The Goodyear Tire & Rubber Company (GT) Q3 2018 Earnings Report, Transcript and Summary

Good morning. My name is Keith, and I'll be your conference operator today. At this time, I'd like to welcome everyone to Goodyear's Third 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. Please go ahead.

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

Thank you Christina, and good morning, everyone. Before beginning my remarks, I'd like to welcome back Darren Wells who recently rejoined the company as our Chief Financial Officer. For those of you who are unfamiliar with Darren, during his prior time with Goodyear, he was instrumental in the development of our turnaround strategy during the mid- 2000s and was the architect of several of our major capital structure decisions. He also served as a leader of our email operations and helped to bring stability to the business. Throughout his tenure, Darren has experienced several business cycles and can add valuable perspectives as we work our way through the current environment. With his deep knowledge of Goodyear, the tire industry and its familiarity with many of our analysts and investors, it goes without saying that we're very excited to have Darren back on the team. Welcome Darren. In the third quarter, segment operating income totaled $362 million and segment operating margin was more than 9%. Our global tire shipments increased by 2% on a year-over-year basis, driven by the significant gains in the Americas and EMEA. Globally despite significant headwinds in China, we grew both our consumer and commercial volumes led by our consumer replacement and commercial OE businesses. During the quarter, we continued to improve the operating performance in our key mature markets, driven by the benefits of strong mixed trends, and solid volume growth. Our teams delivered outstanding growth in the premium segments of the US and European consumer replacement channels. These gains contributed to improving momentum in our two largest regions as EMEA delivered operating income growth of more than 20%, and the Americas turned in its best year-over-year performance since 2016. We're pleased to see that our total operating performance was relatively stable in a period of increasing volatility. The issues that began to emerge in the second quarter have persisted into the fourth quarter, including a stronger US dollar and deteriorating market conditions in China. In addition, newly enacted emission standards in Europe, growing economic volatility in Latin America, and a changing global trade environment have added incremental challenges for the overall industry. While these factors have a near-term impact on our results, the headwinds do not traject from our value proposition in the market or the continued execution of our long-term strategy. Our teams are delivering on improvements in volume and mix in our mature markets, while continuing to build on our capabilities to expand our opportunities for growth. With the strength of our products, our people, our brand and our focus on business model innovation, the current environment does not change my perspective on the longer-term trajectory of our business in the new mobility ecosystem. Turning to Slide 4. I'll cover the performance of the Americas as well as the industry conditions in the region. US consumer replacement industry selling demand was up 5% in the quarter representing an acceleration versus the first half of the year. In comparison, our US consumer replacement volume was up 11% and higher than the second quarter when our shipments increased 8% after adjusting for the significant impact related to the transition from ATD to Tire-Hub. Our transition to Tire-Hub is progressing smoothly and Tire-Hub's daily sales and delivery rates continue to increase steadily. We're pleased with the team's execution and dedication to this strategic initiative. Industry growth in the 17 -inch in larger segments came in at 9% in the quarter. And once again, we grew share in this important segment outperforming the market by over 2.5x. Goodyear's sellout volume or consumers buying at retail was up 5% in the US. We have now seen three straight quarters of mid-single digit growth and sellout demand which is a testament to the quality and value of our products. The strong retail demand has improved inventory turns in the channel leaving wholesale inventory of Goodyear branded products with our distributors in excellent shape. Just this month, Goodyear's assurance weather-ready reached yet another important milestone more than one million tire sold. This latest achievement comes just a few weeks after the tire was ranked number one among consumers in the Grand Touring all season category. In addition, last week a leading consumer magazine ranked the Goodyear's assurance CS Fuel Max the highest among SUV all season tires. This is great news and again a testament to the quality of our products. The strength of our product portfolio in combination with the lean channel inventory should enable us to capitalize on our plans to drive a richer mix and improve value proposition going forward. Our U.S. commercial operations continue to leverage the strong freight environment including record setting ISA truck orders; our commercial only volume was up more than 30% in the quarter. Commercial replacement volume was down slightly partially reflecting the strong OE performance and some transitory ramp up inefficiencies in our U.S. plants. Overall, we continue to have a constructive outlook for our U.S. commercial truck business as the drivers of the industry demand remain robust, including ton miles utilization rates and spot rates. While industry conditions improved in North America, growing economic and political volatility in Latin America contributed to a more challenging backdrop in the region. These dynamics have notable impact on our performance in Brazil, which accounts for a significant portion of our operations in Latin America. Our total shipments in Brazil fell 2% in the third quarter reversing the trends seen through the first six months of the year, when volume increased in the mid-single-digit range. We saw deterioration in both our consumer and commercial businesses reflecting lost economic momentum in the wake of the national transportation strike weakness in the Riyal and uncertainty surrounding the presidential elections. While the replacement market is softening our consumer OE business in Brazil grew 10% during the quarter as we've continued to grow our share with new platforms particularly in the 17-inch and greater segment. Additionally, as we have completed the modernization of our American and Brazil plan, we have expanded our OE business with more manufacturers to capture growth in the coming years as the Brazilian and Latin America economies improve. Turning now to Slide 6, our EMEA business delivered solid performance during the quarter aided by improving industry conditions. The European consumer replacement industry grew 2% with ETR and main members outperforming. In comparison, our consumer replacement volume was double the growth rate of the overall industry. Our share gains in the 17-inch and greater category continued in the third quarter as we delivered 12% growth, 200 basis points ahead of the industry. EMEA's commercial truck operations delivered robust results across the board. OE volume rose 14% versus last year, replacement shipments increased 5% reflecting the strength of our fleet services model and favorable industry conditions. We feel good about our relative position versus the industry during the final months of the year given our strong performance and this year's third party winter and all season tire test. Our successes include the Good Year Vector IV seasons, which earned podium finishes in all six tests this year including three first place finishes. In addition our winter tires continue to be highly recognized by leading European tire magazines and the market place as we grew share during the third quarter in this important segment. Now clearly the unpredictable winter weather will affect buying patterns. Regardless, we are confident our award winning winter products will position us to win in the market place. Lastly, I'd like to acknowledge a significant win by our OE team in the region. Audi selected the Eagle F1 Asymmetric 3 SUV for the e-tron; it's first fully electric SUV. These tires use Goodyear's sound comfort technology which effectively reduces the interior vehicle noise by 50%. Being fitted onto the Audi e-tron is a testament to the work of our technology and engineering teams, the work that they're doing to improve handling while reducing rolling resistance and noise levels. The great job by that team. Now turning to Slide 7, I'll cover Asia Pacific performance and provide an update on operating conditions in China. Asia Pacific shipments fell 4% as declines in China more than offset growth across the other countries in the region. We're not seeing any substantial signs that suggest industry conditions in China are likely to improve in the near term. OE customers continue to ratchet it down their production forecast and response the softening end market demand and elevated inventory levels. In September, passenger and commercial vehicle sales declined 12% and 8% respectively. While the magnitudes of these declines are significant, ROE business in China is tracking in line with the view we expressed on our second quarter call. At that time we consciously made the decision to plan for a very difficult OE environment in the second half of the year based on our analysis of market conditions. This turned out to be the correct decision and allowed us to take some offsetting actions ahead of the sharp deceleration. The replacement market is also being negatively impacted by events currently shaping the business environment in China. We're seeing ongoing destocking activity and deteriorating retail demand. We expected a significantly weaker replacement Market in China, when we revised our forecast earlier in the year. However, market conditions are now below our expectations primarily due to the weaker-than-expected sellout trends. We continue to believe that the weakening fundamentals in OE and replacement channels reflect tighter credit conditions, a weak stock market and worsening consumer and business sentiment all cyclical factors. While China's economy has not responded as quickly to stimulus as it has in the past. We are encouraged by the government's recent actions to reduce individual income tax rates and to create liquidity through monetary easing for the fourth time this year. It may take some time for market conditions in China to improve, but our continued investment positions us and our business to come out of the cycle even stronger. Looking back at the quarter. I'm satisfied with our volume performance in our major markets. In the US and Europe, we are regaining share and driving strong mix gains both of which contributed to our overall performance in the quarter. As we enter the final months of 2018, our expectations are that these trends will continue albeit with some moderation as we face more difficult comparisons, especially in the U.S. Even with these successes a variety of industry and macroeconomic headwinds has changed the landscape in 2018 and will continue to have an impact in 2019. We think that it's prudent to take a more conservative view of our near-term potential given that we are in a period of increasing volatility. While the current environment will keep us from reaching our full potential in the short run, we have a strong track record of successfully navigating through similar conditions in the past. As we look ahead, we'll continue to leverage our strengths where the markets are healthy and take a disciplined approach to manage near-term challenges and set ourselves up for future recovery. While the macro environment has become more volatile in recent quarters, we will not abandon our unwavering commitment to pursuing growth in the industry's most attractive market segments and ensuring that we capture the full value of our brand and products in the marketplace. More importantly, you will see us continue to challenge the industry's traditional business models in order to build on our competitive advantages. Tire-Hub is a perfect example of disrupting the status quo to strengthen the value of our brand and enhance our value proposition to the consumer. Additionally, just this month we launched Roll by Goodyear, a new retail concept in two major markets that is designed to enable us to win with consumers. I'm confident that our strategic plan and the investments were making are improving our long-term competitive position in the market. Now, I'll turn the call over to Darren.

Thank you, Rich and good morning, everyone. Let me start by saying that I'm very excited to be back on the Goodyear team. While we're going through a period of some adverse macroeconomic conditions, the underlying business fundamentals impressed me as being stronger than they were five years ago when I did my last earnings call as CFO. Even though I'm only 30 days into my return to the role, I wanted to take a couple of minutes to offer you some initial impressions. My first impression is that the current cycle of raw material cost increases has a lot in common with prior cycles. There are some differences as well but overall I don't see anything that should change our ability to recover margins over time. I'll talk more about this in a few minutes. My second impression is that the tire industry hasn't gotten any easier Even in times with pretty good economies; we find challenges that make our near-term financial results difficult to predict. For Goodyear, this means we have to continue to focus on disciplined execution of our operational excellence initiatives, as well as on our connected business model, making sure that we are as well positioned as possible when the current volatility settles. My third Impression is there are businesses positioned with the right capabilities to navigate these challenges. I'm impressed by the progress over the past few years on multiple fronts. The company is continue to address its cost structure, continued its strategy of reinventing U.S. distribution and it's made investments in technology that sets us up for changing automotive ecosystem. Hopefully, you can tell how enthusiastic I am about our prospects in the coming years that are one of the reasons I've rejoined the team. However, I also realized that you're very focused on understanding our near term results and having better visibility in to how the next few quarters may play out. Today, I'm going to focus on the fourth quarter. I should be able to come back at the beginning of next year with the full perspective on 2019. After we get to that point, we'll start to look at 2020 and beyond. In the meantime, I look forward to continuing the dialogue ahead with many of you over the last few weeks and getting to understand your views and questions as we work through our plan for next year. Turning back to Q3. I want to start by reflecting on where we are in the raw material cycle, and how I see the similarities and differences versus prior cycles. The chart on Slide 9 illustrates the net impact of price and raw material cost over the last seven quarters and compares that impact to our experience during the last similar cycle, which I remember well in 2010-2011. Each of the line starts in the quarter where we first saw the step up in raw material costs. In this cycle it was the first quarter of 2017. In the prior quarter it was Q2, 2010. You can think of the area below and above the horizontal line as margin compression and expansion relative to the base line at the start of the cycle. You can see that during the prior cycle, margins were compressed early on and then started to improve ultimately taking nearly three years and five price increases to fully recover. You also see the recovery wasn't in the straight line but we got there. I remembered a lot of questions during 2011 focusing on whether the industry has changed and whether we could really get back the raw material costs. These questions were especially intense when the recovery rate dropped back down in the fourth quarter of 2011. We remain confident then and we remain confident now that we can recover the loss margin over time, but it takes time. This later cycle seems to be last longer which doesn't feel very good, but probably reflects the couple of dynamics that are different this time around. First this cycle's raw material cost increased is less severe only about $900 million for Goodyear over eight quarters, versus the last cycle when we saw $900 million in only three quarters. So much quicker last time and a bigger impetus for industry pricing to move. Second in the last cycle, raw materials kept rising after the initial three quarters, ultimately increasing for 11 quarters in a row. This was another driver of industry pricing. In this cycle raw materials flattened out after the initial three quarters before starting to increase again. This make pricing decisions more difficult as it was less clear which direction raws would take. As the line for the current cycle shows, we are recovering and we'll continue to focus on getting full value for our products in a competitive marketplace. The recovery may not be a straight line but the destination doesn't change. Transitioning to a review of our performance during the quarter, I'll begin with the income statement on Slide 10. Our third quarter sale was $3.9 billion, up slightly from a year ago as the benefits of higher volume and favorable price mix were substantially offset by unfavorable foreign currency translation. Segment operating income was $362 million for the quarter, and our segment operating income margin was 9.2%, both relatively consistent with prior year. Our results were influenced by certain significant items, most notably the gain we've recorded on the Tire-Hub transaction. Adjusting for these items, we generated earnings of $0.68 per share on a diluted basis. The step chart on Slide 11 compares third quarter 2018 segment operating income to third quarter last year. Higher volume and improved factory utilization resulted in a $35 million increase in operating income. Raw material costs were essentially flat but worse than we expected reflecting the impact of foreign exchange on emerging markets as well as adverse cost for some inputs we source in China and I'll talk more about this as I review the outlook for the fourth quarter. Price mix was lowered by $10 million. This reflects the flow through impact of pricing actions taken during the third quarter of last year. This year-over-year decline was mostly offset by favorable mix. Cost savings was $69 million more than offset the $44 million negative impact of inflation delivering a net benefit of $25 million. The negative effect of foreign currency exchange and other totaled $18 million and $35 million respectively. Turning to the balance sheet on Slide 12, cash and cash equivalents at the end of the quarter were $896 million. Working capital was in line with our typical seasonality, but decreased $250 million year-over-year, reflecting an increase in accounts payable given higher year-over-year production volume and increase raw material costs. Net debt was effectively unchanged versus a year ago. Slide 13 summarizes our cash flow and the period. Cash flow from operating activities was $60 million for the quarter similar to the year ago, and $1.3 billion on a trailing 12 month basis. While net income was up for the quarter, it was largely a reflection of non-cash gain on Tire-Hub, Those reversed out in calculating cash flow from operating activities. Outside free cash flow, we repurchased $100 million worth of our common stock in the third quarter or about 4.2 million shares. For the first nine months of 2018, we've repurchased $200 million worth or just over 8 million shares. Turning now the segment results on Slide 14. Americas segment operating income was stable versus 2017. Revenue increase 3% with higher volume and higher non-tire revenue more than offsetting on favorable foreign currency translation. While, in the U.S., consumer replacement volumes were up 11%, Brazil consumer replacement volumes declined 6%, offsetting part of the strength in the U.S. Segment operating income reflected at $23 million benefit from this increased volume, including the impact of higher factory utilization. The benefit of higher volume was more than offset by lower price mix, higher raw material costs and higher manufacturing costs. One final point in the Americas, third quarter results were impacted by two specific items, first $21 million for a favorable settlement we received in a trade tax dispute in Brazil. And second, a $6 million negative impact for bad debt reserve in Brazil. So a net $15 million positive from these two items. Turning to Slide 15. EMEA delivered solid volume growth but saw relatively flat revenue given unfavorable impact of foreign currency. Winter tire sales and consumer replacement started out strong during the third quarter, reflecting low channel inventory after robust sellout the end of last winter. Toward the end of the quarter, weather remained relatively warm and selling slowdown. As many distributors were waiting for increased demand in the retail channel before taking further deliveries. As always weather will be a key contributor to our fourth quarter volume in EMEA. Our commercial business as Rich said continued to deliver strong performance both in replacement and OE in EMEA. Segment operating income increased 23% during the quarter, driven primarily by lower raw material costs and positive price mix, which were partially offset by unfavorable foreign currency translation. The translation was a function of a weaker euro and the devaluation of the Turkish Lira during the quarter. Turning to Slide 16, Asia Pacific's third quarter segment operating income was $57 million. A year-over-year decline reflects a challenging industry environment in China, where our OE and replacement volumes each declined in excess of 20%. We also recorded $4 million of incremental bad debt expense in the quarter, primarily related to one of our smaller China OE customers. Outside of China, the region saw double-digit consumer placement growth in Japan and India. OE volume outside China was essentially flat. We see only in India though as a watch out going forward. While recent weakness was a result of the national transportation strike and flooding. More recently tightening liquidity, rising fuel costs and recent insurance regulation are creating further challenges for OE sales in India. Despite a tough current environment, we continue to build a foundation for future growth in China. Our growing pipeline of OE fitments including the electric vehicle segment will help us to drive OE volume and replacement demand over the coming years. Slide 17 updates our outlook for full year segment operating income drivers. We now see unit volume at the low end of our prior range. Principally to reflect continued softening of consumer replacement demand in China and weaker demand environment in Brazil. We also expect less benefit from factory utilization on overhead absorption. As a result of this volume weakness in our key emerging markets. We have increased the benefit we expect from price next of $45 million, reflecting the impact of recently announced pricing actions partially offset by lower mix driven by the weakness in China. While we've taken steps on pricing, we've also seen increases in our raw material cost for Q4. This takes the full year impact of raws to $270 million. The increase in raw material cost reflects the impact of currency in our emerging market locations, as well as some higher input cost particularly for carbon black and other oil based derivatives that we source from China. We're seeing cost increases in these materials at least partly due to strict reinforcement of environmental regulations in China. The response to this enforcement several of our Chinese suppliers have closed plants, curtailed production and raised prices to cover the cost of unplanned investments required to meet the new environmental standards. So these increases are purely commodity related but they're still having an increasing impact on material spend. The last point I want to make on this page is regarding our cost outlook. This forecast is $10 million below our previous guidance and is in area that we control. Well some of this deterioration is situational and related to changes we're making in our factories to prepare for the future; we have some performance challenges that we have to overcome. This is another area that we'll come back and talk to you about when we talk about 2019. While we will continue to look for opportunities to improve price mix and drive addition volume our best deal on segment operating income incorporating all these factors as that will exceed $1.3 billion. We look to improve from there, but we feel like this is an appropriate expectation given the recent changes we've seen. The focus now is on the steps that we can take to improve our momentum as we entered 2019 even as raw materials look to be higher and emerging market businesses look like a challenge will continue into the first half. Now we'll open the line for your questions.

[Operator Instructions] We'll take our first question from Rod Lache with Wolfe Research. Please go ahead your line is open.

Good morning. Just first of all two housekeeping items. Can you just confirm the accounting for Tire-Hub shipments at this point, are they still on a consignment basis? In other words there's no benefit from channel filling there and are you bucketing some of the big changes that we've seen in Turkish Lira, Peso and some of those other pretty significant moves in the raw material bucket?

Yes. So, Rod, I think, I'll answer your second question first and say, yes, the devaluation does have transactional impact that we do put in raw materials to the extent our factories in Turkey are buying raw materials that are denominated in dollars or in non- Lira currency. So you're thinking about that one the right way. And I think it confirm there's no benefit from moving tires into the channel with Tire-Hub.

And Rod that's by definition that's not the purpose of it and certainly that's not happening in the quarter and we're pretty much through the consignment element of it as well.

Okay and I'm just hoping you can help us with a few kind of perspective items, one is, is pricing mix really accelerating to about a $100 million in the fourth quarter? And I'm wondering how we should be thinking about some of these things that we look out to 2019 just on a preliminary basis? If price and mix adjustments you're making right now hold what would that mean for 2019? How should we think about raw materials? And then any other color that you can provide for us on some of the other things that you've mentioned in the past like San Luis Potosi ramp and the non-recurrence of the Tire-Hub and cost reduction. Some of those things are as they stand today looking out to 2019?

Yes, Rod, let me, I guess the first thing I'll say is that I won't, I offer you what I can on 2019. I think our plan for 2019 is something that I'm certainly still working with the team to try to better understand. So there's going to be some elements of 2019 that I won't be prepared to comment on today. But I think your point on the price mix performance for the fourth quarter is a fair one. And based on achieving $45 million of price mix for the full year, but that does imply that the fourth quarter is going to be a big turnaround so we're going to go from having negative impact of price mix over the last three quarters to having a very significant positive effect of price mix in Q4. And I think that is something that is a positive for us as we set ourselves up for 2019. The other positives I guess as we look out to 2019 that we've got some clarity on at this point is, yes, and I think you've pointed some of these out that the continued ramp up of our factory in Mexico and the additional units that will be getting out of that factory which are both high margin units and have a better cost structure. Then - we would high cost factories. The reversal of some of the impact of Tire-Hub. So some of the hit we've taken for reduced volume in Tire-Hub this year, obviously, that will unwind next year, and will provide some positives. And we'll have, I think we'll continue to have net cost savings. I think it's worth having a longer discussion about and I'm not fully ready for that discussion yet. But we've got, our net cost savings I think we look at in the fourth quarter is being a bit lower than it has been the rest of this year. And ultimately, it's being done for some good reasons, but that doesn't mean that's not a concern for me. On the negative side, I think raw materials as we look out to next year given where raw material prices and currency sit today would be $350 million or $400 million increase. And obviously that does include the foreign exchange effect that you referenced. And that includes our view of foreign exchanges today. I should say what foreign exchange is today rather than our view, where our raw material cost are today and a view of the changes that we're having to make related to the supply issues in China that I mentioned in my prepared remarks. So with that fairly an increasing hurdles. I think we were looking at $150 million to $175 million when Rich and Christina were out in Laguna. Now we're looking at $350 million to $400 million going into next year. Foreign exchange is also going to be a negative. And at today's spot rates would be another $40 million or so. The China environment, obviously as we look last this year's first half in China was pretty good. If the current conditions continue, then the first half of next year would be up against pretty tough comps in China and would continue to be a headwind. So I think a number of things there that are going to be challenges for next year. Obviously, against that we're going to be working on the price mix question as well as what we can do to grow volumes. But even on the volume front, because of some selectivity on our part getting out as some of the less profitable OE fitments that we were on. We're facing OE volumes that even if the industry stay stable we'd be down 2 million or 3 million units in OE. Focusing on our mature market businesses that. So we've got some volume there that we're going to have to look freeze up some tires for replacement which is good. But it is still some volumes going to come out for us. So I think we're looking at a number of those factors. And those are all factors that will take into account as we pull together our overall view for 2019. And we'll pull that together and talk about our view of 2019 when we get the pass the year-end.

Okay, thanks. And just to clarify if the, on that turnaround in price and mix. Is that something that kind of all things being equal. You would have 3 more quarters that sort of that level through next year or is there something unusual that is occurring in the fourth quarter of this year that was that number?

Yes. I mean, we're obviously getting pass the anniversary of some of the price decreases and that's helpful. Some of the price balance that took place last year. That's helpful for Q4 and it will be somewhat helpful going forward. Rod, just I'm not at a point where I'm comfortable giving you a clear view of where price mix is going to be going into 2019. But I think we're --obviously we are making progress there. Continuing to deliver very strong mix and taking some continued action on price including the price increase that we announced in the U.S. that really started benefiting us will start benefiting us in Q4.

We'll take our next question from John Healy with Northcoast Research. Please go ahead. Your line is open.

Good morning, guys. I wanted to ask to say a kind of a big-pictured question on the volume side, so three quarters in a row with replacement market growth in the US, clearly you can point to the economy driving that. But can you help us understand what's changed? And maybe a view of how sustainable this will? obviously not 11% but sustained growth, and we might expect sustained growth for the next few quarters on the replacement side, your level of confidence there?

Yes, John, I think, I think I'll go back and maybe refer to questions that we got a lot last year that I suspect many remember. And that was when we saw such a robust economy relative to sentiment and consumers and VMT and everything else. And we weren't seeing the demand out, the sellout demand in the marketplace. And what we said back then it was going to be a question of when not if. And I think that when is now. And I think that's what you're seeing. And as you think about this year, go back to Q1 remember, our volumes were down about I think about 3% or it was $3 million, I can't remember exactly what the number was. We were down in Q1 but sell out was up 8% at that time. And what we said is that pent-up demand was going to come forward because inventory channels were emptying. And since then just as you said, we've had a very, very, in North America and in Europe we've had very robust second quarter volumes and very robust third quarter volumes. And on top of that what you're seeing is the channels are in good shape as well. So that speaks to where we are, as I said on my script we've had good, we've had mid-single digit sell out for three quarters now. And that trend is we're about ending October continues into October. And if you think about that we're getting the volume, we're getting sellout, and channels are in good shape. And as Darren just mentioned, the benefit of our price is going to come in into the fourth quarter. So you've got a lot of those things all working together right now which is exactly the momentum that we want to take in to end the year and then take out into 2019. So I think it's really the economy, the demand for our product, the demand to support VMT and tread rubber burning finally coming to fruition.

Okay, helpful. And then I thought slide 9 was great in terms of illustrating previous cycles and the raw increases, but when I look at that slide you highlight the eleven quarters it took to recover the raw increase. Given the environment on the volume seems healthy. And you guys seem like you expected to continue, can that period of time in terms of recovering the raw prices actually potentially be shorter do you think the net 11 quarter timeframe. And how do you think that might play out?

Yes, So, Rich, I'll start on this one. And I think the fact that we're - our volume is recovering. And our market share is in a strong position and clearly those are things that make the job easier. We've been through obviously a period of time last year where volume went the other way. And that continues to be something that we have to be watchful of because we're working to recover this but we're working to recover it in a competitive marketplace. Yes, the thing I find to be the, require the most thought about this particular cycle, is that the raw materials have been through periods of flattening out, which makes it sort of harder to read the direction. And if we got to a point where we believed raw materials we're going to go back down. And I don't think we're there but if we got to that point, then it would raise questions about which direction pricing would likely take. And I think that's the biggest uncertainty for us as we move forward, but I think that what we've done in the third quarter. And I think what we'll continue to work on is going to demonstrate that we're committed to, taken that area that we're experiencing, you're under the line so to speak over the last seven quarters. And create some space above the line. As we did in the last cycle and that, that is the model, it is a business that has these raw material cycles. And that, that's how we work through and we're going to continue to hammer away at that.

Great and this is one final question for me, Tire-Hub, any color you could give us just on how installer response has been to the launch. You are seeing good retention of the dealers that you had in your network prior. And are you seeing any big wins out there in terms of geographies or just markets where you had been, may be underserved in the past?

Yes, John, I would say it's frankly exceeded our expectations in terms of its ramp up and in terms of servicing customers. Like any startup if you will, there's hiccups along the way. And I think on a customer by customer basis there's probably been some out there and we work diligently to get through that but no customer losses, no big customer losses and none at all really. And the process is working very well as we intended. And I think as we think about it from a strategic perspective, it's absolutely in line. And what our strategies and what our intentions are, so to get off on the right foot, I think was key for us and that's exactly happened. In terms of growth, we never intended to have significant growth in 2018 as we ramped it up. I think if you look out to 2019 and beyond, that's where you're going to see the benefits of expanding the distribution. And it will also support some of the new initiatives that we're working on, whether it's goodyear.com, and working with our partners out there, our partner dealers, and our other aligned distributors, or the new retail concept that we're testing out as well in a few markets in Washington called Roll by Goodyear, and I can elaborate on that if you like. But that's what Tire Hub's for, and I'd say it's on plan and frankly even a little bit ahead of plan.

And we can take our next question from Anthony Deem with Longbow Research. Please go ahead. Your line is open.

Good morning, everybody. Thanks for taking my questions. This first one's for Darren. I'm wondering if we can get an update on your leverage ratio outlook and investment grade intention. At the beginning of this year it was Goodyear's goal to grow EBITDA, to lower the leverage ratio more so versus paying down debt, and just wondering where we sit today, with you in the CFO role, will buybacks remain priority over deleveraging?

Yes. So, Anthony, I think you've raised a good question here, because obviously when we look at our shareholder return programs, those programs were always meant to be a reflection of our ability to generate cash. And as we go through this part of the raw material cycle, our results and our cash generation have been impacted. I would say that we are still committed to having a balanced, investment grade type balance sheet, I mean that is a long-term objective for us. It's something that has, I think, always been part of the DNA here, and has a lot to do with the types of companies that we compete with. So we need to have consistent access to reasonable cost capital through the cycle, and so the investment grade balance sheet is what helps drive that. So, as we've seen, obviously our debt - I don't know, different leverage ratios available but certainly on a debt-to-EBITDA basis, we were having some nice improvements down into the mid 2s. And our intention was to continue to work toward a ratio of around 2x. And instead in 2017 and 2018, because of the results, I mean the drop in EBITDA, our leverage ratio has moved back up. And I think the commitment is still there, to answer your question. I think we're going to have to balance our commitment to shareholder return programs with our desire and our strategic need to keep improving our balance sheet. So I mean that commitment is clearly there. So I think the balance is going to have to be struck, and we've had, so far this year we have repurchased about $200 million of Goodyear stock. So, a fairly substantial amount, I think that's something that we're going to have to moderate, quite honestly, as a result of what our cash flow is. And in order to do the right things for our balance sheet. We've got confidence in our business for the long-term, no question, you would have seen that in the increase that we made in the dividend recently. So I don't think it's a question of what we think we can do, or the cash we can generate in the long run, but as we go through a cycle like this, and given that it's difficult to predict how long a cycle like this lasts, we're going to have to take some steps to protect the balance sheet. Does that answer your question, Anthony?

Yes, that does, it's probably tough to commit to a targeted timeframe, I assume, at this point, right, because previously it's 2020.

Yes, I think that's fair. I mean, we're going to be taking a hard look at our 2019 plan, and then obviously coming back to take a look at where we think we're going to be 2020 and beyond. So we need some time to work on that, I need some time to work on that, just from a personal level. So we will come back on that question. I understand the question, and obviously we'll keep having dialogue and listening to our investors, and the viewpoint that they have.

Thank you. I have a few more questions if I may. And sorry if this is already answered. Can you specify exactly how much of the $80 million raw material guide down for 2018 is related to transaction impact versus increases in the commodity and non -commodity costs? Spot pricing was just sort of flat to slightly lower, raw material cost third quarter versus second quarter. So just want to get that's mostly FX driven.

Yes. So I think that of the $80 million about $30 million of it is foreign exchange related. There is another substantial factor here and there is some that is a reflection of higher commodity costs. And most of the increases that are not foreign exchange related are in the categories of carbon black and some of the-- and some oil based derivatives that we purchase. Within that carbon black and oil based derivative category, you heard me mention earlier the fact that there has been a fairly significant change in the availability of supply in China. And over the last several years, a lot of the production of these materials has shifted to the point where most of it is made in China. And so if China then starts to regulate through environmental regulations or other policies, starts to reduce the amount of this material that's produced. A couple of things happen, both of which are affecting us. One, there are some suppliers that just stop and you aren't able to make the required investments to comply with the environmental standards. And therefore if you are a customer there's you are forced to change supply. And generally you're changing supply for a higher cost supplier. The other effect is that all the suppliers in the market start to raise their prices to recoup the additional investment for those who are able to make it, recruit the additional investment in meeting the environmental standards. So it is something that that pushes up those materials and for our Asia-Pacific business and even for our business in North America, we do a lot of our procurement for these materials in China. So that is playing into it, and it also plays into our outlook for raw material cost going into next year.

And I know you're not prepared to give the price mix outlook for next year, but given the circumstances that you just described do you see Goodyear undergoing another round of price increases maybe here in the fourth quarter?

Yes. So I think, we will probably going to stand on the fact that we're going to recover the --we're focused on recovering the impact of raw material costs on our margins and doing it over time. we have to do it in a way that fits the marketplace that we operate in. So I'm not going to point to particular timing, but I think we're making a big step forward in Q4 and it's something that we'll get a lot of time and attention from us going forward.

Great, then it's one last quick one, is 5% a good estimate for the pre buy benefit for US consumer replacement shipment growth? The 11%, we saw about 5% industry growth. So assuming maintain market share was the pre buy benefit 5 to 6 percent-ish.

So when you talk about the pre buy benefit, I want to make sure I'm answering the right question here or we are answering the right question. Are you talking about the pre, the question of, are there people buying tires ahead of our price increase?

Yes. As I understood it, it was September first price increase that was somewhat expected in the marketplace to the third quarter. So I was, I believe that you gave some opportunity for free buy for your customers and wondering if that provided a benefit to your shipment.

Yes. Frankly, it's been very positive in the sense that there's really been no significant pre buys, I would say not only for us, but as we look around at our customers, our multi branded customers. We haven't seen a lot of that from an industry perspective at this time. So I would say it's been very moderate, certainly relative going back to some of Darren's comments when we went through this before, and some of these recoveries of raw material price increases in the past were expected you might see some prices, there some free buy. We saw very little of that and again I think that goes back to the earlier question of volumes, sell in volumes are good, sell out volumes our good. Channel inventories are good and the price increases that we've put in as of September 1st have been very favorably received from our perspective, so they're sticking.

And we'll take our next question from Ashik Kurian with Jefferies. Please go ahead. Your line is open.

Good morning. Can I just start with following up on the previous questions. I mean did you just say, did you imply there was no pre buy effect because I think from or we understand your price increases were probably effective from September 1, most of the other Tier one I think price increases are from Q4, well the main question I want to ask because I think last time around in 2017 your pricing was slightly out of sync with the rest of the industry which had an impact on your volumes. This time around and especially for Q4 are you seeing any big distortions between your volumes and industry or you think both pricing and volume development is pretty much in line with what it is for the members.

Ashik, I would say in line. I mean again we didn't see any significant free buy and I guess maybe to answer the question directly, we said industry was up five, our volumes were up eleven in North America, greater than 17-inch industry was up 12, we were up 24. And you've seen those volumes now up for tracking like that for two quarters in a row. So it wasn't the announced price increase that caused the pre buy that drove our third quarter volume to be clear. And as we said sell out continues to be good and that continues in October. So the volumes we had have not been, the incremental volume hasn't been a pre-buy as we move ahead to be clear.

And should we worry about the Europe because no one's announced price increases there. Is that just a reflection of the high level of inventory there, lackluster market I mean any thoughts and how likely it is your price increase in Europe?

So, Ashik, remember, we did do a price increase in the commercial business that we talked about on the second quarter call. And again if you want to think and sort of environmentally at least from a macro perspective, here we have replacement markets in Europe and the corridor up five for commercial this is, and OE up about 14. So volumes are good, our business is good; industry is good. And as we look at this, what we see is a market that's good and taking pricing on as we look at the Europe truck market. Remember, passenger is much different particularly in the winter segments. Darren knows as well, winter pricing --our pricing on winter tires is set earlier in the year. So as we go into that selling season, it's sort of set as we go. So we didn't expect any incremental price as we went into third quarter. Having said that, remember we said our volumes on selling have been very good. We gained share in the winter markets and we did that on the back of some excellent products out in the marketplace. We'll see sell out start to happen now in October. We would have hoped it happened in September, but the weather still been warm as you know over there. So we'll see those tires coming out and getting pulled into the market, and then have a restocking of the distribution ideally in the fourth quarter, assuming we see snow coming into the market. Now, remember and I said this last time the opportunity to revisit how to recover our raw material costs will be with the new summer tires or the summer tire season that will start late in the fourth quarter as well. So we will be as Darren said earlier, we'll be looking closely at how we approach that market given the high raw material cost as summer tires get set in the market later in the fourth quarter.

One more on China. What are your views on the Chinese sellout trend? I mean is the weakness we are seeing in sell in largely destocking by the dealers due to credit issues or is there been an underlying sellout weakness as well? And also given your high OE proportion of sales in Asia if you do get a volume weakness, do you think you have enough demand in the replacements side to offset it?

So, Ashik, you hit on both points. Clearly, we've seen the deterioration in China and we haven't found the bottom yet as we go. And remember, as you point out, our mix in China is much higher, we're about 60:40 OE to replacement. So if you look at both markets, I say we leaned in to the OE market in Q2 and right now I think the orders, the OEM order books to us have kind of come to where we said they would be in our forecast in Q2. So it's been deteriorating, but we feel pretty good and as you know, auto sales have been down three months in a row. September down 12%, as really pretty severe as we go. That said I'll just comment on OE, we continue, I'm very pleased with the win rate that we're getting on new OE business in China particularly EVs and particularly around large rim diameter tires with both transplants and domestic producers. So I think OE will rebound as the economy gets better in China, but clearly the headwinds are there. On the replacement side, Ashik, I think you hit it right. What you saw was essentially credit drying up. Remember a lot of distributors paying bank acceptances, those large even mid to small size distributors, when they don't have access to liquidity, and they can't pay. You see them essentially selling tires that they have to get cash to pay down their debt whether it's in the tire business or for other businesses they've owned. So we're clearly seeing less purchases going in, but there's also because sellout is slow, there's also a lot of inventory in the channel right now. And I think that's what has to work its way through, and that's going to come through with consumers buying cars and buying tires. And I think that's a sort of a derivative of the slow economy in China that we all know about right now. And as we said in the past, the government, the Chinese government clearly puts stimulus into the economy. Our sort of rule of thumb was it took about two quarters to sort of turn up in our business and get volumes flowing again. Despite the government reducing reserve rates, reducing income taxes, putting more liquidity in the market, we still yet to see the benefit of that stimulus sort of hitting the end consumer to start to empty the channels and get buying going again. So it's taking a little bit longer this time. We get that but again I'll say it doesn't really deter our view that China is a great market and continue --will continue to be down the road. So we'll work our way through this. And yes, less OE demand gives us more to sell in replacement, but we need to see that sell out in replacement happen and we're just not seeing that yet.

And we'll take our final question today from David Tamberrino with Goldman Sachs. Please go ahead.

Great, good morning, gentlemen. Darren you kind of dancing around in a couple of times, I figured just ask you directly with you coming on board now should we view the 2020 guidance that was previously set as off the table?

Yes. So, David, I think right now I'm focused on making sure that - yes, I have been focused on making sure we understand where we are in the fourth quarter. And as soon as we get past today call, I mean the work is all going to be about where we're set up for 2019. I think that the question around 2020 is going to have, it's going to a degree be dependent on the external environment. In the past, if we look at the past cycle, we could say there was some very quick recovery. So there was the over a two year period of time we saw our segments operating income jump dramatically, coming out of the last cycle. So I think it will be, part of the determination is going to be where we are in this raw material cycle. And so really not going to make any definitive comments about it today other than to say that by year-end we're going to be in a position to talk in a robust way about 2019. And once we get through the discussion and lay out where we are in 2019, we're going to go to work on a view of where we are for 2020.

Okay and on that topic because I do really like slide 9 and trying to fit this into prior cycles. What I was surprised by within your commentary that you didn't really address the capacity situation within the industry today versus where we were previously. And the growing or recovering global backdrop from 2010 to 2013. So I'd be curious to hear your comments on how do you think that overlay with a lot of capacity that's been coming online because we had a really great period from 2013 and 2014 and 2015 with tight supply and demand, tight capacity utilization on HBA tires. And declining raw mat that we had a lot of projects greenlit. I'd love to hear that overlay from you on that capacity and how that might be different this time than the prior cycle?

Yes, no, and David I think it is the right question. And at some point in the future I think we'd like to do a larger discussion on how we see the supply versus demand balance evolving in that 17-inch and above or the high value tires. There are clearly some dynamics here that I understand that there have been a lot of new factories constructed. And there are some new competitors in the market. As I look at our businesses in North America and in Europe, the performance that we're delivering right now doesn't seem to indicate a situation of oversupply. And that we're getting to a point where we're going to be delivering volume and price mix improvements simultaneously. And I think that's that is an indication you have nothing else of a reasonable balance between the two. I realized that during that time in 2013-2017 because there was a real shortage of supply for some of the high-end product. I think for some of that product that's still true. Big question about how much capacity has been impacted by the additional complexity and the slower build cycle times on these higher end tires. And yes it's a question I have and I think it's one that we want to continue to inform you and our investors about. So it may be that I can't give complete clarity there, but I'll say I don't see the evidence that I would expect to see of an oversupply situation.

Okay, that's helpful. Look forward to that discussion in the future as you obviously take a look deeper into it. I appreciate you guys fit me in and taking the question.

Thanks David. So, everyone thanks. We appreciate you are listening today. Thanks for your attention.

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