Goodyear Tire & Rubber Co (GT) 2005 Q2 法說會逐字稿

Good morning. My name is Judy. I will be your conference facilitator today. At this time, I would like to welcome everyone to the Goodyear 2005 second-quarter earnings release 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) Ms. Gould, you may begin your conference.

Thank you, Judy. Good morning and welcome to Goodyear's review of second-quarter results. Our discussion this morning will be available by replay after 10.15 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 Acrobat format on our website and we filed our 10-Q last night. 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, 2004 and its form 10-Q for the quarter ended June 30, 2005. 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. Referring to the agenda on slide two, Bob will open with the highlights of our second quarter. Rich will cover the financials, including the SBUs and then Bob will come back to discuss the outlook for the second half of 2005 and the challenges and opportunities in front of us and then we will close with questions. Now I will turn the call over to Bob.

Thank you, Barb. Good morning, everyone. I want to thank you for being with us today and expressing your interest by being with us. We have very solid second-quarter performance to report today, including net income of $69 million or $0.34 per share on record globals sales of $5 billion. Our segment operating income has increased 24% to $316 million for the second quarter and increased 40% to $608 million for the first half. Five of our businesses, including North American Tire, have achieved record second-quarter sales numbers. In fact, North American Tire's quarterly sales represents a record for any quarter.

We had record segment operating income for the second quarter in all of the international tire businesses and also the highest segment operating income of any quarter for our Asia-Pacific region. We also had record revenue per tire, which represented a 5% increase over 2004 and this was due to both price and mix improvement.

Our key positive operating trends continue. We continue to gain share in key targeted segments. We continue to improve our operating margins and we continue to become a stronger global competitor. Given the rapidly escalating raw material costs that the entire industry has faced with oil pricing of $60 plus and natural rubber near $0.70 a pound, I am pleased with our profitability gains in the quarter. I will tell you that raw material prices escalated ahead of our assumptions; however we have successfully executed two price increases in our North American Tire business already in 2005. As you have seen this week, we notified our customers of an additional price increase effective September 1.

Our progress continues. We are meeting the commitments as we outlined for you 2.5 years ago and we are putting business improvement platforms in place that are built around the seven strategic drivers of our business that I have referred to in previous calls, but I can't resist stating them again; excellent leadership team, an intensity around cash is king, a focus on cost, product leadership, fully leveraged distribution channels, building our brand strength, and creating an advantaged supply chain.

The performance of our innovative new products continues to be a highlight for our Company as we continue to make gains in key targeted market segments. In Europe, our new excellence tires are gaining marketshare in the important high-performance summer segment for the Goodyear brand. And with the Ultra Grip 7 Winter tire that we recently launched, combined with plans to launch a new Dunlap Winter tire in the coming weeks, our Winter product lineup is very strong in Europe. And as you know, that is a major market segment for the industry and for us at Goodyear.

In North America, our Assurance family of tires is outperforming 2004 unit sales levels, which as you recall, reflected the most successful product launch in the Company's history. Sales of our new Fortera and Wrangler SilentArmor light truck and SUV tires with Kevlar are above planned sales levels and frankly are challenging the record launch numbers of the Assurance family. I would simply remind you here that this market segment addressed by these new tires is smaller than that of the broad market segment addressed by the Assurance family. The overwhelming acceptance of these products by consumers has been validated by a number of awards that just keep coming for Assurance, SilentArmor, and our European new products. We are proud of those awards.

I can also assure you that we are not finished in the new product area for 2005. We have more impactful new products that will be launched later this year. Our new product engine is creating the market differentiation that we need to build our business. Also our relationships with those dealers that we have worked hard to rebuild these past three years are continuing to strengthen and provide a competitive advantage for us. I encourage each of you to talk to our dealers, ask them how they assess the performance of the new Goodyear.

In the quarter, we moved our Asia-Pacific and Latin American headquarters closer to their markets and closer to their respective customers. The Asia-Pacific region opened its Shanghai office in April and our Latin American team completed its move to Sao Paulo, Brazil last month. The Asia-Pacific headquarters, remember, also houses our purchasing initiative to increase our procurement from China of raw materials, semifinished goods, finished equipment, and tires. And our procurement goal here is to purchase 10% of our roughly 8 billions total spend from China over the next three years. At present, we are at roughly 1%. So we have got to move from 1% to 10% over the next three years.

We continue to make significant progress on our capital structure improvement plan in the second quarter. We announced the sale of the Wingtack adhesives resins business to Sartomer for approximately $65 million and we would expect that to close in the third quarter. The sale of the Sumatra Plantation is moving along under government review and the sale of the North American farm business is pending a steelworker contract agreement with Titan.

In the second quarter, we also issued $400 million of 9% unsecured notes in June in addition to completing the refinancing of the bank debt in April, which we discussed on the first-quarter call. I would tell you that Goodyear last issued unsecured non collateralized notes in 2001. So that is a very positive step for us.

In summary, we are very pleased with our second-quarter business progress given the escalating raw material prices in the environment and with that, I would like to turn the call over to Rich to take a more detailed look at the operating results both at the corporate level and for our individual businesses.

Thanks, Bob. Good morning, everybody. Looking at a summary of our second-quarter results on slide five, you can see we have continued to make progress and have achieved significant year-over-year improvements in sales, gross margins, segment operating income, and net income. Worldwide tire units increased about 1.3 million to 56.4 million units in the quarter and the unit growth was driven primarily by growth in the international markets as well as strong OE commercial truck tire sales.

Consumer OE volumes declined 8% in North America and the European Union consumer replacement units increased in the quarter primarily driven by growth in Goodyear and Dunlop branded units. Total sales were up 5 billion, or about 10%, over the prior year and if we exclude the favorable impacts of translation, sales were up a little bit over 8%. The increase versus 2004 was due to $200 million of higher pricing and a more favorable product mix in our tire businesses and higher volume of nearly $80 million.

Gross margin improved in the quarter to 21%, our highest gross margin in more than two years. Total segment operating income increased to 316 million from 254 million in the second quarter of '04, an increase of 24% or 14% excluding translation. Improvements in price and mix contributed over $160 million to the year-over-year increase while volume increases and lower conversion costs added about 25 million and $20 million respectively. These year-over-year improvements were partially offset by higher raw material costs of approximately 10%, or $130 million, in the quarter as well as higher SAG expenses primarily related to higher ad spend in North America and the European Union, higher wages, and increased workers compensation costs in our North America business.

Now overall, our segment operating income margin for the quarter was 6.3%, up from 5.6% in 2004. As Bob mentioned, net income from the quarter was 69 million or $0.34 on a diluted basis. This is compared with 30 million or $0.17 per share for the second quarter of '04. While there were some items both positively and negatively impacting our net income in the quarter, and I will talk about those in a moment, we are pleased with the operating performance of our businesses, which really underlie this improvement.

Now if you look at slide 6, I am not going to go through all the items between segment operating income and pretax income, but I will highlight a couple. As we told you last quarter, with the refinancing of our credit facilities, we incurred a charge of $45 million to write off previously unamortized fees related to the facilities replaced. In the quarter, we recovered $31 million from various insurance claims as well. We received 19 million from the Equitas related -- from Equitas insurance company here related primarily to prior period environmental expenses and $12 million of insurance recoveries from a fire at our Phillipsburg, Germany plant that happened in 2004.

General and product liability related primarily to asbestos claims in the quarter resulted in a gain of $8 million, which included an insurance recovery that more than offset the expenses we incurred in the quarter.

Finally we recorded a $7 million charge to tax expense related to the settlement during the quarter of some prior year tax liabilities.

Now to change pace for a moment, I would like to address an ongoing topic of interest, which is our legacy cost. At the beginning of the year, we estimated that our postretirement benefit expenses would be approximately equal to 2003 levels due to a $50 million reduction resulting from the enactment of certain Medicare legislation. We are currently running in line with that forecast and pension expense is also in line with our forecast at about $180 million for the six months of the year. Now to date, we have contributed $96 million for our domestic pension plans and another 42 million for our international plans. We still expect to make 400 to 425 million of domestic contributions in 2005. Obviously, from the way those numbers break out, there will be more contributions in the second half of the year than there were in the first.

Relative to our asset returns, through the first six months of '05, we have had a return of 1.6% versus our planned assumption of 8.5%. Finally, to help you analyze the income statement and balance sheet impact of these potentially changing assumptions, we have provided an updated sensitivity analysis and you can see that on slide seven.

Now if I can turn you to slide eight, we also wanted to provide an update on the sensitivity of oil and natural rubber pricing on operating income and also update our forecast for raw material costs for '05. Again, we summarize this on slide eight. Due to the higher natural rubber pricing that we have seen in the past months, we are now raising our estimate for raw material cost increases for the full year of 2005 to 10%.

Turning to slide 9, in the first six months of 2005, cash flow from operations was a source of $61 million compared to a use of 40 million in the 2004 period. The improvement in cash flow from operations was primarily generated from the $185 million improvement in net income. Working capital was a use of approximately $470 million year-to-date, compared with the use of about 700 million in the first half of 2004. High raw material costs as well as strong sales contributed to the use of working capital in 2005.

Relative to inventory, while the dollar value is up for reasons we just stated, higher raw material costs and also for foreign exchange, I would tell you our unit levels remain relatively flat with the prior year while supporting year-to-date unit and sales increases of approximately 2 and 8% respectively. Working capital reduction remains a key focus item for our Company and is clearly an area for opportunity as we increase our focus on debt reduction.

Capital expenditures totaled 228 million in the first half and we still have plans in place to spend approximately 640 million on CapEx in 2005. In addition to molds for new products, we are expanding truck tire production in Latin America and upgrading our ability to make higher value added tires at North America and Europe in addition to being able to produce run-flat tires in China.

Turning to slide 10, our cash position at the end of June was 1.6 billion, excluding about 220 million of restricted cash. We used cash in the quarter to pay down a euronote which matured in June as well as to fund working capital and our pension obligations. When adding (ph) our available credit under various facilities, our liquidity at June 30, 2005 totals 3.2 billion or about $1 billion more liquidity than we had at the end of June of 2004.

Now as you know, we completed about a $3.7 billion refinancing in April which gave us additional flexibility with access to funds from revolving credit agreements. In June, we also completed a $400 million unsecured note offering due in 2015.

Slide 11 shows the changes in the maturity schedule of our capital markets debt from the end of 2004 versus the end of June 2005. We were able to lengthen substantially the maturity dates of our credit facilities while also reducing the variable-rate interest rates we pay and increasing our flexibility to repay portions of these facilities temporarily, which represents a real interest expense savings for us. The improvement we have achieved in debt maturities and in interest expense will help us to address the increasing pension contributions ahead of us. We are pleased with the progress we have made in refinancing our obligations and extending our maturities and while we will continue to opportunistically access the capital markets to address our pension funding needs, we also are now more focused on developing a longer-term strategy aimed at reducing our debt and after sales and raising equity remain as potential options to do so.

Now moving back to our second-quarter operating results, if I can turn you to slide 12, you can see, consistent with recent periods, price mix improvements drove our revenue per tire improvements, which increased 5% in the quarter excluding the impact of exchange. In Eastern Europe, revenue per tire increased 7% over the second quarter of 2004. Again, excluding the impact of foreign exchange, and revenue per tire in North America was up 6%, the European Union up 5%, followed by a 3% increase in Latin America.

In Asia-Pacific, revenue per tire declined 3% due to the extensive competition in some of the markets there as well as the impact of the consolidation of SPT in 2004. The revenue per tire increases we're seeing is clearly related to the multiple price increases we have implemented over the course of the last few years as well as in selling more Goodyear branded product globally.

Now referring back to segment operating income on slide 13, you will see that it has improved over 24% in the quarter versus the 2004 period and 141% versus 2003. As you can see from the chart, the improvement has been driven by all our business segments and it also (indiscernible) for the six-month period, segment operating income was 608 million or near 40% increase versus 2004.

Now let's cover each segment individually starting with North America. North America had its fifth consecutive quarter of positive operating income. Sales grew at 6% while operating profit improved by 34% over the prior year quarter. Looking at the drivers of those increases, there is a combination of both the positive effects of volume growth and mix improvement in our targeted channels, which was partially offset by the significant headwinds of continued escalating raw material costs that we are experiencing. We continue to experience strong results in our truck business in both the OE and replacement markets and again this is reflective of both the strong industry and our leading products and services.

We saw strong second-quarter performance in our off-highway businesses that include farm, aviation, and OTR, where demand generally continues to exceed supply. Additionally, in our chemical operations, sales of synthetic rubber to external customers were strong as we were able to capture price relative to increased raw material costs in addition to achieving our internal cost reduction targets stemming from the inclusion of this business as an internal source of supply.

Our replacement product mix continues to be driven by our Goodyear branded products, particularly Assurance and Fortera and Wrangler SUV tires with SilentArmor. Now as Bob mentioned, Assurance unit volume is ahead of the prior year levels and our new line of SUV and light truck tires with SilentArmor are well ahead of the comparative prior year volume and relatively speaking, selling at a faster pace than did our Assurance line in their introductory year. And you can see the impact of our mix improvements in a $4 revenue per tire increase versus the 2004 period.

Now while we were very upbeat about our momentum, our second- quarter results were negatively impacted by an 8% decrease in consumer OE volumes and the impact of rapidly increasing raw material prices. Relative to OE, we continued to successfully execute our selectivity strategy by focusing on fitments and mixing up the OE products we sell. However, the significant raw material cost increases have more than offset the benefits from executing our strategy during the quarter. Let me be clear in saying we continue to believe in our selectivity strategy to improve our OE profitability; however the benefits of this strategy are more difficult to see in our results in this rapidly escalating raw material cost environment. We will certainly continue to work with our customers to improve profitability.

On the theme of raw material cost increases related to our consumer replacement business, we announced two price increases in the first half of the year and have essentially recovered our raw material cost increases during the quarter. As Bob mentioned, we also just announced the third price increase, which is necessary to cover the continued raw material cost escalation. As we think about the implications of the current raw material cost environment, we are confident in our team's ability to react to this environment in a balanced manner by keeping a focus on our core strategies of improving our customers' business, continued innovation around new products, and improving the mix of tires we sell.

Overall, we are pleased with North America's progress to date in delivering year-over-year operating performance, particularly in view of the current environment, which we would expect to continue.

Moving on to Europe, the significant improvement in our European Union business was again driven by continued gains in price and mix in both our consumer replacement business and our truck OE business. While the European consumer replacement market improved from the 5% decrease during the first quarter, the market remains down approximately 3% on a year-to-date basis. Our emphasis on mix improvement and new product introductions drove the year-to-date volume increases of over 2% and a share gain of about over 1 point in the face of these weak European consumer markets. We are very pleased with that performance.

Equally so, our successful truck product has again significantly contributed to Goodyear outperforming by multiples but remains a robust European truck OE industry, which grew at nearly 15% in both the quarter and the first half. Reflective of our volume increase in this growing market, we had significant share gains in both the quarter and the year-to-date periods.

Moving on to Eastern Europe. Again, while our Eastern Europe business segment operating income improvements are somewhat lower than we have seen in prior quarters, they remain solid at nearly 10% and segment operating income as a percentage of sales was about 14%. We continued to improve the mix of products we sell in this region and emerging markets where we operate here still remain very strong. We continue to view this region as having significant opportunity for earnings growth.

The Latin American business segment had another outstanding quarter with 15% unit growth, 31% sales growth, and a 26% improvement in segment operating income. Now despite the impact of currency revaluations in the quarter, the region continues with its mix improvement strategy and pricing plan to cover rising raw material costs, which really speak to our competitive strength in the region. Latin America gained share in the consumer and commercial markets and the OE market in both consumer and commercial tires grew in double-digits in the quarter. Segment operating income in the quarter was 20% of sales and while the potential of an economic disruption could impact the stronger earnings trend that we continued to see in this region, we remain confident in the region's management team to execute against their plan of growing our radial truck business, OE selectivity, cost reduction, and of course, focusing on price.

Now the Asia-Pacific region. Units increased 9%, sales increased 12%, and profits improved 18%. We had a solid volume growth in India, the Ozeon (ph) region, China, Australia, and New Zealand. And marketshare in the replacement business was stable in all markets except Australia and New Zealand. OE marketshare is growing again in China as well as in Australia and New Zealand. Production cuts at our SPT joint venture in the quarter also reduced earnings in the quarter but did as well contribute positively to our cash flow.

Now moving to engineered products, demand continues to be strong for our industrial products, which include conveyor belts and hose. Faced with higher raw material costs, the replacement, automotive and military business are showing good topline growth but at lower profitability. The OE auto business was weak as you know and this was the primary cause of our reduction in year-over-year operating income. Price increases have been implemented and are in place to address the higher raw material costs that this business has seen and additionally our EPD team is ramping up its focus on cost reduction in view of the tough OE markets and the increasing raw material cost environment.

Now despite the tough conditions globally, our business has performed at significantly improved levels in the quarter and our position to improve upon these results as we execute against the seven drivers which you have heard Bob refer to on multiple occasions. I would like to turn the call back over to Bob and he will give you an update on the turnaround of our business as well as an outlook into 2005 and a little bit beyond.

Thank you very much, Rich. Let's take a look at the first half tire market performance and include our expectations for the second half of 2005. In North America, the consumer OE market was down 4% in the first half while the commercial OE market grew 16%. We believe that in the second half, the consumer OE market will show positive growth and the commercial market will continue along the same trendline as the first half. The commercial and consumer replacement markets have both shown approximately 3% growth in the first half and are also expected to continue that trendline growth through the second half.

In Europe, replacement and consumer OE markets are down year-to-date. The commercial OE truck market is the only growing market in Europe and it is up approximately 14% for the first half. The consumer replacement market is expected to return to trendline growth in the second half of 2005. The commercial replacement market is forecast to be above 2004 levels for the second half. However, the market will show a decline of in the range of 2 to 4% for the year.

Second-half sales in the commercial OE market in Europe are projected to be flat with the second half of 2004. As Rich and I have both mentioned, raw material costs are expected to increase 10% for the full year and I think you can assume for purposes of your models, a 10% increase in both the third and the fourth quarters. Interest expense for the full year will be about $400 million, which means that interest expense will continue to run at about 100 million per quarter in the second half. Financing fees will be reduced to about $24 million for the second half of this year.

Now the Company anticipates year-over-year gains in operating performance during the second half of 2005. However, the rate of those gains is expected to be less than they were here in the first half.

If we could just move on to slide 19. At our September meeting with you in New York, we will elaborate more fully on our challenges and opportunities and our forward plans. However this morning, I wanted to provide you with a flavor of our thoughts for dealing with our challenges over the balance of this year and leading into 2006. Well challenge number one, the rapid escalation of raw material prices will continually need to be addressed; our evaluation of the supply demand equation for key raw materials indicates overall 10% year-on-year increase for the second half as we have said. But obviously, there will be significant variability around this forecast. I think that is very possible. As a result, we will continue to be very vigilant. We will be flexible with how we react to that.

Additionally, we continue to make changes in our product formulations that allow us the flexibility to interchange more than we are able to today between natural and synthetic rubber depending on the pricing environment. That is a very important point. We are also pursuing very aggressive purchasing strategies such as the focus on sourcing materials and equipment from China that I mentioned earlier.

The second challenge we have faced is softness in our key Western European markets. Certainly that has been a significant challenge for Mike Roney and his team here in the first half. As I said in our outlook a minute ago, we expect modest growth during the second half and I think it is noteworthy that we gained share during a weak first-half market.

Challenge number three. In the consumer OE business, we will continue with our selective mix off strategy. We expect unit sales to rebound in the second half a bit. But as Rich indicated, profitability will continue to be under pressure. Here, we have programs under way to significantly reduce our cost structure through our global manufacturing footprint along with aggressive purchasing and aggressive productivity initiatives.

Challenge number four. The growth of the Asian imports into our developed markets will continue and quite simply at Goodyear, we believe we have proven that we now have the business model to compete successfully. Our exceptional dealer network, now fully leveraged, strong brand portfolio, new product capability, supply chain performance, and the drive to reduce our cost structure are making us a strong competitor in these developed markets.

Rich commented on working capital earlier and I wanted to just make a brief comment here. We will elaborate more in September. While our working capital performance is solid for our industry today, it currently falls short of what we need. We plan to reduce our dollar investment significantly over time and our leadership team, as I said, will give more details at our September meeting. We're very much looking forward to seeing you at the September meeting, which I think, Barb, I am announcing for the first time, which will be held at the Marriott Marquis on Friday the 23rd beginning at 8:00 AM. We know how much all of you love these meetings on Fridays. But Barb will get an invitation and additional information to you prior to that meeting. And I wanted to comment, I think this is very important, that my leadership team in its entirety will be with me at that meeting and I really encourage you to interact with them at the meeting and you will be impressed when you do that. We have got an outstanding team.

That concludes our review of the second quarter and we would like to open the call to questions.

(OPERATOR INSTRUCTIONS) Jon Steinmetz, Morgan Stanley.

Just a few questions here. On North America, on the aggregate revenue per tire and the price mix breakdown, it seemed like you got a lot of benefit from commercial versus consumer, passenger versus OE, and even mix within the brand Goodyear versus others. Do you have any idea what the pure price on a like-for-like tire component would have been on that?

I think going down, as you know as we have talked in the past, given the mix that we have in their consumer replacement, the OE business, truck, farm, everything else, it's a very difficult number to get to. I think, as we have been going through, I think the consumer business, if you look at that, we have gotten a good chunk of our price increases in that business, which is obviously the heart of our business in terms of volume. And I think that to become a little bit harder as the second quarter progressed, but we are getting a fair bit of revenue increase on those units.

You say a little harder as second quarter progressed. The reason for that would be what?

Higher raw material costs.

I would just comment, Jonathan, not harder in terms of the pricing but that pricing dropping to the bottom line. And obviously, you're going to have some differences quarter-to-quarter but we continue to feel we have got enough pricing power in the market to put two price increases as evidenced by the increase that we put through on consumer, 5 to 8% earlier this week.

Switching gears to Latin America, the operating income was up but it looked like most of that was currency if I'm reading the release properly. Is there anything happening in that market that's causing it to not necessarily decline but sort of stay flat?

Jonathan, it's actually a very good question. You see the currency impact of their results but what you also saw today and I think you'll see it in more detail in the queue is that we continue to get a lot of price and mix in the region. Remember, when you have currency revaluations in the region, typically that shows itself up in pricing in the region fairly quickly. So certainly, you did get a benefit of the reval, particularly in Brazil. But what we saw in view of that is that we, through price and mix, we were still able to really stay on plan to where we wanted to be. So I think yes, you get a bump from currency but I'd also tell you our underlying business remains very strong and very much on plan.

And just a final housekeeping, you gave a pension return year-to-date. Was the date on that as of June 30 or was that more current than that?

It was June 30.

Great. Thank you very much.

Saul Ludwig, KeyBank.

Within North American Tire, could you maybe segregate the contribution of the chemical business this year and last year? I think in the queue you said something about the chemical side was very strong and I just wonder if you could carve out the chemical piece from the total in both years?

As you may remember even in the first quarter, we have not broken out chemical separately in the North America business. If we put that in North America, we are managing it, part of Jon Rich's business, and it's not broken out what that number is. Now that said, it did contribute in the first quarter if you recall. But North America would have been profitable at the operating income level even without chemical and obviously, North America would have been profitable this time without chemical. But certainly, we have seen stronger performance in chemical in the second half -- second quarter than we did in the first quarter.

Maybe just as a background reference, Saul, when we decided not to sell the chemical business last year, we did that in part because we felt there were strategic reasons for keeping it. But we also felt that there were efficiencies here that a new strategy could drive for us and we could drive some cost out of that system. So chemical is a good performer, will continue to be a very good performer for us but it does not overwhelm the North American progress I think that we have made.

In the queue where it says that North America increased earnings from external chemical and other tire related businesses of $23 million. What was the other tire related businesses that the queue was referring to?

In there, Saul, you have some off-highway businesses and things of that nature, primarily a bit of the off-highway businesses.

Great. Thank you very much.

John Murphy, Merrill Lynch.

A question on your pricing strategy. It seems like between North America and Europe there is a slight divergence. In North America, you are raising prices, which it seems across the board, and then you spoke about strategic pricing in Europe. Some of your competitors have alluded to some lower pricing by you and Pirelli. I'm just wondering if there is a difference in strategy between North America and Europe and if lowering prices in Europe might be a better way to gain share over there? I'm just trying to figure out what's going on between the two regions.

I will cover this. I would say there is more commonality than there is divergence between the pricing strategies. In Europe, obviously, we have an opportunity to take advantage of a market which is rapidly mixing up and moving from standard to high-performance to ultrahigh performance and we continue to mix up and you can see that in the revenue per tire numbers in Europe, which are pretty considerable. So we continue to mix up and we price up.

I would mention that, yes, there is a little bit of probably less pressure in Europe from raw materials given the strength of the euro. So that is a factor. But our strategy remains to mix up and to price up in Europe. I think we're doing that successfully. Very similar in North America -- by the way, just to address your question, we do not think that a more aggressive pricing approach in Europe is in our best interest. We are aligned with our approach in North America and frankly globally there, we are looking for profitable sales to market segments. We're not looking necessarily at just the overall share increases. That is a key strategic thesis of ours and that is true in Europe and it would be true in North America.

The only thing I would add to Bob's comment is one of the things that we are very pleased with and we won't go into great detail here but Mike Roney and his team in the European Union have really done a very good job of putting together a set of analytics that drive decision-making in the region. They have done that really down to the lower levels of their business and I tell you, it is something that we see the benefits of coming through our business.

Just in the second quarter, how much of a benefit do you think you saw from some of your missteps of your competitors here in North America, really Cooper's missteps?

I'll just say, John, we don't comment publicly on our competitors per se. So I just would not offer a comment specifically but I will just say hey, the environment is difficult given escalating raw materials and all our competitors are -- believe me when you're sitting where I sit, they are doing a lot of good things, making this a challenge for us. But all I can say is we are becoming a stronger competitor than we have been because of the seven strategic drivers of our business and if somebody makes a misstep today, our attitude has to be they will do something right tomorrow. So we are continually trying to improve our business.

Great. Thanks a lot.

Rod Lache, Deutsche Bank.

Congratulations. I have a couple of questions. Maybe you can just help me a little bit more with what is happening in the Latin American market, this double-digit volume growth is pretty spectacular relative to what the segment had been doing up until now. I thought your marketshare is pretty high in that region. Is there more marketshare that you are gaining? Was this kind of an aberration? Is this something that we can expect going forward?

I think a couple of things are really pertinent here. One, we've got an outstanding organization in Latin America and they have really driven an outstanding dealer network for us. And that is, as well as a very solid brand obviously, but that is kind of the core of what we're doing. What we have seen during the first half of this year is something that we have been working on for some time. We have made gains not only as you would think of us in the replacement consumer business but also in the consumer OE business, which has been strong in Latin America; contrary to what we're seeing in North America and other parts of the world. We set out on a strategic direction three years ago to significantly improve our truck business in Latin America and that has been a key driver of our success as well. So when you take the combination of the solid position we had in consumer replacement that we can improve, a very focused OE business, and an overall truck business that takes advantage of the radialization trends in that marketplace, they are just doing an outstanding job for us. We fully recognize the volatility of the macro, the political and macroeconomic environment that we work in in Latin America. But we're putting all the pieces in place to be able to handle upturns and downturns in Latin America.

Right, but the trendline growth in that market, like Q4 was up 2%, first quarter was down 0.5% and then now it is up double-digit like this. Is this -- (multiple speakers) was there an inflection point? Obviously, something happened here.

I think again you're looking at the quarter-to-quarter movement. We're looking at trendlines month-to-month and over longer periods of time as well. I think we're just seeing the result of the solid strategy that we're playing out in Latin America and I don't want to give future guidance on individual numbers but great teams doing great things in, right now, a very favorable macroeconomic environment.

Would you have the capacity to sustain this level of volume if the demand was there?

Let's take as a presumption that level of volume was there, the answer to that is yes.

By the way, we're getting that capacity not by putting in new plants, as you know, in Latin America. We're getting our incremental capacity because of productivity.

Right. Volume up double digits, average transaction prices up, typically there is quite a bit of operating leverage in the business. Is there any significant piece here that prevented the bottomline growth, which is still good, but it was slightly lower than the topline growth.

I think it is simply what Rich said. You're in an environment in Latin America, generically speaking, of revaluations and it is quite an accomplishment by Eduardo Fortunado and his team I think to be able to handle the pricing environment and the volume environment as well as he has done with that particular set of business conditions. After having had significant -- remember this is not a one year success or a one quarter success in Latin America. Look at the trendlines over the last 3.5 years in Latin America and his operating margins are up over at a rate of 20% plus. So if you ask me, are they likely to double from 20%, I would have to say we're going to try real hard, but I would not say that is likely.

One last thing. Do you have any thoughts on these -- there's the two pension reform bills there are in conference right now and is there anything on the radar, vis-à-vis, the pension minimum contribution?

I will have Rich pound out on that because he spent a little bit of time the last month or so on Capitol Hill discussing that subject.

I think we spent a lot of time here -- Darren is here with me as well -- we've obviously spent a lot of time analyzing what this means for us. I would just tell you there's a lot of different proposals that are floating around right now, about four different proposals between the House and Senate plus the administration's view. I think all of them are really directed at -- and at the end of the day, getting funding into these plans quicker. It is very hard to address them individually because there is such a variety of implications from each one.

I would just tell you we are making our points of really trying to ensure that we have time to make the fundings of our plan, which is, by the way, exactly what we financed ourselves to do. We will make that point as we go forward and I think as we look ahead, given that we have all these different proposals out there, our view is that -- potentially they get it done but they have got a lot of work to do before they are done in December and our key message is to, at minimum, keep the existing legislation that is in place now that tied the discount rate to the Moody's AA thirty-year or corporate AA bond, keep that moving because, as you know, that saved us about $100 million each year since that legislation is in place. So at minimum, we want to make sure that that continues and sure of that, it is very difficult to see what the impacts are. Obviously, some of those plans could put more pressure on pension funding. Some of them really could keep us on the path we are on.

Great, thank you very much.

Mike Kinder (ph), Citigroup.

I was wondering if you could talk about equity and what your thoughts are given the run-up in the stock price in terms of using equity to do over the balance sheet further?

Sure. Rich, you might want to start and then Darren, you might want to talk.

Mike, I think we have talked about this for awhile as a longer-term solution to our leverage issue. I think our thinking remains consistent with what we said, that in fact, at some point, it makes sense to do that. I don't know that we are at that point today. I think, as we have said in the past, that there are multiple factors that will go into that decision. Clearly, the price of our stock is one of them by definition, but it is not the only one and we will continue to evaluate that. Darren, you may want to add to that.

No, I think the focus, now that we have made a lot of progress in terms of extending our maturities, is going to be on deleveraging the balance sheet. We have got a number of ways to do that. Certainly, we're not leaving out operating cash flow and working capital is going to be a big area of focus. We continue to make progress in asset sales. We announced another one this quarter. We are continuing on toward closing on the three divestitures that we have announced, and then the question of equity is going to be a longer-term question for us. Obviously, whatever we do in that arena, we want to make sure it has a significant impact on the Company's balance sheet and the credit rating going forward.

The other questions was, on the 1.6 billion of cash that you had at the end of June, how much of that was domestic versus overseas just roughly?

I was going to say, what I think you've tended to see for us historically is around half or a little bit more of that cash is domestically.

Okay, great. Thank you.

Mike Levine (ph), BB&T.

I had just a question. North America, you seem to be doing a good job improving your cost position and getting your margins up. Do you have a number on what you think potential ultimate margins could be in that business and how long it would take you to get there?

Mike, we tend to confirm what we've said before in a number of venues. We have said that our goals would be that we're going to get the 5% as an operating margin in North American Tire and we've said that that is not a one year statement nor a two-year statement. But that is a reasonable amount of time. We're going to get there. We think now that we have got the platforms in place for doing that, both topline and from a cost standpoint. But you're going to see a lot of activity from us over the balance of the year. We will talk in some more detail about that at the September meeting on the 23rd.

Okay. I will be looking forward to that. Thanks very much.

Andrew Gundlach, Artemis Advisors.

Good morning and congratulations on your numbers. Just going to your guidance, last year in the second half, you did roughly 52 million tires in North America and with the numbers being all flat to positive across the four segments and given the problems at Cooper and at Conti, one would expect that those numbers would be higher on a year-over-year basis. Am I missing something versus really flat first-half versus first-half?

Andrew, I think when you look at our volumes, what's driving North America volume is that 8% decline in OE. On the consumer replacement side, we're still seeing some growth there.

But that OE should change, right?

It is hard to predict. As we look forward, we certainly see the opportunity for our OE business to pick up from where it was in the first half. Obviously, it is hard to predict what is ultimately going to happen. We like to think there is some upside versus the first half.

On the pricing in North America, how much room do you have before there is more meaningful pushback in your opinion given your new products, given the high-performance shift, etc.?

You're now talking about one of the most delicate competitive conclusions that we draw. So we will just -- just like you doing your business, on that one, will just excuse us. We have our conclusions. We have got a pretty good feel for this. But if we reveal it here, I'm revealing some things of a competitive nature that I just can't reveal. So bare with us on that if you would. It's a key question.

Let me ask you one easier question, which you also might laugh at. A very small dividend on your stock would not cost a lot of money and you have a lot of cash and I'm just curious how you are thinking about the dividend along with asset sales and pension and everything else, just something nominal to make yourselves a dividend payer.

Andrew, this is Darren. Obviously, any decision on dividends is something that would be focused on by the Board of Directors. At this point, we are generally focused on improving the capital structure and that obviously, requires us to preserve the cash that we have got. I hear from a technical standpoint, I understand your point. I think you'll see in the new credit facilities that Goodyear put in place, we do have the capacity to pay dividends of a small amount, which previously, our credit facilities was not permitted. And we have got similar type provisions and other financings that we have done, but that is something that I believe we will continue to revisit but nothing particular to say about that at this point.

Great. Thank you and congratulations.

That will conclude our question-and-answer period and now I will turn it back over to Bob for closing.

Just wanted again to thank you for your interest in the Goodyear Company and for your questions, which, as usual, seem to be right on the mark. Clearly, Barb will be available for any additional questions that we were not able to address here on the call today. I did want to mention that, as I indicated to you earlier, we are making continuous progress and that is our goal going forward. We are delivering on the commitments that we made to you and we have we believe solid business platforms in place that are working successfully for us today. We are encouraged by the success we have seen in all of our businesses, including North American Tire. But I can assure you we're not satisfied. Rather, we're very focused on what it takes to win here short, near and long-term. We hope to see you all in New York on September 23rd. Again, thanks for joining us on the call today and for your interest in our Company.

This concludes today's Goodyear 2005 second-quarter earnings release conference call. You may now disconnect.