Goodyear Tire & Rubber Co (GT) 2003 Q2 法說會逐字稿

Good morning, my name is Umeki,, and I will be your conference facilitator today.

At this time, I would like to welcome everyone to Goodyear's second quarter earnings conference call. All lines have been placed on mute to prevent any background noise.

After the speakers' remarks, there will be a question and answer period. If you would like to ask a question during this time, simply press star, then the number 1 on your telephone keypad. If you would like to withdraw your question, press the pound key.

Thank you. I will now turn the call over to Barb Gould. Please go ahead.

Good morning and welcome to Goodyear's review of second quarter results. Our discussion this morning will be available by replay after 2 p.m. eastern time, by dialing 706-645-9291, and entering access code 1440647, or by listening to the web cast replay on www.goodyear.com in the investor relations section. The slide presentation to go along with the conference call is available on our web site also. All reconciliations to non-GAAP items are included on the last page of the slide.

I'd like to remind you that our conversation this morning may contain certain forward looking statements based on current expectations and assumes that are subject to risk and uncertainties that could cause actual results to differ materially.

These risks and uncertainties outlined in the 10-K for 2002 and the 10-Q for the second quarter of 2003, include Goodyear's ability to reduce its costs to implement a turnaround strategy for the North American Tire segment, to recover higher raw material and energy costs, the effects of a work stoppage resulting from the expiration of the master contract from the United Steel Workers of America, failure to comply with any material provision of the credit facility, product liability litigation as well as possible recall and risks associated with doing business in other countries.

The company disclaims any intention to update or update or revise any forward looking statements whether as a result of new information future events or otherwise.

Joining me today on this call are Goodyear's Chairman, CEO and President Bob Keegan, Goodyear’s Executive Vice President and CFO, Bob Tieken and Senior Vice President of Corporate Financial Operations, Stephanie Bergeron.

Bob Keegan will give an overview. Bob Tieken will review second quarter financial results, provide an update on product liability issues and the pension return. And then Bob Keegan will discuss the performance of the operations for the second quarter of 2003 and what we see for the second half of 2003.

Then we'll open the for Q& A. Bob?

Thanks, Barb. Good morning and welcome to everyone on our call. I would like to begin with a review of performance pluses and minuses.

On the plus side, we have mutually agreed to return our bargainers now to Cincinnati to resume negotiations with the steel workers and that will begin next week. Obviously, we see this as a positive development, and we are hopeful that we can reach a mutually beneficial solution to the negotiations.

Now I want to add that this is all I can say about that activity at this point. Why? Because I certainly do not want to jeopardize the results of that effort. You all know how important that is for our company.

Other items on the plus side, the international tire businesses, plus engineered products and chemical, turned in solid performance in the second quarter. Revenues for those six businesses increased 16%, although a large portion of that increase was due to the effects of currency translation. If we look at segment operating income in the same six businesses, that increased to $163 million, representing a 26% increase over the second quarter of 2002.

Once again, I must say we are proud of the performance of these businesses as they successfully execute their strategies of turnaround. While North America had a $2 million loss for the quarter, compared with a $39 million segment income in the second quarter of 2002, the results certainly show a dramatic improvement over the loss of $61 million in the first quarter of 2003.

In North America, I would also add revenue per tire improved by 4%. And for the company, revenue per tire increased 8%, however, currency was a significant factor in the international businesses.

Another plus, North American Tire gained market share in commercial tires, and in Goodyear branded consumer tires. Those gains were primarily driven by the dealer channel. And I want to just comment here that that represents a significant comeback for us--,a comeback that is in progress, but I think we should consider this to be early positive evidence that we are on the comeback path.

In Europe, we gained share in consumer replacement tires and mix improved. China and Eastern Europe, Africa and the Middle East region continue to show significant growth. Our improved commercial truck tire lines have gained us over half a point of market share in Latin America, as that market continues to radialize. Our actions to mitigate cost headwinds are ahead of plan through the second quarter. And, our liquidity is solid.

On the minus side, segment operating income is down 4% on a year over year basis. Also, on a year over year basis, raw material costs were up $124 million. And, as you would guess, energy costs were also significantly higher. The consumer replacement market continues to be weak in North America. Our figures would show that the market was flat in the second quarter and down a little over 1% year to date for the first half. I want to mention, however, that the consumer replacement market was up 4% in June and continues, although we've not seen final data, of course, and continues to feel stronger to us in July.

I'd say overall, we've had a disappointing financial performance for the quarter, but certainly that encompasses some very positive business trends.

And at this point, I thought I'd turn the call over to Bob Tieken, and Bob will cover the financials and then I'll come back and continue with some more flavor on operations. So, Bob?

Okay, Bob. Thank you very much. And good morning to everybody. Well, our second quarter operating income was down 4%, the cygnet income decline of $101 million was driven by rationalization and asset sales of $33 million, higher interest and financing fees of $35 million, and foreign currency exchange of $26 million.

We'll talk about these items in greater detail later, but I just wanted to provide this overview.

In the second quarter, worldwide tire units declined 1% in the quarter, to 52.8 million units. Sales grew at 8%, but this was driven principally by a weak U.S. dollar and improved mix. Segment operating income was almost even, at $161 million, compared with $168 million in the second quarter of 2002.

As Bob indicated in his remarks, 6 out of 7 business units achieved year over year improvement in segment operating income. North American Tire had a loss of $2 million in the quarter, compared to earnings of $39 million in the same quarter of 2002, and a loss of $61 million in the first quarter of 2003.

Weak North America volume, a higher raw material costs that Bob talked about previously, pension and healthcare cost increases, all contributed to the decline in north American earnings.

Taxes in the second quarter were slightly higher than last year. Our foreign earnings are taxed at the loc cat rate. While there is no offsetting benefit from losses in the U.S. due to evaluation allowance that was recorded in the fourth quarter of 2002.

We're reporting a net loss for the second quarter of 2003 of $74 million or 42 cents a share, compared with a net income of $29 million or 18 cents per share in the second quarter of 2002.

Let's look at some of the nonoperating items. If we look at the items between operating income and income or loss before income tax, I'll cover the rationalization actions as well as the as set sales in the second quarter of 2003, in the next couple of slides. Interest expense at $82 million reflects the higher financing costs under our new facilities and replacement of off balance sheet accounts receivable financing with debt. Foreign currency exchange was a loss due to U.S. denominated monetary items, principally in Latin America. In the second quarter of 2002, we recognized a gain from these same items in the same countries.

Financing fees were $15 million higher, due to the amortization of the fees to refinance the debt in the first quarter. The minority interest in net income of subsidiaries is lower, because we now own a higher percentage of our operations in Turkey. The other line items include product liability expenses or incomes, which I will also discuss later.

Product liability, we have added disclosure on the product liability cost for discontinued products, such as industrial sheet gaskets, aircraft break assemblies air (inaudible) hose.

Previously, all product liability costs were included in selling, general and administrative costs. These costs are now included in "other income and expense," and are displayed as a separate line item in the 10-Q footnote. We increased the general and product liability reserves $90 million from the end of the first quarter for these discontinued products.

In the second quarter, primarily as a result of a judgment in a recent trial in Colorado federal court, we established a reserve for Heat Wave (ph) litigation. We have not previously established a reserve for Heat Way, because we had a history of favorable judgments, and we believe that the two negative cases in 2002 had significant errors of fact and law.

We received 10,000 additional asbestos claims in the second quarter, and 500 claims were either settled or dismissed. So at the end of the quarter, we have a total of 111,500 claims. In the second quarter, we spent $3.7 million on defense and resolution of asbestos claims before recovery of any insurance proceeds.

Also during the quarter, we recorded a receivable of $102 million, representing probable recovery from excess liability insurance carriers related to general and product liabilities. This resulted in a net gain of $11.8 million in the quarter.

Rationalizations (missing audio begins) In the second quarter, an $18 million pretax charge was taken for rationalization (missing audio ends) actions in Europe, Latin America, Asia, and engineered products for salaried staff reductions and consolidation of manufacturing operations. Approximately 350 positions will be eliminated as a result of these programs.

We anticipate that the savings will be approximately $20 million annually. Yesterday, we announced the October 1st closing of the Cartersville, Georgia facility. It produces fabric for conveyer belts. The closing will affect 120 salaried and hourly people and will generate about $5 million per year in savings. There will be a charge for this action recognized in the third quarter.

Asset sales. The other part of the rationalization line on the income statement on the segment income slide, includes asset sales. In the quarter we sold 20.8 million of the 24.3 million shares of Sumitomo stock that Goodyear held for about $83 million. We recorded a loss on the sales of these shares of $18 million, which is also included in the assets sale line.

We paid down $62 million of the U.S. term loan with the proceeds from the sale of these Sumitomo shares.

On the cash flow summary, the key item is the use of cash to fund the termination of the off-balance sheet accounts receivable facility in the United States and Canada, in connection with the restructuring of our credit facilities. Unwinding the accounts receivable facilities used $625 million of the $705 million in the second quarter of 2003. The full cash flow statement will be available in our second quarter 10-Q.

Working capital increased to 22% of sales in the second quarter, due to higher current assets attributable to the unwinding of the off balance sheet accounts receivable facility -- $632 million -- and $470 million of higher cash. Current liabilities is reduced due to lower debt due within one year, which is a result of the bond payment that we made in 2003.

Our debt after the bank transaction completed on April 1st, is now $5 billion or $89% of debt to total capital. The increase in debt in 2003 is due to the funding of the termination of the off balance sheet accounts receivable facilities--$632 million. Plus, we have $236 million of higher cash balances on our balance sheet. Liquidity. At the end of June, we had $1.2 billion of cash, down about $50 million from what we reported on April 1st. In addition, we have $277 million available from committed and uncommitted bank lines, plus $166 million available to us under our restructured bank facilities. More importantly, we also want to confirm with you, that we are within the covenants of our bank agreements. These covenants are-- minimum interest coverage is 2.25, minimum net worth of $2.8 billion, and senior secured debt to EBITDA of below 4.

Now, let's look at our pension plan returns year to date. At the end of June, the pension plan had achieved an 8.5% return on as assets. If we exclude the Goodyear stock in the fund, the return would have been 9.6%. The independent fiduciary has been selling the shares of Goodyear stock that were contributed in 2001, according to rule 144.

Although the shares contributed to the plans are restricted initially, the independent fiduciary has the opportunity to diversify the fund holdings now that the restricted time period has passed.

And with that, I would now like to return the call to Bob Keegan, who will discuss business segment results. Bob?

Thank you very much, Bob. Before I begin talking about Europe, I want to reiterate how proud we are of the progress we've made in the international tire business over these past 18 months.

In the European Union, the increase in sales dollars is being driven primarily by currency. However, segment operating income increased 15% to $40 million in the second quarter of 2003. Improving our mix of high performance tires in the consumer replacement market, lessening our dependence on OE where appropriate, and improving profitability in the commercial truck segment, more than offset an approximate $20 million of higher raw material costs for the quarter.

Rationalization actions in Italy and in the U.K. will help to reduce our SAG spend and conversion costs going forward. And obviously, we'll see those benefits in future periods. Let's move into our higher growth areas—Eastern Europe, Africa and the Middle East. Unit sales here increased 27% to 4.7 million units. Subsidiary comments, units sold to Russia more than doubled. There was an 80% increase in Poland in units and almost 40% in the Middle East, all compared to the second quarter of 2002. Our Dunlap Sport Tire was voted the tire of the year in Poland. This is important because it's the second year in a row that Goodyear has won that award. Remember, one of our strategies is to win more of these awards going forward.

Improved pricing in mix as well as favorable currency translation contributed to the 39% increase in sales dollars for Eastern Europe. Segment operating income increased 60%. In the segment operating margin improved to 12.8% in the quarter. Now, not only is the volume strong in the region, but Eastern Europe is benefiting from increased production tickets to serve other regions as well. I wanted to comment that price mix improvements more than offset the $6 million of raw material cost increases for the quarter. So, again, just an outstanding quarter for Eastern Europe. Moving to Latin America. Here we had very difficult market conditions. Our units declined 15% in the quarter, due to both weak auto demand and reduced consumer purchasing power.

Revenues, however, increased 2% due to price increases and improved mix, and that more than offset the currency devals. Segment operating income improved 32% due to that Favorable pricing and mix. So we had a very significant offset for the raw material costs which were about $20 million.

Looking forward, the economy and political environments in Brazil, Argentina, Columbia, are definitely improving, but I must say that Venezuela is still facing significant uncertainty.

In Asia, our strong performer is China where sales and profits for the quarter were both up 22%. For Asia overall, units increased 9% over the prior year second quarter. A number of new product launches such as Wrangler ATR, Ducaro products and the Foreterra helped drive unit and sales growth. Revenues increased 10% due to higher prices in both the OE and replacement markets, and we experienced favorable translation.

Improved pricing and product mix favorable translation and higher volume offset higher raw material costs of $8 million for a 2% increase in segment operating income. As you are aware, we did much better than that for the first half.

Engineered products has done an excellent job of both containing, and I would say, rethinking their costs to generate segment operating income gross here on lower sales. The margin improved to above 6%. That's the best margin for engineered products since the second quarter of 2000.

Sales in the chemical business grew 36%, due primarily to higher net selling prices. And we are certainly moving forward with our previously announced plan to explore the sale of the chemical business.

Now let's look at North America and how North America faired here in the second quarter. I think most importantly, we saw the profitability of North -- American tire turn positive in May and grow once again in June. Revenue per tire increased 4%, due to more Goodyear branded tires being sold through the dealers in the consumer replacement market, as I indicated earlier.

Our own retail business continued to perform very well. We gained share in the commercial tire market. Aggressive cost reduction and supply chain initiatives are helping us take costs out, and just as importantly improve our fill rates. And that's the feedback we're getting from the market as well as seeing in our own data.

Now, for North America, I wanted to make the comment about what we would like to see improved, and there is really three drivers here. First, we would like to see a pickup in industry demand for replacement tires. That would help a lot. As I said earlier, the market did grow at about the 4% rate in June and July seems to be continuing that trend.

Second, raw material comparisons were their toughest for the year in the second quarter. In our planning, we do not expect raw material costs to decline significantly for the rest of the year. Those are our planning assumptions.

And third, we have not completed an agreement with the United Steel Workers at this point. However, we are still very focused on resolving this matter and removing the uncertainty.

Let me give a bit of a market update for North America. We increased share in the Goodyear brand in the consumer replacement market. That was driven by double digit growth of the Goodyear brand in the dealer channel. That's double digit growth for the Goodyear brand and the dealer channel. The dealers have promoted the value and the quality of the Goodyear brand. And I wanted to emphasize, we did not price the buy market share with our dealer channels. As you have already heard, revenue per tire increased 4% in the quarter. Absolutely important for us.

We did lose slight share overall in the consumer replacement segment by reducing our business in the low margin custom brand segment, in the low margin custom brand segment. Although the 2005 goal for North America is to gain two share points of market share, it really does need to be profitable business for us.

In the commercial OE market, we built on our strong position in trailer tires, and in the commercial replacement markets, our marketing programs with our dealers are driving growth in units and in shares.

Let's talk for a couple minutes about what we are doing to gain share. And first, I'll reference the consumer replacement market.

We continued to successfully rebuild our relationships with our dealers. And as I mentioned earlier, we're ahead on an aggressive 2003 plan in the dealer channel. The comeback is starting and the evidence is there. Our Kelly overdrive initiative offers the opportunity to capitalize on the replacement loyalty (ph) factor by offering Kelley tires at OE, and investing more in the Kelly brand. That investment will take the form of additional advertising, more dedicated sales activity, overall marketing resources, and distribution through a new world class supply chain organization.

We're also introducing new Goodyear products such as the Eagle GTHR, which are being featured this week in most media around the country. Our supply chain initiatives are improving our fill rates, and that will continue. And we certainly belief that our tires are now priced competitively.

On the commercial side, we are executing our business development plans for the top 200 fleets. I'll mention some of the specifics. We are working with small to medium dealers to help them build their business and sell more truck tires. New business at Fleetwood RV and growing market share at and a half star will build the -- at Navistar will build the truck business. Those are significant wins for us this year.

Our new steer tire products which we spoke about previously will help us to continue to grow in the second half of 2003. And these products have just been launched, and I wanted to give you a flavor of some of the reviews that have been coming into us, and they are positive.

Reports from our old service centers say the new steer tires have performed very well. Drivers of one of our customer fleets are very happy with the product, and the comment would be they give a much better ride and are excellent in the rain, much better than the prior lines. Another dealer mounted his first set of new steer tires last week for their most critical driver. This fleet actually balances all steers. So without the driver's knowledge, the tires were match-mounted and not balanced, match mounted, not balanced. When the driver came in this week, he said they were the best steer tires he had ever had and that the truck drove better than ever. So, we think we have a winner with our new steer tire line.

Relative to cost reductions, on the manufacturing side, while we have much more to do, we're ahead on our cost targets. We have about 820 fewer people in manufacturing than at year end, and our low cost sourcing of approximately 10 million units for 2003 is on track.

Now, you are all aware of the staff reductions that occurred in the first quarter, and the changes to our healthcare benefits--we froze merit increases, we suspended the 401K match, and we changed our vacation policy, and of course, they are now benefiting North American Tire salary costs.

And as Bob mentioned, our second quarter rationalization charge will drive further reductions to our cost structure as we look forward.

I wanted to give a bit of a second half outlook for you. What do we see for the second half of this year? Now, we are not providing formal guidance, but I wanted to provide some issues for us to think about. And I'll do this in the form of a couple of risks and then some opportunities. The risks that we see are the first that North American market does not strengthen. We expect it to. But certainly the overall U.S. economy is not showing consistent recovery, and we have concerns about that, so I've categorized it here as a risk.

The union settlement continues to be delayed. That's a risk. On the other hand, opportunities are the economy grows, it does start to show consistent recovery, and the replacement market returns to 2% to 3% growth over the balance of the year.

Second opportunity is that the industry price increases which are coming to the market at this point hold. Although I said earlier relative to raw materials, we are expecting no decline in the second half, and in fact, we're planning for flat raw materials costs, there is a positive probability that they will decline in the second half compared to the first half.

A big opportunity for us is an agreement with the steel workers. And the last opportunity is that the momentum that we've driven in our businesses, both in terms of revenue gains and cost reductions continues. So that kind of summarizes our outlook relative to risks and opportunities. And that concludes our formal remarks this morning, and so I'd now like to open the call for your questions.

At this time, I would like to remind everyone, in order to ask a question, please press star then the number 1 on your telephone keypad. We'll pause for just a moment to compile the Q & A roster.

Your first question comes from Steve Girski of Morgan Stanley.

Good morning, Steve.

Good morning, it's actually Jonathon Steinmetz for Steve.

Hi, Jonathan.

I've got three questions. I'll go one at a time. You talked about market share loss in the low margin private label segment.

I was wondering if you could quantify that from a share perspective or a quantity of tire perspective? And if you could discuss whether pricing there is getting more competitive, and if so, why.

Jonathan maybe we can take that question quickly, it'll be easier for us to respond if we do these one at a time. Relative to the market share there, we don't quantify that market share. That's our policy. We'll continue with that policy.

And relative to the pricing question, this is by its very nature a competitive business. It remains a competitive business, and will remain a competitive business for us going forward.

Okay. The second is on the 4% revenue per tire increase in North America, can you quantify at all how much was mix impacted and how much you think was pure price?

Okay. I'll look to Stephanie, do you want to respond to that?

You are right, Jonathan, a mix of both of them, and we can't -- we would tell you that it is some part price, but probably mostly mixed.

Okay. And the final one is on Europe, you gave $149 million revenue benefit from currency. What was the operating income benefit from currency translation?

This is Stephanie. The total for the company is $9 million of which Europe would be the majority.

Right. Thank you very much.

Thanks, Jonathan.

Your next question comes from John Casesa of Merrill Lynch.

I have a handful of questions. This is a walk from Q1 to Q2. You know, you had a tremendous sequential improvement, revenue 6% higher, I'm talking about North American business. How did you manage to narrow the loss from $60 million to only $2 million. What were the Key sequential changes there?

Okay. John, the real driver of that has been conversion in quarter to quarter. Remember we had some negative factor variances in Q1, and we took a host of actions to take costs out of our manufacturing operation, as I indicated in my comments. That's a combination of improvement from Q1 because Q1 was not a good quarter from a variance standpoint, and just solid activity going at the cost structure.

It was lower headcount and greater -- when you talk about conversion, you mean efficiency in your manufacturing operations?

You can look at that as efficiencies, John.

In the second question, following up on pricing, several competitors have raised price or announced price increases in the North America (inaudible) lacement market effective August 1. Have you announced anything or not?

I'll give you where we are. Remember, we increased prices that were effective earlier this year about 4% to 5%.

Okay. And we're aware of pricing in the markets, as you would expect, in great detail, and we're reviewing at what we see at this point, reviewing at that data and looking at options. That's where we are as of today.

Okay.

And then just finally, why was the product liability expense moved to the "other category? What was the thinking about that

We moved it to the other category because basically it's not all product liability. It's just the product liability expenses associated with products that we no longer produce, which is the gaskets and the aircraft brakes and the (inaudible) hosing.

Since we're not continuing to produce those products, and the amount is pretty significant we decided to move it out there so it did not distort current operating results.

Product liability for continuing operation is still recorded?

The tire business and the rest of the businesses that we're continuing to be active in, those liabilities continue to be -- those provisions continue to be recognized in SAG.

Thank you.

I think, John, from our standpoint, that makes a lot of sense to do what we're trying to bundle all operations together and things that aren't related to current operations, we're trying to segregate.

I understand. Thank you very much.

Your next question comes from David Bradley with J.P. Morgan.

Good morning. Thanks for the slide presentation. Very detailed and helpful relative to --

We're trying to meet your needs.

Okay. There is some talk that the potential for a strike is there, obviously with labor and negotiations, and there is some talk that maybe dealers prebought some tires anticipating a potential strike and that might have helped the quarter and market share.

Have you made any assessment of that? Is that a realistic possibility? How much could that prebuy have been and could that affect you in the future?

David, I'll make the following comments. Obviously we are very vigilant in that area, and we're not aware of any significant prebuy at this point. I can't tell you that there has been none, but I think it's been very modest. The bulk from our customer base and our supplier base, I think the attitude out there in our markets is that basically, we will we won't go to the -- we won't go through the situation that you mentioned and this will be resolved.

Okay. Separately, the SAG expense, that's quite a bit higher in the first and second quarter than last year. Is this pension and healthcare? What's causing it to be higher?

I think you also have -- David this is Bob Tieken. You also have the impact of currency. That's probably the single biggest item that's driving it up at this particular point in time.

Okay. Should we expect to stay at this level or are you going to be able to get that down again?

We continue to have very aggressive programs to bring our SAG expenses down, and I think as Bob has probably pointed out in his previous discussions, there are certain areas which I would characterize -- largely in the administrative areas -- where we would like to bring it down. So basically what I would characterize, is redirect some of that money into advertising and sales promotion expenses.

So while the dollars may be flat or even I could conceive increase, I think we would like to tell you that we're just trying to get a bigger bang for our buck with some of those expenditures.

Okay, could you give us the last thing, any elaborations on the entranhose (ph)? What's going on there. What's your position vis-à-vis that and how much might it cost you and so forth?

Dave, you can appreciate that I don't want to spend a lot of time talking about that, and I think you can understand the reasons. I think we told you -- I mentioned in my comments, though, that there was a -- there was a ruling in the federal court in Colorado, in the -- month of June, which was basically a driver in terms of putting us in a position where we had to recognize on our balance sheets some liability associated with that product.

Okay. Thank you.

Thanks, David.

Your next question comes from Saul Rubin with UBS.

Good morning.

Good morning, Saul.

I just had two questions. One, just a quick one. Your explanation of North America, you talk about unfavorable product mix. But how does that -- how does that tie with the replacement being better in the OE market and Goodyear brand?

That's a good question, Saul, one we're well prepared to answer. Stephanie, do you want to grab that?

Saul, when we answered a question earlier on the call about price versus mix and revenue per tire, we talked about mixing the driver of improvement.

The example I would give you there is perhaps our commercial business would represent a larger proportion of our sales this year versus last year and that would drive business mix improvement and revenue per tire. But within product mix and we look at the business quarter over quarter, we would see some mixed degradation -- you heard Bob mention trailer tires being strong. Margins on trailer tires aren't the same as they are in steer tires.

We've also had modest private impact in some channels. We repositioned some of the pricing in our channels last year, so that would impact price in some way and a piece of the business within North America tire.

And then we also look at North America in the form and off road markets and all of those impacts are in price and mix calculations. So a number of things come into price and mix

Okay. Fine. And then another area, I'm just trying to understand exactly how the changes in the debt levels. I think the first quarter debt was up about $1.65 billion.

Your cash is up about $460 million, and I can understand the piece that came on because of the AR facility (ph). But that , I think is $630 million or so. So, it still leaves a large amount unexplained, I think.

Saul, if you don't mind, I'll give you six numbers, all right?

Debt at the end of June was $5,023,000,000. At the end of March. It was $3,827,000,000 So an increase of $1,196,000,000 and there are three derivers (ph) to the $1,196,000,000. The refinancing of the U.S. receivables, the war program, $578 million of debt increase. The funding of the higher cash balances that we're holding is $463 million, and our seasonal working capital increases and other needs in the business drove the debt up, $155 million, to get you to the $1 billion and $196 million.

If you continue your analysis or as you look through the 10-Q, if you or any other participants want information we'll try to give you more detail.

The U.S. and Canadian was 578?

Stephanie Bergeron The Canadian facility, Saul, was gone at the end of march last year. So it was unwound before March 31. So all we did in the $578 million was the U.S. program.

That's this year.

And then the second piece – the $463 million was?

The higher cash balances between March 31st and June 30th.

I think you came up with that number on your own. And then the cash usage during the quarter of $155 million.

Okay, okay, fine. And the -- in the covenants, the debt ratio is based on senior secured debt. What is the actual number at the end of the second quarter of total senior secured debt?

If you would like, Saul, I'll look the number up, we can take other questions and I'll break back into the call and give you the number at that point in time.

Okay, great, thank you.

Thanks, Saul.

Operator: Your next question comes from Saul Ludwig with McDonald investments.

Good morning, guys. Were there any accounts receivable Europe outstanding securitization outstanding at the end of the quarter?

Why don’t you take that, Barb.

There is $281 million.

In the line item where you have financing fees of financial instruments and you pointed out that there was a $15 million delta because of amortizing of the financing fees, but the old number of $12 million, didn't that relate to something to do with your accounts securitization program and shouldn't that go away?

In other words, is this financing fees and financial instruments going to continue at $25 million a quart or should it go back to $15 million that you'll be amortizing.

Saul, I think if I'm correct, and I'll verify, what we're talking about is the other income and expense line that has $26 million at the end of the second quarter.

I'm talking about the on the reconciliation on page 11 of your release, financing fees and financial instruments, $25 million in the quarter versus $12 million in the same quarter a year ago.

Saul, I'll try to get back to you and answer the question on the $12 million.

Okay, great. Next question, while we're talking about the swing from the first quarter to the second quarter, and this year, your units from the first quarter to the second quarter went up a half million units, and your profit swung what, $59 million or thereabouts.

That's approximately right.

Right. Now, last year, from the first quarter to the second quarter, your units only went up $200,000, and your profits swung $90 million.

I'm curious as to why your first to second quarter results in North American Tire were so modest, especially given the, the cost reduction initiatives, et cetera, that have been implemented during this year, versus what was the case last year.

Well, Saul, we have not looked at that quite the way you've described it. But I think from this year, from Q1 to Q2, we've had positive cost activities. We've had negative raw materials, we'll go back and I would say let's look at that for last year, and we've had positive price mix.

Right, well, you see, there is a big difference between what happens sequentially last year and this year. It might be instructive to maybe look at that, and

We'll just say we'll get back. What I don't want to do is speculate a little bit on it, but that's the best summary I can.

Okay, finally, you talk about the segment operating income improvement, and then you have, of course, the foreign currency, which was a big negative. Should they really be combined? Because there is an interrelationship between those two and this foreign currency probably came about what because of their revaluation of the real ?

Stephanie, why don't you talk about that. We spent a lot of time and we think we're in a good position with the way we're showing it.

Saul when we look at EBIT or the segment operating income, there is $9 million worth of translation benefit that comes from the business operations. In the foreign currency line we reflect the impact of currency on the monetary aspects of the company, which aren't necessarily operations related.

You are correct, the impact this year is in Brazil. We do have a substantial number of U.S. dollar assets there because they sell tires to north American and they hold the U.S. dollar receivable.

And in the quarter there was a revaluation as the Brazilian real got more valuable so created a loss for ourselves. You remember last year in the last -- we had a gain also in Brazil, and in that case the real devalued and our monetary assets became more valuable.

So, we think of operations and translation being closely linked together, but the management of the balance sheet and how we hold the assets in countries are separate and distinct.

Okay. And then finally, the minority interest was sort of less of a negative this year, and that minority interest primarily relates to the 25% of Donlop that's owned by Sumotomo.

Now in upper where your results were -- now, in Europe, where your interests are strong that, should have caused the interest to by higher than a year ago.

Does the fact that it was less than a year ago imply that the Donlop operations that are 25% owned by Sumotomo in North America were dramatically worse?

Saul, this is Stephanie. Excellent question. You are right, you would wonder that or conclude that from the statement, but what drives that line is the fact that we own more of our Turkish operation than we did last year. We acquired last year an additional 20% of the business. So those operating results are no longer stripped out for the minority partners.

So you have stronger European JV results offset by loss redistribution to the Turkish owners.

Thank you, thank you very much.

Your next question comes from Chris Sarasso, with CSFB.

Good morning. You said the north American replacement market could either be an opportunity or a risk. How should we think about that market? Is it just the economy that really would be the swing factor or are there other things we should be mindful of?

Bob Keegan Chris, I would say we discuss and try to analyze here a lot of things, but fundamentally, this is the economy. This is consumer confidence, consumer spend, and that's what's going to be the driver here in the second half.

Again, we're pleased with what we saw in June, and thus far without having official numbers, July looks pretty good as well, but I'd like to get three months under our belt before we're confident that we're going to see this market get back to, I would say, more reasonable and historic growth rates at 2% or 3%.

Okay. And on the raw material costs, you mentioned that you are assuming that they are flat, but they could improve in the second half. If they do, do you feel that in the second half? Or is that something that wouldn't benefit you until maybe the first half of next year?

Well, Barb, why don't you take that one.

We were talking about the raw materials that we would actually see what would flow through the P&L. So what we would see would be our raw material costs not declining significantly, but the comparisons year over year might be less, because raw material costs are going up in 2002.

Okay. That makes sense. And then lastly, do you have any update on the Six Sigma efforts in North America? Is that starting to flow through already or did the cost improvements come from other areas?

Okay, well, Chris, I'm going to be concise with my comments. Everybody here on the call is looking at me because I could talk to you for 20 minutes about this. We're seeing good enthusiasm. We're seeing activities that we're starting to cash.

That did not have a huge impact on the second quarter. We're going to start to see significant material impact here in the third and fourth quarter.

We're at the point where we've gotten -- Jon Rich has done a really nice job getting North American Tire enthused, getting -- we've got black belts trained, which is absolutely critical, and if anything, I'm more confident than I was when I -- when we had our meeting with all of you back at the end of April.

Chris Sarasso Thank you very much.

Thanks, Chris.

Your next question comes from PG Vallini with Goldman Sachs.

Good morning. A couple of questions on your working capital, please.

In terms -- if I look at your trade working capital, adjusted by accounts receivables, vendors think correctly at the end of the second quarter, there was still $281 million of securitized advertised receivables. If I adjusted working capital for that, it still comes at around 27.5% of sales, which seems to me to be -- to remain absolute -- high in absolute terms and higher than it was last year on our comparable basis.

What do you expect in terms of your working capital management going forward this year? Would you expect working capital to be a net generator of liquidity for the full year or do you think it will stay where it is?

Bob Tieken is going to respond to that question, that question is right on the mark here.

As you know, our working capital is very seasonal. We basically spend the first six months of the year building working capital principally inventory, but also in terms of terms as dealers basically stock their facilities for sales.

So we would expect to see a decline of our working capital in the second half of the year. The other thing that makes a difference in our working capital this year is your clearly seeing the impact of higher raw material costs in there. You are also seeing the impact of the weaker U.S. dollar in terms of working -- in terms of working capital balances.

But, as we look at the way we're managing, particularly our inventories at this particular point in time, we are in fact carrying, you know, fewer units and inventory today than we did a year ago.

So, in terms of managing our working capital, which is important, not only in terms of working capital balances, but also making sure that we have orderly production in our factories, we're not seeing a -- we're not seeing an issue as we have said previously. We never did have any plans for building any kind of an inventory in anticipation of a strike.

So long-winded way of saying we would expect working capital via cash generator for the remainder of this year as it has been in previous periods.

PG Vallini Sure, absolutely. The second half is always heavily cash generative. I know that. But for the full year, do you expect networking capital to be a generator of cash?

Yes.

Okay. And second question is, in terms of restructuring charges, would you say how much cash restructuring charges you had in the quarter? And how much do you project for the second half?

It'll be in the 10-Q.

But didn't we give that number? Didn't we say -- in the press release, didn't we give $13 million post tax, after-tax? Yes, we did.

Sorry, I missed that. Is that cash?

That's not cash.

Okay, thank you.

Bob Tieken That's a charge.

All right.

And the Q will give the details on the cash pieces, and the Q will be out later this week.

Thank you.

Ladies and gentlemen, we have reached the end of the allotted time for questions and answers. Are there any closing remarks?

I'd just like to say thanks for the questions. They were very good and a couple cases tested us. We will get back to you.

We continue to try to be just as open and transparent, both in written communication on these calls as we can with you.

And we would like your comments in terms of whether we are making progress there.

If you have any other questions, feel free to give me a call today or the rest of the week. 330-796-8576. Thank you.

Thank you, everyone.

Thank you for participation and in Goodyear's second quarter earnings conference call. You may now disconnect.