Good morning. My name is Miki, and I will be your conference operator today. At this time, I would like to welcome everyone to Goodyear's Third Quarter 2021 Earnings Call. All lines have been placed on mute to prevent any background noise. After the speaker's remarks, there will be a question-and-answer session. I will now hand the program over to Nick Mitchell, Senior Director, Investor Relations.

Thank you. And thank you, everyone, for joining us for Goodyear's third quarter 2021 earnings call. I'm joined here today by Rich Kramer, Chairman and Chief Executive Officer; Darren Wells, Executive Vice President and Chief Financial Officer; and Christina Zamarro, Vice President, Finance and Treasurer. The supporting slide presentation for today's call can be found on our website at investor.goodyear.com, and a replay of this call will be available later today. Replay instructions were included in our earnings release issued earlier this morning. If I can now draw your attention to the safe harbor statement on Slide 2. I would like to remind participants on today's call that our presentation includes some forward-looking statements about Goodyear's future performance. Actual results can differ materially from those suggested by our comments today. The most significant factors that could affect future results are outlined in Goodyear's filings with the SEC and in their earnings release. The company disclaims any intention or obligation to update or revise any forward-looking statements, whether as a result of new information, future events or otherwise. Our financial results are presented on a GAAP basis and, in some cases, a non-GAAP basis. The non-GAAP financial measures discussed on the call are reconciled to the U.S. GAAP equivalent as part of the appendix to the slide presentation. And with that, I'll now turn the call over to Rich.

Great. Thank you, Nick. Good morning, and welcome, everyone, and thank you for joining us. Let me begin my prepared remarks by providing some comments to supplement this morning's press release. Our third quarter results show substantial growth in net sales of 42%, partly driven by our recent acquisition of Cooper Tire and partly reflecting strong organic sales growth in our legacy business. With this momentum, we generated $449 million of merger-adjusted segment operating income for the quarter, more than double our earnings from last year and also well ahead of pre-pandemic levels. Notably, our earnings growth came despite a 15% increase in our raw material costs in the quarter, which was in line with our previous forecast. Now for context, this compares with an increase of about 1% in our raw material costs during the first half of the year. And like most companies, we're also experiencing significantly higher inflationary cost pressures. While manufacturing locally in the regions where we're selling tires partially insulates us from cost increases related to global supply chain challenges, we are experiencing the higher transportation costs that we forecasted on our last call. Additionally, we're seeing added pressure from increased wage and benefit costs and higher utility rates, partly reflecting the growing energy crisis in Europe and China. To counter these impacts as well as higher raw material costs, we've continued to execute strategies to capture higher selling prices for our products, which helped drive a 10% increase in our revenue per tire in the quarter, the most in nearly a decade. At the same time, we're also focused on recovering volume and growing our market share. In the quarter, we continue to benefit from strong customer demand for our products globally. As a result, we saw our legacy consumer replacement business recovered nearly…

Thanks, Rich. In most ways, our third quarter results reflect a continuation of many of the industry trends and successful Goodyear initiatives that have driven the strong momentum we've seen over the last 12 months. You will see the impact of this momentum in the strong top line growth and earnings growth for the quarter and the continued strength in segment operating income margin. The quarter also saw a continuation of some of the challenges companies are facing across all industries, including delayed shipping, difficulty maintaining adequate staffing and increasing inflation driven by these and other factors. It's also seen the introduction of a few new challenges, including inconsistent supply of power for manufacturing in China. And of course, the challenges associated with automotive production and rising raw material costs are still with us as well. As you can see, our team has done a good job managing through these factors in order to preserve the benefits of our cost and cash flow initiatives and continue to recover market share loss during 2020 as a result of our unique distribution footprint. This has helped us again deliver results ahead of pre-pandemic 2019 levels with significant industry volume recovery yet to come. Q3 results also reflect the first full quarter's impact of the combination of Cooper and Goodyear, helping drive the significant growth in volume and sales revenue. I shared during our second quarter earnings call and again at an investor conference in mid-September that we were continuing to feel positive about the opportunities to drive synergies. I'll share with you today some more specifics about the early savings we're seeing and the benefits we expect over the first two years of the combination, which we now see as higher than when we announced the transaction. While we won't talk much…

And we'll take our first question from John Healy with Northcoast Research. Please go ahead, your line is open.

Good morning, John.

Good morning, guys. Congrats on the progress this quarter. I wanted to want to ask on the Cooper synergy target, the upside of the goal there. Could you maybe talk to kind of what you're seeing and where you're finding the synergy upside there?

Yes. No, John, thanks for asking. I'll just start by saying the integration process and how we're working with the Cooper team has just been going great. I think everything that we thought has been reaffirmed. Our excitement is there. And we feel absolutely positive about not only the cultural fit, which is so important, but the value creation opportunity that's there. Darren just said, we spent an enormous amount of time together to identify the incremental upside now that we can work together for a team or as a team, I should say. And that's really exactly what's happened, whether it's from the cost side or to expand the reach of the Goodyear brand and the Cooper brand and working together, I think that's exactly what's happened. And that work really allowed us to upgrade the outlook that we have on synergies and raise from the $165 million up to the $250 million. And again, that doesn't take anything away. We'll continue to drive the cash benefits that we have identified relative to working capital and certainly the favorable tax position. So, really I would just -- I'll start off by saying that really on track, maybe even better. I'm very, very pleased with how the teams are working. And you've even seen some of that -- with some of the announcements we've made on new responsibilities within the combined company. So I'll just say, very, very pleased with the way things are going. But Darren, if you could jump in on some of the specifics on the increased target and the timing of it.

Yes. So John, I think the slide in today's deck will give you a little bit of an indication of the broad categories that we're talking about. I think we continue to see significant benefit in areas that we initially focused on including SAG, including logistics. We've seen -- on those original categories, we saw some improvement in what we expect to get from a procurement perspective, so saw a step up there, as you'll see the bar there looks larger. The other thing that we've had a chance to do now is to think through where some of the initial benefits can be in sales and manufacturing. I think we were not prepared to get in deeply into those categories until we had a chance to close the deal and work together. But I think even in the 2-year time frame or effectively 1.5 years that we have left to work here, we found that there were some cases where going both directions, we were going to be able to move production from either a Goodyear facility to a Cooper facility for lower-value product and free up some more capable equipment to make premium products. So there are some cases where we're able to move lower end product to Cooper factories. We've got some other instances where we're actually able to move some lower value or simpler product into Goodyear factories and free up some premium equipment in the Cooper factory in order to build more light truck, more SUV, which are products that factories are very good at. So I think we've gotten some of those examples. I think we've also found some examples, and again, on both sides, where we've been able to look at manufacturing process and compare the two manufacturing process and find ways that we can de-bottleneck our individual areas of the factory in order to get more output. And so we've been able to quantify the benefit of that additional output. And I think without our two sets of engineers working together, that wasn't going to happen. So I think that's good. We've also got some in here, although still not the biggest item, but some additional sales that we've recognized through the ability to put Cooper brand through select Goodyear points of sales and to offer some sale of the Cooper brand to select Goodyear fleet customers. So there's a couple of different areas there that we've started to move toward. First two years probably not going to be -- that won't be the biggest element, but we start to see those initial opportunities. And obviously, we're going to keep looking for them. But those are -- yes, that gives you an idea of where some of these opportunities are coming.

Great. Super helpful. And then just wanted to ask one question on kind of thinking about it next year. Any way we could think about what raw material costs headwind might be for 2022? And what sort of pricing that you would need to get to kind of stay on top of that raw material spread?

Yes. So I will keep -- obviously keep talking about this, as we go from here through our year-end results. But I think where we stand right now, spot prices in aggregate are up slightly from where they were in early August. And I think particularly with carbon black is up, not a lot of movement in the other -- in our other materials, and we're watching the movement in those prices real closely. And we saw butadiene spike during the quarter, but now has come back down, which I guess ultimately is good. If spot prices hold where they are today, we're obviously going to get some significant raw material cost inflation. And I guess right now, I'm focused on the first half because that's where we actually have a really good insight into where things are. And I think you can probably think of the first half as seeing increases that are similar to what we've seen in the second half of this year. So, we'll get further into the year, as we give our outlook in our year-end call. But I think we've been demonstrating that we got the pricing -- yes, we've been able to price and drive price and mix to stay ahead of the raw material costs. I think that track record is going to be important for us as we head into next year. And it's important because not only are we now thinking that our pricing has got to cover raw material costs, but also focused on making sure that we're recovering and recapturing the additional cost for transportation and other inflationary pressures, which are just at -- yes, there are levels that are higher than we can deal with efficiency programs. And I think right now, we're feeling good about that. There's been a lot of a very consistent level of movement in tire prices during the third quarter. So I mean that -- on a broad basis, that seems to if anything, picked up speed. So I think it's -- these are areas that everyone's feeling. And I think that puts us in a good position, as we look at the challenge that we've got to overcome in the first half of next year.

Great. Sounds great. Thank you, guys.

We'll take our next question from Rod Lache with Wolfe Research. Please go ahead.

Good morning, everybody. First thing -- firstly, just pricing, obviously, very strong in the quarter, and the most recent round of pricing only took effect on September 1. So you wouldn't have had a full quarter of that. So I'm -- it sounds like it could be just as strong as this in Q4. And I didn't see anything in your press release about additional price increases, but you've been raising prices every three months or so. So is there any reason to believe that the industry won't just continue to recover some of this margin, especially given the inflationary pressures that you're pointing to? .

So Rod, obviously, a key question and really building on what Darren said, during Q3, kind of repeating, what you said a little bit, we again saw sort of that net recovery of price versus raw material. And remember, that's continuing a trend that actually goes back to like Q3 of 2019. So that's good momentum as we think about that. And then replacement pricing, we've seen moving higher as a response to, again, not only raw material costs, but Darren, as you mentioned, incremental costs that we're seeing on labor, transportation and energy and so forth. So we monitor all those tire manufacturers that are out there. And what we've seen that they've all announced at least three price increases this year, the latest as you mentioned, broadly speaking, again, we're in Q3 of up to 5% to 8%. And Rod, you would know this, I mean -- we haven't seen this type of pricing since around about 2011 coming out of the Great Recession. So that's -- that momentum is very similar to what we're seeing. For us, we announced both Cooper and Goodyear brands up to 8% in -- as effective September 1. We had -- that's our fourth price increase this year. We had four price increases on the commercial side. And also in Europe, we actually had a mid-season price increase, call it, between September and October. And as you know, that's not typical, let's say, of what we're seeing there. So as we look ahead, I mean, I guess I'd say two things. One, the pricing actions to date put us in a good position to handle those raw material increases that Darren mentioned in Q4. But again, as we look out into the future, call it 2022, we know we're going to have to look for those price mix opportunities to help us with not only the raw material cost increases but the other cost components that we're going to see as well. And that's why we sort of go back to the parallel coming out of the Great Recession in 2011 that we have a situation where demand is running ahead of supply. And if you think about consumer replacement running well right now, the OE business is obviously trailing, which is a bit serendipitous in some ways, particularly in certain markets, particularly in the U.S., where we see that OE business coming back at some point in time. We can talk about when that is, but that we see also as a way to sort of extend this ongoing recovery and this question of supply and demand. So put all that together, I'd say everything is very constructive as we head into 2022, even in view of the -- we have these higher raw material costs and other costs that we have to handle.

Okay, that's helpful. And just secondly, there are a lot of moving parts on the cost and savings as we're thinking about our models for 2022. Your Slide 21 actually shows kind of a helpful, like every 1% increase in global inflation is $50 million. I was hoping maybe just give us a little bit of color, especially given what energy costs are doing in China and Europe, but just a little bit of color on the inflationary pressure, what the run rate might be? And then, as an offset, how much of the Cooper synergy do you think you can actually achieve in the next year or so? And you mentioned the European realignment starting to pay off in terms of market share, but you originally also pointed to an improvement in profit per tire. Maybe you can remind us of where you stand on that and what the targets are?

Sure. So let me hit the inflation question first, Rod. We originally were expecting to see inflation in the third quarter. That was about $40 million or above what we saw in Q2. And in fact, the -- it came in a little bit better than that. So we really -- we saw about $20 million less year-over-year than we might have originally expected for Q3. And I think some timing there given some -- the volumes weren't quite as strong as we originally expected in Q3. And so that -- to the extent that volume rolls over into Q4, we'll see a little bit more of that cost come through. But I think that original step-up in inflation from what we had been seeing, which was around $40 million on a quarterly basis to something close to twice that is a pretty good indication of where we are right now, as we're heading into next year. Obviously, we'll start to anniversary that in the third quarter next year. But the first half, I think we're expecting that we're going to have that kind of inflationary pressure. So does that hit your first question?

Yes, that gives us a pretty good idea of the run rate.

Okay. So the Cooper -- I mean, I think your question on the Cooper synergies was about how much of that we might get in 2022? And at this point, Rod, we said we've gotten about $20 million effectively second half of this year. And so we have not given a number for 2022, and we're not going to give one for right now. We'll come back to that when we get to the year-end earnings call. But certainly, that $20 million we're getting in the second half, we'll get a full year benefit of that. We will start to get some of the other synergies. I will say that there are a number of the cost-saving programs for the integration that are going to be reliant on systems implementations. And a number of those system implementations, we won't get through the work on those until the end of 2022. So there is a natural step-up when we get beyond 2022 and get into 2023. But we're still going through some project planning here. We should be able to give you some more visibility when we get to February. You're -- so that's on the point on Cooper and how to think about the Cooper integration for next year. For the European line distribution, I'm actually glad that you asked the question because that program, I think, is something we really feel good about given the results in the third quarter. The team has been able to recover market share. And in fact, third quarter share, I think, is already back to 2019 levels, which is -- I think we're not sustainably there yet, but we've got -- that's a really good indication of what a good job the team has done working through the changes in distribution. And we have also started to capture some additional margin in the European business. And we had originally said, based on our experience of restructuring distribution in the U.S. that we expected to be able to get another $2 to $4 a tire of margin in our replacement business in Europe as a result of the work that we're doing. And it's still early days. We were expecting to get that over a 3-year or 4-year period of time. But I can tell you, we're already getting some benefit there in terms of the additional price and additional margin that we're getting on our tires. So I think, ultimately, our distributors are also doing better. And so this was about both opportunity to increase the value that we got for our product in the market, but also to make sure that our distributors profitability on our brands was consistent and improving. I think we're making progress on both fronts.

Yes. Darren, I would just add, Rod, I mean, really well done by the team. They took some pretty major decisions early on, on impacts that were significant to us as well as taking some decisions in the market that stopped some of the unauthorized Goodyear tires moving around. And those efforts were difficult, but are working, as Darren said; so we're very pleased with the direction.

Great. Thank you.

We will move next with Itay Michaeli with Citi. Please go ahead, your line is open.

Great, thanks. Good morning, everyone. Just wanted to kind of get your thoughts on -- or your latest thoughts on kind of longer-term earnings power of the company. Rich, you kind of compared the current period to the recovery post '09. I think when I saw, eventually had $2 billion. And given all the moving pieces, any kind of high-level thoughts on how you're thinking about Goodyear's medium-term earnings and margin power? Maybe if you can also plan on free cash flow, that would be helpful.

Yes. So Itay, you understand the background here that leading up for the pandemic, our long-term average segment operating income margin was in the mid-8s, so call it, 8.5%. And we obviously have seen some compression going into 2019 that taken it down below that. And over the last two years, we've taken several actions to get our margins moving back at least towards those levels, including the restructurings that we've done in manufacturing for the Americas and EMEA, including the aligned distribution work that we're doing in Europe. And I think you're seeing the benefits of those. And so, we're now here in the third quarter, we're around that 8% segment operating income margin driven by the strong performance in the Americas. We haven't quite gotten there yet on a rolling 12-month basis in terms of Goodyear's legacy-based business, but we're close. And now we've added the Cooper business. And as Rich said, I mean, Cooper had about a 14% operating income return on sales in the third quarter. So that is also helpful. So on a merger-adjusted basis, that's why you're seeing numbers like 9%. And we're feeling very good about that. Near term, I think hard not to be a little bit cautious because of the inflationary pressures, which -- I mean, we know we've got to offset them. We've got a track record of offsetting them. Mathematically, when we get into these periods of raw material inflation, as much as we can recapture the cost and maintain income, we still have a larger denominator, and that tends to make the progress on margins a little bit harder. But I think we feel good about the momentum, and we continue to be confident in our ability to get to double-digit margins in the business in the intermediate -- call it, intermediate medium term. So I think our confidence there remains very high. And then, you had another -- I think you were also asking about free cash flow, Itay?

Yes, that's right. Yes, definitely on the cash front. And also just on maybe the kind of CapEx into next year, kind of given what you're guiding for the Q4 exit rate, yes. And thanks for the reminder.

Sure. No, that's okay. So I'm going to do this -- I'm going to use some of the pro forma information that is going to be -- it will be provided in our 10-Q when that's published later today. But we provided some pro forma information so that you have an easier time getting a feel for what the combined Goodyear and Cooper business would look like if that -- if our businesses have been combined before 2021, just so you get an idea of what the -- a little bit more what the run rate of the combined business looks like. And so, if we look at -- if you look at the trailing 12 months pro forma EBITDA for Goodyear and Cooper combined, we have an EBITDA of around $2.3 billion. If we then use kind of where things are running in terms of interest expense in the fourth quarter, so after we've already done the acquisition financing sort of run rate on rationalization, tax payments, pension costs and the CapEx, which on the two companies combined, on a pro forma basis, would have had CapEx of around $1.150 billion. It's kind of where things are running this year on a combined company basis if we took and combine the companies for the full year. You do all that math, you come up with a run rate on cash flow that would be, give or take, $300 million positive. At today's earnings at current run rate of CapEx , the -- and that's before -- obviously, before we get any benefit from synergies. So I think moving forward, there's going to be opportunity to add those synergies 2022 and 2023. I think that assumes, of course, that there's a working capital while we've reinvested some this year. I…

Terrific. I appreciate all that details. Thank you.

We will take our last question from Victoria Greer with Morgan Stanley. Please go ahead.

Good morning. And yes, just a couple, probably a bit shorter term. Firstly, on the Q4, to your point, that firstly, we clearly can expect some sort of step-up in terms of pricing given the timing of the price increases and also the need to think about price being able to offset inflationary headwinds, do you think that we can expect the $50 million cost headwind you've flagged from the U.S. factories to be fully offset also by price and mix as well as the raw materials for the fourth quarter? That feels achievable given the other dynamics that we've talked through, but just wanted to ask that explicitly. The second thing was thinking about mix, clearly, that has also been helpful with weaker OE this year. How much of that will we need to think about maybe as reversing going into next year? Or has really the majority of the move so far this year really been a brand price? The third thing then, I just wanted to get a bit of color, please, on your own inventory levels really in terms of volumes. Clearly, we can see the balance sheet inventory number stepped up quite a bit, but there's a lot of raw materials and Cooper aspects going on in there. So could you talk about your inventory levels a bit in terms of volumes, please?

Sure. So Victoria, let me cover that last point first, and I'll do that because I know that at your conference, we spent some time on inventory levels. And I think we were talking about at the end of June, how much lower our days inventory were compared to where they were back in 2019. I'll say that our picture at the end of the third quarter is really not much different. So our inventory levels in terms of units are still 20% or so below -- about 20% or so below where they were in 2019. And that's -- it's different by geography, but I'll say the Americas has seen -- the greatest decline is the region where we still have the greatest need to replenish our own stocks. So I think that as we're able to do that, I think that obviously will produce some additional growth opportunity that we're not getting the benefit of right now. The impact -- I want to take your questions in reverse order, we'll come back to Q4. But the OE impact on mix, I think the -- absent a much more dramatic recovery in OE production than we're expecting and much more dramatic than IHS and other third parties are predicting, absent that, I think the impact of OE recovery over time, net-net, is not going to be a negative for us. So there will be a bit of pressure on mix, but it will come at a time when -- particularly in our international business units and may be most impactful in Asia, we're going to be getting the benefit of that volume. And we do have underutilized capacity in Europe and in Asia at this stage. So the volume impact is going to be a positive. A little bit…

Great. Thank you very much.

Sure.

And this concludes today's Q&A session and the Goodyear third quarter 2021 earnings call. Thank you for your participation. You may now disconnect.