Goodyear Tire & Rubber Co (GT) 2007 Q3 法說會逐字稿

At this time I would like to welcome everyone to the Goodyear third quarter 2007 earnings release conference call. (OPERATOR INSTRUCTIONS) Mr. Dooley you may begin your press conference.

Thank you. Good morning, everyone, and thank you for joining us for Goodyear's third quarter 2007 results review and strategy update. Joining me on the call are Bob Keegan, Chairman and CEO, Mark Schmitz, Executive Vice President and CFO, and Darren Wells, senior vice president of finance and strategy. The webcast of this morning's discussion and the supporting slide presentation are available now on our website: investor.goodyear.com. We filed our form 10Q this morning. This morning's discussion will be available for replay after 3 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 and in the news release we issued this morning. 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. Thanks again for joining us today. Now I'll turn the discussion over to Bob Keegan.

Thank you, Greg, and good morning, everyone. Before we report specifics, what I see is an outstanding third quarter. I'll make a few opening comments that touch on key topics of interest for Goodyear. First, our product brand customer and geographic mix continues to be richer each quarter. In the third quarter, this is driven significant margin expansion despite weak market conditions. How did we achieve this outcome? By specifically targeting attractive -- i.e., high-margin market segments -- and market opportunities. Future planned investments will continue to be directed toward available high-return opportunities.

Second, joining me on the call today for the first time is Mark Schmitz, our new Chief Financial Officer. Some of you have already met or talked with Mark since he joined Goodyear in August, and I am pleased to have Mark on board for two important reasons. Mark's addition strengthens our leadership team with an experienced CFO who has a successful track record, who is intimately familiar with big brands and building those brands, and who has considerable international business experiences. In addition, Mark's presence allows Rich Kramer, who many of you know is our previous CFO, to focus his considerable business expertise solely on the operations of our pivotal North American tire business.

Third, I mentioned many times to you that innovation is now at the center of everything we do at Goodyear. While our innovative new products are the most obvious example of this, we seek to apply the same creativity to all parts of our business. This is true whether we are developing initiatives to target attractive new markets globally, developing strategies to optimize our price and mix gains, or creating innovative ways to address our legacy health care obligations for our steelworker retirees in North America through a VEBA trust. I'm particularly proud of our work with the VEBA concept, and we'll talk more about the status of our VEBA trust approval process later there the call.

We are certainly pleased with our third quarter results, and I would like to comment on the highlights of the quarter. Revenue grew more than 3% to a record $5.1 billion, despite lower unit sales that resulted from generally weak markets and our strategic decision last year to exit segments of the private label tire business in North America. Revenue per tire grew 7%, driven by our continuing price mix improvements. Robust demand for our premium products has resulted in supply constraints in many of our markets, and I highlight here that we've got those supply constraints because of robust demand, frankly beyond our forecast. And as a result, we are accelerating our planned investments to increase our capacity to produce high-value added tires and thereby increase our margins. Gross margin increased to 20%. That represents a 260-basis-point increase over 2006, and reflects price mix improvements, structural cost actions and significant growth in our operations outside of the U.S., where we enjoy higher margins. Total segment operating income grew 35%, generating a corporate-wide return on sales of 7.5%. And I would here remind you that the strike in North America started on October 5 last year, and didn't affect Q3 results. So our comparison versus last year's third quarter is a valid count. I would also point out that five out of five strategic business units closed to double-digit or better increases in segment operating income versus Q3 2006. North American Tire's Q3 segment operating income is the highest since the third quarter of 2001. And our emerging markets businesses in Eastern Europe, Latin America and Asia-Pacific continue to perform very well. In aggregate, these three businesses grew revenue 15% and segment operating income 24% versus Q3 last year, following strong performance in each of the past several years.

We made further progress against our four-point cost savings plan and remain on track to achieve our cost goals. We completed the sale of our engineered products business in late July, receiving $1.4 billion in net proceeds, a substantial balance sheet improvement. The sale resulted in a $517 million after-tax gain in the third quarter, and represented the completion of the capital structure improvement plan that we introduced in 2003. Obviously the work with regard to capital structure improvements is ongoing.

As I mentioned earlier, we continue to strengthen our leadership team. In addition to appointing Mark Schmitz as CFO in September, we announced that Mark Purtilar would join Goodyear as chief procurement officer. He replaces Gary Miller who's retiring after 40 years of contributions as a Goodyear associate. And Mark will oversee our global procurement strategy and be responsible for approximately $10 billion in annual purchases. Mark has a successful history of developing global procurement strategies to reduce cost, maximize efficiency and maintain quality, and this is an important area of focus in our company, and Mark will further help us accelerate our low-cost country sourcing initiatives. As I said before, our leadership team today is the best in the industry, and it's getting better every year.

We continue to focus intensively on the five business platforms that we've previously discussed with you. I'll update you on the progress we're making against each of the platforms. We remain focused on achieving profitable top-line growth, bringing innovative new products to the marketplace is key to achieving this goal, and our new product success continued during the third quarter. In North America, we've leveraged the success of a recent European product launch by introducing the Goodyear Eagle F1 asymmetric tire, yet another category-leading product, and this one in the summer ultra-high performance segment.

In Europe, as you will note on the chart, our new products continue to receive top recognition for their performance in the major magazine tests which are a critical factor in driving consumer purchase decisions in those markets. Our new product engine will be supported by investments to align our global manufacturing capacity with the demand trends we see in our industry. Our investment plans are clearly focused on high-return projects. Our investing goal is to expand our high-value-added, or HVA, capacity by 40% by 2012, and expand our low-cost capacity to approximately 50% of our total capacity by that same date, 2012. I think that it's critically important for you to note here that we will continue to apply the same disciplined approach to capital allocation that we have developed during the past five years, as we execute now against these future plans.

During the third quarter, consistent with our goal of expanding HVA capacity, we began investing in our plant in Fayetteville, North Carolina, and Gaston, Alabama. We have commitments for significant local and state government incentives in both states to help fund these projects. We are continuing our evaluation of potential new plants in Eastern Europe and Asia, and these investments, I think it's important to note, would support both our low-cost and HVA capacity expansion plans, and will allow us to capitalize on significant market growth in those regions. I don't have any further specifics to share with you today regarding these potential investments. However, we will provide updates in future calls.

Continuing demand for our new product, supported by increased marketing investment, allowed us to drive price-mix improvements in the third quarter. Price-mix gains once again more than offset raw material costs both in the third quarter and year-to-date.

Of particular note relative to the top line is the support that we continue to get from our customer base in North America. As many of you know, that was an issue several years ago. It's not an issue today. Our dealers are clearly with us, and we receive further confirmation of that at a recent national dealer advisory board meeting, where our dealers indicated that they were very bullish about Goodyear and our positive brand momentum. We are executing well against our four-point cost savings plan, having now achieved nearly $900 million toward our target of $1.8 to $2 billion of cost savings. Remember, that's by 2009. And Mark will go into more detail with you on the progress we are making there. We remain focused on further deleveraging, and reducing our interest expense, most of which, as you know, is not tax-deductible.

With regard to our VEBA trust for current and future steelworker retirees, the parties have signed the required settlement agreement, which was filed in federal court yesterday, October 29, and that's a major step forward in the process. Now, given the required steps in the legal process, including the required 90-day notice period following preliminary approval, we now anticipate having the process completed during the first half of 2008. And while this delays the cost savings, we expect to achieve the full annual run rate savings of $110 million once the process is complete.

As I said earlier, we completed the sale of engineered products in late July, and this allows us to lower our debt, lower our legacy costs and grow our core consumer and commercial tire businesses. We are evaluating remaining non-core businesses as part of our own ongoing strategy review, but have no definitive plans to announce at this point. Goodyear is changing at an accelerated pace, and you'll see that on slide 13. If you reference that slide, you'll see there an impressive list of key actions that we've taken since the beginning of this year. And our team is very proud of the cumulative impact of those actions. Although we're pleased with our third quarter results, we recognize that we will continue to face challenges in this competitive business. I want to just mention these challenges and indicate how we intend to address them.

First, we operate in a competitive industry, and our innovative new product engine, a focus on building our brand portfolio, an advantage supply chain, our rapidly improving marketing capabilities, and aggressive cost actions are keys to sustaining the momentum that we've established. Point number two, raw material costs rose nearly 5% through the first nine months of this year, and are likely to remain volatile. We are driving price and product mix improvements and increasing our ability to substitute lower cost materials to offset future increases. Point number three, while the global economy remains uncertain, we are reducing our fixed cost structure and positioning our capital structure to enable our company to compete more effectively through the ups and downs of the economic cycle. As evidence of our progress, our North American business is improving earnings this year despite substantially lower volumes. Point number four, as I mentioned earlier, we are experiencing short-term supply constraints in some key products. To meet the robust demand for our premium products, we are accelerating our investment high-value-added capacity and making major supply change improvements. To meet the demand for our products, our investment plans will require higher dollar levels of investment than in the past. And we will drive additional cash generation in the business through cost reduction actions and working capital improvements in order to help fund those requirements. We fully recognize that we face challenges, but remain confident that we have the strategies and the team in place to address them effectively, just, frankly, as we've demonstrated over these past several years.

We also remain confident that our execution against our business platforms will enable us to achieve our next-stage metrics. And you'll recall these metrics are an 8% segment operating income return on sales globally, a 5% segment operating income return on sales in North America, and a target 2.5-X debt to EBITDA, and in each case, for each of those metrics, you'll see evidence in the third quarter that we've made substantial progress toward those goals.

I'll now turn the call over to Mark to review third quarter financial results in more detail. Mark, welcome to the call.

Yes, thank you, Bob. I'd like to open my comments by saying I'm fortunate to be joining Goodyear in an exciting time, and look forward to working with Bob and the leadership team as we pursue growth opportunities and the cost improvements ---

As Bob mentioned, we're pleased with our third quarter results. My comments will be focused on the primary drivers of our financial results including cost savings progress and a discussion of the trends that we're experiencing in each region.

Turning first to the income statement, revenue grew by more than 3%, driven by continuation of price and mix improvements and favorable foreign currency translation. These positive impacts were partially offset by a 7% decline in unit volume as a result of the decision to exit certain segments of the private-label business in North America, as well as the continuation of weak conditions in several key markets and the short-term supply channels that Bob mentioned. Gross margin improved by 2.6 percentage points year-over-year. This margin expansion was achieved through price and mix improvements in excess of raw material cost increases, growth in our high-margin emerging markets operations and cost savings actions. These latter included the restructuring of salaried retiree benefits, manufacturing footprint actions and continuous improvement initiatives.

While the third quarter is typically a strong quarter for us in terms of gross margin, as we benefit from increased sales of premium winter tires in Europe, it should also be noted our ongoing investment program will continue to provide additional opportunity for a mix-driven margin improvement as well as cost efficiency Segment operating income amounted to $382 million, or 7.5% of sales, compared to $282 million, or 5.7% of sales last year, an increase of 35%. Each of our tire business segments increased its gross margin and operating income year-over-year.

Net income from continuing operations was $159 million, or $0.67 per share in the third quarter versus a loss of $76 million in the prior period. Reported net income included $6 million, or $0.02 per share, in rationalization and accelerated depreciation charges primarily resulting from the plan to discontinue production at our Tyler, Texas, facility. Gains on asset sales of approximately $10 million, or $0.04 per share, and additional tax expense of $12 million, or $0.05 per share. The increased tax expense was primarily due to the reduced value of deferred tax assets due to a tax rate reduction in Germany. We recorded an after-tax gain on the engineered products sale of $517 million, which is included in discontinued operations. All inclusive net income per share was $2.75.

Several items that impacted our results in the third quarter this year and last year are listed on the last page of our earnings release and in the appendix to the slide presentation. Slide 17 shows the factors which yielded the improvement in segment operating income in Q3 '07 versus the prior year. Price and mix improvements in excess of raw material cost increases yielded $156 million of the improvement, continuing the trend we've been experiencing all year. Foreign currency translation primarily in Europe and Latin America yielded $33 million of the improvements.

In addition we realized approximately $120 million in savings from our four-point cost savings plan during the third quarter. The savings came from successful execution in each of the four areas we've outlined previously. These include manufacturing footprint rationalizations, the salary benefit plan changes we've implemented earlier this year, as well as continuous improvement initiatives and low-cost sourcing. Remember, most of the savings from the steel workers' contract will not be realized until 2008 and 2009. Offsetting these positive factors were the impact of the $4.1 million unit sales decline, reducing segment operating income by $23 million in the quarter, along with inflation estimated at $110 million. Note that this excludes the impact of raw material prices which are netted against our price and mix gains.

We also experienced temporary manufacturing inefficiencies due to changeover in our plants to high-value-added products, the implementation of seven-day operations at to two of our North American plants, training of our new $13-per-hour associates, and inefficiencies related to the planned shutdown of tire production at our Tyler, Texas facilities. Selling, administrative and general expenses also reflected increased advertising which increased by $17 million year-over-year, much of it related to our Get There campaign in North America. Note also that selling, administrative and general also reflected the impact of foreign currency translation and higher cost for incentive compensation plans.

While we're pleased with the progress we're making on the cost savings, a large portion of the structural cost savings we're targeting does remain ahead of us. On slide 18, we show the annualized run rate savings in quarter three compared to what we expect to achieve once the structural savings are fully realized. You can see in Q3, we realize the full run rate savings from our salary benefit restructuring. On high-cost footprint reductions, we expect to achieve the full plan savings at more than $150 million compared to the $85 million annual rate reflected in Q3. This will include the impact of the planned shutdown of tire production at Tyler Texas.

The steel workers productivity savings are expected to ramp up as we realize the savings from the new $13 per hour labor. We expect to realize $140 million of run rate savings by 2009 for steel workers productivity, compared with a run rate of only $20 million in quarter three. And we expect to achieve full run rate savings of $110 million related to the VEBA for steel workers retirees which will begin once the legal process is complete.

Turning to the balance sheet, our cash balance at $2.9 billion is about $900 million less than year-end '06, although $1.6 billion higher than year ago. In addition to reflecting the proceeds of the sale of engineered products and our equity offering completed in May, the change in our cash balance reflects total debt repayment of more than $2 billion since the first of the year, offset by seasonal growth in working capital for quarter three as our highest quarter. This is due to sales of winter tires in European markets as our dealers stock up for the winter selling season.

Absorption of cash and trade working capital through nine months is about $950 million, $100 million more than last year reflecting our winter selling season and our continued recovery from the strike in North America. The trade working capital balance at September 30 was, however, flat versus a year ago, and day supply of working capital was lower than a year ago. Total debt as of September 30 was $5.1 billion, which is down from $7.2 billion at year end.

Now turning to cash flow for the first nine months of the year, cash flow used in continuing operations was approximately $200 million more than last year, reflecting the increased working capital consumption just mentioned as well as higher pension contributions through nine months versus last year. Through nine months we've contributed approximately $510 million to our pension plans and expect the full-year contribution to be in the range of $675 million to $700 million. In 2008, our contributions are expected to be about $300 million lower. Our capital expenditures were $450 million in the first nine months, and we continue to forecast spending of $750 to $800 million this year as we accelerate our investments in high-value-added and low-cost capacity. Overall while we don't provide guidance on cash flow, I do want to emphasize that we have sufficient cash to fund the VEBA and redeem the $650 million of notes that we've previously mentioned we would repay in quarter one, as well as the $100 million of notes maturing early next year.

Going forward, the continuation of improved earnings power, reduced pension contributions, reduced interest expense and an intense focus on managing working capital give us the wherewithal to fund increased capital spending at the same time that we delever. As ever, we remain focused on high-return capital investments.

As discussed earlier we made additional progress against our four-point cost savings plan during the third quarter. We are targeting gross cost savings of $1.8 to $2 billion by the end of 2009. To date, seven quarters into the four-year plan, we've achieved nearly $900 million of gross cost savings.

As shown in slide 22, we've made progress in each of the four areas. In the area of continuous improvement we achieved savings of more than $575 million to date. This includes savings from lean and six sigma initiatives and product reformulation, including raw material substitution. As discussed earlier, to date we've realized only a small portion of the savings related to the steel workers contract.

In the area of footprint reduction, we've achieved savings of approximately $50 million to date. This includes additional savings from the shutdown of tire production at our Valleyfield facility. As a reminder, the $50 million of savings related to the Tyler, Texas, plant will begin in 2008.

In the area of Asian and low-cost country sourcing we've achieved savings of approximately $75 million to date. The savings in this category relate to the work we're doing with third-party suppliers in low-cost regions. We continue to focus on qualifying additional third-party suppliers, a process which does take some time.

In the area of selling, administration and general, we've achieved savings of more than $175 million to date. This includes savings related to the salary benefit plan changes we announced earlier this year. Given the progress we've made to date in each of the four areas, we are confident that we will achieve our targeted $1.8 to $2 billion of gross cost savings by the end of 2009.

Now I'd like to discuss the results for each of our tire business segments. North American Tire segment operating income for the third quarter was $66 million, up significantly from the 2006 third quarter. This was the highest quarterly result for North American Tire since 2001. The significantly improved operating income reflects the company's strategic focus on improving our brand, product and channel mix, and on reducing our costs consistent with the plans we've outlined to investors.

The strong results came despite a period of continuing weak markets in North America. The weak industry and our 2006 decision to exit certain segments of the private label tire business reduced unit volume by 2.8 million units or 12%. At the same time, we grew share in our consumer replacement Goodyear-branded products and in our commercial replacement branded business. Our consumer signature technology products continue to win in the market growing at rates well above the market. Conversion cost was favorable in the quarter by $14 million, which was more than accounted for by a $30 million reduction in pension expense and other post-retirement benefits coming from our previously announced actions.

Several factors somewhat slowed our progress in conversion cost reductions. Many of these factors are transitional in nature, including unabsorbed overhead in plants that are planned for closure and training new workers in plant changeovers. This will create some temporary choppiness in quarterly results in North American Tire. Remember that most of our tire plants do not have extended shutdowns like you see in the auto industry. So new equipment and other changes tend to disrupt daily operations. We will, however, remain on track toward achievement of our next stage metrics, which in the case of North American Tire, is operating income of 5% of sales and toward meeting our ongoing goals.

In summary, despite a weak industry, North American Tire's earning trend continues to support prior decisions to refocus our business on markets where we can win, and we remain confident the manufacturing footprint changes, productivity and other structural cost reduction initiatives are gaining momentum and will overcome the transitional cost increases by a growing margin in the median term.

Our European Union Tire business has had record third-quarter results as sales and segment operating income grew 9% and 11% year-over-year respectively. While the European consumer replacement market has remained relatively soft, the commercial markets, particularly the commercial OE market, remain strong. We are taking advantage of this strength and leveraging available commercial tire capacity in North America to provide additional supply to our European business.

In the European consumer market, our new products continue to be very well received in the marketplace and our performance in recent tire tests, as Bob mentioned, is clear evidence that our product portfolio position looks well into the future. However, we continue to be challenged by our short-term supply limitations in some high-value-added market segments. We do have investments planned to overcome these supply limitations. Revenue growth was achieved despite a 6.5% decline in unit sales, which was driven by a soft consumer replacement market and supply constraints for high-value-added products. The volume declines were offset by price and mix improvements driven by new higher value added products and by favorable currency translation. Segment operating income grew due to price and mix improvements which more than offset higher raw material costs and by favorable currency translation. While we are pleased with our European Union results, supply constraints reinforced the need to accelerate our high return investments in premium product capacity in order to keep up with the robust demand for these category-leading products.

Our emerging markets business in Eastern Europe, Latin America and Asia continue to perform very well. Our sales in these three business segments grew at a combined rate of 15% while operating income grew by 24%. We expect the strength in these business segments to continue driven by favorable market conditions, the success of our new products and our aggressive focus on reducing our cost structure. For Eastern Europe, Middle East and Africa, revenue and segment operating income grew by 13% and 12% respectively. While we continue to experience strong unit growth in developing markets such as Russia and Turkey, Eastern Europe's overall unit sales declined by approximately 7%. The decline in unit sales was driven by the industry-wide strike in South Africa.

Revenue and operating income growth were achieved due to price and mix improvements which drove a 9% increase in revenue per tire and favorable currency translation. We estimate the strike in South Africa negatively impacted segment operating income by approximately $6 million.

Latin American Tire also had very strong results in the quarter as revenue and segment operating income grew by 20% and 29% respectively.

The original equipment markets have remained strong, and while replacement markets have improved due to a stronger economy in the region, our volumes have been held back due to supply constraints for high-value-added products. Sales grew due to the increased in volumes primarily in the OE segments, price and mix improvements, and favorable currency translation due to strong Brazilian Real. Segment operating growth was driven by increases in volume, favorable currency translation and price and mix improvements which more than offset raw material cost increases.

In Asia-Pacific, revenue and segment operating income grew by 12% and 46%, despite lower unit volumes. While volumes in developing markets such as China and India remain strong, our overall unit sales declined driven by our focus on high-value-added products in the Australian market and supply issues related to the fire at our Thailand facility in March. We've since resumed production in Thailand, although some supply constraints linger.

Despite the supply issues in Thailand, we achieved record third quarter results in Asia-Pacific. Revenue increased due to price and mix improvements and favorable currency translations. These improvements were partially offset by lower sales volumes. Segment operating income increased due to price and mix improvements and lower conversion costs. These improvements were partially offset by lower sales volume and higher selling, administration and general costs as we've invested in market development in countries like China.

Now, before turning back over to Bob to discuss the outlook, a brief personal perspective in the quarter would be as follows. I see in this quarter's results plain evidence that the company's strategic decision to emphasize high-value-added premium products was the right decision. This helps us in margin as well as providing opportunities to deploy cash in high-return, fast-payback investments. The premium product strategy, structural cost reduction actions, coupled with our proven ability in emerging markets, equal a robust winning operating strategy that has already set in motion a deleveraging cycle that will add to our financial strength and flexibility. And with that observation, I'll turn the call back over to Bob.

Thanks, Mark. If you'd just reference your outlook slide, we've updated our forecast for full year 2007 North American and European Union industry growth rates. I'll go through this rather quickly because the numbers are incorporated on the slide. In North America for the full year, our forecast for the consumer replacement market is up approximately 2% within the range of our previous forecast that we gave you at the end of Q2 of 1% to 2%. This follows a very weak 2006 market environment. We have revised downward our consumer OE market to approximately a 4% decline versus 3% at the end of Q2, and this reflects ongoing production cuts at our OE customers in Detroit. The commercial OE market in North America is unchanged for the full year, still down about 30%, and as you'll recall, that's a result of new truck emissions legislation.

We have revised the commercial replacement market to be down approximately 5% for the year; and again, our previous guidance was 4% as the demand for freight continues to be weaker than expected. I'm sure you're seeing evidence of that throughout the industry.

In the European Union for the full year, we've revised upward our forecasts for the consumer OE market. We now expect the consumer OE market to be up 1% to 2% versus flat, up slightly in Q2. Our forecast for the other three market segments is unchanged. So consumer replacement is expected to decline 1% to 2%. The commercial replacement market is expected to be up 2% to 3%, and the commercial OE market is expected to be up approximately 20% reflecting continued strength in European OE truck markets.

Our outlook for raw materials costs remains unchanged from our previous forecast, i.e., we continue to expect raw material costs to be up 4% to 6% for the full year 2007. Given recent increases, we are watching raw material trends carefully so that we are prepared to react quickly if prices escalate further. We are reducing our full-year interest expense forecast from $460 to $480 million, driven by lower short-term interest rates and lower than expected use of revolving credit lines.

Our forecast of capital expenditures is unchanged at between $750 and $800 million for this year. As we've indicated in the past, our capital expenditures levels will increase going forward, and while we had previously indicated that 2008 CAPEX would be about a hundred million higher than 2007, we now believe this number may move higher. We are in the process of reviewing our investment plans and will provide a forecast for 2008 capital expenditures on our year-end conference call once our updated plans for next year are fully developed.

For modeling purposes, our tax rate guidance is unchanged at approximately 30% of international segment operating income. And just before we open the call to questions, I'd like to summarize the key points that you've heard from us today. I know there have been many points, but here's a quick summary.

We have delivered an outstanding business performance in Q3, and that has, frankly, reflected outstanding performance in all of our strategic business units. We've strengthened our leadership team with the addition of a new chief financial officer and a new chief procurement officer. Our focus on our business platforms positions us for profitable future growth in our competitive markets. Our VEBA court approval process continues, and we remain confident that we will achieve the full run-rate savings associated with our steelworker contract here in North America. We continue to execute against our four-point cost savings plan and remain on track to achieve our goals through 2009. Robust demand for our premium products has led to supply challenges, which underscores the need to accelerate higher return investments and premium product production capacity, and we'll be implementing those plans.

So, we continue to improve. We have momentum in our markets. We continue to meet or exceed our goals, and we continue to become a tougher competitor. And I think, Greg, with that, let's open the call to questions.

(OPERATOR INSTRUCTIONS) Our first question comes from the line of Himanshu Patel of JP Morgan.

Hi, good morning guys. Can I get into the North American profit walk a little bit? I know you didn't explicitly provide it in the slides, but just looking at some of the details out of the Q, the volumes, it looks like the negative impact on operating income was about $4 million. That seems pretty low, given the magnitude of the volume decline. I'm wondering if you could give a little bit of color on that?

Okay. Well, let me maybe kick off by talking about the volume decline there. The private label -- the exit of segments of the private label business for us in the third quarter reflected about 1.6 million units, and so from a year-to-date standpoint, if we -- if we include the first half of the year, it's about 5.6 million units. Okay? So that's a big piece of that volume change. The other piece in North America is, of course, that consumer OE has been relatively weak, and that has contributed approximately half a million units in the third quarter and for the year-to-date, about 2 million units. And again, part of that is weakness of the market, and part of that is our selectivity, as you're well aware, with certain shipments from the OEs. We also have year-to-date, just a key point here. Remember we do still year-to-date have the strike impact, and we estimate that at about 1.2 million units through three quarters. So that's kind of the, if you will, the build up to what's happening from a volume standpoint.

I get that, but I'm just curious, it looks like the volume hit on revenues was about $184 million, but on operating income, it was only $4 million. Were these -- is this just another way of saying that the volume lost in the quarter was very low margin business for the most part?

Yes. Generally speaking, if you look at our overall strategy, it's to replace all the low-margin business with higher-margin business, and certainly from our standpoint, you're seeing that in the results. Frankly, if we didn't have supply constraints that are near-term supply constraints, that could have even been a bigger swing in a positive direction. And you see it in the revenue for tire.

Okay. Moving on that same segment in North America, the operating income hit from raw materials seemed relatively modest at about negative $8 million and I think it was about $25 million in Q2. I'm just curious, that obviously relative to what you saw in price mix in North America, that's a substantially favorable spread. How long can that continue? I'm not suggesting that you give guidance on the price mix front, but was there something abnormal about how raw materials costs flowed through P&L this quarter that sort of minimized the impact of that in North American results this quarter?

The quick answer, Himanshu, is that, no, there was nothing abnormal. I would mention to you that if you go back to last year, we see significant volatility quarter to quarter in raw materials, and as you probably recall, if you look at the market data we had, whether it was natural rubber or oil, a bit of a respite in the fourth quarter of '06. Then snapping back up to high levels in the first quarter of 2007. So that's affected us, consider about a quarter later in terms of the impact on cogs and on our P&L. So you'll always have those kinds of movements quarter to quarter, but right now I would say that we're making up for some of the increases that have flowed in terms of raw materials, but we're also doing an outstanding job on price mix of moving ourselves to, as I said many times, not only a better mix for product, a better mix for product, brand, our customer base, and if we extend beyond North America, geography as well.

Okay. Can I move to the balance sheet? You ended the quarter at $2.9 billion of cash. You have the VEBA payment to make at year end. What is sort of a level of cash balance that you guys are comfortable running the business with after these corporate finance transactions are out of the way? Should we think about sort of the $1.5 to $2 billion range going forward, or is there some room to even take that lower?

Well, we may all make a contribution to this, because that's a very broad-based question, but Mark, why don't you kick us off?

Himanshu, I think for the near term and Darren, I'm sure, will add to this, but in the near term we look upon a cash balance of $1 billion being the minimum level we need to run the business. Now, having said that, we do feel very comfortable with cash balances we're carrying right now, and given that a big piece of it is earmarked to a couple things in the near term, one being the funding of the VEBA and the other being the paydown of $650 million senior notes that we indicated we would be redeeming early next year. I think there's another $100 million note that matures there, too, so we're pretty comfortable going into the next year.

Okay. And then, on that same note, you've announced a lot of debt paydown, but it just seems to me given the cash balance that you've got right now, even after taking into account the announced debt payment plans and the VEBA, it feels like you could still take out the $495 million senior floating rate note. I think this is the [LIBAR] plus 375. Is there any thoughts on sort of that piece of debt at this stage, or do you just want to kind of see how the year shakes up and how industry conditions are next year before announcing something on that?

I think Darren can't wait to make the comment.

Himanshu, I think it is something we want to be somewhat cautious about. But here's the way to think about where we are today and where we're going to be after these paydowns. If I take the $2.9 billion cash balance, about a quarter of that is around $800 million overseas, so that leaves about $2.1 billion that's domestic. And Mark just walked you through what amounts to effectively $1.7 billion or so of uses that are all domestic uses. So I think the pro forma for those that you'd find a domestic cash balance, and given September is our peak working capital, in terms of seasonality, you can still find the domestic balance is at a level that I don't -- I don't view as excessive.

Okay. Great. And then last question, the interest expense guidance on slide 4 of the appendix, I think it's calling for $60 million lower year on year. That seemed relatively light just based on what you've announced year-to-date. What are the assumptions behind that? Are you assuming some interest costs going up in terms of interest rates, or is there -- maybe I'm just doing the math incorrectly. But it seems that after you do the March paydown as well, that number should be a lot lower than $60 million below the '07 level.

Himanshu, this is Darren. The $60 million that you see on the page is essentially a reflection of three quarter's worth of impact of the two pieces of debt we plan to pay down in March, the 650 and the hundred. And those two combined would have interest expense a little over $80 million annually. So it's really nothing more than three-quarters of that.

I got it. Okay. And then last question. I'm sorry. One more. The plans on capacity expansion, you guys have talked about this for a few months now. Any more color you can give us? Are you looking to Greenfield facilities or is there a chance to buy some existing facilities? Any sort of better granularity on whether you're leaning toward two facilities or one facility?

Himanshu, we'll simply say, I think, if you look at our forthcoming investments you should look at them in a couple of categories. By the way, they will cover both passenger tires and commercial truck tires. So you should be thinking about it that way. I'd also mention that some of that investment will go into strictly modernization of existing facilities and creating the ability to manufacture the premium high-margin products that we want to be able to market, and then we've said that we are looking certainly at potential new sites in Asia and in Eastern Europe. And we're not prepared today to give further direction there, but we would be prepared as we go forward to provide you with some more specificity obviously than that. But I think it's important that you think truck and passenger tires, and it's also important you be thinking about modernization of existing facilities. As I mentioned in my comments with regard to Fayetteville, North Carolina and Gaston, Alabama, just two examples in North America, but there are many other examples overseas, and in addition the potential for new sites in Asia and Eastern Europe. These are all directed at the premium-market segments with high margins, and I can guarantee you, Himanshu, we look at this in terms of capital allocation with everything that we've learned over these past five years or so, we'll be very careful. These will be high-return projects, each and every one of them.

Okay. Thank you.

Thank you.

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

Good afternoon, everybody. A couple things on the cash flow, this $950 million use in working capital is here. How should we think about working capital going into 2008? You're expanding on the high end but pulling back on the private label. You know, net, is that -- is that going to be a plus or minus?

I think the first thing to kind of position yourself on, the working capital use this year, has been that we've been in a strike recovery mode. We've been -- we were first building inventories, then building receivables, and in addition to that, you see the high point of the year, Rod, at quarter three in our European business in particular where we have the winter selling season. So receivables at this point are very much at a high point in Europe. And most of that growth has probably been in receivables this year, and looking forward, your question is asking how should we see this going forward? This is a really -- it's an area of intense emphasis for us right now. We think we have opportunities in working capital, and do recall that we were seeing some of the progress already, even though the use or the absorption of working capital has been fairly high this year. The balance is even with last year, and day supply is actually down. I hope that helps some, Rod.

Okay. So you're saying there's an opportunity there? I mean, what does that mean for 2008?

Well, Rod, again we won't give specific guidance on '08, but it's certainly our goal to continue to take days down in terms of working capital. As I mentioned in my comments, we see that as kind of an imperative here for the company to be able to make the other kinds of investments we'd like to make outside, if you will, the area of working capital, be it in new manufacturing facilities or to continue to invest in marketing initiatives that, in fact have driving the kinds of richer mix that you now see us now producing.

Okay. On the capital spending, do you have a target IRR that you can share on these projects?

We don't share a specific target. I'll simply say, Rod, you can assume well above our cost of capital.

Okay. And can you go into just what exactly happens from here on, this VEBA? You mentioned the 90-day waiting period. Is that from yesterday, so do we count 90 days from yesterday and that's when it gets implemented?

No. We'll kind of walk you through the sequence of events here which, Rod, I'll just say up front, yes, we thought we'd have this progressed further than we have at this point. But I can guarantee you that that's not because the steel workers or Goodyear have tried to slow it down. We're in the legal process which is fairly complex. And Darren, if you would kind of go through that here, we can give you the highlights of that process.

Yes. Rod, as Bob mentioned, we've got the settlement agreement filed, which was sort of the key step two in the process. Now what we need to wait for is for the federal judge to give preliminary approval to the settlement, and once he has done that, which should happen in the very near term, once he has done that, then the 90-day notice period to the class members begins. At that end of that 90-day class -- that 90-day notice period, there would be a fairness hearing, and following the fairness hearing, within short order there would be a judgment rendered sort of giving final approval to the settlement. So that's --

Just to comment, there is, at the end of that, still a 30-day appeal, if there is anybody that wants to appeal. If there are no appeals, the settlement would probably take place and we'd proceed.

Okay. The next milestone then is the federal judge approval? Is that, like, a couple weeks?

That's -- And we say that's -- that's in process for the relatively short term now.

Okay.

That's why yesterday's move with the filing yesterday was so critical for us. That was a critical stage to get over.

Okay. So like a week or two or something like this, we should see another milestone occur?

Well, we would simply say we're thinking in terms of what we know today, a matter of weeks rather than months.

Okay. The productivity that -- the steel workers' productivity targets that you've set out, can you just talk -- you've mentioned that you're hiring $13-an-hour people. What's the target for 2008 productivity? Has that changed, and is there any execution risk that you see related to that?

Yes. Actually, Rod, I'd say that we're probably at or even above target in terms of the pace we're bringing on $13-per-hour workers. However, most of the savings are still in front of us. You'll see only the $20 million type of numbers so far in our results. So that big amount of the structural savings is still out in front of us. We talked about transitional difficulties, transitional inefficiencies that we've faced in the third quarter, and a lot of that does have to do with the learning curve and the training associated with the $13-per-hour workforce. So it's a little hard to be predictive in terms of specific timing and when the savings come in, but we can clearly see them. We're going to realize those savings.

Okay. You previously put out a little bit of, like a calendar on how these things roll in. Is there any reason to believe that would change meaningfully at this point?

Rod, I'd say relatively to what we put out, none.

Okay. Lastly --

But I will say that -- of course, we're learning -- the steel workers are learning as we go through this -- as we go through this process, but there's nothing we see today that would cause us to change the goals or the rough timing in which those goals will be executed.

Okay. My last one is the Q shows pension expense down $65 million -- $67, I know you guys book these expenses into inventory and it's a little more complicated than what we see in these tables. So could you just give us a sense of what we've seen already? Is that in your conversion costs and how does that ramp from here?

Yes, Rob. I think what you would have seen in the third quarter is a full run rate savings for the actions we've taken. I think we talked in the second quarter that we did not see a full quarter's worth. So what you saw in the third quarter is more or less what we would expect to get from two key things. One the higher funded pension level at the beginning of this year and number two, the actions we took to restructure salary retirement benefits. So I think in the third quarter we're at our run rate for those structural savings.

Okay. Because I'm looking at the numbers. It looks like maybe $120 million or so. Is that what the four-point savings plan, that $120 million is related to?

No. I was going to say certainly part of the $120 million in the third quarter does relate to pension and OPEP savings that relates to the salaried retirement benefits restructuring. But I think if you break it apart you'd find part of that -- part of the salary benefits restructuring comes through as SAG, part of it comes through as conversion. But I think, for the quarter, we would be talking about savings that are -- if we take all pension and OPEP together, more in the range of, I guess, $50 million or so that come through the savings plan.

Right. Thank you.

Yep.

Thanks, Rob.

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

Good morning, guys. You've mentioned the capacity constraints a number of times, and I was curious, is there any way to quantify how much of your revenue is constrained?

Well, I would start the answer by saying yes, it is possible, but those estimates are always somewhat crude, because you're looking at demand that you haven't actually realized and trying to estimate how much it is, and back orders and things like that don't totally accurately reflect that. So we're very hesitant to put out a number, but I would comment that, okay, what are we doing about that? One, we're moving towards getting higher productivity out of the assets that we currently have. So that's a very short-term type of potential resolution. Number two, remember, we do have third-party sourcing in parts of the world particularly at the low end of our product line, and we'll continue to be aggressive in terms of those options, and then, of course, the third potential resolution is the investments that we have talked about, but we're pushing all three of those. But it's -- these are reasonably significant constraints, and I would tell you that in large part it's because a year ago, two years ago, we underestimated how much we could grow our demand for key Goodyear and Dunlop products, frankly. And we've underestimated a bit. Now we're playing catch-up. I guess if you're going to have a problem, that's a relatively good problem to have. But I would say it's -- it's material. So once we make the new investments, once we do a better job at third-party sourcing, once we do a better job at getting more productivity out of current assets, this will be a powerful thing for us, not only for our top line, but what we're interested in obviously is for better margins.

Okay. Thanks. Shifting gears to imports, we've had a major move in the dollar here, and I would think that it would be a positive for the domestic tire manufacturers, the fact that the dollar is weakening, and I'm just curious if you see it that way now that you're also an importer.

Yes.

And also is it causing a shift in the tires coming from outside the country to higher price points.

We've had a lot happen this year. You've got the weak dollar, which obviously -- if I combine the weak dollar with our latest agreement with the steel workers, with the potential of new investment in our North American plans, that means we're in a very different competitive situation this year than we were a year ago or two years ago. As we brought on $13-an-hour labor, as we've reduced benefit cost, obviously we're more competitive in North American plants. The other thing that has happened here in addition the dollar is with the price of oil where it is today, obviously freight and transportation costs across large areas -- large geographic areas have gone up significantly. And you've had in China the change in their VAT, which is in effect, taken the value added tax up by 8%. So we're seeing that in terms of let's say tires that we source from China, but that is an industry wide phenomenon. So there's been a change in the balance, but those of us that are used to operating in global businesses know that foreign exchange moves in both directions here over time, so we're not particularly comfortable that that's taken place in saying we're now going to change our investment decisions. But it's clearly affect the geographic competitiveness, if you will. We said to you before that in Latin America, Eastern Europe we can match China and Asia costs while North America has become much more competitive over time. On the other hand, western Europe has now, because the euro has obviously been strong relative to the dollar. So we continue to look at those things on a regular basis. We try to make our investment decisions based not on what's happening today, but what do the fundamentals tell us will be happening out three, five, ten years into the future.

Right, right. Now that you have a second-tier wage, do you think Goodyear is a good candidate for an attrition program?

Yes, Kirk. I think what we've seen so far is we have had more than adequate attrition to keep us well ahead of our original targets on $13-an-hour labor. So I think, as we -- if we were to think about that, certainly it would require us in our unionized facilities, we'd have to work with the United Steel workers on that. But I think, as we see it today, we've actually seen good attrition, have continued to see good attrition, and therefore, very good opportunity to leverage the $13-an-hour labor.

And frankly, relatively good from our standpoint, attrition rates in other parts of the world as well.

Great. Thank you.

Your next question comes from the line of John Murphy with Merrill Lynch.

Hey, guys, thanks for squeezing me in here. I'll keep it brief. I have three questions. First one of your major competitors mentioned there were some delays in implementing price increases. I'm just wondering what you were seeing on that front first. Second question is on the debt refis. Just wondering if you guys were really targeting a net reduction in your aggregate debt, or were you just really trying to more focus on putting it into regions or a Euro denominator debt where you actually get a tax yield and then third, another tax question, are there any tax implications from the engineered products sale.

Okay. Let me, John, take your first one on pricing. What we see is -- we continue to see, I'd say reasonably disciplined pricing here in the U.S., certainly in the truck area, that's true, and I'd have to say that's pretty much true in passenger as well. And again, with what's happening in raw materials over a significant period of time, those are obvious, I think, changes. We continue to see Europe as a bit challenged, and we've said that for some time in the passenger area, not in truck. And Asia and Latin America, well, maybe Latin America is a little different. Latin America you've had a lot of revaluation again with the weak dollar, and so whether it's foreign exchange positive or price increase, we can argue how we strategize and plan around that. But I don't see any major change in the pricing environment from what we said at the end of Q2 or, frankly, at the year end call. Okay. So that's point number one. Mark, in terms of that --

Yes. John, the answer to your second question on debt is really yes to both. We are intent upon delevering, achieving that two and a half times multiple of debt to EBITDA. We do need to take debt down further to achieve that goal. And we feel like we can foresee being able to do that, given the health of the business and the track we're on. But it's also true as we move ahead, we're looking for opportunities to reposition our debt so that we can take better advantage of our tax positions in different places, which usually means moving debt off of the U.S. and into other tax-paying jurisdictions. And I guess the last question had to do with, it really comes down to our valuation allowances, I think, which -- and I'd just say to that that we do continue to maintain a full valuation allowance on tax assets in the U.S., and we'll continue to do so for some time.

And EPD?

Yes. The question on EPD is, I guess, we don't see -- we don't see the EPD transaction as having a permanent effect on our tax rate guidance at this time.

Okay. Great. Thank you very much.

Your last question comes from the line of Monica Keany of Morgan Stanley.

Good afternoon.

Hi Monica.

I was wondering if you could talk a little bit about, if the U.S. does go into a recession, how would you see a downside, and particularly, obviously you've been benefiting a lot from the decision to exit private label and that's benefited you very nicely on the mix. Can you talk a little bit about what you think consumers might do in a downside scenario?

Okay. Darren do you want to kick this off, and we'll jump?

Sure. Monica, the first point I would make in terms of a recession is that the segments of the business that are most susceptible to recession, which I guess you would argue is consumer OE, the commercial truck business in the U.S., and the low end of the consumer replacement business in the U.S., I think we would look at those and say they already have a lot of recessionary character to them. We're already seeing very, very weak volumes there. So that's point number one. oint number two is those in the businesses where we've been reducing our exposure, which is good for us, the high-end consumer replacement business has not reacted in the same way and does not tend to be as sensitive to economic conditions. So the real question that we face is, given a couple of very weak years already in the industry, is there more downside in a recession scenario, and I think that you could look at this and say there's already tire purchases being delayed. The question is going to be, can they be delayed even further, where normally after a couple of weak years like this, we would start to see the volume start to bounce back as the pent-up demand starts to come into the marketplace.

And we have seen, just to maybe be even more specific, we've seen some reduction in miles driven per vehicle in North America already on the passenger side, and of course, you're seeing what we could call as almost recessionary purchasing activity in commercial truck replacement business. So I guess that's how we'd respond, Monica, to that -- and it doesn't stop us from achieving our goals. We're still on track to achieving the goals.

Right. So would you say, though, just if you were to give it some broad parameters -- I agree on the commercial side definitely showing discretionary trends already. Would you say on the consumer replacement in the U.S. maybe down only a little bit, a couple percent, or pretty flat? If you had to kind of bracket it.

Monica, I guess it depends on if you can bracket what the recession means in terms of specifics. I mean, is it a serious recession. By the way our outlook is not recessionary. That's not how we're looking at the economy playing out over the next couple of years, but we could be wrong in that respect. But we would say this would have modest impact, and if we look at the history let's let history be our guide a little bit. Certainly during times of economic weakness, the industry has potentially declined for a year or two and then bounced back as people still drive cars and people will still move freight, and the replacement industry has not shown a great deal of cyclicality. We've seen more in the commercial truck area. So I think those two things would guide us and a recession would certainly play out differently, as we're seeing today. The truck business today is weaker than the passenger business. But we're not going to attempt a forecast here.

And last question, is there much difference in the profitability on the commercial side between North America and Europe?

It depends on the stage of the cycle again, but I would say they're relatively the same, and certainly in the replacement business and pretty close as well in the OE business. There's not a significant difference there.

Okay. Great. Thank you very much.

Monica thank you.

That was the last question. I'm going to hand it back over to Bob.

Yes. I'd simply say we appreciate everybody showing an interest in our company and being with us here today. We appreciate that. We're obviously pleased with the Q3 results and feel comfortable with our future direction, and we look forward to talking with you all again at least at the year end call and maybe in the interim. So thanks for being with us.

This concludes today's Goodyear third quarter 2007 earnings release conference call. You may now disconnect.