Goodyear Tire & Rubber Co
NASDAQ:GT
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Goodyear Tire & Rubber Co
Earnings Call Analysis
Q3-2023 Analysis
Goodyear Tire & Rubber Co
Goodyear has acknowledged the ongoing struggles within its Europe, Middle East, and Africa (EMEA) segment, where earnings are significantly lower than the pre-COVID target run rate of $50 million per quarter. Despite some improvements in Q3 over Q2, performance is still below expectations, with consumer business down by approximately 15% and truck business down by 22% against 2019 numbers. The road to recovery is hampered by structural challenges such as the ICE to EV conversion, competitive pressures, and high operating costs. To address these issues, the company has already implemented manufacturing and plant changes and aims to maintain the savings achieved from cost reductions.
Goodyear is in the process of conducting a comprehensive review of its business operations, especially the EMEA segment, with the aim of maximizing shareholder value. Reflecting the gravity of the situation, the management stated that more information will be shared in a separate call to discuss the results of this strategic and operating review. Investors are advised that the restructuring efforts, historically in a ratio of $3 to $4 in restructuring cash per dollar of savings, are being scrutinized for effectiveness and possible structural improvements.
The company has found stability in pricing throughout Q3 and into October, focusing on the premium market segment where it sees competitive advantages in its brand and technology. Looking forward, Goodyear still expects the premium segment to grow, projecting a 7% increase in 18-inch and above tire sizes in 2023. Despite a favorable demand-supply dynamic in this segment, the overall market outlook includes expected inflationary pressures, which the company plans to mitigate through the inherent value of its products.
Goodyear faced a $15 million negative impact on Segment Operating Income (SOI) in Q3 due to fires at its factory in Poland. This was a discrete event, and the company indicates no continuing impact from this incident.
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Good morning. My name is Nicky, and I will be your conference operator today. At this time, I would like to welcome everyone to Goodyear's Third Quarter 2023 Earnings Call. [Operator Instructions]
Today on the call, we have Rich Kramer, Goodyear's Chairman and 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 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 third quarter 2023 investor letter and their filings with the SEC, which can be found on their 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. Thank you, Nicky. Good morning, everyone, and thanks for joining the call today. By now, you've seen our investor letter covering Q3 results and also an announcement that we'll be with you again next Wednesday, November 15, with an update on the results coming out of our strategic and operating review.
Now with that in mind, we're happy to take questions on the quarter this morning but I'd ask that you hold any questions related to the review until next week when we'll be able to say more. So thank you for that.
And Nicky, with that, let's go ahead and take the first question.
[Operator Instructions] We will take our first question from Rod Lache with Wolfe Research.
I was hoping to ask 2 questions, maybe just higher level. I know you don't want to get into any details on the strategic and operational review. But just first of all, at a high level, maybe you could talk a little bit about the European business, which is still quite weak with a 1.5% margin. And just at a high level, there's -- the worry is that it's a very structurally challenging market that would require a lot of investment. Right now, your restructurings typically take $3 to $4 of restructuring cash for every dollar of savings. So could you maybe just talk to us a little bit about the changes that are being made there and whether some of the -- you see some structural changes that make this more fixable? And on the strategic side, I expect that you'll give us more specifics over the next couple of weeks, but any -- at a high level, any indications of interest that you're assessing on businesses within Goodyear?
Yes, Rod, first of all, I think we would agree with you relative to the performance of EMEA. You may recall, we said our near-term goal was to get back to the sort of the $50 million -- pre-COVID $50 million per quarter run rate. And Q3, while a little bit better than Q2, certainly is well below that run rate, and that's the issue that needs to be addressed to your point.
I'd point out, again, as you know, the industry is still really challenged relative to 2019. As you've seen in our investor letter, we included the 2019 numbers where you see the consumer business is down, let's call it, still 15%; in the truck business, 22% versus 2019. So look, it's not back to normal. But having said that, to your point, we've been and are evaluating EMEA and looking at all options to generate value in the near term and continuing to assess sort of the long-term solutions as well given the macro environment and what's going on over there. And particularly, I think we've all seen sort of the recent sort of number of articles talking about the ICE to EV conversion, the competitive challenges, high cost of doing business there and the like. And I think that's the tough environment that you've referred to.
So I'd say, Rod, near term, like we have, we're acting now, and I'd say more to come. What we're doing now is, as you've pointed out, we've announced already some manufacturing and some plant actions there and some SAG actions as well over the last 2 quarters. You've also seen some competitors do some similar things like that. And also in the near term, what we're looking to do is make sure that we stabilize those earnings in the near term and not lose the benefit of those cost savings that we've done as we know that's happened in the past as well.
So I'm going to go back to my opening statement and say, look, we are continuing to actively assess this, including with our Review Committee. And I would just say more comments to come next week as we look at this. But it is certainly a challenging year, I would agree with you.
And on the IOIs, just relative -- at a very high level, are you receiving any indications of interest from other players in your businesses, because it's pretty well known that you're going through the strategic review, and you'll have more detail to come? But can you just offer any kind of high-level comments on that?
Yes, Rod, again, I'd have to say we'll be back to you next Wednesday on a separate call. The committee is doing all inclusive, including EMEA, a comprehensive review, evaluating all the options, again, with the idea of maximizing shareholder value. So we'll come back to you on Wednesday.
Okay. And just maybe one thing that you may be able to answer is just you've had a pretty nice improvement in raw materials versus net pricing again this quarter. But obviously, oil price is starting to move in an adverse direction. Any thoughts on how things are kind of shaping up into early 2024?
Yes. I mean, Rod, maybe I'll let Christina jump in. I would just maybe add to your point. We're still seeing a very stable pricing environment in Q3. We continue to see that in October as well. And our business this quarter really focused on those areas where we can drive value, again, which is that premium part of the market where our value proposition holds up really well. And that's what we did. That's what we saw.
And I would tell you that part of the market, even as we get into 2024, and Rod, you'll remember this, as we sort of bifurcate the market, the premium part of the market still has the dynamics that are favorable to us. Certainly, in terms of segments, it's the profitable -- that's the most profitable profit pool, if you will, of the market. It's where we have 18-inch above growing fairly significantly, I think, about 7% in 2023. Our products, our brand, our technology, both Goodyear and Cooper, played really -- were really well there. And again, the demand to supply dynamics still work in our favor. And I think that's what you saw in Q3. That's what you'll see in Q4 as we move ahead.
And look, maybe I'll turn it over to Christina. We'll certainly still see some inflation coming at us, and you'd be right to think that we're going to go to offset that in the marketplace with the value of our products. But Christina, you might want to jump in on it.
Yes. Rod, so I'll just anchor us back to what we said on the second quarter call. We had given us some guidance for the first half of next year, indicating that we've got a raw material tailwind. It would be about $400 million over the first half with the increase in spot rates across our base commodities. We would say that feedstocks are down about $120 million since then. So implying a benefit of about $280 million in the first half, I think, we right now would still see a benefit in Q3, maybe a slight headwind in Q4. But we are continuing to assess all opportunities on non-feedstock savings as well. Some of those energy transportation costs are coming down. So we'll continue to refine the assumptions and come back to you on our fourth quarter call, but that's how we're seeing it right now.
[Operator Instructions] We will move next with James Picariello with BNP Paribas.
Just for the fourth quarter guidance framework, if we want to call it that. The only missing piece -- and of course, we continue to appreciate the color on the quarterly outlook roll-up. The only missing piece would be the other line, right? So in the third quarter, for instance, you had your chemicals business incur $21 million headwind, $32 million overall for other. How should we be thinking about that one line item in the 4Q guidance for SOI?
Yes, James. So we've indicated a $15 million SOI impact from the fires that impacted our factory in Poland in the third quarter. That's a discrete item, and that was what will be shown in other. We won't have a continuing impact from chemical sales like we saw earlier in the year. We're lapping that comp in Q4.
Okay. So excluding the fire impact, the other line should be something close to neutral, is that right?
Yes.
Okay. Understood. And then as we think about restructuring spend and free cash flow for next year and just focusing on the series of actions that you guys have announced throughout this year with detail on what the intended cash spend is for those actions, can you speak to what cash restructuring could look like for next year relative to the $100 million that you're guiding for this year?
Yes. So we've announced programs. Inflate programs so far this year, totaling $100 million in savings for 2024. And Rich mentioned earlier, a couple of programs into the EMEA one. That was a larger SAG restructuring program, also a reduction in our production at a [indiscernible] factory. And then there's also been an announcement related to a change in our go-to-market model in Asia Pacific and Australia, in particular. So with those Inflate programs and what's been announced to date, restructuring cash next year would be around $300 million in 2024. Those programs also have a stub into 2025 of about $60 million.
Thank you. And this does conclude our Q&A session as well as our conference call. Thank you all for your participation, and you may disconnect at any time.