Goodyear Tire & Rubber Co (GT) 2004 Q1 法說會逐字稿

Good morning, my name is Heather and I will be your conference facilitator today. At this time, I would like to welcome everyone to the Goodyear's first quarter 2004 financial results.

All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question-and-answer period. If you would like to ask a question during this time, simply press star, then the number 1 on your telephone keypad. If you would like to withdraw your question, press the pound key. Thank you.

Miss Gould, you may begin your conference.

Thank you, Heather. Good morning and welcome to Goodyear's review of first quarter results. Our discussion this morning will be available by replay after 3:00 p.m. Eastern daylight 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 website in both Adobe and Power Point, plus they were e-mailed to our e-mail [technical difficulties]. For your models, details of the FIN-46 consolidation of the South Pacific Tyre and Tire and Wheel Assembly are included on the last page of the presentation. All the numbers shown are restated from prior years. We followed our amended 10-Q for the first quarter 2003 on Friday.

I'd like to remind you this morning that our discussion may contain certain forward-looking statements based on current expectations and are subject to risks and uncertainties that could cause actual results to differ materially. These risks and uncertainties are outlined in Goodyear's filings with the SEC, including its Form 10-K for the year ended December 31st 2003, and Form 10-Q for the quarter ended March 31st, 2004. The company disclaims any obligation to update or revise any forward-looking statements rather as a result of new information, future events or otherwise.

On the call with me today is Chairman, CEO and President, Bob Keegan; Executive Vice President and CFO, Rich Kramer; and Vice President and Treasurer, Darren Wells. Now I'll turn the call over to Goodyear's Chairman, CEO and President, Bob Keegan.

Thanks, Barb. I want to thank you all for joining us on the call this morning. Trying to close year-end and the quarter in about three weeks' time, frankly, was too aggressive on our part. Especially considering the scrutiny that we are giving to our financial reports. We admittedly bit off more than we could chew in the time we allocated. The few days delay, however, was the right thing to do. I apologize for surprising you with the postponement and for any inconvenience that it caused.

I can tell you that our certification process, including the quarterly review performed by our external auditors has been thorough and comprehensive and we are correct in our accounting. I can tell you that we had an excellent first quarter operationally. I can tell you we are now getting traction in our North American Tire turnaround plan. We are beginning to execute well in North American Tire. You'll see that as we discuss the first quarter results.

I can tell you that our mix is improving, and we are having success in pricing and our new products are having a major impact in our markets. The tire industry overall is experiencing strong growth, and while we don't believe the Q1 growth rates are sustainable, we still expect industry growth to be solid for the full year.

However, there remains significant challenges for us, including our high levels of debt and unfunded pension obligations. We will work on these as we have our other challenges with specific strategies. These strategies include refinancing the length of debt maturities, potential asset sales to reduce the obligations and ultimately seeking increased equity funding to improve our credit profile.

Returning to this morning's agenda, Rich Kramer will cover our first quarter performance at the corporate level and provide a liquidity update for you. I will then come back to cover the strategic business units performance for the first quarter and provide an update on the second quarter before we open the call for questions.

Before I turn the program over to Rich, I would like to tell you how pleased I am to have Rich join me today as our CFO. Rich is a talented individual, an excellent leader, and will be a tremendous asset to our team in his new position. With that said, Rich?

Thank you, Bob and good morning, everyone. Before we get started, I'd like to address up front what will be a recurring theme during this call, which will be the impact of consolidating South Pacific Tyre, our Australian joint venture, as a result of the company adopting FIN-46, which governs consolidation of previously unconsolidated investments.

SPT was previously accounted for as an equity investment, but has now been consolidated line by line in our 2004 financial statements. While having no impact on net income, the change in consolidation methods does have an impact on individual income statement and balance sheet line items, as well as now being included as part of our Asia segment.

Since the accounting principles do not allow for the re-statement of prior periods for comparative purposes in the circumstance, a portion of the variants we will be discussing when comparing our current quarter results to prior periods will be resulting from the consolidation of SPT. While virtually all financial statement line items are affected, I would like to highlight the significant items for you now.

The consolidation added 1.8 million units, which represents about 58% of the total increase versus the prior-year quarter in terms of units, and we'll look at total units in a moment. Likewise, sales increased about $180 million, which represents about 24% of the increase versus the prior-year quarter.

Segment operating income was actually reduced by $2 million, including a one-time $5 million charge related to the write-up of SPT inventory in line with some of the fair value accounting provisions related to SPT. Again, that's a one-time charge resulting from this consolidation.

And finally, the consolidation added about $125 million of incremental debt, which is about 48% of the increase versus our year-end debt level. Also, as part of the adoption of FIN-46, the company consolidated T&WA, a tire mounting business in our North American business segment, which increased sales by about $74 million in the quarter, which only had a minimal impact on segment operating income.

Now, back to the first quarter and referring to Slide 3, you can see that we've made significant improvements in the quarter versus the prior period, exclusive of the impact of these newly-consolidated subsidiaries. Worldwide, tire units increased by 3.1 million to 55.7 million units, largely driven by growth in Europe and Latin America and the consolidation of SPT. As I just mentioned, this added about 1.8 million units to our number, but units increased 1.3 million or about 2.6% excluding SPT.

Sales grew 21% to $4.3 billion. This is a record sales for any quarter. Consolidation of SPT and T&WA contributed collectively about $254 million or about 34% of the increase. The impact of foreign currency translation was favorable by about 200 million, while favorable volume price mix added approximately 300 million, and this was driven largely by premium brand tire sales in virtually all of our operating segments, and in particular North America, Europe, Latin America, as well as Engineered Products.

Gross margin improved by almost 3 percentage points due to improved price mix, volume, and favorable translation. Savings from rationalization and improved plant utilizations offset higher raw material costs of approximately $30 million.

Total segment operating income improved by $174 million to $216 million, which is just under 5% of sales. This is compared with segment operating income of $42 million or 1.1% in the first quarter of 2003. This improvement was driven by improved operating results in six of our seven businesses, and it's important to note that one of those six or seven businesses in this case is our North American Tire operation. I'd also point out that our seventh business, our Asia segment, that the operating results were reduced primarily to that one-time charge of $5 million, which I previously mentioned.

We're also reporting a net loss for the first quarter of 2004 of $77 million or 44 cents a share. This is compared with a net loss of $197 million or $1.12 per share for the first quarter of '03, with '03 obviously being reported on a restated basis. While we certainly drove significant segment operating performance in the quarter year-over-year, the reduction in net loss over this period was also impacted by a significantly larger restructuring charge in the first quarter of 2003, which I'll touch on in a moment.

Turning to Slide 4, what I'd like to do is just have a look at the difference between segment operating income and the bottom line, which is our loss before taxes, which appears on Slide 4. To touch on a few of the items, the change in interest new [ph] income, the change in that line item really relates to increased shipments of tires between our operating units as we have imported and shipped across region more tires in the quarter versus prior periods.

As I just mentioned, in the first quarter of 2003, we took a $61 million rationalization charge for reducing administrative staff in North America, Europe, and Latin America, offset by a small $2 million gain on asset sales. In the first quarter of '04, we also took a $24 million charge for rationalization charges, which was largely due to the downsizing of the company's Wolverhampton, England manufacturing facility, as well as outsourcing certain transaction processing functions in the European region. Gains on miscellaneous sales of approximately $4 million were also recorded in the quarter.

Interest expense at $84 million in the quarter reflects higher on-balance sheet debt, resulting from the termination of certain off-balance sheet accounts receivable financing programs in April of 2003. The equity losses of corporate affiliates was reduced to the consolidation of SPT, which as I mentioned, is now reflected in each line item, rather than at that particular single line item in the financial statement.

There's also about $8 million of general product liability expense for discontinued products related to asbestos claims and anticipated liabilities related to Entran II claims in the first quarter of 2004. This compares with $19 million of expense for the same period in 2003.

Now, let me digress for just a moment here and give you a quick update on our national settlement for Entran hose. We had good news in early June on the status of the national settlement. An amended settlement agreement was finalized and signed on June 4th and was actually conditionally approved. This expanded settlement includes the six New England states which previously were not part of the settlement class.

A new notice of the expanded settlement will be released shortly, allowing 60 days for class members to opt out or to rejoin the settlement if they had previously opted out. This settlement should remove some of the uncertainty on the future of these claims.

Again, going back to the 2004 quarter results, first quarter results, the quarter also included an after-tax charge of $12 million or 7 cents a share for our share of the costs primarily relating to a fire in our Philipsburg, Germany facility, which occurred during the first quarter. Also, the quarter included $15 million after-tax charge or 9 cents a share for professional fees associated with the investigation and restatements.

The loss before taxes was $21 million in the first quarter of '04 versus a loss of $166 million in the comparative quarter in 2003. Which is an improvement of over $140 million. You will note that while we had a net loss for the quarter, we did record tax expense of $56 million. This is because the company is unable to record a tax benefit from domestic source losses, but in fact remains a taxpayer in many locations outside the United States.

If I can turn you to Slide 5, and I'd like to give you just a quick overview of our liquidity in the quarter. Our cash position at end of March was $1.4 billion, which included $87 million of restricted cash. This amount, when including available credit, provided us with total liquidity of 2.1 billion. Our position remains strong going forward.

As you know, the company completed $1.3 billion of financing during the first quarter to the completion of both the $650 million additional trunch to the ABL term loan, as well as the completion of a $650 million private placement notes. Proceeds from these transactions were used to permanently pay down our U.S. term loan, and permanently reduced our U.S. revolver by $70 million. Additionally, 249 million of the proceeds were also used to temporarily reduce amounts outstanding under our ABL revolver.

The reduction in cash from year-end of 1.6 billion to 1.4 billion at the end of March was also used to fund working capital. Our working capital, excluding cash, increased in the first quarter, just as it did in 2003, as well as in other first quarters, if you look back at the company's history. In the first quarter of 2003, the company used 675 million of working capital, while the comparative number in the first quarter of 2004 was approximately 390 million.

Part of the use of working capital in the first quarter of '04 is due to the aforementioned consolidation of SPT. The other drivers include first quarter inventory build, preparation for the summer selling season, as well as the contents of higher raw material costs in those working capital numbers, both in receivables and in inventory, as well as payables.

As Bob indicated earlier, we're seeing many positives in our business going forward, but we're also very cognizant of the magnitude of the challenges that we face in terms of our debt and our unfunded pension obligations. We continue to work aggressively to address those challenges and to address our capital structure, with specific strategies designed to improve our overall credit profile.

Now, I'd like to turn the call back over to Bob and Bob's going to talk about our first quarter operations, as well as give an outlook on the second quarter. Bob?

Thanks, Rich. I'll refer you to Slide 6. This slide simply illustrates Rich's prior comments, but I'd like to make a bit of a repeat of those comments. We're very pleased to report that six of our seven business units showed improvement in segment operating income in the first quarter, and I am extremely pleased that one of those six businesses was North American Tire. As you can see, collectively, the segment operating income of our businesses was five times the 2003 level.

As we assess our progress in 2004 in the first quarter, overall revenue was up 5%, excluding FIN-46 in exchange, as we showed solid segment operating results and cash flow. In North America, we had strong industry growth at approximately 7% for the quarter in consumer replacement and 4% in commercial replacement. The commercial OE market improved 39%. This growth was supported by positive sales of Goodyear brand and our new product offerings.

Our overall share in the private label business in North America declined as planned, due primarily to our being selective in the specific business that we chose. However, this selectivity in turn resulted in improved profitability. The momentum continued in our other SBU's with strong industry results, solid volume gains, and favorable price mix.

To produce solid operating results in the first quarter, as I said, we had strong segment results, strong OE performance, both in consumer and commercial, we benefited from continuing cost-down actions and improved capacity utilization. However, raw material costs were up year-over-year by approximately 3% with energy costs also significantly higher.

In Turkey, we overcame a slowdown in the first quarter during labor negotiations and have concluded a favorable settlement during the second quarter, but it had a negative impact on the first quarter. The results in the European Union improved 176% year-over-year, even with the fire that we had in our Philipsburg plant. And as Rich commented, we had costs associated with the accounting investigation. Overall, progress is being made in our efforts to return the company to profitability.

As outlined in one of our seven key strategies for the future, focus on new products, innovation is, and will continue to be, the life blood of this company and all of our businesses. Here the clear goal is market-relevant innovation, generating real consumer-end benefits. We have impactful examples of our execution against our innovation goals in our North American Assurance tires and the G395 long-haul steer tire, the HydraGrip and Dunlop Sport Max in Europe, the Eagle F-1 in Asia and our global industry-leading Runflat Tires. I'll make comments about several of these.

I mentioned that Assurance in our fourth quarter conference call was on its way to being one of the most successful product launches in our history. To put that in perspective, remember that we just introduced the products to dealers in mid-February and started shipping product in March and April. I mentioned that demand is more than three times our expectations. Furthermore, Assurance is exceeding our initial forecast with excellent sellout and replenishment orders, and very importantly, with pricing holding at premium levels.

Remember, these are high margin tires for the replacement market, and based on customer demand and our ability to obtain a premium price for these premium products, the pricing discipline has been, frankly, as good as any we've previously enjoyed. We are making bold decisions here on both pricing and distribution strategy that are paying off. We are working to expand into larger sizes as quickly as we can get the molds and production capacity aligned.

Three months ago in Europe we launched the Goodyear HydraGrip that provides unsurpassed performance in wet weather. Shortly thereafter we launched the Dunlop Sport Max high-performance tire. On both these products we have received excellent customer and consumer feedback, as well as very positive media reviews, those media reviews are critical in the European market, and orders are strong.

Since our last call, we introduced the Ultra High Performance Eagle F-1 tire to Asian journalists who indicated to us that in head-to-head product performance tests, the F-1 was superior to our major competitors.

Runflat tires, which we pioneered on Corvettes back in the mid-1990s, are gaining serious momentum at original equipment with manufacturers like BMW and Mercedes. We are currently working with most of the leading auto makers to provide state-of-the-art Runflat solutions. In Europe this year, we will supply more than 1.3 million Runflat tires, more than double the number in 2003. The BMW is leading the way, we're using both the Goodyear and Dunlop brands, we have the largest share of their Runflat fitments. Starting in 2006 we will be a major supplier of Runflats to BMW in China, ultimately sourcing those products from our own plant in Dalian, China. So we are clearly executing in line with our new product strategy.

And now we will go to Slide 9 and we will talk about the individual businesses in the first quarter. As I indicated earlier, North American Tire results improved in the first quarter. Although replacement units were down slightly, revenue per tire improved 6%, due to share gains in Goodyear branded tires in the high performance segment, continued growth in the dealer channel, and higher growth in the commercial market.

In the commercial market, the Volvo Freightliner and Fleetwood RV contracts fueled solid commercial growth as we gained share in that commercial OE segment. The strong support of our dealer organization reaffirms the watershed dealer meeting we had in February where John, Rich, and his North American Tire team clearly succeeded in re-establishing dealer relationships based on restoring credibility and keeping our promises. I must say, dealer relationships are 180 degrees from where they were two years ago.

As I mentioned earlier, Assurance tires are exceeding all of our expectations with strong sellout and replenishment activity and with strong pricing holding at premium levels. The lower private label share adversely affected sales, but was a positive overall for productivity, or for profitability.

The Dunlop brand was a disappointment in North America in the first quarter, as share has slipped. But here, John Rich has put new leadership in place to revitalize the strong European brand name in North America. Richer price mix accounted for 25 million of the improved operating results. Price increases are sticking in the commercial business and a portion of the announced pricing in the consumer replacement business is holding.

The closure of Huntsville in December and other rationalization actions provided $14 million of savings contribution in the first quarter. Now, remember here, most of the tires sold in the first quarter were produced before Huntsville was closed. Clearly, raw material costs increased, and advertising costs were up approximately $5 million because of the Assurance product launch. But I should emphasize, our philosophy here is clearly to feed that innovation and spend what's required to drive profitable growth.

In summary, while North America's not yet performing at the level that we need and expect, 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.

Our European Union business unit had a very strong first quarter. There was strong industry growth throughout Europe, our revenue per tire increased 2%, excluding the impact of currency translation. We've enjoyed good mix with gains in Ultra High Performance and four-by-four segments. The price increases that we have implemented based on escalating costs of raw materials are sticking. As I mentioned earlier, both the HydraGrip and Sport Max are provided a solid foundation for future growth.

We've had market share gains in our consumer replacement business. Truck performance has been strong both in sales and in cost efficiencies. All product categories reported improved results in the first quarter of '04 compared with '03. And as indicated earlier, segment operating income was up 176%.

Strong price mix contributed $13 million to the increase in segment operating income. The closing of the Passenger Tire production at Wolverhampton in 2003 benefited first quarter conversion costs. The Euro was approximately 14% stronger against the dollar; however, raw material costs were up.

In Eastern Europe, Africa, and the Middle East, I'll simply say this expanding business experienced market share gains in all product categories. Poland, Russia, and Turkey continued to drive significant growth in volume during the quarter. Price increases are sticking in most countries, and we have an improved mix in high performance and four-by-four markets, as well as in higher Goodyear branded sales.

Segment operating income more than doubled, improving operating margins to over 15% for the quarter. The improved price mix accounted for about $14 million improvement and segment operating income, and increased volume contributed another $5 million. On a negative side, SG&A expenses were higher due to continued expansion of the business and the new product launches of HydraGrip and Sport Max. As I said earlier, we'll invest in innovation, we continue to do that in Eastern Europe.

Now, not to be outdone by Eastern Europe, Latin America also had an outstanding first quarter. Price mix actions drove a 15% increase in revenue per tire, excluding exchange. And contributed 34 million toward the improvement in segment operating income. Aggressive pricing actions are holding in the market. Units increased 7% due to double-digit growth in the consumer and commercial replacement segments, contributing approximately 8 million in profitability.

The OE commercial market was growing. In the first quarter, Brazil had record productivity, increasing output per associate hour for the region by 6% in the quarter. Recognized here that economic volatility may inhibit growth in the future, in Latin America.

With regard to Asia, as Rich indicated earlier, we're now consolidated South Pacific Tyre into Asia's results. In the first quarter of '04, SPT added 180 million of sales, more than doubling the sales level for the Asia region. SPT had a loss of 2 million in the first quarter, and as Rich said, that loss was generated by $5 million charged for inventory due to consolidation.

In Asia overall, we experienced growth in China and India, price increases are sticking in most Asian countries, we've obtained the important Runflat business with BMW in China. The China and India growth, however, was offset by lower volume in Indonesia and the Philippines.

With regard to segment operating income, positive price mix resulted in a $2 million improvement. Savings from Six Sigma, quality and technology programs contributed to lower conversion costs for the quarter. And of course, raw material costs increased.

As we look at our Engineered Products business, I'd like to offer an observation, a personal observation, about our people in this division after spending time with them at their national sales conference several weeks ago. I would simply say I was hugely impressed with the attitude, capabilities, and business accruement of this entire organization. They are attacking their business with a courage that exemplifies the spirit and direction of our turn-around efforts.

It was clear to me that the sales force in Engineered Products no longer see themselves simply as sales people. They see themselves as businessmen and businesswomen and from my experience, good ones. That's a major step forward for us. For the quarter, sales were up 9% in Industrial Products, such as conveyor belts and industrial hose, and more than doubled on the military side of the business.

Sales of Original Equipment products, such as automotive belts, coolant hose and molded products were up 10%. However, sales on the automotive replacement business -- these are products such as automotive belts and hose for the after market were off 10%. This was due to the purchase of inventory previously held in consignment by a significant customer during the first quarter of 2003.

Higher volume accounted for approximately a third of the Engineered Products improvement in operating income, the total 31 million. And cost out and Six Sigma benefits are continuing to contribute to our growing profitability. We did experience a slower-than-anticipated start-up in our Mexican manufacturing operations. But are now climbing the ramp up that we expected to climb.

Sales for the chemical business in the first quarter grew 20% while segment operating income grew 34%. Tire Polymer demand grew more than 9%. Non-tire products grew 5% in the quarter. Profitability here was aided by higher pricing, improved mix, and higher productivity. Our chemical plants are running at capacity, creating significant cost improvements for us. We're experiencing tight supply on raw materials. And we continue to explore the sale of the chemical business.

I wanted to provide a second quarter 2004 update with my major points here listed on Slide 16 for you. Our new products around the world are driving improved volume, pricing, and mix. The Goodyear brand continues to perform very well, driven by strong support of our dealer network, as well as continued growth in high performance, Ultra High Performance and four-by-four markets in Europe. In commercial tires, the OE business continues to be strong and the replacement business is now picking up.

We have completed successful Union negotiations in Turkey, Brazil, and Poland here in the second quarter. We are seeing share declines, as I mentioned earlier in our North American private label business, primarily based on our decision to be selective in the business that we chose to source, but that's a positive for profitability. And a negative on sales volume during Q2.

Raw material costs continue to be high. We estimate it will be up year on year approximately 6% in the second quarter. Although the markets in North America and Europe are running ahead of our forecast, we still believe that the year will end up close to our forecast, and here you can reference the table at the bottom of Slide 16. We continue to expect strong operating earnings growth, driven by volume, price mix improvements, and cost reductions in all our businesses during Q2.

Our seven strategies continue to drive our actions. Why? They are quite simply generating improved performance in both market position and financial results. As we indicated previously, there is still much work to be done, but we're attacking our goals and the outstanding issues that I touched on earlier, very aggressively.

We entered 2004 with business momentum and high expectations, and there is no reason for us to alter that outlook. The first quarter provided measurable proof of our operating progress, and we expect that progress to continue in the second quarter. I want to thank you for your attention, and now, Barb, I think we can open the call for questions.

At this time, if you would like to ask a question, please press star then the number 1 on your telephone keypad. Your first question comes from Steve Girsky with Morgan Stanley.

Good morning, everybody. Can you hear me?

Yes, we can. Good morning, Steve.

A couple things. I want to try to get into this price mix issue. You said revenue per tire was up 6% in North America, Goodyear brand was strong, Commercial was strong. It just seems like most of it's mixed and it seems like there's more mix than price. Is that accurate?

I would just say, Steve, that a significant portion of that total is mix, both business mix, consumer, commercial, but also mix in terms of brand and mix in terms of customer or dealer as well, but we are getting price in the consumer replacement area, and in the commercial area we're seeing a significant amount of price, pretty much aligned with what we announced.

Then, it just seems like if you have that much mix, the price should be -- the revenue per tire should be better than what we're seeing here.

I would simply say we were pleased with that increase, but this is one that follow-up with Barb and I think we can maybe by looking at some of the analysis, get you to why that's a good figure for us.

What about the FX impact on EBIT?

You mean for the quarter?

In Europe, Europe. West Europe? FX was favorable, you said, I think it was 14% or something?

Yes -- no, we said the Euro was up 14%.

The Euro was up 14%, that translates --.

Yeah, on the foreign exchange impact for us globally was 13 million. It's about $4 million in Europe.

And could someone just explain the Inter-SBU? It goes in above the line and then you pull it out below the line kind of thing?

Yeah, Steve, this is Rich Kramer. That's just the inter-company eliminations of the segments selling between each other.

So within the segments we were 33 million more and then we pulled it out down below?

Right. And that's the way the company has always done that.

Okay. All right, thanks a lot.

Thanks, Steve.

Your next question comes from Jackie Weiss with Merrill Lynch.

Good morning.

Good morning, Jackie.

I wanted to ask first about raw materials. Cost increased $30 million or 3% in this quarter. For the full year you're expecting 5 to 7%, so I'm just wondering if this quarter surprised you, if there's a seasonal reason that it was lower than your full-year expectations in the first quarter?

Well, Jackie, I would just go back and say you're right, we are expecting for the full year 5 to 7%. I additionally mentioned that for the second quarter I expect that to be in that range at about 6%.

Uh huh.

And yes, I can see why for the first quarter you saw a number that looks rather low to you, but we've assessed that, analyzed it, we're still comfortable with our 5 to 7% for the entire year.

Okay. Okay, that's fine. And you mentioned that you're looking at asset sales, you mentioned in your press release you're looking at asset sales. What are your priorities beyond the chemicals business which you've already made clear that you're interested in selling?

Jackie, we have not announced anything, and I won't announce here this morning any other of the potential assets sales. I'll just say in this area that we've been, I think, pretty comprehensive in our analysis and that we're looking at our portfolio for all opportunities and looking at potential options right now, but I'm not prepared to give specifics with regard to that. I don't apologize for that, that's just where we are.

Okay. That's fair. On capacity utilization in North America, can you give us a sense of how that's trending compared to a year ago? Particularly in light of how -- well, volumes are basically flat year-over-year, and you've mentioned that you are increasing shipments between regions and also are being increasingly selective in the business that you pursue in North America.

Okay, let me maybe start it off. Somebody else may have a comment here, Jackie. First, North America in the first quarter, we ran at about 93% of -- and I'll be careful here, because you can define capacity in different ways -- we ran at about 93% of the AOP, annual operating plan, manned capacity and slightly higher than that, 94%, throughout the rest of the world in the tire business.

Okay.

Okay? I think last year we were more in the high 80s with respect to capacity utilization. So clearly, one of the things that's driving our enhanced performance is better capacity utilization. Relative to global sourcing, we are also doing everything we can to ensure that we are filling our low-cost factories to the maximum amount. So that's kind of our short-term strategy there.

By low cost, you mean the low-cost ones in North America or globally?

Low cost period, but my comment was particularly emphasizing low cost globally.

Okay. Just one more quick one. Are you expecting to take any further rationalization charges this year or I guess in the second quarter specifically?

Well, let me -- I'll address your first question first and then I'll come back to the second quarter. It's clear that we're still on our path to take $1 billion to $1.5 billion of cost out of this company over 3 years, and given that path, that's gonna necessitate further restructuring and rationalization charges. In the second quarter, Rich, do we have plans? I think we have no plan for the second quarter to include any significant rationalization charges.

That's right. Jackie, there are no plans of that significant of a nature that we would bring to your attention at this point, but clearly to reiterate Bob's comment, we continue to look at a multitude of different things, both on smaller scales and larger scales going forward.

Okay, well thank you very much.

Thanks, Jackie.

Your next question comes from Ron Tadross with Banc of America.

Good morning, everyone. Can you hear me?

Yes, we can. Hi, Ron.

Okay, thanks. Could you just discuss in detail the Latin America price increases, and specifically, why we shouldn't just multiply what you did in the first quarter by four for the full year?

Okay. Well, let me do that, not in detail, but let me try to address that. Certainly we've had a situation in the fourth quarter of last year and the first quarter of this year where we've been aggressive on our pricing, you'll also see in some of the revenue per tire some mix impact on the revenue line, as we have two years ago, we made a very aggressive plan that we're now executing against to really hit the new, what is new for Latin America, their MRT, their radio businesses.

Remember in Latin America, they're radiolizing [ph] in the truck business, and we're now gaining share in that area and having a lot of market success in that area, which we weren't having. So there's a bit, on the revenue line, a bit of that transition that's occurring. That will continue, but probably not at the same pace that we've seen recently. But new products, again, back to my point. The reason I made the comments I made about innovation of new products as a strategy that we're now executing against, are driving a lot of that increase in Latin America.

We continue to feel that we will be successful, but yeah, I would not, for purposes of feeding your model, build in the kind of success that we had during the first quarter for Latin America. I made the comment about volatility in markets as well. Right now the markets were doing very well, the industry's doing very well, and we're playing off that strength in the industry, and as you know, Latin America can tend to be a little bit volatile in terms of up and down in the individual markets.

So the 34 million, is that mostly mix?

A significant portion again is mix, but a portion of that, a solid portion of that, is pricing as well.

When you say pricing, is that pricing on existing lines or just new --

That's price increases on existing lines.

Okay.

And that might be in the commercial -- that's true in the commercial replacement area. It's also true in the consumer replacement area.

Okay. And when did you start raising those prices? Like when should this anniversary itself?

Well, we started raising prices last year around mid-year.

Okay, all right. And then--

We can get more specifics later on that.

Okay. And then just finally on the sales here. Maybe I missed something, but you said 200 -- it looked like they were up about 750 million year-over-year. 200 was currency, 300 was pricing mix and volume. Was there another stub there?

Ron, yeah, SPT and --

Oh, that's right, okay.

T&WA got us another about 254 million of that increase.

Oh, okay, all right. So how much was the commercial truck? Where is that in there? Is that in the 300?

It's built into -- frankly, it's built into volume, it's built into price, it's built into mix.

All right, so can you give us a rough idea of how much that is of the 300? Is it a big portion or --?

Ron, it's really hard, I mean, we don't break it down like that.

Okay. All right, thank you.

Uh huh.

Thank you.

Your next question comes from Himanshu Patel with J.P. Morgan.

Hi, good morning. I've got two questions. First, can you give us a sense for your mix expectations for the next couple of quarters? I mean, this seems like a fairly strong quarter. Does it get sequentially better or worse or about the same?

Again, I've given the guidance that I wanted to give for purposes of this call. I would say that we are confident that we'll continue to get enhanced mix on a year-over-year basis.

Okay. And then, maybe -- could we touch a little bit on the balance sheet? Just some of the major debt maturities that are coming forward in '05 and '06, can we just get a sense of what the big ones are and the timing on those?

Sure, I'd ask Darren to cover that.

Yes, the couple of key maturities for next year, we've got two of the restructured bank facilities that will mature in April of 2005, and that is the remaining 680 million of U.S. revolving credit line, along with 650 million of European banks facilities. And in addition to that, we've got a Euro bond that matures next June, which translated to U.S. dollars is around 500 million. So those would be the principle maturities for 2005.

And then maybe one last one on SPT. When does that kind of move out of the red, or is there any expectation of that happening any time soon?

We have not talked to SPT's results in detail at this point, but I can tell you again, the net impact of consolidating SPT in our Asia segment was a negative $2 million, but that also was impacted by the one-time charge of 5 million, so, you can gauge the impact on that, and from a net income perspective, we really have not talked about where SPT is at, but it too carries I mentioned about $126 million of debt with it as well. So on a net income basis, it certainly has its share of interest expense.

Certainly from an operating standpoint, we expect SPT to improve.

Okay, but I mean, even if we add back that 5 million, it looks like it's got half the margins of your traditional Asia business. Is that a gap that we should expect will remain or does that -- are there plans to maybe converge that over time?

I'd simply say that, again, we're working operationally with them on both the revenue side of our profitability equation and the cost side to get up to those levels.

Okay, thank you.

Thank you.

Your next question comes from Jeff Scugland with UBS. Jeff, your line is open.

Jeff, are you there? I think we should move on, I guess.

Your next question comes from Kirk Lutek [ph] with J.P. Morgan.

Kirk Ludke.

Hi, Kirk.

Good morning. By the way, thanks for the additional disclosure. This is really helpful.

Good, I appreciate that! We're working hard at it.

I just wanted to -- you didn't affirm some of the full-year guidance that you rolled out on the last call. So I just, I wanted to make sure that we're still on the same page. You think raw materials will be up 5 to 7% for the year? Is that still a good estimate?

Yes, that is still the best estimate we have.

And 440 of cost saves, is that still--

That's still valid.

Okay. How do you think the cost saves will roll out and how do you think the raw material -- I mean, you gave a little bit of guidance for, up in the June quarter of 6%, but is there a way that we can kind of contour those two items, because they're pretty big numbers.

I see, your question is fundamentally, how do we place that in the model by quarter?

Yes.

Kirk, I think it would be easier if we try to work through those offline. [technical difficulty] it's obviously built to the year, because as raw material costs went up, as oil and natural rubber went up in the year, at the beginning of this year through, it will build towards fourth quarter, but we'll take it offline.

Plus, given the restructuring that we did last year. Certainly you haven't seen the impact of that in Q1. You're gonna see that in greater magnitude here in Q2 and then following Q3, Q4.

Okay. Is there -- I'm looking at Slide 16. I see a lot of positives here for the June quarter, and these numbers at the bottom, these are industry forecasts for the full year?

Yes, they are.

Is it possible that you could give us your estimates in some of these more important categories for the June quarter year-over-year, particularly consumer replacement?

Well, I will simply say that what we're seeing so far is that consumer replacement's running somewhat stronger than these annual forecasts, and probably not as strong as the first quarter. So, to try to bound that, and as I said, the commercial markets continue to move ahead, both on the OE side and the replacement side.

Okay. And then, I guess the last thing I'd like to touch on is, is there anything in the March quarter that I guess was exaggerated? I know you've got a lot of new products, you've reinvigorated your dealer network and you've already said that you expect the year-over-year volume increases to slow, but is there anything in there that we should be aware of in terms of anything that really stands out as kind of boosting these March quarter numbers on the volume side?

Other than, I would say other than a somewhat stronger industry growth that we might anticipate for the rest of the year, I don't think there's anything -- and we've tried to disclose everything that hit us on the negative side, investigation, Philipsburg fire, those kinds of things and the dollars associated with those. I can't think of anything. Rich, from your standpoint?

Kirk, the only thing I would ad is you've heard us talk in the past about getting back and focusing on our core Goodyear brand and our particular channels that we've sold that through, and I think if I point something out in Q1, it's really executing against what we said we were gonna do in that particular part of the market. And obviously, our hope is to continue that going forward with strong mix, strong branded product, the Assurance wasn't in the first quarter, so you will see that moving out. And certainly if we go to the geographies around the world, I think you'd see a similar focus on mix and branded product.

Okay. And then one last: What are these two VIEs do in terms of D&A for the year? Just roughly what do you think?

Kirk, I think I would have to come back on that. T&WA's going to be negligible.

Yeah.

For SPT Barb can answer that one for you.

Okay. I appreciate it. Thanks a lot.

Thank you.

Your next question comes from Monica Kinney with Morgan Stanley.

Good morning.

Good morning, Monica.

I was wondering if you could talk a little bit about the capex expenditures in the quarter. I mean, would you say this is a normalized level? Were they lower than you had anticipated? And are you still standing by the close to 500 guidance for the year?

Monica, yeah, just relative to Q1, they're lower. You're likely to see capex higher even in Q2, and certainly for the entire year, we're still on the guidance level that we were talking about before of order of magnitude 500 or slightly below that figure. I might mention, just because a number of people have asked this in prior calls and in prior conferences, we are being selective in our capex, but we are doing the kinds of things that are essential to do, and we're getting that job done with, I'll say a little less money than we might have historically, but we're getting that job done in terms of new products and the support we need for new products. The quality initiatives that we needed of being funded, and significant activity on productivity as well.

What would be a more maintenance level of capex? Like for the 488, how with you split that by, growth, capex and new products versus maintenance?

Rich, maybe you could comment?

Monica, the maintenance capital is in the range of about $250 million a year. So, the incremental 250 then would go to a variety things related to productivity, as well as quality initiatives, and those dollars are being spent where we think we can get the most return in the marketplace the quickest at this point in time.

But we're being much -- I would say we're being more aggressively analytic than we've been historically in the capex area.

And if you didn't have constraints in the credit agreement, what would be a more normalized level, or is this a level you really would be spending?

Monica, this is Darren. Based on the capital markets financing that we completed earlier in the year, we've actually gotten additional permitted capital expenditure limits under the agreement, so our limit under the agreement is more like a 770 million now. So, when we say we're gonna spend a little less than 500, then you can see the loan agreements themselves don't provide any sort of practical limitations.

And frankly, Monica, we're also virtually, as we speak, looking at the '05 and '06 capital budgets. So, those reviews are underway, but certainly not completed at this point. We've got a lot of tough decisions to make there yet ahead of us.

And in terms of North America, do you -- I guess one question is, it looks like if you were to take out FIN-46 impact of sales, sales were relatively flat sequentially. Should we have expected -- what am I missing in that sequentially --?

Well, again, I come back to the comment that I made, which was that we've given up some volume in what I'll call the private label business in consumer replacement. We did that knowingly. And we did that because we think both in the short-term and the long-term, that that decision will drive better economics for us in that business. And yet we're up in the branded business in consumer replacement, and as we indicated, in the truck business we're well up in the OE side of that business and in replacement. Now the market's starting to turn and we'll certainly follow that market growth.

What I was asking --

We have some tradeoffs is what I'm saying that we made.

Right. I was asking about operating income. I think sequentially, I think last quarter it was a negative 16 in North America and now it's a negative 32. So I was just wondering, sequentially it got worse on the flattish sale --

Let me at least start the response on that and Rich, you might want to comment.

Sure.

Certainly if you took our own retail business, there's seasonality. Fourth quarter to the first quarter. There's also a fair amount of seasonality here on mix. So that if you looked at our units in North America quarter to quarter, OE was up, OE consumer was up, consumer replacement down a bit. OE truck was up, and truck replacement down a bit. But those are not fundamental changes. Those are a function of seasonality.

We also, as you may remember last year, changed our vacation policy, which was a positive increment in 2003. It's not in '04, it's a negative because we don't have that benefit. And I don't know, Barb, do we give that number? Do we quote a number there? It's $6 million. Then we had a little bit of increase, as I mentioned, in advertising in North America to really drive not only the Assurance family of tires -- I should probably make this point -- but also because we feel the Assurance family of tires will have a halo effect in our marketplace here in North America across the rest of our key product lines.

So then the last question is, when would you expect North America to break even or better or profitable? Is that next quarter?

Monica, I'd simply say there that I'm not giving guidance in that, but as I said, that's certainly our goal. Our goal is to make this a profitable business for us, and we're making progress towards that end. Not towards that end, towards that step. I don't mean that minimal profitability is the goal for North American Tire, we're not viewing it that way.

Thank you very much.

We'll take one more question.

Chris Ceraso with CSFB. Chris, your line is open.

Yeah, hi, can you hear me?

Yes, I can, Chris.

Okay, thanks. It's Chris Ceraso at CSFB. Most of these things have been touched on. Maybe if we can clarify a couple of things. Barb, you mentioned that sort of the cadence of material costs will be on an upward trend as you go through the year. For 2005 then, do you expect material costs to be higher or more of a headwind in '05 than in '04?

I think it's difficult to comment on '05 yet. I mean, we just haven't done forecast yet for '05.

And certainly if we could, I would just say that we're constantly looking at this, but we're not confident in -- if we can determine what the price of a barrel of oil's gonna be and what the price per pound on natural rubber in '05, we could give you a forecast, but there's a lot of variability in that forecast in our minds today.

But is it -- what is it, a 6- to 12-month lag between when material prices change and when you feel it in your P&L, and just based on how prices have trended through the first six months of the year?

Chris, that's about right. It depends on region by region, but North America, if you think about it, geographically, it can be about a 9-month lag before that natural rubber in particular finds its way through our cost of sales.

So most of your costs for '05 you should have a decent feel for at this point?

With respect to parts of natural rubber. I mean, that cost increase that we talked about in terms of potential 5 to 7% growth year-over-year in '04 is going to find its way into our inventory at end of December, so yes, some of that certainly will end up in '05, if that's what you're asking. But you're talking there about only a portion of what's gonna impact our total raw material costs, because the other type of costs, the inputs we have from synthetic rubber, from all the other material that's used, like that, carbon blacks [ph] and the like, that drag is certainly much shorter than that, maybe three months on that.

And then if you could just catch me up on the sort of the scope of the overall restructuring charges, what's the expectation to get you to that billion or billion and a half in cost savings and how far are you down the path? How much is left?

Barb, could you comment there in terms of the second question. The first question, Chris, we don't talk -- we're not prepared today to talk about the future restructuring charges. Barb, maybe you could cover the second part of that question.

I think on our year-end slide, Chris, we talked about 440 million coming through in 2004 on top of like 180 million in the first quarter, or in 2003. So, with that kind of guidelines, we're about $620 million, so we're about halfway there with all the, not just the rationalization, but cost savings that we've put in place. We're continuing to work on those going forward.

And I would just say with regard to those numbers, they are not satisfactory to me. Okay, that's where we are at present, but we're working these numbers weekly.

Next one on the Assurance. In the slide on North America, you noted $5 million of incremental costs mostly associated with advertising. Is there incremental profits associated with that in the $25 million or does that not start until the second quarter when you get more volume?

We will not see the profit impact until we play this out during the course of the year. Just remember, again, we started in that Assurance family of tires, the comfort tread, which is doing very, very well. We didn't start shipping until March. And the triple tread, which is also doing well, we really didn't start shipping until April. Okay? So, you'll start to see the revenue side of this equation hit in Q2 and Q3 and it hit significantly here in Q2.

Thank you very much.

Thanks, Chris.

I would now like to turn the call over to Bob Keegan.

I'll just make a short comment here to try to summarize where we are. I believe it's clear that we're making considerable progress. Our operating results have improved considerably as a result of strong volume, improved pricing, a richer product mix, which is primarily a function of new product, but is also a function of just better economics in terms of the business we choose to select, and our cost reduction efforts.

These actions link back to the strategies we're implementing to improve our core business economics. And while challenges remain, we're pleased with the continuing success of our turn-around strategies and with our progress to date. And I want to thank you all for joining us on the call today.

Thank you.

This does conclude today's conference. You may now disconnect.