Ford lowers 2018 profit forecast as Q2 net falls 48%

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UPDATED: 7/25/18 8:02 pm ET – adds conference call

DETROIT — Ford Motor Co. lowered its full-year forecast due to challenges overseas and said CEO Jim Hackett’s global restructuring efforts could result in charges totaling $ 11 billion over the next three to five years.

CFO Bob Shanks said the weaker guidance was not related to the Trump administration’s tariffs on steel and aluminum, which General Motors cited earlier in the day when cutting its own outlook. Ford did, however, take a tariff hit in the quarter and expects a bigger impact later this year.

Ford said trouble in Europe and Asia will trim adjusted earnings to $ 1.30-$ 1.50 a share in 2018, from prior guidance of $ 1.45-$ 1.70 per share. In a statement, the company said it expects a loss in Europe due to higher costs, and a “significant loss” in Asia due to lower pricing and an unfavorable mix in China.

In the second quarter, Ford’s net income fell 48 percent to $ 1.1 billion. Executives blamed the drop on challenges in China and a supplier fire that crippled U.S. production of highly profitable F-series pickups for more than a week in May.

Revenue fell 2 percent to $ 38.9 billion compared with the second quarter of 2017. Ford’s earnings before interest and taxes dropped 40 percent to $ 1.7 billion.

“It was obviously a very tough quarter for us,” Shanks told reporters.

Ford’s North American profit dropped 25 percent to $ 1.8 billion. It attributed the decline to a fire at a Michigan magnesium plant that made parts for the F series and a settlement over faulty Takata airbags. Ford’s earnings fell in each of its global regions other than the one that comprises Africa and the Middle East.

Shanks said Ford took a $ 145 million hit in the quarter related to tariffs and expects that Ford will lose $ 500 million-$ 600 million on tariff-related charges this year. But he said the issue was not affecting earnings guidance because the company will be able to absorb the costs in North America.

Ford shares sank earlier Wednesday to their lowest level in nearly six years but recovered most of their losses and closed the day off just 0.5 percent at $ 10.52. In after-hours trading following the earnings report, the shares fell 3.6 percent as of 7:15 pm ET.

Restructuring charges

Ford officials declined to give many details about the $ 11 billion in restructuring charges.

Shanks declined to say whether Ford planned to exit any global markets but suggested that, by offering a concrete number, Ford already had a sense of what exactly it planned to do. A Morgan Stanley analyst report in March estimated that Ford would need to take charges of $ 4 billion to $ 12 billion to achieve the kind of cost cuts Hackett is targeting.

“When you have strong and winning franchises in regions, it’s not as simple as pulling the plug or exiting markets,” Hackett said on a conference call with analysts and reporters. “We know we can capitalize on our strengths, bolster underperforming products in regions and then, smartly and selectively, disposition where we cannot make an appropriate return.”

Hackett said he was “extremely disappointed” in the company’s performance in China and Europe and noted that products in both regions had grown stale and unappealing. He suggested Ford may take similar actions to what it’s doing in North America, where it’s replacing its traditional sedans with crossovers and utilities.

Jim Farley, Ford’s vice president of global markets, said Ford planned to refocus its product lineup in Europe to spotlight its profitable commercial vehicles.

In China, Farley said Ford had “serious shortfalls” in its go-to-market strategy and that dealer profitability had been hurt by improper maintenance of the product portfolio.

He said Ford has begun to address dealer profitability in the region and that, by the end of next year, 60 percent of its products there will be new or updated.

“We swim in the water with ankle weights — big ones,” Shanks said on the earnings call. “We want to get them off so the real underlying strengths of this company can come through.”

The lack of specifics irked some analysts, who questioned Ford’s communications strategy and complained about the automaker’s decision to postpone its investor day scheduled for Sept. 26. Ford said it would hold the event when “more specifics can be shared on global redesign and restructuring.”

Shanks and Hackett stood by the decision, likening the company’s strategy now to when Ford slowly rolled out specifics on its “Way Forward” turnaround plan in 2006.

Regional performance

Ford’s profit margin for the quarter was 2.7 percent, down from 5.1 percent a year earlier. Its North American margin declined to 7.4 percent from 9.5 percent in the second quarter of 2017.

The company lost $ 394 million in its Asia Pacific region, versus a $ 167 million profit a year earlier. Its European region swung to a loss of $ 73 million, and South American losses grew 1 percent to $ 178 million. It made $ 49 million in the Middle East & Africa after losing the same amount a year earlier.

Ford said its mobility unit lost $ 181 million in the second quarter, nearly triple its outflow a year ago. The unit is in a stage with heavy investment — and little offsetting revenue.

Ford Motor Credit made $ 645 million, a 4.2 percent increase.

Ford’s net income equaled 27 cents per share, 4 cents less than the consensus estimate on Wall Street of 31 cents.

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