ewsba.se
Chief Financial Officer — Christina Zamarro
Mark Stewart: Thank you, Ryan, and good morning, everyone. We appreciate you joining our call. As we look at the quarter, you'll hear Christina and I walk through how we are staying disciplined as market dynamics continue to shift and how we're managing through the current environment. With that, let's start with our results with the Q1 summary. First quarter operating results were largely in line with our expectations and reflected industry declines in both consumer OE and replacement demand in many of our markets. In that environment, both EMEA and Asia Pacific regions showed year-over-year segment operating income growth and SOI margin improvements. Conditions in the Americas were challenging.
Weak consumer and commercial demand, retailer and distributor destocking and increased manufacturer promotion weighed on the results. At the same time, Goodyear Forward savings continued to exceed plan. We generated $107 million of SOI benefits during the quarter. While Goodyear Forward was launched as a 2-year program, the actions we took simplifying the business and improving productivity continue to deliver benefits for us today. The conflict in the Middle East has introduced more uncertainty, particularly around raw materials and potential end market demand. When you add that to already weak industry trends, it creates a challenging backdrop for the coming quarters, but one we're well prepared to manage. In the Americas, consumer OE industry demand declined, reflecting lower OEM production.
Even in that environment, we grew our OE market share by about 2 points in the quarter. That progress really reinforces our confidence in our OE strategy and continues to build a strong pipeline for future premium replacement demand over time in the replacement cycle. On the consumer replacement side, U.S. industry demand declined, driven by harsh winter weather and a cautious consumer. As I mentioned earlier, manufacturing promotions carried over from the fourth quarter given a weak demand environment. Against that backdrop, we stayed disciplined on price mix, and we did not chase near-term volumes.
Americas first quarter volumes also reflect planned actions that rationalize low-margin noncore brands, noncore product lines as we continue to work to streamline our portfolio of product offerings in the marketplace. As we look to the second quarter, we expect consumer replacement volume to improve from first quarter levels given the sharp destocking we experienced in Q1 and new assortment wins achieved by our sales team with key U.S. customers. The Americas commercial truck tire business continued to be impacted by tough comps and a continued weak freight environment during the quarter, showing meaningful declines versus last year.
Volumes remained at a very low level and operating results in our Americas commercial business continued to be challenged given the multiyear downturn in U.S. freight activities. Our focus here is clear: improving the trajectory of earnings through price mix and a strong focus on cost. We believe our industry-leading cradle-to-grave fleet solutions business model will help us win with our customers. Turning to EMEA, where our consumer OE business continued to gain share, growing by roughly 2 points despite industry volume in both OE and replacement declining in the region. In fact, Q1 marked the ninth consecutive quarter of OE market share gains in the region.
EMEA's consumer replacement volume was lower, driven primarily by 2 factors: increased competition in low rim size tires and like the Americas, our strategic portfolio rationalization of low-margin products. Importantly, the Middle East represents a very small portion of our EMEA sales, and we did not see a material volume impact from the conflict during the quarter. In EMEA commercial truck, industry demand improved somewhat with replacement demand up slightly and OE increasing following gains in the second half of last year. We continue to see opportunities to improve our commercial business this year through price mix, and through increasing operational efficiencies in our solutions business.
Finally, as we shared with you on our last call, we completed 2 major factory restructuring actions in Europe in '25. Another is underway this year. EMEA's cost base is seeing improvement, and we expect high utilization across our consumer capacity in the region. We also expect a final decision on the EU tariffs on Chinese consumer tire imports this summer. In Asia Pacific, SOI margin was very strong, with share remaining relatively flat in the quarter, our volume performance reflected underlying market conditions. Our strategy to expand in rim sizes 18 and above continues to gain traction. We're encouraged by our progress.
Premium over 18-inch tire sizes now account for 55% of our consumer sales in the region, a 4-point increase over Q1 of last year. Across our SBUs, our teams have taken decisive actions to strengthen our portfolio. In EMEA, we've relaunched the Cooper brand with a refreshed product lineup with first quarter volumes exceeding expectations. And just this past weekend in the U.S., we introduced our new Fast Is In Us brand campaign in support of our Eagle tire launch. Both reflect where we're choosing to invest in strong brands and products that meet our customers' needs. It's encouraging to see these efforts translate into tangible improvements in 2 of our 3 regions despite the challenging market conditions.
This highlights the strength of our execution and positions us to drive value creation with a more premium product portfolio. Taking a broader perspective on the market, we've been consistent in our conviction that execution on price/mix and cost are critical components of long-term value creation. We remain committed to that strategy. That said, both the macro backdrop and industry dynamics have proved to be somewhat more turbulent than we anticipated at the start of the year. We're responding accordingly, remaining disciplined in our strategic priorities, taking a pragmatic approach to managing the business in the near term.
As we think about the path forward, demand and inflation will largely depend on the duration and direction of the current geopolitical conflict and its impact on consumers. Historically, periods of elevated oil prices have had negative impact on vehicles mile travel with even modest changes in VMT translating into meaningful shifts in the consumer replacement industry demand. In addition to raw material and other cost pressure, the current environment introduces the potential for supply chain disruption. We're actively monitoring this across our supply base, and we're well positioned due to both our purchasing scale and long-term relationships with our supply partners, and we are planning for a range of outcomes to support continuity of supply.
In response, we're going to focus the actions that we can directly influence to manage through uncertain environment. As we've shared with you before, it's about controlling the controllables. We have meaningful carryover SOI benefits in 2026 from Goodyear Forward actions. Additionally, we're accelerating the new cost actions that build on the transformation work we began 2 years ago. That includes a continued emphasis on simplifying the organization, improving efficiency across our manufacturing footprint and strengthening the structural cost profile of the business. We will continue to take action proactively adapting our cost structure as conditions evolve, and we'll provide additional detail as those actions are finalized.
In addition to the actions on cost, it's even more critical today that our product development efforts sustain the momentum we've achieved over the last 2 years. This will help ensure our product coverage aligns with the most differentiated and the most profitable segments of the tire market. In closing, we continue to align our portfolio towards the most attractive segments of the tire market even in a highly dynamic environment. Our consumer OE share gains positions us very well for premium replacement demand in the years ahead. We believe much of the destocking is behind us. As that headwind eases, it should provide a more stable backdrop for volumes.
In addition, we're accelerating the initiatives that build on the success of Goodyear Forward, further strengthening our cost structure. This will require us to make some difficult but very necessary decisions to ensure the business is aligned with the environment we're operating in. We have consistently demonstrated strong capabilities to drive those cost transformations. We are confident this approach will position us well over the long term. With that, I'll turn the call over to Christina. Thank you.
Christina Zamarro: Thank you, Mark. While our operating performance in the quarter was in line with our expectations, the conflict in the Middle East will materially impact our costs. With a high degree of uncertainty around the duration of the conflict, our approach is similar as to how we've navigated earlier macro pressures. We are proactively preparing for a wide range of scenarios. We're implementing further profit-enhancing actions and have already initiated prudent steps on cost management. As events continue to unfold, we'll maintain the flexibility to adjust our approach as needed. I'll come back to the outlook in just a few moments. Turning to the income statement on Slide 6.
First quarter sales were $3.9 billion, down about 9% from last year, given lower volume and last year's divestitures. Unit volume declined 12%, driven by lower consumer replacement volume in Americas and EMEA. As Mark mentioned, consumer OE volume increased, driven by share gains in both of those regions. Gross margin improved by 0.5 point, which includes a $46 million tariff adjustment related to the IEEPA Supreme Court decision in February. SG&A increased $18 million, which was more than all explained by the weaker U.S. dollar, particularly against the euro. Excluding currency, SAG decreased $10 million. Segment operating income was $95 million. I'll note that our effective tax rate was unusually high given our country mix of earnings.
After adjusting for significant items, including new rationalizations and discrete tax items in the quarter, non-GAAP earnings per share was a loss of $0.39. Turning to the segment operating income walk on Slide 7. Our 2025 earnings base was lower by $37 million due to last year's divestitures. After this change in scope, our 2025 SOI was $158 million. Lower tire unit volume and factory utilization were a headwind of $159 million. Price/mix versus raw materials was a benefit of $103 million. Goodyear Forward contributed $107 million of benefits during the quarter and inflation, tariffs and other costs were a headwind of $117 million, which includes a $46 million IEEPA tariff adjustment.
Foreign currency and other were a tailwind of $3 million. Turning to Slide 8. Free cash flow was a use of $893 million in the quarter, consistent with our seasonality and largely in line with last year's levels after excluding operating cash received in the first quarter 2025 from the sale of OTR. Net debt declined almost $900 million versus a year ago, reflecting debt repayment at the end of last year. Moving to the SBU results on Slide 10. Americas unit volume decreased 17%, driven by lower U.S. consumer replacement volume. Commercial volume was also significantly lower than last year, following trends in recent quarters. U.S. consumer replacement volume reflected a couple of different factors. First, the external environment.
We saw destocking at our retailers and distributors given weak industry sell-out trends as well as market share losses following aggressive competition for shelf space, particularly in the less than 18-inch rim size segments. The second factor was our own planned exits of low-margin product lines, which amplified our volume decline in light of the difficult industry environment. We will lap the majority of our product exits by the end of the second quarter. And it's important to note that our premium products continue to perform well as we look at our market share at retail sell-out. Having said that, competitive market share losses in structurally vulnerable lower-tier segments requires that we accelerate actions to reduce footprint costs.
Turning to the commercial truck business. Replacement volume declined 22% and OE volume was down 5.5%, but relatively stable compared with the fourth quarter. Americas segment operating income was $37 million, reflecting the impact of lower volume, partly offset by price/mix versus raw material benefits and Goodyear Forward savings ahead of cost inflation, net of the IEEPA tariff adjustment. Turning to Slide 11. EMEA's first quarter unit volume decreased 8.5%. Consumer replacement volume declined, reflecting a weak sell-in market, low-end portfolio rationalizations and increased competition, partly offset by the relaunch of the Cooper brand in the region. Consumer OE was a continued area of strength and commercial volume improved, driven by replacement.
Segment operating income in EMEA was $1 million in the quarter, reflecting an increase of $13 million adjusted for the sale of the Dunlop brand. I'll also note that in March, we announced a rationalization plan to streamline our sales and distribution model and our business processes that should deliver $50 million in annual savings. The plan should be complete by 2028. Finally, as Mark noted, our direct volume exposure to customers located in the Middle East is relatively immaterial. In addition, before the beginning of the conflict, we have fixed about 75% of our energy rate exposure in EMEA for the current year. And finally, EMEA should see much less of an impact from rationalized product lines in Q2.
Turning to Asia Pacific on Slide 12. Segment operating income increased 27% to $57 million or 12.5% of sales, expanding 3 full points compared to the prior year. Growth in earnings was driven by strong execution in price/mix versus raw materials with our premium product lines up nearly 30% year-over-year. Asia's first quarter unit volume decreased 3.8%, driven by lower OE volume, particularly in China, given lower EV incentives versus last year. Turning to our 2026 outlook. The direct impacts of the conflict in Iran on the tire industry and our earnings largely depends on its duration, related impacts to customer and consumer demand and higher commodity costs, all which make the outlook for the balance of the year unclear.
At current spot prices, raw materials will be a headwind of $200 million in the second half, which represents a headwind of about $300 million from our prior forecast. We have a consistent track record of offsetting raw material inflation with price mix, and we are fully committed to new and meaningful operating and structural cost reduction. While there is very clear pressure on our near-term earnings, I am confident in our team's ability to manage through various scenarios that might unfold over the coming quarters with both price/mix and cost actions over time. As we look at the second quarter on Slide 14, we would expect lower year-on-year volumes, but improving from the first quarter, all else equal.
This expectation is rooted in new assortment wins with key customers, actions we implemented during the first quarter and a more natural alignment of sell-in relative to sell-out. Having said that, it's not clear what demand volatility we may see due to the Middle East conflict. Our second quarter industry assumption for consumer replacement is down about 3% in North America and China and down about 2% in EMEA. For commercial, we expect the industry in North America to be down 12% and down 3% to 4% in EMEA.
Given production cuts in the first and second quarters, including actions to manage our cash flow during this period of uncertainty, unabsorbed overhead will be a headwind of approximately $90 million and negative again in the third quarter. Price/mix should continue to be positive and step up meaningfully from the first quarter given stronger volume and our mix of new fitments, all else equal. Raw materials should be a benefit of roughly $100 million, and Goodyear Forward will drive benefits of approximately $90 million in the quarter. Inflation, tariffs and other costs will be a headwind of approximately $200 million.
On a full year basis, these will be about $420 million higher, which is a reduction of about $80 million from our February call, driven by the IEEPA tariff adjustment of $60 million, $46 million of which we recorded during the first quarter. Finally, the sales of Dunlop and Chemical lowers the base of earnings by $43 million in the second quarter. Other financial assumptions are shown on Slide 15. Given the uncertain environment, we have reduced planned capital expenditures to $725 million. Our global tax rate will continue to be unusually high and sensitive to changes in country mix.
And finally, while our working capital for the year could be shaped by both timing and levels of volume and commodity rates, we will continue to target a working capital inflow at year-end. With that, we'll open the line for your questions.
Operator: [Operator Instructions] And we will take our first question from James Mulholland with Deutsche Bank.
James Mulholland: I just wanted to dig in a little bit on the raw materials headwind in the back half of the year. Given the volatility, I was wondering if you could share some thoughts on the sensitivity of SOI based on oil prices. I mean we've seen a pretty material move yesterday and then again this morning. So it would be helpful if we could ballpark the impacts on the guide. I guess put another way, I'm not sure what the oil price of the current guide incorporates is, but if oil were to change $5 or $10, could you give us some sense of what that sort of benefit might look like?
Christina Zamarro: This is Christina. Thanks for the question. So we -- our spot prices that are noted here in our first quarter conference call are pulled as of April 29. That equates to a crude oil closing price of about $106 per barrel. And so obviously, with the volatility we've seen yesterday, it could be some impact on the forward outlook. Obviously, there's been a significant amount of volatility. We do provide in our supplemental information on our website, sensitivities to changes in raw materials. With oil, in particular, you're going to want to pay attention to synthetic rubber inputs like butadiene and styrene, which are levered more toward oil than some of the other input costs.
We also see a strong correlation to pigments, chemicals and oils, which are also a significant portion of our raw material buy.
James Mulholland: Got it. So I guess, recognizing that you do have index pricing agreements in place for OE tires, that's on a lag. So you won't probably see any help there at least until fourth quarter. Our sense is that some competitors have started to push through price increases on replacement to help offset any raw materials impacts for the year. Understanding there was a 4% to 6% price increase last year in North America, would you look to do something similar? And could we expect to benefit from that in the back half of the year to help offset some of those headwinds?
Christina Zamarro: You're right. I would say about 1/3 of our business is linked to index agreements for increases in raw materials. Those do reset on a lag on average that takes about 6 months or so. So we do have this timing mismatch with a significant increase in raw materials that you're pointing out. So that's the first point. Up until now, I can say we have announced price increases in EMEA for consumer, that's about a 4% increase and in commercial, about a 7% to 8% increase earlier in April, May time frame.
And we will obviously look to continue to increase price/mix to offset the headwinds that we're seeing in raw materials as well as take action on costs to manage through the current volatility.
Operator: We will move next with James Picariello with BNP.
Unknown Analyst: This is [ Jake ] on for James. So just at a baseline, how are you thinking about volumes in the second half? And I realize it's a tough question to answer just given some of the volatility. But just based on my math, if we assume 1% OE and replacement growth in the second half, SOI for the year should be somewhere in the $600 million range. Are we thinking about that right?
Christina Zamarro: So maybe I'll start and Mark can chime in. I would say the overall forecast hasn't changed materially when we think about the flow, in that we do expect volume to improve sequentially each quarter on an absolute basis, and we still should get to year-over-year improvements in the second half, obviously, still dependent on consumer demand and some volatility we may see in VMT just related to gas prices. Having said that, we are annualizing some of the Q1 share loss in Americas, which equates to about 2 million to 2.5 million units lower volume in the second through the fourth quarter versus our February outlook.
Mark Stewart: Yes. Maybe just to tack on to that, right? As far as what did happen in the first quarter, right, when you think about the Americas volume specifically, and it's about 1/3, 1/3, 1/3. When you think about destocking is about 1/3 of the volume delta in the Americas. Our optimizing the portfolio, as we've shared with you guys over the last 2 years, moving out of the lower to no profit pool, lower rim size pieces, as we had planned for that through the process. So that's about 33% of it. And then we saw definitely increased competition in the fourth quarter, particularly on the lower rim sizes with very aggressive pricing in that.
And as we shared with you guys as well, we are not chasing profit into a nonprofitable zone, right? So -- sorry, chasing volume into a nonprofitable zone. So we've continued our absolutely our road map of moving up and proof points to believe, as we shared, we released 40% more new products in the higher rim size last year around the world. Proof points on AP, right? We were substantially up. We were up nearly 3, 4 percentage points. I think 4. We moved from 51% to 55%, 18 and above, with record SOI and AP for the quarter. In EMEA as well, great proof point there of moving up.
And as well, we've launched the Cooper to replace the Dunlop volumes. We're marching ahead of our launch ramp program with really great receipt from customers and end consumers. So we feel very positive about EMEA and really securing that strong Tier 2 marketplace for EMEA. In the Americas, we continue our mix up there. We have moved up from a 42% to 50% greater than 18 and above year-over-year in our consumer replacement, and we continue to launch the new products into the marketplace. And just last weekend, we had our big launch on our new Eagle tires globally, but starting here in the U.S. to fill those white spaces we've shared with you guys before.
So we feel very good that we've got the right products, especially as we think about kind of the K economy of the more resilient pricing and a little bit more Teflon-proof, shall we say, in terms of the pricing in those upper rim sizes.
Unknown Analyst: And then could you just provide an update on the trade environment? Based on our tracking, it looks like tire imports into the U.S. are finally starting to fall off a little bit. And then in EMEA, it looks like the European Commission might be set to implement some duties on Chinese imports in the next couple of months. So you can talk about what you're seeing and what the potential benefit could be there?
Mark Stewart: Sure. Maybe just to start on the EMEA front. By mid-summer, we're anticipating that the EU will give their ruling in terms of the tariffs on Chinese tires coming into Europe. So we hope we'll have news for that as we do our second quarter announcement, but that's the latest info we have is mid-summer, they'll be making the announcement on that. In terms of the U.S., with the lower imports, we did see some destocking. As you guys know, last year, there were the pre-buys around the tariff. There were lots of things with the tariffs moving a lot throughout the year and a big stocking of product. So we do see that starting to destock. Christina?
Christina Zamarro: I don't have a lot to add. I can maybe layer on some statistics. The nonmember imports in North America were down about 7% in the first quarter, which is a positive trend. Having said that, they do remain at a relatively high level compared to historical periods. But I think when you couple that with the elevated raw material costs, we think that's constructive as we think about the layout for imports in the coming quarters.
Operator: We will move next with Ross MacDonald with Citi.
Ross MacDonald: Three questions from my side. The first one is just on that destock that you're calling out in North America. How far through that process do you think you are? Maybe you could talk a little bit about whether there's further destock ahead of us in Q2 or if that process is largely done now? And then within that, how you would assess the Goodyear inventories within the dealer network in the U.S. and whether there's some opportunity to gain back some share in Q2 by topping up dealers. The second question on mix specifically.
I know you don't guide on mix, but given the points you called out, Mark, around the K-shaped economy, the higher rim size share gains that you're making, how should we think about mix more structurally within Goodyear? Is there any steer you can give us for '26 and beyond on sort of structural mix benefits from that work you're doing cutting the lower value-add SKUs? And then just a final question on U.S. trucks. It looks like on some of the freight data that the activity troughed around January. So just be curious what you're seeing maybe on April trading, if there is a little bit of momentum coming back to the freight activity.
And linked to that, whether you're also giving up some share on the truck side and trying to avoid sort of lower value-add products or if that's specific to the consumer business?
Christina Zamarro: So maybe I'll start on the first question, which is destocking, I think, particularly in North America or the U.S., we did lay out our outlook for the consumer replacement industry in the second quarter, which is significantly better than Q1, but still negative. I think that indicates that maybe there's slightly more destocking yet to go because it's a little bit more than the weakness we're seeing currently in sell-out. Dependent all still on the price/mix environment, sometimes we do see prebuy if there is a significant move in overall pricing across the industry, that can instigate some prebuy.
Having said that, with the uncertainty around the consumer, uncertainty around vehicle miles traveled, I'm not sure that I would say we're expecting that here over the course of the next couple of quarters. The second question was on structural mix over the course of the rest of the year. As we talked about this on our fourth quarter call, we did say we would expect mix to improve and stabilize in the second half of 2026, largely due to the fact that we're comping through the commercial truck weakness that began in the second quarter and third quarter of last year. So structurally, we should see a much stronger mix for us coming out of the second quarter.
The third question was on truck. Maybe I'll turn that one over to Mark.
Mark Stewart: Yes. For truck and as we look at the commercial trends, right, it's -- the fundamentals of the market are definitely looking better. We need to see that sustain in quarter 2 and on through the rest of the year. And it obviously takes some time for that to flow through the market. But we've seen the capacity of trucking industry tightening up. The freight rates improving. We're starting to see the OEMs increasing their builds. And the PMI or the purchasing index has been above 50 now for quite a few months, which is a key towards that freight activity picking up.
And in talking closely with our customers through our solution business and our fleet services, we -- again, we see the OEM piece moving up substantially over a low number, granted, but moving up substantially. But we get a nice pull from our fleet customers. And we know there's a lot of talk from them in terms of being more positive in their thinking and in terms of the buy.
But what we have -- to your last point question was really around the lower end of the products, we have been -- just like the consumer side, right, we have specifically been rationalizing those low-margin products and getting out of those to really focus on our premium business, particularly the tractor tire business for the truck drive itself, the drive tires as well as our retreading operations and really working to robustly improve our efficiencies around the world from our solution and service business. So we've got a big lift that we're working on. The team is super focused on our cost structure and the value proposition for our fleet customers around the world.
And so far, we're on track with those plans through the year, and it looks that we'll continue to improve that through the year.
Operator: Our next question comes from John Healy with Northcoast Research.
John Healy: Just wanted to ask about the competitive position. I think when you look at the release, and I know you guys kind of expected a slower start on the U.S. replacement market. But in the categories in which maybe like-for-like tires are being kind of moved at certain dealers or with certain partners, is there a way to think about just kind of what your organic SKUs were doing and maybe how those performed just so we could kind of put your performance kind of in more what I would say, reasonable parameters to judge that?
Mark Stewart: Maybe I would start, John, make sure I understand the question right. But it's the -- if we think about what Christina said in terms of sell-out was stronger than sell-in, right? So there was the destocking that happened from the buildup over quarter 3, quarter 4 of last year. So that's a portion of it. We were still as well in contract negotiations with some of our larger customers that have been settled out.
And so from that standpoint, as we look through that in terms of the volume profile going forward, we're very pleased with our mix up, if I understand organic SKU, right, of our mix with our power lines in terms of products like MaxLife 2, right, the Eagle that I just mentioned that we've completely -- product development has done a super job to reinvigorate and bring new products into the marketplace for that as well as our WeatherReady 2s obviously performed very well in the marketplace.
And so on those power lines, those 18 and above that we have been launching over the course of the last 18 months, and we've got another 36 months of a very robust pipeline coming in. That's why we feel very strong to the -- in terms of the organic growth of our SKUs, if we will, that we are much more meaningfully participating in the higher profit pool, and that will continue to grow because we've got our marketing plans behind it. We've got our sales enablement teams out in the marketplace, and we've got the products to do it with.
John Healy: That's helpful. And just 2 quick follow-ups. I know Walmart has always been a big customer of yours. And I was wondering if you could talk to the relationship there, if anything is changed there or your working with them has kind of moved along in a certain direction. Just if that's impacting the numbers in a meaningful way at all? And then secondly, are there any further like price increases baked into kind of some of the numbers that you guys have talked to us about the price mix headwinds?
Mark Stewart: Yes. We don't normally share on a particular customer on this call, right? We can provide some additional color. What I would say is as we look to -- across all of our portfolio, again, we are purposely mixing up the portfolio, refreshing specific SKUs in certain brand sizes where the profit pools are. What I can say, they're a great customer and have been for 40-plus years, right? So we have a very strong relationship and continue to do so. And as we look at that and the growth of brick-and-mortar -- sorry, the growth of e-com along with brick-and-mortar, we're being pretty successful in that arena with them as well.
Operator: We will move next to Itay Michaeli with TD Cowen.
Itay Michaeli: I want to ask a question on some of the, I guess, upcoming cost and maybe footprint actions you alluded to. I'm curious if maybe you can roughly kind of size those relative to the original Goodyear Forward plan. And ultimately, I guess what I'd like to try to get at is sort of as you plan these next actions, what sort of timetable that you're trying to target in this sort of new environment to kind of get back to like a 10% SOI margin?
Christina Zamarro: So Itay, I'll start. We talked a lot about footprint actions in this call specifically. Obviously, we are targeting restructuring actions that have a very near-term payback and the restructurings that we've completed over the last several years have all been focused in other regions outside of the Americas. But just given where volume is, in particular, in the Americas this quarter, our restructuring is going to be focused there, which will, just because of the nature of the high cost base, usually deliver a very fast payback. So that would be point number one.
A lot of our other initiatives nearer term that we're adding to the coffers as we think about cost outs over the next several quarters and on through 2027, we're looking at raw material consolidation to help bring meaningful cost out, also simplification within our factories, driving efficiencies, indirect spend, control cost towers on a lot of the different levels of spending across the organization and then, of course, optimizing all other SG&A as well.
Mark Stewart: Maybe just to tack on it, right? It's -- we really -- we're in execution mode of building on the integrity and the credibility that we've built with you all, with our shareholder base and our associates around the world of the Goodyear Forward program, right? As we've shared before, we really have it embedded in our DNA, in our governance, in our KPIs, in our actions, and we have a very robust road map of what we're doing. And while we're -- we don't have a formal announcement today of what the details of that are with you, obviously, being very sensitive to that.
But it is our intention to share with you guys coming up on the specific cost-out value creation plans, but it is absolutely in keeping with the principles that we've had in Goodyear Forward. But it's, as we shared, right, we continue to top off the cost reduction value creation actions that we had in Goodyear Forward on a very disciplined way function by function, as Christina mentioned, on direct material, indirect material, our product rationalization, making sure that our footprint and specifically our cost flexing is in line with volume demand.
So it's the continued journey that we're on there, and we continue to be confident in our ability to execute that credibly as we've been doing here over the last 2.5 years.
Itay Michaeli: That's all very helpful. Maybe just 2 quick follow-ups. First, on the CapEx cut for the year, maybe talk a little bit about where that's coming from and how sustainable that is going forward? And a second quick housekeeping. Is the IEEPA adjustment expected to be also a cash benefit this year?
Christina Zamarro: Sure, Itay. So on CapEx, in particular, obviously, we're reacting somewhat to the current demand environment, which brings down the need. As we think about maintenance in the factories, utilization rates are lower than we would have expected. And we are also applying a new best cost methodology across all major categories of capital spend to help control costs. So more to come on that. But hopefully, as we even move into next year and years beyond, we're able to take capital spending to much lower levels than you've seen from us historically. On IEEPA in particular, the cash inflow, very, very difficult for us to say if that comes later this year or early next.
We have booked the receivable based on the Supreme Court ruling, and we'll continue to update you as we move through the rest of the year.
Mark Stewart: And maybe just to tack on to the CapEx piece as well. Again, as Christina mentioned, right, we've done a lot of work over the last, let's say, 1.5 years with our advanced global engineering team towards developing those best cost solutions, but also best spec solutions, right? So we have completely rethought how we go to market for CapEx in terms of bundle buying, in terms of looking at efficiency of where to have it made, but also looking at what we truly need in the operations as we modernize factories and work on our cost footprint.
But we're seeing significant reductions in our CapEx for the ability to produce same as if more -- same as or better quality. And so we feel very good about that, that our CapEx dollars will go much further. So I wouldn't think about it as much of a big reduction in the CapEx bill of starving the future. It really is about feeding the future on a much more efficient base.
Operator: [Operator Instructions] We will move next with Ryan Brinkman with JPMorgan.
Ryan Brinkman: I wanted to continue with these questions asking around the impact of raw materials, commodity prices, offsets, et cetera. Firstly, maybe starting with the indirect impact of higher commodities because I recall during the pandemic, you actually met quite well with the challenge of passing along the higher raw material input prices, but obviously found it more challenging to contend with all of the unusual indirect impacts of the higher cost of higher diesel, freight, ocean shipping, logistics, electricity, natural gas, et cetera. And I think there were unique aspects of that particular environment.
But I just wanted to check in with regard to how these other costs might be tracking, which in some ways, do find their way back to the same Middle East conflict impacting raws more directly. I think you account for this mostly in the -- when it exceeds the general inflation rate in the other costs and tariffs bucket, I suppose, of the SOI Bridge. And how should we think about that driver trending going forward?
Christina Zamarro: So thanks, Ryan, for the question. We have headwinds of about $40 million, mostly in increased transportation, a little bit of energy in that other cost bucket, just as you pointed out. And that is more than offset by the IEEPA tariff refund adjustment as well as some other cost reductions as we've been discussing so far on this call. I think largely, when we also think about energy in EMEA, I mentioned in the prepared remarks that we have hedged out or fixed a lot of the contractual agreements for our energy costs in EMEA pre-war. So that's 75% to 80% of those rates were fixed before the war.
So we feel really good about the position, and we'll monitor the environment for volatility and continue to update you as we move through the year.
Ryan Brinkman: Okay. And then with regard to the offsets of restructuring and price mix against all this headwind, maybe starting with restructuring. Obviously, I see you've increased the Goodyear Forward impact here from $300 million to $325 million, up only [ $25 million ] versus the raw mat degradation for the full year looks $300 million-ish, $312 million or -- you dug deeper with Itay just now on the allusions in the prepared remarks, right, with regard to the restructuring actions. The payback activity -- payback timing, I thought was interesting. It sounds like maybe workforce reductions in Americas that you're looking to maybe not pull the trigger on if the environment quickly resolves?
Is that how we should think about it? But also what about magnitude? Because yes, it seems like really price mix, and that will be my next question, but is the only thing that can really offset this headwind. So what's the outlook for company-specific restructuring actions under your control to be able to offset like how much of this incremental raw mat headwind, say, when we annualize it to next year, for example?
Mark Stewart: Yes. Maybe, Ryan, I can start and then Christina chime in. As we think about -- we really work very hard on our cost flex, our firm versus flexible cost within each of our factories around the world, right? So we have intense governance around that, again, utilizing the principles of the Goodyear Forward in terms of the best cost practice, best quality practices across the plant and implementing those around the plant. Some of that involves flexing of manpower. Some of it involves waste reduction. It's every element of manufacturing 101. So it really is about flexing our costs to match the volume and demand and also the mix of our products.
So we have meaningfully moved products that are important for the portfolio into cost locations where we can make the proper returns on those. We've rationalized footprint -- sorry, rationalized products. We've rationalized footprint, as you know, on the EMEA side, and we continue to look at that all over the world to make sure as we move to global function and global manufacturing, part of that intention was, again, best landed costs for our customers and for our shareholders to make sure that we can hit the right returns and have a competitively priced product in the market.
The other part of that price mix, again, is robustly changing our portfolio, as we've shared, right, with filling out all of those blank spaces that Goodyear has not been participating in or where we were, the products were -- the vitality or the freshness of those products were not appropriate. So that's why we continue to march in each of those. It will lead to some additional restructuring, obviously. But we -- part of it is just normal day-by-day, good cost management. Christina?
Christina Zamarro: Yes, I'll chime in. I think about these 2 buckets a little bit differently, Ryan, in the sense that we have a really strong track record of offsetting raw material inflation with price mix. And we talked about sometimes seeing a structural lag because of OE RMI indexed agreements. But having said that, looking back through the history, the inflation that we've seen in raw materials has been covered by actions all in and around price/mix. Then when it comes to volume, and Mark just made these comments, where we're seeing volume pressure, especially at the lower end of the market, just sort of dictates that we address that unabsorbed overhead with cost-out actions in restructuring dollars.
And those paybacks are generally 1 to 2 years, and they're going to be right now focused on our highest cost footprint. We can't share more details with you today, but we hope to be able to do that over the coming quarter.
Ryan Brinkman: Okay. That's very helpful. And just lastly here, I want to get your thoughts on how things might play out and the impact on Goodyear in a couple of different scenarios here. So hard to predict what's happening in the Middle East. And most of the time I'm thinking, oh my gosh, Brent Crude is going to stay at $120, $100, this is awful. It's going to continue like this. And then other days, the tweet comes up in the White House and it's down 20% on the day, right? So I mean, on the one hand, you sort of just addressed, I think you've got a good track record of passing along these higher costs.
I think there was one time where you didn't, right? And that was kind of when they spiked up, right, at the end of '16, early '17, maybe and then spiked right back down. And I remember when oil fell the most in 30 years or whatnot, the other week, I mean, hopefully, that is the case, it resolves very quickly, right, for the world. But how do you anticipate? And are you prepared for -- do we have to consider that scenario also and maybe making it more complicated to pass along those costs. And of course, the price mix opportunity is not in a vacuum with the softer demand and higher inventory backdrop.
So I guess even in the event that they were to stay elevated, how much could you, this time around, maybe hope to be able to offset relative to prior scenarios that I know you do have a good track record for except for maybe the onetime.
Mark Stewart: Maybe I can start on it, Ryan. As mentioned, I think as we think about the K economy, right, we're seeing the greater than 18 pricing more resilient in the market. We see a lot of competitive price pressures in the below 18 rim size, as we shared earlier, as we do the competitive, the scrapings in the market, looking at sell-out data from the published sources. And as we look to that, right, that, again, it goes back and really reinforces our strategy, which is to position Goodyear as the strong premium #1 brand again, right? That's been our journey.
It's why we continue on that because being in a dog fight in the lower tiers of the marketplace at a very different cost structural base to Christina's point, is not the winning proposition, right? The winning proposition is the journey that we're on, which is to successfully gain. And again, proof points for us, again, in AP, up 4 percentage points to greater than 55%. Same thing of the -- on the -- in the U.S. marketplace, and we've been filling that out in EMEA as well. So we feel good that, that helps that resiliency and also the ability to pass those pricing needs forward into the marketplace.
Operator: We will take our last question from Emmanuel Rosner with Wolfe Research.
Emmanuel Rosner: So Christina, how should we think about free cash flow outlook for this year based on some of the puts and takes that you gave, obviously, on the SOI, but also some actions to preserve cash. And then within that, when we're thinking about some of these potential restructuring actions, should we sort of like budget within that also some extra cash restructuring within this year's outlook?
Christina Zamarro: Yes. So no, thanks, Emmanuel, for the question. I think you're right. We're definitely focused on free cash flow. I do think it's a little too early for us to settle on where we're going to land. I think we're going to need to get through the second quarter, see where raw material prices will fall out in our P&L over the course of Q3 and Q4. But we have given you the drivers that we know today. Free cash flow is still going to also be dependent on some of those variables. You noted, we've reduced CapEx, and we're committed to managing the business for cash, and we feel really good about the balance sheet position.
I would say our free cash flow doesn't contemplate any additional restructuring related to any upcoming announcement that we may make over the course of the next couple of quarters. But I wouldn't expect that anything upcoming to impact our cash flow until next year.
Emmanuel Rosner: Okay. This is extremely helpful. And then in terms of the second quarter volume, I think that you gave the various pieces. I'm not sure if I caught them all in terms of how you're thinking about it. But I know historically, you have sort of like an overall number in the slide. I think here it might be a little bit more complicated. Is there also more -- can you just go back over the pieces of how you think about second quarter volume, but also is it a little bit more volatile? Or I guess why no like point estimate, I guess, this time in the slide?
Christina Zamarro: Yes. So I mean the consumer demand environment is still subject to gasoline prices. I mean we're pulling up the average gasoline prices last night and this morning, and it's above $5 per gallon. And historically, we have seen a commensurate impact on vehicle miles traveled when we see gas prices spike. So I think what we've given you is our best view and still an improvement for volume in Q2 relative to Q1 and sequential improvement as we move through the rest of the year. But we're going to have to stay agile and continue to update you as to impacts on the consumer over the coming quarters.
Operator: And at this time, I will turn the call back to Mark Stewart for closing comments.
Mark Stewart: Thank you, guys, for joining us today, and thank you for the questions. We really appreciate that. As you heard, right, we are absolutely taking and continue to take decisive actions to navigate through the current environment. We've got a clear focus on cost, a clear focus of matching our cost structure with the demand structure of the market and also keeping to a very strict portfolio discipline of moving up into the more premium product mix. So we're confident these actions are positioning us well in supporting our long-term strategy. As Christina mentioned, we are absolutely focused on our cash flow as well. And with that, guys, we really appreciate you joining today. Again, thank you for the questions.
Operator: Thank you. This brings us to the end of today's meeting. We appreciate your time and participation. You may now disconnect.
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Goodyear (GT) Q1 2026 Earnings Transcript was originally published by The Motley Fool