First Quarter Loss For Goodyear
Goodyear Tire & Rubber has posted a first quarter 2003 net loss of $163.3 million, compared to a 1Q loss last year of $63.2 million.
Turnover for the period was up 7.1 per cent to $3.5 billion ($3.
3 bn 1Q 2002), but much of this was due to the effect of currency translation – estimated by the company to be $139 million. Tyre unit volume in 1Q was down at 52.6 million units, compared with 53 million in 1Q last year.
The loss before taxes was $135 million ($85.6 m 1Q 2002). The international tyre businesses generally performed well, but Goodyear continued to struggle with its tyre business in North America.
Robert Keegan, President and CEO, was optimistic, however, saying that Goodyear was “aggressively cutting costs to make the business competitive.” He added: “We have much work left to do, but our turnaround is on track”. Below are brief details of the performance of the different business segments – the figures in brackets refer to the corresponding period for 2002.
North American Tire Unit sales were down to 24.8 million tyres (26.2 m) and turnover fell too, to $1.
59 billion ($1.65 bn), leading to an operating loss for this segment of $61.5 million (-$51.
3 m). OE shipments fell 2.7 per cent and the replacement volume was down 6.
4 per cent. Among the factors blamed were a weakening industry, increased raw material costs and the fact that, in 1Q 2002, Goodyear supplied half a million tyres for the Ford tyre replacement program, worth around $10 million. European Union Tire Volume was up 4.
8 per cent to 15.8 million units (15.1 m), due to a large rise in the replacement sector of 11.
6 per cent. OE shipments fell 7.7 per cent.
Sales were up at $930.9 million ($744.9 m), due largely to favourable currency translation, price increases and an improved product mix.
Currency values also had a big effect on operating income, which was up 92.8 per cent at $32 million (16.6 m).
Eastern Europe, Africa, Middle East Tire Once again, both volumes and turnover were up. Unit sales were 4 million (3.8 m), with replacement sales up 10.
9 per cent and OE sales down 11.1 per cent. Currency effects again helped boost income to $227.
4 million ($174.5 m) – Goodyear estimates that the effect was in the region of $35 million. Operating income was up 94.
4 per cent at $21 million (10.8 m). Latin American Tire The situation here was not so good, with both volumes and revenue falling.
Volume was down 5.7 per cent overall at 4.7 million units (4.
9 m), with replacement sales down 1.7 per cent and those for OE falling by 15.9 per cent.
The currency effect in this region was negative (by $69 million, Goodyear reckons) and turnover was $231.7 million ($245.6 m).
Currency values had an estimated $27 million negative impact on operating income, which nevertheless was up slightly at $26 million ($25.4 m). Asia Tire Volumes rose 8.
9 per cent to 3.3 million units (3.0 m), with replacement volumes dropping by 1.
1 per cent and a massive percentage OE shipment increase of 35.3 per cent, with a notable increase in China. Turnover rose to $140.
5 million ($121.7 m), so too did operating income, to $12.7 million ($7.
6 m). Goodyear’s non-tyre segments Engineered Products and Chemical Products both recorded increases in turnover and operating income. Conference call – the way ahead The publication of Goodyear’s 1Q results was followed by an analysts’ meeting in New York and a conference call, at which senior executives revealed some of the company’s plans.
By rearranging its debt financing, said Robert Keegan, the company has effectively bought itself two years’ grace, which is the time it will need to turn itself around, especially in North America. Goodyear, he continued, needs to be more focused on the market – in the past it has been too inwardly focused – and the company needs to remember its core business and that it is fundamentally a tyre business. By 2005, Goodyear’s aims are to have gained market share in North America (and the rest of the world) and to have taken costs out of the business in the order of between $1 – $1.
5 billion. “Our aim,” he said, “is to fix the business – and I choose my words carefully – in North America.” It will come as little surprise to anybody that this will involve further rationalisation of plants and associates, he warned.
The company has made steady progress in its reconstruction plans so far, he maintained, pointing out that six of the seven business units were performing well “and I couldn’t have said that 18 months ago” he added. However, he was not complacent and admitted that cost reduction was on his mind every day. “We need a significantly lower cost structure and the phrase that keeps going through my mind is that the clock is ticking” he told the analysts.
Simplification is the key in all areas of operations, he continued, saying that complexity merely adds to costs without adding anything in value terms. “We will eliminate brands, some customers and some staff” he promised. ”There are some tough decisions to be made” he said, saying that Goodyear still intends to increase its spend in the market place for disciplines like marketing, and this cash needs to be freed up from other sources and diverted to where it can be spent more cost-effectively and provide the best return.
Goodyear will more fully utilise its low cost production facilities, increasing shipments from these areas to Europe and North America and this would involve capital expenditure in these areas, said Keegan. Goodyear has taken other steps, he went on. For example, negotiations are still in progress regarding the sale of the chemical business and Goodyear has sold 21 million Sumitomo shares.
“We are looking at everything that is non-core,” said Keegan, “but I can make no further comment today.” He spoke of “self-inflicted problems” that Goodyear has suffered in the past and the need to concentrate on “the man at the counter”, who the company has been guilty of ignoring. It is vital, he went on, to build brand strength and Goodyear would be reducing the number of brands it carries, as has been the case in Europe.
The surviving brands will be repositioned to reduce overlap in positioning and pricing – at the moment he believes that there is no clear differentiation between certain brands, which is confusing for both dealer and customer. Goodyear fully intends to increase its marketing spend this year and step up its R&D, reducing its product development times significantly, and both these will funded by the “tough decisions” referred to earlier. New products will help the company achieve its aim of doubling the number of wins it currently has in independent product tests – something that he believes has a big influence on purchasers both in Europe and North America.
A specific goal is for Goodyear to have “the best fill rates in the industry”, said Keegan; a situation which he freely admits is not the case at the moment. To explain further about what the company plans for North America, Keegan introduced Jon Rich, President of North American Tire. Not all bad news Rich kicked off with an overview of the company’s performance in 1Q, saying that the company had made some gains in market share compared to industry averages, although OE volume was down slightly.
This is no accident, as Goodyear has said that it will be more selective about taking on OE business. In the past, there has been a mentality of production at any cost to keep factories going, but this will no longer be the case and plants in the USA that are not competitive “will be fixed or closed” he said. One thing that did please Rich was the fact that, while unit sales overall fell by five per cent, sales to the independent dealer, with whom Goodyear has traditionally been strong, were up five per cent, illustrating, said Rich “that independent dealers are buying Goodyear brands” and backing the company.
Why is Goodyear not making the level of profits that others in the industry are achieving? Some of the reasons are generic, while others are specific to Goodyear, said Rich. In the first category he placed high raw material costs, chronic over-capacity, cheap, imported tyres, while it should be remembered that Goodyear is still market leader in the US and, as such its exposure to so-called “legacy” costs (pensions, medical costs and the like), is far greater than that of other companies. Despite these problems, Rich thinks that, by 2005, Goodyear will have a return on sales in North America of five per cent and will have gained a couple of points of market share.
The objective is to break even in the USA this year, which is a tough order when you consider that the loss in 1Q was over $61 million. Nevertheless, Rich is confident that this will be achieved. The mood of the meeting was generally one of “if we buckle down to it, we can sort this out”, but Robert Keegan admitted that we have heard this sort of thing from Goodyear many times before.
Listening to the comments of the speakers, there was a lot in the way of rhetoric and much of what was said was stating the obvious – the need to reduce costs, the virtues of a simplified operating plan and the objective of supplying the customer with the right tyre at the right time, which is a deceptively simple objective, yet one which few manufacturers seem capable of achieving – but little in the way of exactly how these objectives are to be realised. Sure there were a few pointers – moving of more production to low-cost centres and the departure of a number (unspecified) associates, but if Goodyear is to turn around its North American operations, taking out up to $1.5 billion of costs, then it looks as though the group, and North America in particular, is in for more grief over the next couple of years.
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