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Lower Costs Boost Ford’s Earnings

October 14, 1998

DEARBORN, Mich. (AP) _ Ford Motor Co.’s billion-dollar profit in the third quarter is more evidence that the world’s No. 2 automaker has become the industry’s most successful cost butcher.

Ford trimmed the fat to the tune of $600 million in the three months ended Sept. 30. In the first nine months of this year, it saved $1.9 billion _ well ahead of its $1 billion target for all of 1998.

``Ford has exceeded its own aggressive expectations on cost-cutting,″ said analyst Michael Ward of PaineWebber Inc. ``In the auto industry, that’s very difficult to do.″

The savings, which offset higher incentive expenses and dismal sales in Europe and South America, contributed to a 10 percent increase in Ford’s third-quarter earnings. Wednesday’s report marked the company’s 10th consecutive quarter of improved earnings.

The $1 billion profit equaled 80 cents a diluted share and compared with an adjusted year-ago performance of $906 million, or 73 cents a share _ in line with Wall Street predictions.

Ford’s shares rallied on the news, rising $1.75 to close at $45.81 1/4 in trading on the New York Stock Exchange.

The savings have come through retooling plants to make them more efficient, employing fewer workers, lower costs for raw materials, reduced warranty expenses and relentless pressure on parts suppliers.

``Ask any supplier and they will tell you that Ford is at their door early and often for price reductions,″ said analyst Alan Baum of IRN Inc. ``Ford in many suppliers’ view has surpassed General Motors in terms of its aggressiveness.″

Ford executives said they expect continued savings. Chairman Alex Trotman said the Ford 2000 program ``has given us a glimpse of what we can accomplish for our customers and shareholders.

``We have strengthened our balance sheet, increased our dividend, and year-to-date our total return to shareholders has outperformed the market by a wide margin,″ Trotman said. ``We believe we are well-positioned heading into 1999.″

GM and Chrysler Corp. also have cut costs; their savings have helped the industry to weather a U.S. market in which prices have declined overall. But in the last two years, Ford has reaped the biggest benefits.

``They’ve done a phenomenal job of getting rid of stuff that was unnecessary in the process of building cars,″ said analyst Wesley Brown of Nextrend. ``Unfortunately, at some point that ends. Then it comes down to just selling the product.″

Ford did a good job of selling its products in North America during the last quarter, breaking a 12-year-old earnings record for the period. North American operations posted a $900 million profit, up 45 percent from the $620 million earned a year ago. The previous third-quarter record was $684 million.

The reason was a hugely profitable lineup of sport utility vehicles and pickups. Ford’s new F-series Super-Duty pickups, for example, bring in an estimated $10,000 each and are being snapped up as soon as they arrive on dealer lots, Baum said.

Overseas, the news was less rosy.

Ford’s European operations lost $273 million, about twice the $147 million loss a year ago. The loss mostly reflected the big cost of launching the Focus subcompact line, which replaces the Escort that represented 30 percent of Ford’s volume there. Lower exports to Brazil, Argentina, China and India also were a factor.

In South America, Ford lost $44 million, compared with a profit of $133 million a year ago. Ford doesn’t expect to meet its target of breaking even in the region this year, due to Brazil’s faltering economy.

``The outlook there is tough,″ said John M. Devine, chief financial officer. Ford is reassessing that market and may have to ``resize the business″ if sales volumes remain depressed, he said.

Executives were more optimistic about the United States.

``While some regions of the world face very challenging economic situations, the fundamentals for the automotive industry in the U.S., our largest market, continue to be solid,″ Trotman said.

Ford’s report closed the books on the Big Three’s third quarter. Combined earnings totaled $874 million, down 64 percent from $2.42 billion in 1997′s third quarter _ the drop due entirely to GM’s strike-related $809 million loss. Chrysler’s sales were up 55 percent at $682 million.

Devine played down the effect of the GM strikes on Ford. ``It probably had some impact on our share and on marketing costs, but not a great deal.″

Ford’s 1997 profit figure was reduced by $219 million to reflect the recent sale of Associates First Capital, a financial subsidiary. 1998 third-quarter sales totaled $32.64 billion, down slightly from the Associates-adjusted $33.98 billion in revenues a year ago.

For the first nine months of the year, Ford earned a record $4.9 billion, or $3.94 a diluted share, excluding Associates income. That compares with the previous high of $4.5 billion, or $3.67 a share, in the first three quarters of 1997.

Ford’s cash reserve grew to $22.9 billion from $22.3 billion at the end of the second quarter. That is more than GM and Chrysler have in their reserves combined.

Ford’s big parts-making unit, Visteon Automotive Systems, earned $150 million in the third quarter, up 32 percent from $114 million a year ago. Ford Credit earned $272 million, up from $258 million in the comparable period of 1997.

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