Goodyear Tire & Rubber Co (GT) 2006 Q1 法說會逐字稿

Good morning. My name is Amy I will be your conference operator today. At this time, I would like to welcome everyone to the Goodyear's first-quarter 2006 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 session. (OPERATOR INSTRUCTIONS). Thank you Ms. Gould, you may begin your conference.

Thank you, Amy. Good morning and welcome to Goodyear's first-quarter conference call. Just four quick housekeeping matters. First, 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. Second, the slide presentation that supports our discussion is available in Adobe Acrobat format on our website. Third, we filed our 10-Q this morning.

And fourth and finally, I'd like to remind you this morning that our discussions may contain certain forward-looking statements based on current expectations and assumptions that are subject to risks and uncertainty that can 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 whether as a result of 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 thank you, Barb, and good morning, everyone. Let me begin by setting the agenda for this morning's call. I will cover the highlights of our first-quarter performance and then discuss some of the significant progress we have made on our key strategies so far this year. Then Rich will cover operating results in some detail by reviewing each of our business units, including the impact of the tougher industry environment that we have been operating in for the past several months. I will then come back to discuss our outlook for our business environment for the remainder of the year and then we will open it up for your questions.

As you look at our first quarter, while our execution of our key strategies is delivering solid results, a more difficult environment underscores the ongoing need for outstanding execution against these strategies. Keep in mind that last year's first quarter creates a very tough comparison. In Q1 2005, we realized 25% of our full-year operating income. Historically, our business has been characterized by weaker earnings in Q1, well below that 25% level, with a higher percentage of the year's earnings weighted in the second and third quarters.

Highlights for Q1 include -- and I will go through a list here -- sales set a first-quarter record at almost $4.9 billion. And while this represents a 2% increase from 2005, if you exclude the unfavorable impact of currency and add back the revenue we lost as a result of divestitures in 2005, the increase would be approximately 5%. This growth was achieved despite weakness in certain of our key markets, particularly here in North America, where the industry has been down year-over-year for six of the last nine months.

Sales increases were generated by strong revenue for tire growth at 7% and ongoing marketing focus on the profitable segments of the market. Despite significant increases in raw material prices, this focus on profitable segments resulted in gross margin percentages that were about flat with last year.

Please note that a couple of significant items helped us in the quarter. The legal settlements with some raw materials suppliers and pension actions in Latin America. We were aggressive in pursuing both these areas and both successful outcomes.

Consistent with our cost reduction strategy, we reduced SAG to about 14% of sales compared with a 14.4% performance a year ago. This reflects an increased level of SAG productivity that is key to our strategy.

At the business unit level, North America delivered a solid earnings increase in the quarter despite very weak consumer markets and the challenge of managing rising raw material costs. This is particularly true with our consumer OE customers.

Latin America posted strong profitability in a weak economy after being hurt by production adjustments in the fourth quarter of last year.

Now, I would contrast these positives with our European businesses both East and West, where higher production costs, the weak euro and increased competitive pressure resulted in lower earnings. And Rich is going to talk about the major factors involved in Europe in a few minutes. On balance, the first quarter reflected good performance by our businesses given the tough environment.

In the quarter, there was also considerable progress on our strategic initiatives. Starting late last year, some of our markets began to soften. Although we expected some weakness early in 2006 compared to the really strong markets of a year ago, these industry changes only emphasize again the importance of continuing to drive the seven strategies that have guided our progress to date. As a reminder, those seven strategies include leadership, a lower cost structure, a cash is king approach, building upon our brand strength, leveraging our outstanding distribution network, product leadership and an advantaged supply chain. We continue to have a great deal of confidence in these strategies and I will talk to some of the progress we have made in the first quarter.

As we discussed on the last call, our new performance touring Eagle tire with carbon fiber will begin to reach consumers this month, just as the high-performance tire selling season gets underway. This tire has generated enormous interest and ensures that our dealers now have a Goodyear tire as a top-rated tire in each of the industry's premium categories. And that is a significant position for us and significantly different from where we would have been several years ago.

Innovative new products and the highly effective marketing of those products are helping drive the improvements you see in revenue per tire. Eagle with carbon fiber builds on our recent series of hugely successful new product launches.

In addition, in Latin America, we are benefiting from the launch of the Assurance and Fortera tires in Mexico, in effect extending the impact of these premium products beyond just the U.S. And we will launch additional impactful products in both the broad market and SUV segments in the Latin American region over the next few months.

In China, we have launched our Excellence line of tires which was so successful in Europe in 2005. Over the past six months in Europe, we have launched an Eagle F1 SUV tire and a successor to our popular Wrangler F1 tire and the Dunlop of Winter Sport 3D tire that should be a strong seller in the winter segment based on very positive test results.

Our new product focus does not just apply to consumer tires. In North America and in Europe, we will be launching impactful new lines of commercial truck tires this summer and these lines of tires focus on providing our fleet customers products that meet their value, performance and very importantly, their fuel efficiency needs.

We're on an outstanding new product pipeline plan for 2007 and beyond and we continue to leverage our product development engine to roll out new products at a much faster pace than our company and our industry has been accustomed to in the past. And additionally, I wanted to mention our goal is that the speed of our product innovation will increase over time. As we discussed with you in September, these new products are enriching our mix and are critical in continuing to drive higher revenue per tire, which once again rose year on year by 7% in the first quarter.

Slide 6 is a slide from our September investor meeting. It shows the 10 to $20 revenue improvement per tire that we expect for a significant new consumer product compared with the product it replaces. And needless to say, the potential margin improvement here is obviously significant.

In Q1, we've continued to face what has been a very challenging raw material cost environment. We saw raw materials up $185 million or 14% in the quarter. And this figure excludes the 36 million favorable chemical raw material settlement that we had with certain suppliers. To offset this impact, we increased prices and improved product mix by $166 million. Note here that 2005 averaged $160 million per quarter of increased price mix. So we are at about that same neighborhood here in the first quarter.

With difficult pricing environments in Europe, Latin America and overall in the consumer OE markets, we will continue to balance our market actions with margins uppermost in our thinking. I will repeat with margins upper most in our thinking.

Now those represent some highlights of the work we're doing to grow the top line and while we are very focused on these top-line growth strategies and we've talked about them many times on calls in the past, we're also focused on productivity gains and on improving our overall cost structure.

Our intensive cost reduction strategy is focused across a wide spectrum of activities and processes. Collectively, we believe that over time, these activities will more than offset the impact of increasing costs.

Slide 8 is the same one that we showed in September and reflects our four-point cost saving plan and that plan addresses first, continuous improvement in our manufacturing operations; second, reducing our high-cost manufacturing footprint; third, increasing our age in sourcing; and fourth, reducing selling and administrative expenses. Let's take a look at each of the four points in our plan relative here to progress in the first quarter.

In April, we announced our intention to close our Washington plant in the UK as a part of the plan to reduce our high-cost capacity. This closure reduces that capacity by more than 3 million tire units and represents about 20% of our three-year target as outlined for you in the September meeting in New York. Now this plant closure both improves capacity utilization at other European facilities and opens up more opportunities to source tires from low-cost locations, particularly those in Eastern Europe. We will continue to take actions in this area as part of our goal to take out 8 to 12% of our high-cost capacity. And we will continue to evaluate all our global plant opportunities.

We're making significant progress in our strategy to source both raw materials and low value added tires from China. A critical focus in our Asian sourcing strategy is ensuring that the manufacturers there meet our high standards of quality. Internally, we refer to this effort as qualifying the supplier.

Our outstanding technical team has made substantial progress in moving third-party sources through our qualification process. And as a result, we will have multiple third-party suppliers of consumer tires in China by the end of this year compared to only one last year, 2005. This ultimately means more low-cost sourcing and more cost savings for us. It also means more of our own plants' capacity can be converted or devoted to the high value-added tires where current demand exceeds our present production capacity.

For raw materials, we expect our purchases from low-cost countries to increase by over $150 million this year at an expected average savings in excess of 10%.

We are on track to save more than $150 million this year through our continuous improvement efforts, which internally we call business process improvement. And I think you could look at this definitionally as combination of Six Sigma tools and lean processes. So, when you hear us talk about business and process improvement, that's what we are talking about.

As an example, we're focusing on raw material substitution. You may have seen our recent news release that said we are now capable of substituting less costly synthetic rubber for natural rubber up to a full 15% of our natural rubber content. That capability is especially important given today's high natural rubber prices at roughly $0.88 a pound versus $0.54 a pound a year ago. Synthetic rubber is substantially cheaper at today's natural rubber prices. And I'd just add here that we manufacture about two-thirds of our required needs in the synthetic rubber area.

We continue to focus intensely on opportunities in SAG. Our first-quarter actions included outsourcing another warehouse in Europe, eliminating unprofitable retail locations in Europe and our ongoing process of consolidating back-office functions.

We also continue to make progress on legacy costs by moving away from traditional defined benefit pension plans in the UK and in Brazil during the quarter.

Overall, we expect that our four-point cost savings plan actions will deliver at least 750 million to $1 billion in reductions to our cost structure by 2008. And as you may recall in our meeting last September, we indicated that number represents gross cost reductions before headwinds.

I want to acknowledge this morning our upcoming negotiations in the U.S. with the steelworkers. These negotiations are clearly important because we need to have more productive and more competitive U.S. manufacturing plants. More productive and more competitive U.S. manufacturing plants. We certainly anticipate that will be the outcome.

The next slide reflects our overall capital structure improvement plan, where we have taken substantial steps already. We continue to make progress on our working capital initiatives and Rich will be taking you through that progress.

I want to simply mention to key milestones at the corporate level. First, I would like to confirm that we will begin the marketing of our engineered products business here in the second quarter. We believe this is the optimal time to begin marketing this business given its solid financial results and the strength of the industries it serves like mining and oil products. EPB turned in a solid first quarter and they did that despite military sales that were down more than 50% year-over-year. This demonstrates the ongoing strength of our position in both the industrial and replacement markets.

Second, our shareholders supported us last month by improving an increase in our authorized share count at our annual meeting. And this approval provides us the flexibility for a potential equity offering, which we have talked about on many occasions in the past.

I trust the points that I made demonstrate that we have made important progress in our key strategies in the first quarter, addressing top-line growth, our cost structure and our balance sheet in ways that will deliver ongoing benefits. We fully recognize the challenges we must overcome to meet our performance goals. But I'd like to say we remain confident that the strategies we are driving will result in an 8% return on sales for the Corporation and 5% in our North America Tire business within the next three to five years, while also delivering the targeted improvements in our balance sheet leverage. And in future calls, we will continue to update you on our progress against those goals.

Now I'd like to turn the call over to Rich to cover the operating results in much more detail.

Thanks, Bob, and good morning. Now before getting into specifics, our first-quarter results reflect the benefits of our strategic drivers as well as a continuing need to reduce our structural costs. Also as Bob mentioned, the quarter was impacted by economic factors resulting in high input costs and by competitive pressures in key countries and key market segments.

Now looking first at the income statement, sales were up to 4.9 billion, a record for Goodyear. Sales were up 5% if you exclude $74 million of adverse currency effects and $79 million of sales that the farm and [wing] tag businesses contributed in the first quarter of '05. Unit volume was down by 1.9 million units or 3.5%, primarily in our North America private-label business and our European Union consumer business. This was partially offset by continued strong volumes in our Latin America business.

Segment operating income was up about 7%, reflecting favorable price mix and favorable translation, offset by lower volumes and higher raw material costs. Segment operating income also reflected benefits from legal settlements with certain raw material suppliers totaling $36 million and a pension change in Brazil totaling 19 million. Both actions we aggressively pursued as part of our cost reduction initiatives. I'll cover these items in more detail as I review the business segments.

Excluding these items, segment operating income was down year-over-year due primarily to lower results in our European Union business. Segment results also reflect the loss of 11 million of operating income in North America resulting from divested businesses. Net income was 74 million or $0.37 per share compared with 68 million or $0.35 per share last year. The increase, which reflects higher operating income and the benefit of lower financing fees, also included an after-tax benefit of $10 million from the favorable resolution of a legal matter in Latin America and an after-tax charge of 30 million for rationalization actions. The rationalization charges primarily relate to a plant closure in the UK, to the closure of bicycle tire production in Poland, and to the restructuring of our UK retail operations.

Now turning to Slide 12 and focusing on cash flow, our cash flow from operations was down from the prior year, primarily reflecting lower benefits from insurance settlements and less benefit from deferred taxes due primarily to timing of tax payments. And you may remember we received payment on a substantial settlement from asbestos insurance carriers in the first quarter of '05.

Cash used for working capital at 546 million reflects the seasonal build that is typical in the tire industry. While working capital in total is only a slight deterioration from last year, this number reflects two effects. First, an increased investment in inventory compared with the year ago, which is the result of delayed summer tire sales in Europe and slower sales at the low end in North America; and second, increased trade payables as we work with our supply base to increase capital available to grow our business and theirs.

I would also point out that the first-quarter capital expenditures were up approximately 25 million from a year ago as we continue to increase investment in our product and manufacturing capability, particularly to increase the capacity to produce our high-end branded products where demand continues to exceed supply.

And finally, you'll note that there are only limited pension contributions in the first quarter with no contribution to our domestic plan. This year's contributions for domestic plans began in mid-April.

Now turning to the balance sheet, our cash balance was down about 600 million, again reflecting seasonal working capital as well as the repayment of about $200 million of debt. This cash usage shows the benefit of maintaining the strong liquidity position we enjoyed at the end of last year and as contemplated in our capital structure improvement plan that we've been talking about for a number of years.

Now looking at the business units individually, each one again was focused on driving the Company's key strategies. Our first-quarter results in North America tire reflect the strength of our core business based upon the implementation of our key strategies and also reflect the challenges we had with our structural costs and with our OE and private-label businesses, all of which we continue to address. In North America, as Bob mentioned, we approved an already strong product lineup with the launch of our Eagle high-performance tire with carbon fiber. With shipments that begin in May, this tire will begin to impact results in the second and third quarters.

North America continues to price products strategically with revenue per tire up approximately 10% from 2005. In April, price increases of up to 4% went into effect and this was the second price increase of this year and will contribute to offsetting raw material cost increases.

Overall, North America continued to successfully offset raw materials with price mix during the quarter. Raw materials were up about $74 million in the quarter while price mix was up 84 million. This reflects pricing as well as a strong focus on our profitable segments.

And our North America team also continued to drive its cradle to grave commercial truck strategy, working to provide complete service to our fleet customers -- tires on new equipment they purchase from truck manufacturers, replacement tires and retreads and service stations to perform those activities and get the tires on those vehicles around the country. Goodyear's ability to meet these needs again are really unique to our business versus many of our competitors.

Now covering the first-quarter results, North America Tire sales were up despite a 7% volume decline. The consumer placement market was down 3% year over year, driven by the lower end of the market, where demand is more price elastic and where disposable income has been hit hardest. This is also where continued Asian non-RMA competition has had the most impact. As we have said in the past, producing low-end tires under North America Tire's current cost structure will remain a challenge. Current raw material price levels makes this even more difficult as pricing power in this market segment continues to erode.

The OE market was down approximately 1% in the quarter, driven by a reduction in domestic OE production. Our consumer OE business continues to remain a key part of our portfolio and we continue to execute against our selectivity strategy. The ongoing difficultly of passing along price increases in this record higher raw material cost environment continues to negatively impact our North America Tire business and we are currently taking aggressive actions to mitigate this impact.

Most importantly, however, share of both the Goodyear and Dunlop brands increased in the quarter when the replacement industry continues to shrink. In fact, for many of the high-end branded products, North America has had to work to increase capacity to meet growing demand. North America's lineup of new products and improving performance continues to create demand in pricing power in the marketplace.

Overall, the North America Tire business had segment operating income of 43 million, of which 21 million resulted from a raw material settlement with certain suppliers. Excluding this benefit, operating income doubled from the 11 million recorded in 2005. I would again note here that North America results are impacted by lost earnings related to businesses we've sold. For 2005, that included 11 million in the first quarter and approximately 30 million for the full year.

Consistent with my earlier comments, 2006 operating earnings were negatively impacted by our consumer OE business and our private-label business, whereas I said, offsetting raw materials with price presents a challenge. This was offset by continued strong demand in pricing power in our core branded business as well as in our off-highway and chemical businesses. These two businesses continue to perform at excellent levels, driven in part by the supply/demand equation and by internal cost reduction efforts.

Now looking ahead, the remainder of 2006 will present North America Tire with less robust demand than anticipated. Our focus will remain on obtaining profitable growth in all segments through continued strategic pricing and structural cost reduction. Again looking ahead, NAT continues to execute against the stated goal of delivering a 5% operating margin. Elements necessary to achieve this remain the combination of continued impactful new product introductions, mixing up to sell increasing branded products, improving our customers' business and structural cost reduction.

Now before getting into commentary on our European Union business, which will include some of the results we're seeing from our stated strategies, I want to acknowledge the significant drop-off of segment operating earnings in the segment. The year-over-year earnings miss is due to a combination of a very strong 2005 first quarter, which represented nearly a third of the segment's full year 2005 operating income, and also is impacted by a much tougher competitive environment and higher costs. With that said, Europe continues to drive its key strategies, including premium branded product lineup supported by great marketing of its two strong Goodyear and Dunlop brands, each with products reflecting consumer relevant innovations and focused on targeted premium market segments.

Our EU segment is also well-positioned to benefit from increased German winter tire sales later in the year, driven by new legislation that encourages winter tires in that market. Europe continues to focus on improving price mix as well. Price mix improvements were about $33 million compared with about 42 million of raw material cost increases. The increased impact of raw materials reflects both the increased commodity prices and the weaker euro compared to a year ago. Revenue per tire in the region was up during the first quarter about 8%.

Europe's commercial truck tire business continues to benefit from the substantial gains made at OE where share was up 9% year-over-year resulting from significant new business with strategic accounts like Volvo Scandia. They also launched Fleet First in the first quarter, the platform for servicing fleet customers across Europe. Goodyear's service proposition, including our unmatched fleet online solutions IT platform, has delivered significant new business, like General Electric's tip trailer service fleet of over 60,000 vehicles. And as Bob said, Europe will be launching the first of a new generation of commercial truck products this year.

Finally, the EU is driving significant cost improvements. These improvements include but are not limited to the intended closure of the Washington, UK facility. The action will improve the utilization of other manufacturing facilities and will create further opportunities for low-cost sourcing.

Restructuring in our Debica, Poland factory will help create some of this low-cost production capacity. By eliminating the bicycle tire production, we can expand the plant's ability to produce high value-added tires for the European market.

The EU has also changed from a traditional defined benefit plan in the UK to a less expensive plan as a means of addressing its rising legacy costs. They've also eliminated another Company-owned warehouse in the UK and have closed unprofitable retail stores as a means of reducing SAG. And you can expect the region also to pursue more back-office consolidation similar to what we have done related to our accounts payable function in the region.

Now while EU continues to drive its strategies in the first quarter, European business conditions were tough given the weak euro, higher production costs and quite frankly, increased competitive pricing pressure in key markets. Net sales were down about 5% from last year with the weaker euro more than explaining the decline. Price mix of nearly $80 million partially offset the decline. Excluding the impact of exchange, sales were up nearly 3%; as I mentioned, revenue per tire was up 8%. The region's 3% lower unit volumes reflected increased competitive pricing pressure that resulted in some loss of share in targeted premium segments. Now these are segments where we gained significant share over the past few years.

Operating income was down 35 million from the record 2005 levels of 107 million. First-quarter 2006 operating income also included a benefit of 6 million from the previously mentioned raw material settlement.

The decrease in operating income was driven by lower sales volume and the inability to offset raw material costs with price mix. Conversion costs was also higher in the quarter due to higher input costs and a more complex production ticket as the region continues to increasingly produce high-end product.

Now looking ahead, we continue to see our strategies of cost reduction and price mix improvement as a means of improving this segment's profitability. The closure of the Washington production facility, the change to our benefit plans, and the retail restructuring will drive annualized savings of approximately 35 million, of which approximately 25 will be realized over the remainder of 2006. However, continued year-over-year price mix improvements will be necessary to offset raw material increases.

Eastern Europe continued to drive better business mix by selling more high-performance and premium brands while also controlling costs. Like in Western Europe, production costs and the weaker currency coupled with increased competitive pressure hurt earnings when compared with a year ago. Net sales were about equal to the prior year on lower volumes. Eastern Europe also experienced a tough pricing environment in certain of its key markets. Operating earnings were down with the impact of price mix at $8 million, not enough to offset raw materials of over 13 million and this difference was especially pronounced at OE.

Now going forward, the just announced restructuring of bicycle tire production in Poland will allow the expansion for increased low-cost capacity for high-end tires. The increased third-party sourcing in the region will also help increase low-cost capacity for both the region and the Company. Again, we remain confident in our leading market position in this region and in our ability to drive profitable growth.

Moving on to Latin America, this region had a strong quarter despite weak economies in the region. The strength reflects the continued benefit of our strong competitive position, which is characterized by strong brands, favorable [shipments] at OE, the best distribution channels in the market and great brand strength.

Now to solidify our market position and mindful of our structural costs, during the quarter, the region successfully implemented a change from a defined benefit pension plan to a defined contribution plan. This resulted in the benefit of $17 million and will reduce both the amount and volatility of future pension expense.

During the quarter, sales in Latin America were up nearly 14% on increased units of 6%. The sales increase was driven by strong OE volume and foreign exchange. Operating earnings for the quarter of 102 million compared with 87 million in the prior year. Operating earnings and improved margins were driven by higher volume, by cost savings initiatives and by the benefits from the Brazil pension plan change. Raw materials were up 28 million and price mix deteriorated slightly given the tough pricing environment and the strong mix at OE.

Now going forward, we see continued uncertainty driven by regional politics but economies are expected to improve later in the year as lower interest rates in Brazil and other economic stimulus measures improve the economic conditions. There is, however, always the risk of devaluation that will have an unfavorable impact on the Latin America business's profitability.

Now in Asia, net sales were up reflecting a small increase in units and strong pricing mix performance. High-performance tire volumes were up 30% year-over-year as Asia continued to focus on improving mix. Earnings were also up 16% from the prior year. Going forward, expansion in India, growth in China and addressing the high cost structure at our Australian operation provide us with substantial upside opportunity.

Now our engineered products business saw sales down slightly but this was as expected. The expected decrease came from planned reductions in military sales. These reductions, however, were mostly offset by strong industrial and replacement business growth. Margin improvement in this business reflects the strong industrial performance and the benefits of cost reduction initiatives put in place during 2005.

And finally, just a quick update on legacy issues. Now the most significant point here is the uncertainty surrounding pension contributions. We do not see any legislation pass before the original April 15 deadline and Congress has now set a new deadline of May 29. You'll recall we have two different levels of potential contribution based on whether expected legislation is enacted this year. The low end of $550 to $600 million of domestic contributions requires new legislation while the higher estimates of 700 to 750 million reflect the requirements if no legislation is enacted. It is not clear what will happen here but we're prepared to make the required contributions either way.

So as you can tell, our first-quarter results include both the positives of executing against our strategies, our stated strategies of mix improvement and cost reduction, and the areas where either through internal or external factors, we fell short versus the prior year. We nevertheless feel our momentum remains, our strategies are appropriate and our execution is critical to achieving our goals. Now I'll turn the call back over to Bob.

Thanks, Rich. A lot of information obviously communicated in Rich's comments and I just wanted to make a few more remarks. First regarding expectations for the remainder of the year.

In North America, we expect markets to strengthen somewhat in the second half, although as Rich indicated, not to the levels of our previous forecasts, and I'll have more detail on that in just a second. Given the soft first-half markets, we'll monitor the overall impact on our inventory positions and adjust if necessary. And I emphasize if necessary.

In our European businesses, we also see conditions improving in the second half compared to the first quarter. The currency impact will be more moderate on both sales and earnings and will benefit from the additional German winter tire volume that is expected for the industry, given changes in the German law in 2006. And I will simply say here that that law should act as a stimulant for winter tire sales. Of course, we'll also benefit from the Washington plant closure and the savings associated with that.

Now referring to the outlook slide, I'll talk first about the second quarter and then about the full year. In the second quarter in North America, we expect the consumer OE market to grow 1 to 2% and the commercial OE market 5 to 6%. The consumer replacement market in North America is expected to be flat to down slightly. The commercial replacement market is forecast to be flat to up slightly. In Europe again for the second quarter, the consumer OE market is expected to be flat to up slightly and the commercial OE market up 3 to 4%. The consumer and commercial replacement markets are anticipated to be flat to slightly up.

Now for the full year, we expect the consumer OE market in North America to be down 1 to 2% while the commercial OE market is expected to grow approximately 5%. The consumer replacement market in North America is expected to be flat to up slightly for the year. This is below our previous forecast, where we had indicated 1 to 2% growth. And the commercial replacement market is forecast to grow 1 to 2%. We are expecting the consumer OE market in Europe to be flat to up slightly in 2006 and the commercial OE market up 2 to 3%.

The consumer replacement market in Europe is forecast to be flat to up slightly while the commercial replacement market is expected to be up 1 to 2%.

With regard to raw materials, we continue to forecast ongoing uncertainty in the markets for fee commodities. Now having seen a 14% increase in Q1 costs, we expect a similar level of increases for the full year with increases likely peaking in Q2. So 14% for the full year with increases peaking in Q2. We are also reaffirming our prior estimate for both CapEx and interest expense.

Now referring to Slide 22. As we look forward, we see the strategies that we have discussed as the right ones to address our business challenges and opportunities. And I realize that many of you have heard Rich speak over the last three months referencing Slide 22 and I would just here simply reiterate the slide's key points.

We are continuing to drive revenue per tire through new products and outstanding marketing. We are offsetting raw material cost increases over time with improved price mix. We're dealing with legacy and other cost increases with our four-point cost savings plan. And we continue to improve on our balance sheet leverage.

That concludes our formal remarks this morning and I'd just like to open the call to take your questions.

(OPERATOR INSTRUCTIONS). Himanshu Patel, JPMorgan.

Rich, maybe you could take this one. I'm just wondering the impact of currency movements on your raw materials side, specifically when you look across the spectrum whether it's natural rubber or carbon black, are most of those commodities quoted in dollars. And number two, if they are, to the extent the dollar begins a period of a pronounced decline, does that help your profits in your overseas regions?

Himanshu, we haven't broken out currency on raw materials in and of itself. But I think the relevance of your question really hits us in Europe, where the Euro-dollar relationship and buying most of these materials in dollars has a significant impact. And I think if you go back to for instance the first quarter last year and even the fourth quarter last year and look at our raw material increases in Europe, you will see that they are much higher this year relatively to our other regions and the reason is because of the euro impact. So it does have a significant impact on us on our raw material purchases in that region. And overall, I do think you are right. I think given our international exposure, certainly, the weaker dollar has a favorable impact on our foreign operations.

Okay. And then in the North American business, two questions. One, the strength that we are seeing right now in the off-highway stuff, the mining, construction, equipment, any sort of indications you guys see over the next few quarters that a significant amount of capacity is coming on-stream in that space could potentially hurt the margins that you're earning there?

Himanshu, this is Bob. I'll just comment there that our outlook is very positive in this area. And as you know, we've had this disequilibrium between supply and demand. We don't foresee that there's anything that will happen here over the next months and some might say years that will significantly disrupt that. We still think this is going to be a very strong segment for us going forward. I think most of our customers would agree with that.

Okay. And one more on North America. Volume is down 7%, clearly worse than the industry; presumably a lot of that is low end tires. Revenue per unit though up 10%. How sustainable is that sort of revenue per tire increase? Should we be thinking of that sort of double-digit increase for the rest of the year?

Maybe Himanshu, I will make a comment then Rich may have some comments to elaborate on anything I say.

Certainly, we set out on a strategy several years ago that was a very margin-oriented and targeted strategy in all of our markets, including consumer replacement. We are on that strategy and we knew that to really pull it off, frankly, we had to have great new product and significantly improve marketing and we have both of those now in place and we are learning and we are getting better progressively. So from that standpoint, I think you are right in that frankly the softnesses in the market we have seen has been at the lower end, as Rich indicated, and for us, our volume challenges have been there. They have not been in our targeted high-performance product segments and market segments. So we feel pretty good about that and feel pretty good about that going forward. I don't know, Rich, if you want to make another comment?

No, I think I would echo Bob's comments. I would just say that 10% is a very healthy increase. I mean if you look at last year, they were single digit increases. And I think that is something that we think is still possible, particularly with the new product coming out and with the existing demand for our Assurance tires and Fortera tires and the like. So I think certainly the high end, the revenue per tire increases are still -- are certainly still very possible.

One last one. Could we get a little bit more into western Europe? I know the year-over-year operating profit comparisons are a little bit unfair because of some abnormally low advertising expense of a year ago. Even beside that, it does seem like you have seen a quite sizable reduction in the rate of profit. Should we think of the sort of current level of profitability in this business as something that's probably likely at least until the end of the year and maybe if the markets come back towards the end of the year, we kind of revert back to '05 profitability?

I think when you look at our first-quarter results, remember the first quarter last year, as you have said and Bob and I both comment was a bit abnormal. But that said, first quarter is not necessarily indicative of a full year. We see what is coming on, a very strong opportunity for the winter tire market coming in in Germany. We still have a very, very solid market position over there. So I don't think that necessarily you should move away from the earnings opportunities or the earnings potential, the earnings levels we had in 2005. But again, I will say, if you go back to my comments, there is a tougher competitive environment out there, particularly on pricing and I think as we look ahead, certainly, we're very cognizant of that. But Himanshu, as you also heard me say, with the raw material headwinds coming on particularly because of the weaker euro, price increases are something that we're still going to have to pursue there.

I might, Rich, just to add to that, if you step back from the quarter, I think over the last three to four years, our team in Europe, Western Europe, has done an outstanding job on the top line, building on the brand strength they had, delivering new products, great channel management, RunOnFlat tires, just innovating across the whole top line set of drivers of business.

And we are going to continue that. We are also going to step up, if you will -- and Rich alluded to this in some of his comments -- we're going to step up our focus on reducing the cost structure in Europe. And you saw the Washington plant closure here in the early part of the year as one piece of evidence in that regard and we will see those savings as we go through the year. But that is a significant set of initiatives around cost in Europe. We know we've got to take the cost structure down there, okay? And we should probably move on. Himanshu, thanks for your series of questions.

(OPERATOR INSTRUCTIONS). Saul Ludwig.

Just a combo question here. With your volume being so weak and particularly at the low end, this has to -- brings up the question of capacity utilization. And I remember in the fourth quarter, we had some hits to earnings from lower capacity utilization. So one part of the question relates to should we expect that?

And then the more strategic question is what do you do about this private-label business? I mean, if your replacement units were down 8.5% in the first quarter but were up in Goodyear and Dunlop, they must have been down 10, 12% or something in private brand. What's the future of that business in recapturing that volume or just talk about both of those issues. Plant utilization and recapture of loss of share (multiple speakers).

Rich, why don't you kick off and I'll come back on the second part of Saul's question.

Good morning, Saul. I think you bring up a question that certainly is a relevant one for our thinking going forward and I think the best way to answer it at this point is we have to continue to balance what we're seeing in the marketplace and what we are seeing in terms of our capacity utilization. We have seen a slowing on the soft end of the market and as you know we have also held up very strongly on our price in the marketplace. So balancing those two things out I think is something that we will continue to focus on in the second half and the implications of that is something that we are going to have to keep a close eye on. I certainly can't say right now that our intention is to forecast any kind of a production, a full stop production cut; but clearly, I'd leave you with the thought of balancing those elements in mind and having to make decisions as we look out over Q2 and the balance of the year.

One comment there that we should probably make is again, when you look at the statistics that have been published, because I know it's in people's minds, we're not seeing any reduction in miles driven of any material magnitude. And I think that's important in the markets. The overall market was weak. Strategically, we have said before in the private-label business, much as in the OE business, frankly, we have a very selective strategy and there are areas in private-label where we can make money today and we feel we can make money in the future. There are other areas where we cannot. So we are going through the process. And, Saul, as you know, it's been a couple year process of getting at that. So there is that element of it in terms of managing the business that we really want where we feel we can make some money.

The other thing is we know very well that we have to reduce the cost of manufacturing and supplying tires to that category. And that is a major emphasis right now for not only me but John Rich and his team in North America. And as I said earlier, we are continuing to both drive productivity in our plants in the U.S. but also to look seriously at upgrading and increasing our third-party sourcing of tires in the consumer area. So we know we've got to take our cost down to be able to do that as well. So those are the fundamental strategies that we're looking at to be able to be a -- continue to be a participant and a significant participant in private-label. But ours is not a share gain there. It is a margin gain that we are playing.

Douglas Carson, Banc of America.

A quick question. In the Q, it says on April 11 improved an increasing number of shares but it looks like 300 million to 450 million. Can we read into that? That's a really large number and you commented before that an equity issuance was potentially in the cards? What type of size of an equity issuance could we potentially look at because bondholders are wondering about the clause you have in the 11% and 9% bonds.

Maybe, Doug, we will let Darren open up with his response to that. Obviously, this is an area where we have been thinking about it for sometime.

Doug, I think I know the provisions that you're speaking of there in the private placement notes that we did back in early 2004 in particular. And I think that the size equity offering that we would consider would certainly have to be a size that is meaningful to improve the balance sheet metrics that are important for us and important to credit-based constituencies like the rating agencies. So I think that we're looking for something that would be a significant improvement or significant change in terms of our credit profile. I think that's probably the best guidance I can give you in terms of what we would think about in terms of size. I'm sure that you're well aware of the kinds of typical sizes that the secondary equity offerings might bring in the marketplace.

In terms just as a technical increase in the authorized share count, I wouldn't read a lot into that specifically. I will tell you that we were looking to give ourselves some flexibility but that flexibility is something that I look at over a number of years. If you look at the last time we increased our share count I think was 1993. So it's not something that you expect to go back to shareholders on very often.

Right. But you have 177 million outstanding and then you're going to 450. It seems a big number unless I'm looking at it wrong.

I think there's a lot of outstanding comp programs and other claims on the existing -- up until recently than existing 300 million. So there weren't really that many left under the 300 million that weren't encumbered in some way. There needed to be a little bit of head room there. But again I would say, the head room we created isn't necessarily just with one step in mind. It's with whatever we might want to do over time, including compensation plans and other potential uses of equity.

Because if you did do this equity offering, it was like a reasonable size and you needed to maybe get to 250 million; I'll call it 11% and another 150 million to take the 9's. That would put you at a kind of dilution of like 16% of your equity base. Is that kind of -- that kind of seems reasonable based on what other secondary offerings have been across the market. Am I kind of in the right ballpark thinking about that?

Other than just thinking about what an equity offering might be able to do in terms of significantly impacting the credit metrics we look at and you realize the ones we talk about the most is debt to EBITDA. I will say that we're looking for a meaningful improvement there. I'm not going to say anything more in terms of what our plans are.

That's fair. And then just one secondary and then I will hop. You talked about the pension funding. And I'm just wondering if that is mandatory ARISSA funding that you need to make or that you feel that you want to make?

My quick response is it is but Darren, why don't you elaborate?

I think that is exactly right. Domestically, we're talking about the required contribution levels.

And that is in '06. Did you give a number for '07?

No, what we've said is that 2006, I think under either of the legislative scenarios represents the peak required funding for us.

Jonathan Steinmetz, Morgan Stanley.

I just want to follow up on this 10% revenue per tire increase in North America. Not to take anything away from mix but when we think about the mix, you had strong branded, you had strong off the road, you had strong commercial. Then you had weak OE and weak private-label. It seems like most of that will be skewing the mix. Can you at least rough cut bucket how much of this was price and how much was mix. And then within that, you have got weak sort of demand forecast; a lot of other people do too. Is pricing over the last couple of months getting harder to come by?

Jonathan, I know we've talked in the past. We really don't break out price mix, particularly by business unit, and certainly not in total. But I will say that just directionally, a lot of that was price, okay, versus just mix. Because for the reasons you said, mix was hurt by private-label and OE. And in terms of pricing going forward, I think it is a bit of a tough question to ask because as we see the raw material prices go up, price increases are something that we feel are necessary to put out there to cover that cost at these exorbitant levels.

Now with that said, I think the answer is really reflected somewhat in the first quarter and that we are able to continue to get price for some of the products that are in demand out there. However, as you look at the lower end of the market, price increases today let alone future price increases, are increasingly tougher to get.

I would just say, if we are right on our forecast of volume and we do see a stronger second half, this would be true in Western Europe; it would also be true in North America. That would take some of the pressure off pricing in a sense. So I think that's important for you to recognize.

And I know you don't want to give a number but directionally can you just comment? The PPI has been up about 4%. Can you just say whether you are doing sort of better or worse than that?

Jonathan, that would be tantamount to giving a number I guess. We're just not going to give a number that breaks out price mix. But thanks for the question.

Chris Graham, Greenwich Capital.

The three things that I'm just sort of struggling with to look forward to, the settlement, obviously, is not something that we're going to see again. The FX in Latin America was notable and then the pension in Latin America. Those three things are about 1.5 points margin swing on a year-over-year basis. Maybe you did this when you were going over the segment results but could you just sort of bucket those and tell me what I should be looking forward to for the second and third quarter?

Rich will just speak to that.

Chris, I would just say as you go through those items, clearly, the raw material settlement is in that category of, as I think you may have said a onetimer. But I will tell you particularly in the raw material environment that we're seeing, things like that are very important things that we put a lot of time on getting because it does have an impact on our margin, but I certainly would acknowledge it's a onetimer.

FX in Latin America, that's a number that is fairly volatile depending on rebalance and debalance and it's a kind of thing that impacts everything from demand and pricing in the region. So as I think about it, I don't look at sort of normalizing margins and putting FX into that category. It's really part of the makeup of what is our Latin American business. And going forward or I should say just in the quarter, when you look at the change in our Latin America business because of the pension plan, again, you might call it a onetimer but I would tell you it really is a structural fixed cost reduction for us in the region. Our pension expense will come down, we take away some of the volatility. So you get a onetime benefit of kind of writing back some of the future benefits that were accrued for under the plan but it does really lower our cost structure. So, I'm not sure I consider all those necessarily just simply onetimers as we think about our business.

Now going forward, I will tell you the biggest impact that we see on margin again is going to be the impact of raw material, our ability to recover that in the marketplace, particularly as we said in Europe and also other higher input conversion costs around things like energy in the plants, wage inflation, all those type of things, which, by the way, we've done a pretty good job on offsetting in our convergent cost. If you look in the Q and you break down what's happened to us, you'll see that our conversion cost was about I think consolidated about 15 million negative and some of that's really some inefficient factories. So really again, it points you back to the raw material view and I think going forward, the impact is going to be how much can we offset with price and that's going to answer the question in terms of what to expect on margins going on into Q2, Q3 and really the balance of the year.

Right. And prior to the first quarter, I had that margins were up on a year-over-year basis. I think based upon what you're saying although you're not explicitly saying anything, to me I think here and as we look forward to the remaining three quarters, we should probably expect down year-over-year margins.

Yes, I think, Chris, if you do the math, you're exactly right. Our margins were down when you back off those two other things year-over-year a little over a point. And again, the biggest key to changing that for the balance of the year is going to be offsetting price in the marketplace.

Right. And then raw material obviously, in the second quarter, you think raw materials are going to be equivalent to scale as they were in the first quarter, right?

Well, I think Bob had --

I mentioned that, just to clarify here, we said we saw about 14% inflations in raw materials in the first quarter. Likely to be at that level for the year on average basis across the quarters, probably peaking in the second quarter. And we're not quoting a specific number, but peaking in the second quarter, average for the year at 14, I would say probably [above] 14 (multiple speakers).

Right, yes, I misunderstood. Thanks for that clarification. Thanks, guys.

Rod Lache, Deutsche Bank Securities.

Good afternoon. This is Amit [Miratra] for Rob Lache. I just had a couple of quick questions. If we look at finished products inventory in the quarter, it increased 277 million from the end of '05. That is about a 4.5 mil. units if we use a $62 cost of goods sold per tire. Now if we think about overhead absorption as $10 per unit, it looks like earnings benefited by about 45 million in the quarter. Are we looking at this correctly from a numbers perspective?

Let's go back through it because -- to make sure we've got the analytics right here. If you look at the quarter on quarter, that's what you are looking at? Last quarter or last year's first (multiple speakers)

Year-end '05 to the end of Q1 '06.

Well, first and foremost, there is always a seasonal build during the first quarter. Because, again, peak selling season in the consumer business is the second and third quarter. So what you're seeing to some degree is a seasonal build in inventory, okay? Then you're seeing some build in inventory because the markets overall were weaker than we expected them to be during the first quarter in several of our business units, including North America, okay? Just to set the ground rules on that. Does that --?

Well, I mean, I see that sort of similar move at the end of '03 to the first quarter of '04. But if we look sort of last year what happened, it looks like finished goods were actually down 14 million from end of '04?

That's back to -- remember, one of the messages we're trying to make sure we're putting across here is the first quarter of 2005 was a -- I hate to say it this way -- but an aberrant quarter in the sense that volume was very, very strong, stronger than would be the normal case, some was earnings following that. So was the impact, therefore, on inventory. So as we have looked at it, we don't have a huge inventory issue at the end of the first quarter that is confronting us but we do have inventories a bit on the high side, as Rich said. You know, we're going to continue to look at that and assess as we go forward relative to demand.

There are no further questions at this time. Do you have any closing remarks?

I think I'd just like to say that our leadership team met recently here in Akron as part of our normal planning process and I told the team that as we look back over the last three years and see the challenges that we have successfully faced together that we should feel very good about what has been accomplished. However, I then told them that what was accomplished is really just a foundation for what we are going to do next. That's how we look at it. What really matters is how we're positioned to deal with the future and that's what all of you care about and I want you to know that's what we here at Goodyear care about as well. We think we are focused on the right opportunities with the right strategies to take our business and this Company to the next level and you see that reflected in the three key metrics that we shared with you. So I just want to thank you for your time and your interest in our company here this morning and this afternoon. Good bye now.

Thank you for participating in today's teleconference. At this time, you may all disconnect.