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Ford profit driven down by North America, warranty costs

The company logo is seen on the bonnet of a Ford car during the media day ahead of the 84th Geneva Motor Show at the Palexpo Arena in Geneva
The company logo is seen on the bonnet of a Ford car during the media day ahead of the 84th Geneva Motor Show at the Palexpo Arena in Geneva

By Ben Klayman and Bernie Woodall

DETROIT (Reuters) - Ford Motor Co posted a lower-than-expected first-quarter profit on Friday as the No. 2 U.S. automaker reported $400 million in higher warranty costs in North America, sending shares down more than 3 percent.

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.

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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