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spk09: The site's on hold. We appreciate your patience and please continue to stand by. Your program will begin shortly. Thank you. Thank you. Thank you. Please stand by. Your program is about to begin. If you need audio assistance during your conference today, please press star zero. Good morning. My name is Katherine, and I will be your conference operator today. At this time, I would like to welcome everyone to the Goodyear fourth 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 Christian Gedzinski, Senior Director, Investor Relations.
spk04: Thank you, Catherine, and thank you, everyone, for joining us for Goodyear's fourth 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 Zamoro, Vice President, Finance and Treasurer. The supporting 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 two, 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 in 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.
spk05: Great. Good morning, and thank you for joining today's call. Before we begin, I'd like to take a moment to welcome Christian Gedzinski as our new Senior Director of Investor Relations. Christian is a long-time member of both our finance and North American business teams, and I know he's already familiar to a number of you. Welcome, Christian. Great to have you back on the team. I also want to mention that we're including Goodyear's updated strategy roadmap in today's slide presentation. Well, not something that we're going to have time to go through in detail today. We're sharing it to point out that it includes some important updates to reflect the inclusion of Cooper Tire and the increased importance we're putting on both sustainability and mobility. As you saw in our press release issued earlier today, we continue to have solid momentum in our business. Our fourth quarter sales increased nearly 40% to just over $5 billion, reflecting both the addition of Cooper Tire and the benefit of higher selling prices, particularly in the U.S. This marks our highest fourth quarter revenue in nearly 10 years. This robust sales performance helped us overcome significant cost inflation and deliver strong earnings growth. We generated $398 million of merger-adjusted segment operating income during the quarter, significantly higher than last year and over 60% higher than fourth quarter 2019. These were simply excellent results for our teams, who stuck to our strategy in an environment of rising costs. Like last quarter, our consumer business outperformed the industry globally. We're benefiting from new product launches, actions to strengthen distribution, and recent OE fitment wins, including robust growth in EV tire deliveries. In all, we added more than one-half of a percentage point of organic consumer market share during the quarter. This performance is a great example of all our components of our connected business model at work. At the same time, our commercial business is also performing well, reflecting strong fundamentals in the trucking industry, our best-in-class products, and the strength of our fleet solutions offering. We've gained nearly a percentage point of market share since the fourth quarter of 2019 by doing our part to keep commercial vehicles road-ready and operating efficiently. These mobility solutions give us tremendous advantage in today's rising cost environments. To provide some perspective on costs, our raw materials increased more than $300 million in the quarter, or 31%, a significant acceleration from earlier in the year. As with most companies, inflation is impacting more than just our raw materials. We are seeing these impacts throughout our cost base. To address cost pressures and supply chain challenges, we've remained agile. During 2021, we've implemented a series of price increases. We're also adding new suppliers, substituting materials when possible, and optimizing distribution costs. I'm really pleased with how our team has been aggressively responding in this environment, looking for opportunities to minimize the impact of inflation while increasing the certainty of our supply. Looking ahead, we expect cost pressures to persist over the next several quarters. As you would expect, we remain focused on executing strategies to capture value and drive efficiencies while prudently managing our costs. At its core, our connected business model is about winning with our brands in the marketplace. It's where we create value for our customers and consumers that in turn enables us to differentiate our products and services. As we executed on our strategies in 2021, we also expanded our scope. As you know, in June of last year, we took an important strategic step to strengthen the breadth of our product portfolio, enhance our value proposition with the acquisition of Cooper Tire. We continue to be pleased with the transaction and the opportunities we have going forward as a combined company. During the fourth quarter, Cooper contributed $156 million to merger-adjusted segment operating income, and we continue to make good progress toward our synergy targets. Moreover, I'm confident that with the combination, we have positioned our business to deliver strong organic sales and earnings growth over the long term. In summary, our business is performing well in an environment marked by volatility. We are growing our market share while capturing more value in the marketplace. We're making progress with our integration while maintaining our focus on customers and consumers. And you can see these elements of these successes in each of our SBUs. In the Americas, our U.S. consumer replacement business grew market share for the fourth consecutive quarter. Our premium volume, or our 17-inch and larger rim-sized tires, increased 9% despite supply constraints, including low inventory levels. While we're winning in the market today, we're also readying our business for tomorrow. To this end, we launched our first North America replacement tire tuned specifically for EVs during the quarter. The Goodyear Electric Drive GT, which incorporates our proprietary sound comfort technology, is an ultra-high-performance all-season tire designed to deliver long-lasting tread wear and a quiet ride. We're excited to offer today's high-performance EV owners this best-in-class, fit-for-purpose tire. We're also working hard to keep our Cooper product line current. Now, more than ever, today's value-minded light truck and SUV owners want functional performance and rugged tread patterns at attractive prices. With industry-leading mid-tier products, such as the Discover Rugged Trek all-terrain tire, Cooper is meeting consumers' needs and profitably growing share. Turning to our U.S. commercial business, with diesel and driver costs surging, we continue to see strong demand from fleets looking to leverage our premium tires and mobility solutions to improve their operational costs. Cost per mile is as critical today as it ever has been, and this feeds into our strengths in technology. In this environment, our commercial replacement volume was well ahead of pre-pandemic levels, and as we discussed in the past, if not for supply constraints, our commercial results could have been even stronger. As we look outside the U.S., our business in Latin America is performing well in a challenging environment. The replacement market continues to recover with both consumer and commercial industries approaching pre-pandemic levels. Throughout last year, our Latin American team has consistently demonstrated a commitment to our connected business model by expanding aligned distribution, driving the value of our brand, and successfully executing our product roadmap. We've also remained intensely focused on meeting the needs of our customers, enabling them to continue winning in the marketplace through best-in-class products and services. I couldn't be more pleased with the performance of our Latin American business in 2021, which is a testament to the experience of our leadership team and their ability to successfully navigate through volatility while remaining focused on executing our strategy and delivering value for our customers. Moving on to EMEA, we're seeing continued share recovery in our consumer business, reflecting the impact of last year's actions to strengthen distribution. We're also benefiting in the mid-tier and the economy segments from the current impact of fewer imports into the region. These dynamics are particularly evident in the EU, where we are winning in both the premium and value segments. Overall, we grew our consumer replacement volume 22% organically, or about 8 percentage points faster than the industry. By having the right tires for the right season, we're gaining market share in both summer and winter tire categories, a testament to the strength and breadth of our product portfolio. Turning to EMEA's commercial business, we continue to benefit from our innovations to support our customer transition to a greener future without adding complexity. By developing fuel-efficient products, such as the FuelMax Endurance, and easy-to-use solutions that meet customers' sustainability and efficiency needs, we've been able to grow our volume nearly 10% since 2019. Our suite of products and services for fleets was designed to capitalize on these growing trends. With 80% of fleets expected to have sustainability KPIs in place by year end, our Goodyear Total Mobility offering will afford us significant competitive advantage in the years ahead. In our Asia-Pacific business, we experienced better industry demand than in the third quarter, reflecting less COVID-related disruptions in China and several ASEAN markets. Again, the improving backdrop of our legacy Asia-Pacific business delivered its highest consumer replacement volume on record. With lockdowns and mobility restrictions easing, OE demand was more consistent, but it remained below pre-pandemic levels due to the continued impact of semiconductor shortages. In this environment, we grew our consumer OE volume 6% organically compared to the prior year as the benefit of new fitments more than offset the impact of reduced auto production. In our consumer replacement business, we dramatically outpaced the industry again with organic volume increasing 4% in a relatively flat market. We're benefiting from the continued distribution expansion in India, particularly in rural areas, which resulted in consumer replacement volume growth of nearly 40% in the quarter. In China, the digital tools rolling out make it easier for consumers and customers to choose Goodyear. For example, our app-based direct-to-retail distribution model has been instrumental in expanding dealers' access to our product portfolio and driving share gains. We plan to complete the rollout and add additional functionality this year, further strengthening our competitive position. While we've been focused on execution in today's volatile environment, our goals include advancing our technology and capabilities as well. This work includes various forms of information sharing, co-development, and testing through partnerships with traditional and emerging mobility companies alike. We are continually innovating and collaborating to drive the tire industry's evolution to the next level of performance. So with this as our strategy, our tire intelligence team launched a new test vehicle during the quarter equipped with proprietary algorithms and tire sensors powered by Goodyear Sightline. We're harvesting the power of rapidly prototyping hardware and vehicle data to enhance our ability to analyze tire and road conditions in real time. Mastering these challenges will enable next-generational vehicle control systems and advanced fleet monitoring solutions. This new capability, when coupled with our industry-leading tire technology, will be a core differentiator over the long term. While staying on the cutting edge of tire intelligence will benefit consumers and commercial customers, we're also focused on building a more sustainable business so Goodyear remains the world's preferred tire brand. To this end, we announced our goal to achieve net-zero greenhouse gas emissions by 2050 with minimal reliance on offsets. In support of this ambition, we established new intermediate-term emissions reduction targets aligned with SBTI standards. We understand the importance of reducing our carbon footprint, and our new goals demonstrate our pledge to combat climate change. As an industry leader, we're also committed to using more sustainable materials in our tires to help protect our planet for future generations. As a result, we're working diligently to develop a 100% sustainable material tire by the end of the decade, and the focus is paying off. In January, less than two years after setting the goal, our scientists and engineers constructed a demonstration tire with 70% sustainable material content. 13 featured ingredients are used during construction, including technical-grade polyester sourced from recycled plastic bottles. While we're building the scientific and engineering capabilities to work with these new materials, we're also developing new supply chains to support the transition over time. We're off to a fantastic start, and I look forward to updating you on our progress in the future. As I reflect on 2021, our business is performing exceptionally well. Uncertainty around inflationary cost pressures and industry demand remains, but we're well positioned to deal with these challenges. U.S. inflation gauges are at 40-year highs, reflecting the impact of higher labor, transportation, energy, and commodities. We're committed to taking the steps necessary to counter the impact of these higher costs. The supply of semiconductors is improving, but auto production remains well below consumer demand. While this dynamic creates uncertainty for our OE volume in the near term, our robust OE pipeline positions us for continued share gains regardless of the level of auto production this year. So taken together, our business is performing at a high level despite a challenging macroeconomic environment. We're recovering share while improving margins. The Cooper integration is off to a strong start, and we're driving the innovation necessary to ensure we continue leading our industry through the mobility revolution and beyond. So now I'm going to turn the call over to Darren. Thanks, Rich.
spk01: Our fourth quarter results continue to reflect a number of critical performance trends. These trends allowed our business to recover more quickly in 2021 than we possibly And while Q4 faced tougher year-ago comps than the early part of the year, we continued to see strong top-line growth, recovery of market share, strong growth in revenue per tire, and significant benefits from the Cooper tire combination. While volumes in the quarter remained below pre-pandemic levels, driven by lower OE production, volume trended closer to pre-pandemic levels than Q3, a good sign as we start the new year. As seems to be the case in most businesses right now, the big challenge in Q4 was cost inflation, with COVID-related disruptions a close second. You see in our results that raw materials took another step up in Q4, increasing over $300 million. And we saw a step up in other inflation as well, with over $80 million in calculated general inflation, compared with our recent historical average of closer to $35 million a quarter. In addition, we continue to be impacted by COVID-related absenteeism in our factories and by the need to hire a lot of new workers, particularly in the U.S., to address higher retirements and overall attrition. As discussed last quarter, this not only results in higher costs for workers who are training others or being trained rather than building tires, but also reduces the normal pace of cost savings programs in our factories. and creates a situation where the metric we normally think of as cost savings is negative, reflecting this impact on productivity. While, as you'll see, we offset both raw materials and other cost inflation with price mix in the quarter, these factors, along with lost factory productivity, compressed our segment operating income margin and added pressure to working capital. Even with these impacts, however, we delivered better earnings per share than a strong year-ago quarter, and we ended the year with a better balance sheet. Our year-end net leverage was less than three times, achieving the interim target we announced with the transaction a year early. Overall, we're feeling good about our recent results and continue to feel very good about the benefits of the integration of Goodyear and Cooper. Moving to the specifics of the income statement on slide 10, fourth quarter sales were $5.1 billion, up $1.4 billion from a year ago, including about $960 million of sales from Cooper Tire. Unit volume increased 29% from last year's fourth quarter, reflecting the addition of Cooper Tire units and strength in our replacement business. Segment operating income was $391 million, including $149 million from Cooper, net of merger-related costs. Merger-related costs were $7 million, so merger-adjusted operating income was $398 million, or nearly 8% of sales. After adjusting for significant items detailed in our press release, our earnings per share on a diluted basis was $0.57, up from $0.44 a year ago. The step chart on slide 11 summarizes the change in segment operating income versus last year. As we've done all year, we also included a comparison to 2019 on slide 12 that provides some good perspective by excluding the pandemic-related effects of 2020. While volume in Goodyear's legacy business was just slightly above last year, given weakness in OE production, we continued to deliver strong price mix. Revenue per tire for the quarter was up 11%, excluding foreign currency. The combined impact of higher prices and improved mix contributed $419 million to earnings, exceeding the effects of higher raw material costs, which increased $308 million. This price mix and excess of raw materials was sufficient to offset the calculated level of non-raw material inflation. While using price mix to offset non-raw material inflation is different, given the high level of inflation we're experiencing today, this is how we'll need to approach it, at least in the near term. The red bar next to calculated inflation captures the impact of unique cost factors, including the impact of training and staffing issues at our factory that are not captured in CPI-based inflation. While we feel that this impact is transitory and will likely improve during 2022, there will be a significant factor in Q1, which I'll come back to when we discuss our forward outlook. Similar to last quarter, we've included two bars to show the impact of the Cooper tire transaction on our results. The green bar on the left reflects Cooper's operating income, which totaled $156 million during the quarter. The results reflect strong performance by Cooper's North American consumer replacement business. The red bar on the right captures merger-related costs, essentially the amortization related to the intangible assets recorded in connection with the merger. Turning to the balance sheet on slide 13, net debt totaled $6.3 billion. The increased net debt compared to last year reflects cash consideration paid at closing for the Cooper transaction. Note the decrease in total debt from Q3 includes the repayment of the $400 million second lien term loan that had been part of our capital structure since the early 2000s. Slide 14 shows an analysis of our free cash flow. Over the last 12 months, free cash flow was positive, despite the impact of inflation on working capital. While we continued rebuilding our inventory during the quarter, we have not yet restored our finished goods inventories to targeted levels, particularly in North America. More on that when we talk about the outlook for this year. Turning to our segment results beginning on slide 15, America's unit volume totaled $25.5 million, up 45% compared to the prior year's period. The increase reflects the addition of 8.5 million Cooper tire units, as well as strength in our replacement business. As you might expect, our OE volume was down. America's segment operating income totaled $308 million, or 10% of sales, despite the cost-related challenges. America's results included $142 million of merger-adjusted operating income from Cooper and $7 million of costs triggered by the merger, or a net of $135 million. Also recall that last year's operating income included a favorable legal settlement and other items that added about $20 million. Turning to slide 16, Europe, Middle East, and Africa's unit sales increased 11% to $13.8 million. Replacement volume increased $2.2 million, reflecting a strong winter tire season, as well as share gains in our legacy European consumer replacement business. Overall, OEs in Europe produced about 25% fewer vehicles than in last year's fourth quarter. As a result, our OE volume declined by 800,000 units. EMEA's segment operating income of $41 million was down $28 million compared to a year ago. While price mix offset raw material costs, it did not offset the impact of higher non-raw material inflation, notably energy and transportation. EMEA was also impacted by the non-recurrence of temporary cost reductions a year ago, along with the continued impact of COVID-related disruptions on manufacturing. Despite these challenges, EMEA's segment operating income remained above pre-pandemic 2019 levels. Turning to slide 17, Asia Pacific's tire volume increased by 1.5 million units to 9.3 million, reflecting growth in both consumer OE and replacements. Our consumer OE business was up over a million units, driven by the addition of Cooper and solid performance in our legacy business. While the industry is still impacted by chip shortages, we increased market share for the third consecutive quarter, driven by a ramp-up of new fitments. Growth in replacement reflected strong performance in India, partly offset by COVID-related weakness in China. Segment operating income was $42 million, down slightly from the prior year, reflecting higher raw materials and other cost pressures that we were not able to fully offset in the quarter, despite higher volume and the benefit of Cooper earnings. I want to make one additional reflection on Asia. The current inflationary environment is particularly challenging for our Asia business, given it has a higher mix of OE than any of our other geographies. In addition, in many cases, we lack raw material index agreements with our OE customers in Asia that are prevalent in mature markets. So recovering even raw material cost increases is more difficult there. We believe our position on future fitments and the benefit of our technology will help us achieve better returns on OE business going forward, and that the growth in replacement markets will continue to allow us to improve price mix in the business overall and support recovery in margins over time. Turning to our outlook items on slide 18. Overall, we expect 2022 to be a year of continued volume recovery, with replacement industry demand continuing to grow and OE demand recovering as the semiconductor shortage situation improves. We expect to be able to more than offset raw material costs with pricing actions and improved mix, although our raw material cost increase will reach between $700 million and $800 million for the first half. This includes the impact of currency and non-feedstock supplier costs. Inflation, including incremental wage, benefit, transportation, and energy costs, will result in higher operating expenses and will continue to be at levels beyond what we could offset with efficiency, at least through the first half. Transportation alone will impact Q1 earnings by 20 to 30 million, more than it did in Q4. Bringing these factors together, along with the assumptions on slide 19, we're targeting 2022 free cash flow around breakeven. This includes working capital investment of around $300 million, including the rebuild of America's inventory that we were not able to complete in 2021. It also reflects an increase in capital expenditures to between $1.3 and $1.4 billion, including a full year of Cooper CapEx. This spend will include upgrades for more complex tire designs, including those required for electric vehicle fitments, which we continue to win at rates that are higher than on traditional ICE vehicles. The investment will also include brownfield expansions to increase capacity to address current supply constraints and address growing replacement demand. We'll provide more information on the more significant programs as they're announced. Note that slide 21 provides updated modeling assumptions. These continue to reflect Goodyear's legacy business. Once we anniversary the Cooper combination, we'll revisit these assumptions to reflect the combined business. Also note we expect to file our 10-K early next week. Now we'll open up the line for questions.
spk09: And if you would like to ask a question, please press star and 1 on your touch-tone phone Again, that is star N1. If you would like to ask a question, you can remove yourself from the queue at any time by pressing the pound key. We'll take our first question today from Ryan Brinkman with JP Morgan. Please go ahead.
spk07: Hi. Thanks for taking my questions. Could you maybe talk some more about the pricing dynamics in the aftermarket in the U.S., perhaps from the perspective of, you know, what percentage of announced price hikes might be sticking, whether that is higher than you've experienced historically or I'd be curious what your thoughts are generally in terms of the industry's pricing power, whether investment in quality tires might now be more justified in consumers' minds because of the higher price of the used vehicle that they're maintaining, or any other factor that you think might be impacting the industry's pricing power. And then a related question might be if you think Goodyear's pricing power is any different from the overall industry's, whether because of, I don't know, the segments of the market that you target or because of your specific market. product tire launches, et cetera.
spk05: Sure, Ryan, a lot in that question. I'll start, and I think, you know, Darren and I may tag team a little bit. I would tell you, you know, just to start with, and we'll focus on the U.S. as you asked here, it's a really very, very good constructive pricing environment that we've seen right now, probably the best in recent memory. And, you know, that's in an environment of strong demand, of distributors and dealers having good margins in their business, And I think an environment that also reflects the, you know, the increased vehicle miles traveled out there. If you just look at the industry, you know, on top of the 2021 price increases that we've had, we came into 22 with all of our main – all tire manufacturers out there essentially announcing double-digit price increases coming into 2022 – In our case, for Goodyear, we had Cooper and Goodyear announced up to 12% effective beginning of the year, Jan 1, 2022. And on the commercial side, same thing. We announced up to 14% effective on January 1, 2022. And again, on the commercial side, I know you didn't ask that, but also very, very strong demand there. So I think I said in my comments, if we could make more, we could actually even sell more in the environment that we're seeing. You know, Ryan, I would also point out that as we look at all those price increases that were announced out in the marketplace coming into 2022, we did not see any stockpiling or any pre-buy as we started the year, or as we ended the year, I should say, in December. And I think that's a pretty good sign about how dealers are feeling about their businesses going forward as well. And I would just say January volumes were very good as well, so reflective of, I think, the current environment rather than trying to arbitrage someone's view of where the market's going. You know, and the point on used vehicles, absolutely, I think, if you can't get a new car, used vehicles are looking to be refurbed, whether it's a personal owner or someone selling them, and putting tires on there. And as you know, putting the right tires on a used vehicle can give you a distinguishable drive. And Goodyear tires, particularly in the U.S., when we talk about Weather Ready, when we talk about our light truck tires, the Wrangler series, that makes a big difference. And I think there is a balance. benefit moving to a tire like ours. And I think these are all positive things. You mentioned the segments as well. You know, we've got the Goodyear brand, the Kelly brand, the Cooper brand. As we look at the market, we've seen that positive pricing environment across all brands and across all of our segments. So I think really pretty constructive all around. And, you know, we didn't talk OE. Your comment was mostly on replacement. But, you know, as OE comes back, I think that's upside for us as well as we think about as the supply shortage on chips gets better as well. So very constructive environment overall. So, Ryan, let me add two points.
spk01: One related to the, you know, what's happening with the broader group of industry players. You know, and there are nine competitors that we tend to track. And seven out of the nine have announced price increases in the first quarter. And one of the ones who hadn't raised prices right at the end of last year. So we are seeing, you know, very consistent pricing across all the significant industry players. The other point that I'd like to make is that while historically when we announced price increases, of you know and obviously there are a lot higher numbers today but traditionally if we've announced a price increase of up to four percent uh we generally got an all-in yield of about half of that obviously now we're announcing price increases in double digits which is much higher the other thing that you'll see though and this is reflected in our fourth quarter results I think in our expectations for the first half as well is we're getting a much higher yield on the announced price increases which says that the increases are applying to a broader part of the product portfolio and that you know those price increases and because of the cost environment might in a typical environment.
spk07: That's helpful, Culler. Thank you. And then just lastly, what has been the experience with OE pricing? I think there are maybe more codified commodity pass-through arrangements with automakers versus aftermarket customers, but one thing we've been hearing a lot about from other auto parts suppliers has been the necessary challenge of attempting to recoup from automakers not just higher commodity costs, but also higher non-commodity supply chain costs, such as increased prices for ocean shipping, logistics, freight, natural gas, electricity, even labor. Have you had those discussions also? And how do you feel about your ability to price for those non-commodity costs?
spk05: Yeah, Ryan, I think you've kind of described it. I mean, you know, we're dealing with the impact of lower OE volumes because of the shortages, the chip shortages, and also really uneven volumes as well in terms of getting their demands. And we have the significant cost inflation that you mentioned. So this sort of creates that unique combination of challenges that impact OE profitability. And, you know, when we think about RMIs, and we've talked about those a lot in the past, So you're absolutely right to say there's work needed to continue to address these other costs that we're, these other inflationary costs that we're seeing. And we are having those discussions. And I would tell you, you know, a couple things to think about. And one for Goodyear, you know, the segments that we play and think about light truck and think about the demand for light trucks out there. Think about EVs. We're in the right segments where the vehicles are in demand. There is a demand for our technology out there. What we bring to the table on technology really matters, and also bring our ability to supply. So those are things that I think are really impactful in our ability to work through these things over the long term. You can't do it all in a quarter, but I think they're very positive. And then you add to that, you know, as production comes back, there's production schedules that are uneven where maybe more demand is needed. And I think these are opportunities for us to have those discussions as we think about how we supply those customers going forward. And, you know, I just ended in saying, you know, what matters to the OEs is solving their problems, right? Solving, getting them the tires they need to fit their vehicles. And I'm very confident in telling you Goodyear is very good at that.
spk07: Very helpful. Thank you.
spk09: We'll go next to Emmanuel Rosner with Deutsche Bank. Your line is open.
spk03: Hi, good morning. First, I wanted to follow up on your outlook for free cash flow this year. Obviously, break-even free cash flow is a little bit lower than expected, especially under such strong traction on the operational front. So can you maybe unpack this for us in terms of how much is related to ability or not to sort of keep growing operating income in 2022 and How much of it is sort of like the free cash flow usage pocket that you highlighted? And then as I think about this working capital and CapEx investments, how sticky or not are they? So if you were to say, okay, this is an investment, but then what would that look like beyond 2022? Yeah.
spk01: Yeah, so we'll certainly come back to that, but let me hit on 2022 first. And I think the whole perspective that we have on our free cash flow target, it starts with the fact that we were able to deliver a stronger balance sheet in 2021 than we were originally expecting to be able to deliver. And when we announced the Cooper transaction a year ago, effectively, we said we knew we were taking on some additional debt but we felt like within two years, we would be able to get our net leverage, our net debt to EBITDA back below three times. We actually achieved that by the end of 2021, which is a year early. And the fact that we had our balance sheet in better shape earlier, I think has made us feel like it is appropriate. to be a little bit more aggressive on investment, and particularly investment that we need in order to support our new OE fitments that we've been winning, and make sure we've got the capability in our factories to support the tires that we're going to be designing and building for electric vehicle platforms, which has been a growing part of our OE fitment wins. associated with them so we feel like that you know that justifies the investment we feel like the balance sheet is in shape to make that investment but if we step you know we step back from it and think about the earnings drivers for 2022 first of all we do expect the markets to stabilize and when I say that continue to stabilize so I say that that means we are expecting our volumes to continue to approach 2019 pre pandemic levels And, you know, we had through the first three quarters last year, volumes were still running 7% or 8% below pre-pandemic or below 2019. In the fourth quarter, we were about 4% below our 2019 volumes. And that's with the, you know, in the legacy Goodyear business. So we expect to continue to close that gap. So we expect some continued lift from volume. So we get some good news on volume. We feel confident that we're going to be able to offset raw material costs with price mix. The real challenge in terms of 2022 earnings is going to be addressing inflation in other costs, so non-material costs. And obviously, we think price and mix can help with that. But we've got a number of costs across a number of categories and some continued disruption in our factories from attrition and from the effect of the pandemic. So that's creating some challenges. On the other hand, we're going to have benefit of a full year of Cooper earnings and continued benefit from integration and the earnings synergies that we get from the integration. So a number of things there that I think if you think about the – the free cash flow target around breakeven, you know, I think you're going to conclude that doesn't, you know, that does reflect some increase in earnings or some increase in, you know, an even, even top. The, the investments that we're making for the year, you know, obviously the, the 1.3 to 1.4 billion of CapEx, you know, that's an increase of two to 300 million versus what 2021 would have looked like if Cooper had been included for the full year. So it's an increase, but in the range of $200 to $300 million, which will allow us to do some significant brownfield investments, as well as some equipment upgrades. And that CapEx program, when we step that up, that does tend to be some, you know, those programs tend to be multi-year programs. So, you know, that investment is likely to continue. post-2022, although we've always been fairly agile when we've needed to pull back. But generally, the expectation is that those programs are going to take place over the next two or three years. Working capital, on the other hand, which we said is we expect to invest about $300 million in this year to get our inventories back where we need them to be, that's a bit more of a one-time item. And over time, we've been able to manage the business with working capital as neither a source nor a use of cash. And that's more the model that we would expect when we get out beyond 2022. The remaining items that you see in our financial assumptions, including interest payments, pension, cash taxes, You know, those are levels that are up a little bit, but, you know, from where they would have been last year, but that's principally the inclusion of Cooper. And then, obviously, while our capital expenditures and investments in the factory are up, our restructuring cash payments are down. You know, so we're expecting those, you know, they've been at a couple hundred million a year in the last couple of years. Those have come back down to, you know, be around 100 million for, you know, for 2022. So I think you take all those factors, you know, I think you're going to find that the, you know, while our EBITDA run rate for the trailing 12 months was somewhere in the range of 2.3 billion, that in order to hit break-even, you know, that EBITDA is going to have to rise during 2022, you know, given the investments that we're making.
spk03: Okay. I appreciate all the detail. Maybe just two very quick follow-ups on EBITDA. on your walk, first on the raw materials front. So I think your expectation is for $700 million impact this year, principally in the first half. Are you assuming that you get a tailwind in the back half, or is the back half roughly stable year over year within that assumption? And then the second question is around the restructuring here. You've been doing in Europe. What sort of... could you expect from this this year? And are the challenging operating conditions, you know, labor and such, making it harder to extract some of these cost savings in Europe?
spk01: Yeah. Yeah. So, well, certainly. And I'll answer the, you know, the second question first, I think. And, you know, we are getting the savings from the restructuring of the two German factories. And we've reduced the size of each of them and reduced the staffing as a result of that. And we will get some incremental savings in 2022. I mean, 2022 is the point in time where we expected to have the full $60 to $70 million savings compared to the 2019 baseline. So we will get a step up in the savings for that German restructuring. The issue is that we're seeing other types of cost increases. And I think in Europe, probably the biggest offender is energy prices, which haven't affected us as much in other parts of the world, but are pretty significant for us there. So the non-raw material cost inflation there is making it more difficult to get whatever savings we do down to the bottom line. The team's still doing a good job executing. If we come back then to the raw material question, What we've effectively said is that for the first half, we expect the increase of $700 to $800 billion of raw material cost. And that incorporates, I think that you realize that we've always historically said that about two-thirds of our raw material costs come from feedstock, and about a third of our raw materials come from non-feedstock, which includes transportation, and other supplier costs, as well as supplier margins. So that $700 to $800 million, to be clear, includes the increases in feedstock, which would probably be somewhere around $500 million, but also includes some significant non-feedstock costs, including about $70 million impact of foreign exchange and significant step up in transportation costs. But really, for what we've done What we've done for right now, though, is just look at the first half because we do think there's a lot of uncertainty about how commodity prices are going to evolve over the next few months. So it does leave us with some uncertainty in the second half. If commodity prices stayed where they are, we would still face several hundred million dollars of raw material cost increases in the second half year over year. But we think it is really difficult to make that call right now. And raw materials have dipped down. They have risen back up here early in the year. But we think that with the level of uncertainty we've got, it's just not easy to call where the spot prices of raws are going to go.
spk03: Great. Thank you so much.
spk09: The next question comes from John Healy with North Coast Research. Your line is open.
spk00: Great. Just wanted to kind of stay with the price mix topic just for a couple more minutes. When you look at your ability to get price, you talked about the action you took at the beginning of the year. I think there's been some actions by one or two competitors for shipments maybe in April. As you look out and kind of acknowledge that uncertainty of raws for the second half of the year, do you feel good that you can continue to approach the market with additional pricing? I just would love to get your confidence in terms of, I guess, the ability to continue to get price above the raw, whether it's feed or non-feed costs as we move throughout this year.
spk05: Yeah, I think, you know, I'll start and jump in. Again, going back to where I started, I think we feel very constructive about the pricing environment that we're seeing, given the costs that we're seeing, as Darren explained, both feedstocks and non-feedstock costs out there. So, you know, as we see these incremental cost headwinds come our way, You know, it's our obligation, our jobs to deal with those and our mechanisms to do that are two things, again, both, as you suggest, recovered in the marketplace with price and also focused on the cost actions that we will do in terms of managing spend and doing other things to make sure that our cost structure is in line in an inflationary environment. So I think you're going to see we'll do both on those. Again, that's things like managed spend. It's things like working on our plant optimization programs where we're looking at everything we do, what we do, how we do it, why we do it, where we do it, and even continue to look at all the businesses that we have to make sure they're performing or not. We're not afraid to take those decisions. But getting back to the environment around seeing higher costs in the second half of the year, I would say you can be sure we're going to be aggressive in dealing with those. And I think the market dynamics certainly are favorable and constructive around the ability to capture the value of our brands out in the marketplace.
spk00: Great. And I wanted to spend a minute on the roadmap slide that you guys have on the deck this quarter. You know, you guys talk about sustainability in there. And, you know, I think a lot of companies talk about it, you know, in a lot of different ways. But when I think about your business, you know, does it help you win share with these OEs that are very focused on sustainability as you kind of align the strategy to what they're doing? And, you know, as you talk about raw material costs, do, you know, a move to recycle their kind of alternative kind of raw materials, Can that be a meaningful savings as you look out over the next three to five years? We'd just love to kind of dive into that sustainability aspect of what you guys are trying to put together.
spk05: No, thanks for the question. It's a good one. I think the way we think about sustainability and why it's in our roadmap is, number one, for us, it's the right thing to do. I mean, we know where we are as a society, as a company. Goodyear, it's in our DNA to do the right thing, and dealing with this is in that vein, and so it is a priority for us. And I would also tell you, as we move ahead, we see two things that we have to get ahead of, and that's, one, solving customers' problems. And we know our customers need sustainability solutions, not only in their tire products, but how they view their contribution gases going forward so number one you know centering this around customer needs is why it's important and and related to that really is how we think about the future of mobility and we've called it you know new mobility or whatever you want to say I think you have to add sustainability to that our view of the world going forward is sort of winning in this triangle of technology mobility and sustainability and the ability to solve all those problems in this new world where I think Goodyear can deliver value to our customers deliver value to our shareholders by solving the problems that we have around tire intelligence around connected vehicles and doing it in a sustainable way and I do think that's what our customers want going forward our sustainable tire starts that and We're very proud of getting to 70% already, and we're not manufacturing it full yet, but we're going to get there to do it. And also, I would tell you things like our non-pneumatic tire. You know, we're running that on certain applications already with great success. That's even a more sustainable tire going forward. So I do think that this has competitive advantage, and I do think it highlights... Goodyear's technological advantage over many, many of our competitors, and therefore will benefit us going forward in a real business way beyond just the environment.
spk00: Great. And just two housekeeping questions for me. I know in the slides you guys talk about the $15 OE and the $30 kind of replacement profit per tire, at least in the U.S. If you had to think about the EV units, how would that compare either on OE or replacement? And then just secondly, you know, I thought you guys had some maturities maybe that you could call or maybe refinance in the next year or so or 18 months. I was just curious if you have any thoughts about, you know, maybe given with the leverage coming down, maybe taking advantage of, you know, maybe a different debt profile than you guys had, you know, when you put some of these maturities in place.
spk01: So, let me, you know, let me hit the first question, which is the EV question. You know, I think we, the, you know, OE and replacement. At OE, you know, I think what we know right now is that the electric vehicle fitments, because of the demands of the product and the fact they tend to be, you know, larger, more advanced tires, do bring with them a higher revenue per tire. And I think the last time that we pulled out that analysis, they were something like 30% above the tires that would go on a similar size internal combustion engine tire. The challenge for us, of course, is to make sure that we bring some of that 30% top line to the bottom line. So I think it's an important question. We don't have a specific number in mind. We've got a lot of work to operationalize those tires and to make sure we understand what the cost of production of those tires is. But I think we feel like we've got the opportunity in front of us and we're going to be working to try to improve the margins there. On the replacement side, including with the new product launch that Rich mentioned in his remarks, I think we are feeling like At a point in time, what we called high-value added tire dynamics gave us margin opportunity in the replacement market. I think we feel like electric vehicle transition gives us another opportunity to differentiate products. and to design features that are going to be very important to electric vehicle owners, including the one that Rich mentioned, which is the sound comfort technology, which is just to make sure that there's not a bad experience based on tire noise that goes along with those electric vehicles. So I do think that there is a lot of opportunity there to drive margins ahead of where margins are on traditional ICE vehicles. So that opportunity is in front of us. It's part of why we feel good about the investments that we're talking about making and the higher CapEx program that we're looking at. So maybe I'll let Christina take the question on the debt refinancing.
spk08: Sure. Hi, John. So you're right to point out that we do have our $800 million, 9.5% coupon note. callable at the end of may of this year those were notes that we issued in the early innings of the pandemic and so assuming that markets would remain pretty constructive we could have an opportunity to refinance that and reduce our interest expense i'd say that you know the first call premium is half the coupon and so i'd look for that cash benefit more in 2023 as opposed to this year on structure I don't know if you caught it, but in Darren's prepared remarks, he mentioned that we did repay our second-ling term loan toward the end of the year, and that was important for us as we think about our path to improving our balance sheet and marching toward that investment-grade structure.
spk00: Awesome. Thank you. Thanks, John.
spk09: We'll go now to Rod Lash with Wolf Research. Your line is open.
spk06: Hey, Rod. I was hoping we can maybe just frame what you kind of need from a pricing perspective at this point. So let's say you have that $700 million, $800 million of first half raw materials and a couple hundred million in the back half. That'll be a billion. Sounds like calculated inflation is running and around $80 million a quarter, so maybe another $300 million there. Correct me if I'm wrong. And we're thinking that at this point you have kind of in the bag maybe something approaching $500 million of pricing. So more would be needed. If I go back to prior high inflationary environments like 2011, 2012, you actually had a couple years with a billion or even $2 billion of positive pricing there. So I'm wondering if you think the competitive environment is such that something like that is doable for you to be able to mitigate something of that magnitude with price.
spk01: Well, certainly the rhythm of pricing and the amount of pricing that we've been doing is similar to what we saw back in that 2011-2012 timeframe. And I think that right now, I think that's what gives us the confidence for being able to cover the raw materials in the first half. And it's what's allowing us to cover, at least in a good part of the world, cover additional infillation beyond raw materials. I think the way that the environment evolves is going to be the question. harder to answer second half questions than his first half questions. But I think right now we're certainly feeling like we're in a rhythm of recapturing inflation beyond raw materials. And we're certainly doing it in the replacement market. The OE challenge we've talked about on the call already. And in my remarks, I mentioned the fact that Asia is our smallest business, but it is the business where it's probably most difficult right now. to fully offset the costs that are coming at us. The costs that are probably most difficult for us to recapture are in sort of the new label that we've used, sort of the category formerly known as cost savings, which we now call efficiency excess inflation and other cost increases, as it has gone negative. And that incorporates some of the disruption in our factories that have resulted from our need to hire more people because of attrition and absenteeism, and just the need to manage through absenteeism, which was a significant factor for us in Q4 and Q1, hopefully. We're moving past the absenteeism related to Omicron, and those factors start to decline so that that negative in the earnings walk is transitory and starts to go away as we get to the second half. I think that's what we're hoping for, because I think that's the element that is the most difficult for us to recapture.
spk06: Sorry. Go ahead, Rob. You know, so just competitively, isn't isn't just about every tire company experiencing the same kind of inflationary pressures, whether it's turnover or transportation and all these other things that you're mentioning? And if the environment is as tight as it seems, especially in North America, do you have any color on whether you just feel like the – The mode of the industry right now is to actually recover all of this or no. And can you give us any color on what's happening in Europe? You did mention specifically North America and Asia.
spk05: Yeah. So, Rod, actually, I was going to kind of go just where you went. You know, if you take a step back, I mean, maybe I'll start with going back to your comments around 2011 and 2012, which obviously we all remember here as well, and most of us do. You know, I think that started, and I think it's an important corollary here, with our intentions. internally to address those high costs and to have to get priced was part of the way we would do that. And I would say we have that same intention today to approach it like we know we have to go after that. If you look at the dynamics, I think you rightly point out demand is strong. You know, the supply-demand equation is still pretty good. I mentioned earlier, you know, we didn't see pre-buy in December, and we had a lot of those announced increases were out there. So I think that, again, I mentioned earlier, is a good sort of insight into how the channels are thinking about this as well, because they see We have seen good volumes in January, and I think you're right. These cost increases are kind of pervasive and ubiquitous around. So that says there's an environment that says you've got to deal with these costs. That's one way to go do it. I do think, as Darren says, the way the environment plays out is important as well. What happens to the economy and how does that impact behaviors, if you like? And certainly we don't know the answer to that, but I go back to my first comment that says we are really very committed to address these costs, just like we were. in 2011 and 2012 when we did achieve the numbers that you mentioned. So that's sort of our mindset as we go.
spk01: Yeah. So, and the specific competitive question, you know, I think that, you know, we believe that the cost factors that are hitting us are hitting others. Although, you know, when it comes to the labor situation, you know, I think that the challenge in the U.S. has been greater than it has been in other parts of the world. And while we've had absenteeism in our EMIA factories, we haven't had the level of turnover and the training demands that we've had in the U.S. Europe has some energy costs that are higher. That's probably the bigger challenge there. Having said that, I will say that while there are some challenges to manufacturing in the U.S., I'd probably be remiss if I didn't say that one of the big cost increases we've seen, and I mentioned, and it affects our non-feedstock cost of raw materials, and it affects this category we're referring to as efficiency, excess inflation, and other cost increases, and that's transportation costs. And transportation costs, well, obviously ocean freight has gone up dramatically, and we have much less exposure to ocean freight. I mean, while it affects our raw material costs in ways that are probably similar to others, we ship a lot fewer finished goods by ocean freight. And therefore, we have less of a transportation cost burden than a lot of our competitors do. So I think that's an instance where we're probably a bit advantaged, in fact.
spk05: Hey, Rod, just to close out real quick, your question on Europe, and I think there's a corollary to the U.S. that we saw most major tire companies announce price increases since the beginning of the year as well, albeit at a lower level than we saw in the U.S. And for us, we went out and we announced on the consumer side up to 3% to 6%. Jan 1 as well. So you're seeing the actions over there as well, albeit not quite at the level as the U.S.
spk06: Thank you.
spk05: That's right.
spk09: We have reached our allotted time. This will conclude the Q&A session and today's program. Thank you for your participation. You may disconnect at any time.
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