Goodyear Tire & Rubber Co (GT) Q1 2019 Earnings Call Transcript

GT earnings call for the period ending March 31, 2019.

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Goodyear Tire & Rubber Co  (NASDAQ:GT)
Q1 2019 Earnings Call
April 26, 2019, 9:30 a.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:

Operator 

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. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question-and-answer session. (Operator Instructions)

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

Nicholas Mitchell -- Senior Director, Investor Relations

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 two, 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 their 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 US GAAP equivalent as part of our appendix to the slide presentation.

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

Richard J. Kramer -- Chairman, Chief Executive Officer and President

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 US. 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 US market, allowing us to gain momentum. Our US 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 US 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 US 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 in 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 selling 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 increase 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 continue to be areas of focus for us in 2019. On the last call, I provided an overview of four new tires that we are launching in the US 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 four out of four tests.

The Eagle F1 SuperSport will enhance Goodyear's position in the ultra, ultra high performance category. This tire delivers superior wet braking and dry handling performance versus the competition, both contributing to superior track times. The Vector 4Season 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 offer 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 back approach to product design and innovation. I'm really excited about the prospects 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 and products, which is the foundation of what we do, our progress in the area of emerging mobility continued in the quarter.

Turning to slide nine, 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 EV 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 managers 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 eight 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 ride sharing data into value-added information to improve operating performance and benefit customers. Tire innovation is that our core, but these partnerships are demonstrating the increasing importance of data and fleet management as a service and solving our customer's 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 US can do what we do. Nobody has all the required elements. Our number one 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 want to play and win. As we continue strengthening our connected business model, I am 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.

Darren Wells -- Executive Vice President and Chief Financial Officer

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, which is 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 US 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've continued 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 US 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 from increased production in Q4, in the Americas and Europe, Middle East, Africa. Raw material cost increased $137 million, reflecting higher commodity prices, transactional currency headwinds and an increase in non-feedstock cost 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 US 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 EUR250 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 US and Canada. This growth offset declines in our US consumer OE business and in several countries in Latin America that continue 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 costs, 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 plan.

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 US 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 rims 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 cost 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 a 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 remained 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 US 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 cost 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 US and Western Europe. We've adjusted our expectations for the US 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 it 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 the EMEA. These plants pair our modernization investments with cost reductions in our Hanau and Fulda plants in Germany. The equipment upgrades will take place over a period of approximately three years and require capital investments of approximately $120 million and cash restructuring will total about $125 million. The benefit of reduced headcount will ultimately improve segment operating income by $60 million to $70 million on 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 in 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.

Questions and Answers:

Operator 

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

Richard J. Kramer -- Chairman, Chief Executive Officer and President

Good morning, Rod.

Rod Avraham Lache -- Wolfe Research -- Analyst

Good morning, everybody. I guess, my main question is just, I was hoping you could just characterize pricing conditions in North America and 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 two years?

Richard J. Kramer -- Chairman, Chief Executive Officer and President

Yeah. 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've 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 raw 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 in -- 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 this 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 loss 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.

Rod Avraham Lache -- Wolfe Research -- Analyst

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?

Richard J. Kramer -- Chairman, Chief Executive Officer and President

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 a new products that we put out and we highlighted again of 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.

Rod Avraham Lache -- Wolfe Research -- Analyst

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 US obviously implemented some pretty significant tariffs starting February 15th?

Richard J. Kramer -- Chairman, Chief Executive Officer and President

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

Rod Avraham Lache -- Wolfe Research -- Analyst

Yeah. 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...

Richard J. Kramer -- Chairman, Chief Executive Officer and President

Yeah.

Rod Avraham Lache -- Wolfe Research -- Analyst

...you're seeing as a positive? Is it domestic manufacture?

Richard J. Kramer -- Chairman, Chief Executive Officer and President

Yeah. 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.

Rod Avraham Lache -- Wolfe Research -- Analyst

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

Richard J. Kramer -- Chairman, Chief Executive Officer and President

Right.

Rod Avraham Lache -- Wolfe Research -- Analyst

...indirect.

Richard J. Kramer -- Chairman, Chief Executive Officer and President

Right. Yeah. Yeah. So, Rod, I think the size of the business just use the overall size we use in North America to -- for the total business is 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 OE's and the fleets, and that's between our 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 the anti-dumping 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 that are applied to the import price of those tires coming in.

So, 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 US are made in the US 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 in the OE's and the fleets.

Rod Avraham Lache -- Wolfe Research -- Analyst

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

Richard J. Kramer -- Chairman, Chief Executive Officer and President

Yeah. 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 commercial truck business is a strength for us right now.

Rod Avraham Lache -- Wolfe Research -- Analyst

Okay. Great. Thank you.

Richard J. Kramer -- Chairman, Chief Executive Officer and President

Thanks, Rob.

Operator 

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

John Michael Healy -- Northcoast Research Partners, LLC -- Analyst

Hi. Thank you.

Richard J. Kramer -- Chairman, Chief Executive Officer and President

Good morning, John.

John Michael Healy -- Northcoast Research Partners, LLC -- Analyst

Good morning guys. I wanted to ask a big picture question. When I think about everything that's going on operationally, I feel like there's two sides of the coin. You've got the US 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 -- and production capabilities. As you look at those two things, do you see things in Europe that you can bring to the US maybe in 2020 on the production side and then do you see things in the US 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 two years, do you see yourself pivoting where you take lessons learned and try to implement those across the state back and forth, and can the business look like in the US what you're building, can that be the model in Europe and then vice versa on the production side?

Richard J. Kramer -- Chairman, Chief Executive Officer and President

Yeah. So, John, I think, it's reasonable to look at what we've done in terms of distribution in the US and think that that is going to be instructive for the way we want to approach -- align distribution in other parts of the world. And we are -- and we -- 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. The work that we've done in distribution in North America has taken place over many years. So, there was no -- 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 skew 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 skews 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 are going to try to share those around the globe. So, I think, both the points you make are relevant points.

John Michael Healy -- Northcoast Research Partners, LLC -- Analyst

Okay. Fair enough. And then I wanted to ask about one of the comments in the slides. It comes out of me as you guys gone up building a strong OE pipeline for 2020 and beyond. Can you maybe talk to, if that's US, if that's Europe, is it new partners, maybe potentially how meaningful that can be relative to the performance you've seen in 2018 and then the start of 2019?

Richard J. Kramer -- Chairman, Chief Executive Officer and President

Yeah. 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 is 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've been on that journey and we 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 a 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 AV's and it means a lot of unique tires and characteristics that those manufacturers want not for the vehicles that we're seeing on the road today, but as they're thinking about where those platforms are going forward. So, we're having -- I am 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.

Darren Wells -- Executive Vice President and Chief Financial Officer

Yeah. So, if I can...

John Michael Healy -- Northcoast Research Partners, LLC -- Analyst

Okay.

Darren Wells -- Executive Vice President and Chief Financial Officer

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 have been a question about whether or not that loss OE volume was going to be something that would go on for several years. And 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 and 3 million units. We've won fitment that's going to start to bring that volume back and -- 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.

Richard J. Kramer -- Chairman, Chief Executive Officer and President

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

John Michael Healy -- Northcoast Research Partners, LLC -- Analyst

Great. Thank you, guys.

Richard J. Kramer -- Chairman, Chief Executive Officer and President

Yeah.

Operator 

We'll take our next question from Ryan Brinkman with J.P. Morgan. Please go ahead.

Richard J. Kramer -- Chairman, Chief Executive Officer and President

Hi, Ryan.

Ryan Brinkman -- J.P. Morgan -- Analyst

Thanks for taking my question. Hi.

Richard J. Kramer -- Chairman, Chief Executive Officer and President

Sure.

Ryan Brinkman -- J.P. Morgan -- Analyst

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 latest thoughts generally on cost saves versus general inflation? I think there has 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. Now, where are you in that process, is Germany part of it and when might we expect to learn more?

Richard J. Kramer -- Chairman, Chief Executive Officer and President

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 exclude that fourth quarter inflation and savings, we're about equal. Now in the first quarter, we've gotten some net savings, which I think we're pleased about and is 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 one 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. It's no question. But not at the level of net savings what we -- that we 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 two different aspects of this project. And there are two 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 you would think of as a restructuring and rather than taking reducing capacity by -- I mean, between the two factories, we are in fact reducing high cost capacity by the equivalent of about one factory. So, it's half of each of two 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 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 -- a 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 headcount 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 three 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 timeframe. 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.

Ryan Brinkman -- J.P. Morgan -- Analyst

I see. Thanks for all the great color. And then just lastly from me, I think, it's encouraging that you are gaining share in the US 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 that 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?

Richard J. Kramer -- Chairman, Chief Executive Officer and President

Yeah. 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 coming to Q1. I think you're rightly pointed out, we were -- I think, as Darren mentioned in his remarks, we were 6% up in the quarter in the US 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 broad evidence that any inventory is really building up in the channel. Remember sell out 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 thee 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 that 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 wouldn't attribute everything to certainly the 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.

Darren Wells -- Executive Vice President and Chief Financial Officer

Yeah. The only thing I'd add to that, Rich, is that, while there were certainly an effort early in 2018 to go back and get the volume, and the market share that we have 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 have 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 got.

Richard J. Kramer -- Chairman, Chief Executive Officer and President

No. And Darren, that's a great point, and maybe I'd add one final comment is just to say, we put TireHub, we started TireHub sort of 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.

Ryan Brinkman -- J.P. Morgan -- Analyst

Very helpful. Thank you.

Operator 

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

Richard J. Kramer -- Chairman, Chief Executive Officer and President

Hi, Armintas.

Armintas Sinkevicius -- Morgan Stanley -- Analyst

Good morning. Thank you for taking the question. Question around raw materials, last quarter you said that the guidance was for $300 million of headwind in 2019 versus 2018 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 at minus $300 million. So just wondering about the puts and takes, anything we might be missing there...

Richard J. Kramer -- Chairman, Chief Executive Officer and President

Sure.

Armintas Sinkevicius -- Morgan Stanley -- Analyst

...as to why, we're not seeing a tailwind to raw materials versus prior commentary?

Darren Wells -- Executive Vice President and Chief Financial Officer

No. Good question. And as you point 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, would have implied $150 million less costs than we were forecasting. As we expected, feedstock costs have actually risen over the last 60 days, and that is true and 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 and prices and also taking into account some further strengthening of the US dollar, what today's spot prices would imply is about $50 million, below the $300 million forecasts that we have. So the picture at spot prices 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, 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.

Armintas Sinkevicius -- Morgan Stanley -- Analyst

Okay. Appreciate it. Thank you for the clarification.

Darren Wells -- Executive Vice President and Chief Financial Officer

Sure.

Richard J. Kramer -- Chairman, Chief Executive Officer and President

Thank you.

Operator 

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

David J. Tamberrino -- Goldman Sachs Group Inc. -- Analyst

Great.

Richard J. Kramer -- Chairman, Chief Executive Officer and President

Good morning, David.

David J. Tamberrino -- Goldman Sachs Group Inc. -- Analyst

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

Richard J. Kramer -- Chairman, Chief Executive Officer and President

Yeah. So I think that what we're seeing right now is, yeah, in terms of price mix is good -- is really good momentum in the Americas. So I think headed the right direction there. A little bit more of a mixed picture in Europe. Yeah, 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 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.

David J. Tamberrino -- Goldman Sachs Group Inc. -- Analyst

Okay. 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 2018 to 2019, 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, just assume you'll continue to fund the dividend from the balance sheet and cash.

Darren Wells -- Executive Vice President and Chief Financial Officer

Yeah. No. So, David, I think, that -- I continue to be comfortable that 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 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.

David J. Tamberrino -- Goldman Sachs Group Inc. -- Analyst

Understood. But for this year, I mean, you're expecting positive free cash flow mostly as less CapEx.

Darren Wells -- Executive Vice President and Chief Financial Officer

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

David J. Tamberrino -- Goldman Sachs Group Inc. -- Analyst

It's like part of the question, just...

Darren Wells -- Executive Vice President and Chief Financial Officer

Yeah.

David J. Tamberrino -- Goldman Sachs Group Inc. -- Analyst

...wanted to get your sense, but, OK. Thank you very much.

Darren Wells -- Executive Vice President and Chief Financial Officer

Sure.

Operator 

We'll take our final question today from Anthony Deem with Longbow. Please go ahead.

Richard J. Kramer -- Chairman, Chief Executive Officer and President

Hey, Anthony.

Darren Wells -- Executive Vice President and Chief Financial Officer

Hi, Anthony.

Anthony J. Deem -- Longbow Research LLC -- Analyst

Good morning. Thanks for taking my questions. First one, fixed cost absorption. So $80 million positive in the quarter, you've had lower volumes in the past couple of quarters. So I'm just wondering is TireHub product or regional mix, maybe the Americas plant. Just having a meaningfully positive impact on your overhead absorption. And certainly next quarter looks like you're guiding to a positive outcome in the Americas segment, but you have seen flat or down volume in the past couple of quarters. So, just wondering if you could share anything potentially abnormal going on this line item?

Richard J. Kramer -- Chairman, Chief Executive Officer and President

That's specific to overhead absorption?

Anthony J. Deem -- Longbow Research LLC -- Analyst

Yeah.

Richard J. Kramer -- Chairman, Chief Executive Officer and President

Yeah. Okay. So, I think, we -- that'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 the 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's the question. Now, 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.

Anthony J. Deem -- Longbow Research LLC -- Analyst

Okay. That's helpful. Thanks for the color. And so, on the supply constraints update. So, it looks like you did 12% HVA growth in the US 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? Are you able to put a value or unit number toward that?

Richard J. Kramer -- Chairman, Chief Executive Officer and President

Yeah. So, I think, two -- I mean, two 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 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 will be able to supply some of our higher margin customers better if we can get supply situation in a better spot.

Anthony J. Deem -- Longbow Research LLC -- Analyst

I can ask one question more here. So, advertising R&D sort of the other category in SOI walk net benefit in the quarter it looks 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 main tailwinds remaining of the year, perhaps, this is just the savings lever that Goodyear at this point? Thank you very much.

Darren Wells -- Executive Vice President and Chief Financial Officer

Yeah. 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 costs for the foreseeable future.

Richard J. Kramer -- Chairman, Chief Executive Officer and President

Yeah. 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 our 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.

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

Operator 

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

Duration: 62 minutes

Call participants:

Operator 

Nicholas Mitchell -- Senior Director, Investor Relations

Richard J. Kramer -- Chairman, Chief Executive Officer and President

Darren Wells -- Executive Vice President and Chief Financial Officer

Rod Avraham Lache -- Wolfe Research -- Analyst

John Michael Healy -- Northcoast Research Partners, LLC -- Analyst

Ryan Brinkman -- J.P. Morgan -- Analyst

Armintas Sinkevicius -- Morgan Stanley -- Analyst

David J. Tamberrino -- Goldman Sachs Group Inc. -- Analyst

Anthony J. Deem -- Longbow Research LLC -- Analyst

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