NEW YORK (Feb. 23. 2001)—Goodyear expects to return profits to "their traditional level" in the coming years through a series of cost control and efficiency measures, Chairman Sam Gibara told the financial community recently.
Specificially, Goodyear sees improvements coming from continued sales gains, improved cost controls, reduced levels of staffing, more efficient global product planning, and more efficient purchasing through electronic commerce and other measures, Mr. Gibara said.
The chairman´s comments were made against the backdrop of a fourth quarter 2000 net loss and an 83.4-percent drop in fiscal 2000 net profits.
Analysts who follow the company were reserved in their judgment of Goodyear´s ability to turn the earnings situation around, based in part on uncertain market conditions facing the tire industry this year, including a 5-percent drop in industry shipments.
"Given the cloudy outlook, we prefer to remain neutral on the stock," said a prepared statement from Morgan Stanley Dean Witter. The New York equity research firm is projecting double digit growth the next two years for Goodyear´s earnings per share, but this still will leave that figure at less than $1 per share.
"The ability to beat $1 of (earnings per share) this year will hinge on the ability to hold the price hikes," said Saul Rubin of UBS Warburg, who is advising a "hold" rating on Goodyear´s stock.
David Bradley, of J.P. Morgan Chase in New York, was not convinced that job cuts and plant closings would translate into the cost savings Goodyear says they will.
Goodyear´s stock gained $1.04 in trading on Dec. 15, to close at $21.24.
Mr. Gibara, speaking to financial analysts in New York Feb. 14, said the company expects a quarter-by-quarter improvement throughout the year, which should bring earnings by the second half back up to their level in the first half of 2000. During that period, Goodyear reported earnings before tax and interest of $371.1 million on sales of $7.01 billion, or pre-tax profitability of 5.3 percent.
In terms of sales, Goodyear said a strengthening euro would provide a measurable boost to the ledger; in 2000, unfavorable currency translations cost it $446 million in dollar-reported sales.
Among specific initiatives Goodyear is planning are:
* Cutting its workforce by 7,258 this year—cuts that should yield $148 million in bottom line benefits this year and $252 million annually thereafter;
* Streamlining global product planning—a move that should yield $400 million in savings over four years from an activity with a billion-dollar annual budget;
* Implementing RubberNetwork.com—an industry cooperative materials sourcing service that could produce $200 million in savings over five years.
In addition, the firm continues to accrue $100 million or more in annual savings from synergies out of the Sumitomo/Dunlop alliance, Mr. Gibara said, and should benefit from a leveling of oil prices and a strengthening euro/dollar exchange rate.
The rapid rise in oil prices last year added about $1.40 in cost per tire, and the negative effects of currencies and pricing added another $1.34 in cost per tire, Goodyear said. These costs were offset partially—$1.08 per tire—by productivity increases.
The company expects to generate $350 million in additional cash flow this year from improved operations, asset amortization and the sale of selected assets with which the company can pay down debt, Mr. Gibara said.
Goodyear´s strategy to restore the company to healthy profitability also includes a pledge to get dealer fill rates above 90 percent this year, he said.
The company expects to have all its independent dealers ordering through Xplor—its proprietary Internet-based business-to-business ordering and inventory control system—by mid-year, Mr. Gibara said, up from 75 percent now. Moving all ordering online will help the firm improve its market forecasting and order fill rates and reduce working capital by $50 million to $100 million, Mr. Gibara said.
Additionally, Goodyear said it now has 400 "sizable" dealerships in the U.S. participating in its G3 brands—Goodyear, Dunlop, Kelly—marketing program. That growth in G3 dealerships coincides with what Mr. Gibara calls a consumer "flight to quality," providing the company broader exposure to its targeted customer base for higher value-added flag brands. This, in turn, will allow the company to make more efficient use of its marketing resources, he said.
Goodyear continues to look into ways to improve what it feels already is the most diverse distribution base in the industry. In addition to G3 growth, Goodyear sees opportunities to increase its penetration in the mass merchandiser and wholesale club channel, while also signing up disenchanted Firestone dealers, Mr. Gibara said.
Ad spending up
Goodyear will boost advertising spending worldwide this year 30 percent over previous years in an effort to take advantage of increased consumer sensitivity to quality when shopping for tires, according to Robert Keegan, president and chief operating officer.
While overall spending will increase, the media mix will change as well, with some traditional outlets being eliminated, Mr. Keegan said.
"We need to increase the effectiveness of our message," he told analysts in New York, "and the efficiency of our media selection. We´re rethinking everything."
In North America, ad spending will be spread over the Goodyear, Dunlop and Kelly brands while advertising in Europe will support Goodyear and its affiliated brands, Fulda, Kelly and Sava, and Dunlop and its associated brands Debica, Pneumant and Falken.
The bulk of the tire division cuts will take place in Europe, where Goodyear expects to trim 1,600 jobs in western Europe and 2,000 in its Eastern Europe/Africa/Middle East region. There will be about 500 cuts in North America, 600 in Asia and 500 globally in the engineered products business.
The cuts will be a combination of early retirement and other incentive-based programs, but the company would not rule out the possibility of plant closings.
Taken together with 3,500 job cuts effected last year, Goodyear by year-end 2001 will have reduced its payroll by more than 10 percent, Mr. Gibara told analysts.
However, the newly announced cuts do not include 500 jobs being eliminated in Australia at Goodyear´s joint venture there, South Pacific Tyres, he added.