Goodyear Tire & Rubber Co (GT) 2003 Q3 法說會逐字稿

Good afternoon. My name is Teresa and I will be your conference facilitator today. At this time, I would like to welcome everyone to the Goodyear third quarter financial results conference call. (OPERATOR INSTRUCTIONS) At this time, I would like to turn the call over to Ms. Barbara Gould, Director of Investor Relations. Ma'am, you may begin.

Good afternoon and welcome to Goodyear's review of the third quarter results. Our discussion this afternoon will be available by replay after 4 PM by dialing 706-634-4556, or by listening to the webcast replay on investor.goodyear.com. I do apologize, our slide presentation -- we're having difficulties in posting it to the Web site, but I will let you know as soon as we do get up there so you may check for it. All reconciliations to non-GAAP items are included in the last page of the presentation. If you try to hit refresh right now on investor.goodyear.com, the slides should appear.

I would like to remind you that our conversation this afternoon may contain certain forward-looking statements based on current expectations and assumptions that are subject to risks and uncertainties that could cause actual results to differ materially. These risks and uncertainties outlined in the 10-K for 2002, and the 10-Q for the third quarter of '03, include Goodyear's ability to reduce its costs, to implement its turnaround strategy from the North American Tire segment, to recover higher raw material and energy costs, the effects of the work stoppage resulting from Goodyear's inability to meet certain financial commitments with its labor agreement with the U.S. United Steel Workers, failure to comply with any material provision of the credit facilities, product liability litigation, as well as possible recall, and risks associated with doing business in other countries.

The Company disclaims any intention or obligation to update or revise any forward-looking statement, rather as a result of new information, future events or otherwise.

Joining me today on this call are Goodyear's Chairman and 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 a brief overview of the restatement in the third quarter, and Bob Tieken will review the third quarter financials and the restatement in more detail. Bob Keegan will then return to discuss the performance and the operations for the third quarter and the outlook for '04. Then we will open the lines for Q&A.

Thanks, Barb, and good afternoon everyone. I want to thank everyone for being with us today, and frankly for your patience in waiting for the third quarter numbers while we did the analysis required for our restatement of earnings.

The restatement does not affect our net cash position as of September 30th, 2003, nor our access to credit facilities. Actions have already been taken to strengthen internal controls. And in a few minutes Bob Tieken will cover this subject in greater detail.

Right now I would like to turn our attention to our third quarter with a review of performance pluses and minuses. First the pluses. Our overall global revenue per tire is up 8 percent, with exchange rates responsible for about half of that increase. Total segment operating income is up 12 percent in the quarter. The international tire businesses, plus Engineered Products and Chemical, again turned in outstanding performance. Segment operating income in these six businesses collectively increased to $179 million, a 46 percent increase over the third quarter of 2002.

Productivity, measured as output per plant associate, is up 5.6 percent year-to-date. Now this productivity has helped us to partially offset the head winds of higher raw material, energy, pension and benefit costs.

We now have experienced five straight months of positive growth in the North American consumer replacement market, very good news for all of us, with notable market share gains in both Goodyear and Dunlop branded products. However, the custom and private brand business remains a challenge for us at Goodyear. Profitability on consumer tires sold to the OEs continues to improve through our strategy of selective fitness. But here we still have significant progress that must be made before the business achieves acceptable returns.

On the commercial side of the business, I'm pleased to be able to make an important announcement this afternoon, and that is that Goodyear has been selected by the Volvo Group to become the major tire supplier in North America for the Group. And the Volvo Group, as many of you know, is the world's second-largest truck manufacturer. This is a three-year deal, and our existing agreement with Mack Truck from the Volvo Group is also extended for three years. And I think this decision by the Volvo Group speaks volumes about the progress we have made these past couple of years in our truck tire performance.

The European Union gained market share both in consumer and commercial replacement market in the third quarter. And I also comment here that our winter tire sell in to dealers in Europe has been strong, and there are early signs of a good winter tire season in Europe.

On the minus side for the third quarter, at a year-over-year comparison, raw material costs were up $96 million, and energy costs were also significantly higher than last year. Pension and benefit costs, predominantly in North America, continue to be higher than in 2002.

The commercial market and our product mix continues to underperform in North America. And as I mentioned earlier, the North American custom and private branded consumer business continues to be weak.

I would just comment that overall progress continues to be made on improving our businesses, and North America is taking the necessary actions to improve its results in 2004. I'm going to address results for each of our businesses later in our remarks this afternoon. At this point, I will turn the call every to Bob Tieken to cover the detail on our restatement and financials.

Thank you, Bob, and good afternoon everyone. I'm going to cover the restatement at a very high level. The 8-K has all of the detail is to help your understanding of this subject. As Bob Keegan mentioned, the restatement arose from an intensified effort by Goodyear associates to reconcile certain general ledger accounts to assure that they were supported by data in the Company's records. The analysis resulted in a provision to reduce net income by $31 million as of June 30th, 2003.

During the third quarter of 2003, we identified additional adjustments arising from the account reconciliations, and were advised by PricewaterhouseCoopers that these issues resulted in a material weakness in internal control that required strengthening procedures for account reconciliations, internal reporting, and monitoring. Based on our assessment of the adjustments, we decided to restate financial statements for the period January 2000 through June 30th, 2003. Financial statements prior to 2000 will also be restated, but not in their entirety.

The restatement includes an adjustment to retained earnings at January 1st, 2000 to reflect the impact on periods prior to 2000. The cumulative impact of the adjustments on net income was $84.7 million. The comparable amount included in our October 22nd press release was estimated at $120 million. The amount actually recorded was less (technical difficulty) estimate amount based on work completed during the past three weeks. Also included are changes to the timing of certain previously recognized adjustments not arising from the account reconciliation process. And also other adjustments that were identified by Goodyear associates during this reconciliation process.

The restatements can be broken down into four categories. Account reconciliation issues, which primarily relate to the reconciliation of accounts receivables, inventories, fixed assets, intercompany accounts, prepaid expenses and trade payables. A significant portion of these adjustments is associated with the integration of an enterprise resource planning system into Goodyear's accounting processes. Restatements due to account reconciliations resulted in a decrease of net income before tax of $89 million from 2000 through June 30th, 2003, including the adjustments to retained earnings at January 1, 2000.

Primary items in this account reconciliation category were, first, Goodyear utilizes an interplant purchasing system to procure and track the transfer of capital equipment and raw materials and spare parts required or manufactured by Goodyear units in the United States for its foreign manufacturing locations. The issue arose when amounts were not properly relieved from the interplant system when billed to the foreign plants. The $29 million write-off corrects an overstatement of income and assets.

Second item is North American Tire receivables. Approximately $25 million is attributable to amounts that were erroneously reported in Goodyear's general ledger during the period from April 1999 to November 2000 as the Company implemented certain modules of an ERP accounting system which were not previously integrated into existing systems. Customer billings and cash collections continued to be appropriate during this period.

The third item is account reconciliation for Engineered Products, includes the write-off of $19 million related to issues arising from implementation of the ERP system. In November of 2000, Goodyear made a contribution, which included inventory to Wingfoot Commercial Tire Systems, a consolidated subsidiary. The inventory was valued at Goodyear's historical cost. Upon the sale of the inventory, cost of goods sold was (technical difficulty) by $11 million in its consolidated financial statements. Additionally, inventory and fixed asset losses totaling approximately $4 million were not expensed as incurred, and also needed to be written off.

The second category, out of period adjustments, includes $26 million of accounts reconciliation adjustments for EPD and the interplant, and adjust the timing of income and expense items that were reported previously. The cumulative effect of out of period adjustments was an increase to the pre-tax and net loss of $1.4 million for the restatement period.

Chemical Product segment items, which include those identified as a result of a stand-alone audit of a portion of the Chemical Products business segments, primarily relating to the actual cost of inventories and the fair value adjustment of a hedge for natural gas. These adjustments had no impact on shareholders equity as of June 30th, 2003.

As a result of the restatement adjustments, an additional federal and state evaluation allowance of $30 million was required in 2002, the period in which we provided evaluational allowance. As a result of the restatement, net income in the first half of 2003 increased $10 million after-tax. 2002 income decreased by $17 million. 2001 income decreased by $26 million. And net income increased by $1 million in 2000. The net adjustments for periods prior to 2000 were $53 million.

Now I would like to move on to our third quarter results. Our worldwide units grew by 1.7 percent in the quarter to 55.3 million units. Sales grew 11 percent, driven by a weak U.S. dollar and improved product mix. Currency translation contributed $177 million of the sales growth in the third quarter. Total segment operating income improved to $147 million compared with $132 million in the third quarter of 2002. As Bob indicated, we set five-year segment operating income records in many of our businesses in the third quarter.

North American Tire had a loss of $32 million in the quarter compared to earnings of $9 million in the same quarter of 2002. Weak commercial tire sales, higher raw materials of $49 million, pension and health-care costs contributed to this decline.

Taxes in the third quarter were minimal due to a onetime benefit of $36 million from a favorable settlement of prior years’ tax liabilities and adjustments to the valuation allowance of certain Goodyear entities offsetting foreign taxes.

We are reporting a net loss for the third quarter of 2003 of $106 million, or 60 cents per share, compared with net income of $33 million, or 20 cents per share, in the third quarter of 2002. The net income decline of $139 million was driven by higher rationalization, and nontire product liability charges, higher interest in financing fees of $22 million, and a $37 million change in foreign currency exchange. We'll talk more about those issues in the next slide.

Now let's look at some of the non-operating items, the items between segment operating income and income or loss before income taxes, in greater details. I will cover the rationalization actions in the third quarter of 2003 in a later slide. There were asset sales in the quarter of the Cartersville, George plant for loss of $6 million in 2003. In 2002 we recorded a $14 million gain from the sale of land and buildings in Mexico. InterSBU income is higher due to higher raw material costs, which are reflected in higher selling prices to the tire businesses from our chemical units.

Interest expense at $79 million reflects higher financing costs under our new credit facilities and the replacement of off balance sheet accounts receivable financing with debt. Foreign currency exchange was a loss due to U.S. denominated monetary items in Latin America. In the third quarter of 2002, we had a gain on these same items in Brazil. The minority interest in net income of subsidiaries is lower because we now own a higher percentage of our operations in Turkey.

Financing fees were $7 million higher due to the amortization of the fees to obtain bank debt, offset by the elimination of fees from the domestic accounts receivable securitization program. In the other line, substantially all of the $49 million charge for general and product liability discontinued products, is related to the conditional national settlement for Amtran 2 planes.

Now to the rationalizations. In the third quarter a $56 million pre-tax charge was taken for rationalization actions in North America, Europe, and Engineered Products, for staff reductions and consolidation of manufacturing operations. The North America charge was for a reduction of salaried nonbargaining unit associates. In Europe, the plant in Wolfin Hampton (ph) was downsized, as well as reductions in the French retail operations.

Engineered Products announced the closing of its Cartersville, Georgia fabric plant, and the consolidation of Bomanville (ph) Amtran production into our facilities in Marysville, Ohio. The total headcount reduction was about 1,300 people, and we anticipate realizing about $65 million of annualized savings from those actions.

Now for the balance sheet. Working capital increased to 20 percent of sales in the third quarter, due to higher current assets. Receivables were higher due to the unwinding of the off balance sheet accounts receivables facility, which is $578 million in the second quarter, and higher sales levels this year, $150 million higher inventory due to higher raw material costs, and we also had $440 million of additional cash.

Insofar as liquidity is concerned, at the end of September we had $1 billion of cash. In addition, we had $254 million available to us under credit facilities, plus $276 million available from undrawn foreign bank lines.

More importantly, I want to confirm with you that we're within the covenants of our bank agreements, which are minimum interest coverage is 2.25, the minimum net worth covenant of 2.8 billion, and the covenant on senior secured debt to EBITDA below 4. Now if we look at our pension plan return, at the end of September the pension plan had achieved a 13 percent return on assets.

Due to the improved return on assets, we now believe that our required contributions in 2004 will be in the range of 270 million to $290 million. And I might add that this assumes that the present legislation relief expires, and that no new relief measures are enacted. The discount rate will be used in 2004 calculations will be reduced by 1 percentage point to 6.25, which is consistent with our historical methodology.

And now I would like to turn the call back over to Bob Keegan, who will discuss business segment results.

Thanks, Bob. Over the next several slides, I really want to look at the highlights of business performance here in Q3 for each of our seven business units. And we will start here with Western Europe, the European Union. There our 16 percent increase in sales dollars was driven by a currency translation of about 115 million, and in addition a 10 percent increase in replacement volume, and improved mix in both the consumer and the commercial businesses. The European Union has now had 10 consecutive months this year of market share gains in the Goodyear and Dunlop brands, quite an accomplishment.

Segment operating income increased 30 percent to $39 million in the third quarter of 2003. As I said, higher volume with a favorable mix of high-performance and winter tires in the consumer replacement market, and the lessening of our dependence on OE, along with improving profitability in the commercial truck segment, more than offset the 14 million of higher raw material costs for the quarter. Currency contributed about 7 million to the improvement in profits for the European union.

Continued rationalization, as Bob mentioned, at the Wolfin Hampton plant in the UK, and French retail operations will certainly help reduce our conversion costs and our SAG costs going forward in Western Europe.

Eastern Europe, Africa and the Middle East continues to move ahead. It is now our highest growth business. Strong volume growth in Russia, Turkey, Central and Eastern European countries contributed to a 12 percent unit growth in the third quarter of 2003. The region has gained almost 2 points of market share in replacement consumer tires this year. Favorable currency translation of $41 million, as well as the higher volume contributed to the 34 percent increase in sales dollars.

For Eastern Europe, Africa and the Middle East segment operating income increased 41 percent improving operating margins to 15.1 percent in the quarter. Favorable pricing and mix accounted for 10 million of the improvement.

I wanted to say that not only is the volume strong in the region, but Eastern Europe is benefiting from the high capacity utilization as it serves as a low-cost supply source for our other regions. A favorable currency translation of $4 million offset the higher raw material costs in the quarter compared with the third quarter of 2002, a terrific performance from that region.

Moving to the neck slide, Latin America. Total units declined 4 percent in the quarter due to weak OE demand. And this was partially offset by a 2 percent growth in the replacement sales business. Revenues, however, increased 19 percent due to price increases and improved mix, and favorable currency translation of approximately $4 million. Segment operating income improved 81 percent in the quarter due to 37 million favorable pricing and mix, which more than offset the 16 million that we incurred in higher raw material cost.

I wanted to mention that in a recent leadership change, Chris Clark, who has formally been the President of Latin America, is now responsible for our global manufacturing and purchasing operations and strategy. And this is a key move for us as a Company. I think as reflected in Latin America's numbers, Chris did a tremendous job in leading the turnaround of our Latin American business.

I believe he's got the unique perspective of a proven business leader with the ability to drive change in processes, cost efficiency, and strategic thinking. And this move will certainly allow us to build on the strategic initiatives that we have already had in place in manufacturing. Eduardo Fortunado, formally President and Managing Director of Goodyear Brazil is replacing Chris as our President of Latin America. These are key strategic leadership moves for us.

In Asia, our strong performer continues to be China, where replacement sales set a record in September. For the quarter, replacement sales units declined 6 percent overall due primarily to a shortfall in the Philippines and Indonesia. OE units grew 10 percent in the quarter compared with last year, primarily as a function of strong demand in China. Revenues increased 3 percent due primarily to favorable translation of about $3 million.

Improved pricing and product mix and favorable translation only partially offset higher raw material costs of $7 million. And that drove a 1.2 million decline in segment operating income. But I wanted to remind you that for the first nine months of 2003, segment operating income for Asia is up 13 percent.

On the next slide, we will cover Engineered Products and Chemicals. For Engineered Products revenues increased 9 percent in the quarter due to higher sales of conveyor belts in South Africa and military products in the U.S. In addition, we had $13 million of favorable translation. Segment operating income improved 42 percent in Engineered Products to $16 million due to favorable translation and lower SG&A and raw material costs, as well as the volume increase.

To drive further growth in North America for Engineered Products, a strategic alliance was recently announced with Alpha Goma (ph) of Italy, to offer their high-pressure hydraulic hose fittings and crimpers to create a comprehensive industrial hose offering that we can offer through our distributors in 2004. That is a pure growth initiative for us.

Sales of the Chemical business grew 29 percent in the quarter, and segment operating income 72 percent, due primarily to higher net selling prices resulting from the pass-through of higher raw material and energy costs. We're moving forward with our previously announced plan to explore the sale of the Chemical business.

I wanted to use the next couple of slides to talk about North America and its performance in the third quarter. North America is clearly our biggest challenge as we fight significant cost head winds in what has been, until lately, a weak marketplace. The consumer replacement market has now enjoyed five months of solid growth beginning in June.

Goodyear gained market share in both Goodyear and Dunlop brands, driven by solid growth in the dealer channel. And as many of you recall, that is where we have focused a significant amount of our attention to rebuilding our relationships. And I would say clearly we have had success in rebuilding those relationships.

However, we have lost share in the customer and private branch business, and that remains a challenge for us going forward. We lost share in a soft consumer OE market. But I would add, improved our profitability through our strategy here of selective fitness.

The commercial replacement business in North America remains somewhat soft, although we were able to build on our strong trailer tire position in that market. With our new steel tire we are positioned in the overall commercial market with an outstanding product line up. And I'm very proud to be able to say that today. I could not have said that two years ago.

In North America in the third quarter revenue per tire increased 3 percent due to selling more Goodyear and Dunlop branded tires, and primarily in the consumer replacement market. Our own retail business continued to perform well, adding an incremental 17 million to sales in the quarter.

Now that the agreement with the steelworker workers is signed, we're working towards the December 5th closing of the Huntsville plant, and implementing the productivity programs that were part of the overall contract. It is clear that we will begin to see the full financial impact of that agreement in 2004.

In the third quarter raw material costs for North America were $49 million higher, as Bob mentioned earlier, than a year ago, and conversion costs were also up approximately 20 million. And that might surprise you, but that is due to higher pension and health-care costs that those conversion costs are rising.

Now as we see higher raw material costs and they continue to impact our financial results, we have announced a price increase of 2 to 3 percent for consumer and commercial tires that is going to be effective December 1st. This follows on the heels of two prior price increases that were announced; one that became effective in January of 2003 and one that became effective September 1 in 2003.

We recently extended our contract with PVC for ten more years. As many of you know, we have had a relationship and been a supplier to PVC for approximately 40 years. So I guess that's extends our relationship to 50 years. But that is a very critical customer for us, and we're very happy to extend the contract to ten years.

As I mentioned earlier, Goodyear has been selected as the tire supplier for standard equipment for the Volvo and Mack truck lines for the next three years in North America. And I believe this call is the first announcement of that new deal with the Volvo Group. I want to highlight that.

I would comment that while North America is not yet performing at the levels that we need, we see positive signs through the plans that we have in place and the actions being taken, that the entire North American team is committed to return this important business to profitability.

John Rich's recent appointments of Larry Mason to run our consumer business in North America, and Steve McClellan to run our truck business, are significant catalysts for productive change in North America going forward.

I wanted to take a few minutes and talk about the industry look. And although we will not provide specific guidance, today I will give you our outlook for industry growth, for raw material pricing going forward, and a bit of an update on our plant cost reductions that we expect over the next two years. Let me address industry growth first.

In OE, in North America, the RMA is forecasting a pickup in auto sales that will drive a 1 to 1.5 percent improvement in sales to OE, 1 to 1.5 percent. In the commercial market, the RMA expects the truck market to grow at least 10 percent. Again, that is an OE figure. Addressing the replacement market, the consumer replacement market should show better than trend line growth at 2.5 to 3 percent in 2004, I think in part due to the soft markets over the past 2.5 years. Remember that the market was down in units in 2001 and 2002. And this year, even with a strong performance over the last five months, we expect only a 1 percent increase. The commercial truck replacement market is expected to grow approximately 2 percent in 2004.

Let us switch now to the Western European numbers. Here unit growth we anticipate will be more moderate. First for the OE markets, we expect flat to 1 percent growth in the consumer OE market, and in commercial, 3 to 3.5 percent growth in that market. In the consumer replacement market, we expect growth of 1.5 to 2 percent. And remember here that the European consumer market is up approximately 5 percent year-to-date, and the commercial market is up 4 percent. So we expect a slowdown in that growth for 2004. The commercial replacement market we forecast in the range of 1 to 2 percent.

I would like to move to the cost side and talk about raw material costs, and the forecast that we have going forward. First, for 2003 we have forecast that raw material costs would be up about 5 to 7 percent this year. What we're seeing now indicates closer to an 8 percent rise year on year. And unfortunately, we're not expecting any relief in 2004. Raw material costs will again be up (technical difficulty) our estimate 5 to 7 percent for 2004, driven by significant increases in natural rubber. And here you might note that natural rubber accounts for about 20 percent of our raw material costs today. That is 20 percent of our raw material costs.

For every penny change in the price of natural rubber on an annual basis, it impacts our operating income by 17 million. So that is for every penny change per pound in natural rubber impacts our operating income by about $17 million.

With higher raw material costs of approximately 280 million year-to-date, and increased pension expense of approximately 180 million for this year, I think we have done a good job of offsetting those head winds to generate the segment operating income that we have talked about of 12 percent through these first nine months of 2003.

I also want to talk about costs. And here, as part of our focus on reducing our cost base, we're projecting that we will show approximately 6,000 fewer employees globally at the end of 2003 compared with year-end 2002 levels. That is 6,000 employees. Our cost reduction efforts, most of which we have spoken with you previously about, include the elimination of our 401(k) match, the closing of Cartersville and Huntsville plants, and the downsizing of our Wolfin Hampton plant in the UK, and Bomanville in Canada. And if I took those rograms that we have identified year to year-to-date, they would generate approximately 350 million of annual savings for us.

We're ahead of our plan on our cost savings goals. And we talked to you about this April. We said we expected to achieve 1 billion to 1.5 billion of cost savings. And I'll tell you right now, we expect to achieve at least 1 billion of gross cost savings by the end of 2005 compared with 2002 levels. And those savings will be driven by certainly productivity improvements in staff functions. They will be driven by global sourcing of approximately 10 million additional tires from low-cost locations, generating about $100 million of additional savings. They will be driven by improved purchasing techniques to reduce, not only our raw material costs, but also indirect material and freight costs, which are substantial in our Company, as they are in most companies.

Savings will be driven by material substitution and lower-cost manufacturing techniques overall. And we will drive lower costs by continuous improvement through Six Sigma and other productivity methods that will reduce our waste and improve our throughput.

As you know, cost reduction and the optimum use of our low-cost sources of supply are critical features of our turnaround strategy. You can see the results in our two European businesses in Latin America and in Engineered Products today. Because we put up significant elements of that strategy in place.

I also wanted to provide some general items for your models. Capital expenditures are capped at about 5 million over the next two years by the credit agreements, and we anticipate that we will spend at the level of approximately 500 million in each year in terms of Capex. By 2005, we're working to improve our inventory turns by 2 turns from the level of 2002. And as you know, that generates a lot of cash flow -- potential cash flow for us. And cash taxes will be about 25 percent of foreign income. So that by way of giving you some additional inputs for your models.

In conclusion, we feel that we are making progress on improving our businesses. You can see that as segment operating income was up 12 percent over last year. And we believe that now we have the leadership in place to drive the turnaround in North America, and certainly to continue to feed the business momentum in our other six businesses. We also anticipate that improved volumes from a stronger economy and our marketing initiatives, coupled with the cost savings actions that we're taken and will continue to take, will improve our profitability. And I think with that --.

Bob, I just want to add one thing to the comments I made on our pension plan. Certainly the returns -- the improved returns we're getting are very helpful to us. But the change in our funding requirements is really going to be driven more because of the fact that we've done a new analysis and reevaluation of our population. And also there were some changes that we negotiated in our recent contract with the steelworkers that is also going to have a favorable impact or reduce our requirements. So that is just some additional information to offer on my comments.

Thanks, Bob, for clarification. And I think, Barb, now we should open up for questions.

(OPERATOR INSTRUCTIONS) David Bradley.

A couple of things. It sounds like you are making some good headway on many of the cost issues, but it also sounds like your raw material outlook for this year and next year is pretty dire. So an awful lot of what we get from that savings, simply from the savings overall, goes back into the raw materials hole again. So do we end up being net ahead of the games at the end of the day?

I think, David, I would say that your overview is correct. If raw materials are up at that level, we have challenges. And to address those, of course, we're pushing really hard on the cost structure, but we're also I think being prudently aggressive with pricing at this point. And I think we're going to push on both those levers, and of course as you say, the head winds here in terms of raw materials are headwinds for the industry, not just for us.

Can you talk a little bit about this Amtran settlement, and what the cost was with the after-tax impact of that is? What was the EPS impact? And then, is that thing behind us now?

This is Bob Tieken. The 10-Q includes a summary of that, but as you know, the Amtran 2 is a U.S. phenomenon. So because the evaluation allowance is to record the before tax and after-tax impact of that would be the same.

So basically it hits you for $49 million in the quarter? Is that --?

That's correct.

Before and after-tax are the same?

Yes. Because it is a U.S. item, and we're not taking any tax benefits on those periods.

That would be -- would that be something we would add back to get to operating EPS or not?

Yes, we would.

You mentioned this tax savings. When I looked at the Q, I didn't see that. You said 36 million, is it?

Thirty-six million was a settlement -- it was a settlement of prior year tax returns, and reduced our tax expense by $35 million.

That is in the MQ3?

That's correct.

So something of an offset to the hose settlement?

Yes. Somewhat unrelated, I might add.

Steve Girsky, Morgan Stanley.

Can I just -- a couple of things. On the pricing, if our math is right, revenue per tire in North America was up about 2.7 percent. Yet your mix seemed to be favorable whether it was OE replacement or branded versus private label. Do you have an idea what like for like pricing was? It seems like it would be weaker than the 2 7? Is that correct?

Let me start this answer, Steve. Yes, we said we were up approximately 3 percent, 2.7 percent to be specific, in the revenue per tire. There's a lot of puts and takes here in our business mix. And I would say one of the factors that you want to think about is that in our truck business, we had an adverse mix in our truck business, which hurt that revenue per tire within the truck business. So that is a trend.

You're also seeing the movement a little bit weaker in OE and stronger in replacement, which is a global comment, beyond the North American comments. And that is influencing that as well. And you've got strong retail sales in North America. So we've got all of those factors that are going into that 2.7 percent.

So pricing -- how would you characterize pricing then in the quarter?

I don't think we understand what you are --.

Yes, we're not sure what you are --.

A like to like tire, is prices up 1 percent, 2 percent?

We don't breakout price and mix here, Steve, generally. I don't want to start doing that, but certainly price is positive year on year.

If it recovering raw materials?

Is not sufficient to recover raw materials year on year.

On the pension, I see the '04 requirements are less. Does this mean the '05 requirements are less, or are they just pushed out?

We haven't calculated those yet, Steve.

Okay. And can you -- on the share loss in private-label kind of stuff, the talk is the TBC contract, you lost a little share there. Would that had been reflected in the quarter, or is that expected -- or is that sort of still coming?

I would say this, Steve, that things move around a little bit in terms of share position, as you know, with some of these large custom and private-label business partners that we have. We are working real hard in that area. And I would say that I think one of the things that we're doing better today than we have done probably over the past few years is, we're working real hard with PVC.

I mentioned that we just signed an extension of ten years with them. Okay? And that was not -- that is not a formality. That is because of some hard work that we are undergoing with PVC. You know, we have lost a little bit of share previously this year. And our goal is to have the right level of share and the right level of profitability for every one of those accounts.

Let me rephrase it. Do you expect your private-label share to -- do you expect share pressures to remain tough there throughout next year or no?

Well, I will say that share pressures and profit pressures, that is a tough business, and they're going to remain tough next year. Do I expect that we're going to see a reduction in share next year in that business? That certainly is our goal going into '04.

And just on Volvo, is that new business completely new for you, or did you have some of that?

We had the -- it is virtually all new on the Volvo brand. On Mack, we have had that business. And what this does for us, it gives us a three-year extension on that business. Are you with me?

Yes. So how big is that Volvo brand?

Well --

I mean, just count the Volvo trucks and multiply by whatever?

Yes, count the trucks and multiply that by the number of tires. Again, I'm not going to -- it is a significant piece of business for us, and I will say so.

Are you sole supplier?

We're going to be the major supplier. And I will also tell you that I look forward to more business with Volvo. We're working real hard with them to gain additional business throughout the world.

Rod Lache, Deutsche Bank.

A couple of things. One is just a quick one. Where exactly is the Amtran 2 settlement recognized in the results?

It is in the other income line.

Other income and expense.

Okay. And then I guess I am looking the segment, operating profit in the tire business, which is kind of flatish. It is down a couple of million bucks, but more or less flat. I guess just superficially it looks like, if I looked at the overall company, the revenue per unit increased -- just significantly exceeds the raw material per unit increase, which would imply that your variable profit is up. You sold more units this year versus last year. And it kind of implies a fairly substantial increase in fixed costs, maybe something like $200 million.

I guess it is clear what some of the parts are in those fixed costs. You quantified currency and wages and benefits. But can you maybe give us a walk on a year-over-year basis on the fixed costs, what some of the increases and what some of the offsets were? And then at what point in the future would you expect to see the fixed costs experiencing a positive year-over-year comparison?

This is Bob Tieken. I'm not sure I can follow all of your analysis right here, right now, Rod. Obviously, as you start to see the impact of the reductions that we have taken in places like Huntsville, which is one of our higher cost facilities. That is going to come out. We've also cutback on places like Cartersville, Bomanville. We've also backed off on Wolfin Hampton and other facilities.

So clearly as those items come out of our cost base, you're going to see the reduction in the fixed costs. A lot of the things we have talked about today have been focused on SAG type of expenses, which are also going to have a favorable impact on the fixed. So we're really driving this breakeven from two perspectives. Obviously, the things that we can do to improve our mix in terms of brands and products, and things of that way will help the breakeven point, as well as if we take some of this excess capacity off of the line.

And I think this is clearly demonstrated when you look at -- the kind of the map of all of that is clearly demonstrated when you look at our Eastern European business, and you look at their gross margin and the benefits, as Bob pointed out during his comments, the benefits they get of running these plants flat out.

I don't know if I answered your question, but that --.

Does this thing -- you're taking a charge in the fourth quarter for Huntsville and other things. So would you actually experience the benefit of the plant shutdown already in the fourth quarter, or what kind of ramp would you expect?

No, it you're not going to see that until 2004. At that particular point in time that cost center will be out of the cost base of our North American Tire business.

By mid 2004, something like that?

No, the plant is actually -- the people are going to be gone the end of this year. December 5th, I think is the day we discontinue production, and we will be recording accelerated depreciation on it. So that will be out of our cost base in 2004.

The suspension of the pension accruals in new contract, did that affect the numbers this quarter? When does that --?

The impact of that is going to be on our 2004 contribution. It is not going to be an element in terms of our expense.

It is not going to be in the P&L?

No.

But it's a cash savings over that period of time. Over two years -- it is a two-year moratorium.

Right. And the vacation pay benefit, which was 56, 58 million or something this year? If that something that continues in perpetuity or does that reverse next year?

Rod, that is a one time. And our estimate of that was 50 million. I mean that as a round number, but 50 million is as good an assumption as I think you can have.

One last thing. Through this closure process, should we expect to see some inefficiencies flowing through the P&L? Is there some kind of steady reduction in capacity utilization so that the tires produced at these plants actually have a higher cost, or are all those costs encompassed in the charge?

I would say, Rod, that we have planned this carefully. And remember, we delayed to a degree, I'm sure it was frustrating to you and others, and it was to me as well, that we delayed the announcement on Huntsville by several weeks. And we did that because we wanted to make sure that we had no disruption in customer service, and that we could execute a plan with optimum efficiency. So that is built into the plan now in Huntsville, and we are confident.

Would you see these inefficiencies flowing through the P&L in the fourth quarter through these shutdowns, or no?

When you say about inefficiencies, I don't think you're going to see much -- I don't think you'll see much inefficiency, other than the fact that we have been phasing production out about of that facility and moving it to other locations. So you would probably end up with a little bit of fixed cost absorption, but it should be offset by improved performance at other locations.

So it wouldn't really be noticeable?

I don't think it is going to be what I would characterize as a major problem for us. It it has been a very well-planned exercise.

Saul Ludwig, McDonald Investments.

First on Europe, your op income was up $9 million. And 7 of that came from currency, and I don't begrudge you getting the 7 million. But are you really happy with the operating performance there? In other words, if you didn't have the currency, you would have been up only $2 million bucks given --?

I will say this, Saul, that I would look at that over the nine-month period of the year. And although currency has been positive for us, we've also seen positives in the other -- real operating achievements as well so far this year. So this is not this is a -- the change in Europe, if I look at nine months '03 over '02, it is not a currency driven improvement, although currency is a contributor to the improvement. So I tend to look at it that way.

But in the third quarter it was great mix, big increase in volume -- are you satisfied with those results?

Well, I would categorize them as solid results, net outstanding results, yes.

Next question. You talked about your truck business as being weak. How was your truck units in the third quarter, both at OE and replacement?

Truck units for North America.

You don't have the (inaudible).

I don't have the number in front of me, but about all my recollection is that the truck units were okay.

They would have been up at OE.

Relative to our plan, pretty solid. But the mix looked like this. Pretty good at OE, and struggled at bit at the dealer level. And struggled a bit at the overall fleets, but I don't have those numbers in front of me. Does anybody have them? We will get back to, Saul, on that.

Bob Tieken, given the union contracts, what it is, what will happen to your pension costs from a book expense standpoint in '04 versus '03 given the lowering of the discount rate and all the other puts and takes?

The union -- Saul, I think as we explained in our last phone call when we talked about the union contract, the changes, the moratoriums we negotiated will have a favorable impact on '04 versus '03.

I understand that is what you're going to avoid. I'm asking what you're going to incur? What will be your pension expense in '04 versus '03?

We don't have any guidance on that right now, Saul.

What you think the direction will be?

Pardon me?

What do you think the direction will be?

You're going to see a lowering of the discount rate, and clearly that is going to have an impact in terms of higher cost next year. And we are going to be, I think as Bob pointed out, we are going to be flat in terms of our assumptions on long-term growth rates.

So your belly would tell you it moves higher?

Right, a little bit.

Saul, just to come back. On commercial truck, I found my sheet here, and as I said, we did a little better on OE in North America, and a little worse on replacement.

That is directional, units up, units down you mean?

Yes. And overall units down a little bit, but not a huge drop in the quarter.

And back to the question that Steve Girsky was asking. You know, you raised prices in January. You raised them in September. Do you think you really got a real honest to goodness price increase of consequence on same units third quarter versus third quarter, or are those eaten away in discounts and one thing and another?

Saul, I will say what I said to Steve, maybe using slightly different language, yes, we got realized price. We got some increase. Okay? Now obviously going forward with the announcement that we are raising prices again effective December 1st, we will see how that plays out. But again, there is cost pressure in the industry, and certainly we're feeling that cost pressure.

Everybody else seems to have announced a price increase effective February 1, Michelin, Cooper, Firestone.

I think if you look at the information that is out there, I think you'll see that there are a number of increases mentioned for December 1, January 1, up through February 1. That is my feeling for the information that we have seen publicly.

Yes, some of the import guys did announce that, but the big kahunas up here, well, they were going with, I think, February 1. Do you think you will actually be able to get it in December?

Well, we will see. We're confident that we will get it.

(OPERATOR INSTRUCTIONS) Ladies and gentlemen, we have reached the end of the allotted time for questions and answers. Ms. Gould, are there any closing remarks?

No, I would like to say thank you for being on our call. I will be available for telephone conversations after the call the rest of the day. And thank you.

Yes, thanks for the patience in waiting for these results again. And thanks for being with us. I appreciate it.

Thank you, ladies and gentlemen. This concludes today's Goodyear conference call. You may now disconnect.