Goodyear Tire & Rubber Co GT
Q1 2013 Earnings Call Transcript
Transcript Call Date 04/26/2013

Operator: Good morning my name is Tony, and I will be your conference operator today. At this time, I’d like to welcome everyone to The Goodyear Tire & Rubber Company First Quarter Earnings 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.

Thank you. I would now like to hand the program over to Greg Fritz, Goodyear's Vice President of Investor Relations.

Gregory A. Fritz - VP, IR: Thank you, Tony, 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.

On today's call Rich and Darren will provide perspective on our results and outlook for the remainder of the year. Before we get started, there are few items I need to cover. To begin the supporting slide presentation for today's call could be found on our website at investor.goodyear.com. 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 draw your attention to the Safe Harbor statement on Slide 2. Today's presentation includes some forward-looking statements about Goodyear's future performance. Actual results could differ materially from those suggested by our comments today.

The most significant factors that could affect future results are outlined in Goodyear's filings with the SEC and in an 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.

The financial results presented are on a GAAP basis, and in some cases, a non-GAAP basis. The non-GAAP financial measures discussed in the call are reconciled to the U.S. GAAP equivalent as part of the Appendix to the slide presentation. With that, I will now turn the call over to Rich.

Richard J. Kramer - Chairman, President and CEO: Great. Thanks, Greg, and good morning, everyone. This morning, I'd like to review a few of the highlights of our solid performance in the first quarter, touch on some of the actions we have taken to respond to continued challenges in Europe and provide an outlook for our business and the global tire industry for the remainder of the year.

I'm very pleased with our overall earnings results, our strong momentum in North America and the execution of our strategy roadmap, which, as you know, serves as our business playbook. Despite a tough industry environment, particularly in North America and Europe, we continued to achieve earnings improvement. Overall, our segment operating income for the first quarter was $302 million, up 3% from a year ago, and earnings were up in three of our four business units.

This performance reflects favorable product and brand mix, improved operational efficiency, a disciplined focus on targeted market segments and the benefits of our investments in both innovative products and in upgrading our manufacturing footprint to build those products.

North America earned a first quarter record of $127 million, a 59% improvement over last year's quarter. This exceptional performance was accomplished in a continuing weak volume environment in which unit sales decreased 6%. However, consistent with our key how to of targeting profitable market segments, we sold a richer mix of branded products, and we continued to manage our costs in line with the weak volume environment we are experiencing. Now in addition, the North America team's disciplined approach to working capital is helping us improve our cash generation. This marks the 15th straight quarter of year-over-year earnings improvement in North America.

Two years ago, returning North America to profitability was our top priority. We've accomplished this. Now with the business model changes we've made North America is not only solidly profitable in a weak industry, but is on a path to further grow earnings and capitalize on opportunities when industry volume growth returns.

Asia-Pacific delivered another strong quarter as well. Its segment operating income was $84 million, a first quarter record, is a 25% increase over last year's quarter. In China, we are seeing strong return on our investments and expanding our capacity as Goodyear's business continues to grow.

Product mix and consumer tires is on an upward trajectory and our commercial truck business is in the midst of launching seven new SKUs to meet the needs of our growing customer base. We see tremendous upside as we enter the truck market in China enabled by our new manufacturing plants in Pulandian.

Asia's results continue to be tempered by a sluggish economy and industry in Australia. While our business in Australia has traditionally been a big part of our Asia earnings, the extended industry weakness there has resulted in a significantly reduced contribution. Our team is starting to see the results of its plan to strengthen our competitive position and better serve our customers in this key market.

The third bright spot was our Latin America business; segment operating income increased to $60 million a 9% improvement despite a $16 million earnings decline in Venezuela, where political instability and currency devaluation continues to contribute to a volatile economic environment in that country. Despite the impact of Venezuela, the region was able to deliver increased earnings, thanks to improvement in price and mix in our targeted market segments, supported by improved product supply and customer service.

The investments in our Brazilian manufacturing operation will continue to enhance our supply to meet customer demands in this competitive region. With strong overall earnings in the quarter, continued execution of our strategy and positive momentum in North America, we remain confident in our plan to reach our segment operating income target of between $1.4 billion and 1.5 billion in 2013.

While our results overall were positive in the quarter, we faced two headwinds to our momentum. One is the continuing weakness in Europe, a historical source of stronger earnings for us. The second is our unfunded pension obligations, which as you know, have grown primarily because of the ongoing low interest rate policy in the United States.

Now in Europe, our first quarter performance looked a lot like the past couple of quarters as continued economic weakness affected the entire automotive sector, including tires. This condition is perhaps best exemplified by two trends we're seeing in Germany, which had been more resilient than the rest of Europe. The first is new car registrations, which were down 17% in the quarter and the second is replacement sales, which are now showing the same weakness as the rest of Europe.

As I mentioned on our fourth quarter call, we continue to believe that the effects of the European economic crisis will be felt for an extended period of time and that the impact of weak consumer demand and confidence will be particularly detrimental to the European auto industry, including its suppliers.

For the quarter, our sales, units and segment operating income, all decreased year-over-year as our consumer replacement volume was down 19% in Europe.

As you would expect the existing environment has led to cautious customer behavior with dealers facing a soft selling climate and constraints on bank credit. Now on top of that, cold weather in March delayed the start of summer tire sales.

Although this environment would pressure European results in any circumstance, there are areas where we have not delivered the way we should have for our customers. Our value proposition last year was not in line with the market and our service levels were below expectations. We've taken steps to address these issues and I’ve seen the initial benefits to these changes over the past two months. I'm both pleased and encouraged by our progress.

To return our EMEA business to its historical levels of performance, we know that we must go beyond near-term fixes. Last quarter, we announced a 3 point profit improvement plan to help us operate efficiently in a period of extended industry weakness.

First, we are working to increase the share – our share in targeted segments. For example, Goodyear and Dunlop tires are in 23 magazine test wins and the profitable high and ultrahigh performance categories. Based on these test results, our lineup of high-performance tires with BA ratings for fuel economy and wet grip is industry-leading and we're very proud of that. We’re using our success entire labeling as an opportunity to increase the value of our brands and to highlight the advantages of our innovative products.

Our product leadership is also confirmation of our commitment to innovation, even in a down market. Second, we are increasing our growth in emerging markets. In the first quarter, we saw significant success growing our commercial truck business in the region's emerging markets, taking advantage of white spaces where we can grow our business.

We increased both brand and share and unit sales, helping the EMEA truck business improve its contribution to earnings.

Third, we are activating our productivity and cost reduction initiatives. In addition to our announced plan to close our factory in Amiens, France, we are taking other actions to improve our factory utilization. They include reducing work days and increasing European production of high technology products, such as Run On Flat tires for other regions. We are also addressing our SAG cost structure in the region.

So in total, we are targeting $75 million to $100 million in productivity gains through this plan and we are confident that we will achieve them.

Now, looking ahead, we are realistic about the state of the European environment. As we take further actions to support our plan, we are looking for steady, sustainable progress that will lead to more consistent value creation, similar to the improvements we've driven in North America.

The second key challenge is our unfunded legacy pension obligations. This has driven unexpected volatility in our earnings and cash flow for many years, at times overshadowing significantly improved operating performance and disrupting cash flow projections.

We took our first steps in Q1 to eliminate this volatility by pre-funding our frozen U.S. pension plans with proceeds from $900 million debt offering. This will lessen the volatility on our balance sheet and to North America's earnings.

Darren will talk more about our specific actions in a few minutes, but as this risk is eliminated, the strong performance of our tire business will become even more visible.

Looking at the remainder of the year from an industry perspective, we anticipate that consumer demand will remain weak particularly in mature markets where signs of recovery are inconsistent. We are running our business in North America and Western Europe with the expectation that volumes will remain depressed in the near term.

That said, we still believe there is pent-up demand for tires particularly in the replacement segment and that a snapback in demand is not a question of if, but when. As I recently reminded a group of our dealers we were once too optimistic that prerecession volume increases would continue indefinitely.

Now just the same we cannot be too pessimistic and assume that today's weak industry will never recover. In fact, it will and we will be ready. Relative to raw materials the extended period of decreased global volumes has contributed to lower raw material costs, resulting in a higher level of price competition.

However as much as the peak in raw material prices we experienced in early 2011 was not reasonable. Neither are the low-levels that we’re seeing today. There is no question that with the continued growth in the global car park and increased miles driven across many markets raw material costs will increase over time.

We have to be prepared to operate in today's environment, but also be prepared to react as volumes and raw material costs recover. We also need to continue to implement the actions necessary to return our business in Europe to its historical levels of performance.

We must combine short-term remedies with fundamental changes in our business model to be more flexible, more productive, more efficient going forward all actions are consistent with plan laid out in our strategy roadmap.

Now in summary, I'm pleased with our performance in the first quarter, especially in light of persistent economic weakness and volume softness in multiple markets. Our strategic focus on improving productivity in our factories, driving supply chain improvement to better serve our customers and reduce working capital, produce innovative products and targeting profitable market segments with a stronger mix of products, is working.

We are delivering operationally. We're winning with great products and we're optimistic that when volumes start to grow again, our operating level will support improved earnings growth and cash generation. We continue to believe that the megatrends remain relevant, and we're confident that we will take advantage of the opportunities they present. We believe in our strategy, are confident in our ability to execute and plan to deliver on our goals. While I am pleased with our results in the quarter, I want to reiterate that all of our business decisions are aligned to driving shareholder value through consistent earnings and cash generation, not just in one quarter or one year, but over the long term.

Now I'd like to turn the call over to Darren.

Darren Wells - EVP and CFO: Thanks, Rich. As Rich indicated, our performance in Q1 reflected a continuation of many of the trends we've seen over the last several quarters. While these trends have included very soft volume and challenging performance in the EMEA, they've also included continued delivery by our Asia-Pacific team, stabilization of our business in Latin America and extremely positive performance in North America. So while there remain a number of challenges, all of which are addressable over time, we are continuing to deliver earnings, cost efficiency and cash flow improvement, generating strong returns on the capital we've invested, both in restructuring actions and in growth CapEx.

In addition to the actions that have delivered strong operating performance, we've also taken proactive steps to address the unfunded pension situation. There has been a significant drag on shareholder value. As we benefit from the reduction in pension risk from the actions we’ve taken and still potentially benefit from future increases in discount rates, there is opportunity for significant value creation.

Keep in mind, our operating leaders delivered Q1 results while reducing production and keeping our inventories in line with lower demand levels. While this results in higher unobserved overhead near-term, it positions us to better manage cash flow and to benefit from reduced unabsorbed overhead as volumes recover later this year and beyond. Overall, we feel well-positioned, both to manage weaker markets now and to grow earnings and cash flow going forward.

Turning to the income statement on Slide 9; our first quarter revenue decreased 12% to $4.9 billion. The decline was primarily related to an 8% reduction in unit volume and a 2% reduction due to foreign currency translation. The remainder of the decline is attributable to our chemical business as both volumes and commodity spot prices declined from the prior year.

Replacement unit volumes decreased 10% during the quarter while OE volumes declined 4%. EMEA volumes accounted for over 80% of the overall unit decline.

Revenue per tire declined just under 1% compared with prior year, excluding the impact of foreign exchange, reflecting the impact of substantially lower raw material costs on contractual pricing at OE and on pricing in replacement.

We generated gross margin of 18.8% in the quarter, up 210 basis points from the prior year.

Selling, administrative and general expense decreased $17 million to $645 million during the quarter, but increased as a percent of sales given lower volumes.

Excluding discrete items, our third quarter tax rate as a percent of foreign segment operating income was about 30%. For the full year, we continue to expect income tax expense as a percent of foreign segment operating income of between 25% and 30%. First quarter after-tax results were impacted by certain significant items. A summary of significant items can be found in the appendix of today's presentation.

Turning to the segment operating income step chart on Slide 10. You can see the progression of operating income compared with the prior year. We reported $230 million of reduced raw material cost during the quarter, which were offset partially by $71 million of lower price/mix. I would note that mix remain favorable for us in the quarter.

Lower volume reduced operating income by $60 million, while production cuts resulted in $78 million of additional unabsorbed overhead during the quarter. Cost savings of $99 million more than offset general inflation of $64 million. We continue to realize significant cost savings from our material cost reduction programs during the quarter.

In addition, consistent with our prior guidance, we did see a $25 million reduction in the other tire-related income, largely due to impact of lower butadiene prices on our third-party chemical business.

Turning to the balance sheet on Slide 11. Our net debt totaled $4.2 billion. Compared with a year ago, our net debt increased $647 million as a result of our pension funding strategy. Note this increase in net debt is largely offset by a decrease in our unfunded pension obligation. Our global unfunded pension obligations stood at $2.5 billion at quarter end compared to $3.5 billion at December 31, 2012, as we successfully executed the pre-funding and de-risking of our frozen plants.

Our inventory remain in good shape at quarter end. Our inventory balance stood at $3.2 billion at quarter end, down 20% from the prior year and 3% below year-end.

As indicated previously, we've aggressively managed our production schedule to balance our supply of tires with a challenging demand environment.

Slide 12 shows free cash flow from operations. As a reminder free cash flow from operations is cash generated after both maintenance and growth CapEx, however, it is calculated before any debt repayments or incremental borrowing, before contributions toward our unfunded pension obligations and before cash restructuring actions.

During the quarter, we used $276 million of free cash flow from operations, improving over $600 million versus the prior year. We typically see seasonal working capital built during the first quarter.

Over the last 12 months, our free cash flow from operations was $1.3 billion after $1.1 billion of CapEx, we used $1.5 billion to fund our pension plans during the same time.

Moving to individual business units, I'll start with North America. North American Tire reported segment operating income of $127 million in the first quarter and operating income margin of almost 6%. North American unit volumes were down 6% driven by lower volume and consumer replacement, commercial replacement and commercial OE, reflecting generally weak industry demand.

The consumer and commercial replacement industries were each down 5% and commercial OE industry was down 11%. In the first quarter, North American Tire realized a raw material cost benefit of $163 million. Our price/mix was lower by $47 million partially attributable to our raw material cost pass-through arrangement with our OE fleet and OTR customers.

Lower butadiene prices in our chemical business negatively impacted third-party sales and reduced income by $16 million during the quarter. North American Tire's first quarter manufacturing costs reflected higher unabsorbed overhead of approximately $45 million as we have lowered our production levels in response to the softer industry environment. North America's first quarter performance is evidence that our strategy is working in what remains a challenging industry environment and continues to make growth in North America an attractive investment going forward.

EMEA Q1 performance reflected mainly lower volume and the impact of high manufacturing cost structure in a weak economic environment. Our weak sales volume relates to declining industry volumes as well as the service and value proposition issues Rich discussed. The unusually cold and snowy weather conditions we had late in the quarter delayed the changeover period from winter to summer tires in seasonal markets. These volumes have improved in April.

We continue to adjust our production levels to match our sales volumes, impacting overhead absorption but ensuring we protect cash flow and setting up a substantial recovery in earnings as volumes improve. Even given these issues, we delivered solid revenue per tire and positive price mix versus raw material cost during the quarter.

We also continue our focus on cost. We are moving forward with the information and consultation process to close the Amiens North factory. Our SAG structure is being addressed and we'll continue to focus on adjusting our cost structure to the size of our business.

Our investments in industry-leading products and technology, our actions to improve our service levels and our supply chain as well as our actions on cost will help us bring back our EMEA business to its historical level of profitability as industry volumes recover.

Total unit volumes in Latin America increased 5%. Excluding the impact of exiting bias truck business in certain markets, total unit volumes increased 10%. The volume growth was driven from our replacement business. The strength in our replacement units was partially offset by a 5% decline in OE. Despite the strong replacement volume, total Latin American net sales in the first quarter were $513 million, decreasing 2% versus the prior year. Unfavorable foreign currency translation and the sale of the bias truck tire business more than accounted for the decline. These reductions were partially offset by improved volume and price/mix.

Operating income was $60 million during the quarter, $5 million above the prior year level. The improvement was mainly driven by favorable volume of $6 million and price/mix of $45 million, which was offset partially by cost inflation and unfavorable foreign currency translation.

Unit volumes in Asia Pacific were 5% higher than a year ago, given growth in China and recovery from the late 2011 flood in Thailand. Our Asia Pacific business reported strong segment operating income of $84 million for the quarter. Excluding the Thailand flood impact, our earnings were up $13 million versus prior year, reflecting the impact of volume growth and favorable raw material costs.

Overall, we continue to be pleased with our performance and seek further opportunities in Asia as we continue to grow in China and execute actions to improve our Australia and New Zealand business.

Turning to Slide 14; you can see our 2013 industry outlook for North American and EMEA. Our outlook for the industry generally falls within the previously provided range. However, in North America and EMEA, our consumer replacement volume outlook is now expected to be approximately flat with 2012 levels versus our prior expectations of flat to up 2%. This change largely reflects the softer year-to-date industry volume.

On Slide 15, we have updated our full year modeling assumptions for 2013 and added an outlook for the second quarter. For the full year, we are now projecting our unit volumes to be about flat with the prior year compared to our previous expectation of low single-digit growth. We've also adjusted our overhead absorption outlook to be approximately $25 million to $50 million unfavorable for the year to reflect this lower volume. The changes largely reflect the reduction in our consumer replacement demand outlook in both North America and EMEA.

Cost savings were very strong in the first quarter, with significant savings net of inflation. While we will maintain our focus on cost, the savings we achieved in raw materials began to increase in the second quarter a year ago, so the comps get tougher the rest of the year. Remember, cost savings was lowest in Q1 2012, growing each quarter thereafter.

Given this, we see cost savings net of inflation as less of a benefit in Q2 and roughly in line with inflation for the balance of the year. Also in Q2 2012, there was a favorable impact to inter-SBU profit elimination outside segment operating income that will result in an unfavorable year-over-year variance of $20 million in the second quarter.

Turning to Slide 16, you see other key assumptions for 2013. We have refined our assumptions for several items, but they largely fall within the outlook range we provided you in February. There are two exceptions I would highlight; the first relates to our interest expense range of $405 million to $430 million, which reflects the higher interest expense from our February notes offering. The second is our projected cash pension contributions, which now reflect the Q1 funding of our frozen plans.

Before we go to Q&A, I would again highlight, we remain on track to achieve our 2013 targets despite a very challenging macroeconomic environment. This speaks to the progress we've made toward generating economic value throughout the business cycle. In addition, as volumes do return, we have the capacity to continue to grow our earnings beyond 2013.

With that, we’ll open the call up to questions.

Transcript Call Date 04/26/2013

Operator: Rod Lache, Deutsche Bank.

Rod Lache - Deutsche Bank: Couple of things. First, how should we be thinking about raw materials going forward of spot prices were to stay at these levels? Last quarter I think you had said that it would be about an $800 million tailwind and obviously, raws have fall since then. Related to that how should we be thinking about pricing in the context of that large decline? What’s the magnitude of what you're contractually obligated to pass along? Could you provide any kind of color on the relationship between the two?

Darren Wells - EVP and CFO: So, Rod, I think the outlook right now is very similar to the way that we had commented on it six or eight weeks ago in the February call. So if today's prices raw material to be down about 10% for this year. Yeah, the dollar impact is similar to what you’ve mentioned. Yeah, the outlook we provided balances price, mix and volume. So we chosen to give it to you that way on Slide 15 and I think that’s our expectation and that takes into account the impact of the raw material index contracts that we have with fleets, with OEs and with some of our OTR customers. So I think that’s the way we’ve done it. So we’ve collected it and provided it to you both in the second quarter and the full year.

Rod Lache - Deutsche Bank: I have to go back and check out your comments on the second quarter.

Darren Wells - EVP and CFO: So that’s – on the second quarter we've got price/mix versus raws expected at a positive $50 million to $75 million.

Rod Lache - Deutsche Bank: Can you give us some color on the outlook for the other tire related business?

Darren Wells - EVP and CFO: We took a hit in the other tire-related business in the first quarter. we've got – we're still expecting that other tire-related business for the year would be a benefit anywhere from $0 million to $25 million. It's a bit better than the neutral outlook that we had had previously, and that's despite the negative that we saw in the first quarter.

Rod Lache - Deutsche Bank: Last question. Last quarter, you had a couple of questions about the market share performance for you guys relative – I mean your performance relative to the market, both Europe and North America, and it sounded like at the time you were thinking that over the course of this year, that’s going to start to normalize and that we would see Goodyear performance much more in line with the industry. Any commentary on when we should start to see evidence of that starting to occur?

Richard J. Kramer - Chairman, President and CEO: Rod, I would tell you, as we think about that question, obviously we're paying attention to it. But we still have to go back – anchor the comments back to the fact that we're not going to pursue a strategy of simply volume for volume's sake and frankly, we're still pleased with pursuing a disciplined strategy around volume and around balancing off price/mix and raw materials against that as well. That's different than what we've done as a company in the past. In terms of how we look at things, I will say, I think Darren and I both mentioned this in our earlier remarks, in the second half of last year, we had a value proposition that frankly wasn't as fully competitive in the marketplace as we wanted it to be and I think our volume showed it. We're addressing that through targeted actions, obviously that we look at things like price, but our value proposition goes well beyond that to our brand, to our innovation, to our technology, to our service levels and those are the things that I think we look at over the long-term to continue to keep the business on the path that’s in line with our strategy and our destination.

Rod Lache - Deutsche Bank: That’s a commentary regarding Europe, say the value proposition comment.

Richard J. Kramer - Chairman, President and CEO: I think Rod, I think it's really meant to be an overall comment not just in Europe, but certainly it has applicability in Europe as well and in terms of our philosophy overall driving to our strategy roadmap and our destination, obviously, that’s for the total company.

Operator: Itay Michaeli, Citi.

Itay Michaeli - Citi: Just a question on the Q2 volume outlook flat year-over-year and I think it would imply a far better sequential volume trend than you had the last couple of years, can you talk a little bit about that outlook for the second quarter. Are you seeing positive signs here early in the quarter that gives you confidence that you could run flat year-over-year?

Richard J. Kramer - Chairman, President and CEO: I think Itay, you have to look market-by-market as we look around the world our North America business. Certainly, we haven’t seen the industry sort of snap back the way we believe the pent-up demand will ultimately take us there. So really, I wouldn't say there is a trend line changed to how we’re looking at things and Europe remains difficult. We particularly called out the numbers in Germany to what we’re seeing there is sort of a bit of change there and seeing the rest of the weakness in Europe sort of permeate into Germany at this the point. Our view is, we’re going to continue to plan for tough environment and be ready for the upside that maybe there.

Darren Wells - EVP and CFO: The only point I would add to that and this is specific to Europe, (Itay) and that is that while we had some weather-related delays and people switching back to their summer tires in Europe, we have seen a lot more traffic in April. So market environment looks a lot better in April. So I think that bodes well, at least early in the second quarter for the European summer tire business.

Itay Michaeli - Citi: Then on the price/mix, you did mention the mix was positive. Can you help us out, from remind us how the OEM pass-through contracts work, what the lag tends to be and is most of the negative price in the quarter tied to those OEM contracts or is there some in the replacement the business as well?

Darren Wells - EVP and CFO: So we take the, there are different lags for different customers. So there's no universal answer to how a raw material index contract works, but increasingly we've moved the contracts with more frequent adjustments and even quarterly adjustments. So there may be a slight delay but it's not that much. So as we see raw material prices come down, there is recovery from the OE's perspective and the cost of the tires. So there clearly is an impact there. We have some similar arrangements with commercial truck fleet customers and with some OTR customers, where it helps us. When raw material prices rise, obviously it is something that provides an adjustment for them on the way down, I think either way we're looking to balance the price/mix versus raw material equation. So we feel like that's something that works pretty well for us. We are quantifying, specifically how much of the impact relates to those contracts, but it is embedded in the price mix versus raws guidance that we have given.

Itay Michaeli - Citi: Lastly, on the $75 million to $100 million of productivity savings in Europe over the next three years, have all those or the majority have been identified already? How should we think about modeling those? Are they pretty much even divided by three in the next three years as they are sort of awaiting towards the backend or earlier part of the period?

Darren Wells - EVP and CFO: So I guess Itay, I mean it's going to come from a combination of actions. I think you’re right not to think of it whole is coming right away. It's something that we expect to identify over time. It's going to come to some degree through getting better efficiency in our factories. So eliminating some of the unnecessary losses or inefficiencies that we’ve got. That’s something that we will work on and can work on every year. We've got some programs that we've started there this year that should start to provide some benefits as early as next year, but that we'll build over time. We've set back all this consolidation is another area. That tends to be the kind of project that takes a bit of time. So that certainly will take some time to implement. Then the work that we do to increase our share and targeted segments and to increase growth in our business, in our distribution and emerging markets that will add some volume back to our factories and increase the utilization. That’s something else you can think of is happening over time.

Operator: Aditya Oberoi, Goldman Sachs.

Aditya Oberoi - Goldman Sachs: I had a question on the China start-up cost, which you say that will be a $20 million to $30 million tailwind. Now, is Pulandian kind of ramping up faster than what you initially thought or is it kind of going in line with what you were thinking at the beginning of the year?

Darren Wells - EVP and CFO: I think in case of broad matter, we’ve been very happy with the ramp up process in our factory in China, and both last year and this year have gotten some favorable news versus expectations on the cost of that ramp up. So, I think you can read this as we're feeling good about the ramp up process. We've been able to reduce the cost of that ramp up. Right now we are -- this year we will be up and essentially running at full capacity in the consumer business. Commercial truck business will still be ramping up, but a lot of the biggest startup costs should be behind us by the end of this year, and should be some upside for us beyond 2013.

Aditya Oberoi - Goldman Sachs: Another question on Europe, can you just talk a little bit about the overall pricing environment? Some of your competitors have become extra cautious on how much pricing is deteriorating in that region. Within that context, what would be the plans for Goodyear, whether you guys will participate to hold the line on market share or whether you're focused on keeping yourself more profitable rather than getting into those kinds of price competitions?

Richard J. Kramer - Chairman, President and CEO: I think it's an encompassing question, but as we take a step back, I think I'll go back to what I said a moment ago. We had some value propositions that weren't as fully competitive as we liked last year, and we're focused as always on having that right value proposition for our products to be competitive in the marketplace. That's first and foremost. It has to be what we do to sell our product in what is a competitive industry, notwithstanding the even more difficult environment that we're seeing in the European markets right now. As we look at that, we've taken targeted actions already around the -- again around the value proposition we have in the marketplace and I think in Europe, one of the bright spots that we have as we think about the product offering that we have around price, around service, around technology, around innovation, we have now the by far best label products going into the summer selling season this year. So as we think about that, again, it reinforces our view that our products have to sell on value into the marketplace and give our customers and our consumers’ reason to carry them. Over the long-term, as we look at this we're pursuing a very disciplined strategy and we'll continue to manage the trade-off between price/mix and raw material and do that in the context of the segment operating income targets that we're targeting.

Operator: John Healy, Northcoast Research.

John Healy - North Coast Research: I want to ask about this – the sales versus sellout to customers. I was hoping you could give us some color about how dealers and distributors are feeling and what really they need to see from the consumer before they feel safer restocking and I was hoping you could also maybe provide maybe behind the scene thought process regarding, is there anything in the dealers business model or the distributors business model that's maybe changed whether it's in other way to finance their business or shipping and things like that? Anything operationally that's may be changed the way they operate the business today that's maybe cause for these inventory levels to maybe more structurally leaner over the long run?

Richard J. Kramer - Chairman, President and CEO: I think maybe start with the second half -- second part of the question first. I think fundamentally what has changed is the continued complexity in number of SKUs at the SKU proliferation that's happening for vehicles out in the marketplace and consequently tires out in the marketplace. So if you're dealer your inventory management is obviously a lot different today than it would have been put a time on it 10 years ago, 20 years ago whatever you'd want to put to it. So as they think about their businesses, as they're looking and getting smarter at inventory management, which means for us distribution and supply chain and what we call operational excellence, is really a benefit that we can deliver to the marketplace. It's why we talk about the whole value proposition that we can bring to the dealers. In short, the service and getting the right tire at the right time to the right place is much more important for our customers today than it was in the past, and that's exactly how we're building our business model. You can track that back to the strategy roadmap that we have. John, in terms of, you know what else is happening in the industry, I guess the way we still think about it is that globally, well, particularly in mature markets in North America and Europe, we have weak industry out there and particularly we'll highlight North America, the dealer inventory, frankly, the channel inventories are in really good shape. So we've managed our inventory and our factories very well in this week economy and that's a big positive for us as we think about how we have to navigate through it today and more importantly gives us a lot of optimism when volumes come back as to what that means for the leverage in our North American business. If you are a dealer and again, I think everyone is a little bit different, I think they see the same economic signals than anyone else does and they are not in the mode of restocking at the moment right now and we understand that which is again why we will continue to pursue a disciplined strategy, not pursue volume for volume sake and operate our business today in this environment, but really understand that that pent-up demand is going to come back and that's what we are going to manage our business for.

John Healy - North Coast Research: I wanted to ask maybe along the same lines another question on share. I think you've been incredibly true to your strategy to get value for the Goodyear brand and the Goodyear technology. But, unfortunately, the investment community always focuses on a reported metrics versus an industry metric. I'm sure there's further data that you see. As you look at the segments of the tire market that you really want to compete in and whether it's the higher fitments or more performance side of things. Do you feel like you are maintaining share in those key segments or do you feel you are growing with the market or maybe even gaining share.

Richard J. Kramer - Chairman, President and CEO: I would tell you, the answer to that question is looking at our targeted market segments all around the world. In other words think about how we’re competing in China, think about how we’re competing in Latin America in certain segments in North America. And I would say is a broad statement. We’re very pleased in the progress that we’re making in our targeted market segments. And that’s not just with how we’re dealing in the marketplace on sellout to customers, but also how that plays back to what we’re doing in our factories and leveraging the investments that we’re made as part of our capital investment strategy. As we look at that over the course of starting the strategy, I would tell you, we’ve definitely improved our share in those targeted market segments over the inception, looking at it from on quarter-to-quarter basis, there is a lot of different targeted market segment region-by-region, channel-by-channel. So, it’s very difficult to answer that question with the specific, but I would say absolutely overall, we’re very pleased with how the strategy is working relative to those segments where we think we can bring value not only to Goodyear, but to our customers and to consumers.

Operator: John Murphy, Bank of America Merrill Lynch.

John Murphy - Bank of America Merrill Lynch: Just wanted to follow-up on the questions on price mix. You guys have commented that, mix was positive in the quarter. OE pricing was negative because of the raw mat pass through. I'm just curious, if you can answer sort of in the last bucket in the aftermarket how pricing is going for you, but also more broadly for the industry, because it does sound like there is some signs of weakening in the price environment given sort of this continued unexplained weakness in the replacement market, I’m just trying to understand what you guys are doing in pricing in the aftermarket and what you're seeing more broadly for the industry.

Richard J. Kramer - Chairman, President and CEO: John, I think the comments that I've made earlier, I'm not sure I want to reiterate them again about how we are looking at the value proposition that we are putting out and taking targeted actions around a variety of things to deal with the environment we are in. What I would point to though is, if you look back at our strategy, we have a track record of successfully balancing off price/mix versus raw materials. In this environment where we're seeing a lot of the items that you just spoke of, that's exactly the same philosophy that we are putting to and I am confident we are going to be able to work our way through it just as we have in the past.

John Murphy - Bank of America Merrill Lynch: Then the second question is on the pension contributions. The slightly more than $900 million that you've made year-to-date is kind of what you have talked about. Darren, are you planning on doing more contributions than that or is that kind of it for the year at this point?

Darren Wells - EVP and CFO: Yeah, John, the strategy we discussed in February was to pre-fund and derisk plans once they've been frozen. The transaction that we completed in Q1 fully funded the plans that we had previously frozen. So our next steps are to focus on creating freezing remaining plans and shifting remaining associates to 401(k)s and until that occurs, we are not in a position to consider further funding actions.

John Murphy - Bank of America Merrill Lynch: So the ($454 million) that you did last year is not something that repeated, this $900 million takes the place of that and if we get these incremental agreements then there might be more to come?

Darren Wells - EVP and CFO: That’s the way to understand it.

Operator: Ravi Shanker, Morgan Stanley.

Ravi Shanker - Morgan Stanley: You guys put up a very strong cost savings number in the quarter. Was that consistent with your expectations? Is there something we need to keep in mind in terms of timing of – on a quarter-to-quarter basis do you think it is going to be fairly steady going forward?

Darren Wells - EVP and CFO: I mean our goal is to offset inflation over time and we did have a strong first quarter, but it was against what I would say it is a fairly easy comp a year ago. So our cost-saving actions last year increasingly focused on our ability to reduce the cost of materials that were going into the tire either through substitution or through weight reduction. The success that we had with regards to those material savings ramped up during 2012. So the comps get tougher for the rest of the year, which is why we’ve said the net benefit we get, cost-saving versus inflation is going to be less in Q2 than it was in Q1. The second half of the year we're looking for cost savings to offset inflation.

Ravi Shanker - Morgan Stanley: But still the relationships will still be positive throughout or neutral, it won't be negative?

Darren Wells - EVP and CFO: I was going to say that, we said, yeah positive in Q2 and neutral in the back half of the year, but they are continuing – for the year certainly looking forward to be positive.

Ravi Shanker - Morgan Stanley: Then I mean restructuring in Europe is obviously not easy, so when you look at that $70 million to $100 million you highlighted some of the areas where that's coming from in response to previous question, but do you think that's like low-hanging enough that it's not subject to execution risk and that's pretty much kind of in the bags for the next three years?

Darren Wells - EVP and CFO: So Ravi, I think that we’re very confident that with the plans that we are putting in place that we can achieve that incremental productivity improvement of $75 million to $100 million over three years. You can tell from my comments earlier. I do think it’s going to take that time. It’s not something that can be achieved over night. The three-year timeframe is what we felt like is practical to achieve that. But remember that $75 million to $100 million of productivity is in addition to the $75 million of savings that we would achieve once the factory in Amiens, France, closes.

Ravi Shanker - Morgan Stanley: Got it. Just finally, the chemical headwind that you expect to recover going forward, is that just a timing thing based on contracts, or what gives you confidence you can get that back?

Darren Wells - EVP and CFO: That's the right way to think about it. It is timing thing with contracts and how the movement this year compares to last year.

Operator: Brett Hoselton, KeyBanc.

Brett Hoselton - KeyBanc: First, starting on price/mix versus raws, it looks like going through the third or through the second quarter, you're kind of looking for a positive of $200 million to $234 million, kind of in that range. I guess what I'm wondering is, can you may be put a little bit more definition around the word 'positive' for price/mix versus raws for the full year? What's the back half look like?

Darren Wells - EVP and CFO: Brett, I think that we've probably gone as far as we're going to go in commenting on price/mix versus raws. So obviously, there are different variables that go into what an expectation is, including what happens to raw materials and we're expecting that volume environment is going to get better in the second half. When volumes get better, that tends to bring back raw material prices. So, I think we've got to stay flexible and be able to deal with whatever environment comes, but I think generally, the expectation is that over time, raw materials are going to start to come back.

Brett Hoselton - KeyBanc: As I think about your operating income guidance, so you obviously have some puts and takes here, a little bit weaker volume, but obviously some -- a little benefit here in terms of other in China and so forth. Some of your competitors have relative to earlier expectations, some of your competitors are thinking that the price/mix versus raw spread has deteriorated versus their prior outlook, let's say a few months ago as a result of particularly weak pricing environment, particularly in Europe and I guess my question is – is your price/mix versus raws expectations have they – are they still the same, or have they deteriorated, or have they improved for some reason?

Darren Wells - EVP and CFO: Yeah. So Brett I think generally you'd be able to tell from the fact that our segment operating income expectations for the year have not changed and we're doing it in a lower volume environment. Our expectations on what we're able to do managing price/mix versus raw materials (can) changed a whole lot.

Richard J. Kramer - Chairman, President and CEO: Okay. Everybody thanks for your attention today. We appreciate it. We're off to a good start in 2013 and we look forward to speaking with you next quarter.

Operator: Thank you. This does conclude today's conference. You may disconnect at any time and have a great day.