NEW YORK (July 17, 2008) — Goodyear, emboldened by its business turnaround over the last five years, plans to spend as much as $1.8 billion to modernize its plants, cut production costs and boost its share in emerging markets.
The tire maker also plans to continue launching new products and wants to increase its high-value-added tire capacity in the coming years.
Following several years of restructuring and retrenching, Goodyear said it now has the financial flexibility to pursue profitable growth strategies. These include focusing on emerging markets, particularly China, Russia and Brazil, and increasing its global market share in high-value-added tires.
At an investors conference in New York June 26, Goodyear said it will spend $1.6 billion to $1.8 billion at its plants in the U.S., Latin America and Europe over several years to modernize and upgrade capacity for high-value-added tires.
This is expected to add about 8 million units per year of such consumer tire capacity, primarily by converting existing low-value-added tire production. Commercial truck tire capacity also will be expanded by 2.5 million units by 2012.
What's an HVA tire?
Goodyear defined high-value-added tires as “H” or higher speed-rated passenger tires with rim diameters 17 inches or larger made with silica or multizone tread compounds, segmented molds and presses ranging in size of 45 inches or larger. Goodyear's HVA commercial tires, such as its Fuel Max and Duraseal lines, offer specific performance characteristics and its off-the-road HVA lines use technology to address difficult performance conditions.
The company said it is targeting the HVA tire market because of growing demand in emerging markets and expected incremental margins of $10 to $20 per tire. However, the company acknowledged the challenges of producing HVA tires vs. LVA tires, including the investment in new equipment, transition costs, shorter runs and more sizes.
In the U.S., Goodyear is budgeting $500 million to $700 million over five years to modernize plants in Gadsden, Ala.; Fayetteville, N.C.; Topeka, Kan.; and Danville, Va.
The tire maker said it also is transitioning its supply chain from “pushing” products from its plants to “pulling” product orders from them based on consumer demand. Chairman and CEO Robert Keegan said the goal is to attain a more cost-efficient supply chain that reduces inventory and improves fill rates.
Goodyear also announced:
c The planned closing of its 47-year-old passenger and light truck tire plant in Somerton, Australia, completing its targeted reduction, announced two years ago, of about 25 million units of capacity in high-cost facilities. Goodyear will take a charge of $125 million against earnings to cover the closing, which will provide $35 million in annual cost savings.
c A plan to invest up to $500 million to relocate and expand its Dalian, China, plant to a new site 30 miles away. The new facility, with an anticipated production start-up in 2012, will increase high-end passenger tire capacity and launch the company's truck tire production in China. Goodyear has 75-percent ownership of the plant.
c The allocation of up to $600 million to expand production in Brazil and Chile.
c The budgeting of about $500 million to modernize and expand output at plants in Germany and Poland.
These production adjustments and investments should help the firm increase its HVA capacity by 50 percent from 2006 levels. The goal is to have half of the company's global capacity located in low-cost countries by 2012, Keegan said.
Goodyear assured investors that the company is on track with its four-year plan to attain more than $2 billion in gross cost savings by 2009.
Keegan said the firm's recent price hikes have held in the U.S., and Goodyear is focusing on a price and product mix plan to offset rising costs.
Some stock analysts were guardedly optimistic about Goodyear's plans in the midst of rising raw material costs and slowing economic conditions. KeyBanc Capital Markets Inc.'s Saul Ludwig issued an analysis that kept the company's rating of Goodyear stock at “buy” but lowered his estimated earnings per share for the year to $2 from $2.45.
“As we see it, Goodyear is in good control of its operations and, in light of the environment, is executing its strategy well and should have a strong recovery whenever the economic winds turn, although timing that is impossible,” he said.
J.P. Morgan Securities Inc. maintained its “hold” rating on Goodyear stock with an estimated EPS of $2.60 for 2008. It noted that in Latin America, two-thirds of Goodyear's revenue mix is high-margin truck tires and the firm's new plant in China will give it access to that nation's large and high-margin commercial truck tire market,
At the investor conference, Goodyear also warned that the tough economy and weak tire demand will put pressure on its earnings. The following day, the firm's share price declined 11.1 percent.