Goodyear Tire & Rubber Co (GT) 2004 Q2 法說會逐字稿

Good morning. I would like to welcome everyone to the Goodyear's second quarter 2004 financial results conference call. All lines have been placed on mute to prevent any background noise. After the speaker's remarks, there will be a question and answer period. Thank you. Ms. Gould, you may begin your conference.

Thank you. Good morning and welcome to Goodyear's review of second quarter results. Our discussion this morning will be available by replay after 2:00 eastern daylight time by dialing 706-634-4556, or by listening to the webcast replay on investor.goodyear.com. The slide presentation is available in adobe or [inaudible] that follows your conference call comments, is now available on our website. For your models, details on FIN46 consolidation of the South Pacific Tire and tire field assembly are included in the last page of the presentation. All the 2003 numbers are restated, and we filed our 10Q for the second quarter.

We have filed the 10Q for the second quarter and our amended 10Qs for the second and third quarters 2003, on Tuesday, August 3rd. I'd like to remind this morning that our discussion may contain certain forward-looking statements based on current expectations and assumption that 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 it's form 10K for the year-ended December 31st, 2003 , and form 10 Q for the quarter ended June 30th, 2004. The company disclaims any intention or obligation to update or revise any forward-looking statements rather as a result of new information, future events or otherwise.

On call with me today is Chairman, CEO and President, Bob Keegan, CFO, Rich Kramer and Treasurer Darren Wells. If you look at the agenda on slide two, Bob will provide an overview of the second quarter performance. Rich will discuss the specifics of our second quarter financial performance, as well as comment on our liquidity position and cash flow. And then Bob will return to cover the SBU's performance for the second quarter and provide an update for the second half before we open the call for questions.

Now I'll turn the call over to Bob Keegan.

Thanks, Barb, and good morning everyone, and thank you for joining us us on the call this morning. We are pleased to report our second quarter results in a timely fashion, and to tell you that all 7 of our business units reported an operating profit during the second quarter. As you look at the segment operating results for the second quarter compared to 2003, you see an increase of $137 million, which is nearly double the 2003 operating result. And for the first half of 2004, segment operating income totalled $502 million, compared with $191 million for the first half of 2003. This quarter's improved results were driven by a continuing and relentless focus on the 7 key strategies that I have previously outlined for you. We are now getting traction in our North American Tire turn-around plant. And you'll see that as we discuss their second quarter results in a moment.

Our product and brand mix is improving. We are having success in pricing and in continuing to drive our cost down. And our new products are having a major impact in the market. Frankly, we underestimated the overwhelmingly positive reception for these products by both our dealers and the end user. I will elaborate later in my remarks. The tire industry overall is experiencing strong growth, and while we don't believe the first half growth rates are sustainable, we do expect growth to be solid for the full year. We are fully aware of the significant challenges that remain for us and we continue to address these challenges with specific strategies focused on reducing our debt level and reducing our unfunded pension obligations.

We recently announced our intention to refinance our $680 million revolving credit facility, the new 500 million senior secured funded credit facility is expected to mature in 2007, and will close here in August. We continue to explore potential asset sales to further reduce our obligations, and ultimately will seek increased equity funding to improve our credit profile. Our progress from where we were 18 months ago is gratifying, but we realize fully that it is critical that we continue to show year-over-year improvement and that remains our primary focus as a company. As we assess our progress in the second quarter of 2004 on slide four, overall revenue per tire was up over 5%, excluding the impact of FIN46 and exchange. We showed solid operating income and positive cash flow from operations for the first half of 2004.

In North America, the industry grew 7% for the quarter in consumer replacement and 5.5% in commercial replacement. The commercial OE market improved 36%. This growth was supported by positive -- a positive sales results of the Goodyear brand on our new product offerings in those markets. The growth in truck is not just a North American trend. Worldwide the commercial truck market is growing. In Europe, the OE market is up 11%, in Latin America the entire market is growing 16%, and in Asia, the replacement market is up 5%. Our overall share in the private label business in North America stabilized in the second quarter. The choices we made in this business have resulted in improved profitability for us.

We have developed a plan to build the struggling Dunlop business where we experienced share decline in Q2. A portfolio of new Dunlop products and marketing programs will be rolled out at the Special Equipment Marketing Association Auto Products Show in November. The momentum continued in our other SVUs with strong industry results, solid volume gains, and favorable price mix for Goodyear. Sales in our International Tire locations increased more than 5% excluding the impact of foreign exchange and the FIN46 consolidation. Non-tire sales increased more than 20% compared with 2003, again, excluding favorable foreign exchange.

Our operating income results were generated by -- and I would say most critically -- North America Tire making an operating profit, rebuilding of strong relationships now with our dealers in North America, and the continued sales momentum driven by the strength of the Assurance family of tires. Overall, our global product launches have been successful and price increases are holding. Our strategy to improve product mix, and the focus on branded tires continued to contribute positively to profitability. Our selective [inaudible] strategy in OE is generating improved profitability. We've also benefited from continuing cost down actions driven by our emphasis on [Six Sigma], lean manufacturing, and improved capacity utilization.

In Turkey, Poland and Brazil, we successfully concluded labor negotiations during the second quarter. On a negative side, we saw raw material costs up year-over-year 4%, with energy costs also significantly higher. I'll just sum up by saying overall clear progress is being made in improving the profitability of our company.

I'd now like to turn the call over to Rich Kramer, who will take a closer look at the second quarter financials. Rich.

Thank you, Bob. And good morning everyone. Before I begin my comments on the second quarter results, I'd like it remind you that the company adopted FIN46, effective January 1st, 2004, which required us to consolidate entities previously accounted for under the equity method of accounting. These subsidiaries include South Pacific Tire, our Australian joint venture, and Tire Wheel and Assembly, a wheel mounting business, which is part of our North America Tire business. This accounting change increased sales and segment operating income in the quarter by $327 million and $2 million, respectively.

Looking at the 2004 second quarter, and particularly referring to slide five, you can see that we've made significant improvements in the quarter versus the prior year. In particular, worldwide tire units increased by 2.2 million to 55 million units. This was largely driven by growth in the European union and Latin America businesses segments, as well as a consolidation of South Pacific Tire into the Asian region. SPT accounted for 1.3 million of the unit increase. Total sales were 4.5 billion, which is a 20% increase over the prior year.

As I just indicated, the consolidation of SPT and TW&A contributed 327 million or about 40% of this increase. The impact of foreign currency translation was a favorable $86 million, while volume price mix added approximately $350 million. The impact of volume price mix was primarily driven by the increased sale of premium brand tire units and commercial tire units in virtually all of our operating businesses, but in particular, in North America, Europe and Latin America. Engineered products also had a favorable impact from volume price mix.

Gross margin improved 1.5 percentage points in the quarter, again driven by improved price mix and volume, as well as the impact of cost cutting actions taken in prior years. Raw material cost increases of approximately $40 million offset the savings generated from prior period rationalization actions and improved plant productivity.

Total segment operating income improved by $137 million to $286 million. This resulted in a segment operating income margin of 6.3% to sales. The $137 million improvement is an increase of over 90% when compared to the prior year's segment operating income of 149 million. The significant year-over-year change was driven by improved operating results in all 7 of our businesses. Looking at the bottom of slide five, I am pleased to report net income for the 2004 second quarter of $25 million or 14 cents per share. This is compared with a net loss of $53 million or 30 cents per share for the second quarter of 2003, with 2003, of course, being reported on a restated basis.

Moving to slide number six, let's look at the difference between segment operating income and earnings or loss before taxes line for the second quarter. The change in interest SVU income relates to increased shipments of tires between operating units and higher raw material costs which are reflected in higher selling prices to the tire business from the chemical business. The $10 million charge for rationalization in the second quarter of 2004 was due to restructuring of the retail and sales organization in Europe. In addition, there was a $2 million gain on the sale of assets to North America and the European Union. The EPS impact of these items was a net reduction of 4 cents per share.

The comparable rationalization, excuse me, an asset sale charge in the second quarter of 2003 of $30 million was comprised of three items, $15 million of rationalization charges in Europe, Latin America and engineered products, for salary staff reductions, and a consolidation of manufacturing operations. An $18 million loss resulting from the company's sale of 20.8 million shares of Sumitomo stock and a gain of 3 million on miscellaneous assets during the 2003 quarter. Minority interest expense increased in the quarter due to the strong performance in both the European Union and Latin America, as well as the consolidation of SPT.

The company also recorded a $12 million charge in the 2004 second quarter for general and product liability for discontinued operations. This related to Entran II claims and asbestos claims, net of probable insurance recoveries. For the second quarter of 2003, expense of $53 million related to Entran II claims, as well as a $62 million benefit related to probable insurance recoveries net of asbestos claims, again, or a recorded for net impact or benefit of approximately 9 million in the 2003 quarter. The current quarter also included a $9 million charge related to professional fees associated with the restatement and the ongoing SEC investigation. The EPS impact of that charge was 5 cents per share.

Looking at the bottom of slide six, excuse me, the company is reporting earnings before taxes of $86 million in the second quarter of 2004, versus a loss of 39 million in the same period of 2003. This is a year-over-year improvement of $125 million. The company did record tax expense of $60 million during the quarter. This tax is related it income earned in our International businesses in the current quarter at an effective rate of approximately 34%. As you may recall, the company does not record a tax benefit for domestic losses, consistent with the decision to record evaluation allowance against its deferred tax assets in the fourth quarter of 2002.

Turning to slide seven, our cash position at the end of June was 1.4 billion, including 85 million of restricted cash. When adding to this our available credit under our current revolving credit facilities and undrawn lines, our liquidity at June 30, 2004 totals approximately 2.2 billion. I should point out that this amount excludes proceeds from our recently completed convertible security offering of $350 million, which we received in early July. Year over year, we have over $500 million of additional liquidity than we did on June 30, 2003. And as you can see, our cash position continues to remain strong.

The end of the second quarter tends to be the company's low point for cash during the year. Historically speaking, and again true for the current year, cash is used to build working capital in the first six months of the year. As we look ahead to the balance of the year, we expect the cash and liquidity will improve by year-end.

I might also take this opportunity to comment on why our liquidity position is so important to us. First off, we feel conservative financial management supports our turn-around effort. Secondly, we have over 1.6 billion of maturities due within the next 12 months, excuse me, 12 months which we continue to address as part of our refinancing strategy, which I will discuss discuss in more detail momentarily.

And finally, our liquidity position is important to us because of our required pension contributions, which we have already begun making. As you may recall, our 2004 domestic pension funding requirement is approximately $160 million and our 2005 funded requirement is currently estimated at between 325 and $350 million. We will continue our conservative liquidity management and focus to ensure all constituencies are confident in our strategies to meet our financial obligations.

Moving to slide eight, you will see a summary of our financial restructuring plan. Some of you may recall that we showed you this slide when we were released our year-end 2003 financials. I can tell you, we have been executing according to this multi-step financial restructuring plan, which we began over a year ago, and we continue to do so. In fact, our third quarter results will reflect the impact of two recent transactions. First, a highly successful convertible notes offering, which delivered $350 million of additional capital, which supports our ability to meet upcoming obligations to facilitate refinancing of secured credit facilities.

As referred to earlier, since this transaction closed on July 2nd, the proceeds do not appear on our June 30 balance sheet. Second, we are in the process of refinancing our U.S. revolving credit facility to a September 2007 maturity. By completing this part of our refinancing plan, we will have addressed the 2004 financing requirement included in our contract with the United Steelworkers. Again, these actions are consistent with our stated goal of opportunistically accessing the capital markets, as well as other sources of financing to address our upcoming debt maturities and pension obligations.

Turning to slide nine, the reduction in cash from year-end of 1.6 billion to 1.4 billion at the end of June was partially used to fund working capital. In the first half of 2004, the company used approximately $300 million for changes in assets and liabilities, net of acquisitions and dispositions. Which is about equal to the use in 2003. Year-to-date cash flow from operations was a positive 7 million. Excluding the impact of the 2003 increase in accounts receivable resulting from the cessation of our accounts receivable sales program, the year-over-year change in cash flow from operations was primarily generated from a nearly $200 million improvement in net income.

Year to date, capital expenditures total $165 million. I'll point out that we are still planning on spending just under 500 million of capital expenditures in 2004. Cash flow from operations has been a bright spot for us through the first six months of 2004. This is especially positive since the company is typically a heavy cash user during the first half of the year.

As Bob mentioned, and as I hope the past few slides have depicted, our second quarter performance carried forward the momentum evidenced in the first quarter. Now I'd like to turn the call back over to Bob to discussion the operations further and to give an update for the third quarter.

Thank you, Rich. We'll refer to slide 10. Before I get into the details surrounding the improved performance of the North American Tire business and our other businesses, and the momentum that is building in our company, I want to try to put the market response we are seeing to our Assurance Tire family into perspective for you.

There is a buzz in the market today that's far exceeding our expectations. and frankly. those of our dealers. And our dealers enthusiasm for these new products is helping drive grass roots consumer support for Assurance tires. I am thoroughly convinced that the impact the Assurance Tire family is going to be far greater than we ever had anticipated. Not only for what is happening directly with Assurance, and that's important, but the overall impact or halo effect as I've spoken to you about before, that Assurance is having on the overall Goodyear brand.

Now, rather than me simply telling you what my beliefs are, and they are passionate beliefs, and I've mentioned to you before, that I have tremendous confidence in our ability to differentiate our products and to differentiate our brands, I wanted to share with you a few unsolicited and representative comments received from both our dealers and our consumers.

One of our dealers on the east coast recently shared with me that he had one retail store alone that sold 27 Assurance tires in a single day. For those of you who that are familiar with tire retailing, you know how significant that number is. It's this type of success story that keeps the renewal orders coming in at a steady pace as dealers sell out activity to consumers accelerates. Word of mouth is also spreading very quickly. That's buzz I talked to about, among consumers on their post-purchase experiences with Assurance. And I'll just mention several of these.

A driver in Kansas wrote, "I feel they are truly the best tires I have driven with. The price was a little high, but well worth every penny." That's a perfect comment for me, the price was a little high, but well worth every penny. A consumer in Texas with a PT Cruiser wrote, "Hats off to Goodyear for the Assurance tires. These tires are like riding on a new road, very smooth and quiet." A Lexus owner In Las Vegas wrote, "Never thought I could be excited about tires. Never believed it could make such a difference. I feel like I now have a new car." A California Honda owner wrote, "I would recommend these tires to anyone looking for the ultimate commuter tires. These are by far the best tires money can buy if your main concern is a quiet and comfortable ride." A driver in Florida wrote, "These tires are great for all driving styles. Goodyear has out done themselves. I don't work for Goodyear, or own the stock, maybe that will change."

These are only a few of the -- few comments but there are thousands more where these came from, from our consumers and from our tire dealers. And as I've indicated previously, we are ramping up production of assurance now and we're now manufacturing in 4 plants and are adding new sizes as quickly as we can to meet the demand. I will guarantee you we'll see more and hear more about Assurance in the near future. Well, we'll start to market and promote the all-weather condition performance of the Assurance with triple tread technology, and we'll do that as we move into the fall and winter driving seasons.

I'll move to slide 11, and as I indicated earlier, North American Tire made a profit in the second quarter. Obviously critical for us. The consumer replacement industry grew 7% in the quarter. Commercial replacement, 6% and commercial OE, up 36%. The OE consumer market for the quarter was flat. We benefited from the strong replacement market growth. Our replacement units increased 6%, with the halo effect of Assurance contributing to an overall increase of 10% in Goodyear branded consumer sales. In addition to the Goodyear brand share gains, our market share in the private label business stabilized in the second quarter after having, as you recall, fallen a bit in the first quarter.

We have developed plans to rebuild the Dunlop brand which continues to be weak here in the second quarter. The Volvo, Freightliner and Fleetwood RV contracts, that we signed last year, fueled solid commercial growth as we gained share in the commercial OE segment. Revenue per tire improved 6% year over year, and 4% compared to the first quarter. Due, primarily, to share gains in Goodyear-branded tires in the broad market segment, continued growth in the dealer and mass merchandiser channel, and higher growth in the commercial market. Of course I've already discussed the Assurance Tire launch success.

In terms of profitability, richer price mix accounted for 44 million of the improved operating result. Price increases are sticking in the commercial business, and a portion of the announced pricing in the consumer replacement business is holding as well. The closure of the Huntsville plant in December, and other rationalization actions contributed 21 million of savings in the second quarter. Raw material costs, on the other hand, increased by approximately 4%. Advertising costs were up $11 million, driven by the Assurance family product launch, and as I said, the products are delivering results in the marketplace.

Overall, the quarter in North America represents an encouraging one for us as the team is executing against its plans to revitalize that business. Now, earlier this week, we notified our dealers of an across-the-board price increase in North American Tire, ranging from 2 to 5% and this increase will be effective September 1st. It covers all brands and all product categories.

We'll move to slide 12. Our European Union Business unit had another solid quarter with segment operating income up 51% and a 10% sales increase. The consumer replacement market was up 4%, the commercial OE market grew 11%, and we gained share in both of those markets. Although the overall consumer OE market softened in the second quarter, the critical German market was quite strong. We were able to gain share and improve our profitability. Ultra high performance sales continue to be strong and heavy winter tire sales have already begun. Our price increases are sticking. As previously indicated, our launches of the HydraGrip and Sports Maxx tires are providing a foundation for solid growth and I would say it is well critical acclaim in Europe.

Referencing profitability, price mix contributed $13 million to the increase in segment operating income. Staff reduction throughout Europe, and the closure of the [Wolver] Hampton Passenger Tire facility benefited profitability. However, raw material costs were up, as were SG&A expenses, and those SG&A expenses were -- that increase was due to increased advertising and selling expenses supporting the launch of our new products. The Eastern Europe, Middle East and Africa business drove market share gains in both the commercial replacement market and in OE. Lower OE volume in Poland and lower volumes in the Middle East were partially offset by higher units in Central and Eastern Europe and in Turkey.

Once again, in this region, price increases are sticking in most countries and we have a significantly improved high performance mix. We are experiencing much as in Western Europe an early start to the winter tire selling season. Segment operating income increased 33%. Generating an operating margin of more than 15% for the first half of 2004, 15%. The improved volume price mix accounted for a 19 million improvement in segment operating income, labor discussions in Turkey and Poland were completed. Strong manufacturing performance contributed to profitability across the European markets. Now, our SG&A expenses were higher due to continued expansion of our business into Russia, Romania and the Middle East, as well as marketing and advertising support again through new product launches.

I'll just reference slide 14. Latin America had another outstanding quarter, driving a 20% return on sales. Our aggressive pricing actions are sticking in the market. We gained share in the high growth consumer replacement segments. We are having a bit of difficulty meeting the needs of the fast growing commercial truck market. This is product availability issue for us. And in July, we announced a $50 million expansion to the Colombia plant for manufacturer of radial truck tires for the Latin America market. Price mix actions contributed 23 million toward the improvement in segment operating income, and overall volume growth contributed another $5 million to profitability.

Asia pacific. Excluding the impact of the consolidation of South Pacific Tire into Asia Pacific's results, as both Barb and Rich mentioned earlier, sales grew 3% and profits grew 19%. Again, excluding that consolidation. In the second quarter of 2004, SPT, South Pacific Tire, added 173 million of sales, more than doubling the sales level for the Asia region. SPT had a segment operating income of approximately $1 million for the second quarter. In Asia overall, we experienced strong growth in the consumer replacement market in China and in Malaysia.

The Dalian plant expansion began production earlier than anticipated. We beat our target. The Farm Tire market is recovering well in India. And that's very important for us. The growth in share and consumer replacement tires in China and Malaysia, however, was offset by lower OE volume in China and replacement volume, lower replacement volume in the Philippines. Positive price mix resulted in an $8 million improvement in segment operating income. Savings from [SixSigma], quality and technology programs, and increased productivity contributed to lower conversion costs which were offset by higher raw material costs and increased expenses to support both our brand image and promotional advertising.

Engineered products had a strong demand for all products in the quarter, and I'll just itemize several of those. Sales were up 30% in the heavy truck air springs business, and more than doubled in the military segment of the business. Sales of original equipment products such as automotive belt, coolant hose, and molded products were up 9%. Sales in the automotive replacement business, products such as automotive belts and hose for the after market, which were off 10% in the first quarter of 2004, were up more than 10% in the second quarter. All regions participated in this overall 23% top line growth.

Higher volume and improved pricing and mix contributed to the $12 million improvement in operating income for engineered products. Cost out and Six Sigma benefits are continuing to contribute to the 2 point increase in in marketing for engineered products. By the end of the third quarter, we should have most of the startup challenges behind news our Mexican manufacturing operations. That I mentioned on the first quarter call. Increased freight costs and rising steel costs partially offset the productivity improvements.

Slide 17. We announced that we are no longer exploring the sale of the chemical business. We did that on July 21st. We took an in depth look at the business and concluded it was worth more to Goodyear economically than it would be to a third party. Given the chemical division's improved earnings, we believe the cash flows and cost advantages Goodyear derives from this business, as well as its positive contributions to the tire businesses, outweigh the benefits of a potential sale. Certainly, the current and projected raw material markets also reinforce this decision.

I did want to take a moment just to compliment the associates in the chemical business who have worked so hard to maintain, and frankly, to improve their competitive position, their earnings, and their cash flow, over the past 18 months, while we were evaluating the potential sale, so thanks, from me to all of you guys in the chemical division.

Sales for the chemical business in the second quarter grew 24%, while segment operating income more than doubled year on year. Tire polymer demand grew more than 10%. Non-tire products grew more than 15% in the quarter. Profitability here was aided by higher pricing, improved mix, and much higher productivity. Our plants are running at capacity, creating significant cost advantages.

I did want to take a minute or two and just provide an update to our second half outlook and my major points here are listed on slide 18. Adjusting market growth expectations for the second half, is certainly timely. The North American replacement market is expected to be to 2 to 2.5% for the consumer market, and 1 to 1.5 for the commercial market. That's our forecast for the second half. The North American commercial OE market is forecasted to continue to grow at more than 30% for the second half. In Europe, the commercial OE market is expected to be up 7 to 9%. The European consumer replacement market, we anticipate will grow 2.5 to 3%, about twice the rate that we had originally anticipated for 2004.

As I mentioned, our new products around the world are driving improved volume pricing and mix for us. We expect that to continue in the second half. The Goodyear brand is performing well, driven by the strong support of our dealer network, as well as continued growth in ultra high performance and winter tire markets in both Western and Eastern Europe. We expect to grow with our selected private label customers.

Now, raw material costs, and I know this is a concern to all of you as it to us, raw material costs continue to be high. We estimate an increase of 5% in the third quarter. And we expect that interest expense and taxes will be at roughly the similar levels to the first half.

In summary, we continue to expect year-over-year operating earnings growth driven by volume, price mix improvements, and cost reductions in all our businesses. We are quite clearly making significant improvements in our turn around efforts, and our Q2 results should be seen as strong progress towards sustained performance. I want to express my appreciation to all of our associates worldwide and our customers and suppliers who are focused as a team, driving towards the goal that I've outlined with you before in -- of meeting our 7 strategic drivers of success. I want to thank you for your attention.

Rich, thanks for handing part of this call and we'll open the call for questions.

Your first question comes from Jackie Wise of Merrill Lynch.

Hi, how are you?

Good morning, Jackie. We're doing well, how are you?

Good, thanks. A couple of questions. First, on raw materials, your costs were up 41 million in the second quarter and I think 30 million in the first quarter. It seems like you're -- an on an annualized basis you're trending below your expectation for the full year of something around 300 or 350 million. What's driving this? Have you guys gotten lucky? Are you being conservative and sticking with your 5 to 7% full year outlook at this point?

Okay, Jackie, let me at least start the response here. Rich, you may want to contribute as well.

Sure.

I think in the first -- our projection for the year was consistently, and always, that our raw material prices would be increasing during the course of the year. I'd say the first half is slightly below our initial expectations that we had in our an annual operating plan, but with oil, and you remember, 80 to 85% of our raw materials are either oil or natural rubber derivatives, we're playing that as realistically as we can. We do not think we're conservative with the 5 to 7% for the second half of the year. I think that's a realistic number. Rich, you may have another comment.

No, I think that's a fair comment, Bob. Jackie, we always -- we always had in mind that our second half raw material impact was going to be worse than the first, and I'd tell you that's exactly what we're seeing happen right now.

Okay. Okay. Also, on the second half, industry demand comparisons are going to get tougher starting this quarter. And, you and lots of other manufacturers are planning on putting through further price increases. How do you feel that -- do you feel like there will be any impact from tougher comps on the markets willingness to accept further price increases?

Well, we'll -- Jackie, I would just say, you know, we always will wait and see relative to that. But in making that determination, we felt that it -- that the timing and the market conditions were such that these increases in, substantial part at least, would be accepted by the marketplace. And you're right, the comps are tougher. That's why I said that despite the fact that we've had had this very strong growth in the first half, both in North America and in Western Europe, we feel that's going to tail off a bit year on year during the second half. So we feel confident in both those sets of assumptions at this point. We'll see what happens here with pricing.

Okay. And last question, what's the -- what's the driver in your mind behind the private label stabilizations?

Let me go back a bit to the change in strategy that we -- that we decided upon in the second half of 2003. We said at that point that we can be a significant factor in this private label business. We've got to be more selective. We've got to really take a hard look at the analytics. We've got to take a hard look at who we're doing business with and what product lines we're doing business in. That selectivity, at this point, I think has led us to the position that we're at during the first and second quarter. You will continue to see us be selective here. All of that is focused on profitability and cash flow. And frankly, I'm less concerned about our share position in that overall category than I am about driving profit and driving cash flow, but there are key accounts where we're actually increasing share, maintaining or increasing. there would be some accounts and product lines where we would be decreasing. Overall I think we've got the right balance. You're kind of seeing that balance now if you look at both, the first quarter and the second quarter.

You're expecting stabilization to continue, it's not just the one-quarter?

I would say this, I would -- I'm not making a -- a forecast here in terms of share position. I'm telling you that our strategy is focused more on cash flow and profitability and improving those with tremendous tenacity here in the second half versus strictly the share position.

Okay. Thanks a lot.

Thanks, Jackie.

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

Good morning, everyone.

Good morning.

Just as a point of clarification, the 41 million increase in the raw material costs, that equates to about 1% roughly increase? Is that right?

No, that's -- Ron, the way we've calculated that is it's an approximately 4%.

Okay. That's right.

You've -- what you may be thinking is -- on an annual basis could be 1.

Okay. Right, yeah.

Okay?

Now, -- are you saying for the full year it's 5 to 7%, or the second half?

For the full year it will be in that range, which means we're going to see significant increases as we get late in the year.

All right. Because if you're doing 5% in the third quarter, you've got to go upwards of 10% in the further quarter. Is that fair?

Yeah, 10% might be a little bit high. But, yeah, directionally, you're correct.

Okay. And then if -- as it relates to the pricing, if I add up the numbers in the 10Q, it looks like pricing held by about $40 million from 1Q to 2Q. I'm talking about 2004. I'm guess, I'm wondering if that's accurate and if so, you know, when have you been rolling out these price increases? Have you been rolling them out over the course of the second quarter or the first quarter?

Well, remember the price increases that we started putting into the marketplace actually started late last summer. And there have been a series of increases since then. We've had increases late last summer, in December, here late in the spring and now another one for North America, as we said effective September 1st,. and that varies around the world a bit, okay. We're giving you -- that's the timing from a North American standpoint. The timing around the world varies obviously depending on market situations and seasonality.

So the acceleration from the first quarter to second quarter, was that just accounting related or is there something else -- in terms of how you account for the price increases?

Well, I think -- I think this is just -- the -- remember, the flow of those increases when we announce and when they're effective, it doesn't -- it doesn't play out exactly that way across all our businesses and across all customer sets.

All right.

It's more complex than that. I know we -- you know, I try to get a very straightforward explanation at times too, and it turns out they've got to push a lot of data to get there.

So is the second quarter -- is the benefit on the year-over-year basis, if I just add up all the numbers by region for the second quarter, is that reflective of what we should kind of expect in the third and fourth quarter then? In terms of a year-over-year run rate?

I think if you're looking at a number, you have a combination of both price and mix in that number and I know you've taken a -- taken a steps, say price is about 40 million. I think as we look forward, we should see similar increases as we go forward for the rest of the year. But remember, as well, as Jackie said in the earlier call, the comparatives versus the prior year will get tougher even on the amount of price we get year over year. Your question quarter to quarter though, we should see increases.

Right, right. Okay. Just finally, is there a chance the dealers will need to discount the non-Assurance inventory and if so, would that impact your P&L at all?

We're not seeing that kind of activity at all at this point. I think in the -- in the [inaudible] what's happening, the marketing and the advertising that we're taking to the consumer, Assurance Tires is creating a halo effect and we're seeing good through put on virtually all of our product line. Remember also, we targeted the Assurance tires, both the comfort tread, and the triple tread to get a particular segment of the marketplace where we were not particularly strong. Okay. So, probably having more impact on other people's tires than it is on ours.

Okay. Thanks a lot.

Okay. Thank you.

Your next question comes from [inaudible] of J.P Morgan

Hi, guys. Congratulations on the quarter.

Well, thank you. And good morning.

Good morning. I guess a clean number looks like excluding some of the charges in the gain about 23 cents in Q2. Is it safe to say, given momentum and given that Q3 is usually the strongest month, that we can look for EPS greater than what we saw in Q2?

Well, I'm not given guidance at that level here. I know you'd like it, but I'll just say we expect our year-over-year momentum here in terms of earnings and cash flow to continue through the second half of the year.

Okay. Fair enough. On the raw materials issue, that Jackie touched on, if we use that 300 to -- you know, 350 number as an increase for this year, is it -- that's assuming, you know, close to -- close to or more than 200 million, probably well over 200 million increase over the second half year over year, is that correct?

We'll let Barb respond to that.

No -- I think the number, you know, probably, we'd be looking -- you're right, if we were at the 300, 350. I think thank you take, you know, the 5% on the -- you know, about 4.2 billion of raw materials, it's closer to like -- should be more like 260 to 300 so I think that's probably more the number we're looking at.

And that's for the full year?

Full year, right.

Okay. And then quickly, have you guys heard anything lately on July shipments at all?

I'll simply say that July shipments look fine. They're on our annual updated annual plan numbers.

Okay. Thanks.

Remember again, that's a selling comment I'm making. That's our sales in, just to clarify. I'm not making a sell out comment. But I -- let me make one, because I know you're interested. In terms of resell inventories, we have no reason to believe that the retail inventories overall at this point in any of our markets are well above normal.

Okay.

Okay.

Another real quick one on capacity utilization. What is it -- what is the trending at in North America and then the rest of the world?

Well, it's -- in North America and the rest of the world, we're well above 90% capacity utilization. And it's very similar to what we said on the Q1 call, I think, that we're in the neighborhood of 93 to 95% capacity utilization.

Thanks.

You're welcome.

Your next question comes from Saul Ludwig of Key McDonald.

Good morning, guys..

Good morning, Saul.

Nice job there. A couple of this and thats. These professional fees, they're real money. Do they come to an end now that you've got everything buttoned up with your accounting?

Yeah, Saul, from -- at the level you've seen in the last two quarters, the answer is yes. Certainly, you know, we -- they will not go away but not -- probably not to the point where we're going to be talking about them in these releases anymore.

So they're going to be much less going forward?

Yes.

Okay. Next question, on the -- the monies that you charge for minority interest, the 20 million bucks or so, in minority interest, I think it was 20 million in the -- yeah, $20 million. And it was only $6 million in the first quarter, yet, your earnings and Europe in the second quarter were less than they were in the first. Your earnings in Latin America were less than they were in the first. SPT was [inaudible] and it's importance. Why did minority interest expense go up from 6 million to 20 million? Because it would -- would you have thought that based on the way your business trends were, where you have a minority interest partners, should have gotten less rather than multiples of more.

Yeah, Saul, as you know, there's a lot of accounting that goes into that number in terms of how the consolidation works. But, the answer to the question in a broad sense, by and large, SPT was a loss at the net income level in the first quarter where they made money in the second. So. by and large, that's the difference.

SPT had only $1 million of operating income after interest. How could they have made any money?

There was a tax benefit, Saul, in that line that helps. They made -- the -- both the T&WA and SPT had a net income of 4.4 million in the quarter.

How do you get from a pretax loss to an after-tax profit?

It's not a pretax loss. It was 2 million profit and there's a 2.4 million tax benefit.

Did they have interest, particularly SPT? Oh, no, that wouldn't be -- that would be at the consolidated level.

That's right.

Okay. So they had a tax benefit. Is that tax benefit going to continue in subsequent quarters, or sort of a one-time catch-up?

You can assume it's a one-time benefit.

Saul, we can walk you through the particulars if you like as well.

Okay. You mentioned that you begun to make some pension contribution. How much did you make in the second quarter? And what's left up to do?

Darren, you might want to respond to that.

Yeah, Saul, the required pension contributions started for us really in the second quarter and were relatively small amounts. So, the preponderance or most of the contributions of the 160 million that we've talked about domestically are occurring in the second half.

So small means single digit amounts?

We'll won't get that specific.

What's the big deal about?

The first half, yeah.

Okay. A lot of the product liability costs that continued to be an issue there in asbestos. Do you see them continuing at that same level or higher for the balance of the year based on the way things are blowing in that department?

Yeah, Saul this is Darren again. I would say that, you know, we've got a lot of disclosure, obviously now in the financials on product liability, and we've laid out with a high level of specifics the trends we're seeing in the asbestos claims, which, you know, remain a manageable liability for us, as a manageable cash level, available cash outlet. I will say this, in the second quarter we had about $12 million of cash expenditures for asbestos settlements. I would see -- that was an anomaly. We did settle a large number of claims there that related to malignancies. Those sort of settlements don't happen that often. So, I wouldn't see that as something that would indicate an on-going tren. As for other product liability items, I don't know that there's any -- necessarily any change in trends there.

So this $12 million number that we saw in the second quarter should be a smaller number in the third and fourth quarter, the way you see it now?

The -- you know, Saul, it's very difficult to predict --

I realize it's difficult. I'm just asking how you, how do you see it now? You might be wrong, but what's your best guess now?

I would tell you, as Darren said, that was an anomalies -- anomalistic charge in the first quarter. We would not, as we sit here today anticipate, we don't see those type of settlements on the horizon right now. But, given that this is the asbestos area where we have to project our liability on an incurred but not reported basis, meaning we have to accrue for what's ahead. And, certainly, as our cases go forward ,over the course of the balance of the year, you know, there may be a settlement there that makes my statement incorrect. At the end of the day, we're about 25 to $30 million in cash out the door for asbestos. And that's what I would tell you looking ahead, that's with a we see for the full year.

And then finally, what the retailers are telling me is, you know, they're getting hit with all these price increases. They complain that the big boxes have 60 to 90 day price protection versus maybe only 30 day price protection for the little old retailer, and they seem to be having a somewhat of a difficult time passing on these higher costs, and given that now you want to lay on another 5%, what's your read on the retailers being able to capture the cost increases that the tire manufacturers, not just you, but all of them have put in place?

I think the -- our expectation here, Saul, is that they will be able to pass through, you know, the increases. And I think it's played out that way for the most part throughout our markets, speaking about North American, the North American markets, as well as International markets. And, certainly, we don't -- we don't put forward a price increase without carefully, you know, analyzing the situation both at the end user level and at the dealer level. And, you know, I think that these price increases will be well accepted. We wouldn't announce them if we didn't think that was true, and I would say the history over the past year is -- has given us, you know, good evidence in that area an we're pretty confident.

And then the other thing, when you -- you know, your earnings in Europe, which in the first quarter were $69 million, and the second quarter were 57. So there was sort of a trending, a lower a little bit. Is there anything noteworthy that explains that sort of sequential, downward trend?

The only thing I'll say is the first quarter in Europe was truly an exceptional quarter for volume, both in terms of market -- market performance and our performance in terms of share. We're maintaining good share position, and I think it's quite similarly that, there was early sell in, in Europe for the summer season this year, earlier than we might have seen in 2003, so that -- so, I think that explains the year to year, but also the -- it also explains the move from quarter to quarter. We spent money in the second quarter to support the HydraGrip an the Sports Maxx as well. So no, we feel good about the turn around that Mike [Ronie] and his guys have created in Europe and, you know, are very confident and anticipate that will continue. So don't read too much into that quarter to quarter move.

And just finally, --

Saul, let's move on to someone else. We have time for about one more question, okay? Let someone else take a chance.

Saul, you will come -- come back to us and we'll answer whatever questions anybody on the line has, obviously.

Thank you.

Thank you.

Your next question comes from Adam Sessner of CSFB

Good morning.

Good morning.

Maybe just one last here. I was thinking about you continue to talk about, obviously, the success of the Assurance Tire, but just in terms of your equipment capacity, if I remember correctly, when you talk about equipment capable of doing the triple-tread technology, sort of that mono-component machinery, can you talk about how much of your equipment today is capable to handle that demand. And, as you go through that transition, are there any disruptions in terms of having to move out existing capacity for other tires to other facilities and how is that sort of playing out?

I would just say at this point, remember, when we when launched the product, we had -- naturally we had a point sales estimate that we thought was pretty good. We have gone well above that point estimate because our planning, prior to launch, said we've got to be able to step this up and flex it up to a significant degree. Because there -- it's a new product and we had some uncertainty as to what demand was going to be. We planned for the flex-up that we're now seeing. In we planned that, in terms of -- you're right, you've got a good memory in terms of the quad ex-extruders that we had, we've got enough capacity in quads to be able to handle the triple tread, but we've got enough overall capacity, and you can see what we're doing, we're using capacity now in four plants. Remember, we started and, I think it was controversial with a number of people. We started -- we said we're going expand, and we have plan to expand. Those 4 plants, the fact that we have 4 plants supplying Assurance tires today, give us a fair amount of flex-up capability, and frankly, we've needed it, because the current sales estimate is well above the sales estimate -- the plain estimate that we had before launch, and up at the upper end of with a we were thinking about in our most optimistic and positive looks at the -- at the Tire family before we launched. So, we're in pretty good shape here.

Okay. And then when you talked about your capacity utilization. I mean is there any instances that as you flex up and take on that capacity, is it causing you to have to shift capacity for existing, let's say, large tires and --

No, --

existing facilities or anything along those lines that could be disruptive?

At this point I can tell you we're not giving up any high margin product.

Okay.

There may be times when we give up some low margin product. And I consider that to be a good thing.

Good. Thank you.

Okay. Appreciate it. Thank you.

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

Bob Keegan will take them.

I just like to make a quick comment. I think it's clear that we are making here considerable progress, starting now to make that progress in North American Tire, where it's been obvious for some time, that we've been making that progress in our other businesses. Our operating results have improved dramatically, and I think this is a result of strong volume, improved pricing, richer product mix, and our cost reduction efforts and we need all of those, if you will, in our execution, and we have them. I think the actions link back to the strategies that we're implementing, which are focused on improving our core business economics. That's what we're doing in every one of our businesses and while we recognize challenges remain, we're pleased with the success of our strategies and with our execution to date. But, we fully recognize, on my team, that we have more work to do. And I just want to thank you all for joining us on the call. And we will follow up as we need to through Barb's office. Thank you, very much.