Ford Motor Company (NYSE:F) reported this past week that its second-quarter profit was down 44% from its result in the second quarter of 2017. That was a surprise: Wall Street had expected Ford to report bad news from China, and it did, but it hadn't expected to also hear bad news from Europe, where Ford's sales have been good.
Worse, Ford executives added to the growing list of questions and concerns around its ongoing "fitness improvement" effort by disclosing the effort's likely huge cost -- while still refusing to explain exactly how Ford is planning to spend that money.
In other words, it was a report full of surprises, and not the kinds of surprises that investors like. Here are three big ones.
$73 million: EBIT loss in Europe
Ford had a good solid quarter in Europe -- or so it had seemed before its earnings report, which made its $73 million loss a surprise.
The Blue Oval's sales in the Old World rose 3.4% in the second quarter, on strong demand for SUVs and good sales of its European mainstays, the Fiesta and Focus. Americans don't think of the Focus and Fiesta as particularly profitable products, but they're huge sellers in Europe and Ford has been working to boost their profitability. The company introduced an all-new Fiesta in Europe last year, adding upscale options in hopes of getting higher margins, and plans to follow suit with an all-new Focus shortly.
But the expected higher margins didn't arrive in the second quarter. Part of the problem is that European buyers have increasingly favored SUVs, which has softened demand for the two small stalwarts. A related problem: Ford's mainstay SUV in Europe -- a near-twin of the Escape, called the Kuga -- is dated. The company is losing some of those customers to other brands.
But exchange rates have also been a big problem, as Ford's global markets chief, Jim Farley, explained during Ford's earnings call:
The biggest issue we face is the U.K. We're the #1 brand in the market. Back in '16, we made $1.2 billion in Europe, and most of it was in the U.K. Brexit and the continued weak sterling has been a fundamental headwind for our European business. ... Taking all of these factors into account, we now expect to deliver a loss this year in Europe.
That last sentence is a change to Ford's guidance, by the way. It said in April that it expected its 2018 profit in Europe to be higher than the $234 million it earned in 2017. That's what made this result a surprise.
$3 million: Ford's equity income from its China joint ventures
Ford's Asia-Pacific region posted a second-quarter loss of $394 million, down from a $167 million profit a year earlier. Much of that is attributable to China, where Ford's sales have dropped sharply over the past couple of years. Ford's sales in China were down 31.3% in the second quarter.
We knew that Ford's China result wasn't going to be good, but it was striking to see this number inside the results: Ford earned just $3 million in equity income from its China joint ventures. Simply put, that's unprecedented.
$11 billion: The cost of Ford's business overhaul
It has been over a year since Jim Hackett took over as Ford's CEO. In that time, he and other senior executives have talked generally about improving Ford's "fitness" by refocusing its investments on its more profitable lines of business. But it wasn't until Wednesday evening's earnings report that we heard what that fitness improvement effort will cost, and it was quite a surprise: $11 billion over the next three to five years.
That number was a surprise for a few reasons, including this big one: Hackett and his team have yet to present the details of their overhaul plan for Ford to investors. Raising analysts' eyebrows further, Ford also said on Wednesday that an investor briefing on the plan that had been scheduled for September will be indefinitely postponed.
Several of the analysts on Ford's earnings call were not happy with that news. Morgan Stanley's Adam Jonas was blunt with CFO Bob Shanks:
I just can't really think of an example where for such an important restructuring, it's such large numbers, and you're kind of almost teasing the market with these very large numbers.
I'm concerned that having seen examples of people that restructured successfully, including one we lost today, laying it all out in a narrative that can be understood, that can be on the back of a card, like from the Mulally days, that had a powerful impact. Because I think the risk is that this industry is so dynamic that as that narrative plays out, the rules change, your free cash flow moves negative, and then we're dealing with a moving bar and we don't know what to compare it to.
I really do hope you can reconsider the communication strategy, because it's just not good enough, Bob.
Of course, the reasons Ford hasn't yet shared all of the details of its plan are almost certainly that it hasn't yet figured out all of the details, and some of its plans will have dramatic effects on employees and other stakeholders, and it wants to communicate those parts of the plan carefully.
Those concerns are understandable. But an awful lot of Ford investors, including your humble Fool -- a Ford shareholder since 2009 -- share Jonas' frustrations.