Ford's Profit Surprise
Ford Motor (F) Chief Executive Officer Alan Mulally has from time to time over his 19 months at the helm of the ailing automaker said he prefers to underpromise and overdeliver on results. He did just that Apr. 24, posting a $100 million profit in the first quarter, much better than the loss Wall Street expected and a nearly $400 million swing in net earnings from the same period the year before.
The results were impressive considering the recessionary climate in the U.S., which is depressing auto sales overall; high gas costs that are pushing down demand for Ford's most profitable pickup trucks and SUVs; and rising costs of commodities used to make vehicles.
Ford's automotive operations earned a pretax profit of $669 million, compared with a loss of $895 million the previous year. Its results in Europe, South America, and Asia went a long way to offset the continued losses in North America. The Volvo unit lost $151 million.
Ford also said its Ford Motor Credit Co. reported net income of $24 million in the first quarter, down from $193 million the year before, mainly reflecting a higher provision for credit losses, depreciation on leased vehicles, and higher net losses related to market valuation adjustments from derivatives.
Speaking on the results outside the U.S., Mulally said: "In the past several years, we have substantially restructured these businesses." He added: "We believe this is an indication that our efforts to leverage Ford's global assets across the world will bear fruit. Going forward, we remain committed to our key business objectives, including our goal of reaching North America and overall automotive profitability in 2009 despite the challenging economic conditions."
Ford expects to lose money this year on the whole, but far less than the $2.7 billion it lost in 2007. Mulally said that despite the worsening economic environment in the U.S., Ford's toughest nut to crack, he is sticking to his goal of overall profitability in 2009.
Goldman Sachs (GS) analyst Patrick Archambault said in an investors note that Ford's North American results were much better than expected, a $45 million pretax loss, vs. the $1.1 billion the investment firm anticipated. "This comes as a significant surprise to us," said Archambault.
Mulally said that most facets of the company's recovery were on track, including the reduction of costs—$5 billion in annual ongoing structural costs between 2007 and 2009—as well as the company's cash burn. Ford cut $1.2 billion in costs in the first quarter. Ford closed the quarter with $28.7 billion in cash, having burned $5.9 billion in the first three months of the year.
To shrink its workforce and cut costs, Ford has offered buyouts to its 54,000 United Auto Workers-represented employees and will offer only targeted buyouts by plant and vehicle from this point. It did not give a target for the earlier plan or the new targeted buyouts, though the take rate by employees is known to be less than what Ford had hoped. "It's really an issue of cutting their way close to profitability in North America," Argus Research analyst Kevin Tynan said. "That, as time goes by, gets harder and harder to do."
Ford, General Motors, and Chrysler have all been restructuring their companies, closing factories and buying out workers to match declining market share. The Big Three also negotiated a new four-year labor deal with the United Auto Workers last fall that enables them to buy out workers, fill some jobs with lower-wage workers, and task the UAW with managing a retiree healthcare fund in exchange for cash. Since GM has the greatest number of retirees, it won't see most of the benefits of the new union deal until 2010, when the union healthcare is created.
Chrysler, which is now majority-owned by private equity firm Cerberus Capital LLC, is downsizing, but improvements to its product lineup and quality rankings will be slower to arrive than what GM and Ford are accomplishing.
Balancing Its Lineup
The U.S. economy and economic worries in Europe aside, among Ford's biggest challenges within its own control is getting its product lineup in line with consumer demand and tastes. Ford has done a good job so far of offsetting declining demand in, for example, its Ford Explorer (BusinessWeek.com, 9/1/06) with the more carlike and fuel-efficient Ford Edge SUV (BusinessWeek.com, 10/18/06). And it has an unexpected hit on its hands with the latest generation of the Ford Focus. Heavily criticized by the auto press for dowdy styling when it debuted last year, Ford is increasing Focus production by 30% to meet demand for the small car, which gets above 30 mpg. But David Healy, auto analyst with Burnham Securities, says it's a mixed blessing. "Ford doesn't make any money on that car," he says.
Ford's traditional profit generators are big SUVs and pickup trucks. But rising gas prices have softened sales and forced Ford to lower production to meet declining demand. Ford later this year will launch a redesigned F-150 (BusinessWeek.com, 4/19/06), usually a big event at Ford and for truck buyers, in the teeth of the economic and housing slowdown and Presidential election, which will add to consumer anxiety.
On the upside, and a key to Ford's recovery, is the company's improvement in third-party quality measures. "This kind of validation is the foundation of consumers thinking of Ford in a new and better light and having greater confidence in buying our cars and trucks," said Ford Chief Marketing Executive Jim Farley in a recent interview. J.D. Power & Associates' new quality ranking doesn't come out until June. But Ford is already advertising, based on another firm's measure, that it has parity with rival and quality leader Toyota Motor (TM). Consumer Reports also ranks Ford well above General Motors (GM) and Chrysler, and has said that the automaker is legitimately competing for quality leadership with Japanese automakers.
Ford is still top-heavy in its lineup with trucks and SUVs and will need another two years to better balance its showroom. This fall it launches a modern and compellingly designed car-based SUV, the Flex (BusinessWeek.com, 3/23/08), which has been lauded in the motor press for design and a high quality interior. Around the same time it will also launch the Lincoln MKS sedan, a car the company hopes will continue a nascent resurgence in the venerable American luxury nameplate.
Mulally has refocused the whole company on the Ford brand worldwide, though it still also retains the Volvo brand. Ford has agreed to sell its Jaguar and Land Rover businesses to Indian carmaker Tata Motors (TTM), a deal that will close in the second quarter (BusinessWeek.com, 12/20/07). He tried to sell Volvo, but found no takers at a fair price. In this, Ford has begun to achieve an advantage over GM, which is still trying to feed and manage eight brands in the U.S. as well as three other brands worldwide in Vauxhall (Britain), Opel (Europe) and Holden (Australia).
When Mulally took over Ford, the company was thought by many analysts and business media to be in the worst shape of the three U.S. automakers. Today, it is financially making progress, though still not out of the woods. But independent marketing and corporate image consultant Dennis Keene says: "You have to be impressed with how fast Ford is changing its fundamentals, from products to marketing to the whole culture…when you get that right, the financials tend to follow."
Ford's share price was up nearly 12% to 8.42 in midday trading.