The Goodyear Tire & Rubber Company (NASDAQ:GT) Q2 2023 Earnings Call Transcript

The Goodyear Tire & Rubber Company (NASDAQ:GT) Q2 2023 Earnings Call Transcript August 3, 2023

Operator: 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 Second 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 second 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. This call will focus on questions and answers.

Operator: [Operator Instructions] And we’ll take our first question from James Picariello with BNP Paribas. Please, go ahead.

Unidentified Analyst: Hi, guys. This is [Jake] calling in for James. First, I just want to talk about is the third quarter bridge items. So if I work through those, we get to about $300 million SOI in 3Q. I just want to make sure that I’m thinking about that right. And then looking at full year it looks like the implied guide, it’s about [indiscernible] million. So, can you just talk about some of the puts and takes for the fourth quarter?

Christina Zamarro: Yes. Sure. Hi, Jake. This is Christina. So I’ll start on SOI and I would say if you look at our outlook obviously we are layering in the trends in the industry that we’re seeing as we look into the third and fourth quarters, and as we think about how this has played out, obviously impacts in our earnings in Q2 due to transitory factors like destocking more in consumer but also more recently in commercial. And so, what that means is volume weakness still yet in Q3 and a lot of that is due to our plan for some additional destocking, particularly in Europe with volume approximately flat to up in the back half over the fourth quarter. When I think about the drivers of our SOI block, I mean we’ve laid out the industry assumptions for you unabsorbed overhead wins, I think we’ll have lower Q2 production of about four million units, excluding to below that obviously will impact the fourth quarter.

We’ve given you those values as well. Price mix versus raw materials should more than offset other cost inflation in the second half, I’d say that that’s true on a full-year basis as well. If I think about commercial truck, and maybe this gets to the heart of your question, what we said is big impact $60 million in mix in the second quarter that declines pretty significantly in Q3 and it’s pretty much not an impact at all in our fourth quarter. When I look at fourth quarter price mix versus raw materials what I would say is obviously really strong benefits and lower raw material costs. We do have RMI index is beginning to take effect. But I would say that there is still relatively small here in the fourth quarter, something like 10% of that raw material benefit.

So hopefully that’s helpful.

Unidentified Analyst: Thank you. That’s very helpful. And then it looks like channel destocking was a pretty big drag on the quarter. When should we expect that trend to start to reverse. Thank you.

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Q&A Session

Christina Zamarro: Yes, so I mentioned just a minute ago Jake in the way that we’re thinking about destocking in the back half of the year is that we’re essentially complete in the U.S. I’m seeing some incremental weakness demand in Latin America [indiscernible] in the third quarter down slightly, but more of the destocking to continue in EMEA consumer replacement that’s all driven by still higher levels of winter inventories versus last year. And so even though we had a tough industry in Europe last year, we’re still planning for declines this year. And then as I think about commercial truck, obviously more volatile segment of the market for us. Big destocking event in Q2 because we did see the spot rates for freight just declined so precipitously, spot rates were down 25% in the month of June and so lots of an immediate type of destocking happening with our commercial truck dealers and distributors.

That will still continue on into Q3, but not nearly as severe as what we saw in the second quarter. So in truck unit volume in commercial was down 600,000 units. It’s going to feel something like 200,000 to 300,000 in Q3 and then by Q4 truck will normalize in line with what’s happening in freight ton miles and that’s something that’s just slightly down in the U.S. and a little bit more in Europe.

Unidentified Analyst: Good color. Thank you.

Operator: We will take our next question from John Healy with Northcoast Research. Please go ahead.

John Healy: Thank you, John. Just wanted to ask a little bit about the pricing environment in the U.S. and in Europe. Obviously some different status of where we’ve gotten to with pricing over the last two years. But is there any signs that with raw materials now coming in a little bit that you’re seeing. I don’t know any sort of behavior or erosion of pricing environment, either by tears of operators or is it remain pretty consistent. And what’s your confidence level that that can continue into the end of the year. Thank you.

Richard Kramer: Thanks, John. I mean sorry, it’s a really relevant question. And I think as we, as we look at what we’re seeing today price is still holding and I think that’s because everyone across the industry has seen the higher raw material costs and other inflationary costs. So we’re having to deal with that and I think that’s what you’re seeing that that revenue per tire is still holding in very well and pricing is holding in very well. If we look ahead, we see sort of the last year for us. We had over 30% raw material cost increases. We had headwinds in the first half that turns into some tailwinds in the second half. And in that period, the question becomes relevant how will things hold up. I will tell you, we’ve seen this before in historical periods when this happens, we’re traditionally able to hold our prices as we see raw materials come down.

I think that that’s probably even more relevant now given that inflation really is sticking around. So in the past we’ve been dealing with raw materials alone, but now if you look ahead we’ve got – we’ve got our higher labor costs, we’ve got other energy costs, we have other inflationary costs that are more sticky right now. So I think as we look at this, I don’t think that we’ve seen a reversal of the need to recover all our input costs through market pricing action. So we still feel pretty good about where that’s at. Now, to your point on tiers, I mean, and you know this, I mean Tier 3, Tier 4 have always been price competitive that’s not where we play as you know that. But that’s an area where units move by price and we’re always cognizant of that as well.