Goodyear unveils wide-ranging plan to boost shareholder value

AKRON—Goodyear is moving ahead with plans that will result in a far different company in the future.

It will be a company that, if the Akron-based firm achieves everything it hopes, will include a more optimized portfolio, a doubling of its profit margin by the end of 2025 and a far less-leveraged company with much lower debt.

Goodyear also will have a new leader sometime next year, as Richard Kramer, chairman, CEO and president for the last 14 years, has informed the board that he will retire in 2024. Those retirement plans, Goodyear said today, previously had been discussed with the board, and the world's No. 3 tire maker has retained a leading executive search firm to execute a search considering both internal and external candidates.

The Akron-based tire maker today revealed its "Goodyear Forward" plan, which calls for a wide range of initiatives, including the potential sales of its chemicals/synthetic rubber business, the iconic Dunlop brand and its off-the-road equipment tire brand.

Goodyear projects the sale of those assets could bring in excess of $2 billion.

Other planned actions unveiled in a Nov. 15 news release and presentation to financial analysts include:

• Cost reduction actions that would bring annual benefits of $1 billion by the end of 2025;

• Top line actions in North America to optimize its brand and tier positioning, rationalize SKUs and drive other benefits that would create an annual benefit of $300 million by the end of 2025;

• With the benefits of the cost reduction and top line actions, see its segment operating income margin double to 10 percent by the end of 2025; and

• Increase its net leveraging position over that same time period through its strengthened financial profile, enhanced earnings, cash flow generation and debt reduction of about $1.5 billion—bringing Goodyear closer to an investment-grade rating.

"Our plan is a combination of the acceleration of existing projects and the initiation of new projects, all focused on sustainable value creation," Kramer said on the Nov. 15 investor's call. "Goodyear Forward is not just a great plan on paper, but a plan that is specific and actionable with detailed timelines and accountability that makes it credible and achievable.

"Management and all our leaders are aligned and working together and will be accountable for seeing the Goodyear Forward plans for our (future) will sharpen our focus, fuel profitable growth and dramatically strengthen our business."

Goodyear's Strategic and Operational Review process was prompted by a May 11 letter to Kramer from Elliott Investment Management L.P., a West Palm Beach, Fla.-based investment firm that is one of Goodyear's largest investors.

The letter detailed the firm's dissatisfaction with what it called Goodyear's poor stock performance.

In a July 25 response, Goodyear added three to its board of directors. The Goodyear board also established a review committee to look into all options to maximize "sustainable shareholder value creation" and build upon initiatives Goodyear already had started.

Over a 16-week period, the committee—comprising five directors, including two new independent directors—evaluated all strategic and operational alternatives to maximize shareholder value; explored all portfolio optimization and asset monetization opportunities; and worked with the board to present a detailed recommendation for streamlining the business, improving competitiveness and driving growth.

Goodyear said a dedicated execution team was assigned with plans to achieve milestones, with projects integrated into the annual operating plan to allow for full accountability.

"With the support from top financial advisers and consultants, we executed a comprehensive and rigorous evaluation process to identify the best pathway for maximizing shareholder value," Kramer said on the call. "No stone was left unturned as we analyzed the future landscape to design the optimal path for Goodyear's future."

Laurette Koellner, independent lead director of Goodyear's Board, said the plan is a result of a comprehensive, bottom-up assessment of Goodyear's business.

"The full board supports this plan and is confident it will deliver substantial and durable value creation for shareholders," she said. "We appreciate the constructive input of our shareholders throughout this process."

Mark Steinberg, senior portfolio manager for Elliott Investment Management, and Portfolio Manager Austin Camporin, said that the Goodyear Forward plan is a "significant set of steps" forward for Goodyear and should lead to a stronger and more profitable firm.

"We thank Rich for his leadership and the review committee for its collaborative engagement, and we look forward to continuing our dialogue with the company as it implements these initiatives and works to deliver the substantial upside value that we see for all Goodyear shareholders," Steinberg and Camporin said in a statement.

Kramer and Christina Zamarro, executive vice president and chief financial officer, provided some insight into how the committee determined that the chemicals, Dunlop and OTR tires businesses were put on the sales block.

"For each business, we challenged ourselves on whether we were the best owner of the business in terms of value creation," Kramer said. "And let me be explicit, we looked at every single business and settled on the three that will be undergoing a formal and active strategic review."

Zamarro said the chemicals business generates about $1 billion in annual sales, with segment operating income (SOI) typically in the high single digits. About half is sold to third parties and the other half is consumed internally by Goodyear's operations.

"As we thought about chemicals, given our sharpest focus on Goodyear Forward and where we want to direct our investment capital in the future, this business may be more likely to thrive under different ownership," she said.

The Dunlop brand has revenues of about $700 million a year, with the majority of that in the European market.

"As part of the review, we concluded that a sale of the brand should bring significant value for shareholders, and at the same time, will enable us to focus future investments on the Goodyear brand, streamlining our manufacturing processes by narrowing our product portfolio to a reduction in the number of SKUs," Zamarro said on the analyst call.

The OTR business also has sales of about $700 million annually, supplying specialized tires for mining and construction applications. It typically has SOI margins in the mid-teens, she said, and has technology closer to Goodyear's core tire business.

But its largest competitors in the market are four to five times the size of Goodyear's business.

"The amount of capital it would take for us to achieve competitive scale is significant, and that's unlikely to be achievable in this foreseeable future," Zamarro said.

Goodyear will keep its U.S. retail business. She said the review committee concluded that the retail business has more value to the company today than it would create if it was sold.

"Our retail presence reinforces our strong brand and bolsters our leading industry position in the U.S. consumer replacement business, our most profitable," Zamarro said.

As for plans to increase its annual SOI margins by $300 million, Goodyear said it will optimize brand/tier positioning—with Goodyear as the premium option and Cooper as the mid-tier offering—to capitalize on brand strength to drive premium pricing.

It also will reduce its exposure to lower-tier products and low-margin customers, using price and or mix to boost customer/channel profitability. Goodyear said it will exit product lines where profit margin is limited.

Plans also include capturing more opportunities and boosting market coverage in Goodyear premium product lines.

Goodyear said its $1 billion in cost reductions will come from footprint actions and plant optimization (40 percent); purchasing (35 percent); sales, administrative and general costs (20 percent); and supply chain and R&D costs (5 percent).

Zamarro said these savings, along with the proceeds from the sale of the three businesses, will be used for debt repayment and restructuring.

"We expect to repay approximately $1.5 billion of debt by the end of 2025," she said. "With the benefit of lower debt and higher EBITDA from our margin expansion efforts, our net leverage should decrease to between two and two and a half times by year-end 2025. This level puts us in line with other publicly listed U.S. auto suppliers and moves us closer to an investment grade rating."

During a year that Goodyear celebrated its 125th anniversary, Kramer said he is motivated for the company to build on a strong foundation moving into the future.

"Our plan is balanced and taken together, our plan maximizes long-term value," he said. "Through our efforts, we will deliver a streamlined, more focused business portfolio that we expect will grow in line or above market rates, a doubling of our segment operating margin to 10 percent by Q4 2025, ... and increased financial flexibility and sustainable cash flow generation.

"As we embark on our next stage of growth, the board, the management team and I are fully focused on executing our Goodyear Forward plan," Kramer said. "Work is well underway. I would like to extend my gratitude to the entire team at Goodyear, to all those who have helped realize our achievements to date, and to all of us who are executing our vision of the future."