The Goodyear Tire & Rubber Company (GT) Q3 2020 Earnings Report, Transcript and Summary

Good morning. My name is Keith, and I'll be your conference operator today. At this time, I'd like to welcome everyone to Goodyear's Third Quarter 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 businesses. Now in the U.S., our consumer OE volume increased 7%, outpacing the industry, reflecting our strong position in the SUV and light truck categories where demand is particularly strong. With new car sales returning to pre-pandemic levels in September and dealer inventory more than 20% below average, we're likely to see continued strength in OE demand through the remainder of the year. And as we discussed on our last call, our replacement volume has lagged the industry, as one of our major U.S. customers has kept many of its tire and auto service centers closed. While these locations are in the process of reopening, this will continue to negatively impact our overall share in the fourth quarter. We believe this is a temporary situation that will correct itself as those locations open. On the other hand, our e-commerce and mobile installation businesses continue to grow well above market during the third quarter. This outperformance contributed to overall share gains outside the mass merchant channel. Customers continue to see tremendous value in being able to buy tires on their terms and choose the installation option that best meets their needs, whether at their home or office with one of our mobile vans or one of our approximately 600 retail stores as well as our partner dealer locations. And empowering customers with these choices allows us to further differentiate our products in the market and in the process, capture more value. We are pleased with the momentum we are seeing in these new business models and continue to expand mobile installation services in additional markets. We also continue to set the standard in our commercial fleet business. In today's competitive environment, large fleets and small owner operators are increasingly prioritizing value-added suppliers like Goodyear that can help them maximize uptime and lower operating cost per mile. Goodyear is second to none when it comes to capabilities in these areas with a total solutions offering that includes the high mileage, fuel-efficient Goodyear endurance product line and Goodyear TPMS Plus, our on-vehicle, active monitoring system that evaluates tire conditions in real time. And customers recognize a tremendous value in the innovation that we're bringing to market. During the quarter, we were named preferred tire supplier by one of the largest food and drug operators in the U.S. and securing a new fleet of more than 1,600 vehicles to our fleet business, and that's on the heels of recently adding Ryder, the largest truck leasing company in the U.S., this further validates our industry-leading value proposition. I'm extremely proud of the wins our team keeps adding. And outside of the U.S., our Americas' team also performed well during the quarter, growing our replacement business and gaining significant share in Brazil. Part of this success was driven by recent industry dynamics and part has been driven by our market-facing initiatives. We've continued to strengthen our distribution and introduced a zero contact service offering for the local market, while also expanding the number of sizes available for our most popular product lines. And all the while, as you would expect, our teams have been successful in capturing full value for our products in the marketplace, which is important as the currency devalues in the region. In Europe, our performance continued to be affected by the temporary disruption related to our line distribution initiative. We are pleased with the progress we have made thus far by advancing our strategy. We're already seeing improvements in the value of our brands, which is exactly what the program is designed to do. Despite the temporary volume impact, we delivered double-digit growth in the increasingly important all-season category. We recently enhanced our already best-in-class all-season tire offering with the launch of the Goodyear Vector 4Seasons Gen-3 and the Dunlop Sport All Season. Goodyear has more test wins in the all-season category than any other brand. And the latest generation of Vector 4Seasons with its Snow Grip, Dry Handling and Aqua Control Technologies is keeping the tradition alive. This is a testament to the product technology and competitive advantages that we've created through 30 years of investment in this important product segment. I want to recognize our development team as they have continued to demonstrate our technology leadership and bring best-in-class products to the market. I'd also like to congratulate our European racing operations for driving the Goodyear brand's successful return to Le Mans after nearly a 15-year hiatus. In Goodyear's first year back on the track, our racing team partners claimed 2 podium spots in their category. And in addition, the Goodyear Blimp made its return to Europe, driving brand awareness to new heights. Our consumer OE business in EMEA is also stabilizing, with production in Europe returning to pre-COVID levels in September. We're also seeing some favorable dynamics as demand recovers with EVs now counting for nearly 25% of vehicle registrations in Europe. Electrification plays into our strength as a global leader in tire technology. We've demonstrated we can deliver the performance in technical specs demanded by OEs, as evidenced by higher win rates and a growing pipeline of high value-added fitments. Our capabilities in this area are second to none. These trends leave us feeling confident that we are well positioned to gain share in the OE channel in coming years and benefit from strong replacement pull thereafter. Now turning to Asia Pacific. The market in China is also improving faster than we anticipated. Auto production is above pre-COVID levels, retail traffic continues to improve, and dealers are replenishing their inventories, all of which are contributing to stronger demand. Our consumer replacement business there is benefiting from expanded distribution and the release of new products, such as the Eagle F1 Sport which is tracking ahead of our original 2020 expectations despite the effects of the pandemic and on sales volume earlier in the year. Our product success and distribution actions drove a nearly 20% increase in our consumer replacement volume in China during the quarter. This increase was nearly double the industry growth, helping us deliver a record performance. And we continue to innovate. We recently launched a pilot for an app-based direct-to-retail distribution model in China. Retailers participating in the program can place orders directly with Goodyear through an innovative mobile app. The direct access provides dealers with an easier way to find and buy tires with easy access to our entire product portfolio. And equally as beneficial to them, our aligned distributors who make the deliveries on our behalf enjoy more predictable profits and greater capital efficiency, allowing them to refocus their energy and capital on growth and enhanced service levels. So overall, the good news is that the industry fundamentals are recovering rapidly with light vehicle production returning to pre-COVID levels in September and replacement demand increasing year-over-year in several markets. But the reality remains that we face continued uncertainty in our major markets as we enter the fourth quarter. We're seeing an increase in COVID-19 cases in the U.S. and across many key countries in Europe. Several governments have or are considering reinstating restrictions on mobility and other safeguards. It's difficult to predict how these dynamics will affect consumer demand, miles driven and auto production in the months ahead. But what we do know is that our response to the crisis has served us well. As we move ahead, I'm confident in our ability to continue to drive performance and that confidence stems from our proven track record based firmly on the strength of our strategies, including our industry-leading products developed from the market back, our strong network of aligned dealers and distributors, the significant actions we're taking to improve our cost structure and our absolute focus on managing cash. I'm proud of our team's accomplishments in this unprecedented operating environment. And more importantly, I'm very happy with the way we continue to execute our strategy. Our team remains committed to winning with consumers and serving customers, which will drive our results for the long term. Now I'll turn the call over to Darren.

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 consumer purchases, we see a good recovery, just not as good as manufacturer sales would indicate, with sellout volume down about 10% versus last year. And indicators of miles being driven continue to indicate a high single-digit decline versus pre-COVID-19 levels. In consumer original equipment, we also see a favorable story. During September, industry sales to OEs in the U.S. and Europe recovered to levels that are similar to last year. European replacement industry data shows favorable trends, although not as favorable as we saw in the U.S. I have a couple of comments to add to what Rich said about power volumes. First, our Q3 consumer OE volumes outpaced the industry, as we've started to see the beginning of the expected recovery in OE share we discussed last year. As you'll recall, based on the fitments we've won, we had previously expected our OE volume to grow meaningfully between 2019 and 2022 based on automotive industry projections at that time. Even in today's uncertain environment, we're still confident we'll grow significant share over this period. And second, the impact of volume on our other tire-related businesses moderated in Q3, with earnings in both retail and chemical recovery. Our aviation business is now the primary driver behind the earnings impact for our other tire-related businesses. As you might assume, increased Q3 volume has led to increased production in our factories. We originally had expected production to be down 5 million units for the quarter versus a year ago. But given higher sales, we increased production as the quarter progressed and ended with output down only 4 million units. After surviving the 26 million unit reduction in Q2, we feel really good about being able to ramp up this quickly in response to customer demand. Heading into Q4, our factories are now essentially running at full capacity while we try to rebuild depleted inventories. With that backdrop, I want to move on to the income statement. Turning to Slide 10. Our third quarter sales were $3.5 billion, with both our sales and our unit volumes down 9% from last year. Both OE and replacement volumes were down about 9%. Our segment operating income for the quarter was $162 million, down $132 million from a year ago. We'll come back to the drivers on the next page. Our results were influenced by certain items. After adjusting for these items, earnings per share on a diluted basis were $0.10, back above breakeven. The step chart on Slide 11 summarizes the change in segment operating income versus last year. The impact from lower volume was $73 million, reflecting the decline in unit sales of 3.7 million units, including a reduction in commercial truck tire volume that was essentially in line with the industry. Reduced factory utilization resulted in a $121 million decrease in overhead absorption. This reflects the impact of lower production in Q2, lag through inventory, and approximately $30 million of period costs related to lower production early in Q3. Partly offsetting this were actions taken to temporarily reduce fixed costs during the pandemic shutdown. Price/mix was favorable by $6 million. Similar to last quarter, benefits from increased prices in our replacement business were largely offset by lower OE pricing and adverse mix. Raw material costs were essentially flat with a year ago. The benefits of lower feedstock costs were offset by unfavorable transactional foreign currency of $41 million, resulting from weakness in the Brazilian real and the Turkish lira, along with higher non-feedstock costs. We continue to expect favorable raw materials in Q4. Cost savings of $76 million more than offset $33 million of inflation. Compared with Q2, cost-saving levels reflect 2 factors: first, many of the temporary actions from the COVID-related shutdown, including the furloughing of a large part of our salaried workforce, were not continued in Q3. While cost controls continued to be very tight, this spending began to normalize; second, we benefited from $34 million of savings associated with our restructuring actions in the Americas, including the impact of closing our manufacturing facility in Gadsden, Alabama. The negative effect of foreign currency translation totaled $8 million. The benefits of a stronger euro were more than offset by the impact of a weaker emerging markets currencies, again most notably the Brazilian real and the Turkish lira. The $37 million decline in the other category was driven by weaker results in our other tire-related businesses. As I mentioned earlier, the largest year-over-year impact was from our aviation business, which continues to be adversely affected by the travel industry. Turning to the balance sheet on Slide 12. Net debt totaled $5.6 billion, lower than a year ago, reflecting about $400 million of cash generated over the trailing 12 months. This is a really remarkable outcome delivered by our team. Since the beginning of the pandemic, driving cash flow and ensuring strong cash and liquidity have been the top priority and results over the last 2 quarters reflect that focus. While there's a long list of contributors to this accomplishment, working capital management has been critical, which you can see more clearly on Slide 13. Our team has worked closely with both customers and suppliers to support their businesses and ensure we're well positioned to support them moving forward. That said, I do want to point out that while we had hoped to rebuild some inventory during Q3, stronger sales levels didn't allow us to do that. So we'll now be working to increase inventory during Q4. While we still expect cash inflow during Q4, the strong performance in Q3 and this need to rebuild inventory, mean the cash inflow will be less than it has been in Q4 historically. On Slide 14, you can see the impact of our strong cash flow on our liquidity profile. We ended the quarter with cash and available credit lines of $4.2 billion. This is up about $800 million from a year ago and positions us well for any uncertainty as the pandemic continues. Also, in August, we repaid our $282 million of senior notes at maturity. Slide 15 shows that given this repayment, we have no significant corporate maturities until 2023. Turning to our segment results, beginning on Slide 16. Despite industry recovery, our unit volume in Americas was still down nearly 10%. Replacement shipments were down 12%, which continued to reflect the temporary closure of Walmart's auto care centers. About 15% of these locations remained closed at the end of September, a big improvement compared to July when 2/3 of the facilities were closed. We hope to see most of the remaining locations reopen during Q4. The share decline in North America was partly offset by strong share gains in Latin America. OE volume was essentially flat for Americas, despite increased volume in the U.S. Strength in North American auto production and higher OE market share was offset by lower vehicle production in Brazil. Continued strength in our commercial truck fleet business was a positive for the quarter but was more than offset by lower truck OE production. Segment operating income was $106 million, down $69 million from a year ago. The decline reflects the impact of lower volume, partially offset by [Technical Difficulty] our cost-saving actions and improved price/mix. Savings associated with closure of Gadsden were $34 million for the quarter. Turning to Slide 17. Europe, Middle East and Africa's unit sales totaled 13.2 million, down 9%. OE shipments declined 11%, reflecting lower auto production. Replacement volume fell 8%. As in the Americas, our commercial business in Europe continued to be a highlight given the continued success of our fleet service offering. EMEA's segment operating income of $22 million was down $44 million from the prior year's quarter. The decline reflects lower sales and production volume, partly offset by lower raw material costs and improved pricing. I would add that our German factory modernization project remains on track, and we continue to expect to generate $60 million to $70 million of cost savings by the end of 2022. Turning to Slide '18. Asia Pacific's tire units totaled 7.2 million, down 9% from the prior year, principally driven by lower consumer OE shipments, which fell 20%. Our OE business was particularly affected by weak industry demand in India as well as the impact of discontinued fitments in China. Our consumer replacement business in Asia was a better story. Our business in China delivered its best quarterly volume growth in more than a year, with shipments increasing 19% to a record month. The growth in China was more than offset by a tough comparable in Japan, given prebuy ahead of increased sales tax rates a year ago and industry weakness in other Asian markets. Segment operating income was $34 million, down $19 million from prior year's quarter, driven by lower volume. Turning to our outlook items on Slide '19. Most of our financial assumptions remain consistent with our outlook back in July. We continue to expect working capital will be an inflow for the full year after an outflow of approximately $270 million in the first 9 months. The amount of full year cash generation for working capital will likely be modest, but to some degree will depend on sales activity in Q4. Needless to say, industry demand remains unpredictable. Balancing recent industry strength with the risk of further COVID-19-related disruptions is tough to do. Given we're essentially running our factories full at this point and given December is a low volume month anyway, there's less need for us to place a bet on volume between now and year-end. We expect a negative impact from our other tire-related businesses to improve again in Q4, given stabilization in our retail business and higher demand for our chemicals business, although aviation will remain challenged. In total, the year-over-year earnings decline for our other tire-related businesses is expected to be $20 million to $30 million during the fourth quarter. Operator, you may now open up the line for questions.

[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.