The Goodyear Tire & Rubber Company (GT) Q4 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 the Goodyear Fourth Quarter and Full Year 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 Nick Mitchell, Goodyear's Senior Director of Investor Relations. Please go ahead.

Thank you, Keith, and thank you, everyone, for joining us for Goodyear's fourth 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 two, I would like to remind participants on today's call that our presentation includes some forward-looking statements about Goodyear's future performance. Actual results could differ materially from those suggested by our comments today. The most significant factors that could affect future results are outlined in Goodyear's filings with the SEC and in our earnings release. The company disclaims any intention or obligation to update or revise any forward-looking statements, whether as a result of new information, future events or otherwise. Our financial results are presented on a GAAP basis, and in some cases, 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, Nick, and good morning, everyone. During today’s call, I’ll review our full year performance in the context of industry conditions that are affecting our business units. I’ll also discuss several initiatives for 2019 that are designed to strengthen our connected business model. Darren will follow with a detailed financial review of the quarter and share thoughts on how we are thinking about the business going forward. First, let me start by saying I’m not satisfied with our overall performance in 2018. Our higher raw materials, strong U.S. dollar and industry volatility in China negatively impacted our results our operational execution was below my expectations for our team and of our capability as demonstrated by past performance. The realities of today's challenging macro backdrop mean that we need to intensify our focus on factors that we can control including our expenses and cash flows. However, it's also important to ensure that we are running the business for the long term. We are exceeding our performance from the previous cycle despite a challenging environment. This is confirmation that our strategy is working and that our investments are strengthening our competitive position in the market helping us deliver higher highs and higher lows at each point in the industry cycle. We must not lose sight of the opportunity to leverage our brand our products and innovation in all our markets and particularly during this disruptive time as the underpinnings of the auto industry are evolving in ways unimaginable only a few years ago. We head into 2019 with a focus on execution and with product and business model innovation as a priority. We believe in our current capabilities to drive results and in our leadership in addressing how consumers want to buy. tires and how the purpose and use of the car itself is changing. Turning to slide four, our business teams delivered several operational wins during 2018. Most notably, our consumer replacement shipments increased 2% as we recovered volume in our key mature markets led by above industry growth in the high margin 17 inch in greater category in the U.S. and Europe. In the U.S., retail sellout of the Goodyear family of brands was strong throughout the year outpacing the industry aided by the success of our assurance weather-ready product line. In 2018, weather-ready crossed the 1 million tires sold threshold faster than any other premium product line launched in the company's history. I'd like to congratulate everyone that made this achievement possible. It's a testament to our product innovation and the power of the Goodyear brand. Our commercial truck tire shipments increased as a strong commercial product portfolio and a suite of industry leading fleet solutions allowed us to benefit from the positive momentum in the transportation industry. In Asia, we grew volume outside of China while our performance in China was impacted negatively by a sharp contraction in OE production and slower economic growth during the second half of the year. We continue to broaden our reach in the country including continuing to buildout our retail network as a long-term growth potential remains intact. Globally, we added to our OE pipeline by securing numerous new fitments with many on electric vehicles including the Eagle F1 Asymmetric 3 SUV being selected for the e-tron Audi’s first fully electric sport utility vehicle. These wins will begin adding to our volume in 2020. In the replacement channel, we implemented price increases in several geographies as we work to capture the full value of our award-winning products and brands and recover higher raw material costs. In addition to these operational accomplishments, we achieved several strategic objectives during the year three of which I'm very excited about given their ability to enhance the customer experience. First, we successfully launched TireHub, our new national distributor in the U.S. This launch is a culmination of the work we've done over the past decade to strengthen our distribution capabilities and better align our distribution network in the U.S. TireHub enhances our ability to promote our premium brands and ensure that our retail and fleet customers receive best-in-class service. TireHub also helps us prepare for the changes that we see coming especially in the way the tires are bought and sold. Second, the consumer team in the U.S. continued expanding our mobile installation capabilities to new locations. The Goodyear Mobile Tire Shop is a market back innovation that grew out of the feedback we gained from listening to our customers. This service offering provides installation on the customer's terms. It also enhances our e-commerce platform which is crucial in a world where more and more retail transactions are occurring online. I'm pleased that the rollout remains on track. And most recently, we launched a pilot a Roll by Goodyear which is a new retail concept. Roll provides us with the retail format that we can deploy in high traffic retail locations such as high-end lifestyle centers and business districts, a real departure from traditional tire retail locations. Similar to our e-commerce site and the mobile installation service Roll reduces the complexity in the tire buying process as consumers can shop on their terms and select an installation option that best fits their busy schedules. Roll has tested very well with customers across all demographics especially millennials. Needless to say, we're very excited about Roll’s long-term potential. It's not an exaggeration to say that the changing consumer needs have led to the creation of entirely new company’s new business models and new categories. TireHub, the Mobile Tire Shop and Roll by Goodyear represent our response to the changing consumer behavior as it relates to the tire buying process. Each of these formats strengthened our connected business model and moves us closer to our customers allowing us to improve our service levels today and positioning us to be a leader in the changing mobility landscape. As we enter 2019, we have several initiatives in the pipeline that will further strengthen the underlying fundamentals of our business positioning us for the future. On the manufacturing front, we will continue ramping up our new Americas plant. In Europe, we will begin the expansion of our Slovenian plant. This project will increase the facility's output by 25%. Both of these projects will give us increased low cost capacity for premium tires. As we think about our distribution strategy, we are focusing on capturing the growth opportunities stemming from our recent TireHub transaction in the U.S. In Europe, we will accelerate our efforts to align our distribution network. In Asia, we will continue to develop our wholesale network and expand our retail presence especially in India and China where the long-term growth opportunities remain very, very attractive. An aligned distribution network is the backbone of the changes we are driving in how tires are bought and sold. We will keep advancing new technologies to win EV and AV fitments which will help us build our OE pipeline for 2020 and beyond. We will continue scaling our commercial fleet solutions offerings including tire optics and proactive solutions which will help our commercial business gain share among fleet operators. We will launch many new products in 2019 including the Goodyear WinterCommand and the Eagle Exhilarate consumer tires, the Goodyear Fortitude HT for the growing cargo vans segment and the Endurance LHS 2 for commercial tires. These tires feature our latest technology. We hold our North America customer conference last week in Dallas and I can tell you that the attendees were very excited about the products that we're bringing to market. In 2019, our digital efforts will shift toward more personalized communications and away from the broad audience messages as we work to better address the needs of individual consumers. We will also expand our e-commerce reach to ensure that the Goodyear brand remains top of mind with today's vehicle owners. I remain extremely optimistic about our future. We have a remarkable set of assets a powerful brand the strongest portfolio of products in our history and a growing portfolio of premium OE fitments. This trio ensures that Goodyear has a seat at the table as the changes in mobility rapidly unfold. Equally important, we have a culture of innovation a strategy to win now and grow in the future and strong partnerships with the best dealers in the business. We have demonstrated the will and commitment to adapt and evolve. We were the first tire manufacturer to move online with the launch of our e-commerce platform goodyear.com. We are challenging existing business models with new formats and concepts such as TireHub, Roll by Goodyear and the Mobile Tire Shop. You can expect even more from us in the future. We will not stop moving forward and we are committed to being an industry leader for generations to come. And while a number of the challenges that we faced in 2018 have extended into 2019, I am confident that as we execute our initiatives maintain our commitment to the industry's most attractive market segments and focus on capturing the full value of our connected business model. We will ultimately find ourselves in a position where we are delivering results that meet and exceed our previous record performance. Now I'll turn the call over to Darren.

Thank you, Rich and good morning, everyone. My comments today will be very much in line with those I made three weeks ago at the Detroit Investor Conferences. I said then that our fourth quarter segment operating income had come in weaker than expected given lower volume, weaker mix and worse results in our other tire related businesses. I also discussed the supply constraints we experienced in the U.S. that along with weaker than expected winter tire sales in Europe and a further decline in the China market negatively impacted our performance. Everything you see in our materials today and in our 10k will reflect these factors. The additional detail we're providing with today's release and slides should allow you to more fully digest fourth quarter results and help set the stage for 2019. Turning to slide 12, our fourth quarter sales were 3.9 billion down 5% from last year reflecting the impact of unfavorable current foreign currency translation and lower volume partially offset by improvements in price mix. Unit volume declined 3% driven by a 12% contraction in consumer OE shipments. This decline was primarily a result of weakness in our Asia-Pacific business unit which saw significantly lower automotive production in China and India. Conditions in both countries were weaker than we anticipated explaining much of the volume shortfall in the period compared to our guidance. Replacement shipments were flat compared with prior year. Segment operating income was 307 million for the quarter and segment operating margin was 8%. Our results were influenced by certain significant items most notably an indirect tax settlement in Brazil, discreet tax items and pension settlements. Adjusting for these items, we generated earnings of $0.51 per share on diluted basis. The step chart on slide 13 summarizes the change in segment operating income versus last year. The impact of lower volume was largely offset by improved overhead absorption from stronger production volume in Q3. Raw material costs increased 128 million reflecting higher commodity costs, transactional currency headwins from the strong U.S. dollar and an increase in non-feedstock costs related to stricter enforcement of environmental regulations in China. We delivered 35 million of price mix improvements which partially offset the raw material cost increases we experienced. During the quarter, we benefited from our pricing actions, however, our price mix performance was less than we anticipated due to softness in the European winter tire market toward the end of the quarter and supply constraints in the U.S. Each of these factors resulted in weaker sales of high margin tires impacting our mix. Cost savings of 80 million more than offset 46 million of inflation. Costs for the fourth quarter included the favorable indirect tax settlement we received in the trade tax dispute in Brazil. The negative effects of foreign currency translation totaled 24 million. Weaker results from other tire related businesses accounted for 31 million of the remaining decline with our third-party chemical operations being the most significant individual item. Turning to the balance sheet on slide 14, our net debt totaled just under $5 billion up $276 million from the prior year primarily reflecting our share repurchases of $220 million during the year. Our unfunded pension liability was $599 million; $57 million lower than in the prior year period. As the impact of rising interest rates in the U.S. more than offset declines in the value of the plans fixed income portfolio. Slide 15 summarizes our cash flow for the quarter and for the year. As in prior years, we saw a strong seasonal working capital inflow during the fourth quarter. On a full year basis, cash flow from operations totaled $960 million and working capital was a cash use of $120 million better than we previously projected. Rationalization payments and capital expenditures totaled 174 million and 811 million respectively, also lower than prior expectations. Turning now to our segment results beginning on slide 16. Our Americas volume was 19.1 million tires for the quarter down about 2%. The decline was driven by U.S. consumer OE and weakness in Brazil. Consumer replacement volume in the U.S. was about flat versus a strong year ago quarter which saw an 8% increase. Segment operating income was 179 million or 8.5% of sales, down 38 million from last year. Several factors negatively impacted segment income during the quarter including increased raw material cost, reduced earnings from third party chemical sales, higher product liability costs and unfavorable foreign currency translation. These factors were partially offset by favorable indirect tax settlement in Brazil of about 30 million and improved overhead absorption from higher factory utilization during Q3. Price mix was essentially flat in the quarter as the benefits of pricing actions were offset by weaker mix. The weaker mix was a reflection of product shortages associated with manufacturing complexities and poor performance in U.S. factories. Strong demand throughout the second half to completed our safety stock magnifying the impact of supply constraints during the quarter. These shortages existed in both our consumer and commercial truck businesses and prevented a higher level of sales of high margin tires. Making the problem even worse was that the sales of the tires that we did have on hand were through lower margin channels some of whom like the OEs have contractual priority on supply. TireHub’s customer transition activity orders and deliveries of Goodyear branded product each performed inline or ahead of our expectations. Over the long-term, TireHub will strengthen our ability to promote our premium brands our industry leading e-commerce solution and our strategy of targeting the industry's most profitable large room segments. Turning to slide 17, Europe, Middle East and Africa’s unit sales totaled 13.7 million in the quarter virtually flat versus last year. Stronger commercial shipments and higher consumer replacement volume were offset by weakness in consumer OE, reflecting weak industry conditions and the elimination of small room sized fitments versus a year ago. Consumer replacement shipments increased 1% reflecting stronger industry demand. While volumes were up in both the winter and all-season segments, unseasonably warm weather in December offset some of the strength we saw in the winter category earlier in the quarter. EMEA strong commercial truck results reflected the benefits of favorable freight trends and the momentum of our proactive solutions offering. Segment operating income was 74 million or 6% of sales, a 22 million decrease from last year. The decline was mainly due to unfavorable foreign currency translation. Improvements in price mix more than offset higher raw material costs resulting in a slight net benefit in the quarter. Turning to slide 18, Asia-Pacific tire units were 7.9 million in the quarter, a 10% decline from the prior year. Consumer OE volume declined 25% reflecting sharp production cuts by lighter vehicle manufacturers in China and India. Replacement tire shipments fell 2% driven by ongoing weakness in China. Outside of China, consumer replacement volume increased by 5% driven by growth in India and Japan. Segment operating income was 54 million or 10% of sales, a $63 million decrease from last year. The decline was primarily driven by lower volume in China and higher raw material costs. Turning to slide 19, we have again summarized the positives and negatives we see affecting our results in 2019. As you might expect, this list hasn't changed in the last three weeks since my presentation in Detroit. However, I want to offer a couple of additional reflections. First, I would soften a couple of the positives we've discussed previously. On net cost savings, you saw that in the fourth quarter, if I exclude the benefit of favorable indirect tax settlement in Brazil, our cost savings were about equal to the higher inflation levels that we're seeing. This is a good indicator of the challenge we are now facing in trying to deliver net cost savings and a driver behind our plans to announce further restructuring actions. And regarding the ramp up of our new Americas factory, while we expect it will be able to operate at full capacity by year end, this will mean only 2 million additional units produced there compared to 2018 as we work to add more complex products including a OE fitments to its production lineup. As we prepare for restructuring actions in our factory footprint, we expect to see a degree of transitional manufacturing costs or inefficiencies associated with moving products around. We'll highlight these costs for you as they occur. I would also soften one of the negatives as we've seen raw materials remain at low levels for an additional three weeks. While we maintained our forecast of 300 million for raw material cost increases every week at today's level makes it more likely we'll be able to reduce that number. Finally, we've seen pretty firm demand starting this year in both the U.S. and Europe. While it's still early it's good to see January get off to a decent start. That said, we continue to see a first quarter represents significant challenges in each of our three businesses. Slide 20 gives a high-level summary of the trends that we see. Not surprisingly, raw material costs feature prominently for each business unit, given an expected increase of 145 million in Q1 even higher than we saw in Q4. Slide 21 provides our analysis for your reference. As I said in Detroit, we're not providing any forecast of 2019 earnings beyond directional comments that I've made. However, in our presentation you'll find some updated materials to help you assess the year. Slide 22 provides an updated breakdown of our raw material costs by commodity category. Slide 23 provides an updated breakdown of our consumer business between 17-inch and above and smaller rim diameter tires for 2018. Slide 24 gives you our current expectations of industry volume growth for the U.S. and Western Europe. Slide 25 brings together an extensive set of modeling assumptions developed using current and prior disclosures and fully updated for 2018 results. These assumptions will enable you to model changes in the industry volume mix changes the impact of higher for lower factory utilization pricing changes, raw material and currency movement and cost inflation. To provide some other financial assumptions that we view either as less volatile or within our control. Important among these are some cash flow items. You'll see we plan capital expenditures of about 900 million up slightly from 2018 given spend deferred from last year and the impact of modest growth investments we've announced. On working capital, we're planning to reduce this use of cash to under 100 million and hope to improve on that view as the year progresses. And you'll see that restructuring payments are down significantly from a year ago. While we expect to announce additional restructuring actions during the first half, we expect most of the cash impact of these announcements will be in 2020. You heard earlier from Rich all the reasons he's optimistic about Goodyear's long term success. I share his confidence in our brand, our products, our position at OE and our leadership in future mobility trends. I also believe in our ability overtime to recover the raw material cost increases that have impacted our results over the last two years and it seems set to make 2019 a challenge as well. Either through a reversal of the costs or recovery in price mix, we'll come back up the earnings cycle and benefit not only from that recovery but also from the underlying improvements we're driving in our business. Now, let's open up the line for questions.

[Operator Instructions] We'll take today's first question from Rod Lache with Wolfe Research. Please go ahead.

Thanks. Good morning everybody. I had a couple of questions. First, your guidance for 2019 raw materials, is it still the case that if spot prices remain at current levels that inflation would actually be closer to 150 versus the 300 million that you guys guided to?

And that is the right interpretation. So the 300 million is based on our assumption that the average purchase price of raws in 2019 would be equal to the average purchase price of raws in 2018. And obviously, the 300 million also includes an impact for currency and some non-feedstock increases. But if we were to stay on spot rates about 150 million is where we would end up because the feedstock portion of this would be a lot better.

Okay. And can you help us just interpret some of the commentary you made on price and mix? Are these manufacturing problems that constrained the mix positive in the quarters that's something that could be addressed in relatively short timeframe? And can you just comment on the pricing environment and how we should be bracketing the opportunity for price mix if everything stayed where it is right now in 2019?

So, Rod I think the shortfall that we had in price mix is as we said it's primarily driven by weaker mix. So I can say that we got all nearly all the price increases that we had expected to achieve, so I think good on the pricing front. But the small exceptions to that with the pricing that we were assuming we would get in Brazil and Turkey. We got a little bit less that pricing was there to address devaluation in currency and both those currencies revalued a bit during the quarter and made the pricing tougher to get there. But otherwise, I think we got the price that we were expecting to get. The supply constraint question is something that we believe we will be able to address during the course of 2019. And that was the big driver of the adverse mix in the Americas. So, I think the -- I mean we went through in Detroit. I know you heard the commentary there the fact that these supply constraints are being driven by some additional complexity that we have in our manufacturing facilities and the fact that the strong demand early in the year had run down our safety stock so we couldn't go to safety stock and we couldn't get the tires out of the factory fast enough. Now there are a few things in 2019 that are going to help us improve that situation. And I guess starting with that the first quarter is normally a lower volume quarter and with the factories running as full in the first quarter we should be able to catch up because we'll generally produce more than we sell in the first quarter. So, a little bit of catch up there in addition as we take the 2 to 3 million units of OE volume down and about 50% of that OE volume decline is in North America. As we get that volume reduction in OE that frees up equipment to build replacement tires and should help us start to catch up on the replacement tires where we're in short supply. And finally, as we move through the year the additional output of the factory, San Luis Potosi, is going to help us. Our new America's factory ramping up is going to help us with that supply issue. So, the way I think about that is the mix headwinds that we had in the fourth quarter that related to supply issues. I wouldn't expect to see those in the fourth quarter of 2019. So it should be resolved by then. You may still see some adverse impact from supply in the first quarter.

Okay. So just kind of putting all of that together you know SLP plant alone is 2 million units or $60 million positive. I mean should we be looking at something more like 50 to 100 million of positive price and mix prospectively as you start to address these issues.

Well, I think if we go through the impact this adverse mix impact that we saw in the fourth quarter that were related to supply. I think given the fact that we feel like we got the price benefits that we expected from our pricing and consumer and our price increase in commercial. You could see the mix, the adverse mix impact that we had from shortage of supply could have been in the 20 to 30 million range in the fourth quarter. So it was fairly significant. That's something that I think we will see and we fully expect to see that unwind. So in other words we should get that money back in the fourth quarter of 2019. I think the real question there is how much impact you'll have -- how much can we minimize the impact in the first half of the year.

Right, got it.

First half, we'll see some negative by the second half we -- in particularly fourth quarter we should see some positive.

That's helpful. And then just lastly you did another 1.3 billion to 1.4 billion segment operating income this year. Could you just give us some more color on what the corresponding free cash flow would be? You did mention that restructurings only 50 million and working capital was 100 million this year. How should we think about the cash flow generative power of the company at that that level of profitability?

Yes. So I think with profitability where it is right now Rod I think we look at it and say the cash flow should enable us to pay for the restructuring cash that we've gotten the plan should enable us to cover the CapEx we have in the plan and should enable us to cover the dividend but not much more than that. So I think that that's a reflection of the cash that we're able to generate at this level of earnings. Now I will say this we do have the assumption that we would have a use of cash for working capital. Yes, and we're working to keep that under a 100 million. I am hoping that we come back later in the year and we're able to reduce that number. I mean that's one of the key objectives for the team this year and to the extent we can get more out of working capital than the situation can further improve.

Great. Thank you.

We'll take our next question from Ryan Brinkman with J.P. Morgan. Please go ahead.

Good morning, Ryan.

Thanks for taking my question. Good morning. How should investors think about your ability to stick the 2H 18 price increases in the context of the current raw material price and consumer demand environment? Given your earlier difficulty including in 2017 to stick the plan to price increases as raw material prices fall quickly and demand was soft. Could you please compare the current environment of raw material price decline and consumer demand to what we thought then?

Yes, Ryan, I think it and I think we went out with our announcement and put our price increase in place in North America last September and I think it was effective September 1st and we did a couple increases for truck as well last year. And I think if we compare it to 2017, I say one of the differences as we look today about eight to nine -- eight out of nine of our competitors in the U.S. also announced and implemented price increases or are implementing between October last year and say January of this year. So I think there is a difference in terms of what we've seen. And the question of how we think about you know the movement in raw materials and the impact that it could have I think we have been in a period of rising raw material costs. You heard Darren talk about what our forecast contemplates versus spot today. Hey look you know if that doesn't happen that's a positive thing. But I think it's something that we'll deal with at the time and I think we've shown an ability to you know overtime we've shown an ability to manage price mix in a decreasing environment of raw materials as well. So we would expect to be able to do that in a in a pretty constructive way should that present itself.

Okay. And then just lastly is there any guidance you can provide in terms of when investors might reasonably expect for the price mix to raw materials spread to turn positive or you know if you aren't comfortable calling which quarter, can you discuss the industry conditions that would be necessary to turn the spread positive. So know for example if the current level of spot prices would remain steady and if your recent price increases do stick is that enough to turn the spread positive. At what time in 2019 or do you need from here additional pricing actions or additional spot price declines?

Yes. So I think the two different ways that we can see this recovery happening. I think the one way that it could happen is for raw materials as you suggest to stay at these lower levels. And then by the time we get to the second half we would start to see some benefit from raw material cost. And you know historically when raw material costs have come back down any price adjustments have lagged that and we've been able to recover on a price mix versus raws basis. So that is one scenario that could play out. Another scenario that could play out is pricing dynamics could change and raw materials could head back up. And that is the scenario that's inherent in our raw material forecast. The one that we're operating with the 300 million. We're assuming raw material prices will start to rise again and that is partly based on the idea that we will continue to see reasonably strong volumes and even the possibility of some recovery in emerging markets that have been particularly weak over the last year. And if that recovery happens and volumes in mature markets stay steady then there's demand for raw materials that should bring those prices back up. If that happens and we see and we see different pricing dynamics then we may be able to recover or recover it by driving price mix above raws. So there's a couple of different ways and those are ways that in historical cycles each of those two has happened. And I'm not sure we can call which of those two is going to occur and I don't think we can call any precise timing on either one of them, but I do think we've got competence. In fact, we do have confidence that overtime one of those two is going to playout.

Very helpful. Thank you.

Thanks Ryan.

We'll go next to John Healy with Northcoast Research. Please go ahead.

Good morning, John,

Thank you. Morning. Rich, I want to ask just a little bit more about the complexity issues that you guys are encountering in U.S. plants. I was hoping you could give us some. I don’t know I want to see real life examples but just some more practical examples of kind of what's going on there. How long those issues might persist if they're more structural in nature given the move towards some of the OE fitments that you've had and the complexities with just the excuse or we're just trying to understand kind of what the true logistical issues are and how long those might last and what type of restructuring efforts might be needed to change that trend.

Yes, so John, I guess two things here. There is one. I mean one you're addressing is the supply issue that we had in North America and how long it takes us to get on top of that supply issue. And I can give one answer on that I think the question of the impact of complexity overall is it's a bit of a topic on its own and so I guess before I answer I'll ask you which of those two would you rather I spend time on.

I think the supply side of things might be a little bit more helpful. Yes.

No. And that's what's front and center for us right now. So as we have had a lot of success mixing up our product -- product content in the Americas so that 12% increase that we've seen in the 17 inch and above tires during the course of 2018 that's been a very good thing. And our demand has been very strong particularly in second and third quarters. So I guess that the first thing is that we went through the second and third quarters you know selling more than we were able to supply through the factories and that's a fairly typical pattern that we tend to build more tires than we sell in the first quarter. And then during the second and third quarter we tend to sell a few more than worth building. But this year the demand was particularly strong and that meant our safety stocks. So the inventory that we try to keep as a buffer got run down and run down below levels that you know that we'd like to see it at. And we were working and have been working to respond with increased output from our factories and that's our sort of legacy factories as well as the New America's factory. So we have been working to sort of flex up the output of the factories and we were counting on an ability to increase that output in the fourth quarter. And it is clear now that it's going to take us longer to get that output up even though we think we can do that. But the whole thing that makes it most difficult is that we are building -- we are building a wider variety of SKUs than we have traditionally and that means more changeovers in the factory. And we're building a more complex -- from a technology perspective a more complex type of fires. And I mean we can take -- there are lots of examples here. But those tires take longer to build. And you know if we look at the content of the tire itself you know we take we're generally talking about tires that have a lot higher content of silica. And we just take silica as an example, it takes 15% to 25% more time to extrude than other fillers do than carbon black does. It takes 20% more time to cure, and the extrusion process is impacted even more. So that -- the impact of silica is one of the factors, but there are others because these are tires that have a higher number of components, and they have a tighter tolerance in a lot of cases than the tires that they're replacing. So all-in-all, it creates a significant challenge for us in our factory footprint. We address that partly by upgrading equipment, and we've been doing that, and we'll continue to do that. But there is some portion of this that I'll put in the category of operational excellence, where we just have to work on efficiency programs to offset the effect of this additional complexity. And I think over the long run, we will make a lot of progress on that. In the short run, I think we're going to count on the fact that the first quarters -- the first quarter every year gives us some chance to catch up that we're going to be taking some OE volume out of these factories and the machinery that's been making those OE tires can be rededicated, repurposed to building replacement tires, helping us catch up and then leveraging the new Americas factory and the increased output there to help us catch up in our safety stock and our supply. So I think that supply issue should -- will get resolved during 2019. And again, that -- everything I suppose is market dependent, but I think we're optimistic that we can get on top of that, and still could have some impact in the first half, but I think, we'll get ourselves clear of that as we move through 2019.

Great. That's very helpful. And I wanted to ask just your perspective on China with the boots on the ground that you have there. Maybe some perspective in terms of where that market is for you guys in terms of showing some leveling off or if things do appear to be still cascading lower. Just your expectations on when we might find on the floor there.

The question of where there's a floor, I think, is still a tough one to answer. But I think overall, we don't really have our enthusiasm dampened in terms of the future and the earnings potential that we have in our business in China. The situation we saw in 2018, particularly the last half or even the last quarter, saw the new car production dropped by teens for what? Three months in a row. The full year down 4%, which is the first time, I think, since 1990. So it's more of a very particular thing that hit us right now, and that will linger into at least the first half of 2019 as well. But as we ultimately look to the future, a couple of things get us excited. One, the car parc on the road is still a very good one. And remember, most of those vehicles, given our high OE footprint, is 17-inch-and-above, so there's a good replacement market there. Secondly, the OE vehicles that are coming out are very robust. A lot of those are EVs, and a lot of those are large rim diameter tires. And our future OE portfolio is shaping up very, very strong in China as well. And yes, they're going through a bit of a dislocation right now, and we can't predict exactly when that turns around. We know over the long term, that is a market that we want to be in, and that has great opportunities and really great innovation as well. And then the last thing I'd say is we see, from a retail perspective, lots of opportunities to expand our presence in, not only the coastal cities, but continuing to expand inward. And that white space and that opportunity to grow is still very strong. So I view this as really just the growing pains of an economy that continues to grow at a rate that's obviously essentially best in the world. So we remain very optimistic, I would say.

Great. And then just one final question for me. As you guys think about TireHub, I know you just had your big Dallas kind of dealer meeting. What was the feedback? Are there any metrics that you can kind of give us about TireHub regarding dealer retention? Any sort of updated thoughts? I know you indicated it's progressing well, but just kind of maybe some detail there.

Sure. I mean, if you look at some of the markers that we have out there, I think we essentially exceeded our transition plans as we initially laid out. Equally so, our fourth quarter volumes through TireHub exceeded our plans. We have not lost any customers. We've had some growing pains as we've put TireHub in place as you would with any start-up company, but we have not had any significant customer losses at all as we move ahead. And I would say when we look at their inventory, they're actually running more efficient than our previous supplier. They're running at about -- we say about 42 days. That's about 20 days less than our historical national supplier. So from that perspective, very good. And I would say there an entity that is focused on improving their service, improving their numbers and getting the -- getting those customers and tires where they need them. So I would say, it's moving along very, very well. And I think that the issue on supply that Darren referenced earlier in the last question, that is an issue. But I would also tell you that supply in the fourth quarter in the industry is something that was a bit of a challenge. And I think if you ask around, some of our competitors had the same problem. So that issue, I think, is out there in the near term as well. But overall, I would say, in all of the things we look at, TireHub is essentially on or ahead of schedule.

Great. Thank you, guys.

We'll take our next question from Ashik Kurian with Jefferies. Please go ahead.

Hello, Ashik.

Hi, everyone, thanks for taking my question. I appreciate that a lot of the discussion has been on macro conditions and the industry backdrop improving from here, but from a longer-term point of view, the absolute volume level of the market and pricing, especially in your home market, I would say, is still at very healthy level. So given where we are in the cycle, I'm interested in getting your thoughts on how you see your balance sheet sing. I appreciate the comment on limited share buybacks going forward, but I would have expected more significant actions or strategic decision to shore up on your balance sheet given that you're saying on current earnings, the underlying deleveraging has been significant. And also, the recent volumes and earnings, do you feel justified in spending around $900 million in CapEx?

So Ashik, I think, you're -- I am equally focused on the health of our balance sheet. So I think it is something that we take very seriously, and we intend, overtime, to move ourselves toward a balance sheet that would represent investment grade. I mean, that is the -- strategically where we want to see ourselves going. The -- so as a result, not good to see the increase in our debt-to-EBITDA that we've experienced over the last couple of years. Although I do think we recognize there's always going to be cyclical impact to our leverage metrics. As the earnings cycle plays out, there will be point in time where earnings will drive our debt-to-EBITDA up. And as the cycle recovers, the earnings -- the improved earnings will drive our debt-to-EBITDA back down. But our leverage, which right now is around -- at the end of the year, was around three times and depending on how you calculate it, but around three times. I think something like two times is somewhere we would like to see ourselves long term, and we want to start to make progress on that, certainly. But as we're going through this part of the cycle, I think we -- certainly, we don't want to be using cash, but the level of CapEx and restructuring that we have planned for 2019 and the dividend are things that, at the run rate of earnings, are affordable. The -- I think as we're able to make more progress on working capital, we hope to be able to leverage that to generate a little bit more headroom from a cash flow perspective, and that's an area of focus for us. And as we see our earnings come back up, so as we start to see our way through the raw material cycle and earnings for us and the industry start to move back toward peak levels, we would expect to take some of that cash flow that's generated at higher earnings levels and use that to improve our balance sheet. So I -- that is the perspective that we come in with. I am very focused on ensuring that we are not allowing our balance sheet to deteriorate any further. But I also recognize that some part of improving our leverage is going to have to come from improved earnings.

All right. Just a follow-up. What is your current level of maintenance CapEx? I think previously, might have been around $600 million to $700 million. But now that the Mexican plant up and running, what do you estimate your maintenance CapEx is?

Yes, Ashik, I think we -- I mean, there are always level of CapEx that you can live with for a year or two, and those number is a little bit lower. But I think our depreciation rate, which is around $775 million; I think that's as good an indicator as any of what our maintenance CapEx would be for any extended period of time.

One final housekeeping question for me. In the notes for your SOI drivers, there were a few one-off that you flag, including tax settlement in Brazil. What were -- Is it possible to quantify the one-off impact within SOI from some of the tax impact?

Yes. So I think that the -- yes, the most significant item here was in the Americas, and that was the indirect tax settlement that we reached in Brazil, which was effectively reversing some value-added tax that we had paid over a number of years. And that was a benefit of about $31 million in the Americas. And so now there were a couple of other items that moved the other way in the Americas, but that was the most significant one. That $31 million was also a benefit for us as we look at cost savings versus inflation, and that was the basis. As I look at our cost saving versus inflation, if I take out that 31 million benefit, then our cost savings were about equal to inflation in the quarter. And that is clearly not where we want to be. But that's the -- I mean, those are the places, in the Americas earnings and in our cost saving versus inflation, those are the 2 places where that indirect tax settlement in Brazil features most prominently.

Thanks a lot.

Thanks Ashik.

Thank you. We'll go next to Emmanuel Rosner with Deutsche Bank. Please go ahead.

Hey, Emmanuel.

Hi, good morning, everybody. So I guess just to clarify. Are you now expecting fewer units to come out of the new plant in Mexico in 2019 versus before? And what is driving this?

Yes. So here is -- and it's a good question. So I think in previous discussions, we would have looked for the new Americas factory to produce up to an additional 3 million units in 2019. But given the supply situation that we had in the fourth quarter, we've made a couple of changes to the plan for that factory. And effectively, what we have moved to is working to put more complex products into the new factory quicker, and that includes putting increased OE products into that factory. Now that has the benefit of helping alleviate some of the complexity in the supply challenges in our other factories. So from a long-term perspective, it's the right thing to do, and it helps us get on top of the supply situation. But as we work to put more complex products into the plant -- the Americas plant, the new Americas plant, we now see that increase in unit volume at about 2 million units rather than the 3 million that we have previously seen. But in the long run, we still expect that factory to be able to produce 6 million tires. So it doesn't change the long-term capacity of that factory, but it does mean, on a unit basis, lower output, although ultimately, higher value and more beneficial output for us in 2019.

Okay. That's great color. So I must ask you a little bit more in those sort of supply issues. I understand your points around the wider variety of SKUs being built, more complex types of tires in general. None of those things, though, feel like new issues at least or new topics for this industry. I think you may even have spoken about those over time as sort of like a point of differentiation between higher value-added sort of tires. Has there been sort of a meaningful step-up in the complexity or sort of more a bit of a breakdown in operational execution?

Yes. I'll jump in here. I think you rightly point out that these issues have been lingering for a while in terms of the complexity coming into -- impacting us for a while, I should say, impacting the industry for a while in terms of complexity going up. I think that one of the things that we -- what we saw is that because of we had such good sell-out, demand was so high and even as you saw the industry had -- I think you find the industry was a little bit short of supply on the right tires in the fourth quarter, we saw demand spike, and I think that put an incremental pressure on our factories. And we didn't get out the tires that we had planned to get out because of that complexity. So listen, I have to say, that's on us, right? We did have more pressure. We are focused on this, as Darren said. We know how to do this. We can do better, and we will do better as we look to 2019. But it's not a new issue. I don't think that we could characterize this complexity being new. It's absolutely a continuing issue. And as we think about whether the industry going -- is going, we do believe that, that still is an advantage for us as we look to the future. But in the quarter, we didn't do the best at managing it, and, that's on us.

Okay. That's clear. And then I guess finally, looking at your outlook for 2019, I guess more -- the slide on the positives and the negatives. Which of these factors specifically are hard to quantify or either sort of prevent you from giving a more detailed or specific quantify 2019 guidance? I mean, it feels like the -- a lot of these things are more like discrete items. Some of those you've made assumptions about in the past, in previous years. So what -- where is really the uncertainty here? And why no guidance in the end?

Yes. So I think the -- we obviously spent time -- a lot of time reflecting then coming to the decision on returning to using modeling assumptions rather than segment operating income guidance. But I just -- I mean, for perspective, I participated in Goodyear conference calls for 10 years without us giving guidance. So this is an approach that we have a lot of experience with, so it is going back to an approach that I was very accustomed to. Understand the benefit of guidance in the right circumstances, but I think we're concluding the circumstances were and are not the right ones for giving guidance. And the external factors that are driving near-term results to the greatest degree are factors that we don't control. So I mean, commodity cost would be top of the list. Currency rates would be up there as well. And to some degree, industry volume and pricing dynamics have been very tough to call. So if we look at the last couple of years, certainly, we've had a lot of recent evidence of this volatility and an environment that is difficult to forecast, but I think there are a number of those issues that are not really new. There are things that have traditionally been -- have driven near-term earnings and have been difficult to predict. So I think that's what brings us back to working to do a really good job giving you modeling assumptions, giving you ways to understand how to predict the financial impact of assumptions that you might make, and we're going to continue to do that and keep those modeling assumptions up-to-date. But we ultimately got to the conclusion that, that was a better approach for us than giving segment operating income guidance. I will also say that it is a reflection of a lot of discussions that I had with our shareholders during the course of the first 90 days I was here. A lot of those discussions had a lot of recommendations from our shareholder group that effectively, we go back to using modeling assumptions rather than segment operating guidance as a way to communicate with the investor community. I think I will say this, and I think we'll add this, and I guess we're -- you're obviously not giving any segment operating guidance for 2019 or 2020 or any other year, so we are not doing that. We are doing the modeling factors. We will come back later this year with some thoughts on longer-term objectives for our key metrics. So we will do that. I think we've committed that we would give you our best thoughts on 2019, which we've given you today, and then come back and have a follow-up discussion on the longer term. And I think we will come back with some longer-term objectives for some of our key metrics, but just not today. We'll do that later in 2019.

Perfect. Thank you.

Thank you.

We'll take our next question from Anthony Deem with Longbow. Please go ahead. Your line is open.

Good morning, Anthony.

Good morning, gentlemen. Thanks for taking my questions here. So just to start off first, a month ago, Darren, you publicly stated the first quarter 2019 SOI decline might look similar to the fourth quarter, which was down about 27%, even more excluding the Brazil value-added tax. Wondering if that's still the case, if first quarter 2019 can be down that much.

Yes. No, I think the comment was a reflection of the headwinds that we saw in Q4 and thinking that the Q1 headwinds looked similar to Q4. So and I think our -- my thinking on that was in looking at the dollar decline that we saw in the fourth quarter and the drivers of that and the fact a lot of those drivers look very similar in Q1, I would say the same thing today.

So with the 145 on raws, which you provided in your slide deck, because we have about $93 million negative price mix over raws. So essentially, maybe something on the lines of $50 million, $60 million positive price mix would be reasonable for the first quarter?

Yes. So I'm not going to give particular numbers. I think we're giving you the direction here. I would say that there are going to be a number of different factors that are worth considering for Q1. But I think you're right to point out that price/mix versus raws is driving a big part of the outcome.

Okay. Thank you. Two follow-ups. So you still have about 45% of your OE volume of low value-add tires, 60% total company. That mix is going to benefit a little bit because you're relinquishing 2 million, 3 million OE volume mostly in North America. I'm just wondering, with Goodyear having a sizable percentage of low value-added tires still, I'm wondering what the plans what the volume over the next five years, if there is any impact on absorption, and if there might be a direct connection here to the footprint restructuring. And really ultimately, do you see us modeling down OE volume for the next several years past 2019? Will that be a reasonable expectation with the hype and focus on HVA?

So, I think that our expectation is that we're going to go through a dip in our OE volume in 2019. And as we've come off some low-value fitments, and those fitments particularly focused on smaller rim diameters and focused on sedan tires, we have been having a lot of success acquiring new fitments that will start to come into production in 2020, 2021, and that should take our OE volume back up. And it should improve the mix of that OE volume. So I think, I mean, strictly speaking, that's what we expect, 2019 is a bit of a dip. And then we will -- we're going to start to come back on with some increased OE fitments, increased OE volume thereafter.

One last question for me, please. so USTMA fourth quarter U.S. consumer replacement shipments up 5% for the industry. Goodyear, flat, it looks like. Was -- can you quantify any impact from ATV during the quarter? In that slide in the footnotes, you mentioned you exclude any impacts from ATV as you talk about your market share recovery. And then secondly, it looks like you believe U.S. replacement can ultimately gain share on this sort of normalized run rate, excluding the ATV effect. So for 2019, Americas replacement volume, should we anticipate that Goodyear grows in excess of that 0% to 2% industry outlook you provided?

So on the ATV question, in terms of the fourth quarter, no impact there. And while your numbers I certainly recognize, I'd also added to it. In the fourth quarter, we continue to have a very strong sell-out. So for three quarters of the year, we started a little slower in Q1 for reasons I won't go into now, you may recall, but sell-out remains very strong for us as we ended the year. And as Darren mentioned earlier, we're seeing again good volumes in January as well. So that's kind of how we're looking at it. And then -- and in terms of 2019, we're not going to go into detail.

No, I think -- for 2019, I think the only unique item that would -- or the unique item that would make us different than the industry in 2019 would be a recovery of the onetime TireHub volume decline that we saw in 2018.

And I think second quarter was 0.5 million unit impact. Can you remind us what third quarter was? If the fourth quarter...

Yes. So the third quarter, it was less than 0.5 million.

Right, yes. Okay, got you. Alright. thank you very much.

Thank you.

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

Great. Darren, for the raw materials, can you just describe to us what the non-feedstock cost increases are and what's driving it? Is it higher logistics cost? Is it worse internal utilization? Is it something else?

Sure. And I think that -- listen, the biggest individual factor in the non-feedstock for us right now is the some -- the loss of Chinese supply for a lot of commodities, which it isn't -- strictly speaking, it isn't the feedstocks that are going into suppliers that are rising, but the -- I guess, the number of suppliers available has gone down, and we have had to shift to higher-cost suppliers or we have had to offset the cost of the investments that our existing suppliers in China are making to meet new environmental standards. And to the extent it's offsetting investment they're making, it doesn't mean that their inputs are -- the cost of their inputs are going up, it's the cost of their production that's going up, and we have to cover that. And we separate those two in order to sort of make it clear what's being driven by the movement in observable commodity prices in the marketplace versus what is unique to us and our industry. So I that's the single biggest factor.

Got it. That makes sense, and it is helpful for you to break it out that way. And just another one for you, Darren, before I have a question for Rich. Should we interpret your comments about debt levels and use of free cash flow to kind of help pay that down over time as a change in direction from the balance strategy from a capital allocation perspective that -- did you previously employed?

Well, I think it's certainly a reflection of the experience we've had for the last couple of years. So when we get to this part of the cycle, I think our minds turned to a different place. I think the balanced strategy was very applicable when we were making -- when we were generating enough cash flow to pay for restructurings and capital investments -- reinvestments in the business and cover our dividend and have cash left over for both debt repayment and shareholder return programs. So it made sense -- may have made sense that at that point in time. At this point in time, there's just not enough cash being generated to focus there. And unfortunately, our net debt levels have gone up for the last couple of years, and that's not what we want to see. We don't want to go through the cycle increasing net -- our net debt in that way. Although we may see leverage go up as a result of lower earnings, I don't think we want to see a net debt rise like that. So I think given where we are now and what we've experienced in the last couple of years, I think it has changed -- certainly changed our emphasis in the near term. I think as we go back up to peak of the earnings cycle and as we get our level of leverage moving back toward two times on a debt-to-EBITDA basis, then the opportunity just step back and think about a balanced capital allocation strategy is going to come back. But that's a ways off in the future.

Understood. I appreciate the clarification. And Rich, I have a question for you. Just on Slide eight, you mentioned a nice OE pipeline two-parter. What opportunities are there for you to regain share? What customers are you seeing this opportunity with? And that's one. And then further, and but probably will be tied together, but for electric vehicles, what can you do to differentiate your tire versus the competitors? Or what are OEMs really asking for that is differentiated that maybe only a few top players can do?

Sure. On the first question, I think our -- the OE fitments that we're winning are really broad-based around the world. So I mentioned earlier in China, we have a number of increased fitments with a lot of local OE manufacturers in China, which is a little bit different than how our footprint -- or how or customer base has been in China over the -- over our historical time since we've been there. So that's one thing, and a lot of those vehicles are EVs as well. So that's a big positive. Equally so, we continue to work with some of the global manufacturers on winning global fitments in both emerging markets and in the U.S. A lot of those are in the pipeline right now, and we've had big success with some of those fitments. And as we look in the U.S., our strength continues to be on trucks and SUVs, and that trend is continuing as well. So as we -- as you say, what customers around the world, David, I would tell you, of all the top manufacturers, we are, I would say, increasing our presence with them, both in winning fitments and in working with them on developing tires for new cars coming out. So we feel very strong about where we are on that. And in terms of the EVs, in terms of what we can do different, I think you can put it in a number of categories. One clearly is just sound, right? I mean, sound and the noise levels in an EV are much different than in a normal vehicle that we're all used to. So things like what we've done with foam and tire, things like what we've done in terms of just the complexity around making a tire to make sure the uniformity is there, to make sure it's the right materials, to make sure that the tire delivers the ride and consequently the sound of the right where is a big deal, and that gets to both process manufacturing materials and design with the OEMs, and we have a seat at the table for doing that. So that's clearly one thing. The next thing is around wear, and that involves a lot of the things -- the same things that I said, but wear is very, very important because, as we've talked about in the past, the torque going to the vehicle, the heavier vehicle because of the battery on it, we know that wear can increase anywhere from 20% to some of the sort of faster cars, think of some of the high-end Teslas, we've had numbers that could go up to 50% on those things as well. So wear makes a difference and how we ultimately can construct that tire to give better wear for that vehicle as well is something that we do. And if you'd say how is that differentiated, I would -- I'd put you to may be a source you wouldn't normally think of. But if you look in our commercial industry, one of the reasons that we have the position we do with the fleets is managing the durability and the wear of those tires, and that is a, again, design process manufacturing and listening to the customers and designing backwards from that. So those are a few things that make us a great partner for those EVs. And frankly, that's what we're experiencing. Going back to your first question, that's why we're at the table with all those global manufacturers on those EVs because we can bring that expertise and partnership and proven capability to them.

Got it. That's really in depth and helpful. Just a follow-up, I know your last question of the call. Does that present the same difficulties that you've seen with some of the SKU proliferation and the larger rim diameter tires? Or do you have enough of a runway between now and when those get to a full ramp that you shouldn't see any capacity issues or supply issues for...

I think the answer is a little bit of both. I mean, the complexity issues aren't going our way. That is going to continue. The size and type proliferation that's out there is absolutely going to continue. That's not going to diminish. And again, we know how to manage that, but we didn't demonstrate it at this point, and again, take responsibility for that as we look at Q4. But at the end of the day, we know how to do that and we're planning for that to increase, and that's something that we'll manage. And I think as we look at those OEMs, we look at the fitments, we're committed to making -- to giving in the supply that they want and need. And we're going to do that. So we will have the ability to do it. There's no question about that.

Got it. Thank you very much for the time.

Thank you. So, I think that was our last call and we want to thank everyone for their attention today and appreciate the support.

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