Q4 2019 Earnings Call
Good morning, My name is key for all of your conference operator today.
At this time I'd like to welcome everyone to Goodyear's fourth quarter 2019 ordering school.
All lines have been placed on mute to prevent any background noise. After the speaker's remarks, there will be a question about your especially.
If you like to ask a question during this time simply press star one on your telephone keypad.
If you would like to withdraw your question press the pound cake.
I'll now hand, a program over to Nick Mitchell Senior director of Investor Relations.
Okay, and thank you everyone for joining us for good years fourth quarter 2019 earnings call I'm joined here today by Richard Kramer, Chairman and Chief Executive Officer Enduring Wells Executive Vice President and Chief Financial Officer supporting Slide presentation for today's call. It can be found on our website at investor that Goodyear Dot com.
Replay of this call will be available later today replay instructions were included in earnings release issued earlier this morning.
Android now draw your attention to our Safe Harbor statement on slide two I would like to remind participants on today's call that a presentation include some forward looking statements about goodyear's future performance actual results could differ materially from those suggested by our comments today.
A significant factors that could affect future results are outlined in good years filings with the FCC and in our earnings release, the company disclaims any intention or obligation to update or revise any forward looking statements whether as a result of new information future events or otherwise our financial results are presented on a GAAP basis and in some cases, a non-GAAP basis non-GAAP funding.
Total measures this.
<unk> they call are reconciled to the U.S. GAAP equivalent as part of the appendix slide presentation. It with that I'll now turn the call over to rich great. Thank you, Nick and good morning, everyone.
During today's call I'll share some highlights of our fourth quarter performance and discuss the market environment in each of our regions as we look ahead.
Darren will follow with review of our financial performance as well as covers some of the puts and takes as it relates to our first quarter and full year 2020 outlook.
So.
Landing a challenging environment I was very pleased with the progress we made on multiple fronts during the quarter.
First we continue to see a positive trend in price versus raw materials, reflecting the actions we've taken to capture more value in the marketplace, especially in the United States.
Second the working capital initiatives, we implemented earlier in the year helped drive more than a 40% increase in our cash flow from operations during the quarter.
This performance was ahead of our expectations.
Third in Americas, our U.S. consumer replacement business gained share during the fourth quarter capping off a year of outperformance unit volume increased 2% driven by growth in the high margin premium segments of the market shipments of large rim diameter tires increased 8% significantly.
Outpacing the industry.
This benefit stems from our consistent investments we've made in our product portfolio over the past three years, we've launched 10 major product lines to bolster our product offerings, including the Eagle Exhilarate, the assurance Maxlife and the assurance whether ready.
And not only is the vitality of our products strong. These lines are among the industry's best with both consumers and trade magazines, praising the innovation that we're bringing to the market.
In 2019, the Eagle Exhilarate earned the coveted number one rating in the ultra high performance all season tire category from a leading consumer magazine.
Sure. It's Maxlife is ranked number one in its category in the key consumer rankings, reflecting its long where reliability and value and the weather ready with its soybean oil based tread compound illustrates our commitment to developing top performing products, while having a positive impact on the environment.
Consumers only purchased tires. Once every three to four years. So for those entering the market in 2020, we have a lot of top new product offerings for those consumers.
And we expect to build off the momentum we have with the planned launch of two important products. This year, the assurance comfort drive and the winter command Ultra.
We unveiled both at our North American dealer conference earlier, this month and the feedback was overwhelmingly positive.
The comfort drive as a premium tire for the commuter tour in category, which accounts for approximately 50% of the U.S. market. This line offers premium comfort noise cancellation and superior wet performance.
The Winter command Ultra offers premium ice and snow performance positioning our dealers to win in the winter category.
Fourth our us commercial replacement business also continued to outperform the market shipments increased 1% significantly outpacing a 16% decline in industry demand.
This speaks volumes about the value commercial truck operators see in our fleet solutions, our product offerings and our people.
In fact, our commercial truck tire portfolio has never been stronger the endurance L. Hs our premium high mileage long haul steer tire continues to drive impressive results with fleet customers.
We're also seeing favorable response to the Goodyear Marathon RTD and ultra grip RTD that we launched in the second half of last year to service the rapidly growing regional trucking segment.
Fifth in Latin America, our consumer replacement business continued to grow.
Replacement volume increased 4% driven by double digit growth in Brazil, and we grew our commercial truck tire volumes, despite a difficult economic environment in the region.
Six we continue to see better results in China relative to earlier in the year with our consumer OE in replacement shipments both increasing during the quarter and finally, we continue to grow our future OE portfolio, winning more than our targeted number of fitments with particular strength in Europe and Asia.
Having recently been with our customers at our annual North America customer conference, our hundred year anniversary in Brazil, and multiple customer events in Europe, I can confidently say their attitudes and supportive Goodyear our products and our leadership have never been stronger.
So while I feel really good about these positives we have to be realistic about the challenges we see in the industry environment as well as the issues we have in distribution affecting our European consumer replacement business. So let me address both.
During the quarter, while us market conditions remained largely stable outside the U.S., we faced a challenging industry environment, including recessionary demand trends in several of our key international markets.
Our business in Europe Middle East in Africa faced a more challenging environment during the quarter than we anticipated contributing to a 4% decline in total volume.
Well, we volume continued to be negatively impacted by lower light vehicle production and the downturn in the commercial truck cycle.
Demand in the European consumer replacement segment remained lethargic.
Industry shipments declined 3% in the EU well below the more normalized rate of 1% to 2% growth, we'd expect to see in the region.
This weakness was most pronounced in the winter category, which declined 6%, reflecting warm temperatures this season.
The recessionary conditions in Germany are most certainly negatively impacting its auto industry and our industry as well.
In China, we continue to face a very challenging OE environment and the timing of a significant recovery continues to be pushed out with some forecasters expecting a third year of decline with a significant deterioration in the first quarter.
I also want to take a moment to acknowledge the dynamic situation, our employees and partners in China and Asia Pacific region are navigating as health officials respond to the Corona virus. Our primary focus remains on the well being of our associates.
Our manufacturing plant in our in Poland in restarted operations on a limited basis yesterday, and it's clear that production in demand will be affected during the first quarter.
As a situation develops we will update you as to our near term business impacts.
Well the challenging industry environment, clearly affected our results this year I'm not happy with how our EMEA business performed in 2019.
We are capable of delivering significantly higher segment operating income margins even in challenging conditions.
In 2019, we launched a major modernization and restructuring program in Germany, which will generate significant savings over the next few years.
In addition, we remain focused on cost control and the appropriate level of investment anemia going forward.
However, our lack of progress in distribution has resulted in unstable volume and reduced our value proposition in the marketplace.
Despite a leading product portfolio.
This year, we're proactively strengthening our distribution in the region, we're focusing our efforts on developing a select number of full service distributors that of the talent and logistics capabilities required to support our brands in the marketplace.
This is a strategy that is workforce in the past as you may recall, our shift to align distribution in the US played a pivotal role in the margin expansion in our Americas business I'm confident we will be successful in Europe.
In addition to adjusting addressing distribution challenges in Europe. There are number of other actions, we're taking to drive our future results.
We're capitalizing on the shift to electric power trains our industry, leading innovation is helping to significantly increase our OE win rates in 2019, we grew our OE pipeline at a faster than anticipated pace with 25% of the Fitments, one plan for electric or hybrid vehicles.
We're also investing to enhance our product development capabilities in January we became the first tire manufacturer to purchase a dynamic driving simulator.
The state of the yard simulator will allow us to work more collaboratively with automobile manufacturers and simulate a wide range of driving conditions, helping us generate breakthroughs entire development, while reducing development time and costs.
And we're not just investing in our products the investments that we're making it our digital capabilities and ecommerce platforms continues to help us connect with consumers in fact, our research suggests that more than one third of the tires purchase through the Goodyear tire in service network, followed visit to Goodyear Dot com.
See the results in our retail stores, including role by Goodyear and in aligned retailers as well.
And we're also increasing our service offerings.
With ton mileage for heavy and medium duty trucks expected to remain strong and the shift to ecommerce, creating more complexity than ever for logistics companies. It's imperative that we continue investing in our business to ensure we can help fleets reduce both downtime and costs.
We're investing in our distribution and service capabilities to help us achieve these goals during the fourth quarter, we acquired Raven tire one of the largest tire and service companies in the Midwest.
This move strengthens the combined nationwide capabilities of our Goodyear commercial truck service centers, which means enhance service levels for our fleet customers.
We're also expanding our fleet solutions.
On last year's fourth quarter earnings call I discussed our tire optics tool that we launched in 2018 to help fleet sufficiently monitor tire inflation and tread depth in 2019 tire optics inspected nearly 2 million tires.
This year, we're launching Goodyear checkpoint and in ground device that scans passing tires to measure pressure tread depth and load valuable data that helps service cruise manage tire maintenance.
And at our dealer conference, we introduce TPS, plus which leverages on vehicle sensors to monitor tire conditions in real time.
Our Goodyear fleet HQ assists in routing the driver to the closest dealer in the good your service network or dispatches roadside assistance.
All these initiatives are designed to minimize downtime and support increased safety for our fleet customers to drive operating efficiencies in their businesses. Our fleet services offerings is fully operational with millions of service calls already performed and only getting stronger with digital technology.
Hey incidents.
As we execute on these priorities. It's also important that we continue adapting our business model for the secular trends in the auto industry, including shared and autonomous mobility.
Ultimately these trends will be responsible for determining the winners of tomorrow, and we'll have an increasingly important impact on the future of our industry.
As we entered the new decade, it's clear that the inflection point in new mobility is here.
The change driven by the electrification of vehicles shared mobility and the commercialization of autonomous vehicles are resulting in a restructuring of the legacy auto industry and significant R&D investments.
At Goodyear, we have proactively embraced this change leaning forward and adapting our business in meaningful ways. This will ensure that we can continue supplying the right products and tools to help consumer and commercial fleets on the road.
At the consumer Electronics show, we introduced our intelligent tire, which is now operational implied in pilot fleet programs. This technology allows us to continuously monitor tire temperature tire where entire pressure with more to come.
By using the power of cloud computing and good your proprietary predictive algorithms. We can turn the data we capture into valuable insights and real time performance enhancements to maximize fleet uptime, a perfect solution for driverless vehicles.
We also unveiled and go digital servicing platform designed to enhance fleet performance and safety that is backed by our trusted brand National Service network and software solutions and go is currently available in select markets in California, and will expand to additional markets in the middle of this year.
Advancements in new mobility present, the single most significant opportunity in the last 50 years for tier one tire companies like good year to create competitive advantage and further distinguish ourselves from low end opening price point tire companies.
Why do we conclude that well first the tire is not going anywhere driver or no driver car ownership or shared mobility the tires, the tire industry and good year, we'll be there.
Second requirements like tire technology, and connectivity are proving to be more integral to the performance the safety and the right of the vehicle.
This will only become more evident with time as autonomous vehicle driver systems are perfected.
Tire technology is rapidly advancing to meet the needs of electric vehicles, including range ride and handling and durability improvements intelligent tires will be integrated into autonomous driving systems.
Fit for purpose tires to complement fit for purpose vehicles are coming.
At the same time material and design changes will create more sustainable products along the way.
Finally, the trend of shared mobility is creating significant growth opportunities in consumer and commercial fleet services, and new and growing profit pools.
These dynamics play to our strength, which is why we are embracing the transition to new mobility and committed to leading the way forward in our industry now I'm going to turn the call over to Dan.
Thanks Rich.
Have to agree with riches level of excitement about the impact our investments in technology and service offerings are going to have our business as market evolves.
In addition, there are number of actions I'll cover today that will support improved results over the next two to three years as we work on those longer term programs and as we move through the recessionary environment, We're seeing right now across much of the world.
Turning to the fourth quarter, while several positive developments from the third quarter continued to benefit our business our results fell short of our expectations.
As I reflect on our performance three factors standout is impacting our results relative to our thinking left last time, we spoke.
First our OE business space significantly significant incremental headwinds, reflecting continued year over year declines in light vehicle production as well as the downturn in the us in European commercial truck cycles.
Light vehicle production declined 5%, including the impact of the OE strike in the US which was a deterioration from the third quarter.
And the downturn and commercial truck builds in EMEA in the Americas accelerated in the period further reducing demand for high margin commercial truck tires.
Second demand for consumer replacement tires remained at recessionary levels in Europe.
Industry shipments fell 3% in the EU driven by declines in the winter category.
Shipments of winter tires declined 6%.
We gained share in this important category during the period, however, our volume and price mixed performances were significantly impacted by the loss of winter tire business.
Third as always recessionary industry conditions are resulting in increased competitive pressures.
These conditions are making it difficult for us to capture the full value of our products and geographies, where demand is the weakest, including OE markets in Europe, and China, where customers have been particularly aggressive in demanding price reductions on legacy fitness.
Despite these near term challenges our OE pipeline remains strong and we continue to expect significant volume growth in this channel through 2022, driven by improving win rates, including on high value electric vehicle Fitments.
As we've discussed before the weighting torque associated with electric power trains makes tire design much more complicated. This reduces the number of capable suppliers has resulted in our win rate on e., the fitments being significantly higher.
In the consumer replacement business, we continue to improve our performance in the Americas, we increased share and benefited from actions we've taken to recover the impact of higher raw material cost in recent years.
These achievements helped us deliver significantly higher earnings and margins in our replacement business in the Americas compared to the prior year.
Turning to slide 10, our fourth quarter sales were 3.7 billion down 4% from last year, driven by lower volume and unfavorable foreign currency translation.
These effects were partially offset by improved improvements in price mix, primarily in EMEA in the Americas.
Unit volume decreased 2%.
The decline was more than explained by lower OE shipments, reflecting lower global vehicle production and the continued impact of strategic actions, we've taken to renew our OE portfolio.
Replacement shipments increased slightly with continued strength in the Americas more than offsetting ongoing softness in the EMEA and weakness in Asia Pacific, particularly in Japan.
Segment operating income for the quarter was $242 million down $65 million from a year ago.
About half of this decline came from a decrease in favorable indirect tax settlements in Brazil, and the impact of the OE strike in the U.S.
Our results were influenced by certain significant items and after adjusting for these items earnings per share on a diluted basis were 19 cents.
The step chart on slide 11 summarizes the change in segment operating income versus last year.
The negative impact from volume was 19 million.
In addition production cuts taken during the third quarter, including those related to the OE strike in the US resulted in lower overhead absorption and a negative impact of $26 million.
While these production cuts negatively affected our earnings they were the appropriate response as they contributed to our favorable working capital performance in 2019.
Raw material costs increased 19 million driven by the unfavorable transactional impact of foreign currency and higher non feedstock costs.
We saw a less benefit than we expected from lower feedstock costs, given slower inventory turns reflecting softer than planned demand.
Price mix was favorable by 32 million, reflecting the continued benefit from our pricing actions, particularly in the Americas.
Price mix benefits were reduced by lower than expected winter tire shipments in Europe, and continuing customer and channel mix challenges in the Americas.
Inflation of 46 million more than offset cost savings of 45 million.
It's important to recall that last year's costs were net 21 million lower as a result of indirect tax settlements in Brazil.
Excluding this impact cost savings this year would have been 66 million and we've exceeded inflation by approximately 20 million.
The negative effect, a foreign currency translation totaled $9 million.
The $23 million decline in the other category was driven by higher incentive compensation and R&D costs, partly offset by lower startup costs and a favorable impact of our equity interest entire hub, which improved by 4 million year over year.
Turning to the balance sheet on slide 12, net debt totaled 4.8 billion down 207 million from a year ago, reflecting strong cash flow and improve working capital management.
Our liquidity profile remains strong with approximately 4.5 billion in cash and available credit at the end of the quarter.
This is an improvement of over 500 million from the previous year, reflecting our strong free cash flow performance during the fourth quarter any increase in the size of our European revolving credit facility last March.
Slide 14 summarizes our cash flows we generated 1.3 billion from operating activities, an increase of 406 million compared to the previous year.
This improvement was driven by strong working capital performance, reflecting initiatives, we implemented over the course of the year.
Capital expenditures for Q4 or 209 million.
We slowed down our capital spending plan significantly in the second half to reflect weakening market conditions.
For the full year, we generated free cash flow of $437 million, allowing us to cover our dividend and decrease our net debt.
Turning to our segment results beginning on slide 15, Americas volume decreased 2% to 18.7 million.
The decline was more than explained by lower shipments in our consumer consumer OE business, primarily in the us.
More than half the decline in the US resulted from the OE strike with the remainder largely a function of actions we've taken in previous quarters to reduce our exposure to older Fitments, especially those on passenger cars, which continued to decline as a percent of new car sales.
Shipments of replacement tires increased 2% driven by solid growth in the us in Brazil.
Segment operating income was $152 million down $27 million from last year.
The decline was more than explained by a decrease in indirect tax settlements in Brazil, and the impact of the OE strike.
These factors were partially offset by improved price mix net of higher raw material costs and the benefit of net cost savings.
Throughout 2019, we took several actions to strengthen the competitiveness of our manufacturing footprint in the Americas and curtailed production of tires for declining less profitable segments of the market.
Last February we transitioned our manufacturing facility in Gadsden, Alabama to a five day production schedule in response to declining demand for small rim diameter tires that are produced at the factory.
During the fourth quarter, we offered voluntary buyouts to certain associates in the plant.
Combined these actions have allowed us to reduce our labor costs. However that resulted in near term manufacturing inefficiencies for two reasons.
First we are transacted transitioning certain SK used from our gadson facility to other plants, and our us footprint, which necessitates short term development ramp up costs.
Second the Gadson facility is operating at low volumes. This will result in a write off in Q1 of about 15 million of overhead related to Q1 production.
These transitional manufacturing costs are expected to offset savings from our recent restructuring in the near term.
Turning to slide 16, Europe Middle East and Africans unit sales were down approximately 4% driven by a decline in our OE business.
Our consumer replacement shipments fell 2%, reflecting weak industry conditions in Europe.
Shipments of high margin winter tires declined 5%.
Well this performance was slightly better than the market the absolute decline in winter shipments adversely affected both volume and mix.
Segment operating income was 38 million the decrease versus last year was driven by lower volume wage inflation and higher unabsorbed overhead reflecting production cuts in Q3.
Turning to slide 17, Asia Pacific Tire units totaled 7.9 million effectively flat with last year as growth in OE was offset by softness in our replacement business.
Well, we shipments increased 4% driven by some recovery in China.
Replacement shipments declined by 3% more than explained by a decline in consumer replacement industry volume in Japan.
Excluding Japan shipments of consumer replacement tires increased 5% driven by growth in China.
Segment operating income was 52 million 2 million lower than in the previous year. This variance primarily reflects lower price mix and unfavorable foreign currency translation.
Turning to slide 18, I'd like to share some information regarding the restructuring of our distribution in Europe.
On our last call we indicated 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 lacking focused on our brands.
This is similar to the situation we faced here in North America few years ago.
As you can see on the slide the majority of our volume in Europe flows directly from our warehouses to align channels, including traditional franchise retail car dealers and certain b to C E commerce channels.
However, about 12 million tires are sold the wholesale distributors or large retail chains that are not as focused on the health or growth of our brands.
With our aligned distribution initiative, we are signing agreements with full service distributors covering each geography that we'll have increased focus our brands.
This will require us to shift many of the 9 million units that are currently sold through nonaligned channels to full service distributors.
As a result, we expect to experienced and sell in volume loss during the transition.
In 2020, this could negatively affect volume by as much as one and a half million units.
Overtime, we expect to fully recovered this volume and strengthen our position and improve the stability of our business.
In the US this improvement delivered added net revenue per tire of two to $4 a unit across our entire replacement business and we see no reason why the benefit would not be similar in Europe.
Turning to slide 19, you will see several of the key factors that we anticipate impacting our first quarter results when compared to the previous year, including Unabsorbed overhead from the production cuts we took in Q4, which reduced our Q4 production by about 1 million units year over year.
We continue to expect recessionary OE demand in several geographies, including Europe, China and India.
More importantly, we see little evidenced that suggest the global OE environment will improve in the near term in fact third party estimates of global light vehicle production continued to be revised lower with forecast pointing to a 6% declined in the first quarter, including a 13% decline in China.
And from our vantage point the risks to full year auto production estimates are building.
In total we anticipate our consumer OE volumes declining by about 2 million units. This year with approximately three quarters of the decline occurring in Asia Pacific.
At this point, our thinking excludes any impact of the Corona virus, given the dynamic nature of the circumstances, the duration of the business disruption and funny and related financial impacts can't really the estimated yet.
Slide 20 again reflects on several of the positive factors that gives us optimism as we look at the next two to three years.
In July we talked about the first three items are planned restructuring actions the growth, we expect our OE business given our recent win rate.
And continued recovery if price versus raw materials.
We would now at two other items first improving mix, which was about 80 million negative for us in 2019 that began to recover in Q4.
And second the benefits of the restructuring of our distribution in Europe.
We'll continue to keep you up to date as these plans and expectations play out.
Turning to slide 21, we've included our current financial assumptions for 2020.
We are forecasting raw material cost to be approximately flat, excluding the impact of transactional foreign currency as higher non feedstock costs are expected to offset the benefit of lower commodity costs.
Well, we will benefit from replacement price increases late last year, we expect the benefit easy benefit of these increases to be largely offset by lower OE prices.
We planned capital expenditures of about 800 million effectively in line with depreciation.
At this point, we're expecting 50 to 100 million use of cash for working capital to reflect some timing differences versus 2019. However, we gained good traction with working capital initiatives that we implemented last year and similar to last year I hope to improve on this view as the year progresses.
Restructuring cash outlays are expected to total 125 to 150 million the increasing restructuring payments reflects the actions we are taking both in EMEA and in the U.S.
We expect our book and cash tax rates to be very sensitive to small changes in income in 2020.
Given our distribution initiative and tax framework in EMEA, our global tax rates will likely be volatile.
Cash taxes are expected to range between 130 and $40 million for the year, but book tax levels will depend to a great degree on geographic profitability in EMEA, which is hard to predict with precision.
We will update you on our thinking as the year progresses, but the book tax rate in Q4 was close to 50% and could be even higher at times during 2020.
And finally, you will find a few other reference slides in our deck.
Slide 25 to 27 provide an updated breakdown of our raw material costs by major commodity as well as providing some continued analysis of the price versus raw materials cycle.
Slide 28 provides an updated breakdown of our consumer business between large ram and smaller rim diameter tires for 2019.
Slide 29 provides our current expectations for industry industry shipment growth for the us in Western Europe.
And slide 24 contains updated modeling assumptions that will be useful as you develop your forecasts.
There are few significant changes I would point out in our modeling assumptions page.
Our volume sensitivities have been adjusted to reflect recent share and market data, particularly the near term decline we discussed in consumer OE.
Our assumption for profit margins per tire for the OE business have been adjusted down to reflect recent trends, including increased price pressure.
We've refined our estimates of the impact of pricing on the replacement business to exclude some revenue to which replacement pricing does not apply the biggest change was in Europe.
And finally, the impact of raw materials percentage price changes has been reduced slightly given recent lower prices and lower volumes.
Now, we'll open the volume for questions.
And at this time, if you'd like to ask a question. Please press the star belong on your Touchtone phone you can removed so from acute by pressing the pound.
Once again Istar morning, your Touchtone phone.
We'll take our first question from Ryan Brinkman with JP Morgan. Please go ahead.
Great. Thanks, Marni Ryan question good morning.
You mentioned on slide 19 that in the first quarter of 2020 depressed that we demand in restructurings and distribution changes are expected to more than offset the impact.
Improved pricing environment I'm not sure those comments our year over year and so the implication is first quarter as to why should then be below last years level I don't know if thats the case and then secondly.
What magnitude of price mix gains could be reasonably expected for 2020 and do you think those gains are enough.
Be able to offset these other headwind to drive higher as to why in the remaining quarters of the year beyond one Q absent the unknown impact of foreign buyers.
So.
All right let me.
Let me take a shot at 2020, because I think you're the view on slide 19 to be clear that is a year over year view.
So that together pluses and minuses there are meant to indicate how we feel like the first quarter might evolve versus a year ago. So obviously a lot of minuses on the page.
As we look at 2020 segment operating income.
I think we look at volume as something that clearly it's going to create some pressure.
We're operating in an environment, where we're expecting the industry to be largely flat.
And for us to have a couple of unique factors impacting our volume.
One of those is youve risk of up to a million and a half units for their distribution transition that we've gone through in Europe.
And so we expect that to be ahead for us.
We also are in our OE volume, we're expecting our OE volumes to be down a couple of million units in a relatively flat industry and most of that drop coming in Asia Pacific and there is a specific.
Yes issue that we encountered in China that has resulted in us losing some OE business. There so that as part of what's driving a couple of million unit drop in OE volume for us for the year and Thats before we take into account in the impact of the Corona virus.
So we've got a couple couple of things there that are driving volume down in addition to an industry that saw very robust.
With regard to pricing I think the point, we made there as we will get some benefit.
Carryover benefit from pricing actions that we took in the second half of 2019.
However, that's going to be largely offset by price decreases that we.
Encountered as though we so between the impact of raw material index indices and.
Just pure price reductions that have been demanded by the OE piece.
And have been become part of the market I think both those things are going to offset.
Great degree at the pricing that we would get in replacement during 2020.
Mix is a little less certain.
And after mix being a negative for us for the.
For the first three quarters of 2019 in the fourth quarter. It was still slightly negative.
But essentially flat I think were move in the right direction, it's improving I think we're we're hoping that we can drive some positive mix in the year.
So if we take price and mix together, yes, not getting a lot of benefit there and Fortunately raw materials, we see as flat.
The only point I'll make on raw material costs is that this does our forecast for raw material costs being flat, excluding the impact of currency.
Does assume that there is some recovery in the price of Buda dine in carbon black.
If we don't see prices up you dine in carbon black recover and get back to something on average similar to 2019 than there would be about an $80 million benefit.
And so that couple of different views you can take on raw materials were taken the assumption right now that's it's flat similar to the industry being flat.
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Have some opportunity for net cost savings and that has has been.
10 million a quarter or so for us in 2019, so get a little bit of benefit there.
Restructuring cost savings.
Quite honestly are largely going to come in 2021 for the programs that we have in Europe in the us So and we've got some slight currency headwinds. So you take it altogether.
I think the view for the first quarter and for the full year is that we did the environment to improve to see higher NOI in 2020.
Okay, great. Thanks, and then just lastly from me it looks like you are going to spend some more cash restructuring this year than in some prior years.
You've expressed some dissatisfaction with your performance level in EMEA is that fair to assume that restructuring efforts will be concentrated bear that and I thought I heard you in your prepared remarks say too that you are focused on having the right level of investment in Europe going forward.
To put in the potential changes to the scope of your operations, there or should we just expecting more traditional restructuring.
Yes, I think the restructuring actions that we've taken a falling in the category of have tried to reduce on less capable higher cost of manufacturing capacity.
And also to reduce the.
And level of salary headcount in both of those have been part of the plans that we've had in Europe and continue to be.
The biggest issue that we face business wise in Europe, right now I think as the alignment with our distribution channels and therefore, that's we're putting a lot of time and attention, but as we move through 2020 into 2021 wells, we should see some benefit and recovering a volume in our distribution channels and.
And we'll start to see some of the cost benefit from the two factory downsizings that we announced last year for our factories in Germany.
Clearly the in Europe and in fact in the company overall will continue to look at additional restructuring opportunities just given the softness of the markets were in the part of the cycle that were.
Okay, great. Thank you.
Our next question comes and John Healy with Northcoast Research. Please go ahead.
Thank you Dan and I was hoping you could talk a little bit more about the European distribution efforts.
I was hoping to understand maybe.
A little bit more granular.
How those new channels might look compared to what you did in 2019, and Additionally, how that 1.5 million unit volumes might flow through the year to be.
First half weighted or second half weighted.
Well so John let me take the second question first I think the of the European business is characterized by a couple of seasonal sell in periods.
And so I think that effectively what that means is that the volume impact is going to be spread pretty evenly throughout the year.
As we move through the need to to reposition inventory.
Trade inventory toward our aligned distributors.
And I think the way you can you can envision this is were.
The number of aligned distributors, we have is.
Directionally sort of half the number that we've been working with.
And you were asking and working with each of them to increase their capacity both in warehousing and transportation in order to be able to handle higher volume in our brands and that will take them. Some time to do and so they'll work through the increases in those capacities.
At the same time the distributors that.
The either we have not chosen to work with as full service distributors or who have of themselves chosen.
Not to want to put the additional resource into our brands, they're going to gradually the destocking.
And I think that destocking process, probably takes a bit longer than the the inventory growth in the aligned distributor stakes and and that is going to reduce the cell and volume.
We experienced during the year and clay in fact impact sell in volume more the impact sellout volume.
Yes, certainly they got that's our expectation so in some ways.
Similar to the expectations that we had had to retire hub, although in the entire hub transition, we certainly had a better outcome than we expected then obviously we'll work on.
On improving on the outlook here as well, but but that process started for us in January so it is ongoing right now.
We're doing it in a market thats already a bit soft so theres, a number of things they're going to be.
Playing into this program importantly, though I think we're looking at this is an opportunity to to reposition our volume and to to put us in a position where we can get.
Full value.
In the marketplace for our brands and reduce.
Needed multiple touches and distribution. So that you, which is obviously costs that we don't want to pay foreign consumers don't want to pay for so I think there there is really good opportunity there.
For us to drive our earnings in Europe in 2020, 120.2 and beyond.
Sounds good and then a question on three rich as it relates to Toronto virus.
I understand that.
It's impacting production in China for you guys, but.
Was was wanted to get your Big picture thoughts. If you think that this has an impact on the U.S. replacement market I know how to import tires come in from the region and.
As you look out to the spring do you think the industry as a whole isn't a physician where potentially there could be tires shortages.
And do you think the company is position.
You know to benefit from that potentially with.
Most of its use production.
And you asked are in Mexico.
Yes, I think it's a bit hard to.
Predict given all the variables that would have to happen to have that played out.
I think the two things that that I would.
You know would consider and thinking about that and Thats that channel inventories are pretty much in good shape, so theres not a lot of excess.
Tires out there at the moment, so any disruption that were to happen I think you know.
People aren't sitting on long inventories at the moment, but again, it's really hard to to have to predict what would have to happen for all those things to fall in place to happen. So it's too early to say that I'd also I also just say that.
That that situation would largely impact the low end of the market again, and that's not exactly as you know where we play so I think that.
The focus that we have and will continue to have is is really winning in the markets in the segments of the market, where where we know we have a value proposition that works. So.
Long way of saying.
I don't really know what will happen but.
We don't see that is really a big opportunity or big impact for us as we look forward.
Understood. Thank you guys.
So.
Well take our next question from Rod Glass with Wolfe Research. Please go ahead.
Thanks Marni.
Good morning had a couple of questions.
Could you just give us a little bit more insight into what's behind these additional pricing concessions on how we.
Like you said, it's it goes beyond the contractual pass throughs on raw materials, and obviously always always demand pricing, but until recently you are pretty disciplined on that.
Yes, right I think you know maybe I'll take a step back a little bit.
As we think about the OE business, which we love and we'll continue to love going forward. If you look over the last 10 years, a situation you're very familiar with and most people on on the call are we seeing the technical requirements for the tires that we've been supplying increased demand dramatically whether that be in rim sizable rolling resistance or ride and handling or.
Whatever else it might be we and other tire companies, obviously put the investments in place to supply that and we had certainly a man and added a margin opportunity.
For the advanced Fitments that we were we were supplying there and as a result are.
Our OE profitability increased fairly substantially and that probably peak two to three years ago and since then what have we seen I think the first thing is probably what you put in the in the normal bucket, which is just the normal down cycle or cyclicality that the OE industries going through and when that happens obviously that has an IND.
Packed.
Through the supply chain, the second thing and probably a bit more unique is the increased focus and investment that's going into each of these and simultaneously. The increased focus on cost reductions that are going into sort of the legacy internal combustion engine fitments that they still has to make so you have those things coming in.
And as you put those together you've got some you got some margin compression that I think is hitting the supply chain, including us as we look ahead. So their focus on cost down cycle in the industry few more tires.
Available out there because of that I think is what.
What's behind that.
But having said that look.
We've been through these things before and as we look ahead I'm I'm frankly, more excited about where we're going in our OE business. Because we're you know we're getting out of the this sort of traditional supply of the 15 and 16 inch tires that are still needed out there and so on and so forth in our focus goes to the to ease and.
And.
Tires with even higher technical demands around wastes work and noise and we're finding out that few people few other companies can actually do this this is what we're told in the marketplace. So our our win rate on these is substantial I mean, the last 18 to 24 months our win rate on on the these were bidding on is sort of sort of two of three.
So I am.
I appreciate having gone through this I think now couple of times before with the OE is.
That over time I'm confident the benefits from these future Fitments is certainly going to bounce off the compression on on some of the traditional fitments that we have now but in the near term we'll have to work through some of the the price pressure that that I think you understand well.
Okay.
And just thinking about the bridge.
It sounds like you're expecting one and half million unit decline in replacement, which using your sensitivity to volume and overhead that's about 30 million Bucks.
2 million unit declines about 40 million negative and you've got the $15 million gadson impact seems like that would be offset by.
If you spot prices raw materials, Thats 80 million positive and use that 10 million a quarter or 40 million on the cost.
What happened to some of the other idiosyncratic positives that you've talked about before like the actual savings from the gadson head.
Ed counter that German head count reduction and plant closure or that's higher hub losses declining and that and that you've also mentioned before that some of that 7 million of new OE Fitments starts the comment yes, yes. So I think the on the last point you made deal we fitments for US we're going to I mean, we effectively.
Bottom out in 2020, and we start to rebuild the portfolio in 2021.
So the.
When we've talked about the the increase that we expect as which is sort of 7 million units.
Off of last year's base that that's targeting out like 2022. So 2020 120.2 for the re growth in OE is taking place.
So thats, where we start to recover that volume.
Restructuring actions in Germany, and gadson are still sort of in process right now.
So the the head count reductions are going to take us.
Good part of this year to execute.
So the the savings from those aren't going to be fully ramped up until next year and 2020 is going to be the year that we get the.
The transitional cost impact from changes we have to go through to move products around.
As well as.
In the case of Gadson running a factory that is.
Yes, a relatively high cost location running one shift.
So there is even without the head count Theres a lot of associated costs for the factory that create a drag.
So I think what we're looking at and we have to recognize that so 2020 isn't going to get a lot of benefit I think we're continuing to look at and we will target additional actions during the year to do we can to accelerate it.
And to try to increase the savings that we're getting but in fact the.
The benefits were going to get are largely going to between 21.
Okay, and his tire hub a year over year positive added.
Can you also just lastly, clarify what corporate overhead was in the quarter.
Did you have some kind of catch up here for incentive comp.
Yes, I think that is the story on the corporate overhead.
I think the the delivery on cash flow and second half of the year did result in an increase in our compensation accruals. So I think thats there is not too much more of a story to it than that.
What's the number or corporate overhead number in the quarter that you guys put up.
Yes, so I think for about 50 million for the quarter.
And tire hub.
Yes, so tire hub we.
We continue to improve their so in the quarter. It was a 4 million improvement from a year ago.
So a year ago, our equity loss entire of was about 9 million in the fourth quarter was about five so thats 4 million better.
I think as we go through the first half next year, we had 25 million of equity losses in the first half of 19, if we're running at.
5 million a quarter I was just where we've been the last couple of quarters than we'd have 10 or 15 million benefit there.
And then hopefully seeing continued benefit as well, but the focus on tire up right now is making sure they're making the investments to be able to continue to expand their distribution coverage.
So thats not really not really pushing for profitability as much as we are for the serve any covenant continues to go very well, but it's.
Very good asset for us.
Thank you.
Well take our next question from James pick a row with Keybanc. Please go ahead.
Hey, good morning, guys.
Susan just regarding the European wholesale channel exits youre going to yet.
You're exiting the one and a half million units there.
Have you quantified or can you quantify the associated overhead absorption costs for this year.
So I think the the unabsorbed overhead in Europe.
Yes, depending on where it's where tires are made is eight to $12. A unit. So so if you average around $10 a unit than theirs.
Around $15 million worth of Unabsorbed overhead for us to deal with as a result of that and there is some of that because of the lagged your inventory might bleed over to the beginning of 2021 of the going the other hands, we cut about 1 million units from our production schedule in the fourth quarter.
Yeah that was sort of split between the us anemia. So he may have some of that coming into this year. So I think that 15 million may not be too.
To that a guide for the overall impact there.
Okay, and then the 65 million plus in savings over the two to three year outlook would that be in addition to.
The headwind that you're experiencing in 2020 or would that be captured in the 65 million.
So.
It is not sold two two benefits after 2020, yes. The first benefit is recovering the volume.
The second benefit.
As the X is the two to $4 additional net revenue per tire.
That we would expect so those are the those are two benefits part of which is recovering what we lose in 2020, but part of which is upside relative to history.
Got it yes.
Just within raw materials in the past you kind of separated out feedstock first non feedstock costs are there any of the latter the non feedstock factors playing in for 2020.
So James for 2020, we've got non feedstock cost increases embedded in our forecast of about 50 million.
And therefore, we've got feedstock decreases of about the same amount and the two kind of offset each other.
Thats whats embedded in our are flat guidance.
Any any color at on what the non feedstock increases related to maybe regionally commodities specific anything at all.
Yes, yes generally speaking.
Is.
Matter of either Resourcing.
Yes, commodities, where we have lost suppliers and certainly theres a lot of instances in China, where in petrochemicals, we've got suppliers that just aren't making the material anymore and we have had to shift back to.
Yes to suppliers outside China.
In other cases, we've got.
Suppliers that have had to make incremental investments in order to meet environmental standards and the cost of those incremental investments are being pass through.
And so it's not strictly speaking, it's not feedstocks, but it's increased investment that they've had to make in order to deal with the new regulations.
I mean those are those are very common examples for us behind us and the note the amount of non feedstock increases is declining so less of an impact this year than last year. So I think we're we're working our way through that and obviously, we're focused on trying to find ways to to mitigate those but that is the view that we've got sitting here today.
Got it it's helpful and just last one on mix I believe.
Backing into the fourth quarter, maybe it was still a 5 million headwind within the EBIT bridge.
One is that right and then to just how are you thinking about mix for this year.
I believe the headwind.
A major headwind are a good portion of that headwind in 19 was related to.
Your consumer alignment mix in North America does that finally, abate and 20 Tony.
Yes, so I think the.
I think in the the could be impacted the negative impact in our consumer replacement business in North America, I think we do see that abating, because there's a number of actions that have been taken to address.
Some of the factors that were causing that negative impact. So we've addressed it with some commercial.
Discussions with customers in order to.
At least get rid of some of the duplicative distribution costs that we are experiencing.
So I think thats good I think the.
We will see in 2020 is.
Loss of commercial truck tire volume.
The commercial truck cycle, and particularly OE build starts to hit and some that we expect some loss in our off highway business.
As well as that cycle and the cycle for mining tires has started to turn negative. So we've got a couple of other factors working against us. So I think that wall, where as you said, we're sort of four or 5 million negative in the fourth quarter I think we're hoping to see something at least in the positive direction.
In 2020, but and I think we're confident we'll see something in the positive direction in the consumer replacement business. I think the question is in some of the other businesses and we'll try that we'll try to provide some color for that as we go through the year.
Thanks.
Yes.
Well take our next question from Teva Kelly with Citi. Please go ahead.
Great. Thanks.
Morning.
So just two questions I apologize if I missed the first on slide 20, discontinuing the mix conversation.
Some of the expected positive contribution over next two or three just hoping you could elaborate more on that maybe talk about the individual buckets of product customer and panel and how you're thinking about different scenarios for mix of the next couple of years, yes, yes, So I think the.
Each day that the starting point here is that our product mix continues to improve.
And so we're continuing to get more growth and invest in more growth in higher rim size more complex tires, and I think the as we start to ship OEE tires for electric vehicles that will help as well so I think the core of product mix.
Has been a positive will remain a positive.
We will.
We have started to address some of the channel and customer related mix issues in the replacement business. So I think that that will improve.
And then as we see the cycle improve we work through whatever weakness we experienced this year in the off highway and commercial truck businesses than those business line mix.
Drivers of revenue per tire will start to recover and we'll see some benefit there.
And then the OE business itself as we work start to bring in some of the new Fitments that we've won in 2021 and 2022.
Particularly the electric vehicle segments, but not only those were bringing us some fitments that have revenue per tire that are.
They are fairly strong so our electric vehicle fitments.
Those tires are harder to make as a result bring revenue that's sort of directionally, 15% or so higher than a traditional internal combustion engine segment. So we got number of things there that.
We may be cycling through in 2020 that we see some upside as we get beyond 2020, we get rid of some of the things that have been a drag and let the product the core product mix come through and the results.
That's helpful and then just.
On the consumer OE price reductions that you referred to are you seeing this is sort of a new annual normal is part of the contracts that you've signed for the 7 million units or is this more of a kind of more onetime ish type type of a headwind just in response to market conditions.
Yes, Hey, I would say, it's really the latter I mean as we go through what we're seeing is again the combination of a down cycle and you know a transition to.
These and again the story you all know well in terms of moving to.
The difference to different power trains and what's going through so I think that.
No with any cycle. This this pressure kind of comes in we know that we know how to work our way through it I think the transition that the Oems are going through I think that is that's temporal as we as we move ahead I mean.
We've seen this before for example, even happen in in China. Darren mentioned the units that were we're coming off of in China, We actually.
Had a really good fourth quarter, there, we substantially outperformed the industry, where we saw very challenging environment. As you know industry was down production was down about new car production was down about 8% and our customers were impacted even a little bit more significantly there that being the Ford and GM.
That were down 15, and 13% in particular, so those type of headwinds I think are there from the cyclicality side and then we also what happened to as Darren mentioned to this earlier, we were recently informed by one of our major customers that one of their high volume vehicle was going to be discontinued early.
And that they were actually taking us off switching us off of vehicle that was in his last year production, which is a bit odd. So those type of things I think are sort of the temporal things that we see going on at the moment. It doesnt at all detour, our view of where.
Our OE Fitments are where the OE business is going we're focused on continuing to grow it as I mentioned earlier the the reception that we're getting from the Oems on the new vehicles that are coming out as Darren mentioned and 20 122 timeframe is very strong and thats before we move into the sort of the requirements.
Even more sophisticated tires as we think about certain levels of intelligence being put into them. So.
We're going to have some headwinds in 2020, but it really some of those fitments, we're going to come off anyway. So.
Thats kind of normal course and out over the long term, we see a very robust environment and actually frankly since I've been doing this I'm more excited about what's happening with the Oems in the directions that they're taking than I have been.
Since I have since I've been around so.
I feel pretty good frankly.
Thats very helpful. Thanks for all that maybe just just lastly for Darren just going back to the puts and takes on.
Slide 21 on working capital in restructuring you expecting free cash flow to be able to comfortably covered the dividend again in 2020.
So, yes, I guess each day the thing I would say that we feel like.
That this dividend the dividend we have is appropriate for us to.
For us through the cycle.
For 2020, even if our earnings are under some pressure we believe our cash flow is going to enable us to cover both our planned capex, our restructuring payments and our dividend without a meaningful increase in our net debt.
We've got several actions that we've taken to protect our balance sheet.
And we are very cognizant of that but I I think that we're in a position here, we can cover it without without any meaningful increase in that debt.
That's very helpful. Thanks, so much.
Thanks.
Further questions I'll return, the Florida, our presenters for closing remarks.
We'd like to thank everyone for joining us today appreciate it thanks very much.
And that does conclude today's program. Thanks for your participation you may now disconnect.
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