The Goodyear Tire & Rubber Company (GT) Q3 2016 Earnings Report, Transcript and Summary

Good morning everyone and welcome to The Goodyear Tire & Rubber Company Third Quarter 2016 Earnings Conference Call. At this time all participants are in a listen-only mode. [Operator Instructions] It is now my pleasure to turn today’s program over to Christina Zamarro, Goodyear's Vice President of Investor Relations. Please go ahead.

Thank you, Tony, and thank you everyone for joining us for Goodyear's third quarter 2016 earnings call. Joining me today are Rich Kramer, Chairman and Chief Executive Officer; and Laura Thompson, Executive Vice President and Chief Financial Officer. Before we begin, there are few items we need to cover. The supporting slide presentation for today's call can be found on our website at investor.goodyear.com. And a replay of this call will be available later today. Replay instructions were included in our earnings release issued earlier this morning. If I could now draw your attention to the Safe Harbor statement on Slide 2, 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 SEC and in our earnings release. The company disclaims any intention or obligation to update or revise any forward-looking statements whether as a result of new information, future events or otherwise. Our 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 the Appendix to the slide presentation. With that, I'll now turn the call over to Rich.

Thank you, Christina, and good morning, everyone. This morning, I’ll cover updates to our industry and our 2016 plan since we last spoke at our Investor Day meeting in Boston. Then I’ll briefly discuss each of our regional businesses. As always, Laura will follow with a detailed financial report before opening the call for your questions. Our third quarter results were highlighted by continued growth in segment operating margin. All three of our global businesses achieved operating margins above 12% led by our Asia-Pacific business, which delivered 18.3% operating margin. In addition, our year-to-date core segment operating income grew to a record nine-month level. We delivered global segment operating margin of 14.5% for the quarter in a more challenging overall industry environment, particularly in our U.S. commercial truck tire business. This performance demonstrates the strength of our value proposition and our sustainability of margin growth in our business. As we discussed at our September Investor Day, our strategy is built to take advantage of the trends shaping our industry. Global demand for a high value-added large rim diameter tires is increasing and we believe that our portfolio of these products plus our connected business model position us on the path to sustained growth and competitive advantage. I’m also very pleased with the decisions we are making in our business units to drive and stay on our strategy. We continue to have opportunities to pursue short-term volume in increases that recognize that these opportunities are in unprofitable parts of the market that are not growing. In other words, any potential near-term gains would fall outside our long term strategy. The value of a strategy is in its consistent execution regardless of industry and internal conditions. At Goodyear, we are committed to consistent execution of our strategy. Now during the third quarter and particularly late in the quarter, we experienced some headwinds to our plan. In addition to generally weaker overall industry conditions, three specific items affected our third quarter results and our expectations for the fourth quarter. I’ll comment on each this morning. First, as a result of the challenging market conditions and lower volumes in our U.S. commercial truck tire business, we experienced higher conversion costs in the quarter. Second, we saw increased competition in deterioration in the pricing environment in EMEA, specifically in the smaller than 17-inch rim diameter consumer tire segment of the market. And third, there was incremental weakness in our OTR business consistent with what you’re seeing in the mining industry. While these distinct items had a near term impact on our results, the headwinds do not detract from our value proposition in the market or our ability to execute our long term plan and achieve our 2020 targets. In fact, we made strong progress in the quarter in our targeted market segments that we reviewed with you at our September investor meeting. I’d like to address each of our business units starting with the Americas. Our third quarter segment operating income was a solid $305 million and segment operating margin was strong at 14.7%. Even so, our results were lower than expected. To recap what we saw on the quarter, I’ll depart from the usual flow of my review and begin with our U.S. commercial truck tire business given its impact on this quarter. The U.S. commercial truck industry continues to be effected by weak OE volumes and the impact of tariffs on Chinese imports in the replacement market. The current industry environment in heavy truck, especially new truck production, continues to be challenging. Net orders for North America Class A trucks were down 29% in September alone and 39% year-to-date. In addition to this trend, an impact in the quarter related to a specific commercial OE customer exacerbated the weakness in the overall market. As you would expect, in response to the lower OE demand, and to better manage our inventory we reduced our production levels further during the quarter. The resulting increase in unabsorbed overhead in turn caused unexpected third quarter period caused given the already lower utilization in our factories. Our outlook also includes additional ticket cuts to be made in the month of October. So the weakness in the OE segment, coupled with the pre-buy associated with the expected tariff on Chinese truck tires have created a short-term supply demand imbalance in the marketplace. You recall a similar pre-buying balance related to the tariff impact on consumer replacement tires as well. We expect the supply demand and balance to improve over the next several quarters and we are confident in the strength of our portfolio of Goodyear Dunlop and our value oriented Kelly brands together with our industry-leading service network that offer our customers the right tires for their specific needs. Apparent with our industry-leading fleet solutions business model our commercial truck tire business remains competitively advanced in reducing operating costs for our fleet customers in any economic environment. During my time at Goodyear, we’ve experienced volatility in the commercial truck OE industry before. For example, we saw a spike in new truck purchases triggered by pending emission regulations and mandatory engine changes. We've managed through these and similar circumstances in the past and know from experience that the demand imbalance always turns around. We expect this time to be no different. Switching now to the Americas consumer business, we saw robust margin expansion with strong mix-up in both the U.S. and Brazil. Consumer margins in the Americas were up 200 basis points in the quarter, driven by growth in those 17-inch and larger segment in the U.S. Industry growth in these premium tires was 8% in the quarter, outpacing growth in the overall market by nearly 3 times. And as was the case last quarter Goodyear outperformed the market growth in this segment. This remains a proof point of the soundness of a strategy. However, across the broader consumer replacement market we’ve continued to see some destocking at the dealer and distributor level and a sluggish retail environment. As a result, we now expect the U.S. replacement industry to be up only modestly at 1% for the full-year. Regardless, we remain bullish on the mix-up trend and supply demand situation for tires that are 17-inches and larger. That market remains robust. The underlying fundamentals in our industry, particularly miles driven, gasoline prices and fuel consumption remain strong. Vehicle miles travel increased by a record 3.4% in August and is a strong indicator of the immediate term demand. While the broader market consumer tire selling trends did not afford us an opportunity to offset headwinds in our commercial truck tire business this quarter, we expect more favorable demand in the consumer replacement market in the future. As I said many times, we are not pursuing more volume for volume sake. Our team remains disciplined in our approach as we pursue profitable volume growth. The demand for our premium high-value added tires and replacement is still strong and we continue to be challenged to fully satisfy market demand. We continue to be focused on increasing our capability and managing our production cost to increase our supply of the right tires for this demand for the balance of 2016 and into 2017. This remains our number one priority. So, overall, the Americas underlying consumer business performance remains robust and demonstrates the earnings power of the value proposition in our core business and with the San Luis Potosi factory coming online in late 2017, we are on track to increase our supply of 17-inch and larger tires as this market continues to grow. Turning now to EMEA, we delivered stable segment operating income and year-over-year margin expansion of 70 basis points despite a weaker and more competitive industry environment. The European consumer replacement industry was flat in the quarter, driven by slight increases in summer and slight decreases in winter segments. The winter industry was down 1%, as we’ve continued to see dealers and distributors delay winter purchases. Despite a very low comparable from last year's green winter selling industry winter volumes in Europe were down 3% in the month of September. The winter segment did see robust growth in the 17-inch and larger segment, which was more than offset by a decline in smaller sizes. In the summer replacement industry however, increased competition including a continued presence of imported Chinese tires, particularly in Eastern Europe led to year-over-year volume declines in the quarter in our less than 17-inch segment of the market. In that environment, we didn't chase volume for volumes sake. We stuck to our mix up strategy to capture the volume value of the Goodyear brand for us and for our customers consistent with our objective to pursue profitable growth. As you recall from our Investor Day presentation, we expect global growth in the 17-inch and larger portion of the market at 15% through 2020, more than three times the long-term industry growth rate of 4%. That’s the opportunity. Now at the same time, we see the market for 16-inch and smaller tires to be increasingly oversupply and less profitable. That shift implies declining growth, increased competition, and overall tougher industry environment for the smaller sizes over the same period of time. So, we saw the effect of these factors on the summer tires segment already this quarter, our 2020 plan contemplated this impact and included corresponding actions we would take to address our presence in competitiveness in this part of the market. Our plan includes taking the necessary steps to shift our resources and reduce our exposure to declining less profitable market segments as evidenced by our footprint action we announced earlier this week in Philippsburg, Germany. This is one of the restructuring steps required to execute our 2020 plan and is at the core of what we believe is needed to recalibrate our EMEA business to the more profitable segments of the market. This is among the difficult, but necessary decisions that will be required to execute our plan and we are committed to do just that. As we've demonstrated continually over the past decade, we will reduce cost while investing in our business to grow. We are confident that our line-up of high-value added large rim diameter tires will enable us to meet the increasing demand in the industry's most profitable high growth segments. We continue to have complete confidence in our strategy and we won't compromise our long-term value proposition in the marketplace. In Asia-Pacific, our third quarter segment operating income was a record $99 million, an increase of 38% from last year's performance. In addition, segment operating margin was 18%. Our unit volumes were up 12%, excluding the impact of the new Japanese replacement business. China had an outstanding quarter as volumes increased more than 25% versus the prior year. Once again, our growth was broad based as consumer OE was up 30%, and consumer replacement volume increased about 20%. On a year-to-date basis, our volume growth in China is about twice that of the industry. Similarly, we saw above market growth in India in the quarter of nearly 9%. Our performance across these and other countries is driving share gains for our entire Asia-Pacific region. We’re very pleased with our results in Asia-Pacific and we’re consistently building our foundation to enable continued long-term growth in the region. We’ll continue driving new product introductions, OE pull-through and build-out of our distribution network to support sustainable long-term growth. Reflecting on our 2016 targets, clearly we have experienced short-term obstacles in our markets. You saw in our press release this morning that we’ve revised our 2016 segment operating income targets to be between $2 billion and $2.25 billion. As I’ve said, the tire industry does not move in a straight line. Our team is prepared to deal with that volatility and will continue to be focused on long-term economic value creation in our business. In light of the progress we have made up over the past several years, I am pleased with the resilience of our margins despite the recent turbulence affecting our business. Achieving this stability is perhaps the best indication of the strength of our strategy and the changes we’ve made to Goodyear's business over the past several years. The headwinds we’re experiencing this year do not track from our value proposition in the market or our ability to execute on our long-term plan. We continue to see our view of the industry megatrends being be reaffirmed as the demand for 17-inch and larger tires remains robust. We know that we’re in a very competitive tire industry and there will be occasional obstacles and distractions that will challenge our focus. Winning in the global tire business will require hard work, agility, and discipline, but I am absolutely confident in our commitment to executing our strategy and we will continue our progress toward our 2020 target of $3 billion in segment operating income, and $3.5 million to $4 billion in returns to shareholders as part of our 2017 to 2020 capital allocation plan. We are as focused as ever on working on behalf of our customers by being the industry's innovation leader being first with customers being the leader in profitable segments to the market and as a result of being a company that continuously drives sustainable value. Now, I’ll turn the call over to Laura.

Thank you, Rich, and good morning everyone. Today, I will cover our third quarter results and provide more detail on key income drivers in the quarter. I’ll also cover updates to our 2016 outlook before we open the call up for your questions. Turning to the income statement on Slide 8 and as in prior quarters, we have provided callouts that highlight the impact of the deconsolidation of Venezuela. Our unit volume, excluding Venezuela was about flat year-over-year, as growth in Asia-Pacific was offset by declines in Americas and EMEA. The deconsolidation of Venezuela reduced net sales by $155 million. In addition, lower volume negatively impacted revenues by $73 million. Other tire related revenues were lower by $59 million, driven by the 2015 sale of the North American motorcycle business. Our gross margin increased to 28.9% and segment operating margin increased to 14.5% in the quarter. Our earnings per share on a diluted basis was $1.19, our results were influenced by certain significant items. Adjusting for these items, our earnings per share was $1.17, which represents an 18% increase versus last year. Turning to the step chart on Slide 9, which walks third quarter 2015 segment operating income to third quarter 2016, the negative impact of lower volume and production was $25 million. Lower raw material cost of $41 million more than offset reduced price mix of $38 million for a net benefit of $3 million. Cost saving actions of $93 million, driven by our operational excellence initiatives more than offset the $33 million negative impact of inflation, delivering a net benefit of $60 million. Foreign currency exchange was a slight headwind of $5 million, reflecting the continued strength of the U.S. dollar, particularly against the British pound. Other was lower by $40 million, which was driven by the following three factors. First, a $14 million impact from the sale of our North American motorcycle business bringing the full-year impact to $30 million. Second, our commercial tire and service centers negatively impacted the quarter by $10 million, reflecting the more difficult environment for the commercial truck business in the U.S. And third, lower earnings in our third party chemical business driven by the receipt of a royalty payment last year. Turning to the balance sheet on Slide 10, cash and cash equivalents at end of the quarter were about $1 billion. Total debt is down more than $200 million from the second quarter, and net debt is down slightly as well. The increase in net debt versus year-end reflects the normal working capital seasonality in our business. The increase in net debt versus the prior year period includes the impact of Venezuela's deconsolidation. Free cash flow from operations is shown on Slide 11. For the quarter, we generated $150 million of cash. Working capital was a use of $264 million and in-line with the typical third quarter seasonality of our business. Additionally, cash flow from operating activities was $357 million in the quarter. Turning to Slide 12, the Americas business generated segment operating income of $305 million in the third quarter or 14.7% to sales. The year-over-year decline in SOI is more than explained by three factors. First, a $43 million impact from lower commercial truck demand, including higher conversion and period costs related to unabsorbed overhead, and the impact on our commercial tire and service centers. Second, a $39 million impact of the deconsolidation of Venezuela; and third a $16 million impact from the sale of the GDTNA business last year. Unit sales in the third quarter were $18.6 million or down 8% versus 2015. The negative impact of Venezuela and the sale of GDTNA together was about 600,000 units. Excluding these impacts U.S. consumer volumes were about flat and U.S. commercial shipments were down 12%. The remainder of the unit volume decline was driven by lower consumer OE and replacement volume in Brazil and Canada. In summary and despite several notable headwinds, the Americas region, particularly the underlying performance of our U.S. consumer business which saw 200 basis point of margin improvement remains sound. Turning to Slide 13, Europe, Middle East and Africa generated segment operating income of $152 million in the quarter. Segment operating margin expanded 70 basis points to 12.3%, primarily driven by our continued focus on cost efficiency. This benefit was offset by the impact of lower volume in the quarter. Overall, EMEA unit volumes declined 4.5% year-over-year. EMEA’s OE unit volume was down 8%. We began the quarter with lower expectations for our OE unit volume, following choices we've made consistent with our OE selectivity strategy and our intensifying focus on the more profitable 17-inch and larger rim size fitment. This impact was amplified by reduced demand as one of our customers experienced a supply disruption and lower than plan production during the quarter. Replacement tire shipments were down 3%, which is more than explained by increased competition at the lower end of the market in our summer consumer business, all in less than 17-inch rim diameter products. We have seen mild weather across Europe in October and continue to take a cautious approach on volume expectations for the remainder of the year. That said, the strength of our winter product portfolio has us well-positioned to drive future business and win in our targeted market segments. As Rich mentioned, we are executing plans to realign our EMEA manufacturing foot print to enable growth in profitable market segments, while building a foundation to deliver sustainable earnings. We are confident about the regions long term growth opportunities and remain committed to that long term growth. Turning to Slide 14, Asia-Pacific delivered record third quarter segment operating income of $99 million, a $27 million improvement versus last year, with the main driver continuing to be strong volume growth. Our segment operating margin in the region increased to 18.3%, up from 15.7% a year ago. Asia-Pacific’s volume was $8 million tire units, representing 33% growth versus last year. Excluding the impact of our acquisition of the Japanese replacement tire business, the remaining volume growth is primarily attributable to our key markets in China and India. We are well-positioned in Asia-Pacific and continue to be excited about the long-term growth opportunities there. Turning now to Slide 15, we have updated our full year SOI drivers. Overall, we now expect volume growth of 1% to 2% for the year and our unabsorbed overhead benefit has been updated to about $20 million. Fourth quarter unit volume will be about year-over-year as we expect continued pressure in a weaker environment in Brazil and in a less than 17-inch rim diameters summer segment in EMEA. Raw material costs were unchanged versus our prior outlook at down 4% for the year. Although our net price mix versus raw material cost benefit has been updated to approximately $55 million benefit. This includes the impact of a more difficult commercial truck industry environment in the U.S. Reflecting our strong cost performance in the third quarter, our cost savings is revised up to about $150 million for the year. Our fourth quarter net cost savings will include a $30 million headwind for favorable adjustments to our general and product liability accruals last year. Regarding foreign currency translation, we now expect a headwind of approximately $25 million based on current spot rates. The final update in other, reflects a weaker environment for our other tire related businesses, particularly the U.S. commercial tire and service centers. This driver now reflects an additional $10 million headwind for the year. Our full year SOI guidance totaled $2.00 billion to $2.25 billion for 2016. Additional financial assumptions for 2016 are listed on Slide 16. We have tightened the range for interest expense, which is now expected to be $360 million to $375 million for the full year. The next change is a slight increase in working capital, which is now expected to be a use of approximately a $100 million. We expect CapEx to be about $1 billion, which was the low end of the range we provided in July. Finally, I’ll cover updates on our capital allocation plan. We repurchased $50 million of stock during the third quarter. We’ve repurchased $613 million so far under our existing $1.1 billion share repurchase authorization and $200 million year-to-date. We plan to purchase about $500 million in total for the year, which leaves about $300 million that we expect to complete over the balance of the year. Finally, we remain committed to our 2017 to 2020 capital allocation plan and our 2020 target of $3 billion in SOI. The temporary weakness we are seeing in our commercial business will not impact our ability to deliver on our long-term plan. With our announcement to close the Philippsburg, Germany facility we will use $165 million to $190 million of our 2017 to 2020 restructuring basket. The majority of this cash is expected as an outflow in 2018. The plant has 6 million units of capacity today, primarily in the less than 17-inch market. As part of our restructuring plan, we will reallocate production of the larger more profitable sizes to existing facilities within our footprint at a lower cost. This action further enables our focus on high value segments of the market, while continuing to reduce our exposure to declining market. Now, we’ll open the call up for your questions.

Thank you. [Operator Instructions] We’ll take our first question from Rod Lache with Deutsche Bank. Please go ahead, your line is open.

Good morning, Rod.

Good morning. I guess the - the most important question I want to ask you is, just in terms of the supply demand dynamic because ultimately the biggest driver of the earnings that you put up is going to be pricing versus raw materials and how that evolves, especially now with spot prices for some, raw is up a little bit off the bottom. I understand that the supply demand dynamic is going to be really good on the greater than 17-inch tire market, but you are calling out a few markets obviously that are relatively weak, could you just give us some context on your exposure to the less than 17-inch tire market and how you see that kind of playing into your strategy of offsetting raw material costs with pricing?

Yes, so Rod, it’s a good question, fair question. I guess the first thing that I would tell you sort of unequivocally, we don’t view that there is any change to the upside to the trend of 17-inch or greater that we talked about. We still believe and I know you know these numbers, but we see almost a four times increase in 17-inch and above versus the normal market. So, that situation full stop is exactly the same of what we see and the question of what does that mean, you are relating that back a little bit to the volume price mix versus raw material equation, particularly in-light of, I think you are right to call out some raw material headwinds coming in, in 2017. I would tell you Rod we have a track record even before we had sort of the tailwind of the 17-inch and above market coming in to manage volume price mix effectively and we would intend to do the same moving forward. I can tell you that I am very pleased in the quarter even with the discipline that the businesses have had. I made reference to this in my comments as well. On the lower end of the market, particularly in Europe, we stuck to our value proposition and we stuck to our strategy and we didn’t chose volume for volumes sake. We stuck to the value proposition and you might be right to assume we lost a little volume in doing that, but it is the right thing to in that part of the market that’s declining that’s crowed that’s increasing unprofitable, less profitable, I’ll say and in getting more competitive as we go. So, we stuck to our guns; that’s what we are going to do. And we married that up also with a foot print action to give us the flexibility to take these actions going forward. So, very pleased with the discipline there. And I can also tell you even in the quarter. On the 17-inch and above market, I won’t go into different markets here, but we actually increased our pricing and our value proposition even in the quarter in doing that and you see that coming through broadly speaking in the margin improvements that we had both in North America and in EMEA. So, as we look at this I would say we don’t see any change in what we talked about in September. We don’t see any difference in terms of the opportunities that we see and if anything Rod, I would tell you, we’re really focused on accelerating the change in Europe as we move ahead and accelerating it means exposing ourselves to having to take certain decisions courageously in terms of dealing with some of the segments of the market that we don’t want to play in and that’s exactly what we’re going to do. We know how to do it and it’s exactly what we’re going to do going forward. So, I will just pause there for a moment Rod.

Yes, it’s good to hear that you’re raising prices on the greater than 17-inch, but can you just put some brackets around what your exposure is, I know you’ve prioritized to the higher end, but what is the exposure as it stands today to the less than 17-inch market and if you were to look at current spot prices for raw materials, what’s the magnitude of raw material headwind that you’d expected at some point presumably next year?

So Rod, I think we kind of said as a total company or globally we’re about 55% of our OE business is 17-inch or greater and our goal is to increase that by about 5 percentage points as we get out to 2020. I won’t break it down by region in particular, but I’ll tell you, our exposure in North America and then in Europe are the highest in OE and in total, I would say Europe today is roundabout I think approaching around 30% of our total business is that 17-inch and above. You have to remember that the, you know the middle part of the market which includes some 17-inch or below 17-inch tires is still a lot of tires that we have. And some of that business is very profitable as well. So, we will continue to drive that business, but we’re also going to continue to reduce our exposure to that going forward. That will, some of that will actually move into 2017 as we do that, but again the right decision for us is we take the capacity out and as we continue to mix up and change over that capacity to make 17-inch and above.

And then Rod, just on your question on the raw materials, so certainly based on the current spot rates you are right to say that we will see higher raw material cost in 2017 than in 2016. Now they have increased, the raw have increased recently, we do expect some moderate reduction in those over the next couple of months as we look forward, but we do still see it up year-over-year. When you look at the first quarter of 2017 that certainly will have headwinds because raws were so low in the first quarter of 2016. Now we’ll get into exact percents and so on as we get to the February call as we always do, but I’ll just continue to point out, I think at Investor Day we showed a couple of charts where historically I think it was over the last five years there is always RMIs that come into play a particular quarter of so, but we have been able to do that whether to manage through that whether raw materials where increasing or decreasing.

Okay. And I presume the strategy is to continue that just to match on the pricing side whatever the raw material cost do?

Yes, absolutely, right. We make investments for our products. Our value proposition what we bring to the marketplace, there is absolutely nothing has changed on that mentality.

Okay.

And Rod, I just want to maybe just add a little bit more on the mix question you said, because I do think it is an important one. It is the essence of the positive market that we see. Again I’d go back and if I could elaborate a bit, remember this starts with OE, which is where we are getting these fitments, and then if I could even point you back, you don’t have to look at it now, but I think it’s on page 55 of what Steve McClellan reviewed in the Investor Meeting. He showed a diagram that showed round about a 10-year period for the OE, percentage OE of our business at 17-inch and above to sort of make its way into the replacement business, given two to three to four year change of those tires going forward. We see that trend happening very fast and that’s the upside, that’s the positive nature of what we have and that’s where the supply demand equation still sits in favor of ourselves as we move forward. That also says that as we migrate through that we still sell a lot of 17, or below 17-inch tires and some of those certainly at a profit. So, I don’t want to leave you with the view that we are not selling any of those. As you know that’s still a big size of the market in total, but we’re increasingly shifting over to the larger RIM diameter tires and I know you know this, but remember even though there are smaller volumes the margins are higher and our driving what we have in our results. The 16-inch and below, increasingly crowded, oversupply, declining, literally competing against hundreds of brands in there, particularly some of the Asian brands come into Europe as we’ve talked about in the past. So, as we address that proactively we won’t exit it immediately, but will continue to mix up and that’s where that margin profile was going to come. It is, I would say a great trend that we have in the industry as we look to the future. So hopefully that helped a little bit, Rod.

Yeah, thank you.

Thank you.

Next we will move to Ryan Brinkman with JPMorgan. Please go ahead, your line is open.

Great, thanks for taking…

Good morning, Ryan.

Good morning. Thanks for taking the question. So, it looks like the volatility around the commercial vehicle tire shipments is having a relatively large impact on SOI, can you maybe frame for us the relative contribution or variable profit of commercial vehicle tire versus a light vehicle tire?

Sure. Commercial truck on average we’d say about $60 a tire. Consumer I think, we usually is just under 20, about $18 a tire.

Okay, that’s helpful. And I remember a couple of years ago that it might have been exactly two years ago, you not realized as much raw material savings even though commodities were lower because you shipped fewer OTR tires, which is relatively more raw materials and so you didn’t have quite the savings, is something like that maybe happening to a lesser degree in 3Q this year just given that, I imagine commercial vehicle tires where they use a lot less raw materials that OTR tires?

Ryan I’ll, no that’s really not an issue. As I try to articulate in my remarks. I think if you look at our commercial business we really sort of had these three elements that impacted us in the quarter. You know one was frankly we had a weakness in consumer or in commercial OE volume new trucks, we saw trucks down I think 29% in the quarter and just to be – add a little bit of clarity and transparency on it, we tend to - when we see those we manage our inventory, we take production out. As we took that production out, what happened to us is, when we go through our unabsorbed overhead calculations as part of our accounting policy, as you take that volume out, we can trip a number, which was again very candidly unexpected where instead of that unabsorbed overhead or lower factory utilization turning up as a product cost and then being released is cost of sale when the tire is sold, it effectively gets recorded in the period that we take the production cut in this case in September. So that was an issue that hit us in the quarter. Then we had a specific customer issue, where we are again, I won’t elaborate on, but we’ll say we’re sticking to our value proposition as we go. And then we had frankly just lower volumes. This one is very hard to predict, but we had significant increases in the pre-buys ahead of the tariff and commercial truck tires. I think we had non-RMA members in the U.S. were up, I think 35% in Q1, I think 74% in Q2, and down 23% in Q3. And frankly that’s really hard to predict those pre-volume numbers as we go. And remember that’s in an industry where sort of ton miles and the way to measure freight is, let’s just say relatively flat and not up. So, dealing with that also had an impact in the quarter. Again, little bit harder to predict, but this is something we’ve seen before. Dealers have loaded up on truck tires that means there is a little shelf space, but that will work its way through. Our products are leading in the industry. Our fleet solutions model continues to be very strong. That will work its way through, it will take care of itself as we go forward and we’re working through a distortion. Unfortunately and again just to be very transparent about it; that did have an impact on us in the quarter. So that was one of the things I would say. The OTR did hit us, but that was a little bit more of the cyclicality of the mining industry, it wouldn’t be what you’re referring to which I do remember about a year or so ago.

And that Ryan, just for your - as you look at SOI walks and so on, that OTR impact pretty much hit in the mix of the bucket, okay.

Okay. That was really helpful commentary, thank you. And then just last question is, if you could talk about the drivers of the very strong shipping growth in Asia-Pacific, maybe in-light of the very strong China light vehicle production over there, perhaps you could remind us of your OE versus after market exposure, I think it is different in that market than in the U.S., and then what is your outlook for that region kind of going forward as maybe as per IHS, the China light vehicle production growth decelerates, but perhaps there is tailwind in the aftermarket, how do those net out?

So Ryan, I am actually very pleased with the way our Asia business is delivering right now, particularly in China and Christina or Laura will correct me, our percentage of OE there is about 60%, it’s higher than it is in other regions and that’s because when we went to set up our business there, it started out as essentially all an OE business and therefore that mix still tends to be weight towards OE. That will sort of rectify over time. I would say a couple of things, one the industry was still a very strong, particularly the OE industry. I'd also point out that the OE industry in China does have volatility to it as well, but it was very strong right now and what we’ve done over there is very consciously tried to create, I would say or creating a business model that’s branded, that’s focused on 17-inch and above, the larger rim diameter tires, and also focusing on getting the right vehicles to have that pull through. We've also created a network of stores of distribution points that we manage very consciously. It’s easy to open a lot of outlets and then how to close them later, frankly we've encountered that in the past, but we're very methodically managing our distribution channels over there and using digital and using other tools to reach those consumers. So, our China business from a brand, from a product, from a mix, from a customer basis is very strong and obviously we know that growth is in Asia and in China. So, we're very positive on that and I think as we said in the September investor meeting, we're planning to increasing our capacity at Pulandian factory, and I won't elaborate here. We also increased, announced capacity increases in India as well. So, area of the world is growing here, area of the world that people are continuing to drive and we're positioning ourselves well for it.

Great, thank you.

Thank you.

And next we’ll move to David Tamberrino with Goldman Sachs. Please go ahead, your line is open.

Good morning, David

Hi thanks. Good morning. I got a couple of follow-ups from earlier questions and a few of my own, just on the mix, I think you said you were 55% OE, HVA globally, but you didn't give a replacement breakdown, what does that look like globally for HVA 17-inch and above tires?

So, overall, I think it’s around about the 40% range, if I'm about correct?

Yes 35% to 40% in replacement, yes.

Okay, that's helpful. And on the commercial vehicle side, obviously understanding the supply demand disruption that impacted the quarter, wondering what you’ve seen so far in the October timeframe from a trend perspective, is this going to take another couple of months to work through the excess supply and this is a potential 2017 rebound in volumes, on the replacement side for commercial vehicle or is it going to be an issue into the first half of 2017?

Well David clearly based on the, well I maybe I shouldn't say clearly, but based on the guidance that we did put out there will be a drag in the fourth quarter of the unabsorbed overhead from lower truck production or lower commercial production as well. So that is one of the headwinds that we're facing in the fourth quarter that caused us to change the outlook. So that will continue. How long it takes, the truck product to work through the shelves and the distribution that’s a harder one to call, but we know that will happen just as it happened with the consumer side. So, it doesn't concern me. It is a question of when, not if. And then the larger question of what happens in 2017, I think that’s largely going to be what happens from an industry perspective, and I think as we look to our guidance for 2017 we’ll let you know. OE, you know new truck production as I mentioned, I think down 29%, I think it was in the quarter and 39% and 38% year-to-date. So that will change. I mean David, one thing I’ll tell you about the truck industry, having done this a while, you get to a feast or famine and right now we have the new truck production down, it will come back as we move ahead. Engine changes, whatever it is, we have pre-buys and fall off, so it will come back. I’m very confident of that, but as we look to 2017, I would say we will wait to get to the fourth quarter call and we’ll be in a position to give you I think a better guidance on that.

Understood. As I think about some of your competitor’s, one of them is a little bit larger than you are in the mining tires segment, and they are essentially calling for a rebound within the market in 2017, is that what you are seeing, is that your base case and what if anything in terms of rebound in mining tire demand is baked into your forecast for 2017 through 2020.

Right, so, you know David for our September Investor Day, we certainly did not build-in a rebound in the OTR business. Maybe a little bit of an improvement, but not a rebound. We don't see that also for 2017. As we look at it, we still think 2017 will be under tremendous pressure. Now the good news is, and I, may be famous last words, it does feel like we are at the bottom as we go, but again we’ve not baked any rebound into the 2017 through 2020 plan as we go.

Okay. And then if I think about it just getting back to the levels or maybe not the levels in the 2012, 2013 as we were peaking, but a couple of years ago in 2014 there was about a $19 million headwind in price mix for the entire year, and a large majority of that was driven by the productions in mining tires. I mean is that notwithstanding, you still had the mix up from the consumer tire business and commercial vehicles still performing well. So my question is, if we were to see a rebound in mining is that potentially $50 million, $100 million, $200 million in favorable mix coming back into your P&L?

Yes. I mean the short answer is, yes, right. You’re exactly right, back in 2014 a big part of that negative mix was there. So we are at about half of our profitability levels right now, off of our peak. So you're in the ballpark. It is big numbers when it rebounds.

Thank you, that's helpful. And then just lastly on the restructuring benefits, obviously announced something this week, was that is in addition to what was communicated from 2017 through 2020?

That's right, that's right. So, when we were - at Investor Day and I think you and I talked long about it, we certainly on Investor Day included restructuring cash. We knew we were going to continue to take actions, but couldn't make any announcements and we talked about the benefits then being upside to that. So it’s really the 30 million is incremental to the 2020 plan.

Understood. Thank you very much for tanking taking the questions.

Thank you.

You're welcome.

Thanks David.

Thank you. We’ll move to Adam Jonas with Morgan Stanley. Please go ahead, your line is open.

Good morning, Adam.

Good morning everyone. This is actually Paresh Jain in for Adam. A couple of questions, first one, I wanted to reconcile growth in the greater than 17-inch segment. We recently had one of your peers come out with their own forecast of growth in that segment where [indiscernible] seems to be in the 7% range in the high single-digit range through 2020, almost half of yours and LMC focus, so is there something I’m missing in that comparison or it’s just a difference in expectations?

Yes, I really can't speak to that. We can speak to our view, it’s very hard to speak to theirs. So maybe that’s something we could help you with off-line, but it’s hard to talk about that at this point.

Yes. And then when you look at the numbers, I mean when you kind of look back at the couple of charts we had in the deck pages 5 and 6 and you look at the growth in the 17-inch it substantiates it right.

Right, you also aligned with LMC there, so I just wanted…

These are the actuals. As we reported out on the third quarter actual, you can see the growth in every quarter it goes.

It’s just hard to comment on someone else's announcement.

Exactly.

So, we'd rather not do that.

Got it. And then a follow-up on Asia, I wanted to get your thoughts on margins there again, we are an unchartered margin territory here, since it’s still a market dominated by OE sales, curious to know what kind of feedback or if any pushback you get from OE is on the pricing front, just given where the margin levels are?

Well, I would say, our focus whether it’s OE or replacement, really is predicated on the value that we're bringing, our value proposition to all our OEMs, including the Asian OEMs and that’s around technology, it’s around innovation, it's around helping them solve their problems, and it’s around being able to do the complexities that we talked about in our investor meeting that not everyone else in the industry can do. So, our focus is really to help them solve their problems and deliver it to them, the tires they need to achieve the out outcomes that they need, and I think the value we bring has a proportional relationship back to the value that we received. So our goal is to help them solve their problems, to help them make better vehicles, and if we do that, I’m confident that our value proposition will be recognized.

Thank you.

Thank you.

Thank you. And our final question in queue comes from Emmanuel Rosner with CLSA. Please go ahead, your line is open.

Hi good morning.

Good morning, Emmanuel.

Good morning. Just, high level question, conceptually you and your investors about a month ago, very, very bullish tone and obviously you remain bullish on the long-term, but it seems like maybe the near-term headwinds are quite a bit towards then what you just saw a month ago. So, what has changed so dramatically within the last month, are some of the things you are describing really seems to have, you know accelerate to the downside over the last 30 or 40 days?

No. Emmanuel, I think it’s a certainly a fair question, I would say that really our outlook hasn't really changed. What we had to do is what we have to do to reach those 2020 targets, making sell 20 million more 17-inch and above tires. That is at the core of what we have to go do and if you say what’s on my mind? Every day and what we’re driving the team to it’s actually that. And that means mixing up and making more the right tires in North America where you know we’ve been a little bit short supply. We have to make the right tires at the right cost, no change from what we’ve been saying and no change from what we have to do. In EMEA, again trying to be very candid with you, we saw the replacement market decrease about 8% in September alone. We are out there trying to capture the value of our brand, the value of our value proposition in the marketplace. We stuck to our guns, we did not pursue volume for volume sake, as we are looking to mix up, and we've taken the action. As Laura said, we couldn't necessarily talk about it at the September meeting, to be able to address our switch from mixing up to the higher end of the market. That kind of came through a bit more in September even then we thought, frankly we didn't anticipate a market decrease in summer like that. The markets in Europe are a little difficult, you know we also said, we planned on another green winter, but we actually saw winter volumes down again in September, off of a week last year. So, Europe, a little bit, little bit even tougher then we saw, but that’s the tire business. So that’s okay. We're sticking to our guns and driving our strategy. So, I would say really nothing has changed. In fact, if we peel back and we don't get to that detail, if we look at our 17-inch and above business, if you want to just still on to that, in North America very strong, in Europe very strong, in Asia very strong. So I would say those themes are moving ahead. And if again, I say what happened between now and September 15, the commercial business I went through, I sort of walked you through, what happened there. I’m not happy with it frankly, but it is what it is, and part of that was a volume recognition and then volume recognition on our unabsorbed overhead accounting I should say. Europe was our migration forward and frankly that is the strategy and we’re going to be aggressive in doing that and we did have a little bit of an OTR headwind, but I’m not going to say that's a difference maker, that’s more on the periphery of what we have to say. So, higher raw material cost going into 2017. We will have some of the SLP start-up cost coming into 2017, we won't get that until latter half of 2017 when we will get the units out of that. As others have mentioned, I guess I just said the higher raw material costs going in, you know those are some headwinds we are going to see, we're going to see some of the production cut hang over go into the first quarter as well, but we also know we've got tailwind on the 17-inch and above market. Asia continues to be very strong and these are - our cost savings will continue to move in. So, we are on our path, as I said it won't be in the straight-line. Our 2020 plan is what we're focused on, no real change from that, but look the tire business will have headwinds along the way and we’ll deal with them.

Understood. And then just to make sure I fully understand some of the puts and takes on the, I guess impact on the 2020 plan, when you are saying the no change to 2020 from the declining below 17-inch market in EMEA, is that, I mean and that it was already contemplating is that basically - what are you exactly saying, that it was a headwind in the quarter and potentially in the fourth quarter, but that’s sort of like the shrinking exposure to that and that was all already part of the plan?

Exactly. And I think Emmanuel the only difference, getting out the declining 17-inch market size for us was on part of the 2020 plan and in fact that was part of our presentation in there. What we did, was as we saw that declining much faster as we moved into September looking at our forecast as well. We just accelerated the timing of it, right. And now we went ahead and made the advancement and are moving forward. It’s really in the plan, just probably where we were on September 2015, we moved it up in the plan.

Okay. And then a final one just on the, still on the outlook, obviously your implied fourth quarter SOI, so probably a little bit below what previous plan would serve like required for 2016 are there any different sectors in the fourth quarter than what you have been describing for this past quarter?

I think I mean just make sure we've got a chart in the deck, right. It talks about the impacts to 2016 that’s page 4, and then we also list all of our other key drivers to each segment operating income drivers and balance sheet drivers as part of that.

Okay then on the sequential basis?

Yes and Emmanuel just as we talked about it, don't forget that the overhead impact from truck and the industry weakness that is in the fourth quarter as well and is a little bigger impact to the income statement in the fourth quarter then even the third.

All right, understood. Thank you.

Okay, you're welcome.

Thanks, Emmanuel.

Thank you.

I think that was our last question. I just want to close by saying, we've, personally I've been doing this for now for about over 10 years in my various positions here, and I will just tell everyone again and from personal experience, look the tire business has its disruptions and it always will, whether it’s industry cyclicality, it’s tariffs, it’s OEM production adjustments, it's volume oriented competitors, whatever it might be those are certainties that are going to happen along the way. The key in our key is to have a sound strategy to have the constancy of purpose and to not be dissuaded by all these externalities to move away from that strategy. That’s what we’re doing at Goodyear. At times it can be harder than others, but that’s what we’re doing. Listen, it was a tough quarter. I’m not the happiest with it and I will say that with the appropriate humility, but our core business is sound. The market is very strong for us and our strategy is working. We got a lot to do to the 2020 plan, and I’ll just let you know that’s what we're focused on and that’s what we are committed to deliver. So, thanks everyone for your time today.

Thank you.

Thank you. This does conclude today's conference. You may disconnect at any time and have a great day.