Goodyear Tire & Rubber Co
NASDAQ:GT
Earnings Call Analysis
Q4-2023 Analysis
Goodyear Tire & Rubber Co
Goodyear has experienced an extraordinarily high replacement market share in the U.S., hitting near 28% in the fourth quarter of 2022, driven by import volatility. Transition into the fourth quarter of 2023, the share has normalized, aligning with year-to-date trends and maintaining stable compared to a year-over-year volume decline. Retail sell-out share remains on par with the industry, signaling balance. The future for mature markets like U.S. and Europe is projected to grow slowly, about 1-2% in 2024, with the expectation of stronger performance in the second half of the year. This outlook is set against a backdrop of declining raw material costs.
In Europe, Goodyear's past sales volume performance has been challenged due to original equipment (OE) sector declines and a loss in consumer replacement market share to imported budget brands. To counter this, substantial restructuring efforts in EMEA, including factory closures and a $100 million SAG restructuring, have been announced. While EMEA strives for high single-digit segment operating income (SOI) margins, reaching this goal is expected to extend beyond the 2025 timeline of the 'Goodyear Forward' plan.
The Goodyear Forward savings plan aims for $350 million in full-year savings, with $50 million targeted in the first quarter. Savings are expected to significantly ramp up in the second quarter, then level off for the remainder of the year. These efforts are part of a larger initiative to build into a run rate by the end of 2025, aiming to realize the $1 billion-plus exit rate as outlined in the plan.
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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 Fourth Quarter 2023 Earnings Call. [Operator Instructions] Today on the call, we have Mark Stewart, Goodyear's 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 fourth quarter 2023 investor letter and our 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 Mark Stewart, CEO.
Thank you, Nicky. Good morning, everybody, and thank you for joining Christina and I this morning for what is my first conference call as the Goodyear CEO.
Just now over 2 weeks in my new role, I could not be more excited to have joined this iconic company. As you guys can imagine, I'm working diligently and quickly to understand the deep understanding of our business, meeting with our people, visiting our factories, getting to know our customers, our products, our cost structures and doing that through operational deep dives. I'm looking forward to engaging with the investor community as well over the course of the next several months to gain your perspective as well.
As many of you have read, my most recent role is with Stellantis, where I ran the company's North America operations and a key leader on the global executive team. I will bring a perspective from an automotive OEM, automotive supplier background and the understanding of needing to lead through industry cyclicality and a clear focus on manufacturing, purchasing, engineering and logistics in order for us to achieve our financials.
What this means is that in addition to spending time meeting our customers, understanding our products and product placement, you can expect me to focus heavily on Goodyear's manufacturing operations and distribution, understanding it on every level and working with the team to enhance capability and our cost-effectiveness.
As well, I will focus on clean sheeting and ship cost activities, our SKU, our product complexity as well as our go-to-market strategies. Like all other aspects of our business, that focus will be centered purely around our Goodyear Forward in the coming months. I'm engaged in deep dives on each element of the program, the associated work stream, our amazing teams and committed to delivering the outcomes of the Forward plan.
I've been a part of leading transformational efforts and driving results in my past roles, and bringing them to the bottom line through clear KPIs, the definition, the tracking and speed of execution. For Goodyear, for us, it's about maximizing our strength and our market position in North America, it's improving our cost structure as well as de-risking our balance sheet.
Ultimately, I'm confident Goodyear Forward will drive our company's next stage of profitable growth and success. It's clear, and I fully support the plan.
With that, by now, you read our investor letter from yesterday evening. Christina and I would like to get right to your questions.
So with that, Nicky, let's open the line.
[Operator Instructions] And we will take our first question from Rod Lache with Wolfe Research.
Good to talk to you again, Mark. I understand, Mark, that you're just 2 weeks into working at Goodyear, but I wanted to give you a little bit more of an opportunity to talk about what you see as most important to create a durable industrial turnaround. And what do you think the time line will be for you to kind of put your stamp on the plan?
Thanks, Rod. I think what's clear is going back again to the very well-thought-out Goodyear Forward plan, which was rolled out on November 15, right? And that is my focus.
It's about streamlining the portfolio. It's for us to get to sustainable operational margin of 10%, getting our net leverage to 2, 2.5x by end of '25, and having that sustainable free cash flow that's going to increase our overall financial flexibility.
So specifically, with a whopping 2 weeks and a day out here, I'm right in the middle of this onboarding process. And again, I'm spending the majority of my time and plan to do so in the near term, listening to our team here in Goodyear, both at headquarters, in the plants, our retailers, our customers, meaning in-retail OE and distribution.
And it really is looking forward to meeting you guys as well, Rod, in a different life from the past, right? But I am deep diving into the operations, going through the functions, the financials to really thoroughly understand the business right now.
And so I'm asking lots of questions, taking lots of notes, continuously reviewing that, especially in the first 30, 60, 90 days to challenge what I think in coming in to gain the understanding from our team, also to get clarification of things that maybe we can put into some quick win categories in areas that learnings that I've had from the past as well. So again, it really is about trying to keep that fresh eye look with a hard drive to execution. And it is about speed of execution. It's about us delivering that Goodyear Forward plan.
A couple of the observations I've had in the first couple of weeks. Again, there's incredible momentum in the Goodyear Forward plan, meeting with the teams just the -- as you look to the plans, well-thought-out, step-by-step timing, ownership, execution. And so that is what I'm here to do, is to help Christina and the rest of the team in terms of helping to lead and guide those initiatives across the finish line, Rod.
Great. And just on the business, maybe Christina, you can help us with this. Cost performance is obviously starting to look a lot better now. And I presume that that's not really with much benefit from the Goodyear Forward plan yet. So -- but the question, just looking at the numbers, just continues to be market share.
And I know there's factors that affect it in every region, but even in isolation, just Goodyear's year-over-year volume performance wasn't great. So I'm hoping you can maybe just talk to us a little bit about, do you think that there's market stability for Goodyear? Or is that kind of a work in progress? In other words, do you think that even beyond Goodyear Forward, more realignment is going to be needed to the portfolio?
Yes. Sure, Rod. I'll take it by region, and I'll start with the U.S. And our fourth quarter replacement market share in the U.S. in 2022 was -- I'd have to characterize it, Rod. It's just abnormally high and it approached 28%. And that was all driven by your reference to the volatility in imports that we saw over the course of 2022, even at the tail end of 2021.
When I look at our consumer replacement share in the U.S. in the fourth quarter of 2023, I'd say it's in line with year-to-date results and reflects a more normalized level of sell-in share. And even with the significant change, on a year-over-year basis, looking at the volume decline, what I'd also point out to you is that our sell-out share, so what's getting bolted on to be available at retail was in line with the industry. And so that gets to your question around a level of stabilization.
So we would expect a much more normalized market share going forward in the U.S., certainly with margins in excess of 10%. We are in a good market position in terms of share. That doesn't mean that we won't make changes to the portfolio around the periphery.
We said that we will do that as part of Goodyear Forward, through SKU consolidation, through our customer programs as we look to continue to grow our margins. But I don't think there's anything that's significant there, Rod. I do feel that we've stabilized in the U.S. compared to last year. Having said all that, the forward outlook for our mature markets, say, U.S. and Europe, is both slow growth for 2024, something like up 1% to 2%. It feels tougher in the first half than in the second half. And we know we also have recent declines in raw materials. So there's that to put into the calculus as well.
Now when we think about EMEA, the past headwind has been our sales volume performance. Really going back to 2019, we've been hurt by our position in OE. And that's where the industry has certainly fallen pretty dramatically off its peak. It's also hurt in replacement, where we do tend to be more profitable, as you know.
I think going forward, we see a little downside risk to OE. Our OE forecast globally for 2024 is something that feels a lot more forward or a lot more level. But when I think about the consumer replacement market share in Europe, what I'd say is we lost a lot of market shares since 2019 to imported budget brands.
And they have grown, as a part of the industry, about 15 million units since 2019. And that's, at the same time, the industry shrunk 7 million units. And so we've lost our fair share of that. And that's why we're directing the restructuring dollars as part of Goodyear Forward to the factories in EMEA, and that was all announced in the fourth quarter.
So just, Christina, with that, once the restructuring is done in Europe, you would expect that business to be more descendible or more stable at that level?
Yes. I mean I would say we will -- we're addressing the cost competitiveness with a couple of factories out. I think there will be more work for us to do beyond 2025. I think we can get Europe to a high single-digit SOI margin performance. I don't think we'll get there by the end of 2025.
But we're beginning the work. We're laying the groundwork. We've announced the 2 factory closures. We've also announced a big SAG restructuring worth $100 million. And EMEA will also get their fair share of the purchasing and some of the corporate initiatives that we're running as part of Goodyear Forward.
So we do have a good path to earnings growth in the future in Europe, but I think it's going to take a little bit longer than this 2-year plan period that we're talking about as part of Goodyear Forward.
And our next question comes from James Picariello with BNP Paribas.
Welcome aboard, Mark.
Thank you.
Just on the restructuring actions, the Goodyear Forward savings plan. So you're calling for $350 million for the full year, $50 million in the first quarter. Just curious how we should be thinking about the remainder of the year in terms of the cadence?
And then more broadly, as we think about divestitures and the need for the execution there to fund the heavy lift on the Goodyear Forward plan in 2025, right, to achieve that $1 billion-plus exit rate, just -- does all that need to take place this year for the timing to be maintained here in terms of the time line?
James, so on the Goodyear Forward program, $350 million on a full year basis, $50 million in the first quarter, you can think about that as a big step up in Q2 and then a little bit of a leveling the rest of the year. But then what I would say is it's still ramping on through the fourth quarter. As you can imagine, we're building into a run rate through the end of 2025 with all of these programs.
When I look at the asset sales, I'd say the processes related to the sales of the 3 respective assets that we talked about on November 15 is underway and progressing as planned. So we'll be back to you when we have significant developments.
I'll note that the outlook items within the investor letter don't contemplate an asset sale. So we'll have to come back to you and adjust our box once we close on any sale. But I would say for the 2024 plan, no requirement for additional funding this year from an asset sale in order to achieve our plan.
Right. And maybe this is a question we could answer offline. But if -- just for context, if no divestiture takes place this year, right, just for context...
Sure.
What would be the additional restructuring Goodyear Forward savings that would be in store for next year, just on an incremental year-over-year?
Yes. So when we laid out the plan in November, James, we had said 350 million in year 1 and 750 million in year 2.
Right. But what about under the hypothetical that the divestitures don't take place this year? Again purely hypothetical, just what would be the incremental push to next year without that additional funding source for the additional activities? Does that make sense?
So as of today, we've announced restructurings of about 750 million as compared to that guidance of 1.1 that was in our November announcement. So we've said 300 million of that sits in 2024, 350 million sits in 2025, and that leaves the remaining sub in 2026.
Got it. Much appreciated. And then if I could just ask one more. Just on the full year -- kind of a follow-up to Rod's question, just on a full year basis, would you be surprised if Goodyear's unit volumes were down for the full year, where you've got the minus 2% for the first quarter? Just wondering if we could kind of establish that barometer in terms of just expectations flat or up or down for the full year in terms of units?
Yes. I mean maybe I'll take the opportunity, James, to just talk through our year-over-year SOI view, and that will get you at least sort of how I'm thinking about volume, but I'll go through all the drivers at once, if that makes sense.
On a year-over-year basis, if you start with our 2023 SOI of $968 million, Goodyear Forward, obviously adds that $350 million against base inflation of $215 million. Other costs, so these are costs in transportation and energy. On a full year basis, it should be about flat.
I do see right now a tailwind of $75 million in the first half, that's driven by transportation rates. But we'll flip to headwinds in the back half of the year, driven by increased insurance premiums as well as some transitional manufacturing inefficiencies related to our announced footprint actions in EMEA.
Then separately with Tupelo now at full production, we should get a $50 million benefit in the second quarter on a year-over-year basis. And then raw materials, we've said, are $375 million in the first half. First quarter price/mix down $130 million. And then we'll lap that about $60 million drag that we've been carrying with us as part of the commercial truck decline since the second quarter of last year. We'll lap that in Q2. So our price/mix in Q2 should be better than Q1.
We're also looking to build a couple of million units of inventory in the Americas as levels are lower than what we need for optimal service levels as a result of the tornado and are managing the business for cash last year. That should benefit second half unabsorbed by about $40 million. I know we've said working capital will be neither a source or a use for 2024, but we do have some Goodyear Forward work streams that will help us offset that, particularly around procurement.
Then it comes down to -- and it was your question, James. What it comes down to is what you want to assume on volume, price and mix for the rest of the year. I think if you look at Asia Pacific, we have been seeing steady growth of mid-single to high single-digit in our consumer replacement business.
If you wanted to model that Q2 through Q4, I think that would give you another $35 million or so on volume and unabsorbed. And then you get to the mature markets, where you have to balance the lower volume growth environment, call it up 1% or so, against the declining raw material environment and what you think that means for our price/mix.
[Operator Instructions] We will move next with Emmanuel Rosner with Deutsche Bank.
Congratulations, Mark.
Thank you.
So Christina, I appreciate all the good color around the walk. I frankly didn't have a chance to put it all into my little calculator at the back in real time. So just trying to understand maybe in terms of bottom line versus your view in November, I think when you presented the plan to all of us, I think your high-level view at that point was that we're exiting 2023 with a fourth quarter margin of 7%, which you clearly over-delivered on.
So let's, call it, like -- at the time, you said $1.4 billion sort of like annualized SOI. And then on top of that, we can have net cost savings of about $100 million. So that's the gross savings minus the inflation.
And so you were sort of, I think, suggesting that like 1 5 is something that is potentially a reasonable target. What does this year look like now that you have all the other puts and takes in place versus what you were describing a few months back?
Sure, Emmanuel. So tracking back to our November 15 announcement, you're right. We said that the run rate of the business exiting the back half of the year felt like about 1.4. If I look at it today and adjusting for the first quarter seasonality, we do have a big step down in Q1 always because of -- we generally sell about 4 million units less in Q1 than we do in Q4.
We also dragged in some inefficiencies from the holiday shutdowns into Q1. But what I would say on top of all of that, we do have to absorb about $60 million in OE RMIs that aren't in the run rate. So on a run rate basis, I would start -- knowing where we've closed at the end of the fourth quarter, I would start our run rate at 13 50.
And then we know that we have the positive of Goodyear Forward of $350 million. We have a negative inflation of $135 million. And then outside of inflation, I articulated on the year-over-year walk just a $75 million headwind in the second half, driven by higher insurance premiums, and then some of these manufacturing inefficiencies related to our recently announced factory shutdowns in EMEA. So those -- that's new news.
And then against all of that, again, that $60 million in OE RMIs that we're going to absorb, that's weighted to the first half. It's even more weighted to Q1. And then that leaves your assumptions on how you want to build volume on top of that, Emmanuel. So hopefully, that gives you some clarity around the run rate.
Sorry, the -- just to clarify, the changes versus -- sort of like the new news, I guess, versus the -- the November framework is a little bit of a lower run rate, call it, like $50 million as an exit run rate. And then sort of like this $75 million headwind in the second half. And then any assumption on price/mix volume. Is that it? Or did I leave something else?
Well, yes. I mean I would say OE RMI, we knew back in November. And when I answered the question, maybe in November, we said we have to come back in February and lay out our guidance for the full year. And so OE RMIs are certainly a piece of it. Insurance premiums are a headwind against the run rate, and then we have these transitional manufacturing costs as part of the recently announced closures in Europe.
Okay. And then on the cash side, so the CapEx was guided to, I guess, quite a bit higher than it's been recently, I think, $1.2 billion to $1.3 billion. I don't remember it being sort of like a piece of the plan.
Can you maybe just elaborate on what this is sort of related to? And then conversely, I think the restructuring cash in the initial plan was going to be $600 million outlay in 2024. Now it's $300 million. What is this related to? Are there incremental efficiency or timing of spend? And does that impact the timing of savings?
Yes, sure. So I'll start on the CapEx question, and our guidance implies a $200 million increase at the midpoint to support new programs. We've given a range here. What I would say is if you assume a weaker environment over the course of 2024, we'll find ourselves at the lower end of that range. And at the higher end, in a more constructive volume environment, and that's typically how we've managed our CapEx spend historically.
The step-up is really driven by 2 different new programs in the Americas to drive mix up. One is a factory modernization. One is a factory expansion and modernization going to convert about 9 million units from LVA to HVA, and that will be at its annualized run rate by the end of 2025.
And then another -- I mentioned an expansion, that's going to add, call it, $2.5 million of HVA capacity for us in annualized run rate by the end of 2026. So getting the full year benefit of that in 2027.
The second question on restructuring. The guidance, as part of the November 15 announcement, was $1.1 billion. We didn't save it for you. What we've announced up until now is $750 million. And just based on the timing of the factory closures that we've outlined, $300 million of that falls in 2024, $350 million of that falls in 2025 and the remainder in 2026. So it does feel like timing, Emmanuel, versus maybe what you had written down to start.
Okay. And you're talking about the spending here, the cadence you just gave?
I'm sorry, Emmanuel. I didn't quite hear you.
The $300 million, $350 million and then the remainder, this is the timing of the spending?
That's the timing of the $750 million of announced restructuring.
Thank you. And this will conclude our Q&A session as well as our conference call. Thank you all for your participation, and you may disconnect at any time.