Q2 2022 Goodyear Tire & Rubber Co Earnings Call
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Please standby your program is about to begin.
You should need any audio system and your call today, Please press star zero.
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Good morning, My name is Ashley and I will be your conference operator today at this time I would like to welcome everyone to Goodyear's second quarter 2022 earnings call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question and answer session. If 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.
Now hitting the program over to Christian <unk> Senior director of Investor Relations.
Yeah.
Yeah.
Thank you Ashley and good morning, and welcome to our second quarter 2022 earnings calls.
On the call with me today are rich Kramer, our CEO , Jeremy Welter, CFO , Kristina Tomorrow, our VP of finance and Treasurer.
Well begin with a few words in forward looking statements and non-GAAP financial measures.
We're looking statements involve risks assumptions and uncertainties that could cause actual results to differ materially from those forward looking statements.
More information on the most significant factors that could affect future results. Please see slide two of the supporting presentation for today's call and our filings with the SEC, which can be found on our website at investor Goodyear Dot Com, where a replay of this call will also be available.
A reconciliation of the non-GAAP financial measures discussed in today's call to the comparable GAAP measures is included in the appendix of that presentation and with that I'll turn the call over to rich right. Thank you Christian and good morning, everyone. Thank you for joining the call today.
During the quarter, our business continued to perform at a high level, our second quarter sales and earnings performance were the result of solid execution by our teams around the globe.
Growing unit volume, while driving pricing actions had covered not only raw material cost increases, but most other inflationary headwinds as well.
The third consecutive quarter, where we had done so I missed 40 year high inflation levels.
Revenue of the combined company grew more than 30%, including 15% in our legacy business there.
The result was the highest second quarter revenue level more than a decade.
Our consumer tire volume globally grew 6% and commercial grew nearly 2% excluding Cooper.
And we achieved this volume growth, while increasing revenue per tire by 14% compared to last year.
We're also contributed meaningfully to our results in the quarter as it has since we closed on the transaction now just one year ago, a noteworthy milestone.
I'm truly proud of the results our team delivered during the quarter and through the first half and they did so in an environment of broad based supply chain disruptions and staffing challenges in our factories challenges that is carried on longer and more deeply than anyone expected and the yen our teams rose to the occasion.
And drove another excellent quarter.
Likewise pleased with what our teams have been able to accomplish over the last year to combine Goodyear and Cooper.
While work is ongoing we're making continued progress on achieving the full value of the combined companies are continued work is focused on furthering our integrated brand and product portfolio and driving increased efficiency.
Operations.
Looking forward, we see the headwinds and uncertainty that we've been facing for the last several quarters persisting for the remainder of the year.
I'll make two observations here.
First well first half volume and share trends were favorable we continue to closely watch the balance between channel inventories and sell out is it means of assessing any emerging trends in the market.
Our extensive point of sale information and distributor and dealer market intelligence position us well to see if that's any changes.
And second our teams are prepared just to say work coming into the year for a range of possible outcomes.
Certainty and volatility have defined our landscape since the onset of Covid and continued through award Ukraine supply chain issues and significant inflation.
Our teams have executed well in that environment and are poised to do so again over the remainder of the year as it develops.
As we look to the future we know that our industry will evolve with the changes in the macroeconomic environment. We also know that our business is stronger operationally financially and strategically from.
From the additions of the Cooper product portfolio, and then making value segments to our award winning Goodyear premium products, we are well positioned and excited for what's coming next and with the addition of our mobility solutions initiatives surrounding intelligent tire integrated fleet services that entire made a sustainable materials.
We see even further possibilities.
Since vitality is evident in each of our strategic business units as well and I'll begin with our Americas segment.
Americas continues to execute in an environment that has been normalizing after a sharp recovery from the pandemic last year.
Quarterly revenue in the region was up 39%, including 14% in our legacy business.
Our ability to price for the value of our brands in the replacement market has allowed us to grow our top line.
It has also enabled us to stay ahead of both higher raw material cost and other inflationary cost pressures continuing.
Continuing a trend since we began to feel the effects of inflation towards the end of last year.
This is the third quarter in a row, where we have seen elevated inflation in the third quarter in a row, where price and mix more than offset the increase.
Our strong product portfolio made stronger because of our combination with Cooper also remains a growth catalyst.
The first half of the year, we've introduced a slate of new products to the market throughout the Americas and highlight our capabilities to increase tire sustainability take advantage in EV trends and to meet evolving customer needs.
In the U S reported volumes for the consumer replacement industry were down year over year in the second quarter, reflecting the rebuild of inventory a year ago.
While this impacted our reported volume in the quarter stressing sellout trends have resulted in inventories in our distribution networks falling during the first half and being below pre pandemic levels.
This gives us confidence in second half volumes, assuming recent trends continue.
At the same time other indicators point to a healthy underlying transportation economy in the United States, which is supportive of ongoing tire demand.
U S miles driven is up nearly 4% year to date on par with pre pandemic 2019 levels.
Freight tonnage is also up close to 3% year to date supporting continued commercial tire sellout.
In Latin America, and the replacement markets has been a continued bright spot for us and our teams continued to deliver with.
With our refreshed product portfolio in both consumer and commercial and both OE and replacement, we continued to deliver volume and share growth as well as price and mix.
I remain pleased with our team's execution in this volatile region.
In the Americas, OE business consumer and commercial volume each have grown double digit percentages versus 2021, reflecting the beginnings of a recovery in production.
With the consumer OE tire industry volumes still well below 2019 levels, we anticipate the effects of the OE recovery to persist.
In this environment, our OE win rate continues to be strong with a focus on the higher value E. These segments as we've previously discussed.
Before moving on to our overseas businesses, you'll likely have seen that we reached a tentative agreement on a new labor contract with the United Steelworkers, covering our legacy U S. Goodyear plant. After the most recent agreement expired on July 29th.
As per our normal practice, we will not discuss the details until after he is ratified by the USW membership in coming weeks.
Yes.
In India the replacement tire industry grew steadily in the quarter eclipsing pre pandemic, 20th 19 levels by about 4%.
And Goodyear outperformed the industry for the sixth consecutive quarter.
I continue to remain very positive about our positioning within the industry and this otherwise complex environment.
Thanks to our consistently competitive product offerings actions over the last several years to strengthen distribution and our ability to supply with our western European footprint, our consumer replacement business grew volume, 27% and our commercial replacement tire volume was up 5% compared to last year.
Here.
Consumer replacement tire growth was broad based coverage summer all season and winter tires across the value spectrum.
And as it grows to place while we were successfully implementing several price increases.
Through our aligned distribution initiative, we are winning with consumers and capturing the value of our brands in the marketplace.
Our consumer OE volume was up about 8% versus last year, but well below pre pandemic levels, while we expect carmakers supply chain challenges to last into 2023, and we remain well positioned to reap the rewards of a recovering industry.
Looking forward the effects of war and Ukraine energy security risks and persistent inflation are all current reminders that we need to continue to be attentive and agile.
I'm confident in our team's agility to execute as we move ahead.
Yeah.
Turning to our Asia Pacific Region last quarter, you heard me speak about near term hurdles in China. Following state home orders that disrupted our markets and our factories while.
While the impact of this disruption was in line with expectations. We're also pleased with the pace of recovery in our business, including our plants being back up to capacity and science consumer confidence is beginning to turn a corner.
These trends are encouraging as is the resiliency of our team on the ground.
This region's revenue increased about 11% and our legacy Goodyear's business driven by share gains in India and industry strengths in markets outside of China.
In our OE business, while Covid impacted OE industry volume in China. The effect was more than offset by the ramp up of new fitments as well as continuing growth in India and other parts of Asia, our past investments in product technology will continue to deliver results as the market recovers.
Okay.
As the world of mobility continues to rapidly evolve a trend we read about everyday and certainly see transpiring at all of our customers rest assured Goodyear is not standing still.
This is evidenced in our initiatives in a number of areas such as the increasing digitization of our industry, leading commercial fleet services, our new business models, such as our direct to consumer mobile van installation and NGO our predictive vehicle servicing platform and our numerous other venture funding partnerships.
With all our progress this commitment is no more evident to me and in our work around the intelligent tire.
We fundamentally believe that the content patch between the road in the tire will taken added significance as Evs and avs evolved.
Our deep experience around tiring vehicle performance paired with proprietary predictive algorithms.
And my confidence and the role our products and services will play as mobility evolves from static human driven combustion engine vehicles to electrified connected and potentially autonomous vehicles.
Tire intelligence and the knowledge of what is happening at the connection with the road through the tire contact ads is a job we uniquely do as evidenced by the growing portfolio of partnerships. We now have with Oes and a das system developers.
More to come on this technology, but know that our focus and investment will not be deterred as we navigate the tumultuous economy.
The future remains brighter than ever and Goodyear will be read.
The second half of the year suggests uncertainties in our environment similar to what we've been experiencing however.
However, I am confident in our plans and our teams to deliver against our objectives are against our objectives. Just as we did through the first six months of the year.
Our focus is on execution and our sights are set on the mid and long term opportunities. The changes in mobility will presents our industry, including the goal of Goodyear's solidifying its industry leadership position.
Now with that I'll turn the call over to Darren and join you again in a few minutes to answer your questions Darren Thanks Rich.
Our second quarter results continue to reflect strong top line growth strong growth in revenue per tire.
<unk> benefits from the Cooper combination.
And we continue to increase earnings despite cost inflation and the continued disruption from Covid.
As rich mentioned, we reached the one year anniversary of the Cooper transaction in June and remain confident in our ability to achieve or exceed all synergies.
I've seen in the income statement on slide seven our second quarter sales were $5 2 billion, including $663 million of incremental Cooper sales.
Recall that the Cooper transaction closed on June 7th of last year. So the 'twenty 'twenty. One base period included about three weeks of Cooper results sales from Goodyear's legacy business increased 15% driven by the impact of pricing actions and volume growth.
Unit volume increased 21%, including the effect of Cooper and growth in both the replacement and OE channels of our legacy business.
Segment operating income was $364 million.
Excluding the 8 million of merger related costs merger adjusted segment operating income was $372 million, including contribution of $126 million from Coopers operations.
The effect of price increases and mix offset raw material costs and most inflation on a dollar basis in the quarter. Although segment operating income as a percent of sales declined compared to last year as a result of both revenue and costs rising by these amounts.
Historically this margin compression from material cost inflation reverses when the cycle turns and raw material costs begin to fall.
After adjusting for significant items detailed in our press release, our earnings per share on a diluted basis were <unk> 46 cents.
From 32 cents a year ago.
The step chart on slide eight summarizes the change in segment operating income versus last year.
The effect of volume in our legacy business compared to the same quarter last year was $61 million. This reflects the benefit of unit sales growth as well as the impact of increased production.
Segment operating income in the quarter also benefited from significant price mix driven by pricing actions to address higher raw material and other.
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The combined effect of higher prices and improved mix in our legacy business totaled $561 million.
Highest in the last 10 years.
Compared to the second quarter last year revenue per tire increased 14% excluding foreign currency.
Again, the increase was highest in the Americas region, where revenue per tire was up more than 20%.
Continuing the trend we've seen since inflation began to accelerate at the end of last year price mix in the quarter was enough to offset not only higher raw material costs, but most other inflation capturing two bars in the step chart labeled calculated inflation and efficiency excess inflation and other cost increases.
Note that the latter bar includes the non recurrence of almost $70 million benefit last year related to a tax ruling in Brazil.
The other bar in the chart includes a combination of factors, that's driven mainly by higher advertising and R&D costs.
Lastly, you can see the impact of Cooper on our results the full quarter of Cooper operating earnings this year was $126 million.
This is up $92 million from the $34 million from the three weeks post closing that was included in last year's results.
No. This year's Cooper our results included a gain of 14 million due to a reduction in U S duty rates on certain commercial tires that were imported during 2020.
The bar labeled cost triggered by Cooper merger is favorable this quarter, reflecting the non recurrence of merger related costs from last year, primarily the $40 million step up in the value of Cooper inventory as part of acquisition accounting.
Turning to the balance sheet on slide nine.
Totaled $7 2 billion at the end of the second quarter up slightly from the same time last year, reflecting the effect of higher costs on working capital and a plan to rebuild their inventories.
That was down slightly versus last quarter.
Turning to our segment results on Slide 11, American's unit volume increased 22% driven by the addition Cooper tire.
Americas segment operating income was $293 million.
Earnings benefited not only from the additional Cooper tire, but also strong price mix, which again this quarter offset both higher raw material cost and other cost inflation.
And user demand remained steady in the second quarter, our wholesale distributor inventory of Goodyear brands in the U S declined.
This along with continued recovery, though we volume should support second half revenue.
Moving onto the results for our Europe , Middle East and Africa business on Slide 12 unit sales increased over 20% with growth in the consumer and commercial replacement segments driving the increase on continued industry recovery and share gains.
Replacement volumes that remained at pre pandemic levels through the first half.
OE volume also increased 7%, but remains below pre pandemic 2019 months.
EMEA segment operating income of $52 million was up from $43 million last year, reflecting this volume growth.
The benefits of strong volumes and solid price mix versus raw materials were partly offset by higher energy costs and other inflation.
Yeah.
Turning to slide 13, our Asia Pacific region as unit volume increased $1 3 million units similar to the first quarter. This included growth of about 500000 in replacement and about 800000, OE, but the additional Cooper units and share gains in the replacement market the key drivers.
Volume increases in India, and other parts of Asia helped to offset the effect from Covid stay at home orders in China.
The earnings Environment Asia Pacific in the near term remains challenged segment operating income in the quarter declined 4 million driven by cost and excess of price mix, which more than offset the benefit of higher volume.
As was the case last quarter. This largely reflects a lack of pricing to offset raw material costs, and the OE business and industry wide issue in China.
On slide 14, we highlight the impact of key business drivers for the third quarter.
We're now past the anniversary of the Cooper transaction year over year comments will reflect the combined company.
Other than just the Goodyear legacy business.
We've also updated our modeling assumptions on slide 17 to again reflect the combined business.
During the third quarter, we expect a continuation of many of the same underlying trends from the first half of the year.
We expect continued benefits from strong price mix supported by price increases effective July one.
The previously announced increased for consumer and commercial replacement products in the U S.
While material costs for the combined company are expected to be up by about 600 million for Q3, including the impact of the stronger dollar and higher transportation supplier costs, we expect price mix to continue to exceed raw materials similar to Q1 and Q2.
We estimate the impact from non raw material inflation in the third quarter to be similar to what we experienced in Q2.
We expect the effect of a stronger U S. Dollar to impact Q3 operating income unfavorably by $25 million to $30 million based on translation of foreign earnings to U S dollars using current spot rates.
More than offsetting this currency effect as the non recurrence of about $70 million of cost triggered by the Cooper merger in Q3 of 2021.
Slide 15 provides a number of other updated financial assumptions for the year.
Most of the assumptions are unchanged with the exception of raw materials and Capex.
While Q3 raw material costs are expected to be higher than those experienced in Q2 recent.
Recent trends suggest an improvement in key feedstocks like carbon black natural rubber and steel, which could benefit results later in the year if the trends continue.
We continue to expect to use of about 300 million for rebuilding inventory and working capital, but a significant inflow of cash from working capital in Q4, consistent with normal seasonality.
Additionally, we've revised our capex outlook downward by about $200 million to a range of $1 one to $1 2 billion.
Ongoing chip shortages and broader supply chain disruption during the first half of the year has resulted in delays in equipment orders.
This has not fundamentally changed most project plans that resulted in moving equipment delivery dates through 2023 in some cases.
In other cases macroeconomic factors have caused us to reevaluate and pause a few projects we remain committed to the ongoing modernization of our footprints to prepare for cutting industry trends and to improve our cost competitiveness.
With that we'll open up the line for questions.
Okay.
Okay.
At this time, if he would like to ask a question. Please press star one on your Touchtone phone yeah.
Which all your question at any time by pressing the alky once again that is star into one and we will take our first question from John Healy with Northcoast Research. Please go ahead. Your line is open.
Thank you.
Wanted to ask a big picture question for you kind of dive into some of the.
Quarterly results, but.
Richard comments about EV and kind of where you're positioned you know continues to be consistent might be.
But you know from what I've heard from you guys. It sounds like more portfolio wins and more technology.
Technology going into the tire and maybe that helps you get more revenue per tire over time, but I wanted to ask just about what the move to electric gods to replacement demand longer term.
I know, it's something that I'm sure you guys are studying but with this allows us to you know.
Get your thoughts about a D V rolls into the car population what does it do to replacement demand and is this the first catalyst than what I would say years that maybe that technology of entire does it work against the replacement market maybe causes more growth in the replacement market.
Wanted to get your thoughts there yeah.
Yeah, I mean, John I, I listen I would agree with what you said I think near term.
You know as we've talked about in the past the wins, we're getting you know he has a a better margin profile for us so from a near term perspective. It helps us immediately in terms of the portfolio and then longer term. If we just stick with E V and and I think you know the way we think about it by the way it's not just E V. Those.
E V tires are going to continue to have more technology in them around connectivity and and I don't just mean, the ultimate intelligent tire, but I mean connectivity, whether it's bluetooth or some other things that are going to happen as well in those some of those things are actually in the works as well, but I think the long term sort of profile.
All of these are going to be that tires are essentially a used faster right I mean, the warehouse faster with evs because of the tour go into the engines or excuse me to the two wheels and I think that's a that's a trend actually driving E V. I I've seen it firsthand.
The debt that actually happens and if you talk to people you will see the same thing. So I think long term. It does save the tires are are are going to wear on faster of course dependent on the individual driver, but broadly speaking that will happen and I remember that's also a function of the weight of the vehicle the weight on the tour puts.
More usage on the on the vehicle itself.
So I think long term it bodes very well getting you know John we also has to be balanced I think the number right now is about 5% of the car Park R. E. V. So we can always as you rightly pointed out. This is a trend that is coming and it's a trend that we have to and are.
Addressing right now to make sure is that number continues to grow that our products are there on the road and are ready to be replaced as those tires need them and finally, you know that.
The thing that I think most people will also appreciate as you as you're on the road with Evs are the number of parts that need replacing and a number of parties that actually function or substantially reduced two of the main parts that needs to be replaced consistently and frequently of racing tires. So for my tire perspective at <unk>.
Certainly puts our industry and are in a position of Oh, you don't need in our.
Position of consistent revisit as people use those vehicles and remember these will last longer will last longer as well in terms of our miles on the road in those tires will be very important to them as those E. These vehicles are used over their lifetime. So net positive.
Great and just a question.
Question for Darren just I'm not on the rise a little bit.
I think you guys said $1 billion in the second half of the year and that Q3 would be higher than Q2 is it pretty evenly split between Q3 and Q4 interest when you think about $500 million a quarter or does it or does it split differently than that and you mentioned back in the Q3, you should have price mix positive.
Do you need further price actions to have Q4 be positive on a price mix standpoint.
I was just hoping to get some color there.
Yes, so John the split on raw material cost is weighted towards Q3.
So we're expecting to have about <unk> about.
About $600 million of raw material cost increases in the third quarter.
The only nuance that I wanted to point out there if we're comparing Q3 to Q2.
In Q2, the variance analysis for raw materials, which was the $419 million.
Shown on slide eight.
That is good your legacy business only for the.
Raw material cost increase the Q3 dollars $600 million, where we're actually starting to report the combined company.
So there's like a natural.
Increase of about 25% in the tire business.
So the numbers are going to be naturally, 25% higher just by including Cooper.
So there, but there are still even beyond that so that 400 million if you add in Cooper.
You know become something more like 500 million.
And then you're obviously moving up to 600. So there is a step up there, but then we're seeing it moderate.
In Q4 based on where feedstocks are right now.
And sort of our general outlook. So you.
It won't be quite as big a challenge.
When we look into Q3, we're comfortable that we're in a good position given.
Given the pricing that we've announced in July to more than cover our raw material costs in Q3, and I think that's why we've given the reference to the comparison.
<unk> mix to raw materials, which we've been I mean price makes its been exceeding raw materials in the last couple of quarters, we expect it to be similar in Q3.
So we feel good about how we're positioned in Q3, we've got the raw material and other inflation that will start to be less and less of a factor year over year in Q4.
Yes.
We're feeling you know there's less pricing year over year that would be needed in Q4, and we feel good for that reason as well, although obviously, we're going to continue to monitor the trends there and we will take additional actions if we need to stay on top of it.
Thank you so much.
Thanks, John .
And we'll take our next question from James pick a rally with BNP Paribas Exane. Please go ahead. Your line is open.
When James Hey, Good morning, guys.
Hum.
Can you talk about the quarters are strong you know volume and factory overhead flow through.
That's certainly stood out and you know where the rent was there any one time Oh.
The favorable items in the volume and the operational side of things or you know.
Hey.
Sustainable could look further for the rest of the year.
Yeah, I think that there is nothing unique in there yeah. That's just good operational performance.
And you know I think we had some area. Obviously there are some industry that goes into volume, but overall market share. Our team continues to deliver very well you'll get some recovery there in OE still ways to go on OE, but.
Other than in Asia were.
Replacement business is back above pre pandemic levels. So we're you know we sort of done the recovery in replacement, we still have the recovery in front of us for OA and our share performance has been good. So I think that makes us continue to feel good about where volumes are going to be and Derrick I'll, just add to that James and I.
I appreciate you pointing it out I think Youre also saying if I zoom out for a moment the benefit of a lot of the capacity issues and managing our capacity within the footprint you know those issues. Those are decisions that we took on plant closures a while back I think youre seeing the benefit of that now and in addition.
And to that you know, maybe a shout out to our team all the plant optimization and operational excellence work that we don't talk about so much on the calls really are driving efficiency in our plants and that's really come into play right now and as you see all of the supply chain disruptions and energy increases and labor shortage.
And all of those things and I think our team is really manage that are in this very volatile environment extremely well. So I appreciate you highlighting that.
Yeah, No I appreciate the color.
Yeah, I think you touched on this but can you kind of can you revisit.
How the dealer inventory channels are looking and you know the sell through right now as we think about the additional pricing that could be.
Be needed in the fourth quarter.
Clearly you know inventory levels and the sell through you know aspects of Haynesville.
Determining the you know what what pricing could be.
Received in the market. So that's yeah.
Yeah, you know James I'll start and Dan May want to jump in again on prices. We go but look I think we said it in our remarks is absolutely worth repeating.
I'll start with North America, I mean, our channel inventories are really pretty good right now I mean, they were down in the U S are down about 15% to 20% versus year end, and then a little bit below pre pandemic levels. So really really good levels heading into the second half and you know what.
I think that's largely a part of if you remember last year.
The distributors are trying to get a retired it they keep they could they were going long on inventory.
And and we also had price increases come in pretty heavy so I think you saw that that's been sort of buildup last year. I think you know theres better supply out there right now and I think the dealers and distributors don't see the need to go along with inventory and I think that's got the channels in good place in a good place and I think.
You know if we if we sort of linked it to the second half and we link it to sell out.
No sell out has been down a bit compared to last year, when we have that big Big post COVID-19.
Calgary, but also what we saw particularly in our business that we were really encouraged by our sell out trends in May and June we actually did better than the industry and that too is contributing to a.
To those lower channel inventories and I think again supports the need for good sell in in the second half, even though we have a bit of a volatile environment. So I think that's you know that's a net positive and and and I think that that lines as well and Europe inventories are a little bit higher.
A third higher than they were a year ago, but also there we have some unique things going on in that and again I think particularly I'd highlight the situation on what's happened in Russia, and particularly around winter tires, where that winter tire availability has caused distributors to load up a little.
But more than they might have in the past and again for US love our plants as I mentioned earlier are functioning well, we've been a reliable supplier. So we're not particularly concerned about that certainly will keep our eye on it but again, we think we're pretty well positioned for the second half.
Hi, Scott.
Thank you.
And we'll take our next question from Rod Lache with Wolfe Research. Please go ahead.
Morning, everybody.
Just had a just a couple of things first on on commodities and and pricing. So if spot prices for raw materials stay where they are right now.
Could you just give us a sense of how the math would look for you in terms of.
Somebody a little bit of tailwind.
As you look out to 2023 and now spot.
Spot will be anything, but flat, but that just curious about how the math works at the moment and.
There's obviously just more broadly a lot of signs of macro weakening in the U S and especially in Europe .
At this point does that play any role in the pricing analysis that you guys think about it or does it feel like just supply demand conditions are structurally pretty good supporting that the pricing.
Suraj.
A lot to unpack there.
But I think overall we.
We are seeing a pretty stable demand environment.
And we're watching and doing a lot of analytics trying to figure out.
If we're if we would start to see any lead indicators, but so far.
The demand demand end user demand is remaining pretty good good in consumer and commercial.
And so and that is you know notwithstanding the macroeconomic situation notwithstanding price increases from us and other members of the industry.
So I think overall, that's feeling pretty good that when we get to the fourth quarter I mentioned earlier that raw material costs will not be as big a year over year headwind in Q4 as they will be in Q3.
To the extent, we continue to see.
The flattening out of raw materials, and we've even seen some raw materials start to come back down.
To the extent, we see that then that trend will continue into the first half of next year. So we will see less.
Less headwinds from raw materials, we're also seeing other costs.
Flattened out so in the second quarter.
I guess as an example, like our increase in transportation.
Finished goods.
By itself was $55 million year over year.
Really a significant increase in the cost of finished goods transport.
Working with by the fourth quarter, we're gonna be starting to anniversary some of the big step up in transportation Ocean freight so that's no longer going to be as significant a year over year factor.
Effectively says that we'll be catching up with those costs.
And so I think that there's another factor that's going to be helpful. So it'll be less of an increase you know.
Less increases in raw materials less increases in some of the other costs and obviously, we will continue to benefit from the ongoing impact of the price increases that we've you know we've announced this year.
Okay, So and I guess that just.
Take ways into the next question I had about just.
Inflation.
Hum.
Your tone is is somewhat more optimistic and I know you're not commenting on that the new contract.
There are a lot of puts and takes there and including.
Energy costs, and obviously labor costs and things like that any kind of high level on how we should be thinking about inflation broadly you at one point used to have used to be able to neutralize inflation with productivity do you have line of sight and maybe getting to that.
At some point here into.
'twenty 'twenty three.
Well I think it's important that the big step up in inflation started in the fourth quarter last year. So I think as we start to anniversary that first big step.
We're starting to move back in the direction of an environment that may be more balanced.
So you know and we're now in the fourth quarter seeing that.
Getting through the second and third quarter, which are the peak of the inflation as we see it right now.
I think it's a good thing you start to see fourth quarter with less of a year over year increase.
And then we're going to start to get into the beginning of next year, we'll anniversary some of the big step up but the energy and other costs in Europe . It really just started earlier this year.
And you know that that.
I think that process is likely to continue.
Based on everything that we're seeing right now.
You know Rod I, just maybe add to Dan's comment you know and I know you know well. We go back to 2012 2013 2014, we saw massive at that point raw material increase as you may recall.
Natural rubber was approaching $3 a pound.
We have lots of headwinds there that was the first time, we saw those things it's not dissimilar today, albeit the costs are obviously different and coming in a lot more buckets.
You know, we managed a very well through that situation both on the way up as we hit those costs and on the way down as those costs moderated and and I think what you're seeing from Q4, all the way through now is that where we're we're doing the same thing and I think that's what you should expect going forward.
We can't predict as you said that macroeconomic environment, we certainly didn't predict this environment as specific as as what we've had to deal with but we've managed through it and I would tell you. That's the plan of the team to do again, and we've had a lot of confidence in doing that and and listen on the cost side you know when we have.
These costs that escalates. So quickly absolutely. Our goal is to go back to neutralize those as Darren said as those cost sort of start disabled stabilize even if at a higher level. We will put the plans in place to make sure that we do offset those whether it's automation, whether it's other cost savings programs or other initiatives.
So we have to take but absolutely we will we will get back to a point of neutralizing when its costs.
We as we worked through that.
Richard and I apologize for taking a.
The third thing here, but at one point you had expressed some optimism about getting to like an 8% margin for the business.
In the not too distant future based on what you see are you still kind of.
Thinking that that that's doable here in the next year or so or or is there anything that's really just changing your view on how long it takes to get back to historical average margin.
So I think I'd, rather you know you start I mean, we've taken over the last three years, we've taken a number of actions that were meant to move us back towards that 8% and beyond and Thats. The restructurings that we've done in manufacturing in Americas and EMEA. The actions we took in distribution in Europe .
We still feel like those are likely to get us there.
The compression in margin that we've seen which I think we said.
Just pricing for raw materials and inflation.
In the second quarter compressed margins.
On a like for like basis.
Nearly a percentage point.
And that is something that has happened to us before.
I think we're in a year now where you know like raw materials, we saw $800 million in the first half. We've said, we expect about 1 billion in the second half so $1 8 billion of raw materials. That's effectively the same number we saw in 2011 and we saw similar effects back then.
But then as we went into 2012 in 2013 cost started to come back down.
And Mark that margin compression went away and we went through a period, where your margins got much better yeah, I think that as we get to the point where materials and other costs flatten out.
And perhaps even see raw materials, starting to come back down then I think that that will put us in a really good spot to get to that 8%.
Yeah.
Call it the near term.
The next couple of years and with 10% is a realistic possibility in more of the intermediate term that three to five years. So exactly that's what I was going to say I think rod we absolutely still believe it's possible again. This environment has made it a bit more volatile, but the structural plans. We put in place you know Darren highlighted the aligned distribution initial.
It is in Europe , which is which is working I think I said in my my remarks were six consecutive quarter now share gains there and and we're getting volume we're getting price right. Now. So we feel that are absolutely those numbers are possible.
Thank you.
Thanks Ross.
And we'll take our final question from Ryan Brinkman with J P. Morgan. Please go ahead. Your line is open hi, great. Thanks for taking my questions I wanted to ask a couple around slide eight are particularly if you dig into the efficiency I guess inflation and other cost increases bucket.
It seems like you were to back out the non repeat of the 69 million benefit last year than the year over year swing there would've been more like negative $82 million, you hope able to help us with like that.
C sub component within that you know Ah Ah you know how much are you.
Just sort of a you know within the 82 million just sort of help us better judge execution. So for example, with the efficiency component help year over year, indicating positive performance within the category of things that you can control and that was just like more than offset on a year over year basis during the quarter by inflationary cost more outside your control or what's the.
Right way to think about that and then going forward. What what are you looking for or targeting in terms of efficiency savings or are those.
Those changes in cost relative to things that you can control is that a meaningful offset to cost inflation or do you expect to offset.
I'll start with the impact inflation, primarily through price mix, rather than a cost sites.
I think we'd all like to get back to the.
To more of a historical situation, where we had for many years it seems cost inflation in the $30 million to $35 million a quarter.
And our efficiency actions that had a track record of being able to create savings around 40 million a quarter.
And you know that that was that was the historical situation I think we're all looking forward to when we might get back to something like that because when we were getting a couple you know 2% to 3% inflation, we were able to offset that with the efficiency programs that we have.
You asked the question about the $82 million and how the underlying operational effectiveness or efficiency looks I think generally speaking we feel like the execution by our teams is actually very strong and we have a number of operating metrics.
That looked quite good if we look at the amount of output.
Per associate an hour so on the so the output for each hour of Labor you know we've got some very good.
Evidence there we've made progress in.
The.
Reduction in waste in our factories and the improved.
Yield so the percentage of tires that are ready to to go to the Oes as produced I mean, there are a number of metrics, there where I would say operational effectiveness looks very good.
The difficulty is that when we look at the overall efficiency.
Our factories. It does include the fact that we've got a lot more hiring going on.
And a lot more training going on which means there is some duplication of labor because we have people doing the jobs and other people being trained and jobs and.
And the fact that people have to take time to train others reduces their absolute productivity in an aggregate sense.
So when we put all that together dollar wise it doesn't look like a big impact.
But I don't look at that as anything that shows a lack of effectiveness. It's just situations. So as we get past this need to hire and train more people.
I think we're slowly making progress in that it has come down over the last six months as we get pass that then the effectiveness of our plant optimization programs that are creating these.
Underlying improvements in other metrics that are going to have a chance to get to the bottom line.
Okay. Thanks, and then last question for me, if we were to sort of move on from the savings versus non raw materials inflation bucket to that.
Price mix versus raws bucket.
You've given the outlook for positive price mix versus raws it requeue.
The decline in spot prices of raw materials populations to date I'm guessing, it's gonna more positively benefit for Cuba, and then re queue. So the question is if the current levels of pricing were to hold through the remainder of the year and I'm not sure. That's the assumption you want to use I don't know if you have pending price increases to take into account or whatever but if we were to sort of take into it.
What we know about pricing you know pricing differently et cetera.
What Youre confident you can get in and then if you were to maybe update you know with the analysis for the most recent decline in oil prices and whatnot, but what does that imply a directionally speaking do you think for the trend in our price mix to raws and fourth yep.
Yeah, Yeah. So I think that the changes we're seeing now yes, you may see some you'll see some impact of that in the fourth quarter and probably see some of that rollover to the first quarter as well.
And you know it's going to depend on how quickly we work our way through our inventory.
But yeah I think the outlook. We've given is our best view based on where spot prices are right. Now. So I think you can assume that the fourth quarter.
Raw material costs, which if we get a 1 billion for the second half and 600 of it is in the third quarter, then that's about $400 million.
That does take into account.
What we've seen.
Up until now.
And if we see further reductions then there could be further improvement in the fourth quarter and I think particularly when we're talking about petrochemicals.
Synthetic rubber, which tends to arrive more quickly.
The impact of its natural rubber or if it's a carbon black that's coming in from Asia.
More time on the boat takes longer to get here and more time to work through inventory.
We could see still see some benefit if it keeps going down for Q4, and certainly with Q1 well.
Yeah, I think we feel good about our pricing set up for Q3, and I think the price increases we've announced here mid year set us up pretty well for Q4 also.
We're going to watch the situation that we got to act if we deem other actions then obviously, we're going to take that into account.
Okay helpful. Thank you.
Yeah.
Thanks Ryan.
There are no further questions at this time I'll turn the call back over to Dan miles for any closing remarks.
Yes.
Thank you so.
Before we wrap up I wanted to let you know about a change that we are discussing for the fourth out of our future earnings calls.
So going forward, we're considering publishing our commentary along with financial information.
Argument the night before our earnings call and then using the conference call time exclusively for taking questions.
So rather than a separate press release slide deck in prepared remarks, we're just have one document combining the content of all three.
Obviously appreciate any feedback that investors would like to offer on this process improvement.
Other than that thank you for joining us for the call today, and we look forward to talking to you again next quarter.
Thank you and this does conclude today's program. Thank you for your participation you may disconnect at any time.
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