AKRON—Spinning through the downward economic cycle, Goodyear is continuing to make long-reaching cutbacks to offset weak product demand, reduce inventory levels and gain back market share.
The company unveiled a high-impact, three-part plan Feb. 18 aimed at addressing those issues along with net income losses of $77 million in 2008 and $330 million in the fourth quarter.
Included are planned work force reductions of 5,000 employees in 2009 to go with about 4,000 jobs axed in the second half of 2008 from its global work force of about 75,000; a freeze on salaries and merit raises globally; and a significant reduction in capacity.
Overall, Goodyear hopes to trim costs by about $700 million in 2009. That raises the target for a long-term cost-savings program—put in place in early 2006—to $2.5 billion, Chairman and CEO Robert J. Keegan said during an investor conference call Feb. 18 when the tire maker released its fourth-quarter and full-year financial report.
Because of lower industry demand, “we are taking aggressive action, reducing tire production, cutting costs and adjusting investments to better match market conditions,” the executive said. He cited several belt-tightening moves—capacity and work force cuts, along with plant closures—the company made in 2008 that set the stage for downsizing in 2009 and 2010.
Other initiatives planned for 2009 include implementing new cost-control policies to eliminate nonessential discretionary spending; putting purchasing actions in place to lower both raw material and indirect material costs; and elimination of between 15 million and 25 million units of additional tire capacity worldwide over the next two years.
In early February, Goodyear said it planned to reduce manufacturing at several undisclosed plants in Asia and Latin America, broadening by more than 50 percent a series of production reductions in North America announced earlier in 2009.
The tire maker also said it was closing its rubber mixing plant in Radford, Va., and transferring that production to its factory in Buffalo, N.Y., eliminating 12 hourly and six salaried employees at the facility. The company laid off 31 workers at the plant in December.
Plans to increase sales
To create growth, Keegan said the company plans to launch more than 50 new tires globally this year, all targeted to key segments, which he believes will boost sales. New products, a richer product mix and effective innovation should help Goodyear gain market share with what he termed the firm's “unmatched global offerings.”
Another part of Goodyear's plan calls for the implementation of several cash flow actions, including cutting capital expenditures to between $700 million and $800 million; reducing inventory levels by more than $500 million; and actively pursuing the sale of noncore businesses.
The tire maker's sales fell 19.9 percent to $4.1 billion in the fourth quarter, despite increases in Goodyear's branded market share, the firm said.
Goodyear's loss of $77 million in 2008 is a significant drop from its net income of $602 million in 2007, which included an after-tax gain of $508 million on the sale of the company's former Engineered Products business.
Revenues in 2009 came in at $19.5 billion, less than 1 percent lower than Goodyear's record $19.6 billion garnered in 2007. Sales in 2008 reflect a $1.3 billion negative impact from an 8.5-percent reduction in tire volume and the sale of the company's T&WA tire mounting business, which had revenues of $639 million in 2007.
In early February, Darren Wells, executive vice president and chief financial officer, said Goodyear also has been dealing with high raw material costs, which were roughly 13 percent higher last year than in 2007 and should keep rising throughout the first quarter before peaking.
North American Tire suffers loss
Goodyear's North American Tire business had sales of $8.3 billion, an 8-percent drop from last year's revenues, principally because of a 17-percent volume decline reflecting lower industry demand, the company said. The unit had segment operating profits of $425 million, down from $582 million in 2007.
On the other hand, Goodyear's Asia-Pacific, Latin American Tire, and Europe, Middle East and Africa Tire divisions had record full-year sales for 2008. Europe, Middle East and Africa Tire's operating income fell, but both Latin America Tire and Asia-Pacific Tire saw improvement in their operating income.
Kirk Ludtke, an analyst for CRT Capital Group L.L.C., said CRT was lowering its earnings and cash-flow estimates for Goodyear to reflect lower-than-expected industry volumes and higher-than-expected material costs.
The firm changed its recommendation to “hold” from “buy” on Goodyear's common shares, although Ludtke said CRT continues to view the tire maker's long-term prospects favorably.
Calling the current economic environment challenging, Keegan said remaining flexible and managing costs are the keys to surviving the downturn. He said he has every confidence the company will rebound after the economy improves.
“Extraordinary times require extraordinary actions,” he said. Keegan declared Goodyear's seven strategic drivers will provide the firm with a proven path to the next level.
However, he said the tire maker does have other cost-reduction plans on the drawing board that can be implemented should the economy worsen further.