Bloomberg News

Ford’s U.S. Comeback Not a Road Map for European Success

July 25, 2012

Ford Lowers 2012 Outlook as Overseas Losses Pare Profit 57%

Ford Motor Co. said its market share will fall in the U.S. and Europe this year. Photographer: Andrew Harrer/Bloomberg

Ford Motor Co. (F:US), which had a 57 percent plunge in second-quarter net income, will not overhaul its money-losing European operations in the same way it transformed its now-profitable North American operations.

A widening crisis in Europe is denting the turnaround Chief Executive Officer Alan Mulally has engineered at Ford. European pretax operating losses expanded to $404 million, from a loss of $149 million in the first quarter and profit of $176 million a year earlier. Ford said it now expects full-year European losses to exceed $1 billion and that it no longer forecasts total pretax operating profit to equal last year’s $8.8 billion.

A growing chorus of analysts is calling for Ford to close plants in Europe, where the automaker uses just 63 percent of its factory capacity. In North America over the last decade, Ford shut facilities and surrendered market share while boosting profits. As the automaker reworks its European business plan, not as much needs to be done to reduce capacity, said Chief Financial Officer Bob Shanks.

“In North America, we had to shrink in order to grow, but if we think about Europe, I don’t think that’s where our business is,” Shanks said in an interview. “Our intent is not to shrink. Our intent is to grow our business in Europe.”

Ford yesterday reported second quarter net income of $1.04 billion, or 26 cents a share, down from $2.4 billion, or 59 cents, a year earlier. Excluding one-time items, the profit was 30 cents a share, beating the 29-cent average estimate of 17 analysts surveyed by Bloomberg.

‘Just Brutal’

Shares fell 1 percent to $8.97 at the close in New York, the lowest since Dec. 9, 2009, and only 58 cents more than the $8.39 closing price of Sept. 5, 2006, the day the automaker disclosed it hired Mulally, now 66, from Boeing Co. (BA:US)

“It’s brutal, man, just brutal,” said Gary Bradshaw, a fund manager at Dallas-based Hodges Capital Management, which owns about 250,000 Ford shares. “They’ve done a remarkable job here in the U.S., paying down debt and getting an investment- grade rating, but the European stuff is just killing them.”

The economy in Europe, which accounts for a quarter of Ford’s revenue, is worse than the company anticipated at the start of the year and will stay challenging for at least five more years, Shanks said.

“We think this is a situation we’ll have to deal with for the foreseeable future,” Shanks told reporters yesterday at Ford’s Dearborn, Michigan, headquarters. “We’re not counting on a strong recovery of the business as one of the things that will save us.”

‘Real Demand’

Ford is cutting ad spending and sponsorships in Europe “because people aren’t buying,” Shanks said. The automaker also is reducing production by shortening workdays in factories, reducing assembly-line speeds and shedding temporary employees, Shanks said.

“The most important thing about our plan -- has been and it will continue to be -- is for us to match production to the real demand,” Mulally said yesterday on a conference call with analysts. “We are going to continue to decrease our production to match the real demand.”

It remains unclear how deep those cuts will go and whether they will include closing a factory. Shanks said he and Mulally avoided saying the company would eliminate factory capacity.

“We haven’t explicitly said those words,” Shanks said in the interview. “What we have said is that we have to have a leaner, more competitive cost structure and that we will be looking at all aspects of that cost structure in order to put that type of business structure in place.”

‘Full Schedule’

Over the past decade, Ford had a “pretty full schedule” of capacity reductions that included closing the Fiesta factory in Dagenham, England, and selling European factories as it divested the Jaguar, Land Rover and Volvo luxury lines, Shanks said.

“We did make $2 billion in the eight years leading up to 2011” in Europe, Shanks said. “It does suggest we’ve had some success in the restructuring we had done. We just didn’t, in retrospect, go far enough.”

Ford isn’t ready to say how much farther it will go in its next restructuring in Europe.

“We’re reviewing the situation with a lot or urgency,” Shanks said. “But there’s nothing to share with you about when we’ll be more public about what our plans will be.”

The automaker said its market share will fall in the U.S. and Europe this year. It previously expected market share in those regions to be about equal with last year.

‘Fool’s Gold’

In Europe, Ford said its market share fell to 7.7 percent in the second quarter, from 8.3 percent a year earlier. Most of those losses came in southern European markets of Italy and Spain, where discounting by competitors is beyond what Ford is willing to do, Shanks said.

“It just doesn’t make any sense in going after some of that business,” Shanks said. “It’s market share, but it’s fool’s gold.”

Ford, which regained an investment-grade credit rating this year, also said it’s cutting 2012 capital spending to $5 billion, from a previous plan to spend $5.5 billion to $6 billion. Shanks said those cuts are from finding efficiencies and are not in response to the losses in Europe.

Cutting capital expenditures is often a sign of belt- tightening when an automaker is losing money, said Larry Dominique, former head of product planning for Nissan Motor Co. (7201) and now executive vice president of data solutions with TrueCar.com.

International Deficit

“Usually, the easiest thing for an automaker to cut is the launch of a new product,” Dominique said in an interview. “They can slow it down, so you’re not paying all the tooling, you’re not paying all the investment.”

Shanks said the reductions in capital expenditures have “nothing to do with cutting back on product whatsoever.”

The European loss was the largest contributor to an international deficit of $465 million that was better than the $570 million in overseas losses Ford forecast June 28.

Ford sales are faring worse than average in Europe, where the automaker said its deliveries fell 16 percent in June, more than the total market decline of 1.7 percent. In the year’s first half, Ford’s European sales fell 10 percent, while industrywide deliveries were off 6.3 percent.

‘Economic Crisis’

Ford said in a June 28 federal filing that the “serious economic crisis” in Europe is “compounded by an intensifying competitive environment as manufacturers react to lower consumer demand and excess production capacity.”

Mulally will unveil new European models, including a restyled Mondeo sedan, in Amsterdam in September, according to Mark Truby, a company spokesman. Ford is bringing 20 new models to Europe by 2014.

The automaker also is building “the case for decisive capacity exit,” Adam Jonas, an analyst at Morgan Stanley, wrote in a July 24 note. Ford factories in Southampton, England, and Genk, Belgium, may be vulnerable, analysts said.

“Ford management appears to be losing patience with Europe,” wrote Jonas, who rates Ford overweight. “And they should. After all, it’s on track to lose more money than GM this quarter.” Competitor General Motors Co. (GM:US) is trying to end losses in Europe that have totaled $16.4 billion since 1999.

The crisis in Europe is leading to a selloff in Ford shares, which are down 32 percent (F:US) from a year ago.

‘Too Cheap’

“The stock is almost too cheap to sell,” said Bradshaw, who accumulated Ford shares at $10 and above. “They’ve got so many headwinds in front of them that no one is really willing to bet on it at the moment.”

In North America, where Ford generates most of its sales and profits, the automaker reported pretax operating income of $2.01 billion, up from $1.9 billion last year. Ford said North American operating margin was 10.2 percent.

Ford’s dependence (F:US) on its home market is “highlighting an imbalance in geographic profit not befitting a truly global” automaker, Jonas wrote.

Ford’s U.S. car and light-truck sales rose 6.6 percent to 1.14 million vehicles in the year’s first half, trailing the industry’s gain of 15 percent, according to Autodata Corp., based in Woodcliff Lake, New Jersey. Ford’s U.S. market share fell to 15.7 percent from 16.9 percent.

Second-quarter sales fell 6.2 percent to $33.3 billion. The company planned to increase North American production by 3 percent during the period to 730,000 cars and trucks. The average estimate for total second-quarter revenue was $32.4 billion, according to the average of 8 estimates.

Consumers paid an average of $32,234 for the company’s models in the second quarter, up 3.4 percent from a year ago, according to online auto researcher Edmunds.com. Ford’s average prices are up 28 percent from 2002 and 14 percent from 2007.

Asia Pacific

In Asia-Pacific and Africa, Ford reported a pretax operating loss of $66 million compared with a $1 million profit a year earlier. Ford said sales of its commercial and passenger vehicles rose 18 percent in China last month. Ford is spending $4.9 billion on nine new factories in Asia and introducing 15 new models by 2015 in China, where it had 2.8 percent of the market last year, trailing GM and Volkswagen AG. (VOW)

In South America, Ford reported a pretax operating profit of $5 million down from $267 million last year. In its June filing, Ford said in South America it faces “growing competitive and pricing pressures, as well as weakening currencies and unexpected and adverse changes in government policies affecting areas such as trade and access to foreign currency.”

Automotive Debt

Automotive debt, which excludes Ford Motor Credit, was $14.2 billion on June 30, an increase from $13.7 billion on March 31, the company said. The company said the debt rose because it drew on U.S. government loans to develop advanced technology vehicles.

Ford has more debt than rivals because it borrowed $23.4 billion in late 2006 and avoided the bailouts and bankruptcies that befell the predecessors of GM and Chrysler Group LLC in 2009. The automaker put up all major assets (F:US) as collateral, including its blue oval logo.

Ford recovered those assets May 22 when Moody’s Investors Service became the second major rating company, after Fitch Ratings, to raise the automaker to investment grade. Standard & Poor’s still rates Ford one step (F:US) below that level.

With no solution in sight in Europe, Bradshaw said he doesn’t see “a whole lot of good news in the near term” for his Ford investment.

“I’m not getting any fruit baskets from my customers for owning” Ford, Bradshaw said. “I’m sure Mulally is grinding it out and, kind of like me, beating his head up against a wall and saying, ‘Man, we’re doing everything right, but we’ve got this hole in the bucket in Europe.’”

To contact the reporter on this story: Keith Naughton in Dearborn, Michigan, at knaughton3@bloomberg.net

To contact the editor responsible for this story: Jamie Butters at jbutters@bloomberg.net


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