The Goodyear Tire & Rubber Company (GT) Q2 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 Second Quarter 2018 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] I will now hand the program over to Christina Zamarro, Goodyear's Vice President of FP&A and Investor Relations.

Thank you, Tony, and thank you, everyone, for joining us for Goodyear's second quarter 2018 earnings call. I’m joined here today by Rich Kramer, Chairman and Chief Executive 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 slide presentation. And with that, I'll now turn the call over to Rich.

Thank you, Christina, and good morning, everyone. Today, I’ll take you through our business and Christina will do a brief review of the financials and the outlook before leaving plenty of time for your questions. In the second quarter, segment operating income totaled $324 million and segment operating income margin was over 8%. I’m very pleased with the operational performance that the teams collectively turned in across the globe. We increased our global shipments by over 4% on a year-over-year basis. This performance exceeded our forecast despite unexpected challenges from a national transportation strike in Brazil and softening market conditions in China. We generated strong volume growth in our mature markets as we regain share, particularly in the more profitable 17 inch and greater rim sizes in the U.S. and Europe. We dramatically outperformed the industry growth in these targeted segments, which allowed us to deliver on our price mix during the quarter. I’m also very pleased to report that TireHub is performing exceptionally well out of the gate and our shipments in the wholesale channel are running ahead of our transition plans. Goodyear’s customer base has demonstrated their loyalty to our brand and I’m very confident on our ability to execute going forward. TireHub’s best-in-class service model, together with the added supply from our new state of the art production facility in Americas will enhance value for our retail and our fleet customers. Production in our new plant is on target to meet our 2020 objective of delivering 6 million high value tires and capital and start-up costs are tracking under budget. We are well ahead of planned production releases and have secured wins for new high technology OE fitments. We expect to double our production to $6 million units next year, which is tracking in-line with our IRR objective of about 20% or 100 million of SOI in 2019. We’ll begin to see tailwinds in our segment operating income in the second half of this year as plan startup costs dissipate. The output from the state of the art plan will enable us to meet the strong and growing market demand for high value-added consumer tires in the Americas and will reduce our cost base going forward. The underlying strength in our core operations allowed us to mitigate some of the unexpected macro headwinds that began emerging in the second quarter, including high raw material prices, a strong U.S. dollar and softening market conditions in China. I will touch on each of these dynamics in more detail when discussing our outlook for the remainder of the year. Turning to Slide 6, I’ll cover the U.S. industry environment during the quarter. Overall, industry sell-in demand was up 4% in the quarter, while USTMA members were down 1%. Our U.S. consumer replacement volume was up 2%, which includes a significant impact related to the transition from ATD the TireHub. Now adjusting for this transitory volume, our U.S. shipments increased 8%. We saw industry growth in 17 inch and larger segment at 7%, and we grew share in this segment significantly outperforming the market during the quarter. Excluding transition volume, our growth was almost 20% in the larger rim size segment of the market. Now in addition, sell-out of Goodyear products remained very robust in the quarter as we have now seen back-to-back quarters of mid-single-digit growth in sell-out demand. Our U.S. commercial operations also delivered solid results during the period. Our commercial OE volume was up 21%, and commercial replacement volume was relatively flat. With Class A truck orders hitting record highs and strong freight trends in North America we feel good about the outlook for our commercial truck business. I’ll also note that we’re making incremental adjustments to increase supply out of our U.S. footprint. Now, I’d like to draw your attention to Slide 7, which shows the relative strength of our U.S. consumer replacement business, excluding our former national distributor versus the industry since 2014. We consistently outperform in the market until early 2017 when our momentum was impacted by our relative pricing actions during a period of high volatile raw material costs. Having recalibrated our pricing in the marketplace towards the end of last year, you can see we have re-established our momentum in the first half of 2018. The performance clearly illustrates the power of our brand and products when we are aligned with customers and consumers who value our brand and services in the marketplace. Turning to Slide 8. I’d like to take a moment to briefly discuss the import trends in the U.S. consumer market. Non-member imports are generally focused on the opening price point segment of the market, which has historically been around 20% to 25%. And as the chart shows their share has remained in the narrow range over the past five years. This low margin segment is not the portion of the market that we focus on. So, non-member performance does not significantly impact our volume or change the way we think of our pricing or our go to market strategy. Additionally, when non-member imports fall, the void is quickly filled by member imports, ultimately keeping the underlying supply demand dynamics in this segment of the market, essentially unchanged over time. We believe the stronger shipments from non-members since the beginning of the year reflect a combination of factors, including tariff reductions for several Chinese tire producers and pre-buy activity, due to the possibility of new tariffs rather than an enhanced value proposition. In short, non-member imports are not threatening our long-term earnings power. Turning to Slide 9, our EMEA business delivered outstanding volume performance during the quarter. The European industry increased 4% in total and ETRMA Members were slightly better. In comparison, our consumer replacement volume was up over 10% and increased 30% in the 17 inch and greater rim sizes. EMEA's commercial business also turned in a great performance, which included strong volume in both replacement and OE channels. OE volume rose 10% versus last year. Replacement shipments increased 26%, reflecting the strength of our fleet services model and Goodyear proactive solutions, which enabled our teams to take advantage of favorable industry trends. Looking ahead, we expect to continue to see robust growth in EMEA across our commercial and consumer replacement businesses in the coming quarters. Channel inventory for winter tires is very healthy following the first quarter sell-through. Our winter orders are off to a strong start and well ahead of the levels we had at this time last year. Our winter value proposition is a key strength in EMEA and we're looking forward to a strong sell-in this season. As we closed the first half of the year, I’m very pleased with our performance in our major markets. The improving industry fundamentals in the U.S. and Europe during the second quarter when combined with our share gains and the second straight quarter of mid-single-digit sell-out growth in the U.S. will drive our volume and mix gains in these regions for the remainder of the year. Now turning to Slide 10. I’ll provide more context around the macro environment for the remainder of the year. While our execution in the period was very robust. These headwinds are intensifying, including rising raw material costs, a strong U.S. dollar and softening market conditions in China. In total, these headwinds will have an impact of about $260 million on our business in the second half of the year. As a result, we’re reducing our 2018 segment operating income outlook to 1.450 billion to 1.5 billion. While these exogenous factors are outside of our control, we’ve adjusted our plans accordingly to mitigate the impact of these challenges over the intermediate-term and remain confident in our ability to deliver on our 2020 strategic plan. Now beginning with commodity markets, the chart on Slide 11 summarizes the raw material cost pressures that we’ve experienced in the spot market since the end of April. Most notably, in higher prices for oil-based derivatives. We estimate that raw materials will be a headwind of approximately 190 million in 2018 or significantly higher than our previous forecast. This increase includes the transactional component of foreign currency in our raw materials as we buy U.S. dollar-based inputs in local currencies around the world. We believe the underlying price strength and the effected commodities reflects the improving global economy, general inflationary pressures, and strengthening industry fundamentals. The environment feels very different than last year when we saw a sharp increase in commodity prices that very quickly moderated. The increases that we're seeing today are more like what we’ve seen in the past. And we’ve demonstrated our long-standing commitment to offset raw material headwinds with corresponding pricing actions in our markets. Although the timing of those actions has been subject to industry and market conditions, we remain confident in our facility to recover the value of our products in the marketplace over time. During the second quarter, we may made targeted adjustments in some of our markets, especially where we’ve seen rapid devaluations in response to these headwinds. In our mature markets, we’ve seen largely stable pricing throughout the first half of 2018, despite the choppy demand trends we’ve seen over the past several quarters and our own share gains. Our revised outlook is a conservative view of the next several months and does not include significant incremental pricing actions in our mature markets. However, we have a demonstrated history of offsetting raw material inflation over time and we continue to believe that the pricing environment in 2017 was an anomaly. We remain committed to offsetting these headwinds in our business over time. Going forward, we will continue to offer a compelling value proposition with new products for our customers and consumers that will win in the marketplace, staying disciplined in this challenging environment will position us well as we continue to grow our volume. Moving on to the currency markets. The chart on Slide 12 illustrates the unfavorable moves in the exchange rates that we have the greatest exposure to, including the Euro, the Brazilian real, the Chinese yuan and the Turkish lira. In that environment. In that environment, we expect incremental foreign currency headwinds. This is the current data and as you know currency will continue to ebb and flow as we move ahead. Now turning to Slide 13, I’ll cover the operating backdrop in China. Most notably, we're seeing the tightening credit environment impact consumer OE and replacement demand. The most pronounced impact of the reduced liquidity in the markets has been weaker orders from our distributors in the consumer replacement market. Credit availability is also impacting sources of capital for new vehicle purchases, especially in smaller cities and among younger buyers. This is contributing to slower than expected OE growth in the country. Now in addition, one of our largest OE customers cut its second-half forecast to us by almost 40% in June. We have successfully navigated through transitory credit tightening cycles before in China, most recently in the middle of 2015. To that end we’re encouraged by some of the recent stimulus in the economy. More importantly, the near-term deceleration in the market does not alter our intermediate view of the opportunity. The car parc [ph] is growing rapidly and we're building out our retail network to support pull-through into the replacement market. Additionally, EVs in China are expected to grow exponentially through 2020, which plays into our strength and contributes to our positive intermediate term outlook. In Q2, we continued to win EV fitments with both traditional OEs and new entrants illustrating our ability to capture the benefits of the strong EV momentum in the country. In short, China offers a tremendous long-term growth opportunity despite the recent slowdown and we continue to prudently invest to meet that projected demand. While the past several quarters have been marked by an unusual amount of volatility, we are running our business for the long-term. As we move forward, we will not lose our unwavering commitment to our strategy of pursuing growth in the industry's most attractive market segments, while ensuring that we capture the full value of our connected business model. This philosophy guides our decision-making process as we invest and develop strategy and capabilities to thrive in the emerging new mobility ecosystem and prepare for the shift in our customer base with the rise of AV and EV fleets of the future. Now recently, we extended our worldwide innovation network to include Mcity, the University of Michigan-led public-private partnership to advance connected and automated vehicles and technologies. Access to this facility will allow us to accelerate the development of intelligent tires and the application sensors. This will help ensure we are a driving force in managing the connection of tires to the road to vehicles and ultimately to consumers. Now, I’d like to turn the call over to Christina.

Thank you, Rich, and good morning everyone. As Rich covered the business units in some detail, I will focus my comments on the of quarterly financials and our outlook. Turning to the income statement on Slide 16, our unit volume was up 4% in the period relative to the prior, driven by strong growth in EMEA. Second quarter sales were $3.8 billion, 4% increase from a year ago, due to strong volume and improved price mix. Segment operating income was 324 million for the quarter. After adjusting for certain significant items, our earnings per share were $0.62. The step chart on Slide 17 walk second quarter 2017 segment operating income to this year's performance. Higher volume had a positive impact of 35 million, partially offset by 6 million in unabsorbed overhead. The combined headwind from increased raw material costs and lower price mix total 73 million for the quarter. The lower price mix reflects the annualization of last year's price reduction, which were partially offset by strong growth in mix. Revenue per tire, excluding currency was flat year-over-year. On a sequential basis, price was stable both in total and for each individual business unit. Cost savings actions delivered a net benefit of $33 million in the quarter. Other was a headwind of 34 million, and $9 million higher than we had guided for the quarter. Several miscellaneous and a few non-recurring items accounted for that difference. Turning to the balance sheet on Slide 18, cash and cash equivalents at the end of the quarter were 975 million, inventories decreased 8% from a year ago, due to lower raw material costs, fewer units on hand, and foreign currency translation. Net debt decreased 15 million from the prior quarter. Cash flow from operating activities is shown on Slide 19 and total 305 million for the quarter, up from 101 million in 2017. The stronger performance, primarily reflects the benefit of lower raw material costs in inventory. Slide 23 outlines our updated outlook for the full-year SOI drivers inclusive of the projected impact of the TireHub transaction. As it stands today, we are running about 500,000 units better than we expected given the orderly wind down we’ve had thus far with ATD. We have lowered our volume outlook to 1% to 1.5% growth to reflect softening market conditions in China, which we partially offset with incremental volume as we expand TireHubs products portfolio. For the third quarter, we see volume up about 3%, driven by gains in consumer in the Americas and EMEA. We continue to anticipate a positive impact on overhead absorption. However, we reduced our estimate to $45 million to account for the impact of our revised growth forecast for China. We expected $15 million tailwind in the third quarter following higher Q2 production of 1.4 million units, excluding the new Americas plant. We have lowered our outlook for net price mix versus raw materials to negative 165 million. The adjustment reflects the raw material cost pressures we detailed earlier, inclusive of the impact of transactional foreign currency and reduced mix in China. We expect to partially offset these costs with benefits from our announced emerging markets pricing actions during the second half of this year. For the third quarter, we see a net price mix versus raw material tailwind of 15 million, driven by lower raw material. We now expect our cost savings actions to exceed inflation by approximately 115 million in 2018. This forecast is 15 million, lower than our previous guidance, based on our recent decision to retool two plants in the U.S. to increase commercial truck tire capacity given the strong momentum in the industry. Given the timing of this investment, we expect net cost savings to be neutral in the third quarter. We estimate foreign currency translation will be about a $30 million headwind, which represents a $70 million unfavorable swing from our previous forecast. On Slide 28, we provided a rule of thumb for the impact that changes in key exchange rates have on our segment operating income on both the transactional and translational basis. We also included a table that will allow you to quickly assess the annualized impact of a range of scenarios moving forward. The other line represents a combined headwind from increased advertising R&D and depreciation. The updated outlook for these items combined is about 90 million, which is approximately 25 million higher than our last forecast. We expect a $20 million headwind in the third quarter. On Slide 24, we have listed other financial assumptions for 2018. Working capital investments are now expected to total 150 million, up 50 million from our previous forecast. We also lowered our capital expenditures by 100 million to better align our CapEx with market conditions. In total, we are targeting 1.45 billion to 1.50 billion in SOI in 2018, including the impact of the TireHub transition. We expect the year-over-year growth in both the third and the fourth quarters. We’ve given you some very specific direction for third quarter operating income drivers, which resulted in Q4 SOI of about 475 million to 500 million, which is a very strong run rate as we exit the year. Our fourth quarter volume assumption is reasonable. We have pricing built in for actions we've already taken in the market. We expect overhead recovery based on how we're running the plant this quarter. And given the time lag in our P&L, our raw material costs are largely determined. As such, we have a high level of confidence in our fourth quarter view. Now, we’ll open the line for your questions.

Great, thank you. [Operator Instructions] We’ll take our first question from Itay Michaeli with Citi. Please go ahead. Your line is open.

Good morning, Itay.

Good morning everyone. So, let just ask a first question on, just a little bit more what color on the price mix outlook for the rest of the year, particularly with the negative mix effect in China, and how that plays into some of the pricing actions you took, I think Rich you mentioned there is some conservatism as well in some of these assumptions, and I love to get a little more detail on that as well.

Yes, Itay, so maybe I’ll maybe just take a step back and give you kind of a view of how we're thinking about price mix overall, and I’d say really favorably, you know what we’ve seen is industry pricing in our key markets have really been pretty firm in Q2 compared to Q1. And this is pretty consistent with what you’re seeing in the PPI index. If anything, we're seeing a little bit better than that in the U.S. market. So, a lot of stability, more stability let’s say than we have seen in the past and remember that’s in an environment where we're seeing significant volume increase as well. So, we actually feel pretty good about that as we look forward. Now, relative to China you saw our volume essentially coming out that or roundabout 1.6 million tires coming out driven primarily by the tightening credit environment that we’ve seen there, which we see is transitory and not permanent, but because of that we’ll reduce our mix. So, the mix reduction that you see through the balance of the year is essentially just the volume from China coming out and it is like I said, we expect that to come back given the nature of the growth opportunities in China. And you know, Itay your question on price I think for the balance of the year is a good one. I mean, as you look at our outlook as I said in my remarks, what we’ve only included in the outlook is essentially the pricing that’s in the market to date. And we haven't baked in any future things that may happen, although as we said and will continue to commit to our goal and we believe we have a demonstrated history of being able to offset raw materials with price and mix. So, we didn’t bake that in. That’s a little bit different and if you look at the range we actually have a little bit of question in there as we think about what might happen. Itay, I’ll also tell you just from a pricing in the marketplace to date, look, we haven't sat still. We put price increase in our commercial truck business in North America up to about 4% in July. Remember there we have tight volume, demand is strong, and we got a great business, a great value proposition there. We’ve actually done something similar in Europe where we have proactive solutions. Again, supply demand equation is favorable. We put price increases in the marketplace about 3%, and of course when we look at our emerging markets we’ve put pricing in place to offset the impact of the valuations in addition to the raw material increases and in there in places like Argentina, we’ve put increases to offset deval in the range of 30%, obviously that’s related to the deval not just raw materials, but also in places like Brazil, a great market for us, we put pricing increases in places well. So, clearly, it’s on our mind and that’s an indication of our demonstrated commitment to make sure we’re recovering the value of our product.

That’s very helpful. And maybe assuming out a little bit more, you know, I mean given the challenges, obviously guidance came down again, although it sounds like based on your comments you’re confident in the fourth quarter, what’s your level of confidence given in today's conditions for SOI growth broadly beyond 2018, maybe you could also touch upon the 2020 outlook and what’s changing, maybe some of these recent challenges in China, you know what’s not changing? Maybe just comment a bit about that.

Itay, good question. I’ll go back to your first point on outlook for 2020. I would say, I remain very confident in our ability to hit our numbers and if I take a step back, couple of things that I would point to and I think you will find crossover to how we're thinking about the balance of the year, as well as how we're thinking about 2020, as you think about 2020, maybe the first thing to say is remember only two quarters into the plant. So, there is – a lot can happen. We’ve seen some headwinds, but we can also get some tailwinds as we look after 2020 as well. But I think if you look at it, the industry is actually, the demand trends in the industry are actually at an inflection point, growth trends are a bit of an inflection point upward, particularly in Europe and North America and that comes after really four straight quarters of pretty anemic or lackluster growth last year. In that environment, we’re executing very well. We’ve realigned our prices, you have seen the volume numbers that we have executed against 4%, overall. 9% in Europe, 12% in consumer replacement, 30% in 17 inch and above, North America adjusted 17 inch and above is up 20%. So, we’re executing well as we got our prices, our value proposition, our prices back in-line. So that’s a big positive, we’re gaining share obviously in that environment and because of the growth in 17 inch and above, our mix is very strong. We had good mix performance in the quarter and we expect that to continue as we go out to the balance of the year, say for the adjustment for China, and Itay I would tell you, as we look at sell-out trends what we’ve seen is now multiple quarters of sell-out trends in the mid-single digits now and that’s regaining our momentum as we move ahead. If you add all that up and you think about 2020, our fourth-quarter run rate it was mentioned in the call, if you do the math, you’ll come out to a run rate of about 500 million and again if we do simple math 500 million exit run rate of 2018 [ph] gets you to about 2 billion next year. Okay, quarters have some seasonality to it, but remember you have to add to that 500 million, the benefit of TireHub coming back will be a little bit less then we’ve said because we – our headwinds was actually a little bit less, but 65, call it 80 million of benefit there. We’ve got SLP coming in that’s about another 100 million benefits as we get that plan up and running. That’s on schedule, actually a little bit ahead of schedule, and as I mentioned we haven't baked any future adjustments to price as we go forward. So, if you add all that up, I feel pretty confident about where we’re headed for the balance of 2018 and then on to the 2020 plan.

That's helpful, and if I can just sneak in two last quick ones. One, maybe just talk broadly about the company's performance in under 17-inch diameter tires and kind of your outlook for that market? And secondly, on the 17 [ph] million China impact on second half, could you just share a bit more detail around that because it’s a pretty small part of the overall business globally, so it just seems like a fairly large number just given the overall size of the business, so if you can just talk a bit more about that as well.

Yes, Itay the Asia story I think is really – it is candidly fairly straightforward, and again, we take a long-term view about Asia and what’s happened in China. And what we’ve seen is primarily a result of a tightening credit environment and that was the main thing that had an impact on our replacement in OE volumes. In replacement, the impact comes from less liquidity for our distributors as their liquidity reduces, they buy fewer tires from us. It’s really as simple as that and what we’ve done by the way to deal with that is we’ve had some lower purchases, we’ve gone out as you expect to sign new distributors to make sure we’re represented at retail locations and out there for consumers. Now, we say it’s transitory because as you know, we’ve already seen that China Central Bank cut reserve rates by 50 basis points that you know is said to add about another 100 billion of lending capability in the market. We’ve also seen that they’ve added further liquidity through their open market operation. We’ve read that’s up to about another 75 billion. So, what we see is that stimulus coming back into the economy. That will improve new car sales, which will improve our OE business as we go forward. So, those are – that tightening credit is really the impact, and the impact it has had on OE. I’ll also say that as we think about that, we’ve been here before. I mean, I’ve seen this in 2011 and most recently in 2015. We know how to work through this. What our analysis says between when stimulus starts coming back out it takes sort of about two quarters before that starts to take root to sort of get back to the run rate levels. And I just remind you that on a consumer replacement market China is still about 95 million tires and you compare that to about 240 million markets in Europe and North America. So, we got lots of room to go there. So, okay, but that’s how I think about, and look, 17-inch and below, I think, this is a common question we get and I would tell you, I just want to remind everyone, our below 17-inch business that we have and retained is actually profitable business. It’s got a positive ROIC return and remember the 17-inch and below when we think about that, think more 16, maybe even little 15-inch, not 14-inch, 13-inch. We’re out of that business that’s declined. The 16-inch business that we have in mature markets for example is part of a product screen that our customers want. If you think about the biggest segment of the market being sort of that sedan or commuter touring market it has the biggest part of the car parked, there is a lot of 16-inch tires out there. For instance, we just put out our new Goodyear WeatherReady. As we go to a dealer to sell those tires that dealer wants a product screen that has 80 or 100 plus sizes as they go forward with that screen. We have to have a 16-inch tire available for them in a Goodyear WeatherReady. And let me tell you, that’s the tire that we still make very good margins on, and while we know that market by size is decreasing with time, it’s still a very good market for us as we look ahead. So, don't think of anything below 17-inch is bad business, there is really good business in there as well.

That’s very helpful. Thank you so much.

Thank you.

Thank you. And our next question comes from Ashik Kurian with Jefferies. Please go ahead. Your line is open.

Hello, Ashik. Nice to hear from you. Hope you’re doing well.

Thank you. So, just a couple of questions. I mean, first one is, I mean you mentioned the impact from the TireHub transition has been better than expected, just keen to know what you are seeing on the retail side with this number. ATV said they are still selling out of their inventory of Goodyear Tire. So, is it that may be Q2 wasn’t the quarter that we should have seen disruption and may be down the line is that a risk that once ATD is done selling out of the inventory, how prepared are you to meet and fill in all the gaps that would be left? That’s the first question.

Sure. So, Ashik, I will start with your last point, I would say we feel absolutely very capable and ready to fill in the gaps with TireHub and with the regionally aligned distributors as well. So, I can say that unequivocally there could be a little transition impacts as we go ahead. That’s in the guidance that we gave, but we feel very well prepared to do that. So, going back to where you started, I would say, TireHub is working really ahead of our expectations, ahead of the guidance that we put. The volume impact is less than the amount that we said we’d estimate in the quarter. It’s about 0.5 million units or about $10 million to $15 million impact. That’s less than sort of what we guided before. And that’s because what we're going through is an orderly transition from our national distributor over to TireHub and I'm very, very pleased with the performance side of the gate, with the transition, the transition the teams going through, and how we’re servicing our customers, and our customers are really demonstrating the loyalty of their commitment to Goodyear and the Goodyear brand and we’re able to get those tires to them. Now, I’d also remind everyone, as part of the transition as we're moving away from our national distributor, remember much of what the national distributor delivers on behalf of Goodyear are delivering tires to customers that might be national accounts or that are Goodyear customers that they are delivering for delivery commission as well. So, as we go through an orderly winddown as those tires are ordered, I would say that orderly winddown is taking place and where the demand is up, given the volumes that you’ve seen in our business, the demand for those deliveries has also increased and as part of that orderly transition I think that’s what you're seeing why that volume is what it is. Now, as we move forward, I would say that the impact is probably not 1.5 million tires, but 1 million tires now. We said it guided to 1.5 million. We’re performing better by half. So, say it is 1 million to go. The bulk of the risk we would say is still in Q3 as we go forward. Certainly, we could have some bumps in the road, but I would say, we're progressing ahead of plan and we feel very prepared to service our customers and we’re seeing very good take-up from those customers, we're not seeing any dislocations – any significant dislocations at this time.

Thank you. The second question is on pricing, if I understood you correctly, you said the current SOI guidance is basically based on no further pricing action in the second half, now given, I mean when you look across all the tires makes, everyone is banking on second half volume recovery. Just keen to give your confidence on as long as markets remains in its current levels, you know how credible is it to assume that in the market we will not see any further pricing actions in the second half? And then a follow-up to that is, in 2017, you tried to be disciplined on your pricing for as long as you could, but it started to have a significant impact on your market share. This time around, for example if there were to be adverse pricing actions in the market in the second half, would your priorities be slightly different, at least on the short-term basis would you be willing to recapture some of the lost market share or is that a risk that – there could be risk to your volumes if you choose to not making make any further pricing actions in the second half?

So, Ashik I think maybe the best place to start is just from an industry perspective and to say maybe the risk of being repetitive, what we're seeing so far is really pretty firm pricing in the marketplace as we’ve seen strong volumes out there. And if I look at the industry, again I say the industry demand trends are really inflecting a bit upwards, okay, not huge, but in our mature markets the industries are looking pretty good after what we referred to as a really different market last year where we had, as I said pretty lackluster growth. So, I think the industry is safe for what we're seeing in China. This is pretty good. So, I think that has to be woven into the nature of the question. Now, secondly, I’ll say that we have an unwavering commitment and a need to create returns here. And to create returns means that through both our cost actions and recovering of the cost for product in the marketplace. So, we have a commitment, a demonstrated commitment over time to go back and recover those raw materials with price and mix. And I can unequivocally tell you, that hasn’t changed. What I’ll also tell you is, we made price alignment – pricing alignment decisions from last year sort of coming out of third quarter and you are seeing the take-up in the marketplace. You're seeing the core demand for our products. So, we know the demand is there. So, as we look to the second half of the year and look at various scenarios. One of which, you said, if there are other actions that would put pressure on volume, I would tell you that we know how to manage through those situations. Going back to what we did last year is not something that we would certainly do without a lot of thought, but I would also tell you, this year is a lot different than last year and may be that’s the last point I’ll make. Remember, last year what we saw was high volatile raw material so we had a peak and then coming off that peak in a relatively short period of time. Feels a lot different today because what we see today is, raw material sort of going up gradually, more like they did if we go back to beginning part of the decade where we saw raw materials increasing over time. That’s what this feels like and that I think perhaps warrants or merits a different approach than dealing with the volatility we saw in 2017.

And lastly, slightly a big picture question, I mean, just to put things into a bit of perspective, I mean your share prices, I mean at the levels they are currently or SOI is likely to be at the same level in 2019, if not lower in 2018, and I believe there is very little optimism out there in the market on your 2020 plans. Is there anything much more significantly structural that you think needs to be done and would it be better to maybe step away from the 2020 plan and for example is there more restructuring to be done or do you have to expand your retail presence because it feels like being caught on to this 2020 plan, it’s impending the sentiment on the shares, I'm just wondering whether you’ve given this some thought as to given where you share price is, there is probably not much price than for the 2020 plan. Anyways, you know maybe you can expand your strategic freedom to take a more wholesale change to the business model.

So, Ashik, it is clearly a fair question because certainly I don't believe that we're getting credit in the marketplace for the underlying strength of the business in terms of where the stock is valued today. Having said that, I certainly take your point, I’ll go back to what I said, I feel pretty good about the run rate of the business and the changes that we’ve made. I’ll start there. If you look at the volume performance, the mix performance and the things we control, we’ve made, I’m very pleased with the progress that we’ve made. If we look at the headwinds, essentially the guide down is essentially increased raw materials, it’s FX and it’s China. Raw materials and FX, we can't do anything. We can't control what those levels are. As I said, we have a commitment to offset raw material and price mix and we believe that we can do that our time, particularly as we’re faced with a different situation of increasing raws now out into probably a longer period of time than we saw in 2017. FX, you know FX can work for us or against us, and then China again, I would say is transitory. We expect that to change and we expect that to go back to the growth trends that we have. So, when I look out to 2020, I don't feel fundamentally that our plan is flawed. Now, what I will tell you is that we have a history of it and we will continue to be very aggressive on cost and we will be very aggressive in terms of dealing with our supply capacity and our cost structure. We demonstrated that by taking Philippsburg factory out about a year ago, and we’re always looking at restructuring opportunities through a bottoms-up analysis of requirements versus the capacities that we have out there. We have nothing that we’re announcing today, but you can be sure that that’s an analysis that we do with sort of our D&A as opposed to – related to simply a current market circumstance.

Thanks a lot, Rich.

Thank you, Ashik.

Great, thank you. Next, we’ll move to Armintas Sinkevicius with Morgan Stanley. Please go ahead, your line is open.

Good morning.

Good morning. Thank you for taking the question.

Sure.

Two actually, one is, you lowered the guidance for 2018 and yet you reiterate the guidance for 2020, you know I can appreciate that you view these trends as transitory and you're not really impacting the long-term outlook of the business, but I'm just curious why reiterate the guidance when you’ve had a challenging time with near-term guidance? Given the guidance for 2018, I think investors are going to discount the guidance around 2020, and frankly some of the investors that we talked to would really like to get involved with the stock, but you know I have a hard time with estimate achievability. So just curious about, how you're thinking about setting and sticking to guidance over the long-term when we’ve had challenges here in the near term?

No, listen, it’s a fair question and I’ll start by saying, my job is you would expect us to manage the business for the long-term, and that’s what we're doing and that’s what we think about every day and the fact that we have these headwinds around higher raw materials and FX and the like, are things that we have to deal with, but it can't sort of obfuscate our view of where we have to take the business over the long-term. That’s primary responsibility of what we ultimately have to do. And look, we haven't delivered on all the estimates because of these headwinds and we’re responsible for that and take responsibility for that going forward. And the best way that we’re going to demonstrate that is by delivering, and I think Q2 core business performance is a good indication of the earnings power of the business and the execution of what the team is doing in terms of what we can control. And finally, I’d just say, as we think about looking out to 2020, we talked a bit about looking at the run rate of the business coming out of the fourth quarter. Remember what we said, we're going to have, we have a significant volume about a 3% volume increase in Q3, have a little volume increase in Q4, you can kind of get there if you look at full-year versus what we guided in Q3, but we’ve got better overhead absorption. We’ve got price mix at that time expected to be about flat in the guide that we have. So, as we come out of that, you can get yourself to about a $500 million run rate. To your point, we got to deliver that and that’s what we're focused on every day. Once you do that, you can get yourself back to the low end of the guide at 2 billion. Again, by sort of analyzing that, take something off for seasonality, but then go back to the benefit of TireHub and go back to the benefit of a new factory coming in place, and put execution on that and of course you can get yourself back numerically to wear that 2020 plan is. So, we're not against it and we’re not giving up on it. And I don't think I size, before – I sized TireHub at about 60 million to 80 million. SLP, when we get our 6 million units up in 2019, will be worth about $100 million. So that’s a significant tailwind for us as well.

Okay. And then just on the fourth quarter guide, I think the math makes a lot of sense on a year-over-year basis, but how do I think about it sequentially? Going from something in the 300 million range to the 500 million range it’s almost a 50% increase quarter-over-quarter, just trying to think through getting comfortable with that trajectory?

Yes. So, I’ll jump in. I mean, [indiscernible] prize at the end of the third quarter in 2017 that was a part of our price realignment. And so, the headwind in price fall off at the end of the third quarter, and so we have a nice tailwind in price coming into Q4, which is something very different than what we’ve seen in the SOI walk up until now, and as Rich detailed some of the pricing actions, like commercial vehicles in the U.S. and Europe and some of the emerging markets, those pricing actions are already announced and installed in the markets. That’s the benefit of price that we see in Q4. We don't have a comp issue there. So, price goes up. The mix comps are also relatively easy based on the performance last year in the business where we had a lot of OE drag in 2017, and then, you given you the – pretty much how to back into the volume expectation. You get to about 0.5% volume increase in Q4, which I view is very reasonable.

And these are year-over-year dynamics, right? Or are there sequential?

Well, the pricing comment is sequential.

Okay. Thank you.

Thank you.

Thank you. Next, we’ll move to David Tamberrino with Goldman Sachs. Please go ahead, your line is open.

Hi David.

Hi Rich. I wanted to talk about China, and I was wondering if you could help me break down the 70 million headwind into the buckets of volume price mix an overhead absorption?

Well, if I break it down the volume, we estimated about [1.6 million] in terms of volume and I would say about 75% of that going forward is OE, and that OE piece really comes from some of the OE production cuts that we saw. We mentioned a few of those or mentioned one of those on the call. They have been fairly significant. That’s about a sort of a 20% forward downgrade of where we thought we were on OE volumes. The other 25% would be in replacement and that just makes our growth run rate a little bit less. And then in terms of mix, the mix changes that you see is essentially all driven by that volume and we get a little bit of overhead absorption impact from that as well. So, those are really the changes that you see on the walks, well, will be from a mix perspective is all going to be from China.

Dave, I will jump in and tell you, you can use our normal rules of thumb on sales margin for $22, the mix ideas of 2015 and overhead, we usually point to $10 to $12 per tire, may be a little bit pushed into 2019.

Okay. And the reason I want to understand this is, it is about 600 million and 700 million of revenue in China, 28% of Asia market, so, does that imply that you're going to be unprofitable within China for the back half of the year?

Oh no. I mean David, our business in China is very good business, it is a very good SOI percentage. So, not at all will we lose money in China. No, it is – like I said, it is a very good business for us. It’s high mix, very good OE business, good replacement pool, all Goodyear branded, lots of 17 inch and above, and as I mentioned, these sort of transitory issues called credit or whatever, they happen in China, it does not at all deter the opportunities that we see in China, nor the return on investments we get from the investments we make, but I point out maybe to one of the points you’re making. Look, if volume has to come down, we calibrated our CapEx, we took CapEx down by about $100 million, a lot of that is going to be some of the expansions that we had in China. So, we’re making a reaction to it in a way that we think is very prudent, but not sort of taking away the upside we have over the long-term.

Okay. Coming back to the U.S. market, you're talking about the outperformance for your 17-inch, are you back above your market share from where you were, call it in 2016, given the market share loses in 2017, is there still room to get your share back up higher?

We’re pretty close Dave. And the second part of the question, absolutely there is room to get our share up higher as we go, but there is a lot of pluses and minuses in our numbers as you are looking at the Americas number. What you see is, the Brazil headwind that we had in there, about 300,000 unit, you have TireHub in there. If you just distil it down to consumer replacement in the U.S. I would refer you to Slide 7 in the deck and what you can see is, that we’re gaining share and we’re back to sort of the run rates that we had prior to what happened in 2017 and that’s supported by the significant volumes increases that we’ve seen in the U.S. So, we’re getting back to where we were in 2016 and absolutely we believe there is room to grow.

Got it. And then, lot of questions on the pricing dynamic forecast. I'm just curious, with what happened last year, will Goodyear be the first actor on pricing in the back half of this year?

David, we will manage our business with our commitment to make sure that we address high raw material cost with price and mix and you know the particulars of that are part of how we manage the business. So, that’s probably what I can say at this point. But I’ll certainly reaffirm our commitment to make sure that we’re offsetting raw materials with price and mix over time.

Alright. Thanks for taking the questions.

Thank you.

Thank you. Next, we’ll move to John Healy with Northcoast Research. Please go ahead. Your line is open.

Good morning, John.

Good morning, Rich. Clearly this isn’t your first rodeo with pricing and raw cost. So, I want to get a little bit more historical perspective. When you see kind of these, what you call more normal kind of creep in terms of raw material prices, can you remind us kind of historically how long you wait for those prices to creep up before you have seen the market react with a price increase? And obviously there is a lag in terms of how it hits your P&L and we can – you kind of forecast that, but if these raws do hit in the fourth quarter, which they will, when would you normally see price actions in the market and you call the pricing environment firm, but have you seen any of your competitors, you know maybe initiate any kind of more what you call replacement type price increases in the market yet?

Yes. So, John, really good questions and I hope, since it is not my first rodeo you are not telling me I am getting old, but look, I have seen them before, you are absolutely right, and maybe I will start with your last question, but virtue of industry pricing as I said being firm or stable, I think that speaks to the environment out there and I think that is where I will leave it. I think you can see, you can talk to competitors on your own or do your own test in terms of what’s happening in the marketplace, but we are seeing pretty stable pricing in the marketplace. The question of how much it takes over time, I actually think about this back in the context when we saw natural rubber go from, you know let’s say $0.60 a pound, $2.65 a pound. And I don’t have the quarters memorized, although maybe I should, but what you saw is, early on – you can go back to our transcripts. Then we said that we will offset raw material across with price mix over time because it takes a while to get in there, whether it is RMIs that we have, indices that we have with certain customers out there, whether it's certain market conditions, whether it's pricing books that are out there that are already in place before raw material costs start to increase or before raw material cost start to hit your P&L. So, timing is sort of a function of a lot of those elements and then you to underly that by a consistent or a consistency of increase or a consistency of view that raw materials are going higher. We’ve said for a long period of time we believe in this industry raw material price will go up. We are seeing that trend happen right now. So, this is again, akin to what we saw before and I would say it took maybe we can go back and actually map that out. It took quarters before that ultimately got in place to get the price and mix decisions put into the market that offset raw material, but it did take quarters, it did not happen in a quarter. And then what happened as, if you go back historically, as raw material prices continue to rise and rise rapidly, I think there was an ability to get to address those cost increases quicker than it was when they initially started to rise. What I would say now is, probably the market, the industry is seeing raw material cost initially start to rise. So, we’re back toward how do we get those over time as opposed to getting in immediately. That’s probably the analysis that I would give you.

Great. That’s helpful. And, I wanted to ask about your view on the OE business for 2019. Every now and then, you'll see a cross-report of a manufacturer getting on a certain OE vehicle for next year. I was just kind of curious of your initial thoughts on your market share for 2019 vehicles, and maybe the visibility you have into 2020, both in U.S. and in Europe, how you feel you're faring in terms of winning fitments and opportunity over the next two years?

Actually, we feel very good about it. If we dissect it a bit in the U.S., what you are seeing is that retooling from Sedans over to SUVs, light truck and CUVs. And remember, we have number one share in OE in the U.S. So, really, we feel really pretty good about that switch and about the move to larger rim diameter, even light truck tires, Wrangler tires or large rim diameter Assurance or Eagle tires. So, that's going pretty good and we're winning – I’m very pleased with the win rates that we have in the U.S. If I can go to China first before Europe, you know one of the areas that we’re winning in a very constructive way is with a lot of EV fitments in China. There's a lot of growth, a lot of manufacturers there, and our win rate there both with western transplants, as well as domestic Chinese OEMs, is something that I feel really good about and it’s giving us the opportunity to continue to hone our product for the EV market. And then in Europe, we said in Q1, you saw a fairly significant decrease in volume in OE in Q1. We said it would moderate. It did moderate in Q2. We did exit a lot of low rim size diameter OE fitments over the past few years. So, what we're doing now is we're building that back and going out and winning the OE fitments with our European car manufacturers and getting a better and building a better book of business going forward. And I say that's what we're in process of doing right now, and I feel pretty good about that, both within Europe and then some of the global platforms coming out of Europe that will help the other regions as well.

Okay. Thank you, guys.

Thank you.

Thank you. Our next question comes from Emmanuel Rosner with Guggenheim. Please go ahead. Your line is open.

Hello Emmanuel.

Good morning, everybody. Hi, good morning. So, just wanted to come back again on China because I'm still a little bit confused. I mean, I think the China represented maybe 5% of your revenues last year. And so, I'm still not clear how this could have such a large impact on this year's segment operating income and what it means for the underlying profitability of the China operations over the rest of the year.

Well, Emmanuel, we don't really go through our – China's profitability on a standalone basis, but I think the simple way to think about it is, if you look at a volume reduction in the back half of the year of about 1.6 million tires and you put on the numbers Christina gave you for mix or for overhead recoveries, and you can get to a – get to that impact fairly quickly. And remember, that 70 million, I think, that we sized at is a headwind for us, but it's not something that takes us to not making money in China to be clear. And it's something that we don't view as permanent in nature. It's just a transitory issue. So, I said, we've dealt with it before and we'll do with it again. And the Chinese government actions certainly are pointed in the right direction to help moderate it.

And just in terms of the transitory issues, I think you mentioned a few things. There were sort of the distributors and sort of the tight credit environment, but also, I think some OE schedule, which I think, was a big part of it. So, can you just go back over both pieces like it's – I could see how the credit could be transitory, but is there anything going on with sort of like the OE business?

Yes. So again – and there's probably other information that could give you even more detail than I can, but what we see historically happen in China is, as the credit markets, let's say, get a little bit frothy, whether it's direct or through some of the shadow credit markets, it gets a little bit extended and then we see sort of a tightening of that or getting it back to some what might call normalized levels. Our distributors – entrepreneurs, our distributors take advantage of the credit markets in China. They take advantage of the liquidity to help them grow their business, which generally is a good thing as they try to take advantage of the growth markets in China. What happens from time to time is you see that as those credit markets tighten, their liquidity decreases as their liquidity decreases, they focus on selling their inventory and turning more to cash to pay off some of the financings that they had, which means they can essentially buy fewer tires from us. That's a bit what we're feeling right now in the marketplace, and we know how to manage through that. And what I mean by that is, going and just dropping price and trying to flog tires to put in their inventory is not good because what happens when you do that is those tires just get turned to cash by those distributors trying to manage their liquidity, which in turn negatively impacts pricing in the marketplace. So, we're managing that by managing supply and demand as opposed to just putting extra tires in the marketplace. The same issue with liquidity impacts new car sales as well. As liquidity decreases, car sales decrease, particularly amongst younger buyers. As that happens, I think you just see the demands go down, and of course, that just waterfalls to the number of tires that we sell to them. And Emmanuel, I'd say I'm being very high level. Of course, each OE has, in many cases, different things going on and some of those have particular impacts to our volume. So, I'm being a little bit higher level in sort of painting it all in one brush, but I think it's a pretty good macro view of what's happening there.

Thanks. And then just finally on the TireHub. So, appreciate the comments on how things are off to a better start and expect them to be on the supply side. Do you have any sort of like early read into dealer satisfaction, so I guess in terms of your customers? There was some survey, I think, in tire business a couple of weeks or so ago suggesting that a decent chunk were either not so happy with the initial service or had to change suppliers. So, any sort of like early metrics on the satisfaction on the demand side?

Emmanuel, the best metric I have is, we don't have any defection or loss of a customer of any significant magnitude at all. And I think that's the best metric that I can give you. Our customers are sticking with us. When there is transitory things going on and a dealer has to go through some changes in how they manage their business, there's always going to be questions around how they do it. I think our teams, both from a Goodyear perspective and a TireHub perspective, have done just an excellent job in managing that transition. And I think that's why I come back and say, we really haven't had any customer issues with them. So, I'm very [indiscernible]. Okay.

Thank you.

Thank you. And at this time, I'll turn the call back over to our speakers for any closing comments or remarks.

Good. I just want to thank everyone for their attention and participation today, and we appreciate you listening. And obviously, we'll be happy to answer any more questions as we move to the future. We're committed to our plan. And hopefully, that's what you understood today as well. Thank you.

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