BL: Ford Chief Abandons 2009 Profit Goal on Rising Costs (Update2)
By Bill Koenig and Jeff Green
More Photos/Details
May 22 (Bloomberg) -- Ford Motor Co. abandoned a target of returning to profit next year because of rising costs for steel and gasoline, a month after Chief Executive Officer Alan Mulally said the second-largest U.S. automaker expected to meet its goal.
Ford fell the most in almost a month on the New York Stock Exchange. North American vehicle production will be cut for the rest of this year, the Dearborn, Michigan-based company said today. Mulally told analysts and reporters on a conference call that the sales outlook darkened in May's first half.
The CEO declined to say whether he expects a profit in 2010 and said Ford, which lost $15.3 billion in the past two years, would know more when it reports second-quarter results in July. U.S. sales at the maker of F-Series pickups and Explorer sport- utility vehicles fell 9.8 percent this year through April as gasoline prices approached $4 a gallon.
``It's a stumble,'' said Bernie McGinn, president of McGinn Investment Management Inc. in Alexandria, Virginia, which owns 300,000 Ford shares and bought more this morning. ``It's a punch in the gut to people in Detroit, but the long-term story is still intact. This is still a two- or three-year play.''
Ford will pare North American production 15 percent from a year earlier this quarter, from a previous 12 percent cut. It plans to reduce output in the region as much as 20 percent in the third quarter and up to 8 percent in the fourth quarter.
The company also expects to write down the value of North American auto assets, according to a U.S. regulatory filing. Ford said it can't specify the amount yet.
Ford fell 64 cents, or 8.2 percent, to $7.16 at 4:15 p.m. in NYSE composite trading, the biggest decline since April 25. The shares have risen 6.4 percent this year. The company's bonds fell and its credit-default swaps rose, an indication investors think Ford is less creditworthy.
Kerkorian Offer
Ford's board also took a neutral stance on billionaire Kirk Kerkorian's offer to buy 20 million shares, in addition to the 100 million he already owns.
Kerkorian, 90, disclosed in April that he held a 4.6 percent stake and on May 9 began a tender offer to buy the additional shares at $8.50 each, which would raise his stake to 5.5 percent.
The investor has a history as an activist shareholder at Chrysler Corp. and General Motors Corp. His Tracinda Corp. made a hostile bid for Chrysler in 1995 and pressed for major changes at GM a decade later. Tracinda has said it invested in Ford because Mulally was turning around the automaker.
The Ford offer runs through June 9, unless it's extended. Tom Johnson, a Tracinda spokesman, declined to comment today.
``We welcome Tracinda and thank them for their confidence in our plan,'' Chairman William Clay Ford Jr. said at the automaker's May 8 shareholders meeting. Mulally today declined to comment beyond the company's statements.
`Tipping Point'
The revised outlook by Ford is a setback for Mulally, 62, who was recruited to the company in 2006 and had pledged to return it to profitability next year. Ford cited ``the rapidly changing business environment in the U.S.''
Sales of pickup trucks, vans and sport-utility vehicles deteriorated further in May's first half because of rising fuel prices, Mulally said today on the conference call. ``It seemed like we reached a tipping point.''
The light trucks were 65 percent of Ford sales through April, making the company more vulnerable than Asia-based rivals such as Toyota Motor Corp. and Honda Motor Co. as gasoline prices have pushed consumers to cars, typically more fuel-efficient.
More Cuts Ahead
Ford will ``take decisive action'' to regain profitability, which ``will take longer than we originally thought,'' he said on the call. The company expects to eliminate more production and salaried jobs, Mulally said, without elaborating. Ford will announce more cost cuts by its July earnings release, he said.
The company already has proposed buyouts at plants in Chicago and Louisville, Kentucky. Those offers may be extended to other U.S. factories, Mulally said, without elaborating.
Ford notified 430 workers at its Windsor, Ontario, engine plant that they may be laid off within 8 weeks, spokesman Mark Truby said today. The factory makes V-8s for the company's large trucks. The exact number of layoffs will ``become clearer as we work through our production volumes,'' Truby said.
The new round of job cuts will be finished by Aug. 1, Mulally said in a memo to employees that the Detroit Free Press put on its Web site. ``We want to do what is right for the future of our business and also respect the fact these actions will personally affect our team and their families,'' the memo said.
Unexpected Profit
The automaker had affirmed the 2009 profit target April 24 when it reported a first-quarter net income of $100 million, after analysts had estimated a loss. Ford never specified a figure for the forecast, which excludes what the company considers one-time costs and gains.
Analysts had expected a 2009 profit of 53 cents a share, the average of 13 estimates compiled by Bloomberg.
``It's hard to say if Ford is doing enough,'' George Magliano, auto research director at Global Insight Inc., told Bloomberg Television. ``We are looking at a recession extending well into 2009.''
Ford said it expects to use $14 billion to $16 billion in cash from 2007 through 2009. The company said that's up from its previous projection, which it didn't specify, while lower than its initial $17 billion forecast. Ford said it had access to $40.6 billion in funds as of March 31, including credit lines.
The company has been unable to meet many of its profit targets set during this decade. Bill Ford, then the chief executive, in 2002 set a 2006 target of $7 billion in pretax profit. That was withdrawn in April 2005.
Start of Losses
Ford began posting losses in the second half of 2005 as sales of sport-utility vehicles and large pickup trucks, its main source of profit in the 1990s, faltered. Ford in early 2006 first set a target for its North American auto unit, the main source of losses, to be profitable this year.
The company said Sept. 15, 2006, that the target was delayed to 2009. The revision came two weeks after Mulally joined Ford from Boeing Co., where he led the commercial aircraft business.
The automaker's cutbacks come as wholesale and raw-material costs climb, while a weakening economy has hampered companies from passing the expenses on to consumers.
Steel prices surged to a record $850 a ton last month, 47 percent higher than in January, according to an April 30 report from Purchasing Magazine.
Ford's 7.45 percent note due July 2031 fell 2.06 cents to 71.44 cents on the dollar, according to Trace, the price- reporting system of the Financial Industry Regulatory Authority. The yield increased to 10.84 percent.
Credit-default swaps on Ford debt gained 76 basis points to 977 basis points, according to CMA Datavision in London. The contracts are designed to protect bondholders against default. A rise in the price indicates a decline in the perception of a company's credit quality.
Standard & Poor's changed its outlook on Ford debt to ``negative,'' meaning the rating may be lowered. S&P kept its rating of B, five levels below investment grade. Moody's Investors Service affirmed Ford at B3, six levels into junk.
To contact the reporters on this story: Bill Koenig in Southfield, Michigan at wkoenig@bloomberg.net; Jeff Green in Southfield, Michigan at jgreen16@bloomberg.net.
Last Updated: May 22, 2008 16:21 EDT
AI
