Good morning. My name is Keith, and I'll be your conference operator today. At this time, I'd like to welcome everyone to Goodyear's Third Quarter 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, and thank you, everyone, for joining us for Goodyear's Third Quarter 2020 Earnings Call. I'm joined here today by Rich Kramer, Chairman and Chief Executive Officer; Darren Wells, Executive Vice President and Chief Financial Officer; and Christina Zamarro, Vice President, Finance and Treasurer. 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 are 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 in 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. During the third quarter, we continue to feel the effects of the economic disruption resulting from the COVID-19 pandemic. However, industry conditions improved meaningfully compared to the second quarter and much faster than we expected. We benefited from stronger light vehicle production as OEMs worked to swiftly replenish dealer inventories. Miles driven trends improved globally, as did freight volumes benefiting from increased consumer and industrial activity. Our team executed well, allowing us to capitalize on the stronger industry. Our global volume declined less than 10% for the third quarter, improving materially from what we experienced during the second quarter. The recovery in our volume helped us return to profitability just one quarter after the steepest decline in industry volumes on record. In addition, our cash flow was simply outstanding. We generated over $450 million of free cash flow during the quarter. This performance exceeded our expectations, reflecting the benefit of stronger volume as well as our focus on managing costs and working capital. Our results demonstrate the effective execution of our plans to manage the impact of COVID-19 on our business and position us well as we look beyond the crisis. And I've never been prouder of our team's ability to deal with the challenges at hand, while at the same time, demonstrating an unwavering focus on our strategic priorities. We continue to take every opportunity to continue to build our business for the long term, including through important electric vehicle fitment wins, through growing our best-in-class fleet service offering, by responding to changes in consumer buying behaviors and strengthening our aligned distribution and making sustainability an increasing priority and increasing our investment in technology to address emerging mobility challenges. And you can see these initiatives and priorities in each of our…

Thanks, Rich. We came into the quarter feeling cautious, given the lifting of restrictions and the next wave of COVID-19 infections. While our caution about the possible increase in coronavirus cases seems well founded, the rise in cases clearly didn't have the same impact on industry volume that it was having earlier in the year. This is one of my key reflections on the quarter, better volume than we expected. My other key reflection is the great job our team did delivering cash flow and cost efficiencies, recovering a big part of the hit to our balance sheet in Q2 and ensuring the benefit of higher volumes made it all the way to the bottom line. I'll come back to the financials, but I want to spend a minute on the volume environment for us and for the industry. We're continuing to evaluate industry results for Q3 to segregate the factors influencing reported industry data. Even after considering these factors, however, the situation will almost certainly seem positive, particularly in the U.S., where industry consumer replacement volume compared to a year ago went from 8% -- down 8% in June to up 5% in July, up 9% in August and up 10% in September. On an annualized rate, that means the run rate went from $220 million in June to $275 million in Q3. The positive consumer replacement industry sales in the U.S. need to be digested in light of 2 key and interrelated factors: restocking the distributor inventories, which were down 8% at the end of Q3 compared with down 19% in Q2; and pre-buying ahead of potential tariffs on Asian passenger car tires that could come into effect early next year. In Q3, non-U.S. TMA member volume increased 47% compared to a year ago. If we look at…

[Operator Instructions] We'll take today's first question from Ryan Brinkman with JPMorgan.

What is the expected cadence for the layering back in of the temporary fixed cost reductions? And then just on cost saves more broadly, a lot of companies reporting earnings this season so far, they're putting up really strong margins. They're saying that they're learning to be leaner, adding cost back more slowly than revenue, as everyone's been sort of forced into this zero-based budgeting situation in 2020. Do you see the potential beyond the temporary fixed cost reductions to also restructure or get leaner? Can investors expect a bigger spread in 2021 between the impact of cost saves versus general inflation in comparison to in recent years?

Yes. So the -- I guess, the answer to the first question, Ryan, the -- which I think is probably referencing Slide 11, the temporary actions that we took that reduced our fixed cost in the factories, those were effectively related to the full shutdown in the factories that we went through in Q2. Yes, we split them out to make sure that we're consistent -- in showing numbers that are consistent with the modeling assumptions we provide. But I think you've interpreted it the right way, which is, you sort of take the sort of overhead and temporary fixed costs, put those together, that was the impact that we had, a significant part coming out of Q2, but they were temporary. So if you're thinking about when those are going to layer back in, they've effectively already come back. Because we got the factories up and running at full production now. So the fixed costs related to the factories, they've got to be back in place. The longer-term question, which is what will we do with our cost structure, I think that it's an important planning assumption for us as we move into next year. There is some of that that's going to be volume dependent. And we're -- we have taken a fairly cautious view of how quickly the long-term volume recovery is going to come. And despite the fact that we've got more demand than supply in the industry right now, I think we're still seeing miles driven well below where they were in 2019. And that gives us a little bit of caution about planning 2021. We will use that as we plan our cost structure for 2021. So we will inevitably keep our cost controls pretty tight. In terms of structural changes, I think the ones that we've made on manufacturing are the ones that are going to be most significant, near term, and that's the closure of the Gadsden facility in the U.S. where you saw over $30 million of benefit in the third quarter. That came quicker than I think we had originally -- we would have originally expected. We'll continue to get that savings. We'll continue to look on -- look at the manufacturing or work on the manufacturing, restructuring that we're going through in Germany. And continue to look at what other structural cost moves we need to make if, in fact, we're going to have a longer-term volume run rate below 2019. If we see things coming back to 2019 levels more quickly, then we may get a temporary benefit, but a lot of the cost for marketing and sales and even cost operationally will come back. So I think we're just -- we're working through our plan for 2021. Big questions in front of us in terms of how much of the cost we allow to come back.

Yes. And Ryan, I think Darren answered the question correctly. The one thing I would say, if you look at our track record on cost reductions, whether it's Gadsden, before that Phillipsburg, the changes in reductions in Hanau and Fulda, things we've done around SAG with terms of shared service centers, R&D spend as a percent of sales compared to our competitors, managing CapEx costs over time, I think we have a pretty good track record of not being afraid to roll up our sleeves on cost. And I think Darren framed it correctly. The real thing raising our P&L is volume, right? That's the issue and volume has been COVID-driven. So we're very cognizant of that. And I would say we'll continue to look at that, and we're not bashful about doing what else we need to do given the environment that we're in. And again, I think our track record proves it. So it's a good question, and we'll remain focused on it for sure.

Okay. Great. Last question is a follow-up on Darren's comment there about the balance between supply and demand in the industry. Wondering if you can also comment just on what the inventory situation looks like for your own company, but for the industry as a whole? And what this all means for U.S. tire pricing? I think Yokohama, Continental, a couple of others, maybe Michelin have announced increases. What's the potential for you to do the same and realize those benefits?

Yes. I think, Ryan, I'll just start from your comments on pricing. Our revenue per tire was -- excluding FX was up about 2% in Q3. And in the U.S., I know you're familiar with the numbers that you'd see the PPI is up about 1% during the quarter. In Europe, we see favorable pricing trends across all categories, summer, winter, all season. Certainly, in emerging markets, we continue to price given the devals and all the changes we're seeing there, including dollar-based raw materials increasing. So we do see a favorable environment, let's say, as we've talked about. But as we look at inventory levels, clearly, I think ours as well are lower than normal, sort of reflecting the faster than planned recovery of demand that we saw in Q3. And that does mean that service levels are really not where we prefer them to be, and that's a common for us, but we understand it's true for a number of our competitors as well. So we do see a demand ahead of supply right now as we go. And if you look at us for a moment, we said in Q2 that we plan to increase production in Q3, again anticipating a lift of demand given how low it was in Q2 and also to replenish inventories. What we saw in Q3 is demand obviously exceed our expectations, I think everyone's expectations. So we did increase production by over 1 million units in the quarter and we still ended Q3 at lower than the planned inventory levels than we wanted. So we'll continue to run our plants at full capacity. Certainly, we'll rebuild some inventory and we focus on the right SKUs. But I do think that -- certainly, that is the case that the restocking, particularly in the U.S. and the demand that we saw was pretty favorable and it does put us in that situation at this moment.

Our next question from John Healy with Northcoast.

I wanted to ask about, I think, it's Slide 24, where you guys kind of laid out the feedstocks. Some of those feedstock commodities are significantly below where they were in 2019. As you guys talk to your procurement people and kind of your engineers, is there anything that's like structural going on with carbon black or butadiene prices or from an alternative standpoint or just a supply of the product standpoint that's coming on that would maybe make prices for some of those feedstocks lower for a longer period of time even if tire demand does pick up?

Yes. So John, I don't -- generally, I don't think so. I think that -- I mean, our read right now is that for most of the commodities we're buying, this is purely a reaction to demand levels and where production has been. And I guess, to some degree, to the price of oil. And what we've seen is, at least in 2 commodities, we've seen the kind of snapback in price that we would expect, given the industry is -- we are and the industry is ramping up production or getting production back to pre-COVID levels. And that's natural rubber and butadiene. So both of which have -- in the last few weeks have moved up significantly. So I think natural rubber is something like $0.75 a pound right now. We average something in the high 50s -- $0.57, $0.58 a pound in Q3. Butadiene has gone from $0.20 -- $0.22, $0.23 up to $0.32 right now. So we've got some very significant increases. To say, I'll accept your point that carbon black has not done the same thing. And there are some other petrochemicals that have not done the same thing yet. But I don't know if there's anything structural there. So I think we're continuing to watch that pretty closely. And I guess, expect that as we see product -- if, production, in fact, holds at the levels that we're at today, then we can easily see raw material costs get back to where they were in 2019.

Great. And then just one follow-up question from me. I thought one of the most encouraging things in the release was the cash flow of this quarter. And I understand that there's probably going to be some reinvestment in inventories in Q4. But as you look at the business, Darren, and that will be in back for a little while, are there any programs or initiatives or anything that potentially could be on the horizon that you could implement to help the cash conversion of the company improve? From my perspective, I think, more consistent and bigger free cash flow generation would probably be the biggest catalyst for the stock.

Yes. And John, I think the answer is there are some things that we're working on that I think are going to have long-term benefits. And most recently, I'd say that we have been looking very carefully at how our factory scheduling works, looking at what we can do to maintain service levels while running at a permanently reduced inventories. Yes, so I think -- I mean, our inventories are down $800 million from where they were a year ago. But I agree with your point, we're going to have to reinvest some in inventory because we're running below anything that we'd be targeting. But there is part of that inventory reduction that we would be planning on and would expect to be able to keep lower on an ongoing basis. And we're approaching the run strategy of our factories with that in mind. So -- and that's something that we had a chance to work on because we did have to go through a full shutdown, and then we were able to start with a clean slate in thinking about how we're going to work through our portfolio every month, every quarter to try to keep inventories lower. In terms of payables and receivables, those are areas where I think our team has done a great job, and I think we've got a long track record of working both the customer -- with our customers and with our supplier partners to make sure that we keep our receivables and our payables at levels that are as good as we can have them in our industry. So that is more of an ongoing push. I don't know if there's anything that I could point to structurally there. But that doesn't mean that there's going to be any less attention to it. The working capital excellence has been a long-term push for us. It's going to continue to be a push for us.

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

Apologies, I did join the call quite late. So some of these topics may have been addressed. I was curious to dig a little bit deeper on the price/mix dynamics here. I was -- would you mind fleshing out, I guess, why the price/mix in your EBIT bridge seems to continue to be weighed down towards flat when a lot of the higher earnings we've seen so far are seeing some positive price in that EBIT line and obviously, in the context of some of the price increases that were mentioned earlier in the call by some of your competitors?

Yes. Emmanuel, I know Darren will jump in here as well. I'll start -- something we talked about even in Q2 that our volume and price/mix or mix, as you go on from there as well, is certainly impacted by some things that are sort of external market conditions and other unique factors. And you have to remember, coming out of 2019, particularly in the U.S., we had some of our strongest quarters in the consumer replacement business in recent history. So we think, fundamentally, what we're doing around product, what we're doing around brand, I can tell you, I have very high confidence levels. And -- but what you might remember is that our business is sort of disproportionately affected certainly by Walmart temporarily closing their stores. That hits our volume, we think that is going to go away. Darren mentioned on the call that all but 15% of those stores are open. So that's something that is -- that's going to reverse. So we don't view that as permanent. And also as we think about our volume, we did see some pre-buy already because of the tariffs that were coming in for -- excuse me, some of the prebuys coming in for the potential tariffs coming on related to some Asian countries. We've seen that in terms of volume before where we see a spike now and we see that taper off later. And excluding, particularly the Walmart area, we're actually slightly better than numbers in the U.S. TMA relative to volume. And also, remember, in Europe, that what we're seeing are sort of the anticipated impacts of our line distribution strategy, which is affecting the tires that we sell over there, certainly, our share in the short run, and I would tell you, we're absolutely behind that. It's working. It's the right decision. We've done it before. And the upside, as you know, is about -- as we said before, is about $2 to $4 margin per tire. So we're seeing the positive impacts of that. But all that also sort of flows into the question on what's happening on our VPM in total. So I'll stop there. Darren, I know you want to jump in as well.

No. I think there are a couple of other items that we think through that are -- yes, again, I would say, in some way, temporary in nature. So I think the point that Rich made about line distribution in Europe, I think it's the right point. And in fact, the regions of Europe where we had the biggest job to do in getting our distribution aligned this time of year in particularly because it's more northern -- parts of Northern Europe, they tend to be a very rich mix region. And so that makes mix much harder to achieve. Now if I combine that with the fact that the winter sales this year have been hurt more than other segments, so I think we had winter industry down something like 15% in the third quarter. That makes mix even harder to achieve. So -- and I understand that there's an industry element to that. But I think given the work that we're doing on distribution may have hit us a little bit harder than it has hit others.

Okay. I understand. So I understand your point on volume, certainly. I think you mentioned sort of some European mix. Anything within the price/mix bucket, again, I guess, maybe on the U.S. side, that's sort of like a headwind to what would seem to be otherwise a positive pricing environment, specifically on, I guess, U.S. mix?

So I think that the -- 2 points, I guess, I would make there is: one, we are getting the benefit of price. So to the extent that we're seeing less price/mix than we're expecting, I would say that's principally a reflection of mix, not price. And if we think about the impacts that we've had on mix, there are a number of them. And we spent some time last year talking about the work that -- the impact on which channels we're using to distribute tires in the U.S. that have -- effectively had some tires being distributed through lower margin channels, which -- because it's not a change in the price for any of the channels. If we're selling tires through lower margin channels, then that is treated as a mix item as well. So which channel is getting the tires is going to be an element of the mix analysis in the U.S. But I think, in the end, we can't get away from the fact, and there's a [indiscernible] the slide is in the appendix. We can't get away from the fact that, in the third quarter, our sales of 17-inch and above tires lagged the industry. And so we need to get our large rim diameter sales growing again. And yes, they've not been growing as strongly as we'd like. Now part of that is going to require us to do some work on supply to make sure that we're building more of the right tires and catching up on those tires. And we're prioritizing them in our production. So that is certainly going to be an element for us. I think we've taken the right actions to be able to do that. But yes, there's no question, we're not getting the benefit of mix that we've gotten in the past. Yes, I think we accept that, and we have a lot of focus on getting that going again.

And as Darren said, as we improve, particularly in the U.S., the supply constraints around those tires, I think we expect that to improve.

That's super helpful. And then just rounding out then this discussion. So looking forward, because it seems from what you're saying that once you sort of solve some of this impact in the market share from the constraints you would probably solve some of the mix issue as well at the same time. So how should we think about it timing-wise? When can you sort of really see lapping of some of these, I guess, European investment? I think some of the Walmart stores are reopening. I don't know if you've given any outlook for the fourth quarter or for next year. But how would you think about the timing for essentially lapping some of these issues?

Yes. So I certainly think there's going to be improvement to look forward to in 2021. Because there are some temporal issues that won't be or shouldn't be in place by the middle of next year. And I think all of the other supply challenges, we should be -- whatever supply challenges we have, I think we're going to have an opportunity to catch up a bit as we generally -- in the fourth quarter and first quarter, we generally will build more tires than we sell. So we have an opportunity to rebuild some inventory and get to a better supply situation. So I think middle of next year will be an opportunity for us to see some of the improvement coming through.

[Operator Instructions] We can go next to James Picariello with KeyBanc Capital Markets.

Are you seeing any indications from your Tier 1 competitors to put through another round of price increases? I know this was already asked, but just curious, I mean, is the current environment favorable for an increase in the U.S.? And why or why not in your view?

Yes. Again, I go back and say what we've been seeing, as I mentioned, is a pretty good environment around the world in the U.S., PPI, again what we're seeing across all the channels in Europe. And then obviously, in emerging markets, we've seen good ability to price, particularly relative to covering devals. And I think the only other thing I would add to that is, again, this question of what dealers have been doing and then consumer demand has been doing, which has been increasing sequentially since Q2. So as a result of that, what we've seen is restocking of -- in channels or inventory in the channels of both wholesale and retail. And those inventory levels, I think, I'd still point out, tend to be lower than they are historically. They were down, I think we said in the U.S. for our products about 20% year-over-year. They're down about 8% in Q3. Certainly, Q2 was reflective of COVID, Q3 is reflective of getting better. But the notion of the channels restocking, I think, is very real, particularly in the U.S. And because of that and because of the view of incremental end-user demand improving as well, what we are seeing is demand ahead of supply. And I think that's a real element that's in the marketplace. And as I mentioned, we certainly see it for us. It goes back to making more of the right tires that Darren talked about, but it was also something that we're hearing is true for a number of our competitors as well. And I think that's sort of just the supply/demand situation that's out in the market today. And that's something as a company in this industry, we always assess.

The one other point that I would add is that we still sit as an industry with a lot of raw material cost relative to last 3 or 4 years, we've gone through a period where the industry has underrecovered the cost of raw materials and I think that's -- that is still there, and that's something that still has to be a concern to us in terms of getting the right returns on the investments that we're making.

Right. And since the industry has underrecovered, that might support price increases on its own, just given that fact. Is that the point you're making?

So certainly, I think we're -- I believe -- we go through these cycles. This has been a particularly long cycle. And I think we continue to look for opportunities to recover some of the cost increases that we've experienced. So that's -- so we expect that has happened for us -- and that's what's happened in the past. We tended to go through these cycles where there's compression, and then there -- we go through cycles where we have opportunities to recover raw material costs.

Yes. No, no, that's helpful. And then on the topic of raw materials. I mean, since you have that 3- to 6-month visibility or lag in the flow-through, it will still be volume-dependent for the actual dollar impact. But just directionally, should transactional effects subside within raw materials? And based on what you already have booked, are we looking at a first half benefit on the raw materials side of things? Or how should -- any color there would be helpful.

Yes, sure. So maybe just -- if I start with Q4, yes, in Q4, we do expect more raw material cost benefit than we got in Q3. So we should have a benefit of something like $65 million from lower raw material -- yes from feedstock prices. Now that excludes the foreign exchange impact. The foreign exchange impact was about $40 million in Q3. And that essentially offset the entire benefit we got from lower commodity prices. In Q4, we should get some benefit to the bottom line even after the foreign exchange impact. And so that element of the variance walk will look a little bit better in Q4. As we go into Q1, a little less certain because we have started to see natural rubber and synthetic rubber prices increase. We should still be getting some flow-through, some of the benefit we see in Q4 early next year. But what we see for the full year of 2021, it's going to depend on whether or not these recent increases we've seen in raw material market prices sustain themselves and whether some of the other commodities do the same thing. So I think what we see in the results for 2021 is a little bit less certain. If we get to the point where raw material market prices in 2021 are back to where they were in 2019, then what that would effectively do for us is that would mean about $100 million increase in raw material costs in 2021 versus 2020, right, if we got all the way back to those levels. So maybe that brackets it for you.

And it does appear we have no further questions, and this will conclude today's Goodyear Third Quarter 2020 Earnings Call. We'd like to thank everyone for participating. You can now disconnect and have a great weekend.