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 Fourth Quarter 2022 Earnings Call. All lines have been placed on mute to prevent any background noise. After some opening remarks, there will be a question-and-answer session. [Operator Instructions]. Today on the call, we have Rich Kramer, Goodyear's Chairman and Chief Executive Officer; Christina Zamarro, Chief Financial Officer and Darren Wells, Chief Administrative Officer.. During this call, Goodyear, we'll refer to 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 refer to the important disclosures section of Goodyear's fourth quarter 2022 Investors letter and their filings with the SEC, which can be found on their website at investor.goodyear.com, where a replay of this call will also be available. A reconciliation of the non-GAAP financial measures that may be discussed on today's call to the comparable GAAP measures is also included in the investor letter. I will now turn the call over to Rich Kramer, Chairman and CEO.

Great Thanks, Ashley. And good morning, everyone. Thanks for joining us today. We released our fourth quarter Investor Letter after the market closed yesterday that we received very good feedback from investors on both our letter and our Q&A call format following our third quarter release. So as we did last quarter, we use this time again to focus solely on your questions. Now, just before opening the line. I want to acknowledge as you've heard earlier that both Christina and Darren are joining me on the call today. As you saw with the announcement in December, Christina became our Chief Financial Officer as of January one, replacing Darren who moved into a new role of Chief Administrative Officer. Congratulations to both of them and again they're joining me here. I'm excited to continue to partner with both of them in their new roles. And given the transition, Darren is joining us on the call today, but Christina and I will take the lead in responding to your questions on these calls as we go forward. So with that, Ashley, let's open up the call for the first question.

Certainly. We'll take our first question from Emmanuel Rosner with Deutsche Bank. Please go ahead.

Good morning. Thank you so much for the questions and agree with the feedback on the call format. So very much in favor of it.

Thanks, Emmanuel. We appreciate the feedback and Christina pushed us that way. So well done, we appreciate that.

Great. First question, maybe I think last year, around the same time, I think you had helped us out with sort of like framing sort of a base case scenario for what could happen to free cash flow for you guys for the full year ahead under certain conditions. So will we be able to go into this discussion for 2023. Obviously, appreciate all that in this slide. Just curious knowing all you know, what this request will look like for you?

Sure. So Emmanuel. Hi, this is Christina. And let me start by saying thank you for the comments on the Investor Letter. And I have to send out thanks to our teams, this has been a great push by our Investor Relations Team, FPNA our controlling teams, all the put that together. And again, we've received really great feedback on that. As far as free cash flow in 2023. And if you look through the drivers, we've laid out as part of our letter, and if you were to take the assumption, and so just stay with me on the assumption, if you were to take the assumption that our EBIT was going to be flat in 2023 with our EBIT in 2022, which was about $1.1 billion. You should get to a level of free cash flow in the range of about $400 billion. And that's just reflecting the year-over-year improvement in working capital. Emmanuel, what I'd add to that is, it's not that we're targeting flat earnings. Our goal is to improve earnings. And after a really tough setup in the first quarter, as you read in the letter, the trajectory should improve meaningfully as we move to the remainder of the year. In the second quarter, our goal is for segment operating income to approach 2022's levels, with volume stabilizing and given in lower year-over-year raw material cost increases that we're expecting in the second quarter. Assuming a relatively stable economic outlook, then we would begin to see the benefits in the second half of higher volume on either comparables, strong growth in Asia-Pacific driven by a recovery in China and lower inflation levels that we're expecting in the first half of the year. We would also expect the benefits from our recent cost actions that we've announced. And then of course, at current spot prices, tailwinds and our raw material cost. Historically, this has been the time in the cycle where we've seen growth in earnings and growth in our margins as well.

Okay, that's, that's helpful. And then I guess, following up on some of the pieces of the fruit, I guess of the free cash flow guidance. I think CapEx was gathered at $1 billion for the 2023. This compares to maybe a $1.2 billion $1.3 billion framework that you discussed previously, in terms of the investments you need to make in gross. What is enabling you to sort of like keep it around the $1 billion? And is that roughly sort of like, just maintenance CapEx? Are you cutting back at, I guess, where are you cutting back?

Yeah. Good question Emmanuel. And so what I will tell you is, as we went through 2022, we just scale back our plans for capital expenditures, just given the outlook for the global macroeconomic environment. As we look at 2023, we expect to continue to invest in the Americas and in Asia-Pacific, although investment levels in EMEA will decline, just given the current macroeconomic outlook there. We continue to allocate capital to high return projects that will improve our overall competitiveness over time.

Yeah, Emmanuel, I'll just jump in and echo Christina's points. I think we take a lot of time to go through those capital plans. And we've worked through a lot of cycles and I think you can count on us to adjust CapEx to the end environment we're in. And then when we do that we really don't shortchange ourselves, excuse me on what we see as long-term growth projects that we have to do. So we were comfortable with what we spend. And I would just tell you, even if you see things like things that we did at CES around intelligent tire and around sustainable tire. There are projects, growth projects, industry leading sort of technological projects that we're going to continue to move forward within the capacity of the spend that we have. And we feel comfortable of knowing how to do that.

Okay. Yeah, I appreciate the color. And then just very finally, I guess, since you're mentioning the environment, can you maybe just provide a little bit your perspective on some of the drivers of this market, demand weakness that seems to be across every region, every major region, I guess. What is driving this? How will you see that potentially evolve through 2023 on the demand side? And then any implications for how to think about pricing?

Yeah, I think a lot there. Maybe I'll just start with the Americas. We did see a weaker market in the fourth quarter and we see a little bit of slowdown coming into Q1. We reacted not only to the Americas, but Europe as well, as you saw on our Investor Letter by taking production down with that focus on making sure we don't have excess inventory, a bit of a slowing market, and to focus on cash as Christina went through. But as Emmanuel, as I think about the Americas going forward, you also saw in our letter, we saw that our channel inventories are up about 10%. But what I would tell you is that's pretty healthy. I mean our distributors are really rebuilding their inventory, we didn't see any buy ahead, so I'd say in anticipation of any price reductions or anything like that. It's a pretty healthy place and I would say in-line with the expectations of where the market is going in '23. So we feel pretty good about North America. A little slow to start, but I think we have a stronger second half coming, a little slow to start, because we're bringing some of those costs on the balance sheet of unobserved inventory into the first quarter as well. But we feel pretty good about the demand. Picture, sell out was about flat in the fourth quarter, and year-over-year in the fourth quarter. And we don't see any big changes going into the year. Europe, I think, a little bit different story. Obviously, a bit tougher there. I would take a step back and say we feel really good about the initiatives, we've put in place in Europe. Aligned distribution is working. In the quarter, we got volume, we got price mix ahead…

Thanks for the color.

Thank you.

We'll take our next question from Rod Lache with Wolfe Research. Please go ahead.

Good morning. Two quick questions. First, are you seeing anything that would indicate anything other than stable pricing as you're entering this week this year just in the context of the weak demand? And can you clarify your expectations for the other tire-related businesses, has looked a bit soft in the fourth quarter?

Sure. Rod, from how we're looking, I guess, I'll say price mix and how we're looking at the raw material environment that's obviously related to that. You know that sort of the essence of your question is the earnings pressure and margin compression we've seen over the last quarters because of these escalating raw materials. That's true for Goodyear, true for the industry as well, and we need to recover that. I would tell you, our momentum has been very good. Our teams across all our businesses offset all the raw material headwinds with price and mix. And in two of the businesses in Europe not being one of them, we also offset some of the other cost increases we had as well. So the team has done a really good job. Now as Christina mentioned as well, we see this potential decrease for raw materials. And I would tell you, our plan is to capture the benefits of those raw materials and see that in margin improvements as we continue to capture our value proposition out in the marketplace. And I think, Rod, you know this well, having been with us so long, historically, in a period of declining raw materials, we're able to grow margins, we're able to drop through those benefits into the -- into our earnings. And I'd say we see that as still the plan and our way forward and what we're driving for. And also tell you what can help them, excuse me, is we also see the OE business coming back, which means they'll be a pull on the best capacity that the industry is making. And that's good for sort of a supply-demand equation out there as well as we think about how to manage the demand in the replacement market. And then finally, Rod, I'll just tell you, in terms of what we're seeing in the marketplace, we have not seen any decreased demand or trade down in our Tier 1 volumes at all. We've seen a little bit in Tier 2 moving toward the lower-tier brands. But I'll tell you, I'm not sure that's a trade down or a price issue as much as it is. All those sort of imported tires that were backordered and paid upfront in cash by the distribution, particularly in the U.S. I'm talking here that sort of hit the docks in the past quarters, that obviously drove the industry numbers. All that came, it came late, it was paid for. And so I think what you see is a lot of push of those tires to turn it back into cash. And I think that's a dynamic we're dealing with. But again, that doesn't really impact sort of our Tier 1 tires or the value proposition for those. So I hope that helps.

Yeah. But I'll jump in on the non-tire business performance in the fourth quarter. That was principally driven by our chemical business, as you know, that's a pass-through margin business. And when they're buying Betadine at higher prices and then Betadine dropped in the fourth quarter pretty precipitously. That means they're adjusting their pricing real time in the market. So it's more of a timing issue. As I look to 2023, expecting good growth in these areas, really driven by our aviation business, seeing and expecting strength in volumes, strength in pricing and mix. And we're seeing that across the portfolio, especially given the reopening and demand pull out of China.

Thanks for that. And just one more thing, if I can ask. Just taking a step back. Maybe you can just elaborate a little bit on what it will take to close the gap, obviously, on a mix-adjusted basis versus your peers? Presumably some of the capital spending that you were planning was aimed at doing that. And maybe you could just provide a little bit of color on what you're shooting for here in the next year or two years?

Yeah. So I'll go ahead and start. I mean we talked a little bit with earlier on the call about the plans for CapEx for 2023 and a lot of that is influenced obviously by the European macroeconomic outlook. I have to say, over the last two to three years, we do feel that we've made significant progress on closing our conversion cost per tire gap versus our competitors. I would say two or three years ago, we had estimated that gap to be in and around $4 per tire. And today, we have said with the closure of a very high cost facility in Gaston in the U.S., a big restructuring in EMEA. And then, of course, you add a benefit in as much as many of our competitors had low-cost supply coming into Western Europe out of Russia. Put all those together, and we think our disadvantage right now is nearly half of what it would have been, say, two or three or four years ago. So we're feeling well positioned on a relative basis. That's not to say we're not going to do the work to move forward. And what I'll tell you is that the investments that we have in the plan we started last year and continuing in 2023 in the Americas, in Asia-Pacific are very high return projects and as much as they're more expansionary instead of greenfield type plants. That will help move our low cost percentage forward as part of our footprint and increase our overall competitors as we go.

Okay. Thank you.

[Operator Instructions] And we'll go next to John Healy with Northcoast Research. Please go ahead.

Thank you. Rich, I wanted to ask a big picture question about kind of the changes in the C-suite recently. Just love to get your perspective on the move with Darren into the more of the strategy centric elements of the business. What might we expect from you guys over the next couple of years? Like what are the areas where you think that change is going to have the biggest impact on the DNA of the organization?

Well, I think the way I'd answer that, John, and the one thing I would say is we operate as a team. So I think that what makes -- what I'm proud of in leading the Goodyear team is that it's not reliant on one person. So whether Darren is in the CFO role or in a different role, helping us with strategy where Christina and Darren have worked together for so long, I think this was a really natural and elegant transition, if I can say. And I look to the leaders of our business units as well as our CTO, Chris Helsel. I think that when you look at what we're doing, it's the team that really is where the value is. I won't limit it to any individual person. But I will say from a strategic perspective, I think, one, I would highlight what Christina just talked about, which is to say that we are keenly focused that we have to get our cost structure continuingly in line, not only relative to competitors who also get better. But just the trends we see in the marketplace of. I always speak about transparency about price and availability of inventory which puts press your margin compression pressure on every business in every industry. We're keenly aware of that, and we need to make sure that our operations continue to get more efficient every day. That means what we do in our factories on conversion cost, it means where our factories are, we've taken footprint actions. You can count on us to continue to take more of those and then to make the high value-added return investments that we are going to do to help drive both cost structure and more efficiency in the products we make. So that will…

Thank you. That's super helpful. And just one other question I had just on distribution. It sounds like the Cooper and the Goodyear portfolios are starting to be maybe a little bit more connected in terms of dealer availability. We just love to get your thoughts in terms of access of super productive Goodyear dealers and vice versa. And are we at a point where maybe 1 plus 1 can start to equal 3? Or is it kind of going to continue to be somewhat separated in terms of how each go to market?

So I actually think it's a little bit of both. And the reason I say that -- for instance, our retail stores now have Cooper product in it, and that is and has turned into in terms of the performance of those stores sort of a 1 plus 1 equals 3 in terms of how they're operating, how we're taking care of customers and the products that we're offering them. In the same respect, there are certain distribution elements of how Cooper goes to market, how they sell to distributors. And that process is one of the reasons that we wanted to combine Cooper with Goodyear. And they can do some of those things really well, and we are not going to touch those. We're going to make sure what they did really well and candidly, what they were better at than we are. We're going to keep the best of that, and we are, while we're integrating where it makes sense to do. So I think it's actually a little bit of both. And I would tell you, both the terms of the synergies, we're on the run rate synergies that we said we were going to get. And I think that the market side, we said we weren't going to do anything rash right out of the box. We haven't. And you'll see continued progress on how Goodyear and Cooper equate into the market together in 2023. So I think more to come on that, but I'm very happy with where we are.

Okay. Thank you.

And we'll take our final question from James Picariello with BNP Paribas. Please go ahead.

On the second quarter color of SOI approach a year ago levels potentially, what would be some of the key assumptions to get there? Correct me if I'm wrong here, but the second quarter, it should have a similar overhead absorption impact in the first quarter, and maybe that's $60 million to $70 million. And then from there, the three buckets -- key buckets as I see it would be unit volumes, price mix versus raws and then the non-raw materials inflation piece. Yeah, just any color on that would be super helpful.

Yeah, sure. James, it's Christina. So I guess I would start by saying, in the second quarter, we see volumes stabilizing. And I would have -- and we have announced a 5% plus price increase in Europe consumer replacement beginning January 1. And so we expect Europe to begin to catch up to the increases in raw materials over the course of the first quarter and second quarter. Obviously, there's a very significant step down in raw material price increases from Q1 to Q2. And so that should be a benefit for us as well.

Okay. And then just -- well, then how to how do you foresee the elevated channel inventories in Europe, I think a 30% above year ago levels. With the price increase and with replacement sell-in demand down for the industry, a mid-teens entering '23. Yeah, how do you see that unfolding? And do you -- catching up?

Yeah. It's a great question, James. And the elevated channel inventory is actually all reflective of winter. And so what happened in the first quarter is, we see a shift from winter tire sell-in in the fourth quarter. In the first quarter, we shipped into a summer tire sell-in season. There, the inventory in this channel is much more balanced and even healthy. What I would tell you is that the energy prices in Europe have also abated significantly since the third and fourth quarters as well. And so expecting that to support consumers out over the course of the first and second quarters.

Thanks.

Sure.

And there are no further questions at this time, and this will conclude today's Goodyear fourth quarter 2022 earnings call. You may disconnect your line at this time, and have a wonderful day.