Goodyear Tire & Rubber Co (GT) 2019 Q1 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 Goodyear's First Quarter 2019 Earnings Call. (Operator Instructions)

I will now hand the program over to Nick Mitchell, Senior Director, Investor Relations. Please go ahead.

Thank you, Keith, and thank you, everyone, for joining us for Goodyear's First Quarter 2019 Earnings Call. I'm joined here today by Rich Kramer, Chairman and Chief Executive Officer; and Darren Wells, Executive Vice President and Chief Financial Officer.

The supporting slide presentation for today's call can be found on our website at investor.goodyear.com, and a replay of this call will be available later today. Replay instructions were included in our earnings release issued earlier this morning.

If I could now draw your attention to the safe harbor statement on Slide 2. I would like to remind participants on today's call that our presentation includes some forward-looking statements about Goodyear's future performance. Actual results could differ materially from those suggested by our comments today. The most significant factors that could affect future results are outlined in Goodyear's filings with the SEC and in our earnings release. The company disclaims any intention or obligation to update or revise any forward-looking statements, whether as a result of new information, future events or otherwise.

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

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

Great. Thank you, Nick, and good morning, everyone. Thanks for joining us today. During today's call, I'll share some highlights of our first quarter operating performance and discuss the steps we're taking to address our cost structure and improve our supply of premium tires. I'll also spotlight several new mobility partnerships as well as the upcoming launch of our commercial e-commerce pilot in the U.S. Darren will follow with a review of our financial performance as well as details on our recently announced European restructuring and the refinancing of our European credit facility. He will conclude with an update on how we're thinking about the business going forward.

We entered the year with renewed focus on the elements of our business that we can control and influence, including our operating execution, the efficiency of our manufacturing facilities, our cost structure and product and business model innovation.

We made progress increasing our premium supply for the U.S. market, allowing us to gain momentum. Our U.S. consumer replacement tire shipments increased 6%, outpacing the performance of the USTMA members. This was led by strong growth in the high-margin 17-inch and greater category.

Our U.S. commercial truck replacement tire volume turned positive, reflecting improved manufacturing performance at our commercial truck tire plants as well as the strength of our fleet solutions' offering. Both businesses grew share while increasing the value we capture in the marketplace.

Our U.S. and EMEA commercial OE businesses delivered another quarter of impressive volume growth, reflecting healthy trends in the trucking industry, including increased ton miles and higher utilization.

EMEA's commercial replacement business also posted solid growth aided by the strength of our Proactive Solutions offering. European consumer replacement industry demand waned throughout the quarter, reflecting weakness in the emerging markets and Germany. This negatively affected EMEA's consumer replacement volume.

And as expected, our Asia Pacific results were greatly influenced by the macro environment in China, including lower vehicle production, which continued from the second half of 2018. Our OE volume declined by nearly 15% in the quarter.

I'd like to take a few moments to address some of the key areas driving and influencing our business, and the first is China. Looking at China overall, we started seeing indicators of stabilization in the quarter as government stimulus has shown signs of improving business confidence. Sales of new commercial trucks have improved as construction and infrastructure projects are increasing. And as I mentioned, while new car sales contracted for the ninth month in a row, the rate of decline moderated relative to the previous month as well as through the first quarter.

We're also seeing some encouraging developments in the consumer replacement channel, most notably, industry sell-in trends are improving, aided by lower inventory levels following months of destocking activity by small- and medium-sized distributors.

Next, I'd like to address some actions taken in the quarter regarding our manufacturing footprint. Recently, we took steps to improve the competitiveness of our manufacturing footprint and increased our premium tire capacity. Both of these actions will help us with our goal of having the right tire at the right place at the right time and at the right cost. We announced plans to modernize our Hanau and Fulda manufacturing facilities in Germany. These investments will bolster the capabilities and the productivity of our German plants, strengthening our competitive position in the market. The transformation will result in these plants having more automated production and being fully capable of producing consumer tire with rim diameters greater than or equal to 17 inches.

These transformational investments, along with the planned expansion of our plant in Slovenia announced earlier this year, will add nearly 4.5 million units of high-value-added capacity, better positioning us to meet the growing demand in the higher-margin premium segments of the European market.

Our portfolio of industry-leading products is key to capturing this growing demand. Product innovation and vitality continued to be areas of focus for us in 2019. On the last call, I provided an overview of 4 new tires that we are launching in the U.S. this year, each of which were well received at our Annual North America Customer Conference.

Our product development team in EMEA also has tremendous momentum on this front with several new high-value-added products scheduled for launch this year, including the Eagle F1 Asymmetric 5 and the Eagle F1 SuperSport consumer tires, the Vector 4Seasons Cargo for the all-important cargo van segment and the KMAX gen 2 and FUELMAX gen 2 commercial tires for the drive and steer positions. These tires feature our latest technology. The Eagle F1 Asymmetric 5 delivered excellent performance in this year's European magazine summer tire tests, including earning first or second place finishes in 4 out of 4 tests.

The Eagle F1 SuperSport will enhance Goodyear's position in the ultra-ultrahigh performance category. This tire delivers superior wet braking and dry handling performance versus the competition, both contributing to superior track times.

The Vector 4Seasons Cargo refreshes our offering in the all-important cargo van segment. This marks the first refresh in a number of years within this category. This product offers superior wet breaking, snow handling and mileage performance compared to its predecessor, and our customers are waiting for it.

The KMAX gen 2 aimed at the regional haul service segment delivers enhanced all-weather capability and tread robustness compared to its predecessor.

And lastly, the FUELMAX gen 2 is tuned for long-haul service providers and offers superior all-weather capability, noise reduction and mileage potential versus the earlier generation.

Each of these new product launches represent the power of our market-backed approach to product design and innovation. I'm really excited about the prospect for each of these lines as we move throughout 2019 into 2020. Our product line is second to none.

In addition to our industry leadership in products, which is the foundation of what we do, our progress in the area of emerging mobility continued in the quarter.

Turning to Slide 9, I'd like to spotlight our latest mobility partnerships. We expanded our portfolio of mobility and technology partners to include Envoy Technologies, Local Motors and YourMechanic.

Envoy Technologies provides turnkey easy car sharing solutions that allow real estate owners and operators to offer mobility as an amenity. Goodyear's proprietary predictive tire servicing solution will enable Envoy's fleet manager to efficiently manage the service needs of the company's vehicles with the aim of minimizing the operational downtime of the fleet and maximizing the user experience.

Local Motors is a ground mobility company focused on shaping the future for the better through open collaboration and co-creation. Goodyear has teamed with Local Motors to conduct tire testing with Olli, an 8-passenger autonomous shuttle. Local Motors also selected Goodyear tires for exclusive fitment on its Olli vehicles. Expanding our fleet of test vehicles will allow us to continue advancing our knowledge of the best strategies and formats for transferring advanced vehicle and ridesharing data into value-added information to improve operating performance and benefit customers.

Tire innovation is at our core, but these partnerships are demonstrating the increasing importance of data and fleet management as a service in solving our customers' problems better than anyone else.

Another partner, YourMechanic, offers mobile repair, maintenance, inspection and reconditioning services directly to millions of consumers and fleets across North America. The company added goodyear.com to its platform for tire sales and services. YourMechanic will further enhance Goodyear's global innovation network that includes numerous customers, suppliers and independent start-up businesses all in the name of making the tire buying process easier.

These initiatives provide us with valuable opportunities to continue learning and innovating. The collective insights that we gain from our mobility partnerships when combined with our remarkable set of core assets will ensure that Goodyear has a seat at the table to shape the mobility revolution as it unfolds.

Finally, selling tires online with our aligned partner dealers continues to unfold and grow. New technologies and changing consumer and customer needs are reshaping how tires are bought and sold. This dynamic is not only here to stay but it's a trend that we think will only accelerate going forward as consumers increase their knowledge and comfort of buying tires online and having them installed at trusted partners like Goodyear.

Our B2C e-commerce site, TireHub, Goodyear Mobile Install and Roll by Goodyear are examples of our response to changing consumer behavior as it relates to the tire buying process. In 2015, we were the first tire manufacturer to move online with the launch of our e-commerce platform, goodyear.com. In June, we will launch our commercial e-commerce pilot, marking another first for our company and industry. This new platform provides us with an opportunity to better meet the changing needs of commercial truck fleets and owner-operators and increase the business and online competitiveness of Goodyear's commercial tire dealers. There has been a pull from the market for this platform, and we're pleased to initiate it with our partner dealers.

Each of these mobility partnerships as well as the upcoming launch of our commercial e-commerce pilot were made possible because our connected business model was able to provide an attractive solution to an unmet need or unresolved problem. This is the beauty of what we have with the connected business model. Nobody in the U.S. can do what we do. Nobody has all the required elements: our #1 brand; our strong position in the market; the right fitments with original equipment manufacturers; our outstanding product portfolio; our unmatched aligned distribution, including TireHub and our third-party retail and wholesale distribution; and our industry-leading e-commerce platform. And nobody has the ability to connect them the way we do. This is what creates competitive advantage in the marketplace. This is why OEMs, dealers, distributors and consumers want to do business with us now and will continue to do business with us as the mobility revolution unfolds. We can deliver them something that they can't get anywhere else. This is what allows us to separate ourselves in those segments of the market where we want to play and win.

As we continue strengthening our connected business model, I'm confident we will be positioned to deliver results that meet and exceed our previous peak performance through the cycle.

Now I'll turn the call over to Darren.

Thank you, Rich, and good morning, everyone. I'll begin my remarks with a couple of reflections on the quarter. First, I think you'll find that the factors that shaped our first quarter performance were largely consistent with the drivers we discussed as part of our year-end conference call. We did see a couple of slight shifts as the U.S. replacement industry was stronger than we had planned and the replacement industry in Europe was weaker.

Second, I'd say that, overall, nothing we've seen during the first quarter has fundamentally changed the way we're thinking about full year 2019. Having said that, we continue to take action to build our long-term fundamentals, including the modernization and restructuring plans we've announced in Germany, which we expect to benefit our earnings next year.

Turning to Slide 12. Our first quarter sales were $3.6 billion, down 6% from last year, reflecting the impact of unfavorable foreign currency translation and lower volume partially offset by improvements in price/mix.

Unit volume contracted 3% driven by an 8% decline in consumer OE shipments. The global consumer OE environment continued to be challenging during the quarter, particularly in our Asia Pacific region due to weak demand in China and India. Light vehicle production also declined in Europe and the Americas.

Replacement shipments were relatively stable with weakness in EMEA and Asia Pacific largely, offset by growth in the Americas. Asia Pacific's performance was driven by weak consumer replacement shipments in China. European consumer replacement demand was also soft, driven by difficult winter tire comparisons and a slow start to the summer selling season. Robust growth in the U.S. consumer replacement market drove the increase in the Americas.

Segment operating income for the quarter was $190 million, down about $90 million from a year ago and slightly better than we expected, primarily reflecting improvements in cost performance.

Our results were influenced by certain significant items, most notably charges relating to the restructuring plan we announced in Germany. Adjusting for these items, earnings per share on a diluted basis was $0.19.

The step chart on Slide 13 summarizes the change in segment operating income versus last year. The impact of lower volume was largely offset by improved overhead absorption for increased production in Q4 in the Americas and Europe, Middle East, Africa.

Raw material costs increased $137 million, reflecting higher commodity prices, transactional currency headwinds and an increase in nonfeedstock costs related to stricter enforcement of environmental regulations in China.

We delivered $42 million of price/mix improvements as we benefited from our recent pricing actions and improving supply in the Americas.

Cost savings of $55 million more than offset $45 million of inflation. Inflationary headwinds were the strongest in EMEA, particularly in emerging markets there. The negative effects of foreign currency translation totaled $14 million.

The other category includes benefits from lower advertising expense and reduced start-up costs at our new Americas plant, which were partially offset by weaker results from other tire-related businesses, including U.S. chemical operations.

Turning to the balance sheet on Slide 14, net debt totaled $5.6 billion, up from $5 billion at year-end primarily reflecting the seasonal build of working capital.

As a side note, in January, we adopted the new lease accounting standard, which requires substantially all leases to be recognized on the balance sheet. To this end, we recognize liabilities reflecting our operating lease obligations and corresponding assets to account for the right of use of the underlying assets. This change does not have a significant impact on our net income, cash flow or book equity.

Our liquidity profile remains strong with approximately $3.5 billion in cash and available credit at the end of the quarter.

In March, we refinanced our principal revolving credit facility in Europe, extending its maturity to 2024. Given the favorable loan market conditions, we increased the size of the facility by EUR 250 million and reduced the margin by 25 basis points. With this refinancing complete, we have no significant maturities until 2021.

Slide 15 summarizes our cash flows. Net cash used by operating activities was $364 million, which is in line with last year's first quarter usage as lower restructuring payments helped to offset lower earnings and higher working capital.

Turning to our segment results on Slide 16. Americas volume of 16.7 million units was stable versus 2018. Replacement shipments were very strong in the U.S. and Canada. This growth offset declines in our U.S. consumer OE business and in several countries in Latin America that continued to experience economic volatility, including Brazil.

Segment operating income was $89 million, down $38 million from last year. The decline was driven by increased raw material cost, reduced earnings from third-party chemical sales and unfavorable foreign currency translation. These factors were partially offset by better price/mix, improved overhead absorption and lower start-up costs associated with our new Americas plant.

Last quarter, we reported supply constraints affecting our results in the Americas. These constraints were driven by a combination of stronger-than-expected demand trends in the second and third quarters of 2018, which reduced our safety stocks, as well as lower production resulting from increasing manufacturing complexities and poor performance in a couple of our U.S. factories. Although we have more work to do, we've made progress on supply in the first quarter and we were able to reduce our order backlog.

Turning to Slide 17. Europe, Middle East and Africa's unit sales totaled 14.4 million, down about 2.5% from the prior year. The volume decline primarily reflects weakness in the consumer replacement business as shipments fell 4% driven by decreases in less than 17-inch rim sizes. Consumer OE shipments decreased 1%. These declines in the consumer business more than offset strength in the commercial shipments. EMEA's strong commercial truck business reflects the benefits of favorable freight trends and the momentum of our fleet services offering.

Segment operating income for EMEA was $54 million, a $24 million decrease from last year. The decline was mainly due to higher raw material costs, inflation, including higher transportation costs, and lower volume, partially offset by improvements in price/mix.

Turning to Slide 18. Asia Pacific volume declined 9% to 6.9 million units, reflecting the challenging industry environment in China where our combined consumer OE and replacement volume declined over 15%. Weak consumer OE volume in India was offset by double-digit increase in consumer replacement shipments there.

Segment operating income was $47 million, a $29 million decrease from last year. The decline was driven by higher raw material costs, lower volume in China and lower fixed costs absorption. These factors were partially offset by the benefit of cost controls on SAG.

Despite the challenging external environment, we continue to build a strong foundation for long-term growth in the Asia Pacific region, including expanding our retail network and building our OE pipeline, both of which will help us drive demand in the key growth markets of China and India as markets recover.

Turning to Slide 19, we've reiterated the positives and negatives affecting our results in 2019. Both sides of the ledger remain as we showed them in February. We continue to expect raw material cost pressures of approximately $300 million for the year based on forecasted rates, including an $80 million headwind in the second quarter. I will point out, however, that our OE volume outlook while still negative has improved slightly, trending toward the more favorable end of the range.

On Slide 20, we show the puts and takes for the second quarter for each of our regions. The Americas will continue to be challenged by higher raw material costs and weaker results in our other tire-related business, primarily our U.S. chemical operations given low butadiene prices. Improved overhead absorption is expected to offer a partial offset due to higher production volume in Q1.

Once again, EMEA's results will be influenced by weaker currency and higher inflation, including increases in energy and transportation rates as well as general cost pressures in emerging markets. EMEA's volume is also expected to decline principally due to lower consumer OE shipments resulting from strategic choices we made in previous years.

Similar to the trends during the first quarter, Asia Pacific's performance will be shaped by higher raw material costs and the impacts of weaker volume in China, including higher unabsorbed overhead due to lower production levels in the first quarter.

On Slide 22, we provide an updated industry outlook for the U.S. and Western Europe. We've adjusted our expectations for the U.S. commercial replacement industry to reflect the sharp decline in commercial tire imports during the first quarter. This volatility affects the reported commercial replacement sell-in figures but is not a reflection of sell-through trends in the market, which remain constructive. We also increased our expectations for commercial OE industry shipments in Western Europe to reflect healthy truck production there.

We list other key financial assumptions for 2019 on Slide 23. We increased our forecast for interest expense to approximately $350 million from the prior range of $325 million to $350 million as we've seen increases in certain emerging market interest rates. The other estimates are unchanged from the view we presented in February.

The last point I want to cover is the factory restructurings announced in Europe, which lay the path for a significant improvement in our results in EMEA. These plants pair modernization investments with cost reductions in our Hanau and Fulda plants in Germany. The equipment upgrades will take place over a period of approximately 3 years and require capital investments of approximately $120 million, and cash restructuring will total about $125 million. The benefit of reduced head count will ultimately improve segment operating income by $60 million to $70 million on an annualized basis, and the investment will enable improved margins as we shift 2.5 million units from less than 17-inch to 17-inch or greater rim diameter. The plant is expected to be completed by the end of 2022.

As is the case with these projects, our focus continues to be on the steps we can take to improve our momentum, and we remain confident our actions will not only support earnings recovery in the near term but also enable new highs over the coming years.

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

(Operator Instructions) Today's first question will come from Rod Lache with Wolfe Research.

I guess my main question is just was hoping you could just characterize pricing conditions in North America, and I wanted to ask you whether you think it's time to reexamine pricing just given the recent raw material price increases plus the fact that you really haven't fully recovered everything that you lost in terms of the spread over the past 2 years.

Yes. So Rod, it is an ongoing matter for us to look at what we need to do in order to recover the lost margins that we'd experienced from the increased raw material costs over the last couple of years, and it's something we're confident we'll be able to do over time. I think if we look at where we were in the first quarter, we were able to -- we achieved price/mix of $42 million, which compares to $35 million in Q4 and negative numbers for several quarters before that. So I think we feel like we're making progress. And in particular, it was good for us to see price/mix in the Americas turned positive after having slightly negative in Q4. So in the Americas, we've got good momentum on price and we've got mix improving as we enter Q2. And this is at the same time when raw material -- year-over-year material cost increases are getting a little more moderate, so that's a good combination. So that -- I mean that's kind of how we feel about the Americas.

And just to hit on Europe and Asia Pacific, I think where we have good momentum on pricing in the Americas, not as clear in EMEA and Asia Pacific as price/mix in Q1 for both of them was a little lower than Q4. So there's some seasonality in it for the EMEA business. But I think it's fair to say the momentum there is not as good as it is in the Americas. But overall, I think I mean, we feel like we're making progress. We're still working toward that crossover point where we can start to recover the lost margins that we've experienced from rising raw materials. I didn't include the cyclical price versus raw materials chart in today's deck. It hadn't really changed very much as you can -- as you might imagine. But we will come back to that later in the year to do a progress check and to talk some more about that. But that's obviously an ongoing point of focus for us.

Well, maybe I could just ask this a little bit differently. What would be the key metrics or indicators that you would analyze to determine that the time is right to implement additional pricing?

Rod, I don't think -- I'll jump in. I don't think they're a lot different than what we've done in the past. It's a combination of where our input -- the change in our input costs and we go as well as other market conditions that are relevant to each of the particular areas that we deal with. So I don't think the things that we look at are going to be any different. It's going to be the environment, and it's also going to be -- we've said this consistently in the past and we believe this and Darren just said it again that we believe we can recover over time not just on market conditions and input costs but also the value we're putting out in the marketplace, whether it's the new products that we put out. And we highlighted again where our product portfolio is, that's an opportunity for us to continue to go back and look at what we can offer in the marketplace and the price at which we're offering it. So we look at our portfolio, we look at the services we're providing, and we look at the value we're bringing around all the programs, whether it be advertising, whether it be some of the distribution programs we have, whether it be some of the new products. All those type of things that we bring to market are all things that go into the mix of what we do.

Okay. And just lastly, could you just remind us, in North America, how big is your truck and bus radial tire business? And has there been any benefit to you since the U.S. obviously implemented some pretty significant tariffs starting February 15?

So Rod, when you're asking about the commercial truck tire business, you're just asking for the relative size of the business?

The relative size to you. Right. The size to you within the North America business, and obviously, a lot of tires imported from China in that segment. Maybe it's more lower end, but I think the tariffs are like 40% or something like that on those imports. Is that something that you're seeing as a positive? Is it domestic manufacture?

Yes. You're really just trying to get the -- you're trying to get the tariff impact more than anything else, Rod, is that -- that's kind of where you're going with it?

Well, presumably not much direct tariff impact for you, but maybe indirect.

Right.

Right. Yes, so Rod, I think the size of the business, just use the overall size we use in North America to -- for the total businesses relative to North America as well as we look at it. So -- and I think you're right. I mean I'll kind of -- I'll jump to the end and maybe add a little bit more color, but our focus is typically on the OEs and the fleets, and that's between product and product performance as well as our fleet solutions and Proactive Solutions. Our brand technology and those type of things is what drives our business as opposed to the low end. But as we look at it, there is now, as you know, a 4% standard tariff in place as we look at it. Then there's a 10% section, if I get a little technical, Section 301 tariff that went into effect in the middle of 2018. And the increase to 25%, as you may remember, was supposed to occur at the start of the year, that's been delayed. And then also, there was the ITC announced antidumping and countervailing duties that went into effect in mid-February, and those amounts can differ by company, as you probably know. But the combined sort of effective rate for most manufacturers, call it between 42% to 45%, and those rates then are applied to the import price of those tires coming in. So -- and as an example, a standard sort of commercial truck tire coming in from China on average is about -- import value about $120. So the importer of record would need to pay approximately an incremental, call it, $70 to cover all the duties. So that's sort of how to think about the tariffs coming in. Remember, for us, nearly all our commercial truck tires that we sell in the U.S. are made in the U.S. and they're made to support that business model that we spoke of. So clearly, it has an impact there. Darren made reference to that in his formal remarks about what it does to the industry, but our focus is going to continue to remain on where we add value to our customers and the OEs and the fleets.

Okay. Great. Sounds like you're seeing some benefit, I guess, in a nutshell just given what's happening competitively there.

Yes. I think we're at a point where the -- it's an industry that is in good shape, and we've got a very competitive offering. So I think the commercial truck business is a strength for us right now.

We'll take our next question from John Healy with Northcoast Research.

I wanted to ask a big picture question. When I think about everything that's going on operationally, I feel like there's 2 sides of the coin. You've got the U.S. business where you've made some pretty significant moves in terms of changing distribution and exciting launch in June with the e-commerce on the commercial truck side. And then if you go over to Europe, and it seems like you guys are really digging in on the operations in terms of being effective with your production capabilities. As you look at those 2 things, do you see things in Europe that you can bring to the U.S. maybe in 2020 on the production side? And then do you see things in the U.S. on the distribution side that you can take to Europe in 2020? And I guess the way I'm asking this is at some point over the next 2 years, do you see yourself pivoting where you take lessons learned and try to implement those across the sea back and forth? And can the business look like in the U.S., what you're building, can that be the model in Europe and then vice versa on the production side?

Yes. So John, I think it's reasonable to look at what we've done in terms of distribution in the U.S. and think that, that is going to be instructive for the way we want to approach a line distribution in other parts of the world, and we are thinking about what it takes to establish that level of alignment in other markets where we operate. So I think it's fair. Those are changes that take place -- tend to take place over extended periods of time. So your specific question was about 2020. I think the work that we've done in distribution in North America has taken place over many years. So there was -- TireHub was a significant event, but there was a lot of work done over a long period of time that led up to that. So I think directionally, we are looking to develop that level of alignment in other markets, but those changes take some time to accomplish.

In terms of production, certainly our European factories have had a longer -- have had a lot of experience with high levels of product complexity and SKU proliferation. So I think inevitably, there are some lessons that can be shared. And I think we look at our manufacturing programs on a global basis. So our plant optimization program, including the efforts that we're undergoing to address any sort of constraints that we have on producing the type and variety of SKUs that we're now being asked to produce, those are learnings that we share globally. And to the extent we have factories that have greater levels of experience, then we're going to leverage those learnings and we're going to try to share those around the globe. So I think both the points you make are relevant points.

Okay. Fair enough. And then I wanted to ask about one of the comments on the slides jumped out at me is you guys are calling out building a stronger OE pipeline for 2020 and beyond. Can you maybe talk to if that's U.S, if that's Europe? Is it new partners? Maybe potentially how meaningful that can be relative to the performance you've seen in '18 and then the start of '19?

Yes. I think, John, how I would look at it is really on a continuum. And you've heard us talk about this in the past as having a selectivity strategy where we've been very thoughtful about the portfolio and where it was and where we wanted to take it.

And I would tell you to think of what we're doing now is very much in line with that. We have been on that journey and will be -- will continue to be on it to make sure we're getting on the right fitments and have the right pull with the right partners going forward. And what you've seen is certainly a lot of decisions to move away from products and pull -- replacement pull that wasn't there to improve our business and to be able to get our cost structure in line to do that. As we look ahead, I would say that this is not region-specific, I think it's company-specific. I'm very pleased with the OE fitments and the win rates that we're having in the Americas, including Latin America, in Europe as well as in Asia. In Asia particularly, both China and India where we're having very successful win rates in getting on the fitments we want, and that means not only a particular country platforms but global platforms, and it means AVs and it means a lot of unique tires and characteristics that those manufacturers want not for the vehicles that we are seeing on the road today but as they are thinking about where those platforms are going forward. So we are having -- I'm very pleased with the success we're having on win rates and I'm even more pleased with the partnerships that we're having with those individual OEMs to work together on bringing those vehicles to market.

Yes. So if I -- John, if I could just add one thing, because, again, you were focused on the year that the benefits might begin, I do -- we did -- we had a question on the year-end conference call when we were talking about the 2 million to 3 million units of OE volume that we expected to reduce this year because of selections that we had made in our portfolio, and there had been a question about whether or not that lost OE volume was going to be something that would go on for several years. Now I think we want to keep making the point that while we're -- our OE volume is expected to decline this year and now probably closer to 2 million than 3 million units, we've won fitments that's going to start to bring that volume back in a significant way beginning in 2020. So we don't see that OE decline in terms of our fitments as a long-term thing. It really is -- it's principally a 2019 thing and we'll recover thereafter.

That's a good point, Darren. Our pipeline to get those tires out is full right now, so we're feeling good.

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

Regarding the German plant modernization and restructuring program, should we think about this more as an LVA to HVA type conversion that is aimed at benefiting mix? Or is it more of a cost reduction action? And what are your related thoughts generally on cost saves versus general inflation? I think there's been some anticipation you might be set to pull additional levers to try to ramp cost saves back up to the level of recent years. Where are you in that process? Is Germany part of it? And when might we expect to learn more?

Okay. So Ryan, let me -- I'm going to ask -- answer your last question first regarding cost savings versus inflation. And the -- I think we were pleased to see that in the first quarter, we were -- we had cost savings that exceeded inflation by $10 million. And that was after a fourth quarter where if we exclude the one-time settlement we had on Brazil VAT, which was a benefit in terms of cost savings in the fourth quarter, if we excluded that, fourth quarter inflation and savings were about equal. Now in the first quarter, we've gotten some net savings, which I think we're pleased about as part of what delivered earnings a little bit better than we might have been expecting in Q1. The cost inflation issue though is still very much in front of us. So our cost savings programs are going to have to ramp up. We've kept a lot of attention in that area. But inflation is continuing to build I think. Particularly in EMEA, particularly in emerging markets, we're feeling that. And it's going to be a struggle for us this year to deliver net savings. I mean that's kind of -- that's where we've been. It hasn't really changed. We're 1 quarter in and we delivered a little bit more than we had originally expected. I think that's good. We're going to stay focused there. There's no question. But not at the level of net savings where we -- that we'd really like to see.

If I come back to the German restructuring, I think the way you phrased your question is right on the mark because you are separating the 2 different aspects of this project. And there are 2 aspects because, first, we are reducing some high-cost capacity that's no longer capable of producing tires that are in highest demand, and that's the element of it that you would think of as a restructuring. And rather than taking -- reducing capacity by -- I mean, between the 2 factories, we are, in fact, reducing high-cost capacity by the equivalent of about 1 factory. So it's half of each of 2 factories, but we're kind of taking out that level of high-cost capacity.

And then second, there's an investment in new equipment that's going to allow us to produce 2.5 million units of additional high-value-added tires or 17-inch and above rim diameter tires. And that is -- that's similar to some other upgrade projects and expansion projects that we've done. So I think that's really the way I think about it is we're going to take out a significant high cost -- part of the high-cost footprint that's no longer capable, and then we're going to add that 2.5 million units as a CapEx project. And we're going to get benefits from each one of those. The benefit -- the strict benefit from the restructuring from the approximately 1,100 head count reduction is the $60 million to $70 million. So we're going to get that benefit. We'll get that over time, so over the next 3 years. And then there will be the additional benefit, which is the added margin on the 2.5 million incremental high-value units. So that's a mix-up benefit that we're going to get over about that same time frame. Now that -- there's about $120 million of capital expenditures that go into that. So we've got $125 million of cash restructuring, $120 million of CapEx, and what we get from that is $60 million to $70 million of cost savings plus the added margin on those 2.5 million of high-value-added tires.

I see. And then just lastly from me, I think it's encouraging that you are gaining share in U.S. consumer replacement market, including after the price increases in the back half of 2018. Maybe you can talk about the role that TireHub, if any, may have played in improving share? I'm curious to know also, though, if you think that you took as much price in the back half of 2018 as did your average competitor? Or if maybe you elected to invest in a little bit more competitive price point to try to recover some of that share that was lost when maybe you were in retrospect being too assertive in raising price in 2017?

Yes. I mean I'll jump in. I would say our value proposition in the fourth quarter was what I thought and what we thought was appropriate for the markets at the time. So I think I would -- I'd leave it at that in terms of how we went to market. We were very pleased in the fourth quarter, coming out of the fourth quarter in terms of how we were set up in the market, and I think you saw that come into Q1. I think you rightly pointed out, we were, I think as Darren mentioned in his remarks, we were 6% up in the quarter in the U.S. market. I think that's reflective of that value proposition I talked about. Great products in the marketplace, new products in the marketplace and a strong demand out there. And as we look at it from -- overall, we saw market prices sort of trending higher in the quarter year-over-year and sequentially. And again, as you said, our revenue per tire was up, our volume was up, our market share was up, and that comes off of the situations that we had in 2017 as well as 2018 with TireHub. So I'm very pleased with the way that we've worked through that.

And I might add, we don't see any sort of a broad evidence that any inventory is really building up in the channel. Remember, sellout has been good, vehicle miles traveled is good, consumer confidence is good, so the industry is pretty good. And from our perspective, our inventories are certainly in relatively good shape at both the wholesale and retail level. So we feel pretty good about that.

And in terms of TireHub, TireHub is doing what we intended to do, right? This is -- we started it last year. We did that as part of our initiative overall to drive our aligned distribution with our aligned partners to support our delivery of tires in the marketplace, to support the initiatives that we're putting out there. It's doing just that. We exceeded our transition plans last year. Yes, we've had some bumps in the road, but we continue to build momentum. We haven't lost the customer, and we're executing against those customer deliveries. So -- and as I mentioned, inventories are in good shape, and we're actually operating with less inventory than our previous national distributor had. And we're doing that getting better visibility into the demand trends and consumer preferences that are out there. So I think I wouldn't attribute everything to -- certainly to TireHub based on our first quarter volume, I think that's a lot of things. But TireHub certainly is doing what we intended it to do.

Yes. The only thing I'd add to that, Rich, is the -- there was certainly an effort early in 2018 to go back and get the volume and the market share that we had lost in 2017 when our pricing got out of phase with the rest of the industry. So I think that happened. But if I look at the fourth quarter and the first quarter, I would say that our pricing momentum there was strong. And the -- I think and we've talked about this at the fourth quarter call, we had good pricing momentum in the Americas, but we had negative mix. Some of that related to the supply situation. There is still a bit of that in the first quarter, right? So we're still looking to get to the point where we start to get some benefit from mix because the last couple of quarters, mix, in fact, has been a bit of a drag and is hiding some of the benefit of the pricing that we've gotten.

And Darren, that's a great point. And maybe I'd add one final comment just to say we've put TireHub -- we started TireHub sort of in the middle of 2018. A big decision for us to do, particularly coming off of 2017 as we described, and you're seeing that momentum now come back into 2019. I'd say it's just a view that we do -- that strategy we have long term is something we're committed to and we're executing against.

We'll take the next question from Armintas Sinkevicius with Morgan Stanley.

Question around raw materials. Last quarter, you said that the guidance was for $300 million of a headwind in '19 versus '18 based on forecasted rates, but it would be $150 million of a headwind based on spot rates. It looks like raw materials have been holding in fairly well since then, but the raw materials guidance is still a minus $300 million. So just wondering about the puts and takes, anything we might be missing there as to why we're not seeing a tailwind to raw materials versus prior commentary.

A good question, and as you pointed out, our forecast has not changed. And when we did our call in February, spot prices at that point would have implied -- if they stayed where it was, it would have implied $150 million less cost than we were forecasting. As we expected, feedstock costs have actually risen over the last 60 days, and it -- and that is true in natural rubber. Certainly, it's true in carbon black. Obviously, a little bit of the effect of oil prices rising over that period of time. At today's commodity prices and also taking into account some further strengthening of the U.S. dollar, what today's spot prices would imply is about $50 million below the $300 million forecast that we have. So the picture at spot price has gotten $100 million worse than it was 60 days ago. So I guess we're still at a point where we believe the $300 million cost increase is the right assumption for the year because we're still expecting it -- still expecting a little bit further increase, and it's embedded in our forecast. If it doesn't happen, obviously that $50 million of good news would still be there. But I think we're feeling like we've done the right thing given that we've seen what we were expecting to see.

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

Two questions for you. Just the back and forth, a couple of questions. Does it sound like -- from what I'm hearing, there's potentially less pricing action on the horizon or we're in a wait-and-see mode given how the market is shaping up from a OE consumer replacement demand and supply in the market?

Yes. So I think that what we're seeing right now is in terms of price/mix is really good momentum in the Americas, so I think headed in the right direction there. A little bit more of a mixed picture in Europe. So in Europe, we've seen -- for the summer season, we've seen some manufacturers raise price. We've seen other manufacturers lower price. So kind of a mixed situation there. And obviously, the situation in China is -- as that improves, it may change, but right, now very weak markets there and that's having an impact. So I do think there are some regional differences there with the North American market probably being in the best position. So -- but I don't -- I think our intentions are to recover the cost of raws over time, and we've got a ways to go before we achieve that. So it's a constant area of focus for us.

Right. And then my second one, which I feel like is probably the key question for you for this year because if I'm not mistaken, your guide or your directional commentary was for SOI to be down slightly somewhat from '18 to '19. And I look at the free cash flow, TTM, look at where you were at -- for 2018, just trying to get a sense of if you think, Darren, that 2019, you're going to be able to achieve a positive free cash flow? And if not, let me just assume you'll continue to fund the dividend from the balance sheet and cash.

So David, I think that -- I continue to be comfortable that at the level of earnings where we're running today that we're in a position to fund the investments we're making in the business, which are principally some restructuring in our CapEx plan and cover the dividend without increasing our leverage, and that's the balance that we are focused on. We are clearly focused on protecting the balance sheet. And we -- so we've taken actions to make sure that we're doing that. Our leverage ratios are up. And that is to some degree cyclical and related to where our earnings are, but we're very focused on making sure that we're not increasing our debt levels. So we've taken some discrete actions there, including discontinuing the share repurchases, but we're also taking operational actions, including a lot of focus on working capital to look at opportunities to improve our balance sheet. And then, obviously, as the cycle turns and earnings and cash flow improve, we'll be looking to take advantage of that to further improve the balance sheet.

Understood. But for this year, I mean, are you expecting positive free cash flow -- OCF, less CapEx?

Yes. So I think we -- I'm comfortable that we'll be able to cover our dividend payment, if that's the question.

And we'll take our final question today from Anthony Deem with Longbow.

First one, fixed cost absorption. So $18 million positive in the quarter. You've had lower volumes in the past couple of quarters. I'm just -- so I'm just wondering is TireHub product a regional mix? Maybe the Americas plant, is this having a meaningfully positive impact on your overhead absorption? And certainly next quarter, it looks like you're guiding to a positive outcome in the Americas segment, but you've seen flat or down volume in the past couple of quarters. So just wondering if you could share anything potentially abnormal going on in this line item.

And that's specific to overhead absorption?

Yes.

Yes. Okay. So I think we -- it's a good question because we do have -- in an environment where our volume has been down, we've got favorable overhead absorption, which I think is -- makes it a very natural question. Our -- I think, though, as we look at a lot of the volume decline has been Asia Pacific. And our production -- the reduced production has principally been in Asia Pacific, and that's -- our overhead for tire is the lowest there. So we've had our hot -- our production has been actually up in the Americas and EMEA, notwithstanding the volume. And part of that's been trying to catch up with our supply situation in the Americas. And it's been up, and it's been up the most in commercial truck. So it's been up in some areas that have the highest overhead absorption. So there's a bit of a mix among geographies that's benefiting us there. The -- so I think that is really what you're seeing and I think we'll continue to see a bit of that. So that is -- if that's the question -- and you asked the question also about the increased production in our new Americas factory, and obviously we're getting some benefit as that ramps up as well.

That's helpful. And so on the supply constraints update, so it looks like you did 12% HVA growth in the U.S. this past quarter and you took some share. So I guess the question we're wondering is what could those numbers be without some of these supply constraints, and are you able to put a value or unit number towards that?

Yes. So I think 2 -- I mean 2 benefits that we would get if we were able to supply better. Certainly we would have opportunity for those numbers to be higher because we're not supplying all the high-value tires that we would be able to supply. And to be clear, that's true in the consumer business, also true in the commercial truck business. And the 12% you're referring to, that's only a consumer business point, but the same effect is true in the commercial truck business. So you would see that. The other thing that it would help us with is it would help us supply all of our customers where we do have some customers who have first claim on supply, and obviously, the OEs are the clearest example of that. But we have replacement customers who also have sort of a first call on our supply, and they're not always our highest margin customers. And that's been one of the challenges we have in achieving mix is that we are selling more tires to some of our lower-margin customers. And we would be able to supply some of our higher-margin customers better if we could get supply situation in a better spot.

If I could fit in one question more here, so advertising R&D sort of the other category in the SOI walk, net benefit in the quarter it looked like. So is it fair to assume -- I know you're not giving explicit guidance, but I'm wondering if it's fair to assume if these were to remain tailwinds for the remainder of the year, perhaps this is just a savings lever that Goodyear is pulling.

Yes. So I think -- the fact that we're very cost-focused, I think, shouldn't be a surprise. I will say that there are -- when it comes to advertising, there are some differences quarter-to-quarter. So I don't know that I would look at first quarter as a clear indicator of where we're going to be in the full year. The timing of product launches and some of our marketing pushes can change. And if, in fact, we start to see some recovery in some of our markets in the second half, that would have an impact on the investment we'd be making in marketing, advertising and SAG. So I guess I don't read too much into one quarter, but I think it is fair to say that we're going to stay very, very focused on cost for the foreseeable future.

And all I would add is over time, I think we've demonstrated a very good sort of decision-making and timing of CapEx and R&D as we go through the cycle. So you would expect to do the same. We'll make good decisions, but we're no less committed to -- or particularly, you mentioned our R&D expense, that remains a priority for us. But I would say we manage it very well in terms of prioritizing and executing our projects.

So -- and I believe that was the last call, so I just want to thank everyone for your attention today. Thanks very much.

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