Edited Transcript of GT earnings conference call or presentation 11-Feb-20 2:00pm GMT

Second, the working capital initiatives we implemented earlier in the year helped drive more than a 40% increase in our cash flow from operations during the quarter. This performance was ahead of our expectations.

Third, in Americas, our U.S. consumer replacement business gained share during the fourth quarter, capping off a year of outperformance. Unit volume increased 2% driven by growth in the high-margin premium segments of the market. Shipments of large-rim diameter tires increased 8%, significantly outpacing the industry.

This benefit stems from our consistent investments we’ve made in our product portfolio. Over the past 3 years, we’ve launched 10 major product lines to bolster our product offerings, including the Eagle Exhilarate, the Assurance MaxLife and the Assurance WeatherReady. And not only is the vitality of our products strong, these lines are among the industry’s best with both consumers and trade magazines praising the innovation that we’re bringing to the market.

In 2019, the Eagle Exhilarate earned the coveted #1 rating in the ultra high-performance all-season tire category from a leading consumer magazine. The Assurance MaxLife is ranked #1 in its category in the key consumer rankings, reflecting its long-wear reliability and value. And the WeatherReady with its soybean oil-based tread compound illustrates our commitment to developing top-performing products while having a positive impact on the environment.

Consumers only purchase tires once every 3 to 4 years. So for those entering the market in 2020, we have a lot of top new product offerings for those consumers. And we expect to build off the momentum we have with the planned launch of 2 important products this year, the Assurance ComfortDrive and the WinterCommand Ultra. We unveiled both at our North America dealer conference earlier this month, and the feedback was overwhelmingly positive.

The ComfortDrive is a premium tire for the commuter-touring category, which accounts for approximately 50% of the U.S. market. This line offers premium comfort, noise cancellation and superior wet performance. The WinterCommand Ultra offers premium ice and snow performance, positioning our dealers to win in the winter category.

Fourth, our U.S. commercial replacement business also continued to outperform the market. Shipments increased 1%, significantly outpacing a 16% decline in industry demand. This speaks volumes about the value commercial truck operators see in our fleet solutions, our product offerings and our people. In fact, our commercial truck tire portfolio has never been stronger. The Endurance LHS, our premium, high-mileage, long-haul steer tire, continues to drive impressive results with fleet customers.

We’re also seeing favorable response to the Goodyear Marathon RTD and UltraGrip RTD that we launched in the second half of last year to service the rapidly growing regional trucking segment.

Fifth, in Latin America, our consumer replacement business continued to grow. Replacement volume increased 4% driven by double-digit growth in Brazil, and we grew our commercial truck tire volume despite a difficult economic environment in the region.

Sixth, we continue to see better results in China relative to earlier in the year with our consumer OE and replacement shipments both increasing during the quarter. And finally, we continue to grow our future OE portfolio, winning more than our targeted number of fitments with particular strength in Europe and Asia.

Having recently been with our customers at our Annual North America Customer Conference, our 100-year anniversary in Brazil and multiple customer events in Europe, I can confidently say their attitudes in support of Goodyear, our products and our leadership have never been stronger.

So while I feel really good about these positives, we have to be realistic about the challenges we see in the industry environment as well as the issues we have in distribution affecting our European consumer replacement business. So let me address both.

During the quarter, while U.S. market conditions remained largely stable outside the U.S., we faced a challenging industry environment, including recessionary demand trends in several of our key international markets. Our business in Europe, Middle East and Africa faced a more challenging environment during the quarter than we anticipated, contributing to a 4% decline in total volume. OE volume continued to be negatively impacted by lower light vehicle production and the downturn in the commercial truck cycle.

Demand in the European consumer replacement segment remained lethargic. Industry shipments declined 3% in the EU, well below the more normalized rate of 1% to 2% growth we’d expect to see in the region. This weakness was most pronounced in the winter category, which declined 6%, reflecting warm temperatures this season. The recessionary conditions in Germany are most certainly negatively impacting its auto industry and our industry as well.

In China, we continue to face a very challenging OE environment, and the timing of a significant recovery continues to be pushed out with some forecasters expecting a third year of decline with a significant deterioration in the first quarter.

I also want to take a moment to acknowledge the dynamic situation our employees and partners in China and the Asia Pacific region are navigating as health officials respond to the coronavirus. Our primary focus remains on the well-being of our associates. Our manufacturing plant in Pulandian restarted operations on a limited basis yesterday, and it’s clear that production and demand will be affected during the first quarter. As the situation develops, we will update you as to our near-term business impacts.

While the challenging industry environment clearly affected our results this year, I’m not happy with how our EMEA business performed in 2019. We are capable of delivering significantly higher segment operating income margins even in challenging conditions. In 2019, we launched a major modernization and restructuring program in Germany, which will generate significant savings over the next few years. In addition, we remain focused on cost control and the appropriate level of investment in EMEA going forward. However, our lack of progress in distribution has resulted in unstable volume and reduced our value proposition in the marketplace despite a leading product portfolio.

This year, we’re proactively strengthening our distribution in the region. We’re focusing our efforts on developing a select number of full-service distributors that have the talent and logistics capabilities required to support our brands in the marketplace. This is a strategy that has worked for us in the past. As you may recall, our shift to align distribution in the U.S. played a pivotal role in the margin expansion in our Americas business. I’m confident we will be successful in Europe.

In addition to addressing distribution challenges in Europe, there are a number of other actions we’re taking to drive our future results. We are capitalizing on the shift to electric powertrains. Our industry-leading innovation is helping to significantly increase our OE win rates. In 2019, we grew our OE pipeline at a faster-than-anticipated pace with 25% of the fitments won planned for electric were hybrid vehicles.

We’re also investing to enhance our product development capabilities. In January, we became the first tire manufacturer to purchase a dynamic driving simulator. This state-of-the-art simulator will allow us to work more collaboratively with automobile manufacturers and simulate a wide range of driving conditions, helping us generate breakthroughs in tire development while reducing development time and cost.

And we’re not just investing in our products. The investments that we’re making in our digital capabilities and e-commerce platforms continues to help us connect with consumers. In fact, our research suggests that more than 1/3 of the tires purchased through the Goodyear tire and service network followed a visit to goodyear.com. We see the results in our retail stores, including Roll by Goodyear and in aligned retailers as well.

And we’re also increasing our service offerings. With ton mileage for heavy- and medium-duty trucks expected to remain strong and the shift to e-commerce creating more complexity than ever for logistics companies, it’s imperative that we continue investing in our business to ensure we can help fleets reduce both downtime and costs.

We’re investing in our distribution and service capabilities to help us achieve these goals. During the fourth quarter, we acquired Raben Tire, 1 of the largest tire and service companies in the Midwest. This move strengthens the combined nationwide capabilities of our Goodyear commercial truck service centers, which means enhanced service levels for our fleet customers.

We’re also expanding our fleet solutions. On last year’s fourth quarter earnings call, I discussed our Tire Optix tool that we launched in 2018 to help fleets efficiently monitor tire inflation and tread depth. In 2019, Tire Optix inspected nearly 2 million tires. This year, we’re launching Goodyear CheckPoint, an in-ground device that scans passing tires to measure pressure tread depth and load, valuable data that help service crews manage tire maintenance. And at our dealer conference, we introduced TPMS Plus, which leverages on-vehicle sensors to monitor tire conditions in real time. Our Goodyear fleetHQ assists in routing the driver to the closest dealer in the Goodyear service network or dispatches roadside assistance.

All these initiatives are designed to minimize downtime and support increased safety for our fleet customers to drive operating efficiencies in their businesses. Our fleet services offerings is fully operational with millions of service calls already performed and only getting stronger with digital technology advancements.

As we execute on these priorities, it’s also important that we continue adapting our business model for the secular trends in the auto industry, including shared and autonomous mobility. Ultimately, these trends will be responsible for determining the winners of tomorrow and will have an increasingly important impact on the future of our industry.

As we enter the new decade, it’s clear that the inflection point in new mobility is here. The change driven by the electrification of vehicles, shared mobility and the commercialization of autonomous vehicles are resulting in a restructuring of the legacy auto industry and significant R&D investments.

At Goodyear, we have proactively embraced this change, leaning forward and adapting our business in meaningful ways. This will ensure that we can continue supplying the right products and tools to help consumer and commercial fleets on the road.

At the Consumer Electronics Show, we introduced our intelligent tire, which is now operational in pilot fleet programs. This technology allows us to continuously monitor tire temperature, tire wear and tire pressure with more to come. By using the power of cloud computing and Goodyear proprietary predictive algorithms, we can turn the data we capture into valuable insights and real-time performance enhancements to maximize fleet uptime, a perfect solution for driverless vehicles.

We also unveiled AndGo, a digital servicing platform designed to enhance fleet performance and safety that is backed by our trusted brand, national service network and software solutions. AndGo is currently available in select markets in California and will expand to additional markets in the middle of this year.

Advancements in new mobility present the single most significant opportunity in the last 50 years for Tier 1 tire companies like Goodyear to create competitive advantage and further distinguish ourselves from low-end opening price point tire companies. Why do we conclude that? Well, first, the tire is not going anywhere. Driver or no driver, car ownership or shared mobility, the tires, the tire industry and Goodyear will be there. Second, requirements like tire technology and connectivity are proving to be more integral to the performance, the safety and the ride of the vehicle. This will only become more evident with time as autonomous vehicle driver systems are perfected.

Tire technology is rapidly advancing to meet the needs of electric vehicles, including range, ride and handling and durability improvements. Intelligent tires will be integrated into autonomous driving systems. Fit-for-purpose tires to complement fit-for-purpose vehicles are coming. And at the same time, material and design changes will create more sustainable products along the way.

Finally, the trend of shared mobility is creating significant growth opportunities in consumer and commercial fleet services and new and growing profit pools. These dynamics play to our strength, which is why we’re embracing the transition to new mobility and committed to leading the way forward in our industry.

Now I’m going to turn the call over to Darren.

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Darren R. Wells, The Goodyear Tire & Rubber Company – Executive VP & CFO [4]

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Thanks, Rich. I have to agree with Rich’s level of excitement about the impact our investments in technology and service offerings are going to have on our business as market evolves. In addition, there are a number of actions I’ll cover today that will support improved results over the next 2 to 3 years as we work on those longer-term programs and as we move through the recessionary environment we’re seeing right now across much of the world.

Turning to the fourth quarter, while several of the positive developments from the third quarter continued to benefit our business, our results fell short of our expectations. As I reflect on our performance, 3 factors stand out as impacting our results relative to our thinking last time we spoke.

First, our OE business faced significantly — significant incremental headwinds, reflecting continued year-over-year declines in light vehicle production as well as the downturn in the U.S. and European commercial truck cycles. Light vehicle production declined 5%, including the impact of the OE strike in the U.S., which was a deterioration from the third quarter. And the downturn in commercial truck builds in EMEA and the Americas accelerated in the period, further reducing demand for high-margin commercial truck tires.

Second, demand for consumer replacement tires remained at recessionary levels in Europe. Industry shipments fell 3% in the EU driven by declines in the winter category. Shipments of winter tires declined 6%. We gained share in this important category during the period. However, our volume and price/mix performances were significantly impacted by the loss of winter tire business.

Third, as always, recessionary industry conditions are resulting in increased competitive pressures. These conditions are making it difficult for us to capture the full value of our products and geographies where demand is the weakest, including OE markets in Europe and China where customers have been particularly aggressive in demanding price reductions on legacy fitments.

Despite these near-term challenges, our OE pipeline remains strong, and we continue to expect significant volume growth in this channel through 2022 driven by improving win rates, including on high-value electric vehicle fitments. As we’ve discussed before, the weight and torque associated with electric powertrains makes tire design much more complicated. This reduces the number of capable suppliers and has resulted in our win rate on EV fitments being significantly higher.

In the consumer replacement business, we continue to improve our performance in the Americas. We increased share and benefited from actions we’ve taken to recover the impact of higher raw material costs in recent years. These achievements helped us deliver significantly higher earnings and margins in our replacement business in the Americas compared to the prior year.

Turning to Slide 10. Our fourth quarter sales were $3.7 billion, down 4% from last year, driven by lower volume and unfavorable foreign currency translation. These effects were partially offset by improvements in price/mix, primarily in EMEA and the Americas. Unit volume decreased 2%. The decline was more than explained by lower OE shipments, reflecting lower global vehicle production and the continued impact of strategic actions we’ve taken to renew our OE portfolio. Replacement shipments increased slightly with continued strength in the Americas more than offsetting ongoing softness in EMEA and weakness in Asia Pacific, particularly in Japan.

Segment operating income for the quarter was $242 million, down $65 million from a year ago. About half of this decline came from a decrease in favorable indirect tax settlements in Brazil and the impact of the OE strike in the U.S.

Our results were influenced by certain significant items. And after adjusting for these items, earnings per share on a diluted basis were $0.19.

The step chart on Slide 11 summarizes the change in segment operating income versus last year. The negative impact from volume was $19 million. In addition, production cuts taken during the third quarter, including those related to the OE strike in the U.S., resulted in lower overhead absorption and a negative impact of $26 million. While these production cuts negatively affected our earnings, they were the appropriate response as they contributed to our favorable working capital performance in 2019.

Raw material costs increased $19 million driven by the unfavorable transactional impact of foreign currency and higher nonfeedstock costs. We saw less benefit than we expected from lower feedstock costs given slower inventory turns, reflecting softer-than-planned demand.

Price/mix was favorable by $32 million, reflecting the continued benefit from our pricing actions, particularly in the Americas. Price/mix benefits were reduced by lower-than-expected winter tire shipments in Europe and continuing customer and channel mix challenges in the Americas.

Inflation of $46 million more than offset cost savings of $45 million. It’s important to recall that last year’s costs were net $21 million lower as a result of indirect tax settlements in Brazil. Excluding this impact, cost savings this year would have been $66 million and would have exceeded inflation by approximately $20 million.

The negative effect of foreign currency translation totaled $9 million.

The $23 million decline in the other category was driven by higher incentive compensation and R&D costs, partly offset by lower start-up costs and a favorable impact of our equity interest in tire hub, which improved by $4 million year-over-year.

Turning to the balance sheet on Slide 12. Net debt totaled $4.8 billion, down $207 million from a year ago, reflecting strong cash flow and improved working capital management.

Our liquidity profile remains strong with approximately $4.5 billion in cash and available credit at the end of the quarter. This is an improvement of over $500 million from the previous year, reflecting our strong free cash flow performance during the fourth quarter and the increase in the size of our European revolving credit facility last March.

Slide 14 summarizes our cash flows. We generated $1.3 billion from operating activities, an increase of $406 million compared to the previous year. This improvement was driven by strong working capital performance, reflecting initiatives we implemented over the course of the year. Capital expenditures for Q4 were $209 million. We slowed down our capital spending plan significantly in the second half to reflect weakening market conditions. For the full year, we generated free cash flow of $437 million, allowing us to cover our dividend and decrease our net debt.

Turning to our segment results, beginning on Slide 15. Americas volume decreased 2% to $18.7 million. The decline was more than explained by lower shipments in our consumer OE business, primarily in the U.S. More than half of the decline in the U.S. resulted from the OE strike with the remainder largely a function of actions we’ve taken in previous quarters to reduce our exposure to older fitments, especially those on passenger cars, which continued to decline as a percent of new car sales.

Shipments of replacement tires increased 2% driven by solid growth in the U.S. and Brazil. Segment operating income was $152 million, down $27 million from last year. The decline was more than explained by a decrease in indirect tax settlements in Brazil and the impact of the OE strike. These factors were partially offset by improved price/mix net of higher raw material costs and the benefit of net cost savings.

Throughout 2019, we took several actions to strengthen the competitiveness of our manufacturing footprint in the Americas and curtailed production of tires for declining less profitable segments of the market. Last February, we transitioned our manufacturing facility in Gadsden, Alabama to a 5-day production schedule in response to declining demand for small-rim diameter tires that are produced at the factory. During the fourth quarter, we offered voluntary buyouts to certain associates in the plant. Combined, these actions have allowed us to reduce our labor costs. However, they resulted in near-term manufacturing inefficiencies for 2 reasons.

First, we’re transitioning certain SKUs from our Gadsden facility to other plants in our U.S. footprint, which necessitates short-term development and ramp-up costs. Second, the Gadsden facility is operating at low volumes. This will result in a write-off in Q1 of about $15 million of overhead related to Q1 production. These transitional manufacturing costs are expected to offset savings from our recent restructuring in the near term.

Turning to Slide 16. Europe, Middle East and Africa’s unit sales were down approximately 4% driven by a decline in our OE business. Our consumer replacement shipments fell 2%, reflecting weak industry conditions in Europe. Shipments of high-margin winter tires declined 5%. While this performance was slightly better than the market, the absolute decline in winter shipments adversely affected both volume and mix.

Segment operating income was $38 million. The decrease versus last year was driven by lower volume, wage inflation and higher unabsorbed overhead, reflecting production cuts in Q3.

Turning to Slide 17. Asia Pacific tire units totaled $7.9 million, effectively flat with last year, as growth in OE was offset by softness in our replacement business. OE shipments increased 4% driven by some recovery in China. Replacement shipments declined by 3%, more than explained by a decline in consumer replacement industry volume in Japan. Excluding Japan, shipments of consumer replacement tires increased 5% driven by growth in China.

Segment operating income was $52 million, $2 million lower than in the previous year. This variance primarily reflects lower price/mix and unfavorable foreign currency translation.

Turning to Slide 18. I’d like to share some information regarding the restructuring of our distribution in Europe. On our last call, we indicated the volume situation in Europe has been exacerbated by poor performance in our distribution channels. This reflects a lack of alignment, the results from distribution lacking focus on our brands. This is similar to the situation we faced here in North America a few years ago.

As you can see on the slide, the majority of our volume in Europe flows directly from our warehouses to align channels, including traditional franchise retail, car dealers and certain B2C e-commerce channels. However, about 12 million tires are sold to wholesale distributors or large retail chains that are not as focused on the health or growth of our brands.

With our aligned distribution initiative, we are signing agreements with full-service distributors covering each geography that will have increased focus on our brands. This will require us to shift many of the 9 million units that are currently sold through online channels to full-service distributors. As a result, we expect to experience some sell-in volume loss during the transition. In 2020, this could negatively affect volume by as much as 1.5 million units. Over time, we expect to fully recover this volume and strengthen our position and improve the stability of our business. In the U.S., this improvement delivered added net revenue per tire of $2 to $4 a unit across our entire replacement business and we see no reason why the benefit would not be similar in Europe.

Turning to Slide 19. You will see several of the key factors that we anticipate impacting our first quarter results when compared to the previous year, including unabsorbed overhead from the production cuts we took in Q4, which reduced our Q4 production by about 1 million units year-over-year. We continue to expect recessionary OE demand in several geographies, including Europe, China and India. More importantly, we see little evidence that suggests the global OE environment will improve in the near term. In fact, third-party estimates of global light vehicle production continued to be revised lower, with forecasts pointing to a 6% decline in the first quarter, including a 13% decline in China. And from our vantage point, the risk to full year auto production estimates are building.

In total, we anticipate our consumer OE volume declining by about 2 million units this year with approximately 3/4 of the decline occurring in Asia Pacific. At this point, our thinking excludes any impact of the coronavirus. Given the dynamic nature of circumstances, the duration of the business disruption and related financial impacts can’t really be estimated yet.

Slide 20, again, reflects on several of the positive factors that give us optimism as we look at the next 2 to 3 years. In July, we talked about the first 3 items: our planned restructuring actions, the growth we expect in our OE business given our recent win rate and continued recovery of price versus raw materials. We would now add 2 other items: first, improving mix, which was about $80 million negative for us in 2019 but began to recover in Q4; and second, the benefits of the restructuring of our distribution in Europe. We’ll continue to keep you up-to-date as these plans and expectations play out.

Turning to Slide 21, we’ve included our current financial assumptions for 2020. We are forecasting raw material costs to be approximately flat, excluding the impact of transactional foreign currency as higher nonfeedstock costs are expected to offset the benefit of lower commodity costs. While we will benefit from replacement price increases late last year, we expect the benefit of these increases to be largely offset by lower OE prices. We plan capital expenditures of about $800 million, effectively in line with depreciation. At this point, we’re expecting $50 million to $100 million use of cash for working capital to reflect some timing differences versus 2019. However, we gained good traction with working capital initiatives that we implemented last year, and similar to last year, I hope to improve on this view as the year progresses.

Restructuring cash outlays are expected to total $125 million to $150 million. The increase in restructuring payments reflects the actions we are taking both in EMEA and in the U.S. We expect our book and cash tax rates to be very sensitive to small changes in income in 2020. Given our distribution initiative and tax framework in EMEA, our global tax rates will likely be volatile. Cash taxes are expected to range between $130 million and $140 million for the year. But book tax levels will depend to a great degree on geographic profitability in EMEA, which is hard to predict with precision. We will update you on our thinking as the year progresses, but the book tax rate in Q4 was close to 50% and could be even higher at times during 2020.

And finally, you will find a few other reference slides in our deck. Slides 25 through 27 provide an updated breakdown of our raw material costs by major commodity as well as providing some continued analysis of the price versus raw material cycle. Slide 28 provides an updated breakdown of our consumer business between large-rim and smaller-rim diameter tires for 2019. Slide 29 provides our current expectations for industry shipment growth for the U.S. and Western Europe. And Slide 24 contains updated modeling assumptions that will be useful as you develop your forecast.

There are a few significant changes I would point out in our modeling assumptions page. Our volume sensitivities have been adjusted to reflect recent share and market data, particularly the near-term decline we discussed in consumer OE. Our assumption for profit margins per tire for the OE business have been adjusted down to reflect recent trends, including increased price pressure. We’ve refined our estimates of the impact of pricing on the replacement business to exclude some revenue to which replacement pricing does not apply. The biggest change was in Europe. And finally, the impact of raw materials percentage price changes has been reduced slightly, given recent lower prices and lower volumes.

Now we’ll open up the line for questions.

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Questions and Answers

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Operator [1]

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(Operator Instructions) We’ll take our first question from Ryan Brinkman with JPMorgan.

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Ryan J. Brinkman, JP Morgan Chase & Co, Research Division – Senior Equity Research Analyst [2]

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You mentioned on Slide ’19 that in the first quarter of 2020, depressed OE demand and restructurings and distribution changes are expected to more than offset the impact of improved pricing environment. I’m not sure if those comments are year-over-year. And so the implication is first quarter SOI should then be below last year’s level. I don’t know if that’s the case. And then secondly, what magnitude of price/mix gains could be reasonably expected for 2020? And do you think those gains are enough to be able to offset these other headwinds to drive higher SOI in the remaining quarters of the year beyond 1Q, absent the unknown impact of coronavirus?

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Darren R. Wells, The Goodyear Tire & Rubber Company – Executive VP & CFO [3]

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So Ryan, let me take a shot at 2020 because I think you’re — the view on Slide 19, to be clear, that is a year-over-year view. So that — the pluses and minuses there are meant to indicate how we feel like the first quarter might evolve versus a year ago. So obviously, a lot of minuses on the page. As we look at 2020 segment operating income, I think we look at volume as something that clearly is going to create some pressure. We’re operating in an environment where we’re expecting the industry to be largely flat and for us to have a couple of unique factors impacting our volume. One of those is our risk of up to 1.5 million units for their distribution transition that we’re going through in Europe, and so we expect that to be a hit for us.

We also are — in our OE volume, we’re expecting our OE volume to be down a couple of million units in a relatively flat industry, and most of that drop coming in Asia Pacific. And there’s a specific issue that we encountered in China that has resulted in us losing some OE business there. So that is part of what’s driving a couple of million unit drop in OE volume for us for the year, and that’s before we take into account any impact of the coronavirus. So we’ve got a couple of things there that are driving volume down, in addition to an industry that’s not very robust.

With regard to pricing, I think the point we made there is we will get some benefit, carryover benefit from pricing actions that we took in the second half of 2019. However, that’s going to be largely offset by price decreases that we’ve encountered at OE. So between the impact of raw material indices and just pure price reductions that have been demanded by the OEs and have been — become part of the market, I think both those things are going to offset to a great degree the pricing that we would get in replacement during 2020.

Mix is a little less certain. And after mix being a negative for us for the first 3 quarters of 2019, in the fourth quarter, it was still slightly negative but essentially flat. I think we’re moving in the right direction. It’s improving. I think we’re hoping that we can drive some positive mix in the year. So if we take price and mix together, not getting a lot of benefit there. And fortunately, raw materials, we see as flat. The only point I’ll make on raw material cost is that this — our forecast for raw material costs being flat, excluding the impact of currency, does assume that there is some recovery in the price of butadiene and carbon black. If we don’t see prices of butadiene and carbon black recover and get back to something on average similar to 2019, then there would be about an $80 million benefit. And so that — a couple of different views you could take on raw materials. We’re taking the assumption right now that it’s flat similar to the industry being flat.

We have some opportunity for net cost savings. And that has been sort of $10 million a quarter or so for us in 2019, so get a little bit of benefit there. Restructuring cost savings, quite honestly, are largely going to come in 2021 for the programs that we have in Europe and the U.S. So — and we’ve got some slight currency headwinds. So you take it all together, I think the view for the first quarter and for the full year is that we need the environment to improve to see higher SOI in 2020.

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Ryan J. Brinkman, JP Morgan Chase & Co, Research Division – Senior Equity Research Analyst [4]

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Okay. Great. And then just lastly for me. It looks like you are planning to spend some more cash restructuring this year than in some prior years. You’ve expressed some dissatisfaction with your performance level in EMEA. Is it fair to assume that restructuring efforts will be concentrated there then? And I thought I heard you in your prepared remarks say, too, that you’re focused on having the right level of investment in Europe going forward. Are you contemplating any potential changes to the scope of your operations there? Or should we just expect a more traditional restructuring?

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Darren R. Wells, The Goodyear Tire & Rubber Company – Executive VP & CFO [5]

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Yes. I think the restructuring actions that we’ve taken have fallen in the category of trying to reduce our less-capable, higher-cost manufacturing capacity and also to reduce the — our level of salaried headcount. And both of those have been part of the plans that we’ve had in Europe and continue to be. The biggest issue that we face business-wise in Europe right now, I think, is the alignment with our distribution channels. And therefore, that’s where we’re putting a lot of time and attention. But as we move through 2020 into 2021, we’ll — we should see some benefit in recovering volume on our distribution channels, and we’ll start to see some of the cost benefit from the 2 factory downsizings that we announced last year for our factories in Germany. Clearly, in Europe, and in fact, in the company overall, we’ll continue to look at additional restructuring opportunities, just given the softness in the markets we’re in and the part of the cycle that we’re in.

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Operator [6]

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Our next question comes from John Healy with Northcoast Research.

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John Michael Healy, Northcoast Research Partners, LLC – MD & Equity Research Analyst [7]

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Darren, I was hoping you could talk a little bit more about the European distribution efforts. Just hoping to understand maybe a little bit more granular kind of how those new channels might look compared to what you did in 2019 and additionally, how that 1.5 million unit volume might flow through the year. Should it be first half weighted or second half weighted?

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Darren R. Wells, The Goodyear Tire & Rubber Company – Executive VP & CFO [8]

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Yes. Well, so John, let me take the second question first. I think the — I mean, the European business is characterized by a couple of seasonal sell-in periods. And so I think that effectively, what that means is that the volume impact is going to be spread pretty evenly throughout the year as we move through the need to reposition inventory, trade inventory toward our aligned distributors. And I think the way you can envision this as we’re — the number of aligned distributors we have is directionally sort of half the number that we’ve been working with. And we’re asking and working with each of them to increase their capacity both in warehousing and in transportation in order to be able to handle higher volume in our brands, and that will take them some time to do. And so they’ll work through the increases in those capacities.

At the same time, the distributors that either we have not chosen to work with as full-service distributors or who have themselves chosen not to want to put the additional resource into our brands, they’re going to gradually be destocking. And I think that destocking process probably takes a bit longer than the inventory growth in the aligned distributors takes. And that is going to reduce the sell-in volume that we experienced during the year, and it may, in fact, impact sell-in volume more than it impacts sellout volume. And certainly, that’s our expectation. So in some ways, similar to the expectations that we had, had for TireHub, although in the TireHub transition, we certainly had a better outcome than we expected. And obviously, we’ll work on improving on the outlook here as well. But that process started for us in January. So it is ongoing right now. We’re doing it in a market that’s already a bit soft. So I think there’s a number of things that are going to be playing into this program.

Importantly, though, I think we’re looking at this as an opportunity to reposition our volume and to put us in a position where we can get full value in the marketplace for our brands and reduce unneeded multiple touches in distribution, so that — which is obviously cost that we don’t want to pay for and consumers don’t want to pay for. So I think there’s really good opportunity there for us to drive our earnings in Europe in 2021, 2022 and beyond.

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John Michael Healy, Northcoast Research Partners, LLC – MD & Equity Research Analyst [9]

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Sounds good. And then a question for you, Rich. As it relates to the coronavirus, I understand that it’s impacting production in China for you guys, but was — wanted to get your big-picture thoughts, if you think that this has an impact on the U.S. replacement market. I know a lot of import tires come in from the region. And as you look out to the spring, do you think the industry as a whole is in a position where potentially, there can be tire shortages? And do you think the company is positioned to benefit from that potentially with most of its U.S. production in the U.S. or in Mexico?

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Richard J. Kramer, The Goodyear Tire & Rubber Company – Chairman of the Board, CEO & President [10]

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Yes. I think it’s a bit hard to predict given all the variables that would have to happen to have that play out. I think the 2 things that I would consider in thinking about that, and that’s the channel inventories are pretty much in good shape, so there’s not a lot of excess tires out there at the moment. So any disruption that were to happen, I think people aren’t sitting on long inventories at the moment. But again, it’s really hard to have to predict what would have to happen for all those things to fall in place to happen. So it’s too early to say that.

I’d also just say that, that situation would largely impact the low end of the market again, and that’s not exactly as you know where we play. So I think that the focus that we have and will continue to have is really winning in the markets, in the segments of the market where we know we have a value proposition that works. So a long way of saying, don’t really know what will happen, but we don’t see that as really a big opportunity or a big impact for us as we look forward.

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Operator [11]

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We’ll take our next question from Rod Lache with Wolfe Research.

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Rod Avraham Lache, Wolfe Research, LLC – MD & Senior Analyst [12]

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I had a couple of questions. Just first, could you just give us a little bit more insight into what’s behind these additional pricing concessions on OE? Like you said, it goes beyond the contractual pass-throughs on raw materials. And obviously, OEs always demand pricing. But until recently, you’re pretty disciplined on that.

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Richard J. Kramer, The Goodyear Tire & Rubber Company – Chairman of the Board, CEO & President [13]

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Yes, Rod. I think maybe I’ll take a step back a little bit as we think about the OE business, which we love and will continue to love going forward. If you look over the last 10 years, a situation you’re very familiar with and most people on the call are, we’ve seen a technical requirements for the tires that we’ve been supplying increase dramatically whether that be in rim size or rolling resistance or ride and handling or whatever else it might be. We and other tire companies, obviously, put the investments in place to supply that. And we had certainly an added a margin opportunity for the advanced fitments that we were supplying there. And as a result, our OE profitability increased fairly substantially, and that probably peaked 2 to 3 years ago. And since then, what have we seen? I think the first thing is probably what you put in the normal bucket, which is just the normal down cycle or cyclicality that the OE industry is going through. And when that happens, obviously, that has an impact through the supply chain.

The second thing and probably a bit more unique is the increased focus and investment that’s going into EVS and simultaneously, the increased focus on cost reductions that are going into sort of the legacy internal combustion engine fitments that they still have to make. So you have those things coming in. And as you put those together, you’ve got some margin compression that I think is hitting the supply chain, including us as we look ahead. So their focus on cost, down cycle in the industry, a few more tires available out there because of that, I think, is what’s behind that.

But having said that, look, we’ve been through these things before. And as we look ahead, I’m frankly more excited about where we’re going in our OE business because we’re getting out of the sort of traditional supply of the 15- and 16-inch tires that are still needed out there and so on and so forth. And our focus goes to the EVs and tires with even higher technical demands around waste, work and noise. And we’re finding out that few people, a few other companies can actually do this. This is what we’re told in the marketplace. So our win rate on these is substantial. I mean in the last 18 to 24 months, our win rate on the EVs we’re bidding on is sort of 2 out of 3. So I’m — I appreciate having gone through this. I think now a couple of times before with the OEs that over time, I’m confident the benefits from these future fitments is certainly going to balance off the compression on some of the traditional fitments that we have now. But in the near term, we’ll have to work through some of the price pressure that I think you understand well.

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John Michael Healy, Northcoast Research Partners, LLC – MD & Equity Research Analyst [14]

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Okay. And just thinking about the bridge, it sounds like you’re expecting a 1.5 million unit decline in replacement, which, using your sensitivity to volume and overhead, that’s about $30 million. The OE 2 million unit decline is about $40 million negative, and you’ve got the $15 million Gadsden impact. It seems like that would be offset by — if you use spot prices for raw materials, that’s $80 million positive, and you said $10 million a quarter or $40 million on the cost. What happened to some of the other idiosyncratic positives that you’ve talked about before, like the actual savings from the Gadsden headcount or the German headcount reduction and plant closure or the TireHub losses declining? And you’ve also mentioned before that some of that 7 million of new OE fitment starts to come in.

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Darren R. Wells, The Goodyear Tire & Rubber Company – Executive VP & CFO [15]

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Yes. So I think, Rod, on the last point that you made, the OE fitments for us, we’re going to — I mean, we effectively bought them out in 2020, and we start to rebuild the portfolio in 2021. Yes, so the — when we’ve talked about the increase that we expected, which is sort of 7 million units off of last year’s base, that’s targeting out like 2022. So it’s 2021. 2022 where the regrowth in OE is taking place. So that’s where we start to recover that volume.

The restructuring actions in Germany and Gadsden are still sort of in process right now. So the headcount reductions are going to take us a good part of this year to execute. So the savings from those aren’t going to be fully ramped up until next year, and 2020 is going to be the year that we get the transitional cost impact from changes we have to go through to move products around as well as, in the case of Gadsden, running a factory that is a relatively high-cost location running 1 shift. So there is — even without the headcount, there’s a lot of associated costs for the factory that create a drag.

So I think what we’re looking at — and we have to recognize that — so 2020 isn’t going to get a lot of benefit. I think we’re continuing to look at and will target additional actions during the year to do what we can to accelerate it and to try to increase the savings that we’re getting. But in fact, the benefits we’re going to get are largely going to be in 2021.

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John Michael Healy, Northcoast Research Partners, LLC – MD & Equity Research Analyst [16]

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Okay. And is TireHub a year-over-year positive? And can you also just lastly clarify what corporate overhead was in the quarter? Did you have some kind of catch-up here for incentive comp?

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Darren R. Wells, The Goodyear Tire & Rubber Company – Executive VP & CFO [17]

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Yes. I think that is the story on the corporate overhead, Rod. I think the delivery on cash flow in the second half of the year did result in an increase in our compensation accruals. So I think that’s — there’s not too much more of a story to it than that.

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John Michael Healy, Northcoast Research Partners, LLC – MD & Equity Research Analyst [18]

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What’s the number, the corporate overhead number in the quarter that you guys put up?

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Darren R. Wells, The Goodyear Tire & Rubber Company – Executive VP & CFO [19]

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Yes. So I think for about $40 million for the quarter.

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John Michael Healy, Northcoast Research Partners, LLC – MD & Equity Research Analyst [20]

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Okay. And TireHub?

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Darren R. Wells, The Goodyear Tire & Rubber Company – Executive VP & CFO [21]

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Yes. So TireHub, we’ve continued to improve there. So in the quarter, it was a $4 million improvement from a year ago. So a year ago, our equity loss in TireHub was about $9 million. In the fourth quarter, it was about $5 million, so that’s $4 million better. I think as we go through the first half next year, we had $25 million of equity losses in the first half of ’19. If we’re running at $5 million a quarter, which is kind of where we’ve been in the last couple of quarters, then we’d have $10 million or $15 million benefit there and then hopefully some continued benefit as well. But the focus on TireHub right now is making sure they’re making the investments to be able to continue to expand their distribution coverage. So that’s, I think, not really pushing for profitability as much as we are for the service and coverage.

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Richard J. Kramer, The Goodyear Tire & Rubber Company – Chairman of the Board, CEO & President [22]

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And it continues to go very well.

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Darren R. Wells, The Goodyear Tire & Rubber Company – Executive VP & CFO [23]

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Right. No, it’s a very good asset for us.

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Operator [24]

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We’ll take our next question from James Picariello with KeyBanc.

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James Albert Picariello, KeyBanc Capital Markets Inc., Research Division – Analyst [25]

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So just regarding the European wholesale channel exits, you’re going to get — you’re exiting the 1.5 million units there. Have you quantified or can you quantify the associated overhead absorption costs for this year?

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Darren R. Wells, The Goodyear Tire & Rubber Company – Executive VP & CFO [26]

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Yes. Yes, so I think the unabsorbed overhead in Europe, depending on where tires are made, is $8 to $12 a unit. So if you average around $10 a unit, then there’s around $15 million worth of unabsorbed overhead for us to deal with as a result of that. And there is some of that, that because of the lag for inventory, might bleed over to the beginning of 2021. But on the other hand, we cut about 1 million units from our production schedule in the fourth quarter, and that was sort of split between the U.S. and EMEA. So EMEA had some of that coming into this year. So I think that $15 million may not be too bad a guide for the overall impact there.

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James Albert Picariello, KeyBanc Capital Markets Inc., Research Division – Analyst [27]

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Okay. And then the $65 million-plus in savings over the 2- to 3-year outlook, would that be in addition to the headwind that you’re experiencing in 2020? Or would that be captured in the $65 million?

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Darren R. Wells, The Goodyear Tire & Rubber Company – Executive VP & CFO [28]

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Yes. So it is not. So we’ll — 2 benefits after 2020. The first benefit is recovering the volume. The second benefit is the $2 to $4 of additional net revenue per tire that we would expect. So those are 2 benefits. Part of which is recovering what we lose in 2020, but part of which is upside relative to history.

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James Albert Picariello, KeyBanc Capital Markets Inc., Research Division – Analyst [29]

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Got it. Yes. Just within raw materials, in the past, you kind of separated out feedstock versus nonfeedstock costs. Are there any of the latter, the nonfeedstock factors, playing in for 2020?

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Darren R. Wells, The Goodyear Tire & Rubber Company – Executive VP & CFO [30]

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Yes. So James, for 2020, we’ve got nonfeedstock cost increases embedded in our forecast of about $50 million. And therefore, we’ve got feedstock decreases of about the same amount. And the 2 kind of offset each other. And that’s what’s embedded in our flat guidance.

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James Albert Picariello, KeyBanc Capital Markets Inc., Research Division – Analyst [31]

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Any color at all on what the nonfeedstock increases relate to, maybe regionally, commodity-specific, anything at all?

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Darren R. Wells, The Goodyear Tire & Rubber Company – Executive VP & CFO [32]

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Yes. Generally speaking, it is a matter of either resourcing commodities where we have lost suppliers. And certainly, there’s a lot of instances in China where in petrochemicals, we’ve got suppliers that just aren’t making the material anymore, and we have had to shift back to suppliers outside China. In other cases, we’ve got suppliers that have had to make incremental investments in order to meet environmental standards. And the cost of those incremental investments are being passed through. And so it’s not — strictly speaking, it’s not feedstocks, but it’s increased investment that they’ve had to make in order to deal with the new regulations. So I mean, those are very common examples for us behind us. And the amount of nonfeedstock increases is declining, so less of an impact this year than last year. So I think we’re working our way through that. And obviously, we’re focused on trying to find ways to mitigate those, but that is the view that we’ve got sitting here today.

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James Albert Picariello, KeyBanc Capital Markets Inc., Research Division – Analyst [33]

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Got it. That’s helpful. And just last 1 on mix. I believe, backing into the fourth quarter, maybe it was still a $5 million headwind within the EBIT bridge. One, is that right? And then two, just how are you thinking about mix for this year? I believe the headwind — a major headwind or a good portion of that headwind in ’19 was related to your consumer alignment mix in North America. Does that finally abate in 2020?

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Darren R. Wells, The Goodyear Tire & Rubber Company – Executive VP & CFO [34]

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Yes. So I think in the impact — the negative impact in our consumer replacement business in North America, I think we do see that abating because there’s a number of actions that have been taken to address some of the factors that were causing that negative impact. So we’ve addressed it with some commercial discussions with customers in order to at least get rid of some of the duplicative distribution costs that we were experiencing. So I think that’s good. I think the — what we will see in 2020 is loss of commercial truck tire volume as the commercial truck cycle and particularly OE build starts to hit and some — we expect some loss in our off-highway business as well as that cycle and the cycle for mining tires has started to turn negative. So we’ve got a couple of other factors working against us. So I think that while we’re, as you said, we’re sort of $4 million or $5 million negative in the fourth quarter, I think we’re hoping to see something at least in the positive direction in 2020. But — and I think we’re confident we’ll see something in the positive direction in the consumer replacement business. I think the question is in some of the other businesses, and we’ll try and provide some color for that as we go through the year.

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Operator [35]

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We’ll take our next question from Itay Michaeli with Citi.

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Itay Michaeli, Citigroup Inc, Research Division – Director and VP [36]

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Just 2 questions. I apologize if I missed that. The first, on Slide 20, just continuing the mix conversation in terms of the expected positive contribution over the next 2 or 3 years, hoping you could elaborate more on that and maybe kind of talk about the individual buckets of product customer and channel and kind of how you’re thinking about different scenarios for mix over the next couple of years.

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Darren R. Wells, The Goodyear Tire & Rubber Company – Executive VP & CFO [37]

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Yes, so I think the — Itay, the starting point here is that our product mix continues to improve, and so we’re continuing to get more growth and invest in more growth in higher-rim size, more complex tires. And I think as we start to ship OE tires for electric vehicles, that will help as well. So I think the core of product mix has been a positive, will remain a positive. We will — we have started to address some of the channel and customer-related mix issues in the replacement business. So I think that will improve. And then as we see the cycle improve, we work through whatever weakness we experienced this year in the off-highway and commercial truck businesses, then those business line mix drivers of revenue per tire will start to recover, and we’ll see some benefit there.

And then in the OE business itself, as we work — start to bring in some of the new fitments that we’ve won in 2021 and 2022, and particularly, the electric vehicle shipments, but not only those, we’re bringing in some fitments that have revenue per tire that are fairly strong. So our electric vehicle fitments, those tires are harder to make and, as a result, bring revenue that’s sort of directionally 15%-or-so higher than a traditional internal combustion engine fitment.

So we’ve got a number of things there that we may be cycling through in 2020, but we see some upside as we get beyond 2020. And we get rid of some of the things that have been a drag and let the core product mix come through in the results.

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Itay Michaeli, Citigroup Inc, Research Division – Director and VP [38]

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That’s helpful. And then just on the consumer OE price reductions that you referred to, are you seeing this as sort of a new annual normal, this kind of part of the contracts that you’ve signed for the 7 million units? Or is this more of a kind of more onetime-ish type of a headwind just in response to market conditions?

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Richard J. Kramer, The Goodyear Tire & Rubber Company – Chairman of the Board, CEO & President [39]

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Yes. Itay, I would say, it’s really the latter. I mean as we go through, what we’re seeing is, again, the combination of a down cycle and a transition to EVs and again, the story you all know well in terms of moving to the different powertrains and what’s going through. So I think that with any cycle this pressure kind of comes in, we know that, we know how to work our way through it. I think the transition that the OEMs are going through, I think that is — that’s temporal as we move ahead. I mean we’ve seen this, for example, even happen in China. Darren mentioned the units that we’re coming off of in China. We actually had a really a good fourth quarter there. We substantially outperformed the industry where we saw a very challenging environment. As you know, industry was down. Production was down about — new car production was down about 8%. And our customers were impacted even a little bit more significantly there, that being the Ford and the GMs that were down 15% and 13% in particular. So those type of headwinds, I think, are there from the cyclicality side. And then we also — what happened to, as Darren mentioned to this earlier, we were recently informed by 1 of our major customers that 1 of their high-volume vehicle is going to be discontinued early, and that they were actually taking us off, switching us off a vehicle that was in its last year production, which is a bit odd. So those type of things, I think, are sort of the temporal things that we see going on at the moment. It doesn’t at all deter our view of where ROE fitments are, where the OE business is going. We’re focused on continuing to grow it. As I mentioned earlier, the reception that we’re getting from the OEMs on the new vehicles that are coming out, as Darren mentioned, in ’21, ’22 time frame is very strong. And that’s before we move into the sort of the requirements of even more sophisticated tires as we think about certain levels of intelligence being put into them.

So yes, we’re going to have some headwinds in 2020, but it really — some of those shipments were going to come off anyway, so that’s kind of normal course. And out over the long term, we see a very robust environment. And actually, frankly, since I’ve been doing this, I’m more excited about what’s happening with the OEMs and the directions that they’re taking than I have been since I’ve been around. So I feel pretty good, frankly.

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Itay Michaeli, Citigroup Inc, Research Division – Director and VP [40]

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That’s very helpful. And maybe just lastly, for Darren, just going back to the puts-and-takes on Slide 21, on working capital and restructuring, are you expecting free cash flow to be able to comfortably cover the dividend again in 2020?

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Darren R. Wells, The Goodyear Tire & Rubber Company – Executive VP & CFO [41]

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Yes. So I guess, Itay, the thing I would say is that we feel like that this dividend — the dividend we have is appropriate for us through the cycle. And for 2020, even if our earnings are under some pressure, we believe our cash flow is going to enable us to cover both our planned CapEx, our restructuring payments and our dividend without a meaningful increase in our net debt. We’ve got several actions that we’ve taken to protect our balance sheet, and we are very cognizant of that. But I think that we’re in a position here where we can cover it without any meaningful increase in net debt.

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Operator [42]

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It appears we have no further questions. I’ll return the floor to our presenters for closing remarks.

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Darren R. Wells, The Goodyear Tire & Rubber Company – Executive VP & CFO [43]

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We just like to thank everyone for joining us today. Appreciate it. Thanks very much.

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Operator [44]

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That does conclude today’s program. Thanks for your participation. You may now disconnect.