Goodyear Tire & Rubber Co (GT) 2009 Q1 法說會逐字稿

Good morning, my name is Michael, and I will be your conference operator today. At this time, I'd like to welcome everyone to the Goodyear first quarter financial results 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 call over to Mr. Patrick Stobb, Director of Investor Relations at Goodyear Tire & Rubber Company. Mr. Stobb, you may begin your conference.

Thank you, Michael. Good morning, everyone, and welcome to Goodyear 's first quarter conference call. Joining me on the call are Bob Keegan, Chairman and CEO; Darren Wells, Executive Vice President and CFO; and Damon Audia, Senior Vice President, Finance and Treasurer.

Before we get started, there are a few items I'd like to cover. To begin, the webcast of this morning's discussion and supporting slide presentation are available on our Web site at investor.goodyear.com. A replay of this call will be accessible this afternoon. Replay instructions were included in our earnings release issued this morning.

The last item, we plan to file our 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 could cause results to differ materially.

These risks and uncertainties are outlined in Goodyear's filing 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 provide a strategy update followed by a market overview. After Bob's remarks, Darren will review the financial results and discuss outlook before opening the call to your questions.

That finishes my remarks, I will now turn the call over to Bob.

Thanks, Pat. And good morning, everyone. And thank you for joining us on the call this morning. When we announced our year end earnings in February, we suggested that Q1 was going to be a difficult quarter much like we saw in the fourth quarter of last year, and you will see from our results it was.

Industry volumes were down more than we expected in some markets with commercial truck markets being hit the hardest. Our OE customers continued to struggle with their business, particularly here in the U.S. And raw material costs remained high as we worked through higher priced commodities. While we are not satisfied with the quarterly financial results they generally reflected expectations given the prevailing market conditions.

Darren will provide details in a few minutes. While our markets presented us with the challenges we expected and in some cases more we continued to take the right actions to strengthen our business, to position ourselves to rapidly take advantage of opportunities as the market recovers, which it inevitably will.

Our actions are fully aligned with the strategy that has served us well over the past several years, a strategy guided by our intense focus on the seven strategic drivers of our business. Our future direction is not a new one . We are taking a proven strategic path to the next level of business performance.

Today I will update you on the progress we have made and our action plans in three areas, top line growth, cost savings and cash management. Then I would like to provide you with our view of where the tire markets are and where we see them heading near term. Initially, let me address our actions to support the top line. These actions are absolutely critical given weak industry conditions.

Our industry leading new product engine has become the public face of the new Goodyear has positioned us well to deal with this year's market challenges. How? First, we have more new product launches than ever, more than 50 in 2009, and already 23 have been launched through the first quarter, keeping customers and potential consumers focused on our brands in a highly competitive environment.

Based on consumers' purchases and the result market share gains we have enjoyed with the Goodyear brand it is evident that today's markets are continuing to reward innovation. Innovation remains the cornerstone of our business strategy.

Second, our new products are targeted precisely at the currently strong parts of the market. The branded mid-tier segment has gotten stronger as consumers push for greater value and the majority of our new products are positioned right in this segment's sweet spot.

Third, these products incorporate features that as a result of our consumer analysis and focus directly address critical consumer needs. Cooperation between our technical and marketing teams and our market research has never been better. An outstanding innovative example is the introduction of our Goodyear Assurance FuelMax tire in North America.

Fuel Max was a fast response to consumers' desire for a fuel efficient tire that, first, delivers improved fuel mileage to offset extremely high gasoline prices that we initially saw in 2008. Second, delivers mid-tier pricing, so the value proposition of FuelMax is extremely attractive. And remember here that FuelMax delivers 27% less rolling resistance. That provides about a 4% overall improvement in highway fuel economy, the equivalent of 2,600 miles worth of gas over the life of the tire.

Third, it delivers low rolling resistance performance without compromising handling, traction and mileage. So far FuelMax has delivered in every area. It has gotten off to an excellent start with orders running beyond our expectations, with positive media reviews in respected auto publications, and with equally positive consumer reviews online where consumers have been posting comments reflecting their early fuel savings experience.

I'll mention one. A previous owner wrote about a 200-mile trip from Baltimore to central New Jersey where he gotten 54 miles per gallon on the trip, where he would typically get around 51. And his comment was these tires definitely made a huge miles per gallon difference for me. Breakthrough products such as FuelMax are the result of a truly global development effort characterized by an open innovation network.

A collaboration of our own market research and technical capabilities along with input from respected third parties including government research scientists, academia and suppliers. As an example, the involvement of Sandia National Laboratories in predictive mathematical modeling has given us the ability to introduce products like Fuel Max faster than our competitors.

With Sandia, where we like to say nuclear science meets tire science, we can bring a product to market without the time consuming physical testing that was required in the past. This improves both development time and, of course, cost. Now being an American Company, we are the only major player in the tire business able to benefit from Sandia's considerable intelligence in this area.

And Sandia's scientists tell us they learn as much from our scientists as we do from theirs. In Europe, we introduced the EfficientGrip tire with fuel saving technology. This is the first high performance summer tire tuned to improve fuel consumption and rolling resistance while still delivering shorter breaking distance on both wet and dry roads.

This is an innovative product with outstanding early market response. These new products, the outstanding marketing we wrap around them, and the intense focus that we have on our end markets have energized our dealer network. With survey results now in from our North American dealer meeting in February, our customers are indicating unprecedented levels of understanding or our messaging, direction and strategy.

This is critical based on the important role the dealers play as advisors to consumers in the tire purchasing process, particularly during challenging economic times. Our ongoing innovation played a significant role in driving our first quarter top line. Number one, we continued our strong market share performance especially in the U.S. consumer business where the Goodyear brand gained market share.

Number two, our revenue per tire increased 3.4% in the quarter, excluding foreign currency translation, despite the significant decline in higher price commercial truck tires. Without the drop in commercial truck, that increase would have been several points higher.

Number three, the benefits of price mix the segment operating income for the quarter were $161 million. Additionally, we recently hosted a supplier innovation day at Goodyear where we invited key leaders from our suppliers to Akron to talk about evolving relationships that are based on strategic alignment and promote sharing of both product and process innovation.

The unanimous feedback from this session was that our openness demonstrated to them that we were indeed a new Goodyear and our new approach was both unique and refreshing. In other words, we stood out from the crowd.

We expect this new approach to benefit not only our top line efforts as suppliers help us to find creative product and process solutions, but also cost and cash. When went we talked to you in February we outlined a plan of attack on our cost structure, a set of actions designed to drive our break even point considerably lower.

I will now provide you an update on our efforts. I told you in February that we had increased our Four-Point Cost Savings Plan target to $700 million for 2009. This will take us to $2.5 billion in savings over four years, from 2006 to 2009. I'm pleased to tell you this morning that we are tracking toward that increased target.

Despite extensive down time in our factories, limiting opportunities for manufacturing cost savings, we achieved $145 million of cost savings in the first quarter. Working with the United Steel workers, we were able to agree on reduced staffing levels in three U.S. plants, Danville, Virginia; Topeka, Kansas; and Buffalo, New York. Of course, we're also reducing salaried level position at those facilities.

A key factor in Goodyear remaining competitive will be the cooperative effort we are engaged in with the steel workers. In Q1, we had similar staffing reductions at two major Brazilian manufacturing plants that we're also working through reductions currently in Europe and in Asia. In February, we announced plans to reduce an initial 5,000 jobs globally this year and we remain on pace to achieve that reduction.

During the first quarter of 2009, we reduced global employment by 3,800, that's 3,800. Our plan looks very solid. These reductions were in addition to the 4,000 jobs eliminated in 2008, primarily in the second half. In Q1, selling administrative and general expenses declined $102 million or 16% compared to the 2008 first quarter.

Also in Q1, we implemented a global salary freeze. Now in addition to solid progress against the Four-Point Cost Savings Plan, we are progressing in our efforts to reduce global manufacturing capacity by 15 million to 25 million units over the next two years. While we have nothing further to announce at this time, we will provide specifics relative to this plan as details are finalized.

Our focus on managing cash has guided our actions over the past several years and has intensified given current economic conditions. We told you on our February call that we were implementing targeted inventory cuts of more than $500 million or approximately 15% of inventories, made possible by significant improvements in our supply chain capabilities.

We have made excellent progress on our inventory reduction target. Our total inventory levels at the end of Q1 are more than $300 million below their levels at year end 2008. We also indicated that we were adjusting our CapEx plan downward as market demand has eroded to a total of between $700 million and $800 million in 2009. Our CapEx plan is on target through the quarter.

We said that we were continuing to pursue the sale of non-core assets which we are pursuing aggressively. In addition, I wanted to mention that we have contingency plans for 2009 for all of our businesses and functions to allow for a high level of operating flexibility to meet the challenges of the macroeconomic environment we face.

This allows us to focus intensely on our businesses with the capability to quickly recognize and act upon changing market conditions. We employed this type of flexible planning in 2008 and as a direct result responded aggressively at the outset of the slowdown by implementing contingency actions that were developed at the beginning of the year.

From my perspective, here is how the tire industry looks today versus our February expectations. I will start on the minus side. The commercial truck tire markets in both the U.S. and Europe are weaker than expected for both replacement and OE, and undoubtedly weaker than most of you expected as well. We expect this industry weakness will continue to pressure our results during the second quarter.

Despite the stimulus programs and the focus that the U.S. government has placed on helping the automobile manufacturers, liquidity issues for some of our U.S. OE customers have clearly intensified to the point where they have indicated publicly they are exploring all available options. However, I would just remind you that our overall business with the Detroit 3 in 2008 was less than 7% of our total global sales.

Consistent with what we saw during 2008, we continue to see a growing percentage of consumers defer tire purchases. Finally, general credit availability remains highly constrained. Here I would be specific that's general credit availability remains highly constrained.

On the plus side, despite the obvious financial pressure consumers are rewarding our innovation with their purchases. As you think about stimulus packages being put forward by governments around the world, we see some quantifiable successes.

First, China seems to be rebounding in response to government efforts. China just reported a 6.1% GDP growth for the quarter, which while less than the double-digit growth pre-downturn is still significant when compared with the rest of the world. In our industry, the country saw record auto sales in March with unit sales above the United States. That's above the United States.

Second, there is a positive impact in Germany and Italy from their programs that are encouraging vehicle purchases through incentives for scrapping older, less fuel efficient vehicles. The fact that the U.S. government is now considering similar programs demonstrates a willingness to look at what is working and adapt. Third, the industry is also showing strength in India.

We have seen noticeable reductions of inventory in tire distribution channels during the first quarter. And dealers are generally running their businesses with a focus on keeping inventories low. Today cash is certainly king for tire dealers. Capacity in the industry has been reduced due to plant closings and reductions of work hours.

Miles driven in the U.S. for February increased 2.7% per day ending 14 consecutive months of decline. However, gas supply data, which has been a leading indicator for miles driven has been trending unfavorably, so we are somewhat guarded in our optimism here. Finally, we've seen the equity markets rebound significantly over the past several weeks.

While it is not clear that our markets have stabilized we are encouraged by the positive factors that are emerging. As I have shared with you in the past, the historical data provides us with confidence that we'll experience a tire market recovery in both consumer and commercial truck markets.

During the one to two years following previous recessions the industry experienced a snap back in demand. And that demand snap back occurred because the temporarily depressed buying behavior of consumers and dealers during recessionary times created a pent-up demand for our products.

Finally, a bit of new information. Forbes Magazine and the Reputation Institute completed their annual survey of consumers to determine America's most respected companies. I'm pleased to announce today that Goodyear has been recognized as the most respected automotive company for the second year in a row.

This recognition is particularly meaningful as it comes from the consumer who buy our tires and put their trust in Goodyear every day. The specific results will be made public later today by Forbes. So this is, obviously, a major impact for our people and it clearly shows our strategies are working.

As you look at how we've approached this recession, clearly with an intense focus on emerging from the downturn in a position of strength, in the three key areas of top line cost and cash, we firmly believe that we are on a proven path to the next level of performance, one that will provide us with both a fast start, when markets rebound, and enhanced long-term competitiveness.

I will now turn the call over the Darren to review in detail the quarter performance and our outlook and then we will take your questions.

Thanks, Bob. I will start this morning with a few summary comments before moving on to address our income statement, the balance sheet, business unit results and our outlook for 2009.

First quarter results reflect the continued impact of unprecedented economic challenges we currently face. As in the fourth quarter last year, the two factors having the most significant impact on our results are weak industry demand and peak raw material costs. Otherwise, you will see our plans are on track. In North America, we saw significant volume declines continue across all tire segments despite market share gains, with replacement industry volumes declining by levels consistent with the fourth quarter last year, but OE volumes declining even more severely.

In Europe, the story was similar, commercial volumes in particular were hard hit, and have shown no signs of like at this point as some fleets are choosing to cannibalize tires from idle equipment rather than purchase new tires.

In our other regions, industry volumes were also very weak compared to the prior year. But there were some hopeful signs with passenger vehicle production picking up in China and India, driven by strong government incentives. The significant drop in industry volumes when compared to the prior year, drove global unit sales lower by nearly 9.5 million units, a reduction of almost 20%.

We continue to see the double hit to earnings from production cuts which reflect for us not only lower sales, but also our aggressive management of inventory levels. So in the first quarter we reduced production by 12 million units, equal to what we indicated in our February call.

Raw material costs increased $332 million, or 31% versus a year ago, the highest percentage we have seen as the high cost from the raw materials purchased in mid-2008 flowed through our inventories. Fortunately, the negative impact from raw materials will be less of a factor beginning in Q2 followed by expected year-over-year raw material cost declines in the second half of the year.

Price mix continued to provide benefits in Q1, with revenue per tire higher by 3.4% compared to last year. As Bob indicated, the revenue per tire was up less than the 8% we saw in 2008 due partly to commercial truck tire volume, which dropped by 33% compared to a decline of just over 18% in consumer tires. As Bob mentioned, our cost reduction actions in both manufacturing and SAG are helping mitigate industry pressures and are driving our cost structure lower, and our liquidity remains solid.

Looking at the income statement, sales were down approximately 28% in the first quarter, reflecting lower unit sales across all businesses, and adverse currency movement of about $500 million given the strength of the U.S. dollar. Price mix improvement impacted sales favorably.

Lower gross margin, segment results and our net loss all reflected lower volumes as well as significantly higher raw material costs. SAG was down significantly from a year ago reflecting aggressive cost cutting, decreased compensation related costs and the benefit of foreign exchange.

Note that the first quarter after tax results included rationalization related costs totaling $57 million along with other significant items. The appendix includes a summary of these items for this year and last year. The segment operating loss for the quarter was $176 million. As I mentioned previously, the impact of weak markets across all of our businesses accounted for the majority of the year-over-year decline in operating income.

Price mix of $161 million, was more than offset by the peak of raw materials at $332 million. Mix, as I mentioned, was affected by significant declines in commercial truck business. Our aggressive cost cutting continued in the first quarter, with savings from our Four-Point Plan of $145 million providing significant net benefits as the general inflation rates are down compared to the rates we experienced last year.

We expect many of the same challenges to continue in Q2, as industry conditions are expected to remain weak impacting both our unit sales and lengthening the time it takes to work through last year's high priced raw materials that remain in our inventories.

Turning to our cost saving progress for the quarter. As I indicated, we saw results in each of the categories of our Four-Point Plan with savings of $145 million. Savings rates reflected a reduced opportunity set given lower volume and declining inflation. Head count reductions and other cost saving actions will provide more impact in Q2 and beyond as we run the factories on a fuller schedule. We remain confident in our ability to achieve the full $700 million in savings for 2009.

Looking at our balance sheet, you can see the benefit of our focus on inventory. Our inventory is down $330 million or 9% from year end despite Q1 typically seeing increases based on normal seasonal trends. This reduction stems from the success of advantaged supply chain initiatives in combination with lower raw material prices and foreign currency translation.

Our advantaged supply chain process has focused on improvements in manufacturing flexibility to handle smaller runs more efficiently so we can improve our service levels while reducing inventory. This drives our production with a demand pull from customers rather than from a push.

Cash and cash equivalents were about flat with year end, although both total debt and net debt increased reflecting seasonal borrowing and operating losses. We received a $24 million disbursement from the reserve primary fund in Q1 and an additional $16 million in April, which means we've now received 90% of the $360 million that we had invested at the time the fund froze withdrawals last year.

Our liquidity remains solid at quarter end given the strong cash balance in covenant flexibility and our maturity profile remains strong. We plan to run our business or our near-term maturity $500 million we have due in December can be satisfied from existing cash and liquidity, but we will be opportunistic about refinancing as opportunities present themselves.

One more point related to liquidity. Given the uncertainty around the situations at key U.S. automakers during Q2, I wanted to comment briefly on how we view the potential impact on Goodyear. As Bob said, the U.S. OEs represent less than 7% of Goodyear's global sales and have typically on an historical basis represented $100 million to $150 million of receivables.

Given today's production environment, we now estimate our peak accounts receivable exposure in North America to the two OEs that are most at risk at about $60 million to $80 million during Q2. We believe some of these receivables could still be paid even in the event of a bankruptcy, and we've been evaluating the government-sponsored supplier protection program offered by both OEs and may participate in that program.

We see the impact on our OE volumes as the more important long-term question. Further ongoing volume reductions would be more unabsorbed overhead in our North American factories. Finally, in our 10-Q you will see the impact of the adoption of a new accounting standard, FAS 160. This new standard changes the presentation for minority interest on the income statement to a separate line item and on the balance sheet from liabilities to shareholder's equity.

Turning to the segment results. North America reported the loss of $189 million in the quarter, which compares to segment operating income of $32 million in the 2008 period. About $160 million of the decline is explained by weaker tire markets including unabsorbed factory overhead. The remainder is explained by the spike in raw material costs together with lower results in other tire-related businesses.

Given the weak industry volumes, we sold 3.9 million fewer tires in North America compared to the prior year, with over half the decline coming in the consumer OE business. In the midst of market weakness, our North American business led by the Goodyear brand gained share in the replacement market given the success of new products, strong market initiatives, and dealer support.

As in the fourth quarter of 2008, North America experienced significant impact from unabsorbed fixed costs due to production cuts which in Q1 totaled 4.6 million units. Unabsorbed fixed costs totaled approximately $121 million in the quarter, including $83 million of costs for first quarter production cuts which we recognized immediately under FAS 151.

Price mix performance overall was strong, but did not keep pace with the increase in raw material costs in Q1 which increased $137 million. The net impact of price mix versus raws in North America was a negative $77 million. Despite some factors that hurt mix, including the sharp drop in commercial truck volumes, we still achieved an increase of more than 6% in revenue per tire in the quarter.

In response to lower demand, North Americas has reduced its production schedules. In Danville, Buffalo and Topeka we reached an agreement with the United Steel Workers to change from seven-day to five-day work weeks. Reaching these agreements in such a short time frame not only represents good cooperation, but also demonstrates the commitment both parties had to addressing the current environment. Going forward these actions will help reduce inefficiencies at these plants at today's lower production levels.

As in North America, the impact of weak industry demand and peak raw material costs on our results in Europe, Middle East and Africa were substantial and accounted for the majority of the year-over-year decline in earnings. EMEA sold 3.8 million fewer tires in Q1, with severe declines in OE, particularly in the commercial truck markets.

Sales declined $682 million, reflecting the lower unit sales along with weaker European currencies. The negative impact from currency on sales was almost $300 million. At the segment operating income level, however, weaker currency helped reduce the operating loss in the quarter.

Revenue per tire decreased slightly in Europe, Middle East and Africa given the steep decline in commercial tire volumes which have a higher per unit revenue than consumer tires. If viewed individually, both the consumer and the commercial businesses saw increased revenue per tire. So a constant mix revenue per tire would have be 6 percentage points higher.

Weak demand drove production cuts of about 5 million units in the quarter and we incurred unabsorbed fixed costs of $55 million. This is a much lower impact than we saw in North America given higher flexibility in our EMEA factories, particularly in eastern Europe. Higher raw material costs more than offset price mix benefits year-over-year.

The results in Europe reflect the toughest environment we've got now globally. But there are two good news points. First, raw material impact will be measurably lower going forward, which will help alleviate the year-over-year impact to our results. Second, our cost reduction actions continue to gain momentum throughout EMEA.

Switching our focus to Latin America, we reported segment operating income of $48 million in the first quarter. This is a solid outcome considering the current environment. The result is below the prior year levels primarily due to weak industry demand. When compared to the prior year, unit sales declined about 19% or a million units, reflecting weak consumer and commercial demand, and as the previous quarter a number of currencies in the region weakened against the U.S. dollar.

When compared to the U.S. dollar, the Brazilian real, which is the region's largest exposure, weakened by about 25% year-over-year. In addition, volumes were negatively impacted by import restrictions in certain markets, a political issue driven by the economic downturn.

In response to weak demand and the trade restrictions, Latin America cut production by approximately 1.6 million units in the quarter resulting in unabsorbed fixed costs of about $16 million. In the quarter, price mix benefits were substantial, reflecting what we view as the strongest product line that the region has ever fielded which helped yield a 10% increase in revenue per tire, nearly offsetting peak raw material costs.

The final item to consider when evaluating the year-over-year comparison in Latin America is last year's one-time gain of $12 million related to a favorable tax settlement which did not recur this year. Although market conditions in the region remain challenging in Q2, we see some positive market signs, with car sales in Brazil growing in the first quarter.

Even in Asia, the economic slowdown has had a significant impact on the quarter. The impact of weak industry demand resulted in a 17% decline in unit sales compared to the prior year. Volume declines were most severe in Australia and New Zealand where the economic slowdown is having the deepest impact.

In addition to lower volumes, these markets have a greater high-value added tire concentration, so the bottom line impact is more pronounced. As a result, first quarter operating profit was $15 million. The impact of the lower industry volumes and the unabsorbed fixed costs associated with production cuts of a million units accounted for the majority of the decline when compared to the prior year.

On the positive side, revenue per tire increased 9%. And price mix benefits were sufficient to offset raw material costs. Also, strong cost control helped mitigate the impact of weak demand.

Overall, Asia performed well despite the impact of weak markets, and we see China and India showing signs of demand recovery, a good sign. So in each of our regions we saw the significant impact of weak industry demand along with the effects of peak raw material costs.

So in each business, we continued to see strength in our brands and our products, which along with cost improvements are helping mitigate the severe industry conditions. This provides assurance that we will be positioned to benefit when the markets recover.

I want to turn now to our outlook for 2009. Considering the current state of the global economy and the high level of uncertainty we see in our end markets, we expect demand to remain weak in the second quarter with year-over-year declines similar to those experienced in Q1.

Once we get to the second half, demand comparisons begin to get considerably easier. In response to continued market weakness, we plan to cut production by nearly 11 million units in the second quarter and we'll continue to monitor market demand and react as needed. Our projections for raw materials in the first half of 2009 is an increase of about 18%, which is the high end of our previous range.

This implies second quarter raw materials will increase about 5% to 7% compared to the prior year. This reflects the impact of low Q1 production, which increased the lag time required for raw materials purchased in mid-2008 to work through inventory.

For modeling purposes, we expect interest expense in the range of $315 million to $335 million for the year and we continue our tax expense guidance at approximately 25% of our international operating income. As you consider takeaways from this morning, remember our points. On one hand, markets continue to be tough, especially the commercial truck markets. Raw materials and unabsorbed fixed costs are still an issue for us, and we see significant risks with our U.S. OE customers.

But on the other hand, our strategies are working. Our product engine continues to deliver, we continue to make progress in price mix, raw material costs will decline in the second half. We're on track with our cost savings and our cash and liquidity actions, and we continue to be recognized at the top of the table as most respected and most admired in our industry.

As we look for signs in market recovery, we remain confident that we will be positioned to take full advantage of the recovery when it comes. Thank you for your interest in Goodyear this morning. Bob, Damon and I will now take your questions.

(Operator Instructions) We will pause for just a moment to compile the Q&A roster. Your first question comes from Rod Lache with Deutsche Bank.

Good morning. Can you hear me?

Yes, we can, Rod, good morning.

I have a couple of questions, was hoping first of all you can break down the volume versus the mix effect in the quarter and within mix just speak, if you can, to -- you mentioned that truck, commercial truck, was down but OE was down also, and I would imagine that the OE would have a positive effect on mix. So how did you see that affect the overall mix result?

Rod, the point that you are making you are right, we do have some factors going in each direction. But I think when you look at it, the severe drop in the commercial truck tire markets, as well as some drop that we see in the OTR markets are both working strongly against the mix factor. To us, what we saw as an impact on revenue per tire that was more significant than the benefit we would have gotten from some lower OE volumes.

And I think if you break it apart by region you will see some differences as well, and you can see the impact that Europe gets is more strong from the volume. And part of that is the fact that the OE business there is better for us than the OE businesses in the U.S.

What was the price effect, if you just looked at that in isolation, was that a positive year-over-year?

We have seen, we continue to focus on our strategy on pricing, and we've worked very hard to establish price positions in the market. Obviously, we are continuing to focus on that with our new product engine. We don't break price and mix out specifically, but I think the focus you would have on the mix effect is going to be on the mix among our businesses as much as it is anything else.

Would you expect that pricing to remain fairly stable over the course of the year, even as, you've commented that raw materials should become favorable towards the latter half of the year?

Maybe, Rod, I will just jump in and say, as we are looking forward this year, obviously, as raw material prices come down we've got a weak demand environment, there will be some pressure here. We don't think it'll be very intense pressure. We have been able to get price mix not only in the first quarter, but in 2008 and the previous four years. So we are pretty confident about the value propositions that we are putting out there.

Okay. The last two from me would be, looks like you cut production by 12.6 million units, if I calculated it right, and you had a 9.5-million-unit sales decline. How much did the inventory reduction impact your unabsorbed overhead?

And then, lastly, looking at prospective cost savings, it looks like the big opportunities are in the productivity and steel, USW bucket and in the capacity bucket. Could you just speak to, as you are coming up on a new contract, what are your expectations there is and what would the savings be from this 15 million to 25-million-unit capacity reduction?

Rod, I'll take the question on the production cuts first. Clearly that is an area of where we have taken a double hit. Our cut backs in production have been more than the lost volume. And so you are right to look at that and say, yes, that's driving a lot of unabsorbed overhead, that even if the unit sales continued we wouldn't continue to see all of that.

Now having said that, we are continuing to focus on driving our inventory levels down, and that does carry with it some impact on absorbed overhead. And I think the production cuts that you see are in the range of the 12.5 million units versus 9.5 million units or so of volume decline. So I think you can figure out what portion of that is going to be from the additional production cuts.

The productivity question or the productivity point you make is the right point. Going forward, we should see significant impact on cost savings from the head count reductions that we have taken.

That's both in the salaried staff as well as in our production facilities, and if we look at what we've been able to do there, not just in the U.S. but around the world, we have been able to take reductions that are going to pay -- that are going to pay us back over the course of the year more than they would have in the first quarter.

What would the savings be from the 15 to 25 million capacity reduction?

Yes, I mean, Rod, we've taken out 25 million units of capacity over the last several years. And I don't have any better guidance for you than to suggest that the savings should be similar to savings we've seen in capacity reductions historically.

Okay. Thank you.

Rod, maybe just one point, because you raised the question of the negotiations with the steel workers, obviously, those will begin in June. Our policy will continue to be not to comment until we are through those negotiations.

I will just say that with the progress we made in the three plants I mentioned, in Danville, Topeka and Buffalo, that we've got a good working relationship, and frankly a good environment here.

Thank you.

Next question.

Your next question comes from Himanshu Patel with JPMorgan.

Hi, good morning. I wanted to talk about North America, either for Bob or for Darren. Just looking, it looks like your revenues and units were sequentially from the fourth quarter down about 20%, and your segment operating income is roughly flat.

I know you don't disclose sequential bridge on profits, but could you give us some color there? What were the factors that went more favorable to offset that sort of revenue pressure?

Yes, Himanshu, the point you are making is we dropped from 16.9 million units to 13.9 million in terms of volume from -- as we go from Q4 to Q1. Clearly, the volume had some impact, although if we look at that I think a large part of it is drop in OE volume which in North America doesn't carry with it a lot of earnings.

So the drop-off there isn't as significant as it might appear to be just given that those are pretty low margin units. I think in addition to that you'll see that North America is getting some cost savings, that's going to be helpful as we go from Q4 to Q1.

The other thing, though, that worked against us to some degree, and you will see it in our disclosures, as the 10-Q is published, is the non-tire businesses, or the tire-related businesses, I should say, in North America, and you can think about the chemical business, the retail business, the retread business, those are businesses that have continued to get tougher for us.

Darren, when you say cost savings was there a big relief sequentially from general inflation?

We did see some, if you think sequentially, not as much relief as you see from a year-over-year perspective. Inflation wasn't nearly as much of a factor in Q1 as it was for us in Q4.

Couple of things you do see there. Number one, you see the first quarter when we get the full benefit of the [Viva] in North America, as it flowed through inventory, given the lag that that would have taken. So that's a benefit. And benefit from some savings we taken in SAG, pretty significant.

Okay. The 11-million-unit production cut guidance for the second quarter, first, just a housekeeping comment, what is that in reference to? Is that versus year ago or is that versus your previous internal plans?

Yes, Himanshu, you can think of it -- I don't think it's going to be too much different. 11million units is going to be compared with what we would consider to be a normal production schedule. If we look at a year ago, we were still on more or less what we would have seen an a normal production schedule. Our production cut backs started somewhat in the second quarter, but mostly kicked in in the third quarter of last year.

Okay. So my question on that is is there a chance here that the 11 million may be too steep just in the sense that looks like inventories are starting to get under control.

We are seeing some stabilization or improvement, whatever, in miles driven, it looks like the rate of decline on consumer replacement in Europe has also started to moderate. Are you viewing this as sort of a conservative number or would you say that number has down side risk to it? I'm just trying to get some color around that.

We still think it's a realistic number. We have been aggressive cutting production schedules and drawing inventory down since the middle of last year. I think we are still going to be aggressive in that area. There is a lot of volatility in the demand environment as you see.

We think this is a realistic number. I'm not sure I would quite go so far as to say it's a 50% upside, 50% downside, but it's a very realistic number at this point.

Last question, for Darren. Maybe you could just comment on just given where the markets are, both on the equity and the credit side, what are some of the financing options that you think could be tapped opportunistically to address the debt maturity at year end?

This is Damon. As Darren alluded to we would look to opportunistically refinance if the December maturity presented itself. For us, as a high yield Company there is, obviously, the unsecured market that we would look at, and given our secured position we do have the option to look at the secured market as well.

Okay. Any thoughts on an equity-linked transaction or is that still something you think would -- either you are not interested in or you think it's just hard to pull off?

The equity-linked market is another option for us to consider, Himanshu. But as we look through the options, we look at the cost of each of these, the market's appetite for a Goodyear transaction, and then looking at what is in the best interest of the Company in the near term and the long term and looking at what different options we have.

Okay. Very good, thank you.

Thank you.

Your next question comes from John Murphy with Merrill Lynch.

Good morning, guys. You've made pretty good progress on your inventory reduction, have a little bit more to go according to your targets, so that bodes well for you. What is your sense of the competition on their inventory reduction and what are you hearing sort of from the channels? I'm just trying to understand, if we get into this low inventory level you're heading for, that we get some pricing support, particularly in the second half of this year?

John, I won't comment on where the competition is. But I will go back to the comment I made in my remarks, that if we look at the overall trade distribution channels, people are running with fairly low inventories at this point. As I said, cash is certainly king for them.

Most of them have run their businesses for many years on a cash basis and still do so. So we think inventories that are out there are what you might call a normal level or below in virtually all the markets.

The only place where that might be a little different is on the commercial truck where people have gotten caught by surprise a bit with the fall in demand. But in the passenger area, and I'm making a global statement here, inventories are relatively normal to low.

And you alluded to moving to an environment where you might see more of a pull model, as opposed to a push model on inventory, are there any signs of that pull model beginning to develop as far as the demand/supply balance?

For us, we have been working intensely on this for the past three years, and for us, we are certainly moving towards a pull environment rapidly. Again, I won't comment on the competition in that regard. But for us, that's a step we have now taken and we've got the capability in place to do it.

Bob, you mentioned that you were able to gain market share, a lot of which it sounds like it came from these mid-tier tires, that you have a very good product in. What is the profitability of those tires? Is that sort of along the corporate average or is that slightly above or below?

They are pretty good margins, John, because remember what we say, I talked about branded mid-tier, and it's important to have all those words. There are mid-tier products that are not branded where margins might be a little less, but for branded mid-tier a significant portion of that is what we've called in the past HVA, or high-value added product. These are good margins in that area. Particularly, if you bring new product to the category like the Assurance FuelMax.

Okay. Then just lastly, one question on slide 17, the available credit line looked like it's dropped significantly from $1.7 billion at the end of last year to $1.0 billion at the end of the first quarter. Is there something that changed in the borrowing base or what's going on there?

John, this is Damon. The delta, the drop in the available credit lines is really due to the seasonal borrowings in Europe. So when you see the Q, you will see that we've drawn our credit line in Europe which is fairly traditional.

Great. Thank you very much.

Thanks, John.

Your next question comes from Saul Ludwig with KeyBanc.

Good morning, guys.

Good morning, Saul.

With all the inventory cuts that have taken place and the fact that there is seven other tire plants that have already been announced for closing, do you still feel taking out another 15 million to 25 million units is necessary given that there have been additional plant closings subsequent to your originally announcing the need to take out that additional capacity?

Saul, I would just comment to some degree we've got the range in there. The range was positioned for the reasons that you mentioned. We are continually monitoring demand, we are continually rethinking where demand will be in the future. We've got to take some capacity out. We feel strongly about that, and we have some high cost capacity that needs to come out, and some regions that are more stressed from a demand standpoint than others. So we feel pretty good about that range.

Right. Next question, what's the timing when you have to move out of the Dalian plant and where do you stand with the construction of the new plant?

I won't give you precise timing because it moves a little bit. I will simply say that we are on plan in terms of government interaction, so we have joint plans, and the preparation of the site. So, no, things are right on plan with Dalian.

Is there any time when you have to be out of the existing plant because of the neighborhood in which it's in, Bob?

It's a function of -- remember this is all well-coordinated. It's a function of when the new plant is ready to roll. So that's the pacing item, Saul.

Are we in the two to three-year time frame or one to two-year time frame or -- I'm not nailing it down to a specific month, but what's the broad --?

I'd simply say that we are in the two-year plus time frame to be completely ready to ship product.

Then finally, Damon, why with the $64 million of interest expense in the first quarter, what's going to cause that interest expense level to be so much higher to achieve the $315 million to $325 million expense for the full year?

Sure. Good question, Saul. One of the big variables, Saul, is the debt that we reported at the end of the first quarter, as I alluded to earlier, part of that was the draw of our line in Europe.

That was an outstanding for the full quarter. So you can't really extrapolate the interest expense for the first quarter for the remaining three quarters. So that's one variable. The other one is when we look at our guidance we look at forward-looking LIBOR curve. So given LIBOR today is currently low, the forward rates are a little bit higher. Those are probably the two biggest items.

And then the third one I'd point out is the European securitization program, which is not currently fully utilized. As those receivables increase in Europe that would translate into incremental interest expense for us as well.

Great. Thank you for a great explanation. Thank you, guys.

Thanks, Saul. Your next question comes from Itay Michaeli with Citi.

Thanks, guys. This is Will Randow for [Brie Camicalli.] I was hoping you could discuss your outlook on particularly working capital, capital expenditures and cash flow seasonally as we look through the rest of the year? Give us a sense where that will fall out?

Sure. You want to take that?

What we generally experience from a working capital and a cash flow perspective in our business is a cash outflow during the first, second and even the third quarter. And then cash inflows during Q4. That's our traditional seasonal pattern.

We take that and we overlay the inventory reduction targets we have. Obviously, we are trying to work inventory down over time. We made progress on that in the first quarter. We are going to continue to be focused on that. You have not seen inventory build the way traditionally it would build. Clearly, what happens in the marketplace in the second half of the year is going to have some influence on what level of working capital is going to be needed to support the business.

There is a big uncertainty, we are not in the position to have complete clarity over what the third and fourth quarter volumes are going to look like. That's going to have some effect on where inventory, where receivables have to be. From a CapEx perspective, we are in line with our plans on CapEx. We've got plan to spend $700 million to $800 million of CapEx during the year, which, while it's down about $300 million or so from last year, is a reflection of the fact that we don't need the capacity that we once thought we were going to need.

And that's, the market has reset, it's reset to a lower level. So we don't need the high-value added capacity and the upgrades and the expansions that we once thought we were going to need. We brought CapEx levels back down, we feel that we are in line with our expectations there. The cash flow is going to have all of those variables involved in it. With a big part of it revolving around first, what are the levels of business activity in the second half of the year.

Is it possible in Q2 to have a decent sized benefit given your inventory reduction actions and typically in Q2 it's a relatively neutral working capital period?

I think the real question is going to be, typically sales in Q2 and working capital in Q2 would build. What happens in the marketplace is going be a driver there, but we continue to drive our inventory levels down. Inventory is something we look to get a benefit from. Other elements of working capital are going to be driven by business activity levels.

Thank you.

Next question, Michael?

Your next question comes from Patrick Archambault with Goldman Sachs.

Hi, good morning. I guess I wanted to dig into pricing a little bit more. One of the things that has been brought up is that some of your competitors may see the benefits of lower raw material costs a little sooner from a P&L perspective simply because they are on a different inventory accounting system with less of a lag versus FIFO.

And I was wondering whether you thought that might lead to potentially accelerated pricing or discounting within the next quarter, what you are seeing, what you are hearing about that, and if you would agree with that, that would be my first question.

Maybe just to address that, as I said earlier, that we feel pretty good about what we have been able to accomplish in terms of price and mix and feel pretty good going here into the second quarter in that regard as well. With regard to the FIFO versus what I think from most of our major competitors, or kind of an averaging type of methodology, we haven't seen empirically over the past few years a lot of impact from that directly in pricing.

So I don't know that there would be a delta there in terms of the timing. We certainly, we monitor the market all the time. But I wouldn't anticipate that.

Okay.

Darren, I don't know, any other comment on that?

No.

Just to follow up on mix. We've spoken a lot about either the impact of trucks, but specifically within passenger car how is the move to what you described as mid-tier on a go forward basis, how is that going to impact mix as a tailwind as we get into the back half of this year? How should we think about modeling that?

Just to be clear here, I want make sure, you are looking at, I think, what we will see, the reason for going to the mid-tier, the branded mid-tier is because there is a lot of volume there. And a lot of industry volume. And there is a lot of potential, therefore, for us to take on more consumers and more volume at very attractive margins and attractive price levels.

So to me, it's not as simple a question when we look at the mid-tier as just looking at price mix, it's an absolute dollar gross margin type of question. And that's really what we are going after there.

Sure, no, absolutely, but I guess if we were to model it out like you have represented on slide 14, your success in doing that would help diminish volume headwinds, unabsorbed overhead and all those aspects but the mix part of it might actually shrink a little bit --

I think it might not because the mid-tier pricing, although below the premium pricing, and as I said is still high-value added. It is still substantially HVA product. Pricing on our new FuelMax is a good value proposition, but the pricing is attractive from our standpoint too.

It's a good fit. It's attractive to us and attractive to the ultimate consumer. So there may be a little play down, but there is also a play up in terms of creating a stronger mix for us. Remember, we've exited a lot of lower price business, consciously done it over the past few years. So I wouldn't naturally assume that mix will be down because of that play in the mid-tier. I think there will be solid pricing.

Okay. So sort of set at a very high level year-on-year just given some of the private label stuff you've been exiting you still expect mix to be a tailwind even if --

Still be a positive.

Okay.

And it will be a positive in -- certainly, I would say, in all four of our geographic markets. Unless market demand changes considerably. We haven't seen that to date.

But the reason for going after the mid-tier is obviously we see that as a relatively strong market segment. We saw that 18 months ago, and because of our ability to launch new products quickly we've got products in that segment that we are shipping here early in 2009. That's the reason for speed and the new product stream being so critical.

Okay. Great. And last one, the, I might have missed this, but can you give us a sense of what the unabsorbed overhead cost associated with the second quarter production cut will be? I mean, I may be remembering this wrong, but I think it was between $10 and $20 a tire or something like that, depending on what region you were in, is that the guideline you would use for just assuming that, excuse me, estimating that for Q2?

There is, if we look at the last three quarters, I think we've gotten yields, you will able to see as much data that would help you estimate the second quarter as I can provide. It will be dependant on which factories take the production cuts, which regions of the world those factories are in and what the level of fixed costs are.

Obviously, we've done some things over time that are reducing the fixed costs, as we take people on, as we take costs out of the factory. So we are working to get that unabsorbed fixed cost burden down over time, but for the second quarter you look at it and say the situation isn't going to be that much different than it was in the first quarter.

Great, thanks a lot, guys.

Due to time restraints, your final question will come from Kirk Ludtke with CRT Capital Group.

Good morning, guys.

Good morning, Kirk.

I just had a couple of follow-up questions. One was regarding the liquidity slide, 17. And I think you mentioned that the decrease in the availability was due to the draw on the European facilities and I just wanted to clarify, the definition of availability, the pan-European securitization, I guess, you have another $200 million of capacity, but you don't have the borrowing base to actually draw it? Is that a fair --

This is Damon. That's the way to look at it. We have a committed facility there, but given the seasonal nature of the receivables and given the drop-off you saw in the first quarter, we didn't have full access to that currently. Historically, you see the receivables in Europe grow in the second and third quarter. So as those do come online in revenue you would see us be able to borrow against that.

Okay. Is there any part of the billion dollars that's similarly situated, committed but constrained by the borrowing base?

No.

Okay. Great. Then how is it going rolling these facilities, the facilities that matured in the first quarter? Did they all roll over at the same levels?

Kirk, we see, we are rolling small facilities, nothing meaningful in size, and we continue to renew these facilities without any major problems. Again, every country, every region has different lines, but nothing significant.

And, Himanshu asked about the capital market options, and I was curious, are you sharing the amount of secured debt you could layer into your capital structure?

We haven't given a specific number, Kirk. But I guess what I would tell you is we look at our credit facilities. We look at our other unsecured debt that we have out there. We don't feel there is any significant restrictions in allowing us to do something like a third lien transaction or anything like that.

Then last question, I'll raise it because no one else has, but is there any update on the Sumitomo put? Any developments that you want to share?

The short answer is no, Kirk. Our feelings are the same as they were when we talked on the Q4 call that, both parties achieving significant benefits and there is no update.

Okay. Thank you very much.

Good relationship, both parties deriving benefits.

Thank you.

This is Pat. This concludes today's call. Thank you very much for joining us today. If you have any follow-up questions, please feel free to contact me.

Thanks, everyone.

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