Q1 2023 Goodyear Tire & Rubber Co Earnings Call
Please standby your program is about to begin.
Good morning, My name is sneaky and I will be your conference operator today.
At this time I would like to welcome everyone to Goodyear's first quarter 2023 earnings call. All lines have been placed on mute to prevent any background noise.
After some opening remarks, there will be a question and answer session.
Do you remember did you start to ask questions by pressing star and one on your Touchtone phone.
Can we draw your question. Please press star two.
Today on the call, we have breached Kramer, Goodyear's, Chairman and Chief Executive Officer, and Christiana Tomorrow, Chief Financial Officer.
During this call. Good here I will refer to forward looking statements and non-GAAP financial measures forward looking statements involve risks assumptions and uncertainties that could cause actual results to differ materially from those forward looking statements.
For more information on the most significant factors that could affect future results. Please refer to the important disclosures section of Goodyear's first quarter 2023, investor letter in their filings with the S. E C, which can be found on their website at investors, daughter, Goodyear Dot com, where a replay of this call will also be.
Available.
A reconciliation of the non-GAAP financial measures that may be discussed on today's call on the comparable GAAP measures is also included in the Investor letter.
I will now turn the call over to rich Kramer, Chairman and C E O.
Great. Thanks, Nikki and good morning, everyone and thanks for joining us.
Released our first quarter Investor letter after the market closed yesterday, you can find a copy of that on our Investor Relations website, along with an update on the Cooper tire integration, which we hope you'll find valuable as.
As we've done the last couple of quarters with this newer format, Christine and I will devote today's time to your questions.
I'll, just say while industry volumes have been down early this year as we expected stabilizing industry demand in the back half of this year along with the benefits of a decrease in raw material costs should improve margins as we move through the year. We look forward to the discussion today. So now let's open the line for questions.
And at this time, if you would like to ask a question. Please press. The Star then one on your Touchtone phone.
You may withdraw your question by pressing star to once again to ask a question. Please press the star and one on your Dutch don't sound.
And we will take our first question from Brian Brinkman with J P. Morgan. Please go ahead.
Hi, Thanks, just wanted to follow up.
Good morning, just wanted to follow up on some of the comments in the shareholder letter about the softer industry volume trend, we've been noting that the.
The U S T M. A numbers in the Americas two are in the U S that is in and I understand that that's a wholesale number so it's looking to get a little bit more color from you because you own retail stores and you monitor the industry closely what what the the retail demand might be doing and I saw some of the comments in the Americas outlook section two about.
Channel Destocking and just curious what might be the driver of that and.
But that might suggest the retail demand might be better, but also kind of might want to ask around the extent to which the softer.
Volume trends, including because the miles driven you know is is up our year to date and slightly ahead of the 2019 levels the extent to which may be that the bad news on the volume side might be related to the good news on the pricing side with a potentially demand destruction and sort of what you're hearing about that.
Customer reaction to these price hikes, which of course, we're encouraged to see.
Yeah. So so Ryan you'll look I'll start and I think you're right I mean, as we started the year and I'll say it again as we expected we had a weaker industry coming off of a really tough comp from Q1 in 2022 remember we had a lot of stocking going on back to that in a really strong industry.
And and that was sort of again that strength, we saw coming out of Covid. So we saw a weaker industry coming off so that we saw destocking as well as you mentioned the dealers kind of took a step back and showed in our results. We also took production cuts in the fourth quarter and again, we're doing some in the first quarter.
Just representative of all of that and that's some of the volume decrease that we saw but just as you said and I said in my opening remarks, I think that as we as we anticipated volumes will continue to get better quarter over quarter as we get through our.
2023.
And the trends that we see frankly, both in the U S and Europe DMT in the U S is up as you said about 4% Europe is actually up about 13% as well. So we actually see people getting out that that trend of people wanting to get out and travel Oh, that's what we see as well and I think that points toward a situation where.
Volumes in demand will continue to improve the consumer.
As we you know as we see it is still in pretty good shape. So that speaks to good demand for the balance of the year again coming out of a weaker Q1, and so that's a positive as well and you know as we think about pricing remember, we lapped about a 12% our price increase from Q1 last year.
And our you know if we just take a step back I think.
You know were up over two years about 30% on revenue per tire. So yeah, I feel really good what the teams have done to capture those incremental raw material cost out there I think the benefit will also see are those in decreasing our raw material costs, starting in Q2, and even at a faster pace as we get to the back half of the year.
Here as well as lower some of those inflationary costs that we've seen as well so you know.
Good demand environment, a pretty good pricing environment and a decreasing Ah.
Cost input environment as we get through the back half of the year. So I think all that bodes well in terms of what we said last quarter and how we see the year filling out.
Okay, Great. Thanks, and then lastly for me just looking to get more color on that the Cooper integration I followed the the hypertext link in the shareholder letter to Ah another PDF with even more details on the integration, which is excellent and I understand that you increased the synergies once already and now you're saying that the cost synergies will be you know fully achieved.
More than than originally announced by just next quarter.
Just to follow up on that though you know there's a lot in here about the cost savings.
What was you know left on <unk>.
Quantified at the time of the announcement and the closure wise you know these further out potential revenue synergies our go to market benefits et cetera, and just curious if you know maybe it's a combined company now and that's how it's gonna outbreak going forward or if you are in a position now to maybe put some more numbers around that or talk about you know what the time frame, which you expect.
The benefit from from the revenue synergies.
Well I'll start Christina you may want to jump in here as well first of all I would say that the go to market strategy is both the Goodyear brand or the Goodyear family brands plus Cooper continues to be on the past that we expected so oh no no.
No negatives from that going forward, we have not put any numbers around that in terms of quantifying what that would look like but I would tell you you know as we look at the segments, particularly around light truck, which is one of the biggest are attributes that we got when we when we did the acquisition I would tell you our share performance.
Formats across to all segments of the industry continues to be very strong and continues to be very much in line with what we expected. When we are when we did the transaction and additionally, as we look at some of the channels that were new to US again are a challenge that we may have exited that Cooper tire was still in.
<unk> businesses are still performing very well for us, particularly as we see some movement from tier one down to tier two tier three is the economy.
It has softened a bit so that actually has worked out very well for us as well. So so we have not quantified that Ryan, but I will tell you. There's there's no negative there that that I would highlight in fact, I would say, it's going as planned and even better in certain segments.
Okay, great. Thank you.
Nothing behind it.
Just to say within the presentation you can see in our upgraded outlook, we had a bar for initial manufacturing and sales opportunities and a lot of that has been about broadening availability.
Cooper product with Goodyear aligned distributors, we also yeah.
Have them introduce new sales incentive programs for the combined portfolio for our dealers and distributors here in the U S and all of that's contemplated in this July this upgraded 250 million dollar outlook, which we expect them to deliver.
Deliver by the end of the second quarter that that's all really good the other thing I would just add on the Cooper integration overall is that we're feeling really good about it.
On the delivery of the synergies if I you know we took on Cooper in the middle of 2020. One just after yeah. The economy began to reopen in a more material way after COVID-19.
And so I can't I can't come out versus 2020, but if I look at 2019 as an example, our Americas business was at 7% and feel like margin, we delivered $515 million in earnings and then Cooper in 'twenty or 'twenty and 19 was about 180 billion in O I and so taken together.
And as it moves through the two volatile years, 'twenty 2020 'twenty, one you would have assumed.
Yeah, our combined businesses, what it made something like 735 million or so or 750 million, but in fact, it twice 42, we earned $1 1 billion. So that's the benefit of synergies in the Americas. In particular also some of our own self help we did close the factories during COVID-19 It Gadsden, Alabama.
And really good execution by the Americas team on over delivering on price versus cost in 2022 as well so feeling good about the momentum in the Americas business.
Yeah.
And we will take our next question from Rod Hall with Wolfe Research. Please go ahead.
Morning, everybody.
Hi, Brad.
I wanted to ask you a little bit about pricing first off you mentioned.
Some price increases that were taken in Europe earlier this year.
Can you just give us a sense of how pricing would look for you in the back half of this year.
You year over year I'm I'm, referring to is if things were to be frozen at current levels and I know, there's some complexity here because you do have OEM index agreements.
And and and also related to pricing do you think that you've kind of kept pace with your peers and pricing in North America, we've seen a few.
Public announcements about some price increases from others, but we haven't seen anything yet from Goodyear.
So Brian I'll start maybe on the last question again, you know I'm actually I'll say it again, I mean, I'm actually very pleased with the way. The teams has gone to market on recovering not only the incremental raw material cost, but the oh.
But the incremental inflation that we've seen over the past two years and again that's.
Over the last two years, we're up about 30% in revenue per tire and the teams are.
Or were you know very on point, let's say front footed to go out and get those are price increases that we needed to cover those raw material costs, you're right, we have announced our price increases in Europe and other countries. So we're certainly still top of mind on that as we came into this quarter in the Americas remember we.
Did laughed at 12% price increase from Q1 last year and instead of essentially just doing across the board price increases.
Teams have been very focused on you know call. It dynamic price increases on a SKU by SKU basis to make sure that we're recovering the are the costs that we need to going forward you did see and this was I think the first quarter in a while where north America's a price mix didn't offset raws and the income.
<unk> inflation, we actually had been doing that we do see getting back to covering that again in Q2, and certainly for the balance of the year as those as those costs come down. So I think we feel pretty good where we are from a pricing standpoint, right now Kristine I don't know if you want to answer that yeah, no maybe rod I'll, just help a little bit with the modeling.
And so in Q2, well at a 7% price increase in Europe , and that's in consumer replacement Theres also a 14% increase from last year in Q2 and European commercial there's a couple in Q3 from the U S.
Up to 10% last July .
Chiller replacement, 6% on commercial replacement and then by the time, we get to Q4, the only the only price increase that would have installed at least in the major markets because we're always doing silly.
The only things related to devaluations in some of our emerging economies, but by Q4, the only price increase in flight would be this most recent hot about four and a half per cent increase at the beginning of the here in Europe .
Okay. So it sounds like pricing would still be net net positive.
You look out to the back half of the year, even as you get some of those tailwind.
From a commodities it I wanted to switch gears.
Of course.
So it's you're used to achieve.
Just a routine kind of benefits from productivity. So there'd be an inflation line that we would see and then there'll be things that you do that that that mitigated that inflation and often mitigated it completely and I understand the factors that made that impossible recently that it kind of led to this excess inflation.
And you had a lot of employee turnover energy freight and all that.
I'm wondering if you have visibility on a point in time when that sort of in the rearview mirror and you can kind of start getting back to.
Our productivity that that actually means that that Goodyear has absorbing less than I'm, just kind of CPI inflation.
Yeah sure so right.
I'll give it a start the.
Yeah, the inflation in our cost basis is CPI based for 2020 three it's going to feel something close to $400 million and that's a step down from last year, where it was about 500 million, but you're right. We've seen this.
Excess inflation, mostly driven by transportation energy and to some extent wages.
And as I as it looks forward into the back half here you know I I start with our our year over year guide for inflation and excess inflation in Q2, its another $180 million, that's a lot driven by energy in the accents basket, but I would see.
See you know a big step down in Q3 on the access part of the equation, so something that feels better by $40 million to $50 million. So 180, dropping on a year over year basis, and then by the fourth quarter dropping again, another $40 million to $50 million, assuming you know this.
Is all assuming current credit energy rates in utility rate, but what that would mean is that by the fourth quarter you know.
We're essentially neutral on excess inflation. So we've lost a lot of the very high comparable to last year. We are beginning to add productivity back into the footprint through a plant optimization. So that should continue to benefit us as we at the end of the year and as we move into next year as well.
Great. Thank you.
Uh huh.
And our next question comes from James Picariello with BNP Paribas. Please go ahead.
Hey, good morning, everyone.
Good morning, James.
So you're you're taking down production and are in the second quarter by 3 million units right, calling out that the overhead absorption headwind that'll hit you are in the third quarter.
This is in addition to the inherent loss production that to the Cooper Tupelo plant I was just wanted to confirm that right because that'll be out of commission for for at least two months. So just.
Just a few questions on that so where do you suspect you your channel inventory levels could be at the end of the second quarter and I know you know channel inventories in the Americas or in a flat year over year versus the prior quarter up 10% can you also just speak to the sequential trend and in the channel inventory levels as well. Thanks.
Yeah, So James that I'll.
Happily respond to that is our expectation what we've laid out to the americas'.
And consumer replacement overall, it's feeling like a down 5% in Q2, that's in the face of a V. M. T. That's feeling pretty okay. So the expectation is that we do continue to see destocking in the Americas and in Europe over the course of the second quarter, So expecting channel inventory levels.
Certainly be lower I'm on a on a year over year basis, as we get to the end of Q2.
And have had channel inventories come down from <unk> to the end of this first quarter.
Yes, and so we do disclose for the Americas and EMEA, we do disclose the change in channel inventory from year end and on a year over year basis and so those are included in the ER.
Segment results within.
Within the Investor letter and so in Americas.
So when you look at them are highways for so long so activity, we talk about where inventories were in their in line on a year over year basis, and that compares with up 10% in the Americas and the end of last year.
In EMEA are similarly, you know seeing destocking at the end of the year, We said inventories were up 30% and that was all driven by a very weak.
Sell out in winter and currently inventories I was in Europe by about 14%, so hopefully that helps.
Yeah, no very helpful. Thank you and then just to follow on on rods question tied to pricing.
Yeah, given the you know the the trend for raw materials to begin to deflate right in the back half.
And a.
A competitor of yours recently.
'cause conceded that your pricing could be a lever to pull to help stimulate demand that they're going to be more intensely focused on.
On the optimized mix.
Yeah. It is you know anecdotally is it pause you know is it possible that the dealers the dealer channel is he's waiting for that.
That shoe to drop out on price to begin you know restocking now that your channel inventories are in line year over year, you know you're still you're taking down you're still taking down production at a at a good clip too to get things right size.
Yeah, just your just your high level thoughts on on the pricing and the topics here. Thanks.
I mean, I'll jump in and I'll say, you know you have to keep in mind that the industry still is short on the highest end tires, you know a higher performing tires light truck tires, you know large rim diameter tires for the F. 150 is in the late in the replacement market. So that's still isn't really good dynamic and also helping that dynamic is old.
Are you starting to come back and remember that take some of our best tires that we make the best capacity out of everybody's factory, so so that supply.
Supply demand dynamic still works in our favor and you know the one thing to also keep in mind I mean, I I look back in and let's say you know over the last seven quarters, we've seen our raw materials go up you know just under $3 billion now as we see some of the.
Some of the cost increases abating, a little bit.
You know there there are only a small portion of that you know call. It under $3 billion raw material increases that are out there. So we have you know lots of cost that we have to recover in terms of a cat.
Capturing the value that we're putting in the marketplace. I mean, I think if you look at it our numbers. If you look at the Investor letter, you'll see that we expect a tailwind from reduced raw materials in the in the fourth quarter, but you'll see it's round about $300 million I think.
400, excuse me as for what you would see that against you see that against that call. It 3 billion.
Oh, just under $3 billion of cost increases over the last seven seven quarters or what have you. So there's a you know there there's lots of reasons that we have to to make sure. We're recovering what we what we put in the marketplace and I think we're not alone in that.
Got it that's super helpful. Thank you guys.
Thank you.
We will take our next question from John Healy with Northcoast Research. Please go ahead. Thank.
Thank you.
Wanted to ask a question on the decision to make production realignments go for Q2 is that something you think others in the industry are doing curious if what your competitive intelligence is telling you there and I'm just.
Or are we can maybe be in a situation where you know you guys are acting rationally and maybe the other others aren't so I was just curious your thoughts there.
Yeah, I mean I'm not sure that we can we can speak to to our competitors I would tell you that the decisions that we make are exactly as you said there they're rational with our focus on on working capital and focus on cash flow our focus on making sure that you know, we're not putting too many tires in inventory.
That could you know could impact negatively that that supply demand equation I just spoke to as well. So so I can't speak to them, but Oh I know, what we do to manage our business and we feel we feel pretty confident in doing that.
Understood and just wanted to ask a big picture question just on the OE business.
Frankly, I thought that business did a little bit better than we had expected. This quarter. So I was just kind of curious your expectations on OE, maybe by geography as we start to think about 2024 do you see yourself in a share gain position and maybe some of the pluses and minuses, we could start thinking about for that business.
Yeah, I'll start and I know Kristina will jump in as well I think we've probably you know, we'd probably I'll speak for myself personally having been around for a while I feel better about our OE portfolio are now than I had been a long time, and we've always been very strong and a weak, particularly in solving our OE.
<unk> problems around.
Making sure the tires deliver what they need to deliver for each of their Fitments I think if you look at our mix right now with where we're trending much higher towards the EV fitments across all our regions and particularly in China, where are the easy business is growing faster than probably any other region in the world and our.
Our sort of our customer profile there has changed from a lot of the transplants to a number of the local domestic producers there as well remember in that business. We you know we have a higher revenue as well as higher margin per tire on the EV fitments that we're getting so all of that.
Well I think as you look at where OE production has been again you have these numbers as well it's going to go up which also bodes well for us so increasing volumes with a better margin profile and then on top of that that you know maybe maybe less tangible on the calls but the teams are doing a I would say.
As good as they've ever done relative to doing things like reduce the iterations to get those tires to attend you always faster from a development basis I can tell you. We've had one where we had actually are our first virtual submission, where we went virtual submission to one production and that's it.
If you think about that spreading that over the Oh, you know over an OE portfolio over time, that's a significant cost reduction as well so using technology using our simulator and working with the Oems as partners. I think is something that is a bit of a even a new frontier to a process that works well that will both get.
New business, but also do it at a at a better cost and ideally a higher price and higher margin as well. So I feel I feel really good about where we're headed with our with the OE portfolio I'll just end by saying you know we are always focused and if that's something that we we even target ourselves internally we're all.
He's focused on making sure.
We're getting an improved margin profile for each of the tires that we're selling to OE, because it's certainly a competitive business.
Yeah, maybe I'll jump in here, John just to say that the market share gains across all of Rich's comments, where you're gonna see yep, good strong growth in our <unk>.
Overall portfolio, driven by Asia Pacific and in Europe , because that's where all the growth isn't easy right now and they are winning their fair share as easy as just not as strong yet here and particularly in the U S. But just.
To underline some of Rich's comments here I mean in this quarter.
Revenue per tire on a we went through E V was more than double.
The revenue on ice and just Fitments that we've won and so that's all go forward business, but and and gross margin with the same so double at least for this quarter and that's been a trend we've been talking about is yeah, we've been rebuilding our OE portfolio more towards high value electric vehicles.
Got it.
Great. Thank you.
And we will take our next question from Emmanuel Rosner with Deutsche Bank. Please go ahead.
Hi, Thank you very much good morning.
Good morning Emmanuel.
So I think the previous quarter and some of the.
You shared with US maybe some sort of you know scenario thinking around full year free cash flow under certain assumptions I was hoping you could maybe update this for us in light of.
Sort of like your your your positive outlook for the rest of the year.
Yeah sure no Emmanuel I'll take that and I think you know we we he would provide a lot of detail on the puts and takes for our full year free cash flow as part of the Investor letter.
And the only only real change is as you know.
A better raw material set up in the back half in our guidance as well as you know the better overall non raw material cost as well. So that's a part of what we're seeing for the back half of the year, but you know what we what we talked about in the past and I think this is a still.
And we're still pretty much unchanged from our last call. Although I'd say, we're more confident just given that the costs have been coming down. If you were to take an assumption that our their earnings were flat on a year over year basis at about $1 1 billion and then used all of the drivers that we do share with you as part of the letter you should get to.
A strong free cash flow of about $400 million and that's all just driven by the change in working capital from last year to this year.
And so yeah, depending on how you know you want to lay out the assumptions for earnings for the year. Even if you just assumed flat yeah, you should get to a very strange strong free cash flow development and I don't think that our goal is or to say that we're targeting flat earnings of course, we want to grow where I'm expecting more synergies.
For the Cooper transaction. This year. He goes here, even our corporate other forecast is down on a year over year basis, but having said all of that that's how I'd have you think about it.
That's super helpful. So the way you would characterize that as the.
Headroom materials outlook and in a sort of a.
Moderation in inflation just gives you more generally more confidence in this direction.
Yes.
Okay.
And I guess, just just honing in actually on this.
Moderation in inflation, I guess, which is we think about you know drive herself eat to improve profitability in the back half and in particular your comments are in or approaching maybe 80% sort of correct Soi margin, which of these are non material costs.
It was.
It is important driver.
And do you see as a mother a day.
Okay.
Yeah sure so yeah.
Talk to us brought a little bit earlier about how we're seeing the year over year development of inflation in the back half of the ear and sort of by the end of the year.
Sort of just showing the CPI based inflation in our P&L and sort of lapping and or offsetting increases in excess of inflation. So a big part of this is our are taking cost back out through productivity in our factories. You know that's been a big initiative for us this year, but also where.
Seeing trends and trade transportation, yeah, moderating and improving also seeing trends in energy improving in Europe , but you know we're you know by the you know the third and fourth quarter of last year, we saw some really high spikes in energy and so she loves that could pull through as well as some of our own.
Initiatives in our factories.
Yeah.
Okay, great. Thank you very much.
Yeah.
Thanks Daniel.
And we will take our last question from an India does with Nomura. Please go ahead.
Hi, Good morning. Thank you for taking my question. So you mentioned that you expect replacement demand to recover through the rest of the year now if that recovery do you think would be similarly based across all regions. So would you expect the recovery in some regions such as North America.
We're running ahead of the other regions, such as Asia or Europe .
I would say generally speaking I, a very similar trend in the U S and Europe and this is because we're cycling through.
I'm very tough comparable as if you think back.
Through you know the recovery after the pandemic you know both the U S. Europe was down a little bit of a lag, but even even Europe saw a really robust demand for tires and supply chain got tight and there was a clamoring not just to fulfill demand, but also to restock inventories. So we're cycling through.
Those comparable in our mature markets. So I would expect very similar trends there and then outside of that Asia Pacific should continue to grow through the remainder of the year.
Okay. That's helpful. So I'm just a follow up on that in terms of the quarterly cadence would you say that you know the second quarter could possibly mark the low point for the year, considering that you know on a year over year impact from raw material headwinds should continue to ease as the year progresses and.
You know it should become a tailwind in the second half plus you have the full Cooper synergies.
Would be the right way to look at that.
Well, so I would say that the first quarter you know there's this particular quarter. When we're looking at Soi is going to be the low point.
Generally speaking it always is because it's seasonally a low point for our sell in you know following the holidays Q2, we generally see a little bit more of a volume pick up better in a better dynamic and as I think about it sequentially in Q1 to Q2, we're going to see a better raw material.
Ariel development in Q2 versus Q1.
Well generally speaking see.
No.
A little bit better volumes, and so I think that we should expect you want to be.
The low point for 2023.
Great. Thanks.
Thank you.
Thank you and this does conclude our Q&A session as well as our conference call. Thank you all for your participation and you may disconnect at any time.
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