Goodyear Tire & Rubber Co (GT) 2008 Q2 法說會逐字稿

Good morning. I will be your conference operator today. At this time, I would like to welcome everyone to the Goodyear second quarter 2008 conference call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question-and-answer session. (OPERATOR INSTRUCTIONS) Thank you. I would now like to turn the conference over to Patrick Stobb, Director of Investor Relations. Sir, you may begin your conference.

Thank you. Good morning, everyone, and thank you for joining us for Goodyear's second quarter 2008 conference call. Joining me on the call are Bob Keegan, Chairman and CEO, Mark Schmitz, Executive Vice President and CFO, and Darren Wells, Senior Vice President, Finance and Strategy. Before we get started, there are a few administrative items I would like to cover. To begin, the webcast of this morning's discussion and the supporting slide presentation are now available on our website at investor.goodyear.com. A replay of this morning's discussion will be available at noon today by dialing 706-645-9291 or at our website at investor.goodyear.com. The last item, we filed our form 10-Q earlier this morning. If I could not direct your attention to the Safe Harbor on slide two of the presentation.

I would like to remind you 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. Turning now to the agenda. On today's call we will provide an overview of the second quarter results and discuss other related business matters, including a recap of our June 26th investor meeting. For reference the investor meeting presentation is also available on our website. The presentation provides a very good overview of the Company, together with the comprehensive review of our business growth strategies. We will follow this discussion with a review of the financial results and a summary of our latest industry outlook before opening this call to your questions. Now, I will turn the discussion over to Bob Keegan.

Thank you, Pat, and good morning, everyone, and thank you for joining us today. Our strong second quarter and first half performance demonstrates the successful execution of our strategies despite the significant economic challenges we are facing, particularly in North America. In the quarter, robust revenue growth in our international operations especially in emerging markets more than offset the continuing weakness of the North American market. Our core strategy to invest in our emerging market businesses has resulted in a profitable and growing set of businesses. Revenue contribution from the international businesses was approximately 60% of our global total for both the second quarter and first half. We remain confident in our ability to manage through the challenging near-term business conditions and are focused on maximizing current business performance. At the same time, our long-term investment strategy highlighted for investors at our June 26th meeting positions us to capitalize on available and attractive market opportunities.

Our second quarter performance was assisted by the contingency plans that we put in place last December to address the type of macro conditions we see in our markets today. These plans included an intense focus on cost reduction, an adjustment in our production volumes in U.S. and in Europe, full utilization of our innovative new product engine to further drive price mix improvements and leveraging our purchasing capabilities to realize better input costs. In addition to our contingency actions, our ability to continue to perform well overall, despite current business conditions, can be attributed to the business model we have created over the past five years. It has significantly improved our competitive capabilities in several respects and I'll mention those. Our business model is grounded in the ability to introduce innovative differentiated and marketable new products that consumers desire and to do it at a faster pace than anyone else in our industry. Second we have reduced our exposure to the economically sensitive consumer segments of the business. For example, exiting certain segments of low end private label tires and, as another example, focusing on segments of the OE business that return higher margins and increased consumer loyalty. Third, we have successfully focused on the emerging market as a source of continuing top line and margin growth. Fourth, we've continued to lower our structural costs, including our move toward a more competitive and compressed manufacturing footprint. And number five, we have strengthened our balance sheet and liquidity position to enable us to fund future profitable growth initiatives. With this improved business model in place, Goodyear now has the foundation to navigate through the current weak business conditions.

I'd like to now cover our major achievements during the second quarter. We achieved record sales of $5.2 billion, which represents an increase of 6.5% compared to prior year. And I'd ask you to remember here that the year-ago period revenue of $4.9 billion included $186 million in revenue from the now divested TWA business. Therefore our sales growth would have been 10.6%, if we were to exclude the sales related to the divestiture of the TWA business from the prior year results. Income from continuing operations increased 159% to $75 million. Despite the reduction of production units that we indicated at our June 26th meeting with you in New York and the resulting unabsorbed overhead, segment income grew to $330 million driven by EMEA Asia and Latin America. We maintained our positive trend of price mix improvements, with price mix more than offsetting raw material increases and price mix more than offsetting raw material increases by an amount of $125 million. Revenue per tire increased by 9%. Year-over-year revenue per tire has increased for 15 consecutive quarters. We raised our four-point cost savings target to more than $2 billion.

We announced our plan to close a high cost manufacturing facility in Australia and, with that closure, we will complete the footprint reduction actions under our four-point cost reduction plan. We also announced the planned closure of our mix center in Tyler, Texas which now completes the shutdown of that manufacturing facility. We laid our plans for the relocation and expansion of our Dalian China plant, which includes our first commercial truck tire capacity in China. As planned, we refinanced our European securitization program, increasing the size by EUR 175 million and extending the maturity from 2009 to 2015. And you'll recall that this represents our lowest cost financing. This action reduces our near-term maturities by nearly half in 2009. You can reference the detail on slide number 26 in the appendix. We were recognized as number 16 in a Forbes magazine list of America's most respected companies. This is a consumer driven ranking that measures the overall respect, esteem and admiration consumers hold towards the world largest companies and obviously a powerful motivator for both our associates and our customers. And we held an investor meeting on June 26th in New York City, during which we demonstrated the depth and capability of our leadership team, as all our business leaders and many of our functional leaders presented, responded to your questions and interacted with investors. We provided investment plans aimed at capitalizing on the attractive market opportunities that we see in front of us. And we addressed the impact of current economic challenges on our Company, especially in North America, and our initiatives to counter them. The meeting generated significant interest among a broad group of investors with nearly 400 participants globally. The resulting positive and supportive third-party feedback relative to our strategies was encouraging.

I would like to spend a few minutes recapping the key points from the New York meeting. We focused our attention on five key areas that will help take our business model -- our business platforms to the next level. First, we plan to maximize our presence in high value added tire segments. Market growth in these segments has been, is now and will continue to be significant. For those of you who are joining us for the first time today, HVA refers to tires that incorporate one or more characteristics related primarily to tire diameter, construction and performance. They are packed with technology. Due to the technical complexity of HVA products, margins are higher, in the range of $10 to $20 per tire more than those not meeting the HVA criteria. Goodyear has been successful in the HVA segment, primarily because of our ability to differentiate our products based on brand strength, technology and innovation and the ability to deliver through our industry leading global distribution network. And we plan to continue capitalizing on these core strengths. Second, we plan to build on our capabilities in emerging market where industry growth and conversion to HVA tires present favorable trends and, frankly, opportunities for us. Third, we are driving improvement in supply chain efficiency both to reduce inventory and to improve fill rates for our customers. Fourth, as I mentioned earlier, in June we raised our cost savings targets under the four-point plan to more than $2 billion.

And finally, we plan to increase our capital investments to take advantage of the high return opportunities that exist in our markets. Our announced investment plan covers modernizing existing plants for HVA tire production, expanding capacity for growth in emerging markets, improving our supply chain to reduce both our cost and our working capital investment, and increasing cost efficiency in both production facilities and in back office operations. Through these planned investments, totaling $1 billion to $1.3 billion per year, we will create significant HVA capacity and incremental margin. This new HVA capacity will increase on average 8 million units per year or 32 million units over the next four years and will help us to generate both increased price mix and improved manufacturing flexibility, efficiency and product uniformity. As I said in New York, given the current economic challenges, our pace of investment can be altered to account for changes in outlook as we work to maintain a positive corporate cash flow. Now, we are acutely aware of the macroeconomic situation that we find ourselves in both in the U.S., where this economic slowdown started and around the globe. These are themes we address head on in our June meeting with you. In the U.S., we are seeing the early stages, and I emphasize the early stages, of a trend toward less gas consumption and fewer miles driven, clear signs that the state of the U.S. economy and higher oil prices are impacting consumer behavior.

In the second half of this year, we continue to expect challenging business conditions, somewhat more challenging than in the first half. Raw material costs will be substantially higher. Volume weakness and inflation concerns will remain, and as a result, the impact of production cuts and the associated unabsorbed overhead in our income statement will be higher. While we see some weakening in our international markets, those businesses continue to perform well for us. We have placed an intense focus on mitigating the negative impact of these pressures, and that focus manifests itself in several ways. First, the Company is -- and remember here we have a track record in this respect -- the Company is successfully offsetting raw material cost with price mix improvements. To date, our outstanding new product engine, our steady stream of high value added product introductions, has enable us to generate richer mix and improve market share in our targeted market segments. These are and will remain attractive segments. For example, Goodyear has introduced a number of HVA technologies in North America and in Europe and has now extended those technologies into Asia and Latin America.

The commercial segment's line-up of Fuel Max and DuraSeal technologies, which many of you saw in New York, are also having a positive impact on revenue and most importantly margin. As preferences in the U.S. market evolve toward more fuel efficient vehicles, we have been moving aggressively on that front as well. Goodyear is positioned on six of the top eight most fuel efficient vehicles available in North America today. Fuel Max is providing significant fleet savings to our commercial customers. We believe the European market is a good proxy for what lies ahead in the U.S. market. Despite smaller vehicles and higher fuel costs in Europe, HVA trends there are well ahead of the U.S. market. Goodyear's engineers today are well aligned in the development of the next generation of tires. Point number three, we continue to drive efficiency changes throughout the organization, as we look to achieve our four-point cost reduction plan with the target we mentioned now exceeding $2 billion. We have reduced our production volumes in the U.S. and European facilities and of course the potential exists that additional reductions may need to be made to manage inventory levels.

Finally, our purchasing efforts have been aggressive in addressing challenges on four fronts. First, we are leveraging our technical capabilities to reduce material usage and where possible. For example, substituting synthetic rubber for natural rubber or vice versa, depending on where the cost advantage currently resides. Second, we are working to reduce our supply chain costs. Third, we continue to drive low cost sourcing. And fourth, we are focused on manufacturing initiatives that will significantly reduce energy consumption in our facilities. So in summary, as we manage through the economic downturn, we will continue to do the right things. Q2 was a good quarter, buoyed our strength in overseas markets. We continue to grow the Company profitably, and the North American market is proving difficult at many levels, particularly as it relates to the weakened demand environment. Yet our second quarter results keep us on track to achieve the remainder of our corporate next stage metrics. As we said at the New York investment meeting, the current environment in North America only impacts the timing of our delivery on those commitments, not the achievement of those commitments themselves. Our business model changes have positioned us to better face the challenges of an economic downturn and to emerge as a stronger and leaner competitor. And I'll now turn the call over to Mark for his comments about the corporation and segment results. Mark?

Thanks, Bob. In my comments today, I will discuss the Company's second quarter results, building on Bob's comments, followed by a review of segment information, the balance sheet and cash flows. As Bob mentioned, we are pleased with our second quarter results which contributed to a strong first half for Goodyear. The strength of our global brands and outstanding growth in our international businesses once again helped the Company grow profitably, despite significant challenges related to higher raw material costs and a weak demand environment in North America and to a lesser extent in parts of Europe. The Company's year-to-date 2008 results reflect a continued progress against a well balanced set of strategies aimed at near-term performance and long-term profitable growth. Turning first to the income statement, net sales in the quarter grew to a record $5.2 billion, an increase of 6.5% over the prior year. This percentage increase would have been 10.6% if we were to exclude the sales related to the divestiture of the tire and wheel assembly business from the prior year results. Price and mix improvements and favorable foreign currency translation were offset partially by lower unit volumes, primarily in North America and Europe.

Gross margin was 19.9% for the quarter, which is a 0.5 point improvement from the prior year, continuing the good gross margin results we saw in quarter one. Segment operating income increased to $330 million, which was 6.3% of sales in the quarter. Selling, general and administrative cost increased by $43 million. The higher level of SAG can be attributed primarily to foreign currency translation which increased SAG costs by $46 million. Income from continuing operations was $75 million or $0.31 per share in the second quarter versus $29 million or $0.14 per share in the prior year. Reported income from continuing operations in the 2008 quarter included after tax expenses of $87 million or $0.36 per share for rationalization and accelerated depreciation charges. These related primarily to the announced closure of our Somerton, Australia tire manufacturing plant. A list of significant second quarter items for this year and last year, including per share amounts, can be found in the last page of our earnings release and in the appendix of the slide presentation.

The next slide provides the primary factors that drove the $20 million year-over-year improvement of segment operating income. To begin with, foreign currency translation provided the benefit of $35 million for the quarter, primarily in Europe and Latin America. Price and mix improvements and excessive raw material cost increases was a favorable $125 million in the quarter. This price and mix benefit reflects the success of our pricing actions, as well as continued momentum in our strategy emphasizing HVA products. While confident in our price and mix strategy, it is noteworthy that raw material costs as they affect our P&L will escalate considerably for the remainder of the year. We reported previously that quarter one raw materials had increased by only about 1%, due in part to a spike in prices in natural rubber purchased in the second half of 2006 and the lag effect of (inaudible) inventories hitting our P&L. In the second quarter, our raw material increases year-over-year is approximately 8.5%. Obviously by keeping pace with price and mix, we have absorbed this increase and then some. We've given guidance that raw material cost increases for the full year will be in the range of 10 to 12%. This implies the second half increase will be far larger than those we've seen in the first half. We are focused on continuing to drive price and mix improvements, but there's no denying the second half will be more challenging.

With respect to our four-point cost saving plan, we made continued progress with realized savings of $190 million in the quarter. These positive factors were partially offset by a $3 million unit sales decline, which reduced segment operating income by $37 million compared to previous year. As a reminder, this amount reflects the average margin in the lost units and does not include the impact of unabsorbed overhead related to lower production volume. Notwithstanding this volume decline versus last year and the underlying soft markets, particularly in North America, we've increased revenue per tire by 9%. The estimated impact of inflation other than raw materials was significant at $191 million. Inflation was more pronounced in the quarter, particularly as it affected wages, indirect materials and energy costs. Transitional manufacturing costs in North America Tire were at about the same level of last quarter and, when coupled with unabsorbed overhead due to volume reductions, amounted to $46 million. If you recall, transitional costs include costs related to factory modernizations, conversion to HVA and training of our $13/hour workforce. The remaining unfavorable variance of $56 million relates primarily to higher manufacturing costs in our international businesses, including unabsorbed overhead for production cuts and certain non-recurring costs in Europe. The negative impact of the weak demand on our retail business was also a factor.

With regards to progress in our four-point cost savings plan, two-and-a-half years into the plan we've achieve more than $1.4 billion of cost savings. This places us on a competent path to achieve our targeted savings, which we recently increased to more than $2 billion. We've realized improvements in each of the four areas during the second quarter including our continuous improvement initiatives, high cost footprint reductions, low cost sourcing and SAG cost reductions. This includes incremental steelworkers productivity savings primarily due to the hiring of additional $13 her hour labor. At our investor meeting in June, we announced our plan to close the Somerton, Australia tire plant which brings our total reduction in high cost footprint to our target of 25 million units. The achievement of this goal is a significant accomplishment for the team. We also recently announced our intent to close the mix center at our Tyler, Texas facility which remained open after we discontinued tire production in quarter four of last year. We remain committed to our previously announced next stage metrics and we continue to make good structural progress toward achieving the remaining goals. As we said in June, due to the economic environment in North America, the achievement of remaining targets will take longer than we would have liked. But when the market recovers we are confident we will be there.

Turning to the segment results, North American reported profits of $24 million in the quarter, which compares to $53 million in the 2007 period. The 2008 profit level is based on revenue of $2.1 billion and volume of 18.3 million units representing year-over-year declines of 6% and 12% respectively. Sales in the quarter would be up by 2% if we exclude sales of $186 million related to the divestiture of the tire wheel assembly business from the prior year's results. The demand environment weakened significantly during the quarter as consumers drove fewer miles, bought fewer cars and consequently purchased fewer tires. Published U.S. government data has shown a 2.4% reduction year-to-date in highway miles driven. During the second quarter, the U.S. consumer replacement market declined by 3% and consumer OE declined by 20%. Industry volume for commercial replacement and OE were also weak, declining 9 and 10% respectively. The impact of the lower industry volumes was significant as we sold 2.5 million fewer tires compared to the previous year. North America has lowered production schedules judiciously, as it looks to control inventory and manage for cash. As we said at our investor meeting on June 26th, we plan to cut production in North America by about 8 million units this year. About three fourths are expected in the second half. We will reevaluate this level if conditions change.

Raw material cost increases accelerated in the quarter as did general cost inflation affecting wages, indirect costs and the cost of energy in our plants. Raw materials alone experienced double digit increases compared to the prior year. Price and mix more than offset the higher raw material costs, providing a net benefit of $48 million in the quarter. Once again, we saw improvement in our mix of high value added tires, driven in part by the continued growth in Goodyear branded products. These factors contributed to a 12% increase in revenue per tire in the quarter. We continue to see roughly the same level of transitional manufacturing cost we experienced last quarter in the area of $30 million. In addition, while the unabsorbed overhead in connection with tire plant in our Tyler plant virtually ended in quarter two, the amount, roughly $15 million, was replaced by unabsorbed overhead associated with production costs. Unabsorbed overhead flows through inventory, which takes about 60 to 90 days before impacting our results. Although in certain circumstances, such as significant changes in production, these costs are expensed in the period incurred.

Looking to the second half we expect unabsorbed overhead in each of the remaining quarters of the year will be significantly higher than the costs we realized in the second quarter. The year-to-year comparison was negatively impacted by lost profits of $4 million due to the divestiture of our tire and wheel assembly business in 2007. Altogether, we see progress with the results achieved by North American Tire in quarter two, as we make further steps toward our strategic goals in a difficult environment. We have reduced structural costs, exited businesses, repaired the balance sheet, and improved mix. Over time, the transitional costs we are experiencing will diminish. Markets will recover and our movement toward high volume added products will continue to feed a powerful mix engine.

Now turning to Europe, our results came in strong, with growth in both sales and earnings for the period. Revenue per tire excluding currency increased by 6% reflecting favorable share in our strategic segment and premium brands. Before moving to the details, let me refined you that we combined our two European businesses into one strategic business unit, Europe, Middle East and Africa or EMEA in the first quarter of 2008. Operating income in the quarter increased 20% despite a 4% decline in unit volumes. Price and mix improvement more than offset raw material cost increases, which contributed to earnings growth by approximately $40 million in the quarter. Foreign currency translation was also favorable, as the Euro strengthened more than 15% against the U.S. dollar in 2007. Negative factors impacting the quarter included a weaker industry demand, which had a direct impact to our volumes. Compared to prior year, volume declined by almost 1 million units. Consumer replacement and OE volumes were both lower, due to softer demand and to a lesser extent our decision to selectively focus on sales in the more profitable high value added market. Commercial volumes were mixed, with OE volumes up strongly year-over-year and replacement demand softening. Consistent with our remarks at the investor meeting in June, we lowered our European production expectations for the year primarily at the lower value end of the product range. Inflation negatively impacted both transportation and SAG costs. Additionally, we incurred certain non-recurring operational expenses including a strike in Turkey. Overall EMEA is performing very well and remains an impressive success story for the Company. Recognizing weakened market fundamentals, we are maintaining balance optimism for the second half.

Latin American Tire reported another excellent quarter in growth in sales an profits of 25% and 14% respectively. Second quarter segment operating number was $103 million on sales of $572 million. Volumes were about equal to the previous year, as growth in Brazil and Venezuela for the most part declines in Mexico which has slowed primarily due to its connections to the U.S. market. Favorable price and mix more than offset higher raw material costs and helped drive a 13% increase in revenue per tire. Foreign currency was favorable, primarily due to the strengthening of the Brazilian real which has continued to appreciate against the dollar. Similar to the other regions, cost inflation was significant, related primarily to energy, transportation and wages. We continue to be very pleased by and optimistic about the performance of our business in Latin America. This business enjoys a combination of high growth, favorable operating margin and the lowest SAG to working capital ratios among our SVUs. Our challenge now is to make the business grow faster, and we expect to do so with an unprecedented pace of new product introduction in both consumer and commercial tire markets.

Finally Asia-Pacific Tire reports outstanding performance in the quarter, rounding out an impressive first half. Second quarter sales and operating income grew 20% and 27% respectively. Segment operating income strengthened from the previous year to 10.1% of sales. Performance was driven by an 11% volume increase primarily due to continued growth in China. Demand was not uniform throughout the region, as we are seeing economic weakness in some areas primarily Australia and New Zealand. Further benefits from derived from favorable price and mix versus higher raw material costs and to a lesser extent foreign currency translation. These positives were partially offset by higher costs related to increased marketing, business expansion and cost inflation. Our operations in China are expanding as we look to grow our presence in retail, manufacturing and sourcing. We announced plans to relocate and expand our manufacturing capabilities in the region, including increased consumer high value added capacity and Goodyear's first commercial truck capacity in China. The region continues to perform very well with excellent prospects.

Turning to the balance sheet, we finished the second quarter with nearly $2.1 billion in cash which is $1.4 billion lower than the cash balance at year end. The lower balance reflects debt repayments of $750 million made in the first quarter as well as seasonal increases in our working capital. In addition to seasonal factors, increases in inventory reflect higher raw material costs and weaker unit volume, primarily in North America and Europe. We continue to maintain a relatively high cash balance, primarily due to the anticipated VEBA funding which we are optimistic will be approved. Total debt at June 30th, 2008 was just under $4.1 billion compared to $4.7 billion at the end of the 2007 and almost $5.5 billion at June 30th, 2007. The reduction compared to year end 2007 resulted from $750 million of debt repayments executed in the first quarter. Net debt stands at $2 billion. I would also highlight that we've recently completed the refinancing of our European accounts receivable securitization program that was mentioned at our investor meeting in June and was completed on July 23rd. The size of the securitization program, which is an on balance sheet program, was increased by EUR 175 million to EUR 450 million, while tending maturity from 2009 to 2015. In addition to increasing our borrowing capacity overseas, this program continues to be a primary source of liquidity for our European business and is one of our lowest cost sources of debt. It also reduces our need to raise debt at the corporate level, thus improving our balance sheet efficiency. Additionally, we expect to secure financing to support our relocation and expansion project in Dalian, China during the third quarter.

Turning to cash flow for the first six months of the year, operating cash flow used by continuing operation was $215 million or almost $300 million favorable to last year. Cash flow from operations improved as a result of increased earnings and lower pension contributions partially offset by higher working capital needs. We contributed $162 million to our global pension plans in the first half of the year versus $265 million in the second half -- in the first half of 2007. We've also reduced our expected 2008 contributions to our global funded to a range of $300 to $350 million from the previously indicated $350 million to $400 million. Working capital as the use of cash increased in the period compared to last year, primarily as a result of the increase in inventory seen on the previous slide. We intend to keep a very tight check on our finished goods inventories and we'll manage production aggressively for the remainder of the year. Capital expenditures were $476 million through June 30th, as we executed our investment plan explained at the investor meeting in June. In summary, our quarter two and first half results reinforce the effectiveness of our strategies, demonstrating our ability to improve the business in difficult times. Our structural cost reductions, stronger balance sheet, and richer product brand customer and geographic mix all work in our favor in this period of economic uncertainty. You can expect us to continue to drive mix, price, cost reductions and high return investments in an aggressive though balanced way that meets both short-term performance requirements and longer term strategic goals. Now I'll turn the call back over to Bob.

Thank you, Mark. And before we open up the call to your questions, I'd like to summarize our updated outlook for the industry in 2008. Overall the outlook for industry unit sales in 2008 has weakened. In North America we now expect the consumer replacement market to be down 2 to 3% during 2008. Our forecast for the consumer OE market is now down 15% plus, anticipating lower builds as the OEs manage inventories derived from slower sales. Our forecast for commercial OE has been revised to down 5 to 10% and this industry has a tendency to fluctuate more than the replacement, based on a smaller number of units in the industry base. Our forecast for the commercial replacement market is now down 2 to 4%. In Europe, for the full year, our forecast for the consumer replacement market is now down 1 to 3%. For the consumer OE market, our forecast remains unchanged at up 1 to 3%. For the commercial replacement market, our forecast is now down 4 to 6% and our forecast for the commercial OE market is now up 8 to 10%.

While we continue to see considerable uncertainty and volatility in raw materials much as you do, driven primarily by the volatility of oil and natural rubber pricing, while our expectations for raw materials remains the same as we communicated in New York last month, that is up 10 to 12% for the year, the volatility we see may mean we are moving toward the higher end of that range. But the range remains in place. Consistent with our Q1 call, we expect interest expenses in the range of $320 million to $340 million. For modeling purposes, we held our tax rate guidance at approximately 25% of international segment operating income. Our 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 wanted to provide you with a concluding comment. We remain confident in our ability to manage through the challenging near-term business conditions and are focused on maximizing current business performance. Clearly here, we'll continue to think creatively and aggressively about new initiatives to counter the current market weaknesses. At the same time, our long-term investment strategy highlighted for investors at our June 26 meeting positions us to capitalize on the available and attractive market opportunities that we've identified. So we thank you very much for your interest in Goodyear and we'll now open the call to your questions.

Thank you. (OPERATOR INSTRUCTIONS) Your first question comes from the line of Rod Lache with Deutsche Bank.

Good morning, everyone.

Good morning Rod.

Can you first of all tell us whether there's been any change to the timing of the VEBA settlement and is there any risk at this point to that?

Let me kick off and Darren you might have a comment on this as well. The judge asked for additional information, as I think you know. That information was provided. There was a hearing that was held on the 23rd of June and that's where we stand at this point. I'm sure the judge will consider what he's seeing in terms of all the information, including this additional information and come forward. From our standpoint and this is the standpoint not only of Bob Keegan, but also our attorneys, we still remain confident in this area.

Okay. And you are expecting that around the Q4 time frame?

Rod, I think that the decision itself could come anytime but we are starting to look like the savings will start in Q4.

Okay. And how much higher would you expect the unabsorbed overhead to be in the second half and also just on the headwind side, non raw material cost inflation was bigger this quarter than it was in Q1. Can you address the outlook for that?

First of all on the unabsorbed overhead question, Rod, we can't give you very specific guidance on that right now and I'll tell you why. The accounting rules get a little bit complex here. If you cross a threshold in terms of volume cuts that's significant, you start recognizing unabsorbed overhead as a period cost rather than letting it flow through inventory. It is going to be more significant. Even if it flows through inventory the way it has the last couple of quarters, it is going to be more significant than what we've seen. But it's very difficult to provide specific guidance on it. Let me just add to that and say that it's not more cost in total. If it flows through as period cost as opposed to inventory, in fact it will benefit in some future period as it will essentially just be an acceleration of cost recognition. And on the question on inflationary other than raw materials, yes, we've definitely seen it. I think all of our competitors have seen it. We're seeing it in the economy at large. Some of this is really easy to understand, as you see the impact of fuel prices on transportation costs. Some is a little bit more subtle, such as the impact on our wage settlements. So we are seeing it but I think we are -- we understand it and we are able to deal with it.

Okay. Can you quantify the total impact of the 8 million units of unabsorbed overhead? I understand it might be a period cost or built into inventory but what is the hit in totality? And secondly and lastly, just comment on the outlook for pricing versus raw materials as you get into the back half of the year. Do you believe you'll be able to set the double digit raw material cost inflation in the back half. Would you be able to mitigate that with pricing?

Rod, I probably can't give you a specific answer that would satisfy you completely, but let me just kind of repeat what we've seen here in quarter one and quarter two, where we did see additional unabsorbed overhead, I think it was $15 million in quarter one and about the same $16 million in quarter 2. In quarter three and quarter four, it is going to be somewhat larger than that. And that's about as much as I can tell you right now.

Okay. And pricing?

This is Bob again. Let me do one thing. I want to correct. I'm told I said June 23rd and not July 23rd on the latest hearing on the VEBA, it was July 23rd. If you are in my position, it probably seems like it was a month ago but it was July 23rd. From the standpoint of pricing, Rod, what we will say is that we think we have demonstrated our ability to contribute significant amounts of price mix over time. As I've said we've had 15 quarters in a row where we've had great performance, and certainly, it would be our intention to continue that process particularly with the significant cost inflation that we're seeing as you correctly mentioned and Mark just commented not only in raws but in other areas as well. So I say look to our -- look to what we've done and I think we've created a track record here that is pretty admirable in that area. And again we do that through outstanding marketing, outstanding products and outstanding new products. And we'll intend to continue that.

Thank you.

Thanks. Your next question will come from the line of Himanshu Patel with JPMorgan.

Good morning.

Good morning.

In North America on price mix, you mentioned that the contribution from revenues was about $149 million and looks like in the operating income line it was pretty strong, about 107. That sort of implies that you converted that at about $0.77 on the dollar and that I think is almost a 20-point change versus what you were doing in the last two quarters. Does that mean mix has started to soften or does that really mean that the rate of price increases has really started to improve much more?

This is Darren. What we are saying in both quarters is that we had significant contributions from price and from mix. Clearly in this case, we've had a lot of drop-off in the OE business and the drop-off not as steep in replacement relatively speaking and that is a helpful factor for us. It helps us with mix as well. But I would caution you against drawing too many conclusions there, given the number of moving pieces. But I don't think your suggesting anything that we've seen as a trend, but we continue to drive both.

And particularly, remember you are looking at a quarter and if you look at the half, you'll see some different movements and we tend to look at the quarter but also at the half of the 12 months and that is what guides our assessment of what we've been doing and what's been happening in terms of market dynamics and therefore what we have to plan for and execute next.

One -- I think you revised down the European market outlook. It looks like the exit rate of volumes on both commercial and consumer for the industry in Q2 in Europe was considerably weaker than maybe what the total quarter was and I'm just thinking, if we get into a situation where the second half demand outlook gets a lot worse, can you just at a high level talk about your labor flexibility in Europe? Can you adjust production as fast and as cost effectively as North America or is the business structure different there?

Just to provide context here, in terms of the market, in Europe we've had a very strong -- this is an industry comment here. Strong industry in April and weakness in both May and June and you probably have heard that on other calls that you've had. So -- and that hasn't surprised us but more a little more negative than we expected. So naturally we are looking at the second half from a contingency standpoint. Going back to what I mentioned, the contingency plans that we were talking about in December of last year certainly covered from a European standpoint, a macro possibility that we find ourselves in this situation. And I think our team has reacted very appropriately to that weakness to date and will continue to do so. Relative to labor flexibility and, Mark, I know you'll make a comment here to elaborate, but in Europe we have a fair amount of flexibility relative to variable labor and labor is in fact a variable cost.

Just to expand on that comment from Bob, the implication of that is that the underabsorbed factor for European production cuts probably isn't as large as we see for North America. Recall also in that regard, that we have a fair amount of our production in Europe coming from the east, and in general, we've got factories there that are more flexible, i.e. have a higher proportion of variable versus fixed costs.

I'm sorry, Mark, you said the unabsorbed overhead that could result in Europe from lower volumes would be lower than it would in North America for a comparable volume decline.

That's exactly right.

And then another question. Slide 11, the last bar "Other" $56 million negative, I'm sorry, you ran through some of the components. Can you give us a little bit more granularity on what's in there and which geography it's in?

A little more granularity, yes. We certainly see additional costs of both lower volumes outside of the U.S. and manufacturing complexity related to conversion to high value added products, and there are some other factors in there as well. For example, lower earnings in our retail business in North America would be buried in that as well.

The only thing I would add is that we have a couple of what you classify as non-recurring items, I think, or one-timers that are in there as well. In Europe we had the strike in Turkey for instance, which hits for about $5 million or $6 million, and we had the cost of a wage settlement in one of our French plants that was about $5 million. So a couple of things in there that -- going through the manufacturing cost line, we kept them in "Other" in order to portray the North American manufacturing cost cleanly.

And then last question. The issue on freight cost, any way you can help us with guidance on that? Should we just look at what is happening with diesel cost and assume your business will move in tandem or do you have any sort of contracts in place, is this sort of stepped in over several quarters, or how do we think about that going forward?

I just mentioned that I talked about our purchasing activities, and we are looking to procure certainly at the rates of inflation below the market, but what we saw in the first half was virtually at market rates, maybe slightly below. So I think a reasonable assumption is slightly below the market for the second half of the year.

Okay. Thank you.

Thanks.

Your next question will come from the line of Kirk Luedtke with CRT Capital Group.

Good morning.

Good morning.

I guess I was -- Bob, you mentioned the trends during the quarter in Europe, and I was curious if you could go through the same type of analysis, the trends and replacement demand in the other three regions and then if you've got any thoughts on how July is going, that would also be very helpful.

Let me kick off by just saying that -- I went through the other regions -- let me start with North America. Remember there are always ups and downs by month here, but certainly from a volume standpoint, you've seen the industry data and the forecast there that we provided, we are continuing to see pretty consistent weakness in consumer replacement and of course OE speaks for itself with our forecast. I won't give you any insight that is useful for July probably except to say that trends are continuing as best I know at this point. From an Asia standpoint volume was strong, driven by the -- by China and the other emergent markets in Asia and that is offsetting to some degree some weakness in Australia and New Zealand, as those economies overall have some problems. But we anticipate that we are going to continue to see good growth. I would caution you here that you are hearing today that maybe China is slowing a bit, and we hear those same comments. What we see is if the GDP in China goes from 11% to 8%, it is still significant growth for us particularly in the times -- in the segments and products that we are delivering. So we feel pretty good there. Latin America, as you know, is a tale of a couple of different economies. Brazil is booming and Mexico being as it is associated with North America is having some issues. And we are seeing -- those comments that I am making would apply to consumer and to the truck business overall. So I'm trying to give you a very quick rundown, but that would be a quick rundown on volumes. We don't see anything happening in July that is particularly or dramatically different than what we saw coming into July.

That's very helpful. Thank you. Also you mentioned some of the year-over-year changes for the first half, and I think you mentioned in North America. I didn't catch them, but could you give us those again and then also is there a way to do the same thing for Europe so we can back into what it means for volumes in the second half?

Are you talking to the industry volumes?

Yes. If you can give us the comparable numbers from slide 20 for just the first half year-over-year.

I think there we'd say that for the first half, if you took the consumer replacement business in North America, it's off about 1%. Okay? The European business is off about 4%. And these are rough. But the order of magnitude. They are decent numbers to work from in the first half. The OE business in North America is off about 17 and these are industry -- this is all industry numbers and Europe is up 2. Does that give you --

Yes. Do you have the same numbers for commercial?

Commercial in North America for the first half, the replacement would be down 5. The Europe would be down 8 and then commercial OE in North America would be down approximately 20 and Europe would be up 14.

That's very helpful.

I was going to say in Europe -- it's important to remember here. In Europe the OE business is strong at this point in time and it continues strong unlike North America. That is a fundamental difference that you guys want to be thinking about and certainly our people are thinking about.

And then just to check my math a little bit. Does your full year material cost increase guidance translate into about a 17% increase year-over-year in the second half?

It wouldn't be far off. Just to track this, because I think this would be helpful. If you looked at first quarter, our raw material costs were up 1%. Second quarter, 8.5. So you can force the rest of the year and you are going to be at a number in the ballpark of that 17%.

Okay. I appreciate it. Thank you very much.

Thanks.

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

Good morning. On your outlook for your OE business in North America, it looks like you are looking for something similar to what we are with the big production cuts that we are seeing, I was just wondering with the capacity cuts that we are seeing at GM and potentially Chrysler, given your large share there, might be there be some more restructuring actions that you might take for the future or is this really just good news that they're cutting capacity and you shift this mix over to the replacement market?

It's a bit of both. Part of it -- part of that mix is shifted over to replacement with the associated higher margins and, in part, we play that out so far this year and now if we see further cuts, those would be cuts that we can't just migrate into the replacement business and that's why we said in North America we are taking 8 million units out of our production here for the year. At least that's our current estimate.

So your current actions encompass 750,000 units of capacity that is cutting on the trucks?

It's a current number.

Got it. And then I apologize, but my line dropped for a second after -- when you were talking about the North American market. But on slide 14, I was just wondering, you mentioned that sales were up 2% ex the TWA sale. Does that impact volumes or units at all there or doesn't have any impact, just on the sales line?

It's strictly a revenue line item, no impact on units.

Got you. And then on the transition costs that you were mentioning in North America that were about $30 million in the quarter, you said those were going to be larger in the third and fourth quarter each greater than $30 million?

No. Just to correct that, no. If we gave you that impression, it's not accurate. Darren, do you want to comment?

John, you need to break down the North American manufacturing into four pieces and that is one of them. You saw $34 million bad news for the quarter in conversion costs in North America and what you saw there is about $30 million worth of the transitional manufacturing costs, which is about the same as we reported in the last quarter. You would have seen about $16 million then of what we refer to as unabsorbed overhead and it's that 16 that is expected to grow in the second half of the year. Now in addition to that, a couple of other components. You have about $46 million of structural cost improvements in the quarter, which means that there's about $34 million of bad news unexplained and that is explained by higher inflation that has not been offset by efficiency actions. So several different pieces there, but the part that's going to increase, second quarter to second half is that $16 million of unabsorbed overhead.

Great. Thank you very much.

(OPERATOR INSTRUCTIONS) Your next question comes from the line of Saul Ludwig with KeyBanc.

Good morning.

Good morning.

What did you see raw material cost increase was in North America this quarter?

I probably didn't say for North America per se, but we did say that the raw material increase for Goodyear was 8.5%.

Could you tell us what it was for North America?

I can't tell you exactly, but it was a little bit higher than that and the reason for it was that remember the rest of the world has a bit of a currency hedge as a result of much of the raw material being priced in dollars.

Okay. Could you bring us up to date on the whole situation in France, and wouldn't that result in some additional reduction of high cost capacity if you are successful in achieving what you set out to do in France?

Well, let me go back to what we set out to do in France. Just for everybody, Saul, I think you are talking about Amiens facility.

Yes.

What we set out to do in France is what we've done in many other locations. We think we've got a plan and a strategy there that will help build those two facilities in Amiens stay vibrant and become profitable, and those are moving those plants to HVA production. And we are willing to make investment to do that. One of the plants has signed on from a union standpoint. The other one has not at this point to that. Our plan remains our plan. We only have so many degrees of freedom in terms of trying to improve the profitability of those plants. That's where we are today. So your reaction to that could be, well, what if the other union never cooperates and we play out our plan. As I've said, we only have one plan that will work for the Company and for the employees of that plant, which will continue to provide jobs.

What happens come the end of the year, let's say, and no progress?

We'll play out our plan.

Okay.

It's a binary plan. We are either going to make new investment to create high value added product with the kinds of competitive cost structure that we need or we are not.

Would that plan be subject to being eliminated if they don't want to play ball?

I'm saying in effect that what we'll do is -- and we are doing that today. I have to take production out of that plant. That process is engaged today.

Darren, could you tell us what led to the -- on FX being a $6 million positive versus a $12 million negative when it's been a negative number almost every quarter?

Yes. It really is relative currency movements and principally in Latin America. So if you see, a lot of our Latin American affiliates will have receivables that are in U.S. dollars. So as the Latin American currencies move, that will give you different directions as those receivables are revalued.

But it's been moving positively for the last two years. In other words --

In this case we are not principally talking about the real, which has been only moving in the positive direction.

Was it the --

-- other currencies. So if you look in the Q, you'll probably see Chile and Colombia mentioned specifically.

And how do you think about that number going forward? Is that likely to be a positive number?

It really is going to depend on the movement of those currencies. Those operations will continue to have U.S. dollar receivables that have to be revalued.

We certainly don't consider ourselves experts in forecasting currency movements. We try to play out our plans for any eventuality and be flexible.

I wondered if you can talk about the goal of getting the 5% margin in North America. That number has been an elusive number for many, many companies for a long time. You are tracking at 1%. What has to happen to get there and is it achievable in the next few years?

We think it is. As I've said earlier, we are not going to back away from that number. We think it's achievable, and in fact, we would have made huge progress towards that number this year had we not had the weak -- very weak economy that we have and weak OE et cetera. We think, as Rich Cramer described at the June meeting, that we execute against those plans. We are going to do just fine and the 5% is definitely within our sights.

You think that is doable by 2010?

I'll say it's within our sights. That exactly timing if you want to add the precise timing depends upon the economy. But the things that Rich talked about, our marketing capability, our supply chain capability, the investments that we are going to be making in North America to provide HVA product, those are the things that are going to really make a difference for us.

Just finally, in the manufacturing conversion costs, which cost you $34 million in North America, how much help did they get from lower pension expense? Meaning other things would have been a bigger negative.

It could be in the neighborhood of $10 million year-over-year improvement there.

And finally having any trouble getting (inaudible)

I'll tell you we work at it, but it had no disruptive impact on us at all. We continue to evaluate the situation but from our standpoint it hasn't disrupted production. Like I said, our purchasing people are doing a great job.

Great. Thank you very much.

Thanks.

This is Pat again. This concludes today's call. We thank you again for joining us today and if you have any further questions, please don't hesitate to give me a call. Can you please wind it down.

My pleasure. Thank you everyone for your participation in today's Goodyear second quarter 2008 conference call. You may now disconnect