Ford Turns $2.6 Billion Q1 Profit in ‘Uncertain World’

Ford may have beat analyst projections by posting first-quarter net income of $2.6 billion, but there are potential stumbling blocks ahead in what CEO Alan Mulally calls an “uncertain world.”

In a conference call with analysts and journalists, Mulally says chief among concerns is the lingering uncertainty surrounding parts shortages due to the March 11 earthquake and tsunami in Japan.

Most of Ford’s global operations, with the exception of its Asia/Pacific facilities, have not experienced significant production disruptions, the Ford CEO says. And none are expected.

Related document: Ford 1st Quarter 2011 Earnings

But that doesn’t mean there hasn’t been some hand-wringing by management.

“Imagine what it was like when we couldn’t get commitments on everything and all our (guidance) charts were red,” Mulally says. “It was fantastic to see those charts go to green.”

Ford was able to minimize the impact by working closely with key suppliers to find alternatives where parts shortages appeared imminent, he says.

If component supply becomes an issue in the key North American region, Ford will take steps to ensure dealers are provided with the most profitable vehicles, Chief Financial Officer Lewis Booth says.

“If we have to manage ourselves through any parts shortages, we’ll do so in favor of vehicles that have decent margins consistent with making sure dealers are supplied with a good mix of vehicles,” he says.

Mulally says Ford on track to solid profitability in 2011.

Rising commodity costs, which Ford predicts will increase this year by about $2 billion, also have the attention of top executives. Part of that jump is the result of higher volumes, as the auto maker continues to launch new vehicles, such as the ’12 Ford Focus.

Structural costs also continue to trend upward, increasing $400 million in the first quarter.

The auto maker is keeping an eye on the conflicts in the Middle East and the rapidly increasing price of oil, which Mulally says is driving consumers toward smaller vehicles, a trend he expects to continue.

Despite consumers downsizing to smaller models, Ford’s series mix has improved as buyers opt for higher trim levels and other up-market features, Booth says.

“The strength of our products drove favorable mix improvements in the quarter,” he says, noting the auto maker recorded a $900 million hike in net pricing. “In full-year 2011, we expect more (gains from) series mix than product mix.”

While Ford has vastly improved the quality of its vehicles over the last few years, issues remain, Mulally says, without divulging details.

The auto maker recently has faced criticism for its multi-media MyFord Touch interface and has launched a number of recalls, including calling back 1.2 million F-150 pickups earlier this month because of defective airbags.

There are “near-term issues we’re addressing for our quality outlook,” Mulally says.

Although challenges loom, Ford says it is on track to be solidly profitable in 2011, building on a first-quarter in which total revenue hit $33.1 billion, up $5 billion from year-ago.

First-quarter growth was driven by improvements in nearly every region of the world. In North America, Ford posted net income of $1.8 billion, a $591 million jump from like-2010.

With anticipated vehicle shortages from Japanese auto makers, Ford is in a good position to build North American sales this year, but capacity constraints may limit this opportunity. Mulally says Ford’s U.S. plants currently are running at about 92% of capacity, but adds the auto maker is “looking at how to increase production to support an increase in demand.”

Outside of North America, most regions posted a solid quarter, including Europe, which has yet to experience any significant economic growth following the global recession.

In the first quarter, Europe reported net income of $293 million, up $186 million from year-ago.

“Our plan in Europe starts with our product line,” Mulally says. “We have a number of new and refreshed vehicles, and we’re seeing our customers appreciating them. Also, our European operations worked hard to manage their cost structure.”

Mulally is especially bullish on the Russian market, which he says will be the largest in Europe by 2015. The auto maker recently formed a joint venture with Russian auto maker Sollers, which is expected to double Ford’s capacity in the region.

“It gives us scale right away and aligns us with where industry and government wants to take (the Russian automotive industry),” Mulally says. “It’s going to be a positive for us going forward.”

In the Asia/Pacific region, Ford posted net income of $33 million, up from $23 million in like-2010. In South America, first-quarter net income was $210 million, up $7 million from year-ago.

Mulally says Ford’s strong performances throughout the global markets has enabled the auto maker to slash its debt by $2.5 billion and move closer to investment grade, which would allow the company to borrow money at a lower interest rate.

“We’re moving aggressively toward investment grade,” he says. “It’s an important objective for us.”

Ford ended the year with $21.3 billion automotive cash, an increase of $800 million compared to the end of fourth-quarter 2010.

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