Q4 2020 Goodyear Tire & Rubber Co Earnings Call

Good morning, and my name is Keith and I'll be your conference operator today.

At this time I would like to welcome everyone to Goodyear's fourth quarter 2020 earnings call on.

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 and one on your telephone keypad.

If you would like to withdraw your question press the pound key.

I'll now hand, the program over to Nick Mitchell Senior Director of Investor Relations. Please go ahead.

Thank you Keith and thank you everyone for joining us for Goodyear's fourth quarter of 'twenty and 'twenty earnings call and.

And here today and by Rich Kramer, Chairman and Chief Executive Officer, Darren Wells Executive Vice President and Chief Financial Officer, and Christina and Tomorrow, Vice President Finance and Treasurer.

The supporting slide presentation for today's call can be found on our website and investor Goodyear Dot com and a replay on this call will be available later today.

<unk> instructions were included in our earnings release issued earlier this morning.

If I could now draw your attention to the Safe Harbor statement on slide two I would like to remind participants on today's call and presentation includes some forward looking statements about goodyear's future performance.

Actual results could differ materially from those suggested by our comments today and most significant factors that could affect future results are a line and goodyear's filings with the SEC and in their earnings release.

The company disclaims any intention or obligation to update or revise any forward looking statements, whether as a result of new information future events or otherwise.

Actual results are presented on a GAAP basis and in some cases on non-GAAP basis.

Non-GAAP financial measures discussed on this call are reconciled to the U S. GAAP equivalents as part of the appendix to the slide presentation and with that and then I'll turn the call over to rich.

Great. Thank you Nick and good morning, everyone good to be with you today.

And you saw in our news release. This morning, the fourth quarter was an outstanding conclusion to a truly unprecedented and challenging year per segment operating income and the quarter was $302 million up 25% from last year.

Volume improved sequentially, reflecting a modest uptake and global industry demand compared to the third quarter as well as improvements in market share and several of our businesses.

We also continued to benefit from execution on cost savings initiatives, including actions, we've taken to improve our structural cost at the same time, we saw improvements in both price mix and raw material costs.

These factors helped us deliver significant earnings growth and margin expansion during the quarter.

In addition, we delivered $1 2 billion and free cash flow, our highest fourth quarter cash flow since 2011 after a strong Q3.

I'm incredibly proud of our team's ability to persevere and finished the year strong.

The prospects of fourth quarter earnings growth and this level of cash flow cash flow and excuse me frankly were not something we had imagined six months ago or even three months ago.

Yes, with the determination to win with our products and the marketplace and a relentless focus on cost and cash we finished the year on high note with our business is well positioned for continued recovery.

Each of our strategic business units contributed to this outcome.

And the Americas, our commercial business continued to perform well volume increased 7% as we benefited from significant share gains and both OE and and replacement.

And the momentum we have with our commercial customers is a testament to our market back approach to developing products and services and how the owner operators and fleets of all sizes maximize on time and lower operating cost per mile.

We believe we can build on this trend and 2021 truck tonnage freight rates and class a truck orders are trending favorably and the U S, suggesting we're likely to see a combination of industry conditions.

We also see a significant benefit from recent customer wins, including rider Albertsons Dart and Pepsi and mid America and just to name a few.

We are expanding our suite of digital tools and fuel efficient products to help us continue winning with fleets and the new year.

Recently introduced fleet central and interactive tool designed to help fleets lower costs and the <unk>.

Last year and more informed decisions regarding their tire and maintenance needs.

Later this year, we will rollout the fuel Max <unk>, two and fuel Max RSD, the fuel Max and <unk> as and drive tire designed for long haul fleet looking to lower fuel cost and reduce their carbon footprint. This tire offers low rolling resistance that meet phase II greenhouse gas emissions and.

And fuel efficiency standards.

The fuel Max <unk> will allow us to differentiate our product portfolio. Further. This tire is designed for regional haul carriers that demand fuel efficiency for highway travel, but also require a robust durability and traction to navigate city routes.

These type of customer backed products combined with an increasingly digital based service proposition will help us advance our strong industry leading proposition.

Yeah.

Turning to the Americas consumer business, our OE volume increased 6% outperforming the industry for the fourth consecutive quarter.

While I am pleased with our recent performance and even more excited about the gains we expect and our OE business and 2021 and beyond.

When is the right fitments such as the award winning 2021 ramps 500, Trs, which is equipped with Goodyear Wrangler and territory on shrink tires allows us to strengthen our brands and build customer loyalty both of which are key drivers of demand and the replacement market.

As you heard from us and the past if these type of platforms that generate the highest customer loyalty and replacement.

And we've demonstrated that we can maintain our competitive advantage and the all important light truck category on electric Fitments as well.

And as you Wrangler territory empty off road tire was selected to be fitted on Gm's, new EV hummer.

And for our consumer OE business and and non to how we are transforming our capabilities to meet customers' changing needs.

Turning to our U S consumer replacement business, while lower demand and the mass merchant channel continued to impact our absolute results, our relative performance and the U S improved with our share and targeted segments, increasing more than two full points compared to the third quarter.

Outside of the mass market channel, we grew share with customers The award winning Eagle Exhilarate and insurance, whether ready along with customer favorites, such as the assurance Max life were instrumental and our ability to perform well and other retail channels.

Our new product Rollouts will continue in 2021. This month, we will introduce the comfort drive a premium tire designed for the commuter touring category.

And that accounts for half of the consumer replacement tires sold in the U S.

The wrangler workforce power line will debut later and the year as well. This product line is designed for those and rely on hard working dependability from their tires to get the job done.

Shifting to EMEA, our commercial business delivered another impressive quarter by tailoring our products to the needs of our commercial customers and building a fully integrated service business, we haven't been able to grow share for two consecutive years.

We expect to maintain the strong momentum in 2021 by strengthening our mobility solutions offering expanding our service network and broadening our reach with small and medium fleets.

I'm excited to say that we're off to and a terrific start as well and January rider selected Goodyear as its sole and mobility partner and Europe, becoming the latest fleet to recognize the substantial value of our furniture and mobility solutions.

Now turning to the consumer segment early business is beginning to see the impact of higher win rates on targeted fitments, particularly on Evs.

Our volume increased 16% and a relatively flat market.

Winning with customers, who place tremendous emphasis on tire technology and performance demonstrates our capabilities. We continue to see strong win rates for future Fitments Oems are recognizing the commitment we've made to develop and tires that will help them transform their portfolios to more energy efficient and eco.

And these vehicles, while delivering performance capabilities consumers demand.

For example, Volkswagen and selected the Goodyear efficient great performance and and Goodyear Ultra grip performance for its E. Three is first vehicles to be designed exclusively for electric mobility.

Both tires will feature our proprietary sealant technology.

Mobility solutions like these have helped us secure our leadership position and electric mobility and <unk>.

Pat E. These now accounts for approximately half of our OE development projects in Europe.

And EMEA consumer replacement business and the continuation of consolidating our distribution footprint is temporarily affected our volume.

However, the changes were necessary and will enhance the value of our brands and our products over time.

We continue to see positive effects on the value of our products and the market and and our results as a result, and this initiative this momentum and increases our confidence that we will deliver on our goal of increasing our margins by two to $4 per tire over the coming years and.

And we saw improvements and our share compared to Q3 will matter and we believe will carry forward into 'twenty and 'twenty one.

Turning to Asia Pacific our consumer replacement business continued to be the highlight outperforming the industry and turning and its highest quarterly volume ever.

Once again, we benefited from strong growth in China, where we increased replacement units by more than 10%.

And this growth is supported by the work we're doing to transform distribution.

Last quarter, we announced the pilot for and App based direct to retail and distribution model in China and.

And 2021, we expect to add approximately 600, new branded retail stores across Asia to support future replacement growth with more than half of our locations planned for China.

We're also continuing to enhance our product portfolio to ensure we meet the evolving needs and the consumer this year, we will launch the Goodyear assurance Max Guard detached your growth and the mid SUV segment.

Turning to Asia consumer OE business, where 2020 was impacted by the discontinuation of some high volume Fitments and China, we see a very different story in 2021 and.

And in addition to the favorable impact from higher light vehicle production. This year, we expect to benefit from a strong OE pipeline.

We are focused on being on platforms with high replacement pull and this will help drive strong replacement demand and the years ahead.

Yeah.

While it's important that we focus our efforts on the opportunities that lie ahead, we cannot lose sight of all that we accomplished the position Goodyear for recovery.

We increased our OE pipeline, winning fitments, representing more than 9 million units.

We made it easier for consumers to buy our tires by launch and Goodyear mobile install and new U S markets and doubling our fleet of service fans.

We expanded our commercial fleet services and added significant fleet accounts.

And we continued advancing our future mobility capabilities.

We know there's been a lot of public focus around the experience being accumulated with regards to connected tire technology. Our primary focus hasn't been around these statistics, but given the interest we went back and calculated our accumulated connected miles and it's a large number.

As of year end, we have over 1 billion miles of data on connected tires and no plans of slowing down this learning.

I'm very satisfied with the solid progress we've made and the second half of this year.

I'd like to thank each and every goodyear associated for their sacrifices and commitment throughout the year and for the strong fourth quarter finish we have good momentum as we enter into 2021.

Now I'll turn the call over to Darren.

Thanks, Rich you can see from our results and from Rich's remarks, as the fourth quarter reflected a combination of continued industry recovery and strong performance by our team, including on market share cost efficiency and cash generation.

Our consumer OE business continues to gain momentum building on our share gains and the third quarter.

We discussed in 2019, our expectation that our OE share would begin to recover by 2021. After the declines we were seeing at that time.

And this recovery started earlier than we expected and we will continue given the pit and the wins that we've had over the last several years.

Our replacement share improved sequentially as the impact of last year's customer store closures and the U S continued to improve and the impact of actions to address our distribution network in Europe against this.

We also continued to see the impact of restructuring actions and our manufacturing footprint.

We delivered net cost savings of $70 million per the quarter.

And finally, despite strong cash performance in Q3, we delivered historically strong Q4 cash and working capital improvements.

On a positive cash flow for the full year and one of our highest levels of cash and liquidity.

Overall, I'm very pleased with our performance for the quarter, while we continue to face a high level of uncertainty. We are encouraged by the trends on our markets and on our business as we enter 2021.

Turning to slide nine our fourth quarter sales were $3 7 billion down only 2% from the prior year, our unit volume declined 5% versus a decline of 9% that we saw on the third quarter.

Our segment operating income for the quarter was $302 million up $60 million from a year ago.

Our reported segment operating income included two items that were excluded from our adjusted earnings per share.

First a $34 million benefit from a legal settlement and second a $13 million charge for the establishment of and environmental reserve associated with the closed facility.

After adjusting for these and other items earnings per share on a diluted basis were <unk> 44.

Up from 19 from the prior year.

The step chart on slide 10 summarizes the change and segment operating income versus last year the.

And the impact from lower volume was $40 million, reflecting a decline in unit sales of $1 9 million.

Reduced factory utilization and the third quarter compared to a year ago resulted in a $32 million decrease and overhead absorption and Q4 results.

Production and the fourth quarter was flat compared to 2019.

Price mix improved $33 million, while raw material costs declined 25 million compared to a year ago.

Note that we benefited to some degree from the three to six months lag as raw material costs move through our inventory recent raw material price increases, we'll catch up some over the coming quarters.

Cost savings of $103 million more than offset $33 million on inflation saving.

Savings associated with the closure of gas and totaled $33 million consistent with the third quarter.

Foreign currency translation negatively impacted our results by $5 million driven by weaker currencies in South America, primarily the Brazilian real.

The $9 million increase and the other category includes the benefit of the legal settlement of $34 million, which more than offset lower earnings on our other tire related businesses and the establishment of the environmental reserve on $13 million.

Turning to the balance sheet on slide 11, net debt totaled $4 5 billion, a decline of more than $300 million from the prior year.

Slide 12 summarizes our cash flows during the quarter and for the year we.

We generated $1 1 billion of cash flow from operating activities and 2020.

Capital expenditures were $647 million.

Free cash flow total to approximately $470 million per the year up about $30 million from the prior year, Despite pandemic disrupted earnings.

Working capital inflows exceeded our expectations and the fourth quarter.

Since the beginning of the pandemic driving cash flow and ensuring strong cash and liquidity and our top priority and our results over the last three quarters reflect that focus.

Turning to slide 13, we had total cash and available liquidity of $5 4 billion that year and this is over $900 million higher than at the end of 2019 and marks the highest liquidity levels and recent history.

Turning to our segment results beginning on slide 14 unit volume and the Americas declined 6% and improvement from a nearly 10% decline and the third quarter.

Replacement volume was down 9% driven by our consumer business.

While the adverse impact of lower sales through Walmart's auto care centers was less in Q4 and in Q3, So it's trending the right way.

And continued to drive a year over year decline and our volume relative to others and the industry.

Our commercial replacement volume on the other hand, and increased 9% driven by strength and the transport industry and growth and our fleet business.

OE volume was up 6%.

Segment operating income per Americas totaled $190 million or <unk> $38 million higher than last year.

<unk> and the impact of the onetime legal settlement and the environmental remediation Reserve Americas segment operating income would have been $169 million still up $17 million from the prior year.

The benefits of our cost saving actions and improvements and price mix contributed meaningfully to the earnings growth.

Savings associated with the closure of Gadsden over $33 million for the quarter and our aviation and off the road earnings remained down from the prior year.

Turning to slide 15, Europe, Middle East and Africa as unit sales totaled $12 4 million on that.

5% from a year ago.

OE volume increased 16%, reflecting the impact of several new fitness launches as auto production was essentially flat during the quarter.

Replacement volume fell 11%.

Lower volume and our consumer business more than explains the decline and our replacement volume.

Our commercial and replacement business performed very well driven by continued momentum on our fleet business.

EMEA segment operating income increased 31 million to 69 million the increase was driven by lower raw material costs and improvements and price mix.

Turning to slide 16, Asia Pacific and <unk>.

Cynics tire units totaled $7 8 million down 2% from the prior year and a significant improvement compared to the third quarter.

This sequential improvement our volume was driven by our consumer replacement business, which increased 5% and the latest period.

While our business and China remains a growth engine. We also grew consumer replacement volume outside of China during the quarter.

Our OE business results year over year continued to be affected by discontinued fitness and China.

Yes.

Segment operating income was $43 million down 9 million from the prior year's quarter, driven by lower earnings on our other tire related businesses.

Turning to our outlook items on slide 17, while markets have recovered considerably since the middle of last year, we continue to face a high level of uncertainty.

Despite these uncertainties, we wanted to share with you some thoughts on how we're currently thinking about the business during the first quarter.

First we expect volume will be similar to what we experienced in Q4 with overall levels below 2019, reflecting lower auto production and continued softness and vehicle miles traveled.

Second we expect our production levels to be about 3 million units higher than last year positively impacting our fixed cost absorptions.

Third we expect to see continued improvements and price mix, while we still expect on raw material cost to be lower than the first quarter of 2020, the year over year benefit will be significantly less and in the fourth quarter.

Slide 18 summarizes several of our full year financial assumptions.

Based on current spot prices, we would expect our raw material cost to increase $125 million to $175 million net of cost savings largely and the second half of the year.

Our planned capital expenditures total about $850 million, which includes some catch up with the investments that were deferred as a result of the pandemic.

Given the industry recovery and the second half of last year, and the resulting impact on our inventory levels will need to reinvest and working capital in 2021.

At this point, we expect to reinvest it around half of the cash we pulled colleagues working capital and last year.

Rationalization payments are expected to be similar to last year's levels as we complete the plans, we've announced in Europe and the U S to strengthen the competitiveness of our manufacturing footprint.

We expect our book tax rate will continue to be very sensitive small variations and income so hard to estimate with any precision.

At this point, we anticipate paying cash taxes of $125 million to $150 million, which includes payments deferred from 2020.

Last year, we suspended our quarterly dividend and response to COVID-19, and expect the suspension to continue while the impact of COVID-19 persists.

And finally, youll find several updated reference slides and our presentation slide.

Slide 20 contains updated modeling assumptions that will be useful as you develop your forecasts.

On a significant changes compared to the prior year's versions are and the section on volume sensitivities, reflecting the impact of lower industry volume and 2020.

Slide 21 provides an updated percentage breakdown of our raw material costs by commodity.

Note that our overall spend in 2020 was significantly impacted by lower production.

On Slide 22 provides an update on the percentage of our consumer business made up of large rim diameter tires, you'll notice the significant increases and the percentage of 17 inch and above and our OE businesses.

Now, we'll open up the line for questions.

And at this time, if you would like to ask a question. Please press star and one on your Touchtone phone and keep in mind, you can remove yourself by pressing the pound cake once again, its star and one on your Touchtone phone.

We'll take today's first question from Rod Lache with Wolfe Research. Please go ahead.

Good morning, Brian to everybody and good morning.

Was hoping you might.

And be able to talk a little bit about what youre seeing in terms of price and mix and in particular, just the supply demand impact of these tariffs on.

On the four Asian countries and.

They accounted for.

At least a quarter of U S replacement.

Supply and and.

And in the past couple of years, so how do you.

See that starting to trickle through the market.

Yeah, So rod maybe I'll take it in two pieces, one just give a few remarks or some thoughts on the tariffs and then talk a little bit about the pricing environment and on.

Do you see a relevant question. So I would say as we think about it.

Leveling the playing field and the U S is really no question and a good thing for the health of the domestic tire industry and and.

And I know you know and going back to the last year. We saw on 2014, you could go back and look at the numbers. There is a clear benefit to the U S industry.

There's a bit of a distinction because back to 2014.

Didn't see much of the import volume quickly shift on China into a lot of the other southeast Asian countries. As you know on many of which now are the ones who are actually the one subject to the potential antidumping and countervailing duties and tariffs. So I think as we look at this going on given that history. The benefits of these more re.

Recent tariffs potentially may be longer lived and they have a big but longer life. Just as you think about it. They are just simply fewer locations and places to put those tires to send them back into the U S.

So taking a step and we think that the industry is doing pretty well, we see good recovery and demand demand is running ahead of supply.

Particularly in the premium products, that's a good thing for us and as you see in the fourth quarter deposit and benefits that we got out of price and mix and we see that even relative to what we see your high raw material costs coming in next year and then if you just take a step back and look at what's happened and price or how we're thinking about price and what we're seeing I should say right.

Now and 2020, we did see a net recovery and price mix versus raw materials building on debt momentum that we saw on the second half of 2019. That's a good thing, but also remind you and everyone else. We're still not fully recovered from those high raw material costs, we saw in 2017 and <unk>.

2018, so really a net positive and really important evidence and what we're seeing.

And cycle is kind of turning around.

To help us recover all those raw materials, and again and you see it and in our price per tire ex FX was up about 3%. So good outlook on that on the replacement side remember on the OE business has some rmi basically has an.

And impact as well and then if we just look around the globe will start and the U S. The PPI was up about 1% and Q4 versus the prior year always a good sign and then as we look around we saw nine and 10 of our consumer tire manufacturers out there the ones that we monitor day.

And they've announced price increases since November of about 5% to 8%, we announced up to 5% on our consumer replacement business effective December one.

And then if we go to the commercial side, we saw more than half of the chart tire manufacturers that we track they've also announced price increases on that same amount of on 5% to 8% since November and.

We've announced up to a 6% price increase that was effective November one.

And then if we switch to Europe and remember we're in the summer selling season, right now and we've seen several tire companies Theres announced price increases as they start selling those tires.

And relative to us, we implemented a price increase and about 2% and both summer and all season effective December worse, some per <unk> excuse me.

And also on the truck business the truck business as Darren and I, both referenced and our remarks is very robust and Europe right now and we've had some pricing actions there as well and then if we just broadly speaking look and emerging markets. We do what we always do there is as used price to offset weak currencies and raw materials. So I would say a pretty constructive.

And all around.

And.

I was hoping just secondly, you'd be able to just touch on what you still think you need to do.

Kind of longer term to achieve competitiveness, you've kind of referenced a low cost country versus high cost country manufacturing.

Is that something that you see getting executed over the relatively near term and if you can just remind us what kind of cost savings you've got.

Between GAAP and in Europe restructuring.

You look out to 2021.

Yes so.

On the.

Yes.

Competitive position point that you made which we've been open about is our cost for manufacturing consumer tires.

Significantly above what we see as the industry median and Thats the competitive issue that we have been working to address.

The restructuring and Gadsden and the restructuring and our factories in Germany, and Alan Foldup are an important first step toward addressing.

Addressing that cost position and.

And we've started to get the benefits of that in the second half of 2020. So we got essentially full benefit of Gadsden and the second half, which was around $33 million a quarter and obviously, we will get the remainder of that savings as we go into Q1 and Q2 of 2021.

We've only just started to get some savings from the German restructuring and that will ultimately be $60 million to $70 million.

And so if we take the two together and it's approaching 200 million when we compare.

If we compare 2022 to where we were in 2019.

So that's going to be a significant move and the right direction, obviously, where we're filling in with some expansions that we're making and some of our lower cost factories, including our factory and Slovenia.

And.

Obviously, the Mexican factory has ramped up as well so we've gotten some moves and the right direction I think we're continuing to stay focused on cost and that.

And that improvement can come from additional investment.

Including some investment in automation.

And streamlining some of the production, we have and our existing factories.

As well as some continued expansion on some of our most efficient facilities. So I think we're we feel like we're on the right track there, but there's still more work to do.

Great. Thank you.

And the next question comes from James Picariello with Keybanc capital markets. Please go ahead.

Hey, good morning, guys.

On the on the 'twenty 'twenty, one and outlook.

Do you expect global industry volumes to be down on the first quarter or just the color you provided relate to two good years, and Darren you bench and volumes similar to the fourth quarter was that a reference to the year over year comp and.

And you know just given the full reopening of your largest north American replacement customer.

Should we expect sustained sequential improvements through the year in terms of the Companys regained share and an eventual volume outperformance and how should we be thinking about that thanks.

So let me take the industry, our thoughts on the industry <unk>.

And so the first quarter, but give you a little bit on a feel for how we're thinking about the industry because the ultimately the comment that we made about the first quarter. It was essentially a reference to the fact that we believed our volume would still be down somewhat in the beginning in Q1, but that that comparison is versus <unk>.

2019 so.

So we still believe we would be running below 2019 levels. Yes, I think we feel comfortable we're going to be up versus the 2020 levels. The debt that may be and obvious thing given that.

On the beginning of the pandemic last March.

If we step back from it though for consumer replacement and the U S is probably the most complicated of.

The <unk>.

Industry volumes to assess and Thats as a result of the spike in imports that we saw on the second half of last year.

So 2020 volume and consumer replacement volume and the U S was down 7%, but.

Remember volume was down and effectively 12%, 13% and.

And the non member volume were up about 15% and most of that.

Differential happens and the second half so the comparisons for the first half.

Relatively balanced and we should get some good recovery versus 2020 levels.

And we get to the second half it becomes a little bit harder.

Hard to analyze I think we expect the members, including ourselves we will still have some volume improvement coming in the second half, but non numbers given the.

There was pre buy ahead of the tariffs I think non members, we would expect to be down.

And therefore, if we if we were to give an overall outlook for the industry I think it's probably a flattish outlook. If we take the members and non members together.

We also would see the first half with some sequel with significant improvement and.

And the second half not as clear so you'll likely down if youre incorporating the impact of those imports.

So.

So that's on.

How we're looking at the U S consumer replacement industry volume and Thats part of what goes in to the assessment that we offered on the first quarter. Some good recovery versus 2020, but it's still below 2019 wells, yes, if we get if we run quickly through the other and.

Industry factors that would affect our volume.

Consumer OE I don't think our outlook is probably that much different.

And what you would read I think and the U S. We would expect that we would recover most if not all of the 2020 declined during 2021 and so it was down consumer OE was down 19% last year.

We expect to recover that this year commercial replacement.

The replacement was up about 1% last year and I think we expect it to be up single digits. This year. So there wasn't really a decline, but I think we continue to see good volumes and.

And commercial OE, and which was you took the hardest hit last year.

And about 30% I think we'd expect to recover some.

On the order of half of that base.

Based on the production outlook that we see right now.

So thats I mean thats.

And what we're seeing and the U S industry.

On the European industry, we saw consumer replacement last year down, 12% I think we'd expect to recover over half of that decline this year, but certainly not all of it.

Consumer OE and Europe was down about 25% expect to recover something over half of that as well.

But recovery not not as strong as we see and the U S. <unk>.

Commercial replacement was.

It was down about 7% in Europe last year, we expect that to be fully recovered.

And commercial OE and Europe down about 18%, we also expect full recovery on.

So and we expect a good bounce back and the commercial business there.

On a little bit slower recovery and the consumer business then.

And then we're seeing and the U S.

So I think that overall I think thats our backdrop.

And we sit and circle back to the question on our Q1.

We're expecting to see a decline versus 19 that is.

And Directionally similar to what we saw in the fourth quarter.

Yeah.

Got it that's super helpful. Thank you for all that color.

As we think about your T V. Our OE business is.

Would you venture to say that the margin profile of that business is higher or at least in line with the margin profile of your consumer replacement.

<unk>.

Sorry, just a question Covid was commercial OE.

Yeah, Yeah Sure Bureau.

And so <unk>, our commercial and we model our margins on commercial OE tires and.

Essentially the same level that we do commercial replacement tires.

So theres not not distinct difference there.

And obviously different products have different margin character, but we tend to model those as being similar wear and consumer.

Margins on OE tend to be lower than margins on replacement.

And James the part of the reason for that remember as a line of those tires on OE or being spec by our fleet customers. So there is much more integration between what happens at the fleet level and then what gets pulled out of OE. So our customers sort of flows right through where Oems are essentially two different customers.

Got it yeah, just given the strong industry production backdrop for this year I just wanted to ask about CVR. Just my one follow on your other tire related businesses I think amounted to about $150 million.

$150 million headwind for the full year.

Aviation will be the ongoing headwind that sustains no surprise, but.

But how much of the 150 day. Thank you can be it can be recaptured and 2021. Thanks guys.

Yes, I think our view here is given the continued challenges in aviation and we're probably looking to recover something on the order of half of the $150 million that we lost in 2020.

And then wed expect.

And the remainder of that to come back.

Over the coming years, but the aviation industry I think we are.

Probably have a three or four year outlook for a full recovery.

Understood. Thanks.

And we will take our next question from.

Victoria Greer. Please go ahead.

And good morning.

Two questions from me, please morning, and firstly on the Q1 and.

Could you just give us a little bit more detail and the absolute and might you would expect to have a raw materials headwind in Q1, and you mentioned that you expect the Q1 price mix versus wells to be positive, but less of a tailwind net wells in Q4 could you talk us through the different drivers that youll have and in Q1 versus Q4.

And then the second question really around inventory levels, and we know the industry has been running production pretty high to catch back up on the second half of 2020 since that's been the case for you as well you were expecting to rebuild some inventories in Q4, and but I guess looking at the working capital and Phil you had that totally happens more in 2021.

Can you talk a bit about firstly, where you think inventories are nine and both for your own business and then also into the dealer channels is there still a catch up needed there. Thanks.

Yep.

So let me.

Richard maybe we start by commenting on where we where we see channel inventories, yes sure.

A lot there and I'll absolutely the right questions as well so from a channel inventory perspective, I would say we are maybe I'll break it down between the U S and Europe.

Excuse me the easiest way to look at it and I would tell you that in the U S. During Q4, we saw what I would say sort of a modest restocking by our wholesalers and retailers and as we think about that sell in was essentially a prior year levels, but sell out was down about double digits and again. This include.

And I would say not limited to the impact that Darren referred to earlier, which was the impact of the pre buy of the Asian tires that we saw and now having said that there is evidence of the U S. PMA members inventory growing as well now for US our third party and distributions our inventory was down versus the Goodyear tires and.

Net inventory was lower versus the prior years, but we would say thats very consistent with the reduction and sell out which tracks the DMT, which we view as a good indicator over time of on how to match us.

Supply and demand and what's going on and we certainly see a rich.

And some of that as we go into 'twenty and 'twenty one in Europe on our third party channel inventory and the distribution and the retail our brands was down at the end of December versus the prior year again, driven by what we always see at this time and Thats lower winter tire inventory, but remember this is a really significant change from what we saw.

Bob.

Moving quantity.

13% I think we've seen that restocking start.

And the second lien and 20, so I'd say good shape overall as we look at it but clearly and Victoria I think your question and ill send it back to Darren one of the things that we're looking at as we try to catch up on on some of that inventory. This year, but as you said on demand was and in better shape and to get those plants working.

To meet both demand and to rebuild and rebuild inventories.

Challenge, that's front and center and what we have to do and 2021. So Darren maybe you can walk through some of the numbers and how we are thinking about that and I think that's fair.

Channels to start to do their catch up on their inventory, but we haven't had a chance to catch up on power and inventory.

You're right to point out the fact that we had hoped we said and the third quarter call. We were hoping to rebuild some of our inventory and the fourth quarter and that did not happen.

So we've ended the year with inventory down and about 700 million from.

Go.

Our plan effectively as debt.

Okay.

And.

We would've liked.

And it made some progress on that and.

Okay.

Our share.

And.

Richard.

And I'm doing that during the course of 2021, so that makes up the biggest part of the 405.

Okay.

I want to come back to your raw material question, but before he does that cover your question related to inventory.

Yes, that's clear on the inventory.

Sales for the first quarter.

And you are coming out fourth quarter, where we had 25 million of benefit and raw materials, I will say that that $25 million benefit and the fourth quarter.

And was made up.

75 or $80 million.

And from Robert.

Fox on.

Offset to great degree by transactional Forum.

Adverse transactional foreign exchange.

Italy, Turkish lira and the Brazilian real.

That drove up the cost.

Moving the countries and that sort.

Raw material net benefit was $25 million.

We expect both debt yes.

That number before and the number after the currency effect.

The debt out.

First quarter.

And actually the probably get half the benefit and the first quarter that we saw in Q4.

And that one.

Victoria.

No.

Okay, well move on and extra John Healy with Northcoast Research. Please go ahead.

Thank you Tom.

Hey, good morning, I wanted I wanted to ask a big picture question just.

And just about the EV market I know you guys highlighted the success and the momentum you have there.

And so I was hoping you could spend a little bit of time educating us a bit more about what it is is it about the R&D that you've put into place or what.

And what's going on specifically that you guys think is allowing you to garner some good share opportunities there and any way you could kind of frame for us how you think youre doing relative to the market on the EV side of things.

Yes, John I would tell you I'll.

To start with your last question I think that.

And that we're doing really really well and you've you've kind of heard some of the fitments that we won over time and we mentioned one of them just in the call today, but I think you have to you have to look at this as really putting.

On a combination of things together to start with it's really core of tire technology that.

And again and frankly, we have I would say excellent an excellent team of <unk>.

Engineers and scientists working on how to solve those problems and remember one of the EV problems and Theres a couple of them I'll touch on it but one of the main ones is around rolling resistance and Goodyear I feel very confident in telling you is is the leader and rolling resistance and many of the markets around the world.

I would say and all of the markets around the world really and Asia, and Europe and the U S. So so that science around.

Everything from trade compounds into material uses to different weighted to to put that to work is where we have expertise and then expertise grows and value when youre trying to solve a range issue on and EV vehicles. So that's one of the areas, but remember meeting the requirements of these evs isn't just rolling resistance.

And as clearly that is clearly being able to have and hold the extra weight Av and EV that has the batteries around it it's the durability because the incremental towards that goes to those tires and it's also on things like sound and noise because as we've said before you don't hear the engine. So any tire noise is going to become very prevalent.

And an easy versus and internal combustion engine. So those are things like foam and tire that we have another other elements to do that and then on top of that you can't give up in fact, I would say you have to increase the actual ride and handling perspective is how these evs and want to outperform in consumers' hands. So it's the combination of all.

Those things not just one that really puts Goodyear I would say as the leader and easy technologies, and then add to that what where we're going around.

Around let's call it the integrated tire the intelligent tire EV tires are aware of that intelligence is going to show itself. So why do we have we made mention of the 1 billion miles of that we have on connected fleets out there today and to learn about how we can make sure. We're getting all of those properties from the tire all the data off the tire the road.

To integrate with those vehicles going forward and as you might imagine the first users of that are going to be EV EV.

<unk> companies and easy operators. So I would tell you that's why when you look at us versus some of our competitors is just not building the plant and make an entire as we've always said, it's integrating all those things together and a way that adds value to the customer and we think about that about changing.

What services are we bringing what problem are resolving and what what product area and bringing to our customers to help them drive their future. That's how we think about the EBIT business.

Great and then just one follow up question for me on pricing.

Pricing and maybe specifically in the U S replacement market.

I think you guys mentioned nine of 10 manufacturers raising prices.

And with the industry inventories being kind of and AR and AR.

And our leading position and with the tariffs coming do you think theres an opportunity for further price increases and 2021 or do you think that.

And the industry is already kind of turned the page for a for what 2021 pricing might be for that for for a replacement units.

Yes so.

John and hardcore first to comment about the industry I.

I will say that given our outlook on raw materials.

Yes, which is for free.

While material cost increases.

Principally and the second half and a range of $125 million to $175 million is today's raw commodity spot prices hold on.

The pricing actions that we took at the end of the year.

And would generate enough pricing to cover about half of that cost in Q3 and Q4.

So there's more that we would have to do in order to fully offset.

Raw material costs.

I mean, mathematically I think thats it and.

And I think what we're focused on is continuing to.

Manage raw material cost with price and mix and Thats.

And that's how we've handled it in the past that telling me.

And we'd expect to continue to handle it.

Okay. Thank you guys.

Okay.

And your next question is from Ryan Brinkman with J P. Morgan. Please go ahead.

Hi, Thanks.

And I thought to ask what's the latest you are seeing in Latin America, I recall before you've rolled that reporting segment up into the Americas, you were disproportionately commercial tire focused with strong franchise the margin whats historically high down there and there's been a downturn, but more recently, we've been hearing including from some of the suppliers that have reported so far this.

Quarter that the run rate on the outlook for commercial truck production has considerably improved there.

Recently and may be helped by that a stronger agricultural commodity prices.

And I don't know if youre seeing the same and.

If thats a tailwind for you.

Yes, Ryan I would say, we're pleased with the way Latin.

Latin America is shaping up and I'm very pleased with how hard our team is operating and as you know that Latin America has been and what would be I think lightly described.

Difficult economic circumstance for really elongated period of time.

In that environment I would tell you a couple of things one and our passenger business, we continue to mix up to larger rim diameter tires and.

<unk> continued to expand our distribution throughout the region, we have more points of sale, we've been adding and each year over the course of the last few years, we've completely redone our product line, there and I would tell you that business is going very well and on the commercial side, a very similar story that the industry.

<unk> has rebounded a bit our product line has been completely revamped.

Our product performance I think is leading and the industry and is broad based across all of the Latin American countries, and we also and continue to expand our distribution points and notably continue now in a region that was a little bit harder to do it are really moving ahead with some of the fleet solutions that you hear us talk about and North America.

And in Europe, So I would say we feel very good if you asked me what the biggest challenge I would still say it's.

As the economy is getting the economies to recover down there, but in that environment I would say I'm very pleased with the weighted teams executing.

Okay. Thanks, and then just lastly, there's been a lot of questions already on price mix versus raws and most of mine are answered.

And the potential for future price increases et cetera.

I, just thought to ask around that and a little bit of a broader way I mean, obviously this past year has been very.

Very exciting from a macroeconomic perspective theres been.

A lot of inflation already and financial and real and alternative assets and increasingly and commodities, but it does seem to be.

Economists are more debate and you know what the outlook is going to be it for consumer prices with with some not projecting as much of a rise I don't know if you how you feel about that maybe we all have our own opinions and you're putting through some price increases already the tariff will help the industry generally has a good track record of passing on costs long term, but there was that softer period.

And our back end in 2017 and 18, so I don't know I just thought to check in with you generally how you think the industry is positioned relative to what seems to be more of a inflation and.

Input cost relative to our consumer prices generally is this kind of going to be the gating factor for your earnings over the next couple of years is.

The price mix versus raws trying to potentially.

So maybe I'll just take a step back and certainly I. Appreciate you, bringing up 17, and 18 because that wasn't period debt debt that we didn't recover raw materials, certainly for us and I'd say as an industry, but if I take a step back and I kind of look at this from a macro perspective and think about where.

We are headed and you have to start with a combination of the vaccines coming out with herd immunity moving forward, even with the varying and coming are putting a little head and tailwind or headwind to that I'd say, we all see light at the end of the tunnel.

And does it mean it means the way we think about it people and spending has been sort of a sideline we all know that.

If we look at the macro comments and you know this as wells as adding one second half.

And could see.

A bit of a turn as we get beyond the vaccine and people want to get out and they want to travel they want to go places thats. Good for Goodyear is good for our industry as BMT goes up as travel comes back, albeit maybe at a slower place that's a that's a positive and.

And two that we're already seeing the combination as I think Darren and I. Both mentioned demand running ahead of supply and particularly in the premium segment and is one of the questions was thats coming off low inventories in our industry, but one might say and every industry. That's out there and you look at that with some of the raw material inflation that.

Darren mentioned, we see coming particularly in the second half of the year and then you add to it the stimulus money that's coming out there.

Debt you have people that are going to be liquid and net debt are going to want to spend. So I think if you put all that together I would say that we view that as a constructive environment now what does that exactly means I think we have to tell and we have to see how that plays out because if anything what we've learned and the last year and nothing moves and a straight line.

So, but having taken a step back I think that that to me is a very constructive environment that we're looking at into the future first we got to get by this virus, Hey look we got to.

We got it and we got to stay safely get to defeat this thing, but on the other side of it I think there's good stuff.

All right very helpful. Thank you.

And we'll go next to Emmanuel Rosner with Deutsche Bank. Please go ahead.

Hi, good morning, everybody.

Morning.

I was hoping to ask you.

First about free cash flow both in terms of near term outlook and maybe how to think about it.

Longer term so it seems based on some of the pieces of outlook you've given for this year.

And you need to reinvest and inventory obviously continued restructuring.

Catch up catch up on Capex.

So is it the right way to think about it debt.

And our free cash flow could be a decent year.

In 2021 and.

And on a go forward basis, how should we think about it in terms of and.

And our free cash flow outlook and and recovery on there.

Sure.

I guess the business plan.

Okay.

And so Emmanuel.

We look forward and I think your conclusions right and that's when we take into account the need to reinvest $450 million to $500 million and working capital and 2021.

You are right to conclude that is going to cause us to have some use of cash and.

In 2021.

If we look out longer term.

And set aside working capital.

We.

Even heading into the pandemic. If we took the 12 months that were leading up to Q2 last year.

We were on the running at a pace, where we are.

Sold just under 150 million tires.

We're generating $700 million of segment operating income add back 800 million of.

Depreciation and take out $100 million of corporate costs.

And you can get.

Secondly on cash flow debt is.

At the level required to pay for the items that we have on our cash flow guidance. This year, if I exclude the working capital and the restructuring payments.

Now we've taken some actions.

And are going to reduce that breakeven point.

Our restructuring actions in Germany, and guest Alabama on it.

Take that breakeven point down five or 6 million units.

And by doing that it gets us down to effectively the level of volume that we're running at.

So as we see volumes grow above where they are right now.

That should start to open up the possibility of generating positive cash flow.

Even at the.

And the slightly higher capex levels that we've got in our plan.

Taking into account the other items that we've got in our cash flow.

Look.

Does that with great clarity.

Super Helpful. And then I guess following up specifically on these.

And restructuring actions can you. Please just go back and summarize some of the expected bench.

Benefits, both this year and next to the extent of debt.

They've been quantified in terms of discrete actions impact and timing and go from some of these.

I guess lower cost points.

Yes.

So the first and the U S restructuring action, it's principally the closure of the guest Alabama facility.

And that was the fact, you're effectively completed and the second quarter last year. So we got full savings in Q3, and Q4, which is about $33 million a quarter.

We will get that continue to get that or similar amount in Q1 and Q2.

And now represent sort of the full run rate savings. So we'll anniversary that in Q3 this year.

So I wouldn't necessarily expect additional savings and the second half of this year, because we'll have already gotten the full savings from Gaston.

And the cost savings from the restructurings in Europe.

Are you going to be more weighted towards this year and 2022, and we haven't given precise timing, but if we look at 2022, we should have the savings $60 million to $70 million realm.

Relative to 19, and most of that relative to 2020.

You have to split that between 'twenty and 'twenty, one and 2022.

And thinking about when we're getting the savings for the factory restructurings and Germany.

The one other thing that I might point out here as long as we're on this question around our cost savings.

Because of the 2020 was sort of an odd year for tracking cost savings given some of the extreme measures that we took to address the hard shutdown that the pandemic created.

And there is no question and cost efficiency installer, one of our top priorities.

But if we look at 2021, even if we even if we.

Yes.

Getting the benefit of the restructurings and the way that we've traditionally reported our net cost savings on our cost savings net of inflation.

That number is going to end up a peering negative for the full year.

Given the.

The onetime nature of some of those savings actions, we took in 2020.

So for the first quarter, we're going to see solid net cost savings.

And that those temporary actions for the pandemic didn't really start until Q2, but when we get into Q2 and Q3, we are going to get.

Some costs being restored versus pandemic levels, and thats going to make the debt.

Net cost comparison.

Was really favorable in 2020, and it's going to make it look less favorable in 2021, we're still going and get the savings on restructuring but that is.

Yes, just a little bit of watch outs as you model the cost savings year over year in 2021.

Great. Thanks for the color.

Okay.

And this will conclude today's Q&A session and also conclude Goodyear's fourth quarter 2020 earnings call. We want to thank you for your participation you may now disconnect and have a great day.

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