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Presentation

Operator: Good morning. My name is Shelby, and I will be your conference operator today. At this time, I would like to welcome everyone to Goodyear’s Third Quarter 2024 Earnings Call. All lines have been placed on mute to prevent any background noise. After some opening remarks, there will be question-and-answer session. [Operator Instructions] Please note, this call may be recorded. It is now my pleasure to turn the conference over to Greg Shank, Senior Director, Investor Relations.

Greg Shank: Thank you, Shelby. Good morning, and welcome to our third quarter 2024 earnings call. Today on the call, we have Mark Stewart, our CEO and President; and Christina Zamarro, our Executive Vice President and CFO. 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 21 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 the non-GAAP financial measures discussed on today’s call to the comparable GAAP measures is also included in the appendix of that presentation. With that, I will now turn the call over to Mark.

Mark Stewart: Thank you, Greg, and good morning, everyone. Welcome to our third quarter earnings call. Before we dive into the numbers this morning, I want to take a moment to acknowledge the momentum the Goodyear team has collectively created over the past four quarters. Goodyear Forward is delivering significant and tangible results, both in the bottom line earnings and in being a key driver enabler in our structurally changing the way in which we work and govern the company. In fact, 2024 will mark the first year Goodyear has expanded margins since 2016, excluding the recovery immediately following COVID. As we’ve discussed with you in the past, since becoming CEO, I have spent time in getting to know and listen to our people, learning the technical and operational aspects of our operations and product development.

I visited our factories, our retail stores and have directly engaged with our international operations. I’ve also been meeting with key customers and partners here in the Americas and around the world to hear directly what we’re doing well and what we can do better to meet and exceed consumer and customer needs. Developing a deep understanding of where we can leverage our strengths and address our shortcomings as an organization has given me even greater confidence in our ability to transform and to position ourselves for long-term profitable growth, particularly in the premium segments of the market. Let’s turn to the quarter three results. The third quarter was strong for us in terms of margin expansion. We delivered segment operating income of $347 million, our SOI margin was 7.2%, both higher than last year.

To put this in perspective, we have now successfully put together four consecutive quarters of margin growth under the Goodyear Forward plan and the actions and the governance we have put in place this year with our robust cadence of manufacturing, engineering and commercial accountability. This morning, we’re building on that momentum by increasing our transformation plan savings targets. We’ve raised our guidance for ‘24 Goodyear Forward benefits to $450 million, up $100 million since the start of the year. Additionally, by the end of next year, we expect to deliver a total of $1.5 billion in run rate benefits. That’s up from our original target of $1.3 billion, and we will not stop there. We will continue to look for opportunities to deliver beyond our updated targets as well, as we create a more efficient, stronger company.

Like any plan, we know that while the path may change, the goal remains the same, deliver increased value to our customers and our shareholders. We still have much work to do in the face of industry headwinds. Our consumer replacement volume continues to underperform the industry with Tier 4 tires flowing into the majority of our key markets. At the same time, OEM production continues to reset to a lower base. In that environment, I assure you we are absolutely not letting up. I continue to have confidence we will reach our 10% SOI margin target by the end of next year. This takes into consideration both the volume headwinds and what we see today as far as increases in our raw material costs in 2025. Looking at Goodyear Forward. On our last conference call, we discussed in some detail the cost savings and the efficiency contributions of Goodyear Forward.

Today, I’ll share an update on the work we’re doing on the customer and consumer-facing aspects of the business. One of our major priorities as part of Goodyear Forward is elevating Goodyear and our family brands. Our brands have to resonate with consumers, and we must be thought of as a premier tire technology leader in the industry. This is the surest path for us to capture value at the high end of the market and create pull across all other segments. One way we are engaging consumers is through our partnerships with some of the most recognizable brands in the world. In September, we partnered with Ferrari on unveiling their new 12Cilindri. If you haven’t seen it, this car is truly awesome. It’s an awesome machine. It looks like a GT, drives like a super sports car.

This is Goodyear’s first fitment on a Ferrari in 30 years. It highlights our renewed commitment to our brand and our premium technology-driven strategy. This is a space where we will need to be positioned, and we continue to partner on the right halo fitment with pure-play technology leaders to showcase our brand and our cutting-edge products. We continue to be positioned well and showing technical and marketing strength in our EV fitments around the world as well. Another big part of this renewed engagement with our consumers is increasing our offering of premium SKUs. As an example, in the US, during the quarter, we successfully launched the Assurance WeatherReady 2, a top-tier power line targeting first and second replacement customers. In this line, we will introduce 60% more SKUs than the predecessor line had.

This is very important as it will make the product line competitive with best-in-class Tier 1 premium offerings. Similarly, in early ’25, we will launch an all-new Eagle F1 Asymmetric 6 and Eagle F1 SuperSport, combining offering of 150 unique SKUs almost entirely in the 18-inch and above rim sizes. These tire lines have no predecessor in our US market and demonstrate our commitment and our actions to expanding in the premium sector of the marketplace. Additionally, the Eagle F1 all-season product line will launch in late 2025, with about 70% more coverage than the predecessor line. We know our customers need to see us as a reliable supplier covering all SKUs in the premium product line offerings. We simply can’t just supply a portion of the premier line, that relegates us to a choice number two or even number three in the minds of our dealers.

A broader offering that picks up the tail SKUs is crucial to our success. Of course, tail SKUs are highly profitable in their own right, but they’re also an important component of our overall value proposition. When we provide the total portfolio, all SKUs will benefit from the consistency we will offer in customer service. Coverage at the premium end of the market is an enormous opportunity for us, and we are committed to making it happen. This is a market segment where as an organization, quite frankly, we have not done a good job of maximizing our opportunity across the value chain. This includes designing and producing what our customers want and differentiating our products in the marketplace in that segment. We are actively changing that.

This is part of the operational and cultural shift we are making as part of our transformation. Going forward, we will continuously assess market opportunities utilizing the datasets and the analytics and leverage our global assets for our customers and consumers with one goal in mind to profitably win. Before I move on to our market-facing strategies, I’d also like to highlight that we have continued to demonstrate remarkable growth in our US retail business. We have just delivered our best performance in more than 15 years with earnings growth driven by a focus on our value proposition to customers and an increasing customer base in well-known last-mile fleets. This includes converting nearly 50 stores to dual operations, supporting retail customers by day, fleet customers at night.

I see a lot of runway ahead of us as we execute on these objectives we’ve set out and look forward to the leverage and growing our retail operations on a forward basis. While Goodyear Forward continues through the end of next year, you’re hearing my emphasis on the actions we’re taking to elevate our performance over the long term. We’re rebuilding our brand strategy, product strategy and operations, setting a solid course for the future and a direction that will drive significant opportunities for our business over the long term. I’ll — now I’ll turn it over to Christina and take you through the financials, and we’ll move on to the Q&A. Thank you.

Christina Zamarro: Thank you, Mark. We’re on track to exceed our original target for 2024 Goodyear Forward benefits by $100 million. And as we look ahead to next year, we expect to achieve another $750 million in year-over-year growth benefits from the program. We’ll provide more detailed 2025 guidance in February, but these commitments are a testament to our ongoing commitment to transforming the way we work, improving operational efficiency and managing our costs. I’ll begin with the income statement on Slide 9. Q3 sales were $4.8 billion, down 6% from last year, driven by lower volume and the negative impact of translation resulting from the stronger US dollar. Unit volume was 6% lower than last year, with gains in OE partially offsetting declines in replacements.

Volume was lower than what we expected given the continuation of increased low-end imports in the US and Europe. Segment operating income for the quarter was $347 million and SOI margin increased 70 basis points. Goodyear net income includes charges related to planned rationalization programs under Goodyear Forward and a noncash impairment charge related to a reduction in the balance sheet carrying value of lower-tier brands, including MasterCraft and Roadmaster, stemming from increased competition and opening price points in the US market. After adjusting for significant items, our earnings per share were $0.37. Turning to our segment operating income walk on Slide 10. Lower tire unit volume and factory utilization were a headwind of $94 million in the quarter.

Net price/mix versus raw material cost was favorable $7 million. Sequential pricing from the second quarter was stable. Goodyear Forward initiatives contributed $123 million with benefits driven across all of our work streams, including purchasing, supply chain, R&D and SAG. Inflation and other costs were a headwind of $59 million. Insurance proceeds, net of current year expenses, primarily related to last year’s storm damage at our Tupelo factory were a benefit of $17 million. Other SOI was favorable $25 million, driven by higher earnings in our Chemicals business and better miscellaneous cost performance. Turning to Slide 11. Net debt was $8.1 billion at the end of the third quarter and was up about $450 million compared to last year, reflecting increases in working capital.

Higher working capital was driven by declines in our accounts payable balances, while inventories remained high on a relative basis, reflecting reductions in our full year volume outlook. In the fourth quarter, given our normal seasonality, we expect significant cash inflows in working capital as we reduced finished goods inventories and increased collections. With respect to our leverage, we expect to close on the sale of the OTR business in early 2025, and we continue to make progress on our two other strategic reviews. While there’s not a lot we can say while we’re in process, we will keep you updated as we have more information to share. One final note on our capital structure. We have $500 million outstanding on our 9.5% coupon notes due May 2025.

This maturity is supported by a backup credit facility that would replace it through mid-2026 if needed. Having said that, we expect to use proceeds from asset sales to repay this maturity next year, which would reduce our interest expense by almost $50 million on an annualized basis. Moving to our SBU results and starting on Slide 13. Americas third quarter unit volume decreased 1.9 million units, driven by consumer replacement. Low-end imports in the US remained elevated during the quarter, reflecting a 17% increase year-over-year. The increase in imports was less so than what we saw in the first half. Including imports, the consumer replacement industry sell-in in the US declined 1.5% and collectively, industry members declined more than four times that amount.

On the other hand, despite weak industry trends in OE, our US OE volume grew 6% reflecting share gains of 2.5 points in strong growth in light truck fitments. We also gained share in Latin America. Americas segment operating income was $251 million or 8.8% of sales. Americas earnings benefited from the execution of Goodyear Forward initiatives, including retail sales growth of $20 million in the quarter. This growth reflects the increasing scale of our fleet customer base. These benefits were offset by the impact of lower volume and inflation. Moving to Slide 14. EMEA’s third quarter unit volume decreased 3% or 300,000 units. Our volume reflects lower OE production and continuing pressure from low-end imports. Non-member imports grew about 15% in the quarter.

Recently, two of EMEA’s premium tires were awarded the top spot by Europe’s largest auto association, ADAC, in their annual all-season and winter testing, which we expect to support our winter value proposition to consumers. Segment operating income was $24 million and stable from a year ago. Goodyear Forward actions and favorable price/mix versus raw materials offset inflation and unfavorable fixed overhead absorption. Turning to Asia Pacific on Slide 15. Third quarter unit volume decreased 5%, driven by declines in several of our key countries. Industry volume in China was down 6% in OE and 4% in replacement, driven by overall weak consumer sentiment. Segment operating income was $72 million and nearly 12% of sales, an increase of $16 million compared to last year.

Asia’s earnings benefited from Goodyear Forward initiatives, including the redesign of our go-to-market model in Australia. We expect this initiative to continue to contribute benefits in 2025. Now turning to our fourth quarter outlook on Slide 17. We expect global unit volumes to decline approximately 4%, reflecting elevated wholesale channel inventories and weak sellout trends in the US. Like we saw in the third quarter, we expect growth in our OE volume, reflecting share gains and a weak US comparable related to the UAW strike in 2023. We expect volume to be up about 1 million units on a sequential basis, driven by stronger OE volume. In addition, we expect higher unabsorbed fixed costs of $40 million driven by 1.1 million units of lower production during the third quarter.

Additionally, we expect our fourth quarter production to be about 1.5 million units lower than last year as we reduced finished goods inventory in line with our need. This reduction will negatively impact our costs in the first quarter of 2025. Price/mix is expected to be a net headwind of approximately $15 million, driven by higher OE volume. Raw materials will increase approximately $100 million, driven by natural rubber and carbon black. At current spot rates, we would expect to see raw material cost increases of about $300 million in the first half of 2025. Goodyear Forward will drive benefits of $165 million, reflecting the progress we are seeing across all work streams. Inflation and other costs are expected to be a headwind of about $35 million and Other is expected to be a benefit of about $40 million reflecting higher earnings in our other tire related businesses, the recovery from the fire in our Debica, Poland factory last year and better miscellaneous cost performance.

Other financial assumptions on Slide 18 have been updated to reflect our most recent expectations. In total, there is not a significant change to our free cash flow drivers from our last call. I’ll speak to two of the more significant changes with the first being that we’ve reduced our restructuring costs as we’ve seen lower cash outlays than expected in specific programs given higher levels of voluntary attrition. Second. We’ve updated our working capital guidance from either a source or use to a use of approximately $150 million to $200 million. This increase is partly driven by the timing of production cuts and partly by plans to increase finished goods inventory in advance of actions we expect to take in early 2025 to reduce our structural costs.

We expect to recover this outflow next year. With that, we’ll open the line for your questions.

Operator: [Operator Instructions] We’ll take our first question from John Healy with Northcoast Research. Your line is open.

John Healy: Hi, thanks for taking my question. Mark, I just wanted to ask kind of a high-level question on the margin targets that you guys have put out, especially as you look to next year, I mean, you kind of called out the $300 million headwind on raw mats and the volume side has probably been a bit more challenging. I’d love to get more color on what’s incrementally better. And I imagine you’re going to answer it with Goodyear Forward to get to those margin targets. But I was hoping you could kind of like give us kind of a look underneath the kind of surface a little bit of kind of where within the plan or where within other areas of the business you’re finding those incremental benefits? Thanks.

Mark Stewart: Thanks, John. And yeah, just to cover what we’re going through with it. As you mentioned, a key part of it is Goodyear Forward. But one of the things we’ve been doing throughout the course of this year is we continue to refill the pipeline of projects in Goodyear Forward. And Goodyear Forward is a two-year point in time, right, this year and next year. But what we’re doing is integrating that into our annual operating plan as well as our long-term strategies, John. And of course, we’ve got all the pricing dynamics associated with raw materials. So with the OEMs and the natural flex up and down with indexation. But when we look at it, it’s far more than just a Goodyear Forward and what is helping with those margins, right?

We are fundamentally changing the way we’re doing our businesses. As we shared earlier this year, we’ve got — we’ve really broken manufacturing and we’re in the final stages of bringing on our Chief Manufacturing Officer for all three regions around the world. And what we’re doing there is really focusing on our plant efficiencies. We’re reducing our scrap. We’re driving our plant OEE, operating equipment effectiveness, on a week-by-week basis by process. And so that’s a whole lot of the nuts and bolts of manufacturing 101. And then as I mentioned as well, we are strongly driving with dedicated teams that have been pulled out to make sure we are tackling the 18-inch and above rim size into the premium parts of the market. And as I shared in the opener, one of the things when we take a look at it, it’s something that we’ve not done the best job overall globally to really tackle that situation.

And so what we’ve done is we pulled the folks out, we’ve established the teams, we are driving it from engineering, we have dedicated resources in the plant, a dedicated machinery to bring those products to market. We’re leveraging our global footprint as well to move tires around the world in a very cost-effective way. In the meantime, even as we speak, we’ve got 90-plus SKUs on the water on the way to the Americas market from EMEA to address the Tier 1 high-end, what we would call, the tail SKUs, but the premium side of the greater than 18-inch and above. And so we have a very clear roadmap over the next 24 months of bringing those in as well as the coverage and the fitments we have across those. So we are making sure that we have got the right replacements coming into the market in the Americas.

EMEA has been doing a really nice job of that of filling their gaps. And then on the AP side, we continue to have very strong wins with the right customers, if you would say, in the EV space. So really focusing all three of those. So it’s top line fitment wins, it’s top line premium segment wins and it’s really just good old-fashioned manufacturing and purchasing 101s and the teams are doing a really nice job to make the progress.

John Healy: Great. Thank you. And then just one question. There’s been some media reports out there about you guys and ATD and some of the things they’re going through right now. I was just wondering if you could give us a little color on kind of the exposure there and I imagine it’s with the Cooper brand? But secondly, I mean, as you see that kind of update in the market regarding what’s going on with them, how does it make you feel about kind of your distribution strategy and how you might see the ripple effect of this news maybe playing out on the industry in the replacement market for ’25? Thanks.

Mark Stewart: Yeah. Maybe I’ll start, and then I’ll turn it to Christina with some more details on it, John. But we really — maybe to start on your comment to TireHub, right? I mean, of course, situation like a second bankruptcy with ATD can be quite disruptive. But we really view that situation as a strong validation that the team took and Goodyear took in forming TireHub some years back as well as getting closer to our aligned distribution network. We have restructured our sales and go-to-market organization within the Americas within the last month to be even closer to our WD customers and from that standpoint as well as working on our TireHub, but we’re going to continue to focus on the value propositions where we can deliver products to consumers, right place, right time, right cost structure.

And from the ATD side, I’ll let Christina cover about the receivable a little bit, but we continue to evaluate any strategic alternatives in terms of what’s playing out right now. Christina?

Christina Zamarro: Yeah. So, John, I’ll just fill in some of the history for folks on the phone who may not know about our past relationships with ATD. I think you’re probably well aware. So ATD, one of our largest wholesale distributors, filed Chapter 11. As Mark just mentioned, this is the second time that ATD has filed for protection — bankruptcy protection since 2018. And back in 2018, Goodyear didn’t have a relationship with ATD at that time. We had exited it just given that we saw ATD as increasing their focus on lower-tier brands. But of course, through the acquisition of Cooper, we reacquired an ongoing relationship with ATD, which we’ve maintained. Now our current receivable base with ATD stands at about $135 million.

And as is customary in these situations, the court did enter an interim order authorizing ATD to pay pre-petition claims on certain vendors. And at this point, we have reached an agreement with ATD regarding the payment of substantially all of our pre-petition claims. And so we don’t see a material impact on us at all from this situation. I think for context, what I would tell you is that — and you asked a little bit earlier, John, the majority of these tires that we’re selling to ATD today are private label branded. There’s a little bit of Mastercraft, Mickey Thompson and Cooper there, but the majority, again, private label branded.

John Healy: Great. Thank you so much.

Operator: Thank you. We’ll take our next question from James Picariello with BNP Paribas. Your line is open.

James Picariello: Hey everybody. So I want to first ask about the demand environment. If we look at the last nine quarters in North America, your replacement volumes are down an average 9%. I’m just curious if you could assess your market share over this period, right, comparing now to the middle part of 2022? Just at a high level because I’m just curious, like, is this a generational-type market share shift that we’re seeing which can be temporary, but like in terms of the magnitude and persistence of the weakness. And I know there’s an element of actively exiting certain business as part of your Forward plan. So if you could contextualize that as well relative to these declines, that would be great. Thanks.

Mark Stewart: Yeah. Sure, James. Maybe I’ll start and then let Christina add some additional, too. When we look at that period, as you said, as we mentioned, there’s been a continued influx in the Tier 4 market space with the Asian tires. And specifically, when we look at the inventories of those at the moment, I believe it could be a prebuy of people being concerned about tariffs that may or may not happen coming into the new year. But one of the things as we look, we have, as you mentioned, we definitely have had a very clear plan to exit low-margin, low-value business, and we’ve executed upon that. We’ve done repricing in those areas as well. And the others I mentioned with the question with John as well is really us focusing on that greater than 18 to increase the number of SKUs we’ve got in that marketplace. So we will very meaningfully participate and grow our share in the upper part of the Tier 1s on it, James.

Christina Zamarro: Yeah, James, I’ll just jump in here to say that as part of Goodyear Forward, you may remember on the walk as part of our November announcement last year, we talked about a reduction in revenue, primarily in the US of about $200 million, which equates to about 2 million to 3 million units of intentional volume loss, and that’s fixing the unprofitable volume that was in our footprint as part of Goodyear Forward. I think broadly, your question around, just the generational shift, I’d say, the sell-in is way outperforming what we’re seeing on sellout. I mean we’re seeing VMT kind of up about 1% over the last year and sell-in up 3 to 4 points globally. And so that’s a whole lot of prebuy going on with the low-end products.

I think that says a lot about distributor behavior because what we tend to see is distributors overstocking in and around inflationary environments, of course, which we’ve been in, but also there’s potential speculation related to election here today. And so we’ll continue to watch the regulatory environment and the macro environment over the coming quarters.

James Picariello: That’s super helpful. And then my next question is going to be on price/mix versus raw. So for the fourth quarter, the guidance is abundantly clear, right, calling for a net $115 million headwind, right, which we haven’t seen a negative number since the second quarter of 2019 and certainly not to this magnitude. So what’s driving the fourth quarter delta and then how should we extend that thought to next year where we know in the first half at current spot, you’ll have that $300 million raw mats headwind, what does — or what — how could price/mix look in that equation for the first half? Thanks.

Mark Stewart: Yeah. As we look to the first of it as we said earlier, right, I mean, it’s more than just the raw material going into the pricing equation, right? We’ve got many factors going in. It is our product position in the marketplace. It is making sure through our public web scrapes and constantly viewing the market and also the tech needed going into development in terms of what it’s costing to bring things to market. As I mentioned with John, James, we have really been attacking that underlying cost structure of what it costs to bring products to market as well as the actual cost to convert on those. So when you add all of those things together, we continue to take it on a SKU by SKU competitive level of where we will take pricing and where we won’t take pricing with that.

So just as the normal course of business with that and that flows into our regular governance process for that, right? But we want to make sure that we’ve got the products competitively priced for our end consumers.

Christina Zamarro: Yeah, James, I’d just — go ahead.

James Picariello: No, no. Please.

Christina Zamarro: I was just going to jump in to say that as a reminder, about 30% of our business covered through OE RMI contracts. So that can help you think about how to play that through without any new price increases announcements we don’t articulate what we’re thinking about for pricing in advance. And I’d say the other comment on raw mats still is just given the sell-in and the sell-out dynamics we talked about earlier was sell-in being so much higher than sell-out, I think that’s influencing raw material prices as well. And I would expect commodity pricing to normalize as prebuy of lowered import stabilizes as well. But go ahead and ask your follow-up.

James Picariello: Appreciate it. Yeah, so just on CapEx. So I thought the prior view might have been for 2025 CapEx to trend similarly to this year at that $1.25 billion range. You did confirm or indicated in the deck that next year’s CapEx should trend below $1 billion. So maybe that’s a $300 million-type cut to your CapEx. So what’s driving that? And then for this year’s guide, the working capital is now a use of cash of $150 million to $200 million, is that associated with the ATD receivable? And does that get made up next year? That’s it for me. Thanks.

Christina Zamarro: Yeah, I’ll take the cash question. So, working capital, you’re right, there, the guidance would have been sort of a stable level in 2025. Now we’re saying something lower than D&A or less than $1 billion. I think part of that driven by the trends in volume. But I also think a part of that is driven by a lot of the Goodyear Forward work inside of the company as we’ve looked at how we’ve been allocating capital. Mark and I have concluded that we need to reassess our standards and our processes to ensure we’re getting the best cost outcomes in all of our cases. I think we’re challenging a lot our assumptions around capital spend. That means we go back to designing for lowest cost as opposed to a process maybe where in the past, there might have been more customization involved that wasn’t necessarily adding to the return.

So all is to say we’re focused on generating a very strong free cash flow next year, excluding restructuring. And we’re focused on moving to a more disciplined capital allocation process and I expect that to benefit our spend even as we move beyond 2025 as well.

Mark Stewart: Yeah, James, I’ll bolt-on to it a little bit from a manufacturing, engineering and procurement side of it, as Christina mentioned, right, the work streams of the Goodyear Forward teams across the five, right, are all helping to show us different ways of working as well. Christina and I and staff been out on the road in both Europe, Eastern Europe, Middle East and Asia over the last 1.5 months as well, meeting with our equipment suppliers, purchasing teams, going into the factories and looking at our best processes. And I would say the procurement team is doing an excellent job of looking at alternative second and third sources together with engineering and our standards team to redefine what our standards are and what the cost — a clean sheeting cost process with some of the new folks we’ve brought in to help our teams to complete those processes and really make a big dent in what we would typically spend in a given year on the CapEx side.

So all those things and coupling it with our product engineering teams, looking at bottlenecks in the process. So we were just at the tire mold factory, one of them two weeks ago, looking at bottleneck operations and breakthroughs to bring some of our tire mold capabilities up over 20%. So meaningful changes in terms of the amount of CapEx needed to bring the product to market, James.

Christina Zamarro: James, just to follow up on that working capital question. So our guidance is for a use of $150 million to $200 million this year. I’d say that’s driven by two factors. One is the timing of production cuts. And the second is just a planned build in finished goods inventories ahead of actions we expect to take early next year to reduce our structural costs. And no announcements at this time, but I think all related to Goodyear Forward, and we would expect to recoup that use of working capital in 2025. So no net change and a good free cash flow generation again in 2025.

James Picariello: Thank you.

Operator: Thank you. We’ll take our next question from Douglas Karson with Bank of America. Your line is open.

Douglas Karson: Great. Thanks, guys. I wanted to maybe talk about the Goodyear Forward program a little bit. It’s an impressive program and important strategic initiative. And maybe if we can go to just to Slide 6. The biggest line item there is footprint and plant optimization, and it looks like it could be a $500 million number annualized in 2025. Can you just give us a little thought around what that plant optimization could look like and how you’re going to try to achieve that? And then I have a follow-up on inventories.

Mark Stewart: Yeah, Douglas. So when we look at Goodyear Forward plan, we’ve already executed two of the key restructuring activities when it comes to plant rationalizations. And that’s the first of all, the all of the governmental and union discussions are completed, and that has now moved into the execution mode for that. And we continue to look around the world. We’ve just finished the closure of our Malaysia plant, which had — within September, I think, when we have completely finished that activity, and that’s in the sale process for the land at the moment. And as we look forward, again, we’ll continue to assess how much capacity we need around the world going through the modernization efforts as well, as we’ve shared with you guys before, that’s a key part of the Goodyear Forward and our long-term strategy, particularly in the areas of automation as well as the equipment standards we just touched on from James’ question around the CapEx usage.

So we will — long story short, we will continue to look and take the actions necessary to keep us competitive.

Douglas Karson: Great. If I could just ask one or two more. The net leverage target is a great target, 2 to 2.5 net leverage by the end of 2025. Is there a reason your committed to such a low leverage? Your number that’s pretty low relative to your historic leverage for many high-yield companies. I just want to maybe take a look at that kind of big picture.

Christina Zamarro: Yeah, Doug, I think the interest rate environment and our access to capital are big drivers of our goal to achieve a more investment grade credit rating or balance sheet. I think when we look across the Tier 1 space, our major competitors also have balance sheets that are less than two turns levered. So I think a lot of it — the competitive dynamics we want to be equally situated as we think about fixed asset coverage costs and interest coverage costs. And I also think that our goal after the acquisition of Cooper was to drive net leverage down below three times. When we went through the review as part of our strategic and operational review committee last year, we had identified three different assets for divestiture that enabled us to drive to this lower outcome over just a couple of years. So put all those together and it leads to a really nice healthy leverage for us by the end of next year.

Douglas Karson: That’s great. That’s great. And just last question for me. As far as inventory in the system or in the market, do you think we’re kind of heading towards normalization there? How do you feel about the inventory picture? Looks you’re doing some great changes on your mix and kind of going upscale to some more premium product. But just maybe a little color on inventories and how that could affect global unit volumes?

Mark Stewart: Maybe to start with EMEA, right? So EMEA last year was much heavier when it came to the inventory levels and the overall channel inventory in EMEA is about 10% lower than the prior year with the destocking that happened. And then the winter inventories are also about 15% lower. But we’ve been really working hard to build that inventory for the winter as the selling season is beginning there, but the — and the sellout trends have been really good from that side. On the US side, it is, as Christina mentioned, the channel — overall channel inventory is pretty heavy with the low-end tiers of an assumption of some pre-buy that people did. But when we look at the — from our inventory levels, right, I think that we are we’re in an overall pretty good shape in terms of there’s not a big overstock or a destocking situation. It’s pretty level set. Christina?

Christina Zamarro: No, I agree with that. I mean, Doug, the comments that we made a little bit earlier, there’s been a lot of prebuy of low-end inventory by a lot of distributors, but I think — and I think that will take a couple of quarters to sell through. our inventory is generally very healthy, especially in EMEA where Mark was just discussing very low in winter in particular.

Douglas Karson: Okay. Very helpful. That’s it for me. Appreciate the answers.

Christina Zamarro: Thanks, Doug.

Mark Stewart: Thank you.

Operator: We’ll take our next question from Ryan Brinkman with JPMorgan. Your line is open.

Ryan Brinkman: Great. Thanks for taking my questions. It was encouraging to see the margin expansion in the Americas despite the 8.3% volume decline in the quarter. It’s clear you and other US TMA members continue to destock. But with the non-US TMA tires seemingly continuing to build there in the channel or at least certainly not destock, I’m just curious what you think that those latest changes in channel inventory and demand imply for the industry pricing and shipment backdrop next year versus what backdrop might be needed for you to achieve your 2025 end margin targets?

Mark Stewart: Yeah. Thanks, Ryan. I think that when we look at the pricing and end consumer behaviors on a Tier 1 upper Tier 2 are different from the lower Tier 3, Tier 4 types of entry-level products and the value side. As Christina mentioned, from our side of it, and as I mentioned at the beginning, right, we are really focusing on adding to the SKUs in the upper part of the market, those particular tail SKUs, leveraging our global footprint, so — on a best cost basis. And then from the standpoint, though, of having a product in the — we would call it the Tier 2 level, right, from our MasterCraft brand, we will continue on a cost-effective basis to supply SKUs for our customer base who want those products, but we will do it in a profitable way.

Ryan Brinkman: Great. Thanks. And then with the definitive agreement for the sale of the OTR business now behind you and understanding you are, of course, limited in what you can share with regard to the two other planned dispositions, specifically, are you may be able to update, though, with regard to your approach to the process generally? So for example, would you say that the timing for the overall process is tracking roughly as expected or maybe if you might be more focused on maximizing proceeds or finding the correct fit versus completing the transaction within a set period of time? Or how should investors be thinking about the process generally?

Christina Zamarro: Hi, Ryan, I’ll jump in here. And I think all of those variables you just talked about are important for us. When we think about the other two asset sales in general, I’d say we are where we expected to be at this point in the process. And we continue to feel really confident about our ability to meet our objectives. We’re certainly focused, first, on driving the right value for our shareholders, and we’ll take the time that’s required to that end.

Ryan Brinkman: Okay. Thanks. And then just finally, I was intrigued by the comments in the prepared remarks about the retail operations serving the retail customers by day, I guess, I should call it the company-owned stores and the fleet customers by night. Maybe you could expand upon that? I recall at the time of the Goodyear Forward plan when it was first unveiled you’d identified a number of opportunities to improve the operations and profitability of the company-owned stores as a reason to not sell them. With the fleet services, including last mile delivery being maybe the biggest such opportunity, is there an update you can give on the profitability of your company-owned stores or their relative success? And as you continue to make progress here, hopefully, does that do you think makes the retail stores just to kind of dress them up, makes them more attractive as a disposition candidate given their greater profitability and so maybe implied greater potential proceeds or does it make them more attractive to retain given their growing benefits to the core operations?

Christina Zamarro: So, Ryan, I’ll jump in on the profitability. We talked about a $20 million year-over-year lift in sales, which is almost all leverage. And so that’s — a lot of that is dropping to the bottom line. We don’t disclose retail profitability. And I think I’ll turn it over to Mark to just talk about our opportunities even to further scale and grow retail because I think that comes into the calculus when you’re thinking about opportune times to sell. We have a ton of opportunity to grow in this footprint on our own. Mark?

Mark Stewart: Yeah, sure. Yeah, Ryan, we have really been focused during this year on the retail opportunities coming in a little bit from my background, in my former life side of Ryan Waldron and myself together with Fred and John and the retail team and Alex have really been diving in on a week-by-week basis, making sure that we are leveraging those opportunities, right, when it comes to customer service. So let’s break it into the two segments, right? The normalized kind of Goodyear Auto Service Center and then the leveraging for the fleet business, both are going very well. So really great that we’ve got our store managers out there performing very strongly with their teams. We have changed how we go to market with them in terms of the KPIs that we’re tracking, in terms of the data and analytics that we’re scraping and sharing with those teams, so they know where they stand in the market.

We’ve increased our service on our base business, not only in just pushing tires but really improving our value-add across the network and really have those in a great shape for that. Then you add on the locations that have already doing double duty now, as I mentioned, with a, quote, well-known, last mile fleet to start. And we’re talking 600, 700 appointments a day as we look at that and continuing to grow that and we see that as a great area of growth for us, a profitable growth for us. At the same time, we see our existing retail business also in very much a favorable growth mode in terms of the value-add proposition and the bottom line earnings. So absolutely, it’s a key part of our long-term strategic growth, and we’ll continue to reassess that as we said, right, about where is the best home for that.

At the moment, that best home is absolutely with us. And my plan is for us to get ourselves prepared and get moving forward and do even more of what the team has been successful at over these last eight months-or-so as we’ve made the transitions there. So really proud of our retail team.

Ryan Brinkman: Great. Very helpful. Thank you.

Operator: [Operator Instructions] We’ll take our next question from Emmanuel Rosner with Wolfe Research. Your line is open.

Emmanuel Rosner: Thank you very much. My first question is on free cash flow. It was a decently large use this quarter. Can you talk to us a little bit about what’s going on, what the outlook is not just in the near term, but just into next year as well. I believe Christina, you mentioned positive free cash flow next year. [Did I hear] (ph) the strike? And then what would be the levers and drivers to improve free cash flow and leverage from here?

Christina Zamarro: Hi, Emmanuel. So I’ll start on the quarter. Our third quarter free cash flow was a use of $340 million and that as compared to a use of $41 million last year. And really, two major drivers of that change. The first is higher rationalization payments. As part of Goodyear Forward, we’ve obviously announced a lot of structural risk rationalizations as well as an increased use of working capital. So I’d say rationalization payments and some of the Goodyear Forward costs were about $100 million higher, working capital $75 million higher. And the rest is timing of tax payments and timing of interest expense payments and accruals also some other balance sheet accruals and payments, but no real significant changes here other than timing.

I think we’re confident about our expectations for very strong free cash flow here in the fourth quarter, in line with our historical seasonality. And our full year free cash flow guidance for this year is stable compared to what we shared with you on our Q2 call. I think looking ahead to 2025, a couple of major drivers relative to this year on free cash flow. First, we expect to recover the working capital outflows in 2024 next year. We also are reducing our CapEx below $1 billion. So that’s a swing of about $300 million on a year-over-year basis. And so I think we should expect really strong free cash flow next year. Right now, we’ve announced restructurings of $400 million, which would subtract from all of that free cash flow. But I think our restructuring could go as high as $700 million.

Some of that could be — that additional could be in 2025, some of that could be in 2026. We’ll continue to keep you posted there on our plans around structural costs, but still feel very good about cash flow.

Emmanuel Rosner: Okay. Just a quick follow-up on this restructuring spend. Can you just remind us how much is sort of like left to spend after 2024 is done?

Christina Zamarro: So right now, we’ve said that we’ll spend about $1 billion in restructuring over the course of the program. So it’s inclusive of the guidance today for 2024. Next year, we’ve announced about $400 million in cash out. There could be some other structural cost announcements that could add to that next year or in 2026. And we’ll just have to continue to keep you posted as to the timing of those outflows. But expect no more than $1 billion under the total program between 2024 and 2026, maybe early 2026.

Emmanuel Rosner: Got it. Thank you. And then maybe a follow-up on volume. So I think I understand some of what’s going on in terms of drivers of volume weakness as well as the strategy you’re pursuing to go after some of the more profitable — the most profitable value. At the same time, it’s a little bit hard from our vantage point to — and I said at what point will volume no longer be as large a headwind to the point that it offsets some of the benefits from your strong cost reductions? I think in the past, you anticipated that by now, you would probably have reached this point where volume would not necessarily underperform the industry, but it still does and still guided to do. So how should we think about that? When will you be done with your own actions? What part of it is driven by Goodyear versus industry dynamics? At what point can volume no longer be the part that basically offsets the good stuff you do on the cost side?

Mark Stewart: Yeah. I think you put it exactly right, Emmanuel. In terms of the industry piece versus the Goodyear and the Goodyear brand’s piece. I’ll give you a great example, right, on WeatherReady 2, right, as we mentioned, we’ve got — I think it was 50%, 60% more SKU coverage coming into this the refreshing and the new award winners coming into the marketplace today. So at this moment, we’ve got 40 of those SKUs in the marketplace for sale. By the end of the year, there will be 58. By — then by the time we get into the end of the first quarter next year, we’ll be up to 78. So from 40 to 78 on that. Prior to, right, we would have been sitting roughly in that 50 kind of range. So we’re covering more of the marketplace. And what we’re doing very much from an analytical perspective from our folks in data analytics, from the marketing team and from our sales, our consumer sales teams that we used to call category, right, that are sales enablement, looking at the car park, looking at the first and second replacement cycles and where we have holes in those fitments.

So long story short to it is WeatherReady 2 is a great example of bringing that in and having the right places. The 90-plus SKUs that are on the water from EMEA on the high-end fitments or a key part of that strategy that come into the marketplace between December and February of next year, it will be flowing all the way through next year and into early ’26, to answer your question.

Emmanuel Rosner: And so timing wise — I appreciate this color. Timing wise, do you think that on the other side…

Mark Stewart: Don’t have a process when it comes to the actions that we’re taking from the time we release development and the refresh or the vitality we call it on existing power line SKUs. So it’s the refreshing of SKUs, it’s new SKUs to the market and still though being very cognizant of our platforming and both the carcass and the green tires to not clog up the plants. So it’s — we’re doing that in harmony with each other, so we don’t cause a backwards move on our plant side. But it’s basically, it’s about 1.5 years type of process, I think, for us to get exactly where I would like for us to be.

Emmanuel Rosner: Okay. Thank you.

Operator: Thank you. We’ll take our last question from Ross MacDonald with Morgan Stanley. Your line is open.

Ross MacDonald: Yes, thank you for taking the questions. It’s Ross at Morgan Stanley. A quick one on SKU rationalization. Could you maybe help steer us in terms of the volume you’re currently doing in 18-inch and above in the US and how much open road do you see for growth there? Just be helpful, I think, to understand where we’re starting from and where you want to be in a couple of years’ time? Thanks.

Christina Zamarro: Hi, Ross, so I have the stats for North America and Goodyear branded products, 57% greater than 18-inch, but across the portfolio, which would include Cooper and all of our family of brands, we’re at about 46% greater than 18 inch. So a lot of runway to grow here in North America going forward. That’s in a pretty big contrast. If I go to the other end, like in China, for example, we’re already 80% greater than 18-inch and that’s just given the car part they’re more heavily skewed to OE.

Ross MacDonald: That’s helpful. Thank you. And then final question, just on the disposals. Again, I appreciate you’re slightly restricted in what you can say. But specifically on Dunlop, you’d previously guided us towards that business, which is predominantly Europe focused, I believe, doing annual sales of around $700 million. Would that still be the best estimate for 2025 given the budget share gains that we’re seeing in Europe? And related, you mentioned that business we’re seeing something like a mid-single-digit margin. I guess how should we think about the Dunlop margin profile next year given the budget dynamics that you laid out earlier? Thank you.

Christina Zamarro: So, I would say, yeah, you’re right, Dunlop for us is about 5 million units, mostly concentrated in EMEA. Over the past year, we’ve repositioned Dunlop into the Tier 2 space in the market. So we have been growing share there. products performing very well. I would expect that revenue to be up somewhat, just given the unit volume increases we’ve seen since we last discussed the brand at the end of last year. And I think the margins are still healthy, still very healthy relative to the rest of the portfolio. And I’m talking on a gross margin basis overall. And that is a clear area of focus for us, growing — continuing to grow the strategic positioning of our brand families and continuing to work towards this process where we’re undergoing the strategic review for divestiture as well.

Ross MacDonald: Thanks very much. Maybe a very, very quick follow-up just on the mix question. Would you consider in your EBIT bridge splitting out what is net price versus what is mix? I know some of your Tier 1 competitors do that, would just be helpful maybe to showcase what is structural to help us see the evidence of that mix coming through. Thank you.

Christina Zamarro: Yeah. We will — historically, Ross, when there’s been a significant driver, we’ll make some qualitative comments, I think, because of our market share in the US and some of the ongoing scrutiny around pricing conversations broadly, we tend to stay away from really avert pricing commentary.

Ross MacDonald: All right. Understood. Thanks very much.

Christina Zamarro: All right. Thank you.

Operator: Thank you. And it appears that we have no further questions at this time. I will now turn the program back over to our presenters for any additional or closing remarks.

Mark Stewart: No, that is it guys. Thank you guys for calling. Especially I know some of you guys are out at the SEMA Show, it’s quite early for you. But we want to thank everybody for joining and thanks for the great questions today. Look forward to talking to you in quarter four.

Operator: That concludes today’s teleconference. Thank you for your participation. You may now disconnect.