Ford weathers capital intensive 2014 with pre-tax profit USD6.3-bil in 2014, down 27% y/y

Ford's deliveries and revenues were down 1.8% and 4.5%, respectively, in the fourth quarter of 2014, while net income after tax declined 98.3%. Ford delivered another profitable quarter, however, with USD1.1 billion in pre-tax profit, though this was down 14.9% year on year (y/y) from the corresponding quarter a year earlier. The automotive operating-related cash flow was USD0.5 billion for the fourth quarter, and gross cash declined to USD21.7 billion.

Ford updated its 2014 outlook during an investor conference at the end of September 2014, when it was nine months through an aggressive 2014 launch schedule which impacted cash flow. Overall results for 2014 were in line with that guidance, though automotive revenue had been forecast to come in about equal with the USD139.4 billion in 2013, and 2014 saw a drop to USD135.8 billion. Operating margin and operating-related cash flow came in lower, as expected. However, Ford did miss its forecasted pre-tax profit. Instead of the projected USD7-8 billion, the company took in USD6.3 billion in pre-tax profit.

Europe continues to execute the company's restructuring plan, while deteriorating business conditions in Russia and balance-sheet exchange effects impacted the year, as did production launch costs of the Focus and Mondeo. Ford now expects a pre-tax loss in Europe in 2015, but “substantially improved” from 2014; in 2014, results in Europe were improved from 2013, including increased market share driving increased wholesale deliveries. South America's losses are increasing as the region struggles, with a USD1.2 billion loss in pre-tax results and reduced revenue and wholesales for the year just ended. Asia-Pacific saw pre-tax profit decline by USD14 million from 2013, explained on higher warranty cost on a field-service action. North America is still Ford's strongest region, though the company delivered 164,000 fewer vehicles in 2014 (2.8 million) in 2014 than 2013, resulting in lower revenues and pre-tax profit in 2014. Over the course of 2014, Ford laid groundwork for future profitability, with investment in new product and new capacity (two plants in China, one in Brazil). As Ford advised earlier in the year, it delivered a solid and profitable year—though not as strong as 2013.

Ford advises that the 'calendarisation' of pre-tax profits for 2015, globally, will follow an atypical path, with the pre-tax profitability lower in the first quarters of the year, but growing progressively. Historically, Ford says, its more profitable quarters have been in the first half of the year.

Outlook and implications

North America

Operating margin dropped in 2014, from 10.2% a year ago to 8.4%, as the second half had impact of launch activities for Mustang and F-150 (including several weeks of downtime for the F-150). Pre-tax income was down 21.7% for the year, impacted by lower wholesales (down 5.5%) and revenue (down 5.2%). Additionally, pre-tax income was impacted by higher warranty costs on recalls. Ford's market share picked up to 17.2% in the US in 2014, up from 16.0% the year earlier. North American share also jumped, from 19.3% to 20.7%. Wholesale volume was down to 2,842,000 units, compared with 3,006,000 in 2013. With deliveries down, revenue slipped as well, down 5.2% to USD82.4 billion. The drop in delivery drove the decline in revenue, though deliveries were down on the F-150 downtime and supplier shortages, which have been addressed. North America performance comes from opposing sectors, full-size pickup truck sales and small- and mid-size fuel-efficient cars. IHS Automotive forecasts Ford will see North American sales increase to 3.0 million units in 2015, staying in that range through the decade. Ford's guidance for North American performance sees operating margin in the same range (8% to 9% in 2015, 8.4% in 2014), with higher pre-tax profits as high-profit-margin vehicles get into the market.

South America

South America has had a difficult 2014 in each of its major markets, reflecting in Ford's increasing losses; conditions have changed enough that Ford changed guidance to a USD1.2 billion loss in 2014. For 2015, Ford's results will be improved on not including Venezuela in its consolidated results, though the company will not leave the market. Factors pulling the market down included devaluation of the Venezuelan currency and lack of currency availability, which resulted in production shutdowns, increasing instability in Argentina, where the government works to control currency devaluation and applies import quotas. Pre-tax results in 2014 reflected a USD1.2 billion loss, compared with a USD33 million loss in 2013. Wholesale sales (13.9%), revenue (18.5%) and operating margin (12.9 points) each dropped for the year. IHS forecasts Ford's South American results to remain flat in 2015, at about 445,000 unit. Argentina and Venezuela are forecast to decline. Though the new Ka may help Ford see a small increase in Brazil, that country's industry is not forecast to return to growth until 2016.

Europe

While Ford's plan is on track, wholesale deliveries increased and revenues grew in 2014, the situation in Russia has delayed expectations for regional profitability past 2015. Wholesale deliveries and revenues grew 5.3% and 8.1% respectively in 2014. An increase in the Europe 20, as defined by Ford, was offset by declines in Russia and Turkey. At Ford's investor meeting in September 2014, the company adjusted 2015 expectations for Europe. A loss is now predicted for 2015, though notably lower than that of 2014. Europe's wholesale volume increased in 2014, with 1.4 million cars delivered; according to Ford's data, market share in the 20 European countries it tracks was 15.1%, up 0.5% y/y. IHS Automotive forecasts improving volumes in Europe, including for Ford; in 2015, we forecast sales of 1.43 million for the company.

Asia-Pacific

The Asia-Pacific, Middle East, and Africa region was split into Asia-Pacific and Middle East/Africa regions 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. Ford projects higher pre-tax profits for the region in 2015. For 2014, wholesale deliveries increased 13.3% and revenue increased 3.9%. The higher volume is primarily, according to Ford, on higher market share and industry volume. Even with higher structural costs (including investment into new Ford plants in the region) and unfavourable exchange, the region delivered stronger pre-tax profit in 2014 than 2013. Ford has earned a 3.5% share in 2014, with stronger sales in China and market share increased to 25.2% in that country. Operating margin for the year increased 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.

Middle East and Africa

As this sales region is being established, it showed a loss for 2014, though a 70% smaller loss than in 2013. The region did not breakeven as forecast, with wholesale deliveries down 3.5% and revenues down 2.2%; market share, however, increased to 4.1% from 3.7% in 2013. Ford attributed the loss in deliveries on an unfavourable change in dealer stocks as the company adjusted for market demand. The Middle East and Africa region saw operating margin improve, though still in the negative. Ford has adjusted expectations for that region for 2015 as well, expecting a loss this year.