Okay, well, we're ready to kick off the next session with Goodyear. So, just to introduce this, obviously a lot of things that are changing at this company right now. $1 billion of projected cost savings from restructuring, $2 billion of projected proceeds from asset sales, a new CEO. There's a lot for us to dive into and better understand. Very excited to have Christina Zamarro, Chief Financial Officer of Goodyear here, joining us. So, Christina, thanks for coming.
Yeah, thanks for having me, Rod.
Maybe I'll just hop right in. Operationally, a lot is teed up for the company right now. And then we also heard for the first time from Mark Stewart on the earnings call. I'd like to just ask you, first of all, what has he communicated to you about his process as he's come in? And on the earnings call, at least to our group, it sounded like he complemented the logic of the Goodyear Forward plan, wondering if we could see any changes once he's had a chance to review it, or is it are we sort of thinking this is in flight right now and what he's focused on most is executing what you're focusing on most is executing to that plan?
Sure. So, for those of you who may not know, Mark Stewart joined Goodyear just two and a half weeks ago. He was the COO of Stellantis previously, and his background all in and around the automotive industry. So, came into the company a couple of months after we announced our Goodyear Forward plan, which is $1 billion of cost out programs plus $300 million of margin expansion specifically directed in the North America area. And what Mark has done as he's onboarded into the company is, of course, he's working on understanding the intricacies of the tire business. He's been through deep dives on all of the different work streams. I think his reflections back to all of us in the Goodyear organization have been that, you know, these, these work streams in particular look like, different types of restructurings that he's been a part of in past lives.
When you think about what's in flight, you know, going back to all of the work and time we spent on developing this program over the course of 2023, many of these work streams were already in flight by the third quarter, certainly in the fourth quarter, which is why we're actually able to drop some savings already to the bottom line as part of our first quarter forecast. So, my read of the situation is that nothing will change with the Goodyear Forward program overall. I think that what we'll what Mark will add is, you know, specific experience in and around manufacturing, operations, and procurement. You heard him mention those as part of our fourth quarter conference call.
You know, he has a lot of expertise and experience there, and I think those will be opportunities for us to exceed our projections or potentially grow earnings potential for even beyond 2025.
That's great to hear. Obviously, one of the big questions you've heard me ask this before, so this is not going to come as a surprise to you, is how much of that actually drops to the bottom line? And look, at a high level, Goodyear is making good progress. So, you had 2023 margins that were just under 5%. You ended the year at 7%. If you're successful, you're going to get to 10% by the end of 2025. To get there, high level, for those of you who are listening, you kind of started at a $2.3-$2.4 billion EBITDA run rate, right, in the fourth quarter. You target $1 billion of savings. You subtracted $300 million for the divestitures, and then you made some adjustments for volume, price, and mix, and you came up with about $2.7 billion of EBITDA. So, sounds great.
There have been a lot of restructurings in the past, different regions. Some of that's been lost. We see that in Europe, actually, very clearly, right, because that business is still kind of break even. Even in the Americas, which is a good margin business, it's actually lower volume than when we pro forma for the Cooper acquisition. If we go back to 2019, the market is up a little bit, but you're actually down. So, it does look like there's some leakage that occurs. Does it feel different to you now when you're looking at what you need to do and what you'll be able to retain versus what we had seen before?
It does feel different. To talk you through the volume story, Rod, I think I have to take this regionally because the stories are very different for both the Americas and, as you suggested, Rod, in India, in the Americas and in the U.S. in particular. You know, if I look back to the 2019 pro forma volumes that you're thinking about, Rod, pro forma for the acquisition of Cooper, I'd have to note a couple of pretty significant factors that we have to think about when we roll forward into our full-year results on unit volume for 2023. The first is that in the height of COVID, so this was May 2020, we closed a very large U.S. factory in Gadsden, Alabama. It was six million units for us.
This was relatively aged equipment in our footprint that had been covering overheads up until COVID, and that was questionable as we moved into a recovery post-COVID. So, we took the opportunity to close that factory and exit that business in 2020. The other consideration I would offer is that, you know, ahead of the acquisition of Cooper and as we were working through their 2019 results, you know, we had identified what we thought was risk in their volumes and risk in their top line because there were, at the time, some recently enacted tariffs on four different Southeast Asian countries. And so, we have a lot of experience with this. Temporarily, domestic producers can get a lift in volume when there's some brand new tariffs, but we always typically see that benefit wash away as the different import volumes move around the world.
We wrote down our expectations for volume ahead of the acquisition. In fact, for the Americas business and the U.S. in particular, when we announced the Cooper acquisition in the middle of 2021 on our conference call, you know, we said that we expected our U.S. market share to settle in at the low 20s. And that's exactly where we were in the fourth quarter. That's exactly where we expected to be at, and in line with the full year results. So, you know, to your point, Rod, on the earnings, so we're certainly coming from a very strong defendable position in the U.S. and in our Americas business with the 10% SOI margins at the end of the year.
When I think about putting that in the context of the Goodyear Forward plan, we have said that we do intend to address rationalization as part of the next couple of years plan. We have also said that we expect to address customer level profitability. So, there may be some movements in volume vis-à-vis how the industry's performing. Thank you. There may be some movements vis-à-vis how the industry's performing over the course of the next couple of years, but I see that more as peripheral and all designed to drive the performance and margin that we're targeting over the next couple of years. So, that's the Americas. And then I want to shift to Europe really quickly. Europe, a completely different story. You know, we were running in 2018, 2019, about $250 million of SOI on turnover of $5 billion-$6 billion.
So, relatively low margin business for us already. Coming out of COVID, our EMEA region has really struggled to recover first from the very high levels of inflation that we saw in raw materials and then non-raw material costs specifically driven by transportation and higher energy costs. In addition to that, the European industry remains. You mentioned that the U.S. industry's up a couple of points since 2019. Europe's down about 10 points from 2019. And I think what's also important to understand is within that down 10% for the European industry, we've seen imports grow, low-end imports grow as a percentage of the industry from about 21% to about 27%. So, what that means is that local producers since 2019 have been share donors in Europe.
It means that distributors, it means that our consumers are more willing to bolt on opening price point tires across the European region. And I do just think that's a reflection, Rod, of the macroeconomic situation, and the impact of more recent events on, you know, the European consumer. And so, in their lives, you know, a lot of the rationale for the significant restructuring underlying our plan here that we've announced, the restructuring, you know, to deliver the cost out that we're anticipating is about $1 billion over the two-year period.
The European business, I was hoping you can kind of explain this to us a little bit more about what it really looks like, especially without the Dunlop brand, which you're going to be selling that brand. So, is the challenge for you the brand positioning, the mixed positioning, the cost competitiveness, when you think about that business, and it's not just you, it's all the domestic Europeans, what is it going to take to stabilize that business?
Sure. So, I'll say a couple of comments at the front. Exiting 2023, I would say we're at a point in time where price mix versus cost, so that's cost inclusive of raw materials, is now caught up since, you know, since we began to recover from COVID. And so, I think that that's a sign of a level of stabilization for our business. Our order books, our order rates so far in the year are in line with our forecast, which is also a very good sign and a, you know, a nod to that stabilization that you're seeking. I think, you know, when I look at our European business, you know, the brands are very strong. Obviously, Dunlop has this very rich heritage of racing and legacy.
The Goodyear brand, also very well known, right now being fitted on a significant number of premium OE footprint across the region. So, really good brand performance. The products are top notch for the last several years. Whether you're looking at winter, all season, or summer categories, we have always been at the top of the magazine test. So, the products and the technology is second to none. And so, that leaves the footprint. And when I look at manufacturing cost relative to our competitors, we are much more weighted to high cost locations in Western Europe than are our competitors. Many of our competitors over the course of 2000-2010 migrated east. Some migrated just east to Eastern Europe. Some migrated further east. But that is a disadvantage to our cost structure relative to our competitors.
What I would say right now is, and we've talked, broadly speaking, about a $3 cost per tire disadvantage against the average of the industry players in our and that is weighted toward Europe. I'd say Europe is more like $5. The plan that we've announced will take $3 out by 2027 through the couple of factory restructurings. We will move from a mix of factories in high cost to low cost in the European region that's more like 50/50 today. So, 50% high cost, 50% low cost to something that feels more like 75% low cost with the two planned restructurings that were announced. Of course, we're still in consultation with our works councils, still need to continue those conversations and execute on the closures over the next couple of years as planned. But that will move our footprint meaningfully in the right direction.
And that's, you know, manufacturing savings as part of EMEA's plan is $160 million over the course of the next few years. We're going to add to that an SAG restructuring program worth $100 million. And this is essentially moving a lot of the back office work that's been historically, completed in the countries to our shared services organizations. And then the EMEA region overall will continue to benefit from some of the workstreams that we're executing at the corporate level, like in and around purchasing and our own SAG headcount reductions as well.
The $3 per tire cost disadvantage, that's pro forma for the restructuring?
Pro forma for the restructuring.
So, there will still be a $3 disadvantage. It's now $5, did you say?
It's about five.
It's about five, and it's going to go to three. So, there is some disadvantage. But, you know, that you mentioned that imports have gone from 21%-27% of that market. Seems like structurally, that market is more somehow more open to imports now than it was before. Once you get to where your peers are losing share too, your domestic peers. So, is this a good market? Is this a market that you want to invest in or that you think could actually become a good return business for Goodyear over time?
Absolutely. I mean, the return opportunities in the premium end of the market are still very, very good. And when we talk about the premium pieces of the tire industry, we're really talking about, as a proxy, rim sizes of 18 inches larger. And this is where we're able, you know, to generate the return for the products and technology, starting with OE vehicles, whether that's, you know, in the U.S., it's SUV, light truck. In Europe, it's been more about EV at OE more recently, and that delivers a very high return in first and second replacement.
I know you want to talk more about the asset sales in a minute, Rod, but some of the rationale behind, you know, the separation of the brands in Europe and the sale of Dunlop is that it will allow us, as an organization, to focus more on premiumizing the brand, the Goodyear brand, taking that brand up market for a more sustainable business model in the future.
The additional restructuring that will be needed, is there a way for us to assess what the investment required will be? Is ultimately the goal to get that business to North America-like margins down the road? Is there a way for us to think about what it would take to be at parity versus your peers?
So, I would, I would say that we are targeting not by 2025, but we are targeting higher single-digit margins for EMEA. Structurally, it's a different market for us than the U.S. in the sense that we don't have the SUVs and the heavy truck fitments that we have and smaller cars. And also the fact that we are not, you know, the national home team and the home player there. So, there's reasons we should be a bit lower. Having said all of that, I think that, you know, when we move through this larger restructuring plan, just over $1 billion over the two-year period, I think that we will move back more toward the restructuring programs that you've seen us execute over the last 20 years.
As I look at the landscape, say, between 2010 and 2020, we actually executed two major plant closures, one in the U.S., one in Europe. And so, that's the kind of funding that I would anticipate being needed on a go-forward basis after this plan.
And the midpoint where you land in it by the end of next year is mid-single-digit margins and high single-digit margins later in the decade, is that right?
We would target sort of mid-single-digit or just below that and then moving our way up to high single-digit by 2027 or 2028.
I'd like to ask you about the asset sales. So, there's three of them. You've got the Dunlop brand, which is kind of centered in Europe, the chemicals business, which is mostly the U.S., the off-the-road tire business, which is mostly Asia. It sounded like Dunlop was furthest along. Can you give us some idea of when you would expect some resolution or some definition around what that looks like? And, are any of these issues that we're reading about? There's a broad investigation right now across, not Goodyear. It's this broad tire investigation that the European authorities are conducting. Does that add any complexity, or is that just sort of noise in the background?
Sure, Rod. So, I don't see the E.U. investigation as an impediment to our continuing along on the path with the asset sales and divestitures. You're right. We've announced that we are looking at the divestiture of three assets, two businesses, and really one brand. The brand is the Dunlop brand. And what we've said and what we've shared is that that's for Goodyear on 2023 volumes, about seven million units, and about five million of those units are concentrated in the European footprint. And so, when you think about the sale of Dunlop and as we go through the process, there are many variations under which that deal could actually transpire. You could envision a scenario where there is a longer-term contract manufacturing arrangement. You could envision a scenario where actually some manufacturing footprint moves with the brand.
But I think as we move through the process, we're being very open-minded about all of those different variables, and we will work to put together the very best structure for Goodyear and our shareholders on Dunlop.
Is there, do you have an indication of what is more likely or less likely the way this, that?
Not at this point, Rod. I mean, it is still the transaction that is furthest along, although I would say, you know, what we said in November, and I still think this is very true and real, that we would come back in the middle of 2024 with updates on the sale transactions. I am still working toward that timeline.
Okay. So, this is not like a Q1 call expectation. It's middle of the year.
Middle of the year.
Okay. The chemical business is also pretty integrated into Goodyear. I know that at one point years ago, you'd considered selling it and then didn't, but now it sounds like you're comfortable doing that. Can you just talk about what the strategic implications are of not being vertically integrated into that?
Sure. So, the chemicals business and what we've said is that it's about $1 billion turnover business if you include our internal sales as third-party sales, and it generally would attract sort of a high single digit EBIT margin. And you're right, Rod. I think 10 or 20 years ago, ownership of this type of asset, we viewed as much more strategic and as much as we viewed the product technology as more proprietary. We also viewed supply as much more constrained out there in the market. And as we went through our review as part of our Strategic and Operational Review Committee last year, what we determined was that we believe there's adequate supply available in the market.
You know, the chemical supplies, generally the synthetic rubber for our tire treads in the U.S. and in EMEA, we believe that the supply chain has caught up versus where it was 10 years ago. We also believe that the technology has become more regular way. So, for those reasons, you know, there are really great synergies for a buyer who does not need to run this business as vertically integrated. We will obviously pay a third-party premium that we're not paying today, but we expect to be paid for that on the sale of the business.
Right. And that was incorporated into the $300 million EBITDA adjustment. Okay. That you'd given us.
It was.
Can you just remind us preliminarily what you were thinking when you set this up in terms of the valuations and any color on whether those seem like they were appropriate is in total?
Sure. So, we kind of gave you some parameters to how to think about valuations. We were targeting and still are targeting over $2 billion in asset sale proceeds. So, the first is Dunlop, $700 million of revenue on a 2023 basis. Harder, you know, it's higher EBIT margins in replacement would be, you know, the way to place the valuation, although it's a brand. It is a well-known brand with a very long heritage. So, it is so much more than a business. Chemicals we just talked about, it's about $1 billion with so a high single digit EBIT margin. And then we look at Off Highway, very similar size to Dunlop in that it's also about $700 million in turnover, generally with a mid-teens EBIT margin. And so, that should help you think about the valuations.
Right. And just in total, the $2 billion in proceeds, that's, you're pretty consistent at this point. You think that that was reasonable?
Yes.
Let's talk a little bit about leverage and free cash flow.
Sure.
So it looks like because you are spending $300 million on rationalization this year and $100 million, I think, on professional fees and some other things that you disclosed, it looks like there might be a bit of cash burn this year. So leverage goes up a little bit, obviously, depending on what happens to the proceeds from asset sales. But can you talk a little bit about liquidity, where the leverage could go? You have some maturities coming up next year. So how do you manage that? There are certain things that you can sort of see, and then we don't really know what the timing is of the asset sales. But how do you sort of work your way through that?
Sure. So, our liquidity position at the end of the year was over $5 billion, Rod. That's very consistent with history. And I would say over $3 billion of that is derived from our major revolving credit facilities that are committed with our larger relationship banks. And that is, and has proved to be, more than enough to handle any near-term maturities as well as any recessionary difficulties and challenges that might come our way. And so, that's a, you know, very strong backdrop for us as we think about moving through the next year. When it comes to the capital structure, we have no near-term maturities. We have one note in the capital structure that matures in 2025. It's a note we issued in May of 2020. So, in the depths of COVID. And so, it's got a high coupon on it.
It's a 9.5% note. It's got an $800 million notional. And you're right, Rod. I mean, ideally, this is a piece of debt that we repay outright, you know, as part of our deleveraging plan. And that's because it is the highest coupon note by far in the capital structure. And what we'll do as we move through the course of the next several months is continue to watch what's happening with our sale processes and make sure that we're working with the timing if we're able to pay off that note. Otherwise, we will look at refinancing options. We're going to be prudent with the capital structure, certainly as we move forward.
Right. But you could easily bridge it with the revolver and then it's high high coupon note and just conveniently you've got the cash come in.
For sure. We have options. Absolutely.
Okay. And then where does the leverage end up once the restructuring is done? And can you talk about what would the assuming you get to that 10%, $2.7 billion EBITDA, what is the free cash generative power of the business?
So, we're targeting and this plan that we laid out in mid-November takes us to a 2x-2.5x leverage on a net leverage basis on a run rate at the end of 2025. So, that's just under 2 years from now. And that's the power of both the earnings benefits from, you know, the cost out programs as well as the power from incremental divestiture proceeds. And so, targeting that 2x-2.5x , what we've also said is, you know, after the billion-ish dollar of restructurings that we need to get through over the course of the next couple of years, our business will be in a position and we should be throwing off free cash flow in the range of $600 million.
Around $600 million at that point, pro forma for the asset sales.
Correct.
And you'll obviously be in a much healthier leverage position at that point. Let me open this up. If anybody has any questions. Well, let's talk about, sort of the expectations, the areas that investors are skeptical. I think one of the things was, there's a pretty significant seasonal drop in the first quarter from the fourth quarter. Always. I think typically you sell four million fewer tires in Q1 versus Q4. So, we know that. But the magnitude of the EBITDA decline was larger than we typically see. And that might have raised some questions about, like, what is the year going to look like? Can you give us any color on, boy, over the course of this year, here are the things that you should start to see materializing.
Obviously, the go forward, the Goodyear Forward strategies, starts to accelerate over the next couple of quarters. What other things are we going to be looking for?
Yeah, sure, Rod. And I think you're right. The first quarter feels a little more depressed than normal seasonality. And that's driven by the fact that we are including a lower volume down 2%. And that's based on, you know, especially our expectations in Europe. We've been seeing continued destocking. We think we're mostly finished with destocking around the globe. Just a little more to go in EMEA. Also, assumptions on EMEA OE for the first quarter are hurting that outcome. So, as we move through that lower volume into the back half of the year, what we've said is we expect a much stronger second half than we do in the first half. And that's on the top line, certainly, as we think about industry volumes.
But it's also as we look at, you know, the Goodyear Forward programs and how we're planning to build momentum in all of the different work streams that will help us deliver on the program over the two-year period.
Right. Among the things that you can control, what do you see as the biggest potential source of upside? Obviously, you can't control what the volumes or the macro is going to be. But what do you think we might be surprised by on the upside? What is the biggest risk that you're most focused on of the things that you're able to control?
So, for upside, and if I think about the work streams that we've laid out in the cost out programs that have to point to purchasing, and this is something that Mark even talked about on the fourth quarter conference call as being an area where he has some expertise. You know, we spend $6 billion in raw materials every year. We spend about $8 billion in indirects. And we have targeted $350 million of cost out over two years. That's about 3%. It feels like we can go further and we can go longer, you know, to develop sustainability in our cost out program. So, certainly would look to purchasing as an area where I think we can we can grow and outperform.
When I think about risk, you know, we have laid out you mentioned the fees a little bit earlier ago, Rod, and we have laid out $200 million of cost to achieve over the course of the two-year plan. As I look at that today, we are fully budgeted. What that is mostly comprised of are things like contractors and third-party consultants help actually executing on these plans so that we do achieve the cost out that we plan to in the desired period of time. I don't see it right now, but if we're at this time next year and I need to pull on some extra third parties into the organization in order to execute on the plan, I could see a bump up in our one-time fees in order to execute.
I think all in all, I would say, you know, these work streams are developed through a very strong governance program. Obviously, we went through the reviews with our board last year as part of the Strategic and Operational Review Committee. We have work stream leaders and line level leaders all down through the organization. So, really good level of governance. But I want to make sure that we have the right resources enabled to support the programs we want to deliver.
Makes sense. Well, Christina, thanks so much. Just obviously, if the company, we're out of time, unfortunately. But, look, obviously, if the company achieves $2.7 billion EBITDA with your leverage targets, I mean, five times this could be a $27 stock. Even on our $2.3 billion number, it could be a $19 stock with the asset sales and deleveraging. So, there's we're thinking good risk reward here, and, we're looking forward to following it. So, thanks again.
Thanks, Rod.