The Goodyear Tire & Rubber Company (GT) Q4 2011 Earnings Report, Transcript and Summary

Good morning. My name is Tina, and I will be your conference operator today. At this time, I would like to welcome everyone to the Goodyear Fourth Quarter and Full Year Sales and Earnings Results conference call. [Operator Instructions] I will now turn the call over to Greg Fritz, Vice President of Investor Relations for the Goodyear Tire & Rubber Company. Please go ahead, sir.

Good morning, everyone, and welcome to Goodyear's fourth quarter conference call. Joining me today are Rich Kramer, Chairman and CEO; and Darren Wells, Executive Vice President and CFO. Before we get started, there are a few items I would like to cover. To begin, the webcast of this morning's discussion and the supporting slide presentation can be found on our website at investor.goodyear.com. Additionally, a replay of the 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 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 review, including perspective on our fourth quarter and full year results and how we are progressing toward our key strategic objectives. After Rich's remarks, Darren will discuss the financial results and outlook before opening the call to your questions. With that, I will now turn the call over to Rich.

Great. Thank you, Greg, and good morning, everyone. As we exit 2011 and head into 2012, I'm pleased with our progress, which has been consistent with the strategy we introduced in March of last year. Our progress in 2011, both financially and operationally, is frankly ahead of where we envisioned we would be as we started the year. However, as we look ahead to 2012, we already are experiencing more economic and internal headwinds than initially anticipated. Now that said, we remain on path toward 2013 target of $1.6 billion of segment operating income. As I said in our last quarter call, we're not running our company for one good quarter for one good year or for short-term performance. We understand our journey to our destination may not be in a straight line. Our strategy and our goals are based upon delivering results consistently over the long term and building the capabilities to do so. So again, I'm very pleased with our 2011 results, but I'm even more encouraged about the improvements made in executing our strategies, such as leading in innovation, winning in targeted market segments and in striving for operational excellence. I see these benefits in our business every day. More importantly, I see the opportunities relative to what remains to be accomplished. Now clearly, we must execute. But I believe in our team's ability to lead this industry in innovation, in marketing and in operational efficiency. In the fourth quarter, despite weak volumes, we saw branded share improvements and the continued trend of strong price/mix, despite more than 30% raw material cost increases. The price/mix improvements were offset by the results in our chemical business, the impact of the Thailand flood, startup costs related to our new factory in China and costs related to the transfer of products stemming from the closure of our Union City factory. Darren will elaborate on each of these and review the quarter's results in detail in a few moments. I'd like to take a few moments to discuss our full year results in the context of our overall strategy as we drive toward our 2013 targets. I will remind you that our strategy is designed to take advantage of the 7 Mega Trends we introduced in March that are driving the tire industry over the coming years. They're vitally important, as they guide our innovation, our product roadmaps and our CapEx deployment as we drive toward our destination. I'm pleased that we delivered record results in 2011 in both sales and segment operating income. Our $1.4 billion of full year segment operating income is nearly 50% more than 2010, and is more than 10% higher than our previous record. What is most gratifying, however, is that these results were achieved amidst an uncertain global economic climate. We view our performance as continued validation of the strategy roadmap we presented to you almost a year ago. Our market-backed approach, our commitment to innovation and focus on targeted market segments contributed significantly to our 2011 results. For the year, our price/mix performance drove revenue per tire up 17% from a year ago. Our price/mix strategy was critical to our ability to offset record high raw material costs, and the success of that strategy continued through the end of the year. 2011 was a step change in our ability to address the expected ongoing trend of raw material cost increases. Each of our 4 global businesses achieved its highest ever fourth quarter and full year sales total despite volume softness. This is evidence of the power the Goodyear brand and the clear value customers see in our products, including our EfficientGrip consumer tire in Europe, honored for its breakthrough fuel savings technology. The Eagle F1 Asymmetric 2 and the Assurance Fuel Max, named best tires of the year by leading auto magazines in China. The Assurance TripleTred All Season and ComforTred Touring, both named Consumer Digest's best buys in North America, and certainly the continued success of the Fuel Max tires in North America, with sales of more than 7 million tires since its introduction just 3 years ago. Now these and other great products enabled us to succeed in targeted market segments. In addition, our performance in price/mix increased operational capability, and growth in branded share clearly position us as a much stronger company coming out of 2011 with momentum in our key strategies. Now one of these key strategies is returning North America tire to sustained profitability. In 2011, the business posted full year operating income of $276 million. It's the best full year performance since 2000. The results were achieved with continued improvement in price/mix, which increased revenue per tire by almost 20%. Now as always, our focus remained on building our branded business with innovative products, and 2011 marked the sixth straight year of branded share growth in consumer tires. We're winning in our targeted market segments, supported by improved operations driving increased fill rates. Simply said, we're getting better at supplying the right tires at the right time at the right places, and our customers have noticed. Many have told me that we are the best supplier in the business. Now a few weeks ago, we hosted more than 1,500 Goodyear customers in our annual North America dealer conference. Our customers and business leaders said it was our best meeting ever, as dealers understood and embraced our strategy and our direction. They continue to be very enthusiastic about our product lineup and our services. Among the new innovative products we introduced to our North America dealers were an Assurance TripleTred for SUVs and CUVs, and the Eagle F1 Asymmetric all-season performance tire. Our best product line ever, combined with the significantly advantaged supply chain from the customer all the way back to the factory, is functioning as a competitive advantage in the North American industry. Now personally, I have never seen our customers more aligned with our objectives, more passionate about our products or more confident that they can grow their business with Goodyear. It's outside confirmation that our strategy is the right one and that it's working. Now another of our key strategies is continuing success in our Europe, Middle East and Africa business. We did that in 2011 as the region delivered segment operating income of $627 million, another record and almost double last year's total. Again, our high-value products continue to win in profitable targeted segments in the region. Despite a mild winter and an overall decrease in volume, EMEA increased its fourth quarter sales by 11% to a quarterly record of $1.9 billion on the strength of improved price/mix and an increase in OE volume. Now relative to the overall fourth quarter volume decline, keep in mind that we also sold more than our historical volume of winter tires into the channel in the third quarter to restock dealers in anticipation of winter weather. And innovation continues to drive our business in EMEA as we are focused on differentiating our Goodyear and Dunlop products from the competition when tire labeling takes effect in Europe in late 2012. And while acknowledging the current economic uncertainty in Europe, our EMEA results are both evidence of progress and a source of optimism for the future. Now you may remember on our strategy roadmap that we list key how-tos which are areas where we must deliver in order to fulfill the strategy. One of them is what we refer to as enabling investments to improve flexibility and to drive profitable growth. Our progress here was illustrated by the changes we made to our global footprints in 2011. As you are aware, we shed high-cost capacity from the closure of our manufacturing facility in Union City, Tennessee, at the same time we are investing in our North American factories and we have invested in both Latin America and Asia to increase capacity in these high-growth regions. In Latin America, we have capacity expansions under way in our manufacturing plant in Chile and Brazil to deliver more high-value added consumer and commercial truck tires. In our new manufacturing plant in Pulandian, China will provide capacity to double the size of our business in this growing region, where our sales continue to substantially outperform the industry. This investment is part of our growth strategy of winning in China. These strategic actions were among the drivers of our progress in 2011, as we positioned our global footprint and capabilities to meet the growth and the market-backed demands of the industry going forward. Now having highlighted our successes in 2011, I'd like to identify some areas where I see opportunity for improvement. The overall Latin American economy continued to be very volatile with local inflation and currency having the largest impact. As I've said before, this is a normal state of affairs in the region. We've managed through it before and we'll continue to do so. Now even so, our challenge certainly is to return to historical levels of profitability in the market. We expect the uncertain climate to continue, particularly in Brazil, where the strength of the currency and consequent import increases will remain a structural challenge for indigenous manufacturers. Nonetheless, we will plan accordingly in order to execute our strategy. Another area of opportunity relates to cost. Some of the issues, product transition and manufacturing startup costs were transitory in nature. But the issue is not simply about onetime cost reduction. In a broader sense, we must deliver higher levels of efficiency and productivity over the long term. Now the good news is that this is really within our control. Going back to our strategy roadmap, another of our key how-tos was achieving operational excellence. This means driving efficient standardized processes across our business, including our supply chain and our manufacturing operations. Our work to standardize and integrate our business in this way has only begun. This is our solution to delivering better efficiency and more predictability, delivering the products our customers want when they want them with no wasted costs or effort. Now we've taken a further step in this journey by hiring Greg Smith as head of our Global Operations. As the operations leader for a complex global company known for its process efficiency, Greg has experience in maximizing productivity and brings first-hand expertise at leading change in this area. Greg's addition, along with the promotion of Steve McClellan as President of our North America business and Dan Smytka to run Goodyear Asia Pacific, round out what we believe is the best leadership team in the industry. The combination of deep tire industry knowledge with outside expertise will provide new perspectives and solutions to today's issues, as well as ways to meet tomorrow's challenges. We have seen glimpses of the results the team can deliver. But even more encouraging is the promise of the capabilities we believe it can build. Now before I conclude my remarks this morning, I'd like to call attention to one event during the fourth quarter that has made all of us proud. In October, devastating floods forced the temporary closure of our manufacturing plant in Thailand, disabling all production, but most critically, putting the supply of global aviation tires at risk. Since November, the response of Goodyear associates, global suppliers, governments, agencies and the commercial airline industry has been nothing short of remarkable. Goodyear associates from all over the world have been working around the clock to bring the plant back online as quickly as possible. Other aviation tire manufacturers have increased their output to ensure product supply. Makers of tire-building equipment have gone to great lengths to help the Thailand factory restore production, and commercial airlines around the world have been extremely cooperative as we worked through the temporary constraints. I would like to express my sincere thanks and gratitude to everyone who has worked together in this time of crisis. We have not yet fully recovered, but we have made tremendous progress and the situation has improved dramatically, thanks to the combined efforts of everyone involved. Again, thank you on behalf of everyone at Goodyear. As we head into 2012, we know that there are internal and external challenges ahead and work still to be done. But we have positive momentum and more confidence than ever that we can successfully execute our strategy and reach our destination by being first with customers, providing the best products and the best supply chain to help them grow their businesses by being the leader in our targeted market segments, with the right brands, channels and customers selling premium products in the segments where the potential margins are highest; by being the innovation leader, setting the pace for market-back innovation in our industry; and finally, by being competitively advantaged in everything we do, including our products, our marketing, supply chain and manufacturing. As a result, we will be profitable throughout all economic cycles, cash flow positives and we will return to investment grade. That's our destination. In March, we laid out our path to $1.6 billion of segment operating income in 2013. In doing so, we anticipate that the industry's normal ups and downs, and expect them to continue in 2012 and beyond. But we are building our business for the long term. Frankly, our full year results for 2011 were better than we expected. But remember, $1.4 billion of segment operating income in 2011 was not our target. Regardless of the results of one quarter or one year, we are committed to our long-term strategy. We are on a journey, and 2011 was a positive step on that journey, but just one step. 2012 is another step, one that will bring with it the uncertainty of a presidential election in the U.S., ongoing sovereign debt concerns in Europe and slower growth in China. The environment around us will constantly change, but we will not waver from our strategy, our targets or our ultimate destination. We feel very good about our business and are pleased with where we are on our path. So make no mistake. I'm very happy with our performance in 2011. Our results were a significant achievement. And even though I remain focused on areas we need to improve, I have never been more confident in our strategy, our team and our ability to reach our long-term destination. So thank you for your attention. And now, I'll turn the call over to Darren.

Thanks, Rich, and good morning. I'm going to cover the fourth quarter results at a corporate level, give you some perspective on our year-end balance sheet and then spend some time on our business unit results and our outlook for 2012. While our results were not as strong as earlier in the year, given weaker industry volumes, our costs were also adversely impacted by previously discussed structural changes that we're making through our manufacturing footprint. These changes will support stronger earnings in 2013 and beyond. Turning to the income statement on Slide 7. Our fourth quarter revenue increased 12% to approximately $5.7 billion on a 4.6% reduction in volume. Revenue per tire increased 19% compared with the prior year. Lower replacement industry demand across mature markets was the main driver of our unit volume decline. Our OE demand remains solid across most regions, however, consumer OE demand in Asia was unfavorably impacted by Thailand flooding, which disrupted production during the fourth quarter. We generated gross margin of 15.3% in the quarter, representing a little over a 2-point decline compared to the prior year. Nearly the entire decline is the mathematical effect of increasing both cost of goods sold and sales by the higher raw material costs. Selling, administrative and general expense increased $9 million to $724 million during the quarter. As a percent of sales, SAG declined 140 basis points to 12.7% in the quarter. Excluding discrete items, our fourth quarter tax rate as a percentage of foreign segment operating income was about 26%. Our reported tax rate included a $60 million favorable impact, primarily from the release of a valuation allowance in Canada, which reflected our consistent improvement and profitability there. Fourth 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 8. You can see the progression of segment operating income compared to the prior year. As you see from the chart, we had several items that are transitory in nature. First, our other tire-related results were impacted by the sharp decline in earnings from our third-party chemical sales. This decline resulted from contractual price reductions to reflect the drop in view of butadiene prices during the quarter. Our third party chemical business more than explained the $19 million year-over-year reduction in other tire-related earnings during the quarter. We expect other tire-related earnings to return to more normalized levels as the butadiene prices have stabilized. The other unique items relate to the flooding in Thailand and the Latin America farm tire sale, which reduced our segment operating income by $12 million and $9 million, respectively. The first quarter of 2012 will mark the final quarter before we have a negative year-over-year impact from the sale of our Latin America farm tire business. These 3 factors combined to reduce our segment operating income by approximately $40 million, which more than accounted for the year-over-year decline in total segment operating income during the quarter. Turning to the other items. We continued to see good momentum from our price/mix actions, which had a favorable impact of $702 million during the quarter and exceeded the $631 million in raw material cost increases. As we’ve mentioned previously, the fourth quarter is the peak quarter for raw material cost increases in this cycle. Other positives included the lower unabsorbed fixed costs and lower pension expense. Turning to the unfavorable items, there are 2 I would like to highlight. First is the impact of lower sales volume. And second, as we've discussed previously, our cost savings results were reduced by higher profit sharing under our North America labor agreement, as well as cost inefficiencies in our North American factories as we closed our Union City facility and ramped up Union City products across our other factories. Additionally, in Europe, we incurred higher marketing-related expenses to support the sellout of winter tires and continued to experience corporate activity in our facilities in Amiens, France. While our cost savings were below where we'd like them to have been during the quarter, we have now generated cost savings of $748 million over the past 2 years, and remain on track to deliver a billion of savings for the 3-year period ending this year. Turning to the balance sheet on Slide 9, we show an overall reduction in our net debt balance of $2.4 billion during 2011. While our year-end working capital continued to decline as a percent of sales, we did see some working capital cash usage during the year as a result of raw material cost increases and a recovery of inventory to improve customer service levels. We ended the year with over $5.5 billion of cash and available credit compared with $4.8 billion at the end of 2010. Given this improvement, we feel very comfortable with our liquidity position heading into this year despite higher required pension contributions. Turning to Slide 10, you can see our debt maturity schedule. We ended the year with the no funded debt maturities prior to 2014, and no bond maturities until 2016. Our strong liquidity position, coupled with limited near term debt maturities, provides a strong foundation for the execution of our strategy. Turning to segment results. We see there are businesses in North America and Europe, Middle East and Africa continue to see improved earnings in Q4, and were the drivers behind 2011 full year results. Latin America and Asia earnings were weaker, each for different reasons after 3 years of providing earnings stability even through the recession. North America reported segment operating income of $21 million in the fourth quarter, which compares to operating income of $11 million in the fourth quarter of 2010. North America industry unit volumes were down, reflecting a generally weak consumer and commercial replacement industry, down 3% and 7%, respectively. However, OE industry continued to see strong sales gains with commercial demand increasing 47% and consumer up 17%. As we continue to focus on mixing up in products and channels and with customers, North America delivered a price/mix improvement of $289 million, which more than offset $258 million of additional raw material costs. In addition, North American Q4 earnings continued to benefit from reductions in unobserved overhead of $15 million, lower pension expense, and consistent with Q3, North America's results benefited from a reduction in accruals for product and general liability as a result of favorable trends over the last several quarters. Cost improvements were offset by higher profit sharing, higher workers compensation expense and the costs related to Union City product transfers and ramp-up costs. To step back and put the Union City impact in perspective, in Q1, Q2 and Q3 last year, overall manufacturing costs in North America were favorable each quarter, about $50 million on average. In Q4, however, given the transition work, manufacturing costs were $40 million unfavorable versus 2010. This primarily reflects the disruption caused by the plant closure and the transfer of products during Q3, with a one quarter lag impact on results. As I mentioned earlier, the recent the drop into the butadiene prices rises created a $20 million unfavorable impact on North America's other tire-related operating income. Despite these impacts, the fourth quarter results in NAT bring our full year segment operating income to $276 million. This is beyond our expectation for 2011 and puts us well on the way toward our 2013 target of $450 million. Europe, Middle East and Africa reported segment operating income of $88 million in the quarter, which compares to $60 million in the 2010 period. Industry unit volume for consumer replacement was down 3.5% on mild winter weather which slowed retail demand. Consumer OE volumes were down about 3%, commercial replacement industry shipments declined 20% versus the prior year, impacted by dealers reducing inventory during the quarter. Truck OE volumes, up 17% where the one segment in Europe with improve year-over-year industry volumes. Our 2011 results reflect sales of $1.9 billion, an increase of 11% versus the prior year on a 5% decrease in unit volume. Revenue per tire, excluding the impact of foreign exchange, increased 21% year-over-year. EMEA sales growth versus prior year was driven by stronger price/mix performance from announced pricing actions and stronger channel mix. These favorable factors were partially offset by weaker unit volume. In addition to a weak industry, our volumes were also impacted by an early winter sell-in into the channels in Q3. The weaker euro and other currencies versus a year ago negatively impacted sales for the quarter by $27 million. EMEA segment operating income increased $28 million versus this prior year, reflecting price/mix of $280 million which more than offset $219 million of raw material cost increases. Segment operating income was negatively impacted by lower sales volume compared with a year ago. Higher third quarter capacity utilization in our factories favorably impacted segment operating income in Q4 by $16 million. Q4 results were down from a record Q3, primarily on lower volume after the early sell-in winter of tires in Q3, along with higher SAG to support retail sellout for the winter tires result of dealers in the third quarter. Overall, we're very pleased with the results for EMEA, with full year 2011 segment operating income nearly doubling to $627 million and setting a new record for the region. Revenues in Latin America increased 2% to $596 million during the fourth quarter, excluding the impact of the divested farm tire business, revenues increased about 6%. Revenue per tire increased 12% year-over-year. Latin America reported segment operating income of $48 million in the quarter compared to $93 million in the prior year. Latin America, and particularly Brazil, faced a dual pressure for increasing cost inflation and import competition in the low end of the market, impacting our volumes and our ability to recover raw material cost increases. During the fourth quarter, our price/mix benefit was $66 million, compared to raw material cost inflation of $90 million. The sale of the farm tire business reduced income by $9 million. During the fourth quarter, the Brazilian real has weakened somewhat. If this trend were to continue, our cost competitiveness relative to imported products should improve, but it would not necessarily reverse competitive dynamics of now-entrenched import competition. Our team is working to shift our business to targeted market segments, while supporting our dealers and their need for tires across all price points. Goodyear's operations outside Brazil continue to deliver consistent results. We continue to make significant investments in our Latin American business and believe in its long-term potential. As Rich said, it's clear we have work to do to get this business back to its peak earnings levels. More on that as we progress through 2012. Our Asia Pacific business reported segment operating income of $39 million for the quarter. The $21 million decline versus prior year reflected mainly the October 20 closure of our Thailand factory, which resulted in $12 million of incremental expenses and lost profits in the quarter, and an incremental $10 million of startup expenses associated with the ramp-up of our new factory in Pulandian, China. In addition, softer market demand in China and the continued macroeconomic weakness in Australia contributed to volume weakness. Helping to mitigate some of these challenges was our OTR business, which continued to perform very well, given the growth of the mining sector in the region. Price/mix improvements also continue to more than offset raw material cost increases in the quarter. Overall, we continue to be pleased with the opportunities we see in Asia, and particularly in China, going forward. Despite the relative softness we saw in Q4 and the short-term impact related to our Thailand operations. We also see opportunity in our business in Australia and New Zealand, as we focus the business on targeted segments and improve the efficiency of our supply chain in distribution channels. Just a couple more points on the outlook for our Thailand operations, we have begun restoration of our factory, and we'll restart production of aviation and consumer tires over the next few weeks, ramping up to full production during Q2. We expect to benefit from insurance proceeds, which would largely address our losses above our deductible. However, due to the lag timing of the insurance proceeds and our ramp-up schedule, we expect Thailand-related costs to impact the Asia's results adversely through the first half of 2012. Some of the insurance proceeds will be reflected later as the claim is resolved. Turning to Slide 12, you can see our 2012 industry outlook for North America and Europe. For the year, we expect Europe to have lower demand in each major segment, with OE volumes seeing the most significant reduction on a percentage basis. This is largely driven by the macroeconomic outlook across the Eurozone which points to at least a mild recession. For North America, we see growth in each segment with the exception of consumer replacement, where we expect a slight decline in industry volume. On Slide 13, we provide some modeling assumptions for 2012. Based on our industry outlook globally, we would expect tire unit shipments to remain essentially flat with 2010 and 2011 levels. Assuming spot prices remain at current levels, we anticipate our raw material costs will increase by approximately 5% for the full year. For the first quarter, raw material costs are expected to increase by 20% to 25%, or $500 million, from the prior year. Based on our raw material outlook, previously announced pricing actions and raw material indexing agreements with certain customers, we expect price/mix net of raw material costs to be positive in Q1 and about neutral in Q2. Over the long term, we expect raw material costs to increase as global tire demand grows. And if that happens later this year, we will again take actions to address these increases. We expect to see a favorable impact from overhead absorption in the range of $40 million to $60 million for 2012, largely driven by savings from our Union City facility closure. The Union City savings are being offset partially by lower expected production levels as we reduced production in Q4, and will also reduce Q1 to adjust the inventory to reflect lower industry demand costs. Offsetting these positive impacts are several items. First, while we expect to achieve our 3-year plan for $1 billion in cost savings, we are anticipating inflation in the range of about $70 million to $80 million per quarter during 2012. Second, assuming current spot prices for the euro and the Brazilian real, we would also experience an unfavorable impact from foreign currency translations. Finally, given the nature of our Pulandian, China's plant start-up, which entails taking our Dalian facility offline in 2012, while simultaneously ramping up the Pulandian facility, we expect to incur an additional $40 million to $60 million of start-up costs during the year compared to 2011. Turning to Slide 14, we highlight some of our other key assumptions for 2012. We expect interest expense in the range of $360 million to $385 million. Our tax rate assumption is unchanged to 25% of international segment operating income. Looking at global pension expense, we expect a range of $275 million to $325 million for the year, with funding in the range of $550 million to $600 million. The higher expense is largely due to the lower assumed discount rate of 4.52% compared with 5.2% previously, and the impact of 2011 asset returns, which were just under 1%. Turning to some cash flow items. We are projecting working capital will be neither a source nor a use of cash in 2012. Our capital expenditure outlook remains unchanged at $1.1 million to $1.3 billion. We will continue to invest in key projects and we're devoting a significant share of capital to increasing our HVA capabilities in North America, Latin America and Europe. We continue to see strong return potential from these investments. I'll close with Slide 15, which is an update from the same slide we presented to you last March. This slide, first presented almost a year ago, provided the assumptions we were making in setting our goal of $1.6 billion of segment operating income in 2013, along with the risks that could get in the way. A year later, macroeconomic challenges have reduced our previous volume assumptions and unprecedented low interest rates and lower asset returns have increased our projected pension expense. Despite these adversities, we delivered stronger-than-expected 2011 results and we remain on path to our 2013 target of $1.6 billion. We recognize and want to be upfront about the fact that there continue to be risks to the achievement of our 2013 target, but we're focused on managing these risks and delivering the $1.6 billion. Now we'll open the call up to questions.

[Operator Instructions] Your first question comes from Rod Lache, Deutsche Bank.

I guess, a couple of things. First, you're guiding to somewhat weak North American replacement volumes going into 2012. A lot of -- some of the incoming macro data has been somewhat more positive and people are looking for, obviously, positive GDP growth. I was hoping you can maybe give us a little bit more color on what you see happening, what's behind it and whether it's -- there are some factors that you're looking at, such as inventory wholesale and that kind of thing?

Okay, Rod. I thought you were going to ask another question. Relative to North America, I think you're right. I mean, I think as we've look at it, we've guided the way we have because it's, frankly, pretty reflective of what we're seeing. One of the things that we've done pretty well over the past 6 months and now already into January and going out is really get better insight into channel inventories and sellout data. And it really confirms the forecast that we have that we still see sellout okay, not really picking up relative to some of the macro ups that you're referring to. And we still see dealers, I think, certainly being cautious, particularly relative to the raw material environment and the like. So I think what we see is still a cautious environment out there. I would tell you, there is possibility for upside if the economy goes up. The way we think about that is particularly relative to taking Union City out last year. Rod, I have to say we're probably very -- we're as well-positioned since I've been with the company in North America from a footprint perspective to deal with both the outlook that we've put in our forecast as well as to deal with an uptick that might come should those macroeconomic elements really show themselves in the marketplace.

Okay. And just relative to your price/mix versus raw material outlook for this year, you're talking about raw materials being up 5%. I'm just wondering if pricing and mix stays where it is right now, would you agree that it would likely exceed the raw material cost headwind that you're anticipating for this year, or is there some contractual giveback that you're anticipating for later in the year?

Yes. So Rob, what we see right now, I think, from the comments is that with -- as we start into the year, we've got the price increases we've taken and our outlook for mix. And I think even with $500 million of raw material cost increases in Q1, I think we feel comfortable that we're going to be able to more than offset the raw material costs in Q1. I think in Q2, the way it looks right now and including the fact that we do have price downs under raw material indexing agreements with some of our contractual customers, and that works up and down, so we do get some reductions related to those raw material formulas, given that we expect second quarter to be about neutral. And second half of the year, I think that we know what we expect, given raw materials staying where they are today. And that would -- the map would say that effectively means raw materials would be down a bit in the second half. But I think we'll hold out and understand what the environment is going to bring there before we give any further guidance. But what I would say is that at some point here we do expect raw material cost to go back up. Raw materials have started back up here in the first quarter, so we've seen some increase in rubbers, an increase in butadiene as well. And to the extent that trend continues, we know there's actions we're going to have to take to address that going forward.

Okay. And just lastly, any comments on when the Union City inefficiencies end? And are you planning on updating the plan for EMEA anytime soon?

Yes. So Rob, I think the Union City impact is primarily a Q4 2011 and Q1 2012 effect. So you should continue to see some impact of Union City transition going into the Q1 results. And then after that, it should get better. We, I guess, purposefully have not given any specifics around the Amiens situation. It is still one that -- we're committed to addressing that situation and eliminating that high-cost consumer production capacity. And we continue to work toward that goal. If we aren't able to get an agreement to shut down the consumer capacity, then we'll have to look at other alternatives, including potentially closing the entire facility. So one way or the other, we'll work through that. It's kind of tough to call the timing with any precision right now, but we're working toward getting it done s quickly as we can.

Your next question comes from Saul Ludwig, Northcoast Research.

Hey, one question about Europe. I was just thinking about Europe overall in 2012. You mentioned you that got euro headwind, your outlook for volume is pretty cautious particularly on truck tires. You've got the situation where your snow tire business was fabulous in 2011, but the sellout maybe wasn't so good. And the situation in France, I mean it's going to linger for a while and hopefully you get absolved eventually. But these are all a sort of the big headwinds that you have looking at Europe. Are there any sort of positives or is does it just look like 2012 is going to be a tough year for Europe compared to a great year that you had in 2011?

Well, Saul, I think you probably summed up Europe as well as we can in terms of the headwinds that we see there and I think most of those are very real. In terms of positives, you have to remember the product portfolio that we have there, the mix of business that we have is really still very, very good. In terms of what we were able to accomplish in price/mix, in terms of -- in 2011, I should say, and in terms of how we've actually driven our mix strategy in Europe over the past, I would say, at least 5 years is really what you saw 2011 being the beneficiary of. When you look at what particularly the German OEMs are continuing to do, you look at the product lineups that we have, I would tell you that the core business in Europe is still very strong. In addition to that, while certainly there is an economic overhang over in Europe in general, there are still good growth businesses in East Europe that continue to drive our profitability there as well. So clearly headwinds, but a strong foundation and still a lot of growth areas and a lot of opportunities to mix that will be in 2012 and beyond.

Would you think the net positives are greater than the headwinds? Or I mean just directionally, given Europe, from an EBIT standpoint, looks like a tough comp.

Yes. I think, Saul, what I'll say is 2012 will be a tougher year than 2011 for the reasons you said. But trying to give you a net position on that is like trying to forecast whether the Greeks will accept the austerity package. It's very hard to make prognostications like that. Very difficult in fluid situation that we have there, so I'm going to refrain from sort of calling that one.

Your next question comes from Himanshu Patel, JPMorgan. Himanshu Patel - JP Morgan Chase & Co, Research Division: Three questions. Just the production cuts that you alluded to in Q1 and Q2, can you talk to a little bit just where are the inventory issues by segment and what sort of magnitude are these issues?

Yes. So, Himanshu, I guess just to be clear, what we've done is we adjusted our production in the fourth quarter and we'll take some production cuts again in the first quarter, just to get our inventories back in alignment with where we've seen sales levels. And I think, as you know, we are very careful about what we do with inventories and protecting our cash position. So we tend to do that when we need to. We've done that, That'll have an impact on our first quarter earnings. The impact of the production cuts in Q4, flowing into Q1 and then from Q1 into Q2. So expect some impact there. I think, overall, where we ended the year, I think certainly we had consumer sales at the end of last year were very soft. And in Europe, the warm winter there wasn’t a lot of retail sellout activity and therefore, not a lot of reordering from dealers. So our consumer inventory in Europe above where we'd originally thought it would be, I think, similar in the U.S. We had soft sales in December and net-net there, our inventory was high at year end. I think a little bit of that in Commercial as well for us. So I think we're taking those adjustments, we're going to do what we need to do there. But overall, I think our inventory position, it's not significantly out of line, it's just some actions that we needed to take there to address, the softness at the end of Q4 and what looks to be a relatively soft start to Q1.

Himanshu, I might just add. I think what you're also seeing there is sort of actions consistent with what we said around Cash is King and taking decisions to sort of look in to see what we see coming from an industry perspective and adjusting as best we can to not build inventory and to not be in a position to be on the wrong side of that. So that's a consistent behavior that you'll continue to see. Himanshu Patel - JP Morgan Chase & Co, Research Division: Okay. And just a couple more here. Just the October 1 up to 5% price hike announcement from North America, can you just give a little bit of context or color around what the kind of net realization level was on that? It seems like the whole industry has been pretty geared up to implement price increases. So historically, we've thought about sort of a 50% net realization on kind of the up to announced amount. I'm just trying to understand is are we in an environment where you're actually seeing kind of a better net realization than that?

Himanshu, I think it's hard for me to say anything that can be much stronger than the fact that we've got the kind of increases in revenue for tire that we got in the fourth quarter. So the fact that North America had revenue per tire of 19% gives us a pretty good indication that we're getting the price and mix that we're targeting. And the price/mix performance there are very strong. And we are starting to anniversary some of the price increases that we've taken over the last year. So you've got to build that into your thinking. But overall, I think the team has done a good job in driving towards the revenue per tire that we've gotten. So I think we’re feeling good about our performance there. And that's something we've had to do in order to address the raw material cost increases. Himanshu Patel - JP Morgan Chase & Co, Research Division: Okay. And then, Darren, on Slide 13, you guys did a nice job of just laying out kind of the incremental headwinds on 2012. I'm wondering if you could just go back and think about -- help us think about 2011 on a full year basis and help us think about the headwinds that you faced in 2011 that you would pretty much say are not repeating in 2012? And I think you touched on some of them. It sounded like there was a $40 million hit on Union City in the fourth quarter. Maybe some of that continues in Q1, but maybe on a full year basis, that's a tailwind year-over-year. It sounds like the chemical business had a $20 million hit in Q4 because of butadiene prices. There's also, I think, a profit sharing hit in the fourth quarter. Does that repeat itself in the fourth quarter of next year? Can you just kind of walk us through those items from 2011 to 2012?

No, I think, it's -- I can absolutely do that. So I think, Himanshu, that first of all, a number of the things that affected Q4 I think are going to continue to affect Q1. And so from one year to the next, you get some of the similar factors, in one year it was in Q4, the next year it's in Q1. And that, I think you would include the Union City transition costs, which were in Q4, they'll be in Q1. The Thailand flood impact, which is going to continue and affect probably a little bit higher in Q1, given it's a full quarter versus a couple of months in Q4. Continue to have China startup expenses, in fact, the increases there. And we'll have some impact of production cuts coming as well. But in terms of the things that we saw in 2011, I think you probably hit a number of them. We've got some of these things in Q4 that bled over. I think the raw materials is the big difference between the 2 periods. I mean, a lot less raw material costs increased this year than last year, provided raw materials stay where they are. I think to the extent we see rising butadiene prices, then that'll help the chemical business, where at the end of last year, the drop in butadiene prices was a headwind for us. So I think you can probably hit on some of the big ones there. Yes, obviously, we expect as we get through 2012 and into 2013, there's some of these things, including, in particular, the footprint actions that will start to have less impact as we get past 2012. Because there are a lot on the -- really a lot going on in the footprint side right now. I mean, you've got the shutdown and the transfer of products for Union City. We've got the construction of the China facility, and the fact that we're going to be going through shutting down the old facility in 2012. So you're going to have a construction and a shutdown going on over there simultaneously, which is why you see the impact that we showed there. You continue to see the ramp up of the factory in Chile, although that was a big challenge for us in '11. We'll start to get some momentum there in 2012. And then we've got, obviously, the situation in Amiens, which is an issue for us in 2011. And until we get that resolved, it will continue to be an issue for us. Himanshu Patel - JP Morgan Chase & Co, Research Division: And is the profit sharing every fourth quarter we should think about that?

Well, I think, the profit sharing, Himanshu, I think, we've said in the past is the agreement with the United Steel Workers was for 12% of EBITDA, effectively with a cap of $175 million over the 4-year length of the contract. And the EBITDA metric has some adjustments, so it's not perfect. But I think what you'd see is that once we go through, we had a lot of profit sharing that hit 2011. I think you'll see that'll continue through 2012, provided we continue to drive earnings in North America. Once you get past 2012 though, we would start to approach the cap and there'd be less of an impact for 2013.

Your next question comes from Patrick Archambault, Goldman Sachs.

I guess one question on just the cash flow, I mean, going way back now to sort of your Analyst Day. I think the original plan consistent with the 1.6 SOI target, was that, I think, cash flow including pension contributions should be about breakeven. Now it does seem like there's a few items that have come in a bit worse, pension is one of them. Maybe some of the startup costs and footprint actions have been maybe a little bit more costly in terms of disruption as well. Is that breakeven level still something that we should be thinking about? Or should we -- might there be a little bit more caution in that estimate today?

Yes, so, Pat, I think it's a fair question. And certainly what you've heard us say today, and then you just need to step back to March for a second. In March, we said we get about -- we were targeting $1.6 billion of segment operating income. Clearly, we, even with some of the headwinds, we're still saying $1.6 billion is our target for 2013. In terms of the key cash flow items, you have seen pension contributions which -- or we've got a slide in the appendix of our deck today that gives some revised estimates of pension contributions. We now see instead of $525 million in pension contributions, which is what we had estimated back in March, we see $575 million. So about $50 million delta based on what happened in 2011. But beyond that, the other items, CapEx remains the same, interest and taxes, no big change in outlook there. So I think we're still focused on getting ourselves to that breakeven cash flow for 2013 and our $1.6 billion. I mean, we remain committed to those targets.

Okay. And that I think it hinted in one slide that you may do a little bit more restructuring as well. So that could be sort of a risk factor, but where you stand now, you'd be pretty close to that breakeven.

Yes. No, Patrick, we said those are the targets. That's what we're shooting for. I think Darren highlight the most significant headwind that we've really identified since we met back in March.

Okay, great. One last one if I may. Can you just go over again, I know you referred to mix as being something that's sort of a structural tailwind here. Clearly, it was in a pretty big way in 2011. How much of that is like Commercial Truck, I suppose, on the OE side more than anything else? And then how much of that is HVA? And can you just remind us of what the main drivers of this rotation upwards to HVA are as well?

I think, Patrick, when we talked about mix, particularly in 2011, most of that mix was in the Consumer business as we looked ahead. And if you think about mix, what our goal is and what our goal has been is to drive our innovation through new products and branded business where we can differentiate our products going forward. That's something I mentioned, we started initially in Europe in a meaningful way. Certainly, we've made very significant progress in driving our mix in North America, thus the improvement that you saw year-over-year, both in the ability to offset a significant raw material headwind. But, really, in the mix of our business where we shifted the portfolio from a high percentage of private label and a lot of more unprofitable OE business to more Goodyear-branded business in the mid tier and the upper tier of the performance tier in the market. And that's what driving our mix. You see the same trends that we're doing in Asia right now, particularly in China, where our business is directed at the higher ends of the markets with Goodyear-branded product. And certainly, as both Darren and I alluded to in our remarks, we've got some work to do in Latin America, but certainly that's where we're headed there as well.

So Pat, just to hit the other point which is what are the drivers of the mix. I think Rich laid out what the drivers are in terms of our strategy. I think from an industry perspective, you look at the proliferation of sizes and types of tires, particularly over the last few years, you'd look at the push for improved rolling resistance, which tends to require more technology, it tends to push toward more high-end tires. And then ultimately, I guess the MegaTrend of the industry is going to be the trends towards higher labeling, which is just going to demand higher levels of technology and it's going to push more consumers toward tires that we would characterize as high value-added, which are places where we can differentiate with technology.

Your final question comes from Chris Reenock, Citi.

I'm calling in for Itay, and just had a couple. I apologize if any of this has been said, but I got logged off for a second. Can you just quickly comment on the challenges now of building on 2011 strong price/mix, and how and where do we go in 2012?

Well, I think as we look back to 2011, number one, I think what you saw is that we really built our confidence and our ability to address record high raw material costs. I think we had 3 consecutive quarters in a row where we offset anywhere from 28% to 35% of raw material cost increases. So clearly, we made progress, and again, reinforced our belief that the importance to that is around innovation brands and products to do so. I think that Darren mentioned earlier that as we look to 2012, we do have some items that are going to impact us. One, again, is the OE contracts that we have that have raw material price indexes in them, which actually will adjust the downward in this case because of lower raw material costs. And certainly, we have a tougher comp in the third quarter reflective of the strong winter business and the winter mix we had in 2011. So as you think about 2012, those are some of the things to work through. But again, over the long term, our belief is that raw material prices again will increase. We've got a proven track record to be able to address them. And as they go up, we'll certainly be ready to take the actions to go and do that.

Okay, great. And one on China, do you expect the start-up costs to start to taper off in 2013? Or is this something that's going to continue to be a headwind?

I think as we look at the outlook for China, we had the start-up costs in 2012. Darren made reference to the fact that, just to put in perspective, the China factory is a significant factor in that it both is a consumer factory and a truck factory. As we work through 2012, we're seeing the startup on the consumer side, we would expect that to evade as we get into 2013. But certainly, we'll start up our truck business as we get into 2013 as well. So that's something, I think, we'll certainly give more view into as we get into the future. But really, we've got a lot going on there. Again, it's a good way to frame it for you, starting up a consumer factory closing, our Dalian, our existing factory and then starting up the truck factory in Pulandian as well. So those are the things that are going to be with us a few more years.

So I think '12 and '13, we continue to have some impact there. But I mean, these are projects that ultimately have very strong returns and a market that's going to continue to see a lot of growth, particularly at the high end. So I think we're comfortable with the investments. We've got a couple of years of startup to work through.

And I think that was the last call. So everyone, we appreciate your attention this morning. Thanks very much.

This concludes today's Goodyear Fourth Quarter and Full Year Results and Earnings Results Conference Call. You may now disconnect.