The Goodyear Tire & Rubber Company (GT) Q1 2011 Earnings Report, Transcript and Summary

Good morning. My name is Christina, and I will be your conference operator today. At this time, I would like to welcome everyone to the Goodyear Tire & Rubber Co. First Quarter 2011 Financial Results Conference Call. [Operator Instructions] I would now like to turn the call over to Patrick Stobb, Director of Investor Relations. Please go ahead, sir.

Good morning, everyone, and welcome to our first quarter conference call. With me today are Rich Kramer, Chairman and CEO; and Darren Wells, Executive Vice President and CFO. Before we get started, there are a few items I'd like to cover. To begin, the webcast of this morning's discussion and the supporting slide presentation can be found on our website at investor.goodyear.com. Additionally, a replay of this call will be accessible 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 of the presentation. Our discussion this morning may contain forward-looking statements based on our current expectations and assumptions that are subject to risks and uncertainties. These risks and uncertainties which can cause our actual results to differ materially are outlined in Goodyear’s filings with the SEC and in the news release we issued this morning. The company disclaims any intention or obligation to update or revise any forward-looking statements whether as a result of new information, future events or otherwise. Turning now to the agenda. On today's call, Rich will provide a business review including first quarter highlights. After Rich's remarks, Darren will discuss the financial results and outlook before opening the call to your questions. That finishes my comments. I'll now turn the call over to Rich.

Thank you, Pat, and good morning, everyone. Our strong first quarter results provide further evidence that our strategies are working, we are executing our plan and we are continuing our positive momentum. But before I discuss our first quarter results, which I am very pleased with, I'd like to go back 5 weeks ago when we met with you in New York City. At that time, we outlined Goodyear's strategic roadmap through 2013, a plan that reflects confidence in our ability to take advantage of the opportunities we see in the tire industry. During my remarks today, you will hear many of the themes we discussed at the investor meeting as our progress in the first quarter is consistent with the strategies and objectives we presented to you. These strategies not only position Goodyear to hit our targets, but position us for success beyond 2013. I'd like to spend my time today focusing on 3 areas: first, I will highlight our outstanding first quarter results and provide context for how they were achieved; then, I'll discuss specific areas of performance, focusing on our North America Tire business; and finally, I will provide our perspective on a couple of important topics that we believe will affect our industry for the rest of the year. At the New York meeting, we shared with you the details of Goodyear's plan for reaching our target of $1.6 billion of segment operating income in 2013. We discussed the MegaTrends, shaping the industry over the next 5 to 10 years and how they offer distinct advantages for Goodyear. And members of our team provided evidence that we are on pace to hit our key metrics. As we share our first quarter results with you this morning, I believe you'll see further confirmation that we are on the right path toward not only the 2013 target, but also, our long-term objective of creating sustainable economic value. Our total sales in the first quarter were $5.4 billion, the highest achieved by our company in any quarter, ever. Sales in all 4 of our regions hit record levels. Total segment operating income was $327 million, an $87 million improvement over our 2010 first quarter. And our first quarter 2011 results were the highest quarterly performance since mid-2008 before the great recession took hold. And now as strong those results are, I'm even more pleased with how we earned them. We saw continued profitability in our North American Tire unit. Revenue per tire increased by 15%. Price/mix nearly offset a 26% increase in raw material costs. We gained share in our key targeted market segments. We achieved our targeted overhead absorption level with increased production, including our growing commercial business. Productivity gains in the quarter supported our supply chain and fill rate progress, particularly in our North America business where producing more of the right tires enabled our volume growth and share gains in our profitable branded business. Our new product engine continued to deliver more relevant innovative new tires around the globe. We delivered on our initiative to achieve our expected cost savings. And finally, we made significant progress toward balance sheet improvements through success in executing the preferred stock offering in March in both of our European credit facility refinancing and notes offering in April. This progress is consistent with our strategies to reach our profit targets. Now of course, we have much more to do. But I'm very pleased with our momentum and our accomplishments thus far. Perhaps nowhere is that momentum clearer than in our North America business. Returning North America to consistent profitability is essential to reaching our long-term goals. Segment operating income was $40 million, the best first quarter performance since 2006, and an enormous improvement over the $14 million loss in the same period a year ago. Sales increased 30% to a first quarter record of $2.3 billion and we grew branded share in the quarter consistent with our strategic focus on growing in targeted market segments. Those results were directly attributable to outstanding execution in our market-back processes. Continual operational improvement and alignment and demand planning, production scheduling and distribution enabled us to better respond to the demands of the market. We know what customers want, we are making more of the right tires and we are delivering them for our customers to sell. Together, that's our Advantaged Supply Chain, a competitive edge that facilitated our results in the first quarter. Also, our sales and revenue growth validate our position that consumers will pay for the technology, performance and value that Goodyear Tires deliver. As an example, the demand for our Assurance Fuel Max tires is increasing as fuel prices rise. Our ongoing commitment to innovation and technology continues to differentiate our products in the marketplace. And consistent with our strategy, we continue to focus on targeted market segments and sell branded products through the right channels and customers. During the quarter, we saw no evidence of trading down as we increased our branded market share in North America. Our price/mix strategy nearly covered raw material price increases, including at OE, where we continue to exercise our selectivity strategy. Even though the overall industry saw tightness in supply, we were able to deliver premium tires that the market demanded. So as I said a few moments ago, North America profitability is essential to reaching our 2013 target and the high level of execution we saw in the first quarter gives us great momentum for the rest of the year and toward our goal. In our other businesses, Europe had an outstanding quarter with sales increasing 28%. The region also nearly offset raw material increases with price/mix. And from an industry perspective, supply for both summer and winter tires, remains tight in both the replacement and OE segments. During the quarter, our teams executed against our targeted market strategy as they continue to make decisions to drive our mix and to sell our award-winning branded products in key profitable channels. An example of our product leadership in the region is the recent recognition for our innovative products in the key German market. In the recent summer SUV tire test, Goodyear and Dunlop tires were ranked first and second among 8 tested products in the category. Goodyear's Eagle F1 SUV tire earned the top spot while the Dunlop SP QuattroMaxx was right behind in second. We continue to operate as a technology-driven market-back company focused on relevant innovation. And nowhere is that more evident than in our European business. In the emerging markets, our focus remains on strategic capital investments, particularly related to our new factory in Pulandian, China and capacity expansion in Brazil and Chile to support our future growth. This is consistent with our view on long-term growth in these markets as we discussed at our recent investor conference. While earnings in both Asia and Latin America were lower than a year ago, this is a reflection of some specific items rather than an indication of a long-term performance change. Darren will cover this in more detail in a few moments. So as I look at our businesses collectively, our results reflect continued commitment to innovation leadership, improvement in operational effectiveness and focus on key target market segments. While Q1 was strong for both Goodyear and the industry, we know there are things that you have on your mind and of course, we have them on ours as well. So I'd like to continue my remarks by offering some perspective on key topics affecting the global tire industry going forward. The first area of focus relates to industry growth, which continues to be a great story. While we expect a strong year, we did not expect to see the same level of industry growth that we saw in the first quarter. There are a couple of items that heightened the first quarter industry results. The increase reflected some level of dealer pre-buy in advance of announced price increases. And additionally, we saw evidence of dealers building inventory due to a concern about ongoing tightness of industry supply. And another factor we're keeping our eye on is fuel prices and fuel consumption. Historically, as gas prices have spiked to the $4.00 level, there's been a decline in fuel consumption. And while higher fuel prices enhance the value of our fuel-efficient tires, the future impact on long-term consumer behavior is uncertain. We are not seeing any impact at this point, but we continue to watch the situation closely. With that in mind, we'll reiterate what we've said before and we still believe that consumers will continue to value their mobility. Based on the strength of the first quarter, and what we continue to see in the industry over the balance of the year, we will raise our industry outlook for 2011 and see our own growth at the higher end of our previous range. Now the second area of focus is raw material costs and supply. We continue to see significant volatility in natural rubber prices. Since our last earnings call, we've seen the swing from a high of $2.61 a pound to below $1.80 and back to $2.40 earlier this month. And prices this week have averaged about $2.10 per pound. While the prices for natural rubber have declined, they are still well above last year. We also are seeing significant increases in other raw materials as well. Recently, prices of other key commodities such as butadiene and carbon black have risen to $52 week highs. Going forward, the raw material cost story will be about more than just natural rubber with challenges coming in a broad cross-section of commodities. The final item to consider for raw materials is the impact of industry growth on raw material supply. While we continue to see adequate supply, there are areas where availability of certain materials has tightened because of industry growth and the recent situation in Japan. We continue to secure alternate supply when necessary and are pursuing material substitution where possible. As we said at our recent conference, the 5- to 10-year outlook for the tire industry remains strong as driven by the emerging markets and the demand for HVA tires. In that environment, we expect tire supply to remain tight and raw material costs to stay at heightened levels. I am pleased with how our team has been aggressively responding in this environment of extreme raw material costs. As I said, our strong price/mix performance in the first quarter covered almost the entire increase in the raw material costs we saw and our efforts at tire weight reduction and material substitution got us the rest of the way. In the second quarter, we expect to offset the raw material headwinds through improved price and mix. But over the second half of the year, we expect that our strategy will be tested under conditions that we have not seen previously. Over time, our price/mix strategy has proved successful against this challenge and is not limited to the replacement tire business alone. We continue to work on our contractual pricing arrangements with OE customers, which generally delay our ability to recover increased costs. This is another part of our selectivity strategy at OE, which we discussed at our investor meeting in March. It benefited us in Q1 and will continue to benefit us for the remainder of the year. We will continue to run our business with price/mix as a key component and are confident that we will continue to offset raw material cost increases over time. Our first quarter results reinforce the confidence we expressed at our investor meeting that we are on the right path with solid strategies and a clear road map for delivering sustainable economic value. We believe our first quarter performance was an excellent first step toward our 2013 target. It validates our strategy, renews our commitment to our plan and gives us momentum to stay on track to achieve our goals. So thank you for your attention. I'll now turn the call over to Darren to take you through the financial details. Darren?

Thanks, Rich, and good morning. Our first quarter financial results demonstrate clear performance against our operating plan, and provide further evidence of continued success in 3 areas. First, our ability to increase volume as markets recover globally. This volume increase was weighted toward the replacement business and toward targeted premium segments. Second, record price/mix nearly offsetting the 26% increase we saw in raw material costs. This is improved performance versus Q4 and versus any prior quarter with the 20%-plus increase in raws. Third, improved cost efficiency, with both a continued benefit from lower unabsorbed fixed-costs and from our 3-year $1 billion cost savings program. I'll hit on each of these key areas as I review our results and discuss our outlook for the remainder of 2011. Taking a look at the income statement, our first quarter revenue increased 27% on a 7% increase in unit volume, reflecting continued improvement in global tire demand, our strong price/mix performance, the benefit of increasing chemical and non-tire-related sales as well as the positive impact of foreign currency of $125 million. Our strong volume growth reflected both industry volumes globally with growth rates generally higher than we planned, and continued strong performance of our products in targeted market segments. And the value of our Advantaged Supply Chain. While supply is tight across the globe, many customers are viewing Goodyear their go-to-supplier, as evidenced with Wal-Mart selecting Goodyear as the Supplier of the Year. While gross margin increased significantly in dollars, the rate as a percent of sales was down versus the prior year, as both cost and revenues reflect raw material cost inflation. This was more than offset by better SAG as a percent of sales which declined nearly 2 points to 12.4% in the quarter. Segment operating income was $327 million, the highest since Q2 of 2008 and up $87 million versus the prior year. Segment operating margin of 6.1% was up slightly versus the prior year. In Q1, our effective tax rate was 19% of our foreign segment operating income. This is lower than our full year outlook. And as has historically been the case, the rate in individual quarters can vary due to country mix. For the year, our effective tax rate's still expected to be about 25% of our foreign segment operating income. First quarter after-tax results were impacted by certain significant items. A summary of these can be found in the appendix of today's presentation. Turning to the segment operating income step chart, you see price/mix performance offset all but $24 million, of the $385 million we saw in higher raw material costs. First quarter results further build our confidence in the outcome that we can drive through our focus on price/mix. Although, the benefits of price/mix don't always match up with the rapidly rising raw materials within a period. This will remain our focus even as similar percentage increases will result in higher dollar cost increases in the coming quarters. Higher volume was the benefit of $32 million, driven by an additional 3 million tires sold. Higher production levels continued to drive lower unobserved fixed cost versus the prior year since the benefit of $81 million was generated on incremental production of 5 million units back in Q4, given the one quarter lag in inventory. This puts us well on our way towards the $175 million improvement we expect in unabsorbed overhead this year. In the first quarter, we've realized cost savings of approximately $69 million, which is net of the year-over-year impact of the USW profit sharing program. This saving was consistent with our plan for 2010 to 2012 and keep us on track to achieve $1 billion in savings over the 3-year time period. The savings came from our increasing focus on reduced raw material cost and better factory performance. Of the $69 million in savings achieved, $33 million was the result of efforts to substitute lower-cost materials on our compounds and to reduce the amount of material that's required to produce each tire. Our cost savings largely offset the $73 million impact of inflation in Q1. As anticipated, pension expense continued to improve in our North American business in the quarter. The other category reflects a few offsetting factors. Foreign currency rates were generally a positive, as the U.S. dollar weakened versus most major currencies, and combined with improvements in other tire-related businesses, partially offset increases in advertising and other small items during the quarter. Before moving onto the balance sheet, I want to take a moment to focus the discussion on our Commercial Truck business. We've once again included a breakout of our first quarter sales for consumer and commercial. You'll recall last year that Commercial Truck business was a $3.5 billion business for Goodyear. In Q1, sales were up by more than 40% reflecting unit growth and significant gains in price/mix that drove higher revenue per tire. While we don't report results to this business separately, the improved factory utilization and higher volumes contributed significantly to earnings improvement. For the remainder of 2011, we continue to expect a strong recovery as OE demand is exceeding expectations and the ongoing global recovery is driving increased freight lines. The Q1 rate implies an annualized sales rate that would put us above 15 million units for this year. This compares to 14 million units we sold in 2010. Turning to the balance sheet. Our normal seasonal working capital increase was amplified by higher raw material costs and weaker U.S. dollar, resulting in an increase of approximately $900 million for the quarter. While higher inventory in receivable values significantly pressured working capital, increased payables served as an offset. Despite this inflationary pressure, our working capital management reduced our working capital as measured in days versus the first quarter last year. Assuming today's spot rates as a guide, we'd still expect the cash used of about $200 million for raw material inflation for 2011. We'll continue to update you on our working capital outlook as the year progresses. Net debt increased by $329 million. This reflects the impact of the seasonal working capital increases, offset by the impact of completing a preferred stock offering of $500 million in March. As a side note, we've included information in the Appendix relating to the preferred stock offering and the dilution impact, which really begins in Q2. You can use this chart each quarter to determine how the share count will be calculated for that quarter's fully diluted EPS. The number of shares assumed to be issued upon conversion ranges from a minimum of 27.5 million shares to a maximum of 34.3 million shares, depending on our common stock price at the time that the dilution is calculated. As Rich mentioned, we also refinanced our European credit facility on April 20 and now have no funded debt maturities until 2014 and no bond maturities until 2016. Over the longer term, we will continue to focus on reducing our leverage to 2.5x. As we discussed during the March Investor Day, when considering this target, we included both debt and our unfunded pension obligations. Turning to the segment results. North America reported segment operating income of $40 million in the first quarter, which compares to a loss of $14 million in the first quarter of 2010. Industry growth was a significant positive in the quarter with the consumer replacement industry up 5% and OEM 14%. Commercial was even stronger with the replacement up 25% and OE up almost 60%. But even more significant is that our strategic focus on growth in targeted market segments is delivering significant improvements in mix as customer demand continues to shift towards higher technology-branded products. This allowed us to not only take advantage of growing markets, but also drive higher branded market share in the quarter. In addition to higher volumes, strong price/mix performance offset about 85% of raw material increases in North America. Year-over-year, North American earnings continued to benefit from ongoing reductions and unabsorbed overheads, and lower pension expense. Consistent with Q4 2010, higher year-over-year production levels at our plants have enabled North America to recover $43 million in unabsorbed fixed cost. Cost improvements were reduced by higher USW profit sharing and non-recurrence of a prior year reduction in Workers' Compensation accruals. Finally, we remain on-track with plans for the shutdown of our Union City, Tennessee facility by year-end. Europe, Middle East and Africa reported segment operating income of $153 million in the quarter, which compares to $109 million in the 2010 period. This is a solid result and the highest segment operating income in almost 3 years. The 2011 results reflect sales of almost $2 billion and volume of nearly 20 million units, a 28% increase in net sales on a 7% increase in unit volume. Volume was supported by double-digit unit growth in emerging markets as well as strong industry volumes, with consumer replacement up 7% and OE of 5%. As in North America, commercial was even stronger, with the replacement industry up 12% and OE up 80% versus a year ago. EMEA sales growth also reflected improved price/mix with revenue per tire, excluding the impact of foreign exchange, increasing 17% versus Q1 2010. The stronger Euro and other currencies favorably impacted net sales for the quarter by $46 million. EMEA segment operating income increased $44 million, mainly impacted by stronger sales volume and lower unabsorbed fixed cost of $34 million. Price/mix improvements offset about 80% of the increased raw material costs. Latin America reported segment operating income of $67 million compared to $76 million in the same period last year. There are a few items to consider that will help you put the year-over-year performance into perspective. There were approximately $18 million of events that negatively affected the year-on-year comparison. These events are important to note because they mask improvement in underlying operating performance in Latin America. In the 2011 quarter, we incurred $8 million to correct prior-period depreciation on tire molds in Brazil and $5 million for a net worth tax charge in Colombia due to a change in legislation. The 2010 quarter included a benefit of $5 million Brazil related to a legal case. Putting the $18 million to the side, you can see that Latin America's operating income would've improved versus last year. Two other factors constrained our Latin America results. First, we saw volume weakness at the lower end of the market due to increased competition from low-cost imports, given the strength of the Brazilian real. We will continue our strategy of mixing up in our targeted segments to offset any lost volume at the low end. Second, we saw cost increases from inflation as well as costs related to the ramp up of our Chile manufacturing investment that we were not able to fully offset with productivity improvements. Our team remains focused on increasing our cost saving efforts to offset these headwinds. From the positive side, Venezuela Q1 2011 operating income recovered from Q1 2010 when earnings were severely affected by currency devaluation. Earnings have been improving each quarter since Q2 last year. Also, our price/mix performance remained strong in Latin America, more than offsetting the impact of raw material costs. Beginning in Q2, you should note Latin America will be impacted by the lost earnings from the sale of our Farm Tire business, which closed on April 1. So overall, our Latin America team is effectively managing the volatility in Venezuela, the increased pressure from currency appreciation and cost inflation, as well as the major investments and asset sales that are changing our product portfolio and preparing us for more success going forward. Our Asia Pacific business reported another impressive quarter. The continued strong demand from China and India helped mitigate the continued weak retail environment in Australia and New Zealand. As a result, Asia Pacific reported segment operating income of $67 million. The result included $7 million of incremental start-up expenses in the quarter related to the ramp up of our new factories in Colombia and China. Foreign currency was favorable by $4 million, reflecting mainly the stronger Australian dollar. In addition to strong market growth, we were successful in executing price/mix improvements, which were able to more than offset the raw material increases. Remember, our Asia Pacific business recognizes the increases in natural rubber costs sooner than our other business units due to its geographic proximity to the source. Overall, we continue to be very pleased with performance and opportunities we see in Asia and, particularly China, going forward. Moving to our industry outlook. We've updated our views, including our expectations for industry volumes and raw materials. In consumer replacement, we expect higher growth in both North America and Europe as the economic recovery continues. And we have slightly increased the full year outlook for both. Our outlook for North American consumer OE remains unchanged from February's range. Given actions that we've taken to be more selective in our OE fitment, we expect our OE volumes to increase at the low industry rates. We've increased the consumer OE outlook in Europe to reflect full year growth of 4% to 8%. In the Commercial Truck business we've increased the outlook across the board, but we expect the strongest recovery in commercial OE as it was the segment most impacted by the recession. As Rich said, we continue to expect our unit sales for the year will increase 3% to 5%. Although, given the performance in the first quarter, our expectation is more toward the higher end of the range. Looking to our outlook for raw material costs over the balance of the year. We expect raw materials to increase 25% to 30% year-over-year, reflecting the recent moderation in natural rubber offset by higher costs in other key commodities. As a result of the first quarter performance, our confidence in our ability to manage raw material cost increases at these levels has increased. We expect price/mix to offset raw material costs in Q2. However, the challenge will be more significant in the second half, as we expect to face unprecedented raw material increases that will exceed $500 million per quarter. While our goal remains to recover raw material increases over time, this does not mean we can offset increases within the same period. We're confident in our strategy and are focused on offsetting raw materials with price/mix over time, which is essential for attaining our 2013 profit target. Moving to unabsorbed fixed costs. While we continue to see the benefit of increased plant utilization on our profitability, the year-over-year variances will be less going forward as they begin to reflect higher production levels from the 2010 base period. And as we said, we expect to recover about $175 million of unabsorbed fixed cost in 2011, primarily in North America and Europe, reflecting higher production despite some inefficiencies related to pending plant closures. As a reminder, there's a partial offset to this recovery. In 2011, we expect to incur about $30 million to $40 million of additional costs in Asia Pacific versus 2010 as we start up our new plant and wind down operations in our existing factory in China. For modeling purposes, we now expect 2011 interest expense to be about $325 million to $350 million, which includes the benefit of the announced debt redemption. Additionally, as I mentioned earlier, we expect a tax rate of approximately 25% of foreign segment operating income for the year. That completes my outlook comments. Overall, we continue on the path we discussed back in February and again in March, but with improved industry growth, better results in price/mix and further progress on the balance sheet. Now we'll open up the call for Q&A.

[Operator Instructions] Our first question comes from the line of Itay Michaeli with Citi.

Just going back to the OE pricing comments. I think you said you've seen benefits in the first quarter and some more later on in the year. Are those benefits expected to accelerate throughout the year? Or are you kind of seeing the full run rate of those benefits already in Q1?

I think, Itay, what you're referring to is our OE pricing that we've achieved and we made reference to in the call. I think, if you think about our selectivity strategy that we've put in place now for a number of years, we like to think of this as really part of that strategy. It's something we've been working on for a long period of time to sort of go back and revisit how we used to conduct business with the OEMs and how we're doing it now and what's important to us and what value we deliver and how we can get compensated for it and the like. So certainly, the rise in a raw material headwinds has given us even more confidence to go after that type of situation. So certainly, we've seen some of it in the first quarter, but I would tell you that we're going to continue to go back and continue to look at our business and look at our headwinds and look at the price we need for our product in that context. So I would say, more to come from our perspective, but clearly these are negotiated contracts. And that's where our focus is, and that's where our focus will continue to be.

Sure. And then a cash flow question, Darren. Looks like you're able to offset some of the working capital pressure you're seeing from higher raw material cost. Where exactly is that offset coming from? How are you able to sort of maintain that $200 million use outlook for the year?

I think you bring up a good question, because certainly in the first quarter, we saw a bigger cash usage for working capital than we saw a year ago. And I think what we see is that the inflation in raw materials is flowing through to working capital. Now the work that we've done in supply chain has allowed us to keep our units and inventory lower, and that's work is continuing so I think that's an area that we continue to make progress in. And we continue to work with our own suppliers and those relationship in order to take advantage of trade credit, which is obviously an important item for us as a lot of our suppliers see the same kind of inflation. So again, a couple of areas there that we continue to be very focused on. We continue to help build our customers' businesses. And so that the customers don't rely as much on us from financing as well. So I think all 3 areas are areas we've made a lot of progress in. We continue to be focused on, and I think that's why we still feel confident in containing the use to about $200 million for the year.

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

Just a couple of things. First, kind of diving into this pricing and the outlook. I noticed your revenue per unit and commercial was up by about 12.5% sequentially, which is a big move, but the Consumer Tire business, it was only about 1.8%. And I'm wondering -- I think that there actually was a fairly significant light vehicle tire price increase in October, and maybe you can just give us some color on what's going on within these businesses? And then, just kind of think -- can you talk us through what we should expect sequentially from Q1 to Q2 in terms of price on the one hand and then raw material costs on the other hand. Should the spreads widen or narrow from Q1 to Q2?

Yes, Rod, I think, clearly the pressure on the Commercial Truck business has been significant, given the higher natural rubber content. So as you see the increased price/mix there, it reflects the fact that some of the price increases in Commercial Truck have been higher in percentage terms than the increases in the Consumer business. So you saw that with the most recent increase where Commercial Truck increase was up to 15% versus Consumer being up to 8%. So when we look at each product, we look at the raw material content and we look at that and what impact it's going to have over time. I think, as we look forward, one of the things that we're going to be looking at is the fact that some of the other raw materials are now causing a lot of the increase. So natural rubber is down about 20% from where it was in February. But we've got carbon black that's up about 20% and butadiene up about 40% since then. And those are materials that are going to have as big an impact on Consumer as they do on Commercial. So I think the challenge for us is to maintain each of those businesses, and it's going to be a matter of dealing with the raw material costs that we've got.

Can you give us some brackets around what the sequential raw material cost increase is likely to look like as we look from Q1 to Q2?

Yes, Rod, I think it's a good question. And as we look at this, in the first quarter, we saw a headwind of about 26%, full year, we said about 25% to 30%. And again, we're really very pleased with how we dealt with price/mix in the first quarter. We offset the bulk of the headwinds, and we had some cost progress as well that helped us really even increase or to get more of that raw material headwind coming in. So really, a great start for the year, but also, remember, the bulk of those headwinds are really yet to hit us. The commodity prices we're going to get in over the balance of the year are still going to be significant. So if we look at it, I would say, overall we still had a lot of confidence in our ability over time to offset those raw materials. You may recall, we've said in the past, when we see increases in commodity costs of, say, 20% or above, sometimes we don't capture that in the same period we see the cost increase, but we get it over time. So as we look forward, Q1, excellent job. Q2, we expect that we can offset raw materials in Q2. As we look toward the second half of the year, I think, we say we're going to have a bigger challenge because we're going to be in sort of unprecedented territory where we're going to see in the quarter about sort of $500 million headwinds in each of the third and the fourth quarter as we look at it today. Now, that said, again I'm going to reiterate our commitment and our belief that we can offset that. It just may not happen on a one-to-one basis as those headwinds come in.

Okay. And then just lastly, can you just remind us very quickly the impact of the Farm Tire business in Latin America. What is the EBIT impact of that? I know you're doing another transaction in Europe, which could offset it. But maybe you could give us those numbers. And then lastly, just thinking about -- your target for 2013 in North America included about $145 million of improvement from unabsorbed overhead. Can you give us a sense of how much of that was 2011 expectation?

So Rob, first on the Latin American Farm Tire sale, Latin America will have a negative segment operating income impact of $35 million -- $30 million to $35 million annually, starting in the second quarter. So you'd spread that $30 million to $35 million over 4 quarters. Then that gives you an idea what the earnings impact is that we expect. The offset as you suggested is going to come once we close on the European Farm Tire sale. And the losses we incur there then would be less and would help mitigate the impact of lost earnings in Latin America. The unabsorbed fixed cost question in North America, the $145 million -- yes, that's something that clearly we're prepared to achieve by the 2013 target date. There is, as you can imagine, a number of challenges in North America to work through. The closure of the Union City factory requires us to move a lot of products around, moving from that factory to other factories in North America. So part of the fact that we see clearly 2 years from now, tougher to pin it down with precision in '11 and '12, is the fact that we do have a lot of operational issues to work through between here and there. So how much falls in '11 versus '12, a little harder to call, but we know where the endpoint is in 2013. I think the fact that we've got $43 million in the first quarter is a pretty good start. So I think we're clearly feeling good about that, but we'll stick to the 2013 target there in terms of how to recover the raw material cost -- the unabsorbed overhead cost, pardon me.

Your next question comes from the line of Himanshu Patel with JPMorgan. Himanshu Patel - JP Morgan Chase & Co: A few questions. I'm wondering if you guys could drill into Europe a little bit. There's obviously a very strong quarter in that region. Could you identify maybe just some particular areas of strength? Was it really the 80% rebound in commercial OE volumes? Was there any particular strength related to winter tires? Or was it pretty much across the board?

Yes, Himanshu, I would say, really, across-the-board. If you kind of look at what happened and think about our European industry, if we start there. A very, very strong winter market as we closed out last year and came into this year. So a lot of inventories out in the channel drawn down and a lot of focus by manufacturers, I would say, on getting those winter tires out in the marketplace. That boded well then for the summer tire market, so we're seeing very good demand in the summer tire market as those dealers want those tires. So that's a bigger demand or better demand than perhaps we would've thought. And on top of that, as we look ahead, we know as winter tires were depleted last year, we're looking forward to another good winter selling season as we look to the balance of 2011. So I think from a replacement -- past our consumer side, that's what we see, and from an OE side, certainly, you'd notice from the other companies you follow, the European OEMs, particularly the German OEMs, are looking at very strong business right now. So we see good demand on tires from them as well. So really, our Passenger business has excellent demand right now as we look ahead. Now that said, our team, I think, did an excellent job of operating in that market by focusing on the key brands, the key markets, the key customers, the key channels to maximize our business. And that's what drove our profitability, as well, in the quarter. They're making very good decisions as they look at Q1 and they look at the balance of the year. And then on the commercial side, I think it's, as we said, we see the markets rebounding. The OE business is very strong, there's a lot of demand there. And more trucks on the road replacing equipment that's been on the road for quite some time. And I think that's really the same thing in our North America business. I know we're talking about Europe but our North America business sees the same thing: a lot of old equipment out there getting replaced and a lot of OEM truck manufacturers who have significant backlogs right now. I think that's a trend that we see. So good industry and good performance in it. Himanshu Patel - JP Morgan Chase & Co: A couple of more questions. Darren, your comment on Latin America caught my attention regarding low-cost imports increasing. Can you just go about how big of an issue this is? I think it's the first time, at least, I've heard of it. Does it just sort of vacillate with currency rates? Or are you, in general, seeing something like what North America saw 10 years ago where there's just a steady increase in Chinese or Korean imports coming into the market?

Yes, Himanshu, I think currency does play a real key factor here, a real key role here. We've seen the pressure from imports in Brazil fluctuate with currency, and obviously, the Real right now is really a strong point vis-a-vis the U.S. dollar and other currencies. So it becomes an attractive market for importers at the low end. Now I think the challenge for us is, in all of our businesses, as we're targeting the more mid to premium segments, and that's true in our Latin America business as well. There's some investments that we're making there to transition our production from low value- to high value-added tires. And that's why it's going to be required for us to be selling tires that are more weighted toward the high end and are less subject to the pressures from these low-cost imports. So I think, in the long term, not a big concern for us. In the near term, that pressure does have some impact on our volume and that's part of what we saw in Q1. Himanshu Patel - JP Morgan Chase & Co: And then, I also picked up on your comment. I forgot whether it was -- I think it was towards the end, one of you mentioned that you guys are more confident now on offsetting raw materials. I'm curious, what's sort of driving that? Is that just the net price realization you're seeing in the replacement or OE side is perhaps better than what you had expected earlier in the year? Or is it the commercial mix that's really helping you become more confident? Can you give a little bit more color behind that?

Yes, I think, Himanshu, where I'd start, is to say -- where we always try to reiterate because we believe in it and it's really part of what we're trying to do as a business. A part of that price recovery in our mind is the value for the products we're putting out. We have, again, I think we had 14 new products in the quarter. There's a lot of innovation in those tires, those are tires that have relevant innovation in them such as fuel savings, rolling resistance and the like, so I think that's #1, value for our product. And I think if you go back, and you look at our comments that we've made at the New York investor meeting, and you look at the industry in total, a lot of demand for tires is coming. And I think that situation is in the market today, as I just mentioned in Europe, in terms of the supply-demand equation there. So I think that's a piece of it, as well. And also, particularly in our North America business, Darren mentioned this in his remarks, I think our focus on getting the right tire to our customers through our distribution, through our demand planning, to know what they want and through our factories to actually make the right tires is really something that's working. And it gives us the ability to put tires in our consumers' inventory through our distribution to allow them to have tires when consumers come in the door. And we're doing a very good job of that right now. And I think that's a differentiator in the marketplace that's helping us as well. Himanshu Patel - JP Morgan Chase & Co: And one last question. There was a 35% plunge obviously in spot natural rubber prices from, I guess, kind of mid-Feb to mid-March. Were you guys able to do any opportunistic buying on that?

No, Himanshu, I think we view commodity cost or input cost as something that we have to manage. We don't go -- we don't do hedging, as you know. We don't take positions. We buy forward as we need the material, and I think, as Darren mentioned, we did see some of the benefits in our Asia region where we can act quicker to get that rubber into our factories and into tires, so we did see a benefit there. We'll continue to try to do that as you’d expect, but no activities different than our normal process.

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

A couple quick questions. Number one, on pricing. The number you did in the third quarter was clearly higher than where kind of some of the peak quarters that you've seen where pricing tended to cap out at 300. I guess, first of all, can you tell us roughly how much of that was pricing versus mix? And maybe give us a little sense of what your sense of the elasticity is on pricing? Because these are obviously very big numbers, but at some point, one would assume that perhaps it might actually dent volumes, which it hasn't been doing so far, clearly.

Yes. Well, Patrick, you raise a really good point. And part of the thing that has raised our confidence and our ability to manage price/mix is the fact that, in the first quarter we did deliver more price/mix than we've ever delivered. And if we go back historically, into the third quarter we had about $250 million that we achieved in price/mix, and that felt pretty good. In the fourth quarter, we got over $300 million, which essentially put us above the highest we'd ever achieved. And we came back this quarter, and we were able to get $361 million. So we're clearly breaking new ground here in terms of the ability to move to offset raw material costs. And that's feeling very good for us. The point Rich made about the value proposition that is in the product for the customer is a big part of the question -- or the answer to the question as to why consumers are continuing to move toward higher technology-branded products. They're coming in to buy tires after 3 years. And the tire may be more expensive than the tire that they bought 3 years ago, but it's also got better performance. It's got better traction characteristics, it's got better fuel economy associated with it, so there's more value in it for them. And I think that's a fundamental that you've got to take into account if you're thinking why are consumer's willing to pay these higher prices and why we continue to see demand and an increased demand, for the higher-end, more premium-branded products.

And very quickly, just to add one comment to what Darren said, if we even look at our Commercial business where we actually introduced our Fuel Max Technology a number of years ago, our customers have told us that the fuel savings they get with our Fuel Max tires actually pays for their fuel bill. And I think that sort of goes back into the value equation of why innovation matters and why tires are important and why consumers and customers are willing to pay for them, as we think about where the industry is today and the value that we can deliver.

Okay. And any kind of -- I guess you guys have never provided this, but any kind of indication of how much of that $361 million was just pure pricing versus the mix shift in that?

Yes, the mix was a significant impact, as we look at the benefit to revenue per tire. I'll stick with significant. We aren't going to split it out, yes.

Okay. And then, on the -- you said that, in terms of the headwinds from raw materials, I think there was $33 million -- that was net of a $33 million reduction or cost reduction that you guys had to reduce materials. Can you tell us a little bit more about that, like what are some of the things you're doing and to kind of -- separate from structural costs, reduce the variable cost of the tire, how we can expect those to benefit you on a go-forward basis.

Yes, I think the first thing I would say is, in our minds, it's not enough. It's good performance, but in this environment we're going to continue and have sort of redoubled our efforts to make sure that we're dealing with these high headwinds both from a price and mix standpoint but also from a cost standpoint. And the things that we do, we've talked about some of these in the past. One is just in the construction of the tire, our goal to get equal or better performance out of the tire with less weight, and of course, less weight means less cost in terms of the material that goes into the tire. And the other is material substitution. So where we can find substitutions, lower cost alternatives, those are things that we do. Some of that are things we know how to do today. I think right now we're at about, substituting synthetic rubber for natural rubber, at about 30%. We've increased our ability to do that. And we continue to pursue other avenues to do similar things to focus on our costs. And I would also tell you, it's really just productivities that we get into our factories around waste and around just how we make the tires and how efficient we are doing it. And again, these are efforts we're going to continue to focus on going forward. Those are very near-term things we're doing today. One thing, as an example of long-term, is our initiative using BioIsoprene, which in effect would replace natural rubber and synthetic rubber as we know it, as a different alternative, as a much lower-cost alternative. That's not something that is in our tires today, but certainly that's a look-forward project that has a lot of promise to it.

Okay, thanks, and one last quick one, if I may. On the selectivity strategy, are you finding that other tire makers in your segments are following suit with that, which means that you could potentially get kind of a baseline price increase across the board without giving up too much share? Or are you finding that you're really going to sort of trade share for price with that strategy?

Yes, I would tell you -- certainly, we can't comment on how our competitors are looking at their business. I would just tell you: Our focus on OE is on making the business increasingly, improvingly, if you will, profitable. Our focus is on the net present value, if you will, on the fitments that we're taking, where can we sell it at OE and where can we get the follow-on business in the replacement market. And our focus is on getting value, getting paid for the cost of us making those tires. That's where we put our energy, Patrick.

At this time, your last question comes from the line of Ravi Shanker with Morgan Stanley.

So can you just dig deeper, better into the non-Tire business, which seemed really strong in the quarter? So, what's driving that? And how can see that evolve over the next few quarters?

Yes. So, Ravi, just to make sure I've got it, your question is on the other tire-related businesses?

Yes, that's correct.

So, yes, I mean, what we saw in the quarter is we had about $275 million of improvement in revenue related to these other tire-related businesses and some earnings improvement as well, focused, particularly, in North America. And we saw a detriment from a dropoff in other tire-related businesses as we went into the recession, and what you're effectively seeing is a recovery in many of those businesses. But by far, the biggest contributor to both the revenue and the earnings improvement here is the third-party chemical sales in our North American business. And the big revenue change, you can read it's just a pass-through of the input costs that the Chemical business -- for the feed stocks that the Chemical business is buying. The customers for the Chemical business, third-party customers, are essentially paying indexed prices for the chemicals we sell them. So it gets passed straight through. It doesn't really help us in margin terms. It raises cost of goods sold and raises revenue, with essentially the same dollar amount. So it looks like it has a significant effect on revenue, not a lot of impact on earnings but it did have some impact and some benefit in North America.

Understood. And also, on the Japanese situation, you said you're monitoring the situation. Is that purely from a demand perspective? Or is that also something going on in the supply side, maybe synthetic rubber or something, that comes from Japan?

Yes, so you're just talking about the comments we made about the impact on -- or potential impact on raw materials from disruptions like the one we've seen in Japan? I think, right now, the comment is that our raw materials supply is adequate. We've got the materials that we need. When that event occurred, I think, certainly, we put in place the business continuity activities that we run when there is any such emergency. Our businesses aren't located close to where the events occurred there and hasn't really been a disruption for us. We have one factory that is -- Goodyear factory in Japan. It's in the southern part of Japan. I think that's where our concern was centered, but as it's played out it has not had a material effect on us. So no big impact on us at this point.

Thanks, Ravi. Okay, that wraps up the call. Everyone, I want to thank you for listening and your participation. Hopefully, you see the quarter is nested in the strategy that we laid out at our recent meeting. That's the way we think about the business. Certainly, the first quarter is a good start. And we're going to continue to march toward the goals that we laid out in March. So thanks very much.

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