The Goodyear Tire & Rubber Company (NASDAQ:GT) Q1 2024 Earnings Call Transcript

The Goodyear Tire & Rubber Company (NASDAQ:GT) Q1 2024 Earnings Call Transcript May 7, 2024

The Goodyear Tire & Rubber Company isn’t one of the 30 most popular stocks among hedge funds at the end of the third quarter (see the details here).

Operator: 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 2024 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. [Operator Instructions] Please note this call may be recorded. It is now my pleasure to turn the conference over to Greg Shank, Senior Director Investor Relations. Please go ahead. Greg Shank Thank you, Nikki. Good morning and welcome to our first quarter 2024 earnings call. Today on the call we have Mark Stewart, our Chief Executive Officer and President; and Christina Zamarro, our Executive Vice President and Chief Financial Officer.

During this call we 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 slide 20 of the supporting presentation for today’s call and our filings with the SEC. These materials can be found on our website at investor.goodyear.com where a replay of this call will also be available. A reconciliation of non-GAAP financial measures discussed on today’s call to the comparable GAAP measure is also included in the appendix of that presentation. With that, I will now turn the call over to Mark.

Mark Stewart: Thank you, Greg, and good morning, everybody. Thanks for joining us. Yesterday, after the market closed, we published our first quarter results. As you’ve seen, we’ve updated our quarterly earnings format with a goal to enhance our process, provide information to the investors, which they’re most interested in. We are happy to take your feedback on our new format as we move forward. As we kick off with some reflections, I’d really like to begin today thanking the entire Goodyear team for delivering on our first quarter ahead of plan. We are fully engaged in executing the Goodyear forward and it is this level of momentum that is going to help us drive towards stronger results, stronger segment operating margins, and stronger free cash flow over the next couple of years.

I do want to point out that it’s not just what our associates have accomplished. It’s also about how they’re doing it. We are focused on a very clear set of KPIs to deliver the Goodyear forward, our operating plan, and we have the governance and accountability very clear through our chain. Through my first months here at Goodyear, it is clear our associates are committed to doing the right things and in the right way. This is why the company continues to be one of America’s top trusted brands. Since I joined Goodyear just over 90-days ago, it’s been inspiring to engage in discussions with our associates in our plants, at our retail centers, at our tech center and headquarter, and all of our stakeholders, as well as I’ve worked to dive deep into understanding the business and making sure that I’m laser-focused together with the team to execute our Goodyear Forward transformation, as well as the annual operating plan we have in front of us.

We turn to Q1 results. As we look at our results for the first quarter, we delivered segment operating income of $247 million ahead of expectations and nearly doubling our earnings from last year. This reflects a marked recovery in our America’s business, with SOI up $100 million from the prior year. Our Asia Pacific business also continued to see significant growth, both in volume as well as earnings. EMEA’s results in the quarter were relatively stable, providing a good base for us to grow. All that said, as we see our overall volume softness in the quarter, partly driven by weaker industry members selling volumes, partly due to the very specific actions we’re taking to increase profitability on low margin, low value-add products. This is a clear strategy of the Goodyear Forward plan, something that will help us to increase our margins over the next couple of years.

It’s a focus by product line, profitability and our product should cost analysis which I’ll cover more later. And at the end it’s always about our execution. Like we’ve seen over the past several quarters, global consumer replacement industry volumes continue to be influenced by growth in low-end imports in both the U.S., as well as Europe. This dynamic was captured as part of our first quarter outlook. As we look at what is happening at the retail level, industry sellout was up slightly in the U.S. and up about 3% in Europe. In our commercial truck business, and like we’ve seen over the last several quarters, a weak fleet industry condition continued to weigh on our business in the Americas, as well as the EMEA. For the Americas, while sellout conditions are stabilizing, the industry did see some pre-buy as a result of potential new tariffs on imported tires coming from Thailand.

With that said, we don’t see this incremental import activity as a significant headwind to our plan. As we turn to Goodyear Forward, we delivered about $70 million in segment operating income improvements during the first quarter. In addition to what we captured in the P&L this quarter, we are executing actions to drive towards our $1.3 billion planned earnings improvement as part of Goodyear Forward. In our footprint and plant optimization, we have put together very detailed plant-specific factory plans. Going to the work center level to drive factory efficiencies across our footprint, we are reviewing the details of these efficiency plans with our plant operating teams together with the leadership team on a weekly basis. In addition, I spent the last month visiting our manufacturing sites in the U.S. to support both these initiatives to get to know our teams and to get to know the folks on our production floor.

The work in our factories includes implementing improvements to drive increases in our operating equipment uptime, reliability, reducing the complexity in our factories, reducing the number of configurations, preparing to run several products on common product platforms, as well as rationalizing our materials. We are also working to reduce overtime and third-party contractor spend as we move forward. In addition, we’ve announced changes to our distribution strategy in Australia, three planned factory closures, two in Germany, one in Malaysia. In purchasing, we’re negotiating with our suppliers using clean sheet and shift cost methodologies and analytics, which are aided by tech advancements. We are implementing enhanced spend control standards and control processes to get to a deeper level of visibility, as well as very proactive management of our spend all the way down to the factory level.

Given that procurement plays such an essential role in the success of Goodyear Forward, I have elevated the Chief Procurement Officer role to report directly to me on the leadership team. In our SAG areas, we previously announced a reduction of 1,200 positions in EMEA. It will deliver $100 million in savings by 2025. In addition, we’ve also taken actions on additional 135 positions in the U.S. and LatAm during the first quarter. While headcount reductions of any kind are always very difficult decisions that we can make as a management team, they are in fact required for us to right size our cost structure and enable our long-term competitiveness as a company. In the supply chain and research and development, we continue to optimize for best cost.

As I mentioned earlier with respect to margin enhancements, we took actions in the first quarter to increase our price/mix on our lowest margin accounts. At the same time, we are also working to industrialize a number of new products to bring to market and the SKUs associated with that. In the quarters ahead, we’re going to broaden our product portfolio with increased premium Goodyear fitments for the high-end market as we continue to rationalize our portfolio and SKU count where appropriate. We continue to be very focused on the Cooper brand as well and continuing to grow in that area. Our retail store network in the U.S. turned in their best first quarter in five years, driven by advancements in consumer insight and the actions we’ve taken to improve our price and our mix.

Overall, as I reflect on the quarter, I am very encouraged with our execution. I’m excited about the improvements that we are driving for the future. And by now, I’ve been through the detailed makeup of the Goodyear Forward plan inside and out and can confirm that we have the line of sight to the $1.3 billion run rate improvements and 10% segment operating income margin by the end of next year. We’ll keep a close eye on the industry volume and price/mix over the next quarters to ensure we’re managing the external environment, while we execute our plan to drive value for our shareholders. Now I’ll ask Christina to take you through the first quarter financials in greater detail and we’ll move on to Q&A. Thank you. Christina?

Christina Zamarro: Thank you, Mark. I’ll start by echoing Mark’s excitement about the execution we’re seeing from our team on Goodyear Forward. With energy carrying throughout our organization, it’s clear that the combination of this plan, our team’s knowledge of the business, and their ability to drive results sets us up for success. I’ll begin with our financial results starting with the income statement on slide eight. Our sales totaled $4.5 billion, down 8% from last year, driven by lower tire volume and unfavorable price/mix. The unfavorable price/mix was due to the impact of two factors. First, a weak commercial truck industry on our mix and second, contractual price adjustments as feedstock prices have remained low over the last several quarters.

Unit volume was down 3% from last year. Overall replacement volume declined 7%, partly offset by higher OE volume, which increased about 9%. Segment operating income for the quarter was $247 million, up $122 million from a year ago. After adjusting for significant items, our earnings per share was $0.10, up $0.39 versus last year. The year-over-year drivers of our earnings are shown on slide nine. The impact of lower tier unit volume was $28 million, reflecting a decline in shipments of 1.4 million units. Factory utilization was a slight benefit. Segment operating income benefited from favorable net price/mix versus raw material cost of $127 million. Raw materials were a benefit of $261 million and price/mix was negative for the quarter due to commercial truck mix and contractual pricing adjustments.

The negative impact of price/mix was $134 million. Having said all that, sequential pricing from the fourth quarter was stable. Goodyear Forward initiatives contributed $72 million in the quarter with benefits driven by plant optimization and purchasing. Inflation in the quarter was $58 million or about 3%, which was partly offset by favorable other costs of $25 million, driven by lower transportation rates. Other SOI is primarily consist of the impacts from the fire in our Poland facility that occurred in August of last year. Turning to slide 10, net debt totaled $7.4 billion at the end of the first quarter, down just over $550 million from the same time last year. Cash flow from operating activities is typically negative in the first quarter as activity ramps up following the holiday shutdown.

Cash use decreased in the first quarter versus a year ago, given lower raw material costs in our inventory and increased earnings. Moving to our SBU results and starting on slide 12, America’s first quarter unit volume decreased 7% or 1.5 million units driven by replacement volume. These results are in contrast to the relatively strong U.S. industry in the first quarter, which was driven by an increase in low-end imports. Industry member volume, primarily representing large branded tire companies, was lower year-over-year. Segment operating income totaled $179 million, or nearly 7% of sales, reflecting an increase of $100 million year-over-year. America’s earnings benefited from lower transportation rates, the execution of Goodyear Forward, and from net price/mix versus raw materials, which more than offset inflation and volume headwinds.

Moving to slide 13, EMEA’s first quarter unit volume decreased 5% or 700,000 units driven by replacement. Like in the U.S., Europe’s consumer replacement industry growth in the first quarter was driven by imports. Our premium segment share remained stable versus prior year. Segment operating income was $8 million and flat from a year ago. Favorable net price/mix versus raw materials and Goodyear Forward actions were offset by volume declines and inflation. Turning to Asia Pacific on slide 14, first quarter unit volume increased 10% or 800,000 units driven by OE growth in China. Segment operating income totaled $60 million and 10% of sales with an increase of $22 million in SOI, compared to the prior year. Asia’s earnings benefited from favorable net price/mix versus raw materials, volume, and Goodyear Forward initiatives.

These benefits were partially offset by higher costs. Turning now to our second quarter outlook on the left-hand side of page 16, we expect second quarter global unit volume to be about flat versus prior year. I’ll note that this excludes the America’s replacement unit volume recovery related to last year’s tornado at our Tupelo facility, which I’ll cover in SOI other in just a moment. Additionally, we expect higher unabsorbed fixed costs of about $30 million, driven by lower production volume during the first quarter. Lower raw materials will be a benefit of about $160 million, partially offset by about $70 million of lower price/mix, driven by raw material indexed agreements. We expect Goodyear Forward to deliver approximately $75 million of SOI benefits during the second quarter.

Lower transportation rates will partly offset general inflation for net headwind of about $10 million in costs. SOI other items to consider include a net benefit of the recovery from the 2023 storm at our Tupelo facility and the continuing impact from the fire at our Poland facility. The combination of these events reflects a net benefit of $35 million in the second quarter. On the right-hand side of the page, our full-year assumptions are relatively unchanged from our previous call, although I’ll note we have increased our full-year outlook for Goodyear Forward given our first quarter performance and reflecting our confidence as we move through the execution of our plan. With that, we’ll open the line for questions.

Operator: [Operator Instructions] I will take our first question from James Picariello with BNP Paribas. Please go ahead.

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Q&A Session

Unidentified Analyst: Hi, everyone. This is [Jake] (ph) on for James. Congrats on a great quarter and congratulations, Mark. Could you guys just help me put a finer point on your full-year volume assumptions for Goodyear? If I work through the SOI bridge items you laid out, I guess something at roughly $1.4 billion for the full year, I just want to see if there’s any update on into that.

Christina Zamarro: Yes, hi. Good morning. So our full-year outlook on volume as we laid out in the presentation is to be slightly behind the industry in consumer replacement. That’s all going to be driven by our first quarter experience. And so when you look at the remainder of the year, what I would say, broadly speaking, is that we should be more in line with the industry. As we look at what’s happened over the past few quarters, we’ve seen a lot of the de-stocking that we needed to sell through in Europe complete. And in the U.S., in the first quarter, we were cycling through a really easy comp on the import side of the house. But as we move into Q2, we’ve guided relatively flat volume. And in the back half of the year, yes, of course, depending on your assumptions for industry growth, but we see growth in volume just given that the consumer sellout has trended positively here in the U.S. VMT up a couple of points, and Europe also up about 3% on the sellout basis.

And so hopefully that helps you with your modeling.

Unidentified Analyst: That’s very helpful. Thank you. And it looks like most of the upside in the restructuring state this year from $350 million to about $375 million was captured in the first quarter? Are there any other opportunities to potentially push that number higher through the rest of the year? Thank you.

Christina Zamarro: Yes, sure. So on our fourth quarter conference call, we had said that we should benefit from Goodyear Forward actions in 2024 by about $350 million. And just given our experience here exactly right in the first quarter. You know, we’ve increased that to at least $375 million, which does mean that we have good reason to believe that we should be able to exceed that level, although we need to continue to execute on our workstreams, real time to be able to increase that amount publicly here. For now we’ve increased both purchasing and supply chain based on savings. We do have line of sight too that was over and above that initial plan. I’d say supply chain is higher on better utilization and network optimization and purchasing.

You know, we have added some new workstreams since Mark came on board to deliver more value and indirect spend. This includes new MRO workstreams, gray stock, and other spend control programs in our factory. So a lot of good success is there. You know, what I would say is we’ll give you an update in the next quarter. We should be pretty much locked in on knowing where we land on the savings by Q3, just given our FIFO accounting. But at least where we’re comfortable right now is at that at least $375 million level.

Mark Stewart: Yes. And I would just add to it a little bit, [James] (ph), in terms of we’ve got really strong momentum, some great energy with each of our functional teams, with each of the forward teams. And as Christina mentioned, right, with this $72 million of total actions already in that are demonstrated results in the first quarter. But as we look through it, right, I’m personally, as well as Christina, we’re meeting across the workstreams on a weekly basis with each of the functions, be it purchasing, be it manufacturing, across our retail, et cetera. And as we look across each of the five areas tying into that $375 million plus number Christina mentioned, right? It really involves, it’s our footprint and plant optimization and the work that we’re doing.

And we can talk a bit on it later, other questions, but we’ve been going, Christina and I and the staff have been going out to each of our plants in the U.S., deep diving with our plant leadership teams and our manufacturing, engineering, and purchasing groups, meeting weekly with purchasing in terms of the diligence. And really we’ve tightened our KPIs across the organization, both at the staff level of what we’re looking at on a monthly basis and diving, but within each of our teams with dedicated purchasing and manufacturing meetings weekly to ensure execution and also to add to those workstreams. So I feel very good about that along with, as we mentioned earlier, our SAG streams of getting that SAG out of the system around the world for better cost competitiveness for the future state.

And then the supply chain and logistics cost savings are flowing through quite nicely, as well as the actions that we’ve taken around complexity reduction, commonality of platforms, and to enhance our margins, be it through repricing, be it through choosing not to run those other products that really don’t fit into our portfolio.

Unidentified Analyst: Got it. Thank you.

Operator: Our next question comes from John Healy with Northcoast Research. Please go ahead. John Healy, your line is open.

John Healy: Thank you. I wanted to ask about the volume side in North America. You talked about the lower margin product kind of going away a bit? Could you talk to what sort of volume impact that is, maybe in terms of units, I assume, on the replacement side, and maybe what areas of the market or retailers or brands like that those are disappearing with?

Christina Zamarro: Yes, John. So I’ll start here, and I’ll just say we’ve certainly seen some volatility over the last several quarters with respect to low-end imports. And if you take a broad step back, what I’d say is that the import activity was suppressed for the period immediately following COVID. And then what we’ve seen is this several quarters of overcompensation, if you will, over the next — over the last several quarters. If I think about our share in 2023, I’d say broadly speaking, we’re about where we expect it to be. If I look at non-member imports over 2023, that low end part of the market, it’s about 20%, 21% in 2023. That’s about where it was for all of the last five years. So I think what we’re seeing is a whole lot of choppiness.

In the first quarter in particular, though the imports were 25% of the market, and that represented a pretty significant increase. You know, non-member imports, if you will, John, were up 100%, which was about 1.5 million units than what we would normally see in a quarter. But again, really believe that is lumpiness. When we think about a question, maybe getting to, you know, the question is the consumer really trading down, at least in the U.S., what I would say is we don’t have evidence of a consumer trade down, especially in branded Tier 1 tires. So this would be all of the Tier 1 tire companies, including Goodyear. That share of the market has been very consistent. Over the last five years, I’d say more recently over the last couple of quarters, we have seen some weakness in Tier 2 and Tier 3, accreting to Tier 4 and share.