Goodyear Tire & Rubber Co (GT) 2010 Q3 法說會逐字稿

Good morning and welcome to the Goodyear third quarter 2010 financial results conference call. All lines have been placed on mute to prevent any background noise. Operator: After the speakers' remarks there will be a question and answer session. (Operator Instructions). Thank you. Operator: I would now like to turn the call over to Pat Stobb, Director of Investor Relations. Please go ahead, sir.

Good morning everyone, and welcome to Goodyear's third quarter conference call. With me today are Rich Kramer, President and CEO, and Darren Wells, CFO. Before we get started there are a few items I would like to cover. To begin the webcast of this morning's discussion and the supporting slide presentation 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. A last item, we plan to file our 10-Q later today.

If I could now direct your attention to the Safe Harbor statement on slide two of the presentation. Our discussion this morning may contain forward-looking statements based on our current expectations and assumptions that are subject to risks and uncertainties that can 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 business review. 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.

Thanks, Pat, and good morning everyone. We appreciate you being with us today. Before I talk about Goodyear's third quarter results, which I would say I am very pleased with overall, I first want to share with you some observations about the tire industry, and where we are in the recovery. While cautious, I certainly feel much better about what we have recently been seeing in the economy and in our industry, especially in the context of what are forward-looking views were two years ago, when we saw volumes drop by almost 20%. We are seeing the associated benefits of the economic growth as global markets begin to recover, our industry and industry in general is on an upward tick. We are seeing evidence of investments in essentially every region of the globe, entire unit volumes, even in trucks, are trending back to higher levels at a faster pace than anyone had anticipated.

And I would note that we have raised our industry outlook throughout the year in Europe and North America, and in emerging markets, particularly Brazil and China, industry volumes are continuing to grow, and have already exceeded volume levels for each before the great recession. So what does all this mean for Goodyear? Well demand for our products is strong. Volumes are growing on a path to prerecession levels and our mix strategy is succeeding. Our plant capacity utilization is improving, and we have benefited from the ability to offer a strong value proposition with our premium award-winning products.

The bottom line is that as we look to the future, we feel good about the direction of the tire industry, and we feel even better about the direction as a Company. As I think specifically about our third quarter performance with the industry recovery as a backdrop, it was a very good operational quarter for us. We made progress in every one of our areas of significant focus. Together, these successes provide me a level of confidence that our third quarter performance is another positive step toward our next stage metrics. As we specifically look at some of the Q3 highlights, our unit sales continued to grow, reflecting not only the industry growth, but all share gains and targeted markets driven by demand for our premium products.

Our revenue was up 13%, or a couple points higher if you exclude the adverse impact of currency. The growth reflects higher unit volumes and increased revenue per tire with our North American business leading the way with a 17% growth. Our revenue per tire globally increased by 8% versus a year ago, reflecting our pricing actions, as well as a continuation of our planned shift in mix towards higher margin segments. Our price mix overall totalled more than $250 million for the quarter. An 8% increase in commercial truck tire volumes globally. We had higher levels of factory utilization and higher productivity flowing to the bottom line, and our year-to-date cost savings now total approximately $350 million.

Segment operating income in the quarter was $234 million, and while this is down from last year, it is higher than the second quarter in part reflecting our success and offsetting most of the sequentially higher raw materials of $157 million with strong price and mix. Also in the quarter, we continued to improve our balance sheet, completing $1 billion debt issuance and redemption that extended our maturities out to 2020.

Now looking at SVU performance for the quarter, I will specifically comment on two of our business. That is Latin America and North America. In our Latin American business, we had a great quarter, particularly in Brazil, although we need to disaggregate the numbers to fully appreciate our progress. Darren will review the results in more detail, but our Latin America business is essentially flat year-over-year despite a significant reduction in our Venezuelan operating income resulting from the currency devaluation.

The difference was made up by the remainder of the region where our Brazilian business led the way. Brazil continues to be a common bright spot for many companies this earnings season, and for Goodyear our Brazilian business has been a long time industry leader, with a leading distribution channel, world class low cost manufacturing, and a dedicated customer base, looking to grow profitably together with us. We remain well-positioned to take advantage of the stability in Brazil, and we see a path to continued profitable growth in the future.

Last quarter I laid out the path to a 5% segment operating income margin in our North American business. I am very pleased with both our third quarter results, and more importantly, the actions that drove them and the impact of those actions goes well beyond the quarter. Year-to-date, North American tire is slightly above breakeven, and its third quarter segment operating income surpassed the prior year, despite significant raw material headwinds. The success of our new product action drove a 7% revenue per tire increase. Our fill rates in North America's consumer business remain lower than we would like.

They are indicative of what remains a supply constrained industry environment, getting low inventories coming out of the recession. And improving OE business, which I think you know is contractually preferenced over our replacement business, also contributes to the replacement business fill rate challenge. Now in that environment, our orders remain strong, reflective of demand for our branded Goodyear products, and I would all point out that tire sell out or end consumer demand, remains generally below sell in to the channel. And as the US economy improves, we would expect consumer demand to improve, offering additional growth opportunities for our business.

Now in addition to improved price mix, our North American business remains focused both on improving its operating efficiency and improving the mix of tires they produce. Ultimately, our supply chain goal is to efficiently make only the right tires, thereby reducing investment and inventory while simultaneously improving our fill rates,and we are making progress.

Our plant leverage has certainly been improving as the industry volumes rebound. However, we all continue to drive productivity by producing more from our existing assets as well. I recently visited our factory in Fayetteville, North Carolina, where we make many of our newest products, and where I saw examples of double-digit productivity improvements being achieved. This is an excellent example of what is possible under our 2009 labor contract with the United Steel Workers, who have been and will be instrumental in achieving these gains. While we obviously have more work to do in North America, that visit gave me even more confidence in our ability to drive further productivity in our domestic factories.

Now as we look beyond the Q3 highlights and numbers, I thought it might be beneficial to talk about specific focus areas that likely align closely as about the future. The first area is raw materials, not surprisingly. The biggest question you may have, is whether we can offset the historic increases we have been experiencing. And my answer to you is absolutely we can. When you think about the raw materials headwinds we have been facing recently, the one with the most volatility right now, and consequently a significant focus of our efforts. Historically composing more than 25% of our total raw material costs, the range of prices over the past two years has been from $0.60 per pound, to the current high of around $1.80 which in our view makes little sense.

As we evaluate the market, we know that usage is increasing globally as economies recover from the recession, and emerging markets continue their growth. We continue to see ample supply to support our business needs, keeping in mind that usage in the industry is still below 2007 and 2008 levels. We also know the number of new plantings has increased significantly over the past several years, and is expected to continue. And over the past year, unfavorable weather conditions in southeast Asia, where most of the natural rubber supply is produced, has driven the perception that supplies will tighten.

And the futures market also has limited liquidity. For example, physical rubber going through the Singapore exchange represents only about 1% of the tonnage used each year. So it stands to reason in our opinion that the combination of rising demand and the perceived impact of weather on supply drives speculation. So you can think about the rubber markets as one where supply and demand may be playing a role, but where we believe speculation has taken prices well above levels that make any sense to us. Now that said, in response to the historic high pricing, we are continuing to aggressively substitute synthetic rubber for natural rubber where possible. We believe we have the best ability in the industry to substitute synthetic rubber in our compounds and we have increased technical resources to identify additional substitution opportunities.

We also are aggressively pursuing alternative raw materials such as BioIsoprene, developed in partnership with Genencor. We introduced the concept tire last year in Copenhagen featuring this compound. We are collaborating with Genencor to produce quantities by mid-2011 that will support production of test tires. And of course, we are continuing to focus on price/mix opportunities as we have historically done in the face of increasing raw material costs.

The second area you may be questioning is the sustainability of price mix. Our confidence in our ability to continue to deliver price and mix is tied directly to our innovation, the strength of our new product engine, and decisions we are making as we selectively focus on profitable growth opportunities. As you think about this, remember that mix is not only driven by products, but business mix as well. We continue to receive awards and third party recognitions that drive differentiation in the market place, and ultimately translate into consumer demand for our premium branded products.

Goodyear Assurance Fuel Max, a low-rolling resistance fuel savings tire we introduced in North America last year, has already sold more than 3 million units, and was recently given the Good Housekeeping seal. This product is a clear winner a segment where demand continues to stay ahead of supply. Also in North America, our Goodyear Eagle F1 asymmetric tire and our Dunlop SP Sport Max GT tire finished one/two among 21 competitive tires in the ultrahigh summer performance category testing, and earned a best buy recommendation from a leading US consumer publication.

We have got great product news in Europe as well. We achieved unprecedented success in recently completed winter tire tests, that are critical to the consumer purchase decision. In fact, I would go so far as to say that our Goodyear and Dunlop tires dominated the German winter tire test leader board. Goodyear/Dunlop had the number one tire in eight of the nine early German test results. In every one of those tests our tires were evaluated as highly recommendable. Most remarkable are the results from a 16 million member motor club, and a respected independent research firm where we placed four of our products among the top five. No competitor was even close to our levels of success. And this success is extremely significant, as winter tires comprise approximately 25% of the replacement market in Europe, and the category will likely continue to grow.

Furthermore, top positioning in the all important magazine tests, directly correlates consumer demand and purchase intent. Innovation and new products are not limited to the consumer segment only. I am also pleased to report that our development of a brand new 63 inch OT tire we expect to ship it later this quarter. I am confident these tires will deliver the performance end users are looking for in the mining industry as these markets continue their rebound. These new products demonstrate the technical advantage Goodyear brings to the industry by innovating, designing, manufacturing, and marketing the most technically advanced tires in the world.

We combine these product successes to our selective mix strategy as well. For example, in North America, we took the Kelly brand national replacing private label offerings, and improving our product mix of brand and share. And another example is our continued OE selectivity, where we have rigorously balanced volumes and profitability versus our consumer replacement business, where in many cases, we continue to have back orders. Mix versus volume orientation will remain an important part of our business strategy going forward.

Now the final area I will cover is our investment plans. We see significant opportunities in the tire industry as our markets continue to grow, and as consumers demand increasing levels of tire technology. Those opportunities offer high return investment alternatives. To make certain we are capitalizing on those profitable growth opportunities that will help take us to new levels, Goodyear continues to pursue an investment strategy focused in three areas. Increasing our low cost footprint, improving our ability to supply tires with increasing levels of consumer relevant technology, and driving profitable growth in emerging or growing markets. We increased our level of CapEx this year to more than $1 billion, to address the growth opportunities that we have targeted. This level of investment is about $400 million above the level to sustain our existing business.

As we consider these investments, we also perform a risk assessment of future demand. The tire industry is a cyclical industry typically following GDP trends. The data supports that view. So as the economy recovers and grows, so will the tire industry. And as I said, we are actually seeing that trend happen. We also see two significant differences in what is happening coming out of the recent economic downturn versus previous recessions.

The first is the continued strong and now sustainable growth and increased relevance of emerging markets, particularly in the BRIC countries, where GDP and car part growth continue at high single-digit or double-digit rates. A shift has taken place where we now see a trend of growth for these markets continuing for an extended period of time, with any disruptions likely slowing rather than reversing their underlying growth trends. In the past, these markets were arguably more volatile.

The second difference from previous recessions is the increasing complexity of tire construction, and higher demands on tire performance. These changes are driven by trends such as a focus on low rolling resistance for greater fuel economy, while not trading other performance attributes, such as wet traction, noise or tread wear. Increasing tire complexity and performance expectations will create demand for new products, I would suggest even in future periods of economic slowdown. This is particularly true in mature markets where tire performance continues to drive consumer purchases. The Assurance Fuel Max is a good example of this.

Tire labeling will further drive future complexity as performance thresholds in specific categories will be spelled out on the products for clearer consumer awareness. This trend, which we believe is here to stay, represents the most significant change to the tire industry in decades. It will place a premium on innovative technology and manufacturing capabilities, to deliver premium tires that meet these new performance criteria.

So as the economy recovers, as emerging markets drive more sustainable growth, and as tires evolve to meet the new levels of performance requirements, the solid underpinnings of a growing tire industry with the trend toward increased product differentiation are certainly firmly planted. With both the opportunities and risks in mind, we are pursuing two major investments that will increase our capacity in low-cost locations. The relocation and expansion of our Dalian China, and the expansion and modernization of our factory outside Santiago, Chile. Both of these investments will come on line beginning in 2011, and will increasingly add to capacity over the next three to four years.

We also have two US locations undergoing major upgrades to produce additional HVA tires,Oklahoma and our Fayetteville, North Carolina, plants. These upgrades are already adding to our ability to meet customer demand, and will add more value over the coming years. While capital is clearly important to our growth, our philosophy remains to first get more of the right output from our existing assets. Second, to use third party supply as we do selectively for non-Goodyear branded tires. Third, only then do we consider capital expenditures as a way forward. We see the investments we are making as addressing the parts of the market where we are going to play, while balancing that with a focus on cash flow and our capital structure.

In summary, when we think about the third quarter, combined with our prospects for the future, keep in mind that volumes are improving, our products are succeeding, the headwinds we face can and are being managed, we are making tangible progress in our North America business, we are managing and improving our capital structure, and we are investing where we strongly believe we will get the highest impact and the most profitable return. We are doing precisely what we want to do, and we feel very confident about our future direction.

With that I will turn the call over to Darren to take a closer look at the details of the quarter. Darren?

Thanks, Rich. Good morning everyone. Our third quarter financial results continue to demonstrate strong performance in each of our businesses. Absent the impact of the spike in raw materials, results would have been better than any time in recent history. This shows the benefit of our reductions in fixed cost, as well as improved business and product mix. And still leaves more opportunity as we further benefit from greater factory utilization, and have time to fully offset raw material costs. So third quarter results continued to demonstrate progress required to achieve our next stage metrics.

Taking a look at the income statement, our unit sales globally increased by 6%, and revenue increased 13% reflecting improvement in Q3, reflecting improvement in global tire demand, as well as improved price mix. Once again this quarter each business unit exceeded 2009 unit sales and revenues. Segment operating income in the quarter was $234 million. Price mix benefits of $252 million were among the highest we have seen over the past several years, and led to an increase in revenue per tire of 8%. Our ability to achieve price mix at this level reflects the continued success of our brands and innovative products in the market place, and strategic decisions to focus sales on the most profitable brands and distribution channels.

We experienced high raw material cost of $412 million, an increase of 30% consistent with our expectations. The 2009 period reflected the low point in the raw materials cycle. Natural rubber bottomed out in 2009 at about $0.60 per pound versus $1.30 at the end of June, and about $1.80 today. While we have been successful in off setting raw materials over time, during short periods of rapid escalation like we saw in the third quarter, the benefits of price mix don't always match up.

Looking at the sequential comparison, that is the comparison between the third quarter and the second quarter this year, we increased segment operating income despite over $150 million sequential. increase in raw material costs We were able to do this by nearly offsetting the sequential raw material coast increase through price mix improvements. I should mention that our year-to-date price mix remains about $220 million ahead of raw material costs. We are confident our strategy will allow us to offset raw material cost increases over time, and there is nothing in the market we see today that would change our confidence.

Focusing next on volume. Year-over-year tire sales increased by 2.7 million units in the quarter, and higher production levels drove an improvement in unabsorbed fixed costs. With production levels in Q2 up about 6.5 million units from the prior year, the amount of unabsorbed fixed costs in Q3 was $75 million lower than a year ago after considering one quarter lag. On per unit basis, this is slightly below our guidance of $12 to $14 per unit, as consumer production has come back faster than commercial production. On a year-to-date basis, we have been recovering around $12 per tire.

While not broken out separately, our other tire related businesses provided only a small benefit in the quarter, as raw material pressures affected these businesses as well. In the third quarter, we realized about $70 million of cost savings, raising the total to about $350 million through the first three quarters. Unlike the second quarter, where the savings were weighted toward head count reductions versus a year ago, this quarter we saw savings focussed in the area of raw material costs, given the significance of that challenge to our business. Of the $70 million in costs achieved, of savings achieved, over $30 million was the result of efforts to take advantage of lower cost sources, substitute lower cost materials in our compounds, and reduce the amount of material required to produce each tire.

While our third quarter cost savings remain consistent with our plan, we are driving to add this performance going forward, as we further improve manufacturing efficiency, take plans footprint actions in high cost locations, see the benefit of seven day operations at our remaining plants, and continue to drive further back office consolidation. As anticipated, pension expense continued to decline in our North American business in the third quarter. Currency hurt our international earnings primarily reflecting the effects of the devaluation in Venezuela, and the weaker euro versus the US dollar. The euro fell 8% versus last year to an average of $1.31 in the quarter, although recent trends were favorable. While not broken out in the chart, actions taken in Venezuela to improve business results since the devaluation are having a positive impact, and reduced the year-over-year effect in Q3. I will update you on the situation in Venezuela as I discuss the business unit results.

As we turn now to the balance sheet, you see that working capital increased about $500 million, reflecting seasonal factors related partly to winter tire sales. Together with higher raw material costs and pressure from improved demand. Q3 typically reflects cash usage for increased working capital ahead of cash in flows in Q4. As we stated previously, for the full year we expect working capital to be a use of no more than $200 million.

Looking at our debt maturity profile, we completed several transactions in the quarter that collectively eliminated bond maturities between now and 2016. In August, we issued a total of $1 billion of 8.25% senior note with a maturity of 2020. Proceeds were used during September to repay $713 million of notes coming due in 2011, and $260 million of notes due in 2015. This now leaves us with no significant maturities other than the refinancing of our secured credit facilities over the next five years.

On the last conference call, we commented that we were in the process of evaluating the new pension relief legislation. Pension relief legislation which was signed into law on June 25th allows companies to reduce near term pension funding by allowing unfunded amounts to be funded over longer periods of time than the standard seven years. During Q3, we completed a complex and comprehensive analysis of the alternatives offered under this legislation. The rules and requirements related to each alternative, the impact on beneficiaries of each of the plans, and the cash flow impact that changes in contributions will provide. This analysiswas conducted for each of Goodyear's six US qualified pension plans. Using this analysis, we elected the nine year contribution period, also known as two-plus-seven.

As a result, we now expect our US contributions in 2011 to be at about 2010 levels. Remember that we had been expecting an increase in 2011 of about $250 million. Our expected US contributions for 2010 remain unchanged at $200 million to $225 million. Future years will also benefit from this.

Turning to the segment results, North America reported segment operating income of $5 million for the quarter, which compares to income of $2 million in the same quarter of 2009. Sales in 2010 reached $2.2 billion, an increase of 17% over last year. This increase in sales was supported by a 5% increase in unit volume, with 18 million units sold in Q3. The results in North America reflect a continuing operating improvement in the face of substantial raw material costs. Despite $148 million in raw material cost increases, North American tire was able to produce earnings results of above prior year levels.

Our strategy of focusing on growth in our branded tire business specifically the Goodyear, Dunlop, and Kelly brands, helped us increase replacement sales in Q3 versus the prior year, even though the consumer replacement industry was down 6% in the same period. As a result, we again gained branded share, and grew share in total. I will remind everyone that the third quarter of 2009 had sell-in levels, what tire makers were selling to dealers, at higher rates prior to the imposition of tariffs on Chinese imports in late September of last year. The impact on Q4 was the opposite, and volumes were artificially low in Q4 last year following the implementation of the tariff.

The consumer OE industry experienced strong year-over-year growth, with an increase of 18% in the quarter, despite 2009's third quarter sales being aided by government incentives. Commercial truck industry conditions continued their trend of improvement, with the replacement industry increasing by 14%. Freight tonnage increased by 5% in September over the 2009 levels. September marked the tenth consecutive month of year-over-year gains, driven by improving economic activity and inventory restocking across sectors. Commercial OE industry volumes improved by 35% on strong truck levels.

North America's revenue per tire increased by 7% over 2009, on the effect on price increases to offset higher raw material costs and overall favorable product mix. Strong OE sales served to reduce the benefit of mix as this volume comes at the expense of higher margin replacement business. North American earnings improved on higher sales volumes, improved conversion costs, which reflect the benefit of fixed cost recovery on higher production, as well as lower pension costs. These year-over-year gains were partially offset by raw material cost inflation exceeding price and mix improvement. We recently announced price increases at up to 6% in consumer, and up to 8% in commercial, both effective October 1st, to combat further raw material headwinds. Although the full impact of our price increases will not be felt until Q1, given back orders and lower seasonal volume in Q4.

Europe, the Middle East, and Africa reported segment operating income of $77 million in the quarter, which compares to $106 million in the 2009 period. The 2010 results reflect sales of $1.7 billion ,and volume of 19.1 million units, a 7% increase in both sales and unit volumes.

Industry growth was solid in the quarter. The consumer replacement tire industry was stronger versus prior year driven by strong winter tire demand. This was partly offset by consumer OE, which decreased 5% driven by a pull ahead in sales in the first half, ahead of the determination of government incentives. The commercial replacement tire industry grew by 13%, and the commercial OE rebounded with industry volumes almost double a year ago. EMEA sales growth reflected an improving economy, new innovative products, and stronger business mix, coupled with price increases to offset higher raw material costs. Revenue per tire excluding the impact of foreign exchange increased 7% versus Q3 2009.

Within the region, strong execution by our team in eastern Europe resulted in a 17% volume increase versus Q3 2009. We continued to gain market share in Q3 in both consumer and truck in the emerging markets of EMEA. Recall that our sales in EMEA were also reduced by the termination of our agreement to distribute certain tires produced by Sumitomo Rubber, which represented about 1.8 million units in the full year 2009 results. The weaker euro versus a year ago negatively impacted the sales for the quarter by $100 million.

EMEA segment operating income decreased $29 million, mainly driven by higher raw material costs of $154 million. Stronger volume along with price and mix in Q3 partially offset raw material costs. In addition, stronger production volume resulted in a benefit of $32 million from lower unabsorbed fixed costs in our factories.

In Latin America, we reported segment operating income of $95 million on sales revenue of $569 million, which represents a revenue increase of 17% on a 4% increase in unit volume versus the prior year. Similar to what we saw in the second quarter, segment operating income compared to a year ago reflected two offsetting factors. Our business in Brazil and other countries outside Venezuela increased earnings by $20 million, an outstanding result. This improvement was more than offset by a decrease in earnings in Venezuela of $24 million, which I will discuss further in a moment. The increased sales reflect a strong pace of economic improvement in most of the region, especially in Brazil where the latest GDP statistics show second quarter growth of almost 9%.

Excluding Venezuela, the consumer replacement industry growth has been robust, at nearly 10% and the improvement in OE has been even stronger. The commercial industry volumes increased more than 10% in replacement, while commercial OE volumes were up well over 50% versus Q3 last year. Price mix benefits more than offset higher raw material costs in the quarter, while also helping to address the currency devaluation in Venezuela.

Coming back to the situation in Venezuela, the adverse environment continued to have significant impact on segment operating income in Q3. Segment operating income versus 2009 in Venezuela declined by $24 million, compared with the second quarter, however, earnings in Venezuela increased about $13 million. The improvement versus Q2 was driven by both our actions to increase local production of truck tires, and pricing actions initiated to offset inflation. To put Q3 in perspective our Venezuela business is now running at profitability levels last seen in Q4 2009. So good work by the team there.

Our Asia Pacific business reported record third quarter volume and revenue. The fundamentals of the business remain strong, as Asia's volumes increased 8%. Sales were up 14% versus the same period last year. China and India continue to perform well, displaying strong demand, strong mix, and market share gains in consumer replacement.

Second our operating income for the quarter was $57 million. The year-on-year decline in earnings was due primarily to our price mix improvement of $23 million, not fully offsetting rapidly rising raw material cost increases of $35 million. The impact of these rising raw material costs is particularly acute in Asia. Asia is closer to the natural rubber supply, and has lower finished goods inventory. Thus the impact of raw material price changes is reflected quickly in Asia's earnings. We remain confident that over time our Asian team will recover raw material cost increases through price mix.

Other business segments in the region are also showing strength with record agricultural tire volume in both OE and replacement, and trends in the OTR segment remain favorable. 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. This new factory will produce its first tires next year, and should reach its full capacity by 2014. Our Asia business is an excellent business, and as Rich said, we are positioning ourselves for continued success going forward. So across all of our business units you saw evidence of successful execution of our strategies, continued volume growth, improving price mix, benefits from higher factory utilization, and strong performance in both our consumer and our commercial businesses.

Turning now to our outlook for the remainder of the year, we have updated our views, including our expectations for industry volumes and raw materials. As you can see on slide 21, industry volumes continue to be a good story. We continue to expect growth in the key market segments for North America and Europe, and have increased our expectations somewhat. The impact of tariffs on Chinese tires last year in Q4 creates an easy comp, so consumer replacement industry volumes in North America will be stronger than the full year average. Alternatively, consumer replacement in Europe during Q4 is expected to be down a few percentage points versus prior year. Commercial volumes in both regions during Q4 will be in line with that of our full year guidance.

Looking at raw materials, natural rubber prices have increased measurably since our call in July. While this was not factor in Q3, given the lag through inventory, there will be a moderate impact in Q4. Raw materials are now expected to increase at least 35% in Q4 versus prior year, compared to our previous expectation of about 30%. Inaction onpricing so that the year-over-year difference in price mix versus raw that we saw in Q3, will only widen slightly in Q4. We expect this to further improve during the first half of 2011, provided the rate of raw material price increases moderates, as our price increases take full effect.

For modeling purpose we now expect 2010 interest expense to be about $325 million. We reconfirm our prior guidance of a 25% to 30% tax rate on foreign segment operating income. For third quarter at 30% was at the top of the range, with the same expected for Q4. If you recall on the last call we said that the tax rate in the second half will be higher than what we experienced in the first half. We provide a range to reflect the fact that the calculated rate can move from quarter to quarter, depending on the geographic split of profitability.

Our outlook for CapEx remains unchanged, with a significant level of investment expected to be completed in Q4. As we look to Q4 and beyond, you can expect our progress to continue. We remain very positive regarding the long-term prospects for our business. Global growth and continued demand for higher technology tires provide significant opportunity for Goodyear. This will allow us to continue to improve our operating results, leveraging our richer mix of products, a shift toward lower cost manufacturing footprint, and growth in emerging markets.

Now I will open the call up for Q&A.

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

Good morning. Firstly, I know you said this, but it was kind of quick. Can you tell us what the north America OE and replacement passenger did in the quarter?

Sure, Rod. North America, you are asking about North America OE? North America OE we had OE up 18%.

And replacement?

And replacement down 6%.

And you said you outperformed on both of those?

Yes. So what we said, is we had increase in replacement volume in the quarter, versus an industry that was down 6%.

Okay. Thanks for that. I guess maybe just a little bit more color on how we should be thinking about the North American margins going forward. The volumes obviously have come off the bottom. You are facing a pretty intense raw material cost headwind, and you are going to be adding some price in here. But it sounds like raw materials sequentially continue to go up into Q4 and maybe into Q1. How should we be thinking about this trajectory to get to 5%? Can you just maybe give us a couple components from a bridge from this breakeven level that you are at right now?

I think if we go back to what we said last quarter, it is probably a good place to start. And I would tell you our confidence from what we said last quarter hasn't diminished at all. I might say it has even increased, given that as we look to North America, we improved quarter to quarter, despite a significant raw material headwind. So in other words, we offset that headwind with stronger price mix and cost savings. So I think from a trajectory perspective, we feel pretty good about where we are going.

If we look at a bridge broadly speak about that path to 5%, again, I would tell you we see volumes increasing, both in terms of margin and in terms of overhead recovery. Remember we really hadn't seen much of the truck business come back yet, or at least in a way that the consumer markets have come back. We will continue to be aggressive on price mix versus raw materials with our goal of offsetting it. And as you know, when we had periods of these high raw material costs in a quarter like that, price mix lags a little bit, but ultimately we catch up and we will offset. I suggest or pass it, as that raw material number comes down. Also from a North America perspective, we see incremental cost savings coming in both beyond the plants filling, but for some of the cost structure improvements including the USW savings. Remember, that is worth $100 million-plus as we go forward.

As I mentioned last quarter, we also contemplated footprint action as we go forward. Finally I would say over the long term run, pensions is something that we have had a significant headwind versus 2007. It is getting better, as Darren mentioned on the call. But we have little control over what happens there. As you know, we stopped new entrants into the hourly plan. We halted our salary plan a while ago. What we are really dealing with is the impact of asset returns and discount rates. That is going to, Darren will talk about that a bit as well. That will actually increase on us as we look to next year, and we look at discount rates going down. So between volume, price mix and raw materials, the cost structure actions, footprint actions, and pension, that is ultimately how we are going to get there. In terms of trajectory, I would say no change in terms of how we thought about it. We are on a path to do it.

When you think about the raw materials versus the pricing as we go from Q3 to Q4, and then Q4 to Q1, it sounds like raw materials will be the bigger driver as you get into the fourth quarter. That implies some margin compression. Then you start to make up the difference. Do you see the net of those from this point as being a positive, and if so, when would that happen?

Maybe if I can take a step back and just give a little bit of perspective again. We talked a lot about this on the call. It might be worth just reiterating some of the points. In the quarter we saw about little over $400 million, or a 30% increase in headwinds. And that is pretty much where we expected it to go. Again the driver was natural rubber. Q4, as Darren mentioned on the call, now we are looking at least 35%. So we will see an increase for the next quarter. And again, it is driven by natural rubber being up around $1.80 a pound.

But when we look at that, just to give you a way to think about this, when we look at the fundamentals of what is driving that price, because I think it goes to the long term of where price mix catches up with raw materials, and eventually reverses itself, in terms of price mix sticking, and raw material coming down a little bit. As we look at the raw material markets, we still struggle to see the cause of the high raw material costs. Natural rubber clearly is up as the economies are growing. We also know that there is ample supply out there today, and usages aren't even back to where they were in 2007 and 2008. And plantings have taken place already.

So we know the supply is growing, and yes, there has been a lot of bad weather over there. It has really given a perception of a supply disruption, but not one that we physically see. We really struggle to see the logic in the sense of natural rubber being as high beyond a speculative impact at this point, so that is what gives us confidence that it will balance out and reduce over time. But no prediction on when. Certainly that is something that we would anticipate happening, just as it did sort of at the end of 2009 and into the beginning of 2010.

Now what are we doing about it? You saw in the quarter, we had $252 million of price mix in the quarter, which is an excellent performance at or near our highest price mix in any quarter. We have had three price increases since December of last year. Our new products are out there, and supporting those price increases in a significant way. And sequentially, year-over-year we are down, but sequentially we almost offset almost $160 million of cost increases quarter to quarter.

And in North America we actually had higher EBIT quarter to quarter, year-over-year, as I mentioned. As a corporation we came within $40 million of segment operating income from a year ago, offsetting almost all of that $400 million increase. So we see it. We still see raw material going up, but we are doing the actions on the product and price side. And we have redoubled the efforts on product substitution, looking at the weight of the tires, looking at new materials that we are going to put in here. Of course, we will continue to revisit price mix. Of course we will continue to take costs out in other places. So I think we are doing all of the right things, successfully doing the right things to deal with it.

And over the next couple quarters, again, with the way raw materials turn, we know we are going to have a headwind, but we think we are doing the right things to catch up to it, stay ahead of it, ultimately. So that is how we think about it. Q4 will be a headwind, as you think about rolling over Q1, we are not giving guidance on, but our rollover is about six months particularly in North America, a little over six months. So we are going to be with the raw materials. There is nothing out there that we really can't manage.

Can you give us just as a data point what your year-to-date pension performance has been? And my last question is, you are seeing a lot of competitors raising capital and ramping up capital spending. A lot of that is going into emerging markets. Are there any implications for Goodyear at this point from this, or for the industry? Is there anything that would concern you in terms of relative spending levels?

Let me have Darren address the pension cost, and I will talk about the investments.

So, Rod, on pension, we have got two issues. One is a funding issue and the other is the impact on the P&L. You heard us say on the call that from a funding perspective, we have benefited from elections we have made in the funding relief program. So that now instead of expecting a $250 million increase in funding next year, we are expecting funding levels in 2011 at about the same level as 2010.

Take that though, that means we are contributing less, which net/net does create an additional expense. Because we have fewer assets in the plan. But if we look at where we are year-to-date, we have now through September 30th, have a 7% return on our portfolio. So closing in on the 8.5% return that we assume for the purposes of our calculations, and our forward view of expenses. So 7% return is obviously helpful. It is better than where we have been. I think we are in pretty good shape there.

The last thing that we will have to think about as we look forward is the discount rate. And if we look at discount rates at the end of September, they were down around 80 basis points from where we were at the end of last year. And that will start to have an effect on 2011 expense,not until the second quarter next year, given the lag through inventory. But we look at that and we say we are going to continue to get benefit from lower pension expense through the fourth quarter, and through the first quarter. And then the impact of the lower discount rates will start to hit us in Q2. So I think the outlook on pension ultimately is benefit in Q1 similar to what we have been seeing, and then an increase in Q2 through Q4 next year of a lesser amount. So ultimately not much change in 2011 versus 2010.

And Rod on the investment side, I will just tell you, we see again very significant opportunities of the tire industry growing around the globe. We also see the demand for, as I mentioned, the increasing technology in the tires that are going to be sold. And in that environment I would say our investment priorities remain very consistent. And that is to increase our low cost manufacturing capabilities, and also improving our ability to supply those tires that consumers want with a consumer relevant technology. And also driving profitable growth in emerging markets.

And that I just add, we see those, we see great opportunities for growth in emerging markets. But again we are going to be focused on profitable growth in our targeted segments. Those segments we have consistently defined as where Goodyear brands and technology offer a very strong value proposition. That is where our focus will be. We took our investment, our CapEx up to $1 billion. We are expanding low cost facilities in China and in Latin America and in Chile, and we are upgrading our facilities in North America to make more of those tires that the market wants. I would just say not withstanding what other companies are doing, we remain with a very disciplined CapEx process. We look for high return investments. We think the investments we are making are high return investments. We will balance that off with our focus on cash flow and our capital structure.

Okay. Thank you.

Thanks Rod.

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

Good morning, I just wanted to follow up on the pension question. Two issues. Number one what kind of constraints do you have when agreeing to the two-plus-seven? I think I remember reading that there were some restrictions on compensation, and things like that, that were sort of tied to utilizing that legislation.

And then the other thing, I mean, what do you think about, there has been some discussion about it. What do you think about potentially raising equity to try and sort of once and for all reduce the underfunding, or do you think that just the combinations of kind of more normalized interest rates, and ROA going back up to parity with your assumption, or maybe over will be enough to kind of get you to that funded status you need?

I think fair questions. Let me hit to the relief legislation first. Because I think that is a quick one. Then we can talk a bit about capital structure, and the way that we think about that. We add pension into our other debt-like obligations, as we think about what our leverage is.

From a constraint perspective, we don't view anything significant with the pension funding relief. There are some provisions in there, I think the ones that you are referring to, are provisions that provide that the amount of contribution reduction can be affected in a small way if there is payment of what they deem to be excess compensation. Not a significant item for us. We can go through the specifics of that. But overall not a big impact from our perspective as we elect two-plus-seven relief.

The more important question is, how do we deal with this obligation over the long term? As we see the discount rate likely coming down, although everything is going to be evaluated at year end. We are looking at a discount rate reduction of 75 or 100 basis points, based on where things were September 30th. And that is going to add, could add another $300 million, $400 million, $500 million to the unfunded obligation. Obviously, the interest rates can go the other way. I think when you look at the unfunded obligation, along with our debts, our debt as being the obligations that we have to deal with.

We look to have a capital structure in the long run that would have debt plus our legacy obligations to EBITDA, to the EBITDA we would add back the legacy expense. But have that ratio be no more than 2.5 times. We will achieve that metric over time. We will achieve it by improving earnings. We will achieve it, hopefully by interest rates normalizing and getting some return on the assets. We will obviously make contributions to the plan over time. And that is going to be one of the uses of cash that we have, although less of an issue for 2011 than it had been.

And then looking at our capital structure in the long run, we don't put a timetable on this, we wouldn't rule out using capital market transactions to help in the process as we have done in the past. But there is nothing there that is on a specific timetable. I think we keep all of the alternatives open as we think about how we get there over time.

Okay, great. That is helpful. One final one. Can you tell us a little bit more about your outsourcing strategy? You have talked about some of the rejiggering you are doing in North America to HVA tires. How much is outsourcing kind of a core part of your 5% SOI target in North America? And I guess you have eluded to a little bit of that with your additional footprint actions that you mentioned were sort of likely to happen. And kind of how much does this outsourcing model sort of work into your North America manufacturing strategy, and over what time period would we be talking about?

Just to make sure that we are on the same page, you are referring to having third parties produce tires for us?

That is correct, yes.

And that is fine. I think we have talked about in the past, as we went through and discussed where our production was last year, that given the tires that we produced and the tires that we sold, we had about 10 million tires produced by third parties. And partly that is partners that we have, that we have joint ventures with, and partly it is third parties who are suppliers for us.

So I think you start off and say, that 10 million tires is a global number. Obviously some of those would relate to North America. But I think as we go forward, the level of tires that we have had produced which have been nonGoodyear branded tires, has been important to us, but not a critical element. You have heard us focus more on branded product as we have worked on improving the mix in our business. So I think that those are things you've heard. Rich, I don't know what other things you would say.

The only thing I would add to it. Darren is right, it is not strategic to what we are doing. The way that we think about third party sourcing, and again some of our partners give that to us. It is not all sort of outside third parties, if you will. Is that it is really a different source of a way to get tires without having to invest more capital.

Our focus is not only getting the high return capital investments for the investments we make to supply our tires, but also to get the most out of the factories that we have. So as a philosophy and particularly in North America, our first pass is going to need to make those branded tires in the factories we have appearing higher efficiency, higher output with the capital investments to make more of the tires that the market wants. That is the first priority. That is where we see higher efficiency gains, higher plant utilization, and higher margins on the branded tires that we will make out of there.

So if you think about it philosophically, that is the path that we are moving on to as part of our path to 5%. Not an outsourcing strategy to do that. Now in other parts of the world, we have gotten third party sourcing, and we have managed it very effectively. It works when we need volume. And it is manageable when those volume demands go down with industry fluctuations.

Great. Thanks. Very helpful.

Thanks.

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

Good morning guys. I wanted to go back to North America a little bit. I understand that it was maybe a transitory quarter in terms of the price mix raw materials spread, and over a few quarters maybe that washes itself out. I guess just at a basic level, your volumes are at about $18 million this quarter, and if you assume, I think you voluntarily exited about 10 million or so of annual private label volumes, which I would say that is $2.5 million per quarter. Kind of add that back in. Your business is about 20 million units of North American volumes pro-forma, which is not that far off. Actually 20.5 millionis pretty much what your unit volume was in the third quarter of 2007. I guess just at a basic level, it doesn't really sound like volumes are kind of the real issue at this stage. Is the real issue here that you just need to take another bite at the apple, in terms of sort of going deeper into North American restructuring? And is that a discussion that you need to have with the unions at this stage?

Darren, you can answer this as well. I will tell you, we don't view the union as the hindrance to getting to our 5% metric. We signed a contract with them in 2010. That contract gives us the flexibility to do what we think we need to do to drive the business forward. So I think as we look at this, we have a path forward, and as you look at, we have a path forward to 5%. As I mentioned it won't go 3 to the elements. When you look at that versus 2007 and where we are now, remember we still have commercial business that is not at the level that, the production level that we want. So we are carrying along still a significant amount of unabsorbed overhead in the P&L versus 2007 we do have a significant amount of higher pension expenses going forward. Those fundamental cost issues are still there when you look at us versus 2007. Volume has come back but we still have work to do on the cost structure as we move forward. I think we recognize that, and we have plans in place to do that.

So Rich, if I could add a couple things to that. What we are saying for North America is clearly we have got additional cost structure to take out. And we have got flexibility under the contract to do that, both productivity at the existing plants, plus the flexibility. We have got a plant that is unprotected in the contract. We look at this and say we are going to have to take advantage of every opportunity to cut costs. No question about that.

If we come back to the price mix equation, I don't want it to be, I don't want to lose the fact that if we are just looking at how things are evolving sequentially. As we move from the second quarter to the third quarter, right, the cost from quarter to quarter increased over $150 million. We were still able to raise our, increase our segment operating income as a Company over that time frame. So we are finding ways. Granted, some of it is price mix. In the case from second to third,we were able to almost offset that $150 million of raw material cost. But we are finding other ways, including cost savings, to make up the difference. We take a lot of satisfaction in the fact that we are able to hit that trend and improve our earnings from Q2 to Q3.

I just want to add one other quick point. And that is that when we look at North America, we are looking at it in the aggregate. We don't split out each of the businesses consumer, commercial, what have you.

But I will say when we look at the consumer business, both replacement and OE, between our ability to address price, our mix changes, which are very significant, we referenced those on the call. But the focus on business mix changes from products to channels, all of those types of things are working very effectively for us. We are, I would tell you doing an excellent job with price in the consumer business as well. And when I look at that, I am very confident and where we are going and our biggest segment of that of our North American business. Truck is still a lag. It sort of mutes some of the bigger successes we are having in the consumer business.

And you guys in the past have, I think, indicated that you have got about 17 million units of annual commercial vehicle production capacity. Could you just update us on kind of what your production rate was annualized in Q3, relative to that level?

Himanshu, what we said, our peak was selling about 17 million units a year. Through the middle of this year we have gotten ourselves back up to a level of about 14 million units run rate. And that is roughly still where we are. So we have still got some significant opportunity to go up from here, both in terms of sales of commercial truck tires, but very importantly, the utilization of the commercial truck factories, which they are still operating at, even as have we ramped up production, I think globally we are still at something like three-quarters of, only utilizing three-quarters of our capacity for commercial trucks.

But also, Himanshu, all trending in the right direction. We see significant increases in the OE business globally. That is still off a high base. Coming off to a low and the working its way up. The commercial replacement businesses are trending in the right direction as well.

Okay. And then could you help us a little bit with the pace of cost savings that we should start thinking about over the next few quarters? You mentioned that there was some difference in the sources of cost savings in Q3 versus H1. How do those items interplay over the next few quarters? Just directionally should we think about the pace of cost savings sort of being where we were in Q3, or going back to where we were in H1?

Himanshu, that is a good question, and I would tell you we still feel very strongly about our proven track record at driving significant cost savings in all areas of the business, and I can tell you will remain a very significant focus for us as we go forward, year-to-date we are at about $350 million in cost savings, and that keeps us on track to the $1 billion target that we put out there over the three year period, 2010 to 2012. So we feel very much that we are on track with our goal. Now as you rightly point out we had about $70 million in the third quarter, a lot of that was this quarter was weighted towards some of the raw material substitution and raw material savings that we did, as opposed to second quarter where it was more weighted toward the benefit of head count reductions we took in the prior year.

The other portion of the savings that we had in the quarter still relates to a big focus that we have around manufacturing efficiency, through our low cost sourcing, through a lot of the continuous improvements, like the Lean Six Sigma initiatives that we have, on getting the standards in place with the USW contract and realizing the savings that that contract offered to us. And also continuing to focus in on SAT savings from back office efficiencies that we have put in, in various places around the globe. So I would tell you we feel good about where we are at, but I would also tell you that we are not going to stop there. We need to continue to get more savings out, that is where our focus is, we are focused on getting more efficiencies out of the factories now, and are implementing our Goodyear operating system. As Darren mentioned, there are planned footprint actions around the globe, and we continue to get more volume back, which we should get more efficiencies out as we get to seven day operations. So all said, comfortable with where we are at, but we are not going to stop there, we are going to keep going after it, both on the material side and the efficiency side.

Okay, thank you.

Thanks.

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

Hey thanks for this. Just on the trucks again, I think you said you had about three-quarters utilization at the end of this quarter, can you remind me what that was at the end of the previous quarter?

Yes, we have continued to ramp up our commercial truck production, but I think that between the two quarter, and I will look here as we are going forward, but I don't think it is too much of a change versus where we were at the end of the second quarter.

Okay. So we haven't really seen any price mix or volume benefit from improved mix of commercial versus consumer?

No, so I think the commercial truck growth has been, has started to be significant, but the consumer volume has recovered faster, particularly consumer OE. So there is opportunity for us going forward for increased mix to come as the truck producers ramp up their production and as the commercial recovery continues. So I think there is an opportunity there for improved mix for more commercial truck tires.

Got it. And one of the things that I was starting a little bit to grasp was, how you guys had this pretty decent price mix deal wins this quarter. But it seemed like your revenue per unit actually declined sequentially in North America. And also how you got this really big jump in Latin American margins when your volume was pretty flat sequentially. So just trying to see if there is something mix related going on there?

Yes. Well Ravi I think I can tell you we had about an 8% increase--.

7%.

7% in North America, 8% overall. 7% increase in North America tires. So I have to say that I am very pleased with that stat, I think we did a good job of driving that going forward. And in terms of Latin America, I would tell you Latin America is a combination of aggressive price mix, given the raw material headwinds they have had, driving our costs down, you will see our SAG there continues to be below 10%, and the price mix there really being driven by the new product portfolio there, I think we have got about a 75% turnover of new products in the region, and that is helping not only drive demand and volume, but also getting what we believe is the right value out in the marketplace for those products. And we continually say that tough circumstances in Latin America, a lot of volatility from time to time, but our team does a very good job of managing through that.

Yes. Alright. I will just follow-up offline for that detail on the revenue per unit thing. But finally, what portion of your most recent price increase was included in this quarter?

So the most recent price increase that we had was effective October 1st, so you wouldn't see the impact of that price increase in Q3. I think as you go into Q4 what you will see is that given the back orders that we had at the end of September, and the fact that the prior price would apply to those back orders, you will see only partial impact of the price increase October 1 for the fourth quarter, and then you get the full impact of it starting in Q1.

Got it. And remind me again if you had a price increase in the fourth quarter of last year that might make the comps there hard?

Yes, the price increase that we had last year was December 1st.

December 1st, okay.

So what you will see is pretty limited impact of that in Q4 a year ago.

Understood. Thank you very much.

Thanks Ravi.

Okay, that concludes today's call. Chanelle can you please close down the call? Thank you.

Thanks everyone.

Thank you.

Thank you for joining the Goodyear third quarter financial results conference call. You may now disconnect.