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. [Operator Instructions]

I will now hand the program over to Nick Mitchell, Senior Director, Investor Relations. Please go ahead.

Nick Mitchell - Senior Director, Investor Relations

Thank you, Keith. And thank you everyone for joining us for Goodyear's second quarter 2021 earnings call. I'm joined here today by Rich Kramer, Chairman and Chief Executive Officer; Darren Wells, Executive Vice President and Chief Financial Officer; and Christina Zamarro, Vice President, Finance and Treasurer.

The supporting slide presentation for today's call can be found on our website at investor.goodyear.com and a replay of this call will be available later today. Replay instructions were included in our earnings release issued earlier this morning.

If I can now draw your attention to the Safe Harbor statement on Slide 2, I would like to remind participants on today's call that our presentation includes some forward-looking statements about Goodyear's future performance. Actual results could differ materially from those suggested by our comments today. The most significant factors that could affect future results are outlined in Goodyear's filings with the SEC and in our earnings release. The company disclaims any intention or obligation to update or revise any forward-looking statements, whether as a result of new information, future events or otherwise.

Our financial results are presented on a GAAP basis and, in some cases, on 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.

Richard J. Kramer - Chairman, Chief Executive Officer and President

Great. Thank you, Nick and good morning everyone. 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 1.5 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 1 point.

In our OE 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 continue 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 mix 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 resilient 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 0.25% year-to-date.

Our consumer OE business also continued outperforming, but with less impact as parts shortages limited recovery in 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 EV's were 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 volume. We benefited from exceptionally strong results in the On-Road segment, driven by our growth portfolio fleet customers. During the quarter, for example, we had to test those [Phonetic] 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 vary 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 and 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 1 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 place further groundwork for 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 telematics solution. By using a common telematics unit, we can simplify fleet interactions making 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 [Indecipherable] 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 and 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 and 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.

Darren Wells - Executive Vice President and Chief Financial Officer

Thanks, Rich. Our results in the second quarter were again a reflection of strong performance by our team and their focus on continuing our recovery market share, improving our manufacturing cost, and managing for cash, and pursuing all of these while also delivering strong price/mix to address rising raw material costs and inflation and many other cost categories. These results also illustrate the momentum built up over the last year across our consumer replacement OE and commercial truck businesses. And as of June 7, we had the momentum that the Cooper team has developed to the overall equation, creating even more opportunity going forward. We're excited to have completed the combination so quickly, giving our teams a chance to work more closely together and accelerating the opportunity to deliver the full benefits of the transaction.

While our team is delivering, we have to acknowledge the added volatility we've experienced at our end markets during the second quarter. We saw lower OE production than we anticipated; a problem that seems likely to persist longer than originally thought. And we saw increased disruptions in our emerging markets businesses; some COVID-related, particularly in Asian markets; and some the result of social unrest with significant impact on our South Africa and Colombia manufacturing facilities; and still others reflect - 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 7 through June 30. This means there is 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 a 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 combination. 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 and EPS. But this quarter we have merger-adjusted SOI as well. The most significant item from the Cooper transaction impacting SOI is the mark-up of Cooper's June 7 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's 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 in the U.S. in the first quarter, which reduced our Americas segment operating income by approximately $24 million. After adjusting for the impact of the storm and other significant items detailed in our press release, including the impact of the 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 9 summarizes the change in segment operating income versus last year. Similar to the 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 the first quarter and is beginning to reflect increased cost pressures 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 TireHub, 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 years COVID shutdown.

You'll notice, we added two columns to the 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 7 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 3.5-week period.

While Cooper 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 $1 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 helped us deliver our stronger-than-expected balance sheet position.

Turning 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 continue 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.

Americas segment operating income totaled $233 million, up $520 million from the year ago. Excluding the impact of the Cooper transaction, segment operating income for the Americas would have been $247 million. Americas results include $31 million in 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. Americas 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 years 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 the industry demand and the benefits of recent fitment wins, including some significant electric vehicle platforms. EMEA's 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, EMEA'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 you 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 years 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 million 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 30 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 million to $20 million for Q4.

Now, we'll open up the line for questions.

Question & Answers

Operator

[Operator Instructions] Our first question today comes from Ryan Brinkman with J.P. Morgan. Please go ahead.

Ryan Brinkman - J.P. Morgan - Analyst

Hi, thanks for taking my questions. I wanted to ask how you're feeling about your relative pricing power and ability to therefore offset commodity cost headwinds, maybe in the context of a few factors that I thought might be important, but, of course, any other factors you think might be important, maybe starting with where we are at with regard to consumers' average tread depth on their tires. I think that you likely have some good insight into that, given the large number of retail stores that you operate. So what are you seeing there as miles driven recover? And then if maybe replacing tires is something that Americans deferred earlier during the pandemic, but maybe now need to catch up on making those purchases somewhat less discretionary.

Another factor I thought to ask on, if it's important, is all of the monthly child tax credit and other transfer payments that many Americans are now receiving, whether that could help. And then lastly, the increased equity that consumers have in their used vehicles, right? So the Manheim Index is up a little bit today but if used cars are worth 35% more than before the pandemic, does that help rationalize purchasing a new set of tires and maybe paying a little bit more for those tires if the vehicle itself is so much more valuable? How do you think these or other factors will play into your ability to implement and to stick the price increases that are required to offset raw material inflation?

Richard J. Kramer - Chairman, Chief Executive Officer and President

So, Ryan, there is 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 individual's accounts, I'll tell you, we always see correlations between things like tax returns or tax refunds coming back into people's accounts 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 is definitely a correlation with that going forward.

And from a used tire - excuse me, 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 leasing, 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 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 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, 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 are 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 1 on both the Goodyear and the Cooper brand. And, remember, for us, that's about our fourth one recently. We did - you may recall, we did up to 5% going back to December 1 and we did up to 8% both effective April 1, as well as June 1. 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 - excuse me, 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 were taken in recent months, clearly, better position us to handle what we see, as Darren mentioned, those second half higher raw material cost and that cost inflation that's going to hit us. So all in all, very constructive environment out there.

Ryan Brinkman - J.P. Morgan - Analyst

That's helpful. Thank you. And then my last question is, I'd always been fairly impressed by Cooper Tire's ability to fund their 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?

Richard J. Kramer - Chairman, Chief Executive Officer and President

So, Ryan, Darren and I will tag team a little bit here, but I would say you 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 very - as I mentioned in the beginning of my remarks, very talented people, very effective, great product line, a great go-to-market strategy through the channels that they deal with. And I would say what we thought we're probably seeing - we're even more impressed with what the people can do there, the teams can do there. Great to have them on board, great to have them to be part of the team.

As we said from day one, clearly, I think that we bring some things to the party but, equally, they can teach us some things in some of that effectiveness, some of the way they do their developments, we're all ears and we're going to learn together from them. So our job as part of integration, and maybe this is where I'll turn it over to Darren, is to make sure that we don't - we not only don't lose that element, but that we actually create an environment where we can benefit from it going forward. That's the plan.

Darren Wells - Executive Vice President and Chief Financial Officer

I think, yeah, 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 are excited about in the combination and has further built the confidence that we have and the value we can create here. We announced with the transaction that we would expect to realize at least $165 million - or 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 various - how 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 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 cost and less resources is one of the key learnings that we're going to have from the Cooper team.

Yeah, 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, yeah, 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 - yeah, we're not in a position to do that today, but I think moving forward, we're going to have an opportunity to update you and share with you, not just the general points that we're making today, but some of the specific areas where we're seeing opportunities like the one that you mentioned.

Ryan Brinkman - J.P. Morgan - Analyst

Great to hear, thank you.

Darren Wells - Executive Vice President and Chief Financial Officer

Thanks, Ryan.

Operator

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

Rod Lache - Wolfe Research - Analyst

Hi, everybody.

Richard J. Kramer - Chairman, Chief Executive Officer and President

Hi, Rod.

Rod Lache - Wolfe Research - Analyst

Hey. So pricing is really just a great barometer of what's happening in terms of supply and demand, but I was just wondering if we should also be considering the potential for mix to moderate a bit once light vehicle production accelerates just since the OE has historically been a little bit less profitable versus replacement. And also relative to that - 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?

Darren Wells - Executive Vice President and Chief Financial Officer

So, Rod, let me take your last question first here. And I do think that there is some evidence of channel inventories recovering, in that, we - the industry's sell-in, which is up about 12% from the 2019 levels, is above the sell out, which is up mid-single-digits. So, it's still very good. But I think, certainly, and it's a little bit - it's been a little bit ahead of sell-out which has meant that we are making some progress restoring inventories in the channels. Unfortunately, we have not made any progress yet or a significant progress in North America restoring our old inventory, which for us to have the right level of service, we still need to do. So there is - there's going to be a need for us to keep producing essentially everything that we can produce. But, I think that the question of recovery of OE volume and what impact that will have on our mix, it 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. Yeah, 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 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, that delay, if anything, might help us a bit.

The other thing that I think 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 we - I mean, 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 were getting - 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, winning volume on about 60% of the fitments that we're bidding on and which is, I mean, a real testament to how good a job our OE teams have been doing, meeting the performance in 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 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, because 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 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 we've circled back here analyzing the situation post-COVID and particularly with all the push toward electric vehicles. And just - we're really seeing some positives there for our own business and our future mix. And obviously with those vehicles tending to wear out quicker, that eventually has benefits for us in the replacement market as well. So I know that, 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, and I think there's a lot of positives there.

Rod Lache - Wolfe Research - Analyst

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

Darren Wells - Executive Vice President and Chief Financial Officer

Yeah. So, Rod, on synergies, I think inevitably there are going to be some savings that we'll get this year because there are some things that effectively happen right away. I mean, there are some positions that were - effectively went away immediately because of the - having one public company instead of two public companies. The tax savings opportunities began right away. But I referenced the detailed planning process that our teams are going through and we're - we have literally hundreds of synergy ideas that the teams have identified that we're looking at and we're developing work plans around. So hard to get too detailed about the cadence and I don't think that the larger part of those savings are going to be happening in the second half of this year. I do think that we'll get a large part of those synergies 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 in 2022 versus 2023 and even how it might evolve during 2022. So we'll - I'd love to save that one for future call.

Back to your first question, I would have been disappointed if you didn't ask it, which is sort of our trend towards the margin targets. So we've said that - and we've talked about on prior calls, the fact that with some of the actions we're taking, we saw our way to [Indecipherable] getting back over 8% in 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 for over the 8%. If we take a look at those adjusted numbers, we're - anyway 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, we're not –I think we won't feel like that is accomplished once we're able to get 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 8-K, they were over 11% EBIT to sales this year. So 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. Progress is feeling very good, certainly the recovery of the shortfall in raws versus pricing - price/mix versus raws is very good for us as well.

Rod Lache - Wolfe Research - Analyst

Yeah, yeah, that's really good. Thanks for that, Darren.

Darren Wells - Executive Vice President and Chief Financial Officer

Thanks, Rod.

Operator

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

John Healy - Northcoast Research - Analyst

Hi. Thank you. And congrats, guys, on the…

Richard J. Kramer - Chairman, Chief Executive Officer and President

Good morning, John.

John Healy - Northcoast Research - Analyst

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. Wanted to ask, though, a little bit about Cooper strategy going forward. With 60 days under your belt with the asset, any initial thoughts on distribution either at retail or in the wholesale market? Obviously, a part of Cooper strategy was to get bigger in the mass merchant channel, and obviously you guys do well there. So, kind of, any sort of expectations we could set for how Cooper might be playing into that channel?

And then, secondly, with the relationship with HV [Phonetic], obviously, you guys moved away from that channel and that player two or three years ago. Any thoughts in terms of how Cooper might continue to operate with that entity going forward?

Richard J. Kramer - Chairman, Chief Executive Officer and President

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

John Healy - Northcoast Research - Analyst

Understood. And just wanted to ask a little bit on sourcing. Darren, I think you made a comment in your prepared remarks about how you're 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 - and I would love to get your perspective on what's going on there and how problematic is some of the conditions in Asia with flooding and tree disease on the supply chain. And can you utilize synthetic rubber more to kind of offset if that situation does become as complicated as some speculate on?

Darren Wells - Executive Vice President and Chief Financial Officer

Yeah. So, John, you remember it correctly that we have - there is a reasonable amount of substitution flexibility that we have moving from natural rubber to synthetic rubber and moving back the other way. And we utilized that in the past and generally we've utilized it to address price differential between natural rubber and synthetic rubber. In fact, right now, the prices of the two aren't too much different. And we have not really had any significant availability issues on either product. That doesn't mean our teams aren't working very hard to make sure that that's the case, and certainly they are and certainly the winter storms that went through the Texas Gulf Coast tightened up supply for petrochemicals, generally, and transportation has been really the challenge on natural rubber, more than availability. It's just a matter of getting containers and being able to transport the rubber from Asia and other rubber-producing areas to the locations where we have factories. Yeah, 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 they've been relatively stable.

The real questions, I think, have been around the petroleum-based products, and we did go through a period of time where there were some - where supply was very tight. And now we're going through a period of time where oil prices are up. And, obviously, there is an environmental overhang for the production of some of these products. So, yeah, I think 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 at this point, we really have not seen a lot of - we haven't really seen any disruption coming from it.

Richard J. Kramer - Chairman, Chief Executive Officer and President

Hey, Darren, I'm going to just jump in on two points, and one just to echo the comments, our Chief Procurement Officer, Maureen Thune and her team have just done a fantastic job, making sure we don't have any of those supply issues by really being forward-thinking 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 via - in business continuity mode from time to time.

And, John, just the second point I would make, the near-term material situation is exactly like Darren described. I would also tell you, though, longer term - I mean, 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, but our goal is to make a tire 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.

John Healy - Northcoast Research - Analyst

Great, thank you, all.

Richard J. Kramer - Chairman, Chief Executive Officer and President

Thanks, John.

Operator

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

Victoria Greer - Morgan Stanley - Analyst

Good morning. [Speech Overlap] 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 raw material 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-off 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.

Darren Wells - Executive Vice President and Chief Financial Officer

Yeah, yeah. So the - yeah, Victoria, let me handle your last question first. 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 cost will come in Q3. So we've got about $85 million of those costs in Q3 relative to 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 7 and that was the single biggest factor. There are some ongoing costs, including the mark-up for intangible assets that have to be amortized, and that's one of the other elements and that's the 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 - the effectively $15 million to $20 million of those merger-related costs in Q4, that's more of the ongoing. Yeah, so that's more of what you would see going into 2022 as well.

The - on the price/mix versus raws question, I think, I guess, first point is, I think, we've - 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 million to $475 million, if I take the midpoint of $450 million, we saw $15 million of that in the first half. So that means about $435 million for the second half. And we've said - we said in our remarks today that less than half of that would be affecting the third quarter.

So, the impact on raw materials in the third quarter will be less than half of the $400 million [Phonetic]. So I'll let you - we've said slightly less, so we'll let you make your own assumptions there. But, yeah, I think that you can make the assumption that there is going to be something approaching a couple of 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.

Victoria Greer - Morgan Stanley - Analyst

Great, thanks very much.

Darren Wells - Executive Vice President and Chief Financial Officer

Thank you.

Operator

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GOODYEAR TIRE & RUBBER CO

Q2 2021

Earnings Transcript

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