Goodyear Tire & Rubber Q1 2023 Earnings Call Transcript

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May 5, 2023

There are 9 speakers on the call.

Operator

Good morning. My name is Nikki, and I will be your conference operator today. At this time, I would like to welcome everyone to Goodyear's First Quarter 2023 Earnings Call. All lines have been placed on mute to prevent any background noise. After some opening remarks, there will be a question and answer session.

Operator

To withdraw your questions. Today on the call, we have Rich Kramer, Goodyear's Chairman and Chief Executive Officer and Cristina Samaro, Chief Financial Officer. During this call, Goodyear will refer to forward looking statements and non GAAP financial measures. Forward looking statements involve risks, assumptions and uncertainties that could cause actual results to differ materially from those forward looking statements. Call.

Operator

For more information on the most significant factors that could affect future results, please refer to the important disclosures section of Goodyear's Q1 2023 investor letter and their filings with the SEC, which can be found on their website at investor. Goodyear.com, quarter replay of this call will also be available. A reconciliation of the non GAAP financial measures that may be discussed on today's call on the comparable GAAP measures is also included in the investor letter. I will now turn the call over to Rich Kramer, Chairman and CEO.

Speaker 1

Call. Great. Thanks, Nikki. Good morning, everyone, and thanks for joining us. We released our Q1 investor letter after the market Closed Yesterday.

Speaker 1

You can find a copy of that on our Investor Relations website along with an update on the Cooper Tire integration, which we hope you'll find valuable. Call. As we've done the last couple of quarters with this newer format, Christina and I will devote today's time to your questions. Call. I'll just say while industry volumes have been down early this year as we expected, stabilizing industry demand in the back half of this year along with the benefits of a decrease in raw material costs should improve margins as we move through the year.

Speaker 1

We look forward to the discussion today. So now let's open the line for questions.

Operator

And we will take our first question from Brian Brinkman with JPMorgan. Please go ahead.

Speaker 2

Call. Hi, thanks. Just wanted to follow-up on some of the comments in the shareholder letter about the softer industry volume trend. We've been noting the USTMA numbers in the Americas too in the U. S.

Speaker 2

That is. And I understand that that's wholesale number. So I was looking to get a little bit more color from you because you own retail stores and you monitor the industry closely, what the retail demand Might be Doing and I saw some of the comments in the Americas outlook section too about channel destocking and Just curious what might be the driver of that and if that might suggest the retail demand might be better, but also kind of might want to ask around the extent to which the softer volume trends, including because the miles driven you note is up year to date and slightly ahead of the 2019 levels. The extent to which maybe the bad news on the volume side might be related to the good news on the pricing side with potentially demand disruption and sort of what you're hearing about the customer reaction to these price hikes, which of course we're encouraged to see.

Speaker 1

Call. Yes. So Ryan, look, I'll start and I think you're right. I mean, as we started the year and I'll say again as we expected, we had a weaker industry coming off of a really a tough comp from Q1 in 2022. Remember, we had a lot of stocking going on back then, a really strong industry and that was sort of again that strength we saw coming out of COVID.

Speaker 1

So we saw a weaker industry coming off of that. We saw destocking as well, as you mentioned. The dealers kind of took a step back and showed in our results, we also took production cuts in the Q4 and again we're doing some in the Q1 just representative of that. And that's some of the volume decrease that we saw. But just as you said and I said in my opening remarks, I think That as we anticipated, volumes will continue to get better quarter over quarter as we get through 2023.

Speaker 1

And the trends that we see frankly both in the U. S. And Europe. VMT in the U. S.

Speaker 1

Is up as you said about 4%, Europe is actually up about 13% as well. So we actually see people getting out that trend of people wanting to get out and travel, that's what we see as well. And I think that points toward A situation where volumes and demand will continue to improve. The consumer, as we see it, It's still in pretty good shape, so that speaks to good demand for the balance of the year, again coming out of a weaker Q1. So that's a positive as well.

Speaker 1

And as we think about pricing, remember, we lapped about a 12% price increase from Q1 last year. And our if we just take a step back, I think we're up over 2 years about 30% on revenue per tire. So Yes, I feel really good what the teams have done to capture those incremental raw material costs out there. I think the benefit we'll also see are those decreasing raw material costs starting in Q2 and even at a faster pace as we get to the back half of the year as well as lower some of those inflationary costs that we've seen as well. So a good demand environment, a pretty good pricing environment and a decreasing cost input environment as we get through the back half of the year.

Speaker 1

So I think all that bodes well in terms of what we said last quarter and how we see the year filling out.

Speaker 2

Okay, great. Thanks. And then lastly from me, just looking to get more color on the Cooper integration. I followed hypertext link in the shareholder letter to another PDF with even more details on the integration, which is excellent. And I understand that You increased the synergies once already, and now you're saying that the cost synergies will be fully achieved 50% more than originally announced by just next quarter.

Speaker 2

Just to follow-up on that though, there's a lot in here about the cost savings. I think that what was left Q1. On quantified at the time of the announcement and the closure was these further out potential revenue synergies, go to markets, benefits, etcetera. And just curious if maybe it's a combined company now and that's how it's going to operate going forward or if you are in a position now to maybe some more numbers around that or talk about the timeframe which you expect to benefit from the revenue synergies.

Speaker 1

Well, and I'll start, Christina, you may want to jump in here as well. First of all, I would say that the go to market strategy of both the Goodyear brand or the Goodyear Family Brands plus Cooper continues to be on the path that we expected. No negatives from that going forward. We have not put any numbers around that in terms of quantifying what that would look like. But I would tell you, as we look at the segments, particularly around light truck, which is one of The biggest attributes that we got when we did the acquisition, I would tell you our share performance across all segments of the continues to be very strong and continues to be very much in line with what we expected when we did the transaction.

Speaker 1

Additionally, as we look at some of the channels that were new to us again or channels that we may have exited that Cooper Tire was still in, Those businesses are still performing very well for us, particularly as we see some movement from Tier 1 down to Tier 2, Tier 3 as the economy Has softened a bit, so that actually has worked out very well for us as well. So we have not quantified that, Ryan, but I will tell you there's No negative there that I would highlight. In fact, I would say it's going as planned and even better in certain segments.

Speaker 3

Okay, great. Quarter. Just

Speaker 4

to say, within the presentation, you can see in our upgraded outlook, we had a bar for initial manufacturing and sales opportunities. And a lot of that has been about broadening availability of Cooper product with Goodyear Align Distributors. We also have introduced new sales incentives programs for the combined portfolio for our dealers and distributors here in the U. S. And all of that is contemplated in this This upgraded $250,000,000 outlook, which we expect to deliver by the end of the second quarter and that's all really good.

Speaker 4

The other thing I would just add on the Cooper integration overall is that we're feeling really good about The delivery on the synergies, if I we took on Cooper in the middle of 2021, just after the economies began to reopen in a more material way after COVID. And so I can't comp out versus 2020. But if I look at 2019 as an example, our Americas business was at 7% SOI margin. We delivered $550,000,000 in earnings. And then Cooper in 2019 was about $180,000,000 in OI.

Speaker 4

And so taken together and move through the 2 volatile years of 2020 2021, you would have assumed our combined businesses would have made something like 730 $5,000,000 or so or $750,000,000 But in fact, in 2022, we earned $1,100,000,000 So that's the benefit of synergies in the Americas in particular also some of our own self help, we did close the factory during COVID in Gadsden, Alabama and really good execution by the Americas team on over delivering on price versus cost in 2022 as well. Feeling good about the momentum in the Americas business.

Speaker 2

Thank you.

Speaker 4

Call. Hi, Raj. Good morning.

Speaker 5

I wanted to ask you a little bit about pricing first. You mentioned Some price increases that were taken in Europe earlier this year. Can you just give us a sense of how pricing would look For you, in the back half of this year, year over year, I'm referring to, if Things are to be frozen at current levels. I know there's some complexity here because you do have OEM index agreements. Call.

Speaker 5

And also related to pricing, do you think that you've kind of kept pace with your peers question and pricing in North America. We've seen a few, at least public announcements about some price increases from others, but we haven't seen anything

Speaker 1

So Rod, I'll start maybe on the last question. Again, I'm actually I'll say it again. I mean, I'm actually very pleased with the way the teams have gone to market on recovering Not only the incremental raw material costs, but the incremental inflation that we've seen over the past 2 years. And again, that's Over the last 2 years, we're up about 30% in revenue per tire and the teams were very on point, let's say, front footed to go out get those price increases that we needed to cover those raw material costs. You're right, we have announced price increases in Europe and other countries.

Speaker 1

So we're certainly still top of mind on that. As we came into this quarter in the Americas, remember we did lap that 12% price increase price increases on SKU by SKU basis to make sure that we're recovering the cost that we need to going forward. You did see and this was I think the Q1 in a while where North America's price mix didn't offset raws and the incremental inflation. We actually had been doing that. We do see getting back to covering that again in Q2 and certainly for the balance of the year as those costs come down.

Speaker 1

So I think we feel pretty good where we are from a pricing standpoint right now. Christine, I don't know if you want to add to that.

Speaker 4

Seat. Yes. No, maybe Rod, I'll just help a little bit with the modeling. So in Q2, we'll have a 7% price increase in Europe and that's in consumer replacement. There's also a 14% increase from last year in Q2 quarter.

Speaker 4

In European Commercial, there's a couple in Q3 from the U. S, up to 10% last July call on consumer replacement, 6% on commercial replacement. And then by the time we get to Q4, The only price increase we would have installed at least in the major markets because we're always doing things related to devaluations in some of our emerging economies. But by Q4, the only price increase in flight would be this most recent call about a 4.5% increase at the beginning of the year in Europe.

Speaker 5

Okay. So it sounds like pricing would still be net net positive As you look out to the back half of the year, even as you get some of those tailwinds from commodities, question. I wanted to switch gears to costs. Goodyear used to achieve just routine kind of benefits from productivity. So there'd be an inflation line that we would see.

Speaker 5

And then there'd be things that you do that mitigated that inflation and often mitigated it completely. And I understand the factors that made that impossible recently that kind of led to this excess inflation, you had a lot of employee turnover, energy, freight and all that. Call. I'm wondering if you have visibility on a point in time when that's sort of in the rearview mirror and you can kind of start getting back to productivity that actually means that Goodyear is absorbing less than just kind of CPI inflation.

Speaker 4

Call. Yes, sure. So Raj, I'll give it a start. The inflation call. In our cost base, and this would be CPI based for 2023, it's going to feel something close to $400,000,000 and that's a step down from last year where it was about $500,000,000 But you're right, we've seen this excess inflation, mostly driven by transportation, energy and to some extent wages.

Speaker 4

And as I look forward Into the back half of the year. I start with our year over year guide for inflation and quarter. Excess inflation in Q2, it's another $180,000,000 That's a lot driven by energy in the excess basket. I would see a big step down in Q3 on the excess part of the equation. So something that feels better by $40,000,000 to $50,000,000 so $180,000,000 dropping on a year over year basis.

Speaker 4

And then by the Q4 dropping again another $40,000,000 to $50,000,000 assuming this is all assuming current energy rates and utility rates. What that would mean is that by the Q4, we're essentially neutral on excess inflation. So we've lapped a lot of the very high comparables from last year. We are beginning to add productivity back into the footprint through plant optimization. So that should Continue to benefit us as we at the end of the year and as we move into next year as well.

Speaker 5

Great. Thank you.

Operator

Our next question comes from James Picariello with BNP Paribas. Please go ahead.

Speaker 3

Call. Hi, good morning everyone. Good morning, James. Hi. So you're taking down production in the Q2 by 3,000,000 units, right, calling out the overhead absorption headwind that will hit you in the 3rd quarter.

Speaker 3

Call. This is in addition to the inherent loss production at the Cooper Tupelo plant. I just want to confirm that, right, because that will be out of commission for at least 2 months. So just a few questions on this. So where do you suspect your channel inventory levels could be at the end of the second quarter?

Speaker 3

And I know Channel inventories in the Americas are now flat year over year versus the prior quarter, up 10%. Can you also just speak to the sequential trend in the channel inventory levels as well. Thanks.

Speaker 4

Yes. So James, I'll happily Happily respond to that. Our expectation, what we've laid out for the Americas, and consumer replacement overall is feeling like it's down 5 percent in Q2. That's in the face of a VMT that's feeling pretty okay. So the expectation is that we do continue to see destocking in the Americas and in Europe over the course of Q2.

Speaker 4

So expecting channel inventory levels to certainly be lower quarter on a year over year basis as we get to the end of Q2.

Speaker 3

And Have channel inventories come down from 4Q to the end of this Q1?

Speaker 4

Yes. And so we do disclose for call. The Americas and EMEA, we do disclose the change in channel inventories call from year end and on a year over year basis. And so those are included in each of the segment results within the investor letter. And so in Americas, when you look at our highlights for sell out activity.

Speaker 4

We talk about where inventories were and they're in line quarter on a year over year basis, and that compares with up 10% in the Americas at the end of last year. In EMEA, similarly seeing destocking at the end of the year, we said inventories were up 30% and that was all driven by a very weak sell out in winter and currently inventory is up in Europe by about 14%. So hopefully that helps.

Speaker 3

Call. Yes, very helpful. Thank you. And then just to follow on Rod's question tied to pricing. Given the trend for raw materials to begin to deflate right in the back half call.

Speaker 3

And a competitor of yours recently kind of conceded that Pricing could be a lever to pull to help stimulate demand that they're going to be more intensely focused on optimized mix. Call. Anecdotally, is it possible that the dealers, the dealer channel is waiting for That should a drop on price to begin restocking now that channel inventories are in line year over year. Call. You're still taking down production at a good clip to get things right sized.

Speaker 3

Yes, just your high level thoughts on the pricing and the topics here. Thanks.

Speaker 1

Yes, James, I mean, I'll jump in and I'll say, you have to keep in mind that the industry Still is short on the highest end tires, higher performing tires, light truck tires, large rim diameter, Tires for the F-150s and the like in the replacement market. So that still is a really good dynamic. And also helping that dynamic is always starting to come back and remember that takes some of our best tires that we make the best capacity out of everybody's factory. So that supply demand dynamics still works in our favor. And the one thing to also keep in mind.

Speaker 1

I mean, I look back and let's say, over about the last 7 quarters, we've seen our raw materials Go up just under $3,000,000,000 Now as we see some of the Cost increases abating a little bit. There are only a small portion of that, call it, under $3,000,000,000 of raw material pieces that are out there. So we have lots of costs that we have to recover in terms of capturing the value that we're putting in the marketplace. I mean, I think if you look at our numbers, if you look at the investor letter, you'll see that we expect tailwind from reduced raw materials in the Q4, but you'll see it's round about $300,000,000 I think 400, excuse me, is 4, but you see that against that call it 3,000,000,000 just under $3,000,000,000 of cost increases over the last 7 quarters or what have you. So there's lots of reasons that we have call to make sure we're recovering what we put in the marketplace.

Speaker 1

And I think we're not alone in that.

Speaker 3

Got it. That's super helpful. Thank you, guys.

Operator

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

Speaker 6

Call. Thank you. Just wanted to ask a question on the decision to make production realignments for Q2. Is that something you think others in the industry are doing? Curious of What your competitive intelligence is telling you there?

Speaker 6

And just or we can maybe be in a situation where you guys are acting rationally and maybe the others aren't. So I was just curious your thoughts there.

Speaker 1

Yes. I'm not sure that we can speak to our competitors. I would tell you that the decisions that we make are exactly as you said, they're question. With our focus on working capital, our focus on cash flow, our focus on making sure that we're not putting Too many tires in inventory that could impact negatively that supply demand equation I just spoke to as well. So I can't speak to them, but I know what we do to manage our business and we feel pretty confident in doing that.

Speaker 6

Quarter. Understood. And just want to ask a big picture question just on the OE business. Frankly, I thought that business did a little bit better than we had expected this quarter. So I was just kind of curious your expectations on OE maybe by geography.

Speaker 6

As we start to think about 2024, do you see yourself in a share gain position and maybe some of the pluses and minuses we could start thinking about for that business.

Speaker 1

Call. Yes, I'll start and I know Christina will jump in as well. I think we've probably I'll speak for myself personally having been around for a while. I feel better about our OE portfolio now than I have in a long time. And we've always been very strong in OE, particularly in solving our OE customers' problems around making sure the tires deliver what they need to deliver for each of their fitments.

Speaker 1

I think if you look at our mix right now, we're trending much higher toward EV fitments across all our regions and particularly in China, where the Easy business is growing faster than probably any other region in the world. And our sort of customer profile there has changed from a lot of the transplants to a number of the local domestic producers there as well. Remember, in that business, we have higher revenue as well as higher margin per tire on the EV fitments that we're getting. So all that bodes well. I think as you look at where OE production has been, again, you have these numbers as well.

Speaker 1

It's going To go up, which also bodes well for us. So increasing volumes with a better margin profile. And on top of that, that It's maybe less tangible on the call, but the teams are doing, I would say, as good as they've ever done relative to Doing things like reduced iterations to get those tires to the OEs faster from a development basis. I can tell you we've had one where we had actually our first virtual submission, where we went a virtual submission to 1 production and that's it. If you think about that spreading that over the over an OE portfolio over time, that's a significant cost reduction as well.

Speaker 1

So using technology, using our simulator and working with the OEMs as partners, I think is something that is a bit of even a new frontier to a process It works well that will both get us new business, but also do it at a better cost and ideally higher price and higher margin as well. So I feel really good about where we're headed with the OE portfolio. I'll just end by saying, we are always focus and expect something that we even target ourselves internally. We're always focused on making sure We're getting an improved margin profile for each of the tires that we're selling to OE because it's certainly a competitive business. Quarter.

Speaker 4

Yes, maybe I'll jump in here, John, just to say that the market share gains are going to follow Rich's comments where you're going to see good strong growth in our overall portfolio driven by Asia Pacific and Europe because that's where all the growth is in EV right now. Americas is winning their fair share of EV. It's just not as strong yet here and particularly in the U. S. But just question.

Speaker 4

To underline some of Rich's comments here, I mean, in this quarter, the revenue per tire quarter. On our OE wins for EV was more than double the revenue on ICE engine fitments that we won. And so that's all go forward business, but And gross margin was the same, so double, at least for this quarter. And that's been a trend we've been talking about is We've been rebuilding our OE portfolio more towards high value electric vehicle fitments.

Speaker 6

Great. Thank you.

Operator

And we will take our next question from Emmanuel Rosner with Deutsche Bank. Please go ahead.

Speaker 7

Thank you very much. Good morning.

Speaker 3

Good morning. Good morning, Emmanuel. Question.

Speaker 7

So I think in previous quarters, you've kindly shared with us maybe some sort of scenario thinking around full year free cash flow under certain assumptions. I was hoping you could maybe update this for us in light of Sort of like your positive outlook for the rest of the year.

Speaker 4

Yes, sure. Emmanuel, I'll take that. And I think question. We do provide a lot of detail on the puts and takes for our full year free cash flow as part of the investor letter. And the only real change is a better raw material setup in the back half question.

Speaker 4

In our guidance as well as the better overall non raw material costs as well. So that's a part of what we're seeing for the back half of the year. But what we talked about in the past and I think this is quarter. We're still pretty much unchanged from our last call, although I'd say we're more confident just given that the costs have been coming down. If you were to take an assumption that our earnings were flat on a year over year basis at about $1,100,000,000 and then used all of the drivers that we do share with you as part of the letter, you should get to a strong free cash flow of about $400,000,000 and that's call just driven by the change in working capital from last year to this year.

Speaker 4

And so depending on how you want to lay out the assumptions for earnings quarter. For the year, even if you just assumed flat, you should get to a very strong free cash flow development. And I don't think that our goal is Or to say that we're targeting flat earnings. Of course, we want to grow. We're expecting more synergies.

Speaker 4

For the Cooper transaction this year, you'll see our even our corporate other forecast is down on a year over year basis. But having said all that, that's how I'd have you think about it.

Speaker 7

That's super helpful. So the way you characterize it as the better materials outlook and sort of like moderation in inflation just gives you more Generally more confidence in this direction.

Speaker 4

Yes.

Speaker 7

Okay. And I guess just honing in actually on this moderation in inflation. I guess, which as we think about drivers of It will improve profitability in the back half and in particular, your comments are approaching maybe the 8% sort of direct SOI margin. Which of these nonmaterial costs do you view as important drivers? And do you see as moderating?

Speaker 4

Question. Yes, sure, Emmanuel. So I talked with Rod a little bit earlier about how we're seeing the year over year development of inflation in the back half of the year and sort of by the end of the year, sort of just showing the CPI based inflation in our P and L and sort of lapping and or offsetting increases in excess inflation. So a big part of this is Our taking cost back out through productivity in our factories, that's been a big initiative for us this year. But also we're seeing trends in freight transportation moderating and improving, also seeing trends in energy improving in Europe.

Speaker 4

We know where by the 3rd Q4 of last year, we saw some really high spikes in energy. And so Seeing all of that pull through as well as some of our own initiatives in our factories.

Speaker 7

Okay, great. Thank you very much.

Speaker 3

Call. Thanks, Emmanuel.

Operator

And we will take our last question from Anindya Das with Nomura. Please go ahead.

Speaker 8

Call. Hi, good morning. Thank you for taking my question. So you mentioned that you expect replacement demand to recover through the rest of the year. Call.

Speaker 8

Now is that recovery do you think would be similarly paced across all regions? Or would you expect the recovery in some regions such as North America running ahead of the other regions such as Asia or Europe.

Speaker 4

I would say, generally speaking a very similar trend in the U. S. And Europe, and this is because we're cycling through very tough comparables. If you think back call. Through the recovery after the pandemic, both the U.

Speaker 4

S, Europe was on a little bit of a leg, but quarter. Even Europe saw really robust demand for tires as supply chains got tight and there was a clamoring not just to fulfill demand, but also to restock inventory. So we're cycling through those comparables in our mature markets. So I'd expect very similar trends there. And then outside of that Asia Pacific should continue to grow through the remainder of the year.

Speaker 8

Okay. That's helpful. So just to follow-up on that. In terms of the quarterly cadence, Would you say that the Q2 could possibly mark the low point for the year considering that on a year over year impact from raw material headwinds Should continue to ease as the year progresses and it should become tailwinds in the second half, plus you have the full Cooper Tire synergies. Question.

Speaker 8

Would that be the right way to look at it?

Speaker 4

Well, so I would say that the Q1, this quarter when we're looking at SOI is going to be the low point. Generally speaking, it always is because it's seasonally a low point for our sell in. Following the holidays, Q2, we generally see a little bit more of a volume pickup and a better dynamic. And as I think about sequentially Q1 to Q2, we're going to see a better raw material development in Q2 versus Q1. I think we will, generally speaking, see call.

Speaker 4

A little bit better volumes. And so I think that we should expect Q1 to be the low point for 2023.

Speaker 8

Great. Thanks.

Speaker 3

Thank you.

Operator

Call. Thank you. And this does conclude our Q and A session as well as our conference call. Thank you all for your participation and you may disconnect at any time.

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Earnings Conference Call
Goodyear Tire & Rubber Q1 2023
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