Goodyear Tire & Rubber Co (GT) 2009 Q4 法說會逐字稿

Good morning and welcome to the fourth quarter and full year sales and earnings 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)

Mr. Patrick Stobb, you may begin.

Thank you, Rachel, and good morning, everyone, and welcome to Goodyear's fourth quarter conference call. With me today are Bob Keegan, Chairman and CEO, Rich Kramer, Chief Operating Officer, Darren Wells, Executive Vice President and CFO, and Damon Audia, our Senior Vice President, Finance and Treasurer.

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 can be found on our website at investor.goodyear.com. A replay of this call will be accessible later today. Replay instructions were included in our earnings release issued earlier this morning. The last item, we plan to file our 10-K 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. That finishes my comments. I will now turn the call over to Bob.

Well thank you, Pat, and good morning, everyone, and thank you for joining us on the call this morning. On today's call, I'll comment on the solid progress we made in the fourth quarter and during 2009 overall, and the success we had strengthening our business despite a challenging economy and operating environment. I'll also provide you with an updated perspective on our continuing confidence in the market opportunities available to us in 2010 and beyond. Darren will then provide detail on the financials and our outlook. We'll close by taking your questions. We've got a lot of material to cover this morning on the quarter and the full year, so I'll get started.

As I reflect back on our February call one year ago, we came to you with an aggressive action plan and we achieved that plan. How did we do it? First, through the courageous and well-judged decisions made by my Leadership team, which I consider the best in our industry, and we continue to improve the team with the addition of Curt Andersson as, President of the North American Tire Business. And Curt comes to us with strong experience in GE, Timken, McKinsey and Cooper Industries. Curt is an outstanding addition to the team and we welcome his contributions. And importantly, this will also allow Rich Kramer to fully transition to his Chief Operating Officer Corporate role.

Second, through our commitment to a proven strategy. Third, through winning in the marketplace. Share of market is again up in our targeted market segments. Fourth, through an all out attack on our cost structure. We exceeded our 2009 cost goals. And fifth, through changing the way we run our supply chain. We generated outstanding reductions in inventory levels as you've seen in our reports this morning. In summary, we achieved that plan through doing what we told you we would do.

Our fourth quarter results reflect the success of the aggressive actions we took a year ago to address the unprecedented economic challenges of 2009. The ultimate goal of our top line cost and cash actions was not to just survive the recession, but rather to ensure that Goodyear is well positioned for success when tire markets recover. Putting aside macro economic factors that were outside of our control, we had an impressive performance in 2009. Whether measured by market share, price mix net of raws, over $700 million in cost savings, more than $1.1 billion in inventory reductions, or our excellent cash flow performance, our success in 2009 establishes a solid foundation for our business going forward. We won in 2009 and we like where we are headed in the future.

Obviously, challenges persist in the wake of the worst industry environment any of us have seen in our business lifetimes. The industry and the economy have changed and we expect a somewhat muted recovery. While our strategic path held firm, you saw us attack, innovate and change rapidly during the year. And that is precisely what you and we would expect.

Our progress was once again brought to light at our annual North American Dealer Conference in January, the largest such gathering in the industry by far. A year ago, I referenced the fact that we went into the conference in 2009 in the throes of the prevailing economic turmoil with a mindset that we would need to work hard to energize our customers. What in fact happened was that our customers arrived with an attitude that energized us. It was a true win/win situation for all of us. So when we reunited with our customers in Orlando, a few weeks ago, there was no concern by our team about their mindset. There was certainly no concern about ours. The majority of our customers had had a successful year in 2009, irrespective of the macro economy. They were positive about the learning they had experienced, and engaged with our people to identify additional business opportunities.

What customer after customer said to me at the conference was they saw a Goodyear team that was confident and working effectively to help them grow their businesses. They saw a team that has momentum and a credible future direction. They saw a team hitting on all cylinders. And despite any lingering challenges that the economy may have in store for the industry, they saw a better future, not only in 2010, but beyond.

You can't just show up at a conference and make people draw these conclusions unless you believe them yourself and have delivered in the market. At our conference, our customers passionately reinforced the ongoing progress that we feel we're making. The job that Rich Kramer and his entire North American team did throughout 2009 is reflected in these customer comments. Their comments reflect the conviction and the confidence our strategic partners have in the success of both our business direction and our NAT team.

As I reflect broadly on 2009, I will tell you that I have never been more proud of my Leadership Team and our Company globally than I am right now for the way we handled ourselves during the industry challenges. These were challenges that were not of our making, challenges that fundamentally changed the reality of our business environment for years to come, and challenges which tested our minds and our courage, and we passed the test.

Specific global highlights from the fourth quarter included sales increased 7% to $4.4 billion reflecting an 8% increase in tire unit volume, as industry conditions improved from last year's significant decline. We achieved segment operating income of $249 million, representing an increase of more than $400 million versus 2008 driven by improved industry conditions, price mix net of raws of $290 million and aggressive cost savings. Our excellent cash performance continued in Q4 with positive operating cash flow. This performance helped drive impressive cash results for the full year, and generated lower debt and a stronger balance sheet.

Our overall performance in Q4 was stronger than expected. Stronger primarily because of North America, where we had previously indicated an expectation of more margin deterioration than we actually saw. Darren will provide more detail and insights in a few minutes. But while some of the improvement in North America reflected a pull ahead of volume and the timing of costs in 2009 versus 2010, I still see the North American performance as a credit to the team's ongoing efforts.

I'll now look at our top line costs and cash initiatives. We view continuing progress in these three areas as establishing platforms for future growth. Our success in top line performance I attribute to the best dealer network in the industry and the way we focus on building that network's businesses, the best new product engine in the industry that continues to produce innovative and award-winning products at exceptional speed, and the excellent marketing programs that we wrap around our new products, and our supply chain efforts to service the dealer network, to get them the right products when they need them in the most efficient manner possible.

We made the right decision late in 2008 to launch a record 62 new products in 2009, despite poor industry conditions. Others may have made a different decision. The Goodyear assurance fuel Max in North America is a prime example of an impactful new product launch the Fuel Max fire in North America was the prime example of an impactful new product launch. Fuel Max was the most successful high value added new product launch in the history of our Company, taking just seven months to sell more than a million tires. To date, we've sold two million.

Why such success? We were right on target with superb product features and mid-tier pricing. This launch demonstrated that we are now applying our outstanding technology beyond the premium tire segment. We're thereby increasing Goodyear's addressable market and generating more sales volume and margin. Popular Science magazine recognized our Fuel Max tire as one of the 100 most innovative products of the year., not surprisingly the only tire so recognized.

In Europe, we also have the leading fuel efficient tire with the Goodyear Efficient Grip. With fuel efficient tire, we have created a major new growth generator for our Company and for our customers. My comment to our customers has been consistent and clear, don't underestimate the market's appetite for fuel efficient tires,it is likely to exceed all our expectations. We are the leader in fuel efficient technology today, and we intend to maintain that leadership.

Now, Fuel Max is but one example of the 62 new products we introduced in 2009, albeit a very powerful example. But the halo effect of Fuel Max, Efficient Grip and other signature products globally, and our overall branded market share and product mix, is a major driver of our confidence in the future. These new product successes have helped drive our volume, and were critical to supporting our price mix in 2009, in an environment of declining raw materials pricing, weak industry demand and unfavorable commercial truck tire mix. For the year, price mix improved more than $200 million. In addition, we're now optimizing our new product engine globally so that new products, regardless of where they are first developed and introduced, can very quickly be launched in other geographic markets where a demand opportunity exists.

Also of note, the fourth quarter segment operating income of $70 million for Asia/Pacific exceeded the prior record performance delivered in the third quarter. For the full year, segment operating income was a record $210 million, a significant increase of 25% from 2008. This result was driven through top line performance that delivered price mix benefits, despite declining raw materials pricing. The take away? We are positioned well for profitable growth in Asia.

In Europe, we will leverage the new EU labeling regulations to be in the industry forefront in terms of providing consumers both clear information on tire performance, for example rolling resistance and wet traction, and clearer product performance excellence. We see the new regulations as an opportunity for Goodyear.

Further advancement in our open innovation initiative, that has already resulted in key product and technology advances, will continue with partners ranging from suppliers to universities to start up companies, and of course, to Sandia National Laboratories. You will see significant advances as our work in open innovation accelerates.

Our improved cost structure continues to enhance our competitiveness. Our successful four point cost plan delivered $730 million in savings during 2009, including $190 million during the fourth quarter. This completes the final year of this plan, which has delivered savings of $2.5 billion over four years, that's $2.5 billion over four years. Although we reached our goal in 2009, we will continue to attack our cost structure. Our efforts to drive cost reductions through continuous improvement, low cost country sourcing, manufacturing footprint decisions and SAG productivity, will continue. Over the next three years, we expect gross cost savings of an additional $1 billion from those sources.

As part of the 2009 actions, we completed an 8% reduction in our global work force, exceeding the original target of 5,000 by almost 700 jobs.

Our negotiations in North America with the United Steelworkers delivered an impressive set of agreements that are a logical extension of the groundbreaking work that was done during the 2003 and 2006 negotiations. These agreements that include shift reductions at five steelworker plants and the ability to close the Union City Tennessee plant based on market conditions are consistent with the new realities of our industry. The master agreement provides the ability to address the way work is done within the plant, through new competitive standards, accountability for performance and increased scheduling capabilities. Now beyond these essential productivity improvements, the master agreement now provides for most post-2006 hires to be covered by a defined contribution retirement plan. Together, these factors will provide significant cost savings over the four year life of the agreement.

Internationally, we closed our Philippines tire plant and announced the plan to discontinue consumer tire production at our Amien North plant in France. Together, these two projects will reduce our high cost capacity by eight million tires. The Amien plan is still in process as we work through the issues with the French Works Council.

Today, we reaffirm our goal to further reduce high cost plant capacity by 15 to 25 million tires, including the eight million tires from the Philippines and the Amien North plants. Additionally, we've held the line on costs in our factories, so as tire markets improve and we increase production in 2010, we expect that unabsorbed fixed costs will be a benefit when compared to 2009. Darren will provide you with more details during his remarks.

With our Shanghai sourcing team now fully staffed, we expect to increase low cost sourcing by year end 2010 to more than $900 million, or approximately 10% of our global buy, a substantial increase from the 2009 level.

Throughout 2009, we have made major progress on our cash initiatives. The significant cash we generated enabled us to reduce our net debt to $2.6 billion, almost $500 million better than a year ago. A major driver was our advantage supply chain effort which resulted in year end inventory levels more than $1.1 billion below the year end 2008 level.

The team also did an outstanding job handling the bankruptcies of US automakers. We worked closely with our customers to provide them the tires they needed and did so in a way that resulted in no material losses on our receivables. Given the industry sales decline, we reduced our CapEx accordingly, with expenditures for the year at $746 million. That's within the range of $700 million to $800 million that we had projected for 2009. We will continue to invest in the improvement and growth of our businesses including projects to expand manufacturing in China and in Latin America.

We successfully took action in the capital markets to further enhance our liquidity and balance sheet position, as soon as the markets were accessible by completing a $1 billion bond offering in 2009. In the fourth quarter, we repaid $500 million of bond debt and another $800 million of revolving bank debt. This debt reduction not only reflects our outstanding cash performance in 2009, but I think also underscores the confidence we have in our business and our prospects for healthier markets.

We will continue to address our balance sheet in a prudent way, for example, as we did when we announced our February 2 debt exchange offer. You can expect us to continue to manage for cash, doing more with less, as we did in 2009. As one illustration, we plan to make further progress in supply chain simplification. Our customers are looking for it, manufacturing is looking for it, distribution is looking for it. Why? It's all about doing more with less via simplifying our product portfolios, reducing SKU's, downsizing our logistics networks, which I might add with no dropoff in effectiveness, and improving our manufacturing processes. Actions in these areas will not only allow us to hold on to what we've achieved to date, but will help us address the upcoming investment challenges that will be generated by increasing demand and product complexity in our plants.

As we announced last May, we continued to explore the sale of our European and Latin American farm tire businesses. Discussions with Titan International continue, and a letter of intent regarding the potential sale of certain farm-related assets was signed in September of last year.

Now, as you think about the successes that we've had to date in top line cost and cash initiatives, and the opportunities for us to drive further competitive advantage in these areas, you begin to understand that these are powerful business platforms that are the foundation of our future growth.

We continue to be energized by the attractive opportunities the tire markets are presenting to us in 2010 and beyond. We entered 2010 fully expecting to build and sell more tires. How many more is a function of the economic recovery which obviously varies by geographic region. We know right now that US consumers are driving somewhat more. Through November of 2009, and that's the latest data available, the number of miles driven slightly exceeded the total for 2008.

OE sales are rebounding from historic low levels during the depths of the recession, no doubt positively impacted by Government stimulus programs. We had strong winter replacement tire sales in Europe, and obviously the robust economic growth in China and India are positive signs of better times to come. However, commercial truck tire sales for the industry are not expected to rebound dramatically in 2010, as key tonnage metrics in the US and Europe remain weak.

As I said earlier, many challenges will persist as the economy is likely to recover at a modest pace. I'll close my comments by elaborating on some of our challenges and opportunities along with what you can expect from us in 2010.

Number one. We know that we will be tested by the escalation of raw material costs. You can expect us to continue to focus on price mix as we fully engage our new product engine. Number two, we know that tire markets, while improving, are still well below the industry sales levels we experienced in 2007, and our factories will continue to be underutilized. Therefore, you can expect us to continue to run our plants as efficiently as possible, and to keep our supply chain as lean as possible. You can expect us to continue to increase low cost capacity, and we will be flexible and prepared to step up production quickly in advance of increased demand.

Number three, we know that emerging markets growth will continue at a solid pace. You can expect us to make the right investments in production capacity, products and marketing initiatives to capitalize on the available opportunities. Number four, we know that consumers will continue to reward innovation, just as they've done these past five or six years. And they will demand higher content of high value added products. You can expect our new product engine to be a huge competitive advantage here.

Number five. We also know that new challenges and opportunities will arise, including competitors that want to emulate our strategy, our ideas and our products. You can expect our Leadership team to stay at the top of their competitive game, by continuing to build winning teams and capabilities deep into their organizations.

Given that 2010 will be a year of modest recovery in our markets, a year that continues to reflect the aftermath of last year's crisis, our job at Goodyear is to continue building on our strong business platforms as these difficult economic conditions pass and the industry rebounds, and to position ourselves to win. And that is precisely what we intend to do. I'll now turn the call over to Darren for his comments on our business results and outlook. Darren?

Thanks, Bob. Yes, I'll start this morning with a few opening comments before moving on to address our operating results, the balance sheet and our outlook, including comments on the first quarter and the full year.

Looking back on 2009, we see evidence of significant accomplishments in each of our businesses. While part of these accomplishments were actions taken to address the economic crisis, actions like reduced staffing, footprint changes, overhead reductions and production cuts, most of what was accomplished will benefit the business as the market's recovery. During 2009 we continued to drive improvements on our top line where the market presented opportunities, particularly in our consumer businesses. New products and strong marketing efforts drove our share up in key consumer replacement markets, even as the US OE market collapsed. Outside the US, we leveraged our technology capability to increase our OE business where government incentives kept those volumes relatively strong, markets like Western Europe, Brazil and China.

As Bob said, in the commercial truck and off the road market, the opportunities were limited given dramatic declines in these markets and sparse evidence of recovery. The weakness in these high-value commercial and OTR tires and strength in overseas OE markets, relative to replacement, both resulted in an adverse business mix that affected our revenue and earnings. The good news is that as the economy recovers, we expect our business mix to rebound allowing us to increase sales in our commercial business, and increase the utilization of commercial truck in OTR factories.

We expect the recovery to begin in 2010 but returning to pre-recession levels is likely to be a multi-year process. Also as the economy recovers, we will no longer see the double hit to our production volumes we saw for much of 2009, both from lower sales and from reductions in inventory. While it will take a while to get to historical production levels, at least the improvement has begun. As I review the Company's results and the results for each business unit, you'll hear more evidence of 2009's accomplishments strengthening our business. While the pace at which these improvements impact our results will depend on a number of macro factors, including industry volumes, raw material prices, and in some cases currency, there's no question our business is better positioned at the end of 2009 than it was at the beginning.

Looking at the income statement, both our unit sales and revenue increased by more than 7% compared with a year ago, the first year-over-year sales increase since Q2 of 2008. This increase reflects primarily improvement in global consumer tire demand, as weakness continues in the commercial truck and OTR markets in Europe and North America.

Margins, segment operating income, and net income all increased versus the prior year, reflecting higher volumes and lower raw material prices, which were reflected in our results after a normal one to two quarter lag. SAG increased versus the prior year as a result of foreign exchange. At constant currency, SAG improved from the prior year, reflecting cost reductions. Note that the fourth quarter after tax results in both periods were impacted by certain significant items. The appendix includes a summary of these items for 2009 and 2008.

Going into more detail on the increase in segment operating income, you see the final quarter of our four point cost savings plan, generated savings of approximately $190 million. Similar to the past few quarters, the plan provided significant net benefits to our cost structure as general inflation was minimal. Price mix net of raw materials was positive reflecting a 22% decline in raw material costs with only a modest decline in price mix versus the prior year. As in past quarters, our unabsorbed fixed cost has been presented both before and after the benefit of restructuring actions. The impact year-over-year is much less than we've seen over the last year or so. I'll come back to unabsorbed overhead in a minute.

For the quarter, higher unit sales and currency were also a positive. Offsets versus the prior year include higher pension expense, primarily in North America, as well as added costs for incentive compensation compared with last year's fourth quarter.

Unabsorbed overhead costs have been one of the biggest recent drivers of our cost structure. For the past two years, weak industry demand has had a significant impact on our results, including reduced sales volume and low capacity utilization at our plants. Compared to essentially full production in 2007, we experienced high level of unabsorbed overhead costs, totaling $373 million in 2008 and $863 million in 2009. On page 37 of the appendix to today's presentation, there's a table summarizing the production cuts each quarter over the last two years and the related unabsorbed overhead, including timing of recognition of these costs either lagged through inventory or recognized immediately in the income statement.

Keep in mind part of the production cuts in 2009 related to about nine million units that we took out of inventory. Production for 2010 will reflect sales increases versus 2009 and the added nine million units related to the non-recurrence of these inventory cuts. So unabsorbed fixed costs will be lower this year than in 2009.

On the third quarter call, we indicated that for each incremental tire built this year, we would recover an average of $15 per tire of unabsorbed overhead. As a result of less costs than expected being recognized in the fourth quarter of 2009, including in North America, there will be more cost in inventory to be recognized in 2010. Reflecting this change, we now see slightly less improvement in 2010 on an average of about $12 to $14 per unit. Keep in mind that this is a full year average and will vary from quarter-to-quarter. It could also change based on the mix of products and the specific plants where products are built.

If we look at specific drivers of cost savings in the quarter, we saw our results in each of the categories of our four point plan, delivering savings for 2009 of $730 million. As Bob mentioned, this brings our total over the four years of this plan to $2.5 billion. This plan was a huge success for the Company, and in keeping with Bob's words, helped us manage through the worst business conditions any of us have seen in our careers.

So what is next? What phase is Goodyear entering regarding cost saving efforts? These are good questions and ones we often get asked. Cost savings will continue to be a major focus. Savings will be significant and will continue to focus in four areas, continuous improvement, low cost sourcing, footprint and SAG. As Bob mentioned, we expect to achieve savings of $1 billion over the next three years. Now similar to the last four years, we expect to generate a majority of the savings from continuous improvement actions, reflecting lean and six sigma efforts in the implementation of our USW contract. Savings at this level will help us keep pace with general inflation pressures related to wages and other cost increases, which together averaged about 3.5% over the last four years.

Looking at our balance sheet, you can see positive movements versus the third quarter, with net debt improvement of $722 million in Q4. Cash flow in Q4 was very positive, reflecting both seasonal patterns in working capital and strong collections at year end. For the year, inventory declined by more than $1.1 billion, well above our original target. With consumer and commercial inventory now at or below target levels, we expect a return to more normal seasonal patterns this year, including growth of working capital in Q1.

The challenge in 2010 will be to constrain working capital growth as volumes increase and raw material costs drive higher inventory and receivable values. While we're committed to driving our working capital initiatives, given the sharp decline in Q4, we expect we may see increases in 2010 in the range of $200 million.

We end the year with cash and liquidity of $4.7 billion. Included in that total was $370 million of cash in Venezuela denominated in local currency.

As you know, on January 8th, the Venezuelan Government announced the devaluation of its currency. The exchange rate changed from 2.15 bolivares fuertes to the US dollar to 2.6 for essential goods and 4.3 for nonessential goods, a dual exchange rate. While we continue to evaluate the impact of this devaluation, and the dual exchange regime, we expect to record a charge in Q1 for the remeasurement of our balance sheet. If calculated at the less favorable of the two rates, this charge would be about $150 million net of tax. And our 2009 year end liquidity would be about $4.5 billion on a pro forma basis. To the extent that imports of products and/or raw materials qualify for a more favorable rate, the impact could be reduced.

Looking at our pension obligations, our net unfunded amount at year end was about equal to the prior year with modest improvement in the US offset by increases internationally. The US improvement reflected a 26% gain in our investment portfolio, offset partly by increases in liabilities resulting from a 75 basis point decrease in our discount rate. As a result, pension expense in 2010 will decrease for North America, which will begin to be reflected in the second quarter cost of goods sold. I'd also point out we advance by a few weeks contributions to our US pension plan making 2009 contributions slightly higher than originally planned given our strong cash balance. This will reduce the 2010 funding obligation for global pension plans to $275 million to $325 million.

Turning to the segment results, North America reported a loss of $27 million in the quarter, which compares to a loss of $193 million in the 2008 period. When comparing results with our October guidance, the largest difference relates to price mix net of raw material costs which accounted for nearly half the improvement versus our original forecast and reflects a stronger mix of products, brands and channels in our consumer business. We also benefited from lower SAG costs driven by cost savings programs and reduced accruals for general and product liability and worker's compensation costs. Now I'll just note here that we conduct those actuarial assessments in December each year.

Finally, the stronger markets benefited us in two ways. First, higher volumes, which were aided in part by some pull ahead of demand due to our US price increase in December. As you'd expect, we're seeing the offsets of this in the first quarter. Second, the unabsorbed fixed costs were lower given higher production levels and fewer plants reaching our threshold requiring immediate recognition of unabsorbed fixed costs in the income statement. This timing difference, while benefiting in Q4 2009, will have a negative impact on Q1 2010 results.

Despite improvement versus our expectation, industry volumes remain weak with consumer replacement about equal to Q4 2008 and commercial truck replacement and OE both continuing to decline, 3% and 11% respectively. The only North America industry segment showing a year-over-year increase in Q4 was consumer OE, up 9% versus a very depressed Q4 2008.

Revenue was down slightly on lower external chemical sales. Revenue for tire was about equal to last year, reflecting two offsetting factors. First, a meaningful improvement in revenue per tire for the consumer business year-over-year. And second, a lower mix of commercial truck and OTR volumes. This resulted in price mix holding essentially flat with raw materials down significantly.

North America's conversion costs were slightly favorable versus 2008, driven by lower unabsorbed overhead and rationalization plant savings of $30 million. Higher pension costs of $56 million partially offset these positive factors. SAG costs decreased by $15 million in Q4 versus 2008. The decrease was primarily driven by the lower general and product liability and worker's compensation accruals and cost savings actions, partially offset by higher incentive compensation spending. While North America's results were better than expected, they remain well below our targeted next stage metric. We continue to see an ability to achieve a 5% return on sales in North America as industry volumes recover, as pension expense moderates and as our top line and cost savings actions continue to deliver benefits.

The timing of achieving the goal continues to depend at least partly on the pace of market recovery. It will likely take three years or more to return to industry volumes that we saw in 2007, and our recovery will mirror this trend. So what we see in our operating results gives us increased confidence every month and every quarter that this level of earnings is achievable in North America.

Europe, Middle East and Africa reported segment operating income of $125 million in the quarter, which compares to a loss of $32 million in the 2008 period. The 2009 results reflect sales of about $1.6 billion and volume of 16.2 million units, representing year-over-year increases of 11% and 7% respectively.

Industry volume in Q4 was stronger than the prior year and represents the first quarter of year-over-year growth since Q1 2007. The winter tire market increased 25% year-over-year reflecting low dealer inventories at the end of last year and bad weather in late 2009. The consumer OE market also showed an improvement compared to last year. The truck replacement markets grew by 12%. Despite this improvement, 2009 volumes are still 19% below Q4 of 2007. The OE market remained depressed and was down 55% versus last year.

In key Eastern European markets we saw signs of market recovery, after a strong drop in Q4 2008 but also still not back to Q4 2007 levels. Strong execution in these markets resulted in a 21% volume decrease versus Q4 2008. Overall, EMEA sales increased $153 million, reflecting the better unit sales as well as a stronger Euro compared with a year ago. Weaker commercial truck tire mix was a partial offset. Raw materials for EMEA declined $133 million in the quarter, while price mix was down only slightly. SAG costs improved as well, reflecting continued focus on costs in a weak market environment and actions taken to reduce costs as we begin the process of consolidating our back office functions. EMEA benefited from a slowly improving economic environment and delivered their strongest quarter of 2009, thanks to good price mix management and tight controls of costs.

In Latin America, we reported segment operating income of $81 million compared to the prior year result of $49 million. The increase reflects stronger industry demand, which helped boost unit sales by 30% versus a year ago. Higher volumes, lower unabsorbed fixed costs and foreign currency translation drove the year-to-year improvement. Price mix versus raws had a neutral impact year-over-year as the benefit of lower raw material costs was offset by weaker mix. While both consumer and commercial volumes were higher in 2009, the pace of recovery in consumer, especially lower end OE sales, due to government incentives, outpaced the improvement in commercial sales. This contributed to a decline in revenue per tire. So Latin America had a strong quarter, despite continued challenges from weaker mix.

The exception of course is Venezuela, where conditions have deteriorated since we last discussed the topic in October. Recent updates include the devaluation announced on January 8th, a change to highly inflationary accounting, so that all currency fluctuations going forward are reported in earnings effective January, 2010, increased restrictions on business activity and weaker consumer markets. And as a result, compared with 2009, we expect a combination of foreign currency translation and weak economic conditions to negatively impact Latin America's segment operating income by $50 million to $75 million.

Despite tough current conditions, Goodyear has a strong operation in Venezuela producing most of the products it sells locally. We have a leading market share and a strong product portfolio, and we're committed to maintaining our strong business in Venezuela. Our Management team there is fully engaged, experienced and focused on mitigating the impact of these challenges on our business. And I'd note that this is not the first time our team has dealt with this type of situation.

Our Asia/Pacific business reported its third consecutive quarter of record segment operating income with $70 million reported in Q4. Asia/Pacific is also the only region to report improved full year profits versus prior year. The increase in Q4 profits reflects holding price mix despite lower raw materials. It also reflects the benefit of cost cutting together with improved market demand resulting in both favorable volume and lower unabsorbed overhead costs.

Asia continues to lead the economic recovery, with China's fourth quarter GDP growth at 10.7%. In fact, China's growth is now placed as the world's largest new car market. Our plant relocation and expansion project continues on plan, which will further enable us to benefit from the growing market demand, not only in consumer, but also for the first time in commercial truck. Compared to last year, price mix net of raw materials was a benefit of $30 million and currency was a favorable $9 million. Market recovery had a positive impact of $16 million, including volume and lower unabsorbed fixed costs.

So in summary, the team is pleased with progress made in each of our businesses in 2009. We gained share in our replacement businesses with strong price mix, and on the back of some successful new products across our business while raw material costs declined in our P&L. We executed strong cost performance that provided significant benefit to the bottom line. We made outstanding progress in our advantage supply chain during 2009. And we measure our supply chain efficiency through balanced metrics of the level of inventory, number of warehouses and our customer fill rates. We made progress in each area with significant reduction in inventory, fewer warehouses and customer fill rates that were maintained or improved. We negotiated a game changing USW agreement that we've only just begun to implement. So we start 2010 with strong momentum.

Turning to the outlook, I want to provide some of our views for 2010 beginning with the industry environment and then commenting on some specific expectations for our results. In North America, we expect the consumer replacement market will improve as volumes continue to recover slowly. For the year, we expect an increase of 1% to 3%. We see the strongest recovery in consumer OE where markets are expected to increase 20% to 30%. Commercial replacement is expected to increase 1% to 5%, and commercial OE, which was hit the hardest last year, is expected to increase 5% to 15% versus the prior year. Now I'll note here that while the strongest recovery in North America is in consumer OE, we continue to take a selective approach to our OE business, particularly in North America, focusing on (inaudible) that drive profitable replacement business. So our OE volumes may not be up as much as the consumer OE market overall.

In Europe at this point we see less favorable conditions for recovery in 2010 than we see in North America. In consumer, we see markets that range from flat to up 2% in replacement and down 3% to up 5% in OE. Commercial markets are forecast to increase 5% to 10% in replacement and 20% to 30% in OE. Our views on raw material inflation have been impacted by the run up in natural rubber prices during the last several months.

But to put this in perspective, natural rubber has increased over 50% since our third quarter earnings call. Given our normal one to two quarter lag, we expect raw material costs will benefit our first quarter by about 15% versus the prior period. For the first half overall, we anticipate a benefit of about 5%, reflecting increased costs in the second quarter. Looking to the back half of the year, we expect significant raw material pressures, with increases approaching 30% year-over-year.

Past performance will tell that you we've been able to more than offset raw material cost increases over time with price mix. Our results have been impressive even during difficult periods. During short periods of rapid escalation, however, the benefits of price mix don't always match up with raw material increases. Given the expectation of nearly 30% increase in the second half raw material costs, and a volume environment that remains below historical levels, it may be challenging to fully offset these second half increases in 2010.

We expect global pension expense to decline in 2010 and it will be in a range of $275 million to $325 million which compares to $387 million in 2009. As a reminder, most US pension costs are reported in cost of goods sold, so there's typically a quarter lag before changes impact our results. In Q1, we expect a negative impact on pensions will be somewhat less than Q4 but still significant. Beginning in Q2, the expense will be with lower year-over-year. For the full year therefore we expect the impact from pension expense will be positive.

With respect to pension funding levels in 2010, short-term funding relief provided by the IRS in 2009, combined with our decision to increase funding last year, will result in a decrease in contributions relative to 2009. However, contributions in 2011 are expected to increase by as much as $250 million, absent any additional pension relief legislation.

As we transition to healthier markets, we expect increases marketing and other SAG investment to support our world class brands, including advertising, and to keep pace with continued growth in emerging markets. When considering the impact of these actions, together with general inflation and our cost savings efforts, would we expect our SAG will increase by about $100 million in 2010, this excludes the effects of currency. While costs are expected to increase year-over-year, SAG as a percentage of sales should still be lower than the 14.7% we saw in 2009.

For modeling purposes, we expect interest expense in the range of $350 million to $375 million for the year. And we expect our tax expense will be in the range of 25% to 30% of our international segment operating income. The rate increase versus our prior guidance primarily reflects a change in our mix of earnings among countries. This includes Australia, where we're now reporting tax expense on our earnings, given we released our valuation levels.

Consistent with our remarks last quarter, we expect our full year CapEx to fall within the range of $1 billion to $1.1 billion. The increase versus 2009 reflects improving market conditions and support of low cost manufacturing, including the ramp up of construction of our plant in China and our plant expansion in Chile. So when you think about 2010, think about markets recovering but gradually. Gradual improvements in volume and reduced unabsorbed overhead costs, raw material costs continuing down in Q before spiking again in the second half, continued focus on driving cost efficiency and finally confidence to invest prudently to drive our business forward. Now we'll take your questions.

(Operator Instructions) Your first question comes from Rod Lache with Deutsche Bank.

Good morning, everybody.

Good morning, Rod.

I had a couple questions. First of all, on a year-over-year basis, you had a 3 million unit increase in volume and you're showing on slide 19 a $45 million increase in earnings from volume, which is -- it looks like about $14 a tire, just based on simple math, and you've talked about $15 a tire from overhead absorption. Shouldn't the volume benefit be somewhat greater than that?

Yes, Rod, I think you're-- as you look at the volume variance and as you've looked at it in prior quarters you see that the benefit we get from sales volume will vary. Mean it will vary based on the mix of products, OE versus replacement, it will vary consumer versus commercial. So it's something that can go up and down over time. But if we look at the fact that, particularly overseas, we had a lot of strength in the OE markets, that is an adverse mix. And we had consumers certainly recovering better than commercial, so I think that -- you got to take those factors into account in evaluating that volume variance.

Okay but-- so you're not putting those kinds of factors, consumer versus commercial, and you're not putting that into that mix column, you're putting that somewhat in the volume column?

Yes I was going to say, if you are calculating on a unit basis, you're going to see the volume, but there will be some dependency on mix as well. So the answer is there's some impact in both places.

Okay and I was hoping maybe you could go through a little bit more on the pluses and minuses on your cost structure in 2010 versus 2009. Just on the inflation side first, if you assume 3% inflation on your non raw material cost of goods sold and on your SG&A ex-pension, it looks like you'd probably be anticipating like a $300 million head wind from inflation. Is that roughly correct?

Yes, I think, Rod, what we've seen is if we look at the last four years, we've seen inflation of about 3.5% on average. And we had some years that you recall are very high and we had a year that was closer to 6%. We had two years that were lower than that including last year. But I think if you take our non raw material costs, it's going to be in the neighborhood of $10 billion. So that's the part that you'd be applying the inflation rate to. So it really comes down to where inflation is going to be this year.

Right. So your four point cost savings plan, the $1 billion over three years, would offset basically inflation? It wouldn't be in excess of the inflation?

Yes, I think we're looking at that certainly to offset inflation. And I think depending on where inflation is, it could offset inflation, it could do a little bit better than offset inflation.

Okay and that includes your savings from the steelworkers contract and the head count reductions and all those things, right?

It does.

But does it include the pension cost reduction that you highlighted, that $90 million?

No. I think the pension cost reduction, we saw a pension expense go up I think close to $160 million last year, that pension expense is going to come down over time. We view that as a separate factor.

And I was hoping, there's always a lot of confusion around this under absorbed overhead issue and I appreciate the additional disclosure, but just to make sure that we understand this right, you took inventory down by nine million units in 2009, so you underproduced in 2009 by that amount. And you're saying that we should be thinking about a $12 to $14 per tire kind of recovery. So just that under absorbed overhead from a GAAP perspective, if you look at 2010 versus 2009, would it be like $100 million benefit, something like that?

Yes Rod, I think there's two factors to think about for the unabsorbed overhead. There is the nine million additional units we'll produce because we're not reducing inventories. And then there's going to be whatever additional units we produce based on sales increasing 2010 versus 2009.

Right. But--

And you get the $12 to $14 on the nine million and on whatever number you put on the unit sales increase year-over-year.

Okay. But you seem to suggest that some of that, some of that cost was kind of deferred into the first quarter. So would it still be on a year-over-year basis just that part that's related to the nonrecurrence of the inventory correction, would that still be a $100 million positive year-over-year at least?

I think the-- when we referred to that deferral, some of the costs we had expected to see in Q4 that are now are carried in inventory into Q1. What that caused us to do is -- I mean effectively, what it did was raise costs in Q1, and it caused the average recovery per unit to drop from about $15 to that $12 to $14 range. So that's where we've reflected that in the dollars per unit.

Right. Okay. Thank you.

Yes.

Thanks, Rod.

Your next question comes from Himanshu Patel with JPMorgan.

Hi good morning, guys.

Good morning.

Can I ask a question on Venezuela? The $50 million to $75 million estimated hit in 2010, two questions on that. First, is that simply the FX translation hit? Or does that estimated impact also incorporate what I think should be some adverse transaction exposure there as well, just presuming you're buying dollar-based raw materials? And number two, should that impact expected to be permanent or should we expect that to recede in 2011 or in future years?

Himanshu, the $50 million to $75 million takes into account a number of factors. Certainly it takes into account the currency factors that you're raising. It also takes into account the expected reduction in volume from the fact that that market, given the fact that there's a lot of change taking place there, that market is unsettled, demand is down, and so we're building in there an expected drop in volume as well, when we see that $50 million to $75 million. So we think about what's going to happen going forward, it's going to be a combination of how do volumes recover there. And what happens with the currency versus what we're able to do in our business to offset those effects.

And is the biggest operational offset price increases in the domestic market?

Yes, I think there are a number of things that we'll focus on as we look at improving things in the Venezuelan market. There's certainly additional volume opportunities, we've got strong business there, a lot of local production costs. So we'll look to recover in volume. And we're going to look to continue to have a great product lineup there that allows us to deliver a better value proposition to our competitors there. And that value proposition is obviously something that we focus on in driving our margins there.

Okay. And then I wanted just some clarification on the slide 37, thank you for that, but all of the detail on unabsorbed fixed costs, just the first line there, and where you say production cuts for full year 2009 were $51.6 million. Is that incremental production cuts versus 2008 or versus the 2007 base?

It is versus, you can think of it as versus the 2007 base or versus essentially our full capacity.

Got it. Okay so the actual incremental production cut is really the difference between the $51.6 million and the $31 million in the year ago. So it's like $20 million incremental production cuts happened in 2009 and I think you said $9 million of that was attributable to inventory destocking, so basically half of your production cut in 2009 was due to inventory destocking. Is that kind of a fair assumption?

I think I agree with everything you just said.

Okay. And then just going back to your comments on raw materials, I think you mentioned that in the second half the 30% raw materials inflation could be -- it's at a velocity that may not allow you to fully offset it with price mix. How do you think about that relationship in the first half? I mean I'm just trying to sort of understand the full year picture. In the first half it would seem -- is it fair to say maybe you could actually more than offset that? So perhaps on a full year basis, price mix versus raw is sort of a wash?

Yes, I think the first half and second half, you're right to think about being very different, In the first half, we're going to see still a big step down, so a big benefit from lower raws in the first quarter. Second quarter starts to rise. And then third and fourth quarter has a big spike. I think you look at the first half, that is going to more closely resemble periods of time where we've been successful at getting, we'll just say, getting gains and price mix versus raws. So certainly we're focused on managing that way and managing our price mix versus raws together.

We get to the second half, you're going to get into a period that's more like -- more similar to Q4 2008 and Q1 2009, where we were seeing the big spike close to 30% increases. And I'll say in those historical quarters, we were not able to fully offset raw materials in the quarters. Now we kept driving and we keep moving forward, and so it's a matter of time and we're comfortable that we can manage the two going forward. But there's really a timing question there, given the steep increase in the second half.

And maybe a question for Bob. When you look on slide 32, you've got this nice five-year history of outpacing raw materials increases. Can you just talk a little bit about industry structure currently, given what's happened with the Chinese tire turf, given what's happened with some incremental capacity reductions. Is there a reason to think that, assuming your individual business mix between consumer commercial OE replacement was constant, is there a reason to think that this relationship between price mix outpacing raw materials over the medium term, should we expect that to continue or maybe even be improved going forward?

Well, I would say the -- given our goals, and the plans we're putting in place, our goal is going to be to try to improve that relationship over time. I think with obviously tough cost actions, which you're all aware of, with the new product launches that we've had and those that will come, and the cumulative impact of those, we're using innovation in both the cost area, the pricing area and frankly the supply chain area, to try to drive the situation where we can do better than that. On the other hand, we've done very well under those circumstances. We don't see anything structurally in terms of the competitive environment that's going to change that situation dramatically. In a negative -- I think you were alluding to the fact that, Himanshu, that'd be a negative factor, I don't particularly see it that way. And again, it is up to us and our team to add competitive advantage on those other areas to be able to drive a little better situation that we've seen historically.

But I don't mean to diminish what we've done. I think what we've done over the past five years has been probably unexpected by most people who are observers of the industry five years ago. So we're getting better in each one of those areas that drove that performance.

Okay and then I'm sorry, if I could just sneak in one last one. On that same slide, for 2009, if you controlled for business mix, being constant, would price mix versus raw materials within each one of the four sub segments have been -- what would that relationship have looked like if you looked at consumer replacement individually, commercial replacement, et cetera?

Yes, I mean mix was a negative effect for us. So I think when -- almost any metric we look at, if we controlled for mix, we wouldn't have that adverse effect and our performance would be better. So if we look at the individual businesses, we saw consumer business where we were able to drive improvements in revenue per tire, you'll get better price mix in that business. But when we combined it and think of it combined with the weakness in commercial and OTR, that doesn't come through as strong.

And I think another way maybe to look at it is if you think just product mix, and you leave out the business mix crossing over between OE and replacement and crossing over between commercial and consumer, Himanshu, if you looked at just product mix within most categories, you'd see gains in mix.

Okay. Thank you very much.

Your next question comes from Patrick Archambault with Goldman Sachs.

Hi, thank you. Could we maybe dive a little bit more into just on slide -- on the North America slide where you guys have outlined kind of the three nonrecurring benefits. Can you kind of maybe quantify those items for us? Yes, could you just give us a sense of how big they were of the benefit for you in the quarter?

Yes, I think what we referred to, and I'm going to stick at a corporate level, but North America is going to be a significant part of my comments. So what we said is we had a couple of driving factors there. We had some volume that was pulled ahead into the fourth quarter from the first quarter, and part of that was a reaction to our price increase and the fact that customers put orders in before the price increase came into effect. So we had some pull ahead of volume there.

And we also had some of our factories that did not have enough production cut for the unabsorbed overhead to be written off to the income statement in Q4, so instead it's now in inventory and it'll come out in Q1. I think if you aggregate those effects together for the Company, you'd be in the $25 million to $30 million range. And you can assume there's a meaningful part of that that's in North America.

Okay. Great. And then sort of building on that, would you guys be able to help us out just in terms of how we think about the walk from Q4 to Q1? I take it-- I mean it all depends, volumes obviously up to us, but let's assume you got a little bit of a sequential increase there, raw materials feel like I guess they could be fairly similar, just given your guidance for the first quarter? Then I guess you'd have this negative $25 million to $30 million of nonrecurring items. Is there anything I'm missing here? It seems like you might be flattish to slightly down, if you kind of add this stuff up. I just wanted to get your take.

Yes, I think you've got some-- you got multiple factors there. I think that you're right to think about the pull ahead factors as affecting Q1. I think for raw materials, sequentially, if we go Q4 to Q1, raw materials are trending upward. So raw material costs, if we look at them in that way, you are going to continue to go up as they did from Q3 to Q4.

With natural rubber being the driving force.

Yes, that's a good point.

So you've already kind of worked through all of the cheapest stuff in your inventory then?

Yes, I think the-- it's certainly trending upward. I mean that's where rubber has been going up for a while and has conditioned to go up over the last 90 days. So that's a trend that started in Q4, it's going to continue in Q1 and if you look at it sequentially.

Got you. So I'm sorry, but just on -- can we kind of finish that walk though. I guess it sounds like in that case you might actually be down sequentially, right? Because you've got these nonrecurring items, you've got the raw mats, you might have a little bit of an offset from volume, but it sounds like orders of magnitude, that that probably wouldn't be sufficient.

Yes, I mean for those factors, I think that's fair. There are a number of other factors that we haven't talked through. I mean we will get -- there'll be some -- and just so I make sure I'm answering the right question, you're still focused on North America only, or are you thinking --

No, no, sorry, globally.

Globally. Okay. Yes, no I think that there's-- the story could be a little bit different internationally. We continue to see some volume growth. We continue to get benefits from new products. So there is some positives there. I think in terms of pension expense, you heard first quarter continues to be a high pension expense. We won't get benefits for Q2. So I think you're right not to think of that as an improvement from Q1. But I think overall there, there's a number of factors, the volume's going to be a big dependency and the unabsorbed overhead, there is a lot in inventory there, and I think that something that we provided the data, so you'd know how to think about the first quarter versus fourth. So I guess I'd encourage you to spend some time with that slide, that appendix slide, as you think about what is going to happen in Q1 versus Q4.

Okay. Thank you. That's very helpful.

And your final question comes from John Murphy with Bank of America/Merrill Lynch.

Good morning, guys. After the third quarter, you had seemed to indicate that there was a weakness in the commercial vehicle market and there may have been some overbuild and excess inventory in the channel. I'm just wondering where you see that standing right now, and if there-- if that has been worked through the system in your inventory and in the distribution channel?

Yes, John, it's Rich Kramer. I assume you're largely talking about North America.

Correct.

The inventory build in the commercial business really started in earnest at the end of 2008, really fourth quarter 2008. And I would tell you our inventory, certainly I can't speak for industry inventory, but our inventory is-- has been taken down substantially. And you see that in some of the cash flow numbers that Darren somewhat alluded to. So as we look at it right now, our inventory is down substantially, down actually to even where it was during the strike levels. We're able to fill at very high rates right now. And in terms of the industry, picking up substantially in the near term, we really don't see it, but we feel like we're well positioned to address the demands that we see and well positioned to pick up when the industry comes back.

So the concern you were expressing at the end of the third quarter in the third quarter call was more focused on the industry environment going forward as opposed to the inventory levels?

Exactly, exactly.

Got you. Next question on Latin America, is Latin America about -- I'm sorry, is Venezuela about a third of the Latin American business? And also as we think about Venezuela being maybe a third, how much exposure do you have on accounts receivable in Venezuela in addition to sort of your cash exposure? Or is that included in what you're talking about?

Yes I think it's a fair question. So as we look at -- and we don't dimension financials by country, so that's going to be a tough one. We-- the only thing we do for Latin America is we say that Brazil is about half the Latin American business and so all of the other countries in aggregate are the other half. And Venezuela is certainly a significant sized business within that other half, but that's the best way that we have to dimension that. But your question on whether or not we're taking into account all parts of the balance sheet, when we talk about the one time write down of $150 million that we would take on the, based on the currency devaluation, if we use the 4.3 to 1 currency rate, that takes into account our cash position, our payables our receivables, so really, all the monetary parts of the balance sheet.

Okay. So it's all encompassing. Then lastly, on Titan and the potential sale of the farm tire business to them in Europe, is that similar to what we saw in North America in 2005, the sale there? Is it that small? Would that be a big needle mover in Europe as far as revenue or profits or mix?

Yes, the farm tire business for us is-- I think in Latin America and Europe is a-- it is not-- it's a relatively small percentage of the business in bulk business units. It's been a good business for us. It's not core. It's not some place that we're going to put a lot of investment. And that's the reason that we moved in 2005 to sell the North American farm tire business. So I think we're, without dimensioning it specifically, I don't see-- it's not a major strategic driver of either of those businesses. But there'll be some impact when we get to the conclusion of that sale process, we'll provide some more information.

And then just actually just lastly on the supply chain simplification, as you look at the reduction in inventory that you've made so far, how much of that has to do with taking on layers in the supply chain or the distribution channels? And is there the opportunity as you simplify the supply chain to potentially take out a significant amount more of inventory?

I'll answer, Bob, and you can certainly jump in. I think in the aggregate, it's all of the above. We took substantial physical assets out as we worked on the supply chains and certainly that helped. Our inventory levels right now are again at probably near record low levels with our fill rates being at nearly very high levels I'd say, I wouldn't say record levels but very high levels as we talk about 2009.

As we go forward, our view, and I think Darren made mention of this earlier, we'll see some inventory growth as the business grows again. But we feel, through a combination of sufficiency in the factory, sufficiency in terms of the whole supply chain from forecasting all the way back to buying raw materials, that we can grow the business without substantially growing our inventory from where it is now on a unit basis. Obviously the dollars will be impacted by raw material costs and the like. So I would tell you, right now, if anything, we see upside in terms of opportunities in the supply chain.

Yes I'd just maybe add to that, Rich, that if you look at the process work, and I know it's frustrating to most of you on the phone to a degree these last three years because we talked a lot about supply chain process and how we're improving that and it'll take a little bit of time, well in 2009, you started to see the definitive financial and physical inventory impacts of that. But we are still learning every day and every month how to do this and do this effectively around the globe, so there's more opportunity.

Great. Thank you very much.

Thank you.

Okay. That concludes today's call. Thanks for joining us, everybody.

And maybe just a quick comment. I think as I listen to your questions, I just reflect and say, look 2009, I said I'm very proud of the team around the globe for their performance in 2009. We've-- a lot of learnings, a lot of learnings come out of these tough environments. We think we've learned quite a bit and as a result, that we've got great platforms in place for growth. And we're improving, just as we mentioned a minute ago, on supply chain in each of those areas. Recovery in the markets, modest in 2010, with consumer at this point ahead of the commercial truck tire industry from our standpoint. So we move into 2010 a confident team, but still challenged by weak overall industry environment. Thank you all for being on the call.

Thank you, ladies and gentlemen, for participating in today's fourth quarter and full year sales and earnings results conference call. You may now disconnect.