NEW YORK — S&P Global Rating, a U.S. credit rating agency and a division of S&P Global, has revised Goodyear's outlook to negative, from stable, following the release of Goodyear's fiscal 2022 results.
S&P cited weaker cash flows, especially declines in volumes and margins in Europe, for the revised outlook. The agency maintained that lower volumes also created higher than expected capital use, which further reduced free operating cash flow (FOCF).
"Although we expect cash-flow generation will improve in 2023, the level of margin and cash-flow recovery will depend on the recovery in Europe and the enduring strength of the U.S. consumer, which we expect to weaken this year as the economy goes into an expected recession," S&P said.
It also affirmed its credit rating on the company of BB- on Goodyear's unsecured debt.
Goodyear declined to comment on the rating.
The agency said the negative outlook could be lowered if the Akron-based tire maker's debt-to-EBITDA ratio "sustainably increased above 5x or if its FOCF-to-debt ratio remained below 5%. This could occur if volumes and margins remained weak or deteriorated further due to weaker global demand for tires."
For that to occur, it said Goodyear would need to increase margins in Europe, maintain margins in the Americas and manage its inventory levels to reduce working-capital investments.
S&P cited Goodyear's recent financial report, in which it said the replacement market was down 13.7% in Europe, while margins fell due to a worse mix (less high-margin winter tires), higher input cost and higher unabsorbed overhead costs.
The lower margins, along with greater-than-expected working capital investment (due to lower European sales volumes) caused negative free cash flow in 2022 of more than $500 million.
"While leverage of 4.2x at the end of 2022 remains within our expectations for the current rating, FOCF to debt remained below 5% for both 2021 and 2022, which is a downside trigger for the rating," S&P said. "For 2023, we expect debt to EBITDA to be about 4.5x and FOCF to debt should improve to 3% to 5% as working capital investments reverse to some degree."
The agency said that while FOCF should improve in 2023, recovery will depend on end markets, which are expected to weaken in the next 10 months.
S&P said it expect margins and demand to remain weak in Europe, but margins should improve, it said, as summer tire inventories are tighter and as some price increases are implemented to offset inflation. Restructuring in Europe also should help.
S&P also said an expected recession later this year could lead to lower volumes and a weaker mix of tires in the Americas. In addition, pricing is already weakening in the Tier 2 tire segment, S&P said, as a large number of Asian tires enter the market in 2022 as freight rates fell.
S&P noted that raw material costs are falling, original equipment volumes are slowly increasing, and Goodyear should get the full benefit of synergies with the 2021 acquisition of the Cooper Tire & Rubber Co. ($250 million). The agency forecast margins to fall about 1% this year, but recover in 2024.
S&P noted that Goodyear remains well positioned with significant market share globally in premium tires and a strong pipeline of new products. It noted that the Cooper acquisition strengthened Goodyear in North America, expanded its presence in China and enhanced its mid-tier product offerings.
"We also think Goodyear has a strong portfolio of new products for electric vehicles where heavier weights from the batteries create different engineering requirements to reduce wear and tear and increase performance," the agency said.
S&P said that Goodyear's cutting capital spending cuts — the company reduced its planned capital spending of up to $1.4 billion in 2022 and to $1.06 billion in 2023 — could potentially hurt its market share longer term.
"We think this is prudent but wonder if this may put the company at a disadvantage longer term compared with peers like Michelin and Bridgestone that have higher margins, less debt and stronger FOCF," S&P wrote.
