Goodyear Tire & Rubber Co (GT) 2010 Q2 法說會逐字稿

Welcome to the Goodyear Tire and Rubber Company's second quarter financial results call. All lines have been placed on mute to prevent background noise. After the speakers' remarks, there will be a question-and-answer session.

(Operator Instructions). I will now hand the floor to Patrick Stobb, Director of Investor Relations. Thank you. Mr. Stobb, please go ahead.

Good morning, everyone and welcome to Goodyear's second quarter conference call. With me today are Rich Kramer, President and CEO and Darren Wells, Executive Vice President and CFO. Before we get started, there are a few items I would like to cover. To begin, the webcast of this morning's discussion and supporting slide presentation can be found at 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 a 10-Q later today.

If I could now direct your attention to the Safe Harbor Statement on slide two of the presentation. Our discussion this morning may contain forward-looking statements, based on our current expectations and assumptions that are subject to risks and uncertainties that could cause 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 provide a financial overview. After Rich's remarks, Darren will discuss the financial results and 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. I will separate my remarks this morning into three sections. First, I will highlight our strong second quarter results which are very gratifying, then I will offer some observations on what I see in our markets and the economy and finally, I will share with you some reflections of my first 100 days on the job, and how my discussions and observations over the past three months have increased my confidence in our business, our industry, our team and finally our earnings prospects.

First, let's highlight our strong second quarter results. During the second quarter, we achieved significant progress across all our businesses, driven by a combination of sales growth and cost actions. Versus the comparable prior year period, sales were up 15%, units up 10% and segment operating income was $219 million, an improvement of more than $190 million for the second quarter 2009. This kind of performance demonstrates that we have pulled the right levers during the economic downturn and that our actions have us well-positioned for growth opportunities presented by the recovery.

From an operational standpoint, our performance was driven by our ability to capture the benefits by recovering industry demand in terms of both sales volume and factory utilization. The continued cadence of award-winning new products in all of our regions, delivering price increases and mix improvements through a relentless focus on brands and channels to address escalating raw material costs and delivering productivity improvements resulting from a continued focus on sustainable cost reduction programs. Some particular highlights of our performance include strong results in our North America business with segment operating income was $16 million which was more than a $100 million improvement over the prior year period.

I point out that the improvement would be even more impressive were it not for a $20 million impact from an unforeseen adverse procedural ruling on a six-year old product liability case which we continue to contest. Our North America business continued to focus on innovation, price mix, productivity and improving its manufacturing efficiency as part of our process of transforming that business, a transformation that was on track before being disrupted by the great recession. Our results reflect progress in these areas and give us confidence in our ability to achieve our 5% segment operating income margin target. Certainly we have more actions planned, but we are absolutely on the right path.

In Latin America, despite the issues in Venezuela that reduced our year-over-year results, our team again delivered by nearly offsetting this decrease. Our market lead position, our brands, our new products, and our distribution networks position us well as Latin American markets continue to advance. The success and impact of our new product engine was recognized again in China where our recently introduced Goodyear Eagle EfficientGrip tire received Motor Trend magazine's award for Comfort Tire of the Year. In Europe, where innovation has been our mainstay, we introduced the Goodyear LH2 commercial trailer tire which completes our Fuel Max.

To provide a sense of the impact this product line-up delivers, a fleet using Fuel Max tires in average long-haul operations can realize savings of up to $3000 per truck per year, in addition to reducing CO2 emissions by 5200 kilograms per truck per year. And additionally, our high return capital investments targeted that improving costs, capacity and capability are progressing on schedule. Our planned investments of more than $1 billion in 2010, an increase of more than one-third in 2009, demonstrate our commitment to improving our competitiveness and growing our business.

Our operating cash flow continues to reflect actions we have taken to improve our supply chain and reduce working capital with seasonal growth below historic levels. Our businesses has delivered in the second quarter by executing against our strategies and despite the anticipated challenges of second half raw material costs and an unusually uncertain economy, I come out of the quarter energized that we are clearly on the right path.

Now relative to the economy, we saw more robust first half 2010 recovery than was anticipated. This was particularly true for North America and Europe. While we see global economies progressing, we remain mindful that consumer spending has not rebounded, unemployment will remain high for an extended period of time and government's response to increased deficits and other sovereign crises remain undecided and consequently uncertain.

However, we do see tire volumes increasing globally and as a result, see production being added back to our factories. We anticipate truck tire volumes while improving, taking longer to return to prerecession levels than in our consumer business. Now remember, the North American and European truck industry experienced a decrease of about 33% between 2007 and 2009.

The improving global economy, while certain not to be a straight upward path, will provide the environment to fill our factories and growth in both mature and emerging markets will allow us to drive our profitable growth strategies by being selective relative to where we direct our resources of product, of people and of investment. Executing against our cost plans of capacity reduction and productivity, combined with our investment plans gives us confidence to navigate through whatever economic environment we are likely to face.

But taking a step back after finishing my first 100 days on the job, I thought it might be helpful for me to provide a perspective on what I have been seeing and give you a view of how I am thinking about the business. As you can imagine, I've made it a point to visit our business teams around the world as I moved into my new role. I must say this opportunity to interact with these teams is incredibly energizing and it is really what gives me confidence in our ability to lead this industry.

Let me share observations with you. I saw an enthusiastic, dedicated and motivated workforce with a winning attitude. They are dedicated to continuous improvement. They are financially astute, market-backed thinkers. They love tires and the tire business and they are solution-oriented, not afraid to engage in tough discussions and to make tough decisions and they are dedicated to growing their customers' business.

I saw peoples' ways to focus on demand creation and I saw ingrained in them to view the market by segments in terms of growth and profit potential versus simply volume. I saw relentless cash-is-king focus result in a number of our businesses operating with zero and in some cases even negative working capital. I saw the strength of our open innovation efforts by our R&D organization. We have gone beyond our initial work in computer modelings as an accelerator for physical testing. This development work has now become an enabler of the transformation of our entire development process. Clearly, this is a competitive advantage as we develop the next generation of tires which will have expanded capabilities in fuel economy and nd tread wear and in stopping distance.

I saw numerous examples of world class production and engineering processes that separate Goodyear from our competitors. And I saw examples of outstanding factory performance where productivity earns investment and drives not only cost competitiveness, but also quality and customer service. I saw significant progress in our investment to produce a new 63-inch radial tire for large mining equipment which later this year will round out our off-the-road product portfolio and position us with an industry-leading tire in this category. I saw our cradles to grave truck tires service efforts in action. Our industry-leading fleet service business model is delivering value to our customers that extends well beyond tires and I am hearing this message repeatedly from fleet operators. This business model is operating in the Americas, in Europe and will soon be deployed in Asia. When compared with our innovative new products, such as the new G399 fuel mileage truck tire, our commercial business is favorably positioned as the trucking industry continues to rebound.

I also saw the strength of our commercial truck tire offerings in emerging markets such as Poland and Brazil. In Poland we went from virtually no presence some 10 years ago to a leading position, passing all competitors along the way. In Brazil our new product line-up has put us in a leading position for radial truck tires. I saw an enthusiastic and supportive customer base of dealers around the world who really value our brands, our distribution, our products and our services to help them grow their business, instead of simply selling them tires.

I attended a meeting with more than 80% of our Latin American dealer base just a few weeks ago in Mexico City and their enthusiasm for our product offerings, our marketing programs and our growth opportunities in general was tremendous. They are loyal, they are dedicated and they are committed to growth of our brands and our Company. This meeting was an excellent reminder for me that the tire business is also a people business and that relationships truly matter.

And finally, I see that despite the great recession and despite higher fuel costs, people around the world continue to treasure their mobility and they prove it by increasingly driving their vehicles. As the world's population grows, the vehicle and tire industries will continue to grow, both in emerging and mature markets. With that growth, will come an evolving demand of technology and performance. That continued evolution of tire performance and consumer expectations is a trend that favors our expertise and will provide ongoing growth opportunities.

Now I add these reflections on our international businesses to views I have had for being part of our the North America team for the previous three years, as we develop plans aimed toward our next stage metric of a 5% segment operating income margin. Let me say, we continue to be committed to this target which is a key enabler for the Company to reach the global 8% segment operating income metric and position our business for future success. My confidence in achieving the NAT metric is supported by our success over the last four quarters with the business essentially returning to breakeven performance despite an unprecedented downturn in the industry.

We attribute this success to innovation and impactful new products, thoughtful decisions to improve brand and channel mix, strong work with our dealers to drive our brands in the marketplace, successful management of price and mix and our cost reduction initiatives. Certainly we still have many challenges, most specifically, the raw material increases in the still somewhat uncertain economy, but we are managing everything in our control extremely well to keep us on the path to our profitability objective.

Now if you recall, before the bottom fell out of the global economy, we had already achieved our goal of two and a half times debt to EBITDA, and we're within reach of our 8% global and 5% NAT next stage metric goal. We are now back on that path. What does this path look like? Our current path in North America includes the benefit of continuing moderate industry recovery, offsetting raw material price increases through price mix improvements over time, driving an improved cost structure including US building and contract implementation, a significant footprint action although no final decisions have been made at this time and reduced pension plans as we fund plans as asset values increase.

Our ability to achieve this goal remains dependent on the pace and consistency of economic recovery in North America, the timing of which quite frankly is a question currently on almost everyone's mind. We certainly have a timetable in mind and are confident in our plans to get there. However, today's environment makes predicting a timetable quite difficult. I believe that we are on the right path supported by a long proven track record of execution in areas within our control.

So as you can tell, I'm excited about our industry, our Company and our future opportunities and as positive as I am about the things I saw, I also see additional opportunities for improvement. The trends I see support the investments we are making and support our ability to differentiates ourselves in the marketplace. The global growth opportunities I see have perhaps never been better.

Looking ahead, my near-term focus remains on the areas I discussed last quarter; offsetting escalating raw material costs with price mix and material cost reduction and substitution programs, our track record here certainly speaks for itself, improving manufacturing efficiency through changing how we work in our factories and getting increased operating leverage out of our existing equipment and building a world-class advancing supply chain that not only efficiently makes and delivers the right tire to our customers, but let's us do so with lower investment and inventory. We have seen our efforts already produce results in our growing North America truck business where we are achieving higher levels of service with significantly lower levels of inventory.

Understanding that these areas will take time to fully develop and meet our ultimate expectations, we improved in each area so far this year and expect to continue to do so over the second half and into 2011. I see our progress in these areas as necessary to address near term headwinds in a volatile economy, but ultimately execution against these imperatives is required for us to take advantage of the growth opportunities in China, Latin America and eastern Europe. These are markets where we have leading positions, where we have demonstrated capability and where we have identified segments with profitable growth potential.

Before I turn the call over to Darren, what I conclude following my first 100 days is that we are successfully executing our strategies of improved productivity in our manufacturing plants, increased capabilities and efficiency in our supply chain, success with innovative brand products in growth segments and regions around the world, continued progress in reducing costs and increasing our cash position and top line growth through all customers and channels. These are the foundations of a sustainable business model that will give us the ability to lead this industry and to reach our next stage metrics.

Now, I am going to turn the call over to Darren.

Thanks, Rich. There were four significant themes you see reflected in our second quarter results. These themes include, first, success in our work to drive price mix within our replacement business. While consumer replacement volume was up only modestly, the consumer replacement business was the big driver of improved earnings as we successfully executed price increases and continued to shift mix from private label to branded products.

Second, volume growth was weighted toward OE with 3.2 million of our 3.9 million increase in units coming in the OE segment. This reflects increased OE production that we are contractually required to supply. This reduced our opportunity to grow in the replacement business and hurt our price mix as we were unable to fully reflect raw material cost increases in our OE pricing.

Third, strong performance in our commercial business, taking advantage of recovering markets while also growing our share in many geographies. One particular success that means a lot to our team is that we now have achieved the number one position in radial truck tires in Brazil, passing a key competitor as truck [leads] continue to move from bias to radial truck tires.

And fourth, outstanding work to reduce costs and recover the unabsorbed fixed costs that created a significant drag on our results over the last two years. Notwithstanding our strong topline performance, we remain completely committed to addressing our cost structure. We expect these themes will continue to be factors as we move into the second half.

Looking at the income statement, our unit sales increased by 10% and revenue increased 15% in Q2, reflecting improvement in global tire demand in both consumer and commercial markets as well as improved price mix. Each business unit exceeded 2009 unit sales and revenues and price mix more than offset increased raw material costs. Margins, segment operating income and net income all increased versus the prior year.

SAG increased to $670 million from $614 million last year, driven by three factors. First, the recent adverse court ruling that Rich mentioned, which impacted SAG in North America by about $20 million, second, increased advertising to support our strong brands and to drive emerging markets growth, and third, compensation accruals. Note that second quarter after-tax results in both periods wer impacted by certain significant items. The appendix includes a summary of these items for 2010 and 2009.

Segment operating income in the quarter increased $195 million. This increase reflected higher volume as well as the benefit of lower unabsorbed fixed cost compared with a year ago. This continues the trend that we've seen in the prior two quarters. Given production levels in Q1, which were up nearly six million units from the previous year, the amount of unabsorbed fixed costs in Q2 results after a one-quarter lag was $71 million lower than a year ago or about $12 per tire, consistent with our guidance. Price mix of $121 million more than off set raw material cost increases of $89 million or 6% in the quarter.

The majority of raw material cost increases in the quarter affected our Asian Pacific and Latin America businesses which tend to see raw material cost increases hit more quickly than Europe and North America. North America and Europe will see more of the increases starting in Q3. I point out here that we executed $35 million of raw material cost savings actions in the quarter, reducing the net raw material increase to $54 million. Including these savings, our cost reduction plan generated benefit of $133 million during the quarter.

Cost savings actions provided significant net benefits as inflation was about $60 million in the quarter. As we discussed in our first quarter call, savings this year will be front-end loaded given the first half carryover benefits from significant headcount reductions and other actions taken during the great recession which made up a significant portion of our first half cost savings. Savings in the second half will show less change versus last year as headcount has stabilized, reflecting a ramp-up in production to support market recovery.

As anticipated, pension expense began to decline in our North America business in the second quarter after increasing in Q1. Currency hurt our international earnings, primarily due to the effects of the devaluation in Venezuela and the weaker euro versus the US dollar. Given the continuing weakness of the euro which fell over 8% versus last year to an average of $1.26 in the second quarter, we expect foreign currency pressures to continue in the second half. Last year's average euro exchange rate in Q3 was $1.43 and in Q4 it was $1.47. If Q2 rates were to continue, the negative impact of currency translations in the remaining quarters would be higher than the impact we saw in Q2.

While not broken out in the chart, Venezuela continued to negatively impact results. The Q2 year-over-year impact was $32 million which was somewhat worse than our expectations, primarily reflecting lower volumes. I'll update you on the situation in Venezuela as I discuss the business unit results.

As we turn now to the balance sheet, our efforts to manage working capital continue to be effective even as higher raw material costs and improved demand put pressure on receivables and inventory. Working capital was up about $100 million versus the end of March, less than what we would typically expect. Q2 and Q3 typically reflect cash usage for increased working capital ahead of cash inflows in Q4. The cash use would have been far more without the significant benefits we are experiencing from supply chain improvements that we have made over the past two years. We ended the quarter with cash and liquidity of $4.2 billion, which is down about $100 million from Q1, reflecting the seasonal growth in working capital.

Turning to the segment results, North America reported segment operating income of $16 million in the quarter which compares to a loss much $91 million in the 2009 period. The 2010 results reflect sales of more $2 billion and volume of 16.6 million units, a nearly 21% increase in sales on a 13% increase in unit volume. The North American results were supported by strong industry recovery versus a challenging 2009 environment. Consumer replacement industry volume increased by 5% in Q2 while the consumer OE industry was 70% higher, mainly reflecting lower production a year ago given Chrysler and GM shutdowns during the government supported restructurings.

Commercial truck industry conditions also improved with the replacement industry increasing by 22% on higher freight tonnage. We see increased tonnage being driven by improving economic activity and inventory restocking across sectors. The commercial OE industry grew by 42% as fleets began to address the need for replacement of aging vehicles. We see improving industry conditions in all NAT core businesses. As the industry continued to recover, our North America business continued to drive branded share gains in our consumer replacement business. Our decision to eliminate two remaining private label brands and replace them with the broad availability of the Kelly brand has been effective in increasing our branded and improving our product mix this year.

Our overall replacement share however, was down slightly, impacted by two factors; first, increased OE demand which limited product availability in our replacement business and second, private label volume we eliminated in line with our Kelly brand strategy. Revenue per tire for our replacement business in North America increased about 4% versus 2009, reflecting announced price increases. Revenue per tire gains were offset partially by a higher mix of lower revenue consumer OE tires, driven by the recovery in OE production. Including this impact, overall revenue per tire grew by 1%.

North America earnings improved on higher sales volumes and the benefit of fixed cost recovery on higher production while strong price mix performance also drove earnings higher as raw materials were essentially flat. The recently announced price increase of up to 6% in consumer and up to 8% in commercial will be fully realized beginning in Q3, along with the benefit of nine new products launched in Q2. Lower pension costs and net productivity in our plants also improved our results.

Europe,Middle East and Africa reported segment operating income was $73 million in the quarter which compares to a loss of $15 million in the 2009 period. The 2010 results reflect sales of about $1.5 billion and volume of 16.8 million units, a 4.5% increase in sales on a 6% increase in unit volume. Industry volumes rose in Europe, Middle East and Africa as well. The consumer replacement tire market increased 11% year-over-year, benefiting from early demand for winter tires as trade inventories were very low after a strong 2009-2010 winter season. The consumer OE industry increased 8% which was more than we expected.

The commercial replacement market grew by 19%. The commercial OE market rebounded, partially driven by exports with Q2 77% higher than a year ago with all OEs implemented factory shutdowns. EMEA's sales reflected an improving economy and strong early winter tire market which was up 56% compared to a year ago, coupled with price increases to offset higher raw material costs. Strong execution by our team in eastern Europe resulted in a 10% volume increase versus Q2 of ' 09.

We continued to gain market share in Q2 in both consumer and truck in eastern Europe, Middle East and Africa. Our sales in EMEA also reflect a determination of our agreement to distribute certain tires produced by Sumitomo Rubber, which represented about 1.8 million units in full year 2009. The stronger US dollar versus a year ago negatively impacted net sales for the quarter by $83 million. EMEA segment operating income improved to $88 million driven by higher volume, increased price mix of $23 million which more than offset raw material increases of $3 million, as well as higher factory utilization levels which resulted in the benefit of $36 million from lower unobserved fixed costs.

In Latin America, we reported segment operating income of $66 million on sales revenue of $529 million, which represents a revenue increase of 21% on a 13% increase in unit volume versus the prior year. Segment operating income was down from last year. The [key to our perspective], however, the $7 million reduction in segment operating income compared to a year ago in Latin America reflected two offsetting forces. Our business in Brazil and other countries outside Venezuela sends increased earnings by $25 million. Unfortunately, this improvement was more than offset about a decrease in earnings in Venezuela of $32 million, which I will discuss further in a moment.

Stronger sales reflect the ongoing economic recovery in most of the region, especially in Brazil where the latest GDP statistics show almost 90% growth for the first quarter while industrial production continues to show strength. Excluding Venezuela, the replacement growth has been robust within consumer and commercial industry volumes, increasing more than 15% versus Q2 of last year. The recovery in OE markets has been even stronger.

Market share in both consumer and commercial replacement businesses were strong in the quarter, reflecting the benefits of a strong new product line-up. This product line-up will be further enhanced with the launch of DuraPlus with Fuel Max technology in the second half. Price mix benefits more than offset higher raw material costs in the quarter while also helping to address the currency devaluation in Venezuela. These actions drove a 9% increase in revenue per tire versus the prior year.

Coming back to the situation in Venezuela, the impact on the segment operating income of the devaluation and economic weakness in Q2 was $32 million, raising the impact in the first half to $60 million versus the prior year. The adverse full year impact may now exceed our prior guidance of up to $75 million versus last year with continued negative impact in Q3. The comparable becomes easier starting in Q4. This will take our full year earnings in Venezuela back to levels consistent with 2008, before the significant peak we saw in the Venezuela market in 2009, just before the devaluation.

The higher than expected Q2 impact reflects lower sales volume as consumers in Venezuela have started to pull back, operational disruptions for lack of supplies and high absenteeism and difficulties importing raw materials and finished goods. We remain confident, however, in some second half improvement. Given we have already secured the approval necessary for import licenses required for second half operations, we continue to take actions to increase local production of truck tires where we are working to offset the impact of increased costs. While this remains a difficult situation, our team is taking steps to return our business there to higher levels of profitability over time.

Our Asia Pacific business, fueled by strong market demand in China and India, reported record second quarter segment operating income. Successful price mix actions combined with a volume increase in excess of 9% and effective cost controls more than offset raw material cost increases. The team continues to leverage strong market growth in key segments. In China, sales continue to reflect strong economic growth, product innovation and improvement in our distribution capabilities. In Q2, Goodyear reported its highest ever consumer replacement volume in the Chinese market.

In India, Goodyear also achieved record sales in consumer replacement. In Thailand, Goodyear was named the most trusted brand for the second year in a row. And our OTR and aviation businesses show continued strength, driven by demand for raw materials in air transportation in both China and India. And our business in Australia has recovered significantly, leveraging low cost supply and strong distribution channels as markets recover.

The opportunities in Asian markets remain significant, driven by continued OE demand and rapidly growing replacement markets, especially in China and India. In response, we are continuing to enhance our product line-up. We will launch the Eagle EfficientGrip and the Assurance Fuel Max tires in Asia in the second half of this year. Both of these tires are already receiving third party accolades, building our brand awareness.

As part of our plan to take advantage of growth opportunities in these markets, we continue to make progress on the relocation and expansion of our Dalian, China factory, which once operational will help us continue our growth in China. We continue to reduce our cost structure in the region with the announced closure of our factory in Taiwan. In addition, we also continue to reduce our cost structure in the region with the announced closure of our factory in Taiwan. Across all our business units, you saw evidence of successful execution of our strategies, improving price mix, despite the difficulty of increased OE mix and strong performance in our commercial business and of course, continued cost improvements.

Turning to our outlook for the remainder of the year, we have updated our views including our expectations for industry volumes and raw materials. Looking at industry volumes, we've provided updated expectations for full-year industry growth in North America and Europe on slide 21. As you can see, we continue to expect growth in the key market segments for North America and Europe and have increased our expectations somewhat, particularly in commercial truck. Overall, given volumes were up significantly in the second half of 2009, year-over-year industry comparisons for Q3 and Q4 on a percentage basis will be less.

Looking at raw materials, while recent moderation of rubber prices have helped to reduce the impact of raw material costs somewhat, the benefit will be concentrated in Q4. We expect the peak year-over-year increases will occur in the third quarter. Raw materials were expected to increase 30% to 35% in Q3 versus the prior year, and we expect Q4 to increase about 30%. For modeling purposes, we now expect 2010 interest expense to be in the range of $325 million to $350 million as interest rates remain at historically low levels. The outlook for tax expense and CapEx remain unchanged from the levels provided in the first quarter call, recognizing this implies both CapEx and our tax rate will increase in the second half compared to the first six months.

We are very pleased with the continued improvements we have had in the first half of this year. We remain very positive regarding the long-term prospects for our business. Global growth and continued high demand for higher technology tires provide significant opportunity for Goodyear. This will allow us to continue to improve our operating results, leveraging a richer mix of products, a shift towards lower cost manufacturing footprint, growth in emerging markets and reduction in legacy costs to deliver on our next stage metrics.

Now, we will open up the call for Q&A.

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

Good morning, everybody. I had a couple questions. First of all, there are a whole bunch of reasons why your North America replacement volume has been a little bit less than the overall market. I was wondering when you expect to start cycling through some for those things, like the Kelly brand discontinuation. Is there a point where you think Goodyear will start to track in line with -- better than the overall industry in North America replacements specifically.

Rod, let me answer that, but just to be clear, we haven't discontinued Kelly. We actually have taken it from a handful of dealers if you will, and taken it nationally to all our dealers. In fact, it is going very well. We discontinued the Remington and Republic brand just for clarity.

Sorry.

That's okay. Just to your question, I think it's a good one because as we look at the industry, our North America replacement volumes were slightly up with -- but certainly the industry was up a bit more. If you look at it, what it reflects to us as we look at the quarter is increased branded share in Goodyear and in the Kelly brand. Certainly we had success in broadening the distribution of our Kelly brand. We had significant share increase there. That was offset by the elimination again of those two Remington and Republic brands, getting out of those lower end businesses again as a conscious decision to mix-up our North America business. And also it was offset by our stronger OE volumes. They were up significantly. Industry was up about 70% and that required us to reallocate production away from our mixed up higher end replacement to meet some of those, as you know, contractual commitments that we have.

As we look out, I would say we are very confident in what we have, in terms of products, our product line-up, the distribution, our supply chain activities. We think this will allow us to maintain and improve that share of our brands going forward. In terms of an exact time, it is harder to say, but as I think about it over the horizon, I'm not overly concerned that we can't get that share back.

Okay. On page 21 where you provide the industry outlook, it looks like the majority of the North America consumer replacement volume growth could be attributable to the first half. Are you expecting some moderation there? Can you also give us some color on what your production levels look like, relative to what the shipments were? Were you operating at a higher level or lower level than where shipments were?

I will start and I will tell you in terms of how we look at the second half, we still feel very good about where the market is going in the second half. What you see in terms of first half and second half is, remember, second half of 2009 we had the impact of the ITC ruling, the 421 ruling which had strong volumes last year and we also had more of an OE phenomenon, but certainly Cash For Clunkers as well. When you look year-over-year second half to second half, it is more of a comp issue than any trend issue in the marketplace. In terms of the production levels, I will let Darren address that.

You will see -- and you will have a chance to take a look at the appendix as we have provided information there as we have in the past. But Q2 production levels were up about 6.7 million units versus last year. Where that brings us to is just under 43 million units of production versus a capacity of about 50 million a quarter. It obviously reflects higher sales as well as nonrecurrence of the inventory reductions we went through a year ago. If we build a little under 43 million units, you see sales are about 44 million units.

We talked about the fact that last year we had about 10 million units that we brought in or 2.5 million a quarter from third parties. If you take that and assume another 2.5 million or 3 million for from third parties, what you will conclude is we did build a little bit of inventory back during the quarter which is there to help us meet market demands, to deal with seasonality and hopefully address the market share question you asked earlier. Production in Q2 is about 43 million units. Obviously the -- we have a couple of plants -- significant plants that are still running below capacity given the fact that we have footprint actions that we have planned, including the plan we've announced in France. Hopefully, that gets to your question.

Yes. Lastly, you typically see seasonally stronger earnings in the back half for your company than the first half. I'm wondering whether you looking at a different pattern this year, just given the FX headwind and the cost savings comments raw material comments you made in your prepared remarks.

Rod, there are clearly things that we expect to continue to make progress on. First and foremost, we see continued momentum in products, continued momentum in driving improved mix to the business, continued momentum in our cost savings programs. Absolute confidence there. But you are right to point out that currency in the second half, particularly on a year-over-year basis, more of a headwind than we saw in the first half.

First half we had some benefit of cost savings from all the restructurings that we did during the great recession. We've now gotten through a full year of benefits of those. There is no incremental benefit from those restructurings as we look forward because they were already in the second half last year. The volume comps obviously are tougher and we have increased raw materials sequentially as raw materials continue to roll through our inventories of cost of goods sold. It's always appropriate to point out the fact that those are challenges that we look to the second half.

Somewhat different seasonality than in the past.

Rod, I wouldn't look at a change in seasonality as a new pattern for us going forward. It is, as Darren described, a good situation [circumstantial] as this point.

Yes. I would imagine the biggest objective here, given what you see in raw materials is just adjusting prices again for the overall. It's probably the same issue for the overall industry.

In -- our view has been to drive our business through a mixed strategy, through a price mix strategy going forward and to address raw materials. Rod, you are right to point out, our focus remains there. Going back to your first question, in terms of where we are on volumes, say North America, but true for the Company. We are focusing on those parts of the market where we can win, focusing on brand, focusing on mix. That is ways -- a much more important level for us than just pure volume.

Thank you.

Thank you.

Your next question comes from the line of Itay Michaeli with Citi.

Good morning. Just a couple of questions. On the cost savings front, you talked about it being weighted towards the first half. How are you tracking versus the billion dollar, three-year goal? It seems even if you slow down the cost savings, you probably -- maybe you can achieve upwards of half of that this year.

Itay, we are tracking very well. I'll let Darren walk you through some of the particulars. As we look forward, our focus is not only on mixing up and doing it with the right brands or right channels, but cost has been and will remain a priority for Goodyear as we move forward. I feel very confident and you should feel -- hearing from us very confident that we are tracking towards that and we are going to continue to focus on it. Our goal is to do it even faster than we've said. Darren, go through a bit of the details.

We are happy with our progress with the first half. We have over $280 million in cost savings through the first half from initiatives around the Company. We've had improved manufacturing efficiency. We have gotten some improvements from sourcing products in low cost countries. We've done a good job and gotten some benefit of SAG restructurings. We've taken actions to reduce transportation costs.

You will see highlighted in the materials that we had cost savings in the raw material category for raw material substitution and construction changes we have been able to make to take weight out of tires; the total $35 million just for the second quarter. With raw materials going up, a lot more focus of our engineers has been going into how do we reduce the amount of the material and the type -- the cost of the type of the material in the tires. We feel very good about the cost savings in the $280 million for the first half.

But I will bring you back to the fact that we cut about 5500 associates off of our payrolls during the mid 2008 to mid 2009 timeframe. We got the full benefit of that in the first half and that was a significant part of the $280 million. Without that impact of the headcount reduction, obviously the run rate of $280 million is a lot different number. We remain -- my point at this stage is we remain committed to our prior guidance of achieving the $1 billion over the three years, keeping ourselves on pace to offset general inflation and look for opportunities to make improvement beyond that and we have a proven track record of driving those cost reductions and we will stay focused on it. That's how we would answer the question at this point. It is important to take into account what was going on with the restructuring savings in the first half.

That's helpful. Thanks. Maybe a follow-up cash flow question. It looks like some of your interest expense guidance, you expect a pretty material bump in expense in the second half of the year. When I think about the seasonal cashing flow you typically have a much better second better half on the inventory sell down and working cap. Help me think about why interest would drop maybe $30 million plus --when maybe net debt should be coming down in the second half?

I think there are a couple of things here. I think first of all, we do have -- there continues to be some market expectations for variable rates going up. We don't predict interest rates, but we do look the what the forward curve looks like just to make our variable interest expense. Second point here is that our peak working capital in this case has been in the third quarter. Right now we have -- it's been building and we have done a good job constraining it, but this does take into account the fact that the average debt balance -- the second half, we're expecting to be higher than the average debt balance in the first half.

Okay. That's helpful, but you still would expect a pretty healthy fourth quarter cash flow from the working capital?

Yes. The cash flow we experience in the fourth quarter is generally significant. That's a pattern that we wouldn't expect to change. The timing of that cash coming in is obviously important when you think about an average debt balance versus a [new] period.

Thanks helpful. Thanks.

Your next question is from the line of Himanshu Patel with JPMorgan.

How are you doing, Himanshu?

Good morning. Could you guys comment on the state of the industry, commercial vehicle tire inventories right now? How do you feel about both industry and inventories as well as Goodyear's?

To be clear, you mean commercial truck or you mean inventories in general?

Commercial truck.

Commercial truck. I would say inventories are still pretty good out in the channel in the sense that people are still buying. No one was long on inventory coming out of 2009. The channel was low and is starting to restock a little bit. We see an opportunity to sell more tires. As we look at is it, we see the commercial recovery is happening in each of our businesses and you notice, we increased the outlook, both in North America and European replacement in OE markets.

We saw, as you know, a significant commercial drop from -- in our business from 17 million units in ' 07 down to about 12 million in ' 09. When we look at our second quarter, we are on an annualized rate now, call it at about 14 million units. As the market recovers, we see our sales increasing. We see our factor utilization improving and we are building what we sell this year versus cutting inventories. We have an uncertain economy out there as you know as well. But ultimately for right now, we are seeing the recovery coming and we are selling more tires. It is not being impacted by any adverse inventory situation in the channel.

Okay. I wanted to go back to Darren's comment about you guys being hurt on the mix front because of a contractual increasing consumer OE demand. I'm curious. I know there is quarter to quarter issues on that. When you step back and look over the next three years, I think most people would argue that the rate of growth in North America in auto production from today's starting point for consumer OE is probably going to be greater than the potential rebound that could happen on consumer replacement. What are the implications on your business on that? That would seem to suggest that mix would only get worse for you guys because more and more of your consumer high value added tire capacity would be directed into OE as a percentage of total.

It's a good question and I will tell you how we think about it. As we have looked at our business over the course of the last few years, what you have seen is a lot of time spent on getting our mix right. If we go back, maybe more further than is relevant to the question, but to make a point, we had a very high share of OE and we had a lot of [shipments] that we didn't like. Systemically, we have worked that over a -- call it a five, six, seven-year period to get to a point where we like our mix much better today in OE than we did back then. That is a process that we will continue to go through. We have been very, very disciplined on our selectivity of what shipments we take and what shipments we don't. That's a process we will continue.

We still like the OE business, but we have got to make decisions that make sense for Goodyear on an MVP basis, meaning that we're going to put a tire on a new car that we have opportunities to put Goodyear tires at the first, second or even third replacement as we look at it. If we can't do that, we will make decisions appropriately. As you think about it going out, as you think about the market increasing, it is not a 1 to 12 correlation that OE goes up and replacement is constrained. We will continue to be to be selective in OE and some of that capacity will move into the higher margin replacement market. That's how we see the business going forward. I don't want to have you think that the situation we saw in the second quarter is going to be indicative of two and three years out.

Two last questions on the demand situation. Less about Goodyear, but maybe the overall industry. First on Latin America and then on North America. In Latin America there was sequential weakening on Q2 divisional process even though volumes look like they were slightly up. Was that all Venezuela sequentially weakening in terms of underlying demand? If that is the case, can you just give us a sense on what is actually happening there sequentially? Has the consumer at least stabilized there or are we still in a phase of sequential deterioration in there?

Himanshu, Venezuela obviously was the driver in the year-over-year decrease. Darren, made reference to those in his comments so Darren, maybe elaborate on that a bit more.

Himanshu, I think when you look at this sequentially, what we are looking at is continued issue in Venezuela, but I would not -- I wouldn't read into it that Venezuela was down from Q1 to Q2. The Q1 was our highest level of disruption as we went through a period where the government was adjusting rules and regulations for the new exchange regime. Second quarter, maybe slight normalization, but certainly not the benefit that we expected to get. I think second quarter was worse than we would have anticipated.

The sequential change in Latin America, there are a number of factors here. But there were some cost related issues there that we went through in the second quarter. We had some labor negotiations that had some cost implications for us and some things -- you will notice that in the list of significant items, there is one $3 million item that related to the settlement of a review of import taxes that we went through there. And that hurt them in the quarter as well. A couple cost related issues was really the big driver in terms of the sequential decline.

Venezuela is right now the big variable for us in Latin America. Year to date, we are down $60 million versus 2009 in Venezuela. We have changed the way we have talked about the full year impact. Previously we've said $50 million to $75 million. Now we are saying, it could be $75 million or a little bit more which takes us back to essentially what we were earning in Venezuela in 2008. 2009 was very much a peak earning period in Venezuela and 2010 is coming back down to levels where that we had seen prior to 2009, prior to that peak.

The good news is those markets are stabilizing. We've already secured -- some of the problem that we have had there has been importing raw materials and importing finished goods, particularly truck tires or that market. We have already secured the necessary import licenses that is we need for the second half. We have gotten the approvals we need to get import licenses for Q3 and Q4. That is a good thing. We are in the process of increasing our local production of truck tires so we don't have the concern about supply for that market.

There have been a lot of actions taken to deal with the increased cost that we've experienced there. It remains a difficult situation. We see improvement coming in the second half, improvement coming over time in Venezuela. The rest of Latin America, we see the business doing very well. We may have had a few unique cost items in the second quarter, but the Latin America and business model outside Venezuela continues to operate very well. The consumer and commercial in Brazil and other markets around Latin America, very strong and our teams are absolutely performing there.

I just want to add one thing just in the general sense because when we look at our earnings in North America -- Darren walked you through what we are seeing. But remember, disruptions in Latin America happen. I have always said that some disruption was going to come hit us. It happens to be Venezuela right now.

Really in my mind, you have to [buy for cake both] what happens when we have a one-off disruption like a Venezuela to our core business in Latin America and our team's ability to execute. Our core business in terms of product -- our product line has been essentially completely revamped. Our distribution, our customers, our people down there, our core business model will continue to move forward. Venezuela just happens to be one of a historical set of disruptions. We will manage through them and we will drive that business forward.

Thank you very much.

Your next question comes from the line of John Murphy with Banc of America.

Morning, guys. Just a question on the press release. You mentioned that sales in North America were positively impacted by $179 million of sales of chemicals, primarily third parties. Just curious what those end markets were and if that is repeatable. If there is real strength. I'm not sure what the end markets are there for that increase, and what the margin is on the chemical sales. Is it particularly high?

There are a variety of products that we sell. I'm not going to delve into all the particulars on them right now.

I think the performance of that business is really subject to market conditions. Sometimes it is very strong and other times, it is less strong, I'd say. That's how we think about it. We don't look at it as core. It is not something that we look as a core driver of what we have to do over the long-term.

Two additional points I would make, John. One, a lot of the revenue volatility in the chemical business is related to price indexing of the raw materials that go into the chemical business. While you see a lot of volatility on the revenue line, if doesn't necessarily go to our chemical customers, it doesn't translate through to earnings. It's effectively us passing through the cost of higher inputs to our chemical customers under contract. The volatility in revenue doesn't translate into volatility in earnings there. That is the first point.

The second point is the first half, we did see in North America some benefit to earnings as a result of what we refer to as our other tire related businesses, which includes chemical. It includes retail. It includes our Wing Foot commercial truck tire businesses. And we did gelt some benefit there. The first half of last year was very weak. The first half of this year was stronger.

As we go forward, that's not going to be -- it is not going to be a continued year-over-year benefit from those businesses because they have caught up to more normalized levels right now. Those are the points I would make on the other tire related business and the chemical sales.

Second question on [CapUt] on truck tires. In the first quarter, you were mentioning you were significantly below 50% CapUt. Just wondering if we are still within that same range in the second quarter.

John, we are higher than that and I would tell you increasing as we look over the balance of the year.

One last quick one. Obviously you gave us a lot of guidance on slide 21. Just wondering as far as pricing -- price hikes have been implemented. Any concern or even more positive outlook for pricing? What is your outlook for pricing in the second half?

John, we don't comment on pricing. Darren mentioned in his script the price increases that we've put in place. We are getting that price and some of that will carry over into Q3 so you will see a continuing benefit as we move on over the balance of the year. Again, our track record speaks for itself that we will continually look at price mix and look how we move the business forward.

Thank you very much.

Your last question comes from the line of Ravi Shanker of Morgan Stanley.

Thanks very much. A couple of housekeeping questions here. The raw material cost savings that you had in the quarter, is that -- you knew that in your four-point cost savings. Is that incremental to that or was already part of it?

Ravi, if you look at the segment operating income chart, the $133 million of cost savings, that includes $35 million of savings related to raw material cost savings actions.

Was that part of your billion dollar target for that plan?

It is.

Okay. The Venezuela impact, you said was going to be higher than the $70 million. Did you say where it was going to be?

No. What we've said is it could now be higher than the $75 million.

Okay.

Previously, we had been at $50 million to $75 million. We're at $60 million year to date. We expect it will get better. Q3 will still have a negative impact. Q4, the comparable gets easier.

Okay. As for my model, it looked like your corporate expenses were a bit higher than usual. Is that the case? Was anything going on there or is it going to be in the -- I have about $60 million. Will it be in that range going forward?

Yes. What you probably got -- what you probably see in there is partly the -- I don't know how you are going through to look at that, if you are looking for SAG or if you are looking at the reconciliation between the business units and the corporate figures?

Yes. That's what I do.

There isn't any significant trend there. We will go through the one time items and there is impact of a couple of one time items there, but I don't think you are seeing a significant trend.

Finally on timing of cash flows, you said that the seasonal build was lower than usual and [uncertainly of cash balance] was much better than I was expecting. Is it something to do with timing? Or is it just you guys are -- your building and material costs are going up. I'm surprised your inventory hasn't gone up more actually.

Darren, can address this a bit further, but I will tell you is we look at our supply chain efforts -- we have been demonstrating, particularly as I mentioned in certain of our businesses of driving our growth in our businesses with equal or lower inventories that we saw at low points over the course of the past few years. Our truck business now is operating with about half the inventory it had before in terms of units.

That's one of the things that we are looking at in terms of working capital. We are seeing the advantage supply chain initiative turning up in our inventory, and consequently turning up in benefits and cash flow. Now the working capital and cash flow story is certainly more complex than that so Darren, you may want to comment a bit further on how we are thinking about a full year cash flow and year over year.

We feel good about where the cash flow is, but there --- you recognized there are some significant differences between what we saw in 2009 and what we see and expect in 2010. Some of that will be more prevalent in the first half than it was in the second half. That includes higher capital expenditures, increasing from about $750 million last year to our guidance at $1 billion to $1.1 billion for 2010. Through the first half, we saw essentially the same on those last year. The increase was coming in the second half.

Working capital, we said this year we were expecting working capital to increase $200 million. What you have seen during the first half was less working capital build than you might have expected which says that there is still the view that as we have raw materials continue to increase, and as we continue to adjust our inventories to the higher growth rates that we have seen in the industry, that there will still be some cash that we use in the second half. You are looking at it the right way. We are absolutely proud of the performance that we have put in the supply chain. I think that will permanently change the amount of working capital required to run our business. But the cash flow outlook for this year, there are still some items that you will see coming in the second half.

Thanks very much.

Thank you. Before we close off here, I want to thank you all for joining us on the call today. I would leave you with a few brief thoughts. I'm very pleased with our second quarter and first half results. I like our industry and the growth potential it offers. I like Goodyear's position and opportunities to succeed within our industry and I believe we are doing the right things to capitalize on all those available opportunities. Thanks for your attendance on the call today. Go ahead and close the call now, please.

Thank you for your participation. This concludes today's conference. You may now disconnect.