Goodyear Tire & Rubber Co (GT) 2005 Q3 法說會逐字稿

Good morning. My name is Kim, and I will be your conference facilitator today. At this time, I would like to welcome everyone to the Goodyear's third-quarter 2005 financial results conference call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question-and-answer period. (OPERATOR INSTRUCTIONS).

Thank you. Ms. Gould, you may begin your conference.

Thank you, Kim. Good morning, and welcome to Goodyear's review of third-quarter 2005 results. Our discussion this morning will be available by replay after 2 PM Eastern time by dialing 706-634-4556 or by listening to the webcast replay on investor.Goodyear.com. The slide presentation that follows our conference call comments is available in Adobe Acrobat format on our website. We filed our 10-Q this morning.

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 risks and uncertainties that could cause actual results to differ materially. These risks and uncertainties are outlined in Goodyear's filings with the SEC, including its Form 10-K for the year ended December 31, 2004; its Form 8-K filed on June 20, 2005; and its form 10-Q for the quarter ended September 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 one, Bob will open with the highlights of our third quarter. Rich will cover the financials, including the SBUs. Then Bob will come back to discuss the outlook for the fourth quarter of 2005 and 2006. Now, I'll turn the call over to Bob.

Thanks, Barb, and good morning everyone. I would like to start this morning with some comments about the recent hurricanes that, frankly, impacted the entire tire industry supply chains. And don't worry. Then we'll get to the numbers and analysis of the quarter. But I think this will be instructive for you.

While Hurricane Katrina was the worst from the perspective of media coverage and the associated human effects, Hurricane Rita certainly dealt the biggest blow to the tire industry and the U.S. economy because of its widespread impact on raw material suppliers to many industries, including ours. Its impact was a combination of facility damage and damage to the power grid and overall infrastructure that services the region.

Today, I wanted to highlight what I consider to be a series of outstanding efforts by Goodyear associates to minimize the hurricane's impact on our customers, on our suppliers, and certainly on our investors. I commented at the investor meeting in New York last month regarding the success that we had in handling the difficulties presented by Katrina. Those efforts were largely centered around the interruption of the supply of natural rubber in the Gulf ports and damages suffered by our retail outlets and those of our independent tire dealers.

The world-class business processes of our Business Continuity team that were forced into action to deal with Katrina were well proven as Hurricane Rita reached land. The financial impact from Katrina on Goodyear was not material. In planning for Hurricane Rita, we had our facilities prepared, warehouse product was shipped out of the area, contingency suppliers were identified, and our people in Texas prepared to bring our facilities back onstream quickly once the storm was over.

I can't say enough about our people, especially those 60 people who were staying in the Beaumont, Texas plant dormitory-style to bring the plant back up as quickly as possible. They showed tremendous dedication and heart, and were critical to delivering product to our customers. I would simply add here that in many cases, those associates did not know how their own homes fared through the storm.

By all accounts from our suppliers and our customers, Goodyear's quick recovery from Hurricane Rita was nothing short of amazing. I've spoken to customers personally who have expressed both respect and appreciation for the way Goodyear addressed the resulting issues.

I am sure you will recall that we temporarily reduced production by 30% to assure we didn't and wouldn't run out of raw materials. We were back up to full production at our tire plants by mid-October, and we are today approaching full production at our Beaumont, Texas chemical plant as well.

During that time, we were able to meet our customers' requirements without any delays or disruptions of significance. And that applies to both the requirements of our tire customers and those we supply with synthetic rubber from our chemical plants.

The overall financial impact of the hurricanes on the third quarter is approximately $10 million. And this amount, as you know from the release, is included in our segment operating income for Q3. It's already included in the Q3 number. In addition, we estimate that the impact to Q4 results will be limited to approximately $20 million.

Now I share these thoughts about our rapid recovery because of the insight it provides as to our leadership, to how we run our operations, to the respect that we have for and from our customers, and to the type of dedication that we have from our people. These are all factors that will play heavily in the future success of our Company. And in the face of Mother Nature's adversity, our people have performed remarkably well once again.

I'll move to third quarter highlights. I'm certainly pleased to announce this morning that we had an outstanding third-quarter performance, including net income of $142 million, or $0.70 per share, versus $38 million at $0.20 during 2004. Despite challenging market conditions, we generated record sales of more than $5 billion, which is the single best sales quarter our company has ever reported. This is our best quarterly earnings performance in seven years.

Our segment operating income increased 21% to $330 million for the third quarter, and 33% to $938 million for the first nine months of 2005. We continue to gain share in key targeted markets. We are becoming a stronger global competitor. And our market and financial momentum continues. Now, Rich will have detailed comments on the drivers of this performance for you in a few minutes.

I did want to talk about innovative new products. Our revenue per tire improved 4% in the quarter, excluding the impact of exchange. Now certainly, this increase reflects the three price increases that we have executed in our North American tire replacement business in 2005 as well as the price increases that we have implemented around the world. But in addition, it reflects, as I have noted on prior calls, our positive new product impact. Richer product, brand, and customer mix has been the result.

During September, in the U.S., we responded to a significant consumer need by introducing the Fortera TripleTred for SUVs. This tire has the three tread zones for ice, rain, and dry handling that has made the Assurance TripleTred such a success. That Assurance success was recently highlighted once again with the number one rating for Assurance TripleTred tire by the top U.S. consumer magazine, providing further validation that TripleTred technology is a home run for us. Our dealers have reacted very enthusiastically to the new Fortera TripleTred. While test driving the new tire, they were energized by the clear handling difference that this tire provides.

In Europe, we introduced two innovative winter tires -- the Goodyear UltraGrip 7 has just been rated the best-performing winter tire by ADAC in their annual winter tire testing of competitors' tires. Just by way of background, ADAC is among the most respected of the European testing organizations. And in Europe, consumers rely heavily on its test results for purchase guidance. Additionally, we introduced the Dunlop Wintersport 3D, which also received high ratings in the test.

I would like to offer a couple of additional comments related to our new product innovation capability. I know there have been questions in the past around our ability to deliver on innovative products while investing less overall dollars in R&D than two of our major competitors.

I would like to point to two pieces of data to support our position that it's not how much money you spend, but it's how well you spend your money. Part of our R&D strategy is to partner with others, like Sandia National Labs, to take advantage of technological capabilities without significant incremental investment. Our success here was validated once again in this area, as Goodyear and Sandia were recently honored by the prestigious R&D Magazine for our work on Assurance TripleTred as one of the year's top 100 technology innovations.

The joint work on TripleTred replaced our need to -- as has been the case for many years, our need to build, test, and repeat with a powerful set of simulation tools for design, prototype development, and performance evaluation of new tires. As you can see from this slide, we are in very illustrious company with this award.

Second piece of data is a study that was conducted by Booz Allen that found that there is no direct relationship between R&D spending and significant measures of corporate success such as growth, profitability, and shareholder return. We have long subscribed to their findings. Money alone doesn't buy results. Rather, we feel, it's important to wisely spend your money.

These efforts are helping to advance our industry leadership position in the introduction of high-margin new products. Today, we have a strong global portfolio of innovative and differentiated products. We also now have the marketing capability to fully leverage this portfolio.

And if you didn't see it, I would ask you just to look at USA Today's Monday article on Goodyear that summarized our progress in differentiating our new product lines. And I think it was a significant article, and you will see many more like it in the future.

I did want to mention several actions that have been taken during the third quarter. We completed the sale of the Sumatra plantation and the Wingtack adhesives business, and announced the exploration of the sale of the Engineered Products business. I would also comment that we are hopeful that the sale of our North American farm tire business will close in the fourth quarter.

At our September investor meeting in New York, we announced three new metrics by which we and you can judge our performance in the next stage of our business development. As you probably recall, they include -- improve the North American tire segment operating income margin to 5%, improve the total company segment operating income margin to 8%, and further improve our debt to EBITDA ratio to 2.5.

In the third quarter, North America achieved a 2.4% segment operating margin, and improved year to date to 1.8%. That is the best quarterly segment operating margin for North America since the late 1990s. We believe 5% would place the North American business as one of the best, if not the best tire performer in North America.

Global segment operating margin for the Company is currently at 6.3% on a year-to-date basis and was 6.6% for the quarter. As you have seen, our international operations continue to drive outstanding performance. And while we know that over the next several years, we are likely to have challenging economic conditions around the world as well as ongoing tough competition, we believe that we can continue to improve our overall operating margin to 8%.

Through improved operating performance, we have also improved our rolling 12 month debt to EBITDA to 3.2 times. I think that's a little better than we showed at the September meeting through the first half. Our goal is to continue to improve that ratio in order to position us to regain an investment-grade credit rating.

In summary, we are very pleased with our performance in third quarter and in the first nine months of 2005, and are looking forward to achieving the targets that we set for the next stage of our Company's development. I would now like to turn the call over to Rich to look at the operating results for the Corporation and for our individual businesses and a little bit of his perspective on our business.

Thanks, Bob, and good morning, everyone. And thanks in advance for listening in.

Our third-quarter results continue our eight-quarter trend of significant year-over-year improvements in sales, gross margin, segment operating income, and net income. Our worldwide tire units increased 2% to 58.4 million units in the third quarter. The improvement was driven by growth in the international markets, where our original equipment units grew 8% and replacement units grew 2%.

In North America, growth in consumer units was offset by lower commercial units. The European Union consumer replacement units were up 4% in the quarter, primarily driven by Goodyear and Dunlop branded units and targeted market segments such as run-flat, high performance, and 4x4 tires. Our European Union truck OE units were also up approximately 40%, substantially outperforming the industry in the quarter, and building upon the momentum of the first two quarters of 2005.

Total sales of 5 billion were up 7% over the prior year and for the first time, the Company achieved sales of over 5 billion in a quarter. The increase versus 2004 was due primarily to higher pricing and a more favorable product mix in our tire business, higher volume, and favorable currency movement. Gross margin remained strong in the quarter at 20.3%, which is ahead of the 2004 third quarter.

Third-quarter segment operating income increased to 330 million from 273 million in the prior year, an increase of 21%. And as Bob mentioned, third-quarter segment operating income includes a $10 million charge related to the recent Gulf Coast hurricanes. I will speak to the components of that in a moment.

While about 30 million of our segment operating increases was from currency, improvements in price and mix contributed about 185 million to the year-over-year increase, while volume increases added about 15 million. These year-over-year improvements were offset partially by higher raw material costs of 150 million in the quarter.

Overall, our segment operating income margin for the quarter was 6.6%, up from 5.8% in 2004. Net income for the third quarter was 142 million, or $0.70 per share on a diluted basis. And this is compared with 38 million or $0.20 per share for the third quarter of 2004. In a moment, I will comment upon some significant items which impacted our net income in the quarter.

Related to our year-to-date operating performance, units are up 2.6 million, or 1.5%, versus 2004. Sales are 14.8 billion, or 9% ahead of 2004. Segment operating income is 938 million, or 33% ahead of 2004, and only 8 million behind our 2004 full-year segment operating income. And EPS is $1.39 versus a $0.06 loss in the comparable 2004 period.

Similar to our past calls, we're not going to cover all of the items between segment operating income and net income. But I would like to highlight a few of the more significant items impacting our net income in the quarter.

Restructuring charges in the quarter totaled $9 million which primarily related to associate severance cost in North America, the European Union, and in our Engineered Products business. We recorded a gain of 14 million from a settlement with certain insurance companies related to environmental and asbestos recoveries. We also recorded a gain of 25 million on the sale of our Wingtack business.

And you will also note that our current-quarter tax expense of 71 million is substantially higher than the 2004 period. This is due to the Company having recorded a benefit of 44 million in the 2004 third quarter related to the settlement of prior-year tax liabilities.

And finally, as I mentioned earlier, the impact of the Gulf Coast hurricanes was $10 million in the quarter. This is for unabsorbed overhead related to the chemical and tire plants, as well as additional bad debt expense associated with losses at a dealer. We also estimate that the impact could be about $20 million in October due to the unabsorbed overhead in our chemical and tire plants.

Our chemical and tire plants are currently running on normal schedule -- now, although we could still see that additional raw material shortages could appear in the quarter if certain of our suppliers continue to have issues bringing their production facilities back on-line.

Now, moving to a topic which continues to be important to us is our legacy cost. Our postretirement benefit expenses is on a run rate of $230 million for 2005. In 2006, we would expect it to be slightly higher.

Pension expense has been about $90 million per quarter through the first three quarters of 2005. The fourth quarter will increased to about $100 million to reflect the end of the moratorium negotiated with the United Steel Workers in 2003. Looking ahead to 2006, we expect pension expense will be back to around $100 million per quarter.

From a funding perspective, there is no change to our 2005 estimated pension contributions. We will contribute between 400 to 425 million for the domestic pension plans. The range for domestic contributions in 2006 is now slightly wider than we have given you in the past, at 550 to $750 million, really reflecting the changes in corporate bond and treasury interest rates. To help you analyze the income statement and the balance sheet impact going forward, we have again provided a pension sensitivity analysis. And you can see that on slide 10. As we look ahead, we also continue to monitor closely the potential implications of the proposed pension legislation currently pending in Congress.

We also wanted to provide an update on the sensitivity of oil and natural rubber pricing on our operating income and our forecast for raw material costs in 2005. We believe that the raw material cost increases for the full year will be approximately 10%.

Given the current supply and demand situation, the guidelines of $1 change in the price of oil per barrel impacting operating income by $20 million does not hold anymore. Above $50 per barrel of oil, what we're seeing is that the supply and demand of raw materials which we purchase -- again, such as butadiene, styrene, carbonblack, and polyester fiber -- that becomes more influential in determining the price of the materials than the price of oil itself.

In addition to our raw material costs, the cost of natural gas, which is used in the production of synthetic rubber and to produce steam for curing tires, also increased about 50% in the quarter. And in the way of information, energy accounts for about 5% of our cost of goods sold.

Now, relative to the significant cost headwinds we are facing related to raw materials and energy, both in the fourth quarter and on into 2006, we continue to seek productivity initiatives to partially offset these increases. Additionally, we will continue to evaluate the need for future price increases.

Turning to slide 12, in the first nine months of 2005, cash flow from operations was a source of $184 million compared to a source of $18 million in 2004. The improvements in cash flow from operation was generated from the 289 million improvement in net income, and cash used for working capital was about $400 million better than a year ago. As we have said, working capital reduction is 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 about 370 million in the first nine months of 2005, and we still have plans in place to spend approximately 640 million on capital expenditures in the full year of '05.

Price mix improvements again drove our revenue per tire increases of 4% overall, excluding the impact of exchange. Revenue per tire improved in North America by 6%, by 4% in Latin America, and 3% in the European Union. We have raised prices three times in North America in 2005 as well as two times in Europe. Also contributing to our revenue per tire improvements are the many new products released in 2004 and 2005, which Bob talked about a bit earlier.

In Eastern Europe, revenue per tire increased 6% over the third quarter of 2004. In addition to improved product mix, we have raised prices in many of our countries throughout the region. And for example, in September, we raised prices on winter tires 7% in Russia.

Due to higher consumer OE tire volumes, revenue per tire was flat in the Asia-Pacific region.

Referring back to segment operating income on slide 14, you will see that it has improved 21% in the quarter versus the 2004 period. The improvement from 2004 has been driven by our tire businesses. We have now seen eight consecutive quarters of year-over-year improvement. Now, let's cover each segment individually and talk about the causal factors for our engineered products' profit reduction from 2004.

In North America had its sixth consecutive quarter of positive operating income. Sales grew at 5% while operating profit more than doubled over the prior year quarter. Looking at the drivers of the year-over-year changes, there is a combination of both the positive effects of price and mix in our targeted channels, as well as the significant headwinds of continued escalating raw material costs. As you may recall, we introduced the price increase on September 1 of 6 to 8%. This increase was reflective of continued rising raw material costs that we are experiencing.

While we are holding these price increases, their impact in the quarter was not terribly significant, given the September 1 effective date. Our volume in the quarter was essentially flat, given our focus on maintaining pricing discipline to cover higher raw material costs.

Now despite flat volume, segment operating income improved over 100%, and was driven by continued improvements in price and mix in our key consumer replacement business, which is largely due to our new product introductions and past price increases. Segment operating income also improved due to strong performance in our off-highway businesses, which includes farm, aviation, and OTR, where demand continues to exceed supply, and also due to strong performance in our Wingfoot commercial truck tire centers, consistent with our strategy to increase our participation in the truck service business. These improvements were partially offset by higher raw material prices, particularly impacting our consumer OE business, where price increases remain difficult to achieve.

The commercial market was softer in the quarter. However, freight activity appears to be strong, and sellout continues to be solid for our dealers. And we are expecting the OE markets to finish 2005 up 10%, a solid improvement over a very strong 2004, which you may recall that the truck OE market was up nearly 40% in 2004 versus 2003.

As I mentioned earlier, the impact of the Gulf Coast hurricanes was $10 million in the third quarter, and we estimate that the impact could be $20 million in October, reflecting unabsorbed overhead. Our chemical and tire plants are currently running a normal schedule, although again, we believe that additional raw material shortages could appear in the quarter as recovery efforts continue in the supply chain. Overall, we are pleased with our progress in our North American tire business, but certainly remain focused on the challenges ahead.

Segment operating income in our European business increased 18% in the quarter on a 4% sales increase. The earnings improvement resulted from continued price and mix improvements in our consumer replacement business, and growth in our truck OE business, where we have grown our market share 7 points over the past nine months.

The European consumer replacement market has rebounded from a slow start in 2005, growing 3% in the quarter, and strong sales of our Goodyear and Dunlop-branded product drove growth of 4% in our business. Our successful truck product portfolio has again significantly contributed to Goodyear outperforming a softer European OE truck industry, which grew about 2% in the quarter. The commercial replacement market, although down 3% in the quarter, was stronger than earlier in the year.

The off-highway business also performed well in Europe. Not only was volume growth strong; profitability improved as a result of closing our tire operations in the Wolverhampton location in 2004.

Price increases implemented in the region during 2005 are also sticking, evidenced by a 3% revenue per tire increase, excluding the impact of translation. We are pleased with our operating performance in Europe as we have held prices, improved mix, gained share in key markets while improving operating earnings to 272 million, or a 40% improvement on a year-to-date basis.

Now moving onto Eastern Europe, Middle East, and Africa, we recorded a 15% sales increase in the region due to improved price and mix. We continue to record significant growth in key market segments such as high performance, ultra-high performance, 4x4, and premium-branded product, particularly in central European countries. Segment operating income increased 7% in the quarter, with the benefits from price and mix partially offset by the negative impacts of production cuts stemming from lower exports to Western Europe.

The Latin America business segment had another solid quarter with 18% sales growth and a 20% improvement in segment operating income. The region continues with its mix improvement strategy and has been able to price to maintain their operating margin, which really speaks to our competitive strength in the region.

Replacement volumes were slightly lower in the quarter, although we continue to achieve year-over-year price improvements in the face of strengthening currencies and rising raw material costs. OE volumes increased, consistent with previous quarters.

Our focus on brand management, leveraging our distribution network, new product introduction, and cost management have driven our performance in the region. While the potential of an economic disruption could impact the strong earnings trend in the region, we are confident in the management team's ability to continue to execute against their long-term plan of growing the radial truck and consumer replacement businesses, OE selectivity, and cost reduction.

In the Asia-Pacific region, units increased 6%, sales increased 12%, and segment operating income improved 26%. The increase in earnings has been driven by improvements in India, South Pacific Tyre, and our off the road business in the region. In fact, reflective of the rapidly growing passenger radial market in India, we announced this week an $18 million expansion to our Indian manufacturing facility.

Relative to the off the road market, the industry has been growing rapidly on a global basis. Asia, through our operation in Japan, has experienced solid margin improvement consistent with our other business units participating in this market.

Relative to our presence in China, we continue to make progress with our procurement operation on the ground in Shanghai, as well as with expanding our presence in the local consumer replacement markets. As we have stated, this region is strategic to our future plans from both a growth, and perhaps more importantly, a sourcing perspective.

Moving to Engineered Products, we announced that we are exploring the sale of the Engineered Products business in September. In the third quarter, sales grew 7% and over 13% through nine months. Demand continues to be strong for our industrial products which includes our conveyor belt and hose products. The replacement business is showing good topline growth and improved profitability.

However, the OE and military businesses were another story in the quarter. The OE business grew in the quarter, but higher raw material costs reduced profitability. The military business is weaker than last year as well.

Relative to the hurricane, it really had a minimal impact on our Engineered Products production in the quarter. And while it was a tough quarter for our EPD business, there are many positive developments in this business. Our EPD team continues to win business in the industrial and replacement segments, and has an intense focus on revenue enhancement and cost reduction in order to improve its operating margin. And we certainly have confidence in the management team's ability to do so.

Now as we reflect on our operating results, not only in the quarter or in 2005, but over the course of our turnaround efforts, we are pleased with our performance. In the face of record or near-record high raw material costs, increasing energy costs, unprecedented pension and health-care expenses, and an increasingly tough global competitive environment, we have executed against our goals and have achieved significant year-over-year segment, operating, and net income improvements. These improvements have been centered around our seven strategies, with none as important as the combination of innovation and leveraging our brand, the Goodyear name.

We have also improved our capital structure by undertaking multiple billion dollar refinancings over the course of the last three years to give us the time to continue our turnaround and to address our existing pension obligations. These are achievements that we are proud of.

Now with that said, we fully acknowledge that we have much work to do, particularly around our cost structure and delevering our balance sheet. And I will say that we are intensely focused on these challenges. As we discussed at our September investor meeting, we are planning to reduce our global high-cost tire capacity by between 8 to 12% and to take more cost out of our business. This will involve restructuring charges and cash expenditures. These are big challenges, but ones that we recognize are necessary for our long-term success, that we have the plans to address, and that we hope to be as successful as we have been with our turnaround efforts to date.

So again, thank you for your attention, and I'll turn it back over to Bob.

Thanks, Rich, and given that look at third quarter and year-to-date performance, let's take a look at tire market performance and our expectations for full year 2005 and then 2006.

In North America, the consumer OE market was down 2% while the commercial OE market grew 10% through the first nine months of 2005. We believe that in the fourth quarter, again for North America, the consumer OE market should improve because of the new model year production, and the commercial market will continue to grow around 10%. The commercial and consumer replacement markets have both shown approximately 3% growth during the first nine months of 2005, and are also expected to finish 2005 at about the same levels.

In Europe, the consumer OE market was down 3% while the commercial OE market grew 11% through the first nine months. In our estimation, the consumer market should continue at about the same rate for the fourth quarter, and we expect the commercial market to slow somewhat from that 11% growth rate through the first nine months of the year.

The consumer replacement market in Europe has been flat for the first nine months of 2005, and is expected to remain essentially flat for the remainder of the year. The commercial replacement market was down 6% for the first nine months, and is expected to improve slightly in the fourth quarter.

Now shifting to interest expense, interest expense for the Company will be in the range of 105 to 110 million in the fourth quarter of this year. Financing fees will be approximately 10 million for the fourth quarter.

Globally for 2006, we expect minimal growth in the consumer OE market, and slower growth than we have seen in the past two years in the commercial OE market. We expect trendline growth for the North American replacement market and slightly below trendline in 2006 for Europe.

Due to the higher oil, natural rubber, and energy prices that we have seen and everyone is forecasting for 2006, we expect raw materials to increase another 8 to 10% next year. So for 2006, raw materials in our estimation -- another 8 to 10%. Interest expense will be in the 450 to $475 million range. And capital expenditures will be about equal to depreciation.

We feel that we have the processes in place to use our capital expenditures effectively to grow our business. And as we said earlier, we're not following the strategy that says we need to produce everything that we sell. We believe that we can benefit from our suppliers' expertise, both as sources for R&D and low-cost product sourcing. Clearly, the third-quarter results are further evidence that our turnaround is on track. We feel very good about that.

Going forward, we have a healthy respect for our challenges -- for rising prices of raw materials, for slow market growth in the EU, and for a competitive industry that demands an increasing focus on marketing innovation and cost reduction.

However, I will tell you we continue to build on our momentum. How are we going to do that? Well, as we have said before, first, we are clearly focused on topline growth. You see that in our results, and that will carry into our future performance as well. We will continue to bring innovative new markets products to market faster than ever with our outstanding new product engine. I believe that we are now clearly the industry leader in commercializing and marketing high-impact new products.

We will continue to leverage our exceptional distribution network globally. We will build on what is already a strong brand portfolio. We will continue to invest wisely in marketing, R&D, product quality, and capital to grow our core businesses.

Second, we are intensely focused on reducing our global cost structure. As we said at our New York City meeting a month ago, we are implementing plans to reduce our cost by approximately 750 million to $1 billion over the next three years. And as Rich mentioned, we expect to pay cash restructuring charges of 150 to $250 million over the next three years to help us accomplish that. We will continue to make changes in our product formulations that provide us the flexibility to interchange between natural and synthetic rubber, depending on market pricing.

We are pursuing aggressive purchasing strategies, such as our focus on sourcing materials and equipment from lower-cost countries, including China. We will continue to drive improved productivity in our operations through the application of lean and Six Sigma initiatives.

With successful execution of both these topline and cost initiatives, we believe we are well positioned not only to meet the market challenges which we talk so much about, but most importantly, to capitalize on the marketing opportunities that present themselves. And we feel there are significant marketing opportunities in front of us.

Now, I'd like to open the call to questions.

(OPERATOR INSTRUCTIONS). Jonathan Steinmetz.

A few questions. I'm trying to disentangle -- there's a lot of puts and takes in North America. But to the extent you can, what did the EBIT look like from the consumer -- the passenger and light truck replacement businesses? If we ex out the off-highway and the commercial and the chemicals and all of that in the OE, do you think it was up?

Jonathan, we don't split out, as you know, the consumer replacement versus consumer OE or those kind of segments or product lines -- profitability.

I would say -- we don't get to that granular level, but I would comment to you that we still have had good results from the off-highway-type businesses -- farm, aviation, and the like, particularly versus the prior year. But we also saw improvements, as you might guess, in our consumer replacement business.

But what we've also experienced a challenge with versus 2003, as you might guess as well, is our consumer OE business where, as I mentioned, it's becoming increasingly difficult to capture or to recover the raw material price increases we're seeing because of how difficult it is to get pricing at the OEs.

I had a follow-up on that, actually, which is -- your raw material costs are likely to be up next year. Some of your customers don't have the best financial situation to absorb the price increases. But are there other tiremakers willing to come in at these prices if you guys walk away? Why can't you get any pricing in the face of this raw material environment with the OE light-vehicle side?

Jonathan, just to be very clear here -- because I think clarity is demanded in talking about this, we have not said that we're not able to get any pricing. Okay? We're able to get some pricing. Certainly, if we go back to the strategy that we set in motion approximately three years ago, we said we'd be very selective with the OEs, and that strategy has played out well for us in several respects. We are more selective. In other words, we have moved to higher potential margin segments or tires within a given customer.

We have also diversified our customer base significantly, and I think -- particularly here in North America, but also in Europe. And that has played in our favor. And we have gotten some pricing activity. We also have enhanced product mix going forward.

But this could be a challenge -- this will continue to be an ongoing challenge, with raws up 8 to 10 -- at the level of 8 to 10% next year on top of 10% this year on top of the '04 increases. So we're just going to work our way through that. We feel we have got a very strong strategic positioning, given our advanced engineering, and now add to that our new product capabilities. So we're not saying that we're getting no increases. We have had some increases, and we will continue to push hard on this and feel we're in a good strategic position with the OE's.

Okay. So if I get right, you're getting some increases, just not enough to grow (ph) that 8 to 10% upwards.

Yes, (multiple speakers) that's an accurate statement. And believe me, we're not satisfied with that.

Okay. And last, on the sales of Titan, you made brief comments, but you still have a high confidence level that that can go through?

I would say this -- that as you know, we in effect have an agreement now to sell the North American farm business to Titan. They are in the process of negotiating with the steel workers as we speak this morning. And we feel confident that that will go through. And we are hopeful that that will go through here in the fourth quarter.

John Murphy.

Just a question on this Sandia partnership and relationships you have like that. Clearly, you're getting some leverage on your R&D spend there. And I was wondering -- it's hard to quantify what it is, but is it a 1.5 to $1 spend, or 2 to 1, or 3 to 1? How many partnerships do you have like that, and how helpful can that be in developing new products going forward?

I will say this, John. You're right. It is extremely difficult to quantify the benefit. But I can tell you that -- let me just give you two images. An old image was if we were developing new tires, we developed a test tire. Then we had to test it. We had to run it on the road. And then we'd come back and we'd reapply all of the learning from that first test. And number one, it's expensive, but number two, it's time-consuming. It's expensive and it's time-consuming.

Working with Sandia and creating the mathematical models and the simulations to be able to take a prospective tire design and take that through simulation all of those tests and real-life kind of testing that we did before, provides us with two dimensions of advantage. One is we don't spend all the money. Number two, it gets us to market faster. And as I think we've started to show people in this business, if we're going to take tires from this perception of commodity to differentiated products, we need quick time to market as well as saving some money. So it's along both those dimensions that we're helping.

I would also say the Sandia partnership is a really interesting one. When I came into this business, my assumption is they helped us a lot. And that's accurate. We also help them a lot, because as you can imagine, the number of combinations and permutations that are involved in testing tires and simulating tires -- different road conditions, different vehicles, different suspension setups, different weather conditions -- creates a lot of variety, let's say, and variance (ph).

So that's a typical partnership, but it's not just the saving of the money. It's being able to get out with new products extremely quickly. And as we said in New York, what you will see from us are more partnerships. I think we've opened up our R&D community the way we've opened up many parts of our Company to outside market contributions that people can make.

Helpful. And then another question. You're indicating 5% operating margin in North America as a target. How do you get there? Is that richer mix? Is that market share gains? Is that cost reduction? Can you put any specifics around how you get there?

I may kick this off, and then Rich Kramer will probably have a comment or two. I think we get there the way Jon Rich talked about this -- Jon, the president of North American tire, talked about it in New York. We've got to do all of those things. We have got to do a great job in terms of developing the marketing and topline capability that we're starting now to show you. And we also have to be very intense about how we go after our cost structure. And Jon mentioned several of those areas. I think just the new things he highlighted in September.

In our truck business, we've got a significant topline and bottom-line opportunity with providing services to the fleet operators here in North America. And we think we've got an advantage in moving to do that. And from a cost standpoint, Jon mentioned that certainly we're looking at productivity improvements. And we are also looking to get much more effective in reducing our reliance on low-value tires that are today being manufactured in North America. So that will give you some guidance. Rich?

No, I think you it on the head with your first answer. It's really everything that you said. And it's the degree of difficulty doing all of those things simultaneously. That's our challenge. And I think that's, to a large degree, what Jon laid out for you. There really is no one particular thing that's going to get North America to 5%.

I would say where we have come in North America -- today, we know where we want to play in North America, and we've got very good definition of how we want to play in various markets and market segments. Absolutely critical for us, because there are a lot of market opportunities in the tire business. There are also traps. So our goal, obviously, John, is to hit the opportunities, avoid the traps.

Just one last question on asset sales. Is there any hold up in what's going on in the farm tire business sale? And then also, is there any update or any guidance you can give us on the timing for the engineering sale?

I just comment on farm. The only -- I'd say the obstacle has been -- Titan has to negotiate an appropriate agreement with the steel workers. And that's ongoing. And they're having discussions on a very regular basis. And we have confidence that that will get done. Other than that, there's no significant obstacle there.

Relative to Engineered Products, look, we've just basically announced that in September 20, I think -- we announced that we were exploring the sale. So it's early days to be commenting on timing. We know there's -- I'll just say at this point there's a significant amount of interest.

Rod Lache.

I don't want to use up my one question quota here. (laughter) So my first question is not really a question. I just want you to repeat -- can you repeat what you said about the outlook for North American replacement demand in Q4? And did you mention expectations for Latin America?

I did not mention expectations for Latin America. For the replacement market in North America, I said that both -- frankly, for consumer and commercial, both of those markets have shown about 3% growth year-to-date. And we're expecting it to finish at about that level -- so about a 3% growth rate here in the fourth quarter.

Okay. So you're not seen any impact from lower miles driven or deferred maintenance -- that kind of thing?

No, I'd say this, Rod. It's a key issue, an authority issue at this point. I'd say we're not seeing that. Now, we are awaiting, as you probably are, statistics when they are published about mileage -- miles driven. At this point, we have no statistical or empirical evidence that we are seeing any of that, although we could argue that in some cases, some people are probably driving a little bit less. But we don't have any evidence at this point that there's any significant broad change in behavior.

Okay. And Latin America -- any color on what's going on?

Well, Latin America, I would simply say -- what can I say? I think everybody's question -- first, we question how well we did in '03. Then we question how well we did it '04. Now we question how well we did in '05. We have got a tremendous competitive position in Latin America. And we are very proud of what our guys have done with product line, both in replacement market and OE and consumer, and also how they capitalized on the truck radialization these past couple of years in Latin America.

They're doing extremely well in terms of managing, I would say, the competitive dynamics in Latin America. Certainly, we're watching, as undoubtedly most of the people on the call are, overall macroeconomic activity. We have had strong markets, and we've had strong currencies. And I guess questions going forward would be -- will we see de-vals (ph)? I can only tell you that if we do -- or if and when we do, we've got a very experienced, financially astute team in Latin America working closely with Rich Kramer that can handle that situation.

Okay. Let me just ask one question here on the cost savings objective. Can you give us any color on what you think is achievable in 2006, and particularly, your comments about reducing the exposure to high-cost markets. Where in the world today do you have excess capacity, so that if you shifted out of a high-cost market, where would you be able to sort of make up for it? And are there any sort of expectations for health-care or any other structural cost reduction that you're hoping to get next year?

Okay, Rich, maybe you can --

Sure. Rod, I thing relative -- if we break it down, your first question on kind of breaking down our savings by year, particularly '06 -- we haven't done that, and likely are not going to do that as we move forward. It's a three-year objective, and we've got a lot of plans in place to do it, but we're not going to break it down on an annualized basis. I think in the past we did report it to you. Barb continually puts a schedule out that shows what we believe we've achieved as we do it, and we would continue to do that.

And I would tell you what's always an issue here is the cost savings that we get versus the headwinds that we are faced with. And that will continue to be a challenge for us as we look into 2006 and beyond.

In terms of high-cost capacity -- where do we have high-cost capacity? To be truthful, with the exception of our -- probably Latin America and Eastern European regions, we probably have what we would deem high-cost capacity in all of those regions. That can be for a variety of reasons. It can be everything from labor costs, benefit cost, to the type of equipment or the type of facility that we have there.

So I think as we look around the globe, we see opportunities for capacity reduction on a global basis. And that's why we certainly commented particularly that its global tire capacity that we're going to. We're not targeting one region in particular.

And I think in terms of where we have excess capacity, I don't know that we would characterize it that we have excess capacity anywhere in the world. But what I would say is we do have capability to either make incremental tires with small investments, or with the investments that we have now in places like Eastern Europe, Latin America, even in some of our Asian facilities -- and quite frankly, even some of our facilities in North America and western Europe.

When we look at where we're going to put tires, as Bob mentioned, we are open to looking at third party sourcing. And as we think about it, our goal is particularly not to add incremental capacity in any large quantities, but to increase the capability of our factories to make the type of products that we think we can sell in a profitable way.

And then relative to health-care, I thing that's probably a topic that we could talk on for a long time. But certainly, that's an area that we will continue to talk about in 2006, both with our salaried and hourly workforce as we look ahead.

Yes, I think those are key topics that come into play in our partnership with the steel workers here in North America, but also, with other facilities and other unions overseas.

Himanshu Patel.

Rich, if we go back to slide seven that just shows the sort of the high-level synopsis of the topline, it looks like you had about a 1 million unit volume increase. And I think earlier in the call, you had mentioned that the operating profit benefit of the volumes was about 15 million. That kind of suggests about a 17% or so pretax contribution margin. Is that what we should think about for your business? I would have thought it would have been a bit higher than that.

Yes, I think if you look at it, you see our topline impacted by a couple of things -- volume, price, and mix as well. So when you look at that, I think it's more complicated than your analysis right now.

Okay. But the volume was 15 million benefit, right? Is that what you had mentioned earlier?

No, that's correct.

Okay. The second question was -- we've heard grumblings on it from some of your competitors about what's happening in the European truck market -- the commercial truck market. How much does that worry you, and what are you guys seeing on the ground over there in terms of weakness?

Well, I'll start, and I'm sure Bob will want to answer. But I would just say that there has been some softness in the region. But really, that softness -- and that's really been in the replacement market. But that softness has been one that -- actually, our performance has actually not been terribly impacted by. As you look at our new products, as you look at our progress in OE, I think if there's one area where we've made significant progress even globally, I think we highlight the truck business in Europe. And Bob, you may want to add to that.

Yes, I'll just say -- we started on a strategic path a little over three years ago in Europe, and we said we were going to rebuild our truck business. And I mean rebuild it -- management, people throughout the organization, and the amount of dollars and resources that we've devoted to the truck business. This is also true in North America, but we'll talk about Europe.

I think we've made great strides in product. And if you talk to people in Europe, they will tell you that. I think we've made great strides also in building our service network. For us, it's not a wholly-owned network in Europe. We're working with service partners throughout Europe. And we've created now a significant network there.

So all I can tell you is we've been able to handle the commercial replacement challenges. And I said I think this year, we're off about 6% -- that market is off 6%. And we've started late last year with the Volvo business and the Scania business late in 2004 -- we have started to take on a lot of very impactful, and I would say high-quality OE business, which is very important in Europe as well.

So we're doing well at this point, given difficult market conditions. And we continue -- and I think we have got enough business platform strength in place to continue to do well in Europe.

And on that same note, we're obviously getting into the last inning of the North American commercial truck cycle. How are you guys looking at that? Looking into '07, is that a period of volume decline that you are not really that concerned about? Or have you -- do you have enough sort of adjustments made on layered capacity that you think that this is not as big of a deal?

It strikes me that that's been a fairly sizable component of the earnings improvement in North America over the last few years. And if we do enter into a period where OEM commercial vehicle volumes are, say, down 30, 40%, is that something that you guys have sort of planned for already?

I'll tell you -- the answer to that is yes. What we do there -- we don't try to predict the exact timing of the various phases of the cycle here in truck. But there are some indicators, of course, that we use. And we tend to do scenario planning. And we, I think, have basically addressed this in several ways. One, we are driving our costs down in the truck business. Two, we are using both our own capacity, our own plants and equipment, and third parties to supply truck product to us. And we are also building a much more robust replacement business including the service sector.

So that's absolutely what's critical for us in terms of building, if you will, underpinnings of a business and a business model that's very different than we had before with much more strength in the replacement business. And yes, we like the strength in the OE business, but we recognize the cyclicality of it. So we are in the process of building a business model that won't eliminate any impact from the downcycle, but will certainly minimize that impact. That's what we're setting out to do. And I think we've got the underpinnings in place to be able to handle it. Whether that's '07 or '08 -- it probably won't be '06.

Just to paraphrase, that's largely because you think the replacement portion of the commercial business is just a larger portion of the total now than it was before?

I think for us, it will be -- look, the OE business continues to be a growth area for us. Why? Because we now have the product quality and product capability to be a strong competitor there. But I'm saying in addition to that, we know -- because the cyclicality in that OE business which we don't control -- we're building a very strong replacement business in addition -- much stronger than we have in the past.

Monica Keening (ph).

I was wondering in terms of North America, in terms of moratorium on the service cost that you got from the steel workers' union, how much was that again on a yearly basis? And how much of that was in this quarter? And when does that benefit end?

Rich?

Monica, on an annualized basis, it's about $40 million. And it started to hit us in -- I believe it was September this year -- September/October, if I'm correct. And yes, I'm sorry. It's starting November 1st. It rolled off in October. But 40 million a year -- but remember, we'll see a little bit of that in the quarter. We said about 10 million higher pension expense in Q4 than we've seen for the first three quarters.

So on an annual basis, it's only 40 million.

40 million, that's correct.

40 million, and we'll see that throughout 2006. (multiple speakers) Plan on it.

Okay. And then in terms of Cooper -- you know, they preannounced negative earnings. And you did not encounter the same kind of issues. Have you been taking significant share from them? Have you been able to capitalize on some of their own issues in North America?

Monica, I won't deviate from our policy here. We don't -- we never comment specifically about specific competitors. And of course, we're -- like you, we see what Cooper says publicly. But we won't comment on our share position relative to a specific competitor. We just have a policy -- we don't do that. You'll have to draw your own conclusions I guess.

But on an overall basis then in this quarter, have you been taking in North America?

We have been -- I'd say this. If we look at our North American share position, as Rich indicated in his comments earlier this morning, our position is we have targeted specific segments and specific markets. And in those markets, we continue to gain share. And that's the heart and soul of our efforts throughout the world and in North America, because what are we targeting? High-growth, high-margin segments where people appreciate the engineering characteristics of our product.

And then last quick question. I don't know if you mentioned this -- on the Engineered Products side, when do you think a timetable of when you might close that transaction? Or is it still very preliminary?

Yes, I think it's preliminary. We announced the exploration of sale on September 20th. And its early in the game. And as I said earlier, I'll just say there's a significant amount of interest in Engineered Products. But I can't -- it would be pure speculation or conjecture as to when we'd close it.

Now, I'd like to turn the call back over to Bob to close.

Yes, just thanks for the questions. And we really -- I'll tell you, we really appreciate your interest in Goodyear and for your being with us this morning.

Clearly, Barb will be available -- we always put the pressure on Barb here at the end of these calls. Barb will be available for any additional questions that you were not able to ask, or maybe we weren't able to address today.

As I indicated earlier, we just completed an outstanding third quarter, and you see that. And we continue to make progress on the objectives we talked about in New York City a month ago. Our seven strategic drivers that I've mentioned to you on many occasions remain the focal point of our efforts and drive our decisions, and we are delivering on those commitments. And I just thank you all for joining us on the call today. Thank you.

This concludes today's conference call. You may now disconnect.