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Executives

Gregory A. Fritz - Vice President of Investor Relations

Richard J. Kramer - Chairman of The Board, Chief Executive Officer and President

Darren R. Wells - Chief Financial Officer and Executive Vice President

Analysts

Itay Michaeli - Citigroup Inc, Research Division

Patrick Nolan - Deutsche Bank AG, Research Division

Elizabeth Lane - BofA Merrill Lynch, Research Division

Ravi Shanker - Morgan Stanley, Research Division

Saul Ludwig - Northcoast Research

Brett D. Hoselton - KeyBanc Capital Markets Inc., Research Division

Goodyear Tire & Rubber (GT) Q1 2012 Earnings Call April 27, 2012 8:30 AM ET

Operator

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 First Quarter 2012 Financial Results Conference Call. [Operator Instructions] Greg Fritz, Vice President of Investor Relations, you may begin your conference.

Gregory A. Fritz

Thank you, Gina, and good morning, everyone. Welcome to Goodyear's first quarter conference call. Joining me today are Rich Kramer, Chairman and Chief Executive Officer; and Darren Wells, Executive Vice President and Chief Financial Officer. Before we get started, there are few items I would like to cover.

To begin, the webcast of this morning's discussion and the supporting slide presentation can be found on our website at investor.goodyear.com. Additionally, a replay of this call will be available later today. Replay instructions were included in our earnings release issued earlier this morning.

If I can now direct your attention to the Safe Harbor statement on Slide 2. Our discussion this morning may contain forward-looking statements based on our current expectations and assumptions that are subject to risks and uncertainties. These risks and uncertainties, which can cause our actual results to differ materially, are outlined in Goodyear's filings with the SEC and in the earnings release. The company disclaims any intention or obligation to update or revise any forward-looking statements whether as a result of new information, future events or otherwise.

Turning now to the agenda. On today's call, Rich will provide a business overview, including perspective on our first quarter results and our progress and Goodyear's 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 would like to turn the call over to Rich.

Richard J. Kramer

Great. Thanks, Greg, and good morning, everyone. For more than a year, we've discussed Goodyear's strategy roadmap and our destination of creating sustainable value. But during that time, we've seen significant changes and continued volatility in both the business environment and the economic outlook. But despite these changes, we've remained focused on our strategies that we laid out, building towards our destination. We believe that by executing our strategies, we will be competitively advantaged in an industry that is being shaped by the 7 MegaTrends that we've discussed with you previously. Our strategy roadmap journey aligns not only with where the global tire industry is now but more importantly, where it's headed.

We continued on that journey in the first quarter of 2012. Our results confirm that we are continuing to make progress on the path to our 2013 target of $1.6 billion in segment operating income. Over the first 3 months of the year, we recorded $292 million in segment operating income and a record $5.5 billion in sales. We achieved these results despite weaker industry volumes and continued high raw material costs. We were once again able to more than offset raw material increases with price mix as our overall revenue per tire increased 16% versus a year ago. And we continue to focus on, and win in, targeted market segments, growing volume and share in many of these profitable segments while selling fewer, low value and private label tires.

Now to reiterate my comments from our Q4 call, we are not running our business for one good quarter or one good year, but rather with the consistencies and stability over the long-term to withstand the inevitable ups and downs of the tire industry. The progress in our North America business provides us with a great example of how our strategy can change the capability of our business, those that's particularly relevant in North America, as returning that business to consistent profitability is one of our key strategies. In the first quarter, North American tire delivered segment operating income of $80 million, double its total for the first quarter of 2011 and sales increased 8% to $2.5 billion, a first quarter record. This performance was achieved even though total tire unit volume was down 8%. So with 25% higher raw material costs and an 8% lower volume, North America doubled its earnings. This performance was enabled by a consistent execution of the how-to's from our strategy roadmap.

Now let me elaborate starting with the first one, and that's market-backed innovation. Our Goodyear Assurance family of tires is the foundation of a clear, simplified product portfolio. Assurance TripleTred, ComforTred and Fuel Max embody market-backed innovation and are the most-demanded Goodyear products in North America. We have helped generate, capture and fulfill that consumer demand with our new and growing tire and service network, which is supported by proprietary online tools. Our digital marketing capabilities now acts as a bridge between shoppers and our network dealers. Our innovation leadership applies not only to innovative products, but also to processes and tools that make it easier for consumers to choose Goodyear. At the same time, those processes and tools support profitable growth for our customers and for Goodyear. It's a winning formula and certainly, a competitive advantage for both of us.

Now next, those innovative products are being sold in profitable target market segments. In the replacement market, our improved mix is a result of Goodyear branded products being sold in those market segments where our innovative products and technology are differentiated from our competitors. We also see this at OE. We are winning profitable OE shipments on high loyalty vehicles, another success in our targeted market segment strategy. This reflects the OE selectivity approach we initiated several years ago and has revived since then. Selectivity, paired with raw material price adjustments included in our OE contracts, has made this a segment worth targeting, consistent with our strategy. And also, keep in mind that part of targeting profitable market segments is deciding not to compete where there is insufficient return even if volume opportunities exist. We have, and will continue to say no to business that is not consistent with our strategy as we are not running our business for volume alone.

Now this is true in our commercial business as well. We're applying many of the initiatives that have worked successfully in our Consumer business there as well.

The third how-to is operational excellence. North America Tire has made a commitment to improving operating processes to more efficiently deliver industry-leading service to our customers. We have seen encouraging progress in making and delivering more, the tires our customers want while reducing the amount of inventory we have to carry to meet that demand. We believe operational efficiency is a distinct competitive advantage for Goodyear and one where we see many opportunities for continued improvement. Now in addition to efficiency, operational excellence includes cost reduction programs as well. The most significant of which was the closure of our high-cost Union City factory in 2011. As the shifting of products from Union City to our other facilities in North America nears completion, the associated transition cost will be eliminated in Q2, allowing NAT to realize the full benefit of that closure.

Our enabling investments include upgrades to our remaining North America factories to make more of the high value-added tires that consumers want to buy and our dealers want to sell. So not only are our North America plants full, but more importantly, they're making more of the right products, the products to meet the demand in our targeted market segments. And finally, we believe our North America team is the best in the industry. Our associates in the product business units and functions are aligned, connected and performing with dedication to the strategy. Now equally important here is that our customers see it, they appreciate it and benefit from the consistency of both message and purpose. So through execution of the key how-to's, North America Tire achieved a profitability quarter despite an environment in which volumes remained weak and the industry was still well off its historical trends. Clearly, the business is being run with the discipline and consistency needed to reach its targets and ultimately create sustainable value in line with our destination.

While North America shows the most dramatic improvement in the first quarter, our other regions also made progress in line with our strategy. In Europe, we felt the effects of softer consumer and commercial replacement industries. This condition was attributable in large part to an extraordinarily warm, or as we call the "green" winter, and weak economic conditions across much of Europe which have resulted in reduced sellouts and increase dealer inventories. In that environment, however, we continued to execute our strategy by winning in our targeted market segments, offsetting increases in raw material costs with price mix, proactively implementing cost-reduction programs and not chasing non-core volume. We gained share in our targeted market segments or in product recognition and launched more new high value-added tires to continue to differentiate our brands from the competition. For example, the new Goodyear and Dunlop brand winter tires were well-received in Russia, where there actually was snow this year. And the Dunlop Sport Maxx RT and Sport Maxx Race were introduced at a high-performance market, a key market for us there.

And in Latin America, we have capacity expansions underway in our manufacturing plants in Chile and Brazil to deliver more high-value added consumer and commercial truck tires. The volatile business environment continues to be a challenge in Brazil and other key Latin American markets but we're pleased that the team has demonstrated commitment to the strategy and is aligning in action -- aligning its actions with the key how-to's. Our Asia Pacific business had a solid quarter, delivering segment operating income equal to the first quarter of a year ago. Though growth in China is more moderate than a year ago, the foundation of our business there is strong and we are growing at a consistent put pace in our key targeted market segments. We certainly continue to believe in the long-term growth potential of the China market. And our commitment to the market is supported by our new production facility in China that will nearly double our capacity there.

Our results in the quarter were achieved even with higher cost given the ramp up of that new factory in China. This ramp up is on track and will enable us to discontinue production at our old factory later this year. And in addition, we will start producing commercial truck tires this year in China and we're excited to see production really accelerate next year and our analysis of the Chinese truck tire market confirms that high-performing fuel-efficient truck tires form a growing key targeted market segment there, as Chinese fleets increasingly see the benefits of our value proposition and our technological advances. So again, in a continued uncertain economic environment, the progress in all of our strategic business units is a clear indication that we're making continual strides on our journey.

Now stepping back from our business units, I also want to take a moment to talk about the improvement in our capital structure, which is a key enabler of our progress.

Now while Goodyear has had a solid balance sheet for a number of years now, last week, we completed the second of 2 important refinancings during 2012. Our existing $1.5 billion revolving credit facility was increased to $2 billion and its maturity was extended to 2017, and our $1.2 billion term loan was extended to 2019. Now taken together with the 10-year notes we issued in Q1, we are now in a position to not only have a strong cash and available credit, but also have 7 years ahead without any term debt maturities. This will allow us to function with even more focused time spending on executing our strategy. So as we look ahead to the next quarter and the rest of the year, we'll continue to manage our business for the long term. To respond to bleak demand, we have decreased our decreased our production especially in Europe. We see the adjustment as simply a course correction, allowing us to manage cash, control inventories and reduce overhead while continuing to supply the tires that are in the greatest demand. These decisions result in short-term cost, but we're confident they are the right decisions for our long-term choices. They are consistent with our goal of creating sustainable value for the long-term.

Now we will continue to take the appropriate actions in these uncertain times. While the U.S. economy is showing signs of modest improvement, such as total miles driven being up 3 months in a row, we expect that other economies, such as Europe, will remain volatile.

Now in that environment, we will continue to plan our business cautiously and do so with discipline, focusing on intense cost control and prioritizing cash and earnings over volume. Now that said, we remain optimistic over the long-term as we believe volumes, particularly in our mature markets, will ultimately rebound as we continue to seek pent-up consumer demand driven by weak economies, high unemployment and general consumer cautiousness.

Now however, anticipating volume increases over the long term, we continue to expect an environment of escalating raw material costs. Our strategy is to continue to manage raw material cost with price mix while delivering strong returns with the same focus we're practicing now and certainly, within the context of our strategy roadmap. I'd like to close my comments by revisiting another of the distinguishing traits of our destination. As we drive towards creating sustainable economic value, we will run our business in a way that allows us to be profitable through the economic cycle. We are still on a journey but we view the results of this quarter as evidence that we're becoming more consistent in both our execution and our results. We are pleased with the fundamental strength of our business, which is winning in targeted market segments with innovative products. We are pleased with the progress we have made in building the capabilities necessary to execute the key how-to's of our strategy roadmap. And we are pleased with the decisions we have made to run our business for the long-term to reach our destination of creating sustainable value.

Our momentum continues to build and we are sustaining a consistent level of performance. We have now reported 8 quarters in a row of positive operating income in our North America business, 6 straight quarters of more than $5 billion in sales, 6 consecutive quarters of double-digit revenue for tire growth and 4 straight quarters in which we have more than offset record increases in raw material costs. These results have been with a consistent focus on progress against our strategy roadmap. We are confident in our teams, our products and the path we're on to hit our long-term targets. So now, I'm going to turn the call over to Darren. Darren?

Darren R. Wells

Thanks, Rich, and good morning, everyone. While our Q1 results were not as strong as last year, given significantly lower industry volumes, our performance was substantially improved from fourth quarter levels. As North America earnings improvement continued and Asia recognized insurance proceeds that more than offset the impact of the Thailand flood in the quarter. We continue to believe the underlying structural improvements in our business, including the end of the inefficiencies related to the plant closing in North America will support solid earnings growth through 2012 and beyond.

Turning to the income statement on Slide 8, our first quarter revenue increased 2% to $5.5 billion on an 8% reduction in volume. Replacement unit volumes decreased 12% during the quarter, while OE volumes rose 4%. It's important to note that our replacement unit volume comparisons were challenging given the very strong performance we had during the prior year in many of our business. Revenue for tire increased 16% compared with the prior year, excluding the impact of foreign exchange. We generated gross margin of 16.7% in the quarter, representing a 70 basis point decline compared to the prior year. As has been the case for several quarters now, the decline is more than explained by increases in both COGS and sales as a direct consequence of higher raw material cost.

Selling, administrative and general expense decreased $6 million to $662 million during the quarter. As a percentage of sales, SAG declined 40 basis points to 12%. Excluding the discrete items, our first quarter tax rate as a percentage of foreign segment operating income was approximately 21%. First quarter after-tax results were impacted by certain significant items. The most notable of these was $86 million in charges related to the successful redemption of 10.5% notes which resulted in an unfavorable impact of $0.35 per share after tax. The summary of significant items can be found in the appendix of today's presentation.

Turning to the segment operating income stature on Slide 9, you can see the progression of operating income compared with the prior year. We reported $525 million of favorable price mix during the quarter, which more than offset $482 million of raw material price increases. With lower volume was the $54 million reduction in income, cost savings of $64 million partially offset general inflation of $75 million. We remain on track to achieve our 3-year, $1 billion cost savings goal.

As we've discussed on our prior call, our other tire-related businesses went from a negative to a positive, with a $16 million year-over-year improvement, reflecting third-party chemical profits benefiting from rising gizdying [ph] prices and improved earnings from the Off-The-Road tires. In the other category, you see unabsorbed overhead was an unfavorable $6 million due to the production cuts, especially in EMEA, partially offset by the benefit of our Union City closure in North America. As we indicated on the previous call, we have made adjustments to our production schedules given the recent softness in demand.

Turning to the balance sheet on Slide 10. Our net debt balance increased to $3.5 billion at quarter end. The increase during the quarter is largely attributable to seasonal working capital requirements, along with this year's higher pension contribution. Our liquidity position remains solid with $4.5 billion of cash and available credit before the benefit of increasing the size of our revolving credit lines. Our strong liquidity position, enhanced further with recent refinancing, provides us with good flexibility as we continue to execute our strategy.

Turning to Slide 11, you can see our debt maturity schedule pro forma for the impact of our recent refinancing actions. As you can see on the chart, we have no term debt maturities until 2019. This provides a clear path for us to address required pension contributions over the next few years.

Turning to segment results, North America reported a strong improvement earnings during the first quarter. Europe, Middle East and Africa reported lower earnings in what proved to be a challenging macro environment. Latin American earnings were weaker and Asia earnings were essentially flat with the prior year despite higher start-up costs for our new factory in China.

Looking at the key drivers in each business unit, North America reported segment operating income of $80 million in the first quarter, which compares to operating income of $40 million in the first quarter of 2011. North America unit volumes were down 8%, reflecting generally weak consumer and commercial replacement industries which were down 6% and 13%, respectively. We also face strong year-ago comps for our sales, given the strong sell-in to dealers in Q1 2011. OE industry demand continues to see strong gains with commercial demand increasing 21% and consumer up 8%. Our strategy of focusing on targeted market segments helped deliver significant price/mix improvement, which more than offset $184 million of additional raw material costs. Revenue for tire increased 21% year-over-year.

Like we saw on the fourth quarter last year, North American manufacturing cost were still impacted by the disruption from transferring Union City products to other factories. Q1 is the last quarter when this should be a significant factor, with Q2 manufacturing cost expected to reflect the full benefit of the Union City closure with no offset. Our first quarter results are further evidence that North America business continues to make excellent progress toward our $450 million segment operating income target.

Europe, Middle East and Africa reported segment operating income of $90 million in the quarter, which compares to $153 million in the 2011 period. Our 2012 results reflect sales of $1.9 billion, a decrease of 1% versus the prior year. The decline in sales was driven by a 9% decrease in unit volume. Unfavorable foreign currency translation impacted net sales for the quarter by $94 million. Revenue for tire, excluding the impact of foreign exchange, increased 16% year-over-year. EMEA's increase in revenue per tire was driven by strong price mix performance. Industry unit volume for consumer replacement was down 5%, the consumer replacement industry was impacted by warm winter weather, leaving the high winter tire inventory at our dealers. As a consequence, summer tire sell-in has started slowly. In addition, industry unit volume for consumer OE was down 7%. In commercial truck, replacement industry shipments declined 13% versus last year, with volume reductions exacerbated by dealers reducing their inventories. Truck OE industry volumes, which have been a bright spot in recent quarters, were up only 1% in Q1. EMEA segment operating income of $90 million reflected price mix of $209 million, which more than offset $177 million of raw material cost increases. Lower unit volume negatively impacted income by $28 million compared with a year-ago. To align inventory with lower level of demand, production schedules in Q4 and Q1 were reduced, negatively impacting Q1 segment operating income by $20 million. SAG increase versus prior year reflecting a higher warehousing cost on softer sales, along with investment in marketing to drive branded share.

In Latin America, sales for the first quarter declined 11% to $521 million, with the sale of farm tire business and foreign exchange account for more than 70% of the year-over-year sale decline. Tire unit sales declined 12% from the prior year. Lower volumes were largely consistent between replacement and OE. Latin America reported operating income in the first quarter of $55 million, compared to $67 million in the prior year. This decline is largely attributable to the lower unit volume particularly in Brazil. Longer-term, we remain confident in the strength of our brand, our products and our distribution and our ability to transition to future needs of the market in Brazil and other Latin American markets.

Our Asia Pacific business reported segment operating income of $67 million for the quarter, which was flat versus the prior year. We're pleased with these results given the incremental $7 million of start-up expenses associated with the ramp up of our new factory in China. The continued impact of the flood in Thailand and softer consumer replacement demand in many parts of Asia, more than offset the growth in our China business year-over-year. Improved price mix around the region more than offset raw material increases. Revenue for tire excluding foreign exchange increased 9% versus prior year. Our Off-The-Road business continues to perform very well given the growth of the mining sector in the region. We continue to be excited about the opportunities we see in Asia and particularly in China going forward, despite the relative softness that we've experienced over the last couple of quarters.

With regards to the recovery from the flooding of our Thailand factory, which was closed on October 20, we have now began production of both aviation and consumer tires. We anticipate regaining full production during the second quarter. During the quarter, the net impact of losses in insurance recoveries was a favorable $3 million, with insurance proceeds covering all the Q1 impact and making up for part of the impact from Q4. We expect flood-related cost to impact Asia's result adversely again during the second quarter with additional insurance recovery proceeds to be reflected later in the year as the claim is resolved.

Turning to Slide 13, you can see our 2012 industry outlook for North America and EMEA. We have adjusted our outlook to reflect the softer first quarter volumes and our current view of the next 3 quarters. In North America, we now expect consumer replacement volumes to decline between 1% and 3% for the full year, slightly below our previous outlook of flat to down 2%. Consumer OE is now expected to increase between 2% and 7%. For North America commercial replacement, we now see volumes at plus or minus 2%, which is below our prior forecast of an increase of 2% to 6%. Our commercial OE outlook remains unchanged.

Turning to EMEA, we have reduced our consumer replacement volume outlook to 3% to 5% -- to down 3% to 5%. Our consumer OE and commercial replacement outlooks remains unchanged. We have improved our commercial OE outlook to down only 10% to 15% compared with the prior outlook of down 20% to 25%.

On Slide 14, we provide some modeling assumptions for 2012. As you can see on the slide, some of the assumptions remain unchanged while others have been slightly revised. We have lowered our overall volume outlook to down 2% from flat previously. This revision largely reflects the softness in the first quarter as we expect volumes would be essentially flat for the balance of the year. As a result of the lower volume outlook, we now expect to see no overhead absorption improvement during the year, given the production cuts that we've implemented. The net impact of unabsorbed overhead is likely to be about flat, with $80 million Union City savings being offset by the impact of production cuts. During the first quarter, the number of units cut from production was similar to the fourth quarter reductions and will impact our second quarter results similarly. Assuming spot prices remain at current levels, we anticipate our raw material cost will increase by approximately 9% for the full year, slightly higher than our prior outlook as we've seen some increases in oil-based materials in recent months. For the second quarter, raw material costs are expected to increase by approximately 12% or $250 million from the prior year. Based on our raw material outlook and previously announced pricing actions, we expect the impact of price mix, net of raw material cost over the remainder of the year, to reflect trends that we've seen over the last couple of quarters. Assuming current spot rates, we expect the unfavorable impact from foreign exchange to be approximately $40 million for the year, after essentially no impact in Q1.

Finally, our expectations for cost savings, general inflation and China facility start-up costs remain unchanged from our prior outlook.

Turning to Slide 15. Our other key assumptions for 2012 are also unchanged. I would note, however, that our pension portfolio returns through March 31 were 8.4%, compared with our annual return assumption of 8.5%. Stepping back and looking at the quarter, we delivered solid profitability in a tough environment. We feel that this performance shows increased consistency in our results and strong alignment with our strategy roadmap.

With that, we'll open the call up for questions.

Question-and-Answer Session

Operator

[Operator Instructions] Your first question comes from Itay Michaeli, Citigroup.

Itay Michaeli - Citigroup Inc, Research Division

Just 2 questions. One, Darren, can you just clarify what you just said about pricing and mix? I think may have missed it. I think previously, you were looking for price mix versus raw to be neutral in Q2. I was hoping you can update us a bit more on the comment on price mix.

Darren R. Wells

Yes. So Itay, what I said was that the -- our performance of price mix versus raw materials over the balance of the year ought to be similar to what we saw the last couple of quarters. So when you look at the back of the last couple of quarters, the takeaway is, it was, on average, $50 million or $60 million positive between the 2 of them.

Itay Michaeli - Citigroup Inc, Research Division

And then just a bigger picture question. You've expressed confidence this morning around the 2013 targets. Just maybe if you could talk a little bit more about what gives you that level of confidence. And maybe perhaps, list some of the headwinds that you faced in the last quarter or 2 that might be somewhat nonrecurring in nature, not saying that they'll definitely non-recur, but things that may be sort of non repeat going to 2013, Thailand for example, the farm tire business. Just if you could talk a little bit more about that, how that plays into perhaps your confidence around 2013?

Richard J. Kramer

Itay, no, it's a good question. And I think, the best way to start the answer to the question is just looking at the first quarter performance. With 8% volumes down, we had segment operating income $292 million and I think it's reflective of a lot of the benefit to the actions that we've taken in our business overtime around structural costs and capacity, as well as building in some of the benefits of the business model that we're building. And ultimately, that's what give us the confidence that we'll be able to hit the targets that we have. If we look at it, things like the Union City savings, we mentioned in the call, we're going to get that $80 million as we go ahead. We look at our business model around the combination of innovating, bringing new products to market, putting those products in the right targeted market segments again, being very choiceful about where we're going to play in our business to drive the price mix as we move ahead and then, driving continual operational efficiencies in our business to be able to make more of the right tires that we have and that we need to deliver to our customers, that's what's driving the price mix as we move ahead. And you see that probably best in our North American business, where we've had, what I would say, a very good quarter in terms of doubling our earnings there. In terms of headwinds, as you look at it, I think if we go back to what we said when we met in New York about a year ago, 2 of the key elements that we said we had -- we really were looking to help us get to that target was about a 3% of 5% volume growth. Last year, we were about flat. This year, we just say about minus 2%, you've heard us say. So that's a bit of a headwind. And also, we saw a benefit from pension coming in when we laid this out about a year ago. Clearly, now we have a little bit more headwinds from pension. But as we look at that, those are things that we're going to have to work through. And again, I would say Q1 is evidence that our business model now is one that allows us to have confidence that we could hit those targets. And frankly, our goal is certainly to deliver on those targets but build this business beyond that and drive ourselves to our destination of creating sustainable value for this business over time and being profitable throughout the cycles.

Operator

Your next question comes from Rod Lache of Deutsche Bank.

Patrick Nolan - Deutsche Bank AG, Research Division

It's actually Pat Nolan on for Rod. A couple of questions. First on the free cash flow, 1.1 burn in the quarter, I know that includes the pension contribution. How should we think about the working capital for the balance of the year and are there going to be other call backs on what's been used over the past, I guess, it's been a 1.25 years now?

Darren R. Wells

Yes. Pat, I think it is a good question. And I think, ultimately, we're going to come back to the fact that we see working capital as neither a source nor a use for us the full year. So in the first quarter, we saw a seasonal build similar to what we saw a year ago. In addition, we had the pension contributions that we made that were higher than last year. So what we've got there was largely what we would have expected to get. I will make a comment about inventory though, because if there's one area that we're focused on, it is inventory. We did see an uptick in the first quarter inventory. We saw an uptick in Q4 as well and both of those, given the soft volume environment declines in the -- and ultimately, declines in the industry unit demand. So we've taken actions in Q4 and Q1 to cut production. And so we're taking steps to proactively manage inventory, deal with our cost position. We'll take additional actions during the second quarter and the remainder of the year as we need to but we come back and say, given the first quarter volume was soft, and what we see for the balance of the year is essentially unchanged from what we have previously expected, volume-wise, we'll get some improvement in demand for the first quarter levels. And those, along with the production actions we've taken are going to get our inventories in line for year end and bring us back to working capital being neither a source nor a use for 2012.

Patrick Nolan - Deutsche Bank AG, Research Division

Just another couple of quick ones. Just on the Union City run rate, are we at the full $80 million annual run rate in the first quarter or does that improve going forward?

Richard J. Kramer

What we saw in the first quarter, we get the savings of essentially $20 million a quarter for the Union City closure. But we continue to have that offset by the inefficiencies that are created by moving those Union City products to other North American factories. So we get those transitory cost that we saw in Q4, we also see Q1. Q1 is the last quarter where we're going to see those. So in Q2, you still get the $20 million of savings but you're not going to have those offsets with the product transfer inefficiencies. So that said, that there is continuing improvement for North America in Q2 and the remainder of the year versus Q1.

Patrick Nolan - Deutsche Bank AG, Research Division

Just one last one. On the commercial vehicle business, is there a material difference as far as a percent of your volume that the commercial vehicle industry represents in Europe and North America. I know it's higher in Latin America but when you look at North America versus Europe, is one of those regions more significant?

Darren R. Wells

No, no. They're about the same.

Operator

Your next question comes from John Murphy, Bank of America Merrill Lynch.

Elizabeth Lane - BofA Merrill Lynch, Research Division

This is actually Elizabeth Lane on for John. You may just have answered this on Pat's question but I just wanted to confirm. So your reduced full year outlook for tire volumes, is that really just a result of the first quarter being weaker than expected or does it seem like Q2 and onward might be a little worse than previously expected as well?

Darren R. Wells

Now listen, I think, you understood it correctly.

Elizabeth Lane - BofA Merrill Lynch, Research Division

Okay, great. And you mentioned that you expect solid earnings growth in 2012 and beyond, should we be thinking about that as -- that earnings growth as net income basis or on an operating income basis? And besides the cost savings coming through better in the rest of the year, in such a sluggish volume environment, do you think -- what do you think are the biggest drivers of that solid earnings growth?

Darren R. Wells

Yes, so I think the -- as we look at -- I mean, first of all, the measurement that we use for our segment operating income that doesn't show our target when we make those comments generally, that's what's we're referencing. I think Itay asked a question about some of things that our headwinds force now that won't be there going forward. And I think we talked about, one, which is the transition cost around moving products from Union City to other factories in North America. Clearly, that's going to be an improvement. This is the -- first quarter was the last quarter where we'll take the impact of having sold the farm business in Latin America. So that's behind us now. The recovery and the full recovery in the Thailand factory, that's something that is going to be behind us. And those are of a one-time nature. If we look beyond that, we're looking to get volume growth back, so we're expecting and planning for volume growth in 2013, after having flat volumes last year and volumes slightly declining this year, particularly in the first quarter. I think balance of the year, we expect them to be essentially flat. In addition to that, we should see some continued improvement in unabsorbed overhead. We have expected some improve this year. What you'll see now is that we expect it to be essentially flat to last year but that still leaves us with a significant amount of factory utilization benefit that we can get going forward. And we take all that, you can also add to that the fact that our pension expense, given the contributions that we're making this year, our pension expense will be down next year in the range of $50 million. So we have a number of things there that are going to help us that are discrete in nature in addition to just expecting better industry environment. So, Rich?

Richard J. Kramer

I would add 2 things. I think Darren has given you a very good, almost a walk of how you could go through that. I'd emphasize one and add another and that's the benefits, just remind you, the benefit of volume. Darren mentioned unabsorbed overhead. Remember, we were flat last year. Year-over-year, down 2%. This year, as we look at it, the thing I'd remind everyone is ultimately the volume that we seek today will get better. Now the exact timing of that, obviously, is a little bit hard to predict. But as we look at where we were, say prerecession, there was sort of a sentiment that volume was going to go up and it wasn't going to decrease anymore. Now, we're in a situation where certainly volume is moderated because of the great recession. But I would tell you, we will get back to the higher levels than we are today. And that volume going through our plants given that the business model that we're structuring will be very valuable to us. And the second thing is as we look at our plans in 2012 and beyond, we're continually making a higher mix of products that's driving what we're selling in the marketplace, supporting the price/mix and supporting our ability to win in those targeted market segments. We've made more of those in 2012, we'll make more of them in 2013. And as we get the benefits of the capital investments we're making in all of our factories around the world, that's going to continue to improve as well.

Elizabeth Lane - BofA Merrill Lynch, Research Division

Okay, right. Yes, that makes sense for getting to your 2013, that's how I targeted. So I just wanted to confirm that you're expecting SOI high-growth in 2012 versus 2011.

Richard J. Kramer

Yes. We're not giving specific guidance on that. I think we're giving you an indication that what we see is some things that's clearly going to help us grow earnings going forward.

Operator

Your next question comes from Ravi Shanker, Morgan Stanley.

Ravi Shanker - Morgan Stanley, Research Division

The start-up costs in China and the Thailand impact and even the European plant impact, were not nearly as high in 1Q as you were expecting? Is there something lumpy going on there because even your guidance remains unchanged and it did much better than what's your guidance?

Richard J. Kramer

The question's about the Thailand -- the impact of the Thailand flood, we experienced volume losses and extra expenses related to the flood, both in Q4 and Q1. The difference is that in Q1, we recognized insurance proceeds. And effectively, what we got was -- and insurance proceeds are recognized as a claim gets processed. So it's a little bit lumpy. And what we saw is that on the fourth quarter, we got hit with over $20 million of impact from the Thailand flood. First quarter had significant impact as well, but we actually got enough insurance proceeds recognized in Q1, that we -- not only did we offset all of the Q1 impact, but we actually got a little bit of money back from what we lost in Q4. So what you see in -- and you see this in Asia Pacific most notably, is you see a slight positive impact of the Thailand flood in Q1 because we got the insurance.

Darren R. Wells

And Ravi, that's consistent with how we laid it out back to Q4 as well.

Ravi Shanker - Morgan Stanley, Research Division

Got it. And what about the China plant? I mean, is that fairly consistent for the year as well?

Richard J. Kramer

Yes, so the China start-up is really no change to our outlook there. Maybe a little bit of timing, we're a couple of million dollars lower run rate in Q1 but the outlook for the full year hasn't changed.

Ravi Shanker - Morgan Stanley, Research Division

Also your Latin America margin stepped up nicely sequentially versus the last 3 quarters. How are the -- how will you characterize the competitive and pricing environment there now?

Richard J. Kramer

Ravi, I would say it's really a continuation of what we saw sort of through the back half of last year. Latin America, for us has been and we believe will continue to be an excellent markets for us where our brand has tremendous value. What we're seeing there, and I've mentioned this in the past is that you see instability from time to time in Latin America, is sort of the one thing that you can count on and we're seeing a bit of that right now. But clearly, from a competitive standpoint, with the exchange rates in Brazil, certainly impacting domestic manufacturers in a variety of industries, certainly, we're in that group, where we see imports coming in at a lower cost given the exchange there. So that's been a headwind for us. But something that we're working our way through. And frankly, the way we're working our way through is really applying the same strategies that we have. We're investing in our Americana factory to make more of the HVA tires that helped distinguish our brand and our products from lower-end competitors. The same things go forward in places like Venezuela and now even a bit more in Argentina, where we see a lot of the political instability that I think all of you are certainly familiar with. So those present both opportunities and headwinds, and again, I think those are things that are temporal, we'll work our through them. We've worked through them in the past and I'm very confident we'll do it again. Our product lineup there is very good, our brand is excellent, our distribution is excellent, our commercial truck tires are probably better than they've ever been. So competitively, I think, we're very well-positioned and we're confident we'll work through the situation there.

Ravi Shanker - Morgan Stanley, Research Division

Great. And then just a follow-up on the previous question on the insurance proceeds. That is split out as a special item, right? So that's not actually in adjusted SOI?

Darren R. Wells

The benefit of that will be reflected in SOI in Asia Pacific, there is a small impact that's in corporate as well. But there is -- but most of that is reflected in Asia Pacific.

Operator

Your next question comes from the line of Saul Ludwig, Northcoast Research.

Saul Ludwig - Northcoast Research

A couple of quickies here. The interest expense that you look at for the rest of the year is a much lower rate than what you incurred in the first quarter. What is giving rise to this more favorable trend in interest expense?

Darren R. Wells

Yes. It's a good question because there is an adjustment that is -- it's a $13 million adjustment reflected in the interest expense line this quarter related to prior-period capitalized interest. So we've adjusted -- it was effectively was $2 million to $3 million a year over several years that we needed to put back into interest expense this year. So that's a one-time effect in the first quarter. Even with that, we have not changed our full year guidance. So you can see that as a one-time blip in the first quarter.

Saul Ludwig - Northcoast Research

So the $360 million, the $385 million excludes the $13 million?

Darren R. Wells

No, it includes the $13 million. So you can think, we got the $13 million which was essentially an unexpected increase. We actually -- we did the bond refinancing in the first quarter, the interest rate on that was actually a bit better than we expected. So the 2 are essentially netting against each other.

Ravi Shanker - Morgan Stanley, Research Division

Got you. So the run rate going forward is going to be $75 million, $80 million a quarter, it sounds like.

Richard J. Kramer

Yes, so if you think about the interest expense without that one-time adjustment, it was about $88 million for the quarter.

Saul Ludwig - Northcoast Research

Could you discuss the update on the whole issues in France, in Amiens and the Union and it's been lingering for a long, long time. I'm sure it's certainly frustrating to you guys. Any progress there? Any light at the end of the tunnel?

Darren R. Wells

Saul, I think Amiens is one that we've been working through what is a very difficult labor environment in France. I would tell you that we continue to move ahead and we have progress being made. But frankly, to put a time line on that is difficult at this point. We'll continue to explore all the different alternatives that we have. We have confidence that ultimately, we'll get to a conclusion there. But again, it's very difficult to put a time period on it at this point.

Saul Ludwig - Northcoast Research

And then my final question. In your 2013 goals, which was the $1.6 billion in segment operating income. Now you've highlighted, Rich, that a couple of items aren't moving as you expected, volume and pensions toward that. But when you put the $1.6 billion goal together, does that include other sort of specials, like continued start-up costs and truck tire manufacturing in China, maybe some repositioning of France, other issues that would be a negative, are they baked into the $1.6 billion SOI?

Richard J. Kramer

Yes, I mean. Saul, those 2 items in particular that you're mentioning are in our thinking and in our path to that $1.6 billion. So we can't speak to all the things that may have come along the way but certainly, those things we're aware of are baked into our thinking. And again, I've kind of gone through some of the ways we have confidence, we can get there. I think Darren articulated a few other things. So we're putting it all together and despite those headwinds, we're still on path to get to that number.

Operator

The final question comes from Anthony Deem, KeyBanc Capital Market.

Brett D. Hoselton - KeyBanc Capital Markets Inc., Research Division

This is actually Brett Hoselton. A couple of thoughts here. First of all, sequentially, it sounds to me -- I mean, you've given us an outlook for price mix, raws, volumes and so forth. It sounds like as you move into the second quarter, we're going to get an incremental benefit from Union City of about $20 million. It sounds like the Thailand situation is kind of maybe a push going into the second quarter. Are there any other significant variables, as we move from the first quarter to the second quarter, unusual items or anything like that, that affected maybe the first quarter or will affect the second quarter?

Darren R. Wells

Brett, I think you raised the Thailand question, we got the insurance proceeds in the first quarter. We actually don't expect to have those in the second quarter. So the impact from Thailand, you might actually see as bad news in Q2 versus Q1. That's our expectation. And then later in the year, as we settle the claim, we expect we may get to recognize more insurance proceeds. But that's kind of a lumpy process. So Q1 is probably better than Q2 for the Thailand effect. Other than that, and the fact that we get past the transitory cost for Union City, I don't think that there's a lot else that we would point to there. Obviously, we're expecting that volumes will be flat in Q2 after being relatively flat Q2 or through the rest of the year, I should say. Certainly, the year-over-year volume picture, we'd expect to be better than it was in Q1, but other than that, Rich...

Richard J. Kramer

I think it's fairly straightforward at this point.

Brett D. Hoselton - KeyBanc Capital Markets Inc., Research Division

And as we think about the third quarter, last year, you benefited from a very good winter tire season and obviously, benefiting your price mix. You've already given us some commentary on price mix for the remainder of the year, and I'm wondering, as we think about the third quarter, that seems like a really difficult comp but it sounds like you're suggesting that we can possibly see a $50 million to $60 million price mix over raws benefit as we move to the second, third and the fourth quarter. Am I hearing you correctly?

Darren R. Wells

Yes. So I think, we're not saying that it's going to happen the same way every quarter. We're just giving an indication I guess, of generally, how we see it. So we see the trends from the last couple of quarters being a good way to think about the remainder of the year. But it's not meant to be a particular point for each and every quarter.

Richard J. Kramer

Okay. Thanks, everyone. We appreciate you listening today and we'll speak with you next quarter. Thank you very much.

Darren R. Wells

Thanks.

Operator

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

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