Good morning. My name is Keith and I'll be your conference operator today. At this time, I'd like to welcome everyone to Goodyear's Second Quarter 2020 Earnings Call. [Operator Instructions] I'll now hand the program over to Nick Mitchell, Senior Director of Investor Relations. Please go ahead.

Thank you, Keith and Thank you everyone for joining us for Goodyear's second quarter 2020 earnings call. I'm joined here today by Rich Kramer, Chairman and Chief Executive Officer; Darren Wells, Executive Vice President and Chief Financial Officer; and Christina Zamarro, Vice President of Finance and Treasurer. The supporting slide presentation for today's call can be found on our website at investor.goodyear.com. And a replay of this call will be available later today. Replay instructions 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 a non-GAAP basis. The non-GAAP financial measures discussed on the 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.

Great. Thank you, Nick. And good morning everyone. The second quarter was arguably the most challenging quarter in Goodyear’s 122-year history, and was definitely the most difficult operating environment that I've experienced during my tenure. Industry demand during the quarter was significantly affected by the actions governments, businesses, and consumers took to slow the spread of the COVID-19 virus. While these actions were necessary to deal with the many unknowns surrounding COVID-19, the impacts were simply unprecedented. In April, we witnessed the significant declines in vehicle production around the globe as auto manufacturer's idled factories to protect employees in respond to falling demand. At the same time, wholesalers and dealers reduced orders, as shelter in place mandates restricted consumer mobility. In our commercial tire market, demand for truck tires also fell precipitously, as fleets cancelled orders for new tractors and trailers, and ton miles rapidly deteriorated. These dynamics paired with the uncertainty in consumers' minds, contributed to the steepest year-over-year decline in industry volume in history. Our April unit volumes fell by nearly 70%, contributing to the 45% decline for the quarter. The month of April alone accounted for about half the reduction in our earnings for the entire quarter. And as you know, we were quickly able to take out substantial costs during the quarter and we will be prudent about how we bring costs back into our footprint. Importantly, we're also leveraging the crisis as a catalyst to accelerate our plans, to improve our structural manufacturing costs and to improve operating processes through increased efficiency. I'm extremely proud of the way our associates rose to the challenges we faced at the beginning of the quarter. I would like to thank every member of the Goodyear team for their relentless efforts and sacrifices to support our customers and our…

Thanks Rich. It's the end of July. We're seven months into 2020 and five months into the pandemic, at least during the Western Hemisphere. It seems like we're now in a position to answer the key question we were contemplating three months ago. That question was, how bad can it get? Along with that question we were simultaneously asking ourselves, what can we do to limit the damage during the second quarter? Today, we find ourselves asking a different set of questions, the most significant of which are how long will it take for the business to get back to prepandemic levels? And how should we manage the business during a period of recovery, that's likely to see a significant level of volatility. I'll come back to these last two questions. But I want to start out by reflecting on the answers as we see them now to the first two questions. How bad did it get and what were we able to do to limit the damage? You saw on Slide 4, our monthly volume trend to the second quarter. There's no question this was the most severe volume shock we've ever experienced. Worse than the Great Recession, and worse than the strike related shutdown we had back in 2006 and it came on the heels of a weak second half of 2019. The impact of this volume shock is reflected in our results, even before the non-cash write-downs and rationalization charges. We had net losses of over $400 million in the second quarter and approaching $600 million for the first half. This will have a lasting effect on our balance sheet. There's no way around that. In the second quarter, we sold 45% fewer tires, and built 70% fewer tires than a year ago, impacting our operating income…

[Operator Instructions] We'll go first to Rod Lache with Wolfe Research. Please go ahead.

Had a couple of questions, just first, can you just talk a little bit more about what's embedded in your Q3 negative 20% expectation, just seems steep. I think auto production generally they can sense this is like negative 10% to 15%. So, are you expecting replacement to be worse than that?

Yes, so, Rod, the second half volume recovery expectation here and we're trying to think through this on a global level. And you recognize completely that we had some numbers in June that looks pretty good and some numbers in July, particularly for U.S. OE, that look even better. So, I think we're taken some of those trends, including the good U.S. OE, the strength that we're seeing in China and even some of the pent up demand and lower channel inventories that should be supportive of sales but I think we're balancing those against some uncertainty in European OE, where registrations are still down. Some uncertainty in Europe for the winter season for sure, you know, where inventories are still generally higher than they should be, given the level of sales last year. A lot of uncertainty in emerging markets, you know, including India, which Rich mentioned in his remarks. And then just overall concern about what's going to happen with consumer attitudes given the rising number of COVID-19 cases. So, I think we're balancing it out. Not challenging the point that you're making about the strength in the U.S. OE build at all. But taking into account I think we're --what we're seeing globally and not taking for granted that the trends continue given the risk of further government actions on higher levels of cases.

Okay. Two other things, I was hoping you could just talk about. One is, you know, what is the impact of everything that's happening right now on some of the savings actions that you're taking? You had originally targeted $65 million to $130 million of savings from aligning distribution in Europe. Are things like that on track or are they falling behind, in any kind of high-level comment on this ITC decision at the end of August? It sounds like there's a potential for some duties or tariffs on maybe 25% of the U.S. replacement supply, if this actually happen, and if it did, would the impact be similar to what we saw back in the - I guess it was 2010, I can't remember exactly when but there was a period of time with pretty strong industry pricing for a while as a result of tariffs on China, which was similar?

Yes, Rod. I'll start and I'll start with the line distribution in Europe. And I would say that we're actually very pleased with the progress. So, the question of we're on track? Absolutely. And I think it's important to say again that COVID did not at all change our plans or our commitment to it. We've reached agreement with now almost, well, all the, essentially all the full-service distributors that we wanted to work with almost 90 of them. And we're beginning to transition their role to take on more territory in line with the business conditions that we'd like them to. And as we said, you know, last time that could cost us about a million and half units or about 5% of loss, if you will, in volume and I think that's exactly what you saw in the second quarter. And already we're seeing some good impacts to the value of our brands in end consumer poll. We saw even relatively good pricing in Europe in Q2. And remember, we said the benefit about $2 to $4 per tire margin, per tire increase over the next three to four years. So we're full gas on that and very pleased with where we are. And your question on tariffs, I think is a good one. And you're right to kind of go backwards to look at this. So, if we look at background, maybe just a couple quick reminders for everyone. As a rule of thumb for Goodyear, we tend to manufacture where we sell. So, in terms of imports or exports, the tariffs would not impact us as such. And remember these actions tend to impact the lower end of the market and not sort of the premium segments where we're focused. And you know, also what happens…

Our next question is from Ryan Brinkman with JPMorgan. Please go ahead.

Just a follow up to Rod’s question on the volume earlier, sounds like you're studying more uncertainty, maybe even conservatism around second wave of infections et cetera. I just wanted to check though, if you have seen any actual weakness so far in 3Q including after LKQ commented yesterday that the strong sequential improvement trend and demand for their aftermarket products in 2Q sort of stalled out suddenly in the first three weeks of July. Curious if you saw that to, if there's anything you can say about how 3Q was trending so far?

No, yes. So I think that we've actually continued to see the trends from June and even the later part of June through July. Yes, so - if anything that strong recovery for us has continued through the month of July. So I think the uncertainty for us is less July, it's more about what happens what plays out in August and September.

And then obviously, a free cash flow in 2Q tracked way better than you had warned about at the time of 1Q earnings. You mentioned working capital, being use of cash in 3Q, but can you just talk about some of the other various puts and takes that went into the better to 2Q cash flow and the sustainability of those seemingly net favorable factors in the back half of the year?

Yes - clearly, we can do that. Yes, we can't take away to the fact that the - some stronger volume and the related stronger earnings did play a role in the second quarter. So the fact that the quarter itself, the sales came in only down - unit sales down 45 instead of 50. Certainly there was an element there. I do think the work that the team did to get inventories down and to keep production levels down, while still delivering the tires that our customers were ordering. I mean, that you can't underestimate that impact. And it is the combination it's, you can always get inventory down. But in this case, we're able to take inventory down while still delivering to our customers and getting the extra volume that was in demand. So, that your inventory clearly came out in a better position. And the fact that our receivables stayed in line and we continued to maintain appropriate payment patterns with our customers through a time when there are a lot of customers who have distress in their own business, I think was a very big deal as well. Yes, so a lot, I mean a lot of work with customers to make sure that their businesses are managed appropriately and that their working capital is in good shape. So they had the liquidity to stay current on payments. So and there is still a lot of work to do there. There is a lot of challenges for the supply chain going forward. But I think we ultimately got to a place that was much better than what we could have envisioned back in April.

Ryan, I'd also just add real quick, I think you're also seeing the benefits of Darren and Christina's leadership working with our businesses. They've been through this before, we went right to assessing our liquidity as we started and we put the actions in place, both from making sure we had enough liquidity and how we're going to operate the business around working capital and supply. And I think, you're seeing the benefit of it. So I tip my hat to them as well and the businesses. And then…

No, thanks Rich, I think the final point here is cost savings. Obviously, some very significant cost savings plans. And we set out some aggressive targets and like - in a number of cases, we exceeded those as well. And that helped create the increased earnings along with the extra volume.

That's helped.

Sure.

Yes, I just want to say lastly, what is your take on the pricing environment because I recall you discussing even prior to Coronavirus that there was some aggressive competitor actions out there around OE pricing that was offsetting some of the benefits that you would like to seeing from lower raw materials. So - helpful to get your take on whether you think the industry has been relatively disciplined in the context of this environment or if maybe some of your less well capitalized players in the industry facing this degree of under observed overhead, might be reacting with steeper discounts?

You're right to point the OE situation out, but I would say overall, we’re relatively - replacement pricing was positive in the quarter, I think you've pretty much performed in line with our expectation, and - we got the benefit of the contribution increase revenue per tire. So we feel pretty good about that. Ryan is if we look around the world in the U.S. We're seeing prices improve sequentially during the quarter and year-over-year. I think as we look at that, you'll see PPI up 1%. As I mentioned earlier, we seen favorable pricing trends in Europe across summer, winter, and all seasons again both year-over-year and versus the prior quarter and emerging markets were pricing there primarily to offset the impacts of devaluation also on the raw material prices as well. But where we do see the headwinds your memory is absolutely correct. We previously said that there's pricing pressure in the OE business, particularly because that excess capacity that's out there, and that really hasn't changed at this point. So, I think you're right to point that out.

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

I wanted to ask a big picture question. I think Darren and Rich you both said that this was the toughest period you've seen in your careers, and having to respond and feel like [indiscernible] the team have done just putting the liquidity in place and putting some of the buffers to stabilize the business is pretty remarkable. But you had a lot of these actions kind of almost underway, it seems like on the strategic side before COVID, whether it's Gadsden or European kind of alignment? Is there anything that's coming out of this from a big picture standpoint that you think, might be long-term optionality that the company might pursue, either from a manufacturing standpoint or an alignment standpoint, or even just a market segmentation standpoint that might change the face of Goodyear a little bit?

Okay Darren start, I'll jump in a next couple things as well.

So John, I think there are a couple of things here that would raise first and some of it is I think affirmatory. Yes, so I think as we got into this kind of difficult environment, obviously the work that we're doing to improve our manufacturing cost per tire is very valuable to us. And anything we can do to make our manufacturing more flexible is going to be important to us. So it's not just getting our cost per tire down when we're running the factories full. But it's having the flexibility to get the cost per tire down at whatever level of volumes we have. And I think that is a little bit of new thinking for us, contemplating more how to become more flexible even when the factories are not running full. So, I think that's an insight in an area of operationally this has pushed us on. I think generally our run strategy for the factories this has given us an opportunity to focus on how to produce a wider array of products each month, because we do have some extra capacity to work with right now. And by producing a wider array of products on the ticket each month that allows us to look at ramping our volumes back up at lower inventory levels. So that gives us an opportunity to think about running with inventories below where they've had to be historically, while still providing better levels of customer service. So, I think - that's another item operationally that has come from the discussions in and around the COVID-19 environment. I think the work that we've done on line distribution is another area where you very clearly, this is helping illustrate the importance of it and the benefit of it. And I think that…

And just one quick question from me, any update in terms of where Walmart, in terms of it, kind of reemergence in the installation side of the business?

You're talking about their auto service centers opening up?

Yes

So, John, it's really a great question because, you know, when you looked at our share performance, we were down a bit in the quarter but really, I'm extremely pleased with our North America performance. We were impacted certainly by the external market conditions but also the unique impact that we've had from Walmart, as you know, we're category captain there. And as Walmart, shut their auto service centers back in March, they're only opened now about a third of those. So, we're disproportionately affected by Walmart temporarily closing those auto service centers. So, as they open up, and they will open up and they will thrive again, we're feeling a little bit of the negative of that right now. But I'll also tell you excluding the Walmart impact, we outperformed the market. So our teams went out and gained share in channels other than Walmart. So, I view that as completely temporal. Our products are best product lineup we've ever had. We were on a run of gaining volume, I think multiple, multiple quarters in a row through 2019. We ended strong and that momentum, I think is something that's going to - it's still there if you just sort of adjust for these peculiarities that we have right now.

Our next question is from Itay Michaeli with Citi. Please go ahead.

Just wanted to go back to the long-term discussion again, and yes, when we think about all the changes at the company and the industry, as you've kind of discussed internally about the company's long-term earnings power, we think about in the prior, kind of almost 2 billion of SOI. What are the puts and takes that we should be thinking about in terms of, you know, what can restore that, exceed that, what was the risk, of course, they're getting back to that level? And how do we put from a long-term earnings power parameters, given all that's happening in the industry and all the changes happening, of course, the company as well?

So, Itay, if we look at the last 10 years, Goodyear’s segment operating income margins averaged around 8.5%.And your work - certainly we need some volume recovery but as volumes recover over the next couple of years, we're going to get the benefit of a number of initiatives that are going to improve our business from those historical levels. And the two restructuring actions that we've taken in both dimensions, so a $60 million or $70 million of savings from the restructuring and investments we are making in Germany. Other $30 million of savings from closure of Gaston, the $2 to $4 a tire that we could get from the improvement in our European distribution, it may just a starting point. So, I mean, those are all going to be additive. I think that, you know, we feel like with some volume recovery, and those actions that even without any recovery of price versus raw materials, yes, which has been the point of compression up through 2019, we could still get our SOI margins back up over 8% in the next two to three years. And that's a level of operating margin that maybe below where we were at the peak, but still level where we add economic value. We continue to believe that the replacement business is also going to recover margin. Yes, that price versus raw material cost equation. We kind of turned the corner on that, it's a little bit of an unsettled situation right now. But we're continuing to see solid abilities on price at a time when raw materials have come back down. So I think we're feeling like there's still opportunity there. But yes, I mean, I think we're feeling like we'll get ourselves back in that - back over 8% within the next two to three years. Longer term, we still believe there's an opportunity to get back to double digits

And then just to follow up maybe on EV and the wins you talked about there. Did you have an estimate of what Goodyear’s win rates are for EV OEM fitments?

Yes. So, we did some initial analysis that we shared a year ago. I mean, we found that we were getting, we were winning fitments on about two thirds of the bids that we were submitting. And that's the only statistic that we have quoted and that was a reflection of the fact that, that initially instead of competing against 8 or 10 other tire companies on those fitments, we were generally competing with two or three. So, the competitors said that we're able to deliver a tire that could meet the specifications and that's rolling resistance, it's carrying the load, it's dealing with the torque. I was just, fewer people who could credibly do it. Over time, we expect that that will - I mean the competitors said it will grow but it gave us an opportunity to get a lot of wins that are helping us rebuild our portfolio after we spent some time exiting some fitments that we didn't see long term opportunity. Yes, I don't have a more recent statistic to quote, in fact the last few months has been kind of a disrupted time in terms of OEs awarding fitness. So, I'm not sure that the recent statistics are going to mean a whole lot anyway. But I think we still feel very good that we're winning the number of fitments that it takes to grow our OE share, as we look out over the next two, three, four years.

Yes and we're still in that environment where they OEs have sort of reduced or delayed their awards at the moment. We're still very happy with the win rate that we have, Itay and again, a lot of those are EVs and a lot of those are really working on the developments to make those tires do what the OEs need to do. So, we still feel really good about it.

Ladies and gentlemen, we have reached the end of our allotted time, and this will end Goodyear's second quarter 2020 earnings call. We want to thank you for your participation. You may now disconnect and have a great weekend.

Thanks for joining us today.