If Goodyear was hoping to draw high fives and kudos from analysts with its cost-slashing strategy unveiled at a Sept. 23 investors meeting in New York, it didn't get the reaction it wanted.
But the company's plan to improve profitability didn't draw bad reviews, either.
Analysts for the most part simply weren't surprised. They're taking a wait-and-see stance to determine how the tire maker follows through on its cost-cutting program.
Goodyear wants to slash high-cost manufacturing capacity by 8 to 12 percent during the next three years to save $100 million to $150 million annually. Overall, it is looking to save $750 million to $1 billion in three years, while incurring restructuring charges of about $150 million.
Robert Keegan, chairman and CEO, said Goodyear aims to improve the firm's segment operating margin to 8 percent (vs. 6.2 percent for the '05 half year) and its North American segment operating income to 5 percent (vs. 0.4 percent). ``We successfully achieved many of our goals we set three years ago (when the firm launched phase one of its restructuring plan) and look to further improve our performance,'' he said.
To achieve its goals, the company said it will close high-cost factories globally, although it didn't disclose how many plants are targeted or where they are located. It also plans to trim its cost structure, increase Asian sourcing for low-end products, upgrade manufacturing, accelerate tire introductions and generate capital to support further investment in the firm's core tire business.
Some of that capital could come from the divestiture of the Engineered Products division, which the company said Sept. 20 is up for sale.
``Engineered Products is a good business but it doesn't fit Goodyear's overall strategy,'' said Saul Ludwig, an analyst with KeyBanc Capital Markets' Equity Research. ``I think there are buyers out there for it.''
While the sale would reduce Goodyear's revenue, it would fit nicely with the company's strategy to concentrate solely on tire manufacturing, said Efraim Levy, an analyst with Standard & Poor's Equity Group in New York.
Possibly. But there were no takers for Goodyear's chemical business when the company put it on the selling block in March 2003.
A legitimate deal never surfaced and the firm finally pulled it off the market in mid-2004 and eventually made it part of the company's North American Tire business, where it's had a positive impact on sales and earnings.
Mr. Ludwig said the news at the investors' meeting was as expected. ``I'm not really surprised by the plan,'' he said, although the cuts aren't as large as he anticipated. However, he said, no negatives came out of the meeting.
Goodyear's success will be determined by the execution of its restructuring, according to a commentary from Morgan Stanley Equity Research prepared by analyst Jonathan Steinmetz. ``Increased restructuring spending could be a very wise investment with a high payback, but will require union cooperation in 2006,'' he said.
The firm retained its equal-weight rating of Goodyear, noting the tire maker has a strong brand name and a solid position in markets outside North America. The report labeled Goodyear's restructuring plan ``sensible,'' but not unique.
``We would characterize Cooper Tire, Michelin, Continental and Bridgestone, among others, as pursuing a similar approach,'' Morgan Stanley said.
Problems Goodyear continues to face, according to the report, are:
* High leverage, including pensions;
* Little free cash flow going to investors in the next several years because of restructuring, pension funding and possibly increased capital spending; and
* ``Lack of a clear reason why North American results improve substantially.''
Morgan Stanley does continue to prefer shares of Goodyear to those of Cooper Tire & Rubber Co.
The firm said it believes Goodyear's accelerated push for low-cost sourcing will place more pressure on Cooper to follow suit quickly. That, in turn, could intensify price pressure in the low-priced tire segment.
The United Steelworkers (USW) union will be a major player in the restructuring plan throughout the three-year process.
Union officials said they want to work with the tire maker and pointed out the current contract has enabled Goodyear to bring new products to the marketplace and rebound financially.
The USW said it has cooperated with the company in the past and wants to be an active partner in controlling costs in the future. It represents 18,000 workers at seven Goodyear North American tire plants.
``Our union has shown that it can be an extremely innovative partner, provided that we're engaged in a fully informed and open dialogue with the company-and as long as the company is mindful of its substantial and continuing obligations to our members, retirees and their communities,'' said Ron Hoover, a USW executive vice president. He's the union's Goodyear contract coordinator.
Under the tire maker's master contract with the union, 12 of 13 facilities are protected through the life of the pact, which expires July 22, 2006, although a plant in Illinois is included in a pending sale of Goodyear's farm tire unit.
``We have a successor clause in our contract,'' a union spokesman said. ``A new buyer would have to fulfill the agreement and recognize the USW and the workers' representative. Goodyear has indicated that would be part of the process.''
The union's current contract provides for minimum employment levels and guaranteed capital investments. Talks on the next contract are expected to begin in the spring of 2006.
North America the key
Jonathan Rich, president of Goodyear's North American Tire unit, said at the investor meeting that ``the financial health of Goodyear is ultimately linked to our performance in North America.'' The segment's first-half sales increased 8 percent over 2004.
He said the division seeks to improve earnings by finding new growth, creating service businesses, cutting operating costs, improving the manufacturing base in North America and dealing with the firm's legacy obligations. Costs will be reduced by boosting productivity, investing in plant efficiencies and new technologies, and a major product and process design initiative, he said.
The division's goal is to have every factory running at capacity and producing high-margin goods. To do that, Goodyear will move commodity tires to low-cost manufacturing countries, so the firm can still serve customers and earn a satisfactory return, Mr. Rich said.
``Today we are importing about 10 percent of our product needs and this will grow as we increase our production of high-margin products in North America,'' he said.
The business will rationalize under-performing product lines-fixing or eliminating those that don't meet the company's strategy. Mr. Rich said plants that don't perform up to expectations could close.
The tire maker needs to trim legacy costs in North America, he said, including funding and capping its benefit plan. Goodyear's pension fund is underfunded. ``Over the next two years we will make more than $1 billion in contributions to those plans,'' Mr. Rich said.
The executive noted that the company needs to start another plan for younger employees and get workers and retirees to share more health care expenses.
While Mr. Hoover acknowledged that health care and pension costs are big issues, he said Goodyear and the USW can work together to maintain excellent benefits while controlling costs. Both likely will become part of the bargaining process between the company and USW next year.
Engineered Products could play a key role in the restructuring.
If the operation is sold, Goodyear gets additional capital but loses a business that makes money.
The hose and belt business had sales of $1.47 billion and operating income of $113 million last year. The business has achieved year-over-year growth in both sales and earnings in 2002, 2003 and 2004. It operates 30 facilities globally and has about 7,000 employees. Of those, 2,250 at seven North American plants are members of the Steelworkers union.
The USW said it will closely monitor the possible sale of Engineered Products.
Successorship language covers the hose and belt maker's plants and a buyer would have to negotiate a new labor pact with the union prior to completing the purchase.
``Goodyear has been straightforward in telling us that it wants to explore this avenue,'' Mr. Hoover said. The union will ``vigorously'' represent workers throughout the process, he said.
Timothy R. Toppen, president of Engineered Products, said he understood why the company was exploring sale of the business and the gains the operation could realize.
``But that isn't our concern,'' he said. ``The cornerstone of our operating philosophy stays intact-we want to help our customers grow their businesses for the long term.''
* * *
* Achieve savings of $750 million to $1 billion in three years.
* Cut high-cost production capacity by 8 to 12 percent.
* Improve operating margins.
* Outsource commodity tires to low-cost producing countries.
* Accelerate tire launches.