Goodyear Tire & Rubber Co (GT) 2012 Q3 法說會逐字稿

Good morning. My name is Christy and I will be your conference operator today. At this time, I would like to welcome everyone to the Goodyear Tire & Rubber Company third-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. I would now like to hand the program over to Greg Fritz, Goodyear's Vice President of Investor Relations.

Thank you and good morning, everyone. Welcome to Goodyear's third-quarter conference call.

Joining me today are Rich Kramer, Chairman and Chief Executive Officer, and Darren Wells, Executive Vice President and Chief Financial Officer. Before we get started, there are a few items I would like to cover. To begin, the webcast of this morning's discussion and supporting slide presentation can be found on our website at investor.goodyear.com. 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 our earnings release. The Company disclaims any intention or obligation to update or revise any forward-looking statements whether as result of new information, future events or otherwise.

Turning now to the agenda, on today's call, Rich will provide a business overview, including perspective on our third-quarter results and our progress toward Goodyear's key strategic objectives, as well as a view of the industry environment. 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. Thank you, Greg and good morning, everyone.

During the third quarter, we continued to make significant progress in line with our strategic plan highlighted by our outstanding results in our North America Tire business. That said, we also continue to experience the underlying uncertainty in the global economy most evident in Europe which remained a very difficult environment and where our Business results were significantly lower versus the prior year. Today, I will elaborate on the drivers of our third-quarter results, put those results in the context of our strategy road map, and finally, share with you an outlook of both our near-term targets and a view of the tire industry.

Now, as I have often said, we're not running our Business for one good quarter or one good year but to create sustainable profitability with consistent earnings and cash generation throughout the volatile demand cycle that characterizes the tire industry. I'm pleased with the choices we have made to better withstand this demand volatility while delivering solid segment operating income compared to our past results during periods of similar industry volume levels.

Now looking at the positives in the quarter, our success in North America is at the top of the list. The North America team delivered another outstanding quarter. The $130 million of segment operating income in Q3 brings North America's year-to-date earnings to nearly $400 million. On our second quarter call, we discussed the combination of operational improvements, product wins and many tough business choices they have led us to these consistent results in NAT. This progress enables us to achieve and exceed our 2013 goal of $450 million of segment operating income a year early. Now these results are being earned at much lower volume levels and significantly less improvement less in pension expense than we originally expected. This is a real win for the team.

Most importantly, however, is that we continue to support our customers' profitable growth with products and services that help distinguish them in the marketplace. Now during the third quarter, we continued to see the destocking we highlighted in the second quarter with sell into the channels down more than sell out to consumers. The North American replacement industry remains at historic low levels. Our view continues to be that it is not a question of if but when industry volumes return to more normal levels. Now with channel inventories remaining low and US miles driven being up in seven of the past nine reported months, we continue to see significant upside in our Business as volume returns.

Now as a side note, there has been a lot written recently about the expiration of the tariffs in the United States on Chinese-made consumer tires. While the tariff expiration seems to have created some erratic order patterns in September, the impact on our North America business was limited as we've largely exited the segments served by these imports.

Now driven by North America's performance, our overall level of segment operating income is in line with our expectations. We delivered nearly $350 million of segment operating income despite high recessionary volumes. This reflects the structural changes in fixed cost reductions that we've implemented. Our price mix execution remains strong and it's helped us run our Business profitably even amidst the volatile economy. Our focus on price mix relative to the value of our products and services, as well as raw material cost remains a point of emphasis for our teams as we believe that raw material cost will continue to increase over the long term.

While certainly facing challenges in Europe and parts of Latin America, we are pleased that we have been able to deliver consistent segment operating income. Our success in price mix is reflected in our global revenue per tire which increased 5% from the same quarter a year ago. In line with our focus on innovation, we continue to mix up to a richer portfolio of innovative products that are winning with consumers. Now in China, Goodyear's newly launched EfficientGrip SUV tire was named the 2012 SUV Tire of the Year, marking the third consecutive year that Goodyear China has won a prestigious Tire of the Year Award from Motor Trend Magazine. In addition, our strong line-up of winter tires continues to be well reviewed in the European magazine tire test.

Five products were test winners, while the entire range of offerings earned high recommendations. In North America, the Eagle F1 Asymmetric All-Season is getting spectacular reviews for its performance, especially in the wet fall weather heading into winter. Now another positive in the quarter was our execution against our cost reduction targets, as we're on track to exceed our 3-year $1 billion cost savings plan. We implemented workforce reductions in all regions and took actions to substitute alternative materials and reduce tire weight. As you would expect, we will remain focused on our cost efficiency in 2013 and beyond.

Now in addition, the highlight of our quarter was our Asia Pacific business, which continued to grow earnings despite recessionary conditions in Australia and New Zealand. This was driven by success in growing our Business in China. Now, as you recall, one of our key strategies is winning in this critical market. Our Business in China had three key milestones in the quarter. First, the formal opening of our new factory in Pulandian, our most modern factory, and one that almost doubles our capacity in China. Second, the early closure of our original factory in nearby Dalian, completing the relocation of our production to the new Pulandian site. And third, just lastly, the launch of our first locally produced commercial truck tire product in China, also produced at our new facility in Pulandian.

Our business in Asia will benefit over the next several years as the Pulandian facility ramps up to full capacity and our team there continues to develop our China sales and distribution capability to help us win in targeted profitable market segments. Relative to our OTR business, our 63-inch tire production is in full force at our Topeka plant and we recently began the expansion of our OTR facility in Japan. Both of these are high return projects that allow us to take advantage of the strong global demand for such products.

And finally, another positive for the third quarter was cash generation. In the quarter, our free cash flow from operations was more than $100 million, a real accomplishment in the quarter that sees a seasonal use of cash for working capital growth. Over the past 12 months, we've generated more than $1 billion of free cash flow from operations. Now while there are enumerated positives in the quarter aligned with our strategy, our challenge was in volume, particularly in our European business.

The year-over-year volume decline in EMEA was more than 4 million units, representing most of the volume decline we've experienced globally. Certainly, this situation was a result of higher channel inventory due to the lingering impact of last year's green winter and reduced demand because of Europe's weak and uncertain economy. To be clear, all regions including Europe reflected strategic choices to focus on targeted profitable market segments versus a simple volume orientation. This is reflective of our disciplined choice making. But there were instances in Europe when we were not as flexible as we needed to be to address more aggressive actions by our competitors and provide higher levels of service to our customers.

Now to address this, we have taken steps to enhance our capabilities around people, process and systems and are seeing favorable outcomes. I'm confident in our ability to make significant progress here just as we have in North America where our supply chain is the clear competitive advantage. Now overall, the European tire industry is weak and we do not anticipate significant improvement in the near term. In that environment, we are focused on cost and cash and have reduced headcount, SAG, and other expenses consistent with the environment that we are seeing. For the quarter, our segment operating income in EMEA was below the prior year for the reasons I've mentioned, but also recall that last year's third-quarter volumes were at record levels and dealers restocked coming out of the prior year's white winter, anticipating another strong season.

Our business in Europe continues to have industry-leading winter products and is preparing to launch new products as the impact of tire labeling begins in earnest in early 2013. While we expect that strong label scores will certainly differentiate our products in the marketplace, we will continue to highlight many other performance attributes beyond those on the label. There will be no compromise in the market-back innovation that increases the value of our brands and our products for consumers. I'm confident in the steps that we've taken as we head into a prolonged slow growth environment with uncertainty around the Euro Zone remaining a relevant factor.

While being mindful of the impact of economic volatility pervasive in today's global economy, I look at our third quarter in the context of our strategy roadmap. The actions we choose to take in response to such uncertainty are largely within our control and are guided by our strategy roadmap. We believe that by any measure, we are successfully executing our plan. We are leading in market-backed innovation.

We are winning in many of our targeted segments and improving our product mix to increase our profitability in attractive markets. We have been aggressive on cost reduction and have improved our cash flow picture considerably. While we acknowledge work to be done in EMEA and Latin America, North America has not only returned to profitability but is on track to exceed the targets established in March of 2011 one year early. And we're growing our Business in China and increasing segment operating income in the region.

As you recall, one of the components of our destination is keeping Goodyear profitable through the economic cycle. Of course, given the challenges of the global economy, we remain in a slow growth portion of that cycle. In our view, this is where commitment to our strategy has its greatest benefit. Through continued execution of our key how-tos, including market-back innovation excellence, targeting profitable market segments, and enabling investments, we have not only delivered solid results but have made structural changes that position us to deliver sustainable value regardless of external conditions.

Our strategy is also helping drive more consistent earnings despite the tough environment. For the first nine months of the year, our segment operating income as a percent of sales was more than 6%. This is despite volumes at essentially 2009 levels. In 2009, our segment operating margin was a full 5 percentage points lower at these volumes. This demonstrates the consistent focus we have maintained on structural improvements to our Business and our processes. These improvements are helping us in 2012 and setting us up for success in 2013 and beyond.

Now there's a common theme to many of the positives we see for the quarter in North America results and Asia results and cost savings and in cash flow performance. That thread is our focus on another of the key how-tos operational excellence, the improvement in our planning, supply chain, production, and procurement processes that help deliver better results and better service to our customers. Now where these programs are working best, we see the best results. And where we see challenges, we are intensifying our efforts to further leverage these programs.

Progress in these operational excellence programs as well as other elements of our strategy roadmap is critical to our current progress and to our long-term success. The challenges of the current economic environment make it more important than ever that we stick to our strategy. It's the plan that we believe will enable us to deliver results and help us define the capabilities needed to reach our destination.

Now regarding the tire industry, I'd like to offer a few points for perspective. First, is to reinforce that the seven MegaTrends we introduced more than a year ago remain very relevant. Even in this environment, we continue to see the trends of emerging market growth, high-value tires in the mid-tier, green trends and labeling, to name just a few. The technological advances of the tire industry remain strong and play to our strengths.

Second, industry volumes clearly have slowed versus the projections of many experts. We are responding to this near-term slowdown, but remain steadfast in our belief that the long-term growth projections remain intact. That's what keeps us excited about our Business. While we are delivering strong results in today's low-volume environment, volume growth means higher capacity utilization and earnings power. That is what we are prepared to deliver. But for now, we remain focused on our near-term performance.

As you saw in our press release, we continue to target $1.6 billion of segment operating income along with positive cash flow in 2013. Clearly, with volumes as low as they are, this requires a different approach than we originally envisioned when these goals were established at the beginning of 2011. For example, our plan will rely more heavily on North America and less on International operations than we previously thought. In addition, we will have to rely less on volume and more on the value proposition of our products, and on improved cost efficiency.

Darren will review our volume forecast with you shortly. You will see that we are forecasting volume growth as part of a slow-moving economy. We will continue to closely monitor the economic climate region by region, and we will revisit our view if conditions change.

We've also taken significant restructuring actions this year both in our manufacturing operations and on our salaried workforce to bring our costs back in line with today's market environment. We continue to focus on additional actions, particularly in Europe and Latin America, to further improve results. To drive cash flow, we have managed our inventory position while also managing other elements of working capital. We have also taken a hard look at capital expenditures, reducing this year's spending to less than $1.1 billion and scrutinizing forward spending plans. Be assured we remain very focused on making the right adjustments to deal with tougher market conditions as we continue to move toward our destination as a Company.

Now I'll turn the call over to Darren.

Good morning. Thanks, Rich.

As Rich said, our results for the quarter reflected strategies we've been pursuing, focusing on driving earnings and cash flow over volume per share. We continue to generate consistent earnings in a challenging market. We continue to build our Business to deliver in 2013 and beyond. While segment operating income is down, this is a reflection of a decline in EMEA earnings after a 2011 third quarter that was a record by over $80 million. This year, EMEA earnings were down, but still well above 2010 levels despite the dramatic drop in winter tire volume. Outside EMEA, overall results were stable and very strong in North America.

We delivered these results while reducing production and lowering our inventories, bringing working capital back in line. While this resulted in higher unabsorbed overhead near term, it positions us to better manage cash flow and to benefit from reduced unabsorbed overhead as volumes recover in 2013 and beyond. Overall, we feel well-positioned, both to manage weaker markets now and to grow earnings and cash flow going forward.

Turning to the income statement on slide 7, our third-quarter revenue decreased 13% from last year's record level to $5.3 billion. The decline was primarily related to a 12% reduction in unit volume and a 4% reduction due to currency translation. Replacement unit volumes decreased 16% during the quarter, while OE volumes declined 1%. EMEA volumes accounted for probably three quarters of the overall unit decline. Our volumes were impacted by choices we made consistent with our long-term strategy to pursue only profitable volume.

Revenue per tire increased 5% compared to the prior year excluding the impact of foreign exchange. This reflected continued progress in price and product mix. We generated gross margin of 18% in the quarter, essentially equal to the prior year despite lower volumes. Selling, administrative, and general expense decreased $25 million to $652 million during the quarter. Foreign currency translation more than accounted for the decline in SAG. In a few moments, I'll highlight some of the cost savings actions we've taken that will have a favorable impact on our SAG costs going forward.

Excluding discrete items, our third quarter tax rate, as a percent of foreign segment operating income, was about 25%. For the full year, we continue to expect income tax expense as a percent of foreign segment operating income of between 25% and 30%. Third-quarter after-tax results were impacted by certain significant items. A summary of significant items can be found in the Appendix of today's presentation.

Turning to the segment operating income step chart on slide 8, you can see the progression of operating income compared with the prior year. We reported $159 million of favorable price mix during the quarter which more than offset $47 million of raw material price increases. Lower volume reduced income by $114 million while production cuts resulted in $89 million of additional unabsorbed fixed costs during the quarter, even after Union City closure savings. Cost savings of $102 million more than offset general inflation of $71 million. With the third-quarter results, we have now essentially achieved our 3-year $1 billion cost savings goal.

Going forward, we'll continue our efforts to improve cost efficiency and have implemented additional actions to further our progress in this area and now expect to exceed our original $1 billion goal. The other category includes higher pension expense and unfavorable foreign currency translation, consistent with the modeling assumptions we've provided previously. In addition, we did see a $27 million reduction in other tire related income, largely due to the impact of lower Butadiene prices on our third-party Chemical business.

Turning to the balance sheet on Slide 9, our net debt totaled $3.7 billion. Compared with a year ago, our net debt declined $233 million, despite significant pension contributions over the last 12 months. Again, to highlight our quarter inventory at $3.6 billion. As indicated previously, we aggressively reduced our production schedules to balance our supply of tires for the challenging demand environment. We made strong progress not only in reducing inventory on the balance sheet, but also in reducing unit inventory levels which are down over 10% from June 30 and are now below 2011 year-end levels.

Slide 10 shows free cash flow from operations. As a reminder, free cash flow from operations is cash generated after both maintenance and growth CapEx. However, it's calculated before any debt repayments or incremental borrowing, before contributions toward our unfunded pension obligation, and before cash restructuring actions.

During the third quarter we generated $105 million of free cash flow from operations. Over the last 12 months our free cash flow from operations was just under $1.1 billion, after $1 billion of CapEx, about one-third of which was for growth projects. This free cash flow from operations was used for contributions toward our unfunded pension obligation and to pay for restructuring actions, primarily the shutdown of our Union City factory. In addition, we also reduced our net debt position over this time period. So, if you look at our key balance sheet priorities, we made good progress in both funding our pension plans and reducing our net debt levels.

Moving to individual business units, I will start with North America. North American Tire reported segment operating income of $130 million in the third quarter, an increase of 67% from the third quarter of 2011. In North America, unit volumes were down 6%, reflecting generally weak tire industry demand. The consumer replacement industry was down 5% as dealers and distributors continued to destock during the quarter. Consumer OE industry demand increased 7%, as manufactures increased production in response to strong new vehicle demand. The Commercial replacement and OE industries were both down 6%.

Revenue per tire increased 4% year-over-year. Our strategy of focusing on targeted market segments, mixing up in products and pricing per value of our tires helped deliver significant price mix improvements of $87 million versus 2011. Consistent with the second quarter, North America tire's third quarter costs reflected approximately $20 million in savings from the closure of our Union City factory in July 2011. However, higher unabsorbed overhead negatively impacted results by $44 million, as we have lowered our production levels in response to the softer volume environment.

Lower butadiene prices in our Chemical business have negatively impacted third-party sales and reduced income by $20 million during the quarter. North America's third quarter results continue to give us confidence that we will not only meet but exceed our $450 million segment operating income target a full year ahead of plan. This is a significant milestone for Goodyear and is validation of our strategy in what remains a challenging macroeconomic environment.

Europe, Middle East and Africa reported segment operating income of $105 million in the third quarter which compares to a record $260 million in the 2011 period. Our 2012 results reflect sales of $1.7 billion, a decrease of 21% versus the prior year. The decline was driven by a 22% decrease in unit volume. Unfavorable foreign currency translation also impacted net sales for the quarter by $171 million. Revenue per tire, excluding the impact of foreign exchange, increased 9% year-over-year. EMEA increase in revenue per tire was driven by solid price mix performance.

The Consumer Tire business was unfavorably impacted by weakening in consumer confidence, weaker sales of winter tires after last year's green winter and dealers in some European countries having more difficulty obtaining bank credit. As winter tires sell in, it's been lower than the prior year, we've aggressively reduced our production volumes in both the third quarter and for the balance of the year. The impact of reduced production volumes negatively impacted EMEA's third-quarter results by $57 million. Industry unit volume for Consumer OE was down approximately 7%, and vehicle registration weakened further during the third quarter. Commercial Truck industry volumes declined for both OE and replacement as manufacturing output and industrial confidence indicators weakened.

Lower sales volumes negatively impacted income by $92 million compared with a year ago. Unfavorable volume was partially offset by cost reduction activities in selling and administrative expenses, which were $7 million below the prior-year level, and positive price mix of $31 million, which more than offset the raw material cost increases. Note that EMEA results were also impacted by a $12 million reserve for volume-related penalties under a contract for supply of tires by a third-party. We continue to focus on sales, cost and productivity efforts as we manage through the challenging environment we face in EMEA.

So Latin America, net sales in the third quarter were $520 million, decreasing 20% from the prior year. Unfavorable foreign currency translation accounted for approximately 9 percentage points of the revenue decline. Tire unit sales were 7% lower. The decline in unit volume was mainly attributable to reduced volume in our Consumer Replacement business and exiting the (technical difficulty). Production lines in both the third quarter and for the balance of the year. The impact of reduced production volumes negatively impacted EMEA's third quarter results by $57 million. Industry unit volume for Consumer OE was down (technical difficulty).

Ladies and gentlemen, I do apologize for the technical delay. I will hand the program over to Darren.

Sorry about that. I'm not sure where you lost me, but I'm going to keep going here. I was in the middle of some comments on Europe. I think in Europe, lower sales volume negatively impacted income by $92 million compared with a year ago. Unfavorable volume was partially offset by cost reduction activities in SAG, which was $7 million. SAG was $7 million below prior-year levels. Positive price mix was $31 million which more than offset raw material cost increases. Note that EMEA results were also impacted by a $12 million reserve for volume-related penalties under a contract for a supply of tires by a third-party. So we continue to focus on sales, costs and productivity efforts as we manage through the challenging environment we face in EMEA.

The Latin America net sales in the third quarter were $520 million, decreasing 20% from the prior year. Unfavorable foreign currency translation accounted for about 9 percentage points of the revenue decline in Latin America. Tire unit sales were 7% lower. The decline in unit volume was mainly attributable to reduce volume in our Consumer Replacement business and exiting the [bias] truck business in certain countries. These reductions were partially offset by improved price and product mix. Operating income was $49 million during the quarter, $13 million below the prior-year level, despite $39 million of favorable price mix. Operating income decreased due to a mix of factors including lower volume and associated unabsorbed fixed cost, cost inflation, and unfavorable foreign currency exchange.

Our Asia Pacific business reported segment operating income of $64 million for the quarter, a year-over-year increase despite $4 million of unfavorable foreign currency translation and $3 million of incremental start-up expenses associated with the ramp of our new factory in Pulandian, China. Units were 1.9% lower versus prior year as the strong demand in China was not able to fully mitigate the ongoing economic weakness in Australia and slowing economic conditions in India. Overall, we continue to decrease with performance and opportunities we see in Asia, and particularly in China, going forward.

Turning to Slide 12, you can see our 2012 industry outlook for North America and EMEA. For the most part, our outlook on the industry falls within the previously provided guidance range. There are a few exceptions I would like to highlight. In North America, our Consumer Replacement volume outlook is now down approximately 2% to 3%, the low end of our previous outlook. This change largely reflects the softer year-to-date industry volume as we expect fourth quarter volume to improve slightly from year-to-date performance.

We now expect Commercial OE volume to increase 6% to 8% for the full year. Volumes weakened during the third quarter and fourth quarter production schedules indicate further softness during in Q4. Turning to EMEA, we've maintained our guidance for the Consumer Replacement industry and reduced our volume outlook to the lower end of the range for Commercial Replacement industry demand.

On Slide 13, we updated our modeling assumptions for 2012. We are projecting a fourth quarter volume decline of 3% to 5%. This largely reflects continued weakness in EMEA. As a result of the lower volume outlook and our focus on inventory management, we now expect to see a possibly $240 million of additional unabsorbed fixed costs during 2012 compared to 2011 even after the benefit of Union City cost savings.

During the third quarter, we cut over 6 million units of production, which will impact our fourth-quarter results accordingly. We continue to anticipate our full-year raw material costs will increase by approximately 7%, although we expect to generate a benefit of approximately 10% during the fourth quarter. On a dollar basis, we expect the full-year increase of just under $600 million. We expect a modest increase in price mix during Q4 despite the negative impact of raw materials index agreements in certain OEM fleet contracts.

Assuming recent spot rates, we expect the unfavorable impact of foreign exchange to be about $50 million for the year. As I mentioned earlier, we expect our cost savings of about $325 million for the year. Finally, our expectations for Pulandian start-up costs are now below the previous range as we make progress in completing the transition from our old facility at a faster pace. Given we are now beginning production of Commercial Truck Tires in Pulandian, however, we do anticipate an uptick in the fourth quarter costs.

Turning to Slide 14, you see our key assumptions for 2012. We have refined our assumptions for several items, but they largely fall within the previous outlook range we provided in July. The one exception relates to our capital expenditures forecast. As you can see from the slide, we've reduced our anticipated capital spending for 2012 to below $1.1 billion. In addition, as we look in 2013, we are revealing possible reductions in response to lower industry demand and our focus on spending efficiency.

Before we go to Q&A, I would again say we continue to target $1.6 billion in segment operating income despite 2013 volumes now well below what we expected them to be back in March of 2011. As Rich referenced in his opening remarks, beating our target will require a different approach. It still assumes volume growth in the range of 5% from this year's levels.

That said, we demonstrated significant progress in areas of cost reduction and producing innovative products that consumers value while effectively managing raw material cost increases. We view our target as achievable, given the fundamental improvements that we've made to our business model and the opportunity for volume from pent-up demand. In addition, as volumes do return, we have the capacity to continue to grow our earnings beyond 2013.

With that, we will open up the call for questions.

(Operator Instructions)

Rod Lache, Deutsche Bank.

A couple things, one is, just to clarify, I missed this, but did you say that there was a $12 million penalty in the SOI for Europe in the quarter?

Yes, Rod. The comment there was that we had a reserve for a $12 million penalty under a third-party tire supply agreement. So we are taken lower volumes from that third-party and we've had to reserve for the contractual penalty.

Okay so that's a one-time item, I would imagine?

Yes.

Okay. Can you talk about your trend in terms of replacement volumes in a few markets; looks like it is a bit weaker than the overall industry, the 10% drop in North America, I think you said 20% for Europe. How should we be thinking about that just relative to industry performance right here and then going forward?

Yes, Rod, I think -- excuse me, I think if we look at it, we actually have to look at it. I think you make a good point, region by region, I think the dynamics are different. So if we look at it in the current quarter, what we see is we think about our share and our volumes. We look at it and we think about three different things. One, is relative to us, relative to everyone, we saw lower industry because of the general economic weakness so that certainly impacted our volumes.

Second to that, we are impacted by geographic mix which I think you appreciated. We have higher penetration by and large of a mature markets which were more impacted by the economic situation we're in than were some of the emerging markets. That certainly compounded the impact of a weak economy. The third thing is, is really the choices that we are making in line with our strategy, really focusing on the targeted profitable segments that are in our sight, and measuring volume in the lower segments of the market that aren't profitable for us. So we're following our strategy, making decisions in line with that and certainly comfortable with it.

As we look at volumes, as we look at volume going out, again, I think in North America, certainly, we see really a pretty good environment. As I said on the call, our channel inventories really are in very good shape. They're at very low levels and we continue to see a lot of pent-up demand there. I know you guys follow as well. We see miles driven now up seven out of the last nine months, almost up 1% year-to-date so that pent-up demand is there; just a question of when it comes back. EMEA clearly, clearly tougher than we expected. The volumes there, from an industry perspective, are really approaching, are at really the 2009 recessionary levels.

Again, unprecedented levels and there we are making changes to increase some flexibility in our supply chain. I'm happy with the decisions we are making to get back to where we want to be more so in Europe. Overall, I think when we look at it, we see where the industry is headed. We are making our best call and we are comfortable with it and we will continue to monitor it as we go forward.

So just to -- on that last point about the [steel] activity that you're commenting on. I guess should we just be thinking that going forward, volumes may not move or probably won't move in line with the industry, maybe a little bit lower, but your pricing will typically be quite a bit higher? And related to that, how should we be thinking about pricing here as we get into this period here from Q3 to Q4 on a year over year basis when you start to see a bit of a drop in raw materials? Should we be assuming that some portion of that in the near term is being passed back into the market?

Yes, Rod, on the first point, I think we are going to stick to the strategy that we have and that's really not pursuing volume just to fill the factories. Certainly, we are cognizant of our factories and the fact that we need to manage our cost structure and you see us doing that, but we will remain focused on those market segments where we can add value to our sales and our customers. Again, to your point, you see that in the results in revenue per tire. You see it in segment operating income, even in Europe, that's certainly below last quarter. But if we look at where Europe was at the volumes at these levels back in '09, I think we lost $50 million, we made $105 million here. So our strategy is one we are comfortable with.

We're making those choices, but we are comfortable with the choices that we're ultimately making and I guess looking ahead, we continue to see lots of opportunities for us to continue to mix up the business. In terms of how we look at pricing going forward, I think you're right, you connect it in part to raw material cost. Darren, you can talk a little about, certainly the RMIs we had with the OEs that impact [raw materials] as well.

Yes, that maybe the point to make that first consideration here is raw materials have gone down and stayed down for a while. What we see the impact of the raw material indexing agreements or adjustment agreements that we have with OEs, with fleets and with certain OTR customers, clearly becoming a factor. Those are decisions we made. We are happy with those decisions. Those decisions -- those contract provisions help us as raw materials increase, obviously, protect us from raw material costs increases, but it doesn't mean that there's price reductions that are automatic in the contracts as raw material costs come down.

Aside from that, we are always focused on having the right value proposition for our products, making sure that we are competitive on that basis. While price is a factor there, we take our own targeted actions, our value proposition goes well beyond price, includes technology, our service levels, our brands. Every segment is going to be unique in that respect. But clearly, we are looking to, on an ongoing basis, get the value proposition right for our products and deal with raw material cost as they move both on the way up and on the way down.

Okay, just to clarify, have you made any adjustment on the replacement market in terms of pricing thus far?

Rod, if you look, going backwards, I think what you've seen in the industry is certainly you've seen some select discounting and promotional activities and we have done that as well.

Any way to quantify that?

I think Rod, what we've been able to do is we've essentially anniversaried all our price increases. You are still seeing a revenue per tire growth for us which says we are continuing to get the benefit of price and product mix. Anything that we've done from a discounting or promotional activity perspective is inherent in that 5%. I guess that you -- I probably have to leave it there. The revenue per tire growth is not as high as it was as raw materials were increasing. Clearly that's revenue per tire growth has been double digits, it is 5% in this quarter.

You ask a question about going forward, I think you look at history, a track record is that even as we've seen raw materials decline, we've tended to still, for the most part, have some positive price mix affect. That's what we are looking for in the fourth quarter as well, even with some significant benefit from raw material costs and the impact of the raw material indexing agreements for the OEs and fleets.

Itay Michaeli, Citi.

Thanks, just a first question on the volume outlook for the fourth quarter of down 3% to 5%. How much visibility do have on that right now? What are you assuming industry-wide and perhaps inventory levels in the channel behind that 3% to 5%? Just want to try to understand how much visibility we have on that target?

Itay, I think you know it is almost the end of October right now, so we certainly have a view of how our business is going forward. I think, really, what we are giving you is the best estimate of what we see from our basis on where the industry is headed right now. Our OE business in North America continues to stay robust. In North America, I think we see volume decreasing as you see on the slides that we have there, but for us our mix and our price/mix continues to be very strong for us. Europe obviously continues to be a problem as we look at where that market is heading given the whole economic conditions there.

Great. Then just a modeling question. The corporate other walk from SOI to EBIT seems a little bit higher in the quarter. How should we think about that for the fourth quarter? It should be similar as what we saw in the third? And then are you still comfortable with $150 million placeholder for 2013?

Yes, so Itay, after another walk in, I think that there are a couple of items there. I don't think we see anything significant in the run rate. I will say that the stock price movement does affect incentive compensation accruals and in fact, the stock price was up in the quarter had an impact. So when we did our -- I think in the last call, when we did outlook at 2013, we had adjusted the Corporate Other outlook to $150 million for next year.

Right. Okay. And then as we start to think about 2013, it sounds like you're still pretty confident in the $1.6 billion of SOI, we're talking big picture around what some of the drivers there are? Just price mix perhaps, China, I know you mentioned 5% industry or low volume growth assumption, perhaps some restructuring that might becoming like in EMEA's [France]? Just want to maybe do a broad walk of how we should think about the walk between 2012 and 2013.

So Itay, it is a good question. I think there's a couple of things of how we think about where we are and where we are we are going. Number one is, really to start with where the business is today. We're very pleased with the progress that we've made. In fact, we would tell you actually, in our North America business, much further ahead than we thought we would be. We reached our -- we're planning to exceed our 2013 target a year early. So as we bridge that, we are actually pretty confident in terms of where the North America business is.

As we look to bridge it further, we're assuming, as Darren said in his remarks, a volume increase next year and that's certainly a key element both in terms of volume increase from a sales standpoint but also the throughput we'll get through the factories to recover some of that unabsorbed overhead that we are incurring now from the production steps that we've taken. And then in addition to that, as we look where raw materials prices are today, you're going to see some of that flow through come into at least the first half of 2013 that should help us to our target as well. And then to your point, you can obviously count on us to increase the cost and productivity and the efficiencies in our business particularly given where the global economy is at.

So as we look at that, I think from a structural standpoint, we're really ahead of our business. We've made good progress in sticking to the target of the $1.3 billion. Certainly it is tougher than it was, but [evidence]-- excuse me, tougher than it was when we started it, but I think evidence of the structural changes we've made in our business is on the fact that we are sticking to it in the case where we are about 20 million units less than we said we were going to be when we put that target out in 2011. We are not getting a really pension tailwind in terms of hitting that.

That's very helpful. And just lastly, Darren, any thoughts on working capital on a full-year basis? I think you're at a use of $900 million a year to date. Just wanted to have a better sense of that and maybe you'll just talk about fourth-quarter free cash flow on that?

Yes, so I think that our business model continues to be working capital as neither the source nor use. So we look to continue to grow our business without using cash for working capital. We've got a good track record doing that so obviously, we've had a long history now of driving down working capital as a percent to sales which then allows us to grow our sales without using cash and working capital. Fourth quarter tends to be a working capital reduction quarter and I think we still expect that this year. Although I would say that we've done a better job keeping working capital more consistent, not using as much cash and working capital in the middle of the year this year. So we feel good about that, but we are still going to see some seasonal inflow in the fourth quarter.

John Healy, Northcoast Research.

(technical difficulty) Latin America business -- (technical difficulty)

Sorry, John. We lost you on the first one. We couldn't hear you.

Wanted to ask a little bit about the Latin America business. It seems like that market continues to be competitive and I know there were some things that were talked about in the press about -- (technical difficulty)

John, we've lost you again. Operator?

(Operator Instructions)

Hello?

John, we are still here but you started with Latin America and we lost you.

Okay, sorry about that. Wanted to ask about some of the things going on in that country there. There were some news reports about some tariffs, with it taking place in Brazil. Is the momentum there continued? Is that an opportunity for you guys to maybe firm up your position in that market? I'd appreciate any commentary there.

So John, Latin America for us has been a tremendous market for us. It is fundamentally still a good market. I think what we saw over the maybe past 18 months is with the strengthening of the currency, we saw a lot more imports coming into the market that certainly changed the dynamic of the market really for the first time in its history. Latin America, broadly speaking, not just Brazil, has had a history of having volatility to it. We understand that and that's okay. We know how to manage through that.

We see the market as continuing to grow and we see the market as continuing to mix up into larger rim diameter tires in line with that, that expectation or that trend, really one of the Megatrends that we've talked about. We've announced the expansion and upgrading of our factory at Americana to make those HVA tires just as we have in other parts of the world. So we are very excited about the opportunities we see on the Consumer side and relative to the Truck side, I would tell you our Truck products in Latin America and Brazil are really industry-leading. We have excellent products there. It's what we hear from our dealers, it is what we hear from our customers. So between the two of those, we remain very well-positioned to continue to success we've had in Latin America under, as you say, certainly a different set of competitors that has been there historically.

Great. I wanted to ask about the price mix that you've been benefiting from the last few quarters, number of quarters. When you look at the price mix benefit in the US and then you look at it outside of the US, is there any different relationship between the two? Is one market more of a beneficiary of price and then the other of mix? Trying to understand what's happening by segment, and maybe how the consumers may be beginning to pay more for the value of the Goodyear brand?

No, I think -- I wouldn't distinguish region by region, a fundamental difference in terms of price mix, in terms of our value propositions for how our customers view it. I think it is pretty consistent. Our view is, Darren made a comment earlier that we talked about the value of our products, the value of our services, the value creation in terms of the product attributes to the customers, those are the things we focus on. Our value proposition may differ from region to region. For example, winter tires in Europe are a much bigger part of the market than they are, say, in North America. So we do have differing value propositions, but at the end of the day, that focus on price mix and value creation is in line with our strategies around innovation and around targeting profitable market segments.

John, the only point that I would add to that because I think that, that pretty well covers it. I will say that where we run into instances where there are very high levels of inflation. We've got some examples in Latin America right now. You do see some additional pricing that we've [done] historically to deal with that inflation and so I might call that a bit unique in a couple of the economies in Latin America, but otherwise I think Rich hit the point.

Aditya Oberoi, Goldman Sachs.

Hi, yes, this is Pat in for Adi, just for old times' sake here.

Good to hear from you.

I was hoping to just get your comments on the impact of the ITC Tariff expiration which happened in September. Is that -- I know that you had downplayed in the past the likelihood that, that was going to have a big impact just because you don't really play at the lower end so much. But how is that changing things just from what you've been hearing from dealers with the October data?

I think, Pat, we said this in our remarks. We saw some unique and maybe even erratic ordering patterns in the market as the tariffs came off and everyone was trying to understand what the implications were. But I think it impacted the September industry numbers if you look at it, but at the end of the day, as we've consistently said, that's not the part of the market where we spend a lot of time. In our North America business, as you know, we've [exited] a lot of private label parts of that -- private-label volume so as we look at our business, not a significant impact for us as the tariffs came off.

Okay, great. And then one last question if I may. Mix continues to be one of the important tailwinds for you guys. Can you just remind us about what the core drivers of that are going forward? I think you've cited rim diameters continuing to get bigger so there's a vehicle stock driver. I guess you mentioned Latin America trading up, but collectively, what are the biggest things that you expect to continue to push that forward as a tailwind?

So Pat, what I refer you back to are the seven Megatrends that we highlighted back in 2011. I think if you look at that, those really are things pushing the industry to an upgraded place, if you will. As we said, we have a larger, more complicated higher performing tires moving into the mid-tier not just playing at the high end of the market. You see a lot of even economy vehicles with 18-inch rim diameter tires. You see fuel economy driven tires, those are Fuel Max tires more so in OE and consumers being more focused on it as they think about their budgets. So that more complex tire are moving to the mid-tier is clearly a trend that's going to drive it. The tire labeling trend that we've talked about really fills those tires with just a tremendous amount of technology to be able to simultaneously get the attributes of increased fuel mileage or rolling resistance while not giving up, in fact increasing traction and not giving up and increasing tread where it's well. Those are trends that are going to continue to drive this industry going forward.

So again, if I have you refer back to those seven Megatrends, that's really what it is going to be and those are not limited to mature markets, those are happening at even faster paces in emerging markets as well. So it's our focus. If you look at our key how-tos, we talk about innovative products to drive mix and to drive our products. We talk about winning in targeted profitable market segments, really focusing very particularly on the channels where those product attributes, those set of Megatrends are taking route. Those are the core of our strategy to drive our price mix. If I could say, you've seen that again in our North America results. You've seen it in strong price mix for the Company. You've seen us more than offsetting raw materials now as a trend because we are focusing on those parts of the market.

Brett Hoselton, KeyBanc.

Darren, in your opening comments, I think you made a comment regarding fourth quarter price mix performance versus raw. I didn't quite catch that. I was hoping you could just repeat your expectations there?

Brett, I'll take the question. What -- the view that we've got in fourth quarter price mix is that even though we are going to see a big, a fairly significant decline in raw material cost in the fourth quarter, we are still expecting price mix to be positive, although maybe less of a positive than we saw in Q3. But a positive and it's probably being impacted by the fact that we've got these raw material index agreements in our OE and flee contracts. So we've got some price downs that come automatically in those contracts but we are still looking forward to be a modest positive for us in Q4.

As we think about the indexing contracts, what's the lag between when raw materials start to decline relative to the index itself? Is it a one-month, one-quarter, six-month lag?

Yes, Brett, the contracts, as much as we can, are set up so that the pricing adjustment tracks with our cost of goods sold. So there's a quarter lag or so at least in the, as we look at raw material change and when the contracts kick in. I'd say we have contracts that have different timeframes, but for a lot of them, we do have quarterly adjustments now.

And then as we think about the 2013 target, the $1.6 billion in segment operating income, if I'm not mistaken, over the past couple of quarters, the two things that you cited as incremental challenges were going to be pension and volume; am I correct on that? Are those the two primary challenges?

I think, Brett, I'd have you focus probably more so on volume as being the challenge. As we said originally, we needed 3% to 5% growth each year to hit that and that's something that obviously, if we look backwards, we haven't gotten. Now as we look ahead, we see an opportunity for volume to increase as we look at where the various regions are. In Europe, we are bouncing around at 2009 levels, so '12 would indicate to us that we at a floor or bottom of that market and that should help us as we get into 2013. In North America, we've been at low levels where we see opportunity for a tailwind given that Consumer Replacement industry has been around 240 million, 241 million units. That market has been as high as 257 million as we look at it so there's an opportunity for a tailwind there.

If you pair that up with the destocking that we refer to that's going on particularly in North America, I think it is reasonable to assume that, that stops at some point in time given where channel inventories are again. And then as we look to 2013, we are certainly still seeing some emerging market growth so as we look ahead, volume will be a challenge. We see, from a planning standpoint, as we look at the industry, that there is an increase that we are forecasting. Of course, that's going to be subject to the global economy and any shocks or severe things that may happen region by region. But as we look at it, we think our outlook is reasonable when we look at the fundamentals of the industry.

And as we think about $1.6 billion target, if we were to assume the volumes were flat in 2013, where would that $1.6 billion fall, roughly?

So Brett clearly, for us to get to the $1.6 billion, we've got to have some volume. I think that you would look at and say realistically, we've got to have some volume growth. So I think that it gets very tough, but to the extent we've encountered different volume environments, we've consistently been able to take actions to adjust for those. If we run into a volume environment that's tougher, we are obviously going to lean more heavily on what we can do from a product perspective, from a mix perspective and from a cost perspective. I think that we have shown some flexibility to adjust to changing environments so I think if we look at it, I don't know that it's determinable now. If we run into a different environment, we're going to make adjustments. We're going to do everything we can to stay focused on that target.

And then finally, in your opening comments, or at least your press release, you talked about some potential for additional cost reduction actions and it sounds like that's something that's important to achieve in the $1.6 billion. I guess my question is, am I correct in my interpretation of that? And then secondly, are you in the planning stage at this point in time? Do you expect to unveil some additional targets at some point in time in the future?

Brett, cost savings and cost efficiency are an ongoing matter for us. I think the scenarios that we look at playing out next year, obviously, there are different scenarios and those different scenarios are going to require a different level of cost focus. Clearly, I think we are looking at what actions we're going to need to take to the extent we continue to see a soft volume environment. And what actions we would have to take if the volume environment is even weaker than we expect. So I think that we are in a perpetual planning stage on this and I think it's not lost on us but we've got the significant headwind from unabsorbed overhead. So I think the challenge to us is to continue to look at what kind of structural cost we want to have for manufacturing and I think, particularly, in Europe, given the environment there.

Okay, everybody, thanks very much for listening in today.

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