Goodyear Tire & Rubber Co (GT) 2010 Q1 法說會逐字稿

Good morning. Welcome to the Goodyear quarterly results for the first quarter 2010. After the speakers' remarks, there will be a question-and-answer session. (Operator Instructions) Thank you.

Mr. Stobb, Director of IR, you may begin your conference.

Thank you and good morning, everyone and welcome to Goodyear's first quarter conference call. With me today are Rich Kramer, President 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 would like to cover. To begin, the Webcast of this morning's discussion and 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-Q later today.

If I can 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 actual results to differ materially. These risks and uncertainties are outlined in Goodyear's filings with the SEC and in the news release we issued this morning. The Company disclaims any intention or obligation to update or revise any forward-looking statements, whether as a result of new information, future events or otherwise.

Turning now to the agenda. On today's call, Rich will discuss strategy and provide quarterly highlights. After Rich's remarks, Darren will review the financial results and discuss outlook before opening the call to your questions. That finishes my comments. I will now turn the call over to Rich.

Thank you, Pat. And good morning, everyone. Thanks for joining our call today as we address what was strong first quarter performance. As this is my first conference call at Goodyear's President and CEO, I thought it would be appropriate to begin with a few words about my predecessor, Bob Keegan and his numerous contributions to Goodyear since 2003 when he was named to lead the Company. When you reflect on the many challenges the Company faced back then, and I know them well since I worked side-by-side with Bob from the beginning, the journey has been a remarkable one. The challenges were such that the strategy and ultimately the execution, both had to be flawless.

So as I think about the true measure of Bob's leadership and the resulting success since he assumed the CEO role, I asked myself two questions. Is Goodyear in better shape today as a Company? And is Goodyear better positioned for the future? The answer to both of those questions is an unequivocal yes. The contributions that Bob made in developing the industry's best new product engines, building an outstanding business team, reviving the Goodyear brand and restoring the Goodyear spirit; have established a strong foundation to build upon with confidence and with optimism. So consequently, on behalf of the entire Goodyear team I'd like to thank Bob for his guidance and his leadership as CEO over the past seven years.

Now, I recently had the opportunity to visit with a number of investors, that allowed me to reconnect but also, more importantly, provided me a firsthand view into what investors were thinking about Goodyear. Now, of course, I received many questions concerning my new role, Goodyear's direction and the state of the industry. I'd like to briefly elaborate on those topics before we get into our first quarter results, which by the way, I was very pleased with for a number of reasons, including the beginnings of some positive trends.

Now, as I think about the future, I remain very optimistic about the transportation industry. Cars and wheels and consequently, tires, are going to be with us for a long time, as there are no real alternatives to personal and commercial travel on the horizon. We will continue to see existing drivers drive more and we are only beginning to experience the explosion of new vehicles in the emerging markets, such as China, just to name one.

And as I look into the future, the industry will see larger percentage growth in smaller emerging markets and smaller percentage increases in larger, more mature markets. Both, however, result in the opportunity to see significant tire unit growth. And that growth will not be in simpler, smaller tires but in increasingly more complex tires, requiring more innovative technologies to support such trends as improved rolling resistance, tire performance captured by tire labeling and continually evolving OEM requirements. In other words, the opportunity for improved mix will continue. And in addition, strong brands and efficient supply chain and outstanding distribution network all will continue to be integral in delivering these value propositions to consumers.

So when I think about those trends, I believe Goodyear, with our brands, our global presence, our innovation track record, our unmatched speed to market, our advanced supply chain, our leading global distribution network, our superior sales and marketing capabilities, and the quality of our teams. I believe Goodyear is second to none in terms of our ability to lead the way. And that's why I'm excited about my new role. As we continue forward, my strategic priorities will be to drive our innovation engine with new products, packed with technology, developed from the market back. To drive operating efficiencies throughout our supply chain to higher levels of performance. To drive North American tire first to breakeven and then to our next stage metric goal of 5% EBITDA sales and we'll drive this improvement in multiple ways through volume, price mix and cost actions.

Another strategic priority is to drive growth in the emerging markets, particularly the high growth markets in Asia. Also, to protect and improve our balance sheet over time, to ensure stable and cost effective access to capital. And finally, of course, to continue to build upon the best team in the industry. I look forward to both the opportunities and challenges ahead for us, as I believe we are well positioned to capitalize on opportunities the industry offers us and to effectively deal with the challenges we will inevitably face.

Now, focusing on our first quarter performance, we had an excellent start to the year. The following are some key highlights. First, from a financial perspective, sales for the quarter were up 21% from a year ago, to $4.3 billion, reflecting a 14% increase in units sold. We see industry volumes recovering, perhaps even further than we had expected at this stage. The benefit of stronger industry conditions versus a year ago was significant and contributed approximately $125 million in the quarter, primarily due to higher volumes and lower unabsorbed fixed costs. We had a favorable net impact of price mix and raw materials of nearly $250 million. We achieved overall cost savings of nearly $150 million in the quarter. These factors contributed to an increase of more than $400 million of segment operating income versus the prior year.

Net income was a loss of $0.19, which included the impact of the $99 million or $0.41 charge related to the devaluation of the bolivar fuerte in Venezuela. And finally, operating cash flow remained strong, particularly relative to our historic quarter cash flow usage trend. And from an SBU perspective in the quarter, we saw North American tire earnings sequentially improve from Q4 2009 and increase by more than $170 million versus Q1 2009. This positive trend included a 10% increase in sales volume and was driven by favorable price mix and cost management, particularly in the factories. This progress in price mix and cost efficiency has reduced the breakeven point for the NAT business significantly compared to pre-recession levels.

In Europe, volume increased by 14% versus the prior first quarter, driving a sales increase of 21%. These increases included improvements in both our consumer and commercial businesses. In Latin America, our consumer replacement business had record unit volume in March and near record unit volume for the quarter, reflecting markets rebounding to levels approaching or exceeding those before the downturn.

And in Asia, where we saw double-digit industry growth in all our businesses, we had record first quarter segment operating income of $69 million. This was just short of the all-time quarter record established in Q4 2009. Our business in Asia continues to grow profitably and with the construction of our new factory in China, which will begin production in 2011, we see opportunities for significant growth in the future, as we remain focused on our targeted market segments.

And as you would expect, a key element continuing to drive our performance were the new innovative products made possible by our commitment to our industry-leading new product engine. Building upon our industry leadership and rolling resistance and fuel efficient tires, such as the Assurance Fuel Max and the efficient grip tires, as well as the 62 new products launched in 2009 in the midst of an economic downturn, we've already introduced 17 new products in this first quarter and all have been met with strong reception. In North America, this includes the all new Assurance ComforTred Touring tire that we introduced to our dealers in January, with an expanded size lineup to cover a much larger portion of the market. This product is getting great reviews by our dealers and orders are significantly ahead of our plan at this stage.

In the commercial tire segment, we introduced the G296MSA super-single tire for heavy and off-road applications and the Dunlop SM family of SmartWay approved fuel efficient tires for long haul fleets, where demand is already exceeding our expectations. I'll also note, that we will introduce 13 new products in the NAT commercial business this year, which is a record for any year. And in Europe, we introduced two Dunlop products, which helped increase market share and sales in our product segments. The Dunlop SP Quadmax ultra high performance SUV tire. And the Dunlop SP Street Response summer tire.

In China, the Goodyear team accepted two of "Auto Sports Magazine's" "2010 Best Tire of the Year" awards during its ceremony in Beijing. The Eagle F1 Asymmetric was awarded best for handling and the Goodyear Assurance, best for safety. And in addition, Assurance also was named "Auto Product of the Year" by CBS Interactive. And in Latin America, we saw the continued benefits from the momentum of the 600 Series truck tire, which has met with extensive consumer praise, as the truck tire market begins to improve in the region. As you can see, our new product engine is as strong as ever, as is the resulting impact on our operating results.

In addition to our first quarter financial performance, we also received significant acknowledgement from two highly respected well-known publications. We were again among the list of "Fortune's" most admired companies. We've ranked consistently at or near the top as the most admired automotive parts suppliers for the past several years. And "Forbes" magazine just announced last week that Goodyear was again included in its annual rank of most respected companies. And I'm pleased to note that, again, Goodyear was the only tire Company included in this prestigious list and is the highest ranking Company in the automotive industry. These awards are a reflection of Goodyear associates' commitment to driving excellence in everything we do and also of the power of the Goodyear brand.

Now, in addition to the positive impacts of our execution, clearly, the first quarter results also reflected the benefits of a global industry rebound that is both encouraging and supported by a variety of economic indicators globally. However, we must keep in mind that volumes in North America and Europe remain well off their historical highs, reached before the great recession. And this is particularly true in the commercial truck markets. As our first quarter volumes and earnings improved, we're encouraged by moderate to strong GDP growth in mature markets and emerging markets respectively, by increased US industrial production levels, improved retail sales, improved auto sales, and improved freight hauling indices.

However, our encouragement remains somewhat tempered by high unemployment rates in the US and Europe, volatile consumer spending statistics, vacillating US gas consumption and miles driven statistics and of course, steadily increasing raw material prices that have hit all-time highs. So on balance, we remain optimistic that we will see the first quarter trends continue but we can also envision possible disruptions along the way toward full economic recovery, from continued economic volatility. We anticipate emerging markets to remain strong, consumer and commercial markets to improve, OEM production to increase, supply to remain tight and no obvious relief in raw material price trends.

Our business plans reflect these perspectives and I have confidence in our teams to successfully execute in this environment. So as I too look ahead to delivering our plan in this environment, the near term challenges that will occupy my time and attention include the following. The first, not surprisingly, is raw materials. The environment remains volatile, with natural rubber reaching all-time highs, in excess of $1.50 a pound, higher than what we saw at the time of our February call. Now, as Darren will elaborate upon in a moment, we now estimate second half raw material headwinds to be in excess of 35%.

While I'm confident in our ability to offset higher raw material costs over time, with price and mix, as we've done over the past six years, the sharp increases in the coming quarters require us to act on all fronts to manage the impact on our results. This means a focus globally on price mix, continuing to maximize the impact of our new product engine, driving for increased volume opportunities in our targeted market segments and a focus globally on raw material cost our initiatives. You see evidence of focus and success in each of these areas in our first quarter results. However, our objective for the remainder of the year is to deliver even more.

The second immediate focus area is manufacturing efficiency or productivity. This includes our commitment to reduce high cost capacity by 15 million to 25 million units, as part of our three year, $1 billion cost savings plan. But it doesn't stop there. At Goodyear, we have some of the lowest cost, best performing plants in the world and we have some that are more challenged, particularly in our mature markets. Now, regardless of where any of our factories are located or classified, they all share in the opportunity for continuous improvement.

As you might imagine, our primary focus is on our North America facilities, where in 2009, we negotiated a labor agreement to drive productivity through increased output and cost reductions. Our new contract gives us the opportunity to change how we work, with the goal of substantially increasing our productivity. And having recently visited a number of factories, I've seen output improvements firsthand and I'm encouraged by the signs of engagement and improvement I've seen from the entire workforce, both salary and hourly alike, that gives me confidence that significant progress is happening. Our manufacturing efficiency focus really revolves around improving our ability to make more of the right tires cost effectively and intensifying our strong cost and productivity discipline.

Now, let me briefly elaborate. At each of our factories, we're moving away from metrics that drive pure output and moving towards metrics that drive attainment of producing the exact list of tires that our sales and operating plan indicate are in demand. The ultimate step in this journey is a pilot process we launched in one of our North American tire plants. This is a true lean production process, where no activity takes place until a demand signal is received by the machine operator. Our execution will be the key to delivering the productivity we need, as part of achieving our profitability goals for our North America tire business. Our manufacturing and NAT organizations are fully committed to this goal, particularly as volumes return to the factories.

Now, the third area that will remain my focus is driving our supply chain to be the most efficient, not only in the tire business, where it is today, but among any businesses, regardless of industry. By seamlessly linking demand forecasting with the production and delivery process, we can sustain and drive further improvements in production scheduling, manufacturing asset utilization, and working capital in turning both raw material and finished goods inventory. While this has been an area of focus for us over the past two years and we've seen some solid successes, there is still significant opportunity for increased efficiency throughout our supply chain, starting from the market back.

As we progress with our supply chain efforts, you'll see continued improvement in our cost and cash efficiency, further optimized inventory levels and ultimately, improved customer service levels in our targeted market segments. Now, needless to say, I'm excited about the upside we can generate in each of these areas and I'm cognizant of the challenges to achieving them. Execution will be essential and is where my focus will be. Ultimately, we firmly believe with our intense focus on near term challenges, the rewards of our overall strategic direction will be significant.

We are currently on a path to drive higher levels of profitability as volumes rebound, price mix improves and emerging markets grow. We are committed to our next stage metrics, including our 5% targeted return on sales in North America. And we expect to drive even greater efficiency and flexibility in our business, long-term. So, we're off to a good start in Q1 and we recognize we still have much to do. Now, I'll turn the call over to Darren for a closer look at the first quarter results and then, we'll open up and take your questions. Darren?

Thanks, Rich. 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 second quarter and full year. My comments about the first quarter are going to continue themes that you've heard on our year-end call. We continue to see financial results that reflect market recovery and the benefit of strong platforms that we've established for our businesses. Results were significantly better than a year ago, driven by, first, the benefits of our aggressive cost initiatives taken during 2009. Second, stronger volumes. And third, solid price mix, which allowed us to take the lag benefit of last year's lower raw material costs to the bottom line.

We've continued to see some uncertainty in the mature market economies. Although, arguably less uncertainty than existed at the beginning of this year. Our key challenge remains how to address the now rapidly escalating raw material costs, through price mix and by ensuring we get the full benefit of increased volumes, including reduced unabsorbed fixed costs in our factories. We'll drive volume and price mix by leveraging new products and by focusing on branded replacement business, with a selective approach to both OE and non-branded business.

Looking at the income statement, both our unit sales and revenue increased significantly from last year. The year-over-year increase reflects improvement in global tire demand in both consumer and commercial markets, across all the geographic regions. Segment operating income and net income increased versus last year, reflecting higher sales, higher production levels and lower raw material costs. Lower raw material costs were reflected in our results after the normal one to two quarter lag. Offsets include higher pension costs in North America and the effect of events in Venezuela.

SAG increased in Q1 versus the prior year, partly as a result of foreign exchange and partly as a result of insensitive compensation accruals this year versus reversals a year ago. Despite these increases, SAG was about 14% of sales, compared to about 15% a year ago, reflecting the benefits of cost reduction initiatives put in place last year. We continued to expect SAG to increase this year by about $100 million, excluding currency translation and the reclassification of certain sales incentives from sales to SAG.

Our decision to increase SAG reflects our commitment to strong marketing initiatives and our plans to support emerging markets growth. Note, that the first quarter after-tax results were impacted by certain significant items, including favorable one-time supplier settlements of $12 million before taxes, that were included in segment operating income. The appendix includes a summary of these items for 2010 and for 2009.

Going into more detail on the $416 million increase in segment operating income, you see that improved industry conditions were a significant driver. Both volume and unabsorbed fixed costs contributed positively to the quarter. As the output of our plan increases, we've seen unabsorbed fixed costs decline from where they were a year ago. Given these higher production levels, we're no longer experiencing significant levels of FAS 151 period costs. Therefore, the impact on earnings from unabsorbed fixed costs, now and for the foreseeable future, is expected to follow a more typical one quarter lag. Given production levels in Q4, which were up about 5.5 million units from last year, the level of unabsorbed fixed cost in Q1 was $67 million lower or about $12 a tire. Similar to last quarter, we included a schedule detailing these costs in the appendix of the presentation.

Price mix, net of raw materials, continued to be as positive year-over-year, reflecting a 15% decline in raw material costs. Price mix was flat, despite adverse mix, driven by the strong recovery in lower margin OE, which was up nearly 50% globally in Q1. This solid result reflected strong performance in our branded replacement business and a selective approach to OE. Our advanced supply chain has been critical to growing in our targeted market segments, as market volumes recover and we have needed to ensure the right products are getting to our customers at the right time.

We also continue to make progress in our cost savings programs, which more than offset cost increases related to pensions and general inflation. These savings include the benefit of USW contract savings in North American tire, the impact of last year's salary personnel reductions, and a reduction in supply chain costs, including the elimination of several warehouses. I would note, we see cost savings this year as being front end loaded, given the carry-over benefits in the first half of last year's headcount reductions.

As you can see, other tire related businesses also contributed, primarily due to improved results in third party chemical sales this year versus a weak 2009 Q1. We do not expect this to recur in future quarters. Foreign currency rates were generally a positive, as the US dollar weakened versus most major currencies. Beginning in Q2, we expect currency to be a negative year-over-year given the recent weakness in the euro.

While not broken out in the charts, lower earnings in Venezuela reduced segment operating income by $28 million when compared with last year. This impact reflected the full effect of the devaluation in reduced volumes for market disruption, while reflecting only part of our actions to address the devaluation, which we began implementing during February and March. We expect the market to improve and expect our results to recover slowly, beginning in the second quarter, as that market stabilizes and our actions begin to have full effect.

Before moving on to the balance sheet, I wanted to broaden the discussion on our commercial truck business. Slide 13 shows the last 15 years of US commercial truck tire replacement sales. The graph highlights just how far industry volumes have fallen over the past two years. As you know, the commercial truck business, which represents about 20% of our revenue in the normal environment, has been under extreme pressure. While we saw double-digit commercial industry growth in the quarter in all our markets, which is an encouraging sign. Compared with 2007, our global commercial truck volumes were down 5 million units, from 17 million to about 12 million, a 30% decline.

Given the high value of these tires, which can be three or four times the value of a consumer tire, and the low capacity utilization rates in our commercial truck tire factories, which operated at about 50% of capacity in 2009; there has been a significant impact on our earnings, particularly in North America and Europe. While the markets for these tires are recovering, the outlook and the pace of recovery remains uncertain. Given past volatility in commercial truck industry volumes, we know there's a possibility of a quick recovery at some point in the next few years. And we see continued strong growth in demand for these products in emerging markets.

With these factors in mind, we're focusing near term on; First, improving plant efficiency as much as possible. Second, driving our new products and service offerings to best meet our customers' needs. Third, growing in emerging markets. And fourth, improving profitability, while continuing to assess our capacity needs. While volumes may be slow to return to previous highs, we're confident in our ability to make progress in each of these areas.

Turning now to the balance sheet, we had a good working capital outcome in the quarter. The businesses did a solid job keeping inventory low and minimizing the impact related to seasonal trends, rising raw material costs and increased demand. I'd also note, the seasonal working capital growth was somewhat muted in Q1, as our dealers continue to have strong liquidity and are generally paying earlier than normal. Increased net debt reflected the change in working capital. For the year, we continue to expect working capital increases in the range of $200 million.

In Venezuela, we recorded a $99 million after-tax impact from re-measuring our balance sheet to reflect the currency's devaluation, announced earlier this year. This one-time charge was lower than initial estimates, given the majority of our raw material purchases qualify for the better of the two official exchange rates, rather than the less favorable rate we use to determine our initial estimates. In addition, close to devaluation, our ability to obtain approvals from the central bank to pay suppliers has improved, which is a positive development for our business.

Despite the ongoing disruption, we have confidence our local management team and their ability to perform in this environment. We ended the quarter with cash and liquidity of $4.3 billion. This is down from year-end, primarily due to seasonal growth in working capital and the devaluation of our cash in Venezuela. We completed the successful debt exchange in March. This exchange reduced our 2011 maturities by over 25%, pushing $262 million in maturities out to 2020 at favorable terms.

Turning to the segment results. North America reported a loss of $14 million in the quarter, which compares to a loss of $189 million in the 2009 period. The 2010 results reflect sales of approximately $1.8 billion and volume of 15.2 million units, a 15% increase in sales, on a 9% increase in unit volumes. The North American consumer replacement industry grew by 5% in Q1, while the consumer OE industry grew by 60%. Commercial industry conditions also improved, with the replacement industry growing by 15%, on increasing freight tonnage. While the commercial OE industry grew 17% on strong demand for tractors with 2009 engines. So, industry volumes are improving, although they remain well below pre-recession levels.

We continued the trend of branded share gains in our consumer replacement business during the first quarter in North America. We accomplished this despite some negative effect on Q1 volumes, from pull-ahead of demand into the fourth quarter last year, due to our US price increase in December. Our action to eliminate two remaining private label brands and replace them with broad availability of the Kelly brand, was very effective at increasing branded share and improving our product mix in the quarter.

Revenue per tire in North America remained about equal to last year, reflecting two offsetting factors. Meaningful year-over-year improvement in revenue per tire for our consumer and commercial replacement businesses. Offset by a higher mix of lower revenue consumer OE tires, driven by the recovery in OE production. North American earnings improved on higher volumes and strong price mix performance, with lower raw material costs. Partly offset by $44 million in higher pension expense. You'll recall that North American pension costs will decrease, beginning in the second quarter, as we begin to realize the benefit of strong 2009 investment performance.

As a final point on North America, I want to provide you an update on the implementation of our USW contract. We are on track to deliver the targeted savings levels we discussed last year, with pre-bargain shift reductions continuing to deliver benefits. We're also making significant progress on establishing new work standards for individual jobs and with improved discipline systems, ensuring our North American plants become more competitive over time.

Europe, Middle East and Africa reported segment operating income of $109 million for the quarter, which compares to a loss of $50 million in the 2009 period. The 2010 results reflect sales of about $1.5 billion and volume of 18.4 million units, a 21% increase in sales on a 14% increase in unit volume. EMEA segment operating income represented a strong start to 2010, supported by our market performance and favorable raw material costs. Industry volumes rose in Europe, Middle East and Africa as well, with the replacement tire market increasing 10% year-over-year.

The consumer OE industry increased 32%, compared to a low base of last year. I would note, that car registrations were up 9% in Q1, benefiting from the end of the scrappage incentives during the quarter. So, we may not see increases in Q2 continue at these levels. The truck replacement market grew by 37%, primarily reflecting dealers buying ahead of announced price increases. The commercial OE market remained flat versus last year's depressed levels but March was higher. So, we'll watch to see if this improvement continues.

EMEA sales growth reflected the improving economy, a continuation of the strong winter markets seen at the end of last year, and a pull-ahead of some sales due to announced price increases for Q2. Stepping back, you'll remember, we saw a similar effect in Q4 in North America, which as expected reduced Q1 volumes. We now expect to see the same effect in Europe in Q2. The weaker US dollar versus a year ago also increased revenue.

Strong execution by our team in eastern Europe resulted in a 19% volume increase there versus Q1 2009. And we continued to gain market share in Q1 in both consumer and truck in eastern Europe, Middle East and Africa. Our sales in EMEA also reflected the termination of our agreement to distribute certain nonbranded tires produced by Sumitomo Rubber, which represented about 1.8 million units in 2009. In addition, cost reduction initiatives continue to be a major focus. As part of our goal to eliminate high cost production, we continue to pursue the shutdown of consumer tire production at our Amiens North plant.

In Latin America, we reported segment operating income of $76 million, compared with a prior year result of $48 million. This result was achieved despite the $28 million impact of the devaluation in Venezuela. The improved result reflects the ongoing recovery in most markets in Latin America, particularly Brazil, where economic growth quickly rebounded from pre-crisis levels and has resulted in strong improvements in our consumer and commercial truck markets. Our new products have continued to position us well for this market recovery, as we move more of our volume from OE to the replacement market and continue to improve our leading position in radial truck tires, as the shift from bias truck tires continues.

We are also seeing benefits from actions taken last year to centralize back office operations for our businesses across Mexico, Central America and Caribbean markets. This has allowed us to improve service levels, while reducing costs and inventories. Our Asia-Pacific business reported a first quarter segment operating income of $69 million. This represents another milestone quarter for our business there, where the team has effectively leveraged market growth and cost efficiency actions to drive an impressive series of results over the last several quarters.

The increase in operating income versus the prior year in Q1, reflects improved price mix, the benefit of cost cutting actions, benefits of foreign exchange and improved market demand, which resulted in both favorable volume and lower unabsorbed overhead costs. The future opportunities in these markets remain significant, driven by OE demand and rapidly growing replacement markets. As part of our plan to take advantage of these opportunities, we continue to advance the construction of our new facility in China. And as a result, we drew approximately $80 million from the committed credit line to [penny] up capital expenditures this year.

In summary, our business has performed well in the quarter. Our performance in the marketplace remains strong, with solid branded market share performance, actions to improve mix and new products driving the top line as markets recover. Strong price mix focus allow the benefits from lower raw material costs to drop to the bottom line and cost savings from actions taken during the recession continue to deliver benefits. This gives us good momentum going into Q2.

Turning to the outlook, I want to update some of our views for 2010, beginning with our outlook for raw materials. We have updated our raw material cost outlook. While we still expect raw material costs to decrease about 5% for the first half, we now expect cost increases in the second half of over 35% year-over-year. As I indicated on our last call, past performance will tell you that we've been able to more than offset raw material cost increases, over time, with price and mix. During short periods of rapid escalation, however, the benefits from price mix don't always match up with raw material increases.

To give you a perspective on recent raw material trends, in the first quarter, our per unit raw material costs were up over 5% from the fourth quarter of last year. Looking at the second quarter, there's a sequential increase in per unit raw material costs approaching 15%. This trend of increase has continued in the second half. As Rich said, this means we have to continue taking all available actions to address the impact on our results.

Our forecast for the impact on segment operating income of Venezuela is unchanged. The combination of difficult price mix, higher costs and weak volumes are expected to negatively impact Latin America's segment operating income by $50 million to $75 million for the full year, with the impact declining throughout the year.

For modeling purposes, we continue to expect interest expense in the range of $350 million to $375 million for the year. And our tax expense will be in the range of 25% to 30% of our international segment operating income. 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 improved market conditions and support of low cost manufacturing, including the ramp-up of the construction of our plant in China and our plant expansion in Chile.

Coming back to our outlook for the industry. We've increased expected growth levels in many of our market segments, particularly commercial truck. In North America, we expect consumer replacement market will improve as volumes continue to recover. We continue to see an increase of 1% to 3% for the full year. We also maintain our view in consumer OE, where markets are expected to increase 20% to 30% for the full year.

We've increased our view of growth in commercial replacement, which is expected to increase 3% to 7% for the full year and in commercial OE, which is now expected to increase 10% to 20%. While the strongest recovery is in consumer OE, we continue to take a selective approach to our OE business, particularly in North American tire, focusing on fitments that drive profitable replacement business. So, our OE volumes may not be up as much as the consumer OE market. Turning to Europe, in consumer, we see markets up 1% to 3% in replacement, and flat to up 10% in OE. Commercial markets are forecast to increase 8% to 12% in replacement and 40% to 50% in OE.

In closing, we're very pleased with the strong start to the year. Our businesses performed well, taking advantage of lower raw material costs and increasing demand. The most significant near time challenge is raw material costs and we're taking the right actions in all of our businesses to address this challenge. Prospects for our business, long-term, remain very positive, especially as our industry continues its recovery. You can expect us to continue to capitalize on improving markets and capture the significant growth we see in emerging markets. Now, we'll open up the call to Q&A.

(Operator Instructions) Your first audio question comes from the line of Rod Lache with Deutsche Bank.

Good morning, Rod.

Good morning. A couple of things. First, you shipped 43.9 million tires but I noticed your finished goods inventory was up a bit. Could you just give us a sense of what your production was in the quarter?

Yes, Rod, our inventory was up a little bit and most of that actually was in North America. Just getting ahead of some of the anticipated shipments we have over the balance of the year, particularly heading into the summer. Darren, you want to go through some of the production numbers?

Yes, and you'll see in the appendix, Rod, we've got the data listed there. But we had -- we took production cuts of only 7.7 million units in the quarter, which on a base production capacity of about 50 million, means that we produced just over 52 million units in the quarter. Now, keep in mind, we do source some units from third parties. And so, we produced around 42 million units for the quarter and sourced some from third parties. So, not a lot of change in the units in inventory. You are seeing in inventory the impact of rising raw material costs, the materials we've been purchasing. And obviously, those will come out in cost of goods sold in future periods.

So, relative to your prior comments about $12 to $15 of overhead absorption per tire, you're saying that there really wasn't any material benefit this quarter from inventory building?

Yes, there was not a lot of units built in inventory. I think that's a fair comment. We said for this year, the way to think about our production is that we're going to be producing at about the level we're selling at. And we wouldn't expect a lot of units to be built. There is some seasonality there but I think in the first quarter, industry was strong enough that we didn't have the opportunity to build a lot of units.

Okay. And do you happen to know what your run rate of commercial tire sales was, if you annualized it in the first quarter, relative to the 17 million you used to do?

I was going to say, certainly we've seen an increase in the first quarter rates on commercial truck. And I think if we take the North America industry, we saw commercial up about 15% in the quarter for the industry, and OE up about 17%. So, I think what you'd be able to do is, you can look at that and assume that, at least directionally, Goodyear's volumes are seeing some of that benefit. It could be a little higher or a little lower than the industry units but generally, that's what you see in North America. In Europe, commercial replacement was up a lot. It was up about 37%. And so, you can assume we're getting some benefit from that increase in the replacement market in Europe as well. The OE market for commercial in Europe was about flat. But I think if you take those percentages, it's going to give you an idea what kind of volume increase we got.

Okay. And if I just throw out a couple last ones. Could you tell us the cost savings objective for the year? You said it was front end loaded. And also, you mentioned that you were up only slightly in North America replacement. Was there some share loss that you experienced in the quarter?

Rod, on the cost targets, I think we'll stick with the $1 billion over three years that we've put out there. And that's a good start for the quarter but a little bit front-loaded as we said but we haven't delineated it by year. But good progress, from my perspective, in terms of what we're working on, both in manufacturing and low cost sourcing and SAG and a couple other areas. But we haven't broken it down by quarter.

And in terms of North America, in terms of the volumes and share, what you saw is our volume was essentially flat in consumer replacement, where we saw an industry increase. And if you break it down on the positive side, if you will, we saw increase in our branded share and also the benefits of taking Kelly nationwide versus the sort of limited distribution we used to have in that brand. Both of those were positive for us.

Those were a little bit offset, though, by the volume pull-forward we had in Q4, given the price increase that we put in at the end of last year. And also, volume went down a bit from exiting some of the lower margin nonbranded product, like the Republic and Remington brands that we had before. And then, finally, you can also put in there growth of the consumer OE business, which causes us to reallocate some production to meet some of the contractual requirements around OE. And as you saw, those OE volumes were very strong in the first quarter.

So that's what we -- that's how we think about our volumes, at this point, for North America. As I look out over the balance of the year, I think given our products, given the distribution, the supply chain we have, given the new products we put into the market, we feel pretty comfortable with the long-term trend on share and don't view Q1 as any kind of a run rate or indicative of how we think about it over the longer term.

Okay. Thank you.

Thanks.

Your next audio question comes from the line of Himanshu Patel of JPMorgan.

Good morning, Himanshu.

Hi, good morning, guys. Just so we can get a sense for what normalized volumes in North America could be, can you give us a sense of the combined impact of strategic volume exits over the last few years in North America in segments like private label? And I think you're also now referring to consumer OE markets that you've kind of lightened up on. But just directionally, you did about 83 million units in North America in 2007. I think 2009 was about 20 million lower. As you think of an economic recovery, is it fair to assume all of that 20 could come back or maybe 5 million, you've kind of exited? How would you kind of dimension that?

I think, Himanshu, in terms of volumes that we've exited, the single most -- the single biggest area, if you will, would be the wholesale private label business that we exited a number of years ago. And that was sort of in that 8 million to 10 million range. And that's sort of going to be the bulk of that and that volume, I think, we've said is not coming pack. That's not a business we're going to play in in any significant way. The next biggest thing would be our business in consumer OE in North America. And we had shares over 40% at the top end of the range there, as much as 30 million units.

We haven't publicly put out a volume target, what have you. But I will tell you, our view, in terms of mixing up our business, will be to continue down the path of being very selective in the OE fitments that we take. Again, looking at it as sort of an NPV basis. What do we get from that sale out in the replacement market? And we also look at the residual benefit of that in growing in the key consumer replacement markets, as well, particularly in the branded business. So, I don't know if that completely answers your question but that 10 million units, again, we're not going to go back into. In OE, we're going to continue to be very selective.

Okay. And then, I think, Darren, on the last call you mentioned -- I think you had guided us to $12 to $14 per tire reduction in unabsorbed overhead cost as production rebounds. Given that you've gotten more bullish on your volume assumptions for commercial truck end markets this year, how should that number change versus what you thought before?

Yes, Himanshu, we've stuck with the $12 to $14 guidance and I would stick with it today. We had anticipated a significant pick up in commercial truck production when we established that number. We have seen some additional growth in industry volumes and we've guided to higher levels. So I think you're right to think that there's probably been some related increase in commercial truck production. Some of that will be in the second half and will come out in cost of goods sold next year. So, that would limit the impact it has on our guidance for this year. But I'd stick with the $12 to $14 for right now, even though there is a little bit of improvement there that we've seen in the commercial truck production.

Okay. And then, two last ones. Thank you for the 20% number in terms of revenue mix normalized. Can you just help us dimension that sort of geographically a little bit better? How does your commercial revenue mix fare between North America, Europe and Latin America? I think Latin America has historically been the highest but where is that relationship for North America and Europe?

Himanshu, I've looked at this and obviously, it's fluctuated a lot over the last three years. So, I'll be a little bit careful on how we guide on this. But I think what you can think of is that Latin America is quite a bit higher. We've said in the past and I think I would reiterate, that the commercial truck business approaches 50% of our business in Latin America. So, a lot higher exposure there. I think for the rest of the world, it's all going to fall a little bit below what the global average is. So, I think Latin America is a higher number, the other regions generally a little bit lower and on a global average, we get to the 20%.

Is there any big difference between North America and Europe?

It fluctuates, Himanshu but I'm not going to give you any view there. There's no significant difference.

There's no big difference, Himanshu.

Okay and just last question. How would you characterize inventories now in North America and Europe for consumer and commercial replacement?

Himanshu, I'll start there. Darren, you can jump in if you like. I think we feel that our inventories are in really good shape, relative to what we want to do, which is to keep as much of the benefits we pulled into 2009, both in terms of dollars and in terms of units, and run our business off lower inventory. I think we have the processes in place that we're working on in terms of our supply chain organization to do that. So, we're feeling okay with where the inventories are at.

Now, if you take a step back, particularly in North America, there have been a lot of comments around supply issues out in the marketplace. And I think many of those comments are valid. Because if we take a step back, what we've seen is inventory levels throughout the channel, both manufacturers and the dealer channels, starting from a pretty low point in 2009. And then, we've seen a faster recovery, including the OE business in 2010. And I think that adds up to an industry service level issue that's out there. And for us, I think as we listen very closely to our dealers, we hear that as well.

We also hear that when compared to others, we're doing -- we're comparing favorably to them going forward. And I'll have to say, we know we can do better and we are doing better. But when I think about it long-term, I still see our efforts and our advantaged supply chain as a competitive advantage for us. And consequently, that's why I say, the inventory levels are at a place where we like them. Could have a little bit more in certain places but our focus is on flow-through and a volume of that inventory moving through the channel, not in terms of absolute levels.

Thank you.

Your next audio question comes from the line of Patrick Archambault with Goldman Sachs.

Hi, Patrick.

Hi. Good morning.

Good morning.

Just on the timing of price increases, it's been -- we -- I think it was maybe the week before last you announced that one on commercial. But it's been since December since we've seen one on the passenger car side, I think, from you guys. Just wondering -- I understand that in the past you've had sort of a cycle of three months or so in between price increases. But it does seem -- we're starting to get kind of beyond that now. And just wondering if you guys are waiting for capacity utilization to improve or if you're waiting until the actual cost of the inventory goes up before you push that through? Maybe you could just tell us a little bit more about how you're thinking about matching those commodity inflation numbers you put out?

Sure. Patrick, I think it's a good question and I think the way I'd start in answering the question is really looking back at what we've done historically and how we think about raw materials and price mix. And historically, our strategy has been to really use price mix to offset raw material inflation. And when you look over the past six years or so, I think you'd see that we've successfully done that through the impactful new products that we've introduced, through improving our mix. And again, there, think about branded versus nonbranded, think about more replacement versus OE and of course, the pricing actions that we've taken over the period. That's been our record and certainly, our intention is to manage our business that way.

Now, to your point, starting in Q2, we're going to see raw material cost increases intensify and that's going to carry into the second half. You rightly point out and as I think Darren and I both mentioned, we're looking at second half increases of about -- in excess of 35%. So, we'll continue to drive the things that have worked for us in the past. We'll drive that with renewed intensity. And we're also putting a lot more focus now on cost savings areas to get at that -- those raw material cost increase, as well. And there, you think about things like material substitution, think about things like weight reduction in the tire.

And again, we've been able to do these things. We have confidence in our ability to do it. Over the short term , I think that this rapid escalation of raw materials, price mix to offset them may take a little bit longer, particularly in the second half. But over the long term, we're very confident that our strategy that's worked in the past will work again. I think that's how I'd characterize how we're thinking about the issue. And again, we're thinking about it with a lot of confidence over the longer

Okay. Thanks. And one follow-up, just on the North America 5% segment operating target. Can you describe to us a little bit about what your footprint might look, sort of, in that scenario? Is there a significant amount of reduction in the current footprint you have that would need to take place? Is it something where you're going to have to have a pretty material portion of North America sales met through outsourcing? Which you've kind of talked about a little bit in the past. Or is it something that maybe the heavy lifting is done by just better volumes and better capacity utilization in the factories you already have?

I think, Patrick, it's a pretty relevant question and I continue to think it's on a lot of people's minds. So, maybe I'll start by just commenting that we still very much believe in the 5% EBITDA sales metric in North America. We believe it's achievable. But to get there, there's going to be multiple factors that are going to get us home, rather than just a footprint action, let's say, in and of itself. As we think about it, what will get us there is increased volumes, of course, driven by part of the market recovery that we've seen.

We'll get the benefit of the sales volume but we'll also get the benefit of unabsorbed overhead cost to start soaking up some of that fixed cost or that unabsorbed cost, I should say, that's in the P&L. In addition to that, you'll see increased production that will help us get there because remember, we were in an inventory declining period last year. You're not going to see that anymore. So, we'll get the benefit of increased production as well. Also, you have to think about the pension expense. 2009 was about $150 million higher than 2008 in terms of pension expense. That ultimately will abate and go down. I can't give you a time period but we'll get the benefit of pension going back to a more normalized level after the big asset decreases in the plan that we saw in 2008.

We also have cost savings actions, the efficiency that I referenced to in my remarks earlier, particularly coming out of the USW contract. There's a lot of opportunity there. And also, from improved mix. You've heard me refer to that a couple times. Again, replacement versus OE, branded versus nonbranded. And then I'd say, finally to your point, a footprint action that we've been thinking about and certainly, that was reflected in the union contract that we negotiated last year. So, while I can't give you the exact timing of when and how all that happens, we feel like we're on a good path to achieving it.

Just kind of digging a little bit more into that footprint action, is part of some of the references to outsourcing tire production, is that going to have to also be part of the solution to be able to get the cost structure in the right place?

No, Patrick. I think, as a business in North America, we've always imported some level of tires into North America for a variety of reasons. Some of them, we just can't make here, whatever the reason might be. But I think, as you're look looking at it, if you're asking; Will it be a strategy to offshore a high percentage of tires into North America? I've said, in the past, our intention is to produce the tires we have here in North America successfully, at the right cost. And that's a big part of what our accomplishments will have to be as we look forward. And we'll continue to work on footprint and some level of imports, as we have in the past, as part of our overall supply plan for North America.

Okay. Great. Very helpful. Thank you.

Okay.

And due to the length of the call, your last question comes from the line of John Murphy with Bank of America.

Good morning, guys.

Good morning, John.

Hi, John.

The commercial tire information you gave us on slide 14 was very helpful, 20% of normal revenue. I was just wondering where we were in 2009, as a percent of revenue and then where we are in the first quarter? If you can help us understand where that business is in total right now?

Well, John, as you might expect, the percentage in 2009 would have been below the 20% historical number. I won't mention it specifically. You can see on the graph what happened in North America, the dramatic declines that we saw in the industry there. In Europe, we saw something similar. So, we had very severe industry declines that took place in commercial. And I think the OE being the biggest, where in North America we were down almost 40% and Europe down almost 70% last year.

So, we had a very big impact there, much bigger than we saw in the consumer business. And as a result, our mix of revenue in commercial truck was down in 2009. As we look in 2010, there is a recovery in commercial truck and it's a stronger recovery than we're seeing in consumer. So, you can say, directionally, moving back toward the historical average but at these rates, it's going to take awhile to get back to where our history was.

Okay. And then, you had mentioned that the CapUt on your commercial tires was running around -- capacity utilization was running about 50%. Given the outlook that you have, you have roughly a 10% to 15% increase in aggregate commercial tires. So, it sounds like CapUt would probably get to that 60% to low 60% range. Where do you break even in the commercial tire CapUt?

Yes, so, John, the first thing, one thing I would point out because clearly, we're going to be in better shape from a production standpoint this year. The thing I would point out is, when we ran the factories at 50% capacity utilization last year, we were cutting inventory. So, the first thing that's going to happen this year is that we're not going to take units outs of inventory, which means that even if the sales were the same, we'd produce more this year. So that will increase the capacity utilization to well above the 50%. And then, we also have to produce the incremental units for any sales increases year over year.

So, the pattern works in a way that's similar in commercial to what we see in consumer. And that we're adding some units because we're not taking units out of inventory and we're adding some units because of higher sales. So, I think you take those two pieces, the capacity utilization is going to increase quite a bit this year. But given that we're starting from last year's sales base of about 12 million units versus 17 million that we sold back in 2007. Even if sales move up this year somewhere in the percentage range that you're quoting, we don't need the number of tires that we needed back in 2007. So, there's still going to be some open capacity.

Got you.

We're moving much -- we're moving back in the right direction there.

And then, you mentioned revenue per tire in commercial side is three to four times that it would be on the consumer side. Should we think about that as the profitability differential between passenger and commercial or is it even greater than that revenue per tire?

I think, John, if I look at the overhead absorption, so the unabsorbed overhead recovery, I think the three to four times of consumer tire is a pretty good rule of thumb. In terms of overall profitability, it's very dependent on region and product segment. So, I'm not sure I could give you a clear rule of thumb on that. But the profitability on commercial truck tires, I don't think you'd be thinking of it being well beyond that but it's really going to depend on region. So, there's not an easy rule of thumb, there really isn't. But for unabsorbed overhead calculation, at least that part of the contribution, I think you can use the three or four times the consumer tire.

And then, just lastly, pension contributions, you guys laid it out nicely for us, I think, in the appendix here. The 2010 contribution remained at $275 million to $325 million. I think you had talked about a ramp up of $200 million to $300 million, I believe, in 2011 in pension contributions. But given the good returns in the market, is that number that significantly higher in 2011 or maybe has that number come down?

John, this is, Damon. At this point, we haven't revised our guidance. Through the first quarter, our pension returns are about 4%. And as you know, that will ultimately impact, potentially, the 2011 contributions but too early in the year to change that guidance.

Thank you very much, guys.

Okay. Thanks, John. And everyone, thanks for your attention today. We appreciate you listening. We appreciate the questions. Thanks very much. All right, you can close down the call, please.

We thank you for joining today's conference call. You may now disconnect.