Goodyear Tire & Rubber Co (GT) 2004 Q3 法說會逐字稿

Good morning; my name is Matthew and I will be your conference facilitator today. At this time I would like to welcome everyone to Goodyear's third-quarter 2004 financial results conference call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question-and-answer period. (OPERATOR INSTRUCTIONS) Thank you. I would now like to turn the call over to Ms. Barb Gould, investor relations. Ma'am, you may begin.

Thank you, Matthew. Good morning and welcome to Goodyear's review of third-quarter results. Our discussion this morning will be available by replay after 2 PM Eastern Time by dialing 706-634-4556 or by listening to the webcast replay on investor.goodyear.com.

The slide presentation that follows our conference call comments is available in Adobe on our website. For your model, details of the FIN 46 consolidation of South Pacific Tyres and Tire & Wheel Assembly are included in the appendix of the presentation.

All of 2003 numbers are restated; and we filed our 10-Q for the third-quarter 2004 last night. We will file an amended 10-K for 2003 in the next few weeks which will include additional footnote disclosures and other adjustments which were discussed in the prerelease last week.

I would like to remind you this morning that our discussion may contain certain forward-looking statements based on current expectations and assumptions that are subject to risk and uncertainty 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 31, 2003, and Form 10-Q for the quarter ended September 30, 2004.

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

On the 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 2, Bob will open with observations and comments from his customer and market experiences at SEMA last week along with an update on our 2004 accomplishments. Rich will discuss the specifics of our third-quarter financial performance, as well as comment on our liquidity position, cash flow, and the performance of our international and nontire SBU performance.

Then Bob will return to cover North American Tire's performance for the third quarter and provide an outlook for the fourth quarter and 2005 before we open the call for questions. Now I will turn the call over to Bob Keegan.

Thank you, Barb, and good morning everyone. I want to thank you for joining us on the call this morning. When I took this job 2 years ago we identified several critical steps that needed to be taken for this Company to be successful. We said that new products were the lifeblood of our Company, and we needed to accelerate the introduction of impactful new products globally. We are delivering on that promise today as you will hear later this morning.

We said we needed to restore and rebuild relationships with our network of independent dealers in North America. Jon Rich and his team have done a tremendous job in this area.

Our international businesses were performing well, but we said that they could and would perform even better. The Q3 results again show that they have significantly improved their performance.

We said that we needed to create a dramatically different leadership team to take this Company to the next level. We have, and that team is delivering in all areas of the business. We're making steady progress against our objectives.

All 7 of our business units reported an operating profit improvement over 2003 for the third quarter. The Company had a second consecutive record sales quarter. Year-to-date, segment operating income is up 138 percent on 2003. In the quarter, segment operating earnings doubled, with new product innovations driving significant improvements in our market position as well.

Before we get into the specifics of our financials and business unit data, I would like to comment on my experience at this past week's SEMA show in Las Vegas where we introduced several new products to the market and talked with hundreds of dealers about their market and their Goodyear experiences.

Much of the conversation at SEMA centered on the many product successes that we at Goodyear have achieved in 2004. Here is a brief summary of both awards won and market successes.

J.D. Power and Associates 2004 Original Equipment Tire Satisfaction Study ranked Goodyear Wrangler tires number 1 for pickups and full-size vans. In addition, Goodyear products moved nearer to the top in each of the other 3 categories. Those categories are broad market passenger, high-performance, and SUV tires.

Our new Assurance tire with TripleTred Technology was named a finalist in the prestigious Global Automotive News Pace award for industry innovation. It was the only tire so recognized.

Then at the SEMA show itself, the Assurance TripleTred was honored by Popular Mechanics with the Editor's Choice for outstanding product innovation. Once again, it was the only tire so honored at SEMA.

TripleTred was also listed at the very top of the tirerack.com consumer ratings for all-season passenger tires. And the Eagle F-1 GSV3 (ph) was at the top of the performance tire category.

North America's leading consumer magazine ranked Goodyear's Fortera HL as the best SUV and light truck tire in its November issue when compared to 21 other tires in that category.

In Europe, Goodyear's HydraGrip and Eagle F-1 were named the top passenger and performance tires, respectively, in independent magazine testing by Autocar. And the Dunlop Sport Maxx turned in the best lap time performance among all competitive brands. In addition, the HydraGrip and the Eagle F-1 won their respective braking tests. I'd just remind you that these are key metrics in the highly competitive European market.

The independent test winning Sport Maxx was one of the 3 new Dunlop tires introduced to the media and SEMA visitors for the North American market. In addition, we launched the Dunlop Direzza for sport compact tuner cars, and the Dunlop Grandtrek for an improved ride in SUVs.

On the Goodyear side, we introduced our award-winning Fortera in a new 22-inch size.

As I mentioned earlier, innovative products are the lifeblood of our Company and represent one of our key 7 strategies that we outlined for you more than a year ago. This flurry of product successes in the market is only the beginning. Our North American dealers will find out, when they attend our national dealer meeting in Dallas in late January, we will have more introductions at that point in both Goodyear and Dunlop brands.

Also, I continue to be very pleased with the response of our dealers that I met at SEMA to our marketing initiatives. They not only appreciate the product awards that we are now winning, but they truly appreciate the job that Jon Rich and his entire leadership team are doing to help them build their businesses.

I would be remiss if I did not include an update for you on run-flat tires now that these tires are gaining momentum with the OEs. We continue to gain product (technical difficulty) as the innovator (technical difficulty) leader in run-flats, more than (technical difficulty) replacements since gaining (technical difficulty). We expect to sell (technical difficulty) and another approximately 2.5 million in 2005.

We have supplied 18 OE models and have OE approvals for current and future programs that now number 100. The vehicles with Goodyear and Dunlop run-flat tires range from the Corvette to the Jeep Grand Cherokee, and from BMW's 5 series to Toyota's Sienna minivan. We supply run-flat tires to BMW, DaimlerChrysler, Ferrari, Fiat, Ford, General Motors, and Toyota. Our market leadership in run-flats is built upon our innovation, our continuous improvement, and the resulting broad portfolio of run-flat solutions that we offer.

Let's now look at slide 5. We will take a look at our achievements during the first 9 months of 2004, and then take a look at the challenges facing us in the fourth quarter, and then into early 2005.

Our revenue for Tire globally is up 11 percent, excluding exchange, with improvements in every Tire business unit. Our product and brand mix continues to improve. New products are having a major impact in the market, led by the Assurance family of tires here in North America. Their success is resulting in improved revenue per tire and a much richer product mix.

North American Tire has achieved positive segment operating income year-to-date, driven by significant gains in mix, and is increasing our share of market in targeted products and channels. Our new productline in commercial truck has helped us gain share in the original equipment market.

Our OE sales year-to-date in North America are up 66 percent, compared to market growth of 41 percent. We're selling every tire we can manufacture and are working to further improve productivity to take better advantage of that market strength.

Our overall productivity improved 8 percent through September, helping offset raw material price increases, rising health care costs, and the conversion cost increases that derive from producing a richer mix of products.

We continued to strengthen our leadership team with the addition of Pierre Cohade as the President of Asia-Pacific, and we also consolidated business development strategy and restructuring under Joe Copeland, who as you know previously led our Chemical business.

Pierre brings extensive experience from North America, Europe, Latin America, and Asia, where he has grown his business's profitability in each major region of the business world. Joe did an excellent job running our Chemical division; and with his background and experiences both at Goodyear and in prior positions at Intel and Ford, is a perfect fit to handle our business development strategy and restructuring initiatives.

Finally, we completed 4 debt financings in 2004. The 650 million expansion to the ABL term loan facility; A $650 million senior secured note in the first quarter; a $350 million 4 percent convertible senior note due in 2034, which was part of our commitment to the union; and we refinanced our U.S. revolving credit facility with a 680 million funded credit facility due in 2007.

We are fully aware of the significant challenges that remain for us in Q4 of 2004 and into 2005. We continue to address each of these challenges with specific strategies. Some of these challenges are a reduction in OE builds in North America, impacting our fixed-cost coverage.

Clearly the growth of the Chinese consumer market has slowed, and we have rapidly adjusted by using the capacity from our recent expansion in Dalian, China, to support the growth of our high-performance tires in both the European Union and North America.

The worldwide commercial truck market is strong, which is good news, but there currently is tight product availability. Here we continue to make significant productivity improvements in our facilities to help meet demand while new capacity is being added for Goodyear in Latin America.

We are continuing to focus on cost-reduction actions to offset an expected 9 percent increase in raw materials in the fourth quarter; that is 9 percent in the fourth quarter; and another 4 to 6 percent forecast increase in 2005.

We will continue to focus on reducing our debt level and our unfunded pension obligations through extending maturities, asset sales, and ultimately we will seek increased equity funding to improve our credit profile.

With 2 profitable quarters behind us, our progress from where we were 2 years ago is gratifying. But our focus and our intensity remain here on continuing to improve our market position, the economics of our business, and our core financial results.

At this point I would like to turn the call over to Rich to discuss Goodyear's financials; and as Barb mentioned Rich will also cover the performance of our international and nontire businesses. And then I will return to discuss the performance of North American Tire, and the outlook for both the fourth quarter of this year and 2005. Rich.

Thank you, Bob, and good morning, everyone. Before I began my comments on the third-quarter results, I would like again remind you that the Company adopted FIN 46 effective January 1, 2004, which as you may remember required us to consolidate entities previously accounted for under the equity method of accounting.

These subsidiaries include South Pacific Tyres, our Australian and New Zealand joint venture, and Tire & Wheel Assembly, a wheel mounting business which is part of our North American Tire business. This accounting change increased sales and segment operating income by 315 million and 5 million respectively.

Looking at slide 6, you can see that we have made significant improvements in the third quarter of 2004 versus the prior year. Worldwide tire units increased by 2.1 million to 57.4 million units. This was driven by the consolidation of SPT into the Asia region, which added 1.6 million units, as well as growth in our Eastern European and Latin American business segments.

This increase was partially offset by the decrease in North America of consumer OE units resulting from production cuts by domestic automakers. Total sales were 4.7 billion, which is a 21 percent increase over the prior year. As I just indicated, the consolidation of SPT and T&WA contributed 315 million or about 40 percent of that increase.

The impact of foreign currency translation was a favorable 105 million, while volume price mix added approximately 335 million. The impact of volume price mix was primarily driven by increased sale of commercial truck tire units and Goodyear-branded tires in virtually all our Tire business segments.

Gross margin improved 1.9 percentage points in the quarter, again driven by improved product mix.

Raw materials cost increases of approximately 75 million were offset by 38 million in savings generated from rationalization actions and 40 million lower conversion costs resulting from higher volumes.

Total segment operating income more than doubled from 151 million in the third quarter of 2003 to 305 million in 2004. This resulted in a segment operating income margin of 6.5 percent of sales. Again, this significant year-over-year change resulted from improved operating results in all 7 of our businesses.

Net income for the 2004 third quarter was 36.5 million or 21 cents per share of a fully diluted basis. This is compared with a net loss of 119 million or 68 cents per share for the third quarter of '03. All the 2003 numbers as you know are on a restated basis.

Moving on to slide 7, let's look at the difference between segment operating income and the earnings or loss before tax line for the third quarter. The change in inter-SBU income relates to increased shipments of tires between our SPUs and higher raw materials costs, which are reflected in higher selling prices to the Tire businesses from the Chemical business.

The $30 million for rationalization charges and asset sales in the third quarter of '04 resulted from restructuring actions totaling 44 million. This is primarily related to headcount reductions of approximately 350 associates in the Company's Engineered Products and Chemical businesses, as well as the reversal of $15 million of previously recorded rationalization reserves no longer needed for their originally intended purpose.

Accelerated depreciation of approximately 2 million was also recorded in the quarter. That was related to the retirement of certain assets no longer needed as part of those restructuring activities. The EPS impact of these items was a net reduction of 18 cents per share.

The 60 million comparable rationalization asset sale charge in the third quarter of 2003 was comprised of restructuring actions in North America, Europe, Engineered Products, and a loss on the sale of the Cartersville, Georgia, Engineered Products plant.

Minority interest expense increased in the quarter due to the strong performance in the European Union, as well as due to the consolidation of SPT. Interest expense is higher in 2004, due to a combination of higher debt levels and higher interest rates. Additionally, financing fees are higher by about 10 million versus the prior quarter, partially reflected accelerated amortization of fees for the U.S. revolving credit facility which we refinanced during the quarter.

The company also recorded an $8 million charge in 2004 for general and product liability, which is lower than the prior year charge of 62 million, which really reflected significant expenses related to the national settlement of Entran II claims in 2003.

The current quarter also includes a $9 million charge related to professional fees associated with our ongoing investigation as well as Sarbanes-Oxley compliance. The EPS impact of these items is approximately 4 cents.

Looking at the bottom of slide 7, the Company is reporting earnings before taxes of 65 million in the third quarter of 2004, versus a loss of 118 million in the same period of 2003. This is a year-over-year improvement of over $180 million.

With respect to taxes, the Company recorded expense of 29 million during the quarter, compared with 1 million in the third quarter of '03. Both the 2003 and 2004 quarters included a tax benefit from the settlement of prior-year tax liabilities of approximately 36 and $44 million respectively. The EPS impact of the settlements in the 2004 third quarter was a net increase of 25 cents a share.

Now turning to slide 8, you can see our cash position at the end of September was 1.6 billion, excluding 86 million of restricted cash. When adding to this our credit under our current revolving credit facilities, as well as our undrawn lines, our liquidity at September 30, 2004, totals approximately 2.4 billion.

Now compared with last year, we have added almost $1 billion of additional liquidity. We continue to focus on our liquidity position for 2 reasons. First, it ensures we have capital available to support our turnaround effort; and secondly, it provides flexibility in addressing the 1.2 billion of maturities we have over the next 12 months.

Now with that in mind, we are continuing to execute against our financial restructuring plan. In fact in the third quarter we completed 2 significant transactions. The first was a convertible notes offering, Goodyear's first offering of this kind; and the second was the refinancing of the U.S. revolving credit facility which I just mentioned earlier. And we refinanced that with the new 3-year facility.

By completing this part of our refinancing plan, we have addressed the 2004 financing requirement included in our contract with the United Steelworkers. Again, we will continue to opportunistically access the capital markets to address our upcoming debt maturities and pension obligations, while also looking at opportunities in the longer term to reduce debt through asset sales and raising equity.

Looking at slide 10, in the first 9 months of 2004, cash flow from operations was a positive 42 million. Now, 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 $360 million earnings improvement.

Year-to-date capital expenditures total about 278 million, and I would say the Company is still planning to spend just under 500 million for the full year.

The Company also used 526 million for changes in assets and liabilities. Most of the use of this cash is in accounts receivable, which increased an additional 410 million since June 30, due primarily to higher September sales in North America and early winter tire sell-in in Europe. Timely collection obviously will be a key focus for us in the fourth quarter.

Also, while inventory dollars are up versus year-end and the 2003 quarters, due in large part to higher raw materials costs as well as the consolidation of SBT, our inventory turns did improve to 5.3 turns, compared with 4.8 in the September 2003 period. I would also like point out that our overall inventory units are essentially flat versus the prior year, while supporting year-to-date sales growth of approximately 13 percent when you pull out the incremental consolidation of SPT.

Our cash flow from operations has been a bright spot for us for the first 9 months of 2004, and certainly working capital levels and cash flow remain a key focus area for our management team and all of our businesses. That is part of the 7 strategies that we have also outlined for you before. Certainly cash is king remains prominent in all our minds.

Switching topics, I would just like to take the opportunity to briefly address a few observations related to our legacy costs. Our pension expense through the first 9 months of 2004 was 284 million; that compares with 330 million for the same period in 2003. The reduction reflects provisions in our contract with the United Steelworkers that reduced expense for 2 years.

I will point out, however, that while pension expense declined 46 million, retiree health care costs increased to the point where the 2 items effectively offset each other.

As previously discussed, our 2004 domestic pension contribution will be about $160 million, about half of which we will be contributing in the fourth quarter. Our return on plant assets for the first 9 months was just under 4 percent.

Looking ahead, our 2005 domestic funding requirement is currently estimated at between 425 and $450 million. This is an increase of $100 million compared to prior estimates, reflecting lower interest rate assumptions, as well as portfolio returns which to date have been below prior expectations.

Given the assumption changes, both pension and OPEB expense, or retiree medical expense, for 2005 are expected to be up modestly from the 2004 levels, again reflective of the current interest rate and asset return environment.

To help you analyze the income statement and balance sheet impact going forward, we provided an updated sensitivity analysis on slide 11 for your use. While challenging, we continue to believe that the legacy obligations remain a manageable exposure for this Company.

Now before going on to discuss the results of our business segments, I would like to take a moment to address our recent announcement to amend our 2003 Form 10-K to include some additional footnote disclosure related to certain affiliates, and to restate the Company's prior-period financial statements to reflect certain out-of-period adjustments, some of which had been disclosed as such in our first and second-quarter 2004 Form 10-Qs.

The net impact of these adjustments is approximately 4.6 million. Additionally, the Company will correct a recently identified balance sheet misclassification related to the reporting of certain deferred tax assets and liabilities, which had previously been reported on a gross versus net basis. While having no impact on shareholders equity, net income, or cash, this classification issue did result in offsetting overstatements of both total assets and total liabilities.

Most of these adjustments were identified through the implementation of the Company's enhanced procedures to improve its financial controls. Speaking for Bob Keegan, myself, and our entire team at Goodyear, we remain committed to accurate and transparent financial reporting and we will continue to improve our control environment with that commitment in mind.

Now moving on to review our segment operating results, you'll see segment operating income increased to 305 million in the quarter, which more than doubled the prior-year. This increase continues a directional trend in year-over-year improvements which began in the fourth quarter of 2003. Through the 9 months of 2004, segment operating income totaled 811 million, compared with 340 million for the first 9 months of 2003.

This quarter's improved results were driven by a continuing and relentless focus on the 7 key strategies that we have previously outlined. Traction continues in our North American Tire business, and Bob will review their third-quarter results in a moment. First, I will cover the other SBUs.

Let's start with Europe. This business unit had another solid quarter, with segment operating income up 42 percent on a 10 percent sales increase. The consumer replacement market grew 3 percent in the third quarter; and although our business grew slower than the market, we did again achieve continued mix improvement which drove our improved results.

The early winter tire sell-in as well as sales of winter run-flat tires for the replacement market were very strong in the quarter. Our technology in run-flats and the recent product launches of the HydraGrip and the Dunlop Sport Maxx are providing a foundation for solid growth in Europe.

The commercial replacement market was down 3 percent, while the OE market grew 6 percent. We did gain share in the OE market due to our new products and global contracts. Our revenue per tire increased 3 percent in the quarter excluding the impacts of exchange.

The European Union also remains capacity constrained in certain consumer market segments and in commercial truck tires. Our global sourcing strategy is helping to alleviate this situation, while meeting demand through productivity improvements in Eastern Europe, as well as by importing product from Asia made possible through our China expansion.

In terms of profitability, price mix contributed $22 million to the increase in segment operating income. The driver of this increase is our focus on continuing improvement in targeted product and market categories in both our consumer and commercial business.

Benefits from rationalization actions were 13 million in the quarter and along with price mix improvements offset increased raw material energy cost of approximately 8 million. Finally, while the euro remained strong versus the dollar, the impact on operating earnings was only 3 million.

Moving on to our Eastern European business, volume increased 8 percent in the quarter, contributing to a 22 percent sales increase, while segment operating income was a record 60 million for the third quarter 2004.

In terms of market share, we gained in both the consumer and commercial markets; and a shift to ultra high-performance tires in the summer markets, strong truck tires sales, as well as the beginning of the winter tire sell-in season resulted in a positive price mix contribution of 18 million. Rising raw material costs were substantially offset by higher volume, price increases, and the product mix improvements I just mentioned.

On slide 15, you can see our Latin American business segment had another outstanding quarter with record sales driving a 20 percent return on sales. Furthermore, our pricing actions are holding in the market, obviously something that is very important to us. We also announced an expansion in Peru to radialize passenger capacity to meet the increased demand in the radial tire market.

Similar to the situation I described in Europe, demand is outstripping supply in the fast-growing commercial truck tire market. To address this situation, in July we announced a $50 million expansion to our plant in Colombia to increase production of radial truck tires for the Latin America truck market.

Similar to our other business segments, price mix also contributed 30 million toward the improvement in segment (technical difficulty). This when compared with our focus on cost reduction in the region offset approximately 9 million of higher raw material costs. I will also point out the transportation costs and a shortage of shipment containers are contributing to higher costs in the region.

In the Asia-Pacific region, excluding the impact of the consolidation of SPT, sales grew 8 percent and profits increased 33 percent. SPT added 168 million of sales, more than doubling sales in the region, and SBT had segment operating income of approximately 5 million in the quarter.

In Asia, our growth in China, Indonesia, and the Philippines has slowed. Related to China in particular, the moderation in market growth is a result of the general economic situation perhaps best reflected in rising interest rates and tightened consumer credit in the country.

As Bob mentioned, we are opportunistically using the slower growth in China to maximize the expanded capacity at our Dalian facility by supplying high-performance tires to other Goodyear regions. This is an example of our global sourcing strategy at work.

Operationally, positive price mix resulted from strong prices and a better mix in the region due to the introduction of 2 new products, the Goodyear Ducaro and the Eagle F-1. These resulted in a $10 million improvement in segment operating income.

Our performance in the commercial market is also improving and we gained share in the third quarter. Higher raw material costs at 9 million were only partially offset by savings from Six Sigma cost reduction initiatives and increased plant productivity in the region.

Now moving on to our nontire businesses, our Engineered Products business had record sales and operating income in the quarter. In fact, segment operating income was up 149 percent versus the prior-year. While all regions contributed to 26 percent sales growth in the quarter, North America, due to its strong military sales, accounted for the majority of the growth. Sales in the military segment have more than doubled over the third quarter of '03.

The industrial market, which includes conveyor belts and hose, benefited from strength in the mining industry. Sales of original equipment product such as automotive belts, coolant hose, and molded products also grew in the quarter; while sales to the automotive replacement market were flat. We're working aggressively to expand our distribution channels in the replacement market and to build on our strong brand appeal, as well as the use of Goodyear's tie-in with NASCAR.

On the profitability side, higher volume contributed 25 million to the improvement in segment operating income versus the prior quarter. Additionally, savings from past rationalization programs improved segment operating income by 7 million in the quarter.

In September, we announced additional rationalization actions designed to lower the business segment's overall fixed cost structure. These actions should generate annual savings of approximately 5 million starting in 2005.

The Chemical business also had record sales and segment operating income in the quarter. Sales from the Chemical business in the third quarter grew 29 percent, while segment operating income improved 66 percent year-over-year.

To focus on some specifics, higher polymer demand grew 10 percent over the third quarter of 2003, while natural rubber demand remained strong at 6 percent growth in the quarter. Profitability was aided by higher pricing, improved mix, and improved productivity.

However, there are still opportunities to increase output through Six Sigma and lean manufacturing initiatives; and this remains a focus of the business team running our Chemical segment. Reflective of that, in September, we also announced the reduction of 100 positions in the Chemical business, and as a result of these actions we should achieve 9 million in savings in 2005.

The International and Product businesses continue to execute on their plans. They are gaining share, building on brand strengths, introducing new products, and reducing costs in order to improve operating results. While market growth in certain segments has contributed to these gains, our focus on markets, on customers, on products, and on improving our leadership teams have served as a foundation for improvements and will continue to do so as we look ahead.

Now, I would like to turn the call back over to Bob to discuss North American Tire operations and to give an update for our fourth quarter and 2005. Bob.

Thanks, Rich; and clearly those businesses are doing a terrific job, building on a terrific base that they had already established a couple years ago.

Referring to slide 19, North America had its second consecutive quarter of positive operating income. To further highlight their improvement, North America has contributed 16 million in segment operating income through the 9 months of this year, compared to a loss of 116 million in 2003. To accomplish that year-to-date improvement, they overcame a headwind of $57 million in rising raw material costs.

Revenue per tire in the quarter improved 7 percent year-over-year, and 3 percent compared to the first-half, due primarily to high-quality share gains in Goodyear-branded tires in the broad market segment; continued growth in both dealer and mass merchandiser channels; and strong growth in the commercial and off-highway markets.

Although the consumer replacement industry declined year-over-year, 3 percent in the quarter, our replacement units increased in the quarter, with Goodyear-branded product growing almost 6 percent. That is in a market that declined 3 percent.

The success of Assurance continues. Given the excitement that dealers expressed at SEMA, as we enter the winter months we expect to see accelerating sales of TripleTred tires. Our private-label share remains stable as we continue to be successful with a selective strategy.

The only negative for the quarter in consumer replacement was the Dunlop brand, an area we are addressing as I mentioned earlier with 3 exciting new products that we were introduced at SEMA. We have confidence in our ability to turn the Dunlop brand around.

OE consumer sales for Goodyear were down about 600,000 units, compared with last year.

The commercial OE market continues to be very strong, up 48 percent in the quarter compared with last year, and up 7 percent from the second quarter. Our sales almost doubled in the quarter, compared with last year. The Goodyear brand gained share in the commercial replacement market, which was down slightly, about 1 percent.

In terms of profitability, I want to reiterate that North American Tire was profitable for the second consecutive quarter and is profitable year-to-date. Richer price and mix accounted for 65 million of the improved operating results; and as Rich mentioned, our intense focus on improving our price mix strategies in all our businesses is paying off in a major way for our Company.

(technical difficulty) 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 late last year and other rationalization actions contributed approximately $27 million of savings in the third quarter. Overall, we have reduced employment compared to the third quarter of 2003 by about 1,600.

We experienced increases of $23 million in raw material cost, advertising expenses -- and I categorize this as a plus. Advertising expenses were up $7 million for the Assurance launch. I consider that increase in expense a positive, because of the terrific results of Assurance in the marketplace in North America.

While the operating trend in North America continues to be strong, Q3 segment operating income was down compared to Q2. This was due in part to higher raw materials and transportation costs. Additionally, in the third quarter, we had higher general and product liability and legal costs, which along with the financial impact of the hurricanes in the southeastern part of the United States represented an additional 12 million of costs in the quarter.

That completes the review of our third-quarter operations, and I would like to just provide an update on the outlook for the fourth quarter and on 2005.

In the fourth quarter in North America, for OE we are expecting a 5 to 6 percent decline in the consumer market, while the commercial truck market will remain strong at better than 30 percent growth. The replacement market is expected to be flat for consumer tires and down slightly for commercial tires.

In the European markets, the European OE market, we are expecting the consumer market to be flat while the commercial OE market will continue its growth in the 7 to 9 percent range. We are anticipating minimal growth in the European consumer and commercial replacement markets in the fourth quarter.

We would expect the Goodyear brand to continue to perform well, driven by the strong support of our dealer network and our new product launches. The winter tire markets in both Western and Eastern Europe, which is so critical to our success, are now waiting for early snowfalls to drive demand in the fourth quarter. We will see how that plays out, as we do every year.

With respect to raw material costs, we estimate increase of 9 percent in the fourth quarter, which will put us in the range that we have talked about for the past couple of calls of 5 to 7 percent for the entire year 2004.

We expect interest expense will be roughly at the same level as the third quarter.

Now, normal global seasonality would indicate that the fourth quarter performance would not be as strong as the second and third quarters. That is a function of the seasonality of our business.

Now, in addition I thought I would provide you with our perspective to assist you with your 2005 models. In North America, we forecast the original equipment market for consumer tires to be up 1 to 1.5 percent. The commercial OE segment will still see and continue to see strong growth, but at a slower rate of growth than has been experienced in 2004. We are expecting trendline growth in the replacement markets for both the consumer and truck segments.

In Europe, we would expect similar trends to those we have experienced in 2004.

We have cost initiatives in place to help us offset raw material cost increases of 4 to 6 percent, as I mentioned earlier, for 2005. Interest expense will be in the range of 380 to $400 million. Tax expense will be about 35 percent of segment operating income for the International Tire business units.

We are expecting capital expenditures in 2005 to rise somewhat and to be approximately equal to our depreciation. For planning purposes, we have assumed no major movement from today's spot rates for foreign currencies.

In summary, we continue to expect year-over-year segment operating earnings growth driven by volume, price mix improvements, and cost reductions in all our businesses. We are making significant progress in our turnaround efforts, as you can see from the third-quarter results, but recognize that significant challenges certainly still lie ahead of us; and we intend to meet those challenges.

I think, Barb, with that said, we can go to taking your questions.

(OPERATOR INSTRUCTIONS) Himanshu Patel, J.P. Morgan.

A couple of questions. First, you may have covered this; I forgot. But I think on slide 20 you mentioned a 29 million increase in the share count. What is that for? For the fourth quarter?

What that is, as you remember we issued the convertible offering back earlier in the third quarter; and because of the changes in the accounting rules related to those contingently convertible securities, those incremental shares will go into our fully diluted calculation beginning in the fourth quarter. It's really an accounting change when those shares now will have to be included in our EPS calculation.

I understand that, but was it just kind of a -- I'm comparing that to the 2005 outlook slide on page 21; and you didn't mention it there. We should assume that that applies to '05 as well?

It would.

It would go from that point forward. It would be in there prospectively.

On your outlook statement for volumes, you guys are looking for consumer replacement to be flat in the fourth quarter. Given what looks like sort of a soft October, I think it kind of implies sort of 6 percent growth for November and December.

Was the exit rate in October something that encouraged you guys? Or are you just thinking maybe the comps are relatively easier in November and December, so we could see some positive comps?

It's a good question. As you have seen, maybe not everyone on the call has seen, certainly October was not a strong month for industry volume. Of course again I would remind you that is sell-in volume.

The impression we have is slightly different than the RMA numbers. I think RMA has indicated that the markets were down from last year against a tough comp by about 10 percent.

We are actually, in terms of the model that we use, we take that input and then we provide other input and knowledge that we have from the marketplace. We think it was a little less than that. Still a negative, but not as significant as 10 percent would indicate.

You're right; we're looking at inventory levels, the flavor we got at SEMA, and a host of field input to say that we still think it will come out flat. Could it be slightly down? It could be slightly down for the fourth quarter, but I will simply say that every indication in November is a solid one for us.

Bob, maybe you could just lastly touch a little bit on pricing. I know the first-half price increases were probably a bit easier to implement than the sort of September/October one. Are you sort of getting a sense that the competitors are perhaps getting back into the pricing bandwagon, maybe into either as we end out this year or looking into the early part of next year?

Maybe I could start. I will give you first a non North American Tire comment. If you look at our business internationally, I would say the price increases that we put through in both the truck market or commercial market and the consumer market are sticking.

Here in North America, and you have got to draw this distinction here, particularly because of the significance use of natural rubber in truck tires, on the truck side, price increases are sticking and flowing through. On the passenger side or consumer side in North America, a portion of the increases are sticking.

As relative to the public announcements, you have seen a number of people recently continue to announce price increases. I won't go into detail on that.

So given the escalation that we anticipated back when we talked at the end of the first quarter, and then at the end of the second quarter, we don't see the raw material increase abating here in the fourth quarter. In fact we see it accelerating a bit. I mentioned 9 percent. Next year we are still looking at 4 to 6 percent. It is difficult to avoid that cost pressure.

Himanshu Patel Okay. Just one last housekeeping question for Rich. You mentioned CapEx to equal depreciation for next year. Do you mind giving an absolute number around depreciation or CapEx for next year?

Our depreciation is round about $600 million as you know. In terms of a final number, we are still in the midst of our planning process right now. So I'm going to refrain from doing that. But that gives you pretty well a directional sense of where we will be.

Maybe the other comment we should make there would simply be one of, you're looking at the third-quarter year-to-date number on CapEx. Our comment that we will spend in the neighborhood of probably just shy of 500 million, we will come in close to that number.

We have got a couple kind of lumpy projects, and we will make significant expenditures here in the fourth quarter. You should expect that.

Okay, great. Thanks a lot.

Steve Girsky, Morgan Stanley.

Is your pension year now closed? Was it a September pension year? So is this 450 or 425 to 450 locked in, or no?

I will ask Darren to comment on that; he is on top of that.

The calculations that will ultimately determine the contributions next year will be done at year-end, and then will continue to be done throughout next year. So it is not set in stone. There is some variability around it, which is why we have indicated a range.

So that is the best estimates that we can do at this point, given where the markets were effectively at the end of September.

What do you think the liability is, Darren? Say somewhat (ph) we know now?

The liability as it will show up in the footnote is going to be up. Last year I think we had liabilities that were somewhere around 6.8 billion. That is going to be up a little bit. Not a whole lot. I think that is going to reflect the fact that we have got a discount rate that may very well be down another quarter point from 6.25 down to about 6 percent.

The unfunded liability will be what?

The unfunded liability, we have had about 2.8 billion at the end of last year. I think with that increase in liability it could be up a little bit as well.

Can I just ask you guys, how much of the Chemical sales are internal?

About 65 percent.

I was going to say, close to two-thirds.

So as the Chemical profits go, some of that gets washed out of the cost in the Tire business?

Yes.

Is that delayed at all because of FICO (ph) or does it show up right away through intercompany elimination?

It flows through pretty quickly. There is not like a quarter lag or anything like that. Not that long.

Bob, just on the pricing, do you expect Q4 prices to be higher than Q3, the same is Q3? I know mix should be better. But do you think your assessment of the pricing environment in North America right now?

I would simply say what I did say on the truck side, take the international businesses aside, pricing should be up. Mix should be up. In North America on the truck business, pricing will be up; and on the consumer business we expect --

Remember we did not put the prices into effect until September 1 both on truck and consumer in North American Tire. So we really only got one month of those increases in the third quarter. We will have 3 months of those increases in the fourth quarter. Okay?

All right, thanks.

Jackie Weiss, Merrill Lynch.

My first question is, you mentioned that you have achieved around $27 million in cost savings in North America from the closing of the Huntsville plant and other cost-saving actions.

Can you break that out a little bit? What portion is coming from the Huntsville closing, and how much is coming from other cost-saving initiatives? To what extent are other cost-saving initiatives still ramping up?

Let me take the second question first. As I said, we continue to focus through our lean initiatives in manufacturing, but initiatives throughout our businesses' cost centers, on driving costs to a lower level. We fully recognize that we have got to take more cost out of our business while continuing to make some of the critical investments that we are making going forward.

So I would say you can expect us to continue driving costs down, and we've got initiatives in place to do that, frankly in all our businesses. I think Rich and I both commented that in the International businesses and the Chemical and Engineered Products business we are making significant strides forward.

Same goes for North American Tire. Jon Rich and his team are really focused on driving I will say the bad costs out of our system, and investing in the areas that we need to invest for growth and quality product and new product.

Back to your first question, Rich, do you want to just maybe comment?

We said, if you recall, about $100 million of impact from the Huntsville factory in the full year of 2004. So in the quarter, Huntsville was really the lion's share of the number that you gave.

There are obviously other productivity improvements that are not in that rationalization savings number that we would also put in the same light in the cost savings that Bob is talking about.

I mentioned in my comments that we got 8 percent productivity year-to-date, which for us is a significant, significant number relative to our history. As many as you know, we have been more in the category of 4 to 4.5 productivity; and a significant portion of that is being driven from North American Tire.

Thanks. My next question relates to Latin America. A while back you mentioned that -- you're seeing very strong profitability in Latin America, and a while back you mentioned that we should not to expect to see this level of profitability continue forever. Yet we are still seeing it a couple quarters later. I am just wondering what the status is there.

I will tell you exactly how I think about Latin America. We put strategies in place 2.5 years ago that are working very effectively for us today. Those were both aimed at growing our business, and growing it profitably, and taking cost out of Latin America.

We are on that path. I can tell you we will make further improvements in all our initiatives and our operating performance in Latin America. But Latin America is a volatile region, and issues of macroeconomic significance and, therefore, foreign exchange rates are always with us.

My comment, Jackie, previously was more around the volatility of the macroeconomic environment than it was, let's say, the competitive dynamics. We're doing very well in Latin America in terms of driving the competitive advantage that we have, and I think we are undoubtedly surprising a host of people that we're able to attain this level.

I think we can maintain it and improve on it, but that is going to be a function of the macroeconomics in Latin America, which I say are inherently volatile. We understand that and we have ways of dealing with that.

Last question is for Rich. Did you mention what the expected pension and OPEB expense should be in 2005?

No, we didn't mention that yet. Again, as Darren mentioned, the calculations that we go through relative to 2005 still have to be locked down. There's a lot of inputs and a lot of things that still change, but what we did say is that it's going to modestly go up. And again, if you look at the numbers that we disclosed for the 3 months, you can kind of come to what full-year is going to be for us and ratchet it up slightly. It is just hard to pinpoint at this point in time because of the inputs and the assumptions still move around on us.

Okay, thank you.

We have time for about one more question.

Rod Lache with Deutsche Bank.

Good morning everybody. If I could get just 2 or 3 under the wire here, just to follow up. Latin America and Eastern Europe now is close to 60 percent of your tire profits. Just going back over time, I don't see any period in which you had the kind of margins that you have right now.

As you said, these are pretty volatile regions. Do you think that there is -- is that level of profitability such that it will attract competition and those margins are going to be eroded over time, or is there something that is a competitive advantage for you guys in those regions that could give you some sustainability?

Rod, there is a long answer to that. The short answer is, frankly, I think few people believed us 3 years ago when we said we could achieve those levels because of the inherent volatility in those regions.

We have established, I think, just through our marketing initiatives, very solid market positions there. And I will tell you, people come after us. They're coming after us today in those regions of the world. So I think we are doing very well from a market standpoint.

We also didn't rest on our laurels. We're driving out a lot of cost of our already low-cost plants in both Latin America and in Eastern Europe. Eastern Europe, broad region, also has a fair amount of market growth that is going to work in our favor. So somebody else to get growth doesn't have to necessarily take share in it.

I will just say in Latin America we have got an outstanding team of people by country in Latin America. So we feel very confident of the competitive dynamic in both of those regions.

Do you happen to know offhand what your marketshares are in those regions?

Do I know what they are? Yes. But Rod, as you know, I don't share the specific marketshares. I will simply say that our marketshares are moving in very positive directions and --

Are they better than what you have in North America?

I will just say they are moving in very positive directions. That is true on the consumer side of the equation.

On the truck side of the equation we are making substantial progress with the radialization of the truck market in Latin America; and in Eastern Europe with our significantly improved productline over the past year or so.

You mentioned a 0.9 percent year-over-year improvement in replacement volume in North America, which sounds pretty impressive given the Q3 decline in the U.S. market. Could you tell us what Goodyear did, light vehicle versus the heavy truck replacement in North America?

Come back and just clarify. I want to be careful here. Clarify the 0.9.

I thought I read in your Q that your replacement volume in North America was up 0.9 percent. Am I wrong?

No. That's right.

I think that is right. 0.9 percent in replacement.

But that is overall. Heavy truck, commercial, and the light vehicle; right?

Let me make sure of that. Because I think back in the Q we said that -- yes; that was our total. I would simply say that for the third quarter, what the market in the passenger area, the replacement area, was off about 3 percent. I think 3.3 percent, actually. And we said that we were up in Goodyear. Goodyear-brand was up 6 percent.

But overall were you guys up in the light vehicle replacement market?

The answer to that is yes.

Okay.

With, very importantly, remember one of the things that we have been focusing on for these 2 years and doing an outstanding job of, we are focused on getting the right tires in the right channels. Meaning we get the right margins. That is why you're seeing this margin improvement, frankly, throughout the world.

1 last thing. The raw material cost inflation that you're seeing, although it is significant, it is pretty benign relative to what other companies are talking about in the industry.

Could you just tell us why that is? Is there something that you guys have achieved in terms of using purchasing leverage or something that is actually a mitigating factor for you?

I would answer it this way; others may have a comment to make. I'm not going to comment on how we're doing relative to the other tire manufacturers.

I will simply say from our standpoint that, as you know, we highlighted purchasing in our overall procurement strategies a couple years ago as a key focus of our Company. And yes, we're getting some productivity. This is not just a matter of passing through. We're constantly looking at, I will say, new areas of the world and new suppliers.

So we're getting some productivity, and I would simply leave it at that. I can't comment on the competition.

Thank you.

Bob Keegan will now offer closing remarks.

I think maybe just by way of closing, we're clearly making progress. We clearly have momentum in our businesses. We are improving the core economics of our businesses. We are delivering against the critical steps that we outlined when we started to execute against the 7 strategies, as I said at the beginning of our call.

We are bringing new innovative products to market faster than ever. We are building strong relationships with our dealers. Why? Because we are helping them build their businesses.

We're driving improvement in our already strong international businesses, and I would say fundamentally we have got a strong, capable, committed new leadership team, and it is a new team. So I feel pretty good about where we are today.

As we said on this call we're going to continue to improve. We have some challenging business conditions in some markets, and we're going to deal with those and have strategies for dealing with those. I just want to thank you all again for joining us on the call today. Obviously, Barb will provide follow-up as needed. Thank you very much.

This concludes the Goodyear third-quarter 2004 financial results conference call. We thank you for your participation. You may now disconnect.