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New Man, New Focus: Armes Aims to Strenghten Cooper’s Base While Keeping an Eye on the Future

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Roy V. Armes was named president and CEO of Cooper Tire & Rubber Co. last December, following the August resignation of Tom Dattilo.

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A 31-year veteran of Whirlpool Corp., Armes held several senior-level posts in various departments at the appliance manufacturer, including engineering, project management and purchasing. He also had positions in Mexico and China and was responsible for establishing overseas manufacturing operations and joint ventures.

Most notably, Armes oversaw the integration of Maytag into the Whirlpool fold and, over the years, gained a strong background in manufacturing and technology, engineering, international business, consumer products and distribution channel management.

At the time he left Whirlpool, the University of Toledo graduate was senior vice president of the firm.

When Armes took the top job at Cooper, he was aware of the rough road ahead. The same morning Dattilo announced his resignation, the tire company posted a first-half 2006 net loss of $26 million against sales of $1.2 billion.

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But anyone who spends just a few minutes with Armes will soon get the sense that he is a positive, down-to-earth, upbeat person. He’s the kind of guy who sees challenges as opportunities, not roadblocks.

During the recent launch of Cooper’s new CS4 touring tire in San Antonio (Tire Review, April 2007), Tire Review sat down with Armes for this exclusive interview.

When you came on board as CEO on Jan. 1, what were your initial impressions of Cooper? What changes did you feel were necessary?

Within the first hour of coming on the job, I got the leadership team – about 15 or 20 people – together for a meeting. All of a sudden, I’m sitting here with this new team and this new company, and they are looking for direction.

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So, I started going through five or six things that, based on my research, would hit home with the team. That’s the first and most important thing – to make sure people are comfortable with the new guy.

For the first 90 days, my whole intent was to step back, learn and listen. There were tons of people who wanted my time – consultants, media, Wall Street – but I said, ‘Look, I need to understand the business. People need to wait.’

During the first 90 days, after talking with the leadership team, there were three pieces that came to my mind. One was the customer. What do I need to learn about the customer? Who are the customers? How do we do business with these customers? How does the whole ‘go-to-market’ concept work in the tire industry?

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My second emphasis was on Cooper’s people. What do I need to learn about the people in the organization and their experiences, talents and skills?

I believe that, if we can get those two right, then we can deliver value to the shareholder, which was my third step. I spent time with the analysts in New York, and it was grueling. Still, we got a lot of support from the Street.

I’m not a tire expert. The people working with me have hundreds of years of experience, and I have to be able to rely on that. I don’t think that is such a bad thing. We’ve got the experience; our customers tell us that. We have some of the best people in the industry. I think that is really important. First, I look at the customer, then the employees, and then how to deliver value to the shareholders. That’s where my focus was in the first 90 days.

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I have touched base – through introductions and discussions – with 200 customers at least. I have been in front of hundreds of employees. I have met with union leadership. I’ve also met with community leaders, which is very important, particularly in a place like Findlay, Ohio, where Cooper is a big employer. The community needs to have confidence in the business and be assured that the business is not going under.

For a small community, Findlay is very progressive. I give the community leaders a lot of credit for that. We were very pleased about the receptivity of the community. A lot of people welcomed us.

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Your parents were both automotive people. Was Cooper a natural progression for you? Was the move to the tire industry, in some ways, a path back to your comfort zone?

My father was working as a millright at Chrysler when he passed away. My mother worked for General Motors as a factory worker for more than 30 years. She retired last year. I worked at Chrysler a few summers during school. So, there is a little bit of a natural evolution.

When I was with Whirlpool, I would go to China, Europe and Mexico and always got to observe different environments, cultures and people. For me, moving to Cooper was almost like moving to a different jobs inside of Whirlpool. The products are different, but, in terms of learning a new job, I would do that anyway every few years.

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When I came back from Asia to work in procurement, I had never worked in procurement before, and here I was going to integrate all of Whirlpool’s procurement operations globally. I really had to sell myself again in the operation.

I’ve been pleased with making the move. I wouldn’t leave Whirlpool for just any job. This was a great opportunity.

What part of your experience with Whirlpool translates over to Cooper? Are there any similarities in the two?

Being in the appliance industry prepared me well for the tire industry. It is highly competitive. It’s a global business, and it works on very thin margins. That is the struggle of both industries. And, innovation is the way that new products, services and new ways of doing business help get you out of the mold.

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When I think of the two industries, there are a lot of similarities. Globalization is a big one. Whirlpool was well ahead of Cooper in terms of globalization curve. That is a learning that I can bring here. The different jobs I had at Whirlpool – such as P&L jobs, functional jobs – allowed me to touch on just about every product category. So, from an operations standpoint, there’s probably no area I haven’t touched on. I think that experience can be valuable at Cooper. If I didn’t have that experience, it would have been a tougher transition, I think.

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Two years ago, Cooper took an 11% equity stake in Kumho Tire Co. We haven’t heard much recently about your relationship with Kumho. Has there been discussion about how the two can work together?

We are continuing that dialogue. We have an option in February 2008, and we have to decide how we want to exercise that option. We can put our ownership on the table again. We can continue on or sell back our portion. We have not made a final decision.

One of Cooper’s goals is to reduce inventory by $100 million by the end of this year. Overall, the company is aiming for a $170 million improvement through cost and profit initiatives. Toward those ends, what are your other short- and long-term goals for Cooper, and how are you going to achieve them?

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As for the $100 million in inventory reduction, we are well on track to deliver that for this year. In fact, we are on track to deliver that ahead of schedule. That $100 million was based on inventory levels at the end of June 2006, and we wanted to reduce that by the end of this year.

As for the $170 million, in the fourth quarter of last year we delivered about $17 million of that savings, and we will deliver another $100 million this year. Those are critical to us to reset our competitive base.

Our focus right now is on profitable growth. We are working with an organization to look at ways to expand our business, fulfill product needs and to continue to grow but at a profitable rate. We don’t want to grow just for volume’s sake. That’s one of the distractions we have had over the last few years; we were pushing a lot of volume. And, we’re no longer pushing volume for volume’s stake.

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Don’t get me wrong – to grow, you have to have volume and revenue, but I think our guys are stepping back and saying, ‘There is a better way to go about this.’ We are in the process of putting plans together to be able to do that.

The next goal is continuous quality improvement. I really feel good about our quality. I was impressed with the number of tires we have on the street today and the meticulous approaches we take internally. We practice the Six Sigma and lean manufacturing tools. I don’t want to lose focus on that.

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The recalls in early 2000 involving Bridgestone/Firestone and Ford has caused industry disruption. Now, there is a lot more litigation that we have to deal with. We have to keep quality improvements in front of us and keep getting better – every day, every week, every month, every quarter and every year.

Another goal is cost competitiveness. We have to be competitive in order to be a successful company. Because of the distractions over the last couple of years, we probably lost focus on that. Cooper was well known before as being very competitive in the broadline business.

Over the last few years, however, the company put more attention on high performance and ultra-high performance, and that required a lot of investment. It takes a lot of resources to reshape things. And, in that process, we lost our focus on being more competitive.

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We are getting that focus back. We have to have the right balance. We have to deliver better products to the market but, at the same time, we have to be competitive in everything we do.

When I talk internally to the organization, my focus is on operational excellence. We have to become operationally excellent in everything we do, particularly the core things we are going to focus on. And, I think we have lost sight of that over the last few years.

What do you mean when you say ‘operational excellence?’

Take, for example, the product development process. We have to be very good at that process, and we have to think about how we are better than anybody else in the ways we get a product to market. What are the toll gates we have to go through? And, we have to execute every step of that process with speed.

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On the factory floor, for example, how do we cure tires better than everybody else? We use Six Sigma tools, but how do we get operationally excellent in the curing process? That includes the changing of dies, the molding cycle time and the quality of the tire coming out. It’s all about execution.

When we think about operational excellence, it means being good at the things you have chosen to be good at – what you want as a core competence. You have to be excellent at executing those things. Operational excellence is part of cost competitiveness.

Then, there’s innovation. We’ve revamped our technology and research and development and put more resources and money towards the advanced engineering of materials, as well as managing the day-to-day product development cycle. We have to start leveraging that.

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Also take, for example, the technology centers in Europe and Asia that we are setting up. We’re doing that to make sure that we are leveraging our technology capabilities across the world. In many instances, a lot of technologies start out in Europe. And, operations in China can leverage technology from other regions. If we can do that right, we can get into a more frequent cadence of product introductions – new products that deliver a better value to the customer.

Last but not least, it is all about our talent. As we grow globally, we need more talent, skills and capabilities than we have ever needed. So, how do we develop our talent? How do we acquire more talent to be able to support our business as we grow?

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Those are the major priorities we are focusing on. That’s where the organization is today in my first 75 days of the job.

All of these goals – cost competitiveness, profitable growth, operational excellence, continuous quality improvement and better products – serve as a good 50,000-foot view of Cooper’s strategy. But, getting down to the dealer level, what will all of those broad goals mean to Cooper dealers in North America?

First of all, dealers are looking for availability of the product. That’s very important to them. We have to keep that foremost in our minds. If we think about reducing inventory, for example, we have to be able to do that and still keep the availability to the customer that we had before. They don’t care if you reduce inventory, as long as you don’t mess up availability. If you don’t have the right availability, that misalignment becomes a problem.

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Dealers will also look for what they can deliver to the consumer that has real value. Price, performance, delivery – those are all things dealers are looking for, and our job is to keep delivering products and benefits so dealers can continue to deliver value to their customers.

All the things I have mentioned add up to one thing: We are creating value in the whole value chain. All of those things will add up to value for consumers, and if something is valuable to consumers, it is easier for dealers to sell.

Last November, Cooper announced that its Texarkana, Ark., plant will be converted to a “flex plant,” reducing production by approximately 3.3 million tires per year. Payback and annual savings from that move was expected to be about $12.3 million. Are those goals still on target? Can dealers expect to see further production cuts?

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The reductions gained and resulting savings are well on target. We delayed that conversion by about three weeks because of demand. Still, our organization figured out how to do the conversion in half the time.

We are now making that conversion in the second quarter, but the forecasted annualized savings have not changed. We are still well on track to achieve that.

Dealers won’t see further reductions in production this year. We have our operations coming up to speed in China. Then, we are going to figure out how we can leverage our total footprint. We are certainly not looking to invest in more capacity at this time.

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Asian imports have been a huge influence in the North American and European markets. What are you plans to keep Cooper competitive against lower-cost brands?

The things I mentioned before are at the foundation of making us competitive. I would add that we have to be able to leverage our full footprint. We are taking product from China, Europe is taking product from China and we are shipping from the U.S. to Europe and vice versa.

So, leveraging that full footprint and taking advantage of any off-take opportunities in low-cost countries are other ways we can stay competitive. But, the priorities I mentioned earlier are really the crux of our competitive position.

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A lot of tire manufacturers have pulled away from private brands. In fact, that market has constricted to just a few of major private branders. Are you planning on growing your private brand business?

Our primary focus now is being able to support tire companies with their private brands. They are committed to the private brands, and we are committed to supporting them. Many of them are doing business overseas, and we will continue to support them.

There are a lot of brands in the industry. I refer to it as ‘brand clutter.’ When you see some of the tire manufacturers leaving the private brand business, they are doing that to focus more on their core businesses, which is not an unusual thing to do in any industry. But, today, private brands are still part of our core business.

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