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spk05: Good morning. My name is Keith, and I'll 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. If you would like to ask a question during this time, simply press star 1 on your telephone keypad. If you would like to withdraw your question, press the pound key. I will now hand the program over to Nick Mitchell, Senior Director, Investor Relations. Please go ahead.
spk00: 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 Zamara, 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 could now draw your attention to the safe harbor statement on slide two, 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 can affect future results are outlined in Goodyear's filings with the SEC 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. Non-GAAP financial measures discussed on the call are reconciled to the U.S. GAAP equipment 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, and good morning, everyone.
spk03: I'd like to start today by welcoming all of the Cooper Tire Associates joining us this morning. I've had 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 U.S. and China. Given these markets play to our strengths, we saw global consumer replacement market share rise nearly one point. In our OEM business, the global shortage of semiconductors resulted in weaker and more volatile demand than we expected. The auto industry produced approximately 2 million fewer vehicles than initially expected at the beginning of the quarter. Despite the weaker-than-expected backdrop, we continue to recover share globally, including the benefit of our strong position on SUVs and light trucks. We're also continuing to see the benefits of our strong cost management. On balance, our business performance is strengthening. And with this as the foundation, towards the end of the second quarter, we completed our announced combination with Cooper Tire. I believe this is truly a transformational milestone for both companies. Our collective team continues to share excitement about our prospects going forward. As we do the work to bring our companies together, I know we will be better positioned than ever before to meet our customers' evolving needs. and you can see evidence of our strengthening performance and the initial benefit of the Cooper combination in each of our SBUs. In the Americas, our U.S. consumer business took advantage of favorable conditions in the replacement market where we continued to see robust demand for our most premium products. Our large rim diameter volume performance was particularly notable with our growth exceeding the industry by nearly 10 points, The resulting mixed benefits combined with pricing actions more than offset higher raw material costs. Our U.S. commercial business is also capitalizing on strong end-user markets. With freight demand outpacing supply, keeping existing trucks road-ready is a top priority of fleets. As a result, more customers are relying on Goodyear's Fleet Central to make informed decisions regarding their tire and maintenance needs. The growing popularity of our suite of fleet management tools is helping us drive market share in targeted segments. In the quarter, our commercial shipments were nearly 15% above the second quarter of 2019. Turning to Brazil, our consumer and commercial replacement businesses are recovering faster than anticipated. Shipments in both segments were well above pre-pandemic levels during the quarter, reflecting both economic recovery and share gains. Our Brazilian OE business, however, saw more than half of the country's auto assembly facilities taking capacity offline during the quarter, keeping our OE volume considerably below pre-pandemic levels. In EMEA, markets are also recovering, albeit with less consistency than in the Americas, with industry demand softening sequentially. We sustained our relative momentum in the quarter with share gains in all of our businesses. Our European consumer replacement business more than recovered higher raw material costs supported by the impact of our distribution changes. At the same time, our market share in Europe has recovered by more than a quarter of a percent year to date. Our consumer OE business also continued outperforming but with less impact as part shortages limited recovery and auto production. Our continued improvement in the consumer OE segment is supported by our ability to meet the demands of electrification. Today, Goodyear has a presence on nearly half of the EV platforms produced in Europe. Having this leadership position is critical as electric mobility begins a period of dramatic growth. And as tires on most EVs wear faster than on a comparably sized internal combustion-powered vehicle, these benefits will extend well beyond the initial fitment. So what we're seeing are dynamics that should position our consumer business for long-term profitable growth. Turning to commercial, volume was more than 10% above 2019 levels, despite lower freight volumes. We benefited from exceptionally strong results in the on-road segment driven by our growth portfolio fleet customers. During the quarter, for example, we added Tesco's fleet of 6,800 trucks and trailers to our customer portfolio. Tires alone are no longer enough to win over fleet customers. Today's fleets demand innovative solutions that will help them maximize uptime and reduce costs. We recently unveiled Goodyear DrivePoint, the latest productivity tool in our total mobility offering. DrivePoint combines on-valve sensors, battery-powered receivers, and mobile apps to deliver fleets a cost-effective way to monitor tire performance. These technology solutions strengthen our position as a preferred provider of monitoring and predictive maintenance, making Goodyear more valuable to our customers and preference over other mobility solution providers. Turning to Asia Pacific, industry demand varied significantly by country. Challenging conditions persisted in India, Malaysia, and other countries with low vaccination rates affecting demand and our production in the region. In China, the story was encouraging with demand fairly consistent with pre-COVID levels. In a stable market, we leveraged an expanded retail network to grow our consumer replacement volume by more than 20% compared to the second quarter of 2019. Turning to our consumer OE business, we grew our volume more than 40% compared to the prior year in an expanding market. Our team did an excellent job in this environment helping us capture nearly one point of market share. In addition to delivering solid second quarter results, we continued advancing our mobility solution strategy. In June, we launched Goodyear Sightline, the first tire intelligence solution for cargo van fleets, a timely launch considering the impact the pandemic had on e-commerce volumes. Goodyear Sightline combines sensors and cloud-based algorithms to provide fleet operators with real-time tire health information. This rollout lays further groundwork for a connected tire future. We're also taking steps to make our mobility solutions more accessible. Last month, we announced a strategic partnership with ZF to jointly offer our Goodyear connected tires with ZF's telematic solution. By using a common telematics unit, we can simplify fleet interactions, make it easier for customers to get the tire and trailer performance data needed to optimize vehicle use and reduce fuel consumption and emissions. As I've said before, Goodyear is committed to shaping the mobility revolution. Initiatives like ANGO, Goodyear Sightline, and partnerships like the one we have with ZF, along with our focus on the intersection of new mobility, sustainability, and technology, are demonstrative of new business models and solutions that will define Goodyear's position and relevance for the next 120 years. We view our job as requiring the operational excellence to deliver results today while simultaneously building the capability to lead our industry tomorrow when the tire's relevance will not just continue but evolve to a more prominent role to enable mobility. It remains a great time to be a technology leader in the tire industry. We're entering the second half of the year focused on the opportunities ahead. Markets are more stable than at the beginning of the year, particularly in the aftermarket. Fundamentals are robust in U.S. consumer replacement, with dealer restocking and increased driving underpinning demand. In Europe, the demand picture continues to improve, led by recovery in vehicle miles traveled as more employees return to the office. And the need to keep goods flowing through supply chains is driving the demand for commercial tires around the world. And while supply chain constraints continue to limit auto production, the outlook for our consumer OE business remains favorable given our ongoing share recovery, the long-term need for OEs to restock dealer inventory, and the accelerating shift to electric powertrains, which favors Goodyear's strengths in product design and materials. Against this backdrop, we're focused on sustaining our momentum while working to integrate Cooper. The trajectory of our markets makes us feel good about the timing of the combination. We look forward to achieving our full potential in the years ahead. Now, I'll turn the call over to Darren.
spk04: 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 of market share, improving our manufacturing cost, and managing for cash. and pursuing all of these while also delivering strong price and 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 7th, 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 result of social unrest, with significant impact in our South Africa and Colombian 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 has 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 been critical in serving markets including Latin America, Europe, and China, and particularly the U.S., where replacement tire demand remains very strong. So as we enter the second half of the year, we're feeling very good about the industry outlook and our ability to outperform the industry, while continuing to see our profitability trend toward target levels. Before I begin reviewing the financial results for the quarter, I want to highlight a couple of items that are going to seem a little bit different, given we're incorporating for the first time some Cooper results. First of all, our results reflect the impact of Cooper sales from June 7th through June 30th. This means there's a little over three weeks' worth of Cooper sales and volume reflected in our company results, as well as in each of our business units. We'll provide disclosures that clarify the impact of these added sales, which overall were just over $250 million for the quarter. Second, results reflect the number of items related to the transaction itself. This includes costs directly related to the transaction, as well as accounting treatments that are required in such combinations. In order to provide a view of results without these items, we are providing a calculation of our earnings that excludes them. We've typically shown adjusted net income in EPS, but this quarter we have merger-adjusted SOI as well. The most significant item from the Cooper transaction impacting SOI is the markup of Cooper's June 7th inventory to market value. which means much higher cost of goods sold on those units as they're sold out in Q2 and Q3. This makes up $40 million out of the $50 million of Cooper-related items hitting our segment operating income in the quarter. With that preamble, let's turn to our income statement on slide 8. Our second quarter sales were $4 billion. This is now above pre-pandemic levels from 2019, even without the incremental sales from Cooper. Unit volume increased 84% from last year's second quarter, reflecting continuing industry recovery, market share gains, and the addition of Cooper units. Second quarter segment operating income of $299 million was well ahead of last year and also well above 2019. Second quarter merger adjusted segment operating income of $349 million exceeded our results from 2018 as well. This included merger-adjusted Cooper tire income of $34 million. Our second quarter results were also adversely affected by the carryover impact of a winter storm that hit the U.S. in the first quarter, which reduced our America's segment operating income by approximately $24 million. After adjusting for the impact of this storm and other significant items detailed in our press release, including the impact of inventory step-up adjustments, our earnings per share on a diluted basis were $0.32, up from a loss of $1.87 a year ago. The step chart on slide nine summarizes the change in segment operating income versus last year. Similar to last quarter, we also included an analysis versus 2019 on slide 10 to help you better track our recovery. Compared to the COVID-impacted year-ago period, the total impact from higher volume was $531 million, reflecting the benefits of higher unit sales and increased production. Price mix improved by $159 million compared to a year ago, more than offsetting a $30 million increase in raw material costs. While this is a significant net benefit in Q2, the increase in raw materials will be much higher beginning in Q3. Cost savings of $86 million included $25 million associated with the closure of Gadsden, as well as the benefit of an indirect tax ruling in Brazil. Aside from these benefits, savings were limited, as many of the one-time savings implemented during COVID did not recur this year. Inflation of $41 million was higher than in the first quarter and is beginning to reflect increased cost pressure across multiple categories. The $37 million improvement in the other category reflects a $94 million increase in the earnings generated by our other tire-related businesses, as well as a $17 million benefit from improved profitability at TireHop, which recorded its first profitable quarter. These factors were partially offset by higher advertising and R&D expense as we restored investments in these areas after severe cutbacks during last year's COVID shutdown. You'll notice we added two columns to this step chart to clearly illustrate the impact of the Cooper tire transaction on our results. The first bar captures Cooper's operating income between the June 7th closing and quarter end. The second bar reflects the impact of costs triggered by the business combination, including the effects of fair market value step-up on Cooper's inventory and certain other assets. These costs totaled $50 million in the quarter, more than offsetting the $34 million of merger-adjusted operating income Cooper contributed during the three-and-a-half-week period. While Cooper's standalone results are no longer reported publicly, Cooper also performed very well during the second quarter. Operating profits and margins were stronger than in their comparable 2020 and 2019 periods, with increased volume and improvements in price mix driving the results. Turning to the balance sheet on slide 11, net debt totaled $6.9 billion, increasing less than a billion from second quarter of 2020, despite cash consideration of over $2 billion paid to close the Cooper transaction. The impact of the merger consideration was partially offset by free cash flow generated during the last 12 months and Cooper balance sheet cash at closing. Completion of the Cooper tire merger impacts the comparability of our working capital to prior periods. Controlling for this impact, we made some progress rebuilding our inventories in Q2. However, we have a way to go before reaching levels that are aligned with demand, especially in North America. Slide 12 summarizes our cash flows for the quarter and for the trailing 12 months that have helped us deliver our stronger-than-expected balance sheet position. Turn to our segment results beginning on slide 13. Unit volume in the Americas increased 125% from a year ago. Our replacement business, which was up 8.6 million units, continued to benefit from higher unit sales through Walmart's auto care centers. You'll recall that the closure of these locations greatly impacted our relative performance last year. Our OE volume increased 1.9 million units, reflecting the pandemic's impact on auto production last year. While semiconductor shortages continue to affect our customers' production schedules, our OE business is positioned to capitalize on the stronger demand that will follow, given our high fitment win rate in recent years. America's segment operating income totaled $233 million, up $520 million from a year ago. Excluding the impact of the Cooper transaction, segment operating income for the Americas would have been $247 million. America's results include $31 million of merger-adjusted operating income from Cooper and $45 million of costs triggered by the merger, including a $35 million impact of the Cooper tire inventory step-up. America's earnings benefited from higher volume, improvements in price mix, and continued recovery in our other tire-related businesses. These factors were partially offset by payroll and advertising expenses returning to more normal levels after last year's COVID-19 response actions. as well as by higher raw material costs. Turning to slide 14, Europe, Middle East, and Africa's unit sales totaled $12 million, up 63% from last year. Replacement volume increased $3.2 million, reflecting stronger demand for both consumer and commercial tires. Market share gains in both segments also contributed to the growth. Our OE business was up 1.5 million units, reflecting a partial recovery in industry demand and the benefits of recent fitment wins including some significant electric vehicle platforms. EMBA segment operating income of $43 million was up $153 million versus last year on higher volume, improved factory utilization, and improvements in price mix. As expected, EMBA's earnings moderated compared with Q1, reflecting typical demand seasonality and the absence of some unique factors that positively impacted the first quarter. Turning to slide 15, Asia Pacific's tire units totaled $6.5 million, a 43% increase over the prior year. OE volume increased $800,000, reflecting a partial recovery in industry demand. Total replacement volume increased $1.1 million during the second quarter. We maintained strong growth in the Chinese aftermarket as our actions to strengthen distribution continued to deliver both volume and price mix. Excluding the impact of the Cooper transaction, our consumer replacement volume in China during the quarter was up more than 20% from the second quarter of 2019. Segment operating income was $23 million, up $57 million from the prior year's quarter, reflecting higher volume and improvements in price mix. Turning to our outlook items on slide 16, we expect continued volume recovery in Q3 and should see our volume move closer to pre-pandemic 2019 levels than we saw in Q2. For reference, Cooper's volume in Q3 2019 totaled approximately 10 million units. We expect production to remain at or near pre-pandemic levels given our need to replenish inventory. Similar to Q2, the cost benefit related to higher production will impact us immediately, given the accelerated cost recognition related to low production in Q3 2020. We expect price mix will continue to more than offset raw material costs, reflecting the benefit from recent pricing actions and improved mix. Net cost savings will reflect the impact of the non-recurrence of last year's COVID-related temporary fixed cost reductions, as well as incremental transportation and labor costs. One other note, given that Q3 will include a full three months of Cooper results. If you're using Cooper's Q3 2020 to help you model your expectations for this year, remember that Cooper recorded a $49 million favorable adjustment to its product liability reserves in the third quarter of 2020. Slide 17 summarizes several of our full-year financial assumptions. Based on current spot prices, we now expect raw material costs to increase $425 to $475 million net of cost savings. Slightly less than half of the cost increase is expected in Q3. This $100 million increase from the outlook we provided on April 30th only represents the impact on legacy Goodyear operations, as we intend to report Cooper's contribution to our segment operating income as a standalone item, at least through the middle of next year. We've provided updated figures for several other financial assumptions. In nearly all instances, the change compared to the previous estimate reflects the impact of the merger. However, we've refined our forecast for rationalization payments to reflect our latest thinking on the cash required this year to finish executing our German modernization plans. Lastly, our reported results will continue to be impacted by non-cash costs triggered by the merger. including amortization of the Cooper Tire inventory step-up and incremental amortization of Cooper Tire intangible assets. On a pre-tax basis, our provisional estimates is for these costs to be about $85 million in Q3 and approximately $15 to $20 million for Q4. Now we'll open up the line for questions.
spk05: And at this time, if you would like to ask a question, please press star and 1 on your touch-tone phone. That's star and 1. Our first question today comes from Ryan Brinkman with J.P. Morgan. Please go ahead.
spk02: 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, you know, given the large number of retail stores that you operate. So what are you seeing there as miles driven recover? And then, you know, if maybe replacing tires is something that Americans deferred earlier during the pandemic, but maybe now 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, you know, monthly child tax credit and other transfer payments that many Americans are now receiving, whether that could help. And then lastly, the the increased equity that consumers have in their used vehicles, right? So the Mannheim Index is up a little bit today, but if used cars are worth 35% more than before the pandemic, does that help rationalize purchasing a new set of tires or 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?
spk03: So, Ryan, 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. Sellout is good, and we think that's something that's going to continue on going forward. If you sort of 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'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 individuals' accounts, I'll tell you, we always see correlations 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 vehicle perspective and the increased value in used 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 sending it back on lease or whatever it might be, also plays in people's minds to make sure they have a good set of tires on their vehicle. And again, that's playing out through all our channels, whether it's through our own retail stores, through some of our franchisees, through some of the The large regional retailers, as well as some of the mass channels, I think we're seeing that benefit of used vehicles staying on the road a bit longer and now actually being worth a little bit more since you can't replace it with a new car. So all those are trends moving in the right direction. Now, taking a step back on... On price, I will tell you during the second quarter, we again saw a net recovery of price over raw materials, and that's a continuing trend that we've seen now for multiple quarters. It's a good trend that's going forward. If I break it down for you a little bit, They will start in the U.S. in consumer. And as you might imagine, you know, we monitor what's happening in the market as well as for our competitors. In the quarter, we certainly saw the replacement industry pricing move higher. And as we do our monitor of key competitors, key consumer tire producers out there, I would tell you we saw at least two price increases since November, sometimes three, and those in the range of about 5% to 8%. And for Goodyear, earlier this week, we just announced in our consumer replacement business an up to 8% price increase effective September 1st on both the Goodyear and the Cooper brand. And remember, for us, that's about our fourth one recently. You may recall we did up to five going back to December 1st, and we did up to eight, both effective April 1st. as well as June 1st. And if I peel Cooper back a little bit as well, they've taken price increases about up to 8%, one in January, one in May, and one in July. And if I go to the commercial markets in the U.S., very similar if we look at the commercial truck tire producers, we've seen significant increase as well in that range of 5% to 8%. From a Goodyear perspective, we've gone effective price increases up to 6% on November 1, as well as April 1, and then up to 12% this past July 1. So I'd say that that's reflective of what's happening out in the marketplace in terms of our input costs and the demand versus supply dynamic. In Europe, I'd say, again, we are seeing price increases. Most tire companies announced prices now ahead of the winter season. We have a summer-winter market there, as you know. So we did see that, and those announcements are really similar to the price actions that were taken ahead of the summer and all season sell in at the end of right around Q1. So that's a positive trend that we're seeing. From a Goodyear perspective, we implemented a price increase up to 4% to 5% on winter and an additional 2% to 3% on summer and all season at the end of the first quarter. So good trends there as well. And also we're seeing the same thing happening in the truck markets there. So if you add all that up, I would say certainly that the pricing actions that we're taking in recent months clearly better position us to handle what we see, as Darren mentioned, those second half higher raw material costs or that cost inflation is going to hit us. So all in all, very constructive environment out there.
spk02: That's helpful. Thank you. And then my last question is, you know, 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?
spk03: So, Ryan, Darren and I will tag team a little bit here, but I would say you've sort of summarized 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, 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 there. Great to have them on board, great to have them to be part of the team. You know, 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 and some of that effectiveness, Some of the way they do their developments, boy, 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 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.
spk04: I guess maybe echo the point is that 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. You know, we announced with the transaction that we would expect to realize at least 165 million, or that we would 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 areas those synergies will 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 business. each group and each functions, practices, and making sure we're picking the right ones. And I think 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. So I think we're ultimately listening very carefully. Right now we're going through effectively a 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. 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.
spk02: Great to hear. Thank you.
spk04: Thanks, Ryan.
spk05: Next question is from Rod Latch with Wolf Research. Please go ahead.
spk06: Hi, everybody. Hey, so pricing – is really just a great uh barometer of what's happening in terms of supply and demand um and 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 uh the oe has historically been a little bit less profitable versus replacement and also relative to that uh the weaker oem demand right now Is that helping the industry rebuild inventories on the replacement side, or are inventories on the replacement side still pretty tight? Yeah. So, Rod, let me take your last question first here.
spk04: And, you know, I do think that there is some evidence of channel inventories recovering and that we, you know, the industries sell in which is up about 12% from the 2019 levels, is above the sellout, which is up mid-single digits, so still very good. But I think sell-in has been a little bit ahead of sell-out, which has meant that we are making some progress restoring inventories in the channels. Unfortunately, we have not made any progress yet or any significant progress in North America restoring our own inventory, which for us to have the right level of service, we still need to do. So there is 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 than we might have originally thought, just given that the semiconductor issue seems to be turning out to be more protracted than might have originally been expected. So I think ultimately that's helpful, but I think there's two other things that I think we are upbeat about, and that is that we've been recovering share of fitments in OE. Our win rate over the last two or three years has been... you know, 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 share of the vehicles being built. So I think that, you know, that delay, if anything, might help us a bit. The other thing that I think is, you know, is ultimately a real positive here, and it does get straight to the question of OE economics, And that is the economics of electric vehicles. And it's now a couple of years ago that we first talked about a couple of the key factors that are making this, as Rich put it, such a great time to be a technology leader in the tire industry. And that is with the electric vehicle trend, our win rate on electric vehicle fitments is significantly higher than it has been in general historically. So I think when we talked about it two years ago, we said we were winning on about two-thirds of the fitments that we were bidding on for electric vehicles. And as you might expect, that's dropped down a bit. But our most recent read is that we're still winning volume on about 60% of the fitments that we're bidding on. which is a real testament to how good a job our OE teams have been doing, meeting the performance and the tech specs for the increased weight, the higher torque, vehicle dynamics. So that continues to be a real benefit. The other key statistic I think that we – And I guess, you know, maybe all of that is driven by the fact that there are only about half the number of competitors for these fitments that we have had on internal combustion engine fitments historically. So, I mean, fewer companies bidding. The other thing, and this is a positive move even compared to two years ago, is I think two years ago we were looking at electric vehicle fitments and saying the revenue per tire on those fitments was about 15% higher than than the equivalent ICE vehicle. So that 15% was essentially a revenue premium. That revenue premium is more than double that amount today. And I think part of that is that the average electric vehicle size has been growing and there's more SUVs and trucks in the mix. and therefore more complexity in the fitment. But this is something that, you know, we've circled back here, you know, analyzing the situation, you know, post-COVID, and particularly with all the push toward electric vehicles. And, you know, just, I mean, really seeing some positives there for our OE business and our future mix. And obviously with those vehicles tending to wear out quicker, you know, that eventually has benefits for us in the replacement market as well. So I know that may have gone a bit beyond, the specifics that you were asking about on the OE versus replacement, but I think the trends within the OE business are worth reflecting on. I think there's a lot of positives there.
spk06: Great, thanks. And just two really quick ones, hopefully quick. You know, 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 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 expect that to start getting rolled in?
spk04: Yeah. So, Rod, on synergies, I think, you know, inevitably there are going to be some savings that we'll get this year, you know, because there are some things that, you know, effectively happen right away. I mean, there are some positions that, that were, you know, effectively went away immediately because of the, you know, having one public company instead of two public companies, the tax savings opportunities began right away. But I referenced the, you know, the detailed planning process that our teams are going through. And, you know, we have literally hundreds of synergy ideas that the teams have identified and we're looking at and we're developing work plans around. So it's 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 during 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 2022 versus 2023 and even how it might evolve during 2022. So we'll have 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 toward margin targets. And we've said that, you know, and we've talked about on prior calls the fact that with some of the actions we're taking, you know, we saw our way to, you know, we'll say getting back over 8% in, you know, sort of the near to intermediate term. And I guess 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 where we're over the 8%. If we take a look at those adjusted numbers, any way you cut it, I think our first half is at 7.5%. And our trailing 12 is over 7%. So I think the trend is all in the right direction. And I think we're feeling very good about our ability to be over that 8%. I mean, I think we all feel like that is accomplished once we're able to get a full 12 months held over the 8% mark. So I think we're close, but not quite there. But I think we continue to see the opportunity, even in the legacy Goodyear business, to move from that sort of approaching 8% back toward double digits. And then if we add Cooper in, and I realize that we have our own internal views, but just with the numbers that Cooper filed in their 8K, they were at over 11% even to sales this year. So if we add in their margins, then obviously that's an additional increment to what we'll be able to deliver on a combined company basis. So I think overall we're feeling good about that. You know, progress is feeling very good. Certainly the recovery of the, you know, the shortfall in raws versus, you know, price mix versus raws is feeling very good for us as well.
spk06: Yeah. Yeah. That's really good. Thanks for that, Darren. Thanks, Rob.
spk05: The next question is from John Healy with North Coast Research.
spk01: Please go ahead. Hi, John. Congrats, guys, on the – Morning. I'd be remiss if I didn't say congrats on the quickness in terms of how you closed the deal and just the progress in the second quarter. I wanted to ask, though, a little bit about Cooper's strategy going forward. You know, it's 60 days under your belt with the asset. Any initial thoughts on distribution, either at retail or in the wholesale market? You know, obviously... a part of Cooper's strategy was to get bigger in the mass merchant channel. And obviously you guys, you know, do well there. So kind of any sort of expectations we could set for, you know, how Cooper might be playing into that channel. And then secondly, with the relationship with HB, obviously you guys moved away from that channel and that player, you know, two or three years ago. Any thoughts in terms of how Cooper might continue to operate with that entity going forward?
spk03: Yeah, you know, John, I think, you know, 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 time on. We're, I would say, no less encouraged. We're actually more encouraged in 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 our integration process. So I think you're thinking about it right, but we'll hold off to lay the details out a little bit later.
spk01: Understood. And I just wanted to ask a little bit on sourcing. Darren, I think you mentioned you know, 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, Tena would love to get your perspective on what's going on there and, you know, how problematic is, you know, some of the conditions in Asia with flooding and tree disease on the supply chain and Can you utilize synthetic rubber more to offset if that situation does become as complicated as some speculate on?
spk04: John, if you remember correctly, there is a reasonable amount of substitution flexibility that we have moving from natural rubber to synthetic rubber and moving back the other way. We've utilized that in the past. 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. 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 that 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 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 the production of some of these products. So I think that we continue to do work there. Our procurement team and our operations teams, they have had to take some new approaches and think about new transportation modes and even 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 they've done a good job on that. But, you know, at this point, we really have not seen a lot of, you know, we haven't really seen any disruption coming from it.
spk03: Hey, Darren, I'm going to just jump in on two points. And one, just echo what the comments are. Chief Procurement Officer Maureen Tooney 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 and 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 in business continuity mode from time to time. And, John, just the second point I would make, you know, the near-term material situation is exactly like Darren described. I would also tell you, though, longer-term, maybe mid-term 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 environment. 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 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 would 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. Great. Thank you all.
spk05: And our next question is for Victoria Greer with Morgan Stanley. Please go ahead.
spk07: Good morning. A couple for me, please. Firstly, on price mix versus raw 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 volatilial guidance, how would you think about that split roughly between Q3 and Q4? And the second thing on the Cooper transaction, the $50 million of one-offs that we've seen in Q2, is that really just something that is a one-time issue that happens in the closing of the deal, or do we have to think about those kinds of numbers happening again in the second half? Thanks.
spk04: 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 markup 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 way to think about that. So once we get to the fourth quarter, and we've got that effectively 15 to 20 million those merger-related costs in Q4. That's more of the ongoing. So that's more what you would see going into 2022 as well. On the price mix versus Roths question, I guess the 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 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, you know, we've said in our remarks today that, you know, that less than half of that would be affecting the third quarter. So, you know, so the impact of raw materials in the third quarter will be less than half of the 400. So I'll let you, you know, we've said slightly less. So we'll let you make your own assumptions there. But, you know, I think that, you know, that you can make the assumption that there has got to be something approaching a couple hundred 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 positive. And then there would be another increment going into the fourth quarter. So that means price mix would have to take another step up in Q4 to continue to stay ahead of raw materials.
spk07: Great. Thanks very much.
spk04: Thank you.
spk05: 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.
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