GM Expects Big Drop in 2005 Profit

DETROIT -- General Motors Corp. forecast a significant drop in 2005 earnings amid projections of a $1 billion rise in health-care costs, a substantial loss in Europe and lower earnings at its financing arm.

In a related announcement, General Motors Acceptance Corp., GM's financing unit, said yesterday that it is considering a restructuring that would group two residential-mortgage businesses in a new holding company in an attempt to lower its borrowing costs. The holding company probably would be able to get a credit rating separate from GM's rating, which slipped in the past year and made it more expensive for the company to issue bonds.

Looking ahead to 2005, the world's largest car maker expects to earn $4 to $5 a share, down about one-third from the $6 to $6.50 a share it is on track to report for 2004, Chief Financial Officer John Devine said in a meeting with analysts and reporters. The figures exclude one-time items.

Mr. Devine said GM still is sticking with its target of achieving earnings of $10 a share, but he conceded that the company won't be in a position to do that until 2007 at the earliest.

"We think this target is still the right target," Mr. Devine said. "Given the head winds in 2005, we believe we will not hit $10 [per share] in 2006. We think we will see earnings up in 2006 and again in 2007. We think it's possible to reach the target, or come close to it, in calendar year 2007."

The forecast, which was released just before 4 p.m. EST yesterday, sent GM stock down. At 4 p.m. in New York Stock Exchange composite trading, GM stood at $37.32, off $1.07.

GM faces a tough battle in its home market in North America. In 2004, it lost market share and was forced to cut production as Japanese rivals such as Toyota Motor Corp. and Nissan Motor Co. posted substantially higher sales of mainstream cars. At the same time, luxury-car makers such as BMW AG are expanding further and further into midpriced segments that GM once dominated.

GM, Ford Motor Co. and the Chrysler unit of German auto maker DaimlerChrysler AG together have lost nearly nine percentage points of market share since 2000, despite spending billions on dozens of new vehicles and boosting rebates to $5,000 or more on some models.

In detailing GM's outlook, Mr. Devine said the company's North American automotive operations are expected to generate about $500 million in net income in 2005, down somewhat from 2004, as a result of lower sales of big trucks and sport-utility vehicles.

The company's portfolio will lean toward passenger cars in 2005. It has some new models such as the Pontiac G6 and Chevrolet Cobalt, but new versions of many of its best-selling sport-utility vehicles and full-size models won't be launched until 2006.

The company expects about $600 million in net income from its Asian-Pacific operations. Mr. Devine, however, said earnings in the booming Chinese market would decline as a result of increasing price competition there.

But those gains would be eroded by a sharp rise in employee health-care costs, to a projected $5.3 billion from $4.3 billion in 2004, driven mainly by higher drug prices. "That's the key ingredient," Mr. Devine said.

He said driving down health-care costs will be "a high priority" this year. "In a nutshell, we are continuing to work hard with the providers. We continue to work in Washington, but we are not optimistic that there is a solution in Washington. In fact, we think there is not," he said.

On a positive note, Mr. Devine said GM expects more modest rises in health care in 2006 and 2007. He also said pension costs in 2005 would decline, to about $1.2 billion from $1.4 billion.

In Europe, where GM hasn't made money since 1999, the company is expecting a 2005 loss of $500 million. That doesn't include the cost of a restructuring it has started that will cut 12,000 jobs, mostly in Germany. GM Europe officials said the restructuring measures could cost as much as $1 billion.

GMAC is expected to generate net income of at least $2.5 billion in 2005, although that will be down from record profit in 2004 as a result of higher interest rates. Higher rates increase GMAC's cost of borrowing money.

Under its proposed restructuring, GMAC's two residential operations, GMAC Mortgage Corp. and Residential Funding Corp., would become wholly owned subsidiaries of a new holding company called Residential Capital Corp. The newly formed entity would seek a stand-alone credit rating based on its separate capital structure and its corporate-governance protections.

"If it were fully implemented and if it enabled these mortgage units to refinance externally some of the intercompany borrowings that exist now, then that would be a modest positive development in our view, because it would enhance the funding flexibility of GM and GMAC," said Scott Sprinzen, a managing director of corporate ratings at Standard & Poor's.

Write to Lee Hawkins Jr. at lee.hawkins@wsj.com¹