Ford Profit Dented by Swings in Commodities Prices -- Update

On his first day on the job, Ford Motor Co. Chief Executive Jim Hackett compared fixing the auto giant's problems to a Rubik's cube. Nine months later, he is still trying to solve the puzzle.

Ford on Wednesday reported disappointing fourth-quarter results and reiterated a bleak outlook for 2018. As Mr. Hackett scrambles to catch up to General Motors Co. and other rivals on electric and driverless cars, the pressure on the company's current finances is evidence the new CEO is facing a multifaceted challenge.

Mr. Hackett, a longtime office-furniture executive, has begun cutting expenses in core areas including engineering and marketing. In recent months, executives have signaled plans to exit poorly performing segments, including a potential retreat from sedans and compact cars, while rerouting billions of investment into high-profit trucks and sport-utility vehicles.

The outlook for 2018, however, indicates that Mr. Hackett needs to manage several factors outside of his direct control. Rising commodity costs, unfavorable currency movements and higher interest rates will pressure margins at both the company's automotive division and the lucrative Ford Credit finance arm.

Ford's global profit margin of 5% on the core auto business last year is in the bottom tier of major auto companies and well below the 9% operating margin GM reported through the first three quarters. A company that enjoys a lead in the profitable market for large pickup trucks, Ford is now finding itself on more equal ground with Fiat Chrysler Automobiles NV when it comes to regional profits.

On Wednesday, Ford Chief Financial Officer Bob Shanks said the auto maker needs to do a better job managing the business to weather swings in raw-material costs and exchange rates. He said the company's profit margin "should be 8% or more," which is Ford's longer-range target.

"One of the reasons why perhaps you're not hearing as much from others about [commodity prices] is because they're fitter," Mr. Shanks said. "Despite whatever the hit is on their business, they're still able to hit a margin that's appropriate. Our issue is we can't do that."

Mr. Hackett has outlined a corporate "fitness" plan that aims to cut $14 billion in cumulative costs through 2022. He wants to simplify key areas of the business, from the way vehicles are engineered and built to the number of model combinations available on dealership lots.

Ford said fourth-quarter operating income fell 19% to $1.7 billion, hurt by the higher cost of steel, aluminum and other commodities, as well as unfavorable foreign-exchange rates. Earnings per share were 39 cents, lower than the 42-cent average forecast of Wall Street analysts.

Revenue rose 7% to $41.3 billion, surpassing analysts' expectations of about $37 billion.

Fourth-quarter operating profit in North America fell 16% to $1.6 billion, as higher warranty costs offset strong sales and pricing on Ford's flagship pickup-truck business. A spokesman said most of Ford's roughly 57,000 unionized U.S. workers will get profit-sharing bonuses of about $7,500, based on 2017 North American profit.

Ford's stock price fell to a three-month low earlier this week and closed at $12.05 Wednesday. Mr. Hackett's hiring was expected to address investor concern about a stalled stock price, but the company's valuation remains mired below $50 billion, significantly lower than GM's market capitalization.

Ford outlined how much it will cost to catch up in the emerging car-technology war taking place between conventional auto companies and tech giants, such as Alphabet Inc. and Apple Inc. The company is now breaking out its performance related to so-called Smart Mobility efforts, including driverless-car research, saying it lost about $300 million on those efforts in 2017.

"Ford's strategy will take several years to bear fruit," Deutsche Bank analyst Rod Lache said in a research note this month. Analysts have expressed concern about Ford's ability to keep pace with its closest rival, GM, at a time when major changes could be confronting the car business.

"The performance gap between the two appears to continue to widen," Evercore ISI said in a research note last week. GM has been credited with keeping profits strong amid a slowdown in the U.S. market and as it backs away from several other major markets, including Europe.

GM reports earnings Feb. 6. It has recently unveiled plans to build autonomous electric cars in Michigan and ramp up testing and deployment of robot taxis in 2019, and Navigant Consulting now ranks GM's as No. 1 and Ford as No. 4 among about 20 companies working on autonomous cars.

As Mr. Hackett works to close the gap on future projects, his lieutenants have been charged with employing his fitness plan. Jim Farley, Ford's global markets chief, recently told analysts the company is behind on overhauling key areas of the business, including product development.

"Our business structure is out of sync with our outlook on revenue...out of sync with our competitive set," Mr. Farley told analysts last week. "We're taking urgent action to increase our profitability."

Mr. Shanks said Wednesday that steel and aluminum prices began rising in late 2016 and are projected to go higher this year amid growing global demand. He said those two materials account for roughly two-thirds of Ford's raw-material purchases.

Write to Mike Colias at Mike.Colias@wsj.com

(END) Dow Jones Newswires

January 24, 2018 18:14 ET (23:14 GMT)