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Morningstar | Ford's 2Q Rough as it Cuts 2018 Guidance and Results Fall Hard in China and Europe. See Updated Analyst Note from 26 Jul 2018

Ford's second-quarter adjusted diluted EPS of $0.27 missed consensus of $0.31 and the company suffered from terrible results outside North America, as well as previously disclosed headwinds from the now resolved Meridian supplier fire impacting second-quarter F-Series volume. The poor environment in Europe and especially China led to management lowering its 2018 EPS guidance to a range of $1.30-$1.50 from $1.45-$1.70. We are lowering our fair value estimate to $13 from $14 to factor in new information around management's efforts to make Ford more physically fit, as CEO Jim Hackett likes to say. Ford expects to incur $11 billion of restructuring charges over the next three to five years, with $7 billion of this amount cash charges. Modeling these cash outflows and lowering our 2018 EPS to $1.39 from $1.60 results in the new fair value estimate. We model the restructuring over 2019-21 but this timing is likely to change as Ford gives more information. Management is not yet ready to disclose specifics on restructuring but we expect a lot of it to occur in Europe and South America and probably some in North America as Ford exits traditional sedans.

We describe Asia-Pacific's results as horrendous, with the unit losing $394 million for the quarter compared with a $167 million profit in the prior year's quarter. China drove essentially all of the decline. Management has previously said 2018 would be the bottom for China due to its too-old product lineup finally starting to be refreshed soon. First-half 2018 China volume fell by 25% and Ford China's second-quarter market share fell by 130 basis points year over year to 3.2%. Second-quarter Chinese equity income fell 98% to just $3 million and is down 70% in the first half of the year to $141 million. Overall second-quarter China losses (including consolidated operations) were $483 million as dealers rightsize inventory, equity income fell $192 million, and a $242 million volume and pricing headwind hit results hard.

Next year, China will have 60% of its lineup new or refreshed and Lincoln models currently made in North America will begin to be made in China starting in 2020 to avoid tariffs currently at 40%. By 2025, Ford China will have 50 new vehicles including eight SUVs and at least 15 electrified vehicles. The sooner the better because we now model total Ford equity income down about 50% in 2018 versus 2017.

Outside of the Ranger midsize pickup and some SUVs, Ford cannot make money in South America. Pricing and volume gains helped offset weaker currencies against the U.S. dollar and inflation pressure, but we expect some drastic restructuring to eventually be announced for the segment. South America lost $178 million in the quarter versus a $177 million loss in second-quarter 2017. Management now expects a 2018 loss in Europe compared with prior guidance of an improvement from a $234 million pretax profit last year. Higher variable costs, an old Kuga crossover, a slower than planned rollout of the new Focus, and a $106 million foreign exchange headwind led to the segment losing $73 million for the quarter compared with a $122 million profit in second quarter 2017. Management rightfully says it needs to increase its SUV mix contribution, but this will take more than a few quarters due to the time to launch new product.

There was much analyst disappointment on the call at the lack of restructuring specifics and management delaying its Sept. 26 analyst day to an undetermined later day when it had just announced the event in April's first-quarter earnings release. It is strange to see Ford so quickly change its mind on an analyst day and suggests the turnaround plan still has a long way to go; however, at least some restructuring numbers have been provided though only on the cost rather than also on the benefit side. Investors should expect frequent updates even on earnings days rather than all information coming out at a future analyst day.