Q3 2024 The Goodyear Tire & Rubber Co Earnings Call
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Shelby: Good morning, My name is Shelby and I will be your conference operator today.
Shelby: At this time I would like to welcome everyone to Goodyear's third quarter 2024 earnings call.
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After some opening remarks, there will be a question and answer session.
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Speaker Change: It's now my pleasure to turn the conference over to Greg Shanks Senior Director Investor Relations.
Greg Shanks: Thank you Shelby good morning, and welcome to our third quarter 2024 earnings call today on the call we have Mark Stewart, our CEO and President and Kristina Tomorrow, our executive Vice President and CFO.
Greg Shanks: During this call we 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.
Greg Shanks: These refer to slide 21 of the supporting presentation for today's call and our filings with the SEC. These materials 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 on today's call to the comparable GAAP measures.
Greg Shanks: It is also included in the appendix of that presentation.
Greg Shanks: With that I will now turn the call over to Mark.
Mark Stewart: Thank you, Greg and good morning, everyone welcome to our third quarter earnings call before we dive into the numbers. This morning, I want to take a moment to acknowledge the momentum. The Goodyear team has collectively created over the past four quarters Goodyear forward is delivering significant and tangible results both in the bottom line, earning.
Mark Stewart: And then being a key driver enabler in our structurally changing the way in which we work and govern the company.
Mark Stewart: In fact, 'twenty 'twenty four will mark the first year Goodyear has expanded margins through 2016, excluding the recovery immediately following COVID-19.
Greg Shanks: As we've discussed with you in the past since becoming CEO I have spent time in getting to know and listen to our people learning the technical and operational aspects of our operations and product development I visited our factories, our retail stores and have directly engaged with our international operations I've.
Greg Shanks: Also the meeting with key customers and partners here in the Americas and around the world to hear directly what we're doing well and what we can do better to meet and exceed consumer and customer needs.
Greg Shanks: Developing a deep understanding of where we can leverage our strengths and address our shortcomings as an organization has given me even greater confidence in our ability to transform and to position ourselves for long term profitable growth, particularly in the premium segments of the market.
Greg Shanks: Let's turn to the quarter three results the third quarter was strong for us in terms of margin expansion. We delivered segment operating income of $347 million. Our Soi margin was 7.2% both higher than last year to put this in perspective, we have now successfully put together.
Greg Shanks: Four consecutive quarters of margin growth under the Goodyear forward plan and the actions and the governance, we have put in place this year with a robust cadence of manufacturing engineering and commercial accountability.
Greg Shanks: This morning, we're building on that momentum by increasing our transformation plan savings targets. We've raised our guidance for 'twenty for Goodyear forward benefit to $450 million up 100 million since the start of the year. Additionally.
Greg Shanks: Additionally by the end of next year, we expect to deliver a total of 1.5 billion in run rate benefits. That's up from our original target of $1 3 billion and we will not stop there. We will continue to look for opportunities to deliver beyond our updated targets as well as we create a more efficient.
Greg Shanks: Stronger company.
Greg Shanks: Like any plan, we know that while the past may change. The goal remains the same deliver increased value to our customers and our shareholders. We still have much work to do in the face of industry headwinds our consumer replacement volume continues to underperform the industry with tier four tires flowing into the majority of our key <unk>.
Greg Shanks: Markets at the same time OEM production continues to reset to a lower base.
Greg Shanks: In that environment I assure you we are absolutely not letting up I continue to have confidence we will reach our 10% Soi margin target by the end of next year. This takes into consideration both the volume headwinds and what we see today as far as increases in our raw material costs in 2025.
Greg Shanks: Looking at Goodyear forward on our last conference call, we discussed in some detail the cost savings and the efficiency contributions of Goodyear forward today I'll share an update on the work we're doing on the customer and consumer facing aspects of the business one of our major priorities as part of Goodyear forward is elevating Goodyear.
Greg Shanks: <unk> and our family of brands, our brands have the resident with consumers and we must be thought of as a premier tier technology leader in the industry. This is the surest path for us to capture value at the high end of the market and create poll across all other segments.
Greg Shanks: One way we are engaging consumers is through our partnerships with some of the most recognizable brands in the world in September we partnered with Ferrari on unveiling their new 12 cylinder.
Greg Shanks: If you haven't seen it this car is truly awesome, it's an awesome machine it looks like a G. G drives like a super sports car.
Greg Shanks: This is goodyear's first fitment on a Ferrari in 30 years. It highlights a renewed commitment to our brand and our premium technology driven strategy. This is a space, where we will need to be positioned and we continue to partner on the right Halo fitment with pure play technology leaders to showcase our brand.
Greg Shanks: And our cutting edge products, we continue to be positioned well and showing technical and marketing strength and our EV fitments around the world as well.
Greg Shanks: Another big part of this renewed engagement with our consumers is increasing our offering of premium Skus as an example in the U S. During the quarter, we successfully launched the assurance whether ready to a top tier power line targeting first and second replacement customers in this line we will introduce.
Greg Shanks: 60% more skus than the predecessor line had this is very important as it will make the product line competitive with best in class tier one premium offerings.
Greg Shanks: Similarly in early 'twenty five we will launch an all new Eagle F. One asymmetric six and Eagle F. One supersport combining offering of 150 unique skus almost entirely in the 18 inch and above rim sizes. These timelines have no predecessor, and our U S market.
Greg Shanks: And demonstrate our commitment and our action to expanding in the premium sector of the marketplace.
Greg Shanks: Additionally, the Eagle F. One all season product line will launch in late 'twenty twenty-five with about 70% more coverage than the predecessor line.
Greg Shanks: We know our customers need to see us as a reliable supplier covering all skus in the premium product line offerings, we simply can't just supply a portion of the Premier line that relegates as to a choice number two or even number three in the minds of our dealers a broader offering that picks up the tail skus is.
Greg Shanks: Crucial to our success of course tail skus are highly profitable in their own right, but they are also an important component of our overall value proposition. When we provide the total portfolio all skus will benefit from the consistency, we will offer and customer service.
Greg Shanks: Coverage at the premium into the market is an enormous opportunity for us and we are committed to making it happen. This is a market segment, where as an organization quite frankly, we have not done a good job of maximizing our opportunity across the value chain. This includes designing and producing when our customers want and differentiating our.
Greg Shanks: Products in the market place in that segment. We are actively changing that this is part of the operational and cultural shift we are making as part of our transformation going forward, we will continuously assess market opportunities utilizing the datasets and the analytics and leverage our global assets for our.
Greg Shanks: Customers and consumers with one goal in mind to profitably win.
Greg Shanks: Before I move on to our market facing strategy I'd also like to highlight that we have continued to demonstrate remarkable growth in our U S. Retail business. We have just delivered our best performance in more than 15 years with earnings growth driven by a focus on our value proposition to customers and an increasing customer base.
Greg Shanks: And well known last mile fleets. This includes converting nearly 50 stores to dual operations supporting retail customers by de fleet customers at night I see a lot of runway ahead of us as we execute on these objectives, we've set out and look forward to the leverage and growing our retail arc.
Greg Shanks: <unk> on a forward basis.
Greg Shanks: While Goodyear forward continues through the end of next year Youre hearing my emphasis on the actions, we're taking to elevate our performance over the long term, we're rebuilding our brand strategy product strategy and operations setting a solid course for the future in a direction that will drive significant opportunities.
Greg Shanks: For our business over the long term.
Greg Shanks: Now I'll turn it over to Kristina and take you through the financials, then we'll move on to the Q&A. Thank you.
Kristina Tomorrow: Thank you Mark we're on track to exceed our original target for 2020 for Goodyear forward benefits by $100 million and as we look ahead to next year, we expect to achieve another $750 million in year over year growth benefits from the program.
Greg Shanks: Well provide more detailed 2025 guidance in February but these commitments are a testament to our ongoing commitment to transforming the way, we work improving operational efficiency and managing our cost.
Greg Shanks: I'll begin with the income statement on slide nine Q3 sales were $4 8 billion down 6% from last year, driven by lower volume and the negative impact of translation, resulting from the stronger U S. Dollar.
Greg Shanks: Unit volume was 6% lower than last year with gains in OE, partially offsetting declines in replacement.
Greg Shanks: Volume was lower than what we expected given the continuation of increased LOE and imports in the U S and Europe.
Greg Shanks: Segment operating income for the quarter with 347 million and Soi margin increased 70 basis points.
Greg Shanks: Goodyear net income includes charges related to planned rationalization programs and a good year for word and a noncash impairment charge related to a reduction in the balance sheet carrying value as lower tier brands, including master craft and roadmaster stemming from increased competition in the opening price points in the U S market.
Greg Shanks: After adjusting for significant items, our earnings per share were 37 cents.
Greg Shanks: Turning to our segment operating income walk on slide 10.
Greg Shanks: Lower tire unit volume and factory utilization were a headwind of $94 million in the quarter.
Greg Shanks: Net price mix versus raw material costs with favorable $7 million sequential pricing from the second quarter with stable.
Greg Shanks: Goodyear forward initiatives contributed 123 million with benefits driven across all of our work streams, including purchasing supply chain R&D and S. E T.
Greg Shanks: Inflation and other costs were a headwind of 59 million.
Greg Shanks: Insurance proceeds net of current year expenses, primarily related to last year's storm damage at our Tupelo factory were a benefit of $17 million.
Greg Shanks: Other S, Hawaii with favorable $25 million driven by higher earnings in our chemical business and better miscellaneous cost performance.
Greg Shanks: Turning to slide 11, net debt was $8 1 billion at the end of the third quarter and was up about $450 million compared to last year, reflecting increases in working capital.
Greg Shanks: Higher working capital was driven by declines in our accounts payable balances while inventories remained high on a relative basis, reflecting reductions in our full year volume outlook.
Greg Shanks: In the fourth quarter, given our normal seasonality, we expect significant cash inflows from working capital as we reduced finished goods inventories and increased collections.
Greg Shanks: With respect to our leverage we expect to close on the sale of the OTR business in early 2025, and we continue to make progress on our two other strategic reviews, while theres not a lot. We can say well. We're in process. We will keep you updated as we have more information to share.
Greg Shanks: One final note on our capital structure, we have 500 million outstanding on our 95% coupon notes due may 2025.
Greg Shanks: This maturity is supported by backup credit facility that would replace it through mid 2026 if needed.
Greg Shanks: Having said that we expect to use proceeds from asset sales to repay this maturity next year, which would reduce our interest expense by almost $50 million on an annualized basis.
Greg Shanks: Moving to our SBU results and starting on Slide 13, America's third quarter unit volume decreased $1 9 million units driven by consumer replacement.
Greg Shanks: Low end imports in the U S remained elevated during the quarter, reflecting a 17% increase year over year. The increase in imports was less though than what we saw in the first half.
Greg Shanks: Including imports the consumer replacement industry sell in in the U S declined one 5% and collectively industry members declined more than four times that amount.
Greg Shanks: On the other hand, despite weak industry trends and O E. R. U S. OE volume grew 6%, reflecting share gains is two and a half points and strong growth in light truck Fitments. We also gained share in Latin America.
Greg Shanks: Americas segment operating income was 251 million or eight 8% of sales.
Greg Shanks: Americas earnings benefited from the execution of Goodyear forward initiatives, including retail sales growth of $20 million in the quarter.
Greg Shanks: This growth reflects the increasing scale of our fleet customer base.
Greg Shanks: These benefits were offset by the impact of lower volume and inflation.
Greg Shanks: Moving to slide 14, EMEA third quarter unit volume decreased 3% or 300000 units or.
Greg Shanks: Our volume reflects lower OE production and continuing pressure from low end imports now.
Greg Shanks: Non member imports grew about 15% in the quarter.
Greg Shanks: Recently two of EMEA as premium tires were awarded the top spot by Europe's largest auto Association a T. A C in their annual all season and winter testing.
Greg Shanks: Which we expect to support our winter value proposition to consumers.
Greg Shanks: Segment operating income was 24 million and stable from a year ago, Goodyear forward actions and favorable price mix versus raw materials, offset inflation and unfavorable fixed overhead absorption.
Greg Shanks: Turning to Asia Pacific on Slide 15, third quarter unit volume decreased 5% driven by declines in several of our key countries industry volume in China was down 6% in OE and 4% replacement driven by overall weak consumer sentiment.
Greg Shanks: Segment operating income was 72 million and nearly 12% of sales an increase of 16 million compared to last year.
Greg Shanks: Asia's earnings benefited from Goodyear forward initiatives, including the redesign of our go to market model in Australia. We expect this initiative to continue to contribute benefits in 2025.
Greg Shanks: Now turning to our fourth quarter outlook on Slide 17, we expect global unit volumes to decline approximately 4%, reflecting elevated wholesale channel inventories and weak sell out trends in the U S.
Greg Shanks: Like we saw in the third quarter, we expect growth in our OE volume, reflecting share gains and a weak U S comparable related to the UAW strike in 2023.
Greg Shanks: We expect volume to be up about 1 million units on a sequential basis driven by stronger OE volume.
Greg Shanks: In addition, we expect higher unabsorbed fixed costs of $40 million driven by $1 1 million units of lower production during the third quarter.
Greg Shanks: Additionally, we expect our fourth quarter production to be about one 5 million units lower than last year as we reduced finished goods inventory in line with our need.
Greg Shanks: This reduction will negatively impact our costs in the first quarter of 2025.
Greg Shanks: Price mix is expected to be a net headwind of approximately 15 million driven by higher OE volume.
Greg Shanks: Raw materials will increase approximately $100 million driven by natural rubber and carbon black.
Greg Shanks: At current spot rates, we would expect to see raw material cost increases of about $300 million in the first half of 2020 five.
Greg Shanks: Goodyear for work will drive benefits of $165 million, reflecting the progress we are seeing across all work streams.
Greg Shanks: Inflation in other costs are expected to be a headwind of about 35 million.
Greg Shanks: And other is expected to be a benefit of about $40 million, reflecting higher earnings in our other tire related businesses. The recovery from the fire in our Denbighshire, Poland factory last year and better miscellaneous cost performance.
Greg Shanks: Other financial assumptions on slide 18 have been updated to reflect our most recent expectations.
Greg Shanks: In total there's not a significant change to our free cash flow drivers from our last call.
Greg Shanks: I'll speak to two of the more significant changes with the first being that we've reduced our restructuring costs as we see lower cash outlays than expected and specific programs given higher levels of voluntary attrition.
Greg Shanks: Second we've updated our working capital guidance from neither a source or use to a use of approximately $150 million to $200 million.
Greg Shanks: This increase is partly driven by the timing of production cuts and partly by plans to increase finished goods inventory in advance of actions. We expect to take an early 'twenty 'twenty five to reduce our structural costs.
Greg Shanks: We expect to recover this outflow next year.
Greg Shanks: With that we'll open the line for your questions.
Speaker Change: At this time, if you would like to ask a question. Please press the star and one on your telephone keypad, he may or move yourself from the queue at any time by pressing star to once again that is star one to ask a question, we'll pause for a moment until our quest.
Speaker Change: <unk> to kill.
Speaker Change: We'll take our first question from John Healy with Northcoast Research. Your line is open.
John Healy: Thanks for taking my question Mark I wanted to ask kind of a high level question on the margin targets that you guys have put out.
John Healy: Especially as you look to next year, I mean, you kind of call out the 300 million headwind on raw Mat and you know the the volume side has probably been a bit more challenging.
John Healy: I'd love to get more color on what incrementally better.
Greg Shanks: And I imagine you're going to answer with Goodyear forward them to get to those margin targets, but I was hoping you could kind of like give us kind of a look underneath the surface a little bit of kind of where within the plant are aware within other areas of the business.
Greg Shanks: You know you're finding those incremental benefits. Thanks.
Speaker Change: Thanks, John and Yeah, just to cover what our what we're going through with as you mentioned are a key part of it is Goodyear forward, but one of the things we've been doing throughout the course of this year as we continue to refill the pipeline of projects and Goodyear forward in Goodyear forward is a is a is a two year point in time right. This year and next year.
Speaker Change: But what we're doing is integrating that into to our annual operating plan as well as our long term strategy as John and of course, we've got all the pricing dynamics associated with raw materials, so that with the Oems and the natural flex up and down with indexation, but when we look at it. It's it's far more than just a goodyear forward and what what is helping with those mom.
Greg Shanks: Right, we are fundamentally changing the way we're doing our businesses as we shared earlier. This year. We've got you know, we've we've really broken manufacturing and when they're in the final stages of of bringing on our our chief manufacturing officer for all three regions around the world and what we're doing there is really focusing on our plant efficiencies were reducing.
Greg Shanks: Scrap were driving our our plant Oh E operating equipment effectiveness on a week by week basis by process and so that's a whole lot of the nuts and bolts of manufacturing 101, and then as I mentioned as well we are strongly driving with dedicated teams that have been pulled out to make sure.
Greg Shanks: Sure we are tackling the 18 inch and above rim size into the premium parts of the market.
Greg Shanks: As I shared in our in the opener you know one of the things when we take a look at it it's something that we've not done the best job overall globally too to really tackle that situation and so what we've done is we've pulled the folks out we've established the teams we are driving it from engineering, we have dedicated resources into plant and dedicated machinery.
Greg Shanks: To bring those products to market, we're leveraging our global footprint.
Greg Shanks: As well to move tires around the world in a very cost effective way in the meantime, even as we speak we've got 90, plus skus on the water on the way to the Americas market from EMEA to address the tier one high end, what we would call the tail skus that the premium side of the greater than 18 inch and above and so.
Greg Shanks: We have a very clear roadmap over the next 24 months of bringing those in as well as the coverage and the Fitments we have across those so we are making sure that we have got the right replacements coming into the market in the Americas EMEA has been doing a really nice job of that of a fill in their gaps and then on the E. P.
Greg Shanks: Side, we continue to have very strong wins with the right customers. If he would say in our in the EV space. So really focusing all three of those so it's it's a it's topline fitment wins, it's top line premium segment wins, and it's really just good old fashion manufacturing and purchasing one on ones and the teams are doing a really nice job to make.
Greg Shanks: To make the progress.
Speaker Change: Great. Thank you and then just one question Theres been some media reports out there about you guys and a T D and some of the things that are going through right. Now was just wondering if you could give us a little color on kind of the exposure there and I imagine it's with the Cooper brand.
Greg Shanks: But secondly, I mean as you see that.
Greg Shanks: You kind of update the market regarding whats going on with them you know how does it make you feel about kind of your distribution strategy and how you might see you know the ripple effect of this you know news, maybe playing out on the industry and the replacement market for for 25.
Speaker Change: Yeah, maybe I'll start and then I'll turn it to to Christina with some more details on it John but you know we really maybe just start on the on your comment to the tire hub right I mean of course.
Greg Shanks: And like a second bankruptcy with a T. H D can be quite disruptive, but but we really view that situation as a as a strong validation that the it team took in Goodyear took informing tire hub some years back.
Greg Shanks: As well as getting closer to our aligned distribution network, we have restructured our our sales and go to market organization within the Americas within the last month.
Greg Shanks: To be even closer to our W D customers and and from that standpoint, as well as working on our tire hub.
Greg Shanks: But you know we're going to continue to focus on the value propositions, where we can deliver products to consumers in a right place right time, right cost structure and and from the eighties decide you know well like Christina cover about the receivable a little bit.
Greg Shanks: But you know we continue to evaluate any any strategic alternatives in terms of what's what's playing out right now.
Greg Shanks: Christina.
Christina Cover: Yes, John I'll, just fill in some of the the history for folks on the phone who may not know about our past relationships with a T. D. I think you're probably well aware so a T D. One of our largest wholesale distributors I'm filed chapter 11 as Mark just mentioned this is the second time to a T D.
Christina Cover: Has filed for protection bankruptcy protection since 2018 and back in 2018 Goodyear didn't have a relationship with a T. D. At that time, we had exited it I'm just given that we saw a T D as increasing their focus on lower tier brands that of course through the acquisition of Cooper we.
Greg Shanks: <unk> and ongoing relationship with a T D, which we've maintained.
Greg Shanks: Our current receivable base with a T D stands at about $135 million and as is customary in these situations. The court did enter an interim order authorizing a TD to pay pre petition claims of certain vendors and at this point, we have reached an agreement with a T D.
Greg Shanks: Regarding the payment of substantially all of our pre petition claims and so we don't see.
Greg Shanks: A material impact.
Greg Shanks: On us at all from this situation I think for context, what I would tell you is that the you asked a little bit earlier, John that the majority of these tires.
Greg Shanks: That we're selling to a T D. Today, our private label branded Theres, a little bit of Master craft, Nicky Thompson and Cooper, there, but the majority again private label branded.
Greg Shanks: Great. Thank you so much.
Speaker Change: Thank you we'll take our next question from James Spitzer Ela with BNP Paribas. Your line is open.
Speaker Change: Hi, everybody.
Speaker Change: So Jeff.
Speaker Change: I wanted to first I want to.
Speaker Change: First ask about the demand environment.
Speaker Change: We look at the last nine quarters in North America.
Speaker Change: Our replacement volumes are down and averaged 9% I'm just curious if you could assess your your market share over this period right comparing now to <unk>.
Speaker Change: Middle part of 2022, and just at a high level because I'm. Just curious is this a generational type of market share shifts that we're seeing which can be temporary but in terms of the magnitude and persistence of the weakness.
Speaker Change: I know, there's an element of actively exiting certain business as part of your forward plan. So if you could contextualize that as well.
Speaker Change: Relative to these declines that would be great. Thanks.
Speaker Change: Yeah sure. So maybe I'll start and then let Kristina add some additional too you know when we look at at that period. As you said as we mentioned you know there has been a continued influx in the in the tier four market space with the Asian tires, and specifically when we look at the inventories of those at the moment.
Speaker Change: I believe it could be a pre buy of people being concerned about the tariffs that may or may not happen are.
Speaker Change: Coming into the new year, but one of the things. So as we look we have as you mentioned, we definitely have had a very clear plan to exit low margin low value business and we've executed upon that we've done this repricing in those areas as well and the others I mentioned with the question with John as well is really.
Speaker Change: US focusing on that greater than 18 to increase the number of Skus. We've got in that marketplace. So we will we will vary meaningfully participate and grow our share in the upper part of the tier ones on it James.
Speaker Change: Yeah, James I'll, just jump in here, let's.
James: Let's say that as part of Goodyear for where you may remember on the walk as part of our November announcement last year, we talked about a reduction in revenue primarily in the U S of about $200 million, which equates to about two to 3 million units of intentional volume loss and that's fixing you know the unprofitable volume.
Speaker Change: It was in our footprint as part of good year forward I think you know broadly yes to your question around you know, we just said the generational shift I'd say.
Speaker Change: You know that the sell in.
Speaker Change: Way outperforming what we're seeing on sell out anywhere seeing DMT kind of up.
Speaker Change: About 1% over the last year and sell in a three to four points globally and so that's a whole lot of pre buys going on with the low end products I think that says a lot about.
Speaker Change: Distributor behavior, because what we tend to see as distributors overstocking.
Speaker Change: In and around inflationary environment of course, which we've been in but also you know there's potential speculation related to the election I'm here today, and so well continue to watch the regulatory environment and the macro environment over the coming quarters.
Speaker Change: So that's that's super helpful and then.
Speaker Change: My next question is gonna be on price mix versus raws. So.
Speaker Change: For the fourth quarter, but the guidance is abundantly clear right calling for.
Speaker Change: $115 million headwind right, which.
Speaker Change: We haven't seen a negative number.
Speaker Change: Since the second quarter of 2019.
Speaker Change: Yes.
Speaker Change: No not to this magnitude so.
Speaker Change: What's what's driving the the fourth quarter.
Speaker Change: Delta.
Speaker Change: And then.
Speaker Change: How should we be extend that that thought to next year, where window in the first half at current spot youll have that $300 million raw mat headwinds.
Speaker Change: What does or what how could price mix look.
Speaker Change: In that.
Speaker Change: Equation for the first half thanks.
Speaker Change: Yeah, as we look to the first of it is you know as we said earlier right I mean, it's it's more than just the raw material going into the pricing equation right. We've got many factors going on it is our product position in the marketplace. It is making sure yeah through our public web scrapes and and.
Speaker Change: We are constantly reviewing the market and also the Tec tech needed going into developer in terms of what it's costing to bring things to market.
Speaker Change: You know I mentioned, the John James We have we have really been attacking that underlying cost structure of what it costs to bring products to market as well as the actual cost to convert on this so when you add all of those things together, we continue to take it on a SKU by SKU competitive level of where we will take pricing and where we wont take pricing with.
Speaker Change: So just as the normal course of business with that enacted that flows into our into our regular governance process for that right, but we want to make sure that that we've got the products competitively priced for our end consumers.
Speaker Change: Yes.
Speaker Change: Oh go ahead.
Speaker Change: No no I was just kind of step to say that as a reminder, about 30%.
Speaker Change: All of our business cover to OE Rmi contracts. So that can help you think about how to play that through without any new price increases you know announcements yeah. We we don't you know.
Speaker Change: Particularly what we're thinking about for pricing in advance and I'd say the other comment on raw math still is.
Speaker Change: Just given that the sell in and sell out dynamics, we talked about earlier with sell in being so much higher than sell out I think that's influencing raw material prices as well and I would expect commodity prices to normalize as pre buy of low end imports stabilizes as well, but go ahead and ask your follow up.
Speaker Change: Appreciate it yeah, so just on Capex.
Speaker Change: I thought the prior view might've been for 2025 Capex to trend. Similarly to this year at that one point to $5 billion range, you did confirm or indicated in the in the deck.
Speaker Change: That next year's Capex should trading below a $1 billion. So maybe that's a $300 million type cut to your to your capex, So what's driving that and then.
Speaker Change: For this year's guide the working capital is now a use of cash of 150 to 200 is that associated with the <unk> receivable and does that get made up.
Speaker Change: Made up next year.
Speaker Change: That's it for me thanks.
Speaker Change: Yeah I'll take the cash question, so our working capital you're right.
Speaker Change: The guidance would have been sort of a stable level and 2025, now, we're saying something lower than DNA or less than $1 billion I think part of that driven by the trends in volume, but I also think a part of that is driven by.
Speaker Change: A lot of the Goodyear forward work inside of the company as we've looked at how we've been allocating capital.
Speaker Change: Mark and I have concluded that we need to reassess our standards and our processes to ensure we're getting the best cost outcomes in all of our cases, I think more challenging a lot our assumptions around capital spend does that means.
Speaker Change: Yeah, we go back to designing for lowest cost as opposed to a process, maybe where in the past there might have been more customization involved that wasn't necessarily adding to the return. So all is to say.
Speaker Change: We're focused on generating very strong free cash flow next year, excluding restructuring and we're focused on moving to a more disciplined capital allocation process and I expect that to benefit our spend even as we move beyond 2025 as well.
Speaker Change: James.
Speaker Change: OLT onto it a little bit from a from a manufacturing engineering and procurement side of it as Kristina mentioned right. The the work streams of the Goodyear forward teams across the five right are all helping to to show us different ways of working as well Kristina and I staff than I've been out on the road.
Speaker Change: Both are Europe is eastern Europe, Middle East and Asia over the last month, and a half as well meeting with our equipment suppliers purchasing teams going into the factories and looking at our best processes and I'll say the procurement team is doing an excellent job of looking at that alternative second and third sources.
Speaker Change: Together with engineering and our standards team to redefine what our standards are and what the costs are clean sheeting cost process with some of the new folks we've brought in to to help our teams to to complete those processes and really make a big dent in what we would typically spend in a given year on the capex side. So.
Speaker Change: All those things and coupling it with our our product engineering teams looking at bottlenecks in the process. So we were just at the time old factory.
Speaker Change: One of them two weeks ago.
Speaker Change: Looking at bottleneck operations and breakthroughs to bring some of our term old capabilities up over 20%. So some meaningful changes in terms of the amount of capex needed to bring the products to market James.
Speaker Change: Appreciate it James just to follow up on that working capital question. So our guidance is for a use of $150 million to $200 million. This year I'd say, that's driven by two factors one is the timing of production cuts.
Speaker Change: And the second is just a.
Speaker Change: A planned build in finished goods inventories ahead of actions, we expect to take early next year to reduce our structural costs and no announcements at this time, but I think all related to Goodyear forward and we would expect to recoup that use of working capital in 2010.
Speaker Change: 25, so no net change and good free cash flow generation again in 2025.
Speaker Change: Thank you okay.
Speaker Change: Thank you we'll take our next question from Douglas Karson with Bank of America.
Speaker Change: Your line is open.
Douglas Karson: Great. Thanks, guys.
Douglas Karson: I want to maybe talk about the good your forward.
Speaker Change: Program, a little bit it's impressive program, an important strategic initiative and maybe if we can go to slide.
Speaker Change: Six.
Speaker Change: The biggest line item there is a footprint and plant optimization.
Speaker Change: And it looks like it could be a $500 million number annualized in 2025 can you just give us a little thought around.
Speaker Change: What that plant optimization could look like.
Speaker Change: How are you going to try to achieve that then I have a follow up on on inventories.
Speaker Change: Yeah Douglas so when we look at our Goodyear for planning that we've already executed.
Speaker Change: Two of the key restructuring activities when it comes to a plant rationalizations and that's the full the first of all the all of the governmental and and Union discussions are completed and that has now moved into the execution mode for that and we continue to look around the world. We've just.
Speaker Change: Finished the closure of our Malaysia plant, which you know.
Speaker Change: It had a it was in September I think our when we have a completely finished that activity and that's in the sale process for the land at the moment.
Speaker Change: And as we look forward again, we will continue to assess how.
Speaker Change: How much capacity, we need around the world are going through the modernization efforts as well as we've shared with you guys before that's a key part of the Goodyear forward in our long term strategy, particularly in the areas of automation as well as the equipment standards. We just touched on from from James's question around the Capex usage. So we will long story short.
Speaker Change: We will continue to look and take the actions necessary to keep us competitive.
Speaker Change: Great if I could just ask one or two more.
Speaker Change: The net leverage target is a great target two to two and a half net leverage.
Speaker Change: We ended 2025.
Speaker Change: Is there a reason you're committed to such a low leverage you a number that's pretty low relative to historic.
Speaker Change: Leverage for for many high yield companies. This once maybe you take a look at that kind of big picture.
Speaker Change: Yeah, Doug I think.
Speaker Change: Yeah the.
Speaker Change: Interest rate environment, and our access to capital are big drivers of our go to.
Speaker Change: She is a more investment grade.
Speaker Change: Credit rating or balance sheet, I think when we look across the tier one space our major competitors.
Speaker Change: We also have balance sheets that are less and less than two turns leverage. So I think a lot of it is you know the competitive dynamics, we wanna be equally situated as we think about fixed asset coverage costs and interest coverage costs and I also think that you know.
Speaker Change: Our goal after the acquisition of Cooper was to get drive net leverage down below three times you know when we went through the the review as part of our strategic and operational Review Committee last year, where we had identified.
Speaker Change: Three different.
Speaker Change: Assets for divestiture that enabled us to drive to this lower I'll come over just a couple of years. So put all those together and it leads to a really nice healthy leverage for us by the end of next year.
Speaker Change: That's great that's great and just last question for me.
Speaker Change: As far as inventory.
Speaker Change: In the system or in the market.
Speaker Change: Do you think we're kind of heading towards normalization there.
Speaker Change: Do you feel about the inventory picture looks youre doing some.
Speaker Change: Great changes in your mix and kind of going upscale test some more premium products, but just maybe a little color on that.
Speaker Change: Inventories and how that could affect global unit volumes.
Speaker Change: Maybe maybe to start with the EMEA alright, So EMEA last year was much heavier when it came to the inventory levels and.
Speaker Change: The overall channel inventory and EMEA is about 10% lower than the prior year.
Speaker Change: With the Destocking that happened and then the winter inventories are also about 15% lower but we've been really working hard to build that inventory for the for the winter is the selling seasons, beginning there, but the and the sellout trends have been really good from that side on the U S side you know it is.
Speaker Change: Kristina mentioned that the channels overall channel inventory is pretty heavy with the low end tiers of a of an assumption of some pre buy that people did but when we look at the from our inventory levels right. I think that we are we're in an overall pretty good shape in terms of there's not a.
Speaker Change: Big Overstock or a destocking situation, it's pretty level said Kristina no I agree with that.
Speaker Change: Doug that the comments that we've made a little bit earlier theres been a lot of pre buy of low end inventory buy them a lot of distributors, but I think and I think that will take a couple of course to sell through.
Speaker Change: Our inventories generally very healthy, especially in EMEA, where you know Mark was just discussing very low and in winter in particular.
Speaker Change: Alright.
Speaker Change: Very helpful. Alright. Thanks, that's it from me I appreciate that.
Speaker Change: Answers.
Speaker Change: Thanks, Thank you.
Speaker Change: Thank you we'll take our next question from Ryan Brinkman with J P. Morgan Your line is open.
Ryan Brinkman: Great. Thanks for taking my questions and it was encouraging to see the margin expansion in the Americas. Despite the eight 3% volume decline in the quarter. It is clear to you and other U S. PMA members continue to destock, but with the non U S. TMA tires seemingly continuing to build there in the channel or at least certainly not destocking I'm just curious.
Ryan Brinkman: What do you think that those latest changes in channel inventory and demand supply for that industry pricing and shipment backdrop next year versus what backdrop might be needed for you to achieve your 2025 and margin targets.
Speaker Change: Yeah. Thanks, Ryan I think that when we look at the.
Speaker Change: The pricing in <unk> and in consumer behaviors on a on a tier one upper tier two are are different from the lower tier three tier four types of entry level products and the value side as Kristina mentioned from our side of it and as I mentioned at the beginning you're right we are really folk.
Speaker Change: Casing on adding to the Skus in the upper part of the market that those particular tail skus leveraging our global footprint.
Speaker Change: So on a best cost basis, and then from the standpoint, though of of having a product in the yeah, we would call. It the tier two level right from our Master craft brand. We will continue on our cost on a cost effective basis to.
Speaker Change: To supply Skus for our customer base, who are who want those products, but we will do it in a profitable way.
Speaker Change: Great. Thanks, and then with the definitive agreement for the sale of the OTR business now behind you and understanding you are of course limited in what you can share with regard to the two other planned dispositions. Specifically are you may be able to update though with regard to your approach to the process generally. So for example would you say that the timing for.
Speaker Change: The overall process is tracking roughly as expected or maybe if you might be more focused on maximizing proceeds are finding the correct that verse.
Speaker Change: Is completing a transaction within a set period of time or how should investors be thinking about the process generally.
Speaker Change: Hi, Brian I'll jump in here and I think all of those variables you just talked about are important for us.
Speaker Change: When we think about the other two asset sales.
Speaker Change: In General I'd say, we are where we expect it to be at this point in the process and we continue to feel really confident about our ability to meet our objectives. We're certainly focused first on driving the right value for our shareholders and will take will take the time that's required to that end.
Speaker Change: Okay. Thank you and just finally, you concentrate by the comments and the.
Speaker Change: Prepared remarks about the retail operations, serving the retail customers by day, I guess I should call. It the company owned stores in the fleet customers by night, maybe you could expand upon that I recall at the time of the Goodyear forward plan. When it was first unveiled you'd identified a number of opportunities to improve the operations and profitability of the.
Speaker Change: Company owned stores as a reason to not sell them with a fleet services, including last mile delivery and have been maybe the biggest such opportunity is there an update you can give on the profitability.
Speaker Change: Of your company owned stores or their relative success and as you continue to make progress here hopefully does that do you think makes the retail stores is it kind of address them up it makes them more attractive as a disposition candidate given their way to greater profitability himself, maybe implied greater potential proceeds or does it make them.
Speaker Change: More attracted to retain given there.
Speaker Change: Growing benefits to the to the core operations.
Speaker Change: So Brian I'll jump in on the profitability, we talked about it a $20 million year over year lift in sales, which is almost all leverage and so that's a lot of that is dropping to the bottom line. We don't disclose retail profitability and I think you know I'll I'll turn it over to Mark can you just talk about or opportunity.
Speaker Change: Even to further scale and grow retail because I think that comes into the calculus, when you're thinking about opportune times to sale to sell we have a we have a ton of opportunity to grow in this footprint on our own Mark Yeah sure. Yeah, right. We have really been focused during this year on on the retail opportunity.
Speaker Change: These are coming down a little bit for my background.
Speaker Change: In my former life side, but Ryan Waldron, and myself together with with with Fred and John and the retail team and Alex had really been diving in on a week by week basis, making sure that we are leveraging those opportunities right. When it comes to customer service.
Speaker Change: So let's break it into the two segments right. The the the normalized kind of Goodyear Auto Service Center and then the leveraging for the fleet business. Both are going very well. So so really great that we have we've got our store managers out there performing very strongly with their teams we have changed how we go.
Speaker Change: The market with them in terms of the Kpis that we're tracking in terms of the data and analytics that we're we're scraping and sharing with those teams. So they know where they stand in the market we've increased our service.
Speaker Change: On our base business not only in just pushing tires, but really in improving our value add across the network.
Speaker Change: And really have those and are in a great shape for that then you add on the the locations that have already are already doing double duty now as I mentioned with a quote well known last mile fleet.
Speaker Change: To start and you know we're talking a six 700 appointments a day.
Speaker Change: As we look at that and continuing to grow that.
Speaker Change: And we see that as a as a great area of growth for us of profitable growth for us at the same time, we see our existing retail business also and very much a favorable growth mode in terms of the value added proposition and in the bottom line earnings So absolutely. It's a it's a key part.
Speaker Change: Our our long term strategic growth and we will continue to reassess that as we said right about where is the best home for that at the moment that best home is absolutely with us and and my plan is for us to get ourselves prepared and and get moving forward and do even more of what the team has been successful out over these last.
Speaker Change: Last these last eight months or so is as we've made the transition there so really proud of really proud of our retail team.
Speaker Change: Very helpful. Thank you.
Speaker Change: And once again to ask a question. Please press star one.
Speaker Change: We'll take our next question from Emmanuel Rosner with Wolfe Research. Your line is open.
Emmanuel Rosner: Thank you very much my first question is on the free cash flow it was.
Emmanuel Rosner: Decently large use.
Speaker Change: This quarter can you talk to us a little bit about what's going on what the outlook is not just in the near term, but just.
Speaker Change: Into next year as well I believe Christine you mentioned.
Speaker Change: Positive free cash flow next year are going to do that.
Speaker Change: I hear the strike and then what you know what would be the levers and drivers to improve free cash flow and leverage from here.
Speaker Change: Hi, Emmanuel so I'll start on the quarter.
Speaker Change: Our third quarter free cash flow was a use of $340 million in that that's compared to a use of $41 million last year.
Speaker Change: And really two major drivers of that change. The first is higher rationalization payments as part of Goodyear forward, We've obviously announced a lot of structural.
Speaker Change: Rationalizations as well as an increase.
Speaker Change: Use of working capital.
Speaker Change: So I would say rationalization payments and and some of the Goodyear forward costs were about 100 million higher working capital $75 million higher than the.
Speaker Change: The rest is.
Speaker Change: Timing of tax payments and timing of interest expense payments and accruals also some other balance sheet accruals and payments, but no real significant changes here other than timing I think we're confident about our expectations for very strong free cash flow here in the fourth quarter in line with our historical seasonality in our.
Speaker Change: Full year free cash flow guidance for this year stable compared to what we shared with you on our Q2 call I think looking ahead to 2025.
Speaker Change: A couple of major drivers relative to this year on free cash flow first what we expect to recover the working capital outflows in 2020 for next year. We also are reducing our capex.
Speaker Change: Below a $1 billion. So that's a swing of about $300 million on a year over year basis, and so I think we should expect really strong free cash flow next year right now we've announced.
Speaker Change: Restructurings of $400 million, which would.
Speaker Change: Subtract from all of that free cash flow, but I think you know our restructuring could go as high as 700 million some of that could be in that additional could be in 2025. Some of that could be in 2026, we'll continue to keep you posted there on our plans around structural cost, but still feel very good about cash flow.
Speaker Change: Okay. Just a quick follow up on this restructuring spend can you just remind us how.
Speaker Change: How much is sort of left.
Speaker Change: Left to spend.
Speaker Change: After 2024 he's done.
Speaker Change: So right now we have we've.
Speaker Change: It said that we'll spend about $1 billion in restructuring over the course of the program. So that's inclusive of the guidance today for 2020 for next year, we've announced about $400 million in cash out.
Speaker Change: There could be some other structural cost announcements that could add to that next year or in 2026, and we'll just have to continue to keep you posted as to the timing of those out for but expect no more than $1 billion under the total program between 2024 and 2026.
Speaker Change: Maybe early 2026.
Speaker Change: Alright, thank you.
Speaker Change: And then maybe a follow up on that on volume.
Speaker Change: So I think I understand some of what's going on in terms of drivers of volume weakness as well as the strategy you're pursuing to go after some of the more profitable the most profitable volume.
Speaker Change: At the same time.
Speaker Change: It's still a bit harsh.
Speaker Change: Our vantage point too.
Speaker Change: And then at what point will volume no longer be at.
Speaker Change: Larger headwind to the point that it offsets some of the benefits from your strong cost reductions I think in the past.
Speaker Change: Anticipated that by now you would probably have reached a point where volume would not necessarily underperform the industry, but it's still doors and still guided to do so.
Speaker Change: How should we think about that when will you when will you be doing.
Speaker Change: With your own actions, what part of it is driven by good year versus industry dynamics.
Speaker Change: At what point.
Speaker Change: <unk> volume longer would be.
Speaker Change: That basically offsets the good stuff you do on the cost side.
Speaker Change: Yeah, I think and I think you've put it exactly right Emmanuel in terms of the industry the industry piece versus the Goodyear and the Goodyear brand piece.
Speaker Change: I'll give you a great example, where it all on weather ready to right. As we mentioned we've got got you know I think it was 50, 60% more SKU coverage coming into this the refresh inning in the new.
Speaker Change: Award winners coming into the marketplace today. So at this moment, we've got 40 of those skus in the marketplace for sale by the end of the year there'll be 58 by then by the time, we get into the end of the first quarter next year will be up to 78. So from 40 to 78 on that prior to right. We would have been sitting roughly.
Speaker Change: And that 50 kind of range. So we're covering more of the market place and what we're doing it very much from an analytical perspective from from our folks in data analytics and the marketing team and from our our sales our consumer sales teams that we used to call category right that our sales enablement looking at the car Park looking at the first and second replacements.
Speaker Change: Cycles, and where we have holes in the shipments. So long story short too. It is whether ready two is a great example of bringing that in and having the right places. The 90, plus skus that are on the water from EMEA on the high end fitments or a key part of that strategy that come into the marketplace between December and February of next year.
Speaker Change: <unk> it.
Speaker Change: It will be flowing all the way through next year and into early 'twenty six answer your question.
Speaker Change: And so timing wise I. Appreciate this color timing wise do you think that.
Speaker Change: Oh, the other year and a half that process when it comes to the actions that we're taking from the time, we released development and the refresh of the vitality we call. It an existing power line Skus. So is the refreshing of Skus, it's new skus to the market and still though being very cognizant of our platforming and the.
Speaker Change: The charcas and the green tires to not clog up the plants. So we're doing that in harmony with with each other so we don't cause a backwards move on our plant side, but but it's basically it's about a year and a half type of process I think for us to get exactly where I would like for us to be.
Speaker Change: Okay. Thank you.
Speaker Change: Thank you we'll take our last question from Ross Macdonald with Morgan Stanley. Your line is open.
Ross MacDonald: Yes. Thank you for taking my question. This is Ross at Morgan Stanley quick one on the SKU rationalization could you maybe help steer us in terms of the volume Youre currently doing in 18 inch and above in the U S and how much open road you see for growth. There just be helpful. I think to understand where we're starting from and where you were.
Ross MacDonald: To be in a couple of Years' time.
Ross MacDonald: Sure.
Speaker Change: Hi, Ross So I have the stats for North America, and Goodyear branded products.
Speaker Change: 57% greater than 18 inch but across the portfolio, which would include Cooper and all of our family of brands, we're at about 46%.
Speaker Change: Greater than 18 inch so a lot of run way to grow here in North America going forward, that's a pretty big contrast, if I go to the other and like in China For example, where we're already 80%.
Speaker Change: Greater than 18 inch and that's just given the car park, they're more heavily skewed to <unk>.
Speaker Change: That's helpful. Thank you and then final question just on the disposals again I appreciate you're slightly restricted in what you can say, but specifically on Dunlop you'd previously guided us towards that business, which is predominantly Europe focused I believe doing annual sales of around $700 million would that still be the best estimate for.
Speaker Change: 2025, given the budget share gains that we're seeing in Europe and relates to <unk>. You had mentioned that business, we're seeing something like a mid single digit margin.
Speaker Change: How should we think about the Dunlop margin profile next year, given the budget dynamics that you laid out earlier. Thank you.
Speaker Change: So I would say yeah, you write them up for US is about 5 million units, mostly concentrated in EMEA.
Speaker Change: Over the past year, we've repositioned dunlop into the tier two space in the market. So we have been growing share there.
Speaker Change: Products, performing very well I I would expect that revenue to be up somewhat just given the unit volume increases we've seen since we last discussed the brand at the end of last year.
Speaker Change: I think the margins are still healthy still very healthy relative to the rest of the portfolio.
Speaker Change: I'm talking on a gross margin basis overall and that is a clear area of focus for us growing continuing to grow the strategic positioning of our brand families.
Speaker Change: And continuing to.
Speaker Change: Work towards this.
Speaker Change: Process, where we're undergoing a strategic review for divestiture as well.
Speaker Change: Thanks, very much maybe a very very quick follow up just on the mix question.
Speaker Change: Would you consider in your EBIT bridge splitting what is net price versus what is mix I know some of your tier one competitors do that but just be helpful. Maybe to showcase what is structural and mixed benefits.
Speaker Change: To help us see the evidence of that mix coming through thank you.
Speaker Change: Yeah Yeah.
Speaker Change: Yeah, well, we will historically was when there's been a a.
Speaker Change: A significant driver will make some qualitative comments I think because of our market share in the U S and some of the ongoing scrutiny around pricing conversations broadly we tend to stay.
Speaker Change: Stay away from yeah really over pricing commentary.
Speaker Change: Alright.
Speaker Change: Understood. Thank you very much.
Speaker Change: Alright. Thank you. Thank you.
Speaker Change: Thank you and it appears that we have no further questions. At this time I will now turn the program back over to our presenters for any additional or closing remarks.
Speaker Change: No that is debt guys. Thank you guys for calling especially I know something you guys are out at the same Michelle it's quite early for you.
Speaker Change: But we want to thank everybody for joining in and thanks for the great questions today look forward to talking to you in quarter four.
Speaker Change: That concludes today's teleconference. Thank you for your participation you may now disconnect.
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