Goodyear Tire & Rubber Co (GT) 2006 Q4 法說會逐字稿

Good morning. My name is Janice and I will be your conference operator today. At this time I would like to welcome everyone to the Goodyear year-end 2006 earnings release conference call. [OPERATOR INSTRUCTIONS]

Thank you. Mr. Dooley, you may begin your conference.

Thank you, Janice. Good morning, everyone, and thank you for joining us for Goodyear's full-year 2006 results review and strategy update. Joining me on the call today are Chairman and CEO, Bob Keegan, CFO Rich Kramer, and treasurer Darren Wells. The webcast of this morning's discussion and the supporting slide presentation are available now on our website, investor.goodyear.com. We filed our 2006 Form 10-K this morning. This morning's discussion will be available for replay after 3:00 p.m. eastern time today by dialing 706-634-4556 or on our website at investor.goodyear .com.

Before we get started I need to remind everyone that our discussion this morning may contain certain forward-looking statements based on current expectations and assumptions that are subject to risks and uncertainties 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 intension or obligation to update or revise any forward-looking statements, whether a result of new information, future events or otherwise.

Thanks again for joining us today. Now I'll turn the discussion over to Rich Kramer.

Thanks, Greg, and good morning, everyone, and we appreciate you joining our call today. Today's call will focus on 2006 full-year results, as well as on our next stage earnings and cash flow drivers, including our outlook. And in a change for our normal order, I'm going to start the call and then turn it over to Bob. I'll begin by providing further insight into the results you've already seen in our press release. My comments will focus on the full year, as well as to provide some further insight into the ongoing impact of our fourth quarter strike by the United Steelworkers. I'll then turn the call over to Bob, who will put these results in full context, including a discussion of the stronger business platform we now have in place to move our business forward and to increase our competitiveness.

I'll begin my remarks with a review of 2006. Overall 2006 was certainly a transitional year filled with numerous actions consistent with our turn-around plans. 2006 results showed strong operational progress, particularly late in the year, but also reflected a substantial impact of the strike in North America. As we look at our consolidated results for 2006, the combination of the strike and restructuring actions taken during the year make it difficult to evaluate the true performance of the business. While our reported results show a significant decrease in gross margin, segment operating income and EPS, as we reported a net loss of $1.86 per share, when you overlay the impact that the strike had on our results and consider the restructuring costs we incurred, our net income would have been significantly positive.

Revenue of $20.3 billion was up more than $500 million and exceeded the $20 billion mark for the first time in the Company's history, and this was despite the impact of business divestitures and the impact of the 12-week strike in North America. Excluding the impact of divestitures, sales increased more than 4% for the year. Our revenue per tire increased 7% in 2006, driven by strong pricing and improvements in product mix; clearly a bright spot for us this year. Our gross margin was 16.1% down from 19.4% in 2005. Gross margin was impacted adversely by the strike, as well as higher raw material costs of approximately $870 million. Substantial price mix improvements of about $780 million versus 2005 were not enough to fully offset the raw materials increase, particularly in our European Union business. Higher pre-strike conversion costs of approximately $200 million were also a factor. They were driven particularly by reviewed production volume in our North American Tire business. due in large part to the decision to exit certain segments of the private label tire business.

Excluding the impact of reduced production volume and consistent with our continuous improvement initiatives, we were able to offset higher wage, energy and transportation costs with increased productivity and cost savings actions. Selling, general and administrative costs were down more than $100 million. excluding unfavorable currency translation. The decline in SG&A costs were driven by head count reductions and other back office savings actions consistent with our SG&A cost savings plan, as well as by decisions to reduce ad spend reflective of weak markets globally and the impact of the strike. Segment operating income was $786 million versus $1.164 billion in 2005. This reflects the significant impact of the 12-week strike in North America, which reduced segment operating income by $361 million. Excluding the impact of the strike, segment operating income was only down a little more than 1%, with reduced year-over-year results in North American Tire and the European Europe partially offset by double-digit earnings growth in Eastern Europe, Latin America and Asia.

We reported a net loss of $330 million, or $1.86 per share, as I mentioned earlier. This includes the impact of the strike, which reduced net income by $367 million or $2.07 per share, as well as significant restructuring charges, including accelerated depreciation and asset write offs of more than $400 million after tax of $2.32 per share, which were largely related to the footprint actions we announced during the year. Now these significant items were partially offset by other items, including a one-time gain of $163 million after tax, or $0.92 per share related to the favorable resolution of a tax contingency. I would refer you to slide 33 for a summary of significant items to assist in your understanding of our 2006 earnings.

Now turning to the balance sheet, we ended the year with nearly $4 billion in cash. This reflects the financing actions we looks towards -- we look towards the end of 2006 as well as improved working capital due to the USW strike, which we estimate to be $400 million to $500 million. We ended the year with total debt of $7.2 billion, which was up from the prior year, reflecting the nearly $1 billion drawn down under our revolving credit facilities and the $1 billion senior notes offering we completed during the fourth quarter. Now I'd point out that all of the remaining borrowings under the revolver were repaid in early January. I would also point out that shareholders equity was negative $760 million at December 31, which was due to the adoption of a new accounting standard that mandated companies recognize on the balance sheet the full underfunded status of their pension plan and other post-retirement benefits. Now relative to this change I'd also point out that this had no impact to cash flow, to the income statement or importantly to the calculation of our debt covenant.

Now I'll summarize each of our business segments' results for 2006. As I mentioned earlier 2006 was a transitional year in Goodyear's turnaround and this is particularly true for our North American Tire business. Sales for the year in the region were flat compared to 2005, and that was despite an overall volume decline of nearly 11% or 11 million tires. The significant volume decrease was driven by three factors. First, the strategic decision to exit certain segments of the private label business. Second, one of the weakest markets in North America in the past 50 years. And, third, the impact of the strike. In addition, businesses divested in 2005 pushed sales lower by $265 million.

Offsetting the lower volume and divestitures was improved price mix, again reflective of pricing actions taken to offset higher raw material costs and the continued success of our strategic focus on premium brand of products, even in the weak 2006 markets. North American Tire segment operating income was down significantly for the year, reflecting $313 million of strike-related costs, as well as lower volume driven by both the weak industry and our decision to exit certain segments of the private label business. As we look at the North American Tire business, the continued pattern of strong pricing and product mix offset nearly all of the $370 million of raw material cost increases we incurred in the year while simultaneously growing its strong share of market position in the branded tire segment, again in spite of the strike.

The European Union business had a tough start to the year, as we saw earlier in the year, after several years of significant market share gains. However, from a trend perspective, the second half was much stronger and sales grew 13% versus the second half of 2005, with robust winter tire sales driven by our outstanding winter tire products. As you recall, the winter tire market in Europe was up dramatically in 2006 as a result of new German legislation that encourages the use of winter tires. For the year, the European Union business grew sales nearly 7%, driven by improved price mix and favorable translation. Partially offsetting these positive impacts was a slight volume decline due to our strong stance on price increases at the expense of some sales volume. Segment operating income for Europe dropped 10% in 2006, as the competitive pricing environment during the first half of the year limited our ability to recover rising raw material costs. While price mix improved nearly $140 million year over year, raw material costs increased more than $220 million. However, in terms of 2006 trends, we saw improvement in our price mix performance in the second half of the year.

Our emerging market businesses in Eastern Europe, Latin America and Asia all delivered record earnings and revenues in 2006. These businesses, which total more than $4.5 billion in sales overall, achieved revenue growth of nearly 8% and segment operating income growth of 14%. Looking first at Eastern Europe, sales were strong in 2006, increasing nearly 9% reflecting improved volume and strong price mix. The volume increase and strong price and products mix also drove segment operating income higher by 16% year over year. Our Latin American business also posted solid growth, with sales increasing more than 9% and segment operating income growing nearly 11%. While these results reflect solid growth, they are even more impressive when you consider the competitive environment in which they were achieved. The team did an excellent job overcoming a weak Brazilian market, new competitor capacity and imports and used cost cutting to offset higher raw material costs.

In our Asia Pacific region we took advantage of strong growth in China and India, while offsetting raw material cost increases with price and improved product mix. Sales increased 6% and segment operating income rose significantly, up nearly 24% year over year. Similar to what we saw in the European Union, we took a strong stance on increasing prices at the expense of sales volume in certain Asian markets. In addition to the regions strong operating performance, it is also playing a growing role in the entire Company's efforts to reduce cost by sourcing low-cost tires, raw materials, capital equipment and other items from the region.

Our Engineered Products business delivered solid results, excluding the $48 million impact of the strike on segment operating income. Its core industrial products business remains strong, while other product areas including military were weaker than a year ago. Engineered Products also delivered strong growth in its international businesses and made significant moves to reduce its cost structure. Now taken together our business has turned in strong results in tough market conditions, although certainly for North American Tire and our Engineered Products group the strike impact was substantial, but in our view necessary to drive our business forward.

Now turning to the strike impact, my first thought would be that it was a key enabler -- a key platform for our businesses in the future. While the strike had a negative impact near term, the more than $600 million of savings we expect the resulting labor contract for NAT and EPD over the next three years are critical to the performance of those businesses. In financial terms, we saw the strike lower segment operating income by $361 million in the fourth quarter. This was primarily the result of unabsorbed factory overhead during the period, due to reduced production of approximately seven million units as well as some lost sales. I'm also pleased to report that our factories were up and running at full pre-strike capacity before the end of January, allowing us to begin to rebuild our inventories to meet customer demand.

Now as we look ahead at our 2007 forecast, and consistent with comments made on our January 9th conference call, we see a temporary negative impact to segment operating income from the strike. The impacts will be felt primarily in the first half of the year in the form of lost sales coming from lower January production as we restarted our factories and from lower beginning inventories. We estimate these items will create between a $200 million to $230 million headwind in North American Tire and an additional $5 million to $10 million headwind for Engineered Products. We also estimate that we will incur manufacturing cost inefficiencies of approximately $50 million as we transition to a smaller footprint. This includes the elimination of tire production in our Valleyfield, Quebec facility and winding down production at our Tyler, Texas facility during 2007, as we transition production to our remaining facilities. Our intent, you may recall, is to close Tyler after December 31, 2007, as part of our contract with the steelworkers.

Now I'll turn the call over to Bob so he can put the year in context with regards to where we are driving our business and the key elements to getting us there. Bob?

Well, thanks, Rich, and good morning, everyone. As Rich indicated we delivered strong results in a number of areas during 2006 by remaining focused on our seven strategic drivers. And I'll talk about four subjects here with you here this morning. First, challenges in '06, second, our accomplishments in '06. Then I'll spend a fair amount of time on business platforms for our future business and conclude with an outlook for 2007.

In 2006 our results were delivered despite significant challenges, and $ich has identified several of those. Consider the environment we operated in during 2006. First, we faced unprecedented increases in the cost of raw materials. The price of natural rubber doubled during the year, peaking above $1.10 per pound and remains at high levels even today. We faced significant increases in the price of synthetic rubber and other oil-based commodities. These increases derived from high-cost oil, which increased from $53 per barrel at the beginning of the year to $70 a barrel by August. Overall we saw raw materials increase by 17%, or well over $800 million. Second, we saw a reduction in industry growth. This ranged from slow downs in Latin America, based on macro economic weakness particularly in Brazil, to the dramatic declines we saw in North America driven by the income squeeze experienced by lower to middle-income earners as a result of higher gasoline and utility costs.

Third we saw some of our major OE customers in North America encountering their own set of challenges. And these challenges saw car-buying pace, also driven by high fuel prices, change significantly, with light truck and SUV segments down double-digits during 2006 and renewed interest in compact cars and alternate fuel vehicles. As our overall volumes declined so did our domestic OE business. Finally we experienced a 12-week strike in our North America factories, and as a result we had to work to protect our distribution channels while operating at about half of our normal production.

Now, despite those challenges, the Goodyear team delivered significant accomplishments in 2006 and I'm just going to highlight several of those. First in the area of revenue growth. We continued our new product industry leadership. We saw our Goodyear Eagle® tire with carbon fiber technology recognized repeatedly for technical excellence, for performance and consumer relevance. We leveraged successful products, which you're familiar with, such as the Goodyear Assurance® tire from the U.S. and the Goodyear Excellence® tire from Europe, to further bolster our product lineup in the emerging markets. Our Dunlop® SP Sport 5000 tire was recognized by the leading U.S. consumer magazine as the top-rated product in its category. We also launched -- and I might add a very timely launch -- we launched a commercial truck product offering, our fuel efficient truck tire with fuel max technology.

In addition we focused on marketing, extending our relevant technology messages to consumers through both traditional and emerging media, and I'll just give one example. Armed with research indicating that 60% of our tire buyers now start their buying process with internet research, we drove an internet marketing effort to provide substantially more information to these consumers at the right time in their buying process. This information increased their awareness of Goodyear's premium products and our dealers most convenient locations. Now as a result of these efforts on new products, marketing and channel management we saw strong price and mix performance. As Rich said, we drove a 7% improvement in revenue per time last year and total revenue of more than $20 billion. This strong price and mix performance continued even as raw materials moderated in the fourth quarter.

In 2006 we also delivered on our cost savings targets. As you'll recall, in September of 2005 we presented a four-point plan to you indicating that we planned to eliminate between $750 million, and $1 billion in total cost by 2008. In mid 2006, we raised that goal to more than $1 billion, given our intense and successful focus on reducing our cost structure. During 2006 we took critical steps toward achieving this revised and higher goal. We announced significant changes to our global manufacturing footprint. With the actions that have been taken -- to discontinued tire production in Valleyfield, Quebec, close factories in Tyler, Texas, Washington in the UK., Upper Hutt in New Zealand, and Casablanca in Morocco -- we have announced plans to reduce our high-cost global capacity by 21 million units -- 21 million tire units. That's above our stated objective of 8% to 12% of high-cost capacity, or 15 to 20 million units by the end of 2008.

In addition we reduced selling, administrative and general expense by well over $100 million, after adjusting for unfavorable currency translation. Excluding advertising, which I would add may return to higher levels going forward, our SAG costs were still down more than $60 million compared to 2005. We made important progress on our continuous improvement initiatives and on low-cost sourcing, and I'll discuss these savings in more detail in a few minutes. As you all know, we also successfully managed one of the most significant challenges we've faced as a management team here at good year, a 12-week strike by the United Steelworkers. This challenged to us effectively manage disruption for customers, suppliers and our associates, while remaining focused on our contract goals.

However, I must say more important than these accomplishments in 2006 are the core changes we have made in our business platforms. These platforms position Goodyear for strong profitable growth in the future. And I'd look at our business platform entering 2007 as a combination of strength in top-line growth capability, a step change -- a step change improvement in our cost structure, a stronger balance sheet, tight focus here at core businesses and core target markets, and a focus on speed, and I'll elaborate on each of those areas. First, top-line growth. Remember that our revenue performance going forward will be generated by price and volume increases and continually richer product, brand and customer mix. Our top-line growth will be supported by a continuing stream of new products, great marketing and an outstanding dealer network, and I'll speak to each of those. We launched several outstanding new products for the North American market at our recent dealer meeting.

Most notably, the new Goodyear Eagle® F1 all-season tire and the new Goodyear Wrangler® SRA for the SUV and light truck market. The Eagle® F1 all-season for high performance vehicles combines the benefits of carbon fiber and Kevlar technology in a product that we expect to perform at the top of the industry category. With the Wangler® SRA launch we are introducing wet track technology for enhanced traction on wet roads for this high-volume market segment. We also introduced the Dunlop® SP Sport signature passenger tire with hydro-paddle technology, and borrowed from our European business two outstanding Goodyear Ultra Grip winter tires, for performance and SUV winter segments.

In Europe we have already announced several new exciting products this year. The new Goodyear Ultra Grip extreme, which is targeted at the important winter performance segment of the market, was launched in January. Our team in Europe followed up this introduction quickly with the launch of the new Goodyear Eagle® F1 asymmetric tire this month, which is targeted at the high performance segment. Next month, we have two exciting new products from Dunlap, the SP Sport Fast Response and the SP Sport Max GT. Now these are just a few examples of the impactful new products that will be launched in Europe this year, which address key targeted market segments, and it's quite a portfolio of new products. As you can see, overall our new product engine remains robust and we are accelerating -- just as we said we would do, we are accelerating our pace of high-impact product launches.

From a marketing perspective we will integrate our fleet of Goodyear blimps into our advertising strategy at major televised sporting events, with targeted product and technology messages. And with our new 'Get There' advertising campaign -- I'll repeat that -- 'Get There' advertising campaign that we introduced to our North American dealers last week -- and by the way they loved it -- with that introduction we will have taken one step further toward a completely integrated branded marketing program. You may have seen just this morning our teaser ad in either of the Wall Street Journal or USA Today. We're excited about this campaign, but you don't have to take my word for it. You can get a sneak preview of our ads that will launch with this weekends Daytona 500, and you've all seen the excellent marketing by NASCAR around the Daytona 500. But you can see our ads and get a preview by visiting our investor website at investor.goodyear.com at the end of this meeting. You'll see iconic branding and strong product messages in these ads.

In addition you will see much more marketing innovation from us in 2007. This will include capitalizing on our new five-year marketing and supply agreement with NASCAR, also announced last week at our dealer meeting. Naturally we're very excited by both our impactful new products and our new integrated marketing campaign. Our continued progress in these areas is further evidence of our view that we are now a marketing Company and not simply an automotive supplier. We are a marketing Company.

Clearly our success also depends on leveraging our outstanding dealer network. I want to briefly comment on our recent North American dealer meeting in Orlando, Florida, which, by the way, was the largest such meeting that we've had during my tenure with Goodyear and one of the most gratifying. Just consider where we were four years ago when I first addressed our large dealer audience. Now I can tell you the difference between then and now is night and day. Our dealers now see a transformed company. They comment that they see this transformation manifested in our culture, manifested in our business strategy and manifested in our operations in the way we interact with them. They are encouraged, as we have driven a series of dramatic changes. First, a steady stream of outstanding new products. Second, a significantly lower cost structure, which makes us more competitive. A healthy and growing truck tire business. A leadership team that delivers on its commitments to them and to our end users. And -- and I think this is most important, a supplier truly interested in helping them grow their businesses.

Now what's transpired over these past four years, not only operationally, but I think equally important in the overall quality of our relationship with our dealers and in our commitment to building their businesses, was very instrumental in sustaining Goodyear through the challenges associated with the 12-week strike by the steelworkers. Frankly, without the courageous support, the trust and the efforts of our dealers, the outcome of the strike might have been much different. Never before did we need to be aligned as fully with our dealer network and never before did we test our relationship with them as fully. I'll simply state here that our dealers behavior during this challenging time was professional, it was classy and created deep emotional bonds between the dealers and our people here at Goodyear.

As I said earlier, 2006 saw us drive our four-point cost savings plan aggressively forward. I want to provide you with more detail on our progress in each of those four areas. If you look at the slide from the upper left, our continuous improvement initiatives, including Lean and Six Sigma, delivered nearly $300 million in savings in 2006 alone. On the upper right, as I indicated, our announced footprint reductions have now surpassed our goals of eliminating 15 to 20 million units of high cost capacity by the end of 2008. Although we've exceeded our goal in this area, we're never satisfied and, therefore, we continue to review opportunities to further reduce that high cost capacity around the globe. In the lower left quadrant our Asian sourcing initiative, driven from our Shanghai office, has increased the portion of Goodyear purchasing being done in China. While a nearly $200 million of sourcing in 2006 delivered nearly $35 million of savings, this initiative will accelerate over the next two years, as the ground work that we've laid over the last two years begins to pay offer.

Finally in the lower right-hand quadrant, our selling, administrative and general savings initiatives in 2006 totalled more than $100 million, as I mentioned. So to summarize on cost, after one year of execution against our cost plan we have made substantial progress. Total cost savings already identified of nearly $600 million validates the upward revision to our target -- of our target to over $1 billion during this 2006 to 2008 time period. We are revisiting our three-year target with a view of raising our goal and will provide more clarity as the year progresses.

As we said on our January conference call, please note that the steelworker contract savings are largely incremental to this four-point cost plan. That's a very important point. Contract savings are largely incremental to this four-cost -- four-point cost plan. The only potential point of overlap is the savings from the closure of the Tyler, Texas, plant. We anticipate the ongoing savings from this contract will be $300 million or more in our North American operation. Part of this $300 million savings will come from the closure of the Tyler, Texas, plant. But as we discussed in January, and I'd ask you to remember that most of the savings come from, A., better productivity, including more cost-effective wages and benefits for new hires, as well as from B., the elimination of retiree healthcare costs for steelworker retirees and active associates. So as $ich and I have both indicated here this morning, this is a 'see change' in North American Tire's cost structure and a key platform for us to compete profitably and achieve our target of 5% return on sales in North American Tire.

My team set our four years ago on a capital structure or a balance sheet improvement plan and we continued to execute on that plan. We are now at a stage where we can envision near-term achievement of our balance sheet goal of 2.5 times debt to EBITDA. With the completion of the sale of our Engineered Products business, where strong buyer interest has been unaffected by the strike, and the benefit of an equity offering, we believe we will have the capital to reduce debt for more than $6 billion today to levels consistent with our goal. We would achieve the debt reduction goal while also seeing our unfunded pension obligations drop to about $1.8 billion by year-end 2007 and our retiree healthcare obligation drop to less than $1.3 billion to reflect eliminating the obligation to current and future steelworker retirees. Now, this obligation could decrease even further if actions that we are considering today for salaried OPEB reach implementation.

I want to make a few comments specifically on equity. I realize there are many possible views about when the best time is for Goodyear to issue equity, and we've talked with many of you about this subject. And there are many views about whether Goodyear should take actions to reduce debt near term or wait. To be clear on our position there are three-point I would make. First, we need a balance sheet that provides us with reliable access to capital throughout the economic cycle. This is a critical competitive issue for us, given that we have competitors who are investment grade and, therefore, have this capital access today. Second, achieving this position is something we need to do sooner rather than later. We believe it would be inappropriate to take the risk of an economic downturn or another external factor preventing us from driving our future performance when we can take immediate steps to ensure our performance.

Third, we believe raising additional equity capital is in the interest of our shareholders. Why? Because it will facilitate our ability to drive greater value in the business going forward. While the prospect of achieving these major balance sheet milestones and the related savings and benefits cost and interest expense are exciting, I am not able to add specificity as to expected timing this morning. Changing associates' retirement plans, selling a major business unit and, particularly, raising additional equity capital are certainly amongst the most complex corporate finance decisions a company phases. We intend to ensure these decisions are made and executed exceptionally well.

A further improvement in our business platform is a sharper focus on businesses and targeted market segments where we can grow profitably. We have taken actions to exit businesses where we could not successfully compete. An examples here include our North American farm tire business, certain segments of the private label tire business -- particularly the wholesale piece of that business here in North America -- and tire fabric production. Now these actions not only freed up capital but they allowed us to allocate resources much more efficiently going forward. These actions add to prior significant changes in focus where we have achieved positive results, including our focus -- intense focus on the truck tire business a more selective approach in the consumer OE business.

Want to talk for a minute about pace and speed. Combine this core business focus with strong top-line growth, a better cost structure and a stronger balance sheet and you have a business that is capable of moving forward at a much quicker pace than anything you have seen to date. As an indication of that pace, let's simply consider the announcements we made since the steelworker agreement was reached at the end of 2006. We announced the elimination of tire production in Valleyfield. We closed our unprofitable operations in Morocco. We signed the new five-year agreement with NASCAR.

We introduced impactful and innovative new products in North America and Europe, including the Goodyear Eagle® F1 all-season tire, the Goodyear Wrangler® SRA light truck and SUV tire and the Dunlop® SP Sport signature all-season high-performance tire. We launched our new 'Get There' advertising theme, beginning a new direction in North American Tire marketing and a new attitude in our Company, 'Get here.' We brought our North American factories back up to full pre-strike production before the end of January. By the way, that's much quicker than planned and much quicker than we have done historically. We repaid almost $1 billion of borrowings under our revolving credit lines. So these five directions -- top-line growth, cost reductions, balance sheet improvement, focus on core businesses and pace and speed -- collectively represent a dramatic change in our business platform.

In essence, we're building on the momentum in new products and marketing that we have established over the last few years and we're combining it with a 'see change' in our cost in capital structure. These changes and the speed with which we can now drive them create tremendous opportunity for future profitable growth. We continue to believe that these platforms will enable us to deliver on our next-stage metrics. As you recall. these metrics are an 8% return on sales globally and a 5% return in North America, along with, as I already mentioned, the 2.5X debt-to-equity target.

We'll open up the call for your questions in just a minute, but first I wanted to quickly touch on the industry environment that we see for 2007. For the full year in North America we expect the consumer OE market to be up approximately 1% and the commercial OE market to be down, and to be down as much as 20%. And you'll recall here that that reflects the spike in commercial truck sales ahead of this year's new EPA regulations. The consumer replacement market in North America is expected to be up 1% to 2%, clearly much better than the industry volume decline we saw in 2006, while the commercial replacement market is forecasted to be relatively flat. Just for a bit of flavor, we expect a continued mix shift in consumer replacement toward larger part rim sizes and more high-performance tires, driven in large part by OE fitness. We also expect the North American supply/demand dynamic to be favorable, given announced industry-wide capacity reductions of approximately 43 million units over the past three years. And those are announced capacity reductions, some of those yet to be implemented, 43 million tire units.

In Europe for the full year, we expect the consumer OE market to be flat to down 1%, and the commercial OE market to be up 4% to 5%. The consumer replacement market in Europe is expected to be flat to down 3%, as winter tire sales will face a difficult comparison with 2006. Why? Because, as you recall, in 2006 we had German legislation that created a boost for winter tire sales, while the commercial replacement market is forecasted to be up 1% to 2%. For raw materials, naturally we continue to see quite a bit of uncertainty, primarily driven by a significant volatility in the cost of natural rubber. Due to this volatility it is difficult to project 2007 raw material costs. However, based on our current projections, we expect raw material costs to be flat in 2007, better than the challenging 2006 increase of 17% for Goodyear. Now this estimate could change significantly, based on changes in the cost of natural rubber or other key raw materials, as we go through the year.

Our estimate for interest expense is $520 million to $540 million. This is higher than the 2006 levels, due to the additional interest expense that's associated with the senior notes we issued in the four -- during the fourth quarter of 2006. For capital expenditures we are forecasting investments of $750 million to $800 million for the year as we accelerate our conversion of capacity to high value-added product and increase the productivity and efficiency of our remaining manufacturing facilities. Our covenants, by the way, permit CapEx at these levels and even slightly higher. For modeling purposes, our tax rate guidance is unchanged at approximately 30% of international segment operating income.

And with that we would like to open the call to your questions.

Thank you, sir. [OPERATOR INSTRUCTIONS] Your first question comes from the line of Himanshu Patel with JPMorgan.

Hi, good morning, guys.

Good morning, Himanshu.

Bob, I just want to go back to a comment you made. Did say you guys were looking to raise your long-term cost targets. and if so can you go back to slide 21 and give us a sense for which one of those four buckets you see the most upside in?

Oh, okay. Himanshu, yes, remember if I go back to September of 2005 we indicated at that point that over three years, '06 through '08, we were driving for $750 million to $1 billion in cost. Then we revised that last summer to $1 billion. And now we look at our situation, the success we've had, some of the initiatives that we've already put in place and more initiatives that are still in the planning stage, and we're going to go above that $1 billion. But I said is that, as we progress during the year, we'll be more definitive in that regard. But I think you can look for -- from our standpoint, we're looking very hard at continuous improvement. I mentioned in my comments that reduced footprint, we're above the goal that we set of 15 to 20 million units. We're at 21 million units today. We're looking to go beyond that so we continue to look for opportunities there.

Asian sourcing, we're off to a good start, but really we've just created the ground work for being able to drive more improvement. Selling and administrative and general, we continue to look significantly in various parts of the world at back office consolidation, legal entity changes, et cetera. So we're really looking at all four of these areas and saying there's ample opportunity, and that should be a stimulant for us to take our number above $1 billion. And when we have more precision on that we'll provide that precision.

And on a related question. the whole issue of salaried healthcare, I understand it's a sensitive issue, but can you explain what are the limitations in being able to announce something on that? Is it that you're -- you would like to time the announcement with some other announcements or is it simply you just haven't decided on the depth of the cuts that you potentially would want to take on?

Well, maybe I'll kick this off and then Rich or Darren will have comments. But, look, this is a very complex area, involves a lot of critical and people to our Company. We're not going to announce anything until we've really thought this through and have thought through what the adjustments imply to our people, not only to our financial performance. Rich and Darren, I know you guys --

I think I simply echo the point and say it's really an internal process and I don't think there's much more to read into it than that.

Okay. On the equity offering, I understand no numbers, but if you dial back to six months ago versus now, clearly your cost structure has improved, I imagine your internal expectations for cash generation has improved. Is it fair to say that, even though you'd like to do an equity offering, at least the magnitude of the size of the offering perhaps you may have down-scaled that from your prior expectations?

Rich, do you want to --

No, I think -- obviously, Himanshu, we expected the question. It's one that we get very often. And I would tell you we have -- I think steadfastly, when you've heard myself and particularly Darren talk about this, we've kind of steadfastedly -- steadfastly stuck to our capital instructure -- capital structure improvement plan, and in there we've also said an equity offering would be something that we wanted to do that would have a meaningful impact to us, and particularly to our debt to EBITDA ratios. And I think that theme still holds. I think the only thing I would add is that, as we talk about putting equity into the [z-book], what might impact the size that perhaps we initially thought of would be, what if anything, happens relative to putting equity into the z-book. That's really where we're at. I wouldn't say that we've really changed our mind. And frankly, Himanshu, that's why we've never really formally put out a particular dollar target that we wanted to raise equity on.

Sure. But if your targets were capital structure based, where you were looking at two and one-half times debt to EBITDA, presumably your EBITDA projections have risen and so -- I think would it be a fair deduction from that that the magnitude of the offering that you were looking at perhaps has changed because of that as well, or am I not thinking about that correctly?

Well, I think -- and I'll let Darren comment as well -- I think the one thing that you should also think about as we go forward is the fact that now we're sitting at a little over $6 billion in debt here in January. Therefore, you can presume improved EBITDA correct going forward, but we also have some higher debt as well as we sit here today, which perhaps wasn't there when we looked at this a year ago.

Himanshu, I think this also highlights it, and you're highlighting a number of factors and we would say, yes, there are a number of factors that play into this decision. So a lot of moving parts and, obviously, we're going to consider all of those.

Two last quick P&L questions. How do you guys feel about price mix? Plus 7% revenue per unit improvement in '07, very good, but obviously, the raw materials inflation pressures are also moderating. How should we think about price mix in '08? Does it get better or worse than where we were in '07? And number two, you guys talked about I think a fairly sizeable lingering strike impact on the P&L in the first half of '07. How should we think about that number? If your plants are already up and running in January, is this really all concentrated in Q1 for the most part or does this even spill-over into Q2?

Okay. Himanshu, I'll -- let me get the first one and, Rich, maybe you take the second one? With regard to the price mix, we're not going to give guidance on specific numbers, but you know that everything we're doing is focused on a richer mix in not only our product -- and new products are obviously a great accelerator, if you will, of that for us, and I think our new product line-up in '07 is even better than it was in 2006. So that's point number one. Also, brand mix, very important here, and we are doing well in terms of market share -- strike short term aside -- with regard to our key branded mix. And our customer mix is getting better and richer all the time. So those three areas are areas that we're going to continue to push. Obviously, where raw material costs goes is another factor that we've got to consider there, but that's how I'd answer your question. And, Rich, you maybe take the strike impact in '07?

Yes, I think the way to think about the '07 strike impact, the $200 million to $230 million impact particularly, is really to think about comparing it to Q4. Q4 was by and large -- let's just use the 80/20 rule. That's not perfect but most of the unrecovered overhead '06 was little -- fewer of that impact in lost sales. When you get to '07, you kind of invert that and say the lion's share of the impact is going to be going and recapturing the sales, or really the impact of lost sales in 2007, with a lesser extent due to unabsorbed overhead. So you're thinking about it correctly that most of the under-absorbed overhead piece is going to hit us in January. The rest of the impact really is going to be just catching up on getting those -- getting those sales back. And as we build those tires -- and keep in mind, a tire is not a tire. Really the sales that we 're looking for are those Goodyear branded, high value-added tires and, Himanshu, that will take us awhile to get those sales back. So getting those sales back will extend beyond Q1. Although a good bit of that $200 million to $230 million will hit in Q1, there will be a lingering impact over the rest of the year.

Thank you.

Thanks for the questions, Himanshu.

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

Good morning. Can you hear me?

Hi, Rod. We can hear you. Might be a little quiet.

Okay, I'll try to speak up. How much inventory are you guys needing to rebuild now, post the strike?

We can handle that a number of different ways. Darren, you want to kick it off?

Yes, let me kick that off, Rod, because I think it ultimately gets to an important cash flow question. And I think that as you look at our balance sheet, you'll see that working capital was down substantially at year end. We generated in the fourth quarter this year I think $700 million more cash than we generated a year ago. And what we've said in our K -- and you may not have gotten to this commentary, yet -- but we would say $400 million to $500 million of working capital improvement in North American that directly related to the strike. So we're -- which Rich had in his remarks. I think really we're foc -- I would focus on that $400 million to $500 million. I mean, that was the working capital benefit we got in the fourth quarter related to the strike. So as we rebuild, inventories and receivables start to rebuild as well, then some part of that, obviously, is going to come back, although we will keep the number as small as we can.

I think that's a key point there. Frankly, the strike had some positives, some benefits for us, and one of them is -- one of those benefits is in this whole area of supply chain and inventory management.

Right. Well, just thinking about the lost sales, the absolute inventory level is not that much lower than it was at year-end last year, so is there some -- aside from just not having the right inventory, is there some other measurable impact from the strike on market share?

Rich, you want --?

Rod, just let me come back to your inventory comment. You bring up a good point. On a dollar basis, inventory's about $2.8 billion last year and this year, but when you look at the unit content, we don't particularly talk about units but I will tell you our units are double-digit down versus last year. So that dollar amount really isn't in the units we have, it's in the dollar -- it's just in the raw material costs that we have in there. Now that said, I think from a share market comment -- and Bob can add this as well -- I think our intension and our plans are that any -- any share that we need to get back we can, but remember on our branded products we actually gained a little bit of share in 2006. So we do have some customers out there who -- whose orders we need to fill, and that goes back to my earlier comment about building -- filling those orders over the balance of the year. We view that as just part of what we need to do in 2006. And I think if you talk to our customers, you'll see that they are with us and, in fact, we really did very well with those customers over the course of the strike, so we don't view that as a long-term lingering issue.

But our clear goal is not to rebuild inventory to the unit level that we needed before. We think we can be much more efficient in our supply chain.

Okay, and how should we think about the impact of the exited businesses in '07, and this contract for Hummer tires, is that a big -- is that a big drag on a year over year from a profitability perspective?

Rod, there's a number -- again, it's a broad question, let me address one thing specifically. With the U.S. military we're still going to be providing them with tires. The contract, which was won by Michelin, is a supply contract. They act as the supply chain manager, if you will. For the next year or two we 'll be selling the same -- virtually the same number of products that we have and we'll continue to run our plants full in those areas. So that's one comment, clarification. Rich, I know you've got another --

Relative to the exiting of the wholesale private label business,there, Rod, the only impact that we'll really see is really, as I mentioned, getting out of some of the factories and really resizing our footprint. You'll see some of the inefficiencies, some of that under-absorbed overhead, as we close, particularly Tyler, in the back half of the year where you can see -- it's not, quote, restructuring per se, but it is, in effect, a part of that plant closure and that's the impact you might see.

That addresses, Rod, your question, but it also speaks to part of the question, Himanshu, that you mentioned.

One last one. It look like you guys are pointing to a $0.22 clean number. I just wanted to confirm that that does not include any impact, I guess, through some kind of reserve that you've set up for this for this $300 million of steelworkers contract savings or the $50 million of savings from Canada and Morocco.

No, Rod. I think that what we try to do is really -- we put it in the slide presentation, we put it as an attachment to the press release -- and I think those are the items that we want to highlight for anyone looking at our numbers to consider as they do it. But there are no -- particular to your question, there's no such reserve that you're speaking about.

Okay. All right. Thank you.

Thanks, Rod.

Your next question comes from the line of Kirk Ludtke with CRT Capital.

Good morning.

Hi, Kirk.

A follow up to Himanshu's question about pricing and mix. I think you suggested that mix would be a positive in '06 versus '06, and I didn't hear you mention anything about pricing. I thought maybe you could give us an update on some of your -- the successes, some of your more recent price increases?

Well, I can speak historically. I'm not going to give a forecast here on price, but just historically speaking, I think if you look at North America, we've seen I would call it good pricing discipline in the market as we've gone through 2005 and 2006. I think that, as I mentioned, the supply/demand situation in North America, with all this capacity coming out, will certainly help that situation and that discipline. The pricing situation in Europe, as Rich mentioned, was I would say hot and competitive during the -- particularly the first quarter of 2006 and has improved certainly during the second half of the year, as I think everybody's recognized what was really happening with raw material price escalation. So that's basically my summary, Kirk, of where we -- of where we've been. As I say, going forward, depend on a host of thing, not just raw material increases but competitive dynamics. Our clear goal is to create great product lines backed up by great marketing and dealer relationships so we're, quite frankly. less vulnerable to whatever pricing may take place in the general market.

Okay. With respect to the CapEx guidance, it's a little bit higher than I was expecting and I was curious if the '07 guidance is a good run rate to use for the out years? And secondly, if you can give some color as to what you're spending the money on in '07?

Yes, yes, it is a higher number than we've had these past five or six years, and I think it's appropriate that we're spending at this level. And essentially, that money is being focused on the -- following the market in a sense. Following the market moves to more premium products -- I called it, in my comments, high value-added products -- so we're following that market move and being aggressive certainly in that regard. Some of that money for us, as we accelerate our new products, we're spending some of that capital to be able to make the outstanding new products that are coming out of our product engine here at Goodyear. And also we are intensely focused on looking at ways that we can take additional cost out of our factories or create more efficiency. And so those three areas are absolutely critical for us in terms of that capital spend. In terms of your comment about capital going out beyond 2007, we're not going to quote a number. I think I'd simply say that the number for '07 is certainly a reasonable base for those projections.

Kirk, I'd also add that, remember with the strike, we spent a little bit less in 2006 than we intended. therefore you're seeing a little bit of that made up. And remember, our focus is on getting our capacity to make the tires that we can sell at a higher margin in the marketplace. That's what those dollars are going to, and that's really priority number one. So you're going to see us spend that money and those things in place as soon as we can.

But I'd say it's very -- look, when we set out on this turn-around path that we've been on four years ago, we said we were happy with the money we were spending in R&D. We said we were happy with the money we were spending in marketing, which we consider an investment just like R&D and CapEx, and we'd adjust that marketing spend a little bit over time. And we said in CapEx, if there was one area where we needed to pick up our investment it was in CapEx and you're seeing us start to do that.

Right, okay. And then last question, which is the toughest one. I think you've mentioned in the past that you wouldn't do an equity offering that wasn't accretive, and I'm curious if that's still the case? And maybe you could walk us through some of the math as to where the cost reduction on the interest expense side and the reduction in the tax rate and any other benefits of an equity offering you might see?

Okay, Rich --?

Kirk, I'd say one of the things that I've said continuously that as we think about an equity offering and fixing our capital structure we would do that in the interest of creating long-term shareholder value, and that's really been the key focus of what we've been doing. I think in terms of some of the things that you're mentioning, I think as we think about it -- and it's probably a longer discussion to go through here -- is as we get our capital structure in line, a lot of good things continue to happen, like bringing up cash overseas, where a lot of our unsecured lines went away when we lost our investment grade credit rating. As our credit rating would go go up as we delever, our degrees of freedom overseas go up. It allows us to send more cash back here. It allows to us take interest expense out of the U.S., where we get no tax benefit for it and strategically place it where we can actually get a benefit for it. So a lot of those good things happen as we fix our balance sheet and as we fix the capital structure. So when you say accretive, I would say our goal over the long-term is really shareholder value creation and we still firmly believe that.

Is there any guidance as to how many basis points you can take out of your interest expense and what your tax rate goes to if you succeed in all these initiatives?

Darren, you --?

Yes, I was going to say, Kirk, that -- and we can and I don't think I'll do it now -- but obviously you can go through each piece of debt and the provisions for repaying that debt are all a matter of public record. I won't run through them, but I think that's -- yes, that is something that we can have an off-line discussion on, just [inaudible] the information that's available there.

Great. Thank you very much, guys.

Kirk, thank you.

Your next question comes from the line of Jonathan Steinmetz with Morgan Stanley.

Thanks. Good morning, everybody. Can you hear me okay?

We sure can, Jonathan.

All right, so a few follow ups. First on this whole pricing and mix versus raw materials, is it reasonable to think, though, if you are guiding to flat raw materials that we should see at least some benefit from price mix versus raw materials, given the price increases that have been layered in throughout the year?

I think -- I'd say almost axiomatic that we should see that.

Okay. On the capital spending side is there -- you gave a little bit of granularity on what's going into that $750 million to $800 million, but is there any project that would be consuming $100 million or $150 million, or something, that would be building a plant or anything like that, because I noticed that Asian CapEx was roughly flat and you talk about that being one of the areas you want to make progress on. Is it that done via building plants or is there more off-take agreements that you can keep the CapEx range to do it?

Jonathan, good question. I would say, overall, we're evaluating all the options. You're going to see off-takes from us in the low end, and naturally at this point we're looking at additional capacity, be it additions to current plants or other activities in low cost areas of the world, so we're doing both of those.

Okay, but there's no new major facility or something that's part of that $750 million to $800 million?

Not that we're ready to announce today.

Next, on the ad spend, can you just give the change in ad spend for the quarter and for the year?

We don't put out our ad spend particularly. We'll simply say that with fairly soft markets in 2006 and with the strike in the fourth quarter, we cut our ad spend back a bit. And I think our comment was that with SAG, year on year we were down about $100 million adjusted for FX, foreign exchange. And that the ad spend -- without the ad spend reduction it was about $60 million, so that's a bit of granularity there in terms of that calculation. And I mentioned that we're likely to see, if business develops the way we think it is, that that -- and by the way, that's not ad spend, it's total marketing spend, which includes promotion and all the other activities that we'd encapsulate under the marketing label.

Was that counted as part --

But it's likely to go up a bit in 2007.

Okay, and was that counted as part --

And we'll pay for that with efficiencies in other part of the -- other parts of the system.

Was that accounted as part of the strike impact number, the reduction as an off-set, or would that be a separate bucket, so to speak?

Separate item.

Last question for you, I'm a little confused on the $200 million to $230 million in terms of the first part of the year and some of the comments related to the negative effect from the strike impact in the first half of this year, can you just explain to me? I would think as you start to ramp back up and get orders I understand the cash flow impact but wouldn't you start to get a relatively good efficiency in the plants and why would that be a negative versus a positive?

Jonathan, it's only a negative in the -- it was a negative, I should say, in the month of January, as we restarted the plants. As we go ahead, we wouldn't expect relative to ramping our production up to get inefficiencies from the strike. That's the key as we rebuild our inventory. The other point, which maybe is confusing you, as we start closing Tyler, as Valleyfield gets closed, and we move around production, those are inefficiencies we may incur. Not strike related, just related to moving to a smaller footprint and moving production around.

Thank you.

But strike impact, $200 million to $230 million, that again -- again just 80/20 rule, and don't interpret those exactly to numbers, but the impact is going to be on lost sales as we rebuild our inventory.

Thank you.

Thanks, Jonathan.

Okay, I think that was the last question.

Yes, sir. There are no further questions at this time.

Maybe I could just make a concluding comment, then, guys. I think, as you can see, I'm very proud of the team for what they accomplished last year, despite a difficult set of business conditions. And I think the powerful business platforms that we now have in place, they excite and energize us around our future prospects. It is well worth reiterating here that we continue on track with the next stage metrics that I mentioned, and we simply thank you for your interest in the Goodyear Tire and Rubber Company. Thank you.

Thank you, sir. Ladies and gentlemen, this concludes today's conference call. You may now disconnect.