Q2 2021 Goodyear Tire & Rubber Co Earnings Call

August 6, 2021

Yeah.

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And where you stand by your programs and balance sheet.

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Good morning, My name is Keith and I'll be your conference operator today.

At this time I would like to welcome everyone to Goodyear's second quarter 2021 earnings call.

All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question and answer session.

If he would like to ask a question. During this time simply press star 1 on your telephone keypad.

If you would like to withdraw your question press the pound key.

And I'll hand, the program over to Nick Mitchell Senior Director of Investor Relations. Please go ahead.

Thank you Keith and thank you everyone for joining us for Goodyear second quarter 2021, and 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 and Tomorrow, Vice President Finance and Treasurer and supporting slides.

Dentation for today's call can be found on our website at Investor day at Goodyear Dot Com and a replay of this call will be available later today.

<unk> instructions were included in our earnings release issued earlier this morning.

And I can now draw your attention to the Safe Harbor statement on slide 2 I would like to remind participants on today's call that our presentation includes some forward looking statements about goodyear's future performance actual results could differ materially from those suggested by our comments today and more.

Significant factors that could affect future results are outlined and goodyear's filings with the SEC and and our earnings release.

The company disclaims any intention or obligation to update or revise any forward looking statements, whether as a result of new information future events or otherwise our financial results are presented on a GAAP basis and in some cases on non-GAAP basis, the non-GAAP financial measures discussed in the call.

All 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 and good morning, everyone.

I'd like to start today by welcoming all of the Cooper tire associates, joining us this morning, and he had the opportunity to meet many of you in recent weeks and I've been so impressed by your passion for Cooper and for our industry.

From our initial interactions on through to our integration meetings and business reviews, it's clear that your industry knowledge and experiences will bring tremendous value to the combined organization.

Sharing ideas and best practices will make us a stronger competitor and allow us to find new ways to better serve our customers and consumers.

Our journey is just beginning but I'm really excited about our future and about what we can achieve together.

Let me begin my prepared remarks today by providing some comments to supplement this mornings press release for.

And for the second quarter, we delivered $349 million of merger adjusted segment operating income, which is over 1.5 times, what we earned in the second quarter of 2019. These strong results reflect continued recovery and demand and we outperformed industry growth across many of our businesses.

At the same time, we delivered the highest quarterly contribution of price mix that we've seen and our business and 9 years and we continue to have good momentum.

As I look at the global consumer replacement industry during the quarter, we continued to see a sustained path towards recovery.

As you would expect this general theme is largely carried by mature markets. We continue to experience pandemic related weakness and several of our emerging market countries.

More broadly however, economic recovery remains robust, particularly in the U S and China.

Given these markets play to our strengths, we saw global consumer replacement market share rise nearly 1 point.

And our OE business, the global shortage of semiconductors resulted in weaker and more volatile demand than we expected.

The auto industry produced approximately 2 million fewer vehicles and initially expected at the beginning of the quarter.

Despite the weaker than expected backdrop, we continue to recover share globally, including the benefit of our strong position on Suvs and light trucks.

We're also continuing to see the benefits of our strong cost management on.

On balance our business performance is strengthening.

And with this as the foundation towards the end of the second quarter, we completed our announced combination with Cooper tire.

I believe this is truly a transformational milestone for both companies our collective team continues to share excitement about our prospects going forward as.

And as we do the work to bring our companies together I know, we will be better positioned than ever before to meet our customers' evolving needs.

And you can see evidence of our strengthening performance and the initial benefit of the Cooper combination and each of our Skus.

And the Americas or U S consumer business took advantage of favorable conditions and the replacement market, where we continue to see robust demand for our most premium products.

Our large rim diameter volume performance was particularly notable with our growth exceeding the industry by nearly 10 points.

The resulting mix benefits combined with pricing actions more than offset higher raw material costs.

Our U S. Commercial business is also capitalizing on strong end user markets.

With freight demand outpacing supply keeping existing trucks road ready is a top priority of fleets as a result more customers are relying on Goodyear is fleet central to make informed decisions regarding their tire and maintenance needs.

The growing popularity of our suite of fleet management tools is helping us drive market share and targeted segments.

And the quarter, our commercial shipments were nearly 15% above the second quarter of 2019.

Turning to Brazil, our consumer and commercial replacement businesses are recovering faster than anticipated shipments in both segments were well above pre pandemic levels during the quarter, reflecting both economic recovery and share gains.

Our resilient and OE business, however saw more than half of the country's auto assembly facilities, taking capacity offline during the quarter, keeping our OE volume considerably below pre pandemic levels.

And EMEA markets are also recovering, albeit with less consistency than in the Americas with industry demand softening sequentially.

We sustained a relative momentum and the quarter with share gains and all of our businesses.

Our European consumer replacement business more than recovered higher raw material costs supported by the impact of our distribution changes at the same time, our market share on Europe has recovered by more than a quarter of a percent year to date.

Our consumer OE business also continued outperforming but with less impact as part shortages limited recovery and auto production.

Our continued improvement and the consumer OE segment is supported by our ability to meet the demands of electrification today Goodyear has a presence and nearly half of the EV platforms produced in Europe.

Having this leadership position is critical as electric mobility begins a period of dramatic growth.

And as tires on most evs, we're faster than on a comparably sized internal combustion powered vehicle. These benefits will extend well beyond the initial shipment.

So what we're seeing are dynamics that should position our consumer business for long term profitable growth.

Turning to commercial volume was more than 10% above 2019 levels, despite lower freight volume.

And we benefited from exceptionally strong results and the on road segment, driven by our growth portfolio of fleet customers. During the quarter. For example, we added test goes fleet of 6800 trucks and trailers to our customer portfolio.

Tires alone are no longer enough to win over fleet customers today's fleets demand innovative solutions that will help them maximize uptime and reduce costs.

We recently unveiled and Goodyear drive point, the latest productivity tool and our total mobility offering.

Drive point combines on valves sensors battery powered receivers and mobile apps to deliver fleets a cost effective way to monitor tire performance.

These technology solutions strengthen our position as the preferred provider of monitoring and predictive maintenance, making goodyear more valuable to our customers and preference over other mobility solution providers.

Turning to Asia Pacific industry demand varied significantly by country.

Challenging conditions persisted and India, Malaysia, and other countries with low vaccination rates affecting demand and our production and the region.

And China. The story was encouraging with demand fairly consistent with pre COVID-19 levels.

And a stable market, we leverage and expanded retail network to grow our consumer replacement volume by more than 20% compared to the second quarter of 2019.

Turning to our consumer OE business, we grew our volume more than 40% compared to the prior year and an expanding market our teams and an excellent job and this environment, helping us capture nearly 1 point of market share.

In addition to delivering solid second quarter results. We continued advancing our mobility solutions strategy in June we launched Goodyear sideline. The first tire intelligence solution for cargo van fleets, a timely launch considering the impact of pandemic head on E Commerce volumes.

Goodyear Sightline combined sensors and cloud based algorithms to provide fleet operators with real time tire health information and this rollout lease further groundwork for connected tire future.

We're also taking steps to make our mobility solutions more accessible last month, we announced a strategic partnership with setup to jointly offer our Goodyear connected tires with set us telematic solution by.

By using a common telematics unit, we can simplify fleet interactions, making it easier for customers to get the tire and trailer performance data needed to optimize vehicle use and reduce fuel consumption and emissions.

As I've said before Goodyear is committed to shaping the mobility Revolution initial.

Initiatives like and go Goodyear Sightline and partnerships like the 1 we have with <unk> along with our focus on the intersection of new mobility sustainability and technology are demonstrative of new business models and solutions that will define goodyear's position and relevance for the next 120 years.

We view our job as requiring the operational excellence to deliver results today, while simultaneously building the capability to lead our industry tomorrow. When the tires relevance will not just continue but evolve to a more prominent role to enable mobility.

It remains a great time to be a technology leader and the tire industry.

We're entering the second half of the year and focused on the opportunities ahead and markets are more stable and at the beginning of the year, particularly in the aftermarket.

Fundamentals are robust and U S consumer replacement with dealer restocking and increased driving underpinning demand.

And Europe the demand picture continues to improve led by recovery and vehicle miles traveled as more employees returned to the office and the need to keep goods flowing through supply change is driving the demand for commercial tires around the world.

And while supply chain constraints continue to limit auto production and the outlook for our consumer OE business remains favorable given our ongoing share recovery. The long term need for oes to restock dealer inventory and the accelerating shift to electric powertrains, which favors goodyear strengths and product design and materials.

Against this backdrop, we are focused on sustaining our momentum while working to integrate Cooper.

The trajectory of our markets makes us feel good about the timing of the combination.

We look forward to achieving our full potential and the years ahead now I'll turn the call over to Darren.

Thanks Rich.

And the second quarter were again, a reflection and strong performance by our team and their focus on continuing our recovery market share and improving our manufacturing cost and managing for cash.

And pursuing all of these while also delivering strong price mix to address rising raw material costs and inflation and many other cost categories.

These results also illustrate the momentum built up over the last year across our consumer replacement OE and commercial truck businesses.

And as of June 7 we had the momentum with the Cooper team has developed to the overall equation, creating even more opportunity going forward. We're excited to have completed the combination so quickly, giving our teams a chance to work more closely together and accelerating the opportunity to deliver the full benefits and the transaction.

While our team is delivering we have to acknowledge the added volatility we've experienced and our end markets during the second quarter we.

We saw lower OE production than we anticipated a problem it seems likely to persist longer than originally thought and we saw increased disruptions in our emerging markets businesses.

Some COVID-19 related, particularly in Asia markets and some of the result of social unrest with significant impact on our South Africa, and Colombia and manufacturing facilities and.

Still others reflect reflecting the difficulty of shipping products to markets like the middle East, where we don't have a manufacturing presence.

Overall this slowed down the global volume recovery temporarily with the pent up demand and these markets will be a source of further growth over the coming months.

Operationally our team has done a great job keeping our factories fully supply.

So while we continue to see escalation and raw material prices, we have seen no impact of material supply on our production.

And consistent production has been critical and serving markets, including Latin America, Europe, and China, and particularly the U S where replacement tire demand remains very strong.

So as we entered the second half of the year, we're feeling very good about the industry outlook and our ability to outperform the industry, while continuing to see our profitability trends towards target levels.

Before I begin reviewing the financial results for the quarter I want to highlight a couple of items that are going to see them a little bit different given we're incorporating for the first time Super results.

First of all our results reflect the impact of Cooper sales from June 7 through June 30th.

This means there is a little over 3 weeks worth of Cooper sales and volume reflected and our company results as well as and each of our business units will provide disclosures to clarify the impact of these added sales, which overall were just over $250 million for the quarter.

Second results reflect a number of items related to the transaction itself.

This includes cost directly related to the transaction as well as accounting treatments that are required and such combination.

In order to provide a view of results without these items, we are providing a calculation of our earnings guidance excludes them.

We have typically shown adjusted net income and EPS, but this quarter, we have merger adjusted Soi as well the.

And the most significant item from the Cooper transaction impacting Soi is the markup of Coopers June 7th inventory to market value.

Which means much higher cost of goods sold on those units as they are sold out in Q2 and Q3.

And this makes up $40 million under the $50 million of Cooper related items, hitting our segment operating income in the quarter.

With that preamble lets turn to our income statement on slide 8.

Our second quarter sales were $4 billion.

This is now above pre pandemic levels from 2019, even without the incremental sales from Cooper.

Unit volume increased 84% from last years second quarter, reflecting continuing industry recovery market share gains and the addition of Cooper units.

Second quarter segment operating income of $299 million was well ahead of last year and also well above 2019.

Second quarter merger adjusted segment operating income of 349 million exceeding our results from 2018 as well.

This includes merger adjusted Cooper tire income of $34 million.

Our second quarter results were also adversely affected by the carryover impact of a winter storm that hit the U S and the first quarter, which reduced our Americas segment operating income by approximately $24 million.

After adjusting for the impact of the storm and other significant items detailed in our press release, including the impact of inventory step up adjustments our earnings per share on a diluted basis were <unk> 32.

Up from a loss of $1.87, a year ago.

The step chart on slide 9 summarizes the change and segment operating income versus last year.

Similar to last quarter. We also included an analysis versus 2019 on slide 10 to help you better track our recovery.

Compared to the Covid impacted year ago period, the total impact from higher volume was $531 million, reflecting the benefits of higher unit sales and increased production.

Price mix and improved by $159 million compared to a year ago more than offsetting a $30 million increase and raw material costs.

This is a significant net benefit in Q2, the increase in raw materials will be much higher beginning in Q3.

Cost savings of $86 million included $25 million associated with the closure of Gadsden as well as the benefit of and indirect tax ruling in Brazil.

And from these benefits savings were limited as many of the onetime savings implemented during Covid did not recur this year.

Inflation of $41 million was higher than in the first quarter and is beginning to reflect increased cost pressure across multiple categories.

The $37 million improvement and the other category reflects a $94 million increase and the earnings generated by our other tire related businesses as well as the $17 million benefit from improved profitability at tire hub, which recorded its first profitable quarter.

These factors were partially offset by higher advertising and R&D expense as we restored investments in these areas after severe cutbacks during last year's Covid shutdown.

You'll notice we added 2 columns and the step chart clearly illustrates the impact of the Cooper tire transaction on our results. The first bar captures Cooper's operating income between the June 7th closing and quarter and the.

The second bar reflects the impact of cost triggered by the business combination, including the effects of fair market value step up on Cooper's inventory and certain other assets.

These costs totaled $50 million and the quarter more than offsetting the $34 million of merger adjusted operating income Cooper contributed during the $3.5 week period.

While Cooper Standalone results are no longer reported publicly Cooper also performed performed very well during the second quarter.

Operating profits and margins were stronger than in the comparable 2020, and 2019 periods with increased volume and improvements and price mix driving the results.

Turning to the balance sheet on slide 11, net debt totaled $6.9 billion, increasing less than $1 billion from second quarter of 2020, despite cash consideration of over 2 billion paid to close the Cooper transaction.

The impact of the merger consideration was partially offset by free cash flow generated during the last 12 months.

And Cooper balance sheet cash at closing.

Completion of the Cooper tire merger impacts the comparability of our working capital to prior periods.

Controlling for this impact we made some progress rebuilding our inventories and Q2. However, we have a way to go before reaching levels that are aligned with demand, especially in North America.

Slide 12 summarizes our cash flows for the quarter and for the trailing 12 months and helped us deliver our stronger than expected balance sheet position.

Turning to our segment results beginning on slide 13 unit volume and the Americas increased 125% from a year ago.

And our replacement business, which was up $8.6 million units continued to benefit from higher unit sales through Walmart and auto care centers.

Youll recall the closure of these locations greatly impacted our relative performance last year.

Our OE volume increased $1.9 million units, reflecting pandemics impact on auto production last year.

While semiconductor shortages continued to affect our customers' production schedules and our OE business is positioned to capitalize on the stronger demand that will follow and given our high win rate in recent years.

Americas segment operating income totaled $233 million up $520 million from a year ago excluding.

Excluding the impact of the Cooper transaction segment operating income for the Americas would have been $247 million.

Americas results include $31 million and merger adjusted operating income from Cooper and $45 million of cost triggered by the merger, including a $35 million impact of the Cooper tire inventory step up.

Americas earnings benefited from higher volume improvements and price mix and continued recovery and our other tire related businesses. These factors were partially offset by payroll and advertising expenses returning to more normal levels. After last year's COVID-19 response actions as well as by higher raw material costs.

Turning to slide 14, Europe, Middle East and Africa's unit sales totaled $12 million up 63% from last year.

Placement volume increased $3.2 million, reflecting stronger demand for both consumer and commercial tires.

And what share gains in both segments also contributed to the growth.

Our OE business was up $1.5 million units, reflecting a partial recovery and industry demand and the benefits of recent fitment wins, including some significant electric vehicle platforms.

EMEA segment operating income of $43 million was up $153 million versus last year on higher volume improved factory utilization and improvements and price mix.

As expected Emea's earnings moderated compared with Q1, reflecting typical demand seasonality and the absence of some unique factors that positively impacted the first quarter.

Turning to slide 15, Asia Pacific tire units totaled $6.5 million or 43% increase over the prior year OE volume increased 800000, reflecting a partial recovery and industry demand total.

Total replacement volume increased $1.1 million during the second quarter, we maintained strong growth and the Chinese aftermarket as our actions to strengthen distribution continue to deliver both volume and price mix.

Excluding the impact of the Cooper transaction, our consumer replacement volume in China during the quarter was up more than 20% and the second quarter of 2019.

Segment operating income was $23 million up $57 million from the prior year's quarter, reflecting higher volume and improvements and price mix.

Turning to our outlook items on slide 16, we expect continued volume recovery in Q3 and should see our volume moving closer to pre pandemic 2019 levels and we saw in Q2.

For reference Coopers volume in Q3, 2019 totaled approximately 10 million units.

We expect production to remain at or near pre pandemic levels, given our need to replenish inventory.

Similar to Q2, the cost benefit related to higher production will impact us immediately given the accelerated cost recognition related to lower production and Q3.2020.

We expect price mix will continue to more than offset raw material costs, reflecting the benefit from recent pricing actions and improved mix.

Net cost savings will reflect the impact of the non recurrence of last year's COVID-19 related temporary fixed cost reductions as well as net incremental transportation and labor costs.

1 other note given that Q3 will include a full 3 months of Cooper results.

If you use and Cooper's Q3, 2020 to help you model and your expectations for this year remember that Cooper recorded a $49 million favorable adjustment to its product liability reserves and the third quarter of 2020.

Slide 17 summarizes several of our full year financial assumptions based on current spot prices. We now expect raw material cost to increase $425 million to $475 million net of cost savings.

Slightly less than half of the cost increase is expected in Q3.

This $100 billion increase from the outlook. We provided on April 30, only represents the impact on legacy Goodyear operations as we intend to report Cooper's contribution to our segment operating income as a standalone item at least through the middle of next year.

We provided updated figures for several other financial assumptions and nearly all instances the change compared to the previous estimate reflects the impact of the merger.

However, we've refined our forecast for rationalization payments to reflect our latest thinking on the cash required this year to finish executing our German modernization plans.

Lastly, our reported results will continue to be impacted by noncash costs triggered by the merger, including amortization of the tire Cooper tire inventory step up and incremental amortization of Cooper tire intangible assets on.

On a pre tax basis, our provisional estimates is for these costs to be about $85 million and Q3, and approximately 15% to $20 million for Q4.

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

And at this time, if you would like to ask a question. Please press star and 1 on your Touchtone phone net.

<unk> and 1.

Our first question today comes from Ryan Brinkman with Jpmorgan. Please go ahead hi.

And thanks for taking my questions I wanted to ask how you're feeling about your relative pricing power and ability to therefore offset commodity cost headwinds maybe in the context of a few factors that I thought might be important but of course any other factors do you think might be important and maybe starting with <unk>.

And where we are at with regard to consumers average tread depth on their tires I think that you'll likely have some good insight into that given the large number of retail stores that you operate. So what are you seeing there as miles driven recover and then.

And maybe replacing tires is something that Americans deferred earlier during the pandemic, but maybe now need to catch up on making those purchases somewhat less discretionary and other factor I thought to ask on if it's important is all of the monthly child tax credit and other transfer payments that many Americans are now receiving whether that could help and then last.

The increased equity that consumers have and they are used vehicles right. So the manheim index was up a little bit today, but if used cars are worth 35% more than before the pandemic does that help rationalize purchasing a new set of tires and maybe paint a little bit more for those tires. If the vehicle itself is so much more valuable and how do you think these are.

Or other factors.

Play into your ability to implement and to stack.

The price increases that are required to offset raw material inflation.

So Ryan.

There is a lot there, but I think all really headed and the same direction and I can.

And I can start by saying everything that Youre talking about I think is manifesting itself and a positive way and the market right now demand is good particularly in the U S. Sell out is good and and we think that that's something that's going to going to continue on going forward. If you if you sort of Peel back what <unk>.

You said in terms of tread depth, we're not seeing anything really unusual in terms of more worn on tires, it's been pretty consistent and I can tell you that that's really been pretty normal. The last time, we saw really really worn on tires coming in was and the great recession. Since then it's been fairly consistent so I wouldn't say.

That alone is.

Is driving anything having said that your comment about child credit or other government programs, putting our money and individuals' accounts I'll tell you, we always see correlations between things like tax returns and our tax refunds coming back into People's accounts, and we see that spending manifesting itself out and.

And our channels.

Number of them and.

Particularly across some of the mass market mass merchandisers as well that we deal with so there's definitely a correlation with that going forward and from a use tire or excuse me a used vehicle perspective, and the increased value and used vehicles. I would also tell you that yes, absolutely I think as people keep their vehicles.

Longer the importance of tire from a safety perspective.

And the fact that they're keeping it longer and not turning it back not lease it not sending it back and lease or whatever it might be also plays in People's minds to make sure. They have a good set of tires on their on their vehicle and again, that's playing out through all our channels, whether it's through our own retail stores through some of our franchisees through some of the large regional retailers as well as some of the <unk>.

<unk> channels I think we're seeing net benefit of Av.

Used vehicles staying on the road a bit longer and now actually being worth a little bit more since you can't replace it with a new car. So all of those are trends moving in the right direction.

Now taking a step back on.

On price I will tell you during the second quarter, we again saw a net recovery of price of ROM and over raw materials and that's a continuing trend that we've seen now for multiple quarters. It's a good trend thats going forward, if I break it down for you a little bit.

They will start and the U S and consumer and as you might imagine.

And we monitor what's happening and the market and.

And the market is wells for our competitors and the quarter. We certainly saw the replacement industry pricing move higher and as we do our monitor of key competitors key consumer tire producers out there I would tell you we saw at least 2 price increases since November sometimes 3 and those and the range of about 5% to 8% and.

For Goodyear earlier this week, we just announced and our consumer replacement business and up to 8% price increase effective September 1 on both the Goodyear and the Cooper brand and remember for US that's about our fourth 1 recently, we did you may recall, we did up to 5 going back to December 1 and we did up to 8.

And for both effective April 1 as well as June <unk>.

And if I, if I Peel Cooper back a little bit as well they've taken price increases about up to 8% 1 and January 1 and May and 1 in July and.

And I go to the commercial markets and the U S. Very similar if we look at the commercial truck tire producers, we've seen significant increase as well and that range of 5% to 8% from a Goodyear perspective, we've gone on.

Effective price increases up to 6% on November 1 as well as April 1 and then up to 12%. This past July 1 so I'd say that that's reflective of what's happening out in the marketplace in terms of our input costs and the demand versus supply dynamic and Europe.

Again, we are seeing price increases most tire companies announce prices.

It gives me now ahead of the winter season, we have a summer winter market. There as you know so we did see that and those announcements are really similar to the price actions that were taken ahead of the summer and all season sell and at the end of right around Q1, So thats a positive trend that we're seeing from a Goodyear perspective, we implemented a price increase.

<unk> up to 4% to 5% on winter and.

And an additional 2% to 3% on summer and all season at the end of the first quarter. So.

Good trends there as well and also we're seeing the same thing happening in the truck markets. There. So if you add all that up I would say certainly that the pricing actions that were taken in recent months clearly better positioning us to handle what we see as Darren mentioned, those second half higher raw material costs and net cost inflation is going to hit us all and all.

Constructive environment out there.

Helpful. Thank you and then my last question is and I had always been fairly impressed by Cooper tire is the ability to fund the research and development of payers, including more expensive high value add tires in order to effectively compete with other tire manufacturers that were really multiple times larger and more global than they were and with more financial resources and yet still generate the margins in <unk>.

Turns that they did do you do you think that Coopers culture had an element of thriftiness to it or sort of doing more with less and if so how do you ensure that the combined organization can learn or benefit from different aspects of the Cooper culture going forward.

So Ryan Darren and I will tag team, a little bit here, but I would say you sort of.

Summarize some of the positives that Cooper has and why they were so attractive for us too.

To do the deal that we did with them.

Clearly they have very as I mentioned and the beginning of my remarks, very talented people a very effective great product line.

Great go to market strategy through the channels that they deal with and.

And I would say what we thought were probably seeing we're even more impressed with what the people can do their the teams can do their great to have them on board great to have them to be part of the team as we said from day, 1 clearly I think that we bring some things to the party but equally.

And teach us some things and some of that effectiveness some of the way they do their developments, we're all ears, and we're going to learn together from them. So our job as part of integration and maybe this is where I'll turn it over to Darren is to make sure that we don't we not only don't lose that element, but do we actually create an environment, where we can benefit from.

Going forward that's the plan.

And then I think.

And I guess.

And maybe echo the point.

Everything we've seen over the first 8 weeks post closing has reaffirmed that.

Things that we're excited about and the combination and as further built the confidence that we have and the value we can create here.

We announced with the transaction that we would expect to realize at least $165 million.

California.

<unk> delivered $165 million of run rate cost synergies within 2 years I think we expect to realize at least that.

Along with the additional cash and tax benefits.

And there's a number of areas.

Synergies will come from it and it does include and I think part of the reason, we're being methodical right now as it does include making sure that day.

This is a process of taking the best of both worlds. So it is not applying goodyear approaches to Cooper's business.

Is looking at each each group and each functions practices and making sure we're picking the right ones and I think you are.

And the ability to do some things operationally with lower costs and less resources is 1 of the key learnings that theyre going to happen and the Cooper team and yeah. So I think we're ultimately listening.

Very carefully and right now we're going through.

Effectively a 3 month process.

The integration leaders from each side.

To develop more detailed plans and.

And once we moved past that process.

Yes, I think we're going to be able to start to share more on this specific insights and more of the specific areas of opportunity.

To provide some more details where were not and are positioned to do that today.

But I think moving forward, we're going to have an opportunity to update you and share with you.

Not just the the general points that we're making today, but some of the specific areas, where we're seeing opportunities like the 1 that you mentioned.

Great to hear thank you.

Hi, Brian.

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

Hi, everybody.

Hey.

Pricing is really just a great <unk>.

No matter whats happening in terms of supply and demand.

And but I was just wondering if we should also be considering the potential for mix to moderate a bit 1 light vehicle production and accelerates just didn't.

<unk> has historically been a little bit less profitable versus replacement and also relative to that the weaker OEM demand right now.

Is that helping the industry rebuild inventories on the replacement side or on rock inventories on the operating side, so pretty tight.

Yeah.

So rod let me take your last question first here and I do think that there is some evidence of channel inventories recovering.

And that.

The industry's sell in.

This is up about 12% from the 2019 levels.

As above the sell out which is up mid single digits. So still very good, but I think certainly and there's a little bit it's been a little bit ahead.

Ahead, and sell out which has meant that we are making some progress restoring inventories and the channels and unfortunately, we have not made any progress yet on a significant progress in North America, restoring our owned inventory, which for us to have the right level of service, we still we still need to do so there is going on.

And need for us to keep producing essentially everything that we can produce Bob.

I think that the.

The question of recovery of OE volume and what impact that will have on our mix.

It is a fair point.

And it seems like that recovery and OE volume is going to happen over a longer period of time that we might have originally thought just given that the semiconductor issues seems too.

Turning out to be more protracted than might have originally been expected.

So I think ultimately thats helpful, but I think there's 2 other things.

And then I think we are upbeat about and that is that we've been.

Recovering share of Fitments and OE.

And our win rate over the last 2 or 3 years has been.

A real positive and we had expected to be rebuilding our OE market share. So as we get to the point, where the oes are catching up on production and restocking their dealers on.

They're going to be doing at a time when we've got a greater share of the vehicles being built so I think that that delay if anything might help us a bit.

The other thing and I think.

And ultimately a real positive here and it does get straight to the question of OE economics.

And that is the the economics of electric vehicles.

And we.

And it's now a couple of years ago that we first talked about a couple of the key factors that are making this rich put it such a great time to be a technology leader and the tire industry.

And that is with the electric vehicle trend.

And our win rate on electric vehicle Fitments.

And is significantly higher than it has been in general historically.

So I think.

And we talked about it 2 years ago, We said we were getting.

Winning on about 2 thirds of the Fitments that we were bidding on for electric vehicles.

And as you might expect that that's dropped down a bit but our most recent range is that we're still winning winner.

Winning volume on about 60% of the Fitments that we're bidding on and when.

On a real testament to how good a job our teams have been doing meeting the performance and the tech specs.

For the increased weight, the higher torque vehicle dynamics.

So that continues to be a REIT.

Will benefit the other key statistic I think that we.

And I guess, maybe all of that is driven by the fact that they are only about half the number of competitors for these fitments that we have had on internal combustion engine fitments historically, so I mean fewer companies bidding the other thing and this is a positive move even compared to 2 years ago.

And so I think 2 years ago, we were looking at electric vehicle, Fitments and saying the revenue per tire on those fitments was about 15% higher than the equivalent ice vehicle.

So that 15% was essentially a revenue.

Revenue premium.

That revenue premium is more than double.

That amount today.

And I think part of that is that the average electric vehicle size.

It's been growing and Theres, more suvs and trucks and the mix and.

And therefore more complexity and the fitment, but but this is something that we circle back here and.

Analyzing the situation post COVID-19, and particularly with all the push toward electric vehicles and.

And just on you're really seeing some positives there for our OE business and our future mix and.

And obviously with those vehicles tending to wear out quicker that eventually has benefits for us and the replacement market as well so.

And I may have gone a bit beyond the specifics that you're asking about on the OE versus replacement, but I think.

And the trends within the OE business, our work reflected on and I think there's a lot of positives there.

Great Thanks, and just.

2 really quick ones hopefully quick.

And a lot going on this morning. So it's possible that my quick math is wrong, but are you already converging now on that original 8% Soi margin target for Goodyear.

And second.

And just give us a sense of the cadence of synergies with Cooper tire what are the key actions that are being taken and how should we think that and how should we expect that to.

Theyre getting rolled in.

Yeah. So.

And on synergies and I think inevitably they're going to be some savings that we'll get this year because there are some things that effectively happened right away and there are some.

And physicians that.

And we're effectively went away immediately because of the.

Having 1 public company instead of 2 public companies.

The tax savings opportunities began right away, but I referenced.

The detailed planning process that our teams are going through and.

And we're literally hundreds of synergy ideas and the teams have identified and we're looking at and we're developing work plans around so hard to get too detailed about the cadence and I don't think that the larger part of those savings are going to be.

Happening and the second half of this year.

I do think that we will get a large part of those synergies during 2022 and once we get past. This initial planning process I think we'll be able to start to share what that cadence might look like.

<unk> thousand 22 versus 2023, and even how it might evolve during 2022.

We will love to save that 1 for for a future call.

The.

Back to your first question I would have been disappointed if you didn't ask it.

Which is sort of our trend towards the margin targets and we've said that and.

And we've talked about on prior calls the fact that with some of the actions we're taking.

We saw our way too.

I will say getting back over 8%.

And sort of the.

Near to intermediate term and.

I guess, we're looking at it now and saying.

And there are different ways that we could look at this and obviously we've introduced merger adjusted segment operating income, but we've got a quarter here for over.

Over the 8% if.

If we take a look at those adjusted numbers were.

Any way you cut it I think our first half is at 7 and 5% and our trailing 12 months is over 7%. So I think the.

Trend is all and the right direction and.

I think we're feeling very good about our ability to to be over that 8% I mean, we're not and I think Laura.

We won't feel like that is accomplished once we're able to get a full 12 months held over the 8% Mark. So I think we're close but not quite there, but I think we continue to see.

The opportunity even in the.

The legacy Goodyear business.

To move from that sort of approaching 8% back towards double digits and.

And then if we add Cooper and <unk>.

And I realize that we have our own internal views, but just with the numbers that Cooper filed and their 8-K.

Over 11% EBIT to sales this year. So if we add we add and their margins and obviously that's an additional.

Additional increment to what we'll be able to deliver on a combined.

Company basis so.

So I think overall, we're feeling good about that.

Progress is feeling very good and certainly the recovery of the shortfall and raws versus price and price mix versus raws and feeling very good force as well.

Yes, that's really good thanks for that Darren.

Alright, Thanks Robert.

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

And John and congrats guys on the.

Good morning, I'd be remiss, if I didn't thank you congrats on the quickness in terms of how you close the deal and and just the progress on the second quarter.

And I wanted to ask though a little bit about Cooper's strategy going forward.

60 days under your belt.

What the assets.

Any initial thoughts on distribution either at retail or and.

On the wholesale market.

And part of Cooper's strategy, what to get bigger and the mass merchant channel and obviously you guys do well there so and of any sort of expectations, we could set for how cooper might be.

And to that channel and then secondly.

With the relationship with HD, obviously, you guys moved away from that channel and that and.

Net player through 3 years ago any thoughts in terms of how Cooper Mike.

And you'd operate.

With that on fleet going forward.

Yes.

John I think.

Good questions and I would say at this point, it's too early for us to answer that with any specificity and I'll go back to what Darren outlined earlier is our integration process is a very thoughtful and methodical process that we're going to to make sure that we achieve and overachieve, what what we said we were going to do.

I will tell you, though your thought process is absolutely the right 1.

And we see this as beneficial for our customers and for consumers to expand the Cooper line, particularly and certain tire lines, but also in terms of the channels that they go to we see lots of opportunities to get the efficiencies on the go to market strategy as well and.

I think that exactly how that plays out is something that we are spending a great deal of time on.

I would say no less encouraged we're actually more encouraged and the opportunities that we see and I think you'll hear us talk more about that with the specificity youre looking for as we as we get through our integration process. So I think youre thinking about it right, but we'll just we'll hold off delay the details out little bit later.

Understood and just wanted to ask a little bit on sourcing.

Darren I think you made.

Made a comment in your prepared remarks about how you are comfortable with the situation.

But there is a fair amount of speculation and industry and kind of noise out there about natural rubber and potentially multiyear shortages on on that side of things, So and I would love to get your perspective on what's going on there and how problematic and some of the conditions in Asia with flooding and treat disease.

On the supply chain and.

Can you utilize synthetic rubber mark to kind of offset.

And that situation.

It does become it's complicated and speculate on.

Yes. So John you are remembered correctly that there is a reasonable amount of substitution.

Flexibility that we have moving from natural rubber and synthetic rubber.

And moving back the other way and we.

And we utilize that in the past and and generally we've utilized it to address.

The price differential between natural rubber and synthetic rubber.

In fact right now.

Prices of the 2 aren't too much different.

And we.

We have not really had any any significant availability issues.

And on either product.

Doesn't mean, our teams are working very hard to make sure that that's the case and.

And certainly they are and certainly the winter storms and the went through the Texas Gulf Coast tightened up supply for petrochemicals generally.

And transportation has been really the challenge on natural rubber on more than availability and it's just a matter of getting getting containers and being able to transport the rubber from Asia and <unk>.

On the rubber producing areas to the to the locations, where we have factories.

I don't really think I mean.

At this stage our view is not that we have any sort of long term.

Supply issue.

To deal with and I think the.

The natural rubber prices, probably reflect that and that they've been relatively stable.

The real questions I think have been around the petroleum based products and we did go through a period of time, where there was and.

Where supply is very tight and.

And now we're going through a period of time, where oil prices are up.

And obviously there is there is and environmental overhang for the production of some of these products. So I think that we continue to do work there are procurement team and our operations teams.

And they have had to.

It takes a new approaches and think about new transportation modes, and even different supply lines and expand our group of suppliers in order to make sure that we're addressing the long term need to ensure availability and I think has done a good job on that but.

At this point, we really have not seen a lot of us.

We haven't really seen any disruption.

Moving from it Hey, Darren I'm going to just jump in on 2 points and 1 just echo the comments are.

Chief Procurement officer morning, Tony and her team have just done a fantastic job, making sure. We don't have any of those supply issues by really being forward thinking and too many people to name, but our supply chain teams all around the world have done just a great job to make sure that our plants are are functioning and staying open even even via.

And business continuity mode from time to time and John just the second point I would make.

And the near term material situations exactly like Darren described I would also tell you, though longer term midterm and long term. We're also focusing from a sustainability perspective on other material replacements, you've heard us talk a lot about.

Rice husk cash and soybean oil and those are really great additions to make them more sustainable tire, but our goal is to make a tire fully sustainable tire.

By 2030, as we go forward and before that ideally. So we're working on a lot of things to create different types of materials that we use which will have an impact certainly on on the traditional materials that we have as well so nothing to speak about now, but I would put that sort of and your thinking as you think about material that goes into it.

And what's happening around the world as well.

Great. Thank you all.

And Sean.

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

And good morning flow for me please and.

Firstly on on Prem.

This mix price and raw materials and.

Very helpful to the guidance for that to be positive in Q3 could you give us a feeling for the potential magnitude of dose.

All of the positivity.

$130 million that <unk> seen in Q2.

And could you also talk us through that and.

And how you see that net for Q4 and on as well and your and your <unk> guidance. How would you think about that split roughly between Q3 and Q4 and.

And on the second thing on the Cooper transaction and the $50 million on a 1 off can be seen in Q2 is that and really just.

Something that is a 1 time issue that happens on the closing of the deal or do we have to think about those kinds of numbers happening again and the second half.

Yes so.

Victoria, Let me handle your last question first and we've put a couple of notes here on page 17, and our slide deck to address the impact of these merger related costs and.

In fact, the biggest impact is going to come in on those merger related costs will come in Q3. So we've got about $85 million of those costs in Q3 relative to the about $50 million and we had in Q2 and between Q2 Q3 that will take care of the impact of the mark to market of Coopers and.

Inventory on June 7th and that was the single biggest factor.

There are some ongoing.

Costs, including the markup for intangible assets.

That has to be amortized and that's 1 of the other elements and that's more 1 is ongoing.

And so that.

And.

So that I think is the is the way to think about that so once we get to the fourth quarter and we've got that effectively 15 to 20 million on.

Those merger related costs and.

In Q4, and Thats more of the ongoing.

And so that's more what you would see going into 2022 as well.

The.

On the price mix versus raws question I think I guess first point is I think I.

I think we've got confidence that we're going to be able to manage.

And the situation through the fourth quarter as well and continue to work to keep price mix ahead of raw material costs fourth quarter raw materials will be a bit higher than the third quarter.

So if we take our guidance on raw material costs.

For the year of $4.25 to $4.75, if I pick the midpoint of $4.50, and we saw 15 of that and the first half so that means about $4.35 for the second half and.

We've said and we've said and our remarks today that.

Less than half of that would be affecting the third quarter.

So.

So the impact on raw materials, and the third quarter will be less and half of the 4 hundreds so I'll let you.

We said slightly less so we'll let you make your own assumptions, there, but yes, I think yes.

You can make the assumption that there is got to be something.

And.

Approaching a couple hundred million dollars and the third quarter of raw material costs.

And we've said, we will be able to get our on price mix above that level to keep the number of positive and then there would be another increment going into the fourth quarter. So that means price mix would have to take another step up in Q4 to continue to stay ahead and raw materials.

Great. Thanks very much.

Thank you.

Yes.

We'll conclude today's Goodyear second quarter 2021 earnings call. Thank you for your participation and you may now disconnect have a great weekend.

[music].

Good morning, My name is Keith when I'll be your conference operator today.

At this time I would like to welcome everyone to Goodyear's second quarter 2021 earnings call.

All lines have been placed on mute to prevent any background noise.

After the Speakers' remarks, there will be a question and answer session.

If he would like to ask a question. During this time simply press star 1 on your telephone keypad. If you would like to withdraw your question press the pound key.

And I'll hand, the program over to Nick Mitchell Senior Director of Investor Relations. Please go ahead.

Yeah.

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

This call can be found on our website and investor Goodyear Dot com and a replay of this call will be available later today and replay instructions were included in our earnings release issued earlier this morning.

And 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 and.

Significant factors that could affect future results are outlined and goodyear's filings with SEC and and 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.

<unk> results are presented on a GAAP basis and in some cases on non-GAAP basis. The non-GAAP financial measures discussed on the call are reconciled to the U S. GAAP equivalents 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 and good morning, everyone and.

I'd like to start today by welcoming all of the Cooper tire associates joining us this morning.

Opportunity to meet many of you and recently and I've been so impressed by your passion for Cooper and for our industry.

From our initial interactions on through our integration meetings and business reviews. It is clear that your industry knowledge and experiences will bring tremendous value to the combined organization sharing ideas and best practices will make us a stronger competitor and allow us to find new ways to better serve our customers and consumers.

Our journey is just beginning but I'm really excited about our future and about what we can achieve together.

Let me begin my prepared remarks today by providing some comments to supplement this mornings press release.

For the second quarter, we delivered $349 million of merger adjusted segment operating income, which is over 1 and a half times, what we earned and the second quarter of 2019. These strong results reflect continued recovery and demand and we outperformed industry growth across many of our businesses.

At the same time, we delivered the highest quarterly contribution of price mix that we've seen and our business and 9 years and we continue to have good momentum.

As I look at the global consumer replacement industry during the quarter, we continued to see a sustained path towards recovery.

As you would expect this general theme is largely carried by mature markets. We continue to experience pandemic related weakness and several of our emerging market countries.

More broadly however, economic recovery remains robust, particularly in the U S and China.

Given these markets play to our strengths, we saw global consumer replacement market share rise nearly 1 point.

And our OE business and the global shortage of semiconductors resulted in weaker and more volatile demand than we expected.

And the auto industry produced approximately 2 million fewer vehicles and initially expected at the beginning of the quarter.

Despite the weaker than expected backdrop, we continue to recover share globally, including the benefit of our strong position on Suvs and light trucks.

Also continuing to see the benefits of our strong cost management on.

On balance our business performance and strengthening.

And with this as the foundation towards the end of the second quarter, we completed our announced combination with Cooper tire.

And I believe this is truly a transformational milestone for both companies our collective team continues to share excitement about our prospects going forward as.

And as we do the work to bring our companies together I know, we will be better positioned than ever before to meet our customers' evolving needs.

And you can see evidence of our strengthening performance and the initial benefit of the Cooper combination and each of our Skus.

Yes.

And the Americas or U S consumer business took advantage of favorable conditions and the replacement market, where we continue to see robust demand for our most premium products.

Our large rim diameter volume performance was particularly notable with our growth exceeding the industry by nearly 10 points.

The resulting mix benefits combined with pricing actions more than offset higher raw material costs.

Our U S. Commercial business is also capitalizing on strong and end user markets.

And with freight demand outpacing supply keeping existing trucks road ready is a top priority of fleets as a result more customers are relying on Goodyear is fleet central to make informed decisions regarding their tire and maintenance needs.

The growing popularity of our suite of fleet management tools is helping us drive market share and targeted segments.

And the quarter, our commercial shipments were nearly 15% above the second quarter of 2019.

Our resilient OE business, however saw more than half of the country's auto assembly facilities, taking capacity offline during the quarter, keeping our OE volume considerably below pre pandemic levels.

And EMEA markets are also recovering, albeit with less consistency than in the Americas with industry demand softening sequentially.

We sustained a relative momentum and the quarter with share gains and all of our businesses.

Our European consumer replacement business more than recovered higher raw material costs supported by the impact of our distribution changes at the same time, our market share and Europe has recovered by more than a quarter of a percent year to date.

Our consumer OE business also continued outperforming but with less impact as part shortages limited recovery and auto production.

Having this leadership position is critical as electric mobility begins and period of dramatic growth.

And as tires on most evs, we're faster than on a comparably sized internal combustion powered vehicle. These benefits will extend well beyond the initial shipment. So what we're seeing are dynamics that should position our consumer business for long term profitable growth.

Turning to commercial volume was more than 10% above 2019 levels. Despite lower freight volume we benefited from exceptionally strong results and the on road segment driven by our growth portfolio fleet customers. During the quarter. For example, we added test goes fleet of 68 <unk>.

<unk> trucks and trailers to our customer portfolio.

Tires alone are no longer enough to win over fleet customers today's fleets demand innovative solutions that will help them maximize uptime and reduce costs.

We recently unveiled Goodyear drive point, the latest productivity tool and our total mobility offering.

<unk> combines unveil sensors battery powered receivers and mobile apps to deliver fleets a cost effective way to monitor tire performance.

These technology solutions strengthen our position as a preferred provider of monitoring and predictive maintenance, making goodyear and more valuable to our customers and preference over other mobility solution providers.

Turning to Asia Pacific industry demand varied significantly by country.

Challenging conditions persisted and India, Malaysia, and other countries with low vaccination rates affecting demand and our production and the region.

And China. The story was encouraging with demand fairly consistent with pre COVID-19 levels.

And a stable market, we leverage and expanded retail networks to grow our consumer replacement volume by more than 20% compared to the second quarter of 2019.

Turning to our consumer OE business, we grew our volume more than 40% compared to the prior year and and expanding market. Our team did an excellent job and this environment, helping us capture nearly 1 point of market share.

In addition to delivering solid second quarter results. We continued advancing our mobility solutions strategy and June we launched Goodyear Sightline. The first tire intelligence solution for cargo van fleets, a timely launch considering the impact of pandemic head on E Commerce volumes.

Goodyear Sightline combined sensors and cloud based algorithms to provide fleet operators with real time tire health information and this rollout further groundwork for our connected tire future.

As I've said before Goodyear is committed to shaping the mobility Revolution initial.

Initiatives like and go Goodyear Sightline and partnerships like the 1 we had was set up along with our focus on the intersection of new mobility sustainability and technology are demonstrative of new business models and solutions that will define goodyear's position and relevance for the next 120 years.

It remains a great time to be a technology leader and the tire industry.

We're entering the second half of the year and focused on the opportunities ahead and markets are more stable and at the beginning of the year, particularly in the aftermarket.

Fundamentals are robust and U S consumer replacement with dealer restocking and increased driving underpinning demand and.

And while supply chain constraints continue to limit auto production and the outlook for our consumer OE business remains favorable given our ongoing share recovery.

The long term need for Oes to restock dealer inventory and the accelerating shift to electric powertrains, which favors goodyear strengths and product design and materials.

Against this backdrop, we're focused on sustaining our momentum while working to integrate Cooper.

The trajectory of our markets makes us feel good about the timing of the combination.

We look forward to achieving our full potential and the years ahead now I'll turn the call over to Darren.

Thanks Rich.

And the second quarter were again, a reflection and strong performance by our team and their focus on continuing our recovery market share and improving our manufacturing cost and managing for cash.

And pursuing all of these while also delivering strong price and mix to address rising raw material costs and inflation and many other cost categories.

These results also illustrate the momentum built up over the last year across our consumer replacement OE and commercial truck businesses.

And as of June <unk>, we had some momentum with the Cooper team has developed to the overall equation, creating even more opportunity going forward.

And we're excited to have completed the combination so quickly, giving our teams a chance to work more closely together and accelerating the opportunity to deliver the full benefits and the transaction.

While our team is delivering we have to acknowledge the added volatility we've experienced at our end markets. During the second quarter, we saw lower OE production than we anticipated and problems it seems likely to persist longer than originally thought and we saw increased disruptions in our emerging markets businesses.

Some COVID-19 related, particularly in Asia markets and some of the results of social unrest with significant impact on our South Africa, and Colombia and manufacturing facilities.

And still others reflect we're reflecting the difficulty of shipping products to markets like the middle East, where we don't have a manufacturing presence.

Overall, this slowed down the global volume recovery temporarily, but the pent up demand and these markets will be a source of further growth over the coming months.

Operationally our team has done a great job keeping our factories fully supply.

So while we continue to see escalation and raw material prices, we have seen no impact of material supply on our production.

And consistent production has been critical and serving markets, including Latin America, Europe, and China, and particularly the U S where replacement tire demand remains very strong.

So as we enter the second half of the year, we're feeling very good about the industry outlook and our ability to outperform the industry, while continuing to see on profitability trends towards target levels.

First of all our results reflect the impact of Cooper sales from June 7 through June 30.

This means there is a little over 3 weeks worth of Cooper sales and volume reflected and our company results as well as and each of our business units will provide disclosures and clarify the impact of these added sales, which overall were just over $250 million for the quarter.

And second results reflect a number of items related to the transaction itself.

This includes costs directly related to the transaction as well as accounting treatments that are required and such combination.

In order to provide a view of results without these items, we are providing a calculation of our earnings excludes them.

And typically shown adjusted net income and EPS, but this quarter, we have merger adjusted Soi as well.

The most significant item from the Cooper transaction impacting Soi is the markup of Coopers June 7th inventory to market value, which means much higher cost of goods sold on those units as they are sold out in Q2 and Q3.

This makes up $40 million under the $50 million of Cooper related items, hitting our segment operating income in the quarter.

With that preamble lets turn to our income statement on slide 8.

Our second quarter sales were 4 billion. This is now above pre pandemic levels from 2019, even without the incremental sales from Cooper.

Unit volume increased 84% from last years second quarter, reflecting continuing industry recovery market share gains and the addition of Cooper units.

Second quarter segment operating income of $299 million was well ahead of last year and also well above 2019.

Second quarter merger adjusted segment operating income of $349 million exceeded our results from 2018 as well and this includes merger adjusted Cooper tire income of $34 million.

And up from a loss of $1.87, a year ago.

The step chart on slide 9 summarizes the change and segment operating income versus last year.

Similar to last quarter. We also included an analysis versus 2019 on slide 10 and to help you better track our recovery.

Compared to the Covid impacted year ago period, the total impact from higher volume was $531 million, reflecting the benefits of higher unit sales and increased production.

Price mix and improved by $159 million compared to a year ago more than offsetting a $30 million increase and raw material costs.

While this is a significant net benefit in Q2 and the increase in raw materials will be much higher beginning in Q3.

Cost savings of $86 million included $25 million associated with the closure of Gadsden as well as the benefit of and indirect tax ruling and Brazil.

Beside from these benefits savings were limited as many of the onetime savings implemented during Covid did not recur this year.

Inflation of $41 million was higher than in the first quarter and is beginning to reflect increased cost pressure across multiple categories.

The $37 million improvement and the other category reflects a $94 million increase and the earnings generated by our other tire related businesses as well as and $17 million benefit from improved profitability and tire hub, which recorded its first profitable quarter.

These factors were partially offset by higher advertising and R&D expense as we restored investments in these areas after severe cutbacks during last year's Covid shutdown.

The second bar reflects the impact on cost triggered by the business combination, including the effects of fair market value step up on Cooper's inventory and certain other assets.

These costs totaled $50 million and the quarter more than offsetting the $34 million of merger adjusted operating income Cooper contributed during the $3.5 week period.

While Cooper Standalone results are no longer reported publicly Cooper also performed performed very well during the second quarter operating profits and margins were stronger than the comparable 2020, and 2019 periods with increased volume and improvements and price mix driving the results.

The impact of the merger consideration was partially offset by free cash flow generated during the last 12 months and Cooper balance sheet cash at closing.

Completion of the Cooper tire merger impacts the comparability of our working capital to prior periods.

Controlling for this impact we made some progress rebuilding our inventories and Q2. However, we have a way to go before reaching levels that are aligned with demand, especially in North America.

Slide 12 summarizes our cash flows for the quarter and for the trailing 12 months and have helped us deliver our stronger than expected balance sheet position.