Market changes pummel Ford

January 29, 2018 12:00 AM

DETROIT — When you're out of shape and unhealthy, even a common cold can send you reeling.

That is what's happening right now to Ford Motor Co., where CEO Jim Hackett says the company is not financially "fit." That means market fluctuations of the moment — surging steel and aluminum prices, negative currency rates and recall costs — are hurting Ford's bottom line more than they are its competitors.

Ford said last week that rising commodity costs will slash $1.6 billion off its 2018 earnings. It reported that they already took $1.2 billion off its 2017 numbers.

The price of steel has spiked 18 percent since the start of last year, according to Bloomberg's industrial metals index. Aluminum is up by nearly a third. Other automakers haven't indicated that will significantly hurt their profits.

FCA CEO Sergio Marchionne said last week it was not changing its guidance because of those rising costs. General Motors executives didn't discuss that when previewing earnings earlier this month at a Deutsche Bank conference.

"One of the reasons why you're not hearing as much from others is that they're fitter, so that, despite the hit on their business, they're still able to hit a margin that's appropriate," Ford CFO Bob Shanks told reporters last week. "Our issue is we can't do that."

Hackett has placed the automaker on a strict diet: cut $14 billion from bloated engineering costs, reduce the amount of low-margin cars in its lineup, increase the number of profit-rich SUVs and trucks, and pare down bureaucracy to make faster decisions.

2017 vs. 2016

Revenue: $156.8 billion, up 3.3 percent

Adjusted pretax profit: $8.4 billion, down 19 percent

Net income: $7.6 billion, up 65 percent

Operating margin: 5%, down 1.7 percentage points

Average profit-sharing check to Ford-UAW workers for 2017: $7,500, vs. $9,000

If Ford follows that regimen, it should start to see healthier returns by the end of the decade, Shanks said. But until then, the automaker will feel some financial pain.

"We may need to wait 18-24 months before the Ford story is exciting again," Barclays analyst Brian Johnson said in an investor note following the company's fourth-quarter and full-year earnings report.

Others are more optimistic.

"It seems like they're having a bit of a tough time, but I don't think they're in a bad place," Jessica Caldwell, executive director of industry analysis at Edmunds, said in an interview.

"They're still the best-selling brand in the U.S. and they have an amazing product in the F-Series. I think the market just wants them to take that next step."

Year-end results

For the full year, Ford's 2017 pretax profits fell 19 percent to $8.4 billion, explained by rising commodity costs, higher recall costs and losses in its mobility division. Net income soared 65 percent to $7.6 billion, as revenue rose 3.3 percent to $156.8 billion. But that largely reflects accounting changes Ford made in 2016, including a lower tax rate and re-measurement of pension liabilities, which hurt its earnings that year but made the 2017 comparisons favorable.

Ford's 2017 operating margin was 5 percent, down 1.7 percentage points year-over-year and far from the 8 percent returns the company wants. The result also lags its crosstown rivals.FCA posted a 6.4 percent margin in 2017, and while GM has yet to report full-year earnings, it posted a 7.5 percent margin in the third quarter.

"I and my team are not satisfied with this level of performance," Hackett said. "We see 2018 as the opportunity to prove to you that we can sharpen operational execution."

Still, Hackett has said 2018 will be a "bad year."

Its per-share guidance for 2018 translates to earnings of $8 billion to $9.2 billion, according to investment firm Barclays Capital, down from an initial forecast of $9.9 billion.

Ford's stock tumbled nearly 4 percent the day after the earnings report.

"That's a report card on fitness," Shanks said. "Frankly, the fitter we are the more options we have to succeed in the future because we'll have more cash, more flexibility, and we'll be better protected against potential mistakes along the way or changes in the external environment."

Changes coming

Ford's leaders are confident they'll get there. Hackett said the company has established six work streams, although he declined to provide details.

"You have to stand in line," Hackett told Morgan Stanley automotive analyst Adam Jonas about when the outside world will learn about Ford's organizational improvements. "You have to wait until our people know. It's getting close to the point where we can bring you under the tent."

Most of his directives are aimed at a common goal, which he defines as delivering "smart vehicles for a smart world."

Said Shanks: "We've established our North Star."