The Goodyear Tire & Rubber Company (GT) Q3 2017 Earnings Report, Transcript and Summary

Good morning. My name is Keith, and I will be your conference operator today. At this time, I would like to welcome everyone to the Goodyear’s Third Quarter 2017 Earnings Call. All lines have been placed on mute to prevent any background noise. After the speakers’ remarks, there will be a question-and-answer session [Operator Instructions]. Thank you. I would now like to hand the program over to Christina Zamarro, Goodyear’s Vice President, Investor Relations.

Thank you, Keith. And thank you everyone for joining us for Goodyear’s third quarter 2017 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 get started, there are a few items we need to cover. To begin, the supporting slide presentation for today’s call can be found on our Web site 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 two, I would like to remind participants on today’s call that our presentation includes some forward-looking statements about Goodyear’s future performance. Actual results could differ materially from those suggested by our comments today. The most significant factors that could affect future results are outlined in Goodyear’s filings with the 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, are non-GAAP basis. The non-GAAP financial measures discussed on our call are reconciled to the U.S. GAAP equivalent as part of the appendix to the slide presentation. And with that, I’ll now turn the call over to Rich.

Thank you, Christina and good morning everyone. We released our results a little while ago, so I'd like to get right to them and leave plenty of time for your questions. In the third quarter, we continue to experience several of the conditions that affected our second quarter. The factors contributing to the ongoing challenges over the past three months included lower consumer replacement industry volumes, a raw material cost headwind of more than 30% the most of any quarter for the year and production cuts by automakers, reflecting both lower car sales and the need to reduce higher summer inventories. In addition, in the U.S., hurricanes Harvey and Irma posed an incremental headwind in the quarter. These factors drove an increasingly challenging competitive environment and negatively affected our results beyond what we had anticipated. During the quarter, our segment operating income was $357 million and segment operating margin was 9%, which reflect these ongoing challenges in the overall industry environment. Our third quarter volume was down 5%, driven by declines in our consumer replacement business. It's important to note that in total, the decline in our consumer replacement volume in the quarter occurred in the smaller less than 17 inch rim sizes. This is the segment of the market where the competitive dynamics are less favorable and even more so in today's volatile environment. Our 17 inch and larger rim size segment was stable as EMEA outperformed in both the winter and summer tire segments and the U.S. was affected by its relative price positioning in the market. It's clearly the experienced short term obstacles in our markets that we need to work through. That's my responsibility, and I'm committed and confident in the capabilities of our team to overcome these obstacles just as we have in the past. Our track record is a credible one. Equally important is keeping our perspective and commitment to our strategy. The current market conditions of simultaneous raw material headwinds, slow consumer industry growth and significantly reduced new car production, would make it easy to pursue a volume oriented strategy instead of mixing up to the larger rim diameter tires to drive our profitable growth over the long term. I know the commitment to that plan is being tested by some near term headwinds. The value of the strategy is in its constancy of purpose. It is in that context I continue to be confident that we've made the right strategic decisions for our business as we look out over the next quarters and years. I'd like to address each of our business units, starting with the Americas on slide four. The Americas third quarter segment operating income was $189 million and segment operating margin was 9%. Despite improvements in the economy, U.S. consumer replacement industry selling was down 1% in the quarter. You’ll recall that as we ended the second quarter, channel inventory was unusually high given the level of pre-buy ahead of the price increases earlier in the year. Furthermore, U.S. industry sellout, meaning consumers buying at retail, was about flat. Noting some extreme weather during the quarter, we estimate that the hurricanes Harvey and Irma were a combined headwind of about 1% for the industry. With that as a backdrop, the Americas consumer replacement volume was down 7%, driven by declines in the less than 17 inch rim sizes where we continue to feel the impact of our relative price positioning in the U.S. market. As you know, we implemented price increases across our business units earlier in the year in response to higher raw material costs, which reached a peak increase of 32% during the third quarter. You’ll recall that as we exited the second quarter, our average price increase in the U.S. stood significantly higher than our competitors, as shown in relation to the tire manufacturers’ PPI index. During the third quarter, net index increased only marginally. In addition, we continue to see an increased level of promotional activity, including rebase and discounts, just as they were in the second quarter. Because of this relative positioning, we have adjusted our price mix expectations in the second half from about 5% to about 4%. Taking wider look at the volume performance in the U.S., I want to add some perspective supporting my confidence that our business remain solid. This is best demonstrated by the segmentation of sales volume across our different channels in the quarter. Sales volumes in our retail channel was strong. This includes retailers we serve directly, third-party dealers, auto dealers, affiliated dealers and our company-owned stores, including e-commerce. In this channel, we candidly outperformed industry sell-in with our performance in the mid single digit range. The performance is this customer facing channel reflects the strength of our products, market share and the pull of the Goodyear brand in today’s market. The overall strength in retail demonstrates the value of interacting directly with our customers and consumers together with our line partners. These results reinforce that our value proposition remains intact, driven by the power to Goodyear brand and our customer service. In contrast, our consumer replacement volume declined in the U.S. was entirely explained by the wholesale channel. As you know, the wholesaler model is based on a buy-low sell high trading component that creates volatility in the industry, driven by speculation about where pricing may be headed. This practice can be heavily influenced by, among other things, raw material volatility, which historically stabilizes as that volatility subsides. As current conditions can be characterized by higher channel inventories from pre-buy, continued weak sell-out and decreasing raw material prices are relative price position resulted in our volume trailing the market in the wholesale channel. If we had adjusted our price position further, we likely could have sold or pushed more tires into the channel. However, we believe such an action would have only influence the near-term sell-in and would not have affected our long-term sell out market share trends. In the interim and given our current conditions, we believe we have managed our business the right way for the long-term rather than chasing volume for volume sake in that short-term. Turning to slide five. The fourth quarter marks the launch of our latest new product, the Goodyear Assurance WeatherReady, our new premium traction tire for CUVs and passenger vehicles. Designed from the market back, the WeatherReady excels in all weather conditions without sacrificing other premium features, such as ride durability and noise. The total size of the market for Assurance WeatherReady is about 80 million tires. Our line-up features 40 sizes and covers more than 80% of the market, much greater coverage than competitive offerings. More importantly, Assurance WeatherReady is heavy focused on the 17 inch and larger sizes. This new tires position to win in this segment, which is growing much faster than the industry. Looking ahead, we believe the underlying trends supporting the U.S. replacement industry are robust. In July, miles driven increased eight tenth of a percent to a record of 284 billion miles. At the same time, miles driven for the trailing 12 months rose 1.6%. Fuel prices remained low and U.S. unemployment is favorable. We continue to believe that it's not a question of if sell-out trends improve, but when. And with that in mind, we continue to support our sales with distinctive marketing and advertising. For example, we’re in the process of finalizing a new multiyear partnership with NASCAR. In addition to being the excusive tire provider for NASCAR’s top three series, we will continue to use to sport its teams and drivers in creative marketing programs across traditional and digital media. Our long term partnership with NASCAR is one we are proud of and lines up perfectly with our targeted consumer base. With the strength of our products another Goodyear brand, the current environment does not change my perspective on the long term trajectory of our business. Another important market for the Americas is Brazil, and I'm pleased to share its third quarter showed a tremendous growth in volume and mix on all fronts. Brazil's consumer OE business grew 25% and consumer replacement grew in the high single digit range. On the commercial side, we continue to see growth in replacement and OE turned in a very significant improvement in unit volume. These results indicate that country is showing concrete signs of climbing out of its two year recession. While our business in Brazil is far from its historical earnings level, our team is well positioned to capitalize on opportunities as the market recovers. We’re very clearly headed in the right direction. Turning to slide six. I'll cover the industry environment in Europe. EMEA delivered segment operating income of $87 million and segment operating margins of 7%. Our volume declines in EMEA were primarily driven by our consumer OE business. This decline was driven by less than 17 interim sizes, as well as fitment changeovers. Our forward focus in Europe is with selected customers, driving a stronger connection to the replacement profit pool with premium fitments. The European consumer replacement industry, excluding non-members, was down 1% in the quarter. In this weaker environment, our EMEA business grew share in 17 inch and larger rim sizes, and this performance came without significant adjustments to our expectations for price mix during the quarter. As you know, we’ve taken the necessary steps, such as the closure of our plant in Phillipsburg] for Germany in July to shift our resources and reduce our exposure to slow growth less profitable market segments. This is one of the restructuring steps required to execute our strategic plan and is at the core what we believe is needed to recalibrate our EMEA business to the more profitable segments of the market. In support of that strategy, during the quarter, we announced plans for a new production facility in Luxembourg called mercury. The plant will provide the capabilities to increase our agility and flexibility to meet the growing demand for small volumes of high margin premium Goodyear tires, and to deliver them to customers on demand faster than ever. Our industry leading innovative new products continue to be recognized in influential magazine test across Europe. The Goodyear of Vector 4 seasons, our all season tire, was the winner in multiple leading automotive magazine tests. The Goodyear also grew performance and the Dunlop Winter Sport 5 also claimed the top spot in several European magazine tests. We’re very pleased with this independent validation of our winter products. As we’ve demonstrated continually over the past decade, we will reduce costs, 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. In our Asia Pacific business unit, segment operating income was $81 million and segment operating margin was 14%. In China, we continued to see double digit volume growth in our consumer replacement segment, which more than offset declines in our consumer OE volume. China’s OE sales rose in September for the fourth consecutive month, underscoring growing momentum in the world's largest auto market after a slower start to the year. China's auto inventories have stabilized as well. These trends leave us feeling very confident about our China OE business heading into the fourth quarter. Our confidence is strengthened by multiple new OE platform wins in the 17 inch and larger rim sizes, and continued expansion opportunities for consumer replacement in tier 3 and tier 4 cities. Turning to slide eight, and looking ahead. We remain focused on the opportunities we see for profitable growth across our regions. Sell-out trends in our key markets, excluding the impacts of the hurricanes in the U.S., have turned positive and are more reflective of our longer term expectations. We also see U.S. and European channel inventories as more balanced heading into the fourth quarter. As I mentioned earlier, however, with the weaker industry environment in the U.S. during the third quarter, we've adjusted our volume and price mix expectations. As a result, we now expect our 2017 segment operating income to be about 1.5 billion. Our pricing strategy this year has left us exposed in weaker markets, especially to the smaller rim size segments. The revisions to our outlook leaves room to adjust our volume or price mix is necessary as we move through the quarter. Raw material headwinds are beginning to subside and these competitive dynamics should normalize over the coming quarters. We continue to expect multiple sources of increased earnings in 2018, driven by improved benefits of volume, price mix, net of raw materials and our cost savings initiatives. Even in the current environment, our strategy hasn't changed. Each of our regions has made choices to focus on segments of profitable volume growth in our markets, and not push volume for volume sakes. Be assured that we are making the right adjustments to deal with the tougher market conditions we've seen in the third quarter as we continue to execute against our long term strategy. Clearly, I'm not pleased with our performance this year or with the circumstances that drove it. But as I said consistently, during periods of earnings growth and during periods of earning contraction, the tire industry does not move in a straight line and we're not managing our business for one quarter or one year, but for the long term. We're confident that our volume will return to growth and remain committed to our strategy of pursuing profitable volume and share in segments where the Goodyear brand is a differentiator. And we remain well positioned for the changes we know are coming as the new mobility ecosystem emerges. I'll now turn the call over to Laura.

Thank you, Rich. I'll begin with the income statement on slide nine. Our units were down 5% year-over-year reflecting lower consumer volume, particularly in the U.S. and Europe. Our third quarter sales were $3.9 billion, up 2% from a year ago. Third quarter sales reflect 5% higher revenue per tire, excluding currency, which was partially offset by lower volume. Segment operating income was $357 million for the quarter and our SOI margin was 9.1%. Third quarter earnings per share, on a diluted basis, was $0.50. Our results were influenced by certain significant items. Adjusting for these items, our earnings per share was $0.70. The step chart on slide 10 walks third quarter 2016 segment operating income to third quarter 2017. The negative impact of lower volume was $53 million, an unabsorbed overhead primarily in Americas segment, was $33 million. Increased raw material costs of $300 million more than offset improved price mix of $131 million for a net headwind of $169 million. Our raw material costs were up 32% for the quarter. The third quarter marks the peak of our raw material cost increases for the year. Cost savings actions of $72 million, driven by our operational excellence initiatives and efficiencies in SAG, more than offset the $36 million negative impact of inflation, delivering a net benefit of $36 million in the quarter. Foreign currency exchange was a modest headwind of $4 million and other was a benefit of $6 million as both incentive compensation and advertizing expense were lower year-over-year. Turning to the balance sheet on slide 11. Cash and cash equivalents at the end of the quarter were $822 million. Total debt was up $363 million and working capital up $236 million year-over-year. The increase in working capital was driven by higher commodity cost reflected in inventory. Free cash flow is shown on slide 12. Cash flow from operating activities was $31 million for the quarter and $1.1 billion on a trailing 12 month basis. For the quarter, we used $155 million in free cash flow, which includes capital expenditures of $186 million and an increase in working capital of $294 million. Turning now to the segment results, I’ll start with the Americas on slide 13. In the quarter, the Americas reported segment operating income of $189 million or 9% to sales. The impact of positive price mix was more than offset by higher raw material cost. Operating income was also unfavorably impacted by lower consumer volume and unabsorbed overhead, resulting from production adjustments. Unit sales were $17.1 million tires. Our consumer replacement volume was down 7% versus 2016, driven by a weaker selling environment and our relative price positioning in the U.S. As Rich mentioned earlier, our consumer replacement volume declines were driven by decreases in the wholesale channel where inventories were full heading out of the second quarter. We also saw continuing volume impact from reductions in OEM production in our consumer OE business. Our consumer OE volume was worst than we expected during the quarter due to the OE's aggressive actions to trend inventories. As a result, we've adjusted our U.S. OE industry outlook from down 4% to 5% to down 6% to 7% for the year. Our commercial replacement volume was up 2% and commercial OE unit volume was up 12% in the quarter, both also reflecting a sequential improvement from the prior quarter. Brazil's consumer OE volume showed strong growth and its consumer replacement volume was up 7%. While we remain at a point where we are still operating the low optimal absorption levels, Brazil’s healthy volume improvements give us confidence as we look ahead. While our overall results in the Americas were challenged in the third quarter, our business remains fundamentally sound. We are well positioned to take advantage of favorable trends in the industry. Turning to slide 14, Europe, Middle East and Africa reported segment operating income of $87 million in the quarter, which represents a decrease of $65 million versus 2016. The decrease in SOI was driven by higher raw material costs and lower consumer volume. These headwinds were partially offset by improved price mix in the consumer replacement business and our continued focus on cost savings. Unit sales were $14.9 million in the third quarter, down $0.5 million from prior year. The volume decline primarily relates to the consumer OE business with unit volume down 13%, driven by the decreases in the less than 17 inch size fitment. Replacement unit volume was down 1%, primarily in our consumer business, driven by lower industry demand. EMEA’s 17 inch and larger rim size tires outperformed the market in both the winter and the summer segments. As Rich mentioned, we completed Phillipsburg plant closure in July to reduce exposure at the lower end of the market in our consumer business with summer industry volumes declined 11% year-over-year. With the exit of this volume now behind us, EMEA will have a positive comparable on replacement volumes and the cost benefit in the coming quarters. EMEA’s commercial replacement business grew volume and share, reflecting the strength of our fleet services model with their proactive solutions. Commercial OE was also less in the quarter. We have seen miles 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 to win in our targeted market segments. Turning to slide 15, Asia-Pacific delivered third quarter segment operating income of $81 million, an $18 million decrease versus last year. This year-over-year decline in earnings was mainly driven by significantly higher raw material cost that more than offset the benefit of higher prices mix. Our OE business was down 1% due to the timing of our fitment. Our replacement business was down 2% due to our relative price positioning and selective parts of our business. Those factors more than offset the volume growth in China where we had double digit increases in consumer replacement volume. Despite the short-term headwinds from higher raw material cost and fluctuations in our OE business, we are confident about the region's growth opportunities in the fourth quarter. Next, I’ll cover significant updates to our outlook drivers on slide 16. We expect full year volume to be down about 5% from 2016, reflecting expectations for flat volume in the fourth quarter. We see our full year raw material cost headwinds at about $736 million with the first quarter representing about 22% increase versus last year. Our net price mix versus raw material assumption is now a headwind of about $300 million, following adjustments to our price mix as a result of the competitive industry environment and the higher raw material cost outlook. We continue to track toward our net cost savings of $140 million for the year. Foreign exchange is now expected to be a slight positive for the year. Based on current spot rates and the other category, should be $5 million headwind versus last year with lower incentive compensation and advertising, partially offsetting higher depreciation, R&D and the start up costs for our San Luis Potosi plant. Taking these drivers together, our 2017 SOI outlook is now about $1.5 billion. With the peak of our raw material headwinds now behind us, we are increasingly confident in our earnings trajectory and margin improvement as we move forward. Other financial assumptions are shown on slide 17. We have refined the range for interest expense to $345 million to $355 million and decreased corporate expense by $20 million, driven by incentive compensation adjustments. In addition, we have lowered our full year assumption on our booked tax rate to 28%, which reflects the impact of reduced earnings in the U.S. Our cash tax rate remains unchanged at 15%. Finally, we continue to execute on our capital allocation plans. Earlier this month, we increased our common stock dividend by 40% to $0.56 per share on an annualized basis. In addition, we repurchased $175 million of our common stock in the third quarter or about 5.6 million shares. We intend to purchase about $400 million in stock in total for the year, which leaves almost $200 million, that's subject to our performance, we expect to complete over the fourth quarter or early 2018. Now, we'll open the line up for your questions.

[Operator Instructions] We'll take our first question from David Tamberrino with Goldman Sachs. Please go ahead.

Good morning Rich, good morning Laura, thanks for taking my questions here. Obviously, a tough quarter and a tough environment. Wondering if you can help me square the circle on this. Volume guidance coming down, price mix guidance also coming down. Shouldn't volumes improve if you lower the price? And I ask this before you respond as I think about the Mexico plant launching over the next year or two, you're going to have another 6 million of capacity. How do you get your share back when launching that new capacity if there isn't reduction in price given where the market is right now?

Sure. David, I think you summed up right, tough quarter and certainly it’s a tough environment, as well. And I think some of the things you alluded to, reflect that. You know I would say, you looked at some of the volume, you looked at our 2018 guidance and you saw some of the volume come down in the price mix versus the guidance that we had in the last quarter. And I think what you're seeing is a view that's just reflective of the current environment that we're in. And we wanted to take a view that says, hey, this is what we think the environment is going to be as we head into 2018. And that’s really what we’re looking at. I think your point on how we get our share back and what the environment is like. Look, as we go out to 2018, I want to say that as we explained on the call, 2017 had some what we might view as anomalies or some assumptions that we made that that didn’t work out relative to some of the industry going down, let's say. But as we get out to 2018, I think as we look at the mega trends, as we look at OE recovering, as we look at 17 inch and above growing, all those trends are still there. And in the underlying -- the underlying volume assumptions that we have in there, yes, we’ve baked in what's happened in 2017. But I would tell you that the trends are still there, the opportunity for us to go back and get the share is there for us. Remember, we broke down, tried to give you a view of where we lost the share in the wholesale channels. And I think those are things that will work their way through, as well as we see a more stabilized environment as we look out into the future. And again, coming back to your point, I think there probably is some conservatism in the volume outlook that we have. I mean, if I say directly like that.

I think we just -- as we look at it, really to come back to you with more details around 2018 and then the very credible fashion at this point, the volume, yes we’re saying that what's going on doesn’t turn around right away. It takes some time. And then on the raw material side, since our call, they continue to bounce around, right. At the end of the second quarter was more of a tailwind for next year. Now, it's much less of a tailwind as we went. The spike is out of the raws, but there are still well above 2016 levels. So again, with the raws and the outlook, we’re just saying, given the current environment this is where we're trying to have to say, it is right now, is there potentially some upside, yes. But given the current environment, we want to be real credible as we talk about 2018 on both the volume and price mix versus raws.

And I think that’s fair from that prospective, just thinking about hey, your competitors have acted a little bit more tactically and gone after volume in a slower growing environment. So the question become, hey when you have more supply, how does that change the dynamic for you and the value proposition, may be as a follow up to my question. As we think about some of the other global tire manufacturers, the definition of what they call HVA or premium tire, that continue to create up a little bit in rim size or diameter. At what point in time do you think if it does happen? Does the 17 inch size become a little bit more commoditized for some of other tier 2, tier 3 players, growing their share there? And did that ultimately continue to creep up into '18 and '19 overtime? And how could you address that or help us think about that, commoditization on…

David, it’s a good question. And I would say, just as to say directly not for a long period of time, and maybe a couple of points. As you look at even 16 inch tires today, 15 inch tires today, still a big segment of the market, more competitive clearly than let's say 17 inch and above. But before 17 inch and above moves into that type of environment, it will take quite a long time. So I don’t see that as a segment of the market that’s going to go backward sooner than later. I don’t see that at all. Secondly, I think and more importantly than just that, one of the things that I want to stress again, it's not just about building a factory or being able to make the tire and push it into the marketplace. The way to drive profitable growth in the market is really seen in together all those things from technology to great products to a brand to be on the right OE fitments, and pulling it through our distribution network is part of our whole connected business model, that’s the way to create value. So while some of that capacity is coming in and some of it's certainly in 17 inch and above, I don’t know that all of it that hits the market will be as those manufacturers try to learn how to deal with the marketplace that we’re seeing. But it's not just about building a factory, that’s not how you create value. You create value by creating it for the consumer for our customers all the way through the channel. And that’s where I continually said and I'll continue to say that’s where Goodyear adds value, that’s where our brand, our distribution network, our line partners comes into play and that’s how we create value, not just by being able to make a tire of a certain rim size.

And if you think about, I think also Rich the plant coming online, right, as we think about it David. It wasn’t that long ago, we were really short tires in the U.S. market, industry wise. And we’re going through a time period, especially the third quarter where the OE is down double digits, lots of tires available but as what these inventory cuts. So I think, it always feels like there is a lot of tires during a certain week times in market. But ultimately all that capacity is really needed to meet that growth in greater than 17 inch.

We will take the next question from Rod Lache of Deutsche Bank. Please go ahead.

For the year, on a year-over-year basis, obviously, your adjustment to net price versus raw materials looks like it’s a bigger adjustment to net price. And when you look out two the drivers for next year on slide 8, $240 million to $400 million, it was $505 million to $650 million last quarter. So I could see that your pricing expectations are weaker. And my question is, there is volume, it's coming in very low and there is capacity that’s coming online every quarter. You guys pointed this. I think it was 50 million units of additional HVA capacity per year at the Investor Day. So does it feel like the supply-demand balance is a real risk? And I'm just wondering what you can point to that should give us confidence that this stabilizes? Do we need to see a decent recovery in demand for that to become less of a risk?

So Rod, one I would say, an increase in demand certainly will help a lot. And coming out of our second quarter, we assumed a higher sellout to a better industry than we saw. So certainly that would help. And our belief is that it's still coming just by looking at economic indicators out there, whether it's GDP, whether it's the consumers’ balance sheet, whether it's miles driven. We still feel confident that that sellout trend is going to happen. So certainly, that would help. Going back to the supply-demand question though, I think our view continues to be that the supply demand equation, particularly for the large rim diameter tires, is still in balance. And we look at that by saying as we go back and look at the industry trends that we see driven by the OEMs that’s not changing at all. So on the demand side we don’t see that going backwards at all. We don’t see that changing at all. Equally so, as we look at capacity coming online, which you mentioned and I think rightly so. I think the thing that maybe throws this year into a little bit of an anomaly goes back to what Laura said and that we've had significant OEM cuts. So, as you know one of our big domestic manufacturers who happens to be a big customer of ours as well, had I think 25% production cuts in the third quarter. Those tires, and just use that as an example of other OEMs as well, that production they're cutting by enlarge is 17 inch and above, because that's what they're putting on these vehicles. That's a good thing for us. In a period where they cut production, those tires come back into the replacement market. So we saw some of that incremental headwind as we looked at the markets in 2017 as well. That's not the overall driver. But when we look on balance that certainly didn't help us right now. Now, we don't think that that's ultimately going to continue. Those OEMs are retooling right now and the vehicles they're going to -- the tires they're going to be putting on those vehicles are in line with the trends that we see coming. So we don’t see that this is a permanent change or something that's going to change our point of view. And then I just go back and reiterate to Laura's comment. Remember, not too long ago we were and I would argue 17 inch capacity, 17 inch above in the industry was actually short supply to the OEMs. So this is an industry that I don't say just to say the words, it doesn’t necessarily move in a straight line. A while ago, we're short on supply. Now, we're little bit long on supply. As we look out over the long term, our confidence remains that that balance is going to be ultimately where it’s at. And that's just something we have to work through. And if I could say, Rod, maybe just one more thing. The decisions that we make to the point is a rough quarter, but the decisions we made were consistent with our view. And going back and taking an aggressive stance, particularly coming out of Q2 and particularly giving what we did in view of our coming out first in the U.S. and Europe on pricing, given the high raw material cost. In that view, we still believe we made the right decision by having done something different, particularly coming out of Q2. I don’t know exactly the outcome that would have happened, had we done that what in terms of results. But what I do know is we clearly would have undermined and inhibited our long term trajectory on taking advantage of those 17 inch and above tires.

Well, the expectations as you know as far as the reproduction instead were near -- were closer to the peak here in North America. So I would imagine that what you're counting on is an improvement in the replacement market more than anything else to achieve that 10% or 15% volume growth that you've been talking about. Can you just talk about -- you changed the way you guys are disclosing your regions and now basically consolidating things to the Americas. What was Goodyear's U.S. replacement volume year-over-year in the quarter?

Rod, we've put them together and talked to them as region now. So I think that's…

We can follow up if you don't have it handy. I guess obviously, there's market share losses here that are occurring and it had been occurring for a while. Could you just talk about how we should be thinking about restructuring? Because you guys have a history of aligning the capacity to whatever the demand is doing. In the past, you talked about something like $150 million a year of restructuring. Is that the right ballpark that we should be thinking about if this demand environment persists?

So I think, nothing to announce in terms of restructuring. The capital allocation plan has figures in there. I think those are still very valid and very relevant, but nothing there. If you're thinking about like the U.S. market and where we're going, we need that capacity. We continue to convert that capacity to greater than 17 inch, which takes the way tires less than 17 inch from the market. So, I don’t see any big change in that outlook. Right now, we’re at the place where we're continuing to convert and we were shutting down the Phillipsburg plant in Europe. And that gives us a tailwind as we go forward and regain some growth, some share now with more greater than 17 inch tires, which they did really well in the third quarter ahead of the market and greater than 17 inch growth. But overall, I don’t see any change in our really restructuring cash spend overtime.

And Rod, relative to the U.S., I think your question was a big grounded in the U.S. as well. As you know very well, we’ve taken out a lot of capacity related to markets that we didn’t think that were when growing or where the profit pools where they are essentially or we could make money doing it. We've done a lot of that, as you know, and those are out. I think if you think about how we're looking at it, going forward, it's about building the capacity to meet market demand, something like San Luis Potosi. And then other than that it's really about making sure we're just refining our capacity to be able to meet market demands in terms of type of products. From a share perspective, our view is that we have the opportunity to continue to grow share in the parts of the market we want. And when you look at share in 2017, we try to break out a little bit where we’ve actually continued to do well, is relative to our direct to consumer and our retail customers, if you. The dynamics in wholesale, given the raw material environments and environment we talked about in the call. That’s where we’ve had an issue. And that volume we don’t view as a permanent loss of volume.

Just before Rod some thoughts are, so the U.S., if you look at the Americas, in total, it has the volume down 7.7%. If you broke that out, the U.S. market would be down about 9%. And as Rich talked about it that is all in the wholesale channel. Now, as Bob said, there is some good little bit of growth in Brazil right but that really gets that total back to about 7.7% down.

And just lastly just to help us modeling on the free cash flow. Your accounts receivable were up a lot on three week volume. Could you just explain what was behind that in the quarter?

I think it's just the timing of the winter tire sales in Europe, which started pretty heavily over the last -- really at the end of the second quarter, but really just timing.

So is it different than it was last year, because you did mentioned that it's been a pretty mild winter?

This is just starts -- we had gotten the inventory and the channel down to a good level. So we did sell some tires in the second quarter and third quarter into that channel, and that’s the receivables from them. There is no concern there. We look best as always to make good collections in the fourth quarter.

We’ll take our next question from Adam Jonas with Morgan Stanley. Please go ahead.

Do electric cars, e-tires, I'm not an engineer, but I believe that vehicle power in a way both contribute to tire ware. So if I compare the power and way to say a Model S or Shelby Bolt, to other cars as a same footprint. They’re really much more powerful and weigh about 20% or 25% more mass. So you must have data on this.

So, you’re absolutely right. And Adam our current model that does something similar, a lot of the all wheel drive vehicles as they push power to each of those wheels, you have a similar phenomena. You can get a bigger impact just as you’re pointing out from an e-vehicle, because as you said, the power goes directly to those wheels. So this goes exactly to the design of tires to meet the specs of the manufacturers to be able to do that. And Adam it also says why the replacement market for those tires for e-vehicles out into the future is so important to us. And that’s why as we think about working with the OEMs today as we’re doing working on designing tires and developing tires, particularly for those vehicles and then again looking at the net present value of that as we think about the replacement market.

I just don’t believe I’ve ever seen any data presented from you on that, any scientific data you must have it so just maybe a suggestion or as you start to provide a little more transparency there, but thank you. Second question, my final question is [Lift], I believe recently said that ride sharing accounts for 0.4% of miles traveled in the U.S., which is similar with our numbers. That’s roughly 15 billion miles per year. I'm using round numbers here right and tires get replaced every 50,000 miles, that’s 1.2 million tires per year. Starting to become a significant level of industry volume albeit at small but rapidly growing, getting to like a volume of a small plant maybe soon a large plant. When do we see this first fleet wide cooperation between a ride sharing giant in a tire firm?

I think we are -- I'll just say, we’re working on those things. As we speak, Adam, we’ve had relationships with them already on let's say a less formal basis. What we’re working is what you’re talking about and how we can do that, so nothing to say at this time. But we are working on those things. And I would tell you, Adam, one of the things related to what you’re talking about in terms of approving our credentials to be able to support this as we look to the future and even going back to your last question is you heard us talk about that partnership with Test Loop, and that really is an incubator of learning how the vehicles function on road in taxi like environments or ride sharing like environments to see how the tire performs in there and get the data to be able to do that, not only for our purposes but for the purpose of then being able to share that with the fleets and then being able to help them manage those fleets better, not only on just replacing tires but on their cost per mile as they move ahead. And that’s the value proposition that we are working through right now.

We’ll take our next question from Ryan Brinkman with JPMorgan. Please go ahead.

So starting on the question on the volume front, but when I think -- look at your volumes in 3Q, they were down 5% and for 4Q, you were expecting a flat volume. There seems to be stabilization embedded in that numbers, stabilization of the environment right now. What is driving your confidence that the promotional activity you’re seeing from competition in 3Q doesn’t process into 4Q? I know, you have started talking about 2018 already. But what's the visibility into the volume trajectory in 4Q, right now?

So, as we think about that, I think the first point I would make is we looked out to Q4, we did adjust our assumptions, which is inherent in the forecast that we put in there. And we did that with, as I said, room to be able to react to the competitive environment during the quarter as well. So I think that's the first thing that I would say. And as we look at our volume going out and in the competitive environment we have, we feel that the volume we have flat year-over-year is something that is sensible in the environment we're in and we look at what's going on in each of the market. So for the Americas, for instance as I said, we’ve made the adjustments to our value proposition out in the marketplace to be more competitive, given the environment that we're seeing. We also see better channel inventories than we did earlier in the year, let's say. We also think we'll see, not significantly, but some improvements in OE production during the quarter given again a lot of those inventories came off, a lot of the car sales came off the loss, those inventories now are back to rather I guess positive levels, which means they need to be replenished but we see some production coming on. And also we have new product introductions, particularly the Assurance WeatherReady in the U.S. products. We're really excited about replacing our old Assurance TripleMax and our TripleTred, and that's off to a great start already. So those are some of the things that we feel will allow us to be more competitive in the Americas. And I'll just stop there for a moment, because we can go through each of the regions. But we have things like that as we go into Q4 that say our volume outlook is one that's sensible to us and with room to react to make sure that we deliver.

And just moving away from North Americas for a bit for one question, which is -- so your European margins were I think 6.6% this quarter and you already talking about a mild winter and cautious about volumes for next quarter. So when should we think about starting to see some improvement in those margins. Is it midway through next year or how should we think about the trajectory here for margins in Europe?

I mean, I think you're on the right track, right. We shut down the facility in Phillipsburg and that really exited a lot of those less than 17 inch tires. So yes, we see first of all that behind us and better volumes as we go forward with more greater than 17 inch capacity along the way. So feel better about that. That also provides a cost benefit with it that'll come in to 2018 as well for about $45 million next year so again, both of those things. Now, we continue to work on our channel work, our product line up. We've won great magazine testings in our winter tires. We still are counting on that unfortunately another green winter is how we’ve modeled things out. But should we ever go back to a more normalized winter tire market that will help as well, okay. It is good mix in our European business, because of OE, the fitments that come off of there and as those flow into the replacement market. The European market in total is just a notch behind the U.S. in terms of its greater than 17 inch. It's a little bit stronger in OE in the U.S. than it is in Western Europe. But that trend continues. So, I think all of those things together to me is how we continue to make progress on those margins, and are very focused on that for our European business. But to do them the right that gives us sustainable profitable growth versus just a one-time profit improvement.

We'll go next to Itay Michaeli with Citi. Please go ahead.

Just going back to the 2018 price mix versus raws, I apologize if I missed this. But could you just share what the raw material assumption there is for 2018? And just then just the overall assumption for promotional activity in the 17 inch and above and 17 engine below as well?

Let me try to walk you through this. So, I guess as we look at 2018 and again two pieces here right, and I’ll stick with the raw materials for a second. So where we were at the end of the second quarter, we did see a big tailwind for 2018. That has lessened, raw materials do continue to bump around, up and down. On today's spot rates, you would say that may be $75 million to $100 million of benefit in raw materials in 2018 year-over-year. But again, the raw materials do continue to move, right. They’ve really not recovered from that high point in 2017, only partially. But as we look out, given the current environment, we’re essentially saying that on a net price mix versus raws that price will equal raw materials in 2018 is our assumption on our guide and really the benefits year-over-year come in form of mix, all mix, is it what stilled into the assumption at this point.

And then going back to the fourth quarter, any color preliminary you can share on how October is trending thus far relative to your expectations?

I think we would just say just we don’t do month by month plays. But obviously everything -- what we're talking about today, the guides we’re giving, the outlooks taking the consideration, our view of October as well.

And then lastly on CapEx in the last quarter, you took it down as the volume came down. Are these the levels we can expect that into next year as well? Could it be distributional opportunity to trim down the CapEx, if market conditions remain difficult, but you expect that to generally trend higher again in the next couple of years?

It's probably just like you said. Right now, because of the output, throughput in our factories this year, we were able to take the CapEx down and preserve all the CapEx for the greater than '17 inch, the new facility that’s coming online. As we look forward, as market conditions improve that will go up slightly to may be more like the levels we started the year at or so. And we’ll fine tune that in February with you. But yes, we always adjust if market conditions get stronger or weaker we always make adjustments to that CapEx to really line it up with the timing of when we can get the returns on it.

We’ll take our next question from Brett Hoselton with KeyBanc. Please go ahead.

So I want to follow on with the price mix versus raws discussions. Really struggling, simply because it seems as though your 2018 expectations are very conservative. From what I understand what you just said Laura was that the $75 million to $100 million tailwind you expect in 2018 is simply raw materials coming down and it sounds like you're also expecting some benefit from mix. But that’s not included in your guidance. And it sounds like you’re attracting no recovery in pricing. So it all seems extraordinarily conservative in my mind. And I know things change dramatically, but am I missing something?

So may be just -- may be I’ll clear it up a little. But where you are correct essentially is that we’re basing our outlook on the current environment. We’re just assuming at this point that it doesn’t turn around. We wanted to credibly provide an outlook based on what's actually going on today. We do see this as something that works itself out overtime, but it doesn’t turnaround right away. So, let's go back to the price and the mix versus raws. So essentially net price mix versus raw $75 million to $100 million next year is all mix. So yes, I said that at current spot rates, which could change, we see a tailwind of $75 million to $100 million next year. But given the current environment, again, we’re just saying, what that’s we’re going to have to say, we may have to give that up. And we would say, yes, there is absolutely upside. What the timing of that upside is what's hard to predict given the current environment and the weak market, some of the weak markets. And I think just wanting to give more specificity around 2018 the way we see it today that’s our approach to it. We will, as always, keep updating this as we work though the fourth quarter. If we think stabilize more, we’re much happier with how quickly things might turnaround as we enter the year. There might be some upside to that as we lay out very specific numbers for you in February for 2018.

Just for clarification. Did I understand that your raw material assumption, excluding price and mix. Is that next year we’ll have a tailwind of $75 million to $100 million?

That’s correct.

But your total net price mix versus raw material is tailwind of $75 million to $100 million. So where does the mix benefit come from? Or where is that reflected in your guidance?

So the price -- so what it is, price equals raw materials. So if raws go down $100 million, price goes down $100 million, think of it that way. And then that effect is the mix and that’s where I'm saying on the price versus raws, you’re right that ought to be a tailwind. But we have said listen given the current environment to be very credible with you as to what’s happened in the second and the third quarter this year, that’s our assumption for 2018. Do we see upside, as the timing of that, what kind of plays out that’s when we’ll build that into the guide for your, give you a view to that.

And then you’ve got the one shot, which you’ve shown that over a period of five or six years, you’ve been able to offset higher raw material cost over a period of time. You’ve got $300 million headwind this year, yet next year, you’re expecting $75 million to $100 million tailwind. So is there some reason why at some point in time you will make up the difference between that $300 million headwind this year and the $75 million to $100 million tailwind next year. Has something changed in the industry or do you think this is a temporary phenomena?

So nothing changed in the industry. We think it’s a temporary phenomena. What I think we’re trying to get nailed down is the timing of that. So to your point, there is no reason to believe that it won't. That is the history. Even in the history, it shows several quarters of not in line between price and raws. And I think again, given the current environment, that’s the way we’re building our assumptions at this point. But if we get more clarity to that timing as the markets and the industry rebound in certain areas that’s when we’ll go ahead and build that into the guide. But to your point, this is still a temporary issue that we’ve got.

And Brett, I'll just reiterate Laura's comment. Again, I think we think it’s a function of this current environment rather than a reflection of what's going on. I mean, we’ve got weak sell-out in the U.S. and Europe. We've had pre-buy and high channel inventory impacting us. We’ve had OE come in. And it's a confluence of all these events. And then we had this volatility in raw material. And we obviously have taken some assumptions on that. And now we're looking at it, as Laura described. And I think we're still working on it. But as we look at the world today, that's what we're thinking. And you can rest assured we're not finished.

And just one final thought. So VAR channel check suggested that comparisons were going to become more easier on the consumer sellout side, which would bode well for consumer sellout and selling of course, and so forth. It would seem as though that’d be an opportunity for pricing to become more rational in price mix versus raws spread to start to improve some. But is that the logical chain of thought?

I think your thinking is logical.

And we'll take today's last question from Ashik Kurian with Jefferies. Please go ahead.

Just have one question left. You've highlighted the impact from wholesale channels on the volumes in the U.S. Just trying to understand a bit better as to why you would underperform, especially in the third quarter, because based on what your competitors have reported, mean their price mix in the quarter isn't that drastically different from what you have reported. So is your understanding that your pricing is still a lot higher than what your competitors have? Or is it just a fact that the wholesalers are just waiting for you to lower your prices in 2018, given that you have a raw material tailwind?

I think, I'll start and Laura can jump in. I think, Ashik, I think the one thing I'll go back to our commitment to what our strategy is and what we're doing, and our ability or sense that what we're trying to do is make sure that we continue to stay on strategy. And ultimately protect what we see is our value proposition is our number one priority is creating value over time. As we've done that and selling into a distributor channel, you have a channel that has the capability to store inventory, has the capability to take advantage of free buy, has the capability to take advantage of promotional programs. And those programs allow those tires to sit in inventory. We obviously had a value proposition that wasn't as attractive to them as they went forward. And I think that's ultimately what was -- what caused that. And that's why all our volume loss was in that channel. As we went to retail, we saw actually what I'm very pleased with the performance that we had in that channel, both in terms of mix and our service in that channel. Now, having said that, your point on competitors, I can't really speak to what they've done or how or what their programs were. We don't know. Obviously, don't have the reporting that we do or haven't been out that we could even look at that. But I don't know that. What we do know is if we just go back to our PCI charts that we had last quarter, we didn't put that in and we're not going to get in the habit of putting that in. But what you'll see is not a tremendous uptick of the lower bar of the chart we showed last year, the green bar, which was the tire PPI. So I can't speak to competitive actions. I can look to the PPI and say that we stuck to our strategy and then you can go from there in terms of your assessment.

And Ashik if you, for the U.S. market, that PPI at the end of June was at 1.2% up, right. At the end of September, it’s up 1.6% for the U.S. market. And that's a published data point, so just to understand.

Can I have a quick follow up? I mean, what does your pricing done sequentially Q3 over Q2? I mean, I would guess probably flat, but across the regions and is it expected to be broadly flat in Q4 as well? I know, year-over-year the numbers probably get a bit distorted with the pricing actions you would have done in 2016. But just sequentially what has your pricing done?

It does vary by region. We don’t really go through it that way. I think, one of the charts we showed had the -- showed the 4% as price mix for tire, Q3 and Q2. So essentially no change, in total.

You can see that on slide seven, Ashik, if you look there you can see that and you can obviously look back to our Q2 number for that as well.

Okay, thank you, Ashik. And again, we appreciate everyone’s attention today and we’ll talk to you next quarter. Thank you.

Thank you very much.

And this will conclude today's program. Thanks for your participation. You may now disconnect. Have a great day.