Ford posts 9% decline in Q2 profit, warns of challenges ahead
DETROIT -- Ford Motor Co. today said its second-quarter profit fell 9 percent to $1.97 billion and warned that the rest of the year would be “much weaker than normal” as U.S. demand softens and the automaker launches redesigned versions of its heavy-duty pickups.
Even with the decline, Ford achieved record pretax profits and margins for a half-year period. But executives said the company was at risk of falling short of its full-year targets and was undertaking a series of “profit improvement actions,” including cuts to manufacturing costs starting in the third quarter.
Ford shares dropped as much as 10 percent in morning trading on the news, wiping out all of the gains made in July. The shares recovered only slightly during the day, closing the day down 8.2 percent to $12.71.
“We remain committed to our 2016 guidance, but we’re facing risks to achieving that,” CEO Mark Fields said on a conference call with analysts. “We’ve implemented an aggressive companywide attack plan on costs.”
Revenue in the second quarter increased 6 percent to $39.5 billion, and Ford had $4.2 billion in positive automotive cash flow, a record for any quarter. Those figures were overshadowed by Ford’s unexpectedly grim outlook, which it attributed primarily to rising incentives in the U.S., deteriorating prices in China and the United Kingdom’s June vote to leave the European Union.
Ford reduced its full-year U.S. sales outlook for the industry to between 17.4 million and 17.9 million vehicles, including medium and heavy trucks. Its previous forecast range had a midpoint of 18 million. Most of the new range is below last year’s industry total of 17.8 million units.
“We’re starting to see a maturation of the economic cycle,” CFO Bob Shanks told reporters. “We’re at a strong level. I think that will continue.” But, he added, “We don’t see growth in the near term.”
Ford posted a pretax North American profit of $2.7 billion, 5.3 percent lower than the same period last year. Its margin for the region decreased to 11.3 percent from 12.2 percent a year ago.
“The competitive environment has increased as growth has slowed,” Fields said. “The bottom line is that we’ve seen a tougher pricing environment this quarter, and we will face one going forward.”
An $8 million loss in the Asia-Pacific region broke a streak of 12 consecutive quarters in the black, though Ford said it was profitable in China.
In Europe, profits nearly tripled from a year ago, to $467 million, marking the best quarterly results there since 2008. That was despite a $60 million hit from the U.K. vote known as Brexit, or British exit, due to the falling value of the pound.
Shanks said Ford expects Brexit to cost Ford $140 million in the second half of 2016 due to weaker vehicle demand in the U.K., and $400 million to $500 million in each of the following two years, for a total impact of up to $1.2 billion by the end of 2018.
Ford listed five actions it is taking to increase profits in the second half to counter the risks it is facing.
Those steps include reducing costs in manufacturing and other operations, implementing improved “go-to-market plans” in the U.S. and China to bolster revenue, and using analytics to optimize vehicle mix and pricing around the world. In the first half, Shanks said Ford beat its cost targets by $1.6 billion.
Regardless of the effect those actions have, Fields said the third and fourth quarters would be “much weaker than normal.” But he said those results should not be interpreted as an indication of a new, lower run rate for Ford beyond that.
“We expect 2017 to be another solid year for Ford,” Fields said.
Super Duty launch
In North America, Ford is launching redesigned Super Duty pickups this fall. The Super Duty is lighter and more powerful than the outgoing model thanks to its new aluminum body. The changeover will not be as disruptive as the F-150 switch last year, but it still will ding Ford’s revenue and profits.
“This is the first full redesign in 19 years, so this is a really, really big launch,” Shanks said. “It’s a high-margin vehicle, and this is going to set the vehicle up to be a strong leader for the next decade.”
Another negative factor Shanks cited is falling auction values of off-lease vehicles, particularly smaller cars, which he said will result in a lower profit for Ford Motor Credit this year.
Editor's note: The Brexit vote cost Ford about $60 million during the second quarter. The figure was misstated in an earlier version of this story.
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