Good morning. My name is Miki, and I will be your conference operator today. At this time, I would like to welcome everyone to Goodyear's Third Quarter 2021 Earnings Call. All lines have been placed on mute to prevent any background noise. After the speaker's remarks, there will be a question-and-answer session. I will now hand the program over to Nick Mitchell, Senior Director, Investor Relations.

Thank you. And thank you, everyone, for joining us for Goodyear's third quarter 2021 earnings call. I'm joined here today by Rich Kramer, Chairman and Chief Executive Officer; Darren Wells, Executive Vice President and Chief Financial Officer; and Christina 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 can 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 their earnings release. The company disclaims any intention or obligation to update or revise any forward-looking statements, whether as a result of new information, future events or otherwise. Our financial results are presented on a GAAP basis and, in some cases, a non-GAAP basis. The non-GAAP financial measures discussed on the call are reconciled to the U.S. GAAP equivalent as part of the appendix to the slide presentation. And with that, I'll now turn the call over to Rich.

Great. Thank you, Nick. Good morning, and welcome, everyone, and thank you for joining us. Let me begin my prepared remarks by providing some comments to supplement this morning's press release. Our third quarter results show substantial growth in net sales of 42%, partly driven by our recent acquisition of Cooper Tire and partly reflecting strong organic sales growth in our legacy business. With this momentum, we generated $449 million of merger-adjusted segment operating income for the quarter, more than double our earnings from last year and also well ahead of pre-pandemic levels. Notably, our earnings growth came despite a 15% increase in our raw material costs in the quarter, which was in line with our previous forecast. Now for context, this compares with an increase of about 1% in our raw material costs during the first half of the year. And like most companies, we're also experiencing significantly higher inflationary cost pressures. While manufacturing locally in the regions where we're selling tires partially insulates us from cost increases related to global supply chain challenges, we are experiencing the higher transportation costs that we forecasted on our last call. Additionally, we're seeing added pressure from increased wage and benefit costs and higher utility rates, partly reflecting the growing energy crisis in Europe and China. To counter these impacts as well as higher raw material costs, we've continued to execute strategies to capture higher selling prices for our products, which helped drive a 10% increase in our revenue per tire in the quarter, the most in nearly a decade. At the same time, we're also focused on recovering volume and growing our market share. In the quarter, we continue to benefit from strong customer demand for our products globally. As a result, we saw our legacy consumer replacement business recover nearly a percentage point of market share. That's a significant move over a very short period of time. We came into the year confident that we would grow market share given the distribution changes we made in Europe last year and the benefits of Walmart reopening its Auto Care Centers after temporarily closing them early in the pandemic. I'm proud of how our team is executing and quickly recovering our share. In our commercial replacement business, we experienced robust demand as the transportation industry moves record freight volume. Here, we delivered another strong performance with shipments to fleet customers well above pre-pandemic levels. Focusing on this important segment of the commercial truck market is paying off for us, winning with these results in more consistent demand for our most premium products and creates opportunities to enhance customer loyalty through our leading mobility solutions, both of which can reduce the impact of cyclicality. We're also excited about our progress integrating Cooper. As we learn more about Cooper's business, we're identifying additional opportunities. These insights have increased our confidence in achieving synergies beyond our initial forecast. On the other hand, our consumer OE business continued to be affected by weak auto production given the shortages of manufacturing components and materials. During the quarter, industry shipments to OE customers were more than 20% below the third quarter of 2019 and considerably weaker than third-party forecasts at the beginning of the quarter. Reductions in orders related to OE production have created inefficiencies in our operations and limited our volume growth this year, particularly in Europe and in China. The current conditions will undoubtedly lengthen the global OEM recovery. While the environment is certainly less than ideal, the need for OEMs to catch up with consumer demand and replenish inventories will support higher industry volume over the next few years. We are well positioned for the recovery, given our growing market share, including our leading position on EV platforms. In summary, we're seeing some contrasting industry dynamics today between consumer replacement and OE, but combined the two segments should provide good growth prospects going forward. You can see this in each of our business units. In the Americas, our consumer business continued to benefit from a strong cyclical recovery. Excluding the impact of the Cooper merger, our large room diameter consumer replacement volumes increased more than 20% in the U.S., nearly three times the industry rate. While our premium products continue to set the pace for growth, we also experienced double-digit growth in smaller rim diameter segments, supported by recovery at Walmart's Auto Care Centers. Cooper's mid-tier offerings continue to resonate with consumers, who are looking to balance product performance and price, helping our team deliver strong results. A leading presence in the mid-tier light truck and SUV category helped Cooper grow its U.S. consumer volume while delivering double-digit operating margin performance, excluding the impact of merger-related costs. There is also a strong recovery underway in the U.S. transportation industry. These dynamics are fueling an increased need for new Class 8 trucks, tires, and services, all of which play to the strength of our commercial business. During the quarter, our U.S. commercial OE volume was up over the prior year, reflecting higher truck builds. In addition, our Goodyear fleet business continued to perform well with fleet tire volume increasing more than 10% compared to the third quarter of 2019. If not for supply constraints, our commercial results could have been even stronger. While we're benefiting from our leading position in the North American commercial market, we are not resting on our laurels. Instead, we are innovating to develop solutions that will allow us to win as markets change and customer needs evolve. In the third quarter, we signed a multi-year collaboration agreement with Gatik, the first autonomous middle-mile logistics service provider in North America. Together, we will work to advance sustainable mobility solutions for autonomous B2B short haulers with the shared goal of making it safer and easier to move goods. Gatik's fleet of autonomous commercial vehicles will leverage the power of our tire intelligence technology powered by Goodyear Sightline to improve stopping distances, reduce fuel consumption, and lower maintenance costs. This is a terrific opportunity for us to apply our connected tire solutions to drive efficiencies in the increasingly important middle-mile segment. Turning to EMEA, we are seeing good momentum in our business. Excluding the merger, our European consumer placement business delivered 9% volume growth in a relatively flat market, supported by our aligned distribution strategy. The outperformance was broad-based as we gained market share in summer, winter, and all-season categories, a testament to the strength of our product portfolio. And it's just not consumers who see great value in our products; just this month, Goodyear was named the winner of the German magazine Auto Bild's all-season tire test for the second consecutive year, placing ahead of more than 30 other brands in a comprehensive examination of dry, wet, snow, and mileage performance. Accolades like this helped reinforce our leading position in the all-season category, the fastest-growing market segment. EMEA's commercial business is seeing strong demand for our commercial truck tires as Europe's economic recovery continues. Volume in our Goodyear commercial business was 6% above 2019 levels. While we have grown our share considerably this year, capacity constraints have restricted our performance. To meet the fast-growing demand for our fleet solutions in EMEA, we've recently announced capacity expansions at our manufacturing facilities in Luxembourg and Wittlich, Germany. We're also harnessing innovation to respond to our customers' needs. For example, we've committed to developing solutions to help our customers achieve their CO2 emissions reduction goals. In September, our European commercial team launched the Fuel Max Endurance, the most versatile and fuel-efficient commercial tire we have ever produced. As a result, fleets no longer need to choose between durability, mileage performance, and fuel efficiency, a key driver of emissions. We believe tires and related solutions will play an essential role in the journey towards sustainable mobility. This market evolution will give us opportunities to further differentiate our products as we move ahead. Turning to Asia Pacific, industry demand softened considerably during the quarter, largely reflecting COVID-related disruptions in China and several ASEAN markets in July and August. Lockdowns and other mobility restrictions further complicated what was an already challenging OE environment due to semiconductor shortages. While these factors pressured organic volume trends in our OE business, we gained share for the second consecutive quarter, reflecting the release of new fitments. We're also growing faster than the market in the consumer replacement segment. Investments in distribution are driving strong results in India, where we've increased our share by more than 7 percentage points compared to 2019. Our share is also up nicely in China compared to pre-pandemic levels, as we are benefiting from scaling up our direct-to-retail distribution model and new product launches, including the recent debut of the Assurance MaxGuard. I'm sure you can tell from our business initiatives that we're very focused on leading towards a more sustainable future. The challenge we believe is right in front of us. Change in our industry is creating tremendous growth opportunities for Goodyear, and as a leader in our industry, we must set the tone for benefits of future generations. Our track record is clear. We developed more fuel-efficient products, reduced energy usage in our factories, and eliminated waste to landfills. We've discovered ways to use more sustainable raw materials such as soybean oil and rice husk ash silica that delivers similar or better product performance while reducing our environmental impact. Our engineering and manufacturing teams are also embracing these advances. We've constructed a tire without petroleum-based content and traditional film materials like carbon black and sand-based silica. With this momentum, we've challenged ourselves earlier this year by setting a goal of developing a 100% sustainable material and maintenance-free tire by the end of this decade. We're also focused on greenhouse gases and greener energy sources. As a part of our commitment to reduce CO2 emissions, we are working with an energy supplier to build two large solar power stations at our testing facilities in Luxembourg. Beginning in 2022, these cutting-edge facilities will add carbon-free energy to the local power grid that will be available to nearby communities for years to come. In addition, we have recently announced a multiphase plan to power Goodyear's manufacturing facilities across Europe, the Middle East, and Africa solely with renewable electricity by the end of 2022. We estimate this critical shift will reduce our carbon footprint by up to 250,000 tons, significantly reducing the environmental impact of our operations. Goodyear is committed to building a better future. In keeping with this commitment, we plan to announce updated climate-related goals by year-end, consistent with the climate strategy development timeline we shared in April. I look forward to updating you on our long-term ambitions in the new year. In summary, we have good momentum, and we are taking actions to strengthen our business and to ensure we are leading our industry toward a more sustainable future. When I consider the industry conditions we faced in the middle of last year, I'm truly amazed at what we've accomplished during the past four quarters. We've recovered our market share, strengthened our OE pipeline, more than offset inflationary cost pressures, and successfully managed unprecedented supply chain challenges. We've also completed a transformational acquisition and continued advancing our mobility and sustainability initiatives. To accomplish all of this in the midst of a global pandemic is a testament to the strength of the Goodyear team, a team that is stronger following the addition of Cooper. I would like to thank all our associates for their contributions to our success. And now, I'll turn the call over to Darren.

Thanks, Rich. In most ways, our third-quarter results reflect a continuation of many of the industry trends and successful Goodyear initiatives that have driven the strong momentum we've seen over the last 12 months. You will see the impact of this momentum in the strong top-line growth and earnings growth for the quarter and the continued strength in segment operating income margin. The quarter also saw a continuation of some of the challenges companies are facing across all industries, including delayed shipping, difficulty maintaining adequate staffing, and increasing inflation driven by these and other factors. It's also seen the introduction of a few new challenges, including inconsistent supply of power for manufacturing in China. And of course, the challenges associated with automotive production and rising raw material costs are still with us as well. As you can see, our team has done a good job managing through these factors in order to preserve the benefits of our cost and cash flow initiatives and continue to recover market share lost during 2020 as a result of our unique distribution footprint. This has helped us again deliver results ahead of pre-pandemic 2019 levels with significant industry volume recovery yet to come. Q3 results also reflect the first full quarter's impact of the combination of Cooper and Goodyear, helping drive the significant growth in volume and sales revenue. I shared during our second-quarter earnings call and again at an investor conference in mid-September that we were continuing to feel positive about the opportunities to drive synergies. I'll share with you today some more specifics about the early savings we're seeing and the benefits we expect over the first two years of the combination, which we now see as higher than when we announced the transaction. While we won't talk much about 2022 today, these positives, along with the challenges will be the backdrop for our plan for next year, as we look to continue our momentum while addressing both increased capital investment needs and our deleveraging objectives. Our third-quarter sales were $4.9 billion, including just over $900 million of sales from Cooper Tire. Sales generated through Goodyear's legacy operations increased 16%, driven by improvements in both price and mix. Unit volume increased 32% from last year's third quarter, reflecting the addition of Cooper Tire units and organic growth in our replacement business. Segment operating income of $372 million marked our best third-quarter performance since 2016. Merger-related costs were $77 million, including $70 million of amortization associated with the step-up of inventory to fair market value at closing. Third-quarter merger-adjusted segment operating income, which excludes these costs, totaled $449 million or 9% of sales. After adjusting for merger-related costs and other significant items detailed in our press release, our earnings per share on a diluted basis was $0.72, up from $0.10 a year ago. The step chart on Slide 10 summarizes the change in segment operating income versus last year. As we've done all year, we also included a comparison to 2019 on Slide 11 that provides some additional perspective on our recovery. Compared to the COVID-impacted year-ago period, the benefit of higher volume was $115 million, reflecting increased production and replacement unit sales growth in Goodyear's legacy business. The non-recurrence of temporary fixed cost reductions, including COVID-related government payroll incentives, partly offset the benefit of higher production volume. As Rich mentioned earlier, we delivered our best price/mix performance in nearly 10 years, and revenue per tire for the quarter was up 10%, excluding foreign currency. The combined impact of higher prices and improved mix contributed $327 million to earnings, which more than offset higher raw material costs of $161 million as well as inflation of $57 million. The cost savings versus inflation picture is worth spending a bit of time on, as this is an area that looks different going forward, at least in the near term than it has in recent history. Third-quarter costs reflect a combination of factors. First, there was some restoration of costs that were artificially low last year, as we were ramping up after the spring COVID-related shutdown. This is what creates negative cost savings. This impact is temporary. Second, as we indicated on our last call, we started to see increased inflation in transportation and labor costs. These added costs helped drive healthy inflation impact well above anything we've seen in recent years. Although some of the increase we expected in Q3, now will be recognized in Q4 given volume timing. These cost pressures are going to remain with us for the remainder of this year and into next year. We'll come back to this when we discuss the fourth-quarter outlook, but the cost savings versus inflation picture will require more focus going forward. The other category nets to zero, so no overall impact in the quarter. This reflects offsetting factors. First, it includes the restoration of advertising costs to something closer to pre-pandemic levels. Second, it includes some additional inflationary cost pressures, including warehousing and retail. These cost increases were offset by improved earnings from our other tire-related businesses and higher equity earnings on our TireHub investment. Similar to last quarter, we've included two bars to show the impact of the Cooper Tire transaction on results. The green bar on the left reflects Cooper operating income, which totaled $125 million during the quarter or 14% of sales. The results reflect strong performance in North American consumer replacement. The red bar on the right captures the merger-related costs mentioned earlier, including $70 million of amortization of the Cooper Tire inventory step-up and $7 million of amortization related to the incremental intangible assets recorded in connection with the merger. The amortization of intangibles is running a bit lower than previously expected given ongoing updates to preliminary purchase accounting. Turning to the balance sheet on Slide 12. Net debt totaled $7.1 billion. The increased net debt compared to last year reflects approximately $1.9 billion of cash consideration and closing costs for the Cooper transaction. Net of over $500 million of positive cash flow generated over the trailing 12 months, as shown on Slide 13. Turning to our segment results beginning on Slide 14. Americas unit volume totaled 25.9 million, up 59% compared to the prior year's period. The increase reflects the addition of 8.7 million Cooper Tire units as well as volume returned to pre-pandemic levels in our replacement business. As you might expect, our OE volume was down. Americas segment operating income totaled $259 million or nearly 9% of sales. Americas results included $113 million of merger-adjusted operating income from Cooper and $69 million of costs triggered by the merger, mostly amortization related to the inventory fair value step-up at closing. Excluding the impact of the Cooper transaction, segment operating income for the Americas would have been $215 million, reflecting improvements in price mix net of higher raw material costs and benefits of higher volume, including increased factory utilization. These benefits were partially offset by the cost pressures that impacted our company results, including higher transportation and labor costs. In addition, our North American factories experienced staffing challenges that were more significant than in other parts of the world. While there's been higher absenteeism globally, in the U.S., we've had much greater levels of retirements and turnover and therefore, more long-term hiring needs post COVID. The result of this is a much higher number of associates being trained in our factories in the U.S. This has impacted our Americas business in three ways: first, it has made it more difficult to increase production to pre-pandemic levels; second, it's resulted in a higher number of nonproductive workers, both those being trained and those training them; third, it's made it more difficult to work on ongoing efficiency programs. This has resulted in significantly higher costs near-term relative to the number of tires being produced. More about that when we cover our outlook. While we expect these additional costs to be transitory, they'll be with us through at least Q1 of next year. Turning to Slide 15; Europe, Middle East and Africa's unit sales increased 8% to 14.2 billion. Replacement volume increased $1.5 million, reflecting share gains in our legacy European consumer replacement business, including continued recovery of last year's temporary volume losses as a result of our initiative to better align our distribution. Overall, OEs in Europe produced 30% fewer vehicles than in last year's third quarter. As a result, our OE volume declined by 0.5 million units. Europe, Middle East Africa segment operating income of $81 million was up $59 million compared to a year ago. Improvements in price/mix net of higher raw material costs and the impact of higher volume, including increased factory utilization, drove the earnings growth. There was no material earnings impact from the Cooper transaction for EMEA. Turning to Slide 16. Asia Pacific's tire units increased 900,000 to 8.1 million, mainly reflecting the addition of Cooper Tire volume. While our China consumer replacement business was affected adversely by the return of COVID-19 lockdowns and flooding in the head-on province. We still saw share gains and replacement volume growth in the quarter. We also saw growth in our OE business with volume up 0.5 million units compared to a year ago. While industry demand was lower, we increased market share for the second consecutive quarter. We would expect to see an even more meaningful impact from our improved market position as vehicle production normalizes. Segment operating income was $32 million, down slightly from the prior year, reflecting higher raw materials and other cost pressures that we were not able to fully offset in the quarter. The addition of Cooper did not materially impact Asia Pacific's earnings. I'll cover our normal outlook items in a minute. But first, I want to share with you an update on the work the combined team has done to develop specific synergy plans for the Cooper/Goodyear combination. An enormous amount of effort has been put into this planning process over the last 180 days, led by Ryan Patterson and John Bodart. The result of this planning has been to reaffirm our confidence in tax and cash benefits and increase the expecting earnings benefits. We initially estimated that our synergies would reach $165 million within two years of closing. We now expect the benefits, including the addition of international initiatives and some initial manufacturing and sales opportunities, to reach a run rate of $250 million by mid-2023. This year's results are expected to reflect about $20 million of cost savings from the elimination of duplicative corporate costs, which is a good start. This, of course, excludes one-time transaction costs and accounting adjustments. Turning to our outlook items on Slide 18. As you can see from the summary, we expect many of our trends experienced during the third quarter to continue into the fourth quarter. Against this backdrop, we expect our fourth quarter volume trends to be similar to the third quarter. We expect price mix to continue to more than offset raw material costs, reflecting the benefit from recent pricing actions and improved mix, although our raw material cost increase will approach $300 million for Q4. Similar to what we saw in the third quarter, inflationary pressures, including incremental wage, benefit, transportation, and energy costs will be at levels beyond what we can offset with efficiency. What this seems to indicate overall is that we will need to continue to focus on additional price mix to offset not only continued raw material trends but also other cost inflation, as we move into 2022. There are two additional factors that will impact Q4 costs. First, the transitory cost pressures in our U.S. factories related to tires produced in Q3 will impact our cost of goods sold in Q4 by approximately $50 million. While these pressures will continue into next year, they should begin to moderate with Q1 production, and even the Q1 cost of goods sold impact will be less than Q4. Second, like many other companies, our manufacturing facilities in China have been impacted by the widely reported rolling blackouts. It's difficult right now to estimate the impact of this. We expect our working capital to exhibit normal seasonality in Q4, resulting in seasonal cash inflows and positive free cash flow for the quarter. Lastly, as a reminder, our fourth quarter 2020 results included a $34 million favorable legal settlement and a $13 million charge to establish an environmental reserve. Neither of these items will occur this year.

We're ready to take our first question from John Healy with Northcoast Research. Please go ahead, your line is open.

Good morning, guys. Congrats on the progress this quarter. I wanted to ask on the Cooper synergy target, the upside of the goal there. Could you maybe talk to kind of what you're seeing and where you're finding the synergy upside there?

Yes, John, thanks for your question. The integration process with the Cooper team has been going very well. All of our expectations have been confirmed. We are very excited about the cultural fit and the opportunities for value creation. As Darren mentioned, we've spent a significant amount of time together identifying the potential for growth now that we are collaborating as a unified team. This effort has enabled us to revise our outlook on synergies, increasing it from $165 million to $250 million. This increase does not diminish our focus on the cash benefits we've identified related to working capital and our favorable tax position. Overall, we're right on track, possibly even ahead of schedule. I am very pleased with the teamwork, which is evident in the announcements we've made regarding new responsibilities within the combined company. I am very happy with our progress. Darren, could you share some details about the increased target and its timing?

Yes. I believe the slide in today’s presentation will provide some insight into the broad categories we are discussing. We continue to see significant advantages in areas we initially targeted, such as SAG and logistics. There has been some improvement in our procurement expectations, which is reflected in the larger bar you’ll see. We have also had the opportunity to consider where initial benefits might arise in sales and manufacturing. Initially, we weren’t ready to deeply explore those areas until we could finalize the deal and work together. However, even within the next two years, or more realistically, the 1.5 years we have left, we've identified cases where we can transfer production from a Goodyear facility to a Cooper facility for lower-value products, thereby freeing up more advanced equipment for premium products. In some instances, we are moving simpler, lower-value products into Goodyear factories, which allows us to utilize premium equipment at Cooper to produce more light trucks and SUVs, areas in which those factories excel. We have gathered examples on both sides where we've examined the manufacturing processes and identified ways to improve efficiency and increase output, allowing us to quantify the benefits of that increased production. This collaboration between our engineering teams has been crucial for these improvements. Additionally, though it’s not our primary focus just yet, we've recognized some extra sales opportunities through the ability to sell the Cooper brand at select Goodyear sales points and to certain Goodyear fleet customers. While the first two years may not yield the highest impact, we are beginning to uncover these initial opportunities and will continue to seek out more. This gives you an idea of the sources of our opportunities.

Great. Super helpful. And then just wanted to ask one question on kind of thinking about it next year. Any way we could think about what raw material costs headwind might be for 2022? And what sort of pricing that you would need to get to kind of stay on top of that raw material spread?

Yes. I will continue to discuss this as we approach our year-end results. Currently, overall spot prices are slightly higher than they were in early August, with a notable increase in carbon black, while other materials show minimal movement, and we are closely monitoring those price changes. Butadiene prices spiked during the quarter but have since decreased, which is ultimately a positive development. If spot prices remain stable at their current levels, we will experience significant inflation in raw material costs. Right now, my focus is on the first half of next year, as we have a clear understanding of that period. You might expect increases in the first half to mirror those we observed in the second half of this year. As we progress into the year and provide our outlook in our year-end call, we've demonstrated our ability to adjust pricing and manage price and mix effectively to stay ahead of raw material costs. This track record will be crucial as we enter next year. It’s essential that our pricing not only covers raw material costs but also addresses the additional expenses incurred for transportation and other inflationary pressures that exceed what we can manage through efficiency programs. We feel positive about our current situation. There has been a consistent upward trend in tire prices during the third quarter, which seems to be gaining momentum. These are challenges that everyone is experiencing, and it positions us well to tackle the difficulties we will face in the first half of next year.

Great. Sounds great. Thank you, guys.

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

Good morning, everyone. First, pricing has clearly been very strong this quarter, and the latest price increase took effect on September 1. So, we haven't seen the full impact of that yet. It seems possible that similar strength could continue into Q4. I didn't notice any mention of additional price increases in your press release, but you've been implementing price hikes approximately every three months. Is there any reason to think the industry won't continue to recover some of this margin, especially considering the inflationary pressures you're highlighting?

So Rod, a key question building on what Darren mentioned: during Q3, we again observed a net recovery of price versus raw material costs, continuing a trend that started around Q3 of 2019. This indicates good momentum. Additionally, replacement pricing has been increasing in response to rising raw material costs and other incremental costs related to labor, transportation, energy, and so on. We keep an eye on tire manufacturers, and they have all announced at least three price increases this year, with the latest increase being between 5% to 8% in Q3. We haven't seen this level of pricing since around 2011, following the Great Recession, which reflects similar momentum. We announced price increases of up to 8% for both Cooper and Goodyear brands effective September 1, marking our fourth price increase this year, along with four price increases on the commercial side. In Europe, we also implemented a mid-season price increase between September and October, which is not typical. Looking ahead, the pricing actions we've taken position us well to manage the raw material increases that Darren discussed for Q4. However, we will need to seek price mix opportunities in 2022 to address not only raw material cost increases but also other costs we may encounter. This situation is reminiscent of conditions following the Great Recession in 2011, with demand outpacing supply. Consumer replacement demand is strong, while the OE business is lagging, particularly in the U.S., where we expect the OE business to recover eventually. Overall, everything appears constructive as we approach 2022, despite the higher raw material and other costs we need to manage.

Okay, that's helpful. And just secondly, there are a lot of moving parts on the cost and savings as we're thinking about our models for 2022. Your Slide 21 actually shows kind of a helpful, like every 1% increase in global inflation is $50 million. I was hoping maybe just give us a little bit of color, especially given what energy costs are doing in China and Europe, but just a little bit of color on the inflationary pressure, what the run rate might be? And then, as an offset, how much of the Cooper synergy do you think you can actually achieve in the next year or so? And you mentioned the European realignment starting to pay off in terms of market share, but you originally also pointed to an improvement in profit per tire. Maybe you can remind us of where you stand on that and what the targets are?

Sure. So let me hit the inflation question first, Rod. We originally were expecting to see inflation in the third quarter. That was about $40 million or above what we saw in Q2. And in fact, it came in a little bit better than that. So we really saw about $20 million less year-over-year than we might have originally expected for Q3. I think some timing there given the volumes weren't quite as strong as we originally expected in Q3. To the extent that volume rolls over into Q4, we'll see a little bit more of that cost come through. But I think that original step-up in inflation from what we had been seeing, which was around $40 million on a quarterly basis to something close to twice that is a pretty good indication of where we are right now, as we're heading into next year. Obviously, we'll start to anniversary that in the third quarter next year. But the first half, I think we're expecting that we're going to have that kind of inflationary pressure. So does that hit your first question?

Yes, that gives us a pretty good idea of the run rate.

Okay. I think your question about the Cooper synergies was regarding how much of that we might see in 2022. Currently, we have noted that we expect to see about $20 million in the second half of this year. We haven't provided a number for 2022, and we won't be doing so at this time. We'll address that in our year-end earnings call. However, we will benefit from the full year of that $20 million. We will also start realizing some additional synergies. I want to mention that many of the cost-saving programs related to the integration depend on systems implementations. We won’t finish the work on those implementations until the end of 2022, which indicates that we will see a natural increase after 2022 as we move into 2023. We’re still in the project planning phase, and we should have more visibility to share in February. Regarding the European line distribution, I'm pleased you asked about it. We feel optimistic about this program considering the results from the third quarter. The team has successfully regained market share, and it appears our third quarter share has already returned to 2019 levels. While we’re not yet sustainably there, it is a positive sign of the team’s effective management of changes in distribution. We have also started to capture additional margin in our European operations. Based on our past experience of restructuring U.S. distribution, we initially expected an increase in margin of $2 to $4 per tire in our European replacement business due to our ongoing efforts. It’s still early, but we are already starting to see benefits in terms of both pricing and additional margin on our tires. Ultimately, our distributors are also experiencing improvements. This initiative enhances both the value we receive for our products in the marketplace and ensures that our distributors' profitability aligns with and improves our brand performance. We are making progress on both fronts.

Yes. Darren, I would just add, Rod, I mean, really well done by the team. They took some pretty major decisions early on on impacts that were significant to us as well as taking some decisions in the market that stopped some of the unauthorized Goodyear tires moving around. And those efforts were difficult but are working, as Darren said; so we're very pleased with the direction.

Great. Thank you.

We will move next with Itay Michaeli with Citi. Please go ahead.

Great, thanks. Good morning, everyone. I wanted to hear your latest thoughts on the company's longer-term earnings potential. Rich, you compared the current period to the recovery after 2009, which I recall eventually resulted in $2 billion. With all the variables involved, could you share any high-level insights on how you're approaching Goodyear's medium-term earnings and margin capacity? Additionally, any information on free cash flow would be appreciated.

Yes. Leading up to the pandemic, our long-term average segment operating income margin was around 8.5%. However, we experienced some decline leading into 2019. Over the last two years, we've implemented several initiatives, including restructuring efforts in manufacturing for the Americas and EMEA, as well as alignment in distribution in Europe, which are beginning to show results. Currently, in the third quarter, we are achieving an approximately 8% segment operating income margin, largely due to the strong performance in the Americas. While we haven't fully reached that level on a rolling 12-month basis for Goodyear's legacy business, we're getting close. Additionally, with the inclusion of the Cooper business, which posted a 14% operating income return on sales in the third quarter, our position is strengthened. This is reflected in our merger-adjusted numbers, which indicate about 9%. While we are optimistic, we remain cautious due to ongoing inflationary pressures that we need to address. Historically, we have managed to offset these pressures, but rising raw material costs can complicate margin improvements due to a larger denominator in our calculations. Nevertheless, we are encouraged by our momentum and are confident in our ability to reach double-digit margins in the medium term, maintaining a high level of confidence in our future.

Yes, that's right. Yes, and definitely on the cash front. And also just on maybe the kind of CapEx into next year, given what you're guiding for the Q4 exit rate, yes. And thanks for the reminder.

Sure. I'm going to share some pro forma information that will be included in our 10-Q published later today. We've provided this information to give you a clearer idea of what the combined Goodyear and Cooper business would have looked like if they had merged before 2021. Looking at the trailing 12 months pro forma EBITDA for both companies together, we have around $2.3 billion. Considering the current interest expenses for the fourth quarter and the acquisition financing, along with rationalization, tax payments, pension costs, and CapEx, the combined pro forma CapEx would be about $1.15 billion. This is a reflection of what the two companies would show if evaluated together for the entire year. After calculating, the run rate for cash flow appears to be around $300 million positive, based on today's earnings and current CapEx run rate, and this is before realizing any synergies. Looking ahead, there is potential to achieve those synergies in 2022 and 2023, assuming working capital needs since we have reinvested some this year. Over time, we’ve managed business operations without relying on working capital as a source or a use, and we plan to maintain that approach moving forward. This brings us to the question of how earnings will evolve. Certainly, the synergies will play a role in increasing that $2.3 billion. We also recognize the need for additional CapEx due to tight supply, which presents growth opportunities for us. Additionally, we must continue upgrading our factories, especially considering the trends related to electric vehicles. Producing these tires will be more challenging, and the normal production of larger bus tires will reduce the output from existing factories, affecting us and the industry. We anticipate that investments will be necessary to keep up with these demands, and enhancing the overall cost competitiveness of our manufacturing footprint is crucial. We will be closely reviewing our CapEx plan and will provide more details in February. We are committed to making necessary investments while also focusing on the strategic goal of deleveraging. Our objective is to reduce our debt to EBITDA ratio over time, and we will remain dedicated to achieving that aim.

Terrific. I appreciate all that details. Thank you.

We will take our last question from Victoria Greer with Morgan Stanley. Please go ahead.

Good morning. And yes, just a couple, probably a bit shorter term. Firstly, on the Q4, to your point, that firstly, we clearly can expect some sort of step-up in terms of pricing given the timing of the price increases and also the need to think about price being able to offset inflationary headwinds, do you think that we can expect the $50 million cost headwind you've flagged from the U.S. factories to be fully offset also by price and mix as well as the raw materials for the fourth quarter? That feels achievable given the other dynamics that we've talked through, but just wanted to ask that explicitly. The second thing was thinking about mix, clearly, that has also been helpful with weaker OE this year. How much of that will we need to think about maybe as reversing going into next year? Or has really the majority of the move so far this year really been a brand price? The third thing then, I just wanted to get a bit of color, please, on your own inventory levels really in terms of volumes. Clearly, we can see the balance sheet inventory number stepped up quite a bit, but there's a lot of raw materials and Cooper aspects going on in there. So could you talk about your inventory levels a bit in terms of volumes, please?

Sure. Victoria, let me address that last point first. At your conference, we discussed our inventory levels, especially how much lower our days inventory was at the end of June compared to 2019. As of the end of the third quarter, our situation remains similar. Our inventory levels in units are still about 20% lower than they were in 2019. This varies by geography, with the Americas experiencing the greatest decline and where we still need to replenish our stocks the most. As we are able to do that, it should create additional growth opportunities that we are currently not benefiting from. Regarding the OE impact on mix, unless there is a significant recovery in OE production beyond our expectations and those of IHS and other third parties, I believe the net effect of OE recovery will not be negative for us. There may be some pressure on mix, but particularly in our international business units, especially in Asia, we'll benefit from increased volume. We currently have underutilized capacity in Europe and Asia, so the volume impact will be favorable. While there will be some pressure on mix, we are also bringing in better equipment that we have acquired over the last few years, which has a solid profit and revenue profile. In terms of your first question about how Q4 might look, based on our Slide 10 for this quarter, we expect that on the cost side, the fourth quarter may not show much difference for various reasons. In the third quarter, we had some fixed cost reductions from last year due to COVID-related actions that we are now unwinding. In the fourth quarter, that tough comparison will no longer be an issue, but we are facing additional inflation and operational challenges in our U.S. factories. So, when considering the temporary fixed cost reductions and the inflation indicators shown on Slide 10, we expect Q4 to not look significantly different in the end.

Great. Thank you very much.

And this concludes today's Q&A session and the Goodyear third quarter 2021 earnings call. Thank you for your participation. You may now disconnect.