Earnings Call Transcript - GT Q2 2025

Operator, Operator

Good morning. My name is David, and I'll be your conference operator today. At this time, I'd like to welcome everyone to Goodyear's Second Quarter 2025 Earnings Call. Please note this call may be recorded. It is now my pleasure to turn the conference over to Ryan Reed, Senior Director of Investor Relations.

Ryan Reed, Senior Director of Investor Relations

Thank you, and good morning, everyone. Welcome to our second quarter 2025 earnings call. With me today are Mark Stewart, CEO and President; and Christina Zamarro, Executive Vice President and CFO. A couple of notes before we get started. During this call, we'll make forward-looking statements that involve risks, assumptions and uncertainties that could cause actual results to materially differ from those forward-looking statements. We'll also refer to non-GAAP financial measures. For more information on the most significant factors that could affect our future results and for reconciliations of non-GAAP measures, please refer to today's presentation and our filings with the SEC. All our earnings materials can be found on our website at investor.goodyear.com, where a replay of this call will also be available. With that, I'll hand the call over to Mark.

Mark W. Stewart, CEO and President

Thank you, Ryan. Good morning, everyone, and thank you for joining our call today. Let me start by saying our second quarter results were below our expectations and reflect an unprecedented level of industry disruption given changes in global trade that negatively impacted our consumer and commercial businesses globally. At the same time, the midterm outlook is also turbulent given what we're seeing in terms of industry environment. I'll talk about what we're seeing in detail before we move on to the financials and to your questions. While the near term has proved to be significantly more challenging, I am confident in our ability to regain our momentum once the market stabilizes and we work through some of the transitory headwinds we're seeing today. Within the current environment, our focus continues to be on controlling that which we can control. We have executed consistently on Goodyear Forward, where P&L benefits continue to be achieved ahead of schedule. We've increased pricing in the U.S. and Canada in response to the tariffs. in consumer OE in the U.S. as well as in Europe. We've increased the vitality or the refreshing of our product portfolio. We grew in the greater than 18-inch market, and we're on track with our new 18-inch plus SKU developments and launch timing. We've expanded our margins in Asia Pacific. Our SG&A, or SAG costs are down. And finally, we're on pace to deliver a strong balance sheet by the end of the year supported by the 3 divestitures we committed in Goodyear Forward. Net-net, we're paving the way for our organization to deliver increased value and focus on becoming number one in tires and service. Market factors, the things that we don't control. They certainly had an impact during the quarter, and I'll share more about that shortly. As we look ahead, once this turbulence around the prebuy in the first half of the year settles down, we are well positioned with our U.S. footprint with our products and with our distribution, and we're also looking at raw material benefits beginning in quarter 4. If we turn to the industry environment in the second quarter, several factors limited our ability to mitigate rising costs. First, the market continued to feel the effects of OEs navigating new complexities of the global supply chain. Specifically, we saw the consumer OE industry contract more than we anticipated in both the Americas and in Europe. In addition, we continue to see weakness in our Asia Pacific OEMs volume given our own premium mix of customer and fitments. Consumer preferences in Asia Pacific, continued OEM price discounting and favorable government incentives in China are leading to a disproportionate amount of sales of opening price point vehicles, which is well below where we focus in our targeted segments of the luxury and the SUV EV segment. Having said that, even while our OE volume was weaker than expected, we continue to register significant OE shares in the U.S. and Europe, which is a relative sign of strength, highlighting our industry-leading technology and service. Moreover, we've recently seen increased demand from our OEs as they've sought to rebalance their tire supply with more focus on USMCA capacity. We believe we're in the early innings as it relates to this opportunity and see positive momentum. Second, the consumer replacement market was characterized by increased competition, particularly in the Americas and in EMEA, which impacted our volume. Despite new installed tariffs, the second quarter U.S. nonmember growth in imports was actually higher than in the first quarter as dealers and distributors prioritized shelf space and liquidity to stockpile the imports. What's more, we've already seen some of this excess volume materialize in the U.S. sellout market. As you all know, we've announced broad-based price increases in the U.S. and Canada that became effective in the second quarter and remain intact today. It's clear that our relative positioning impacted our overall consumer replacement volume and the price mix although we did continue to record gains in the 18-inch and above rim sizes. Another contributing factor influencing our views on the U.S. consumer replacement market is related to distribution. As many of you know, we made a strategic decision earlier in the quarter to rebalance our U.S. distribution to ensure high levels of customer service and mitigate credit risk following the second bankruptcy of ATD. Other manufacturers have taken similar actions. As distributor relationships are important for reaching end-customer accounts, some manufacturers as well as distributors operating in the U.S. market introduced new and meaningful incentives during the quarter. These programs presumably shift retailers to new distribution networks. These actions serve to further increase competition in today's markets. There are 2 additional developments to highlight as we think about the outlook for our Consumer business. First, North America consumer replacement margins steadily improved throughout the quarter as we implemented price and mix actions into the market. Second, U.S. growth in nonmember imports started to ease recently, and we expect to see declines in the level of imports beginning as early as the third quarter. On a related note, the EU recently launched an investigation on imported tires from China. While we don't have any final second quarter data yet, we believe the announcement led to an increase in imports over the last several months as we have seen distributors prioritize liquidity and warehouse space for the imports. Our EMEA business is well positioned and should tariffs ultimately be implemented in Europe. Finally, turning to our Commercial business, the truck tire market, which have been running at recessionary levels for the last couple of years, took another significant leg down during the second quarter, positioning us now at a point where we expect our full year volume and mix to register below COVID year levels. As many of you know, the U.S. OE industry fell nearly 30% on the back of uncertainty related to the implementation of the 2027 EPA mandates. In addition, global replacement demand also contracted relative to our expectations as truck tire customers remain cautious about freight conditions and broader economic trends. In spite of these dynamics, U.S. nonmember imports increased over 30% in the quarter and European imports rose as well. So in summary, in the coming quarter, we expect market headwinds to persist as U.S. dealers work through elevated levels of low-end import inventory and weak demand in the global commercial truck market. We're making the necessary internal changes to drive performance and control the working capital. As we look at the second half, while global trade disruption is weighing on our full year outlook, I assure you our team is positioned to win with customers and consumers as the turbulence dissipates. It isn't a matter of if, but when, as our fundamentals are strong, and we have firmly positioned our business to deliver our targeted margin once the market conditions improve. And our organization isn't waiting passively for the upswing. We're continuing to develop new premium products to generate our own organic growth tailwinds. In May, we introduced the Eagle F1 Asymmetric 6 and in July, the Assurance MaxLife 2 in North America. In Europe, we've extended the lineup of our premium winter tire, the UltraGrip Performance 3. We will increase its total offering to over 250 SKUs this year, making it our most extensive winter offering to date. Additionally, within All-Season, we were recently awarded the top rating by Europe's largest auto association for the Vector 4Seasons Gen-3 tire. These new product introductions and third-party reviews are crucial because ultimately, we expect the recent challenges we've experienced in our markets will give way to the opportunity. We continue to expect to realize benefits from trade policy changes over time as well as to capitalize on our organizational focus on winning in the premium segment of the marketplace. Now I'll ask Christina to take you through the second quarter financials, and we'll move on to the Q&A.

Christina L. Zamarro, Executive Vice President and CFO

Thank you, and good morning, everyone. Mark has shared important context for what impacted our second quarter relative to our expectations. Looking at the financials, about half of the miss in the quarter came in our Commercial business given materially weaker OEM replacement demand globally. The other half was driven by lower consumer OEM replacement volume. Second quarter sales were $4.5 billion, down 2% from last year, given lower volume and the sale of OTR, partly offset by increases in price/mix. Unit volume declined 5%, reflecting the impacts of global trade disruption on OE production, distributor and fleet buying patterns and consumer sell-out trends. Gross margin declined 360 basis points. SAG was lower by $39 million, consistent with results in Q1. Segment operating income for the quarter was $159 million. Goodyear net income increased to $254 million, driven by a gain on the sale of the Dunlop brand. Our results were impacted by other significant items, including rationalization charges of $59 million. After adjusting for these items, our loss per share was $0.17. Turning to the segment operating income walk on Slide 10. The sale of the Off-the-Road business reduced earnings by $23 million during the second quarter. After this change in scope, our SOI declined $152 million versus last year. Lower tire unit volume and factory utilization were a headwind of $51 million. Price/mix was a benefit of $91 million, driven by our recent pricing actions in the U.S. and Canada. Price/mix came in $44 million lower than we guided on our first quarter call, driven by headwinds in commercial truck of about $30 million and lower mix in the Americas as U.S. dealer and distributor demand was geared toward our lower price point products in advance of announced price increases. Raw material costs were a headwind of $174 million and Goodyear Forward contributed $195 million of benefit during the quarter. Inflation and other costs were a headwind of $127 million and other was a headwind of $18 million. The second quarter also included the nonrecurrence of 2024 net insurance recoveries of $63 million. Turning to the cash flow and balance sheet on Slide 11. Our second quarter use of free cash flow was stable versus last year despite increases in working capital. Our free cash flow includes benefits of $191 million in the quarter and $376 million year-to-date from proceeds from the sale of OTR and Dunlop. This amount includes $86 million of inventory held for sale that will transfer at the end of the year and $290 million for long-term supply and transition agreements that we are amortizing into SOI over roughly 5.5 years. Net debt declined over $600 million, which reflects the proceeds from asset sales this year, net of cash used for working capital and restructuring as part of Goodyear Forward over the last 12 months. We continue to expect to receive gross proceeds of $650 million from the sale of our Chemical business later this year. Moving to the SBU results on Slide 13. Americas unit volume decreased 2.6%, driven by headwinds in consumer OE and replacement. While the U.S. consumer replacement markets were up 5%, low-end imports continued to outperform and grew approximately 15% during the quarter, which was an all-time high following a record quarter in Q1. U.S. industry sell-out is about flat year-to-date. In addition to the churn we're seeing in the Consumer business, Americas commercial OE volume declined 22%, where speculation surrounding changes to the implementation of 2027 EPA mandates negatively impacted demand. At the same time, commercial nonmember imports grew 32% during the quarter. Americas SOI was $141 million or 5.3% of sales, a decrease of $100 million compared to last year, driven by higher costs net of Goodyear Forward benefits. On Slide 14, EMEA's second quarter unit volume decreased 2%, driven by declines in replacement volume, where we saw channel destocking in summer tires. This trend was driven by distributors prioritizing imports ahead of potential tariffs. In late May, the EU announced it had launched an investigation on Chinese passenger tire imports with potential for applicable rates to be between 41% and 104%. The investigation should be complete by the end of the first quarter next year, although the EU has begun to register the imports beginning in late July for potential retroactive tariffs. This change led our distribution channels in EMEA to prioritize deliveries of imports during the quarter, similar to the actions we saw in the U.S. On the other hand, EMEA's consumer OE volume grew 11% and registered share gains of about 2.5 points despite significant contraction in the industry. This growth helped to offset some of the weakness in the summer selling season. Like our experience in the Americas, we also saw significant weakness in Europe's Commercial business with truck registrations declining 15% across the EU. Fleet replacement demand was also extremely cautious given the impact of tariff uncertainty on the flow of cross-border logistics and steeper costs. Segment operating income in EMEA was a loss of $25 million, consistent with results in Q1. Turning to Asia Pacific on Slide 15. Second quarter unit volume decreased 16%, driven by replacement volume, reflecting our strategic decision to rationalize less profitable SKUs. Additionally, replacement trends were impacted by weak demand in China. OE volume was also lower despite overall industry growth given our customer mix. We expect that our China OE volume will improve over the course of the second half. Segment operating income was $43 million and 9.4% of sales. Excluding the sale of the OTR business, Asia Pacific's segment operating income was flat and SOI margin grew 150 basis points. Turning to the outlook and as we consider the industry environment more broadly, we expect the themes that we saw in the second quarter to remain with us through the near term. In commercial truck, we are seeing a recalibration to changes in global trade. And based on what we know today, we would not expect a recovery for the Truck business until 2026. Our current demand forecast would take our full year commercial earnings about $135 million lower than our prior forecast and to the lowest absolute level we have on record. This decline represents about 650,000 to 700,000 units less than our prior forecast, reductions in price/mix and higher inefficiencies in our factories given very low levels of utilization and the flattening variability of our cost curve. In addition to impacts and lower truck tire volume, we also expect higher tariffs related to U.S. supply coming from our truck tire joint venture in Vietnam and supply of U.S. retread products, which are sourced from our Brazil operations. The near-term outlook for the Consumer business has also weakened since our first quarter conference call. We now expect global OE volume reductions beyond what we had accounted for in our prior forecast. More significantly, we expect consumer replacement volume to be challenging, driven by disruption in the U.S. market. We also expect increased risk in EMEA with the announcement of the tariff investigation in the EU, creating risk as dealers and distributors may continue to allocate liquidity and shelf space for imports, which could soften our sell-in of winter tires. We expect to mitigate some of the higher costs we will incur as a result of lower production with proceeds from business interruption insurance related to the fire at our factory in Poland in late 2023. At the same time, we'll continue to execute on Goodyear Forward to best position our costs for when the environment stabilizes. As we look at industry factors influencing our outlook, we expect that it will take longer for us to achieve our 2025 year-end margin and leverage objectives. While we continue to expect to exceed the original goals of Goodyear Forward, both in terms of cost savings and in gross proceeds from asset sales, the recent disruption related to tariffs and impacts on the global supply chain have overshadowed our success. We remain confident in our ability to recover and return to growth in earnings once this turbulence subsides. Turning to the third quarter. We are expecting volume that is more reflective of our first half experience with global volume down about 5%. In addition, we expect higher unabsorbed fixed costs of $50 million, driven by lower production in the second quarter. As we reduce inventories in line with our sales, we expect our unabsorbed fixed cost to increase in the fourth quarter. Price/mix is expected to be a benefit of approximately $100 million, driven by the benefit of our recent pricing actions and raw material index contracts with our OE and fleet customers. Raw material costs will increase approximately $50 million. At current spot and currency rates, Q4 would be a benefit of approximately $15 million. Goodyear Forward will drive benefits of approximately $180 million. Inflation, tariff and other costs are expected to be a headwind of approximately $180 million, reflecting higher costs given U.S. tariff impacts and a global inflation rate of about 3%. This amount captures above-average increases in freight rates and transitory manufacturing costs associated with announced facility closures. We expect this amount to increase in the fourth quarter. Based on rates in effect today, our annualized tariff costs are about $350 million, up from our prior estimate with increases in applicable rates in Brazil and Vietnam, both impacting our Commercial Truck business. Foreign exchange will be a benefit of $5 million. And finally, the nonrecurrence of insurance proceeds received last year is $17 million and the sale of OTR is $10 million. With that, we'll open the line for your questions.

Ryan Brinkman, Analyst

I'd like to start by asking around the surge in low-cost imports that you referenced across your key markets. I mean, firstly, outside the U.S., on your last call, you did mention your more balanced near-term view and considered the impact of tires originally destined for the U.S. to be redirected to other markets. So just curious if that was a more considerable headwind than you earlier expected? And then in the U.S., just given the 25% Section 232 automotive sectoral tariff in place for much of the quarter on consumer tires, I guess the 15% increase in non-U.S. MTA imports is on the surface somewhat surprising. Maybe you could help us a little bit? I recall you mentioning on your 1Q call on May 8, something about tariffs beginning to be collected on May 3, whereas I thought they were to go into effect on April 3, at least for non-USMCA compliant parts. And so maybe you can clarify that because if it was May 3, then that could explain the ability for there to be a prebuy. Was there a surge then in April and it's already subsided beginning in May? And on commercial tires, which get the reciprocal rather than sectoral rate, I guess, did you see a prebuy there during the 90-day pause? And I know that pause only ended yesterday, but maybe like based on your conversations, do you expect that to be effectively over now?

Christina L. Zamarro, Executive Vice President and CFO

Yes, thank you for your questions, Ryan. I'll begin with the first one regarding our guidance for the second quarter. We aimed for a balanced approach because we anticipated that the tariffs in the U.S. might redirect imports to other international markets. However, what actually occurred was that the imports into the U.S. still surged significantly, and we also experienced a wave of imports in Europe. Instead of seeing U.S. imports shift to different markets, we had an influx across our major markets, particularly in the U.S. and Europe. Regarding the effective dates for Section 232 for tires, that was in early May, and we are still observing a notable increase in imports in the U.S. market during the second quarter. This might seem counterintuitive. The order rate and shipping times for tires from Southeast Asia could range from 3 to 5 months. Therefore, the tires arriving now are likely tied to the fluctuating discourse around tariffs and speculation about potential delays in the implementation of those tariffs. Currently, the narrative regarding tariffs appears to be stabilizing, which leads us to expect that we might see a decline in U.S. imports as we enter the third quarter. However, for Europe, this could mean the possibility of additional tariffs, as the investigation won't conclude until the first quarter of next year. It's worth noting that there is a consideration that tariffs could be applied retroactively to July. We will need to monitor how these developments unfold over the next quarter.

Ryan Brinkman, Analyst

Second and last question is still on price/mix. But from the perspective of any color that you could please provide on the relative contribution of price versus mix? Are you seeing pricing tailwinds partly offset by mix headwinds given general consumer affordability angst issues? And then how to think about that going forward? It seems like the pricing component of price/mix can improve in a straightforward manner once the pre-buys are finally over. But how should we think about mix? Is mix going to be helped by the fact that the lowest tier tires will increase proportionately the most because they're the ones that are disproportionately imported? Or do you expect there to be a headwind to mix as consumers shift to lower feature tires to try to cope or compensate for the higher like-for-like tire pricing?

Christina L. Zamarro, Executive Vice President and CFO

So I guess what I would start with is just to say that the price announcements that we made in early May are effective. Mark mentioned this in his script. I mean they are installed and effective, and that's what you're seeing show up in our second quarter walk, mostly offset by a couple of items. The biggest driver of the offset is commercial truck mix, just given the downdraft that we've seen in that industry. And then there's a little bit of an impact because when we implemented pricing, a lot of the demand in the U.S. came at the lower end of the market, I think around speculation that there will be more price inflation in the industry overall at the low end of the market. I mean we can't really talk about forward pricing. What I would say is we do have some seasonal mix impacts here, especially as we head into the fourth quarter, we always tend to have a strengthening mix heading into the end of the year. And then as Mark mentioned also, I mean, we are introducing just a ton of new products in greater-than-1-inch room sizes. We've got 11 new product launches in the back half of the year in North America, in particular, that should really help drive a rich mix for us as well.

Mark W. Stewart, CEO and President

Globally, we mentioned the 230 SKUs in the rich winter mix for EMEA. In total, we have over 500 new SKUs across the U.S., EMEA, and AP, with a strong focus on the 18-inch and larger sizes. As we discussed in previous earnings calls, this strategy is intended to help us participate in and capture share of the premium segment of the market.

James Mulholland, Analyst

Just on your walk in the quarter, if we look at it, there's a significant headwind that came from this bucket of other costs. I was wondering if you could just double-click on what that $74 million is and whether it's something we should have in our models for the next few quarters?

Christina L. Zamarro, Executive Vice President and CFO

Sorry, what was the figure you quoted, James?

James Mulholland, Analyst

There is a $74 million in other costs within your inflation and other cost category, and I believe it's significantly higher than it has been in previous quarters. I'm just curious about what is included in that amount.

Christina L. Zamarro, Executive Vice President and CFO

Sorry, yes, I'm sorry. I was focused on another basket on the SOI walk. But when we look at all of the buckets kind of concentrated in and around manufacturing costs, I break it down into a few major drivers. The first is annualized inflation that runs about $225 million across our cost base, and that's 3% annual inflation. Also included in that figure is about $350 million of annualized tariff costs. That's new coming into the cost base. So that's probably the increase you're noting. I'd expect that number to be on the order of magnitude of $60 million in Q3, $70 million to $80 million in Q4 as we continue to incur tariff costs across our global supply chain. And then we will expect to get to that run rate in 2026. The third factor I'd point out, and this is a big part of our Goodyear Forward programs is we're carrying some incremental manufacturing inefficiencies that would generally just attract costs more than what we would normally expect because we are ramping down some factories, especially in Germany, first involved in Fulda. So as we get to full facility closures on those, those costs will come out. And those dates are public and announced for each one of those factories.

James Mulholland, Analyst

Great. That's helpful. And then within that commercial vehicle headwind that we saw in the quarter, should we expect a similar SOI impact going forward for the next few quarters? Or was this maybe the peak of it? And then as you ramp down a little bit to adjust for it, it shouldn't be as significant?

Christina L. Zamarro, Executive Vice President and CFO

Well, I would have you consider that we discussed a $30 million challenge related to the product mix. This is due to the substantial contribution from commercial truck profits. We didn’t provide a detailed forecast for the third and fourth quarters, so I would expect that we will need to manage that. Additionally, there will be further adjustments in Q3 and Q4 as we modify production, which could result in an additional $25 million in unabsorbed costs during the latter half of the year. I also mentioned that we are facing new tariff expenses. The rates in Brazil have increased from 10% to 50%, affecting our retread products sourced from our operations. We're also procuring some products from our truck tire joint venture in Vietnam, which will raise our expenses by an additional $20 million on an annual basis.

Thomas Scholl, Analyst

This is Jake Scholl filling in for James. It appears that tariffs are becoming a bit more challenging. Do you have any strategies in place to address this as we prepare for next year's annualization? Additionally, it seems we've had a significant adjustment for the full year, with the third quarter's statement of income projected in the $285 million to $290 million range compared to our previous estimate of about $400 million, and the full year expected to be around $1.0 billion instead of the earlier $1.3 billion. Can you confirm if we're interpreting those figures correctly?

Christina L. Zamarro, Executive Vice President and CFO

I want to make a few comments. You mentioned that our tariff costs are expected to increase from approximately $300 million this year to around $350 million due to rate changes. I believe we will adjust our supply chain to minimize that impact on our profit and loss statement during the second half of the year. We will provide updates on our plans at the end of this year or early next year, including cost-saving measures and sourcing strategies to help lower that figure moving forward. There has been noticeable volatility in that area. When considering the outlook, what we're facing is linked to an extraordinary time in our industry, and we are focusing on what we can control. Mark highlighted that our Goodyear Forward targets for cost savings are on track. Looking ahead to the fourth quarter, I want to maintain a balanced perspective. We will focus on volume, and I have shared insights on how price mix might develop. My earlier comments also outlined how you should view our costs. For the fourth quarter, the remaining variable mainly revolves around volume, with the potential for some additional price mix. However, the current characterization of the industry suggests there is limited visibility on when we might see a pre-buy sell-through. We anticipate that will unfold through the third quarter, and we prefer to assess that experience before offering our outlook on volume for Q4.

Mark W. Stewart, CEO and President

The other thing, James, I would add on is just reiterating what Christina mentioned, right? And we talked about at the beginning, which is really around the cadence, the governance and the diligence behind our Goodyear Forward actions. And we continue the robustness of our cadence of sessions with all the associates around the world, continuing to refill our pipelines with projects and really focused on the ones that are value-add or cost controlling all around the world, right? So that's been embedded in our DNA, and we'll continue to focus on the flex to make sure that we are controlling every cost possible during this period. Maybe I can start and then Christina can pick up. I guess taking a step back, why did we exit ATD, right? Our very clear strategy at Goodyear is to make sure we're working with aligned distributors that are representing our full product portfolio, right? And working together with us to build our Goodyear brands in the marketplace. We are constantly looking and doing super careful assessments around operational capabilities, the service rate, stability and alignment. And we decided to strengthen our partnerships specifically with TireHub, which is our joint venture with Bridgestone and some other key partners who have long-standing aligned distributors that are in keeping with partnership with Goodyear. And we see a lot of benefit for us working with fewer but much more aligned distributors building our Goodyear family of brands and servicing our dealers and our retailers effectively and efficiently with a full product screen, which we have available to the marketplace. We don't want to work with individuals that aren't representing our full portfolio. And as we looked and as I shared in my comments at the beginning, right? We took risk assessments. We took service assessments. And again, we feel that it absolutely is the right thing to do there. By the way, ATD was less than 5% of our total consumer replacement volumes.

Christina L. Zamarro, Executive Vice President and CFO

Yes. Maybe I'll just pop in to say we had a distribution that we had to transition, retailers that we had to transition to new distribution. I would say, by the end of July, nearly all and 95% of the retail base voluntarily made that switch and all of our orders are coming in through those new distributors. We do have some private label volume at ATD as well. That's something that we expect to wind down over time in a very orderly way. And we expect to offset that volume through mutual commitments with other of our distributors.

Emmanuel Rosner, Analyst

I appreciate all the elements of outlook into the third quarter. Just curious if you could comment on how you would see, therefore, the full year play out on some of the main metrics. It doesn't look like some of these issues are probably going to be going away super quickly. So any sense where that sort of leaves us on SOI or free cash flow on a full year basis? Or another way to ask potentially is what are puts and takes going to Q4? Are some things expected to get better or not necessarily?

Christina L. Zamarro, Executive Vice President and CFO

Yes, sure, Emmanuel. I'll hit the fourth quarter SOI. I mean we've given you a lot of the different drivers for Q3. And these are the factors that we know. Q4 raw materials should be favorable. Goodyear Forward should be a benefit of $175 million. I think unabsorbed overhead in the fourth quarter is going to be a little higher than the third quarter, just given that we will be making appropriate ticket reductions in our factories in order to align with demand and manage for cost and cash. Other costs, I mean, we've talked about this a little bit already. Other costs in the fourth quarter will be higher due to new tariffs and some incremental factory inefficiencies ultimately depending on that production in the third quarter. And we want to be, again, aligned with demand and environment is very uncertain. Price/mix, I've made some comments about we have some seasonality benefit in the fourth quarter in mix, in particular. And then what that leaves us is with volume. And just having come through such a disruptive and challenging quarter, I think it's hard for us, again, to determine exactly how that's going to play out in the fourth quarter because we don't know how long it's going to take for some of this churn in the U.S. market is going to take. I think we're looking for some data that will help us give you more of a forecast around stabilization in the U.S. and that's data to support things like import slowdown and import channel inventory sell-through. And we're expecting that to come through over the course of the third quarter, maybe in the fourth quarter, but we just don't have that data yet to guide on the volume.

Emmanuel Rosner, Analyst

Okay. And just a clarification, then I have a separate question, but these add-backs related to the supply agreement, those were not contemplated in your previous free cash flow walk?

Christina L. Zamarro, Executive Vice President and CFO

No, they were not.

Emmanuel Rosner, Analyst

I wanted to ask about the long-term perspective. I understand your points about the timing of when industry conditions will improve and how that will allow for better performance. I'm interested in what specifically gives you confidence in this outlook. It seems that when one market imposes tariffs, imports often shift to another market, which is also significant for Goodyear. While the U.S. might be stabilizing, Europe is still a concern. So, what factors lead you to believe that conditions will eventually stabilize and that your efforts will yield positive results?

Christina L. Zamarro, Executive Vice President and CFO

Well, Emmanuel, I guess I'll start and let Mark finish up. But I would say it's an especially turbulent environment. And we still should benefit. I mean we completely expect to benefit with the strength of our U.S. manufacturing footprint. And all at the same time, what's a little bit new news that's also really good for us is that there are these new contemplated tariffs in Europe and those rates are punitive, 41% to 104% is what the EU has disclosed as far as those tariffs. I think it's really hard for us to give you clarity on timing right now because I do think we're going to have to work through some of this disruption. But we're as confident today as we were last quarter that as the market stabilizes, we're going to be able to capitalize on those opportunities.

Mark W. Stewart, CEO and President

Yes, as Christina mentioned, the investigation into pricing in Europe with the anticipated tariffs should be retroactively applied from the start of the inquiry. This situation has likely led to some speculation regarding prebuy activities. As we work through this, we expect the impacts to be felt by the end of the year or the beginning of next year. We are also optimistic about the winter sellout season on our end. In the U.S. market, the various delays and changes have created new opportunities for prebuy, though the timing remains uncertain. We are beginning to see these opportunities reflected in sellout trends. Our U.S. presence is strong, and we are engaging with multiple original equipment manufacturers who are shifting towards more U.S.-Mexico-Canada Agreement (USMCA)-compliant products, which benefits us significantly. While the timing for the initial phase remains uncertain, we feel well-prepared. Additionally, we are actively developing and launching higher performance and premium tires of 18 inches and above in the Americas, an area where we previously had little presence. This gives us confidence that when the market begins to recover, we will be ready to respond. Our growth in the 18-inch and above category this quarter has been promising, and we anticipate continued success with upcoming product launches throughout the remainder of this year and into the first quarter of next year.

Itay Michaeli, Analyst

Just a follow-up to the last question. I know it's early to really talk about 2026 in any detail. But I'm curious, as you think about how the industry is progressing this year, what are the puts and takes to think about at a high-level impacts on next year when we start to think about the SOI bridge and kind of how this year's events may impact the bridge into next year?

Christina L. Zamarro, Executive Vice President and CFO

Yes, Itay, Mark mentioned the challenges in predicting the timing of this disruption. We hope that by the fourth quarter, some of it will have resolved. However, we are currently struggling to estimate volume in Q4 due to the extent of disruption in the U.S. market. Looking ahead to 2026, we see some positive variables. Raw materials have turned into a favorable factor, and while it is still August, we expect current feedstock levels to provide a tailwind of a couple of hundred million dollars next year. Goodyear Forward should contribute at least $250 million in flow-through benefits. Additionally, we have sourcing changes and other cost savings initiatives that we will elaborate on as the year comes to a close. We are aiming for stabilization as we refine our outlook for 2024. I would also like to highlight that a 1% price increase in our U.S. Consumer Replacement business equates to $55 million. We have already implemented a 4% increase in the U.S. market since May. Similarly, a 1% price increase in EMEA represents $25 million on an annualized scale. Furthermore, we anticipate potential improvements in volume that could yield around $40 per unit when considering sales margin and overhead absorption. There is a significant opportunity for us to capitalize on this once we see stabilization in the market.

Itay Michaeli, Analyst

That's very helpful. And then just given some of the near-term challenges, I'm curious if you are thinking about additional cost cutting or even restructuring actions, just given the asset sale proceeds and the incremental cash you'll be bringing on to the balance sheet. I'm not sure if you're at that point yet, but just curious if there's potential additional actions that you're contemplating?

Mark W. Stewart, CEO and President

Yes. I think, Itay, it would be super speculative at this point for us to make any comments around any additional restructuring to the cost base above and beyond what we've already committed to and are in process with. Again, we don't believe this current environment is reflective of the long-term part of the business or the normalized industry environment. With that said, we are in the process of closing the 3 factories in Europe. We announced the South Africa one last month or the month before. So the 2 in Germany plus South Africa. And we're rightsizing plants all around the world on a regular basis. It's just part of our flexing of our cost structure. So again, we continue to aggressively manage the cost structure with the Goodyear Forward discipline, keeping the pipeline full. So as I mentioned earlier, right, we're keeping those projects and new projects filled so that we are adding value by reducing the cost and continuing to look at that. But there's no major one that to be announced at this point above and beyond normal discipline.

Operator, Operator

And there are no further questions on the line at this time. I'll turn the program back to Mark Stewart for any additional or closing remarks.

Mark W. Stewart, CEO and President

Thank you, David, and thank you all for joining the call today. Let me just wrap up for Christina and I saying, while short-term outlook definitely remains turbulent given the industry environment broadly, we're staying very focused on what we can control and what we continue to deliver. We're continuing to execute ahead of schedule on Goodyear Forward. We're continuing to take the right cost control actions. We're taking smart pricing actions in the marketplaces, and we're gaining share in the profitable premium segments of the market. We continue to sharpen that portfolio and at the same time, strengthening our balance sheet as we've shared, right? We're really focused again on refreshing the existing product lines, bringing the new power lines into the market into the premium spaces. And despite these near-term headwinds, I am very confident as the market stabilizes, our momentum will return. The Goodyear team is committed to execution and delivering results. Thank you all for joining.

Operator, Operator

This does conclude the Goodyear Second Quarter 2025 Earnings Call. Again, thank you for your participation, and you may now disconnect.