5 Things Ford Motor Company's Management Wants You to Know

Ford expects profit margins in North America to be squeezed a bit as it gears up to launch the all-new 2015 F-150 pickup. Source: Ford Motor Company.

Ford (NYSE: F  ) had a surprise in store for investors when it reported its second-quarter earnings on July 24: a profit in Europe.

That profit was tiny, just $14 million. But Ford's management wanted us to know two things about it: First, it's a sign that the company's turnaround plan is working, and second, that it's still in progress, and there will be more losses in the second half of 2014.

Here are five more things Ford's top executives want investors to know, from the company's second-quarter earnings conference call.

Europe wasn't the only area of improvement

Ford's automotive business is divided into five regional business units; those, along with Ford Motor Credit, the company's in-house bank, are its principal operating divisions.

In his opening remarks, CEO Mark Fields noted that, "All automotive business units contributed to the company's pre-tax profit, and all improved from a year ago, with the exception of South America." 

Ford, like its rivals, is facing tough times in South America thanks to political and economic pressures. But everywhere else, the story was good: North America's pre-tax profit set a record, Asia-Pacific posted strong results thanks to increased market share in China, and Europe, as I noted above, earned its first quarterly profit in over two years. 

The result in North America is especially important, as it contributes the lion's share of Ford's profits at the moment.

Source: Ford Motor Company.

Ford Motor Credit isn't considered an "automotive" business unit. Its pre-tax profit of $434 million was actually down slightly ($20 million) from its result in the second quarter of 2013. But it still did well.

Ford is having a very busy year

"This year is the most aggressive in our history for new product launches," Fields said. But so far, they're going well: "We remain on track with our 23 global product launches."

Late in December, Ford Chief Financial Officer Bob Shanks warned that the company's pre-tax profit in 2014 would likely fall short of the $8.6 billion it reported in 2013. Why? Because Ford had a lot of new-product launches planned for 2014, and launching new products is expensive.

The highest-profile new Ford is of course the all-new 2015 F-150, set to go into production in the fourth quarter. But there are plenty of others: The all-new 2015 Mustang began production in the last week of August, Transit vans are arriving at North American Ford dealers for the first time, and the all-new 2015 Lincoln MKC SUV is out and selling well. 

The all-new 2015 Ford Mustang went into production late in August at Ford's factory in Flat Rock, Michigan. It's just one of a slew of new products Ford is rolling out in 2014. Source: Ford Motor Company.

That's just in the U.S. Elsewhere, the new Ford Escort compact has rolled out in China, along with the Lincoln luxury brand. And still to come -- along with the new F-150 -- is a refreshed version of the Focus compact, set to be rolled out around the world this fall.

When an automaker replaces an old product with an all-new one, it incurs costs in several different ways, including:

  • Thinner margins as the last of the old models are sold off with discounts
  • Logistics costs (think of this as "shipping and handling") as the new products are shipped in bulk to dealers
  • Marketing costs as the new product is introduced to consumers
  • A sales dip, because dealers typically have only limited supplies of the new model for the first month or two

These costs are just part of the business, of course. But when an automaker is replacing a lot of products at once, as Ford is -- and one of those products is its most profitable model, the F-150 pickup -- the costs can weigh significantly on the bottom line.

It's not a problem, and it has long since been priced into the stock. But Fields wanted to remind us that this is a huge year for Ford on the new-product front -- and to let us know that at least as of July 24, all of those launches remained on track.

Profit margins will take a hit as Ford gears up to launch the 2015 F-150

Ford's operating profit margin in North America was an outstanding 11.6% in the second quarter. But that won't continue, Shanks warned.

"[W]e continue to expect pre-tax profit to be lower than 2013 and operating margin to range from 8% to 9%," Shanks said. "Our guidance includes 13 weeks of production downtime this year for the launch of the new F-150, including the summer shutdown at our Dearborn and Kansas City plants." He continued:

Three weeks occurred in the first quarter, and at the Dearborn plant, eight consecutive weeks are planned beginning in late August. The Kansas City summer shutdown in July and a few individual down days in the second half make up the remainder of the downtime.

Let's translate that. Ford's best-selling and most profitable product in North America is the F-Series pickup line, which includes the F-150 and its Super Duty siblings. Ford is gearing up to replace the F-150 with an all-new version that features a big change: body panels made of aluminum instead of steel.

Like all of the new 2015 F-150s, the top-of-the-line Platinum model features aluminum body panels. Source: Ford Motor Company.

Those new body panels are expected to boost the 2015 F-150's fuel economy. That's a good thing. But there's a complicating factor: Aluminum body panels require different tooling and techniques than steel. 

There's always some downtime at an auto factory as it changes over to build an all-new model, while tooling is replaced and workers trained to build the new vehicles. But the changes needed to build the new F-150 are far more significant than usual, and that means extended downtime at the two factories that build Ford's pickups -- 13 weeks in 2014, and more in early 2015.

Ford North America chief Joe Hinrichs has said that the company will lose about 90,000 units of production as a result of that downtime -- or put another way, Ford's dealers will have fewer F-150s to sell for several months. Ford is managing supply and demand by reducing its pickup incentives; that helped preserve strong North America profits in the second quarter, even though Ford's share of the pickup market was down.

What Shanks was saying is that that happy situation probably won't last. Ford will have to boost incentives to clear out the last of the 2014 pickups, and that will trim its profit margins over the next couple of quarters.

Market share is down in Europe, in part for good reasons

"[Ford's market share in Europe] at 7.9% was down two-tenths of a percentage point from a year ago," Shanks said, "reflecting primarily a reduction in rental and fleet share, as well as adverse industry segmentation in passenger cars."

Ford boosted production of the Fiesta in Germany during the second quarter. Retail demand for the refreshed subcompact has been very strong in Europe. Source: Ford Motor Company.

Ford's turnaround plan in Europe has several key parts. One of those is to reduce Ford's dependency on sales to rental-car fleets, which tend to have low margins (and which also tend to drive down the resale value of Ford's products, which makes leasing more expensive). 

That's a strategy that Ford has been pursuing here in the U.S. with some success, and it's expected to help return Ford Europe to sustainable profitability by the end of next year -- even if overall "market share" drops a bit.

Market share is up in Asia, for great reasons

"Our second-quarter market share [in Ford's Asia Pacific region] was a record 3.7%, four-tenths of a percentage point higher than a year ago," Shanks said. "This was driven by China, where our market share improved three-tenths of a percentage point to a record 4.6%, reflecting continued strong sales of Mondeo, Fiesta, and Kuga."

Ford was very late to the Chinese auto boom, arriving with a serious effort long after rivals like General Motors and Volkswagen had established massive presences in the country, and commanding leads in market share.

But Ford has made a big effort to catch up. That effort has been aided greatly by the fact that Ford's current global product strategy has hit a sweet spot with Chinese consumers.

Look familiar? It should: China's Ford Mondeo is a twin of the Ford Fusion in all but name and a few details. Source: Ford Motor Company.

Ford's plan of building mainstream products with premium features turned out to be a great fit for Chinese tastes. That, and the company's strategy of establishing dealers in interior towns and cities ahead of the competition -- following the strategy that Henry Ford used in the U.S. a century ago -- has given Ford sales growth that has far outpaced the overall Chinese market.

One note: Ford uses the European names for its products in China. But you should know that the "Mondeo" is the same car the U.S. knows as the Fusion, and the "Kuga" is China's version of the Escape. (The Fiesta sold in China is the same Fiesta Ford sells here.) They're tweaked a little bit for the Chinese market, but if you're familiar with their American siblings, you'd recognize them right away.

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Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On September 02, 2014, at 1:22 PM, SkepikI wrote:

    JR... I am still looking for good info on progress with Pension Plan underfunding...the last dragon....I've not seen anything rational and trustworthy about it. Perhaps you could do your readers a service in this department that they won't otherwise see....maybe its something Management DOS NOT want me to know?

    Hey there's a thought for your editor... a better series more in tune with value MF can deliver...how about 3 things Ford Management Doesn't want me to know?

  • Report this Comment On September 02, 2014, at 3:52 PM, Cody700 wrote:

    Ford is doing a fabulous job of new vehicles being brought to market. The 2015 F150 has received more free press than any vehicle in history. This is all great for Ford. The company is poised to gain market share, and increase volume with its new platforms and vehicles.

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