The Goodyear Tire & Rubber Company (GT) Earnings Call Transcript & Summary

Well, hi, everybody. Thank you very much for joining us for this session with Goodyear as part of Deutsche Bank's Global Automotive Conference. My name is Emmanuel Rosner, and I'm the senior U.S. autos and technology analyst at Deutsche Bank. Goodyear is one of the largest tire makers in the world. It recently completed its acquisition of Cooper Tire and started the process of integration. We're very pleased to be joined today by Darren Wells, who is EVP and CFO of Goodyear, to discuss this latest development as well as anything else that's been going on in the industry and with Goodyear. The format for this session will be some short introductory remarks from Darren, followed immediately by questions from me and from the audience. If you have any question, you can enter it on the left side of your window, and I will try and weave them into the conversation. So with that, Darren, thanks a lot for being with us today. And would you like to share your views on how things are going for Goodyear and what's top of mind for you?

Okay. Now first of all, thank you for the opportunity to be here today. It feels like a good opportunity to be able to provide investors a little bit of an update here, as we get toward the end of the second quarter. We've had really good momentum in our business in recent quarters and in the industry generally. And I think we feel like that momentum is continuing. I thought I might take the opportunity though today to provide a little bit of insight into how the business and industry have evolved over the last couple of months, yes, since our last earnings call as well as, I guess, updating on the closing of the Cooper transaction. So I guess maybe that comes first because it seems appropriate to mention that we closed the acquisition of Cooper beginning of last week and feel very good about getting the combination completed so quickly. So that it was only 15 weeks between announcement and closing. And that puts us in a position to, I guess, eliminate a lot of the uncertainty that teams go through when there's a transaction like this that's being conducted and now gives us the opportunity to be on the inside working through the opportunities that we are very comfortable are there for improvements in the combined business. So we've reiterated as part of our announcement last week, our expectations on synergies. And we've learned obviously a lot more since the announcement, and it's continued to build on our confidence that we can get the core synergies that we announced, which is $165 million of cost synergies by combining the 2 companies, $250 million cash from working capital as well as some significant tax benefits. And the -- certainly nothing we've learned since the announcement has given us any concern about that. I think we're feeling very positive about it as well as feeling positive about things that we might do longer term as we look at potential growth by leveraging each of our distribution channels and potential efficiency from looking at the combination of our 2 manufacturing footprint. So I think those things will take a bit more time, but there are certainly things that we continue to be very excited about. Yes, I think the integration process generally is going well. But I think we also realize that right now in the North American market both businesses are struggling and doing everything they can to keep up with customer demand. And first and foremost, we are focused on making sure we don't disrupt any of the business of our customers. So both teams are focused on continuing to deliver our plans for this year, making sure that we're getting as much production and as much support out there for our customers as we can. Yes, I think the significant benefits we're going to see are going to be there. I think 2022 is going to be the year where a lot -- we'll start to see some of this -- those significant improvements. But I think between now and year-end, there's a lot of planning to do and still a lot of volume to deliver for 2021. So, yes, that's where we'll be focusing and making sure that we don't do anything to disrupt the very good momentum that both the Goodyear and the Cooper businesses have. So I think that's good. Second, I think we continue to feel very good about our business performance. And now I'm probably referencing the Goodyear standalone business performance because we've had really good progress on market share, a really good progress on product mix over the course of the last few quarters and really good progress offsetting the impact of increasing raw material costs. And I think that's something that we continue to see. We've announced some additional price increases recently on the Goodyear side. So effective June 1, our consumer replacement business, we announced another update percent price increase. That was on the heels of up to 8% that we announced for April 1. So continued momentum there, which we need in order to address the raw material cost impact that we're going to see in the second half. In addition to that, we've also announced up to 12% for our commercial truck business effective July 1, which is obviously a very substantial cost -- very substantial price increase for our commercial truck business, which continues to have very good momentum as well and seeing a lot of very strong demand. And we've seen some additional pricing in our European business as we published our price list for the winter tire market. And that was something that we had not seen much winter tire pricing at the time we did our first quarter earnings release. So we knew we had seen some price increases in Europe on summer and all-season tires early in the year, but winter tires for next season were an uncertainty. Now we've seen some of that. And both for us and for others in the industry, we've seen some price increases in winter tires, which I think is important for us as we look at the raw material costs that are coming in the second half. I can also say, I guess, now -- as of this week, I can say that our Cooper business has also raised -- had a couple of price increases announced during the quarter. First, they had up to 8% in -- at the beginning of May. And then we have also announced an additional increase of the same size for the beginning of July for the Cooper Tire business. So same sort of dynamic and similar sort of increases there, as we all look to make sure that we're offsetting raw material cost increases that have been developing over the last several months. So we've got a lot of positives going on there and I think things that we feel very good about that continue our momentum. I will get a couple of balancing comments. I think we do see some volatility in volume. And certainly, that's been the case with original equipment production. So OE production schedules have been changing. And generally, our OE volume has come down a bit because of the changes that the OEs are making in production schedules to reflect the supply of semiconductors. So generally supply chain issues there. And we've been affected by that also. I think we feel very good about our market share in OE, which has been recovering, but the industry volumes themselves have not been as robust as we might have hoped for. We've also had some disruptions in certain of our emerging market businesses based on industry volumes driven by COVID shutdowns. So there's a few examples there. I think India is a very significant example for us of a market that's really experienced some tough conditions and has clearly had an impact on volumes. So as a result, I think our outlook for volume in the second quarter may have moderated a bit versus how we were feeling when we did the first quarter earnings call. But otherwise, not a whole lot of change in our outlook items relative to April. So I think we've continued to feel a lot of that same momentum, and we've seen many of our markets continue to go from strength to strength. So markets that we have experienced strength in remaining very robust. And that -- the replacement business in the U.S. and in North America certainly falls in that category. The commercial truck business in the U.S. and Europe falls in that category. The replacement business in China clearly falls in that category. So we've got a number of our most significant businesses that continue to be in markets that are very strong. And obviously, we feel good about the fact that the additional businesses that we get with the Cooper acquisition are focused in the North American and Chinese markets, which are our markets where we're seeing a lot of that strength. So that makes it feel like those are good places to be increasing our scale, so to speak. So I'm feeling good about that. Maybe just a couple more comments. I think as a general matter, we are still working very hard to keep up with demand, and that is first and foremost priority in our businesses, including in North America and in China. And so our inventories remain leaner than we'd like them to be. I think in the North American market, we see the -- say, the channel inventories probably also leaner than our channel partners would like them to be. And this is at a time where we're seeing a recovery in miles-driven. Yes, so we've had good consumer sales, so good end-user demand even before we saw miles-driven recover. Now we're seeing miles-driven recover. So I think that is -- that bodes well for a continuation of the strength in the replacement cycle in North America. So a lot of key strengths in our key markets, a little weaker volume in OE and emerging markets. And, yes, I guess, we'll have a chance to provide further updates tally to these markets are evolving once we get to our second quarter earnings release, which we would now expect and maybe make a note that probably going to come a few days later than it normally would, given that we have to go through the work of consolidating the 2 companies for this release. So that's likely to be a late -- an early August release rather than late July for us this year. But we'll be able to give some more updates once we get through the next few weeks. So Emmanuel, hopefully, that gives us a reasonable starting point for our conversation. And maybe then turn it over and see where you want to take questions.

Yes. Awesome. Thank you very much, Darren, for the overview and way more than the starting point, so very helpful. So I guess just coming back to a few of these points. So first on the impact from the semiconductor shortages, so far in the quarter, I think in your case, you had indicated that the lower OE demand could actually result in positive mix as you feel more profitable aftermarket orders. I wasn't completely clear from your earlier comments when you're saying maybe a little bit less volume than expected. Is that -- was that sort of like an OE comment, an aftermarket comment? And what does that do to that mix dynamic?

Yes. So the mix dynamic is clearly a factor for us, and particularly in North America where we are most -- where we do have the most significant supply constraints. So by having fewer OE tires to ship in North America, we were able to ship more replacement tires, and there is a margin benefit for that. So I think that is a real positive. In Europe, not as clear because the supply situation in Europe is better. The supply constraints aren't really the prominent factor for us there. So to the extent we lose some volume in the OE business in Europe may not be the same opportunity to offset that in replacement. So that is an area where we feel a little bit of the impact of lower volume. And then in our emerging market businesses, which is to the extent there are additional COVID shutdowns. I mean that's an effect on the replacement market as well as some cases the OE markets in those emerging market countries.

Understood. What's your latest view about the impact from higher commodity costs for the year? And to what extent can that remain a large factor in 2022?

Yes. So I think the -- so let me go through -- when we did our earnings announcement back on April 30, we provided at that time a view that if -- at-then-spot prices for commodities, we'd be expecting a cost increase of $325 million to $375 million, net of cost savings in our raw material line this year. So I'm going to -- I'll try to shortcut this a little bit. With the changes that have occurred since that April 30 call, which has primarily been a little bit of further increase in market prices of the petroleum-based inputs and primarily synthetic rubber, I would say there has been a slight increase in raw material costs. There has been, though, some offset to that in currency movement. And in the end, we still feel like we are within that $325 million to $375 million range. But we're probably a little bit higher in the range than we thought we would be if we go back to April 30. So I see that as movement within the range. I think the question of 2022 is still in front of us. I'm not going to try to quantify that. I think there's still a lot of uncertainty as what's going to happen with market prices as we start to catch up on supply. And as we see how miles-driven start to play out, I think there are different directions that, that could go, but I think sort of irrespective of where commodity prices head from here through the end of the year, I think it's ultimately a positive thing that we have developed a pattern of pricing that's allowing us to offset the impact as it comes. And we haven't seen quite this type of pattern since 2010, 2011. And it was -- once that pattern was established, then it did put us in a better position to stay on top of raw material cost impacts that were coming at us.

So when you reported the first quarter, you said that about half the cost of the inflation could be offset by price increases that you had already passed through then, which included some on April 1. Since then, you've announced a few other ones, which you just mentioned in your opening remarks. Is that enough to fully offset this year's impact yet?

Yes. So we're getting closer for sure. So I think we feel good that we've gotten some additional pricing actions into the market. And I think the pricing actions that we've taken have obviously stuck because we -- otherwise, we wouldn't be able to continue the process. I think that there is still work to do. And I think part of the reason there remains work to do is the fact that the -- our OE adjustments for raw material cost tend to come in a significant lag and tend to only be partial recovery, which means that we're still not where we need to be in terms of our OE profitability. I think for our replacement business, and particularly our replacement business in the U.S., I think we're -- we feel like we've made a lot of good progress. So I don't think the work is done, and there is still some of the level of challenge that's yet to be determined based on how the oil-based commodity prices move from here as we go through the third quarter. So there's still some uncertainty. But I think certainly progress since April 30. Still some work to do in order to make sure that we are able to fully offset the cost increases we see in the second half.

Okay. That's very clear. What impact are you seeing in the market from the higher tariffs on Asian imports? And is your overall exposure somewhat different now that you're absorbing Cooper?

So, yes, I think that generally tariffs are not a significant factor for us. Historically, in the Cooper business, there was some impact in the commercial -- in the commercial truck business because of supply that was coming from China and the tariffs that were applied to commercial truck tires coming from China. And there have been some actions taken by the Cooper team to address that. But beyond that, there's really not a lot of direct impact of the tariffs to us. There is obviously some indirect impact and that we feel like there's been a lot done here with the tariffs to level the playing field in the North American business. I think generally, that is a positive for local producers. And, yes, I think we are seeing the financial impact of the tariffs along with the financial impact of rising commodity prices and rising transportation costs, all work their way into the market. And I think that is ultimately coming through in the economics in the lower tiers of the tire market. And I think we -- as it has done in the past, I think we would expect it to have a significant impact different than in the past. Yes, I think we expect it to be a more persistent, longer-term impact because there -- in the past, there might have been opportunities to move production to other geographies. Not real -- there are a lot of other options right now. So there still continues to be, I think, strong supply and strong import volumes into the U.S. from all of those markets, but they're obviously coming in with a different economic profile than they have historically.

Understood. So switching over maybe to some of the other dynamics, you recently began recapturing some share previously conceded in the past quarters within the consumer replacement tires. Can we expect this to continue? And what are the main drivers here?

Yes. So I think there's 2 different areas where we're recovering share and for different reasons. But in the North American market, a lot of the share loss that we experienced during COVID was a result of Walmart having shut down their auto care centers. And that is a very large distribution channel for us. We are -- we're the category captain. So we are the ones that are most impacted by the fact that they went through that shutdown. And I think we said at the time, and I think we always felt that we would recover that volume once the Walmart reopened the auto care centers. That has happened and that share recovery is occurring. As additionally assisted by the fact that we did some work to grow our volume in some other channels during that period of shutdown and that growth in other channels continues to help us now as well. So there are some other retail channels where we extended our strength, and we feel good about that. And I think both the recovery in Walmart and our expansion into other channels are both things that will position us well going forward. So I think we're feeling very good about the progress we're covering that market share and moving back toward our pre-pandemic levels. In our European business, it was a different impact. It was -- it wasn't third-party decisions, it was our own decision. So we went through a decision to rationalize our distribution channel in Europe, reduce the number of distributors that we were working with and focus more of our work with distributors that were dedicating more of their efforts and assets to our brands. And we knew that we would lose some volume in transition that we would then recover. And we did lose volume in transition. That volume loss probably exacerbated by the fact that we were doing in the middle of COVID, which was not the original plan, but our team stuck to their guns, which I think was the right thing to do. We are now -- having come out of COVID and having gone beyond that transition, we are recovering volume that was lost last year. And importantly, we are also getting better value for our products in the marketplace. And our aligned distributors are in a position to grow their profitability with our brands, which then encourages them to continue to focus on our brands and making sure that they're providing the service that we need to provide to retailers that serve consumers. So I think we're feeling very good about that. The volume is coming back. Our market share is recovering. In Europe, we do see that as a process that will take place over 3 or 4 years with a combination of volume recovery and margin improvement that comes from getting the right level of distribution serving the marketplace. So I think we're feeling very good about that. There are other market share stories around the world. And I think like China and India are both places where we've continued to expand our distribution and take some actions to make sure that, that distribution was appropriate for those markets, also seeing a lot of success there.

All right. That's great to hear. Your first quarter SOI was already above 2019 levels, despite volumes being still 8% below then. Is this sustainable in an environment of rising raw material prices? And if so, where do you think Goodyear margins could recover to in the midterm?

Yes. Yes. So I think you probably heard me say in the past, and I'll say again today that I think generally we're expecting to be able to get our margins back above 8% in the near to intermediate term, and that's sort of our first stage. And that puts us in a place where we are comfortably adding economic value. And then we can start to look beyond that. I think we feel good about our ability to get to that level. And we are -- while certainly we need to continue to offset the impact of rising raw material costs, we feel good about the momentum we have in doing that right now. And in fact, we also feel good about the fact that as we look through the first half of this year, we have been able to recover some of the margins that we lost during the 2017-2018 cycle of raw materials. And that's part of what it takes to rebuild our margins back to adequate levels. So I think we're feeling very good about that. And we feel good that we're getting back to those 2019 levels, and we still have a lot of the volume recovery ahead of us. And we have that volume recovery with a better factory cost structure given the restructurings that we're doing in the factory. And we have the coming benefits of things like the aligned distribution initiative that we have in Europe. So they're still feeling like we have some things that are going to help us continue to grow our margins, both in the distribution end of the business and our production. Yes, so I think that gets us to that 8% area. I think the question for us and the drive is to think about what it takes to get ourselves back to double-digit margins. And we see a lot of opportunity, as we combine Goodyear and Cooper to take cost out. We see a lot of opportunity to improve working capital, deliver some additional cash flow. But we also see opportunity to deliver additional growth and potentially think about how to leverage our combined manufacturing footprint to help address some of the increased complexity that we see in the market and try to build a supply chain that is more flexible and better able to react to market demand. So I think we -- there are some near-term opportunities that are very big. I think we see some longer-term opportunities there that should be margin accretive as well.

Understood. Let's switch focus to Cooper. You closed your acquisition last week. You indicated at the beginning of the call that you feel very good about the synergy targets that were communicated initially. Can you talk to us about the midterm opportunity from -- that were not in there for manufacturing and distribution?

Yes. So I think -- and there's still a lot of work to be done in order to plan those types of business changes. And in the near term, we're very focused on just making sure we're delivering for our customers for the rest of 2021. But I think that if we look at a potential growth, we are looking at the complementary nature of the Cooper brand and the Goodyear brand. And the fact that each of us have distribution channels where we have relationships that are really well developed. And I think that there are going to be opportunities for us to leverage the Cooper brand in parts of the world where we don't have an offering, a strong offering in that mid-tier and a strong offering like theirs in the SUV and light truck segment. So I certainly think there's going to be big opportunities for us there in China. I think there are likely going to be opportunities for us in other parts of Asia, in Europe, and in North America to make sure that we're leveraging our distribution in order to support the Cooper brand. I think there are also going to be opportunities for us to leverage the distribution relationship that the Cooper business has. And those may be relationships that we can use to help build the Goodyear brand. So I think there's opportunities on both sides there. And that's true in North America, I think particularly true in some of our overseas businesses. So that's going to be -- I think that's going to be very exciting for us to be able to come to market in those distribution channels with such a strong lineup in sort of the OE type tires, the very premium end of the market. And then a great powerful brand and a great product lineup in the replacement and more of the mid-tier. And I think you put those 2 together in the really strongly growing SUV and light truck segments of the market. And that's going to create some exciting opportunities. The factory footprint, I think a lot of the contemplation there is 2 things, is one, how do we leverage the fact that we now have more factories and questions around whether or not we can specialize the roles of some of the factories to reduce the level of complexity that each factory has. And that increase in complexity, that's been something that we've talked a lot about it, and how the broader array of products and the greater degree of technology in those products has tended to have the effect of slowing down production and reducing the practical capacity in our factories. By looking at having differentiated roles for different factories, I think we are thinking through whether or not we can start to offset some of that. That by itself would be pretty exciting. I also think it's great to have a larger number of facilities to look at as we think about where expansions -- expansion investment should take place. And obviously, Cooper brings with it some locations that are clearly candidates for expansion for more high-end tire production. So that's going to be a benefit. And that may be a benefit in manufacturing cost. It may be a benefit also in efficiency around CapEx. So making sure that we can get the most out of the CapEx dollars that we're investing. So I think some exciting opportunities there. I also think there is another area where there are things that the Cooper team do very well in the way that they organize themselves to serve their customers in the market. And I think there are going to be opportunities for us to learn some of those lessons on the Goodyear side. So I think each of these teams is -- and when I say integration is going well, I mean part of the reason I reflect that is in listening to the conversations that our joint teams are having and listening to people on the Goodyear side, reflecting on the things that they're learning and reflections they're having after understanding how the Cooper team approaches things and vice versa. So both teams are having a level of reflections. And obviously, that was something that wasn't as possible until we started working closely together and getting to closing. So I think that's only going to increase as time passes.

Great. Let me just squeeze 2 more quick ones maybe. The first one, when would you expect to start generating more meaningful free cash flow and deleverage the balance sheet?

So deleveraging the balance sheet is going to be very high priority for us. As we've talked about the Cooper acquisition, we're pleased with the fact that the acquisition itself was somewhat beneficial and then our leverage post-acquisition is actually going to be modestly better than pre-acquisition. So I think that was already a positive, but we're focused on getting our net leverage, which would have -- at the point of acquisition would have been closer to 4x EBITDA, getting that down below 3x within a couple of years. And that is going to be facilitated by the fact that we do feel like we can generate free cash flow. And even Goodyear on a standalone basis, if we set aside the onetime working capital build or rebuild this year, the -- our pre-pandemic earnings, which, as you pointed out, we've been ahead of, would have put us at a level of EBITDA that could cover all of our other cash outflows this year other than that onetime working capital rebuild. So even just getting to the 2019 levels puts us in a level of kind of breakeven from a free cash flow perspective. So as we start to take our earnings above 2019, and that's both from further volume recovery and from some of the things that we talked about that we'll be improving our margins. We will start to generate cash over and above what we need for the immediate cash needs of the business. And so there should be cash flow available to help us pay down debt and improve the balance sheet and start to work our way toward the leverage targets that we've set out. So I think we feel good about that. We feel that's a fairly near-term event. And certainly, I feel like we've got an opportunity to make significant progress over the next couple of years.

Great to hear. And then maybe just a very final one. Topic of electric vehicles. I think maybe a year or 2 ago, you were highlighting some above-average market share that you have in EV OE tires. Is that something that has continued? What's the opportunity there for you, both in terms of better content and better market share?

Yes. So I think the advantages that we feel like we've got in electric vehicles are still very relevant 2 years later. So I think we are feeling very good about that. And there are a lot -- 2 years ago, a lot of the successes that we were having on electric vehicle platforms were coming in Asia and in Europe. Now there are increasing number of electric vehicle platforms in North America. And so some of the benefits that we can bring to bear are starting to be more and more relevant here. I do think that those benefits, which come from our ability technically to handle the greater strains on the tire in an electric vehicle platform while also addressing the need for lower noise levels, greater range and effectively addressing the need to reduce weight in any way possible, which we can do through sealant tires as an example. I think all of those we feel like are advantages. And obviously, when those type of technologies are being brought to bear, there are a lot fewer competitors in the market. And so we feel like that, that provides us an advantage. And I still feel very good. I mean, we saw in the first quarter that nearly 1/3 of the fitments that we won were on electric vehicle platforms. So it's getting to be a larger and larger part of our OE portfolio as we look at what we're going to sell over the next 2 and 3 years.

Great to hear. Darren, thank you so much for all the insights today, for the update. Thank you for joining us. And thanks, everyone, on the line for joining us for submitting your question. Next up, we have the CEO of Daimler starting in exactly 1 minute. So Darren, thank you so much again.

All right. Thanks, Emmanuel.

Thank you. Bye-bye.