The Goodyear Tire & Rubber Company (GT) Q3 2007 Earnings Report, Transcript and Summary

Good morning. My name is Wanda and I will be your conference operator today. At this time, I would like to welcome everyone to Goodyear Third Quarter 2007 Earnings Release 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]. At this time, I would now like to turn the conference over to Mr. Greg Dooley, Investor Relations. Thank you. Mr. Dooley, you may begin your conference.

Thank you, Wanda. Good morning everyone and thank you for joining us for Goodyear's third quarter 2007 results review and strategy update. Joining me on the call are Bob Keegan, Chairman and CEO; Mark Schmitz, Executive Vice President and CFO; and Darren Wells, Senior Vice President of Finance and Strategy. The webcast of this morning's discussion and the supporting slide presentation are available now on our website investor.goodyear.com. We filed our Form 10-Q this morning. This morning's discussion will be available for replay after 3 PM Eastern Time today by dialing 706-634-4556 or on our website at www.investor.goodyear.com. Before we get started, I need to remind everyone that our discussion this morning may contain certain forward-looking statements based on current expectations and assumptions that are subject to risks and uncertainties that can cause actual results to differ materially. These risks and uncertainties are outlined in Goodyear's filings with the SEC and in the news release we issued this morning. The Company disclaims any intention or obligation to update or revise any forward-looking statements, whether as a result of new information, future events or otherwise. Thanks again for joining us today. Now, I will turn the discussion over to Bob Keegan.

Well, thank you, Greg and good morning, everyone. Before we report specifics, what I see is an outstanding third quarter. I’ll make a few opening comments to touch on key topics of interest for Goodyear. First, our product, brand, customer, and geographic mix continues to be richer each quarter. In the third quarter, this is driven significant margin expansion despite weak market conditions. How did we achieve this outcome? By specifically targeting attractive i.e. high margin market segments and market opportunities. Future planned investments will continue to be directed toward available high return opportunities. Second, joining me on the call today for the first time is Mark Schmitz, our new Chief Financial Officer. Now some of you have already met or talked with Mark since he joined Goodyear in August and I am pleased to have Mark on Board for two important reasons. Mark’s addition strengthens our leadership team with an experience CFO who has a successful track record, who is intimately familiar with big brands and building those brands and who has considerable international business experiences. In addition, mark’s presence allows Rich Kramer who many of you know, our previous CFO, to focus his considerable business expertise solely on the operations of our pivotal North American tire business. Third, I’ve mentioned many times to you that innovation is now at the center of everything we do at Goodyear. While our innovative new products are the most obvious example of this, we seek to apply the same creativity to all parts of our business. This is true whether we are developing initiatives to target attractive new markets globally, developing strategies to optimize our price and mix gains, or creating innovative ways to address our legacy healthcare obligations for our Steelworker retirees in North America through a VEBA Trust. I’m particularly proud of our work with the VEBA concept and we’ll talk more about the status of VEBA Trust approval process later in the call. We are certainly pleased with our third quarter results and I’d like to comment on the highlights of the quarter. Revenue grew more than 3% to a record $5.1 billion despite lower unit sales that resulted from generally weak markets and our strategic decision last year to exit segments of the private label tire business in North America. Revenue for tires grew 7% driven by our continuing price mix improvements, robust demand for our premium products has resulted in supply constraints at many of our markets, and I highlight here that we got those supply constraints because of robust demand, frankly, beyond our forecast. And as a result we are accelerating our planned investment to increase our capacity to produce high value added tires and thereby increase our margins. Gross margin increased to 20% that represents a 260 basis points increase over 2006 and reflects price mix improvements, structural costs actions, and significant growth in our operations outside the U.S. where we enjoy higher margins. Total segment operating income grew 35% generating a corporate-wide return on sales of 7.5% and I would here remind you that the strike on North America started on October 5th last year and didn’t affect Q3 results. So, our comparison versus last year’s third quarter is a valid comp. I would also point out that five out of five strategic business units posted double digit or better increases in segment operating income versus Q3 2006. North American tires Q3 segment operation income is the highest since the third quarter of 2001. And our emerging markets businesses in Eastern Europe, Latin America, Asia-Pacific continue to perform very well. In aggregate, these three businesses grew revenue 15% and segment operating income 24% versus Q3 last year, following strong performance in each of the past several years. We made further progress against our Four Point Cost savings plan and remain on track to achieve our cost goals. We completed the sale of our engineered products business in late July, receiving $1.4 billion in net proceeds a substantial balance sheet improvement. The sale resulted in a $517 million after tax gain in the third quarter and represented the completion of the capital structure improvement plan that we introduced in 2003. Obviously, the work with regard to capital structure improvements is ongoing. As I mentioned earlier, we continue to strengthen our leadership team. In addition to appointing Mark Schmitz as CFO in September, we announced that Mark Purtilar would join Goodyear as Chief Procurement Officer. He replaces Garry Miller who is retiring after 40 years of contribution as a Goodyear Associate. And Mark will oversee our global procurement strategy and be responsible for approximately $10 billion an annual purchases. Mark has a successful history of developing global procurement strategies to reduce costs, maximize efficiency and maintain quality, and this is an important area of focus in our Company and Mark will further help us accelerate our low cost country sourcing initiatives. As I have said before, our leadership team today is the best in the industry and it is getting better every year. We continue to focus intensively on the five business platforms that we previously discussed with you. I’ll update you on the progress that we are making against each of our platforms. We remain focused on achieving profitable topline growth, bringing innovative new products to the marketplaces key to achieving this goal and our new product success continue during the third quarter. In North America, we leveraged the success of a recent European product launch by introducing the Goodyear Eagle F1 asymmetric tire, yet, another category leading product and this one in the summer ultra-high performance segment. As you know, in the chart, our new products continue to receive top recognition through their performance in the major magazine test, which are a critical factor in driving consumer purchase decisions in those markets. Our new product engine will be supported by investments to align our global manufacturing capacity with the demand trends we see in our industry. Our investment plans are clearly focused on high return projects. Our investing goal is to expand our high value added or HVA capacity by 40% by 2012. And expand our low cost capacity to approximately 50% of our total capacity by that same date, 2012. I think that is correctly important for you to note here that we will continue to apply the same disciplined approach to capital allocation that we had developed during the past five years as we execute now against these future plans. During the third quarter, consistent with our goal of expanding HVA capacity, we began investing in our plants in Fayetteville, North Carolina, and Gadsden, Alabama. We have commitments for significant local and state government incentives in both states that help fund these projects. We are continuing our revaluation of potential new plans in Eastern Europe and Asia. And these investments, I think it’s important to know would support both our low cost and HVA capacity expansion plant and will allow us to capitalize on significant market growth in those regions. I don’t have any further specifics to share with you today regarding these potential investments. However, we will provide updates in future call. Continuing demands for our new products supported by increased marketing investments allow us to drive price mix improvements in the third quarter. Price mix gains, once again, more than offset raw material cost both in the third quarter and year-to-date. A particular note relative to the topline is support the that we continue to get from our customer base in North American as may of know that was an issue several years ago, it’s not an issue today. Our dealers are clearly with us and we receive further confirmation of that, any recent national dealer advisory board meeting, where our dealers indicated that they were good… bullish about Goodyear and our positive brand momentum. We are executing well against out Four Point Cost savings plan having now achieved nearly $900 million towards our target of $1.8 billion to $2 billion of cost savings, remember that by 2009, and Mark will go in more detail with you in the progress we are marking there. We remained focused on further de-leveraging and reducing our interest expense, most of which, as you know, is not tax deductible. With regard to our VEBA Trust for current and future Steelworker retirees, the parties have signed the required settlement agreement which was filed in Federal Court yesterday October 29, and that’s a major step forward in the process. That given the required steps in the legal process, including the required 90 days notice period following preliminary approval, we now anticipate having the process completed during the first half of 2008, and while this delays of cost savings, we expect to achieve the full annual run rate savings of $110 million once the process is complete. As I said earlier, we completed the sale of engineer projects in late July, and this allows us to lower our debt, lower our legacy cost, and grow our core consumer and commercial tire businesses. We are evaluating remaining non-core businesses as part of our own ongoing strategy review, but have no definitive plans to announce at this point. Goodyear’s changing and an accelerated pace and you’ll see that on slide 13, if you reference that slide, you’ll see there, an impressive list of key actions that we’ve taken since the beginning of this year. And our team is really proud of the cumulative impact of those actions. Although, we are pleased with our third quarter results, we recognize that we will continue to face challenges in this competitive business. And I just mentioned these challenges and indicate how we attempt to address them. First, we operate in a competitive industry, and our innovative new product engine, a focus on building our brand portfolio, an advantage supply chain, our rapidly improving marketing capabilities, and aggressive classed actions are keys to sustaining the momentum that we have established. Point number two, raw material costs rose nearly 5% through the first nine months of this year and are likely to remain volatile. We are driving price and product mix improvements and the increasing our ability to substitute lower cost materials to off set future increases. Point number three, while the global economy remains uncertain, we are reducing our fixed cost structure and positioning our capital structure to enable our Company to compete more effectively throughout the ups and downs of the economic cycle. As evidence of our progress, our North American business is improving earnings this year despite substantially lower volumes. Point number four, as I mentioned earlier, we are experiencing short-term supply constraints in some key products. To meet the robust demand for our premium products, we are accelerating our investment high value added capacity, and making major supply chain improvement. To meet the demand for our products, our investment plans will require higher dollar levels of investment than in the past. And we will drive additional cash generation in the business through cost reduction actions and working capital improvements in order to help fund those requirements. We fully recognize that we face challenges, but remain confident that we have the strategies and the team in place to address them affectively, just frankly as we demonstrated over these past several years. We also remain confident that our execution against our business platforms will enable us to achieve our next stage metrics. And you recall, these metrics are an 8% segment operating income return on sales globally, a 5% segment operating income return on sales in North America, and a target 2.5 ex-debt to EBITDA and in each case, to reach those metrics, you will see evidence in the third quarter that we made substantial progress towards those levels. I’ll now turn the call over to Mark to review third quarter financial results in more detail. Mark, welcome to the call.

Yes. Thank you, Bob. I would like to open my comments by saying I am fortunate to be joining Goodyear in an exciting time, and I look forward to working with Bob in his leadership team as we pursue growth opportunities and the cost improvements and the others. As Bob mentioned, we are pleased with our third quarter results and my comments will be focused on the primary drivers of our financial results, including cost savings progress and a discussion of the trends that we are experiencing in each region. Turning first to the income statement. Revenue grew by more than 3%, driven by continuation of price and mix improvements and favorable foreign currency translation. These positively impacts were partially offset by 7% decline in unit volume as a result of the decision to exit certain segments of the private label business in North America, as well as the continuation of weak conditions in several key markets and the short-term supply challenges as Bob mentioned. Gross margin improved by 2.6 percentage point year-over-year. This margin expansion was achieved through price and mix improvements in excess of raw material cost increases, growth in our high margin emerging markets operations and cost savings actions. These latter included the restructuring of solid retiree benefits, manufacturing footprint actions, and continuous improvement initiatives. While the third quarter is typically strong quarter for us in terms of gross margin as we benefit from increased sales of premium with tires in Europe. It should also be noted our ongoing investment program will continue to provide additional opportunity for mix driven margin improvement as well as cost efficiency. Segment operating income amounted the $382 million or 7.5% of sales compared to $282 million or 5.7% of sales last year, an increase of 35%. Each of our tire business segments increased this gross margin and its operating income year-over-year. Net income from continuing operations was a $159 million or $0.67 per share in the third quarter versus a loss of $76 million in the prior period. Reported net income included $6 million or $0.02 per share in rationalization and accelerated depreciation charges primarily resulting from the plan to discontinued production of our tire in Texas facility. Gains on asset sales were approximately $10 million or $0.04 per share and additional tax expense of $12 million or $0.05 per share. The increased tax expense was primarily due to the reduced value of deferred tax assets due to a tax rate deduction in Germany. We reported an after tax gain on the engineered product sale of $517 million, which is included as discontinued operations. All inclusive net income per share is $2.75. Several items that impacted our results in the third quarter of this year and last year are listed on the last page of our earnings release and in the appendix to the slide presentation. Slide 17 shows the factors which yield at the improvement in segment operating income in quarter 3 ‘07 versus the prior year. Price and mix improvements in excess of raw material cost increases yielded a $156 million of the improvement, continued net trend that we have been experiencing all the year. Foreign currency translation primarily Europe and Latin America yielded $33 million of the improvement. In addition, we realized approximately $120 million of savings from our Four Point Cost savings plan during the third quarter. The savings came from successful execution in each of the four areas we have outlined previously. These included actually footprint rationalizations, the salary benefit changes we implemented this year as well as continuous improvement initiatives and low cost sourcing. Remember most of the savings from the Steelworker contract will not be realized until 2008 and 2009. Offsetting these positive factors where the impact of the 4.1 million units sales declined reducing segment operating income by 23 million in the quarter, along with inflation estimated at $110 million. Now that this exclude the impact of raw material prices, which are net against our pricing net gains. We also experienced temporary manufacturing inefficiencies due to the changeover in our plans to high value added products, the implementation of segment operations in two of our North American plants, training of our new $13 prior associates and inefficiencies related to the plants shutdown at tire production at Tyler Texas facility. So, administrative and general expenses also reflected increased advertising, which increased by $17 million year-over-year, much related to our Get There campaign in North America. No loss of the selling administrative and general also reflected the impact of foreign currency translation and higher cost in terms of compensation plans. While we are pleased with the progress that we are making in cost savings, a large portion in structural cost savings were targeting does remain ahead of us. In slide 18, we show the annualized run rate savings in quarter 3 compared to what we expect to achieve once the structural savings are fully realized. You can see that in quarter 3 we realized the full run rate savings from our salary benefit restructuring. On high cost footprint reductions, we expect to achieve the Four Plan savings and more than $150 million compared to the $85 million annual rate reflected in quarter 3 This will improve the impact of the planned shutdown of tier production in Tyler Texas. The Steelworker’s productivity savings are expected to ramp up as we realized the savings from the new $13 per hour labor. We expect to realize $440 million of run rate savings by 2009 from Steelworkers productivity compared with a run rate of only $20 million in quarter 3. And we expect to achieve full run rate savings in the $110 million provided to the VEVA steel force retirees, which will begin in post deliver process is complete. Turning to the balance sheet. Our cash balance at $2.9 billion is about $900 million less than year-end ’06, although, $1.6 billion higher than a year ago. In addition to reflecting the proceeds of the sale of engineering products in our equity offering completed in May, the change in our cash balance reflects total debt repayment of more than $2 billion, since the first of the year. Offset by seasonal growth in working capital where quarter 3, is our highest quarter. This is due to sales in winter tires in European markets as our dealers stock up for the winter selling season. Absorption of cash and trade working capital through nine months is about $950 million, $100 million more than last year, reflecting a winter selling season and our continued recovery from the strike in North America. The trade working capital balance at September 30th was, however, flat versus a year ago and day supply working capital was lower than a year ago. Total debt at September 30th was $5.1 billion, which was down from $7.2 billion at year-end. Now turning to cash flow for the first nine months of the year. Cash flow used in continuing operations was approximately $200 million more than last year, reflecting the increased working capital consumption just mentioned as well as higher pension contributions through nine months versus last year. Through nine months, we have contributed approximately $510 million to our pension plans and expect the full year contribution to be in the range of $675 million to $700 million. In 2008, our contributions are expected to be about $300 million lower. Our capital expenditures were $450 million in the first nine months and they continue to forecast, then we have $750 million to $800 million this year as we accelerate our investment in high value added and low cost capacity. Overall, while we don’t provide guidance on cash flow, I think what I emphasize that we have sufficient cash to fund the VEBA can redeem the $650 million of notes that we have previously mentioned we would repay in quarter 1 as well as $100 million of notes maturing early next year Going forward, the continuation of improved earnings powered reduced pension contributions, reduced interest expense, and an intense focus on managing working capital give us the wherewithal to fund increase capital spending at the same time that we de-lever. As ever, we remain focused on high return in capital investments. As discussed earlier, we made additional against our Four Point cost savings plan during the third quarter. We are targeting gross cost savings at $1.8 billion to $2 billion by the end of 2009. To-date, seven quarters into the four year plan, we have achieved nearly $900 million of gross cost savings. As shown in slide 22, we have made additional progress in each of the four areas. In the areas, continues improvement, we have achieved savings in more than $575 million to-date. This includes savings from Lean and Six Sigma initiatives and product reformulation including raw material substitution. As discussed earlier, to-date, we realized only a small portion of the savings related to Steelworkers contract. In the area of footprint reduction, we have achieved savings of approximately $50 million to-date. This includes additional savings from shutdown of tire reduction in our Valley Field facility. As a reminder a $50 million of savings related to the Tyler, Texas plant will begin in 2008. In the area of Asian and low cost country sourcing, we have achieved savings of approximately $75 million to-date. The segment in this category will led to the work we are doing for the third party suppliers in low cost regions. We continue to focus on qualifying additional third party suppliers, a process which does take some time. In the areas of selling, administrative and general, we received savings of more than $175 million to-date. This includes savings related to salary development benefit plan changes we announced earlier this year. Given the progress we have made to-date in next each of the four areas, we are confident that we will achieve our target of $1.8 billion to $2 billion of gross cost savings by the end of 2009. Now, I would like to discuss the results for each of our tire business segments. The North American Tire segment operating income for the third quarter was $66 million, up significantly from 2006 third quarter. This was the highest quarterly result for North American tire since 2001. The significantly improved operating income reflects the company’s strategic focus on improving our brand, product and channel mix and on reducing our cost consistent with the plans we have outlined to investors. The strong results came this Friday period, continuing weak markets in North America so weak chemistry in our 2006 decision to accept certain segments from the private label tire business reduced in volume by 2.8 million units or 12%. At the same time we grew share in our consumer replacement Good year branded products and in our commercial replacement brand of business. Our consumer signature technology products continue to win in the market growing at rates well above the market. Conversion cost was payable in the quarter by $14 million which was more near the counter floor by $30 million deduction of pension expense, and other post retirement benefits coming from our previously announced actions. Several factors somewhat slowed our progress in conversion cost reductions. Many of these factors are transitional in nature including unabsorbed overhead and plans for the plant foreclosure, train the new workers and plant changeovers. This will create some temporary choppiness in quarterly results in North American tire. Remember that most of our tire plants do not have extended shutdowns like you see in the auto industry so new equipment and other changes tend to disrupt daily operations. We will however remain on track towards achievement of our next stage metrics which in the case of North American tire, yields operating income of 5% of sales in toward meeting our ongoing goals. In some part, despite a weak industry, North American tires earnings strength continues to support prior decisions to refocus our business on markets where we can win, and we remain confident to manufacture footprint changes, productivity, and other structural cost reduction industries are gaining momentum and we will overcome the transitional cost increases by a growing margin in the medium term. Our European Union tire business has had record third quarter results as sales and segment operating income grew 9%, and 11% year-over-year respectively. While the European consumer replacement market has remained relatively soft, the commercial markets, particularly the commercial OE market remains strong. We are taking advantage of the strength and leveraging available commercial tire capacity in North America to provide additional supply to our European business. In the European consumer market our new products continue to be very well received in the market place and our performance in a recent tire test results, as Bob mentioned is clear evidence. They are product portfolio consistent with… well into the future. However we continue to be challenged by our short term supply limitations in some high value added market segments. We do have investments planned to overcome these supply limitations. Revenue growth was achieved despite a 6.5% decline in unit sales which was driven by soft consumer replacement market and supply constraints for high value added products. The volume declines will offset by price and mix improvements driven by new higher value added products and by favorable currency translation. Segment operating income grew due to price and mix improvements, which more than offset higher raw material costs and by favorable currency translation. While we are pleased with our European Union results, supply constraints reinforced the need to accelerate our high return investments in premium product capacity, in order to keep up with the robust demand for each category leading products. Our emerging markets business in Eastern Europe, Latin America, and Asia continue to perform very well. Our sales in these three business segments with a combined rate of 15%, while operating income grew by 24%. We expect the strength in these business segments to continue, driven by favorable marketing conditions, the success of our new products, and our aggressive focus on reducing our cost structure. For Eastern Europe, Middle East and Africa, revenue and segment operating income grew by 13% and 12% respectively. While we continue to experience strong unit growth in developing markets such as Russia and Turkey. Eastern Europe’s overall unit sales decline by approximately 7%. The decline in unit sales was driven by the industry-wide strike in South Africa. Revenue and operating income growth were achieved due to price and mix improvements, which drove a 9% increase in revenue per tire and favorable currency translation. We estimate the strike in South Africa negatively impacted segment operating income by approximately $6 million. Latin American tire also had very strong results in the quarter as revenue in segment operating income grew by 20% and 29% respectively. The original equipment markets have remained strong, and while replacement markets have improved due to stronger economies in the region, our volumes have been held back, due to the supply constraints for high value-added products. Sales grew due to an increase in volumes primarily in the OE segments, price and mix improvements and favorable currency translation due to strong Brazilian Real. Segment operating income growth was driven by increases in volume, favorable currency translation, and price and mix improvements which more than offset raw material cost increases. In Asia-Pacific, revenue and segment operating income grew by 12% and 46%, despite lower unit volumes. While volumes in developing markets such as China and India remained strong, our overall unit sales declined driven by our focus on high value added products in the Australian market and supply issues related to the fire at our Thailand facility in March. We have since resumed production in Thailand, although, some supply restraints linger. Despite this supply issues in Thailand, we achieved record third quarter results in Asia-Pacific. Revenue increased due to the price of mix improvements and favorable currency translation. These improvements were partially offset by lower sales volumes. Segment operating income increased due to price and mix improvements and lower conversion costs. These improvements were partially offset by lower sales volume and higher selling, administration and general costs, as we have invested in market development in countries like China. Now before turning back over to Bob to discuss the outlook, a brief personal perspective in the quarter would be as follows. I see in this quarter’s results playing out of the Company’s strategic decision to emphasize high value added premium products was the right decision. This helped us in margin as well as providing opportunities to deploy cash in high return fast payback investments. The premium product strategy, structural cost reduction actions, coupled with our proven ability in emerging markets, equal a robust winning operating strategy that has already set in motion a de-leveraging cycle that will add to our financial strength and flexibility. And with that observation, I will turn the call back to Bob.

Well, thanks, Mark. If you had just referenced your outlooks slide, we have updated our forecast for full year 2007, North American and European Union Industry growth rates and I will go through this rather quickly because the numbers are incorporated on the slide. In North America, for the full year our forecast for the consumer replacement market is up approximately 2%, within the range of our previous forecast at the end of… that we gave you at the end of Q2 of 1% to 2%. Remember that this follows a very weak 2006 market environment. We have revised downward our consumer OE market to approximately a 4% decline versus 3% at the end of Q2 and this reflects ongoing production cuts that are OE customers in Detroit. The commercial OE market in North America is unchanged for the full year, still down about 30% and as you recall that’s a result of new truck emissions legislation. We have revised the commercial replacement market to be down approximately 5% for the year. Again, our previous guidance was 4% as demand for freight continues to be weaker than expected, and I am sure you are seeing evidence of that throughout the industry. In the European Union for the full year, we have revised upward our forecast for the consumer OE market. We now expect the consumer OE market to be up 1% to 2% versus flat, up slightly in the Q2. Our forecast for the other three markets segments is unchanged. So, consumer replacement is expected to decline 1% to 2%, the commercial replacement market is expected to be up 2% to 3%, and the commercial OE market is expected to be up approximately 20% reflecting continued strength in European OE truck markets. Out outlook for raw materials products remain unchanged from our previous forecast, i.e. we continue to expect raw material cost to be up 4% to 6% for the full year 2007. Given recent increases, we are watching raw material trends carefully, so that we are prepared to react quickly if prices escalate further. We are reducing our full year interest expense forecast to $460 million to $480 million, driven by lower short-term interest rates and lower than expected use of revolving credit lines. Our forecast of capital expenditures is unchanged that between $750 million and $800 million for this year. As we’ve indicated in the past, our capital expenditure levels will increase going forward, and while we have previously indicated that 2008 CapEx would be about $100 million higher than 2007, we now believe this number may move higher. We are in the process of reviewing our investment plans and will provide a forecast for 2008 capital expenditures at our year-end conference call, once our updated plans for next year are fully developed. For modeling purposes, our tax rate guidance is unchanged to approximately 30% of international segment operating income. And just before here we open the call for questions, I would like to summarize the key points that you heard from us today. I know there maybe many points, but here is a quick summary. We’ve delivered an outstanding business performance in Q3 and that is frankly reflected outstanding performance in all of our strategic business units. We strengthened our leadership team with the addition of a new Chief Financial Officer and a new Chief Procurement Officer. Our focus on our business platforms positions us for profitable future growth in our competitive market. Our VEBA quarter approval process continues and we remain confident that we will achieve the full run rate savings associated with our Steelworker contract here in North America. We continue to execute against our Four Point cost savings plan and remain on track to achieve our goals in 2009. Robust demand for our premium products has led to supply challenges, which underscores the need to accelerate higher return investments in premium product production capacity and will be implementing those plans. So, we continue to improve. We have momentum in our markets, we continue to meet or exceed our goals, and we continue to become a tougher competitor. And I think right with that, let’s open the call for questions.

Wanda, we’ll take the first question. Question and Answer

Thank you. [Operator Instructions]. Your first question comes from the line of Himanshu Patel with JP Morgan.

Hi, good morning guys.

Good morning, Himanshu.

Can I get into the North American profit walk a little bit, I know you did explicitly provided in the slides, but just looking at some of the details out of the Q, volumes, it looks like the impact… negative impact on operating income was about $4 million, that seems pretty low, given the magnitude of the volume decline, I wonder if you could give a little bit of color on that?

Okay. Let me maybe kick off by talking about the volume decline there. The private label… the exit of segments of the private label business for us in the third quarter reflected about 1.6 million units. And so, from a year-on-date standpoint, if we include the first half of the year is about 5.6 million units, okay. So, that’s a big piece of that volume change. The other piece in North America is, of course, the… that consumer OE has been relatively weak and that is contributed approximately half 0.5 million units in the third quarter and for the year-to-date about 2 million units. And again, part of that is weakness in the market and part of that is our selectivity, Himanshu, you are well aware with certain shipments from the OEs. We also have year-to-date just a key point here, remember we build still year-to-date of a strike impact and we estimate that and about 1.2 billion units through three quarters. So, that’s kind of the… if you will, the build up to what’s happening from a volume standpoint.

I mean I get that, but I mean I am just curious it looks like the volume hit on revenues was about $184 million, but on operating income it was only 4 million. I mean where these… is this just another way of saying that the volume lost in the quarter was very low margin business for the most part?

Yes. Generally speaking, if you look at overall strategy gets to replace all the low margin business with higher margin business and certainly from our standpoint, you're seeing that result. Frankly, if we did have supply constraints here are that are near-term supply constraints, that could have even been a bigger swing in the positive direction and you see it in the revenue per tire.

Okay. Moving on, that same segment in North America, the operating income hit from raw materials seemed relatively modest at about negative $8 million and I think it was about $25 million in Q2. I’m just curious, I mean, that obviously relative to what you saw on price mix in North America, that’s a substantially favorable spread. How long can that continue, I mean I’m not suggesting that you give guidance on the price mix front? But was there something abnormal about how raw materials cost flow through the P&L this quarter that that sort of minimized the impact of that in the North American results this quarter?

The quick answer there, Himanshu, would be, no. There was nothing abnormal. I would mention to you though, if you go back to last year. We see significant volatility quarter-to-quarter in raw materials and as you probably recall if you look at the market data we had whether it was natural rubber or oil a bit of respite in the fourth quarter of ’06. Then snapping back up the high levels in the first quarter of 2007. And so that’s affected us consider about a quarter later in terms of the impact on our, on cogs and on our P&L. So you're always going to have those kinds of movements quarter-to-quarter but right now I would say that, yes, we're making up for some of the increases that have flowed in terms of raw materials but we're also doing an outstanding job on price mix of moving ourselves to as I said many times, not only a better mix for product. A better mix for product or/and our customer base and if we extent beyond North America geography as well.

Okay. Can I move to the balance sheet? You ended the quarter at $2.9 billion of cash. You've got the VEBA payment to make at year-end. What is sort of a level of cash balance that you guys are comfortable running the business with after these corporate finance transactions are out of the way. Should we think about sort of the $1.5 billion to $2 billion range going forward, or is there some room to even take that lower?

So, we may all make the contribution to this because that’s a very broad based question. But, Mark, why don’t you tick us off?

Yes. Himanshu, I think for the near-term and, Darren, I’m sure will add to this. But I think for the near-term, we kind of look upon cash balance of $1 billion dollars being kind of the minimum level we need to run the business. Now, having said that, we do feel very comfortable with the cash balances we're caring right now and given that a big piece of it is earmarked towards couple of things in the near-term one being the funding of the VEBA and the other being the pay down of the $650 million of senior notes that we have indicated we would be redeeming earlier next year. And I think there is another $100 million note that matures there too. So, we are pretty comfortable going into the next year.

Okay. And then on that same note, you’ve announced a lot of debt pay down, but it just seems to me given the cash balance you have got right now even after taking into account the announced debt payment plans and the VEBA now it feels like you could still take out the $495 million senior floating rate note I think this is the LIBOR plus 275. Is there… any thoughts on sort of that piece of data this stage or do you just want to kind of see how the year shakes up and how industry conditions are next year before announcing something on that.

I think Darren, can’t wait to make the comment.

Yes, Himanshu, I think it is something that we want to be somewhat cautious about. Here is the way to think about where we are today and where we are going to be after these pay downs. If I take the $2.9 billion cash balance, about a quarter of that is around $800 million is overseas, so that leaves about $2.1 billion that’s domestic, and Mark just walked you through what amounts to effectively $1.7 billion reserved on uses, and that are all domestic uses. So, I think that your pro forma for those you find the domestic cash balance and given September is our peek working capital here in terms of seasonality, you’ll still find the domestic balance is at a level that I don't view as excessive.

Okay. Great. And then last question the interest expense guidance on slide four of the appendix, I think its calling for 60 million lower year-on-year that seemed relatively light just based on what you have announced year-to-date. What are the assumptions behind that? Are you assuming some interests costs moving up in terms of interest rates? Or is there… maybe I’m just doing the math incorrectly, but just seems like after you do the March pay down as well, that number should be a lot lower that $60 million below the ’07 level.

Yes Himanshu, this is Darren. The $60 million you see on the page is essentially a reflection of three quarters worth of impact of the two pieces of debt we plan to pay down in March. The 650 and the 100, those two combined will have interest expense a little over $80 million annually. So, it’s really nothing more that three quarters of that.

I got it. Okay. And then last question… sorry one more. The plans on capacity expansion I mean you guys have talked about this for a few months now. Any more color you can give us… are you looking to greenfield facilities or is there a chance to buy some existing facilities any sort of rather granularity on weather you are leaning towards two facilities or one facility.

Himanshu, we’ll simply say, I think if you look at our fourth coming investments you should look at them in a couple of categories. And by the way, they will cover both passenger tires and commercial truck tires so you should be thinking about it that way, I also mentioned that some of that investment will go into strictly modernization of existing facilities and creating the ability to manufacture the premium high margin products that we want to be able to market and then we’ve said that we are looking certainly at potential new sites in Asia and in Eastern Europe and we are not prepared to today to give further direction there but would be prepared as we go forward to provide you with some more specificity obviously than that. But I think it’s important that you think truck and passenger tires and it’s also important that you be thinking of modernization of existing facilities as I mentioned in my comments with regard to Fayetteville North Carolina and Gaston, Alabama just two examples in North America, but there are many other examples overseas. And in addition to the potential for new sites in Asia and Eastern Europe and these are all directed at the premium market segments with high margins and I can guarantee, Himanshu, we look at this in terms of capital allocation with everything that we have learnt over these past five years or so, we’ll be very careful these will be high return projects each and everyone of them.

Okay. Thank you.

Thank you

Your next question comes from the line of Rod Lache with Deutsche Bank.

Good afternoon everybody,

Hey, good morning Rod.

A couple of things. On the cash flow this… $950 million use in working capital this year, how should we think about working capital going into 2008 you are expanding on the high-end, the point back on the private label. Net-net, is that… is that going to be a plus or minus.

I think the first thing to… the kind of position yourself on… the working capital use this year has been… we have been in strike recovery mode we were first building inventories and then we’re been building receivables. And in addition to that you see the high point of the year, Rod, at quarter 3 in our European business in particular were we are… we got the winter selling season. So, receivables at this point are… and very much at a high point in Europe. Now, most of that growth has probably been in receivables this year. And looking forward, your question said… and asking how should we see this going forward? This is a really… it’s an area of intense emphasize for us right now, and we think we got opportunities in working capital. And do recall that we are seeing some of the progress already even though the use of the absorption of working capital has been fairly high this year, the balance is even with last year and day supply is actually down. So, I hope that helps some.

Okay. So, you are saying that there is an opportunity there. I mean, what does that mean for 2008?

Well, we rather give… we will give specific guidance on ’08, but it’s certainly our goal to continue to take days out in terms of working capital. And as I mentioned in my comments, we see that as kind of an imperative here for the Company to be able to make the other kinds of investments we would like to make outside if you will the area of working capital and do manufacturing facilities or to continue to invest in marketing, initiative else that, in fact, it driven the kinds of virtual mix that you see us now producing.

Okay. And on the capital spending, do you have a target IRR that you could share on these projects?

We don’t share a specific target. I will simply say Rod, you can assume well above our caps… our cost of capital.

Okay. And can you go into just what exactly happens from here on this VEBA. You mentioned this 90 day waiting period. Is that from yesterday so that we count like 90 days from yesterday and that’s when it gets simple method?

No we will kind of walk you through the sequence of events here with right out to say up front that we thought we had this progress further than we have at this point, but I can guarantee you that that’s not because the Steelworkers of Goodyear have tried to slow it down. We are in a legal process which is fairly complex and there if you can’t go through that here we can give you the highlights of that process.

Yes, Rod. As Bob mentioned we got the settlement agreement filed which was sort of the key step two in the process and now what we need to wait for is for the Federal judge to give preliminary approval to the settlement and once he has done that which should happen in the very near-term. Once he has done that then the 90 day notice period to the class members begins. At the end of that 90 day class, that 90 day notice period there would be a fairness hearing and following the fairness hearing here within a short order there would be judgment rendered sort of giving final approval to the center. So, that is the way…

Just a comment there is at the end of that still a 30 days appeal. If there is anybody that wants to appeal, if there are no appeals, the settlement accounting would take place as we proceed.

Okay. The next milestone then is federal judge approval, is that a couple of weeks?

And that’s and we say that sort of that’s in process for the relatively short-term now.

Okay.

That’s why yesterday’s move, with the filing yesterday was so critical for us, that was a critical stage to get over.

Okay. So, like a week or two or something like this we should see another milestone occur?

While as we simply say we are in terms of what we know for there a matter of weeks rather than months.

Okay. The productivity… the Steelworkers productivity targets that you’ve set out can you just talk, you mentioned that you’re hiring 13 now on our people, what’s the target for 2008 productivity? Is that change, and is there any execution risk that you see related to that?

Yes. Well, actually, Rod, I say that we are probably we are half or even above target in terms of pays and which were bringing on $13 for our workers. However, most of the savings are still in front of us. So you can see only the $20 million type of numbers so far in our results. So that big amount of structural saving is still on the front of us. We talked about transitional difficulties, transitional inefficiencies that we faced in the third quarter and a lot of that does have to do with a learning curve and the training associated with the $13 on our workforce. So, it’s little hard to be predictive in terms of specific timing and when the savings come in, but if you can clearly see we are going to realize the savings.

Okay. You had previously put out a little bit of a like a calendar on how these things roll in, is there any reasonable EBITDA would change meaningfully at this point?

Rod, what I say relative to what we put out none.

Okay. And lastly …

But I will say, I will say it’s important for you to know, of course, we are learning, the Steelworkers are learning as we go through this as we go through this process, but there is nothing we see today that will cause us to change in our goals or the rough timing in which those goals would be executed.

Okay. My last one is just here the Q shows pension expense down $65 million, OPEC $67 million. I know you guys book these expenses in the inventory and is a little bit complicated than what we see these tables. So, could you just give us a sense of what we have seen already is that your conversion cost and how does that ramp from here?

Yes, Rod, I think what you’ve seen in the third quarter is a full run rate savings for the actions that we have taken, like we have talked about in the second quarter that we did not see a full quarters work. So, what you saw in the third quarter is more or less what we will… would expect again from two key things, one the higher funding pension level at the beginning of this year and number two, the actions we took to restructure salary retirement benefits. So, I think that in the third quarter, we had our run rate for those structural savings.

Okay. Because I am looking at the numbers, it looks like maybe $120 million or so, is that with the Four Point savings plan at $120 million is related to?

No. I will just say, certainly part of the $120 million in the third quarter does relate to pension and OPEC savings that relates to the salaried retirement benefits restructuring, but I think that if you break it apart, you will find part of that is… part of the salary benefits restructuring comes through SAG part of… it comes through conversion. But I think for the quarter, we will be talking about savings that are if we take all pension OPEC together more in the range of $15 million comes through the savings plan.

Great. Thank you.

Yes.

Thanks Rod.

Your next question comes from the line of Kurt [inaudible] with CRT Capital.

Good morning guys.

Hi, good morning.

You’ve mentioned the capacity constraints number of times, and I was curious is there any way to quantify how much of your revenue is constraint?

Well, I would start the answer by saying, yes, it is possible, plus those estimates are always somewhat proved, because you are looking at demand that you haven’t actually realized and try to estimate how much it is, and back orders and things like that totally accurately reflect that. So, we are very hesitant to put out a number, but I would comment that, okay, what we are doing about that? One, we are moving towards getting higher productivity out of the assets that we currently have. That’s a very short-term type of potential resolution. Number two, remember we do have third party sourcing in parts of the world, particularly at the low-end of our product line and we will continue to be aggressive in terms of those actions, and of course, the third potential resolution is the investments that we have talked about what we are pushing all three of those. But it’s… these are reasonably significant constraints and I would tell you that in large part is because a year ago, two years ago we underestimated how much we could grow our demand for key Goodyear and Dunlop products, frankly and we have underestimated a bit, now we are playing catch up, that’s it. I guess if you could have a problem, it’s a relatively good problem to have but I would say it’s material. So, once we make the new investments, once we do a better job at third part sourcing, once we do a better job in getting more productivity out of current assets, this will be a powerful thing for us not only for our top line but what you are interested in obviously is for better margins.

Okay. Thanks. Shifting gears to imports, we have had a major move in the dollar here and I am… I would think that it would be positive for the domestic term manufacturers, the fact that the dollar is weakening. And I am just curious if… if you see at that way now that you are also an importer?

Yes.

And also, is it causing a shift in the tires coming from outside the country to higher price points?

Well, I would say several things have happened, remember we had a lot happen this year. You have got the weak dollar which obviously, if I can buy the weak dollar with our latest agreement with the steel workers with the potential of new investments in our North American plants. That means we are in a very different competitive situation this year than we were a year ago or two years ago. As we brought on $13 dollar an hour labor as we reduced benefit costs, obviously we are more competitive in North American plants. The other thing that has happened here in addition to the dollar is with the price of oil where it is today. Obviously freight and transportation cost across large areas, large geographic areas has gone up significantly. So… and you have had in China, the change in there, in their VAT which is in effect taken the value added tax up by 8%. And so we are seeing that in terms of let’s say, tires that we source from China but that is an industry wide phenomena, so there has been a change in the balance but those of us who are used to operating in global businesses, the foreign exchange moves in both directions here over time so we are not particularly comfortable that that’s taken place and saying that we are not going to change our investment decisions but its clearly affected the geographic competitiveness if you will. We’ve said to you before that in Latin America, Eastern Europe you know we can match, China and Asia costs while North America has become much more competitive over time on the other hand western Europe is not. Okay. Because the euro obviously is much stronger relative to the dollar so we continue to look at those things on a regular basis and we try to make our investment decisions based not on what’s happening today but what do the fundamentals tell us will be happening out three, five ten years into the future.

Right, now that you have a second tier wage. Do you think Goodyear is a good candidate for an attrition program?

Yes, Kurt, I think the, what we have seen so far is that we have had more than adequate attrition to keep us well ahead of our original targets on $13 an hour labor so I think if as we were to think about that certainly it would require us in our unionized facilities we would have to work with the United Steelworkers on that but I think as we see it today we’ve actually see good attrition, and have continue to see good attrition and therefore very good opportunity to leverage the $13 an hour labor Robert J. Keegan - Chairman of the Board, Chief Executive Officer and President And frankly relatively good from our stand point attrition rates and other parts of the world as well.

Great. Thank you.

Thank you.

Your next question comes from the line of John Murphy, with Merrill Lynch.

Hi guys, thanks for squeezing me in here.

Hi John.

I’ll keep it brief, I got three questions, first one of your major competitors mentioned there were some delays in implementing price increases, I was just wondering what you are seeing on that front first, second question is on the debt revise. Just wondering, you know if you guys are really targeting a net reduction in your aggregate debt or were you just really trying to more focus on your putting into regions or euro denominated debt where you actually get there tax shield and then third also another tax question, is there any tax implications form the engineered product sale.

Okay, let me try and take you first one, on pricing what we see is, we continued to see I’d say reasonably disciplined pricing here in the U.S. certainly in the truck area that’s true and then we have to say that that’s pretty much true in passenger as well, and again what’s happening in raw materials over a significant period of time those are obviously I think changes. We continue to see Europe as a bit challenged and we have said that for some time in the passenger area not in truck and Asia and Latin America, well, maybe Latin America is a little different. Latin America, you have had a lot of revaluation going with the weak dollar and so whether it’s foreign exchange positive or price increase we can argue how we strategize and plan around that but I don’t see any major change in the pricing environment from what we said at the end of Q2 or frankly at the year end fall. Okay, so that’s point number one.

Market in terms of debt?

Yes. The answer to your second question on debt really is yes to both. We are intensifying team operating achieving that 2.5 times multiple of debt to EBITDA. We don’t need to take that down further to achieve that goal and we feel like when we can foresee being able to do that given the helpful levels in the track that we are on. But it’s also true as we move ahead here we are looking for opportunities to reposition the debt so that next what we can take better advantage of our tax positions in different places in the world which usually means moving debt off the U.S. and into other tax paying jurisdictions. And I guess, the last question had to do with, a really I make it count to our valuation levels because I think… which… I just think that we do continue to maintain a full valuation allowance on tax assets in the U.S. and we will continue to do so for some time.

And EPD?

Yes. The question on EPD I guess is… we don’t see… we don’t see the EPD transactions having a terminal effect on our tax rate guidance at this time.

Okay. Great. Thank you very much.

And Wanda, I think we have time for one more question.

Your last question comes from the line of Monica Calif with Morgan Stanley.

Good afternoon.

Hi, Monica.

I am wondering if you could talk a little bit about the U.S. going through recession, how you would see a downside? And particularly, obviously you have been benefiting a lot from decisions to except private label and that’s benefited you very nicely in the mix. Could you talk a little bit about what you think consumers might do in a downside scenario?

Okay. Darren, do you want to kick this is off.

Sure. Well, I think Monica the first point that I would make on, yes, in terms of the recession is that the segments of the business that are most susceptible to recession, which I would guess you would argue is consumer OE, the commercial truck business in the U.S. as and the low end of the consumer business… consumer replacement business in the U.S.. I think we would look at those and say they already have a lot of recessionary character to them. I’ve already seen very, very weak volumes there. Now, so that’s point number one. Point number two is, those are the business where we've been reducing our exposure, which is good for us. The high end consumer replacement business has not reacted in the same way and does not tend to be sensitive to economic conditions so that the real question that we face is given a couple of very weak years already and in the industry is there more down side in a recession scenario and though I think that you could look at this and say there’s already tire purchases being delayed. Question’s going to be can they be delayed even further where normally after a couple of weak years like this we would see the volumes start to bounce back as that pent up demand starts to come into the market place.

And we have seen… just to maybe be even more specific. We've seen some reduction in miles driven per vehicle in North America already on the passenger side and of course you're seeing what we could call is almost recessionary purchasing activity in commercial truck replacement business. So, I guess that’s how we'd respond, Monica, to that, because it does… and it doesn’t stop us from achieving our goals and we're still more attracted to achieving our goals.

So, would you say though… just if you were to give it some broad parameters I agree on the commercial side definitely showing recessionary trends already, would you say on the consumer replacement in the U.S. maybe down only a little bit a couple of percent or pretty flat? If have it kind of bracketed

Yes. Monica, it depends on, if you could bracket what the recession means, in terms of specifics, I mean is it a serious recession? By the way our outlook is not recessionary. I mean that’s not how we're looking at the economy playing out over the next couple of years. But we could be wrong in that respect. But we would say this would have rather modest impact and if we look at the history. Let the history be our guide a little bit. Certainly, typically during times of economic weakness the industry has potentially declined for a year or two and then it’s bounced back, as people still drive cars and people will still move freight. And the replacement industry has not shown a great deal of cyclicality. We've seen more in the commercial truck area. So, I think those two things would guide us and a recession would certainly play out differently as we're seeing today. The truck business today is weaker than the passenger business. But we're not going to… we won’t attempt a forecast here.

And then last question. Is there much different in profitability on the commercial side between North America and Europe?

Yes, it depends on the stage of the cycle, again, but I would say they’re relatively the same is certainly in the replacement business and pretty close as well in the OE business. There’s not a significant difference there.

Okay. Great. Thank you very much.

Monica, Thank you.

Wanda, that was the last question. I’m going to hand it back over to Bob for some closing remarks. Robert J. Keegan - Chairman of the Board, Chief Executive Officer and President I’d simply say, we appreciate everybody showing an interest in our company and being with us here today we appreciate that. We're obviously pleased with the Q3 results and I feel comfortable with our future direction and we look forward to talking with you all again at least at the year-end call and maybe in the interim. So, thanks for being with us.

That concludes today’s Goodyear third quarter 2007 earnings release conference call. You may now disconnect.