Earnings Call Transcript - GT Q1 2024

Operator, Operator

Good morning. My name is Nicky, and I will be your conference operator today. At this time, I would like to welcome everyone to Goodyear's First Quarter 2024 Earnings Call. Please note this call may be recorded. It is now my pleasure to turn the conference over to Greg Shank, Senior Director, Investor Relations. Please go ahead.

Greg Shank, Senior Director, Investor Relations

Thank you, Nicky. Good morning, and welcome to our first quarter 2024 earnings call. Today on the call, we have Mark Stewart, our Chief Executive Officer and President; and Christina Zamarro, our Executive Vice President and Chief Financial Officer. During this call, we 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 forward-looking statements. For more information on the most significant factors that could affect future results, please refer to Slide 20 of the supporting presentation for today's call and our filings with the SEC. These materials can be found on our website at investor.goodyear.com, where a replay of this call will also be available. A reconciliation of non-GAAP financial measures discussed on today's call to the comparable GAAP measure is also included in the appendix of that presentation. With that, I will now turn the call over to Mark.

Mark Stewart, CEO

Thank you, Greg, and good morning, everybody. Thanks for joining us. Yesterday, after the market closed, we published our first quarter results. As you've seen, we've updated our quarterly earnings format with a goal to enhance our process and provide information to the investors, which they are most interested in. We are happy to take your feedback on our new format as we move forward. As we kick off with some reflections, I'd really like to begin today by thanking the entire Goodyear team for delivering on our first quarter ahead of plan. We are fully engaged in executing the Goodyear Forward. It is this level of momentum that is going to help us drive towards stronger results, stronger segment operating margins and stronger free cash flow over the next couple of years. I do want to point out that it's not just what our associates have accomplished, it's also about how they are doing it. We are focused on a very clear set of KPIs to deliver the Goodyear Forward, our operating plan, and we have the governance and accountability very clear through our chain. Through my first months here at Goodyear, it is clear our associates are committed to doing the right things and in the right way. This is why the company continues to be one of America's top trusted brands. Since I joined Goodyear just over 90 days ago, it's been inspiring to engage in discussions with our associates in our plants, at our retail centers, at our tech center and headquarters, and with all of our stakeholders as well, as I've worked to dive deep into understanding the business and making sure that I'm laser-focused together with the team to execute our Goodyear Forward transformation as well as the annual operating plan we have in front of us. We turn to Q1 results. As we look at our results for the first quarter, we delivered segment operating income of $247 million, ahead of expectations and nearly doubling our earnings from last year. This reflects a marked recovery in our Americas business with SOI up $100 million from the prior year. Our Asia Pacific business also continued to see significant growth both in volume as well as earnings. EMEA's results in the quarter were relatively stable, providing a good base for us to grow. All that said, as we see our overall volume softness in the quarter, partly driven by weaker industry member selling volumes, partly due to the very specific actions we're taking to increase profitability on low-margin, low-value-add products, this is a clear strategy of the Goodyear Forward plan, something that will help us to increase our margins over the next couple of years. It's a focus by product line, profitability and our product ship cost analysis, which I'll cover more later. And at the end, it's always about our execution. Like we've seen over the past several quarters, global consumer replacement industry volumes continue to be influenced by growth in low-end imports in both the U.S. as well as Europe. This dynamic was captured as part of our first quarter outlook. As we look at what is happening at the retail level, industry sellout was up slightly in the U.S. and up about 3% in Europe. In our commercial truck business, and like we've seen over the last several quarters, a weak fleet industry condition continued to weigh on our business in the Americas as well as EMEA. For the Americas, while sellout conditions are stabilizing, the industry did see some prebuy as a result of potential new tariffs on imported tires coming from Thailand. With that said, we don't see this incremental import activity as a significant headwind to our plan. As we turn to Goodyear Forward, we delivered about $70 million in segment operating income improvements during the first quarter. In addition to what we captured in the P&L this quarter, we are executing actions to drive towards our $1.3 billion planned earnings improvement as part of Goodyear Forward. In our footprint and plant optimization, we have put together very detailed, plant-specific factory plans. Going to the work center level to drive factory efficiencies across our footprint, we are reviewing the details of these efficiency plans with our plant operating teams together with the leadership team on a weekly basis. In addition, I've spent the last months visiting our manufacturing sites in the U.S. to support both these initiatives to get to know our teams and to get to know the folks on our production floor. The work in our factories includes implementing improvements to drive increases in our operating equipment uptime, reliability, reducing the complexity in our factories, reducing the number of configurations, preparing to run several products on common product platforms as well as rationalizing our materials. We are also working to reduce overtime and third-party contractor spend as we move forward. In addition, we've announced changes to our distribution strategy in Australia, three planned factory closures, two in Germany, one in Malaysia. In purchasing, we're negotiating with our suppliers using clean sheet and ship cost methodologies and analytics, which are aided by tech advancements. We are implementing enhanced spend control standards and control processes for deeper visibility as well as very proactive management of our spend all the way down to the factory level. Given that procurement plays such an essential role in the success of Goodyear Forward, I have elevated the Chief Procurement Officer role to report directly to me on the leadership team. In our SAG areas, we previously announced a reduction of 1,200 positions in EMEA. It will deliver $100 million in savings by 2025. In addition, we've also taken actions on an additional 135 positions in the U.S. and Lat Am during the first quarter. While headcount reductions of any kind are always very difficult decisions that we can make as a management team, they are, in fact, required for us to right-size our cost structure and enable our long-term competitiveness as a company. In the supply chain and research and development, we continue to optimize for best cost. As I mentioned earlier, with respect to margin enhancements, we took actions in the first quarter to increase our price/mix on our lowest-margin accounts. At the same time, we are also working to industrialize a number of new products to bring to market and the SKUs associated with that. In the quarters ahead, we're going to broaden our product portfolio with increased premium Goodyear fitments for the high-end market as we continue to rationalize our portfolio and SKU count where appropriate. We continue to be very focused on the Cooper brand as well and continuing to grow in that area. Our retail store network in the U.S. turned in their best first quarter in five years, driven by advancements in consumer insight and the actions we've taken to improve our price and our mix. Overall, as I reflect on the quarter, I am very encouraged by our execution. I'm excited about the improvements that we are driving for the future. And by now, I've been through the detailed makeup of the Goodyear Forward plan inside and out and can confirm that we have the line of sight to the $1.3 billion run rate improvements and 10% segment operating income margin by the end of next year. We'll keep a close eye on the industry volume and price/mix over the next quarters to ensure we're managing the external environment while we execute our plan to drive value for our shareholders. Now I'll ask Christina to take you through the first quarter financials in greater detail, and we'll move on to Q&A. Thank you. Christina?

Christina Zamarro, CFO

Thank you, Mark. I'll start by echoing Mark's excitement about the execution we're seeing from our team on Goodyear Forward. With energy carrying throughout our organization, it's clear that the combination of this plan, our teams' knowledge of the business and their ability to drive results sets us up for success. I'll begin with our financial results, starting with the income statement on Slide 8. Our sales totaled $4.5 billion, down 8% from last year, driven by lower tire volume and unfavorable price/mix. The unfavorable price/mix was due to the impact of two factors: first, a weak commercial truck industry on our mix; and second, contractual price adjustments as feedstock prices have remained low over the last several quarters. Unit volume was down 3% from last year. Overall, replacement volume declined 7%, partly offset by higher OE volume, which increased about 9%. Segment operating income for the quarter was $247 million, up $122 million from a year ago. After adjusting for significant items, our earnings per share was $0.10, up $0.39 versus last year. The year-over-year drivers of our earnings are shown on Slide 9. The impact of lower tire unit volume was $28 million, reflecting a decline in shipments of 1.4 million units. Factory utilization was a slight benefit. Segment operating income benefited from favorable net price/mix versus raw material cost of $127 million. Raw materials were a benefit of $261 million, and price/mix was negative for the quarter due to commercial truck mix and contractual pricing adjustments. The negative impact of price/mix was $134 million. Having said all that, sequential pricing from the fourth quarter was stable. Goodyear Forward initiatives contributed $72 million in the quarter with benefits driven by plant optimization and purchasing. Inflation in the quarter was $58 million or about 3%, which was partly offset by favorable other costs of $25 million, driven by lower transportation rates. Other SOI primarily consists of the impact from the fire in our Poland facility that occurred in August of last year. Turning to Slide 10. Net debt totaled $7.4 billion at the end of the first quarter, down just over $550 million from the same time last year. Cash flow from operating activities is typically negative in the first quarter as activity ramps up following the holiday shutdown. Cash used decreased in the first quarter versus a year ago, given lower raw material costs in our inventory and increased earnings. Moving to our SBU results and starting on Slide 12. Americas first quarter unit volume decreased 7% or 1.5 million units driven by replacement volume. These results are in contrast to the relatively strong U.S. industry in the first quarter, which was driven by an increase in low-end imports. Industry member volume, primarily representing large branded tire companies, was lower year-over-year. Segment operating income totaled $179 million or nearly 7% of sales, reflecting an increase of $100 million year-over-year. Americas earnings benefited from lower transportation rates, the execution of Goodyear Forward and from net price/mix versus raw materials, which more than offset inflation and volume headwinds. Moving to Slide 13. EMEA's first quarter unit volume decreased 5% or 700,000 units driven by replacement. Like in the U.S., Europe's consumer replacement industry growth in the first quarter was driven by imports. Our premium segment share remained stable versus the prior year. Segment operating income was $8 million and flat from a year ago. Favorable net price/mix versus raw materials and Goodyear Forward actions were offset by volume declines and inflation. Turning to Asia Pacific on Slide 14. First quarter unit volume increased 10% or 800,000 units driven by OE growth in China. Segment operating income totaled $60 million and 10% of sales with an increase of $22 million in SOI compared to the prior year. Asian earnings benefited from favorable net price/mix versus raw materials, volume and Goodyear Forward initiatives. These benefits were partially offset by higher costs. Turning now to our second quarter outlook on the left-hand side of Page 16. We expect second quarter global unit volume to be about flat versus the prior year. I'll note that this excludes the Americas replacement unit volume recovery related to last year's tornado at our Tupelo facility, which I'll cover in SOI other in just a moment. Additionally, we expect higher unabsorbed fixed costs of about $30 million, driven by lower production volume during the first quarter. Lower raw materials will be a benefit of about $160 million, partially offset by about $70 million of lower price/mix, driven by raw material indexed agreements. We expect Goodyear Forward to deliver approximately $75 million of SOI benefits during the second quarter. Lower transportation rates will partly offset general inflation for a net headwind of about $10 million in costs. SOI other items to consider include a net benefit of the recovery from the 2023 storm at our Tupelo facility and the continuing impact from the fire at our Poland facility. The combination of these events reflects a net benefit of $35 million in the second quarter. On the right-hand side of the page, our full year assumptions are relatively unchanged from our previous call, although I'll note we have increased our full year outlook for Goodyear Forward given our first quarter performance and reflecting our confidence as we move through the execution of our plan. With that, we'll open the line for questions.

Operator, Operator

I will take our first question from James Picariello with BNP Paribas.

Thomas Scholl, Analyst

This is Jake on for James. Congrats on a great quarter, and congratulations, Mark. Could you guys just help me put a finer point on your full year volume assumptions for Goodyear? If I work through the SOI bridge items you laid out, I get something at roughly $1.4 billion for the full year. I just want to see if there's any update going through to that.

Christina Zamarro, CFO

Yes. So our full year outlook on volume, as we laid out in the presentation, is to be slightly behind the industry in consumer replacement. That's all going to be driven by our first quarter experience. And so when you look at the remainder of the year, what I would say, broadly speaking, is that we should be more in line with the industry. As we look at what's happened over the past few quarters, we've seen a lot of the destocking that we needed to sell through in Europe complete. And in the U.S., in the first quarter, we were cycling through a really easy comp on the import side of the house. But as we move into Q2, we've guided relatively flat volume. And in the back half of the year, yes, of course, depending on your assumptions for industry growth, but we see growth in volume just given that the consumer sellout has trended positively here in the U.S., VMT up a couple of points; in Europe, also up about 3% on a sellout basis. And so hopefully, that helps you with your modeling.

Thomas Scholl, Analyst

No, that's very helpful. And it looks like most of the upside in the restructuring statement this year from $350 million to about $375 million was captured in the first quarter. Are there any other opportunities to potentially push that number higher through the rest of the year?

Christina Zamarro, CFO

Yes, sure. So on our fourth quarter conference call, we had said that we should benefit from Goodyear Forward actions in 2024 by about $350 million. And just given our experience, you're exactly right, in the first quarter, we've increased that outlook to at least $375 million, which does mean that we have good reason to believe that we should be able to exceed that level, although we need to continue to execute on our work stream in real time to be able to increase that amount publicly here. For now, we've increased both purchasing and supply chain. Based on savings, we do have line of sight to that was over and above that initial plan. I'd say supply chain is higher on better utilization and network optimization and in purchasing. We have added some new work streams since Mark came on board to deliver more value and indirect spend. This includes new MRO work streams, reducing stock and other spend control programs in our factories. So a lot of good successes there. What I would say is we'll give you an update in the next quarter. We should be pretty much locked in on knowing where we land on the savings by Q3, just given our FIFO accounting. But at least where we're comfortable right now is at that at least $375 million level.

Mark Stewart, CEO

Yes. I want to emphasize that we have strong momentum and great energy across our functional and forward teams. As Christina noted, we have already achieved $72 million in total actions with demonstrated results in the first quarter. Personally, along with Christina, we are engaging weekly with each function—purchasing, manufacturing, retail, and more—across our five focus areas contributing to the $375 million-plus goal mentioned by Christina. This effort includes optimizing our footprint and plants, and we are visiting each of our U.S. plants to collaborate with plant leadership and our manufacturing, engineering, and purchasing teams, focusing on diligence in our purchasing processes. We have tightened our key performance indicators throughout the organization at both the staff and team levels, holding dedicated weekly meetings to ensure effective execution and enhance our work streams. I'm optimistic about our progress, particularly in reducing system complexity and improving cost competitiveness globally. Additionally, we are seeing supply chain logistics cost savings and have taken actions to reduce complexity and unify platforms, which will help us improve margins by making pricing adjustments and discontinuing less fitting products.

John Healy, Analyst

I wanted to ask about the volume side in North America. You talked about the low-margin product kind of going away a bit. Could you talk to what sort of volume impact that is maybe in terms of units, I assume, on the replacement side? And maybe what areas of the market or retailers or brands like that those are disappearing with?

Christina Zamarro, CFO

Yes, John. I'll start by saying we've observed some volatility in low-end imports over the past few quarters. If we look at the bigger picture, import activity was initially suppressed after COVID, followed by several quarters of overcorrecting. In terms of our share for 2023, we're generally where we anticipated being. Nonmember imports in 2023 are around 20% to 21%, similar to the previous five years. We've experienced a lot of fluctuations, especially in the first quarter when imports accounted for 25% of the market, which was a notable increase. Nonmember imports rose by 100%, resulting in approximately 1.5 million additional units compared to normal quarterly levels. However, I believe this reflects inconsistency. Regarding the question of whether consumers are trading down, there is no evidence of that in the U.S., particularly for branded Tier 1 tires. That market share has remained steady over the last five years. Recently, we have noticed some decline in Tier 2 and Tier 3 as they dip into Tier 4 market share. It's unclear whether this decline is due to consumer preferences or distributor behaviors. Historically, distributors have tended to stock up on low-end tires during inflationary periods, which is something we'll monitor closely. In Europe, however, the situation is different. Low-end imports as a percentage of the market have increased from about 20% to 27% over the past five years. This suggests that distributors are more inclined to stock these lower-priced tires, possibly due to the impact of high inflation on consumers and other recent macroeconomic events there. This aligns with the rationale behind some of the major restructurings we’ve announced in Europe. I hope that provides some clarity.

John Healy, Analyst

No, it's super helpful. And then just a finer point I wanted to ask just about the price/mix outlook. I think you guys are saying price/mix would be positive in the second half of the year. Just thinking through some of the moving parts globally, with the destocking or maybe growth in the import brand, to me, it seems like that has a little bit of a risk to it. Do you see that as an area with risk to the business? And how do you get confidence that price/mix will be positive in the second half?

Christina Zamarro, CFO

I believe that by the end of the second quarter, we will have overcome the challenges related to the commercial truck mix that we've experienced in recent quarters. Most of that will be resolved in the first quarter. In the second quarter, we will address the effects of RMI indexed agreements on our pricing and product mix. This will provide us with a clean starting point for the third and fourth quarters. As for the second half of the year in the Americas, I anticipate significant growth in our consumer original equipment business, which should allow us to outperform market share due to our strong mix of fitments, particularly geared towards trucks and SUVs. Additionally, winter inventories in Europe are down 40% year-over-year, creating favorable conditions for a successful selling season in the third quarter and improving our mix in the EMEA region. Therefore, I have strong reasons to believe that we will see positive pricing and product mix in the latter half of the year.

Mark Stewart, CEO

I would like to touch on new products, John. We are launching some exciting premium products globally this season. In the Americas, we have the WeatherReady 2 and the ElectricDrive 2, which is an all-season tire for electric vehicles. In the EMEA region, we are introducing the Eagle F1 Asymmetric with six new sizes. In the Asia Pacific, we're also launching our version of the Goodyear ElectricDrive. We are experiencing strong success in both the luxury and premium performance markets in Asia Pacific, along with a sustained advantage in the electric vehicle segment. All of this points to positive trends for us.

Emmanuel Rosner, Analyst

My first question is a follow-up on the volume question. So I think you've essentially identified two trends, right? Some of it is the lumpiness and this import dynamics in the U.S. and in Europe. And then some of it seems to be a little bit more deliberate as part of Goodyear's strategy. And you explained very, very well that lumpiness and the import dynamic and how that would move forward. I just want to focus on the second piece. I guess, how much more do you have to do in terms of amount of business or tire volume that you're not really interested in or that's not profitable and that will help your profitability from exiting? Just curious when I'm looking at, I guess, your volume outlook for the rest of the year, will this be a meaningful factor of potential performance versus the industry? Or are you mostly done with this?

Mark Stewart, CEO

Yes, Emmanuel, thank you for your question. I would begin with your last statement regarding the actions we've taken in the first quarter. We are closely analyzing shipping costs and profitability while considering our cost structure on a per-tire basis across our customer platforms. We have reviewed the situation, and it doesn’t necessarily mean we are abandoning any customers. We are working with them to find the right price point for each product at its respective performance level. This process does not imply that everything is being removed; in some instances, it simply requires a price adjustment to align with market conditions based on the performance of specific SKUs or tires. Overall, we feel positive about the steps we've taken so far. Moving forward, we are collaborating with some customers to reset their price points, a process that has been ongoing for the past four to five months. We concluded our final actions in the first quarter and anticipate stability in this area, as Christina indicated earlier.

Emmanuel Rosner, Analyst

Okay, that's great color. Then I have a question about the Goodyear Forward plan. So it seems in the quarter, it helped Americas' profitability quite a bit. I'm curious, when could we expect to start seeing it helping EMEA's profitability? Is this going to be still within this year? Or is it a little bit more back-end loaded as a result of how things work in Europe?

Mark Stewart, CEO

Yes. As we mentioned at the opening, really, the SAG actions have already been well implemented, and we're on track to fully execute. The 1,200 roles, which were identified, are coming out on plan, if you will. And if we look at year-to-year, as we said, with EMEA really being about flat in terms of the earnings, but with all of the Goodyear Forward restructuring activities done as well as the two plants which were announced late last year in terms of Fulda, first of all, going through, and that's also proceeding to plan. So from that aspect of it, we are absolutely on track with the actions we've got in EMEA. Christina, anything else you'd like to add?

Christina Zamarro, CFO

Emmanuel, I'd just say that when we announced the plan in November, we did say that the majority of the actions would benefit our Americas business. It was a split of like 70% of the $1.3 billion that was going to be accretive to the Americas and the rest split between EMEA and Asia Pac. I think we should expect improving margins in EMEA over the course of the year. And then as Mark mentioned, with the factory restructurings coming more to bear next year, then again, another step-up in 2025.

Emmanuel Rosner, Analyst

That's very helpful. Would you think that 70% holds also for the $375 million in benefit expected for this year? Or is that more of like...

Christina Zamarro, CFO

Yes, I would use the same math.

Emmanuel Rosner, Analyst

Okay. And then one final quick one, if I may. I guess, what can you tell us about the process to divest the non-core assets and how that's actually going? Any new or updated timeline around potential future updates?

Christina Zamarro, CFO

Yes. This is regarding the strategic review of our portfolio. I can confirm that the process for each of these assets is progressing as expected. As mentioned during our fourth quarter call, we anticipate providing a more comprehensive update on one or more of these processes by midyear, which you can consider as our second quarter conference call. We are still on track for that timeline, and everything is moving along well.

Operator, Operator

I will take our next question from Ryan Brinkman with JPMorgan.

Ryan Brinkman, Analyst

Firstly, Mark, it was great to hear in your introductory remarks that you were able to come in initially as an outsider, dug deep into the Goodyear Forward plan. I recognized that you were able to independently confirm for yourself the line of sight into the operating improvements that the rest of the management team had identified. At the same time, I recall you on the last call saying that while it has been extremely early days in your listening tour, et cetera, that you were looking to also identify some quick and easy wins or low-hanging fruit in terms of how the plan, which you said had good bones, might be augmented or accelerated in some ways. I'm just curious, the last 90 days, what incremental opportunities might you have found or are looking into that you think might have the most potential?

Mark Stewart, CEO

Thank you, Ryan. As you mentioned, I can be quite talkative, but I have really focused on listening during the first five weeks. One quick action we took was to add Shawn Pace, our Chief Procurement Officer, to the senior leadership team, reporting directly to me. It's crucial that we maintain real-time visibility and support Shawn and the purchasing team to enhance our speed of execution. We've also identified additional savings opportunities in this area and have improved the speed of our global bidding process, beginning in the Americas. We're exploring both raw materials and MRO, where we've found several opportunities, including in our MRO contracts. We're reviewing our contracts and implementing basic manufacturing practices, such as overtime planning and scheduling, in collaboration with our plant leadership. I have held face-to-face meetings with plant leaders across the Americas and conduct weekly sessions to align our processes differently. This helps us replicate our best-in-class performance benchmarks across the network to capture savings that may have previously been planned but at a different timing. We’re also reallocating resources between plants, including engineering and manufacturing teams, to enhance execution. Additionally, we are working on centralizing our manufacturing footprint for consistency and improving efficiency by focusing on OEE, reducing scrap, and simplifying processes in line with our shipping costs. We have narrowed down the KPIs we monitor to the most impactful ones and are driving progress on these weekly, ensuring clear ownership and timelines among the teams.

Ryan Brinkman, Analyst

Okay. And then lastly for me, if I could just focus in on the plan on significantly increasing segment operating income, that free cash flow will naturally follow and benefit also, of course, from the deleverage enabled by the nonoperating or divestiture aspect of the plan. But I'm curious how you're thinking about other opportunities to improve free cash flow relative to EBITDA and how important that is or should be as a part of the plan. We've sometimes seen big inflections in cash flow after management has changed the way in which their employees are incentivized, thinking of LKQ as one example in this industry. And I know there's rightly a ton of focus on driving margin and then getting those divestitures done to pay down the debt. But how large of an opportunity might there be around working capital efficiency, CapEx discipline, CapEx reusability, anything that you can bring from your former employment, et cetera? And how are you thinking about the cadence of operating earnings improvement versus the cash flow as we progress through the plan? Maybe that one is more for Christina.

Mark Stewart, CEO

Sure. Let me start and then Christina can add to it. When we consider our past experience in capital-intensive industries, we have a clear plan for the research and development necessary for Goodyear Forward and the subsequent years. Our approach is very disciplined. We have combined our purchasing with engineering to devise a manufacturing equipment strategy that emphasizes obtaining the best return on capital for our modernization efforts. This year, for instance, we are undertaking significant modernization at our Lawton facility, alongside many others, to ensure our cost structure is highly competitive while balancing our products across the network. To achieve this, we are focusing on our working capital as you mentioned, investing wisely and negotiating effectively in purchasing. We are examining our negotiation process closely, especially as we modernize our equipment. For instance, if we're transitioning from replacing ten machines to possibly thirty or fifty, we aim to negotiate effectively upfront to secure the best prices. We are also setting our depreciation schedule to conserve cash upfront while ensuring our cost structure is appropriate wherever equipment is deployed. Additionally, we are collaborating with our local plant leadership teams globally to enhance cost efficiency. We are engaging with them not just on the cost center level but also in terms of profit and loss management within their scope. They have influence over many factors, such as maintenance, repair, and operations, which can tie up significant cash. We are also exploring shared resources for spare parts across the network and maintaining disciplined spending practices. We have implemented a weekly spend control mechanism to address any spikes in spending proactively. Overall, our focus is on modifying patterns and behaviors while reinforcing our existing systems and ensuring they are robust.

Christina Zamarro, CFO

No, Mark, I think you've covered a lot of it. I think internally to describe what it feels like, Ryan, is that behavioral change where what we're emphasizing to the teams is when we get to a target, then it's not that we've necessarily done the job. We're going to continue to look for what else we can do. And I think it's that never-satisfied mentality. And as we've put together this plan, and as Mark has come in and added his experience and perspective to it, I think it's all about achieving that sustainability in cash flow, that sustainability in earnings. And when we look out to the fourth quarter of 2025, we would see an annualized cash flow on an adjusted free cash flow basis of like $600 million or $700 million. And that's on an adjusted EBITDA of, say, about 2.7. So our goal is to not, obviously, to not have a good year or two, but we're really trying to structurally change the cash flow profile of the business.

Operator, Operator

We will move next with Itay Michaeli from Citi.

Itay Michaeli, Analyst

Just two final questions for me. First, on the inflation and other costs, can you just maybe walk through the puts and takes for the second half of the year? I think the first half is implied with just over $40 million. I think you've got over $200 million of a headwind for the full year. And then maybe going back, my second question, on the assumptions for the second half for volume and pricing. Hoping you could just kind of review just the underlying assumptions for industry sellout trends, maybe your market share, and then maybe the impact from some of the new products, Mark, that you alluded to before.

Christina Zamarro, CFO

Yes, I'll begin with the question about inflation. For the full year, we are facing cost challenges of approximately $215 million, predominantly in the second half, with quarterly inflation impacts of about $50 million to $55 million. In the first half, we benefited from lower transportation rates, particularly in the U.S., which we have now surpassed in the second half of the year. We will also incur additional expenses due to the announced closures of two factories in Europe, which will lead to inefficiencies as we prepare those factories for closure in 2025 and 2026. Additionally, we are experiencing some challenges with insurance costs related to market tightness and claims from the past year. Regarding volume, we have stable expectations; we have guided for flat volume in Q2, with ongoing growth in original equipment (OE) but some weakness in replacement. For the latter half of the year, channel inventories in the U.S. and Europe are in a healthy state, with the U.S. down about 4% from year-end and EMEA down 8% year-over-year. It's important to note the consumer has remained resilient, with a 3% increase in sellout in Europe and a 1% increase in the U.S., where the growth has been consistent over several quarters. We anticipate a decent market in the latter half of the year; we expected stronger growth in this period compared to the first half due to channel inventory dynamics. Specifically regarding regions, the Americas are expected to see strong OE growth in the second half, contributing to our market share gains. In EMEA, winter tire inventories are notably down by 40%, indicating a positive restocking opportunity in the third quarter. Growth in Asia Pacific continues, even with tougher comparisons in OE for the second half, but replacement remains favorable. We feel optimistic about volume and price/mix in the second half. Additionally, as Mark mentioned, we are rolling out new products, expanding our premium SKU portfolio while streamlining lower-end SKUs, which supports our mix strategy.

Operator, Operator

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