The Goodyear Tire & Rubber Company

Good morning. My name is Nikki, and I will be your conference operator today. At this time, I would like to welcome everyone to Goodyear Third Quarter 2021 Earnings Call. The 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.

Thank you, and thank you, everyone, for joining us for Goodyear's third quarter 2021 earnings call. I'm joined here today by Rich Kramer, Chairman and Chief Executive Officer, Darren Wells, Executive Vice President and Chief Financial Officer, and Christina 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 NOT DRAW YOUR ATTENTION TO THE SAFE HARBOR STATEMENT ON SLIDE 2, I WOULD LIKE TO REMIND PARTICIPANTS ON TODAY'S CALL THAT OUR PRESENTATION INCLUDED SOME FORWARD-LOOKING STATEMENTS ABOUT GOODYEAR'S FEATURE PERFORMANCE. ACTUAL RESULTS CAN DIFFER MATERIALLY FROM THOSE SUGGESTED BY OUR COMMENTS TODAY. THE MOST SIGNIFICANT FACTORS THAT COULD AFFECT FEATURE 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, a non-GAAP basis. The non-GAAP financial measures discussed on the call are reconciled to the U.S. GAAP equivalent as part of the appendix to the slide presentation. And with that, I'll now turn the call over to Rich. Great.

Thank you, Nick. Good morning and welcome, everyone, and thank you for joining us. Let me begin my prepared remarks by providing some comments to supplement this morning's press release. Our third quarter results showed substantial growth in net sales of 42%, partly driven by our recent acquisition of Cooper Tire, and partly reflecting strong organic sales growth in our legacy business. With this momentum, we generated $449 million of merger-adjusted segment operating income for the quarter, more than double our earnings from last year, and also well ahead of pre-pandemic levels. Notably, our earnings growth came despite a 15% increase in our raw material costs in the quarter, which was in line with our previous forecast. Now, for context, this compares with an increase of about 1% in our raw material costs during the first half of the year. And like most companies, we're also experiencing significantly higher inflationary cost pressures, While manufacturing locally in the regions where we're selling tires partially insulates us from cost increases related to global supply chain challenges, we are experiencing the higher transportation costs that we forecasted on our last call. Additionally, we're seeing added pressure from increased wage and benefit costs and higher utility rates, partly reflecting the growing energy crisis in Europe and China. To counter these impacts, as well as higher raw material costs, we've continued to execute strategies to capture higher selling prices for our products, which helped drive a 10% increase in our revenue per tire in the quarter, the most in nearly a decade. At the same time, we're also focused on recovering volume and growing our market share. In the quarter, we continue to benefit from strong customer demand for our products globally. As a result, we saw our legacy consumer replacement business recover nearly a percentage point of market share. That's a significant move over a very short period of time. We came into the year confident that we would grow market share given the distribution changes we made in Europe last year and the benefits of Walmart reopening its auto care centers after temporarily closing them early in the pandemic. I'm proud of how our team is executing and quickly recovering our share. In our commercial replacement business, we experienced robust demand as the transportation industry moves record freight volume. Here, we delivered another strong performance with shipments to fleet customers well above pre-pandemic levels. Focusing on this important segment of the commercial truck market is paying off for us. Winning with fleets results in more consistent demand for our most premium products and creates opportunities to enhance customer loyalty through our leading mobility solutions, both of which can reduce the impact of cyclicality. We're also excited about our progress integrating Cooper. As we learn more about Cooper's business, we're identifying additional opportunities. These insights have increased our confidence in achieving synergies beyond our initial forecast. On the other hand, our consumer OE business continued to be affected by weak auto production given the shortages of manufacturing components and materials. During the quarter, industry shipments to OE customers were more than 20% below the third quarter of 2019 and considerably weaker than third-party forecasts at the beginning of the quarter. Reductions in orders related to OE production have created inefficiencies in our operations and limited our volume growth this year, particularly in Europe and in China. The current conditions will undoubtedly lengthen the global OEM recovery. While the environment is certainly less than ideal, the need for OEMs to catch up with consumer demand and replenish inventories will support tire industry volume over the next few years. We are well positioned for the recovery given our growing market share, including our leading position on EV platforms. In summary, we're seeing some contrasting industry dynamics today, the two segments should provide good growth prospects going forward. You can see this in each of our business units. In the Americas, our consumer business continued to benefit from a strong cyclical recovery. Excluding the impact of the Cooper merger, our larger-in-diameter consumer replacement volumes increased more than 20% in the U.S., nearly three times the industry rate. While our premium products continue to set the pace for growth, We also experienced double-digit growth in smaller rib diameter segments supported by recovery at Walmart's auto care centers. Cooper's mid-tier offerings continues to resonate with consumers who are looking to balance product performance and price, helping our team deliver strong results. A leading presence in the mid-tier light truck and SUV category helped Cooper grow its U.S. consumer volume while delivering double-digit operating margin performance, excluding the impact of merger-related costs. There's also a strong recovery underway in the U.S. transportation industry. These dynamics are fueling an increased need for new Class A trucks, tires, and services, all of which play to the strength of our commercial business. During the quarter, our U.S. commercial OE volume was up over the prior year, reflecting higher truck bills. In addition, our Goodyear fleet business continued to perform well, with fleet tire volume increasing more than 10% compared to the third quarter of 2019. If not for supply constraints, our commercial results could have been even stronger. While we're benefiting from our leading position in the North American commercial market, we are not resting on our laurels. Instead, we are innovating to develop solutions that will allow us to win as markets change and customer needs evolve. In the third quarter, we signed a multi-year collaboration agreement with GADIC, the first autonomous middle-mile logistics service provider in North America. Together, we will work to advance sustainable mobility solutions for autonomous B2B short haulers with the shared goal of making it safer and easier to move goods. GADIC's fleet of autonomous commercial vehicles will leverage the power of our tire intelligence technology powered by Goodyear Sightline to improve stopping distances, reduce fuel consumption, and lower maintenance costs. This is a terrific opportunity for us to apply our connected tire solutions to drive efficiencies in the increasingly important middle mile segment. Turning to EMEA, we are seeing good momentum in our business. Excluding the merger, our European consumer replacement business delivered 9% volume growth in a relatively flat market supported by our aligned distribution strategy. The outperformance was broad-based as we gained market share in summer, winter, and all-season categories, a testament to the strength of our product portfolio. And it's just not consumers who see great value in our products. Just this month, Goodyear was named the winner of the German magazine AutoBuild's all-season tire test for the second consecutive year in a row. placing ahead of more than 30 other brands in a comprehensive examination of dry, wet, snow, and mileage performance. Accolades like this help reinforce our leading position in the all-season category, the fastest growing market segment. EMEA's commercial business is seeing strong demand for our commercial truck tires as Europe's economic recovery continues. volume in our Goodyear commercial business was 6% above 2019 levels. While we have grown our share considerably this year, capacity constraints have restricted our performance. To meet the fast-growing demand for our fleet solutions in EMEA, we've recently announced capacity expansions at our manufacturing facilities in Luxembourg and Wittlitz, Germany. We're also harnessing innovation to respond to our customers' needs. For example, We've committed to developing solutions to help our customers achieve their CO2 emissions reduction goals. In September, our European commercial team launched the FuelMax Endurance, the most versatile and fuel-efficient commercial tire we have ever produced. As a result, fleets no longer need to choose between durability, mileage performance, and fuel efficiency, a key driver of emissions. We believe tires and related solutions will play an essential role in the journey towards sustainable mobility. This market evolution will give us opportunities to further differentiate our products as we move ahead. Turning to Asia Pacific, industry demand softened considerably during the quarter, largely reflecting COVID-related disruptions in China and several ASEAN markets in July and August. lockdowns, and other mobility restrictions further complicated what was an already challenging OE environment due to semiconductor shortages. While these factors pressured organic volume trends in our OE business, we gained share for the second consecutive quarter, reflecting the release of new fitments. We're also growing faster than the market in the consumer replacement segment. Investments in distribution are driving strong results in India, where we've increased our share by more than 7 percentage points compared to 2019. Our share is also up nicely in China compared to pre-pandemic levels, as we are benefiting from scaling up our direct-to-retail distribution model and new product launches, including the recent debut of the Assurance MaxGuard. I'm sure you can tell from our business initiatives that we're very focused on leading towards a more sustainable future. The challenge, we believe, is right in front of us. Change in our industry is creating tremendous growth opportunities for Goodyear, and as a leader in our industry, we must set the tone for benefits of future generations. And our track record is clear. We've developed more fuel-efficient products, reduced energy usage in our factories, and eliminated waste to landfills. We've discovered ways to use more sustainable raw materials such as soybean oil and rice husk ash silica that deliver similar or better product performance while reducing our environmental impacts. Our engineering and manufacturing teams are also embracing these advances. We've constructed a tire without petroleum-based content and traditional fill materials like carbon black and sand-based silica. With this momentum, we've challenged ourselves earlier this year by setting a goal of developing 100% sustainable material and maintenance-free tire by the end of this decade. We're also focused on greenhouse gases and greener energy sources. As a part of our commitment to reduce CO2 emissions, we are working with energy supplier Inovos to build two large solar power stations at our testing facilities in Luxembourg. Beginning in 2022, these cutting-edge facilities will add carbon-free energy to the local power grid that will be available to nearby communities for years to come. In addition, we recently announced a multi-phase plan to power Goodyear's manufacturing facilities across Europe, Middle East, and Africa solely with renewable electricity by the end of 2022. we estimate this critical shift will reduce our carbon footprint by up to a quarter of a million tons, significantly reducing the environmental impact of our operations. Goodyear is committed to building a better future. In keeping with this commitment, we plan to announce updated climate-related goals by year end, consistent with the climate strategy development timeline we shared in April. I look forward to updating you on our long-term ambitions in the new year. In summary, we have good momentum and we are taking actions to strengthen our business and to ensure we are leading our industry toward a more sustainable future. When I consider the industry conditions we faced in the middle of last year, I'm truly amazed at what we've accomplished during the past four quarters. We've recovered our market share, strengthened our OE pipeline, more than offset inflationary cost pressures, and successfully managed unprecedented supply chain challenges. We've also completed a transformational acquisition and continued advancing our mobility and sustainability initiatives. To accomplish all of this in the midst of a global pandemic is a testament to the strength of the Goodyear team, a team that is stronger following the addition of Cooper. I would like to thank all our associates for their contributions to our success. And now I'll turn the call over to Darren.