Goodyear sales up 7.6%, net income drops in third quarter

AKRON — Goodyear suffered a 44% drop in pre-tax operating income for the quarter ended Sept. 30, as energy and raw material costs increased and global tire volume dropped.

The company's EBITDA fell to $116 million in the quarter, while sales revenue increased 7.6% to $5.31 billion.Goodyear also cited inflationary costs — especially in Europe — contributed to the drop in operating profitability to 2.2%

The tire maker said it expects current headwinds to continue into the fourth quarter of 2022 and the first quarter of 2023 before there is any expectation of market settlement.

"Uncertainty and volatility have defined our operating environment since the onset of COVID," said Richard Kramer, president, CEO and chairman of Goodyear.

"During the third quarter, we faced many ongoing challenges, including persistent inflation. At the same time, new challenges emerged, including a less certain outlook in Europe and the effects of a stronger U.S. dollar.

"While our execution has been strong, the environment is expected to continue to be challenging. Despite the uncertainties in our environment, we continue to build and invest to lay the groundwork for future earnings growth."

Net income was down $88 million (or about 67%) to $44 million Adjusted earnings per share came in at 40 cents for the third quarter of this year, against 72 cents per share for the third quarter of last year.

Through the first three quarters of 2022, sales jumped 24.2% to $15.4 billion, with net income up 45% to $308 million.

The Americas continue to lead the way for Goodyear, with a $337 million increase in net sales for the third quarter, or an increase of 11.4 percent year-over-year.

Coupled with the Asia-Pacific region ($79 million increase in net sales, or an increase of 13.9 percent year-over-year), the two regions helped mitigate a $39 million loss in net sales for the Europe, Middle East, Africa region, or a decrease of 2.8 percent year-over-year.

Overall, Goodyear experienced approximately $33 million in net inflationary costs from Europe in the third quarter alone, according to a Nov. 1 letter to investors, a new disclosure format that contains the third quarter earnings report.

"The global industry is basing its outlook on the same headwinds that we have out there right now," Kramer said. "Raw material, labor, transportation and energy costs are impacting everyone.

"But in North America, we have essentially offset raw material costs (with a record $742 million in price/mix for the third quarter, against $538 million for the quarter in raw material costs). We did not quite get there with overall costs, but we got pretty close.

"North America is the best tire market in the world right now. But the environmental inflationary costs, particularly in Europe, ... that landscape is there for everyone, and we expect it to continue."

In addition, Kramer said the addition of Cooper Tire continues to improve Goodyear's bottom line.

"The synergies of the Cooper Tire combination during the quarter totaled approximately $25 million, continuing to trend upward compared with second quarter benefits of approximately $20 million," he said. "We continue to expect synergies to reach an annual run rate of $250 million by mid-2023."

Tire volume, driven predominantly by lower replacement and aftermarket demand, dropped 3.1% for the quarter, or by 1.5 million units, which translated to about $49 million in revenue loss, Goodyear said.

Replacement tires dropped by 3.5 million units, OE fitments were up by 2 million units.

In the Americas, volume fell 1.8 million units for the quarter, or about 7%. In Europe, volume dropped 6.5%, or about 900,000 tires year-over-year.

"In 2021, industry volume benefited from a significant channel inventory rebuild following the pandemic as well as recovering consumer demand," Kramer said. "This year, with overall industry product availability improving, there is less need for distributors to carry additional inventory.

Asia-Pacific was the only region to report volume growth, with unit sales up 15.5% or 1.2 million units, to 9.3 million units. This volume increase had a positive impact of $20 million, Goodyear said.

During the quarter, Goodyear noted that the Asia-Pacific business returned to "profit growth" after four straight quarters of year-over-year declines in segment operating income.

Globally, the replacement tire market was down 3.5 percent for the quarter.

Goodyear itself was down 9 percent in replacement tires, "reflecting a recovery in the number of imports into mature markets after supply chain disruptions impacted supply in 2021," Kramer said.

On the other side of the ledger, Goodyear's OE volume was up 25.6%, which was better than the industry average for the quarter and "reflected share gains from recent fitment wins as recovery in industry volumes."

"In addition, higher prices and interest rates have increased the cost of carrying that inventory."

When raw material, transportation and energy costs rise, they need to be offset by the cost of tires, a sales profit metric that registers as price/mix.

"I would say that, yes, there is an acknowledgment of what price/mix has to do with the environment we are in right now," Kramer said during the Nov. 1 call. "Business is good, and OE wins are strong, as we have been gaining share in market segments."

The price/mix for the 72,000-employee Akron-based tire maker was $742 million for the third quarter of this year, which helped offset about $538 million in raw material cost increases (for all three business segments).

This left about $204 million for the company to offset non-traditional inflationary increases of about $239 million, including $145 million in calculated inflation, a volume drop of 3.1 percent ($49 million loss) and a currency hit from a strong dollar at about $9 million, all figures for the third quarter.

"The net benefit of price/mix versus raw material offset most of the impact," said Darren Wells, executive vice president and CFO at Goodyear. "Our competitiveness in manufacturing is a big deal. Our factories have traditionally been in higher-cost locations and we have had a bit of a cost disadvantage on a cost-per-tire basis.

"But we have taken steps to close that gap."

The price/mix was higher than raw material costs in all three regions, including EMEA, which showed a price/mix of $247 million against raw material and other cost increases of $206 million.

In addition, Wells cited the elimination of Russian capacity that once had been used for export, which "improves Goodyear's competitive position."

"And energy inflation is concentrated in Europe, where we have less concentration than our key competitors," Wells said.

He added that there "are no material differences" between Goodyear and the rest of the tire industry as they relate to cost increases for wages and transportation.

"There are an array of factors that we have benefited from, while others are more or less neutral," Wells said.

In the Americas, net sales increased $337 million (the strongest of all geographic locations), or 11.4 percent. Sales growth reflected a 19-percent increase in revenue per tire (excluding foreign exchange), partly offset by lower volumes (down 7 percent).

Segment operating income was $306 million compared with $259 million a year ago—an increase of $47 million.

And this result reflects the benefit of price/mix for the Americas for the third quarter of 2022 of $439 million, more than offsetting raw material cost increases of $263 million and inflation and other cost increases of $150 million.

Despite a highly volatile economic environment in Europe, Goodyear's manufacturing operations remained productive in the third quarter.

"During the fourth quarter, we plan to reduce production by approximately 10 days (or about 1.5 million units) at most of our European factories to address softer demand and prevent buildup of excess inventory," Wells said. "In response to the energy crisis in Europe, we have also taken action (including) conservation and energy efficiency projects that not only will have a positive impact on consumption in the near term, but also will support our sustainability efforts in the longer term.

"In addition, we have prepared our European factories for the use of alternate fuel sources to ensure consistent supply to our customers going forward."

Capital expenditures were revised during the third quarter and now are expected to total $1 billion to $1.1 billion in the coming year.

"While capital expenditures are well below original expectations for the year, reflecting difficulty obtaining equipment (including semiconductor shortages) along with our work to better match project timing with expected market conditions, we continue to have a number of ongoing and planned modernization and expansion projects that will significantly improve the competitiveness of our footprint," Kramer said.

But the uncertainty in Europe remains the biggest concern for Goodyear executives moving forward.

"We will go through further pressure in the fourth quarter, and a big piece of that is the energy cost in Europe," Wells said. "I am hoping it will be somewhat seasonal (in its impact) and that once we get through the winter things will moderate a bit."

Wells added he believes the industry "has peaked" on ocean freight costs and that they, along with inland freight, will "start to come back down halfway through next year."

"On these non-traditional inflation costs we should start to see recovery," he said. "For all of these reasons I am pretty optimistic—for the industry and for our ability to recover some of our margins."

Kramer noted that OE fitments for EVs have been a success for the company and should continue to be.

"We have had continued success winning OE fitments," the Goodyear CEO said. "Part of our ability to go to OEs and help them solve the most complex of their problems—around range, performance, handling and around sound—has been a success.

"Our team has continued to deliver with solutions with very different specs to meet. The pull is very high relative to the vehicles that we are on, and from a geographic basis it is very balanced. We've had big wins in China, and I'll leave those big names off for the moment, but we are really looking to lock in supply partnerships around EV fitments.

"Overall, we are on pace. Our profitability is exactly where we want it and I am feeling really good about that."

Kramer added that price/mix is "good to talk about" and can help weather the inflationary storm, but that Goodyear "is focused on cost as well."

"We've seen these environments multiple times, certainly in the last couple years, that have put us to the test again," he said. "If someone would have said we would get over $2 billion of price/mix at the beginning of year no one would have believed us.

"We know we have potential headwinds as we work through Europe. We are getting value from the market, but cost structure is important. We need to make sure we use it as an opportunity to set us up for the future."