Good morning. My name is Keith and I will be your conference operator today. At this time, I would like to welcome everyone to Goodyear's Second 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. Please go ahead.

Thank you, Keith and thank you, everyone for joining us for Goodyear's second 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. As 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 could 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 our 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, on 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 will now turn the call over to Rich.

Great. Thank you, Nick and good morning, everyone. I'd like to start today by welcoming all of the Goodyear Tire associates joining us this morning. I got the opportunity to meet many of you in recent weeks, and I've been so impressed by your passion for Cooper and for our industry. From our initial interactions on through to our integration meetings and business reviews, it's clear that your industry knowledge and experiences will bring tremendous value to the combined organization. Sharing ideas and best practices will make us a stronger competitor and allow us to find new ways to better serve our customers and consumers. Our journey is just beginning, but I'm really excited about our future and about what we can achieve together. Let me begin my prepared remarks today by providing some comments to supplement this morning's press release. For the second quarter, we delivered $349 million of merger adjusted segment operating income, which is over one and a half times what we earned in the second quarter of 2019. These strong results reflect continued recovery in demand, and we outperformed industry growth across many of our businesses. At the same time, we delivered the highest quarterly contribution of price mix that we've seen in our business in nine years and we continue to have good momentum. As I look at the global consumer replacement industry during the quarter, we continue to see a sustained path toward recovery. As you would expect, this general theme is largely carried by mature markets. We continue to experience pandemic-related weakness in several of our emerging market countries. More broadly, however, economic recovery remains robust, particularly in the US and China. Given these markets play to our strengths, we saw global consumer replacement market share rise nearly one point. In our OE…

Thanks Rich. Our results in the second quarter were again, a reflection of strong performance by our team and their focus on continuing our recovery market share, improving our manufacturing costs and managing for cash and pursuing all of these while also delivering strong price mix to address rising raw material costs and inflation and many other cost categories. These results also illustrate the momentum built up over the last year across our consumer replacement OE and commercial truck businesses and as of June 7, we had the momentum that the Cooper team has developed to the overall equation, creating even more opportunity going forward. We're excited to have completed the combination so quickly, giving our teams a chance to work more closely together and accelerating the opportunity to deliver the full benefits of the transaction. While our team is delivering, we have to acknowledge the added volatility we've experienced at our end markets during the second quarter. We saw lower OE production than we anticipated a problem that seems likely to persist longer than originally thought and we saw increased disruptions in our emerging markets businesses. Some COVID related, particularly in Asian markets and some the results of social unrest was significant impact on our South Africa and Columbian manufacturing facilities, and still others were reflecting the difficulty of shipping products to markets like the Middle East, where we don't have a manufacturing presence. Overall, this slowed down the global volume recovery temporarily, but the pent up demand in these markets will be a source of further growth over the coming months. Operationally, our team's done a great job keeping our factories fully supplied. So while we continue to see escalation in raw material prices, we have seen no impact of material supply on our production. Consistent production has…

Our first question today comes from Ryan Brinkman with JPMorgan. Please go ahead.

Hi, thanks for taking my questions. I wanted to ask how you're feeling about your relative pricing power and ability to therefore offset commodity cost headwinds. Maybe in the context of a few factors that I thought might be important, but of course, any other factors you think might be important, maybe starting with where we are at with regard to consumers average tread depth on their tires. I think that you likely have some good insight into that, given the large number of retail stores that you operate. So what are you seeing there as miles driven recover? And then, if maybe replacing tires is something that Americans deferred earlier during the pandemic, but maybe now I need to catch up on making those purchases somewhat less discretionary. Another factor I thought to ask on, if it's important is all of the monthly child tax credit and other transfer payments that many Americans are now receiving, whether that could help. And then lastly the increased equity that consumers have in their used vehicles, right? So the Manheim index is up a little bit today, but if use cars are worth 35% more than before the pandemic, does that help rationalize purchasing a new set of tires and maybe paying a little bit more for those tires, if the vehicle itself is so much more valuable, how do you think these or other factors will play into your ability to implement and to stick the price increases that are required to offset raw material inflation.

So Ryan there there's a lot there, but I think all really headed in the same direction and I can start by saying everything that you're talking about I think is manifesting itself in a positive way in the market right now. Demand is good, particularly in the U S sell-out is good and we think that's something that's going to continue on going forward. If you peel back what you said in terms of tread depth, we're not seeing anything really unusual in terms of more worn-out tires, it's been pretty consistent. And I can tell you that that's really been pretty normal. The last time we saw really, really worn out tires coming in was in the great recession. Since then it's been fairly consistent. So I wouldn't say that, that alone is driving anything. Having said that, your comment about child credit or other government programs putting money in individual's accounts. I'll tell you, we always see a correlation between things like tax returns or tax refunds coming back into people's account and we see that spending manifesting itself out in our channels, a number of them, and particularly across some of the mass market, the mass merchandisers as well that we deal with. So there's definitely a correlation with that going forward and from a used tire, or excuse me, in a used vehicle perspective and the increased value in use vehicles, I would also tell you that yes, absolutely, I think as people keep their vehicles longer, the importance of tire from a safety perspective and the fact that they're keeping it longer, not turning it back, not lease it -- not sending it back on lease or whatever it might be, also plays in people's minds to make sure they have a good set…

That's helpful. Thank you. And then my last question is, I'd always been fairly impressed by Cooper Tire's ability to fund the research and development of tires, including more expensive, high value add tires in order to effectively compete with other tire manufacturers that were really multiple times larger and more global than they were and with more financial resources and yet still generate the margins and returns that they did. Do you think that Cooper's culture had an element of thriftiness to it or sort of doing more with less? And if so, how do you ensure that the combined organization can learn or benefit from different aspects of the Cooper culture going forward?

So, so Ryan, Darren and I'll tag team a little bit here, but I would say you've sort of summarize some of the positives that Cooper has and why they were so attractive for us to do the deal that we did with them. Clearly they have very, as I mentioned in the beginning of my remarks, very talented people, very effective great product line, a great go-to market strategy through the channels that they deal with. And I would say what we thought we're probably seeing we're even more impressed with what the people can do there. The teams can do. Great to have them on board, great to have them to be part of the team. As we said from day one, clearly I think that we bring some things to the party, but equally they can teach us some things in some of that effectiveness, some of the way they do their developments we're all ears and we're going to learn together from them. So our job as part of integration, and maybe this is where I'll turn it over to Darren, is to make sure that we don't, we not only don't lose that element, but that we actually create an environment where we can benefit from it going forward. That's the plan.

I don't know. I think so I guess maybe echo the point as everything we've seen over the first eight weeks post-closing has reaffirmed the things that we were excited about in the combination and has further built the confidence that we have and the value we can create here. We announced with the transaction that we would expect to realize at least $165 million deliver $165 million of run rate cost synergies within two years. I think we expect to realize at least that along with the additional cash and tax benefits, and there's a number of various, those surgeries on come from, but it does include, and I think part of the reason we're being methodical right now is it does include making sure that this is a process of taking the best of both worlds. So it's not applying Goodyear approaches to Cooper's business. It is looking at each group and each function's practices and making sure we're picking the right ones. And I think you're -- the ability to do some things operationally with lower costs and less resources is one of the key learnings that we're going to have from the Cooper team. And, yeah, so I think we're worldly listening very carefully. Right now we're going through, effectively at three month process with the integration leaders from each side to develop more detailed plans. And once we move past that process, I think we're going to be able to start to share more of the specific insights and more of the specific areas of opportunity, to provide some more details. Yeah, we're not in a position to do that today. But I think moving forward, we're going to have an opportunity to update you and share with you not just the general points that we're making today, but some of the specific areas where we're seeing opportunities like the one that you're mentioning right there.

Next question is from Rod Lache from Wolfe Research. Please go ahead.

Hi everybody. So pricing is really just a great barometer of what's happening in terms of supply and demand. But I was just wondering if we should also be considering the potential for mix to moderate a bit once light vehicle production accelerates just since the OE has historically been a little bit less profitable versus replacement. And also relative to the weaker OEM demand right now, is that helping the industry rebuild inventories on the replacement side or our raw inventories on our operations sides still pretty tight.

Yeah. So Rod, let me take your last question first here. And I do think that there is some evidence of channel inventories recovering and that we've -- the industries sell in, which is up about 12% from the 2019 levels is above the sell out, which is us been single digits. So it's still very good, but I think certainly it is a little bit, it's been a little bit ahead of sell-out, which has meant that we are making some progress restoring inventories in channels. Unfortunately, we have not made any progress yet or any significant progress in North America. We're restoring our own inventory, which for us to have the right level of service, we still need to do so there is there's going to be a need for us to keep producing, essentially everything that we can produce. I think that the question of recovery of OE volume and what impact that will have on our mix is a fair point. It seems like that recovery in OE volume is going to happen over a longer period of time that we might have originally thought just given that the semiconductor issues seems turning out to be more protracted than might've originally been expected. So I think ultimately that's helpful, but I think that there's two other things that I think we are upbeat about. And that is that all we've been recovering share of fitments in OE our win rate over the last two or three years has been, a real positive and we had expected to be rebuilding our OE market share. So as we get to the point where the OEs are catching up on production and restocking their dealers, they're going to be doing it at a time when we've got a greater…

Great. Thanks. And just two really quick ones, hopefully quick, a lot going on this morning. So it's possible that my quick math is wrong, but are you already converging now on that original 8% SOI margin target for Goodyear? And, and second, just, if you can just give us a sense of the cadence of synergies with Cooper Tire, just what are the key actions that are being taken? How should we think that and how should we expect that to start getting rolled in?

Yeah. So Rod on synergies, I think inevitably there are going to be some savings that we'll get this year down because there are some things that, effectively happened right away. There are some physicians that that were effectively went away immediately because of having one public company instead of two public companies. The tax savings opportunities began right away, but I referenced the detailed planning process that our teams are going through. And we're have literally hundreds of synergy ideas that the teams have identified that we're looking at and we're developing work plans around. So hard to get too detailed about the cadence and I don't think that the larger part of those savings are going to be happening in the second half of this year. I do think that we'll get a large part of those synergies starting 2022 and once we get past this initial planning process, I think we'll be able to start to share what that cadence might look like in 2022 versus 2023, and even how it might evolve during 2022. So, I love to save that one for a future call. Back to your first question, I would have been disappointed if you didn't ask it, which is sort of our trend towards margin targets. And we've said that and we've talked about on prior calls, the fact that with some of the actions we're taking, we saw our way to, we'll say getting back over 8% in sort of the near to intermediate term. And, I guess we're, we're looking at it now and saying, there are different ways that we could look at this and obviously we've introduced merger adjusted segment operating income, but we've got a quarter here for over the 8%. If we take a look at those…

Yes. That's really good. Thanks for that. Darren,

The next question from John Healy from Northcoast Research. Please go ahead,

I'd be remiss if I didn't say congrats on the quickness in terms of how you close the deal and just the progress in the second quarter. One of the ask though, a little bit about Cooper strategy going forward, its 60 days under your belt with the assets. Any initial thoughts on distribution either at retail or in the wholesale market, obviously a part of Cooper's strategy was to get bigger in the mass merchant channel. And obviously you guys do well there. So kind of any sort of expectations we could set for how Cooper might be playing into that channel. And then secondly with the relationship with HD, obviously you guys moved away from that channel and that player, two or three years ago. Any thoughts in terms of how Cooper might continue to operate with that going forward?

Yeah. John, I think, good questions and I would say at this point, it's too early for us to answer that with any specificity, I'll go back to what Darren outlined earlier is our integration process is a very thoughtful and methodical process that we're going to, to make sure that we achieve and overachieve what we said we were going to do. I will tell you though your thought process is absolutely the right one. We see this as beneficial for our customers and for consumers to expand the Cooper line particularly in certain tire lines, but also in terms of the channels that they go to. We see lots of opportunities to get the efficiencies on the go-to market strategy as well. And I think that exactly how that plays out is something that we are spending a great deal of timeout. We're I would say no less encouraged. We're actually more encouraged to the opportunities that we see. And I think you'll hear us talk more about that with the specificity you're looking for as we get through the integration process. So I think you're thinking about it right. But we'll just we'll hold off to lay the details out to a bit later.

Understood. And just wanted to ask a little bit on sourcing. Darren, I think you made a comment or prepared remarks about how you were comfortable with the situation but there, is a fair amount of speculation and industry kind of noise out there about natural rubber and potentially multi-year shortages on that side of things. So kind would love to get your perspective on what's going on there. And how problematic is some of the conditions in Asia with flooding and treat disease on the supply chain. And can you utilize synthetic rubber more to kind of offset if that situation does become as complicated as some speculate on.

Yeah. So John you're remembering correctly that there is a reasonable amount of substitution flexibility that we have moving from natural rubber to synthetic rubber and moving back the other way. And we've utilized that in the past, and generally we've utilized it to address the price differential between natural rubber and synthetic rubber. In fact, right now the prices of the two aren't too much different and we have not really had any significant availability issues on either product. That doesn't mean our teams aren't working very hard to make sure that that's the case. And certainly they are and certainly the winter storms that went through the Texas Gulf coast tightened up supply for petrochemicals generally. And transportation has been really the challenge on natural rubber more than availability. It's just a matter of getting containers and being able to transport the rubber from Asia and other rubber producing areas to the locations where we have factories. I don't really think we're -- I mean, at this stage, our view is not that we have any sort of long-term supply issue to deal with. And I think the natural rubber prices probably reflect that. And then they've been relatively stable. The real questions I think, have been around the petroleum-based products. And we did go through a period of time where there was some where supply was very tight and now we're going through a period of time where oil prices are up. And obviously there's an environmental overhang for production of some of these products. So, I think that we continue to work there. Our procurement team and our operations teams that they have had to take some new approaches and think about new transportation modes and even in different supply lines and expand our group of suppliers in order to make sure that we're addressing the long-term need to ensure availability. And I think it has done a good job on that, but at this point we really have not seen a lot of -- we haven't really seen any disruption coming from it.

Hey, Darren, I'm going to just jump in on two points. And one just echo the comments, our Chief Procurement Officer Maureen Thune and her team have just done a fantastic job, making sure we don't have any of those supply issues by really being forward-thinking in too many people to name, but our supply chain teams all around the world have done just a great job to make sure that our plants are functioning and staying open, even via in business continuity mode from time to time. And John, just the second point I would make the near term material situation is exactly like Darren described. I would also tell you though, longer term, any midterm and long term, we're also focusing from a sustainability perspective on other material replacements. You've heard us talk a lot about rice husk, ash and soybean oil and those are really great additions to make a more sustainable tire. But our goal is to make a tire, a fully sustainable tire by 2030 as we go forward and before that, ideally, so we're working on a lot of things to create a different type of materials that we use, which will have an impact certainly on the traditional materials that we have as well. So nothing to speak about now, but I wouldn't put that sort of in your thinking, as you think about material that goes into tires and what's happening around the world as well.

And our next question is from Victoria Greer with Morgan Stanley. Please go ahead.

Good morning. A couple of, from me please and firstly, on price mix versus real materials obviously very helpful to be guiding for that to be positive in Q3. Could you give us a feeling for the potential magnitude of the positivity versus the very big $130 million that you've seen in Q2? And could you also talk us through a bit how you see that net for Q4 and as well in your, in your tibial guidance, how would you think about that split roughly between Q3 and Q4? And the second thing on the Cooper transaction and the $50 million of one-offs that we've seen in Q2, is not really just something that is a one-time issue happens in the closing of the deal, or do we have to think about, those kinds of numbers happening again in the second half?

Yeah. So Victoria let me handle your last question first, and we've put a couple of notes here on page 17 in our slide deck to address the impact of these merger related costs. And in fact, the biggest impact is going to come in on those merger related costs will come in Q3. So we've got about $85 million of those costs in Q3 relative to the about $50 million that we had in Q2 and between Q2 and Q3, that will take care of the impact of the mark to market of Cooper's inventory on June 7th. And that was the single biggest factor. There are some ongoing costs, including the mark-up for intangible assets that have to be amortized. And that's one of the other elements and that's more one that is ongoing. So that I think is the -- there's a way to think about that. So once we get to the fourth quarter and we've got that the effectively $15 million to $20 million of those merger related costs in Q4, that's more of the ongoing yeah. So that's more what you would see going into 2022 as well. On the price mix versus Ross question, I think, I guess first point is I think we've got confidence that we're going to be able to manage the situation through the fourth quarter as well, and continue to work to keep price mix ahead of the raw material costs. Fourth quarter raw materials will be a bit higher than the third quarter. So if we take our guidance on raw material costs for the year of 425 to 475, if I pick the midpoint of 450, we saw 15 of that in the first half. So that means about 435 for the second half. And we've said in our remarks today that less than half of that would be effecting the third quarter. So the impact of raw materials in the third quarter will be less than half of the 400. So I'll let you, we've said slightly less, so, we'll let you make your own assumptions there, but I think that you can make the assumption that there's got to be something is in approaching a couple $100 million in the third quarter of raw material costs. And we've said we'll be able to get our price mix above that level to keep the number of positive, and then there would be another increment going into the fourth quarter. So that price next would have to take another step up in Q4 to continue to stay ahead of raw materials.

Great. Thanks very much.

This will conclude today's Goodyear second quarter 2021 earnings call. Thank you for your participation and you may now disconnect. Have a great weekend.