New models, rising U.S. sales, higher transaction prices and a rebound in Europe helped Ford Motor Co. post a first-quarter profit of $2.6 billion.
New models, higher U.S. sales and transaction prices, and a rebound in Europe helped Ford Motor Co. post a first-quarter profit of $2.6 billion.
It was the automaker's largest first-quarter profit in 12 years and compared with earnings of just over $2 billion a year ago.
Revenues totaled $33.1 billion, up $5 billion from a year ago. The year-earlier revenues exclude those from Volvo, which Ford subsequently sold.
The first-quarter performance puts Ford on track for its third straight year of annual profit after posting losses totaling $30.1 billion from 2006 through 2008.
Ford has recovered from the downturn faster than rivals and has become one of the most profitable automakers despite several challenges.
The company has continued to make money amid high gas prices, lower industry sales volumes, lower market share levels and sluggish economic growth – an indication of just how much Detroit automakers have revamped operations in recent years.
"Ford is confident that it will benefit from higher volumes and managing its product mix, despite higher gas prices, and costs to offset these headwinds," Standard & Poor's said today after the earnings release.
Ford posted huge losses when gas prices soared in 2008 – exposing a huge reliance on trucks for profits and a lack of fuel-efficient cars.
"We are on track with what we said we'd do," Lewis Booth, Ford's CFO, said today. "We're feeling pretty good."
Ford's 2011 first quarter pre-tax operating profit was $2.8 billion, an increase of $827 million from the year-earlier period.
Operating profit in Europe nearly tripled from a year earlier to $293 million. A $51 million pretax loss in Europe had contributed to Ford's 79 percent decline in profit in the fourth quarter.
The automaker warned today that quarterly results in the latter part of the year may not be as strong as the first quarter, citing lower expected profit at Ford Motor Credit Co., increasing commodity costs, seasonal factors that favor the first half of the year and higher investments and costs related to its longer-term growth and brand plans.
Watching gas prices
With new models such as the Fiesta subcompact and Explorer crossover that offer improved fuel economy, the automaker is also better positioned to cope with rising gasoline prices in the U.S.
Gas prices are not spiking as quickly as they did in 2008. That's allowing Ford management to better monitor prices weekly and make production adjustments as needed.
"If we see consumer purchasing decisions soften up a bit, we'll make production adjustments," Booth said today. "But we don't see that yet. We've seen some shift toward smaller vehicles."
But the steady rise in gas prices has prompted some analysts to trim their forecast for 2011 U.S. light vehicle demand. IHS Automotive last week reduced its outlook for 2011 U.S. sales to 12.9 million units from 13.3 million units.
Ford said today it still expects U.S. industry sales to total 13 million to 13.5 million units this year.
Ford's sales in the U.S., its largest market, increased 12 percent during the first quarter. The automaker launched a redesigned Explorer crossover in the quarter and sales of the profitable F-Series pickup rose 23 percent as more small business owners replaced aging trucks.
Ford also continues to attract higher prices per vehicle than it did last year, in part because of new model launches and wider availability of expensive options.
Truecar.com says Ford's average transaction prices climbed 8 percent to $33,173 in the first quarter compared to $30,658 a year ago.
"Ford's transaction prices are up sharply compared to the rest of the industry, even as their share of smaller, compact cars increased this past quarter," said Jesse Toprak, an analyst with Truecar.com.
"Where Ford could use some improvement is by lowering their dependence on fleet sales," Toprak added. "Ford's goal should be to reduce sales to fleet to under 25 percent."
On the quality front, Ford said its first quarter performance was "mixed" and fell short of a goal to improve. The automaker said its outlook for the year is now for a "mixed" performance on quality gains instead of an improved one.
The quality issues in the quarter were found in the automaker's North American operations, Ford spokesperson Todd Nissen told Bloomberg, while declining to discuss details.
In Europe, revenue rebounded in the first quarter on an increase in volume and a boost in net pricing. Ford reported a first-quarter operating profit in Europe of $293 million compared to $107 million in the year-ago period.
Ford Credit posted a first-quarter pretax operating profit of $713 million, down $115 million from a year earlier due to lower market valuation adjustments to derivatives and lower outstanding loans.
Ford said it ended the first quarter with automotive gross cash of $21.3 billion, up $800 million from the end of 2010. Ford reduced debt in the first quarter by $2.5 billion, leaving it with $16.6 billion in debt.
The automaker – which is seeking an investment-grade credit rating -- is expected to continue paring debt in the coming quarters as well.
Ford expects 2011 capital expenditures in the range of $5 billion to $5.5 billion. Capital spending in the first quarter was $900 million.
Ford executives remain optimistic about 2011 and expect the automaker's profits and cash flow to improve as additional new models, namely the Focus compact, come on line.
The automaker is not making any adjustments to its North American production plans and expects second quarter output to be about 1.5 million units, up 12,000 units from a year ago.
That reflects strong customer demand for new products, Ford said. The automaker added that its production forecast reflects Ford's best estimates of the impact of Japan's March 11 earthquake at this time.
Analysts say Ford may benefit from inventory shortages at Toyota Motor Corp. and other Japanese automakers following the earthquake.
"We estimate Toyota's production will be cut by more than 50 percent, which creates a share gain and pricing opportunity for Ford," Brian Johnson, an analyst with Barclays Capital, said in a recent report. "Ford has better cars and better price points on their product line" than during the last fuel price surge in 2008.
Still, Ford and other automakers are facing higher costs for oil and other commodities.
Ford raised U.S. vehicle prices by an average of $117 per model on April 1 to counter some of the increase in material costs.
With the elimination of Mercury and sale of Volvo last year, Ford is now a two-brand automaker in the U.S. market.
At the Ford division, which has captured some previous Mercury owners, 2011 sales are up 25 percent through March. In the first quarter, demand for the Ford Fusion jumped 27 percent and sales of the new Ford Fiesta subcompact totaled more than 20,000.
But Lincoln is skidding, with sales off 11 percent this year.
Booth credited Ford's latest results to new products, such as the Fiesta and redesigned Explorer, and to keeping production in line with demand. That has forced Ford to be disciplined on incentive spending in all regions.
Booth said Ford should have a better year this year versus last year, "both in terms of profitability and cash flow."
Booth said the rebound in European profits reflects continued cost controls along with new products such as the C-Max and Fiesta small cars.
Ford estimates commodity costs will increase by about $2 billion this year. In the first quarter, Ford's structural costs increased $400 million from the year-earlier level, and commodity costs increased $300 million.
Booth said 97 percent of Ford's Mercury dealers have signed agreements to close down their franchise. Ford took $339 million in charges last year to shutter the brand. In the first quarter, Ford reported $1 million in charges to eliminate the Mercury brand.
The automaker has moved up scheduled plant downtime around the world to offset any impact from Japan's earthquake last month, Booth said.
Ford recently idled several plants in the Asia-Pacific region to conserve parts. Booth said Ford has lost 12,000 to 14,000 units so far in the second quarter due to reduction in overtime in those Asia-Pacific plants, temporary shutdowns and "other actions" in that region.
Ford might lose more units, but it will not be a "material" loss, Booth said.
"We're seeing fantastic efforts by the Japanese supply base to get their plants up and running," Booth added.