Good morning. My name is Nikki, 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. You may register to ask questions by pressing star and 1 on your touchtone phone. To withdraw your question, please press star 2. 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 will refer to forward-looking statements and non-GAAP financial measures. Forward-looking statements involve risks, assumptions, and uncertainties that could cause actual results to differ materially from those forward-looking statements.
For more information on the most significant factors that could affect future results, please refer to the Important disclosures section of Goodyear's 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.
Great. Thanks, Nikki. Good morning, everyone, 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 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 a decrease in raw material costs, should improve margins as we move through the year. We look forward to the discussion today. Now let's open the line for questions.
At this time, if you would like to ask a question, please press star and one on your touchtone phone. You may withdraw your question by pressing star two. Once again, to ask a question, please press star and one on your touchtone phone. We will take our first question from Ryan Brinkman with JP Morgan. Please go ahead.
Hi. Thanks. Just wanted to follow up. Good morning. Just wanted to follow up on some of the comments in the shareholder letter about the softer industry volume trend. We've been noting the U.S. TMA numbers in the Americas too, in the U.S. that is. I understand that that's a wholesale number, so I was 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. I saw some of the comments in the Americas outlook section too about, you know, channel destocking and just curious what might be the driver of that and if that might suggest the retail demand might be better.
Also kind of might wanna ask around the extent to which the softer volume trends, including because the miles driven you note is up year to date and slightly ahead of the 2019 levels, the extent to which maybe 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.
Yeah. Ryan, you know, 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, you know, we had a weaker industry coming off of a really, you know, a tough comp from Q1 in 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. We saw a weaker industry coming off of that. We saw destocking as well. As you mentioned, the dealers kinda 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.
That's some of the volume decrease that we saw. 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. The trends that we see, frankly both in the U.S. and Europe, VMT in the U.S. is up, as you said, about 4%. Europe is actually up about 13% as well. 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 situation where volumes and demand will continue to improve.
The consumer, as we, you know, as we see it, is still in pretty good shape. That speaks to good demand for the balance of the year, again, coming out of a weaker Q1. That's a positive as well. You know, as we think about pricing, remember, we lapped about a 12% price increase from Q1 last year. You know, if we just take a step back, I think, you know, we're up over two years about 30% on revenue per tire. You know, I feel really good what the teams have done to capture those incremental raw material costs out there.
I think the benefit we'll also see are those 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. You know, 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. I think all that bodes well in terms of what we said last quarter on how we see the year filling out.
Okay, great. Thanks. Lastly from me, just looking to get more color on the Cooper integration. I followed the hypertext link in the shareholder letter to another PDF with even more details on the integration, which is excellent. I understand that you increased the synergies once already, and now you're saying that the cost synergies will be, you know, fully achieved 50% more than originally announced by just next quarter. Just to follow up on that, though, you know, there's a lot in here about the cost savings. I think that what was, you know, left unquantified at the time of the announcement and the closure was, you know, these further out potential revenue synergies, go to markets, benefits, et cetera.
I'm just curious if, you know, 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, you know, the timeframe which you expect to benefit from the revenue synergies.
Well, I'll start, Christina, you may wanna jump in here as well. First of all, I would say the go-to-market strategy of both the Goodyear brand or the Goodyear family of brands plus Cooper continues to be on the path that we expected. You know, no negatives from that going forward. We have not put any numbers around that in terms of quantifying what that would look like.
I would tell you know, as we look at the segments, particularly around light truck, which is one of 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 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 one down to tier two, tier three as the economy has softened a bit.
That actually has worked out very well for us as well. We have not quantified that, Ryan, but I will tell you 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.
Okay, great. Thank you.
Yeah, Ryan.
Mm-hmm. Go ahead.
I'll just jump in quickly 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, you know, have introduced new sales incentive programs for the combined portfolio for our dealers and distributors here in the U.S. All of that's contemplated in 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, you know, really good about the delivery on the synergies.
If I, you know, we took on Cooper in the middle of 2021, you know, just after, you know, the economies began to reopen in a more material way after COVID. I can't comp out versus 2020, but if I look at 2019 as an example, our Americas business was at 7% SOI margin. We delivered $550 million in earnings. Cooper in 2019 was about $180 million in OI. Taken together, you know, and moved through the two volatile years of 2020 and 2021, you would have assumed, you know, our combined businesses would have made something like $735 million or so, or $750 million. 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 a factory during COVID in Gadsden, Alabama, and really good execution by the Americas team on over-delivering on price versus cost in 2022 as well. Feeling good about the momentum in the Americas business.
Thank you.
We'll take our next question from Rod Lache with Wolfe Research. Please go ahead.
Morning, everybody.
Hi, Rod.
Morning.
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-over-year, I'm referring to. If things were to be frozen at current levels. I know there's some complexity here because you do have OEM index agreements. Also related to pricing, do you think that you've kind of kept pace with your peers in pricing in North America? We've seen a few, at least public, announcements about some price increases from others, we haven't seen anything yet from Goodyear.
Rod, I'll start maybe on the last question. Again, you know, 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 incremental inflation that we've seen over the past two years, and again, that's, you know, over the last two years, we're up about 30% in revenue per tire. The teams, you know, 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, 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. Instead of essentially just doing across the board price increases, you know, the team's been very focused on, you know, call it dynamic price increases on a SKU by SKU basis to make sure that we're recovering the cost that we need to going forward. You did see. 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 as those costs come down.
I think we feel pretty good where we are from a pricing standpoint right now. Christine, I don't know if you wanna add to that?
Maybe, Rod Lache, I'll just help a little bit with the modeling. In Q2, we'll lap 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 U.S., up to 10% last July on consumer replacement, 6% on commercial replacement. By the time we get to Q4, the only price increase we would have installed, at least in the major markets, because we're always doing things related to devaluations in some of our emerging economies. By Q4, the only price increase in flight would be this most recent, called about a 4.5% increase at the beginning of the year in Europe.
Okay. 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 to costs. Goodyear used to achieve just routine kind of benefits from productivity, so there'd be an inflation line that we would see, and then there'd be things that you do that mitigated that inflation and often mitigated it completely. I understand the factors that made that impossible recently, that it kind of led to this excess inflation. You had a lot of employee turnover, energy, freight and all that.
I'm wondering if you have visibility on a point in time when that's sort of in the rearview mirror and you can kinda start getting back to a productivity that actually means that Goodyear is absorbing less than this kind of CPI inflation.
Rod, I'll give it a start. The, you know, the inflation in our cost base, and this would be CPI-based, for 2023 is gonna feel something close to $400 million, and that's a step down from last year, where it was about $500 million. You're right, we've seen this excess inflation mostly driven by transportation, energy and to some extent, wages. As I look forward into the back half of the year, you know, I start with our year-over-year guide for inflation and excess inflation in Q2. It's another $180 million. That's a lot driven by energy in the excess basket. I would see, you know, a big step down in Q3 on the excess part of the equation.
Something that feels better by $40 million-$50 million, so that $180 dropping on a year-over-year basis. Then by the fourth quarter, dropping again another $40 million-$50 million, assuming, you know, this is all assuming current energy rates and utility rates. What that would mean is that by the fourth quarter, you know, we're essentially neutral on excess inflation, so we've lapped a lot of the very high comparables from last year. We are beginning to add productivity back into the footprint through plan 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.
Great. Thank you.
Uh-huh.
Our next question comes from James Picariello with BNP Paribas. Please go ahead.
Hi. Good morning, everyone.
Morning, James.
Hi.
You're taking down production in the second quarter by three million units, right? Calling out the overhead absorption headwind that'll hit you in the third quarter. This is in addition to the inherent, you know, lost production at the Cooper Tupelo plant. I just wanna, you know, confirm that, right? Because that'll be out of commission for at least two months. Just a few questions on this. Where do you suspect your channel inventory levels could be at the end of this second quarter? I know, you know, channel inventories in the Americas are now flat year-over-year versus the prior quarter, up 10%. Can you also just speak to the sequential trend in the channel inventory levels as well? Thanks.
Yeah. James, I'll happily respond to that. Our expectation, what we've laid out for the Americas, and consumer replacement overall is feeling like a down 5% in Q2. That's in the face of a VMT that's feeling pretty okay. The expectation is that we do continue to see destocking in the Americas and in Europe over the course of the second quarter. Expecting channel inventory levels to certainly be lower on a year-over-year basis as we get to the end of Q2.
Have channel inventories come down from 4Q to the end of this first quarter?
Yes. 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. Those are included in each of the segment results within the investor letter. In Americas, you know, when you look at our highlights for sell out activity, we talk about where inventories were, and they're in line on a year-over-year basis, and that compares with up 10% in the Americas at the end of last year. In EMEA, similarly, you know, seeing destocking. At the end of the year, we said inventories were up 30%, and that was all driven by a very weak sell out in winter. Currently inventories up in Europe by about 14%. Hopefully that helps.
Yeah. No, very helpful. Thank you. Just to follow on Rod's question, you know, tied to pricing. Given the, you know, the trend for raw materials to begin to deflate right in the back half, and a competitor of yours recently, you know, kind of conceded that your pricing could be a lever to pull to help stimulate demand, that they're gonna be more intensely focused on a optimized mix. Anecdotally, is it possible that the dealers, you know, the dealer channel is waiting for, you know, that shoe to drop on price to begin, you know, restocking, you know, now that your channel inventories are in line year-over-year? You're still...
You know, you're still taking down, you know, production at a good clip to get things right-size. Yeah, just, you know, just your high level thoughts on the pricing and the topics here. Thanks.
Yeah, James, I mean I'll jump in and I'll say, you know, you have to keep in mind that the industry still is short on the highest end tires, you know? Higher performing tires, light truck tires, you know, large rim diameter, you know, tires for the F-150s and the like in the replacement market. That still is a really good dynamic. Also helping that dynamic is OE is starting to come back. Remember, that takes some of our best tires that we make, the best capacity out of everybody's factory. That supply demand dynamic still works in our favor.
You know, the one thing to also keep in mind, I mean, I look back and let's say, you know, about the last seven quarters, we've seen our raw materials go up, you know, just under $3 billion. As we see some of the, you know, some of these cost increases abating a little bit, you know, they're only a small portion of that, you know, call it under $3 billion of raw material increases that are out there. We have, you know, lots of costs that we have to recover in terms of capturing, you know, 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. You'll see it's around about $300 million, I think. $400 million, excuse me, is 4. You see that against that, call it $3 billion, just under $3 billion of cost increases over the last seven quarters or what have you. There's, you know, there's lots of reasons that we have to make sure we're recovering what we put in the marketplace, and I think we're not alone in that.
Got it. That's super helpful. Thank you, guys.
Thank you.
We'll take our next question from John Healy with Northcoast Research. Please go ahead.
Thank you. Just wanted to ask a question on the decision to make production realignments go for Q2. Is that something you think others in the industry are doing? Curious if what your competitive intelligence is telling you there. Just, you know, or are we gonna maybe be in a situation where, you know, you guys are acting rationally and maybe the others aren't? I was just curious your thoughts there.
Yeah. I'm not sure that 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, you know, we're not putting too many tires in inventory that could, you know, could impact negatively that supply demand equation I just spoke to as well. I can't speak to them, but I know what we do to manage our business, and we feel pretty confident in doing that.
Just wanna ask a big picture question just on the OE business. Frankly, I thought that business did a little bit better than we had expected this quarter. 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? You know, maybe some of the pluses and minuses we could start thinking about for that business.
Yeah, I'll start, and I know Christina will jump in as well. I think we've probably, you know, I'll speak for myself personally, having been around for a while. I feel better about our OE portfolio, now than I have in a long time. I believe and always been very strong in OE, particularly in solving our OE customers problems around making sure the 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 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.
Our, you know, 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, you know, we have, higher revenue as well as higher margin per tire on the EV fitments that we're getting. 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.
On top of that, you know, is 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, where we went a virtual submission to one production and that's it. If you think about that, spreading that over the, you know, over an OE portfolio over time, that's a significant cost reduction as well.
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 better cost and ideally higher price and higher margin as well. I feel really good about where we're headed with the OE portfolio. I'll just end by saying, you know, we are always focused and expect something that we even 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.
Yeah, maybe I'll jump in here, John, just to say that the market share gains are going to follow Rich's 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 EV. It's just not as strong yet here and particularly in the U.S. Just to underline some of Rich's comments here. I mean, in this quarter, you know, the revenue per tire on our OE wins for EV was more than double the revenue on ICE engines fitments that we won. That's all go forward business. And gross margin was the same. Double, at least for this quarter.
That's been a trend we've been talking about as, you know, we've been rebuilding our OE portfolio more towards high value electric vehicle fitment.
Great. Thank you.
We'll take our next question from Emmanuel Rosner with Deutsche Bank. Please go ahead.
Thank you very much. Good morning.
Morning.
Morning, Emmanuel.
I think in previous quarters you've, you know, kindly shared with us, maybe some sort of, you know, scenario thinking around, you know, full year free cash flow under certain assumptions. I was hoping you could maybe update this for us, in light of, you know, sort of like your positive outlook for the rest of the year.
Yeah, sure. No, Emmanuel, I'll take that. I think, you know, 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. The only real change is a, you know, a better raw material set up in the back half that in our guidance as well as, you know, the better overall non-raw material costs as well. That's a part of what we're seeing for the back half of the year. You know, what we talked about in the past, and I think this is 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, 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. That's all just driven by the change in working capital from last year to this year. So, you know, depending on how, you know, you want to lay out the assumptions for earnings for the year, even if you just assumed flat, you know, you should get to a very strong free cash flow development. I don't think that our goal is or to say that we're targeting flat earnings. Of course, we want to grow.
We're expecting more synergies for the Cooper transaction this year. You'll see even our corporate other forecast is down on a year-over-year basis. Having said all that's how I'd have you think about it.
That's super helpful. The way you characterized it is the better materials outlook and, sort of like moderation in inflation just gives you more, generally more confidence in this direction.
Yes.
Okay. I guess just honing in actually on this, moderation in inflation. I guess which as we think about, you know, drivers of, you know, improved profitability in the back half, in particular, your comments on approaching maybe the 8% sort of like SOI margin. Which of these, non-material costs, you know, do you view as important drivers, and do you see as, you know, moderating?
Yeah, sure, Emmanuel. You know, I talked with 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. A big part of this is our taking costs back out through productivity in our factories. You know, that's been a big initiative for us this year. Also we're seeing trends in freight transportation, you know, moderating and improving. Also seeing trends in energy improving in Europe, you know, where, you know, by the, you know, the third and fourth quarter of last year we saw some really high spikes in energy.
Seeing all of that pull through as well as some of our own initiatives in our factories.
Okay, great. Thank you very much.
Thanks, Emmanuel.
We will take our last question from Anindya Das with Nomura. Please go ahead.
Hi. Good morning. Thank you for taking my question. 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 paced across all regions, or would you expect, you know, the recovery in some regions such as North America running ahead of the other regions such as Asia or Europe?
I would say, generally speaking, a very similar trend in the U.S. and Europe. This is because we're cycling through very tough comparables. If you think back through, you know, the recovery after the pandemic, you know, both the U.S., Europe was on 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 inventory. We're cycling through those comparables in our mature markets, so I'd expect very similar trends there. Outside of that, Asia Pacific should continue to grow, you know, through the remainder of the year.
That's helpful. Just to follow up on that. In terms of the quarterly cadence, would you say that, you know, the second quarter could possibly mark the low point for the year, considering that, you know, on a year-over-year impact from raw material headwinds should continue to ease as the year progresses and, you know, 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?
Well, I would say that the first quarter, you know, this particular quarter when we're looking at SOI is going to be the low point. Generally speaking, it always is because it's seasonally a low point for our sell in. You know, following the holidays. Q2, we generally see a little bit more of a volume pickup and a better dynamic. As I think about, you know, sequentially Q1 to Q2, we're going to see a better raw material development in Q2 versus Q1. I think we will, generally speaking, see, you know, a little bit better volumes. I think that we should expect Q1 to be the low point for 2023.
Great. Thanks.
Mm-hmm.
Thank you.
Thank you. This does conclude our Q&A session as well as our conference call. Thank you all for your participation, and you may disconnect at any time.