Goodyear Tire & Rubber Co (GT) 2008 Q3 法說會逐字稿

Good morning. My name is Thea, and I will be the conference operator today. At this time, I would like to welcome everyone to the Goodyear third 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.

At this time, I will turn the conference over to Patrick Stobb. Sir, you may begin.

Thank you Thea. Good morning everyone, and welcome to Goodyear's third quarter conference call. Joining me on the call are Bob Keegan, Chairman and CEO, and Darren Wells, Executive Vice President and CFO. Before we get started, there are a few 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 call will be available later this afternoon. Replay instructions can be found in our earnings release issued this morning. The last item we plan to file our Form 10-Q later today.

If I could now direct your attention to the Safe Harbor Statement on Slide two of the presentation. Our discussion this morning may contain forward-looking statements based on our current expectations and assumptions, that are subject to risks and uncertainties that can cause our 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, Bob will begin with an executive summary and Q3 highlights, followed by a detailed business discussion. Darren will follow with a review of the financial results, and a summary of our latest industry outlook, before opening the call to your questions.

Now I will turn the discussion over to Bob Keegan.

Well, thank you Pat. Good morning everyone. Thank you for joining us today.

Before I address our solid Q3 and strong nine month results, I wanted to welcome Darren Wells, to his first call as Goodyear's Chief Financial Officer. I am particularly pleased to have Darren in his new role. Since joining Goodyear six years ago, Darren has been a key contributor to our Company's progress in a broad set of areas. He was the lead architect of our financial restructuring plan. He has dealt effectively with a wide range of opportunities and asset sales and refinancing, and during the past 14 months has also been working shoulder to shoulder with me on Corporate Strategy.

He is certainly well known to you as investors and analysts, and is the perfect fit to help us navigate through the volatility that all businesses are facing today. As I said when we named Darren CFO, he will use his strong business and financial skills along with his leadership capabilities, to help drive shareholder value for Goodyear.

A few overall comments seem appropriate before Darren and I get into the detail of our call this morning. As I mentioned at the outset, I am pleased to say that the Company reported another quarter of solid results, contributing to a strong performance for the first nine months of the year. That success has been a result of a very strong business model developed in concert with our strategies, effective execution versus our strategies, taking decisive actions to reduce the risk profile of the Company, via the strengthening of our balance sheet, and an intense focus on the opportunities presented to us to diversify our Company geographically in the emerging markets, significant progress towards the goals of our four-point cost savings plan, the effectiveness of the contingency plans, which anticipated weaker business conditions that we put in place at the beginning of this year.

As you are well aware, our industry continues to face serious economic pressures, and these pressures have intensified throughout the year. The segment results for the quarter reflect the economic reality of the weakened industry demand, primarily in North America and Europe, and the associated cost impact of the production cuts we initiated in the quarter. While we are progressing with our business strategies, we continue to carefully evaluate the impact the economic environment is having on market demand, and shifting consumer buying behavior.

The proven strength of our operations and the proactive measures we are taking to address these economic challenges, will position Goodyear to optimize our performance in this environment. These proactive measures include intensely focusing on new products that meet changing needs, more aggressive cost and productivity initiatives, changes in our manufacturing plans, accelerating plans for plants and plant capacity, modification and reduction of near term capital investment plans, and leveraging the growth of our off highway businesses.

We believe our performance under challenging conditions during the first nine months of the year, demonstrates the capabilities of both our leadership team and the business model we have put in place, and highlights the operating leverage we expect will have full impact when industry conditions improve. In a few minutes I will address additional actions we are taking in key areas.

I will now cover Goodyear's major achievements during the third quarter. We achieved record third quarter sales of $5.2 billion, which represents an increase of 2% despite significantly lower industry volumes. Remember that the year ago period revenue of $5.1 billion included $145 million in revenue from the now divested T&WA business. So if you exclude the T&WA sales from the previous year sales results, our sales growth was 5%.

Revenue per tire excluding the impact of foreign currency increased by 8%. We maintained our positive trend of price and mix improvements more than offsetting the year-over-year increases of raw material costs of 16%. Emerging market growth continued, sales generated were 16% above the prior year.

We made significant progress toward our four-point cost savings plan with plan savings now totaling $1.6 billion, in the quarter savings were $145 million. And we are clearly on a path to significantly surpass our goal of more than $2 billion of savings. Also during the quarter, we funded the $1 billion VEBA, thereby removing the significant OPEB liability from our balance sheet, and we are proud of the fact that the VEBA agreement represented an innovative business solution, that set a precedent for similar agreements throughout US industry.

And our new Goodyear and Dunlap European winter tires, dominated the results of nine independent magazine tests, that consumers and enthusiasts in Europe regard as ultra important factors in their purchase decisions. You will recall that the winter tire segment historically represents approximately 30% of industry consumer replacement tire sales in Europe. As I mentioned previously, economic pressures have intensified throughout the year, and are having a significant impact on our industry, our business and consumer demand trends.

I will take a minute now to comment on how we see these developing consumer trends. Consumers are driving less and consuming less gas. For example, in the US, we see this reflected in miles driven, which have declined approximately 3% over the past nine months, and we are seeing similar trends in Europe. Gas supplied in the US is up more than 4% in October from a year ago.

Consumers are clearly spending less. For example, adjusted consumer spending declined four months in a row, from June through September, for an overall 3% drop for the quarter versus prior year. Declines in US household discretionary income are being reflected in virtually every consumer purchase category. Consumers are deferring purchases.

For example, in our US Company owned stores, we are seeing evidence of tire purchases being deferred, compared to 2007 3% more of our customers in the past three months have less stores with tread depths that typically have been replaced, and we believe our store experience is a reasonable indicator of a broader industry trend. Why? Many anecdotal reports from key dealers around the country, also support this trend toward purchase deferral, and we see early signs that consumer preferences may, and I emphasize may, because it is still early days, be changing.

We are seeing some evidence of growing strength in mid-tier product lines, and more consumers interested the fuel efficiency of their tires. However, while our premium tires are not growing at the pace we had anticipated prior to the downturn, we continue to gain share, and price in our high value-added branded products is up.

The cumulative impact of these trends on Goodyear and the tire industry has been significant as consumers are clearly buying fewer tires. Here I would like to make two key points. First, while tire purchases can be delayed, they can't be postponed indefinitely. And second, the recent significant reduction in US gas prices at the pump, creates the potential that the downward trend on miles driven is poised for a reversal, as the pressures of those higher gas prices of discretionary income and spending ease.

In the interim, we are adapting rapidly to the current business conditions. While global market challenges have certainly intensified, the impact on industry demand varies by region. In North America, replacement industry volumes continue at weak levels compared to the previous year, and OE volumes are down significantly, however, our Goodyear branded market share continued to improve.

In Europe, conditions have become more challenging with softening industry demand, however, we are experiencing market share improvements in our key targeted segments, with both the Goodyear and Dunlap brands. In Latin America, our profitable growth has been adversely impacted by only moderate growth in Brazil, versus very high levels previously, and continued weakness in Mexico. Here, we have a new wave of product introductions in the region, that will help generate additional demand for our brand going forward.

With respect to our Asia Pacific operations, unit sales 7% over last year, and the quarter drove record third quarter profit, however Australia and New Zealand remained weak. As you would expect, the lower industry demand, particularly in North America and Europe, is impacting our conversion cost and higher raw material costs, and general inflation continue to have a significant impact on our business. And Darren will provide more specifics in his remarks.

We are rapidly assessing the implications the present market challenges have for our operations, investment strategies and cost structure, and we are taking the necessary actions to drive performance, and to strengthen our capabilities in this environment. Let me highlight four key areas of action for you here this morning.

First, as always, it starts with our leadership team, which continues to improve, and in my estimation is the best in the industry. Note that we have learned well here from past periods of adversity. Second, the benefit of our price mix decisions is evident from our demonstrated success during the past five years. We have driven significant price/mix improvements through each of our businesses totaling $3.2 billion.

Now how have we accomplished this? By having decision makers with outstanding price/mix experience and judgement, by having outstanding analytic capability underlying our decisions, and by developing an outstanding new products engine, which generates high value-added product introductions at a pace not seen before in our industry.

As you know, our product engine has enabled us to generate richer mix, improved per revenue per tire, and improved market share in our targeted market segments. Our relentless introduction of product innovations featuring consumer-desired technologies is helping us fully leverage our brand portfolio, and is driving the success of our pricing strategy. As a result, we have achieved revenue per tire gains across every region. Despite more challenging market conditions, these positive actions related to market opportunities will continue to enhance our position in target segments. We will continue to capitalize on the available HVA opportunities.

Certainly we are adjusting the pace of capital investments to reflect changing market conditions. Our investment plan will be focused on key high return projects, but at a pace that matches changing expectations for the market. You will see more innovative and high impact new products from us globally in 2009, as we take advantage of exciting new technologies that broaden our product portfolio.

In Europe, the SmartWear technology of our new OptiGrip tire, combines two layers of compounds and a tread design that changes throughout the tire's tread life, allowing it to perform as well-worn as it does now, I will repeat that, as well worn as it does new. Launched to the European media recently, it has been written about as and I quote, 'A revolutionary new technology set to change the face of tire wear for years to come.'

In North America, we'll leverage our a claimed and market proven Fuel Max technology, taking it from the commercial truck/tire business into our consumer products line, to provide great tires that will save consumers money at the gas pump. We already are highly respected in fuel saving technology, with product fitments on many of the highest profile fuel efficient vehicles. Our new products in 2009 will further strengthen that position, and take our capabilities to the next level. These tires simply represent two of the highest profile new product offerings in the queue.

As a third action area, we continue to successfully deliver significant savings under our four-point cost savings plan. We view this plan as an ongoing comprehensive restructuring plan, the most comprehensive in our industry.

The four-point plan has yielded third quarter savings of $145 million, and total savings to date of approximately $1.6 billion. Of the more notable cost actions we have taken, we completed the VEBA agreement, the resultant annual impact will be gross savings totaling $100 million, and cash flow improvement of $130 million, and those are both annual figures. And we will close our high cost Australia plant by year-end, with this decision we have now exited manufacturing in this part of the Asia Pacific region.

Again, we view this plan as a comprehensive restructuring plan, that has intensified in response to the current market environment. We anticipate delivering significantly over the plans targeted cost savings. I would simply tell you that success here is an imperative for our Company.

Fourth, as we continue to manage through the current market conditions we will accelerate our actions under our Cash is King strategy. We will manage aggressively for cash. By making the necessary production cutbacks with aggressive inventory targets, by slowing the pace of our capital investments to reflect market conditions, we will spend at the low end of our previously announced range of 1 billion to $1.3 billion in 2008, and less than that in 2009. By maintaining very tight controls on receivable, and by severely limiting spending.

In summary, we remain confident in our ability to drive performance in a difficult environment. If you look at our recent history, we have a proven track record when faced with adversity. We are confident in ourselves and in our business model. We have consistently said that the timing of achieving our next stage metrics, would be a function of the economic environment, but we believe our powerful growth platforms, will allow us to continue our drive toward an 8% return on sales globally, and a 5% return on sales in North America. Given today's market volatility, we are taking the right actions to optimize available market opportunities.

We are moving forward with our business strategies. I would like to reflect that it was 12 months ago when we started developing contingency plans to address a potential downturn in the economy. We quickly implemented those plans when economic and market conditions deteriorated. While we may not have projected the overall global severity of the downturn, by the way, no one did, we leaned into the challenges in a productive manner, and I assure you that we will continue to develop high quality contingency plans, and will remain highly flexible in terms of our short-term approach.

I would now like to turn the call over to Darren, for a review of the Q3 business results and our outlook, and I will then come back to make some summary comments, framing the environment beyond 2008 before we take your questions. Darren, welcome to the call.

Thanks, Bob. Good morning, everyone. First of all I would like to say I appreciate Bob's comments, and the notes and calls that I have received from many of you. The time I have spent engaged with the investment community has been a tremendous value in my prior position, and is even more valuable to me in the CFO role. But now the business at hand.

As you assess the quarterly results, I would focus you on five key points. First, we have to acknowledge the weak demand environment, particularly in North America and Europe. Earnings reflect not only the lost margin on these sales, but also the unabsorbed factory costs related to cutting production. A key point, however, is the impact of the production cuts on earnings in the second half, is greater than the sales volumes would imply.

The impact reflects lower 2008 sales and targeted lower year-end inventories, for expected market weakness going into '09, so in essence, it is a double hit. So clearly, a tough environment. Against that back drop, there were clear positives. Price mix more than offset even the substantially higher raw material costs we saw in the quarter. Raw materials in the third quarter were up about 16% versus 4 to 5% in the first half.

Asia and Latin America both continued to grow profitably in the quarter, with Asia showing year-over-year gains in segment operating income for the 15th consecutive quarter. Our liquidity remains strong which continues to be an advantage in this environment, and finally, we are taking actions to deal with today's more difficult conditions, through increased cost savings and other activities to drive earnings and cash flow.

As you review the Income Statement you will see sales up 2%. As Bob mentioned, sales were up about 5%, excluding the impact of a divestiture last year, so we see continued growth on the top line. The sales growth shows the impact of increased revenue per tire, as price increases and product mix improvement together with currency translation, helped to offset the significantly lower industry volume.

Lower gross margins, segment operating income, and income from continuing operations, all reflect the substantial impact of production cuts, and higher costs related to general inflation. Unabsorbed fixed costs related to the production cuts totaled $120 million in the quarter. Unabsorbed fixed costs normally flowed through inventory which takes about 60 to 90 days before impacting cost of sales.

As we explained in the second quarter call in the case of significant changes in production, like the ones we saw in the third quarter, these costs are taken as period costs as required by FAS 151. In the third quarter, about $70 million out of the $120 million of unabsorbed fixed costs were these period costs for FAS 151.

Selling, administrative and general expense, or SAG, were 12.1% of sales compared to 13.2% in 2007. SAG expenses declined year-to-year principally as a result of lower executive compensation costs, together with reduced advertising expenses, and some benefits from restructuring. These factors more than offset increases from wage inflation and foreign currency translation. The 2008 quarter included rationalization costs and settlement losses related to the VEBA transaction, and impact of the chemical plant from Hurricanes Ike and Gustav. A list of significant third quarter items for this year and last year including per share amounts can be found in the Appendix of the presentation.

Moving to the segment operating income step chart, SOI was $266 million, which represents a decline of $116 million. Savings generated by the four-point plan, favorable price mix net of raws, and currency, were positive factors in the quarter. General inflation was significant at about 6% of our non-raw material cost. Reduced energy prices should begin to ease this effect, allowing more of our cost savings to positively affect the bottom line.

Looking at the remaining variants, this includes the $120 million double hit in conversion costs from unabsorbed overhead, primarily in North America and Europe in Q3. Production cuts were about 4.5 million and three million units respectively. It also includes increased transitional manufacturing costs in North America of about $7 million compared to last year. About $50 million of lower executive compensation expense was a partial offset.

Looking at the fourth quarter, we expect unabsorbed fixed costs to be somewhat higher, with production cuts of nearly six million in North America, and nearly five million units in Europe, higher than previously indicated given the changes in the environment. As Bob mentioned, the four-point cost savings plan is one of the most comprehensive restructuring plans in the industry. Under the plan, we have reduced cost by approximately $1.6 billion since it's inception, and reduced our high cost production capacity by about 25 million units.

The VEBA approval will add an additional $100 million of savings next year, and we have accelerated our continuous improvement actions, and now anticipate savings will be significantly above $2 billion. Our third quarter savings of about $145 million were at levels about equal to our three year average. Applying this average over the next five quarters, would imply savings significantly greater than planned levels, and with the potential for lower inflation the benefits should positively affect our bottom line.

Looking forward at how our more aggressive cost and productivity initiatives will affect our results, in addition to the VEBA savings, I would point out the following. First, increased focus on investments for efficiency in our manufacturing facility, versus focusing primarily on maximizing HVA output. This will translate into further progress on continuous improvement initiatives, some of which were constrained given the old equipment. This includes, of course, the lower labor required for the new tire building systems we highlighted in June, but extends well beyond this to all areas of manufacturing.

Second, further manufacturing cost reductions to reflect lower production levels going forward. Third, footprint savings from a completion of plant closures. In Tyler, we closed the mixing center as well as the closure of our last Australian tire manufacturing plant at year-end.

Fourth, SAG savings related to salaried staff reductions and other process improvement actions. For example, we will begin implementing common business platforms in our international businesses next year, that should deliver savings well in excess of $50 million once fully implemented in 2010. Elsewhere, we have implemented hiring freezes, eliminated non-essential travel, and cut back non-essential marketing expenses.

Finally, we will look and take advantage of changing currency values, and the weaker demand environment, to look for savings opportunities in our purchasing activities. While this was an area that was challenging with a weaker dollar and high fuel prices, it is now an area that we look to accelerate.

Turning to the segment results, since I have covered cost initiatives already, I am going to focus principally on the market, the volume, and the price mix elements of our business, given the rapidly changing demand environment. North America reported a loss of $19 million in the quarter, which compares to segment operating income of $66 million in the 2007 period.

Despite the lower volume, sales in the quarter increased 2%, if adjusted for the lost sales of $145 million related to the divestiture of the T&WA business. The decline in North America earnings really comes down to the reduction in unit volume, mostly driven by consumer and commercial industry slowdowns. This comes despite continued gains in the Goodyear brands share in consumer, and strong price mix driving an 11% increase in revenue per tire. Continued strong results in our Off-Highway businesses, including mining and aviation tires, helped third quarter sales and segment operating income.

During the third quarter the US consumer replacement market declined by 3%, and the consumer OE declined 22%, with commercial OE and replacement also declining. Our sales reflected this lower industry volume as we sold 2.6 million fewer tires than in the prior year. Even more impactful, however, was the 4.5 million unit reduction in tire production. The double hit in the unabsorbed fixed costs I referred to earlier reduced North American segment operating income by approximately $90 million, more than explaining the year-over-year decline.

With these costs and the continued increases in raw material costs, which I will cover more in a moment, the challenge for NAT is clear. In response to this challenge, our team in North America have started initiatives on multiple fronts. We have been aggressive on pricing to address raw materials with an increase of up to 10% on September 1st.

We have implemented new sourcing plans, bringing volume back from third party producers, to reduce our unabsorbed overhead. We also have strong product and marketing plans that reflect changing customer needs, particularly in the branded mid-tier market segments where the largest volume opportunity exists, including not only Goodyear, but also the Dunlap and Kelly brands.

These are the right actions to address the difficult market conditions we face today, and in no way jeopardize our long term strategy for North America. This strategy focuses on increasing HVA capacity, and making improvements in manufacturing efficiency and Supply Chain to improve our competitive position.

Moving to Europe, Middle East and Africa, results reflected success of our strong products and marketing in down markets. Revenue per tire excluding currency increased by 5%, reflecting strong performance in strategic segments, helping increase revenue despite lower volumes. Our unit volumes reflected the industry, with consumer replacement industry down over 6% on very weak winter tire sales, and the commercial replacement industry down 5%. We also saw weakness at OE in the third quarter, a reversal of a strong first half.

The key in Europe, Middle East and Africa, however, is that we continue to gain share in targeted market segments and in our premium brands in both Eastern and western European markets. Operating income in the quarter decreased about 24%, primarily reflecting the effect of lower volumes and the unabsorbed fixed costs of about $30 million. As we have said in the past the impact of these costs is not as high in Europe as it is in North America, given greater labor flexibility in many of the European plants.

A strong price mix improvement exceeded raw material cost increases by about $12 million, foreign currency translation which had been a strong contributor in the first half was not much of a factor in the third quarter, given the weakening of the Euro and Eastern European currencies against the dollar during the quarter.

As an aside in volatile markets like these, we know we have to closely monitor our distribution channels. While we continue to look for an opportunity to grow volumes we are cognizant of the financial position of our customers. By insuring our customers are maintaining a strong financial position, we will prepare both them and ourselves well for the eventual recovery.

This is a clear focus for our team in Europe, Middle East and Africa, particularly in the emerging market areas, but it also applies to our businesses globally. Overall, Europe, Middle East and Africa is performing well given weaker market conditions, and we continue to position ourselves for recovery in Western Europe, and continued growth opportunities in the East. Latin America's results reflect strong progress in price and product mix, driven by continued introduction of impactful new products.

For the quarter, this more than offset higher costs due to raw materials and cost inflation. Unit sales were down during the quarter as OE volumes were lower, and the consumer replacement market in Mexico remained weak. Commercial truck businesses both OE and replacement and the agricultural tire business remained strong in the quarter.

As in Europe, this quarter also saw lesser benefit from currency translation, given the short drop in Latin America currency values during this global financial crisis. The impact of currency to valuation requires aggressive management. Our team in Latin America has deep experience with this type of volatility, and is taking appropriate actions to adjust for the changes. In addition, the availability of credit both for our customers and for consumers is a key issue in these markets, and we are monitoring this availability carefully.

As I mentioned earlier, Asia continues it's stretch of record quarterly performance. Despite moderating growth, even in high growth markets like China and India, unit volume continued to grow. Showing the positive impact of product launches and marketing actions, although growth was at a slower pace than earlier in the year, as markets in China, and particularly consumer OE in China, were weaker post-Olympics.

Improved operating income reflects higher volume, along with the effective price mix ahead of raw materials. Improvements in Australia's performance and continued strength in the OTR business were key contributors to improve segment operating income. Going forward, the buyout of the minority interest in our China manufacturing plant which we are announcing today, along with the closure of our last remaining tire plant in Australia at year-end will provide earnings improvement opportunities, however, currency to valuation against the dollar will continue to need to be managed aggressively.

To summarize our business unit performance, each of our business segments is seeing pressure from the environment, but each remains focused on addressing the challenges and on winning in the marketplace, positioning for the eventual recovery in the economy.

Before I talk about the balance sheet and cash flow, I want to address two key strategic topics. First the changes that we are making in our plans for capital expenditures, and second, the impact of the recent decline in raw material cost. We discussed in June our plans to invest $1 billion to 1.3 billion per year on CapEx over the next three years,, with $500 million to 600 million annually targeted at a dozen or so high return projects. These projects are focused on increasing both our HVA and low cost manufacturing capacity.

So what changed from June through October? I will start with what didn't change. Our view on the strength of the HVA market, and the opportunities for growth in emerging markets. It is our belief that these investments are the right strategy for us, and represent an excellent path to improve shareholder value over the long term. What we did change is a function of industry demand, and the mix between OE and replacement.

First, industry volumes have decreased significantly, and in the US are at levels we haven't seen since the late 1990s. As a result, we need less capacity to address the market. Second, the OE market which requires a high mix of HVA tires has declined significantly, freeing up some of our existing HVA capacity. Taking these two factors into consideration, together with our forward industry assumptions, we are able to adjust the pace of our investment while still meeting market demand.

Our new product launches remain on track, and as Bob indicated , include high impact launches in 2009. So what does adjusting the investment mean? It means we are slowing the pace of new equipment installation, and we are also delaying planned expansions to better match the timing of expected demand, but the returns on these opportunities remain high. We are refocusing our efforts on insuring maximum efficiency in our equipment, turning our attention to cost savings and the effectiveness of our Supply Chain.

Our efficiency gains will better position us for the future, and we have been and will remain disciplined in our approach, to these and all other investments. As a result of these actions as Bob indicated, we now expect 2008 CapEx to be at the low end of our announced range, and we look for next years levels to be below $1 billion. How far below will depend on how the markets evolve over the next several months.

I also wanted to give you a way to think about the impact of the recent decline in raw material prices on Q4, and on 2009. Since the second quarter call, we have seen oil prices and natural rubber both drop by about 45%. Although we have seen synthetic rubber prices increase nearly 10% over this timeframe, it too has begun to decline more recently.

Our raw materials impact which also will also be affected by currency movement, as our overseas Operations in Europe, Brazil, and elsewhere, have not benefited from the same reduction in raws, when denominated in their local currency. For example, natural rubber prices today compared to the average price in the third quarter are down over 35% in dollars, but they are down only 25% when measured in Euros. Now given the three to six-month time lag we experience in raw materials, our results for the fourth quarter and first quarter 2009, will continue to show a substantial year-over-year raw material cost increase, with the first quarter of '09 significantly above Q4.

Assuming prices remain at today's level however, the situation improves toward the middle of 2009. Now while the currency effect on raw materials will affect future quarters based on the three to six-month lag in inventory, keep in mind the effect of currency on our sales and on price mix begins immediately.

Looking at the balance sheet, there are a number of moving parts this quarter. First I would point out we made a cash contribution of $980 million to the VEBA trust, related to retiree healthcare for our USW associates. Second we said in a release in September, that we had $360 million invested with a money-market fund called the Reserve Primary Fund. This fund temporarily froze withdrawals. While we awaited our withdrawal from the fund, we reclassified this cash as other current assets, so this represents another reduction to the balance sheet cash amount. On Friday, we received about half of this balance back from the fund.

Third, inventories remained high given the weak sales environment, and the impact of higher raw material costs and currency translation. As we said we are taking action on production to bring inventories back in-line, and to prepare for a weak start in 2009. Taken together in these three factors explain the $1.7 billion increase in net debt compared to a year ago.

I want to remind you that our maturity profile remains very strong, given the great job our corporate finance team did, in extending maturities and repaying high cost debt over the last year. With only one maturity between now and 2011, we plan to run our business so the one maturity, the $498 million due next December, can be satisfied from existing cash and liquidity. Despite the temporary issue with the preserved primary fund, we have cash well in excess of the $1 billion that we look to maintain for operations. We also have credit lines that remain undrawn.

The third quarter is normally our peak in terms of cash usage, so this picture should improve even further between now and year-end, as receivable balances decline and production cuts and declining raw material costs, bring inventories back in line.

One final point I would make on the balance sheet. Our prior expectation was that debt and legacy obligations at year-end would total $6 billion to 6.5 billion. While our view of debt and OPEB liability has not changed, particularly now that the VEBA has been approved, the unfunded pension obligation remains an uncertainty in today's market.

With our US pension portfolio at about $4.5 billion starting the year, the global market volatility has taken a toll, with September year-to-date returns down 17%, and a further decline in October. While this impact will be offset partially by higher discount rates, there will be a significant impact on our unfunded pension obligation at year-end, and on pension expense next year. While cash contributions are not significantly affected in 2009, there would be a significant increase in our cash funding obligation beginning in 2010.

Before I turn the call over to Bob, I want to cover how we now view the industry, and reaffirm some of our key modeling assumptions. Overall the outlook for industry unit sales in 2008 has weakened, which is reflected in our revised estimates. In North America, we now expect the consumer replacement market to be down 3% for the full year. Our forecast for the consumer OE market is now down 18 to 20%, based on continuing lower builds. Our forecast for commercial OE has been revised to down 14 to 16%, and the commercial replacement market is now expected to be down 6 to 7%.

In Europe for the full year, our forecast for consumer replacement is now down 4 to 5%. Our forecast for the consumer OE market is now down 2 to 4%. For the commercial replacement market our forecast is down 7 to 9% and our forecast for commercial OE is now up only 4 to 6%. We project raw materials to be up about 12%, which is the high end of our previous range. This implies raw material cost increases higher in Q4 than Q3, with a substantial further increase as raw materials peak in Q1 '09.

We continue to expect interest expense in the range of $320 million to $340 million, and 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 our deferred tax positions, and the mix of foreign earnings among low and high tax jurisdictions.

For the last couple of years as I have worked with Bob and Goodyear's leadership team on strategy, we faced many challenges. Seeing these third quarter results in such a tough environment with continued strong price mix, share growth in targeted segments and geographies, and a strong liquidity position says we have been on the right path. Our actions to drive richer product mix, improve cash flow, and reduced cost going forward keep us on that path.

Well thanks, Darren, for 2009, there remains a high level of uncertainty concerning the impact of the global economic slowdown, and the demand signals suggest certainly a challenging environment for the tire industry, especially in the first half as Darren indicated.

As a result, our plan to actions for 2009 will address a range of likely demand scenarios, and we plan to manage both production output and costs aggressively for the foreseeable future. I reiterate that we are taking actions now to reduce our capital investments, to those that maximize return, consistent with current and anticipated market demand, and overall we are managing the business to maximize our cash flow performance. We have a leadership team with the experience of operating effectively under extremely challenging conditions, we will continue to rely on their capabilities for innovation, creativity, and outstanding execution.

Thank you for your interest in Goodyear this morning, and we will now open the call to your questions.

(OPERATOR INSTRUCTIONS). The first question is from Himanshu Patel with JPMorgan.

Hi. Good morning guys.

Good morning, Himanshu.

Darren, can we get just a bit more granularity on the North American walk for SOI? I think you said price mix versus raws were kind of a wash, unabsorbed overhead in North America was negative 90 million. What about the volume hit, what about non-raw materials inflation? Could you give us some color on those items?

Yes. I think, Himanshu, on the question of the non-raw materials inflation, you would see on the segment operating income chart, that the inflation levels which weren't quite as high as they were in the second quarter were still pretty high, so you would say that what you would see in the North American conversion costs, are clearly going to reflect some inflationary pressures as well.

In terms of the impact on volume, I think what I wold say there is you saw an impact of not too much different than we saw in the second quarter. Second quarter I think the volume impact was around 28 million on segment operating income, and the drop in volume was about the same in the third quarter as it was in the second, so I think you will see it in the Q as we get that published later on, but you can think of it as roughly the same magnitude.

Okay, and then I noticed on Slide 27 most of your revisions to end market assumptions, they were sort of the steepest in Europe, both on consumer and commercial side. Are you guys, that is volume. Are you guys seeing any deterioration in mix or pricing in Europe at this stage?

I would say, Himanshu, that you are right in terms of volume, like everyone I think, we were surprised by the magnitude of the OE reductions late in the quarter, and the replacement business is about at the level we have been anticipating.

Relative to mix, no significant change to mix at this point. We are very happy with our share performance for both Goodyear and Dunlap brands, and from a pricing standpoint, we have said before that we have had some challenges in the European market, but we are doing pretty well.

My comment in my remarks about winter tires clearly, we have had a slow winter season, a start to that season, particularly at the low end, and I am speaking for the industry, but that would also apply to Goodyear and Dunlap product so where we have had the new product launches at the high end we are doing quite well. In fact, I think probably when the year finishes, we will see the winter tire mix has held up very well at the high end.

And Bob, you had mentioned in your prepared comments earlier that mid-tier brands were seeing some strengthening, and the rate of premium tire sales were maybe slowing a little bit. Does that imply that that was a comment particularly for North America?

That was a North American comment.

Got it.

Yes, that was a North American comment.

Okay, and then lastly, Darren, Slide 34, pension expense, for the year, you are saying 195. I think it was 220 or 225 or something before. What caused that change?

Yes, Himanshu, our global pension expense, we have revised some estimates down. We had some actuarial work that's done mid year every year, and what you would see there is theres some adjustment in the third quarter that we benefit from, and that has taken the pension expense levels down.

Okay, great. Thank you.

Yes.

Thanks, Himanshu.

The next question is from Rod Lache with Deutsche Bank.

Hi, everyone.

Good morning Rod.

Congratulations Darren.

Thank you.

A couple of things. First, in the reconciliation slide on the operating income that you have in your press release, there is a $7 million income item in corporate incentive and stock comp, which I assume is related to the stock price decline, but there is also $7 million income from intercompany eliminations. Can you just walk through what normal corporate overhead should be, assuming that those kinds of variances, and what would contribute to intercompany actually being a positive?

Rod, I can take the question generally. I think what you see is there are some transactions between business units as you might expect. I think that, I am not sure in recent years we could point to a normal, but I think that the walk that we have between the business units, and what you view as the segment operating income, and we view as the corporate EBIT will include those intercompany eliminations, as well as certain items that we don't report in our business unit results.

An example of that would be accelerated depreciation which does not show up in our business unit results, but is part of the EP on the EBIT calculations and things, so there are a lot of ups and downs as you see different items as a result of restructuring, but I think as you look right now when volumes are changing this dramatically, that can have a big impact on our intercompany transactions, and I think that is part of what you are seeing there.

Inventory is obviously high right now, and I appreciate that you guys are taking that down through year-end, but could you just help us a little bit on, you mentioned higher costs in the fourth quarter, there was $120 million impact in the third quarter, of which 70 was recognized. I assume that the remaining 50 comes in to the fourth quarter but then there is more because you are taking inventory down further, so how do we sort of triangulate on a number through the year end during the fourth quarter on the overhead issue?

Rod, it is a good question, and usually is the case, there is not a precise answer to it, but think of it this way. In the third quarter, we recognized in our cost of goods sold about 120 million for unabsorbed overhead, or unabsorbed fixed cost. About 70 million of that was period cost that we took that related to production cuts in the third quarter. The other 50 million was unabsorbed overhead that was run through inventory at a normal pace, so it was principally coming through from the second quarter.

You might have had a little bit from the third quarter production cuts, but most of that is coming through as unabsorbed overhead from second quarter production, so what you would think about now going into the fourth quarter, is what is left in inventory from the production cuts that we took in the third quarter, and what level of FAS 151 period costs would we take, given the fact that we have got in the fourth quarter we have said, assumed production cuts of 6 million units in North America and 5 million units in Europe, both of which are significantly above what we thought in Q3.

Rod, I might just add, as Darren said earlier, those numbers include I would say, aggressive positioning by us on inventory, to get inventories down, and to lean into that a bit as we enter 2009.

So just to make sure we get this straight, you are saying there is still 50 million in inventory now that is going to be expensed, plus there is a bigger charge?

Rob, we have not quantified for you what is in inventory. What you would say is that you saw in the third quarter, and the piece of this equation that is missing, and it is very hard to pin down because it is going to differ based on different circumstances, but you don't get a direct calculation of the per unit amount, but what we saw in the third quarter is of whatever unabsorbed overhead cost was created in the third quarter production, 70 million of it has been written-off in the third quarter, and some amount that we have not provided is being carried over to Q4.

If you take that 70 million that was based on production cuts of 4.5 million units in North America and 3 million in Europe, so if you take that to the fourth quarter and you would expect those period costs are going to get higher in the fourth quarter as well, given 6 million unit production cut in North America and 5 in Europe.

My last questions are just prospective pricing, maybe you could just give us some color on how you are thinking about that, particularly in markets where you got some FX deflation, is that still something you intend to rollout there even in a weak demand environment, and any kind of color on the Latin America outlook you can provide?

Rod, maybe I will kick-off, and Darren may have a point or two to make as well. Relative to I will call it the emerging markets overall including Latin America, Asia, Eastern Europe, where currencies have fallen significantly, and I would say 'weak' at this point, you bet we will be aggressive there in taking appropriate price actions, and even if the demand environment is somewhat weak, we almost have to do that, and it will also be aggressive in terms of pushing mix. Remember this game for us is not just price.

It is price and mix, so we will continue to have new product introductions, and to capitalize on those new product introductions in those markets as well, so I would say that is the comment relative to the markets overall where currency is weak, and if you look at the European situation, I would just say that we will continue on the price mix path that we have been on.

Does that apply to Europe as well?

Yes, to Western Europe as well. I am not making a price comment. I am telling you in terms of price mix that strategy goes ahead, and you will see it in the winter tire market this fall, with the new products that have gotten such dramatically positive acclaim.

Outlook for Latin America, is it softening further, or how should we be thinking about that?

Well I would say what we are seeing in Latin America certainly is some challenges on the demand side in replacement markets and OE as well, I would mention, because OE is a relatively recent phenomenon, so we are seeing some softness in Latin America, but the fundamentals of our business in Latin America continue to be positive, and there again, we have got dramatic new products that have been introduced in the market in '08, and more that will come in 2009, and we have got I would say a very experienced leadership team in Latin America, that knows how to handle the volatility of those markets, both from a currency standpoint, and from a demand spiking or declining standpoint as well.

Your next question is from Patrick Archambault with Goldman Sachs.

Hi, yes, good morning. On the pension question, can you just provide a little bit more detail on the potential cash requirements? As far as I knew, it was depending on what the change of your funded status was, or the underfunding, I think it is below 95% you would have to rate away, contribute a certain amount to get you back up to that level, but of course you are saying that contributions probably aren't likely to be material until 2010. Is that because of past credits, or can you just give us a little bit more color on that?

Patrick, it isn't anything as esoteric as past credits. It effectively is a reflection on what time we have got to meet contribution requirements for the 2008 plan year and essentially, we have until September of 2010 to complete the required contributions, but your point is right. The underfunded amount as it is measured for ERISA purposes, it will get measured at year-end, and the basic construct there, although it is not quite as simple as this, but the basic idea is that you have about seven years, over which to make up the additional unfunded amount.

Okay, I see, and on FX, I understand that there are a lot of moving parts there, but can you give us a broad sense about how we think about modeling that, what kind of a margin have you traditionally had on foreign currency, and what impact are there of hedges, and other things that might sort of offset it?

Well, the good news and bad news on this is that we don't do a lot of hedging, so what you see in the marketplace is what you will tend to see in our results. I think that we have to acknowledge up front that the weaker dollar has been a good thing for Goodyear, given the strength of our overseas earnings, but we have strategies to deal with the stronger dollar as well, but if I look and think about where foreign exchange has been helping us, if we look at the second quarter, we had about a $300 million year-over-year sales improvement for foreign currency.

That 300 million is down to about 100 million in the third quarter, so it is clearly affecting our sales growth, and if I look at our earnings, we have had, give or take this year, first quarter, second quarter we have been benefiting from around 30 million of year-over-year improvement and segment operating income from currency, and now we see here that in the third quarter we have a lot less benefit from it.

And I guess said another way, just it sounds like what about a 10% margin on currency, 30 on 300 in the second quarter, that is what you said?

Well that is certainly the way it worked out in that timeframe. I can tell you that depending on the geographies we are dealing with, it is very hard to come up with rules of thumb. We have tried, but we have never come up with one that was particularly consistent.

So okay, but I mean, I guess just simply said though, if we expect that next year FX is actually going to be a tailwind, the margin on that might be up for debate, given the moving parts but clearly it is going to be impactful?

Yes, if you assume that the dollar remains strong, then that is going to be something that is going to make it tougher for us, not easier.

But Patrick, again, we have tools at our disposal, price mix being a significant set of tools to be able to counteract that.

Okay, that is helpful. And I guess my last one was just on raw materials. I guess can we start to, when you say that it is going to peak in Q1 in terms of the year-on-year headwinds and then start to subside, I mean just given some of the substantial declines we have seen, maybe not in synthetic, but at least in natural rubber and oil, would the outlook call for a moderation in the increase in raw materials inflation, or could you actually even see raw materials become a tailwind as you get into the second half of next year, provided you kind of stayed at these levels?

Well, Patrick, I will just kick-off and say that clearly with the declines we are seeing at some point, you will see moderation of increase and could perhaps even see some decreases year-on-year at today's levels. By the way, we are not spending a lot of our time trying to forecast exactly where that is. We spend a lot of our time doing contingency planning to handle what the market provides.

Okay, great. Thanks a lot guys.

Thanks Patrick.

The next question will come from John Murphy with Merrill Lynch.

Good morning guys.

Hi, John.

Just wanted to touch on the balance sheet for a second, and I am probably missing something here. I want to clarify something. I'm looking at total debt at the end of the second quarter of about 3.6 billion, that ramps up to about 5.4 billion at the end of the third quarter. I was just wondering, is that the result of a large revolver draw outside of the US, because I thought the revolver draw in the US was 600 million, and is the bulk of that going into working capita,l which looks like it was a big use in the quarter

John, you are coming to the right conclusion there. Around the world, we have peak working capital needs in the third quarter, particularly think about Europe given the winter tire sell-in, which requires us to fund a large increase in working capital, so you would have seen credit lines drawn in Europe, credit lines drawn in the US for some different reasons, but that is what you're seeing, so you have got to the right conclusion there.

And the expectation will be if this is high working capital, low is at the end of the year.

Got it, okay. And then I just wanted to sort of explore your pullback in your CapEx next year a little bit, and just really thinking about what is going on in North America, and is your capacity that you are selling into the OE, truly fungible where it could just be turned around and sold in the aftermarket, and also as you think about this, there are two large players out there or maybe three depending on how you look at it on the OE side, that are in extreme duress/distress, however you want to say it, that look like they might be massively smaller in the near term, and I was wondering as you are making these CapEx issues and something about your capacity, how you work through the contingency planning for that potential event?

Okay, let me kick-off here by saying that certainly the capacity, whether, frankly it is flexible, whether it is OE or replacement, we have got flexibility in that area, so that is point number one. And I would say point number two in terms of the way we try to forecast demand, again we do scenario planning, incorporates the optimistic and I would say slightly pessimistic view, and that includes with regard to the US OEs, so we are continually in that situation.

Interestingly enough we still have some capacity issues on some of our North American iconic products, the high value-added product that we have launched in the last couple of years, so we still have some capacity issue there under one demand scenario, and under another demand scenario for OE, it disappears. And I would also tell you that certainly we did the right thing six years ago, when we said that we were going to diversify our OE business, and we have made moves to diversify there, so the key question for us is the SAR number, and then there is a number, a series of numbers we have to look at, relative to the individual OEs, but the key number for us is the SAR number today.

Bob, you made a very interesting comment about 3% of your consumers are leaving stores that previously would have replaced tires, and that is very interesting. I am just wondering if there's anyway to gauge how much tread life is left on those 3% that are leaving. Like how long before these guys have to come back to you?

John, I would say very, very difficult to do. We just know that in some cases, individual consumers are altering their purchase behavior from what we normally see.

By the way this is not the first time we have seen it. We have seen this in previous recessions or near recessions in the United States, and we have always gotten a bounce back in terms of demand within a year or two. You can only defer so long, and that bounce back I am talking about is the macro of all of our sales, but these individuals are just postponing the inevitable. And probably I am using some anecdotal information with tread depths that they have to replace within a short period of time.

Lastly, on an offbeat question, when you sold the farm tire business to Titan in 2005, you licensed the Goodyear name on those tires. Just wondering how long that license or that agreement lasts for, and if there would be any point in time where you could potentially pull that back?

Darren?

John, I think the way to think about that is that you would consider it a fairly long term license agreement involved in that agreement, to allow them to use the brand name for a number of years in exchange for a royalty, and that is something that is subject to renewal, and we won't get into discussions about that at this point, but you can assume that they would have wanted to have a right to use the name for some significant period of time.

And from our standpoint, we have got the right kinds of conditions, and at this point are pleased with what is happening there.

Okay, great. Thank you very much.

Thanks, John.

The next question is from Kirk Luedtke with CRT Capital.

Good morning, Kirk.

Good morning guys. I have got one question regarding materials, and I recognize that we probably haven't been through the kind of volatility that we have seen the last year or two, but if you think back to the previous cycle and material costs, how long did it take before you started seeing downward pressure on consumer prices?

Kirk, as you can imagine we have tried to study all of the historic data, and extrapolate it into the current condition, and we have concluded from that there are just too many changes. I mean, just dramatic the changes that have taken place in our industry I think with the last cycle, no one talked about HVA tires, for example, so given the changes in the fundamental market we are less trying to extrapolate the history, than to just keep up with what the markets is telling us, and what we are seeing from the market and doing the best job analytically we can there.

The history really isn't a very good determinant, except that we know that people have to replace tires, and we know this is a product category that people need. And in terms of the pricing the competitive dynamics have changed considerably over the past 5 to 10 years. I wish I could give you a more definitive answer, but that is how we are approaching it.

Okay, helpful. With respect to the I think just as a follow-up to an earlier question about you mentioned you had flexibility to sell tires that you had made for original equipment manufacturers into the aftermarket, is it safe to assume that you don't have any practical limitations, you have unlimited ability to sell tires that you had designed for car makers into the aftermarket?

Yes, that is virtually true. The only strength that we have, is whether we have demand in the aftermarket, but aside from that, the individual products, et cetera, can be moved in the aftermarket.

Okay, and then last topic, I know I am jumping around here, but you have got a contract with the Steelworkers that expires in July '09 I believe?

We will start those negotiations in June of '09.

Okay, well given that you took a pretty lengthy strike last time around, is the contract, would you expect this next round of negotiations to go more smoothly, given that you won some flexibility last time around?

Well I will simply say that Darren and I will both be active participants with that, one with Rich Kramer and his team. We can't give any indication here, we don't want to do anything that gets in the way of very productive discussions, and we think we will have productive discussions with the Steelworkers, but that is as far, Kirk, as I can go at this point.

I appreciate it. Thank you.

Thank you.

Ladies and Gentlemen, we have time for one final question, and that question will come from Monica Keany with Morgan Stanley.

Hi, good morning.

Good morning Monica.

I was wondering, do you have the balance of the gross amount of receivables sold in the quarter?

Monica, are you referring to the securitization that we have in Europe, or are you looking at something else?

Yes, the factoring.

Yes, so the securitization in Europe is an on balance sheet program, so the receivables are still reflected in our receivables.

But isn't there also an off balance sheet amount?

We have some small amounts in overseas markets.

I think at June 30 it was like 180 that was sold.

Yes, I think what you might see is something that is in the same range, or slightly lower.

Okay, great. And then I was wondering, do you have a sense for what and I don't know if you mentioned this already, cash restructuring for '08, and the trajectory for '09 cash needs?

Yes. I think the cash restructuring, what we have seen over time is typically at 50 to 100 million of cash restructuring charges. I think for 2009 we do have a substantial cash amount for the closure of the Summerton manufacturing facility, the tire plant in Australia, which I think was around 85 million of cash, restructuring charges for that one, so you might see 2009 just a bit above that as a result of the Australian plant closure.

So '09 above the 50 to100 million?

Yes, if you take that along with other restructurings that we have announced or might announce, you might get to a point where you are thinking a little higher than 100 million for next year.

Okay, and then on working capital, for Q4 it is obviously always a big source.

Yes.

So directionally then for the year, can you give us some guidance for the full year?

Yes, I mean, Monica, I think you are right to point out the fourth quarter is a big cash flow, cash in flow quarter, and we would expect that to be the case this year as well. We have continued to focus on cash flow. Bob made several comments about Cash is King, and what we are doing. I think you would see, for making the production cuts that we are taking, certainly that is a big action toward generating cash, and making sure that we are running the business for cash.

Looking carefully at all expense categories is something else that we are doing, so we are doing everything that we can focused on protecting the balance sheet, focused on generating the cash flow. Over time there is no question our philosophy has been to focus on generating positive cash flow, but in an environment like this, it is a lot tougher to see out into the future, than we might have thought even three or six months ago.

The other thing Monica that we obviously are spending a fair amount of time on is receivables, and in that area, in this period of economic downturn globally, our operating people, as well as our financial people are on top of that.

So I guess your point is, you are obviously trying to do everything you can, but it is hard to predict for the year if it is going to be much of a source?

I think that is a fair position, but Bob's last point was an important one. We are really spending a lot of time now monitoring our customers, making sure that we understand the position that they are in, given a lot of difficulties in the credit markets. I think we feel like we are on top of that, we feel like we are doing what we can do there, but it is something we have to continue to monitor.

And then just one quick thing. When you gave those returns was that obviously for Europe pension, when you said September down 17%?

Yes, that is for the US pension portfolio.

Okay, and had you given '09 guidance before on the cash for the pension?

No.

And you are not going to hazard a guess today?

No. Not going to try today. We will just say the returns this year don't have much of an affect on the cash contributions for next year.

Okay, thank you.

Thanks Monica.

All right, this is Pat. This concludes today's call. I will be available this afternoon for your questions, so please call me should you have any. Thanks again for joining us.

Thanks for being here. Good bye.

Ladies and gentlemen, thank you for participating in today's Goodyear third quarter 2008 conference call. You may now disconnect.