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Participants

Greg Shank; Senior Director & Investor Relations; Goodyear Tire & Rubber Co

Mark Stewart; President, Chief Executive Officer, Director; Goodyear Tire & Rubber Co

Christina Zamarro; Executive Vice President, Chief Financial Officer; Goodyear Tire & Rubber Co

James Picariello; Analyst; BNP Paribas Exane

John Healy; Analyst; Northcoast Research

Emmanuel Rosner; Analyst; Deutsche Bank

Ryan Brinkman; Analyst; JPMorgan

Itay Michaeli; Analyst; Citi

Presentation

Operator

Morning, my name. No operator today. At this time, I would like to welcome everyone to Goodyear quarter two 2020 for earnings call. All lines have been placed on mute to prevent any background noise, some opening remarks, it will be a question and answer session register to ask questions at any time by pressing the star and one on your telephone. You may withdraw yourself from the queue by pressing star two call may be recorded. Now my pleasure to turn the conference over Greg Shank, Senior Director, Investor Relations.

Greg Shank

Yes, thank you, Nikki and good morning, and welcome to our first quarter 2020 for earnings call. Today on the call, we have Mark Stewart, our Chief Executive Officer and President and Christina tomorrow, our Executive Vice President and Chief Financial Officer.
During this call, we will refer to forward-looking statements and non-GAAP financial measures. Forward-looking statements involve risks, assumptions and uncertainties that could cause actual results to differ materially from those forward-looking statements. For more information on the most significant factors that could affect future results.
Please refer to slide 20 of the supporting presentation for today’s call and our filings with the SEC. These materials can be found on our website at investor dot goodyear.com, where a replay of this call will also be available. A reconciliation of non-GAAP financial measures discussed on today’s call to the comparable GAAP measure is also included in the appendix of that presentation.
With that, I will now turn the call over to Mark.

Story continues

Mark Stewart

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

Christina Zamarro

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

Question and Answer Session

Operator

(Operator instructions) James Picariello, BNP Paribas.

James Picariello

Yes, hi, everyone. This is Jake on for James. Congrats on the great quarter and congratulations, Mark. But could you just help me put a finer point on on your full year volume assumptions for Goodyear, if I work through the SLI bridge items you laid out. I got something at roughly $1.4 billion.
Yes, I just want to see if there’s any and the downside of that.

Christina Zamarro

Yes, hi, good morning. So our full year outlook on volume, as we laid out in the presentation, is to be slightly behind the industry in consumer replacement. That’s all going to be driven by our first quarter experience. And so when you look at the remainder of the year, what I would say broadly speaking is that we should and be more in line with the industry. As we look at what’s happened over the past few quarters, we’ve seen a lot of the destocking that we needed to sell through in Europe complete and in the US in the first quarter, we were cycling through a really easy comp on the import side of the house. But as we move into Q2, we’ve guided relatively flat volume in the back half of the year yet, of course, depending on your assumptions for industry growth. But we see growth in volume just given that the consumer sell-out has trended positively here in the USVMT. a couple of points in Europe also of about 3% on a sellout basis. And so hopefully that helps you with your not least, that’s very helpful.

James Picariello

Thank you. And it looks like most of the upside in the restructuring space this year from $350 million to about $375 million was captured in the first quarter. So are there any other opportunities to potentially push that number higher through the rest of the year?

Christina Zamarro

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

Mark Stewart

than our original guidance and end of June.
In terms of we’ve got really strong momentum in brewed energy with each of our functional teams of each of the four teams. And as Kristina mentioned, right, with this $72 million of total actions already REN that are demonstrated results in the first quarter, but as we look through it, right, I’m I’m personally as well as Christina. We’re meeting across the work streams on a weekly basis with each of the functions, be it purchasing be it manufacturing across our retail, et cetera. And as we look across each of the five five areas tying into that three, 75 plus number, Christina mentioned, right, it really evolves it’s our footprint and plant optimization and the work that we’re doing. We’ve and we could talk a bit on it later or the questions that we’ve been pursuing. And I am SaaS going out to each of our plants in the US. Deep diving with our plant leadership teams and our manufacturing engineering and purchasing groups are meeting weekly with purchasing in terms of the diligence. And really we’ve tightened our KPI.’s across the organization, both at the staff level of what we’re looking at on a monthly basis and diving, but within each of our teams with dedicated purchasing and manufacturing meetings weekly to ensure execution and also to add to this workstream. So feel very good about that along with, as we mentioned earlier our RSAG. strains of getting getting that SAG out of the system around the world for better cost competitiveness for the future state and then the supply chain and logṁistics cost savings are flowing through quite nicely as well as the actions that we’ve taken around complexity, reduction, commonality of platforms and to enhance our margins, be it through repricing be it through choosing not to run those other products that really don’t fit into our portfolio.

James Picariello

Yes.
Thank you.

Operator

John Healy, Northcoast Research.

John Healy

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

Christina Zamarro

Yes, John. So I’ll start here and I’ll just say we’ve certainly seen some volatility over the last several core quarters with respect to low and imports. And we take a broad set that what I’d say is the import activity was depressed for the period immediately following COVID. And then what we’ve seen is this is several quarters of over compensation, if you will, over the next, you know, over the last several quarters?
Yes, as I think about our share in 2023, I’d say broadly speaking, we’re about where we expected to be. If I look at nonmember imports over over 2023, that low end part of the market is about 20%, 21% in 2023. That’s about where it was for all of the last five years. So I think what we’re seeing is a whole lot of choppiness and in the first quarter, in particular, though the imports were 25% of the market, and that represented a pretty significant increase in our nonmember imports, if you will, John were up 100%, which was about $1 million and a half more units than what we would normally see an importer. But again, we really believe that as lumpiness when we think about a question maybe getting getting to the question on is the consumer really trading down at least in the US. What I would say is we don’t see we don’t have evidence of a consumer trade down, especially in branded Tier one tires. So this would be all of the Tier one tire companies, including Goodyear, that that share in the market has been very consistent over the last five years. And even more recently over the last couple of quarters, we have seen some weakness in Tier two and Tier three accreting to Tier four and share. And I think at this point, it’s really not clear, John, whether that’s weakness driven by consumer preference or whether that’s something that’s linked to distributor behavior because historically what we have seen is distributors going long on low-end tires in an inflationary environment. So this is one that we will continue to watch as income. What’s different is what’s happening with imports in Europe. And I think if you look over the last five years, the import low end imports as a percentage of the market have grown from something like 20% to 27%. And so that what that means is that our distributors are more willing to stock. Our consumers are more willing to bolt on these opening price point tires. And I think that’s really a reflection of is the impact of the very high inflation on the consumers in Europe and also just the more recent macro events there and so therein lies the rationale for a couple of the major restructurings we’ve announced in Europe. Hopefully, that helps.

John Healy

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

Christina Zamarro

Well, well, I think a good question, John. I’d say by the end of the second quarter, we’ll have one the commercial truck mix drag we’ve been seeing the last several quarters. Actually, that’s mostly finished in the first quarter here in Q2. While we will lap the impact of RMI indexed agreements on price mix. And so I think, you know, until we get a clean base, if you will, for Q3 and Q4 and then the volume I’m looking at in our back half of the year in the Americas, really strong growth in our consumer OE business. We should and outperform the market share just given our mix of fitments, obviously heavily geared to truck and SUV, which creates a lot of rich mix for us. And then we also expect winter inventories in Europe are down 14% year over year, so really low. And that sets us up for a really good selling season in Q3 in media mix also. So I think a lot of good reasons to believe in price mix in the back half of the year.

Mark Stewart

And I would just add on one point on and specifically around new products, John, and that’s where I look at the premium products launching around the world. We’ve got some great products coming into the marketplace for season and it’s for the Americas. We’ve got we’re ready to launch in the fitments filling out the electric drive to as well, which is an all season EV tire for us in the electric drive to a demand side. We’ve got the Eagle F1 Asymmetric we’ve got six sizes coming out, filling out that segment. And then on the AP, we’ve got our versions of Goodyear electric drive there, and we’re seeing some really positive success in the luxury and premium performance markets in Asia Pacific and the continued strength of our wins on the EV segment. So all very positive news for us.

John Healy

Great.
That’s of luck.

Christina Zamarro

Thanks.
John.

Operator

Emmanuel Rosner, Deutsche Bank.

Emmanuel Rosner

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

Mark Stewart

And thanks for the question.
And as always, I will start with your last statement, and that’s why we’ve taken the actions through the first quarter that that we needed to do with that, we’re really using a should cost and profitability at in conjunction, obviously, with the cost structure by tire basis and across our customer platforms. And so we’ve gone through to take a look at it. And it doesn’t always mean that we’re walking away, right? We’re just working with those customers for the right price point for that product at that performance level. And so it’s not a matter of everything totally going away. In some cases, it’s just a reset of the price to the market based on the performance of it of those individual SKUs are tires. So we actually feel very, very positive on that. We’ve taken the actions we needed to take with it. And as we move forward, you know, again, we worked with some customers in terms of getting the price points reset, and that’s actually been happening before my time, I think over really the last four or five months or so. But we took the final actions to that towards first quarter and expect those things to be relatively stable on that as Kristina mentioned before.

Emmanuel Rosner

Okay. That’s great. That’s great color. And then I had a question about the from the good year forward plan. So it seems in the quarter it helps America’s profitability quite a bit. I’m curious when could we expect to start seeing it helping Aimia’s profitability? Is this can be still within this year?

Mark Stewart

Or is it a little bit more back-end loaded as a result of passing to work in Europe as we as we mentioned at the opening, really the SAG. actions have already been well implemented and we’re on track to fully execute. The 1,200 roles which were identified on are coming out on plan, if you will. And if we look at year to year as I said with the May release being about flat in terms of the earnings. But with all of your forward restructuring activities done and as well as the two plants that were announced late last year in terms of Florida and first of all, to going through, and that’s also proceeding to plan. So from that aspect of it. So we are absolutely on track with the actions we’ve got

Christina Zamarro

and Aman percent indicating I’d like to point out to me, I can’t find that when we when we announced the plan in November and we did. We did say that the majority of the actions would benefit our Americas business. It was a split of like 70% of the $1.3 billion was going to be accretive to the Americas.
And Peter, the breast stone split between India and Asia Pac. I think we should expect improving margins in EV over the course of the year. And then as Mark mentioned, with the factory restructuring, I’m coming more to bear next year and then again, another step up in 2025.

Emmanuel Rosner

That should, Ralph, would you think that 70% holds also for the $375 million in benefits expected for this year or January yet?

Christina Zamarro

That is the same the same.

Emmanuel Rosner

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

Christina Zamarro

Yes.
Actually, this is regarding a strategic review on our portfolio. And may I say that and process for each one of these assets is well under way exactly where we expected to be at this point in time. And if you remember on our fourth quarter call, we said that we should be in a position to offer a more fulsome update on one or more of these processes by midyear. So you can think about that being our second quarter conference call. We are still working towards that time line. So and no other update other than things are progressing and progressing well.

Emmanuel Rosner

Great.
Thank you.

Operator

Ryan Brinkman, JPMorgan

Ryan Brinkman

Good morning and thanks for taking my questions. Off your personal market. It was great to hear in your introductory remarks that you were able to come in initially as an outsider because you’ve dug into deeply into that good here forward plan, a Brexit deal, you were able to independently confirm for yourself the line of sight into the operating improvements at the rest of the management team I had identified at the same time, I recall you on the last call saying that while it was that extremely early days in your listening tour, et cetera, that you’re hoping to also identify some quick and easy wins or low-hanging fruit in terms of how the plan, which you said, like, I think good bones, you know how it might be augmented or accelerated? And unless I’m just curious, I know the last 90 days would be incremental, but your founder are looking into that and we think might have the most potential?

Mark Stewart

Sure.
Thanks, Ryan. As I said, I mean, I mean, you know, I sometimes have a big mouth, but I definitely listen a lot the first five weeks, the one of the things, though, in the first five weeks, which we did execute very quickly was was to to add to that Sean Pathe, our Chief Procurement Officer, on the senior leadership team staff you have reported directly to myself. It’s very important that we have real-time visibility and ability to help Sean and the purchasing team to in terms of speed of execution and so we absolutely have done that. We’ve identified some additional savings trends in that area in quite a few of those actually increased the speed of going through some of the global bid process starting here in the Americas, but up in looking as well into both from the raw material stream, but as well into our MRO, which we have identified quite a few additional opportunities, MRO contract employees, the way our contracts are set up. We’re going through a lot of things, basic manufacturing one-on-ones, if you will, such as our overtime overtime planning our scheduling within our manufacturing facilities with our plant leadership teams, we brought in all of our plant leaders across the Americas have had some sessions with those guys face-to-face as well as we do weekly sessions with them. And we’ve really got ourselves lined up slightly differently across process streams so that we can take our best-in-class performance benchmark and ensure that those are cloud-based across the network in order to capture those savings, whether they were already Anaplan, but maybe the timing was different. So we’ve been able to pull those in faster in terms of our execution within this year and next as well as things that maybe weren’t on the radar screen for particular plant. We’re also moving resources across plants, both engineering as well as our manufacturing resources to speed those execution pieces as well, Ryan. So those are the couple just a couple of highlights to what we’ve been doing with that. The other thing we’re in the process now is more of a centralized manufacturing footprint for consistency and for us to be able to take efficiencies in terms of OEE., reducing our scrap commonality and complexity reduction all tied in with our shared cost activities. So we’ve got ourselves lined up for that. We have reduced the number of KPI that we’re looking at into the important the top important ones for us that have the biggest lever for impact, and we’re driving those on a week-by-week basis to make sure that we have clarity with the teams that we have ownership with the teams and we have timing of when to do business.

Ryan Brinkman

Okay.
Thanks. And then lastly for me, I suppose, but focused in the plan on significantly increasing segment operating income, that free cash flow will naturally follow and benefit also, of course, from the deleverage enabled by the non-operating or divestiture aspect of the plan, I’m just curious how you’re thinking about other opportunities to improve free cash flow relative to EBITDA and how important that is or should be as a part of the plan?
We’ve sometimes seen big inflections in cash flow after management have changed the way in which their employees are incentivized taken. Lkq is a one example in this industry, and I know there’s likely a ton of focus on driving margin and then getting those divestitures done, but to pay down the debt. But how large of an opportunity might there be around working capital efficiency CapEx discipline, CapEx, reusability, anything that you can I think, to bring from your former employment, et cetera. How are you thinking about the cadence of on the operating side, operating earnings improved versus that the cash flow improves as you progress through the planning about one’s market share?

Mark Stewart

Sure.
Maybe let me start on Prosigna add onto it that when we think about the again, things things kind of coming going from my past rate of also highly capital intensive businesses as well. So we’ve already we’ve got a very clear line of sight to the to the R & D that we have planned for as part of that good year forward and then in the years following as well, right? So very disciplined approach on that another reason why we put purchasing to the leadership team of us working together with purchasing in IT Engineering, look into what is our manufacturing equipment strategy, looking at the items again on a payback analysis on that best return on capital for the modernization activities, we have tremendous amount of modernization going on this year, example in our one facility. But as well as many of the other facilities to get our cost basis to a very, very competitive level, if you will, and then balancing our products across the network for looking at a best cost. So in terms of how to do that, right, all these things are tied into that working capital, as you mentioned, right, so investing in the right things at the right time looking with purchasing in terms of how we’re negotiating that, just over the one two threes of our negotiation process, how we’re bundling when we know we’re going through a modernization period here across our equipment. If we know for example, we’re going to go from, you know, from replacing 10 machines to possibly at 30 50, et cetera, but negotiating that upfront so that we can get the best price on that. So we’re setting up our depreciation schedule and conserving cash upfront, but also making sure the cost structure is right also where the equipment is being placed. The other thing is really working with our individual plant leadership teams around the world, looking at at that cost efficiency level. And really we’re starting to talk to the plant leadership teams, not only on a cost center basis, but also on a P&L basis in their window, right? So things that they can impact and it is things like MRO that ties up a lot of cash and a credit, if you will, around the world. So things such as shared, shared spare part resources around the network and things like that, that again, more more basic discipline items when it comes to our spending, we have a weekly spend control as well, quite frankly, that we’ve installed so that if anything, triggers higher than that, it escalates we talk through it. So it’s about changing patterns and behavior while putting the system and discipline, which we already have the systems in place, but getting the robustness of that really, really strong.
Christina, as you like to add on to that now.

Christina Zamarro

Hey, Mark, I think you covered a lot of it. I think internally as to describe what it is, what it feels like granted is that behavioral change where we’re emphasizing to the teams is when we get to a target, it’s not that we’ve necessarily done or done the job we’re going to we’re going to continue to look for what else we can do. And I think it’s that it’s that never satisfied mentality in as we’ve put together this plan. And as Marc has come in and added his experience and perspective to it, I think it’s all about achieving that sustainability of cash flow that sustainability of earnings. And when we when we look out to the fourth quarter of 2025, we would see an annualized cash flow on an adjusted free cash flow basis is like $600 million or $700 million and that that’s on an adjusted EBITDA, say about 2.7. So our goal is to not enough, obviously, to not have a good year or two, but we’re really trying to structurally change the cash flow profile of the business.

Ryan Brinkman

That’s very helpful.
Thank you.

Operator

(Operator instructions) Itay Michaeli, Citi.

Itay Michaeli

Great.
Thank you.
Good morning, everyone. Just two final questions from me. First, on the inflation and other costs. The other thing I would just maybe walk through the puts and takes for second half of the year, I think first half imply that just over $40 million that you’ve got over $200 million of a headwind for the full year. And then maybe going back on my second question on the assumptions for second half for volume and pricing. Hoping you just kind of review on just the underlying assumptions for industry sellout trends, maybe your market share and then maybe the impact from some of the new products mark that you alluded to before? And thank you.

Christina Zamarro

It’s a third on the inflation question and your full year cost headwinds. For us of about $215 million. You rightly point out this is weighted to the second half call-based inflation every quarter, about $50 million or $55 million for us in the first half, we had the benefit of some lower transportation rates, particularly in the U.S. pulling through. We’ve lapped that in the second half of the year. And then we will put on some additional costs because we’ve announced two factory closures in Europe that we run that through our inefficiencies, if you will, as we scale those factories down and ready to ready them for closure over the course of 2025 and 2026.
We also had some insurance headwinds were related to and the tightness in the market. But also some of the claims activity that we’ve had over the last year. So that’s the first test.
Second half story on cost. As I look at volume more broadly, we talk through this a little bit earlier, I’d say we have good expectations for stability. I guess I would say in Q2 with kind of volume about flat and that’s good growth in OE still continuing and maybe a little bit of weakness in replacement. And then as we look to the back half of the year, and I guess I would also say channel inventories in the US and Europe are healthy. I would say the US is down about 4% compared to year end is down 8% on a year-over-year basis year over year comp, there is more important because we have different seasonalities and all all of that time. You say the consumer has been resilient to sell out in Europe, up 3% so out in the U.S. as it was, it’s been up kind of 1% or so the last several quarters. So expecting a decent market in the back half of the year even coming into the year, our thoughts were that we would see stronger growth in the back half than the first half, just knowing what we need to move through as far as channel inventory, but we think the setup is good. Specifically, if I take you through a little bit of the regions because that may be helpful too. And the Americas should have really good OE growth in the back half. That’s on our, you know, Goodyear specific mix of fitments.
So we’ll gain share.
We talked about that earlier.
And then in EMEA, as I mentioned this earlier to winter tire inventories down 40%. It is very low levels, so should indicate a good restocking for us in the third quarter in Asia Pacific as just continued to see growth. We have some tougher comps in OE in the second half, but replacement should still be pretty positive for us. So feeling feeling good about on volume and price mix in the second half. And then Mark will walk you through some of the new product introductions and a lot of that kind of two things happening was we’re releasing new products sort of opening up the aperture on the SKU portfolio, the number of SKUs that we’re offering into more premium in the market and then rationalizing SKUs at the lower end, which is all really supportive of mix as well.

Itay Michaeli

Terrific.
That’s all very, very helpful. Thank you.

Christina Zamarro

Welcome, Guillaume.

Operator

Thank you. This will conclude our as well as our conference call. Thank you all for your participation and you may disconnect at.