Q3 2019 Earnings Call
Good morning, My name is Keith I'll be your conference operator today at this time or would like to welcome everyone to good years third quarter 2019 earnings call.
All lines when placed on mute to prevent any background noise.
After the speaker's remarks, there will be a question answer session you would like to ask a question. During his time, So we press star and one on your telephone keypad.
If you would like to withdraw your question press the pound key.
I'll now hand, the program overturned Mitchell Senior Director Investor Relations. Please go ahead.
Okay, and thank you everyone for joining us for good years third quarter 2019.
I'm joined here today by Richard Kramer, Chairman, and Chief Executive Officer, and they're in Wells Executive Vice President and Chief Financial Officer.
Supporting slide presentation for today's call can be found on <unk> website at Investor Dr., <unk> Dot com and 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 two I like to remind participants on today's call that our presentation includes 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 good years filings with the FCC.
And then earnings release like company disclaims any intention or obligation to update or revise any forward looking statements whether or is it as a result of new information future events or otherwise our financial results are presented on a GAAP basis and in some cases, a non-GAAP basis non-GAAP financial measures discussing the color reconciled.
The U.S. GAAP equivalent as part of the appendix to the slide presentation and with that I'll now turn the call over to rich.
Great. Thanks, Nick [noise] excuse me and good morning, everyone. During today's call I'll share some highlights of our third quarter performance and discuss the key themes behind the results in each of our S. Buese.
Karen will follow with the review of our financial performance and offer perspective on our expectations for the fourth quarter.
As we anticipated the operating environment of the global tire industry improved during the quarter.
The decreases in consumer OE demand that have weighed on the industry in recent quarters have stabilized, albeit at lower levels.
Consumer replacement demand was stronger in most major markets and for the first time in three years, our price versus raw materials equation turned positive representing an inflection point in the industry cycle.
Our teams in the Americas, and Asia Pacific, we're able to capitalize on improving market conditions, we grew our volumes and gain market share in both business units.
Segment operating income began stabilizing in these regions, reflecting better demand trends moderating raw material costs and the actions we've taken to capture more value in the market.
However, our EMEA region experienced a more difficult industry environment than we expected as wells challenges with our channel distribution.
Despite the challenges in Europe , our margins increased 170 basis points sequentially from the second quarter.
In the Americas, we experienced continued strength in our U.S. consumer replacement business with shipments up 3% on top of double digit growth in the previous year.
This performance was driven by share gains in the high margin premium segments of the market shipments of large rim diameter tyres increased 10% significantly outpacing the industry.
[noise], we're benefiting from our award winning products and our best in class service offerings earlier. This month the Eagle Exhilarate earned the coveted number one rating in the ultra high performance all season tire category from a leading consumer magazines.
Outstanding handling and hydro planning resistance combined with impressive breaking performance on dry wet and icy roads allowed the eagle exhilarating outperform 20 other tires.
This is a significant victory for the newest extension of the Eagle line and reflects more than three years of committed research and testing to develop a winning product for this competitive an important segment of the market.
And our commitment to excellence extends beyond our products recently Newsweek named good your auto service to its list of America's Best customer service brands.
The second time good your auto service has been awarded best in class status in February leading consumer magazine named good your auto service a top automobile chain one of five stores to be recognized for standing out in a crowded industry.
These achievements reflect our emphasis on such attributes as courtesy quality and timeliness of repair.
[noise] and it's not just the media that notice the difference online consumer ratings for good your auto service stores are also reflecting our initiatives with scores soaring from 2.5 stars in 2015 to more than four stars today.
In a world where ratings and reviews are more important than ever. This recognition is clearly a competitive advantage.
Our U.S. commercial replacement business continued to gain share driven by both our Goodyear and Kelly branded offerings, we saw strong demand from our fleet customers throughout the quarter would sell out approximately 10% in the period.
This strong performance reflects the strength of our fleet solutions offerings and value customers see in our products.
In Latin America, we started seeing healthier trends as we were able to deliver volume growth, despite a dynamic political and economic environment and volatile industry trends.
Mints increased 3% in Brazil, our largest market driven by 6% growth in the consumer replacement channel.
We also saw continued momentum in our commercial OE business as volume increased by double digits for the third consecutive quarter.
More recently, we've seen disruption in Chile, which has limited our production at our factory there over the last several days, we'll continue to monitor the situation our top priorities, our with our associates as we navigate through this period.
The continued strength in our U.S. consumer replacement business, along with the solid growth in Brazil gives us positive momentum in these important markets as we head into the final months of the year.
Our businesses in Europe , Middle East Africa did not perform to their potential.
Our overall shipments fell 6% driven by declines in our consumer businesses. Our OE volume was negatively affected by lower vehicle production and strategic fitment choices in consumer replacement softer than anticipated industry conditions and lack of alignment in our distribution channel both.
Contributed to our performance falling short of expectations.
Notwithstanding the challenging backdrop, our EMEA business is capable of delivering much stronger results the characteristics of the European market play to the strengths of our strategy and our competitive advantages.
<unk> P.M. consumers value the technology and performance of Goodyear tires.
Our ability to design and manufacture outstanding products that are recognized by sophisticated OE manufactures and through magazine test scores is a significant advantage our product portfolio is stronger than ever which provides a strong foundation for us to build upon.
As evidence of our product strength, the Goodyear Ultra grip performance plus was named the best overall winter tire by a bridge prestigious German car magazine, the tire outperform 10, other tires and delivered best in class breaking distances on snow.
The good your ultra grip performance plus also ranked first in the coveted auto expresses winter tire test a strong endorsement of our engineers hard work and talent. This is evidenced that we have the products to win in the marketplace.
We also improving our capabilities to supply premium high margin tires, the investments, we're making in premium tire building capacity in Germany as well as the expansion of our manufacturing facility in Slovenia will further improve our competitive position. This added capacity will support our growing OE.
Blind and better position us to meet the rapidly changing needs of our dealers in the replacement market.
The modernization of our plants in full then Hanau, Germany remains on track as well, we expect to generate significant savings from these projects, which will improve our manufacturing cost structure in the region and further enhance our competitive position.
We remain positive about Amy's future. However, the region faces several challenges, including the lack of aligned in our distribution channels and an influx of Asian imports in recent years.
Distribution is an area of our business, but we have a tremendous opportunity to improve our value proposition and address some of these recent challenges.
To take advantage of that opportunity, we expect to accelerate our plans to improve distribution performance. These actions should improve the focus on our brands in the marketplace and ensure that we capture the full benefit to the investments you're making to increase the supply of premium high margin tires over the next several years.
We continued to be positive on EMEA is long term potential and we believe we will achieve stronger margins as we continue developing industry, leading products and execute on our strategy to improve our cost structure and strengthen our distribution.
In Asia Pacific our team turned in the regions best relative performance in more than a year.
Shipments rose, 5% and growth accelerated throughout the quarter.
In China, our consumer OE in replacement volumes increased by double digits during the quarter and our commercial truck tire shipments grew as well.
During the quarter, we benefited from the launch of several new OE fitments, reflecting the success, we're having diversifying our OE portfolio with local manufacturers and winning fitments on the right platforms.
Meanwhile, improve distribution is aiding our replacement businesses in Asia with more than 470, new Goodyear branded retail stores open through the first three quarters of the year.
The good your brand is highly recognized in China and dealers want to leverage its strength.
Channel inventories in China are lower relative to the previous year and we anticipate the positive momentum to continue in the fourth quarter.
Solid execution combined with good traction with our internal initiatives helped us navigate through what remains a challenging OE environment in China.
The tire industry has faced significant macroeconomic headwinds over the past few years, which have greatly affected our profitability.
Several of these challenges our abating and we're seeing a positive impact in our results.
Segment operating income is stabilizing in the Americas, and Asia Pacific aided by share gains in both geographies, we expect the improving momentum in our business to continue into the fourth quarter.
We have work to do before we're performing at a level that is consistent with our potential but I'm confident that our strategy remains relevant and this time of rapid change.
Our brand is strong around the world. We continue to develop best in class products and push innovation to new levels. We are leading the way in changing how tires are bought and sold and making it easier for consumers to choose Goodyear.
We're investing in new premium tire building capacity around the globe and improving the competitiveness of our existing manufacturing footprint and we are strengthening our distribution.
I am convinced this is a winning combination that few if any tire companies can match.
As we look ahead, we'll continue to leverage our strengths where markets are healthy and we'll make the necessary adjustments to be positioned for recovery and weaker markets.
Confident that our strategy and operating initiatives, along with improving industry conditions will allow us to deliver volume growth in our targeted segments stronger margins and enhance shareholder value in coming years, now I'll turn the call over to Derek.
Thanks Rich.
Well our results for the third quarter can best be characterized as mixed.
I have to agree with rich we have a lot of strings to build on.
We can largely in we've largely achieved what we expected with better volume and Asia Pacific and the Americas and pricing finally ahead of raw materials.
Also as expected we saw some cost challenges, including a negative impact from production cuts to balance out inventory levels.
You see in our presentation materials. However, there are couple of areas that were not aligned with the expectations, we discuss back in July .
First volumes in Europe , particularly winter tire volumes were lower.
This hurt our revenue per tire and therefore our mix.
While the industry in Europe was weaker than forecast, we can't blame all of this on the industry are relative performance was weak as well both in terms of volume in terms of our share of premium tires.
Well this is only one week quarter after several quarters of solid market share performance in Europe , we see in these results evidenced of issues, we know we need to address and our European consumer replacement business.
While effectively we know our product technology and quality is second to none and the Goodyear brand to see huge asset. We also know sales through our distribution channels remain problematic.
Making it difficult for us to move our product to market.
Vehicle to get full value for our product and difficult to predict our sales volume.
I'll come back to our action plan, a few minutes, but we're very focused on addressing this issue.
The second Harry the different from our expectations was our mix performance.
While our pricing remained solid our revenue per tire remained essentially flat mix of continued weakness in mix, we talked last quarter about the week mix, we experienced at our North American consumer business, beginning in last year's fourth quarter.
Driven not by product mix, driven by sales through lower margin channels channels with higher distribution costs.
Equity losses from tire hub, which are now excluded from mix improved during the quarter channel mix did not.
We also saw adverse mix, our North America commercial truck and Latin American businesses in the quarter.
So what we weren't happy in these two areas the cornerstone important inflection.
It was good to see the adverse impact and the macro environment ease to see evidence of volume improvement and recovery of raw materials, and just see the better earnings trend in two of our three businesses.
Turning to slide eight our third quarter sales were 3.8 billion down 3% from last year, reflecting the impact of unfavorable foreign currency translation reduced third party chemical sales and lower volume.
These effects were partially offset by improvements in price mix.
Unit volume decreased 1%, even with a 5% decline in OE shipments the reduced OE volume reflected the decline in global vehicle production and the continued impact of the strategic actions that we're taking to improve our OE portfolios in the us in Europe .
Replacement shipments increased 1% will strengthen the Americas and Asia Pacific more than offsetting weakness in EMEA.
Segment operating income for the quarter was 294 million down 68 million from year ago, or 47 million, excluding last year's benefit of an indirect tax settlement in Brazil.
This year over year performance was a significant improvement from our first half results in both percentage in dollar terms.
Our results were influenced by certain significant items and after adjusting for these items earnings per share on a diluted basis were 45 cents.
The stepped chart on slide nine summarizes the change in segment operating income versus last year.
The negative impact from volume was much less this quarter than in Q2, but the benefit was offset by unabsorbed overhead from production cuts in EMEA and Asia.
Raw material costs increased 41 million driven by the unfavorable transactional impact of foreign currency as well as higher non feedstock costs.
Price mix was favorable by 20 million, reflecting continued benefit from pricing actions offset by negative mix in the Americas.
Inflation of 45 million more than offset cost savings of 40 million.
Remember cost savings were impacted negatively by the non recurrence of a $21 million benefit from the indirect tax settlement in Brazil last year.
Excluding this impact our net cost savings improved compared to the previous two quarters and more than offset inflation.
The negative effect of foreign currency translation totaled $4 million also better than recent quarters.
The $60 million decline in the other category was driven by weaker results in our other tire related businesses, including our us chemical operations similar to the previous quarter. This category includes the impact of our equity interest entire hub, which improved by 2 million.
Turning to the balance sheet on slide 10, net debt totaled 5.8 billion up from 5.6 billion a year ago, reflecting an increase in working capital, including higher than planned inventory, partially due to weak industry demand.
We reduced production in the third quarter by approximately 1.7 million units versus the previous year to address inventory levels, primarily in Europe and Asia Pacific.
Our liquidity profile remains strong with approximately 3.3 point 4 billion in cash available credit at the end of the quarter.
Yes.
Slide 12 summarizes our cash flows net cash generated by operating activities was $152 million from 60 million last year, driven by less cash used for working capital.
Capital expenditures were $160 million down $13 million.
Turning to our segment results beginning on slide 13, America's volume increased 1% to $17.9 million strong growth in replacement shipments and an increase in commercial OE volumes were offset by weakness in consumer OE principally in the U.S. This only weakness reflected the continued rotate.
And out of older Fitments and an expected drop in production, resulting from the strike at a large OE customer in September .
Segment operating income was 175 million down $19 million from last year. The decline was more than six more than explained by the nonrecurrence of a favorable indirect tax settlement in Brazil last year.
The positive contributions from our pricing actions over the past year more than offset the impact of higher raw material costs and we continue to benefit from improved factory utilization at our new Americas plan.
These positives were partly offset by adverse mix discussed earlier.
Turning to slide 14, Europe Middle East Africa as unit sales totaled 14.5 million units down roughly 6% with declines in both our OE and replacement business.
Segment operating income was 66 million.
Decrease versus last year was driven by lower volume cost inflation and higher unemployment overhead.
Turning to slide 15, Asia Pacific Tire units totaled 7.9 million, a 5% increase than prior year.
This was a significant change reflecting inflection in China, which has been declining for the last several quarters.
Consumer a lead volume in Asia rose, 3% as double digit growth in China, and the ASEAN countries more than offset continued industry softness in India.
Consumer replacement tire shipments increased 8%, including double digit growth in China.
Segment operating income was 53 million slightly below year ago, while there are few pluses and minuses. The decline can be more than explained by lower factory utilization, primarily reflecting the production cuts we made in the second quarter two line inventory with demand.
As I mentioned in my opening comments, we anticipate that we will continue benefiting from improving fundamentals in the fourth quarter Slide 16 summarizes the puts and takes we see for the final order of the year.
The items listed are largely consistent with those we showed on previous call. The notable exception is that we're no longer is confidence in the increase in volume in EMEA for the fourth quarter.
As I mentioned earlier the volume situation in Europe has been exacerbated by poor performance in our distribution channels. This reflects a lack of alignment the results from distribution representing too many brands.
In some cases. This is the result of actions we've taken that made our brands less profitable for distributors.
This is similar to the situation we faced here in North America, a decade ago, we were able to address it here and we will be able to address it there as well.
While our plan to focus on fewer distributors in each geography has been the preparation stages for some time, we're now looking at potentially accelerating these changes while this may create volume disruption next year, while we transition we see the benefit we can achieve by addressing this issue being similar to what we saw in North America.
While also improving our dealers margins.
We will provide more detail regarding our plans at year end, but we see this along with our restructuring actions and OE business growth as another opportunity to improve our earnings over the next two to three years.
Before we opened it up for questions ill just mentioned a couple of small changes to our 2019 financial assumptions.
We are now anticipating capital expenditures to be 800 million to 825 million down 50 million due to actions to push out the timing of certain projects to reflect market conditions.
Also note our industry growth assumptions have been revised industry estimates for Europe has been reduced to reflect softer conditions. We've also reduced our forecast for the us commercial replacement industry, reflecting a further decline in low cost imports, which doesn't really have an impact on our volumes.
Expectations for us consumer replacement of an increased slightly and use so we has decreased slightly.
Now I'll open the lines for questions.
And at this time, if you'd like to ask your question. Please press the star and one on your Touchtone phone you can any of those yourself from the Q.
Hi, pressing the balance sheet once again start one for your questions.
First the Ryan Brinkman with JP Morgan. Please go ahead your line is open.
Hi, Brian for taking that.
Good morning, taking my question.
Relative to the helpful chart on Slide 17 can you talk about your visibility into.
Price mix versus Rob turning higher in coming quarters, how much of becoming inflection is simply.
A reflection of the known previous trend in commodity prices and already announced price increases versus how much is may be dependent upon.
Anticipated ability to realize further price increases it'd be great. If you would talk about sort of the broader macroeconomic environment tire shipment volume backdrop, what competitors are doing an inventory in the channel has may impact your ability to get the price versus roz.
Spread turn positive here.
Yes, Ryan I'll I'll start on pricing, we can we can jump into mix as well, but I would say relative to.
To price, particularly in the us probably over the last 60 to 90 days, we've probably seen a healthier pricing environment, particularly in our consumer replacement business remember if we go back.
To Q round about Q3 Q4 last year, when we had some announced in effective price increases.
We're actually experiencing the benefits of those right now as you'd expect as well as some things that we've done over the last six months as well so.
Feeling pretty good about that and now remember we still have a lot of work to do I mean, I know you know and others know if we go back to raw material increases to 2017.
We're up about 1 billion three so we still have to overcome that as we move ahead, but positive momentum in that regard, we also announced a price increase of up to 5% on beginning of September effective.
First of October as well, so I think you'd see that we are still.
Focused on making sure we get the value for our brands the value for investments in the marketplace and again I would tell you.
When I look at things nothing makes me think any differently about this cycle than other cycles in terms of our ability to ultimately recover.
The cost of our products out in the marketplace. So so again, if anything a bit more positive from where we where last year.
Yes, so maybe I'll jump in and just hit a point on mix here, because while I'm on slide 17, really only addresses raw materials and price and are sort of getting to the point now where.
A little less headwind on raw materials, some more momentum on price and therefore, we've sort of hit the the point where prices.
At least a little ahead of raw materials for the quarter, which is obviously an inflection that we've been expecting and looking for.
At the same time, the there are areas of mix that in the first half of the year and even again in the third quarter.
We're adverse for us for profitability perspective, and those are things that we expect to improve over time.
Including in the fourth quarter.
So we we talked about that in the last call that we have had 20 to 30 million of negative mix in the first two quarters of the year and we expected by the fourth quarter than we would get that to a point of being 20 or 30 million positive.
And while it doesn't directly address the chart 17, it's still an important part of what we do to get value for our products in the market.
So what we got significant price.
Benefit in the quarter, we did have some things working against us on mix and maybe just to hit those to put them in context, the soft winter market in Europe resulted in less winter tire shipments less winter, we're down to five or 6% in winter tire shipments that's an adverse mix.
Factor.
Lower shipments of commercial tires in Brazil, and a little bit of worse customer mix in fact in the commercial business in the US those bulk worked against us on mix.
And then even the.
The OE strike in the us resulted us losing some volume.
On some light truck tires that are pretty high value.
And while we can eventually use that.
Shift that production to replacement.
For the sake of the third quarter that hurt us.
Hurt our volume and hurt our mix.
And then we still have some pressure from some sales through lower margin channels, which I mentioned in my prepared remarks channels, where our distribution cost is higher. So we saw this new things there that we're not working for us in the third quarter. The we expect will improve for us going forward.
We continue to see strong growth in premium segments.
The us so that.
We'll continue to work for us and we expect to get back to positive mix in the fourth quarter.
It may not be as positive as we thought it was going to be but so may not be as high as the 20 to 30 million communicated previously, but we still expect for to be positive.
So I think we'll continue to make progress.
With regard to mix, yes, and.
Gives me Ryan maybe just.
To close out your last question on channel inventories overall, I would say excuse me I would say really they remain pretty healthy in the us.
Inventories about the same as they were a year ago and that they were down a year ago from the year. Prior my memory serves and remember that's an environment, where there continues to be tight supply for certain premium tires out there as well.
Same thing in.
As we look at China days on hand, there really in good shape against significantly below where they were a year ago and remember this is an environment where sales are up so things are pretty good balance there given that the the economic situation that we're facing there and then finally in Europe I think were.
We have seen in or sort of seeing a continuation of a bit of a trend I guess, where.
Where our sense is that wholesalers and dealers are really tending to buy a little closer to need now which results in lower inventory in the channel, meaning they are now below well below last year.
Little bit lower cell and as they're relying on.
Really are waiting I should say until they need the tires to purchase them. This is good.
Tories are low in the channel and and again should we have but for instance, a good snow in Europe , I think thats going to.
Thats going to pull some demand for but overall, we would say inventories are looking pretty good.
Okay. That's great color. Thanks, and then just lastly, as my follow up even though the U.S. commercial on highway OE market continues to track strong as measured by build some who follow that industry closely our forecasting potentially large decline next year, maybe concentrated in North America class eight trucks would be great. If you could share your own expectation for that market.
I'd also just generally remind us of the materiality of commercial truck tires in the context of your overall North America or Americas business, and then again, the materiality of OE versus replacement.
Within Americas commercial vehicle.
So I guess just to put.
Put the business in context, we've got to.
Approaching 20% of our topline.
Is related to the commercial truck business.
Yes, if we take the yes, the commercial truck business itself, then we would have around 20% of that that would be OE related.
The OE part of the business has been a little bit higher as we've gone through this year because of the strength of the commercial truck build and thats actually constrained our ability to serve the replacement market and the way that we want we.
We do CEO , we do understand the truck orders peak last summer.
Remains strong strong right now that the backlog has been being worked down.
So we're expecting the OE commercial OE industry shipments to decline in the fourth quarter.
And expect most predict projections are for them to be down.
Into next year as well.
I mean, the first thing that that will allow us to do as to better serve the replacement business. So we think our replacement business is going to benefit from improved supply as the OE demand normalizes. So comes off of the the recent peak.
And I think we've got.
Our ability to ship premium truck tires, we actually think there's going to increase as a result of that so we'll get some benefit from that.
And at least initially and then ultimately it's just going to be a question of where the level of the level of freight goes that will determine that cycle and we we understand the cyclical business, but I think so right now we.
We've got some opportunities in replacement that'll help us address any decline in commercial.
Commercial loan built.
And I just had Ryan we see mcallen and his team and in our Americas business in North America in particular and work through a lot of the.
The cycles of the tire and excuse me the commercial tire industry, where you have OE builds go up and down there. They are very good at managing through that and I might also add that one of things we're doing to Darrens point on the replacement side, we talked about Goodyear tires Dot com.
I think one or two.
Excuse me calls ago and.
Those are the type of initiatives that help us whether through better the cyclicality of the industry, particularly on the replacement side. So we feel good about that.
Very helpful. Thanks.
We'll take our next question from John Healy with Northcoast Research. Please go ahead.
Hi, John .
Hi, guys I thought what are the most encouraging things in the release today was the performance of Asia and.
Just kind of want to get your view as if the performance at the segment kind of surprised you in the bounce back and volumes as maybe a little bit quicker than you thought and then secondly, you think that weve reached the bottom in that market and Matt the trend line in the Asia volumes as well as the age of profits.
We can probably start thinking moving higher rather than lower as it.
To make that call or.
As it too early to do that.
Well.
I'll start.
I will tell you.
We're very encouraged and very pleased by the performance of the of the business in the quarter to be sure because as we look at as the industry still remains very challenging, particularly in China, where as you know the OE business has been down now I think it's about five quarters straight was down approximately 5% in the quarter.
And remember that's annualizing, a 5% down a year ago as well so continues to be a tough environment and and remember I think we talked about it on the last call. Our original planning assumption was that we see some of that bounce back in the OE business in the second half of the year, We said last quarter, we didnt see that happening and it hasn't.
And of course competition that amongst tire company supplying those Oems just gets a bit more intense because of that if we look to our OE business and really to your point, John ROI, our OE business outperformed the industry by a really a considerable margin that's really a combination of of two things maybe three.
Including the hard work in the team, but really being on a launch of some several new fitments out in the market that goes back to our focus on getting on the right Fitments at OEE and secondly, it's really growing our business with more domestic manufacturers really reflecting the steps we're taking to diversify.
Our consumer or excuse me our customer base. There that's working and we would continue and we would expect that momentum would continue in in Q4 as well and on the replacement side again, we outperformed the industry and we feel really good about that and I think thats really benefiting from something that we did with a lot.
Of intentional intentionality in the past and Thats really making improvements in our in our distribution. There we're seeing the positive impacts of some of the actions we've taken around our aligned distribution.
Initiatives, there, but we've taken some hard lines in terms of how we go to market, we're seeing on a relative basis. Some of the benefits of that and also I'd be remiss, if I didn't say the.
Our brand in China is very strong.
Goes up in the new retail stores that were opening dealers like the Goodyear sign on their stores and.
And consumers like to shop for brands in our brand metrics brand awareness has been really I think at an all time high right now as well so we're seeing.
A lot of positives.
Out there in terms of how the teams managed the business.
In terms of making a call.
I think theres still a lot of variables that are still going out there I mean, the what we see in terms of all we forecast are still moving around right now so I think that.
That's something we'll be will be better prepared to.
To talk about in.
As we get to our year end call as well I will tell you one of the surprises that actually was a drag on on the business in the quarter.
Despite the performance we had was really the slowdown in Nbn, particularly in the OE business. There is I suspect you know the OE business was down.
20, 20% I think in September and that's been on a run rate of decreasing and that.
That business has been very good for us we expected it will come back, but as India goes through some of their issues right now.
Thats had a bit of an impact on us as well remember we made a capital investments in.
In India, a little while back and Thats been a really good investment for us to be able to supply the always in India with.
Sort of the Chk tires. They look at so that's one that we have to work through as well so in terms of outlook more to come on the next call.
Great and then just final question for me.
The impact of the strike in the third quarter their way to think about kind of what that cost you guys. In terms of after July dollars in the Americas and as I recoverable in the fourth quarter.
So yes, John the.
So we estimate the first 15 days and the strike.
Impacted our OE volume in the Americas by about 4% of about 160000 units.
And while our rule of thumb is the premium OE tires have sales margin just under $20.
Yes, Hi, this GM business is large diameter tires for Sq, these and pick up trucks.
Per unit impact is actually higher than that.
In the Americas business.
Thank you we'll take our next question from Rogge last with Wolfe Research. Please go ahead.
Good morning, everybody.
Hi, Rob was hoping I was hoping you can just.
Elaborate a little bit more on.
Price mix versus raw material expectations for Q4 and beyond.
In the past Youve.
Provided what your view is on full year raw material impact and if we keep raw materials at the spot prices that we see today.
Incorporating the lag what kind of of a tailwind magnitude of tailwind should be thinking about based on spot.
For 2020.
Yes.
So the as you say, having raw materials are moderating and we're at a point, where they'll still be a slight negative for us in the fourth quarter, So something what order of magnitude around 10 million negative.
And then at current spot rates, we'd start seeing benefit from feedstock costs in 2020.
I asked the real question that we're asking ourselves.
Is whether we see volume continuing to improve.
Which our volume has I think and we see some recovery in the industry, we're likely to see some commodity price recovery also.
And then that would then start to push raw materials the other way.
Yes, Thats one scenario, we're looking at for next year in another scenario.
Volumes could stay soft and which we would get the benefit from lower feedstock costs.
But we'd be faced with the weaker demand and a little lower volume would offset part of the benefit that we get.
The other thing I'll tell you the where we're trying to get our minds around as we look at feedstock cost for next year is the the possibility of higher carbon black prices.
Due to the international Maritime organization stricter sulfur emissions standards, which will start on Jan one.
Which may drive up the feedstock costs for carbon black suppliers I think thats.
Yes, Thats still question that's out there.
So I think we're all agree with your point the spot prices, we would have benefits next year.
Yes that would be pretty significant.
I think we'd be balancing those against the expectation that if volume say stable raws will come back up and if if raw stay down that probably implies that volumes are that weaker next year. So yes, I think all that will play into the way we think about 2020 in the way we come back in and comment on it on our next call.
Yes, I understand the.
No one's got a crystal ball on on commodity prices not a lot of factors that will play a role but.
Just to kind of level set where we are right now.
Yes. These spot prices were to persist into next year well what is the magnitude the tailwind based on your mix today.
Yes, so I think the.
Today's spot prices it would be around 200 million next year.
Yes, Okay that makes sense and then can you just.
Maybe give us a little bit more color here on this.
Me, a business and when you're expecting Miss that gets better.
Yes, My my memory is not that great for what happened 10 years ago, and North America, but is this something that.
Your your thinking there's.
Sort of that structural challenge for the company. They could last a couple of years or is this something that.
That does that can be fixed in relatively short order.
Well, yes, so I think I put this in the category of things that we'll be doing there are going to be positive for us. If we look at the two to three year time horizon.
Because I have is something that will take longer than a year and it did for us in the Americas as well.
We went through and I think you you with US along the way we went through quite a turnaround in our earnings in the Americas business than the North America business and part of what went on there there were a number of different factors there, but certainly.
Yes, there was some real changes in our distribution approach and a significant.
Reduction in the number of distributors that we were closely partnering with.
And as a result of that.
Helped us get better.
Better predictability and better value for our product in the marketplace and so I think theres. Some lessons there that we would look to apply in Europe and this this is even in Europe . The planned for this is not new.
But we are getting getting ready to start some of these actions and I think as we start these actions.
We do recognize that.
Any transition of volume.
From.
One supplier to another.
We will often result in a reduction in cell in temporarily until the inventory gets realigned so but I think that ultimately we need to get to the point, where we've got distributors, who are more focused on representing our brands at retail and who have a larger part of their business.
Dedicated to Goodyear's brands and that's ultimately what we're looking to do those transitions do require some changes for those distributors and they require some discussions between us and them.
In terms of how those transitions will work so I think were.
We are certainly feeling strongly that we need to move forward on that.
Some of the consolidation in the distribution channels in Europe , probably make that even more urgent is we want to make sure that we've got a route to market using distributors, who have objectives that are aligned with our objectives.
So I think that will I mean, we'll get there our brands still play very well there we've got great product technology there.
So we got the building blocks to make that work.
And so we're confident that we're going to be able to do that but clearly it was working working against us in the third quarter.
And it's something that we think we can make some significant improvements on.
While at the same time addressing.
The other big issue that we have in our European business, which is our manufacturing cost structure and we've got it and were.
We're continuing down the road of restructuring the two German factories and that will deliver some cost savings there.
Yes that was just my last question can you remind me what you've got kind of in the pipeline vis-a-vis restructuring savings and so we announced.
Actively.
Rather than.
Plant closure, we've actually downsized and upgraded to German factories, which eliminated about five and a half million of low value capacity.
For we'll as we as we move through that so it's it's a project. It takes a couple of years, we'll get 60 to 70 million of savings from that project. In addition to getting some increased capacity for high value tires.
And the discussions with the works Council in Germany have been successful there. So we've got.
We've got alignments and those restructuring actions, so we're going to be able to move forward on them and over the next couple of years, that's going to make a big difference for us in EMEA business.
Okay, but that's that's over years that season.
We look at that is.
We look at that something it starts to create deliver benefits 2021 2022 exactly okay.
Got you all right. Thank you.
Great. Thanks Russ.
And as a reminder, it is storm wine if you'd like to ask a question. We'll go next to James Pirrello with Keybanc capital.
Please go ahead.
Hey, good morning, guys. Good morning, just on the restructuring topic.
Can you.
But any color on what your intentions are in the us.
We've obviously seen some some news headlines on some initial actions related to severance et cetera. So yeah. Just just wondering what the update is there.
Yes, I mean, we discussed on the second quarter call that we're looking at several options in the Americas.
That should deliver savings there at least as great as the ones that I just mentioned for the German restructuring.
And beyond similar timetable so.
As one step we've offered voluntary buyouts.
The eligible associates have till the end of.
Ended the month or until November onest to submit applications for those buyout. So yes. The amount savings there is going to be determined by the size of the buyout and obviously the yes that will be part of what we need to do in the Americas.
There are additional actions that will have to look at but we've got strong track record of delivering on that type of cost improvements. So we'll we'll anticipate taking some additional actions but.
Nothing further to put forward today.
Okay got it and then just on the U.S.
Channel mix, there the lower margin.
Channel mix the volumes there were I think maybe a little bit higher than what you are anticipating because.
As my understanding exiting last quarter that that dynamic in the U.S. was slated to be like largely behind good year. So.
Just wondering.
Are those volumes now expected to be go away in the fourth quarter.
The actions there.
So I do think we we saw some directional improvement in the third quarter.
Yes, and I think we're expecting improvement in the fourth quarter as well.
There are couple of things there that will have to be addressed through commercial discussions. So we're.
I mean, we need to be selling our tires through channels that are efficient in terms of distribution costs and there've been some cases here where.
Yes, we've got distribution taking place through some are larger.
Ours or customers that get highest volume discounts.
Which translates effectively the higher distribution costs for us.
And so a lower net we also have a number of customers who have used what we refer to as secondary supply. So there.
Lets keep their own inventory's low they are.
They are taking delivery not directly but taking it through third parties and we pay those third parties for those deliveries. So these are things that commercially we can work out we understand that there are some of our customers who are looking to keep their own working capital in line.
And I think there are things, we can do to help them do that but we're going to have to.
Figure out a way to make that make that work, while still getting to revenue per tire that we're targeting.
And our team clearly focused on that I think we we see some progress I think theres more opportunity for us to do that expect the mix to improve in the fourth quarter.
Got it Thats helpful. Maybe I just missed this but can you quantify what the tire hub equity loss was in the quarter and what that what the progress is regarding the distribution buildout within that JV and and more importantly, maybe what you're expecting in terms that level of spend for next year.
Is that an incremental tailwind as that spend ramps down.
Well I think overall, we expect to continue continue to get benefits from tire hub next year versus this year. So that'll be in the category of things that will continue to help improve our performance in the Americas, Yes, So I think that and there are couple of.
Elements of that one is reduce losses at tire of itself and obviously, we get our 50% share of any losses that take place there.
We also expect contingent get synergies and those synergies come both in terms of volume at in terms of mix.
So improve channel mix for us.
So both of those things I think are going to be benefits for us in 2020.
If we look at the third quarter and I think there's the question you're asking we actually did see reduce losses entire and therefore, our equity share of those losses was lower.
In fact give us a couple of million better than last year, but maybe more importantly after.
First and second quarter.
Where we had sort of double digit losses equity losses entire hub equity losses for Q3 were 4 million.
So a couple of million down from last year and significantly better than the second quarter.
Got it that's very helpful and just just last one.
In the U.S. replacement market.
Just wondering if you could you know square up how you would view the September volumes for the industry.
Over 6%, which you would you say that.
Would you agree that maybe there was some pre buying ahead of the latest slate of price increases across a lot of a lot of the major suppliers.
And.
I know you touched on channel inventory, but just your general assessment of the inventories in the channel right now yeah, well I think and I think you can probably tell this from the outlook, we're giving for the consumer replacement business.
For the US you can tell after a strong industry in the third quarter, we're expecting a little bit of give back in the fourth quarter.
I think that may be along the lines of what you're suggesting.
Got it.
Thanks, guys.
Well take our next question from became Mackay with Citi. Please go ahead.
Great. Thanks, good morning, everyone boring.
My one question really was it just on free cash flow anything you can do to help us to kind of dimension the puts and takes in the fourth quarter and really the if you step back whether you expect the free cash to ultimate cover the dividend this year and a four year basis, and then lastly, if you could just talk about given some initiatives that you're taking on how we should think about.
Cash restructuring a rationalization payments in the next couple of years.
Yes.
So.
Thank you you.
Probably I mean, you've seen that our restructuring cash estimate for this year has given the actions we've taken we've we've bumped it up a little bit.
Around 50 million to around 65 million, so, allowing obviously some cash relating to the additional restructurings we've announced.
That restructuring cash in the past has been.
We're going through restructurings has been 100 billion or so so I think there theres room that that could go up a bit as we execute on these these restructurings weve discussed.
If we come back to the cash flow for this year.
I think I guess bottom line, we continue to believe our cash flow for the year is going to allow us to cover our capex and our dividends.
Which means obviously that will continue to get some improvement in working capital in the fourth quarter. The fourth quarters. The yes generally the quarter four we turn free cash flow positive for the year as our working capital comes down related to some seasonality and cash flow.
So.
I would say, helping us further is earlier this year, we've put in place some programs to on to improve working capital management.
We did see some benefits of these initiatives in the third quarter. So working capital investments in the third quarter were better than they were a year ago.
And we expect those to continue to benefit us in Q4.
In addition, we took down our capex. So we've got some investments that we have pushed out.
Delayed a bit given the industry environment than we have in a few markets.
Markets like India Rich mentioned, so we've got some investments lined up there that just don't need to take place as quickly and so we have pushed those off a bit and so I think you take all that together I think we're we're comfortable that we'll be able to cover our capex and our dividends this year without increasing our net debt.
That's how that's very helpful damaged Super quick follow up on that.
Maybe early talk about 2020, but these levels of Capex.
Are these sustainable or do you think at some point.
I guess, what would you need to see two to take that up.
Yes, I think as we start to look forward and consider the opportunity for some recovery in some of these markets. We're obviously going to want to invest ahead of that recovery. We wanted to make sure we're able to take advantage of opportunities to grow in premium tires. The timing of that I suppose is the big question and give or.
Developing our 2020 plans I don't I'm not in a position to give any specific guidance for next year.
I think going forward.
Expect that as weak as we think about.
What.
Additional actions, we want to take so growth in growth markets and what additional actions, we want to take to improve our manufacturing.
Cost from a footprint perspective, there will be some additional investments will want to do any tailwind I would just to add to that if you think about.
How we've managed through cycles in the past I mean, we've we've been able to manage levels of higher and lower spend I think effectively relative to what's happening in the market and timing our investments.
Fairly well being prudent with how we spend and I think this is just another example of it we would expect that together their investments that we need to make in future and we feel that we'll be in a position to make.
That's that's all very helpful. Thanks, so much.
Actually do.
Your next question for constant Korean with Exane. Please go ahead.
Hi, Thanks for taking my questions Mike.
First wanted to sign described Commons on expected demand in the us for Q food.
So I drivers and then on the free cash flow it looks like to me at least that you would need a fairly significant improvement in your working capital in the fourth going to do secondly can you comment.
How many a dividend and how much of that is being driven by some level is.
Destocking and I know you made comments on the at any.
Comments about trying to get inventory is down so just wondering whether some of the free cash flow supposed to do it again influence going to.
At the expense of Destocking and might limit some of the so I.
Any influence go into.
Yes. So there's no question, we expect to have reduced inventory by the end of the year and that's been part of our plan we've taken production actions to help support that.
So that part of the benefit or part of our progress in the fourth quarter would be improvements in inventory also say that.
Our level of accounts payable given the recent production cuts has come down so were.
We've had less.
Less benefit from accounts payable that's something we also expect to improve by year end as we get ready to ramp up production a bit for the first quarter. So there are couple of different things there that I think.
We'll be.
Hopeful for us.
Periods, where they've been the last few quarters.
Thing.
And this is very typical our receivable balance since come down at the end of the year and Thats generally is just timing of customer purchases.
Yes.
But there is no more than normal Levin of Destocking that you plan to do and useful because I know how does that because of announced sabic yeah.
So I.
Aspect.
The Destocking that we're doing I think will be an improvement.
Versus where we have been the last couple of quarters add but it gets us back to levels that are more appropriate for the business. So its is an improvement where we are right now.
More than it is an improvement compared to prior years.
Tim.
Just one last question I know you.
Did sort of positive spend on.
Volumes coming potentially coming down.
Next is in North America, but I mean, the drawn out let some boots.
North America, and you and so.
Greetings doesn't seem to.
And again I mean, most people have much more bands assumptions for both the OE and even the basin. Most cuts is likely to do and you've been snuff.
Just curious to know what sort of contingency plans do you have.
If the.
Hi Williams.
You can shop downturn next year than what do you plan I mean should we be looking at.
More restructurings.
Especially on the tough times side.
Have you made I mean, what other means do you have to protect margins on the talk scientists.
Take a shot but don't.
Actually I think it's a it's a it's a good question I think maybe a little context might help as well and we've talked about in the past where where we look at you know a key element of how we manage our truck business is going to the fleets and and selling that whole whole sort of cradle to grave our AR.
Fleet HQ our whole.
System of selling a new tire selling your retread tire selling a replacement tire being able to service them essentially anywhere in the U.S. and get them up and running in less than 90 minutes I think where we may have said, we've done over 2 million calls on that and I think if you think about the value of the fleet business. It certainly doesn't insulate.
From economic or cyclical changes.
In the truck tire markets, but it does activity a lot more sticky and a lot more of a consistent business model than simply writing the waves of are we going up and down a truck builds going up and down and I think we have I think very well sort of calibrated our business to make sure that we balance off and don't.
Go too far in one direction or another and what it means by that is in the past I think we had dedicated a lot of capacity to the Oems as truck builds were going.
That's that's good in the sense of selling volume. It also presents challenges in that you see it usually goes that the OE side runs at the same time is the replacement side and that tends to be a mix down in so far as your capacity is going to OEE and not available for the fleets as weve balance that off better were less were less.
Up to both to the OE swing not not that we won't have an impact, but dedicating less volume there and means we have a more dedicated to our replacement business and I think we've balanced that off very well and I think thats, how we better manage through these cycles now is the volume downturn.
Is more severe than we're anticipating I think that you know we have I think shown very good.
Foresight are very good actions in terms of making sure that we're bouncing off production with demand in the marketplace and if that would happen we would we'd really see no.
See no reason that we wouldn't be proactive to make sure that we're managing demand managing the factory in managing cash properly and and again it will be temporal because we know that volume will come back, but but again, if you think about how we set ourselves up to win in that fleet side of the market with premium tires, I think that that helps us whether it.
Downturn much better.
Just last question from my side.
Steve timing because of announced price increase it's different timings in units on the consumer side.
Anything from your side that you can come into.
Would you are planning to do have done already in units given that the market. So we so it is going to be more challenging exercise price increases.
No we've taken a price increase.
Effectively being effect for the starting in the fourth quarter in our European business.
Okay.
Thank you.
Thank you I appreciate it.
And this will conclude todays Q when a session as well as concluding Goodyear's third quarter 2019 earnings call, we'd like to thank you for your participation. You may now disconnect have a great day.
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