Goodyear Tire & Rubber Co (GT) 2011 Q2 法說會逐字稿

Good morning. Welcome to the Goodyear Tire & Rubber Company second quarter financial results conference call. (Operator Instructions)After the speakers remarks, there will be a question and answer session. I will now hand the floor to Greg Fritz, Vice President of Investor Relations.

Thank you, Christina, and good morning everyone. Welcome to Goodyear's second quarter conference call. Joining me today are Rich Kramer, Chairman and CEO, 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 own or web site at Investors.Goodyear.com, additionally a replay will be accessible later today. Replay instructions were included in our earnings release issued early this morning. If I can now direction your attention to the Safe Harbor statement on slide two of the presentation.

Our discussion may contain forward-looking statements based on our current expectations and assumptions that are subject to risks and uncertainties. These risks and uncertainties, which can cause our actual results to differ materially, are outlined in Goodyear's filings with the SEC and 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 to the agenda, Rich will provide a business overview, including second quarter highlights and accomplishments. After Rich' s remarks, Darren will discuss the financial results and outlooks before opening the call to your questions. With that I'll turn the call over to Rich.

Thanks, Greg, and good morning everyone. Please join me in welcoming Greg Fritz, our new Vice President of Investor Relations. I know some of you have already been working with Greg and we are certainly glad to have him on board. So Greg, welcome to the team. Today we're very pleased to report outstanding second quarter results, highlighted by record sales, a significant increase in segment operating income, and the continued successful execution of our strategy.

The most impressive results were delivered by our North American tire business which delivered earnings of $137 million, marking its most profitable quarter since 1998. In total, all of our businesses continue to make solid progress in achieving price-mix improvements through innovative product offerings in targeted market segments. This is consistent with the strategy we shared with you earlier in the year.

In April, we reiterated our belief that our strategies and objectives were the right ones and our first quarter results provided evidence of progress. We are very pleased that our second quarter results indicate that we are executing our plan and staying on pace to hit our targets. Now as I usually do, I'll cover a few topics before turning the call over to Darren, then taking your questions. First, I will call attention to some accomplishments that were important to Goodyear's outstanding second quarter results, then I'll share my thoughts on a strong performance we saw in our North American tire business, and try to put in context.

Then finally, I will provide a prospective on the second half of the year, and our longer term outlook, touching on the challenges and opportunities that lie ahead. The first accomplishment I would like to highlight in Q2 is our top line performance. We achieved total sales of $5.6 million, the best quarterly total in our Company's history. Likewise, three of four regions achieved record second quarter sales.

The second accomplishment, is our execution on price and mix, which more than offsets significantly higher raw material costs. As we've previously discussed and demonstrated, price mix improvement has been an effective and necessary response to unrelenting raw material cost headwinds. All four of our regions fully offset the raw material cost increases in the quarter. I'll make further comments about price-mix in a few moments when I discuss our North American business.

The third accomplishment is maintaining our focus on pursuing sales in targeted market segments. Our revenue per tire grew 18% from a year ago, while the industry volumes were weaker overall, there remained strong demand for our premium innovative products in both emerging and developed regions. Additionally, we are continuing our focus on operational excellence. Across our global footprint being we are improving our ability to make more of the right tires, leading to a richer product mix and increased customer service levels.

Our efficiency in eliminating low value tires and moving products from Union City to our other plants, facilitated closure of that factory ahead of schedule. This action is also consistent with our plan to reduce high cost capacity which we've detailed for you in previous calls. Our new products also were critical to further accomplishments in the quarter. In Latin America, high technology Fuel Max and AquaMax tires were launched across the region.

Though it's been an extremely hot summer for many of us, Europe is all ready preparing for the winter driving season. Goodyear and Dunlop will continue their leadership in winter tires, with more new products being introduced this year to build on the existing portfolio of award winning products. Our European business also delivered significant year-over-year and quarter-over-quarter improvements, driven by successful price-mix performance.

By keeping our focus on targeting summer tire market segments and getting off to a fast start if winter tire sales, we were not significantly effected by softness in the Southern European markets. We continue to see strong growth for our innovative products and India's target market segments, including commercial trucks, and we'll keep adding to our portfolio of award winning tires. In China, Assurance Fuel Max was named Auto Trend Magazine, Tire of the Year, topping all competitors and becoming the publication's highest rated tire ever.

Fuel Max received perfect grades in nine of the ten performance categories. That's outstanding for us. Our growth in Asia is being supported by an expanding retail present in China, as we opened 64 new retail stores in June, alone.

In 2010, Goodyear was named both Retail Brand of the Year, and Employer of the Year in China, and our expanding retail presence fortifies both of these positions. Much of our recent commentary about our Asia Pacific business has focused on our new factory in Pulandian China. I'm happy to report a significant accomplishment for our team there. In June, the first tires for public sale were manufactured in this facility.

Crossing that threshold was an important step for our operations, for our presence in China, and for our opportunity for growth in the region. Our new Pulandian facility will double our capacity over our existing factory, providing the basis to continued growth, consistent with our strategy of winning in China. But perhaps the quarter's most significant accomplishment and best illustration of how we're executing our plan, is in North America. The momentum that was apparent in the first quarter, continued over the past three months.

Segment operating income was $137 million, which corresponds to a 5.7% segment operating margin, a level we have not seen in North America in more than a decade. We achieved these strong results by focusing on new innovative products for our key targeted market segments. For example, the newest generation for our most popular tires, the Assurance TripleTred All Season, hit dealer shelves in the quarter. In fact, this week we launched a 16-city ride and drive tour for customers to experience the new TripleTred.

We're very proud of it. We have sold more than 22 million Assurance tires since we launched the sub-brand in 2004 and we expect the new Assurance TripleTred All Season will build on that success. Now, in addition, we continue to address our business portfolio by shifting to in demand, branded products, and being selective about (inaudible) to assure we receive an appropriate return. Also, we are well-positioned for the rebound of the commercial tire segment with a full portfolio of business solutions.

In the month of June, our FleetHQ Service Program got 22,000 immobilized trucks back up and running, the highest monthly total since program's inception three years ago. We also have introduced important new products, such as innovative wide-based tires that help reduce fleet operating costs. These super singles offer both the fuel efficiency of Fuel Max technology, and the puncture resistance of DuraSeal technology. Now, during the quarter we also priced proactively for the value of our products to address increasing raw material costs.

These results will be difficult to repeat in the second half, because of increasing raw material cost challenges and uncertain economic conditions. As we said repeatedly, we are confident that we can offset increasing raw material cost over time with price mix, but we expect periods where we cannot recover these increases as they result. As a result, we believe our Q1 earnings are more indicative of our current earnings run rate in North America.

Now, as pleased as I am about our exceptions results in North America, and more importantly the initiatives driving them, the level of earnings in the second quarter is not yet sustainable. It's more reasonable to expect progress toward our 2013's earnings target of $450 million will be made with steady, but smaller steps. Looking at our Businesses in total, we are seeing execution of our strategies, with measurable results from our focus on price and mix. Progress on North America's path to sustained profitability, continued strength in Europe and successful activation of our investment for future growth in Asia and Latin America, improvements in operational efficiency, and success with innovative products in targeted market segments.

I believe that these outstanding results are further confirmation that we're on the right path to not only the 2013 targets, but towards our long-term target of creating sustainable economic value. In the second half of 2011, we expect the global tire industry to continue to grow, but recent trends have affected our outlook somewhat. We see the recovery and developed markets remaining sluggish overall, driven in large part by two things.

The first is a genuine macro-economic concern, relative to the prevailing debt issues in the US and Europe, which is have a discernable impact on confidence among customers. The second is a more balanced relationship with sell-in to the dealer channel, versus sell-out to the end users. So the debt is not entirely available and transparency here is difficult, but the trends seem to have emerged.

While sell-in was stronger than sell-out during the first quarter, we're now seeing lower sell-in volumes. The balance seems to be shifting towards meeting consumer demand and away from inventory restocking, a trend perhaps not surprising given the existing economic uncertainty. This is a trend that we will watch in the near term, but since consumer demand has not yet returned to pre recession levels in mature markets and since dealer inventory does not appear high, clarity in the economy or other positive catalyst should improve demand over the long-term.

Relative to the emerging markets, we see higher structural inflation and the resulting effect on growth rates. Of particular importance to us is the strength of the real in Brazil, which continues to bolster the import market, putting pressure on domestic manufacturers in many industries, including tires. We saw the impact of these factors on segment operating income margin in the regions this quarter. To be clear, we still see growth opportunities in Latin America and emerging markets.

However, these dynamics reminds us that volatility remains despite an optimistic future. Now balanced against some of the challenges, is continuing strong demand for our high value added, branded products, which in many cases remain short supply. We see industry growth in areas such as consumer OE tires, particularly as the Japanese auto makers continue their recovery from the effects of this year's natural disaster.

European winter tires, it's harsh weather last year, and increased winter tire legislation have dealers preparing for high consumer demand, and in commercial truck tires in North America, as the transportation industry continues its recovery. I'll also remind you that while higher volumes may indicate a healthier industry, our focus on targeted market segments leads us away from volume simply for volume sake. We will stay disciplined in our approach to price-mix and focus on selective profitable segments, that's our strategy and we're going to stick to it.

Now, we're facing substantial raw material cost increases in the second half of the year as well, these are conditions that we're now familiar with, and show no signs of abaiding. That said, we remain focused on price-mix as a way to address these raw material cost increases. Darren will provide financial details of the anticipated raw material cost impact in the second half of the year. Now, on the volatility we see over the second half of 2011 is a reality of our industry, we remain confident in long-term opportunities.

The growth of HDA tires in mature markets will continue, and the strong GDP growth in emerging markets will sustain the expansion of the middle class and subsequently the need for tires. I will reiterate that we believe in focusing on targeted market segments where we can drive value for Goodyear in our customers. We believe in operational excellence in everything we do as a source of competitive advantage, and we believe that innovation in our product is the key element that differentiates our tires and, in fact, our Company from the competition. So there are significant challenges ahead.

We are very pleased with our second quarter results. They offer further validation of our strategy, reward our execution, and strengthen the confidence in our plans, our products, and our people. We are on the right path and we firmly believe that we are on track to reach our 2013 targets. So I appreciate your attention and now I'll turn it over to Darren to take you through the financial details. Darren?

Thanks, Rich, and good morning. As you heard this morning, we generated a significant increase in segment operating income during the second quarter, despite having to manage through a substantial increase in raw material costs. Our Q1 call, I pointed out that raw materials were rising at a rate well beyond our historical ability to offset them with price-mix. Needless to say, I'm very happy with the price-mix improvement of $554 million that we achieved compared to the prior year.

Far more than we have ever achieved in a quarter. This substantial increase was a result of several factors. First, we realized the benefit of our price increases. Given the sizeable increase in raw material costs inflation, this has been critical to our results, and reflects the strengths of our brand and product offerings.

Second, our targeted segment strategy drove improved mix during the quarter. Our product mix was favorable in all regions, as we were able to deliver more of the tires consumers were shopping for. And third, we saw a continuing recovery in the commercial truck markets, which added to our ability to achieve price-mix. To put our performance into prospective, we've now nearly offset raw material cost increases that we've seen over the trailing four quarters in aggregate.

As we consistently maintained, the timing of price-mix actions and raw material costs increases, are not always directly in-sync and I'll stick to that statement. But I've also said that we're confident in our ability to offset raw materials over time. Q2 adds to our solid track record in this respect.

Turning to the income statement, our second quarter revenue increased 24% despite a 2% decline in tire unit volume. The revenue increase was largely due to improved price-mix, which explained 14 percentage points of our revenue growth on a year-over-year basis. Favorable other tire revenue in foreign currency explains the remainder of year-over-year improvement. Coming back to unit volume.

We saw uneven trends during the quarter. As Rich explained, US consumer demand softened as dealers worked through some of the first quarter pre buy. EMEA consumer unit volume on the other hand, continues to shows growth during the second quarter, driven by early ordering of winter tires. We maintained our gross margin percent of sales despite the adverse impact of year-over-year increases in raw material costs.

Selling, administrative and general expense increased $83 million, to $753 million during the quarter. Foreign currency translation accounted for $57 million of the year-over-year increase. As a percentages of sales, SAG declined 140 basis points to 14.3% over the quarter. We reported segment operating income of $382 million, which I'll discuss more in a minute.

Excluding discreet items, our second quarter effective tax rate as a percentage of foreign segment operating income was about 22%. For the year we continue to expect our effective tax rate to be about 25% of foreign segment operating income. Second quarter after tax results were impacted by certain significant items, including restructuring and debt prepayment. A summary of these can be found in the appendix in today's presentation.

Turning to the segment operating income step chart, can you see the benefit of price-mix in $554 million, compared with raw material costs increases of $428 million. In addition, during the second quarter, we generated cost savings of $78 million, net of the USW Profit Sharing Program. Our second quarter savings are consistent with the plan from 2010-2012, and keep us on track to achieve a billion in savings over the three year time period.

Out of the $78 million in savings, $47 million was the result of efforts to substitute lower cost materials in our compounds, and to reduce the amount of materials required to produce each tire. Our cost savings largely offset the $80 million impact inflation in the second quarter. Higher production levels continued to drive lower unobserved fixed costs versus the prior year.

The benefit of $39 million was generated on incremental year-over-year production of 3 million units in Q1, after a one quarter inventory lag. This result, coupled with the first quarter unabsorbed fix cost improvement of $81 million, puts us on track toward a full year improvement of at least $175 million, much of this has already been realized through the first half of the year and we currently expect the remaining improvement will be spread about evenly over the next two quarters.

Favorable foreign currency translation, driven by a weaker dollar, resulted in a $28 million benefit for the year, or from the prior year, and as anticipated, pension expense continues to improve if our North America business in the quarter. Lower unit volume had an unfavorable impact at $12 million. The other categories, primarily reflects higher advertising, start up cost for our new factory in China, the sale of the Latin America farm tire business and transportation costs.

These increased costs were partially offset by the non-re occurrence of last year's $20 million adverse ruling in a six year old product liability case. As I have done for the last few quarters, I want to take a few moments to discuss our sales and unit volumes for the global consumer and consumer businesses separately. Our global commercial business continued to see strong growth. New truck production rates remained robust as markets continued their recovery.

As is the case in Q1, the improved factory utilization and higher volumes in commercial trucks, contributed significantly to earnings improvement in North America and EMEA. On the consumer side we experienced lower unit volumes. This reflected lower OE production and a lower North American consumer replacement industry, which follow add strong Q1. For both consumer and commercial, you can see the higher revenue per tire, driven by both price-mix and favorable foreign exchange.

Turning to the balance sheet, our net debt increased from the first quarter, as we saw $500 million increase in working capital. The working capital increase was mainly driven by seasonal requirements, higher unit raw material costs, and a weaker US dollar, but also reflected higher inventory levels, given weaker industry volume in the quarter, which gave us an opportunity to catch up on inventory to improve service levels for our customers. We expect working capital to be in use of $300 million to $400 million of cash for the full year, reflecting seasonal improvements in the second half and the benefits of our working capital initiatives, offsetting much of the cash in the first half. The slightly increased outlook reflects the opportunity to catch up on inventory.

Turning to segment results. North America reported segment operating income of $137 million in the second quarter, which compared to income of $16 million in the second quarter of 2010. North America unit volumes were down, as industry volumes for consumer replacement and OE each declined approximately 4%. Commercial industry demands continues to see strong gains, with replacement demand up 9% and 0E up 57%.

In addition to the benefit of price-mix of $216 million, more than offsetting $131 million of raw material costs, North American earnings continued to benefit with ongoing reductions in unabsorbed overhead, and lower pension expense. Higher year-over-year production levels in our plant in Q1 resulted in North America recovering of $20 million in unabsorbed fixed costs. Cost improvements were partially offset by higher USW profit sharing as a result of higher profitability levels.

Given the recent consumer industry volume trends, we were able to execute our Union City closure on July 11. As a result of this action, we expect to generate $80 million of annualized cost savings beginning in 2012, part of our recovery of unabsorbed overhead in North America. We will not be net savings in 2011 given savings are temporarily offset by product ramp-up and other transition related costs.

Our second quarter North America results, demonstrate we have the right strategy, targeted market segments, industry leading innovation, and a continued focus on cost reduction. Evidence of the strategy is visible if the price-mix improvements, in the increases in branded share for consumer replacement, and continued cost improvements in the quarter. Looking forward, however, we see current earning run rates more consistent with Q1, as raw material costs pressures increase in the second half, and we lose the benefit of high third-party chemical income that we had in the first half. Europe, Middle East, and Africa reported segment operating income of $126 million in the quarter, which compared to $73 million in the 2010 period.

The 2011 results reflect sales of $1.9 billion, a net sales increase of 34%, on a 2% increase in unit volumeRevenue per tire, excluding the impact of foreign exchange, increased 19% year-over-year. Industry unit volume reflected strong growth in emerging markets, as well as a 23% increase in the winter segment, partially offset by a 5% decline in the summer segment in Western Europe. Consumer OE volumes increased slightly and commercial was stronger, with replacement up 12%, and OE up 56% compared to a year ago. The stronger Euro and other currencies versus a year ago, favorably impacted net sales for the quarter by $222 million.

EMEA segment operating income increased $53 million, reflecting primarily price-mix of $199 million, more than offsetting $135 million in raw material costs increases. Strong winter volumes help to support improved mix. Results were also favorably impacted by $17 million benefit from lower unabsorbed fixed costs, driven by higher capacity utilization in our factory.

Latin America reported segment operating income of $54 million during the second quarter, compared to $66 million in the prior period. These factors impacted our Latin America year-over-year results. As previously announced, we sold our farm tire business to Titan on April 1st. This negatively impacted the year-over-year segment operating comparison by $8 million, consistent with the $30 million to $35 million annualized impact we discussed on the Q1 call.

Second, structural cost inflation, we were unable to offset with savings actions. And third, unique cost related to the ramp-up the Chile manufacturing investment In addition, our Latin America business is experiencing some adverse market dynamics, including the strength of the Brazilian Real, which has significantly increased import competition at the lower end of the market.

Our team recognizes these challenges and is putting into place actions to address these market dynamics. Our Asia Pacific business reported another very impressive quarter. The continued strong demand from China and India helped mitigate ongoing weakness in the Australian and New Zealand retail environment, and softening OE demand.

As a result, Asia Pacific reported segment operating income of $65 million, a year-over-year increase, even with $10 million of start up expenses associated with the ram-up of our new factory in Pulandia China. Foreign currency was favorable by $7 million, reflecting mainly the stronger Australian dollars. Price-mix improvements were more than able to offset raw material increases. Overall, we continue to be pleased with permanence and opportunities we see in Asia and particularly in China going forward.

Turning to our industry outlook, we have tempered our full year expectations for North American consumer replacement demands, given some of the recent trends and overall macro economic uncertainty. We now expect full year industry growth to be flat to up 2%, which implies a flat second half replacement industry in North America. Our EMEA consumer replacement industry outlook remains unchanged.

Our assumptions in North America and EMEA for consumer and commercial OE businesses are also unchanged from the prior quarter. On the commercial truck replacement side, we see stronger demand trends within the North American industry, which is now expected to grow 10% to 15% in 2011. In EMEA, we expect commercial replacement growth of 7% to 11%, inline with our previous expectation.

For Goodyear, we now expect full year unit volume growth will be at the low end of the previous range of 3% to 5%. Looking on raw material costs over the balance of the year, we expect cost increases of move than 30%. In the third and fourth quarter of the year, we are projecting raw material costs increases approaching $600 million in each quarter.

These increases will represent a substantial sequential increase from our second quarter level, as the lag effect from recent raw material increases moves through the P&L. Our outlook for interest expense, tax rate, and capital expenditures remain unchanged. That completes my outlook comments.

Overall, we feel very good about the progress we've made as a Company in executing the key elements of our strategy, and we feel we can focus on the things we can control as a Company, while we manage through an uncertain macro-economic environment.

Now we'll open the call up for Q&A.

(Operator Instructions). Your first question comes from the line of Itay Michaeli, with Citi.

Good morning.

Good morning, and congrats on another good quarter. Just a couple of questions on pricing and mix, really three. One, if you could breakdown price versus mix in the quarter? Two, if you could maybe talk about the second half of the year, you guys have beaten your own expectations for price and mix.

It was very strong again. I think last quarter you thought it might be even, and it was a positive quarter, maybe talk about how to think about the second half of the year. Lastly, weigh in on how you're thinking about pricing in general and why some of the volume softness and macro softness we're all seeing now.

I'll start, Darren might add something as well. I think relative to price mix, we don't break out price mix separately. I think it's safe to say we've had strong performance in the price mix equation in the quarter. Relative to a second half outlook, I guess there's a lot of things happening relative to volumes, as well as raw materials, and I guess maybe I'll just focus on our outlook relative to how we're thinking about raw materials.

I think the best way to frame this, and the way we think about it even strategically, is that we look at our track record and our ability to offset raw material costs increases with price and mix, and we've got a very good track record as you look back at where we've been over the course of the past few years, and I think even with the performance we saw, the timing of our price mix actions and the raw material increases that we see as we've often said, don't always happen in the exact same period and we really don't feel any different about that as we look at the second quarter and how we think about the outlook there. I think Darren's comments, my comments talked about volume a bit in the second half. Clearly we were pretty clear in our comments.

We're sticking to our guidance of 3% to 5%, maybe a little bit on the lower end right now, but year-to-date we're comfortable with that number and we're going to continue to watch volume really as it relates to some of the macro economic concerns out there, which we feel is probably the most significant thing pressing on volume risk right now as we look at the balance of the year. That said, we still feel very confident in the direction that we're taking the business. Your last question about price, about how we think about price and volume over the back half of the year and price mix and volume. You know, I guess the way we think about this is, we put a strategy out in March, and we're going to stick to that strategy, and that strategy is really about focusing on our targeted market segments, focusing on our brand business, and focusing on innovative new products, that's where we're going to continue to focus.

We're not following a strategy of volume for volume sake, so we're going to stick to that strategy. Our goal is to get value from the product innovation that we bring to the market, and it's to recover the raw material costs that we put into the products that we sell. We're on that path, we're going to stick to it. We expect, as we think about our long-term outlook, that there's going to be bumps in the road.

The tire industry doesn't grow in a straight line, at least it hasn't since I've been in the industry. That's okay. We're continuing to deal with it proactively, as a sign of that is taking our Union City plant out, so we're going to continue do that with a focus on cash going forward rather than volume, and we think we're prepared to deal with some of those bumps that come to head, some volume disruptions we may see in the second half. That's how we think about it.

That's very helpful. Then just one more on the lags on raw material increases. Can you maybe just remind us on what those lagz look like today, particularly the differences that might exists between natural rubber and synthetic? particular?

I think our general guideline is we give a one to two quarter lag, between the time we buy raw materials and the time they're reflected in our cost to goods sold. For synthetics, it would generally be more like the one quarter lag. Natural rubber tends to be more towards the two quarter lag, particularly in our European and North America businesses. Latin America and Asia get natural rubber a bit quicker than that.

Thank you so much.

Thank you.

Your next questions from the line of rod Lache from Deutsche bank.

Hi, everybody. I was hoping you could clarify what you said about your expectations for North America margins. Are you suggesting the 2% level that we saw in the first quarter is kind of sustainable despite higher raw material costs expectations you have right now .

I think, Rod, as we think about the North America results in the second quarter, I'm very pleased with what we did to get there, both tactically around how we had to react some of the raw material headwind that we saw and while still driving some of the strategic initiatives that we have. I think the first quarter was demonstrative of the capability that we're building in North America. Clearly we saw those positive developments as we look at it. Now, we also said that we had very good price mix performance, versus the raw material headwind in the quarter, that said, I will go back to what we've said, we've got a very strong track record of offsetting those raw material costs increases with price mix, but not necessarily every time in the same period, and I think that's what brings us back to say that as we think about the tactical execution, the strategic capabilities that we're building, we feel more comfortable going back and saying Q1 is more indicative of the run rate we see in North America at this time, on our way to the strategic targets we put out there going forward. That's how we think about it.

So you're not necessarily commenting on the second half necessarily on that 2%? Am I hearing you correctly?

Yes. I think, Rod, the way we think about it is looking to Q1 as a run rate, but it doesn't deter our confidence in terms of our capability to get to our targets, and it also doesn't deter our confidence based on what we've done in the past, relative to our ability to offset raw material costs headwinds with price and mix.

And just on the pricing question. Are you seeing evidence that the industry is working to offset this recent increase in Butadiene prices that you've been seeing? Maybe you could give us some feel for what you would see as the second half pricing on the year-over-year basis, if there were no additional changes from here, just relative to that $600 million year-over-year cost inflation that you were talking about.

Rod, I think we don't comment on what the industry is doing. We just look at what we're doing and our focus is again on recovering the raw material costs that we have in our products through price mix and drive that through the new products and with our leading innovation in those products going forth. That's what we can control. Those are the things that we focus on and again, we can't predict quarter-to-quarter exactly how price mix versus raw is going to come out, but we know in time we can recover it.

Just lastly, hoping can you comment on maybe on the unusual things that happened in the quarter. For example, as European mix unusually strong for this part of the year just given winter tire starting early, is the chemical business unusual this period, and obviously the inventory building that's occurring, is that now kind of behind us?

Rod, the points you made are the right ones. There were some things that helped mix in the quarter, no question. You know, in Europe the fact that winter orders have started earlier than they have in past years, that's helpful. The fact that the commercial truck business has been strong in North America and in Europe, also helpful for mix, and the fact that OE was down a bit given that OE margins tend to be lower, also a bit of help on mix.

We have to understand the impact of that going forward. I think good mix performance even beyond those factors, but those factors help. The chemical profitability in North America in the second fourth, in fact, the first half contributed to some earnings improvement. We don't consider that something that's going to continue, so that's one of the comments we made just to confirm that. And I think we're now at a point where we're much more comfortable with where our inventories are.

I think we talked about it over the last three or four quarters, that our inventories were below where we really wanted them to be and it was putting pressure on the service levels. We had an opportunity to catch up a little bit and rebuild the inventory, so our opportunity to service the customers to go forward should be better and more inline where our inventories are. Having said that, we're not looking to increase inventory as we go forward here, so I think going forward we're going have to be tracking our production with the sales office. I think that's the question that you're asking, but that's the way we look at it now.

Okay, thank you.

The next question comes from John Murphy with Bank of America Merrill Lynch.

I wanted to follow-up on this inventory line of questioning. It looks historically like historically the second quarter has been the high point of inventory and you've worked off in the third and fourth quarter a little bit of that. Is there the potential that you could see the benefit on inventory work down in terms of cash flow? And also just curious the other working capital items if there might be some benefit as we go through the third and fourth quarter?

I think the point you're making is the right point. The middle of the year tends to be the high point in our working capital, in particularly in our inventory. We would expect the same this year. As we look and gave our outlook that says we that we expect working capitol to be a use of $300 million to 400 million of cash this year. We have used a lot more than that through the first half.

Yes, we do expect to work down inventory and reduce working capital from here through the end of the year. That is a typical pattern for us. We look at working capital overall, I think the place where the increases come is clearly in inventory. Our receivables have continued to be good. Accounts payable has continued to be a contributor to working capital improvements. As we look at the rest of the clear, clearly there's going to be a lot of focus on our working capital initiatives, not just counting on seasonality, but looking for ways to improve working capital practices to continue to get that cash back from the balance sheet.

Okay, so there's no reason that the seasonal factors, seasonal pattern we've seen historically would change dramatically?

No, I think you're still going to see the working capital reduction between now and end of the year.

The second question on the outlook, as we look at the changes that you've made as North American replacement being a little bit weaker than you expected previously and commercial replacement being a little bit stronger, that would indicate that mix in aggregate for the year on the margin would be slightly better than you had expected before. Just curious, is that a fair characterization because that's implicitly what you would assume from this change in outlook?

John, I understand what you're saying. I think you do have to think about the fact that the OE volume will be coming back in the second half, as we recover from the Japanese events, and having that OE volume higher volume tends to work against mix.

Gotcha. Be relative to the previous forecast, would you presume that mix, based on this, you would presume it would be a little bit better.

If you're looking at the full-year outlook, yes.

Okay. And then just to follow-up a little bit. In the consumer replacement North America with this weakening of volumes relative to your expectation, is there any pressure on the price hikes that the industry or Goodyear is passing through, or are they still going through just fine, and conversely is there maybe a little bit more pricing power in commercial replacement because demand is improving relative to your expectation for the industry and Goodyear?

I think, John, the best way that we can talk about our price mix is really looking at whether our price and our mix is sticking in the marketplace is looking at the performance in the quarter, I think that's probably pretty indicative with what's happening in the market, the comments you've made about consumer replacement outlook I think are accurate on point. I still let you know from a mixed standpoint, while we are seeing some softening, we still see strong demand for the branded products, The Assurance Line, the Eagle GTs, the Forteras and what have you. So while certainly there is some softness particularly on the lower end, I want to be clear that there still is good demand out there for our premium products and that's a positive thing for us, both for volume and for mix, as we look out over the second half.

Now clearly we are going to keep an eye on what happens over the second half. I think if we look at year-to-date, our North America business, our business overall is pretty well inline with expectation as to where our volume is. The uncertainty we see is really some of the reactions both by dealers or our customers, then consumer and how they think about what's happening about the whole uncertain macro economic situation that we're all living through right now. I think we're seeing that trickle in a little bit, and what we have to manage is what does that ultimately do for us over the second half.

We still feel good about the business. We still feel good about where it's going, but as I said earlier, we're going to stick to our strategy of selected or targeted market segments, we're going to stick to premium products, and we're going manage our business that way. We're not going to go back to inventory builds or selling tires for volume. We're going to focus on cash, we're going to focus on winning, and our strategies are targeted market segments.

That's how we're going to react as we go forward to. To reiterate the point, to the extent that we get a little bump along the way or some bump in the road, we're going to work our way through it. That's the tire business, that's what we do, and I think we're well-positioned to do it and our track record say we know how.

Rich, to follow up on the pricing specifically in the quarter, were price hikes sticking better than you would have expected and was that a big benefit in the quarter? I'm just trying to understand how the pricing power is developing, because it seems like it's much better than most people would have expected.

Again, I can only speak to our business and I think our strategy, our pricing actions that we've taken have been very successful thus far and that's why you see the results in the second quarter.

Lastly, on that end. Sounds like you had a little bit more competition from imports. I'm just trying to understand the competitive environment down there, because it seems like that's pressuring the business a little bit. Is there anything changing as far as the domestic manufacturing base down there that would pressure you, or is this purely a currency issue that's making imports more viable for the time being.

You know, John, it's a relevant question, a good question, and Darren and I were just down there and had really a hands-on look on what's happening in the business. Darren, maybe elaborate a bit more on what we're saw in the environment we're seeing.

Fair question. I think the last couple of quarters we've had, call it some unique events that have affected Latin America results adversely. Again, this time the earnings from the farm tire business, which was a profitable business down there, has been pulled out because it was sold on April 1st, and we do have some cost for the ramp-up for our manufacturing plant in Chile, which has begun building sellable tires. So we do have a couple of those things going on. Couple of things that are factors here.

One, there is a significant amount of inflation, wages, energy costs, and I guess costs of all types beyond raw material costs, and that's a real factor for us. It's running at levels that are beyond what we're typically able to offset with improved efficiency, and that's putting pressure, and that pressure does contribute to the overall cost of manufacturing products there. It's true for Goodyear, it's also true for other industries, so it's true for the whole tire industry there and it's true for other industries. In addition to the inflation, the currency factor compounds the situation, and makes imported products much less expensive.

Again, has really started to challenge some of the manufacturing that takes place within Brazil in particular right now. I think what we see ourselves doing, and first of all to be clear, our team has dealt with a lot of volatility over time in the Latin American markets and they've dealt with a lot of changes as the Brazilian market matures and goes through this long period of stable growth. We're confident that they're going to be able to deal with this as well. Ultimately, we've got a strategy of being in targeted market segments and that's true in Latin America as well.

As is the case in other parts of the world, the import competition issue is much more a factor at the low end of the market than it is the high end. Our ultimate goal will be in segments of the market in Latin America where our technology and our products have the best value proposition, that's where we're going to be focused. Ultimately, our team is good at this. They deal with volatility, they're able to continue to produce good results even through challenging times, and we have confidence that they'll continue doing that going forward.

So the 8% to 12% operating margin that we saw in the first and second quarter, second and first quarter; is that the kind of rate we should be thinking at? You guys have typically been in that 15% to 16% range for the last couple of years down there. I'm trying to understand if we're seeing something that might be lower than that 15% to 16% range structural.

So I think that a couple of things have happened to address that directly.

One, the inflation in raw material costs, even to the extent we are able to offset it with price mix, that inflationary pressure tends to drive margins down.

So compared to history, there's clearly a couple of points of margin decline that's just related to passing through raw material costs. If we then take the impact of the farm tire business, there's probably given the sales and earnings that we've given up there's another point or so that we've given up as a result of that. There's a couple of things there that have created some decline in margin that I guess are a bit artificial. The business environment there has put some pressure on for now, and we're lock for our team to back and deal with that, and get back to levels of profitability that are consistent with our history down there, and we're confident that they're going to be able to do that.

Great, thank you very much, guys.

Thanks, John.

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

How are you?

Good.

Two questions. Rich, I think you spoke earlier about Goodyear's inventory. I'm wondering in North America whether you could offer some anecdotal color industry inventory level on the commercial side, as well as the consumer side?

I start with consumer, I think that when we look at inventories right now, I think we see them in pretty good shape, meaning they're not excessive. Himanshu , if we go back to what we've seen, we saw consumer replacement strong industry in the first quarter, and we saw that as a result of both restocking and perhaps buy ahead of some of the price increases that were coming, and that was again building up from what were very low channel inventories over the past call it 18 months prior coming out of the great recession. We saw a little bit of building and again we saw slower volume growth in the second quarter, so we see more of an equilibrium between selling into the channel and selling out of the channel for consumer.

The way I think about, that the way we view it, we kind of try to equate it to what's happening on sell-out and we just think about this from a longer term prospective, sell-out has really in North America in particular, has really not gotten back to the levels that it was before the great recession. Yes, we've seen positive sell-out, but true consumer demand has not really snapped back to what it was pre recession. The second half of that as we look at dealer inventory, they're pretty much inline to buy to sell rather buy to stock, so if we see some kind of improvement in consumer demand, which we think we'll see, the timing is a little bit harder to predict, I think that, that demand will flow through the channel and back to the manufactures, in this case, ourselves. So we feel pretty good about where it is right now.

The issue I would again point to end consumer demand, rather than the channel. On the truck side. Truck inventories are a little bit harder for us to see. Channel inventory is hard to see, there's no real metric other than how we work with our customers to see it. I would just point to demand remains very, very strong.

You saw the percentage overall in our truck business went up almost 40%. Strong EA growth as well. I know you follow it close, you follow some of the OE manufacturers and some of the situations they're seeing. So we see the truck business still remaining very strong and I guess that demand is also probably a good indicator of where their inventory levels

Would it be too much of a generalization to say that there's still a little bit more catch-up that probably needs to happen on commercial inventories as opposed to consumers.

I think it's a reasonable observation to make. Himanshu, my only hesitation is that I don't have good data to support that, but certainly that's what we see, that what we feel.

Okay. If I could shift to the North American replacement business, and I'm sorry, I missed some of the earlier comments, so you may have talked about this all ready. Your replacement volumes I think were down 5%.

It looks like from the data that we have that the US market RMA data was down about 6% on replacement. I guess, you know, it's better than market, but I would have thought it would have been maybe even more better than the market, given your relatively low presence in private label and low end tires. Was there a considerable or material weakness in high end branded tires as well this quarter for the industry that could explain that?

No. To my earlier comment, Himanshu, I think when I talked to our business about everyday is making more of the right tires, because the right tires, those high end tires remain in demand for us. There's really not any weakness in what we're seeing in our premium branded tires.

In fact, as you pointed out, we actually continue to gain share there. Yet you also have to look back a little bit to Q1 and see the strong growth we had in Q1, and sort of balance those two off over the first half. But specifically the question, we're not seeing any kind of slow down in the premium products.

So maybe it's just a little bit of timing around price increases or whatever, and maybe we should look at the first half kind of on a blended basis.

Exactly. Strong first half, not so strong second half balances ok, with a view on second half that we're watching because of the macro economic concerns we have out there.

Great. Then a housekeeping item. Anyway you could help us with just a unit volume mix inside of your North American consumer OEM business of Japanese transplants.

We haven't talked about shared account on each of those businesses, but I would say we're somewhat balanced. Our focus is really on getting the right shipments across all of the manufacturers, that's where it's been, that's where it's going to be, that's part of our selectivity strategy, and that's why, Himanshu, because we are balanced cross that, including the JOEMs that we did see our consumer OE volumes go down, so we were impacted a bit from it, but certainly we see some of that coming back in the second half.

All right, thank you, guys.

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

Hi, good morningJust more generally I wanted to talk about the pace at which you think you can build from, 2% margins in North America in the back half. Just generally, if you could go over, again remind us of some of the initiatives that you have in place and sort of the timing. On the call you obviously talked about the closure of your one high cost plant and that would probably be more of a 2012 impact. I think other things you've mentioned in the past have clearly been more flexibility in work rules, and then eventually some additional capacity outside of the U.S. Maybe if we can just go over that.

So I guess three things we point to, and very consistent with what we showed in the investor meeting back in March. It's the first quarter run rate, we're going to be two big discreet items. One is the $80 million in savings you're suggesting from Union City, which we'll get in 2012. Second thing is the pension expense will continue to improve as we fund the pension. You saw some benefit from that.

Now we expect more benefit from that in 2012 and 2013. The third thing is getting the remaining part of the unabsorbed overhead benefit ,as we filled the factories up, we still had some of absorbed overhead in this year, so 2012 will look better in that respect. You take those three things together, and I think the good part is that those are all cost related, and are going to take us a big part of the way where we are today, to where we target in 2013. Along the way, we still have volume, price and mix that we'll continue to focus on. Those are going to be important for us as well, and our strategy of offsetting raw material costs with price and mix over time, is always going to be a piece of the equation, but I think those three cost pieces are the big part of the walk from here to there.

Okay, thank you. Actually, just one last one. There's been a lot of questions on the demand piece in the US and I understand the restocking concept. How do you guys assess the level of pent up demand that's out there. I think the last time you had mentioned that tread levels at some of your dealers were still at extremely low levels, and I understand that miles driven has slowed and there's this restocking issue, but one would think that, you know there's would be sort of a pent up demand that would provide a pretty meaningful offset to some of the macro issues that we're seeing right now.

I think, Patrick, I think we look at a variety of different things. For instance, we look at the miles driven trends, gas consumption trends, and we've seen them see-saw from a big down coming out of '08, '09 toward improvements last year, toward the last few months which I think the last month reported was May, so we've seen volatility there again. That's one indicator of how we think about pent up demand and what's there. We also look at GDP, because as we said, GDP is a good indicator that follows where consumer industry demand is, so we look at that, and then again to your point, we look at, in our retail stores and some of the dealers we see, we get a view of things like tread depth, things of like someone coming in to buy one tire, two tires or four tires, whatever it might be.

So we have a pretty good pulse on what's happening out there, and I think I would leave you with two things to think about. One is a repetition of what I said earlier, and that's that we really haven't seen a big snap back in robust consumer demand. We think it's there. We think it's going to come for the reason that you say, that there has to be pent up demand there. The second thing is, because we haven't seen that demand come back as strong, we know that people have to replace tires, so even though we might not see it as strong as we like.

You can only drive our your tires so long, so that core demand is out there and it's sort of annualized itself from when people put it off, to now when they have to replace it. It's just a question of how fast are they going to replace it, and that's a bit of the function of the economy and it's a bit of the function of confidence, which is a little bit troubling today, it's a function of those things. Our view long-term is that demand is still there and when it comes, there is going to be an uptick in a good supply opportunity for us. I think we're positioning ourselves well to supply that demand with the right tires and the right segments of the market.

Very helpful. Thanks a lot.

Ladies and gentlemen, due to time, the final time comes from Brett Hoselton with KeyBanc.

Hi.

How are you?

Good.

First, I want to make sure that I understand how you're characterizing the price mix versus raws relationship in the back half of the year. Coming out of the first quarter, seems like you were very confident that price mix would be able to offset raws. Sounds like going into the third quarter and fourth quarter, while you think that you are eventually going to be able to offset the higher raw materials, it sounds like it's unlikely that you'll be able to offset the raws in the third quarter and fourth quarter timeframe is that a fair characterization.

Brett, I guess historically when we've seen raw material inflation at the levels that we're seeing right now, we've only recovered about two-thirds of it in that quarter, via price mix. The second quarter gave us a new high water mark on price mix as we more than offset $428 million in raw material costs, and even in North America and Europe where it tends to be tougher, we offset raw material costs. That's a new high water mark, we feel great about that .

But one quarter doesn't make a trend and we know that the bulk of the raw material costs increases are coming in the second half. With raw material cost increases approaching $600 million year-over-year in Q3 and Q4, that's more than we could have offset even with the second quarter best ever performance in price mix. We look at that, we understand what we've done, and we understand what's happened historically, and we also understand that we have had a very strong second quarter, but while our goal remains to recover raw material increases over time, I have to stick to the statement that it doesn't mean that we can offset the increases in the same period in every

Speaking of tire shipments in Asia in particular. The current trends that you're seeing today, do you think that's indicative of where you see the remainder of the year is going to be.

Yes, I think it's a fair way to look at it. You know when we talk about Asia Bret, it's really an amalgamation of a lot of different markets over there. Clearly China and India for example, remain very strong. If we go to Australia, New Zealand we see a weaker economy, weaker consumer demand there, we're feeling part of that. So softer volumes in Australia, New Zealand, stronger volumes in places you would think. I think it's a fair way to frame it for yourself.

Then finally, we have had a number of truck OEMs talking about a shortage of tires, reducing their abilities to produce trucks. I'm wondering, is this a problem at Goodyear, or it more kind of industry in general, maybe some of your competitors? Does it represent a potential good opportunity in the back half of the year for Goodyear?

I think if you look at the truck growth we saw in the quarter, you see the robust demand for truck OE's coming back to us. I would say we are supplying our customers, we're doing it very well, but we're also doing it in the context of our strategy to make sure we're selling the right tires in the right places and the right brands, and that's how we're looking at it right now. We are, I think our customers would tell you, that we're a good supplier and there's more demand out there, and that's a good thing for us as we go forward.

Thank you very much, gentlemen.

Thanks, Brett. Okay, I think that wraps up the call, everyone. We appreciate your attention. Thanks very much.

This concludes today's conference call. You may now disconnect.