Goodyear to Reduce Staff, Freeze Worldwide Salaries

Following yesterday’s announcement that the company had sustained fourth quarter net losses of $1.37 per share and that net revenues had also fallen 19.9 per cent year-on-year to $4.1 billion, Goodyear’s full year results for 2008 revealed the extent to which the fourth quarter was down on 2007, showing a mere 1 per cent drop from the previous year’s record sales of $19.6 billion. The manufacturer also reported that it had seen increases in Goodyear-branded market share. However, the company’s statement on the figures took the opportunity to announce Goodyear’s plans to freeze salaries, cut an additional 5,000 jobs – though it is yet to be decided which markets will see these job losses – and sell non-core assets in an effort to cut costs and operating expenses by $700 million during 2009 fiscal year.

Reacting to the news, an analyst report from Deutsche Bank reported “positive signs” from the results, saying that the Q4 loss could be viewed as “a respectable result considering that global volume (-19 vs. our -10.5 per cent estimate) and overhead under-absorption (-$213MM vs. our -$144MM estimate) deviated negatively against our assumptions.” Countering the 19 per cent drop in global volume, which Deutsche’s report called “a bit unsettling,” was the bank’s long-term prediction that shows Goodyear making a 54 cent profit per share in 2009 and $2 in 2010. It backed up these estimates by pointing towards the acceleration of “the bottom-line benefit of fixed-cost reduction” in 2009; the reduction of tyre companies’ capacity in general, leading to better “price discipline”; and that Deutsche analysts believe “tyre companies, including Goodyear, are poised for a pretty big improvement in gross margins in the back half, as they benefit from plummeting raw material costs.”

Action in 2009

Goodyear’s own statement releasing the figures detailed the actions the manufacturer is going to take in 2009; CEO and chairman Robert J. Keegan stated, “We will remain flexible and are prepared to take additional actions if market conditions warrant. Our goal is to ensure Goodyear is positioned for success when tyre markets recover.” This flexibility includes the freezing of salaries and 5,000 personnel reductions during the year, adding to the 4,000 already made in the second half of 2008, though company representatives say that no decision has yet been made as to where these reductions will take place.

Personnel is not the only area in which Goodyear plans to reduce its costs; the company will be seeking ways to reduce its spend on raw and indirect materials through “purchasing actions,” while there will be new cost control policies designed “to eliminate non-essential discretionary spending.” Goodyear will also seek to continue to grow its top line through more than 50 new global tyre launches, including the new Assurance Fuel Max – OE on the electric Chevrolet Volt – and other “innovative” products.

2008 full-year results

The manufacturer’s sales for 2008 were $19.5 billion. Goodyear explains that the 2008 sales reflect the $1.3 billion negative impact resulting from an 8.5 per cent reduction in tyre volume. Also impacting the change in sales was the 2007 divestiture of the company’s T&WA tyre mounting business, which contributed sales of $639 million in 2007. Favourable foreign currency translation positively impacted sales by $383 million.

Sales benefited from pricing and mix improvements, which drove revenue per tyre, excluding the impact of foreign currency translation, up 8 per cent compared to 2007. Asia Pacific, Latin American and Europe, Middle East and Africa sectors each achieved record full-year sales.

Segment operating income was $804 million, down from $1.2 billion in 2007. This reflects the lower unit sales, which resulted in a negative volume impact of $249 million and higher conversion costs of $487 million, primarily driven by under-absorbed fixed costs of $373 million. Improvements in pricing and product mix of approximately $942 million more than offset higher raw material costs, which increased 13 per cent, or approximately $712 million, compared to 2007.

Asia Pacific and Latin American achieved record full-year segment operating income. Goodyear’s net loss of $77 million (32 cents per share) in 2008 compared to 2007 net income of $602 million ($2.65 per share). The 2007 results included an after-tax gain of $508 million ($2.19 per share) on the sale of the company’s former Engineered Products business. All per share amounts are diluted.

Keegan concluded, “Given lower industry demand, we are taking aggressive action, reducing tyre production, cutting costs and adjusting investments to better match market conditions. The many positive actions we took and the results we achieved in 2008 provide a base from which we will address the market challenges we will inevitably face in 2009.”