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The Goodyear Tire & Rubber Co. (NASDAQ:GT)

Q1 2009 Earnings Call

April 29, 2009 10:00 AM ET

Executives

Patrick Stobb - Director of Investor Relations

Robert J. Keegan - Chairman, Chief Executive Officer and President

Darren Wells - Executive Vice President and Chief Financial Officer

Damon J. Audia - Senior Vice President of Finance and Treasurer

Analysts

Rod Lache - Deutsche Bank

Himanshu Patel - J.P. Morgan

John Murphy - Merrill Lynch

Saul Ludwig - KeyBanc

Patrick Archambault - Goldman Sachs

Kirk Ludtke - CRT Capital Group

Operator

Good morning. My name is Michael and I will be your conference operator today. At this time, I would like to welcome everyone to the Goodyear First Quarter Financial Results Conference Call. All lines have been placed on mute, to prevent any background noise. After the speakers' remarks, there will be a question-and-answer session. (Operator Instructions).

I would now like to turn the call over to Mr. Patrick Stobb, Director of Investor Relations at Goodyear Tire & Rubber Company. Mr. Stobb, you may begin your conference.

Patrick Stobb

Thank you, Michael. Good morning, everyone, and welcome to Goodyear's first quarter conference call. Joining me on the call are Bob Keegan, Chairman and CEO Darren Wells, Executive Vice President and CFO, and Damon Audia, Senior Vice President, Finance and Treasurer.

Before we get started, there are a few items I'd like to cover. To begin, the webcast of this morning's discussion and the supporting slide presentation are available on our website at investor.goodyear.com. A replay of this call will be accessible this afternoon. Replay instructions were included in our earnings release issued this morning. The last item, we plan to file our 10-Q later today.

If I can now direct your attention to the Safe Harbor statement on slide two of the presentation. Our discussion this morning may contain forward-looking statements, based on our current expectations and assumptions that are subject to risks and uncertainties that can cause actual results to differ materially. These risks and uncertainties are outlined in Goodyear's filing with the SEC and in the news release we issued this morning.

The company disclaims any intention or obligation to update or revise any forward-looking statements, whether as a result of new information, future events, or otherwise.

Turning now to the agenda. On today's call, Bob will provide a strategy update, followed by a market overview. After Bob's remarks, Darren will review the financial results and discuss outlook, before opening the call to your questions.

That finishes my remarks. I will now turn the call over to Bob.

Robert J. Keegan

Well, thanks Pat, and good morning, everyone, and thank you for joining us on the call this morning. When we announced our year-end earnings in February, we suggested that Q1 was going to be a difficult quarter, much like we saw in the fourth quarter of last year. And you will see from our results, it was.

Industry volumes were down more than we expected in some markets, with commercial truck markets being hit the hardest. Our OE customers continued to struggle with their business, particularly here in the U.S. And raw material costs remained high as we worked through higher priced commodities.

While we are not satisfied with the quarterly financial results, they generally reflected our expectations, given the prevailing market conditions. Darren will provide details in a few minutes.

While our markets presented us with the challenges we expected and in some cases, more, we continued to take the right actions to strengthen our business, to position ourselves to rapidly take advantage of opportunities as the market recovers, which it inevitably will.

Our actions are fully aligned with the strategy that has served us well over the past several years. Our strategy guided by our intense focus on the seven strategic drivers of our business.

Our future direction is not a new one. We are taking a proven strategic path for the next level of business performance. Today, I'll update you on the progress we have made in our action plans in three areas, top-line growth, cost savings and cash management. Then I'd like to provide you with our view of where the tire markets are, and where we see them heading near term.

Initially, let me address our actions to support the top line. These actions are absolutely critical given weak industry conditions.

Our industry leading new product engine that has become the public face of the new Goodyear, has positioned us well to deal with this year's market challenges. How? First, we have more new product launches than ever. More than 50 in 2009, and already 23 have been launched through the first quarter. Keeping customers and potential consumers focused on our brands in a highly competitive environment.

Based on consumers' purchases and the resultant market share gains that we have enjoyed with the Goodyear brand, it is evident that today's markets are continuing to reward innovation. And innovation remains the cornerstone of our business strategy.

Second, our new products are targeted precisely at the currently strong parts of the market. The branded mid-tier segment has gotten stronger as consumers push for greater value. And the majority of our new products are positioned right in this segment's suite spot.

And third, these products incorporate features that as a result of our consumer analysis and focus, directly address critical consumer needs. Cooperation between our technical and marketing teams and our market research has never been better.

An outstanding innovative example is the introduction of Goodyear Assurance Fuel Max tire in North America. Fuel Max was a fast response to consumers' desire for a fuel efficient tire that first, delivers improved fuel mileage to offset extremely high gasoline prices that we initially saw in 2008.

Second, delivers mid-tier pricing. So, the value proposition of Fuel Max is extremely attractive. And remember, given that Fuel Max delivers 27% less rolling resistance, that provides about a 4% overall improvement in highway fuel economy, the equivalent of 2600 miles worth of gas over the life of the tire.

Third, it delivers low rolling resistance performance without compromising handling, traction and mileage. Well, so far, Fuel Max has delivered in every area. It has gotten off to an excellent start, with orders running beyond our expectations, with positive media reviews in respected auto publications, and with equally positive consumer reviews online, where consumers have been posting comments reflecting their early fuel savings experiences.

I'll mention one. A previous owner wrote about a 200 mile trip from Baltimore to Central New Jersey, where he had gotten 54 miles per gallon on the trip, where he would typically get around 51. And his comment was, these tires definitely make a huge miles per gallon difference for me.

Now breakthrough products such as Fuel Max are the result of a truly global development effort, characterized by an open innovation network, a collaboration of our own market research and technical capabilities, along with input from respected third parties, including government research scientists, academia and suppliers.

As an example, the involvement of Sandia National Laboratories in predictive mathematical modeling, has given us the ability to introduce products like Fuel Max, faster than our competitors.

With Sandia, where we like to say nuclear science meets tire science, we can bring a product to market without the time consuming physical testing that was required in the past. This improves both development time and of course, cost.

Now being an American company, we're the only major player in the tire business able to benefit from Sandia's considerable intelligence in this area. And Sandia's scientists tell us that they learn as much from our scientists as we do from theirs.

In Europe, we introduced the EfficientGrip tire with fuel saving technology. This is the first high performance summer tire, tuned to improve fuel consumption and rolling resistance, while still delivering shorter breaking distance on both wet and dry roads. This is an innovative product with outstanding early market response.

Now, these new products, the outstanding marketing we wrap around them and the intense focus that we have on our end markets have energized our dealer network. With survey results now in from our North American dealer meeting in February, our customers are indicating unprecedented levels of understanding of our messaging, direction and strategy. And this is critical, based on the important role that dealers play as advisors to consumers in the tire purchasing process, particularly, during challenging economic times.

Our ongoing innovation played a significant role in driving our first quarter top-line. Number one, we continued our strong market share performance, especially, in the U.S. consumer business, where the Goodyear brand gained market share.

Number two, our revenue per tire increased 3.4% in the quarter, excluding foreign currency translation, despite the significant decline in higher priced commercial truck tires. Without the drop in commercial truck, that increase would have been several points higher.

Number three, the benefits of price mix to segment operating income for the quarter were a $161 million.

Additionally, we recently hosted a supplier innovation day at Goodyear, where we invited key leaders from our suppliers to Akron, to talk about evolving relationships that are based on strategic alignment and promote sharing of both product and process innovation.

The unanimous feedback from this session was that our openness demonstrated to them that we were indeed a new Goodyear, and that our new approach was both unique and refreshing. In other words, we stood out from the crowd.

We expect this new approach to benefit not only our top-line efforts and suppliers help us to find a creative product and process solutions, but also cost and cash.

When we talked to you in February, we outlined a plan of attack on our cost structure, a set of actions designed to drive our breakeven point considerably lower. And I'll now provide you an update on our efforts.

I told you in February that we had increased our four-point cost savings plan target to $700 million for 2009. This will take us to $2.5 billion in savings over four years, from 2006 to 2009. I am pleased to tell you this morning that we're tracking toward that increased target.

Despite extensive downtime in our factories, limiting opportunities from manufacturing cost savings, we still achieved a $145 million of cost savings in the first quarter.

Working with the United Steelworkers, we were able to agree on reduced staffing levels in three U.S. plants, Danville, Virginia, Topeka, Kansas, and Buffalo, New York.

Of course, we are also reducing salary level positions at those facilities. A key factor in Goodyear remaining competitive will be the cooperative effort we are engaged in with the Steelworkers.

In Q1, we had similar staffing reductions at two major Brazilian manufacturing plants, and we're also working through reductions currently, in Europe and in Asia.

In February, we announced plans to reduce an additional 5,000 jobs globally this year, and we remain on pace to achieve that reduction.

During the first quarter of 2009, we reduced global employment by 3800. That's 3,800. Our plan looks very solid. These reductions were in addition to the 4,000 jobs that were eliminated in 2008, primarily in the second half.

In Q1, selling, administrative and general expenses declined a $102 million or 16%, compared to the 2008 first quarter.

Also in Q1, we implemented a global salary freeze.

Now, in addition to solid progress against the four-point cost savings plan, we are progress -- progressing in our efforts to reduce global manufacturing capacity by 15 to 25 million units over the next two years.

While we have nothing further to announce at this time, we will provide specifics relative to this plan as details are finalized.

Our focus on managing cash has guided our actions over the past several years, and has intensified given current economic conditions.

We told you on our February call that we were implementing targeted inventory cuts of more than $500 billion or approximately 15% of inventories, made possible by significant improvements in our supply chain capabilities. We have made excellent progress on our inventory reduction target. Our total inventory levels at end of Q1 are more than $300 million below their levels at year-end 2008.

We also indicated that we were adjusting our CapEx plan downward, as market demand has eroded, to a total of between 700 and $800 million in 2009.

Our CapEx plan is on target through the quarter. We said that we were continuing to pursue the sale of non-core assets, which we are pursuing aggressively.

In addition, I wanted to mention that we have contingency plans for 2009, for all our businesses and functions, to allow for a high level of operating flexibility to meet the challenges the macroeconomic environment we face. This allows us to focus intensely on our businesses with the capability to quickly recognize and act upon changing market conditions.

We employed this type of flexible planning in 2008, and as a direct result, responded aggressively at the outset of the slowdown by implementing contingency actions that were developed at the beginning of the year.

From my perspective, here is how the tire industry looks today versus our February expectations. I'll start on the minus side. The commercial truck tire markets in both the U.S. and Europe are weaker than expected, for both replacement and OE, and undoubtedly weaker than most of you expected as well. We expect this industry weakness will continue to pressure our results during the second quarter.

Despite the stimulus programs and the focus that the U.S. government has placed on helping the automobile manufacturers, liquidity issues for some of our U.S. OE customers have clearly intensified to the point where they have indicated publicly that they are exploring all available options.

However, I would just remind you that our overall business with the Detroit 3 in 2008, was than less 7% of our total global sales. Consistent with what we saw during 2008, we continue to see a growing percentage of consumers defer tire purchases.

And finally, general credit availability remains highly constrained. And here I'd be specific that's general credit availability remains highly constrained.

On the plus side, despite the obvious financial pressure, consumers are rewarding our innovation with their purchases. As you think about stimulus packages being put forward by governments around the world, we see some quantifiable successes.

First, China seems to be rebounding a response to government efforts. China just reported a 6.1% GDP growth for the quarter, which while less than the double-digit growth pre-downturn, is still significant when compared with the rest of the world.

In our industry, the country saw record auto sales in March, with unit sales above the United States. That's above the United States.

Second, there is a positive impact in Germany and Italy from their programs that are encouraging vehicle purchases through incentives for scrapping older, less fuel-efficient vehicles.

The fact that the U.S. government is now considering similar programs, demonstrates a willingness to look at what's working and adapt.

Third, the industry is also showing strength in India. We've seen noticeable reductions of inventory in tire distribution channels during the first quarter. And dealers are generally running their businesses with a focus on keeping inventories low. Today, cash is certainly king for tire dealers.

Capacity in the industry has been reduced due to plant closings and reductions of work hours. Miles driven in the U.S. for February increased 2.7% per day, ending 14 consecutive months of decline.

However, gas supply data, which has been a leading indicator from miles driven, has been trending unfavorably. So, we are somewhat guarded in our optimism here.

Finally, we've seen the equity markets rebound significantly over the past several weeks. While it is not clear that our markets have stabilized, we are encouraged by the positive factors that are emerging.

As I've shared with you in the past, the historical data provides us with confidence that we'll experience a tire market recovery in both consumer and commercial truck markets.

During the one or two years following previous recessions, the industry experienced a snapback in demand. And that demand snapback occurred, because the temporarily depressed buying behavior of consumers and dealers during recessionary times created a pent up demand for our products.

Finally, a bit of new information. Forbes Magazine and the Reputation Institute completed their annual survey of consumers to determine America's most respected companies. And I am pleased to announce today that Goodyear has been recognized as the most respected automotive company for the second year in a row.

This recognition is particularly meaningful, as it comes from the consumers who buy our tires and put their trust in Goodyear every day. The specific results will be made public later today by Forbes.

So, this is obviously a major impact for our people. And it clearly shows our strategies are working. As you look at how we've approached this recession, clearly with an intense focus on emerging from the downturn in a position of strength in the three key areas of top-line cost and cash.

We firmly believe that we are on a proven path to the next level of performance, one that will provide us with both a fast start, when markets rebound, and enhanced long-term competitiveness.

I'll now turn the call over Darren, to review in detail, the quarter performance and our outlook. And then, we'll take your questions. Darren?

Darren Wells

Thanks Bob. I'll start this morning with a few summary comments, before moving onto address our income statement, the balance sheet, business unit results and our outlook for 2009.

First quarter results reflect the continued impact of unprecedented economic challenges we currently face. As in the fourth quarter of last year, the two factors having the most significant impact on our results are weak industry demand and peak raw material costs.

Otherwise, you will see our plans on track.

In North America, we saw significant volume declines continue across all tire segments, despite market share gains, with the replacement industry volumes declining by levels consistent with the fourth quarter last year. But, OE volumes declining even more severely.

In Europe, the story was similar. Commercial volumes, in particular, were hard hit, and have shown no signs of life at this point. As simply to choosing to cannibalize tires from idle equipment, rather than purchase new tiers.

In our other regions, industry volumes were also very weak compared to the prior year. But, there were some hopeful signs, with passenger vehicle production picking up in China and India, driven by strong government incentives.

The significant drop in industry volumes, when compared to the prior year, drove global unit sales lower by nearly 9.5 million units, a reduction of almost 20%. We continue to see the double hit to earnings from production costs, which reflect for us, not only lower sales, but also our aggressive management and inventory levels.

So in the first quarter, we see -- we reduced production by 12 million units, equal to what we indicated on our February call.

Raw material costs increased 332 million or 31% versus a year ago, the highest percentage we've seen as the high cost from the raw materials purchased in mid-2008 flow through our inventories.

Fortunately, the negative impact from raw materials would be less of a factor beginning in Q2, followed by expected year-over-year raw material cost declines in the second half of the year.

Price mix continues to provide benefits in Q1, with revenue per tire higher by 3.4% compared to last year.

As Bob indicated, revenue for tire was up less than the 8% we saw on 2008, due partly to commercial truck tire volume, which dropped by 33%, compared to a decline of just over 18% in consumer tires.

As Bob mentioned, our cost reduction actions in both manufacturing and SAG, are helping mitigate industry pressures, and are driving our cost structure lower. And our liquidity remains solid.

Looking at the income statement, sales were down approximately 28% in the first quarter, reflecting lower unit sales across all businesses, and adverse currency movement of about 500 million, given the strength of the U.S. dollar. Price mix improvement impacted sales favorably.

Lower gross margin segment results and our net loss, all reflected lower volumes, as well as significantly higher raw material costs. SAG was down significantly from a year ago, reflecting aggressive cost cutting, decreased compensation related costs, and the benefit of foreign exchange. Note that the first quarter after-tax results included rationalization related costs totaling 57 million, along with other significant items.

The appendix includes a summary of these items for this year and last year.

The segment operating loss for the quarter was a 176 million. As I mentioned previously, the impact of weak markets across all of our businesses accounted for the majority of the year-over-year decline in operating income.

Price mix of a 161 million was more than offset by the peak of raw materials at 332 million. Mix, as I mentioned, was affected by significant declines in commercial truck business.

Our aggressive cost cutting continued in the first quarter, with savings from our four-point plan of a 145 million providing significant net benefits, as the general inflation rates are down, compared to the rates we experienced last year.

We expect many of the same challenges to continue in Q2, as industry conditions are expected to remain weak, impacting both our unit sales and lengthening the time it takes to work through last year's high priced raw materials that remained in our inventories.

Turning to our cost saving progress for the quarter. As I indicated, we saw results in each of the categories of our four-point plan, with total savings of a 145 million. Savings rates reflected a reduced opportunity stat, given lower volumes and declining inflation.

Head count reductions and other cost saving actions, will provide more impact in Q2 and beyond, as we run the factories on a full schedule. We remain confident in our ability to achieve the full 700 million in savings for 2009.

Looking at our balance sheet, you can see the benefit of our focus on inventory. Our inventory is down 330 million or 9% from year end, despite Q1 typically seeing increases based on normal seasonal trends. This reduction stems from the success of advantaged supply chain initiatives, in combination with lower raw material prices and foreign currency translation.

Our advantaged supply chain process is focused on improvements in manufacturing flexibility to handle smaller runs more efficiently, so we can improve our service levels while reducing inventory. This drives our production with a demand pull from customers rather from a push.

Cash and cash equivalents were about flat with year-end, although both total debt and net debt increased, reflecting seasonal borrowing and operating losses.

We received a 24 million disbursement from the reserve primary fund in Q1, and an additional 16 million in April, which means, we've now received 90% of the 360 million that we had invested at the time the fund flows (ph) withdrawal of last year.

Our liquidity remains solid at quarter-end, given the strong cash balance and covenant flexibility, and our maturity profile will remain strong.

We plan to run our business or our near term maturity, 500 million we have due in December, can be satisfied from existing cash and liquidity. But, we'll be opportunistic about refinancing as opportunities present themselves.

One more point related to liquidity. Given the uncertainty around the situations at key U.S. auto makers during Q2, I wanted to comment briefly on how we view the potential impact on Goodyear.

As Bob said, the U.S. OEs represent less than 7% of Goodyear's global sales. And typically, on historical basis, represented a 100 to 150 million in receivables.

Given today's production environment, we now estimate our peak accounts receivables exposure in North America to the two OEs that are most at risk, at about 60 to 80 million during Q2.

We believe some of these receivables can still paid, even in the event of a bankruptcy, and we've been evaluating the government-sponsored supplier protection program offered by both OEs, and may participate in that program.

We see the impact on our OE volumes as the more important long-term question. Further ongoing volume reductions would be more unabsorbed overhead for our North American factories.

Finally, in our 10-Q you'll see the impact of adoption of a new accounting standard, FAS 160. This new standard changes the presentation for minority interest on the income statement, to a separate line item, and on the balance sheet from liabilities to shareholders' equity.

Turning to the segment results. North America reported the loss of 189 million in the quarter, which compares to segment operating income of 32 million in the 2008 period.

About a 160 million of the decline is explained by weaker tire markets, including unabsorbed factory overhead. The remainder is explained by the spike in raw material costs, together with lower results in other tire related businesses.

Given the weak industry volumes, we sold 3.9 million fewer tires in North America, compared to the prior year, with over half the decline coming in the consumer OE business.

In the midst of market weakness, our North American business, led by Goodyear brand, gained share in the replacement market, given the success of our new products, strong marketing initiatives and dealer support.

As in the fourth quarter of 2008, North America experienced significant impact for unabsorbed fixed costs due to production cuts, which in Q1 totaled 4.6 million units.

Unabsorbed fixed costs totaled approximately 121 million in the quarter, including 83 million of costs for first quarter production cuts, which we recognized immediately under FAS 151.

Price mix performance overall, was strong, but did not keep pace with the increase in raw material costs in Q1, which increased to 137 million. The net impact of price mix versus raw in North America, was a negative 77 million.

Despite some factors that hurt mix, including the sharp drop in commercial truck volumes, we still achieved an increase of more than 6% in revenue per tier in the quarter.

In response to lower demand, North America has reduced its production schedules. In Danville, Buffalo and Topeka, we reached an agreement with the United Steelworkers to change from seven-day to five-day work weeks. Reaching these agreements in such a short timeframe, not only represents good cooperation, but also demonstrates the commitment both parties have to addressing the current environment.

Going forward, these actions will help reduce inefficiencies at these plants at today's lower production levels. As in North America, the impact of weak industry demand and peak raw material costs on our results in Europe, Middle East and Africa, was substantial, and account for the majority of the year-over-year decline in earnings.

EMEA sold 3.8 million fewer tiers in Q1, with severe declines in OE particularly, in the commercial truck markets. Sales declined 682 million, reflecting the lower unit sales along with weaker European currencies. The negative impact on currency and sales was almost 300 million.

At the segment operating income level, however, weaker currency helped reduce the operating loss in the quarter.

Revenue per tire decreased slightly in Europe, Middle East and Africa given the steep decline in commercial tire volumes, which have a higher per unit revenue than consumer tires.

If viewed individually, both the consumer and the commercial businesses saw increased revenue per tire. So, a constant mix revenue per tire would have been about six percentage points higher.

Weak demand drove production cuts of about 5 million units in the quarter. And we incurred unabsorbed fixed costs of 55 million. This is a much lower impact than we saw in North America, given the higher flexibility in our EMEA factories, particularly in Eastern Europe.

Higher raw material costs more than offset price mix benefits year-over-year. The results in Europe reflected toughest environment we've got right now globally.

But there are two good news points. First, raw material impact will be measurably lower going forward, which will help alleviate the year-over-year impact to our results. And second, our cost reduction actions continue to gain momentum throughout the EMEA.

Switching our focus to Latin America. We reported segment operating income of 48 million in the first quarter. This is a solid outcome, considering the current environment. The result is below the prior year levels, primarily due to the weak industry demand.

When compared to the prior year, unit sales declined about 19% or a million units, reflecting weak consumer and commercial demand. As in the previous quarter, a number of currencies in the region weakened against the U.S. dollar.

When compared with the U.S. dollar, the Brazilian real, which is the region's largest exposure, we can buy about 25% year-over-year.

In addition, volumes were negatively impacted by import restrictions in certain markets, and political issues driven by the economic downturn.

In response to weak demand and the trade restrictions, Latin America cut production by approximately 1.6 million units in the quarter, resulting in unabsorbed fixed costs of about 16 million.

In the quarter, price mix benefits were substantial, reflecting what we view as the strongest product line that the region has ever fielded, which helped yield a 10% increase in revenue per tire, nearly offsetting peak raw material costs.

The final item to consider when evaluating the year-over-year comparison in Latin America, is last year's one-time gain of 12 million, related to a favorable tax settlement which did not recur this year.

Although market conditions in the region remained challenging in Q2, we see some positive market signs, with car sales in Brazil growing in the first quarter.

Even in Asia, the economic slowdown has had a significant impact on the quarter. The impact of weak industry demand resulted in a 17% decline in unit sales, compared to the prior year. Volume declines were most severe in Australia and New Zealand, where the economic slowdown is having the deepest impact.

In addition to lower volumes, these markets have a greater high value-added tire concentration. So, the bottom-line impact is more pronounced. As a result, first quarter operating profit was 15 million. The impact of the lower industry volumes, and the unabsorbed fixed costs associated with production cuts of a million units, accounted for the majority of the decline, when compared to the prior year.

On the positive side, revenue per tire increased 9%, and price mix benefits were sufficient to offset raw material costs.

Also, strong cost control helped mitigate the impact of weak demand.

Overall, Asia performed well despite the impact of weak markets. And we see China and India showing signs of demand recovery, a good sign.

So, in each of our regions we saw the significant impact of weak industry demand, along with the effects of peak raw material costs. But, in each business we continue to see strengthen our brands and our products, which all the cost improvements are helping mitigate this severe industry conditions. This provides assurance that we'll be positioned to benefit when the markets recover.

Oh, let's turn now to our outlook for 2009. Considering the current state of the global economy, and the high level of uncertainty we see in our end markets, we expect demand to remain weak in the second quarter, with year-over-year declines similar to those experienced in Q1.

Once we get to the second half, demand comparisons begin to get considerably easier.

In response to continued market weakness, we've planned to cut production by nearly 11 million units in the second quarter, and we'll continue to monitor market demand and react as needed.

Our projections for raw materials in the first half of '09 is an increase of about 18%, which is the high-end of our previous range. This implies second quarter raw materials will increase about 5 to 7%, compared to the prior year.

This reflects the impact of low Q1 production, which increased the lag time required for raw materials purchased in mid-2008 to work through inventory.

For modeling purposes, we expect interest expense in the range of 315 million to 335 million for the year. And we continue to -- continue our tax expense guidance at approximately 25% of our international operating income.

As you consider takeaways from this morning, remember our points, on one hand markets continue to be tough, especially, the commercial truck markets. Raw materials and unabsorbed fixed costs are still an issue for us. And we see significant risks with our U.S. OE customers.

But on the other hand, our strategies are working. Our product engine continues to deliver. We continue to make progress in price mix. Raw material costs will begin to decline in second half. We're on track with our cost savings and our cash and liquidity actions. And we continue to be recognized at the top of the table as most respected, most admired in our industry.

As we look for signs of market recovery, we remain confident that we'll reposition to take full advantage of the recovery when it comes. Thank you for your interest in Goodyear this morning. Bob, Damon and I, will now take your questions.

Question-and-Answer Session

Operator

(Operator Instructions). Your first question from Rod Lache with Deutsche Bank.

Rod Lache - Deutsche Bank

Good morning. Can you hear me?

Robert Keegan

Yes. We can, Rod. Good morning.

Rod Lache - Deutsche Bank

I have a couple of questions. Was hoping, first of all, you can break down the volume versus the mix effects in the quarter. And within mix, just speak, if you can, to -- you mentioned that truck -- commercial truck was down, but OE was down also. And I would imagine that the OE would have a positive effect on mix. So, how did you see that affect the overall mix result?

Darren Wells

Well, I think I mean the point that you're making are right. We've had some factors going in each direction. But, I think when you look at it, the severe drop in the commercial truck tire markets, as well as there's some drop that we see in the OTR markets, are both working strongly against the mix factor.

All right, so that to as what we saw as an impact on revenue per tire that was more significant than the benefit we would've gotten from some lower OE volumes. And I think if you break it apart by region, you'll see some differences as well. And you can see the impact that Europe gets is more strong from the volume, and part of that is the fact the OE business there is better for us than the OE businesses in U.S.

Rod Lache - Deutsche Bank

What was the price affect, if you just looked to that in isolation? Was that a positive year-over-year?

Darren Wells

Yeah. We've seen -- we've continued to focus on our strategy on pricing. And we've worked very hard to establish price positions in the market. Obviously, we're continuing to focus on that with our new product engine.

We don't break pricing mix out specifically. But, I think that the focus that you would have on the mix effect is going to be on the mix among our businesses as much as there is anything else.

Rod Lache - Deutsche Bank

And would you expect that pricing to remain fairly stable over the course of the year, even as you've commented that raw material should become favorable towards the latter half of the year?

Robert Keegan

I think, maybe Rod, I'll just jump in and say, as we're looking forward this year, obviously, as raw material prices come down, we've got a weak demand environment. There'll be some pressure here. But, we don't think it will be very intense pressure. We've been able to get price mix, not only in the first quarter, but in 2008, the previous four years.

So, we're pretty confident about the value propositions that we're putting out there.

Rod Lache - Deutsche Bank

Okay. And just the last two from me would be, looks like you've cut production by 12.6 million units, if I calculated it right. And you had a 9.5 million unit sales decline. How much did the inventory reduction impact your unabsorbed overhead?

And then lastly, looking at prospective cost savings, it looks like the big opportunities are in the productivity and steel USW bucket, and in the capacity bucket. Could you just speak to you are coming up on a new contract. What are your expectations there, and what would the savings be from this 15 to 25 million unit capacity reduction?

Darren Wells

Rod, I'll take the question on the production cuts first. Clearly, that is an area where we have taken a double hit. Our cutbacks in production have been more than the lost volume.

And so, you're right to look at that and say, yeah, that's driving a lot of unabsorbed overhead. But, even if the unit sales continued, we wouldn't continue to see all of that.

Now, having said that, we are continuing to focus on driving our inventory levels down. And that does carry with it some impact on unabsorbed overhead.

And I think the production cuts that you see are in a range of 12 million units, versus 9.5 million units or so volume declined. So, I think you can figure out what portion of that is going to be from the additional production cuts.

The productivity question or the productivity point you make is the right point. Going forward, we should see significant impact on cost savings from the head count reductions that we've taken. And that's both in the salaried staff, as well as in our production facilities.

And if we look at what we've been able to do there, and not just in the U.S., but around the world, we have been able to take reductions that are going to pay us back over the course of the year more than they would have in the first quarter.

Rod Lache - Deutsche Bank

What would the savings be from the 15 to 25 million capacity reductions?

Darren Wells

The -- I mean, Rod, we've taken out 25 million units of capacity over the last several years. And I don't have any better guidance for you than to suggest that the savings should be similar. The savings we've seen in capacity reductions historically.

Rod Lache - Deutsche Bank

Okay. Thank you.

Robert Keegan

Rod, maybe just one point, because you raised the question of the negotiations with the Steelworkers. Obviously, those will begin in June. Our policy will continue to be not to countdown until we're through those negotiations.

I'll just say that with the progress we made in the three plants I mentioned in Danville, Topeka and Buffalo, that we got good working relationship. And frankly, a good environment here.

Rod Lache - Deutsche Bank

Thank you.

Patrick Stobb

Next question.

Operator

Your next question comes from Himanshu Patel with J.P. Morgan.

Himanshu Patel - J.P. Morgan

Hi, good morning. I wanted to talk about North America, either for Bob or for Darren. Just looking, it looks like your revenues in units were sequentially from the fourth quarter down about 20%. And your segment operating income is roughly flat. I know you don't disclose a sort of sequential bridge on profits. But, could you just give us some color there, what was it -- what were the factors that went more favorable to offset that sort of revenue pressure?

Darren Wells

Yeah, Himanshu I think the point you're making is we dropped from 16.9 million units to 13.9 in terms of volume from as we go from Q4 to Q1.

Clearly, the volume had some impact. Although, if we look at that and I think a large part of it is drop in OE volume, which in North America doesn't happen, it doesn't carry within a lot of earnings. So, the drop off there isn't as significant as it might appear to be, just given that those are pretty low margin units.

I think in addition to that you'll see that North America is getting some cost savings. That's going to be helpful, as we go from Q4 to Q1. The other thing though that worked against us to some degree, and you'll see it in our disclosures is the, as the 10-Q is published that the non-tire businesses, or the tire related businesses, I should say, in North America. And you can think about the chemical business, the retail business, the rethread (ph) business. Those are businesses that have continued to get tough for us.

Himanshu Patel - J.P. Morgan

Darren, was the, when you say cost savings, was there a big relief sequentially from general inflation?

Darren Wells

Well, I mean, we did see some -- if you think sequentially, not as much relief as you see here from a year-over-year perspective, because inflation wasn't nearly as much of a factor in Q1, as it was for us in Q4.

A couple of things that you do see there. Number one, you see really the first quarter will get the full benefit of the Viva in North America, as it flow through inventory, given the lag that, that would have taken. So, that's the benefit. And benefit from some savings that we have taken in SAG. They're pretty insignificant.

Himanshu Patel - J.P. Morgan

Okay. The 11 million unit production cut guidance for the second quarter. First, just a housekeeping comment, what is that in reference to? Is that versus a year ago, or is that versus your previous internal plans?

Darren Wells

Yeah I mean, you can think of it. I don't think it's going to be too much different. It is -- the 11 million units is going to be compared with a -- not what we would consider to be a normal production schedule. And if we look at a year ago, we were still on more or less what we would have seen as a normal production schedule.

Our production cutbacks started somewhat in the second quarter, but mostly kicked-in in the third quarter of last year.

Himanshu Patel - J.P. Morgan

Okay. So, my question on that is, is there a chance here that the 11 million maybe too steep, just on the sunset (ph). It looks like your inventories are started to get under control. We're seeing some stabilization or improvement, whatever, in miles driven. It looks like the rate of decline on consumer replacement in Europe has also started to moderate. Are you viewing this as sort of a conservative number, or would say this number has downside risk to it? I was just trying to get some color around that.

Robert Keegan

We still think it's a realistic number. We've been aggressive cutting production schedules and drawing inventory down, since the middle of last year. I think we're still going to be aggressive in that area.

There's a lot of volatility in the demand environment as you see. But, we think this is a realistic number. And I am not sure whether I'd quite go so far as to say, it's a 50% upside, 50% downside. But, it's a very realistic number at this point.

Himanshu Patel - J.P. Morgan

And then last question on for Darren. Maybe you could just comment on just given where the markets are, both on the equity and the credit side, what are some of the financing options that you think could be tapped opportunistically, to address the debt maturity at year-end?

Damon Audia

Himanshu, this is Damon. As Darren alluded to, we would look to opportunistically refinance the December maturity, if presented itself for us in the high yield company, there is obviously the unsecured market that we will look at. And given our secured position, we do have the options with the secured market as well.

Himanshu Patel - J.P. Morgan

Okay. Any thoughts on equity-linked transaction, or is that still something that you think would -- either you're not interested in, or you think it's just hard to pull off?

Damon Audia

The equity-linked market is another option for us to consider, Himanshu. But, as we look through the options, we look at the cost of each of these, the market's appetite for Goodyear transaction. And then, again, looking at what's in the best interest of the company in the near term and the long-term, and looking at what different options we have.

Damon Audia

Okay, very good. Thank you.

Robert Keegan

Thank you.

Operator

Your next question comes from John Murphy with Merrill Lynch.

John Murphy - Merrill Lynch

Good morning, guys.

Robert Keegan

Good morning, John.

John Murphy - Merrill Lynch

You've made pretty good progress on your inventory reduction, have a little bit more to go according to your targets. So, that bodes well for you.

What is your sense of the competition on their inventory reduction, and what are you hearing sort of from the channels. And I'm just trying to understand, if we get into this lower inventory level that you're heading for, can we get some pricing support particularly, in the second half of this year?

Robert Keegan

John, I won't comment where the competition is. But, I'll go back to the comment I made in my remarks that if we look at the overall trade distribution channels, people are running clearly, with fairly low inventories at this point.

As I said, cash is certainly king for them. Most of them have run their businesses for many years on a cash basis, and still do so. So, we think inventories that are out there are, what you might call, a normal level or below in virtually all the markets. And the only place where that might be a little different is on the commercial truck, where people have gotten caught by surprise with the fall in demand. But, in the passenger area and I am making a global statement here, inventories are relatively normal to low.

John Murphy - Merrill Lynch

Okay. And you alluded to moving to an environment where you might see more of a pull model as opposed to a push model on inventory. Are there any signs that that pull model is beginning to develop as far as the demand and supply balance.

Robert Keegan

Well, for us, we've been working intensely on this for the past three years. And for us, we're certainly moving towards a pull environment very rapidly. And again, I won't comment on the competition in that regard. But, for us, that's a step that we have now taken. And we've got the capability in place to do it.

John Murphy - Merrill Lynch

Bob, you mentioned that you were able to gain market share a lot of which something came from is mid-tier tires that you have included in the very good product. What is the profitability of those tires? Is that sort of along the corporate average, or is that slightly above or below?

Robert Keegan

They're pretty good margins, John. Because remember, when we say, I talked about branded mid-tier. And it's important to have all those words. So, there are mid-tier products that the not branded, where margins might be a little less. But for branded mid-tier, a significant portion of that is what we've called in the past HVA or high value-added product.

So, these are good margins in the area particularly, if you bring new product to the category like the Assurance Fuel Max.

John Murphy - Merrill Lynch

Okay. And then just lastly, just one question on slide 17. The available credit line looks like it dropped pretty significantly from 1.7 billion at the end of last year to 1.0 billion at the end of the first quarter. Was there something that changed in the borrowing base, or what's going on there?

Darren Wells

Damon, you want to take that?

Damon Audia

Yeah. John, this is Damon. The delta, the drop in the available credit lines is really due to the seasonal borrowings in Europe. So, when you see the Q, you will see that we've drawn our credit line in Europe, which is fairly traditional.

John Murphy - Merrill Lynch

Great. Thank you very much.

Robert Keegan

Thanks, John.

Operator

Your next question comes from Saul Ludwig with KeyBanc.

Saul Ludwig - KeyBanc

Hi. Good morning, guys.

Robert Keegan

Good morning, Saul.

Darren Wells

Good morning.

Saul Ludwig - KeyBanc

With all the inventory cuts that have taken place. And the fact that there is seven other tire plants that have already been announced for closing. Do you still feel taking out another 15 to 25 million units is necessary, given that there have been additional plant closings subsequent to your originally announcing the need to take out that additional capacity?

Robert Keegan

No, I'd just comment to some degree, we've got the range in there. And the range was positioned for the reasons that you mentioned. We're continually monitoring demand. We're continually rethinking where demand will be in the future.

But, yeah, we've got to take some capacity out. We feel strongly about that. And we have some high cost capacity that needs to come out. And some regions that are more stressed from a demand standpoint that others. So, we feel pretty good about that range.

Saul Ludwig - KeyBanc

Right. Next question. What's the timing when you have to move out of the Dalian plant? And where do you stand with the construction of the new plant?

Robert Keegan

Yeah. I won't give you a precise timing, because it moves a little bit. I'll simply say that we are on plan, in terms of government interaction. So, we have joint plans, and the preparation of the site. So, no, things are right on plan with Dalian.

Saul Ludwig - KeyBanc

Is there any time when you have to out of your existing plant, because of the neighborhood in which it's in Bob?

Robert Keegan

It's a function of, remember, this is all well coordinated. It's a function of when the new plant is ready to roll. So, that's the pacing item, Saul.

Saul Ludwig - KeyBanc

And are we in the two to three year timeframe or one to two year timeframe, or -- not nearly if you answer a specific month?

Robert Keegan

(inaudible). But, I'd simply say that we're in the two year plus timeframe to be completely ready to ship product.

Saul Ludwig - KeyBanc

Okay. And then finally, Damon, why with the $64 million of interest expense in the first quarter, what's going to cause that interest expense level to be so much higher to achieve the 315 to 325 expense for the full year?

Damon Audia

Sure. Good question, Saul. One of the big variables Saul, is the debt that we reported at the end of the first quarter, as I alluded to earlier, part of that was the to draw of our line in Europe. That wasn't outstanding for the full quarter. So, you can't really extrapolate the interest expense for the first quarter for the remaining three quarters.

So that's one variable. The other one is the when we look at our guidance, we look at forward-looking LIBOR curve. So, given LIBOR today, it's currently low, the forward rates are little bit higher. So, those are probably the two biggest items.

And then the third one I'd point out is the European securitization program, which is not currently fully utilized. As those receivables increase in Europe, that would translate into incremental interest expense for us as well.

Saul Ludwig - KeyBanc

Great. Thanks for your good explanation. Thank you, guys.

Robert Keegan

Thanks Saul.

Operator

Your next question comes from Itay Michaeli with Citi.

Unidentified Analyst

Thanks guys. This is Will Randa (ph) for Itay Michaeli. I was hoping you could discuss your outlook on particularly, working capital, on capital expenditures and cash flow seasonally, as we look through the rest of the year. Just give us a sense where that would fall out?

Darren Wells

I am going to take that. The -- I mean, what we generally experienced from a working capital and a cash flow perspective in our business is a cash out flow during the be it the first, second, even the third quarter. And then cash inflows during Q4. And that's our traditional seasonal pattern.

Now, if we take that and we overlay the inventory reduction targets we have. And obviously, we're trying to work inventory down over time. We made progress on that in the first quarter. We're going continue to be focused on that.

So, you have not seen inventory build the way it traditionally would build. And clearly, what happens in the marketplace in the second half of the year is going to have some influence on what level of working capital is going to be needed to support the business there.

So, there is a big uncertainty. We're not in a position to have complete clarity over what the third and fourth quarter volumes are going to look like. But clearly, that's going to have some effect on poor inventory where receivables have to be.

From a CapEx perspective, we are inline with our plans on CapEx. We've got plan to spend 7 to 800 million of CapEx during the year, which, while it's down about 300 million or so from last year, is a reflection of the fact that we don't need the capacity that we once thought we were going to need. And that's -- the market has reset. It's reset to a lower level. So, we don't need the high value-added capacity, and the upgrades and the expansions that we once felt we were going to need. So, we thought CapEx levels back down, we feel that we are inline with our expectations there.

The cash flow is going to have all those variables involved in it. And with a big part it revolving around where the levels of business activity in the second half of the year.

Unidentified Analyst

Is it possible in Q2 to have a decent size benefit given your inventory reduction actions as typically in Q2, it's a relatively neutral working capital period?

Darren Wells

Yeah I think the real question is going to be where -- typically sales in Q2 and working capital in Q2 were build? Now what happens in the marketplace is going to be a driver there. But, we continue to drive our inventory levels down. So, inventory is something we look to get a benefit from. Other elements of working capital are going to driven by business activity levels.

Unidentified Analyst

Thank you.

Robert Keegan

Thank you.

Patrick Stobb

Next question, Michael.

Operator

Your next question comes from Patrick Archambault with Goldman Sachs.

Patrick Archambault - Goldman Sachs

Hi, good morning.

Robert Keegan

Good morning, Pat.

Patrick Archambault - Goldman Sachs

I guess, I just wanted to dig into pricing a little bit more. One of the things that has been brought up is that some of your competitors may see the benefits of lower raw material costs a little sooner from a P&L perspective, simply because I guess, they are on a different inventory accounting system with less of a lag versus FIFO. And I was wondering whether you thought that might lead to potentially accelerated pricing or discounting within the next quarter, what you're seeing, what you're hearing about that. And if you would agree with that, that would be my first question.

Robert Keegan

Okay. And maybe just to address that as I said earlier, that we feel pretty good about what we've been able to accomplish in terms of price and mix and feel pretty good going here into the second quarter in that regard as well.

With regard to the FIFO versus what I think from most of our major competitors' kind of an averaging type of methodology, we haven't seen empirically over the past few years a lot of impact from that directly in pricing.

So, I don't know that there'd be a delta there in terms of the timing. We certainly, we monitor the market all the time. But, I wouldn't anticipate that.

Patrick Archambault - Goldman Sachs

Okay.

Robert Keegan

Darren, I don't know, any other comment on that's...

Darren Wells

No.

Patrick Archambault - Goldman Sachs

And just a follow-up on mix. We've spoken a lot about the impact of trucks. But specifically within passenger car, how is the move to what you described as mid-tier on a go forward basis? How is that going to impact mix as the tailwind, as we get into sort of the back half of this year. How should we think about modeling that?

Robert Keegan

Well, just to be clear here. I want to make sure, you're looking at I think what we'll see. The reason for going to the mid-tier, the branded mid-tier, is because there's a lot of volume there, and a lot of industry volume.

And there is a lot of potential there for us, to take on more consumers and more volume at very attractive margins and attractive price levels.

So, to me, it's not as simple a question when we look at the mid-tier. It's just looking at price mix. It's an absolute dollar gross margin type of question. And that's really what we're going after there.

Patrick Archambault - Goldman Sachs

Sure. No, absolutely. But I guess, if we were kind of to model it out, like you have represented on slide 14, your success in doing that would help diminish volume headwinds, and unabsorbed overhead and all those aspects. But, the mix part of it might actually shrink a little bit.

Robert Keegan

Well, I think, it might not. Because, the mid-tier pricing, although, below the premium pricing. As I've said, it's still high value-added. It is still each substantially HVA product.

I mean, pricing on our new fuel backs is a good value proposition. But, the pricing is attractive from our standpoint too. It's a good fit, attractive to us, and attractive to the ultimate consumer.

So, there may be a little play down. But, there is also play up, in terms of creating a stronger mix for us. Because remember, we've exited a lot of lower price business, consciously done in over the past few years. So, I wouldn't naturally assume that mix will be down, because of that play in the mid-tier. I think there will be solid pricing.

Patrick Archambault - Goldman Sachs

Okay. So, sort of set at a very high level year-on-year just given some of the private label stuff you've been exiting, you still expect mix to be a tailwind even if...

Robert Keegan

It will still be a positive.

Patrick Archambault - Goldman Sachs

Yeah, okay. Okay.

Robert Keegan

And that will be a positive. And certainly -- and I would say in all four of our geographic markets. I mean, unless market demand changes considerably, and we haven't seen that to-date. But, the reason for going after the mid-tier is obviously, we see that as a relatively strong market segment.

We saw that 18 months ago. And because of our ability to launch new products quickly, we've got products in that segment that we're shipping here early in 2009. That's the reason for speed and the new product stream being so critical.

Patrick Archambault - Goldman Sachs

Okay, great. And last one, the -- I might have missed this. But, can you give us a sense of what the unabsorbed overhead cost associated with the second quarter production cut will be? I mean, I think I maybe remembering this one, but I think it was between 10 and $20 a tire or something like that, depending on what region you were in? Is that the guideline you would use for just assuming that for Q -- estimating that for Q2?

Darren Wells

Yeah. There is a -- if we look at the last three quarters, I think we've gotten you'll be able to see as much data that would help you estimate the second quarter as I can provide. It will be dependent on where -- which factories take the production cuts? In which region of the world those factories are in, and what the level of fixed costs are?

And obviously, we've done some things overtime that are reducing the fixed costs. As we take people out, as we take costs out of factory, we're working to get that unabsorbed fixed costs burden down overtime. But, for the second quarter you'll look at it and say, The situation isn't going to be that much different than it was in the first quarter.

Patrick Archambault - Goldman Sachs

Okay, great. Thanks a lot guys.

Robert Keegan

Thanks, Pat.

Operator

And due to time restraints, your final question will come from Kirk Ludtke, with CRT Capital Group.

Kirk Ludtke - CRT Capital Group

Good morning, guys.

Robert Keegan

Good morning, Kirk.

Darren Wells

Good morning.

Kirk Ludtke - CRT Capital Group

I just had a couple of follow-up questions. One was regarding the liquidity slide 17. And I think you mentioned that the decrease on the availability was due to draw to the European facilities. And I just wanted to clarify, the definition of availability. The Pan European securitization I guess, you have another 200 million of capacity. But, you don't have the borrowing base to actually draw. Is that a fair?

Damon Audia

This is Damon. That's the way to look at it. We have a committed facility there. But, given the seasonal nature of the receivables, and given the drop-off you saw in the first quarter, we didn't have full access to that currently. Historically, you'll see the receivables in Europe grow in the second and third quarter. So, at those two compound lines in revenue, you would see us be able to borrow against that.

Kirk Ludtke - CRT Capital Group

And is there any part of the billion dollars that similarly situated, committed, but constrained by the borrowing base?

Damon Audia

No.

Kirk Ludtke - CRT Capital Group

Okay, great. And then, how is it going rolling these facilities, these -- the facilities that matured in the first quarter. Did they all roll over at the same levels?

Robert Keegan

Yeah, Kirk, we see, and we 're rolling small facilities, nothing meaningful in size. And we continue to renew these facilities without any nature of problems. Again, every country, every region has different minds (ph) but nothing significant.

Kirk Ludtke - CRT Capital Group

And Himanshu asked about the capital market options. And I was curious. Are you sharing the amount of secured debt that you could layer in to your capital structure?

Darren Wells

We haven't given a specific number curve. But, I guess, what I would tell you as we look at our credit facilities, we look at our other unsecured debt that we have out there, we don't feel that there is any significant restrictions in allowing us to do something like a third lean transaction or anything like that.

Kirk Ludtke - CRT Capital Group

And then, last question. I'll raise it, because no one else has. But, is there any update on the internal puts, anything that -- any developments that you want to share?

Robert Keegan

The short answer is no, Kirk. Our feelings are the same as they were when we talked on the Q4 call that with both parties achieving significant benefits. And there is no update.

Kirk Ludtke - CRT Capital Group

Okay. Thank you very much.

Robert Keegan

...good relationship both parties to arriving benefits.

Kirk Ludtke - CRT Capital Group

Thank you.

Patrick Stobb

Thank you, Kirk. This is Pat. This concludes today's call. Thank you very much for joining us today. If you have any follow-up questions, please feel free to contact me.

Robert Keegan

Thanks everyone.

Darren Wells

Thanks.

Operator

Ladies and gentlemen, this concludes today's conference call. You may now disconnect.

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Source: The Goodyear Tire & Rubber Q1 2009 Earnings Call Transcript
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