The Goodyear Tire & Rubber Company (NASDAQ: GT) Q3 2022 earnings call dated Nov. 01, 2022
Corporate Participants:
Richard J. Kramer — Chairman, Chief Executive Officer & President
Darren Wells — Executive Vice President & Chief Financial Officer
Analysts:
Rod Lache — Wolfe Research — Analyst
Emmanuel Rosner — Deutsche Bank — Analyst
James Picariello — BNP Paribas Exane — Analyst
Itay Michaeli — Citi — 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 Third Quarter 2022 Earnings Call. [Operator Instructions] Today on the call, we have Rich Kramer, Goodyear’s Chairman and CEO; Darren Wells, CFO; and Christina Zamarro, VP, Finance and Treasurer.
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 Third Quarter 2022 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 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 J. Kramer — Chairman, Chief Executive Officer & President
Thanks, Nicky. Again, good morning, everyone, and thanks for joining us. Now yesterday, you saw that we released our third quarter results after the market closed in a new updated format. We’re always looking for ways we can enhance our process and that’s led us to introducing our first-ever quarterly investor letter. It replaces our typical press release, slides and prepared remarks and puts all that information in one place so we can focus on your questions during our conference call. So thanks again for joining our call today.
And with that, let’s open up the line and have some questions.
Questions and Answers:
Operator
[Operator Instructions] And we will take our first question from Rod Lache with Wolfe Research. Please go ahead. Your line is open.
Rod Lache — Wolfe Research — Analyst
Good morning, everybody.
Richard J. Kramer — Chairman, Chief Executive Officer & President
Hey, Rod. How you’re doing?
Rod Lache — Wolfe Research — Analyst
I’m doing okay. Hope you’re well. Just wanted to ask a couple of things about pricing and competitiveness. I understand that from your release that in your view the weakness is at least in part an inventory correction, but you were also taking a bit of down time to prevent an inventory build. And just in light of that, can you just maybe give us some color on what you’re seeing with regard to price discipline? Do you think that the industry is going to kind of take the tack of trying to support pricing in order to compensate for inflation? Is that kind of the industry’s direction still? And related to this, just in terms of the competitive landscape, I’m sure you’re watching currencies and freight rates and things like that as well as we are. Any thoughts on just the competitive landscape, particularly in North America?
Richard J. Kramer — Chairman, Chief Executive Officer & President
Yeah. Rod, I’ll start and I know Darren is probably going to jump in here as well. There’s a lot there. Listen, I would say, the industry is certainly facing the same headwinds that we have out there. I mean, you saw by the numbers, our raw material cost increases, plus energy, plus transportation, plus labor, plus everything is sort of impacting anyone. And you look at our performance, on a trailing 12 months, we’re about $2.3 billion of price that we got to offset all those costs.
In North America, we’ve essentially offset raw material and those other costs. On a total company basis, we didn’t quite do it, but we did pretty good. And I think that environment of those inflationary costs are still going to be with us. That’s particularly true in Europe where we see energy costs going up dramatically as a consequence of the war. So I think that landscape is there for everyone.
And I would suggest to you that everyone faced with that same issue has to offset those costs through a combination of recovering them in the marketplace through price as well as taking cost actions, which again, you saw us do already in Europe with the Melksham closure, with some actions in South Africa. And it would be safe to say, we’re not done as we think about what we’re going to be doing.
So I would say, yes, I think that there is an acknowledgment of what price and mix has to do in the marketplace to deal with the environment we’re in. And I’ll just maybe say from a North American perspective, business is still good. Our product line is winning in the marketplace. That’s particularly true in light truck. Our OE wins are very strong. And I would say that from a competitive basis, we’ve been gaining share in our key segments. And it’s the best tire market in the world right now. So we feel pretty good about where we are in North America.
Darren Wells — Executive Vice President & Chief Financial Officer
So Rod, there was one underlying question there and I want to make sure I got it right. But it felt like you were probably — you’re also looking for any insight into how the factors that are at play in the market are affecting us relative to how they might be affecting our competition, particularly some of those cost factors. Was that…
Rod Lache — Wolfe Research — Analyst
Yeah, that’s right.
Darren Wells — Executive Vice President & Chief Financial Officer
So let me — I mean, there are a couple of those I think they’re worth touching on, because for us, our competitiveness in manufacturing was a big deal. And we’ve talked in the past about the fact that our factories have historically been in higher cost locations on average relative to our competitors. We had a bit of a cost disadvantage on a cost per tire basis. And the actions that we’ve taken to restructure our manufacturing have closed that gap. But there have been a couple of other things at play here, one of which is the elimination of a lot of Russian capacity which has further closed that gap for us this year. So the elimination of some of that capacity that was used for export. So that improves our competitive position.
The other thing I think that generally improves our competitive position is the fact that the energy inflation is concentrated in Europe and we’ve got less concentration in Europe than some of our key competitors. I think otherwise, when we’ve looked at factors like wage inflation, transportation, we haven’t really seen any material differences between ourselves and competition. So I guess, if I look at the array of factors that are at play here, a couple of them, I see that we’ve benefited from others I think are more or less neutral.
Rod Lache — Wolfe Research — Analyst
How about FX, Darren? Is that the U.S. dollar strength?
Darren Wells — Executive Vice President & Chief Financial Officer
Yeah. So the dollar — I think the — clearly, it’s had an impact on our international earnings. And it’s impacted the transactional exchange that boosts our cost of our raw materials. We’ve had enough luck and strategy around pricing for laws that the transactional exchange. I’m not sure if that is as big a deal. The impact on the — our earnings overseas has, I can’t say it’s insignificant, but there are a couple of things at play here.
One, I guess, if we’re going to pick a time for the U.S. dollar to be strong, from a pure exchange point of view, it’s good to have weaker European earnings because then the weaker euro doesn’t impact us as much, and certainly we’ve seen that. The other thing that we’ve seen is that Brazil, which is one of our largest markets and one where our team has been executing really well, the real has appreciated against the dollar. And so the increased value of Brazilian earnings has mitigated some of the negative of the euro and a few of the other currencies.
Rod Lache — Wolfe Research — Analyst
But you’re not seeing that as a competitive issue in the U.S. just vis-a-vis Asian imports or anything like that?
Darren Wells — Executive Vice President & Chief Financial Officer
I think that the questions around the Asian imports, and you’ll see that we’ve put some — in our investor letter, we’ve put some specific description around this effect of the Asian imports. And I think we feel like it’s a little hard to discern right now because Asian imports slowed down for a period of time last year, during the time when transportation was so difficult and container ships were stacked up outside ports. So there was a bit of an artificial slowdown. And we’ve referred to that and discussed it in terms of the impact it had on the U.S. TMA data. So it’s in the America’s section in the investor letter. There were some similar effects in Europe.
We’ve then seen periods of time where some of that stacked up on the water. Imported tires have flowed into the markets in a fairly short timeframe, after which it’s died down. So the movement that we’ve seen in import volumes and how that’s affected the lower end of the industry, at this point, it appears to be more of a reflection of the transportation dynamics than it does anything else.
I think the point is well taken that the fact that the Asian currencies are weaker versus the dollar. It’s something that could have an effect at that lower end of the market. If it’s going to have that effect, I don’t think that we’ve seen it yet. And obviously, it’s not a part of the market that we’re particularly exposed to. But I think to the extent that’s going to happen, I think something is going to happen in the future. It’s not really something we’ve seen in a significant way to date. Although, I guess you could also say that the volatility in volumes for sort of non-industry member imports is a little bit hard to read because the volatility has been so significant.
Rod Lache — Wolfe Research — Analyst
And just really quick if I could fit this in. At one point, Rich had talked about the comps on non-standard inflation, like things like energy and freight would start to get easier as we kind of close out this year and enter next year. Do you have line of sight on when that part of the excess inflation really starts to look more neutral at this point or not yet?
Darren Wells — Executive Vice President & Chief Financial Officer
So I guess, maybe handle it this way. We’re going to go through, for a couple of different reasons, some further pressure in the fourth quarter. And a big piece of that is the further step-up in energy cost or the forecasted step-up in energy cost in Europe. And in the Europe, Middle East, Africa business, a big part of this will hinge on what happens with energy costs. But I think we’re presuming that those energy costs will be at least somewhat seasonal. And as we get through the winter, then that will have a chance to moderate. And obviously, the longer term outlook is something I think we probably have more discussion on.
The transportation cost, we have effectively peaked on ocean freight and started to come back down. I think as we move through the fourth quarter, we will get to our peak on inland freight. And then in the first half of next year that will start to come back down. And so we’ve got, I guess, a number of those non-raw material costs that we are going to be peaking and starting to get into a better position as we move through the first half of next year. And add to that, the outlook on raw materials, which by the middle of next year, based on today’s spot prices, we would start to get some relief in raw materials, get to the point where raw materials are moving toward neutral.
So I think all of those are reasons that I’m pretty optimistic about the setup for the industry and for our ability to recover some of our margins by the time we get out in the middle of next year, which I think is — I mean, something you’ve commented on, I think that that optimism is there based on the way we expect costs to evolve.
Rod Lache — Wolfe Research — Analyst
Thank you.
Darren Wells — Executive Vice President & Chief Financial Officer
Sure.
Operator
Thank you. Our next question comes from Emmanuel Rosner with Deutsche Bank. Please go ahead. Your line is open.
Emmanuel Rosner — Deutsche Bank — Analyst
Thank you very much. Good morning.
Richard J. Kramer — Chairman, Chief Executive Officer & President
Good morning.
Darren Wells — Executive Vice President & Chief Financial Officer
Good morning.
Emmanuel Rosner — Deutsche Bank — Analyst
I was hoping you could maybe first give us a little bit more color on the dynamics around the free cash flow outlook for the rest of the year, in particular, the larger working capital draw than previously expected? And I guess, related to this, I think early in the year, you had sort of like shared with us some sort of an essentially free cash flow scenario that was result into sort of breakeven free cash flow under certain assumptions and scenarios with the larger working capital, but somewhat lower capex, where would you shake out?
Darren Wells — Executive Vice President & Chief Financial Officer
Yeah. So I think the quick takeaway, Emmanuel, is that the changes that we’ve made in our — in the financial assumptions effectively show no real change in aggregate from the assumptions that we shared at the end of the second quarter. So a bit more working capital given the inflation in inventory and accounts receivable. So some overall working capital inflation, a bit higher level of units in inventory, pushed that up a bit. Our investment levels, we’ve pulled back on, and there are a couple of other small items as well. But I think net-net, it’s neutral relative to the cash items that we shared at the end of the second quarter.
Emmanuel Rosner — Deutsche Bank — Analyst
Okay. And can you just discuss how to think about these working capital dynamics as we, I guess, move into next year, Darren?
Darren Wells — Executive Vice President & Chief Financial Officer
Yeah. So well, the — I think if we look out for the free cash flow outlook for next year, I mean, ultimately, they will be influenced from the economic environment, but we don’t expect to use significant cash for working capital next year. So the second half of 2021 and the period we’ve gone through, through the first part of 2022, it was kind of the unique rebuild period for working capital. And that’s happened to us once before after The Great Recession, but it really hasn’t happened otherwise. So we’re not expecting to have that kind of use.
And to the extent that we do see any deterioration in the economic environment, that tends to create periods where cash flow is stronger as volumes come down and working capital comes down. So I think that we feel pretty good about the setup for free cash flow. So if we get a nice stable volume environment, then we’re not going to have the working capital rebuild, and that creates obviously an opportunity to generate cash. And even if we get a softer environment, that tends to be the kind of environment where we’re able to generate cash. So either way, we’re focused on making sure that our planned level of investment, capex and otherwise, is consistent with the environment we’re in and the long-term balance sheet targets that we’ve got.
Emmanuel Rosner — Deutsche Bank — Analyst
Okay. I appreciate this color. I guess, on the second topic, so either you shared that at current spot prices you would expect $300 million to $400 million of raw material headwinds year-over-year in the first half of 2022, which is really useful. Is the current price — is your current pricing enough to offset it or I guess assuming no increase or decrease in tire prices from here, would pricing offset this kind of raw materials next year?
Darren Wells — Executive Vice President & Chief Financial Officer
Yeah. So Emmanuel, mathematically, I think the answer is, what we’ve got in place would go a long way towards covering the raw material costs that we have. It’s a broad statement. I think there are areas where we’re going to continue to get price. And so we’re going to continue to get pricing under our raw material index agreements from the OEs. So we should get that in the first half of next year. And there are certainly going to be areas — businesses around the world where we’re going to be experiencing costs, and we’d be continuing to do that work.
But if we look at the first half and say, $300 million to $400 million of raw material cost increases in the first half, most of which will be in the first quarter. Then in the first quarter, to get — if we call most of that $300 million to $400 million, something in the neighborhood of $250 million to $300 million. That is still well less than half of the increase that we saw in the third quarter. And I think we’re looking at the fourth quarter that’s going to be similar. And as we move into the first half, if we look at North America, we’re going to anniversary effectively half of the pricing that we took during 2022. So we’ve got half the pricing and less than half of the raw material cost.
So I think that, as a starting point, feels pretty good. But again, every one of our businesses is going to have unique circumstances. And obviously, we’ve got the non-raw material costs that are going to continue to be there as well. We feel — based on the comments I made earlier, you can tell, we feel other than the questions around energy costs in Europe, I think we feel good about getting past some of those cost increases.
Emmanuel Rosner — Deutsche Bank — Analyst
Okay, great. Thanks for all the color.
Operator
Thank you. [Operator Instructions] We will move next with James Picariello with BNP. Please go ahead. Your line is open.
Richard J. Kramer — Chairman, Chief Executive Officer & President
Good morning, James.
James Picariello — BNP Paribas Exane — Analyst
Hey, good morning, guys.
Darren Wells — Executive Vice President & Chief Financial Officer
Hey, James.
James Picariello — BNP Paribas Exane — Analyst
So as we think about the fourth quarter sequentially, despite the challenges in Europe, it sounds as though Americas volume should trend flattish year-over-year, which should be up sequentially, and then in Asia, continued healthy growth year-over-year and quarter-over-quarter. So if volumes are up sequentially, price mix versus raws sustain at a similar strong rate to the third quarter. Are these factors enough to offset the additional inflationary pressure in the fourth quarter to drive sequential SOI growth?
Darren Wells — Executive Vice President & Chief Financial Officer
Yeah. So I think the real question — I think we do feel good about where our businesses are in the Americas and in Asia. I think a lot of the question for the fourth quarter is going to be around what’s going on in Europe. And there is an impact in Europe of the production cuts that we’re taking. So we’re taking those cuts to make sure that we’re not building any excess inventory, not taking any — not tying up cash on the balance sheet, not taking any excess inventory into next year. So that’s — to the extent there’s been some softness — recent softness in demand there, we’re making sure to adjust now.
I think the — where demand is in the fourth quarter in Europe is an uncertainty and the unabsorbed overhead impact for us. There may be some of that in the fourth quarter, some of it may carry across to Q1. I mean, I think that’s really the only area that is of significant concern to us as we go into the fourth quarter. So we had a couple of businesses running well. We’ve got one business that’s facing the uncertainty, I guess, everyone’s facing in Europe right now.
Richard J. Kramer — Chairman, Chief Executive Officer & President
And James, I would just add to Darren’s comments, maybe building a little bit of what I said before. We’ve seen these environments multiple times. Certainly, the last three years have put us to the test again. But we’re putting a lot of focus, a lot of discussion on price and mix as well we should. The team has done a tremendous job executing it. If we would have said, we would have gotten over $2 million — $2 billion of price mix at the beginning of the year, you probably wouldn’t have believed us. So team has done an excellent job being able to manage through the situation.
I think as you think about Europe and you think about working capital and cash flow, we know that we’ve got some potential headwinds as we work through Europe. We’ve taken some actions and we’re going to continue to focus on not only getting value of the product in the marketplace, but also looking at the cost structure over there as we see some of the changes around energy costs, around what’s happening in some of the geographies there to make sure that we’re going to use this as an opportunity to set ourselves up for some of the upside that Darren talked about earlier. So it’s good to talk about volume, price and mix, but just remember, we’re focused on the cost equation there as well.
James Picariello — BNP Paribas Exane — Analyst
Yeah. No, that’s helpful. Is there any way to dimension what that absorption headwind could be in Europe, because I mean, would it still kind of run the rule of thumb of $13 a tire, 1.5 million units?
Darren Wells — Executive Vice President & Chief Financial Officer
So I think the production cuts in Europe are essentially in our consumer business. And the modeling assumptions we provide, which now that we have started using the investor letter format, we actually have those modeling assumptions as part of the supplemental slide deck that is in the Financial Reports section of the website. But those modeling assumptions have a — for EMEA consumer, assume $8 to $12 a tire of overhead absorption, which is — given the range of different production costs in Europe. But if you pick the midpoint of that $10, we said, we’re cutting about 1.5 million units out of production. So — and that would come out to be about $15 million. And some of that fall in Q4, some of it could be held in inventory and come out in Q1, but I think that’s the way to dimension it.
James Picariello — BNP Paribas Exane — Analyst
Yeah. No, that’s really helpful. And then just lastly, as you think about Europe’s energy inflation, a $33 million headwind in the quarter, it sounds as though this likely does run higher or at least we know that your net inflation runs higher in the fourth quarter. Just maybe clarify, if you could clarify, what does that quarterly run rate look like at the energy inflation line? And does this carry over through the first half of next year, get worse or possibly get better through mitigation efforts? Just how do we think about that Europe energy inflation?
Darren Wells — Executive Vice President & Chief Financial Officer
Yeah. So I guess — yeah, just to mention that, that $33 million we saw in Q3, I mean, that more than doubled the energy cost for the EMEA business. And I think we’re looking forward to be even a bit worse in the fourth quarter. And we’ve got — our energy costs, we do tend to lock in a few months in advance. So I think we’re going to go through in the first half of next year, to the extent energy stays where it is, we would see similar type increases through the first half before we start to anniversary the increases that we saw in Q3. I guess, it seems as if there’s a good chance that those energy costs may come back down in the middle of next year, and I think we’re allowing for that. But I think through the fourth quarter and through Q1, we’re going to continue to see some pressure there.
James Picariello — BNP Paribas Exane — Analyst
Thanks, guys.
Operator
Thank you. And we will take our last question from Itay Michaeli with Citi. Please go ahead. Your line is open.
Richard J. Kramer — Chairman, Chief Executive Officer & President
Hey, Itay.
Itay Michaeli — Citi — Analyst
Hey, good morning, everybody.
Darren Wells — Executive Vice President & Chief Financial Officer
Good morning.
Itay Michaeli — Citi — Analyst
Just a couple of follow-ups. Darren, going back to the free cash flow, I just want to make sure, just to clarify, do you expect the full year to kind of be around breakeven? Could we get a bit of a use just — because I know there’s a couple of moving pieces on the working capital, capex and rationalization payments. So I just want to revisit that. And then maybe one for Rich as well. Hoping you could just expand a bit more on some of the EV OE fitments that you won in the quarter?
Darren Wells — Executive Vice President & Chief Financial Officer
Okay. Yeah, so I think the — so the cash flow question you’re asking, Itay, it’s the 2022 free cash flow question?
Itay Michaeli — Citi — Analyst
Yes, the full year. Yeah.
Darren Wells — Executive Vice President & Chief Financial Officer
Yeah. So I think the assumptions that we have, which we have listed on Page 15 of the investor letter, and obviously, we’re — we don’t give specific guidance. But I think from the beginning of the year, we’ve said that we’re going to invest at levels that still took into account our desire to protect the balance sheet and with the focus on not increasing our net debt. And we may — I mean, that mindset is important to us given the longer term balance sheet objectives that we’ve got.
So when we’re moving forward from the second quarter to the third quarter, you effectively see four things changing in the financial assumptions that relate to cash flow. Two of them are more significant and had working capital increased from a use of about $300 million to a range or a use of $300 million to $500 million. So I guess, if you pick the midpoint there, then that use is up about $100 million. On the other hand, the range of capital expenditures came down from $1.1 billion to $1.2 billion, down to $1 billion to $1.1 billion. So that came down $100 million. So those two have just sort of equal amounts in opposite directions.
Now in addition to that, our income tax — cash income taxes have come down a little bit. That range we’ve tightened up and brought down a little bit. Rationalization payments have gone up a little bit. So those two kind of offset each other as well. So I think the overall picture, obviously, there are some things that have evolved during the year, but I think the picture in aggregate really hasn’t changed much.
So that was the first question. The second question, I think you wanted some color on our success winning EV fitments in the quarter?
Itay Michaeli — Citi — Analyst
Yeah. There was a mention in the letter around that. Just hoping you could expand a bit upon that.
Richard J. Kramer — Chairman, Chief Executive Officer & President
Yeah. Itay, listen, I would tell you, we have had continued success winning OE fitments. And I would say, it’s part of our ability to go to the OEs and help them solve what I would still suggest their most complex problems that they need to solve, getting these vehicles down the road, again around what we’ve talked about in the past around range, around performance and handling, around sound, around everything. And the teams continue to deliver with solutions that are very, very difficult specs to meet and our teams are doing that.
I would say, the margins still come in at levels that we’re very pleased with. The pull is very high. We’re only on the front end of that, as you know, but the pull is very high relative to the vehicles that we’re on. And I would tell you, on a geographic basis, it’s kind of been a very balanced, I would say. Most recently, we’ve had even in the quarter a number of big wins in China. I’ll leave some of the names off for a moment, but say, they’re both transplants into China as well as domestic in China who are really looking to lock in supply, particularly around EV fitments. And the team over there is doing a great job.
Same in Europe. I think in Europe, you’re seeing a sort of key pace with the evolution that the German automakers are going through as they make that shift from ICE to EV. So we’re, I would say, getting a bit of equal or more share on those vehicles moving forward. And then in the U.S., we are continuing to win on EVs, again both with the traditional, call it, traditional OEMs as well as a lot of the new start-ups that we — whose names we know. And a lot of that’s in light truck as well. And I think that’s one of the things that Goodyear was known for where our products on light truck vehicles, our share in light trucks is well above our overall share. And now adding to that, the Cooper brand as well as now EVs coming in on light trucks, and that’s something where the team is coming through and winning a number of fitments as well.
So I would say, overall, we’re on pace. As you know that percentage of EVs is small, but it’s going to grow. And our positioning is exactly where we wanted, and equally important, the profitability is exactly where we wanted. And when we look at the pull through, it’s exactly what we want to see happen. And beyond that, Itay, we’ll talk more in the future of starting to put some intelligent tire features on some of those key EVs as well. And I think there will be more of that to come in the future. So feeling really good about that.
Itay Michaeli — Citi — Analyst
That’s all very helpful. Thanks so much.
Operator
Thank you. And it looks like we have a follow-up from Emmanuel Rosner with Deutsche Bank. Please go ahead. Your line is open.
Emmanuel Rosner — Deutsche Bank — Analyst
Thank you so much. Yeah, I was hoping to take advantage of your brand new format to ask a few more questions, if that’s okay.
Richard J. Kramer — Chairman, Chief Executive Officer & President
Yeah.
Emmanuel Rosner — Deutsche Bank — Analyst
So I guess, first of all, on the demand side, I think your — some of your prepared remarks in the shareholder letter sort of mentioned a bit of a sequential softening, especially on the replacement side in some regions. Can you maybe talk a little bit more about what you’re seeing there on the ground? And maybe comment around — and I think, obviously, Goodyear built some unit inventory and expecting to build some towards the end of the year, but are dealer and distributor inventories also on the heavier side?
Richard J. Kramer — Chairman, Chief Executive Officer & President
Yeah. Well, Darren you can start and I’ll jump in. Go right in.
Darren Wells — Executive Vice President & Chief Financial Officer
No, I think — yeah, I think we’ve seen a couple of different things. But I think generally, the situation has — it’s been evolving, both in the U.S. and in Europe. And the fact that our trade inventories have been coming down, I think partly, it does relate to the comment that I made earlier on the influx of imports, after imports have been hard to get into the markets during a good part of the last 12 months. So I think there is some repositioning there and I wanted to I guess make that connection.
The part of what we’ve seen I think is just a reflection of some warehouse space shifting to accommodate some of the imports that had been ordered last year and started showing up during the course of the summer. And we’ve had trade partners that just didn’t really have a choice. They had to make room for those tires. And they know now that there is I think better supply in the industry. So they’re — they have gotten used to us being good suppliers. They’ve been able to normalize their supply in some of our other — their stock in some of our brands.
Richard J. Kramer — Chairman, Chief Executive Officer & President
No, Darren, I think you said it right. Emmanuel, if you just go around, last year in the U.S., we had a really big restocking that got done and that was really good. But as Darren said, that the shelves are there, supply is more reliable, carrying cost of inventory is a little bit higher and you have this sort of bump of new tires coming in from the Asian supply.
So that’s kind of — Darren, I think what we would say is sort of a normalization of, we get these bumps through re-supplying, destocking, re-supplying, imports coming in. Once that smooths out, I think you’ll see our business continues to do very well. Our channel inventories are holding up very well. They’re not long on Goodyear tires right now. So I think that sets us up very well as we think about going — ending ’22 and going into ’23.
In Europe, obviously, you’re seeing a little bit more headwinds there, a little uncertainty of demand. So distributors are taking a little bit of a step back, but our channel inventories are actually better positioned at the end of the third quarter in terms of volume or in terms of stocking than they were at the end of the second quarter. So we feel pretty good about how we’re positioned there as well.
And I’ll just reiterate something Darren has talked about at length. And that is, and I think you know this, when we get through tumultuous times like this or a slowing economy, we are straight away focused on cash flow, which means working capital. And we don’t build tires, we don’t need, we don’t want those in inventory. Our focus is on generating cash. And as Darren said, a slowing economy generally results in us generating more cash than less. And I would say, historically, that’s the case and that’s exactly how we’re thinking about it right now.
Emmanuel Rosner — Deutsche Bank — Analyst
Okay. That’s helpful color. And then maybe a final one from me, maybe for Darren. So would you think that the second half annualized SOI is a good starting point for us to model 2023? And if so, what would be the broad puts and takes starting from second half of this year into how do you think about next year?
Darren Wells — Executive Vice President & Chief Financial Officer
So I actually think the — as we’re moving through the second half, we have had — I guess, maybe take this as four points. So our volumes in the second half so far have reflected some reduction in dealer stock. And so to the extent that reduction in dealer stock related to sort of a one-time need for our dealers to accommodate the imports that were arriving. Then I think as we move into next year, I wouldn’t expect that to recur. So I think it actually could create a volume environment that’s a little bit better, and particularly if we’re thinking about the Americas and Asia. I think Europe is a little bit harder to predict given the macroeconomic conditions there.
However, I think we’re also looking at 2023 as a period where at least some of the OE production should continue to recover. So we’ve got potentially a good set — a better setup for replacement just given if dealers have reduced stocks, then that could end and we’ve got continued recovery in OE. So I think from a volume front, I think there’s some reason — potentially some reason for some optimism. And even if we get a little bit of recessionary impact, generally, that’s only 2% or 3% impact on vehicle miles traveled than on replacement tire consumption.
The cost increases, I think we see those continuing into the first half of next year, but raw material — the increase in raw materials will be coming down. And other than the energy cost in Europe, we’re going to be anniversarying a lot of the cost increases that we saw on ocean freight, on inland freight, the labor cost bump that we got during the year. So I think we’re looking for moderation in both raw materials and other costs, setting aside the questions around energy costs in Europe.
And I think generally, we’re looking at the middle of next year as a period of time where we may have costs coming back down. And that once we’ve gone through this period that we’ve gone through where prices have risen dramatically, once we get to that moment in time where cars’ costs start to drop, that tends to be an opportunity for margins to expand.
So we have a decent set up on volume and a decent setup on margin moving into the second half of next year. Obviously, we’re going to continue to work on addressing OE profitability because we’ve had a lot of cost beyond raw materials that have not been captured in the raw material index agreements with our OE customers and our fleets. And we’ve been having constructive discussions there that I think could provide us some benefits next year that we haven’t been getting this year.
And then finally, by middle of next year, we’ll get to our full Cooper synergies. So in the third quarter, we got about $25 million of benefit from Cooper synergies. So that is obviously a run rate of about $100 million a year. We’re looking to get ourselves up to that $250 million level on an annualized basis by middle of next year. So that’s something that also would help create some optimism around what we could get. So first half of next year, we still got some of the same challenges. But by the middle of next year, I think there are a number of things here, volume, cost and Cooper that could all be a fairly constructive setup.
Emmanuel Rosner — Deutsche Bank — Analyst
Perfect. Thank you so much.
Operator
[Operator Closing Remarks]