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No. of Recommendations: 10
You all know by now that GT has reported 4th quarter and full year results for 1999.

Clearly some had feared the results could have been worse, and there might therefore be a natural reaction of relief following the announcement. However, the facts are that the results are very poor, and that managements outlook for 2000 is without any ambition whatsoever.

I will not repeat the results which all can study by themselves. I do however want to highlight a few concerning issue from the announcement and from a conference call which I understand took place with Mr. Gibara.

1. GT has during FY 1999 barely been able to earn enough money to pay its dividend of $1.2/share!

2. GT achieved operating income in North America of $19 million. In this market the company had sales of $6.4 billion!

3. Selling, Administrative and General Expenses increased in FY 1999 by 7% and in the 4th quarter over same quarter in 1998 by 16% (sixteen percent)! Sales increased in the year by 2% and in the quarter by 11%

4 GT's total debt at the end of FY 1999 was $3.4 billion an increase of 73% over total debt by end of FY 1998! - So GT's total debt is now approximately the same as the market value of its shares!

5. Mr. Gibara reportedly informed analysts today that he is comfortable with EPS estimates for FY 2000 of $3/per share. EPS in 1998 was $4.36!

6. Mr. Gibara also announced that synergies from the Dunlop integration would be $116 million rather than the $110 million originally announced, an increase of $6 million! This for a company which in FY 2000 will experience total costs of approximately $13,600 million, so GT's management is happy to have found additional savings of $6 million (less than 0.05 pct. of total costs!).

7. Mr. Gibara also announced that Capital Investments in FY 2000 will be $650 million down from $800 million in FY 1999.

8. Mr. Gibara announced that $500 million of assets would be disposed of by 3rd quarter of FY 2000.

9. Mr. Gibara announced that GT would increase prices in FY 2000 by an average of 3%.

10. GT's cash flow in FY 1999 has clearly been negative to a considerable extent - as confirmed by the dramatic increase in debt. With the plans disclosed by Mr. Gibara for FY 2000, there is great risk that cash flow also in FY 2000 will be negative. -Unless, GT reduces its Working Capital investments (cash tied in receivables increased during FY 1999 by 30% or $525 million, which is far more than the total increase in sales for the year! Clearly somthing is out of control in that area), improves earnings above Mr. Gibara's estimate today, reduces dividends or further increase leverage (which will cause the price of its shares to drop further).

This is very depressing stuf. That GT's management is not more ambitious in its cost cutting and efficiency efforts is totally unacceptable. With a total cost base of $13.500 million - and following a relatively substantial merger - cost reductions should (over a couple of years) be in the range of 5% to 8% or between $650 million and $1,100 million, corresponding to EPS improvemets of between $2.75/share and $4.65/share.

The danger is, that if GT for competitive reasons is unable to implement its 3% price increase - corresponding to approximately $1.9/share in EPS it will only earn in FY 2000 what it earned in FY 1999. I do not even want to think about what that would do to GT's share price.

Another matter is, that a carefully thought out plan to rationalise, by improving efficiency and cutting costs, is within management's own control, and the market will place considerable value on it - if it has confidense in the management implementing it. Wheras earnings based on price increases - even for a market leader - can be undermined by competitors, and the market will place less value on such expected earnings enhancement.

Shareholders of GT, employees at GT and customers of GT all deserve a new management with the right ambition for this great brand. If it does not happen soon the future truly is glumy for GT and its "Associates".

Take care.

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