Ford CFO: Better Cars Don't Come Free

DETROIT ( TheStreet) -- Ford ( F) continues to forecast a strong increase in U.S. auto sales in the second half of the year, but higher costs, largely related to its effort to make better cars, could diminish the benefit to the automaker.

On Tuesday, Ford reiterated its view that 2011 U.S. light vehicle sales will come in between 13 million and 13.5 million, well ahead of the July sales pace, estimated by J.D. Power to be around 11.5 million. In 2010, light vehicle sales totaled 11.6 million.

For the second half, "demand is there and as supply becomes available, following recovery from the Japan disaster, we expected to see gains in the third and fourth quarters," said CFO Lewis Booth, on Ford's earnings conference call.
Lewis-Booth
Ford CFO Lewis Booth

Moderating fuel prices are also a positive, Booth said. But he noted that recent economic weakness leads him to believe "the bottom end of the range is more likely now -- we were thinking the top end was more likely." That puts Booth closer to 13.1 million than to 13.5 million.

How much Ford shares can capitalize on the increased industry sales remains an open question, largely because Ford's costs are increasing. Cost increases were a big factor in second-quarter results, a strong quarter where sales increased, market share grew and Ford narrowly beat estimates, yet cost increases meant the company failed to surpass year-ago earnings.

The increases reflect, in part, higher commodity prices, but also Ford is spending more to enhance its vehicles. "The underlying thesis of the recovery at Ford is to have great products in all segments," Booth said. "As I've said all along, this stuff doesn't come for free. The only way to have great products is to have some additional costs." An example, Booth said, is the improved new Focus, built on a global platform. "You will not see us back away from world class products," he said.

Added CEO Alan Mulally, "We see generally an appreciation by the consumers of the content, no matter what the size of the vehicle is, whether F-150 or Fiesta or Focus."

In phrasing a question, Goldman Sachs analyst Patrick Archambault told Booth that while "for the last couple of quarters, you have offset costs with pricing, this quarter it does look like the leverage you would have gotten from the volume piece was offset by increases in fixed costs. What's going to allow you to outgrow fixed costs in subsequent periods?"

Booth responded that that Ford will "continue to get the benefit of investments in making new products," noting that "the further we get down the line on global products, the more we will see the benefit of scale."

Mulally cautioned that second-half profits will diminish from the first half. "We remain on track to deliver continued improvement for the full year, but second half results will not be as good, due to seasonal factors and increasing commodity costs and lower profit at Ford Credit as predicted," he said.

Also, Booth noted, higher fuel costs mean that car sales are increasing faster than pickup truck sales. "In North America, we're selling more cars, but cars have a negative profit effect compared to trucks," he said. Still, "selling more cars is what we wanted to do."

It's impossible to say whether Japanese production woes are responsible for Ford's market share increase, Booth said. After all, "we honestly couldn't follow up the increased demand for small cars during the second quarter. We are flat out of Fiesta, we are flat out of Focus." Mulally added that demand for the two small cars was "clearly led by the strength of the product line."

-- Written by Ted Reed in Charlotte, N.C.

>To contact the writer of this article, click here: Ted Reed

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