The silhouettes of attendees are seen in front of Ford Motor Co. signage displayed during the 2018 North American International Auto Show (NAIAS) in Detroit, Michigan, U.S. (Photographer: Andrew Harrer/Bloomberg)

Ford Warns Restructuring Will Cost $11 Billion, Take Years

(Bloomberg) -- Ford Motor Co. warned investors it’s embarking on a costly restructuring that will take years and punctuated an ugly day for Detroit’s big carmakers, with all three cutting their 2018 profit forecasts. The shares fell in late trading.

The second-largest U.S. automaker expects to rack up $11 billion in charges over the next three to five years, as it exits businesses beyond North American sedans. A stale product lineup in Asia and costs to comply with tougher emissions rules in Europe contributed to both regions swinging to losses in the second quarter. The struggles Ford is having with those operations spurred the decision to slash its earnings projection for this year.

Ford joined General Motors Co. and Fiat Chrysler Automobiles NV in lowering forecasts for 2018, making Wednesday arguably the worst day Detroit has seen since the depths of the global financial crisis that sent two of the town’s traditional car-making giants into bankruptcy. Ford vowed to cut deep as it confronts an uncertain future in which U.S. President Donald Trump is considering tariffs on imported autos and parts, on top of steel and aluminum levies that have already driven up costs.

“The team is making the hard decisions to raise the returns of underperforming assets where we can,” Chief Financial Officer Bob Shanks said in a statement. “We will disposition the rest. This type of profound redesign will take time, and we will communicate as decisions are made.”

Ford Warns Restructuring Will Cost $11 Billion, Take Years

Ford now expects adjusted earnings will drop to as low as $1.30 a share, from an earlier projection for as much as $1.70. The Dearborn, Michigan-based company’s Asia Pacific and Europe operations lost a combined $467 million in the second quarter. A year earlier, the automaker was profitable in both regions.

The shares fell as much as 5.1 percent as of 5 p.m. in New York, after regular trading. Ford had dropped 16 percent this year as of Wednesday’s close.

Rescheduled Meeting

Ford Warns Restructuring Will Cost $11 Billion, Take Years

Chief Executive Officer Jim Hackett shocked the auto industry -- and many of Ford’s dealers -- when he announced plans in April to abandon the shrinking North American sedan market and go all-in on higher-profit sport utility vehicles and pickups.

Ford is now signaling it’s going to proceed more deliberately with major restructuring moves. It’s rescheduling an investor meeting that had been planned for September to when it can share more specifics about its plans.

Hackett, 63, took over as CEO last year and has pledged to cleave $25.5 billion in costs by 2022 to reach a long-held target for an 8 percent profit margin. Three months after saying it would be able to reach this level of earnings by 2020 -- two years earlier than planned -- Shanks said this will be “more challenging” after the erosion of Ford’s business in China and Europe.

China sales plunged 25 percent in the first half, dogged by aging of top models including the Focus and Escort. Redesigned versions of those cars are rolling into showrooms later this year, and 60 percent of the company’s lineup will be new or refreshed by the end of 2019.

Ford Warns Restructuring Will Cost $11 Billion, Take Years

China’s escalating tariffs in retaliation to U.S. levies cost Ford about $50 million in the second quarter, and the damage may total $200 million to $300 million for the year, Shanks said.

As is the case with its Asia Pacific operation, Ford now expects to lose money in Europe this year. Earnings before interest and taxes fell in the second quarter on higher costs that are primarily regulatory related. The European Union is in the process of switching to a stricter emissions-measurement system known as the Worldwide Harmonized Light Vehicles Test Procedure, or WLTP.

Expenses linked to restructuring the company will cost Ford about $7 billion in cash over the five-year span that the revamp is expected to take.

North America Issues

Even North America -- Ford’s breadwinner region -- struggled in the second quarter, with its profit margin dropping to 7.4 percent. The company would have earned a margin of about 10 percent had it not been for a supplier fire that cost the company about $600 million in lost production of high-margin vehicles. A $299 million class-action settlement related to Takata Corp. air bags also dragged on results, Shanks said in a Bloomberg Television interview.

North America also accounted for a “good portion” of the $300 million hit Ford took in the quarter linked to costlier commodities, he told reporters in Dearborn. About $145 million of that is related to tariffs, which have inflated prices for steel and aluminum.

“The price of steel, the price of aluminum has really skyrocketed well above the prices we see outside of the United States,” Shanks told Bloomberg TV. At the start of the year, Ford had anticipated $1 billion in additional commodity costs. It’s now projecting about a $1.6 billion hit, he said.

©2018 Bloomberg L.P.