Ford Posts $2.6 Billion Pre-Tax Profit; Europe Shows Signs of Life

Ford beats most analyst projections by posting a $2.6 billion pretax profit in the second quarter, with all business units, with the exception of South America, reporting positive results.

The most surprising aspect of the results, which mark the 17th profitable quarter by the automaker, is the $14 million pretax profit in Europe where the auto industry has seen sales stagnate.

It is Ford’s first quarterly profit in the region since the market took a downturn three years ago.

Ford credits the improvement to lower operating costs and favorable exchange rates, but notes the profit was offset by some joint ventures, particularly in Russia, where a down market and geopolitical concerns have created uncertainty.

“At this point we don’t see issues in Russia affecting our ability to reach profitability (in Europe) by 2015,” President and CEO Mark Fields says in a conference call with analysts and reporters. “The Russian environment is clearly difficult, but has the potential to be the largest (market) in Europe over time. Right now it’s very challenging and fluid.”

Fields says Ford is working with Russian JV partner Sollers to improve its business outlook but does not disclose details.

North America again contributes the most to Ford’s quarterly gain, posting a pretax Q2 profit of $2.4 billion, an increase of $119 million from year-ago. Not all went well for Ford in the region, however. The automaker saw its U.S. market share drop 1.2 percentage points from like-2013 to 15.3%, while wholesale volume and revenue fell 5% and 3%, respectively.

Ford should get a boost in North America with the launch of the all-new ’15 F-150 later this year. Fields quells concerns the launch could face hurdles as the automaker transitions from a largely steel pickup to an aluminum-intensive model.

“We’ve been testing the riveting and adhesive processes for over a year and when you look at it today, we feel confident the development and try-out processes has positioned us well for an on-time launch with quality,” Fields says. “The innovative approach the team is taking going to launch is very comforting to us.”

The Asia-Pacific region, with a strong contribution from China, posted a pretax profit of $159 million, up $29 million from year-ago.

“When you look across the (Asia-Pacific) region, nine of 12 markets grew share, and in China we had record share and we’re getting a lot of growth in Tier 4-6 cities where there is a lot of growth,” Fields says. “The consumers we’re attracting are younger and have higher income (than industry average) and our retail sales are mostly from first-time buyers or (consumers) buying an additional vehicle. We think that positions us well for growth going forward.”

The one sore spot in Ford’s Q2 financial performance was South America, where the market has been slammed by slowing gross-domestic-product growth, lower industry volume, weak currencies, high inflation and policy uncertainty in some countries.

Ford is transitioning from legacy products in South America to global products as part of the One Ford strategy. The move will lead to lower product-development costs as they are spread out across all markets.

The arrival of global products, including the soon-to-be-released Ka minicar, are reasons for optimism going forward, Fields says.

The Ka “is a very important launch,” he says. “The segment is over 50% of the industry in places like Brazil, and the initial response has been very encouraging. We’re looking forward to getting it into the marketplace and growing business.”

Ford’s second-quarter net income was $1.3 billion, or $0.32 a share, an increase of $78 million compared with year-ago. The automaker ended the quarter with automotive gross cash of $25.8 billion, exceeding debt by $10.4 billion.

Fields, participating in his first quarterly conference call since becoming CEO July 1, says he has no intentions of changing the One Ford strategy conceived by his predecessor, Alan Mulally.

“Because there is someone else sitting in the chair there’s been indication there has to be a new strategy, but I wouldn’t assume that,” he says. “My message to the team is one of continuity and also acceleration of the plan. That message resonates with the team, particularly in an environment where there is a lot going on in the industry and around the world.”

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