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spk00: Please stand by, your program is about to begin. If you should need any audio assistance in your call today, please press star zero. Good morning, my name is Ashley and I will be your conference operator today. At this time, I would like to welcome everyone to Goodyear's second quarter 2022 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 Gadzinski, Senior Director, Investor Relations.
spk02: Thank you, Ashley. Good morning, and welcome to our second quarter 2022 earnings call. On the call with me today are Rich Kramer, our CEO, Darren Wells, our CFO, and Christina Zamaro, our VP Finance and Treasurer. We'll begin with a few words and forward-looking statements and non-GAAP financial measures. Forward-looking statements involve risks, assumptions, and uncertainties that could cause actual results to differ materially from those forward-looking statements. For more information on the most significant factors that could affect future results, please see slide two of the supporting presentation for today's call and our file links with the SEC, which can be found on our website at investor.goodyear.com, where a replay of this call will also be available. A reconciliation of the non-GAAP financial measures discussed in today's call to the comparable GAAP measures is included in the appendix of that presentation. And with that, I'll turn the call over to Rich. Great.
spk03: Thank you, Christian, and good morning, everyone. Thank you for joining the call today. During the quarter, our business continued to perform at a high level. Our second quarter sales and earning performance were the result of solid execution by our teams around the globe, who helped grow unit volume while driving pricing actions that covered not only raw material cost increases, but most other inflationary headwinds as well. This is the third consecutive quarter where we have done so amidst 40-year high inflation levels. Revenue of the combined company grew more than 30%, including 15% in our legacy business. The result was the highest second quarter revenue level in more than a decade. our consumer tire volume globally grew 6% and commercial grew nearly 2%, excluding Cooper. And we achieved this volume growth while increasing revenue per tire by 14% compared to last year. Cooper also contributed meaningfully to our results in the quarter, as it has since we closed on the transaction now just one year ago, a noteworthy milestone. I was truly proud of the results our team delivered during the quarter and through the first half, and they did so in an environment of broad-based supply chain disruptions and staffing challenges in our factories, challenges that have carried on longer and more deeply than anyone expected. In the end, our teams rose to the occasion and drove another excellent quarter. I'm likewise pleased with what our teams have been able to accomplish over the last year to combine Goodyear and Cooper. While work is ongoing, we're making continued progress on achieving the full value of the combined companies. Our continued work is focused on furthering our integrated brand and product portfolio and driving increased efficiency in our operations. Looking forward, we see the headwinds and uncertainty that we've been facing for the last several quarters persisting for the remainder of the year. I'll make two observations here. First, while first have volume and share trends were favorable, we continue to closely watch the balance between channel inventories and sellout as a means of assessing any emerging trends in the market. Our extensive point of sale information and distributor and dealer market intelligence position us well to see and sense any changes. And second, our teams are prepared, just as they were coming into the year, for a range of possible outcomes. Uncertainty and volatility have defined our landscape since the onset of COVID and continued through a war in Ukraine, supply chain issues, and significant inflation. Our teams have executed well in that environment and are poised to do so again over the remainder of the year as it develops. As we look to the future, we know that our industry will evolve with the changes in the macroeconomic environment. We also know that our business is stronger operationally, financially, and strategically. From the additions of the Cooper product portfolio in the mid-value segments to our award-winning Goodyear premium products, we are well positioned and excited for what's coming next. And with the addition of our mobility solutions initiatives around the intelligent tire, integrated fleet services, and a tire made of sustainable materials, we see even further possibilities. This vitality is evident in each of our strategic business units as well, and I'll begin with our Americas segment. Americas continues to execute in an environment that has been normalizing after a sharp recovery from the pandemic last year. Quarterly revenue in the region was up 39%, including 14% in our legacy business. Our ability to price for the value of our brands in the replacement market has allowed us to grow our top line. It has also enabled us to stay ahead of both higher raw material costs and other inflationary cost pressures, continuing a trend since we began to feel the effects of inflation toward the end of last year. This is the third quarter in a row where we have seen elevated inflation and the third quarter in a row where price and mix more than offset the increase. A strong product portfolio, made stronger because of our combination with Cooper, also remains a growth catalyst. In the first half of the year, we've introduced a slate of new products to the market throughout the Americas that highlight our capabilities to increase tire sustainability, take advantage of EV trends, and meet evolving customer needs. In the U.S., reported volumes for the consumer placement industry were down year over year in the second quarter, reflecting the rebuild of inventory a year ago. While this impacted our reported volume in the quarter, strengthening sell-out trends have resulted in inventories in our distribution network falling during the first half and being below pre-pandemic levels. This gives us confidence in second-half volumes, assuming recent trends continue. At the same time, other indicators point to a healthy underlying transportation economy in the United States, which is supportive of ongoing tire demand. U.S. miles driven is up nearly 4% year-to-date, on par with pre-pandemic 2019 levels. Freight tonnage is also up close to 3% year-to-date, supporting continued commercial tire sellout. In Latin America, the replacement markets have been a continued bright spot for us, and our teams continue to deliver. With our refreshed product portfolio in both consumer and commercial, and both OE and replacement, we continue to deliver volume and share growth, as well as price and mix. I remain pleased with our team's execution in this volatile region. In the America's OE business, consumer and commercial volume each have grown double digit percentages versus 2021, reflecting beginnings of a recovery in production. With the consumer OE tire industry volumes still well below 2019 levels, we anticipate the effects of the OE recovery to persist. Now in this environment, our OE win rate continues to be strong with a focus on the higher value EV segments as we've previously discussed. Before moving on to our overseas businesses, you will likely have seen that we reached a tentative agreement on a new labor contract with the United Steelworkers covering our legacy U.S. Goodyear plants after the most recent agreement expired on July 29. As per our normal practice, we will not discuss the details until after it is ratified by the USW membership in the coming weeks. In EMEA, the replacement tire industry grew steadily in the quarter, eclipsing pre-pandemic 2019 levels by about 4%. And Goodyear outperformed the industry for the sixth consecutive quarter. I continue to remain very positive about our positioning within the industry in this otherwise complex environment. Thanks to our consistently competitive product offerings, actions over the last several years to strengthen distribution, and our ability to supply with our Western European footprint, our consumer replacement business grew volume 27%, and our commercial replacement tire volume was up 5% compared to last year. Consumer replacement tire growth was broad-based, covering summer, all-season, and winter tires across the value spectrum. And this growth took place while we were successfully implementing several price increases. Through our aligned distribution initiative, we are winning with consumers and capturing the value of our brands in the marketplace. Our consumer OE volume was up about 8% versus last year, but well below pre-pandemic levels. While we expect carmaker supply chain challenges to last into 2023, we remain well positioned to reap the rewards of a recovering industry. Looking forward, the effects of war in Ukraine, energy security risks, and persistent inflation are all current reminders that we need to continue to be attentive and agile. I'm confident in our team's agility to execute as we move ahead. Turning to our Asia-Pacific region, last quarter you heard me speak about near-term hurdles in China following stay-at-home orders that disrupted our markets and our factories. While the impact of this disruption was in line with expectations, we're also pleased with the pace of recovery in our business, including our plants being back up to capacity and signs consumer confidence is beginning to turn a corner. These trends are encouraging, as is the resiliency of our team on the ground. This region's revenue increased about 11% in our legacy Goodyear business, driven by share gains in India and industry strength in markets outside of China. In our Oli business, while COVID impacted OE industry volume in China, the effect was more than offset by the ramp-up of new fitments, as well as continuing growth in India and other parts of Asia. Our past investments in product technology will continue to deliver results as the market recovers. As the world of mobility continues to rapidly evolve, a trend we read about every day and certainly see transpiring at all of our customers, rest assured Goodyear is not standing still. This is evident in our initiatives in a number of areas, such as the increasing digitization of our industry-leading commercial fleet services, our new business models such as our direct-to-consumer mobile van installation and ANGO, our predictive vehicle servicing platform, and our numerous other venture funding partnerships. With all our progress, this commitment is no more evident to me than in our work around the intelligent tire. We fundamentally believe that the contact patch between the road and the tire will take an added significance as EVs and AVs evolve. Our deep experience around tire and vehicle performance paired with proprietary predictive algorithms has grown my confidence in the role our products and services will play as mobility evolves from static human-driven combustion engine vehicles to electrified connected and potentially autonomous vehicles. Tire intelligence and the knowledge of what is happening at the connection with the road through the tire contact patch is a job we uniquely do, as evidenced by the growing portfolio of partnerships we now have with OEs and ADAS system developers. More to come on this technology, but know that our focus and investment will not be deterred as we navigate a tumultuous economy. The future remains brighter than ever, and Goodyear will be leading it. The second half of the year suggests uncertainties in our environment similar to what we've been experiencing. However, I'm confident in our plans and our teams to deliver against our objectives just as we did through the first six months of the year. Our focus is on execution, and our sights are set on the mid- and long-term opportunities the changes in mobility will present our industry, including the goal of Goodyear solidifying its industry leadership position. Now, with that, I'll turn the call over to Darren and join you again in a few minutes to answer your questions. Darren?
spk05: Thanks, Rich. Our second quarter results continue to reflect strong top-line growth, strong growth in revenue per tire, and significant benefits from the Cooper combination. And we continue to increase earnings despite cost inflation and the continued disruptions from COVID. As Rich mentioned, we reached the one-year anniversary of the Cooper transaction in June, and remain confident in our ability to achieve or exceed announced synergies. As seen in the income statement on slide 7, our second quarter sales were $5.2 billion, including $663 million of incremental Cooper sales. Recall that the Cooper transaction closed on June 7th of last year, so the 2021 base period included about three weeks of Cooper results. Sales from Goodyear's legacy business increased 15%, driven by the impact of pricing actions and volume growth. Unit volume increased 21%, including the effect of Cooper and growth in both the replacement and OE channels of our legacy business. Segment operating income was $364 million. Excluding $8 million in merger-related costs, merger-adjusted segment operating income was $372 million, including a contribution of $126 million from Cooper's operations. The effect of price increases and nicks offset raw material costs and most inflation on a dollar basis in the quarter. Although segment operating income as a percent of sales declined compared to last year as a result of both revenue and costs rising by these amounts. Historically, this margin compression from material cost inflation After adjusting for significant items detailed in our press release, our earnings per share on a diluted basis were 46 cents, up from 32 cents a year ago. The step chart on slide eight summarizes the change in segment operating income versus last year. The effect of volume in our legacy business compared to the same quarter last year was 61 million. This reflects the benefit of unit sales growth as well as the impact of increased production. Segment operating income in the quarter also benefited from significant price mix, driven by pricing actions to address higher raw material and other input costs. The combined effect of higher prices and improved mix in our legacy business totaled $561 million, the highest in the last 10 years. Compared to the second quarter last year, revenue per tire increased 14%, excluding foreign currency. Again, the increase was highest in the Americas region, where revenue per tire was up more than 20%. Continuing a trend we've seen since inflation began to accelerate at the end of last year, price mix in the quarter was enough to offset not only higher raw material costs, but most other inflation, captured in two bars in the step chart labeled calculated inflation and efficiency, excess inflation, and other cost increases. Note that the latter bar includes the non-recurrence of an almost $70 million benefit last year, related to a tax ruling in Brazil. The other bar in the chart includes a combination of factors, but is driven mainly by higher advertising and R&D costs. Lastly, you can see the impact of Cooper on our results. The full quarter of Cooper operating earnings this year was $126 million. This is up $92 million from the $34 million from the three weeks post-closing that was included in last year's results. Note this year's Cooper results include a gain of $14 million due to a reduction in U.S. duty rates on certain commercial tires that were imported during 2020. The bar labeled Cost Triggered by Cooper Merger is favorable this quarter, reflecting the non-recurrence of merger-related costs from last year, primarily the $40 million step-up in the value of Cooper inventory as part of acquisition accounting. Turning to the balance sheet on slide 9, net debt totaled $7.2 billion at the end of the second quarter, up slightly from the same time last year, reflecting the effect of higher costs on working capital and the planned rebuild in our inventories. Net debt was down slightly versus last quarter. Turning to our segment results on slide 11, America's unit volume increased 22% driven by the addition of Cooper Tire. America's segment operating income was $293 million. Earnings benefited not only from the addition of Cooper Tire, but also strong price mix, which again this quarter offset both higher raw material costs and other cost inflation. End-user demand remained steady in the second quarter, while wholesale distributor inventory of Goodyear brands in the U.S. declined. This, along with continued recovery in OE volumes, should support second-half revenue. Moving on to the results for our Europe, Middle East, and Africa business on slide 12, unit sales increased over 20%, with growth in the consumer and commercial replacement segments driving the increase on continued industry recovery and share gains. Replacement volumes have remained above pre-pandemic levels through the first half. OE volume also increased 7%, but remains below pre-pandemic 2019 levels. EMEA segment operating income of $52 million was up from $43 million last year, reflecting this volume growth. The benefits of strong volume and solid price mix versus raw materials were partly offset by higher energy costs and other inflation. Turning to slide 13, our Asia Pacific region's unit volume increased 1.3 million units. Similar to the first quarter, this included growth of about $500,000 in replacement and about $800,000 in OE, with the addition of Cooper units and share gains in the replacement market the key drivers. Volume increases in India and other parts of Asia helped offset the effect from the COVID stay-at-home orders in China. The earnings environment in Asia Pacific in the near term remains a challenge. Segment operating income in the quarter declined $4 million, driven by costs in excess of price mix, which more than offset the benefit of higher volume. As was the case last quarter, this largely reflects a lack of pricing to offset raw material costs in the OE business, an industry-wide issue in China. On slide 14, we highlighted the impact of key business drivers for the third quarter. Given we're now past the anniversary of the Cooper transaction, year-over-year comments will reflect the combined company rather than just the Goodyear legacy business. We've also updated our modeling assumptions on slide 17 to, again, reflect the combined business. During the third quarter, we expect a continuation of many of the same underlying trends from the first half of the year. We expect continued benefits from strong price mix supported by price increases effective July 1st, including the previously announced increase for consumer and commercial replacement products in the US. While material costs for the combined company are expected to be up by about $600 million for Q3, including the impact of the stronger dollar and higher transportation and supplier costs, we expect price mix to continue to exceed raw materials, similar to Q1 and Q2. We estimate the impact from non-raw material inflation in the third quarter to be similar to what we experienced in Q2. We expect the effect of a stronger U.S. dollar to impact Q3 operating income unfavorably by 25 to 30 million based on translation of foreign earnings to U.S. dollars using current spot rates. More than offsetting this currency effect is the non-recurrence of about 70 million of costs triggered by the Cooper merger in Q3 of 2021. Slide 15 provides a number of other updated financial assumptions for the year. Most of the assumptions are unchanged, with the exception of raw materials and capex. While Q3 raw material costs are expected to be higher than those experienced in Q2, recent trends suggest an improvement in key feedstocks, like carbon black, natural rubber, and steel, which could benefit results later in the year if the trends continue. We continue to expect a use of about $300 million for rebuilding inventory and working capital, with a significant inflow of cash from working capital in Q4, consistent with normal seasonality. Additionally, we revised our CapEx outlook downward by about $200 million to a range of $1.1 to $1.2 billion. Ongoing chip shortages and broader supply chain disruption during the first half of the year has resulted in delays in equipment orders. This has not fundamentally changed most project plans, but resulted in moving equipment delivery dates to 2023 in some cases. In other cases, macroeconomic factors have caused us to reevaluate and pause a few projects. We remain committed to the ongoing modernization of our footprint to prepare for coming industry trends and to improve our cost competitiveness. With that, we'll open up the line for questions.
spk00: And at this time, if you would like to ask a question, please press star 1 on your touchtone phone. You may withdraw your question at any time by pressing the pound key. Once again, that is star and one. And we will take our first question from John Healy with North Coast Research. Please go ahead. Your line is open.
spk01: Thank you. I wanted to ask a big-picture question before I kind of dive into some of the quarterly results. But, you know, Richard, comments about EV and kind of where you're positioned, you know, continues to be consistent and upbeat. But, you know, from what I've heard from you guys, it sounds like more portfolio wins and more technology going into the tire, and maybe that helps you get more revenue per tire over time. But I wanted to ask just about what the move to electric does to replacement demand longer term. I know it's something that I'm sure you guys are studying, but we'd just love to get your thoughts about as EV rolls into the car population, what does it do to replacement demand? And is this the first catalyst in what I would say years that maybe the technology of a tire doesn't work against the replacement market and maybe causes more growth in the replacement market. Just wanted to get your thoughts there.
spk03: Yeah, I mean, John, listen, I will agree with what you said. I think near-term, you know, as we've talked about in the past, the wins we're getting at OE have a better margin profile for us. So from a near-term perspective, it helps us immediately in terms of the portfolio. And then longer-term, if we just stick with EV, and I think, you know, the way we think about it, by the way, it's not just EV. Those EV tires are going to continue to have more technology in them. around connectivity and and I don't just mean the ultimate intelligent tire but I mean connectivity whether it's Bluetooth or or some other things that are going to happen as well and those some of those things are actually in the works as well but I think the long-term sorta profile of EVs are going to be that tires are essentially used faster right I mean they wear out faster with EVs because of the torque going to the engines excuse me, to the wheels. And I think that's a, you know, that's a trend actually, you know, driving an EV. I've seen it firsthand that that actually happens. And if you talk to people, you'll see the same thing. So I think long term, it does say that tires are going to wear out faster, of course, dependent on the individual driver. But broadly speaking, you know, that will happen. And remember, that's also a function of the weight of the vehicle, the weight and the torque puts a you know, more usage on the vehicle itself. So I think, you know, long-term it bodes very well. You know, John, we also have to be balanced. I think the number right now is about 5% of the car park are EVs. So, you know, as you rightly point out, this is a trend that is coming, and it's a trend that we have to and are addressing right now to make sure as that number, you know, continues to grow, that our products are there on the road and are ready to be replaced as those tires need them. And finally, the thing that I think most people will also appreciate, as you're on the road with EVs, the number of parts that need replacing or the number of parts that actually function are substantially reduced. two of the main parts that need to be replaced consistently and frequently are brakes and tires. So from a tire perspective, it certainly puts our industry in a position of need and a position
spk01: longer will last longer as well in terms of miles on the road and those tires will be very important to them as those EVs vehicles are used over their lifetime so net positive great and just you know question for Darren just on the on the rods a little bit I think you guys said a billion dollars in the second half of the year and that q3 would be higher than q2 is it pretty evenly split between q3 and q4 you know should we think about 500 million a quarter or does it split differently than that? And you mentioned that in Q3 you should have price mix positive. Do you need further price actions to have Q4 be positive on a price mix standpoint? So I was just hoping to get some color there.
spk05: Yeah, so, John, the split on raw material costs is weighted toward Q3. So we're expecting to have about $600 million of raw material cost increases in the third quarter. The only nuance that I want to point out there, if we're comparing Q3 to Q2, in Q2, the variance analysis for raw materials, which was the $419 million that's shown on slide 8, that is Goodyear legacy business only for the raw material cost increase. The Q3 $600 million, we're actually starting to report the combined company, so there's like a natural increase of about 25% in the tire business. So the numbers are going to be naturally 25% higher just by including Cooper. But they're still even beyond that. So that $400 million, if you add in Cooper, would become something more like $500 million. uh equivalent and then you know we're obviously moving up to 600 so there is a step up there but then we're seeing it moderate uh in q4 based on where feed stocks are right now and you know sort of our general outlook so uh it won't be quite as big a challenge when we uh we're looking at q3 we're comfortable that we're in a good position given the pricing that we've announced in july to more than cover raw material costs in Q3. And I think that's why we've given the reference, the comparison of price mix to raw materials, which we've been, I mean, price mix has been exceeding raw materials the last couple of quarters. We expect it to be similar in Q3. So we feel good about how we're positioned in Q3. We've got raw material and other inflation that will start to be less of a factor year over year in Q4. And, you know, so I think we're feeling, you know, there's less pricing year over year that would be needed in Q4. And I think we feel good for that reason as well. Although, obviously, we're going to continue to monitor the trends there, and we'll take additional actions if we need to to stay on top of it. Great.
spk01: Thank you so much. Thanks, John.
spk00: And we'll take our next question from James Piccarelli with BNP Paribus Exane. Please go ahead. Your line is open.
spk04: Good morning, James. Hey, good morning, guys. Good morning. Can you talk about the quarter's strong, you know, volume and factory overhead flow through? That certainly stood out. And, you know, were there any, I don't know, one-time, you know, favorable items in the volume and the operational side of things? Or, you know, is this a sustainable good look for the rest of the year? No.
spk05: Yeah, I think there's nothing unique in there. know that's just good operational performance and you know i think we had you know some area obviously there's some industry that goes into volume but overall market share our team continues to deliver uh very well you know we're getting some recovery there in oe still ways to go on oe but you know other than in asia we're our replacement business is back above pre-pandemic levels. So we're, you know, we've sort of done the recovery and replacement. We still have the recovery in front of us for OE, and our share performance has been good. So I think that makes us continue to feel good about what volumes are going to be.
spk03: Yeah, and Darren, I'll just add to it, James, and I appreciate you pointing it out. I think you're also seeing, if I zoom out for a moment, the benefit of a lot of the capacity issues and managing our capacity within the footprint, those decisions that we took on plant closures a while back. I think you're seeing the benefit of that now. And in addition to that, you know, maybe a shout out to our team, you know, all the plant optimization and operational excellence work that we don't talk about so much on the calls really are driving efficiency in our plants. And that's really coming to play right now as you see all the supply chain disruptions and energy increases and labor shortages and all those things. And I think our team has really managed that in this very volatile environment. extremely well, so I appreciate you highlighting that.
spk04: I appreciate the color. I think you touched on this, but can you revisit how the dealer inventory channels are looking and the sell-through rate as we think about the additional pricing that could be needed in the fourth quarter you know, clearly, you know, inventory levels and the sell-through, you know, aspect of things will, you know, determine the, you know, what pricing could be received in the market. So, thanks.
spk03: Yeah, you know, James, I'll start, and I think Darren may want to jump in again on price as we go. But look, I think we said it in our remarks, and it's absolutely worth repeating, you know, I'll start with North America. I mean, Our channel inventories are really pretty good right now. I mean, they're down in the U.S. They're down about 15% to 20% versus year-end and a little bit below pre-pandemic levels. So really, you know, really good levels heading into the second half. And, you know, I think that's largely a part of, if you remember last year, distributors were trying to get every tire that they could. They were going long on inventory. And we also had, you know, price increases. know, you saw that sort of buildup last year. I think, you know, there's better supply out there right now. And I think the dealer or distributors don't see a need to go long in inventory. And I think that's got the channels in good place, in a good place. And I think, you know, if we sort of link it to the second half and we link it to sellout, you know, we know sellout has been down a bit compared to last year when we have that big post-COVID recovery, but also what we saw, particularly in our business, that we were really encouraged by our sellout trends in May and June. We actually did better than the industry, and that, too, is contributing to those lower channel inventories, and I think, again, supports the need for good sell-in in the second half, even though we have a bit of a volatile environment. So I think that's a net positive, and I think that lines up well. In Europe, look, inventories are a little bit higher. a third higher than they were a year ago. But, you know, also there we have some unique things going on. And again, I think particularly I'd highlight the situation on what's happened in Russia and particularly around winter tires where, you know, that winter tire availability has caused distributors to load up a little bit more than they might have in the past. And again, for us, look, our plants, as I mentioned earlier, are functioning well. We've been a reliable supplier. So we're not particularly concerned about that. Certainly we'll keep our eye on it. But again, we think we're pretty well positioned for the second half.
spk04: Thanks, guys.
spk03: Thank you.
spk00: And we'll take our next question from Rod Lash with Wolf Research. Please go ahead.
spk06: Good morning, everybody.
spk00: Hey, Rod.
spk06: had uh just a couple things first on um on commodities and um and pricing so uh if spot prices for raw materials stay where they are right now um could you just give us a sense of how the math would look for you in terms of um presumably a little bit of tailwind as you look out to 2023 and it'll spot will be anything but flat but uh just curious about how the math looks at the moment and um There's obviously just more broadly a lot of signs of macro weakening in the U.S. and especially in Europe. At this point, does that play any role in the pricing analysis that you guys think about, or does it feel like just supply-demand conditions are structurally pretty good in supporting that pricing?
spk05: So, Rod, there's a lot to unpack there. But I think overall, we are seeing a pretty stable demand environment. And we're watching and doing a lot of analytics trying to figure out if we're, you know, if we would start to see any lead indicators. But so far, you know, the demand, you know, demand, end user demand is remaining pretty good, good in consumer, good in commercial. And that is notwithstanding the macroeconomic situation, notwithstanding price increases from us and other members of the industry. So I think overall that's feeling pretty good. Now, when we get to the fourth quarter, I mentioned earlier that raw material costs will not be as big a year-over-year headwind in Q4 as they will be in Q3. to the extent we continue to see the flattening out of raw materials. And we've even seen some raw materials start to come back down. And to the extent we see that, then that trend will continue into the first half of next year. So we'll see less, you know, less headwinds from raw materials. We're also seeing other costs flatten out. So in the second quarter, I guess as an example, our increase in transportation for finished goods by itself was $55 million year-over-year. So a really significant increase in the cost of finished goods transport. By the fourth quarter, we're going to be starting to anniversary some of the big step-up in transportation, ocean freight. So that's no longer going to be as significant a year-over-year factor. It effectively says that we'll be catching up with those costs. I think that is another factor that's going to be helpful. It'll be less increases in raw materials, less increases in some of the other costs. Obviously, we'll continue to benefit from the ongoing impact of the price increases that we have announced this year.
spk06: And I guess that just segues into the next question I had about just inflation. Your tone is somewhat more optimistic, and I know you're not commenting on the new contract, but there are a lot of puts and takes there, including energy costs and obviously labor costs and things like that. Any kind of high level on how we should be thinking about inflation broadly in you at one point used to be able to neutralize inflation with productivity. Do you have line of sight in maybe getting to that at some point here into 2023?
spk05: I think it's important that the big step up in inflation started in the fourth quarter last year. So I think as we start to anniversary that first big step up, then we're starting to move back in the direction of an environment that may be more balanced. So, you know, and we're in the fourth quarter seeing that, you know, getting through the second and third quarter, which are the peak of the inflation, as we see it right now, I think it's a good thing. We start to see fourth quarter with less of a year-over-year increase. And then we're going to start to get into the beginning of next year where we'll anniversary some of the big step up of the energy and other costs in Europe that really just started earlier this year. And I think that process is likely to continue based on everything we're seeing right now.
spk03: And, you know, Rod, I'd just maybe add to Darren's comment, you know, and I know you know it well. We go back to 2012, 2013, you know, 2014. We saw massive, at that point, raw material increases. You may recall, you know, natural rubber was approaching $3 a pound, and, you know, we had lots of headwinds there. That was the first time we saw those things. It's not dissimilar today, albeit the costs are obviously different and coming in a lot more buckets. We managed very well through that situation both on the way up as we hit those costs and on the way down as those costs moderated. And I think what you're seeing from Q4 all the way through now is that we're doing the same thing. And I think that's what you should expect going forward. We can't predict, as you said, that macroeconomic environment. We certainly didn't predict this environment as specific as what we've had to deal with. But we've managed through it. And I would tell you that's the plan of the team to do again. And we've had a lot of confidence in doing that. And listen, on the cost side, you know, when we have these costs that escalate so quickly, absolutely our goal is to go back to neutralize those. As Darren said, as those costs sort of start to stabilize, even if at a higher level, we will put the plans in place to make sure that we do offset those, whether it's automation, whether it's other cost savings programs or other initiatives that we have to take. But absolutely, we will get back to a point of neutralizing those costs. you know, as we work through.
spk06: Rich, I apologize for taking a third thing here, but at one point you had expressed some optimism about getting to like an 8% margin for the business in the not-too-distant future. Based on what you see, are you still kind of thinking that that's doable here? in the next year or so, or is there anything that's really just changing your view on how long it takes to get back to historical average margins?
spk05: Over the last three years, we've taken a number of actions that were meant to move us back toward that 8% and beyond. And that's the restructurings that we've done in manufacturing in Americas and EMEA, the actions we took in distribution in Europe. And I think we still feel like those are likely to get us there. The compression in margin that we've seen, which, I mean, it was just pricing for raw materials and inflation in the second quarter, compressed margins on a like-for-like basis by nearly a percentage point. And that is something that has happened to us before. And I think we're in a year now where, you know, like raw materials, we saw 800 million in the first half. We've said we expect about a billion in the second half. So 1.8 billion of raw materials, that's effectively the same number we saw in 2011. And we saw a similar effect back then. But then as we went into 2012 and 2013, costs started to come back down, and, you know, that margin compression went away, and we went into a period where, you know, margins got much better. You know, I think that as we get to the point where materials and other costs flatten out and perhaps even see raw materials starting to come back down, then I think that, you know, that will put us in a really good spot to get to that 8% and you know, and call it the near term, you know, so the next couple of years, and with 10% as a realistic possibility in more of the intermediate term, call it three to five years.
spk03: Exactly. That's what I was going to say. I think, Rod, we absolutely still believe it's possible. Again, this environment has made it a bit more volatile, but the structural plans we put in place, you know, Darren highlighted the Aligned Distribution Initiative in Europe, which is working. I think I said in my remark We're six consecutive quarter now of share gains there, and we're getting volume. We're getting price right now. So we feel that absolutely those numbers are possible. Thank you.
spk00: Thanks, Ryan. And we'll take our final question from Ryan Brinkman with J.P. Morgan. Please go ahead. Your line is open.
spk07: Hi, great. Thanks for taking my questions. I wanted to ask a couple around Slide 8. particularly to dig into the efficiency excess inflation and other cost increases bucket. It seems if you were to back out the non-repeat of the $69 million benefit last year, then the year-over-year swing there would have been more like negative 82 million. Are you able to help us with like the efficiency subcomponent within that? You know, how much, you know, just sort of, you know, within the 82 million to sort of, you know, help us better judge execution. So for example, was the efficiency component a help year over year indicating positive performance within the category of things that you can control? And that was just like more than offset on a year-over-year basis during the quarter by inflationary costs, more outside your control, or what's the right way to think about that? And then going forward, what are you looking for or targeting in terms of efficiency savings or, you know, those things? changes in cost relative to things that you can control. Is that a meaningful offset to cost inflation, or do you expect to offset the impact of inflation primarily through price mix rather than cost size?
spk05: I think we'd all like to get back to more of a historical situation where we, for many years, had seen cost inflation in the $30 to $35 million a quarter range. And our efficiency actions had a track record of being able to create savings around $40 million a quarter. And that was the historical situation. I think we're all looking forward to when we might get back to something like that, because when we were getting 2% to 3% inflation, we were able to offset that with the efficiency programs that we have. You asked the question about the $82 million and how the underlying operational effectiveness or efficiency looks. I think generally speaking, we feel like the execution by our teams is actually very strong and we have a number of operating metrics that look quite good. If we look at the amount of output per associate hour, so the output for each hour of labor, we've got some very good evidence there. We've made progress in the reduction in waste in our factories and the improved yield, so the percentage of the tires that are ready to go to the OEs as produced. I mean, there are a number of metrics there where I would say operational effectiveness looks very good. The difficulty is that when we look at the overall efficiency of our factories, it does include the fact that we've got a lot more hiring going on and a lot more training going on, which means there is some duplication of labor because we have people doing the jobs and other people being trained on the jobs. And the fact that people have to take time to train others reduces the absolute productivity in an aggregate sense. So when we put all that together, dollar-wise, it doesn't look like a big impact. But I don't look at that as anything that shows a lack of effectiveness. It's just situational. So as we get past this need to hire and train more people, I think we are slowly making progress at that. It has come down over the last six months. As we get past that, then the effectiveness of our plant optimization programs that are creating these underlying improvements in other metrics, they're going to have a chance to get to the bottom line.
spk07: Okay, thanks. And then last question for me, if we were to sort of move on from the savings versus non-raw materials inflation bucket to the price mix versus raws bucket, you've given the outlook for positive price mix versus raws in 3Q. You know, the decline in spot prices, raw material spot prices to date, I'm guessing is going to more positively benefit 4Q than 3Q. than 3Q. So the question is, if the current levels of pricing were to hold through the remainder of the year, and I'm not sure that's the assumption you want to use. I don't know if you have pending price increases to take into account or whatever, but if we were to sort of take into account what we know about pricing, you know, pricing currently, et cetera, or what your company can get, and then if you were to maybe update, you know, the analysis for the most recent decline in oil prices and whatnot. What does that imply, directionally speaking, do you think, for the trend in price mix to RAS in 4Q?
spk05: Yeah. Yeah, so I think that, you know, the changes we're seeing now, you know, you may see some – you'll see some impact of that in the fourth quarter. You'll probably see some of it roll over to the first quarter as well. And, you know, it's going to depend on how quickly we work our way through our inventory. But I think the outlook we've given is our best view based on where spot prices are right now. So I think you can assume that the fourth quarter raw material costs, which if we get a billion for the second half and 600 of it is in the third quarter, then that's about $400 million. That does take into account what we've seen up until now. And If we see further reductions, then there could be further improvement in the fourth quarter. And I think particularly when we're talking about petrochemicals, you know, synthetic rubber, which tends to arrive more quickly, less of an impact if it's natural rubber or if it's carbon black that's coming in from Asia. You know, because that spends more time on the boat, takes longer to get here, and more time to work through inventory. But I think we could still see some benefit if it keeps going down for Q4, and certainly it would set up Q1 well. I think we feel good about our pricing setup for Q3, and I think the price increases we've announced here mid-year set us up pretty well for Q4 also, although we're going to watch the situation. If we need other actions, then obviously we're going to take that into account.
spk07: Okay, helpful. Thank you.
spk05: Thanks, Ryan.
spk00: There are no further questions at this time. I'll turn the call back over to Darren Wells for any closing remarks.
spk05: Thank you. Before we wrap up, I wanted to let you know about a change that we're discussing for the format of our future earnings calls. Going forward, we're considering publishing our commentary along with financial information in a document the night before our earnings call, and then using the conference call time exclusively for taking questions. So rather than a separate press release, slide deck, and prepared remarks, we just have one document combining the content of all three. Obviously, appreciate any feedback that investors would like to offer on this process improvement. So other than that, thank you for joining us for the call today, and we'll look forward to talking to you again next quarter.
spk00: Thank you, and this does conclude today's program. Thank you for your participation. You may disconnect at any time.
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