Q4 2021 Goodyear Tire & Rubber Co Earnings Call
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Good morning, My name is Catherine and I will be your conference operator today at this time I would like to welcome everyone to the Goodyear fourth quarter 2021 earnings calls.
All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question and answer session.
He would like to ask a question. During this time simply press star one on your telephone keypad. If you would like to withdraw your question press the pound key.
I will now hand, the program over to Christian <unk> Senior Director Investor Relations.
Thank you Catherine and thank you everyone for joining us for Goodyear's fourth quarter 2021 earnings call.
I'm joined here today by Rich Kramer, Chairman and Chief Executive Officer.
Darren Wells Executive Vice President and Chief Financial Officer.
Hey, Kristina Tomorrow, Vice President Finance and Treasurer.
The supporting presentation for today's call can be found on our website at Investor Goodyear Dot Com and.
And a replay of this call will be available later today.
Replay instructions were included in our earnings release issued earlier this morning.
Yeah.
If I could now draw your attention to the Safe Harbor statement on slide two I would like to remind participants on today's call that our presentation includes some forward looking statements about goodyear's future performance.
Actual results could differ materially from those suggested by our comments today.
The most significant factors that could affect future results are outlined in <unk> 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 on the call are reconciled to the U S. GAAP equivalent as part of the appendix to the slide presentation.
And with that I will now turn the call over to rich great. Good morning, and thank you for joining today's call before we begin I'd like to take a moment to welcome Kristian <unk> as our new senior director of Investor Relations accretion as a longtime member of both our finance and North American business teams and I.
No. He is already familiar to a number of you welcome Christian great to have you back on the team.
I also wanted to mention that we're including Goodyear's updated strategy roadmap in today's slide presentation, well not something that we're going to have time to go through in detail today, we're sharing it to point out that it includes some important updates to reflect the inclusion of Cooper tire and the increased importance, we're putting on both sustainability.
<unk> and mobility.
As you saw in our press release issued earlier today, we continue to have solid momentum in our business our fourth quarter sales increased nearly 40% to just over $5 billion, reflecting both the addition of Cooper tire and the benefit of higher selling prices, particularly in the U S.
This marks our highest fourth quarter revenue in nearly 10 years.
This robust sales performance helps us overcome significant cost inflation and deliver strong earnings growth, we generated $398 million of merger adjusted segment operating income during the quarter significantly higher than last year and over 60% higher than fourth quarter 2019.
These were simply excellent results for our teams who stuck to our strategy in an environment of rising costs.
Like last quarter, our consumer business outperformed the industry globally, we're benefiting from new product launches actions to strengthen distribution and recent OE fitment wins, including robust growth in EV tire deliveries and all we added more than one half of a percentage point of organic.
Super market share during the quarter. This.
This performance is a great example of all our components of our connected business model at work.
At the same time, our commercial business is also performing well, reflecting strong fundamentals in the trucking industry, our best in class products and the strength of our fleet solutions offering.
We gained nearly one percentage point of market share since the fourth quarter of 2019 by doing our part to keep commercial vehicles road ready and operating efficiently.
Mobility solutions give us tremendous advantage in today's rising cost environment.
To provide some perspective on costs, our raw materials increase more than $300 million in the quarter or 31% a significant acceleration from earlier in the year.
As with most companies inflation is impacting more than just our raw materials. We are seeing these impacts throughout our cost base to.
To address cost pressures and supply chain challenges. We remained agile during 2021, we've implemented a series of price increases were also adding new suppliers substituting materials when possible and optimizing distribution costs.
I'm really pleased with how our team has been aggressively responding in this environment looking for opportunities to minimize the impact of inflation, while increase increasing the certainty of our supply.
Looking ahead, we expect cost pressures to persist over the next several quarters as you would expect we remain focused on executing strategies to capture value and drive efficiencies, while prudently managing our costs.
At its core our connected business model is about winning with our brands in the marketplace is where we create value for our customers and consumers and in turn enables us to differentiate our products and services.
As we executed on our strategies in 2021, we also expanded our scope as you know in June of last year, we took an important strategic step to strengthen the breadth of our product portfolio enhance our value proposition with the acquisition of Cooper tire.
We continue to be pleased with the transaction and the opportunities we have going forward as a combined company.
During the fourth quarter Cooper contributed $156 million to merger adjusted segment operating income and we continue to make good progress toward our synergy targets.
Moreover, I am confident that with the combination we have positioned our business to deliver strong organic sales and earnings growth over the long term.
In summary, our business is performing well in an environment marked by volatility we are growing our market share while capturing more value in the marketplace.
We're making progress with our integration, while maintaining our focus on customers and consumers.
And you can see these elements of the successes in each of our Sbu's.
In the Americas, our U S consumer replacement business grew market share for the fourth consecutive quarter.
Our premium volume or 17 inch and larger rim size tires increased 9% despite supply constraints, including low inventory levels.
While we are winning in the market today, we're also readying our business for tomorrow.
And we launched our first North America replacement tire tuned specifically for Ev's during the quarter, the Goodyear Electric drive GT, which incorporates our proprietary sound comfort technology is an ultra high performance all season tire designed to deliver long lasting tread wear and acquired right.
We're excited to offer today's high performance easy owners. This best in class fit for purpose tire.
We're also working hard to keep our Cooper product line current.
Now more than ever today's value minded light truck and SUV owners, one functional performance and rugged traffic patterns at attractive prices.
With industry, leading mid tier products, such as the discover rugged check all terrain tire Cooper is meeting consumers needs and profitably growing share.
Okay.
Turning to our U S commercial business with diesel and driver cost surging, we continued to see strong demand from fleets looking to leverage our premium tires and mobility solutions to improve their operational costs.
Cost per mile is as critical today as it ever has been and this feeds into our strengths in technology in this environment. Our commercial replacement volume was well ahead of pre pandemic levels and as we discussed in the past if not for supply constraints, our commercial results could have been.
And even stronger.
As we look outside the U S. Our business in Latin America is performing well in a challenging environment. The replacement market continues to recover with both consumer and commercial industries approaching pre pandemic levels.
Throughout last year, our Latin American team has consistently demonstrated a commitment to our connected business model by expanding aligned distribution driving the value of our brand and successfully executing our product roadmap.
We've also remained intensely focused on meeting the needs of our customers, enabling them to continue winning in the marketplace through best in class products and services.
I couldnt be more pleased with the performance of our Latin American business in 2021, which is a testament to the experience of our leadership team and their ability to successfully navigate through volatility while remaining focused on executing our strategy and delivering value for our customers.
Yeah.
Moving on to EMEA, we're seeing continued share recovery in our consumer business, reflecting the impact of last year's actions to strengthen distribution.
We're also benefiting in the mid tier and the economy segments from the current impact of fewer imports into the region. These.
These dynamics are particularly evident in the EU, where we're winning in both the premium and value segments. Overall, we grew our consumer replacement volume, 22% organically or about eight percentage points faster than the industry.
By having the right tires for the right season, we're gaining market share in both summer and winter tire categories, a testament to the strength and breadth of our product portfolio.
Turning to Emea's commercial business, we continue to benefit from our innovations to support our customer transition to a greener future without adding complexity.
By developing fuel efficient products, such as the fuel Max endurance and easy to use solutions that meet customers' sustainability and efficiency needs, we've been able to grow our volume nearly 10% since 2019.
Our suite of products and services for fleets was designed to capitalize on these growing trends with 80% of fleet is expected to have sustainability kpis in place by year end, our Goodyear total mobility offering will afford us significant competitive advantage in the years ahead.
In our Asia Pacific business, we experienced better industry demand than in the third quarter, reflecting less COVID-19 related disruptions in China and several ASEAN markets again, the improving backdrop of our legacy Asia Pacific business delivered its highest consumer replacement volume on <unk>.
Kurt.
With Lockdowns in mobility restrictions easing OE demand was more consistent but it remains below pre pandemic levels due to the continued impact of semiconductor shortages.
In this environment, we grew our consumer OE volume, 6% organically compared to the prior year as the benefit of new fitments more than offset the impact of reduced auto production.
In our consumer replacement business, we dramatically outpace the industry again with organic volume, increasing 4% and a relatively flat market.
We're benefiting from the continued distribution expansion in India, particularly in rural areas, which resulted in consumer replacement volume growth of nearly 40% in the quarter.
In China, the digital tools, we're rolling out make it easier for consumers and customers to choose Goodyear.
For example, our App based direct to retail distribution model has been instrumental in expanding dealers access to our product portfolio and driving share gains.
We plan to complete the rollout in that additional functionality this year further strengthening our competitive position.
Yes.
While we've been focused on execution in today's volatile environment. Our goals include advancing our technology and capabilities as well. This work includes various forms of information sharing co development and testing through partnerships with traditional and emerging mobility companies alike.
You can see we're continually innovating and collaborating to drive the tire industry's evolution to the next level of performance.
So with this as our strategy our entire intelligence team launched a new test vehicle during the quarter equipped with proprietary algorithms and tighter sensors powered by Goodyear sideline.
We're harnessing the power of rapidly prototyping hardware and vehicle data to enhance our ability to analyze tire and road conditions in real time.
Mastering these challenges will enable next generational vehicle control systems and advanced fleet monitoring solutions. This new capability when coupled with our industry, leading tire technology will be the core differentiator over the long term.
While staying on the cutting edge of tire intelligence will benefit consumers and commercial customers were also focused on building a more sustainable business. So Goodyear remains the worlds preferred tire brands.
To this end, we announced our goal to achieve net zero greenhouse gas emissions by 2050 with minimal reliance on offsets.
In support of this ambition, we established new intermediate term emissions reduction targets aligned with <unk> standards.
We understand the importance of reducing our carbon footprint and our new goals demonstrate our pledge to combat climate change.
As an industry leader, we're also committed to using more sustainable materials in our tires to help protect our planet for future generations. As a result, we are working diligently to develop a 100% sustainable material tired by the end of the decade and the focus is paying off in January less than two years.
After setting the goal our scientists and engineers constructed a demonstration tire with 70% sustainable material content.
13th featured ingredients are used during construction, including technical grade polyester sourced from recycled plastic bottles.
Overbuilding, the scientific and engineering capabilities to work with these new materials. We're also developing new supply chain to support the transition over time.
We're off to a fantastic start and I look forward to updating you on our progress in the future.
As I reflect on 2021, our business is performing exceptionally well uncertainty around inflationary cost pressures and industry demand remains but we are well positioned to deal with these challenges.
U S inflation gauges or a 40 year highs, reflecting the impact of higher labor transportation energy and commodities, we're committed to taking the steps necessary to counter the impact of these higher costs.
The supply of semiconductors is improving but auto production remains well below consumer demand. While this dynamic creates uncertainty for our OE volume in the near term or are robust OE pipeline positions us for continued share gains regardless of the level of auto production this year.
Taken together our business is performing at a high level, despite a challenging macroeconomic environment.
We're recovering share while improving margins.
The Cooper integration is off to a strong start and we are driving the innovation necessary to ensure we continue leading our industry through the mobility Revolution and beyond so now I'm going to turn the call over to Darren.
Thanks Rich.
Our fourth quarter results continued to reflect a number of well performance trends.
<unk> allowed our business to recover more quickly in 2021, and we possibly could have expected starting the year.
And while Q4 face tougher year ago comps than the early part of the year, we continued to see strong topline growth.
<unk> market share strong growth in revenue per tire and significant benefits from the Cooper tire combination.
While volumes in the quarter remained below pre pandemic levels, driven by lower OE production volume trended closer to pre pandemic levels than Q3, a good side as we start the new year.
It seems to be the case in most businesses right now the big Challenge in Q4 was cost inflation with Covid related disruptions a close second.
You see in our results that raw materials took another step up in Q4, increasing over $300 million.
And we saw a step up in other inflation as well with over $80 million and calculated general inflation compared with our recent historical average of closer to $35 million a quarter.
In addition, we continued to be impacted by Covid related absenteeism in our factories and by the need to hire a lot of new workers, particularly in the U S to address higher retirements and overall attrition.
As discussed last quarter. This is not only results in higher costs for workers, who are training others.
<unk> trained rather than building tires, but also reduces the normal pace of cost savings programs in our factories and creates a situation with a metric we normally think of as cost savings is negative reflecting this impact on productivity.
While as Youll see we offset both raw materials and other cost inflation with price mix in the quarter. These factors along with loss factory productivity compressed our salt segment operating income margin and added pressure to working capital.
Even with these impacts however, we delivered better earnings per share than a strong year ago quarter, and we ended the year with a better balance sheet our.
Our year end net leverage was less than three times, achieving the interim target, we announced with the transaction a year early.
Overall, we feel and we're feeling good about our recent results and continue to feel very good about the benefits of the integration of Goodyear and Cooper.
Moving to the specifics of the income statement on slide 10 fourth quarter sales were $5 1 billion up $1 4 billion from a year ago, including about $960 million of sales from Cooper tire.
Unit volume increased 29% from last year's fourth quarter, reflecting the addition of Cooper tire units and strengthen our replacement business.
Segment operating income was $391 million, including $149 million from Cooper net of merger related costs.
Merger related costs were $7 million. So a merger adjusted operating income was $398 million or nearly 8% of sales.
After adjusting for significant items detailed in our press release, our earnings per share on a diluted basis was <unk> 57.
Up from 44, <unk> a year ago.
The step chart on slide 11 summarizes the change in segment operating income versus last year.
As we've done all year. We also included the comparison to 2019 on slide 12 that provides some good perspective by excluding the pandemic related effects of 2020.
While volume in Goodyear's legacy business was just slightly above last year given weakness in OE production. We continued to deliver strong price mix revenue per tire for the quarter was up 11% excluding foreign currency.
The combined impact of higher prices and improved mix contributed $419 million to earnings exceeding the effects of higher raw material costs, which increased $308 million.
This price mix in excess of raw materials was sufficient to offset the calculated level of non raw material inflation.
While using price mix to offset non raw material inflation is different.
Given the high level of inflation, we're experiencing today. This is how we will need to approach it at least in the near term.
The Red bar next to calculated inflation captures the impact of unique cost factors, including the impact of training and staffing issues at our factories that are not captured in CPI based inflation well.
We feel that this impact is transitory and will likely improve during 2022, there will be a significant factor in Q1, which I'll come back to when we discuss our forward outlook.
Similar to last quarter. We've included two bars show the impact of the Cooper tire transaction on our results.
The Green bar on the left reflects Cooper's operating income, which totaled $156 million during the quarter.
The results reflect strong performance by Cooper's North American consumer replacement business.
The Red bar on the right captures merger related costs, essentially the amortization related to the intangible assets recorded in connection with the merger.
Turning to the balance sheet on slide 13, net debt totaled $6 3 billion.
The increased net debt compared to last year reflects cash consideration paid at closing for the Cooper transaction.
Note the decrease in total debt from Q3 includes the repayment of the $400 million second lien term loan that has been part of our capital structure since the early two thousands.
Slide 14 shows an analysis of our free cash flow over the last 12 months free cash flow was positive despite the impact of inflation on working capital.
While we continued rebuilding our inventory during the quarter, we have not yet restored our finished goods inventories to targeted levels, particularly in North America.
More on that when we talk about the outlook for this year.
Turning to our segment results beginning on slide 15, America's unit volume totaled $25 5 million up 45% compared to the prior year's period.
The increase reflects the addition of $8 5 million Cooper tire units as well as strength in our replacement business.
As you might expect our OE volume was down.
Americas segment operating income totaled $308 million or 10% of sales despite the costs related challenges.
Americas results included $142 million of merger adjusted operating income from Cooper and $7 million of cost triggered by the merger or a net of $135 million.
Also recall that last year's operating income includes a favorable legal settlement and other items that added about $20 million.
Turning to slide 16, Europe , Middle East and Africa's unit sales increased 11% to $13 8 million.
Replacement volume increased $2 2 million, reflecting a strong winter tire season, as well as share gains in our legacy European consumer replacement business.
Overall believes in Europe produced about 25% fewer vehicles than in last year's fourth quarter. As a result, our OE volume declined by 800000 units.
EMEA segment operating income of $41 million was down $28 million compared to a year ago.
While price mix offset raw material costs, it did not offset the impact of higher non raw material inflation, notably energy and transportation.
EMEA was also impacted by the non recurrence of temporary cost reductions a year ago, along with the continued impact of Covid related disruptions on manufacturing despite.
Despite these challenges EMEA segment operating income remained above pre pandemic 2019 levels.
Turning to slide 17, Asia Pacific's tire volume increased by $1 5 million units to $9 3 million, reflecting growth in both consumer OE and replacement.
Our consumer OE business was up over 1 million units driven by the addition of Cooper and solid performance of our legacy business.
While the industry is still impacted by chip shortages, we increased market share for the third consecutive quarter driven by a ramp up of new Fitments.
Growth in replacement reflected strong performance in India, partly offset by Covid related weakness in China.
Segment operating.
Operating income was $42 million down slightly from the prior year, reflecting higher raw materials and other cost pressures that we were not able to fully offset in the quarter, despite higher volumes and the benefit of Cooper earnings.
Okay.
Well I'll make one additional reflection on Asia.
The current deflationary environment is particularly challenging for our Asia business given it has a higher mix of OE than any of our other geographies.
In addition in many cases, we lack raw material index agreements with our OE customers in Asia that are prevalent in mature markets. So recovering even raw material cost increases as more difficult there.
We believe our position on future Fitments and the benefit of our technology will help us achieve better returns on the OE business going forward and that the growth in replacement markets will continue to allow us to improve price mix in the business overall and support recovery in margins over time.
Turning to our outlook items on slide 18 overall, we expect 2022 to be a year of continued volume recovery with replacement industry demand continuing to grow and OE demand recovering this is semiconductor shortage situation improves.
We expect to be able to more than offset raw material costs with pricing pricing actions and improved mix, although our raw material cost increase will reach between seven and 800 million for the first half.
This includes the impact of currency and on feedstock supplier costs.
Inflation, including incremental wage benefit transportation and energy costs will result in higher operating expenses and will continue to be at levels beyond what we can offset with efficiency at least through the first half.
Transportation alone will impact Q1 earnings by $20 million to $30 million more than it did in Q4.
Bringing these factors together along with the assumptions on slide 19, we're targeting 2022 free cash flow around breakeven.
This includes working capital investment of around $300 million, including the rebuild of America's inventory that we were not able to complete in 2021.
It also reflects an increase in capital expenditures to between one three and $1 4 billion, including a full year of Cooper Capex.
This will include upgrades for more complex tire designs, including those required for electric vehicle Fitments, which we continue to win at rates that are higher than on traditional ice vehicles.
The investment will also include brownfield expansions to increase capacity to address current because of supply constraints and address growing replacement demand.
We'll provide more information on the more significant programs as they are announced.
Now to slide 21 provides updated modeling assumptions. These continue to reflect good years legacy business. Once we anniversary. The Cooper combination we will revisit these assumptions to reflect the combined business.
Also note we expect to file our 10-K early next week.
Now we will open up the line for questions.
And if you would like to ask a question.
Press Star and one on your Touchtone phone again that is star one if you would like to ask a question you can remove yourself from the queue at any time by pressing the pound key.
Our first question today from Ryan Brinkman with Jpmorgan. Please go ahead.
Thanks for taking my question. So could you maybe talk some more about the pricing dynamics in the aftermarket in the U S. Perhaps from the perspective of what percentage of announced price hikes might be sticking whether that is higher than you've experienced historically.
Would be curious what your thoughts are generally in terms of the industry is pricing power.
They're investing in quality tires might now be more justified in consumers' minds because of the higher price of that.
Used vehicle that they are maintaining or any other factor that you think might be impacting the industry's pricing power and then a related question might be.
If you think Goodyear is pricing power is any different from the overall industry's weather because I don't know the segments of the market that you target or because of your specific product tier launches et cetera.
Sure Brian .
A lot in that question I'll start and I think Darrin and I may tag team, a little bit I would tell you.
Just to start with and we will focus on the U S. As you asked here.
A really very very good.
Constructive pricing environment that we've seen right now probably the best in recent memory.
That's in an environment of strong demand of distributors and dealers, having good margins in their business.
I think and.
The environment that also reflects the.
The increased vehicle miles traveled out there if you just look at the industry.
On top of the 2021 price increases that we've had we came into 'twenty two with all of our main all tire manufacturers out there essentially announcing a double digit price increases coming into 2022, and our case for good year, It had Cooper and Goodyear announced up to 12%.
At the beginning of the year began 102022 and on the commercial side same thing, we announced up to 14% effective on January one 2022, and again on the commercial side I know you didn't assets, but also very very strong demand. There. So I think I said in my comments that we could make more we could actually even sell more in the.
<unk> that we're seeing.
Ryan I'd also point out that as we look at all of those price increases that.
We're announced out in the marketplace coming into 2022, we did not see any stockpiling or in any pre buy as we started the year, whereas we ended the year I should say in December and I think thats a pretty good sign about the how dealers are feeling about their businesses going forward as well and.
I would just say January volumes were very good as well so reflective of I think the current environment rather than trying to arbitrage.
And ones view of where the market is going.
And the point on used vehicles.
Absolutely I think if you can't get a new car.
Used vehicles or are looking to be referred to whether it's a personal owner or someone selling them and putting tires on their end as you know putting the right tires on a used vehicle can give you a distinguishable drive and Goodyear tires.
<unk> in the U S. When we talk about weather ready when we talked about our light truck tires Wrangler series that makes a big difference and I think there is a benefit moving to entire like ours and I think these are all these are all positive things you mentioned the segments as well we've got the Goodyear brand the Kelly brand the Cooper brand as.
We look at the market we've seen that.
That positive pricing environment across all brands and across all of our segments. So I think I think really pretty.
Constructive all around and we didn't talk OE your comment was mostly on replacement but.
As OE comes back I think that's upside for us as well as we think about as the.
Apply shortage on chips gets better as well so very constructive environment overall.
Alright, let me add two points.
One related to the competitors.
It's happening with.
The broader group of industry players and.
There are nine competitors that we tend to track.
Seven out of the nine of announced price increases in the first quarter.
And one of the ones, who hadn't raised prices right at the end of last year. So we are seeing very consistent pricing across all of the significant industry players.
The other point I would.
I'd like to make is that while historically, when we announced price increases.
<unk>.
And obviously there are a lot higher numbers today, but traditionally we've announced a price increase of up to 4%.
We generally got an all in yield of about half of that.
Obviously now we're announcing price increases in double digits, which is much higher the other thing that youll see though and this is reflected in our fourth quarter results and our expectations for the first half as well is we're getting a much higher yield.
On the announced price increases, which says that the increases are applying to.
Broader part of the product portfolio and those price increases and because of the cost environment are.
Are sticking and are much more significant way than they might in a typical environment.
That's helpful color. Thank you and then just lastly, what has been the experience with OE pricing I think there are may be more codified commodity pass through arrangements with automakers versus aftermarket customers, but one thing we've been hearing a lot about from other auto part suppliers has been not necessary challenge of attempting to recoup from automakers not just <unk>.
Higher commodity costs, but also higher non commodity supply chain costs, such as increased prices for ocean shipping logistics freight natural gas electricity even labor.
Have you had those discussions also and how do you feel about your ability to price for those non commodity costs.
Brian I think you've kind of described it I mean, we're dealing with the impact of a lower OE volumes because of the shortages that chip shortages and also really uneven volumes as well in terms of getting their demands.
And we have the significant cost inflation that you mentioned, so that sort of creates that unique combination of challenges that impact OE profitability and when we think about rmi and we've talked about those a lot in the past those are certainly helpful. But they take time to come in and you don't you won't get all of those at once so youre absolutely right to say Theres work needed.
To continue to address these other costs that were these other inflationary costs that we're seeing and we are having those discussions and I would tell you a couple of things to think about and one for Goodyear.
The segments that we play and think about light truck and think about the demand for light trucks out there think about evs and we're in the right segments, where the vehicles are in demand.
There is a demand for our technology out there what we bring to the table on technology really matters and also bring our ability to supply. So those are things that I think are really impactful in our ability to work through these things over the long term you can't do it all in a quarter, but I think theyre very positive and then you add to that as production comes back.
There is a production schedules at our uneven where may be more demand as needed and I think these are opportunities for us to have those discussions as we think about how we supply those customers going forward.
I just ended and saying.
What matters to the Oes is solving their problems right solving getting them the tires, they need to fit their vehicles and I'm very confident in telling you. It's Goodyear is very good at that.
Very helpful. Thank you.
We'll go next to Emmanuel Rosner with Deutsche Bank. Your line is open.
Good morning Emmanuel.
Hi, good morning.
First I wanted to follow up on your outlook.
Outlook for free cash flow. This year, obviously breakeven free cash flow is a little bit.
Lower than expected, especially in the under.
No such strong traction on the operational prospect can you maybe unpack this.
For us in terms of.
How much is related to your ability or not to sort of keep growing operating income in 2022, almost whether you sort of like the free cash flow usage bucket. That's you.
That you highlighted and then as I think about these working capital and Capex investments.
Husky on that so if we were to say okay. This is an investment, but then what would that look like beyond 2022.
Yes, so it will certainly come back to that but let me let me hit on 2022 first.
The whole perspective, yes, I think that we have on our free cash flow target. It starts with the fact that we were able to deliver a stronger balance sheet in 2021.
Then we were originally expecting to be able to deliver and we had when we announced the Cooper transaction lap a year ago.
Secondly, we said we knew we were taking on some additional debt, but we felt like.
Within two years, we would be able to get our net leverage.
Our net debt to EBITDA back below three times.
We actually achieved that by the by the end of 2021, which is a year early and the fact that we had our balance sheet in better shape earlier.
I think has made us feel like is appropriate to be a little bit more aggressive on investment and particularly investment that we need in order to support our new OE fitments that we've been winning and make sure. We've got the capability of our factories to support the tires that we're going.
B designing and building for electric vehicle platforms, which has been a growing part of our OE fitment wins, and obviously have some economic opportunity associated with them. So we feel like that that justifies the investment and we feel like the balance sheet is in shape.
To make that investment, but if we if we step back from it and think about the earnings drivers for 2022.
First of all we do expect the markets to stabilize and when I say that continue to stabilize so I say that that means we are expecting our volumes to continue to approach 2019 pre pandemic levels.
And we had through the first three quarters last year volumes were still running seven or 8% below.
Pre pandemic are below 2019 in the fourth quarter, we were about 4% below our 2019 volumes and Thats what.
The legacy Goodyear business. So we expect to continue to close that gap. So we expect some continued lift from volume.
Yeah, So we'll get some good news on volume.
We feel confident that we're going to be able to offset raw material cost with price mix.
The real challenge in terms of 2022 earnings is going to be addressing inflation in other costs, so non material costs.
Obviously, we think price and mix can help with that but we've got a number of cost across number of categories and some disrupt continued disruption in our factories from attrition and from the effects of the pandemic. So that's creating some challenges on the other hammer to have benefit of a full year of Cooper earnings.
And continued benefit from from integration and the synergies, earning synergies that we get from the integrations. So.
Number of things there that I think if you think about the.
The free cash flow target around breakeven I think youre going to conclude that doesn't that does reflect some increase in earnings or some increase in.
EBIT EBITDA.
The investments that we're making for the year, obviously, the one three to one 4 billion of Capex.
An increase of two to 300 million.
Versus what 2021 would've looked like at Cooper had been included for the full year. So it's an increase but in the range of $2 million to $300 million, which will allow us to do some.
Some significant brown.
Brownfield investments as well as some equipment upgrades.
And that that Capex program, when we step that up that does tend to be.
So those programs tend to be multi year programs. So.
That continued in that investment is likely to continue.
Post 2022, although.
We've always been fairly agile when we've needed to pull back.
Generally the expectation is that those programs are going to take place over the next two or three years.
Working capital on the other hand, which we.
We expect to invest about $300 million in this year.
To get our inventories back where we need them to be that's a bit more of a onetime item and over time, we've been able to manage the business with.
With working capital as neither a source nor use of cash and thats more of the model that we would expect when we get out beyond 2022.
The remaining items that you see in our.
And our financial assumptions, including <unk>.
Interest.
Interest payments pension cash taxes.
Those are at levels that are up a little bit but.
From where they would have been last year, but that's principally the inclusion of Cooper.
And then obviously our <unk>.
While our capital expenditures and investments in the factory are up our restructuring cash payments are down yes.
So we're expecting those.
A couple of hundred dollars dollars a year in the last couple of years those have come back down to be around 100 million for free.
For 2022.
So I think you take all those factors I think youre going to find that.
While our EBITDA run rate for the trailing 12 months was somewhere in the range of $2 3 billion.
In order to hit breakeven that EBITDA is going to have to rise during 2022, given the investments that we're making.
Okay I appreciate all the detail maybe just two very quick follow ups.
On your walk first on the raw materials front. So I think you are.
Expectation is for a $700 million.
This year principally in the first half are you assuming that you get a tailwind in the back half or is that.
Is the back half roughly sort of like stable year over year with it within that assumption and then the second question is around the restructuring.
You've been doing in Europe .
Sort of.
Benefit could we expect from this.
This year and are the challenging operating conditions in the labor and.
And such making it harder.
Extract some of them.
Cost savings in Europe .
So while certainly I will answer the <unk>.
Second question first I think.
We are get those getting the savings from the restructuring of the two German factories.
We've reduced the size of each of them and reduced the staffing as a result of that and.
And we will get some incremental savings in 2022 and 2022 is the point in time, where we'd expect it to have the full $60 million to $70 million savings compared to the 2019 baseline. So we will get a step up in the savings for that German restructuring.
The issue is that we're seeing other types of cost increases and I think in Europe .
Probably the biggest defender is energy prices, which haven't affected us as much in other parts of the world that are pretty significant for us there. So the non raw material cost inflation there is.
Making it more difficult to get whatever savings, we do down to the bottom line. The team is still doing a good job executing.
If we come back to the raw material question.
We've effectively said is that for the first half we expect the increase of $7 billion to $800 billion of raw material cost.
And I mean that incorporates.
I think that you realize that.
Always.
Historically said that about two thirds of our raw material costs come from feedstock.
And about a third of our raw materials come from non feedstock, which includes transportation and other supplier costs as well as supplier margins. So that seven to 800 million to be clear includes the increases in feedstock.
Which would probably be somewhere around $500 billion, but also includes some significant non feedstock costs, including about $70 million impact of foreign exchange.
Significant step up in transportation costs, but really for what we've done what we've done for right now though is just look at the first half because we do think there's a lot of uncertainty.
About how.
How commodity prices are going to evolve over the next few months. So it does leave us with some uncertainty in the second half if commodity prices stayed where they are we would still face several hundred million dollars of raw material cost increases in the second half year over year.
But we think it is really difficult to make that call right now and your raw materials.
Dip down.
And back up here early in the year, but we think that with the <unk>.
Level of uncertainty, we have guys just not easy to call where the spot prices of raws are going to go.
Great. Thank you so much.
Yes.
The next question comes from John Healy with Northcoast Research Your line is open.
Great just wanted to kind of stay with price mix topic, just for a couple more Matt when you look at your ability to get price.
About the actually the beginning of the year I think theres been some actions by one or two competitors for for our shipments maybe in April .
As you look out and kind of acknowledge that uncertainty abroad for the second half of the year do you feel good that you can continue to approach the market with additional pricing.
It just would love to get your confidence in in terms of.
The ability to continue to get price above.
The raw, whether its feed or non feed.
Costs.
As we move throughout this year.
Yes, I think I'll start and jump in again going back to where I started I think we feel very constructive about the pricing environment that we're seeing given the costs that we're seeing as Darren explained both feet excuse me, both feedstock and non feedstock costs out there. So as we as we see these incremental.
<unk> cost headwinds come our way.
It is our obligation our jobs to deal with those and are mechanisms to do that or two things again, both as you suggest recovered in the marketplace with price and also focused on the cost actions that we will do in terms of managing spend and doing other things to make sure that our cost structure and is in line and in.
<unk> environment, So I think youre going to see we will do both on those again that things like managed spend is things like working on our plant optimization programs.
Programs, where we're looking at everything we do what we do how we do it why we do it where we do it and and even continue to look at all the.
The businesses that we have to make sure they are performing or not and I think our track record shows we're not afraid to take those decisions, but getting back to the environment around being higher costs in the second half of the year I would say you can you can be sure where we're going to be aggressive in dealing with those and and I think the market dynamics.
<unk> certainly are favorable and constructive around the ability to capture the value of our brands out in the marketplace.
Okay, great and wanted to spend a minute on the roadmap side that you guys have.
Quarter.
You guys talked about sustainability in there and.
I think a lot of companies talk about it.
And a lot of different ways, but when I think about your business.
Does it help you win share with these oes that are very focused on sustainability as you kind of outline the strategy.
What theyre doing and as you talk about raw material costs do move to recycle their alternative.
Kind of raw materials can that be a meaningful savings as you look out over the next three to five years would just love to kind of dive into that sustainability aspect.
Of what you guys are trying to put together.
No. Thanks for the question.
It's a good one I think the way, we think about the sustainability and lights and our roadmap is number one for US. It's the right thing to do I mean, we know where we are.
Society as a company.
Good year, it's in our DNA to do the right thing in dealing with this is is in that vein and so it is a priority for us and I would also tell you as we move ahead, we see two things that we have to get ahead of and Thats, one solving customers problems and we know our customers need sustainability solutions not only in their tire products.
But how they view their contribution to reduce greenhouse gases going forward so number one.
Centering this around customer needs is why it's important and related to that really is how we think about the future of mobility and we've called it new mobility or whatever you want to say I think you have to add sustainability to that our view of the world going forward as sort of winning in this triangle of technology <unk>.
<unk> sustainability and the ability to solve all those problems in this new world is where I think goodyear can deliver value to our customers deliver value to our shareholders by solving the problems that we have around tire intelligence around connected vehicles and doing it in a sustainable way and I do think.
And that's what our customers want going forward are sustainable tire starts that.
We're very proud of getting to 70% already and we're not manufacturing in full yet, but we're going to get there to do it and also I would tell you things like our non pneumatic tire wear.
We're running that on certain applications already with great success, that's even more sustainable tire going forward. So I do think that this has competitive advantage and I do think it highlights goodyear's technological advantage over many many of our competitors and therefore will will benefit us going forward in it.
Real business way beyond just the environment.
Okay, Great and just two housekeeping questions for me.
And on the slides you guys talk about the $15 or $30.
Replacement profit per tire.
In the U S.
You have to think about the EV units, how would that compare either on OE replacement and then secondly.
I thought you guys had some maturities maybe that you could call or maybe refinance.
And the next year salaries 18 months was just curious if you have any thoughts about.
Maybe given with the leverage coming down maybe taken advantage of maybe a different debt profile than you guys had.
When you when you put some of these maturities in place.
So let me yes.
Let me hit the first question, which is the question.
<unk>.
The OEM.
OE and replacement and OE, Yes, I think what we know right now is that the electric vehicle Fitments.
Because of the demands of the product and the fact, they tend to be larger and more advanced tires do bring with them a higher revenue per tire.
I think the last time that we pulled out that analysis, there were something like 30% above similar.
The tires that will go on a similar sized internal combustion engine tire.
The challenge for US of course is to make sure that we bring some of that 30%.
Offline to the bottom line.
So I think it's an important question, we don't have a specific number in mind.
Got a lot of work to operationalize those tires and to make sure we understand what the what the cost of production of those tires is but I think we feel like we've got the opportunity in front of us and we're going to be working.
To try to improve the margins there.
On the replacement side.
<unk> with the new product launch that rich mentioned in his remarks, I think we are feeling like.
As.
At a point in time, what we called high value added tier dynamics.
Yes.
Dave Us margin opportunity in the replacement market I think we feel like electric vehicle transition.
It gives us another opportunity to differentiate products and to design features that are going to be very important to electric vehicle owners.
Including.
The one that rich mentioned, which is the southern comfort technology, which is just to make sure that there is not a bad.
<unk> based on tire noise that goes along with those electric vehicles. So I do think that there is.
Yes, there is a lot of opportunity there to drive margins ahead of where margins are on traditional ice vehicles. So I think the opportunities in front of US. It's part of why we feel good about the investments that we're talking about making in the higher Capex program that we're looking at.
So I'll, let Kristina to take the question on the.
On the debt refinancing.
Sure Hi, Ken.
So you're right on.
I can point out that we do have.
Our 800 million nine 5% coupon note.
Callable at the end of May of this year. There was one notes that we issued in the early innings of the pandemic and so assuming the markets remain pretty constructively could have an opportunity to refinance that and reduce our interest expense I would say that.
That first call premium is half the coupon and so I'd look for that cash benefit more in 2023.
Here I'm sure I have a few.
Claude <unk> here.
Aaron.
<unk> remarks, he mentioned that we can't repay our second lien term loan towards the end of the year and that was important for us.
And as we think about our path to improving our balance sheet and marching toward that investment grade structure.
Awesome. Thank you.
So thanks Jim.
Yeah.
We'll go now to Rod Lache with Wolfe Research Your line is open.
Okay Rod.
I was hoping we can maybe just frame what you kind of need from a pricing perspective at this point.
Let's say.
You have that seven $800 million of first half raw materials and couple of hundred million in the back half of it that'll be $1 billion.
It sounds like calculated inflation is running at around $80 million a quarter, So maybe 300 million there.
Correct me, if I'm wrong, but and we're thinking that at this point you have kind of in the bag, maybe something approaching $500 million of pricing.
So more would be needed.
If I go back to prior high inflationary environments like 2011, 2012, we actually had a couple of years with a $1 billion or even $2 billion.
Positive pricing.
I'm wondering if you think the competitive environment is such that it does something like that is doable.
For you to be able to mitigate.
Something of that magnitude with price.
Well certainly the rhythm of pricing and the amount of pricing that we've been doing is similar.
What we saw back in 2011 2012 timeframe.
And I think that right now I think that's what gives us the confidence for being able to cover.
<unk>.
Cover the raw materials in the first half and that's what's allowing us to cover at least in.
The good part of the World cover additional integration beyond raw materials.
Yes, I think the.
The way that the environment evolves is going to be the question.
So it's harder to answer second half questions that as first half questions, but I think right now we're we're certainly feeling like.
We're in a rhythm of recapturing inflation beyond raw materials.
And we're certainly doing it in the replacement market.
The OE challenge, we've talked about on the call already.
And in my remarks, I mentioned, the fact that.
Asia is our smallest business, but is the business, where it's probably most difficult right now.
To fully offset.
The costs that are coming at us.
The costs that are probably most difficult for us to recapture are in.
The new label that we've used sort of the category, formerly known as cost savings, which we now call efficiency excess inflation and other cost increases.
As it has gone negative and that incorporates some of the disruption in our factories that have resulted from our need to hire more people because of attrition and absenteeism.
And just the need to manage through absenteeism, which was a significant factor for us in Q4 and Q1 hopefully.
We're moving past the absenteeism related to <unk> and those factors start to decline.
So that that negative.
<unk>.
The earnings walk.
As transitory and starts to go away as we get to the second half I think that's what we're hoping for because I think that's the element that is the most difficult for us to recapture.
So.
Competitive.
Sorry.
Ill go ahead Ron.
So just competitively isn't.
Is it just about every tire company experiencing the same kind of inflationary pressures whether it's.
Turnover or.
Transportation and all these other things that you are mentioning.
If the.
The environment is as tight.
As it seems and so.
Specialty in North America.
Do you do you have any color on whether you just feel like the.
The mode of the industry right now is to actually recover all of this.
No.
Can you give us any color on what's happening in Europe , you did mentioned specifically North America.
And in Asia.
Yeah, So rod I actually I was going to kind of go just where you went.
If you take a step back I mean, maybe I'll start with going back to your comments around 2011, and 2012, which obviously, we all remember here as well as most of us do.
Think that started and I think it's an important corollary here with our our intention internally to address those high cost and and to <unk>.
Has to get price was part of the way, we would do that and I would say we have that same intention today to approach. It like we know we have to go after that if you look at the dynamics I think you rightly point out demand is as strong.
The supply demand equation is still pretty good.
I mentioned earlier, we didnt see pre buy in December and we had a lot of those announced increases were out there. So I think that again I mentioned earlier is a good sort of insight into how the channels are thinking about this as well because they see the same constant increases that you mentioned as well we didn't.
See a lot of buy ahead, and we have seen good volumes in January and I think youre right. The these cost increases are kind of pervasive and ubiquitous around so.
That said there is an environment that says we.
You've got to deal with these cost that's one way to go do it I do think as Darin says the way the environment plays out is important as well what happens to the economy and how do we how does that impact behaviors. If you like and certainly we're not going to we don't know the answer to that when I go back to my first comment that says we are really very.
Committed.
To address these costs and just like we were in 2011 and 2012, when we did achieve the numbers that you mentioned, so that's sort of our mindset as we go.
And the specific competitive question I think that we believe that the cost factors that are hitting us are hitting others.
Although when it comes to the labor situation.
I think that the challenge in the U S has been greater than it has been in other parts of the world.
While we've had absenteeism in our EMEA factories, we haven't had the level of turnover and the training demands that we've had in the U S.
Europe has some energy costs that are higher that's probably the bigger challenge there.
Having said that I will say that.
There are some challenges to manufacturing in the U S. I would probably be remiss, if I didn't say that.
One of the big cost increases we've seen.
And I mentioned in an effects are.
Non feedstock cost of raw materials and it effects.
This category, we're referring to as efficiency excess inflation and other cost increases and that's transportation costs.
Transportation costs.
<unk>.
Honestly ocean freight.
Gone up dramatically.
And we have much less exposure.
To ocean freight I mean, while it effects, our raw material costs in ways that are probably similar to others.
We shipped a lot fewer finished goods by ocean freight.
And therefore, we have less of a transportation cost burden.
Then a lot of our competitors too, yes, so I think Thats, an instance, where we are.
Probably a bit advantaged in fact.
Hey, Rod just.
To close out real quick your question on Europe , and I think there's a corollary to the U S that we saw most of major tire companies announced price increases since the beginning of the year as well, albeit at a lower level than we saw in the U S and for US we went out and we announced on the consumer side.
The 3% to 6% on the commercial side up to 8% effective Jan one as well so you're seeing the <unk>.
Actions over there as well, albeit not quite at the level as the U S.
Okay. Thank you.
Thanks, Rob.
Yeah.
We have reached our allotted time this will conclude the Q&A session and today's program. Thank you for your participation you may disconnect at any time.
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