Earnings Call Transcript - GT Q3 2020

Operator, Operator

Good morning. My name is Keith, and I'll be your conference operator today. At this time, I'd like to welcome everyone to Goodyear's Third Quarter 2020 Earnings Call. I'll now hand the program over to Nick Mitchell, Senior Director of 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 Third Quarter 2020 Earnings Call. I'm joined here today by Rich Kramer, Chairman and Chief Executive Officer; Darren Wells, Executive Vice President and Chief Financial Officer; and Christina Zamarro, Vice President, 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 are included in our earnings release issued earlier this morning. If I could now draw your attention to the safe harbor statement on Slide 2, I would like to remind participants on today's call that our presentation includes some forward-looking statements about Goodyear's future performance. Actual results could differ materially from those suggested by our comments today. The most significant factors that could affect future results are outlined in Goodyear's filings with the SEC and in our earnings release. The company disclaims any intention or obligation to update or revise any forward-looking statements whether as a result of new information, future events or otherwise. Our financial results are presented on a GAAP basis and in some cases, a non-GAAP basis. The non-GAAP financial measures discussed in the call are reconciled to the U.S. GAAP equivalent as part of the appendix to the slide presentation. And with that, I'll now turn the call over to Rich.

Richard Kramer, Chairman and CEO

Great. Thank you, Nick, and good morning, everyone. During the third quarter, we continue to feel the effects of the economic disruption resulting from the COVID-19 pandemic. However, industry conditions improved meaningfully compared to the second quarter and much faster than we expected. We benefited from stronger light vehicle production as OEMs worked to swiftly replenish dealer inventories. Miles driven trends improved globally, as did freight volumes benefiting from increased consumer and industrial activity. Our team executed well, allowing us to capitalize on the stronger industry. Our global volume declined less than 10% for the third quarter, improving materially from what we experienced during the second quarter. The recovery in our volume helped us return to profitability just one quarter after the steepest decline in industry volumes on record. In addition, our cash flow was simply outstanding. We generated over $450 million of free cash flow during the quarter. This performance exceeded our expectations, reflecting the benefit of stronger volume as well as our focus on managing costs and working capital. Our results demonstrate the effective execution of our plans to manage the impact of COVID-19 on our business and position us well as we look beyond the crisis. And I've never been prouder of our team's ability to deal with the challenges at hand, while at the same time, demonstrating an unwavering focus on our strategic priorities. We continue to take every opportunity to build our business for the long term, including through important electric vehicle fitment wins, through growing our best-in-class fleet service offering, by responding to changes in consumer buying behaviors and strengthening our aligned distribution and making sustainability an increasing priority and increasing our investment in technology to address emerging mobility challenges. And you can see these initiatives and priorities in each of our businesses. Now in the U.S., our consumer OE volume increased 7%, outpacing the industry, reflecting our strong position in the SUV and light truck categories where demand is particularly strong. With new car sales returning to pre-pandemic levels in September and dealer inventory more than 20% below average, we're likely to see continued strength in OE demand through the remainder of the year. And as we discussed on our last call, our replacement volume has lagged the industry, as one of our major U.S. customers has kept many of its tire and auto service centers closed. While these locations are in the process of reopening, this will continue to negatively impact our overall share in the fourth quarter. We believe this is a temporary situation that will correct itself as those locations open. On the other hand, our e-commerce and mobile installation businesses continue to grow well above market during the third quarter. This outperformance contributed to overall share gains outside the mass merchant channel. Customers continue to see tremendous value in being able to buy tires on their terms and choose the installation option that best meets their needs, whether at their home or office with one of our mobile vans or one of our approximately 600 retail stores as well as our partner dealer locations. And empowering customers with these choices allows us to further differentiate our products in the market and in the process, capture more value. We are pleased with the momentum we are seeing in these new business models and continue to expand mobile installation services in additional markets. We also continue to set the standard in our commercial fleet business. In today's competitive environment, large fleets and small owner operators are increasingly prioritizing value-added suppliers like Goodyear that can help them maximize uptime and lower operating costs per mile. Goodyear is second to none when it comes to capabilities in these areas with a total solutions offering that includes the high mileage, fuel-efficient Goodyear endurance product line and Goodyear TPMS Plus, our on-vehicle, active monitoring system that evaluates tire conditions in real time. And customers recognize tremendous value in the innovation that we're bringing to market. During the quarter, we were named preferred tire supplier by one of the largest food and drug operators in the U.S., securing a new fleet of more than 1,600 vehicles to our fleet business, and that's on the heels of recently adding Ryder, the largest truck leasing company in the U.S., this further validates our industry-leading value proposition. I'm extremely proud of the wins our team keeps adding. And outside of the U.S., our Americas' team also performed well during the quarter, growing our replacement business and gaining significant share in Brazil. Part of this success was driven by recent industry dynamics and part has been driven by our market-facing initiatives. We've continued to strengthen our distribution and introduced a zero contact service offering for the local market, while also expanding the number of sizes available for our most popular product lines. And all the while, as you would expect, our teams have been successful in capturing full value for our products in the marketplace, which is important as the currency devalues in the region. In Europe, our performance continued to be affected by the temporary disruption related to our line distribution initiative. We are pleased with the progress we have made thus far by advancing our strategy. We're already seeing improvements in the value of our brands, which is exactly what the program is designed to do. Despite the temporary volume impact, we delivered double-digit growth in the increasingly important all-season category. We recently enhanced our already best-in-class all-season tire offering with the launch of the Goodyear Vector 4Seasons Gen-3 and the Dunlop Sport All Season. Goodyear has more test wins in the all-season category than any other brand. And the latest generation of Vector 4Seasons with its Snow Grip, Dry Handling, and Aqua Control Technologies is keeping the tradition alive. This is a testament to the product technology and competitive advantages that we've created through 30 years of investment in this important product segment. I want to recognize our development team as they have continued to demonstrate our technology leadership and bring best-in-class products to the market. I'd also like to congratulate our European racing operations for driving the Goodyear brand's successful return to Le Mans after nearly a 15-year hiatus. In Goodyear's first year back on the track, our racing team partners claimed 2 podium spots in their category. And in addition, the Goodyear Blimp made its return to Europe, driving brand awareness to new heights. Our consumer OE business in EMEA is also stabilizing, with production in Europe returning to pre-COVID levels in September. We're also seeing some favorable dynamics as demand recovers with EVs now counting for nearly 25% of vehicle registrations in Europe. Electrification plays into our strength as a global leader in tire technology. We've demonstrated we can deliver the performance in technical specs demanded by OEs, as evidenced by higher win rates and a growing pipeline of high value-added fitments. Our capabilities in this area are second to none. These trends leave us feeling confident that we are well positioned to gain share in the OE channel in coming years and benefit from strong replacement pull thereafter. Now turning to Asia Pacific. The market in China is also improving faster than we anticipated. Auto production is above pre-COVID levels, retail traffic continues to improve, and dealers are replenishing their inventories, all of which are contributing to stronger demand. Our consumer replacement business there is benefiting from expanded distribution and the release of new products, such as the Eagle F1 Sport which is tracking ahead of our original 2020 expectations despite the effects of the pandemic on sales volume earlier in the year. Our product success and distribution actions drove a nearly 20% increase in our consumer replacement volume in China during the quarter. This increase was nearly double the industry growth, helping us deliver a record performance. And we continue to innovate. We recently launched a pilot for an app-based direct-to-retail distribution model in China. Retailers participating in the program can place orders directly with Goodyear through an innovative mobile app. The direct access provides dealers with an easier way to find and buy tires with easy access to our entire product portfolio. And equally as beneficial to them, our aligned distributors who make the deliveries on our behalf enjoy more predictable profits and greater capital efficiency, allowing them to refocus their energy and capital on growth and enhanced service levels. So overall, the good news is that the industry fundamentals are recovering rapidly with light vehicle production returning to pre-COVID levels in September and replacement demand increasing year-over-year in several markets. But the reality remains that we face continued uncertainty in our major markets as we enter the fourth quarter. We're seeing an increase in COVID-19 cases in the U.S. and across many key countries in Europe. Several governments have or are considering reinstating restrictions on mobility and other safeguards. It's difficult to predict how these dynamics will affect consumer demand, miles driven, and auto production in the months ahead. But what we do know is that our response to the crisis has served us well. As we move ahead, I'm confident in our ability to continue to drive performance, and that confidence stems from our proven track record based firmly on the strength of our strategies, including our industry-leading products developed from the market back, our strong network of aligned dealers and distributors, the significant actions we're taking to improve our cost structure and our absolute focus on managing cash. I'm proud of our team's accomplishments in this unprecedented operating environment. And more importantly, I'm very happy with the way we continue to execute our strategy. Our team remains committed to winning with consumers and serving customers, which will drive our results for the long term. Now I'll turn the call over to Darren.

Darren Wells, CFO

Thanks, Rich. We came into the quarter feeling cautious, given the lifting of restrictions and the next wave of COVID-19 infections. While our caution about the possible increase in coronavirus cases seems well-founded, the rise in cases clearly didn't have the same impact on industry volume that it was having earlier in the year. This is one of my key reflections on the quarter, better volume than we expected. My other key reflection is the great job our team did delivering cash flow and cost efficiencies, recovering a big part of the hit to our balance sheet in Q2 and ensuring the benefit of higher volumes made it all the way to the bottom line. I'll come back to the financials, but I want to spend a minute on the volume environment for us and for the industry. We're continuing to evaluate industry results for Q3 to segregate the factors influencing reported industry data. Even after considering these factors, however, the situation will almost certainly seem positive, particularly in the U.S., where industry consumer replacement volume compared to a year ago went from down 8% in June to up 5% in July, up 9% in August, and up 10% in September. On an annualized rate, that means the run rate went from $220 million in June to $275 million in Q3. The positive consumer replacement industry sales in the U.S. need to be digested in light of two key and interrelated factors: restocking the distributor inventories, which were down 8% at the end of Q3 compared with down 19% in Q2; and pre-buying ahead of potential tariffs on Asian passenger car tires that could come into effect early next year. In Q3, non-U.S. TMA member volume increased 47% compared to a year ago. If we look at consumer purchases, we see a good recovery, just not as good as manufacturer sales would indicate, with sellout volume down about 10% versus last year. And indicators of miles being driven continue to indicate a high single-digit decline compared to pre-COVID-19 levels. In consumer original equipment, we also see a favorable story. During September, industry sales to OEs in the U.S. and Europe recovered to levels that are similar to last year. European replacement industry data shows favorable trends, although not as favorable as we saw in the U.S. I have a couple of comments to add to what Rich said about power volumes. First, our Q3 consumer OE volumes outpaced the industry, as we've started to see the beginning of the expected recovery in OE share we discussed last year. As you'll recall, based on the fitments we've won, we had previously expected our OE volume to grow meaningfully between 2019 and 2022 based on automotive industry projections at that time. Even in today's uncertain environment, we're still confident we'll grow significant share over this period. And second, the impact of volume on our other tire-related businesses moderated in Q3, with earnings in both retail and chemical recovery. Our aviation business is now the primary driver behind the earnings impact for our other tire-related businesses. As you might assume, increased Q3 volume has led to increased production in our factories. We originally had expected production to be down 5 million units for the quarter versus a year ago. But given higher sales, we increased production as the quarter progressed and ended with output down only 4 million units. After surviving the 26 million unit reduction in Q2, we feel really good about being able to ramp up this quickly in response to customer demand. Heading into Q4, our factories are now essentially running at full capacity while we try to rebuild depleted inventories. With that backdrop, I want to move on to the income statement. Turning to Slide 10. Our third quarter sales were $3.5 billion, with both our sales and our unit volumes down 9% from last year. Both OE and replacement volumes were down about 9%. Our segment operating income for the quarter was $162 million, down $132 million from a year ago. We'll come back to the drivers on the next page. Our results were influenced by certain items. After adjusting for these items, earnings per share on a diluted basis were $0.10, back above breakeven. The step chart on Slide 11 summarizes the change in segment operating income versus last year. The impact from lower volume was $73 million, reflecting the decline in unit sales of 3.7 million units, including a reduction in commercial truck tire volume that was essentially in line with the industry. Reduced factory utilization resulted in a $121 million decrease in overhead absorption. This reflects the impact of lower production in Q2, lag through inventory, and approximately $30 million of period costs related to lower production early in Q3. Partly offsetting this were actions taken to temporarily reduce fixed costs during the pandemic shutdown. Price/mix was favorable by $6 million. Similar to last quarter, benefits from increased prices in our replacement business were largely offset by lower OE pricing and adverse mix. Raw material costs were essentially flat with a year ago. The benefits of lower feedstock costs were offset by unfavorable transactional foreign currency of $41 million, resulting from weakness in the Brazilian real and the Turkish lira, along with higher non-feedstock costs. We continue to expect favorable raw materials in Q4. Cost savings of $76 million more than offset $33 million of inflation. Compared with Q2, cost-saving levels reflect two factors: first, many of the temporary actions from the COVID-related shutdown, including the furloughing of a large part of our salaried workforce, were not continued in Q3. While cost controls continued to be very tight, this spending began to normalize; second, we benefited from $34 million of savings associated with our restructuring actions in the Americas, including the impact of closing our manufacturing facility in Gadsden, Alabama. The negative effect of foreign currency translation totaled $8 million. The benefits of a stronger euro were more than offset by the impact of weaker emerging markets currencies, again most notably the Brazilian real and the Turkish lira. The $37 million decline in the other category was driven by weaker results in our other tire-related businesses. As I mentioned earlier, the largest year-over-year impact was from our aviation business, which continues to be adversely affected by the travel industry. Turning to the balance sheet on Slide 12. Net debt totaled $5.6 billion, lower than a year ago, reflecting about $400 million of cash generated over the trailing 12 months. This is a really remarkable outcome delivered by our team. Since the beginning of the pandemic, driving cash flow and ensuring strong cash and liquidity have been the top priority, and results over the last two quarters reflect that focus. While there's a long list of contributors to this accomplishment, working capital management has been critical, which you can see more clearly on Slide 13. Our team has worked closely with both customers and suppliers to support their businesses and ensure we're well-positioned to support them moving forward. That said, I do want to point out that while we had hoped to rebuild some inventory during Q3, stronger sales levels didn't allow us to do that. So we'll now be working to increase inventory during Q4. While we still expect cash inflow during Q4, the strong performance in Q3 and this need to rebuild inventory mean the cash inflow will be less than it has been in Q4 historically. On Slide 14, you can see the impact of our strong cash flow on our liquidity profile. We ended the quarter with cash and available credit lines of $4.2 billion. This is up about $800 million from a year ago and positions us well for any uncertainty as the pandemic continues. Also, in August, we repaid our $282 million of senior notes at maturity. Slide 15 shows that given this repayment, we have no significant corporate maturities until 2023. Turning to our segment results, beginning on Slide 16. Despite industry recovery, our unit volume in Americas was still down nearly 10%. Replacement shipments were down 12%, which continued to reflect the temporary closure of Walmart's auto care centers. About 15% of these locations remained closed at the end of September, a big improvement compared to July when two-thirds of the facilities were closed. We hope to see most of the remaining locations reopen during Q4. The share decline in North America was partly offset by strong share gains in Latin America. OE volume was essentially flat for Americas, despite increased volume in the U.S. Strength in North American auto production and higher OE market share was offset by lower vehicle production in Brazil. Continued strength in our commercial truck fleet business was a positive for the quarter but was more than offset by lower truck OE production. Segment operating income was $106 million, down $69 million from a year ago. The decline reflects the impact of lower volume, partially offset by our cost-saving actions and improved price/mix. Savings associated with closure of Gadsden were $34 million for the quarter. Turning to Slide 17. Europe, Middle East and Africa's unit sales totaled 13.2 million, down 9%. OE shipments declined 11%, reflecting lower auto production. Replacement volume fell 8%. As in the Americas, our commercial business in Europe continued to be a highlight given the continued success of our fleet service offering. EMEA's segment operating income of $22 million was down $44 million from the prior year's quarter. The decline reflects lower sales and production volume, partly offset by lower raw material costs and improved pricing. I would add that our German factory modernization project remains on track, and we continue to expect to generate $60 million to $70 million of cost savings by the end of 2022. Turning to Slide 18. Asia Pacific's tire units totaled 7.2 million, down 9% from the prior year, principally driven by lower consumer OE shipments, which fell 20%. Our OE business was particularly affected by weak industry demand in India as well as the impact of discontinued fitments in China. Our consumer replacement business in Asia was a better story. Our business in China delivered its best quarterly volume growth in more than a year, with shipments increasing 19% to a record month. The growth in China was more than offset by a tough comparable in Japan, given prebuy ahead of increased sales tax rates a year ago and industry weakness in other Asian markets. Segment operating income was $34 million, down $19 million from prior year's quarter, driven by lower volume. Turning to our outlook items on Slide 19. Most of our financial assumptions remain consistent with our outlook back in July. We continue to expect working capital will be an inflow for the full year after an outflow of approximately $270 million in the first nine months. The amount of full year cash generation for working capital will likely be modest, but to some degree will depend on sales activity in Q4. Needless to say, industry demand remains unpredictable. Balancing recent industry strength with the risk of further COVID-19-related disruptions is tough to do. Given we're essentially running our factories full at this point and given December is a low volume month anyway, there's less need for us to place a bet on volume between now and year-end. We expect a negative impact from our other tire-related businesses to improve again in Q4, given stabilization in our retail business and higher demand for our chemicals business, although aviation will remain challenged. In total, the year-over-year earnings decline for our other tire-related businesses is expected to be $20 million to $30 million during the fourth quarter.

Operator, Operator

You may now open up the line for questions.

Ryan Brinkman, Analyst

What is the expected cadence for the layering back in of the temporary fixed cost reductions? And then just on cost saves more broadly, a lot of companies reporting earnings this season so far, they're putting up really strong margins. They're saying that they're learning to be leaner, adding cost back more slowly than revenue, as everyone's been sort of forced into this zero-based budgeting situation in 2020. Do you see the potential beyond the temporary fixed cost reductions to also restructure or get leaner? Can investors expect a bigger spread in 2021 between the impact of cost saves versus general inflation in comparison to in recent years?

Darren Wells, CFO

Yes. The answer to the first question, Ryan, likely referring to Slide 11, concerns the temporary measures we implemented that lowered our fixed costs in the factories. These actions were primarily due to the complete shutdown of our factories during Q2. We detailed these separately to maintain consistency with the modeling assumptions we provide. You understood correctly that if we combine the overhead and temporary fixed costs, that represents the impact we experienced, with a significant portion coming from Q2, but these were temporary. Regarding when these costs will return, they have essentially already come back since our factories are now operating at full production. Therefore, the fixed costs associated with the factories are back in place. The longer-term question regarding our cost structure is an important planning factor as we move into next year. Some of this will depend on volume. We have adopted a cautious outlook on how quickly we expect long-term volume recovery. Even though there is currently more demand than supply in the industry, miles driven remain significantly lower than in 2019, which creates some caution as we plan for 2021. We will factor this into our cost structure planning for 2021 and will keep our cost controls tight. The most significant structural changes we've made in manufacturing include the closure of the Gadsden facility in the U.S., which provided over $30 million in benefits in the third quarter—this came sooner than we originally anticipated. We will continue to see those savings and will also work on the manufacturing restructuring in Germany, exploring additional cost-cutting measures if long-term volume remains below 2019 levels. If the situation rebounds to 2019 levels more quickly, we could see a temporary benefit, but many costs for marketing, sales, and operations will return. Thus, we are developing our plan for 2021 and face key decisions about how much of the cost we will allow to return.

Richard Kramer, Chairman and CEO

Yes. And Ryan, I think Darren answered the question correctly. The one thing I would say, if you look at our track record on cost reductions, whether it's Gadsden, before that Phillipsburg, the changes in reductions in Hanau and Fulda, things we've done around SAG with terms of shared service centers, R&D spend as a percent of sales compared to our competitors, managing CapEx costs over time, I think we have a pretty good track record of not being afraid to roll up our sleeves on cost. And I think Darren framed it correctly. The real thing raising our P&L is volume, right? That's the issue and volume has been COVID-driven. So we're very cognizant of that. And I would say we'll continue to look at that, and we're not bashful about doing what else we need to do given the environment that we're in. And again, I think our track record proves it. So it's a good question, and we'll remain focused on it for sure.

Ryan Brinkman, Analyst

Okay. Great. Last question is a follow-up on Darren's comment there about the balance between supply and demand in the industry. Wondering if you can also comment just on what the inventory situation looks like for your own company, but for the industry as a whole? And what this all means for U.S. tire pricing? I think Yokohama, Continental, a couple of others, maybe Michelin have announced increases. What's the potential for you to do the same and realize those benefits?

Richard Kramer, Chairman and CEO

Yes. I think, Ryan, I'll just start from your comments on pricing. Our revenue per tire, excluding FX, was up about 2% in Q3. And in the U.S., I know you're familiar with the numbers that you'd see the PPI is up about 1% during the quarter. In Europe, we see favorable pricing trends across all categories, summer, winter, all season. Certainly, in emerging markets, we continue to price given the currency devaluations and all the changes we're seeing there, including dollar-based raw materials increasing. So we do see a favorable environment, let's say, as we've talked about. But as we look at inventory levels, clearly, I think ours as well are lower than normal, sort of reflecting the faster than planned recovery of demand that we saw in Q3. And that does mean that service levels are really not where we prefer them to be, and that's common for us, but we understand it's true for a number of our competitors as well. We currently see demand outpacing supply. In Q2, we indicated plans to boost production in Q3 due to expectations of increased demand following the low figures in Q2 and the need to replenish inventories. In Q3, demand exceeded both our and industry expectations. Consequently, we increased production by more than 1 million units during the quarter, yet we ended Q3 with inventory levels still below our targets. We will continue operating our plants at full capacity to rebuild inventory with a focus on the right SKUs. The restocking effort, especially in the U.S., and the demand we experienced were quite positive, placing us in our current position.

Operator, Operator

Our next question from John Healy with Northcoast.

John Healy, Analyst

I wanted to ask about, I think, it's Slide 24, where you guys kind of laid out the feedstocks. Some of those feedstock commodities are significantly below where they were in 2019. As you guys talk to your procurement people and kind of your engineers, is there anything that's like structural going on with carbon black or butadiene prices or from an alternative standpoint or just a supply of the product standpoint that's coming on that would maybe make prices for some of those feedstocks lower for a longer period of time even if tire demand does pick up?

Darren Wells, CFO

Yes. So John, I generally don't think so. Our current assessment is that for most of the commodities we purchase, this is mainly a response to demand levels and where production has been, and somewhat to the price of oil. We have observed a notable rebound in price for at least two commodities, which aligns with what we expected as our industry ramps production back to pre-COVID levels. These commodities are natural rubber and butadiene, both of which have seen significant price increases in the last few weeks. Currently, natural rubber is around $0.75 per pound, while we averaged about $0.57 to $0.58 per pound in Q3. Butadiene's price has risen from approximately $0.20 to $0.22 up to $0.32 now. We are seeing substantial increases. I acknowledge your point that carbon black has not experienced similar changes, and there are some other petrochemicals that haven't either. However, I am uncertain if there is anything fundamentally different regarding this. We will continue to monitor the situation closely.

John Healy, Analyst

Great. And then just one follow-up question from me. I thought one of the most encouraging things in the release was the cash flow of this quarter. And I understand that there's probably going to be some reinvestment in inventories in Q4. But as you look at the business, Darren, and that will be in back for a little while, are there any programs or initiatives or anything that potentially could be on the horizon that you could implement to help the cash conversion of the company improve? From my perspective, I think, more consistent and bigger free cash flow generation would probably be the biggest catalyst for the stock.

Darren Wells, CFO

Yes. John, I believe the answer lies in the initiatives we are currently working on that will yield long-term benefits. Recently, we have been closely examining our factory scheduling to find ways to maintain service levels while operating with permanently reduced inventories. Our inventories are down $800 million compared to a year ago. However, I agree that we will need to reinvest in inventory because we are currently below our target levels. There is a portion of this inventory reduction that we planned for and expect to maintain at lower levels moving forward. We are aligning the operation strategy of our factories with this goal. This was an opportunity for us to rethink our approach after experiencing a full shutdown, allowing us to start fresh in managing our portfolio each month and quarter to keep inventories lower. In terms of payables and receivables, those are areas where I think our team has done a great job, and I think we've got a long track record of working both with our customers and with our supplier partners to make sure that we keep our receivables and our payables at levels that are as good as we can have them in our industry. So that is more of an ongoing push. I don't know if there's anything that I could point to structurally there. But that doesn't mean that there's going to be any less attention to it. The working capital excellence has been a long-term push for us. It's going to continue to be a push for us.

Operator, Operator

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

Emmanuel Rosner, Analyst

I apologize for joining the call late, so some of these topics might have already been discussed. I'm interested in exploring the price/mix dynamics further. Could you elaborate on why the price/mix in your EBIT bridge continues to be relatively flat, especially when many of the higher earnings reported so far are reflecting positive pricing in that EBIT line, particularly in light of the price increases mentioned earlier by some of your competitors?

Richard Kramer, Chairman and CEO

Yes, Emmanuel, I know Darren will join the conversation as well. To start, something we've mentioned before, even in Q2, is that our volume and pricing dynamics are certainly influenced by external market conditions and other unique factors. It's important to note that coming out of 2019, especially in the U.S., we experienced some of our strongest quarters in the consumer replacement business in recent times. Therefore, we have a lot of confidence in our strategies around product and brand. However, it's worth remembering that our business has been disproportionately impacted by Walmart temporarily closing their stores, which affects our volume, but we believe this is a temporary situation. Darren noted that nearly all but 15% of those stores are now open, so we expect this situation to improve, and we don't consider it permanent. And also as we think about our volume, we did see some pre-buy already because of the tariffs that were coming in related to some Asian countries. We've seen that in terms of volume before where we see a spike now and we see that taper off later. And excluding, particularly the Walmart area, we're actually slightly better than numbers in the U.S. TMA relative to volume. And also, remember, in Europe, that what we're seeing are sort of the anticipated impacts of our line distribution strategy, which is affecting the tires that we sell over there, certainly, our share in the short run, and I would tell you, we're absolutely behind that. It's working. It's the right decision. We've done it before. And the upside, as you know, is about $2 to $4 margin per tire. So we're seeing the positive impacts of that. But all that also sort of flows into the question on what's happening on our VPM in total. So I'll stop there. Darren, I know you want to jump in as well.

Darren Wells, CFO

No. I think there are several other factors we need to consider that are, once again, temporary in nature. I agree with Rich's point about line distribution in Europe. The regions where we faced the greatest challenge in aligning our distribution this time of year, particularly in northern parts of Europe, tend to have a very diverse mix. This diversity makes achieving the desired mix much more difficult. Additionally, the winter sales this year have been impacted more than other segments, with the winter industry declining by around 15% in the third quarter. This situation further complicates achieving the right mix. I recognize that there is an industry-wide aspect to this, but I believe that the work we are doing on distribution may have affected us more significantly than others.

Emmanuel Rosner, Analyst

Okay. I understand. So I understand your point on volume, certainly. I think you mentioned sort of some European mix. Anything within the price/mix bucket, again, I guess, maybe on the U.S. side, that's sort of like a headwind to what would seem to be otherwise a positive pricing environment, specifically on, I guess, U.S. mix?

Darren Wells, CFO

I would like to make two points. First, we are experiencing some benefits from pricing. If we're noticing that the price/mix isn't meeting our expectations, it primarily reflects the mix, not the price itself. There are several factors affecting our mix. Last year, we discussed how our choice of distribution channels for tires in the U.S. has influenced the mix. Some tires are being sold through lower margin channels, and since the prices across channels remain unchanged, those channels impact the mix as well. Thus, the distribution channels for our tires are a key part of our mix analysis in the U.S. Ultimately, however, we cannot ignore that our sales of tires with a rim diameter of 17 inches and above fell behind the industry's performance in the third quarter. We need to focus on increasing our sales in that segment, which has not been growing as robustly as we would prefer. Improving this situation will require us to enhance our supply chain to ensure we are producing a larger quantity of the appropriate tires and prioritizing their production. We believe we are taking the right steps to address this issue. However, it is clear that we are not currently benefiting from the favorable mix that we have enjoyed in the past. We acknowledge this challenge and are dedicated to turning it around.

Richard Kramer, Chairman and CEO

And as Darren said, as we improve, particularly in the U.S., the supply constraints around those tires, I think we expect that to improve.

Emmanuel Rosner, Analyst

That's super helpful. And then just rounding out then this discussion. So looking forward, because it seems from what you're saying that once you sort of solve some of this impact in the market share from the constraints you would probably solve some of the mix issue as well at the same time. So how should we think about it timing-wise? When can you sort of really see lapping of some of these, I guess, European investment? I think some of the Walmart stores are reopening. I don't know if you've given any outlook for the fourth quarter or for next year. But how would you think about the timing for essentially lapping some of these issues?

Darren Wells, CFO

I believe there will be improvements to expect in 2021, as some temporary issues should be resolved by mid-next year. Regarding supply challenges, we will have a chance to catch up, particularly since we typically produce more tires than we sell in the fourth quarter and first quarter. This provides an opportunity to rebuild our inventory and improve our supply situation. I anticipate that mid-next year will present a chance for us to start seeing some improvements.

Operator, Operator

We can go next to James Picariello with KeyBanc Capital Markets.

James Picariello, Analyst

Are you seeing any indications from your Tier 1 competitors to put through another round of price increases? I know this was already asked, but just curious, I mean, is the current environment favorable for an increase in the U.S.? And why or why not in your view?

Richard Kramer, Chairman and CEO

Yes. What we've observed globally, especially in the U.S. with the PPI and across all channels in Europe, indicates a positive environment. In emerging markets, we have also successfully managed pricing amidst devaluations. Additionally, it's worth noting the behavior of dealers and the rising consumer demand, which has improved sequentially since Q2. As a result, we've seen inventory levels restock in both wholesale and retail channels, although these levels remain lower than historical averages. We previously indicated in Q2 that we would ramp up production in Q3, anticipating a recovery in demand and the need to replenish inventories. Demand in Q3 surpassed both our expectations and those of others, prompting us to increase production by over 1 million units for the quarter. Despite this, we concluded Q3 with inventories still below our targets. We will continue operating our plants at full capacity, focusing on the right SKUs to rebuild inventory. The restocking in the U.S. and the favorable demand we experienced indeed place us in a strong position at this time.

Darren Wells, CFO

One additional point I would make is that our industry is still facing high raw material costs compared to the last three or four years. We have experienced a time where the industry has not fully recovered these costs, and this remains a concern for us regarding achieving the appropriate returns on our investments.

James Picariello, Analyst

Right. And since the industry has under-recovered, that might support price increases on its own, just given that fact. Is that the point you're making?

Darren Wells, CFO

I believe we are experiencing these cycles, and this one has been particularly long. We continue to seek ways to recover some of the cost increases we have faced. Historically, we have gone through periods of compression followed by times when we can recover raw material costs. Yes, that's helpful. Regarding raw materials, since you have 3 to 6 months of visibility or lag in the flow-through, the actual dollar impact will still depend on volume. Directionally, do you anticipate that transactional effects will lessen in raw materials? Based on your current bookings, should we expect a benefit from raw materials in the first half, or can you provide any insights on that? Yes, certainly. Starting with Q4, we anticipate a greater benefit from raw material costs compared to Q3, estimating around $65 million in savings due to lower feedstock prices. This does not include the impact of foreign exchange, which was approximately $40 million in Q3 and offset the benefits we gained from decreased commodity prices. In Q4, we expect to see some positive impact on our bottom line even after accounting for foreign exchange effects, leading to a more favorable variance outlook. Looking ahead to Q1, there is some uncertainty, as we have noticed increases in natural rubber and synthetic rubber prices. However, we should still experience some carryover advantages from Q4 into early next year. The overall outlook for the full year of 2021 hinges on whether the recent upticks in raw material prices persist and if other commodities follow suit. Consequently, the results for 2021 are less predictable. If raw material prices return to 2019 levels, we would face approximately a $100 million increase in raw material costs in 2021 compared to 2020. I hope that provides some clarity.

Operator, Operator

And it does appear we have no further questions, and this will conclude today's Goodyear Third Quarter 2020 Earnings Call. We'd like to thank everyone for participating. You can now disconnect and have a great weekend.