Ford Posts Q3 Profit on Strength of North America

Ford surpasses analysts’ projections by posting its best-ever third-quarter pretax profit of $2.2 billion, up $200 million from like-2011, while net income of $1.6 billion remains flat with year-ago.

Once again, the lion’s share came from North America, which saw a Q3 pretax profit of $2.3 billion, Ford’s best quarterly result since at least 2000, when it began recognizing the region as a separate business unit. Additionally, North America garnered a staggering 12% operating margin in the quarter, considerably more than the industry norm.

Bob Shanks, Ford executive vice president and chief financial officer, says the North American operating margin is unlikely to remain at that level.

“Twelve percent is a very high number in our industry and isn’t a number in general you would expect to sustain over a long period of time,” he says today in a conference call with journalists and analysts. “But as we go ahead, we think North America will continue to carry the load with a healthy margin.”

Ford would like to see operating margins in the 8%-9% range for its global operations, with North America achieving 8%-10% on average, he says.

The auto maker currently is selling smaller vehicles at a profit in North America, something that was not possible in the past when it relied on large vehicles such as the best-selling F-150 fullsize pickup to offset losses in other segments.

Shanks credits the One Ford plan, which stresses building to demand, for making it possible to make money on vehicles such as the Fiesta B-car.

“If you go back five to six years ago, we lost a tremendous amount on small cars and made money on trucks,” he says. “Truck margins are still strong, but we’ve seen dramatic improvements on the rest of the portfolio. Will you make as much on a Focus as an F-Series? No, but you still have to make something. And that was key to the turnaround in North America.”

Ford is hoping the same strategy will pay dividends in Europe, where the industry is being battered by overcapacity resulting from a fall in consumer confidence due to the sovereign debt crisis.

The auto maker posted a Q3 pretax loss of $468 million in Europe, compared with a $306 million loss year-ago. Compared with North America, Ford of Europe’s operating margin was a negative 8.0%.

Ford last week detailed plans to shutter three European plants. The planned action is expected to reduce its overcapacity, excluding Russia, by 18% or 355,000 units, affect 13% of its total workforce and yield annual cost savings of $450 million-$500 million.

Ford also will launch a slew of new products in Europe based on global platforms. Shanks says the auto maker’s European restructuring efforts should result in a return to profitability by mid-decade.

“Europe is not North America,” he says. “It has excess capacity, but in other areas it’s very lean. So as we come out of this and invest in product, we will see efficiencies from (reducing) excess capacity.”

Ford faced a different set of issues in South America, where it posted a Q3 pretax operating profit of $9 million, down from $276 million in like-2011.

The auto maker’s pretax operating margin in South America was 0.4%, down 8.9 points from year-ago due to Brazil’s weak currency, unfavorable volume and mix and higher costs. Brazil is the region’s largest market.

Shanks says Ford plans to launch new global products in South America, including the EcoSport cross/utility vehicle. It also expects the region to be profitable for full-year 2012, but at a substantially lower level than 2011.

“The main thing that’s going to help is the investments we’re putting into product,” he says. “We’re taking a product lineup that is largely legacy products and going to all global products, and we’re going to expand the portfolio so segments we cover will go up. And we will continue to work on operating efficiencies across the business.”

In the Asia/Pacific and Africa regions, Ford posted a Q3 pretax operating profit of $45 million, up $88 million from year-ago. The region’s operating margin was 1.7%, up 3.5 points from like-2011. While the auto maker expects to post a full-year loss, due to investments in the first half, Shanks says funds spent to increase manufacturing capacity will help improve future profitability.

Also on the call today, Ford CEO Alan Mulally addresses quality issues regarding the auto maker’s MyFord Touch infotainment system and PowerShift dual-clutch automatic transmission, both of which were criticized in the Consumer Reports’ annual reliability survey that saw Ford plunge 12 places to No.27.

While calling the results “disappointing,” he says there have been a number of fixes made already and more to come, “but it takes time to go through the product line. What customers are saying is really important, and we will continually improve going forward.”

Ford ended the quarter with $24.1 billion in automotive gross cash, a net improvement of $1.8 billion compared with year-ago.

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