European Woes Weigh Heavily on Ford in Q2

Europe continues to cast a shadow on Ford’s global operations, with the region driving the auto maker’s second-quarter net profit down to $1.0 billion from $2.4 billion year-ago.

Revenue in the quarter totaled $33.3 billion worldwide, down $2.2 billion from like-2011.

In the 19 European markets Ford tracks, the auto maker says economies were hampered by the debt crisis and austerity measures, leading to a pretax loss of $404 million for the quarter. Ford says it now expects its full-year loss in Europe to exceed $1 billion.

The auto maker doesn’t foresee conditions in Europe improving in the near term, Bob Shanks, executive vice president and chief financial officer, says in a conference call with financial analysts and reporters.

“We’re looking at the situation in Europe with a great sense of urgency, and we’re all over the issues we’ve got,” he says. “There are tremendous opportunities on the revenue and cost side, (as well as) working on the product and brand.”

Shanks and CEO Alan Mulally say Ford’s plan on returning Europe to profitability will follow closely the strategy used to restructure its North American operations, including matching capacity to demand and maximizing profit per unit, all while investing in new products and consolidating vehicle architectures.

But there are structural issues that have to be addressed as well, Mulally admits, noting there is overcapacity in the region. He leaves open the possibility of plant closures.

“We think (the problems) in Europe are structural and not cyclical,” he says. “We have nothing to announce today, but as we develop (a plan) we’ll include all stakeholders.”

While Europe was the biggest black spot on Ford’s Q2 results, it wasn’t the only region to show signs of weakness.

Ford’s pre-tax operating profit in South America totaled only $5 million, improving on $262 million in losses in like-2011.  Ford blames the still disappointing results in part on declining vehicle sales, higher operating costs, unfavorable exchange rates and increasing competition.

South America is a “region that is protected, and if you’re inside the walls you can make a good return and profit,” Shanks says. “We’re seeing more and more players wanting to participate. Many are coming in and adding capacity, and those within the walls also indicate plans to add capacity.”

Shanks says rapidly changing government policies also are an impediment in South America, noting several countries have “thrown curveballs” over the past six months in terms of trade restrictions and access to foreign currency.

Ford intends to address issues in South America in much the same way it plans to correct Europe’s problems, he says, including introducing an all-new vehicle lineup over the next two years, starting with the launch of the new Ranger, EcoSport and Fusion.

Ford says it expects South America to be profitable in full-year 2012, but anticipates lower earnings than in 2011.

In the Asia/Pacific and Africa region, pretax operating losses were $66 million, compared with a $67 million deficit year-ago.

The auto maker says it expects results to improve in the region in the second half of the year, due mainly to favorable volume and mix as it benefits from added capacity in China and Thailand and the launch of the new Focus and Ranger.

“Our road map for North America is the path we followed through the recent recession and is the basis for our growth strategy in (the) Asia/Pacific,” Mulally says. “It’s the guide for new challenges.”

For the second consecutive month, Ford eclipsed $2 billion in pretax operating profit in its home North American market.

Shanks says the auto maker expects full-year earnings to top last year’s results, noting the company anticipates a strong second half due to a slew of new product launches, including the Fusion sedan and Escape cross/utility vehicle.

North America “is running extremely strong and all elements of the business are contributing,” he says.

Although the auto maker is counting on significant sales volumes from the Escape, it recently launched a recall of the model due to faulty fuel lines that can lead to fires. Mulally says the problem was promptly and properly addressed.

“The Escape is a very important vehicle and launch, and the response (from consumers) has been fantastic,” he says. “On the recall, when we found out about the defective fuel line we moved very decisively to take care of the vehicles.

“We’re picking them up, giving (owners loaners) and fixing the problem. We were disappointed to find a defective part, but we’re going to make it OK very quickly.”

Ford exited Q2 with automotive gross cash of $23.7 billion, an increase of $700 million during the quarter.

Automotive debt of $14.2 billion at the end of Q2 was up from $13.7 billion at the end of Q1, primarily reflecting additional drawdowns of low-cost loans for the development of advanced vehicle technologies, Ford says.

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