Good morning. My name is Tony, and I'll be your conference operator today. At this time, I'd like to welcome everyone to the Goodyear Tire & Rubber Company Second Quarter Earnings Conference Call. [Operator Instructions] I would now like to hand the program over the Damon Audia.

Thank you, Tony, and good morning, everyone. Welcome to Goodyear's second 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 can 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 could 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 our 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 are presented on a GAAP basis and in some cases, on non-GAAP basis. The non-GAAP financial measures discussed on the call are reconciled to U.S. GAAP equivalent as part of the appendix to the slide presentation. With that, I will now turn the call over to Rich.

Thank you, Damon, and good morning, everyone. Thanks for joining us today. This morning, I want to start our call with a comment on our team's outstanding performance over the past 3 months. This performance resulted in the highest second quarter segment operating income in Goodyear's 115-year history. Record second quarter segment operating income in both North America and Asia Pacific, and year-over-year volume growth, which gives us confidence as we go into the second half of the year. In what remains a tough global economy, our team delivered in the quarter. As I review the performance of each of our businesses this morning, you will see evidence of the disciplined execution of our strategy roadmap. We're delivering market-rack innovation and award-winning products, meeting customer needs and differentiating ourselves from the competition. We're winning in profitable market segments, focusing on the areas that have the potential to deliver the best returns and profitable growth for Goodyear and for our customers. We're making progress toward our goal of being the best supplier in the industry. We're delivering more value for our customers by driving more efficient and productive operations through our operational excellence initiatives. We're executing on our significant capital investments, driving higher profitability and delivering the returns we targeted. And most importantly, we're executing our plans with strong commitment and alignment by our team. As pleased as I am with the quarter, you've heard me say many times that we're not running our business for 1 good quarter. Our long-term objective is to achieve sustainable consistent earnings and cash generation, while providing the most innovative products to our customers with increasing efficiency and reliability. Our results are clear validation that our strategy is working. We're making the right decisions in building our businesses and we're seeing consistent, repeatable improvements in…

Thanks, Rich. As Rich discussed, our strong second quarter performance is a reflection of successful execution, despite continued soft volumes in many of our key markets. This execution is particularly notable in 3 areas. First, in the continued management of price/mix versus raw materials. We continue to succeed in winning business in more Premium segments of the market, driving favorable mix and gaining share in many of these segments. Second, in working capital management. Our team has consistently driven down our working capital percent of sales, while maintaining and improving our service levels, and supporting growth in our customers businesses. Finally, we've executed in cost efficiency. This performance ranges from improving our start-up costs in our new China factory, to driving down our SAG spend, to reflect the market conditions in EMEA, to ensuring we control factory costs in North America as we build a richer and richer mix of tires. Overall, we're very pleased with our Q2 results and we're confident that our teams continued execution will position us to grow earnings and cash flows as the soft markets begin to recover. Turning to the income statement on Slide 8. Our second quarter revenue decreased 5% to just under $5 billion. Although volumes improved, revenue per tire declined 2% compared with the prior year, excluding the impact of foreign exchange. This reflects the impact of substantially lower raw material cost on contractual pricings and OE, and on pricing a replacement. The remainder is explained by year-over-year declines in our third-party chemical sales and a 1% reduction due to currency translations. We generated gross margin of 21.4% in the quarter, up 180 basis points from the prior year. Selling, administrative and general expense decreased $6 million to $691 million during the quarter. Excluding discrete items, our second quarter tax rate…

[Operator Instructions] We'll first move to Rod Lache with Deutsche Bank.

It's actually Pat Nolan on for Rod. A couple of questions. You've previously talked about that your goal was to freeze and then fund the remaining defined benefit pension you have in the U.S. Assuming you're successful in doing that, could you just discuss the sources of funds you'd consider using to fund the pension?

Yes. So Pat, the pension strategy that we announced in February was a combination of prefunding and derisking plans once they're frozen. And obviously, we completed a transaction in Q1 that fully funded the U.S. plans that we'd previously frozen, and that was done with debt financing. So yes, I guess that demonstrate that debt financing is certainly an alternative. I mean the benefits of this strategy reduces the overall volatility of our pension plans, which have been a long-term drag on shareholder value, allows us to improve our cash flow and make it more predictable going forward, which opens up some increased flexibility for us. And ultimately, allow shareholders to benefit from the improving results in the underlying tire business. The step we've got next is to freeze the remaining plans. And I can't comment a whole lot about that further at this stage. But until that occurs, we're not in a position to consider further funding actions. You saw that we also had an increase in interest rates through the first half, that relative to the numbers on Slide 11, would reduce the unfunded amount by another $400 million. So if we take the position that we're in and consider that it's something that could occur over time, I think the sources could be a combination of things. And certainly, we're continuing to drive in areas like working capital to focus on generating cash in the business itself. So I think the timing of those actions is going to determine how much of it would be able to be from free cash flow from operations that we're generating internally versus other sources we might consider like the debt raise we did in Q1.

That's helpful. Can you also touch on your CapEx going forward? The guidance came down slightly for this year, but does CapEx trend down over the next several years as we get through the Chinese expansion and capacity?

Yes. So Pat, we spent about $500 million through the first half, and that's essentially in line with the signal that we've given for the year of $1.1 billion. We'll continuously evaluate capital expenditure levels, thinking about industry outlook, thinking about technology requirements to keep our product line as innovative and strong as it is today, and then thinking through our capital allocation priorities. But you're right in pointing out that we have major projects in Chile and China that are going to be effectively completed this year. We haven't announced any other new projects of this size and scale, although we are focused on things like expanding and modernizing our facility in Americana, Brazil. But we continue to go through our planning process. Once we've gone through that process, we'll provide you some more information on future plans as we typically do.

If I could just sneak in one more. Your North American replacement volume down 5%, that appears to be a little bit below what the industry did in the quarter. Can you just discuss how you think you performed relative to the industry? Was there a mix factor, maybe the high end underperformed the overall market or was there a CV mix that impacted that?

No, Pat. I would tell you that we're pretty pleased with North America results overall, it's probably the best way to answer that question. In terms of replacement volumes, obviously, we saw, certainly, an improvement from where -- from an industry perspective, where Q1 was to Q2. So we're seeing some stabilization as we go forward. I would continue to tell you that we really have a very disciplined approach to managing volume, price and mix, certainly versus raw material as well. And our North American business, in its totality, I think is a very good example of that as we look forward. Also thinking our North America business, remember on the replacement side, there's a lot of different channels in the business that we sell to. And obviously, we don't go through those in particular, on the call. But when I look at it, broken down by the channels, we're certainly making progress in the places that we want to. So I'm very pleased with that. And really, as we look on to the second half of the year, we see an industry outlook that's better. I referenced a number of new products on the call, we're seeing a very good take-up of those products already in July. And also, we had some destocking in some of those channels in the past, which we don't really expect to see again. So overall, I think we're in a pretty good position.

Next, we'll move to Itay Michaeli with Citi Group.

Just wanted to chat on raw materials here initially. I think, last quarter, the view was that as volume starts recovering in the second half of '13, that raw materials cost will probably start to go up. I think we've actually seen volume stabilize, but raw materials continue to go down. Can you talk about your latest outlook there, in terms of how much the recent move in raw materials may be impacting your financial results this year? Maybe how much it may impact it next year? Just your overall view as well, in terms of the price dynamics in response to the recent tailwind in raw materials?

Yes. Itay, you have a good memory. And I'm glad because that is our long-term view. I think, Darren, you can break it down a little bit more granular for him.

Yes. I think we continue to see low raw materials prices today, reflecting both the macroeconomic weakness and continued weakness in tire industry volumes. Our long-term expectation is what it is, and that is as volumes recover, we'll see an upward trend in raw materials. In Q2, raw material costs were down $177 million or about 9%. And we continue to expect for the full year, that raws will be down about 10% for us or around $800 million. Now this outlook is consistent with the guidance from our Q1 call. And although you'd look and say, well, natural rubber that we buy is down 6% or 7% since April, and butadiene is down as well. On the other side, there are some materials like carbon black that are actually up from where they were in April. So it is a bit of a mixed bag over the last 3 months. And when we look at our international businesses, given the currency -- a number of currencies have weakened versus the U.S. dollar. In those businesses, we're actually seeing a lot less benefit from raw materials and in fact, can be some increases depending on where the currencies are. So that has -- that, in the international businesses, that changes the picture a bit because with weaker currencies and markets, I can mention Brazil and Australia and India, as 3 examples of that. That drives the cost of raw materials in local currency back up, even if they're relatively flat as we look at them in U.S. dollars. But I continue to see that -- as we see the volume start to increase, as we go into the third and fourth quarter, I think that's generally been the trigger of raw materials going up. I'll say that volume -- we look back to 2011, it took a couple of quarters from the time volumes started to head down, before raw materials started to go down. And so the timing won't necessarily be concurrent. In the past, it's been within a quarter or 2, raw materials start to react. And so I think something like that is a reasonable expectation. So it may take a bit of time, but the raw materials will react to volume.

Very helpful. And then just a question on volume in the U.S. It seems that, versus some of your competitors, you probably have greater exposure to the first replacement sale, maybe a car, it's 3 or 4 years old. And presumably that business maybe at a trough today, just given where the SAR was a few years ago, would you agree with that view? And then can you maybe tell us or compare how the profitability on a first replacement tire sale compares to your overall profitability in the North America replacement market?

Itay, I think that's a pretty accurate statement. And I think, really, part of our strategy being on first replacement and second replacement, and really linking that to our selectivity strategy from an OE perspective is really pretty much in line with what we've been talking about in the past. And as we've migrated away from private label, that private label is obviously where you're getting into probably beyond third, fourth and fifth replacement on OE vehicles -- or excuse me, on replacement vehicles. And that's a part of the market that really is in that sort of 4 for 99 market, where it's really tough to make money. So describing ourselves as linked to first and second replacement, is exactly how we are managing the business and the profitability there is frankly much, much better than it is at the low end of the market.

Absolutely. And then maybe one last quick housekeeping. Darren, it seemed like the incremental margin as implied by the year-over-year volume of $11 million on the slight increase in volume was fairly higher than usual. Is that just sort of a mix issue there?

No. I mean, Itay, it's a good thing to point out because I think what you're seeing there is we've got some volume increases in some higher-margin segments and geographies. So we've got good growth in some areas in commercial truck, still some growth in large mining tires, which is helpful. And we see some strong growth in both Asia and Europe, where we've got some higher-margin tires. Where in places where we've had some weaker volume, we've actually been on the lower margin end of the spectrum. So maybe a little bit of the law of small numbers, but certainly something there that demonstrates our focus on our targeted market segments.

Next we'll move to Aditya Oberoi with Goldman Sachs.

I had a question on Europe. It seems from your commentary that you believe that demand is kind of stabilizing. Just curious, are you seeing the demand stabilizing just because dealers have started to put back inventory on their shelves? Or is it that the end demand or the sellout has started to improve?

Yes. So I think that, clearly, we have seen a cycle of some destocking in the channels. So -- and we've separated into summer tires and winter tires, but we've seen, last year, a very weak summer season. This year, we've had certainly a better product lineup and better value proposition, so our sales in the second quarter were better. And that's helped as our dealers have sold those tires out into the market, that has kept summer inventories in better shape. I think for winter tires, and we're just starting into the winter tire selling season now. We do see that dealers have come off 2 weak winter seasons. And not surprisingly, early preseason sales in June were pretty slow. But inventories in the channel, because of the late winter weather we got in the first quarter, and because dealers have delayed their ordering a bit in Q2, have left the channels in better shape than they were a year ago. And we're starting to see some sales in July improving in winter. And I think that, that does partly reflect the fact that inventories are in better shape. Obviously, winter weather is going to be a key for us here in the second half, but I think we're real confident in our value proposition. So if you take that summer and winter together, you'd say, clearly, we look and say, part of the significant weakness that we saw in Europe during 2012 and early this year was some element of dealer destocking. And obviously, once that's done, it's done. But I think that there is also some stabilization in the sellout and that is ultimately what we need. We need to sell -- not only sell the tires in an industry, we need to sell them out to retail or out to consumers, I think we are seeing some better stability there.

Got it. That's very helpful. And if I may, one more here. On North America margins, obviously, adjusting for some of the 1 x items you mentioned, it still seems a very strong quarter from a North American standpoint. How should we think about, like, are there any peak margins or margins that are the new target for Goodyear? Like I know, historically, you've targeted 5 and now we are already touching double-digit pretty close to that. So is there a new normal for North America that we should be thinking about?

Adi, we haven't put out any new guidance of what you would say the new normal for North America. We're very pleased with the progress we've made. As we've said in the past, we're creating value in a business that hasn't done so for a long period of time. That remains our focus. And I think that's how we're going to continue to manage the business going forward. If we have a new target for North America, we'll give that to you at another time. But right now, we're just focused on driving the value proposition that we've spoken of, hopefully, consistently over the last number of years and you're seeing the results of that right now.

[Operator Instructions] Meanwhile, we'll move to Ravi Shanker with Morgan Stanley.

Can you just talk a little bit more about the position with labeling in Europe? What are your current position as in terms of what percentage of your product actually have AAs and ABs and so forth? Where you are versus the competition? Also, are you seeing any change in customer behavior in your stores with people coming in and asking for specifically for a higher label tires?

So on the first part of the question, I think, Ravi, I would point you back to a slide that we have that shows our labeling portfolio versus unnamed competitors. And I think that's probably the best gauge that we would give you of how we stand. And what you'll see on that page is that we do have the best labeling portfolio in Europe for summer tires right now. So that's, I think, the best place for you to look there. In terms of customer behavior. As I mentioned earlier, I've been out visiting our customers, talking to consumers. And I would tell you that as we look at the consumers coming to the counter, I mentioned this in my remarks. Just as consumers coming into stores in Europe really value the magazine test for winter tires, it's almost a directory to say, which tires they want to buy and consequently, which tires the dealers want to stock. We're seeing a migration to that very similar in terms of labeled tires. As the consumer gets to the counter, and as the purchase decision has to be made, those label scores have a significant and increasing impact on purchase decision of the consumer. I would say that that's a trend that's probably still a bit nascent, that's going to expand. And we're seeing it more in the Germanic countries than in Northern Europe today, in Southern Europe, where I think the economies are a bit tougher. It's probably less relevant today. But ultimately, I think it will become a bit more pervasive. But I can tell you from direct discussions with our customers out in the field, it is -- I think, some of them have been surprised at some of the consumers coming in fairly well educated on label scores and consequently, making that a real element of their purchase decision.

Next, we'll move to Brett Hoselton with KeyBanc.

Darren, you kind of talked a little about European margins and potential improvement there. I guess, what I'm wondering is, did you have a particular time frame in mind? And was there some specific actions that you were looking to make or take to see that improvement?

Yes. So Brett, I think the way that we look at our European business, we're starting today with profitability over the last 12 months, a little over $200 million. And we've got in mind our 3-point improvement plan. And I think the 3 areas that we're focused on are those 3 areas. And the first one is achieving better share in targeted market segments. And I'll say that the big progress we made in Q2 is clearly in the high-performance summer segments. We were gaining share on those segments, that's exactly where our high-labeled portfolio, we were just talking about on the prior question, that's where it hits the market. And that's where the magazine test have really helped us. So those high-end summer fitments. Second thing, yes, we're continue to grow in emerging markets. And emerging markets that we can serve a lot better today, given the soft volumes in Western Europe. So that frees up supply that we can send into supplying emerging markets that we have underserved in the past. So I think both of those, you'll see coming through in terms of margin improvements in Europe. The third point, and one that we can't get around, is the fact that we do have to improve our cost structure in Europe, given the kind of volumes that we're running at and the closure of the Amiens, France facility is an element of that, which would, by itself, add $75 million to our earnings in Europe. In addition to that, over 3 years, so that's this year, next year and the year after, we're targeting another $75 million to $100 million of cost savings over and above inflation to deliver improved margins for Europe. So I think you take -- where were running today, add the $75 million for Amiens, add another $75 million to $100 million for the additional productivity that we're able to generate. And then add to that, the margins we're able to achieve through the mix from targeted market segments and the growth in emerging markets. And I think that's the -- as we look at the next 3 years for European business, that's the growth path that we're looking at.

And then as we think about the margins, basically, for the overall business, I mean, North America as an example, what, 9% segment margin is very, very good margins relative to your target of 5%. So you certainly met that target and exceeded it. But you talked about raw materials potentially moving back up at some point in time here. And I guess what I'm wondering is, how do you think the industry is going to react from a pricing standpoint, as raw materials move back up? Do you anticipate that the industry is going to try to maintain those margins by raising prices or do you think that, that might result in some margin compression?

Brett, I think, obviously, we'll talk from our perspective. And I said this earlier in the call, and we have a very disciplined strategy that we've been executing in terms of balancing volume, price and mix versus raw materials. We have a good track record of doing that. And I think you should expect us to continue doing that moving forward.

It appears we have no further questions at this time.

Okay. Thank you, everyone.