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    Goodyear Tire & Rubber Co (GT)

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    Business Description

    The Goodyear Tire & Rubber Company (Goodyear) is a global leader in tire manufacturing, distribution, and sales. The company produces a wide range of tires for various applications, including automobiles, trucks, aircraft, and industrial equipment, and also provides related services such as retreading and automotive maintenance. Goodyear operates through three regional segments: Americas, Europe, Middle East and Africa (EMEA), and Asia Pacific, with a strong presence in both original equipment and replacement tire markets.

    1. Tires - Manufactures and sells tires for automobiles, trucks, buses, motorcycles, aircraft, and industrial equipment. Includes consumer tires, commercial tires, and specialty tires for off-the-road (OTR) vehicles, mining, and aviation.

      • Consumer Tires - Designed for passenger vehicles, motorcycles, and light trucks.
      • Commercial Tires - Built for trucks, buses, and heavy-duty vehicles.
      • Specialty Tires - Developed for aircraft, mining, and industrial applications.

    2. Other Tire-Related Sales - Offers retreaded tires, tread rubber, and materials for tire retreading. Includes specialty products such as aviation and race tires.

    3. Retail Services and Service-Related Sales - Provides automotive maintenance and repair services through company-owned retail outlets, catering to both consumer and commercial customers.

    4. Chemical Sales - Produces and sells synthetic rubber and other chemicals to third-party customers, contributing a smaller portion of overall sales.

    Q3 2024 Summary

    Initial Price$11.38July 1, 2024
    Final Price$8.74October 1, 2024
    Price Change$-2.64
    % Change-23.20%

    What went well

    • Goodyear is focusing on higher-margin premium products and expanding their SKU coverage in larger rim sizes, particularly greater than 18 inches, which presents significant growth opportunities in North America.
    • The Goodyear Forward transformation plan is delivering significant cost savings, with a target of $1.5 billion in run-rate benefits by the end of next year, including plant optimizations and operational efficiencies.
    • Goodyear is actively reducing its net leverage to a target of 2x to 2.5x by the end of 2025, aiming for a healthier balance sheet and better credit rating, aligning with competitors and improving financial flexibility.

    What went wrong

    • Declining replacement volumes and potential market share loss: Over the last nine quarters in North America, Goodyear's replacement volumes are down an average of 9%, raising concerns about a possible generational market share shift due to increased competition from low-end imports, particularly from Asia.
    • Significant raw material cost headwinds: The company expects a $300 million increase in raw material costs in the first half of 2025, leading to a potential $115 million price/mix headwind in the fourth quarter of 2024, which could pressure margins.
    • Negative free cash flow and higher restructuring costs: In the third quarter, Goodyear reported a negative free cash flow of $340 million, a significant increase from the $41 million use in the same quarter last year, driven by higher restructuring payments and increased working capital needs, which could impact the company's liquidity.

    Q&A Summary

    1. Free Cash Flow Outlook
      Q: What's driving the free cash flow usage and outlook?
      A: Christina explained that the free cash flow was a use of $340 million in the quarter, driven by higher rationalization payments and increased working capital use. They expect strong free cash flow in the fourth quarter and next year, driven by recovery of working capital outflows and reducing CapEx below $1 billion, contributing to significant cash generation in 2025.

    2. CapEx Reduction
      Q: Why is next year's CapEx expected to be below $1 billion?
      A: Christina stated that as part of Goodyear Forward, they are challenging capital allocation assumptions and reducing CapEx to generate strong free cash flow. This includes reassessing standards and processes to ensure best cost outcomes, leading to a CapEx reduction of about $300 million year-over-year.

    3. Volume Declines and Market Share
      Q: Is the volume decline indicative of a market share shift?
      A: Mark explained that there has been an influx in the Tier 4 market with Asian tires. Goodyear intentionally exited low-margin business as part of Goodyear Forward, resulting in volume declines. Christina added that sell-in is outperforming sell-out, possibly due to distributors overstocking low-end products ahead of potential tariffs. They are focusing on growing in higher rim sizes (greater than 18-inch) to capture premium market share.

    4. Margin Improvement Strategies
      Q: How are you addressing margin targets amid headwinds?
      A: Mark highlighted that Goodyear Forward is key to improving margins, focusing on operational efficiencies like reducing scrap and enhancing plant effectiveness. They are concentrating on higher rim sizes (18-inch and above) and premium segments, with a clear roadmap over the next 24 months to improve margins.

    5. Asset Dispositions
      Q: What's the update on the asset dispositions process?
      A: Christina mentioned they are progressing as expected with the two other planned dispositions, aiming to achieve the right value for shareholders. They are confident in meeting their objectives and are prioritizing shareholder value over rapid completion.

    6. Leverage Target
      Q: Why target a net leverage of 2x to 2.5x by end of 2025?
      A: Christina explained that interest rates and access to capital drive their goal toward a more investment-grade credit rating. They aim for a balance sheet comparable to competitors, many of whom are less than 2x leveraged, to improve interest coverage costs and competitiveness.

    7. Distribution Strategy and ATD Exposure
      Q: What's the impact of ATD's bankruptcy on Goodyear?
      A: Christina stated that their receivable with ATD is about $135 million, but they have reached an agreement regarding payment of pre-petition claims and do not see a material impact. Mark added that the situation validates their strategy of forming TireHub, and they continue to focus on their distribution value propositions.

    8. Inventory Levels
      Q: Are inventories normalizing in the system?
      A: Mark noted that EMEA's channel inventory is about 10% lower than last year, with winter inventories 15% lower. In the U.S., channel inventory is heavy with low-end tiers due to potential pre-buying, but overall, Goodyear's inventory levels are healthy, and they are focusing on premium products.

    9. Price/Mix Outlook
      Q: What's driving the negative price/mix in Q4 and outlook for next year?
      A: Mark explained that pricing dynamics involve many factors beyond raw materials. Christina added that about 30% of their business is covered through OEM RMI contracts, and they expect commodity prices to normalize as pre-buying stabilizes. They continue to price competitively while focusing on cost structures.

    10. Company-Owned Retail Stores
      Q: What's the progress and outlook for company-owned stores?
      A: Mark emphasized improvements in customer service and leveraging stores for fleet services, with 600–700 fleet appointments per day. They see strong growth opportunities and consider the retail stores a key part of their long-term strategic growth, currently best placed within the company.

    11. SKU Expansion and High Rim Sizes
      Q: How much room is there for growth in 18-inch and above tires?
      A: Christina mentioned that in North America, 57% of Goodyear branded products are greater than 18-inch, but across the full portfolio (including Cooper), it's only 46%, indicating significant room for growth. They plan to expand in this segment.

    12. Dunlop Asset Sale
      Q: What's the status and outlook for the Dunlop business?
      A: Christina confirmed that Dunlop is about 5 million units, mostly in EMEA, and revenue is expected to increase due to volume growth. Margins remain healthy as they have repositioned Dunlop into the Tier 2 space, focusing on strategic brand positioning while undergoing a strategic review for divestiture.

    Key Metrics

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    Executive Team

    NamePositionStart DateShort Bio
    Mark W. StewartChief Executive Officer and PresidentJanuary 29, 2024Appointed as CEO and President in 2024. Previously served as COO of North America at Stellantis N.V. (2018–2024).
    Darren R. WellsExecutive Vice President and Chief Administrative OfficerJanuary 1, 2023Nearly 20 years of service at GT. Previously CFO (2018–2022). Set to retire on February 29, 2024.
    Christina L. ZamarroExecutive Vice President and Chief Financial OfficerN/AOversees GT's financial operations, including reporting, controls, and strategic planning.
    Stephen R. McClellanPresident, AmericasJanuary 2016Responsible for GT's operations in North, Central, and South America. Joined GT in 1988. Set to retire on April 1, 2024.
    Christopher R. DelaneyPresident, Europe, Middle East, and AfricaSeptember 2017Oversees GT's operations in Europe, the Middle East, and Africa. Joined GT in 2015.
    Nathaniel MadarangPresident, Asia PacificMarch 2021Responsible for GT's operations in Asia, Australia, New Zealand, and the Western Pacific. Joined GT in 2008.
    Laura P. DudaSenior Vice President and Chief Communications OfficerJanuary 2019Leads GT's global communications activities. Joined GT in 2016.
    Christopher P. HelselSenior Vice President, Global Operations and Chief Technology OfficerMarch 2021Oversees GT's global operations and R&D. Joined GT in 1996 and has held various leadership roles.
    David E. PhillipsSenior Vice President and General CounselJune 2019Chief legal officer at GT. Joined GT in 2011 and previously served as Associate General Counsel, Americas (2016–2019). Currently 48 years old.
    Gary S. VanderLindSenior Vice President and Chief Human Resources OfficerFebruary 2019Leads GT's global HR activities. Joined GT in 1985 and previously served as VP, HR - Americas (2016–2019).
    Margaret V. SnyderVice President and ControllerMarch 31, 2023Principal accounting officer at GT. Joined GT in 2020. Previously held roles such as Director of Corporate Accounting and Financial Reporting (2020–2022) and Controller for Latin America (2022–2023).

    Questions to Ask Management

    1. Despite the ongoing Goodyear Forward initiatives, your consumer replacement volumes have been declining significantly, with an average 9% drop over the last nine quarters in North America. Can you explain how much of this decline is due to intentional volume loss versus market share loss, and when do you expect volumes to stabilize or improve?

    2. You've set a net leverage target of 2x to 2.5x by the end of 2025, which is lower than your historical levels and many high-yield companies. What is the rationale behind committing to such a low leverage ratio, and how does this align with your capital allocation and investment strategies?

    3. The Goodyear Forward program aims for $500 million in annualized savings from footprint and plant optimization by 2025. Could you provide specific details on the plant rationalizations and optimization strategies you're implementing to achieve these savings, and how they might impact your production capacity and workforce?

    4. Given the significant influx of low-end imports in the U.S. and Europe impacting your replacement tire volumes and market share, what concrete steps are you taking to combat this competitive pressure, and how do you plan to regain share without sacrificing profitability?

    5. With the planned divestitures, including the sale of the OTR business and the potential sale of the Dunlop brand, how are you balancing the objectives of maximizing proceeds, finding the right strategic fit, and adhering to your timeline? Additionally, how will these asset sales affect your long-term growth and profitability targets?

    Past Guidance

    Q3 2024 Earnings Call

    • Issued Period: Q3 2024
    • Guided Period: Q4 2024 and FY 2025

    Guidance:

    1. Working Capital: Use of $150 million to $200 million for FY 2024, with recovery expected in FY 2025.
    2. Goodyear Forward Benefits:
      • FY 2024 savings target raised to $450 million.
      • Additional $750 million in year-over-year growth benefits expected in FY 2025.
      • Total run-rate benefits by the end of FY 2025 expected to reach $1.5 billion.
    3. Segment Operating Income (SOI) Margin: Targeting 10% SOI margin by the end of FY 2025.
    4. Capital Expenditures (CapEx): FY 2025 CapEx expected to be below $1 billion, down from FY 2024's $1.25 billion.
    5. Free Cash Flow: Very strong free cash flow expected in FY 2025, driven by working capital recovery and reduced CapEx.
    6. Restructuring Costs: Total restructuring spend of $1 billion between FY 2024 and FY 2026, with $400 million in FY 2025.
    7. Debt Maturity: Plans to repay $500 million of 9.5% coupon notes due May 2025.
    8. Dunlop Business: Revenue growth and healthy margins expected in FY 2025.

    Q2 2024 Earnings Call

    • Issued Period: Q2 2024
    • Guided Period: Q3 2024 and FY 2024

    Guidance:

    1. Unit Volume: Q3 2024 global unit volume expected to decline by 4%.
    2. Unabsorbed Fixed Costs: Higher unabsorbed fixed costs of $30 million in Q3 2024.
    3. Raw Materials: Increase of $50 million in Q3 2024, offset by price/mix improvements.
    4. Goodyear Forward SOI Benefits: $120 million SOI benefit expected in Q3 2024.
    5. Inflation and Other Costs: Net headwind of $60 million in Q3 2024.
    6. Working Capital: FY 2024 guidance updated to a use of $150 million to $200 million.

    Q1 2024 Earnings Call

    • Issued Period: Q1 2024
    • Guided Period: Q2 2024 and FY 2024

    Guidance:

    1. Q2 2024 Global Unit Volume: Expected to be flat versus the prior year.
    2. Q2 2024 Raw Materials Benefit: Anticipated at $160 million, partially offset by $70 million of lower price/mix.
    3. Q2 2024 Goodyear Forward SOI Benefits: Expected to deliver $75 million.
    4. Q2 2024 Inflation and Transportation Costs: Net headwind of $10 million.
    5. Q2 2024 SOI Other Items: Net benefit of $35 million from recovery at Tupelo and Poland facilities.
    6. FY 2024 Cost Headwinds: Estimated at $215 million, weighted toward the second half.
    7. FY 2024 Volume Expectations: Slightly behind the industry in consumer replacement for FY 2024.
    8. FY 2024 Goodyear Forward Benefits: Increased outlook for earnings improvement.

    Q4 2023 Earnings Call

    • Issued Period: Q4 2023
    • Guided Period: FY 2024 and Q1 2024

    Guidance:

    1. Capital Expenditures (CapEx): FY 2024 CapEx guidance of $1.2 billion to $1.3 billion.
    2. Restructuring Cash Outlay:
      • $300 million in FY 2024.
      • $350 million in FY 2025.
      • Remaining outflows in FY 2026.
    3. Goodyear Forward Savings Plan:
      • $350 million in FY 2024, with $50 million in Q1 2024.
      • Targeting $750 million in savings by FY 2025.
    4. Run Rate Adjustments: Adjusted to $1.35 billion annualized SOI exiting FY 2023.
    5. Market Growth Expectations: Mature markets expected to grow 1% to 2% in FY 2024.
    6. Factory Expansion and Modernization:
      • Conversion of 9 million units from LVA to HVA by the end of FY 2025.
      • Additional 2.5 million units of HVA capacity by the end of FY 2026.

    This table summarizes the issued and guided periods along with the exhaustive guidance metrics for each earnings call.