Ford Still Bullish on Europe, China Despite Underwhelming Q2 Results

Ford sees light at the end of the tunnel in Europe and calls the recent downturn in China a temporary situation as it releases its second-quarter 2015 earnings results today.

“We see some green shoots, but we know we have a lot of work to do,” Ford CEO Mark Fields says of Europe on the Q2 earnings call. Ford kept stable in the region, dropping $14 million, the same pre-tax profit it booked in Q2 2014.

Fields says some of those green shoots include higher commercial-vehicle sales, as well as pent-up demand and an improving mix.

“When customers are ordering their vehicles they’re ordering them more well equipped,” he says of a positive development in the European market in the second quarter.

Ford saw a 3% increase in wholesale volume in Europe, to 389,000 units, on higher industry sales in 20 European countries and higher industry sales and Ford share in Turkey.

Overall, Ford is gaining market share in Europe, led by its Transit van assembled in Turkey, as well as the new Mondeo sedan and continuing strong sales of its SUVs.

“We remain cautiously optimistic on the continued industry growth in the second half,” Fields says of Europe, where first-half new-car registrations rose 8.2% to 7.4 million units according to the European Automobile Manufacturers Assn.

In China, falling commercial-vehicle sales and pricing pressures are contributing to a slowdown.

But Fields says any dip there is temporary, as Ford forecasts sales in the world’s biggest new-vehicle market to hit 30 million annually in the next 5-10 years, driven by China’s less-populated Tier 3-6 cities.

“We are seeing larger percentage growths in those cities, and a lot of it has to do with the fact those cities don’t have the restrictions around license plates and lotteries,” Fields says.

Without getting specific, the Ford CEO says there will be “a lot” of dealer appointments by Ford this year in Tier 3-6 cities. He notes Ford’s Escort is “really resonating with consumers there.”

Chief Financial Officer Bob Shanks says the brand’s market share already is good in those lower-population cities which “will position us well going forward.”

Ford’s market share in China rose to 4.7% in Q2 2015 from 4.6% in the same period year-ago.

Ford’s Chinese results are included in its Asia/Pacific earnings, a region where the automaker saw a record pre-tax quarterly profit of $192 million due to lower costs and favorable exchange rates in the ASEAN, Australian and Indian markets.

Revenue in the region, excluding Ford’s Chinese JVs, fell 15% to $2.4 billion, with the automaker citing lower volumes and weaker currencies for the drop.

Shanks says Ford’s China team has reacted quickly to the market slowdown, taking 33,000 units out of the automaker’s second-quarter production plan there.

He says Ford similarly will manage its newly opened plant in Hangzhou with joint-venture partner Changan, although the automaker feels “quite good about the performance in the second half relative to the first half.” Ford is launching a 3-row Edge CUV in China in the year’s final six months, as well as a new Taurus sedan and the Everest SUV. All three are higher-margin products expected to sell well, Fields says.

Ford continues to spend strongly in China on engineering new vehicles and investing in launching its Lincoln luxury brand there. Shanks says those engineering expenditures will be recouped down the road via royalty payments from JVs.

Globally Ford earned $1.9 billion in the second quarter, a 44% rise from like-2014 on sales of bigger, more expensive vehicles.

In North America, it saw best-ever quarterly revenue of $2.6 billion, rising from Q2 2014’s $2.4 billion.

But Shanks is quick to note the F-150 pickup was not a major contributor to that record result, as inventories were below average in Q2.

Fields expects F-150 inventory to hit normal levels in the third quarter, and he calls last week’s headlines about a $10,000 incentive on the vehicle not entirely correct.

“In some cases it was $10,000, but our average incentive is $3,900,” he says, noting $10,000 may reflect incentives available on all vehicles dealers can add up and possibly includes money dealer associations may add themselves.

Ford lost $185 million in South America, due to lower industry sales and weaker currencies and dropped $46 million in the Middle East/Africa, due to long lead times and volatility surrounding vehicles sourced from other markets.

Ford is sticking to its full-year 2015 forecast of a pre-tax profit of $8.5 billion-$9.5 billion, with higher automotive revenue seen vs. 2014 and global industry sales of 86 million-89 million units.

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