Goodyear Tire & Rubber Co. (GT) Q2 2020 Earnings Call Transcript

Goodyear Tire & Rubber Co. (NASDAQ: GT) Q2 2020 earnings call dated Jul. 31, 2020

Corporate Participants:

Nicholas Mitchell — Senior Director of Investor Relations

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

Darren Wells — Executive Vice President and Chief Financial Officer

Analysts:

Rod Lache — Wolfe Research. — Analyst

Ryan Brinkman — JPMorgan — Analyst

John Healy — Northcoast Research. — Analyst

Itay Michaeli — Citigroup Inc. — Analyst

Presentation:

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 Second Quarter 2020 Earnings Call. [Operator Instructions] I will now hand the program over to Nick Mitchell, Senior Director, Investor Relations. Please go ahead.

Nicholas Mitchell — Senior Director of Investor Relations

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, Chief Financial Officer; and Christina Zamarro, Vice President, 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 can 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 in our earnings release. The company disclaims any intention or obligation to update or revise any forward-looking statements, whether as a result of new information, future events or otherwise. Our financial results are presented on a GAAP basis, and in some cases, on non-GAAP basis. The non-GAAP financial measures discussed on 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.

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

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 unknown surrounding COVID-19, the impacts were simply unprecedented. In April, we witnessed the significant declines in vehicle production around the globe as auto manufacturers idled factories to protect employees and 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 canceled 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 volume 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 cost 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 communities over the last several months. Dealing with the pandemic has once again proven that a crisis brings out the best in people. Our Goodyear associates around the globe are a shining example of just that. Now turning to slide four. As the quarter unfolded, government restrictions eased and economy started to reopen, albeit at varying levels in different geographies. Similar to our experience in China during the first quarter, the replacement channels were the first to improve in Europe and the United States, and as OEMs resumed production, we began to see recovery there as well. In the Americas, auto sales in the U.S. have recovered more than 50% from the lows seen in April, but they were still down nearly 25% from the previous year in June. And the pace of recovery in vehicle production is lagging retail demand, adding further challenges for suppliers.

By being on the right mix of vehicles and having a strong OE position, we’ve been able to mitigate some of the impact of weaker markets. Despite this success, our consumer U.S. OE business was still down 12% in June. The dynamics in the U.S. consumer replacement market are similar. Retail sellout has improved steadily during the last eight weeks of the quarter, yet industry shipments are still down 17% year-over-year. In Europe, we’re seeing steady improvement in industry conditions, but infection rates are increasing, and some countries are reinstating mobility restrictions. New vehicle sales are stabilizing on the back of governmental schemes to stimulate demand. However, registrations were still more than 20% below the prior year’s level in June. While European markets are weak, we have the benefit of operating from a position of strength with a strong brand and outstanding technology, two great assets that give us an advantage in a market that places high value on tire technology. Our OE teams have been able to leverage these strengths to gain share through the first six months of the year in the premium segment with European OEMs. Demand for consumer replacement tires also improved as economies reopened across Europe. As retail demand average declines of more than 40% in April and May, pent-up demand was building. Our analysis of channel inventories is sending the same signal, and we saw some of this demand come back to the markets in June despite selling demand among ETRMA members still declining 11%.

Now I would also point out that while COVID-19 has most certainly impacted demand in EMEA, it has not impacted our commitment to driving our aligned distribution initiative in the region. We continue to expect to deliver on its inherent benefits for both Goodyear and our partner distributors. With a firm commitment to our new consumer-focused products, our teams haven’t missed a beat to ensure our product launches stay on track despite a challenging environment. During the second quarter, we successfully launched the Goodyear Vector 4Seasons Gen-3. Already the leader in the rapidly growing all-season category, our talented engineers were able to significantly improve upon the earlier generation designing a tire that can corner hard on drive pavement while maintaining the ability to pivot and deliver excellent traction and performance on snow and wet pavement. Now turning to Asia Pacific. We are seeing improving industry conditions in China, although still below pre-COVID levels. And while our overall volume in the country was down more than 10% for the month, a successful launch of the Eagle F1 sport contributed to our strong consumer placement shipments in June. Production in China’s automotive industry is running ahead of the prior year’s level with light-vehicle production up more than 10% in June.

But it’s important to note, however, that consumer demand is recovering more slowly with dealer inventory of new vehicles increasing both month-over-month and year-over-year. So we’re mindful of our production plans moving forward, balancing customer service with inventory levels given our focus on cash. While China has seen improvement, conditions in India remained challenging, with new car sales declining 60% in June. The replacement industry is relatively stronger. However, the latest data suggests industry demand is only at 2/3 of the prior year’s level. This will remain a difficult market until COVID-19 is better contained. In summary, while our markets during the quarter were severely impacted by the pandemic, our exit run rates were well off our April lows and trending in the right direction as economies reopened and commerce increased. Now as demand in our major markets around the world began to recover, we responded by executing a phased restart of our production to ensure that we had enough of the right tires to serve our customers as they resumed operations with our manufacturing plan focused on flexibility and agility. As you would expect, we have an intense focus on cost as well as the quality and levels of our inventory and customer service as we look to the back half of the year. Now it’s said that the key to success is constancy of purpose. While operational flexibility is the key to managing through this difficult period, we have remained steadfast to the principles of both our strategy road map and our connected business model. Make no mistake, our focus is not on getting through the pandemic but how we will emerge stronger. We will win with our customers and consumers, manage our costs and build our capabilities to win in the future.

And during the quarter, we saw the benefits from our aligned distribution initiatives, from our e-commerce initiatives and from our enhanced-service offerings, which ensured that we were able to continue servicing our customers during the peak of the COVID-19 pandemic in April. And they played a role in us being able to connect with customers and consumers as other paths to market became partially or completely inaccessible. TireHub, our national distributor, remained opened and helped us to serve disrupted markets throughout the second quarter. Additionally, our newest sales channels and service offerings are seeing accelerated adoption rates as the pandemic has caused consumers to ship spending online and away from traditional brick-and-mortar locations. What’s more, we are seeing the momentum behind this digital transition continuing our business even as our economies have begun to reopen. These dynamics helped drive volume growth of approximately 15% through our e-commerce site and 150% through our mobile installation business. Consumers are also responding favorably to our 0 contact service offering at our U.S. retail stores, with sales improving throughout the quarter and profitability increasing in June relative to the prior year. Now another area we saw our competitive advantage growing was in our commercial truck business, where our value proposition starts with, but goes well beyond the tire. While the commercial truck industry was not immune to the pandemic, we continue to see the benefit of our industry-leading products, innovative fleet management tools and a robust service network.

In the U.S., our commercial truck service centers outperformed the broader industry with sellout up in the high single digits through the first half of the year despite weakening fundamentals in the industry. Our ability to help our customers reduce downtime, deliver improved cost per mile and measure their operating performance is why fleets value Goodyear in both good and bad times. This is a key reason we were able to gain share in a difficult market. Our service model also helped us to secure a new partnership during the quarter with Ryder, a well-known and leading transportation and logistics company in the U.S. and beyond. We are very proud to have Ryder as a key customer. Our service offerings are available to smaller fleet customers as well. During the quarter, we unveiled a new e-commerce program with Convoy, a technology company that connects freight shippers with carriers through a digital platform. Now this program helps both Convoy and Goodyear to improve our independent carriers access to our tire-management solutions and products at competitive prices. This market-back attitude also led us to develop Goodyear fleet tracker, which enables fleets to manage all their assets, including trailers more efficiently and effectively. Our commercial team in Europe signed the first contract for fleet tracker in the quarter, advancing our total mobility offering in the region. Having these value-added and increasingly digital solutions to supplement our strong product offering, contributed to our share gain in Europe’s commercial truck tire market during the first half of the year.

We also continued to advance our competitive advantage in our consumer and commercial product platforms. Our technology team accelerated the application of modeling capability for advanced materials that enables our associates to run experiments in a virtual environment and thus leverage millions of proprietary data points from decades of actual experimental data. This technology allowed us to continue the positive momentum in product development and breakthrough innovations that are the lifeblood of our business despite a temporary closure of laboratories and manufacturing facilities across the globe. Nowhere in our business is advanced technology and tire compounds as important as it is when we’re bidding on OE fitments, especially those for electric vehicles. Tire technology is rapidly advancing to meet the needs of electric vehicles, including improved range, better ride and handling and durability improvements, and we’re setting the standard of what is possible through innovation. In June, our Goodyear Eagle touring tires helped Tesla’s new Model S become the first vehicle to exceed the 400-mile range barrier in EPA testing. We are very proud of that. The world looks very different today than it did 12 months ago when we first discussed how our unyielding focus on quality, technology, brand and collaboration was driving increased OE win rates in the electrical vehicle segment that we’re targeting. It’s become clear that one byproduct of the current crisis will be an acceleration and adoption of electric vehicles as several governments around the globe have worked to tie economic stimulus programs with social and environmental goals like lower greenhouse gas emissions.

Plug-in hybrids and battery EVs gained significant momentum in the five biggest European markets during June. While overall registrations across Europe declined 25%, sales of EVs more than doubled. These market dynamics make me more confident than ever in the tremendous opportunity that our OE business has to gain share by leveraging our technology leadership position and the fitments that we have won to date. As we think about the quarters ahead, the uncertainty around the trajectory of the macroeconomic environment is significant. In light of these realities, we are maintaining a realistic perspective as we plan for the second half of the year. While we’re unable to predict how the next few quarters will play out, we can take steps that will position us to win irrespective of market conditions. We remain committed to winning with customers and consumers in our markets today, while advancing our strategic initiatives to strengthen our leadership position and secure our long-term growth prospects. We’re investing to support the robust growth we’re seeing in e-commerce and mobile installation business. These investments will allow us to expand our mobile installation capabilities into new markets by the end of the year and lay the groundwork for further expansion in 2021. At the same time, our OE teams are focused on winning the best fitments to position us to drive profitable growth in the coming years. And we continue to focus on improving our manufacturing costs while adding flexibility to support our customers and do so at lower levels of inventory. This is crucial to how we’re going to successfully adapt our business for the current market conditions.

And finally, we will continue to focus on managing our business for cash, which helps to position our business to win over the long term. We are aggressively and intelligently managing our working capital, and we are targeting positive free cash flow in the second half of the year. As a company, we share optimism about what we can accomplish together as we move ahead. Now I’d like to close my remarks today by reemphasizing my appreciation for all the contributions of our associates during this challenging time in supporting our customers in our business all while supporting and taking care of their families, friends and communities in truly remarkable ways. Now I’ll turn the call over to Darren.

Darren Wells — Executive Vice President and Chief Financial Officer

Thanks, Rich. It’s the end of July. We’re seven months into 2020 and five months into the pandemic, at least here in 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 pre-pandemic 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 four our monthly volume trend for 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 noncash 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 affecting 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 by over $600 million just for Q2. Oyour earnings in the other tire-related businesses, like retail and chemical, were down over a $100 million for the quarter, driven by lower revenue in those businesses. I guess that tells us how bad it can get. What we’re able to do about it is a better story. We figured out new ways to reduce cost and preserve cash, actions we’ve never taken before. Our salaried workforce made significant contributions, with many being furloughed, free to part for all of the second quarter. Those that were working did so at pay that was 10% to 30% lower, in many cases, voluntarily. And they did show while working harder to not only complete required tasks but also while inventing new ways to work. Our manufacturing associates were also idled for much of the quarter, but they have managed to return to operating our factories safely and without any significant disruption, even while implementing a whole new set of protocols designed to prevent the spread of the virus. Our whole team rallied around the operational and financial actions required to manage the situation, cutting spend across all categories and reducing SAG by nearly 25%, and manufacturing costs by over 35%. Our team’s modified engineering plans to reduce capex and leverage government pandemic relief programs to reduce and defer tax payments. Our operating teams developed new run strategies for our factories, so we could meet customer demand at lower levels of inventory, while also working with our customers and suppliers to minimize the cash tied up in working capital. I’ve never faced a tougher situation in my career, and I’ve never been prouder to be part of the Goodyear team.

As a result of these actions and with a stronger-than-expected volume recovery in June, we were able to substantially reduce the amount of cash we used in the quarter. Our original projections from April showed the cash use of up to $1 billion. By the end of May, we had reduced those estimates to closer to $700 million, consistent with our comments at the Auto Show investor conference. In the end, with better earnings and lower working capital, we used less than $500 million, a dramatic reduction that reflects the impact of our team’s focus on driving cash and liquidity and protecting our balance sheet to the greatest degree possible. In addition to consuming less cash, we also secured extra financing to provide further flexibility. We issued $800 million of senior notes in May, adding to the benefits of the successful refinancing of our $2 billion U.S. credit facility in early April. This capital will serve as a valuable reserve as we face the uncertainties resulting from the ongoing pandemic. With the financing we completed, our cash and liquidity ended in as strong a place as it ever has midyear. So we come into Q3 with a better balance sheet than we expected and with volume trends substantially stronger in June. So far, those trends are holding in July. That gives us some confidence heading into the second half but it’s hard to get too confident given the level of new cases and the threat of additional restrictions. I’ll come back in a minute to our thoughts on the second half, including how we plan to manage through this period of industry recovery. But first, I want to quickly review the detailed results for the quarter.

Turning to slide 10. As I indicated in my opening remarks, our unit volume for Q2 decreased 45%. Our second quarter sales were $2.1 billion, down 41% from last year, driven by this lower tire volume, lower sales in our other tire-related businesses and unfavorable foreign currency translation. These effects were partially offset by improvements in revenue per tire driven by price mix. Unit volume was slightly better than the expectations of a 50% decline we had shared previously, as we experienced an acceleration in demand toward the end of the quarter. Overall, replacement tire shipments declined 39%, reflecting the impact of lower end-user demand as well as inventory destocking by our distributors. Original equipment unit volume decreased 62%, reflecting reduced vehicle production. Our segment operating loss for the quarter was $431 million, down $650 million from a year ago. Our results were also impacted by certain other significant items, including a noncash impairment charge of $148 million to reduce the carrying value of our equity interest in TireHub, given the lower volume environment and by rationalization, asset writeoff, and accelerated depreciation charges of $185 million, primarily associated with the previously announced plan to permanently close our manufacturing facility in Gadsden, Alabama. After adjusting for these items, our loss per share totaled $1.87. The step chart on slide 11 provides our variance analysis for second quarter segment operating income versus last year. This is mostly a volume story. The impact from lower tire unit volume was $338 million, reflecting a decline in shipments of approximately 17 million units. Reduced factory utilization resulted in a $299 million decrease in overhead absorption. In total, we reduced production by 26 million units during the quarter compared to the prior year or approximately one million more than our forecast in April. Raw material costs were up modestly, primarily reflecting unfavorable transactional foreign currency of $28 million and higher nonfeedstock costs. While raw material spot prices were down significantly in the quarter, our raw material costs are a reflection of pre-COVID-19 prices given our first-in, first out inventory accounting.

Our cost savings were up substantially for the quarter, primarily a reflection of salary payroll and SAG savings. The $53 million decline in the other category included several items. First, earnings from our other tire-related businesses were down $104 million for the quarter. Earnings at our retail locations were weak early in the quarter, and the sharp drop in travel hurt our aviation business. In addition, our chemical business was affected by lower tire production. Second, other includes an $11 million write-off of work in process inventory associated with the quick suspension of production at our manufacturing facilities. These two negative items were partly offset by over $60 million in savings related to reduced advertising and reduced R&D spend. Turning to the balance sheet on slide 12. Despite operating losses, our net debt was up only $150 million from a year ago, given lower levels of working capital. While we still expect working capital to decline between now and year-end, it will not decline as much as we saw between June and December last year, given the expected ramp-up in our sales as the business environment recovers. On slide 13, you see we had total liquidity of approximately $3.9 billion, including $1 billion of cash and cash equivalents. Note that in mid-August, the company’s $282 million of 8.75% notes mature. Pro forma for this upcoming repayment, we had liquidity of about $3.7 billion, still well above our year ago levels. slide 14 shows that following this payment, we have no other notes or corporate credit facilities maturing until 2023. slide 15 summarizes our cash flows. We used $259 million of cash during the quarter for operating activities, driven by our operating loss. Capital expenditures totaled $152 million, down $28 million from last year.

Turning to our segment results, beginning on slide 16. Americas volume decreased approximately 50% to 8.5 million units. OE volume declined 68% and shipments of replacement tires fell 45%. Our commercial business outperformed our consumer business as industry demand for truck tires was less affected by government shelter-in-place mandates. Additionally, our U.S. consumer replacement business was disproportionately affected by Walmart, temporarily closing its auto care centers. Across other distribution channels, our U.S. consumer replacement shipments outpaced the industry. America’s second quarter operating loss of $287 million was down $421 million from a year ago. Turning to slide 17. Europe, Middle East and Africa’s unit sales were down 45%, driven by lower industry demand in all major categories. OE shipments declined 63%, and our replacement volume fell by 37%. As in the Americas, our commercial business performed relatively better than our consumer business. Europe, Middle East Africa segment operating loss of $110 million was down $154 million from the prior year’s quarter. Turning to slide 18. Asia Pacific tire units totaled $4.6 million, down approximately 36% from the prior year. Original equipment unit volume declined 50%, replacement tire shipments decreased 26%. We were particularly encouraged by the recovery we saw in our business in China as the quarter progressed, driven by double-digit growth in our consumer replacement business there during both May and June. Asia Pacific segment operating loss of $34 million was down $75 million from the prior year’s quarter. Turning to slide 19. I wanted to come back to the question of where we see the industry in Q3 as well as how we expect to manage our business as the market recovery continues.

Needless to say, industry demand remains unpredictable. Balancing recent industry strength with the risk of further COVID-related disruptions, we are expecting industry volumes in aggregate to be down about 20% in the third quarter from a year ago, which is similar to the levels we experienced in June. In essence, we aren’t assuming further improvement nor are we predicting trends will deteriorate from recent levels. We continue to plan for the fourth quarter to improve from these levels, but don’t feel comfortable quantifying Q4 at this time. We also expect the volume decline in our other tire-related businesses to be less in Q3, reflecting stabilization in our retail business and higher demand for chemicals. In total, the year-over-year earnings decline for our other tire-related businesses are expected to be $30 million to $50 million during the third quarter. Given stronger volume, we plan to increase our production in Q3, not only to reflect stronger sales but also to rebuild the unplanned inventory reduction we saw given the surge in sales in late June. We expect our production to be down about five million units from a year ago across consumer and commercial businesses. The impact of this decrease will be about $15 million or higher than our modeling assumptions would imply given the accounting treatment that applies during periods of low utilization. Our working capital levels ended Q2 much lower than we had expected. Part of the benefit we saw in Q2 will mean some further investment in working capital in Q3 to support higher sales volumes. So we expect working capital to be a use of funds for the third quarter.

We continue to expect working capital will be an inflow for the full year after an outflow of over $500 million in the first half. The amount of full year cash generation for working capital will likely be modest, but will ultimately depend on sales activity in Q4 and our assessment of how much inventory we believe we need to support the business in early 2021. Finally, on slide 20, we’ve updated a couple of our other financial assumptions. We are projecting our full year raw material cost to be $100 million lower than the prior year, excluding the impact of unfavorable foreign currency translation. This represents the high end of the range we provided during our first quarter conference call. Depreciation and amortization is expected to total approximately $760 million, down $15 million from our previous forecast. The revised outlook primarily reflects the impact of our decision to permanently close our manufacturing facility in Gadsden, Alabama. And we’ve increased our estimate of rationalization payments by $25 million. Operator, you may now open the line up for questions

Questions and Answers:

Operator

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

Rod Lache — Wolfe Research. — Analyst

Good morning, everyone.

Darren Wells — Executive Vice President and Chief Financial Officer

Good morning.

Rod Lache — Wolfe Research. — Analyst

I 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, the consensus is like negative 10% to 15%. So are you expecting replacement to be worse than that?

Darren Wells — Executive Vice President and Chief Financial Officer

Yes. So Rod, the second half volume recovery expectation here, we’re trying to think through this on a global level. And you’ve recognized completely that we had some numbers in June that looked pretty good and some numbers in July, particularly for U.S. OE, that look even better. So I think we’re taking 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, where inventories are still generally higher than they should be, given the level of sales last year. A lot of uncertainty in emerging markets, including India, which Rich mentioned in his remarks. And then just your 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.

Rod Lache — Wolfe Research. — Analyst

Okay. Two other things I was hoping you could just talk about. One is 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? And any kind of high-level comments 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 happened. 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.

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

Yes. Rod, I’ll start. And I’ll start with aligned distribution in Europe. And I would say that that we’re actually very pleased with the progress. So the question that 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 of the essentially all of 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 like them to. And as we said, last time, that could cost us about 1.5 million units or about of 5% 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 and end consumer pull. We saw even relatively good pricing in Europe in Q2. And remember, we said the benefit of about $2 to $4 per tire, margin per tire, increased over the next three to four years. So we’re full gas on that and I’m 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 of quick reminders for everyone, it’s a rule of thumb for Goodyear. We tend to manufacture where we sell. So in terms of imports or exports that 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 also, what happens here, us being a global company, this does impact the value-oriented segment, but also net result for us tends to be a bit of a plus and a minus, right? Because the actions taken in one location tend to increase supply and put pricing pressure on another locations. Remember, we saw that we had some good benefits in the U.S. when we saw this the last time, but we saw pressure first in Latin America and then in Eastern Europe as well. Now particularly to this one, we could have a potential impact on the industry. You’re exactly right to point it out. There’s four countries affected; Thailand, South Korea, Vietnam and Taiwan, and they account for about 25% of the U.S. industry or about 50% of the imports now coming in. So what we could see again is a market disruption in the U.S. Remember, we used to walk you through those charts where we see big industry swings where we see the impact of big buy ahead or loading up on tires by the distributors and dealers to be sold out later, that’s a onetime pop that we see. And the other impacts, again, you mentioned some that take place back when we had this on the Chinese imports back in 2010. But look, at the end of the day, we don’t expect a big impact on us in terms of volume, particularly because of our premium focus. So as those industry disruptions take place, we’re going to as we did last time, stick to our game and stick to our strategy, and we’re happy to do it.

Rod Lache — Wolfe Research. — Analyst

Okay, all right, thanks for that.

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

Thank you.

Operator

Next question is from Ryan Brinkman with JPMorgan. Please go ahead.

Ryan Brinkman — JPMorgan — Analyst

Great. Thanks. Just a follow-up to Rod’s question on the volume earlier. It sounds like you are setting more uncertainty, maybe even conservatism around second wave of infections, etc. 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 in demand for their aftermarket products in 2Q sort of stalled out suddenly in the first three weeks of July. Curious if you saw that, too? If there’s anything you can say about how 3Q was trending so far?

Darren Wells — Executive Vice President and Chief Financial Officer

Yes. So I think that we have actually continued to see the trends from June and even the later part of June through July. 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 and what plays out in August and September.

Ryan Brinkman — JPMorgan — Analyst

Okay. Helpful. And then, obviously, 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 2Q cash flow and the sustainability of those seemingly net favorable factors in the back half of the year.

Darren Wells — Executive Vice President and Chief Financial Officer

Yes. No, I think clearly, we can do that there. We can’t take away the fact that some stronger volume and the related stronger earnings did play a role in the second quarter. So the fact that the quarter itself 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 our 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. So 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 there’s still a lot of work to do there. There’s 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.

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

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 have been through this before we went right to assessing our liquidity as this 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 head to them as well and the businesses.

Darren Wells — Executive Vice President and Chief Financial Officer

Yes. 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. I think, in a number of cases, we exceeded those as well and that helped create the increased earnings along with the extra volume.

Ryan Brinkman — JPMorgan — Analyst

That’s helpful. I was just going to say, lastly, what’s your take on the pricing environment? Because I recall you discussing even prior to coronavirus, there some aggressive competitor actions out there around OE pricing that was offsetting some of the benefit that you don’t like to see from lower raw materials. So it would helpful to get your take on whether you think the industry is being 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 unabsorbed under-absorbed overhead might be reacting with steeper discounts?

Darren Wells — Executive Vice President and Chief Financial Officer

Yes no, 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 it pretty much performed in line with our expectation, and we got the benefit of the contribution to increased revenue per tire. So we feel pretty good about that. Ryan, if we look around the world, in the U.S., we’re seeing prices improve sequentially during the quarter year-over-year. I think as we look at that, you will see PPI up 1%. As I mentioned earlier, we’ve seen favorable pricing trends in Europe across summer, winter and all seasons, again, both year-over-year and versus the prior quarter. In emerging markets, we’re 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 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.

Ryan Brinkman — JPMorgan — Analyst

Great, thank you.

Operator

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

John Healy — Northcoast Research. — Analyst

Good morning.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 if you look at what Christina and the team have done, just putting the liquidity in place and putting some of the buffers to stabilize the business, it’s 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. Are there 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?

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

Darren, start, I’ll jump in, then I have a couple of things as well.

Darren Wells — Executive Vice President and Chief Financial Officer

So John, I think there are a couple of things here that I 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 that 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 have 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. Yes, I think the work that we’ve done online distribution is another area where very clearly this is helping illustrate the importance of it and the benefit of it. And I think that is Rich made in his comments about the aligned distribution initiative in Europe. And those distributors are where we’re seeing some of the best performance, and those are new agreements for us. So we’ve only just begun those new agreements this year. And already, we’re seeing that, that’s the strength of our distribution there. And if we come back to the U.S. market, the benefit of having TireHub in distribution I mean, TireHub performance in the marketplace, was well above where other distributors were. So having TireHub as a distribution asset was a significant factor for us in the quarter. So I think all of those things are proved to be really impactful. And I think it’s also given us a lot of confidence in the investments that we’re making in areas like mobile installation and e-commerce, as Rich mentioned.

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

Darren, I’m going to just jump in, really two things real quick, and I think that’s really important. As we said, our e-commerce business was up 15%, and our mobile was up 150%. And we’ve always talked about a goal being customer-back and consumer-oriented to make the tire buying process easier. We know that our market research says customers want to make tire shopping easier, more convenient; they want to shop on their terms; they want information to guide their decisions; and they want choices of installations. We know this was true. It was the sort of the predicate of our e-commerce initiatives with our partner dealers, rolled by Goodyear, all our mobile installations. And what we saw with COVID, I think, proved that out. I mean you all know this, but the impact on consumer spending habits and really their practices was just absolutely supercharged during COVID, particularly toward digital transactions. And it went beyond the traditional books and apparel and whatnot, to things like even food and tires where categories that people usually would still go to a bricks-and-mortar store. So we’re seeing the benefit of that, and we’re seeing the benefit of the investments that we’ve made pay off. You can come to Goodyear today in our pilot markets, you can get a tire of the way you want.

You can come to the store, we can come to you. We can come pick up your car. We’ll do it the way you want it to in this environment, really just exploded the understanding of that. And I always say, why do we think tires are different relative to consumer expectations. And I might just say, very quickly, I know we want to get down with our questions here. But one of the things is that we’ve put a lot of effort on and a lot of attention on new mobility. And I would tell you, right now, COVID makes things really unpredictable and obviously negative when you look at volumes. But medium and in the long term, it’s going to end through a vaccine, a therapeutic living with it, whatever it is. And we believe, fundamentally, just as we did back in 2008, people value their mobility, people value connections. They value mobility and mobility is freedom. And all those trends that we’ve talked about around AVs, EVs and shared mobility shared ride, they are going to happen. I mean, the underlying trends on technology, connectivity, sustainability, regulation, cost, convenience, all the things we’ve talked about, those have received a bump in the road, but I suspect most on this call know this, while there’s consolidation, that hasn’t slowed down at all. So while you don’t see that today, we have not at all stopped our efforts, in fact, we haven’t cut our efforts to make sure that we’re on the front end of that. And John, that’s something you don’t see, but man, it is important, and our long-term view hasn’t changed one iota.

John Healy — Northcoast Research. — Analyst

That’s great. And I appreciate your thoughts. And just one quick question for me. Any update in terms of where Walmart is at, in terms of its kind of reemergence in the installation side of the business?

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

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

John Healy — Northcoast Research. — Analyst

Yes.

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

So John, it’s really a great question because 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 are only open now about 1/3 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 at 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.

John Healy — Northcoast Research. — Analyst

All. Thank you.

Operator

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

Itay Michaeli — Citigroup Inc. — Analyst

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

Darren Wells — Executive Vice President and Chief Financial Officer

Yes. So I say, if we look at the last 10 years, Goodyear’s segment operating income margins averaged around 8.5%. And we’re certainly, we need some volume recovery. But as volumes recover over the next couple of years, we’re going to get the benefit of the number of initiatives that are going to improve our business from those historical levels. And the two restructuring actions that we’ve taken have both been mentioned, so $60 million or $70 million of savings from the restructuring and investments we’re making in Germany, $130 million of savings from closure of Gadsden, the $2 to $4 a tire that we could get from the improvement in our European distribution. I mean, just as starting points, I mean, those are all going to be additive. And I think the we feel like with some volume recovery and those actions that even, without any recovery of price versus raw materials, 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 may be below where we were at the peak, but still a level where we add economic value. We continue to believe that the replacement business is also going to recover margin, 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 over 8% within the next two to three years. Longer term, we still believe there’s an opportunity to get back to double digits.

Itay Michaeli — Citigroup Inc. — Analyst

Great. That’s very helpful. Appreciate all that detail, Darren. And then just as a follow-up maybe on EV and the wins you’ve talked about there. Did you have an estimate of what Goodyear’s win rates are for EV OEM fitments?

Darren Wells — Executive Vice President and Chief Financial Officer

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 2/3 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 initially instead of competing against eight or 10 other tire companies on those fitments, we were generally competing with two or 3. 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. There’s just fewer people who could credibly do it. Over time, we expect that, that I mean, the competitor set 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 opportunities. So 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 fitments. 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 2, 3, four years.

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

And we’re still in that environment where the 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 it. So we still feel really good about it.

Operator

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.

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

Thanks for joining us today.