Apr 28, 2010
Executives
Patrick Stobb – Director, IR Rich Kramer – President & CEO Darren Wells – EVP & CFO Damon Audia – SVP, Finance & Treasurer
Analysts
Rod Lache – Deutsche Bank Himanshu Patel – JP Morgan Patrick Archambault – Goldman Sachs John Murphy – Bank of America
Operator
Good morning. Welcome to the Goodyear quarterly results for the first quarter 2010.
All lines have been placed on mute to prevent any background noise. After the speakers remarks there will be a question and answer session.
(Operator instructions) Mr. Stobb, Director of IR, you may begin your conference.
Patrick Stobb
Thank you and good morning, everyone, and welcome to Goodyear’s first quarter conference call. With me today are Rich Kramer, President and CEO, Darren Wells, Executive Vice President and CFO, and Damon Audia, Senior Vice President, Finance and Treasurer.
Before we get started there are a few items I would like to cover. To begin, the webcast of this morning’s discussion and supporting slides presentation can be found on our Web site at investor.goodyear.com.
A replay of this call will be accessible later today. Replay instructions were included in our earnings release issued earlier this morning.
The last item, we plan to file our 10-Q later today. If I could now direct your attention to the Safe Harbor statement on Slide 2 of the presentation, our discussion this morning may contain forward-looking statements based on our current expectations and assumptions that are subject to risks and uncertainties that can cause actual results to differ materially.
These risks and uncertainties are outlined in Goodyear’s filings with the SEC and in the news release we issued this morning. The Company disclaims any intention or obligation to update or revise any forward-looking statements whether as a result of new information, future events or otherwise.
Turning now to the agenda, on today’s call Rich will discuss strategy and provide quarterly highlights. After Rich’s remarks Darren will review the financial results and discuss outlook before opening the call to your questions.
That finishes my comments. I will now turn the call over to Rich.
Rich Kramer
Thank you, Pat and good morning, everyone. Thanks for joining our call today as we address what was strong first quarter performance.
This is my first conference call as Goodyear’s President and CEO. I thought it would be appropriate to begin with the few words about my predecessor, Bob Keegan, and his numerous contributions to Goodyear since 2003 when he was named to lead the company.
When you reflect on the many challenges the company faces that then and I know them well that they work side by side with Bob’s in the morning. The journey has been a remarkable one.
The challenges were such that the strategy and ultimately the execution both had to be flawless. So I think about the true measure of Bob’s leadership and the resulting success as he assumed the CEO role I ask myself two questions.
Is Goodyear in better shape today as a company? And is Goodyear better positioned for the future?
The answer to both of those questions is unequivocally yes. The contributions that Bob made in developing industry’s best new product engine, building an outstanding and outstanding business team, revising the Goodyear brand and restoring the Goodyear’s spirit, have established a strong foundation to build upon with confidence and with optimism.
So consequently, on behalf of the entire Goodyear team I’d like to thank Bob for his guidance and his leadership as CEO over the past seven years. I recently had the opportunity to visit with the number of investors that allow me to reconnect but also more importantly, provided me a first-hand view into what investors were thinking about Goodyear.
Now, of course, I received many questions concerning my new role, Goodyear’s direction and the state of the industry. I’d like to briefly elaborate on those topics before we get into our first quarter results which by the way I was very pleased with for a number of reasons including the beginnings of some positive trend.
When I think about the future I remain very optimistic about the transportation industry. Cars and wheels and consequently tires are going to be with us for a long time if there are no real alternative to personal and commercial travel on the horizon.
We will continue to see existing drivers drives more and we are only beginning to experience the explosion of new vehicles in the emerging markets such as China, just to name one. And as I look into the future the industry will see larger percentage growth in smaller emerging markets and smaller percentage increases in larger more mature markets.
Both, however, result in the opportunity to see significant tire unit growth. And that growth will not be in simpler, smaller tires but in increasingly more complex tires requiring more innovative technology to support such trends as improved rolling resistance, higher performance captured by tire labeling and continually evolving OEM requirements.
In other words, the opportunity for improved mix will continue. In addition, strong brands and efficient supply chain and outstanding distribution network, all will continue to be inter grow and delivering these value propositions to consumers.
So when I think about those trends, I believe Goodyear with our brands, our global presence, our innovation track record, our unmatched beat to market, our advantage supply chain, our leading global distribution network, our superior sales and marketing capabilities, and the quality of our teams, I believe Goodyear is second to none in terms of our ability to lead the way. And that’s why I’m excited about my new role.
As we continue forward, my strategic priorities will be to drive our innovation engine with new products tack with technology developed from the market back. To drive operating efficiencies throughout our supply chain to higher levels of performance, to drive North American Tire first to breakeven and then to our next stage metric goal of 5% EBIT to sales.
And we will drive this improvement in multiple ways through volume, price mix and cost actions. Another strategic priority is to drive growth in the emerging markets, particularly, the high growth markets in Asia.
Also, to protect and improve our balance sheet over time to ensure stable and cost-effective access to capital. And finally, of course, to continue to build upon the best team in the industry.
I look forward to both the opportunities and challenges ahead for us as I believe we are well-positioned to capitalize on opportunities the industry offers us and to effectively deal with the challenges we inevitably face. Now, focusing on our first quarter performance, we had an excellent start to the year.
The following are some key highlights. First, from a financial perspective, sales for the quarter were up 21% from a year ago to $4.3 billion reflecting a 14% increase in units sold.
We see industry volumes were covering perhaps even further than we had expected at this stage. The benefit of stronger industry conditions versus a year ago was significant and contributed approximately $125 million in the quarter primarily due to higher volumes and lower unabsorbed fixed costs.
We had a favorable net impact of price mix and raw materials of nearly $250 million. We achieved overall cost savings of nearly $150 million in the quarter.
These factors contributed to an increase of more than $400 million of segment operating income versus the prior year. Net income was a loss of $0.19 which included the impact of the $99 million or $0.41 charge related to the devaluation of the Bolivar in Venezuela.
And finally, operating cash flow remains strong particularly relative to our historic quarter cash flow usage trend. And from an SPU perspective in the quarter we saw North America Tire earnings sequentially improved from Q4 2009, an increase by more than a $170 million versus Q1 2009.
This positive trend included a 10% increase in sales volume and was driven by favorable price mix and cost management particularly in the factories. This progress in price mix and cost efficiency has reduced the breakeven point for the NAT business significantly compared to pre-recession levels.
In Europe, volume increased by 14% versus the prior first quarter, driving a sales increase of 21%. These increases include an improvement in both our consumer and commercial businesses.
In Latin America, our consumer replacement business had a record unit volume in March and near record unit volume for the quarter reflecting markets rebounding to levels of approaching or exceeding those before the downturn. And in Asia, where we saw double-digit industry growth in all our businesses, we had record first quarter segment operating income of $69 million.
This was just short of the all-time quarter record, established in Q4 2009. Our business in Asia continues to grow profitably and with the construction of our new factory in China which will begin production in 2011, we see opportunities for significant growth in the future as we remain focused on our targeted market segments.
And as you would expect a key element continues to drive our performance where the innovative products made possible while our commitment to our industry leading new product engine. Building upon our industry leadership and rolling resistance and fuel efficient tires such as the Assurance Fuel Max and the Efficient Grip tires as well as the 62 new products launched in 2009 in the midst of an economic downturn.
We have already introduced 17 new products in this first quarter and all have been met with strong reception. In North America, this includes the all new Assurance ComforTred touring tire that we introduced to our dealers in January with an expanded size line up to cover a much larger portion of the market.
This product is getting great reviews by our dealers and orders are significantly ahead of our plan at this stage. In the Commercial Tire segment we introduced the G296MSA super single tire for heavy and off-road applications.
And the Dunlop, the Dunlop FM family of SmartWay approved fuel-efficient tires for long-haul fleets, where demand is already exceeding our expectations. I will also note that we will introduce 30 new products in the NAT commercial business this year which is a record for any year.
And in Europe, we introduced two Dunlop products which helped increase market share in sales in the product segments. And the Dunlop SP (inaudible) ultra high performance SUV tire and the Dunlop SP Street Response Summer tire.
In China, the Goodyear team accepted two of auto sports magazine 2010 Best Tire of the Year Awards during a ceremony in Beijing. The Eagle F1 Assymmetric was awarded best for handling and the Goodyear Assurance best for safety.
And in addition, Assurance also was named auto product of the year by CBS Interactive. And in Latin America we saw the continued benefits from the momentum of the 600 Series truck tire, which has met with exempted consumer praise as the truck tire market begins to improve in the region.
As you can see, our new product engine is a strong as ever as is the resulting impact on our operating results. In addition to our first quarter financial performance we also received significant acknowledgement from two highly respective well-known publications.
We were again among the list of Fortune’s Most Admired Companies. We’ve ranked consistently at/or near the top of the Most Admired Automotive Parts Suppliers for the past several years.
And Forbes magazine just announced last week that Goodyear was again included in its annual rank of Most Respected Companies. And I’m pleased to note that again Goodyear was the only tire company included in this prestigious list.
And is the highest ranking company in the automotive industry. These awards are a reflection of Goodyear associates commitment to driving excellent in everything we do and also of the power of the Goodyear brands.
In addition to the positive impacts of our execution clearly, the first quarter results also reflected the benefits of the global industry rebound that is both encouraging and supported by a variety of economic indicators globally. However, we must keep in mind that volumes in North America and Europe remain well off their historical high reached before the great recession and this is particularly true in the commercial truck markets.
As our first quarter volumes and earnings improve, we are encouraged by moderate to strong GDP growth in mature markets and emerging markets respectively by increased U.S. industrial production level, improved retail sales, improved auto sales and improved freight hauling indices.
However, our encouragement remains somewhat tempered by high unemployment rates in the U.S. and Europe, volatile consumer spending statistics, (inaudible) U.S.
gas consumption and miles driven specific, and of course, steadily increasing raw material prices and uptick all-time high. So on balance we remain optimistic that we will see the first quarter trends continue but we can also envision possible disruptions along the way towards full economic recovery from continued economic volatility.
We anticipate emerging markets to remain strong, consumer and commercial markets to improve, OEM production to increase, supply to remain tight, and no obvious relief in raw material price trends. Our business plan reflects this perspective and I have confidence in our team to successfully execute in this environment.
So as I too look ahead to delivering our plan in this environment the near-term challenges that will occupy my time and attention includes the following. The first not surprisingly is raw materials.
The environment remains volatile with natural rubber reaching all-time high in excess of a $1.50 a pound, higher than what we saw at the time of our February call. Now, Darren will elaborate upon in a moment, we now estimate second half raw material headwinds to be in excess of 35%.
While I’m confident our ability to offset higher raw material cost over time with price and mix as we’ve done over the past six years, the sharp increases in the coming quarters require us to act on all fronts to manage the impact in our results. This means of focus globally on price mix, continuing to maximize the impact of our new product engine, driving for increased volume opportunities in our targeted market segments, and a globally on raw material costs down initiatives.
You see evidence of focus and success in each of these areas in our first quarter results. However, our objective for the remainder of the year is to deliver even more.
The second immediate focus area is manufacturing efficiency or productivity. This includes our commitment to reduce high costs capacity by 15 million units to 25 million units as part of our three-year $1 billion cost savings plan but it doesn’t stop there.
At Goodyear we have some of the lowest cost best performing plants in the world and we have some there more challenged, particularly, in our mature markets regardless of where any of our factories are located or classified, they all sharing the opportunities for continuous improvements. As you might imagine our primary focus is on our North American facilities where 2009 we negotiated a labor agreement to drive productivity to increase output and cost reductions.
Our new contract gives us the opportunity to change how we work opportunity to change how we work with the goal of substantially increasing our productivity. And having recently visited a number of factories, I seen output improvements first hand and I’m encouraged by the signs of engagement and improvement I seen from the entire work force both salary and hourly alike that gives me confidence that significant progress is happening.
Our manufacturing efficiency focus really revolves around improving our ability to make more of the right tires cost effectively and intensifying our strong costs and productivity disciplines. And let me briefly elaborate.
In each of our factories we are moving away from metrics to drive pure output and moving towards metrics that drive attainment of producing exact list of tires that our sales and operating plan indicate are in demand. The ultimate step in this journey is a pilot process we launched in one of our North America tire plants.
This is a true lean production process where no activity takes place until demand signal is received by the machine operator. Our execution will be the key to delivering the productivity we need as part of achieving our profitability goals for our North America tire business.
Our manufacturing and NAT organizations are fully committed to this goal, particularly, as volumes return to the factories. Of the three areas that will remain my focus is driving our supply chain to be the most efficient not only in the tire business where it is today, but among any businesses regardless of industry.
By seamlessly linking demand forecasting with the production and delivery process we can sustain and drive further improvements in production scheduling, manufacturing asset utilization and working capital and turning both raw material and finished goods inventory. While this has been an area of focus for us over the past two years and we have seen some solid successes there is still significant opportunity for increased efficiency throughout our supply chain starting from the market back.
As we progress with our supply chain efforts you will see continued improvement in our costs and cash efficiency further optimizing inventory levels and ultimately improve customer service levels in our targeted market segments. Needless to say I’m excited about the upside we can generate in each of these areas and I’m cognizant of the challenges to achieving them.
Execution will be essential and is where my focus will be. Ultimately, we firmly believe with our intense focus on near-term challenges the rewards of our overall strategic direction will be significant.
We are currently on a path to drive higher levels of profitability as volumes rebound, price mix improves and emerging markets growth. We are committed to a next stage metrics including our 5% targeted return on sales in North America.
And we expect to driving greater efficiency and flexibility in our business long-term. So we’re off to a good start in Q1 and we recognize we still have much to do.
Now, I’ll now turn the call over to Darren for a closer look at the first quarter results and then we’ll open up and take your questions. Darren?
Darren Wells
Thanks, Rich. I’ll start this morning with a few opening comments before moving on to address our operating results, the balance sheet and our outlook, including comments on the second quarter and full year.
My comments about the first quarter are going to continue being you’ve heard on our year-end call. We continue to see financial results that reflect market recovery and the benefit of strong platforms that we’ve established for our businesses.
Results were significantly better than a year ago; driven by first, the benefits of our aggressive costs initiatives taken during 2009, second stronger volumes, and third, solid price mix which allowed us to take the lag benefit of last year’s lower raw material cost to the bottom-line. We continue to see some uncertainty in the mature market economies although hard to believe less uncertainty than existed at the beginning of this year.
Our key challenge remains how we address the now rapidly escalating raw material costs through price mix and by ensuring we get the full benefit of increased volumes, including reduced unabsorbed fixed costs in our factories. We will drive volumes and price mix by leveraging new products and by focusing on branded replacement business with a selective approach to both OE and non-branded business.
Looking at the income statement, both our unit sales and revenue increased significantly from last year. The year-over-year increase reflects improvement in global tire demand in both consumer and commercial markets across all the geographic regions.
Segment operating income and net income increased versus last year, reflecting higher sales, higher production levels and lower raw material costs. Lower material costs were reflected in our results after the normal one to two quarter lag.
Offsets include higher pension costs in North America and the effective advance in Venezuela. SAG increased in Q1 versus the prior year, partly as a result of foreign exchange and partly as a result of incentive compensation accrual this year versus reversals a year ago.
Despite these increases SAG was about 14% of sales compared to about 15% a year ago, reflecting the benefits of cost reduction initiatives put in place last year. We continue to expect SAG to increase this year by about $100 million, excluding currency translation and the reclassification of certain sales incentives from sales SAG.
Our decision to increase SAG reflects our commitment to strong marketing initiatives and our plan to support emerging markets growth. Note that the first quarter after-tax results were impacted by certain significant items, including favorable one-time supplier settlement of 12 million before taxes that were included in segment operating income.
The appendix included the summary of these items for 2010 and for 2009. Going into more detail on the 416 million increases in segment operating income, you see that improved industry conditions were a significant driver.
Both volume and unabsorbed fixed costs contributed positively to the quarter. As the output of our plan increases we are seeing unabsorbed fixed costs decline from where they were a year ago.
Given these higher production levels we are no longer experiencing significant levels of FAS 151 series costs. Therefore, the impact on earnings from unabsorbed fixed costs now and for the foreseeable future is expected to follow a more typical one quarter lag.
Given production levels in Q4 which were up about 5.5 million units from last year the level of unabsorbed fixed costs in Q1 was $67 million lower or about $12 a tire. Similar to last quarter we included a schedule detailing these costs in the appendix of the presentation.
Price mix net of the raw materials continues to be a positive year-over-year, reflecting a 15% decline in raw material costs. Price mix was flat despite adverse mix driven by the strong recovery in lower margin OE, which was up nearly 50% globally in Q1.
This solid results reflected strong performance in our branded replacement business and selective approach to OE. Our advanced supply chain has been critical to growing in our targeted market segments.
As market volumes recovered and we needed to ensure the right products and getting to our customers at the right time. We also continued to make progress in our cost savings programs, which more than offset costs increases related to pensions and general inflation.
These savings include the benefit of USW contract savings in North American tire. The impact of last year’s salary personnel reductions and reduction in supply chain costs including the elimination of several warehouses.
I would note we see cost savings this year has been front end loaded given the carryover benefit in the first half of last year’s headcount reductions. As you can see other tire related businesses also contributed, primarily due to improved results in third-party chemical sales this year versus a week 2009 Q1.
We do not expect this to recur in future quarters. Foreign currency rate were generally a positive as the USD weakened versus most major currencies.
Beginning in Q2, we expect current to be a negative year-over-year given the recent weakness in the Euro. While not broken out in the chart, lower earnings in Venezuela reduced segment operating income by 28 million compared to last year.
This impact reflected the full effect of the devaluation and reduced volumes for market disruption while reflecting only part of our actions to address the valuation, which we began implementing during February and March. We expect the market to improve and expect our results to recover slowly beginning in the second quarter as that market stabilizes and our actions begin to have full effect.
Before moving on to the balance sheet I wanted to broaden our discussion on our commercial truck business. Slide 13 shows the last 15 years of U.S.
commercial truck tire replacement sales. The graph highlights just how far industry volumes have fallen over the past two years.
As you know the commercial truck business which represents about 20% of our revenue in a normal environment has been under extreme pressure. While we saw double-digit commercial industry growth in the quarter in all our markets which is an encouraging sign compared to 2007, our global commercial truck volumes were down 5 million units from 17 million units to about 12 million units, a 30% decline.
Given the high value of these tires which can be three times or four times the value of consumer tire and the low capacity utilization rates in our commercial truck tire factories, which operated about 50% of capacity in 2009 there have been significant impact on our earnings, particularly, in North America and Europe. While the markets for these tires are recovering the outlook in the pace of recovery remains uncertain.
Given (inaudible) volatility in commercial truck industry volumes we know there is a possibility of a quick recovery at some point in the next few years and we see continued strong growth in demand for these products in emerging markets. With these factors in mind we are focusing near-term on, first, improving plant efficiency as much as possible.
Second, driving our new products and service offerings to best meet our customers’ needs. Third, growing in emerging markets.
And fourth, improving profitability, while continuing to assess our capacities. While volumes maybe slow to return the previous highs we are confident in our ability to make progress in each of these areas.
Turning now to the balance sheet, we had a good working capital outcome in the quarter. The businesses did a solid job keeping inventory lower and minimizing the impact related to seasonal trends, rising raw material costs and increased demand.
I would also note that seasonal working capital were somewhat muted in Q1 as our dealers continue to have strong liquidity and are generally paying earlier than normal. Increased net debt reflected the change in working capital.
For example, the year, we continue to expect working capital increases in the range of 200 million. In Venezuela, we reported a 99 million after tax impact on remeasuring our balance sheet to reflect the currency devaluation announced earlier this year.
This one-time charge was lower than initial estimates; given the majority of our raw material purchases qualify for the better of the two official exchange rates rather than the less favorable rate we use to determine our initial estimates. In addition, post-devaluation our ability to obtain approvals from the central bank to pay suppliers has improved, which is a positive development for our business.
Despite the ongoing disruption we are confident our local management team and their ability to perform in this environment. We ended the quarter with cash and liquidity of 4.3 billion.
This is down from year-end, primarily due to seasonal growth in working capital and the devaluation of our cash in Venezuela. We completed the successful debt exchange in March.
This exchange reduced our 2011 maturities by over 25%, pushing 262 million of maturities out to 2020 at favorable terms. Turning to the segment results, North America reported a loss of 14 million in the quarter which compares to a loss of 189 million in the 2009 period.
The 2010 results reflect sales of approximately 1.8 billion and volume of 15.2 million units, a 15% increase in sales and a 9% increase in unit volumes. The North America consumer replacement industry grew by 5% in Q1, while the consumer OE industry grew by 60%.
Commercial industry conditions also improved with a replacement industry growing by 15% on increasing freight tonnage, while the commercial OE industry grew 17% on strong demand for tractors with 2009 engines. So industry volumes are improving although they remain well below pre-recession levels.
We continue to trend a branded share gains in our consumer replacement business during the first quarter in North America. We accomplished this despite some negative effect on Q1 volumes from pull ahead of demand into the fourth quarter last year, due to our U.S.
price increase in December. Our action to eliminate two remaining private label brands and replace them with broad availability of the Kelly brand was very effective on increasing branded share and improving our product mix in the quarter.
Revenue per tire in North America remained about equal to last year, reflecting two offsetting factors. Meaningful year-over-year improvement in revenue per tire for our consumer and commercial replacement businesses offset by a higher mix of lower revenue consumer OE tires, driven by the recovery in OE production.
North American earnings improved on higher volume and strong price mix performance with lower raw material costs, partly offset by 44 million in higher pension expenses. You will recall that North American pension costs will decrease beginning in the second quarter as we begin to realize the benefit of strong 2009 investment performance.
As a final point on North America, I want to provide you an update on the implementation of our USW contract. We are on track to deliver the targeted savings levels we discussed last year with premargin reductions continuing to deliver benefits.
We are also making significant progress on establishing new work standards for individual jobs and with improved discipline systems ensuring our North American plant become more competitive over time. Europe, Middle East and Africa reported segment operating income of a 109 million for the quarter which compared to a loss of 50 million in the 2009 period.
The 2010 results reflect sales of about $1.5 billion and volume of 18.4 million units, a 21% increase in sales and a 14% increase in unit volume. EMEA segment operating income represents a strong start to 2010, supported by our market performance and favorable raw material costs.
Industry volumes rose in Europe, Middle East and Africa as well with the replacement tire market increasing 10% year-over-year. The consumer OE industry increased 32% compared to a low base of last year.
I would note that car registrations were up 9% in Q1 benefiting from the end of the scrappages incentives during the quarter, so we may not see increases in Q2 continue at these levels. The truck replacement market grew by 37%, primarily reflecting dealers buying ahead of announced price increases.
The commercial OE market remains flat versus last year’s depressed levels but March was high. So we wanted to see if this improvement continues.
EMEA sales growth reflected improving economy, a continuation of the strong winter market seen at the end of last year and a pull ahead of some sales due to announced price increases for Q2. Stepping back you will remember we saw a similar effect in Q4 in North America which as expected reduced Q1rvolumes.
We now expect to see the same effect in Europe in Q2. We feel that some of this a year ago also increased revenue.
Strong execution by our team in Eastern Europe resulted in a 19% volume increase there versus Q1 ’09. And we continue to gain market share in Q1 in both consumer and truck in Eastern Europe, Middle East and Africa.
Our sales in EMEA also reflected determination of our agreement to distribute certain non-branded tires produced by Sumitomo Rubber, which represented about 1.8 million units in 2009. In addition, cost reduction initiatives continue to be a major focus.
As part of our goal to eliminate high cost production, we continue to pursue the shut down in consumer tire production at our north plant. In Latin America, we reported segment operating income of $76 million compared to the prior year result of $48 million.
This result was achieved despite the $28 million impact of the devaluation in Venezuela. The improved results reflect the ongoing recovery in most markets in Latin America, particularly, Brazil, where economic growth quickly rebounded from pre-crisis levels and as a result of the strong improvements in our consumer and commercial truck markets.
Our new product have continued to position as well for this market recovery as we move more of our volume from OE to the replacement market and continue to improve our leading position in radial truck tires as the ship and (inaudible) truck bearish continue. We are also seeing benefits from actions taken last year to centralize back office operations for our businesses across Mexico, Central America and Caribbean markets.
This has allowed us to improve service levels, while reducing cost and inventories. Our Asia Pacific business reported a first quarter segment operating income of $59 million.
This represents another milestone quarter for our business there, but the team has effectively leveraged market growth in cost efficiency actions to drive an impressive series of results over the last several quarters. The increase in operating income versus the prior year in Q1 reflects improved price mix, the benefit of cost cutting actions, benefits of foreign exchange and improved market demand, which resulted in both favorable volume and lower unabsorbed overhead costs.
The future opportunities in these markets remain significant, driven by OE demand and rapidly growing replacement markets. As part of our plan to take advantage of these opportunities we continue to advance the construction of our new facility in China.
And as a result we drew approximately $80 from the committed credit line to finance capital expenditure this year. In summary, our business has performed well in the quarter.
Our performance in the market place remains strong with solid branded market share performance, actions to improve mix and new products driving the top line as markets recover. Strong price mix focus allow the benefits for more raw material costs to drop in the bottom-line and cost savings from actions taken during the recession continue to deliver benefits.
This gives us good momentum going into Q2. Turning to the outlook I want to update some of our views for 2010 beginning with our outlook for the raw materials.
We have updated our raw material cost outlook. While we still expect raw material cost to decrease about 5% for the first half we now expect cost increases in the second half of over 35% year-over-year.
As I indicated on our last call, past performance will tell you that we have been able to more than offset raw material cost increases over time with price mix. During short periods of rapid escalation however, the benefits from price mix don’t always match up with raw material increases.
To give you a perspective on recent raw material trends, in the first quarter, our current unit raw material costs were up over 5% from the fourth quarter of last year. Looking at the second quarter there is a sequential increase in per unit raw material costs approaching 15%.
This trend of increases continues in the second half. As Rich said this means we have to continue taking all available actions to address the impact on our results.
Our forecast for the impact on segment operating income of Venezuela is unchanged. The combination of difficult price mix higher costs and weak volumes are expected to negatively impact Latin America segment operating income by 50 million to 75 million for the full year with the impact declining throughout the year.
For modeling purposes we continue to expect interest expense in the range of 350 million to 375 million for the year and our tax expense will be in the range of 25% to 30% of our international segment operating income. Consistent with our remarks last quarter we expect our full year CapEx to fall within the range of 1 billion to 1.1 billion.
The increase versus '09 reflects improved market conditions and support low cost manufacturing, including the ramp up of the construction of our plant in China and our plant expansion in Chile. Coming back to our outlook for the industry we have increased expected growth levels in many of our market segments, particularly, commercial truck.
In North America, we expect consumer replacement market will improve as volumes continue to recover. We continue to see an increase in 1% to 3% for the full year.
We also maintain our view in consumer OE where markets are expected to increase 20% to 30% for the full year. We have increased our view of growth in commercial replacement which is expected to increase 3% to 7% for the full year and in commercial OE which is now expected to increase 10% to 20%.
While the strongest recovery is in consumer OE we continue to take a selective approach to our OE business, particularly in North American tire, focusing on the drive to profitable replacement business. So our OE volumes may not be up as much as the consumer OE market.
Turning to Europe, in consumer, we see markets up 1% to 3% replacement and flat to up 10% in OE. Commercial markets are forecast to increase 8% to 12 % replacement and 40% to 50% in OE.
In closing, we are very pleased with the strong start to the year. Our business has performed well taking advantage of lower raw material costs and increase in demand.
The most significant near-term challenge is raw material costs and we are taking the right actions in all our businesses to address this challenge. Prospects for our business long-term remain very positive, especially, as our industry continues its recovery.
You can expect us to continue to capitalize on improving markets and capture the significant growth we see in emerging markets. Now we will open up the call for Q&A.
Operator
(Operator instructions). Your first audio question comes from the line of Rod Lache with Deutsche Bank.
Rich Kramer
Good morning, Rod
Rod Lache – Deutsche Bank
Good morning. Couple of things.
First, you shipped 43.9 million tires but I know as your finished goods inventory was up a bit. Could you just give us a sense of what your production was in the quarter?
Rich Kramer
Yes, Rod, our inventory was up a little bit and most of that actually was in North America, just getting ahead of some of the anticipated shipments we have over the balance of the year, particularly, heading into the summer. Darren, do you want to go through some of the production numbers?
Darren Wells
Yes, and you will see in the appendix, Rod, we got the data listed there, but we took production cuts of only 7.7 million units in the quarter which are base production capacity by about 50 million means that we produced just over 52 million units in the quarter. And keep in mind that we do source some units from third parties and so we produced around 42 million units for the quarter and so some from third parties.
So not a lot of change in the units and inventory. You are seeing an inventory the impact of rising raw material costs, the materials we have been purchasing and obviously, those have come out and cost of goods sold in future periods.
Rod Lache – Deutsche Bank
So relative to your prior comments about $12 to $15 of overhead absorption for tire –
Rich Kramer
Yes.
Rod Lache – Deutsche Bank
You’re saying that there really wasn’t any material benefit this quarter for the inventory building?
Rich Kramer
Yes, there were not a lot of units built in inventory I think that’s a fair comment. We said for this year the way to think about our production is that we are going to be producing at about the level we are selling at and we wouldn’t expect a lot of units to be built.
There is some seasonality there, but I think in the first quarter, industry was strong enough that we didn’t have the opportunity to build a lot of units.
Rod Lache – Deutsche Bank
Okay, and do you happen to know what your run rate of commercial tire sales was if you annualize that in the first quarter relative to the 17 million you used to do?
Rich Kramer
I was going to say that certainly, we’ve seen an increase in the first quarter rates on commercial trucks. I think if we take the North America industry, we saw commercial up about 15% in the quarter for the industry and OE of about 17%.
I think what we will be able to do is you can look at that and assume that at least directionally Goodyear’s volumes are seeing some of that benefit, could be a little higher, little lower than the industry units, but generally that’s what you see in North America. In Europe commercial replacement was up a lot, it was up about 37% and we’re getting some benefit from that increase in the replacement market in Europe as well.
The OE market for commercial in Europe was about flat. But I think if you take those percentages it is going to give you an idea what kind of volume increase we got.
Rod Lache – Deutsche Bank
Okay and I just throw out a couple of last ones. Could you tell us the cost savings objective for the year?
You said it was front end loaded. And also you mentioned that you are up only slightly in North America replacement.
Was there some share loss that you experienced in the quarter?
Darren Wells
Rod, on the cost targets I think we will stick with a billion dollars over three years that we put out there and that’s a good start for the quarter but a little bit front loaded as we said we haven’t delineated it by year. But good progress from my perspective in terms of what we are working on both in manufacturing and low cost sourcing in SAG and a couple other areas but we haven’t broken it down by quarter.
And in terms of North America what you saw is in terms of volumes and share what you saw is our volume was essentially flat and consumer replacement where we saw an industry increase. And if you break it down on the positive side, if you will, we saw increase in our branded share and also the benefits of taking Kelly nationwide versus the sort of limited distribution we used to have of that brand.
Both of those were positive for us. Those are a little bit offset though by the volume pull-forward we had in Q4, given the price increase that we put in at the end of last year and also volume went down a bit from exiting some of the lower margin non-branded product like the Republic and Remington brands that we had before and then finally you can also put in there growth as a consumer OE business, which causes us to reallocate some production to meet some of the contractual requirements around OE.
And as you saw those OE volumes are very strong in the first quarter. So that’s how we think about our volumes at this point for North America.
As I look at over the balance of the year I think given our products, given the distribution, the supply chain we have, given the new products we put in the market, we feel pretty comfortable with the long-term trend on sharing with you is any kind of a run rate or indicative of how we think about it over the longer-term.
Rod Lache – Deutsche Bank
Okay, thank you.
Rich Kramer
Thank you.
Operator
Your next audio question comes from the line of Himanshu Patel of JP Morgan
Rich Kramer
Good morning, Himanshu.
Himanshu Patel – JP Morgan
Hi, good morning. Yes.
Just so we can get a sense for what normalized volumes in North America could be, can you give us a sense of the combined impact of strategic volume exits over the last few years in North America, in segments like private label and I think you are also now referring to consumer OE markets that you kind of flattened up on I mean just directionally, you did about 83 million units in North America in '07 I think '09 was about 20 million lower. As you think of 20 million lower, as you think of an economic recovery, is it fair to assume all of that 20 million to come back or maybe 5 million you kind of exited, how would you kind of dimension that?
Rich Kramer
I think, Himanshu, in terms of volumes that we have exited the single biggest area, if you will, would be the wholesale private label business that we exited a number of years ago and that was sort of in the 8 million to 10 million range. That’s going to be the bulk of that.
And that volume I think we said is not coming back, that’s not a business we’re going to play in, in any significant way. The next biggest thing would be our business in consumer OE in North America.
And we had shares over 40% at the top end of the range there as much as 30 million units. We haven’t publicly put out a targeted volume target what have you, but I will tell you, our view in terms of mixing up our business will be to continue down the past has been very selective in the OE fitments that we take, again, looking as a sort of an MPV basis what do we get from that sale out in the replacement market and we also look at the residual benefit of that in growing in the key consumer replacement markets as well, particularly, in the branded business.
I don’t know if that completely answers your question but that 10 million units again we are not going to go back into and we’re going to continue to be very selective.
Himanshu Patel – JP Morgan
And then I think Darren on the last call you have guided us to $12 to $14 per tire reduction in unabsorbed overhead cost as production rebounds. Given that you have gotten more bullish on your volume assumptions for commercial truck and markets this year.
How should that number change versus what you thought before?
Darren Wells
Yes, Himanshu, I think we start with the $12 to $14 guidance and I would stick with it today. Yes, we had anticipated a significant pick up in commercial truck production when we established that number.
We have seen some additional growth in industry volumes and we guided to higher levels. So I think you are right to think that there is probably some related increase in commercial truck production.
Some of that will be in the second half and will come out in cost of goods sold next year so that would limit the impact it has on our guidance for this year. But I stick with the $12 to $14 right now even though there is a little bit improvement there that we have seen in the commercial truck production.
Himanshu Patel – JP Morgan
Okay and then two last ones. Thank you for the 20% number in terms of revenue mix normalizes.
Can you just help us dimension that sort of geographically a little bit better? How does your commercial revenue mix fare between North America, Europe and Latin America?
I think Latin America historically been the highest, but where is that relationship for North America and Europe?
Darren Wells
Again, Himanshu, look at this and obviously it’s fluctuated a lot over the last three years. So I will be a little bit careful on how we guide on this, but I think what you can think of is that Latin America is quite a bit higher.
We’ve said in the past and I think I would reiterate that the commercial truck business approaches half of our business in Latin America so a lot higher exposure there. I think for the rest of the world it’s all going to fall a little bit below what the global average is.
So I think Latin America is higher number. The other regions generally a little bit lower in our global average will get to the 20%.
Himanshu Patel – JP Morgan
And is there any big difference in North America and Europe or –?
Darren Wells
It fluctuates, Himanshu, but I am not going to give you any view there, there is a lot significant –
Rich Kramer
There is no big difference, Himanshu.
Himanshu Patel – JP Morgan
Okay. And just last question.
How would you characterize inventories now in North America and Europe for consumer and commercial replacement?
Rich Kramer
Himanshu, I will start and Darren, you can jump in if you like but I think we feel that our inventories are in really good shape relative to what we want to do which is to keep as much as the benefits we pulled into 2009 both in terms of dollars and in terms of units and run our business off lower inventory. I think we have the processes in place that we’re working on in terms of our supply chain organization to do that.
So we’re feeling okay with where the inventories are at now. If you take a step back, particularly, in North America, there have been a lot of comments around supply issues out in the marketplace.
And I think many of those comments are valid because if we take a step back what we’ve seen is inventory levels throughout the channel both manufacturers and the dealer channels starting from a pretty low point in ‘09 and then we’ve seen a faster recovery including the OE business in 2010 and I think that has up to an industry service level issue that’s out there. And for us I think as we listen very closely to our dealers we hear that as well.
We also hear that when compared to others we are doing we are comparing favorably to them going forward and I have to say we know we can do better and we are doing better but when I think about a long-term I still see our efforts and our branded supply chains is a competitive advantage for us and consequently, that’s why I say the inventory levels are a place where we like them, could have a little bit more in certain places, but our focus is on flow through and volume of that inventory moving through the channel not in terms of absolute levels.
Himanshu Patel – JP Morgan
Thank you.
Operator
Your next audio question comes from the line of Patrick Archambault with Goldman Sachs
Rich Kramer
Hi, Patrick
Patrick Archambault – Goldman Sachs
Hi, good morning
Rich Kramer
Good morning
Patrick Archambault – Goldman Sachs
Just I guess on the timing of price increases, I think it was maybe a week before last year announced that one on commercial, but I guess it has been since December since we have seen one on the passenger car side I think from you guys. Just wondering I mean I understand that in the past you had sort of a cycle of three months or so between price increases but it does seem where we are starting to get kind of beyond that now and just wondering if you guys are waiting for capacity utilization improve or if you are waiting till the actual cost of the inventory goes up before you push that through.
Maybe you can just tell us a little bit more about how you think about matching those commodity inflation numbers you put out?
Rich Kramer
Sure, Patrick, I think it’s a good question and I think the way I start in answering the question is really looking back at what we’ve done historically and how we think about raw materials and price mix. And historically, our strategy has been to really use price mix to offset raw material inflation.
And we look over the past six years or so. I think you would see that we’ve successfully done that through the impact on new products that we’ve introduced through improving our mix and again, there think about branded versus non-branded, think about more replacement versus OE, and, of course, the pricing actions that we’ve taken over the period.
That’s been our record and certainly, our intention is to manage our business that way. To your point, starting in Q2, we’re going to see raw material costs increases intensifying and that’s going to carry into the second half.
You rightly pointed out; I think Darren and I both mentioned we are looking at second half increases of about in excess of 35%. So we will continue to drive the things that have worked for us in the past.
We’ll drive that with renewed intensity and we’re also putting a lot more focus now on cost savings areas to get it those raw materials cost increase as well. And there you think about things like material substitution, think about things like weight reduction in the tires.
And again we’ve been able to do these things. We are confident in our ability to do it.
Over the short-term I think this rapid escalation of raw materials, price mix to offset that may take a little bit longer, but, particularly in the second half and over the long term we are very confident that our strategy that worked in the past will work again. That’s I think that’s how I characterize how we think about the issue and again, we are thinking about it with a lot of confidence over the longer-term.
Patrick Archambault – Goldman Sachs
Okay, thanks and one follow-up I guess. Just on the North America, 5% segment operating target.
Can you describe us a little bit about what your footprint might look in that scenario? Is there a significant amount of I guess reduction in the current footprint you have that would need to take place?
Is it something where you going to have to have like pretty material portion of North America sales met through outsourcing, which you have kind of talked about a little bit in the past or is it something that maybe the heavy lifting is done by just better volumes and better capacity utilization in the factories you already have?
Rich Kramer
You know, I think Patrick it’s a pretty relevant question and I continue to think it’s on lot of people’s mind. So maybe I will start by just commenting that we still very much believe in the 5% EBIT to sales metric in North America, we believe it’s achievable, but to get there, there’s going to be multiple factors that are going to get us home rather than just a footprint action, let’s say in and of itself.
As we think about it what will get us there is increased volumes and of course driven by part of the market recovery that we’ve seen. We’ll get the benefit of the sales volume, but we’ll also get the benefit of unabsorbed overhead costs to start soak in up some of that unabsorbed costs I should say it’s in the P&L.
In addition to that you will see increase production that will help us get there. Just remember we were in an inventory decline period last year.
You’re not going to see that any more so we will get the benefit of the increased production as well. Also you have to think about the pension expense.
‘09 was about 150 million higher than ‘08 in terms of pension expense. That ultimately will await and go down.
I can’t give you a time period, but we’ll get the benefit of pension getting back to a more normalized level after the big assets and decreases in the plant that we saw in '08. We also have cost savings action, the efficiencies that I’ve referenced to in my remarks earlier, particularly; coming out of the USW contract, there’s a lot of opportunity there.
And also from improved mix you heard me refer to that a couple of times again, replacement versus OE branded versus non-branded. And then I’d say finally to your point a footprint action that we’ve been thinking about and certainly that was reflected in the unit contract that we negotiated last year.
So I can’t give you the exact timing of when, how all that happens. We feel like we’re on a good path to achieving it.
Patrick Archambault – Goldman Sachs
I guess just kind of digging a little bit more in to that footprint action, I mean, is part of some of the references to outsource entire production is that kind of have to also be part of the solutions to be able to get the cost structure in the right place?
Darren Wells
No, Patrick, I think as a business in North America we’ve always imported some level of tires into North America for a variety of reasons. Some of which we just can’t make here whatever the reason might be.
But I think as you are looking at it if you are asking will it be a strategy to offshore a high percentage of tires into North America, I said in the past our attention is to produce the tires we have here in North America successfully at the right costs and that’s a big part of what our accomplishments have to be as we look forward and we will continue to work on footprint and some level of imports as we have in the past as part of our overall supply plan for North America.
Patrick Archambault – Goldman Sachs
Okay, great, very helpful. Thank you.
Operator
Due to the length of the call your last question comes from the line of John Murphy with Bank of America.
John Murphy – Bank of America
Good morning, guys.
Rich Kramer
Hi, John.
John Murphy – Bank of America
The commercial tire you sort of information you gave us on Slide 14 was very helpful. 20% of normal revenue.
I was just wondering where we were in 2009 as a percent of revenue and then where we are in the first quarter if you can help us understand where that business is in total right now?
Darren Wells
John, as you might expect the percentage in 2009 would have been a bit below the 20% historical number. I will dimension it basically but you can see on the graph what happened in North America the dramatic declines we saw in the industry there.
In Europe we saw something similar. So with very severe industry declines that took place in commercial and I think the OE being the biggest where North America were down almost 40% and Europe down 70% last year.
So we had very big impact there. Much bigger than we saw in the consumer business and as a result our mix of revenue in commercial truck was down in 2009.
As we look in 2010 there is a recovery in commercial truck and that’s a stronger recovery that we’re seeing in consumer. So you can say directionally moving back towards the historical average but these rates is going to take a while to get back to where history was.
John Murphy – Bank of America
Okay. And then you mentioned as a chat on your commercial tires was running around 50% capacity utilization was running about 50%.
Given the outlook that you have you have roughly a 10% to 15% increase in aggregate commercial tires, so it sounds like you would probably get into that, below 60% range. Where do you break even in the commercial tire cap view?
Darren Wells
John, one thing I would point out. Clearly, we are going to be in better shape from a production standpoint this year.
The thing I would point out is we ran the factories at 50% capacity utilization last year. We’re cutting inventory.
So the first thing it’s going to happen this year is that we’re not going to take units out of the inventory which means that even if the sales were the same we produce more this year. So that will increase the capacity utilization to well above the 50%.
And then we would also have to produce the incremental units for any sales increases year-over-year. So the pattern works in a way that similar in commercial to what we’ve seen in consumer and that we’re adding some units because we’re not taken units out of the inventory and we’re adding some units because of prior sales.
So I think you take those two pieces. The capacity utilization is going to cineaste quite a bit this year but given that we‘re starting from last year’s sales base of about 12 million units versus 17 that we sold back in 2007.
Even sales move up this year somewhere in the percentage range that you are quoting we don’t need the number of tires that we needed back in 2007. So there’s still going to be some open capacity.
We’re moving back in the right direction now.
John Murphy – Bank of America
And you mentioned revenue per tire in the commercial side is three times to four times that that would be on the consumer side. Should we think about that as the profitability differential between passenger, commercial or is it even greater than that revenue per tire?
Darren Wells
I think John, if I look at the overhead absorption so that the unabsorbed overhead recovery I think the three times to four times consumer tires pretty good a rule of thumb. In terms of overall profitability it’s very dependent on region and product segment.
So I’m not sure I can give you a clear rule of thumb on that, but the profitability on commercial truck tires, I don’t think you will be thinking of being well beyond that, but it’s really going to depend on region. There’s not easy rule of thumb I can give you there.
It really isn’t but for unabsorbed overhead calculation at least that part of the contribution I think you can use the three times or four times of consumer tire.
John Murphy – Bank of America
And then just lastly, pension contribution you guys laid it out nicely for us I think in the appendix here. The 2010 contribution remained at 275 to 325.
I think you talked about a ramp up of 200 million to 300 million I believe in 2010 in pension contributions. But given the good returns in the market is that number still that significantly higher in 2011 or maybe is that number comes down?
Damon Audia
John, this is Damon. At this point we haven’t revised our guidance.
Through the first quarter our pension returns are above 4%. So as you know that will ultimately impact potentially the 2011 contribution, but too early in the year to change that guidance.
John Murphy – Bank of America
Great, thank you very much, guys.
Rich Kramer
Okay. Thanks, John and everyone, thanks for your attention today.
We appreciate your listening, we appreciate the questions. Thanks very much.
Patrick Stobb
Janetta [ph], you can close down the call, please.
Operator
We thank you for joining in this today’s conference call. You may now disconnect.