Ford Motor Co (F.N) forecast 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.
Wednesday's new full-year outlook for Europe fell in line with analysts' estimates, but was nearly double the No. 2 U.S. automaker's earlier forecast of a loss between $500 million and $600 million.
Chief Executive Officer 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."
The company relied on its North American operations and finance arm, Ford Motor Credit, to turn a profit in the second quarter, but the company trimmed its forecast for industrywide U.S. vehicle sales this year.
Ford said the steeper losses in Europe as well as a "substantially lower" anticipated profit in South America would mean operating earnings would fall in 2012 rather than remain unchanged from 2011, as the company had previously forecast.
Some analysts warned that auto sales could deteriorate further in Europe, which accounted for a little more than a quarter of Ford's revenue last year. During the first six months of 2012, industry sales there fell to their lowest level in nearly 20 years.
"I'm certain Ford is underestimating the situation there, but I think everyone is," Guggenheim Securities analyst Matthew Stover said. "We haven't seen the worst yet."
EUROPE WOES LONG-LASTING
Morgan Stanley analyst Adam Jonas estimates that Ford's capacity utilization rate in Europe is 63 percent, lower than nearly all rivals except for Fiat SpA FIA.MI. "Ford must reduce capacity urgently," he said in a June 29 note.
Ford's larger crosstown rival General Motors Co (GM.N) is also struggling to stem losses in Europe. Earlier this year, GM and PSA Peugeot Citroen (PEUP.PA) formed a product-development and procurement alliance aimed at producing substantial cost efficiencies for both companies.
The crisis in Europe has forced Peugeot to cut deeper. The company is discussing with unions plans for 8,000 job cuts that could save the company $1.8 billion.
Ford operates five plants in Western Europe. The company also has joint ventures in Turkey and Russia, but does not plan to enter more partnerships in the region.
"Do we need more partnerships? Certainly joint venture, equity-related partnerships, I would say no," Chief Financial Officer Bob Shanks said in an interview. "I think we just need to mind our knitting and focus on our opportunities."
Executives said they were charting a recovery path for Europe that draws from the playbook of Ford's U.S. turnaround, which started when Mulally was hired six years ago.
In the second quarter of 2009, during the depth of the U.S. auto crisis, Ford lost $1,858 on each car it sent to dealers in North America. Two years later, it is making nearly $2,800.
In the near term, Ford is laying off temporary workers in Europe, shortening work days and slowing the speed of assembly lines. It has also curtailed its spending on sponsorships and advertising, particularly in countries where sales are lowest.
"As we look over the next five years and lay out all of our plans for our business, we just think the situation in Europe is going to be challenging," Shanks told reporters at Ford's headquarters in Dearborn, Michigan.
The company has the flexibility to shift production of its global vehicles, such as the Fusion mid-size sedan and Escape SUV, to plants outside Europe if necessary, Mulally said.
"But also, we have to take into account what the transportation costs are and the freight and the other things that go with doing that," he added.
CARRYING THE QUARTER
Concerns over Europe have hit shares of Ford and GM on Wednesday, Ford stock fell more than 1 percent to as low as $8.92 on the New York Stock Exchange.
This was the lowest price since December 2009, a year when Ford reported its first profit after losing $30 billion over a three-year stretch ending in 2008.
The loss in Europe accounted for almost all of Ford's red ink outside North America during the second quarter. Ford lost $404 million in Europe and $66 million in Asia, while making a $5 million profit in South America.
Higher vehicle prices in its home market boosted Ford's operating profit in North America to just above $2 billion.
The company now expects industrywide U.S. auto sales to be at the lower end of its forecast of 14.5 million to 15 million vehicles, including medium- and heavy-trucks, due to disappointing demand in recent months, Mulally said.
Excluding one-time items, Ford earned 30 cents per share in the second quarter. On average, analysts expected 28 cents, according to Thomson Reuters I/B/E/S.
The automaker reported net income of $1 billion, or 26 cents per share, down from $2.4 billion, or 59 cents per share, a year earlier.
Ford attributed the decline in part to an accounting change this year that raised its effective tax rate to 37.3 percent from 8.4 percent in 2011.
Quarterly revenue fell 6.2 percent to $33.3 billion.
North America accounted for 63 percent of Ford's revenue in its automotive division during the second quarter. Europe was 23 percent, while Asia and South America made up 7 percent each.
(Reporting By Deepa Seetharaman and Bernie Woodall; Editing by Jeffrey Benkoe, Maureen Bavdek, Lisa Von Ahn and Sofina Mirza-Reid)