Ford's Q2 profits Dragged Down by Weak European Markets

From AP

Just three years after Ford revived its American business, the company must pull off an even trickier turnaround in Europe, where mounting losses weighed down its quarterly results.

Ford's second-quarter net income fell 57 percent to $1 billion, largely because of a $404 million loss in Europe. Car sales there have tumbled to 20-year lows because shoppers are worried about the region's debt crisis and economic slowdown. Ford expects to lose more than $1 billion in Europe in 2012, double its estimate from the beginning of the year.

"This is a very serious situation," Chief Financial Officer Bob Shanks said after Ford announced earnings Wednesday. "It's going to take quite a long time for Europe to work through these issues."

Europe is vital to Ford. A quarter of the company's sales and profits come from the region, its largest market after North America. Four straight quarters of losses in Europe are taking a toll.

The company is trying to stem the losses by laying off temporary workers, slowing line speeds and shortening factory shifts. It has also cut advertising and sponsorships.

But analysts say Ford will have to go much further.

Layoffs and plant closures are inevitable, they say, although the company wouldn't give details about its restructuring plans on Wednesday.

Morgan Stanley auto analyst Adam Jonas estimates Ford is using only 63 percent of its plant capacity in the region. That means the company is paying to keep facilities open even though 40 percent of their space isn't being used. Ford wouldn't confirm that number.

Of Ford's six plants in Europe, Jonas thinks there are two likely candidates for closure: The Southampton, England, plant where 1,000 employees make the Transit commercial van, and the Genk, Belgium, plant where 4,000 employees make the Mondeo sedan and other products. Three plants in Germany likely wouldn't be touched, he said. Ford also has plants in Spain and Romania.

Jonas said the European turnaround will be slow, in part because Europe has larger, more powerful unions than the U.S. that make it more difficult to close plants. Of 220 plants in Europe, only nine have closed in the last 15 years, he says. Ford's current contract in Germany, for example, requires any reductions to be voluntary through 2016.

"If Ford wants to do something they'll have to pay a lot of money and wait a long amount of time," Jonas says.

It's unclear what a restructuring would cost or how long it would take until Ford releases details. But Shanks suggested that Ford's U.S. turnaround will be the blueprint.

"We know what to do in a tough situation," he said.

In the fall of 2006, Ford took out a $26 billion loan and used it to close six U.S. factories, lay off thousands of workers and redesign vehicles that have become big moneymakers, like the Ford Fusion and Ford Explorer. It took three years from that time for the company to start reporting consecutive quarterly profits.

That restructuring has turned Ford's North American region - which accounts for 47 percent of its sales - into an earnings powerhouse. Ford posted a $2 billion profit in the region in the second quarter thanks to higher pricing and highly anticipated new vehicles like the Ford Escape. Earnings rose 5.3 percent from a year earlier.

But losses elsewhere swamped those gains. Ford earned $1 billion, or 26 cents per share, in the quarter, down 57 percent from $2.4 billion, or 59 cents, a year earlier.

Quarterly revenue fell 6 percent to $33.3 billion.

Ford's $404 million loss in Europe compared with a profit of $176 million a year ago. Sales of cars and trucks in the region fell 15 percent. Ford also lost market share as it refused to ramp up deals to lure buyers, as many German automakers have.

Europe is struggling to contain a crisis over too much debt in some countries. Fears that Spain may need a bailout from other governments, or that Greece may leave the euro, have weighed on consumer demand in many markets in Europe, and a financial implosion could deepen what is already a mild slowdown in the region.

Shanks said industrywide auto sales have been falling in Europe for the last four years, but Ford continued to make money in the region until last year, when the declines got even more dramatic. Now the company doesn't think the European market will return to normal for at least five years.

Ford's stock price has fallen 32 percent in the past year, and hit a 52-week low earlier this week.

Ford joined a string of other multinational companies — including UPS and Xerox Corp. — in cutting its profit forecast for the full year because of weakness in Europe.

The automaker still expects a "strong" overall operating profit in 2012, but it will be lower than the $8.7 billion it made in 2011. Previously Ford had expected to make about the same amount as 2011.

If Ford's operating profit falls, it will be the first time since 2008 that Ford hasn't seen a year-over-year gain in operating profit.

Other regions also were weaker. Ford lost $66 million in Asia, where it is in the midst of a multiyear plan to increase production and introduce 10 new products. Profits also fell in South America, where it is being hurt by rising tariffs and the cost of developing and marketing several new products.