Q3 2021 Goodyear Tire & Rubber Co Earnings Call

It began.

[music].

Good morning, My name is sneaky and I will be your conference operator today at this time I would like to welcome everyone to Goodyear's third quarter 2021 earnings call.

Lines have been placed on mute to prevent any background noise.

After the Speakers' remarks, there will be a question and answer session. If you would like to ask a question. During this time simply press star one on your telephone keypad.

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

I will now hand, the program over to Nick Mitchell Senior director of Investor Relations.

Thank you and thank you everyone for joining us for Goodyear's third quarter 2021 earnings call I'm joined here today, very rich Kramer, Chairman and Chief Executive Officer, Darren Wells Executive Vice President and Chief Financial Officer, and Christina Tomorrow, Vice President Finance and Treasurer.

The supporting slide presentation for today's call can be found on our website at Investor Goodyear.

Dot 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 I would draw your attention to the safe Harbor statement on slide two 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 SEC in their earnings release.

The company disclaims any intention or obligation to update or revise any forward looking statements, whether as a result of new information future events or otherwise.

<unk> results are presented on a GAAP basis and in some cases, a non-GAAP basis.

Non-GAAP financial measures discussed on the call are reconciled to the U S GAAP equivalent.

As part of the appendix to the slide presentation and with that I'll now turn the call over to rich great.

Great. Thank you Nick good morning, and welcome everyone and thank you for joining us.

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

Our third quarter results show substantial growth in net sales of 42%, partly driven by our recent acquisition of Cooper tire and partly reflecting strong organic sales growth in our legacy business.

With this momentum we generated $449 million of merger adjusted segment operating income for the quarter more than double our earnings from last year and also well ahead of pre pandemic levels.

Notably our earnings growth came despite a 15% increase in our raw material costs in the quarter, which was in line with our previous forecast now for context. This compares with an increase of about 1% and our raw material costs. During the first half of the year.

And like most companies, we're also experiencing significantly higher inflationary cost pressures, while manufacturing locally in the regions, where we're selling tires, partially insulates us from cost increases related to global supply chain challenges, we are experiencing the higher transportation cost that we forecasted on our last.

Call. Additionally.

Additionally, we're seeing added pressure from increased wage and benefit costs and higher utility rates, partly reflecting the growing energy crisis in Europe and China.

To counter these impacts as well as higher raw material costs, we've continued to execute strategies to capture higher selling prices for our products, which helped drive a 10% increase in our revenue per tire in a quarter. The most in nearly a decade.

At the same time, we're also focused on recovering volume and growing our market share in the quarter. We continued to benefit from strong customer demand for our products globally. As a result, we saw our legacy consumer replacement business recovered nearly a percentage point of market share that's a significant move over.

A short period of time.

We came into the year confident that we would grow market share given the distribution changes we made in Europe last year and the benefits of Walmart reopening and so I don't care centers. After temporarily closing them early in the pandemic I'm proud of how our team is executing and quickly recovering our share.

In our commercial replacement business, we experienced robust demand as the transportation industry moves record freight volume here, we delivered another strong performance with shipments to fleet customers well above pre pandemic levels.

<unk> got in this important segment of the commercial truck market is paying off for us winning with fleets resulted in more consistent demand for our most premium products and creates opportunities to enhance customer loyalty through our leading mobility solutions, both of which can reduce the impact of cyclicality.

We're also excited about our progress integrating Cooper as we learn more about Cooper's business. We're identifying additional opportunities. These insights have increased our confidence in achieving synergies beyond our initial forecast.

On the other hand, our consumer OE business continued to be affected by weak auto production, given the shortages of manufacturing components and materials.

During the quarter industry shipments to OE customers.

We're more than 20% below the third quarter of 2019 and considerably weaker than third party forecast at the beginning of the quarter.

Reductions in orders related to OE production have created inefficiencies in our operations and limited our volume growth this year, particularly in Europe and in China.

The current conditions will undoubtedly lengths in the global OEM recovery, while the environment is certainly less than ideal the need for Oems to catch up with consumer demand and replenish inventories will support its higher industry volume over the next few years.

We are well positioned for the recovery, given our growing market share, including our leading position on EV platforms.

In summary, we're seeing some contracting industry dynamics today between consumer replacement and OE, but combined the two segments should provide good growth prospects going forward you can see this in each of our business units.

In the Americas, our consumer business continued to benefit from a strong cyclical recovery, excluding the impact of the Cooper merger are larger in diameter consumer replacement volumes increased more than 20% in the U S. Nearly three times the industry rate.

While our premium products continue to set the pace for growth. We also experienced double digit growth in smaller rim diameter segments supported by a recovery at Walmart's auto care centers.

Cooper's mid tier offerings continues to resonate with consumers, who are looking to balanced product performance and price, helping our team deliver strong results.

Our leading presence in the mid tier light truck and SUV category help Cooper grow its U S consumer volume, while delivering double digit operating margin performance, excluding the impact of merger related costs.

Theres also a strong recovery underway in the U S transportation industry.

These dynamics are fueling an increased need for new class eight trucks tires and services all of which play to the strength of our commercial business.

During the quarter, our U S commercial OE volume was up over the prior year.

Reflecting higher truck builds in addition, our Goodyear fleet business continued to perform well with fleet tire volume, increasing more than 10% compared to the third quarter of 2019.

If not for supply constraints, our commercial results could have been even stronger.

While we are benefiting from our leading position in the North American commercial market, we are not resting on our laurels. Instead, we are innovating to develop solutions that will allow us to win as markets change and customer needs evolve.

In the third quarter, we signed a multi year collaboration agreement with <unk>. The first autonomous middle mile Logistics service provider in North America together, we will work to advance sustainable mobility solutions for autonomous <unk> short haulers with a shared goal of making it safer and eat.

As you are to move goods.

Capex fleet of autonomous commercial vehicles will leverage the power of our entire intelligence technology powered by Goodyear's sight lines to improve stopping distances reduce fuel consumption and lower maintenance costs.

This is a terrific opportunity for us to apply our connected tire solutions to drive efficiencies in the increasingly important middle mile segment.

Turning to EMEA, we are seeing good momentum in our business, excluding the merger our European consumer replacement business delivered 9% volume growth and a relatively flat market supported by our aligned distribution strategy.

The outperformance was broad based as we gained market share in summer winter and all season categories, a testament to the strength of our product portfolio.

And it's just not consumers, who see great value in our products.

This month Goodyear was named the winner of the German magazine Auto builds all season tire test for the second consecutive year, placing ahead of more than 30, other brands and a comprehensive examination of dry wet snow and mileage performance.

<unk> like this help reinforce our leading position in the all season category the fastest growing market segment.

Okay.

<unk> commercial business is seeing strong demand for our commercial truck tires as Europe's economic recovery continues volume in our Goodyear commercial business was 6% above 2019 levels.

While we have grown our share considerably this year capacity constraints have restricted our performance.

To meet the fast growing demand for our fleet solutions in EMEA, We've recently announced capacity expansions at our manufacturing facilities in Luxembourg, and Whitledge, Germany.

We're also harnessing innovation to respond to our customers' needs. For example, we've committed to developing solutions to help our customers achieve their C O two emissions reduction goals.

In September our European commercial team launched the fuel Max endurance, the most versatile and fuel efficient commercial tire we have ever produced.

As a result fleets no longer need to choose between durability mileage performance and fuel efficiency, a key driver of the emissions.

We believe tires and related solutions will play an essential role in the journey towards sustainable mobility. This.

This market evolution will give us opportunities to further differentiate our products as we move ahead.

Turning to Asia Pacific industry demand softened considerably during the quarter, largely reflecting COVID-19 related disruptions in China and several ASEAN markets in July and August.

Lockdowns and other mobility restrictions further complicated what was an already challenging OE environment due to semiconductor shortages.

While these factors pressured organic volume trends in our OE business, we gained share for the second consecutive quarter, reflecting the release of new Fitments.

We're also growing faster than the market in the consumer replacement segment investments and distribution are driving strong results in India, where we've increased our share by more than seven percentage points compared to 2019.

Our share is also up nicely in China compared to pre pandemic levels. As we are benefiting from scaling up our direct to retail distribution model and new product launches, including the recent debut of the assurance <unk>.

I'm sure you can tell from our business initiatives that we're very focused on leading towards a more sustainable future.

The challenge, we believe is right in front of us changing our industry is creating tremendous growth opportunities for Goodyear and as a leader in our industry. We must set the tone for benefits of future generations and our track record is clear we've developed more fuel efficient products reduce energy usage in our factories and.

<unk> waste to landfills.

We've discovered ways to use more sustainable raw materials, such as soybean oil and rice husk ash silica that deliver similar or better product performance, while reducing our environmental impact.

Our engineering and manufacturing teams are also embracing these advances we've constructed a tire without petroleum based content and traditional film materials like carbon black and sand based silica.

With this momentum we've challenged ourselves earlier this year by setting a goal of developing a 100% sustainable material and maintenance maintenance free tier by the end of this decade.

We're also focused on greenhouse gases and greener energy sources.

As a part of our commitment to reduce C. O. Two emissions, we are working with energy supplier and <unk> to build two large solar power stations at our testing facilities and Luxembourg.

Beginning in 2022, these cutting edge facilities will add carbon free energy to the local power grid that will be available to nearby communities for years to come.

In addition, we recently announced a multi phase plan to power Goodyear's manufacturing facilities across Europe, Middle East and Africa solely with renewable electricity by the end of 2022.

We estimate this critical shift will reduce our carbon footprint by up to a quarter of a million tons significantly reducing the environmental impact of our operations.

Goodyear is committed to building a better future in keeping with this commitment we plan to announce updated climate related goals by year end consistent with the climate strategy development timeline, we shared in April.

Look forward to updating you on our long term ambitions in the new year.

In summary, we have good momentum and we are taking actions to strengthen our business and to ensure we are leading our industry towards a more sustainable future.

When I consider the industry conditions, we faced in the middle of last year I am truly amazed at what we've accomplished during the past four quarters.

We've recovered our market share strengthen our OE pipeline more than offset inflationary cost pressures and successfully managed unprecedented supply chain challenges.

We've also completed a transformational acquisition and continued advancing our mobility and sustainability initiatives.

To accomplish all of this in the midst of a global pandemic is a testament to the strength of the Goodyear team.

Team that is stronger and following the addition of Cooper.

I would like to thank all our associates for their contributions to our success.

And now I'll turn the call over to Darren.

Thanks Rich.

In most ways, our third quarter results reflect a continuation of many of the industry trends and successful Goodyear initiatives that have driven the strong momentum we've seen over the last 12 months.

You will see the impact of this momentum and the strong topline growth and earnings growth for the quarter and the continued strength in segment operating income margin.

The quarter also saw a continuation of some of the challenges companies are facing across all industries, including delayed shipping difficulty maintaining adequate staffing and increasing inflation driven by these and other factors.

It has also seen the introduction of a few new challenges, including inconsistent supply of power for manufacturing in China.

And of course, the challenges associated with the automotive production and rising raw material costs are still with us as well.

As you can see our team has done a good job managing through these factors in order to preserve the benefits of our cost and cash flow initiatives and continued to recover market share loss. During 2020 as a result of our unique distribution footprint.

This has helped US again, a little results ahead of pre pandemic 2019 levels with significant industry volume recovery yet to come.

Q3 results also reflect the first full quarters impact of the combination of Cooper and Goodyear, helping drive the significant growth in volume and sales revenue.

I shared during our second quarter earnings call and again at an Investor Conference in mid September that we were continuing to feel positive about the opportunities to drive synergies.

I will share with you today, some more specifics about the early savings, we're seeing and the benefits we expect over the first two years of the combination, which we now see is higher than when we announced the transaction.

While we won't talk much about 2022 today. These positives along with the challenges will be the backdrop for our plan for next year as we look to continue our momentum while addressing both increased capital investment needs and our deleveraging objectives.

Our third quarter sales were $4 9 billion, including just over $900 million of sales from Cooper tire sale.

Sales generated through Goodyear's legacy operations increased 16% driven by improvements in both price and mix.

Unit volume increased 32% from last years third quarter, reflecting the addition of Cooper tire units and organic growth in our replacement business.

Segment operating income of 372 million marked our best third quarter performance since 2016.

Merger related costs were 77 million, including $70 million of amortization associated with the step up of inventory to fair market value at closing.

Third quarter merger adjusted segment operating income, which excludes these costs totaled $449 million or 9% of sales.

After adjusting for merger related costs and other significant items detailed in our press release, our earnings per share on a diluted basis was <unk> 72.

Up from 10 cents a year ago.

The step chart on slide 10 summarizes the change in segment operating income versus last year.

As we've done all year. We also included a comparison to 2019 on slide 11 that provide some additional perspective on our recovery.

Compared to the Covid impacted year ago period, the benefit of higher volume was $115 million, reflecting increased production and replacement unit sales growth in goodyear's legacy business.

The non recurrence of temporary fixed cost reductions, including Covid related government payroll incentives, partly offset the benefit of higher production volume.

As Fritz mentioned earlier, we delivered our best price mix performance in nearly 10 years and revenue per tire for the quarter was up 10% excluding foreign currency.

The combined impact of higher prices and improved mix contributed $327 million to earnings, which more than offset higher raw material costs of $161 million as well as inflation of $57 million.

The cost savings versus inflation picture is worth spending a bit of a timeline. As this is an area that looks different going forward at least in the near term than it has in recent history.

Third quarter cost reflect a combination of factors.

First there was some restoration of costs that were artificially low last year as we were ramping up after the spring COVID-19 related shutdown.

This is what creates negative cost savings.

This impact is temporary.

Second as we indicated on our last call. We started to see increased inflation and transportation and labor costs. These added costs helped drive up the inflation impact well above anything we've seen in recent years, although some of the increase we expected in Q3 now it will be recognized in Q4 given volume timing.

These cost pressures are going to remain with us for the remainder of this year and into next year.

I'll come back to this when we discuss the fourth quarter outlook, but the cost savings versus inflation picture will require more focus going forward.

The other category nets to zero, so no overall impact in the quarter.

This reflects offsetting factors first it includes the restoration of advertising cost to something closer to pre pandemic levels.

Second it includes some additional inflationary cost pressures, including warehousing and retail.

These cost increases were offset by improved earnings from our other tire related businesses and higher equity earnings at our tire hub investment.

Similar to last quarter. We've included two borrowers to show the impact of the Cooper tire transaction on our results.

The Green bar on the left reflects Cooper operating income, which totaled $125 million during the quarter or 14% of sales.

The results reflect strong performance in North American consumer replacement.

The Red bar on the right captures the merger related costs mentioned earlier, including $70 million of amortization of the Cooper tire inventory step up and 7 million of amortization related to the incremental intangible assets recorded in connection with the merger the.

The amortization of intangibles is running a bit lower than previously expected given ongoing updates to preliminary purchase accounting.

Turning to the balance sheet on slide 12, net debt totaled $7 1 billion the.

The increased net debt compared to last year reflects approximately $1 9 billion of cash consideration and closing costs for the Cooper transaction net of over $500 million of positive cash flow generated over the trailing 12 months as shown on slide 13.

Turning to our segment results.

Beginning on Slide 14, Americas unit volume totaled $25 9 million up 59% compared to the prior year's period the increase.

This reflects the addition of $8 7 million Cooper tire units as well as volume returning to pre pandemic levels in our replacement business.

You might expect our OE volume was down.

Americas segment operating income totaled $259 million or nearly 9% of sales.

America's results include $113 million of merger adjusted operating income from Cooper and $69 million of cost triggered by the merger, mostly amortization related to the inventory fair value step up at closing.

Excluding the impact of the Cooper transaction segment operating income for the Americas would have been $215 million, reflecting improvements in price mix net of higher raw material costs and benefits of higher volume, including increased factory utilization.

These benefits were partially offset by the cost pressures that impacted our company results, including higher transportation and labor costs.

In addition, our north American factories experienced staffing challenges that were more significant than in other parts of the world.

While there has been <unk> been higher absenteeism globally in the U S. We've had much greater levels of retirements and turnover and therefore more long term hiring needs post COVID-19.

The result of this is much higher number of associates being trained in our factories in the U S.

This has impacted our Americas business in three ways.

First it has made it more difficult to increase production to pre pandemic levels.

Second it's resulted in a higher number of nonproductive workers, both of those being trained and those training them.

Third it has made it more difficult to work on ongoing efficiency programs.

This has resulted in significantly higher costs near term relative to the number of tires being produced.

More about that when we cover our outlook, while we expect.

These additional costs to be transitory there'll be with us through at least Q1 of next year.

Turning to slide 15, Europe Middle East Africa as unit sales increased 8% to $14 2 billion.

Replacement volume increased $1 5 million, reflecting share gains in our legacy European consumer replacement business, including continued recovery of last year's temporary volume losses as a result of our initiative to better align our distribution.

Overall, ollie's and Europe produced 30% fewer vehicles than in last year's third quarter. As a result, our OE volume declined by <unk> 5 million units.

Yeah.

Europe Middle East Africa segment operating income of $81 million was up $59 million compared to a year ago improve.

Improvements in price mix net of higher raw material costs, and the impact of higher volume, including increased factory utilization drove the earnings growth.

There was no material earnings impact from the Cooper transaction for EMEA.

Turning to slide 16, Asia Pacific's tire units increased 900000 to $8 1 million, mainly reflecting the addition of Cooper tire volume.

While our China consumer replacement business was affected adversely by the return of COVID-19, Lockdowns and flooding in the add on products, we still saw share gains in replacement volume growth in the quarter.

We also saw growth in our OE business with volume up <unk> 5 million units compared to a year ago.

While industry demand was lower we increased market share for the second consecutive quarter.

We would expect to see an even more meaningful impact from our improved market position as vehicle production normalizes.

Segment operating income was $32 million down slightly from the prior year, reflecting higher raw materials and other cost pressures that we were not able to fully offset in the quarter.

The addition of Cooper did not materially impact Asia Pacific's earnings.

Okay.

I'll cover our normal outlook items in a minute, but first I want to share with you an update on the work. The combined team has done to develop specific synergy plans for the Cooper Goodyear combination.

An enormous amount of effort has been put into this planning process over the last 180 days led by Ryan Patterson and John vote are there.

The result of this planning has been to reaffirm our confidence in tax and cash benefits and to increase the expecting earnings benefits.

We initially estimated our synergies would reach $165 million within two years of closing we now expect the benefits, including the addition of international initiatives and some additional manufacturing and sales opportunities to reach a run rate of $250 million by mid 2023.

This year's results are expected to reflect about $20 million of cost savings from the elimination of duplicative corporate costs. This is a good start.

This of course excludes one time transaction costs and accounting adjustments.

Turning to our outlook items on slide 18.

As you can see from the summary, we expect many of our trends experienced during the third quarter to continue into the fourth quarter.

Against this backdrop, we expect our fourth quarter volume trends to be similar to the third quarter.

We expect price mix to continue to more than offset raw material costs, reflecting the benefit from recent pricing actions and improved mix, although our raw material cost increase will approach 300 million for Q4.

Yes.

Similar to what we saw in the third quarter inflationary pressures, including incremental wage benefit transportation and energy costs will be at levels beyond what we can offset with efficiency.

But this seems to indicate overall is that we will need to continue to focus on additional price mix to offset not only continued raw material trends, but also other cost inflation as we move into 2022.

There are two additional factors that will impact Q4 costs.

First the transitory cost pressures in our U S factories related to tires produced in Q3 will impact our cost of goods sold in Q4 by approximately $50 million.

While these pressures will continue into next year. This should begin to moderate with Q1 production and even the Q1 cost of goods sold impact will be less in Q4.

Second like many other companies our manufacturing facilities in China have been impacted by the widely reported rolling blackouts.

As typical right now to estimate the impact of this.

We expect our working capital to exhibit normal seasonality in Q4, resulting in seasonal cash inflows and positive free cash flow for the quarter.

Lastly, as a reminder, our fourth quarter 2020 results included a $34 million favorable legal settlement and a $13 million charge to establish an environmental reserve. Neither of these items will occur this year.

Slide 19 provides a final view of our full year financial assumptions.

These estimates are fairly consistent with our previous outlook, you'll notice we took our raw materials and corporate other towards the high end of the previous ranges and took our interest expense to the low end.

We also lowered our full year estimate of incremental amortization of intangible assets related to the Cooper transaction, reflecting adjustments made to the allocation of the purchase price.

Now we will open up the line for questions.

At this time, we feel with light ask a question. Please press the star and one are you touched on selling them.

Draw your question at any time.

Once again.

Question. Please press the star and one go ahead touchdown filing.

And we'll take our first question from John Healy with Northcoast Research. Please go ahead. Your line is open.

Good morning, Thank you and I think.

Morning, guys and congrats on the progress this quarter I wanted to ask on the Cooper I wanted to ask on the Cooper synergy target on the upside.

Of the goal there could you maybe talk to kind of what youre seeing and where you are finding that the synergy.

Upside that.

Yes, no John Thanks for asking.

Just start by saying that the integration process and how we're working with the Cooper team has just been been going great. I think everything that we thought has been reaffirmed our excitement is there and.

And we feel absolutely positive about not only the cultural fit which is so important but the value creation opportunity that that's there. Darren just said we spent an enormous amount of time together to identify the incremental upside is now that we can work together for a team there as a team I should say in.

And that's really exactly what's happened whether it's from the cost side or to expand the reach of the Goodyear brand in the Cooper brand and working together.

That's exactly what's what's happened in that work really allowed us to upgrade the the outlook that we have on synergies and raised from the $1 65 up to the $2 50, and again that doesn't take anything away, we will continue to drive the.

The cash benefits that we have identified relative to working capital and certainly have a favorable tax position. So so really I would just I'll start off by saying that.

Really on track, maybe even better.

Very very pleased with how the teams are working and Ive, even seen some of that with some of the <unk>.

Announcements, we've made on new responsibilities within the combined company. So so I'll just say very very pleased with the way things are going but Dan you can jump in on some of the specifics on the increased target and the timing of it.

So John I think the slide in today's deck, we will give you a little bit of an indication of the broad categories that we're talking about and I think we continue to see a significant benefit in the areas that we initially focused on including.

G, including logistics, we've seen.

On those original categories, we saw some improvement in what we expect to get from a procurement perspective. So saw a step up there as you will see the bar there looks larger.

The other thing that we've had a chance to do now is to think through where some of the initial benefits can be in sales and in manufacturing I think we are.

We were not prepared to get in deeply into those categories until we had a chance to close the deal and work together.

But I think even in.

The two year timeframe are effectively a year and a half that we have left to work here. We found that there were some cases where CEO.

Going both directions, we were going to be able to move.

Production from either of Goodyear facility.

Two a cooper facility for lower value product and free up some more capable equipment to make premium products.

So there are some cases, where we're able to move lower end product to Cooper factories, we've got some other instances, where we're actually able to move some <unk>.

Over value or simpler product into Goodyear factories.

And free up some premium equipment in the <unk>.

Cooper factory.

In order to build more light truck more SUV.

Products their factories are very good at so I think we've gotten some of those examples I think we've also found some examples and again on both sides.

Where we've been able to look at manufacturing process.

And compare the two manufacturing process and find ways that we can debottleneck.

Individual areas of the factory in order to get more output and so we've been able to quantify the <unk>.

The additional output now.

Without our two sets of engineers working together that wasn't going to happen.

So I think that's because we've also got some in here although still.

The biggest item, but some additional sales that we've recognized through the ability to put Cooper brand through select Goodyear points of sales and to offer some sale of the Cooper brand.

To select.

Good year fleet customers. So there is a couple of different areas that we are starting to move toward first two years, probably not going to be.

Yes that that won't be the biggest element, but we started to see those initial opportunities and obviously, we're going to keep look at looking for them, but those are yes that gives you an idea of where some of these opportunities are coming.

Great Super helpful. And then just wanted to ask one question on kind of thinking about next year.

Any way, we could think about what raw material cost headwind might be for 2022, and what sort of pricing that you would need to get to kind of stay on top of that Rami.

Raw materials spread.

Yeah, so well.

And we will keep obviously keep talking about this as we go from here through our year end results.

Yes, I think where we stand right now.

Spot prices in aggregate are up slightly from where they were in early August.

And I think particularly with carbon black is up.

A lot of movement in the other our other materials and we're watching the movement in those prices real closely and we saw butadiene.

Spike during the quarter, but now has come back down which I guess is ultimately is good.

If.

Spot prices hold where they are today, we're obviously going to get some significant raw material cost inflation and I guess right now focused on the first half because that's where we actually had a really good insight into where things are and I think you can probably think of the first half is seeing increases that are similar to what.

We've seen in the second half of this year.

So we will get it.

Get further into the year as we give our outlook and our year end call.

I think we're.

We've been demonstrating that.

Got the pricing.

Been able to price and drive price and mix to stay ahead of the raw material costs.

I think that that track record is going to be important for us as we head into next year.

It is important I think not because not only are we now thinking that.

Our pricing has got to cover raw material costs, but also focused on making sure that.

Recovering in recapturing the additional cost for transportation and other inflationary pressures, which you're.

Yes, there are levels that are higher than we can deal with.

With efficiency programs and I think right now we're feeling good about that theres been a lot of.

A lot of very consistent level of movement entire prices during the third quarter or so.

On a broad basis that seems to if anything picked up speed. So I think it's these are areas that everyone's feeling.

Yes, I think.

Puts us in a good position as we look at the challenge that we've got to overcome in the first half next year.

Great sounds great. Thank you guys.

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

Good morning, everybody.

Firstly, just pricing, obviously very strong in the quarter and the.

The most recent round of pricing only took effect on September one. So you wouldn't have had a full quarter of that.

I'm.

It sounds like it could be just as strong as this.

In Q4, and I didn't see anything in your press release about additional price increases, but you've been raising prices every three months or so so is there any reason to believe that the industry won't.

Continue to recover some of this margin, especially given the inflationary pressures that you are pointing to.

So so rod obviously.

A key question and really building on what Darren said during Q3 kind of repeating what you said a little bit we again saw sort of that net recovery of price versus raw material and they remember that's continuing a trend that actually goes back to late Q3 of 2019. So that's.

That's good momentum as we think about that and then replacement pricing, we've seen moving higher as a response to again not only raw material costs, but Darren as you mentioned incremental costs that we're seeing on labor transportation and energy and so forth. So we monitor all those tire manufacturer.

<unk> that are that are out there and what we've seen that they've all announced at least three price increases this year. The latest as you mentioned broadly.

Broadly speaking again, where in Q3 of up to 5% to 8% and Rod you would notice I mean, we haven't seen this type of pricing since roundabout 211 coming out of out of the great recession. So that's that momentum is very similar to what we're seeing for US we announced both Cooper and Goodyear brands up to 8%.

As a effective September one.

That's our fourth price increase this year, we had four price increases on the commercial side and also in Europe, We actually had a mid season price increase.

I would call it between September and October and as you know that's not that's not typical let's say of what we're seeing there. So so as we look ahead I mean, I guess I'd say two things one the pricing actions to date put us in a good position to handle those raw material increases that Darren mentioned in Q4.

But again as we look out to out into the future called 2022, we know we're gonna have to look for those price mix opportunities to help us with not only the raw material cost increases, but the other cost components that we're going to see as well and Thats why we sort of go back to the the parallels coming out of the great.

Recession in 2011 that that we have a situation where demand is running ahead of supply.

You think about consumer replacement running well right now the OE business is obviously.

Trailing which is a bit.

Serendipitous in some ways, particularly in certain markets, particularly in the U S, where we see that OE business coming back.

At some point in time, we can talk about when that is but that we see also is a way to sort of extend this ongoing recovery and this this question of supply and demand. So put all that together I would say everything is very constructive as we head into 2022, even in view of the we have these higher raw material costs and other <unk>.

So we have to hand.

Okay. That's helpful and just secondly, there are a lot of moving parts on the cost savings that we're thinking about our models for 2022.

Slide 21.

Actually shows kind of a helpful. Like every 1% increase in global inflation of $50 million was hoping maybe just give us a little bit of color, especially given what energy costs are doing in China, and Europe, but there's a little bit of color.

On the inflationary pressure.

What the run rate might be and then as an offset how much of that the Cooper synergy do you think you can actually achieve in the next year or so and you mentioned the European realignment starting to pay off in terms of.

In terms of market share, but <unk>.

<unk> also pointed to an improvement in profit per tire, maybe you can remind us where you stand on that and what the targets are.

Sure. So let me let.

Let me hit the inflation question first rod.

We originally were expecting to see inflation in the third quarter that was about $40 million above what we saw in Q2.

And in fact the <unk>.

Came in a little bit better than that.

So we really we saw about $20 million less year over year than we might have originally expected for Q3, and I think some timing there given some volumes warrant.

Quite as strong as we originally expected in Q3, and so that to the extent that volume rolls over into Q4, we'll see a little bit more of that cost come through but I think that original.

That original step up in inflation.

What we had been seeing which was around $40 million.

On a quarterly basis to something close to twice that.

As a pretty good indication of where we are right now as.

As we're heading into next year, obviously, we'll start to anniversary that in the third quarter next year, but in the first half I think we're expecting that we're going to have that kind of inflationary pressure.

Yes.

Does that.

Your first question.

That gives us a pretty good idea of the run rate.

Okay.

The.

Yes, the Cooper I think your question on the Cooper synergies was about how much of that we might get in 2022.

Mhm.

And at this point, Rob you said, we've gotten about $20 million.

Yes, effectively second half of this year.

Yes, so we have not given a number for 2022 and we're not going to give one for right now it will come back to that when we get to the year end earnings call, but certainly that $20 million, we're getting into the second half, we'll get a full year benefit of that.

We will start to get some of the other synergies.

We'll say that there are a number of the.

The cost saving programs for the integration that are going to be reliant on systems implementations.

And a number of those system implementations, we won't get through the work on those until the end of 2022.

There are there is a natural step up when we get beyond 2022 and here into 2023.

We're still going through some project planning here, we should be able to give you some more visibility when we get to February.

Yes.

The point on Cooper, and how to think about.

The Cooper integration for next year.

For the European light distribution.

Actually glad you asked the question because that program I think is.

It's something we really feel good about given the results in the third quarter. The team has been able to.

Recover market share and in fact third quarter share I think is is already back in 2019 levels, which is.

Think for not sustainably there yet, but we've got that's a really good indication of what a good job. The team has done working through.

The changes in distribution and we have also started to capture some additional margin.

And the European business than we had originally said based on our experience.

Structuring distribution in the U S that we expected to be able to get another two to $4 a tire of margin or in our replacement business in Europe. As a result of the work that we're doing.

And it's still early days, we were expecting to get that over three or four year period of time, but I can tell you we're already getting some benefit there.

In terms of the additional price and additional margin that we're getting our tire so.

I think ultimately our distributors are also doing better.

And so this was about both opportunities to increase the value that we got for our product in the market, but also to make sure that our distributors profitability in all of our brands was consistent and improving I think we're making progress on both fronts, yes, Darrin I would just add Brian.

Really well done by the team they took some some pretty major decisions early on.

On impact.

That were significant to us as well as taking some decisions in the market that that stopped some of the unauthorized could.

Could your tires moving around and those those efforts were were difficult working as Darren said, so we're very pleased with the direction.

Great. Thank you.

We will move next with ITI <unk> with Citi. Please go ahead. Your line is open.

Great. Thanks, and good morning, everyone.

It does.

Just wanted to kind of get your thoughts on the latest thoughts on kind of longer term earnings power of the company Richard kind of compare the current period to the recovery post <unk> I think what I want to ask why eventually hit $2 billion and given all the moving pieces any kind of latest high level thoughts on how youre thinking about goodyear's medium term earnings and margin power, maybe if you can also.

Upon our free cash flow that'd be that'd be helpful.

Yes.

Yes.

Okay.

You understand the background here, leading up to the pandemic.

Long term average segment operating income margin was.

Was it in the mid <unk>, so call it eight 5%.

And we.

Obviously, <unk> seen some compression going into 2019.

Taken it down below that.

Over the last two years, we've taken several actions to get our margins moving back at least towards those levels.

Including the restructurings that we've done in manufacturing from the Americas, and EMEA, including the distribute the Hawaiian distribution work that we're doing in Europe, and I think youre seeing the benefits of those and so we're now in.

In the third quarter were around that 8% segment operating income margin.

Driven by the strong performance in the Americas, we haven't quite gotten there yet on a rolling 12 month basis in terms of Goodyear's legacy based business, but will close and now we've added the Cooper business and as Rich said I mean Cooper had about 14% operating income return on sales.

In the third quarter. So that is also helpful. So on a merger adjusted basis Thats why youre seeing numbers like 9%.

And we're feeling very good about that near term I think.

Not to be a little bit cautious because of the inflationary pressures, which I mean, we know we've got to offset that we've got a track record of offsetting them mathematically, but when we get into these periods of raw material inflation.

As much as we can recapture the cost and maintain income.

We still have a larger denominator and that tends to make the progress on margins a little bit harder, but I think we feel good about the momentum and we continue to be confident in our ability to get to double digit margins.

The business in the intermediate call. It the intermediate term so I think our confidence there remains very high.

Perfect Thats all Thats all very helpful. Thank you.

And then you had another.

I think you were also asking.

About free cash flow we take.

Thats right, yes, yes definitely on the cash, but I would also just on maybe the.

What kind of Capex into next year kind of given what you are guiding for the Q4 exit rate, yes, and thanks for the reminder.

Sure No thats, okay. So.

Yung.

Do this I'm going to use some of the pro forma information that is going to be it will be provided in our 10-Q.

And that is published later today.

But we provided some pro forma information so that you have an easier time getting a feel for what the.

The combined Goodyear at Cooper business would look like.

If that if our businesses had been combined before 2021.

Again, the idea of what the little bit more what the run rate of the combined business looks like.

And so if we look if you look at the trailing 12 months pro forma EBITDA for Goodyear and Cooper combined.

We have an EBITDA of around $2 3 billion.

If we then use.

Kind of where things are running in terms of interest expense in the fourth quarter. So after we've already done.

The acquisition financing.

Sort of run rate on rationalization tax payments pension costs.

And the Capex, which.

Two companies combined on a pro forma basis would have had a capex of around $1 billion 150.

Yes, it's kind of where things are running this year on a combined company basis, if we took and combine the companies for the full year.

You do all that math, you come up with a run rate on cash flow that would be.

Give or take $300 million positive.

Today's earnings.

Current run rate of Capex.

The.

And Thats before obviously before we get any benefit from synergies. So I think moving forward, there's going to be opportunity to add those synergies 2022 and 2023.

Sure.

Yes, I think that assumes of course that there is a working capital.

While we've reinvested some this year, yes, I think over time, we manage the business without.

No.

Working capital as neither a source nor use.

Make that assumption going forward as well.

But.

So what that leaves us with the question around.

Our earnings goes going forward, but obviously the synergies will help with that.

Looking to move that $2 3 billion.

But we do recognize there is additional capex need.

Given number one the.

The tight supply.

Feel like we've got opportunities to grow.

And yes, that's going to be important second we're going to have to keep upgrading our factories given that the.

Trends in tires, and particularly when we get to the trends for electric vehicles.

Those tires are going to be harder to produce and their normal impact of building those larger mobile thus tires is to reduce existing factory output that's for us and for the industry.

And I think we will see that we will have to make some investment in order to keep up with that and then obviously, we've got to continue to improve the overall cost competitiveness of our manufacturing footprint. So I do think that we're we're going to be looking very hard at our Capex plan.

We'll share more with you when we get to February.

But I think.

We do see every reason to make some additional investments there having said that we're going to balance our desire to make some of those investments with what we feel like is a really important strategic need to continue to deleverage. So we want to Sierra.

Our debt to EBITDA coming down over time, and we're going to stick to those objectives as well.

Okay.

Terrific I appreciate all that detail. Thank you.

Okay.

Sure.

And we will take our last question from Victoria Greer of with Morgan Stanley. Please go ahead.

Regulatory good morning.

Hey, good morning, just a couple of probably a bit chartered Tam and firstly on the Q4 to your point that first thing. We currently can expect some sort of step up in in terms of pricing given the timing of the price increases and also the need to think about it.

Price being able to offset and inflationary headwinds.

Do you think that we can when we can expect the $50 million cost headwind you've seen flights from the U S fact, chase and to be fully offset also by price and mix as long as the raw materials for the fourth quarter that feels achievable given the other dynamics that we've talked certainly but I just wanted to ask that explicitly the second thing.

I was thinking about mix and clearly that has also been helpful.

With weaker OE this year, how much of that will be we think maybe.

Maybe as reverse thing going into next year or is it really the majority of <unk>. So far this year than they've been in Brian price.

Third thing then I just wanted to get a bit of color. Please on your own inventory levels really in terms of volume.

Clearly, we can see the balance sheet inventory numbers stepped up quite a bit but there's a lot of raw materials and cooper aspects going on in there and so could you talk about your inventory levels a bit in terms of volumes. Please. Thanks.

Sure. So let me cover that last 0.1st.

And I will do that because I know at your conference. We spent some time on inventory levels.

Yes, I think we were talking about at the end of June how much lower our days in inventory were compared.

Compared to.

Are they where they went back in 2019.

I will say that our picture at the end of the third quarter is really not much different.

Yes, so our inventory levels in terms of units are still 20% or below about.

About 20% or so below where they were in 2019 and thats, it's different by geography, but I'll say it in the Americas.

Has seen the greatest declines as the region, where we still have the greatest need to replenish our own stocks.

So I think that as we are able to do that I think that.

Obviously, we will create an additional growth opportunity, but we're not getting the benefit of right now.

The impact of and take your questions in reverse order will come back to Q4, but the OE impact on mix.

Yes, I think.

Absent.

A much more dramatic recovery in OE production than we were expecting and much more dramatic than what.

IHS and other third parties are predicting.

Absent that I think the.

The impact of OE recovery over time net net.

There's not going to be negative for us. So there will be a bit of pressure on mix, but it will come at a time, when and particularly in our international business units and may be most impactful in Asia, we're going to get the benefit of that volume.

And we do have underutilized capacity in Europe and in Asia at this stage.

The impact is going to be a positive a little bit of pressure on mix, although we're going to be bringing on some better cohorts that we've won over the last couple of years.

Profit and revenue profile on those is pretty good.

The.

So then the first question you asked which is the question about how Q4 might look at.

And in fact, if we look at our slide 10.

From this quarter.

Yes, I think what we're looking for for the fourth quarter.

In fact is somebody is not going to on the cost side is not likely to look that much different it'll be for different reasons.

In the third quarter, we had the non recurrence of some fixed cost reductions that we took last year.

Sure.

Part of our Covid related actions.

And we unwound those temporary reductions.

In the fourth quarter, we don't we don't have that tough comparison any longer but we have the additional.

Inflation and operational challenges in our U S factories that I talked about yes. So I think if you take the temporary fixed cost reductions and the inflation.

Hours that show up on Slide 10, I think we're expecting something for the fourth quarter that doesn't in the end doesn't look that much.

Yeah.

Alright, Thank you very much.

Sure.

Okay.

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

Okay.

Yeah.

[music].

Okay.

Okay.

Okay.

Okay.

Okay.

Okay.

Yes.

[music].

Okay.

[music].

Okay.

[music].

Sure.

Okay.

[music].

Okay.

[music].

Yes.

Okay.

Okay.

[music].

Okay.

[music].

Okay.

[music].

Yes.

[music].

Okay.

Okay.

Okay.

[music].

Okay.

Okay.

[music].

Okay.

[music].

Okay.

Okay.

Okay.

[music].

Okay.

Okay.

Good morning, My name is Nicole and I will be your conference operator today.

This time I would like to welcome everyone to Goodyear third quarter 2021 earnings call.

I have been place on mute to prevent any background noise.

After the Speakers' remarks, there will be a question and answer session. If you would like to ask a question. During this time simply press star one on your telephone keypad.

Like to withdraw your question Brendan.

I will now hand, the program over to Nick Mitchell Senior director of Investor Relations.

Thank you and thank you everyone for joining us for Goodyear's third quarter 2021 earnings call I'm joined here today beverage Kramer, Chairman and Chief Executive Officer, Darren Wells Executive Vice President and Chief Financial Officer, and Christina Tomorrow, Vice President Finance and Treasurer.

40 slide presentation for today's call can be found on our website at Investor 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.

If I could now draw your attention to the Safe Harbor statement on slide two 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 their earnings release.

The company disclaims any intention or obligation to update or revise any forward looking statements, whether as a result of new information future events or otherwise.

Our financial results are presented on a GAAP basis and in some cases, a non-GAAP basis. The non-GAAP financial measures discussed on the call are reconciled to the U S. GAAP equivalent as part of the appendix to the slide presentation and with that I'll now turn the call over to rich.

Great. Thank you Nick good morning, and welcome everyone and thank you for joining us.

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

Our third quarter results showed substantial growth in net sales of 42%, partly driven by our recent acquisition of Cooper tire and partly reflecting strong organic sales growth in our legacy business.

With this momentum we generated $449 million of merger adjusted segment operating income for the quarter more than double our earnings from last year and also well ahead of the pre pandemic levels.

Notably our earnings growth came despite a 15% increase in our raw material costs in the quarter, which was in line with our previous forecast now for context. This compares with an increase of about 1% and our raw material costs. During the first half of the year.

And like most companies, we're also experiencing significantly higher inflationary cost pressures, while manufacturing locally in the regions, where we're selling tires, partially insulates us from cost increases related to global supply chain challenges, we are experiencing the higher transportation cost that we forecasted on our last.

Call. Additionally.

Additionally, we're seeing added pressure from increased wage and benefit costs and higher utility rates, partly reflecting the growing energy prices in Europe and China.

To counter these impacts as well as higher raw material costs, we've continued to execute strategies to capture higher selling prices for our products, which helped drive a 10% increase in our revenue per tire in the quarter. The most in nearly a decade.

At the same time, we're also focused on recovering volume and growing our market share in the quarter. We continued to benefit from strong customer demand for our products globally. As a result, we saw our legacy consumer replacement business recovered nearly a percentage point of market share that's a significant move over.

The short period of time.

We came into the year confident that we would grow market share given the distribution changes we made in Europe last year and the benefits of Walmart reopening in auto care centers after temporarily closing them early in the pandemic.

I'm proud of how our team is executing and quickly recovering our share.

In our commercial replacement business, we experienced robust demand as the transportation industry moves record freight volume here, we delivered another strong performance with shipments to fleet customers well above pre pandemic levels.

Focusing on this important segment of the commercial truck market is paying off for us winning with fleets results and more consistent demand for our most premium products and creates opportunities to enhance customer loyalty through our leading mobility solutions, both of which can reduce the impact of cyclicality.

We're also excited about our progress integrating Cooper as we learn more about Cooper's business. We're identifying additional opportunities. These insights have increased our confidence in achieving synergies beyond our initial forecast.

On the other hand, our consumer OE business continued to be affected by weak auto production, given the shortages of manufacturing components and materials.

During the quarter industry shipments to OE customers.

For more than 20% below the third quarter of 2019 and considerably weaker than third party forecast at the beginning of the quarter.

Reductions in orders related to OE production have created inefficiencies in our operations and limited our volume growth this year, particularly in Europe and in China.

The current conditions will undoubtedly lengths in the global OEM recovery, while the environment is certainly less than ideal the need for Oems to catch up with consumer demand and replenish inventories will support its higher industry volume over the next few years.

We're well positioned for the recovery, given our growing market share, including our leading position on EV platforms.

In summary, we're seeing some contracting industry dynamics today between consumer replacement and OE, but combined the two segments should provide good growth prospects going forward you can see this in each of our business units.

In the Americas, our consumer business continued to benefit from a strong cyclical recovery, excluding the impact of the Cooper merger are larger in diameter consumer replacement volumes increased more than 20% in the U S. Nearly three times the industry rate while.

While our premium products continue to set the pace for growth. We also experienced double digit growth in smaller rim diameter segments supported by a recovery at Walmart's auto care centers.

Cooper's mid tier offerings continues to resonate with consumers, who are looking to balanced product performance and price, helping our team deliver strong results.

Our leading presence in the mid tier light truck and SUV category help Cooper grow its U S consumer volume, while delivering double digit operating margin performance, excluding the impact of merger related costs.

There is also a strong recovery underway in the U S transportation industry.

These dynamics are fueling an increased need for new class eight trucks tires and services all of which play to the strength of our commercial business.

During the quarter, our U S commercial OE volume was up over the prior year.

Reflecting higher truck builds in addition, our Goodyear fleet business continued to perform well with fleet tire volume, increasing more than 10% compared to the third quarter of 2019.

If not for supply constraints, our commercial results could have been even stronger.

While we are benefiting from our leading position in the North American commercial market, we are not resting on our laurels. Instead, we're innovating to develop solutions that will allow us to win as markets change and customer needs evolve.

In the third quarter, we signed a multi year collaboration agreement with <unk>. The first autonomous middle mile Logistics service provider in North America together, we will work to advance sustainable mobility solutions for autonomous <unk> short haulers with a shared goal of making it safer and easier.

As you are to move goods.

GATX fleet of autonomous commercial vehicles will leverage the power of our tire intelligence technology powered by Goodyear's sight line to improve stopping distances reduce fuel consumption and lower maintenance costs.

This is a terrific opportunity for us to apply our connected tire solutions to drive efficiencies in the increasingly important middle mile segment.

Turning to EMEA, we are seeing good momentum in our business, excluding the merger our European consumer replacement business delivered 9% volume growth and a relatively flat market supported by our aligned distribution strategy.

The outperformance was broad based as we gained market share in summer winter and all season categories, a testament to the strength of our product portfolio.

And it's just not consumers, who see great value in our products.

This month Goodyear was named the winner of the German magazine Auto builds all season tire test for the second consecutive year, placing ahead of more than 30, other brands and a comprehensive examination of dry wet snow and mileage performance.

<unk> like this help reinforce our leading position in the all season category the fastest growing market segment.

Emea's commercial business is seeing strong demand for our commercial truck tires as Europe's economic recovery continues volume in our Goodyear commercial business was 6% above 2019 levels.

While we have grown our share considerably this year capacity constraints have restricted our performance.

To meet the fast growing demand for our fleet solutions in EMEA, We've recently announced capacity expansions at our manufacturing facilities in Luxembourg and witness Germany.

We're also harnessing innovation to respond to our customers' needs. For example, we've committed to developing solutions to help our customers achieve their cotwo emissions reduction goals.

In September our European commercial team launched the fuel Max endurance, the most versatile and fuel efficient commercial tire we have ever produced as a result fleets no longer need to choose between durability mileage performance and fuel efficiency a key driver of emissions.

We believe tires and related solutions will play an essential role in the journey towards sustainable mobility.

This market evolution will give us opportunities to further differentiate our products as we move ahead.

Turning to Asia Pacific industry demand softened considerably during the quarter, largely reflecting COVID-19 related disruptions in China and several ASEAN markets in July and August.

Lockdowns and other mobility restrictions further complicated what was an already challenging OE environment due to semiconductor shortages.

While these factors pressured organic volume trends in our OE business, we gained share for the second consecutive quarter, reflecting the release of new Fitments.

We're also growing faster than the market in the consumer replacement segment investments and distribution are driving strong results in India, where we've increased our share by more than seven percentage points compared to 2019.

Our share is also up nicely in China compared to pre pandemic levels. As we are benefiting from scaling up our direct to retail distribution model and new product launches, including the recent debut of the assurance <unk>.

I'm sure you can tell from our business initiatives that we're very focused on leading towards a more sustainable future.

The challenge, we believe is right in front of us changing our industry is creating tremendous growth opportunities for Goodyear and as a leader in our industry. We must set the tone for benefits of future generations and our track record is clear we've developed more fuel efficient products reduce energy usage in our factories and.

<unk> waste to landfills.

We've discovered ways to use more sustainable raw materials, such as soybean oil and rice husk cash silica that deliver similar or better product performance, while reducing our environmental impact.

Our engineering and manufacturing teams are also embracing these advances we've constructed a tire without petroleum based content and traditional film materials like carbon black and sand based silica.

With this momentum we've challenged ourselves earlier this year by setting a goal of developing a 100% sustainable material and maintenance maintenance free tier by the end of this decade.

We're also focused on greenhouse gases and greener energy sources.

As a part of our commitment to reduce Cotwo emissions, we are working with energy supplier and <unk> to build two large solar power stations that are testing facilities and Luxembourg.

Beginning in 2022, these cutting edge facilities will add carbon free energy to the local power grid that will be available to nearby communities for years to come.

In addition, we recently announced a multi phase plan to power Goodyear's manufacturing facilities across Europe, Middle East and Africa solely with renewable electricity by the end of 2022.

We estimate this critical shift will reduce our carbon footprint by up to a quarter of a million tons significantly reducing the environmental impact of our operations.

Goodyear is committed to building a better future in keeping with this commitment we plan to announce updated climate related goals by year end consistent with the climate strategy development timeline, we shared in April.

Look forward to updating you on our long term ambitions in the new year.

In summary, we have good momentum and we are taking actions to strengthen our business and to ensure we are leading our industry toward a more sustainable future.

When I considered the industry conditions, we faced in the middle of last year I am truly amazed at what we've accomplished during the past four quarters.

We've recovered our market share.

And our OE pipeline more than offset inflationary cost pressures and successfully managed unprecedented supply chain challenges.

We've also completed a transformational acquisition and continued advancing our mobility and sustainability initiatives.

To accomplish all of this in the midst of a global pandemic is a testament to the strength of the Goodyear team.

Team that is stronger and following the addition of Cooper.

I'd like to thank all our associates for their contributions to our success.

And now I'll turn the call over to Darren.

Thanks Rich.

In most ways, our third quarter results reflect a continuation of many of the industry trends and successful Goodyear initiatives that have driven the strong momentum we've seen over the last 12 months.

You will see the impact of this momentum and the strong topline growth and earnings growth for the quarter and the continued strength in segment operating income margin.

The quarter also saw a continuation of some of the challenges companies are facing across all industries, including delayed shipping difficulty maintaining adequate staffing and increasing inflation driven by these and other factors.

It is also seeing the introduction of a few new challenges, including inconsistent supply of power for manufacturing in China and of course, the challenges associated with automotive production and rising raw material costs are still with us as well.

As you can see our team has done a good job managing through these factors in order to preserve the benefits of our cost and cash flow initiatives and continue to recover market share loss. During 2020 as a result of our unique distribution footprint.

This has helped US again delivered results ahead of pre pandemic 2019 levels with significant industry volume recovery yet to come.

Q3 results also reflect the first full quarters impact of the combination of Cooper and Goodyear, helping drive the significant growth in volume and sales revenue.

I shared during our second quarter earnings call and again at an Investor Conference in mid September that we were continuing to feel positive about the opportunities to drive synergies.

I will share with you today, some more specifics about the early savings, we're seeing and the benefits we expect over the first two years of the combination, which we now see is higher than when we announced the transaction.

While we won't talk much about 2022 today. These positives along with the challenges will be the backdrop for our plan for next year as we look to continue our momentum while addressing both increased capital investment needs and our deleveraging objectives.

Our third quarter sales were $4 9 billion, including just over $900 million of sales from Cooper tire sale.

Sales generated through Goodyear's legacy operations increased 16% driven by improvements in both price and mix.

Unit volume increased 32% from last years third quarter, reflecting the addition of Cooper tire units and organic growth in our replacement business.

Segment operating income of 372 million marked our best third quarter performance since 2016.

Merger related costs were $77 million, including $70 million of amortization associated with the step up of inventory to fair market value at closing.

Third quarter merger adjusted segment operating income, which excludes these costs totaled $449 million or 9% of sales.

After adjusting for merger related costs and other significant items detailed in our press release, our earnings per share on a diluted basis was <unk> 72.

Up from 10 cents a year ago.

The step chart on slide 10 summarizes the change in segment operating income versus last year.

As we've done all year. We also included a comparison to 2019 on slide 11 that provide some additional perspective on our recovery.

Compared to the Covid impacted year ago period, the benefit of higher volume was $115 million, reflecting increased production and replacement unit sales growth in goodyear's legacy business.

The non recurrence of temporary fixed cost reductions, including Covid related government payroll incentives, partly offset the benefit of higher production volume.

As rich mentioned earlier, we delivered our best price mix performance in nearly 10 years and revenue per tire for the quarter was up 10% excluding foreign currency.

The combined impact of higher prices and improved mix contributed $327 million to earnings, which more than offset higher raw material costs of $161 million as well as inflation of $57 million.

The cost savings versus inflation picture is worth spending a bit of timeline. As this is an area that looks different going forward at least in the near term than it has in recent history.

Third quarter cost reflect a combination of factors.

First there was some restoration of costs that were artificially low last year as we were ramping up after the spring COVID-19 related shutdown.

This is what creates negative cost savings.

This impact is temporary.

Second as we indicated on our last call. We started to see increased inflation and transportation and labor costs. These added costs helped drive up the inflation impact well above anything we've seen in recent years, although some of the increase we expected in Q3 now will be recognized in Q4 given volume timing.

These cost pressures are going to remain with us for the remainder of this year and into next year.

I'll come back to this when we discuss the fourth quarter outlook, but the cost savings versus inflation picture will require more focus going forward.

The other category nets to zero, so no overall impact in the quarter.

This reflects offsetting factors first it includes the restoration of advertising cost to something closer to pre pandemic levels.

Second it includes some additional inflationary cost pressures, including warehousing and retail.

These cost increases were offset by improved earnings from our other tire related businesses and higher equity earnings on our entire hub investment.

Similar to last quarter. We've included two bars to show the impact of the Cooper tire transaction on our results.

The Green bar on the left reflects Cooper operating income, which totaled $125 million during the quarter or 14% of sales.

The results reflect strong performance in North American consumer replacement.

The Red bar on the right captures the merger related costs mentioned earlier, including $70 million of amortization of the Cooper tire inventory step up and 7 million of amortization related to the incremental intangible assets recorded in connection with the merger.

The amortization of intangibles is running a bit lower than previously expected given ongoing updates to preliminary purchase accounting.

Yes.

Turning to the balance sheet on slide 12, net debt totaled $7 1 billion the.

The increased net debt compared to last year reflects approximately $1 9 billion of cash consideration and closing costs for the Cooper transaction net of over $500 million of positive cash flow generated over the trailing 12 months as shown on slide 13.

Turning to our segment results.

On Slide 14, Americas unit volume totaled $25 9 million up 59% compared to the prior year's period the increase.

This reflects the addition of $8 7 million Cooper tire units as well as volume returning to pre pandemic levels in our replacement business.

You might expect our OE volume was down.

Americas segment operating income totaled $259 million or nearly 9% of sales.

Americas results included $113 million of merger adjusted operating income from Cooper and $69 million of cost triggered by the merger, mostly amortization related to the inventory fair value step up at closing.

Excluding the impact of the Cooper transaction segment operating income for the Americas would have been $215 million, reflecting improvements in price mix net of higher raw material costs and benefits of higher volume, including increased factory utilization.

These benefits were partially offset by the cost pressures that impacted our company results, including higher transportation and labor costs.

In addition, our north American factories experienced staffing challenges that were more significant than in other parts of the world.

While there has been <unk> been higher absenteeism globally in the U S. We've had much greater levels of retirements and turnover and therefore more long term hiring needs post COVID-19.

The result of this is much higher number of associates being trained in our factories in the U S.

This has impacted our Americas business in three ways.

First it has made it more difficult to increase production to pre pandemic levels.

Second it's resulted in a higher number of nonproductive workers, both those being trained and those training them.

Third it has made it more difficult to work on ongoing efficiency programs.

This has resulted in significantly higher costs near term relative to the number of tires being produced.

More about that when we cover our outlook, while we expect.

These additional costs to be transitory there'll be with us through at least Q1 of next year.

Turning to slide 15, Europe Middle East Africa as unit sales increased 8% to $14 2 billion.

Replacement volume increased $1 5 million, reflecting share gains in our legacy European consumer replacement business.

The continued recovery of last year's temporary volume losses, as a result of our initiative to better align our distribution.

Overall <unk> in Europe produced 30% fewer vehicles than in last year's third quarter. As a result, our OE volume declined by <unk> 5 million units.

Europe Middle East Africa segment operating income of $81 million was up $59 million compared to a year ago improve.

Improvements in price mix net of higher raw material costs, and the impact of higher volume, including increased factory utilization drove the earnings growth.

There was no material earnings impact from the Cooper transaction for EMEA.

Turning to slide 16, Asia Pacific's tire units increased 900000 to $8 1 million, mainly reflecting the addition of Cooper tire volume.

While our China consumer replacement business was affected adversely by the return of COVID-19, Lockdowns and flooding in the head on products, we still saw share gains and replacement volume growth in the quarter.

We also saw growth in our OE business with volume up half a million units compared to a year ago.

While industry demand was lower we increased market share for the second consecutive quarter.

We would expect to see an even more meaningful impact from our improved market position as vehicle production normalizes.

Segment operating income was $32 million down slightly from the prior year, reflecting higher raw materials and other cost pressures that we were not able to fully offset in the quarter.

The addition of Cooper did not materially impact Asia Pacific's earnings.

I'll cover our normal outlook items in a minute, but first I want to share with you an update on the work. The combined team has done to develop specific synergy plans for the Cooper Goodyear combination.

An enormous amount of effort has been put into this planning process over the last 180 days led by Ryan Patterson and John Boehner.

The result of this planning has been to reaffirm our confidence in tax and cash benefits and to increase the expecting earnings benefits.

We initially estimated our synergies would reach $165 million within two years of closing we now expect the benefits, including the addition of international initiatives and some additional manufacturing and sales opportunities to reach a run rate of $250 million by mid 2023.

This year's results are expected to reflect about $20 million of cost savings from the elimination of duplicative corporate costs, which is a good start.

This of course excludes one time transaction costs and accounting adjustments.

Turning to our outlook items on slide 18.

As you can see from this summary, we expect many of our trends experienced during the third quarter to continue into the fourth quarter.

Against this backdrop, we expect our fourth quarter volume trends to be similar to the third quarter.

We expect price mix to continue to more than offset raw material costs, reflecting the benefit from recent pricing actions and improved mix, although our raw material cost increase will approach 300 million for Q4.

Yes.

Similar to what we saw in the third quarter inflationary pressures, including incremental wage benefit transportation and energy costs will be at levels beyond what we can offset with efficiency.

But this seems to indicate overall is that we will need to continue to focus on additional price mix to offset not only continued raw material trends, but also other cost inflation as we move into 2022.

There are two additional factors that will impact Q4 costs.

First the transitory cost pressures in our U S factories related to tires produced in Q3 will impact our cost of goods sold in Q4 by approximately $50 million.

While these pressures will continue into next year. It should begin to moderate with Q1 production and even the Q1 cost of goods sold impact will be less in Q4.

Second like many other companies our manufacturing facilities in China have been impacted by the widely reported rolling blackouts.

As typical right now to estimate the impact of this.

We expect our working capital to exhibit normal seasonality in Q4, resulting in seasonal cash inflows and positive free cash flow for the quarter.

Lastly, as a reminder, our fourth quarter 2020 results included a $34 million favorable legal settlement and a $13 million charge to establish an environmental reserve. Neither of these items will recur this year.

Slide 19 provides a final view of our full year financial assumptions.

These estimates are fairly consistent with our previous outlook, you'll notice we took our raw materials and corporate other towards the high end of the previous ranges and took our interest expense to the low end.

We also lowered our full year estimate of incremental amortization of intangible assets related to the Cooper transaction, reflecting adjustments made to the allocation of the purchase price.

Now we will open up the line for questions.

Yeah.

At this time, we feel with light ask a question. Please press the star and one you touched on the following.

Draw your question at any time.

Once again to ask a question please press star one.

Alan.

And we'll take our first question from John Healy with Northcoast Research. Please go ahead. Your line is open.

Good morning, Thank you and good morning, guys and congrats on the progress this quarter I wanted to ask on the at Cooper.

And our Cooper synergy target on the upside.

The goal there could you maybe talk to kind of what youre seeing and where you are finding that the synergy upside.

Upside there.

Yes, no John.

Thanks for asking.

Just start by saying that the integration process and how we're working with the Cooper team has just been been going great. I think everything that we thought has been reaffirmed our excitement is there and and we feel absolutely positive about not only the cultural fit which.

Is so important but the value creation opportunity that that's there Darren just said we spent an enormous amount of time together to identify the incremental upside is now that we can work together for a team there as a team I should say in and Thats really exactly what's happened, whether it's from the cost side or to expand the reach.

So the Goodyear brand in the Cooper brand and working together.

I think thats exactly what's what's happened in that work really allowed us to upgrade the the outlook that we have on synergies and raised from the $1 65 up to the $2 50, and again that doesn't take anything away, we will continue to drive.

The cash benefits that we have identified relative to working capital and certainly the favorable tax position. So so really I would just I'll start off by saying that.

Really on track, maybe even better.

Very very pleased with how the teams are working and Ive, even seen some of that with some of the.

Announcements, we've made on new responsibilities within the combined company. So so I'll just say very very pleased with the way things are going but Dan you can jump in on some of the specifics on the increased target and the timing of it.

So John I think the slide in today's deck, we will give you a little bit of an indication of the broad categories that we're talking about and I think we continue to see a significant benefit in the areas that we initially focused on including.

G, including logistics, we've seen.

On those original categories, we saw some improvement in what we expect to get from a procurement perspective, so saw a step up there as youll see the bar there looks larger the other thing that we've had a chance to do now is to think through where some of the initial benefits can be.

In sales and manufacturing I think we are.

We were not prepared to get deeply into those categories until we had a chance to close the deal and work together.

But I think even in.

The two year timeframe are effectively a year and a half that we have left to work here. We found that there were some cases where CEO.

Going both directions, we were going to be able to move.

Production from either our Goodyear facility.

Two our Cooper facility for lower value product and free up some more.

Capable equipment to make premium products.

So there are some cases, where we're able to move lower end product to Cooper factories. We've got some other instances, where we're actually able to move some lower value or simpler product into Goodyear factories.

And free up some premium equipment in.

Cooper factory.

In order to build more light truck SUV, which of our products. Their factories are very good at so I think we've gotten some of those examples I think we've also found some examples and again on both sides.

Where we've been able to look at manufacturing process.

And compare the two manufacturing process and find ways that we can debottleneck.

Yes.

Individual areas of the factory in order to get more output.

So we've been able to quantify the benefit of that additional output I think without our two sets of engineers working together that wasn't going to happen.

So I think that's because we've also got some adhere although still.

The biggest item, but some additional sales that we've recognized through the ability to put Cooper brand through select Goodyear points of sales and to offer some sale of the Cooper brand.

To select.

Goodyear fleet customers. So there is a couple of different areas. There that we've started to move toward first two years, probably not going to be.

Yes that that won't be the biggest element, but we've started to see those initial opportunities and obviously, we're going to keep look at looking for them, but those are yes that gives you an idea of where some of these opportunities are coming.

Great Super helpful. And then just wanted to ask one question on kind of thinking about next year.

Any way, we could think about what raw material cost headwind might be for 2022, and what sort of pricing that you would need to get to kind of.

Stay on top of that.

<unk> materials spread.

Yeah, so well.

We will keep obviously keep talking about this as we go from here through our year end results.

Yes, I think where we stand right now.

<unk> prices in aggregate are up slightly from where they were in early August.

And I think particularly with carbon black is up.

A lot of movement in the other our other materials.

Watching the movement in those prices real closely and we saw butadiene.

Spike during the quarter, but now has come back down which I guess is ultimately is good.

If.

Spot prices hold where they are today, we're obviously going to get some significant raw material cost inflation and I guess right now focused on the first half because that's where we actually.

Actually no.

Really good insight into where things are and I think you can probably think of the first half is seeing increases that are similar to what we've seen in the second half of this year.

So we will get it.

Get further into the year as we give our outlook and our year end call, but I think we're.

We've been demonstrating that we've got the pricing.

We've been able to price and drive price and mix to stay ahead of the raw material costs.

I think that that track record is going to be important for us as we head into next year and it's important I think because not only are we now thinking that.

Our pricing has got to cover raw material costs, but also focused on making sure that.

Recovering in recapturing the additional cost for transportation and other inflationary pressures.

You just have yes, there are levels that are higher than we can deal with with efficiency.

Programs and I think right now we're feeling good about that theres been a lot of.

A lot of very consistent level of movement entire prices during the third quarter or so.

On a broad basis that seems to have if anything picked up speed. So I think these are areas that everyone's feeling.

Yes.

Puts us in a good position as we look at the challenge that we've got to overcome in the first half next year.

Great sounds great. Thank you guys.

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

Good morning, everybody.

First thing personally just the pricing, obviously very strong in the quarter and the most recent round of pricing only took effect on September one. So you wouldn't have had a full quarter of that.

I'm.

It sounds like it could be <unk>.

Just as strong as this.

In Q4, and I didn't see anything in your press release about additional price increases, but you've been raising prices every three months or so so is there any reason to believe that the industry is.

Continue to recover some of this margin, especially given the inflationary pressures that you're pointing to.

So so right obviously.

A key question and.

Building on what Darren said during Q3 kind of repeating what you said a little bit we again saw sort of that net recovery of price versus raw material in it remember that's continuing a trend that actually goes back to like Q3 of 2019. So that's that's.

That's good momentum as we think about that and then replacement pricing, we've seen moving higher as a response to again not only raw material costs, but Darren as you mentioned incremental costs that we're seeing on labor transportation and energy and so forth. So we monitor all those tire manufacturer.

<unk> that are that are out there and what we've seen that they've all announced at least three price increases this year. The latest as you mentioned broadly.

Broadly speaking again, where in Q3 of up to 5% to 8% and Rod you would notice I mean, we haven't seen this type of pricing since roundabout 211 coming out of out of the great recession. So that momentum is very similar to what we're seeing for US we announced both Cooper and Goodyear brands up to 8% and.

As a effective September one.

That's our fourth price increase this year, we had four price increases on the commercial side and also in Europe, We actually had a mid season price increase.

Between September and October and as you know that's not that's not typical let's say of what we're seeing there. So so as we look ahead I mean, I guess I'd say two things one the pricing actions to date put us in a good position to handle those raw material increases that Darren mentioned in Q4.

But again as we look out to <unk>.

Out into the future called 2022, we know we're going to have to look for those price mix opportunities to help us with not only the raw material cost increases, but the other cost components that we're going to see as well and that's why we sort of go back to the.

The parallels coming out of the great recession in 2011 that that we have a situation where demand is running ahead of supply.

If you think about consumer replacement running well right now the OE business is obviously.

Trailing which is a bit.

Serendipitous in some ways, particularly in certain markets, particularly in the U S, where we see that OE business coming back.

At some point in time, we can talk about when that is but that we see also is a way to sort of extend this ongoing recovery and this this question of supply and demand. So put all that together I would say everything is very constructive as we head into 2022, even in view of the we have these higher raw material costs and other call.

So we have to hand.

That's helpful and just secondly, there are a lot of moving parts on the cost savings that we're thinking about our models for 2022.

Slide 21.

Shows kind of a helpful. Like every 1% increase in global inflation of $50 million was hoping maybe just give us a little bit of color, especially given what energy costs are doing in China, and Europe, but just a little bit of color.

On the inflationary pressure.

The run rate might be and then as an offset now how much of that the Cooper synergy do you think you can actually achieve in the next year or so and you mentioned the European realignment starting to pay off in terms of.

In terms of market share, but you. Originally also pointed to an improvement in profit per tire, maybe you can remind us where you stand on that and what the targets are.

Sure. So let me let.

Let me hit the inflation question first rod.

We originally were expecting to see in placement in the third quarter that was about $40 million above what we saw in Q2.

And in fact the.

It came in a little bit better than that.

So we really we saw about $20 million less year over year than we might've originally expected for Q3, and I think some timing there given some volumes werent.

Quite as strong as we originally expected in Q3, and so that to the extent that volume rolls over into Q4, we'll see a little bit more of that cost come through but I think that original.

That original step up in inflation.

What we had been seeing which was around $40 million on a quarterly basis to something close to twice that.

Is a pretty good indication.

We are right now as.

As we're heading into next year, obviously, we'll start to anniversary that in the third quarter next year, but in the first half I think we're expecting that we're going to have that kind of inflationary pressure.

Yes.

Does that.

And your first question, yes that gives us a pretty good idea of the run rate.

Okay.

The.

Yes, the Cooper I think you are.

Your question on the Cooper synergies was about how much of that we might get in 2022.

Mhm.

And at this point, Yeah, Roger said, we've gotten about $20 million.

Yes, effectively second half of this year.

Yeah. So we have not given a number for 2022 and we're not going to give one for right now it will come back to that when we get to the year end earnings call, but certainly that $20 million or getting into the second half, we'll get a full year benefit of that.

We will start to get some of the other synergies.

We'll say that there are a number of the.

Our cost saving programs for the integration that are going to be reliant on systems implementations.

And a number of those system implementations, we won't get through the work on those until the end of 2022.

So there are there is a natural step up when we get beyond 2022 and get into 2023.

We're still going through some project planning here, we should be able to give you some more visibility when we get to February.

Yes.

The point on Cooper, and how to think about the Cooper integration for next year for.

For the European line distribution.

Actually glad you asked the question because yes that program I think is is something we really feel good about given the results in the third quarter. The team has been able to.

Recover market share and in fact third quarter share I think is is already back in 2019 levels, which is I think we're not sustainably there yet, but we've got that's a really good indication of what a good job. The team has done working through.

The changes in distribution and we have also started to capture some additional margin.

And the European business than we had originally said based on our experience.

Restructuring distribution in the U S that we expected to be able to get another 2% or $4 a tire of margin or in our replacement business in Europe. As a result of the work that we're doing and it's still early days, we were expecting to get that over three or four year period of time, but I can.

Tell you we're already getting some benefit there.

In terms of the additional price and additional margin that we're getting our tire so.

I think ultimately our distributors are also doing better and so this was about both the opportunity to increase the value that we got for our product in the market, but also to make sure that our distributors profitability all of our brands was consistent and improving.

Making progress on both fronts.

Yes, Darren I would just add Brian.

Really well done by the team they took some some pretty major decisions early on on on.

On impacts that were significant to us as well as taking some decisions in the market that that stopped some of the unauthorized.

Your tires moving around and those those efforts were were difficult but are working as Darin said, so we're very pleased with the direction.

Great. Thank you.

Yeah.

We will move next with anti <unk> with Citi. Please go ahead. Your line is open.

Great. Thanks, and good morning, everyone.

So just wanted to kind of get your thoughts on the latest thoughts on kind of longer term earnings power of the company, which you kind of compare the current period to the recovery post <unk> nine and I think that's why you've actually had $2 billion and given all the moving pieces or any kind of latest high level thoughts on how youre thinking about goodyear's medium term earnings and margin power.

Maybe if you can also upon our free cash flow that'd be that'd be helpful.

Sure.

Yes.

So.

E.

Do you understand the background here that leading up to the pandemic.

Our long term average segment operating income margin was.

Was it in the mid <unk>, so call it eight 5%.

And.

Obviously, <unk> seen some compression going into 2019.

Taken it down below that.

Over the last two years, we've taken several actions to get our margins moving back at least towards those levels.

Including the restructurings that we've done in manufacturing for the Americas, and EMEA, including the distribute the aligned distribution with what we're doing in Europe, and I think youre seeing the benefits of those and so we're now in.

In the third quarter were around that 8% segment operating income margin.

Driven by the strong performance in the Americas, we haven't quite gotten there yet on a roll.

<unk> 12 month basis in terms of Goodyear's legacy base business, but will close and now we've added the Cooper business.

And as Rich said I mean Cooper had about a 14% operating income return on sales in the third quarter. So that is also helpful. So on a merger adjusted basis Thats why youre seeing numbers like 9%.

And we're feeling very good about that near term I think.

<unk> got to be a little bit cautious because of the inflationary pressures, which I mean, we know we've got to offset them. We've got a track record of offsetting them mathematically what we do.

Get into these periods of raw material inflation.

As much as we can recapture the cost and maintain income.

We still have a larger denominator and that tends to make the progress on margins a little bit harder, but I think we feel good about the momentum and we continue to be confident that our ability to get to double digit margins.

In the business and the intermediate call. It the intermediate term so I think our confidence there remains very high.

Perfect Thats all Thats all very helpful. Thank you.

And then you had another.

I think you were also asking.

About free cash flow we take.

Thats right, yes, yes definitely on the cash, but I would also just on maybe the cause.

What kind of Capex into next year kind of given what you are guiding for the Q4 exit rate. Thanks for the reminder.

Sure No thats, okay. So.

Yung.

Do this I'm going to use some of the pro forma information that is going to be it will be provided in our 10-Q.

And Thats published later today.

But we provided some pro forma information so that you have an easier time getting a feel for what the.

The combined Goodyear at Cooper business would look like.

If that if our businesses had been combined for 2021.

So again the idea of what the little bit more what the run rate of the combined business looks like.

And so if we look if you look at the trailing 12 months pro forma EBITDA for Goodyear and Cooper combined.

We have an EBITDA of around $2 3 billion.

If we then use.

Kind of where things are running in terms of interest expense in the fourth quarter. So after we've already done.

The acquisition financing.

Yes, Sir.

Run rate on rationalization tax payments pension costs.

And the Capex, which.

The two companies combined on a pro forma basis would have had a capex of around $1 billion 150.

Yes, it's kind of where things are running this year on a combined company basis, if we took and combine the companies for the full year.

You do all that math, you come up with a run rate on cash flow that would be.

Give or take $300 million positive.

Today's earnings.

Current run rate of Capex.

The.

And Thats before obviously before we get any benefit from synergies. So I think moving forward, there's going to be opportunity to add those synergies 2022 and 2023.

Yes, I think that assumes of course that there is a working capital.

While we've reinvested some this year, yes, I think over time, we manage the business without.

No.

Working capital as neither a source nor use and kind of make that assumption.

Function going forward as well.

But.

So what that leaves us with the question around.

We're earnings goes going forward, but obviously the synergies will help with that.

Looking to move that $2 3 billion.

But we do recognize there is additional capex need.

Given.

Number one.

The tight supply so.

Feel like we've got opportunities to grow.

And yes, that's going to be important second we're going to have to keep upgrading our factories given that the.

Trends in tires, and particularly when we get to the trends for electric vehicles.

Those tires are going to be harder to produce and there.

The normal impact of building those larger and more robust hires is to reduce existing factory output that's for us and for the industry.

And I think we will see that we will have to make some investment in order to keep up with that and then obviously, we've got to continue to improve that overall cost competitiveness of our manufacturing footprint. So I do think that we're.

Going to be looking very hard at our Capex plan.

We will share more with you when we get to February.

But.

But I think we.

We do see every reason to make some additional investments that having said that we're going to balance our desire to make some of those investments with what we feel like it's a really important strategic need to continue to deleverage. So we want to Sierra.

Our debt to EBITDA coming down over time, and we're going to stick to those objectives as well.

Okay.

Terrific I appreciate all that detail. Thank you.

Yeah.

And we will take our last question from Victoria Greer of with Morgan Stanley. Please go ahead.

We are in Victoria good morning.

Hey, good morning, just a couple of probably a bit chartered Tam and firstly on the Q4.

To your point that Tim first thing. We currently can expect some sort of step up in terms of pricing given the timing of the price increases and also the need to think about price being able to offset and inflationary headwinds.

Do you think that we can when we can expect the $50 million cost headwind you flagged for the U S factories and to be to be fully offset also by price and mix as well as the raw materials for the fourth quarter that feels achievable given the other dynamics that we've talked sorry, but I just wanted to ask that explicitly the second thing.

Was thinking about mix and clearly that has also been helpful.

With weaker OE this year, how much of that will be distinct.

Maybe as reverse thing going into next year or is it really the majority of <unk>. So far this year than they've been in Brian price.

Third thing then I just wanted to get a bit of color. Please on your own inventory levels really in terms of volume.

Clearly, we can see the balance sheet move entry number stepped up quite a bit but there is a lot of raw materials and cooper aspects going on in there and so could you talk about your inventory levels a bit in terms of volumes. Please. Thanks.

Sure. So let me cover that last 0.1st.

I'll do that because I know at your conference. We spent some time on inventory levels and I think we were talking about at the end of June how much lower our days in inventory were.

Compared to where they were they went back in 2019.

I will say that our picture at the end of the third quarter is really not much different.

So our inventory levels in terms of units are still 20% or below.

About 20% or so below where they were in 2019, and it's different by geography, but I will say it in the Americas.

Has seen the greatest declines as the region, where we still have the greatest need to replenish our own stocks.

Yes, so I think that as we are able to do that I think that obviously will create an additional growth opportunity, but we're not getting the benefit of right now.

Yes.

The impact of and take your questions in reverse order will come back to Q4, but the OE impact on mix.

I think the.

Absent.

A much more dramatic recovery in OE production than we were expecting in <unk>.

Much more dramatic than what.

IHS S and other third parties are predicting.

Absent that I think the.

The impact of OE recovery over time net net.

Is not going to be negative for us. So there will be a bit of pressure on mix, but it will come at a time, when and particularly in our international business units and may be most impactful in Asia, we're going to get the benefit of that volume and we do have underutilized capacity in Europe, Indonesia at this stage.

So volume impact is going to be a positive a little bit of pressure on mix, although we're going to be bringing on some endeavor.

We've won over the.

The last couple of years.

Profit and revenue profile on those as you know is pretty good.

The.

So then the first question you asked which is the question about how Q4 might look.

In fact, if we look at our slide 10.

From this quarter.

Yes, I think what we're looking forward for the fourth quarter.

In fact is somebody is not going to do on the cost side is not likely to look that much different it'll be for different reasons.

In the third quarter, we had the non recurrence of some fixed cost reductions that we took last year.

We're.

Part of our Covid related actions and we unwound those temporary reductions.

In the fourth quarter, we don't we don't have that tough comparison any longer but we have the additional.

Inflation and operational challenges in our U S factories that I talked about so I think if you take the temporary fixed cost reductions and the inflation bars that show up on slide 10, I think we're expecting something for the fourth quarter that doesn't in the end doesn't look that much.

Great. Thank you very much.

Sure.

Okay.

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