Ford's profit, margins slip in Q1, expected to improve in H2

In the first quarter of 2015, Ford's wholesale deliveries and revenues were down 6.4% and 6.2%, respectively, and net income after tax declined 6.6%. Ford delivered another profitable quarter, however, with USD1.4 billion in pretax profit, up 1.7% from a year earlier. The automotive operating-related cash flow was USD0.5 billion for Q1 2015, and gross cash declined to USD19.5 billion.

Ford advised when announcing full-year 2014's results that the calendarisation of pre-tax profits in 2015, globally, would follow an atypical path, with pre-tax profitability lower in the first quarters of the year but growing progressively. By the end of the second quarter, the F-150 launch will be fully complete and production at normal levels, and the Ford Edge will be entering the market. Ford is introducing 15 new products globally in 2015, compared with 24 in 2014.

Ford continues to execute its restructuring plan in Europe, and deteriorating business conditions in Russia and balance-sheet currency exchange effects impacted on the quarter's results. Ford has announced it will double-down on Russia, while General Motors is ending production in the country (see Russia: 13 April 2015: Ford to take control of Russian JV as Sollers makes loss), though the change has not impacted on Ford's first-quarter earnings. Ford now expects a pre-tax loss in Europe in 2015, but this will be "substantially improved" on 2014's results. In a conference call discussing the results, Ford CEO Mark Fields said that performance was worse than expected in South America, though the first quarter saw a reduced loss compared with the same period of 2014, as 2014's results also included the spun-off Venezuelan operations. In Asia-Pacific, pre-tax profit declined in the first quarter compared with the same quarter of 2014, on lower deliveries and revenues. North America was still Ford's strongest region.

Outlook and implications

North America

Operating margin dropped in the first quarter of 2015, from 7.3% a year ago to 6.7%, on ongoing launch activity. Pre-tax income was down 10.7%, impacted by lower wholesales (down 5.4%) and revenue (down 2.0%), the company built 60,000 fewer F-150 trucks, impacting sales and revenues. Ford's market share picked up to 17.1% in the US in 2014, up from 16.0% the year earlier. North American share also jumped, from 19.2% to 20.6%. Wholesale volume was down to 678,000 units, compared with 717,000 in the first quarter of 2014. With deliveries down, revenue slipped 2% to USD20.0 billion, a smaller percentage drop than deliveries on higher pricing. Deliveries were down on new-product launch activity, with the second half of the year expected to provide stronger results, as vehicles like the Ford Edge and Lincoln MKX arrive on market. North America performance typically comes from opposing sectors, full-size pickup truck sales and small- and mid-size fuel-efficient cars, though the F-150 is currently the star product. IHS Automotive forecasts Ford will see North American sales increase to 2.95 million units in 2015, staying in 3.0-million-unit range through the decade. Ford's guidance for the full year in North American performance sees improved operating margin (8% to 9% in 2015), with substantial top-line growth, higher pre-tax profits as high-profit-margin vehicles get into the market.

South America

South America had a difficult 2014 in each of its major markets and these markets are seeing a difficult 2015 as well, reflecting in Ford's expectation for increased losses over the year. The first quarter of 2015, however, looked a bit less grim considering the company spun off Venezuelan operations with 2015. As expected, Ford's 2015 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 (including part of April 2015), increasing instability in Argentina, where the government works to control currency devaluation and applies import quotas. Pre-tax results in first quarter 2015 reflected a US189 million loss, compared with a USD510 million loss in first-quarter 2014. Wholesales (2.9%) and revenue (26.7%) dropped over the period, though performance of the Ford Ka led to increased market share. Without Venezuela, operating margin improved to 12.5%. IHS forecasts Ford's South American sales to drop 4.4% in 2015, less than the region's forecast decline of 5.1%.

Europe

While Ford's plan is on track, wholesale deliveries increased year over year (y/y) in the first quarter of 2015, and the situation in Russia has delayed expectations for regional profitability past 2015. Wholesale deliveries grew 2.5%, though revenues declined 11.5%. 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 to 376,000 units delivered in the first three months of 2015; according to Ford's data, market share in the 20 European countries it tracks was 8.2%, up 0.2% y/y. IHS Automotive forecasts improving volumes in Europe, including for Ford; in 2015, we forecast sales of 1.39 million for the company.

Asia-Pacific

The Asia-Pacific and Africa region was split into Asia-Pacific and Middle East/Africa from the first quarter of 2014. As with other regions, Ford expects pressure on results over the first half of 2015, with substantially improved second-half results. New product launches include the China-only Taurus, the Everest and the Figo, all global One Ford products tailored for the region. Ford projects higher pre-tax profits for the region in 2015 overall, though that metric fell in the first quarter of 2015. Wholesale deliveries increased 4.6% and revenue decreased 11.5%. The higher volume is primarily, according to Ford, on higher market share and industry volume. Market share in the region (3.4%) and in China (4.5%) were even y/y. Operating margin for the quarter decreased to 4.5%.

Middle East and Africa

Though the sales region is being established, it delivered positive pre-tax results in the first quarter of 2015, which Ford attributes to positive foreign currency exchange. As Ford is developing its regional distribution capabilities, wholesale deliveries declined 8.3% and revenues dropped 8.3%; market share, was even at 4.3% y/y. The Middle East and Africa region saw operating margin improve compared with a year earlier. The lower volume Ford attributes to unfavourable changes in dealer stocks; the revenue decline reflects lower volume and the impact of a stronger US dollar.