Goodyear Tire & Rubber Co (GT) 2007 Q4 法說會逐字稿

Good morning, my name is Carrie. I will be your conference operator today. At this time, I would like to welcome everyone to the Goodyear's fourth quarter 2007 conference call. (OPERATOR INSTRUCTIONS) Thank you.

I would now like to turn the conference over to Mr. Greg Dooley, Investor Relations. Mr. Dooley, you may begin your conference.

Thank you, Carrie. Good morning, everyone, and thank you for joining us for Goodyear's fourth 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 10-K 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 start, 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. I'd like to start today with our perspective on the current economic slow down. Then, Mark Schmitz and I will will comment on the quarter and provide a progress report on our strategic growth initiatives. Although the economic environment remains uncertain, we are confident that Goodyear is well positioned to deal with the uncertainty. And we are far better positioned than in our recent past. Why do I conclude this?

First, the company's product, brand, and customer mix has become considerably richer. Given this richer mix, we are more focused in the premium segments of the mark which, of course, tend to have relatively an elastic pricing dynamic. Our decisions to 8 million units of the wholesale private label business in North America and to be more selective in our approach to the global OE business have positioned the company with much less exposure to the most price sensitive segments of the tire market.

Second, our balance sheet has improved dramatically, driven by execution against our capital structure improvement plan, which incidentally was put together in 2003. Our total debt and legacy obligations, which peaked at over $12 billion in 2006, are expected to fall about to about half that in 2008, given our announced debt repayments and our funding ever the [VEBA]. It's important to note that we have cash on hand to fund both our announced debt repayments and the [VEBA] trust. Third, we've also made dramatic improvements in the fixed cost structure.

Since 2004, Goodyear has reduced global capacity by more than 25 million units and closed 6 tire manufacturing plants. Now, certainly we are engaged in contingency planning relative to economic conditions; however, the improvements we've made in our go to market model, our balance sheet and cost structure give us confidence that we are well positioned to progress through the current uncertain economic environment. We are not overconfident. We are continuing to reduce our cost structure and build upon our innovative marketing capabilities, which we have we've been demonstrating in the marketplace.

As we look at our financial highlights for full year, and I'll emphasize here full year 2007, successful execution against our strategies drove strong performance. Our revenue from continuing operations grew 5% to a record $19.6 billion. Despite challenging industry conditions in several key geographies and our strategic decision to exit low margin businesses, including the wholesale segment of the private label business in North America. Revenue for tire grew 8%, driven by a richer product, brand and customer mix, as well as our pricing action, and I'll comment here that when we think of mix, don't just think of product mix. Brand and customer mix have been equally important for us as we have driven that revenue for tire figure and as we've improved our margins.

Gross margin was 19% versus 16.1% in 2006, a significant improvement even after allowing for the strike impact. Total segment operating income grew 24% when adjusted for the strike impact and reached 6.4% of sales compared with 5.4% the prior year. Year-over-year improvements were generated by all five of our strategic business units. Our businesses in eastern Europe, Latin America and Asia-Pacific continued their very strong performance in 2007. In aggregate, those business' sales increased 15%, segment operating income rose 20%, and return on sales reached 15%.

The strategic decision we made five years ago to invest significantly in growing our business in these emerging markets continues to pay significant dividends today and will do so in the future. When adjusted for the strike impact, North American tire reported its highest full-year segment operating income since the year 2000. We made this progress despite difficult, recession-like conditions in the North American commercial truck market throughout the year. Unexpectedly robust demand for our outstanding premium products has resulted in supply constraints in many of our markets. As a direct result, we are accelerating planned investments to increase our capacity to produce high value added tires and, thereby, increase our margins.

We made significant progress against our 4 point cost saving plan and remain on track to achieve our stated financial goals and Mark and I will have more to say on those in a few minutes. So overall, 2000 was a year of strong execution and strong market and financial progress for Goodyear. From my perspective, our progress in 2007 was a function of outstanding execution against our five strategic business platforms. And you'll recall here that the five platforms are strong top line growth capability, a step change improvement in our cost structure, a stronger balance sheet, a focus on our core tire businesses, and a focus on speed.

Two weeks ago, we got together with more than 2000 of our largest North American customers in Dallas for our annual dealer conference. It was a watershed meeting from every perspective. The dealers have experienced firsthand our transformation as a company over the past five years. They now clearly believe in our strategy, our direction, and our people and, more importantly, perhaps, they believe that together, we can be a more powerful force in this industry. Now don't take my word for it. I would encourage you to talk to our customers. Ask them how they feel about the tire industry and how they feel about Goodyear.

Our dealers share our confidence in the future. They are, of course, closely monitoring sales activity, but they aren't overly concerned about an economic slow-down. Rather, like us at Goodyear, they are focused on the attractive market opportunities that are currently available and are working to improve their businesses for the inevitable return of strong economic conditions in the future. I frankly have never heard so many positive comments about our people, about our leadership from our customers at a conference. I will tell you what I told the dealers. I told them I was more energized than ever about the future of our business and our industry. I left Dallas with tremendous confidence in the dealers, and I think they left Dallas with that same level of confidence in us. I simply say here for Rich Kramer and his North American tire team, this represents a huge win.

Let's take a closer look at each of the five business platforms. Our capability to generate top line growth is under pinned by our product leadership strategy which is firmly focused on increasing our mix ever high value-added tires and, of course as a result, increasing our profit margins. We raise the bar again in 2007 with the introduction of several new products to our portfolio, including the Goodyear Eagle F1 Asymmetric and the Goodyear Eagle F1 All Season. These innovative new products have been very well received in the marketplace and have won prestigious wards. The European design produced F1 Asymmetric was chosen number one in the all important European Independent Magazine testing by [Evo] and Auto Car, while the U.S. produced F1 All Season was recently named the overall winner in independent testing done by the respected retailer, The Tire Rack.

What is now become an energizing annual event, we launched several exciting new products in Dallas at our conference. We announced Goodyear Assurance, a high value-added mid-tier product, joining the very successful Assurance family of products. This new tire targets the middle class everyday driver who values an outstanding tire at an affordable price, and I would note here that this market segment represents high volume potential for our dealers and for Goodyear.

We announced the Goodyear Eagle GT, a high performance tire featuring Goodyear's tread lock technology, which provides all season traction as well as a solid foundation for cornering and an attractive price point. The target for this product is younger performance drivers who our research indicates they want a tire with style and handing and all season capability. Our commercial tire customers demand tires and services that they can depend and and that will allow them to reduce vehicle down time. So in response to their needs, we introduced our revolutionary self-sealing DuraSeal commercial tire technology on a broader scale for an use in a variety of applications. No other tire manufacturer offers this technology.

We also unveiled Armor Max technology which adds strength and toughness to commercial tires that are subject to challenging performance demands. All of these products will be supported by Fleet HQ, a new innovative 24 hour, 7-day operation that services fleets nationwide. So, the best new product engine in our industry just got better. We continue to prove that we can successfully differentiate our new products in the minds of end users. Our marketing capabilities are not limited to launching new products.

During 2008, we will continue to leverage the success of our Get There advertising campaign. The Get There campaign which tested in the top 5% of respected market researcher Millward Brown's advertising effectiveness testing history was a major contributor to the Goodyear brand growing 2X, the market rate in North America during 2007. And that rate of growth in a year challenged by strike recovery was very impressive. As with all our investments, we are intensely focused on getting the maximum returns from our advertising spend. At the Beijing Olympics we will use the proven vehicle of aerial coverage brought to you by the Goodyear blimp that has successfully raised the visibility and value of or investment in past Olympics with a combination of high-profile ads and in program product messages linked to our aerial coverage.

Our innovative new products, targeted advertising campaigns, and overall improved marketing capabilities have enabled us to continue to grow our share in key targeted mark segments across the globe and to achieve significant price mix improvements which more than offset raw material costs increases and certainly that was the case during 2007. As we had previously discussed, to complement the marketing initiatives, Goodyear is now focusing its capital initiatives to meet two objectives.

First, to increase our capacity to produce high value-added tires by 40% by 2012. Today, based upon the strong demand for our new products and our progress in executing in our plants, in 2007, we increased our HVA capacity by 15%. I think you would agree that is strong performance. Based on that, we are adjusting that objective to an increase of 50%, so we are moving the 40% up to 50% by 2012. And our second objective is to increase our capacity in low-cost countries by 33%, with a target of having low-cost capacity at 15% of our global total again by 2012.

In 2007, we improved low cost capacity to 40% of our total. In addition, we are continued to evaluate potential new factory sites in Eastern Europe and Asia, although I have no specific announcements regarding new facilities this morning. We continue to evaluate our level of planned capital investments for 2008 given the uncertain economic environment. We continue to identify available investments that will provide economic returns well in excess of our cost of capital. Now, we believe our evaluation will result in 2008 capital investments above 2007 dollar levels.

Higher levels of investment can be funded using cash generated in our business so that our balance sheet metrics, particularly our net debt, will continue to improve. And we will provide additional information on our investment plans as the year progressing on these calls. We made significant progress against our 4-point cost savings plans with the initiatives we implemented during 2007. We signed a milestone contract with the United Steelworkers, including the proposed VEBA trust which will result in step change improvement in the cost structure of our North American tire business. We ceased tire production in two North American plants, Tyler Texas and Valley Field, Quebec, which reduced high-cost capacity by approximately 16 million units and results in annualized cost savings of approximately $90 million.

We announced changes to our salary benefit plans resulting in annual savings of $80 to $90 million in our legacy costs. Now, these actions along with many others, have contributed to our progress against the cost saving goal that we previously shared with you. Through 2007, two years into our plan, we've achieved gross cost savings of over $1 billion towards our target of $1.8 to $2 billion by the end ever 2009, and we are clearly on track to achieve these goals.

I'd like to acknowledge our Goodyear associates for their collective efforts to find new and innovative ways to reduce our cost structure. I would say they have fully embraced the idea of continuous improvement. And Mark will go into some additional detail on cost initiatives in a few minutes.

Turning now to the balance sheet, our equity offering in the sale of engineered products marked the completion of the capital structure improvement plan that again we developed in 2003. We have clearly made significant progress in delevering our balance sheet. During the fourth quarter, we completed the conversion of nearly $350 million of 4% convertible notes into equity and we ended 2007 with a total debt balance that was $2.5 billion lower than where we started the year, $2.5 billion. Of course, our focus on improving the balance sheet continues in the 2008.

On February 1, we announced our intention to repay $650 million of senior security notes in early March. Now, we view this as a milestone event as this is not only our highest cost debt, but it is the last remaining debt from the company's near distressed period back in 2003, 2004. And as a result, annualized interest expense savings from this debt repayment will total $75 to $80 million. Now, in addition to debt repayments, we've reduced our legacy obligations. As I already commented, the aggregation of our debt and legacy obligations which totaled more than $12 billion in 2006 now stands at less than $8 billion and should be less than 6 billion at year end 2008. And this reduction in leverage is a terrific accomplishment and after reflecting these actions, we will have achieved our next stage metric for leverage of 2.5 X debt-to-EBITDA. So we will face the current economic slow down with a considerably healthier balance sheet. And, believe me, that feels very good to the team here at Goodyear.

During 2007, we made significant changes that enable us to increase our focus on our core businesses. Consumer and commercial tires. We completed the sale of the engineer product business at the end of last July, raising about $1.4 billion in net proceeds, and as you all recognize, our timing could not have been better. We completed the exit of certain segments of the private label tire business in North America, and this action concentrates our production capacity on a more profitable product line. In December, we completed the sale of substantially all of the assets of North American Tires tire and wheel assembly operation, eliminating non-core business with low patterns and limited growth prospect for Goodyear.

We continue to drive initiatives that will accelerate the pace of change at Goodyear. The accelerating pace at which we now launch high impact new tires to the market to address key market segments is an obvious example. Another recent example, during the fourth quarter, we announced that effective in the first quarter 2008 we are creating a new regional business unit, Europe, Middle East and Africa, enabling faster decision making and frankly opening up further cost efficiency opportunities for our previously separate VU and Eastern Europe, Middle East and Africa regions. Given the actions we've taken over the past several years, we are now able to quickly adapt to the changing dynamics of our industry and we look forward to changes that our markets will presents.

Execution against these strategic business platforms means that Goodyear is on a clear path towards achieving our next stage metrics. And remember, that we are targeting metrics here of an 8% segment operating income return on sales globally, a 5% segment operating income return on sales in North America, and as referenced earlier, 2.5 X debt-to-EBITDA. Now, I'd like to turn the call over to Mark to discuss our fourth quarter financial results in more detail. Mark.

Thank you, Bob. As Bob said earlier, execution of our strategies led to strong results in 2007. My comments today will be focused on fourth quarter results. Turning first to the income statement, revenue grew by more than 4% year over year, adjusted for the strike impact in 2006. The improvement was driven by continuation of pricing mix improvements and favorable foreign currency translation. Revenue per tire grew 10% in the fourth quarter. These positive impacts were partially offset by a 2% decline in unit volume as a results of the decision to exit certain segment of the private label business in North America as well as continuation of weak conditions in several key markets, including weak winter tire sales in Europe. Gross margin was 19.4% for the quarter versus 11.3% of last year's strike affected quarter. This margin performance was achieved through price mixed improvement and excessive raw material costs driven by our focus on high value added tires, growth in our high margin international operations, and cost savings actions consistent with our 4-point cost savings plan.

Selling, administrative and general costs grew by $47 million year over year, primarily driven by unfavorable foreign currency translation which increased SAG by $45 million. SAG as a percent of sales declined by 60 basis points in the fourth quarter to 4.3% of sales. For the full year, SAG was up as a percent of sales by 0.5%, due primarily to some unique items such as curtailment charges related to the salary benefit plan changes. We also had higher advertising and incentive compensation expenses this year.

Segment operating income amounted to $313 million in the fourth quarter compared to a strike adjusted 227 million, an increase of 38%. All were business segments except EU increased operating income year over year in quarter four, and the EU held even versus last year despite the weakness in this year's winter tire markets. All five segments were up in operating income in the full year basis.

Income from continuing operations was $61 million or $0.27 per share in the fourth quarter versus a loss of 310 million in the prairie, largely a result of the strike and rationalization charges. Reported income from continuing operations included $26 million or $0.11 per share in rationalization and accelerated depreciation charges. Losses on certain asset sales of approximately $19 million or $0.08 a share, and a reduced tax expense of $11 million, or $0.04 per share due to a tax law change that allows us to utilize existing tax losses against a newly enacted state gross margin tax. We also incurred additional financing fees of $17 million or $0.07 per share related to our convertible exchange offer.

Net income, including discontinued operations, was $52 million, or $0.23 per share, and this includes a $9 million charge or $0.04 per share true-up on the quarter three gain on the sale of engineered products. Several items that impacted our results in the fourth 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 16 shows the primary factors that drove the year over year increase of almost $400 million in our segment operating income in the fourth quarter. Before I discuss the business drivers of this earnings improvement, I would highlight the fact that the biggest change versus last year is the $313 million impact of the 2006 steelworkers strike. For our North American operations, this makes it a difficult (inaudible), but we feel the favorite trends we've seen in North American business this year continue in the fourth quarter.

In addition to the non-recurrence of the strike impact, we saw a continuation of price mix improvements and excessive raw material costs, totaling $111 million. For the full year, price and mix improvements in excess of raw materials cost increases totaled $444 million. Foreign currency translation, primarily in Latin America and Europe, yielded $45 million in improvement during the fourth quarter. We also realized more than $175 million of savings in the quarter from the 4-point cost saving plan. The savings came primarily from successful execution from continuous improvement initiatives, high cost footprint reductions, and low cost sourcing. These positive factors were partially offset by 1.2 million unit sales decline which reduced segment operating income by $39 million.

We also continued to experience manufacturing in efficiencies in North American Tire due to the change over of our plants to high value added production capacity, the implementation of 7-day operations in some of our facilities, training of our newer $13 per hour associates, and in efficiencies related to the shut down of tire production at the Tyler Texas facility. As we indicated in the third quarter conference call, we are pleased with our progress in cost savings. Furthermore, a large portion of the structural cost savings we're targeting remains ahead of us.

On slide 17, we show the annualized run rate savings achieved in the fourth quarter compared to what we expect to achieve once the structural cost savings are fully realized. In quarter four 2007, we realize the full run rate savings from our salary benefits restructuring. On high cost footprint reductions, we expect to achieve the full plan savings of more than $150 million compared to the approximately $85 million annual rate reflected in quarter four. This will include the impact of savings related to the shutdown much tire production at Tyler, Texas, which was completed in December. Our steelworker's savings remain on track as we hire and train new $13 per hour labor. We expect to realize $140 million of run rate savings by 2009 from steel workers productivity compared with a run rate of approximately $65 million in quarter four. And we expect to achieve e full run rate savings of $110 million related to the VEBA for steel workers retirees, which is expected to begin once legal process is complete, anticipated by the end of quarter two 2008.

Now, turning to the balance sheet, our cash balance at the ends of the year was 3.5 billion, which is about 400 million less than year end 2006. This reflects the proceeds from the sale of engineering products and our equity offering, but also significant debt repayments during the year. Total debt at December 31, 2007, was 4.7 billion compared to 7.2 billion at the end of 2006 and 5.1 billion at the end of September. During the fourth quarter, we completed a convertible exchange over, converting notes into equity which resulted in debt reduction of nearly $350 million. At year end, shareholder's equity was up over 1 billion from September 30 and 3.6 from a year ago. As a reminder, we will be repaying a total of $750 million worth of debt in March, which includes the redemption of $650 of secured notes as well as a $100 million maturity bringing our total debt balance to under $4 billion.

As Bob mentioned, pro forma for these actions we have achieved are next stage metric for leverage which is 2.5 times debt-to-EBITDA. We also have $1billion of cash earmark to fund the VEBA. Turning to cash flow for the year, operating cash flow provided by continuing operations was $92 million, or $353 million less than last year, primarily reflecting the rebuilding of working capitol both receivables and inventories and business records from the strike affected quarter four of last year. Accounts payable were also up substantially from a year ago reflecting recovery to more normal levels of business. Our global pension contributions totaled $719 million in 2007. And we expect to contribute in the range of $350 to $400 million to our global pension plans in 2008.

As discussed earlier, we made additional progress against our 4-point cost savings plan during the fourth quarter. We are targeting gross cost savings of $1.8 to $2 billion by the end of 2009. To date, two years into the four-year plan, we've achieved well over $1 billion of gross cost savings. In continuous improvement, we've achieved savings of more than $700 million to date. This includes savings from lean and six sigma initiatives, and product reformulation, including raw materials substitution. This also includes approximately $30 million of steelworker's productivity savings primarily due to our new $13 per hour associates. In footprint reduction, we've achieved savings of approximately $75 million to date. This includes additional savings from a shut down of tire production at our Valley Field Quebec plant. This does not yet reflect any savings from the shutdown of tire production in our Tyler, Texas facility, which was completed in December.

In low cost country sourcing, we've achieved savings of nearly $100 million to date. The savings in this category relate to 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. Administrative in general, we have achieved savings of more than $175 million to date. This includes savings related to the seller benefit plan changes we announced earlier this year. Given the progress we 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 of each of our five business segments. Overall, while challenges remain, North American Tires operating performance in 2007 shows that our previously stated strategies are effective and they're being executed as planned. North American Tires segment operating income for the the fourth quarter was $40 million, which was a significant improvement over the strike impacted 2006 fourth quarter. The year-over-year comparisons are clouded by the strike. Nonetheless, North American Tires results show continued progress against our strategies of reducing structural costs, exiting non-strategic businesses, and driving innovation as a catalyst to improve our brand, product, and channel mix. Our success in driving our strategy is evidenced by share gains we've achieved in our branded consumer and commercial placement business in 2007. In fact, our branded replacement market share exceeded the level prior to 2006 strike.

2007 was not a robust year for North American Tire industry, although the consumer placement market did show modest growth from 2006 levels. Due to distortions caused by 2006 strike, it's more relevant to look at 2007 industry growth versus 2005 levels. Consumer replacement industry volumes were flat versus 2005. Consumer OE and commercial replacement were below 2005, and commercial OE industry volumes were more than 40% below 2005. It is, I think, very significant that our mix-up strategy paired with structural cost reductions allowed us to stay on our strategic path and resulted in operating performance which was significantly better than the last time we encountered such weak markets. Compared to 2005, in quarter four '07, North American tires sold roughly 4 million or 17% fewer tires. However, at the same time, premium Goodyear branded products were up 20% versus 2005. Our commercial truck business is another excellent example of the right strategy, executed very well during weak market conditions.

The commercial truck business is a cyclical business. In 2007, it was definitely one of the down years for the industry. For the year versus 2006, the replacement industry declined 3% and the OE industry declined 34%. Despite the weak industry, our business performed very well. This performance was achieved by providing a full value proposition to our customers, one of high quality branded products, and high quality service in our targeted segments. The result is higher revenue per tire, higher market share and higher earnings all coming at the low point of the industry cycle. Overall, for North American tire, our price increase is coupled with our richer mix. Has had a favorable impact on our operating performance in a weak market. We recently raised prices in our consumer replacement business by up to 7% effective February 1 due to the continued escalation of prices in many of our key raw materials.

With regards to manufacturing costs in quarter four '07, you'll appreciate there are many moving pieces in including the 2006 strike that make the year-over-year comparisons difficult. To mention the most impactful of these, in 2007 we have the shut down of tire production at Tyler and Valley Field, the salaried benefit plan changes, the new steelworkers' agreement, including $13 per hour labor and conversion to 7-day operations, and investments in (inaudible) of plants in high value added product capacity. There are clearly pluses and minuses but the to simplify, we estimate the normalized year-over-year comparison is a net $15 million favorable manufacturing cost variance in quarter four '07. The favorable $15 million reflects approximately 55 million of structure cost savings offset partially by approximately $40 million of cost increases which are necessary as part of the implementing the HVA capacity, footprint reduction and other core strategies. These include the costs of unabsorbed overhead ahead of the Tyler shut down. They also include the costs absorbing $13 per hour workers, transition to 7-day operations, and adding to high-value added tire production.

As Bob pensioned earlier, we've increased our capacity for high value added products by 15% worldwide and some of that is in North American tire. And, most importantly, we expect $10 to $20 per tire of increased margin for high value added tires. As we look towards 2008, the $55 million of fourth quarter structural cost savings are expected to increase as we realize more of our initiatives, particularly once the VEBA trust is implemented. Some of the cost increases will remain as we continue to transition our plants to 7-day operations and convert to high value added production. But all these costs are essential to implementing the more profitable mix and structural cost reductions, strategies that are accretive to North American tire's bottom line.

Our manufacturing operations are undergoing dramatic change as we migrate to a footprint that will produce the right mix of high value added products via a truly advantage supply chain while delivering the structural savings to our bottom line. Overall, with respect to North American tire, we remain confident that we are on track to achieve our next stage metrics. Our confidence comes from our belief that we are executing against the right strategy and, as Bob mentioned, this belief was strongly confirm an at our recent dealer conference in Dallas.

With respect to Europe, as Bob mentioned earlier, effective February 1 we are combining our two European businesses into one strategic business unit. The new region of Europe, Middle East and Africa, EMEA, will be Goodyear's largest in terms of geology, and second largest after North America in terms of annual sales revenue. Annual combined sales revenue for the two regions in 2007 was $7.2 billion. We believe this new structure will allow us to accelerate growth, and maximize earnings through simplicity, speed, and intense focus on our customers and markets. The markets in Europe are getting closer and closer, providing us with a great opportunity to centralize core functions such as supply chain and purchasing while still allowing us to tailor our marketing programs for specific markets as needed. In addition, we intend to continue focusing and even accelerate our activities in high-growth markets, such as eastern Europe.

We will begin reporting the new segment first quarter and will adjust all prior segment reporting to reflect this combination. Our European union business had solid top line performance during the fourth quarter as sales grew 5%, despite a 11% decline in units sales due to a combination of favorable price mix and foreign currency translation. The weakness in the European consumer replacement market continued during fourth quarter. Although the initial winter tire selling season was relatively good and in line with expectations, subsequently, mild weather in Western Europe resulted in lower than expected sales. As a result, the winter tire replacement market experience a more than 20% sales decline year over year during the quarter. This in part reflects the regulations in Germany in 2006 that underpinned a more robust demand for consumer replacement tires that year. But commercial OE market in Europe remains strong and we continue to leverage our available commercial tire capacity in North America to provide additional supply to our European business.

Volume declines were offset by favorable foreign currency translation and price mix improves, which were driven by the success of our new products. Our new European consumer products continue to be very well received in the marketplace. Our premium Goodyear and Dunlop brands gained share. However, we continue to be challenged by premium product supply constraints. As we've indicated in the past, the investments we are making to expand high value added capacity will allow us to overcome the supply limitations over time.

Segment operating income was flat versus last year as price and mix improvements and favorable foreign currency translation were offset by volume declines and manufacturing inefficiencies at our two Amiens facilities France. I wanted to take a minute to comment on our recent announcement regarding planned reductions at our two facilities in Amiens France. As we've done in other situations, we have made our goals clear to these manufacturing facilities. In high-cost manufacturing locations, we prefer to work with our associates to reduce costs while making investments to upgrade equipment for production of high value added tires. In the event we are unable to agree with our unionized associates, we must take actions to protect our business and create a sustainable cost structure. That is what we are going to do in Amiens.

Our businesses in Eastern Europe, Latin America and Asia-Pacific continue to show outstanding results. For Eastern Europe, Middle East and Africa, revenue and segment operating income grew 20% and 34% respectively. We experienced strengthening markets throughout the region during the fourth quarter. We continued our strong performance in developing markets like Russia, Poland, and the Middle East. Eastern Europe's strong sales results were driven by 9% increase in replacement volumes and the combination of price and mix improvements which more than offset higher raw material costs. Given the strong industry growth in Eastern Europe and particularly robust demand for our premium products, we continue to be challenged by high value added supply constraints. However, we are implementing our investment strategy to increase high value added capacity.

Latin America had another strong quarter as revenue and segment operating income grew 24% and 44% respectively. The strength in the original equipment markets continued in the fourth quarter and stronger than expected economies led to improvements in the replacement markets. Although we continue to see robust demand for our premium products, our replacement volumes continue to be held back due to supply constraints for applied value added products. Again, we are investing to increase our HVA capacity to address these constraints. Sales and segment operating income growth were driven by improvements in price and mix and favorable foreign currency translation as a result of the continued strength of the Brazilian real. Asia-Pacific also had a strong quarter as revenue and segment operating income grew 16% and 50% respectively. We continue to see strong growth in developing markets such as China and India. We continue to execute our strategy focused on premium products in the Australian markets.

Our unit volume grew 2% versus the prior year with growth limited by supply issues in Thailand due to the fire earlier in the year. Full production has resumed in Thailand, which is expected to result in improved supply. Asia's revenue operating income increases were driven by volume growth, favorable foreign currency translation, and price and mix improvements. Improvements in operating income were partially offset by higher conversion and SAG costs as we continue to invest in market development throughout the region. Overall, we're pleased with the company's performance in the fourth quarter and throughout 2007. We are better positioned than in the recent past to deal with economic uncertainty, both from a balance sheet and a structural cost standpoint. We remain vigilant in the face of economic uncertainty, and will take action as necessary to remain on our strategic path. Now I'd like to turn the call back over to Bob.

Thank you, Mark, and before we open the call up to your questions, I'd like to just take a few minutes to discuss our outlook for the industry in 2008. You'll note that we still see growth potential in our markets with the exception of consumer OE business in North America, despite weak economic conditions. And this, in part, reflects the already depressed levels of unit growth that we've been seeing in 2006 and 2007. To be specific, in North America for the full year, our forecast for the consumer OE market is down 2 to 4% which should improve our available product supply bore the replacement market where of course our margins are higher.

Our forecast for commercial OE is up 20 to 30%. And then the forecast for both the consumer and the commercial replacement markets is flat to up 2%. Given that we are combining our European businesses this year, our outlook has been expanded to include the eastern European countries where we have good data. In Europe for the full year, our forecast for the consumer OE market is up 2 to 4%, and up 5 to 10% for the commercial OE market. Our forecast for the consumer replacement market is flat to up 1% and for the commercial replacement market is forecast to be up 1 to 2%.

Now, we continue to see quite a lot of uncertainty in raw materials driven by the volatility of oil and natural rubber prices. Based on current projections, we expect raw material costs to be up 7 to 9% in 2008 and that follows a 3.5% increase in 2007. And this estimate could obviously change significantly based on change in the cost of natural rubber or other key raw materials. As we discussed earlier, we've made significant improvements in our balance sheet which has resulted in reduced leverage and significantly lower interest expense. For 2008, our interest expense forecast is $350 to $360 million compared to $450 million in 2007. And this forecast takes into account the savings from our announced debt repayments and the lower interest rates on our variable debt, variable rate debt.

Our capital expenditures levels will likely increase going forward as a result of our portfolio of high return investment opportunities as I said earlier. The pace of our investments will reflect both the macro-economic environment and specific markets situations we encounter during 2008. We will continue to take a disciplined IE demanding of high return approach to our investments. For modeling purposes, our tax rate guidance is 25 to 3% of international segment operating income. Our effective tax rate may vary depending on factors such as the release of valuation allowances against deferred tax positions and the mix of foreign earnings among low and high tax rate jurisdictions.

I'd like to close with a few summary comments. Our strong execution against our strategies in 2007 led to strong financial performance. Our business platforms position us for profitable future growth when a new product engine that not only remains strong but is improving with time, and this innovation will continue to generate a richer mix and, therefore, higher margins. We will continue to focus on high return investments. We remain on track to achieve our stated cost savings targets. We are well positioned to deal with an economic slow down and are prepared to take contingency actions as necessary if economic conditions worsen, and we are confident that we can achieve our next-stage metrics. I want to thank you for your interest in our company, and I think we'll now open the call to questions and answers.

(OPERATOR INSTRUCTIONS) First question come from Himanshu Patel with JP Morgan.

Hi, I had a couple of questions. Can we first talk about the balance sheet? You guys ended the quarter with 3.5 billion in cash . I guess there's a billion dollar payment for the VEBA, 750 for debt pay-down. That kind of pro forma, you are at 1.7 already. And then let's say say you generate a couple hundred million in cash next year. You could be back to 2 billion of cash at the end of '08, and you talked about running the business, I think with about a billion going forward. Does the, is there scope here for additional debt pay-down and when should we start thinking about that? Is that second half of '08 or more

Well, Himanshu, good morning, by the way, as we said before, our seasonal working capital needs here and somewhat limited access to overseas debt requires to carry more cash than we would otherwise. I think Mark, you might want it comment on the situation as we see ourselves going forward. By the way, the comments are right, we said we need about a billion on cash on a regular basis to operate the company.

I think the other comment is right, Himanshu. Yes, we're always looking at opportunities to pay down debt faster. We've got nothing that we are going to commit to right now. There's enough urn certainty out there that we were happy to have a buffer at this point.

Okay. Can I jump to slide 16? This is, I guess, the walk on segment operating income. It looks like that number on transitional manufacturing expense was 25 million in the third quarter, looks like a jump to 40 million. Was that increase entirely relied to the Tyler shut down or were there other issues, and I guess more broadly can you give us just some granularity on what that 40 is made up? How much is the temporary cost of hiring $13 an hour labor, how much is Tyler?

We will have Mark kick it off.

I probably can't give you as much granularity as you would like to have on that, but I will say it is more than efficiencies related to Tyler. There's the unabsorbed overhead related to Tyler, also the cost of implementing 7-day operations, cost of training and incorporating our $13 per hour workers. There are a number of factors in there which really are, I have to say they are all good things, they're all moving us in the right direction. If, to be specific about the Tyler effect, it's probably around half of that, half of that $40 million.

So 20 million from Tyler, and I meant in the rest of it sort of lingers around for a few more quarters, but is it fair to say the next quarter we should think of the Tyler component going away?

No. It won't go away, and it's because Tyler, as you know, we closed tire production at the end of quarter four, so we basically took those excess costs into our cost of goods sold that will come out as cost of goods sold in quarter one, so it clearly will continue and affect us in the P&L basis in quarter one.

I think, Himanshu, it's important to note here, I know we are a challenge to look at from a cost standpoint because we see the, some of the incremental costs that we are incurring as good costs, because what they are doing is given our strategy of upgrading mix, in some cases we have higher costs that are, that are simply a reflection of our move to higher mix, and we have some in efficiencies but all of it drags with it higher margin. And that's what you've been seeing in the results the past several years. So we may have inefficiencies that we are dealing with short-term but, overall, have confidence that the strategy continues to play out here. We're doing the right thing to drive higher margins.

Two last questions. First, LIBOR is down 200, how much of your debt is effectively floating net of --

I'll let Darren answer, but I'm going to try and impress him with my knowledge. I think the variable is about 2.4 billion.

That is correct.

Are there any swaps or derivative agreements there that would suggest that maybe the floating exposure is not that big in reality, or that is the floating exposure?

Yes. Himanshu. I think you'll see, you'll see in the disclosures, we don't have a lot of drive it was on the books, so I think the porch thing to focus on the 2.4 billion floating rate debt is going to be when that debt resets. And I can tell you, just as an example, the 1.2 billion second lead term loan has its interest reset generally every 6 months, and it was a deal that was done in April. So you expect that to reset in April. So you go through the other debts the same way, just important to think about when they reset.

Okay. Last question, this is little bit [RK] and I apologize. In your K I think you guys, you disclosed the impact on revenue changes from price mix and also on operating income. If I just back into what those numbers were for North America in the fourth quarter, it looks like on revenues price mix benefited you by about 87 million, on operating income it benefited you by about 45 million. That implies kind of a 50% contribution margin on the price mix benefit. That's down sharply, I mean it was 86% in Q2, it was 65% in Q3, 52% in Q4. Am I thinking about this correctly? It sounds like the dollar amount on revenue from price mix is the same but the EBIT contribution is receding. Does that mean more is mixed and less price?

Himanshu, let Mark again respond to this.

What I was going to say is no, it has not, first of all it has not declined. Favorable pricing mix has not declined. I think what you are, what you are seeing here is in large part the difficulties of that comparable period analysis, quarter four '06 to quarter four '07 with quarter four '06 being adjusted for the strike impact. It just makes it a very difficult analysis to do with precision.

I see. So directionally, you guys wouldn't say that the composition of price mix has tilted more in favor of mix and less in favor of price in recent quarters?

No, we would not, Himanshu, but we would say -- you characterize this as an arcane question. I think it's an important question because we ask ourselves that same question and working through the analytics of it, we've seen nothing to slow down our move in mix. In fact, as I mentioned earlier, relative to our dealer conference, we continue to feed that mix, but the quarter four analysis given the strike in '06, very difficult North American tire. So as we look at other parts of the world, we can look at North American tire in several different ways as you would understand, we feel good about the momentum that we have.

I'm going to sneak in one last one. I apologize. Back on slide 16, --

Is this number 7, Himanshu?

The estimated inflation, it looks like this is the non-raw mass insulation. Looks like it is running 100 million a quarter last couple of quarters. Darren, you've kind of suggested that the rate of non-raw mass inflation may be a little bit unstainably high. Any sort of guide post you can give us for what we should think about those numbers for '08?

Yes, Himanshu, that's real tough to do. I think your point is right. We've seen in non-raw material price inflation, we've seen numbers that, across all categories 4 upwards of 5%. So and 5% is not inflation rate we've seen generally in the mature markets around the world, which really carry the heaviest weight for us. So I think clearly there is room to go down, bunny in the fourth quarter, there's a big spike in energy prices. And energy prices are part of that non-raw material price inflation because we need utilities to run the plants and so forth. So I think for right now, it continues to be above where we would see it long-term, very hard to get a read for it if you're going forward given the effective energy.

Thank you guys.

Thank you.

Your next question comes from Rod Lache with Deutsche Bank.

Good morning everybody. You still have, looks like 735 to a billion, $800 million to a billion dollars left on this 4-point plan. Is that something that you would say is kind of half and half '08-'09? Can you give us any kind of breakdown on that? And just update on the timing of the healthcare deal that you would had previously quantified the productivity gains and expected benefits from LCC's this year?

I'd say, Rod, that what, we haven't changed our objective $1.8 to $2 billion, there would be reason to expect progress to accelerate when you see all the structural savings that we have still ahead of us. The, on the second part of your question related to VEBA, nothing has changed. We think that is on track. No reason to doubt it will be concluded in the second quarter.

And relative to '08, '09 split that is very difficult, very difficult to do. We'll just say that obviously, rod, as we said when we announced the plan 1.8 to 2 billion, that our goal would be to certainly hit the upper end of that and that's what we are attempting to do here.

(OPERATOR INSTRUCTIONS) Next question comes from Saul Ludwig with KeyBanc.

Good morning. This will be a long one question then. It's two parts. Part A. With regard to the $13 an hour workers, give us a little color on that like how many of them you now had, we are what kind of turnover rates you are experiencing, and the training, and the negative costs associated with it, less than what the positive benefits are, and in 2008 do you expect, what do you expect the number of $13 an hour workers will be incremental to 2008. And the second part of the question has to do with your goal of bringing on more supply of HVA tires. In each segment of your business you talk about having shortages. I wonder if the benefits of having shortages are this exceptionally strong pricing and the relationship of price to raw materials, and if you and others are successful in dramatically increasing your supply, what do you think that impact is going to be on the, from this other pricing?

Okay. So, Darren, you want to take part A?

Saul, question on the $13 an hour workers. I think what you would recall from the discussion we had when we announced the union contract is that across the plants that were not scheduled for closure, yet we had 10,000 or a little bit more steelworkers and we were expected 6 to 7% attrition each year. So what that would imply 600 to 700 workers each year leaving for retirement or other reasons, and what you've heard from us over the course of our calls is that number, we've been above that number during 2007. Now, in addition to that, there's been some $13 an hour workers hired to help fill in where overtime would have filled in in the past, which was part of the savings that we communioned as part of the contract. So I think if anything, we're ahead of where we thought we would be. Your question on the training costs is a good one. There is an investment in training there, and if we think about it, if you think about very short time frames, the first couple of months the $13 an hour worker is there, the training cost is in that period, the benefits aren't really in that period, but once we get past the training period then the benefits kick in. Clearly we view the cots as being transitional in nature. It exists to some degree, but I would say this is a lot of people to higher in the North American plants, more than we hired in certainly in recent years. And the investment we're making in training is going to pay benefits for us as we get the efficiency for the workers.

If I could maybe take part B. Which was the question around high value ad or premium tires and as we increase supply, how does that match up with demand, and our competitors doing the same thing. I would comment here that our belief is that not all high value added tires are created equally, and that's why you see the emphasis from us and industry leading new products on product innovation, on creating marketing capabilities around those new products that our goal would be to have a position as the best in the industry in our ability to do that. Although supply may be increased; by the way, these markets even irrespective of what kind economic slowdown we have in the U.S. and the impact on that on the rest of the world, this is going to be growing at significant rates and double digit rates in most of the segments. So the industry will be playing, you know, catch up if you in terms of supply, for some point in time and the same for us. Because I think our achievement here has been to create the best new product engine in the industry, and we didn't do that just by bringing up HVA or high value added product. We did it by bringing up industry-leading new premium products, and so what we are going to focus on is continuing to innovate, continue to drive our marking, and continuing to make sure that our cost structure comes down in manufacturing that product so that would be my response there, and that's what we are going to try to do and it's not only strategy, but try to execute against that. So not all HVA products are created equally.

Your next question --

Thanks Saul for the one question

Your next question comes from Kirk [Luedek], with SRT Capital

Good morning. I, Bob, you mentioned early in the presentation you reminded us that mix is attributable to product brand and customer.

Yes.

And I'm just wondering if you were would hook back at the improvement in mix in '07, could you, would it be possible, I know their inter-related, but would it be possible to rank the three in importance?

In a really anoquantitative sense, it's probably not possible, but I'll give you a perspective on it because your point is exactly the right point. They are interactive. Part of what we are doing in product interacts with what we are doing in brands and particularly the Goodyear brand here in North America and the Goodyear and Dunlop brand in Europe. And then, our customer mix, we're going to the people that we think have tremendous capability to grow their business in selling high value added product and have that capability on their teams in store and in their supply chains. So they are so inter-related, one of those mix elements alone doesn't get the job done. We have to have all three, but in terms of quantifying the contribution to all three, all three are essential to us. It obviously started with product mix for us. Without having the right products, industry leading new products providing characteristics and performance characteristics that meets the needs of the end user, you can't do the other two effectively. So in a sense, I'd say the core here is, is new product, and then we build on that, that build brand, and that builds our traction to the customers that can really move the product. Yes, Mark?

Just add one thing to that, Kirk, you have product brand and customer, you can add to that geography. We are growing faster in those parts of the world where we earn higher margins, and the point is, all four of them are positive.

Thanks, Kirk.

Your next question comes from John Murphy with Merrill Lynch.

Good morning, guys.

Hey, John.

I have two quick ones. First, the margins in North America were lighter than I was looking for in the quarter, and I understand the walk year over year. It's sort of a difficult walk to make from the quarter we were looking at that was impacted so greatly by the strike. Just wondering if you could you look sort of sequentially or give us the big swing factors sequentially from the third quarter to the fourth quarter or even the last two quarters versus the fourth quarter because they were particularly strong in fourth quarter was a little bit weaker than we were looking for.

Okay. John, by the way, I just mentioned here that for us we were very pleased with the fourth quarter in North America, given what we saw as the, the tremendous number of moving parts that came into that, but that's our comment. Mark, a response?

Sequentially, of course, quarter four you have holiday shut downs which complicate some of the comparisons and certainly adds to higher costs, but I think what you see happening in quarter four and it's a good thing, is that you see some acceleration of some of these structural cost changes that are in high value added capacity improvements that are going to lead to higher margins, improved mix as we go forward, but as we accelerate our progress in those things that do lead to higher margins, you see the transitional costs which, to some extent, holds you back on a quarter basis. We're not disturbed by it, we are on hack track, we are happy with it, but sequentially that's what you're seeing, John.

So that should lead us to believe that in the coming quarter there should be a greater net realization of your cost savings targets?

Particularly as we get into Q2, three and four in 2008.

Okay. Anne you mentioned something about $10 to $20 uptick in profit per tire for HVA or high performance tires versus what was the baseline? It's low, sort of was that private label or average tire? Trying to gauge what you were talking about there.

John, this is Darren. We do that comparison, I think we are generally dividing the tire world into two categories, we got what low value added and high value added, and the low value added, and there's not crystal clear definition here, but generally low value added would be the type of tires you see in private label. That would be a big, big part of what we consider low valued, and you are comparing that to a mid to high end branded product which would be high value added. The $10 to $20 is something we've given as a rule of thumb. Clearly, the real range is bigger than that, but I think as you look at model, the benefits you get from having 15% higher HVA production capacity at the end of '07 than we had at the end of '06, we're using that $10 to $20 as a tire per guideline.

It's almost, John, it's just a spin off of what Darren has already said. It's almost an average. We are trying to give you something that can help you feed your models but, as Darren said, in many cases it's greater than $20 and some cases it is as low as $10 depending on comparison. So think of it as average, and our goal obviously over time is to push that number up.

Next question comes from Al [Kadeli] with Goldman Sachs.

Hi. Good morning guys. Some questions on the pricing and the price increase that you initiated in February in North America, based on what is sticking. Do you feel that you've got enough to at least offset the 7 to 9% raw material inflation that we are expecting this year or do we need some more coming in the pipeline?

Let me just try to position this as, look, if we see 7 to 9% we are going to need 3 to 4% of price to totally offset that, that's without mix. With price, we are going to need 3 to 4% to offset that, so that will probably ground you as bit here. Now, I just go back to 2007. We had two increases, if we take, and Al, you're talking about the North American, the consumer replacement business. We had an increase in April last year up to 4%, I think, and then we had another increase in September in the fall that was up to 7%. And we have the current increase that is up to 8% for February 1, right?

Up to 7%.

Up to 7. They are all up to, up to 7. Up to 8. Well, from my standpoint what we are doing is we will we'll look at how the market reacts to that, because we are always a market back group. We'll take a look at how the market reacts to that and move forward, so I won't say that the, I won't comment on future price increases, but I certainly won't say there won't be any other price increases from us. It depends on what we're seeing in raws and other aspects of the market, and we'll, we'll digest that and we'll make the appropriate decisions going forward. I think Mark, you had another comment? No. Covered it? Okay. That's the response, Al. I know that's a part of your question. You have another part? Okay.

50-ish part sticks which would imply you could make it even. I'm trying to get a sense for how you are feeling about it, and then, B, Europe, haven't seen any price increase announcements in Europe and wondering, given the headwinds, how you could offset the raw materials in Europe or do we need to see some pricing soon?

From an European standpoint, we've been talking about Europe on the call for about a year in terms of pricing, I think it's been a challenging price market for us, in consumer replacement, much less so in truck. It's maybe been our most challenging geographic area. It continues to be a bit of a challenge, and what happens in Europe right now is you've got what I'll call fast start or selling programs that take place at this time of the year for summer and the pricing usually will clarify coming out of those programs. Might not be totally clear to you and the general market today, but will be clear coming out of those programs. We expect it to remain somewhat a challenge, given the growth rates and the competitive situation.

Okay. And then question one, see if I may, which is dove tailing on an earlier question on the transitional and manufacturing expenses of 40 million in the quarter. Could you just break out how the much was in North America versus the rest of the world? Out of that 40 million?

Okay. Mark?

Yes, I don't know if I can precisely break it out. We talked about it being primarily a North American issue, and that's where I would leave it at this point.

Thank you.

Thanks, Al

We have time for one further question. Your last question comes from Jonathan [Steinmets] with Morgan Stanley.

Hi guys. This is [Robby] in for Jonathan. Two part question again. Where do you see your market share evolving in the Latin American markets going forward? Also, can you talk about fleet HQ and what you are trying to do with that initiative and your plans for that initiative?

Yes, Robby, just share market. Let me take the first one. In terms of share market in Latin America, we never give guidance on share market. I will tell you this. I think there's been a lot of skepticism for frankly five years I've been in this job from a host of people in tenderness of can you continue to increase your margins and continue to grow in a productive way in Latin America. Our feeling is that we've got significant competitive advantages in Latin America today. And those range from brand to dealer network to cost position. What we are doing currently in Latin America is you'll see a series of introductions of new products using world class technology in Latin America unlike anything that's been seen before. That will happen in the consumer area and in the truck area. So naturally we are looking for very profitable growth and possibly even expansion into the margins, although the margins in Latin America are high, so from our standpoint, we see growth opportunities that are significant in Latin America.

Building on a strong basic capabilities and now really hitting that with new product which, in some cases, the consumer market is now ready for in Latin America the five years ago they wouldn't have been ready for, but we are will go innovating significantly new products and trucks. In terms of your second question, was around fleet IQ, or HQ. Fleet HQ, what we are trying to do there is create, in effect, a service network. You can think of this as a call center, and we talked before about cradle the grave, in terms of our retreading capability in servicing fleets throughout North America. Well, you can think of this beyond that as a call center manned by our people that is in contact with the drivers, the operators that are out there on the highway, and provides them with 24/7 capability in terms of their service needs. So think of it as a huge customer service network servicing our fleets on highway. As I said, in my comments this morning, our commercial truck people demand tires and services that keep them up and running. They can't, they can't have down time, and so what we are trying to do is reduce the down time and frankly take away the concerns and the anxiety around that both for the owner and for the individual drivers so that's that program. And we've got the ability to dispatch help very quickly to people that are having on the road problems.

Carrie, that was our last question. So thank you everybody for joining us this morning.

We just appreciate your interest in the company, and we're frankly very proud to have delivered another very solid quarter. Thank you very much.

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