Q2 2020 Goodyear Tire & Rubber Co Earnings Call
Good morning, My name is keep and I'll be your conference operator today.
At this time I would like to welcome everyone to good years second quarter 2020 earnings call.
All lines have been placed on mute to prevent any background noise.
After the speaker's remarks, there will be a question answer session. If he would like to ask a question. During this time. So we press star in why would your telephone keypad.
If you would like to withdraw your question impressive County.
I'll now hand, the program over the Knick Mitchell Senior Director Investor Relations. Please go ahead.
Thank you Kate and thank you everyone for joining us for Goodyear second quarter 2020 earnings call.
Joined here today by Richard Kramer, Chairman and Chief Executive Officer.
Well, <unk> executive Vice President and Chief Financial Officer.
Christine is a moral vice president finance and treasurer.
Supporting slide presentation for today's call can be found on our website at Investor Day, Goodyear 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.
I cannot draw your attention to the Safe Harbor statement on slide two I would like to remind participants on today's call that her presentation include some forward looking statements about goodyear's feature performance actual results could differ materially from those suggested by our comments today. The most significant factors that could affect future results.
And in Goodyear's filings with the FCC in in our earnings release, the company disclaims any intention or obligation to update or revise any forward looking statements whether as a result, new information future events or otherwise our financial results are presented on a GAAP basis and in some cases on non-GAAP basis and I'm not.
Financial measures discussed on the call are reconciled to the U.S. GAAP equivalent as part of the appendix to the slide presentation, it with that I'll turn call over to rich.
Great. Thank you Nick and good morning, everyone.
The second quarter was arguably the most challenging quarter in good years 122 year history and it was definitely the most difficult operating environment that I've experienced during my tenure.
Industry demand during the quarter was significantly affected by the actions governments businesses and consumers talks to slow the spread to the cobot 19 virus.
While these actions where necessary to deal with the many unknown surrounding covert 19, the impacts were simply unprecedented.
[noise] in April we witnessed the significant declines in vehicle production around the globe as auto manufacturers idled factories to protect employees and respond to falling demand at the same time wholesalers and dealers reduced orders a shelter in place mandates restricted consumer mobility.
In our commercial tire market demand for truck tires also fell precipitously as sleeves canceled orders for new tractors and trailers and ton miles rapidly deteriorated.
These dynamics paired with the uncertainty in consumers' minds contributed to the steepest year over year decline in industry volume in history.
Our April unit volume fell by nearly 70% contributing to the 45% decline for the quarter.
The month of April alone accounted for about half the reduction in our earnings for the entire quarter.
[laughter] unless you know we were quickly able to take out substantial cost during the quarter and will be prudent about how we bring costs back into our footprint. Importantly, we're also leveraging the crisis as a catalyst to accelerate our plans to improve our structural manufacturing costs and to improve operating processes through.
Increased efficiency.
I'm extremely proud of the way our associates rose to the challenges we faced at the beginning of the quarter I.
I would like to thank every member of the Goodyear team for their relentless efforts and sacrifices to support our customers and our communities over the last several months.
Dealing with the pandemic has once again proven.
I had a crisis brings out the best in people are Goodyear associates around the globe. Our Shining example of just that.
Now turning to slide floor as a quarter unfolded government restrictions east and economies started to reopen albeit at varying levels in different geographies similar to our experience in China. During the first quarter the replacement channels, where the first to improve in Europe, and the United States and as always.
EMS resumed production, we began to see recovery there as well.
In the Americas auto sales in the U.S. have recovered more than 50% from the low seen in April but they were still down nearly 25% from the previous year in June and the pace of recovery in vehicle production is lagging retail demand, adding further challenges for suppliers.
By being on the right mix of vehicles, and having a strongly position we've been able to mitigate some of the impact of weaker markets. Despite the success our consumer U.S.. So we business was still down 12% in June.
The dynamics in the U.S. consumer replacement market are similar retail sell out has improved steadily during the last eight weeks of the quarter, yet industry shipments are still down 17% year over year.
In Europe, we're seeing steady improvement in industry conditions, but infection rates are increasing and some countries. Our reinstating mobility restrictions new vehicle sales are stabilizing on the back of governmental schemes to stimulate demand. However, registrations were still more than 20% below that.
Prior years level in June.
Well European markets are weak, we have the benefit of operating from a position of strength with a strong brand and outstanding technology to great assets that give us an advantage in a market that places high value on tire technology.
Early teams have been able to leverage these strengths to gain share through the first six months to the year in the premium segment with European Oems.
[noise] demands for consumer replacement tires also improved as economies reopened across Europe.
As retail demand to average declines of more than 40% in April and May pent up demand was building.
Our analysis of channel inventories is sending the same signal and we saw some of this demand come back to the markets in June despite selling demand among each year and may members still declining 11%.
Now I would also point out that while coping 19 has most certainly impacted demand in EMEA. It has not impacted our commitment to driving our align distribution initiative in the region. We continue to expect to deliver on its inherent benefits for both Goodyear and our partner distributors.
With a firm commitment to our new consumer focused products. Our teams haven't missed a beat to ensure our product launches stay on track despite the challenging environment.
During the second quarter, we successfully launched the Goodyear vector Fourseason is gen three.
Already the leader in the rapidly growing all season category, our talented engineers were able to significantly improve upon the earlier generation designing a tire that can corner hard on drive pavement, while maintaining the ability to pivot and deliver excellent traction in performance on snow and what pavement.
Now turning to Asia Pacific, we're seeing improving industry conditions in China, although still below pre covert levels and while our overall volume in the country was down more than 10% for the month a successful launch of the Eagle F. One sport contributed to our strong consumer replacement shipments in June.
Production in Chinas automotive industry is running ahead of the prior years level with light vehicle production up more than 10% in June.
But it's important to note however that consumer demand is recovering more slowly with dealer inventory of new vehicles, increasing both month over month and year over year. So we're mindful of our production plans moving forward balancing customer service with inventory levels, given our focus on cash.
While China has seen improvement conditions in India remain challenging with new car sales declining 60% in June.
The replacement industry is relatively stronger however, the latest data suggests industry demand is only a two thirds of the prior years level.
This will remain a difficult market until covert 19 is better contained.
In summary, and while our markets during the quarter were severely impacted by the pandemic, our exit run rates for well off our April lows and trending in the right direction as economies reopened and commerce increased.
Now lets demand in our major markets around the world began to recover we responded by executing a phased restart of our production to ensure that we had enough for the right tires to serve our customers as they resumed operations with our manufacturing plan focused on flexibility and agility.
As you would expect we have an intense focus on cost as well as the quality and levels of our inventory and customer service as we look to the back half of the year.
Now with said that the key to success is constancy of purpose, while operational flexibility is the key to managing through this difficult period. We have remained steadfast to the principles of both our strategy roadmap and our connected business model.
Make no mistake, our focus is not on getting through the pandemic, but how we will emerge stronger we will win with our customers and consumers manage our cost and build our capabilities to win in the future.
And during the quarter, we saw the benefits from our aligned distribution initiatives from our E commerce initiatives and from our enhanced service offerings, which ensured that we were able to continue servicing our customers during the peak of the cobot 19 pandemic in April.
And they played a role in us being able to connect with customers and consumers as other pads to market became partially or completely in accessible.
Tire hub, our national distributor remained open and helped us to serve disrupted markets throughout the second quarter.
Additionally, our newest sales channels and service offerings are seeing accelerated adoption rates as the pandemic has caused consumers to ship spending online and away from traditional brick and mortar locations. What's more we're seeing the momentum behind this digital transition continuing our business, even as our economies have been.
Going to reopen.
These dynamics helped drive volume growth of approximately 15% through our ecommerce site and 150% through our mobile installation business.
Consumers are also responding favorably to our zero context service offering at our us retail stores with sales improving throughout the quarter and profitability increasing in June relative to the prior year.
No. Another area, we saw our competitive advantage growing within our commercial truck business, where our value proposition starts with what goes well beyond the tire.
While the commercial truck industry was not immune to the pandemic, we continue to see the benefit of our industry, leading products innovative fleet management tools and a robust service network.
In the U.S., our commercial truck service centers outperformed the broader industry with sell out up in high single digits through the first half of the year, despite weakening fundamentals in the industry.
Our ability to help our customers reduce downtime deliver improved cost per mile and measure their operating performance is why fleets value Goodyear in both good and bad times.
This is a key reason we were able to gain share in a difficult market. Our service model also helped us to secure a new partnership during the quarter with rider, a well known and leading transportation and logistics company in the U.S. and beyond we are very proud to have rider as a key customer.
Our service offerings are available to smaller fleet customers as well during the quarter, we unveiled a new ecommerce program with convoy a technology company that connects freight shippers with carriers through digital platform.
Now this program helps both conboy and good year to improve our independent carriers access to our tire management solutions and products at competitive prices.
This market back attitude also led us to develop Goodyear fleet tracker, which enables fleece to manage all their assets, including trailers more efficiently and effectively.
Our commercial team in Europe signed the first contract for fleet tracker in the quarter advancing our total mobility offering in the region.
Having these value added an increasingly digital solutions to supplement our strong product offering contributed to our share gain in the in Europe's commercial truck tire market during the first half of the year.
We also continue to advance our competitive advantage in our consumer and commercial product platforms. Our technology team accelerated the application of modeling capability for advanced materials that enables our associates to run experiments in a virtual environment and thus leverage millions of proprietary data.
Points from decades of actual experimental data.
This technology allowed us to continue the positive momentum in product development and breakthrough innovations that are the lifeblood of our business. Despite a temporary closure of laboratories and manufacturing facilities across the globe.
Nowhere in our businesses advanced technology entire compounds as important as it is when we're bidding on only fitments, especially those for electric vehicles.
Tire technology is rapidly advancing to meet the needs of electric vehicles, including improved range, better ride and handling and durability improvements.
And we're setting the standard of what is possible through innovation in June our good your Eagle touring tires helped testing is the teslas new model S become the first vehicle to exceed the 400 mile range barrier in EPA testing, we're very proud of that.
The world looks very different today than it did 12 months ago. When we first discussed our unyielding focus on quality technology brand and collaboration was driving increased we win rates in the electrical vehicle segment that we're targeting.
It's become clear that one byproduct of the current crisis will be an acceleration in adoption of electric vehicles as several governments around the globe at work to tie economic stimulus programs with social and environmental goals like lower greenhouse gas emissions.
Plug in hybrids and battery he.
Gained significant momentum in the five biggest European markets during June.
While overall registrations across Europe declined 25% sales of E. These more than doubled.
These market dynamics make me more confident than ever in the tremendous opportunity that our OE business has to gain share by leveraging our technology leadership position and the Fitments that we've won to date.
As we think about the quarters ahead, the uncertainty around the trajectory of the macroeconomic environment is significant.
In light of these realities, we are maintaining a realistic perspective as we plan for the second half of the year.
Well, we're unable to predict how the next few quarters will play out we can take steps that will position us to win irrespective of market conditions, we remain committed to winning with customers and consumers in our markets today, while advancing our strategic initiatives to strengthen our leadership position and secure our long term growth.
Prospects.
We're investing to support the robust growth, we're seeing an ecommerce and mobile installation business.
These investments will allow us to expand our mobile installation capabilities into new markets by the ended the year and lay the groundwork for further expansion in 2021.
At the same time, our OE teams are focused on winning the best Fitments to position us to drive profitable growth in the coming years.
And we continue to focus on improving our manufacturing costs, while adding flexibility to support our customers and do so at lower levels of inventory. This is crucial to how we're going to successfully adapt our business for the current market conditions.
And finally, we will continue to focus on managing our business for cash which helps to position our business to win over the long term.
We are aggressively and intelligently managing our working capital and we are targeting positive free cash flow in the second half of the year.
As a company we share optimism about what we can accomplish together as we move ahead.
I'd like to close my remarks today by Reemphasizing My appreciation for all the contributions of our associates. During this challenging time in supporting our customers in our business, all while supporting and taking care of their family friends and communities and truly remarkable ways now I'll turn the call over time.
Dan.
Thanks Rich.
Let's see into July.
We are seven months into 2025 months into the pandemic at least here in the western hemisphere.
It seems like we're now in a position to answer the question. We were contemplating three months ago that question was how bad can it get.
Along with that question, we were simultaneously asking ourselves what can we do to limit the damage during the second quarter.
Today, we find ourselves asking a different set of questions. The most significant of which are how long will it take for the business to get back to pre pandemic levels.
And how should we manage the business during a period of recovery, that's likely to see a significant level of volatility.
I'll come back to these last two questions, but I want to start out by reflecting on the answers as we see them now to the first two questions how bad did it get and what we are we able to do to limit the damage.
You saw on slide four our monthly volume trend for the second quarter. There's no question. This was the most severe volume shock we've ever experienced worsen the great recession and worse than the strike related shut down we had back in 2006 and it came on the heels of a weak second half of 2019.
The impact of this volume shock as reflected in our results.
Even before the noncash write downs and rationalization charges, we had net losses of over 400 million in the second quarter and approaching 600 billion for the first half.
This will add a lasting effect on our balance sheet Theres no way around that.
In the second quarter, we sold 45% fewer tires and built 70% fuel retires than a year ago impacting our operating income by over 600 million just for Q2.
Our earnings in the other tire related businesses like retail and chemical were down over 100 million for the quarter driven by lower revenue in those businesses I guess that tells us how bad it can get.
What we're able to do about it is a better story.
We figured out new ways to reduce cost and preserve cash actions, we've never taken before.
Our salaried workforce made significant contributions with many being furloughed for either part or all of the second quarter.
Those that were working did so it pay that was 10% to 30% lower in many cases voluntarily.
And they did so while working harder to not only complete required tasks, but also while inventing new ways to work.
Our manufacturing associates were also idled for much of the quarter, but it managed to return to operating our factories safely and without any significant disruption, even while implementing a whole new set of protocols designed to prevent spread of the virus.
Our whole team rallied around the operational and financial actions required to manage the situation.
I think spend across all categories, and reducing essay achieved by nearly 25% and manufacturing costs by over 35%.
Our teams modified engineering plans to reduce capex and leverage leveraged government pandemic really programs to reduce and deferred tax payments.
Our operating teams develop new run strategies for our factories. So we could meet customer demand at lower levels of inventory, while also working with our customers and suppliers to minimize the cash tied up in working capital.
I would never faced a tougher situation in my career I've never been prouder to be part of the good your team.
As a result of these actions and with a stronger than expected volume recovery in June we were able to substantially reduce the amount of cash we used in the quarter.
Our original projections from April show, the cash use of up to $1 billion.
By the end of May we introduce those estimates to closer to 700 million consistent with our comments at the auto show Investor Conference.
In the end with better earnings and lower working capital, we use less than 500 million a dramatic reduction that reflects the impact of our team's focus on driving cash and liquidity and protecting our balance sheet to the greatest degree possible.
In addition to consuming less cash we also secured extra financing to provide further flexibility.
We issued 800 million of senior notes in May adding to the benefits of the successful refinancing of our 2 billion dollar us credit facility in early April.
This capital will serve as a valuable reserve as we faced the uncertainties, resulting from the ongoing pandemic.
With the financing, we completed our cash and liquidity into isn't as strong a place as it ever has mid year.
So we come into Q3 with a better balance sheet than we expected and with volume trends substantially stronger in June.
So far those trends are holding in July.
That gives us some confidence heading into the second half, but it's hard to get too confident given the level of new cases, and the threat of additional restrictions.
I'll come back in a minute to our thoughts on the second half, including how we plan to manage through this period of industry recovery, but first I want to quickly review the detailed results for the quarter.
Turning to slide 10, as I indicated in my opening remarks, our unit volume for Q2 decreased 45%.
Our second quarter sales were 2.1 billion down 41% from last year, driven driven by this lower tire volume lower sales in our other tie related businesses and unfavorable foreign currency translation.
These effects were partially offset by improvements in revenue per tire driven by price mix.
Unit volume was slightly better than the expectations of a 50% decline we had shared previously as we experienced an acceleration in demand towards the end of the quarter.
Overall replacement tire shipments declined 39%, reflecting the impact of lower end user demand as well as inventory destocking by our distributors.
Original equipment unit volume decreased 62%, reflecting reduced vehicle production.
Our segment operating loss for the quarter was 431 million down 650 million from a year ago.
Our results were also impacted by certain other significant items, including noncash impairment charge of 148 million to reduce the carrying value of our equity interest entire hub, given the lower volume environment and by rationalization asset write off and accelerated depreciation charges of.
185 million, primarily associated with the previously announced plant permanently close our manufacturing facility in Gadsden, Alabama.
After adjusting for these items are loss per share totaled $1.87.
The step chart on Slide 11 provides our variance analysis for second quarter segment operating income versus last year.
This is mostly a volume story.
The impact from lower tire unit volume was 338 million, reflecting a decline in shipments of approximately 17 million units.
Reduced factory utilization resulted in a $299 million decrease in overhead absorption.
In total we reduced production by 26 million units during the quarter compared to the prior year or approximately 1 million more than our forecast in April.
Raw material costs were up modestly, primarily reflecting unfavorable transactional foreign currency of $28 million and higher non feedstock costs.
While raw material spot prices were down significantly in the quarter, our raw material cost a reflection of pre covert 19 prices given our first in first out inventory accounting.
Our cost savings were up substantially for the quarter, primarily a reflection of salary payroll and say Gee savings.
The $53 million decline in the other category included several items.
First earnings from our other tire related businesses were down 104 million for the quarter.
Earnings result tail locations were weak early in the quarter and the sharp drop in travel hurt our aviation business.
In addition, our chemical business was affected by lower tire production.
Second.
Other includes an $11 million write off of work in process inventory associated with the quick suspension of production or manufacturing facilities.
These two negative items were partly offset by over 60 million in savings related to reduced advertising and reduced R&D spend.
Turning to the balance sheet on slide 12, despite operating losses, our net debt was up only 150 million from a year ago.
Given lower levels of working capital.
While we still expect working capital to decline between now and year end it will not decline as much as we saw between June and December last year, given the expected ramp up in our sales as the business environment recovers.
On Slide 13, you see we had total liquidity of approximately 3.9 billion, including a 1 billion of cash and cash equivalents.
Note that in mid August the Companys 282 million of eight in three quarters notes mature.
So format for this upcoming repayment, we had liquidity of about 3.7 billion still well above our year ago levels.
Slide 14 shows that following this payment we have no other notes or corporate credit facilities maturing until 2023.
Slide 15 summarizes our cash flows we used $259 million of cash during the quarter for operating activities driven by our operating loss.
Capital expenditures totaled 152 million down 28 million from last year.
Turning to our segment results beginning on slide 16, America's volume decreased approximately 50% to 8.5 billion units.
Well, we volume declined 68% and shipments of replacement tires fell 45%.
Our commercial business output outperformed our consumer business as industry demand for truck tires was less affected by government shelter in place mandates.
Additionally, our us consumer replacement business was disproportionately affected by Walmart template temporarily closing its autocare centers.
Across other distribution channels, our us consumer replacement shipments outpaced the industry.
America's second quarter operating loss of 287 million was down 421 million from a year ago.
Turning to slide 17, Europe Middle East and Africa's unit sales were down 45% driven by lower industry demand in all major categories.
We shipments declined 63% and our replacement volume fell by 37%.
As in the Americas, our commercial business performed relatively better than our consumer business.
Europe Middle East Africa segment operating loss of 110 million was down 154 million from the prior years quarter.
Turning to slide 18, Asia Pacific Tire units totaled 4.6 million down approximately 36% from the prior year.
Original equipment unit volume declined 50% replacement tire shipments decreased 26%.
We were particularly encouraged by the recovery we saw in our business in China as the quarter progressed, driven by double digit growth in our consumer replacement business. There during both May and June.
Asia Pacific segment operating loss of 34 million was down 75 million from the prior years quarter.
Turning to slide 19, I wanted to come back to the question of where we see the industry in Q3 as well as how we expect to manage our business as the market recovery continues.
Needless to say industry demand remains unpredictable.
Balancing recent industry strength with the risk of further covert related disruptions, we are expecting industry volumes in aggregate to be down about 20% in the third quarter from year ago, which is similar to the levels we experienced in June.
In essence, we aren't assuming further improvement nor are we predicting trends will deteriorate from recent levels.
We continue to plan for the fourth quarter to improve from these levels, but don't feel comfortable quantifying Q4 at this time.
We also expect the volume decline in our other tire related businesses to be less in Q3, reflecting stabilization in our retail business and higher demand for chemicals.
In total the year over year earnings decline for our other tire related businesses are expected to be $30 million to $50 million during the third quarter.
Given stronger volume, we plan to increase our production in Q3, not only to reflect stronger sales, but also to rebuild the unplanned inventory reduction we saw given the surge in sales in late June.
We expect our production to be down about 5 million units from a year ago across consumer and commercial businesses.
The impact of this decrease will be about 15 million a higher there are modeling assumptions with imply.
Given the accounting treatment that applies during periods of low utilization.
Our working capital levels ended Q2, much lower than we had expected part of the benefit we saw in Q2 will mean, some further investment in working capital in Q3 to support higher sales volumes. So we expect working capital to be a use of funds for the third quarter.
We continue to expect working capital will be an inflow for the full year after an outflow of over 500 million in the first half.
The amount of full year cash generation for working capital will likely be modest but will ultimately depend on sales activity in Q4, and how our assessment of how much inventory, we believe we need to support the business in early 2021.
Finally on slide 20, we've updated the couple of our other financial assumptions, we are projecting our full year raw material costs to be 100 million lower than the prior year, excluding the impact of unfavorable foreign currency translation.
This represents the high end of the range, we provided during our first quarter conference call.
Depreciation and amortization is expected to total approximately 760 million down $15 million from our previous forecast. The revised outlook, primarily reflects the impact of our decision to permanently closed our manufacturing facility in Gadsden, Alabama.
And we've increased our estimate of rationalization payments by 25 million.
Operator, you May now open the lineup for questions.
And at this time, if you'd like to ask your question. Please press the star and one on your Touchtone telephone.
And one on your Touchtone phone.
We'll go first to Rod glass with Wolfe Research. Please go ahead.
Morning, running every good morning.
Had a couple of questions. Just first can you just talk a little bit more about what's embedded in your Q3 negative 20% expectation.
Just seems Steve I think auto production.
Generally the consensus is like negative 10% to 15%.
So are you expecting replacement to be worse than that.
Yes.
The second half volume.
Recovery.
Expectation here and we're trying to think through this on a global level.
And you are recognized completely that we had some numbers in June that looks pretty good and some numbers in July particularly for us. So we.
That look even better.
So I think were taken some of the some of those trends, including the good use so we the strength that we're seeing in China, and even some of the pent up demand and low lower channel inventories that should be supportive of sales, but I think we're balancing those against some uncertainty in European OE.
Where registrations are still down.
Some uncertainty in Europe for the winter season for sure where inventories are still.
Generally higher than they should be given the level of sales last year.
Lot of uncertainty in emerging markets, including India, which rich mentioned in his remarks, and then just overall concern about what's going to happen with consumer attitudes given the rising number of coven 19 cases.
So I think I think we're balancing it out.
Not challenging the point that you're making about the strength in the us OE build at all.
But taking into account I think were what we're seeing globally and yes, not taking for granted that the trends continue given the risk of further government actions on higher levels of cases.
Okay.
Two other things I was hoping you could just talk about one is.
The you know what is the impact of everything that's happening right now on some of the savings actions, you're taking you'd originally targeted.
$65 million to $130 million that savings from aligning distribution in Europe.
Our things like that.
On tracker or are they falling behind and any kind of high level comment on this.
ITC.
Decision at the end of August.
It sounds like there's the potential for.
Some duties are tariffs on maybe 25% of us replacements supply if this actually happen and if it did with the impact be similar to what we saw back in the.
Yes. It was 2010 I can't remember exactly when but there was a period of time with pretty strong industry pricing for a while as a result of.
Tariffs on China, which was similar.
Yes, I'll start.
And I'll.
Start with align distribution in Europe, and I would say that that were actually very pleased with the progress. So the question of we're on track absolutely.
And I think it's important to say again that covert did not at all change our plans are our commitment to it. We've we've reached agreement with now almost well all of the essentially all the the full service distributors that we wanted to work with almost 90 ASM.
And we're beginning to transit transition.
They are role to take on more excuse me more territory in line with the business conditions that we'd like them too and as we said last time that could cost us about a million and a half units are about 5%.
Loss, if you will in volume and I think Thats exactly what you saw in the in the second quarter and already we're seeing some good good impacts to the value of our brands and end consumer poll, we saw even relatively good pricing and in Europe in Q2, and remember we said to benefit.
About two to four.
Dollars per tire margin for tire increase over the next three to four year, so were full gas on that and.
I'm very pleased with where we are in your question on tariffs I think is is a good one and and you're right to kind of go backwards to look at this so we look at background, maybe just a couple of quick reminders for every one is a rule of thumb for Goodyear, we tend to manufacture where we sell.
So in terms of.
Imports or exports that the tariffs would not impact to us as such and remember these actions tend to impact the lower end to the market and not sort of the premium segments, where we're focused and also what happens here us being a global company.
It does impact the value oriented segment, but also net result for us tends to be a bit of a plus and minus right because the actions taken in one location tend to increase supply input pricing pressure on another locations remember we saw that we had some good benefits in the us when we saw this.
The last time, but we saw pressure so first in Latin America, and then in eastern Europe as well now particular to this one we could have a potential impact on the industry, you're exactly right to pointed out there's four countries affected Thailand, South Korea, Vietnam in Taiwan, and they account for about 20.
5% of the us industry or about 50% of the imports now coming in so we could see again.
As a market disruption in the us.
Remember, we used to walk you through those charts, where we see big industry swings, where we see the impact of big buy ahead or loading up on tires by the by the distributors and dealers to be sold out later, that's at one time pop that we see.
And the other impacts you again again, you you mentioned some that take place back where we had this on the Chinese imports back in 2010, but look at the end of the day, we don't expect a big impact on us in terms of volume, particularly because of our premium focus so as those those industry disruptions.
Take place, where we're going to as we did last time stick to our game and stick to our strategy and we're happy to do it.
Okay, all right thanks for that.
Thank you.
Our next question from Ryan Brinkman with JP Morgan. Please go ahead.
Thanks, just a follow up too.
Next question on the volume earlier sounds like Youre setting more uncertainty, maybe even conservatism around second wave of infections et cetera, just wanted to check though if you have seen any actual weakness so far in threeq you, including after I will take you commented yesterday that the strong sequential improvement trend in demand for their aftermarket products in Twoq, you sort of stalled out.
Certainly in the first.
Three weeks of July curious if you saw that too. If there was anything you can say about how threeq you is trending so far no. Yes. So I think that we've actually continue to see the trends from June and even the later part in June through July.
So if anything that that strong recovery for US has continued through the month of July yes. So I think the the uncertainty for US is less July it's more about what happens in what plays out in August and September.
Okay helpful. Thanks, and then obviously.
Free cash flow into Q tracked way better than you had warned about at the time of one Q earnings you mentioned working capital being use of cash in Threeq you, but can you just talked about some of the other various puts and takes that went into the better to cash flow in the sustainability of those seemingly net favorable factors in the back half of their yes.
Clearly, we can do that in there we can't take away. The fact that the some stronger volume and the related stronger earnings did play a role in the second quarter. So the fact that the the quarter itself sales came in only down unit sales down 45, instead of 50.
Certainly there was element there I do think the work that the team did to get.
Inventories down.
And to keep production levels down while still delivering the tires that our customers ordering.
I mean that you can't underestimate that impact.
And it is the combination as you can always get inventory down but in this case, we're able to take inventory down while still delivering to our customers and getting the extra volume that was in demand.
So that our inventory clearly came out in a better position.
And yes.
The fact that our receivables stayed in line and we continued to maintain.
Appropriate payment patterns with our customers through a time when there are lot of customers who have distress in their own business. I think was a very big deal as well, yes, a lot lot of work with customers to make sure that their businesses are managed appropriately in the their working capital is in good shape. So.
They have to liquidity to to stay current on payments. So there's still a lot of work to do there there's a lot of challenges.
For the supply chain going forward, but yes, I think we yeah, we ultimately got to a place it was much.
Yes, a much better than what we could envision back in April.
Ryan I'd also just add real quick I think you're also seeing the benefits of Darren and Christine his leadership working with our businesses.
They've been through this before we we went right to assessing our liquidity is started and we put the actions in place both from making sure we had enough liquidity and how we're going to operate the business around working capital in supply and I think you're seeing the benefit of it so I I tip, my hat to them as well and the businesses.
Yes.
Thanks, Rich I think the the final points here as cost savings.
You know, obviously, some very significant cost savings plans and we we set out some aggressive targets.
A number of cases, we exceeded those as well and that helped helped create the increased earnings along with the extra volume.
Thats helpful. Thanks.
Yes, I would say lastly, you know what's your take on the pricing environment, because I recall, you discussing piously Corona virus that give us some aggressive competitor actions out there around OE pricing that was offsetting some of that the benefit that you'd like to seem from lower raw material. So we helped helpful to get your take on whether you think the industry has been relatively disciplined.
In the context this environment or.
If maybe some of your last well capitalized players in the industry basin. This degree of Unabsorbed under absorbed overhead.
Reacting with steeper discounts.
You know you're right to point, the always situation now, but I would say overall.
We were relatively.
Relatively replacement pricing was positive in the quarter I think you've pretty much performed in line with our expectation and we got the benefit of the contribution to increase revenue per tire. So we feel we feel pretty good about that Ryan if we look around the world in the US we're seeing a prices improve.
Sequentially during the quarter Euro and year over year, I think as we look at that.
You will see PPI up 1% as I mentioned earlier, we seeing favorable pricing trends in Europe across summer winter and all seasons again, both year over year and versus the prior quarter and emerging markets. We're pricing there primarily to offset the impacts of of a devaluation on.
Also on the raw material prices as well, but where we do see the headwinds year. Your memory is absolutely correct. We previously said that theres pricing pressure in the OE business, particularly because that excess capacity that's out there and that really hasn't changed at this point. So I think you're right to point that out.
Great. Thank you.
Well take our next question from John Healy with Northcoast Research. Please go ahead.
And more John I think you good morning.
Yeah.
Wanted to ask a big picture question, Thanks, Dan and rates you. Both said that this was the toughest period you've seen in your careers.
And having to respond and you look at West Casino that Don just putting that liquidity in place and putting some of the buffers. The stabilized the business is pretty remarkable but.
You had a lot of these actions kind of almost underway. It seems like on the on the on this strategic side before cobot, whether it's got then or.
At the end kind of alignment.
Are there any is there anything that's coming out of this from a big picture standpoint that you think.
Might be long term optionality that the company might pursue either from a manufacturing standpoint are in line that standpoint, or even just the market segmentation standpoint that that.
Might change the pace of Goodyear a little bit.
Darren start I'll jump in than yes, also John I think there a couple of things here the.
Yes, I would raise first and some of it is I think afirma Tory, yes, So I think as we got into.
The this kind of difficult environment, obviously, the work that we're doing to improve our manufacturing cost per tire.
Is very valuable to us and anything we can do to make our manufacturing more flexible is going to be important to us. So it's not just getting our cost per tire down.
When we're running the factories fall, but its having the flexibility to get the cost per tire down at whatever level of volumes, we have and I think that that is a little bit of new thinking for us.
Contemplating more how that how to become more flexible even when the factories are not running full.
So I think thats, an insight in an area of.
Operationally this is pushed us on.
Yes, I think generally are run strategy for the factories. This has given us an opportunity to focus on.
How to produce a wider array of products each month, because we do have some extra capacity to work with right now and by producing a wider array of products on the ticket each month that allows us to look at ramping our volumes back up at lower inventory levels. So that gives us an opportunity to think about.
Running with inventories below where they've had to be historically, while still providing better levels of customer service. So I think that yes, thats another item operationally that.
Yes, it has come from the discussions in and around the cobot 19 environment.
Yes, I think the despite the work that we've done online distribution.
Is another area where.
Yes, very clearly this is helping illustrate the importance of it.
And the benefit of it and I think that is rich made his comments about the aligned distribution initiatives in Europe.
And those distributors are where we're seeing some of the best performance and those are new agreements for us. So we only just begun those those new agreements this year and already we're seeing that thats the strength.
Of our distribution, there and if we come back to the us market.
The benefit of having tire hub and distribution I mean tire hubs performance in the marketplace.
Was well above where other distributors were so having tire hub is a distribution asset.
Was a bit I was a significant factor for us in the quarter. So so I think all of those things are.
Proved to be really impactful.
I think it's also give us.
A lot of confidence in the investments that we're making in areas like.
Mobile installation and E commerce and.
Again, rich mentioned divested I'm going to his jump in really two things real quick and I think that's that's really important as we said our ecommerce business was up 15% and our mobile was up 150% and you know we've always talked about a goal being customer back and consumer oriented to make the tire buying process easier.
We know that our market reach at research says customers want to make tire shopping easier more convenient they want to shop on their terms. They want information to guide their decisions and they want choices of installations. We know this was true it was the sort of the predicate of our E commerce initiatives with our partner dealers rolled.
Hi, good year, all our mobile installations, and what we saw with Covance I think prove that out I mean, you all know this but the impact on consumer spending habits and really their practices was just absolutely supercharged.
During covert, particularly toward digital transactions and it went beyond the traditional books in apparel and whatnot to things like.
Things like even food and tires were categories that people, usually would still go to a bricks and mortar store. So we're seeing the benefit of that and we're seeing the benefit of the investments that weve may pay off.
Can come to Goodyear today in that in our pilot markets you can get a tire the way you why income to the store. We can come to you. We can come pick up your car will do it the way you want to two in this environment really just exploded the understanding of that and I always say why do we think tires are different relative to to consumer expectations and I.
I'd like to say very quickly I know, we want to get on with our questions here, but you know one of the things is that we've put a lot of effort on that and a lot of attention on new mobility and I would tell you right now Cove. It makes things really unpredictable and obviously negative when you look at volumes, but medium and long term it's going to.
And through vaccine a therapeutic living with at whatever it is and we believe fundamentally just as we did back in 2008 people value their mobility people value connections they value mobility and mobility is freedom and all those trends that we've talked about around.
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Avi Cvs and.
And shared mobility shared right, they're going to happen I mean, the underlying trends on technology Connectivities sustainability regulation costs convenience all the thing we've talked about those those are received a bump in the road, but but I suspect most on this call novus, while there's consolidation that hasn't slowed down.
And at all so why you don't see that today, we have not at all stopped our efforts in fact, we haven't cut our efforts to make sure that were on the front end to that and.
And that's something you don't see but man it it is important and and our long term view hasn't changed one iota.
That's great and I appreciate the thoughts and just one quick question for me.
Any update on terms of our Walmart that in terms of it sounds kind of reemergence in the installation side of the business.
You're talking about their auto service centers opening up.
Yes. So so you know so John it's really a great question because when you looked at our share performance, we were down a bit in the quarter, but really I am I'm extremely pleased with our North America performance, we were impacted certainly by the external market conditions, but also the unique impact that we've had from Walmart Walmart.
As you know were category captain there and as Wal Mart shut their auto service centers back in and March there only open now about a third of those so were disproportionately affected by Walmart temporarily closing those those auto service centers. So as they open up and they will open up and they will.
Thrive again, we're feeling a little bit of than the negative that right now, but I'll also tell you.
Excluding the Walmart impact we outperformed the market. So our teams went out and gain share in channels other than Walmart. So I view that is completely temporal our products are best product lineup. We've ever had we were on a run of gaining volume I think multiple multiple quarters in a row through 2019, we ended up.
Drawing in it and that momentum I think is something that's going to its still there. If you just sort of adjust for these these peculiarities that we have right now.
Great. Thank you.
Thanks, John.
Hi, guys questions and retained by Keller with Citi. Please go ahead.
Yeah, Great morning, everyone.
Just wanted to go back to the long term discussion again and when we think about all the changes at the company in the industry.
As you kind of discussed internally about the Companys long term earnings power, we think about the prior kind of almost $2 billion. So why.
For the puts and takes that we should be thinking about in terms of what can restore that exceeds what what's the risk of course to getting back to that level to how we put some of the long term earnings power primers, given all that's happening the industry and all the changes happening of course, the company as well.
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So I'd say, yes, if we look at the last 10 years.
Good year segment operating income margins averaged around 85%.
And.
We're.
Certainly we need some volume recovery business volumes recovery as Rick bones recover over the next couple of years, we're going to get the benefit of a number of initiatives that are going to prove our business.
From those historical levels and that the two restructuring actions that we've taken a both in mentioned.
So 60 or 70 million of.
Savings from the restructuring and investments, we're making in Germany.
30 million of savings from closure of Gaston the two to $4 a tire.
We could get from the improvement in our European distribution. It may just a starting point some of those are all going to be additive.
Yes, I think that.
We feel like with with some volume recovery and those actions that even without any recovery of price versus raw materials, which has been the point of compression up through 2019, we could still get RF soi margins backup over 8%. The next two three years.
And that's that's a level of operating margin that maybe below where we were at the peak, but still level, where we add economic value.
Yes.
We continue to believe it's a replacement business is also going to recover margin.
That price versus raw material cost equation.
We kind of turned the corner on that's a little bit of an unsettled situation right now, but we're continuing to see.
Yes, so solid abilities on price at a time when raw materials have come back down. So I think we're we're feeling like there's there's still opportunity there, but but yes, I mean, I think we're feeling like we'll get ourselves back in that back over 8% within the next two three years longer term, we still still believe.
As an opportunity to get back to double digits.
Great Thats very helpful. Appreciate all that all that detail Darren and just to follow up maybe on on easy and the wins you've talked about there did you have an estimate of what good years.
When rates are for easy OEM fitments.
Yes, so when we did some initial analysis as we shared a year ago.
I mean, we found that we were getting we're winning fitments on about two thirds of the bids that we were submitting.
And that's the only statistic that we have quoted.
And that was a reflection of the fact that.
The initially instead of competing against eight or 10 other tire companies on those Fitments, we were generally competing with two or three yes. So the competitor said that we're able to.
To deliver.
Tire that could meet the specifications and Thats rolling resistance its carrying the load it's dealing with the torque I was just fewer people who could credibly do it.
Overtime, we expect that that I mean, the competitor set will grow but it gave us an opportunity to get a lot of wins that are helping us rebuild our portfolio. After we spent some time exiting some fitments that we didnt see long term opportunity.
Yes, so I don't have a more recent statistics to.
To quote in fact that the last few months has been kind of a disrupted time in terms of always awarding fitness. So I'm not sure that the recent statistics are going to mean, a whole lot anyway, but I think we still feel very good that we're winning the number of fitments that it takes to grow our OE share as we look over out over the next 234 years.
Again, we're and we're still in that environment, where the always have sort of reduced or delayed their their awards at the moment, we're still very happy with the win rate that we have.
Okay and.
And again a lot of those are ease and a lot of those are really.
Working on the developments to make those tires do what the always need to do we still feel really good about.
So thats all very helpful. Thank you so much.
Ladies and gentlemen, we have reached the landlord lauded time and this will end Goodyear second quarter 2020 earnings call. When I. Thank you for your participation. You may now disconnect have a great weekend, thanks for joining us today.
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