Goodyear Tire & Rubber Co (GT) 2012 Q2 法說會逐字稿

Good morning. My name is Christie, and I will be your conference operator today. At this time I would like to welcome everyone to the Goodyear Tire & Rubber Company second-quarter earnings conference call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question-and-answer session. (Operator Instructions).

Thank you. It is now my pleasure to hand the program over to Mr. Greg Fritz, Vice President of Investor Relations.

Thank you, Christie, and good morning, everyone. Welcome to Goodyear's second-quarter conference call. Joining me today are Rich Kramer, Chairman and CEO; and Darren Wells, Executive Vice President and CFO.

Before we get started, there are a few items I would like to cover. To begin, the webcast of this morning's discussion and the supporting slide presentation can be found on our website at investor.goodyear.com. Additionally, a replay of this call will be available later today. Replay instructions were included in our earnings release issued earlier this morning.

If I can now direct your attention to the Safe Harbor statement on slide 2 -- our discussion this morning 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 in the earnings release. 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, Rich will provide a business overview, including perspective on our second-quarter results and our progress on Goodyear's key strategic objectives. After Rich's remarks Darren will discuss the financial results and outlook before opening the call to your questions.

With that, I will now turn the call over to Rich.

Great. Thanks, Greg, and good morning, everyone. We look forward to discussing our business, which continues to do well in this uncertain environment. For the past several months we have all seen increasing uncertainty in the global economy and its effect on virtually every industry and business. Beginning with the great recession of late 2008 and continuing with today's volatility in Europe, this has been a time of immense challenges.

Yet our second-quarter results gives us confidence that we have the right strategies in place, and we are successfully building our business to better withstand the fluctuations of the tire industry, the marketplace, and the global economy.

In the second quarter we delivered $336 million of segment operating income and $85 million in net income. This is a strong result and one I'm very proud of, given that industry volumes declined to levels similar to those we saw during the depths of the great recession.

During my remarks this morning, I'll take you through an overview of the second-quarter results, offer my perspective on our outstanding performance in North America, address the business situation in Europe, and offer an outlook for 2013. I'll begin by taking a look at some of the positives and negatives that stood out during the second quarter.

Our North America business delivered record results for any quarter. I'll elaborate on this further in a few moments, but I want to emphasize that these results were not based on volume, but rather the structural change we have been implementing to our business model, aimed at creating consistent earnings; positive cash generation; and most importantly, industry-leading customer service.

For the total Company, our gross margin also improved year over year, reflective of continued strong price mix, offsetting what continued to be historically high raw material cost increases. This is the strategy we have been executing consistently over many quarters, critical given our expectation of rising raw materials over the long term.

In our Asia Pacific business, our record second-quarter earnings of $71 million, even with the startup costs associated with our Pulandian facility demonstrate progress toward our strategy to win in China. Our progress there is bolstered by investments in innovative products, building brands, enhancing our distribution, and developing our team.

Those efforts are supported by our newest and most modern production facility, now up and running ahead of plan. As a result, we continue to gain share in China, focused in on our targeted market segments.

During the second quarter we also continued to strengthen our financial position on our balance sheet. We completed the refinancing of our US credit facilities in April, which now extends our maturity schedule considerably and gives us significant flexibility to drive our strategy even in the midst of economic uncertainty. And when coupled with the new US legislation to stabilize pension contributions, our near-term cash and liquidity position have improved substantially.

We also saw several challenges in the second quarter. Volume softness, driven by economic weakness particularly in Europe, combined with destocking in dealer channels globally, hurt our volumes and resulted in higher inventories despite aggressive actions to reduce European production and to manage working capital. I'll add more thoughts about Europe in a few moments as well.

We also were negatively impacted by the effect of weaker currencies against the US dollar, which for the first time since early 2009 significantly affected our international sales and segment operating income.

Now considering all the positives as well as the headwinds, perhaps the most important takeaway from our quarter results is that our segment operating income of $336 million was achieved on volume of 39.2 million units. Now to put this in perspective, the last time unit volumes were that low was in the first quarter of 2009 as the recession took hold.

Our corresponding segment operating income for that quarter was a loss of $176 million, with North America tire recording a loss of $189 million. Our results indicate that our efforts to change how we fundamentally run our business are working and gives us confidence that we can lean into the challenges that are still ahead.

Such fundamental change has been our emphasis since 2010. We said that our goal was to drive an operationally excellent business that efficiently makes the right tire by collaboratively linking our business process from the market, to supply, to manufacturing, to procurement. Now, as much progress as we've made, I continue to see room for improvement.

The continued integration of our operations capability is advancing and allowing us to be a more reliable supplier while reducing investment in inventory, all in the name of delivering industry-leading innovative products to our customers. That is the definition of a competitively-advantaged business.

And guiding our actions is our strategy roadmap, where we are driving our strategic goals of returning North America to profitability, winning in China, and continuing our success in Latin America and EMEA. We are achieving these goals by delivering a cadence of market-back innovation; focusing on targeted market segments and not volume for volume's sake; driving operational excellence in manufacturing, supply chain, and procurement to deliver more of the right tires at lower costs; by investing in higher-return projects consistent with our targeted segment strategy; and by building a team of A players who can execute our strategy.

This is what will deliver sustainable economic value. It's the foundation for our decision, and it drives our associates' behavior. To illustrate the progress we have made structurally improving our business, slide 4 provides an analysis of volumes and operating margins over the past three years.

We told you that our second-quarter volumes were consistent with the depths of the great recession. If you look at the first half, volume was not quite as bad as in the first half of 2009, but it is substantially below that of the recovery years of 2010 and 2011. Volumes continue to hover below historical industry norms.

Now, the progress we have made in our North America tire business and certain of our overseas businesses has enabled us to consistently deliver a much better level of segment operating margin than we have been able to deliver historically in such soft-volume environments. This represents progress toward our goal of being profitable through the economic cycle, and perhaps nowhere is this more evident than in our North America business.

A significant part of our Company's improved ability to remain profitable in this weaker environment is progress in returning North America to solid profitability. On prior calls, in fact my first call as CEO, I said that our goal was first to get NAT to break even; then to our 5% earnings-to-sales target; and finally, beyond that threshold in a sustainable way. We are on track to do just that.

We talked about the transformation in our North America business as being driven by three elements. First, improved cost structure and operational capabilities, in part through reduced high-cost footprint, including a partnership with the United Steel Workers to make our remaining factories more cost-competitive.

Second, a continued focus on innovation, driving industry-leading cadence of new products, working market-back to respond to the needs of consumers and customers. And third, making profitable choices in the replacement and OE businesses to improve the mix of our business in line with the megatrends and to support our strategy of offsetting the trend of higher raw material costs with pricing mix. The team in North America has executed our strategy in a disciplined way and exceeded my expectations in meeting its earnings targets a year early.

Now we are delivering targeted profit levels, levels that more than cover North America's cost of capital, and delivering that profit at a time when markets are weak. This weakness is partly a reflection of consumer behavior and an uncertain economy, but also because of dealer destocking. We see a number of indicators that this volume weakness is not sustainable.

Now, slide 6 presents several views of North America's consumer replacement market. Starting with the box in the upper left, we see that manufacturer sales to dealers have been very weak in recent quarters. In the upper right you can see this continues an extended period of weakness relative to long-term industry trends, reflecting consumers delaying their purchases since the start of the great recession.

Now in the lower left, you see the situation has been compounded by dealers reducing inventory, or destocking, as their purchases have consistently trailed their sales to consumers. Now while all this is going on, in the lower right we see the miles driven trend actually increasing. It was up 1.2% year to date through May and increased in five of the last six reported months.

So in the aggregate, given the increasing need for tires for the additional miles driven; given the long-term trend in industry demand; and given the low inventory levels in the distribution channels, including our North America tire inventories, it appears that the table is set for a recovery in volumes and a return to more normal levels. We believe this is not a question of if but a question of when.

And should North America volumes remained weak in the meantime, which is certainly possible, both Goodyear and our distribution channels are already well positioned for that situation. Clearly, we are feeling confident about North America's business fundamentals and how we are positioned for whichever way the markets move in the near term.

Now I'd like to come back to Europe, which is clearly a much tougher and more volatile situation. In our second-quarter results you have seen the severe impact of the economic and policy uncertainty in the European Union and the fallout of consumer and dealer responses to this uncertainty. Through the first quarter, parts of Europe continued to show stability as market softness was concentrated in southern Europe.

In the second quarter the weakness extended to Germany and other markets that had been stable through the first quarter. The outcome was a market that was the weakest we've seen in many years and weaker than we had predicted. Our team took actions to reduce production and to help customers manage through the situation, but clearly, no number of actions could fully address this unprecedented weakness in the near term.

The marketplace is now shifting its focus to winter tire products, presenting the industry with a dual challenge of a soft economy and the effects of last year's warm winter that left many dealers with winter tire inventory. Our planning had taken these factors into account, but we are now planning for even greater levels of weakness after seeing the market dynamics in the second quarter. You will see this as Darren talks about our volume outlook, along with the expected production costs and related unabsorbed overhead.

Now as we look at our European business, we see a slow growth economy for an extended period of time. Consequently, will be taking further steps to align our business with our strategic goals. We will continue to focus on product innovation, starting with labeling, which I will address in a moment.

We will more aggressively pursue our targeted market segments, not pursuing volume for volume's sake. We will align production with demand, increase flexibility, and make our supply chain a competitive advantage, and we will take steps to reduce our cost structure.

We believe Europe will remain an excellent market to sell tires. Our goal is to address Europe's existing condition while simultaneously improving our business model for the future.

Now with regard to labeling, one of our seven megatrends, we see the forthcoming requirements for tire labeling in Europe as another opportunity to demonstrate Goodyear's technological advantage. At the end of May we presented then new Goodyear Efficient Grip and the Dunlop Sport Blue Response, two tires that achieved A grades in both rolling resistance and wet grip without compromising on the other key performance characteristics.

We also are taking the necessary steps to position our entire portfolio to meet and exceed consumer expectations through label grades. As you consider labeling, I would have you to take keep a few key items in mind.

First, the tire label highlighting three key attributes, rolling resistance, wet grip, and noise, will serve as a starting place for educating consumers on the full range of product qualities that we believe differentiate our brands and products. While we will focus on high label grades, we will not compromise on other characteristics, as most magazines test about 15 performance categories, not just the three labels on the tire. And we see our magazine test winning results in winter tires as being much more relevant than label grades as consumers shop for winter tires.

Second, labeling in 2012 is a start. In most markets the effects of labeling on actual consumers' buying behavior are more likely to be seen in 2013 and beyond, since the selling period for summer products, which are the most affected by label ratings, won't start until early January, when labeling will be mandatory.

And finally, regulation and enforcement will be imperative to ensure the credibility of tire labeling. This is equally true for consumer protection and for manufacturers investing in technologies to produce such products. At Goodyear our focus is not just on high label grades. We will not compromise any attributes that our customers demand.

The challenges of the current environment will not deter our commitment to great new products with market-back innovation. In Europe, the Goodyear Eagle F1 Asymmetric was named best tire in the UK's auto express product awards. This honor comes on the heel of the top ranking in a German magazine, which called it a tire without fail.

And in North America, the Eagle F1 Asymmetric All-Season has earned rave reviews since its launch in July. After testing the new Eagle against the competition, Motor Trend wrote that the tire might be the ultimate performance all-season option. That's what gets us excited.

Now you may have read about our other breakthrough technologies, including just last week the use of soybean oil in tire manufacturing. The prospect of reducing the use of petroleum while improving tread life reflects our commitment to industry-leading and industry-changing innovation. You've heard about it in other breakthroughs as well, such as air maintenance technology, enabling players to self-inflate, and the use of BioIsoprene to reduce raw material dependence.

Great new innovative products and technologies never fail to get us excited. We will keep our foot on the innovation accelerator, as this is a critical advantage for Goodyear to win in our targeted market segments.

Now reflecting on our 2013 goals, clearly we are facing a tougher environment. While we don't control the economy, we accept the current environment as a new reality in the near term, and we continue to focus on the successful execution of our strategy roadmap.

In spite of economic weakness, we continue to see our view of the long-term industry megatrends being reaffirmed, and the strategies and the key how-tos in our strategy roadmap are delivering the results we expect. We continue to see areas of opportunities where we can improve our execution, and we certainly see significant opportunities as markets ultimately recover from today's recessionary conditions.

You saw in our press release this morning that we are on track to achieve the North American Tire segment operating income target of $450 million a year early, and we remain committed to our 2013 target of $1.6 billion in segment operating income. In today's uncertain world, making comments about 2013 requires a lot of thought. In coming to that conclusion, our view assumes a continued scenario of muddling through in Europe, with no further destocking assumed, and a level of stability and modest growth in the rest of the world.

Now in concluding my remarks, I want to reiterate my comments from prior calls that we are not running our business for just one good quarter or one good year. We are running our business to create sustainable economic value for the long term. In driving toward this destination, we have addressed our balance sheet position and liquidity; we have addressed our cost structure; and we made significant progress in turning around our North America business; and we've significantly changed how innovation and new products are introduced in the tire industry.

Looking ahead, we will address our remaining challenges in the same disciplined way, focusing on intense cost control, prioritizing cash, and earnings over volume. That's our commitment.

Now I'll turn the call over to Darren, who will provide you with some more color on our second-quarter results. Darren?

Thanks, Rich, and good morning, everyone. Our solid second-quarter results continued to reflect the benefit of underlying structural improvements in our business. You can see the result of improved cost structure and manufacturing footprint in North America. You can see the result of the investment that we've made for growth in Asia. And you can see the improvement in specific businesses, like our OE business in North America, where we've made choices that ensure an acceptable level of profitability given the capital and resources we commit to the business.

Our results also show areas where we need to make further improvement. Examples include our cost structure and manufacturing footprint in EMEA and our distribution strategy in Brazil -- both opportunities to drive future results. So while there are a lot of macroeconomic factors impacting our results, we are working to ensure that we can deliver in all parts of the cycle, requiring us to focus on continuing the changes in our business model.

Turning to the income statement on slide 10, or second-quarter revenue decreased 8% to $5.2 billion on a 9% reduction in unit volume and a 6% reduction due to currency translation. Replacement unit volumes decreased 14% during the quarter, while OE volumes rose 6%. The replacement volume decline was largely attributable to softness in industry volumes globally. The OE strength was predominantly due to higher consumer OE volumes in North America and Asia. Our volumes were also impacted by choices we made consistent with our long-term strategy to pursue only profitable volume.

Revenue per tire increased 8% compared to the prior year excluding the impact of foreign exchange, reflecting continued progress in pricing mix. We generated gross margin of 19.6% in the quarter, representing 100 basis point improvement compared to the prior year, despite lower volumes.

Selling, administrative, and general expense decreased $56 million to $697 million during the quarter. Foreign currency translation accounted for the majority of the decline in SAG. Excluding discrete items, our second-quarter tax rate as a percent of foreign operating income was approximately 42%. The second-quarter rate was higher than our previous guidance, largely due to the mix of income and losses among foreign operations, particularly in Europe; and the fact that we are no longer recording a valuation allowance in our Canadian subsidiary. For the full year we are now projecting income tax expense as a percent of foreign segment operating income of between 25% and 30%.

Second-quarter after-tax results were impacted by certain significant items. A summary of these items can be found in the Appendix of today's presentation.

Turning to the segment operating income step chart on slide 11, you can see the progression of operating income compared to the prior year. We reported $313 million of favorable price mix during the quarter, which more than offset $238 million of raw material price increases. Lower volume was a $70 million reduction in income, while production cuts resulted in $18 million of additional unabsorbed fixed costs during the quarter, even after Union City cost savings.

Cost savings of $74 million offset general inflation of $73 million. For the full year we expect cost-saving actions to essentially offset about $300 million of inflation. As a result, we now expect to exceed our three-year $1 billion cost savings goal. The Other category includes higher pension expense, unfavorable foreign currency translation, and higher depreciation, consistent with the modeling assumptions we provided previously.

Turning to the balance sheet on slide 12, our net debt declined $34 million from March to just over $3.5 billion at quarter end. Compared with the year ago, our net debt is essentially flat.

Slide 13 introduces a new cash flow analysis that reflects our free cash flow from operations. Free cash flow from operations is cash generated after both maintenance and growth CapEx. However, it is calculated before any debt repayments or incremental borrowing; before contributions toward our unfunded pension obligation; and before cash restructuring actions. This separates the operational drivers from the balance sheet activities and gives a view of the cash-generating ability of our business.

Over the last 12 months our free cash flow from operations was $569 million after $1 billion of CapEx, about a third of which was for growth projects. This free cash flow was used for contributions toward our unfunded pension obligation and to pay for restructuring actions, primarily the shutdown of our Union City factory. We plan to continue focusing on this cash flow analysis in our future investor communications. We've provided a reconciliation of this analysis to our GAAP statement of cash flows in the Appendix of today's presentation.

Given the recent changes in the US pension funding laws, I'd like to take a moment to review slide 14. The new law provides for the use of a 25-year average of interest rates as the basis for required contributions, which is more favorable than using historically low rates that we've seen over recent years.

As you can see, our 2012 cash contributions remain unchanged and are expected to be in the range of $550 million to $600 million. For 2013 we now project our minimum required contributions in the range of $350 million to $400 million. This represents a $200 million reduction from our previous 2013 estimate, so we're pleased with the added flexibility it provides.

As a result of lower 2013 contributions, our expected year-end 2013 unfunded amount will be slightly higher than we previously expected. Our 2012 book pension expense estimates remain unchanged from prior estimates. The estimates for 2013 have increased slightly to $275 million to reflect reduced contributions in 2013 and a change in the status of an international pension plan. Our sensitivity analysis for the impact of interest rates and investment returns has not changed.

Moving to our individual business units, you'll see three overall themes. First, volume weakness, with only our Asia business increasing unit volumes. Second, revenue declining more than unit volumes in our international businesses, reflecting the effect of the stronger US dollar. And third, earnings improvements in all but our EMEA business, despite volume and revenue weakness -- a reflection of strong price mix performance.

In North America, unit volumes were down 1%, reflecting generally weak consumer and commercial replacement industries, which were down 1% and 9%, respectively. Our volume decreases were predominantly in lower-tier, non-targeted segments.

OE industry demand continued to see strong gains, with consumer OE up 24% and commercial OE increasing 15%. Revenue per tire increased 10% year over year. North American Tire reported segment operating income of $188 million in the second quarter, which compares to operating income of $137 million in the second quarter of 2011. Our strategy of focusing on targeting targeted market segments and pricing for the value of our tires helped deliver significant price mix improvement, which more than offset $114 million of additional raw material costs.

North American Tire's second-quarter manufacturing costs benefited from the closure of our Union City factory in July 2011. As we are no longer experiencing disruptions from transferring products to other factories, we recognized the full benefit of the closure in Q2.

Last year North America reported a strong second quarter, but we said at that time it was not really representative of the run rate of the business, having benefited from some favorable timing of costs. This year North America delivered even stronger results, and there are no caveats and no special items. Results reflected core strength in our North America business and strong delivery by the team.

Europe, Middle East, and Africa reported segment operating income of $19 million in the quarter, which compares to $126 million in the 2011 period. Our 2012 results reflect sales of $1.6 billion, a decrease of 18% versus the prior year.

The decline in sales was driven by a 17% decrease in unit volume. Unfavorable foreign currency translation impacted net sales for the quarter by $194 million. Revenue per tire, excluding the impact of foreign exchange, increased 10% year over year. EMEA's increase in revenue per tire was driven by solid price mix performance.

Industry unit volume for consumer replacement was down approximately 10%, reflecting both a weak economy in Europe and cautious behavior by dealers and distributors. As a consequence, summer tire sellout has been lower than anticipated, and the winter tire sell-in season has started slowly.

The inventory in the trade remains high as a consequence of last year's green winter and slow summer sellout. This has resulted in volumes about 1 million units below the low point of the great recession. As a result, we have aggressively reduced our production volumes in both the second quarter and for the balance of the year. We saw the impact of $40 million for production cuts in EMEA's second-quarter results.

Industry unit volume from consumer OE was down 8%. In commercial truck replacement industry shipments declined 8% versus last year. Truck OE industry volumes, which have been a bright spot in recent quarters, declined 3%. EMEA segment operating income of $19 million reflected positive price mix of $60 million compared to raw material increase of $48 million. Lower sales volumes negatively impacted income by $56 million compared with a year ago.

Looking to the second half, we should see a seasonal benefit of moving to the higher-margin winter selling season, while also benefiting from cost reduction initiatives we are taking in EMEA. However, relative to a year ago, we still see a significant impact of lower volumes and a challenging price mix comparison in the third quarter and the second half.

Latin America tire sales decreased 21% to $503 million on a 14% decline in unit volume. Foreign exchange drove additional decline in revenue. Revenue per tire, excluding the impact of foreign exchange, was up 11%.

Despite lower volumes, operating income in the second quarter of 2012 was $58 million, a $4 million year-over-year increase. Operating income increased, primarily due to improved price mix across the region, reflecting the progress in shifting more of our business toward targeted market segments while supporting our dealers and their need for tires across all price points. This benefit was slightly offset by lower volume, increased raw material costs, inflation, and unfavorable foreign currency exchange. Longer term, we remain confident in the strength of our brand, our products, and our distribution, and our ability to transition the future needs of the market in Latin America.

Our Asia Pacific business delivered a solid quarter. Demand from China, coupled with our off-the-road business, helped mitigate ongoing weakness in Australia and New Zealand. As a result, Asia-Pacific reported segment operating income of $71 million for the quarter, a year-over-year increase of $6 million, even with an incremental $5 million of start-up expenses associated with the ramp-up of our new factory in Pulandian, China. Improved price mix around the region was able to offset unfavorable foreign currency, primarily in Australia and India.

A quick comment following up on the recovery from last year's flooding in Thailand. Production has now been fully restored in our Thailand factory. During the quarter the net impact from the Thailand destruction after insurance recoveries was an unfavorable $2 million. We expect minimal impact in future quarters, with additional insurance proceeds to be reflected later in the year as the claim is resolved.

On a more positive note, in June the Company purchased the minority share of its Japanese off-the-road tire manufacturing subsidiary from Toyo Tire and Rubber and Mitsubishi. Additionally, Goodyear announced that it will invest $250 million to upgrade and expand this manufacturing facility to increase our global supply of large off-the-road tires for key customers. The expansion will support growth in the Company's Asia Pacific OTR business beginning in 2014.

Overall, we continue to be pleased with the performance and opportunities we see in Asia, and particularly in China going forward, despite the slowing economic growth in the region.

Turning to slide 16, you can see our 2012 industry outlook for North America and EMEA. We've adjusted our outlook to reflect the softer industry volumes we experienced in Q2 and anticipate will continue through the third quarter, and to a lesser extent, into the fourth quarter.

In North America, our consumer replacement volume outlook is unchanged, while we have increased our consumer OE forecast to up 5% to 10%. This increase reflects the ongoing strength in light vehicle sales rates and production schedules.

On the commercial side, ongoing softness in the replacement market has resulted in an expectation for a 5% to 10% decline from approximately flat previously. The commercial OE outlook remains unchanged.

Turning to EMEA, we have reduced our consumer replacement volume outlook to down 8% to 10%, and our consumer OE outlook is now down 5% to 10%. Commercial replacement remains unchanged, and commercial OE outlook has improved to down only 5% to 10%.

On slide 17 we provide some modeling assumptions for 2012. As you can see on the slide, we've revised our assumptions for recent trends that we've seen.

We have lowered our overall volume outlook to down 5% to 7% from down 2% previously. This revision largely reflects the softness that we've seen in EMEA. From a second-half perspective, we expect the year-over-year decline in third-quarter volumes will be greater than the fourth quarter given the year-over-year comparison. As a result of the lower volume outlook and our focus on inventory management, we now expect to see approximately $150 million of additional unabsorbed fixed costs during 2012 compared to 2011, even after the benefit of Union City cost savings.

During the second quarter we cut over 5 million units of production, which will impact our third-quarter results accordingly. Assuming spot prices remain at current levels, we anticipate our raw material costs will increase by approximately 7% for the full year, below our prior outlook for a 9% increase. We expect to see all the benefit of this reduction during the fourth quarter, given the lag effect of material costs through our income statement.

For the third quarter we expect the benefit of price mix net of raw material costs to reflect trends that we've seen over the last couple of quarters, with the net benefit increasing during Q4. Assuming recent spot rates, we expect the unfavorable impact from foreign exchange to be approximately $60 million for the year, as the US dollar has strengthened substantially since our first-quarter call. As I mentioned earlier, we expect our cost savings fully offset general inflation for the year.

Finally, our expectations for Pulandian start-up costs are now below the previous range, as we've made progress in completing the transition from our old facility at a faster pace.

Turning to slide 18, you see our other key assumptions for 2012. We've reduced our full-year interest expense assumptions slightly, and as I mentioned previously, we expect our full-year tax rate to be slightly higher.

Turning to slide 19, we've updated our outlook for certain cash flow items for 2013. With the changes to our US pension contributions, we now expect to generate positive cash flow after capital expenditures and cash pension contributions during 2013, rather than expecting breakeven cash flow.

I'll close on slide 20, which summarizes the key assumptions that underlie our $1.6 billion segment operating income target for 2013. I'd like to highlight the change in volume assumptions from March 2011.

As you can see, we originally assumed a 3% to 5% volume growth rate each year from our 2010 unit volume level. We continue to target $1.6 billion in segment operating income, despite 2013 volumes now expected to be about flat with 2010, or about 20 million units below our original expectations -- and despite seeing more unabsorbed overhead and higher pension expense.

As Rich referenced in his opening remarks, we view this as evidence that our strategy is working, and that we have structurally improved our business despite a more challenging macroeconomic environment. In addition, when volumes do return, we have the production capacity to continue to grow our earnings beyond 2013 levels.

With that, we'll open up the call for questions.

(Operator Instructions). Itay Michaeli, Citigroup.

Just a couple of questions. First, Darren, I just want to clarify that the pricing commentary, if I heard you correctly, looks like you think in the third quarter the price mix versus raw should be similar positive spreads, what you've seen in the last couple of quarters, which if my math is correct is about $50 million, $60 million?

Yes. No, that was the comment.

Okay, great. And then as you think about your 2013 SOI target, what kind of volume growth do you think you'll need to really gain confidence you can get there? I mean, the comps seem to be getting a lot easier for you as you start looking at 2013. Is it low single digit, mid-single digit? If you can help us with that.

Sure. So as we look at that, Itay, when we reflect on the last slide of the presentation, the fact that we are assuming that we have 2013 volumes in line with 2010, we had sold about 181 million units in 2010, which was also how many we sold in 2011.

We're now looking down to be down 5% to 7% this year. So that 5% to 7% is -- call it in the area of 10 million or 11 million units. What this would imply, then, is that we get those units back next year. That's effectively what this says, that we'd be back in that range of 180 million units for 2013.

Okay, that's helpful. And then a couple on just cash flow. It looks like Q2 was a very good quarter there. It seems like you're running a little bit below the full year CapEx target, and you'll get some working capital relief, supposed in the fourth quarter. Can you help us in terms of walking through cash flow in the second half of the year?

Yes, so Itay, I think we'd stick to the guidance that we provided here and say -- don't read too much into the CapEx. We have taken our CapEx guidance to down a bit to $1.1 billion to $1.2 billion for the year. And previously we did a $1.1 billion to $1.3 billion. I'll still say the full-year rate ought to reflect what we're providing in the guidance, so I would stick with that.

Working capital -- I think our view has been neither a source nor a use of working capital. I think we'll stay with that as well as we look at the full year.

Great. And then just lastly on cash flow, on slide 19 it looks like $200 million positive, but then if I equate that to the new definition on slide 13 -- which is really helpful, by the way -- it looks like you're guiding to something like $650 million of free cash flow. I just want to make sure I'm doing that math correctly in terms of what your expectations are for 2013, because clearly it would be a pretty substantial free cash flow next year.

Itay, I think -- I appreciate you raising the point, because we do -- we're doing -- we have essentially two cash flow metrics that we're showing here, and we're maintaining both of them, because we made our -- we laid out our targets last year based on slide 19.

The metric on slide 13 is a bit different. I think that the bottom line is that on slide 13, if you take the free cash flow from operations and then reflect the pension contributions in it, we're expecting to be cash flow positive on page 19.

So I think directionally you're reconciling the two correctly. And we're coming back to a positive cash flow outlook for 2013, not just as free cash flow from operations, but total cash flow after we take into account pension and restructuring costs.

Great. Thanks so much. That was very helpful. Thanks.

Good. Thanks.

Rod Lache, Deutsche Bank.

Just hoping you can, first of all, elaborate on that comment you made about expecting the volumes to come back next year to -- just to the extent that some of this looks like it was market share as opposed to the market. Maybe you could just explain North America, for example, replacement volumes down 10%. I think the industry was down single digits, and the same goes for Europe. It looked like it was quite a bit more than the overall market.

Rod, maybe I'll take it in two parts, maybe first talk about share. And I guess if you go back to what our strategy is, I think we've been very happy with our focus on targeted market segments, and as we've often said, not volume for volume's sake. So I think we're comfortable with where we're at.

And as we look at volumes, obviously mature markets are growing certainly below their historical trendline, but you also have to remember this is particularly true in North America that we've consciously exited unprofitable business. Certainly we've done that relative to some on profitable OE fitments, but we've also exited, as you know, the low end in a lot of private-label fitments. And these were tough choices for us, but I would tell you the right choices as we manage the business.

So our focus continues to remain on profitable share. And I think the results in the quarter, again, even particularly in North America, show that. But that philosophy permeates all our businesses, and you'll continue to see that coming through.

Now relative to volumes in 2013, I think the way we look at it, I think number one, that Darren walked you through the percentages and the numbers, the units that we have to bring back, but as we look at that, I think we look at the volume coming back really from two assumptions that we have in there.

The first is not a repeat of the significant dealer destocking that's going on right now; and secondly, some moderate growth. And I think if you dissect the businesses by region, we think those are certainly reasonable assumptions as we go forward.

In my remarks I walked you through a picture of North America and the dealer destocking event that's going on. I think that that similar event is happening within Europe as well.

So as we look to 2013, we don't envision that same thing happening again. That gives us an opportunity for growth. And again, there is an opportunity for certainly moderate growth in the other geographies as well. So that is how we think about the 2013 volume increases.

Is there restocking next year post-labeling? Or is that not a factor?

Pardon me, Rod?

Is there restocking? To some extent, I think you'd commented previously that the labeling implementation might actually be contributing to the destocking. Then are you assuming that there is restocking next year post-labeling?

Rod, I don't think that given everything going on, that we are assuming a restocking right now. I think as we think about labeling, everyone -- manufacturers have now voluntarily started labeling tires. But as I mentioned, we really see that really taking hold as we get into 2013, particularly with the summer selling season, when labeling really takes root, consumers understand it, and what have you.

So I think the labeling impact will be there, but we're not attributing a restocking particularly to that effect. And I think the reason, part of the reason for that is, as we've called it, a continuation of the muddling through strategy in Europe. And I think that probably alone will keep dealers cautious. Short of solving that problem, dealers will be cautious in terms of rebuilding their inventory. That's our view.

Okay. And Darren, in the past you've commented on this raw material inflation being a pretty big negative for working capital. It seems like you've had a pretty big drop here since April. Is there some reason why you're not anticipating this as a pretty huge positive for working capital going forward?

So Rod, I think that the outlook is right. There will ultimately be some benefit from lower raw materials to the extent they stay where they are.

If I look at the third quarter, though, what we said is we expect our raw material costs to be flat year over year. So if our raw material costs are flat year over year for the sales we expect in the third quarter, probably realistic to conclude that the raw materials and inventory -- sort of the rates in inventory aren't much different than they were a year ago, either. I think as we get later in the year, some of our higher-cost inventory will roll off, and there is an opportunity for that to benefit working capital. Having said that, I'm going to stick with my neither a source nor a use view of working capital for the year.

Okay. And just lastly, just any updates on restructuring actions in Europe? Obviously, there'd been some talk about Amiens possibly being a source of that going forward. Just given how weak the volumes are there, is that influencing the pace of restructuring in that region?

Rod, I think we're going to -- as we think about Europe, we're going to stick to the strategies that we've put in place, and recognizing that in the slowing market our focus on cost is going to have to continue to increase. So Amiens is a path for us to get incremental production out.

We're still working on that. We see a path forward. Obviously, that's taken quite some time. And I think at this point, we'll tell you we'll continue to look at all aspects of our business as we go forward.

Rod, just one more thing that I guess that may add to the conversation -- and I think appropriately so -- is there's no question that there's a lot of production cuts that we're going to have to go through as a result of the lower volume outlook. And what you heard is in the second quarter, we cut 5 million units out of our production schedule, and most of that for Europe.

We expect we'll take another 5 million out in the third quarter. And we're looking at a number -- something like 14 million units this year compared to last year, if we look at our production schedule overall. And when we have those levels of production cuts, there's no question that that makes us feel -- it's even more important to get the footprint action completed in Amiens and to take a hard look at our cost structure and production footprint in Europe overall.

Okay. Thank you.

Thanks, Rod.

John Murphy, Bank of America Merrill Lynch.

It is actually Liz Lane on for John.

Okay, Liz.

On the 2013 targets, you're still comfortable in general with the full Company 2013 targets. For North America specifically, the guidance -- it looks like you might reach that target a little early, even though the guidance you gave was incrementally somewhat more negative, except for consumer OE and raw material costs. Are those two items a strong enough benefit to offset the weakness in the replacement market, or do you expect improvement elsewhere in the business for North America in the second half of the year, to be able to reach that target early?

The volume situation in North America, I think you can go back to the guidance that we've given there, but I'd have you think about hitting our target in North America. And we said that we see a path to do that a year early, to hit that $450 million a year early.

More than volume that's going to get us there is the structural changes we've made in the business going forward, that we've made so far and you'll continue to see going forward, around focusing on the targeted market segments where we can get value for our brand; around taking costs out; around aligning our production and our manufacturing, linking it to what the demand signals are in the marketplace; and being able to manage our costs that way.

So it's not -- the North America strategy is not a volume strategy. It hadn't been, and it won't be going forward. So clearly in our business volume has an impact, but that's not going to be the key that gets us to the $450 million. It's going to be the things that we've talked about.

Okay, great. And can you break out by segment the mix of consumer versus commercial?

So we -- I think we do provide two things, Liz. One, we provide the consumer versus commercial disclosure in the Appendix to the slide deck. So page 22 and 23, I think you're going to provide that for the quarter as well as for last year.

Right. Do you have that for the full -- for each segment?

So you get a view of consumer versus commercial. I'm sorry?

You have that for each segment, or is that --?

We don't disclose it by segment.

Okay. And finally, just one more. It looks like -- foreign exchange was a pretty big negative hit, and you mentioned that you've talked about $60 million negative impact for the year. Can you just remind us what the total impact was -- has been year to date and what you expect incrementally for the rest of the year?

The question is year-to-date foreign exchange impact on segment operating income, or on sales?

On segment operating income.

On segment operating income? Okay, I think about $15 million year to date.

Okay, great. Thanks very much.

Aditya Oberoi, Goldman Sachs.

Great. Can you talk a little bit about pricing in the back half? What are you hearing? Given that raw materials have pulled back, are you getting some pushback on rolling back some of the pricing that you implemented earlier?

So I think the first place to look at is the performance we had in price mix in the quarter. And I think that's a good indication of what we've been doing for now I think five quarters in a row, where we've lost that price mix with raw material. And that pricing power around our products and around the value proposition is holding us in good stead as we look at the environment that we're in right now.

So I think over the balance of the year, we still see price mix being ahead of raw materials, as Darren went through. And from a marketplace perspective, I would say that the price pressure probably is more in the context of not getting the incremental price increases that we had perhaps planned on as opposed to rolling back existing prices.

The only thing I would add to that is we do have raw material index agreements in a number of our contracts, and that would apply predominantly to OE and to fleet -- commercial fleet agreements. And in those contracts we will make adjustments downward for lower raw material costs, just as when raw materials rise, we adjust upwards. So when you see our price mix for the remainder of the year, you have got to keep that in mind, as well.

Got it, but I would say more on the retail side you guys are not forcing any kind of price rollbacks?

Yes.

Okay, great. My second question was on the demand, on the replacement side, especially specifically North America. What do you think is causing the delay in people coming back and replacing their tires? Is it the macro economy, or is it just that the tires are still very expensive?

No, I think it is the macro environment, and I think the consumer confidence numbers certainly show that. And it's understandable as we think about what consumers are doing.

But I would say as we look at the miles driven numbers, as miles driven is increasing, tread rubber is being burned off as we go; therefore, those tires have to be replaced at some point in time. And I think the fundamentals point toward that happening. As we said, it's a question of if, not when -- some uptick in the economy may trigger that, but we certainly see some need for it, just as I said, as people drive more.

Got it. And finally on your North America SOI target, obviously, you guys had a very strong Q2. You pulled forward your SOI target, your margin target for North America. What are the points that you think you cannot sustain this 7%, 7.5% performance going forward?

That we can't sustain that?

Yes.

I think, number one, our goal is to not only sustain the $450 million, the earnings power of the business, but to grow it going forward. And again, I think there is a view that volume's going to have an impact on that. And certainly it may, but ultimately it is the structural changes that we're making in that business is what gives us confidence to the consistent and sustainable earnings power of the business.

As you look at Q2 as a stand-alone quarter, we do have the impact of seasonality in there as well, but I would tell you that's a normal occurrence. That's not something that is unique to North America's performance as we think about it over the long term.

Great. Thanks a lot, guys.

Your final question comes from the line of Brett Hoselton with KeyBanc.

In looking at your volume guidance for the year, it appears relative to your peers that you're taking a more conservative stance towards the back half of the year. I'm wondering if I'm interpreting that correctly, or is that more a reflection of the difference in your business profile, possibly?

Well, Brett, I think it's a good question. And I think it's reflective of how we look at things and really reflects our proactive planning relative to what we're seeing in the industry. So certainly it reflects the weaker European environment that we've talked about, but it also reflects that is what we see as further dealer destocking, particularly in Europe, as we see the balance of the year.

And as I've often said, not a throwaway word, as we think about our business, we're not managing it just for the quarter or the year. As we look at this, we want to make sure that we get our business best positioned as we can for the environment that we're working in. And again, that is always going to choose cash over volume. And what you see are some of the perspectives that we have and our proactive approach to it. That's how we think about it, and that's going to drive our decisions as we go forward. So I think that's the underlying view that we would give you.

And then as we think about pricing into the back half of the year, you've got the additional impact -- you obviously -- raw is coming down, and there is substantial pressure there, but also the additional impact of the tariff. Maybe you could discuss what you think the potential impact of the tariff is -- would be on pricing in general for Goodyear.

And then secondly, it would seem that pricing is going to be negatively impacted by declining raws. Is there some reason to believe that you think that it's more sustainable as opposed to maybe a slow drift-off, along with the raws?

So I think that the question on tariff, I'll give you a view as we think about those coming off. And really, Brett, the answer there is that part of the market has really not been the place that Goodyear plays.

It hasn't had a significant impact to us as we've seen the tariffs in place these last three years that we've moved upmarket. And I think as these tires come back, it's going to be not in our targeted market segments. So that's the perspective I'd give you on that.

And in terms of price in the second half or over the long-term, Brett, what I would have you think most about here is, again, the value proposition that we're offering; the cadence of innovation; the new products we have out there that's allowing us to get value in the marketplace. And the second thing, which I think is an important point for us to continually stress that over the long term we see raw materials increasing to levels above where they are today.

The trend of raw materials for a variety of reasons that we could talk through are going to increase over time as the economies grow again. And that natural rubber, just to single one out, is down right now. It's come down I think from $1.60 the last time we talked to about $1.30, even a little bit below that today.

But over the long-term, raw material prices are going to increase. And our view is to offset -- our philosophy is that we're going to offset those raw materials with price and with mix.

Thank you very much, gentlemen.

Thank you, Brett.

Thanks, Brett. Okay, everybody, thanks very much for listening today.

That does conclude today's conference call. You may now disconnect.