The Goodyear Tire & Rubber Company (GT) Q3 2011 Earnings Report, Transcript and Summary

Good morning, and welcome to the Goodyear Tire & Rubber Company's Third Quarter Financial Results Conference Call. [Operator Instructions] I will now hand the floor to Greg Fritz, Vice President of Investor Relations. Thank you. Mr. Fritz, please go ahead.

Good morning, everyone, and welcome to Goodyear's third quarter conference call. Joining me today are Rich Kramer, Chairman and CEO; and Darren Wells, Executive Vice President and CFO. Before we get started, there are few items I would like to cover. To begin, the webcast of this morning's discussion and the supporting slide presentation can be found on our website at investor.goodyear.com. Additionally, a replay of this call will be accessible later today. Replay instructions were included in our earnings release issued earlier this morning. If I could now direct your attention to the Safe Harbor statement on Slide 2. Our discussion this morning may contain forward-looking statements based on our current expectations and assumptions that are subject to risks and uncertainties. These risks and uncertainties, which can cause our actual results to differ materially, are outlined in Goodyear's filings with the SEC and in the earnings release. The company disclaims any intention or obligation to update or revise any forward-looking statements whether as a result of new information, future events or otherwise. Turning now to the agenda. On today's call, Rich will provide a business overview, including third quarter highlights and accomplishments. After Rich's remarks, Darren will discuss the financial results and outlook before opening the call to your questions. With that, I will now turn the call over to Rich.

Thanks, Greg, and good morning, everyone. During the third quarter, we were very pleased that our positive results were achieved through continued execution of our strategic objectives. We saw that even in an uncertain economy, the tire industry MegaTrends we introduced in March are still valid and our plans to return long-term targets remain on track. I will discuss those topics with you today and conclude with a brief outlook on the work we have yet to do and the opportunities we see ahead. Goodyear's positive momentum from the first half of 2011 continued over the past 3 months as we delivered the highest quarterly sales and earnings in our history. All 4 of our strategic business units set all-time quarterly sales records, leading to a total of $6.1 billion, the highest sales figures for any quarter in Goodyear's history. I'm very pleased with our performance in the quarter as we demonstrated execution of capability and confirm that our strategies around renovation, brands and targeted market segments are in fact the right ones. To summarize some highlights of the quarter, revenue per tire was up 18% versus the prior year. Price/mix of nearly $740 million offset by $554 million in higher raw material costs in the quarter. This marks the second quarter in a row where we more than offset raw material cost increases of nearly 30%. Price/mix improvements were driven by a continued stream of consumer-focused innovative branded products, particularly evident in our award-winning winter products in Europe. And we continue to improve our mix by producing more of the high value-added tires that our consumers are demanding from our existing factories. The result was record segment operating income of $463 million. SOI for North American Tire was $78 million in the quarter and is now to $255 million year-to-date. Our European business delivered $260 million of operating income, increasing its 9 months total to $539 million, which is approaching the region's previous annual record. And finally, our third quarter performance was delivered on flat volumes reflecting somewhat weaker demand, but more importantly, consistent with our selectivity strategy focusing our business on targeted market segments. As we assess our third quarter performance, we gain more confidence in the 7 MegaTrends that we identified and we believe will define industry over the next 5 to 10 years. In particular, volume in emerging markets continues to grow in the aggregate and mature markets continue to offer significant growth in the key segments that are demanding, leading-edge performance products. Tires constructed with innovative technologies are rapidly differentiating the upper and the lower ends of the market. It's increasingly clear that tire technology matters more than ever to our customers. And such technology is accentuated by 2 other MegaTrends, the green movements and of course, tire labeling. Those trends are developing in the marketplace and we saw their impact in the improved price and mix driving our third quarter results, the only chance to compete in the marketplace that allows us to differentiate our products through innovation and marketing. And remember, we're only at the front end of the MegaTrends so there is more opportunity that's ahead of us. Our third quarter performance provide a clear evidence to us that our strategy is the right one for both now and for where the industry is headed. Now as pleased as I am with our third quarter and year-to-date results, I'd like to reiterate that we're not running our business for one good quarter, one good year or short-term performance. Our strategy in our goals are based on delivering results consistently over the long term and we know there is still work to be done. We defined our destination as being profitable throughout the economic cycles and creating sustainable economic value. We will achieve this outcome through industry-leading innovation and by targeting profitable segments by delivering strong returns on our investments, by staying focused on cash and working capital and by achieving operational excellence. Our initiatives are aimed at being the best in service to our customers to help them grow profitably selling Goodyear products. Now I'll take a moment to elaborate on each one starting with innovation. As a company, our focus on innovation remains our top priority. We always work from the market back and our successful new products such as the Ultra Grip 8 Winter tyre in Europe, the Assurance Fuel Max in China and the 2 new wide-based commercial truck tires with DuraSeal Technology in North America support this strategy. I can tell you we will never take our foot off the innovation gas pedal. Our success in targeting profitable segments is clear from our third quarter results. We continue to make proactive decisions around brands, channels and even tire lines consistent with this strategy. Examples include OE selectivity in the brand rationalizations that we've done. Our strategy will be implemented through not only the business we take, but through the volumes we don't take using a disciplined decision-making process. This was the case as we exited private label and recently closed the manufacturing facility in North America that primarily produced tires that were inconsistent with our strategy. And our investment philosophy remains linked to our long-term strategy by judiciously investing in high-return projects delivering products consistent with the MegaTrends and our product roadmap. Examples of investments directed at increasing our production of Goodyear branded at high-value products include the construction of our new factory in Pulandian, China, which will double our existing production capacity to serve the high-growth Chinese market. The expansion of our factory in Chile, multiple factory upgrades in our European footprint and the investment in 63-inch OTR tire production in Topeka, Kansas to supply the high-growth mining industry. We will continue to be measured in how we invest in order to account for the inevitable cyclicality of the market and its impact on factory utilization. And finally, our goal is to get these investments fully ramped up to supply key growth segments as quickly as possible with the lowest startup expenses. And always linked to our investment strategy is our relentless focus on cash and working capital. Our track record on running the business for cash and working capital efficiency has been clear over the past few years. Our working capital as a percentage of sales is industry-leading. But given the continuing impact of rising raw material costs, we must continue to lean forward in our efforts to control working capital and cash generation. We're aiming for world-class working capital management, not just leading our industry. Now in addition to traditional ways of approaching working capital, we will also focus on operational excellence. By driving efficiency in the planning process to ensure our decisions result in only making the tires consumers demand, we will improve our productivity, increase customer service and drive lower investments and working capital. While I'm not yet satisfied with our performance in this area from both cost and cash perspectives, certainly, we've made progress but what really inspires me are the opportunities for improvement that remain ahead of us. So we had a great third quarter, in fact, a record third quarter. But our focus remains on long-term, consistent results. Before looking at the balance of the year and beyond, I would like to comment briefly on each of our business units to provide some perspective starting with North America. More important than North America tires earnings in the quarter, is the momentum the business is generating by driving its price/mix, cost, operational efficiency and customer focus strategies. In a flat market and a sluggish consumer industry, the business drove brand channel and customer mix and offset record high raw material increases by selling premium Goodyear branded products in targeted market segments. And remember, when the market does come back more robustly, there will be even more opportunity for us to capitalize further. So overall, we remain confident in North America tire achieving its targets. The European region, as you know, has been a high-performing business and our goal is to see it return to and in fact, exceed its historical earnings levels through the continued focus growth of our business there. Now on the strength of a very strong third quarter, its year-to-date performance is already close to reaching that level. Europe's third quarter results were driven by price/mix execution, and by the team's quick response to an early rising winter tires season. We were able to capitalize on the industry strength because of 2 things: The strong demand for innovative products, and the flexibility of our operations to react to changes in market demand. Consistent with these MegaTrends, we see Europe as a mature market that has a high-growth segments. The region is our technology leader and our brand's reputation for delivering performance will be even more critical when tire labeling comes into effect next year. That said, we'll be keeping a vigilant eye on the European economy, particularly in Southern Europe, which has shown increased weakness and continued volatility. This remains an area of a focus for us as we look ahead to 2012. Our business in Latin America is confronting challenges that include a strong Brazilian real, a directly correlated increase of imported products and significant inflation increasing our costs. This is a situation we will have to deal with for the foreseeable future. The fluid nature of the Latin American economy will depend -- will demand flexible response in our operations, something we're confident our team there can deliver. In China, the steady stream of accolades for our brands and our products, coupled with opening more than 300 new stores, continues to raise awareness and drive sales. Volumes in the consumer replacement business in China have grown more than 40% year-to-date, and Goodyear has increased its share by 1 full point. Elsewhere in the Asian region, consumer spending remains low in Australia and the Asian countries are being impacted by the flooding in Thailand. Asia, and particularly winning in China, remains a key tenant of our strategy. Now before turning the call over to Darren, I'd like to close with a few thoughts on what we see ahead. As we look forward, our expectation is that the economic volatility we see will not go away. While at the moment we don't see recessionary situations as we assess the markets, we do expect the continued economic uncertainty. That said, rather than waiting for certainty, we have accepted this economic climate as the new normal, or at least the new normal for now, and we are developing plans to deliver superior performance in this environment. We will continue to make decisions focusing on cash, prudently investing it, and delivering results while simultaneously building capabilities for the future. The tire industry is cyclical and that path to our goals will not likely be a straight line. But we are committed to progress toward our goals regardless of the economic environment. Our record third quarter performance in an extremely difficult economic climate gives us confidence and motivation going forward. We are on the right path to reaching our long-term targets, we're progressing on schedule, and we are building a more robust business model along the way. For us, it remains a great time to be in the tire business. So thanks for your attention, and now I'd like to turn the call over to Darren.

Thanks, Rich. Good morning, everyone. As you heard from Rich, we generated record levels of segment operating income during the third quarter despite flat unit volume and managing through the largest quarterly increase in raw material cost in our history. The record level of earnings was driven by our Europe, Middle East and Africa business along with continued high levels of performance in North America and Asia-Pacific. During the quarter, we generated price/mix improvements of $739 million compared to the prior year. There are 2 areas I'd like to highlight related to our price/mix performance during the quarter. First, as we've gone throughout 2011, we realized the benefit of our price increases. Realizing this benefit reflects the strength of our brands and product offerings. Second, our targeted market segment strategy continued to drive improved mix during the quarter. This strategy in Europe is benefited from a very strong winter tire market, but our focus on the winter segments has resulted in us having the best product lineup in the industry at just the right time. Turning to the income statement on Slide 6. Our third quarter revenue increased 22%. The revenue increase was largely due to improved price/mix, which resulted in an 18% improvement in our revenue per tire on a year-over-year basis. Favorable non-tire related revenue and foreign currency added $220 million and $175 million, respectively. From a unit volume perspective, we continued to see growth in the industry demand across most geographies, but generally at the lower end of our prior outlook. Our volumes were flat, reflecting reduced volume in low-value tires with continued growth in targeted market segments. We generated gross margin of 18% in the quarter representing a full point of margin improvement from the prior year. We improved gross margin despite significant year-over-year increases in raw material cost. Price/mix and cost reduction actions were key offsets to the raw material cost increases. Selling, administrative and general expense increased $37 million to $677 million during the quarter. Unfavorable foreign currency translation accounted for $23 million of the year-over-year increase. As a percentage of sales, SAG expense declined 170 basis points to 11.2% in the quarter. Segment operating income and net income were records for any quarter. Excluding discrete items, our third quarter tax rate as a percentage of foreign segment operating income was approximately 24%. For the full year, we expect our effective tax rate to be slightly under 25% of foreign segment operating income, a bit better than our prior guidance. Third 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 on Slide 7, you can see the benefit of price/mix compared with raw material cost increases of $554 million. Our third quarter performance provides continued evidence that we can effectively manage raw material cost increases and deliver net benefit from our focus on improving mix in targeted segments. We recovered $43 million of unobserved fixed cost during the quarter, which brings our year-to-date total to $163 million. With our strong progress in 2011, we expect to be above our original expectation of $175 million improvement in an absorbed fixed cost this year. During the third quarter, we generated cost savings of approximately $106 million, net of the USW profit share program. Our third quarter savings are consistent with our plan for 2010 through 2012, and keep us on track to achieve $1 billion in savings over the 3-year time period. Approximately $48 million of these savings are related to our initiatives to reduce material content, as well as optimize the type of compounds we utilize in our tires. Q3 cost savings also benefited from reduced cost of general and product liability claims that we've seen trending down over the last several quarters. Our cost savings initiatives allowed us to more than offset the $82 million of cost inflation we experienced during the quarter. While we remain on track to deliver $1 billion of savings over 3 years, keep in mind in Q4, we will see non-recurrence of a $25 million benefit in workers' comp in the prior year, as well as higher profit sharing and transitional manufacturing cost in North America. The other category includes cost related to the sale of our Latin America farm tire business and start up costs associated with our Pulandian facility. Together, these items accounted for $21 million of our other variance during the quarter. Turning to the balance sheet on Slide 8. Our debt increased for the second quarter as we saw -- from the second quarter, as we saw our net working capital balance increase $600 million from June 30. The working capital increase was mainly driven by higher raw material costs and our richer mix of winter tires and other high value-added products. To give you some perspective on working capital levels, on Slide 9, we show our quarterly working capital trends as a percentage of sales. There are 2 key trends I'd like to point out. First, as you can see, we've made steady progress in reducing the amount of working capital we have employed in our business. Since 2008, you can see the overall downward trend that we've delivered. This trend will be even more significant if we went back further in history. The second point is that we've historically had a distinct seasonal trend, with working capital increasing in Q2 and Q3 and decreasing in Q4. As you look at the remainder of this year, we expect to see a similar pattern but with pressure from higher selling prices and a richer product mix. We currently expect to generate $1.5 billion of cash from working capital during the fourth quarter, and we'll continue to focus on further working capital reductions going forward. Turning to Slide 10, you can see our debt maturity schedule. As you can see from this chart, our debt maturities remain limited prior to 2014 and we have no bond maturities until 2016. We have solid liquidity with $3.9 billion of cash and available credit lines at quarter end, so our capital structure remains solid at the end of September. Turning to segment results, North America reported segment operating income of $78 million in the third quarter, which compares to operating income of $5 million in the third quarter of 2010. North America unit volumes were down, reflecting a generally weak consumer replacement industry. Unit volumes also reflect a reduction in our sale of low value-added tires versus a year ago, along with reduced exposure to low-margin OE vendors. Commercial industry demand continued to see strong gains with replacement demand up 5% and OE up 51%. As we continue to focus on mixing up in products, in channels and with customers, North America delivered strong price mix of $262 million, more than offsetting $214 million of additional raw material costs. North American earnings continued to benefit from ongoing reductions in unabsorbed overhead and lower pension expense. Consistent with the first and second quarter of 2011, higher year-over-year production levels in our plants enabled North America to recover $18 million in unabsorbed fixed cost. Cost improvements were partially offset by one -- first, higher USW profit sharing as a result of higher profitability levels; and second, the cost related to the shutdown of Union City. North America's Q3 results also benefited from a reduction in accruals for product and general liability to reflect favorable trends over the last several quarters, as well as from higher earnings from third-party chemical sales. Now I'd note that with the drop in butadiene prices, the benefit from third-party chemical sales that we've seen in the last several quarters turns into a headwind for North America in Q4. Overall, our earnings rate this year in North America keeps us on track for our 2013 target of $450 million. Europe, Middle East and Africa reported a record segment operating income of $260 million in the quarter, which compares to $77 million in the 2010 period. The 2011 results reflect sales of $2.2 billion, a net sales increase of 31% on an 8% increase in unit volume. Revenue for tire, excluding the impact of foreign exchange, increased 18% year-over-year. The stronger euro and other currencies versus a year ago, favorably impacted net sales for the quarter by about $100 million. As you would expect, the $183 million increase in segment operating income for EMEA required a number of things to go well all at the same time. First, this year's winter tire market is built on last year's strength with the industry shipments of winter tires up 22% for the quarter. Second, Goodyear has the most successful lineup of winter tire products in the industry at exactly the right time, allowing us to benefit from the strong value proposition and improve our mix of sales in targeted market channels and segments, while also gaining share in our premium brands. Overall, this resulted in over half of EMEA's Q3 sales coming from winter tires. Third, the impact of European economic uncertainty has been focused in Southern Europe, sparing the winter tire market which is focused on the North. And finally, we still saw some benefit in the stronger euro in the quarter. Overall, we feel great about the quarter and see the results validating our global strategy and demonstrating our ability to execute in EMEA. Panning into Q4 and Q1, we're very focused on the changes in the European market. Winter tires will be a smaller part of our business in the seasonally lower Q4, as we start to focus on summer tire sell in to serve retail demand in Q1. And we already see some weakness in the commercial truck replacement market, part of which maybe dealers reducing inventory. We will continue to monitor European demand closely given the macroeconomic uncertainty in the region. Revenues in Latin America for the third quarter rose 14% or $82 million to $651 million, a record for any quarter. With revenue for tire up 8% and units down 2%, Latin America reported segment operating income of $62 million for the third quarter, down from a year ago. While 2 items, the sale of our farm tire business and foreign exchange, combined to reduce earnings by about $10 million, segment operating income was down even excluding these factors. Latin America, and particularly Brazil, faces the dual pressure from first, imports in the low value part of the market driven by stronger currency; and second, increasing cost inflation. This pressure was offset partially by cost savings initiatives across the region. More recently, the Brazilian real has weakened somewhat, which if this trend were to continue may reduce pressure from imports. Either way, our team is working to shift our business toward targeted market segments while supporting our dealers in their needs for tires across all price points. Longer term, we remain confident in the strength of our brand, our products and our distribution and our ability to transition to future needs of the market in Brazil and other Latin American markets. Our Asia Pacific business reported another solid quarter. Although growth rates are not as strong as they were in the first of the year, demand for China and India, coupled with our OTR business helped mitigate weakness in other markets. As a result, Asia Pacific reported segment operating income of $63 million, a year-over-year increase of $6 million, even with $13 million of incremental startup expenses associated with the ramp up of our new factory in Pulandian, China. Foreign currency was favorable reflecting mainly the stronger Australian dollar. Price/mix improvements were able to more than offset raw material cost increases. Overall, we continue to be pleased with performance and opportunities we see in Asia, and particularly in China going forward. As a near-term issue, like many manufacturers in Thailand, we're being impacted by ongoing flooding in that region. We had to close our factory on October 20, and it remains closed today due to the continued situation there. To dimension this for you, Thailand makes up less than 1% of our sales. We continue to monitor the situation, but don't have an estimate for when we'll restart operations in our plant or what the ultimate impact to the fourth quarter will be. Once the damage is known, we do have insurance coverage for this type of event. Turning to Slide 12, you can see that we've refined our industry outlook for the full year. Rather than going through a discussion of each segment, the 2 updates I would like to bring your attention to are the North American consumer replacement outlook and the European commercial replacement outlook. For the North American consumer replacement market, we now expect full year volumes will be essentially flat with the prior year at the low end of our previous expectation. As we've highlighted previously, we've seen less volatility in retail sales to end consumers, which we believe have remained essentially flat throughout the first 9 months. We now expect the European commercial replacement market to increase about 1%, down compared to our prior outlook of up 7% to 11%. We continue to see some positive indicators such as toll road usage, and therefore believe the recent trends maybe at least partly attributable to dealer inventory rebalancing. For Goodyear globally, tire unit sales have grown about 1% year-to-date and we expect similar growth for the full year, below our original expectations of 3% to 5% growth. Looking at raw material cost, we expect our fourth quarter cost will rise more than $600 million, which will represent more than a 30% increase in our costs versus the prior year. Based on our announced price increases, we expect price/mix to essentially offset this impact in the fourth quarter. Overall, we feel very good about the improvement that we've made as a company throughout this year. Good about our strategic -- our strategies addressing industry trends and good about hitting our 2013 targets. Now we'll open up the call for questions.

[Operator Instructions] Your first question comes from the line of Rod Lache with Deutsche Bank.

It's actually Pat Nolan in for Rod. Can we start with Europe, the 11% operating margin you achieved there during the quarter. I know it was extremely strong winter mix, but can you just give us an idea? I mean has anything changed in that business where -- I mean, with the overall margin outlook as you go forward? I mean, is this just kind of an aberration the way you're looking at it right now?

No. I think, if we start sort of it from a macro perspective. I think if you go back to what we said strategically, our goal was to drive our European business back to at least the historical earnings level that we had and then some, and fundamentally, that was grounded and the targeted market segments that we see is very opportunistic for us in the region, our innovative products and particularly in the winter area where we have award-winning, industry-leading products, particularly identified by the magazine tests over there. So what you see happening, I would say, is not at all aberrational. It's a -- an excellent market to sell tires, it has excellent market segments within the market in the aggregate, and we have designed and executed our strategy to take advantage of those. So I think in a macro sense, I wouldn't at all have you think about it as an aberrational business model for us in Europe. Now, I think though, if we look at our Q3 performance, you've rightly point out that what's driven it is a strong winter tire market. And again, we executed very well in terms of having the right product at the right place at the right time. So I would say we certainly took advantage of a good situation, and I'm very, very pleased with the way the team there executed. So that strategy is going to continue. We've had success in those targeted market segments in Q3, and we intend to do that in Q4 as well. That's going to be again both now more in summer and winter tires, and we'll see some softness in the winter tire markets impacting Q4 and potentially out even into Q1 as we see a higher weighting towards summer and away from winter. In Q4, in particular, we'll see a product mix that's again going to shift more towards summer and the volumes will just be lower in Q4 historically, as I have based on seasonality. So we'll see a little reduced volume and a little bit of mixed shift from winter to summer. And I think that's really not again an aberration, that's the typical trend that we ultimately see. So again, I would tell you we're very, very pleased with what we see in Europe, and I would say we're on strategy and frankly, our earnings getting back to historical levels is something that we targeted. And given the strong winter, we're probably even a bit ahead of what we thought we'd be.

But more than 50% of your volume being winter tires in the quarter, what's that typically in the third quarter?

There's no question, this is a year where winter tire sales have come earlier. Partly, that's demand, partly driven by the fact that there was a strong winter last year. So I think that our mix of winter tires improved this year. But to the extent those sales have come in the third quarter, then we'd expect our mix of winter tires to be a bit less in the fourth quarter.

Okay. And I believe we're also approaching the job deadline for the European farm tire sale? What's going on there, and is there an alternative plan as you go past that deadline?

No. I think as we look at what's happening there, we continue to feel confident that we can get a deal done there as they -- a lot is going on. The teams are working with the local unions to resolve the future of the factory there. I think, we're -- we still have a lot of dialogue going on with both the Unions and Titan, and I think our view is that the parties will ultimately come to an agreement as soon as possible. It's taking a bit longer obviously than we thought, but I don't think we changed our perspective on getting the deal done.

Yes, one last one. Can you give us an update on what your pension asset performance is year-to-date?

Yes. So I guess 2 points I'd make there. One is that September year-to-date, our asset returns were down minus 3% for the year. But if I look at those returns today, it's -- they're up 2% or 3% for the year. So -- and we've benefited from the recovery that we've seen over the last month.

Your next question comes from the line of Itay Michaeli with Citi.

It's actually Chris Reenock for Itay. My first question is, just if you could speak directionally and broadly, if all stays equal right now, how should we think about price and mix in 2012?

Well, I think, Chris, for price and mix in 2012, it's not something that we're going to give guidance on going forward. I will tell you, from a price/mix standpoint, if you look and you go back our strategy, our strategy very specifically is focused on innovative products getting the most customer back -- best innovative products in the marketplace, and selling those in the targeted market segments where we see the opportunities to sell our technologically advanced tires. That's what we're going to do. And relative to the raw materials that whatever that we're going to see in the future, as we've consistently set, our goal is to offset those raw materials with price and mix. So as we look to 2012, we're certainly not going to give you any guidance. But as we think about where we're headed with our strategy, and we think about the opportunities the market has for us, I'd say we feel pretty much very confident that we're going to continue to execute, excuse me, along that path.

Okay, great. And can you give us an update on Latin America and just where you see margins heading in Q4?

Yes. So the Latin American businesses has got the same challenge a lot of manufacturing businesses have that operate in Brazil. And a big piece of that driven by the influx of low-cost imports that have become very inexpensive to Brazilian consumers based on the strength of the real and stability of that economy over the last several years. The import pressure continues, although the real has weakened a little bit, which makes imports more expensive. But I think I'll -- you'll look at that and say, that's not something that's going to resolve itself overnight and certainly not within the course of a quarter. So I think the import pressure continues to be there. The Brazilian real is a bit weaker so maybe that gives us some relief if that weakness continues. The cost inflation there continues to be an issue for us as well, and that's inflation in all types of costs. So let's set aside raw materials and think of it as energy, wages, in particular, benefits. So we've got some cost inflation to deal with as well in a very competitive environment. So I think that the business there, the outlook for Q4, a lot of the same pressures we saw in Q3 are going to be there in Q4. But if we look at the health of our business in the long run, we continue to have -- to do very well there in the premium branded part of the market. Our distribution channel continues to be a real competitive advantage for us. And I think as tire labeling and tire technologies progress, I think that's going to continue to be a very attractive market for us. So I think for the near term, some of the same pressures, for the long-term, I think we'll continue to see strength in that business.

I'd add one thing very quickly. Just from a macro perspective, I've said in the past that we've seen volatility in the Latin American business over the past 10, 20 years that most of us on the call might remember. When we look and we see periods of stability, our business has done very -- our core business has done very well. And when we see volatility, our core business still does very well. So the fact that we're seeing some of that volatility now, in the past, it's been currency revaluations, now it's a strong currency and imports coming in. I would tell you, those are circumstances that our team knows how to deal with. We're going to deal with them, and we feel confident that we can. So yes, we're seeing a little bit of that volatility that has really hallmarked Latin America for a long time. I'd say that's what we have, we're going to work our way through it, and I think that's the longer-term perspective I'd give you on it.

Your next question comes from the line of Himanshu Patel with JPMorgan. Himanshu Patel - JP Morgan Chase & Co, Research Division: A couple of questions. I'd like to get a little bit into North America. Replacement volumes, I think, were down 10% for you guys. I thought the U.S. market was roughly flat on replacement. I know you guys are not focusing on some of the low-end demand, but it just seem like a bigger decline than what would I have expected. Was there something going on there with the timing of price/mix or whatever that made it a particularly tough volume quarter for you guys?

I think, Himanshu, there wasn't and I would go back to where you started this. Remember, our strategy has been, as you said and we're very with what's happened in the quarter. We said in the past our strategy is going to focus on innovation, on branded products, on targeted market segments and we're going to take advantage of sort of the MegaTrends shift towards those HVA tires. We also said that we're not going to pursue volume-for-volume's sake, and those are the decisions of which we ran the business this year and in the quarter. We make our decisions consistent with that philosophy. And I think what you saw is the results of North America, another very, very good quarter. Sort of the second highest individual quarter in absolute terms that we've had over the last 5, 6 years or so. So we've had lower volume, but we've had increased price and mix. We've improved our brand, our product and our channel mix going forward, our customer mix going forward. So we're very confident that the strategy is working, and certainly not to say that volume is not important to us. But more important is focusing on the strategy, and I think you saw some of that within the quarter.

Himanshu, the only thing I would add is that the 18 million units a year ago made a pretty tough comp, I mean that was a strong volume quarter a year ago for us. Himanshu Patel - JP Morgan Chase & Co, Research Division: Okay. Can we shift to Europe a little bit? It sounds like there's a couple of cross currents for Q4. You're obviously talking about the winter tire mix receding sequentially. But also on the commercial truck side, it was a little bit surprising to see your industry forecast for EMEA commercial replacement go down by so much in just one quarter. I'm wondering, are you seeing any sort of cliff event in that subsegment, or it's just within 3 months to see the forecast go from 8.5% to 1% was kind of surprising? I'm curious, if you could shed some color on that.

I think, Himanshu, you're right. We clearly saw softness in the third quarter with our volumes decreasing. And I think obviously, we're trying to look for signals in the marketplace as well. And I would tell you at this point, we see mixed signals out there. We certainly see it prudent to adjust our forecast, but we're really seeing a mixed signal as we sort of pulse the market. We're seeing a little bit of dealer destocking given what's been, as you know, very uncertain European economic environment. So there's some of that and there maybe some holds off on purchasing and inventory rather than just appear a lower industry demand. And in fact, when we look at some of the data that we get our hands on in terms of industry demand, we actually do see a reason to get an increase in the German toll data of trucks driving around there. So that gives us sort of a different signal than a downward view. And also, most recently, we saw e-registrations of trucks growing. So we see some positives and negatives in there. All that said, our conclusion I think is reflected on the forecast that we saw prudently to take it down. And what we can tell you is we will continue to monitor that very closely as we get into Q4 here. Himanshu Patel - JP Morgan Chase & Co, Research Division: Okay, and then last question. There's been a couple of tire makers that has announced plans to add capacity or I think entirely brand new plants into the U.S. I think there's a couple in South Carolina or somewhere in the Sun Belt. I know these are a few years away from being fully ramped up, but I guess I was just a little bit surprised to see that we've been kind of accustomed to people shutting down plants in the U.S. for the past decade. Can you talk a little bit to just kind of what's the cost competitiveness of U.S. tire manufacturing today versus where it was a few years ago? And I'm particularly interested on your view on the competitiveness of Chinese imports into this market. Have we gotten to a tipping point now where a combination of U.S. labor cost going down, maybe imported Asian cost going up, transportation cost going up whatever such that it no longer really makes that much economic sense to import tires here?

Himanshu, I won't obviously, comment on our competitors action in terms of how they're thinking about it. But I think if you look at it, what I would point you back to is the MegaTrends that we've pointed toward back in our March meeting. And that really pointed toward sort of a distancing, if you will, of higher value-added tires versus sort of let's call them lower technology tires going forward. Those higher value-added tires as we sort of articulated back then have a higher margin associated with them. And as we look at the world today, we see probably more availability from a production perspective on the lower end, and less availability of production capability on the higher end. So I think what you see happening and the way we look at it, it's very, very consistent with how we saw the market developing. So as we look at production capacity, how we think about our production capacity, I should say, it's really about making the investments that can make the tires the market wants. And that means for us, it's adding capacity in places like Pulandian, China and in Chile. For us, it's also making -- fitting up our factory in Europe and North America to make those tires because we can sell them for a higher margin. And we would tell you, it's working at this point. So there's a lot of different things that I would say go into it. But I think the underlying point to take away from it is that the market really is looking at needing more products on the high end. That's a great environment for us, that's how we want to compete, and that gives us the opportunity to get more of those tires out of the factories, it gives us more the opportunity to grow our business. It's exactly the environment we want. And again, in North America, were doing some of that as well. We fitted up our Fayetteville factory, we made investments in Gadsden, made investments in Lawton and all those investments are to serve that high end of the market. And again if you look at North America, we still got to hit our marks. So I'm not putting the cart in front of the horse here, but clearly that strategy is working. And I think that's how I think that capacity coming on should be framed.

Your next question comes from the line up Brett Hoselton with KeyBanc.

I wanted to continue on, especially in the commercial vehicle. First, very simply, can you give us a quick split between North America, Europe and Asia in your commercial vehicle business? And then secondly, can you tell us what commercial vehicle replacement demand did in Europe, their percentage year-over-year change. I know you gave us the aggregate, but can you give us the breakout of what commercial vehicle did in Europe?

No. I mean, the answer to your last question is we saw the industry down about 9 percentage points in the quarter for European truck commercial replacement. And again, I think what we saw there is some inventory destocking in dealers after a real strong first and second quarter sell in for manufacturers to dealers. So I think we saw some dealers backing off the inventories that they've been building up. In North America, we continue to see some increases in the quarter. If you look at Goodyear's commercial truck business and there's a slide in the appendix in today's presentation that gives you the sales, it's Slide 15 in the deck. The commercial units overall went up for us in the quarter, so up about 4% for us globally. I think that you can tell that U.S. was a better trend than Europe given the industry trends there. But if you look at our business overall, it's a business where most of the 20% of our sales in commercial truck business are split between Europe and North America. Our next largest is in Latin America. Latin America, it's large relative to the size of our Latin American business. It's a bigger mix of commercial truck there than it is elsewhere. But from a sheer volume and revenue perspective, smaller than our businesses in North America and Europe. Asia Pacific, our participation in the commercial truck business is pretty limited. We don't build radial truck tires in Asia. So we have some residual bias business, which has been a business trending down over time. So relatively small business for us in Asia, but a big opportunity. So part of our investment in China is investment in being able to build medium radial truck tires for that market. And that's the largest truck tire market in the world, so that's something that will become a factor for us going forward.

In raw materials, you've given us the guidance for the fourth quarter. But as we look out into the first quarter, it looks as though raw material costs should trend down. And I was wondering, what's your thoughts are on a preliminary basis in terms of raw material cost? And in particular, floods in Thailand. Last year, there's concern that rain in Thailand was negatively impacting or could negatively impact natural rubber supply. Do you have any thoughts on how the floods in Thailand might or might not impact natural rubber pricing? Because it doesn't appear as though it has.

At this point, we have not seen any impact on natural rubber. And as we look at it, it's not something that's expected now. That said, you never know what ultimately happens there. But that's not the -- that does not seem to be a concern right now. We're not seeing it in pricing, and we're not -- certainly not seeing it in supply in terms of actually getting natural rubber, so that's not a primary concern for us. And I think, talking about raw materials, the question on where raw materials go. I think I'd have to point back again to the fact that our Q3 -- in the third quarter, we had price/mix of $740 million offsetting what was again about a 30% increase in raw material prices. It's the second quarter in a row that we offset those high cost increases again of about 30% each so we feel very, very confident of that. Before we talk about lower raw material prices that could potentially be there, as we look to the fourth quarter I think that Darren mentioned, we still have more lifting to do. We've got another 30% coming at us or another, say, $600 million. And I would tell you, that's where our focus is. And as we look at that, we're very confident that between the previously announced price increases that we have, our focus on mix on those targeted market segments will allow us to offset those increases that we're going to see in the first quarter. Despite again, as Darren mentioned earlier as we talk a little bit about the mix change on having less winter tires coming into the fall in the fourth quarter that we do -- that we've in the third quarter. So that's how we look at it longer term. I think in February, we'll talk more about where our outlooks are for raw materials. Probably best to hold off then till we comment on where natural rubber and other raw material prices are until then.

And just sequentially, Darren. Does Union City and Amiens, France benefit sequentially from the third to the fourth quarter -- your fourth quarter results, or is that predominantly going to start to benefit you in the 2012 time frame?

I think, the Amiens plant as Rich mentioned, we have not completed the closure yet. So that's something that still out in front of us. For the Union City closure, I think the way to think about that is the real benefit of the Union City closure starts in 2012. We've -- the plant has been closed and so in the third quarter, the cost of running that plant weren't there. After a one quarter lag, that would -- you'd expect to see that in the fourth quarter. It's been offset by some of the transition costs that we incurred to take products we were building in that plant and moved them to other plants. So you really don't see the benefit coming through in Q4, but you should start seeing benefit starting in Q1.

Your final question comes from the line of Ravi Shanker with Morgan Stanley.

A couple of questions. On the cost savings line, it looks like you already achieved $720 million of the $1 billion with a year and a quarter ago. Any chance that you have more ripe out of there or is the base of gains going to slow down going forward?

So Ravi, cost savings is going to continue to be a big focus area for us, no question. There's some things that as we -- third quarter looked very good. We had over $100 million of cost savings. Although $15 million of that came from the favorable claims experienced in product liability, so essentially an accrual being adjusted downward. You saw $48 million of it related to lower raw material costs or savings we've implemented there. And so a couple of things. I think in one sense, we've got some good track record and good momentum, although I think the -- as we look at the fourth quarter, we're not going to get the recurring savings from a onetime adjustment to workers' comp accruals we had a year ago. So that reverses itself and in fact, becomes a bit of a headwind for Q4. We've got transitional manufacturing costs coming through from the plant closures, including Union City. And we've got continued pressure from profit sharing in North America and we scorekeep those as part of our efficiency. So those make the cost savings a bit tougher. I think as Rich said, we feel like there's more that we can do to become more efficient in our operations, and we're going to keep pushing on that. But at this point, we're going to stick with the goal that we've set out which is a to achieve $1 billion savings over 3 years.

Got it. And I know it's a dangerous exercise, but if you annualize your SOI of this quarter, you're above your 2013 target. Any chance you think you can bring that forward or raise that?

Ravi, I can tell you, we're always pushing ourselves and pushing internally to reach all of our goals faster. I would tell you the way we think about it is that's our goal. When we hit that objective, then we're going to go change it. But rest assured, we're going to do everything we can internally. We are doing everything we can internally to reach those goals as fast as we can.

I will now turn the call back to management for closing remarks.

Well, everyone, we appreciate you listening today and we'll talk to you next quarter. Thank you.