Goodyear Tire & Rubber Co (GT) 2003 Q4 法說會逐字稿

Good morning. My name is Sharette and I will be your conference facilitator today. At this time I would like to welcome everyone to the Goodyears fourth quarter 2003 financial results 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. [Caller Instructions]. Thank you. I would now turn the conference over to Barbara Gould.

Good morning and welcome to Goodyear's review of fourth quarter results. Our discussion this morning will be available by replay after 2:00 P. M. eastern time, by dialing 706-634-4556 or by listening to the webcast replay on investor.goodyear.com. The slide presentation to go along with the conference call comments is available on our Web site. The reconciliations to nonGAAP items are included in the last page, on the last page of the presentation.

I'd like to remind you this morning that our discussion 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 outlining Goodyear's filing with the SEC including its Form 10(K) for the year ended 2003 and includes the effects of greater then anticipated competition in the company's markets, possible changes in demands for the company's products and services, fluctuations in the prices paid for raw materials and energy, the company's ability to successfully implement it's turnaround strategy for North America tire segment, the company's ability to successfully introduce new offerings in a timely and cost-effective basis, potential adverse consequences and of litigation of the company including liability related to discontinued products of litigation arising out of the restatement, possible actions taken by the SEC related to its formal investigation into the facts and circumstances surrounding our restatement ,the company's ability to realize anticipated savings and operational benefits from its labor agreement with the U.S. W. A., and its ability to satisfy certain financing commitments in that agreement.

The completion of this companies interim financial statements for the quarter ended March 31, 2004, and the effects of the more general factors such as changes in general market or economic conditions or in legislation, regulation or public policy. The company disclaims any intention or obligation to update or revise any forward-looking statement whether as a result of new information, future events or otherwise. Joining me today on the call are Goodyear Tire's Chairman, CEO and President, Bob Keegan, Executive Vice President and CFO, Bob Tieken and Senior Vice President of Strategic Planning and Restructuring, Rich Kraemer. Also on the call are Vice President and Controller, Tom Connell and Vice President and Treasurer, Darrin Wells for q -- for -- to answer, to help us answer questions. Bob Keegan will give a review for operations for 2003 in the fourth quarter and then Bob Tieken will review the financial results. Bob Keegan will then return to discuss our outlook for the first quarter of 2004 and then we'll open the lines for Q&A. Bob?

Well thanks, Barb. Good morning and thank you all for joining us today on this conference call. Bob and I would like to also thank you for your patience as we work to complete our financial restatement process. Bob will provide you, of course, with the details a bit later on the call. However, I did want to comment about how disappointed I was to find us in this situation. It's important for everyone I think on the call to understand that our people first identified the issues, we initiated the review and restatement, and ultimately we took corrective action. At the direction of our audit committee, a thorough investigation was completed. Also we will continue to address the issues that led us to this position through the ongoing implementation of strengthened controls. We have not and will not tolerate noncompliance with company policy nor with the company's code of business conduct.

I want to assure you that during this period the company's leadership continued to focus on the execution of our turnaround strategy. And as you will see later we are making meaningful progress. Our focus on outstanding leadership, market driven strategy and execution is paying off. We are improving the economic characteristics of our businesses. Now on to 2003 full year and Q4. As Barb indicated, I'll cover operations and Bob will then take you through the financials. Then I'll come back to talk about where we're going in a forward sense. As we indicated in February of 2003, our objective for the year was to stabilize our North American Tire Operations and to accelerate the momentum we had in our other six businesses. And I believe you'll see this morning that we had good success in this regard. Looking at the full year, 2003 was certainly a challenging one both for Goodyear and for our industry.

However, collectively our six businesses, excluding North American Tire, had segment operating income almost three times the 2001 level. And an increase of 36% from the 2002 levels. As we assess our progress in 2003, positives on the revenue side included record corporate sales of $15.1 billion, revenue per tire was up 3.4% excluding here, the impact of exchange. We had significant new product introductions like the G395 Spear tire in North America, that our customers now confirm gives us the best performing truck tire package in the industry. Based a largely on product performance we were awarded commercial O. E. contracts with Volvo an global basis as well as significant contracts with Freightliner and with Fleetwood RV in North America. We've gained commercial share in North American Tire and the European Union, in Latin America and eastern Europe, Middle East and Africa.

In passenger tires the Eagle F1 was launched in the ultra high performance tire segment in North America and in Europe, establishing the full capability of our technology. The Eagle F1 is receiving tremendous accolades on both continents and it's soon to be introduced to the Asian markets as well. We also repaired our relationships with dealers in North America. This was the number one priority for John Rich and his team in '03. It simply had to be done and it was. Our annual meeting with dealers in February, '04, was the best we've had in many, many years, and that's a qualitative comment from our, from our dealers. And these dealers have been our biggest supporters in the past year, aggressively selling the Goodyear brand. 2003 cost achievements include a ground breaking new three-year contract with United Steel Workers that will allow to us take out 450 million of cost over the next three years. As part of the contract we were able to close the Huntsville, Alabama, plant which resulted in a head count reduction of 1100, and a reduction of 7% of our North American Tire production capacity.

Globally we were able to reduce headcount by approximately 6,000. Improved segment operating income was achieved in six of our seven businesses. We improved o our O. E. profitability without share sacrifice through our selective strategy in North America -- North American Tire. However as we look at 2003, our share of private label business in North America declined. And here the reasons are two-fold. First the impact of Asian imports and second, maybe not as obvious, as in the O. E. business, we have become much more selective and more choiceful in the business we pursue. This is an important part of the business for us. We are addressing it both through being very selective and being aggressive in terms of our global product sourcing strategy. Also, raw material costs were up as you know but for us year over year, raw materials increased by $335 million, with energy costs also significantly higher.

Pension costs, predominantly in the U.S., were up $184 million. However we will see relief going forward as a result of the new steel workers contract. You'll recall that the contract for the steel workers was completed later than we had anticipated so we did not see all the benefits that we had hoped for during 2003. And finally our investigation into our accounting issues delayed our financials which in turn did not allow to us meet our equity and bank financing commitment to the steel workers, and we'll have more to say about that later. Overall, progress continues to be made on accelerating the momentum in our six profitable businesses and North America is now taking the necessary actions to improve its results in 2004. I'd like to look at the fourth quarter. Our total segment operating income in the fourth quarter more than doubled on sales of $3.9 billion. Revenue per tire increased by 4%, again excluding the impact of exchange. Our Eagle F1 received the best buy rating from the leading North American consumer magazine.

It appears price increases are being accepted in our markets. We closed the Huntsville, Alabama plant as planned. As I mentioned before, the decline in market share on our private label business continued in the fourth quarter in North America. On the flip side of the price increases, raw material costs increased $53 million in the quarter. We received no fourth quarter benefit from the steel workers contract for closing of Huntsville. We'll of course see those benefits at the beginning of 2004. Overall from a profitability standpoint, segment operating results improved in all of our businesses, seven out of seven. But the restatement delayed our financials and our refinancing. I want to move to our individual business units. And I'll start by commenting that both of our European based units had very strong fourth quarters. Revenue per tire increased 1% in the European Union, excluding again the impact of currency translation. Currency translation accounted for 147 million of the growth in sales.

Segment operating income was up 25% and excluding a one time Q4 charge of approximately 13 million to settle a labor lawsuit in France those segment operating income results would have essentially doubled year on year. While volume was down, that was more than offset by improved mix in both the consumer and the commercial market. We had higher pricing as well. We gained almost 1.5 share points in winter and ultra-high performance tires for the year. We continue to make significant strides with our O. E. customers on their use of run flat tires. Most of this activity is in Europe and centered on the high-end automakers today. We've made gains here in both actual sales and future approvals. And we continue to be the industry leader in the run flat market having produced and sold more than 2 million of these tires. We currently have, just to give you the scope here of run flats, we currently have 62 European approvals for run flat tires at O.E. On the negative side in europe, our retail store performance has been weak both in France and the U.K. With regard to cash, we made progress in reducing our working capital needs by four days.

I want to move on to our highest growth business, Eastern Europe Middle East and Africa. This business experienced an 8% increase in revenue per tire, excluding the impact of exchange, and had market share gains in all critical segments. We experienced strong volume growth throughout the region as well as improved mix in winter and high performance tires. Segment operating income increased 58%, improving operating margins to 16.2% for the quarter, 16.2%. The ability to run our plants full by serving as a low cost supply source for other regions helped improve conversion costs by 10%. And our working capital was reduced by seven days from 2002 levels. This performance in Q4 clearly concludes an outstanding year by Jarro Kaplan and his team in eastern Europe. They had a tremendous year. Latin America also had an outstanding 2003 with its highest segment operating income since 1998, and highest cash flow since 1994.

Price mix actions drove a 20% increase in revenue per tire, excluding exchange, in the fourth quarter, 20% increase. And the region set a fourth quarter record for manufacturing output and productivity while continuing its successful cost containment focus. In Asia, Q4 unit sales were 4% ahead of 2002 with strong growth in China and Thailand. Overall, revenue per tire increased 1.5%, excluding the effect of translation. We're seeing growth in our high value, premium and performance tire lines and we're experiencing strong sales of the new Takaro GA tire in Malasia and Thailand. On the cash side for Asia inventory turns improved 9%. Strong military sales and improving conveyor belt business in North America and sales growth in Latin America allowed Engineered Products to exceed 1.2 billion in sales in 2003.

Cost cutting actions such as low cost sourcing from Mexico improved operating income to 22 million from the -- for the quarter, up from 7 million in the fourth quarter of 2002. Engineered Products introduced a number of new products including high performance synchronous belts and double casing oil field hoses. They're also building on their existing business with both Auto Zone and Home Depot. Sales for the chemical business in Q4 grew 20.5% and segment operating income 14% due primarily to higher net selling prices resulting from the pass through of higher raw material and energy costs. Our Six Sigma activities in the chemical business continue to provide significant cost savings. We are also continuing to explore the sale of the chemical business. North American Tire results improved overall in the fourth quarter. Although units were down slightly, revenue per tire improved 4% year on year.

This improvement was due to gains in Goodyear branded tires and the high performance segment, continued growth in the dealer channel and higher growth in the commercial market. As I mentioned earlier, the Volvo, Freightliner and Fleetwood RV contracts fueled solid commercial growth. We closed Huntsville in December and took a restructuring charge of $150 million plus 120 million of accelerated depreciation. We will have approximately $100 million of savings from the closing of Huntsville in 2004, and in each subsequent year. Output per man hour improved driven by plant efficiencies in North America. Negatively impacting revenue was the share decline as I mentioned earlier in custom and private brands. Cost increased in raw materials, about 29 million. Also cost increases in transportation, pension and healthcare impacted us in the fourth quarter.

While North American Tire is not yet performing at the level we need, we see positive results which are confirming that the right plans are in place, the right actions are being taken and we are starting to return this important business to profitability. I'll now turn the call over to Bob Tieken to discuss more details on the fourth quarter, the restatement and our financing plans, and then as Barbara said earlier I'll return to talk a little bit about the first quarter outlook. Bob?

Okay, thank you, Bob, and good morning everyone. Before I go through the financials I would just say that Bob's comments just reinforced his earlier observation, that the restatement process was not a distraction to our business leaders as they basically drove for improved performance within the business. Starting out with the 2003 overview, worldwide tire units were down 800,000 units to 213.5 million units. Largely driven by 2.7 million fewer units in North America. By being more selective in our private label business as we did with O. E., we are improving our profitability in our North American Tire segment. Our sales grew by 9% to a record $15.1 billion. Volume basically flat for the year, the impact of foreign currency translation was a favorable $737 million, and favorable price mix added another $418 million, driven largely by North America, Latin America and our chemical products business.

Total segment operating income improved 24% to $513 million, compared with $417 million in 2002, driven by improved operating income in six out of seven business units. Favorable price mix of 184 million, savings from rationalization actions of 135 million, and positive impact of currency translation of 51 million, offset higher raw material costs of $335 million. The loss before taxes was $690 million for 2003, versus a loss of $14 million in 2002. In 2003, we had $335 million higher rationalization costs and loss on asset sales, $133 million of accelerated depreciation, mainly from the closure of Huntsville, $105 million higher interest expense and financing fees, and $50 million higher foreign currency exchange and $112 million additional product liability charges, which offset a number of smaller positive comparisons for a total difference of $676 million in performance below operating, below segment operating income and before-tax.

We are reporting net loss for 2003 of $802 million, or $4.58 per share compared with a net loss of 1.2 billion or $7.35 per share in 2002 on a restated basis. As you may recall we took a non-cash tax valuation allowance of $1.1 billion in the fourth quarter of 2002. Now for the fourth quarter. In the fourth quarter similar to the total year, tire units declined 800,000 units in the fourth quarter to 52.8 million units. Sales grew 12% driven by a weak U.S. dollars and improved mix. The effect of translation added 7% of the increase in sales and price mix contributed another 3% increase to the 12% higher sales volume. Total segment operating income more than doubled to $173 million compared with $79 million in the fourth quarter of 2002. The increase in segment operating income was driven by $58 million of improved price mix and 31 million favorable impact of exchange which was partially offset by $53 million of higher raw material costs. Taxes in the fourth quarter were $66 million.

We basically pay taxes on our foreign income with no benefit from the U.S. losses due to the $1.1 billion tax valuation allowances that we reported in the fourth quarter of 2002. We are reporting a net loss for the fourth quarter of 2003 of $434 million, or $2.49 per share, compared with a net loss of $1.221 million, or $6.96 per share. Let's look at the differences between segment income and the loss before taxes now for the fourth quarter. The change in inter- S.B.U. income relates to higher raw material costs which are reflected in higher selling prices for the tire business from our chemical products business. In the fourth quarter, the rationalization charge for closing Huntsville facility was $138 million of the rationalization charges. Restructuring in Engineered Products in the European Union accounted for the remaining $25 million. In addition, accelerated depreciation due to the closure of Huntsville is $120 million, plus [inaudible] and other asset write-offs totaling $133 million. Interest expense at $77 million reflects the higher on balance sheet debt that we have had in the last nine months of 2003, due to the replacement of off balance sheet accounts receivable financing in April of 2003.

The minority interest in net income of subsidiaries is lower due to the contribution of [inaudible] tires into our European joint venture. Financing fees were $13 million higher due to the amortization of fees from the restructured bank debt facilities, partially offset by the elimination of fees from the domestic accounts receivable securitization program. On the other line, there are $73 million, there is $73 million of general and product liability for discontinued product related to asbestos personal injury claims and anticipated liability related to M Tran2 claim particularly related to the proposed national settlement that we had discussed previously. Now let me briefly talk about the restatement. First of all following up on Bob's comments, we are pleased to have the restatement and investigation process behind us. We took the time to conduct a comprehensive review and we took the actions required to deal with the issues that were uncovered.

Meanwhile, we were careful to continue our focus on running the business and executing the turnaround plan. We have outlined a remediation plan to improve our control processes in the 10(K). Let me talk with you about a few of the details of that plan. First of all, we have taken disciplinary actions where appropriate and devoted additional resources and training to insure that all ledger accounts are reconciled in a timely and accurate basis. Other changes, organization and personnel. Clearly we are focused on improving communication and reporting. Improving our monitoring controls, and increasing the oversight to reduce the opportunities for override of our control procedures. And most importantly we are also simplifying and improving financial processes and procedures throughout the company. In the 10(K) you will find complete details of the restatement. We are continuing to cooperate fully with the SEC and its investigation of the restatement of prior year financial results. Now let's discuss the results of the investigation and other adjustments found during the closing process.

Our total restatement was $281 million. There were $31 million of restatement items included in our second quarter 2003 results that were subsequently included in the restatement, plus the 85 million announced in the 8(K) in November of 2003 and included in the company's third quarter financial filing. Today we announced an additional $165 million of adjustments which has two components. First is approximately is $65 million of adjustments which we initially announced in April 2004. In the $65 million, of improper, in the $65 million there was $10 million of items arising from their overseas investigation, $18 million of Workers' Compensation adjustments resulting from an understatement of Goodyear's potential liability for payments relating to Workers' Compensation claims. The 65 million also includes $36 million of items identified during our closing review process, which continued during the overseas investigation.

The second component of the additional adjustments announced today, results from the fact that since the adoption of FAS 87, the company has used the six-month average of corporate rate bonds as of the end of September of the current year as a means of establishing a discount rate to determine its pension obligation. The same methodology was used in the company's application of FAS 106 post retirement benefit. Utilization of this rate was considered to be consistent with the provisions of prevailing guidance and our external auditors had not objected to its use. During the first quarter of 2004, Goodyear reassessed the discount rate used in calculating costs of pensions and other pensions and other post retirement benefits over the last five-year period. The total reduction to income before-tax was $18.9 million.

The reassessment of the discount rate also resulted in an increase to the company's minimum pension liability of $160.9 million; which are recorded in other comprehensive income included in the equity section of the balance sheet and a related $81.2 million increase in the income of tax expense in 2002 to provide for a valuation allowance against the tax benefits of this adjustment. These discount rate adjustments accounted for the increase in accounting adjustments over the estimate of $65 million that we announced on April 12 of 2004. The reassessment of the discount rate did not significantly change the company's underfunded pension obligation at the end of 2003 and had no impact on the required cash contributions. I would also point out two other points we view as relevant to your understanding of this matter. First, again, it did not change our underfunded position and, secondly, it has no cash, it has no cash impact.

As a result of all the adjustments, the net loss for 2003 increased by an additional $56 million, by $121 million for 2002, including the tax valuation allowance of 81 million, and $50 million for 2001. The impact related to years prior to 2001 was a decrease in retained earnings of $53 million. And as I said before, additional details of the restatement can be found in our 10(K). Now, 2004, a year of, a year of traction. Having the restatement behind us and the release of 2003 financials, let's start looking ahead at 2004. First let's look at our financial restructuring plan. With bank agreements a year ago and two new debt facilities, we have completed the first two stages of our financial restructuring plan. Stage three involves continuing to extend our intermediate term maturity and reducing our overall leverage. We still have a commitment to the United Steel Workers to issue $75 million of equity or an equity linked security which we certainly intend to honor.

In terms of our first quarter financing, in the first quarter we took advantage of a relative, relatively strong high yield market and up sized the asset based loan facility by $650 million. It matures in 2006 as does the rest of the ADL facility. We also placed $650 million of secured notes through a private offer. With the proceeds of these two facilities, we paid off the U.S. term loan early and there by avoided a milestone fee of approximately $16 million. We also permanently reduced the U.S. revolver by $70 million and the remainder of the proceeds will be used for general corporate purposes. We have substantial liquidity. Our cash position at the end of March of 2004 was $1.3 billion of cash, and with available credit, total liquidity for the company was almost $2.1 billion. Our position remains strong on a going forward basis. If we look at the cash usage, what are the usage for cash over 2004? I'm not going to go over this chart in detail but it out lines what we are going to be using the cash for.

I am sure that our business unit people would like to have more capital expenditures, but the $488 million is good to let us do what we need to do to be competitive and to grow the business. It certainly also forces a discipline to spend only where you can get appropriate return on your dollars of investment. And obviously another use for our cash in 2004 is our pension contribution. Now insofar as our pension plans are concerned, in 2003 the market gain on pension assets added $707 million to the planned assets. However, the underfunded position of the plan grew to $2.8 billion. The recently passed legislation lowered our required domestic contribution in 2004 to $160 million. In previous discussions of this topic we had indicated an expectation to make contributions of somewhere in the neighborhood of 250 to $270 million in 2004. Including our international plans our total contribution in 2004 will be approximately $210 million. The contribution required to our domestic plans in 2005 will be in the range of 325 to $350 million. Now I'd like to cover raw material cost headwinds and savings initiatives for 2004 before I turn the program back to Bob Keegan. Raw materials. Let's start with the headwind that everybody is familiar with, raw material costs. We are still comfortable with our estimate of 5 to 7% increase in raw materials for 2004 that we discussed with you in November.

In the first quarter we saw raw materials were up 5%. Obviously if oil remains in the $40 a barrel range we will be near the higher end of the range insofar as the rest of the year is concerned. Now I'd like to take a quick look at rationalization actions that we took in 2003 and their benefits, their cash payments and benefits that we expect to see in 2004. Through rationalization actions announced in 2003, almost 4,400 people will be removed, and we expect to obtain almost $210 million of savings in 2004 from the rationalization actions that we took in 2003. Since 1998, six high cost plants have been closed including Huntsville, which reduced our capacity by 25 million tires and 25,000 positions were eliminated in this process. Cost savings. These rationalization programs in addition to eliminating the 401K match and low cost sourcing translated into $180 million of savings in 2003. We also had productivity savings driven through Six Sigma and lean manufacturing initiatives which added to these savings.

However, headwinds of over $500 million from higher raw materials and pension costs offset the achieved savings. In 2004 we will have additional benefit from the announced rationalization actions plus the outsourcing of indirect material purchasing in Europe and human resource function in Akron will add another $20 million in savings. Furthermore we expect to see the first part of the savings from the union contract, $135 million in 2004. Although the increase in pension and healthcare costs will not be as significant in 2004 as they were in 2003, partially attributable to the union contract, we do expect to see another 5 to 7% as I said previously, in raw material costs increases in 2004. Overall, we're making good progress on our program to save somewhere between 1 billion to $1.5 billion. Bob, back to you.

Well, thank you, Bob. I want to talk a little bit about the first quarter of 2004 and our outlook. Certainly for the first quarter industry growth has surpassed everyone's expectations, especially in North America and in western Europe. Some of this growth can be attributed to buying ahead of price increases and new recycling regulations in France. We do not expect this level of growth to continue throughout 2004. We'd be hopeful that it would but we won't expect it to. But we do see positive market reception to our new product offerings that will certainly enhance our competitiveness in the marketplace. Our Assurance tires in North America and the new Hydro-grip and Sport Max tires in Europe are being received extremely well, by both by dealers and consumers. While Assurance is not a significant contributor to sales or profits in the first quarter, as we've just recently launched the tires, Assurance is shaping up to be the most successful new product launch in our history.

The orders from our dealers are running about three times our initial evident estimates and l'll tell you, our initial estimates were not overly conservative. We have just announced that we expanded production from our Lawton, Oklahoma plant to Napanee, Ontario, Gadston, Alabama, and Tyler, Texas. We are also seeing continued strong demand for Goodyear branded tires fueled by our dealer channel. The O.E. commercial truck business grew at an almost 40% rate in the first quarter, almost 40%. And the contracts that we gained in 2003 with major truck manufacturers, driven by the performance of our new G 395 Long Haul Steer tire, are starting to pay off as we significantly outgrew the market. And as I said the market growth was 40%. On the down side as Bob mentioned, raw material costs were up 5% in the first quarter, and interest expense will come in at approximately 80 million for the quarter. Now as you know, because of the delay in closing our year end and frankly we are still in the process of closing our first quarter books, I can't give you detailed guidance for the quarter.

But I can tell you that we estimate strong earnings growth driven by price mix improvements and cost reductions in all our businesses. Total revenue for the seven businesses is expected to be up double digits, excluding the impact here of FIN 46 changes. Segment operating income is expected to improve more than 25% for every business but Asia and, yes, that statement includes North America. Again, our objective for 2003 was to stabilize the North American business and to accelerate the momentum we had in our other six businesses. The plan in '04, of course, is continue that momentum in the six businesses and firmly establish both market and financial momentum in North American Tire. There are certainly positive economic trends driving industry tire volumes back to or above historic trend line growth. Our actions are gaining force and we have further financial restructuring planned ahead.

In essence we're executing against our seven strategies which we've talked to you about before. These represent the drivers of our turnaround. I'd like to say a brief word on each of these. With regard to leadership, we now have new and focused leadership in our business. And I personally have high confidence in each one of those leaders and their teams. We're focused on cash. We have positive cash-flow both in our company and in North American Tire despite the earnings difficulties in 2003. We are aggressively, I can assure you, managing and reducing our cost structure to help offset the headwinds that Goodyear, frankly like the other tire companies, continues to face. And Bob mentioned most of the prominent drivers. We obvious have to take advantage of a major asset that we have in terms of our dealer network.

We have the broadest and deepest dealer networks in the world and our relationship has been repaired and I would say dramatically improved in North American Tire. We continue to improve our share globally in the Goodyear Tire branded business and are putting significant marketing investment behind our brand initiatives. Certainly in the first quarter and in the fourth quarter our brand mix is improving. I've highlighted the significant achievements with the Assurance family of tires, our G 395 truck tire, Hydro-grip and Sport Max in Europe. Well those examples of product leadership are only the beginning. Expect more launches, expect more excitement in our key markets. We talked before about advantage supply chain and I think this cuts to the heart of what's important for this company.

And that is our service level to our customers. Their success and satisfaction frankly will be the measure of our marketplace success. We are now there yet but we are making substantial progress. Now those are the seven strategies that are driving our actions and driving our business. There is much work to be done, but we are attacking our goals very aggressively. We enter 2004 with business momentum and high expectations. We estimate that the first quarter will provide measurable proof of the progress that we are making. I want to thank you for your attention and I'd like to open the call, Barbara, if we can do that for questions.

Say Bob, before you do that I would just like to, I've been reminded that my aging eyes apparently failed me. I may made a mistake on a number on a nonoperating item on the other line which shows on the chart as $93 million the impact on that of general and product liability was a charge of $73 million, $37 million.

Thank you, Bob. Now we are open for your questions.

[Caller Instructions]. And your first question comes from Jonathan Steinmetz with Morgan Stanley.

Hi, Jonathan.

Hi, good morning everybody. A few questions here, first on the price mix in North America, it looks like revenue per tire was up about 4.5% but you talked about the some of the positive mix impact. Are you able to quantify how much of this was mix and how much of this was price, pure price, like for like tire?

Jonathan, we are not giving out that quantification but I will tell you the composition is both price and mix. And we are very pleased with the mix initiatives and the success of those initiatives in North American Tire.

Okay. And you talked a little bit about share loss and private label. On a strategic level can you talk a little bit about, is there going to be a real push to try to regain share or is selectivity going to continue with a sort of profitability focus here?

Okay. It's a good question. And I would simply comment here, that in that area, this is an important business for us going forward, it provides a lot of volume. We're doing a couple of things from a strategic standpoint. One is as I mentioned in my comments, we are being much more selective in the business that we, that we except and frankly business that we'll walk away from. That's hugely important for us if we are going to drive a profitable situation in that business. And secondly, we are using our global sourcing capabilities here to drive our cost structure down in that area. We've got to do both of those things to be successful in the business. But it will remain a very important business focus for us in North American Tire.

Thank you.

Thank you, Jonathan.

Your next question comes from Jackie Weiss with Merrill Lynch.

Good morning. Can you just give us a little more detail on your selectivity? What do you expect to be the direction of share trends in 04 and what kind of overall volume impact will this have?

Jackie I won't be very specific which may disappoint you but I will tell you that we have certain business where we can do more volume and should be doing more volume in that area because it's attractive business for us. We have other business that, that we're not going to serve to nearly the extent that we have historically. So we're balancing within that segment the good business and the business that isn't so good for us much like we do in the O.E. business. And I really on this call won't be more specific than that.

Okay, but you expect that assuming that, say, the market is flat in terms of units you guys would be able to compensate for units that you are willing to give up but...

I think, I think that we will, I think that overall in the short term, we'll see some share decline in that area. And then well, what would happen is if we are drawing a curve we'll show a bit of decline, not a huge decline but a bit of decline, we'll then flat, and then we'll decide with the market, do we increase that share or not in that particular segment. Okay? So it's going to be very choiceful.

Thanks. Some industry players have indicated that the price increases that manufacturers have put through recently seem to be sticking fine at the wholesale levels but that some retailers aren't passing the full amount on to their end customers. Are you hearing this from your customers or seeing it in your own stores?

I'll tell you what we see. Frankly if we took our own stores, the stores that we own, let me be very specific, we are getting price increases here in North America. But if I looked at our global situation, if I looked at our global situation, I would say that outside of North America we are seeing price increases that are for the most part covering any currency issues that we have and raw materials. Here in North America, if we look at the commercial business, primarily the truck business, the price increases are sticking. Okay, and then most of you recognize there's a reason for that because there's a lot of natural rubber composition in our commercial tires more so than in passenger and with natural rubber prices as was indicated earlier being significantly above any historic trend line that's natural. In the passenger business, which may be what you're referring to mostly Jackie, we are seeing some mixed results, we are seeing price increases but not at the level of the full list price increases that have been announced. And that's, that's pretty much what we are seeing in our data. And it's also what we are hearing back from the market.

Thanks. One last question for Bob, can you refresh us as to your current covenants and are you as of this quarter still in compliance?

Jackie, what I am going to ask, I am going to ask Darren Wells, our Treasurer to address that because Darren lives in that world minute to minute.

Hi, Jackie.

Hi.

Yeah the -- quick reminder on what the covenants are and then I will say we are in compliance with our covenants. At year end 2003 we had covenants that required us to have an interest coverage ratio or EBITDA interest of 2.25 times. We had a covenant that required us to maintain a minimum net worth which effectively excludes the impact of OCI and non-cash charges of 2.8 billion. And, and I would say that both of those covenants have changed as a result of the, of some amendment or provisions in the agreements and amendments so that this year the interest covenant would need to be 2.0 times and the net worth covenant for 2004 is 2.5 billion, so it steps down.

By this year you mean 2004 it needs to be 2.0 times worth?

Correct. Correct, sorry. And finally there's a third covenant which is a maximum secured debt to EBITDA coverage which four times. And we're in compliance with again, all three of those covenants.

All right, thank you very much.

Next question comes from Kirk Luntz of JP Morgan.

Good morning, Kirk Ludkey

Hi, Kirk.

Hi. I just wanted to touch on a couple of the, the slides. And boy, there's a lot of information in this release so excuse me if you've already mentioned this but,.

Kirk, we just say, we -- you know, we fully understand that and expect that we'll be busy answering questions for the next couple of days.

Well, on slide 24, did you quantify what 5 to 7% on raw material, raw materials is in dollars?

No, we did not.

Is there any way that you could do that for us, any kind of? I think at one point you said another 5 to 7% of raw material, does that suggest that 335 is about that number?

We had last year, last year be, I think our number was 335 million is the number we quoted for 2003. Okay? And that represents in that same neighborhood of increase.

Okay. That's, that's what I thought I heard. And then pension costs does, the increase in pension costs, did you mention that?

Kirk, this is Darren. What we said for 2003 was we had pension increases about 184 million, we do not, yeah, we actually expect pension expense to go down some this year and we have not provided a specific estimate of the expense.

But it'll be, it'll be a positive impact?

Yes, it will.

Okay. And then on the slide where you touch on the cash requirements for '04? Is working capital a source or a use or do you feel like that's going to be a neutral?

Rich Kraemer will take that.

Rich Kraemer speaking. So far, you know, we have not, obviously Bob mentioned, we have not talked about in any sort of detail our first quarter but what will we are seeing is that given where our sales are headed that thus far we're very pleased with the performance of working capital so I would tell you as we look at it right now it's become a source for us. Certainly as we look out for the rest of the year we're going to, we're going to continue to watch it closely but right now it's been very positive for us.

And we'll, Kirk, I just mention here we, you know, we're continuing the plans that we've been working hard at the last two years to take down past dues and receivables and to be very efficient with our supply chain. I talked about an advantaged supply chain and our goals there are to get better service but also to lower our inventory investment. And as Rich said we are making progress there. And also to decrease the cost of serving those, you know, our dealer network. So we're, we're trying to work all three, if you will, vectors of, of the supply chain.

Also on that slide cash uses, I can understand why restructuring expenses that that's a bit of a moving target and you probably don't want to talk too much about what you expect the end trend settlement to be, but can you put a range on either of those two?

[inaudible] Yeah go ahead, Bob.

This is Bob Keegan. At this time in time I'm sure you can, you can appreciate that we don't want to, that's not a subject that we want to discuss at this particular point in time.

Okay. And then I just wanted to make sure I understood the fourth quarter. What, you've reported segment operating income in the fourth quarter of '02 of 79 and 173 in the fourth quarter of '03.

That's correct.

What was.. how much D&A was subtracted to arrive at those numbers?

Those include D&A. I mean that's a, that's a part of cost so...

That's depreciation and amortization are included in those numbers.

Right. Do you know how much was in there?

I think Kirk's ques.., is your question, Kirk, just to be clear, how much was 2002 and how much was 2003? Is that the question?

Correct.

It'd probably be in the neighborhood of $150 million.

For each period?

Yes.

Okay. Was any rationalization expense in those?

No, we don't... rationalization comes down below the line. You see that as you drop down on slide number 13, you see we have rationalization and asset sales of $163 million.

Okay. And then last topic, segment operating income for the first quarter of '03, I just, I know that, that it's going to be up substantially but I was hoping that if you could, with the restatement I was curious, did you restate the? Can we expect the segment operating income that you've reported for the first quarter of '03 to change and if so what are the new numbers?

Yeah, it'll have a restatement, there'll be a restatement impact on the first quarter of '03 and it will be a downward adjustment.

That's not, the 79 million.

No, 79 was fourth quarter earnings. He's talking first quarter.

First quarter of '03, got it.

Could you share the new segment operating income numbers?

Kirk, we'll do that. Again, we should mention and I planned on mentioned that we'll have a call here when we've closed the book on the first quarter. In a period of weeks. And at that point in time we will go into some of that detail.

Okay. But it will be, segment operating income will be less than the, I thought you reported 68 million.

Than the published, it'll be less, we -- we anticipate it'll be less than the published number from last year.

Kirk, what I think we can say is one of the restatement adjustments that we talked about earlier which is the restatement relating to our Engineered Products division, and in the first restatement we reported a $19 million charge and that charge will sit, has been put in the first quarter of 2003, so there while there will be some other adjustments I tell you the largest piece of that adjustment will be that 19 million in our Engineered Products segment.

So the number we published was, you're right it was about 68 million, will go down by 19 million and then a little bit more because of other, you know, other restatement items. But that 19 million is going to be the biggest part of that change.

And the 19 million was a one time item?

Correct. That was the impact of restating some account reconciliation items related to the SAP implementations in, in Engineered Products and as we went through that process we could not actually determine the exact period in which those reconciliations occurred so the accounting convention will then have you put that in, I believe it's the period in which they were identified which in our case was Q1 '03. So the full 19 million sits in Q1 '03 although on an actual basis they were not actually created in Q1 '03.

So if we were trying to arrive at a first quarter '03 segment operating income, excluding non-recurring items, it sounds like the investment is not a big one.

Yeah, again, the lions share will be that particular item.

I appreciate it. Thanks a lot.

Next question comes from Monica Kinney with Morgan Stanley.

Good morning, Monica.

Monica, your line is open.

Yes, I was wondering, can you hear me.

We can, Monica we can barely hear you.

Can you hear me now?

Boy, you sound like you are at the end of a very long tunnel. We are trying. Why don't you try it, Monica and we'll tell if you if we can't understand the question.

Okay. Can you give us an update on where you are with regard to sale of the chemical business?

The only update today, Monica, will be, we're still exploring the sale of that business. And as you understand we haven't had a 10(K) filed for 2003 until today.

But is it safe for us to assume that you're significantly closer now that you have the filing completed and behind you? And can you give us...

As I say, Monica, I'm not going to make any further comment other than we continue to explore the sale of the chemical business. Which I would add, as you know it did very well in 2003 and very well in the fourth quarter, and beginning of the year has been very strong as well.

[inaudible].

Monica, we can barely hear you, I'm sorry.

[inaudible] expense versus the cash in '04, what that might look like?

I'm sorry, could you repeat, Monica, we couldn't pick it up?

Can you, can you hear me now? The healthcare expense versus the healthcare cash for '04, what that difference may be?

Yeah, like, I'd ask, I'd ask Darren just to comment on that.

Monica, you're referring to the retiree healthcare?

Yep.

The, I think you'll see in the 2003 10(K) that, you know, the cash payments were just slightly above expense levels [inaudible] and we would expect it to be about equal to each other in '04.

Okay. And then given that, that the growth rates that are, you know, fairly strong for the fourth quarter and also it looks like the first quarter, do you have a sense of where you would expect overall 2004 to maybe shake out for a growth rate perspective for the top line?

Monica, all I comment on there is we have an industry forecast and on our forecast if you were to look at in North American Tire the consumer replacement business, we still think our number 2.5 to 3% for the industry, is a reasonable forecast. Despite the fact that the industry in the first quarter grew more rapidly than that. As I said I don't expect that to continue but that's as much guidance as I would give on the top line.

And then my last question is, in the quarter, European volume, do you have a sense of how the overall industry did versus your performance?

In which quarter?

In the fourth quarter? How Europe, the industry did?

In the fourth quarter, I don't -- let us look for just a second because I know we have the data. I'm going to try to see if we have it at our fingertips. [pause] Yeah in the, if we took the consumer replacement business, our estimate is the industry grew about 6% and we did a bit better than that.

Okay. And do you have commercial?

The commercial business, again, our estimate is about 6 or 7% for the industry and we were above about that same level of increase. That's a unit metric that I'm using there, not a value metric.

Overall your [inaudible]

Sorry, we heard overall.

Overall your volume's nearer the industry?

For the commercial area for replacement we are a little better than the industry in the fourth quarter.

Okay. Thank you.

Your next question comes from Ben Tatay with Key McDonald.

Good morning. Just a few brief questions for you. Can you give some color on your, like the customer inventory levels?

Well, I mean, what we are seeing right now, we are in a very critical point in the year here in North America and throughout the rest of the world. I don't have a quantitative sense of those inventory levels. But because we've had such significant sell-in in the first quarter, you know, obviously the dealers now are well stocked with everything but they are still trying to get more of our new products, our new Assurance family of tires, et cetera.

So I think from our standpoint that, that we're going through a normal seasonal, I don't see anything to indicate that the inventories would be below normal nor above normal except on our new product introductions we're struggling to keep everybody, everybody, you know, fully, fully inventoried. And that's a nice problem to have and we're working real hard to, make sure that we do that for the Assurance family and then the Hydro- grip and the Sport Max in Europe as well. I think we'd have to conclude the inventories are about at a normal level today.

Okay. Second question, what do you see going on in Asia that makes you forecast flat year over year results in the first quarter?

Well, we've got -- let me, let me mention a couple things there. Because Asia is, as you know, is as diverse a region as any in the world, and we're just coming on stream now, literally as we are speaking here this morning, with a major expansion in our plant in China, and we have been somewhat restricted in terms of our selling capability in China, to the point where today we're importing some product into China for the consumer replacement business and for the truck business. We've been, we took a conscious decision about a year and a half ago to fully supply the O.E. business there.

But with this expansion we'll be much more engaged in the replacement business as well. So that certainly has been a factor. We've also had some weakness in a couple markets in the Philippines and in Indonesia and then we've had strength as I indicated in China and Thailand. So it's kind of a mixed bag. But certainly when that production comes on stream, by the way that production is a significant increment of capacity in China, we'll start to see, as you've seen throughout 2003, volumes grow in the Asian region. I mean, that's our expectation.

Lastly, can you talk about manufacturing productivity at your plants and kind of where you see that trending?

Well, the way I come at that is the way we come at it with you. We don't give specific quantified guidance there. But certainly we talked last year about over three years the need to drive 1 billion to 1.5 billion in cost reduction, much of which comes out of manufacturing productivity. I would say our plans are well along in that regard. We've had very positive, not only discussions but specific plans now with the steel workers here in the United States at every one of our plants and they are today acting against productivity goals, by plant, here in North America.

We're also, we're also very much in, in, in the stage right now where we're looking at from a global standpoint, how do we drive productivity? I would say sharing. We're using Six Sigma and lean manufacturing as the headline programs for that activity, reporting to Chris Clark who's -- most of you know him as the guy that used to run Latin America for us. He's now running our Global Manufacturing Operation, and bringing Six Sigma and lean skills and heavy aggression on productivity. But we are not giving quantitative judgment.

Okay, thank you.

Okay.

Your final question comes from Mike Kindear with Citigroup.

Yes, I was wondering on the pension you gave the cash contribution estimate growth for North America. I was wondering if you could give us how that, you expect that to vary versus expense?

Yeah, Mike, this is Darren. We have, as you noticed, we've gone through a process of reassessing our discount rate for the last several years on pensions. And as a result we've had to recalculate the expense levels as well as the liability levels in those years.

Right.

And what that's resulted in is expense of about 412 million globally for 2003. And we do expect that expense level will come down somewhat in 2004 but I don't have a specific number for you, for this year. But if you can think, yeah it, it's going to come down marginally, it's not going to be an enormous rock and you can see the 210 million we've said is the intent, intended contribution to pension plans.

What's the, what's the European counterpart to that 210?

The 210 is a global number, Mike.

Okay.

Of that 160 million is domestic.

So basically we should expect pensions to, expense to be higher than contributions is the message, we just don't know how much?

That's right.

Okay. A couple other questions. One was on the cost saves. In the slide had you, you a number of, 210 in '04 and it was about 60 or so in '03. Is that, does that 210 include the 60 or is that 210 on top of the 60?

That's on top of the 60, Mike. It's an additional 210 in '04.

And also, the last question was the Tyler, Texas, plant, I know that was, you know, one of the, you know, the key plants where you're going to try achieve operating improvement. Can you give us an update on the status of that, how it's doing?

Mike, we don't give too much information on individual plants. I will simply tell you there that John Rich and his travels around the country was in, at the Tyler plant within the past three or four weeks, was well pleased with the results, well pleased with the, both the company and union agreement in terms of productivity actions that are taking place in that plant. And as you know we've got more flexibility frankly, in terms of Tyler productivity and manning than we do in our other North American tire plants. So that's progressing well.

Actually one other think EBITDA in the 10(K)., there was a number 1.023 billion for 2003. I was wondering if I could get the corresponding '02 number adjusted for all the restatements as well as the fourth quarter numbers for each year? I don't know if you have that handy or feel free to get back to me.

We will just follow up with that.

We can follow up with that. We've got, yeah we do have that number, it's not, you know, it's not published in the slides [inaudible].

Okay. Great. Thank you. Robert Keegan speaking.

Ladies and gentlemen, we have reached the end of the allotted time for questions. I would now like to turn the conference over to Bob Keegan.

Okay. Thank you very much. Just again, I'll say what I said at the beginning of this conference call. We appreciate your patience and understanding. I know there'll be a lot of questions over the next couple of days. We're ready to answer those questions and want to make sure that we take you to a position of as much clarity as we possibly can relative to '03 and prior years. So I know you won't hesitate and just appreciate your being on the call with us here this morning. Thank you all.

Thank you for participating in the Goodyears fourth quarter 2003 financial result conference call. You may now disconnect.