GOODYEAR TIRE & RUBBER CO /OH/ Q4 FY2024 earnings call

Management Statement and Operational Highlights

• In 2024, Goodyear executed nearly $500 million of transformation benefits, achieving five consecutive quarters of margin expansion under Goodyear Forward. Full year segment operating income grew $350 million over 2020, excluding insurance recoveries.
• Completed divestiture of OTR and announced agreement to sell Dunlop brand. Plans to achieve $750 million of transformation benefits in 2025.
• In the U.S., will introduce 5 new product lines this year, modernize manufacturing in Oklahoma facility to add premium tire capacity. Strengthen sales capabilities through global digital platforms.
• Added Don Metzelaar as SVP of Global Manufacturing and Supply Chain, and Alain Kohnen to lead manufacturing in the Americas. Aligned global structure and process to innovate, operate with speed, and drive better products, lower cost, better service.

Segment Performance

• Americas: Fourth quarter unit volume decreased about 1 million units driven by consumer replacement. Americas segment operating income totaled $262 million or 9.1% of sales. U.S. consumer OE volume grew ~20% with year-over-year share gains of ~4 points, while commercial OE and replacement volume declined.
• EMEA: Fourth quarter unit volume increased 2% due to strong winter tire selling season. Segment operating income was $41 million.
• Asia Pacific: Fourth quarter unit volume decreased 9% driven by reducing lower-margin business and channel destocking in China. Segment operating income totaled $82 million and 13.5% sales, an increase of $14 million compared to last year.

Guidance

• Expect first half SOI to decline due to volume, carryover effects of production cuts, and significant raw material cost increases. Second half expects modest volume growth and price mix to offset raw material inflation, supported by Goodyear Forward benefits, especially in fourth quarter.
• Anticipate consulting fees and other Goodyear Forward related costs to decline by about $80 million in 2025.
• First quarter global unit volumes expected to decline approximately 2% to 3%, raw materials to increase ~$350 million, Goodyear Forward to drive ~$200 million of benefits, inflation and other costs to be a headwind of ~$75 million.
• OTR transaction expected to reduce 2025 SOI by approximately $80 million.

Risks

• Further step-up in raw materials later this year could limit earnings growth in the second half as it takes time to offset raw material cost increases with price and mix.
• Potential tariff impact related to Canada and Mexico is difficult to predict, including primary and secondary effects.
• Growth in low-end imports in the U.S. market impacts the consumer replacement industry.

Question and Answer

Q: My first question is just on your price mix expectation for the year? I know it's harder to call the farther out. But can you just confirm what the expectation is for the first half, if you already provided that. And then thoughts on the second half, raw materials, should we assume neutral or an additional headwind potential based on spot pricing? And have you seen any pricing actions from your peers thus far given the rather substantial raw material headwinds that the industry is facing?

A: Christina Zamarro: Yes. Sure. James, I'll start, and I'll have Mark follow-up on the pricing environment. When we look at our SOI bridge for 2025, your price/mix should grow from the first quarter on into the second and third quarter. A part of that is the realization of our OE RMIs and our raw material index contracts with our fleets. Those generally were price on a 6 months -- in 6 months arrears. And so we don't have nearly the full run rate here in Q1. There's also been pricing actions that we've taken in our key markets around the world in the first quarter as well. And I'll let Mark follow-up on that. When we look at the raw materials, what I would say is the $350 million is baked based on current spot rates for the first half. If spot rates hold, we could see a headwind of about $100 million to $150 million in the back half of the year. Of course, while spot prices have been pretty volatile, so we'll continue to update you on that. But again, looking for price mix to grow into Q2 and Q3 before leveling off or just depending on what happens the rest of the year with gross. Mark? Mark Stewart: Yes, James. Yes, just talking through some of our pricing actions that we've already happened, as Christina mentioned, right, since the third quarter call, pricing actions we've taken. We've done multiple rounds of pricing globally, commercial tires in Turkey, for example, across the Latin American countries as well as consumer pricing in Europe as well as Middle East. And then across the U.S. on specific product line, we've taken product actions in both in quarter 4 as well as rolling into quarter 1. So we'd expect to see the benefit of that going into the quarter 2 time period as that flows through the system. We continue to watch things to make sure that we are competitively priced based on our upgraded marketing intelligence. As we mentioned, it's a big area we focused on in ’24 was our scraping and making sure that we're benchmarking that we're in the right price position across each of the categories and really taking a look at that from a consumer-facing thing so that we are competitive in the marketplace.

Q: I was hoping to actually follow up on the same topic, which is volume, price mix outlook, first half versus second half. So it seems the outlook contemplates a decline in -- so at least in the first half, but then growth in the second half. Can you just maybe just go back over for those volume, price and mix, what will be the anticipated drivers of improvement in the second half? And I guess, how much visibility and conviction do you have on this at this point?

A: Christina Zamarro: Sure. I'll start out with the SOI Bridge for 2025. And if you look at the puts and takes, as we've talked about them, our 2024 SOI was about $1.3 billion. If we adjust that for insurance proceeds, we are at $1.2 billion. Now Goodyear Forward, of course, going to add $750 million for us against that base inflation of $225 million. We said we're also going to have headwinds in other costs outside of core inflation, and that's mostly driven by transportation. It's going to run $20 million a quarter. We also have 3 factories that we are ramping down or decreasing production in the third and fourth quarter of this year. So that will increase our manufacturing costs through some transitory inefficiencies in the third and fourth quarter by about $30 million. We talked a lot about raw material headwinds, about $350 million in the first half, about $100 million, maybe up to $150 million at current spot prices in the second half. And then spent a lot of time already on the call about how we're thinking around price/mix. We've given you the first quarter, but that should grow pretty materially in Q2 and Q3 and get to a run rate by Q4. And that's driven by pricing actions that we've implemented in the first quarter already. Pricing through our OE RMI indexed agreements with fleets as well. And then, obviously, Mark just spent a lot of time on the new product development, new product lines we're bringing into the market, which should also support our mix. OTR should be a headwind. We've outlined that in the presentation, $80 million on a full year basis, and then it does come down to volume. What we've laid out is a lower first half driven mostly by the U.S. channel stocking of low-end imports and lower OE volumes just following OEM production broadly and then moderate growth in the second half for us, driven by very low comps and a recovering industry broadly in commercial and in consumer OE. And so once you put all of that together, I think it's safe to say you should be able to model a level of SOI that's in line with our current year, including the insurance, which means that we should be demonstrating a very strong level of underlying growth in the business, something on the order of 10%.

Q: Great. I want to maybe turn to the balance sheet for a moment here. Net leverage now as it's 3x almost a turn below what you had last year. So the forward program is certainly working. And I've just kind of pulled up your ratings at B1 and B Plus seemed pretty underrated relative to the progress you've made on the balance sheet. Have you had a chance to kind of refresh with the rating agencies to have them take a kind of newer look at where the balance sheet is headed?

A: Christina Zamarro: Yes. Thanks, Doug, for the question. And certainly making a lot of progress on the balance sheet. We intend to close on the Dunlop transaction a little later this year, and that will bring in $700 million more of gross proceeds that we intend to use to deleverage even further. We do talk to each one of the rating agencies very regularly. Last night, in fact, was the most recent conversation. And I think they do look at our forward forecast, I think there was a lot of emphasis placed on 2024 free cash flow, which you can see was slightly negative because of a lot of the restructuring programs that we had in place. And so I think as we look ahead, we would expect more positive outlook and sentiment from the rating agencies, just given the progress so far.

Q: Wanted to ask about the -- on the chemical side. I know you said you're still on track for a sale. Has the reception been a bit more muted? We speak to some chemical companies and obviously, there's some challenges just for the industry there. What are your latest thoughts on that?

A: Christina Zamarro: Edison we don't have a lot more to say other than that, that review remains in process. I think that, generally speaking, I think the interest has been -- it's pretty across all sectors, whether you think about strategic or private equity. This one, in fact, was when we got into the market a little bit later, of course, the focus on OTR and Dunlop in the earlier part of 2024.

Q: And then just a quick one on the SOI in APAC. And I apologize if I missed it earlier. It was actually very, very strong margin. Was there anything kind of one-off there some sort of kind of benefit that doesn't carry over? Just wanted to double check on that.

A: Mark Stewart: 1 No. We've got -- we just have a really strong operation in AP. Their manufacturing process is very strong. Pricing in the marketplace, very good, new fresh products going in, winning with the right winners in the marketplace, particularly on the -- EV front there. And just really operations doing quite well on AP.

Q: I know you -- I heard earlier about the expansion in Oklahoma. Is that in any way kind of maybe mitigation in case of the tariffs?

A: Mark Stewart: No. We would like to tell you our crystal ball was good enough to do that, Doug, but that was not the case, right? It's just necessary modernization that we needed to make across our footprint. And that's one of our larger facilities or one of the largest, actually. And we just were taking all the right actions we needed to take there in terms of moving more into the higher RIM sizes, additional volume for the marketplace in that higher profit, higher margin segments.