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 First Quarter 2021 Earnings Call. I will now hand the program over to Nick Mitchell, Senior Director, Investor Relations.

Thank you, Nikki. And thank you, everyone, for joining us for Goodyear's first 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.

Great. Thank you, Nick. And good morning, everyone. Thanks for joining us today. The results we reported earlier today show that we're building on the momentum we established in the second half of last year. We delivered segment operating income of $226 million for the quarter, up $273 million from the previous year. While we expected to surpass last year's results, given the level of disruption from the pandemic, our segment operating income was nearly 20% higher than first quarter 2019 even though industry demand has not yet fully recovered. Our consumer replacement business delivered strong results despite the ongoing impact of the pandemic. By leveraging improved distribution in new products, we significantly outperformed the industry in the U.S., Europe, and China. In the OE segment, we continued benefiting from our OE pipeline, which again resulted in share gains. We generated these share gains while capturing more value for our products, allowing us to continue recovering raw material cost inflation. And finally, we continue to see improved manufacturing efficiency and reduced structural costs in the U.S. and Europe. These results reflect the commitment of our associates to position the company in the best possible way for recovery. As we look across our markets, we see healthy demand trends. We're encouraged by the momentum that we're seeing in consumer replacement, where demand has nearly returned to pre-pandemic levels and done so much faster than we anticipated. Conditions are particularly strong in the U.S. where sellout demand exceeded 2019 March levels.

Thanks Rich. You can see from our results and from Rich's remarks that the first quarter reflected continued industry recovery and strong performance by our team, including on market share, cost efficiency, and managing for cash. Our consumer OE business continued its momentum building on share gains in the second half. We continue to see 2021 as a year of share recovery for our OE business after the anticipated decline we saw in 2019 and 2020. Our replacement share improved sequentially as the impact of last year's customer store closures in the U.S. continued to improve and the impact of actions to address our distribution network in Europe began to dissipate. The unwind of these actions also helped us improve the mix with our 17-inch and greater rim diameter growth returning to above industry levels. This mix, along with price increases, delivered significant improvement in price mix ahead of the raw material cost increases that will begin to impact us in Q3. We also continue to see cost savings from rationalizations in our manufacturing footprint. We delivered net cost savings of over $60 million for the quarter. And while we saw seasonal growth in working capital, we continue to see the benefits of improvements in our cash conversion cycle achieved over the last couple of years with Q1 cash usage below historical levels despite work to rebuild inventory. Overall, it was a good quarter. While we continue to face a high level of uncertainty, we're encouraged by trends in our end markets and our business as we move toward the middle of 2021. Turning to Slide 10, our first quarter sales were $3.5 billion. While sales were up 15% from a COVID-affected year-ago period, it may be more meaningful to compare to pre-COVID levels from 2019. Q1 sales were down about 2% from 2019, in line with the results we saw in Q4. Our unit volume was up 12% from last year but remained 8% below 2019. So there's still a ways to go before we see full recovery to pre-COVID volumes. Our $226 million segment operating income for the quarter, on the other hand, was up versus full 2020 and versus 2019. During the quarter, a severe winter storm in the U.S. temporarily impacted production at our chemical plants and three of our tire factories. It also affected more than 170 of our retail locations. We estimate the disruption reduced our segment operating income by about $17 million. Absent this impact, our earnings growth would have been even more significant. After adjusting for this and other significant items, our earnings per share on a diluted basis were $0.43, up from a loss of $0.60 a year ago. The step chart on Slide 11 summarizes the change in segment operating income versus last year. And Slide 12 summarizes the change versus 2019. Versus last year, the impact from higher volume was $67 million, reflecting an increase in unit sales of 3.7 million. Non-recurrence of period charges from a year ago resulted in a $51 million increase in overhead absorption. Production in the first quarter was up 4 million units compared to last year. We get a larger portion of the benefit of this higher production in the period than we normally would, given immediate recognition of the impact of last year's shutdowns. Price mix improved by $64 million, while raw material costs declined by $15 million compared to a year ago. Note that we benefited, to some degree, from the three and six-month lag as raw material costs move through our inventory. Recent raw material price increases will catch up some over the coming quarters. Cost savings of $91 million more than offset $30 million of inflation. Savings associated with the closure of Gadsden and the restructuring of two manufacturing facilities in Germany totaled $33 million. Foreign currency translation negatively impacted our results by $4 million, driven by weaker currencies in South America, primarily the Brazilian real. The $19 million increase in the other category included an $11 million benefit from improved profitability at TireHub. It also benefited from the non-recurrence of certain costs incurred during last year's suspension of production. Turning to the balance sheet on Slide 13, net debt totaled $4.9 billion, a decline of more than $650 million from the prior year. Slide 14 summarizes our cash flows during the quarter. As anticipated, we used cash in our operating activities in Q1, given the seasonal working capital increases and efforts to rebuild inventory. Turning to our segment results beginning on Slide 15, unit volume in the Americas increased 7% from a year ago. As Rich mentioned, the replacement volume was up 11%, driven by our consumer business. The continued recovery of sales through Walmart's Auto Care Centers and increased share in other channels resulted in year-over-year share gains, reversing the trend experienced last year. Our OE volume was down 6% as a result of lower industry demand, including the impact of supply chain challenges for auto parts, including semiconductors. Segment operating income for Americas totaled $114 million compared to breakeven a year ago. Excluding the impact of the severe winter storm, Americas segment operating income would have been $131 million. The benefits of our cost savings actions and improvements in price mix contributed to the earnings growth. Savings associated with the closure of Gadsden were $29 million for the quarter. Turning to Slide 16, Europe, Middle East, and Africa's unit sales totaled 12.7 million, an increase of 10% from a year ago. Replacement volume increased 11% with increases in both consumer and commercial. Our consumer OE business was up 4%, despite a drop in industry demand, reflecting the benefit of new platforms and strong demand in the light truck and SUV segments. EMEA segment operating income of $74 million was up $127 million versus last year. The increase was driven by higher volume, improvements in price mix, and lower raw material costs. And while we remain pleased with the higher earnings delivered by EMEA during the last two quarters, we recognize that there are some unique factors involved. These include a benefit of approximately $10 million related to customer programs in Q1 and pricing ahead of upcoming raw material cost increases. Pre-pandemic earnings and margins are more reflective of our expectations going forward with improvements from restructuring actions and volume recovery building on that foundation as we head into next year. Turning to Slide 17, Asia-Pacific's tire units totaled 6.8 million, up 29% from the prior year. OE volume increased 26% and replacement increased 31%, driven by strong growth in China and India. Segment operating income was $38 million, up $32 million from the prior year's quarter, reflecting the higher volumes. Turning to our outlook items on Slide 18. While markets have continued to recover through the first three months of the year, we still face a high level of uncertainty. Additional COVID-related shutdowns impacted several of our key international markets in April, which clouds the volume outlook for Q2. Despite this uncertainty, our overall expectation is that second quarter volume will continue to move towards pre-pandemic 2019 levels with a two-year decline less than we saw in Q1. We expect our production to remain at about 2019 levels, given our need to replenish inventory. The segment operating income impact of higher production compared with last year will again largely be realized in the quarter rather than being lagged through inventory as we had to recognize the impact of last year's production cuts immediately given the severity. We expect price mix to more than offset raw material costs as we benefit from recent pricing actions before feeling the full impact of rising raw materials in the second half. Slide 19 summarizes several of our full-year financial assumptions. Based on current spot prices, we would expect our raw material cost to increase $325 million to $375 million, net of cost savings, largely in the second half of the year. This is an increase of approximately $200 million from the outlook we provided on February 9. Our other financial assumptions remain essentially unchanged from February. One last point I want to hit before we open up the call for questions. While we continue to be very excited about the acquisition of Cooper, we don't have anything new to add today beyond what we shared on February 22. The Cooper shareholder vote takes place today and we continue to work on required regulatory approvals. We look forward to sharing more information with you on the Cooper acquisition once we complete these procedures. Now, we'll open up the line for questions.

We'll take our first question from John Healy with Northcoast Research. Please go ahead.

The first question I wanted to ask was, should we maybe put aside 2020 and really just look at your margin performance relative to 2019 and kind of look at the growth rate that you saw, I think, about 20% SOI growth over 2019 levels? Do you think that's the right way to think about the business? And as you look at the remainder of the year, any reasons to think that 20% improvement maybe could continue? I know raw materials are going to do some things in the second half, but it also seems like you got some pricing recently at least in some regions. So, just trying to think about how we should think about the pace of improvement for the next nine months compared to '19.

So, John, you can probably tell from the fact that we included the walk chart comparing first quarter to 2019. That is in fact our mindset as we tend to be benchmarking what we're trying to achieve, thinking about how we're doing versus the pre-pandemic levels, sort of looking through the 2020 results and thinking about what we're doing to build up from 2019. Yeah. So I think the fact that our operating income is already above 2019 levels. We feel like that's a very good sign. And obviously we went into that with at least one key part of our business that's nowhere close, which is the off-highway segment in the business. So the aviation and off-highway tire businesses are still well below so that the things that we categorize, a number of them we categorize as other tire-related. And we really didn't get any recovery in the first quarter in those other tire-related categories. So I think we're feeling very good about the fact that our segment operating income is up. And I think partly good because it demonstrates the cyclical recovery of price versus raw materials. We think that's obviously a big deal. It's showing the benefit of some of the structural cost-saving actions that we've taken, which I also think is a pretty big deal. If we take those things and then think, okay, we're already - we're above 2019 levels of segment operating income and we still haven't got the benefit of the full volume recovery, so we're still 8% down on volume. So as we see - and obviously we see some very good volume trend, so we're expecting that volume recovery to occur. So we're going to get - we should get continued growth as volumes continue to recover. We should start to get some of the $150 million that we lost last year in that other tire-related business category. And obviously things like the winter storm Uri, we're not going to expect to get hit with that again. So, I think, all of those are very positive and we're also seeing in the first quarter a recovery in our performance on 17-inch and above relative to the industry, which means some of the mix that we lost during 2020 were also recovering. So I think we have a number of things that are very good in the first quarter and a number of additional items that should allow us to continue to build going forward. Yeah, I think, the other question about the second half is a good one. Yeah, I think we continue to see a lot of these factors benefiting us in the second half.

Understood. Makes sense. And then, just a question, kind of on supply chains and logistics. I know there has been a couple of industry kind of news stories in the last two or three weeks about just maybe some beginning levels of scarcity of natural rubber and maybe drawing some parallels to natural rubber shortages mirroring that of semiconductors potentially. And I'm not sure if that is exaggerated or reality. So was kind of curious to get your perspective on that. And then, secondly, and I think it's really easy to think that the manufacturers are producing autos at the same clip that they were. They want to be sourcing product from you guys at the same level, but is that in essence how they're responding to this or are they looking at certain aspects of their supply chain and saying, hey, we can't let raw materials such as natural rubber do what semiconductors are doing? So how is like the true response on working with suppliers like yourselves?

Yeah. So, John, I'll start with the first one on natural rubber. And the first thing I'll do frankly on all the - working through a lot of the supply challenges we had in the first quarter. As you all know, we had the winter storm in the Gulf Coast, we had the Suez Canal blockage and the shortage of containers and all that. I just want to tip my hat to our teams - our operations teams and procurement and our businesses who have really worked through these things just tremendously. And the end result is, it really hasn't caused us any issues in terms of our production. And if I talk specifically to natural rubber, we're certainly not experiencing any limitations that you might have read about in some of the stories that are out there. So we're certainly aware of some of the issues on tight supply that came up last year as the industry started ramping up, which was sort of normal course, I would say. But again, we took a lot of proactive measures anticipating that to ensure we have the supply and to not make it an issue. And I think, recently you've seen natural rubber prices return back to sort of Q4 last year levels after a spike. And I would say that tends to be indicative and we've seen this really from my time over decades in 15 years now. We've seen these type of moves to be indicative of more price volatility that really reflects speculation around natural rubber, could be stockpiling, could be doing those other things as opposed to an underlying supply/demand situation. So that's not something that we're seeing here that we can't manage through right now. It's not an issue that's taken up a great deal of my time. And on the second question relative to the OEMs, we have obviously very productive and transparent discussions with the OEMs on a regular basis. And I would say, that continues during this period as well. As you know, we have to meet their just-in-time supply requirements. And I'm proud to say that we do that with great regularity. And I would expect, as their volumes sort of fluctuate right now with the semiconductor situation, they will be back and we'll be ready to supply them for the relationships we have with them. So I wouldn't say we've seen any dramatic difference in that, again very constructive discussions. I would also tell you, I'll just say, as we look at this, we see the demand - I'll just jump in, John, and say, the demand for new cars, as you know, is very strong as well as for used cars. So, the semiconductor shortage clearly is having a big impact on their business and consequently our OE supply. Having said that, in the near-term, yes, it will impact our OE volumes, but we also see this as an opportunity to continue to supply the replacement market where the demand is very strong. And remember, our OE tires are large rim diameter, very good tires. So we got a lot of good capacity to support the market out there, the replacement growth that's out there as well as to rebuild inventory that we all managed very cautiously down during COVID. So near-term, I think we're going to work our way through that very well. And long-term, listen, I think as we think about what Darren mentioned and I mentioned in some of my remarks, the supply/demand equation is pretty good when you look at inventory levels and where our sell-out is. As OE comes back, as that replacement demand stays strong, I think that puts forward a pretty constructive supply/demand equation looking out into the future. And again, we do think that semiconductor situation will be solved and I can't predict when. But given all the attention focused on it, I'm certain that it will be solved and maybe even sooner than we think.

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

I'd like to first maybe just get a little bit more color on market share outperformance that you're seeing in the U.S. and Europe. I think, in the U.S., obviously a lot of factors behind it, but maybe you can peel it back a little bit. What's the extent of Walmart coming back? And are you also seeing some of these stories about the West Coast port logjam have been playing a role, tariffs on Asian tires, I would imagine, are also playing a role. Have any thoughts on what it is that we're seeing here now on sustainability?

Yeah. Rod, I think you're right to point out the situation of 2020. And I'll just start by saying, we're very pleased both in the U.S. and Europe with our share performance in the first quarter. And again, just to maybe reiterate what you said, 2020 in both our markets was really not reflective of our ongoing market strength through the market position we have. If I start in the U.S., we had the impact of Walmart in 2020 and that's where we sort of were disproportionately impacted by Walmart closing their auto care service centers during the pandemic. That obviously hit our volumes last year. Now what's happening is, those stores are open, I think they're all just about open right now. But as traffic comes back, their recovery really still tails the overall tire industry return. So that's still impacting us as we think about where we are right now. But I will tell you a couple of things and the first is, in 2020 you may recall, given the situation that we had, we took a lot of steps to gain share and to do that in channels - in other channels, let's say then, just our big box channel with Walmart, we had great momentum leaving 2020 with gaining share in alternative channels. That momentum continued into 2021. And I think that's what you saw driving the share performance that we had. And add to that the return of the auto care centers being opened. I think we're very confident that that traffic is going to return and that we're going to get back the share that we lost in 2020. And I would say, the momentum is absolutely pointing in that direction. So, feeling very good about that. And then, in Europe, again, a little bit of a unique situation that you'll recall is that we initiated an aligned distribution initiative in 2020. And as part of that, we expected to lose volume about 1.5 million units. With COVID coming in, that turned out to be about 2.5 million units. And I would tell you, the brunt of that probably was felt in Q3 of last year. But starting in Q4 and continuing this quarter, we started gaining momentum back and seeing the value of those programs working. And it turned up in what we would hold as significant share improvement in Q1. So these programs are working. We're seeing it as we capture more of the value of our brands in the marketplace, as we look at how tires are being sold in Europe in a more aligned way, and let's say unaligned way with tires going in different directions. And that's been very successful. And we're on that path. We remain on that path and we continue to believe that this program has margin improvement of about EUR2 to EUR4 per tire on our consumer replacement business in Europe. So, overall, I would say, we're feeling pretty good about the direction of where our share is heading in Q1.

And maybe just a little bit more color on the drivers of that $91 million cost savings that you had in your bridge, you said $33 million is Gadsden - mostly Gadsden but also some contribution from the German plant. Maybe you can give us a little bit of a sense of that. And then, if we add back the impact of the storms, you're pretty close to a 7% SOI margin already. Are you gaining line of sight on 8% maybe happening next year?

Yeah. So, I think, the cost savings - Rod, I think, you're right to point out, the structural cost savings we have from the manufacturing footprint actions. Yeah, I think we've maintained some very tight cost controls coming out of the pandemic. And obviously we've still got volumes that have not recovered to pre-pandemic levels. So I think you're still seeing some of those benefits. Yeah, I think there are some costs there that will likely return as we get back to the higher volume levels. But I think right now, we've continued to run at a very tight level of cost efficiency. So, the question about where the margins get to, I won't go back to my thinking versus 2019 levels. But obviously, we're above 2019 levels and, in fact, if we go back before 2019 levels, first quarter of 2018, we were just over 7%. And I think with the factors that we talked our way through, we're heading back. We can - you could add back the additional volumes. So we fully recovered volumes back to 2019 levels and we got some recovery from the other tire-related businesses and added back the storm impact, which was your suggestion. But it wouldn't be hard to do the math to put our segment operating income above 2018 levels. And that will be sort of in that 7% to 8% margin range, which is I think what you're trying to walk your way to. So I can do that math, I can see our way there. Obviously, that work is not done yet, but it's not too hard to think about how we could move our way back beyond 2019 levels back toward levels that were similar to 2018.

We'll take our next question from James Picariello with KeyBanc Capital. Please go ahead.

Just on Goodyear's strong volume outperformance, are you sensing any share gain momentum yet from the tariff situation in U.S. or is that a potential catalyst later in the year maybe as the company rebuild some inventory?

Yeah, I think - James, I think right now, we're really struggling to keep up with demand. And so, I think we're struggling to keep up with the recovery and we haven't yet been able to restore our inventories back to something more like normal levels. And we've got channel inventories that are low as well. So we've got a lot of customers that are interested in trying to get their own inventories back in position. Then I think it's a little bit too early to think about any potential impact from tariffs. I think, in the end, I think we continue to see tires, important tires coming into the U.S. So, I think the sell-in in the second half of last year was very high. And there may be some year-over-year difference this year, but in fact, I think generally U.S. tire makers are producing about as fast as they can right now. And to fill the rest of consumer demand, I think there'll still be some imports coming in, those will be coming in with tariffs.

Right. Okay, got it. And then, this was touched on already. But as you think about the lean channel inventory situation in North America, its strength and sell-out demand on the replacement side, and then overlay that with the semiconductor challenges affecting OE volumes, this should actually be a positive development for Goodyear and the industry, right, as you'll have more capacity to send for your higher mix replacement channel. Yeah, just curious if you have any color, any thoughts on what that benefit could be from a mix standpoint if OE volumes are in fact lower than prior expectations.

Yeah, I think I'll start and we can talk about the mix impact going forward. But I'll even say on that, remember, the capacity that's not being sold to OE typically is larger rim diameter on very high-end tires. So that's tires that there is demand for the replacement market. But I think, James, if you take a step back on the channel inventories, I think it's something to maybe share some perspectives on. And I think, as Darren said, we saw some modest destocking of our brands with our wholesalers and retailers. But maybe equally as interesting in our third-party distributors and our line distributors, we saw that their inventories were about 10% down versus Q1 of 2019. And I think, if you look at that, I think that makes the point on where inventory levels are. But I think if you add to that some other points and that's around where sell-out was, and obviously we saw sell-out in Q1 was - Q1 2020 was pretty good. But also, as I mentioned in my remarks, sell-out in March was about 7% above sell-out in 2019. And I think that just talks about where the demand trend is. And then, if you add to that the direction of where, let's say, vehicle miles traveled are going, that was still down 12% in February. But I think as we think about March and into the summer, I think it's reasonable to say that vehicle miles traveled will certainly head back in the direction of 2019. And I think if you look at gas usage versus 2019, you'll see sort of similar directional lines. And I think all that's pretty good because now we're seeing lower inventory to support higher growing sales, let's say, higher sales demand. And we're also doing that, as Darren said, in an environment where manufacturers are trying to rebuild our inventories from where they were managed during COVID as well. So, those are pretty positive and then I think if you can take one more step to think about, one more added point would be that as we look at retail sell-out prices from some of the indicators that you know very well, I think there is evidence that retail prices are rising as well. So, a pretty good dynamic as you think about the supply/demand dynamic that's out there, particularly relative to having to cover the raw materials we see in the second half of the year.

The only thing I would add to that is, maybe just, I think, to quantify a little bit the point you're trying to get to. And so, I guess, and that is how do we quantify the benefit of being able to fill replacement demand with tires that we would otherwise be sending to the automakers. I guess, I felt like that - that was embedded in your question. Is that fair?

Yeah.

Yeah. So if we - I mean, just using the modeling assumptions that we use, I mean, if we saw a 5% decline in the U.S. OE build, that would be something - that would free-up something like 450,000 tires that we could put in the replacement market. And if we're assuming those are 17-inch and above tires, which almost all of our OE tires at this stage are, then there would be something like an extra $12 or $13 of margin on each of those 450,000 tires. And that will ultimately go into our mix, I mean that would help our mix. So, it's - I mean, it's clearly a favorable effect and obviously helps our customers as well, which we see as a real positive thing. We have to see how that plays out.

Yeah. That's super helpful. Just a quick one on TireHub, $11 million year-over-year improvement in the quarter. Was there anything one-time-related or is that maybe a sustainable trajectory from here, just thoughts on TireHub? Thanks.

So, I think, what we're seeing there is, what we expected with TireHub net is, as their volume builds up, they'd be in a better position to cover their cost base, including the investments that we want them to make to expand. So, there is not really seeing anything of a one-time nature there. We're just seeing, after having some losses on our equity in TireHub for the first couple of years after startup, we're starting to see them get - move back toward breakeven.

We'll take our next question from Emmanuel Rosner with Deutsche Bank. Please go ahead.

First, a couple of quick questions to understand better how you're thinking about the second quarter outlook. And you gave a lot of helpful comments, but obviously the year-ago comparison was a little bit distorted. So, would you expect the change in price mix versus raw materials to be of similar magnitude to what we just saw this quarter? And then, if I think about it in terms of SOI per unit or SOI margin, if you prefer, would you think about it as similar or lower than what we've seen in the first quarter? And if so, what would be the drivers of that?

So, I'll then focus on the drivers, because we intentionally don't give specific guidance on items. But here is, I think, how you can think about that. I think, first of all, second quarter volume, I think we're looking or expecting the volume decline versus 2019 to be less than we saw in Q1. Now, there is some seasonality. We've got some business units where the second quarter is seasonally a lower volume quarter. And that's certainly true in Europe. But generally, we're expecting, just to keep closing in, on where volumes are for 2019. So, if we're comparing SOI, and I will, I think about how our SOI in the second quarter is going to compare to '19 rather than '20 because '20 was so disrupted. Here we can say that volume is probably going to be less of a negative in the second quarter versus '19 than it was in Q1. If we think about the impact of price versus raw materials, I would say that the pricing that we have announced is generally going to have the same kind of effect in Q2 that it had in Q1. And in fact, we've got a price increase announced in the U.S. about 8% that's effective April 1. So that will mean there is bigger pricing impact or bigger pricing benefit in the U.S. in Q2 than there was in Q1, which I think that's a positive as well. So we got a little bit of positive from volume, a little bit positive on pricing. Raw material costs, we've actually got in our appendices, we've got a raw material slide that shows a couple of things, and it is Slide 23, I believe. But two points here. First of all, it shows the $15 million decline in raw material cost we got in the first quarter. But it also points out that we expect a modest increase in raw material cost in the first half. And so, what we would see in the second quarter, and we'll call it modest, that at least the second quarter, it would more than make up for that $15 million reduction in loss in the first quarter. And then, probably a bit more about that. So we would have a modest increase in raw material costs in the second quarter resulting from that. But we're going to have the increased pricing from that April price increase to help deal with that. So, I think, you've got kind of a balanced view there of price and mix. Obviously we don't expect to have the - actually I'll say this. We actually will continue to have some impact from the winter storm that carries over to the second quarter because we've got some production impact that is still held up in inventory that will come out in our cost of goods sold in the second quarter as well. And then, in terms of cost savings, if I'm thinking about it versus 2019, we will - this will be our fourth and final quarter of the benefit of the Gadsden closure. So we've been getting about $30 million a quarter benefit versus 2019 from the closure of Gadsden. We'll get something similar to that in the second quarter as well.

Okay. I really appreciate all the detail. That's very helpful. And then, just talking about a couple of markets outside of the U.S., I think you mentioned that in the prepared remarks, but can you just go over sustainability of your margin performance from your point of view? And then, what were the drivers of Asia margin weakness and how do you think about that going forward?

So let me hit Asia-Pacific margins. I'll come back and make a couple of comments about Europe. So, I think that - and I'm going to keep going making these comparisons to 2019, and for the same reason. But if I look at Asia-Pacific margins, their margins in the first quarter were just under 8%. And back in 2019 in the first quarter, it was a little bit over 9%. So there was a decline, it's $38 million of SOI this year versus $47 million back in 2019. I'll say that most of that decline reflects some additional investment that we're making in marketing and developing our distribution channels for future growth. So there is some element of that. And there is also an outsized impact on Asia-Pacific from our off-highway businesses, so the OTR business and our aviation business. And we didn't get any recovery in those businesses in the first quarter. So those are still - have significant impact there and not really improving. But I think the real improvement is going to take a little bit of time. So if I take those two factors, I think, overall we're pretty satisfied with the performance in Asia-Pacific in Q1. Yeah, our replacement business was record volumes, the distribution initiatives that we've got in China and in India are helping deliver on those results. I think, as we continue to deliver on those results, we are going to - and we get recovery in the aviation and off-highway businesses. We're going to see our volumes in the consumer business grow into some of those investments that we're making. So I think we feel good about the outlook going forward there as well. If we - I'll finish my remarks on Asia there. In the European business, we've had a couple of quarters, and I mentioned in my prepared remarks, we have a couple of quarters where we were earning $70 million or so of segment operating income and getting the margins that go with that. I think right now we're feeling like that - while we appreciate there were some very good performances to deliver those two quarters, we're not yet at a point where we've got Europe back to those levels sustainably. Yeah, I think our sustainable level of earnings in Europe probably closer to what we saw in 2019, where we were running about $50 million a quarter. And I think as we look forward, we can take that $50 million and we know we're going to get benefit from restructuring. We know we're going to get benefit from the recovery and the rebuild of our OE portfolio. And we know we're going to get the benefit of the actions we're taking on the line distribution. So I think we still feel like there is a path to get ourselves to the level that we've seen in the last couple of quarters sustainably. I think we're feeling like we're not there yet. Yeah, I think as we look into 2022, I think we feel like we're going to move ourselves there. But I do think that in the last couple of quarters, we've had some things that helped boost those results that aren't yet at a sustainable level.

We'll take our next question from Ryan Brinkman with JPMorgan. Please go ahead.

Thank you for taking my questions. Some of the other companies we cover, including in the automotive aftermarket, have cautioned recently around pending higher labor costs as the economy reopens, amidst still elevated government unemployment benefits. I'm guessing you may be relatively protected from this, given your longer-dated union contracts for workers in your assembly plants, but was curious if maybe you're seeing perhaps some of the same in your company-owned retail stores. And then, just looking beyond labor, are you seeing anything notable with regard to any other non-raw materials inflation such as ocean freight, logistics, etc, and how would you rate the coping mechanisms available for you to counteract the effect of non-raws inflation? I think we're used to talking about sort of price mix versus raws and then separately about cost savings versus general inflation. But do you think you may have the ability to take price in the marketplace to help defray some of these other non-raws costs too?

Yeah. So, Ryan, I'll start and Darren can jump in here as well. I would tell you, in terms of labor cost, I think our labor cost - I think labor costs in general have been on an upward trend. So that's not necessarily a new headwind for us. I will tell you, the headwind that we did experience during the pandemic and, again, I'm going to tip my hat to the teams, particularly in North America, for this is that we have a lot of people out with COVID or a lot of people not coming to work because of COVID. And we saw retirements and things like this take place. We can all speculate this to the source of why those things are, you mentioned a couple of them, but the fact of the matter was, we had to hire, train, and put a lot of people to work in our factories in the U.S. to be able to meet the demands as we started ramping our factories back up. And I would tell you that the teams did a tremendous job of doing that and doing it safely, in line with our protocols. And we've done a fantastic job of getting the plants to continue to make the tires that we need to the market. They're running and running hard. And I would say that's going very well in terms of delivering the tires that we need. And that's both on the consumer side and the commercial side. We haven't talked much about the truck business, but the truck business is very strong and we need every tire we can get. So that's something that we continue to focus on going forward. On the retail side, I do think that there is wage pressure there, but there are always - again, that's sort of an ongoing situation. I think the team again is very well equipped to manage that. And I think they are - and I look at that - I look at the quality of the people that we're hiring based on some of the recognitions that we get. And I think you saw not too long ago our retail stores were rated as some of the best experience that a consumer can have going to a retail store. So, I'd say, we're managing that very well. And then, the question on some of the supply disruptions. We clearly had those. I mean, I think, you had a combination of demand really coming back faster than we anticipated. And then you had the disruptions coming in around, as I mentioned earlier, the Gulf weather, the shutdown of a lot of the petrochem facilities there, including our own. You had some of the Suez Canal issues, you had the port issues, you had containers and all these types of things. But again, I will tell you, we don't see a significant risk to our production. We're working through that. The teams are doing a great job. Our suppliers are in line. They have adequate inventory to meet our leads - our needs, excuse me. But what I will tell you is, the end result of this is - and I think Darren alluded to this a few times, we are seeing higher transportation costs that we have to manage and we're very well focused on that.

Yeah. Ryan, I think - I mean, if I take it back to the way we, I guess, analyze our cost structure, I think we're going through a period of time of rising inflation in 2019. We're starting to see $45 million or $50 million a quarter in inflation. And a significant - I mean, a lot of that was wage-based inflation. As a result of the pandemic, inflation effectively came way down, this quarter we had something like we had $30 million of inflation, which is one of the lowest inflation rates that we've had in the last three years. I do think that as we see some of the factors that you're referencing, I think I would expect that that inflation number is going to start to creep back up towards where it was in 2019. In 2019, we were able to maintain savings programs to offset that level of inflation. So, I think, as we work our way back up to 2019 levels, I think we remain comfortable. To the extent inflation goes beyond those levels, it's going to require more work on our part to keep offsetting it.

Okay. Very helpful. Thanks. And then, just lastly, I realize that there will be in Q2 a non-repeat of various austerity actions taken last year amidst the onset of the pandemic. And so, year-over-year cost savings could be minimal and maybe that continues into Q3. But are you able to say, if you were to, like try to normalize for the temporary savings, whether you think you may have found more permanent savings as a result of those cost actions taken in response to lower volumes last year such that you feel any more positively about normalized margin going forward? I'm not sure if there's a way to quantify those residual savings or if you could maybe highlight where you expect to layer back in fewer costs than you took out, whether that's primarily in manufacturing or SG&A, etc.

Ryan, I think that there ultimately will be some. I think, to keep it simple right now, I would focus on the factory footprint savings and structural elements that's different than it was in 2019. I ultimately think there will be some areas that we'll find some permanent savings in, but not at a point of trying to quantify those right now. And I know there are some costs that we are still running without that are likely to come back as we get all of our business activity back to those 2019 levels.

Yeah. So I don't want to mislead anyone, because I think there are some costs that will come back. The factory restructuring cost, those are going to be permanent savings. The other area is the right question to ask. I think it's going to be clear to us as we get through the second and third quarter, what additional savings, including areas like SAG, we may have as more of a longer-term effect.

This concludes our Q&A session and today's Goodyear first quarter 2021 earnings call. Thank you all for your participation and you may disconnect at any time.