Automaker Cites Rising Cost of Gasoline, Steel
By Bill Koenig and Jeff Green
Bloomberg News
Friday, May 23, 2008
Ford Motor has abandoned a target of returning to profitability next year because of rising costs for steel and gasoline, a month after chief executive Alan Mulally said the second-largest U.S. automaker expected to meet its goal.
In addition, North American production of pickups and sport-utility vehicles will be cut for the rest of this year, the Dearborn, Mich., company said yesterday. Mulally told analysts and reporters on a conference call that the sales outlook darkened in May's first half.
Mulally declined to say whether he expected a profit for 2010 and said that 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 SUVs 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 in Alexandria, which owns 300,000 Ford shares and bought more yesterday. "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."
This quarter, Ford will pare its North American production 15 percent compared with the corresponding period a year earlier, 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 its North American auto assets, according to a U.S. regulatory filing. Ford said it could not yet specify the amount.
Ford fell 64 cents, or 8.2 percent, to close at $7.16 yesterday, 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 that investors think Ford is less creditworthy.
Ford's board took a neutral stance yesterday on billionaire Kirk Kerkorian's offer to buy 20 million shares in addition to the 100 million he owns.
Kerkorian 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 and General Motors. His Tracinda 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 is extended. Tom Johnson, a Tracinda spokesman, declined to comment yesterday. The revised outlook by Ford is a setback for Mulally, who was recruited in 2006 and had pledged to return the company to profitability next year. Ford cited "the rapidly changing business environment" in the United States.
Sales of pickup trucks, vans and SUVs deteriorated further in May's first half because of rising fuel prices, Mulally said during 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 and Honda Motor as gasoline prices have pushed consumers to cars, which are typically more fuel-efficient.
Ford will "take decisive action" to regain profitability, which "will take longer than we originally thought," he said during 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. Those offers may be extended to other U.S. factories, Mulally said, without elaborating.
"It's hard to say if Ford is doing enough," George Magliano, auto research director at Global Insight, told Bloomberg Television. "We are looking at a recession extending well into 2009."
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.
View all comments that have been posted about this article.