Ford’s Back To Profitability

The Ford Motor Co. is slowly recovering from the aftermath of the shift of the market to small and fuel efficient cars. In the recent quarterly sales report submitted by the company, it was reflected that Ford’s losses narrowed. That fact is a semaphore that the ailing Detroit automaker has a still a long way to go as noted by Ford’s CEO Alan Mulally.

Slashed net loss

Earlier, critics who are anticipating for more bad news were surprised by the Ford Motor Company’s better-than-expected net loss amounting to $282 million. The figure has far surpassed the expectations of Wall Street and triggered a meek rally in the company’s stock. The figure also mirrored Ford’s return to profitability. “Although our first-quarter results are encouraging, we still have a long way to go,” Mulally said during a conference call. But “the basics of our business are improving.”

The automaker’s loss for the first quarter of this year was a big improvement as compared to the $1.4 billion that the company has lost in the same period last year. Still, the Ford’s key North American business posted worse results than the previous year. The reason behind it is the continuing loss of market share.

In a nutshell, Ford’s sales were up worldwide, but fell in North America where the loss expanded to $614 million compared to $442 million in 2006. Despite that, the figure was more than $500 million better than the company had expected. This information was given by the Ford Americas President Mark Fields.

The Ford Credit, which Mulally said remains to be a vital part of the business, remained lucrative however it saw earnings decline from $248 million to $193 million. On the other side of the Atlantic, the Ford of Europe reported a net profit of $219 million which is an increase from the $65 million from the previous year. The Premier Automotive Group, consisting of the Aston Martin, Jaguar, Land Rover, and the Volvo brands, posted its best results ever. Ford’s ignition to recuperate is likened to the power of a Volvo distributor cap.

Where the plan is heading

According to analysts in the industry, these numbers are the first clear indicators of where Mulally’s turnaround campaign is heading. When Mulally, the former CEO of Boeing, was hired in September by Ford, he told its board of directors that it was too late to have much impact on the 2006 results. He added they should start judging him by January’s results.

While it is apparent that the figures have improved, some analysts cautioned about reading too much into them. “Ford acknowledges that, like last year, the first quarter will be its strongest quarter,” said Shelly Lombard with Gimme Credit. “We still believe management is doing all the right things, Ford’s liquidity should be sufficient to get them through this turnaround period, and even in a bankruptcy scenario, the bonds are probably worth par. But this is a marathon, not a sprint. And there is more pain to come.”

Ford executives said they, too, do not expect the first quarter results to be sustained through the year. “We are facing significant adverse headwinds for the remainder of the year,” said the Chief Financial Officer Don Leclair. He pointed to unfavorable currency exchange rates, rising materials costs and the poor performance in the domestic housing sector that historically translates into the declining demand for pickups.

The transition of the plan

But Mulally said the company does expect to meet its turnaround goals. “This transition is not just about the Blue Oval in North America. This is about all of our operations worldwide and all of our brands,” Mulally added. “What you saw today was that plan working. Not only did North America exceed their plan, everybody did.”

Mulally imparted the positive news with employees at a “town hall” meeting at the automaker’s headquarters in Dearborn, during which he commended them for their hard work and reiterated the Ford’s commitment to return to profitability no later than 2009.

To cut $5 billion operating costs

To overcome losses like the $12.7 billion monster it has posted for 2006, Ford has to cut $5 billion in operating costs by the end of 2008. The CEO said that the company is on track to do that, thanks in large part to the success of its early retirement and voluntary buyout programs.

Ford has already slashed a total of 11,900 salaried jobs in North America since the end of 2005. Further, it expects another 2,100 jobs to leave by the end of 2007. Approximately 16,500 hourly workers also have left the automaker’s North America factories since the end of 2005, and the company expects as many as 14,200 more to leave by the end of 2008. This is regardless of the fact that 2,000 blue-collar workers who have signed up for buyouts changed their minds over the last three months.

Additionally, 5,000 hourly workers employed at the former Visteon Corp. factories have left the company. The automaker also intimated its plan to sell or close all of them by the end of 2008, but the company said Thursday one or two plants may remain open a while longer to ensure a continuous production flow.

More plant closures expected

As part of its plan to close 16 plants by the end of 2012, Ford also plans to idle nine factories in the United States and Canada by the end of 2008 and some of which have already closed. Together, these moves are expected to translate into a 26 percent decrease in the company’s North American production capacity.

However, Ford raised its second quarter North American production plan to 810,000 vehicles from the 770,000 it had previously forecast. It said the move was necessary to boost inventories and was not expected to change the full year production volumes.