The Goodyear Tire & Rubber Company (GT) Q4 2022 Earnings Call Transcript

The Goodyear Tire & Rubber Company (NASDAQ: GT) Q4 2022 earnings call dated Feb. 09, 2023

Corporate Participants:

Richard Kramer — Chairman and Chief Executive Officer

Christiana Zamarro — Chief Financial Officer

Analysts:

Emmanuel Rosner — Deutsche Bank — Analyst

Rod Lache — Wolfe Research — Analyst

John Healy — Northcoast Research — Analyst

James Picariello — BNP Paribas — Analyst

Presentation:

Operator

Good morning. My name is Ashley and I’ll be your conference operator today. At this time, I would like to welcome everyone to Goodyear’s Fourth-Quarter 2022 earnings call. [Operator Instructions] Today, on the call, we have Rich Kramer, Goodyear’s Chairman and Chief Executive Officer; Christina Zamarro, Chief Financial Officer; and Darren Wells, Chief Administrative Officer.

During this call, Goodyear 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 fourth-quarter 2022 investors that are in their filings with the SEC, which can be found on our website at investor.goodyear.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 to the comparable GAAP measures is also included in the investor letter.

I will now turn the call over to Rich Kramer, Chairman and CEO.

Richard Kramer — Chairman and Chief Executive Officer

Great. Thanks, Ashley. And good morning, everyone. Thanks for joining us today. We released our fourth-quarter investor letter. After the market closed yesterday and we received very good feedback from the investors on both our letter and our Q&A call format following our third-quarter release. So as we did last quarter, we’ll use this time again to focus solely on your questions.

Now, just before opening the line. I want to acknowledge, as you’ve heard earlier, that both Christina and Darren are joining me on the call today. As you saw with the announcement in December, Christina became our Chief Financial Officer as of January 1, replacing Darren. He’s moved into a new role of Chief Administrative Officer. Congratulations to both of them, and again, they’re joining me here. I’m excited to continue to partner with both of them in their new roles. And given the transition, Darren is joining us on the call today, but Christina and I will take the lead in responding to your questions on these calls as we go-forward.

So, with that, Ashley, let’s open up the call for the first question.

Questions and Answers:

Operator

So we will take our first question from Emmanuel Rosner with Deutsche Bank. Please go-ahead.

Richard Kramer — Chairman and Chief Executive Officer

Good morning, Emmanuel.

Emmanuel Rosner — Deutsche Bank — Analyst

Thank you. Good morning, and thank you so much for taking my questions, and agree with the feedback on the on the call format. So very much in favor of it.

Richard Kramer — Chairman and Chief Executive Officer

Well, good. Thanks, Emmanuel. We appreciate the feedback and Christina pushed us that way. So, well done. We appreciate that.

Emmanuel Rosner — Deutsche Bank — Analyst

Great. First question, maybe, I think last year, around the same time, I think you had helped us out with, sort of like framing, sort of a base-case scenario for what could happen to free cash flow for you guys for the full-year, and had on there certain conditions. So would you be able to go into this discussion for 2023? Obviously, I appreciate all that’s in this slide, just curious, knowing all you know what does that — what does free cash flow look like for you?

Christiana Zamarro — Chief Financial Officer

Sure. So Emmanuel. Hi, this is Christina. And let me start by saying thank you for the comments on the Investor Letter. And I have to send out thanks to our teams. This has been a great push by our Investor Relations Team, FP&A our controlling teams, all the put that together. And again, we’ve received really great feedback on that.

As far as free cash flow, in 2023, and if you look through the drivers, we’ve laid out as part of our letter, and if you were to take the assumption, and so just stay with me on the assumption, if you were to take the assumption that our EBIT was going to be flat in 2023 with our EBIT in 2022, which was about $1.1 billion. You should get to a level of free cash flow in the range of about $400 billion. And that’s just reflecting the year-over-year improvement in working capital. And Emmanuel, what I’d add to that is, it’s not that we’re targeting flat earnings. Our goal is to improve earnings. And after a really tough setup in the first-quarter, as you read in the letter, the trajectory should improve meaningfully as we move through the remainder of the year.

In the second-quarter, our goal is for segment operating income to approach 2022’s levels, with volume stabilizing and given, in lower year-over-year raw material cost increases that we’re expecting in the second-quarter. Assuming a relatively stable economic outlook, then, we would begin to see the benefits in the second half of higher-volume, on either comparables, strong growth in Asia-Pacific driven by a recovery in China and lower inflation levels than we’re expecting in the first-half of the year. We would also expect the benefits from our recent cost actions that we’ve announced. And then of course, at current spot prices, tailwinds in our raw material cost. Historically, this has been the time in the cycle where we’ve seen growth in earnings and growth in our margins as well.

Emmanuel Rosner — Deutsche Bank — Analyst

Okay, that’s helpful. And then I guess, following up on some of the pieces of the — I guess of the free cash flow guidance. So, I think capex was guided at $1 billion for the 2023. That’s like this compares to maybe a $1.2 billion $1.3 billion framework that you discussed previously, in terms of the investments you need to make in growth. What is enabling you to sort of like keep it around for the $1 billion? And is that roughly sort of, like, just maintenance capex? Are you cutting back at, I guess, where are you cutting back?

Christiana Zamarro — Chief Financial Officer

Yes. So, first question, Emmanuel. And so, what I would tell you is as we went through 2022, we did scale back our plans for capital expenditures just given the outlook for the global macroeconomic environment. As we look at 2023, we expect to continue to invest in the Americas and in Asia-Pacific, although investment levels in EMEA will decline, just given the current macroeconomic outlook there. We continue to allocate capital to high return projects that will improve our overall competitiveness over-time.

Richard Kramer — Chairman and Chief Executive Officer

Yes. Emmanuel, I’ll just jump in and echo Christina’s points. I think we take a lot of time to go through those capital plans and we’ve worked through a lot of cycles and I think you can count on us to adjust capex to the environment we’re in. And then when we do that, we really don’t short change ourselves, excuse me, on what we see as long-term growth projects that we have to do. So we’re comfortable with what we spend. And I would just tell you, even if you see things, like, things that we did at CES around intelligent tire and around sustainable tire. These our projects, growth projects, industry-leading sort of technological projects that we’re going to continue to move forward with within the capacity of the spend that we have and we feel comfortable knowing how to do that.

Emmanuel Rosner — Deutsche Bank — Analyst

Okay, yes, I appreciate the comment. And then, just if I may, just since you’re mentioning the environment, can you maybe just provide a little bit of your perspective on some of the drivers of this markets demand weakness that seems to be across every region, every major region? I guess, what is driving this? How would you see that potentially evolve through 2023, as you know, on the demand-side? And then, any implications for how to think about pricing?

Richard Kramer — Chairman and Chief Executive Officer

Yes, I think, a lot there, maybe I’ll just start with the Americas. We do — we did see a weaker market in the fourth-quarter and we see a little bit of slowdown coming into Q1. We reacted, not only to the Americas, but Europe as well, as you saw in our investor letter by taking production down with that focus on making sure we don’t have excess inventory, bit of a slowing market and to focus on cash as Christina went through.

But, Emmanuel, as I think about the Americas going-forward, you also saw in our letter, we saw that our channel inventories are up about 10%, but what I would tell you is, that’s pretty healthy. I mean, our distributors are really rebuilding their inventory. We didn’t see any buy aheads, let’s say, in anticipation of any price reductions or anything like that. It’s a pretty healthy place and I would say in-line with the expectations of where the market is growing in ’23. So we feel pretty good about North America. A little slow to start, but I think we have a stronger second-half coming. A little slower to start because we’re bringing some of those costs on the balance sheet of unabsorbed inventory into the first-quarter as well. But we feel pretty good about the demand picture. Sell-out was about flat in the fourth-quarter and year-over-year in the fourth-quarter, and we don’t see any big changes going into the year.

On Europe, I think a little bit different story. Obviously, a bit tougher there. I would take a step-back and say, we feel really good about the initiatives we’ve put in-place in Europe. Aligned distribution is working. Our EBIT in the quarter, we got volume, we got a price-mix ahead of raw materials, again. And we had share gains in a down-market across-the-board for I think the 11th or 12th quarter in a row.

So things are working in Europe. We also, as you know, took a lot of actions there to get our costs in-line. I would say, we feel really good about those things. But obviously, in Europe, we’ve seen big energy inflation in Q4 driven by the war, and we saw, in anticipation of these high-energy costs, really sort of reduced consumer demand out there, as we saw really weak markets in the consumer replacement business, particularly in November and December where we saw consumer base thinking about big energy bills and the channel sort of slowing down on wanting to buy more inventory.

So, Europe is a different case. We know that’s going to continue for a little bit into 2023, first-half, especially second-half. Again, as Christina said, we’ll be better. And we’re taking the appropriate actions to make sure we don’t build excess inventory to make sure we focus on cash and continue to look at more cost areas. In November, in Europe, we’ve done a lot in terms of restructuring our footprint head and full value, so we did in UK, in Belgium. We restructured the business in South Africa and we did some restructuring, some sort of add volume and get some more efficiencies in France. So we’ll continue down that path.

And then, in Asia, and we’ll particularly focus on China here. Tough right now because of COVID, but we really see that reversing, and we see that reversing in our favor in two areas. One is the OE business, which was strong in the fourth-quarter, and will continue to be. We doubled our win rate in the OEs in 2022 to about 70% and we have a higher mix into EV, the high EV win rate, a high luxury SUV and truck win rate as well with the domestic OEMs, the Chinese OEMs, that’s higher profitability and will create good pull in the replacement market.

And as COVID sort of — as we get through COVID, if I can say, that’s going to happen towards the second-half, we see a stronger pull and it makes up in replacement as well. And to get ready for that, we continue to invest in distribution in the key markets in China and in India as well. So, overall, look, we’ve got to get through Q1, first-half, if you will, again, as we see some of this tumultuousness. But beyond that, we do see some upside and feel relatively good.

Emmanuel Rosner — Deutsche Bank — Analyst

Thanks for all the color.

Richard Kramer — Chairman and Chief Executive Officer

Thank you.

Operator

We’ll take our next question from Rod Lache with Wolfe Research. Please go-ahead.

Rod Lache — Wolfe Research — Analyst

Good morning, everybody.

Richard Kramer — Chairman and Chief Executive Officer

Good morning, Rod.

Rod Lache — Wolfe Research — Analyst

Two quick questions, first, are you seeing anything that would indicate anything other than stable pricing, as you’re entering this week, this year, just in the context of the weak demand? And can you clarify your expectations for the other tire related businesses, those looked a bit soft in the fourth-quarter?

Richard Kramer — Chairman and Chief Executive Officer

Sure. Ryan, from — how we’re looking at, I guess, I’ll say it, price-mix, and how we’re looking at the raw-material environment, that’s obviously related to that, you know that’s sort of the essence of your question is the earning pressure and margin compression we’ve seen over the last quarters because of these escalating raw materials. That’s true for Goodyear, true for the industry as well, and we need to recover that. I will tell you, our momentum has been very good. Our teams across all our businesses offset all the raw-material headwinds with price and mix. And in two of the businesses, and Europe not being one of them, we also offset some of the other cost increases we had as well. So the team has done a really good job.

Now, as Christina mentioned as well, we see this potential decrease for raw materials, and I would tell you, our plan is to capture the benefits of those raw materials and see that in margin improvements as we continue to capture our value proposition out in the marketplace. And I think, Rod, you know as well, having been with us so long, historically, in a period of declining raw materials we’re able to grow margins, we’re able to drop-through those benefits into the — into our earnings. And I’d say, we see that is still the plan and our way forward and what we’re driving for, and also tell you what can help them, excuse me, is we also see the OE business coming back, which means, there’ll be a pull on the best capacity that the industry is making. And that’s good for sort of a supply-demand equation out there as well, as we think about how to manage the demand in the replacement market.

And then, finally, Rod, I’ll just tell you, in terms of what we’re seeing in the marketplace. We have not seen any decrease demand or trade-down in our Tier-one volumes at all. We’ve seen a little bit in Tier II moving toward the lower-tier brands, but I will tell you, I’m not sure that’s a trade-down or a price issue, as much as it is, all those sort of imported tires that were back-ordered and paid upfront in cash by the distribution, particularly in the US, I’m talking here, that sort of hit the docks in the past quarters. That obviously drove the industry numbers. All that came, it came late, it was paid for. And so, I think what you see is a lot of push of those tires to turn it back into cash. And I think that’s a dynamic we’re dealing with. But again, that doesn’t really impact sort of our Tier-one tires or the value proposition for those. So I hope that helps.

Christiana Zamarro — Chief Financial Officer

Yes. But I’ll jump in on the non-tire business performance in the fourth-quarter. That was principally driven by our chemical business, as you know, that’s a pass-through margin business. And when they’re buying Betadine at higher prices, and then Betadine dropped in the fourth-quarter, pretty precipitously. That means they’re adjusting their pricing real time in the market. So it’s more of a timing issue. As I look to 2023, expecting good growth in these areas, really driven by our aviation business, seeing and expecting strength in volumes, strength in pricing and mix. And we’re seeing that across the portfolio, especially given the reopening and demand pull out of China.

Rod Lache — Wolfe Research — Analyst

Thanks for that. And just one more thing, if I can ask, just taking a step back, maybe you can just elaborate a little bit on what it will take to close the gap, obviously, on a mix-adjusted basis versus your peers? Presumably some of the capital spending that you were planning was aimed at doing that, and maybe you could just provide a little bit of color on what you’re shooting for here in the next year or two?

Christiana Zamarro — Chief Financial Officer

Yes. So, I’ll go ahead and start. I mean we talked a little bit with, earlier on the call about the plans for capex for 2023 and a lot of that is influenced obviously by the European macroeconomic outlook. I have to say, over the last two to three years, we do feel that we’ve made significant progress on closing our conversion cost per tire gap versus our competitors. I would say two or three years ago, we had estimated that gap to be in and around $4 per tire. And today, wouldn’t have said with the closure of a very high cost facility in Gaston in the US, a big restructuring in EMEA. And then, of course, you add a benefit in as much as many of our competitors had low-cost supply coming into Western Europe out of Russia. Put all those together, and we think our disadvantage right now is nearly half of what it would have been, say, two or three or four years ago.

So we’re feeling well positioned on a relative basis. That’s not to say we’re not going to do the work to move forward. And what I’ll tell you is that the investments that we have in the plan, we started last year and are continuing in 2023 in the Americas, in Asia-Pacific are very high return projects and as much as they’re more expansionary instead of greenfield type plants, that will help move our low cost percentage forward as part of our footprint and increase our overall competiveness as we go.

Rod Lache — Wolfe Research — Analyst

Okay, thank you.

Operator

[Operator Instructions] And we’ll go next to John Healy with Northcoast Research. Please go-ahead.

John Healy — Northcoast Research — Analyst

Thank you. Rich, I wanted to ask a big picture question about kind of the changes in the C3 recently. Just love to get your perspective on the move with Darren into the more of the strategy centric elements of the business. What might we expect from you guys over the next couple of years? Like, what are the areas where you think that change is going to have the biggest impact on the DNA of the organization?

Richard Kramer — Chairman and Chief Executive Officer

Well, I think the way I’d answer that, John, and the one thing I would say is we operate as a team. So I think that what makes — what I’m proud of in leading the Goodyear team is that it’s not reliant on one person. So whether Darren is in the CFO role or in a different role, helping us with strategy where Christina and Darren have worked together for so long, I think this was a really natural and elegant transition, if I can say. And I look to the leaders of our business units as well, as well as our CTO, Chris Helsel. I think that when you look at what we’re doing, it’s the team that really is where the value is. I won’t limit it to any individual person.

But I will say from a strategic perspective, I think, one, I would highlight what Christina just talked about, which is to say that we are keenly focused that we have to get our cost structure continuingly in line, not only relative to competitors who also get better. But just the trends we see in the marketplace of — I always speak about transparency about price and availability of inventory, which puts pressure, margin compression pressure on every business in every industry. We’re keenly aware of that and we need to make sure that our operations continue to get more efficient every day. That means what we do in our factories on conversion cost, it means where our factories are. We’ve taken footprint actions. You can count on us to continue to take more of those. And then to make the high value-added return investments that we are going to do to help drive both cost structure and more efficiency in the products we make. So that will continue. And we’re going to get — we’re going to continue to get, I would say — Darren, I’ll say creative on how we make sure that we do that. There’s a lot of manufacturing capacity in the industry. And like we did with Cooper, we need to think about how we can use that capacity more wisely as we move ahead.

Secondly, I think I always tell my team, we have to have the best products in the industry. So our product innovation engine has worked. We were high podium in every product category in Europe, including summer. We have the freshest product portfolio we’ve ever had in Asia and Latin America and in the US, and that’s both in commercial and in consumer. We will continue to make sure that our innovation engine is working. We don’t talk about it as much, but we don’t talk about a lot of the things that are working as well as they are. So we will continue to do that.

And I think what gets us most excited about this is the technological trends that are moving forward in our business. They’re not revenue generating today, but the changes we’re seeing in mobility, the changes from just making a, if you will, a dumb tire to an intelligent tire, that actually has a place on an intelligent vehicle, a connected tire that improves the safety and performance of vehicles, and it actually has a role that becomes part of those vehicles operating systems, both in terms of how it’s integrated to the vehicle and the service element of it, is something that gets us excited about where mobility is going and what the role of Goodyear and the tire is. And that’s something that we’re thinking deeply about and I think we’re making great progress on going forward. So there’s a number of things that Darren will help us on as we go forward and do them, but again, I would take a step back. It’s the basics and it’s the technological trends that the industry is going, our ability to execute on both of those simultaneously is going to continue what separates us going forward.

John Healy — Northcoast Research — Analyst

Thank you. That’s super helpful. And just one other question I had, just on distribution. It sounds like the Cooper and the Goodyear portfolios are starting to be maybe a little bit more connected in terms of dealer availability. Would just — wanted to get your thoughts on in terms of access of Cooper products to Goodyear dealers and vice versa, and are we at a point where maybe one plus one can start to equal three? Or is it kind of going to continue to be somewhat separated in terms of how each go to market?

Richard Kramer — Chairman and Chief Executive Officer

So, I actually think it’s a little bit of both. And the reason I say that — for instance, our retail stores now have Cooper product in it, and that is and has turned into, in terms of the performance of those stores, sort of a one plus one equals three, in terms of how they’re operating, how we’re taking care of customers and the products that we’re offering them.

In the same respect, there are certain distribution elements of how Cooper goes to market, how they sell to distributors. And that process is one of the reasons that we wanted to combine Cooper with Goodyear. And they do some of those things really well and we are not going to touch those. We’re going to make sure what they did really well and candidly, what they were better at than we are, we’re going to keep the best of that and we are, while we’re integrating where it makes sense to do.

So, I think it’s actually a little bit of both. And I would tell you, both in terms of the synergies, we’re on the run rate synergies that we said we were going to get. And I think that the market side, we said we weren’t going to do anything rash right out of the box, we haven’t. And you’ll see continued progress on how Goodyear and Cooper incorporate into the market together in 2023. So I think more to come on that but I’m very happy with where we are.

John Healy — Northcoast Research — Analyst

Thank you.

Operator

And we’ll take our final question from James Picariello with BNP Paribas. Please go-ahead.

James Picariello — BNP Paribas — Analyst

On the second-quarter color of SOI approaching a year ago levels potentially, what would be some of the key assumptions to get there? Correct me if I’m wrong here, but with the second-quarter, it should have a similar overhead absorption impact to the first-quarter, and maybe that’s $60 million to $70 million. And then, from there, the three buckets — key buckets, as I see it, would be when unit volumes, price mix versus raws, and then the non-raw materials inflation piece. Yes, just any color on that would be super helpful.

Christiana Zamarro — Chief Financial Officer

Yes, sure. Hi, James, it’s Christina. So, I guess I would start by saying, in the second quarter, we see volumes stabilizing. And I would have — and we have announced a 5% list price increase in Europe consumer replacement, beginning January 1. And so, we expect Europe to begin to catch up to the increases in raw-materials over the course of the first-quarter and second-quarter. Obviously, there’s a very significant step down in raw-material price increases from Q1 to Q2, and so that should be a benefit for us as well.

James Picariello — BNP Paribas — Analyst

Okay. And then, just — well, then, how do you foresee the elevated channel inventories in Europe? I think, like, 30% above year ago levels, with the price increase and with replacement still on demand down for the industry, like, mid-teens entering ’23, yes, how do you see that unfolding? Are you catching up? [Speech Overlap]

Christiana Zamarro — Chief Financial Officer

Yes. It’s a great question, James. And the elevated channel inventory is actually all reflective of winter. And so what happened in the first-quarter is we see a shift from winter tire sell-in in the fourth-quarter. In the first-quarter, we shift into a summer tire sell-in season. There, the inventory in this channel is much more balanced and even healthy. What I would tell you is that the energy prices in Europe have also abated significantly since the third and fourth quarters as well. And so expecting that to support consumers out over the course of the first and second quarters.

James Picariello — BNP Paribas — Analyst

Thanks.

Christiana Zamarro — Chief Financial Officer

Sure.

Operator

And there are no further questions at this time, and this will conclude today’s Goodyear fourth quarter 2022 earnings call. [Operator Closing Remarks]