Goodyear Tire & Rubber Q4 2023 Earnings Call Transcript

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February 13, 2024

There are 6 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 4th Quarter 2023 Earnings Call. All lines have been placed on mute to prevent any background noise. Today on the call, we have Mark Seward, Goodyear's Chief Executive Officer and Christina Zamaro, Chief Financial Officer.

Operator

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. For more information on the most significant factors that could affect future results, please refer to the important disclosures section of Goodyear's 4th quarter 2023 investor letter and our filings with the SEC, which can be found on the website at investor. Goodyear.com, where a replay of this call will also be available. A reconciliation of the non GAAP financial measures that may be Discussed on today's call to the comparable GAAP measures is also included in the investor letter.

Operator

I will now turn the call over to Mark Stewart, CEO.

Speaker 1

Thank you, Nicky. Good morning, everybody, and thank you for joining Christine and I this morning for what is my first conference call as the Goodyear CEO. I'm just now over 2 weeks in my new role. I could not be more excited to join this iconic company. As you guys can imagine, I'm working diligently to understanding deep understanding of our business.

Speaker 1

I'm meeting with our people, visiting our factories, getting to know our customers, our products, our cost structures and doing that through operational deep dives. I'm looking forward to engaging with the investment community as well over the course of the next several months to gain your perspective as well. As many of you have read, my most recent role at Stellantis where I the company's North America operations and a key leader on the global executive team. I will bring a perspective from an automotive OEM, Automotive supplier background and the understanding of needing to lead through industry cyclicality and a clear focus on manufacturing, purchasing, engineering and logistics in order for us to achieve our financials. What this means is that in addition to spending time meeting our customers, understanding our products and product placement, you can expect me to focus heavily On Goodyear's manufacturing operations and distribution, understanding it on every level and working with the team to enhance capability and our cost effectiveness.

Speaker 1

As well I will focus on clean sheeting and ship cost activities, our SKU or product complexity as well as our go to market strategies. Like all other aspects of our business that focus will be centered purely around our good year forward in the coming months. I'm engaged in deep dives on each element of the program, the associated work stream, our amazing teams and committed to delivering the outcomes of the forward plan. I've been a part of leading transformational efforts and driving results in my past roles and bringing them to the bottom line through clear KPIs, the definition, the tracking and speed of execution. For Goodyear, for us, it's about maximizing our strength and our market position in North America.

Speaker 1

It's improving our cost structure as well as de risking our balance sheet. Ultimately, I'm confident Goodyear Forward will drive our company's next stage of profitable growth and success. It's clear and I fully support the plan. With that, by now you read our investor letter from yesterday evening. Christine and I would like to get right to your questions.

Speaker 1

So with that, Nikki, let's open the line.

Operator

Will take our first question from Rod Lache with Wolfe Research. Please go ahead.

Speaker 2

Good morning, everybody. Good to talk to you again, Mark. I understand, Mark, that you're just 2 weeks into working at Goodyear. But I wanted to give you a little bit more of an opportunity to talk about what you see as most important to create a durable Industrial turnaround and what do you think the timeline will be for you to kind of put your stamp on the plan?

Speaker 1

Thanks, Rod. I think what's clear is going back again to the very well Thought out Goodyear Forward plan, which was rolled out November 15, right? And that is my focus. It's about streamlining the portfolio. It's forced to get to sustainable operational margins of 10%, getting our net leverage to 2x, 2.5x by the end of 2025 And having that sustainable free cash flow that's going to increase our overall financial flexibility.

Speaker 1

So specifically with a lumpy 2 weeks and a day here, I'm right in the middle of this onboarding process. And again, I'm spending the majority of my time and plan to do so in the near term listening to our team here at Goodyear, both at headquarters, in the plants, Our retailers, our customers, meaning in retail OE and distribution. And it really is looking forward to you guys as well, Rod, in a different light from the past, right? But I am deep diving into the operations, Going through the functions, the financials to really thoroughly understand the business right now. And so I'm asking lots of questions, taking lots of notes, continuously reviewing that, especially in this 1st 30, 60, 90 days to challenge what I think in coming in To get it to gain the understanding from our team, also to get clarification of things that maybe we can put into some quick win categories in areas that learnings that I've had from the past as well.

Speaker 1

So again, it really is about trying to keep that fresh I look with a hard drive to execution and it is about speed of execution. It's about us delivering that Goodyear forward plan. A couple of the observations I had in the 1st couple of weeks, again, there's incredible momentum in the Goodyear forward plan, meeting with the teams, Just the as you look to the plans, well thought out, step by step, timing, ownership, execution. And so that is what I'm here to do is to help Christina and the rest of the team in terms of helping to lead and guide those initiatives across the finish line, Rod.

Speaker 2

Great. Thanks for that. And just on the business, maybe Christina you can help us with this. Cost performance is obviously starting to look a lot better now. And I presume that that's not really with much benefit from the Goodyear Forward Plan yet.

Speaker 2

So the but the question just Looking at the numbers just continues to be market share. And I know there's factors that affected it in every region, but even in isolation, Just Goodyear's year over year volume performance wasn't great. So I'm hoping you can maybe just talk to us a little bit about, Do you think that there's market stability for Goodyear? Or is that kind of a work in progress? In other words, you think that even beyond Goodyear Forward, more realignment is going to be needed, to the portfolio?

Speaker 3

Yes, sure, Rod. I'll take it by region and I'll start with the U. S. And our 4th quarter Replacement market share in the U. S.

Speaker 3

In 2022 was I'd have to characterize it, Rod, as just abnormally high and it approached 28%. And that was all driven by your reference to the volatility in imports that we saw over the course of 20 22 even at the tail end of 2021. When I look at our consumer replacement share in the U. S. In the Q4 of 2023, I'd say It's in line with year to date results and reflects a more normalized level of sell in share.

Speaker 3

And even with the significant change on a year over year basis, looking at the volume decline, what I'd also point out to you is that our sell out share, so what's getting bolted on to vehicles at retail was in line with the industry. And so that gets to your question around a level of stabilization. So we would expect a much more normalized market share going forward in the U. S, Certainly with margins in excess of 10%, we are in a good market position in terms of share. That doesn't mean that we won't make changes to the portfolio around the periphery.

Speaker 3

We said that we will do that as part of Goodyear Forward through SKU consolidation through our customer programs as we look to continue to grow our margins, but I don't think there's anything that significant there, Rod. I do feel that we've stabilized in the U. S. Compared to last year. Having said all that, the forward outlook for our mature markets, say, U.

Speaker 3

S. And Europe are both slow growth for 2024, something like up 1% to 2%, Feels tougher in the first half than in the second half, and we know we also have recent declines in raw material. So that there's that to put into the calculus as well. Now when we think about EMEA, the past headwind has been our sales volume performance really going back to 2019. We've been hurt by our position in OE and that's where the industry has certainly fallen pretty dramatically off its peak is also hurt in replacement where we do tend to be more profitable as you know.

Speaker 3

I think going forward, we see a little downside risk to OE. Our OE forecast globally for 2024 is something that feels a lot more forward or a lot more level. But when I think about the consumer replacement market share in Europe, what I'd say is we lost a lot of market share since 2019 to imported budget brands. And they have grown as a part of the industry about 15,000,000 units since 2019. And that's at the same time the industry shrunk 7,000,000 units.

Speaker 3

And so we've lost our fair share of that. And that's why we're directing the restructuring dollars as part of Goodyear Forward to the factories in EMEA. And that was all announced in the Q4.

Speaker 2

So just Christina with that, once the restructuring is done in Europe, you would expect that business to be more defendable or more stable at that level?

Speaker 3

Yes. I mean, I would say, We will we're addressing the cost competitiveness with the couple of factories out. I think there will be more work for us to do beyond 2025. I think we can get Europe to a high single digit SOI margin performance. I don't think we'll get there by the end of 2025.

Speaker 3

But we're beginning the work. We're laying the groundwork. We've announced the 2 factory closures. We've also announced a big SAG restructuring worth $100,000,000 and EMEA will also get their fair share of the purchasing and some of the corporate initiatives that we're running as part of Goodyear 4. So we do have a good path to earnings growth in the future in Europe.

Speaker 3

But I think it's going to take a little bit longer than this 2 year plan period that we're talking about as part of Goodyear Forward.

Speaker 2

Got you. Okay. Thank you.

Operator

Thank you. And our next question comes from James Picariello with The NP, Paribas. Please go ahead.

Speaker 4

Hi, good morning everyone and welcome aboard, Mark.

Speaker 5

Good morning.

Speaker 4

Just on the restructuring actions, the Goodyear Forward savings plan. So You're calling for $350,000,000 for the full year, dollars 50,000,000 in the Q1. Just curious how we should be thinking about the remainder of the year in terms of the cadence? And then more broadly, we think about divestitures and the need for the execution there to fund the heavy lift on the Goodyear Forward plan in 2025, right, to achieve that $1,000,000,000 plus exit rate, just Does all that need to take place this year for the timing to used to be maintained here in terms of the timeline?

Speaker 3

Hi, Jade. So on the Goodyear Forward program, dollars 350,000,000 On a full year basis, dollars 50,000,000 in the Q1, you can think about that as a big step up in Q2 And then a little bit of a leveling the rest of the year, but then what I would say is still ramping on through the Q4. As you can imagine, building into a run rate through the end of 2025 with all of these programs. When I look at the asset sales, I'd say The processes related to the sales of the 3 respective assets that we talked about on November 15 is underway and progressing as planned. So we'll be back to you when we have significant developments.

Speaker 3

I'll note that the outlook items within the investor letter don't contemplate in asset sales. So we'll have to come back to you and adjust our box once we close on any sale. But I would say for the 2024 plan, No requirement for additional funding this year from an asset sale in order to achieve our plan.

Speaker 4

And maybe this is a question we could answer offline. But if just for context, if No divestiture takes place this year, right? Just for context. What would be the additional restructuring Goodyear forward savings that would be in store for next year, just on the incremental year over year?

Speaker 3

Yes. So when we laid out the plan in November, James, we had said $350,000,000 in year 1 $750,000,000 in year

Speaker 4

Right. But what about under the hypothetical that The divestitures don't take place this year, again, purely hypothetical. Just what would be the incremental push to next year without that additional funding source for the additional actions. Does that make sense?

Speaker 3

So as of today, we've announced restructurings of about $750,000,000 as compared to that guidance of $1,100,000 that was in our November announcement. So we said $300,000,000 of that sits in 2024, dollars 350,000,000 sits in 2025, and that leaves the remaining stub in 2026.

Speaker 4

Got it. Much appreciated. And if I could just ask one more. Just on the full year, Kind of a follow-up to Rod's question. Just on a full year basis, would you be surprised if Goodyear's Unit volumes were down for the full year, right?

Speaker 4

You've got the minus 2% for the Q1. Just wondering if we could kind of establish that barometer in terms of just expectations, flat or up or down for the full year in terms of units? Thanks.

Speaker 3

Yes. I mean, maybe I'll take the opportunity, James, to just talk through a year over year SOI view. And that will get you at least sort of how I'm thinking about volume, but I'll go through all the drivers at once, if that makes sense. On a year over year basis, if you start with our 2023 of SOI of $968,000,000 Goodyear Forward obviously adds that $350,000,000 against base inflation of $215,000,000 Other costs, so these are costs Transportation and Energy on a full year basis should be about flat. I do see right now a tailwind of $75,000,000 in the first half that's driven by transportation rates, but we'll flip to headwinds in the back half of the year driven by increased insurance premiums as well as some transitional manufacturing inefficiencies related to our announced footprint actions inemia.

Speaker 3

Then separately, with Tupelo now at full production, we should get a $50,000,000 benefit in the second quarter on a year over year basis. And then raw materials, we've said, are $375,000,000 in the first half. First quarter price mix, down $130,000,000 And then we'll lap that about $60,000,000 drag that we've been carrying with us as part of the commercial truck decline Since the Q2 of last year, we'll lap that in Q2, so our price mix in Q2 should be better than Q1. We're also looking to build a couple of 1,000,000 units of inventory in the Americas as levels are lower than what we need for optimal service levels as a result of the tornado and our managing the business for cash last year, that should benefit second half unabsorbed by about $40,000,000 I know we've said working capital will be neither a source or a use for 2024, but we do have Some Goodyear forward work streams that will help us offset that particularly around procurement. Then it comes down to And this was your question, James.

Speaker 3

What it comes down to is what you want to assume on volume, price and mix for the rest of the year. I think if you look at Asia Pacific, we have been seeing steady growth of mid single to high single digit In our consumer replacement business, if you wanted to model that Q2 through Q4, I think that that would give you another $35,000,000 or so on volume and unabsorbed. And then you get to the mature markets where you have to balance the slower volume growth environment, call it up 1% or so against the declining raw material environment and what you think that means for our price mix.

Speaker 4

Super helpful. Thank you.

Operator

Thank you. We will move next with Emmanuel Brosner with Deutsche Bank, please go ahead.

Speaker 5

And congratulations, Mark. Thank you. Good morning. Good morning. So, Christina, I appreciate all the good color around the walk.

Speaker 5

I frankly didn't have a chance to put it all into my little calculator, it's sort of back in real time. So just trying to understand maybe In terms of bottom line versus your view in November, I think when you presented the plan to all of us, I think your high level view at that point was, look, we're Exiting 2023 with a 4th quarter margin of 7%, which you clearly over delivered on, so that's, call it like a At the time, you said $1,400,000,000 sort of like annualized SOI. And then on top of that, we can have net cost savings of about €100,000,000 so like the gross savings minus the inflation. And so you are sort of I think suggesting that like 1.5 I'm saying that it's potentially a reasonable target. What does this year look like now that you have all the other puts in place versus what you were describing a few months back?

Speaker 3

Sure, Emmanuel. So tracking back to our November 15 announcement, you're right. We said that the run rate of the business Exiting the back half of the year felt like about 1.4. If I look at it today and Adjusting for the Q1 seasonality, we do have a big step down in Q1 always because of We generally sell about 4,000,000 units less in Q1 than we do in Q4. We also drag in some inefficiencies from the holiday shutdowns into Q1.

Speaker 3

But what I would say on top of all that, we do have to absorb about $60,000,000 in OER mines that aren't in the run rate. So on a run rate basis, I would start knowing where we closed At the end of the Q4, I would start our run rate at $13.50 And then we know that we have The positive of Goodyear Forward of $350,000,000 We have a negative inflation of $135,000,000 And then outside of inflation, I articulated on the year over year walk, there's a $75,000,000 headwind in the second half, driven by higher insurance premiums and then some of these manufacturing inefficiencies related to our recently announced factory shutdowns in EMEA. So that's new news. And then against all of that, again, that $60,000,000 in OERMIs that we're going to absorb, That's weighted to the first half. It's even more weighted to Q1.

Speaker 3

And then That leaves your assumptions on how you want to build volume on top of that, Emmanuel. So hopefully that gives you some clarity around the run rate.

Speaker 5

Sorry, just to clarify, the changes versus sort of like the new news, I guess, versus The November framework is a little bit of a lower run rate, call it like $50,000,000 as an exit rate and then So like this $75,000,000 headwind in the second half and then any assumption on Price mix volume, is that it or did I leave something else?

Speaker 3

Well, yes, I mean, I would say OER mines, we knew back in November. And when I answered the question in May or November, we said we have to come back in February and lay out our guidance for the full year. And so OERMIs are certainly a piece of it. Insurance premiums are a headwind against the run rate. And then we have these transitional manufacturing costs as part of the recently announced closures in Europe.

Speaker 5

Okay. Thank you. And then on the cash side, so the CapEx was guided to, I guess quite a bit higher than it's been recently, I think $1,200,000,000 to $1,300,000,000 I don't remember it being sort of like a piece of the And if you maybe could elaborate on what this is sort of related to? And then conversely, I think the restructuring cash The initial plan was going to be $600,000,000 outlay in 2024, now it's $300,000,000 What does this relate to? Are there incremental efficiency or timing of spend?

Speaker 5

And does that impact the timing of saving?

Speaker 3

Yes, sure. So I'll start on the CapEx question and our guidance implies a $200,000,000 increase at the mid point to support new programs. We've given a range here. What I would say is, if you assume a weaker environment over the course of 2024, we'll find ourselves at the lower end of that range. And at the higher end is in a more constructive volume environment and that's typically how we've managed our CapEx spend historically.

Speaker 3

The step up is really driven by 2 different new programs in the Americas to drive mix up, one is a factory modernization, one is a factory expansion. And the modernization is going to convert about 9,000,000 units from LVA to HVA and that will be at its annualized run rate by the end of 2025. And then another I mentioned an expansion that's going to add, call it, dollars 2,500,000 of HVAC for us an annualized run rate by the end of 2026, so getting the full year benefit of that in 2027. The second question on restructuring, the guidance as part of the November 15 announcement was $1,100,000,000 We didn't phase it for you. What we've announced up until now is $750,000,000 And just based on the timing of factory closures that we've outlined, 300 of that falls in 2024, 350 of that falls in 2025 and the remainder in 2026.

Speaker 3

So it does feel, like timing and manual versus maybe what, you had written down to start.

Speaker 5

Okay. And you're talking about the spending here, the cadence you just gave?

Speaker 3

I'm sorry, Emmanuel, I didn't quite hear you.

Speaker 5

The $300,000,000 $350,000,000 and then the remainder, this is the timing of this timing?

Speaker 3

That's the timing of the $750,000,000 of announced restructurings.

Operator

Thank you. And this will 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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