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Chrysler, GM hint at progress amid losses

Third-quarter results offer some hope that the automakers are headed in the right direction.

October 26, 2006|John O'Dell | Times Staff Writer

General Motors Corp. and Chrysler Group reported third-quarter losses Wednesday, making it a clean sweep this week for the financially troubled Michigan-based Big Three automakers.

But in their respective financial reports, coming two days after Ford Motor Co. posted a sizable loss, the two automakers offered signs that their turnaround efforts, though challenging and far from complete, were progressing.

Detroit-based GM reported a narrowing $115-million net loss but showed a profit on an operating basis.

"They are in the middle of a jungle here," independent analyst John Casesa said Wednesday at an industry conference in Dearborn, Mich. "The numbers they put up today show they are putting up a good fight, but they are not out of the jungle yet."

Chrysler Group confirmed its warning of a $1.5-billion loss in the quarter, but analysts were generally satisfied that there were no surprises in its report.

The company, the U.S. arm of DaimlerChrysler of Germany, "is doing some good things" with plans to introduce several new small cars and crossover utility vehicles to help boost sales, said Gimme Credit bond analyst Craig Hutson. "Now it needs to address its cost structure."

DaimlerChrysler has begun a program to do just that, sending a stream of specialists from Germany to Chrysler headquarters in Auburn Hills, Mich., to help carve $1,000 from the cost of producing each vehicle.

Like their rival Ford, which posted a $5.8-billion third-quarter loss, GM and Chrysler are wrestling with intense competition from foreign brands and with the costs of wage and benefit packages negotiated with labor unions when times were better.

GM attributed its loss, equal to 20 cents a share, to one-time charges largely connected with its year-old restructuring program and said that without the charges it would have posted an operating profit.

But the company also based a chunk of those operating earnings on one-time tax benefits and acknowledged that the performance of its crucial and ailing North American automotive business still was lacking.

GM shares fell $1.48, or 4.1%, to $34.71 on Wednesday as many analysts and investors looked ahead to a rugged road to recovery.

"GM still has a long way to go," analyst Shelly Lombard of Gimme Credit said.

She cited GM's reliance on $400 million in tax adjustments in the quarter, its continued reliance on older models that can require substantial incentive spending to encourage sales, and its acknowledgment that it still was burning through far more cash than it takes in, about $2.5 billion in the third quarter.

In addition, Lombard noted, GM faces sizable continuing costs in its efforts to help former subsidiary Delphi Corp. emerge from bankruptcy proceedings without triggering a potentially crippling strike by workers facing steep pay cuts.

GM won't discuss negotiations with Delphi, its largest parts supplier, and Delphi's unions. But in a positive sign, GM slashed $4.5 billion on Wednesday from an estimate of its maximum potential liability in the reorganization.

The automaker said it expected its share of costs to fall between $6 billion and $7.5 billion, compared with a previous estimate of $5.5 billion to $12 billion.

Chief Financial Officer Fritz Henderson told reporters that the automaker would probably subsidize pay for unionized Delphi workers who remain with the parts company after it completes its planned downsizing.

GM already has booked $6 billion to cover Delphi-related costs and faces an expense of as much as $400 million next year and $100 million a year "for a limited duration" after that, Henderson said.

He said GM was benefiting from significant cost reductions from its turnaround plan and remained on target to reach $9 billion in structural cost reductions this year. GM intends to close a dozen factories in the next two years and expects to have slashed its North American manufacturing payroll by 34,000 jobs by early next year. The company also has won healthcare cost concessions from the United Auto Workers union.

GM's July-to-September performance was substantially better than the loss of $1.7 billion, or $2.94 a share, it posted in the third quarter of 2005. Revenue of $48.8 billion, up from $47.1 billion a year earlier, set a third-quarter record.

The automaker said that excluding $644 million in special charges, it would have earned $529 million in the period, or 93 cents a share, handily beating analysts' estimates of 49 cents.

Results from its global automotive operations improved substantially, the company said, but it still lost money in North America and Europe.

Citigroup analyst Jon Rogers said customer demand for GM's cars and trucks could continue to decline in the next two years.

"This weakness could lead to further profit-eroding incentive programs in order to stimulate sales," Rogers said in a note to investors.

It was a sales slowdown that caused much of Chrysler Group's loss as the company, which relies on large pickups and sport utility vehicles for most of its business, saw shoppers shifting to smaller, more fuel-efficient passenger cars after the summer's run-up in gasoline prices.

Burnham Securities analyst David Healy said he didn't see Chrysler's loss as the start of a long downturn, however.

"There are no surprises. They lost big because they tried to force the market" by continuing to build and ship trucks, he said. "And then they had to buy their way out" with costly incentives and price cuts.

Chrysler's loss offset gains at DaimlerChrysler's Mercedes-Benz luxury car unit and pulled corporate profit down by 37% to 541 billion euros, or $686 million.

The company's U.S.-traded shares rose $2.35, or 4.5%, to $54.68.

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john.odell@latimes.com

Bloomberg News was used in compiling this report.

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