Goodyear Tire & Rubber Co (GT) 2017 Q2 法說會逐字稿

Good morning. My name is Keith, and I'll be your conference operator today. At this time, I would like to welcome everyone to The Goodyear Second Quarter 2017 Earnings Call. (Operator Instructions)

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 Second Quarter 2017 Earnings Call. Joining me today are Rich Kramer, Chairman and Chief Executive Officer; and Laura Thompson, Executive Vice President and Chief Financial 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, and a replay of this call will be available later today. Replay instructions were included in our earnings release issued earlier this morning.

If I could now draw your attention to the safe harbor statement on Slide 2. I would like to remind participants on today's call that our presentation includes some forward-looking statements about Goodyear's future performance. Actual results could differ materially from those suggested by our comments today. The most significant factors that could affect future results are outlined in Goodyear's filings with the SEC and in our earnings release.

The company disclaims any intention or obligation to update or revise any forward-looking statements, whether as a result of new information, future events or otherwise.

Our financial results are presented on a GAAP basis and, in some cases, on non-GAAP basis. The non-GAAP financial measures discussed on our call are reconciled to the U.S. GAAP equivalent as part of the appendix to the slide presentation.

And with that, I'll turn the call over to Rich.

Thanks, Christina, and good morning, everyone. As always, we appreciate you joining us today. This morning, I will provide an overview of our second quarter results. I'll also address industry conditions, our outlook and some of the questions that are likely on your mind. Laura will follow with the financial review of the quarter and walk through the detail of our revised outlook.

In the second quarter, segment operating income was $361 million and SOI margin was 10% in an increasingly challenging overall industry environment particularly in our consumer business. While these results were in line with the most recent guidance we provided for the quarter at an investor conference in June, I'm certainly not pleased with them.

Before Laura gets into the detail, I will take a few moments to explain the key drivers of our second quarter performance, and more importantly, the implications on the balance of 2017 and 2018.

As we told you on our first quarter call, heading into the second quarter, we expected a decline in unit volume similar to the first quarter driven by our strategic reduction in some of the smaller rim size tires in EMEA and lower auto production.

But the second quarter played out much differently than we had expected. We saw incremental weakness in the OE market, especially in North America and China. During the second quarter, auto manufacturing inventories remained well above normal levels in the U.S. and China due to softer demand than underlying production. We also saw incremental challenges in replacement, which I'll address in a moment. As a result, we have reduced our full year U.S. consumer OE industry outlook from about flat, at the time of our first quarter call, to down 4% to 5%. We continue to closely watch OE industry trends, particularly in China.

On Slide 4, I'll cover the tire pricing environment through the first half of the year as it had a very significant impact on our replacement volumes. I'll note that while the data we are showing on the chart is limited to the U.S. market, the pattern is indicative of the environment we have seen in other regions, particularly in the European summer tire market.

First, a brief explanation of the chart. The green line is a U.S. government statistic called the tire producer price index, which measures the change in the manufacturers' selling price of tires. The blue line is the average change in the price of Goodyear tires. Both lines are measured relative to December 2016. The graph on the left side of the chart is as of the June investor meeting and the right side is where the quarter ended.

As we began the year, the industry was facing its steepest rise in raw material input costs in 6 years. In response, we announced price increases that became effective in both the U.S. and Europe during the first quarter to help offset these raw material headwinds. And we didn't just announce those increases, we implemented them.

As we said in June, our volume in April was significantly worse than we had anticipated. This was primarily due to the impact of the relative timing of our announced price increases as shown on the chart.

As we exited the second quarter, our pricing stood more than 400 basis points higher than that of the overall industry versus year-end. This variance is markedly worse than what we expected, and the revisions we're making to our outlook today are reflective of this situation.

In addition to adjustments to our forward assumptions on our price/mix versus raw material, we have also adjusted our volume expectations for the third quarter due to our relative positioning in the marketplace today.

While we continue to have opportunities to pursue near-term volume increases, we recognize that these opportunities are largely in unprofitable declining segments of the market. Nonetheless, the current environment does not change my perspective on the longer-term trajectory of our business. The value of a strategy is in its consistent execution regardless of industry and other external factors. And I can tell you that we will continue our consistent execution of our strategy.

We see these challenges as near-term headwinds that we're working through. The tire industry is subject to periodic volatility that we are well-equipped to deal with. What we're experiencing today is more reflective of the turbulence of the environment than indicative of industry trends.

On Slide 5, we've outlined several other factors that have contributed to this very challenging first half. First, and perhaps most significantly, the rapid increase we saw in raw materials earlier in the year was followed by an equally extreme decrease. This is uncharacteristic versus the traditional patterns we've seen in our raw material costs over the last 10 years.

Second, sell-out trends in the first half were down about 2% leading to higher than normal inventory in the channel. This inventory build was further exacerbated by a significant amount of industry pre-buy during the first quarter.

And third, the OE industry has weakened throughout the year, which added incremental pressure in the replacement market, particularly in the U.S.

As I mentioned earlier, the industry is feeling the impact from a lower SAAR this year and from the OE's planned inventory reductions in 2017.

The combination of these 3 factors has led to a first half environment, unlike anything that I have ever seen given the favorable trends and miles-driven, gasoline prices and employment, which are trends generally supportive of our industry.

As you would expect, our response to this anomaly was consistent with our strategy. We didn't overreact to distorted market conditions and the weaker sell-out environment. We didn't chase unprofitable volume, and we stuck to our strategy of pricing for the value of our products and brands in the marketplace. And we did not load our distributor shelves with third and fourth quarter volume at discounted prices today.

Instead, we stayed focused in an environment that would have made it easy to divert from our strategy. That focus led our businesses to deliver 10% operating margin and relatively stable price versus raw materials in our consumer replacement business. So it's in that context that I'm very comfortable with the decisions we made in the quarter despite the short-term results that they produced.

Going forward, we will continue to offer a compelling value proposition with new products for our customers and consumers that will win in the marketplace. Staying disciplined in this challenging environment will position us well for the remainder of 2017 and for 2018 when we expect to see solid demand for our products to continue.

On Slide 6, we've shown the trends in our growth in the greater than 17-inch segment of the market over the last several quarters. While the majority of the volume impact we felt in the second quarter was focused in the smaller rim segments, we did still see a temporary impact in the greater than 17-inch segment during the second quarter.

By June, our run rate in the U.S. had returned to a more normalized level, and we expect that level of performance in the future.

With the majority of the competitive pressures during the first half occurring in the smaller rim sizes, we accelerated the closure of our Phillipsburg factory. The factory was officially closed earlier this month, about 6 months sooner than planned. We will continue to look for additional opportunities to reduce our exposure in this declining, less profitable segment of the market.

Our strategy is designed to take advantage of the long-term trends shaping our industry. Global demand for high-value-added, large rim-diameter tires is increasing. This trend will continue into the future and works in our favor as our portfolio of award-winning products and our connected business model position us on a path to sustained growth and competitive advantage.

Looking ahead to the remainder of the year and into next year, we see many of the headwinds we've been facing becoming more constructive. Sell-out trends have been positive in both May and June and more reflective of our longer-term expectations. The improved sell-outs should reduce channel inventory levels as we head into the fourth quarter. In addition, at current spot prices, raw materials will be a significant tailwind in 2018 as well. We also anticipate our fourth quarter exit margins to be very strong as our raw material headwinds begin to subside in the fourth quarter.

Turning to Slide 9 and looking ahead to the remainder of the year and into next year. We see downward pressure on our 2017 outlook in the $1.6 billion to $1.65 billion range. Our intent is to at least regain that lost ground in 2018.

As it relates to 2018, we continue to see multiple sources of increased earnings: First, improved volume growth in our replacement businesses as the price raws environment normalizes relative to 2017, this benefits both sales volume and unabsorbed overhead; second, the continued recovery in our U.S. commercial business; third, a tailwind from net price/mix versus raw materials. We have a demonstrated history of being able to offset raw material headwinds over time, and we will continue to see great mix-up in our business. And fourth, continued cost savings from our operational excellence initiatives and from the Phillipsburg plant closure.

I am confident that our long-term growth trajectory will continue to be strong, and that the underlying trends in our industry play to our strengths.

Having been through multiple cycles of the tire industry, I can say that Goodyear is better prepared than ever to handle the volatility of our global industry and come out of it even stronger. We expected external headwinds to occur in our 2020 plan, that's the tire business. But candidly, we didn't expect that they'd occur in 2017. But that's reality, and we're actively working through it.

As we look to the future, we've been more focused on capitalizing on the trends that are shaping our industry over the years to come, which we outlined at our Investor Day last September. The mobility ecosystem is changing rapidly. Whether it be from changes in consumer experiences, mastering complexity or in autonomous vehicles and the service model that comes with them, we are attuned to the long-term opportunities and our ability to capitalize on them. This quarter's results or some bumps along the way don't diminish our optimism or our focus.

As I discussed in my opening remarks, we remain confident in our ability to deliver strong results over the long term because of our commitment to and execution of our strategy. We will not chase volume for volume's sake. We will price for the value of our products and brands in the marketplace. We will compete for profitable growth in our targeted market segments where the value of the Goodyear brand, our innovative quality products, our pervasive distribution and service networks and the best team in the industry provide us with a competitive advantage. And I said -- as I said often, we're not running our business for 1 good quarter or 1 good year, but to drive sustainable value creation over the long term.

Now I'll turn the call over to Laura.

Thank you, Rich. I'll begin with the income statement on Slide 10. Our unit volume was down 10% year-over-year and was driven by 2 factors: first, lower overall OE demand; and second, lower consumer replacement volume following a weaker sell-in environment during the quarter. And in that market, we were further impacted by the relative timing of our price increases.

Our second quarter sales were $3.7 billion, down 5% from a year ago. Our second quarter sales reflect higher revenue per tire of 4% excluding currency, which was more than offset by the lower volume, particularly in the U.S. and Europe.

Segment operating income was $361 million for the quarter.

And our SOI margin was 9.8%. Our second quarter earnings per share on a diluted basis was $0.58, and our results were influenced by certain significant items. And adjusting for these items, our earnings per share was $0.70.

The step chart on Slide 11 walks second quarter 2016 segment operating income to second quarter 2017. The negative impact of lower volume was $98 million; unabsorbed overhead was $40 million. Increased raw material costs of $189 million more than offset improved price/mix of $127 million for a net headwind of $62 million, which was primarily driven by the timing lag in our OE RMI indexed agreement. Raw material costs were up 21% year-over-year.

Cost-saving actions of $59 million, driven by our operational excellence initiatives and efficiencies in SAG, more than offset the $34 million negative impact of inflation, delivering a net benefit of $25 million in the quarter. Foreign currency exchange was a modest headwind of $3 million, and Other was a benefit of $8 million.

Turning to the balance sheet on Slide 12. Cash and cash equivalents at the end of the quarter were about $900 million. Total debt is down $160 million and net debt is up $75 million from a year ago.

Free cash flow is shown on Slide 13. For the quarter, we used $125 million in free cash flow, reflecting capital expenditures of $226 million and an increase in working capital of $166 million, which was driven by higher raw material costs reflected in our inventory.

Cash flow from operating activities shows cash generation of $101 million for the quarter, $204 million less than the prior year. The difference is primarily due to the impact of higher raw material costs on working capital and lower net income.

Turning to Slide 14. The Americas reported quarterly segment operating income of $213 million or 10.5% to sales. This reflects a $78 million decrease versus 2016 driven by the impact of lower consumer volume and unfavorable factory overhead resulting from production adjustments.

Unit sales in the second quarter were 17.1 million tires, down 9% versus 2016. Our U.S. and Canada consumer OE business was impacted by overall OEM production reductions and the timing of fitments. Our consumer replacement volume was down 9% versus 2016 driven by a significant decrease in April. U.S. consumer replacement volume was up 1% in May and June.

Commercial OE unit volume was up 1% in the quarter and commercial replacement volume was down 6%, both reflecting a sequential improvement from the first quarter. We feel good about the improved performance of commercial truck during the quarter and its potential in the second half of the year.

Americas earnings in the second quarter reflects solid performance given raw material headwinds and market volatility. The region is well positioned to continue to execute their strategy going forward.

Turning to Slide 15. Europe, Middle East and Africa reported segment operating income of $77 million in the quarter, which represents a decrease of $71 million versus 2016. This decrease was driven by overall less volume.

Higher raw material costs and lower consumer volume were partially offset by improved price/mix in the consumer replacement business and our continued focus on cost saving.

Unit sales were $13 million in the second quarter. The volume decline primarily relates to the consumer replacement business and is attributable to increased competition and lower summer tire industry demand.

The summer tire industry challenges were slightly offset by growth in our winter tire volumes, which increased 10% compared to 2016. Our strong winter [tire] position has us well positioned to capture consumer demand in the winter market during the second half.

OE unit volume was down 11%, primarily in our consumer business driven by lower industry demand. Results for the commercial truck business decreased driven by unfavorable price/mix versus raw materials in the replacement business and lower volume.

Similar to consumer, our commercial truck business was also impacted by the relative timing of our price increases. And as Rich mentioned, the closure of our plant in Philippsburg, Germany was completed in July. The closure eliminates 6 million units of capacity, primarily in the less than 17-inch segment of the market.

As part of the restructuring plan, we will reallocate production of the larger more profitable sizes to existing lower-cost facilities within our footprint. This action further enables our focus on high-value segments of the market, while continuing to reduce our exposure to declining segments.

We continue to execute plans for EMEA to enable growth in profitable market segments and to deliver sustainable earnings growth.

Turning to Slide 16. Asia Pacific delivered second quarter segment operating income of $71 million, a $21 million decrease versus last year. The decrease was mainly driven by significantly higher raw material costs, which more than offset the impact of higher prices and favorable mix. This was especially visible in our OE business where raw material index base agreements tend to follow raw material prices with the time lag.

Asia Pacific's volume was 7.3 million units, relatively flat compared to the same quarter last year. The sales volume of replacement tires were slightly lower versus last year mainly in our commercial replacement business due to price increases we announced earlier in the year.

On the other hand, our consumer replacement business grew 1% year-over-year driven by growth in the 17-inch and above segment. Our OE volume was up 2%, primarily due to continued market growth in the region supported by a rebound of new car sales in India. This growth was partially offset by industry weakness in China driven by the reduction of tax incentives for new car purchases.

Despite the short-term headwinds from higher raw material costs and fluctuations in the China OE industry, we are confident about the region's growth opportunities.

Next, I'll cover the changes and the drivers of our outlook on Slide 17. We now see full year volume down about 3.5% from 2016, with volume down about 3% in the third quarter. This volume reduction will generate higher unabsorbed overhead as we align production in our factories with our revised forecast. We expect the third quarter's unabsorbed overhead to be similar to the second quarter.

In line with our comments in June, we expect our full year raw material cost headwind to be about $700 million based on current spot rates, with the third quarter representing about a 32% increase versus last year.

Our net price/mix versus raws, raw material assumption, is now a headwind of about $175 million following adjustments as a result of the competitive industry environment. The majority of this headwind will occur during the third quarter when our raw material headwinds peak at $300 million.

Net cost savings remain at $140 million as we continue to see solid benefit from our operational excellence initiatives.

Moving to foreign exchange. We now expect this to be neutral for the year based on current spot rates.

Other is a negative of $30 million for the year as lower expected incentive compensation will partially offset plant start-up costs and incremental depreciation and R&D. We expect the third quarter to be negative $30 million and the fourth quarter to be about flat.

Taking these drivers together, our 2017 SOI outlook is now $1.6 billion to $1.65 billion.

Other financial assumptions are shown on Slide 18, and there are only a few changes. We continue to expect strong free cash flow in 2017. We lowered our capital expenditure assumption from about $1 billion to $800 million to $900 million for the year as we align our spend to current market needs. Working capital will be a use of $150 million.

In addition, we now estimate our restructuring payment will be about $225 million for the year following the accelerated closure of our plant in Philippsburg, Germany.

Finally, we continue to expect to execute against our capital allocation plan. We intend to purchase about $400 million in stock in total for the year, which leaves about $370 million that, subject to our performance, we expect to complete over the balance of the year.

Now we'll open the line up for your questions.

(Operator Instructions) We'll take our first question from David Tamberrino with Goldman Sachs.

I think the first question that I have and several investors have because it was noticeably absent from the slide deck, and it was in the June 14 presentation. Where you stand today and where you see 2018 shaping up, are you still on track in your view for the 2020 SOI target of $3 billion? And I ask that not just for what's going on today within the market but also from some of the underlying assumptions you had for U.S. SAAR. I think you were using some LMC Automotive forecast, which had like an 18 million SAAR in 2020, so I'm trying to understand how you feel about that guidance almost a year in now and given what's going on within the market.

Okay. Sure, David. Maybe I'll start and then Rich can jump in if you'd like. So I think, David, there is no doubt last September when we laid out our long-term plan, right, we knew headwinds were possible. They always come up in our industry. But clearly, we did not anticipate them in the early part of the first year of that plan. However, as we sit here today, we see a lot of these headwinds as temporary in nature, but there is no doubt that while things are quite volatile at this time period, we'll have to get back to you and walk you through that. The underlying fundamentals, as Rich walked through in his script and as we'll see in the numbers and continue to see in the numbers going forward, they remain very strong. And we're confident in those drivers. But there is no doubt that what's going on in the first year of that plan absolutely has an impact on it. But again, I just -- I keep talking about this, the temporary nature is there for the headwinds, and we feel very confident that, that -- the underlying trends in the industry are still very strong, and we're in a great position with our strength to drive growth through those trends, frankly.

Yes. David, I would just echo Laura's comments. I'd say, as I said in my script, we expected headwinds. We didn't expect them so soon. So we got to work our way through. And I think at this point in time, we need a little time to see how the second half shapes up. Again, we've made some adjustments that we're very comfortable with, and then we'll be back to you with an update going forward. I think it's a little premature for us to answer that question as concretely as you're asking right now, lot of moving parts. I will tell you, again, because I think it's the core of our 2020 plan, are the megatrends that underlie the drivers to hit those numbers. And I would tell you, those things we don't really view as changing. You mentioned the SAAR, which forecasts are going down. You all have probably seen the numbers again today of sellouts or their auto sales and inventories and the like. But we also know that a lot of those plant closures in the second half are to retool, and those retoolings are going to be for exactly the type of tires that we want to sell or we want to sell to or we want to beyond going forward both at OE and replacement. So a lot of those megatrends, they're still alive. They're still there. We're working through what's a tumultuous environmental situation. So it makes it a little bit hard at this moment to be candid to answer that question as definitively as you like. But we will -- we'll certainly update that as we go by the end of the year.

Understood. That's fair. And then just a second one for me. As we think about the change we saw -- we saw the tire PPI inflection downward into June from May after it was coming up nicely. Can you just kind of walk us through what you were seeing within the environment from your competitors mostly, because the price/mix less raws variance is about $200 million from where we were a month ago versus, or say, to where we are today. What really drove that pretty meaningful change? Is it competitors that weren't following through with their price increases, competitors are just looking to take share and pricing down? Maybe just walk us through, help us understand.

So David, as you'd expect, I certainly can't comment on what others have done in the industry. We tried to use that PPI chart as sort of an indicator for you to see some of the trends that are out in the marketplace, if you will. I will tell you, I can comment for us. And clearly, our strategy is clear, our strategy is to recover the value of our products, whether that's branding, whether that's innovation, technology, oh and raw materials, clearly a -- an element of that. And that's what we did. That's what we told you that we were going to do. And as we look at our blue line on there and if you look at Slide 7 on our price/mix per tire and the sequential improvements Q1 to Q2 and then on into the second half, we see the raw materials are there, we see that we need to go capture the value of our brands, and that's what we're -- that's what our intent is, and that's what we're doing.

Yes. And I would say, David, I think to add on to that, maybe I think Slide 5, as we've, again, try to just explain what's going on out there, as Rich said, the PPI sure shows it in the end result, but I think in the first half of the year, we just had this very complex environment unlike anything we've seen before, right. With the raws rising so rapidly, you all remember that from the fall and oil rising and then dropping. And then you have sellout down dramatically in the first part of the year, the OE pressure on top of it. I think what we really -- what we see going on in the industry is, again, more about that environment as opposed to some kind of a trend.

Okay. And just lastly looking at Slide 6, the volume growth reacceleration. How much of that is driven by improved retail sellouts and inventories more in line versus more capacity coming online for you from your Mexico facility?

Sure. So I think if you -- as we look to the second half of the year, right, and we see our volume for the full year down about 3.5%, we have for the U.S -- I think in the U.S., we do see sellout improving. We saw it a little better in June. So baked in our assumptions is that we kind of get back to about flat for the year in terms of industry in the U.S. environment if that helps.

We'll take our next question from Itay Michaeli with the Citi.

Maybe we just start to stick to Slide 6. Can you talk a bit -- a little more about what kind of happened in the quarter specifically? And then I think, Laura, you mentioned June looking a little bit better. How does July look thus far? Kind of what gives you that confidence in the 10% for the second half kind of recovery there?

Yes. So Itay, I think in a macro sense again, I think as a look at the second quarter and you look at Laura's comments in June relative to the second quarter, it's pretty much in line with what we thought was going to happen. I think if you think about the adjustments we've made going forward and maybe to build on what Laura said what's happening and what drove even the decrease you saw in Page 6 in the second quarter, again, you have this current situation that we would say is not really reflective of a change in industry trends, but more of a function of the current environment. Again, rapidly rising raw material costs up to 30%. Then we had a big pre-buy, to put -- had a lot of tires industry-wide into the channels, so you have full channels there. Add to that, we had a weak sellout environment going on, and then that comes in and it's sort of exacerbated by an equally, almost significantly fast or violent decrease in raw material prices. So you have all these things pulling together to have somewhat of a tumultuous environment that we're seeing. And then add on to that the little -- the weaker OE environment that we have, and you've kind of got the -- what's happening in the second quarter. In that environment, and as you look at that bar, I would tell you that as I mentioned earlier, we had a plan, we stuck to our strategy. We have raw material prices going up, starting really at the beginning of the year. Our peak will be in Q3. We have about $470 million in raw materials to offset in the second half. We had significant raw materials in Q2. As we said, we're going to capture the value of our brand. We did what we said. And a consequence of that is, as I think, Laura even alluded to, in June is that we lost volume for that. That's what you see in that bar right there. I don't like losing volume, but as I said in my script, we're comfortable with the decisions we made. Because we have to capture the value of our brands going forward. We can't get behind on our costs, raw material being one of them. And as we've often said, capturing and offsetting that raw material with price/mix sometimes takes longer than others. We could be in one of those environments, but we're confident in what we did. We're confident this is sort of this tumultuous period. And that's kind of what we think and what our view is to what happened in Q2.

Yes. And I think as you go to the second half, Itay, just to maybe for modeling help you, overall, as we see our volume down 3.5% for the full year in -- obviously, given what's going on, we've lowered our expectations, frankly, right, as we go here. So we see this as manageable. Especially for the third quarter, given that channel inventory that Rich talked about, our expectations are not high for the third quarter. We see our volume probably down about 3% in total. Now we do see the fourth quarter start to come back a little bit as that inventory works through, the sellout get back more to flat. And then for the fourth quarter, we -- in terms of total volume, we certainly have China OE, better year -- much better year-over-year, things like that, if that helps, maybe third quarter, fourth quarter view.

Yes. No, that's very helpful. And just my follow-up question is on CapEx being pulled back. Can you specifically talk about where you were able to find some savings there? And how to think about CapEx beyond 2017 given that you do think volume will come back further in 2018?

Itay, I'll start kind of the way our philosophical view on this, and that's always that we want to be very judicious allocators of capital, CapEx being one of those buckets. And when we see the volume impacts that we've had here, it just causes us very prudently to go back and look at our capacity, look at the additions we had and reassess the timing. We would tell you, we're not impacting our sort of 17-inch and above capacity or other strategic investments that we want to make. But at the end of the day, we will go back. And I can assure you, we're scrubbing through those projects that, yes, we might need, but hey look the reality of where we're at, where the industry's at for the moment, we're going to go back and take a hard look at those. And that's the change that you're seeing.

Okay. And then if I could just -- a quick follow-up on that. Does the cutback in CapEx potentially affect how we should think about future net costs savings in the out years? I know you have a number out there for 2018 as we think about that going forward, is there...

No. No, I mean…

Not at all.

Itay, of course, you're absolutely right, CapEx does go into efficiency and consequently, cost savings, but our drivers of our operational excellence initiatives aren't rooted solely in our capital expenditures. They're rooted in projects that we're working on, on the ground floor of all our locations. So no, I would not equate it to.

We'll take our next question from Rod Lache with Deutsche Bank.

I hopped on a bit late, and I missed part of your script, Rich. But I wanted to probe a couple of things. Obviously, it's a pretty volatile environment, but this is the fourth downward revision to guidance in the past year. And this one came about a month after you just provided an update in mid-July. So -- or in mid-June, actually. So did something really change here from your perspective between mid-June and mid-July? Because, obviously, we'd been hearing about very weak demand and price competition through the quarter.

Yes. So Rod, I guess what I would refer you back to is the Slide 4. And what we tried to do on Slide 4, that's where we compare the average price of a Goodyear tire to an industry PPI, which we were using as a way for you to think about this. And what we tried to lay out is what the expectation for the balance of the year was as of our June conference versus what we saw having more real-time data and information subsequent to the quarter. And remember, a lot of activity happens at the end of June and, of course, we've seen into July as well in terms of our analysis of what's happening out in the market. So if you say what's happened, what we did was look at our position in the marketplace and make an -- along with the other factors that we referred to, higher channel inventory, weak sellout, weaker OE, decreasing raw material prices as well as our competitive position, and it just caused us to look at the back half of the year and say, "Okay, what were the assumptions that we had for our price/mix versus raw materials? And how did we reassess those?" And I would have you then look at Slide 7, and what you see there is our price/mix per tire on the right-hand of that slide. What you still see is still sequential increases. What you'd be right to assume is those sequential increases are perhaps lower than previously planned. So I would say an assessment of the market, assessment of what's going on and then making some adjustments.

And I think, Rod, just as you said, raws were rising dramatically at the end of the year. And we wanted to get out ahead of that, get our price increases in place as we announced them. It doesn't mean that just like we talked about in Investor Day, and I think the slide is in the deck again here today, it doesn't mean we won't recover with price/mix, the raw material headwinds coming. This is timing, right. It's over time.

Yes. The Slide 7 on the right, I presume, is year-over-year. The Slide 4 that I was aware the PPI bending down, just shows Goodyear kind of moving in an upward -- up into the right. Is it fair to assume that just look, that you guys made a reassessment of what the market looks like, and you're starting to bend your curve down maybe to follow what the industry is doing?

Rod, I would say, again, I'd refer you to Slide 7 as well. We're not bending the curve down.

Yes. So look as Page 4. Where is the -- look at the scale, right? 5%. Look at the Q4 chart right on Page 7.

Right, right. But there were some sequential declines last year. So we can follow-up on that last call offline. But you're thinking that you will recover despite maintaining the discipline apparently in your guidance. I want to probe also just this thesis that you laid out on -- in last year on the tight supply-demand for 17-inch and greater tires. There was a slide, I can't remember but you probably remember what I'm referring to, but generally, it showed something like, here's 5 years of what we think supply is going to do worldwide. And you had North America, Europe, Asia. And you showed here's 5 years of what we think demand is going to do. And if I remember correctly, it was something like 200 million units of additional capacity that you saw over 5 years, so 40 million a year and you thought demand growth would be in line or better. So at this point, are you seeing more capacity than you thought or less demand than you thought? Because clearly, some players are turning more aggressive or having some additional availability.

Yes, I think the answer to your question directly is no, right. We continue to see this very strong demand. Nothing changes about that chart. I know which one you're referring to. We do have short time periods in between. As we always said, nothing goes up just in a straight line. So in any short period of time, incremental volume can have an impact. But nothing changes about the fact that the mix-up is happening, the industry needs those tires. We still do not see -- we continue, I think, to see favorable demand for that greater than 17-inch over the next 5 years.

Yes. And, Rod, I mean, I think your question is a fair one and clearly one that we're thinking through even in the context of Itay's question on capital allocation and the like over the long-term. And again, I have to come back and say, and you've been around long enough as well, our industry, as I say, doesn't really move in a straight line. And what we're seeing is obviously the tumultuousness that you've referred to. But it doesn't -- we're not changing our view of the long term. We're not changing our view of the profit pools for 17-inch and above. We're not changing our view of what the demands of the OEMs are going to be. We're not coming from a different place on that at all. In fact, you know the OEMs are working on new models, new SUVs, new light trucks, new things like that coming out, which is exactly the -- plays to the strengths that we have. So from our perspective, clearly, we got to work through the situation we have. And we're not -- we are not coming off our strategy to recover the value of our products. And those charts are intended to try to work that through. And again, you made reference to an offline discussion. Christina will certainly walk you through that. But because we're seeing some of the tumultuousness doesn't really change what we're doing. It's the tire business. And, Rod, finally, I'd say, our job, when we see a raw material headwind of as much as 30% at the beginning of the year, our job is to go and, again, capture the value of our products including all those input costs. That's what we need to do, and that's what our strategy is.

And I think...

And just one last thing if I could just interject. The -- on Slide 4, if you were to disaggregate that industry PPI into 17-inch and greater versus broad line tires, are you seeing a significant difference in that bend down in pricing?

Rod, that's a -- I'll answer it this way. I will tell you the market for 17-inch and above remains very strong. If you look what we showed our Q2 volumes went down, but that was more of a function of our position in the marketplace than any industry trend. And again, as we said in our comments and I think Laura mentioned, that trend has already reversed itself in June. And that's what we expect to see over the balance of the year. So that market hasn't changed, Rod.

We'll take our next question from Ryan Brinkman with JP Morgan.

First one's just on American volume down 10%, RMA replacements were down just 1%. I realize that your number, it includes OE, and it's not just the U.S., right, LatAm's going to be soft. But still, just a big difference suggest that you lose a decent amount of share. Can you talk about what you think the biggest drivers of that are? And also, I'm curious if the share loss do you think was less in the retail channel than it was for shipments?

Ryan, I think in terms of the volume decrease we have, I would say it's simply a direct function of our position in the marketplace. And as we've been talking about, I think it's really no more than that. We, as you see on Slide 4, where we showed sort of the difference of us in the marketplace, the simple answer is the end result was the volume loss that we had. And on top of that, obviously, you have the market that we're dealing with right now that has, as I said, high inventories, a lot of prebuy in the first quarter. You had slow sellout, right, and all those things sort of, as we mentioned, wrapped up into the environment that we had. And as we stuck to our strategy, we saw volume loss. I think, and as I said in my comments, I'm very happy with the decisions we've made. It cost us volume. Our job is to go and get that back. And as we said, we see 2018 as a way to go do that. And as Laura said, we see those volume trends even improving on a sequential basis in Q3 and Q4.

And when you think about Q2, remember that really, really bad April, right? And then we started to see a much better, much better recovery as we went through May and June.

Okay, great. And I see you're maintaining the outlook for full year cost saves versus general inflation. Is there any thought to trying to cut a little bit deeper there into operating expense just given the softer demand environment? What is the potential to maybe push a little harder there without impacting RD in the year or something else that you judge critical?

Yes. So I think we're -- as Rich said earlier, we always are looking and pushing, right? At this point, we feel very comfortable with the estimate we have, the $140 million for the year. And as you think about that, okay, I think we're at $64 million or so $67 million through the first half, that will come equally, at this point, we see kind of for Q3 and Q4. But to your point, we always are looking. Trust me, we will find every dollar we can as we look through that. But at this point, feel comfortable with the $140 million.

Okay. And then just lastly for me. How should we think about the guidance to the impact in all of your share repurchase plans? How do you sort of weigh the fact that on the one hand, your cash generation now is going to be less, but on the other, of course, you can buy back the stock at a lower price.

Sure. So we -- so I would look at this way and say, we said we're going to spend about $400 million for the full year. That leaves us about $370 million for the back half of the year. We're going to get busy on that. We understand the stock is under pressure. We see it as undervalued, absolutely. So we're going to get busy on those programs, okay.

We'll take our next question from Adam Jonas with Morgan Stanley.

So just another way of, I guess, asking the "What the hell happened" question in the second quarter. Maybe from the end-consumer standpoint, you obviously have a lot of data and a lot of physical downstream distribution and context, et cetera. I mean, what's happening on -- at that moment where the rubber is making contact with the road? Are consumers coming in with bald tires? Is it that you had subprime, or is there folks that maybe could afford to buy a full-size SUV on some juice residual deal but then when they had to replace a tire, they had sticker shock and they decided to run the tire? I mean, I'm just curious if your -- anything on the -- that very, very end-consumer side that you might be picking up on? Do people run bald tires.

Yes. I think -- yes, we don't see anything different, right, in the underlying fundamentals of the industry that drive people to come in and buy tires to use a pun, right. We don't. We see miles driven continue to notch up. We see gas prices as low, good unemployment. Sometimes, following a really strong OE environment, you can have these time periods just kind of in between before customers walk in the door. Yes, we see in our retail environment, people coming in with very bald tires, but we also see the normal traffic. But overall, retail, I'd say, in the U.S. for us and for all others, has just again being very soft, extremely soft through the month of May, okay. And I should say, really bad in first quarter, still down through April, a notch better, May and June. And June and July kind of give us a view that we think we'll end up flat for the year. But as you say, you get these quarters -- several quarters in a row where you don't -- you have with a weak sell-out, but it eventually catches back up.

Yes. And, Adam, I'd echo Laura's comments about it eventually catches up, which is what we would expect because as we've gone through down cycles, one of the things that I do as I go visit customers around stores you kind of look at the tire piles in the back from tires that have been removed. And in down economies, post-Great Recession, when you see tires come off, you'd see tire cords, you could just go out and feel them and look at threads and see what thread depth was left if any. That's not happening at all. We're not seeing any of that right now. We're just seeing sort of sellout has been sort of consistently running at the GDP levels, if you like, 1% to 2%. But we also know those replacements on the, what's been a very strong SAAR over the last years, has to come through, and we're well positioned to take advantage of that. So we expect it to come. But candidly, as I said in my remarks, we're a bit surprised that those underlying fundamental trends haven't driven sellout as much as we would have expected.

All right. And just maybe a follow-up. There's this thesis out there that changes in the business model, say, auto 2.0, things like ridesharing firms that become mega-fleet managers could be in a position to one day, if not now, be buying many, many millions of tires on a commercial buy for their drivers just like the Uber and Lyfts and whatnot start to try to take some costs out and use their data to try to provide a fleet management solution and better economics to their drivers. I guess that the question is, are you at a point where you can have -- without singling out as specific ridesharing firm on this call, are you having, your folks in the commercial side having those discussions with the ridesharing firms on how your products can meet their needs?

Adam, we are -- one, I mean, just to take a step back, your perspective on a shift to a customer changing over time more towards a fleet, a mega-fleet, as you say, is a trend that I think is ultimately going to happen. As to your point, it's to a degree happening already, which is a very positive trend. And as you know, one of our strengths is managing fleets through not just the tire but through the service model that we have, focusing on uptime, focusing on cost per mile, focusing on service. Those type of elements make that business a very good business for us. So we do see that trend happening. And I would suggest, to your point, we're on the front end of seeing that happening. And those are the type of dialogues we're having with many, many of those players. As you know, there's a wide range and a lot of clarity to fall out yet as to how those things come together in terms of what their business model looks like. But suffice it to say, the need for tires, the point of vehicle miles traveled going up and the need to provide a service to keep those vehicles going through some of those mega-fleets that are emerging, are absolutely on our radar.

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

Just wanted to apologize in advance I missed the beginning of the call and so you may have explained and answered a lot of my question. Just wanted to come back on the Slide #6. I understand your rationale for holding the bar on pricing and how it makes strategic sense. But how do you get conviction from here, that the disciplined pricing will not be hurting your volumes on an ongoing basis? Or in other words, how do you get conviction on this back to 10% growth for the second half and for 2018?

Well, Emmanuel, I'll start with the way I always do because I think it's absolutely key, and that goes back to the value proposition that we have in the marketplace. It's our products, it's the technology in them, it's the brand, it's the marketing, it's the service we bring to the dealers. And even in the second half, for instance, in North America, we have our new weather-ready product coming out. All those things are ultimately what matters and what will be attractive both to our distributors, our dealers and to our consumers. And those things that we have haven't changed at all. So that's the predicate of the conviction that we have that we can continue forward in a very positive way, and Slide 6 deliver those trends, those green bars after Q2 on that list. So that's point number one. The current situation that we have, as I've mentioned a few times, and no need to apologize that you hadn't listened to the front part of it, but we're going through a very -- again, a very difficult environment as opposed to a change in the industry, which just says we're working through those high raw materials, a lot of prebuy, a weak sellout, the things you've heard us talk about and then the raw materials coming back down. So that's the environment that we've been in. Now what gives us confidence on the second half is the outlook that we've put forward changes some of the assumptions that we had before relative to our position in the marketplace. Again, Emmanuel, I would refer you to Slide 7, that you can see our sequential view of where our price/mix per tire is going, which shows a commitment to offset and cover those incremental raw materials. And as I think Laura mentioned earlier as well, our view of volume we adjusted downward in the second half, we've taken into consideration some of the weaker OE trends that are going on out there. So we have confidence that the value proposition we have and the position that we have is an appropriate way to go into the second half. And more importantly, positions us well to exit out of 2017 with some positive tailwinds of lower raw material cost, of good margins coming out based on where our price/mix will be. And we'll focus on protecting those as we get into 2018. So we see a lot of positive things even coming out of 2017.

Exactly. And so I think, Emmanuel, like, Page 6, which is the greater than 17-inch consumer replacement, as we've said, we just -- we see it more what's going on in the environment, what occurred in the second quarter especially for April. And because those fundamentals or trends in the industry remain strong, we don't see that and continue to not see that as we move through the second half of the year. And then as Rich said, our expectation is now for volume for the full year down 3.5%. And as we've think about the second half of the year, think of the third quarter as down about 3%. So we very much lowered our expectation there. We see the fourth quarter more like up about 3% or so, a lot driven by OE in China. So again, just kind of playing in there. We feel we've got realistic expectations as we look going forward.

Okay, that's helpful. And then I guess looking forwards, on your Slide 9 and the 2018 positive SOI driver. So I guess the overall message is certainly a lot of these headwinds are temporary and will get offset into next year. What are some of the other SOI drivers to think about that could be potential offsets including, not everything will be positive going into 2018 but if I sum up, what you have in there, we're talking about a major jump in earnings according to your expectation.

And you're right, there's always other things that come up. In our 2020 plan, we talked about some incremental R&D expense, marketing. There's a little more depreciation, that will come in. Year-over-year, probably some incentive comp versus the prior year, those kinds of things. But we'll -- these are, again, what we see as the positive drivers going forward. We'll continue to give you more and more detail about next year as it plays out for the probably the back half year.

Okay, great. And then just very quickly. When I look at sort of your updated SOI guidance, and I apologize if you went over that before, how do you see 3Q versus fourth quarter playing out?

So I think our third quarter, we see, again, down significantly year-over-year, okay, similar to our second quarter in terms of percentages or so. We do see the fourth quarter starting to turn better. It's a lot of the things we talked about, the price/mix versus raws in the fourth quarter. The comp is much better year-over-year. Again, volumes in China. There's other moving pieces as you go through it. But that's kind of how we see the second half kind of playing out.

And we'll take today's last question from Ashik Kurian with Jefferies.

I just have one on Slide 5. It's interesting that you showed the raw material cycle, and this has clearly been a very short cycle. I'm sure you must have done your price increases with probably a bigger cycle in mind, and that's probably why you've suffered some of the market share losses. But the upshot is probably the dealers are all sitting with higher inventory of your competitors' tires. I'm just wondering, how much of an impact does that have on the retail market share. I know someone asked this question, but I wasn't very clear on the answer. But what are you seeing in terms of the retail market share losses that you're suffering and how long could that last and could it be structural? And how much does the dealer inventory determine the retail market share in the end?

Ashik, I mean, I'd say a couple of things. I mean, one, at the start of the year, you're right, we were looking at $1.1 billion in raw materials. What I would say is we -- what we saw not being able to forecast how long or how high, but we know when raw materials goes up, our job is to deal with those raw materials, and that's what we did. But I would also tell you, we're still looking at $700 million of raw materials, which is still a 20% year-over-year increase. So the raw material costs are very real, and they're something that needed to be dealt with them and we did. And as I said, we're very comfortable having taken that decision. In terms of what this means on a retail sellout in market share position, number one, as you know, the sellout numbers are harder to get in terms of share. The share we see in the industry is more sell-in than sell-out. But I would suggest to you, having gone through this in the past, dealers are very -- certainly, very cognizant of what's happening in the industry in terms of doing prebuys or candidly, the opposite if the situation were in reverse. And I would say when we see these sort of big prebuys or these big movements by the dealers, they're a bit more arbitrage on price from their perspective than they are indicative of changes in share positions in the industry. So I don't really worry that that's the case, and I do that because of the underlying things that we have going on, the strong OE pull in the segments that we want to play, the brand, the distribution that we have, the other services, the other things that we offer to our wide distribution network that really outlast and are more important to them than sort of an opportunity to buy low, if you will. Those things will ultimately come through. They always have, and I don't expect that to change at this point.

Sorry, to follow up on this. But I mean, my concern is, I mean, you flagged that on spot, you're probably looking at a tailwind in raw materials in 2018. Now the current environment doesn't seem like one that you can keep all of it. So potentially tire makers will have to continue to give some of the prices back, and that's why I raise my question as to what is going to force the sell-in to pick-up in the second half when you're continuing to forecast plus 5% year-over-year incremental price/mix?

Yes. Ashik, also, remember, we said sellouts should start to get better in the second. We're seeing it actually get better. So you'll see some of that inventory go through. We would say it takes about -- round about a quarter to get through given what we know. So I do think sellout trends will ultimately be better. And I certainly can't speak to what others are doing. But again, as we look at this, we're still looking at almost $470 million of raw materials to offset in the back half of the year. So our value proposition, and as we've baked that into our view for the second half of the year, I think based on what we know, we're comfortable with that. Okay, I think that was the last call. Again, we appreciate everyone's attention today. Thank you very much.

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