Q4 2023 Goodyear Tire & Rubber Co Earnings Call
Participants
Mark Stewart; CEO; The Goodyear Tire & Rubber Company
Christina Zamarro; Executive VP & CFO; The Goodyear Tire & Rubber Compan
Rod Lache; Analyst; Wolfe Research
James Picariello; Analyst; BNP Paribas
Emmanuel Rosner; Analyst; Deutsche Bank
Presentation
Operator
Good morning. My name is Nikki, and I will be your conference operator, and I would like to welcome everyone to Goodyear's Fourth Quarter 2023 earnings call. All lines have been placed on mute to prevent any background noise. For some opening remarks, there will be a question and answer session.(Operator Instructions). Today on the call, we have Mark 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. 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 the website, investor dot goodyear.com.
Well, 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 Steward, CEO.
Mark Stewart
Thank you, Nikki, good morning, everybody, and thank you for joining Christian and I this morning for what is my first conference call as a good your CEO. and just now over two weeks in my new role, I cannot be more excited to join this iconic company. As you guys can imagine, I am working diligently and quickly to understanding deep understanding of our business.
I'm 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 investment 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 as Stellantis were around the Company's North America operations and a key leader on the global executive team.
And 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 that on every level and working with the team to enhance capability and our cost effectiveness as well. Our focus on clean sheeting and should-cost activities, our SKU or 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 KPI.'s definition, the tracking and speed of execution for Goodyear for us, it's about maximizing our strength in our market position in North America is improving our cost structure as well as derisking our balance sheet.
Ultimately, I am confident Goodyear forward will drive our Company's next stage of profitable growth and success is clear, and I fully support the plan with that by now, you read our investor letter from yesterday evening, Christina and I like to get right to your questions so with that, Nick, let's open the line.
Question and Answer Session
Operator
(Operator Instructions)
Rod Lache, Wolfe Research.
Rod Lache
Please go Good morning, everybody up. Good to talk to you again, Mark, I understand, Mark, that you're just two weeks into it 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?
Mark Stewart
Yes, thanks. Thanks, Ron. Yes, I think what's clear is going back again to the very well thought out good your forward plan which was rolled out November 15th, right? And that is my focus is about streamlining the portfolio for us to get to sustainable operational margins of 10%, getting our net leverage to 2x, 2.5x by end of '25. And having that sustainable free cash flow, that's going to increase our overall financial flexibility.
So specifically, you know, it won't be two weeks in a day here and 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 at 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, right in a different light from the vast right. 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 this first 30, 60, 90 days to challenge what I think is coming in to get it to gain the understanding from our team also to get clarification of things that that maybe we can conclude into some quick win categories and areas that the learnings about half from the past as well.
So again, it really is about trying to keep that fresh look with a hard drive to execution. And it is about speed of execution it's about us delivering that good. Your forward plan. A couple of observations that I had in the first couple of weeks. Again, there's incredible momentum in the good your 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 run.
Rod Lache
Great. Thanks for that. And, just on the business, maybe Cristina, 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 good your forward plan yet.
So, the question just looking at the numbers just continues to be market share. And I know there's factors that affected in every region, but see even in isolation, just good years year-over-year volume performance wasn't great. So, I'm hoping you can maybe just talk to us a little bit about you think that there is market stability for Goodyear or is that kind of a work in progress? And in other words, do you think that even beyond good, your forward more realignment is going to be needed from to the portfolio?
Christina Zamarro
Yes, sure, Rod. I'll take it by region, and I'll start with the US and our fourth quarter replacement market share in the US in 2022 was here I have to characterize it right, is 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 US 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, you're looking at the volume decline, where I'd also point out to you is that our sell out share. So what's getting bolted onto vehicles 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 US, certainly with margins in excess of 10% and 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, right. I do feel that we've stabilized in the US compared to last year. Having said all that, we are the forward outlook for our mature markets, say, US and Europe. Rest of world growth for 2024, something like up 1% to 2% feels tougher in the first half than in the second half. And we know we also have recent declines in raw materials so that there's that to put into the calculus as well.
Now when we think about Amir, 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 is certainly falling pretty dramatically off its peak. It's also hurt in replacement where we do intend to be more profitable as you know, I think going forward, we see little downside risk until we are only forecast, yes, globally for 2024, something that feels a lot more forward or a lot more of them level, but we think about the consumer replacement market share in Europe.
What I'd say is you've lost a lot of market share since 2019 to imported budget brands. And they have grown as a part of the industry, about 15 million units since 2019. And 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 India, and that was all announced in the fourth quarter.
Rod Lache
So, just Christina, with that, once the restructuring is done in Europe, you would expect that business to be Morse defendable or more stable at that level?
Christina Zamarro
Yes. I mean, I would say on we will we're addressing the cost competitiveness with the 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. And so our margin performance, I don't think we'll get there by the end of 2025, but we're beginning the work or laying the groundwork.
We've announced the two factory closures. We've also announced a big SAG restructuring worth $100 million, and you will also get their fair share of the purchasing and some of the corporate initiatives that we're running as part of a good year for us. So, we do have a good path to earnings growth in the future. In Europe, banking is going to take a little bit longer than this two year plan period that we're talking about as part of your forward margin through.
Rod Lache
Thank you.
Operator
James Picariello, BNP Paribas. Please go ahead.
James Picariello
Good morning, everyone, and welcome aboard. Mark. Just on the restructuring the restructuring actions, the your 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 good your forward plan in 2025 for us to achieve that $1 billion plus exit rate. Just what does all that need to take place this year for for the for the timing to a needs to be maintained here in terms of the time line.
Christina Zamarro
Thanks again. So early on fiscal year forward program, $350 million on a full year basis, $50 million in the first quarter. You can think about that is and yes, a big step-up in Q2 and then a little bit of a leveling on the rest of the year. But then what I would say is still ramping onto the fourth quarter. As you can imagine, we're building into a run rate through the end of 2025 with all of these programs where I look at the asset sales, I say the the processes related to the sales of the three respective assets that we talked about on November 15th is underway and progressing as planned.
So we'll be back to you when we have significant developments and 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 it depends.
James Picariello
And maybe this is a question we could have we could answer off-line, but but if just for context, if no divestiture takes place this year, right, just for context, what would be the additional what would be the additional restructuring? Could your forward savings that would be in store for next year
Christina Zamarro
When we laid out the plan in November, James, we had said $350 million in year one and $750 million in year two.
James Picariello
Right. But what about under the hypothetical that the divestitures don't take place this year again, purely hypothetical. Just what would be the the incremental push to next year without that additional funding source for the additional Does that make sense.
Christina Zamarro
So, as of today, we've announced a restructuring of about $750 million as compared to the guidance of $1.1 that was in our November announcement so we said $300 million of that sits in 2024, $350 in 2025. And that leaves the remaining stuff in 2026 it much appreciated.
James Picariello
And then if I could just ask one more just on the full year, kind of a follow-up to Brad's question on just on a full year basis, would you be surprised if Goodyear's unit volumes were down for the full year or you've got the minus 2% for the first quarter. Just wondering if we could kind of established that parameters in terms of just expectations flat or up or down for the full year in terms of units thinks?
Christina Zamarro
Yes. I mean, maybe land, I'll take the opportunity to James to talk through a year over year as our yields and that will get you at least sort of how I'm thinking about volume, but I'll go through all the drivers of why does that make sense on a year-over-year basis, if you start with our 2023 as a way of $968 million, could you forward obviously Asset $350 million against base inflation of $215 million other costs. So these are costs in transportation and energy on a full year basis should be about flat. I do see right now a tailwind of $75 million in the first half is driven by transit transportation rates, but will 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.
And then separately on wood to blow now at full production, we should get a $50 million benefit in the second quarter on a year-over-year basis.
Then raw materials, we've said our $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 at levels are lower than what we need for optimal service level levels as a result of the tornado and are managing the business for cash last year that should benefit second half and absorbed by about $40 million. I know we've said working capital will be neither a source or use for 2024. So we do have some good year for and work streams that will help us offset that, particularly around procurement.
And 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 that would give you another $35 million or so on volume and on absorbed. And then you get to the mature markets where you have to balance this lower volume growth environment call it up 1% or so against the declining raw material environment and what you think that means for improvement.
James Picariello
Super helpful. Thank you.
Operator
Thank you. (Operator Instructions) Emanuel Rosner, Deutsche Bank
Emmanuel Rosner
Congratulations Mark. Good morning. And So Christiana, I appreciate all the good color around the walk. I frankly didn't have a chance to put it all into my little calculator. It sort of backing in real time. So just trying to understand medium term 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 look where exiting 2023 with a Q4 margin of 7%, which you know, clearly over-delivered on. So that's growth call it like that at the time you said $1.4 billion sort of like annualized. So I and then on top of that, we can have net cost savings of about $100 million. So, electrical savings minus the inflation. And so you're sort of suggesting that like one five, zero like some think that is potentially being a reasonable target. What does this year look like now that you have all the other puts and takes on inflation versus what you were describing a few months back.
Christina Zamarro
I'm sure you also tracking back to our November 15th announcement, you're right, we said that the run rate of the business and seeing the back half of the year felt like about $1.4. If I look at it today and adjusting for first quarter seasonality, we do have a big step down in Q1, always because, we generally sell about 4 million units less in Q1 than they do in Q4. We also drag in some inefficiencies from the holiday shutdowns into Q1. But what I would say, we have a lot of that we do have to absorb about $60 million.
Oh, we are mines that aren't in the run rate. So on a run rate basis, I would start knowing knowing where we closed at the end of the fourth quarter, I would start a run rate at [1350]. And then we know that we have the positive of good year forward of [350]. We have a negative inflation of [135]. And then outside of inflation, I articulated on the year-over-year walk to $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 India.
So those that's new news. And then against that, again, that $60 million in OE. our minds that we're going to absorb that's weighted to the first half and 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 that some clarity around the run rate.
Emmanuel Rosner
Sorry, the just to clarify the changes versus select the new news, I guess versus the home in the November framework is a little bit of a lower run rate, call it like $50 million as an exit rate. And then sort of like this a $75 million headwind in the second half. And then and your assumption on price mix volume, is that correct or evaluations and why IBM?
Christina Zamarro
Oh, yeah, unless we knew back in November. When I answered the question, it may or November, we said we have to come back in February and lay out our guidance for the full year until we our minds is 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 would go to grow and I guess quite a bit higher than it's been recently. I'm missing $1.2 to$1.3 billion that I don't remember it being sort of like a piece of the plan assets. Can you maybe just elaborate on why this is so related to And then conversely, I think the restructuring batch in the initial plan was going to be $600 million outlay in 2024 now $300 million. What does this relate to others 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 our guidance implies a $200 million increase at the midpoint to support new programs was given a range here. What I would say is and 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 and more 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 two different new programs in the Americas to drive mix up one, the factory modernization, what is the factory expansion modernizations going to convert about 9 million units from LVA to HVA, and that will be at an annualized run rate by the end of 2025.
And then another I mentioned expansion that's going to add, call it $2.5 million of HVA capacity for us in a wise run rate by the end of 2026. So getting the full year benefit? Is that in 2027?
The second question on restructuring on the guidance as part of the November 15th announcement was $1.1 billion. We didn't say that 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 of that falls in 2024, $350 of that falls in 2025, the remainder in 2026. So it does feel like timing, Emmanuel versus maybe what you had written down to start.
Emmanuel Rosner
Okay. And you're talking about the spending here, the cadence we just gave.
Christina Zamarro
I'm sorry, maybe I didn't quite hear.
Emmanuel Rosner
You look at the $300, $350. And then the remainder of this is the timing of the spending.
Christina Zamarro
That's the timing of the $750 million of announced restructuring.
Emmanuel Rosner
Understood. Thank you.
Christina Zamarro
Sure.
Operator
Thank you. And this will conclude our call Q&A session as well as our conference call. Thank you all for your participation and you may disconnect at any time.
