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

Good morning. My name is Ashley, and I'll be your conference operator today. At this time, I would like to welcome everyone to Goodyear's Fourth Quarter 2022 Earnings Call. [Operator Instructions] Today on the call, we have Rich Kramer, Goodyear's Chairman and Chief Executive Officer; Christina Zamarro, Chief Financial Officer; and Darren Wells, Chief Administrative Officer. During this call, Goodyear will refer to forward-looking statements and non-GAAP financial measures. Forward-looking statements involve risks, assumptions and uncertainties that could cause actual results to differ materially from those forward-looking statements. For more information on the most significant factors that could affect future results, please refer to the important disclosures section of Goodyear's Fourth Quarter 2022 Investor letter and their filings with the SEC, which can be found on the website at investor.goodyear.com, where a replay of this call will also be available. A reconciliation of the non-GAAP financial measures that may be discussed on today's call to the comparable GAAP measures is also included in the investor letter. I will now turn the call over to Rich Kramer, Chairman and CEO.

Great. Thanks, Ashley. Good morning, everyone. Thanks for joining us today. We released our fourth quarter investor letter after the market closed yesterday that we received very good feedback from investors on both our letter and our Q&A call format following our third quarter release. So as we did last quarter, we used this time again to focus solely on your questions. Now just before opening the line, I want to acknowledge, as you've heard earlier, that both Christina and Darren are joining me on the call today. As you saw with the announcement in December, Christina became our Chief Financial Officer as of January 1, replacing Darren, who's moved into a new role of Chief Administrative Officer. Congratulations to both of them. And again, they're joining me here. I'm excited to continue to partner with both of them in their new roles. And given the transition, Darren is joining us on the call today, but Christina and I will take the lead in responding to your questions on these calls as we go forward. So with that, Ashley, let's open up the call for the first question.

So we will take our first question from Emmanuel Rosner with Deutsche Bank.

I agree with the feedback on the call format. So very much in favor of it.

Thanks, Emmanuel. We appreciate the feedback and Christina pushed this that way. So well done. We appreciate that.

Great. First question maybe. I think last year on the same time, I think you had helped us out with sort of like framing, sort of a base case scenario for what could happen to free cash flow for you guys for the full year ahead under certain conditions. So would you be able to go into this discussion for 2023? Obviously, I appreciate all that in the slide. I was just curious, knowing all you know, what does free cash flow look like for you?

Sure. So Emmanuel, this is Christina. And let me start by saying thank you for the comments on the investor letter, and I have to send out thanks to our team. This has been a great push by our Investor Relations team, FP&A, our controlling team, all to put that together. And again, we've received really great feedback on that. As far as free cash flow in 2023. And if you look through the drivers we've laid out as part of our letter, and if you were to take the assumption, and so just stay with me on the assumption, if you were to take the assumption that our EBIT was going to be flat in 2023 versus our EBIT in 2022, which was about $1.1 billion. You should get to a level of free cash flow in the range of about [ $400 million ], and that's just reflecting the year-over-year improvement in working capital. Emmanuel what I'd add to that is it's not that we're targeting flat earnings. Our goal is to improve earnings. And after a really tough setup in the first quarter, as you've read in the letter, the trajectory should improve meaningfully as we move through the remainder of the year. In the second quarter, our goal is for Segment Operating Income to approach 2022 levels with volume stabilizing and given lower year-over-year raw material cost increases that we're expecting in the second quarter. Assuming a relatively stable economic outlook, then we would begin to see the benefits in the second half of higher volume on either comparables, strong growth in Asia Pacific, driven by a recovery in China and lower inflation levels than we're expecting in the first half of the year. We would also expect the benefits from our recent cost actions that we've announced and then, of course, at current spot prices, tailwinds in our raw material costs. Historically, this has been the time in the cycle where we've seen growth in earnings and growth in our margins as well.

Okay. That's helpful. And then I guess following up on some of the pieces of the free -- I guess, of the free cash flow guidance, the -- so I think CapEx was guided at $1 billion for 2023 as this compares to maybe $1.2 billion, $1.3 billion framework that you've discussed previously in terms of the investments you need to make in growth. What is enabling you to sort of keep it around the $1 billion? And is that roughly sort of like just maintenance CapEx? Are you cutting back at -- I guess where are you cutting back?

Yes. Good question, Emmanuel. And so what I would tell you is, as we went through 2022, we did scale back our plans for capital expenditures just given the outlook for the global macroeconomic environment. As we look at 2023, we expect to continue to invest in the Americas and in Asia Pacific, although investment levels in EMEA will decline just given the current macroeconomic outlook there. We continue to allocate capital to high-return projects that will improve our overall competitiveness over time.

Yes, Emmanuel, I'll just jump in to echo Christina's points. I think we take a lot of time to go through those capital plans. And we've worked through a lot of cycles. And I think you can count on us to adjust CapEx to the environment we're in. And then when we do that, we really don't shortchange ourselves on what we see as long-term growth projects that we have to do. So we're comfortable with what we spent. And I would just tell you, even if you see things like things that we did at CES around intelligent tire and around sustainable tire, they are projects, growth projects, industry-leading sort of technological projects that we're going to continue to move forward within the capacity of the spend that we have, and we feel comfortable knowing how to do that.

Okay. Yes, I appreciate the color. And then just very finally, I guess, since you're mentioning the environment. Can you maybe just provide a little bit of your perspective on some of the drivers of this market's demand weakness that seems to be across every region -- every major region? I guess what is driving this? How would you see that potentially evolve through '23 on the demand side? And then any implications for -- how you think about pricing?

Yes, I think a lot there. Maybe I'll just start with the Americas. We did see a weaker market in the fourth quarter, and we see a little bit of slowdown coming into Q1. We reacted not only to the Americas, but Europe as well, as you saw in our investor letter by taking production down with that focus on making sure we don't have excess inventory in a bit of a slowing market and to focus on cash as Christina went through. But Emmanuel, as I think about the Americas going forward, you also saw in our letter, we saw that our channel inventories are up about 10%. But what I would tell you is that's pretty healthy. I mean our distributors are really rebuilding their inventory. We didn't see any buy ahead, let's say, in anticipation of any price reductions or anything like that. It's a pretty healthy place. And I would say, in line with the expectations of where the market is going in '23. So we feel pretty good about North America, little slow to start, but I think we have a stronger second half coming. A little slow to start because we're bringing some of those costs on the balance sheet of unabsorbed inventory into the first quarter as well. But we feel pretty good about the demand picture. Sell-out was about flat in the fourth quarter and year-over-year in the fourth quarter, and we don't see any big changes going into the year. Europe, I think a little bit different story. Obviously, a bit tougher there. I would take a step back and say we feel really good about the initiatives we've put in place in Europe. Aligned distribution is working. Our -- in the quarter, we got volume. We got price mix ahead of raw materials again, and we had share gains in a down market across the board for, I think, the 11th or 12th quarter in a row. So things are working in Europe. We also, as you know, took a lot of actions there to get our costs in line. I would say we feel really good about those things. But obviously, in Europe, we've seen big energy inflation in Q4 driven by the war. And we saw in the anticipation of these high energy costs really sort of reduced consumer demand out there as we saw really weak markets in the consumer replacement business, particularly in November and December, where we saw a consumer base thinking about big energy bills, and the channel sort of slowing down on wanting to buy more inventory. So Europe is a different case. We know that's going to continue for a little bit into 2023 first half, especially second half, again, as Christina said, will be better. And we're taking the appropriate actions to make sure we don't build excess inventory, make sure we focus on cash and continue to look at more cost areas. And remember, in Europe, we've done a lot in terms of restructuring our footprint [indiscernible] full value. You saw we did in U.K. in [indiscernible] We restructured a business in South Africa, and we did some restructurings at some sort of add volume and get some more efficiencies in France. So we'll continue down that path. And then in Asia, and we'll particularly focus on China here, tough right now because of COVID, but we really see that reversing, and we see that reversing in our favor in 2 areas. One is the OE business, which was strong in the fourth quarter and will continue to be. We doubled our win rate in OEs in 2022 to about 70%. And we have a higher mix into EVs, a high EV win rate, a high luxury SUV and truck. Win rate as well with the domestic OEMs, the Chinese OEMs that's higher profitability and will create good pull in the replacement market. And as COVID sort of -- as we get through COVID, if I can say that's going to happen towards the second half, we see a big -- stronger pull in a mix up in replacement as well. And to get ready for that, we continue to invest in distribution in the key markets in China and India as well. So overall, look, we got to get through of Q1 first half, if you will, again, as we see some of this tumultuousness. But beyond that, we do see some upside and feel relatively good.

We'll take our next question from Rod Lache with Wolfe Research.

Two quick questions. First, are you seeing anything that would indicate anything other than stable pricing as you're entering this week -- this year just in the context of the weak demand? And can you clarify your expectations for the other tire-related businesses, has looked a bit soft in the fourth quarter?

Sure. Rod, from how we're looking, I guess, I'll say price mix and how we're looking at the raw material environment that's obviously related to that. You know that sort of the essence of your question is the earnings pressure and margin compression we've seen over the last quarters because of these escalating raw materials. That's true for Goodyear, true for the industry as well, and we need to recover that. I would tell you, our momentum has been very good. Our teams across all our businesses offset all the raw material headwinds with price and mix. And in 2 of the businesses in Europe not being one of them, we also offset some of the other cost increases we had as well. So the team has done a really good job. Now as Christina mentioned as well, we see this potential decrease for raw materials. And I would tell you, our plan is to capture the benefits of those raw materials and see that in margin improvements as we continue to capture our value proposition out in the marketplace. And I think, Rod, you know this well, having been with us so long, historically, in a period of declining raw materials, we're able to grow margins, we're able to drop through those benefits into the -- into our earnings. And I'd say we see that as still the plan and our way forward and what we're driving for. And also tell you what can help them is we also see the OE business coming back, which means they'll be a pull on the best capacity that the industry is making, and that's good for sort of a supply-demand equation out there as well as we think about how to manage the demand in the replacement market. And then finally, Rod, I'll just tell you, in terms of what we're seeing in the marketplace, we have not seen any decreased demand or trade down in our Tier 1 volumes at all. We've seen a little bit in Tier 2 moving toward the lower-tier brands. But I'll tell you, I'm not sure that's a trade down or a price issue as much as it is. All those sort of imported tires that were backordered and paid upfront in cash by the distribution, particularly in the U.S. I'm talking here that sort of hit the docks in the past quarters, that obviously drove the industry numbers. All that came, it came late, it was paid for. And so I think what you see is a lot of push of those tires to turn it back into cash. And I think that's a dynamic we're dealing with. But again, that doesn't really impact sort of our Tier 1 tires or the value proposition for those. So I hope that helps.