Q4 2022 Goodyear Tire & Rubber Co Earnings Call
Begin in just a few moments.
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Good morning, My name is Ashley and I'll be your conference operator today at this time I would like to welcome everyone to Goodyear's fourth quarter 2022 earnings call. All lines have been placed on mute to prevent any background noise. After some opening remarks, there will be a question and answer session.
You May ask a question by pressing star one on your Touchtone phone.
Today on the call, we have rich Kramer, Goodyear's, Chairman and Chief Executive Officer, Christine as MRO, Chief Financial Officer, and Darren Wells Chief administrative officer.
This call Goodyear well refer to forward looking statements and non-GAAP financial measures forward looking statements involve risks assumptions and uncertainties that could cause actual results to differ materially from those forward looking statements.
More information on the most significant factors that could affect future results. Please refer to the important disclosures section of Goodyear's fourth quarter 2022 investors that are in their filings with the SEC, which can be found on their website at investor day at Goodyear Dot Com, where a replay of this call will also be available a.
The non-GAAP financial measures that may be discussed on today's call to the comparable GAAP measures is also included in the Investor letter I will now turn the call over to rich Kramer Chairman and CEO .
Great. Thanks, Ashley and good morning, everyone. Thanks for joining US today, we released our fourth quarter Investor letter after the market closed yesterday we.
We received very good feedback from investors on both our letter and our Q&A call format. Following our third quarter release. So as we did last quarter. We use this time again to focus solely on your questions now just before opening the line I wanted to acknowledge as you heard earlier that both Christina and Darren are joining me on the call today as you saw.
With the announcement in December Kristine It became our Chief financial Officer as of January one, replacing deer, and it has moved into a new role of chief administrative officer, congratulations to both of them and again. They are joining me here I'm excited to continue to partner with both of them in their new roles.
And given the transition Darrin is joining us on the call today, but Christine and I will take the lead in responding to your questions. On these calls as we go forward so with that Ashley let's open up the call for the first question.
Secondly, we will take our first question from Emmanuel Rosner with Deutsche Bank. Please go ahead.
Good morning Amanda.
Good morning. Thank you so much for taking my questions and.
I agree with the feedback on the on the call format. So they're very much in favor of it.
Thanks, Emmanuel we appreciate the feedback and Christina pushes that way, so so well done and we appreciate that.
Great.
First question, maybe I think late last.
Last year around the same time I think you helped you had helped us out with that.
It was like framing sort of a base case scenario for what could happen to either free cash flow.
For you guys for the full year.
I had under certain conditions. So would you be able to go into this discussion for a 2023, obviously you know I appreciate all of that in the slides just curious you know.
Knowing all you know what does that what does free cash flow look like for you.
Sure. So hi, this is Christina now let me start by saying Thank you for the comments on the Investor letter and I have to send out thanks to our teams. This has been a great push by our Investor Relations team S. P. N E. R. Controlling teams all to put that together and again we've received.
Really great feedback on that as far as free cash flow in 2023.
And if you look through the drivers we've laid out as part of our letter.
And if you were to take the or some <expletive> and so I'll just stay with me on the assumption. If you were to take the assumption that our EBIT was going to be flat.
In 2023 with our EBIT in 2022, which was about a billion won.
You should get to a level of free cash flow in the range of about $400 billion.
And that's just reflecting the year over year improvement in working capital.
You know me well what.
I'd add to that is it's not that we're targeting flat earnings our goal is to improve earnings and after a really tough set up in the first quarter as you've read in the letter the trajectory should improve meaningfully as we move through the remainder of the year.
In the second quarter. Our goal is for segment operating income to approach 2020, twos levels with volume stabilizing and given lower year over year raw material cost increases that we're expecting in the second quarter.
Assuming a relatively stable economic outlook, then we would begin to see the benefits in the second half of higher volume on easier Comparables.
Strong growth in Asia Pacific driven by a recovery in China, and lower inflation levels than we're expecting in the first half of the year. We'd also expect the benefits from our recent cost actions that we've announced and then of course at current spot prices tailwind in our raw material cost. Historically this has been a time in the cycle.
Well, what we've seen growth in earnings and growth in our margins as well.
Yeah.
Okay.
That's helpful and then I guess following up on some of the pieces of.
Oh, the free I guess of the free cash flow guidance.
So the Capex it was guided at a $1 billion for 2023 I think this compares to maybe a <unk>.
One point to $1 $3 billion framework that you've discussed.
<unk> previously in terms of.
The investments that we're making in gross.
What is enabling you to sort of keep it around the <unk>.
The $1 billion and is that roughly sort of like just maintenance capex or are you cutting back at.
Where are you cutting back.
Yeah, No. Good question Emmanuel and so what I would tell you is.
As we went through 2022, we did scale back our plans for capital expenditures just given the outlook for the global macroeconomic environment as we look at 2020 three we expect to continue to invest in the Americas and in Asia Pacific Although investment levels.
An email will decline just given the current macroeconomic outlook there.
We continue to allocate capital to high return projects that will improve our overall competitiveness over time.
Yes, Andrew I'll, just just jump into echo and Christine as points I think you know we take a lot of time to go through those capital plans and we've worked through a lot of cycles and I think you can count on us to adjust capex to the environment. We're in and then when we do that we really don't short change ourselves.
Excuse me on what we see as long term growth projects that we have to do so we're comfortable with what we spend.
And I would just tell you even if you see things like <unk>.
Things that we did at CES around intelligent tire and around sustainable tire you know there are projects growth projects industry, leading sort of sort of technological projects that we're going to continue to move forward with within the capacity of the spend that we have and we feel comfortable knowing how to do that.
Okay I appreciate the color and then just maybe finally I guess since your you had mentioned that the environment can you maybe just provide.
Provide a little bit your your perspective on some of the drivers of this markets demand weakness that seems to be across you know every every region every major region I guess, what what is driving this how would you see that potentially evolve through 2023 years.
On the demand side, and then any implications for.
How should we think about pricing.
Yes. Thank you.
A lot there maybe I'll just start with the with the Americas.
You know we did we did see a weaker market in the fourth quarter and.
And we see a little bit of a slowdown coming into Q1, we reacted not only to the Americas, but Europe as well as you saw in our Investor letter by taking production down with that focus on making sure. We don't have excess inventory and a bit of a slowing market and to focus on cash is Christina went through.
But you know Emmanuel as I think about the Americas going forward. You also saw in our letter we saw that you know our channel inventories are up about 10%, but what I would tell you is that's pretty healthy I mean, you know our distributors are really.
Rebuilding their inventory we didn't see any any buy ahead, so let's say in anticipation of any price reductions or anything like that it's a pretty healthy place and I would say in line with the expectations of where the market is going in.
In 'twenty three so we feel pretty good about North America little slow to start, but I think we have a stronger second half coming a little slow to start because we're bringing some of those costs on the balance sheet of unabsorbed inventory into the into the first quarter as well, but we feel pretty good about the demand picture sellout was about flat in the fourth quarter.
We're in a year over year in the fourth quarter, and we don't see any big changes going into the year.
On Europe , I think a little bit different story, obviously a bit tougher there.
I would take a step back and say we feel really good about the initiatives. We've put in place in Europe aligned distribution is working our AR in the quarter. We got volume we got price mix ahead of raw materials again, and we had share gains in a down market across the board.
So I think the 11th or 12th quarter in a row. So you know things are working in Europe . We also as you know it took a lot of actions there to get our costs in line I would say, we feel really good about those things, but obviously in Europe , we've seen big energy inflation in Q4, driven by the war and we saw.
You know the anticipation of these high energy costs really sort of that.
Sort of reduced consumer demand out there is we saw really weak markets in the consumer replacement business, particularly in November and December where we saw consumer base thinking about big energy bills and the channel sort of slowing down on wanting to buy more inventory. So so Europe is a different case.
We know that's going to continue for a little bit into 2023 first half, especially second half again as Christina said will be better and we're taking the appropriate actions to make sure. We don't build excess inventory make sure we focus on our cash and continue to look at more cost areas. So remember in Europe, we've done a lot.
What in terms of restructuring our footprint Hana and full value. So we did in U K and Belgium, we restructured the business in South Africa, and we we did some restructuring and some some sort of add volume and get some more efficiencies in France. So we'll continue down that path and then in in in Asia and book, particularly.
We focus on China here.
Tough right now because of Covid, but we really see that reversing and we see that reversing in our favor in two areas. One is the OE business, which was strong in the fourth quarter and will continue to be we doubled our win rate in the oes in 2022 to about 70%.
And.
We have a higher mix into Evs, Hi, E V win rate of high luxury SUV and truck.
Win rate as well with the domestic Oems and Chinese Oems, that's higher profitability and will create good pull in the replacement market and as Covid sort of as we get through Covid.
I can say that's going to happen towards the second half, we see a big a stronger pull and it makes up in replacement as well and to get ready for that we continue to invest in in distribution in the key markets in China and in India as well. So so overall look we got to get through Q1 first half if you will again.
As we see some of this tumultuous this.
But beyond that we do see some upside in and feel relatively good.
Thanks for all the color.
Thank you.
We'll take our next question from Rod <unk> with Wolfe Research. Please go ahead.
Good morning, everybody.
Alright.
Quick questions first are you seeing anything that would indicate anything other than stable pricing.
You're entering this week this year just in the context of the weak demand.
And can you clarify are your expectations for the other tire related businesses has looked a bit soft in the in the fourth quarter.
Sure you know.
From from how we're looking I guess I'll say price mix in how we're looking at are the raw material environment, It's obviously related to that.
Even though in that sort of the essence of your questions is yearning pressured margin compression we've seen over the last quarters because of these escalating raw materials, that's true for Goodyear true for the industry as well and we need to recover that I would tell you you know our momentum has been very good our teams across all our businesses.
Offset.
All of the raw material headwinds with price and mix.
And in two of the businesses in Europe , not being one of them. We also offset some of the other.
Cost increases we had as well so the team has done a really good job now as Kristina mentioned as well we see this this potential decrease for raw materials and I would tell you. Our plan is to capture the benefits of those raw materials and see that in margin improvements as we are as we continue.
To capture value proposition out in the marketplace and I think Rod you know this well having been with us so long.
Historically in a period of declining raw materials, we're able to grow margins, we're able to drop through those benefits into the.
Into the into our earnings and I would say you know we see that is still the plan and our way forward and what we're driving for.
I'd also tell you what can help that.
It gives me as we also see the OE business coming back which means there'll be.
A a pull on the best capacity that the industry is making and that's good for sort of the supply demand equation out there as well as we think about how to manage the demand in the replacement market.
And then finally, Ron I will just tell you you know.
In terms of what we're seeing in the marketplace.
We have not seen any decrease demand or trade down in our tier one volumes at all we've seen a little bit in tier two moving towards the lower tier brands, but I'll tell you I'm not sure that's a trade down or or a price issue as much as it is you know all those sort of <unk>.
<unk> tires that were back ordered.
Paid upfront in cash by the distribution, particularly in the U S. I'm talking here that sort of hit the docs in the past quarters that obviously drove the.
The industry numbers are all that came it came late it was paid for it and so I think what you see is a lot of a lot of a push of those tires to turn it back into cash and I think that's a that's a dynamic we're dealing with but again that doesn't really impact sort of our our tier one tires.
Or the value proposition for them, so I hope that helps.
I'll jump in on the <unk>.
Non tire business performance in the fourth quarter, but that was principally driven by our chemical business, but you know that you as you know that's a pass through margin business and when thereby butadiene at higher prices and then butadiene dropped in the fourth quarter pretty precipitously that means theyre adjusting.
Pricing real time in the market. So it's more of a timing issue as I look to 2023 expecting good growth in these areas really driven by our aviation business.
<unk> and expecting strength in volume strength and pricing and mix and we're seeing that across the portfolio, especially given the reopening of demand pull out of China.
Okay. Thanks for that and just one one more thing if I can ask I'm, just taking a step back.
Maybe you can just elaborate a little bit on what.
What it will take to close the gap, obviously on a mix adjusted basis versus your peers.
Presumably some of the capital spending that you were planning was was aimed at doing that and maybe you could just provide a little bit of color on on what you're shooting for here in the next year or two.
Yeah. So I'll I'll go ahead and start I mean, we talked a little bit with the earlier in the call about the plans for Capex for 2023, and a lot of that.
It's influenced obviously by the.
The European macroeconomic outlook I'd have to say over the last two to three years, we do feel that we've made significant progress on <unk>.
Closing our conversion cost per tire gap versus our competitors I would say two or three years ago, we had estimated that GAAP to be in and around $4 per tire.
And today you know what he had said with the closure of a very high cost facility in <unk> than in the U S. A big restructuring in EMEA and then of course, you add a benefit and as much as many of our competitors had low cost supply coming into western Europe out of Russia put all of those to.
Other than we think are disadvantaged right now is nearly half of what it would have been say two or three or four years ago. So we're feeling.
Well positioned on a relative basis does not to say, we're not going to do the work to this for work and what I'll tell you is that the investments that we have in the plan. We started last year and continuing in 2023 in the Americas and Asia Pacific You know are very high return projects and as much as they're more expansionary instead of.
Greenfield type plants.
That will help move our little cost percentage forward as part of our footprint and increase our overall competitiveness.
As we go.
Okay.
Okay. Thank you.
And once again as a reminder to ask a question that is star one and we will go next to John Healy with Northcoast Research. Please go ahead.
Thank you.
Rich I wanted to ask a big picture question about kind of debt.
And the C suite recently, just would love to get your perspective on the move with what Darren into that Mark the strategy centric elements to the business.
What might we expect from you guys over the next couple of years like what what are the areas, where you think that change is going to have the biggest impact on that.
The DNA of the organization.
Well I think you know I think the way I'd answer that John and the one thing I would say as we operate as a team. So you know I think that what makes what I'm proud of and leading the Goodyear team is that it's not reliant on one person so whether darren in the CFO role.
Or in a different role, helping us with strategy, whether you know Christine and Darren have worked together for so long I think this was a really natural and an elegant transition if I can say and it looks to the leaders of our business units as well as well as well as our CTO. Chris helps so I think that you know when you look at what we're doing is.
The team that really is where the value is so I won't I won't limited to any individual person, but I will say from a strategic perspective, I think one I would highlight what Christina just talked about which is to say that we are keenly focus that we have to get our our costs.
<unk> continuing Lee in line not only relative to two competitors, who also get better but just the trends we see in the marketplace of you know I always speak about transparency about price and availability of inventory, which puts pressure margin compression pressure on every business in every industry, we're keenly aware.
Where that and we need to we need to make sure that our operations continue to get more efficient every day that means what we do in our factories on conversion cost. It means where our factories are we've taken footprint actions you can count on us to continue to take more of those and then to make the high value added return investments.
That where that we are going to have to do to help drive both cost structure and more efficiency in the products. We make so so that will that will it will continue and we're going to get we're going to continue to get I.
I would say.
Darrin I'll say creative on how we make sure that we do that there's a lot of.
You know a lot of manufacturing capacity in the industry and in like we did with Cooper, we need to think about how we can use that capacity more more wisely as we move ahead.
Secondly, I think.
You know I always tell my team we have to have the best products in the industry. So our product innovation engine has worked.
Hi podium in every product category in Europe , including summer, we have the freshest product portfolio, we've ever had in Asia, and Latin America and in the U S and that's both in commercial and in consumer we will continue to make sure that our innovation engine is working we don't talk about it as much.
But we don't talk about a lot of the things that are working as well as they they are so we will continue to do that and I think what gets US most excited about this.
Is the technological trends that are moving forward in our business.
They're not revenue generating today, but the changes we're seeing in mobility are the changes from just making a if you will of them tier two and intelligent tired that actually has a place on an intelligent vehicles of connected tire that that improves the safety and performance of vehicles.
And it actually has a role that becomes part of those vehicles operating systems. Both in terms of how it's integrated into the vehicle and the service element of it is something that gets us excited about where mobility is going and what the role of Goodyear and the tire is and that's something that we're you know we're thinking deeply about it and I think.
We're making we're making great progress on going forward. So there's a number of things that Darren will you know will help us on as we go forward and do that but again.
I would take a step back it's the basics and it's the technological trends that the industry is going.
Our ability to execute on both of those simultaneously is going to continue what separates us going forward.
Yeah.
Thank you Donna.
Helpful and just one other question I had just on distribution.
Sounds like the Cooper in the Goodyear.
<unk> are starting to be maybe a little bit more connected in terms of dealer availability, but just wanted to get your thoughts on in terms of access.
Super product with Goodyear dealers and vice versa.
Are we at a point, where maybe one plus one can start to equal three or is it kind of going to continue to be.
You know somewhat somewhat separated in terms of how each go to market.
So I actually think you know, it's a little bit of both and there. The reason I say that you know for instance, our retail stores now have Cooper product in it and that that is and has turned into in terms of the performance of those stores sort of a one plus one equals three in terms of how they are operating how we're taking care of customers and.
The products that we're offering them in the same respect there are certain distribution elements of how Cooper goes to market.
How they sell to distributors and are in that process is one of the reasons that we wanted to to combine Cooper with Goodyear and they do some of those things really well and we are not going to do.
Those were going to make sure what they did really well and candidly what they were better than we are we're going to keep the best of that and we are while we were integrating where it makes sense to do so I think it's a it's actually a little bit of both and I would tell you. Both in terms of the synergies were on the run rate synergies that are that we.
Said, we were going to get and.
And I think that are you know that the market side, we said, we weren't going to do anything rash right out of the box, we haven't and you'll see.
<unk> progress on how good your in Kruger incorporate into the market together.
In the in 2023, so I think more to come on that but I'm very happy with where we are.
Great. Thank you.
And we'll take our final question from James <unk> with BNP Paribas. Please go ahead.
On the second quarter color of Soi approach a year ago levels potentially.
Potentially what would be some of the key assumptions to get there.
Correct me, if I'm wrong here, but the second quarter. It should have a similar overhead absorption impact in the first quarter and maybe that's $60 million to $70 million and then from there you know the three buckets key buckets.
It would be unit volumes price mix versus raws and then.
Raw materials inflation piece.
Just any color.
That would be super helpful.
Yeah sure Hi, Jay This is Kristina so I guess I would start by saying in the second quarter, we see volumes stabilizing and I would and we have announced a 5% list price increase and your consumer replacement beginning January one until we expect.
Europe and getting to catch up.
To the increases in raw materials over the course of the first quarter and second quarter, obviously, there's a very significant step down in raw material price increases.
From Q1, Q2, and so that should be a benefit for us as well.
Yeah.
Okay, and then just well then how do.
How do you foresee the elevated channel inventories in Europe , and I think like 30% above year ago levels with.
With the price increase and with replacement sell in demand you know down for the industry that you know mid teens.
Entering 2003.
Yeah, how do you see that unfolding.
Yes.
Okay Alright.
Yeah, So great question James.
Elevated channel inventory is actually all reflective of winter and so what happens in the first quarter is we see a shift from winter tire sell in in the fourth quarter and the first quarter, we shift into a summer tire sell in season, there the inventory in the channels is.
A much more balanced and even healthy.
Would tell you is that you know the <unk>.
Prices in Europe have also abated significantly since then.
The third and fourth quarters, as well and so expecting that to support consumers.
Over the course of the first and second quarters.
Yeah.
Okay. Thanks.
Sure.
There are no further questions at this time and this will conclude today's Goodyear fourth quarter 2022 earnings call. You may disconnect. Your lines at this time and have a wonderful day.
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