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May 26, 2017

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Ford profit beats forecast in N. America

DETROIT -- Ford Motor Co. posted a third-quarter profit that trounced Wall Street forecasts on Tuesday, driven by higher vehicle prices and record profit margins of 12 percent in North America.

Worldwide, Ford earned US$800 million more through price increases than it did last year. Half of that jump came from North America, where Ford has earned more than US$2 billion and posted margins over 10 percent for three quarters in a row.

The No. 2 U.S. automaker's strength in North America offset the effects of the sharp industry downturn in Europe, where Ford expects to lose at least US$3 billion over the next two years, and helped make up for its lagging position in China and other growth markets.

In the third quarter, Ford posted an overall pretax operating profit of US$2.2 billion, or 40 cents per share, beating analysts' average estimate of 30 cents per share, according to Thomson Reuters I/B/E/S.

In North America, Ford earned US$2.3 billion with a 12-percent operating margin. "Twelve percent segment margins is just insane," said Jefferies analyst Peter Nesvold, who has a "buy" rating on Ford.

But operating margins in North America are unlikely to be as high in the fourth quarter because of higher spending in areas like engineering and advertising, Chief Financial Officer Bob Shanks warned during a call with analysts and reporters.

Higher pension costs and fewer cost deductions will pressure North American results next year, he added. Ford must also take steps to boost quality, especially after tumbling to the bottom of a key reliability survey this week.

Europe Plan Echoes US Turnaround

Ford hired Mulally as CEO in 2006 to steer the automaker's turnaround in North America, which began in late 2005 with the "Way Forward" plan engineered by Mark Fields, who had led North and South American operations for seven years.

From 2006 to 2009, Ford cut capacity in North America by a little more than one-fifth, analyst Nesvold has estimated. Higher prices garnered an additional US$10 billion in revenue from 2006 to 2010.

The North American turnaround plan will serve as a blueprint for Ford's restructuring of Europe, although there are limits on how much Ford can draw from its past experiences, Shanks said. Ford of Europe is "much, much leaner" than the U.S. operations were in 2006, he said.

"Europe isn't North America," Shanks said. "It clearly has excess capacity — which we're addressing — but if you look in other areas, it's very lean. We actually want and need to invest in other areas in the business to grow the top line."

Last week, Ford announced three plant closures in Europe to cut costs by as much as US$500 million. Executives also left open the possibility of further actions if a recovery in Europe fails to materialize.

Ford is taking steps to keep its European inventory at around 40 days' supply, down from the typical 50 days, in line with tepid demand. Nevertheless, Ford is launching 15 new or refreshed models in Europe over the next five years.

In a U.S. reliability study released by Consumer Reports magazine this week, the Ford and Lincoln brands tumbled to near the bottom of 28 brands measured, in part because of complaints about its MyFord Touch navigation and entertainment system.

On Tuesday, Mulally said Ford is disappointed with the results of this week's study and plans take further steps to address problems in the system, which launched in 2010.

This year, Ford expects U.S. industry-wide auto sales to reach 14.7 million vehicles. It forecast European sales of about 14 million.

Ford's third-quarter revenue fell 3 percent to US$32.1 billion, better than the US$30.9 billion expected by analysts. Net income in the quarter was about US$1.6 billion, or 41 cents a share, on par with results from last year.

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