Earnings Call Transcript - GT Q4 2021

Operator, Operator

Good morning. My name is Catherine, and I will be your conference operator today. At this time, I would like to welcome everyone to the Goodyear Fourth Quarter 2021 Earnings Call. I will now hand the program over to Christian Gadzinski, Senior Director, Investor Relations.

Christian Gadzinski, Senior Director, Investor Relations

Thank you, Catherine, and thank you, everyone, for joining us for Goodyear's Fourth 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 presentation for today's call can be found on our website at investor.goodyear.com, and a replay of this call will be available later today. Replay instructions were included in our earnings release issued earlier this morning. If I could now draw your attention to the safe harbor statement on Slide 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, a non-GAAP basis. The non-GAAP financial measures discussed in the call are reconciled to the U.S. GAAP equivalent as part of the appendix to the slide presentation. And with that, I will now turn the call over to Rich.

Rich Kramer, Chairman and Chief Executive Officer

Great. Good morning, and thank you for joining today's call. Before we begin, I'd like to take a moment to welcome Christian Gadzinski as our new Senior Director of Investor Relations. Christian is a long-time member of both our finance and North American business teams, and I know he is already familiar to a number of you. Welcome, Christian. Great to have you back on the team. I also want to mention that we're including Goodyear's updated strategy roadmap in today's slide presentation. While not something that we're going to have time to go through in detail today, we're sharing it to point out that it includes some important updates to reflect the inclusion of Cooper Tire and the increased importance we're putting on both sustainability and mobility. As you saw in our press release issued earlier today, we continue to have solid momentum in our business. Our fourth quarter sales increased nearly 40% to just over $5 billion, reflecting both the addition of Cooper Tire and the benefit of higher selling prices, particularly in the U.S. This marks our highest fourth quarter revenue in nearly 10 years. This robust sales performance helped us overcome significant cost inflation and deliver strong earnings growth. We generated $398 million of merger-adjusted segment operating income during the quarter, significantly higher than last year and over 60% higher than the fourth quarter of 2019. These were simply excellent results for our teams who stuck to our strategy in an environment of rising costs. Like last quarter, our consumer business outperformed the industry globally. We're benefiting from new product launches, actions to strengthen distribution and recent OE fitment wins, including robust growth in EV tire deliveries. In all, we added more than 0.5 percentage point of organic consumer market share during the quarter. This performance is a great example of all components of our connected business model at work. At the same time, our commercial business is also performing well, reflecting strong fundamentals in the trucking industry, our best-in-class products and the strength of our fleet solutions offering. We've gained nearly 1 percentage point of market share since the fourth quarter of 2019 by doing our part to keep commercial vehicles road-ready and operating efficiently. These mobility solutions give us tremendous advantage in today's rising cost environment. To provide some perspective on costs, our raw materials increased more than $300 million in the quarter or 31%, a significant acceleration from earlier in the year. As with most companies, inflation is impacting more than just our raw materials. We are seeing these impacts throughout our cost base. To address cost pressures and supply chain challenges, we've remained agile. During 2021, we've implemented a series of price increases. We're also adding new suppliers, substituting materials when possible and optimizing distribution costs. I'm really pleased with how our team has been aggressively responding in this environment, looking for opportunities to minimize the impact of inflation, while increasing the certainty of our supply. Looking ahead, we expect cost pressures to persist over the next several quarters. As you would expect, we remain focused on executing strategies to capture value and drive efficiencies while prudently managing our costs. At its core, our connected business model is about winning with our brands in the marketplace. It's where we create value for our customers and consumers that, in turn, enables us to differentiate our products and services. As we executed on our strategies in 2021, we also expanded our scope. As you know, in June of last year, we took an important strategic step to strengthen the breadth of our product portfolio, enhance our value proposition with the acquisition of Cooper Tire. We continue to be pleased with the transaction and the opportunities we have going forward as a combined company. During the fourth quarter, Cooper contributed $156 million to merger-adjusted segment operating income, and we continue to make good progress towards our synergy targets. Moreover, I'm confident that with the combination, we have positioned our business to deliver strong organic sales and earnings growth over the long term. In summary, our business is performing well in an environment marked by volatility. We are growing our market share while capturing more value in the marketplace. We're making progress with our integration while maintaining our focus on customers and consumers. And you can see these elements of these successes in each of our SBUs. In the Americas, our U.S. consumer replacement business grew market share for the fourth consecutive quarter. Our premium volume for 17-inch and larger rim size tires increased 9% despite supply constraints, including low inventory levels. While we're winning in the market today, we're also readying our business for tomorrow. To this end, we launched our first North America replacement tire tuned specifically for EVs during the quarter. The Goodyear Electric Drive GT, which incorporates our proprietary sound comfort technology, is an ultra-high-performance all-season tire designed to deliver long-lasting treadwear and a quiet ride. We're excited to offer today's high-performance EV owners this best-in-class fit-for-purpose tire. We're also working hard to keep our Cooper product line current. Now more than ever, today's value-minded light truck and SUV owners want functional performance and rugged tread patterns at attractive prices. With industry-leading mid-tier products, such as the Discover Rugged Trek all-terrain tire, Cooper is meeting consumers' needs and profitably growing share. Turning to our U.S. commercial business. With diesel and driver costs surging, we continue to see strong demand from fleets looking to leverage our premium tires and mobility solutions to improve operational costs. Cost per mile is as critical today as it ever has been, and this feeds into our strengths in technology. In this environment, our commercial replacement volume was well ahead of pre-pandemic levels. And as we discussed in the past, if not for supply constraints, our commercial results could have been even stronger. As we look outside the U.S., our business in Latin America is performing well in a challenging environment. The replacement market continues to recover with both consumer and commercial industries approaching pre-pandemic levels. Throughout last year, our Latin America team has consistently demonstrated a commitment to our connected business model by expanding aligned distribution, driving the value of our brand and successfully executing our product roadmap. We've also remained intensely focused on meeting the needs of our customers, enabling them to continue winning in the marketplace through best-in-class products and services. I couldn't be more pleased with the performance of our Latin American business in 2021, which is a testament to the experience of our leadership team and their ability to successfully navigate through volatility while remaining focused on executing our strategy and delivering value for our customers. Moving on to EMEA. We're seeing continued share recovery in our consumer business, reflecting the impact of last year's actions to strengthen distribution. We're also benefiting in the mid-tier and the economy segments from the current impact of fewer imports into the region. These dynamics are particularly evident in the EU, where we are winning in both the premium and value segments. Overall, we grew our consumer replacement volume 22% organically or about 8 percentage points faster than the industry. By having the right tires for the right season, we're gaining market share in both summer and winter tire categories, a testament to the strength and breadth of our product portfolio. Turning to EMEA's commercial business. We continue to benefit from our innovations to support our customer transition to a greener future without adding complexity. By developing fuel-efficient products such as the Fuel Max Endurance, and easy-to-use solutions that meet customers' sustainability and efficiency needs, we've been able to grow our volume nearly 10% since 2019. Our suite of products and services for fleets was designed to capitalize on these growing trends. With 80% of fleets expected to have sustainability KPIs in place by year-end, our Goodyear total mobility offering will afford us significant competitive advantage in the years ahead. In our Asia Pacific business, we experienced better industry demand than in the third quarter, reflecting less COVID-related disruptions in China and several ASEAN markets. Again, the improving backdrop of our legacy Asia Pacific business delivered its highest consumer replacement volume on record. With lockdowns and mobility restrictions easing, OE demand was more consistent, but it remained below pre-pandemic levels due to the continued impact of semiconductor shortages. In this environment, we grew our consumer OE volume 6% organically compared to the prior year as the benefit of new fitments more than offset the impact of reduced auto production. In our consumer replacement business, we dramatically outpaced the industry again with organic volume increasing 4% in a relatively flat market. We're benefiting from the continued distribution expansion in India, particularly in rural areas, which resulted in consumer replacement volume growth of nearly 40% in the quarter. In China, the digital tools rolling out make it easier for consumers and customers to choose Goodyear. For example, our app-based direct-to-retail distribution model has been instrumental in expanding dealers' access to our product portfolio and driving share gains. We plan to complete the rollout and add additional functionality this year, further strengthening our competitive position. While we've been focused on execution in today's volatile environment, our goals include advancing our technology and capabilities as well. This work includes various forms of information sharing, co-development, and testing through partnerships with traditional and emerging mobility companies alike. We are continually innovating and collaborating to drive the tire industry's evolution to the next level of performance. So with this as our strategy, our tire intelligence team launched a new test vehicle during the quarter, equipped with proprietary algorithms and tire sensors powered by Goodyear Sightline. We're harvesting the power of rapidly prototyping hardware and vehicle data to enhance our ability to analyze tire and road conditions in real time. Mastering these challenges will enable next-generational vehicle control systems and advanced fleet monitoring solutions. This new capability, when coupled with our industry-leading tire technology, will be a core differentiator over the long term. While staying on the cutting edge of tire intelligence will benefit consumers and commercial customers, we're also focused on building a more sustainable business, so Goodyear remains the world's preferred tire brand. To this end, we announced our goal to achieve net zero greenhouse gas emissions by 2050 with minimal reliance on offsets. In support of this ambition, we established new intermediate-term emissions reduction targets aligned with SBTi standards. We understand the importance of reducing our carbon footprint, and our new goals demonstrate our pledge to combat climate change. As an industry leader, we're also committed to using more sustainable materials in our tires to help protect our planet for future generations. As a result, we're working diligently to develop a 100% sustainable material tire by the end of the decade, and the focus is paying off. In January, less than 2 years after setting the goal, our scientists and engineers constructed a demonstration tire with 70% sustainable material content. Thirteen featured ingredients are used during construction, including technical-grade polyester sourced from recycled plastic bottles. While we're building the scientific and engineering capabilities to work with these new materials, we're also developing new supply chains to support the transition over time. We're off to a fantastic start, and I look forward to updating you on our progress in the future. As I reflect on 2021, our business is performing exceptionally well. Uncertainty around inflationary cost pressures and industry demand remains, but we're well positioned to deal with these challenges. U.S. inflation gauges are at 40-year highs, reflecting the impact of higher labor, transportation, energy, and commodities. We're committed to taking the steps necessary to counter the impact of these higher costs. The supply of semiconductors is improving, but auto production remains well below consumer demand. While this dynamic creates uncertainty for our OE volume in the near term, our robust OE pipeline positions us for continued share gains regardless of the level of auto production this year. So taken together, our business is performing at a high level despite a challenging macroeconomic environment. We're recovering share while improving margins. The Cooper integration is off to a strong start, and we're driving the innovation necessary to ensure we continue leading our industry through the mobility revolution and beyond. So now I'm going to turn the call over to Darren.

Darren Wells, Executive Vice President and Chief Financial Officer

Thanks, Rich. Our fourth quarter results continue to reflect a number of incredible performance trends. These trends allowed our business to recover more quickly in 2021 than we possibly could have expected starting the year. And while Q4 faced tougher year-ago comps in the early part of the year, we continue to see strong top line growth, recovery of market share, strong growth in revenue per tire and significant benefits from the Cooper Tire combination. While volumes in the quarter remained below pre-pandemic levels, driven by lower OE production, volume trended closer to pre-pandemic levels than Q3, a good sign as we start the new year. As seems to be the case in most businesses right now, the big challenge in Q4 was cost inflation with COVID-related disruptions a close second. You see in our results that raw materials took another step-up in Q4, increasing over $300 million. And we saw a step-up in other inflation as well, with over $80 million in calculated general inflation compared with our recent historical average of closer to $35 million a quarter. In addition, we continue to be impacted by COVID-related absenteeism in our factories and by the need to hire a lot of new workers, particularly in the U.S., to address higher retirements and overall attrition. As discussed last quarter, this not only results in higher costs for workers who are training others or being trained rather than building tires, but also reduces the normal pace of cost savings programs in our factories and creates a situation with a metric we normally think of as cost savings being negative, reflecting this impact on productivity. While as you'll see, we offset both raw materials and other cost inflation with price/mix in the quarter, these factors along with lost factory productivity compressed our segment operating income margin and added pressure to working capital. Even with these impacts, however, we delivered better earnings per share than the strong year-ago quarter, and we ended the year with a better balance sheet. Our year-end net leverage was less than 3x, achieving the interim target we announced with the transaction a year early. Overall, we're feeling good about our recent results and continue to feel very good about the benefits of the integration of Goodyear and Cooper. Moving to the specifics of the income statement on Slide 10. Fourth quarter sales were $5.1 billion, up $1.4 billion from a year ago, including about $960 million of sales from Cooper Tire. Unit volume increased 29% from last year's fourth quarter, reflecting the addition of Cooper Tire units and strength in our replacement business. Segment operating income was $391 million, including $149 million from Cooper, net of merger-related costs. Merger-related costs were $7 million, so merger-adjusted operating income was $398 million or nearly 8% of sales. After adjusting for significant items detailed in our press release, our earnings per share on a diluted basis was $0.57, up from $0.44 a year ago. The step chart on Slide 11 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 12 that provides some good perspective by excluding the pandemic-related effects of 2020. While volume in Goodyear's legacy business was just slightly above last year given weakness in OE production, we continue to deliver strong price mix. Revenue per tire for the quarter was up 11%, excluding foreign currency. The combined impact of higher prices and improved mix contributed $419 million to earnings, exceeding the effects of higher raw material costs, which increased $308 million. This price/mix in excess of raw materials was sufficient to offset the calculated level of non-raw material inflation. While using price/mix to offset non-raw material inflation is different, given the high level of inflation we're experiencing today, this is how we need to approach it, at least in the near term. The red bar next to calculated inflation captures the impact of unique cost factors, including the impact of training and staffing issues at our factory that are not captured in CPI-based inflation. While we feel that this impact is transitory, it will likely improve during 2022, there will be a significant factor in Q1, which I'll come back to when we discuss our forward outlook. Similar to last quarter, we've included 2 bars to show the impact of the Cooper Tire transaction on our results. The green bar on the left reflects Cooper's operating income, which totaled $156 million during the quarter. The results reflect strong performance by Cooper's North American consumer replacement business. The red bar on the right captures merger-related costs, essentially the amortization related to the intangible assets recorded in connection with the merger. Turning to the balance sheet on Slide 13. Net debt totaled $6.3 billion. The increased net debt compared to last year reflects cash consideration paid at closing for the Cooper transaction. Note, the decrease in total debt from Q3 includes the repayment of the $400 million second lien term loan that has been part of our capital structure since the early 2000s. Slide 14 shows the analysis of our free cash flow. Over the last 12 months, free cash flow was positive despite the impact of inflation on working capital. While we continued rebuilding our inventory during the quarter, we have not yet restored our finished goods inventories to targeted levels, particularly in North America. More on that when we talk about the outlook for this year. Turning to our segment results, beginning on Slide 15. Americas unit volume totaled 25.5 million, up 45% compared to the prior year's period. The increase reflects the addition of 8.5 million Cooper Tire units as well as strength in our replacement business. As you might expect, our OE volume was down. Americas segment operating income totaled $308 million or 10% of sales despite the cost-related challenges. Americas results included $142 million of merger-adjusted operating income from Cooper and $7 million of costs triggered by the merger for a net of $135 million. Also, recall that last year's operating income included a favorable legal settlement and other items that added about $20 million. Turning to Slide 16. Europe, Middle East and Africa's unit sales increased 11% to 13.8 million. Replacement volume increased 2.2 million, reflecting a strong winter tire season as well as share gains in our legacy European consumer replacement business. Overall, OEs in Europe produced about 25% fewer vehicles than in last year's fourth quarter. As a result, our OE volume declined by 800,000 units. EMEA segment operating income of $41 million was down $28 million compared to a year ago. While price/mix offset raw material costs, it did not offset the impact of higher non-raw material inflation, notably energy and transportation. EMEA was also impacted by the nonrecurrence of temporary cost reductions a year ago, along with the continued impact of COVID-related disruptions on manufacturing. Despite these challenges, EMEA segment operating income remained above pre-pandemic 2019 levels. Turning to Slide 17. Asia Pacific's tire volume increased by 1.5 million units to 9.3 million, reflecting growth in both consumer OE and replacement. Our consumer OE business was up over 1 million units, driven by the addition of Cooper and solid performance in our legacy business. While the industry is still impacted by chip shortages, we increased market share for the third consecutive quarter driven by a ramp-up of new fitments. Growth and replacement reflected strong performance in India, partly offset by COVID-related weakness in China. Segment operating income was $42 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 despite higher volume and the benefit of Cooper earnings. I'll make one additional reflection on Asia. The current inflationary environment is particularly challenging for our Asia business, given it has a higher mix of OE than any of our other geographies. In addition, in many cases, we lack raw material index agreements with our OE customers in Asia that are prevalent in mature markets. So recovering even raw material cost increases is more difficult there. We believe our position on future fitments and the benefit of our technology will help us achieve better returns on OE business going forward and that the growth in replacement markets will continue to allow us to improve price/mix in the business overall and support recovery in margins over time. Turning to our outlook items on Slide 18. Overall, we expect 2022 to be a year of continued volume recovery, with replacement industry demand continuing to grow and OE demand recovering as the semiconductor shortage situation improves. We expect to be able to more than offset raw material costs with pricing actions and improved mix, although our raw material cost increase will reach between $700 million and $800 million for the first half. This includes the impact of currency and non-feedstock supplier costs. Inflation, including incremental wage, benefit, transportation, and energy costs will result in higher operating expenses and will continue to be at levels beyond what we can offset with efficiency, at least through the first half. Transportation alone will impact Q1 earnings by $20 million to $30 million more than it did in Q4. Bringing these factors together, along with the assumptions on Slide 19, we're targeting 2022 free cash flow around breakeven. This includes working capital investment of around $300 million, including the rebuild of Americas inventory that we were not able to complete in 2021. It also reflects an increase in capital expenditures to between $1.3 billion and $1.4 billion, including a full year of Cooper CapEx. This spend will include upgrades for more complex tire designs, including those required for electric vehicle fitments, which we continue to win at rates that are higher than on traditional ICE vehicles. The investment will also include brownfield expansions to increase capacity to address current supply constraints and address growing replacement demand. We'll provide more information on the more significant programs as they're announced. Note that Slide 21 provides updated modeling assumptions. These continue to reflect Goodyear's legacy business. Once we anniversary the Cooper combination, we'll revisit these assumptions to reflect the combined business. Also note, we expect to file our 10-K early next week.

Operator, Operator

We'll take our first question today from Ryan Brinkman with JPMorgan.

Ryan Brinkman, Analyst

Could you discuss the pricing dynamics in the U.S. aftermarket, specifically regarding the percentage of announced price hikes that are holding steady compared to historical trends? I would like to hear your thoughts on the industry's pricing power and whether the higher price of used vehicles makes investment in quality tires more justified in consumers' minds, along with any other factors that might be influencing pricing power. Additionally, do you believe Goodyear's pricing power differs from the overall industry, perhaps due to the market segments you focus on or because of your specific tire product launches?

Rich Kramer, Chairman and Chief Executive Officer

Sure, Ryan. That's a comprehensive question. I'll start, and Darren and I might share some points. First, let’s focus on the U.S. market, as you asked. Currently, we are experiencing an exceptionally favorable pricing environment, probably the best seen in recent times. This is occurring alongside strong demand, with distributors and dealers maintaining healthy margins in their businesses, reflective of an increase in vehicle miles traveled. Looking at the industry, after the 2021 price increases, we entered 2022 with major tire manufacturers, including Cooper and Goodyear, announcing price hikes of up to 12% starting January 1, 2022. On the commercial side, we also announced increases of up to 14% effective January 1, 2022. There’s significant demand in that area as well, and I mentioned earlier that if we could produce more tires, we could sell even more in the current market. Additionally, I want to highlight that despite the numerous price increases announced for 2022, we did not observe any stockpiling or pre-buying as we wrapped up the previous year in December. This indicates a positive outlook from dealers about their businesses. Volumes in January were also strong, reflecting the current conditions rather than speculation about future market trends. Regarding used vehicles, if new cars are unavailable, there seems to be a trend of refurbishing used ones, whether by personal owners or sellers. Having the right tires on these vehicles can significantly enhance the driving experience. Goodyear tires, especially in the U.S., with our weather-ready technology and light truck tires like the Wrangler series, offer tangible benefits. Overall, we are seeing positive trends across all our brands, including Goodyear, Kelly, and Cooper, and the pricing environment remains constructive throughout all our segments. While we didn’t discuss original equipment (OE) in detail and your focus was mainly on replacement, the potential recovery in OE as the chip supply shortage improves is an additional upside for us. The overall environment appears very positive.

Darren Wells, Executive Vice President and Chief Financial Officer

So Ryan, let me add two points. One is related to what's happening with the broader group of industry players. There are nine competitors that we track, and seven out of the nine have announced price increases in the first quarter. One of the companies that hadn't raised prices did so right at the end of last year. We are seeing very consistent pricing across all significant industry players. The other point I'd like to make is that historically, when we've announced price increases of up to 4%, we generally got an all-in yield of about half of that. Now, we are announcing price increases in double digits, which is much higher. Additionally, as reflected in our fourth quarter results and our expectations for the first half, we are seeing a much higher yield on the announced price increases, indicating that these increases are affecting a broader part of the product portfolio. Because of the cost environment, these price increases are sticking much more significantly than they would in a typical environment.

Ryan Brinkman, Analyst

That's helpful color. And then just lastly, what has been the experience with OE pricing? I think there may be more codified commodity pass-through arrangements with automakers versus aftermarket customers. But one thing we've been hearing a lot about from other auto part suppliers has been necessary challenge of attempting to recoup from automakers, not just higher commodity costs but also higher non-commodity supply chain costs such as increased prices for ocean shipping, logistics, freight, natural gas, electricity, even labor. Have you had those discussions also? And how do you feel about your ability to price for those non-commodity costs?

Rich Kramer, Chairman and Chief Executive Officer

Ryan, you've described the situation well. We are currently facing challenges due to decreased original equipment (OE) volumes caused by chip shortages and inconsistent demand. Additionally, we are experiencing significant cost inflation. This combination of factors poses unique challenges to OE profitability. Regarding raw material inputs (RMIs), while they are helpful, they take time to materialize. We won't receive them all at once, so there's definitely work needed to manage these other inflation-related costs. We are actively engaged in those discussions. For Goodyear, we are well-positioned in segments like light trucks and electric vehicles, where there is strong demand for our technology and products. Our technological contributions and supply capabilities are significant advantages for us. Although we cannot address everything in a single quarter, I believe we have a positive outlook. As production ramps up, there will be uneven production schedules, presenting more opportunities to serve our customers effectively. Ultimately, what matters to the original equipment manufacturers (OEMs) is addressing their needs, particularly in providing the right tires for their vehicles. I am very confident that Goodyear excels at meeting those demands.

Operator, Operator

We’ll go next to Emmanuel Rosner with Deutsche Bank.

Emmanuel Rosner, Analyst

First, I wanted to follow up on your outlook for free cash flow this year. Obviously, breakeven free cash flow is a little bit lower than expected, especially under such strong traction on the operational front. So can you maybe unpack this for us in terms of how much is related to our ability or not to sort of keep growing operating income in 2022? How much of it is to like the free cash flow usage market that you highlighted? And then as I think about this working capital and CapEx investments, how sticky or not are they? So if you were to say, okay, this is an investment, but then what would that look like beyond 2022?

Darren Wells, Executive Vice President and Chief Financial Officer

Yes. So we’ll certainly come back to that, but let me hit on 2022 first. I think the whole perspective that we have on our free cash flow target starts with the fact that we were able to deliver a stronger balance sheet in 2021 than we were originally expecting to deliver. And when we announced the Cooper transaction a year ago, effectively, we said we knew we were taking on some additional debt. But we felt like within 2 years, we would be able to get our net leverage, our net debt to EBITDA back below 3x. We actually achieved that by the end of 2021, which is a year early. And the fact that we had our balance sheet in better shape earlier has made us feel like it is appropriate to be a little bit more aggressive on investment. And particularly, investment that we need in order to support our new OE fitments that we’ve been winning and make sure we’ve got the capability in our factories to support the tires that we’re going to be designing and building for electric vehicle platforms, which has been a growing part of our OE fitment wins. And obviously, you have some economic opportunity associated with them. So we feel like that justifies the investment. We feel like the balance sheet is in shape to make that investment. But if we step back from it and think about the earnings drivers for 2022, first of all, we do expect the markets to stabilize. And when I say that – continues to stabilize, so I say that, that means we are expecting our volumes to continue to approach 2019 pre-pandemic levels. And we had – through the first 3 quarters last year, volumes were still running 7% or 8% below pre-pandemic or below 2019. In the fourth quarter, we were about 4% below our 2019 volumes, and that’s what – in the legacy Goodyear business. So we expect to continue to close that gap. So we expect some continued lift from volume. So we get some good news on volume. We feel confident that we’re going to be able to offset raw material costs with price/mix. The real challenge in terms of 2022 earnings is going to be addressing inflation in other costs, so nonmaterial costs. And obviously, we think price and mix can help with that. But we’ve got a number of costs across a number of categories and some continued disruption in our factories from attrition and from the effect of the pandemic. So that’s creating some challenges. On the other hand, we’re going to have a benefit from the full year Cooper earnings and continued benefit from the integration and the synergies – the earnings synergies that we get from the integration. So a number of things there that I think if you think about the free cash flow target around breakeven. I think you’re going to conclude that does reflect some increase in earnings or some increase in EBITDA. The investments that we're making for the year, obviously, the $1.3 billion to $1.4 billion of CapEx is an increase of $200 million to $300 million versus what 2021 would have looked like if Cooper had been included for the full year. So it’s an increase, but in the range of $200 million to $300 million, which will allow us to do some significant brownfield investments as well as some equipment upgrades. And that CapEx program, when we step that up, that does tend to be some – those programs tend to be multiyear programs. So that continued – that investment is likely to continue post 2022, although we’ve always been fairly agile when we’ve needed to pull back. But generally, the expectation is that those programs are going to take place over the next 2 or 3 years. Working capital, on the other hand, which we said is we expect to invest about $300 million in this year to get our inventories back where we need them to be, that’s a bit more of a one-time item. And over time, we’ve been able to manage the business with working capital as neither a source or a use of cash. And that’s more the model that we would expect when we get out beyond 2022. The remaining items that you see on our financial assumptions, including the interest payments, pension, cash taxes, those are levels that are up a little bit, but from where they would have been last year, but that’s principally the inclusion of Cooper. And then obviously, our – while our capital expenditures and investments in the factory are up, our restructuring cash payments are down. So we’re expecting those – a couple of hundred million a year in the last couple of years. Those have come back down to be around $100 million for 2022. So I think you take all those factors, I think you’re going to find that our EBITDA run rate for the trailing 12 months was somewhere in the range of $2.3 billion that in order to hit breakeven, that EBITDA is going to have to rise during 2022 given the investments that we’re making.

Emmanuel Rosner, Analyst

Okay. I appreciate all the detail. Maybe just 2 very quick follow-ups on your walk. First, on the raw materials front. So I think our expectation is for $700 million impact this year, principally in the first half. Are you assuming that you get a tailwind in the back half? Or is that – is the back half roughly sort of like stable year-over-year within that assumption? And then the second question is around the restructuring here you’ve been doing in Europe. What sort of benefit could you expect from this, this year? And are the challenging operating conditions, labor and such, making it harder to extract some of these cost savings in Europe?

Darren Wells, Executive Vice President and Chief Financial Officer

Yes. Yes. So well, certainly – and I’ll answer the second question first, I think. And we are getting the savings from the restructuring of the 2 German factories, and that we’ve reduced the size of each of them and reduce the staffing as a result of that. And we will get some incremental savings in 2022. I mean 2022 is the point in time where we expect to have the full $60 million to $70 million savings compared to the 2019 baseline. So we will get a step-up in the savings for the German restructuring. The issue is that we're seeing other types of cost increases. And I think in Europe, probably the biggest offender is energy prices, which haven’t affected us as much in other parts of the world that are pretty significant for us there. So the non-raw material cost inflation there is making it more difficult to get whatever savings we do down to the bottom line. But the team is still doing a good job executing. If we come back then to the raw material question, what we’ve effectively said is that for the first half, we expect the increase of $700 million to $800 million of raw material cost. And I mean that incorporates, I think that you realized that we’ve always historically said that about 2/3 of our raw material costs come from feedstock and about 1/3 of our raw materials come from non-feedstock, which includes transportation and other supplier costs as well as supplier margins. So that $700 million to $800 million, to be clear, includes the increases in feedstock, which would probably be somewhere around $500 million, but also includes some significant non-feedstock costs, including about $70 million impact of foreign exchange and significant step-up in transportation costs. But really, for what we’ve done – what we’ve done for right now, though, is just look at the first half because we do think there’s a lot of uncertainty about how commodity prices are going to evolve over the next few months. So it does leave us with some uncertainty in the second half. If commodity prices stay where they are, we would still face several hundred million dollars of raw material cost increases in the second half year-over-year. But we think it is really difficult to make that call right now and raw materials have dipped down. They’ve risen back up here early in the year, but we think that with the level of uncertainty we’ve got, it’s just not easy to call where the spot prices of raws are going to go.

Operator, Operator

The next question comes from John Healy with Northcoast Research.

John Healy, Analyst

Great. Just wanted to kind of stay with the price/mix topic just for a couple more minutes. When you look at your ability to get price, you talked about the action you took at the beginning of the year. I think there's been some actions by 1 or 2 competitors for shipments maybe in April. As you look out and kind of acknowledge that uncertainty of raws for the second half of the year, do you feel good that you can continue to approach the market with additional pricing? I just would love to get your confidence in terms of, I guess, the ability to continue to get price above the raw, whether it's feed or non-feed cost as we move throughout this year.

Rich Kramer, Chairman and Chief Executive Officer

Yes. I think I'll start and jump in. Again, going back to where I started, I think we feel very constructive about the pricing environment that we're seeing given the costs that we're seeing, as Darren explained, both feedstock and non-feedstock costs out there. So as we see these incremental cost headwinds come our way, it's our obligation, our job is to deal with those and our mechanisms to do that are 2 things, again, both, as you suggest, recovered in the marketplace with price and also focus on the cost actions that we will do in terms of managing spend and doing other things to make sure that our cost structure is in line in an inflationary environment. So I think you're going to see we'll do both on those. Again, that's things like managed spend. It's things like working on our plant optimization programs where we're looking at everything we do, what we do, how we do it, why we do it, where we do it and even continue to look at all the businesses that we have to make sure they're performing or not. And I think our track record shows we're not afraid to take those decisions. But getting back to the environment around seeing higher costs in the second half of the year, I would say you can be sure we're going to be aggressive in dealing with those. And I think the market dynamics certainly are favorable and constructive around the ability to capture the value of our brands out in the marketplace.

John Healy, Analyst

Great. And I wanted to spend a minute on the roadmap slide that you guys have in the deck this quarter. You guys talked about sustainability in there. And I think a lot of companies talked about it in a lot of different ways. But when I think about your business, does it help you win share with these OEs that are very focused on sustainability as you kind of align the strategy to what they're doing? And as you talk about raw material costs, do move to recycled or kind of alternative raw materials, can that be a meaningful savings as you look out over the next 3 to 5 years? I just love to kind of dive into that sustainability aspect of what you guys are trying to put together.

Rich Kramer, Chairman and Chief Executive Officer

No. Thanks for the question. It's a good one. I think the way we think about sustainability and why it's in our roadmap is number one, for us, it's the right thing to do. I mean, we know where we are as a society, as a company, a Goodyear. It's in our DNA to do the right thing in dealing with this is in that vein. And so it is a priority for us. And I would also tell you, as we move ahead, we see 2 things that we have to get ahead of, and that's one, solving customers' problems. And we know our customers need sustainability solutions not only in their tire products but how they view their contribution to reduce greenhouse gases going forward. So number one, centering this around customer needs is why it's important. And related to that, really is how we think about the future of mobility, and we've called it new mobility or whatever you want to say, I think you have to add sustainability to that. Our view of the world going forward is sort of winning in this triangle of technology, mobility, and sustainability. And the ability to solve all those problems in this new world is where, I think, Goodyear can deliver value to our customers and deliver value to our shareholders by solving the problems that we have around tire intelligence, around connected vehicles and doing it in a sustainable way. And I do think that's what our customers want going forward. Our sustainable tire starts that. We're very proud of getting to 70% already. And we're not manufacturing in full yet, but we're going to get there to do it. And also, I would tell you things like our non-pneumatic tire. We're running that on certain applications already with great success. That's even a more sustainable tire going forward. So I do think that this has competitive advantage and I do think it highlights Goodyear's technological advantage over many of our competitors and therefore, will benefit us going forward in a real business way beyond just the environment.

John Healy, Analyst

Great. And just 2 housekeeping questions for me. I know in the slides, you guys talked about the $15 OE and the $30 kind of replacement profit per tire, at least in the U.S. If you had to think about the EV units, how would that compare either on OE replacement? And then just secondly, I thought you guys had some maturities maybe that you could call or maybe refinance in the next year or so or 18 months. I was just curious if you have any thoughts about maybe given with the leverage coming down, maybe taking advantage of maybe a different debt profile than you guys had when you put some of these maturities in place.

Darren Wells, Executive Vice President and Chief Financial Officer

Let me address the first question regarding electric vehicles. Currently, we understand that the fitments for electric vehicles, due to their product demands and larger, more advanced tires, generally yield higher revenue per tire. Previous analyses indicated that these tires could bring in about 30% more revenue compared to similarly sized tires for internal combustion engines. Our challenge is to translate some of that 30% increase into actual profits. While we don't have a specific target number, we are focused on operationalizing these tires and determining their production costs. We believe there is significant opportunity ahead, and we will work on improving margins accordingly. On the replacement side, as mentioned by Rich, our new product launch has provided us with high value-added tire dynamics that present margin opportunities in the replacement market. The transition to electric vehicles also allows us to create distinct products and features to meet the needs of electric vehicle owners, such as sound comfort technology, which aims to minimize tire noise issues associated with these vehicles. Therefore, we see substantial prospects for enhancing margins beyond those of traditional internal combustion engine vehicles. This potential is a key reason we are optimistic about the investments we plan to make and the increased capital expenditure program we are considering.

Christina Zamarro, Vice President, Finance and Treasurer

Sure. So you're right to point out that we do have our $800 million, 9.5% coupon notes callable at the end of May of this year, those were notes that we issued in the early innings of the pandemic. And so assuming that markets would remain pretty constructive, we could have an opportunity to refinance that and reduce our interest expense. I'd say that the first call premium is half the coupon. And so I'd look for that cash benefit more in 2023 as opposed to this year. On structure, I don't know if you caught it, but in Darren's prepared remarks, he mentioned that we did repay our second lien term loan towards the end of the year, and that was important for us as we think about our path to improving our balance sheet and marching toward that investment-grade structure.

Operator, Operator

We have reached our allotted time. This will conclude the Q&A session and today's program. Thank you for your participation. You may disconnect at any time.