Goodyear Tire & Rubber Co (GT) 2015 Q3 法說會逐字稿

Good morning. My name is Keith and I will be your conference operator today. At this time I would like to welcome everyone to the Goodyear Tire and Rubber Company third quarter earnings conference call.

(Operator Instructions)

Thank you. I would now like to hand the program over to Christina Zamarro, Goodyear's Vice President, Investor Relations.

Thank you, Keith, and thank you everyone for joining us for Goodyear's third-quarter 2015 earnings conference call.

Joining me today are Rich Kramer, Chairman and Chief Executive Officer; and Laura Thompson, Executive Vice President and Chief Operating Officer. Before we get started, there are a few items we need to cover. To begin, the supporting slide presentation for today's call can be found on our website at Investor.goodyear.com.

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 some cases a non-GAAP basis. The non-GAAP financial measures discussed on the call are reconciled to the US GAAP equivalent as part of the appendix to the slide presentation.

And with that, I will now turn the call over to Rich.

Thank you, Christine, and good morning everyone.

This morning I will review our record third-quarter results including our continued success in North America and provide examples of how we are executing our strategy in both robust and challenging markets. As always, Laura will follow with a financial review of our businesses before we take your questions. I am extremely pleased with our third quarter's record results, including the sequential improvement from our record second-quarter results.

Our consistently strong financial performance in both the volatile global economy and tire industry is a testament to our strategy and more importantly our execution. We delivered outstanding earnings growth in the quarter. A record $599 million in segment operating income.

When excluding the impact of currency on our results, our segment operating grew 25% which is a clear indication that we executed against our strategy. Also, we delivered second in operating margin of more than 14%, the highest in more than 15 years. Despite ongoing macroeconomic challenges and some of our key international markets.

Each of our global businesses had segment operating margin of 11% or higher. By executing on a strategy road map we are doing the right things to deliver strong quarterly results now while building capabilities for profitable growth. Our strong performance in North America continued in the third quarter.

The business grew its segment operating margin to more than 16% and achieved a 54% year-over-year increase in earnings driven by strong demand for our high value-added products. It's $323 million in segment operating income is a record for any quarter. Demand for our tires particularly our premium HVA products remain strong in North America as overall volume increased about 3% in the quarter.

The consistent strength of our North America business is result of our unwavering commitment to a strategy built on the alignment and integration of our industry-leading products developed from the market back, our aligned distribution network, our operational excellence initiatives and the power of the Goodyear brand. Together they create a value proposition that differentiates us from the competition. When we execute at the intersection of these attributes, we win with consumers, we help our customers win in their markets, and we create competitive advantage that is reflected in our results.

As we progress with the execution of our strategy, we will take advantage of our brand strength with further high-profile initiatives to support our more driven campaign. We will continue to build on our NASCAR and ESPN relationships and leverage our new fleet of Goodyear Blimps as I'm sure you seen with our increase presence on college football this season. The results of our ads have been terrific and have exceeded our expectations.

Also, we continue to rollout our e-commerce platform enabling consumers to research and buy tires online and have them installed through our network of aligned retailers. With more than 4,000 installers now signed up, we continued to expand our reach with this program, which is aimed at making the tire buying process easier and creating value for Goodyear, for our participating distributors and of course for consumers. Since we initiated our e-commerce strategy earlier this year, others have taken similar steps, which certainly confirms our strategy.

We remain very confident in our approach which links the Goodyear brand, the number one search brand in the US, our participating Goodyear dealers and our aligned distribution all to benefit consumer. We believe the combination of these attributes will be very hard to match. Regarding industry demand, we expect it to continue to mix up toward premium products.

We welcome this trend as meeting the needs of the most discerning customers plays to our strengths. In the near term, we are working to overcome our capacity constraints as backorders remain for our premium products. We continue to strengthen our supply through our operational excellence initiatives to get more tires out of our factories through investments in our North American plants, and through sourcing products from our global footprint. Additionally, the recent weakness in emerging market tire demand provides us with an opportunity to further leverage our international footprint to meet the strong demand for our products in the US

Overall, this was another terrific quarter for North America's journey towards sustainable performance and value creation. Our goal is to maximize our ability to win at the intersection of innovation, demand creation and supply all to better serve our customers and consumers. We've made tremendous progress, but I know we can do even better.

In our EMEA business, the effect of the strong US dollar and soft winter tire sales explain the vast majority of the year-over-year decline in the region's results. We anticipated a weak industry environment and it was even weaker than expected as winter tire inventory remained high. Given three consecutive warm winters, there was little motivation for the channel to stock up on winter tires during the traditional sell-in season.

On the positive side, our product portfolio remains robust putting us in the strong position when consumers begin to switch to winter tires. Our industry leading innovative new products continue to be recognized in influential magazine tests. The new Good Year Vector 4Season, our all season tire, was the winner in an extensive test by a leading German automotive magazine and was the only tire of 10 that were tested to achieve the top exemplary rating -- the Vector 4Season was the clear winner.

The Goodyear UltraGrip performance winter tire took first place in three magazine tests during the quarter and the Dunlop Winter Sport 5 claimed the top spots into tests. The results of these test influence consumer buying behavior and we're very pleased with the independent validation of our innovative winter products. Beyond the recognition for our winter tires, another positive was a 6% increase in our original equipment volume as the OE industry grained momentum in the quarter.

And in our commercial truck tire business we continue to deliver strong results with numerous key competitively fleet wins as our fleet service value proposition, including our top-performing Goodyear KMAX tire lineup, is demonstrating competitive advantage. We will remain focused on building our value proposition and supporting our business over the long-term with investments to deliver more premium products across the region. You may have seen our announcement in the quarter related to our plan modernization of our factory in South Africa converting to the latest technology to further improve the plants high value-added consumer care tire production.

Looking ahead, we will work strength in our distribution and customer service to help further differentiate our value proposition while also continuing to reduce our costs through an array of initiatives targeting increased profitability for our EMEA business. We expect EMEA to be in a low growth environment and to have a weak euro for the near future and our focus is on executing in that environment.

Market conditions in our Latin America business continue to be extremely challenging. The high level of volatility in the region is not new and our leadership team continue to execute on our strategy and take advantage of pockets of opportunity.

For example, even about even as our consumer OE and commercial truck businesses remain weak in the region, particularly in Brazil, our consumer placement volume grew 22%. This was the foundation of our 8% overall volume growth. I'm pleased with our teams' ability to execute our strategy under these adverse conditions.

We will continue to focus on our cost structure in the region as we anticipate the economic slowdown in Brazil to continue through 2016 and possibly beyond. We also are very focused on reacting quickly to the fast-moving swings in inflation and devaluations to ensure we are proactively managing our value proposition, our costs, and our balance sheet position. As you've heard me say before, this region will continue to be volatile, but we are very well-versed in executing in this environment.

In Asia-Pacific, our segment operating margin grew to more than 15% despite flat volume growth overall in the quarter. We faced a weakening market environment in China in the third quarter as economic slowdown, stock market decline and tighter liquidity negatively affected consumers, retailers and distributor purchases. We had strong growth in our consumer business in India, but also had continued deterioration in Australia due to ongoing macroeconomic challenges in that country.

In China new car sales declined significantly in the past months and credit in the distribution channel tightened as well. Despite these adverse market conditions, we grew our unit sales by 4% in the quarter based on our strong market position and our winning product lineup. More recently, the industry began to stabilize in September and we are encouraged by the announced reduction in sales tax related to new vehicle purchases starting this month.

While we expect continued volatility in China, we remain positive on the long-term market outlook and project the countries growing middle class will drive improvement in the automotive sector. We are well positioned to benefit from this market growth as the Goodyear brand was recently ranked highest for consumer satisfaction in the luxury and SUV segments. Our EfficientGrip performance tire won several important awards in the quarter, including Motor Trend Magazine's Tire of the Year in the comfort category for the second year in a row.

Also, we continue to win key OE Fitments with both global and domestic auto makers creating after market pull. To meet our growth in the region, we are committed to increasing our capacity over the long-term in our factory in Pulandian, China. With are announced and planned projects, we expect to increase our capacity by up to 5 million additional consumer HVA tires by 2020.

We are very optimistic about the long-term value proposition of our business in Asia-Pacific. Our new product introductions, OE pull-through and increasing points of distribution will be supported by our increased capacity and give us confidence that we will continue to be successful in one of our most important markets. Looking back at the third quarter, I'm very pleased with our record results.

More importantly, I am very happy with the way we continue to execute our strategy, whether and strong markets or challenging once. Our teams have made the commitment to winning with consumers and helping our customers build their businesses every day while taking the long view of creating sustainable value. Given our results for three quarters, the strong demand for our high value-added products, and a balance of investment in cost reduction, I'm confident in our ability to deliver our targeted earnings growth in 2015 and 2016.

With our strong year-to-date performance, we now see full year segment operating income tracking to $2 billion which would be more than double what we achieved this five years ago. Our North American business continues to be the cornerstone of our earnings generation. Our international businesses however are operating in very difficult, low growth environments driven by lower commodity prices, weakening economies and weakening currencies versus the US dollar.

We do not anticipate that changing in 2016. Still, we are maintaining flexibility to deliver on our long-term strategy while being prudent and proactive with our costs in the near term. In all businesses, we are delivering innovative new products and investing where appropriate for future growth.

Now I will turn the call over to Laura.

Thank you Rich. And good morning everyone.

My remarks today will start with a review of our third-quarter results including points from each of our four strategic business units. I will then cover updates to our full-year outlook for 2015 before we open the call up for your questions. Turning to slide 8, I'd like to highlight a few items on our income statement. In the quarter we grew segment operating income by 15%.

Our strong performance in a challenging international environment was driven by a combination of volume growth and margin expansion. Segment operating income was $599 million and our SOI margin expanded to 14.3%. Unit volumes increased 1% in the quarter driven by solid growth in Latin America and North America partially offset by a decline and EMEA and Asia was essentially flat.

The decline in our net sales for the quarter is fully explained by the strengthening of the US dollar and reduce sales in other tire related businesses primarily due to the effect of lower commodity prices impacting our third-party chemical sales in North America. Strong performance on price mix versus raw materials improved our gross margin by 3.8 points to 28.3%. Our earnings per share on a diluted basis was $0.99.

The results were influenced by certain significant items which are listed in the appendix of today's presentation. After adjusting for these items, our earnings per share was also $0.99 as the adjustments collectively offset each other. As a result of the release of our US tax valuation allowances at year in 2014, our US tax expense increased significantly year-over-year.

Consistent with our approach in the previous quarters for year-over-year comparison purposes, we have provided an adjusted EPS excluding this incremental non-cash tax expense. For the quarter, the adjusted EPS on that basis is $1.29, up $0.42 versus last year. As a reminder, although we are incurring tax expense and the US today, due to our significant US deferred-tax assets, we do not anticipate paying significant cash income taxes in the US for approximately five years.

The step chart on slide 9 walks third quarter segment on income to the third quarter 2015. Our segment operating income was up 15% year-over-year and excluding the impact of foreign-exchange translation grew 25%. The positive impact of volume growth was partially offset by lower unabsorbed fixed overhead cost of $3 million.

We were able to realize the benefit of lower raw material cost while holding price mix essentially flat for a net benefit of $130 million during the quarter. While year on year prices declined slightly, in part due to our raw material indexed agreement, that reduction was almost entirely offset by positive mix. Excluding Venezuela, our net price mix versus raw material benefit in the quarter was $44 million.

The $86 million impact of Venezuela was higher than we anticipated as we were able to offset higher-than-expected inflation. Our $76 million of cost savings was completely offset by the impact of inflation including hyper inflation and Venezuela. If we exclude the impact of Venezuela, our cost savings net of inflation would have been $55 million during the quarter.

This is more reflective of our progress on operational initiatives throughout the rest of the Company. It is important to note that our performance excluding Venezuela is in line with our net cost savings in recent years. The impact of Venezuela is embedded in each element of our SOI walk as always.

But in aggregate Venezuela accounted for $39 million of our SOI in the quarter and $12 million of the year-on-year growth and SOI. Foreign currency exchange was a headwind of $49 million reflecting the continued strengthening of the US dollar particularly against the euro and the Canadian dollar. The translation impact of the Brazilian real was muted due to weak business results from the continuing recession in Brazil.

Turning to the balance sheet on slide 10, cash and cash equivalents at the end of the quarter were $1.7 billion and is consistent with the prior quarter and the third quarter last year. This cash balance includes $292 million of cash in Venezuela at the end the third quarter. Our total debt and our net debt are both down slightly from the second quarter balances. Net debt is lower than the third quarter last year by $801 million following our strong pre-cash flow performance over the last 12 months.

Slide 11 shows we generated $198 million of free cash flow from operations in the quarter. Our normal seasonal build in working capital was a use of $231 million down significantly from last year's level driven by lower raw material cost. Looking over the last 12 months, our free cash flow performance has been strong exceeding $1.2 billion.

Moving now to the business units on slide 12. North America continues to post impressive results recording the 25th consecutive quarter of year-over-year earnings growth for segment operating income of $323 million. North America's $113 million improvement in earnings was driven primarily by strong price mix net of raw material cost, increased volume from our consumer business and improved cost driven by our operational excellence initiatives.

Partially offsetting these benefits, the weaker Canadian dollar negatively impacted North America's SOI by $12 million. The demand for our industry-leading consumer tires is strong as we realize consumer volume gains of 4%. During the quarter, we increased our share in OE which continues to enhance our profitability with increased sales of our premium HVA products such as the Wrangler All-Terrain Adventure and Assurance Fuel Max on some of the OEMs most popular vehicles.

Demand in our replacement business remained solid and we continue to see benefits from our new product launches such as the Kelly Edge. However, in many instances strong demand is outpacing our ability to supply our premiums Goodyear branded tires. Through September, North America has delivered segment operating income of $842 million, or about 14% per to sales, and we are on track to exceed $1 billion this year.

We believe these results are continued evidence that our strategy is sound, and our team's execution has been outstanding. Europe, Middle East and Africa generated segment operating income of $154 million in the quarter, which was $27 million less than the prior year. This decline was primarily driven by currency weakness as foreign currency translation reduced earnings by $24 million.

Overall, our EMEA unit volumes decreased about 2% year-over-year. The European winter tire industry sell-in the quarter decreased more than 7% year-over-year. Although we did see year-over-year share increases in the winter HVA and SUV segment.

Summer industry volumes were up 4% during the quarter which helped offset some of this decline as well as weakness in parts of Eastern Europe where we have been experiencing an increase in competition from Chinese imports. Our EMEA business has continued to deliver solid underlying performance in 2015. While we have seen cold weather, and even snow in some countries in October, we continue to take a cautious approach on volume expectations for the remainder of the year, but the strength of our winter product portfolio has a position to drive future business and win in our targeted market segment.

Asia-Pacific generated segment operating income of $72 million in the quarter, a decrease of 10% versus last year's $80 million. The main drivers were foreign currency headwinds due to the stronger US dollar and higher SAG expense partially offset by favorable price mix versus raw material costs. The segment operating margin in the region increased to 15.7%.

Despite recent economic headwinds in China, our team has been performing well and growing our volume. Our OE business delivered double-digit volume growth in the quarter despite the weakness in the industry. In replacement we did see an impact from de-stocking in our distributor channel, and we also made some choices based on customer credit both related to the tighter liquidity environment.

Asia remains a key growth opportunity for the company and we are confident about the region's long-term growth trajectory. We are prepared for short-term volatility and remain committed to mid- and long-term growth.

In Latin America, segment operating income was $50 million for the quarter. Latin America benefited from higher volume and positive price mix, which more than offset the impact of inflation on raw material and conversion costs. Our volume increased 8% driven by 18% growth in our replacement business with double-digit growth in most countries in the region including Brazil, Mexico and the [Liaoning] countries as a result of our strong product lineup.

The OE business declined 21% due to the continuing recessionary environment in Brazil. As I mentioned earlier, for the quarter operating income from our Venezuelan business was $39 million. This operating income excludes foreign currency exchange losses related to the Venezuelan bolivar, which were $8 million in the quarter.

While economic conditions and currency controlled in Venezuela remain challenging, we have received $15 million in the quarter to purchase raw materials to support continued operations. Our Latin American team is continuing to work proactively to maximize market opportunities in an increasingly difficult environment, while at the same time taking actions to address the cost structure to be in a position to better weather the storm.

Slide 13 shows our updated full-year modeling assumptions for 2015. You will notice that volume and unabsorbed overhead are and changed from our July call. The first update is an increase in our outlook for price mix net of raw materials.

We now expect a full-year net benefit of approximately $370 million, which reflects an increase related to our third-quarter performance. We continue to expect raw materials to be down about 7% versus 2014 before cost saving actions. This includes the negative impact of currency on raw materials transaction in our international businesses.

With rapidly increasing inflation and Venezuela in the second half of the year, we revised our net cost savings in 2015 to be neutral. Outside of Venezuela, our businesses are delivering on our operational excellence initiatives. The savings, excluding Venezuela, are on plan and are delivering as expected.

Our segment operating income drivers include about $20 million of earnings in Venezuela in the fourth quarter, as we have sufficient US dollars to enable us to produce through the end of the year. We are taking a cautious view on Q4 as Venezuela heads in to its December election, which could amplify the already volatile environment. Based on current spot rates we now expect translation to be headwind of $160 million for the full year.

Finally, with our year to date strength and our other tire related businesses, we have included a $20 million benefit in our outlook. In summary, as we look ahead and based on our current assumptions, we are tracking above our 10% to 15% segment operating income target for 2015 to $2 billion. Additional financial assumptions for 2015 are listed in slide 14 and reflect updates related to our year to date trend. The significant changes are a reduction in our CapEx outlook to $1 billion to $1.1 billion, and a likely need for $50 million to $75 million of working capital to support the business.

Turning to 2016, we continue to target 10% to 15% SOI growth. We have strong positive momentum in many parts of our business and challenges in others. We will weigh all of these factors, including raw materials and foreign-exchange, and provide our specific thoughts during our year end conference call.

Finally, we continue to execute on our capital allocation plan. As part of that plan, we have an existing $450 million share repurchase authorization. Including the $30 million for repurchases during the third quarter, which essentially offset dilution, we have repurchased $313 million under our 2014 to 2016 plan.

We also recently announced an increase in our quarterly dividend to $0.07 per share effective with our December dividend payment. Now we will open the line up for your questions.

And we can take our first question from Itay Michaeli with Citi. Please go ahead.

Good morning. Good morning, congrats.

Good morning, thanks.

I apologize if I missed this, but just on the price mix versus raws being revised up $40 million can you talk about what a little bit that prompted that revision. Is that mostly in the mix size? I think Laurie mentioned the raw material outlook is consistence bill for the year. And to that, you have an early look given the lag of rough [innate] where raw materials may be in the early part of 2016?

Yes, sure, Itay. A couple of things. First I will start with the second question first. Related to 2016, really based on where we fit today current spot rates and currency rates as well. We do see, I guess at this point, low single digit positive as we go into the 2016 versus 2015 on raw materials. The changes that we made in the outlook are a couple of things. Primarily relates to where we are at year to date and including our outlook for Venezuela.

Fine great. If I could just sneak in one on cash flow. It does seem that with EBITDA CapEx year to date you probably have a significant increase just to get the low end of the range. I think you should have a working capital benefit in the fourth quarter. How should we think about doing capital allocation and acceleration and some of the buyback activity in the fourth quarter as cash flow should see some tail winds, it looks like?

Yes. So, Itay, as we think about remember for us, historically just the way our business flows, essentially all of our cash flow is generated in the fourth quarter. So when you think about our three-year plan, our capital allocation plan that is it about 2014, 2015 and 2016, we're really only about one year through our three-year plan and that sense. Now, I get it, the fourth quarter is coming and soon we will have two years into that plan. We have always said that any increases to that shareholder return program, you will remember our capital allocation plan has a range on it right now. It is $0.6 billion to $1.25 billion and again we feel good about results and where we are at, but as we generate that cash in the fourth quarter, we will look to take another look at where we are at in our authorization. We have done $313 million of the share repurchase of that $450,000 through the third quarter and we are very committed to that shareholder return program. Okay? Now we did also increased the dividend in the fourth quarter, so you see us continuing to make progress as we deliver the results.

Terrific. That is very helpful. Thank you so much.

Thanks, Itay.

And we'll take our next question from David Tamberrino with Goldman Sachs.

Good morning and congrats on the quarter. My first question is really just around the $2.0 billion SOI tracking number that you put out. Really, in relation to kind of last year we're still tracking similarly to the top end or above of that 10% to 15 % three quarters now. Just wondering what really gave you the confidence to come out and put out that number of $2 billion, which is 17% year-over-year increase and above that 15%. Is it order levels? What are you seeing in the channel that gave you the confidence?

You know, David, I think it's just confidence in the strategy that we have been executing, the changes we've made to the business model is what you're seeing in the results that we are delivering. And also, you're seeing that particularly in strength of our North American business. I think when we look at what we see in that business, the improvements that we are making there and we look also at some of the other elements around the world, that gave us the confidence to make that statement to say that we are tracking to that range.

Okay. That's fair. And winter tire inventories Europe, obviously, we seen the selling has been poor, I think that with on top of a pretty high single sell in last year. Where do you think the inventories are now as it relates to potentially cold winter here. You know, do think that easy comp from last year will set up for a particularly strong quarter in the event that we do see a little bit more been normalized winter in Europe?

You know, David, it's a good question. If I just maybe take a step back for one second, the winter market is important to the industry there. It's round about 30% of the tires we sell. It Is typically high-end tires and it's a very good mix and so forth. So it's very important to us. And as you know, we are a leader in winter technology.

The situation we're seeing is, you know, coming off of three warm winters in a row. As Laura mentioned, and I think as we said in the past, we have kind of planned for that sort of pre-winter even though we've seen some snow at this point. And you know part of what goes into our thinking is, excuse me, is pretty much in line with what you're saying. You could almost call it, sort of the animal spirits of the winter, or the channel in Europe right now, particularly in Germany, they do have higher inventory in the channel right now. And on top of that, you've had these three warm winters so there is little motivation to go stock up and go long on tires. The industry is typically around 100 million units, something like that if you do the math.

We would say, you know, that with higher inventory in the channel that's obviously, still a question as to whether we can even reach that level. Clearly it's been much higher than that. If you go back to the light winters of 2011, it was actually much higher than what I am saying. So as we look at it, we are going to continue to stay in a cautious view. We think we are very well prepared for it. I went through on my remarks, our winter lineup, our UltraGrip performance tire, our Dunlop Winter Sport 5, our Vector 4 All Season, for those who want to move to all season; that is a small market. But we have top-tier winning podium products in all of those categories right now so we're ready. I think what would give us a boost, what would give the industry a boost, frankly, is cold weather and snow as we head into November here.

Okay. So just to summarize that it sounds as is there is upside to the $2 billion if there is, in fact, a colder and normalized winter in Europe.

Yes. I think unequivocally we could say that. And it's kind of, as we look at the winter, it's kind of like interest rates. We think they are going to go up and they don't. We think it is going to snow and it hasn't. If we have to wait for the event to happen, and then we will see what happens. But clearly if it snows, there's absolutely a virtuous effect in that.

Yes.

Understood and then maybe just one more for me. For the online sales channel we've seen a little bit of a small arms race here as Michelin has bought a few in Europe; they've also rolled out an on-demand service in the US. And then Bridgestone recently bought out some distribution channels both brick-and-mortar, as well as online over this past weekend. How do you see that online e-commerce distribution channel evolving over the coming couple of years really for the global Big Three?

You know I think number one, it's really confirmation of the strategy that we rolled out earlier in the year. And I think that's important. That's we saw coming. It's why we did what we did. And I would tell you we took a long time in getting there building up, what you've heard me say, our brand, and building up searching our brand, where the number one search tire brand, tire manufacturer in the US rivaling some other big online tire sellers right now. And we have been doing that as a manufacturer. We are significantly ahead of others, let's just say. We did that very consciously to create the demand in the market place. Then we pulled together signing up our partner dealers and also putting the distribution capabilities in place. And then marrying the technology to be able to make that work so a customer has a good experience as were doing this really to make the tire buying process easier for the consumer. You know what I said, I said very simply, but it's a very complex problem. It's one of those things that sort of bolt-ons don't necessarily make the process have that much less friction in it, because you've got to hook up all kinds of things in the back. So this is not an easy thing to do to get the SKU explosion, to get the right tire to the right place at the right time when consumers are going online to buy that tire. So this is not an easy process and it's why we're being very methodical and having a good success as we go at this point.

Having said that, I do think, like most other products, and particularly around millennials being the consumers with $1 trillion of buying power, and some 80 million millennials out there that this will be an absolute way to buy tires, an expected way to buy tires because that is how that group does commerce to a large degree. So having a formula that works out there and being able to marry it with the brand and importantly the distribution both retailers and aligned distributors to get the tires there is going to be what wins. And that's how we are thinking about it, sort of building it from the bottom up to be able to deliver on that value promise. So far we feel very good about it, but there's no question, it will be a way that consumers want to shop and Goodyear and its partner dealers are getting ready for that.

Okay. That is helpful. I will turn it over. Thank you.

Thank you.

(Operator Instructions)

We can go next to Rod Lache with Deutsche Bank. Please go ahead.

Good morning, everyone, this is Pat Nolan on for Rob.

Yes, good morning, Pat.

Hi, Pat.

Two quick questions on North America. First, on the supply issues you alluded to in Q3, this that something you see in result near-term? In other words, will you be able to perform in line with the industry over the next couple of quarters or do think these supply issues constrain you there? And secondly, maybe, Rich, if you could expand on your view on the sustainability of this North American margin performance. I mean, it's a multiple of what the historic level has been. Maybe just expand on how sustainable you think these margins are.

Sure. So the first question on the way to catch up on supply. I would tell you, this is a point we've been making relative to supplying those high-end HVA complex tires. I think the larger rim diameter SVU tires in particular or performance tires. Those are tires that remain high in demand and the capacity for those tires on a abroad basis, still, I would say, is behind the demand for those tires. And that is something that we are working to continue to make more of. And doing that by getting more tires out of our existing factories, investing in our North American factories, and also, using our sort of lower demands around the world to import some of those tires in.

So, in the near term that is how we are trying to catch up and continue to be a better supplier. Over the long-term, that's also why we embarked on the Americas plant that we've talked on in the past. So that's something that will take some time to put in place. It also is going to be a function of the demand that is out there as well. We think demand will be there, and we are working feverishly to do that, keeping our factories running full to be able to supply those tires.

I would also say though, just to put it in perspective, that part of the market continues to grow. You know the other parts of the market continues to grow. The other parts of the market, as we said, are always subject to these imports coming in. Remember, we had these big gyrations because buying ahead of tariffs and the like. And you have to remember as that drives the market or has an impact on the market, it impacts us less as we are focused on other segments of the market and not so much what is happening in the lower end.

The question on the sustainability of North America's market -- excuse me, margins. I would say as we look at the business today we remain -- the industry today, we remain very optimistic and positive on what is still available for us to go achieve. I just mentioned the demand for HVA tires out there. I made a few remarks earlier about the opportunities related to growing through digital. And, as we look at our business, the tire business is really one of execution. Right tire, right place, right time. Creating the right demand and having a brand that brings consumers to the stores and to our participating dealers. By doing those things right, and, as I said, working and executing at the intersection of innovation of demand creation and of supply, we see continued opportunity to continue to grow our business.

As we look at the earnings power of North America and we look at the industry conditions out there, I still remain very confident in the ability and the earnings ability of our North America businesses.

Yes, and when you add on the continued operational excellence initiatives that drive the cost, that is not fully rolled out through all of our factories even in North America, through all the workstations. And then I'd probably say, maybe to the earlier question, we live it every day, but don't forget about how complex these tires are. Right? The complexity that is part of the equation.

I would say that we are seeing probably demand higher than our expectations for the really highly complex tires. The performance and the SUV tires as well. And that continues to really put pressure on supply as we go.

That is very helpful. If I could just sneak in one housekeeping item. Laura, what are you incorporating in the guidance as far as the Venezuela profitability in Q4?

About $20 million of SOI.

Thanks very much. I'll get back in the queue.

Will take our next question from Ryan Brinkman with JPMorgan. Please go ahead.

Hi. This is actually [Somnic] on for Ryan. I apologize if I missed a part of the call and these questions have already been answered. Just wanted to touch firstly on the guidance on the raw material price mix spread here. I remember earlier your guiding the to 3Q looking more like the peek benefit in the euro. On that front and now looks like you're sort of looking at 4Q being a similar benefit. Now, I guess with the lag that you see in spot prices going through the PNL, how should we think about 1Q? Does it look like it's going to trail off or does it look similarly strong to Q4?

I guess I would say for raw materials year over year in 2016, we do see, overall, low single digits improvement. I think as we look at it today, based on current spot rates and the currency rates, that would be a little better then that in the first half of the year versus the second half of the year. We will, like I said, we will keep watching this and give you a full update on the fourth quarter call.

Got it. Got it. And just my last question on the North America segment. I see on the global SOI [walk] you had a small headwind from price mix. Could you help me with what that was for North America and how is the pricing environment in North America?

Yes. The price mix for North America continues to be strong, right? The new product lineup, the high demand for the very complex tires. Very positive results in North America. I think mix is very strong. A very significant positive for us in the quarter. And we expect, based on our demand, that could continue. Now, when it comes to price for North America, the only thing is, is our OE contracts, right? Those have RMIs included in them and some of the commercial fleets as well. And that comes into play in the pricing equation in North America, but things are strong in the results.

I would echo Laura's comments on mix. I think as we look at the results we're very pleased with the whole price mix equation for our North America business.

Great. And just a follow-up on that front. Since the data's kick in, in early August has there been any change on that front? Has there been a greater benefit to mix and pricing coming through after that?

You know you meant from the tariffs coming? The tariffs coming in?

Yes.

I would say that's really, by large, part of the market that is not where we have a significant presence. Our situation really revolves around our value proposition, the new products we are bringing to market, and our ability to do that. Our new Wrangler All-Terrain Adventure, our Wrangler Dirt Track, the whole Kelly Edge Power line up. All of these things are really what is driving our increases in the marketplace.

Got it. Thank you.

Thank you.

And we'll take a follow-up from David Tamberrino with Goldman Sachs. Please go ahead.

Yes, hi. Just a few more for me. I think Latin America is one of the concerns here, specifically Venezuela. It sounds as if you guys have continued to be able to transact at one of the favorable SiC [ad] rates. How much longer do you think that continues and you'll be able to you know get US dollars to buy raw materials down there? Because just thinking about the quarter and the year, Venezuela has been a meaningful contributor to earnings and I guess the thought going forward is how much longer can that continue in your view?

Yes, David, just quick comment on Latin America, in general. Very difficult environment down there, particularly in Brazil. I know your question's on Venezuela. I will just take the opportunity -- our teams have been executing well down there. In light of consumer OE business and truck business there that is down 20% plus. As you see from our numbers we grew volume above 20% in -- consumer replacement volume above 20% in virtually all of our key countries down there. So the team is executing well there in what is a very difficult environment around currency and inflation and devaluation, in general, excluding Venezuela. We are pleased with how we're doing, but we clearly see the headwinds going on there. Venezuela is clearly one of them, and I will have Laura address your question in particular.

Yes, sir, David. So when you think about, it for us, and for tires, tires are being treated as a priority good. Right now there's very few forms of transportation in the country. And we continue to have access to US dollars to buy those raw materials, as I mentioned. We just received $15 million in the third quarter. Now, line of sight is limited. Each company's facts and circumstances are very different. But we continue to make and sell tires and they are in high demand. We certainly have a tremendous amount of disclosure related to Venezuela and all of our Q' s and K' s. For us, we continue to operate the business under normal course. And really, predicting the future is very difficult for Venezuela.

Okay, that's fair. I guess, maybe on that topic, when you think about the hyper inflation down there, how conservative have you been it in your updated outlook? And then SOI walk for inflation? Could it be something that gets, again, for the fourth quarter comes in a little bit higher and ends up really eating into and making the cost savings minus inflation negative? Or do you think you've been accurate on your estimates for Q4?

For us that about $20 million in the fourth quarter takes into consideration the December elections. And that, historically, and I think everyone would expect that to create even more volatility as we go, than was in the third quarter. So for us, we see it as a balance estimate for the fourth quarter.

And, David, I would say from your question on cost savings, we still if you exclude Venezuela, which we've tried to do, they are pretty much on our forecast of cost savings if not actually exceeding it. So, if you strip Venezuela out, and it certainly does sort of complicate things, but when you take it away I would say we're executing very well against those cost savings. If that was an underlying question, we feel pretty good about the core business.

Yes. We have been able to work through the inflation increases even if we have some impact further in our cost savings versus inflation. It tends to be offset in the price mix versus raws for Venezuela.

That is helpful. And lastly, in your analogy earlier you were talking about the potential rising interest rates that will revolve and we're waiting to see here. Is there any update when you think about your balance sheet and the structure in terms of the timing of coming to the market and looking at refinancing some of that higher coupon debt that is out there? I know a couple of them has become callable or one has become callable and a few more into the next year.

You know, we always are monitoring our capital structure and we take a very proactive approach to managing our interest expense, and we will continue to do that. Now, we obviously can't talk about or comment when we would be in the market or not. But that is our history and you have seen it recently, right? In May we amended and restated our European revolving credit facility, and I think it was 75 basis point reduction. June we amended the US second lien term loan and lowered that by about 100 basis points. That's been our MO of the past.

And it appears we have no further questions so I will return the call to Goodyear for closing comments.

I just want to thank everyone for joining us today. We had a great quarter and we fell very good about finishing off the year. Thank you very much.

Yes, thank you.

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