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 First Quarter 2020 Earnings Call. [Operator Instructions].I'll now hand the program over to Nick Mitchell, Senior Director of Investor Relations. Please go ahead.

Thank you, Keith. Thank you everyone for joining us for Goodyear's First Quarter 2020 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 a 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.

Great. Thank you, Nick. And good morning everyone. I hope our call here today finds all of you as safe and healthy as you can be and for your families as well and I hope you're all working through this pandemic as best you can.Now during my time of Goodyear, we've managed through the effects of the Great Recession, the European debt crisis, the early 2000s recession and 9/11. And it's not an exaggeration to say that we're in the midst of a crisis of historic proportions. Our business was first affected by COVID-19 in China, but over the course of the first quarter the impacts became widespread. As a result, our first quarter volumes fell 18% and segment operating income fell into negative territory given the effects of lower volume and unabsorbed overhead. The impact of this crisis spans well beyond the economic outcomes presenting both personal and societal challenges that are simply unprecedented. And I'm truly amazed at the way our associates rose to the challenges.In a matter of weeks we fundamentally changed the way we work to ensure the health and well-being of our associates. We close our corporate and regional offices and instituted work from home protocols around the globe ensuring that our associates remain engaged and connected with digital tools. These same tools have helped us stay in constant contact with our customers and suppliers allowing us to quickly adapt to the changing market conditions and maintain the continuity of our business. Our goal is first class service and support for our customers and consumers during these trying times. We've also modified operations at our company-owned retail stores to safeguard our associates and align our staffing to meet market demand without sacrificing our commitment to keep health care professionals, first responders, grocers, and our fleet…

Thanks, Rich. As you seem to tell from our press release on April 16 and from our release earlier today, we've taken dramatic steps over the last six weeks to respond to the disruption caused by COVID-19 and to reduce as much as possible the financial impact it has on the company. We quickly shut down production in the U.S. and Europe and work with suppliers to stop the flow of raw materials and other supplies to reduce expenses and to avoid tying up capital in the inventory unnecessarily. We then evaluated all other categories of expense, including marketing, research and development, and salary payroll.While we have plenty of experience as a team with cost cutting and general belt tightening, we had to add some plays to our playbook to deal with this level of decline in business activity. This included reviewing the roles of 9,000 salaried associates and furloughing approximately 2,000 of them for the entire second quarter. Furloughing another 6,000 for part of the quarter and reducing and deferring pay by 10% to 30% for those who are working. With only a week's worth of planning we've reduced our payroll spend by nearly $65 million for the second quarter taking advantage of the government income replacement programs to ensure our associates are supported. In addition, we cut marketing and other administrative and general expenses by $75 million for the second quarter. Simultaneously, we were working on ensuring our cash and liquidity position was protected to the greatest degree possible. This resulted in a number of actions to preserve cash, including reducing our capital expenditures by over $100 million, deferring investments in distribution, suspending our dividend, preserving over $110 million between now and year end, and leveraging government relief efforts to defer payroll and other tax payments, an improvement…

[Operator Instructions]. We'll go first today to Rod Lache with Wolfe Research. Please go ahead.

Good morning, Rod.

Good morning. A lot of information. And I appreciate the detail. So hoping you can just give us some help with some of the bridging items that you talked about for Q2, which obviously is going to be the toughest quarter of the year. So if I think about volume, last year you did 37.5 million units in the second quarter?

Yes.

I'm assuming that cutting that in half you've got like 18.7 million units and typically it's like $17 per tire volume impact, so that would be $300 million. And then separately from that just so I understand the period accounting, it sounds like you've got $25 million reduction in output from the plant with, I think, on average weighted average of $12 a tire so that's another $300 million on top of that. Is -- am I thinking about that correctly from those two items?

Yes, you're -- I mean, Rod, that's the -- the modeling assumptions still work and I'm here -- and obviously there are -- the volume itself will be spread across different geographies and every geography is a bit different. But directionally you're doing the math that I -- I'd suggest that you do that.

Yes. Okay. Yes. And then separately you've got $150 million from the other businesses that wouldn't be in that and it sounds like $140 million of savings. I mean it sounds like those are the major bridging items, if I understood them correctly.On the working capital your comment about the $1 billion use, well, I mean was that just working capital or were you -- was that $1 billion use overall?

Definitely. So Rod, that – you know the income modeling that you were just talking your way through, effectively what I -- what we've done is we've taken the losses along with the working capital and said if you take the operating losses and the working capital together that can result in a use of around $1 billion of cash in the second quarter.

Yes.

But it's -- only a small part of that is working capital.

Okay, good. Yeah. That makes a lot more sense. Okay. And then can you just give us a sense of -- obviously we're seeing this massive volatility in the commodity complex and oil and presumably all oil derivatives are down huge. So the numbers that you give on a dollar basis are affected by the volume numbers that you're assuming and what you're purchasing, but can you just give it a sense and maybe of the percentage declines that you're seeing kind of on a spot basis and what the strategy is vis-à-vis just taking advantage of that, when would we see this?

Yes. Now I mean -- Rod, I think the comment is fair. And if we look at it's particularly the oil derivatives, so we look at carbon black and look at butadiene. Those are commodities that have dropped dramatically over the course of the last couple of months. And so I think we're -- we were buying carbon black for $40 in the fourth quarter. And the spot price right now is $17 for the same barrel, so that's 50% percent drop. Butadiene, it was closer to $0.40 a pound and now it's more like $0.25 a pound. So we've seen those dramatic reductions. I think -- and we've incorporated where spot prices are and are thinking about what benefit we might get in the second half. However, it is mitigated by the fact that we're not really buying materials right now. So we had materials when the shutdowns occurred. As we ramp back up we'll start to buy materials again, but we won't buy a significant amount until the third quarter so we would start to get some benefit in Q4. So I guess the active question is going to be what's the price of these materials in Q3 because that's when we're actually going to be buying them. Now, we've assumed -- it will take a while for those material prices to go back up and so we've assumed some benefit and that is what we have given in terms of that $50 million to $100 million if we exclude the effect of the transactional effect of currency.

Okay. I think I understand. But basically I guess I'm just thinking about just the magnitude of raw materials as a percentage of COGS typically. And -- I mean are we looking at kind of a weighted average decline at this point of almost 50% that would -- where this would be sustained it would actually benefit pretty massively in '21?

If I took just carbon black and butadiene relative the fourth quarter you'd be getting into that 50% range, but obviously just it has -- it takes some time to work its way into our cost of goods sold. There are other commodities that have not been as affected. So if I do the same math for natural rubber, we were buying it at $0.60, its $0.50 today, so not down nearly as much. So I wouldn't go as far as the 50% even if things were to stay at these prices. I think our expectation is by the time we get to 2021 when we would be getting sort of the ongoing benefit of the decline that increased higher production is going to bring those material costs back up, hard to tell how fast that happens.

Okay. Got you. All right. Thank you.

Yes.

Our next question is from Ryan Brinkman with JPMorgan. Please go ahead.

Hi. Thanks for taking my question. And thanks for the update on the raw materials tailwind just now. How are you thinking though about your ability to capture those raw materials savings and of price/mix? I think earlier the industry and Goodyear had complained of an inability to fully recoup the effect of sharp raw material cost inflation thinking specifically of the 2017 timeframe. Going forward, how do you expect this dynamic to work in a period of sharp raw material deflation? Do you think it is easier as one might imagine to not cut price to the full extent of input cost deflation than it is to raise price to the full extent of inflation or while capturing the benefit you may be unusually challenged by the magnitude of expected industry volume headwinds and related unabsorbed extra cost?

No. Ryan, I think it's a very relevant question and certainly one we're thinking through. And I think if you go back -- and I don't recall the pages, but Darren actually touched on this a bit. And I think if you look to -- into the previous downturns and what we've seen is the benefits of lower feedstock really more than offset sort of the pricing pressure that comes on the lower feedstock prices as well as the soft demand. So net-net what we've seen is a benefit during these periods. And yes, the impact on price ultimately happens but it occurs gradually and sort of on a lag basis. So that's how we've worked through this in the past. And I think there's a basis to think that that situation would again present itself. And I think if you're -- even if you look at how we -- we're seeing pricing in the market today I mean if we go around the world in the U.S., look through Jan and Feb we've -- we really saw a positive -- really a positive pricing environment with several of our competitors as you know announced planned price increases and we announced a price increase of up to 5% in early March.In Europe, if we look around, again mostly a summer market at the points that we've seen, but we saw stable to slightly a positive pricing environment again really focused on summer. Winter will present itself as we work ahead. And then -- you know, so I think as we see that it's a -- it's -- it's a sedentary -- it's a reasonable environment. Right now we'll see what happens. I think Darren's explanation was very clear in that we do see those lower raws right now. It's not simply a straight line as we got to start buying again and we'll see where those prices end up as demand comes back, which we think it will. But we do believe that the -- that situation of being able to capture the benefits of the lower feedstock in this downturn is something that we can do.

Okay. That's helpful. Thank you.

And our next question is from our Armintas Sinkevicius with Morgan Stanley. Please go ahead.

Great. And thank you for taking the question.

Sure.

I was hoping you could maybe walk us through the working capital dynamics here and how that flows from the first quarter into the second quarter? And then the second question is the decremental margins here in the quarter were quite high. How should we think about that into 2Q?

Yes. So I think the -- you know two things are going on. And let me take the working capital question first. I'll come back to the margin question. Yes. So working capital in the first quarter, I would say largely behaved as we might expect in a softening environment in that we had some decline in receivables in it and as sales softened our inventory didn't change a whole lot, but our payables were relatively stable as well. So we have, what I would characterize as, a fairly normal first quarter working capital build based on seasonality. And so that I would look at and say first quarter didn't look much different than first quarter normally looks. When we get into the second quarter, what we're seeing is that our -- obviously our inventory with the production cuts we're taking we're expecting to reduce our inventory so it'll come down as it should given demand.Receivables obviously with lower sales are going to come down as well. But we're also seeing is that when normally we have got 90 days or so of payment terms from our suppliers, which provides financing for our inventory because we are not really buying materials for production right now. By the end of the second quarter most of our suppliers will have been paid and our payables will be much lower. And that's a temporary effect. As we start buying materials again, payables will normalize and that's part of why we're saying that we expect working capital to be a significant source of cash in the second half. And by the time we get to the full year we're expecting working capital to be at least a modest source of cash for us in this environment. So a little bit of a unique effect…

And my other one just real quick. The actions you took here and its sometimes proactive with the dividend and the CapEx, but as we're moving through these numbers it look like they were acting that you had to take. How should we contextualize you being proactive with regards to the back in person these are actions that you have to take?

Yes. No, I think that -- we've -- I believe that we've spent a lot of time on cash flow modeling all of which has confirmed that we've got the resources to manage through this year. But it also helped us focus on fighting actions to keep improving the situation giving the uncertainty we've got in how the recovery is going to look. So I think these are all prudent measures for us to take given the fact that there is going to be, you know, we're going to suffer operating losses during the -- significant operating losses in the second quarter and some uncertainty regarding volume recovery that ultimately will become clearer. But we started the quarter with cash and available credit of $3.6 billion. We're talking about a use of cash of around $1 billion in the second quarter. And then in the second half of the year whatever happens from a volume and earnings perspective we'll have a significant source of cash and working capital.So I think we look at that and say we want to be conservative, we know this is a time to manage the business for cash and to make sure that the balance sheet and our cash and liquidity position is solid, but I think that you can view those actions as being sort of appropriate and proactive to make sure the situation is one that we're able to comfortably manage our way through.

And I would just add to -- Darren, to your comments. I completely agree with him and I think it really goes into a bucket of prudence. Even if we go back to the Darren's comments answering the question on the high fixed costs that we see in the second quarter, we saw a very similar situation when we went through the Great Recession where we saw a deep production cuts, not as deep as they are now, but deep demand falling off and production cuts and what we see are those what were sort of product costs, the flow through cost of sales with the sales of our product becoming period cost that lasts for a quarter or two and then we get back to a normalized sort of production. We believe that will happen again.And secondly, having gone through the Great Recession I think, Darren, you'd agree with me as we look at that part of the issue here is we don't know exactly the timing of how these things come back. So in that environment I think we look at it in the context of certainly managing for cash, focusing on liquidity that's number one. But we also look at it as a way to prudently manage through a situation that is similar but somewhat dissimilar to what we did before, but the similar side is not really knowing exactly how it plays out at the moment and that situation begs a degree of prudency and I think that's how we thought through that question.

Great. Much appreciated.

[Operator Instructions]. Go next to James Picariello with KeyBanc. Please go ahead.

James.

Hey. Good morning, guys. Just wondering if you could talk about your Goodyear's performance with respect to consumer replacement buy-ins in the U.S. and Europe just given the companies [indiscernible] that and what was your bucket in terms of the major impacts there relative to the market?

So -- and you can broke up for a minute, James. So if I don't answer something certainly, please come back in. But I think -- look -- and I think if we believe sort of dissect the two, in the U.S. you have to remember our fourth quarter was one of the highest fourth quarters that we had in the consumer business including our share position there. And remember, that came off essentially gaining back all this year going back to some of the share losses we had as we try to recover raw material prices a few years back. So we were very, very pleased with the performance in the fourth quarter last year, so you have to start there.When you look at what happened in Q1, I would say our business was off to a very good start through Jan and Feb to be clear, but you also have to look at our relative size and weighting in the U.S., and I think a couple of things come to mind here. One is, as you look at where our higher shares are in the U.S., it's on the coasts on the East Coast in particular and in the Midwest. And what again you saw was a little bit weaker winter. So we saw a little bit weaker share be currently for -- weaker volume, excuse me, because of that. And then pair that with two impacts coming out of COVID. One is, again, the high COVID impact to the East Coast also the West Coast and the Midwest in terms of a place like Detroit because we over-index there, we are hit a bit harder in those markets. And secondly, as you know, we have a very big business and business we love with Walmart, but Walmart…

Got it. No, that's really helpful. And then just on the Gadsden closure, can you talk about maybe the timing of $130 million savings over this year and next? And how should we think about the volume inefficiencies related to that closure over the next 12 plus months or Q2, just 2Q and 3Q? How should we think about that? Thank you.

Yes. So James, I think what we've chosen to do here just try to keep things as simple as we can is just to focus on the savings we're going to get 2021 from that improvement in our footprint. The way that is going to play out this year has some real uncertainty around it because of the uncertainty around how our production is going to ramp up and the other factories. So I mean the savings we're going to get there, will have -- will be affected by the timing that we're working through right now in terms of getting the obviously the approval of the local union, starting to take the actions to move the final products out of that factory to other U.S. facilities. And that's going to take some time and all of that timing is affected by how quickly those other facilities are ramping up. So there's -- I would say there's some uncertainty as to how much benefit we're going to get this year. I think there will be some in the second half, but most of the savings here is really going to get to us and benefit us in 2021.

And our next question is from Itay Michaeli with Citi. Please go ahead.

Morning, Itay.

Hey, Itay.

Hi, good morning. Thank you. So maybe just two questions looking beyond Q2, maybe one for Rich, one for Darren. Rich, well, what do you make of the potential kind of longer-term implications of the crisis particularly around the risks of your lower vehicle miles traveled, more able to work from home? And then maybe, Darren, can you just kind of talk about a little bit directionally perhaps where you expect kind of your gross or net debt and the year and how you're thinking about leverage for the company kind of beyond the immediate crisis?

And Itay, I think it's a good question and obviously it's a bit of an unknown, but I will tell you I do see some of the things that we have is somewhat transitory on our way back to some semblance of normality. And I think about that from the perspective of clearly the trends that we're seeing people are going to be more conscious of their personal health and they are. People's comfort with things like e-commerce certainly was happening, but it's really been growing even more as people are realizing what they can actually get delivered to their house, including tires. And also we see the value of a supply chain being even more important. And I think that all puts a premium on being closer to the customers. And again, I'd have to think about all the things that we've been working for -- working toward with the goodyear.com with roll, with mobile vans, all those things I think really play nicely into that environment that we see. And I don't really -- you know I think the opportunity to work from home is going to be much more on the table for companies or organizations than it was. But look, I kind of go back to a question that I got back when I was the CFO during the Great Recession. And we saw new car sales drop dramatically, we saw the world sort of on end and the question was, well we -- are we going to drive around in small cars with small tires and kind of go backwards? My view is we never go backwards. I said at that time, we're never going to go backwards, society doesn't move backwards, it moves forward. And we would get back to selling HVA. We weren't…

Yes. Okay. That's very helpful.

So, Itay, I was going to take the question on the balance sheet effectively and what the impact of this year might be on the net debt we have at the end of 2020. And I think the -- I'll say this, I think there, you know, there's a lot of variables here and obviously we expect to generate some cash and working capital which is going to be helpful for us. I think that the thing that will have the biggest impact on where our net debt ends up year-end is going to be the losses that are generated in this sort of March through the second quarter that we're in because those are periods of time where obviously we've cut a lot of costs but there are still a lot more costs than we are earning money to pay for. So I mean the losses we incur during this period of time, the -- I mean that money is going to get borrowed and that I think we have to realistic about. So as we look at the cash that we're using here during these few months of the peak of the COVID-19 impact we recognize that we're going to have to start working to develop the cash flow to pay that back. As our balance sheet our leverage we're already above the levels we're targeting. So when we get into 2021 we're going to be working to address the impact that we deal this year.Q - Itay MichaeliWell, I appreciate all that detail. Thank you.

Okay, thanks.

Thanks, Itay.

And we do have a follow-up from Rod Lache with Wolfe Research. Please go ahead.

Okay. Yes, thanks for taking my follow-up. I was just -- I'm trying to just get my head around what needs to happen to get to breakeven free cash flow excluding working capital, and I'm just hoping maybe we can talk through that little bit because there's a lot of different moving parts. And I'm not sure if you have a framework that you could share but what -- I was just looking at the capital statement from this quarter, you did like $290 million burn excluding working capital. It sounds like your CapEx is going to come down by $25 million a quarter and your saving starting in Q2 will be like $140 million a quarter, so your -- maybe that can get whittled down to like $120 million a quarter burn which looks like it would correspond with having to sell 4 million more tires the kind of -- at $30 a tire contribution to kind of offset that. Am I thinking about that the right way and do you have any sort of high level thoughts about you think that operationally X working capital you can get to close to a breakeven number the back half?

Yes. So Rod, I think the questions are you're getting to the right point which is the volume recovery is going to be -- that’s going to be an important consideration for what it takes to work our way to breakeven just say excluding working capital. I will say the slower the volume comes back the more working capital benefit you get, so those two do work in concert a bit. I think that as we looked at volume trends, I think we've looked at 2020 for and recognized that there's going to be some cash usage in 2020. But if I move to an environment where we get back I guess what we'll think of as some meaningful but complete part to the volume that we've lost. I think we feel comfortable we can run the business without using cash. Where exactly that falls I think the modeling assumptions that we've got, that we published with our presentation today should help get you there and I think I like to use 12-month modeling periods because the seasonal working capital tends to step in and confuse them otherwise, but I think we're talking about a -- if we were to see a decline in volume this year even in the second half, even at ranges of, I don't know, 10% or so I think you're still in a range where we wouldn’t be using cash. So I think the -- if I step back and think about where the full year could be I think we're going to be below where we would need to be break even on volume for this year but with any modest recovery I'm less concerned about 2021.

Right, but it sounds like it primarily -- in your mind, it's primarily the first half and what you just really think about --

Yes, I mean, it's really this March through June period and that's really that's the place where we're using cash and that cash effectively has to be borrowed.

Yes, got you. Okay. Thank you very much for that.

And speakers, it does appear that we have no questions at this time.

Great, thank you. Thanks your attention today and as we open up the economy I hope everybody stays safe. Thank you.

That concludes today's program. Thanks for your participation. You may now disconnect.