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 Across the auto industry, safety recalls and warranty costs have
received increasing attention as cars have become more complex and
loaded with technology, Ford Chief Financial Officer Bob Shanks
said.
"Everybody is generally reacting, and certainly we do, as soon as we
find a problem," he told reporters at the company's suburban Detroit
headquarters. "And you're seeing that across the business. It's not
any particular company."
While Ford adjusts its warranty reserves every quarter, the total
was larger in the first quarter because the company has dealt with
more field service actions such as recalls and addressing customer
complaints over the last two years, Shanks said.
Conspicuous safety defects also demand that automakers respond or
risk large federal fines and hefty legal payouts, which General
Motors Co now faces because of its recall of faulty ignition
switches linked to at least 13 deaths. The GM recall serves as
reminder to rivals, Stifel analyst James Albertine said.
"Any (automaker) that is not taking advantage of the opportunity GM
has given them to clean the proverbial recall house is missing the
boat," he said.
In addition to the higher warranty costs, Ford's incentives in North
America also rose in the first quarter due to an aging lineup of
vehicles, something Ford is addressing with the launch of 16 new
models in the region this year. Newer vehicles typically sell with
no incentives or reduced ones.
"The company has a lot of new products coming online this year,"
said Fitch Ratings analyst Stephen Brown, who expects earnings to
improve in the second half because of the new model rollouts. "They
haven't seen the benefits (of the new vehicles) on dealer lots yet."
Analysts have worried that U.S. industry incentives may rise as
sales growth slows. Research firm TrueCar.com said industry average
incentive spending per vehicle in April jumped almost 9 percent to
about $2,750.
Despite the rising incentives, Ford affirmed its forecast for pretax
profit for 2014, a year in which it is launching a record 23 new
vehicles globally. It also said it is amending and extending its
revolving credit facility.
Shanks said the underlying business remains strong.
"The run rate is very healthy and we feel that we're moving forward
very nicely in terms of what we expect for the year and setting us
up for stronger growth and stronger profitability in 2015 and
beyond," he said.
Also on Friday, Ford Chief Executive Alan Mulally, 68, said on a
conference call that there was no change in his plans to remain at
the company through the end of the year. Earlier this week, a source
said that Ford will soon name Chief Operating Officer Mark Fields as
Mulally's successor.
Net income fell 39 percent to $989 million, or 24 cents a share,
from $1.61 billion, or 40 cents a share, in the year-earlier period.
The quarter included the $400 million in additional costs for
warranty reserves in North America for vehicles from as early as the
2001 model year, and $100 million in costs related to higher freight
and other items due to the harsh winter in North America. It also
included previously disclosed costs of $400 million, mostly due to
the currency devaluation in Venezuela. All three items totaled 17
cents a share.
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Excluding one-time items for European restructuring, Ford earned 25
cents a share, 6 cents below analysts' estimates in a poll by
Thomson Reuters I/B/E/S. The warranty reserves totaled 6 cents a
share while weather costs accounted for another 2 cents.
Revenue was up slightly at $35.9 billion, above the $34.06 billion
analysts had expected.
EUROPEAN LOSS NARROWS
Ford, which still expects a pretax profit this year in the range of
$7 billion to $8 billion, said its credit facility is expected to
grow to about $12 billion, from $10.7 billion after its completion
at the end of the month. It forecast operations in South America
will be weaker than previously forecast for the year, while Asia
Pacific's profit will be higher than last year.
Shanks said various global launches, including its redesign for the
highly profitable F-150 full-size pickup truck, remain on track.
Net pricing in the quarter was up only $175 million as incentives
increased $471 million over last year. Most of those higher
incentives were offered in North America, where net overall pricing
actually fell.
The North American operating profit fell by more than a third to
$1.5 billion. RBC Capital markets analyst Joseph Spak said that was
below Wall Street's expected consensus of $2.2 billion and the
company's profit margin in the region was weaker than expected.
The North American operating margin fell to 7.3 percent from 11.1
percent last year as Shanks said the warranty and weather-related
costs took a bite of 2.5 percentage points. However, Ford affirmed
its outlook for a full-year margin in the region of 8 to 9 percent.
Overseas, business was more positive as demand continued to increase
in China, the world's largest auto market, and the company's losses
in Europe narrowed and were lower than expected according to
analysts.
In China, Ford said its market share hit a record 4.5 percent, up
from 4.4 percent in the fourth quarter. The profit in Asia Pacific
rose to $291 million from a year-ago loss of $28 million.
The company's loss in Europe, which has been a drag on Ford profit
for several years, was $194 million, down from $425 million a year
ago.
The loss in South America, however, deteriorated to $510 million
from a loss of $218 million last year due to the currency
devaluation in Venezuela and Argentina.
Ford shares were down 3.4 percent at $15.77 on the New York Stock
Exchange on Friday afternoon.
(Editing by Jeffrey Benkoe, Sofina Mirza-Reid and Matthew Lewis)
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