The Goodyear Tire & Rubber Company

Good morning. My name is David, and I'll be your conference operator today. At this time, I'd like to welcome everyone to Goodyear's second quarter 2025 earnings call. All lines have been placed on mute to prevent any background noise. After the prepared remarks, there will be a question and answer session. You may register to ask a question at any time by pressing star and one on your telephone keypad. You may withdraw yourself from the queue by pressing star and two. Please note this call may be recorded. It is now my pleasure to turn the conference over to Ryan Reed, Senior Director of Investor Relations.

Thank you and good morning, everyone. Welcome to our second quarter 2025 earnings call. With me today are Mark Stewart, CEO and President, and Christina Zamaro, Executive Vice President and CFO. A couple notes before we get started. During this call, we'll make forward-looking statements that involve risks, assumptions, and uncertainties that could cause actual results to materially differ from those forward-looking statements. We'll also refer to non-GAAP financial measures. For more information on the most significant factors that could affect our future results and for reconciliations of non-GAAP measures, please refer to today's presentation and our filings with the SEC. All our earnings materials can be found on our website at investor.goodyear.com, where a replay of this call will also be available. With that, I'll hand the call over to Mark.

Thank you, Ryan. Good morning, everyone, and thank you for joining our call today. Let me start by saying our second quarter results were below our expectations. and reflect an unprecedented level of industry disruption, given changes in global trade that negatively impacted our consumer and commercial businesses globally. At the same time, the midterm outlook is also turbulent, given what we're seeing in terms of industry environment. I'll talk about what we're seeing in detail before we move on to the financials and to your questions. While the near term has proved to be significantly more challenging, I am confident in our ability to regain our momentum once the market stabilizes and we worked through some of the transitory headwinds we're seeing today. Within the current environment, our focus continues to be on controlling that which we can control. We have executed consistently on Goodyear Forward, where P&L benefits continue to be achieved ahead of schedule. We've increased pricing in the U.S. and Canada in response to the tariffs. We've won significant share in consumer OE in the U.S. as well as in Europe. We've increased the vitality or the refreshing of our product portfolio. We grew in the greater than 18-inch segments of the market, and we're on track with our new 18-inch plus SKU developments and launch timing. We've expanded our margins in Asia Pacific. Our SG&A or SAG costs are down. And finally, we're on pace to deliver a strong balance sheet by the end of the year supported by the three divestitures we committed in Goodyear Forward. Net-net, we're paving the way for our organization to deliver increased value and focus on becoming number one in tires and service. Market factors, the things that we don't control. They certainly had an impact during the quarter, and I'll share more about that shortly. As we look ahead, once this turbulence around the pre-buy and the first half of the year settles down, we are well positioned with our U.S. footprint, with our product, and with our distribution, and we're also looking at raw material benefits beginning in quarter four. If we turn to the industry environment in the second quarter, several factors limited our ability to mitigate rising costs. First, the market continued to feel the effects of OEs navigating new complexities of the global supply chain. Specifically, we saw the consumer OE industry contract more than we anticipated in both the Americas and in Europe. In addition, we continue to see weakness in our Asia-Pacific OEMs volume, given our own premium mix of customer and fitments. Consumer preferences in Asia-Pacific, continued OEM price discounting, and favorable government incentives in China are leading to a disproportionate amount of sales of opening price point vehicles, which is well below where we focus in our targeted segments of the luxury and the SUV EV segments. Having said that, even while our OE volume was weaker than expected, we continued to register significant OE shares in the US and Europe, which is a relative sign of strength, highlighting our industry-leading technology and service. Moreover, we've recently seen increased demand from our OEs as they've sought to rebalance their tire supply with more focus on USMCA capacity. We believe we're in the early innings as it relates to this opportunity, and see positive momentum. Second, the consumer replacement market was characterized by increased competition, particularly in the Americas and in EMEA, which impacted our volume. Despite new installed tariffs, the second quarter U.S. non-member growth in imports was actually higher than in the first quarter, as dealers and distributors prioritized shelf space and liquidity to stockpile the imports. What's more, we've already seen some of this excess volume materialize in the U.S. sellout market. As you all know, we've announced broad-based price increases in the U.S. and Canada that became effective in the second quarter and remain intact today. It's clear that our relative positioning impacted our overall consumer replacement volume and the price mix, although we did continue to record gains in the 18-inch and above rim sizes. Another contributing factor influencing our views on the U.S. consumer replacement market is related to distribution. As many of you know, we made a strategic decision earlier in the quarter to rebalance our U.S. distribution to ensure high levels of customer service and mitigate credit risks following the second bankruptcy of ATD. Other manufacturers have taken similar actions. As distributor relationships are important for reaching in-customer accounts, Some manufacturers, as well as distributors operating in the U.S. market, introduced new and meaningful incentives during the quarter. These programs presumably shift retailers to new distribution networks. These actions serve to further increase competition in today's markets. There are two additional developments to highlight as we think about the outlook for our consumer business. First, North America consumer replacement margins steadily improved throughout the quarter as we implemented price and mix actions into the market. Second, U.S. growth in non-member imports started to ease recently, and we expect to see declines in the level of imports beginning as early as the third quarter. On a related note, the EU recently launched an investigation on imported tires from China. While we don't have any final second quarter data yet, we believe the announcement led to an increase in imports over the last several months as we have seen distributors prioritize liquidity and warehouse space for the imports. Our EMEA business is well positioned and should tariffs ultimately be implemented in Europe. Finally, turning to our commercial business, the truck tire market, which had been running at recessionary levels for the last couple years, took another significant leg down during the second quarter, positioning us now at a point where we expect our full year volume and mix to register below COVID year levels. As many of you know, the USOE industry fell nearly 30% on the back of uncertainty related to the implementation of the 27 EPA mandates. In addition, global replacement demand also contracted relative to our expectations as truck tire customers remained cautious about freight conditions and broader economic trends. In spite of these dynamics, U.S. non-member imports increased over 30% in the quarter and European imports rose as well. In summary, in the coming quarter, we expect market headwinds to persist as U.S. dealers work through elevated levels of low-end import inventory and weak demand in the global commercial truck market. We're making the necessary internal changes to drive performance and control the working capital. As we look at the second half, while global trade disruption is weighing on our full-year outlook, I assure you our team is positioned to win with customers and consumers as the turbulence dissipates. It isn't a matter of if, but when, as our fundamentals are strong and we have firmly positioned our business to deliver our targeted margin once the market conditions improve. And our organization isn't waiting passively for the upswing. We're continuing to develop new premium products to generate our own organic growth tailwinds. In May, we introduced the Eagle F1 Asymmetric 6, and in July, the Assurance MaxLife 2 in North America. In Europe, we've extended the lineup of our premium winter tire, the UltraGrip Performance 3. We will increase its total offering to over 250 SKUs this year, making it our most extensive winter offering to date. Additionally, within all season, we were recently awarded the top rating by Europe's largest auto association, ADAC, for the Vector 4 Seasons Gen 3 tire. These new product introductions and third-party reviews are crucial, because ultimately we expect the recent challenges we've experienced in our markets will give way to the opportunity. We continue to expect to realize benefits from trade policy changes over time, as well as to capitalize on our organizational focus on winning in the premium segment of the marketplace. Now I'll ask Christina to take you through the second quarter financials, and we'll move on to the Q&A.

Thank you, and good morning, everyone. Mark has shared important context for what impacted our second quarter relative to our expectations. Looking at the financials, about half of the miss in the quarter came in our commercial business, given materially weaker OEM replacement demand globally. The other half was driven by lower consumer OEM replacement volume. Second quarter sales were $4.5 billion, down 2% from last year, given lower volume and the sale of OTR, partly offset by increases in price mix. Unit volume declined 5%, reflecting the impacts of global trade disruption on OE production, distributor and fleet buying patterns, and consumer sellout trends. Growth margin declined 360 basis points. SAG was lowered by $39 million, consistent with results in Q1. Segment operating income for the quarter was $159 million, Goodyear net income increased to $254 million, driven by a gain on the sale of the Dunlop brand. Our results were impacted by other significant items, including rationalization charges of $59 million. After adjusting for these items, our loss per share was $0.17. Turning to the segment operating income walk on slide 10, the sale of the off-the-road business reduced earnings by $23 million during the second quarter, After this change in scope, our SOI declined $152 million versus last year. Lower tire unit volume and factory utilization were a headwind of $51 million. Price mix was a benefit of $91 million, driven by our recent pricing actions in the U.S. and Canada. Price mix came in $44 million lower than we guided on our first quarter call, driven by headwinds in commercial truck of about $30 million and lower mix in the Americas, as U.S. dealer and distributor demand was geared toward our lower price point products in advance of announced price increases. Raw material costs were a headwind of $174 million, and Goodyear Forward contributed $195 million of benefit during the quarter. Inflation and other costs were a headwind of $127 million, and other was a headwind of $18 million. The second quarter also included the non-recurrence of 2024 net insurance recoveries of $63 million. Turning to the cash flow and balance sheet on slide 11, our second quarter use of free cash flow was stable versus last year despite increases in working capital. Our free cash flow includes benefits of $191 million in the quarter and $376 million year-to-date from proceeds from the sale of OTR and Dunlop. This amount includes $86 million of inventory held for sale that will transfer at the end of the year and $290 million for long-term supply and transition agreements that we are amortizing into SOI over roughly five and a half years. Net debt declined over $600 million, which reflects the proceeds from asset sales this year, net of cash used for working capital and restructuring as part of Goodyear Forward over the last 12 months. We continue to expect to receive gross proceeds of $650 million from the sale of our chemical business later this year. Moving to the SBU results on slide 13. America's unit volume decreased 2.6% driven by headwinds in consumer OE and replacement. While the U.S. consumer replacement markets were up 5%, low-end imports continued to outperform and grew approximately 15% during the quarter. which was an all-time high following a record quarter in Q1. U.S. industry sellout is about flat year-to-date. In addition to the churn we're seeing in the consumer business, America's commercial OE volume declined 22%, where speculation surrounding changes to the implementation of 2027 EPA mandates negatively impacted demand. At the same time, commercial non-member imports grew 32% during the quarter. America's SOI was $141 million, or 5.3% of sales, a decrease of $100 million compared to last year, driven by higher costs net of Goodyear Forward benefits. On slide 14, EMEA's second quarter unit volume decreased 2%, driven by declines in replacement volume, where we saw channel destocking in summer tires. This trend was driven by distributors prioritizing imports ahead of potential tariffs. In late May, the EU announced it had launched an investigation on Chinese passenger tire imports, with potential for applicable rates to be between 41% and 104%. The investigation should be complete by the end of the first quarter next year, although the EU has begun to register the imports beginning in late July for potential retroactive tariffs. This change led our distribution channels in EMEA to prioritize deliveries of imports during the quarter, similar to the actions we saw in the U.S. On the other hand, EMEA's consumer OE volume grew 11% and registered share gains of about 2.5 points, despite significant contraction in the industry. This growth helped to offset some of the weakness in the summer sell-in season. Like our experience in the Americas, We also saw significant weakness in Europe's commercial business, with truck registrations declining 15% across the EU. Fleet replacement demand was also extremely cautious, given the impact of tariff uncertainty on the flow of cross-border logistics and steeper costs. Segment operating income in EMEA was a loss of $25 million, consistent with results in Q1. Turning to Asia-Pacific on slide 15. Second quarter unit volume decreased 16%, driven by replacement volume, reflecting our strategic decision to rationalize less profitable SKUs. Additionally, replacement trends were impacted by weak demand in China. OE volume was also lower, despite overall industry growth, given our customer mix. We expect that our China OE volume will improve over the course of the second half. Segment operating income was $43 million and 9.4% of sales. Excluding the sale of the OTR business, Asia Pacific's segment operating income was flat and SOI margin grew 150 basis points. Turning to the outlook and as we consider the industry environment more broadly, we expect the themes that we saw in the second quarter to remain with us through the near term. In commercial truck, we are seeing a recalibration to changes in global trade, and based on what we know today, we would not expect a recovery for the truck business until 2026. Our current demand forecast would take our full-year commercial earnings about $135 million lower than our prior forecast and to the lowest absolute level we have on record. This decline represents about 650,000 to 700,000 units less than our prior forecast, reductions in price mix, and higher inefficiencies in our factories given very low levels of utilization and the flattening variability of our cost curve. In addition to impacts in lower truck tire volume, we also expect higher tariffs related to U.S. supply coming from our truck tire joint venture in Vietnam and supply of U.S. retread products, which are sourced from our Brazil operations. The near-term outlook for the consumer business has also weakened since our first quarter conference call. We now expect global OE volume reductions beyond what we had accounted for in our prior forecast. More significantly, we expect consumer replacement volume to be challenging, driven by disruption in the U.S. market. We also expect increased risk in EMEA with the announcement of the tariff investigation in the EU, creating risk as dealers and distributors may continue to allocate liquidity and shelf space for imports, which could soften our sell-in of winter tires. We expect to mitigate some of the higher costs we will incur as a result of lower production with proceeds from business interruption insurance related to the fire at our factory in Poland in late 2023. At the same time, we will continue to execute on Goodyear Forward to best position our costs for when the environment stabilizes. As we look at industry factors influencing our outlook, we expect that it will take longer for us to achieve our 2025 year-end margin and leverage objectives. While we continue to expect to exceed the original goals of Goodyear Forward, both in terms of cost savings and in gross proceeds from asset sales, the recent disruption related to tariffs and impacts on the global supply chain have overshadowed our success. We remain confident in our ability to recover and return to growth and earnings once this turbulence subsides. Turning to the third quarter, we're expecting volume that is more reflective of our first half experience, with global volume down about 5%. In addition, we expect higher unabsorbed fixed costs of $50 million, driven by lower production in the second quarter. As we reduce inventories in line with our sales, we expect our unabsorbed fixed costs to increase in the fourth quarter. Price mix is expected to be a benefit of approximately $100 million, driven by the benefit of our recent pricing actions and raw material index contracts with our OE and fleet customers. Raw material costs will increase approximately $50 million. At current spot and currency rates, Q4 would be a benefit of approximately $15 million. Goodyear Forward will derive benefits of approximately $180 million. Inflation, tariff, and other costs are expected to be a headwind of approximately $180 million, reflecting higher costs given U.S. tariff impacts and a global inflation rate of about 3%. This amount captures above average increases in freight rates and transitory manufacturing costs associated with announced facility closures. We expect this amount to increase in the fourth quarter. Based on rates in effect today, our annualized tariff costs are about $350 million, up from our prior estimate with increases in applicable rates in Brazil and Vietnam, both impacting our commercial truck business. Foreign exchange will be a benefit of $5 million. And finally, the non-recurrence of insurance proceeds received last year is $17 million, and the sale of OTR is $10 million. With that, we'll open the line for your questions.

At this time, if you'd like to ask a question, please press the star and one keys on your telephone keypad. Keep in mind, you can remove yourself from the question queue at any time by pressing star and two keys. Again, it is star and one to ask a question today. We'll take our first question from Ryan Brinkman with J.P. Morgan. Please go ahead. Your line is open.

Thanks for taking my questions. I'd like to start by asking around the surge in low-cost imports that you referenced across your key markets. Firstly, outside the U.S., on your last call, you did mention your more balanced near-term view and considered the impact of tires originally destined for the U.S. to be redirected to other markets. So just curious if that was a more considerable headwind than you earlier expected. And then in the U.S., Just given the 25% Section 232 automotive sectoral tariff in place for much of the quarter on consumer tires, I guess the 15% increase in non-US MTA imports is on the surface somewhat surprising. Maybe you could help us a little bit. I recall you mentioning on your 1Q call on May 8th something about tariffs beginning to be collected on May 3rd. whereas I thought they were to go into effect on April 3, at least for non-USMCA compliant parts. And so maybe you can clarify that because if it was May 3, then that could explain the ability for there to be a pre-buy. Was there a surge then in April and it's already subsided, you know, beginning in May? And on commercial tires, which get the reciprocal rather than sectoral rate, I guess, did you see a pre-buy there during the 90-day pause? And I know that pause only ended yesterday, but maybe like based on your conversations, do you expect that to be effectively over now?

Good morning, Ryan. Thanks for the questions. I'll start on the first one, which was an ask around the guidance for the second quarter where we had said we wanted to be balanced because we knew with tariffs in place in the U.S. that that might in fact send imports into other of our international markets. What in fact happened is that the imports that were coming into the U.S. still came in a big wave And then we had a wave in Europe. And so instead of seeing U.S. imports redirected to another market, we just had a surge across our key markets, especially the U.S. and Europe. So I think that's the difference there. When it comes to the effective dates for markets, Section 232 for tires, that was early May. And I think we are still seeing in the U.S. market a very significant increase in imports here in the second quarter. It is counterintuitive. What I would tell you, I think, you know, the order rate and the time on the water for tires coming out of Southeast Asia could be anywhere between three to five months. And so the tires that I think now are more related to this on-again, off-again discourse around tariffs and speculation about tariffs actually potentially being pushed out further. We're at a point in time where the tariff narrative seems to be settling down. And so our expectations are that when we move into the third quarter, we might begin to see some declines in the imports in the U.S. I think what that means for Europe, though, is the potential for some additional tariffs coming in because that investigation will not be complete until the first quarter of next year. Having said that, there is this idea that the tariffs might be applied retroactively back through July. So we'll just have to see how some of this plays out over the next quarter.

Thanks for that explanation. Second and last question is still on price mix, but from the perspective of any color that you could please provide on the relative contribution of price versus mix, are you seeing pricing tailwinds partly offset by mix headwinds? given general consumer affordability angst issues. And then how to think about that going forward. It seems like the pricing component of price mix can improve in a straightforward manner once the pre-buys are finally over. But how should we think about mix? Is mix going to be helped by the fact that the lowest tier tires will increase proportionately the most because they're the ones that are disproportionately imported? Or do you expect there to be a headwind to mix as consumers shift to lower feature tires to try to cope or compensate for the higher like-for-like tire pricing?

So I guess what I would start with is just to say that the price announcements that we made in early May are effective. Mark mentioned this in his script. I mean, they are installed and effective, and that's what you're seeing show up in our second quarter walk, mostly offset by a couple of items. The biggest driver of the offset is commercial truck mix, just given the downdraft that we've seen in that industry. And then there's a little bit of an impact because when we implemented pricing in A lot of the demand in the U.S. came at the lower end of the market. I think around speculation that there will be more price inflation in the industry overall at the low end of the market. I mean, we can't really talk about forward pricing. What I would say is we do have some... Seasonal mix impacts here, especially as we head into the fourth quarter, we always tend to have a strengthening mix heading into the end of the year. And then, you know, as Mark mentioned also, I mean, we are introducing just a ton of new products in greater than 18 inch room sizes. We've got 11 new product launches in the back half of the year in North America in particular that should really help drive a rich mix for us as well.

We mentioned the 230 SKUs on the rich winter mix in EMEA. In total, Ryan, we've got over 500 new SKUs between the U.S. and EMEA as well as AP, but all heavily focused on the 18-inch and above that, as we've discussed in earlier earnings calls, are really about us participating and gaining share in that premium mix of the market. Excellent.

And we'll take our next question from Edison Yu with Deutsche Bank. Please go ahead. Your line is open.

Hey, good morning, guys. This is James Mahalan on for Edison. I have a question and then a quick follow-up. Just on your walk in the quarter, if we look at it, there's a significant headwind that came from this bucket of other costs. I was wondering if you could just double-click on what that $74 million is and whether it's something we should have in our models for the next few quarters.

Sorry, what was the figure you quoted, Jim?

There's a $74 million other cost that's sitting within your inflation and other cost bucket. And I think it's quite a bit higher than it has been in past quarters. So I'm just curious what's in there.

Oh, sorry. Yeah, I'm sorry. I was focused on another basket on the SOI walk. But when we look at you know, all of the buckets kind of concentrated in and around manufacturing costs, I'd break it down into a few major drivers. You know, the first is annualized inflation that runs about $225 million across our cost base, and that's 3% annual inflation. Also included in that figure is about $350 million of annualized tariff costs you know that's new coming into the cost base so that's probably the increase you're noting i'd expect that number to be on the order of magnitude of 60 million in q3 70 million to 80 million in q4 as we continue to incur tariff costs across our global supply chain and then we'll we will expect to get to that run rate in 2026. the third factor I'd point out, and this is a big part of our Goodyear Forward programs, is we're carrying some incremental manufacturing inefficiencies that would generally just attract costs more than what we would normally expect because we are ramping down some factories, especially in Germany, first involved in Fulda. So as we get to full facility closures on those, those costs will come out and those dates are are public and announced for each one of those factories.

Great. That's helpful. Thank you very much. And then within that commercial vehicle headwind that we saw in the quarter, should we expect a similar SOI impact going forward for the next few quarters, or was this maybe the peak of it, and then as you ramp down a little bit to adjust for it, it shouldn't be as significant?

Well, the way I would have you think about it is we talked about a $30 million headwind and mix And that's because the contribution from commercial truck profit is so significant. And I think about, you know, we didn't give a robust outlook for the third and fourth quarters. So I would think about having to lap that. But then there's some additional that will come on top in Q3 and Q4 as we adjust production. And so I would think about that being an extra $25 million in unabsorbed. over the course of the second half. And then I mentioned we're also incurring some new tariff costs. The Brazil rates have gone up from 10% to 50%, and that's where we source our retread products from our own operations. And then we're also doing some sourcing from our truck-tire joint venture in Vietnam that will increase our costs. That's $20 million new on an annualized basis.

Perfect. Okay. Thank you very much, guys.

We'll take our next question from James Piccuriello with BNP. Please go ahead. Your line is open.

Hey, guys. This is Jake Scholl. I'm for James. So it looks like tariffs are trending a little bit worse. So do you guys have any mitigation efforts in the hopper as we think about the annualization to next year? And it looks like you know, at a higher level, this was a pretty significant reset to the full year with, you know, depending on your volume assumptions, 3Q SOI running towards the, you know, 285 to 290 million range versus the previous walk, which was about 400, and the full year at about 1.0 billion from the prior 1.3 million. So, can you just confirm if we're thinking about those numbers correctly?

Thank you.

So, just a couple of comments. You started with the note that our tariff costs are going up from about 300 million this year to about 350, just given some of the changes in rate. I do think, you know, we will make adjustments to our supply chain. you know, to limit that risk on our P&L over the course of the second half. And we'll be able to come back to you at the end of the year, early next year with our plans, but certainly have, you know, cost savings actions as well as sourcing actions that will help mitigate that number going forward. There's obviously been a lot of volatility there. I mean, as I think about, you know, the the outlook, I mean, what we're experiencing is really connected to an exceptional period of time in our industry. And, you know, we're delivering against what we can control. Mark mentioned that our Goodyear Forward targets are cost savings on path. And when I think about the fourth quarter, I mean, you know, I don't want to be too positive or too negative. I think For us, on volume in particular, I mean, I've given a lot of perspective on how price mix is likely to play out. In my script, I gave a lot of perspective on how you should be thinking about our cost. And so in the fourth quarter, the variable that's left is really all around volume. And I do think that, and potentially some additional price mix. But I do think the way that we're characterizing the industry environment right now says that not a lot of visibility into when we'll see this pre-buy sell through. Our thinking is that that will play out over the course of the third quarter, but we want to see through that experience before we give you our perspective on volume in Q4.

The other thing, James, I would add on is just reiterating what Christina mentioned, right, and we talked about at the beginning, which is really around the cadence, the governance, and the diligence behind our Goodyear Forward actions. And, you know, we continue the robustness of our cadence of sessions with all the associates around the world, continuing to refill our pipelines with projects. and really focus on the ones that are value-add or cost-controlling all around the world. So that's been embedded in our DNA, and we'll continue to focus on the flex to make sure that we are controlling every cost possible during this period.

Thank you.

And then for the wind-down of the Cooper-Brands relationship with ACG, Can you talk about just the potential disruption that may have had on volumes in the quarter, and when would you expect that to resolve? Thank you.

Maybe I can start and then Christina can pick up. I guess taking a step back, why did we exit ATD? Our very clear strategy at Goodyear is to make sure we're working with aligned distributors that are representing our full product portfolio and working together with us to build our Goodyear brands in the marketplace. We are constantly looking and doing super careful assessments around operational capabilities, the service rate, stability, and alignment. And we decided to strengthen our partnerships specifically with Tire Hub, which is our joint venture with Bridgestone, and some other key partners who have longstanding aligned distributors that are in keeping with partnership with Goodyear. And we see a lot of benefit for us working with fewer but much more aligned distributors building our Goodyear family of brands and servicing our dealers and our retailers effectively, efficiency, with a full product screen which we have available to the marketplace. We don't want to work with individuals that aren't representing our full portfolio. And, you know, as we looked and as I shared in my comments at the beginning, right, we took risk assessments, we took service assessments, and, again, we feel that it absolutely is the right thing to do there. By the way, ATD was less than 5% of our total consumer replacement volumes.

Yeah, maybe I'll just pop in to say, you know, we had a distribution that we had to Transition. Retailers that we had to transition to new distribution, I would say by the end of July, nearly all and 95% of the retail base voluntarily made that switch and all of our orders are coming in through those new distributors. We do have some private label volume at ATD as well. That's something that we expect to wind down over time. in a very orderly way. And, you know, we expect to offset that volume through mutual commitments with other of our distributors.

And as a reminder, if you'd like to ask a question today, please press the star and one keys on your telephone keypad. We'll take our next question from Emmanuel Rossner with Wolf Research. Please go ahead. Your line is open.

Thank you. Good morning. I appreciate all the elements of Outlook into the storage quarter. Just curious if you could comment on how you would see therefore the full year play out on some of the main metrics. It doesn't look like some of these issues are probably going to be going away super quickly. So any sense, you know, where that sort of like leaves us and you know, SOI or free cash on a full year basis? Or another way to ask potentially is what are put and takes by going to Q4? Are some things expected to get better or not necessarily?

Yeah, sure, Emmanuel. I'll hit the fourth quarter SOI. I mean, we've given you a lot of the different drivers for Q3. And these are the factors that we know. Q4 raw materials should be favorable. Goodyear forward should be a benefit of $175 million. I think unabsorbed overhead in the fourth quarter is going to be a little higher than the third quarter, just given that we will be making appropriate ticket reductions in our factories in order to align with demand and manage for cost and cash. Other costs, I mean, we've talked about this a little bit already. Other costs in the fourth quarter will be higher due to new tariffs and some incremental factory inefficiencies ultimately depending on that production in the third quarter. And we want to be again, aligned with demand and the environment is very uncertain. Price mix, I've made some comments about. We have some seasonality benefit in the fourth quarter in mix in particular. And then what that leaves us is with volume. And just having come through such a disruptive and challenging quarter, I think it's It's hard for us, again, to determine exactly how that's going to play out in the fourth quarter because we don't know how long it's going to take for some of this churn in the U.S. market is going to take. I think we're looking for some data that will help us give you more of a forecast around stabilization in the U.S., and that's data to support things like import slowdown and import channel inventory sell-through. And we're expecting that to come through over the course of the third quarter, maybe into fourth quarter, but we just don't have that data yet to guide it on the volume. When I look at free cash flow, Emmanuel, we've laid out those drivers as well. Last call, what we said is we would be slightly positive in free cash flow. Working capital has come down just a touch. you'll need to adjust the earnings. And so your cash flow should be lower. And then there's, I talked about in my prepared remarks, there's an add-back related to supply agreements. And at the end of the year, the add-back in our operating cash flow should be $265 million. And those are related to those supply agreements on both OTR and transition agreements on Dunlop. I think overall, Emmanuel, I'd say our balance sheet position is going to be very strong at the end of the year, even with a little bit of this downdraft we're seeing right now in the industry.

Okay. And just clarification, then a separate question, but these ad backs related to the supplier agreement, those were not complicated in your previous free cash flow walk?

No, they were not.

Okay.

Um, and then separately, um, you know, wanted to sort of just ask you a little bit about the, uh, the longer term view and picture. So, um, you know, sort of like I heard your remarks around, look, it's a question of, uh, when, not if, you know, when things, uh, settle down industry conditions, then you'd be able to perform just, you know, curious on, you know, the drivers of your confidence there. Um, it sort of feels that essentially, um, whenever one market puts a bearers in place, like the tariffs, then these imports, they'll make their way to sort of like another market where, you know, that is significant for good year as well. And so now the U S may be potentially stabilizing, but then you have Europe. So I guess where, you know, what gives you confidence essentially that sort of like at some point this would essentially stabilize and enable you to really show the benefit from your actions.

Well, Manuel, I guess I'll start and let Mark finish up. I would say it's an especially turbulent environment, and we still should benefit. I mean, we completely expect to benefit with the strength of our U.S. manufacturing footprint. And all at the same time, what's a little bit new news that's also really good good for us is that there are these new contemplated tariffs in Europe, and those rates are punitive. 41 to 104 percent is what the EU has disclosed as far as those tariffs. I think it's really hard for us to give you clarity on timing right now, because I do think we're going to have to work through some of this disruption. But we're as confident today as we were last quarter that as the market stabilizes, we're going to be able to capitalize on those opportunities.

Yeah, no, exactly as Christina said, right, it's the investigation into the pricing around Europe with the tariffs that should be ultimately backdated, right, to the start of that investigation for sure creates a bit of a churn in terms of speculative pre-buy, we assume. from the folks there. But again, working through that and as that would take effect, assuming end of year, start of next year, the goodness there would start to flow through. We're also very encouraged by winter sellout season from our side with that. In terms of the U.S., as we said, the on and off or the push outs and different things in the U.S. marketplace created these gaps of opportunities. for additional pre-buy. So it's speculative as to when that will work through or churn its way through. We're starting to see those in the sellout in the marketplace. So it's a bit of a crystal ball of when that works through. But again, we are definitely positioned very well with our U.S. footprint. We're having lots of conversations with various OEs that are already starting to flex to more USMCA-based, which we certainly are a benefactor of that, particularly with the US footprint. So again, that's why we are confident. The timing of the start piece is the question mark, right? But we are absolutely lined up right for that. And as we mentioned as well, Emmanuel, right, the The push that we have in developing, launching, and bringing to market the 18-inch and above higher performance and premium mix of tires, particularly in the Americas market, in areas that we did not participate in before. in a meaningful way gives us all of that confidence to things start flowing, right? We are going to do it. And we actually saw that as well, though, in the quarter in terms of our growth in the 18-inch and above. We're very pleased with that part of it, and it will continue to be so with the new launches coming throughout the rest of this year and into quarter one of next year.

Thank you.

And we'll take our next question from Itay Michieli with TD Cohen. Please go ahead. Your line is open.

Great. Thank you. Good morning, everybody. Just to follow up to the last question, I know it's early to talk about 2026 in any detail, but I'm curious as you think about how the industry is progressing this year, what are the puts and takes to think about, you know, at a high level impacts on next year when we start to think about the SOI bridge and kind of how this year's events may impact the bridge into next year?

Yeah, good morning, E.K., I think Mark just touched on the difficulty in calling the timing with some of this disruption. Certainly would hope that by the fourth quarter, some of this is rolled through. But we're right now having difficulty in even calling volume in Q4, just given the level of disruption in the U.S. market. But as we look into 2026, there are variables. that we do know. I mean, raw materials have slipped to a tailwind. And at least right now, and I realize it's only August, but the baseline of that at current feedstocks would be a couple hundred million dollar tailwind next year Goodyear Forward should be a benefit of at least $250 million. That's just what's going to be in the flow through. And as we discussed a little bit earlier, we've got sourcing changes and other cost savings in the pipeline. that we will share more with you about as we head into the end of the year. But again, just looking to see some of that stabilization as we firm up our thinking around 2024. The other The other pieces I just want to make sure I remind everyone of is that as we think about the ability to scale earnings next year, a 1% price increase in our U.S. consumer replacement business is worth $55 million. And so far, we've implemented... 4% in the U.S. market back in May. In the same way, a 1% price increase in EMEA is worth $25 million on an annualized basis. And then, of course, volume. I mean, when we talked about benefits that we expect to see out of all of this, we may also... improve the volume, and that's about $40, including sales margin and overhead absorption on a per unit basis. So a whole lot of opportunity once we see some of this churn kind of stabilize, sell through and stabilize in the market.

That's very helpful. Thank you for that. And then just given some of the near-term challenges, I'm curious if you are thinking about additional cost-cutting or even restructuring actions, just given the asset sale proceeds and incremental cash you'll be bringing onto the balance sheet. Not sure if you're at that point yet, but just curious if there's potential additional actions that you're contemplating.

Yeah, I think, Taya, it would be super speculative at this point for us to make any comments around any additional restructuring to the cost base above and beyond what we've already committed to and are in process with. Again, we don't believe this current environment is reflective of the long-term part of the business model. or the normalized industry environment. With that said, we are in the process of closing the three factories in Europe. We announced the South Africa one last month or the month before. So the two in Germany plus South Africa. And we're right-sizing plants all around the world on a regular basis. It's just part of our flexing of our cost structure. So Again, we continue to aggressively manage the cost structure with the Goodyear Forward discipline, keeping the pipeline full. So as I mentioned earlier, right, we're keeping those projects and new projects filled so that we are adding value by reducing the cost and continuing to look at that. But there's no major one to be announced at this point above and beyond normal discipline.

Got it.

That's very helpful. Thank you.

And there are no further questions on the line at this time. I'll turn the program back to Mark Stewart for any additional or closing remarks.

Thank you, David, and thank you all for joining the call today. Let's wrap up for Christine and I saying, Well, you know, while short-term outlook definitely remains turbulent given the industry environment broadly, we're staying very focused on what we can control and what we continue to deliver. You know, we're continuing to execute ahead of schedule on Goodyear Forward. We're continuing to take the right cost control actions. We're taking smart pricing actions in the marketplaces, and we're gaining share in the profitable premium segments of the market. We continue to sharpen that portfolio and at the same time strengthen our balance sheet as we've shared. We're really focused, again, on refreshing the existing product lines, bringing the new power lines into the market, into the premium spaces. And despite these near-term headwinds, I am very confident as the market stabilizes, our momentum will return. The Goodyear team is committed to execution and delivering results. Thank you all for joining.

This does conclude the Goodyear second quarter 2025 earnings call. Again, thank you for your participation, and you may now disconnect.