Ford sees smaller 2012 operating profit, $1 billion loss in Europe
North America remains strong
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DETROIT -- Ford Motor Co. is forecasting a drop in operating profit for 2012 as the automaker expects to lose more than $1 billion in Europe, where the deepening economic crisis is hitting sales.
The new full-year outlook for Europe, while not a surprise to analysts, was nearly double the automaker's earlier forecast of a loss between $500 million and $600 million.
CEO Alan Mulally said the company was reviewing all aspects of its European business, but he would not discuss the chance of a plant closure. He and other executives said costs must come down in Europe, where Ford lost $1,125 on every vehicle it shipped to dealers in the second quarter.
"We are assuming that this is a structural issue, not a cyclical issue," Mulally said on a call to discuss second-quarter earnings. "It's not going to come back fast."
Earlier today, Ford said net income declined 57 percent to $1.04 billion, from $2.40 billion a year earlier, as revenues dropped $2.2 billion to $33.3 billion.
North America continued to be Ford's profit driver. North American pre-tax profits were $2 billion, up from $1.9 billion a year earlier.
Ford of Europe operations swung to a loss of $404 million from a year-earlier profit of $176 million.
"The magnitude of this loss will be affected by a number of factors, including the overall economic environment, competitive actions and Ford's response to these developments," the company said in a statement.
Ford also lost money in the Asia Pacific-Africa region, where it is investing heavily in anticipation of future growth. Ford lost $66 million in the region, compared with a $1 million pretax profit a year ago. In South America, Ford reported a $5 million profit, down from $267 million a year ago.
Ford Motor Credit reported a $438 million pre-tax profit, compared with $604 million for the first quarter last year.
The company reported pretax profits of $1.8 billion, vs. $2.9 billion in the second quarter a year earlier.
"The Ford team delivered another solid quarter driven by the strength of Ford North America and Ford Credit," Mulally said in the statement.
Company-wide, Ford expects to see production volumes increase by 69,000 units in the third quarter compared with the year-earlier period. Planned increases in Asia-Pacific and Africa, up 65,000, North America, up 34,000, and South America, up 1,000, will offset an anticipated decrease of 31,000 in Europe.
Ford said it expects full-year pretax operating profit "to be strong, but lower than 2011."
European woes
Ford is wrestling with overcapacity in its once-profitable European region, where industry sales have declined as the continent's economic woes have mounted in the face of high unemployment and a sovereign debt crisis.
On July 13, Ford said that its European sales fell 10 percent for the first half of the year as industry sales across Europe dropped to their lowest level in almost two decades. Ford's European sales dropped 16.1 percent in June.
Ford's market share in Europe declined in the second quarter to 7.7 percent, by Ford's reckoning, from 8.3 percent a year earlier.
Ford CFO Robert Shanks described the situation in Europe as "very, very serious," and said it could remain challenging for some time to come.
Ford is reviewing "all areas of our business to address the near-term challenges," he said. He said it was premature to discuss details of the plan.
'Tremendous margin pressure'
The Europe results will increase the pressure on Stephen Odell, who was named chairman of Ford of Europe two years ago.
The London native is no stranger to turnarounds. He previously was president of Volvo Car Corp., then a Ford unit, where he led a restructuring effort that returned Volvo to profitability. Ford sold Volvo to Zhejang Geely Holding Group in 2010.
The competitive environment in Europe has gotten tougher.
"We are seeing competitors taking some very aggressive actions on pricing and incentives," Shanks said. "There's tremendous margin pressure that's impacting the business."
Ford recognizes that it has excess manufacturing capacity in Europe. Shanks declined to say what long-term actions the company might take to address the capacity issue. But it has taken short-term actions such as shortening work days, reducing line speeds and laying off temporary workers.
Ford is taking other actions to cut costs in Europe. Those include cutting back on sponsorships and advertising, particularly in countries where sales are lowest and many customers aren't buying cars anyway, Shanks said.
Deja vu
He said the situation in Europe is not dissimilar to what it was in North America several years ago when the company began taking steps to restructure itself for a recovery.
"I don't believe the situation in Europe is any different," he said. "It's a situation we'll have to deal with."
Analysts believe Ford needs to get rid of excess capacity in Europe. Ford is using just 63 percent of its manufacturing capacity in Europe, Morgan Stanley analyst Adam Jonas told Bloomberg News.
"Ford management appears to be losing patience with Europe," Jonas wrote in a research note issued Tuesday before the second-quarter results were released. "And they should. After all, it's on track to lose more money than GM this quarter. Unfortunately, capacity exit in Europe requires years to execute."
The bulk of Ford's European vehicle production comes from four assembly plants: Genk, Belgium (Mondeo, S-Max, Galaxy); Cologne, Germany (Fiesta and the European-version Fusion); Saarlouis, Germany (Focus, C-Max, Kuga); and Valencia, Spain (Fiesta, Focus).
The last time Ford closed an assembly plant in Europe was 2002, when it shut down its Dagenham, England, plant.
Ford has closed plants in the United States and Canada since then as part of a restructuring that has paid off in North American profits.
Dagenham has continued as Ford's main center for diesel engine production. Ford also operates a smaller assembly plant in Southhampton, Britain, where it makes a version of the Transit commercial van.
Ford could get a boost in Europe from new vehicles, including a redesigned Mondeo which debuts this fall. The Mondeo looks essentially identical to the North American 2013 Fusion but will be offered in sedan, hatchback and wagon versions.
Banking on North America
For Ford, the main source of good news continues to be its North American operations. Ford still relies overwhelmingly on North America for profit.
Ford's U.S. unit sales are up 7 percent so far this year to 1.14 million vehicles. June sales increased 7 percent from last year to 207,204.
The company is introducing several new vehicles in North America this year including the 2013 Ford Escape crossover, the Fusion mid-sized sedan, C-Max crossover and Lincoln MKZ.
The sharp drop in South American profits was due to declining volumes and rising costs, offset somewhat by improved pricing.
Ford still forecasts a South America profit for the full year, but it now expects the level to be "substantially lower" than in 2011, due to competitive pressures, weakening currencies and changes in government policies affecting areas such as trade and access to foreign currency.
In the Asia Pacific Africa region, Ford expects results to improve in the second half, primarily because of favorable volume and mix as capacity is added in China and Thailand.
Ford Credit continues to expect full-year pretax profits of about $1.5 billion, and total distributions to the parent company of between $500 million and $1 billion.
Ford finished the second quarter with automotive gross cash of $23.7 billion, up $700 million from the end of the first quarter.
Automotive debt rose to $14.2 billion at the end of the second quarter from $13.7 billion at the end of the first quarter. The company said that was primarily because of additional drawdowns of low-cost loans for the development of advanced vehicle technologies. Ford will make its last draw on those loans by August, and repayment of the loans begins in September, the company said.
Ford also recorded a loss of $173 million in the second quarter on the sale of two component businesses.
Reuters and Bloomberg contributed to this report.
You can reach Bradford Wernle at bwernle@crain.com.
