Q3 2020 Goodyear Tire & Rubber Co Earnings Call
Good morning, My name is Keith and I'll be your conference operator today.
At this time I would like to welcome everyone to go to your third quarter 2020 earnings call.
All lines have been placed on mute to prevent any background noise.
After the speakers remarks, there will be a question and answer session. If you would like to ask a question. During this time simply press Star then one on your telephone keypad. If you would like to withdraw your question press the pound key.
I'll now hand, the program up with Mitchell Senior director of Investor Relations. Please go ahead.
Thank you, Steve and thank you everyone for joining us for Goodyear's third quarter 2020 earnings call I'm joined here today by Rich Kramer, Chairman and Chief Executive Officer, Darren Wells Executive Vice President and Chief Financial Officer, Christina Zamarro, Vice President Finance.
Sure.
The supporting slide presentation for today's call can be found on our website at investor activity or dot com and a replay of this call will be available later today replay.
The 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.
To remind participants on today's call that our presentation includes some forward looking statements about teachers feature for us.
Actual results could differ materially from those suggested by our comments today. The most significant factors that could affect future results are outlined in two years at least as you see it in the 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 revenue.
Yes.
Financial results are presented on a GAAP basis and in some cases, a non-GAAP basis. The non-GAAP financial measures discussed on the call are reconciled to the U.S. get it wasn't part of the appendix to the slide presentation.
And now I'll turn the call over to rich great. Thank you Nancy and good morning, everyone.
During the third quarter, we continue to feel the effects of the economic disruptions, resulting from the COVID-19, and Oh, what our industry conditions improve meaningfully compared to the second quarter and much faster than we expected.
Benefited from stronger light vehicle production is Oems work to swiftly replenished dealer inventories miles driven trends improve globally as to freight volumes benefiting from increased consumer and industrial activity or.
Our team executed well, allowing us to capitalize on the stronger industry, our global volume declined less than 10% for the third quarter improving materially from what we experienced during the second quarter.
The recovery in our volumes helped us return to profitability just one quarter. After the steepest decline in industry volumes on record. In addition, our cash flow was simply outstanding we generated over 450 million free cash flow during the quarter.
This performance exceeded our expectations, reflecting the benefit of stronger volume as well as our focus on managing costs and working capital our results demonstrate the effective execution of our plans to manage the impact of COVID-19 on our business.
Mission as well as we look beyond the crisis.
Well I never been prouder of our team's ability to deal with the challenges at hand, while at the same time, demonstrating an unwavering focus on our strategic priorities.
We continue to take every opportunity to continue to build our business for the long term, including some important electric vehicle sales wins from growing our best in class fleet service offerings by responding to changes in consumer buying behaviors in strange thing are aligned distribution and maybe sustain.
In the middle of an increasing priority and increasing our investment in technology to address emerging mobility challenges.
You can see these initiatives and priorities in each of our businesses.
And when the U.S., our consumer OE volume increased 7% outpacing the industry, reflecting our strong position in the S. Yoo me in light trucks categories, where demand is particularly strong.
With new car sales returning to pre pandemic levels in September and dealer inventory more than 20% below average we're likely to see continued strength to know we demand throughout the remainder of the year.
As we discussed on our last call our replacement volume has lagged the industry is one of our major U.S. customers. That's kept many of its tire in auto service centers closed.
Well these locations are in the process of reopening this will continue to negatively impact our overall share in the fourth quarter we.
We believe this is a temporary situation that will correct itself as those locations open.
On the other hand or E commerce, and mobile installation business has continued to grow well above market. During the third quarter. This out performance contributed to overall share gains outside the mass merchant channel.
Customers continue to see tremendous value in being able to buy tires on their terms and she was the installation option that best meets their needs whether their home or office with one of them, our mobile vans or one of our approximately 600 retail stores as well as our partner dealer locations.
And empowering customers with these choices allows us to further differentiate our products in the market and in the process capture more value. We are pleased with the momentum we are seeing in these new business models and continue to expand mobile installation services in additional markets.
We also continue to set the standard and our commercial fleet business in today's competitive environment large fleets and small owner operators are increasingly prioritizing value as suppliers like figure that can help them maximize uptime and lower operating cost per mile.
Linear is second to none when it comes to capabilities in these areas with its whole solutions offering that includes the high mileage utilization Goodyear insurance product line and good your T.M.S. plus on vehicle active monitoring system.
Waste higher conditions in real time.
Customers recognize the tremendous value.
Any innovation that we're bringing to market during the quarter. We were named preferred tire suppliers by one of the largest food and drug operators in the U.S.
And securing a new fleet of more than 1600 vehicles to our sleep business and that's on the heels of recently, adding writer the largest truck leasing company in the U.S. This further validates our industry leading value proposition I'm extremely proud of the wins our team keeps adding.
And outside the U.S., our Americas team also performed well during the quarter growing our replacement business and gain significant share in Brazil part of the success was driven by recent industry dynamics and park has been driven by our market facing initiatives.
We continued to strengthen our distribution and introduced a zero contact service offerings for the local market. While also expanding the number of sizes available for our most popular product lines and all the while as you would expect our teams have been successful in capturing full value for our products in the marketplace, which is important as it can.
Currency devaluation in the region.
In Europe, our performance continued to be affected by the temporary disruption related to our line distribution initiatives. We are pleased with the progress we have made thus far by advancing our strategy, we're already seeing improvements in the value of our brands, which is exactly what the program is designed to do.
Despite the temporary volume that we delivered double digit growth in the increasingly important all season category. We recently enhanced our already best in class all season tire offerings with the launch of the Goodyear vector Fourseason is gen three and the Dunlop sport all season.
A year as more tests when it's in the off season category than any other brand and the latest generation of vector four seasons with the snow Rip dry handling an awkward control technologies is keeping the traditional life. This is a testament to the product technology and competitive advantages we've created through 30 years of investment in this.
Jordan product segment.
I want to recognize our development team they continue to demonstrate our technology leadership and bring best in class products to the market.
I'd also like to congratulate our European racing operations for driving the Goodyear brand successfully returned to them on after nearly a 15 year hiatus.
You Goodyear's first you're back on the track our racing team partners claim two podium spots in their category.
In addition, the Goodyear blimp made its return to Europe, driving brand awareness to new Heights.
Our consumer OE business in EMEA is also stabilizing with production in Europe, returning to pre told with levels. In September. We're also seeing some favorable dynamics as demand recovers with E. These now accounting for nearly 25% a vehicle registrations in Europe.
Electrification plays into our strength as a global leader in tire technology. We've demonstrated we can deliver the performance, it's actually technicals fast demanded by at least as evidenced by higher win rates and a growing pipeline of high value added segments. Our capabilities in this area are second to none.
These trends leaves us feeling confident there are ways that we are well positioned to gain share in the OE channel in coming years and benefited from strong replacement pole thereafter.
Turning to Asia Pacific the market in China is also improving faster than we anticipated auto production is above pre co with levels retail traffic continues to improve and dealers are replenishing their inventories all of which are contributing to stronger demand.
Our consumer replacement business, there is benefiting from expanded distribution and the release of new products such as the Eagle last one sport, which is tracking ahead of our original 2020 expectations. Despite the effects of the pandemic add on sales volume earlier in the year.
Our product success and distribution actions drove a nearly 20% increase in our consumer replacement volume in China during the quarter.
This increase was nearly double the industry growth, helping us deliver a record performance.
And we continue to innovate we recently launched a pilot for an asset based direct to retail distribution model in China right.
Retailers participating in the program in place orders directly with Goodyear through an innovative mobile app. The direct access provides dealers with an easier way to find and buy tires with easy access to our entire product portfolio.
Equally as beneficial to them our line distributors, who makes doesn't leverage on our behalf enjoy more predictable profits and greater capital efficiency, allowing them to refocus their energy and capital on growth and enhanced service levels.
So overall the good news is that the industry fundamentals are recovering rapidly with light vehicle production returning to pre code levels in September and replacement demand increasing year over year in several markets.
But they're pretty well the reality remains that we face continued uncertainty in our major markets as we enter the fourth quarter.
We're seeing an increase in COVID-19 cases in the U.S. and across many key countries in Europe, several governments have or considering reinstating restrictions on mobility and other safeguards.
It's difficult to predict how these dynamics will affect consumer demand miles driven and auto production in the months ahead.
Well, what we do know is that our response to the crisis has served us well as we move ahead I'm confident in our ability to continue to drive performance and that confidence stems from our proven track record based firmly on the strength of our strategies, including our industry leading products developed from the market back our strong network Oh.
Dealers and distributors the significant actions, we're taking to improve our cost structure and our absolute focus on managing cash.
I'm proud of our team's accomplishments in this unprecedented operating environment and more importantly, I'm very happy with the way we continue to execute our strategy. Our team remains committed to winning with consumers and serving customers, which will drive our results for the long term now I'll turn the call over to Derek.
Thanks Rich.
We came into the quarter feeling cautious given the lifting of restrictions and the next wave of COVID-19 infections.
Well, our caution about possible increase in growing the virus cases seems well founded the rising case is clearly didnt have the same impact on industry volume that was having earlier in the year.
This is one of my key reflections on the core volume.
Volume than we expected.
My other key reflection as the great job, our team to delivering cash flow and cost efficiencies recovered a big part of the hit to our balance sheet in Q2, and ensuring the benefit of higher volumes and all the way to the bottom line.
I'll come back to the financials I want to spend a minute on the volume environment for us and for the industry.
We're continuing to evaluate industry results for Q3 to segregate the factors influencing reported industry data.
Even after considering these factors however, the situation will almost certainly seen positive.
Particularly in the U.S., where industry consumer replacement volume compared to a year ago went from 8% down 8% in June to up 5% July 9% August and up 10% So Terry.
On an annualized rate that means the run rate went from 220 million in June to 275 million in Q3.
The positive consumer replacement industry sales in the U.S., we'd be digested in light of two key and interrelated factors.
Re stocking distributor inventories, which were down 8% at the end of Q3 compared with down 19% in Q2.
And pre buying ahead of potential tariffs on Asia Asian passenger car tires that could come into effect early next year.
In Q3, non U.S.T.N. name member volume increased 47% compared to a year ago.
If we look at consumer purchases, we see a good recovery just not as good as manufacturer sales would indicate with so our volume down about 10% versus last year.
Indicators of miles being driven continue to indicate a high single digit decline versus pre totaling 19 levels.
In consumer original equipment, we also see a favorable story.
During September industry sales, Oh ease in the U.S. in Europe recovered to levels that are similar to last year.
European replacement industry data shows favorable trends, although not as favorable as you saw in the U.S.
Yes.
I have a couple of comments to add to what rich said about our volumes first.
First our Q3 consumer OE volumes outpaced the industry as we started to see the beginning if you expect recovery in Oh, we share we discussed last year.
As you'll recall based on the <unk>. Since we won we previously expected our OE volume to grow meaningfully between 2019 and 2022 based on automotive industry projections at that time.
Even in today's uncertain environment, we're still confident will grow significant share over this period.
Second the impact of volume our other tire related businesses moderated in Q3.
Earnings in both retail and chemical recovery.
Our aviation business is now the primary driver behind the earnings impact for our other tire related businesses.
As you might assume increase Q3 volume has led to increased production at our factories. We originally had expected production to be down 5 million units for the quarter versus a year ago.
But given the higher sales, we increased production as the quarter progressed and ended with alpha down only 4 million units.
After surviving the 26 million unit reduction in Q2, we feel really good about being able to ramp up as quickly in response to customer demand.
Heading into Q4, our factories are now essentially running at full capacity, while we try to rebuild depleted inventories.
With that backdrop I want to move on to the income statement.
Turning to slide 10, our third quarter sales were $3.5 billion with both our sales and our unit volumes down 9% from last year.
Oh in replacement volumes were down about 9%.
Our segment operating income for the quarter was 162 million down 132 million from a year ago, we'll come back to the drivers on the next page.
Our results were influenced by certain items after adjusting for these items earnings per share on a diluted basis were 10 cents back above breakeven.
The step chart on slide 11 summarizes the change in segment operating income versus last year.
The impact from lower volume was 73 million, reflecting the decline in unit sales of 3.7 million units, including a reduction in commercial truck tire volumes. It was essentially in line with the industry.
Reduced factory utilization resulted in 121 million decrease in overhead absorption.
This reflects the impact of lower production in Q2 lagged through inventory and approximately 30 million period costs related to lower production early in Q3.
Partly offsetting this were actions taken to temporarily reduce fixed costs during the pandemic shutdown.
Price mix was favorable by 6 million.
Similar to last quarter benefits from increased prices at our replacement business were largely offset by lower OEM pricing adverse mix.
Raw material costs were essentially flat with a year ago.
If it's a lower feedstock costs were offset by unfavorable transactional foreign currency, a 41 million, resulting from weakness in the Brazilian real and the Turkish lira.
Along with higher feedstock costs we.
We continue to expect favorable raw materials in Q4.
Cost savings of 76 million more than offset $33 million of inflation.
Paired with Q2 cost saving levels reflects two factors.
First many of the temporary actions for the cold weather related shutdowns, including the Furloughing a large part of our salaried workforce. We're not continued in Q3.
Well cost controls continue to be very tight this spending began to normalize.
Second we benefited from 34 million of savings associated with our restructuring actions in the Americas, including the impact of closing our manufacturing facility, Yes, Alabama.
The negative effect of foreign currency translation totaled 8 million.
The benefits of a stronger euro were more than offset by the impact of a weaker emerging markets currencies again, most notably the Brazilian real and the Turkish lira.
The 37 million decline in the other category was driven by weaker results in our other tire related businesses.
I mentioned earlier, the largest year over year impact was from our aviation business, which continues to be adversely affected by the travel industry.
Turning to the balance sheet on slide 12, net debt totaled 5.6 billion.
Lower than a year ago, reflecting about 400 million of cash generated over the trailing 12 months.
This is a really remarkable outcome delivered by our team.
Since the beginning of the pandemic driving cash flow and ensuring strong cash and liquidity <unk> been the top priority and results over the last two quarters reflect that focus.
Well, there's a long list of contributors to this accomplishment working capital management has been critical which you can see more clearly on slide 13. Our team has worked closely with both customers and suppliers to support their businesses and ensure we are well positioned to support them moving forward.
That said I do want to point out that while we had hoped to rebuild some inventory during Q3 stronger sales levels didn't allow us to do that so.
So we'll now be working to increase inventories during Q4 only.
Well, we still expect cash inflow during Q4, the strong performance in Q3, and this need to rebuild inventory being the cash inflow will be less than it has been in Q4 historically.
On slide 14, you can see the impact of our strong cash flow our liquidity profile.
We ended the quarter with cash and available credit lines of 4.2 billion. This is up about 800 million from a year ago and positions us well for any uncertainty is the pandemic continues.
Also in August we repaid our 282 million senior notes at maturity slice.
Slide 15 shows that given this repayment we have no significant corporate maturities until 2023.
Turning to our segment results beginning on slide 16, despite industry recovery our unit volume in the Americas was still down nearly 10%.
Replacement shipments were down 12%, which continued to reflect the temporary closure of walmarts Autocare centers about 15% of these locations remain closed at the end of September.
Improving compared to July one two thirds of the facilities were closed.
We hope to see most of the remaining locations reopened during Q4.
The share decline in North America. It was partly offset by strong share gains in Latin America.
Oh, the volume was essentially flat for Americas, Despite increased volume in the U.S. strength in North American auto production and higher OE market share was offset by lower vehicle production in Brazil.
Continued strength in our commercial truck fleet business was a positive for the quarter, but was more than offset by lower truck OE production.
Segment operating income was 106 million down $69 million from a year ago. The decline reflects the impact of lower volume partially.
Our cost saving actions and improved price mix savings associated with the closure of gadson were $34 million for the quarter.
Turning to slide 17, Europe Middle East Africa's unit sales totaled $13.2 million down 9%.
Oh, we shipments declined 11%, reflecting the lower auto production.
Placement volume fell 8%.
As in the Americas, our commercial business in Europe continues to be a highlight given the continued success our fleet service offering.
M. <unk> segment operating income of 22 million was down $44 million no prior year's quarter.
The decline reflects lower sales and production volume, partly offset by lower raw material cost and improved pricing.
I would add to that our German factory modernization project remains on track and we continue to expect to generate 60 to 70 million of cost savings by the end of 2022.
Turning to slide 18, Asia, Pacifics tire units totaled $7.2 million down 9% from the prior year, principally driven by lower consumer OE shipments, which fell 20%.
Our OE business was particularly affected by weak industry demand in India as well as the impact of discontinued Fitments in China.
Our consumer replacement business in Asia was a better story our business in China delivered its best quarterly volume growth in more than a year with shipments increasing 19% to a record low.
The growth in China was more than offset by a tough comparable in Japan, given pre buy ahead of increased sales tax rates, a year ago and industry weakness in other Asian markets.
Operating income was 34 million down 19 million from prior years were driven by lower volumes.
Turning to our outlook items on slide 19, most of our financial assumptions remain consistent with our outlook back in July.
We continue to expect working capital will be an inflow for the full year after an outflow of approximately $270 million in the first nine months.
The amount of pull your cash generation for working capital will likely be modest but to some degree will depend on sales activity in Q4.
Needless to say industry demand remains unpredictable.
Balancing recent industry strength with the risk of further COVID-19 related disruptions, it's tough to do.
Given were essentially running our factories full at this point and given December is a low volume month anyway, there's less need for us to place a bet on volume between now and year end.
We expect a negative impact from our other tire related businesses to improve improve again in Q4, given stabilization in our retail business and higher demand for chemicals business, Although aviation will remain challenged.
In total year over year earnings decline for other tire related businesses is expected to be $20 million to $30 million during the fourth quarter.
Operator, you May now open up the line for questions.
[noise] and gap is Todd if you'd like to ask a question press star and one on your telephone keypad.
The wage move yourself from the queue by pressing the pound key once again Thats star and one.
We'll take todays first question from Ryan Brinkman with JP Morgan. Please go ahead.
Hi, Thanks for taking my question I know what is the expected cadence for the layering backing up the temporary fixed cost reductions and then just on cost saves more broadly you know a lot of companies reporting earnings. This season, so far they're putting up really strong margins, they're saying that they are learning to be leaner, adding cost back more slowly than revenue or is everyone.
It's been sort of forced into this a zero based budgeting situation. In 2020, you know do you see the potential beyond the temporary fixed cost reductions to also restructure get leaner can investors expect a bigger spread and 2021 between the impact of cost saves versus a general inflation in comparison to in recent years.
Yeah, Yeah. So the yeah, I guess to answer the first question Ryan the and you know, which I think is probably referencing slide 11.
Yeah. The temporary actions that we took the reduced our fixed cost in the factories those were effectively well you know related to the shop. The full shutdown of the factories. So we went through in Q2, yeah, we split them out to make sure that were consistent and showing numbers there just with the modeling assumptions we provided.
But I think you have in terms of the right way, which is you sort of take the you absorbed overhead and temporary fixed costs, but those together that was the impact that we had a significant part coming out of Q2, but.
But they were temporary so if you're thinking about when those are going to layer backend they've effectively already come back you know because.
Because we've got the factory is up and running at full production now so the fixed costs related to the factories.
Got to be back in place.
The yeah the longer term question, which is what Oh, we do with our cost structure.
I think that that's an important planning assumption for us as we move into next year, there's some of that that's going to be volume dependent.
And yeah. We're you know we have taken a fairly cautious view of how quickly the long term volume recovery is going to come and.
Despite the fact that we've got.
More demand than supply in the industry right now I think we're still seeing miles driven.
Yeah, well below where they were in 2019.
And that gives us a little bit caution about planning 2021.
And we will use that as we plan our cost structure for 2021, So we will inevitably keep our.
Cost controls pretty tight.
In terms of structural changes I think the the ones that we've made on manufacturing for the ones that are going to be most.
Yes, again near term and that's the you know the closure of the gas that facility in the U.S., where you saw the over $30 million benefit in the third quarter. Our that came quicker than I think we had originally yeah. We would have originally expected. We will continue to get that savings will continue to look on that look at the.
During her work on the manufacturing restructuring there we're going through in Germany.
And continue to look at what other structural cost moves we need to make if in fact, we're going to have a longer term volume run rate below 2019.
If we see things coming back to 2019 levels more quickly than we may get a temporary benefit a lot of the cost for marketing and sales and even cost operationally wont wont come back so.
So I think we're just we're working to get working through our plan for 2021.
Three questions in front of us in terms of how much of the cost we like to come back and right now I I think Darren to answer the question correctly. The one thing I would say if you look at you know our track record on cost reductions, whether it's gas than before that phillipsburg changes and reductions in headcount fold up things we've done around the S.A.G.
In terms of shared service centers R&D spend as a percent of sales competitive compared to our competitors managing capex cost over time, I think we have a pretty good track record of not being afraid to roll up our sleeves on cost and I think different framed it correctly you know the the real thing anything our PML is small.
Right. That's that's the issue in volumes been coded driven so we're very cognizant of that and I I would say, we'll continue to look at that and we're not bashful about doing or what else we need to do given the environment that we're in and again I think our track record proves it. So it's a good question and we will remain focused on it for sure.
Okay. Great. Thanks last question is the follow up on Darrens comment there about the balance between supply and demand in the industry wondering if you can also comment just on you know what the inventory situation looks like for your own company, but for the industry as a whole and and what this all means for you know U.S. tire pricing I think Yokohama Continental a couple others, maybe Michelin have announced increases.
You know, what's the potential for you to do the same and I realize those benefits. Thanks.
Yeah, I think you know Ryan I'll just start you know from your comments on pricing.
Our revenue per tire was excluding FX was up about 2% in Q3 and in the U.S. and I know you're familiar with the numbers that you'd see the PPI is up about 1% during the quarter a in Europe, we see favorable pricing trends across all categories Summer winter all season, certainly in emerging markets, we continue to.
The prices given the d. valves and the all the changes we're seeing there including dollar based raw materials, increasing so you know so we do see a favorable environment lets say is weve as weve talked about but as we look at inventory levels. Clearly I think are ours as well are lower than normal sort of reflecting the faster than planned.
Recovery of demand that we saw in Q3 and that doesn't mean that a a service levels are really not where we'd prefer them to be and that's a common for us, but we understand it's true for a number of our competitors as well. So we do see a demand of head of supply right now as we go and if you look at us up for a moment.
We said in Q2 that we plan to increase production in Q3 again anticipating a lift of demand given how low it was in Q2 and also to replenish inventories. What we saw in Q3 is demand obviously exceed our expectations I think everyone's expectations. So we did increased production by over a million units in.
Order and we still ended Q3, a lower then the planned inventory levels than we wanted so we'll continue to run our plants at full capacity and certainly we'll rebuild some inventory and a and we focus on the right SK use but I do think that certainly that is the case that the.
Restocking, particularly in the U.S., a and the demand that we saw was a was pretty favorable and it does put us in that situation at this moment.
Very helpful. Thank you.
Right.
Our next question from John Healy with Northcoast. Please go ahead.
I think it quite young warning.
Good morning, guys I wanted to ask about I think it's slide 24 hour are you guys kind of laid out that feedstocks. Some of those feedstock commodities are significantly significantly below where they were in 2019.
As you guys talk to your procurement people and kind of your engineers is there anything that's like structural going on with carbon black or are needed I'm prices. There's here from a alternative standpoint, or just a supply of the product standpoint, that's coming on that would maybe make prices for some of those feedstocks you know.
Lower for a longer period of time, even if tire demand does pick up.
Yeah. So John I don't you know generally I don't think so yeah, I think that what I mean, our read right now is that fair.
For most of the commodities were buying this is purely a reaction to yes to demand levels and where production has been.
And I guess to some degree to the price of oil.
And what we've seen is at least into commodities, we've seen the kind of snap back in price that we would expect given the industry. As you know we are and the industry is ramping up production are getting production back to you know, it's a pretty cold at levels and that's natural rubber.
And due to dying so both of which have the last few weeks and moved up significantly. So I think natural rubber as something like 70, or 75 cents a pound right now we averaged something in the high Fiftys Oh, you know 50 758 cents a pound in Q3.
Hi, Diane has gone from.
2022 23 cents.
Up to 32 cents right now so we've got some very significant increases the say you all except your point that carbon black has not done the same thing and there are some other petrochemicals that have not done the same thing, yes, but I don't I don't know if there's anything structural there. So I think were up.
Yeah, we're continuing to watch that pretty closely.
And I guess expect that as we see production if production in fact holds at the levels that we're at today than we could easily see raw material costs get back to where they were in 2019.
Great and.
And then just one follow up question for me.
One of the most encouraging things and the release was that the cash flow this quarter and I understand that there's probably going to be some reinvestment in inventories in Q4, but it is as you look at the business Darren and now being back for a little while are there any programs or initiatives or is there anything that you know potentially could be on the horizon that you know you could.
To implement to help the cash conversion of the company improved from my perspective, I think you know you know more consistent and bigger free cash flow generation, what would probably be the you know the biggest catalyst for the stock.
Yeah, It does and spend John I think you know the answer is there are some things that we're working on that I think are going to have long term benefits.
Yeah. The most recently I've I've said that Weve been looking very carefully at how our factory scheduling works.
Looking at what we can do to maintain service levels, while running at a permanently reduced inventories so.
So I think our inventories are down 800 million from where they were a year ago.
I agree with your point, we're going to have to reinvest some in inventory because we're running below a anything that we'd be targeting but there is a part of that inventory reduction that we did we would be planning on it and would expect to be able to keep keep lower on an ongoing basis and.
We are approaching the yeah, the run strategy, our factories with that in mind you know.
So yeah, that's something that we had a chance to work on because we did have to go through a full shutdown and then we were able to start with a clean slate and thinking about how we're going to work through our portfolio every month every quarter to.
To try to keep inventories lower in terms of payables and receivables yeah. Those are areas, where I think our team has done a great job, but I think we've got a long track record of working both the customer with our customers and with our supplier partners to make sure that we.
Keep our receivables and our payables.
At levels that are as good as we could have done that our industry.
So yeah that does more of an ongoing push I don't know if there's anything I could point to structurally there, but that doesn't mean that there's going to be any less attention to.
The working capital Excellence has been a long term push for us it's going to continue to be a push for us.
Sounds good congrats on the strong quarter.
Thank you. Thank you.
Well take our next question from Emmanuel Rosner with Deutsche Bank. Please go ahead.
Hi, good morning.
Apologies I did join the call quite late so some of these topics have been been addressed I was curious to dig a little bit deeper on.
Price mix dynamics here I was well you might stretching out you know I guess, where the price mix in your EBITDA bridge seems to be continue to.
To be weighed down towards flat when a lot of the kinda or anything seen so far I think some positive price in that EBIT line and obviously in the context of some of the price increases that were mentioned earlier in the call by some of your competitors.
[noise], Yeah, Emmanuel I know dare to jump in here as well I'll start and I'll, let you know something we talked about even in Q2 that our you know our volume and Oh and price mix or mix as you go on from there as well certainly impacted by some things that are sort of external market conditions and the other you.
Many factors and you have to remember coming out of 2019, particularly in the U.S.
We had some of our strongest quarters in the consumer replacement business in recent history. So we think fundamentally what we're doing around product what we're doing around brand I can tell you I have very high confidence levels and what you might remember is that our business is sort of just disproportionately affected a certainly by by Walmart temporarily.
Rarely closing their stores that hits, our <unk>. Our volume we think that is going to go away Darren mentioned on the call that all but 15% of those doors are open. So that's something that is a that's going to reverse so we don't view that as permanent.
And also as we think about our volume we did see some prebuy ready because of the tariffs that were coming in.
For [noise].
Some of the pre buys coming.
Coming in for the potential tariffs coming on related to some Asian countries. We've seen that in terms of volume before where we see a spike now and we see that the that taper off later and excluding you know at particularly the Walmart area were actually slightly better than members in the U.S. DNA relative to volume and also remember in Europe.
That what we're seeing are sort of the anticipated impact of our aligned distribution strategy, which is affecting the tires that we sell to their certainly our share in the short run and I would tell you.
We're absolutely behind that it's working it's the right decision we've done it before and the upside as you know is about as we've said before is about two to $4 margins are tight so were seeing the positive impacts of that but all that also sort of flows into the question on what's happening on our VP of untold. So I'll start there and I know you want to jump in.
No I think they are Oh, yeah.
A couple of other items that we think through that are you know again I would say, yes in some way temporary in nature.
Yeah. That's it so I think the point that rich made about lines distribution in Europe I think it's it's the right point and in fact, there yeah. The regions of Europe, where we had the biggest.
The biggest job to do [laughter] getting our distribution aligned.
This time of year, and particularly because it's more northern parts of northern Europe. They tend to be a very rich you know rich mix a region and so that makes mix much harder to achieve now if I combine that with the fact that the winter sales this year have been.
In her more than other segments. So I think you know we had winter industry down something like 15% in the third quarter that makes makes even harder to achieve so and I understand that's yeah, there's industry element to that but I think given the work that we're doing on distribution that is a little bit harder than.
Yeah that sellers.
Okay I understand so I understand your point on volume certainly I think you mentioned sort of some European mix.
Anything within the price mix bucket again, I guess, maybe on the U.S. side, that's true, but added went to what would seem to be otherwise a positive pricing environment. Specifically on you know I guess you asked me.
Ah says so I think that the yeah.
Yeah.
Two points I guess I would make there is you know what we you know we are getting the.
The benefit of price.
So to the extent that yeah.
Yeah that we're seeing.
You know, we're seeing less price mix than we're expecting yeah, I would say is principally a reflection of mix not price.
And you know we think about the the impacts that we've had on mix that there are a number of them and we spent some time last year talked about the work that were or the impact on which channels. We're using to distribute tires in the U.S. that has effectively add some tires being distributed through lower.
Margin channels.
Which because it's not a change in the price for any of the channels. If we're selling tires through lower margin channels than that is treated as a mix item as well.
So yeah, which channel is getting the tires is yeah, I was going to be an element of it.
The mix analysis in the U.S., but you know I think in the end, we can't get away from the fact that there's a pen the slides in the appendix, we can't get away from the fact that in the third quarter, our sales of 17 inch and above tyres lagged the industry.
And that you know so we need to get our large rim diameter sales growing again.
And they have you know they've not been growing as strongly as we'd like now part of that is going to require us to do some work on supply to make sure that we're building more of the right tires and.
And catching up on those tires that were prioritizing them in our production.
So that so that is certainly going to be an element for us I think we've taken the right actions to be able to do that.
But yeah. There's no question, we're not getting the benefit of mix that we've gotten in the past I think we accept that and you know we have a lot of focus on getting that going and is there and says we proved particularly in the U.S. the supply constraints around those tires I think we expect that to improve.
That's super helpful. And then just running out then this discussion so.
Looking forward because it seems from what you're saying that once used to resolve some of these.
He sort of impact on into market share from the constraints you would probably soak up some of the mix issue as well at the same time. So how should we think about it timing. Once you know when can you sort of really see lapping if some of these you I guess European investment I think some of the Walmart stores are reopening.
I don't know if you've given any outlook for fourth quarter or for next year, but well how would you think about the timing for.
Actually lapping some of these issues.
Yeah. So I certainly think there's going to be improvements I look forward to in 2021.
Yeah, because there are some temporal issues that that won't be a shouldn't be in place by the middle of next year I think all of the other supply challenges yeah, we should be yeah, whatever supply challenges. We have I think we were going to have an opportunity to catch up a bit as we generally in the.
Fourth quarter and first quarter, we generally will build more tires that we sell so we have an opportunity to rebuild some inventory and get get to better supply situation. So I think the middle of next year or will be an opportunity for us to to see some of the improvement coming through.
Okay.
Perfect. Thank you.
Yeah, I'd like to remind everyone. It started one for questions today we.
We can go next to James Pirrello with Keybanc capital markets. Please go ahead.
Hey, good morning, guys.
Alright.
Are you seeing any indications from your tier one competitors you had to put through another round of price increases I know this was already asked but yeah.
Yeah I was just curious I mean is the current environment favorable for an increase in the U.S.C. and why or why not in your view.
Yes.
Can I go back and say, what we've been seeing a as I mentioned as a you know a a pretty good environment around the world or in the U.S.P.I. again, what we're seeing across all the channels in Europe, and then obviously in emerging markets. We've seen a good ability to price, particularly relative to cover.
Indeed sales.
And I think the you know the only other thing I would you know I would I would add to that is again. This this question of what dealers have been doing and then consumer demand has been doing which has been increasing sequentially. Since Q2. So as a result of that what we've seen is restocking of in channels.
Our inventory in the channels in both wholesale and retail assets in those chat and those inventory levels I think it still point out tend to be lower than they are historically they were down I think we said in the U.S. for our products about 20% year over year, they're down about 8% in Q3, certainly that Q2.
It was reflective of cold in Q3 is reflective of getting better but the.
The notion of the channels restocking I think is very real, particularly in the U.S. and because of that and because of the view of incremental end user demand improving as well. What we are seeing is demand ahead of supply and I think that's a that's a a a real elements that's in the marketplace.
And as I mentioned, we certainly see it for us it goes back to making more of the right tires Darren talked about but it's also something that we're hearing is true for a number of our competitors as well and I think that's sort of just the the the supply demand situation that's out in the market today, and that's something as a company in this industry, we always assess.
The one other point that I would have is that you know we still see it as an industry with a lot of raw material costs.
You know revenue relative to last three or four years gone through a period for the industry is under recovered.
The cost of raw materials, and I think that's yes, that's still there and that's something that still has to be a concern to us in terms of getting the right returns on the investments that we're making.
Right and since the industry is under recovered, though that might support price increases price increases on you know on its own just just given that fact is that the point you're making.
I think we're we have law you know we go through these cycles. This has been a particularly long cycle.
And I think we continue to look for opportunities to recover some of the cost increases that weve experience. So that's what.
We expect that has had for us and that's what's happened in the past we've tended to go through these cycles, where there's compression and then there we go through cycles, where we have opportunities to recover raw material costs.
Yeah, No. That's helpful and then on the topic of raw materials. I mean, if you do have that you know that three to six month visibility or lag in the flow through.
You know, you'll still be volume dependent for the actual dollar impact, but just directionally you know should transactional FX subside within raw materials and based on what you already have booked it are we looking at a first half.
Benefit.
On the raw materials side of things or how should you know any color there would be helpful.
Sure. So maybe just if I start with Q4.
In Q4, we do expect more raw material.
Cost benefit that we got in Q3, so we should have about something like 65 million from lower raw material feedstock prices.
Excludes the foreign exchange impact yeah. The foreign exchange impact was about 40 million in Q3 and that offset essentially offset the entire benefit we got from lower commodity prices.
In Q4, we should get some benefit to the bottom line, even after the foreign exchange.
Pat.
Yes, Oh, yeah, so that yes that thought element of the variance in variance walk will look a little bit better in Q4, as we fill in Q1 alone less certain because we have started to see natural rubber and synthetic rubber prices increase we should still be getting some flow through of some of the bad.
What we see in Q4 or early next year.
But what we see for the yeah for the full year 2021, it's going to depend on whether or not these recent increases we've seen and raw material market prices sustain themselves whether some of the other commodities do the same thing.
So yeah, I think what we see in the you know the results for you know for 22, it was a little bit less certain if we get to the point, where raw the raw material market prices in 2021 are back to where they were in 2019.
Then what that would effectively do for US is that would mean about 100 million in.
Increase in raw material costs in 2021 versus 2020.
If we got all the way back to those levels.
So maybe that brackets at four.
Yeah understood. Thank you.
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[noise] yeah. It does appear we have no further questions. This will conclude today's Goodyear third quarter 2020 earnings call, we'd like to thank everyone for participating you can now disconnect and have a great weekend.
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