And I'll elaborate on this in another chart and give you some data on the next chart.

Global procurement, absolutely critical for us. We have achieved significant improvements in our purchasing area. And I'll call it purchasing productivity over the past two years. We're going to continue that. I must tell you, when we first started that series of initiatives, we looked primarily at raw materials. That view today is not only raw materials, it's everything in the company. And frankly, about 40% of our purchases were nonraw material. Were nonraw material.

We've got visibility at that today. And we're putting the right kind of pressure points, and the right kind of expertise in terms of individuals making decisions on each of those areas. And we're also using the latest technology to make it happen, meaning the internet where appropriate, with auctions and beyond.

SAG, I'll simply say here, that we have in front of us, in each one of our business units, a whole host of tough decisions to be made. We've made some. But a series of tough decisions yet to be made. As you'll see in a later term, we're going to increase our spend in the marketplace, whether that's advertising or other components of marketing spend. And we've got to free up the cash to fund it. We've got to free up the dollars to fund it. So we're going to make tough choices and tradeoffs here.

And we need to spend for value creation here. Not for habitual reasons. We're spending too much today based on habit as opposed to where we can really add value. Jon is going to spend a lot of time talking about Six Sigma. Because I would still call Jon Rich the corporate evangelist for Six Sigma. And if you ask why he is evangelical about it, you might say, well he came out of GE, I'd say that's good, probably the right reason.

Why am I evangelical about it? Because in the chemical division last year alone, first year of the application of Six Sigma, we saved over $40 million of cost, over 40 million in the chemical division alone. So one of Jon's first acts coming into North American Tire was to say Six Sigma is not a choice. That's what we're going to do. We're going to use it as a tool and we're going to use it to help us really focus on areas where we can make good trade offs in terms of cost.

So cost is an imperative. And I would say that tremendous energy is being focused on it right now. And we'll probably be able to give you a little more precision on the numbers and what's driving those numbers in coming months.

If we just go to the next chart. I wanted to elaborate a little bit on global sourcing. I wanted to give you some feel for the economics here. And the example here is consumer tires. Looks a little different for truck tires than it would for consumer. But if you just go to the upper left-hand box, you'll see that what we're going to do is certainly, we're going to more fully utilize our low-cost production and we've given you some of the flows there.

I would mention in the lower left-hand box, and just for definitional purpose, this excludes raw materials. In other words, it's conversion cost only. So if you look at conversion costs in our low-cost plants, which, by the way, are competitive with anybody in the world, in Eastern Europe, in Latin America, and in Asia, that the index here is about 55, versus 100 in North America.

So it's natural that we're looking at that. And it's natural, in the box on the right-hand side, that we'd be looking at increasing the shipments from low-cost manufacturing locations into Western Europe and into North America. And you get the rough scale here of how we're increasing that from '02 through '05. It's a complex undertaking, but one that we will implement. And critical for us to do.

Next, cash. Cash is king. This has been our mantra for a couple of years. We've done a nice job in improving our situation in working capital in both receivables and inventories and for that matter, payables.

I just wanted to make a few points off this chart. The most important point is probably the takeaways. We plan on reducing our debt, as I said earlier. And we plan on regaining access to the capital markets within this time frame. That's absolutely essential for us. And we're going to do it.

Just a couple of comments on improving cash velocity. Inventory, our goal for 2005 is to take our inventory turns up by 2. That's a significant step for us. And all the business unit people sitting in this room don't have all the answers in terms of how to get there, but we will get there. We know how to make progress on this. So two turns by '05.

We'll be very focused in capital expenditures. And when I say focused, that hides a lot of work. Because we have to really set good priorities. We're doing that. We're setting priorities to spend our money where we'll get obviously high return and high impact.

So our capital expenditures right now are focused on manufacturing in low-cost areas, productivity. And some capital expansion in those low-cost areas, as well as the truck business, using technology that we've talked to many of you about before, called impact technology. That's where we're focused. And we can get the job done with the level of capital expenditure that we have this year and looking our over the next few years.

On the corporate side, I wanted to mention we've written here what's in the public domain. You know that we're exploring the sale of the chemical business. And that's progressing. That is progressing. And as Bob said, we sold approximately 21 million SRI shares for a little over $80 million.

But I must comment that that represents the first phase. You should interpret it as a first phase. We'll be aggressive here. We're looking at everything that's noncore and nonstrategic for us. But I'm not making any announcements of further areas today. But again, your assumption should be we'll be very aggressive. And dividends, you're aware of.

And also, as we've looked at "cash is king" over the past few months and gone through the refinancing of our debt, a number of opportunities have been uncovered relative to better cash management in our company. Remember, we're a very complex company. We operate in every country in the world, virtually. And we're going to make that happen. Takeaways from that, as you see, I'll just reiterate again. I mentioned them. Debt reduction, and we have to be able to reaccess the capital markets.

Now, the next five charts I'm going to go through quickly. And in the interest of time, that makes me feel both good and bad. We'll be able to get done in a time that's attractive to you. But there's a lot of meat on these next five charts. Because these next five charts really talk about how we're going to grow the top line and our margins with that top line.

And I'd like to start just with leverage distribution. I'll make several comments on this chart. I'd say that our points of distribution are a competitive advantage. Well, they are when we fully leverage them. In most parts of our world, we are leveraging them very effectively today, if not fully. We have more work to do.

But I'll give you an example. In North American Tire, the potential here is significant. But it's only significant when we overcome some of our self-inflected problems of the last year, year and a half. And a big part of Jon Rich's job and his team's job is to overcome those issues. And Jon will comment today in terms of progress against those goals. There's tremendous advantage there. We have the asset. We just have to use it effectively.

Sales counter focus. I will just mention here, as most of you know, there's tremendous switching that goes on at the sales counter in our business. We have a host of tools that we're putting in place, with focus and with intensity, to try to help us with the counterperson. And that's an area where I've got to tell you, in most of our businesses, we didn't spend a lot of time in the past.

Leads right into key account planning. We sold tires, in. Our focus was selling tires in to dealers. And that's not going to make it. We've got to be focused on selling our product out. And we have to be focused on building that dealer's business and understand enough about their economics and dynamics to build their business. And you'll see that as that plays out in our company.

I mentioned here master distribution plan. And you can read this as -- this is a way of looking at a market intensely, continually, looking at the market dynamics and the market potential. And everyone does that, right? In the business world? Well, some do it better than others. And we needed to add some capability to do it better than our competitors. We spent a lot of time in the last year and a half getting to the point where we now feel we can get the superior analytics. That's a function of the data we now have.

And of course, we spent a lot of time driving, and thinking about how we drive, superior relationships. And that's a primary function of, who is the leader of the unit? What's the focus of that individual? Who does he hold accountable, and how precisely does he hold them accountable for results in terms of relationships? That will play out. We call that master distribution plan. That will play out in existing channels, as well as new channels.

I'll say a couple of words about building brand strength. And it's difficult, again, to say a "couple" words about building brand strengths, but that's what I'm going to do. In terms of positioning of our brands, we're going to reduce the number of brands. We've already done that in some cases. Mike Roney and his team in Europe has gone from almost 20 brands to, really, a core of 7 or 8 brands at this point.

That allows us to increase our spend on the core brands, which we think can create value. And we have a number of brands that aren't going to create value for us. They will not be downsized. They will be eliminated. And that will be done in a good, businesslike way. We also have to reduce the overlap that we have in positioning and pricing of our brands. This is particularly acute in North American Jon Rich is going to talk about this a little bit. We have too much overlap in the positioning of our brands and in our pricing, and it does not provide clear differentiation of the brands to the marketplace. It's confusing. It's confusing to the dealer, it's confusing to the end user.

Right pricing we've talked about before. We've got the analytics now to make this happen. And we've got the commitment from the business leaders. And I'd say, Jon, particularly in North America, where we review pricing now on a very rapid feedback loop.

Our spend for 2003 on marketing will be up from 2002. And the way we're funding that is to make the tough choices that we talked about in other areas of our spend.

In terms of products, they're the life blood of our company. I know Joe Gingo, you'll agree. So will everybody else that's in this room. That's what we do. We design, we make, we sell products. On this chart, you see listed current products. And those of you in New York might have had the opportunity in our other room to look at some of our products that are in the marketplace today. And I'll just make comments on several of them.

We are certainly not revealing anything to you today that would hurt our competitive surprise going forward. These are all market products. But I wanted to give you a flavor of what we can do with some of the displays here.

I'll just mention a couple of these. The Eagle F1. We have a new high-performance tire. It's won awards in Europe, it's won awards in the U.S. It's a halo effect product for us. Run Flat's, we continue to be number one in technology, my view. And number one in units and share of markets, the market's view.

I mentioned Hugh to Carl, in Asia, I think our Asian group-- One of the reasons you're seeing the performance out of Asia, is Hugh Pace and his team committed a couple of years ago to several things. One of them was that we were going to position ourselves as the technology leader in Asia. And we're on our way to doing that. In a very demanding set of markets, as you know. So congratulations to Hugh and his team. You guys have done a really nice job. And we're going to do it elsewhere.

Truck steer tires. We've introduced new steer tires here to close a performance that gap we had. We had a good lineup of products with an exception in the steer tire area. We've closed that gap. Now the next challenge is, okay, we closed the performance gap. How do we get out ahead? But certainly we're ready to grow the truck business.

And our two piece, off-the-road, that's OTR, off-the-road tire is a potential breakout product. We're in the process of launching. I wanted to mention those products.

Now, one of the questions you have asked me, in fact, people asked me this morning. And believe me, we asked ourselves this before we established an R&D budget. "Can you guys get this done with the budget that you have? Looks like the other guys are spending more than you do." Well, we're going to get that done, again, by focusing on high impact, high profit opportunities.

I think with the current spend -- but it doesn't matter what I think. You ask the business unit leaders and Joe Gingo, they'll say, "With that budget we can get it done. We are going to be more efficient than the other guy. And yes, we're going to be very focused."

In addition, we'll create shorter development times for our products. We've got to get our products to market more quickly than we have, historically. We know that. It's part of the overall speed issue in our company. And if you ask how we're going to do that, just remember a couple things,

One is, we're substituting mathematical modeling today, where we used to, basically, design new tires by trial and error. And our partner in that effort is Sandia Labs. (phonetic) Our partner is Sandia Labs. So we are making huge strides in mathematical modeling, which gets us to market quicker and saves us money. And saves us money.

The other thing we need to make that happen is a different culture. And that means our sales and marketing and business unit people working ever more closely with Joe Gingo and his people and the manufacturing people to make sure that we're focused on the right product, and we're not wasting money on products that bring little value for our company. And we have done a fair amount of that.

Product quality, I just mentioned here, uncompromising in our devotion to quality products.

Our next sheet is simply a review of the tires that are, I think, shown here today. And I'm going to skip through that and get to advantage supply chain.

Now, let me first try to define this for you, at least as we look at it. This is meeting our customer requirements in a superior fashion. And we're talking everything here from the placement of an order to payment. Our goals, fundamentally, are to meet the promises that we have made to our customers, as defined by our customers. And we have made some mistakes, as many people have in the past, of defining those needs through our eyes. All that counts is what the customer thinks. Are we meeting the promises that they think we've made to them? That's the only thing that really counts.

We plan on establishing clear superiority. And this is a big step for us in some of our markets, particularly in North America, clear superiority in terms of ease of doing business with Goodyear.

We plan on being superior in fill rates. And frankly, in efficiency as well, which means the cost of creating a certain activity. Our ultimate goal is that our customers will pay us a premium for doing this. And I guarantee you, we've got a lot of decisions that have been made. And we're putting in place today to make this happen. But I wanted you not to worry. I haven't built the premium that the customers are going to pay us into our forecast or assumptions in 2005. That will be gravy if we get there.

So how do we do it? Commitment by all our functions. That takes organizational change, and in many cases, it's taking, or has taken leadership changes. We've had to change people.

It's going to take a simplified product portfolio. As I said earlier, if we're going to be serious about simplification, we're going to cut SKUs. And we're not going to do that in a small way in any of our businesses. We're going to reconfigure the network that we have, our logistics network.

And I think probably as importantly as anything else, we have to understand that our supply processes are not universal. And frankly, they are, today. We don't supply to O.E.s, the same way we supply to independent tire dealers. What we've got to do with every one of those tailored processes, is make it fit the customer's needs more effectively than it does today.

And I've said before, I don't think this industry does this very well, and we certainly have not, but we've made improvements. Now we're going to build on the improvements that we've made. Key results we're expecting. Fill rates, best in the industry, unequivocally. Inventory turns, improved by two turns.

Now, these last four areas that I've talked about, the last four strategic drivers, as I said, they're focused on improving our market position, which really isn't very useful unless it translates into increased sales or increased margin, and that's what we intend to do. And you see a summary of points I've mentioned.

One we haven't mentioned is double the number of wins in independent product tests. We're doing quite well here. You may not be as sensitive to it. I can assure you we are. We need to know what the O.E.s think, what various consumer testing agencies think, if we're going to be market-focused. We want to double the rate of our wins in that area. It's crucial for us. And it's crucial, as many of you know, for affecting the person at the counter. In Europe, it's crucial for the consumer. In North America, it's even more critical for having a positive influence of the person at the counter.

Okay. Having reviewed that, I want to go back, and I've got a chart here that just basically reiterates our vision. I'm not going to spend time on that.

I thought it might be useful just to talk for a second of -- so if this is where we're going and this is what we're doing, where are we going to play? And I've done this at a high, corporate type of level. But it's critical to how we are going to refocus what we are going to do in our company.

For both passenger and truck tires, we'll play in high-volume markets. Why? Because the market is there. We'll also play-- You can read markets here as markets/segments, okay? We'll play in high-growth markets and segments. We'll play in markets where we just have high share.

We mentioned a year ago, in our February session with you, that we were going to be much more selective in the O.E. area. And that's playing out. And it's not an overnight pass, as you know, because of contractual obligations, and frankly, just our obligations. But our goal there, just as I said a year ago, I love the O.E.s. I just like some of their vehicles more than others. I like some of their vehicles a lot more than others. And so we've got to become more selective and more focused here. And that's what we're going to do.

The criterion here will be system economics. So we'll combine the economics from the O.E. business, the economics from the replacement business, and make tough calls. And we're in the process of doing that today. And frankly, in North America, in a big-time way. In Europe, Mike in a big-time way. And Chris, in Latin America, as well, in a big-time way. So that's where we'll play.

Now, I wanted to go back and, not reiterate all those seven drivers, but to show you a chart that focuses on how we'll be executing this within our company. This is a chart that's now playing out amongst all our business units. And below their units, so that for example, for Jon Rich in North America, his truck people, his consumer people, his retail people, his farm tire people, would have a similar format. And Mike Roney would have a similar format for those people, plus Germany, France, and the UK.

The objectives, goals, and strategies listed here are the same ones I talked about. And under measures, I must admit I didn't know how to present this to you, so I presented it this way. Those measures are kind of the ones we talked about today. For Mike Roney, for Jon Rich, those measures are essentially their AOP numbers, annual operating plan numbers. What are you actually going to do? So it gets very specific and will get even more specific in terms of their actions and the measures they've committed to.

So I wanted you to see that the ultimate test here isn't whether we can talk about broad general strategies, this has got to be drilled down into our individual units, and that is in process.

Now, Bob and I both mentioned six out of seven business units, and you probably have got that point, right? Everybody has that point. I thought it might be useful just to give you my perception of why it happened. Why did this happen? Sorry, Jon. Next year it will be seven out of seven. I probably won't get the eight out of seven, but we'll try to get seven out of seven.

Why did it happen? And this chart was meant to give you an indication from '01 to '02, what the progress was in ROS. Excuse me. This one defined by segment operating income. [INAUDIBLE] and I are still having some issues here in terms of jargon; segment operating income.

So you can see the obvious progress. That's continued into the first quarter. And I went through my chart and said, well, why did this happen? We've talked about leadership changes at the, kind of, the SPU president level. These guys have done a lot of work with their teams. There's very little similarity for most people and most of our businesses, relative. Team today. Team two years ago. And they've made good calls.

Share gain and mix improvement. Starting to gain momentum. Cost... Everywhere. You know that from your analytics, in terms of why we've made some of those gains. Cost has been a big contributor. Working capital reduction, everywhere.

Although, you'll notice a blank in Asia. The only reason for that is Asia has very little working capital. It doesn't mean they're not going to improve, but it means it's not a big driver for us as a company, because they just don't have the room to work.

Higher capacity utilization. And Jon will talk a little bit about that. Fit between capacity and demand. Real demand. Not the demand you estimate, the demand you deliver.

And entering new markets in a fair number of these businesses. Now, in Eastern Europe, Africa, and the Middle East, as you can imagine, that means geography expansion. But it also means that the markets are developing, and we're moving up into -- and yes, there are ultra high-performance tires being sold in Eastern Europe today.

In engineered products and in the chemical division, I think those teams have done a real nice job when they have assessed how we're going to grow this business, it's not just with conventional markets and conventional applications. We have to go after new stuff that's profitable for us.

I thought that would just give you a better view of how are they doing it in those businesses? The result has been momentum in their markets. And as you've seen, some progress in financial results. And I thought that would be a good, kind of handoff point, Jon, for you to talk to us about next year's seven out of seven.

Thanks, Bob. Good morning, everybody. My first four months on the job, I've been called a let of things. But this is the first day where somebody said I was "polite."

I want to talk about two subjects this morning. I want to talk briefly about Q1performance in North American Tire. And then I'll spend the bulk of my remarks focusing on how we achieve the ultimate turnaround in our business performance and in order to achieve the results that our investors demand, our associates expect, and frankly, that our customers want us to achieve, as well.

Bob Tieken already mentioned to you that the tire industry faced a very difficult set of economic conditions in the first quarter, particularly around very weak industry demand in North America and dramatically increased raw material costs. And we saw those same things impacting us.

If we look at the numbers in the first quarter. Our unit sales were down about 5.3% to 24.8 million. And while our net sales were slightly better than that, down 3.7%, and we were able to achieve some improvement in revenue per tire, based on a combination of price and mix, that increase in revenue per tire was not enough to offset the headwinds that we saw in raw materials. So our net segment operating income for the quarter was down $10 million from a year ago.

Let me assure each and every one of you that there is not one person on the North American team who is satisfied with losing $61 million in a quarter. At the same time, had we lost $50 million, or 40, or 30, while we might have felt better psychologically, at the same time, it does not change my view about the fundamental things that we have to do in North America to dramatically turn around our performance. And frankly, I doubt if anyone in this room would have been very satisfied had we only lost $30 million in the first quarter. So we are really focused as a team on what we need to do to turn around in this division.

As I go to the next chart, I want to talk about, we did make some progress in critical areas that will be vitally important to our overall turn around. And at the same time, we face some challenges. Let me talk about just some of those.

First of all, I'm going to show a chart on market share trends. Over the last 3 quarters we've made some gains in market share versus the industry. And those share gains have been largely driven by improvement in Goodyear and Dunlop brand. And specifically by improvements we made in our dealer channel, which was a channel we had difficult in last year.

One of the reasons that we started to win those -- in fact, the key reason we start to win those dealers back, was not because we dropped price. It was because we focused on key account plans, and we started winning back that business the old-fashioned way. And I'll talk about that in a minute.

O.E. volume, again, in commenting on that, our overall O.E. volume sales quarter to quarter, year over year, was down slightly. But the car builds are holding up better than people have said. Our view is that the car builds in the year 2003 will still come in somewhere between 16 and 16 1/2 million units, not as bad as some people have predicted.

And frankly, we continue to get offered a lot of new fitments at O.E., based on the relationships that a lot of our competitors have with O.E. We are being very, very selective about the new business we take at O.E., to make sure, as Bob said, we get on the right fitment, and we get on the fitments at a profit that we're willing to take. But we're not going to be constrained by O.E. volume this year.

I'm going to show you some facts about our retail business. We had a significantly improved performance in retail in the first quarter. Overall, we did a good job on cost management.

If I look at the puts and takes for the first quarter, between the impact of the Ford Firestone recall, raw material increases and legacy costs, [AUDIO DIFFICULTIES] healthcare, and so forth, we had negative headwinds of about $50 million. We offset that with about $40 million in price mix, but primarily significantly improved productivity and cost performance in our factories. And while we didn't get all the way home, and while we were starting from a very, very negative base, we did some good things in cost in the first quarter.

On the challenges side, again, the operating income speaks for itself. The private label business was very weak in the first quarter. And that's been reported by some others in the industry.

Our business in replacement truck was weaker than we'd like to see. But we still gained versus the industry. And I'll show you some data on that. But the replacement in the truck industry was faced with severe pressure from low-cost imports overseas. And I'll show some data on that.

We got improvements in price, but it was not enough to offset the raw materials increases that we see. And frankly, the first quarter economic conditions were very sluggish in North America. And that's not a surprise to anybody.

If I could go to the next page. I want to talk for just a second about how we did versus the industry in general, and how we did in the various segments. But in order to do that, I want to take just a moment to make sure everyone understands how we view the industry performance and how we're doing versus that.

We start by taking data that's provided to us by the RMA. And then we combine that with a lot of internal research around what we think is going wrong on the low-cost import in tier 3, not related to the RMA. And when we add those two pieces together, you start to get a little different picture of what might be going on in the industry.

If I start with consumer replacement business, again, it's been widely reported by others that the industry was down about 5% in the first quarter, and based on RMA data, that's what we'd conclude as well. But when you add in the influx of low-cost Asian imports, we actually think the industry was down only slightly greater than 3%, which still isn't good. And based on that, we think we beat most of our traditional competitors in the first quarter. And our performance in Goodyear Corporate was between those two figures.

If we look at passenger O.E., where it's not impacted by low-cost imports, we think the industry grew slightly in the first quarter, year over year, about 1%. And there we were down versus last year marginally, and largely that was the choice of our own to try and get off highly unprofitable fitments in O.E., consistent with the strategies that Bob has talked to you about before.

Perhaps the most interesting area is in the truck replacement business. There it's been widely reported by others that the business industry was flat. We think that based on the RMA, it was slightly down.

But here, the influx of low-cost, tier 3 Asian imports in the first quarter was significant. And based on that, we would see that the whole industry gained about 8.4%. And while our replacement business in the truck side was positive year over year, and we think we beat our traditional competitors again, we did not get up to the level of the industry based on the low-cost import. And frankly, it helps us adjust our strategy, because we have to figure out how to deal with this influx of low-cost import. And we have to figure out how to either beat them or join them and we're going to do one of those two things or both.

On the O.E. side of trucks, here we see the most significant of improvements. Consistent with what others have said, we think that the industry was up substantially. And while we achieved double-digit growth in our truck O.E. business, we didn't quite get up to the industry.

But there is some very good news on the truck side. The truck side is starting to turn around. And I think that's a good sign for future economic improvement in the country, and that's what we're counting on.

If I could go to the next page, I want to talk about share market for a moment. Both Bobs, and others, have talked about some decisions we made at the beginning of last year related to pricing. And this chart shows the quarter-over-quarter share of market changes that we've seen. And it's true that based on some of the pricing decisions we made at the beginning of last year, between Q1 and Q2 of last year, we lost about 2.2 share of market points.

But since then, we've stabilized it, and we've started turning it around. And on the first quarter this year, we think we gained back about a point and a half of shares. And we've gained back about two thirds of the share that we lost in the first quarter of last year. Again, those share increases were primarily driven by Goodyear and Dunlop brands. And that's very important to us.

If I look at some other first quarter highlights, focusing on company-owned retail. Again, here are traditional Goodyear [AUDIO DIFFICULTIES] retail saw same store 5% sale increases year over year. And on the unit increases, we were up again 1.3%.

We've opened up a new format, which is the "just tires" format to sell more tire units. And there we saw even more significant increase of 18% sales and 14% units, albeit, starting from a relatively small base since the format is new. But we're very, very encouraged about the progress we're making there as well.

I talked about independent dealers. And this might be the most important factor in the entire first quarter. While our overall unit sales were down five% year over year, we got about a 5% increase in the independent dealer channel. Again, coming off the momentum that we built in our February dealer conference, our dealers, our wholesale dealers are starting to come back to us. And they're buying Goodyear brand. So our mix there is shifting in our favor. And it's very important to us.

Lastly, let me just make a comment on pricing. Overall, as I said, our revenue for tire was up 1.6%. But in the consumer replacement market, our pricing improvements were better than that. So this 1.4% market share gain that we saw in the first quarter was not the result of buying share back. It was the result of winning share back. The old-fashioned way. And that's what makes us feel good about some of the things that went on in the first quarter, despite the overall negative operating income that you see.

Now, let me shift gears and start talking about the overall turnaround that we have planned. If I could have the next chart. Let me start with the simplest question, which is the same one as I'm sure everyone in this room wants to ask. And that is why can't Goodyear North American Tire make the same kind of profits as other people in the industry? And that's a pretty good question.

And when you're faced with that question, the first thing you have to do is look at all the complex variables that we're facing. Some of which are the same variables that others in the industry faced, and some of which are unique to Goodyear's variable. And Bob talked about some of that.

Obviously the industry as a whole is facing higher raw material. The influx of low-cost imports. A chronic overcapacity situation, particularly in North America. And the perception by the consumers that tires have become a commodity.

But some things are unique to Goodyear and Bob talked already about the slow change culture that we have and the necessity for us to pick up the speed. And we have higher legacy costs, just based on the size of our asset base in North America, versus our competitors.

And frankly, we still have the strongest distribution and the broadest retail sales outlets of anybody in the industry, and lest people forget, we are still the market leaders in North America, and we intend to stay there. We've got more distribution and retail points of sale than anybody else. But that creates more channel conflicts than other people have. And we've got to deal with those channel conflicts.

So based with this complex set of variables, how do we turn it around? To me, you start with a relatively simple equation. That is, you get cost and capacity in line. You focus on the distribution advantages that you have, and link that with a world class supply chain organization. If we reinvigorate our brands-- and we still have tremendous brand awareness from consumers, but we've done some things to dilute the brand equity we have. If we fix those things, we will get significantly improved profit.

But they're not all equally weighted. I would argue that in the past several years, we've done a good job focusing on cost reduction. We still have a broad distribution. And frankly, our brands, while somewhat diluted are still holding up.

But the two areas that we've probably failed on the worse, one is in making tough decisions around capacity utilization in North America. And the other is coming up with a supply chain organization that will allow us to leverage the advantages that we have in distribution rather than have that be a negative for us. So you'll hear me talk a lot about what we have to do in those two areas.

But at the end of the day, this is not new to anybody in this room. And I'm sure you'll all say, hey, we've heard this from Goodyear before. What's different? What's different is tough decisions are required. And the new leadership that Bob has put in place is prepared to make those decisions. And with the banking agreement that we've achieved, we have the incentive, in fact, the absolute necessity to make those decisions as quickly as we can. And that's what we're going to do.

Let me focus on where we're going to end up. Let me give you the answer first, then come back to how we're going to achieve that.

Last year, we lost $35 million in North America on unit sales of 104 million, or a net return on sales of minus 0.5%. Our objective this year is to be profitable [AUDIO DIFFICULTIES] segment operating income level in North America. And given the fact that we lost 60 million in the first quarter, I'm sure you're saying, can you still achieve this? And the answer to that, in my opinion is yes, if we get several things to occur that we can control, and some we can't.

We still believe that as you've told us, that the volume increases in North America for this year will still be somewhere between 2 and 3% for the year. And we believe that as well.

We think that raw material prices will decline in the second half of the year. And we'll see the maximum impact of raw material costs in the second quarter this year. But then if oil prices remain where they are today or decline, we'll see favorability in raw materials in the second half of the year.

Very, very important is that we achieve a contract solution with our friends at the steel workers to help us get back on the right foot. And if we do those things and focus on costs, I still believe that we can achieve our goal for this year.

Over the next three years, we're going to try to move up to a return on sales of North America of 5%. Again, we're about $7 billion in sales, so you can calculate what that means. And we're going to gain two points of market share, as Bob said already.

But we're not finished there. Ultimately, this industry demands that tire suppliers return somewhere between 7 to 10% return on sales. And that's where we're going to head to. But we've got to take the steps and the logical sequence, as I'll talk about.

Earlier this year, in February, I outlined to our dealers a four-point plan to turn around North American Tire. And I'd like to go through some of the highlights of that and give you some more details I didn't talk about down in Florida.

Bob talked about the importance-- the first thing we've got to do is stabilize. Stabilize North America. And stabilizing North America means the focus on cost and capacity utilization. Those are critical.

Bob already talked about the dramatic changes that he's made in the leadership level, at the president's level, and we've done similar things in North America. We've made a change in our finance position, and Rich Kramer, my Vice President of Finance is sitting here in the front row. Rich, why don't you wave to everybody. Jack Winterton,(phonetic) who spent a lot of his time at Kelly with the dealers, is now the Director of Dealer Sales in North America.

Brent Smackenburg, (phonetic) who was the manufacturing Vice President in Latin America and did terrific things there on productivity and costs, has come over to be the North American head. Bill Cook, who spent most of his career at United Technologies and has been with Goodyear a couple of years is now my head of H.R. Karen Burke who worked with me at chemical has come over to take the principals that we learned there around Six Sigma and to be my Six Sigma head.

Pat Hurley (phonetic) is the head of the supply chain. Again, a Goodyear veteran and knows his way around the company. Ted Thicke (phonetic) is running my truck business. Again, spent most of his career at Packard, and now is running the truck business. And Laura Thompson, who many of you in this room will remember from her days in the investor relations role, is now my Director of the consumer tire business finance.

So a lot of change the in North America, as well. And if you look down below that level, a lot of changes. I talked already about the steps we're taking to win back our dealers. I'm not going to focus on that.

As far as head count goes, we've done some -- we've taken some tough steps already in the first quarter. You're all aware of the things that we did in Akron around reducing the salaried levels there and R&D and in North America. By the end of the first quarter, we have 1500 fewer associates in North America than we had in the fourth quarter last year. And we will continue to take similar magnitude of steps in the second quarter and for the rest of this year. So we've got a very aggressive plan to reduce head count. And frankly, those decisions are very tough. But they're also very necessary.

The next three bullets might be the most important thing that I'm going to talk about this morning. We have to align our capacity with demand. I've said publicly that we'll fix or close every factory in North America that can't be at least competitive on a global basis.

I want to say just a word about the labor agreement. The contract expired on April 19th. And the union and the company agreed to work on a day-to-day basis. And I continue to be encouraged by the nature of the dialogue that we're having. And if I wasn't encouraged, we wouldn't keep talking. I think both sides are committed to bringing this thing to a conclusion. We spent more effort in this contract negotiation than ever in laying out every fact and every piece of data that we could to the union about the economic condition of the company. And I think there's a joint agreement on conceptually about what needs to be done.

And I can tell you [AUDIO DIFFICULTIES] any unusual steps to increase our inventory levels in preparation for a work stoppage. And while we have developed plans, contingency plans, for everything that could happen, as I've said publicly many times, we're not in a position to take a lengthy outage. But we'll do everything we can to keep key customers supplied in the event that there is an outage. I am, frankly, remaining confident, cautiously optimistic that we are going to get to where we need to be. But I can't promise anything.

Because of the nature of the negotiations, I can't go into more details that I would like about what we need to do with capacity utilization in North America. But it's a simple concept to understand. We either have to have, based on our agreement with the union, a cost structure in North America that allows us to compete more effectively and utilize more of our capacity in North America, or we have to have the ability to take that capacity out, or we have to do a combination of both of those things. That is the most important thing that we have to do in the short term.

Concurrent with that, we have to leverage our global footprint. And bring more tires in from overseas if we cannot make those tires cost effectively in North America. It's not our intention to give up market share or to quit selling tires in North America. But we're going to leverage our global footprint.

Now, if I can go to the next chart, we've talked about this before. And why haven't we done it? And I think there's a very important mindset change that we've undertaken here. In the past, we've talked a lot about cost savings and productivity, and head count reductions and so forth. But at the end of the day, we always were driven by trying to get more volume and feed the monster and keep our factories full. One thing I've learned in the my first four months on the job is that this is an industry where you do not buy market share with price. You have to earn it the old-fashioned way.

And so as opposed to head count reductions and manufacturing savings programs, all of which were critical, and all of which we have to do, a very, very important piece is optimizing our capacity utilization. Utilizing our offshore sourcing, getting our supply chain to a lower cost to serve, will achieve all of these things through utilizing the Six Sigma process. And we've got to select businesses and customers that are going to be profitable to us. We may not be able to be in every business or sell to every customer that we're selling to today. We are going to be in businesses that we can make a profit.

Let's go to the next. The second step we have to go to, and Bob has talked about this already. We have to dramatically simplify everything we do. We've simplified our organizational structure to try and get more accountability. We're going to run our business based on the consumer business, the truck business, and farm, and everything that's off the road.

We've got to -- the first thing customers told me is that we have to make Goodyear the easiest company to do business with. So we have to simplify our selling proposition.

If I could go to the next chart. Let me just talk about supply chain for a minute. And here -- I always like to fall back to the concept of common sense. Two things that are a goal in the supply chain. One is, make Goodyear an easy company to do business with. That makes sense. But perhaps more importantly, is make sure we can get the right tire to the right place at the right time for the right cost. It seems simple. But nobody in this industry seems to be able to do it well. We think that ultimately, if we do the things I've listed here, that our ultimate, sustainable, competitive advantage at Goodyear is a combination of our distribution in North America and our supply chain.

Lots of people in this industry make great tires. We think we make great tires. But at the end of the day, our sustainable competitive advantage is going to be a combination of our distribution channels and our supply chain. And my entire team is focused on that.

I would just make one comment. We are going to announce today the introduction of an online ordering system called Tire HQ. You'll read about that. Tire HQ is the next evolution of the explorer system we have. We think it will make it even easier for our customers to do business with that. So you should be reading about it shortly.

The third part of our plan is focusing on execution. I'm going to talk about Six Sigma and brand strategy.

Getting the price right, and Bob talked about this. At the end of the day, if you have a complex distribution channel like we have, if you don't have pricing discipline, you will have chaos. And in the past, we've occasionally created chaos. We want the pricing to be stable. And we want it to be something that our customers can rely on. So we're going to get out of the surge and purge mentality that we've had in the past to try to drive volume at the end of the quarter. Because as I told you already, we're going to get out of the volume mentality that we had before, which was driving our whole process.

We want to sell -- I'm going to talk about distribution in a minute. But the key concept there is selling with the winners. And we're going to use our master distribution plan to make sure we know in every geography and through every channel who is the best at running their business. And if we sell with the people who are the best at their businesses, we are going to win and gain share. And we're going to use Six Sigma to figure out who those winners are.

Go to the next chart. I just want to talk about Six Sigma for a minute. I couldn't be a bigger supporter of this process. At the end of the day, I think every company has to have some way of focusing the organization on process improvement. And there's a lot of good processors out there, whether it's GQC, or -- but Six Sigma is a proven winner. A lot of companies have used it and made a lot of money with it. So why go away from something that's a proven winner?

Lots of companies do what I say here on the left. They pick up the ground fruit with constant production programs, and we have been doing that well for a long time. To take it to the next level, you have to focus on process redesign and optimizing everything that you do. When I talk about processes, I'm not just talking about manufacturing processes that made the tire, I'm talking about supply chain processes, selling processes, everything from order to cash.

Six sigma is incredibly powerful. And once we've started to get traction in the Six Sigma area, we're going to go to designing future products and processes with Six Sigma in mind. So we make the products right the first time.

Just to give you a sense of where I think we can go with this, Bob already talked about in the chemical division we saved $40 million last year. I'm estimating that half of that drops right to the bottom line. In North America, we have a goal of 200 people focused on this full time. We're already more than halfway there. I would think we could get $200 million in annual project savings from our efforts in North America and that half of that would drop to our bottom line.

Let me talk about our distribution. As I said in the dealer's channel, there's no more important customers to us than the independent tire dealer. They are the heart and soul of our business. And we are happy that we're winning them back. We continue to be strong in the mass merchandiser camp.

At the same time, we need to grow where some of our competitors are winning. All right? We need to sell through the winner and through the differentiated channel. And for us, that means growing in warehouse clubs, large regional retailer, and in the auto dealers, because we think those are channels where we can make headway and get part of this 2% increase that Bob talked about.

At the of the day, we have to dramatically simplify our whole distribution channel. I'll talk more in the future about one step to retail. Right now, some of our tires go four or five steps before they get to a retail outlet. At the end of the day, we want to go one step to retail.

Let me talk quickly here about our brand initiatives. You've told us that our brand segmentation is too complex. And we've told ourselves that. So I want to talk about a simple plan going forward here.

We've look at the segmentation by the vehicle usages and the segmentations within those [AUDIO DIFFICULTIES] You can put together a 4X4 matrix. We want Goodyear to focus on the passenger segment, the SUV 4X4 segment, light trucks, and also the sport performance segment in the American vehicle. We're going to drive our growth in Goodyear through the introduction of dramatically improved new products.

On the Dunlop side, we're going to leverage the European heritage that Dunlop has and we're going to focus that from a marketing standpoint on foreign vehicle. Both at O.E. and the replacement market.

Perhaps the most important thing is trying to get Goodyear out of some of the value and value-aged markets, especially at O.E., and leverage that with Kelly or our associate brands. And there we've got to focus on significantly expanding the distribution that we have for Kelly. Right now, Kelly is in less than 50% of the zip codes in North America. So we think there is a huge opportunity for us to get refocused on Kelly and get that brand expanded throughout the distribution.

Next chart. Bob talked about new products already. So I'm not going to expand them other than to say, you know, look for it at the beginning of next year, because we have great new products coming down the pike. And we're going to announce those early in the year next year. And they're going to be exciting, and they're going to put us back in a position to beat every competitor in the industry. And I know Joe Gingo will be happy to give you more details on that.

Let me go and say, hey, next chart. Bob talked about North American -- about the initiatives that he has for Goodyear as a whole. And I'm just going to tell you that each one of the initiatives that he has for the company as a whole, that we are linked intimately with those initiatives.

Next chart. So how are we going to turn it around? And when are we going to turn it around? We're going to do the following timeline. We're going to focus in the first year, year and a half on cost and capacity utilization. We're not going to try to do everything at once at the same time.

Focus on getting our capacity utilization up and getting our cost competitive in North America. We'll simultaneously work on starting to shift our product mix away from private label business to more branded business, utilizing the brand strategy that I talked to you about. And lastly, at the end of the three-year period, we'll drive those advantages to share gain. We're prepared to be very, very focused here.

Let me finish up with one last thing. I've talked to you about some of the specifics about how we're going to do this. But let me tell you why I think we're going to win. Now, businesses are a lot like sports teams. You know, the teams that are champions often times have great people. But they don't usually have primadonnas. The teams that win usually don't have complicated playbooks, but they focus on executing the fundamentals. We're going to do those things because we've got great people. We've got loyal customers, we still have strong brands, and if we focus on executions and the steps that I talked about, we will turn North America around. I'm very confident of that.

Thank you very much. And with that, I'll turn it back to Bob Keegan.

I'm going to be very brief. We want to get to your questions, obviously. But we had a lot of information we wanted to convey and wanted you to have ample exposure, obviously to Jon Rich of North America. This last slide, I just wanted to reinforce again, this is a multi-year change, we recognize that. But that doesn't mean that we don't have to make significant progress in '03. So we're going to make significant progress in '03.

Our commitment here is we're confident in the plan that we've talked to you about for '05. We're intensely focused on its execution -- And again, neither Jon nor I nor any other member of the management team is interested in plans. We're interested in executing plans and getting the results we expect in the marketplace.

Obviously step one, and imperative, we have to cut significant costs out of this structure of ours. And we will do that. And you have seen some of the things that will drive that here today.

We also have to drive improved revenue. And we remain committed to that. And we're going to do that, but do it in a very different way than we've done historically. Much more focused, much more selective way. We're not going to try to be all things to all people. And we are guilty of having done that in many of our businesses. We're alo fully committed to cash generation. That goes without saying.

But I just leave you with one thought. I think, as Jon just mentioned, you heard his commitment. You've got the same commitment from me and the entire leadership team. We're going to get the plan accomplished. It's a high degree of difficulty plan, but it's doable. And we intend to do it. And I'd leave you with that thought.

And now maybe we can transition into the question period. And can we turn that light out over there? Thanks. Because I can't see anybody on this side of the room. Thanks.

Sure, Rod?

Thanks. I was hoping you can drill down a little more into this billion and a half in cost savings. First of all, is that a gross cost savings target? Or is it net? And have you estimated what it's going to cost you to get there, in terms of rationalization costs and other charges?

Aside from Six Sigma, what are the other components of the cost savings that you're talking about? Can you break that out into categories of some kind? If I'm doing the math right, if you get a billion in cost savings, you should be getting more than a 6% EBIT margin. What are you offsetting that with?

Let me kick off the answer to that, Rod. And others may have a comment. Are the mikes on, by the way? Can you hear me okay? Okay.

First, your comment about the -- is this a net increase? The answer is, those are costs we'll take out. We need some of that to offset headwinds that we're going to have in the marketplace. So you can't take a billion, to a billion and a half dollars, and add it to our EBIT or segment operating income line. Okay? That's point number 1.

Point number 2. Have we looked at what it will cost in terms of -- I'll call them rationalization costs, to be able to do this? The answer to that is, yes. Some of those plans are fully developed. Some are being developed. We do not intend to quantify those for you today. Those would be my comments on those questions.

Bob, you might want to just elaborate on the other comments from Rod.

I think the other things you have to look at is clearly the global sourcing. As we move more of our product [INAUDIBLE], are going to be a significant part of that. We also are basically going to look at, and attack the, what I would refer to as the corporate infrastructure costs. We have a program under way to look at that now.

And don't overlook purchasing here. We purchased multibillion dollars a year of raw materials and indirect. And we're going to cut that bill.

And I think the other thing you have to keep in mind, and I'm addressing the point that Bob just made about the net. Over the years, we've shut eight or nine plants and taken 20,000 people off the payroll. We've taken 800 of those billion dollars [INAUDIBLE] It's something you have to keep doing just to deal with some of the headwinds. We have a consider with the amount of headwinds this year that we have to deal with just to meet the numbers. But we believe we have to do. But it's a multifaceted program. Some of it is material. Some of it is global sourcing. Some of it's corporate overhead.

Well, Rod, just to take you back, just so I'm sure you're with me. When we talk about return on sales, R.O.S., of 6%, that's at the EBIT level. Okay? So that billion to billion and a half dollars of cost is going to be necessary. We've got to strip that out of the system to get to that. Okay? So the -- we've solved the equation in terms of what we expect to get out of top line, what we expect to take out of costs, and what the headwinds are.

[INAUDIBLE]

Roughly half of it. Maybe a little more than half. In fact, as I -- let me think through the question. More than half of it.

And one of the things I think you'll see, Rod, as you'll look at the improvement that's taking place, particularly in our European businesses, some of the things we're doing there in terms of rationalization with plants and sourcing and low cost [AUDIO DIFFICULTIES] is a significant contributor to the performance of that. In many respects, taking that model and moving it into our North American business and continue to grow on the model we've had in Eastern Europe. And we think it will work. It has worked.

Barb, I'm going to ask you to select here. We have a lot of hands up. I don't know--

[INAUDIBLE]

Pardon me?

[INAUDIBLE]

We are not going to provide the cost of the restructuring today. But I do want you to know that that's not because we haven't thought it through. It's back to my comments at the beginning of the sessions this morning. I'm going to be a little cautious in communicating that number.

And the one thing you have to keep in mind about the cost, structure in the cost, they come back pretty quickly. In other words, you get pretty rapid payoffs. And I know there's been some questions asked about whether we can do this in the context of the financial restructuring we just did, we have no reason to believe that we cannot execute these plans. We can execute these plans and not get in trouble with our restructuring.

That's a good point.

Good morning. Couple of questions. Looking at cash flow in 2002 and 2003, when you consider what you might generate from operations and lump in what you think you might spend on restructuring, does the company have net consumption of cash over the two-year period? Or generation of cash? And if so, what sort of a bottom line ballpark answer to that question?

Why don't you take the first part of that, Bob? I'll take the second part.

I missed the first part. No, we don't think we're -- we believe that the plans that we put together, we're going to be able to generate cash. Over this period of time.

Even including restructuring.

Yeah. Because, Saul -- remember here that we've got -- if you think we're regenerating cash. Cash from operations, asset sales, working capital -- so think about those on one side of the ledger. And some of the other users of cash, as you're mentioning, on the other side of the ledger.

You just take a simple thing like inventory turns. You get two more turns out of your inventory. That's worth over $500 million to you. There are things that we can do in terms of managing our balance sheet and our portfolio of businesses, which will basically be sources of funding to do what we have to do in terms of restructuring, and you do get pretty fast paybacks on these restructurings. So some of these will be self-funded over a relatively short today period of time.

Let me just reemphasize the point, which I tried to emphasize. I'm not sure I got the point across very well. In these areas where we say we're taking action. If we take small, incremental actions, it will be totally insufficient to get the job done. Two turns is an example of that. Asset sales will be another example of that.

Just another question. In the first quarter, Jon Rich, you mentioned that you sold more Goodyear brand product, sold more truck, less Kelly, more store business, and there was price hikes last year than the first quarter of this year. Why do we have only 1.6% price increase per unit when it looks like all of the action was in the higher-price spread and you did worse in the lower price spread?

The answer to that is we didn't talk anything today about off the road, farm, or aircraft. And those are lumped in to the net aggregate. And those were very soft in the first quarter.

Okay. David? We can probably all hear you, David, even without --

[INAUDIBLE]

Channel conflict. you know, you can get a good Goodyear tire at Sam's Club cheaper than you can at the local dealer. You've also had the distributor issue, distributor selling dealers selling back to your own dealers at discounted prices, et cetera. That's been a big, big issue for a long time. What's the plan there? How do you think that will work through?

Maybe, John, I can kick off here, because you're right. It's been a -- I'll give you my perspective, and then Jon can give you his perspective, being in the heart of it right now, facing it every day.

From my perspective, there are more good things undone by Goodyear as a result of channel conflict over the past many years than you can imagine. Because as you face your marketplace, there are always -- if you're going to do anything new and different, even without expanding in the new channels, you're going to have channel conflicts. You have to be able to manage that.

I think our risk equation was to swing way over to, my gosh, let's not take any risk. And therefore, channel management, channel conflict, channel risk became almost a mantra at meetings. And at decision points. And I think one of the things that Jon and his team -- because it's not just Jon Rich. Jon and his team has done in North America. And we started to do last fall, even before Jon got there is let's cut through that.

I found ourselves having conflicts with a lot of channels, and we were making decisions not to hurt that channel. We weren't making any money. Or we weren't getting the kind of returns we could get in the new business. And we have examples of that today in our truck business. You know, we've got to grow our business. We've got to grow it in very logical ways, not everybody is going to be happy with those changes. [AUDIO DIFFICULTIES]-- changes every day. And not everyone will be happy with every one of those changes. So you need the team that's got the courage to address it. These guys have the courage to address it.

Just a quick comment, first of all, in my learning process in the tire industry. The channel conflicts depend on whether you're selling tires or buying tires. If you're selling tires, you don't like anyone else selling tires. If you're buying tires, it's my view, that the person who buys a tire at Wal-Mart, it is segmented by the amount of service and support that a customer needs. So a customer that buys at Wal-Mart is not likely to buy at a small independent tire dealer. So there's going to be a natural segmentation of the market. We want to serve those segmentations where customers are buying.

How do we avoid the conflict? Again in the short term, the key to us is to have pricing discipline. It's our discipline. If we're disciplined in pricing, which is what our customers want, we can -- we won't eliminate the conflict. But we can reduce our headaches dramatically, by getting a disciplined pricing process in place. And that's what we're doing.

Long term, you know, -- if a tire has to move five steps to get to a retail outlet, you have to look at the inefficiencies that that creates in the supply chain channel. And sooner or later, that's going to rationalize out. But that's a longer term endeavor. Short term, we've got to get pricing discipline.

We'll get to everybody. Don't worry. We'll do our best to do that.

My questions have to do with the 2% market share increase goal by 2005 in North America. First question is, are you measuring that from the end of 2002 or from where we sit today? And the second is, when you look at that 4X4 matrix that you put up, given that you say that you've made, sort of, Xs in private label business, that suggests a greater than 2% increase in some of the rest. Where within that matrix do you see the possibility for the greatest amount of gain and from which competitors?

Let me talk about that. Two things. One is the 2% is from where we are today. We need to gain that on.

The second piece is around the segmentation. Let me just talk quickly about private label business. I don't want to create a panic in the industry. It's not our intention to exit the private label business. At the same time, you have to ask yourself how effectively we can serve that industry with the cost structure that we have in North America. So if we can figure out how to serve that industry at a cost structure that allows us to make a profit, then we'll look at the share that we want to have there. I mean, we're in general in favor of growing our market share.

That decision is linked intimately to the conversations we're having with the steel workers. At the end of the day, growing our branded business and shifting the mix to branded business is what we want to do. And we want to do it using the techniques that I discussed.

I just -- maybe I can clarify just one thing there. I think it's a good question. Because I've talked in many forums, including this one, about some of our self-inflicted wounds. And nowhere has that been more true than in North American share performance in 2002.

So you might ask one of the reasons, why would North America be two share points and the rest of the world one? Part of that is you get a share point by just taking away the self-inflicted wounds. That's a general comment, probably not precise, quantitatively, but that's a general comment that I think would apply, as well.

[INAUDIBLE]

Let me speak to the company on it. Because if -- then Jon, talk to North America.

No, it does not. We're not going to give forward forecasts here today on head count, per se. But we can essentially say that yes, to get that cost, we're going to take staffing out as I indicated. Jon mentioned the numbers he mentioned because those are actual today. Those are not just North American Tire numbers. Those are corporate staff. They are R&D staff. Those are North America, those are Latin America, and Western Europe, as well. But we're not going to give a forecast in terms of precise head count figure. But to get to those cost figures, obviously we've got a lot of work to do this year and subsequently, in terms of head count.

That covers it. Given the nature of our discussions with the union, we can't -- it depends how that works out.

Yeah, I guess two headwind items that we didn't hear anything about that are still plaguing the company [INAUDIBLE]. One, underfunded pension. And two the asbestos. Any comments in terms of what you're going to do differently? Are you going to change your asset mix, investments, assumptions, et cetera and on the excesses front, as well?

No, clearly we have pension funding obligations in -- we have none this year. We have pension funding obligations in 2004. And those are all built into our liquidity forecast. We did have -- we picked up about 8,000 asbestos claims in the first quarter of this year. But our position on asbestos basically remains as it has been previously. And it's included in our 10-K and 10-Q.

Maybe on asbestos, we should also mention, because, obviously, there's a lot of press around a legislative solution. Naturally we'd just say, and I would personally say, we would endorse, number one, we're happy that finally this is being addressed.

Number two, we're happy if congress is looking for the right solutions, but as always, the devil is going to be in the details here, in terms of getting legislation that's fair and equitable and gets the job done that we'd like to see done. But I think that's not clear at this point. I'm not going to compare one bill versus another bill. I don't want to get into that with you here this morning.

[INAUDIBLE]

Yeah, we basically have a -- our pension return rates are basically, long-term is on 8 1/2%. Those are the assumptions that are built in right now. At a long-term rate and if you look at what our long-term performance has been over time.

Just as a follow on that I question, in your three-year forecast, how much cash is going to go towards legacy issues? Either pension, retiree, medical, asbestos, those types of things? And you know, as you've done a lot of planning in the last year, if you did do a Chapter 11 filing, how much could be avoided through that type of action? I'm concerned that the dynamics of the industry won't allow you enough cash flow to support those legacy issues.

We basically -- the forecast that we use, we have enough cash flow, we're going to generate enough cash flow out of our operations in order to meet our pension funding obligations, as we see them over the next three-year period of time.

There's about somewhere between 350 and 450 million dollars that's going to be required in 2004 that's going to start about the middle of 2004 and require quarterly payments from then on. 2005 is obviously something that, you know, still remains to be seen.

But we have done forecasts. We have estimates that let those in. Those were clearly taken into consideration when we redid our bank financing, along with our retiree, medical and so forth. We think we used some pretty conservative assumptions on it.

But clearly, you know, the thing that's important, and Bob pointed it out, the thing that's really critical on this whole equation is turning around our North American Tire business, starting to generate enough net income in this business so we can go back into the capital markets and refinance some of our debt. I mean, that's a clear part of what we have to do in order to move forward.

By e way, we're not just drawing those conclusions ourselves. Obviously we've taken good counsel. Relative to reaccessing the capital markets.

But your assumption is that you've got the [INAUDIBLE] generate the revenue to do it., [INAUDIBLE]

No, I mean if you go back to the original costs, though, and I think it's the one that Jon showed, that his first program in this stabilization program is work on the cost and the capacity utilization in this North American Tire business.

I mean, that was the first thing you had to do, and then you start working more on the marketplace issues. Because, the point he tried to make is, you can't do it all at once. And your point [AUDIO DIFFICULTY] control today and do something with it, the revenue side of it takes more moving parts in order to make it done. And I think that's one of the reasons why the focus is on the cost.

Another way of looking at this is --, I'll give you my operational way of looking at it. It's not very sophisticated. No matter what we think about the revenue growth that we can drive, we have to de-risk that on cost and cash generation. That's the approach. Unmistakably, that's what we've got to do.

Jon, looking at your presentation I'm wondering about two potential conflicts. One is, you increase your [INAUDIBLE] overturns two times, and reduce your SKU count by 25%.

I'm sorry, I'm having trouble hearing.

I apologize. If you look at your [INAUDIBLE] for increasing inventory turns by two times, and reducing SKU count by 25%, looking at the North American [INAUDIBLE] what channel do think is most negatively affected by those changes?

I'm not sure that any of them would be negative. I would argue the case that all the channels would benefit from it. One of the things we found is we've taken this model and we've used it in one of our other regions where we've made significant changes in SKUs.

And it's actually helped the businesses because they have to carry less inventory in order to meet their customer's needs. So the SKU thing basically works to you. It helps your turnover, but it also helps you sell more product into certain channels because you're easier to do business with.

How does this affect the customers perception of your service level?

It's easier to service when you have fewer SKUs. You've got less inventory to manage, you've got fewer things that you have to carry, and he's got a simpler product line in order to roll out to his customer. Especially a multi-branded dealer, really is a big beneficiary when you have fewer SKUs.

Let me mention another factor here that we didn't talk about today that's a factor, and that's, I can see that's the thinking that you're going through on this.

When we talked about our different brands and eliminating much of the overlap, not all of it, but much of the overlap in those brands, that addresses that question. Because you'll be in a situation where all three brands may not address you as a dealer or you as a consumer, but one of them will very well, one of them may. Are you with me?

So you don't necessarily lose that sale to the Goodyear portfolio of brands by doing that. You've simplified your supply chain, you've taken your working capital down, you've generated cash.

How do you maintain pricing discipline and at the same time grow your business at warehouse clubs.

Jon, we're glad to pass that to you for the simple answer.

The warehouse club channel is not [INAUDIBLE] If you look at Sam's Club and Costco and BJs, and if you go in and buy a tire there, that's not the low end of the tire market. You know, those people are generally selling branded tires at a higher pricing point to people that run small businesses. So I think, given the nature of where they sell, that won't be the most difficult channel for us to hold the pricing discipline on. We'll have some others that are harder, but--

I would venture one of the things that we have to do, because you know, it's a very complex question. So it's a complex answer. We have a lot of diverted product in our industry. Diverted product, call it grey product, product that's moved either from overseas into this market, or more likely, from one part of the country to another part of the country, and we've got to be really tough on getting that eliminated. That's a huge impediment today to pricing discipline for all the major brands.

Let me clarify one thing, we sell into those channels today, so we're already dealing with the pricing issues, it's just a matter of growing our share in those channels. That's what we're going to do.

If you look at North American Tire can you give us an idea of the current capacity [INAUDIBLE] and other capacity that you're utilizing? What percentage would you say is not competitive from a cost standpoint. And then, if we look at the slightly over half of profits of the one, to one and a half billion in savings that is North American, what percent of that, roughly, is tied to the capacity reductions as opposed to other sources.

Let's take them in order. Let's take the capacity utilization. We're at about 87% as a company, I think was our number for '02. And I think North America is slightly less than that. Somebody speak up here, because I'm going from memory.

[INAUDIBLE]

Yeah. That's Lowell Dunckel who runs our global manufacturing.

The important distinction here is manned, versus total capacity. That's significant for us. But if we use total capacity, 87's not a bad number. Running up at 95 for manned capacity. So that's the answer to your first question. Have you got anymore?

I think if you, again, I want to be careful about how I answer this question because it's involved, somewhat in the dialogues we're having, but-- We [INAUDIBLE]

This is back to, you know we're in the middle of discussions at this point, so it's not that we don't want to answer that question, I guess it's we won't answer that because we don't---

If we were much more cost competitive, we could probably sell about 16 million more units. But the question is, how do we get from here to there?

Thank you, Bob. I'm just wondering if you could give us a little more color on this idea of system economics and you intend, the disciplines you're going to use to trade off O.E. versus replacement? Because I really didn't follow you there.

Okay. Maybe I can kick it off and then Jon can deal with that, and maybe some other people here can give you their view on it. For me, I was simply trying to convey that when we look at the O.E. business, the O.E. business doesn't contain the entire economics.

You know, we've got to then translate that into royalty rates, or retention rates in the replacement business. And obviously, John, the retention rate on the car you drive, I'm guessing, is going to be higher than it is on a Ford Focus, for example. Nothing wrong with the Ford Focus, but those systems economics are just going to look dramatically different.

Royalty rates can range from very low rates down. Order of magnitude 15 or 20% up, up to well above 50%. And I think we, and maybe others, have tended to look at average rates before.

You can't look at average rates, they are useless. You've got to look at royalty rates on, if not on individual models, if you don't have that data, price categories. There is a high correlation between royalty and the price that you paid for your vehicle. So that's what I was trying to indicate. There may be an elaboration from somebody.

You've got another situation, too. It will vary by region. Because if you go into the European region where you get a higher percentage, particularly on [INAUDIBLE] where the tires are replaced, [INAUDIBLE] they go back and want the original fitment, so you've got a different set of dynamics than you have in the United States where, you know, the decision is based on the Saturday morning paper and how badly it's raining.

So you get into those kinds of economics. So it's tough to generalize on it. But the more you can push, the more that you can get this royalty factor working for you, the better off you're going to be.

Is that the answer, John? Does that help you?

On North American Tire, do you have to lower price faster than the competition in order to stabilize your share?

No.

No? Alright. So then--.

As I've said before, you can't buy share in this industry with price. Whatever you do, if you don't have an advantage somehow, you can't buy share with price. People will lose an enormous amount of money until they give up their share, so. It's not an effective approach to gaining share.

Okay, then, just on the billion dollars in cost savings, is that at constant volume or is that assuming you gain share?

We're talking about gaining 2 points a share over the next three-year period, but primarily driven in the last year. So we've got to do cost first, shift mix, then share.

So if you don't get the 2 points a share, you'll still get the billion dollars in cost?

Yes.

I just wanted to make a point. Barb just reminded me that we are going to lose people that are on the call with us at 11:00, so we want to thank them for their attendance with us here this morning and we'll keep going with questions if you have them.

One question, kind of following up on the royalty factor markets [INAUDIBLE]. And that would be that you think that you're not going to play in all markets, that you're looking, to some degree, at the loyalty factor beyond the original contract for the O.E.

But, you know, given that you've got some fairly sophisticated people on the other side of the table, too. Can you maybe give some specific examples where you fared well or fare poorly in the sense of getting one contract from Ford or GM, or whoever, and losing another contract?

Okay, this is one where I'm not going to mention specific customers because, just as a policy, we won't do that as a company, but I'll mention to you that the kinds of things, maybe this will help, the kinds of things that we're doing. In some cases we have agreements to be de-sourced. Which just means that somebody else will come in and supply those tires. That's fine, they're welcome to them.

That would be an example. In other cases on the positive side, by recognizing the situation, you're going to get a bigger share of the premium business with us. Because we need you, we respect you, you've got great engineering. You guys make great tires for us. So, it's that kind of thing that's working daily. It's been working daily for a year. with all the major O.E.s. Like I said earlier, we love their business, we just don't love our business on some of their fitments, on some of their vehicles.

Let me put in a plug for our technology, here again. [AUDIO DIFFICULTIES] we are leaders there, and we are winning some fitments with Run-Flat's technology that we can offer that others can't.

And just one more question here, and that is on the unions I know you're not going to [AUDIO DIFFICULTIES] negotiations, but could you maybe give us one thing that is lacking going back to the last year's presentation, is details exactly what you have from the union currently under the contract that just expired. Can you talk a little bit about specifics on what it is that's giving you impediment to reducing [INAUDIBLE] in North America? I know that's different than what's going on now?

I'm not going to go into the details of the numbers, but an obvious one is the one that's impacting everyone, and that is the rapidly rising healthcare and prescription drug costs. Again, our salaried associates are already bearing more of the burden for that than our represented associates.

So we can't continue to face 10 to 15% rises in healthcare costs and prescription drug costs when we're only getting 2.5% increases in volume growth in the industry. So, that's a national problem. We face it, it's one of the focus areas that we're talking about.

Just a quick question on the numbers, if I may. Could you just discuss, really, the balloon, sort of, increase in working capital in the first quarter? Whether you have a target for the balance of the year?

And while I realize you can't talk much about the negotiations right now, the ensuing restructuring charges you will take, can you give us a sense of those payments? Do they look more like a 2003 event or would you expect them to go all the way in toward the end of 2004? Thank you.

I mean, a lot of that, as we've said, is just going to get sorted out as we go forward, but as you saw already in these charts that we have up here, just in our base plan we're going to start increasing the number of tires that we bring in from offshore sources this year.

If you look at us, we do use a lot of working capital early in the year. Particularly in the first half of the year, and that's what you're going to see when you look at our cash flow statements that will be published in connection with our 10-Q. And then we bring them down in the second half of the year.

I know we said that because we lost the conference call people that we were going to continue, because of regulation G and regulation FD, we cannot. And therefore, we are going to have to cut it off, and I just want to apologize for that and hopefully, if you have any other questions, please give me a call 330-796-8576 and I will try to answer them. And Bob's going to--

And I've got one other request. In your packages there are tire coupons. Best thing you can do for us is get those into the hands of consumers that are going to buy tires. Thank you very much for being here.