Q2 2023 Goodyear Tire & Rubber Co Earnings Call

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Again.

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Good morning, My name is sneaky and there will be your call.

France, operator today.

But this time I would like to welcome everyone is too good here second quarter to his house and twenty-three earnings call.

Oh.

You know just to prevent any background noise.

We have a reach Kramer Gutierrez, chairman and Chief Executive Officer.

<unk> Chief Financial Officer.

During these calls.

We refer to forward looking statements and non-GAAP financial measures.

We're looking statements involve frisks assumptions and uncertainty that could cause actual results to differ much really from those forward looking statements.

For more information on the most significant factors that could affect future. We salt. Please refer to the important piece closer to section of Gutierrez second quarter 2000, twenty-three Infestor later.

<unk> with the S E C, which can be found under website at investor Dot Goodyear Dot com, where a replay of these calls will also be available.

Ah reconciliation often on got the financial measures that may be discussed on today's call to the comparable gap as measured it.

Included in the Investor letter.

The school will focus any questions and answers.

And at this time, if you would like to ask a question. Please press the start and one Oh, yeah, a touchtone phone.

You may we draw your question by pressing star two.

Once again for your questions. Please press the star and one Oh, yeah, a touchtone phone.

Okay, we'll take our first question from James Picariello waves.

B M. P. Cerritos. Please go ahead.

Hey, guys district spelling of your James first I just wanted to talk about is the third quarter bridge items. So it works for those we got to about.

300 U S.

S. L Y N three Q I, just want to make sure that I'm thinking about that right.

Looking for.

Full year it looks like.

God.

50 million.

So can you just talk that's all it takes for the fourth floor.

Yeah sure I think this is kristina so I'll start on S. L Y and I would say you know if if you look at outlook obviously.

We are.

And the trend any.

Industry.

Let's see as we walk into the third and fourth quarters.

And.

As we think about how this is played out obviously.

<unk> and her earnings and Q2 due to transitory factors like Destocking.

And consumer.

But also more recently and commercial and so what that what that means is volume weakness.

In Q3, and a lot of that is due to you are playing for some additional destocking, particularly in Europe with volume.

Similarly, I'm fucked up is it bad cat over the fourth quarter, when I think of that.

The drivers of our until I walk I mean, we've laid out the industry of substance for you I just don't know.

Overhead.

And they won't have lower case your production of about 4 million units excluding two below.

That obviously would impact the fourth quarter, we've given any of those values as well.

Snakes versus raw materials should more than offsets other cost inflation.

In the second half I'd say that that's true on a four year basis says well you know if I think about commercial truck and maybe this gets to the heart of your question. What we said is you know big impact 60 million in mixed in the second quarter.

That declines pretty significantly in Q3, and it's pretty much not not at.

An impact at all in our fourth quarter, when I look at fourth quarter price mixed versus raw materials, but I would say is yeah, obviously really strong.

Fish and lower raw material cause we do have our M. I index is beginning to take effect, but I would say that they're still relatively small here in the fourth quarter, something like 10% of that raw material benefits. So hopefully that should help.

Thank you that's very helpful and then.

It looks like channel Destocking, what's a pretty big drag all the quarter, what should we expect that trend to start to reverse. Thank you.

Yeah. So we.

I mentioned doesn't just a minute ago, Jack and the way that we're thinking about do stocking them is it bad Cassidy here is that.

What were essentially complete in the U S I'm seeing some incremental weakness in demand in Latin America. So America.

100 down slightly but more of the destocking to continue in email consumer replacement, that's all driven by still higher levels of winter inventories versus last year, and so even though we had a tough industry in Europe last year, we're still planning for declines this year and then as I.

Think about commercial truck you know obviously are you more volatile segment of the market for us.

Big Destocking event in queue too because we did see the spot rates for free just decline. So precipitously spot rates were down 25 per cent in the month of June and.

So what is it you know an immediate type of destocking happening happening with our commercial truck dealers and distributors that will still continue on into Q3, but not nearly as severe as what we saw in the second quarter sewing and truck.

You get vitamins and commercial was down 600000 units, it's gonna feel something like two to 300.

<unk> thousand in Q3, and then by Q for truck will normal lives in line with what's happening afraid tons of my house and that's something that's just slightly down in the U S and and a little bit more in Europe .

Pretty color. Thank you.

Hey, we won't take our next question from John Healey with North Coast Research. Please go ahead.

I think he's a job.

Hey, everyone just wanted to ask a little bit about the pricing environment in the U S and in Europe , obviously.

You know different status of of where we've gotten too with pricing over the last two years, but as it is there any fine with raw materials mail coming in a little bit that you're seeing I dunno any sort of.

Hey, there are you know.

The pricing environment, either by you know tiers of operators or is it remained pretty consistent and what's.

What is your confidence level that I can continue at the end of the year. Thank you.

[noise] excuse me Hey, Thanks, John I mean, you know [noise] sorry.

It's a it's a really relevant question and I think as we as we look at what we're seeing today prices still holding and I think that's because everyone across the industry has seen the higher raw material costs and other inflationary cost so Ah Ah, they're all having to deal with that and I think that's what you're seeing that that revenue retired.

Still holding them very well and pricing is holding and very well. If we look ahead, we see students. The Ah Ah you know last year for US we had over 30 per cent raw material cost increases we hadn't heard words in the first task that turns into some tail was in the second half and in that period. You know the question becomes relevant how will you know how those things hold up I I will tell.

You know we've seen this before and historical periods when this happens.

Where traditionally able to hold our prices as we as we see raw materials come down I I think that that's.

Robley, even more relevant now given that inflation really is sticking around so in the past we've been dealing with raw materials alone, but now if you look ahead. We've got we've got our higher labor costs. We've got other energy cause we have other inflationary constant or more sticky right now so I think as we look at this I don't think that we've seen a reversal lives.

Need to recover all our input costs through through market pricing action. So we still feel pretty good about where that's at Mount to your point on tears I mean, you know and you know there's some neat tier three tier four have I have always been price competitive that's not where we play as you know that but that you know that's an area where.

There were units moved by price and and we're always cognizant of that as well.

Great and then just a question of <unk> business does any sort of preliminary thoughts about kind of model year 24 is that are coming out and and how your position then and maybe how your position relative to previous years, and just as well as with the potential uncertainty kind of labor for manufacturers any.

You know a guard rails are thought process of how you're approaching kind of the the fall time frame. Thank you.

Yeah. So I'm you know each side of I will tell you you know isn't it Christine has sort of alluded to this obviously, we missed in the quarter and and that was a lot of the European replace can volume in in in truck volume across their reasons, a bright spot was he a lee business in both the U S and in Europe , and I think you know that.

That's still is a you know it's still a factor of all the work that we've done on working with you again just to make sure that we're on the new models coming forward and remembered we've talked about a wind right. That's like in the 60 per cent range highly weighted towards E vs and at higher margins and I think that trend.

Continuing for US a very positive and also I would you know I would tell you that our work with the Oem's has has really shown a lot of promise I think now we've done in in just a quarter I think three fitments that has been a virtual submissions, where we actually haven't even had to build tires, where we do sort of did you did you don't.

Submissions and then build only one tire for them to move forward with and we did that I knew fitments and we did that actually taking fitments away from some competitors. So I I would say really confident that what we've done in Oh, we continues to Ah Ah to move in a in a very positive way.

Thank you.

And we will take our next question from.

Such banks. Please go ahead.

Good morning. Thank you so much good morning, thanks for taking the questions.

So you know Crazy 90 previous quarters, you indulge me in essentially provided your latest socks on the food year free cash flow scenario for the <unk>.

Company and I was wondering if you'd be.

So kind to update it you know in the context of obviously.

Pressures you've seen in the second quarter of some of them continuing the surge, especially on the on the mixed frozen what what would that do for your food you free cash flow.

Yeah sure manual and thanks for the question.

I'd have to say free cash flow certainly remains a top priority for us and.

S. As we think about what our business should be able to generate and normalized environments and also as we think about our leverage go forward.

We look at 2023 right now until we continue to expect some positive free cash flows this year.

That'll be it.

Less now than before so slightly positive free cash flow.

And we set out all of the drivers for you that should help frame that up.

With a smaller contribution coming from free cash flows that may be what we had expected when we last spoke.

We are focused on additional actions in the near term too.

Generate some cash including the sale leaseback program. So we included in the Investor letter you know an expectation for cash proceeds just call. It 150 to 200 million this year fill those transactions.

Do I do think it's important to say that you know we understand that our business is one that should generate.

Free cash flow and will continue to keep our focus on that as earnings improve in the near term and we really get to see the underlying earnings power of our business.

And all of that thought process will go into our next year's planning.

I appreciate it my second question is on the.

Some of the retreated comments in your <unk> Ah shoulder later.

Around approaching a closing in on the East coast time excellent Archer.

The back half of the year.

It seems like based on the factors of.

Sure sharing with us for the first quarter, that's certainly not going to be the case.

<unk> I I'm I'm not sure if it is.

Yeah, I guess you were thinking as you could get there in the fourth or that you were just saying directionally to some sequential improvement in overtime. So I could get there I just I didn't see the change in language, even though it seems like.

<unk> <unk> for the third quarter is quite a bit.

Then you would have probably you know last time. So can you may be sure your thoughts on that path towards eight per cent and timing.

Yeah sure manual that's the way I think about the change from when we last talked I think.

Our second half out look right now would take.

More run rate scenario for emails earnings into consideration the back half of the year, where we were at the end of the first quarter was a position where we thought the email would have by mid year I've gotten to historical run radar. He said just given the weakness in the industry over the past quarter, Yeah, we have.

Really downgraded the expectation.

So you know certainly big improvements sequentially at large it into Q3, and then again in the queue for.

And email still remain subject to a great deal of volatility, but what I would say is we still don't see a very strong recovery in America, then and in Asia Pacific.

And this means a realistic scenario where both of these businesses are are gonna be at or above the eight per cent target in queue for and so I mean, I think it's it's relative to the first half margins and also really strongly improvements and at least a couple of our businesses.

Christine I'll listen I'll jump in I was going to reiterate the point as well when we look at the exit rates for the Americans in Asia, We still feel pretty good about where where those businesses are are heading again, the destocking point I think our inventory in the U S was down I think it was 11 per cent in Q1, and 14% and Q2 in terms of <unk>.

Handle inventories that bodes well add to that in the U S. B M. T is up in there too that you know the economy's actually probably stronger than we thought it would be so we feel we still feel pretty good about where we're gonna be in the in the U S and in Asia as well I think the numbers there speak for themselves Europe continues to be the area that we need to.

Focus on we got hit much harder on trucks and passenger on a declining industry. I mean, it was it was worse than our our expectations for sure.

Industry was down about consumer was down about 13% in the Q1 was down another 12 in queue to sell out was down about 4% in the queue to as well I think that's indicative of the economic malaise that we're seeing over there having said that you know it doesn't do any good to talk about it we.

Need to get volume back in Europe to get that business back to the 50 million run rate that we're talking about a quarter and we need to make sure that we're aggressive on our cost structure over there boats from in N. C. G perspective from a footprint perspective from everything we do over there and last quarter, we alluded to some of the actions that.

That we weren't process of taking those are in play those are things. We're doing Ah. One you saw the action that we took in our plant in Fulda already and you'll see more of that coming in fact, some of this will move into some of the special Committee work that that we're focused on so following the settlement agreement that we had was Elliot.

And Europe is front and center around that we just can't live with the the cost structure and the results we have over here.

And then one final one maybe speaking of the agreements with Elliott, So you've announced last week that.

You know you've set up not just <unk>.

<unk> Review Committee, but also strategic review you know within this you know hired I guess, a number of investment banks, you know as part of that.

Process.

Directionally talks talks about what is or isn't on the table in terms of strategic.

Strategic options for for that to review would you you know in terms of assets that may be for sale or is it only sort of like some of the adjacent businesses or.

Could it be region some of your cause harm leasing business, what what is or isn't on the table as part of the strategic review.

Yeah manual maybe I'll, maybe I'll I'll take one step back and just say that the discussions that we've had with B L. U team that we've been speaking with had been I I would suggest very constructive and collaborative and you know I think when they look at us they see an opportunity for improved Ah March.

Since Ah margin expansion, if you will and Ah better better a better balance sheet on reducing leverage and I would tell you we agree Ah for obvious reasons. So that that you know that's where we stand so as we as we think about that.

Special Committee was as in addition to adding some new very qualified directors, we put our special committee together to start looking at these things and as you said that'll be both operational.

And it'll be strategic and maybe I'll, just talk a little bit about the the strategic side for a moment and then Christina you can jump in on some of the the things we're thinking on from an operational side as we move ahead, but you know.

I should also say, we're not going to get ahead of the committee here in in late things out, but Ah manual to your question around assets I think from our perspective and as long as I had been with the company. We've been very open to looking at where a decision to make sense to add value for the company.

And I think if you go back and look at our track record you'll find that that is true remember we sold our E. P D business and we sold a while your business we sold essentially our farm business, where we get a royalty back you know we've we've done a lot of actions like this and I I would suggest you without getting into any specific it's that attitude and mindset that were coming.

To to look at the strategic analysis that we're we're going to undertake and and I think that makes sense to us we'll make decisions that makes sense for the business to achieve those goals and as we do those we will let you know and and obviously strategic may take a little bit longer than the operational but will be back soon talking about these things because.

Maybe maybe you Wanna just jumping on the on the how are we thinking about some of the operational areas that at least come under the umbrella that we in the committee you'll be looking at.

Yeah sure thing Sir.

I think as we look at the operation side, but we're gonna take a comprehensive review across the organization that it's gonna be multiple facets of the business multiple areas of focus and so what I mean by that is you know we're gonna spend time in R&D looking at our portfolio work and understanding you know.

Rationalize maybe R&D demand.

Which mentions digital a little bit earlier.

Only seeing that capability.

And leveraging that to drive increases in engineering productivity. As another example, well also looking at brands that are skews enterprise positioning and supply chain will spend some time, making sure that you know we have to debate skew placements for customer service levels.

And of course in manufacturing, we're gonna spend time on labor productivity, that's a lot of change elgar's material handling it in the like of course purchasing S. A G. Non F. T. He spent will all be in there as well as we look at the operations.

And you know I don't I guess that rap.

Wrap it up to say, we've always benchmark really well I'm working capital, but you know that's still in the area that we're spending some time on as well and then you know I'll just come in and second richest comments on the portfolio of assets and brands I mean, well access.

What's creating longterm strategic value for business and also what we might be able to monetize in order to redeploy cat, though so boring.

Thank you so much.

Thank you.

And just a reminder.

And one.

He would like to join the queue.

Well for research. Please go ahead.

Good morning, everybody I, I guess I I wanted to firstly just ask about.

A little bit more clarification on what happened during the quarter as in May.

One month into the quarter. When you publish your Investor letter you had guided to global replacement volume consumer replacement volume being down five per cent and they were down 15%.

I look at markets like Europe , the market for consumer replacement not truck consumer replacement was down 4% you were down 26%.

So there is some clear.

A noticeable under performance here, so what specifically.

Are you attributing the under performance too and why did it seemingly.

Accelerates so much from it into into May and June .

Yeah, right I I think you know maybe we'll we'll take a step back you know first of all you're right right, we have to own it and we didn't see the industry or fall off as dramatically as it did in our our forecast didn't show that we had weaker than expected conditions and truck and we had weaker over.

Are all industry environment in Europe , as I spoke up before and and they weren't just small industry changes. They were they were significant and and I would tell you you know, particularly on the truck side. When we look at the truck replacement market. The market's the industry was much worse than we expected America's was down 21% email was.

[noise] down 15 and [noise].

That's in some cases double what we might have expected to see the markets Christina alluded to it before right I mean, I mean, what happened on the truck side is it's a cycle that you've seen before we know it's coming it's just very hard to predict as we came off some of the the the COVID-19 situation, where we had demand running so far ahead of supplying five.

Li what we saw our our lower ton miles, we saw a lower capacity utilization in the trucking industry and is Christina mentioned, we saw significantly lower particularly in June Ah Ah Ah Ah freight rates that were out there those are signs that our distribution sorry, it's not their first rodeo. This is true in Europe and in the U S and what.

They did it start destocking right away, they know that that it's coming and they've seen it before and and that's what Ah Ah that's what they did and that's why we saw the volume decrease in truck I would tell you the positive side on the on the truck part of the business. Our fleet business is holding up very well in fact, we even one suites at at high.

Prices are in the quarter that that business the whole fleet service model with all the digital tools is proving to be very durable, which is which is what the the plan was.

And then secondly on the positive side is Christina mentioned will still see some destocking in Q3, probably more so in Europe than in the U S. But that will that will will will turnaround as well as we go so that that that that's what happens in truck and and you know what we're dealing with it and you saw that in the fork.

<unk>, we're we're kind of moving forward with industry trends, making sure we're not gonna build tires that we can't solve that we need to move on price. So that's you know that that's what we're taking the consideration if the industry gets better will benefit from it and then on the on the Europe side on the passenger side excuse me right, it's kind of what I said.

I mean for US we saw the industry members down 12% after being down 13% I think you'll see a lot of imports coming in as well and on the low end of the market a lotta those imports. It came in last year are actually making their way to the market now that's certainly had an impact on the overall market, but from a <unk>.

Remember perspective, it was about 12% following 13 per cent and then we had really we sell out as well I mean people just weren't buying as as the economy continues to to to cause people to you know just because.

Because our distribution to not go along in inventory and causes consumers to be more cautious on how they're spending their money that's not gonna last forever that will change right, but right now that's what we're seeing in casually. It was worse than we expected what we're doing about it may be as equally important and that's Ah Ah you know that's one we're still <unk>.

Wrong on price and mix.

European business I think you know Christine it for the first time in.

Well over a year, we all set raw material and inflation with price mix I will see those those are raw material tailwinds come back into the second quarter. That's a positive but we have to then take those actions aren't cost and I I mentioned earlier, so we're not gonna sit still but but ride. The the market was was certainly weaker and.

And we felt it.

I I understand what you're saying about the market rich I'm really asking about good your specific underperforming so when consumer replacement the market was down for the members were down 12 year down 26, and then commercial replacement the industry is down 15, and you're down 34%. So what what is I I imagine.

<unk>.

That the delta versus your expectations I'll, obviously, it's partly the industry was weaker but isn't the magnitude of the underperformance relative to the industry.

A factor too.

Oh, well, maybe I'll jump in here and this was noted in a letter on the summary of the quarter reflections page, but in Europe , we gained a lot of share in the second quarter.

Last year versus the industry. So this year was more of a normalization. That's just sell in sure now this isn't reflective of what's happening and sell out but last year, we picked up a couple of points a share versus the industry. So our volume much stronger than our major competitors this year.

Sure Yeah, we're giving that back but that was essentially in our plan I'll I'll be at at better industry levels.

Okay, and just lastly on on the strategic side.

Europe has been a challenge for good year for as long as I've covered the company and I'm just just.

Just wondering if you believe that that business is ultimately strategic to the company and whether whether there's there's alternatives that they've put out actually create some value from that from that region.

All right I I I I have to say there there are alternatives that we have to look at it in terms of everything from going to market to the brand portfolio to the segments that we we play in but I think all those things has to be on the on the table, but to answer your question on it being a strategic I think as we look at.

Ah the Oems that work over there and we look at the technology trends that they tend to lead not only but that they tend to lead a it's a market that our technology plays very well there and we has to be there. How we turn up I think is the question that we have to continue to look at but some of the most complex problems from Ah Ah.

A vehicle perspective of mobility perspective take place in Europe , and and that's where we have some of our best technology. So absolutely we have to be there that set it as an incredibly difficult market as you say and as we look at ourselves there right and you know this and you know the actions that we've taken over time, we have Ah Ah Ah.

[noise] footprint tilted toward western Europe, rather than in eastern Europe or or other low cost countries are labor costs are higher that got worse with with inflation from COVID-19, we've been acting on taking factories out from our beyond Phillipsburg now the folder and I can go back in time Ah Ah, We will continue to do those things and will continue to.

Right size, the business, where we can make sure that the advances that we have around our technology are coming to the bottom line, but when you look at a slow economy as you look at the volume coming out and you look at Ah the high cost footprint. We have there that's what we're we're struggling against we recognize it you know and and we're gonna continue to put.

The actions in places we refer to last time, and I think you'll see more to come sooner than later.

Okay alright, thank you.

Thank you.

Q and a session.

Our conference call.

Anytime.

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