A look at the very first year of the Ford Bronco in this 1966 commercial ‘A Breed Apart.’ Detroit Free Press
Ford Motor Co. executives have warned for weeks that their second-quarter earnings report would be an epic disappointment for a company that emerged from 2019 weaker than expected financially, despite a healthy year for the industry.
Then the company surprised everyone.
Ford announced a $1.1 billion profit Thursday, counting a one-time investment gain from its partnership with Volkswagen in Argo AI, the autonomous driving technology company, of approximately $3.5 billion.
The automaker was facing hideous back-to-back quarterly earnings this year, worsened by the global pandemic. Ford felt pain even before the novel coronavirus shuttered factories in the spring. Three months ago, the company reported its first quarterly earnings net loss since April 2009 during the Great Recession.
Shortly after reporting that $2 billion loss, Ford warned things would get even worse.
Not counting the one-time gain from Argo, Ford reported that second-quarter earnings before interest and taxes — adjusted EBIT — was negative$1.9 billion, about $3 billion less than had been projected. That’s down from plus $1.7 billion in the second quarter of 2019. This year’s second-quarter net income of $1.1 billion was up from $100 million in the same quarter last year.
While self-inflicted mistakes last year hurt the company as it headed into this pandemic, CEO Jim Hackett and Chief Operating Officer Jim Farley have assured industry analysts that the company will do better.
On Thursday, the company said it delivered on that promise.
“I could not be prouder of the Ford team’s optimism and effectiveness as we manage through this pandemic,” Hackett said in a statement. “We delivered a strong Q2 while keeping each other safe, caring for customers and neighbors and assuring tomorrow.”
Last year, a botched launch of its popular Explorer dramatically slowed delivery of SUVs during a period when consumers were eager to buy, which could have created a financial buffer.
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All automakers are dealing with a fragile economy, job losses, record unemployment and uncertainty created by national and international health scares.
Crosstown rival General Motors also exceeded expectations when it reported Wednesday a net loss of $800 million, down 132% from the second quarter a year ago. Fiat Chrysler Automobiles reports earnings Friday.
It is Ford, however, that plans to build and deliver to dealerships later this year on a trio of high-profile projects: a 2021 F-150, the small Bronco Sport and the all-electric Mustang Mach-E SUV. The Bronco SUV is scheduled for 2021.
Cash is essential during these product launches.
Ford ends the quarter with $39.3 billion in cash on hand and $39.8 billion in liquidity.
A year ago, Ford had $23.2 billion in cash on hand and $39.8 billion in liquidity.
“I’m optimistic,” Tim Stone, chief financial officer, said during an investor call. “We’re well positioned for what lies ahead.”
He added, “Our journey will be a long one. Ford is positioned to win this race.”
Ford executives cautioned that the company would incur significant financial challenges in the second half of the year.
Hackett said, “We’re keenly focused on cost and cash discipline.”
Not prepared?
Hackett, since taking the reins at Ford in 2017, has acknowledged publicly during sales and earnings reports that things haven’t been going as hoped. He and Bill Ford Jr., executive chairman of the company, have tried to keep employees calm.
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Yet Ford “so obviously prepared” in the past for a downturn while “this time, it just didn’t seem like anyone was prepared for it,” said Sam Fiorani, vice president of global vehicle forecasting at AutoForecast Solutions based in Chester Springs, Pennsylvania.
“This is not about the pandemic. We’ve been saying troubles were coming for more than a year,” he said.
Market analyst Jon Gabrielsen said Ford’s finances appear fragile.
“Ford has about 50% more debt as GM for the same size company,” he said. “Ford is only able to continue to claim good liquidity by increasing debt and calling it cash.”
Fiorani wonders whether consumers will actually spend money on “lifestyle products” like the Bronco and Mustang Mach-E when people are losing jobs at an alarming rate.
“The market is not prepared for people to be that casual with their money,” he said.
But Ford said Thursday it has received about 150,000 Bronco reservations. Potential customers may show their commitment with a $100 refundable deposit.
The Bronco exceeded all expectations and appears to be perfect to take on Jeep in the off-road segment, Hackett said during an investor call. “We have proven credibility with this off-road space. We are actively working to increase our annual production right now.”
‘Stop the bleeding’
Ford must go beyond just touting its new products and offer more, analysts urge.
“You always have to control costs,” said Carla Bailo, president and CEO of the Ann Arbor-based Center for Automotive Research. “When you’re in a crisis, the first thing you do is hammer down those costs. You must make sure you stop the bleeding wherever the bleeding is. That’s one lever that has to be strongly managed. It would be helpful to understand what that is.”
The demands on Ford now are especially tough, she explained.
“This year, the new product launches have to be flawless. They’ve got to come up to speed and get products to the dealers and hopefully the consumer will have the appetite and financially be able to go forward,” Bailo said. “These rollouts need to be seamless.”
She said, “We’ve been hearing from other automakers, especially GM, about what they are doing to control costs. We haven’t heard so much about that coming from Ford.”
‘Get religion’
John McElroy, a longtime industry observer and “Autoline” host, also said Ford appears to be trailing GM and other competitors when it comes to efficiency.
“Ford has made cuts but GM has been much more open and specific,” he said. “Remember, GM started their reorganization in 2016. GM prepared for a worst case scenario like no other automaker in the world. So GM … got the company into fighting shape before the crisis hit.”
Industry observers credit GM CEO Mary Barra and GM Chief Financial Officer Dhivya Suryadevara for setting a gold standard.
“General Motors has probably led the industry in terms of doing restructuring when times were good,” McElroy said. “Everybody gets religion when the market goes south, then they become very aware of all the cuts they need to make. GM did that when the market was booming, so it’s got a leg up on the competition right now.”
Still, if Ford successfully launches its newest products, everything will be fine, he said.
“Ford is very lucky it’s got three potentially profitable vehicles. Ford needs profitable vehicles now more than ever,” McElroy said. “The Bronco will be built at the Wayne Assembly Plant, which used to make the Focus and C-Max. Now it’s making Rangers. You’re going to see a $1 billion profit swing at that plant.”
VW fears ‘catastrophic’ issue
Ongoing challenges include significant warranty costs that have exceeded company expectations. And that’s not all.
Ford and VW began a limited collaboration in January 2019, centered on development of commercial vans and pickups in certain markets starting in 2022, and expanded their relationship in July to partner on autonomous driving and electrification.
Adding to the latest headaches, Ford and Volkswagen electric models may be delayed by a trade-secret fight, according to a Bloomberg report on July 21.
The two companies “warned a swirling legal dispute between two South Korean battery suppliers could threaten their plans to start producing electric vehicles in the U.S.,” Bloomberg reported. “The dispute between SK Innovation Co. and LG Chem Ltd. could undermine Ford’s intention to make an electric version of the F-150 in Michigan from 2022 and VW’s efforts to build battery-powered cars in Tennessee the same year.”
The situation, which VW warned could lead to “catastrophic supply disruption,” involves claims that SK Innovation is trying to manufacture batteries LG Chem says were developed using stolen trade secrets.
Wall Street analysts peppered Ford with questions about batteries and executives said they’re monitoring various issues and opportunities.
Happy news
When Ford reported its latest earnings Thursday, the financials reflected a dip in Ford and Lincoln vehicle sales but its market share edged up slightly to 14.9%, according to Kelley Blue Book.
Explorer sales went up 12% to 44,839 units, “a big improvement from previous quarters as Ford has struggled to get the Chicago plant running properly to produce ample supply of the SUV, but it is still well below the second-quarter 2017 high of more than 70,000 Explorers,” wrote Michelle Krebs, executive analyst at Cox Automotive, in her earnings analysis.
Ranger sales are up 20% to 25,008 trucks this quarter. The valuable F-Series saw sales drop 23% to 180,825 trucks.
Ford continues to sell fewer vehicles at a higher profit per customer, with average transaction price tags up 6% for a Ford to $43,999 — and up 6% for a Lincoln to $47,107. This marked the highest average transaction price for the company and individual brands in any second quarter, Krebs noted.
Ford was led by Explorer at $47,633 per vehicle, and F-Series at $51,688 per truck.
Lincoln saw average transaction prices grow as the Navigator SUV pushed past $90,000.
Meanwhile, Ford Credit saw earnings before taxes of $543 million in the quarter, down from $831 million in the same quarter last year.
After increasing credit loss reserves by $486 million last quarter, due to COVID-19, Ford Credit increased reserves this quarter by $54 million, as the company is forecasting lifetime losses at about the same level as it did in the first quarter, said spokesman Brad Carroll.
Ford was expected to report a loss of $1.18 per share and revenue of $15.93 billion. But the automaker reported a second quarter loss of 35 cents per share, adjusted, or a profit of 28 cents per share diluted, beating Wall Street analyst expectations.
Rising prices
Krebs cited data that suggested reason for optimism:
- Ford’s total sales, including both the Ford and Lincoln brands, fell 33% to 432,279 vehicles, a bit less than the overall industry.
- Ford brand sales were down 34% to 411,018 vehicles, producing a 14.17% market share, up from 14.10% in second quarter 2019.
- Lincoln sales were off 18% to 21,261, causing its market share to climb to 0.73% from 0.59%. “Lincoln’s star performers were the new Aviator and relatively new Corsair,” Krebs wrote. “The Aviator, which had sales of 4,016 vehicles, has been challenged for inventory as it is built at the same struggling plant as the Explorer.”
T.R. Reid, Ford spokesman, told the Free Press the company recognizes its challenges and has fixed issues of concern.
“The Explorer launch was an anomaly,” he said. “We’ve got to execute every next time. That’s not specific to in the middle of a pandemic but true all the time. Ford has made its name on execution. … We always recognize when it comes to execution what’s most important is the next launch, the next project. That’s what everybody at the company is focused on.”
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‘Flawless’
David Kudla, CEO and chief investment strategist with Mainstay Capital Management, a Grand Blanc investment adviser who manages $2.7 billion in assets, wrote to investors, “Ford will continue to face obstacles, even more so than other automakers, as they have been overhauling their business during a pandemic.”
He pointed out that Ford saw its quarterly sales drop 33.3% year-over-year with SUVs down 22% and cars down 34.7% but trucks only down 0.4%.
“Strong direction from CEO Jim Hackett is needed to calm shareholders and consumers alike,” Kudla wrote. “After a bruising Explorer launch last year, the execution of the Bronco … has got to be flawless.”
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Contact Phoebe Wall Howard: 313-222-6512or phoward@freepress.com. Follow her on Twitter @phoebesaid. Read more on Ford and sign up for our autos newsletter.
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