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Higher warranty costs, weak China sales impacted Ford's guidance, execs say

The head of Ford Motor Co. said the company is experiencing more headwinds than expected in the fourth quarter, specifically from higher warranty costs, as the company works to stabilize its business in China.

"We have lowered our adjusted EBIT guidance range to $6.5 billion to $7 billion, which suggests we will not grow adjusted EBIT this year as we intended," Ford President and CEO Jim Hackett said during the company's earnings call after reporting third-quarter results.

Ford said the lower guidance was prompted primarily by higher warranty costs, lower volumes in China and higher incentives.

"In terms of warranty costs, we are feeling the downstream impact of some products designed earlier in the decade," Hackett said. "But we've taken extensive actions to improve long-term quality and durability, including centralizing core engineering responsibility and bolstering our systems integration and design assurance processes."

Ford's CFO Tim Stone said the higher costs were specifically related to coverage.

"The bulk of the warranty cost increases are in North America," Stone said. "[The 2018] model year and before that are the model years where you've seen an increase in the higher time and service of warranty claims than we had accrued for and have been planning for."

In August, Ford extended warranties on 560,000 Focus and Fiesta cars after transmission issues were discovered.

Softening in China

Lower sales in China also contributed to Ford's lower guidance. Stone said wholesales declined 12% in the country, while consolidated revenue was down 27%.

Stone said Ford's EBIT loss in China was $300 million, an improvement of $100 million year over year driven by lower structural costs and positive market factors in consolidated operations.

However, Stone said the automaker is "working to stabilize" its China business.

This includes launching products "tailored to the needs of Chinese customers," Stone added.

Staying competitive

Ford's vehicle incentives in the quarter were slightly higher than expected, according to Joe Hinrichs, Ford's president of automotive.

The competition in the pickup truck market caused Ford to increase incentives on the Ranger and F-Series, he said.

"If you look at the Ranger launch this year, it's gone very well," Hinrichs said. "We've been gaining share every month this year. We had 18% segment share in September. But as you could expect, the competitors haven't let us just grow that share without any fight. So we've seen a little bit higher incentives on Ranger than we'd expected."

In the fourth quarter, Ford is expecting to recognize the full impact of ratification-related payments linked to the company's negotiations with UAW.