Goodyear Tire & Rubber Co (GT) 2004 Q4 法說會逐字稿

Good morning, my name is Judy and I will be your conference facilitator today. At this time I would like to welcome everyone to the Goodyear 2004 fourth quarter 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. If you would like to ask a question during this time, simply press star then the number 1 on your telephone key pad. If you would like to withdraw your question, press the pound key. Thank you. Ms. Gould, you may begin your conference.

Good morning and welcome to Goodyear's review of full year and fourth quarter 2004 results. Our discussion this morning will be available by replay after 2:00 p.m. eastern time by dialing 706-634-4556 or by listening to the Webcast replay on investor.goodyear.com. The slide presentation that follows your conference call comments is available in Adobe Acrobat format on our website, and for your models details of the FIN-46 consolidation of our affiliate South Pacific tire and tire wheel assembly are included at the end of the presentation. We filed our 10K for 2004 yesterday. The amended 10Qs for 2004 and amended 10K for 2003 will be filed soon. I'd like to remind you this morning that our discussion may contain certain forward-looking statements based on current expectations and assumptions that are subject to risk and uncertainty that could cause actual results to differ materially. These risks and uncertainties are outlined in the Goodyear's filings with the SEC including its form 10K for the year ended December 31, 2004. The Company disclaims any intention or obligation to update or revise any forward-looking statement's 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. Referring to the agenda on slide two, Bob will open with a look at the successes and challenges he's faced in his first 2 years as CEO, Rich will discuss the specifics of our 2004 and fourth quarter financial performance as well as comment on our liquidity position, cash flow, legacy costs, and finish with review of SBU performance. Bob will return to provide an outlook for the first quarter and full year 2005. Now, I'll turn the call over to Bob.

Thanks, Barb. Good morning everyone. I want to thank you for joining us today. I wanted to begin our call in a somewhat unusual fashion I wanted to step back 2 years in time and reflect on the assumptions that I made then about our Company and its markets and how we then set out to fundamentally change our Company. At that time realized we had considerable assets in our Company. For example, here our technology, our brands, our people, and in addition we realized that the tire markets were frankly providing us with very attractive trends. For example, high performance, ultra high performance, larger rim diameter tires.

Unfortunately we weren't capturing the value that was being presented. We were not capitalizing on either of these potential opportunities. So we concluded that our poor performance and our pain was self-inflicted. So we set out to fundamentally change our Company. To build a Company that would take advantage both of its assets and the favorable market trends that we were seeing. We concluded that we could win if we made several core changes in our Company. And I'll elaborate on those changes.

We believed we could win if we accelerated the introduction of high impact and new products, for example, here are the Assurance family of tires in North America. Today we are executing as planned with a series of introductions that are creating for us a richer product mix increasing our brand equity and stimulating our dealers. Our new product engine today is certainly up and running for both passenger and truck tires. We also believed we could win if we rebuilt our strained dealer relations. Our past focus had been on selling in tires to dealers. Our future is firmly focused on building our customers' businesses and ensuring that the velocity of their tires sell-out is outstanding. Our annual dealer conference in North America this past January was proof positive that we have made terrific progress. And more progress is in our future.

We concluded that we could win if we analytically and dramatically changed our allocation of capital. We assessed the core economics of our businesses, invested significantly where we saw value creation and eliminated costs where no value creation was identified. For example today we identify attractive market segments, we investment in them with outstanding product and outstanding marketing programs. Those segments not identified as attractive are quite simply not focus areas for us. We have become both more effective and more efficient with our use of available resources.

We concluded that we could win if we increased the earnings capacity of our international tire businesses and our engineered products and chemical businesses. You are now aware of our outstanding performance in these businesses again during 2004. And frankly it is my personal guess that it exceeds some of your expectations. We will continue to build on this positive momentum in 2005. There is more to come from the international tire businesses and from our engineered products and chemical businesses.

We concluded that we would win if we set out to improve our balance sheet by extending maturities and thereby creating sufficient time for us to turn around our Company, and we are currently on track to accomplish this and Rich will have some comments to make here in a few minutes. We believed we could win if we significantly improved the capabilities of my leadership team, and as you're generally aware my leadership team has undergone many changes in the past few years. In fact, 23 of the 24 top jobs in our Company have been filled by new people in the last 3 plus years. This is a dramatic change that was absolutely essential for our progress. We have successfully brought leaders from both outside and inside our Company and blended them into an outstanding team. Collectively we are continuing to work on changing the culture of our Company.

Now, to summarize, the progress we have made in these areas was absolutely critical to our turn around efforts and the results that they -- I would consider gratifying. However, we remain committed to improving the core economics of our businesses and driving for significantly better market positions and better financial performance. Let's look for a minute at the achievements during 2004 and then I'll make some comments about challenges facing us in 2005.

In terms of achievements during 2004, the Company had record sales of 18.4 billion. Also for the year our total segment operating income more than doubled over 2003. The actual percentage is 111 percent improvement year on year. Each business unit delivered significant segment operating income increases over 2003. So in past calls we've talked about 6 out of 7, I can now say 7 out of 7 businesses and I think that is a key indicator of the core strength of our strategy. Revenue per tire is up 6 percent. That is excluding the impact of foreign exchange and FIN-46.

Our product and brand mix continues to improve, innovative new products are having a major impact in the market. Led of course by the Assurance family of tires in North America in 2004. This success is resulting in improved revenue per tire and a richer product mix. We expect that that success will continue with our SilentArmor technology in the SUV and light truck tire lines introduced at our annual North American dealer conference in January. North American tire achieved positive segment operating income for 2004. Driven primarily by replacement consumer and commercial volume, price, and mix, and cost initiatives.

Our new product lines in commercial truck have helped us gain share of the original equipment market. Our North American commercial OE sales for 2004 were up 70 percent compared to market growth of approximately 40 percent. We are selling at this point, I can tell you, every tire that we can manufacture and are working to further improve productivity to take advantage of that market strength. We increased share of market in targeted products, brands, and channels. Cash flow from operating activities improved and Rich will have more to say in a minute about that subject, and, finally, to improve Goodyear's capital structure we completed 5 debt financings in 2004 and you've see us continue with those efforts early this year.

I wanted to address a big win that we've already had in 2005. We had nearly 3,000 attendees at our annual dealer conference in Dallas, up significantly from attendance in the past few years. But -- we introduced there our SilentArmor SUV and light-truck tires as well as new Dunlop tires. The dealers were extremely pleased about the success, of course, they experienced with the Assurance tire family in 2004, and were equally excited about the new tires that we launched this year. In fact, the order rate on the new products has exceeded that of the Assurance launch last year and we're showing signs here of another big win. We are truly building momentum in our North American markets.

Now, the marketing decision that feature DuPont's Kevlar as the strength behind SilentArmor technology is already paying dividends as the Popular Science April 2005 feature for terra with SilentArmor is 1 of the 20 hot new products that practically speak for themselves. This joint development effort with DuPont is yet another example of how we are now partnering with other outstanding R&D organizations to utilize their development resources to complement our own significant in-house capabilities. We are fully aware of the significant challenges that remain for us in 2005. And we continue to address each of those challenges with specific strategies. And I'll mention several here.

The growth in the consumer OE market has slowed. I know you're all aware of that. We've rapidly adjusted by using our capacity to support growth of our high-performance tires in the replacement market and we're in the process of making that shift. The worldwide commercial truck market is strong today, which is very good news. But there is currently tight product availability. We continued to make significant productivity improvements in our facilities to help meet demand while new capacity is being added in Latin America for Goodyear. We are continuing to focus on cost reduction actions to offset another expected 6 to 8 percent increase in raw material costs in 2005. So our forecast for 2005 is 6 to 8 percent escalation in the price of raw materials.

We'll continue to focus on improving our capital structure by extending maturities and executing asset sales in 2005. I think this list of achievements clearly represents significant progress for us towards our goals. At this point, I want to turn the call over to Rich to discuss our financials and the SBU performance and then I'll return to look at our outlook for 2005 first quarter and full year. So, Rich?

Thanks, Bob. Thanks everyone for joining us this morning. What I'm going to do is just talk about our full-year 2000 results, talk a little bit about Q4 results both in total and by SBU and then I'll also touch on our liquidity and refinancings as well as pensions and benefits just to give you a little bit more information on those topics which I think are certainly relevant to your understanding of where we are as a Company.

Now, before I do that, again, I just have to mention up front that our '04 results include the consolation of SPT and T&WA. SPT is our Australian joint venture, and T&WA is a wheel mounting business in North America. Obviously when you compare '04 to '03 the comparison is a bit skewed, if you will, because '04 includes those results and '03 doesn't. Now, just from a reference perspective, very quickly I'll tell you, in the fourth quarter the increase from this consolidation in units sales operating income is 1.6 million, $335 million and $6 million respectively and again on a full year, the increase in units is 6.3 million, the increase in revenue was 1.2 billion and the increase in segment operating income is about 15 million due to that consolidation.

Before we look at our fourth quarter results I just want to look very briefly at our full-year 2004 results which revealed substantial progress in our ongoing turnaround efforts. You'll see tire units increased 223 million units and were up about 1.6 percent when you exclude the benefit of the consolation of SPT. And as Bob mentioned, sales were a record 18.4 billion and segment operating income more than doubled to 1.1 billion. From a gross margin perspective, gross margin improved 2.6 percentage points due primarily to improved pricing mix and cost reduction actions in 2004. And finally we recorded a profit in '04 of $115 million or $0.63 a share compared with a loss of over $800 million or or $4.61 a share, excuse me, in 2003. I would point out that certainly we had a big insurance settlement in there, as well, in 2004, about $157 million, which we'll talk about a little bit more, but even excluding some of the items in there I think you'll see substantial year-over-year progress and certainly Barb can walk anyone through the particulars of that.

If you look at slide 6 you'll see it summarizes full year segment operating income again, where we saw improvement in all of our businesses, again, we're happy to say 7 out of 7 versus the 6 out of 7 that we've had to say in the past again with North America being the trailer. Again, I'll add more detail on fourth-quarter results by business unit as we move forward. Now, looking at slide 7, you see a summary of our fourth quarter results and you can see we have made continued progress and similar to the first three quarters by achieving significant year-over-year improvements in both gross margin and segment operating income. Now, as we'll discuss these improvements were primarily driven by our strategy to improve our mix to use price increases to offset escalating raw material costs and to continue our ongoing cost reduction effort.

Now, as Bob has discussed on many occasions, our strategy is not one of simply broad growth but really one of selective growth. Which is really to say we want to grow in our targeted channels with our targeted brands and with our targeted customers. Now, to that end we were successful in executing that strategy during the fourth quarter and really for the full year, now by growing our volume in our targeted market segments and by being selective in certain other market segments, we improved profitability in virtually all our businesses. With that said, our worldwide tire units sold increased by 2.4 million to 55.2 million units in the fourth quarter for an increase of over 4 percent. However, excluding the consolation of SPT fourth quarter units increased by only 800,000 or about 1.5 percent.

Now, unit growth was driven primarily by both strong branded consumer replacement volumes and continued strong OE truck tire sales particularly in our North America business, and certainly the consumer branded consumer replacement business was driven by our Assurance tires. Now, these increases were partially offset by lower North America consumer OE volumes as well as lower volumes in certain segments of the European market. Total sales in the quarter were 4.8 billion which is a 24 percent increase over the prior year, however, if you exclude SPT, T&WA and about 150 million from foreign exchange our sales in total increased about 10 percent which is still from our perspective a very good growth and we see that growth driven by both price increases in most of the world, as well as improved product mix, including the increased sale of commercial truck tires as well as the increased sale of Goodyear branded tires in virtually all of our business segments.

Now, gross margin also improved 4.2 percentage points in the quarter, again driven by that price mix that we referred to, that added about $220 million which really offset what was about $130 million of increased raw material in the quarter. Again, you may recall in '03 we had about $130 million of accelerated depreciation and asset write-offs that impacted that margin number related to our Huntsville plant closure. When you look at total segment operating income, it increased to 271 million from 174 million in the fourth quarter of '03 and this resulted in segment operating income margin of 5.6 percent of sales up from 4.4 percent in 2003 and certainly up from a number much lower than that if you go back even a few more years. Net income in the quarter was 125 million, or $0.62 a share on a diluted basis, and this compares with a net loss of over 400 million or $2.44 a share in fourth quarter of '03. I'll point out that the share count for the fourth quarter included an incremental 29 million shares from the convertible offering which we completed in July of 2004. Certainly those shares will be outstanding for all of 2005 as we look ahead.

If you look at slide 8, I'll just make some comments on some of the items that make up the difference between segment operating income and earnings in the line earnings or loss before tax. I'll keep my comments at a summary level. Obviously the 10K has a lot more detail on this, as well. But first off, you'll note in the fourth quarter we had about $7 million of net rationalization after sales and accelerated depreciation expense in the fourth quarter '04, again versus about 290 million in the prior year and that prior year number again was related to the closure of our Huntsville plants. The details on those net rationalizations I'd refer you back to the footnote in the K and you can see the particulars that made that up.

Secondly, the $24 million increase in interest expense between the two periods is really a result of both an increase in interest rate environment and higher absolute debt levels, including the consolation of SPT's debt and the on balance sheet treatment of a recently completed accounts receivable financing in Europe. Now, when reviewing our increased debt levels I would point out that after excluding the increase in debt due to to the consolidation of SPT and the on balance sheet AR facilities and after deducting the cash on our balance sheet, our net debt levels actually slightly decreased versus the prior year.

Now, as we've discussed in the past, and what I'll kind of talk on in detail a bit more momentarily, 2004 was really focused in large part on improving our liquidity, and to that end we completed over 2 billion in financings which provided us with that added liquidity but also added to our absolute debt and to our interest expense. Now, we continue to feel that this was the appropriate action for us to take in 2004 as we needed to address our upcoming obligations to provide time to continue to execute on the turn around of our business. Now, referring back to slide 8, here you'll see that insurance settlement of about $157 million, again that's going to be received in cash over the course of the next 15 -- the next 15 months, or so.

Finally, on slide 8 you'll see the cost related to our implementation of Section 404 of Sarbanes-Oxley, as well as costs related to our restatements, that aggregated about $9 million in the quarter and about $20 million for the year certainly not insignificant costs for us, as we move forward, and hopefully costs that will be reduced as we look out into '05. Looking at the bottom of the page you'll see the Company reported earnings before tax of about $188 million in the fourth quarter of '04, versus a loss of about 360 million in the same period in '03. Obviously a substantial improvement of over $500 million. But I would say with or without the non-operating items in both '04 and '03, such as the insurance settlement or the Huntsville closure, I think you will still conclude that our fourth quarter 2004 performance was substantially improved versus the '03 period.

Now, I'd like to turn you to the next slide. As we mentioned in our press release our cash position at the end of the year is about $2 billion. On this slide you don't see the restricted cash related to our Entran litigation. But when you take that cash on the balance sheet and add it to our available credit lines you'll see our total liquidity is about $3 billion and again that's about a billion-dollar improvement versus where we were in the prior year.

Moving forward, I comment that consistent with Bob's earlier comments about sticking to our strategy and delivering against it, I'm pleased to say that in '04 we accomplished the goals established in our financial restructuring plan which we set forth and shared with you a few years ago. While 2003 was focused on -- 2003 we really focused on restructuring our existing debt obligations and improving our near term liquidity. In '04 we really focused on improving our liquidity and extending our debt maturities. Now, to that end again we did improve our liquidity by that billion dollars that I just mentioned, and we completed approximately 2.3 billion in refinancing transactions including the issuance of a $650 million senior secured note in a private placement earlier in the year in the first quarter. The same time we added a $650 million tranche to our existing asset-backed facility, and in July we completed a convertible note offering, really the first time that Goodyear did such a transaction, and more recently we completed the refinancing of our U.S. revolving credit facility, as well as in the fourth quarter completing 165 million euro paying European accounts receivable securitization which is actually recorded on our balance sheet as I mentioned.

So looking ahead and again consistent with our plan to extend maturities, we're also now in the market to refinance our U.S. and European credit facilities totaling about 3.3 billion and we expect to have this refinancing completed in April. Now, again, this transaction is going very well. With very significant demand levels. In fact we're now considering whether to add an additional loan to this financing package and that would be an additional loan one that would in essence share collateral with our existing secured notes issued in the first quarter of 2004, that $650 million private placement note that I just mentioned. Now, once completed, we expect that the new facilities will extend maturities to 2010 and at interest rates lower than we're currently paying.

Looking at slide 11, I'm not going to walk through that, but certainly you can see the significant changes in our 2006 maturities when you look at this on a pro forma basis. So as we move forward in '05 we'll continue again to opportunistically assess the capital markets, to address our remaining obligations, as well as our pension obligations. We'll also again looking forward in a longer term to reduce debt through asset sales and raising equity.

Just to talk about cash flow for a moment. You see we had positive operating cash flow of about 720 million which compared to a use of about 290 million in 2003. Certainly there's a lot of plus and minuses on that chart, but when you cut through it, the real driver behind this is the improved cash flow from operations which came from our earnings, in essence. Certainly there is some changes in there for putting some cash on receivables back on the balance sheet in '03, but at the end of the day the driver really is improved earnings. From a CapEx perspective, we spent about 520 million in '03, and now we are looking at spending about 640 million in CapEx in 2005, and I think that's consistent with Bob's comments about our capital allocation and focus on return on those expenditures moving forward and certainly we can talk about that in the questions and answer. So, again, I just say cash flow has been a good spot for us in '04. One of Bob's 7 strategies that he's talked about in the past is cash is king. And I can tell you as a Company that goal is still very much in the forefront and, again, as we looked at 2005 areas like working capital will be right in front of us in terms of where our initiatives will head.

Now, switching topics for the moment, I'm just going to briefly walk you through some comments on legacy. You can see our pension expense in '04 decreased about $60 million. Again, by the way, this is on a full-year right now. Again, this was offset by an increase in our retiree medical cost of about 45 million. Certainly the decrease in pension came from some of the provisions of our union contract back in 2003. Looking at our plan assets you'll see that we returned about 12 percent, a little over 12 percent versus our planned assumption of about 8.5 percent. Domestic cash contributions in '04 were approximately 160 million. Again, most of which was made in the fourth quarter.

Now, looking ahead to 2005, we estimate those cash contributions for our domestic plan will be about 400 to 425 million and I just say as a reminder the legislation passed early in '04 which changed the discount rate used for funding purposes by linking it to the corporate double A bonds versus the 30-year treasury will be again in effect during 2005. To the extent this legislation is not extended beyond its '05 expiration date, our future contributions will certainly even be more. Finally, I just commented our discount rate as of December 31, '04, dropped to 5.75 percent from 6.25 percent really with an end result being the driver of an increase in our unfunded pension obligation from about 2.8 billion up to 3.1 billion as of the end of the year. Now, again, to help you analyze the income statement and balance sheet impact going forward we've provided some sensitivity analysis on slide 13 and I'd also reference you back to the MD&A and the '04 10K which does this even in more depth. So again I just conclude that while challenging we certainly continue to believe that our legacy costs are manageable.

Now, before before jumping into segments, I 'd just like to make a few comments relative to our implementation of the provisions of Section 404 of Sarbanes-Oxley, as well as our restatement as the two are certainly related. Relative to our restatements we've prepared a summary on slide 14. The summary reflects both the previously announced adjustments which resulted in a decrease to earnings through June of '04 of about 4.6 million as well as a decrease to earnings of about 13 million or 12.9 million related to SPT which makes up the bulk of the items identified in the fourth quarter. The net impact of these adjustments overall is an improvement to earnings of 5.5 million in '04 and a reduction in prior periods. Again 2003 going back multiple years of about 25 million.

Now, when qualitatively looking at the nature of these restatements I can tell you that in addition to the SPT items they relate primarily to out of period adjustments which in large part have been identified by the improved controlled procedures we've put in place which involved both a lot of people and processing changes. We feel that the actions we've taken since last year have made major improvements to our control environment and I would refer you to item 9A of the 2004 10K just to give you a more in-depth review of all those actions that we have taken. Now, however, as we look ahead, we are certainly cognizant to the extent a Company has near or at even -- near or at break-even net income small dollar value adjustments, out of period adjustments may be considered material to current period results and consequently may need to be reflected in the appropriate prior period. And notwithstanding the improvements to our control environment this risk will stay with us until our net income grows to a point sufficient to make small dollar value adjustments in material.

Now, relative to Sarbanes-Oxley, management here we concluded that we had a material weakness related to our account reconciliation process which simply stated is where and how out of period adjustments are identified. Now, among the factors that led to this conclusion were the continued identification of out of period adjustments and the resulting restatements due the fourth quarter of '04 and taking into account the governing auditing standard which suggests that restatements really are a strong sign of an ineffective control environment.

Now, additionally, as part of our implementation of Sarbanes-Oxley we also identified a material weakness related to segregation of the duties, due to not properly restricting access of certain individuals in both information technology and finance, where the potential, again the potential to cause a material misstatement of the financial statements. I'm pleased to say that our review of this situation revealed no such actions were improperly taken by individuals with this capability, and we've already implemented mitigating controls in 2005 to prevent or identify any future potential occurrences. So overall, we've made progress at Goodyear to address our control environment and are committed to excellence in financial reporting. I can tell you we will continue to build a team of professionals and to address our systems and processes to ensure we execute against this goal.

Now, moving on to slide 15, segment operating income you'll see increased to 271 million in the fourth quarter of '04 which is a 56 percent increase over the 174 million earned in the fourth quarter of '03, again excluding the impact of FIN-46. We now have 6 consecutive quarters of year-over-year improvements. Very quickly, I want to say one of the reasons that we had such positive segment operating performance is, the price mix that we speak of that really drove the revenue per tire increases that we saw in the fourth quarter and really throughout the year, in North America and our European SBU's you will see excluding T&WA and Exchange revenue per tire increased at least 8 percent in those businesses and when we look at Latin America and Asia Pacific regions we see revenue per tire going up 12 percent and 4 percent respectively. On a total Company basis for the fourth quarter our revenue per tire went up about 8 percent. So clearly significant gains.

Now, just talking about some of the SBU's individually, lets start with North America. Again referring to slide 17, you'll see North America had its third consecutive quarter of positive operating income and finished the year with a profit. Now to highlight this improvement, we see, and again, while full year is not on your chart. North America earned 32 million in segment operating income in 2004. Again, that is compared to $130 million loss in the comparative 2003 period. Now to accomplish this we did overcome some significant headwinds from raw material cost increases of about $100 million.

As we look at some of the drivers for our North American business, you'll see that that revenue per tire increase of 8 percent was really due to some high-quality share gains in our Goodyear branded tires particularly in the broad market sector, and also continued growth in both the dealer and mass merchandiser channels and also strong growth in the commercial and off-highway markets. Our replacement units increased in the quarter with Goodyear branded product growing 12 percent. Now, again, this compares to an industry that in the quarter grew about 3 percent and I think continues the trend we've seen for really over 12 months where our Goodyear branded increases have really grown at multiples of what the markets grow.

Also, I would tell you the success of our Assurance tire continues. As you may have heard us say in the past that we sold about twice what our original expectations were for Assurance. And also related to private and associate brand business, what you'll see is that our share really has stabilized due to our selectivity strategy. You might recall the end of '03 and really the first half of '04, that our share declined in associate and private label. We saw some of that come back in the second half of the year as we really executed that selectivity strategy of who -- what customers that we want to work with, and also growing our share of account of those customers in ideally improving their business and, quite frankly, improving the profitability, if you will, of our private label portfolio of businesses.

Negative in the quarter, again, I have to say is our Dunlop business we did not improve our share position there. In fact, we lost a little bit, but we did introduce a number of new products, Dunlop products both at SEMA and at the dealer meeting that Bob referred to and we're confident that we are going to make progress with our Dunlop business as we get into 2005. From a truck tire standpoint the commercial OE markets grew about 37 percent in the quarter. And again, comparative to that we basically grew at a rate double that in the fourth quarter, so we're very pleased with that. And while the commercial replacement business only grew at about 1 percent, we did gain a little share, but again most important there is our price increases, our revenue per tire, and really the profitability we are able to generate in our truck business right now.

Now, again, in terms of profitability, again North America reported positive income operating income in the quarter and again richer price mix accounted for about $60 million of that improved -- of those improved operating results I would tell you price increases are sticking in the commercial business and a portion of the announced price increases are sticking in our consumer replacement business, as well. Just to help you frame what we've done on pricing in North America, since late 2003, back in December '03 we had about up to a 5 percent price increases -- price increase. In May we did about a 4 percent price increase. September of '04 we did up to another 5 percent price increase. And most recently we announced up to another 6 percent price increase in February of '04.

Now, to touch on a few other items. The Huntsville closure that we referred to added about 17 million in cost savings and rationalizations in the quarter. We did however experience head winds of about 42 million in the quarter from higher raw material and energy costs as well as higher workers compensation expenses. I would also point out that North America did receive a portion of that supplier settlement that we've talked about in the past, which was included in the fourth-quarter results.

Finally, we did have higher advertising expense but I would tell you that given the terrific results we've had around Assurance, I think Bob would tell you that's a good expense as opposed to some of the bad expenses we're still working on, and finally I would just say that as we think about '05, we're going to continue to make those investments as we introduce our new family of SilentArmor products. So overall, I think 2004 was a key year in our turn around effort and I think we feel confident that we can carry some of that momentum again momentum with our dealers and our products into 2005.

Our European union business also had a solid quarter with segment operating income up about 185 percent on a 715 percent sales increase. Our revenue per tire increased about 9 percent excluding exchange. And while the consumer replacement markets were essentially -- actually decreased a bit, we did have improved profitability in there driven by our Dunlop, our Goodyear and Dunlop share gains. Again, our European story really is one of mix around high performance, ultra high performance and a brand of business and we've met with some success. As we look at the commercial OE markets, again about 20, over 20 percent growth in Europe, similar, not as high, but similar to what is happening in the U.S. and we did grow fast and the market really driven by our new products and our OE business that we got going back to 2003. And again I would just say the driver of our European business was price mix which added almost $90 million to that increase of segment operating income and again that's a focus on our -- on really exceeding in our targeted market segments.

So for the full year our European business earned over $250 million compared to 130 million in '03 and again I would say our strategic focus paid off. If I just can kind of in the interest of time push together our Eastern European and Latin America businesses I would still refer you to the slides, but what I would tell you on a year-over-year basis both had strong sales and earnings growth on the full-year Eastern Europe grew 32 percent, while Latin America grew about 70 percent. And really, to really get to the core of what is underlying the growth in both of those businesses, it really is our ability in those markets to price ahead of raw materials and, secondly, I would tell you to capitalize and even shape if you will some of the market trends that are happening in those regions and improving our mix by doing it.

Particularly in Eastern Europe it's really capitalizing on the quick move to the high performance, ultra high performance, and 4 X4 tires. And Latin America is really capitalizing on the radialization of the truck market there and leveraging our distribution and our dealer network down there to take advantage of that. I would also say relative to Latin America being a bit more selective on the OE side. So again, I'd point out that Latin America had about a 46 percent segment operating increase in Q4, while EE -- Eastern Europe was down by about 2 million, and really that was due to a combination of some higher SAG's as we expand our business in Russia, some higher costs in our South African business and again the impact of some of the high raw material costs that we saw in the quarter. So, again, as we look forward with those businesses, we do feel very well well positioned to continue the growth that we've seen there even in light of some of our competitors coming on to challenge us in those particular businesses.

Now, with respect to Asia, again, excluding the impact of SPT sales increased about 4 percent but our profits declined. Again, SPT added about 180 million of sales and about 8 million of segment operating income. If I could condense our business in Asia, I would just tell you the main driver was the slow-down of the commercial -- or of the consumer OE business in China and that really did offset some of the progress we made in some other countries in the region. Again, I would point out, as we said the last time, that some of the production capacity, excess production capacity created in China at our China factory has been utilized to send out to some of our other businesses around the world which is actually a positive.

So again, I would just say despite the recent slow-down in China, we continue to believe that the Asia Pacific region offers us a real opportunity for growth and cost reduction and I think our commitment is demonstrated by hiring -- by the hiring of our new President to oversee the Asia operations by strengthening our team there. We've hired a number of people in that region already and actually by soon moving our headquarters to Shanghai. So we're excited about the future and I think you'll hear us talk about our initiatives in Asia in the future.

Finally, just talking about our non-tire business, engineered products had strong sales growth and segment operating income improved 9 percent. 21 percent sales growth really came from all our regions and while overall sales in the auto market were flat, the replacement market did see some growth, and again we're working aggressively to expand our distribution channels in the replacement market and really to build on our strong brand appeal. Just very quickly, many of you know that NASCAR, all NASCAR runs on Goodyear tires. What you may not have known is all the belts on those cars are Goodyear belts as well. And I would tell you when you think about our engineered products business, really what that business is focused on is a combination of cost reduction, new product introduction and finally leveraging our brand. I think Bob would probably join me and tell you they have done a great job with taking the Goodyear brand name and leveraging it and turning it into improved operating performance.

Finally, on chemical I would just tell you the story is similar to what we've had in the past and that's really continued pricing ahead of raw material costs and really the cost reduction efforts as we are now going to consolidate that business in North America starting in 2005 we've really done a good job of reducing our costs in that business, taking head count out and really leveraging the throughput going through those factories. So overall I would tell you our businesses continue to execute on their plans. We continue to gain share in our targeted markets, we continue to build on our brand strengths, continue to introduce new products and we'll obviously focus on cost reduction to improve our operating results as we look into '05. So with that, Bob, I'll turn it over to you.

Well, thanks, Rich. You can catch your breath after a what I would call -- what we intended to be, a comprehensive set of remarks intended frankly to provide all of you with a complete summary of our performance and the drivers of that performance. I'll build on what Rich has commented on by providing you with a brief update here on the first quarter. The consumer OE business in Europe and North America has been flat to down. While the commercial OE business in both regions has been strong, at better than 15 percent growth. By the way, we expected both of those trends. We continued to outperform the robust commercial OE market.

On the replacement side the North American markets were very strong in January and February, and we have performed significantly better than the market during January and February. This performance is linked to the success of the Assurance family of tires which we launched last year, and as I mentioned earlier, we anticipate further impact from the launch of the new SilentArmor Goodyear branded SUV and light-truck tires, as well as additional new product offerings in our Dunlop and Kelly brands. The strong replacement demand is offsetting the lower OE demand for our Company.

In Europe, the replacement market has been somewhat weak in January and February. Although we have achieved gains in the ultra high performance consumer segment that's so critical to us, and gained share in the commercial market, as well. We will be very aggressive in accelerating our rate of productivity gains and in reducing our cost structure to offset the escalating raw material pricing that we're facing in 2005. And I'll make a couple of comments here on raw materials.

We are estimating an increasing of 8 to 10 percent in the first quarter of 2005. But that number is the equivalent of a 2 to 3 percent higher price level than we saw in the fourth quarter of 2004. And for the full year, as I mentioned earlier, we expect an increase of 6 to 8 percent, and of course we'll be constantly reviewing and revising those expectations. We expect interest expense to be at roughly the same level as the fourth quarter of 2004. So overall the first quarter for us at Goodyear appears to be off to a good start.

I thought I would also provide you with a bit of perspective on the remainder of 2005 to assist you with your models. In North America we forecast the original equipment market for consumer tires to be up about 1 to 1.5 percent for the year. That now looks a little strong, but frankly we'll take another look at it in the second quarter and revise if necessary. The commercial OE segment we'll still see strong growth but at a slower rate than the just outstanding growth of 2004, and we are expecting trend line growth in our replacement markets. In Europe, we would expect similar trends to those we've experienced in 2004.

We have cost initiatives in place to help us offset raw materials cost increases, which as I said earlier, are 6 to 8 percent. Due primarily to the increase of the price of oil and therefore oil derivatives which we utilize in our tire manufacturing. Interest expense for the year will be in the range of about $400 million. We will have higher financial expenses in the second quarter due to our refinancing activity, as Rich described. And as Rich also mentioned, we're expecting capital expenditures of approximately $640 million in 2005. We continue to drive increases in segment operating income through volume, price mix improvements and cost reductions in 7 of our 7 businesses. We're making significant progress in our turn-around efforts but we fully recognize the significant challenges that lie ahead of us.

In closing, I would just like to make a brief comment on the 7 strategic drivers that we put in place just over 2 years ago. As a road map toward our continuous market and financial improvement. While the 7 drivers continue to guide our decisions and drive our progress, we also view them as driving the commitments that we have made to our shareholders and we'll continue to make to our shareholders. We are clearly building market and financial momentum in every one of our businesses utilizing these 7 strategic drivers. And I wanted to make a strong point with you here that we have 0 interest in playing in this tire industry of ours to survive. We are clearly playing to win. We are clearly playing to be the leader in our industry. And that's how we're approaching our business quarter to quarter, year-to-year and strategically. I would now like to open the call to questions and, Rich, you probably caught your breath by now, so we'll open it up to questions and I know there is several questions in the queue.

At this time I would like to remind everyone in order to ask a question, please press star then the number 1 on your telephone key pad. In the interest of time, management requests that you limit yourself to one question. If you have a follow-up question you may re-enter the queue by again pressing star, 1. We'll pause for just a moment to compile the Q&A roster. Your first question comes from Himanshu Patel with J.P. Morgan.

Could I just ask any update on what is going on on the asset sale front. Have you guys found any more opportunities or is it still sort of taking it day by day on that?

I would just confirm what we've said before, that we've identified several areas now where we are active and plan to close sales certainly with our plantation operation out in Indonesia, and now with the farm business in process to be sold to Titan. Beyond that we're continuing to evaluate, our portfolio of businesses and markets and that's an ongoing process for us, but we have nothing else to announce here this morning.

Maybe just one quick follow-up. Rich, in China, how are the margins on OE business. I know in the rest of the world it's kind of hard to make a business model there strictly on margins, but I mean is that a more profitable market for you guys.

I'll let Bob elaborate as well, but from an OE business, we've had a lot of our China business has been concentrated in the OE sector and we're actually now expanding that to even more in the replacement market. But while we don't disclose margins in China as they are, I would tell you that we're very pleased with our business over there. Bob, you may want to comment.

I think the China OE market has had obviously there has been a lot of press coverage here in the past six months or so about a slow-down. As Rich said, the OE business in China has been solid in terms of profitability. Now that there's been a slow-down I think we can fairly expect that there will be an overall compression of some of the margins in the OE business, and that's why we're building an outstanding team in China to be able to play not only in the OE business but also in the replacement business. I would just make a further comment that over the past three months, starting in December, carrying through January and February, the OE market is rebounding I would say solidly. Now we have got a three-month trend rebounding solidly in China. We have a lot of long-term confidence in that market.

Okay. Thank you.

Next question comes from Saul Ludwig with KeyBanc.

Good morning, guys.

Hi, Saul.

Could you comment about the two things, one, how the movement of the chemical division into North American tire is going to change the way numbers get reported and will reflect on the comparisons and what we should be doing about that. Secondly, talk about Russia and your sales in Russia and your strategy in Russia, and what is sort of going on with you in Russia.

Okay. I think what we'll do here, Saul, is Rich, maybe you'd address the first and I'll take the second.

I thought I was going to address Russia. Saul, the difference is, and we can walk through the particulars. Barb is prepared to do this, but at the end of the day you'll see in our reconciliation between segment to income before tax there's an elimination in there for the chemical business on where the profits sit. So what you'll see is that segment operating income will come down, will recast us for all the numbers presented and that corporate other elimination will in essence go away. So the net won't change but segment operating income will come down by, right now, Saul, use about $100 million, lets say.

Okay. Relative to Russia, as I think most of you know on the call, we have a fair-sized and growing operation there. And also, you know, the profit potential we see both today and ahead of us is significant in Russia. We have not laid down bricks and mortar in a substantial way in Russia.

I have nothing, Saul, to announce on that score today, but we like the potential of the market, like many companies, we have some concerns about stability in their -- in their government business environment, and so we've got some concerns in that area. We're doing a fair amount of business there today. It 's good business for us. We see more in the future. But those decisions are still out in front of us. Nothing to announce here today.

Roughly sales now?

Pardon me?

Rough order of magnitude of sales you're doing in Russia?

Yes. We don't reveal sales for the Russian market specifically but we're doing very well in terms of market share and doing well importing product there today.

Thank you.

Thank you.

Next question comes from rod Rod Lache with Deutsche Bank.

Hello, can you hear me.

Yes, we can hear you Rod, good morning.

I was hoping you can just address relative to your outlook for 2005, is it generally your expectation that you sort of maintain margins at pretty attractive levels outside of North America and North America is really the source of improvement?

I would say, Rod, we have got a different perspective on that at this point. And, again, I think most people who were looking at our Company 2 years ago underestimated what we could do in the non-North American tire businesses. We see opportunity going forward to improve our margins in those businesses. Albeit in some cases at a slower rate, naturally, because we've had, as Rich went through, some huge increases again again in 2004 in terms of profitability.

But we see opportunity for margin improvements in those businesses and then of course in North American tire which has been our big challenge we're now starting to progress there both in our markets and the financial performance to make additional increases. So we expect that all of our businesses have significant opportunity, frankly, for margin enhancement.

Is the margin improvement largely a function of the price versus raw materials? Is it the net cost savings? Or is it volume?

Rod, I would say it depends on the business, but it is an amalgamation of all of those. We're doing what we're doing to build our marketing and selling capability so that we can enhance, in some cases price, some cases mix, some cases volume. And as Rich said we're very selective about how we go after that volume today. Much more selective, perhaps, than we've been in the past.

But we also recognize, as a challenge going forward, that we have to become even more intense and aggressive in reducing our cost structure. So it's going to be a combination of frankly all of those things. No one of them individually is going to lead us to the turn around and the win that we want in our business. We have got to do all of those and we have got to do them successfully. And I think we've now shown that we're on a path to get that job done.

And just one last thing. How are you doing relative to capacity utilization and fill rates?

Rod, from a capacity utilization we're still in that range about in the let's say on truck probably mid-90's on passenger, probably low 90's. So from that perspective I think it is, you know, much improved over last year. Remember, the truck business in general is going so strong. In term of fill rates, I think what you'd see is we've had much improved fill rates from the prior years and fill rate, you know, defined as both the service levels we've given the dealers as well as product availability, I will tell you that as you go out and you talk to some of the dealers, they'll probably tell you they can't get Assurance tires fast enough and some of those products fast enough, which I would say is something we're working on. And as Bob mentioned, as we see some slow-downs in the OE business, we're able to sort of soak up that capacity to meet those demands.

Which Rod, just on fill rates I think it's important to note here that we've gotten much better. We still have a significant amount of progress that we can make in the future ahead of us. Okay? So I think that's important to say. I think it's also important to say, look, as we introduce dramatic new products, I think we're going to, frankly today, especially in North America, we're building a halo effect with those products. In other words, we introduce Assurance then we introduce SilentArmor.

And as I said, order rates on the new SilentArmor are running higher than they were at this point a year ago on Assurance, which is a bit ahead above our expectations. So we're in that enviable situation I would say in new products where demand is exceeding the original forecast and supply. And we've built a lot of flexibility into our capability here and we'll be able to meet those needs. But there will be some in and out availability issues undoubtedly.

How big are these products relative to North America? I thought Assurance was relatively small.

Well, I'll tell you, Assurance tires, and it depends on what you mean how big are they.

Is it like a 5 percent of mix. Or is it something more--?

We have said on the Assurance product that we've sold last year over 2 million Assurance tires. But if you just look at that 2 million, you will under estimate the impact that the Assurance tires had on North America. There is a huge halo effect. We're buying credibility with dealers, with the consumer and frankly with our own people through those launches. So that launch has a bigger impact than just the pure numbers. By the way, I think our largest launch before that in the history of our Company was Aqua tread just to give you a historic comparison here and that was about a million tires in year one.

Thank you very much.

Next question comes from Michael Lucas with Appaloosa Management.

How does the first quarter look and the second quarter in terms of overall volume?

Well, as I commented just relative to the first two months, here we, you know, the market in the U.S. and consumer replacement has been strong, and we're running ahead of the market. I also mentioned that in commercial OE we're running ahead of that market, so I would say we're off to a good start for the year. Europe has been a little softer than that. We're doing well in terms of our sales relative to a weak market in Europe.

I'm sorry, I just had to be a little bit more specific, I'm just looking for North American units up or down and the world units up or down compare them to your last quarter.

We don't normally provide that information. I'm not going to provide it this morning.

Okay. Where are you looking for in term of capacity? At your plants? What do you think you're running for the first quarter.

I'd say we're about where we've been ending 2004, and, you know, we don't talk to -- forecast specific volumes like that, but, you know, what we're seeing is good trends in the marketplace for us relative to our performance against the market, again, around Goodyear brand and the commercial OE markets, the commercial truck markets, we're seeing similar -- those trends are what we're seeing as we look in Q1 and so far.

Is that basically all markets as well? I mean I know I'm focused on North America when I ask that question.

No, I don't think that's true. For the year, the European consumer replacement market, our big market over there was actually down a little bit.

But, Michael, it is important for you to understand though January and February in our markets are generally low seasonal. I mean, the key to these markets, whether it is in Europe or the U.S., really is this interval March through June.

No. No. I mean, I'm just trying to understand your cost structure and how that might play if volumes go down obviously your cost per unit will go up. That's why I'm trying to focus on that at least for the first quarter, relative in comparison to last year.

Yes, well it is certainly not our intention that our volumes go down and that's why I say we have got to play both a very effective demand generation game and keep our cost structure -- keep the pressure on the cost structure and have some flexibility in our system, because this is a very complex business with a lot of different products and at any given point you're going to have some products that are on the ascendancy and some brands on the ascendancy, some that are not on the ascendancy and I think we're working pretty effectively in managing our capacity relative to that expected demand.

One last question. Were you guys going forward in terms of a policy, would you be willing to give up market share for pricing?

Well, I think the strategy that we put in place 2.5 years ago essentially said, look we're in this to get the maximum return on our assets and return on our investments. So we put in place at that time a selective, meaning we don't go after market share purely for market share, process with regard to the OE business, and we played that out I think successfully, more successfully than people maybe expected 3 years ago. We're doing the same thing here on the private label business in North America, same thing in terms of general direction. Obviously they're not totally analogous in terms of the competitive dynamics but we're playing that out in much the same way.

So we are targeting specific markets and I mean end-user markets. And then we go after them. Once we target them we're now able to bring outstanding product and outstanding market programs to those areas. So that's our focus. And, you know, we're going to lose some share in some segments, we're going to gain some share. We have to gain share in the segments that are most financially attractive to us. And that's what, to me, 2004 represented. That was a big gain for us in 2004.

Thanks.

Thank you.

Your next question comes from John Murphy with Merrill Lynch.

I had a question on raw material pricing. When you're talking about 6 to 8 percent increases in '05 and there are some other industry participants that are talking about double-digit increases. I was just wondering if there was any contracts or anything going on there that you're controlling for that other players aren't able to.

John, maybe I kick off, but I think, I would say initially I think our purchasing people do an outstanding job. And we're doing a better job all the time and they're going to do a better job in '05 than in '04. However, I've seen some of those public comments by other companies and I think you may have a difference in the computation. We might -- I know, Rich, well Darren, since you've been quiet on this call, which is unusual. Just maybe speak to our calculation and then you guys can ask that question of other people in terms of whether the computation is different.

John, I can't, you know, we can't speak to how other companies are calculating the percentage increase. But I think when you do variance analysis there are different approaches that you can use, and I'll tell you what our variance analysis does, and that is focuses for each of our business units around the world on the impact raw materials are having on those businesses in their local currency. And then we are aggregating those business units to report the impact that it's had on the Company overall. I think you may have -- you may have others doing the calculation, the variance calculation differently, and that is something that Barb or I can spend more time with you on offline if you like.

That 6 to 8 percent is X anything that would go on with far X that's sort of like an organic number?

I guess I'm not sure what you mean by an organic number but I think what we're trying to explain is the impact that you will see when we report our variances in 2005.

Okay.

It is the way Goodyear looks at it.

For us, as we try to do everything, remember one of the major shifts, we've tried to create in our Company is we go market back and we're very interested in the impacts we're seeing that lead to decisions. For example, local pricing decisions and other decisions that we might make. That's how we've framed it and, therefore, that's the 6 to 8 percent that you hear as a forecast. It's also the way you see the actual raw materials escalation that we've built into the 2004 year-end.

And then on the flip-side it looks like you're trying to push through about 2 percent pricing increases in February. Should we expect more later in the year and how do you, you know, it looks like in '04 you were sort of able to balance out or gain some pricing ahead of raw material costs. Should we expect more going forward that would get you close to the 6 to 8 percent increase.

I can't speak to specific pricing actions, what I can say is with raw materials escalating at whether it is our 6 to 8 percent or somebody else's different computational percentage, these are significant increases and we'll say the same thing we said at the beginning of '04. Those are very difficult for the industry to absorb.

But as far as the market's absorption of price increases do you feel like there's -- you have the power to potentially, you know, you don't have to specifically do this, but do you think the market might be able to absorb further price increases beyond what you're trying to push through in February.

Well, I'll simply say again that with the raw materials going up to where they are, the fact that, you know, the work price increases in '04 around the globe kind of signifies that certainly we haven't had -- there has been an ability to do that in our industry. And the end-user han't pushed back.

Great. Thanks a lot.

Thanks, John.

Next question comes from Christopher Summers with Green Light Capital.

Hey, guys, this is actually Vinnie Tepe, I have a couple of questions. One is just following up on the raw materials expense. My question is beyond 2005 as you look into 2006, will this year's increase mostly capture where we are now in terms of crude oil prices or not? My second question is, related to the $19 million of after-tax income in the fourth quarter from the legal settlement, has that been included in the North America tire segment profits? And also what is that number pretax? And then the third question was, just related to your operating cash flow for the year, was there a change in how you're classifying the minority interest cash paid to various minority interest subsidiaries? Thank you.

Christopher, we'll pick those off one by one here.

I can start. Maybe to talk about raw material prices going outward and I think you asked whether that's -- whether our recent cost increase is going to be able to absorb that. I think, you know, what we've seen is as oil is going up we continually have to go back and look at -- continue and have to go back and look at where our prices are versus what we do, what our competitors do, and what have you. So when we look out to 2006, I think it is a very dynamic environment. I'm not sure we can give you great insight into what would happen at that point.

The only thing I'd comment on, Christopher, is that if you go back to mid-year 2004, we've said that we plan with very conservative assumptions, meaning if we went back to mid-2004, we were planning, and we were talking about on the predecessor to this call that we thought raw material prices were going to escalate significantly in the second half and we were probably at that point on the high side or conservative side of that estimate. You know, in terms of our planning, we want our organization stretched so we planned for I would say conservative or in the case of oil price, high oil prices.

And your other two questions, the chemical settlement was 23 about million pretax. I remember most of that came domestically where we're not a taxpayer and that was spread throughout all the businesses from a GAAP prospective. What we have to include in segment operating income. That's really one of the items that would go in there, so it is in all of the segments, not just North America. Again, the lion's share is in North America, but it impacts some of the others. We did not make any changes on operating cash flow relative to minority interests.

And just to follow-up on the $23 million pretax. So if the lion's share of it is in North America, does that mean that could be a lot of the 15 or 16 million of profit in North America in the quarter?

No, I think it's, you know, it's quite frankly over simplistic to attribute all the profitability to that particular item. As I mentioned, we did have a substantial increase in workers compensation. We made some changes to how we value that relative to our discount rate assumptions. We had much higher energy costs in addition to the higher raw material costs. So as you would expect there is a lot of of pluses and minuses that go into that number.

Okay. Great. Thanks, guys.

At this time there are no further questions. I will now turn the call back over to management for any closing remarks.

Maybe I just close with something I told our dealers at that annual dealer conference at the end of January. I said, as you look at us, you're going to see dramatic change that's taking place. And I told them expect that there will be much more to come. So you can expect a lot of dramatic change still coming. Hopefully I told them, you, our dealers, are seeing a level of confidence in our Company but not arrogance, but frankly you see a job that's been started and not finished.

And realistically I would say to you all that we're a Company that is still a work in progress, but I can tell you today we're enjoying both the work and the progress that we're making and so I just want to thank you all for joining the call today. Thanks for the questions and, Barb, I know you'll be readily available for follow-up questions. So thank you very much.

This concludes today's Goodyear 2004 fourth quarter conference call. You may disconnect at this time.