Good morning. My name is Ashley and I will be your conference operator today. At this time, I would like to welcome everyone to Goodyear’s Second Quarter 2022 Earnings Call. I will now hand the program over to Christian Gadzinski, Senior Director, Investor Relations.

Thank you, Ashley. Good morning and welcome to our second quarter 2022 earnings call. On the call with me today are Rich Kramer, our CEO; Darren Wells, our CFO; and Christina Zamarro, our VP, Finance and Treasurer. We will begin with a few words on forward-looking statements and non-GAAP financial measures. Forward-looking statements involve risks, assumptions and uncertainties that could cause actual results to differ materially from those forward-looking statements. For more information on the most significant factors that could affect future results, please see Slide 2 of the supporting presentation for today’s call and our filings with the SEC, which can be found on our website at investor.goodyear.com, where a replay of this call will also be available. A reconciliation of the non-GAAP financial measures discussed in today’s call to the comparable GAAP measures is included in the appendix of that presentation. And with that, I will turn the call over to Rich.

Great. Thank you Christian and good morning everyone. Thank you for joining the call today. During the quarter, our business continued to perform at a high level. Our second quarter sales and earnings performance were the result of solid execution by our teams around the globe who helped grow unit volume while driving pricing actions that covered not only raw material cost increases, but most other inflationary headwinds as well. This is the third consecutive quarter where we have done so amidst 40-year high inflation levels. Revenue of the combined company grew more than 30%, including 15% in our legacy business. The result was the highest second quarter revenue level in more than a decade. Our consumer tire volume globally grew 6% and commercial grew nearly 2%, excluding Cooper and we achieved this volume growth while increasing revenue per tire by 14% compared to last year. Cooper also contributed meaningfully to our results in the quarter as it has since we closed on the transaction now just 1 year ago, a noteworthy milestone. I am extremely proud of the results our team delivered during the quarter and through the first half and they did so in an environment of broad-based supply chain disruptions and staffing challenges in our factories, challenges that have carried on longer and more deeply than anyone expected. In the end, our teams rose to the occasion and drove another excellent quarter. I am likewise pleased with what our teams have been able to accomplish over the last year to combine Goodyear and Cooper. While work is ongoing, we’re making continued progress on achieving the full value of the combined companies. Our continued work is focused on furthering our integrated brand and product portfolio and driving increased efficiency in our operations. Looking forward, we see the headwinds…

Thanks, Rich. Our second quarter results continue to reflect strong top line growth, strong growth in revenue per tire and significant benefits from the Cooper combination. And we continue to increase earnings despite cost inflation and the continued disruptions from COVID. As Rich mentioned, we reached the 1-year anniversary of the Cooper transaction in June and remain confident in our ability to achieve or exceed announced synergies. As seen in the income statement on Slide 7, our second quarter sales were $5.2 billion, including $663 million of incremental Cooper sales. Recall that the Cooper transaction closed on June 7 of last year, so the 2021 base period included about 3 weeks of Cooper results. Sales from Goodyear’s legacy business increased 15% driven by the impact of pricing actions and volume growth. Unit volume increased 21%, including the effect of Cooper and growth in both the replacement and OE channels of our legacy business. Segment operating income was $364 million. Excluding $8 million of merger-related costs, merger adjusted segment operating income was $372 million, including the contribution of $126 million from Cooper’s operations. The effect of price increases and mix offset raw material costs and most inflation on dollar basis in the quarter. Although segment operating income as a percent of sales declined compared to last year as a result of both revenue and costs rising by these amounts. Historically, this margin compression for material cost inflation reverses when cycle turns and raw material costs begin to fall. After adjusting for significant items detailed in our press release, our earnings per share on a diluted basis were $0.46, up from $0.32 a year ago. The step chart on Slide 8 summarizes the change in segment operating income versus last year. The effect of volume in our legacy business compared to the…

And we will take our first question from John Healy with Northcoast Research. Pleas go ahead. Your line is open.

Thank you. Wanted to ask a big picture question before we kind of dive into some of the quarterly results. But Richard, comments about EV and kind of where your positioned continues to be consistent and upbeat. But from what I’ve heard from you guys, it sounds like more portfolio wins and more technology going into the tire and maybe that helps you get more revenue per tire over time. But wanted to ask just about what the move to electric does to replacement demand longer term? I know it’s something that I’m sure you guys are studying, but would just love to get your thoughts about as EV rolls into the car population, what does it do to replacement demand? And is this the first catalyst in what I would say, years that maybe the technology of the tire doesn’t work against the replacement market and maybe causes more growth in the replacement market. Just wanted to get your thoughts there.

Yes. I mean, John, listen, I will agree with what you said. I think near-term, as we’ve talked about in the past, the wins we’re getting in OE have a better margin profile for us. So from a near-term perspective, it helps us immediately in terms of the portfolio. And then longer-term, if we just stick with EV, and I think the way we think about it, by the way, it’s not just EV. Those EV tires are going to continue to have more technology in them, around connectivity. And I don’t just mean the ultimate intelligent tire, but I mean connectivity, whether it’s Bluetooth or some other things that are going to happen as well. And those – some of those things are actually in the works as well. But I think the long-term sort of profile of EVs are going to be that tires are essentially used faster, right? I mean they wear out faster with EVs because of the torque going to the engines – or excuse me, to the wheels. And I think that’s a trend actually driving an EV. I’ve seen it firsthand that, that actually happens. And if you talk to people, you’ll see the same thing. So I think long-term, it does say that tires are going to wear out faster, of course, dependent on the individual driver. But broadly speaking, that will happen. And remember, that’s also a function of the weight of the vehicle, the way and the torque puts more usage on the vehicle itself. So I think long-term, it bodes very well. John, we also have to be balanced. I think the number right now is about 5% of the car park are EVs. So, as you rightly point out, this is a trend that is coming, and it’s a trend that we have to and are addressing right now to make sure as that number continues to grow that our products are there on the road and are ready to be replaced as those tires need them. And finally, the thing that I think most people will also appreciate as you’re on the road with EVs, the number of parts that need replacing or the number of parts that actually function are substantially reduced. Two of the main parts that need to be replaced consistently and frequently are brakes and tires. So from a tire perspective, it certainly puts our industry in a position of need and a position of consistent revisit as people use those vehicles. And remember, EVs will last longer as well in terms of miles on the road, and those tires will be very important to them as those EV vehicles are used over their lifetime. So net positive.

Great. And just a question for Darren, just on the raws a little bit. I think you guys said $1 billion in the second half of the year and that Q3 would be higher than Q2. Is it pretty evenly split between Q3 and Q4? Should we think about $500 million a quarter? Or does it split differently than that? And you mentioned that in Q3, you should have price/mix positive. Do you need further price actions to have Q4 be positive on a price/mix standpoint? So I was just hoping to get some color there.

Yes. So John, the split on raw material cost is weighted toward Q3. So we’re expecting to have about $600 million of raw material cost increases in the third quarter. The only nuance that I want to point out there, if we’re comparing Q3 to Q2, in Q2, the variance analysis for raw materials, which was the $419 million that’s shown on Slide 8, that is a good year of legacy business only for the raw material cost increase. The Q3 $600 million, we’re actually starting to report the combined company. So there is like a natural increase of about 25% in the tire business. So the numbers are going to be naturally 25% higher just by including Cooper. So – but they are still even beyond that. So that $400 million, if you add in Cooper, would become something more like $500 million equivalent. And then we’re obviously moving up to $600 million. So there is a step up there. But then we’re seeing it moderate in Q4 based on where feedstocks are right now and sort of our general outlook. So it won’t be quite as big a challenge. We’re looking at Q3, we’re comfortable that we’re in a good position given the pricing that we’ve announced in July to more than cover raw material costs in Q3. And I think that’s what we’ve given the reference. The comparison of price/mix to raw materials, which we’ve been – I mean, price/mix has been exceeding raw materials the last couple of quarters. We expect it to be similar in Q3. So we feel good about how we’re positioned in Q3. We’ve got raw material and other inflation that will start to be less of a factor year-over-year in Q4. And so I think we feel – there is less pricing than year-over-year that would be needed in Q4. I think we feel good for that reason as well. Although obviously we are going to continue to monitor the trends there and we will take additional actions if we need to, to stay on top of it.

Great. Thank you so much.

Thanks, John.

And we will take our next question from James Picariello with BNP Paribas Exane. Please go ahead. Your line is open.

Good morning, James.

Hi, good morning, guys. Can you talk about the quarter’s strong volume and factory overhead flow through? That certainly stood out. And were there any, I don’t know, one-time favorable items in the volume in the operational side of things? Or is this a sustainable good look for the rest of the year?

No.

Yes. I think there is nothing unique in there. That’s just good operational performance. And I think we had some area – obviously, there is some industry that goes into volume. But overall, market share, our team continues to deliver very well. We’re getting some recovery there in OE, still ways to go on OE. But other than in Asia, where – our replacement business is back above pre pandemic levels. So we’re sort of in a recovery in replacement. We still have the recovery in front of us for OE and our share performance has been good. So I think that makes us continue to feel good about what volumes are going to be.

Yes. And Darren, I’ll just add to it, James, and I appreciate you pointing out. I think you’re also seeing, if I zoom out for a moment, the benefit of a lot of the capacity issues and managing our capacity within the footprint. Those issues – those decisions that we took on plant closures a while back, I think you’re seeing the benefit of that now. And in addition to that, maybe a shout out to our team, all the plant optimization and operational excellence work that we don’t talk about so much on the calls really are driving efficiency in our plants. And then it’s really coming to play right now as you see all the supply chain disruptions and energy increases and labor shortages and all those things. And I think our team has really managed that in this very volatile environment extremely well. So I appreciate you highlighting that.

Yes. No, I appreciate the color. I think you touched on this, but can you kind of – can you revisit what – how the dealer inventory channels are looking and the sell-through rate as we think about the additional pricing that could be needed in the fourth quarter? Clearly, inventory levels and the sell-through aspect things will determine what pricing could be received in the market. So, thanks.

Yes. James, I’ll start and I think Darren may want to jump in again on price as we go. But look, I think we said it in our remarks, and it’s absolutely worth repeating. I’ll start with North America. I mean, our channel inventories are really pretty good right now. And they are down – in the U.S., they are down about 15% to 20% versus year-end and a little bit below pre pandemic level. So really good levels heading into the second half. And I think that’s largely a part of – if you remember last year, distributors are trying to get a retire that they could. They were going long on inventory. And we also had price increases coming pretty heavy. So I think you saw that sort of build up last year. I think there is better supply out there right now. And I think the dealer – distributors don’t see need to go along in inventory. And I think that’s got the channels in place in a good place. And I think if we sort of link it to the second half and we linked it to sell out, we know sellout has been down a bit compared to last year when we have that big post-COVID recovery. But also what we saw, particularly in our business, that really encouraged by our sell-out trends. In May and June, we actually did better than the industry. And that, too, is contributing to those lower channel inventories. And I think, again, supports the need for good sell-in in the second half, even though we have a bit of a volatile environment. So I think that’s a net positive. And I think that lines up well. In Europe, look, inventories are a little bit higher, third higher than they were a year ago. But also there, we have some unique things going on. And again, I think particularly, I’d highlight the situation on what’s happened in Russia and particularly around winter tires where that winter tire availability has caused distributors to load up a little bit more than they might have in the past. And again, for us, look, our plants, as I mentioned earlier, are functioning well. We’ve been a reliable supplier. So we’re not particularly concerned about that. Certainly, we will keep our eye on it. But again, we think we’re pretty well positioned for the second half.

Thanks, guys.

Thank you.

And we will take our next question from Rod Lache with Wolfe Research. Please go ahead.

Good morning everybody.

Hi Rod.

Had just a couple of things first on commodities and pricing. So, if spot prices for raw materials stay where they are right now, could you just give us a sense of how the math would look for you in terms of presumably a little bit of tailwind as you look out to 2023 – spot will be anything but flat. But just curious about how the math looks at the moment. And there is obviously just more broadly, a lot of signs of macro weakening in the U.S. and especially in Europe. At this point, does that play any role in the pricing analysis that you guys think about, or does it feel like just supply-demand conditions are structurally pretty good in supporting that pricing?

So, Rod, there is a lot to unpack there. But I think overall, we are seeing a pretty stable demand environment. And we are watching and doing a lot of analytics, trying to figure out if we are – if we were to start to see any lead indicators. But so far, the demand – end-user demand is remaining pretty good, good in consumer, good in commercial. And that is notwithstanding the macroeconomic situation, notwithstanding price increases from us and other members of the industry. So, I think overall, that’s feeling pretty good. Now, when we get to the fourth quarter, I mentioned earlier that raw material costs will not be as big as year-over-year headwind in Q4 as they will be in Q3. To the extent we continue to see the flattening out of raw materials, and we are even seeing some raw materials start to come back down. And to the extent we see that, then that trend will continue into the first half of next year. So, we will see less headwinds from raw materials. We are also seeing other costs flatten out. So, in the second quarter, I guess as an example, like our increase in transportation for finished goods, by itself was $55 million year-over-year. So, really significant increase in the cost of finished goods transport. We are going to – by the fourth quarter, we are going to be starting to anniversary some of the big step-up in transportation ocean freight. So, that’s no longer going to be as significant a year-over-year factor, so effectively – that we will be catching up with those costs. And so I think that there is no other factor that’s going to be helpful. So, it will be less increases in raw materials, less increases in some of the other costs. And obviously, we will continue to benefit from the ongoing impact of the price increases that we have announced this year.

Okay. So and I guess that just segues into the next question I had about just inflation. Your tone is somewhat more optimistic. And I know you are not commenting on the new contracts, is there are a lot of puts and takes there, including energy costs and obviously, labor costs and things like that. Any kind of high level on how we should be thinking about inflation broadly? You at one point, used to have – you used to be able to neutralize inflation with productivity. Do you have line of sight and maybe getting to that at some point here into 2023?

I think it’s important that the big step up inflation started in the fourth quarter last year. So, I think as we start to anniversary that first big step up, then we are starting to move back in the direction of an environment that may be more balanced. So and we are – yes, in the fourth quarter, seeing that getting through the second quarter and third quarter, which are the peak of the inflation as we see it right now. I think it’s a good thing. We started to see fourth quarter with less of a year-over-year increase. And then we are going to start to get into the beginning of next year where we will anniversary some of the big step-up of the energy and other costs in Europe that really just started earlier this year and that will – I think that process is likely to continue based on everything that we are seeing right now.

And Rod, I would just maybe add to Darren’s comment and I know you know it well, we go back to 2012, 2013, 2014, we saw massive, at that point, raw material increase. As you may recall, natural rubber was approaching $3 a pound, and we had lots of headwinds there that was the first time we saw those things. So, not dissimilar today, albeit the costs are obviously different than coming in a lot more buckets. We managed very well through that situation, both on the way up as we hit those costs and on the way down as those costs moderated. And I think what you are seeing from Q4 all the way through now is that we are doing the same thing. And I think that’s what you should expect going forward. We can’t predict, as you said, that macroeconomic environment. We certainly didn’t predict this environment as specific as what we have had to deal with, but we have managed through it. And I would tell you that’s the plan of the team to do again. And we have had a lot of confidence in doing that. And listen, on the cost side, when we have these costs that escalate so quickly, absolutely, our goal is to go back to neutralize those. As Darren said, as those costs sort of start to stabilize even if at a higher level, we will put the plans in place to make sure that we do offset those, whether it’s automation, whether it’s other cost savings programs or other initiatives that we have to take. But absolutely, we will get back to a point of neutralizing those costs as we work through them.

So, Rich, and I apologize for taking a third thing here. But at one point, you had expressed some optimism about getting to like an 8% margin for the business in the not-too-distant future. Based on what you see, are you still kind of thinking that that’s doable here in the next year or so, or is there anything that’s really just changing your view on how long it takes to get back to historical average margins?

I think – I mean, Rod…

Let me start. Yes. No, I mean we have taken over the last 3 years, we have taken a number of actions that were meant to move us back towards that 8% and beyond. And that’s the restructurings that we have done in manufacturing in Americas and EMEA, the actions we took in distribution in Europe. And I think we still feel like those are likely to get us there. The compression in margin that we have seen, which – I mean, it was just pricing for raw materials and inflation in the second quarter compressed margins on a like-for-like basis by nearly a percentage point. And that is something that has happened to us before. And I think we are in a year now where like raw materials, we saw $800 million in the first half. We have said we expect about $1 billion in the second half. So $1.8 billion of raw materials, that’s effectively the same number we saw in 2011, and we saw a similar effect back then. But then as we went into 2012 and 2013, costs started to come back down. And that margin compression went away, and we went to a period where margins got much better. I think that as we get to the point where materials and other costs flatten out, and perhaps even see raw materials starting to come back down, then I think that, that will put us in a really good spot to get to that 8% in, call it, the near-term, so the next couple of years. And 10% is a realistic possibility for the intermediate term, that 3 years to 5 years.

Exactly. That’s what I was going to say. I think, Rod, we absolutely still believe it’s possible. Again, this environment has made it a bit more volatile, but the structural plans we put in place, Darren highlighted the aligned distribution initiative in Europe, which is working. I think I said in my remarks, we are in sixth consecutive quarter now of share gains there. And we are getting volume. We are getting price right now. So, we feel that absolutely, those numbers are possible.

Thank you.

And we will take our final question from Ryan Brinkman with JPMorgan. Please go ahead. Your line is open.

Hi. Great. Thanks for taking my questions. I wanted to ask a couple around Slide 8, particularly to dig into the efficiency, excess inflation and other cost increases bucket. It seems if you were to back out the non-repeat of the $69 million benefit last year, then the year-over-year swing there would have been more like negative $82 million. Are you able to help us with like the efficiency subcomponent within that? How much – just sort of within the $82 million to sort of help us better judge execution. So, for example, was the efficiency component help year-over-year, indicating positive performance within the category of things that you can control, and that was just like more than offset on a year-over-year basis during the quarter by inflationary costs more outside your control, or what’s the right way to think about that? And then going forward, what are you looking for or targeting in terms of efficiency savings or those changes in costs relative to things that you can’t control? Is that a meaningful offset to cost inflation, or do you expect to offset the impact of inflation primarily through price/mix rather than cost saves?

I think we don’t like to get back to the – to more of a historical situation where we – and for many years, had seen cost inflation in the $30 million to $35 million a quarter. And our efficiency actions, we had a track record to be able to create savings around $40 million a quarter. And that was the historical situation. I think we are all looking forward to when we might get back to something like that because when we were getting a couple – 2% to 3% inflation, we were able to offset that with the efficiency programs that we have. You asked the question about the $82 million and how the underlying operational effectiveness or efficiency looks. I think generally speaking, we feel like the execution by our teams is actually very strong and we have a number of operating metrics that look quite good. If we look at the amount of output per associate hour, so the output for each hour of labor, we have got some very good evidence there. We have made progress in the reduction in waste in our factories and the improved yield. So, the percentage of the tires that are ready to go to the OEs as produced, I mean there are a number of metrics there where I would say operational effectiveness looks very good. The difficulty is that when we look at the overall efficiency of our factories, it does include the fact that we have got a lot more hiring going on and a lot more training going on, which means there is some duplication of labor because we have people doing the jobs and other people being trained on the jobs. And the fact that people have to take time to train others reduces their absolute productivity in an aggregate sense. So, when we put all that together, dollar-wise, it doesn’t look like a big impact. But I don’t look at that as anything that shows a lack of effectiveness. It’s just a situation. So, as we get past this need to hire and train more people, I think we are slowly making progress at that. It has come down over the last six months. As we get past that, then the effectiveness of our plant optimization programs that are creating these underlying improvements in other metrics, they are going to have a chance to get to the bottom line.

Okay. Thanks. And then last question for me. If we were to sort of move on from the savings versus non-raw materials inflation bucket to the price/mix versus raws bucket, you have given the outlook for positive price/mix versus raws in 3Q. The decline in spot prices – raw material spot prices to-date, I am guessing is going to more positively benefit 4Q than 3Q. So, the question is, if the current levels of pricing were to hold through the remainder of the year, and I am not sure that’s the assumption you want to use. I don’t know if you have pending price increases to take into account or whatever. But if we were to sort of take into account what we know about pricing currently, etcetera, or what you are confident you can get? And then if you were to maybe update the analysis for the most recent decline in oil prices and whatnot, what does that imply directionally speaking, do you think for the trend in price mix to raws in 4Q?

Yes. So, I think the changes we are seeing now you may see some – you will see some impact of that in the fourth quarter, probably see some of the rollover to the first quarter as well. And it’s going to depend on how quickly we work our way through our inventory. But I think the outlook we have given is our best view based on where spot prices are right now. So, I think you can assume that the fourth quarter raw material costs, which if we get $1 billion for the second half and $600 million of it is in the third quarter, then that’s about $400 million. That does take into account what we have seen up until now. And if we see further reductions, then there could be further improvement in the fourth quarter, and I think particularly when we are talking about petrochemicals, synthetic rubber, which tends to arrive more quickly, less of an impact of its natural rubber or if it’s carbon black that’s coming in from Asia because that spends more time on the boat, it takes longer to get here and more time to work through inventory. But I think we could see – still see some benefit if it keeps going down for Q4 and certainly it would set up Q1 well. I think we feel good about our pricing setup for Q3. And I think the price increases we have announced here midyear set us up pretty well for Q4 also. Although we are going to watch the situation, and we have got to have – if we need other actions, then obviously, we are going to take that into account.

Okay. Helpful. Thank you.

Thanks Ryan.

There are no further questions at this time. I will turn the call back over to Darren Wells for any closing remarks.

Thank you. So, before we wrap up, I wanted to let you know about a change that we are discussing for the format of our future earnings calls. So, going forward, we are considering publishing our commentary along with financial information in a document the night before our earnings call and then using the conference call time exclusively for taking questions. So, rather than a separate press release, slide deck and prepared remarks, we just have one document combining the content of all three. Obviously, appreciate any feedback that investors would like to offer on this process improvement. So, other than that, thank you for joining us for the call today, and we look forward to talking to you again next quarter.

Thank you. And this does conclude today’s program. Thank you for your participation. You may disconnect at any time.