This conference call transcript was computer generated and almost certianly contains errors. This transcript is provided for information purposes only.EarningsCall, LLC makes no representation about the accuracy of the aforementioned transcript, and you are cautioned not to place undue reliance on the information provided by the transcript.
spk00: 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 first quarter 2021 earnings call. All lines have been placed on mute to prevent any background noise. After the speaker's remarks, there will be a question and answer session. If you would like to ask a question during this time, simply press star 1 on your telephone keypad. If you would like to withdraw your question, press the pound key. I will now hand the program over to Nick Mitchell, Senior Director, Investor Relations.
spk05: Thank you, Nikki, and thank you, everyone, for joining us for Goodyear's first quarter 2021 earnings call. I'm joined here today by Rich Kramer, Chairman and Chief Executive Officer, Darren Wells, Executive Vice President and Chief Financial Officer, and Christina Zamaro, Vice President, Finance, and Treasurer. The supporting slide presentation for today's call can be found on our website at investor.goodyear.com, and a replay of this call will be available later today. Replay instructions were included in our earnings release issued earlier this morning. If I can now draw your attention to the Safe Harbor Statement on slide 2, I would like to remind participants on today's call that our presentation includes some forward-looking statements about Goodyear's future performance. Actual results could differ materially from those suggested by our comments today. The most significant factors that could affect future results are outlined in Goodyear's filings with the SEC and in our earnings release. The company disclaims any intention or obligation to update or revise any forward-looking statements, whether as a result of new information, future events, or otherwise. Our financial results are presented on a GAAP basis and, in some cases, a non-GAAP basis. The non-GAAP financial measures discussed on the call are reconciled to the U.S. GAAP equivalent as part of the appendix to the slide presentation. And with that, I will now turn the call over to Rich.
spk03: Great. Thank you, Nick. And good morning, everyone. Thanks for joining us today. The results we reported earlier today show that we're building on the momentum we established in the second half of last year. We delivered segment operating income of $226 million for the quarter, up $273 million from the previous year. While we expected to surpass last year's results given the level of disruption from the pandemic, our segment operating income was nearly 20% higher than first quarter 2019, even though industry demand has not yet fully recovered. Our consumer replacement business delivered strong results despite the ongoing impact of the pandemic. By leveraging improved distribution in new products, we significantly outperformed the industry in the U.S., Europe, and China. In the OE segment, we continued benefiting from our OE pipeline, which again resulted in share gains. We generated these share gains while capturing more value for our products, allowing us to continue recovering raw material cost inflation. And finally, we continued to see improved manufacturing efficiency and reduced structural costs in the U.S. and Europe. These results reflect the commitment of our associates to position the company in the best possible way for recovery. As we look across our markets, we see healthy demand trends. We're encouraged by the momentum that we're seeing in consumer placement, where demand has nearly returned to pre-pandemic levels and done so much faster than we anticipated. Conditions are particularly strong in the U.S., where sell-out demand exceeded 2019 March levels. Vehicle miles traveled are improving, and manufacturers and dealers need to replenish inventories, which were cautiously managed to low levels during the pandemic. These signals, coupled with data from other industries and a robust second-half global GDP forecast, indicate an emerging consumer-led recovery and strong market conditions ahead. These dynamics are also favorable for new vehicle sales. As you know, OE production has been affected by part shortages in the first quarter, particularly the tight supply of semiconductors. This is a situation we expect to persist. For Goodyear, to the extent OE production remains constrained, we have the opportunity to redirect our capacity to much-needed premium replacement tires. Equally so, as OE production improves alongside sustained replacement demand, the industry's supply-demand dynamic will likely remain constructive. While perhaps at different stages, these market trends are evident in each of our SBUs. In the Americas, our volume increased 7%, driven by strong growth in replacement, particularly in the U.S., U.S. consumer replacement volume grew 17%, far outpacing the industry. I'm especially pleased with the performance in the premium high-margin segments, where we grew significantly more than the market, which itself was up double digits. Making it easier for customers and consumers to choose Goodyear is also resonating. And nowhere is this more evident than our e-commerce and mobile installation businesses, both of which contributed to this strong volume performance. Higher traffic and improved conversion rates at Goodyear.com are fueling strong unit growth, with our e-commerce volume up more than 25% in the first quarter. The popularity of our mobile installation business continues to benefit from excellent customer satisfaction scores and greater market coverage. These dynamics contributed to triple digit volume growth during the quarter and impressive performance even for a business that's in the early growth phase. With strong momentum in these new customer facing challenges, with traffic to Walmart's auto care centers improving and with our other distribution channels performing well, we expect to continue recovering share in the coming quarters. Our U.S. commercial replacement business also continued to set the standard. Volume growth once again exceeded the industry rate, with units increasing 13% during the quarter on top of solid growth last year. On a two-year basis, our volume is up nearly 20%, a remarkable performance. In a rising cost environment, fleets continue to find great value in our mobility tools and fuel-efficient products, such as the FuelMax LHD2, a product that demonstrates our commitment to helping our customers achieve their sustainability goals. In Brazil, demand for replacement tires is recovering faster than anticipated. During the quarter, our combined replacement volume in the country was up slightly despite a recent resurgence of COVID-19. Our consumer OE volume decreased 6%, reflecting lower industry demand with vehicle production adversely impacted by supply chain challenges. Despite the decline in shipments, our relative performance remains strong as we outperform the industry for the fifth consecutive quarter. We're laying the foundation for growth beyond this year. With the U.S. government developing strategies to accelerate the adoption of EVs, we have additional opportunities to differentiate ourselves as a technology leader. Last year, we secured several high-volume EV fitments, including the Tesla Model Y and GM's new all-electric Hummer, strengthening our position as a tire maker of choice for EV manufacturers. In 2021, OEMs continue to turn to Goodyear for tires that can handle the added stress of increased vehicle weight, regenerative braking, and higher torque while helping extend vehicle range through reduced rolling resistance. We must deliver on these requirements while also addressing the level of road noise in the cabin through noise reduction technology. Nearly one-third of the fitments we were awarded during the quarter were for EVs, The momentum we have established will strengthen our leading OE position in the Americas as the automotive landscape evolves. In EMEA, our volume increased 10% driven by EMEA's replacement business despite ongoing mobility restrictions. Our consumer replacement business continues to benefit from the strategic changes we made last year to restructure our distribution in Europe. With the transitional volume impact behind us, we outperformed the industry, growing our total consumer replacement volume 11%. During the first quarter, we performed exceptionally well in the all-season and summer segments. The Vector 4 Seasons Gen 3, the Eagle F1 Asymmetric 5, and the Efficient Grip 2 SUV contributed to our solid share gains. Each tire was recently recognized by trade publications for its superior performance in its respective category, further validating our industry-leading technical capabilities. EMEA's consumer OE volume increased 4% during the quarter, also outpacing the industry. In addition to the solid OE volume growth, we also continued adding to our leading position in the EV segment in EMEA. Notable fitments one included Audi's high-performance RS e-tron GT. That's a great fitment for us. Turning to EMEA's commercial business, we continued adding to share gains we achieved over the past two years. Total commercial unit volume increased nearly 20%, driven by growth and replacement. This outperformance continued to be driven by our rapidly expanding fleet business. On our last call, I mentioned that Rider had recently selected Goodyear as its sole mobility partner in Europe. With a strong start, the team is on pace to set a new customer conquest record in 2021, indicating Fleet C tremendous value in our total mobility solutions and our customer-centric approach to product design. In Asia Pacific, consumer replacement volume increased 30% to more than 4 million units, far surpassing the previous volume record for our first quarter. We benefited from strong growth in China and India, where we more than doubled our replacement units on a combined basis versus last year. Turning to our consumer OE business, our volume increased 26%, reflecting a strong rebound in industry fundamentals in China, where demand is approaching 2019 levels. Now, before I move on, I would like to congratulate our consumer OE team in Asia Pacific for earning FAW Volkswagen's Best Supplier Award at a recent supplier conference. This designation recognizes the supplier's commitment to excellent product performance, quality, reliable supply, and outstanding collaboration. Goodyear was the only tire supplier to receive this honor, a testament to our industry-leading technical capabilities, our market-backed approach to product design, and our commitment to working with customers to help them solve their toughest challenges. These same attributes also helped us secure the fitment on the recently launched Volkswagen ID.6 Cross, the latest modular electric battery platform vehicle in VW Group's lineup. Goodyear is proud to be the sole supplier on this EV platform since its inception. Now even as markets recover and our business momentum gains strength, we continue to focus on our longer-term competitive advantage with both the Cooper Tire acquisition and new mobility. Our enthusiasm around the Cooper Tire transaction continues to build as we develop our integration plans and prepare to welcome Cooper Tire to the Goodyear family. The acquisition will allow us to increase our business in markets and segments that play to our strengths and offer a more comprehensive portfolio of products and services to our customers and consumers. We're particularly excited about the potential of stronger combined portfolio of SUV and light truck fitments given the importance and growth in these vehicle segments. At the same time, we expect the combination will deliver significant financial benefits to shareholders through cost synergies as well as incremental growth and margin opportunities in the years ahead. We're excited for this next chapter to begin. Now, beyond the EV wins and general trends you've heard us revert to, the inflection point of future mobility is certainly well underway. A world of connected, electric, shared, and autonomous vehicles is fast approaching, and our progress continues. With Anvil, our digital platform focused on vehicle readiness, we have expanded our platform vehicle service by six-fold since launching in early 2020, and we expect to continue to grow as shared mobility rebounds post-pandemic. The emerging need to service these fleets is clear today and will only increase as the migration to EVs accelerates. Our work on the intelligent and integrated tire has expanded by adding new partners to advance our real-time tire monitoring and integration with vehicle systems. That work and the continued experience we gain with our partner fleets equipped with intelligent tires only increases our perspective that the tire itself is the ultimate sensor to improve the driving experience through anticipating and adjusting safety and performance in autonomous vehicles. And finally, our focus on sustainable materials in our products remains paramount to our future mobility vision with a goal of having a tire constructed entirely of sustainable materials by 2030. Creating new revenue streams in and around our core tire business reflects our commitment to not only be a part of, but driving the future of mobility with safety, performance, and reliability at its core. It's remarkable just how much has changed over the past year. During the first quarter of 2020, we faced an emerging crisis of historic proportions as COVID-19 brought the global economy and the auto industry to a near standstill. While COVID remains a very real personal and economic challenge in some parts of the world, today, on balance, we see a much brighter picture. In many of our key markets, Vaccinations are increasing, vehicle miles traveled are improving, auto production is recovering, and employers are hiring. As we look ahead, we expect to sustain our underlying momentum to capitalize on opportunities in this new era, fully recognizing that we will continue to see pockets of disruption and challenges in the months and quarters ahead. And as the markets recover, We're feeling a level of momentum we haven't felt in some time. We have a strong lineup of products. Following actions to further improve our distribution, our ability to reach customers has never been better. Our fleet solutions offerings is unmatched in the market, and the planned acquisition of Cooper Tire will further strengthen our position, creating increased opportunities to generate value in the years ahead. Personally, I continue to be very excited about our prospects moving forward. Now I'm going to turn the call over to Darren.
spk02: Thanks, Rich. You can see from our results and from Rich's remarks that the first quarter reflected continued industry recovery and strong performance by our team, including on market share, cost efficiency, and managing for cash. Our consumer OE business continued its momentum, building on share gains in the second half. We continue to see 2021 as a year of share recovery for our OE business after the anticipated decline we saw in 2019 and 2020. Our replacement share improved sequentially as the impact of last year's customer store closures in the U.S. continued to improve and the impact of actions to address our distribution network in Europe began to dissipate. The unwind of these actions also helped us improve mix. with our 17-inch and greater rim diameter growth returning to above industry levels. This mix, along with price increases, delivered significant improvement in price mix, ahead of the raw material cost increases that will begin to impact us in Q3. We also continued to see cost savings from rationalizations in our manufacturing footprint. We delivered net cost savings of over $60 million for the quarter. And while we saw seasonal growth in working capital, we continued to see the benefits of improvements in our cash conversion cycle achieved over the last couple of years, with Q1 cash usage below historical levels, despite work to rebuild inventory. Overall, it was a good quarter. While we continue to face a high level of uncertainty, we're encouraged by the trends in our end markets and our business as we move toward the middle of 2021. Turning to slide 10, Our first quarter sales were $3.5 billion. While sales were up 15% from a COVID-affected year-ago period, it may be more meaningful to compare to pre-COVID levels from 2019. Q1 sales were down about 2% from 2019, in line with the results we saw in Q4. Our unit volume was up 12% from last year, but remained 8% below 2019 levels, so there's still a ways to go before we see full recovery to pre-COVID volume. Our $226 million of segment operating income for the quarter, on the other hand, was up versus both 2020 and versus 2019. During the quarter, a severe winter storm in the U.S. temporarily impacted production in our chemical plants and at three of our tire factories. It also affected more than 170 of our retail locations. We estimate the disruption reduced our segment operating income by about $17 million. Absent this impact, our earnings growth would have been even more significant. After adjusting for this and other significant items, our earnings per share on a deleted basis were $0.43, up from a loss of $0.60 a year ago. The step chart on slide 11 summarizes the change in segment operating income versus last year. And slide 12 summarizes the change versus 2019. Versus last year, the impact from higher volume was $67 million, reflecting an increase in unit sales of $3.78. Non-recurrence of period charges from a year ago resulted in a $51 million increase in overhead absorption. Production in the first quarter was up 4 million units compared to last year. We get a larger portion of the benefit of this higher production in the period than we normally would given immediate recognition of the impact of last year's shutdowns. Price mix improved $64 million, while raw material costs declined $15 million compared to a year ago. Note that we benefited to some degree from the three- to six-month lag as raw material costs moved through our inventory. Recent raw material price increases will catch up some over the coming quarters. Cost savings of $91 million more than offset $30 million of inflation. Savings associated with the closure of Gadsden and the restructuring of two manufacturing facilities in Germany totaled $33 million. Foreign currency translation negatively impacted our results by $4 million, driven by weaker currencies in South America, primarily the Brazilian real. The $19 million increase in the other category included an $11 million benefit from improved profitability at Tire Hub. It also benefited from the non-recurrence of certain costs incurred during last year's suspension of production. Turning to the balance sheet on slide 13, net debt totaled $4.9 billion, a decline of more than $650 million from the prior year. Slide 14 summarizes our cash flows during the quarter. As anticipated, we used cash in our operating activities in Q1, given seasonal working capital increases and efforts to rebuild inventory. Turning to our segment results beginning on slide 15, unit volume in the Americas increased 7% from a year ago. As Rich mentioned, replacement volume was up 11%, driven by our consumer business. The continued recovery of sales through Walmart's auto care centers and increased share in other channels resulted in year-over-year share gains, reversing the trend experienced last year. Our OE volume was down 6% as a result of lower industry including the impact of supply chain challenges for auto parts, including semiconductors. Segment operating income for America has totaled $114 million compared to break-even a year ago. Excluding the impact of a severe winter storm, America's segment operating income would have been $131 million. The benefits of our cost savings actions and improvements in price mix contributed to the earnings growth. Savings associated with the closure of Gadsden were $29 million for the quarter. Turning to slide 16, Europe, Middle East, and Africa's unit sales totaled $12.7 million, an increase of 10% from a year ago. Replacement volume increased 11%, with increases in both consumer and commercial. Our consumer OE business was up 4%, despite the drop in industry demand, reflecting the benefit of new platforms and strong demand in light truck and SUV segments. EMEA's segment operating income of $74 million was up $127 million versus last year. The increase was driven by higher volume, improvements in price mix, and lower raw material costs. But while we remain pleased with the higher earnings delivered by EMEA during the last two quarters, we recognize that there are some unique factors involved. These include a benefit of approximately $10 million related to customer programs in Q1 and pricing ahead of upcoming raw material cost increases. Pre-pandemic earnings and margins are more reflective of our expectations going forward, with improvements for restructuring actions and volume recovery building on that foundation as we head into next year. Turning to slide 17, Asia Pacific's tire units totaled 6.8 million, up 29% from the prior year. OE volume increased 26%, and replacement increased 31%. driven by strong growth in China and India. Segment operating income was $38 million, up $32 million from the prior year's quarter, reflecting the higher volumes. Turning to our outlook items on slide 18, while markets have continued to recover through the first three months of the year, we still face a high level of uncertainty. Additional COVID-related shutdowns impacted several of our key international markets in April, which clouds the volume outlook for Q2. Despite this uncertainty, our overall expectation is that second quarter volume will continue to move toward pre-pandemic 2019 levels, with a two-year decline less than we saw in Q1. We expect our production to remain at about 2019 levels, given our need to replenish inventory. The segment operating income impact of higher production compared with last year will again largely be realized in the quarter, rather than being lagged through inventory as we had to recognize the impact of last year's production cuts immediately, given their severity. We expect price mix to more than offset raw material costs as we benefit from recent pricing actions before feeling the full impact of rising raw materials in the second half. Slide 19 summarizes several of our full-year financial assumptions. Based on current spot prices, we would expect our raw material costs to increase $325 to $375 million, net of cost savings. largely in the second half of the year. This is an increase of approximately 200 million from the outlook we provided on February 9th. Our other financial assumptions remain essentially unchanged from February. One last point I want to hit before we open up the call for questions. While we continue to be very excited about the acquisition of Cooper, we don't have anything new to add today beyond what we shared on February 22nd. The Cooper shareholder vote takes place today, and we continue to work on required regulatory approvals. We look forward to sharing more information with you on the Cooper Acquisition once we complete these procedures. Now, we'll open up the line for questions.
spk00: At this time, if you would like to ask a question, please press the star and 1 on your touch-tone phone. You may withdraw your question at any time by pressing the pound key. Once again, to ask a question, please press the star and 1 on your touch-tone phone. One moment while we queue. We'll take our first question from John Healy with North Coast Research. Please go ahead.
spk01: Thank you. Good morning. Congrats on the progress. Thank you. The first question I wanted to ask was, should we maybe kind of put aside 2020 and really just look at your margin performance relative to 2019 and kind of look at the growth rate that you saw? I think, what, 20% SOI growth over 2019 levels. Do you think that's the right way to think about the business? And as you look at the remainder of the year, any reasons to think that 20% improvement, you know, maybe couldn't continue? I know raw materials are going to do some things in the second half, but it also seems like you got some pricing recently, at least in some regions. So just trying to think about how we should think about the pace of improvement for the next nine months compared to 19.
spk02: So, John, you can probably tell from the fact that we included the walk chart comparing first quarter to 2019 that that is, in fact, our mindset is we tend to be benchmarking what we're trying to achieve, thinking about how we're doing versus the pre pandemic levels. sort of looking through the 2020 results and thinking about what we're doing to build up from 2019. Yeah, so I think the fact that our operating income is already above 2019 levels We feel like that's a very good sign, and obviously we went into that with at least one key part of our business that's nowhere close, which is the off-highway segment of the business. So the aviation, off-highway tire businesses are still well below, so the things that we categorize, a number of them we categorize as other tire-related businesses. And we really didn't get any recovery in the first quarter in those other tire-related categories. So I think we're feeling very good about the fact that our segment operating income is up. And I think partly good because it demonstrates the cyclical recovery of price versus raw materials. You know, we think that's obviously a big deal. It's shown the benefit of some of the structural cost-saving actions that we've taken, which I also think is a pretty big deal. If we take those things and then think, okay, we're above 2019 levels of segment operating income, and we still haven't got the benefit of the full volume recovery, so we're still 8% down on volume. So as we see, and obviously we see some very good volume trends, so we're expecting that volume recovery to occur. So we should get continued growth as volumes continue to recover. we should start to get some of the $150 million that we lost last year in that other tire-related business category. And obviously things like the winter storm jury, we're not going to expect to get hit with that again. So I think all of those are very positive. And we're also seeing in the first quarter a recovery in our performance on 17-inch and above relative to the industry. which means some of the mix that we lost during 2020 we're also recovering. So I think we have a number of things that were very good in the first quarter and a number of additional items that should allow us to continue to build going forward. I think that the question about the second half is a good one. I think the And I think we continue to see a lot of these factors benefiting us in the second half. So I think there's a number of things we still feel good about. We do recognize that the significant question is going to be the price mix versus raw materials question in the second half, given we're going to have most of the 325 to 375 million of raw material cost increase happening in the second half. Effectively, what that results in is something like a 15% increase in raw material cost for the second half. And I'm doing that 15% against 2019 as well because the amount of materials that we bought in 2020 wasn't a normal level of materials. But to offset that 15% or so raw material cost increase in the second half, generally is going to take us pricing in the neighborhood of 5%. And we don't have all that pricing in place yet, but we've made pretty significant progress on pricing in the first half. And so I think we've got some momentum there, and we've got a supply-demand situation that is certainly better than it was in 2019. You know, and I think as Rich mentioned in his comments, we've got, you know, sellout in the industry getting back to 2019 levels, at least in the U.S. And we've got industry inventories, you know, channel inventories that are well below where they were in 2019. You know, so I think the setup is pretty good. You know, and certainly, you know, I think we're feeling good in the U.S. And, you know, we realize that we, you know, that the pricing we've announced to date isn't sufficient. to get us through the second half. Probably what we've announced so far, it gets us a little more than halfway there. But we've got some time to work with. We've got some pretty good momentum, and we've got some good industry dynamics that should support us as we work our way toward the second half.
spk01: Understood. Makes sense. And then just a question kind of on supply chains and logistics. I know there's been a couple of industry kind of news stories in the last two or three weeks about just maybe some beginning levels of scarcity of natural rubber and maybe drawing some parallels to natural rubber shortages and mirroring that of semiconductors potentially. And I'm not sure if that is exaggerated or reality. Was kind of curious to get your perspective on that. And then secondly, you know, I think it's really easy to think that if the manufacturers are producing autos at the same clip that they were, they wouldn't be sourcing product from you guys at that same level. But is that in essence how they're responding to this or are they looking at certain aspects of their supply chain and saying, Hey, we can't let, we can't let raw materials such as natural rubber, you know, do what, what semiconductors is doing. So, How is like their true response on working with suppliers like yourselves?
spk03: Yeah, so, John, I'll start with the first one on natural rubber. And the first thing I'll do, frankly, on all the, you know, working through a lot of the supply challenges we had in the first quarter, as you all know, we had the winter storm in the Gulf Coast. We had the Suez Canal blockage and, you know, the shortage of containers and all that. I just want to tip my hat to our teams, our operations teams and procurement and in our businesses who have really worked through these things just tremendously. And the end result is it really hasn't caused us any issues in terms of our production. And if I talk specifically to natural rubber, we're certainly not experiencing any limitations that you might have read about in some of the stories that are out there. We're certainly aware of some of the issues on tight supply that came up last year as the industry started ramping up, which was sort of normal course, I would say. But again, we took a lot of proactive measures anticipating that to ensure we had the supply and to not make it an issue. And I think recently, you know, you've seen natural rubber prices return back to sort of Q4 last year levels after a spike. And I would say that tends to be indicative. And, you know, we've seen this really my time over decades, 15 years now. You know, we've seen these type of moves to be indicative more of price volatility that really reflects speculation around natural rubber. Could be stockpiling, could be doing those other things. as opposed to an underlying supply-demand situation. So that's not something that we're seeing or that we can't manage through right now. It's not an issue that's taken up a great deal of our time. And on the second question, relative to the OEMs, you know, we have obviously very productive and transparent discussions with the OEMs on a regular basis, and I would say, you know, that continues during this period as well. As you know, we have to meet their just-in-time supply requirements, and I'm proud to say that we do that with great regularity, and I would expect as their volumes sort of fluctuate right now with the semiconductor, situation, they will be back and will be ready to supply them for the relationships we have with them. So I wouldn't say we've seen any dramatic difference in that. Again, very constructive discussions. I would also tell you, I'll just say, you know, as we look at this, You know, we see the demand. I'll just jump in, John, and say the demand for new cars, as you know, is very strong, as well as for used cars. So the semiconductor shortage clearly is having an impact on their business and consequently our OE supply. Having said that, you know, in the near term, Yes, it will impact our OE volumes, but we also see this as an opportunity to continue to supply the replacement market where the demand is very strong. And remember, our OE tires are larger in diameter, very good tires, so we've got a lot of good capacity to support the market out there, the replacement growth that's out there. as well as to rebuild inventory that we all manage very cautiously down during COVID. So near term, I think we're going to work our way through that very well. And long term, listen, I think as we think about what Darren mentioned and I mentioned in some of my remarks, the supply-demand equation is pretty good when you look at inventory levels and where a sellout is. As OE comes back, As that replacement demand stays strong, I think, you know, that puts forward a pretty constructive supply-demand equation looking out to the future. And, again, we do think that that semiconductor situation will be solved. And, you know, I can't predict when, but given all the attention is focused to it, I'm certain that it will be solved and maybe even sooner than we think. Great. Thank you, guys.
spk00: And we'll take our next question from Rod Lash with Wolf Research. Please go ahead.
spk07: Good morning, everybody. I'd like to first maybe just get a little bit more color on the market share outperformance that you're seeing in the U.S. and Europe. I think in the U.S., obviously a lot of factors behind it, but maybe you can peel it back a little bit. What's the extent of Walmart coming back and Are you also seeing some of these stories about the West Coast port logjam playing a role? Tariffs on Asian tires, I would imagine, are also playing a role. Any thoughts on what it is that we're seeing here now in sustainability?
spk03: Yeah, you know, Rod, I think you're right to point out the situation of 2020. And I'll just start by saying, you know, we're very pleased both in the U.S. and Europe with our share performance in the first quarter. And, again, just to maybe reiterate what you said, you know, 2020 in both our markets was really not reflective of our ongoing market strength or the market position we had. If I start in the U.S., you know, we had the impact of Walmart in 2020. And that's where we sort of were disproportionately impacted by Walmart closing their auto care service centers during the pandemic. That obviously hit our volumes last year. Now what's happening is those stores are open. I think they're all just about open right now. But as traffic comes back, their recovery really still tails the overall tire industry return. So that's still impacting us as we think about where we are right now. But I will tell you a couple things. And the first is, in 2020, you may recall, given the situation that we had, we took a lot of steps to gain share and to do that in other channels, let's say, than just our big box channel with Walmart. We had great momentum leaving 2020. with gaining share in alternative channels. That momentum continued into 2021, and I think that's what you saw driving the share performance that we had. And add to that the return of the auto care centers being open, I think we're very confident that that traffic is going to return and that we're going to get back the share that we lost in 2020. And I would say the momentum is absolutely pointing in that direction. So feeling very good about that. And then in Europe, again, a little bit unique situation that you'll recall is that we initiated an aligned distribution initiative in 2020. And as part of that, we expected to lose volume about a million and a half units. With COVID coming in, that turned out to be about two and a half million units. And I would tell you the brunt of that probably was felt in Q3 of last year. But starting in Q4 and continuing this quarter, we started gaining momentum back and seeing the value of those programs working. And it turned up in what we would call this significant share improvement in Q1. So these programs are working. We're seeing it. as we capture more of the value of our brands in the marketplace, as we look at how tires are being sold in Europe in a more aligned way than, let's say, unaligned way with tires going in different directions, and that's been very successful. And we're on that path, we remain on that path, and we continue to believe that this program has, you know, a margin improvement of about $2 to $4 per tire, or 2 to 4 euros per tire, I should say, on our... on our consumer replacement business in Europe. So overall, I would say we're feeling pretty good about the direction of where our share is heading in Q1. Okay.
spk07: And maybe just a little bit more color on the drivers of that $91 million cost savings that you had in your bridge. You said $33 million is Gadsden, mostly Gadsden, but also some contribution from the German plants. Okay. You know, maybe you can give us a little bit of a sense of that. And then, you know, if we add back the impact of the storms, you're pretty close to 7% SOI margin already. Are you gaining line of sight on 8% maybe happening next year? Yeah. So I think the cost savings
spk02: Ron, I think that you're right to point out the structural cost savings we have from the manufacturing footprint actions. I think we've maintained some very tight cost controls coming out of the pandemic, and obviously we've still got volumes that have not recovered to pre-pandemic levels. So I think you're still seeing some of those benefits. Yeah, I think that there are some costs there that will likely return as we get back to the higher volume levels. But I think right now we've continued to run at a very tight level of cost efficiency. The question about where the margins get to, I won't go back through my thinking versus 2019 levels, but obviously we're above 2019 levels. And in fact, if we go back before 2019 levels, first quarter of 2018, we were just over 7%. And I think with the factors that we talked our way through, we're heading back. You could add back the additional volumes So we fully recovered volumes back to 2019 levels, and we got some recovery from the other tire-related businesses and added back the storm impact, which was your suggestion. It wouldn't be hard to do the math to put our segment operating income above 2018 levels. And that would be sort of in that 7% to 8% margin range, which is, I think, what you're trying to walk your way to. So I can do that math, and I can see our way there. Obviously, that work is not done yet, but it's not too hard to think about how we could move our way back beyond 2019 levels, back toward levels that are more similar to 2018. Great. Thank you.
spk00: We'll take our next question from James Piccarello with KeyBank Capital. Please go ahead.
spk06: Hey, good morning, guys. Hey, James. Just on Goodyear's strong volume outperformance, are you sensing any share gain momentum yet from the tariff situation in the U.S., or is that a potential catalyst later in the year, maybe as the company rebuilds its own inventory?
spk02: James, I think right now we're really struggling to keep up with demand. We're struggling to keep up with the recovery, and we haven't yet been able to restore our inventories back to something more like normal levels. And we've got channel inventories that are low as well. So we've got a lot of customers that are interested in trying to get their own inventories back in position. Then I think it's a little bit too early to think about, you know, any potential impact from tariffs. And, you know, I think, you know, in the end, you know, I think we continue to see tires, you know, important tires coming into the U.S., So I think the sell-in in the second half of last year was very high, and there may be some year-over-year difference this year. But, you know, in fact, I think generally U.S. tire makers are producing about as fast as they can right now. And to fill the rest of consumer demand, I think there'll still be some imports coming in. They'll just be coming in with tariffs.
spk06: Right. Okay. Got it. And then, you know, this was touched on already, but as I think about, you know, the lean channel inventory situation in North America, sustained strength and sellout demand on the replacement side, and then, you know, overlay that with the semiconductor challenges affecting OE volumes, you know, this should, you know, this should actually be a positive development for Goodyear in the industry, right? As you'll have more capacity to send through your higher mixed replacement channel. You know, just, you know, curious if if you have any other, you know, any color, any thoughts on what that benefit could be from a mixed standpoint if OE volumes are in fact lower than, you know, prior expectations.
spk03: Yeah, I think, you know, I'll start and we can talk about, you know, the mix impact going forward. But I'll even say on that, remember the capacity that's not being sold to OE typically is larger in diameter, very high in tires. So that's, you know, that's tires that there is demand for in the replacement market. But I think, you know, I think, James, if you take a step back on the channel inventories, I think it's something to maybe, you know, share some perspectives on. And I think as Darren said, you know, we saw some modest destocking of our brands with our wholesalers and retailers, but maybe equally as interesting in our third-party distributors, our line distributors, we saw that their inventories were about 10% down versus Q1 of 2019. And I think if you look at that, I think that makes the point on where inventory levels are, but I think if you add to that some other points, And that's around where sellout was. And obviously, we saw sellout in Q1 2020 was pretty good. But also, as I mentioned in my remarks, sellout in March was about 7% above sellout in 2019. And I think that that just talks about where the demand trend is. And then if you add to that the direction of where, let's say, vehicle miles traveled are going, that was still down 12% in February. But I think as we think about March and into the summer, I think it's reasonable to say that vehicle miles traveled will certainly head back in the direction of 2019. you'll see sort of similar directional lines. And I think all that's pretty good because now we're seeing lower inventory to support higher, you know, growing sales, let's say, a higher sales demand. And we're also doing that, as Darren said, in an environment where manufacturers are trying to rebuild our inventories from where they were managed during COVID as well. So all those are pretty positive. And then I think if you even take, you know, one more step to think about or one more added point would be that as we look at retail sellout prices from some of the the indicators that you know very well. I think there's evidence that retail prices are rising as well. So a pretty good dynamic as you think about the supply-demand dynamic that's out there, particularly relative to having to cover the raw materials we see in the second half of the year.
spk02: The only thing I would add to that is maybe just to quantify a little bit the point you're trying to get to. How do we quantify the benefit of being able to fulfill replacement demand with tires that we would otherwise be sending to the automakers? I guess I felt like that was embedded in your question. Is that fair?
spk06: Yeah.
spk02: Yeah, for sure. So if we, I mean, just using the modeling assumptions that we use, I mean, if we saw a 5% decline in USOE build, that would free up something like 450,000 tires that we could then put in the replacement market. And if we're assuming those are 17-inch and above tires, which almost all of our OE tires at this stage are, then there would be something like an extra $12 or $13 of margin on each of those 450,000 tires. And that would ultimately go into our mix. That would help our mix. So it's clearly a favorable effect. and obviously helps out our customers as well, which is, you know, we see as a real positive thing. You always have to just see how that plays out.
spk06: Yeah, that's super helpful. Just a quick one on Tire Hub, you know, $11 million year-over-year improvement in the quarter. Was there anything one-time related, or is that maybe a sustainable trajectory from here? Just thoughts on Tire Hub. Thanks. Yeah.
spk02: I think what we're seeing there is what we expected with TireHub, and that is as their volume builds up, they'd be in a better position to cover their cost base, including the investments that we wanted them to make to expand. So, you know, there's not really seeing anything of a one-time nature there. We're just seeing a, you know, after having some losses on our equity and tire hub for the first couple of years after startup, we're starting to see them, you know, get, you know, move back toward breakeven.
spk06: Thanks, guys.
spk03: Thank you.
spk00: I'll take our next question from Emmanuel Rosner with Deutsche Bank. Please go ahead.
spk04: Hi, good morning. First, a couple of quick questions to understand better how you're thinking about the second quarter outlook. And you gave a lot of helpful comments, but obviously the year-ago comparison was a little bit distorted. So would you expect the change in price mix versus raw materials to be of similar magnitudes to what we just saw this quarter. And then if I think about it in terms of SOI per unit or SOI margin, you know, if you prefer, would you think about it as, you know, similar or lower than, you know, what we've seen in the first quarter? And if so, what would be the drivers of that?
spk02: So I'm going to focus on the drivers because we intentionally don't give specific guidance on these items. But here is, I think, how you can think about that. I think, first of all, second quarter volume, I think we're looking or expecting the volume decline versus 2019 to be less than we saw in Q1. Now, there is some seasonality. So we've got some business units where the second quarter is seasonally a lower volume quarter, and that's certainly true in Europe. But generally, we're expecting to keep closing in on where volumes are for 2019. So if we're comparing SOI, and I will, I think about how our SOI in the second quarter is going to compare to 2019 rather than 2020 because 2020 was so disrupted. We could say that volume is probably going to be less of a negative in the second quarter versus 19 than it was in Q1. If we think about the impact of price versus raw materials, I would say that the pricing that we have announced is generally going to have the same kind of effect you know, in Q2 than it had in Q1. In fact, we've got a price increase announced in the U.S. of up to 8% that's effective April 1st. So that will, you know, mean there is bigger pricing impact or bigger pricing benefit in the U.S. in Q2 than there was in Q1, which I think, you know, that's a positive as well. So we've got a little bit of positive from volume, a little bit of positive on pricing. Raw material costs, We've actually got in our appendices, we've got a raw material slide that shows a couple of things. And it is slide 23, I believe. But two points here. First of all, it shows the $15 million decline in raw material costs we got in the first quarter. But it also points out that we expect a modest increase in raw material costs in the first half. so what we would see in the second quarter and we'll call it modest but that means the second quarter would it would more than make up for that 15 million reduction in laws in the first quarter and then probably a bit more above that so we would have you know modest increase in raw material costs in the second quarter resulting from that but we're going to have the increased pricing of from that April price increase to help deal with that. So I think you've got kind of a balanced view there of price and mix. Obviously, we don't expect to have the – actually, I'll say this. We actually will continue to have some impact from the winter storm that carries over to the second quarter because we've got some production impact that is still hung up in inventory that will come out in our cost of goods sold in the second quarter as well. And then in terms of cost savings, if I'm thinking about it versus 2019, this will be our fourth and final quarter of the benefit of the Gadsden closure. So we've been getting about $30 million a quarter benefit versus 2019 from the closure of Gadsden. We'll get something similar to that in the second quarter as well.
spk04: Okay, I really appreciate all the detail. That's very helpful. And then just talking about a couple of markets outside the U.S., I think you mentioned that in the prepared remark, but can you just go over sustainability of your margin performance from your point of view, and then what were the drivers of Asia margin weakness and how do you think about that going forward?
spk02: Yes. So let me hit, you know, Asia-Pacific margins. I'll come back and make a couple of comments about Europe. So, you know, I think that, and I'm going to keep going, making these comparisons to 2019, you know, and for the same reason. But if I look at Asia-Pacific margins, their margins in the first quarter were just under 8%. And back in 2019, in the first quarter, it was a little bit over 9%. So there was a decline. It's 38 million of SOI this year versus 47 million back in 2019. I'll say that most of that decline reflects some additional investment that we're making in marketing and developing our distribution channels for future growth. So there is some element of that, and there is also an outsized impact on Asia Pacific from our off-highway businesses, so the OTR business and our aviation business, and we didn't get any recovery in those businesses in the first quarter. So those are still a significant factor there and not really improving. But I think they will improve. It's just going to take a little bit of time. So if I take those two factors, I think overall we're pretty satisfied with the performance in Asia Pacific in Q1. Our replacement business was at record volumes. The distribution initiatives that we've got in China and India are helping deliver on those results. And I think as we continue to deliver on those results, and we get the recovery in the aviation and the off-highway businesses, we're going to see our volumes in the consumer business grow into some of those investments that we're making. So I think we feel good about the outlook going forward there as well. I'll finish my remarks on Asia there. In the European business, We've had a couple of quarters, and I mentioned it in my prepared remarks, we have a couple of quarters where we were earning 70 million or so of segment operating income and getting the margins that go with that. I think right now we're feeling like that while we appreciate there was some very good performance to deliver those two quarters, that we're not yet at a point where we've got Europe back to those levels sustainably. You know, I think our sustainable level of earnings in Europe, probably closer to what we saw in 2019, where we were running about $50 million a quarter. And, you know, I think as we look forward, we can take that $50 million and we know we're going to get benefit from restructuring. We know we're going to get benefit from the recovery and the rebuild of our OE portfolio. And we know we're going to get the benefit of the actions we're taking on line distribution. So I think we still feel like there is a path to get ourselves to the levels we've seen in the last couple of quarters sustainably. I think we're feeling like we're not there yet. I think as we look into 2022, I think we're feeling like we're going to move ourselves there. But I do think that the last couple of quarters, we've had some things that have helped boost those results that aren't yet at a sustainable level.
spk04: Thank you for the call.
spk00: Next question from Brian Brinkman with J.B. Morgan. Please go ahead.
spk08: Hi, thanks for taking my questions. Some of the other companies we cover, including in the automotive aftermarket, have cautioned recently around pending higher labor costs as the economy reopens amidst still elevated government unemployment benefits. I'm guessing you may be relatively protected from this, given your longer-dated union contracts for workers in your assembly plants, but was curious if maybe you're seeing perhaps some of the same in your company-owned retail stores. And then just looking beyond labor, are you seeing anything notable with regard to any other non-raw materials inflation, such as ocean freight, logistics, et cetera, and how would you rate the coping mechanisms available for you to counteract the effect of non-raws inflation? I think we're used to talking about sort of price mix versus raws and then separately about cost savings versus general inflation, but do you think you may have the ability to take price in the marketplace to help defray some of these other non-raws costs too?
spk03: Yeah, so Ryan, I'll start, and Darren can jump in here as well. I would tell you, you know, in terms of labor costs, I think, you know, our labor costs, I think labor costs in general have been on an upward trend. So that's not, you know, that's not necessarily a new headwind for us. I will tell you the headwind that we did experience during the pandemic, and again, I'm going to tip my hat to the teams, particularly in North America for this, is that we had a lot of people out with COVID or a lot of people not coming to work because of COVID, and we saw retirements and things like this take place. And, you know, we can all speculate as to the source of why those things are. You mentioned a couple of them, but the fact of the matter was we had to hire, train, and put a lot of people to work in our factories in the U.S. to be able to meet the demands as we started ramping our factories back up. And I would tell you that the teams did a tremendous job of doing that and doing it safely in line with our protocols. And we've done a fantastic job of getting the plants to continue to make the tires that we need to the market. running hard and and I would say that's going very well in terms of delivering the tires that we need and that's both on the consumer side and the commercial side we haven't talked much about the truck business but the truck business is very strong and we need every tire we can get so so that is a you know that's something that that we continue to focus on going forward on the retail side I do think that You know, there is wage pressure there, but they're always, you know, again, that's sort of an ongoing situation. I think the team, again, is very well equipped to manage that, and I think they are. And, you know, I look at that and I look at the quality of the people that we're hiring based on some of the recognitions that we get, and I think you saw not too long ago our retail stores were rated as some of the best experience that a consumer can have going to a retail store. So I'd say we're managing that very well. And then the question on some of the supply disruptions, excuse me, we clearly had those. I mean, I think you had a combination of demand really coming back faster than we anticipated, and then you had the disruptions coming in around, as I mentioned earlier, the Gulf weather that shut down a lot of the petrochem facilities there, including our own You had some of the Suez Canal issues. You had the port issues. You had containers and all these type of things. But again, I will tell you, we don't see a significant risk to our production. We're working through that. Teams are doing a great job. Our suppliers are in line. They have adequate inventory to meet our needs. our needs, excuse me, but what I will tell you is the end result of this is, and I think Darren's alluded to this a few times, we are seeing higher transportation costs that we have to manage, and we're very well focused on that. Okay.
spk02: Ryan, if I take it back to the way we you know, I guess, analyze our cost structure. You know, I think we were going through a period of time of rising inflation in 2019. You know, we were starting to see 45 or 50 million a quarter in inflation, and a significant, I mean, a lot of that was wage-based inflation. Over, you know, during the, you know, as a result of the pandemic, inflation, you know, effectively came way down, you know, and, you know, this quarter we had, you know, something like 30, you know, we had 30 million of inflation, which is, like, one of the lowest we've had in the last three years. I do think that as we see some of the factors that you're referencing, I would expect that that inflation number is going to start to creep back up toward where it was in 2019. Now, in 2019, we were able to maintain savings programs to offset that level of inflation. Yeah, so I think as we work our way back up to 2019 levels, I think we remain comfortable. To the extent inflation goes beyond those levels, it's going to require more work on our part to keep offsetting.
spk08: Okay, very helpful. Thanks. And then just lastly, you know, I realize that, you know, there will be in 2Q a non-repeat of various austerity actions taken last year amidst the onset of the pandemic. And so, you know, year over year cost savings could be minimal, and maybe that continues into 3Q. But are you able to say if you were to like try to normalize for the temporary savings, whether you think you may have found more permanent savings as a result of those cost actions taken in response to the lower volumes last year, such that you feel any more positively about normalized margin going forward. I'm not sure if there's a way to quantify those residual savings or if you could maybe highlight where you expect to layer back in fewer costs than you took out, whether that's primarily in manufacturing or SG&A, et cetera.
spk02: Yeah, Ryan, I think that there ultimately will be some. I think to keep it simple right now, I would focus on the factory footprint savings and structural element that's different than it was in 2019. I ultimately think there will be some areas that we'll find some permanent savings in, but not at a point of trying to quantify those right now. And I know there are some costs that we are still running without. that are likely to come back as we get all of our business activity back to those 2019 levels. So I don't want to mislead anyone, because I think there are some costs that will come back. The factory restructuring costs, those are going to be permanent savings. The other area, it's the right question to ask. And I think it's going to be clear to us as we get through the second and third quarter what additional savings, including in areas like SAG, we may have as more of a longer term effect.
spk08: Okay, great. Thanks for all the color. Thank you.
spk00: This concludes our Q&A session and today's Goodyear first quarter 2021 earnings call. Thank you all for your participation and you may disconnect at any time.
Disclaimer