The Goodyear Tire & Rubber Company (NASDAQ:GT) Q1 2023 Earnings Call dated May. 05, 2023.
Corporate Participants:
Richard Kramer — Chairman, CEO & President
Christina Zamarro — Chief Financial Officer
Analysts:
Ryan Brinkman — JP Morgan — Analyst
Rod Lache — Wolfe Research — Analyst
James Picariello — BNP Paribas — Analyst
John Healy — Northcoast Research — Analyst
Emanuel Rosner — Deutsche Bank — Analyst
Presentation:
Operator
Good morning, my name is Nicky and I will be your conference operator today. At this time, I would like to welcome everyone to Goodyear’s First Quarter 2023 Earnings Call. All lines have been placed on mute to prevent any background noise. After some opening remarks, there will be a question-and-answer session. [ Operator Instructions ]. Today on the call we have Rich Kramer, Goodyear’s Chairman and Chief Executive Officer; and Christina Zamarro, Chief Financial Officer.
During this call, Goodyear, we’ll refer to forward-looking statements and non-GAAP financial measures. Forward-looking statements involve risks, assumptions and uncertainties that could cause actual results to differ materially from those forward-looking statements. For more information on the most significant factors that could affect future results, please refer to the important disclosures section of Goodyear’s first quarter 2023 investor letter and their filings with the SEC, which can be found on their 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 on 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, CEO & President
Great. Thanks, Nicky. And good morning everyone and thanks for joining us. We released our first quarter investor letter after the market closed yesterday. You can find a copy of that on our Investor Relations website along with an update on the Cooper Tire integration, which we hope you’ll find valuable. As we’ve done in the last couple of quarters with this newer format, Christina and I will devote today’s time to your questions. I’ll just say, while industry volumes have been down early this year as we expected, stabilizing industry demand in the back half of this year along with the benefits of of a decrease in raw material costs should improve margins as we move through the year. We look-forward to the discussion today. So, now let’s open the line for questions.
Questions and Answers:
Operator
[Operator Instructions ] And we will take our first question from Ryan Brinkman with JP Morgan. Please go ahead.
Ryan Brinkman — JP Morgan — Analyst
Hi, thanks. I just wanted to follow-up. Good morning, just wanted to follow-up on some of the comments in the shareholder letter about softer industry volume trend we’ve been noting the US TMA numbers in the Americas to in the US that is and I understand that’s a wholesale number, so it’s looking to get a little bit more color from you because you own retail stores and you monitor the industry closely what the retail demand might be doing and I saw some of the comments in the Americas outlook section to about channel destocking and just curious what might be the driver of that and that might suggest the retail demand might be better, but also kind of might want to ask around the extent to which the softer volume trends, including because the miles driven you note is is up year-to-date and slightly ahead of the 2019 levels. The extent to which may be the bad news on the volume side might be related to the good news on the pricing side with potentially demand destruction and sort of what you’re hearing about the customer reaction to these price hikes, which of course we’re encouraged to see.
Richard Kramer — Chairman, CEO & President
Yes, so, Ryan. Look, I’ll start and I think you’re right. I mean, as we started the year and I’ll say again, as we expected, we had a weaker industry coming off of a really a tough comp from Q1 and 2022, remember we had a lot of stocking going on back then a really strong industry and that was sort of again that strength we saw coming out of COVID. So we saw a weaker industry coming off of that. We saw destocking as well, as you mentioned the dealers kind of took a step-back and it showed in our results. We also took production cuts in the fourth quarter. And again, we’re doing some in the first quarter just representative of that and that’s some of the volume decrease that we saw. But just as you said and I said in my opening remarks. I think that as we anticipated volumes will continue to get better quarter-over-quarter as we get through 2023 and the trends that we see frankly both in the US and Europe [indecipherable ]in the US is up as you said about 4%, Europe is actually up about 13% as well. So we actually see people getting out that trend of people wanting to get out and travel, that’s what we see as well and I think that points toward a a situation where volumes and demand will continue to improve the consumer. As we see it is still in pretty good shape. So that speaks to good demand for the balance of the year. Again, coming out of a weaker Q1, so that’s a positive as well. And as we think about pricing, remember we laughed about a 12% price increase from Q1 of last year and our –we just take a step-back. I think we’re up over two years about 30% and revenue per tire.
So, I feel really good what the teams have done to capture those incremental raw-material costs out there. I think the benefit will also see those in decreasing raw-material costs starting in Q2 and even at a faster pace as we get to the back-half of the year, as well as lower some of those inflationary costs that we’ve seen as well. So, a good demand environment, a pretty good pricing environment and a decreasing cost input environment as we get through the back-half of the year. So I think all that bodes well in terms of what we said last quarter and how we see the year filling out.
Ryan Brinkman — JP Morgan — Analyst
Okay. Great. Thanks. And then lastly from me, just looking to get more color on the Cooper integration. I followed the the high protects link and the shareholder letter to another PDF with even more details on the integration, which is excellent, and I understand that you increased the synergies once already and now you’re saying that the cost synergies will be fully achieved 50% more than originally announced by just next quarter. Just to follow-up on that though, there’s a lot in here about the cost-savings. I think that what was left unquantified at the time of the announcement and the closure was these further out potential revenue synergies go-to-market benefits etc. I’m just curious if maybe it’s a combined company now and that’s how it’s gonna operate going-forward or if you are in a position now to maybe put some more numbers around that or talk about the timeframe which you expect to benefit from the revenue synergies.
Richard Kramer — Chairman, CEO & President
Well, and I’ll start Christina, you may want to jump-in here as well. First of all. I would say the go-to-market strategy of both the Goodyear brand and The Goodyear family brands plus Cooper continues to be on the path that we expected. So, no, no negatives from that going-forward. We have not put any numbers around that in terms of quantifying what that would look like, but I would tell you. As we look at the segments, particularly around light truck, which is one of the the biggest attributes that we got when we did the acquisition. I would tell you our share performance across all segments of the industry continues to be very strong and continues to be very much in line with what we expected when we when we did the transaction. Additionally, as we look at some of the channels that were new to us again or channels that we may have exited that Cooper Tire was still in, those businesses are still performing very well for us, particularly as we see some movement from Tier 1 down to Tier 2, Tier 3 as the economy as softened a bit. So that actually has worked out very well for us as well. So we have not quantified that Ryan, but. I will tell you there is there’s no negative there that I would highlight, in fact. I would say it’s going as planned and even better in certain segments.
Ryan Brinkman — JP Morgan — Analyst
Okay. Great. Thank you.
Christina Zamarro — Chief Financial Officer
Yes Ryan maybe, I’ll just jump in, just to say within the presentation, you can see in our upgraded outlook. We had a bar for initial manufacturing and sales opportunities and a lot of that has been about broadening availability of Cooper product with Goodyear aligned distributors. We also have introduced new sales incentive programs for the combined portfolio for our dealers and distributors here in the US and all of that’s contemplated in this this upgraded $250 million Outlook, which we expect to deliver by the end-of-the second-quarter. That’s all really good. The other thing I would just add-on the Cooper integration overall is that we’re feeling really good about the delivery on the synergies, if I — we took on Cooper in the middle of 2021 just after the economies began to reopen in a more material way after COVID. And so I can’t, I can’t compound versus 2020, but if I look at 2019 as an example, our Americas business was at 7% SOI Margin, we delivered $550 million and earnings. And then, Cooper was 20 2019 was about $180 million in OI and. So taken together and moves through the two, two years of 2020 and 2021, you would have assumed. Our combined businesses would have made something like $735 million or so or $750 million. But in fact, in 2022, we earned $1.1 billion, that’s the benefit of synergies in the Americas, in particular, also some of our own self-help, we did close the factories during COVID in Gadsten, Alabama and and really good execution by the Americas team on over-delivering on price versus cost in 2022 as well. So, feeling good about the momentum in the Americas business.
Ryan Brinkman — JP Morgan — Analyst
Thank you.
Operator
And we will take our next question from Rod Hall share with Wolfe Research. Please go ahead.
Rod Lache — Wolfe Research — Analyst
Good morning, everybody.
Christina Zamarro — Chief Financial Officer
Hi Rod.
Richard Kramer — Chairman, CEO & President
Good morning.
Rod Lache — Wolfe Research — Analyst
I wanted to ask you a little bit about pricing first. You mentioned some price increases that were taken in Europe earlier this year. Can you just give us a sense of how pricing would look for you in the back-half of this year, year-over-year I’m referring to. If things were to be frozen at current levels, I know there is some complexity here because you do have OEM index agreements. And also related to pricing, do you think that you’ve kind of kept pace with your peers and pricing in North-America, we’ve seen a few, at lease public announcements about some price increases from others, but we haven’t seen anything yet from Goodyear.
Richard Kramer — Chairman, CEO & President
So I’ll start maybe on the last question again. I’m actually, I’ll say it again. I mean, I’m actually very pleased with the way the teams have gone to-market on recovering not only the incremental raw-material costs, but the, but the incremental inflation that we’ve seen over the past two years. And again, that’s. Over the last two years, we’re up about 30%in revenue per tire and the teams were very on point let’s say front footed to go out and get those price increases that we needed to cover those raw-material costs. You’re right, we have announced price increases in Europe and other countries. So we’re certainly still top of mind on that as we came into this quarter in the Americas, remember we did lap that 12% price increase from Q1 last year and instead of essentially just doing across the board price increases, the team has been very focused on call it dynamic price increases on an SKU by SKU basis to make sure that we’re recovering the costs that we need to going forward. You did see and this was I think the first quarter in a while where North America’s price mix didn’t offset raws and the incremental inflation. We actually had been doing that, we do see getting back to covering that again in Q2 and certainly for the balance of the year as those costs come down. So, I think we feel pretty good where we are from a pricing standpoint, right now. If you’re seeing I don’t know if you want to add to that
Christina Zamarro — Chief Financial Officer
Yes, now maybe what I’ll just help a little bit with the modeling. So in Q2, we’ll add a 7% price increase in Europe and that’s in consumer replacement. There’s also a 14% increase from last year in Q2 in European commercial. There’s a couple in Q3 from the US up to 10% last July on consumer replacement, 6% on commercial replacement and then by the time we get to Q4 the only price increase we have installed at least in the major markets because we’re always doing things related to devaluations in some of our emerging economies. So by Q4 the only price increase in flight would be this most recent call it about a 4.5% increase at the beginning of the year in Europe.
Rod Lache — Wolfe Research — Analyst
Okay, so it sounds like pricing would still be net, net positive, as you look out to the back half of the year even as you get some of those tailwinds from commodities. I wanted to switch gears the costs Goodyear used to achieve just a routine kind of benefits from productivity. So there’d be an inflation line that we would see. And then there would be things that you do that mitigated that inflation and often mitigated a completely. And I understand the factors that made that impossible recently that’s kind of led to this excess inflation yet a lot of employee turnover, energy freight and all that. I’m wondering if you have visibility on a point in time when that sort of in the rearview mirror. And you can kind of start getting back to productivity that actually means that Goodyear absorbing less than just kind of CPI inflation.
Christina Zamarro — Chief Financial Officer
Yes sure, Rod, I’ll give it a start, the inflation in our cost base and this would be CPI based for 2023 is going to fuel something close to $400 million and that’s a step down from last year where it was about $500 million. But you’re right, we’ve seen this excess inflation mostly driven by transportation energy and to some extent wages. And as I look-forward into the back half of the year, I start with our year-over-year guide for inflation in excess inflation in Q2, it’s another $180 million that’s lot driven by energy in the excess basket. But I would see a big step down in Q3 on the excess part of the equation something that feels better by $40 million to $50 million. So [indecipherable] dropping on a year-over-year basis. And then by the fourth quarter dropping again another $40 million to $50 million assuming this is all assuming current energy rates, utility rate, but what that would mean is that by the fourth quarter we’re essentially neutral on excess inflation. So we’ve left a lot of the very high comparables from last year, we are beginning to add productivity back into the footprint through plant optimization. So that should continue to benefit us as we at the end of the year and as we move into next year as well.
Richard Kramer — Chairman, CEO & President
Great. Thank you.
Operator
Your next question comes from James Picariello with BNP Paribas. Please go ahead.
James Picariello — BNP Paribas — Analyst
Hi, good morning, everyone.
Richard Kramer — Chairman, CEO & President
Morning, James.
James Picariello — BNP Paribas — Analyst
I hope so you’re taking down production in the second quarter by 3 million units right calling out the overhead absorption headwind that hit you in the third quarter. This is in addition to the inherent loss production at the Cooper to below plan. I just want to confirm that, because that will be out of commission for at least two months, so. Just a few questions on this. So where do you suspect your channel inventory levels could be at the end of the second quarter and I know channel inventories in the Americas are now flat year-over-year versus the prior quarter of 10%. Can you also just speak to the sequential trend in the channel inventory levels as well. Thanks.
Christina Zamarro — Chief Financial Officer
Yes, so David, I’ll happily respond to that, our expectation what we’ve laid out for the Americas. And its consumer replacement overall feeling like it down 5% in Q2, that’s in the face of EMT that’s feeling pretty okay. So the expectation is that we do continue to see destocking in the Americas and in Europe over the course of the second quarter, so expecting channel inventory levels, certainly be lower on a year-over-year basis, as we get to the end of Q2.
James Picariello — BNP Paribas — Analyst
And then as channel inventory has come down from 4Q to the end of this first quarter.
Christina Zamarro — Chief Financial Officer
Yes, and so we do disclose for the Americas and EMEA. We do disclose the change in channel inventories from year end and on a year-over-year basis. And so, those are included in each of the segment results within the investor letter and so in Americas when you look at our highlights for so our activity, we talk about where inventories were in. They are in line on a year-over-year basis and that compares was up 10% in the Americas at the end of last year. In EMEA, similarly seeing destocking at the end of the year, we said, inventories were up 30% and that was all driven by very weak sell out in winter and currently inventories up in Europe by about 14%, so hopefully that helps.
James Picariello — BNP Paribas — Analyst
Yes, very helpful. Thank you. And then just to follow-on Rod’s question tied to pricing. You given the trend for raw materials to begin to deflate right in the back half and a competitor of yours recently kind of conceded that your pricing could be a lever to pull to help stimulate demand that they’re going to be more intensely focused on optimized mix. Is anecdotally, is it possible that the dealers, the dealer channel is waiting for that shoe to drop on price to begin restocking now that the channel inventories are in-line year-over-year, you’re still you’re taking down your production at a good clip to get things right size. Yes, just your high level thoughts on the pricing and the topics here. Thanks.
Richard Kramer — Chairman, CEO & President
James, I mean, I’ll jump-in, I’ll say, you have to keep in mind, the industry still is short on the highest end tires, you know, high-performing Tires light truck tires, large rim diameter tires for the F150s and the like in the replacement market. So that’s still is a really good dynamic and also helping that dynamic is OEs starting to come back and remembering that takes some of our best tires that we make the best capacity out of everybody’s factory. So that supply thing, supply-demand dynamics still works in our favor. And you know the one thing to also keep in mind, I mean I look-back and let’s say over the last seven quarters we’ve seen our raw materials go up just under $3 billion. Now as we see some of the, some of the some of cost increases abating a little bit, they’re only a small portion of that, call it under $3 billion raw-material increases that are out there. So we have lots of costs that we have to recover in terms of capturing with the value that we’re putting in the marketplace. I mean I think if you look at our numbers, if you look at the investor letter, you’ll see that we expect a tailwind from reduced raw materials in the fourth quarter. But you’ll see it’s roundabout $300 million I think, 400 excuse me, but you see that against, you see it against call it $3 billion. Just under $3 billion of cost increases over the last seven quarters, what have you.
So there’s lots of reasons that we have to make sure we’re recovering what we what we put in the marketplace and I think we’re not alone in that.
James Picariello — BNP Paribas — Analyst
Got it, that’s super helpful. Thank you guys.
Operator
Thank you. We’ll will take our next question from John Healy with Northcoast Research. Please go-ahead.
John Healy — Northcoast Research — Analyst
Thank you just wanted to ask a question on the decision to make production realignments for Q2, is that something you think others in the industry are doing. Curious of what your competitive intelligence is telling you there and just, are we going to maybe be in a situation where you guys are acting rationally and maybe others aren’t so, just curious your thoughts there.
Richard Kramer — Chairman, CEO & President
Yes, I mean, I’m not sure that we can we can speak to our competitors. I would tell you that the decisions that we make are exactly as you said they’re rational with our focus on working capital, our focus on cash-flow. Our focus on making sure that we’re not putting too many tires in inventory that could impact negatively that supply-demand equation I just spoke to as well. So, I can’t speak to them, but I know what we do to manage our business and we feel, we feel pretty confident in doing that.
John Healy — Northcoast Research — Analyst
Understood and just wanted to ask a big-picture question, just on the OE business. Frankly I thought that business did all that better than we had expected this quarter. So I was just kind of curious your expectations on OE, maybe by geography as we start to think about 2024, do you see yourself in a share gain position and maybe some of the pluses and minuses we can start thinking about for that business.
Richard Kramer — Chairman, CEO & President
Yes, I’ll start and I know Christina will jump in as well. I think we probably, we probably I’ll speak for myself personally, having been around for a while. I feel better about our OE portfolio now than I had in a long-time, and we’ve been always been very strong in our league, particularly in solving our OE customers problems around making sure that tires deliver what they need to deliver for each of their fitments. I think if you look at our mix right now we’re trending much higher toward the EV fitments across all our regions, and particularly in China where the EV business is growing faster than probably any other region in the world and our sort of customer profile there has changed from a lot of the transplants to a number of the local domestic producers there as well. Remember in that business, we have higher revenue as well as higher-margin per tire on the EV fitments that we’re getting. So all that bodes well. I think as you look at where OE production has been, again you have these numbers as well. It’s going to go up, which also bodes well for us.
So increasing volumes with a better margin profile and on top of that, maybe, maybe less tangible on the call. But the teams are doing, I would say as good as they’ve ever done relative to doing things like reduced iterations to get those tires to the OEs faster from a development basis. I can tell you we’ve had one where we had actually our first virtual submission. When we went a virtual submission to one production and that’s it. If you think about that spreading that over the, over in OE portfolio over time, that’s a significant cost-reduction as well. So using technology, using our simulator and working with the OEMs as partners I think, is something that is a bit of even a new frontier to a process that works well that will both get us new business, but also do it at a at a better cost and ideally higher price and higher margin. Well, so I feel I feel really good about where we’re headed with the OE portfolio. I’ll just end by saying we are always focused and in fact something that we target ourselves internally, we’re always focused on making sure we’re getting an improved margin profile for each of the tires that we’re selling to OE because it’s certainly a competitive business.
Christina Zamarro — Chief Financial Officer
Yes, maybe I’ll jump-in here. John and has to say that the market share gains that follow were just comments where you’re going to see good strong growth in our overall portfolio driven by Asia-Pacific and Europe, because that’s where all the growth is in EV right now, Americas is winning their fair share of, it’s just not as strong yet here in particularly in the US, but just to underline some of Rich’s comments here. I mean in this quarter, the revenue per tire on our OE wins for EV was more than double the revenue on the fitments that we’ve won. And so that’s our go-forward business, but and gross margin was the same, so double at least for this quarter and that’s been a trend we’ve been talking about is. We’ve been rebuilding our OE portfolio more towards high-value electric vehicle fitments.
John Healy — Northcoast Research — Analyst
Great, thank you.
Operator
And we’ll take our next question from Emmanuel Rosner with Deutsche Bank. Please go-ahead. Thank you very much, good morning.
Christina Zamarro — Chief Financial Officer
Good morning.
Richard Kramer — Chairman, CEO & President
Good morning Emmanuel.
Emanuel Rosner — Deutsche Bank — Analyst
So I think in previous quarters you’ve kindly shared with us maybe some sort of scenario thinking around full year free-cash flow under certain assumptions. I was hoping you could maybe update this for us in light of sort of like your positive outlook for the rest of the year.
Christina Zamarro — Chief Financial Officer
Yes, sure, no, Emmanuel I’ll take that and I think we do provide a lot of detail on the puts and takes for our full-year free-cash flow as part of the investor letter. And the only real change is a better raw-material set up in the back half that in our guidance as well as the better overall non raw material costs as well. So that’s a part of what we’re seeing for the back half of the year. But what we talked about in the past and. I think this is still. I’m still pretty much unchanged from our last call, although I’d say we’re more confident just given that the costs have been coming down. If you were to take an assumption that our earnings were flat on a year-over-year basis at about $1.1 billion and then used all of the drivers that we do share with you as part of the letter, you should get to a strong free-cash flow of about $400 million. And that’s all just driven by the change in working capital from last year to this year.
And so depending on how you want to lay out the assumptions for earnings for the year, even if you just assumed flat, you should get to a very strong free-cash flow development. And I don’t think that our goal is or to say that we’re targeting flat earnings. Of course we want to grow or I’m expecting more synergies for the Cooper transaction this year, you’ll see our, even our corporate other forecast is down on a year-over-year basis. But having said all that, that’s how I’d have you think about it.
Emanuel Rosner — Deutsche Bank — Analyst
That’s super helpful. So the way you characterize it the the better materials outlook can sort of like moderation in inflation, just gives you more, really more confidence in this direction.
Christina Zamarro — Chief Financial Officer
Yes.
Emanuel Rosner — Deutsche Bank — Analyst
Okay and I guess just honing in actually on this moderation in inflation. I guess, which as we think about drivers of improved profitability in the back-half and in particular your comments are approaching maybe 8% direct SOI margin. Which of these non-material costs, do you view as important driver and do you see it as either moderating in.
Christina Zamarro — Chief Financial Officer
Yes, sure, Emmanuel. also I talked to Rod a little bit earlier about how we’re seeing the year-over-year development of inflation in the back-half of the year and sort of by the end of the year, sort of just showing the CPI-based inflation in our P&L and sort of lapping and or offsetting increases in excess inflation. So, big part of this is are taking cost back-out through productivity in our factories, that’s been a big initiative for us this year. But also we’re seeing trends in freight transportation, moderating and improving also seeing trends in energy improving in Europe. We are aware by the the third or fourth quarter of last year we had some really high spikes in energy and so seeing all of that can pull-through as well as some of our own initiatives in our factories.
Emanuel Rosner — Deutsche Bank — Analyst
Okay. Great. Thank you very much. Thanks Emmanuel.
Operator
And we will take our last question from [indecipherable] with Nomura. Please go ahead.
Unidentified Speaker —
Hi, good morning. Thank you for taking my question. So you mentioned that you expect replacement demand to recover through the rest of the year. Now is that recovery do you think would be similarly based across all regions or would you expect the recovery in some regions such as North America running ahead of the other regions such as Asia or Europe.
Christina Zamarro — Chief Financial Officer
I would say, generally speaking, a very similar trend in the US and Europe and this is because we’re cycling through very tough comparables. If you think back through the recovery after the pandemic both the US, Europe was down a little bit of a lag, but even Europe saw really robust demand for tires as supply chains got tight and there was a clamoring not just to fulfill demand but also to restock inventories. So we’re cycling through those comparables in our mature markets, so I would expect very similar trends there. And then outside of that, Asia-Pacific should continue to grow through the remainder of the year.
Unidentified Speaker —
Okay, that’s helpful. So just to follow-up on that. In terms of the quarterly cadence, would you say that the second quarter could possibly mark the low-point for the year considering that on a year-over-year impact from raw material headwinds should continue to ease as the year progresses and it should become tailwinds in the second-half, plus you have the full Cooper Tire synergies. Would that be the right way to look at it.
Christina Zamarro — Chief Financial Officer
Well so, I would say that the first-quarter, this particular quarter when we’re looking at as so why is going to be the low-point, generally speaking, it always is because it’s seasonally a low point for our sell in following the holidays. Q2 we generally see a little bit more of a volume pick up in a better dynamic and it, I think about sequentially in Q1 to Q2, we’re going to see a better raw-material development in Q2 versus Q1. I think we will generally speaking see a little bit better volumes and so I think that we should expect Q1 to be the low-point for 2023.
Unidentified Speaker —
Great. Thanks.
Richard Kramer — Chairman, CEO & President
Thank you.
Operator
[Operator Closing Remarks].