Good morning. My name is Ashley, and I'll be your conference operator today. At this time, I would like to welcome everyone to Goodyear's fourth quarter 2022 earnings call. All lines have been placed on mute to prevent any background noise. After some opening remarks, there will be a question-and-answer session. You may ask a question by pressing star one on your touchtone phone. Today on the call, we have Rich Kramer, Goodyear's Chairman and Chief Executive Officer, Christina Zamarro, Chief Financial Officer, and Darren Wells, Chief Administrative Officer. During this call, Goodyear will refer to forward-looking statements and non-GAAP financial measures. Forward-looking statements involve risks, assumptions, and uncertainties that could cause actual results to differ materially from those forward-looking statements.
For more information on the most significant factors that could affect future results, please refer to the Important Disclosure section of Goodyear's fourth 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.
Great. Thanks, Ashley. Good morning, everyone. Thanks for joining us today. We released our fourth-quarter investor letter after the market closed yesterday. We received very good feedback from investors on both our letter and our Q&A call format following our third- quarter release. As we did last quarter, we will use this time again to focus solely on your questions. Just before opening the line, I want to acknowledge, as you heard earlier, that both Christina and Darren are joining me on the call today. As you saw with the announcement in December, Christina became our Chief Financial Officer as of January 1, replacing Darren, who has moved into a new role of Chief Administrative Officer. Congratulations to both of them, and again, they're joining me here. I'm excited to continue to partner with both of them in their new roles.
Given the transition, Darren is joining us on the call today. Christina and I will take the lead in responding to your questions on these calls as we go forward. With that, Ashley, let's open up the call for the first question.
Certainly. We'll take our first question from Emmanuel Rosner with Deutsche Bank. Please go ahead.
Morning, Emmanuel.
Thank you. Good morning. Thank you so much for taking my questions and agreeing with the feedback on the call format, so; very, very much in favor of it.
Oh, good. Thanks, Emmanuel. We appreciate the feedback and Christina pushed us that way, so well done. We appreciate that.
Great. First question, maybe. I think last year around the same time, I think you had helped us out with sort of like framing sort of a base case scenario for what could happen to, you know, free cash flow, you know, for you guys, for the full year ahead under, you know, certain, you know, conditions. Would you be able to go into this discussion for 2023? Obviously, you know, appreciate all that's in the slide. Just curious, you know, knowing all you know, what does free cash flow look like for you?
Sure. Emmanuel, hi, this is Christina. Now let me start by saying thank you for the comments on the investor letter, and I have to send out thanks to our teams. This has been a great push by our investor relations team, FP&A, our controlling team, all to put that together. Again, we've received really great feedback on that. As far as free cash flow in 2023, if you look through the drivers we've laid out as part of our letter, if you were to take the assumption, just stay with me on the assumption.
If you were to take the assumption that our EBIT was going to be flat in 2023, with our EBIT in 2022, which was about $1.1 billion, you would get to a level of free cash flow in the range of about $400 billion. That's just reflecting the year-over-year improvement in working capital. You know, Emmanuel, what I'd add to that is it's not that we're targeting flat earnings. Our goal is to improve earnings, and after a really tough setup in the first quarter, as you've read in the letter, the trajectory should improve meaningfully as we move through the remainder of the year. In the second quarter, our goal is for segment operating income to approach 2022's levels, with volume stabilizing and given lower year-over-year raw material cost increases that we're expecting in the second quarter.
Assuming a relatively stable economic outlook, then, we would begin to see the benefits in the second half of higher volume on easier comparables, strong growth in the Asia Pacific driven by a recovery in China, and lower inflation levels than we're expecting in the first half of the year. We would also expect the benefits from our recent cost actions that we've announced. Of course, at current spot prices, tailwinds in our raw material costs. Historically, this has been the time in the cycle where we've seen growth in earnings and growth in our margins as well.
Okay. That's helpful. I guess following up on some of the pieces of, I guess, of the free cash flow guidance. I think CapEx was guided at $1 billion for, you know, 2023. I think this compares to maybe a $1.2 billion-$1.3 billion framework that you've discussed previously in terms of, you know, the investments you need to make in growth. What is enabling you to sort of like keep it around the $1 billion? Is that roughly sort of like just maintenance CapEx? Are you cutting back at? I guess, where are you cutting back?
Yeah. No, good question, Emmanuel. What I would tell you is, as we went through 2022, we did scale back our plans for capital expenditures, just given the outlook for the global macro, macroeconomic environment. As we look at 2023, we expect to continue to invest in the Americas and in the Asia Pacific. Although investment levels in EMEA will decline just, given the current macroeconomic outlook there. We continue to allocate capital to high- return projects that will improve our overall competitiveness over time.
Yeah, Emmanuel, I'll just jump in to echo Christina's points. I think, you know, we take a lot of time to go through those capital plans. You know, we've worked through a lot of cycles, and I think you can count on us to adjust CapEx to the environment we're in. When we do that, we really don't shortchange ourselves, excuse me, on what we see as long-term growth projects that we have to do. We're comfortable with what we spend.
I would just tell you, even if you see things like things that we did at CES around intelligent tire and around sustainable tire, you know, there are projects, growth projects, industry-leading sort of technological projects that we're gonna continue to move forward with within the capacity of the spend that we have, and we feel comfortable knowing how to do that.
Okay. Yeah, I appreciate it, Paul. Just very finally, I guess, since you're mentioning the environment, can you maybe just provide a little bit of your perspective on some of the drivers of this market's demand weakness that seems to be across, you know, every region, every major region? I guess what is driving this? How would you see that potentially evolve, you know, through 2023, as, you know, on the demand side? Any implications for, you know, how to think about pricing?
Yeah, I think, you know, a lot there, maybe I'll just start with the Americas. You know, we did see a weaker market in the fourth quarter. We see a little bit of slowdown coming into Q1. We reacted not only to the Americas but Europe as well, as you saw in our investor letter, by taking production down with that focus on making sure we don't have excess inventory in a bit of a slowing market, and to focus on cash, as Christina went through. You know, Emmanuel, as I think about the Americas going forward, you also saw in our letter that we saw that, you know, our channel inventories are up about 10%. What I would tell you is that's pretty healthy.
I mean, you know, our distributors are really rebuilding their inventory. We didn't see any, you know, any buy- aheads, let's say, in anticipation of any price reductions or anything like that. It's a pretty healthy place. I would say in line with the expectations of where the market is going in 2023. We feel pretty good about North America. A little slow to start, but I think we have a stronger second half coming. A little slow to start because we're bringing some of those costs on the balance sheet of unabsorbed inventory into the first quarter as well. We feel pretty good about the demand picture. Sellout was about flat in the fourth quarter in year-over-year in the fourth quarter. We don't see any big changes going into the year.
Europe, I think a little bit different story, obviously a bit tougher there. I would take a step back and say we feel really good about the initiatives we've put in place in Europe. Aligned distribution is working. Our, you know, in the quarter, we got volume, we got price mix ahead of raw materials again, and we had share gains in a down market, across the board, for I think the 11th or 12th quarter in a row. You know, things are working in Europe. We also, as you know, took a lot of actions there to get our costs in line. I would say we feel really good about those things. Obviously, in Europe, we've seen big energy inflation in Q4 driven by the war.
We saw, you know, the anticipation of these high energy costs really sort of reduce consumer demand out there, as we saw really weak markets in the consumer replacement business, particularly in November and December, where, you know, we saw a consumer base thinking about big energy bills and the channel sort of slowing down on wanting to buy more inventory. Europe, you know, is a different case. We know that's gonna continue for a little bit into 2023, first half, especially the second half, again, as Christina said, will be better. We're taking the appropriate actions to make sure we don't build excess inventory, make sure we focus on cash, and continue to look at more cost areas.
Remember, in Europe, you know, we've done a lot in terms of restructuring our footprint. Hanau and Fulda saw what we did in the U.K. and Melksham. We restructured a business in South Africa, and we did some restructuring to some sort of add volume and get some more efficiencies in France. We'll continue down that path. Then in Asia, and we'll particularly focus on China here, tough right now because of COVID, we really see that reversing, and we see that reversing in our favor in two areas. One is the OE business, which was strong in the fourth quarter and will continue to be. You know, we doubled our win rate in OEs in 2022 to about 70%.
You know, we have a higher mix into EVs, a high EV win rate, a high luxury SUV and truck win rate as well with the domestic OEMs, the Chinese OEMs. That's higher profitability and will create good pull in the replacement market. As COVID sort of, as we get through COVID, if I can say that's going to happen toward the second half, we see a stronger pull and a mix- up in replacement as well. To get ready for that, we continue to invest in distribution in the key markets in China and India as well. Overall, look, we gotta get through Q1 first half, if you will, again, as we see some of this tumultuousness. Beyond that, we do see some upside and feel relatively good.
Thanks for the call.
Good. Thank you.
We'll take our next question from Rod Lache with Wolfe Research. Please go ahead.
Morning, everybody.
Morning, Rod.
Two quick questions. First, are you seeing anything that would indicate anything other than stable pricing as you're entering this year, just in the context of the weak demand? Can you clarify your expectations for the other tire-related businesses? Those looked a bit soft in the fourth quarter.
Sure. You know, Rod, from, you know, from the way we're looking, I guess I'll say price mix and how we're looking at the raw material environment, that's obviously related to that. You know, and that's sort of the essence of your questions, is the earning pressure and margin compression we've seen over the last quarters because of these escalating raw materials. That's true for Goodyear, true for the industry as well. And, you know, we need to recover that. I will tell you now, our momentum has been very good. Our teams across all our businesses offset all the raw material headwinds with price and mix. And in two of the businesses, Europe not being one of them, we also offset some of the other cost increases we had as well.
The team has done a really good job. As Christina mentioned as well, we see this potential decrease for raw materials. I would tell you, our plan is to capture the benefits of those raw materials and see that in margin improvements as we continue to capture our value proposition out in the marketplace. I think, Rod, you know this well, having been with us so long. You know, historically, in a period of declining raw materials, we're able to grow margins, we're able to drop through those benefits into our earnings. I'd say, you know, we see that as still the plan and our way forward and what we're driving for.
I'll also tell you what can help that, excuse me, is we also see the OE business coming back, which means there'll be a a pull on the best capacity that the industry is making, and that's good for sort of a supply-demand equation out there as well, as we think about how to manage the demand in the replacement market. Finally, Rod, I'll just tell you know, in terms of what we're seeing in the marketplace, you know, we have not seen any decreased demand or trade down in our Tier 1 volumes at all. We've seen a little bit in Tier 2 moving toward the lower tier brands.
I'll tell you, I'm not sure that's a trade down or a price issue as much as it is, you know, all those sort of imported tires that were back ordered and paid up front in cash by the distribution, particularly in the U.S., I'm talking here, that sort of hit the docks in the past quarters. That obviously drove the, you know, the industry numbers. All that came, it came late, it was paid for. I think what you see is a lot of push of those tires to turn them back into cash. I think that's a, you know, that's a dynamic we're dealing with.
Again, that doesn't really impact sort of our Tier 1 tires or the value proposition for those. Hope that helps.
Yeah. Rod, I'll jump in on the non-tire business performance in the fourth quarter. Well, that was principally driven by our chemical business. You know, as you know, that's a pass-through margin business. When they're buying butadiene at higher prices, then butadiene dropped in the fourth quarter pretty precipitously. That means they're adjusting their pricing real time in the market. It's more of a timing issue. As I look to 2023, expecting good growth in these areas, really driven by our aviation business, seeing and expecting strength in volumes, strength in pricing and mix. We're seeing that across the portfolio, especially given the reopening and demand pull out of China.
Thanks for that. Just one more thing, if I can ask. Just taking a step back, maybe you can just elaborate a little bit on what it will take to close the gap, obviously on a mix-adjusted basis versus your peers. Presumably some of the capital spending that you were planning was aimed at doing that. Maybe you could just provide a little bit of color on what you're shooting for here in the next year or two.
I'll go ahead and start. I mean, as we talked a little bit with earlier in the call about the plans for CapEx for 2023, and a lot of that is influenced obviously by the European macroeconomic outlook. I'd have to say over the last two to three years, we do feel that we've made significant progress on closing our conversion cost per tire gap versus our competitors. I would say two to three years ago, you know, we had estimated that gap to be in and around $4 per tire. Today, you know, would have said with the closure of a very high-cost facility in Gadsden in the U.S., a big restructuring in EMEA.
Of course, you add a benefit in as much as many of our competitors had low- cost supply coming into Western Europe, out of Russia. Put all those together, we think our disadvantage right now is nearly half of what it would have been, say, two to three or four years ago. We're feeling well- positioned on a relative basis. That's not to say we're not gonna do the work to move forward. What I'll tell you is that the investments that we have in the plan we started last year and continuing in 2023 in the Americas, in the Asia Pacific, you know, are very high- return projects.
As much as they're more expansionary, instead of greenfield- type plans. You know, that will help move our low cost percentage forward as part of our footprint and increase our overall competitiveness as we go.
Okay, thank you.
Once again, as a reminder to ask a question that is star and one, we'll go next to John Healy with Northcoast Research. Please go ahead.
Thank you. Rich, wanted to ask a big picture question about kind of the changes in the C-suite recently. Just would love to get your perspective on, you know, the move with Darren into more of the strategy- centric elements to the business. You know, what might we expect from you guys over the next couple of years? Like, what are the areas where you think that change is gonna have the biggest impact on the DNA of the organization?
I think, you know, I think the way I'd answer that, John, and the one thing I would say is we operate as a team. You know, I think that what makes me proud of leading the Goodyear team is that it's not reliant on one person. Whether Darren's in the CFO role or in a different role helping us with strategy, whether, you know, Christina and Darren have worked together for so long, I think this was a really natural and elegant transition, if I can say. I look to the leaders of our business units as well as our CTO, Chris Helsel.
I think that, you know, when you look at what we're doing, it's the team that really is where the value is. I won't limit it to any individual person. I will say from a strategic perspective, I think one, I would highlight what Christina just talked about, which is to say that we are keenly focused, that we have to get our cost structure continuingly in line, not only relative to competitors who also get better, but just the trends we see in the marketplace of, you know, I always speak about transparency, about price and availability of inventory, which puts pressure, margin compression pressure on every business in every industry. We're keenly aware of that. We need to make sure that our operations continue to get more efficient every day.
That means what we do in our factories on conversion cost. It means where our factories are. We've taken footprint actions. You can count on us to continue to take more of those and then to make the high- value- added return investments that we're, you know, that we are going to do to help drive both cost structure and more efficiency in the products we make. That will continue, and we're gonna continue to get, I would say, Darren, I'll say creative on how we make sure that we do that. There's a lot of, you know, a lot of manufacturing capacity in the industry. As we did with Cooper, we need to think about how we can use that capacity more wisely as we move ahead.
Secondly, I think, you know, I always tell my team we have to have the best products in the industry. Our product innovation engine has worked. You know, we were high podium in every product category in Europe, including summer. We have the, the freshest product portfolio we've ever had in Asia, Latin America, and in the U.S., and that's both in commercial and in consumer. We will continue to make sure that our innovation engine is working. We don't talk about it as much, but we don't talk about a lot of the things that are working as well as they are. We will continue to do that. I think, you know, what gets us most excited about this is the technological trends that are moving forward in our business.
You know, they're not revenue generating today, but the changes we're seeing in mobility, the changes from just making a, you know, if you will, a dumb tire to an intelligent tire that actually has a place on an intelligent vehicle, a connected tire that improves the safety and performance of vehicles, and it actually has a role that becomes part of those vehicles operating systems, both in terms of how it's integrated to the vehicle and the service element of it, is something that gets us excited about where mobility is going and what the role of Goodyear in the tire is. That's something that we're, you know, we're thinking deeply about, and I think we're making, you know, we're making great progress on going forward.
There are a number of things that Darren will, you know, will help us on as we go forward and do them. But again, I would take a step back. It's the basics and it's the technological trends that the industry's going. Our ability to execute on both of those simultaneously is gonna continue what separates us going forward.
Thank you, John. No, that is super helpful. Just one other question I had, just on distribution. It sounds like the Cooper and the Goodyear portfolios are starting to be maybe a little bit more connected in terms of dealer availability. Would just love to get your thoughts on the terms of access of Cooper products to Goodyear dealers and vice versa. Are we at a point where maybe, you know, one plus one can start to equal three, or is it kinda gonna continue to be, you know, somewhat separated in terms of how each go to market?
I actually think, you know, it's a little bit of both. The reason I say that, you know, for instance, our retail stores now have Cooper product in it, and that is and has turned into, in terms of the performance of those stores, sort of a one plus one equals three in terms of how they're operating, how we're taking care of customers, and the products that we're offering them. In the same respect, there are certain distribution elements of how Cooper goes to market, how they sell to distributors. That process is one of the reasons that we wanted to combine Cooper with Goodyear. They do some of those things really well, and we are not going to touch those.
We're gonna make sure what they did really well, and candidly, what they were better at than we are, we're gonna keep the best of that, and we are while we're integrating where it makes sense to do. I think it's actually a little bit of both. I would tell you both in terms of the synergies, we're on the run rate synergies that we said we were gonna get. I think that, you know, the market side, we said we weren't gonna do anything, you know, rash right out of the box. We haven't. You'll see, you know, continued progress on how Goodyear and Cooper incorporate into the market together in 2023.
I think more to come on that, but I'm very happy with where we are.
Great. Thank you.
We'll take our final question from James Picariello with BNP Paribas. Please go ahead.
On the second quarter, the color of SOI is approaching year-a go levels, potentially. What would be some of the key assumptions to get there? You know, correct me if I'm wrong here, but with the second quarter, right, should have a similar overhead absorption impact to the first quarter, and maybe that's, you know, $60 million-$70 million. From there, you know, the three buckets, key buckets as I see it would be, you know, unit volumes, price mix versus raw, and then the non-raw materials inflation piece. Yeah, just any color on that would be super helpful.
Yeah, sure. Hi, James, it's Christina. I guess I would start by saying in the second quarter, we see volumes stabilizing, and we have announced a 5% list price increase in Europe consumer replacement beginning January 1. We expect Europe to begin to catch up to the increases in raw materials over the course of the first quarter and second quarter. Obviously, there's a very significant step down in raw material price increases from Q1 to Q2, and so that should be a benefit for us as well.
Okay. Well, then, how do you foresee the elevated channel inventories in Europe? I think like 30% above year-ago levels. You know, with the price increase and with replacement sell and demand, you know, down for the industry at, you know, mid-teens, entering 2023. Yeah, how do you see that unfolding? Do you
Yeah, no, great question.
Are you catching up? Are you...
Yeah. Great question, James. The elevated channel inventory is actually all reflective of winter. What happens in the first quarter is we see a shift from winter tire sales in the fourth quarter. In the first quarter, we shift into a summer tire sell-in season. There, the inventory in the channels is much more balanced and even healthy. What I would tell you is that, you know, the energy prices in Europe have also abated significantly since the third and fourth quarters as well, expecting that to support consumers out over the course of the first and second quarters.
Okay. Thanks.
Sure.
There are no further questions at this time, and this will conclude today's Goodyear fourth quarter 2022 earnings call. You may disconnect your line at this time, and have a wonderful day.