Q2 2019 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 Goodyear's second quarter 2019 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 one on your telephone keypad.
If you would like to withdraw your question press the pound key I will now hand, the program over to Nick Mitchell Senior Director Investor Relations.
Thank you Keith and thank you everyone for joining us for Goodyear's second quarter 2019 earnings call I'm joined here today by Richard Kramer, Chairman and Chief Executive Officer, and daring Wells Executive Vice President and Chief Financial Officer, The supporting Slide presentation for today's call can be found on our website at Investor Day, Goodyear Dot com and a replay of this call will be available later today replay instructions will 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 that our presentation includes some forward looking statements about goodyear's future performance actual results could differ materially from those suggested by our comments today. The most significant factors that could affect future results are outlined in goodyear's filings with the FCC and in our earnings release, the company disclaims any intention or obligation to update or revise any forward looking statements whether as as a result of new information future.
Once or otherwise or 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. GAAP equivalent as part of our of the appendix to the slide presentation and with that ill now turn the call over to rich.
Great. Thank you Nick and good morning, everyone.
During today's call I'll share some highlights of our second quarter operating performance and discuss the progress we are making with several of our initiatives I'll also take a few minutes to highlight the recognition that our teams and products are earning around the globe.
Darren will follow with the review of our financial performance and an update on the steps, we're taking to mitigate the impact of the raw materials cycle and the global OE slowdown.
He will conclude by offering some insights into how we're thinking about our business going forward.
Our us business continued to perform well in the period as we maintain the momentum from recent quarters in all our us consumer replacement volume increased 4%.
This growth was well balanced as shipments increased across all our major distribution channels, including retail wholesale and mass merchants.
I'm pleased to say that we accomplished this while increasing our revenue per tire relative to last year, which is a testament to the strength of our brand and our product offering.
We continue to excel in the all important high margin premium segment of the market.
Shipments of large rim diameter tires increased by 9%.
This growth was more than double the industry and came on top of a strong performance in the previous year.
We benefited from the increasing premium supply aided by the ongoing ramp up of our newest manufacturing facility in the Americas.
Which remains on track to provide 3 million more tires by the end of 2020.
Our fill rates are improving and back orders continued to decline, allowing our dealers and aligned distributors to better meet the high level of demand for our best in class products in the market.
Our us commercial replacement business maintained the momentum it gained earlier in the year.
We continue to increase market share in the second quarter. Despite taking additional actions to increase the value we are capturing in the marketplace.
US commercial OE shipments increased nearly 20% in the quarter on top of a similar gain in the previous year far outpacing industry trends.
These impressive results reflect the strength of our fleet solutions offering and commercial product portfolio.
We're also seeing better manufacturing performance at our commercial truck tire plants, while not where we need them to be our efforts to improve the productivity of these facilities are paying dividends with output increasing and conversion cost per unit declining.
During the quarter, we successfully launched Goodyear truck tires dot com, our commercial E Commerce website, making another first for our company and for the industry.
This new platform better positions us to meet the changing needs of commercial truck fleets and owner operators and enhances the online competitiveness of goodyear's commercial tire dealers.
In Latin America industry trends remained volatile, reflecting slowing economic growth and volatile exchange rates in the region.
In Brazil, our largest market volume declined 2% with weakness in our consumer OE and commercial businesses more than offsetting modest growth in our consumer replacement business.
Our business in Europe , Middle East and Africa turned in mixed results.
Our commercial business continued to perform in the EU during the quarter, despite economic growth slowing in many countries in the region.
Notwithstanding this environment truck miles driven remains supportive in the eurozone, allowing us to leverage our industry, leading fleet solutions offering and successful launches of the K Max Gen two and fuel Max Gen. Two commercial tires for the drive and steer wheel positions.
Turning to our European consumer replacement business and.
Channel inventory of both summer and winter tires remain below a year ago as dealers are managing inventory consistent with demand trends.
This dynamic along with the investments, we've been making to enhance our product portfolio leave us well positions for when the markets turn.
Transitioning to our operations in Asia Pacific trends in China continued to have an outsized influence on our overall performance in the region.
Earlier in the second quarter, we saw what seemed like some positive indications in both OE and replacement.
As the quarter progressed these positive signs moderated.
Our results were also impacted by the downturn in the Indian auto industry, which has been impacted by a slowing economy and tighter credit conditions.
Our overall shipments in India fell by more than 10% driven by lower vehicle production.
At the beginning of the year, we indicated that a challenging macroeconomic environment for the industry would limit our performance in 2019, especially through the first six months of the year.
Given these factors our results do not reflect the true long term capabilities of our assets our people and our brand our product portfolio distribution network retail presence and brand are all stronger than ever.
While we wait for the environment to improve we are investing innovating and forming strategic partnerships to build a stronger business capable of winning today and in the future.
Product innovation and vitality, our top on our list, we're investing in our product portfolio guided by our market back approach to innovation and design, we have good momentum on several fronts.
Our engineers continue to raise the bar on what is possible in the areas of product design compounds and performance.
And the advancements are not going unnoticed earlier this month, a leading independent tire review website among auto enthusiasts selected the Goodyear Eagle F. One supersport as the top all around ultra high performance summer tire.
It earned this designation by offering superior wet handling without sacrificing performance in dry conditions.
On what pavement, the Eagle F. One supersport beat the closest competitor by more than two seconds and impressive an impressive feat given the short lab test tracked.
It did so while essentially matching the capabilities of the top competitors on a dry track.
Our racing operations are leveraging the technology and knowledge that went into building this world class performance tire.
The team is developing a new range of tires for the Fi a world Endurance championship, including the Loehmanns 24 hour race supporting Goodyear's return to the European and International Sports car racing circuits.
We're having a lot of success outside of Europe , as well our product lineup in the US has never been stronger and it's not just the professionals, who have noticed the quality and performance characteristics of our tires that were bringing to market.
Positive consumer feedback recently propelled the Goodyear assurance maxlife to the top ranking in the standard touring all season category on a leading ecommerce website.
And more recently, the Goodyear Eagle Exhilarate receive positive ratings from testing conducted by the E. Tailer in the ultra high performance all season category.
The Eagle Exhilarate sets, a new standard for wet traction performance.
Customers are embracing more than just our tires consumer feedback on our newest customer facing businesses also encouraging.
Our e-commerce platform on Goodyear Dot com and roll our new innovative retail concept are receiving five star feedback from consumers.
More importantly, consumers are spreading the good work to their friends and family roles average net promoter score is on par with those seen in best in class retailers outside the tire industry, which is not the norm for our industry.
We are still in the test and learn face, but the positive feedback reinforces that we're on the right path.
With our product portfolio, where it needs to be we've taken steps to strengthen our consumer OE business as well, we expect to start seeing the benefits from these steps over the next two years with increased volume at better margins driven by enhanced product technology.
Our continued focus on quality technology brand value proposition and collaboration is driving increased win rates in the segments that we are targeting.
Vehicle trends, including the shifts toward electric vehicles are making tire design and production for OE more difficult and reducing the number of relevant competitors for OE business.
These trends play to our strength as a global leader entire technology and will deliver the volume growth Geron will take you through in a few minutes.
Earlier in the year, our global consumer OE team was recognized by Ford and General Motors Goodyear was the recipient of GM supplier of the year Award and Ford's World Excellence Award for achieving the highest levels of excellence in the industry as an original equipment supplier. This marked the second straight year that GM bestowed this honor on Goodyear.
Additionally, our us consumer OE business ranked highest in the performance sport category and JD powers Us OE tire consumer satisfaction study.
Our ability to develop great products provide outstanding customer service and help solve problems is why Oems want to do business with Goodyear.
We are committed to exceeding expectations as a supplier and achieving the highest levels of excellence in quality cost performance and delivery. This commitment will sustain our position in the industry.
Ensuring adequate supply of premium tires is crucial if we're going to fully capture the benefits of our industry, leading product portfolio and expanding OE pipeline.
The ramp up of our newest manufacturing facility in the Americas remains on track in Europe , We started expanding our manufacturing facility in Slovenia, and we announced plans to modernize our plants in Florida and Hanau, Germany.
In total these projects will bolster our global supportive premium tires, better positioning us to respond to our customers rapidly changing needs and deliver the high quality products they demand.
Last but not least we are diligently working to gain additional efficiencies throughout the organization most notably our manufacturing teams are working to reduce our conversion costs. Our European restructuring program will significantly decrease our cost structure in the region as we could tail production of tires for the declining less profitable segments of the market.
We are boosting the productivity of our plants by investing in new equipment that allows for further automation of the tire building process, we have an opportunity to gain additional benefits from our plant optimization program by empowering and enabling our teams to deliver stronger and sustainable performance over time.
Maintaining our cost competitiveness is crucial to our long term success, and we're committed to driving productivity gains across our manufacturing footprint.
We operate in a cyclical industry with macro factors often greatly influencing our performance over short periods.
Im encouraged by the fact that several of the external factors that have significantly impacted our business in recent quarters are beginning to moderate.
Looking forward I'm really excited about the prospects for each of our strategic business units.
From the beginning of my time as CEO I've emphasized that we are running our business for the long term.
Now that we are in another industry down cycle. The second of my tenure and the third in my career at Goodyear.
It's clear that our long term approach is the right one.
Our conviction in that philosophy is unwavering.
Certainly we must operate our business today based on current market realities at the same time, we're responding to changes, we anticipated and distribution in retail and in behaviors and expectation of consumers.
This shifts in mobility and transportation and their impacts on our business are already upon us and we will continue to evolve. These factors both inform and define our long term focus we will continue to navigate through the volatility of our industry, while maintaining our vision and strategy for the future.
Ultimately Goodyear success will not be defined by short term performance during a down cycle, but by our global leadership in a rapidly changing world of mobility now I'll turn the call over to Darren.
Thanks Rich.
While second quarter results were disappointing with both volume and price mix below where we wanted to see them. The first half overall was consistent with our expectations.
We knew that a number of macro factors, we'd be working against us through the first half.
These included higher raw material costs, a stronger US dollar we go we volume, particularly in China, and India, and increasing energy and wage inflation in Europe .
Results for the second quarter were affected by these factors, while also being impacted by weaker than expected European replacement industry volumes.
While the first half results were unfavorable versus the prior year, our expectations for the second half or better.
I'll come back to this in a few moments, but overall raw material cost increases will not be a big factor in the second half our volume outlook is more favorable and we expect factor faster progress on price mix than we saw in the last couple of quarters.
And we should see some meaningful working capital improvements.
In addition to factors impacting the second half there are a couple of key positives I will also highlight as we look out over the next couple of years.
First is the benefit from cost reductions we have underway. These include the manufacturing footprint restructuring actions, we have announced in Europe .
Second is a significant inflection in our OE volume after a decline of two to 3 million units this year.
This inflection is based on the Fitments that we've won over the last 18 months.
I'll come back to these future opportunities here in a few moments, but first let me review the results from Q2.
Turning to slide nine our second quarter sales were $3.6 billion down 5% from last year, reflecting the impact of unfavorable foreign currency translation and lower volume.
These effects were partially offset by improvements in price mix.
Unit volume contracted 4% driven by a 12% decline in consumer OE shipments the reduced OE volume is consistent with the drop in vehicle production across the regions, most notably in China, and India as well as the strategic actions, we are taking to improve our portfolio in the us in Europe .
Continuing the trend from the first quarter replacement shipments were relatively stable with weakness in EMEA and Asia Pacific largely offset by growth in the Americas.
EMEA is performance reflects weak industry sell in trends, especially in the summer category.
Asia Pacific's decline was more than explained by weak consumer replacement shipments in China.
Solid growth in the us consumer replacement market once again drove the increase in the Americas.
Segment operating income for the quarter was $219 million down $105 million from a year ago.
This year over year performance was consistent with our first quarter results with several of the same factors driving the variance.
Our results were influenced by certain significant items and after adjusting for these items earnings per share on a diluted basis were 25 cents.
The step chart on slide 10 summarizes the change in segment operating income versus last year.
The impact of lower volume was partially offset by improved overhead absorption from increased Americas production in prior quarters.
Raw material cost increased $81 million, reflecting transactional currency headwinds an increase in non feedstock costs related to stricter enforcement of environmental regulations in China.
And higher commodity prices.
Keep in mind, we have a three to six month lag as these impacts moved through our inventory and into cost of goods sold.
We delivered $35 million of price mix improvements as the benefits from our pricing actions were partially offset by negative mix in the Americas, which I'll expand on later with my comments on the second half.
Cost savings of 59 million more than offset $48 million of inflation.
Inflationary headwinds continued to be the strongest in EMEA.
The negative effect of foreign currency translation totaled $11 million.
The other category was driven by weaker results from our other tire related businesses, including our us chemical operation and includes our share of startup losses entire out which will also come back to in my comments about the second half.
Turning to the balance sheet on slide 11, net debt totaled $5.8 billion up from $5.4 billion, a year ago, reflecting share repurchases in late 2018, as well as higher working capital, including inventory that is above targeted levels, particularly in Asia.
Note that we reduced production in the second quarter by about 1.1 million units and we will reduce third quarter production by a similar amount versus previous year to address these inventory levels.
Our liquidity profile remains strong with approximately $3.4 billion in cash and available credit at the end of the quarter.
Slide 13 summarizes our cash flows net cash generated by operating activities were $73 million down from $305 million last year capital expenditures were $180 million down $14 million.
Turning to our segment results beginning on slide 14, Americas volume of 17.1 million units was down about 1% compared to the prior year.
Solid growth in replacement shipments in commercial OE volume in the US was offset by weakness in consumer OE, reflecting weaker vehicle production and the impact of choices. We've made on the OE fitments.
Segment operating income was $134 million down $20 million from last year.
The decline was driven by higher raw material costs and reduced earnings from third party chemical sales.
These factors were partially offset by improved factory utilization, including at our new Americas plant.
The Americas first half 2019 results were negative impact negatively impacted by supply constraints, which we described in detail on prior calls.
We made good progress addressing these issues during the first half of the year and are in a better position to deliver stronger mix gains in the second half.
Turning to slide 15, Europe , Middle East and Africa as unit sales totaled 13.3 million units down about 6% driven by weaker light vehicle production and lower replacement industry demand during the quarter.
Note that we gain share in European consumer replacement during the quarter.
Second quarter 2019 segment operating income was $44 million significantly below last year.
This decrease was driven by lower volume increased material costs and unfavorable foreign currency translation.
Partially offset by improved price mix.
Turning to slide 16, Asia Pacific tire units totaled $7 million in the quarter, a 6% decline from the prior year.
Consumer OE volume declined 11%, reflecting weakness in the Indian and Chinese auto industries.
Consumer replacement tire shipments fell 2% driven by a continued challenging environment in China and actions, we've taken to raise prices in part of our distribution channels.
Outside of China, our replacement volume group.
Segment operating income was $41 million, a $29 million decrease from last year. The decline was driven by lower volume higher raw material costs and higher conversion costs, primarily due to lower factory utilization.
As I mentioned in my introductory comments our expectations for results in the second half are better as puts and takes are beginning to balance out.
The first key reason for these expectations is that the increases in raw material costs are largely behind us.
At today's price levels raw materials will be up slightly in the third quarter, and then will be effectively flat in the fourth quarter.
Given most of the materials have been purchased or contracted at this point the level of uncertainty in raw material costs between now and year end is limited.
The moderation of raw material costs allows the benefit of our past pricing actions and our improving mix to hit the bottom line.
The second key reason for a better second half outlook is an improved volume expectation in our consumer business.
After a first half that saw decreases in both consumer OE and replacement, we expect to see increases in both businesses in the second half.
This is partly driven by industry dynamics, including an easier comparable in international automotive production.
And partly a reflection of improved confidence we have in our product lineup products supply and relatively lean channel inventories.
The third key reason is increased benefit from mix, particularly in our us consumer business.
We have experienced three quarters of negative mix in our U.S replacement business, not driven by product mix, but driven by sales through lower margin channels.
As we discussed previously part of this was the result of priority supply commitments, we have to some of our lower margin customers.
And part of that reflected sales through channels that have higher distribution costs.
Another part was the equity losses from tire hub.
Which had previously been treated like other distribution costs and included in mix.
These losses reflect not only tire hub status as a startup company, but also costs incurred to build out their distribution footprint for future growth.
So not really a reflection of cost of ongoing distribution.
These losses have now been broken out separately.
We expect to improve in each of these areas during the second half.
This means the negative year over year impact that we've seen of $20 million to $30 million per quarter in the first half.
Should be 20 to 30 million positive by the fourth quarter.
Now while it isn't our practice to give long term viewpoints as part of our quarterly earnings remarks, I want to come back and provide a couple of data points to help you think about the opportunities.
That we see as were developing our plans beyond 2019.
There are three factors I want to highlight related to our future outlook.
And when I refer to the future here you can think about the next two to three years.
The first is our work to continue to improve the competitiveness of our manufacturing footprint.
You saw the announcement, we made in March related to our German factories. This will improve our earnings by 60 to 70 million as its completed with the full benefit expected by 2022.
While we're not in a position to make any further announcements today, we are working on a significant restructuring plan to reduce low value high cost capacity in the U.S.
This plan should have savings at least as high as the actions in Germany and beyond similar timetable.
The second factor is expected growth in our global OE portfolio.
I mentioned earlier, we are at an inflection in our OE volume after a decline of two to 3 million units this year.
This inflection is based on the Fitments that we've won over the last 18 months and the momentum we see as we enter the second half of the year.
There are two parts to this.
First we have largely completed the work we set out to do to exit low margin Fitments, many of which were on sedans and other vehicles that are in secular decline.
Second our win rate on the Fitments for which we've been bidding has been significantly higher over the last 18 months than we've experienced in recent years.
Up from about one out of three historically to over 50% in the last 18 months.
When we reflect on the reasons for this increasing success, we see multiple factors.
First the vehicles in which we're bidding are more challenging we've been told by OE customers that some of our competitors, particularly those with less technical capabilities have had difficulty meeting the required performance in technical specifications specifications that continued to get more and more difficult.
Perhaps this is most evident in the emerging area of electric vehicles.
The weight and torque associated with these power trains makes tire design much more complicated.
This reduces the number of capable suppliers and has resulted in our win rate being nearly two out of three on electric vehicles last year.
Taken together these trends give us confidence that at current third party auto industry projections, our global consumer OE volume in 2022 would increase by approximately 20% or over 7 million units compared to this year.
With two thirds of this added volume coming from electric vehicle tires that have revenue per tire, 15% higher than traditional fitments.
So we're really excited about Roe business.
The third factor I want to cover related to our future outlook is the recovery of the cyclical impact of raw material costs on our margins over the last two and a half years.
Slide 19 is the slide we've used before to compare the current cycle to the prior raw material cycle early in the decade.
While this cycle has been longer than the prior cycle, we're starting to make progress and still believe.
That either through a decline in raw material costs that might accompany an economic slowdown.
Or by increased pricing that might accompany further escalation in raw materials, we will see a recovery in margins in the coming years as we've seen in prior cycles.
I don't see anything that would change that point of view.
We are continuing to work on our forward plans and we'll share more with you as they develop but we continue to see a lot of opportunity to create value.
Before we open it up for questions I'll, just mention mentioned a couple of small changes to our 2019 financial assumptions.
We are now expecting cash taxes to be approximately 25% of pre tax operating income the high end of the previous range and are expecting capital expenditures to be between 850 and $875 million down from a prior projection of 900.
Also note our industry growth assumptions have been revised down broadly for western Europe .
Industry assumptions for the us are unchanged other than a reduced expectation for commercial replacement, reflecting a further decline in low cost imports.
Our modeling assumptions page is unchanged from our first quarter call. So continue to use these assumptions as you develop your projections.
Now, we'll open up the line for questions.
And at this time, if you'd like to ask your question. Please press star one on your Touchtone phone you can always remove yourself from the Q by pressing the pound key once again its star one on your Touchtone phone.
We'll take our first question from John Healy with Northcoast Research. Please go ahead.
Hi, Kevin.
Good morning, guys I wanted to talk a little bit more about your your excitement on the OEM business.
Yes, the 20% number.
Three years from now it is a big bogey.
So I was hoping to understand.
What sort of global auto production assumptions or maybe in there, but also for the company what geographies are you winning the OE business and because my gut tells me it's not just the U.S. So I was hoping to understand.
Just big picture standpoint, more of the assumptions that go into the excitement on Maui.
John I think its fair question.
I want to make sure that will clear on the fact that we are using third party projections for OE volumes, which as they stand today.
Have about 2% to 3% annual growth between now and 2022.
So obviously the.
Yes that level of growth is what's built into the numbers, so and that would have an impact on the numbers but.
I think we feel like anyone can do and can do work trying to figure out where they think the industry is going so better too.
Gillette.
Yes to let people take their own point of view on that but but this is we've tried to be transparent about the assumptions here and so we do assume.
Soon.
Steady growth in order to deliver the 7 million plus units.
However, I think we're going to see some growth whatever assumptions that you make and I think thats a reflection of a couple of things.
And we talk about the higher win rate.
Where over the last 18 months, we've had a win rate over well over 50% on the bids that we've submitted where.
For several years prior to that.
Our win rate was more like a third so.
Yeah, we're seeing a very significant change and I think to two points on that one is I think we see.
See some trends that are moving back in the direction of larger tire producers with greater engineering capability.
No thats the difficulty of the Fitments and that is something that.
Will help the companies that have made the bigger investment in R&D.
Second thing is obviously, we're taking full advantage of that trend.
And you're making sure that we're winning.
At least our fair share.
The the Fitments that are going to go to the more technically capable companies and I think particularly seeing a lot of win rates are very high win rate.
On electric vehicles, and there were getting the business awarded on two thirds of the Fitments, which gives you an idea just the.
Yes, the differential in capability that.
Now exists as we're bidding on these statements.
Great and then I just wanted to ask on the us business.
Kind of foreshadowing events to come there.
When might we.
Realistically think about hearing the update on that do you think will have details on a plan before year end and.
No anything you can add there.
Yes.
John I think we'll have probably have to just leave the the us restructuring comments with what we've said and that is that we're.
We are working on a significant restructuring.
We will once that plan is finalized we will make further announcements do some further communication obviously, we feel good about the track record we have.
Delivering these kind of initiatives and the savings associated with them.
But there is inevitably some uncertainty in timing given the steps that we have to take prior to announcing something.
Sure and then just one final question from me.
As it relates to capital allocation.
Just your priorities there.
When I kind of do my chicken scratch model here have you guys still free cash flow positive for the year and was wondering.
If that is an assumption that you guys feel like that you can state.
And then if you had to utilize the balance sheet to pay the dividend would that be something that you guys would do assuming.
Tougher macro environment, maybe in 2020 or 2021, where.
Maybe EBITDA isn't where it is today were evident and step lower given macro factors.
Yes.
So.
John I think first point that I'll make is that we do take protecting the balance sheet very seriously.
And improving and reducing our leverage is something that is.
Our strategic focus area for us going forward.
Having said that I'd make the same conclusion that you offer that even at the run rate of our operating income over the last 12 months.
I think given the other assumptions, we still feel like we will generate enough free cash flow to more than covered the dividend.
So I think at this stage.
We've got the money to cover the dividend so the not really acquire theres not really a question of.
Increasing borrowing in order to maintain it so I think where we're generating enough cash in today's earnings level to still cover it.
Great. Thank you guys.
Great.
Our next question comes from Ryan Brinkman with JP Morgan. Please go ahead.
Hi, Thanks for taking my question relative to the US $50 million of equity income losses in entire hub showing into other asset wide driver category can you talk about how long.
The startup costs are expected to last and beyond that can you remind us should we think about how should we think about that line item going forward.
I thought maybe tire hub.
So it was designed to operate on a night or at a profit nor loss, but simply to enable youre enbridge Stone's core business to improve profit via better volume mix price.
Or should we be modeling some sort of lost there going forward.
Yes, yes, so Ryan.
I think there is there is not a need to model a non operating loss in any port sort of permanent sense just to be clear. So I think what we're looking at here is a couple of things.
And maybe just preface this by saying that we continue to see tire hub as a significant strategic asset.
And a big enabler for what we want to do to achieve distribution alignment and deliver on the initiatives we have to make the tire buying process easier. So we feel if anything even more strongly about that today.
Than we did a year ago when tire hope was starting up.
Entire hub is building momentum so were feeling very good.
About what they've been able to deliver and the fact that we've retained our customers and they have done a really good job executing our customer deliveries.
Now having said that.
We are focused on making sure they are making.
The significant investments.
That will enable them to grow in the future.
So and Thats, making sure that Theyve got distribution footprint everywhere, we need them to support our distribution.
I think we have good alignment with our partner on that.
On that idea.
That we want to make sure that we're getting everything that we can out of what is a very strategic asset and so the fact that they're making.
These significant investments in the future right now for that growth. In addition to continuing and have some startup costs I mean, it's a company that's only a year old.
His has led us to think okay. This is not.
Really a representation of the ongoing cost of tire hub as part of our distribution.
And while I could.
Could take different points of view.
Given that all of our other distribution costs are embedded in our normal price mix calculation.
I can take points of view that would either excluded or included.
Yes, I think at this point, we've broken it out in order to provide some additional transparency.
But as with several of the other factors that have been impacting our mix calculation.
Over the last six months, we see this one improving in the second half.
And continuing to improve thereafter.
So I think that the first half.
Tire hub, we've experienced about $15 million, which you see in the slide for the second quarter, we had about $10 million impact from equity losses in the first quarter, so $25 million year to date, and that's certainly something we expect to improve on the second half.
Okay. Thanks, and then lastly for me with raw materials now about to be up slightly lesser headwind for the year. How are you thinking about the outlook for pricing and for price mix to raw material spread maybe you could comment too in your response on the reasons again, you think it is taking as long as it is to recover the higher raw material cost to get greater pricing and whether in any of your benchmarking analysis. You believed that other global tire manufacturers have had the same degree of profit headwind from this gap between price mix and raw materials that you have both in the most recent quarters and it may be sentenced driver I began to turn negative in Two Q1 7, and and if there isn't a disparity what can you do to close that.
Yep.
Yes, so I think that.
I guess the first point is this is something that.
In most ways as an equal opportunity offender.
In that there's very good evidence that everybody has experienced.
A great degree of this and the industry's margins have reflected that.
So I think it is an industry problem now I would also say.
There are a couple of things that are a bit unique for us that make this a bigger challenge in this cycle.
And maybe the most significant one is that the strength of the us dollar.
And we do iOS as a lot of these materials are.
Purchased our benchmark in dollars.
And our local operations are buying them in local currency that does make the raw material headwind look larger as we do those calculations and local manufacturing facilities.
For companies that are not denominated in us dollars that would look less significant.
We have also.
Had I think a harder to tell but we've certainly had an impact from.
Higher cost above and reduced availability of supply for some petrochemical inputs in China. As a result of increased enforcement of their environmental regulations and again, it's a little bit tough to tell and we refer those as non feedstock costs and those have been significant for us this year I think that.
We took advantage of opportunities to go after low cost supply.
We did that in a significant way to the extent, we did more to take advantage of that then as that low cost supply becomes less available that may be a bigger hit to us.
And but but again very difficult to.
To find the transparency to figure out who's done more or less of that but it's a significant impact for us.
But but overall I think the industry has had this effect there is and has been.
More evidence of.
Increases in revenue per tire over the last nine months. So you know as we look at this chart, we see improvement.
And.
I think that in less raw materials take another step down I think theres a lot of.
Yes, Theres continued reason that over time, we're going to have to work to recover them.
Yes ill just jump into Darren.
I think well said I think the other point is we have been here as a company and as an industry before and I think our track record shows that.
Overtime between price mix were able to recover those raw materials and I don't think anything's changed in our view point that we can other than we are in that part of the cycle and it says as Darren mentioned, its lasting a bit longer than it than it has in the past.
Okay. Thank you.
Our next question comes from James pick a row with Keybanc capital markets. Please go ahead.
Good morning, good morning, guys.
So just focusing on the us commercial replacement market, obviously, you've taken your industry assumption down there.
Yes, we all know what's going on.
From a tariff standpoint for the industry and what the impacts are there with some of the price increases have been.
Oh, how would you assess the underlying demand.
Relative to this down 7% to 11%.
How much of this is just.
The pricing.
Causing folks not to not to buy in.
Yes.
Yes, I think the simple way to think about it and we've we've seen this particularly on the consumer side in years past, we've talked about it extensively if you go back in time, the same things happening here in the commercial business now that's really the impact of the tariffs. So as pre buys were done ahead of tariffs you see sort of the the industry being artificially stronger in some periods and now coming down and others as part of let's say pre buys ahead of tariffs and all those type of activities that are.
Lets say less than normal I think the real point that we stress here is the markets that we play in particularly the premium markets on the commercial side, we actually see continued strength in there.
On the OE side.
There we did see orders peak last summer those those builds are just working their way down there is still pretty robust that's taking up some of our capacity is that those orders come down we're going to see more product availability on the replacement side and there we still see freight conditions really robust so I think.
There's sort of two different ways to think about that one is the overall round the tariff impact and one is the industry that we play in and there it's been certainly steady state and its been actually very good for us.
Got it appreciate it and then just.
And following up returning to the tire hub equity loss dynamic.
Down 10 in the first quarter down 15.
This quarter I, just want to make sure I understood Darrens comment that by the fourth quarter equity income becomes a 20 to 30 million positive per quarter.
And so.
Hi, James.
The two two different things.
So well.
And one thing is that we do expect our mix.
As part of our price mix calculation.
To go from what has been 20 to 30 million negative in Q1 and Q2.
To being 20 to 30 million positive year over year by the time, we get to Q4.
Now that is exclusive of the tire hub equity losses.
We also expect the tire hub equity losses to be less in the second half than they were in the first half.
Got it thanks guys.
Great. Thank you.
Our next question comes from Rod Lache with Wolfe Research. Please go ahead.
Good morning, everybody good morning.
I was hoping you can help me with.
Squaring a couple of things.
The.
Numbers missed consensus by quite a bit for the quarter.
Price mix and other.
Accounted for a lot of that.
So as you talk about the positives that you see in the second half.
I was hoping you can maybe just address.
Those two areas. So you just mentioned.
That mix goes from being a 20 $30 million negative to becoming a $20 million to $30 million positive by Q4.
You're currently running at price mix of mid Thirtys.
On a year over year basis.
Does that mean that we get to something like 50, or 60 million potentially positive year over year by the end of the year.
Yeah.
So I think that.
A couple of things are going to happen because certainly we're going to get the boost from stronger mix. So we're going to go from.
Having.
Effectively in the first half we had.
What we're achieving on price.
Minus 20 to 30 of mix in order to get to our net price mix.
So if you take that price mix for the second quarter.
Obviously that number that the price part of that number is a lot bigger than the 35 million.
As we get to the second half we're going to have that positive mix I will say, we will start to anniversary some of the pricing actions.
So absent any further pricing actions than we might get a little less for price, but significantly more for mix.
And I think you net those two together with price mix will be stronger in the second half than what we see in the first half.
Okay.
So so yes certainly.
Moderate that a little bit because of the comps on pricing, but it sounds like better than what you're seeing right. Now so some may be north of 40, and you're suggesting that.
The raw materials kind of flat now.
So just that one factor would would improve your exit.
The run rate of and so I by May be.
By at least 40.
I would think correct me, if I'm wrong and can you talk about.
And how we should be thinking about that other line in the chemicals business has been.
Kind of a tricky thing to model on a quarterly basis, how should we be thinking about other on a year over year basis.
Yes.
So we've got a.
So we.
Right I think effectively what's going to happen and what will happen with chemical as well is.
Just as we're going to anniversary some of the positives on pricing, we're going to anniversary.
In the second half of some of the negatives in other.
And including the lower income and chemical.
Which chemical wasn't wasn't good at the end of last year, either so by the time, we get to this year, it's an easier comp and less of an impact.
So I think that there are some elements there that are.
That are still reality, but I think if you take the chemical business and you take the tire hub equity losses, which I already said are going to be less of an impact in the second half.
You take those two together you got a couple of the major drivers and other that are going to be better in the second half.
Mhm.
Yes, I guess, what I'm driving at is people.
Want to extrapolate from whatever numbers. They are seeing right now and then there are a lot of moving parts.
So as we think about how you're exiting the year.
Is it.
He is is there any reason to believe that you would not be I know, you're not really giving guidance but.
But you are providing enough of the moving parts to kind of triangulate this something.
I'd like a segment operating income in the low $300 million is you get to the to the fourth quarter versus the low 200 millions right. Now is the is there any reason or anything you see at this point looking forward that would that we should be taking into account.
As we're adding these these pluses and minuses up.
Now let me right.
I don't I Havent heard anything you've said that I disagree with.
I think when we look at slide 17 in the presentation deck.
You know what I think what I said.
Certainly what it feels like here is the second half puts and takes are pretty balanced.
In terms of the things that would be affecting our income year over year.
And we have a couple of net positives that we see in the second half and that is volume and price mix versus raws.
And then we've got a couple of things I would put in the net negative category.
Which is because we are taken so we took some production cuts in Q2 tickets some more in Q3, so unabsorbed overhead.
That is a net negative and the.
We won't get we got 50 million.
Effectively onetime benefit from a settlement related to Brazil, VHP that was split between Q3 and Q4 last year. So that 50 doesn't repeat so thats a net negative looking year over year, but I put all those things together and it feels fairly balanced.
We are through the first half there are a lot more things on the negative side of the ledger that on the positive side and Thats kind of what we experience, but I think thats one of the reasons that we feel very comfortable saying the second half is going to feel much better and rod I think thats. Your point run rate basis second half is better than the first NIM, particularly as you look at exit rate.
Right, Okay, all right. Thank you.
As a reminder, star one order Touchtone phone for questions. We'll go next to David Tamberrino with Goldman Sachs. Please go ahead.
Hey, David.
Hi, good morning.
Lot of questions.
Couple of follow ups from other conversations earlier, you had on the price versus raws with raw materials coming down.
We're going to be tougher to hold on the price within the marketplace.
No.
Listen I'll I'll start Dan I know you want to jump in on raws as well, but.
So as we look at it David I mean, we're continuing to see the benefit from the pricing actions that we.
That we took last year and were also we continued to fine tune our pricing, particularly in the us using some.
Analytics that we're doing so I think if you if you look at that and you look at the new product portfolios that we put in place I think the basis for the value proposition that we have out there is pretty strong and I don't think that the.
The changes in raw material given the increases that we've seen now for three years running remember we had about 19% increase in.
In 17, 6% last year looking at another 6%. This year. So the moderations that we're talking about are certainly beneficial first half second half, but there's still a substantial amount of raw material that we need to recover out there and I think is the earlier question said I don't think we're alone in that so I think it's really about.
Putting into value proposition out there and getting paid for and we actually feel pretty confident about that in the us in Europe , and and frankly in China as well and when we look at things like.
Channel inventories, which are in really good shape in the us and Europe going into the winter season.
I think all of those things would say that we feel pretty good about about where we stand relative to the market and relative to.
Volumes in the second half.
Okay.
But are there indexation clauses that you have.
Some of your OE customer or some of your larger fleet buyers as again spot rates are spot prices for a lot of the commodities that are margin puts into your tires have come down.
So you wouldn't you wouldn't necessarily see all that coming through in the second half that would those clauses take time to go into place. So so yes. Those those will come in but also you know will some of the things that I just spoke of and I think thats not the headwind that we would say is the big one that we're looking at right now I'd say net net it's a it's a benefit to us as these rasco down versus a detriment now and I think David.
Yes, I think right now I mean raw materials have moderated, but they have not come down dramatically.
We've had.
Some commodities.
Yes, particularly synthetic rubber that has gotten less expensive we've had carbon black and natural rubber that you have gone the other way a little bit in the first half. So this is not a strong direction.
Yes, I think.
Either.
Either in this cycle, we will see a stronger direction down in raw materials.
And that if we really if we get into a more significant.
Downturn economically I think thats, what we would expect and that would give us and then in the past that has given us an opportunity to recapture our margin.
On.
For the the economy will sustain itself and in that case, I think we might see raw materials.
Turn the other way and.
The.
The work that has to be done to increase prices too.
Offset those raw materials would.
I have to start again, so I think it can play I can see it playing out either way and in the past. It has played out each of those ways at different times.
But I think the.
The situation right now is has not given enough relief to really.
Restore industry restore industry margins.
Okay, and then I wanted to follow up on your OE business wins, I don't think I caught where regionally you've been winning I think you said you've been very strong and electric vehicles that in China that was locals that with jvs and with European customers.
So yes, I listened very good question and John I think John did in fact asked me that and I may not have answered that so the.
Yes first of all our win rates have stepped up significantly in all three regions of the world.
So I would say the same dine, we see the same dynamic in each region.
We see the electric vehicle trend and the wins and electric vehicles being much more weighted toward the markets, where electric vehicle introductions are being done in higher numbers and that is effectively Europe and China.
It's a much greater degree than in the us, but our but the step up in win rates has been significant across all three businesses.
Okay and.
Is that inflection started in the back half of the year, because again I was surprised by the the favorable volume outlook in every region for the second half I mean is that actual orders from replacement channels and Oems is that inflection and consumer demand for GP branded tires or is it just the easy compares that you're looking at yes, no. So I think when we look at the OE business.
David the second half I would call it more easy compares than anything else as we are going to be able to start to deliver some volume growth because we we felt a lot of the reduction occur at the end of last year. So I think we're that's where we see some.
Growth in terms of our global OE volume for replacement.
Yes, I think theres a number of factors there I think as we get in Asia. There is an easier comparable but as we look at the us and Europe I think we see very lean channel inventories.
And we see very strong product line up on our parts and we've got good momentum in market share. So I think we're feeling good about the replacement volume.
On the base on more of a basis of sort of fundamental strength rather than just comparables.
Okay, and then just lastly, Darren I think.
Earlier in the year, you said with regards to full year us or why kind of hard to see.
Improvement in the year.
First half obviously that have much weaker I know rod you kind of went through some of the puts and takes for the back half but.
I mean should we be it seems like it should be down year over year, but still be above a billion dollars does that is that the right way to be taking your commentary today.
Yes, so I think that David I understand the question, but I think I'm going to stick with the comments that I made I mean through through the first half.
I mean were down close downtick.
Close to a couple of hundred million.
And as we look out at the second half, we see a much more balanced picture and in fact, a lot of things that we are.
Feeling good about that they are going to feel a lot better.
But yes, I guess I'll stop short of giving any particular prediction for what the outcome of that is because I think there are still some variables out there.
I do think it feels good and gives us confidence that we don't have the raw material cost variable in the second half because weve effectively bought or contracted for most of what we're going to experience.
So I think that gives us an opportunity to be more confident and hopefully you are hearing in today's call.
The confidence that we do have I mean, the second half is going to feel a lot better and get us moving in.
Much better direction, we knew the first half is going to be tough, we're going to have to get through it now we get to transition in the second half we're feeling good about the second half.
And you know as we exit the second half I think we look out at what the OE portfolio is going to do for us and I will say that a lot of that does come in 2020 122.2. So we're looking at a two to three year outlook, but it gives us a really nice point of optimism that we know is going to start to rebuild our volumes start to allow us to grow and start to provide some additional benefits on top of the restructuring costs that were delivering and on top of any recovery that we can get on price versus raws.
Okay. Thank you Darren Thank you rich, but thank you thanks David.
And it appears we have no further questions and we have reached our allotted time frame. This will conclude today's goodyear's second quarter 2019 earnings call. You may now disconnect and have a great day.
Thank you.
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