The Goodyear Tire & Rubber Company (GT) Q1 2018 Earnings Report, Transcript and Summary

Good morning. My name is Tony, and I'll be your conference operator today. At this time, I'd like to welcome everyone to Goodyear's First Quarter 2018 Earnings Call. [Operator Instructions] I will now hand the program over to Christina Zamarro, Goodyear's Vice President of Investor Relations.

Thank you, Tony, and thank you, everyone, for joining us for Goodyear's First Quarter 2018 Earnings Call. Joining me today are Rich Kramer, Chairman and Chief Executive Officer; and Laura Thompson, Executive Vice President and Chief Financial Officer. 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, on 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 slides. And with that, I'll turn the call over to Rich.

Thank you, Christina, and good morning, everyone. This morning, I will provide an overview of our first quarter results and discuss the recent announcement of TireHub, our planned distribution joint venture in the U.S. I'll also address current industry conditions and our outlook for the remainder of the year. Laura will follow with the financial review of the quarter and walk-through the detail of our outlook. In the first quarter, segment operating income was $281 million and SOI margin was 7% in a challenging overall industry environment, particularly in our consumer business. These results were highlighted by our performance in the 17-inch and larger segment in consumer replacement, which delivered more than double the industry growth in the U.S. and Europe. As we said in February, we expected relatively flat volume in the first quarter, which was driven by our planned exit of some of the smaller rim size tires in EMEA OE and expectations for reduced OE demand in the U.S. driven by lower auto production. As you saw over the course of the quarter, industry sell-in, in both the U.S. and EMEA consumer replacement markets, was weak and worse than we expected, as we saw some destocking in our own channels during the quarter. On the other hand, our sellout demand strengthened in the quarter, particularly in the U.S., which I'll discuss more in a moment. That improvement gives us confidence as we look ahead to the remainder of the year. Now what we're most excited about going forward is our recent announcement of TireHub, our planned distribution joint venture with Bridgestone Americas in the U.S. This strategic transaction will strengthen our ability to promote our premium brands, our industry-leading e-commerce solution and our strategy of targeting the industry's most profitable large rim size segments. TireHub will deliver best-in-class service for our retail and fleet customers and will be the cornerstone of our aligned distribution network. At its core, TireHub will allow us to get closer to both our dealers and consumers. With enhanced insight into channel inventories and sellout, TireHub's dedicated sales force will be an advocate for the Goodyear brand and all that comes with it. In short, TireHub positions us to better capture the value of our technology, our brand and our suite of related services. We see several specific benefits associated with this joint venture that we -- that will further enhance the value of this transaction. Now first and foremost, our improved national presence when combined with our aligned regional distributors will support our growth through increasing our geographic reach and providing retailers access to a deeper and broader range of our products. TireHub will have same-day access to the vast majority of the country and cover 97% of passenger vehicles on the roads. Second, we'll help our customers better manage growing complexity, driven by SKU proliferation through improved fill rates and delivery speed. Third, as we intend to reposition a portion of our existing third-party wholesale volume in conjunction with this transaction, we expect to benefit from higher margin as we redistribute volume to TireHub. With that, we anticipate lower volatility and better demand planning driven by overall less exposure to the wholesale channel. And finally, we expect the benefit of synergies as we combine with Bridgestone Americas, lowering the overall cost to serve our customers. As we think about our distribution strategy more broadly, we are focused on not just what it takes to win in the market today but also over the long term. An aligned distribution network is the backbone to enable the changes we see coming in how tires are sold and how service will increase in value. As we've discussed in the past, consumer buying behavior is changing. More and more consumers are researching and buying tires online. We expect that trend to continue. A tire purchase is no longer simply a transaction. We want a consumer's experience with the Goodyear brand from shopping to purchase to service to be as seamless as possible. Our goal is to make Goodyear easy to buy, easy to own and easy to recommend from initial research to purchase to installation. We innovate to meet the changing demands of consumers, not only in terms of product performance, but also in the total experience they expect from our brand. And we will continue to take additional steps to not only leverage technology seamlessly into the tire buying process but also to shape that process along the way. Looking even further ahead, we also expect to see a shift in our customer base with the rise of AV and EV fleets in the future. Those changes require that we put in place the strategies, investments and capabilities to thrive in that emerging new mobility ecosystem. An aligned distribution network is the foundation, and when paired with supporting infrastructure and vehicle connectivity, enables us to proactively prepare for an eventual shift from personal car ownership to mobility. TireHub is a natural next step in our aligned distribution strategy which, as you know, is a critical part of our connected business model. This is where Goodyear can add value with our technology, our brand, our aligned retail and distribution network and all the capabilities that we bring to bear for the market. The combination of these elements drives value for our customers and consumers and is where Goodyear will continue to demonstrate its competitive advantage starting today and preparing to shape tomorrow. Turning to Slide 6. I'll cover the U.S. industry environment during the quarter. Overall industry sell-in demand was down 2% in the quarter while USTMA members were significantly weaker. Our U.S. replacement volume outperformed industry members by 200 basis points. We saw industry growth in the 17-inch and larger segment at 4%, and we grew share in this segment, significantly outperforming the market during the quarter. More importantly, sellout of Goodyear products was robust in the quarter driven by our -- driven by the strength of our brand and our products. Our performance in the large rim size segment was driven by outsized growth in our retail channel, which includes our large third-party retail network and our company-owned retail stores. Even when including smaller rim size tires, this channel grew 20% during the quarter. As we've discussed in prior conference calls, the retail channel, including our company-owned stores, has been performing very well, delivering above-market growth over the past several quarters. That's the power of the Goodyear brand and our connected business model working together to create value for our business. Turning to Slide 7. I'd like to build on that thought and walk you through the relative performance of our sell-in channels in the U.S. over the past few years, as these differences have had a very significant impact on our replacement volumes and help support how we are thinking about our distribution going forward with TireHub. First, a brief explanation of the graphs on the page. The green line in each chart shows Goodyear's growth in our U.S. customer-facing channels, which includes both third-party and company-owned retail stores as well as our big-box customers, and it shows it on a trailing 12-month basis. The blue line shows the performance of our third-party wholesale channel on the same basis. Both lines are measured relative to March 2015. On the left-hand side of the chart, in the 17-inch and larger segment, our customer-facing channels have grown at a 13% compounded annual growth rate since 2015. The outstanding performance of these channels reflects the strength of our products, market share and the pull of the Goodyear brand in today's market. This consistent performance demonstrates the value of interacting directly with or being closer to our customers and consumers together with our aligned partners. These results reinforce our industry-leading value proposition driven by the power of the Goodyear brand and our customer service. This performance, however, is in stark contrast to our volume in the wholesale channel in the larger rim size segment over the same period. In addition, we've experienced significantly more volatility in the channel. As you know, the wholesaler model can be executed with the buy low, sell high trading component that creates volatility in the industry driven by speculation about where pricing may be headed. On the right side of the page, we have a similar dynamic playing out in the smaller rim sizes, albeit in the declining segment of the market. Even still, our customer-facing channels outperformed the wholesale channel by an average of 17% per year. On Slide 8, we've taken one step further to include the performance of the overall industry. Our customer-facing channels are clearly outperforming the industry in both the larger and smaller rim size segments. This is what our strategy was designed to deliver: demand pull from the market back, favorable mix-up and above-market growth for our business consistently over time. On the other hand, our third-party wholesale channel has grossly underperformed the industry. The buy low, sell high model also can influence what brands wholesalers put out into the retail market. I'll note that this behavior is not representative of all our wholesale customers, and we're showing our aggregate experience to simply demonstrate the point. As we think about TireHub in context of this data, be assured that we are taking the right strategic action to strengthen our distribution network for the future. The adjustments we are making in our wholesale business in conjunction with the announcement of TireHub will provide us with significant opportunity to further leverage our brand with growth and mix-up in the more profitable large rim size tires. We are sharpening our focus on winning with customers and consumers, who value our brand, our products and our service in the marketplace. Turning now to Slide 9. Our EMEA business delivered solid results against a strong comparable in the first quarter of 2018. The European industry was down 2% in total, and ETRMA members were down more than double that amount. In comparison, our consumer replacement volume was down 1%. EMEA's volume performance in the large rim size segment of the market significantly outpaced the industry. We are executing on our plan to mix up our product portfolio in EMEA. We saw incremental industry weakness during the quarter as well as the winter season lingered. In that environment, dealers continued to sell through winter inventories but did not restock. And given the cold temperatures throughout the quarter, we also experienced the slower start to the summer sell-in than we expected. The first quarter marks the official launch also of our next-generation tires for the luxury segment, the Goodyear Eagle F1 and the Dunlop Sport Maxx Race 2. The successor to the Sport Maxx Race has been developed together with Porsche to meet the demanding requirements for its new 911 GT3. With the first-generation Sport Maxx Race tires fitted on previous -- on the previous models of the GT3, Dunlop continues its commitment to provide specialty tires for Porsche vehicles. As we look ahead, we expect to continue to see robust growth in EMEA consumer replacement in the coming quarters, particularly in the second and third quarters. We also see our OE volume improving significantly over the remainder of the year. We are continuing to work to strengthen and further differentiate our value proposition in EMEA. We see opportunities to grow a richer mix, and with it, our profitability in the region. Asia Pacific delivered another strong quarter in segment operating income driven by growth in consumer volume with outsized performance in the large rim size segment. Asia Pacific saw a first quarter record in volume performance during the quarter driven by its consumer business and winning fitments at OE. We also saw volume growth in consumer replacement in the region in spite of a headwind due to the impact of prebuy in the first quarter of 2017. China had another successful quarter with consumer OE volume increasing 14%, as we've seen the market continue to stabilize. OE continues to benefit from strong car sales while growth in replacement was driven by our team's strong execution of sell-through programs and on our retail store expansion into Tier 3 and Tier 4 cities. We also have continued to see robust consumer growth in India and Japan. As we look ahead to the remainder of the year, we expect increasing momentum with double-digit volume growth driven by our key markets in the region. Looking back at our global businesses in the first quarter. I'm very encouraged by continuing strong demand in the large rim size segments of the market across our regions. We continue to expect 2018 segment operating income to range between $1.8 billion to $1.9 billion, excluding the impact of the TireHub transition. Our investment in the joint venture this year gives us increasing confidence as we think about our 2020 segment operating income target of $2 billion to $2.4 billion. The Goodyear brand and our value proposition continues to be a competitive advantage in the marketplace. A large part of that is in developing industry-leading premium products and making the overall tire buying process easier. I'd also like to take a moment to recognize our business teams for their contributions in executing on our strategy. Last week, Goodyear was recognized as GM's 2017 Tire Supplier of the Year. This global award is a testament to the passion of our employees who work tirelessly to innovate, industrialize and deliver truly best-in-class products and services to our OEMs. Similarly, Goodyear was recently also included in Forbes' America's Most Reputable Companies for 2018 and held the highest spot among tire manufacturers. Our teams have made the commitment to winning with consumers and helping our customers to build their businesses every day. They have done so while also taking the long view of creating sustainable value and embracing the changes that will reshape our industry. Now I'll turn the call over to Laura.

Thank you, Rich, and good morning, everyone. Turning to the income statement on Slide 10. Our unit volume was down 2.5% year-over-year driven by declines in consumer OE in EMEA and the U.S. Our first quarter sales were $3.8 billion, up 4% from a year ago. Excluding currency, revenue per tire increased 2%. Our first quarter sales also reflect a favorable impact of foreign currency translation. These benefits more than offset the impact of lower tire volume. Segment operating income was $281 million for the quarter. Our first quarter earnings per share on a diluted basis was $0.31. Our results were influenced by certain significant items. And after adjusting for these items, our earnings per share was $0.50. The step chart on Slide 11 walks first quarter 2017 segment operating income to first quarter 2018. The negative impact of lower volume was $20 million and unabsorbed overhead was $3 million in the quarter. The combined headwind from increased raw materials and lower price/mix was $109 million for the quarter. Raw material costs were up 9% in line with expectations and accounted for nearly all of the headwind. Cost-saving actions of $75 million were driven by our operational excellence initiatives, efficiencies in SAG and savings from the closure of our Philippsburg plant. These savings more than offset the $37 million negative impact of inflation, delivering a net benefit of $38 million in the quarter. Foreign currency exchange was a benefit of $11 million and other was a headwind of $26 million. Turning to the balance sheet on Slide 12. Cash and cash equivalents at the end of the quarter were $837 million. Total debt and net debt increased from year-end, primarily reflecting the seasonal increase in accounts receivable. Free cash flow is shown on Slide 13. For the quarter, we used $637 million in free cash flow, driven by an increase in working capital of $449 million, which is consistent with the seasonality of the business. Additionally, cash flow from operating activities was the use of $389 million in cash. Rationalization payments of $106 million primarily reflect outflows made relating to the closure of our plant in Philippsburg, Germany, last year. Turning to Slide 14. The Americas reported segment operating income of $127 million or 7% to sales. The Americas was impacted by higher raw material costs, lower price/mix and the negative impact of lower volume. Price/mix declined driven by reduced mix as a result of lower consumer OE and commercial sales volume. Unit sales in the first quarter were 16.7 million tires, down 3% versus 2017. Our consumer replacement sell-in volume was down 3% while sellout was robust. OE consumer volume continued to be impacted by lower OEM production in the U.S. and was down 4%. Our commercial OE volume was up 12% in the quarter, marking the third consecutive quarter of double-digit growth. Commercial replacement industry demand continues to show strength in the U.S. Following our robust fourth quarter, commercial replacement volume was down 5%. We saw improvement as the quarter progressed and expect to see growth again in the coming quarters. Brazil's consumer OE volume was up 30%. We expect Brazil to continue to grow in volume and earnings throughout the year. The Americas' underlying business remains sound. Our team is focused on transitioning its supply chain as we look ahead. We continue to expect volume growth despite transition headwinds in the second quarter and for the remainder of the year in the region. Turning to Slide 15. Europe, Middle East and Africa generated segment operating income of $78 million in the quarter, down $23 million compared to the prior year. The decrease in SOI was driven by higher raw material costs, net of price/mix improvements and lower consumer OE volume. These headwinds were partially offset by lower SAG and conversion costs, driven by the closure of our manufacturing facility in Philippsburg and our continued focus on structural cost savings. Unit sales were 14.7 million in the first quarter, down about 5% from prior year. The volume decline mainly relates to the consumer OE business with unit volume down 16%, driven by decreases in less than 17-inch size fitment, as we continue to reduce our exposure to the smaller rim sizes. Replacement unit volume was down 2%, mainly in our consumer business, driven by lower industry demand. EMEA's 17-inch and larger rim size tires outperformed the market in all seasonal segments, winter, summer and all season, showing the broad-based strength of our product portfolio. With the difficult comparables from last year's robust growth, commercial truck replacement volume declined, which more than offset volume growth at OE. Our commercial volume is expected to improve beginning in the second quarter. Our fleet services model, Goodyear Proactive Solutions, enables our teams to take advantage of favorable industry trends. EMEA generated solid performance in a weak sell-in environment in the first quarter of 2018. EMEA is expecting significant growth in the coming quarters, driven by volume, mix improvement and continued focus on cost. Turning to Slide 16. Asia Pacific delivered segment operating income of $76 million. This increase in SOI was driven by the benefits related to higher volume and improved price/mix. These increases were partially offset by higher raw material costs. Asia Pacific's volume was 7.6 million units in the first quarter, up 4.5% from prior year. The growth was attributable to our consumer OE business where unit volume increased 7%, driven by robust growth in China. Our consumer replacement business was up 1% despite strong 8% growth in the prior year, driven by prebuy. With the solid performance of Asia Pacific in the first quarter, we remain excited and confident about the region's future. Our success in winning new OE fitments and expanding our retail network is expected to drive double-digit volume growth over the remainder of the year. Before I review our outlook, I wanted to cover a few items related to our planned investment in TireHub. First, we thought it might be useful to share some color on how to think about the way the temporary reduction in volume will flow through the SOI walk in the coming quarters. The bulk of this headwind will show up in volume. The best way to think about this is to apply our normal $22 per tire sales margin to the 1.5 million units in volume. In terms of cadence, we expect the majority of the volume headwind to occur in the second quarter, as we reposition units across the supply chain. Overhead absorption is the second part of the equation. A good rule of thumb is to work with the per unit metric of $12 to $15. Half of this headwind will fall in 2019 due to the timing of the production cuts. Goodyear will record its portion of the fair market value of the joint venture as an equity investment on its consolidated balance sheet. The company's share is expected to be valued at approximately $300 million. The carrying value of the underlying net assets is de minimis, so we expect to record a sizable, onetime noncash gain in the second quarter as a result of this transaction. The easiest way to think about this impact is the tax effect our share of the estimated fair market value of the joint venture. In addition to the growth opportunities offered by TireHub, we are excited about the ancillary benefits of the transaction. Most notably, the new entity should improve our visibility into the market and allow for closer ties between manufacturing and the wholesale channel. This will improve our demand planning capabilities and reduce volatility in the business. On Slide 17, we have shown our updated full year 2018 SOI drivers, inclusive of the projected impact of the TireHub transaction. We have lowered our volume outlook to 2% growth to reflect the impact of TireHub. For the second quarter, we see volume up about 4%, driven by gains in consumer and commercial replacement volumes across all regions as well as increases in global OE commercial volume. We continue to anticipate a positive impact on overhead absorption. However, we lowered our estimate to $55 million, primarily to account for the impact of TireHub. We expect the second quarter to be about flat. We continue to expect year-over-year pricing headwinds in 2018 in light of the adjustments we made late last year. Our highest price/mix last year occurred during the second and third quarters. And as a result, our strongest pricing comparables occur over the next 2 quarters. The strong momentum in 17-inch and greater rim sizes and an improving outlook for our consumer OE business gives us confidence in our expectations for mix in 2018. However, we have lowered our outlook for net price/mix versus raw materials to negative $25 million, and the adjustment reflects the move in spot prices of petroleum-sensitive inputs, particularly butadiene. For the second quarter, we see a net headwind of $65 million, split almost evenly between raw materials and price/mix. We continue to expect our cost-saving actions to exceed inflation by about $130 million in 2018. We estimate foreign currency translation to be up -- be about a $40 million positive impact, which is a $25 million improvement from our previous forecast. The other line represents a combined headwind from increased advertising, R&D, depreciation and incentive compensation. The updated outlook for these items combined is about $65 million, which is about $25 million better than our last forecast. However, we expect a $25 million headwind in the second quarter. On Slide 18, we have listed other financial assumptions for 2018, which remain unchanged. In total, we continue to target $1.8 billion to $1.9 billion in SOI in 2018, excluding approximately $40 million related to the TireHub transition. In the second quarter, we expect SOI to be down slightly, given that the majority of the transition is expected to occur over the next few months. Excluding this impact, our expectation would be an improvement in SOI for the second quarter. We anticipate substantial improvements in SOI in the second half, as our volume run rates improved, unabsorbed overhead begins to be a benefit, raw material costs become a tailwind and our pricing headwinds subside. Now we'll open the line up for your questions.

[Operator Instructions] We'll take our first question from Rod Lache with Deutsche Bank.

I had a couple of questions. One, just very high level. In North America, we're seeing a pretty wide divergence between the volumes being reported by the RMA, which were down, versus the non-RMA members, which were up. And similarly, in Europe, the bigger European players were down and the non-ETRMA were up. Can you just very quickly give us a gist of what's happening there?

Yes. Sure, Rod. I mean, I'd start by just saying our performance in that market was something that we were pretty pleased with in terms of overall and in terms of our 17-inch and above. So even in that backdrop, we feel like we're on strategy. If you bifurcate the 2, I think you're just seeing some of the continuation of the trends that we saw. I mean, you saw some of the rollback on some of the tariffs on Chinese tires in the U.S., so you see some of that volume coming back in. As you know, that's a market that's sort of ebbed and flowed with tariffs. But if -- when you cut through and we've done this in past quarters, sort of, the quarter-over-quarter movements of restocking of low-cost import tires, that market can distort those RMA or USTMA numbers. But in the long run, it's sort of that set of imports is in this market, it's been in this market, it's at the low end and it's not a market that we play in. So it's sort of just the machinations of what's happening with tariffs coming in. And in Europe, same thing. I mean, what happened -- as you remember when tariffs came on, we saw, first, tires that came to the U.S. go to Latin America. When Latin America currencies changed, got weaker, we saw those tires start coming into Eastern Europe where we were seeing low-end tires coming to places like Poland for EUR 22 a tire. That, too, is a trend that continues to take place. Those tires come in there. But again, that's really not the market that we play in, and the market that we play in is where the profitability is. It's where ultimately we're going to create value. And in those places, we did very well in the quarter.

Yes. It's really just that quarter-to-quarter volatility you see in those numbers, yes, exactly. Yes.

Okay. And I wanted to dive into TireHub a little bit with you. How should -- how are you or how should we be thinking about the risks that are associated with some of these distribution actions that you're taking? And I guess, I would imagine that you'd agree that some of these large independent wholesalers have pretty good relationships, distribution technology, they've got access to other brands. So do you anticipate that some of the 5 million units that you're shifting ultimately gets cannibalized? Do you believe that you have the same relationships with independents that they do? Is Bridgestone basically doing the same thing, which would make TireHub indispensable? How are you sort of thinking about, like the potential risks versus the upside?

Yes. I mean, Rod, I would tell you, our view straight away is that this is a positive, and it puts us in a better position to not only recapture, if you will, the disruption, the repositioning of volume, the disruption we're going to receive now, but it really puts us in a better position to grow going forward. And TireHub has the expertise in terms of the management of the entity itself as well as advocates of the Goodyear brand in there to go out and get that volume back as we move ahead. And I would say, hey, look, there is risk in everything, there is risk in standing still, there is risk in not doing it -- not doing anything. Our view is we're playing this business for the long term. What we want is an advocate of the Goodyear brand as part of our connected business model and as part of our strategy of aligned distribution. That's not new at all. This is really -- just think about this as a continuation or an evolution of that strategy going forward. And on balance, listen, I am -- I'm very positive and bullish and feel this is absolutely the right decision for us to go out and, again, not only recapture that volume but set us on a path to grow going forward in the near term. But as we've talked in the past, as we think about our business model going forward, consumers want tires, they want them now, they want it where they want them, they want it when they want them and having an aligned distribution network is vital to that. And this really, really enables us to deliver on that going forward. And Rod, I'm not -- go ahead. No, go ahead.

Yes. I'm just -- obviously, there's other tire companies that are going to be looking to fill the void with those national distributors. So I mean, do you think that, that is something that represents a valid risk for Goodyear? Do you think that this maybe makes the pricing dynamics somewhat more challenging through this transition? How does that -- or would you anticipate that ultimately TireHub is so indispensable that all those accounts will shift over to you?

Yes. I think, Rod, put it in the context of the value of the Goodyear brand, right? #1 share and the #1 visited brand online and the #1 demand brand when you're going into a retail store. So those entities value the Goodyear brand going in there and that, again, favors to what we're doing in TireHub. And I would say the dynamics of what you're talking about aren't something that's going to start being created with TireHub. Those dynamics exist already. This is actually a way to address those more proactively. So this is not something new. And remember, when you go into a retail store, you've got a demand brand that brings consumers into the store. #1 share, #1 brand awareness is the Goodyear brand. That's what retailers need. Obviously, those -- the consumers come in and dealers also look at, call it a mid-tier or profit brand that they want to sell. That's part of the switching process that goes on, and that's why we want to be closer to the customer, right? And this gets us closer to the dealer and the customer going forward. And then, third brand is that opening price point brand, and that goes back to your first question. Look, everyone has an opening price point brand because there is an opening price point customer. That's really not our market, but TireHub also will be able to service that going forward. So when you put all that together, what you're really saying is what's the consumer going to do when they go into that store, and having a main brand is what a -- excuse me, what a dealer wants, and that's exactly what TireHub is going to deliver to them.

And just lastly, just wanted to clarify the price/mix assumptions here. You did negative $16 million in the quarter. And I presume that, that included some positive mix, but more negative price and that's the net. Are you -- if I'm looking at your numbers correctly in your guidance, are you assuming basically that we have price kind of flattening out in the back half of the year? The positive is -- that you're anticipating in price/mix is essentially all mix?

Yes. Rod, I would tell you, as we look at the price/mix in Q1, mix was the bigger impact driving that, and that essentially was driven by 2 things: one, when you look at the Americas, we saw a little bit -- a calculation of that mix. As you know, it has a lot of moving parts. It has got product. It has country. It has consumer mix in it. And despite having really strong 17-inch and above growth, that mix calculation was a little bit offset by 2 things: one, it was weaker OE. And remember, our OE business index is about 80% to 17-inch and above. And as OE was weaker than consumer replacement in the Americas, that drove a little bit negative business mix, if you like, and we had a real strong Q4 in commercial tires, that was a little bit less volume coming in, in Q1 of '18. So you had a little of that business mix in there as well. So that's really what drove mix. And then in Europe, you had a tougher comp. Q1 2017, we sold in a lot of winter tires. We sold in a little bit less, as that focus was more in sellout this year. So that's what really had impacted our mix in the quarter. From a pricing standpoint, what we actually saw was certainly pricing stability in the U.S. and that's a real positive for us going forward.

It is.

We saw some incremental headwinds on pricing in summer in Europe. But particularly, in small rim, that's a really competitive market. So overall, we felt pretty good about pricing. And then, as you look out to Q2, Q3, remember, those were, particularly Q2, when we had some of our highest prices last year in view of that 20%, nearly $1 billion of higher raw material costs that we saw that we put our price/mix or price out in the marketplace to go address. So overall, think about prices in the market's been relatively stable, and mix was a little bit of a headwind, but we think that, that mix is going to improve in the second half, particularly on 17-inch and above sellout that we're seeing is really strong. We mentioned those numbers on the call. 20% retail growth and outperformed the industry in Europe and North America. And Rod, remember, we've got pretty easy comps if you look at Q2 -- excuse me, in Q3 of last year. So that's kind of how we're looking at them.

Yes. And just to be clear, Rich, because exactly -- but the first thing that Rod said, just the price/mix negative in the first quarter of about $16 million is driven by mix as negative for the reasons you said, just to reiterate. Yes.

Yes. Yes. No, exactly.

Next, we'll move to Ashik Kurian with Jefferies.

So I mean, I just wanted to follow up with -- from the question that Rod asked. Just in terms of the recent change in distribution. Is this something that you expect other players in the industry to follow because I think what surprised us intriguing a lot of people is the like of Michelin and Bridgestone seemingly are quite keen to go ahead with the big national distributors. So the concern is, of course, as to what is the risk to your volumes and in -- over the last couple of days, we've had one announcement. But is there -- I mean, what's generally been the response from both the retailers and wholesalers? And also, do you expect more of the big players to follow suit?

So Ashik, we obviously can't and won't speak to what our competitors are doing. I would just look -- have you look to the announcements that they've made. The one -- the obvious one is TireHub is actually a joint venture with Bridgestone Americas. So there is a -- that's a pretty apparent one, as I say that. And secondly, one of our other competitors in the market announced their own distribution retail joint venture or entity a couple of months back or whatever it was. So that's something for you to ask them more than you ask us. But I point to those 2 things for you. And in terms of response, I think the key to response from our dealers, I mean, this is obviously new news, and we're communicating with them, and I suspect you read those. But the essence of this is really getting closer to the consumer and helping those dealers service those consumers as a part of an aligned distribution network that we've been talking about fairly consistently in our connected business model. And the key to that is creating the dynamics and the pull to bring consumers into tire dealer stores, not only the traditional way through walking in the front door but also through e-commerce and digital and other ways that consumers ultimately are going to shop and experience the installation of tires. That's what's ultimately driving how we're going to interact with the consumer out there. And I would say the dealers certainly understand that, and the Goodyear brand is what is the key to making this work.

Right. Exactly. And just to add, right, as you said it, right, day 1, the Bridgestone-Goodyear joint venture, right, is the contribution of our both of our legacy locations, right, and the business that goes with that, okay? And we do, subject to regulatory approvals, expect that to close or be complete in June likely.

Can I just ask a follow-up on the interesting chart you've shown in Slide 7 and Slide 8 regarding the sales through the different channels. Now I -- it's very clear that the sales through the wholesale channel has been weaker, but how should we think about this being a pure reflection of what the consumer demand is because again -- or how much of the wholesale -- how much has the wholesale channel in the end ended up impacting the retail demand? Because I think, eventual goal would be with this switch or with being able to control your wholesale channel that you effectively see a change in the end market or retail demand. So how should we think about this having an impact on the retail demand?

No. Ashik, it's a good question. And really, it's the essence of the chart that we're showing. Remember that, that green line, we named the customer-facing channel. And just to refresh your memory, everyone's memory, is customer-facing is think about that as our company-owned stores, the big retailers we sell to and the big box are those that are actually close to the consumer, and that's where we have a direct feel on working with them and, certainly, influencing them at the counter in how they shop. And remember, last year, when we had our volume decrease, that primarily came in the wholesale channel. Our consumer-facing channels were actually pretty good. They actually were at market, and, in some cases, above. So when you see that divergence of the blue and the green, I think you rightly point out that in that wholesale channel, it's evidence of not being as close to the consumer and it's evidence of the switching that goes on as you look at how the tire ultimately gets to the consumer. So if you think about TireHub and you think about our strategy of aligned distribution and aligned retail, it's about getting closer to the customer, which is about moving closer, moving the blue line, if you will, upper to -- up closer to the green line. Does that make sense?

Yes. And just an accounting question. When will the revenues be recognized when you sell a tire to TireHub? Does it get recognized when you sell it to TireHub? Or when TireHub sells it to the retailer?

Yes.

Yes. So when you sell -- when Goodyear parent company sells the tire to TireHub, that's when we recognize the revenue, right? And then at the end of the day, 50% of the net income of the joint venture then is recorded in the Americas' segment.

And we'll take our next question from Anthony Deem with Longbow Research.

So I just wanted to ask a couple of questions here. On TireHub, it's my understanding incentive programs aren't changing with your customers. And I'm wondering, do you view this shift to more captive distribution as helping your cause just longer term when it comes to pricing leverage in the channel? Or really just to ask it another way longer term, is this a material price/mix dynamic as you gain greater control over the inventory and maybe as the shift to more of the company-owned distribution continues?

Yes. I mean, listen, the whole essence of this is driving growth, and as our strategy roadmap says, driving sustainable revenue and profit growth. And that's exactly what this does. And as we get closer to the consumer, our ability to drive volume and our ability to drive a positive price/mix is exactly the essence of what we're trying to do as we think about the business going forward. So no doubt that that's one of the things that is inherent in moving toward a TireHub.

Okay. And if I may ask, how much volume do you currently sell through ACT's network? And did the 1.5 million unit volume impact from the transition include the discontinuation of that national wholesaler?

Yes. Yes, it does. So if you think about us -- maybe think about the 1.5 million units coming in 2 parts, right, the timing gap between when we start this repositioning, we said we're repositioning 10 million tires, right? That includes our wholesalers, right, as we go. And then there is the carrying -- the inventory drawdown, I guess, I described, as the manufacturers can carry less inventory than a TireHub, I'm sorry, than a wholesaler would because of our connections back to the factory. So that is considered in the 1.5 million. It is primarily an impact in terms of sales margin on the second quarter, as we move through that transition.

Okay. Then just a last question for me. Second quarter price/mix versus raw material outlook of negative $65 million. It was mentioned partially related to a difficult price compare. And you're expecting around $100 million headwind on price/mix in the second quarter is what I'm backing into. Third quarter is a difficult comp, too, as you mentioned, Laura. But fourth quarter is actually pretty tough, too. So I'm just wondering cadence-wise, is the price/mix growth in the second half mostly fourth quarter weighted based on your current guidance?

Sure. So maybe to think about the price/mix, right, and as you said price/mix versus raws guide of a negative $65 million or so in the second quarter, that is a lot -- about half driven by raw materials, right? We still have a pretty -- a decent-sized headwind in the second quarter, which then becomes more of a tailwind, as we move for raws into the second half of the year. Now the mix really is a move from the second to the third quarter, and it's pretty even over the 2 quarters as we go. And again, think about the comps year-over-year and what was going on in the environment last year, okay? So fourth quarter isn't, I guess, I'd say to an answer to your question, back -- a big hockey stick, okay?

And next, we'll take our question from Armintas Sinkevicius with Morgan Stanley.

When we think about the tires, the reason we're quite constructive on the industry is we're quite bullish on miles driven and the growth that's coming from there. And ultimately, we just think there's just going to be stronger demand for tires. But when we look at the results herein -- and so that's the long-term basis, but as we look at the short term and what's going on today, there's been some challenges, and I think it's more than just sort of Goodyear-specific. It seems like the industry has been a bit soft in U.S. As you pointed out, you outperformed the industry. But can you talk about sort of bridging between the short-term challenges that we're seeing on the tires, what's going on there? And how we end up bridging to sort of the long-term view?

Yes. So I'll start out. Laura can certainly jump in here. But I think if we go back, we got to look back into 2017 a bit. And one of the things that we saw was a weaker-than-expected OE. And I always go back to that third quarter where we saw one of our major U.S. customers cut production, U.S. production by about 25%. And the SAAR was good, but production was way down. And remember, that put a lot of OE tires back into the replacement markets. So there is some of that cyclicality that we had to work our way through. Now having said that, we look at VMT, the trends are still good. I think it was down a bit in February, but the trends are still good. If we look at the consumers' balance sheet, as we look at wages, we look at all that, what we still see is a very robust environment going forward. And I would tell you the sign that makes a lot of sense to us, even though we saw, again, a weaker industry in Q1, what we did see was very strong sellout in our channels for sure in our business and we saw some destocking going on both in some big boxes and by some wholesalers, maybe that was rumors of TireHub and people taking decisions, I don't know. But a strong sellout and a weak sell-in means that restocking has to take place. So I can't give you the particular time of it. But again, there's nothing fundamentally that we would see in the industry that would say that trend won't ultimately bring its -- bring that volume back into the market. In fact, it should be ready for it in the U.S., and that's -- I think, what I would tell you. Maybe if I'd add one more thing that weak OE, remember that also at the same time we have the height of raw material costs coming in as well. So that, sort of, I think had an impact on the business that maybe tells you that there is a little bit more difficulty in the industry at the moment. But look, that will work its way through.

Yes. And if you look at the VMT, really for, I think, January and February is out now and look at it by region, certainly, I hate to keep saying it, but weather was an impact especially in the Midwest, where that really drove the VMT being so, kind of, lethargic in the first quarter. So exactly -- and that sellout that Rich talked about and we saw in the first quarter of the product is great. That means better sell-in as we go. And even to date through April, that still feels really good on the sellout front.

Yes, volumes are good in April. We have solid volumes in April. So that's a positive sign, obviously.

And just one other one. Share buyback seemed a bit light this quarter, particularly when we think about where the stock price has been in the recent months since the last quarter. Just can you talk to us about how you're thinking about share buybacks? And how we can think about that going forward?

Sure. So definitely, in the second quarter, you'll see an increase from what we did in the first quarter. Kind of consistent with what we've done in the last couple of years, our cash flow is very back-half loaded, and we historically purchased more of our shares in the back half. But again, we always are opportunistic. As I said, we expect the second quarter to be higher than the first quarter. We still have almost $800 million remaining on our authorization at this point. So again, we're very committed to our direct returns to shareholders, both through the dividend and the share repurchases.

Next, we'll move to Itay Michaeli with Citi.

Maybe just to continue on that thought. Laura, on free cash flow for the full year, can you give us any updated thoughts? I think in the last quarter when we spoke you thought maybe you could maybe double it, I think, this year versus the last year. I know Q1 was a little bit worse year-over-year by about $80 million. Any puts and takes updates to the thinking on free cash flow?

Yes. It's -- our thoughts are really no different than they were before. Like you said, the first quarter really has some timing issues in it, higher rationalization payments, that's really related to the Philippsburg, Germany, closure last year and the timing of when those cash payments are hit. And then second, another timing issue on interest payments versus expense. But again, all -- that's all included in how we see it. All the other drivers are listed in the presentation that we gave. So no real change to how we feel about cash -- free cash flow in 2018.

Sure. And then on the SOI guidance, I think, I heard correctly, Laura, you mentioned about $40 million impact from TireHub. So is it fair to say that maybe you were tracking or are tracking towards the lower end of that $1.8 billion to $1.9 billion? If so, maybe let's walk through the puts and takes of what can go right, what can go wrong in terms of the guidance, particularly now in the second half of the year?

Okay. So again, we see about $40 million from TireHub. We have the range of $1.8 billion to $1.9 billion. I think as we look at all the drivers, we've taken into consideration the 1.5 million units, as we think about our volume outlook for the year. And again, we're working to hope that doesn't all happen, but that is already taken into consideration in the volume guide. And then again, as Rich talked about, that it's just -- if you think back to what occurred last year in the volume as we worked through price and mix and especially the second and third quarters, there's fairly easy comps, right, both on the volume side and on the unabsorbed overhead side. But again, as Rich said, we've stabilized. We understand where the pricing -- price/mix is in the market. The U.S. is very stable in that environment. You saw us in the first quarter, especially in greater than 17-inch, grow volumes. We feel good about that in Europe as well. So those feel very tight for us, right, as we go into the second half of the year. Cost savings versus inflation, running well, $38 million in the first quarter. So we feel confident in that, some benefit from FX. And then just things like in others, right, we've been able to continue to see our other tire businesses, less SLP start-up costs as we get to the second half of the year. So we feel confident in the outlook that we provided and reasons to believe in all the moving parts as we go.

And Itay, I'd add one thing to Laura's comment. I mean, I think we demonstrated last year our commitment, as we have over time our commitment to offsetting raw materials with price and mix. That's -- that is what we're committed to. And like I said, I think we've been consistent in that. But as we look at this, we look at the choppy demands that we've seen in Europe and the U.S. over the last 4 to 5 quarters. And we look at the heightened volatility that we've seen in the commodity markets over the past, say, 15 months. As we look at this, we've taken a conservative view that we're not going to have the opportunity to immediately recover a significant portion of those added cost pressures in pricing. And I think that's the conservative thing to do. That's how we talked to you last quarter. That's how we're thinking about it this last quarter with respect to an incremental $50 million in raw material headwinds. Now I'm going to tell you that that's how we're thinking about this. I can also tell you and, again, I apologize if I'm a broken record, but this team fundamentally believes that we can and will offset the impacts of raw materials with price/mix over time. That's our track record, and I'll state that that's the commitment that we have to it now as we look ahead.

That's very helpful. And let me, I think, one last maybe it's a long-term strategic question, Rich. I know you talked about you're preparing for a future of autonomous vehicles and fleets. But if we think about a market where let's say you do have a number of a large robo-taxi AV fleets in major cities, is that not at some level potentially takeaway from the aftermarket channel let's say if cars on the road in that city go down and move it more to an OEM channel as a fleet purchase and will that not potentially be a mix headwind in the context of autonomous vehicles?

So I think the one thing, Itay, that we'd all agree, I think the question is absolutely the right one. I think the one thing we agree on that it's a bit of a TBD in terms of how it develops. This is all playing its way out going forward, and it's why we're taking these and you'll see other strategic moves that allow us to be able to take advantage of that market as we go forward, as it evolves. Now as we look at it, I made the comment in my script, we're going to see a shift that's undeniable of personal car ownership decreasing in favor of shared mobility. And you can look at even things like number of licenses being issued for 16 to 18-year-olds over the past 20 years, and you'll see -- you probably know, you'll see a significant decrease. So the trend is coming. The question is how we play for it. And I think it's evolving. I mean, robo-taxis is probably the entry point to it to get you to point A to point B. And that market is going to be a bit like the taxicab market that we have today. That's probably not going to be the value-generating market for all of us. It could be a really interesting -- I think it will be an interesting learning bed for us to understand how that works. But the model of servicing fleets and mobility down the road is something that we're spending a lot of time thinking about and with some of those companies doing that on really not just figuring out how to participate but also helping them shape it as we go forward. That's how we're thinking about it. And I personally think it will be a very profitable market going forward, but it's going to be very different. And again, as you know, that's not tomorrow. That's a way down the road. But it's things that we need to start preparing for right now. And if I can shift back to TireHub, that's really part of thinking how we can get the tires to where they need to be, when they need to be given the size and type proliferation for what's going to be an evolving consumer that we have today, who like all of us, want things when they want them, where they want them, not necessarily the way they bought them 30 years ago. And it's going to be thinking about how we service a fleet down the road and being able to make sure we got the infrastructure to support them.

We'll take our next question from Emmanuel Rosner with Guggenheim.

So first question on TireHub, again. So I understand from your point of view the benefits you expect from this transaction and structure. I'm just curious about the timing. I guess, why now? What has changed? It seems like some of those headwinds on the wholesale channel have been going on for years as you show in your slide. So I guess, why now?

Yes. I think, Emmanuel, it's a fair question. But as you can imagine, we've been working on this transaction with Bridgestone for over a year. It's not a transaction that just happened very shortly. We have to reposition, as Laura said, about 10 million units, and that's a lot, right? That creates a lot of complexity as we move ahead. And to your point, as we think about relationships, relationships change over time. I mean, we had an aligned distribution network that worked very well for many years. And over time, that relationship changes. And those charts that we referred to on Page 7 and 8 give you an indication, right? I mean, I talk a lot about aligned retail and aligned distribution, and that means that opportunistic wholesale buy low, sell high. And then, influencing what goes into the marketplace based on purchase price and putting that out on the shelf is not a situation where ultimately it's aligned with what we want to do. Alignment is when we both win together. And that's something that's really important to us as we move ahead. So relationships change, priorities change. And that's why we're doing this. But certainly, it wasn't a move that is something that just happens overnight.

Yes. Exactly.

Okay. That's good color. And then sir, one question on volume, please. The -- your first quarter volume clearly played out weaker than you had expected and you explained why. But I noticed you maintained the volume growth's assumption for the full year excluding the impact from TireHub. So what gives you sort of confidence on the -- the volume will be so strong on an underlying basis for the next 9 months?

Yes. I think a couple of things. And if I go back and maybe give a bit of context, we talked about what happened in Q1, but contextually, I would say and I said this before, the Q1 sell-in isn't really reflective -- we don't believe is reflective of the underlying demand in the marketplace. Again, we saw that significant sellout happening and some destocking going on, which points toward more volume coming back in the later part in the year. And then secondly, we haven't talked about it much, but we had a bit of an odd dynamic in Europe, right? We had sort of 2 things moving in different directions. One is winter went on forever and people delayed putting summer tires on and dealers sold more winter tires. The positive of that is winter stocks went down, and that should mean for a more robust sell-in as we look into back half of the year. Having said that, summer inventories are high right now, and I think you're starting to see that change over summer to winter in Europe. And hopefully, that's going to make its way through. But if we look at it, think about what gives us confidence, the destocking, the weaker comps that we have in Q2 and Q3 and, particularly, of last year. We see that strong sellout going on, and we have that good mix in there. And we also see improved OE volumes in Europe. I mean, most of our volume miss year-over-year in Europe this year was in the OE channel, and that's going to improve as we move ahead. Remember, part of that was getting out of the Philippsburg in the low-rim diameter, smaller rim diameter tires. So you'll see that improve over time. So that gets us to what we guided toward a 2% growth. And Ashik (sic) [ Emmanuel ] 2% growth off the -- what 159 million.

Emmanuel, yes.

I'm sorry, excuse me, Emmanuel, what we -- 2% growth on the 159 million units we sold last year is very doable for us.

Yes.

Great. And then the very final housekeeping question. So below the lines, below the SOI line, there were a bunch of expenses that were quite a bit lower than your full year guidance would suggest. That included like corporate, other, I think it was just $17 million interest expense, which was less than the quarter of what you're guiding for the full year. Other expense, which was also much less. Like, were there any sort of like timing benefits in the quarter? Anything that sort of like would reverse in the next few quarters?

Yes. So no doubt, the first quarter, the one -- really, I would answer your question with how you did, right? It is timing. The one is on the lower, as in first quarter, it's lower incentive comp, which reflects the accruals for those long-term plans, right, like our 3-year plans and so on.

And we'll take our final question from David Tamberrino with Goldman Sachs.

I think you guys outlined last week you're expecting $80 million to $100 million in benefits from the TireHub transaction. Can you just kind of walk me through? Does it mean for the 10 million tires, you're just expecting another $8 to $10 per tire? Or are there some other benefits that are being rolled up into that total?

I think, David, broadly speaking, we're talking about breaking it into few pieces and Laura can jump in. But we're talking about really versus '18 getting back the 1.5 million units that we're adjusting for, which we're going to work to minimize, but getting that back. And then on top of that, what you're looking at to get to that $80 million to $100 million is incremental synergies that we have and some white space or some growth in their organic growth that you're going to see in that market as well. So that's really versus '18. Again, I would tell you that that's very doable. But what it doesn't bake in is the future beyond that. Hey, what are the growth opportunities that we're building in here? What are the mix opportunities that we're building in? That's still upside for us. What we're saying as we look out over the course of '19 and '20 is what's the impact of getting this thing up and running? And that's going to be getting the volume, getting the synergies and a little bit of growth. But the upside is really on business model structure and how we're positioned to grow for the future.

Got it. But there's an incremental margin that you should be capturing that's not going through the wholesale channel anymore. I'm trying to figure out how much that is, $5 per tire?

Yes, part of that's the cost synergies. And again, part of that's going to be in the better mix, better price/mix as we move ahead. Yes, that's what gets you from the $40 million up to the $80 million to $100 million. The $40 million, meaning the [ 1.5 million ] recap and then up to the $80 million to $100 million.

Okay, I'll follow up with Christina on that. And then post the shift to TireHub, what percentage in the company's distribution is going to be "aligned?" And what percentage are you targeting longer term? Like, are you -- after you transition all this volume, are you exactly where you want to be? Or is there more to go?

Yes, I would say, look, as we look at this, we talked about an aligned distribution network, and as we said, we always wanted a national distribution network supported by aligned regional networks, and that's essentially what we have right now. The volume we have is going to be repositioned to TireHub, and the volume is going to go to our aligned regional distributors. And that's -- I think that's a model that works well for us. If you look at our overall business and put TireHub in, the customer-facing channels directly will now represent about, call it, 75% of our business, and the remaining aligned regional wholesalers will represent round about 25% of the business going forward.

Got it. So that point, it sounds as if you're probably 100% of where you want to be. Is that what I'm hearing?

Yes. David, you're -- our aligned regional distributors are integral. They always have been, they always will be to our strategy. They can serve -- if you look at the map and, obviously, we're not going to get into that. But as you look at the map, they cover certain -- they have covered certain areas. They have done so strategically. And in many cases, they can do that better than anyone else because of their customer relationships and because of their alignment with the Goodyear model. So yes, I'd say we feel like we're in a pretty good position, or we will be as we move ahead. Okay, I think that wraps this up. And again, just want to reconfirm or just to say again, we're very positive on moving forward with TireHub for many of the reasons that I went through. And again, we continue to target our $1.8 billion to $1.9 billion segment operating income for 2018. Again, excluding the impact of the $40 million from TireHub, our expectation would be that we're going to see improvements in SOI for the second quarter. We anticipate that the substantial improvements that we're going to see in SOI in the second half as our volume run rates improve, as our unabsorbed overhead begins to benefit that and as raw material costs become a tailwind rather than the headwind they've been and, certainly, pricing headwinds subside. So we remain committed to that $1.8 billion to $1.9 billion, excluding the impact of TireHub. So thank you, everyone, for joining us today. As usual, we appreciate it.

Thank you. That does conclude today's conference. You may disconnect and have a great day.