Ford's Q2 pre-tax profit rises 1.6% y/y to USD2.6 bil.

During the second quarter of 2014, Ford's deliveries and revenues were relatively flat, up only 1% globally year on year (y/y). Net income reversed its prior decline, increasing 6.3%, although it was still down 19.1% for the first half of 2014. The second quarter delivered a pre-tax profit of USD2.10 billion, down 3.1%. The automotive operating-related cash flow was USD2.6 billion for the quarter, and Ford closed the quarter with about the same gross cash, USD25.8 billion. This has resulted in Ford improving its outlook for operating-related cash flow during "strong first-half performance."

Given Ford's 2014 launch schedule, which includes the aluminium F-Series and Mustang, the company's profit outlook for 2014 includes Asia Pacific results about the same as 2013, Europe to improve (although not to profitability for another year) and North America to see lower, but still strong, profit. South American guidance has shifted, as Ford now expects that region to see greater losses. Ford expectation for global economic growth of 2.5% to 3.0% and global volumes of 85–90 million units.

Europe is showing improvement, with a small profit in the second quarter, although the region is expected to have a full-year loss for 2014. South America's losses are increasing as the region struggles, with a USD295-million loss in pre-tax results and reduced revenue and wholesales. Asia Pacific returned record second-quarter profit, at USD159 million. North America is still Ford's strongest region, with improvements in wholesales and revenues. Over the course of 2014, Ford is laying the groundwork for future profitability, with investment in new product and new capacity (two plants in China, one in Brazil). The results for 2014 will be affected, although the company does expect a solid and profitable year. Argentina and Venezuela remain high-risk, while North American pressures include the impact of the F-Series changeover (and 13 weeks of total downtime), an ageing Focus, and pricing pressure in the small-car segment.

Outlook and implications

North America

Operating margin picked up for the quarter, from 10.6% to 11.6%, but is down through the first half as Ford is investing in development and launch activities for Mustang and F-150. Pre-tax income was up 5.3% y/y for the quarter, on lower wholesales as average transaction prices continue to come up. For the first half, pre-tax results are down 33.3%. The first quarter put 2014 off to a rocky start, with severe weather slowing January and February sales; although the industry is expected to largely recover those sales throughout the year, Ford's market share picked up to 16.9% in the US, up from 15.7% in the second quarter of 2013. North American share, however, slipped from 16.0% to 14.8%. Wholesale volume was down to 760,000 units, compared with 802,000 in the second quarter of 2013. Revenue slipped as well, down 2.8% to USD21.2 billion, on lower market share and unfavourable change in dealer stocks, partially offset by higher industry sales. North American performance comes from opposing sectors, full-size pick-up truck sales and small- and mid-size fuel-efficient cars. IHS Automotive forecasts Ford will sell 2.89 million units in North America in 2014, reaching 2.98 million in 2015. We also forecast a gain for the F-Series to nearly 909,000 units, despite the changeover concerns, as Ford is carefully managing the inventory. Of that total, we forecast 763,402 will be sold in the US.

South America

South America has had a difficult 2014 in all the major markets, reflecting in Ford's increasing losses; Ford revised its outlook for the region in 2014 was for results "about the same" as 2013, but conditions have changed that to guidance for a larger loss. Risk areas in the region include expected devaluation of the Venezuelan currency and lack of currency availability, which resulted in temporary production shutdowns, as well as increasing instability in Argentina, where the government works to control currency devaluation and applies import quotas. Pre-tax results in the second quarter of 2013 reflected a USD295-million loss, compared with a USD151-million profit in the second quarter of 2013; for the year to date, the region's losses have racked up to USD805 million. Wholesales (22.4%), revenue (30.0%) and operating margin (3.8 points) dropped for the quarter. IHS Automotive forecasts Ford's South American sales volume to fall in 2014, to 453,000, with Argentina, Brazil and Venezuela all forecast to decline.

Europe

Despite a very small profit of USD14 million in the second quarter, the story on Europe is largely unchanged. Revenues increased 9.6% to USD8.3 billion. In Europe, Ford is focused on retail sales and reducing reliance on short-cycle rental and dealer self-registration sales, resulting in increasing passenger car retail market share in five major European markets. An increase in the Europe 20, as defined by Ford, was offset by declines in Russia and Turkey. The profit reference for the second quarter is on lower costs and favourable exchange, offset by lower results and royalties from joint ventures. Restructuring costs were also lower this year than last. Ford expects the second-half loss to be higher than the first-half 2014 loss, with lower wholesales due to summer shutdowns in the third quarter and year-end shutdowns in the fourth. In the company release, Ford indicates it is working with partner Ford Sollers to "develop actions to improve its business outlook" given a difficult Russian environment. Profitability remains forecast for 2015, in part based on increasing total industry and retail market share, improving operating margin, and increasing revenues. Europe's wholesale volume was flat in the second quarter, with 376,000 cars delivered; according to Ford's data, market share in the 20 European countries it tracks was at to 7.9%, down 2% y/y. IHS Automotive forecasts improving volumes in Europe, including for Ford; in 2014, we forecast sales of 1.30 million and in 2015, 1.41 million.

Asia Pacific

The Asia Pacific Africa region was split into Asia Pacific and Middle East/Africa in the first quarter of 2014. This newly formed region is also returning growth, as Ford implements a strategy to grow aggressively with an expanding portfolio of global One Ford products tailored for the region. Wholesale deliveries increased 20.7% and revenue increased 7.4%, including 26% growth in China alone. The higher volume is primarily, according to Ford, on higher market share and industry volume. Strong quarterly results brought the company pre-tax profits of USD159 million – the eighth consecutive quarterly profit – as well as a 5.5% operating profit. Ford has earned a 3.7% share in the second quarter, versus 3.3% in 2013 – share is also driven by strong sales of the Mondeo, Kuga ad Fiesta. Operating margin for the quarter increased y/y to 5.5%. Similar to the North American market, wholesale increases are attributed to increasing market share, industry volume and favourable changes in dealer stock. Revenue was reportedly higher on favourable volume and mix. Going into 2014, Ford expects Asia Pacific's pre-tax profit to be about the same as 2013.

Middle East and Africa

Ford adjusted prior data for consistent comparisons, and this region returned a small profit for the company. The Middle East and Africa region delivered stronger pre-tax results (up 76.9%) and stronger operating profit of 2.0%. Revenue, however, was down 8.3% to USD1.1 billion. Wholesale deliveries fell to 49,000 units. Going into 2014, Ford expects the new Middle East/Africa region to break even.