Goodyear Tire & Rubber Co (GT) 2005 Q4 法說會逐字稿

Good morning. My name is Sam and I will be your conference operator today. At this time I would like to welcome everyone to the Goodyear fourth quarter 2005 financial results conference call. All lines have been placed on mute to prevent any background noise. After the speaker's remarks there will be a question and answer session. [OPERATOR INSTRUCTIONS] Thank you. Miss Gould, you may begin your conference.

Thank you, Sam. Good morning and welcome to Goodyear's conference call. Just four quick housekeeping matters. First, our discussion this morning will be available by replay after 2:00 p.m. eastern time by dialing 706-634-4556 or by listening to the webcast replay on investor.goodyear.com. Second, the slide presentation of the [INAUDIBLE] discussion is available in Adobe Acrobat format on our website. Third we anticipate filing our 10K tomorrow. And fourth and finally I'd like to remind you this morning that our discussion may contain certain forward-looking statements based on current expectations and assumptions that are subject to risks and uncertainties that could cause actual results to differ materially. These risks and uncertainties are outlined in Goodyear's filings with the SEC. The Company disclaims any intention or obligation to update or revise any forward-looking statements rather as result new information, future events or otherwise. On the call today are Chairman and CEO, Bob Keegan; CFO, Rich Kramer; and treasurer Darren Wells. Now I'll turn the call over to Bob.

Well, thanks, Barb and good morning everyone. At our annual North American dealer meeting two weeks ago in Nashville, the 2,500 people in attendance saw another clear example of Goodyear's new product capability as we launched a new Eagle tire. Our new Eagle, with response edge and carbon fiber technology, a performance touring tire, represents the latest in our continuing stream of outstanding new product offerings. The tire has met the goal we set at the inception of the product concept, that is a clearly advantage product in its category, and will be available to consumers in May for the important high performance tire selling season. Now my own test driving experience on this new tire clearly indicates that we have another spectacular new product. And while you might not see me, as a totally objective source for such comparisons, when those who are objective drive on the tires I'm confident that they will agree.

In 2005, our tires earned numerous prestigious product awards and endorsements around the globe. Even more than the awards, we like the increased revenue per tire, the richer mix and the increased margins generated by our new consumer satisfying tires. And now with the introduction of Eagle response edge, our dealers will be able to sell a Goodyear brand tire as the best tire in each of our industry's premium categories. And, of course, that's critically important to us. All of these new tires have been developed in the past two years. And our dealers like these tires, are selling these tires in volume, and are growing their businesses with them. As I've said before, I believe our product engine is the best in the industry and I believe it will get better.

Now why will it get better? Our consume insights continue to develop and improve. And we put a lot of analytic capability in that area. Our performance in research and development in marketing and at the critical intersection between R&D and marketing continues to improve. Our speed to market continues to accelerate. Our people have already climbed a steep learning curve and are aggressively looking for new possibilities.

This product innovation capability is a prime example of the aggressive change that you have seen from Goodyear over the past three years as we've driven steady operating pro -- progress guided by our seven strategies. And you will recall here that our strategies focus on leadership first, on market focused products and brands supported by a strong supply chain and fully leveraged distribution. And we maintain a constant focus on cost and cash. And Rich and I will have more to say in those two areas in our remarks this morning. Our relentless focus on these strategies drove our 2005 segment operating income increase of 23% to nearly $1.2 billion, and the near doubling of our net income to $228 million or $1.16 per share. While we are extremely proud of that progress as a Company, we will not let ourselves be complacent.

If you refer to the agenda slide, we recognize that analyzing our fourth quarter, and therefore our full year 2005 financial results, is complex. Given a significant set of unusual items in both 2005 and 2004. So Rich and I in our remarks this morning will speak to the core drivers of our improving market business performance and to the detail that's generating our financial results. And then we look forward to taking your questions.

If you switch to slide five, before I turn the call over to Rich, I want to offer you some introductory comments and my perspective on the speed bumps that mother nature, world economies and other unexpected events presented us with in Q4. I fully acknowledge the ongoing challenges we face from raw material costs, currency fluctuations and changes in our tire markets, but when I refer to these fourth quarter events as speed bumps, I mean just that. Speed bumps slow you down slightly but they are surmountable. Here are my introductory observations.

First, at Goodyear we are succeeding in our marketing efforts. We had record sales last year of $19.7 billion and better operating margins at nearly 6%, reflecting our focus on having great products and building strong brands. And this is happening globally, not just in North America where we tend to emphasize North America in this call. Second, we've made significant progress in addressing our capital structure reducing both net debt and unfunded pension obligations during 2005. We made this progress through strong operating performance in a series of strategic portfolio actions. Cash remained ki -- remains king at our Company.

Third, Goodyear's leaders at all levels of the organization have stepped up time after time to address the challenges that have confronted us. Whether it was recovering from a hurricane or dealing with the $550 million of increased raw materials prices we experienced last year, they have delivered. Fourth, there are fundamental and deep changes in our culture. Referring back to our recent dealer meeting, a continual refrain from our dealers at that meeting was, and I -- and I quote, I'm surprised at how fast you have dramatically changed your culture at Goodyear. As you all recall, culture is a term we use and we use it often internally. Now we're getting that kind of feedback from key dealers. To get that type of positive feedback from our dealers indicates that our cultural change, a change to market and performance intensity is progressing at an accelerated pace. Now I will come back later and talk about how our strategies will continue driving operational success, but first Rich will review their impact on our financial results. And so, Rich, welcome to the call.

Great. Thanks, Bob, and good morning. Now, picking up on what Bob said, during the fourth quarter we were impacted by certain external conditions and took some internal decisions that increased our costs. But more importantly, we saw continued strength in our operations and particularly in our performance in the marketplace. That said, I want to cover the challenges we faced in the fourth quarter and then I'll come back and cover our full fourth quarter results in more detail.

First, we saw raw materials rise at a rate of approximately 13% in the quarter versus our previous expectation of about 11%. This was driven primarily by rapidly escalating price of raw -- of natural rubber, which sat at $0.86 a pound yesterday and recently hit an 18-year high of $0.93 a pound. While this miss versus our expectations may seem substantial, to keep it in perspective, it represents an increase of only about $20 million on a base of $1.4 billion of raw material cost in the quarter which is less than 2%. Reversing a trend we've seen for the last 11 quarters, currency translation actually reduced sales by more than $100 million in Q4. This compares to $150 million improvement currency provided a year ago. And as you know, we saw the effect of the Gulf Coast hurricanes in the quarter. As we've said previously, these hurricanes not only caused us to reduce our production, but also directly impacted our chemical plants and some of our retail locations. As we go through our results, you will clearly see the impact of these challenges on our business. But with that said, the real key is how we have responded to these challenges.

As Bob has said in the past, it's often appealing to sacrifice long-term strategies to drive short-term results. Our turnaround has clearly benefrit -- benefited from the fact that we have chosen to resist that temptation in favor of aggressively focusing on the fundamentals of our strategies. We continue to drive price and mix to offset the impact of raw materials. As a result, even the higher than expected raw material cost increases of $160 million were more than offset by approximately $190 million of improved price in mix. We have been pricing strategically which has enabled us to deal with this type of variability. And while the Euro weakened and negatively impacted our European Union results our North American operations improved to balance out our Q4 results. In the face of that tougher currency environment, our European business continued to leverage outstanding products and our overall marketing capability to drive growth in targeted premium market segments. As a result, we achieved significant share gains in the consumer placement and the commercial OE markets. And in response to the hurricanes we saw our associates demonstrate superb leadership as they leveraged the strength of our supply chain to get raw materials to the factory and products to our customers. And looking ahead, we see no ongoing impact from these disruptions.

Now we realize the challenges of raw material currency and the hurricanes would negatively impact our near term results and we realize reducing Q4 production would further depress segment operating income. But we still made the correct decision to reduce inventories as we go into 2006. The decision reduced working capital, increased cash flow and was clearly the right strategic call. That gives you a view of our key fourth quarter challenges and how we addressed them while continuing to build our businesses. Now let's look at the results in a bit more detail.

Net sales improved 2% on continued high pricing and better mix. Excluding translation, fourth quarter sales increased approximately 4%. When adjusting for the negative impact of the Gulf Coast hurricanes of approximately $15 million and for the favorable benefits from raw material sediments -- settlements in both 2004 and 2005, with certain chemical suppliers of $15 million and $23 million respectively, fourth quarter segment operating income increased 6%. Underlying segment operating income improved despite higher raw material costs, analyst production adjustments in Europe and Latin America. At the net income line, reported a loss in the fourth quarter of $51 million or $0.29 per share reflecting a number of items which we've listed on slide eight.

Significant items recorded in the fourth quarter include the loss on the sale of the Farm Tire Business, the impact of the hurricanes, the impact of the cost cutting rationalization actions, the impact of an accounting change related to the adoption of a new pronouncement and the impact of certain suppliers settlements and tax adjustments. Also, you may recall that the fourth quarter of 2004 included the favorable impact of a particularly large insurance settlement of $157 million. We have provided an appendix to the presentation that lists the numerous items impacting both 2005 and 2004 results, which you may want to understand in evalua -- in evaluating the sustainability of our underlying earnings.

So, to recap, in the fourth quarter, we saw volume and sales growth overall and particularly in targeted premium markets. Continued improvement in our North American tire business, continued pricing mix offsets to rapidly escalating raw materials costs, higher conversion costs resulting from both the negative impacts of the Gulf Coast hurricanes and a strategic desi -- decision to reduce production to improve our working capital and when adjusted for items such as asset sales, insurance and other settlements improved year-over-year operating income, net income and EPS.

Now I'd like to review our full year 2005 results focusing not only on our strong earnings but also drilling down on cash flow and the progress we have made in improving our capital structure. Sales were a record $19.7 billion, a $1.3 billion increase over 2004. About 70% of that increase was due to improved volume pricing and mix. Translation continued to be a benefit for our full year results accounting for approximately $210 million of the increase. Our unit volume was up 3.1 million units or approximately 1.4%. This increase was driven largely by growth in targeted premium market segments of our European consumer replacement business, branded tire sales in North America, and in our consumer OE business in Latin America and Eastern Europe. Segment operating income increased 23% to almost $1.2 billion, raw material increases of 11%, or approximately $550 million, were more than offset by pricing and mix improvements of $635 million. Increased volume improved segment operating income by nearly $7 million while foreign exchange and translation contributed approximately $85 million to the increase.

Finally, we recorded a net profit in 2005 of $228 million, almost double what we earned in 2004. EPS was $1.16 per share on a diluted basis compared with $0.63 in 2004. Now excluding the significant items in both 2004 and 2005, such as insurance settlements again asset disposition, the adoption of a new accounting standard, again those items that we've -- we've laid out, you will find our year-over-year net income and EPS improvements were even greater than I said earlier.

Turning to slide ten, 2005 cash flow from operations was $885 million compared to $785 million in 2004, an increase of $100 million despite a year-over-year increase of $260 million in pension contributions. This increase reflected the $113 million improvement in earnings along with our focus on working capital even as our business grows.

Now a couple of non-operating items are also important to note. First, capital expenditures totalled $634 million, up from 529 million last year as we accelerate our rate of investment. I also want to point out the capital expenditures do not include IT expenditures but going forward we will include those in our CapEx as we go into 2006. Proceeds from asset sales were $257 million, a reflection of the work we've done to sell non-core assets and realign our business portfolio. The connection to make here is that as we generate additional operating cash flow and as we it continue to take portfolio actions to raise cash, we will be able to make further investments in capital expenditures, R&D and marketing to grow our business. And we plan to continue balancing these increased investments against the need to address our capital structure.

Now with that balance in mind, slide 11 shows our December 31 balance sheet comparing it with last year. Since 2003, we've been working on a capital structure improvement plan. During 2003 and 2004, this plan resulted in increased liquidity and longer debt maturities. In 2005, we have not only continued this trend of improving liquidity and lengthening debt maturities but have also begun this thir -- the third stage of our plan. The deleveraging phase. As we've said, this is a stage where we would look to opportunities like asset sales and potential equity to accelerate our progress.

During 2005, we reduced debt by over $250 million and net debt by almost $500 million while making unprecedented contributions to our pension plans in excess of $500 million. This reduction in leverage reflects not only our improved net income but also our focus on managing working capital and selling non-core assets. Now in addition to reducing our net debt, we have also reduced our unfunded pension obligation by $100 million. This improven is the first reduction in the obligation in six years and took place despite a reduction in the discount rate of 25 basis points which has the effect of actually increasing our liability about $170 million. Now for more detailed information related to our pension obligation, pension expense and the related funding for both 2005 and 2006, I refer you to a slide that's included in the appendix of our presentation.

Now I'd like to spend time on the performance of each of our business units. First, slide 12 shows 2005 segment operating income for each of our business units while also comparing it to 2003 and 2004. You can see that the improvements in 2005 were again broad based with all of our tire businesses improving from 2004. Engineered products declined reflecting the impact of lower military sales and tough market conditions in its OE business. Focusing on fourth quarter segment operating income on slide 13, you see the impact the challenges we discussed earlier with lower earnings in our European and Latin America segments being largely offset by stronger North America performance.

Now turning to our North America tire business, I'm pleased to say that North America improved its operating income substantially compared with 2004 despite the impact of hurricanes in the quarter and the difficulty of recovering raw material costs particularly with pricing in our consumer OE business. North America finished the year with a significant improvement in sales and about a 2% operating margin. This compares with a 1.3% operating margin in Q4 of the prior year. To accomplish that improvement we overcame a head wind of nearly $75 million in rising raw material costs. Key accomplishments in the quarter included gaining share in the Dunlop brand. Continuing strong demand for the Assurance, Fortera and Wrangler tires launched over the past two years, improving price mix which contributed almost $80 million toward the improving operating results, continuing strong performance in the off highway businesses and improving service volumes through our Wingfoot stores as we continue to drive our cradle to grave commercial truck strategy.

For the full year our North American tire business earned $167 million of operating income, more than doubling that of 2004. Clearly good progress in 2005, but we also acknowledge that much work remains to achieve our next stage metric of a 5% operating margin.

Our European Union sales and earnings were down in the fourth quarter reflecting strong market performance which was offset by raw material costs, the production decisions we've already discussed along with weaker currency. Earnings were substantially -- were up substantially for the full year. As a result of strong marketing efforts and acceptance of new products we gained share in virtually every consumer replacement market segment. The huge success of the Goodyear UltraGrip 7 and the Dunlop Winter 3D resulted in strong winter tire sales for the quarter. Now during the quarter our consumer replacement volumes increased over 13% resulting in significant share gains.

While the commercial truck market was weaker compared to last year, we gained share in the largest markets in Europe. While price mix contributed $40 million to segment operating income, it was more than offset by the combination of approximately $20 million of raw material cost increases, higher conversion costs of $9 million associated with the production adjustments and higher selling and distribution expenses. There was also an unfavorable currency impact of $7 million reflecting a much weaker Euro than a year ago. For the full year, segment operating income for our European Union business was $317 million, an increase of 25% over 2004 levels. During 2005, we gained share in the consumer replacement market as well as in both the commercial replacement and commercial OE markets with commercial OE substantially outperforming industry growth resulting in a share gain of over seven points.

Looking in more detail at our Eastern European business, late snow drove fourth quarter growth in Central Europe which was partially offset by softness in Turkey. And we had double digit growth in both the consumer and commercial OE business in the region and gained share in all markets. Higher raw material costs and the impact of production adjustments were only partially offset by higher volumes and price mix. SG&A expenses were higher as we ramp up our selling activity in Russia and other emerging markets. While segment operating income was down in the quarter, full year segment operating margin remained a strong at 13.8%. We feel we remain well positioned to continue our growth in the region.

In Latin America, volume was equal to 2004 with consumer OE sales up 4% but replacement sales slacked. The commercial truck and farm markets were weak given the dry weather conditions and lower commodity prices in the agricultural market. The decline in segment operating income was driven by $28 million of higher raw material costs and $9 million higher conversion costs due to the production adjustments to reduce inventories in the quarter. Price mix, especially with the higher consumer OE mix, was not enough to offset the raw material cost increases in the region. For the full year, Latin America had $295 million in segment operating income, up from $251 million in 2004 for an increase of nearly 18%. Operating margin was 20% for the full year.

We also had a strong quarter in the Asia/Pacific region. Improved price mix more than offset the raw material cost increases in the quarter. Selling and administrative expenses were higher by $6 million as we invested to build a retail program in China and launch the Goodyear Excellence tire in China this past December. Now in addition to its role in the tire business, the Asia/Pacific region leads our efforts to drive lower purchasing goods for Goodyear worldwide. We estimate that we have saved about $17 million from Asia sourcing in the nine months since we've established our purchasing office in Shanghai and we will continue to drive increased sourcing from Asia at an increasing pace.

Our engineered products business in 2005 was really the story of two businesses. A strong industrial and replacement business and a more challenging business serving the military and OE customers. Industrial channel sales increased primarily due to the strong demand from Petra chemical in mining industries coupled with growth in -- in the replacement hose and belt sales with the addition of a home center retailer and a major automotive parts seller. This helped improve the mix in our business as well. The military business was down significantly for the quarter and for the full year offsetting the earnings improvement that was achieved in the industrial channel. In addition, achieving price increases at OE to offset raw material costs remains a challenge.

So to summarize, our performance in 2005 resulted in a third consecutive year of share gains in targeted markets of off -- offsetting raw material cost increases with price and mix, of double digit segment operating income growth and of progress against our capital structure improvement plan. These improvements are gratifying to us but not completely surprising given what we believe to be the strength of our strategy. As we move into 2006, undoubtedly higher raw material costs, a weaker Euro and an increasingly competitive global market will make our challenges significant. However, you will see our businesses focus on costs and working capital reduction programs to drive our Company to our next stage metrics. Now we'll turn the call back to Bob for his comments on the business going forward. Bob?

Well, thank you, Rich. And I would like to recognize Rich and his financial team on two fronts. First I am very pleased to be speaking to you today, that is on February 16th. As you will all recall, our calls the past two years to review year-end and Q4 results have been much later in the year. And second, and perhaps more significant is the fact that we closed the books with no material weaknesses. A major achievement. These improvements I think provide clear evidence that the financial controls and the processes that Rich, his team and our line managers have put in place are working. I want to give congratulations to the entire team. Their progress I believe is illustrative of the changes that we are seeing throughout our Company.

Now I wanted to take a couple minutes and give you my best read on how the tire markets look as we start 2006. And then offer you my perspective on how our strategies will continue to drive improving performance. In 2006, we expect the consumer OE market in North America to be down slightly. while the commercial OE market is expected to continue to grow by approximately 5%. The replacement markets in North America in both consumer and commercial are expected to have trend line growth of about 2%. We are expecting the consumer OE market in Europe to be flat to up slightly in 2006 and the commercial OE market flat to slightly down. The consumer replacement market in Europe is forecast to be flat up to slightly while the commercial replacement market is expected to be up 2 to 3%. That represents a significant change versus 2005.

In the first quarter in North America, we expect the consumer OE market to be flat and the commercial OE market to grow 5%. The consumer replacement market is expected to be slightly down during the first quarter due to mild weather conditions. And remember, we're going to have a tough comparison here against what was a very robust Q1 in '05 total industry unit standpoint. The commercial replacement market is forecast to grow 2%.

In Europe, the consumer OE market is expected to be flat for the first quarter and the commercial OE market flat to slightly down. The consumer replacement market is anticipated to be flat to slightly up while the commercial replacement market is expected to grow 3%. Up slightly from the fourth quarter. You should note that we've provided with you with a couple of cash flow modeling assumptions on slide 20.

Moving to slide 21. As I said earlier, while we were extremely proud of our progress as a Company we will not allow ourselves to be complacent. We will continue our relentless focus on building our businesses to improve strategic insights and constantly improving execution. We are making continued progress in our efforts but fully recognize that significant challenges, as Rich indicated, lie ahead. We have the courage and the capability on our team to embrace and overcome each of these challenges. And we see the issues in front of us as manageable and I.m just to address some of those.

We are in a very competitive industry. Through our innovative marketing and product capabilities we have put ourselves in a position of strength in the faster growing more profitable segments. While we continue to be faced with legacy costs, we believe we can work with the steel workers here in the U.S. to manage those costs effectively going forward. We are in a contract year with the steel workers and will continue to work with them to find an equitable solution. We all have a vested interest here in a successful outcome for the Goodyear Tire and Rubber Company. While raw materials are at an unprecedented levels of volatility, we have the proven ability to manage the impact that these costs increases and we've prove than over several years. And we currently have the earnings power and the strategies in place to continue deleveraging our balance sheet. Through pension funding and debt reduction as we progress toward our goal of returning to investment grade.

Now there are two critical areas where we need to intensify our focus. Those are cost and working capital. It my opinion we made progress in 2005 in these areas, but that progress was not fast enough for the environment we were in, nor the environment that we anticipate. In September, we described our goals for cost savings over the next three years. Our goal is to implement savings to the 2005 cost base of between $750 million and $1 billion by 2008. We realized that these savings will be offset partially by higher raw materials and other cost inflation so the net savings will naturally be less. About one-third of the cost savings are expected to come from business process improvements and product reformulations. Through improved productivity techniques, Six Sigma and Lean Manufacturing and taking advantage of natural attrition, we are working toward producing more tires with fewer people and at a lower cost. In 2005, to put this goal in perspective, we believe these improvements delivered well in excess of $200 million of savings compared to 2004.

We will also change our global manufacturing footprint with anticipated conversion savings of 100 million to 150 million in 2008, again compared with 2005 cost base. This change will reduce our high cost manufacturing capacity by 15 to 20 million tires or approximately 8% to 12% of the total. Our one-time cash cost for these changes will be between 150 and $250 million. And you will hear further announcements as our plans are fully developed.

We will leverage our global sourcing capacity. In 2005 we established a new purchasing office in China, as Rich mentioned, to increase our low cost sourcing of tires, of raw materials, of indirect materials, of semi -- semi-finished goods and capital equipment. By 2008, we have targeted a reduction in our spend in these areas of between 150 and $200 million compared with the 2005 base. And as Rich mentioned, we achieved significant savings during the startup of the Shanghai office in 2005 and there is much more to come.

You probably have seen our announced partnership with ICGC focusing on North American procurement. It is another example of our drive for efficiency in this area of purchasing. We are very focussed in this area.

And finally there are opportunities to reduce costs by simplifying the way we process transactions and the way we are organized. Another 150 million to $200 million cost reduction is expected to come from reduced selling, administrative and general expenses. Now this is essentially the same cost savings plan that we shared with you in September, but the urgency with which we were approaching this has intensified since then and we look forward to sharing our progress with you on these initiatives as we report our 2006 results. We also plan to reduce our working capital requirements. Freeing up cash that can then be used to meet our financial obligations and invest in improving the performance trajectory of our businesses. Shortening the cash cycle and improving cash flow from operations will create financial flexibility for us.

Our working capital plans focus in three areas. First, working with our customers to ensure we reduce the level of capital dedicated to the credit we extend to them. Second, working with our key suppliers to obtain further credit to allow us to grow both our business and theirs. And we'll be working on more open communication here with our suppliers. That -- that whole process is already begun. In addition, we'll drive manufacturing initiatives in an advantaged supply chain that will allow us to better manage our inventories and you saw part of that in the -- in the fourth quarter as we moved to better management and less inventory intensity. In some cases we'll be allowing vendors to manage inventories on our behalf. You saw progress in 2005 principally in the area of receivables and inventories but you should expect to see solid progress in all three areas in 2006. And again we'll share our progress on working capital with you as we move through the year.

Referring to slide 23, in September, we established three key metrics to help measure our progress over the course of the next phase of our turnaround. Of the three metrics, just to remind you, are improved North American tire segment operating income margin to 5%, improve the total Company segment operating income margin to 8%, and improve our debt to EBITDA ratio to 2.5. Our strategies are clear. We've made significant progress and we will continue to execute to achieve those metrics.

Today we are a fundamentally different Company than we were three years ago and a considerably stronger competitor in our chosen markets. Now we certainly recognize that the challenges ahead are very real and we embrace those challenges. We look forward to overcoming each with the same capability, passion, confidence and will to win that created the business momentum in 2005 and two years prior to that. I'd like to open the -- the call to questions.

[OPERATOR INSTRUCTIONS] And your first question comes from the line of John Murphy with Merrill Lynch.

Good morning, guys.

Hey, good morning, John.

I got a -- I got a whole bunch of questions. I'll try to -- try to stick to one. Well first -- I mean first, the production adjustments that you made in the -- in the fourth quarter, will they provide -- have you worked down enough inventory that that might provide some support for production going into the first quarter or through 2006? Or is that just an adjustment for excess inventory?

It's a -- John, I would say it's part and parcel of our -- of our plan to reduce working capital and to improve our inventory management capabilities. I will tell you that as we go into the first quarter, as usual given the seasonality of our business, part -- particularly in our big markets North America and Europe, that we're ramping up production for spring selling. So our factories at this point are running -- are running full. So I'd make -- I'd make that comment. And I mentioned that we -- we have a goal here to reduce our inventory levels as we go through '06, '07 and '08.

Just looking at the inventory line, year-over-year the inventory was up on your balance sheet and it was only down $32 million sequentially. Is -- will we see that decline a little bit in the first quarter or is that sort of going to be an interquarter number that we aren't going to see on the balance sheet?

Well, I won't give you a specific comment here on the first quarter. I'd -- I'd tell you that I think we reduced from third quarter to the fourth quarter about 2 million units. 2 million tire units. And from year to year about 600,000 to give you a perspective on that.

Okay. And then just one question on Europe. It looks like -- and correct me if I'm wrong, I'm not sure if I heard this right. Sounds like you gained 7 points of market share in commercial OE in Europe?

Yes, that's -- that's a correct statement. We --

How did that happen?

Well, John, we -- we set out three years ago, I'll tell you, to -- to change our business model totally in the truck business and this is a global comment but let's particularly focus the comment here because of your question on Europe. We invested in that business. Today our product line in that business is the equal of anyone in the business. We've been very aggressive, very aggressive in -- in -- in our marketing and our service capability across the globe in particularly in Europe and we knew that to do this that if our products were as good as we thought they were, we had to gain position, increase our competitive situation with the OEs. And we've done that in North America and in Europe. And it's fundamentally driving every aspect of the business inclu -- including changing the leadership team and creating a leadership team with a real focus on the market and intense profit focus.

So not only did we gain share but our earnings in those businesses have improved and the truck business have improved significantly over the last -- last couple years. So that we're operating today not just from a volume standpoint in truck but a profit standpoint. We're return on investment guys, as you know, and we picked the right customers to -- to go after. We mentioned on one -- on one of these calls and certainly it's been made public that Volvo was a key account for us and we -- and we got that account a year ago. And you're starting to see some of the payoff from -- from that activity. But it was really just fundamentally rebuilding the business. We had the core capacity to do it but we didn't have the strategy and the leadership team to do it. Today we do.

I must sneak one last one and then I'll circle back into queue. Any update on the engineered products sale? Are there books out there or what's the level of interest you're seeing?

Maybe, Rich, you could comment.

John, we hadn't said anything really publicly since our -- our release saying we were exploring the sale and I will tell you at this time that's -- that's what we are continuing to do.

Okay. Thank you very much, guys.

Okay. Thanks, John.

And your next question comes from the line of Himanshu Patel with JP Morgan.

Hi. Good morning, guys.

Good morning Himanshu.

I think, Rich, you mentioned earlier that IT costs were going to be capitalized going forward. What was the -- the logic behind that?

I think as we -- as we've gone forward, we focused our capital expenditure number particularly on -- on our typical assets as you might think for a Company like us and we just did not classify them in that CapEx line. The expenditures have been -- I don't know, around about $40 million a year on average. And as we go forward and just want to just provide more clarity on our -- on our reporting, we're going to include it in the same CapEx line. That's -- that's really all.

And Himanshu it's included on that chart I showed, the outlook chart, the $720 million that you see on that chart includes the IT charges.

Okay. And what line item on the P&L does that -- had that previously shown up on?

In the cash flow statement it was netted in with some other items.

Okay. And then I'm just thinking you guys have talked about an equity issuance for --for quite some time now. Aside from the absolute share price level, what are kind of the other internal metrics you're -- you're -- you're trying to use to gauge whether or not it's time to consider tapping the equity markets?

Himanshu, we've -- we've been asked these question multiple times and -- and certainly I think we've discussed it with you. I don't think we -- we can point you to any specific internal metrics that we have that would -- would kind of give us a green light, red light decision on when we do an equity offering. Our goal overall, as part of our capital structure plan, is in essence to -- to delever and fix the balance sheet and we feel that an equity offering at a point in time is a very productive and value creating event as we -- as we fix the balance sheet. When will that happen, what-- what are the targets, again, I don't think there's anything I would point you to in particular. We've made progress this year on our balance sheet. You saw our -- our -- our debt come down in the aggregate both in total and -- and on net debt. And I think you're seeing progress that we're making and that's the direction we're headed and ultimately I think equity will -- will play a part in that. Darren, you may want to comment as well.

No, Rich, the question on timing is one that's going to have a lot to do with the markets as well as what we're -- how our performance is going. So I don't think there's any specific guidance we'd offer on that.

Maybe I could just sneak in one more. The overseas margins in -- in the emerging markets, there's been obviously some concern in the marketplace for -- fore several quarters about the sustainability of double digit margins there. When you look at the competitive landscape in Eastern Europe and Latin America and you consider the additional capacity that's -- that's being brought on, what's kind of your sense of where Goodyear's current margins are? Should we view these as kind of normalized margins? Or a re these closer to peak margins or what?

Well, we'll take those -- maybe we can take those by region because there -- there -- there's a difference obviously by region here. You see that we're just -- we're in the position where we're increasing our margins in Asia/Pacific and we certainly expect that to continue. Latin America, as we've said, we're operating with margins now around 20%. And we did that by again focusing on the fundamentals of the business. Great dealer network, outstanding people, good strategic pricing capability, focus on the truck business as truck radializes in Latin America and -- and building our brand. In Latin America, we feel very good about our business model and as we all know the macro-economic volatility of Latin America is a fact of life and we'll see some of that but we're very confident in the business model that we have there.

In Eastern Europe, our model has been very strong. You're seeing -- you saw some slowing in the -- in what we see as the profit growth in in -- Eastern Europe and some of that is a function of remember Eastern Europe's an exporter of tires to other regions. If I look at the commercial markets in Eastern Europe we feel very good about those with significant growth possibilities in most of their markets. Certainly now including Russia where we've got a very strong operation. If we just look at it from a business model standpoint, those emerging markets, we've gotten there early in the case of Latin America and Eastern Europe and we've got a position of strength and I think we're showing you in 2005 that we've got capability in Asia/Pacific now with -- with new strategy and frankly new leadership team in Asia.

Thank you.

You're welcome.

And your next question comes from the line of Jon Steinmetz with Morgan Stanley.

Thanks. Good morning, everyone.

Good morning.

A few questions. First on North American tire, you had about $30 million if we X out the hurricane of operating income improvement. Can you just talk about how much of that came from the plain vanilla tire business versus what the chemicals business contributed to that.

Well, Jonathan, first off I'll tell you as you know we don't break out the individual pieces of North America. But what I will tell you from a trend standpoint our chemical business was -- was very strong in the early part of the year. But remember, fourth quarter we had the impacts of the hurricane on the chemical business and we had the Wingtack business no longer in North America. So I would tell you quarter over quarter the chemical business probably had a lesser effect on our North America business than it had during the first three.

Okay. And I know you don't want to break out fully but is it fair to conclude then that the tire was the majority of the improvement?

I would say our tire business is definitely improved, again driven by the price mix and the branded products that we had and in those -- in the tire business again as I stated I think our off-highway business as well has -- had another good quarter.

Okay. Anything -- it looks like the receivables collection was strong in the quarter. Is there anything that you've done in terms of change of terms? Was this a change in customer mix? Did you have a weaker end to the quarter or anything like that? I'm just trying to understand what was behind that.

This is -- Jonathan this a -- this is a difficult one to -- to -- to kind of comment on in a brief period. It varies across the world. Certainly we have changed some terms. Certainly we've put intense focus on our accounts receivable. We've always felt that as we gained market position and become a more attractive competitor, if you will, that that would naturally help our receivables. Foreign exchange helped to a degree. So we -- so -- but -- but it's a multifaceted approach on accounts receivable and it -- and it varies in different parts of the world. But I'll -- I'll tell you the key for us is if we gained market position and we become a better competitor and our customers see us as a better competitor, we're going to have a little more power in those negotiations on receivables. And that's the heart and soul of the issue.

Okay. And last one for me, turning to raw materials, you talked about a 13% year on year I believe in the quarter. You guys are on FIFO, some of the commodities up until recently, anyway, have been rising pretty significantly. Any number that you would care to attach if we sort of remain at current levels to your expectation for this year on a raw materials basis for the full year '06?

You know, I think Jonathan as we look ahead we have not given you a number in terms of what our outlook is but I think going back to some of the comments I made when you see natural rubber really bouncing around in the -- in the mid to high 80s even the 90s, we certainly don't see the cost abating and likely we probably see a little bit of an increase.

This is -- this is an area where the way we've approached it, the last two and a half years, we have -- we have internal planning assumptions, of course. But for me to my -- to my finance guys and to the operating guys, the message is always been guys you have to be incredibly flexible here and adaptive. Look what happened to oil prices here in the last few days. Right, we went from $65 to under $58 very quickly. So to me the key for us, in terms of managing the business in the market and delivering financial results, is going to be our flexibility in dealing with a lot of volatility.

Okay. Thank you very much.

Thank you.

And your next question comes from the line of Saul Ludwig with Keybanc.

Hi. Good morning, guys.

Morning, Saul.

In the -- in this year you -- you sold the Plantation, the Wingtack and the Farm Tire Business, in rough order of magnitude how many dollars of sales were included in your '05 results that won't be there in '06 and similarly how many dollars of op income were included in '05 that disappear in '06?

Yes, we're just -- we're just gathering thoughts here.

Saul, I don't have what was actually included in '05. But if you look back the total sales for those divisions were about -- about $350 million, 200 from Farm. And the impact on North America going forward will be minimal. Okay, from the lost of the Plantation, Wingtack and the -- the benefit from losing Farm.

From a profit.

From a profit standpoint.

In other words, you got rid of two winners and one loser and they sort of net out?

Well, we, Saul, we did -- we did what we said we would do in terms of driving to our core portfolio and did it in the right way, I think, with a fair amount of value created for us in doing so.

The next question is, you noted that in your list of specials that you had this settlement, the supplier settlement of $12 million in the quarter. Which segment got the benefit of that?

Saul, most of that sits in North America.

North America market tire?

Yes, yes.

So, that was sort of $12 million of earnings in North America that was sort of -- I don't want to use the word "windfall" but sort of semi-non-operating?

Yes, and remember it's in -- you have a similar amount in 2004 as well. And actually the '04 amount would have been greater than the '05 amount.

Right, and that the total amount, Saul, for 2004 was 223 million. Okay. I think in Rich's script we said it backwards.

Then on the chart on page eight, slide eight, where you were reconciling your special items --

Yes.

Could there have been another $0.05 per share in there relative to the after tax income related to prior period adjustments that reduced the loss for the quarter by $8 million or $0.05 a share? Should that have been in addition to that list sort of a positive if you will that should go away?

Saul, we left it out, I guess in the past. It has not been something because got out of periods in other periods and the Street didn't really take them out or add them back whichever way it went so that's why we did not add it on the chart.

Because if you took your minus 29, you made all of these subtractions you came up with $0.18 if you will from operations and I'm wondering if that number isn't really $0.13 if one were to consider that $0.05?

I think again, Saul, we've had and have gone out of our way to disclose out of period adjustments but we have not -- we certainly made no attempt to -- to plus/minus those in terms of how you might look at them.

And finally, was any unabsorbed overhead because of production adjustments impacted in North America? You told us about $9 million in Europe and $9 million in I think it was Eastern Europe or Latin America?

Yes, yes. Eastern Europe and Latin America, Saul.

Was there any in North America, Bob?

No, Saul, there -- there was -- there was nothing appreciable to talk about.

Great. Thank you very much.

Thanks, Sol.

And your next question comes from the line of Rod Lache with Deutsche Bank.

Can you hear me?

Yes, good morning, Rod.

Good morning. Just a couple clarifications. First, there was a prior question about the receivables that you answered. I just want to confirm you did not sell receivables in this quarter. That was actually in operating performance?

That's right, Rod, we did not sell.

Okay. And this -- this settlement that Saul was asking about, that was in the segment operating income for North America?

That's correct. The line share of it is in North America.

But -- but you do report that in the segment operating?

Yes.

Okay. And then in the Q4, the segment EBIT is -- it's essentially flat excluding the hurricanes and it looks like price and mix are offsetting raw materials. So, is it correct that the fixed costs generally are sort of flat on a year-over-year basis and that -- is that kind of why you're -- you're talking about picking up the pace on the cost savings?

Well, I think that picking up the pace on the cost savings is in a general way, Rod, is something that -- that we know we have to do over the long term to really get at our structural cost. So I wouldn't say it's -- it's initiated by simply what happened in the fourth quarter. But I think what you're seeing in the fourth quarter again was the impact of those production cuts and -- and raw material price increases particularly in Eastern Europe and Latin America that -- that squeezed our margin a little bit. So I don't think that in terms of fourth quarter being indicative of a certain structural cost or fixed cost rate is what -- what reduced our -- our run rate, if you will.

Okay. It -- it looks like the -- based on the North American volume that you're reporting that you've lost a little bit of market share. Just want to see if that's correct. Maybe you can talk about what your replacement volumes did and related to that, there's been some comments from some of your competitors regarding the pricing environment and whether -- if you can comment on whether you feel that the pricing environment is going to remain as strong going forward or whether you're prioritizing volume or -- or price?

Okay, Rod. I'll just make a few comments here because it's a multifaceted question. Yours always are here. Share market in the U.S., for 2005, we were down only very, very slightly. What we've said is that we look more at our segment share than our total share. We really look at what we're doing in targeted premium segments and there our share has been very, very good. And at the bottom end of the range we've lost a little bit of share. And so when you combine those two we're virtually flat for the -- for -- for 2005. And -- bit it's an important -- it's an important distinction between total share and targeted share. We really target those segments because frankly that's where the money is. That's where the return is. Okay?

In terms of -- in -- in -- in terms of pricing, while you've seen in 2005 globally our revenue for tire up 5% and -- and you also know that we increased prices here in North America on January 1st, up to 6%, I'll simply say what we're seeing today is favorable in reaction to that in both the consumer market and the -- and the commercial market. And with regard do we -- do we stress price or volume, we just stress building our business in the best way that we possibly can. So I don't have a comment on price over volume or volume over price. We just -- we just do what we feel we need to do to build our business.

But you're -- you're not seeing any change in the competitive landscape vis-a-vis the ability to pass along these price increases?

I'm not seeing anything significant in our markets at this point. I would say -- I said before to you we're a stronger competitor today than we were three years ago. So we look at the strength of our -- the advantages we bring to the marketplace and then we -- we determine our pricing strategy accordingly.

Great. Thank you. One last one. Do you have the EBIT impact from FX in the quarter?

In the quarter it was about $11 million.

Great.

Of benefit.

Thank you.

We're going to take one more call, Sam.

Thanks, Rod.

And your final question comes from the line of Kirk Ludtke with JP Morgan.

Hello, guys.

Hey, good morning.

Did you -- did you --just to follow-up, did you say that -- that FX was a benefit of $11 million in the fourth quarter?

That's right.

Okay. If -- if currency stayed where -- where it is today, what do you think the impact would be on EBIT in '06?

That's a -- that's just a hard question to answer, Kirk. I'm not --

Let me -- I think, Kirk, the place that we've given guidance on the impact of currency is with the Euro. We've said that for every $0.01 change in the dollar Euro relationship it's worth about $2 million of earnings for us. And I think the average Euro last -- the Euro will probably average around 1.25, 1.26 last year. So, that will give you some idea if the Euro stayed at rates that it's at today.

Okay. That's -- that's helpful. Thank you. With respect to the -- you outlined it looks like a 1.4 billion to 1.7 billion of cash requirements in '06 and very helpful, looks like working capital you expect to be a source of cash in '06. Could you talk a little bit about the other items and -- and -- and where you think they'll -- they'll fall out in terms of cash flow, cash taxes, cash restructuring things? Other big -- big lumps either -- in either direction?

Yeah, Kirk, this Darren. I think that you're right. As you look at our last year's EBITDA, if you take that as our run rate and it was a 1.7 billion, and you want to work down from there on cash flow. I think what we've said -- and these are going to be relatively rough numbers, is that you've got CapEx there, which includes the IT now, about 7 -- around seven tenths or $700 million. Then you've got interest expense which says 450 to 475. You've got -- this year because of the potentially high pension contributions and cash for retiree health care continuing to exceed the expense line, you've probably got something on the order of a three-tenths deduction for that. And then you've got a like amount for foreign taxes. I think -- I think those are the -- I think those are the key items. So I think you're going to come down and assume -- I guess my assumption would be for the moment working capital neither a source nor a use although we continue to drive at that. So I think you're getting -- you're probably getting the cash flow there based on our earnings run rate relatively break even.

Okay. And including foreign taxes of how much, I'm sorry?

I think what you'll get we use a gui -- a rule of thumb of 35% of our foreign segment operating income. And so I think if you -- and it was a little -- I'll tell you it's a little bit lower than that in 2005. Because there were 230 million or so of cash taxes. But, I think going forward if you took a 35% of last year's foreign segment operating income you'd have a directional figure.

Okay.

I think that'll get you -- get you up close to $300 million.

Great. With respect to the pension, can you give us any color on what you think pension legislation might -- might do for your expense or your funding?

Rich, why don't you cover.

I will and then Darren can -- can jump in. I -- I think we still have so many variables there we still have to stick to the guidance that we've given which is to say if the -- the existing provisions fall off we're -- we're looking at potentially funding next year of up to $750 million and if we see some sort of legislation come through, we have an estimate out there low end of about $550 million. Remains to be seen what -- what happens in Washington and ultimately what -- what that means to us.

And obviously I'll simply say that -- that we're involved in Washington the way you'd expect us to be on that -- on that issue.

Okay. Thank you. One last one. There the target of leverage of two and a half times, sounds like by the end of '08. Do you get there organically or do you need an asset sale or an equity offering to get there?

Kirk, number one I'll just start and then Darren may have comments that -- that we didn't set -- we didn't se '08 as a specific target there just to be careful. Give than we're in some cyclical businesses and there could be down cycles during that period of time. But for the next phase, what you can think of three to five years, that's -- that's -- that's certainly our goal. And it could be -- it could be that it's three years. But that -- that is not our guidance to you that we're going to be there in three years.

And -- and is it organic -- do you get there without an asset sale or equity offerings or is it just kind of with or without that's the target?

Yes, I think the last point that you made, Kirk, I think with -- with or without, every step -- every action that we evaluate we're going to be looking at what we're trying to get to. Bit I think there are different ways that you can get there.

Great. Great presentation. Thanks for the disclosure.

Thank you. We know it's a complex quarter. We're -- we're doing our best and -- and certainly Barb will be available to all of you for your questions here later today. Now I know Darren you had a couple concluding or clarification comments that you wanted to make her and then I'll have a couple comments.

I want to -- I think that there are a couple of areas that I think there's been some confusion on. I think we probably covered the chemical settlement because I know that was one of them. I do want to mention one more thing about the capital expenditures and the reason I want to spend just a second on that is that our capital expenditure numbers have gotten a lot of attention because of the covenants that exist in our bank agreements, our new credit facilities that we closed on last April. And as most of you know the credit facilities limit Goodyear's $700 million a year in capital expenditures. And as you can see we're looking for a little bit more than that in 2006. Two points on that. Number one, in those credit facilities to the extent we are under $700 million in '05, we're allowed to use the -- the shortfall in '06. That's point number one. The second point is that the loan agreements excludes -- specifically exclude IT expenditures from our repor -- from our CapEx for measuring against the covenant. So two points I wanted to clarify there regarding CapEx. And -- and just -- for the cash flow statement, I think it is important to point out that we have gone back and reflected IT in the '04 and '05 numbers as well so that they will be comparable for the '06 numbers as you see them.

Okay. Good. Thanks, Darren. I -- I just wanted to make a couple concluding comments. Certainly we see our market and business momentum continuing. Additionally, we see ourselves much differently today than we did three years ago. Today we see our Company not frankly as an auto supplier as some would characterize us, but rather as an aggressive marketing Company and that is a huge change for us. And I think our key customers are starting to see that in us and -- and it -- and right down to our sales people and throughout our Company. We see our capital structure is challenging but there is light at the end of that tunnel and hopefully we've given you an appreciation for that in the September meeting and today. And I've got to say my confidence in my leadership team has only increased here as this team has risen to meet one challenge after another. I just want to thank you for your time and for your investments in the Company. I know there'll be a lot of calls, Barb, that you're ready for later today. So, thank you very much.

Ladies and gentlemen, this does conclude today's conference call. You may now disconnect.