Good morning. My name is Nicky, and I will be your conference operator today. I would like to welcome everyone to Goodyear's Second Quarter 2023 Earnings Call. Today, on the call, we have Rich Kramer, Goodyear's Chairman and Chief Executive Officer, and Christina Zamarro, Chief Financial Officer. During this call, Goodyear will 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 statements. For more information on the most significant factors that could affect future results, please refer to the important disclosures section of Goodyear's second quarter 2023 investor 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 discussed on today's call to the comparable GAAP measures is included in the investor letter. This call will focus on questions and answers. And we'll take our first question from James Picariello with BNP Paribas. Please, go ahead.

Hi, guys. This is Jake calling in for James. First, I just want to talk about the third quarter bridge items. So if I work through those, we get to about $300 million SOI in 3Q. I just want to make sure that I'm thinking about that right. And then looking at the full year it looks like the implied guide, it's about 700 million. So can you just talk about some of the puts and takes for the fourth quarter?

Yes. Sure. Hi, Jake. This is Christina. So I'll start on SOI and I would say if you look at our outlook obviously we are layering in the trends in the industry that we're seeing as we look into the third and fourth quarters, and as we think about how this has played out, obviously impacts in our earnings in Q2 due to transitory factors like destocking more in consumer but also more recently in commercial. And so, what that means is volume weakness still anticipated in Q3 and a lot of that is due to our plan for some additional destocking, particularly in Europe with volume approximately flat to up in the back half over the fourth quarter. When I think about the drivers of our SOI block, I mean we've laid out the industry assumptions for you unabsorbed overhead wins, I think we'll have lower Q2 production of about four million units, excluding to below that obviously will impact the fourth quarter. We've given you those values as well. Price mix versus raw materials should more than offset other cost inflation in the second half, I'd say that that's true on a full-year basis as well. If I think about commercial truck, and maybe this gets to the heart of your question, what we said is a big impact $60 million in mix in the second quarter that declines pretty significantly in Q3 and it's pretty much not an impact at all in our fourth quarter. When I look at fourth quarter price mix versus raw materials what I would say is obviously really strong benefits and lower raw material costs. We do have RMI index beginning to take effect. But I would say that there is still relatively small here in the fourth quarter, something like 10% of that raw material benefit. So hopefully that's helpful.

Thank you. That's very helpful. And then it looks like channel destocking was a pretty big drag on the quarter. When should we expect that trend to start to reverse? Thank you.

Yes, so I mentioned just a minute ago Jake in the way that we're thinking about destocking in the back half of the year is that we're essentially complete in the U.S. I'm seeing some incremental weakness in demand in Latin America but more of the destocking will continue in EMEA consumer replacement that's all driven by still higher levels of winter inventories versus last year. And so even though we had a tough industry in Europe last year, we're still planning for declines this year. And then as I think about commercial truck, obviously more volatile segment of the market for us. Big destocking event in Q2 because we did see the spot rates for freight just declined so precipitously, spot rates were down 25% in the month of June and so lots of immediate type of destocking happening with our commercial truck dealers and distributors. That will still continue on into Q3, but not nearly as severe as what we saw in the second quarter. So in truck, unit volume in commercial was down 600,000 units. It's going to be something like 200,000 to 300,000 in Q3 and then by Q4 truck will normalize in line with what's happening in freight ton miles and that's something that's just slightly down in the U.S. and a little bit more in Europe.

Good color. Thank you.

We will take our next question from John Healy with Northcoast Research. Please go ahead.

Thank you, John. Just wanted to ask a little bit about the pricing environment in the U.S. and in Europe. Obviously, some different status of where we've gotten to with pricing over the last two years. But are there any signs that with raw materials now coming in a little bit that you're seeing any sort of behavior or erosion of pricing environment, either by tiers of operators or is it remaining pretty consistent? And what's your confidence level that that can continue into the end of the year? Thank you.

Thanks, John. I mean, sorry, it's a really relevant question. And I think as we look at what we're seeing today prices are still holding and I think that's because everyone across the industry has seen the higher raw material and other inflationary costs. So we're having to deal with that and I think that's what you're seeing that revenue per tire is still holding in very well and pricing is holding in very well. If we look ahead, we see sort of the last year for us. We had over 30% raw material cost increases. We had headwinds in the first half that turns into some tailwinds in the second half. And in that period, the question becomes relevant how will things hold up. I will tell you, we've seen this before in historical periods when this happens, we're traditionally able to hold our prices as we see raw materials come down. I think that that's probably even more relevant now given that inflation really is sticking around. So in the past we've been dealing with raw materials alone, but now if you look ahead we've got higher labor costs, we've got other energy costs, we have other inflationary costs that are more sticky right now. So I think as we look at this, I don't think that we've seen a reversal of the need to recover all our input costs through market pricing action. So we still feel pretty good about where that's at. Now, to your point on tiers, I mean, you know this, I mean Tier 3, Tier 4 have always been price competitive that's not where we play as you know that. But that's an area where units move by price and we're always cognizant of that as well.

Great. And then just a question or two on the OE business, just any sort of preliminary thoughts about kind of model year '24 as you're coming out and how you're positioned and maybe how you're positioned relative to previous years? And just on - as well as on what the potential uncertainty on kind of labor for the manufacturers, any sort of guardrails or thought process to how you're approaching kind of the fall timeframe? Thank you.

Yes, so on the OE side, I will tell you and Christina sort of alluded to this. Obviously we missed in the quarter and that was a lot of European replacement volume and truck volume across our regions. A bright spot was the OE business in both the U.S. and in Europe and I think that's still a factor of all the work that we've done on working with the OEMs to make sure that we're on the new models coming forward and remember we've talked about a win rate that's like in the 60% range, highly weighted towards the EVs and at higher margins. And I think that trend is continuing for us very positively. And also I would tell you that our work with the OEMs has really shown a lot of promise. I think now we've done and just a quarter I think three fitments that have been virtual submissions where we actually haven't even had to build tires, where we dealt with sort of digital submissions and then built only one tire for them to move forward with. And we did that our new fitments and we did that actually taking fitments away from some competitors. So I would say really confident that what we've done in OE continues to move in a very positive way.

Thank you.

And we'll take our next question from Emmanuel Rosner with Deutsche Bank. Please go ahead.

Good morning. Thanks for taking the questions. So Christina in previous quarters you indulge me and essentially provided your latest thoughts on the full year free cash flow scenario for the company and I was wondering if you'd be so kind to update us in the context of obviously the pressures you've seen in the second quarter. Some of them continuing in the third, especially on the mix front and what would that do for your full year free cash flow?

Yes, Emmanuel and thanks for the question. I have to say free cash flow certainly remains a top priority for us and as we think about what our business should be able to generate in normalized environments and also as we think about our leverage going forward. As we look at '23 right now until we continue to expect some positive free cash flow this year albeit less now than before. So slightly positive free cash flow and we set out all of the drivers for you that should help frame that up. With a smaller contribution coming from free cash flow that maybe what we had expected when we last spoke, we are focused on additional actions in the near term to generate some cash, including the sale leaseback program, so we included in the investor letter an expectation for cash proceeds of around 150 million to 200 million this year from those transactions. But I do think it's important to say that we understand that our business is one that should generate free cash flow and we'll continue to keep our focus on that as earnings improve in the near term and we really get to see the underlying earnings power of our business and all of that thought process will go into our next year's planning.

I appreciate it. My second question is on the - some of the reiterated comments in your letter - shareholder letter around approaching or closing in on the 8% SOI margin in the back half of the year. It seems like based on the factors of outlook you're sharing with us for the third quarter, that's certainly not going to be the case in this quarter. I'm not sure if it is - if I guess you're thinking is, you could get there in the fours or that you just saying directionally to some sequential improvement and over time we could get there. I just - I didn't see is the change in language even though it seems like the outlook at the very least, for the third quarter is quite a bit weaker than you would have thought probably last time. So can you maybe share your thoughts on that path towards 8% and timing.

Yes, sure Emmanuel. The way I think about the change from when we last talked I think our second half outlook right now would take a more run rate scenario for EMEA's earnings into consideration in the back half of the year. Where we were at the end of the first quarter was a position where we thought that EMEA would have by mid-year gotten to historical run rate earnings and just given the weakness in the industry over the past quarter, we have really downgraded that expectation. So certainly a big improvement sequentially margin into Q3 and then again into Q4 and EMEA still remains subject to a great deal of volatility, but what I would say is, we still see a very strong recovery in Americas and in Asia Pacific and this means a realistic scenario where both of these businesses are going to be at or above the 8% target in Q4. And so, I mean I think it's relative to the first half margins and also really strong improvements in at least a couple of our businesses.

Yes Christina. Listen I'll jump in, I was going to reiterate the points as well. When we look at the exit rates for the Americas and Asia we still feel pretty good about where those businesses are heading and again the destocking point, I think our inventory in the U.S. was down, I think it was 11% in Q1 and 14% in Q2 in terms of channel inventories. That bodes well, add to that in the U.S. VMT is up and add to that the economy is actually probably stronger than we thought it would be. So we feel - we still feel pretty good about where we're going to be in the U.S. and Asia as well. I think the numbers there speak for themselves. Europe continues to be the area that we need to focus on. We got hit much harder on truck and passenger on a declining industry. I mean it was worse than our expectations for sure. The industry was down about, consumer was down about 13% in Q1 was down another 12 in Q2 and sell-out was down about 4% in Q2 as well. I think that's indicative of the economic sort of malaise that we're seeing over there. Having said that, it doesn't do any good to talk about it, we need to get volume back in Europe to get that business back to the $50 million run rate that we're talking about per quarter. And we need to make sure that we're aggressive on our cost structure over there both from an SAG perspective, from a footprint perspective from everything we do over there and last quarter we alluded to some of the actions that we were in process of taking. Those are in play, those are things we're doing. One, you saw the action that we took in our planned folder already and you'll see more of that coming in fact some of this will move into some of the special committee work that we're focused on following the settlement agreement that we had with Elliott. And Europe is front and center on that. We just can't live with the cost structure and the results we have over there.

And then one final one maybe speaking of the agreement with Elliott. So you announced last week that you've set up, not just an operational review committee, but also a strategic review within this hired I guess a number of investment banks as part of that process. Can you maybe directionally talk to us about what is or isn't on the table in terms of strategic options for that review? Would you, in terms of assets that may be for sale, is it on the sort of like some of the adjacent businesses or could it be regions of your core higher business work, what is or isn't on the table as part of the strategic review?

Yes Emmanuel, maybe I'll take one step back and just say that the discussions that we've had with the Elliott team that we've been speaking with have been, I would suggest very constructive and collaborative. And I think when they look at us they see an opportunity for improved margins - margin expansion, if you will, and a better balance sheet on reducing leverage. And I would tell you we agree for obvious reasons. So that's where we stand. So as we think about that special committee was in addition to adding some new very qualified directors, we put our special committee together to start looking at these things. And as you said, that'll be both operational and it will be strategic. And maybe I'll just talk a little bit about the strategic side for a moment and then Christina you can jump in on some of the things we're thinking on from an operational side as we move ahead. But I should also say, we're not going to get ahead of the Committee here and lay things out, but the menu, to your question around assets, I think from our perspective and as long as I've been with the company, we've been very open to looking at where decisions to make sense to add value for the company. And I think if you go back and look at our track record, you'll find that that's true. Remember, we sold our EPD business. We sold a wire business, we sold essentially our farm business where we get a royalty back. We've done a lot of actions like this and I would suggest you without getting into any specific, it's that attitude and mindset that we're coming to look at the strategic analysis that we're going to undertake and I think that makes sense to us. We'll make decisions that make sense for the business to achieve those goals. And as we do those, we will let you know and obviously strategic may take a little bit longer than the operational but will be back soon talking about these things. But Christina, maybe you want to just jump in on the - how you're thinking about some of the operational areas that at least come under the umbrella that we in the community will be looking at.

Yes, sure, thanks Rich. So Emmanuel, I think as we look at the operations side, we're going to take a comprehensive review across the organization and it's going to be multiple facets of the business, multiple areas of focus. And so, what I mean by that is we're going to spend time in R&D looking at our portfolio work and understanding how to rationalize maybe R&D demand. Rich mentioned digital a little bit earlier, harnessing that capability and leveraging that to drive increases in engineering productivity as another example. We'll also look at our brands and our SKUs in our product positioning and supply chain will spend some time making sure that we have the right skill placements for customer service levels. And of course in manufacturing we're going to spend time on labor productivity. That's a lot of changeovers material handling and the like. Of course purchasing SAG, non-FTE spend will all be in there as well as we look at the operations. And I guess to wrap it up to say we've always benchmarked really well on working capital, but that's still an area that we're spending some time on as well. And then I'll just come in and second Rich's comments on the portfolio of assets and brands. I mean, we'll assess what's creating long-term strategic value for our business and also what we might be able to monetize in order to redeploy capital. So more to come.

Thank you so much.

Thank you.

We will move next with Rod Lache from Wolfe Research. Please go ahead.

Good morning, everybody. I guess I wanted to firstly, just ask about for a little bit more clarification on what happened during the quarter. In May one month into the quarter when you published your investor letter, you had guided to global replacement volume - consumer replacement volume being down 5% and they were down 15%. I look at markets like Europe. The market for consumer replacement not truck, consumer replacement was down 4%, you were down 26%. So there is some clear noticeable underperformance here. So what specifically are you attributing the underperformance to, and why did it seemingly accelerate so much from into May and June.

Yes. Rod, I think maybe we'll take a step back. First of all, you're right. We have to own it. And we didn't see the industry fall off as dramatically as it did and our forecast didn't show that. We had weaker-than-expected conditions in truck and we had a weaker overall industry environment in Europe as I spoke of before and they weren't just small industry changes, they were significant. And I would tell you, particularly on the truck side when we look at the truck replacement market, the markets - the industry was much worse than we expected, America was down 21%, EMEA was down 15%, and that's in some case double what we might have expected to see in the markets. Christina alluded to it before. Rod, I mean I think what happened on the truck side is the cycle that you've seen before. We know it's coming, it's just very hard to predict as we came off some of the COVID situation where we had demand running so far ahead of supply. Finally, what we saw our lower ton miles. We saw a lower capacity utilization in the trucking industry and as Christina mentioned, we saw significantly lower particularly in June freight rates that were out there. Those are signs that our distribution saw, it's not their first rodeo. This is true in Europe and in the U.S. and what they did is start destocking right away. They know that it's coming, they've seen it before and that's what - that's what they did and that's why we saw the volume decrease in truck. I would tell you the positive side on the truck part of the business, our fleet business is holding up very well. In fact, we even won fleets at higher prices. In the quarter that business - the whole fleet service model with all the digital tools is proving to be very durable, which is what the plan was. And then secondly on the positive side as Christina mentioned, we'll still see some destocking in Q3 probably more so in Europe than in the U.S. but that will turn around as well as we go. So that's what happened in truck and we're dealing with it and you saw that in the forecast, we're kind of moving forward with industry trends, making sure we're not going to build tires that we can sell that we need to move on price. So that's what we're taking the consideration if the industry gets better we'll benefit from it. And then on the Europe side, on the passenger side, excuse me. Right, it's kind of what I said, I mean for us we saw the industry numbers down 12% after being down 13%. I think you'll see a lot of imports coming in as well. And on the low end of the market, a lot of those imports that came in last year are actually making their way to the market now that certainly had an impact on the overall market, but from a member perspective is about 12% following 13%. And then we had really weak sell out as well. I mean people just weren't buying as the economy continues to cause people to cause our distribution to not go long on inventory and causes consumers to be more cautious on how they're spending their money. That's not going to last forever, that will change, Rod. But right now, that's what we're seeing and candidly it was worse than we expected. What we're doing about it maybe is equally important, and that's one, we're still strong on price and mix. Our European business I think, Christina, for the first time well over a year we offset raw material and inflation with price mix. We'll see those raw material tailwinds come back into the second quarter. That's a positive. But we have to then take those actions on cost that I mentioned earlier. So we're not going to sit still, but rather the market was certainly weaker and we felt it.

I understand what you're saying about the market. Rich, I'm really asking about Goodyear specific underperformance. So when consumer replacement the market was down 4%, the members were down 12%, you're down 26% and in commercial replacement the industry is down 15% and you're down 34%. So what is, I imagine that the delta versus your expectations obviously, it's partly the industry was weaker, but isn't the magnitude of the underperformance relative to the industry a factor too?

Well, Rod, maybe I'll jump in here, and this was noted in our letter on the summary of the quarter reflections page, but in Europe, we gained a lot of share in the second quarter of last year versus the industry. So this year was more of a normalization as just sell in share. Now this is a reflective of what's happening in sell-out, but last year, we picked up a couple of points a share versus the industry. So our volume was much stronger than our major competitors. This year we're giving that back, but that was essentially in our plan albeit at better industry levels.

Okay. And just lastly on the strategic side, I mean, Europe has been a challenge for Goodyear for as long as I've covered the company and I'm just, just wondering if you believe that that business is ultimately strategic to the company and whether there's alternatives that could actually create some value from that, from that region.

Well Rod, I have to say there are alternatives that we have to look at in terms of everything from going to market to the brand portfolio to the segments that we play in. I think all those things have to be on the table. But to answer your question on it being strategic, I think as we look at the OEMs that work over there and we look at the technology trends that they tend to lead not solely but they tend to lead, it's a market that our technology plays very well there and we have to be there. How we turn up, I think is the question that we have to continue to look at, but some of the most complex problems from a vehicle perspective, a mobility perspective take place in Europe and that's where we have some of our best technology. So absolutely we have to be there. That said, it is an incredibly difficult market, as you say, and as we look at ourselves there Rod and you know this, and you know the actions that we've taken over time, we have a footprint tilted towards Western Europe rather than Eastern Europe or other low-cost countries. Our labor costs are higher that got worse with inflation from COVID. We've been acting on taking factories out from beyond Philipsburg and I can go back in time. We will continue to do those things and we'll continue to right-size the business where we can make sure that the advantages that we have around our technology are coming to the bottom line. But when you look at a slow economy, you look at the volume coming out and you look at the high-cost footprint we have there, that's what we're struggling against. We recognize it and we're going to continue to put the actions in place as we referred to last time, and I think you'll see more to come sooner than later.

Okay, all right, thank you.

Thank you, Rod.

And this does conclude our Q&A session, as well as our conference call. Thank you all for your participation and you may disconnect at any time.