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Goodyear estimates at least $610 million in cost savings over the next three years

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At a conference call held earlier today, Goodyear Tire & Rubber Co. explained the affects negotiating and implementing the new three-year contract with the United Steelworkers of America have had and will have on the company.

There were negative short-term effects to the company’s financial health caused by the 86-day strike against Goodyear’s domestic union plants. The company estimates the strike cost Goodyear anywhere from $30 million to $35 million a week during the fourth quarter, or $360 to $420 million.

But the advantages of the contract “far outweigh those negatives,” said Chairman, CEO and President Bob Keegan.

The contract will help the company improve competitiveness and compete effectively in the global market. Keegan said it needed to eliminate excess high-cost capacity, and it did so, in the form of the planned closure of the Tyler, Texas, on Dec. 31, 2007.

(The Tyler plant closure, combined with the recently announced Valleyfield, Quebec, facility closure by mid-year, will take 16 million units of high-cost, excess capacity out of North America.)

Goodyear also will save costs by funding its retirement health care with an independently managed VEBA trust. When established and approved, Goodyear will make a substantial up-front investment, which will “completely remove retiree health care obligation for our company for both current employees and for future employees,” said Keegan.

CFO Rich Kramer said the greatest savings will come from increased productivity – a total of $300 million over the life of the contract, plus ongoing annual savings of $155 million by 2009.

The negotiated wage and benefits package for new hires will help lower Goodyear’s manufacturing costs. Kramer said new hires will start at $13 an hour. After three years, they will earn wages in a “tiered wage scale” ranging from $13 to $24 an hour (the old range was $20 to $26 an hour). He estimates the attrition rate for the existing workforce is between 6% and 7% each year.

Not counting employees at the Tyler plant and the Engineered Productions Division, Goodyear has 10,000 hourly employees.

Overall, the contract will save Goodyear an estimated $610 million over the next three years through increased productivity, reduced capacity and reduced legacy costs.

Keegan said in addition to the cost savings provided by the contract, Goodyear continues to have the ability to drive down costs, to reduce its participation in unprofitable business segments (he expects the sale of Goodyear’s Engineered Products Division to be completed in the first half), and to “flex staffing in our manufacturing plants” to as low as 90% of pre-strike (as of Oct. 1, 2006) levels.

“In addition, we have no restriction on tire imports to North America.”

The striking union workers returned to their jobs on Jan. 2. “The healing process has begun,” said Keegan. “We’ve had an orderly transition in our union plants and solid production numbers.”

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