Ford Posts Surprise US$100-mil. Profit for Q1

Ford posted a surprising US$100-million profit for the first quarter of 2008, doing better than the slight loss most Wall Street analysts had predicted. Operations at home posted another loss (although less than the year-ago period, and continuing to improve) while international profits bolstered the company's bottom line. For the first quarter of 2008, Ford posted a total global revenue of US$39.4 billion, down significantly from US$43.0 billion in the first quarter of 2007. Despite the drop in revenue, Ford posted a net profit of US$100 million for the quarter, a significant improvement from the US$282 million loss in the year-ago period. Excluding special items, Ford's net pre-tax profit rang in at US$736 million, a major change from the US$44 million loss on operations seen in the first quarter of 2007. Even more dramatic, with the exclusion of Jaguar and Land Rover brands (listed as held-for-sale status on previous quarterly reports), Ford posted a US$1.2 billion pre-tax profit from its ongoing automotive operations for the quarter. But just like General Motors (GM), Ford's biggest gains and strongest profits came from its European and South American operations, with the Asia-Pacific region contributing a marginal amount.

North America bore the worst results of Ford's global regions, posting a pre-tax loss of US$44 million, itself a dramatic improvement over the US$613 million loss posted for the first quarter of 2007. First-quarter revenue tells the story: a drop from US$18.5 billion fin the first quarter of 2007 to US$17.1 billion in the most recent quarter, a tumble of US$1.4 billion, thanks to an ongoing recession for the quarter and a sharp decline in the sales of big pick-ups, sports-utility vehicles (SUVs), and large cars. The saving grace for North America has been structural cost improvements of US$1.2 billion, part of an overall US$1.7 billion in cost reductions posted for the quarter. Ford CFO Don Leclair attributed the lion's share of the improvements, nearly US$400 million, to manufacturing cost improvements that ranged from more efficient techniques to simply not having as many people to pay. CEO Alan Mulally noted that with the latest 4,200 hourly workers who have accepted the latest round of buyouts, that Ford has dropped a staggering 40,000 employees since the end of 2005.

Brighter pictures were painted for South America, which turned a revenue increase from US$1.3 billion in the first quarter of 2007 to US$1.8 billion in the first quarter of 2008 into a significant increase in profits. Net income for Ford's South American operations jumped from US$113 million a year ago to US$257 million last quarter, thanks to better pricing, volume, mix, and exchange. Ford's European operations posted similarly positive results. Revenue bumped up from US$8.6 billion a year ago to US$10.2 billion in the most recent quarter, while pre-tax profits jumped considerably from US$219 million in the first quarter of 2007 to US$739 million in the first quarter of 2008. Again, a more favourable mix and volume helped offset increasingly unfavourable currency exchange rates between the pound and the euro.

Ford's Asia-Pacific region had only marginally better results, posting a net income of just US$1 million compared with a loss of US$26 million one year ago. Revenue for the quarter fell to US$1.7 billion from US$1.8 billion a year ago, primarily due to struggling business in Australia. Ford's investment in Mazda continues to show dividends, with the company posting a US$49 million net income from its ownership share of the Japanese automaker, up from US$21 million in the first quarter 2007. And Volvo, now being broken out separately since the Premier Auto Group is effectively gone with the sale of Jaguar and Land Rover, posted a surprising pre-tax loss of US$151 million, compared with a profit of US$94 million in the first quarter of 2007. Sales are down at the Swedish carmaker, with unfavourable volume contributing to a drop in revenue from US$4.6 billion to US$4.2 billion in the most recent quarter.

Finally, Ford Credit turned in less than impressive performances as well, with pre-tax earnings totalling US$36 million for the first quarter, versus US$293 million in the previous year. Net income came in at US$24 million, down from US$193 million a year earlier. Ford chalks up the lower profits to higher previsions for credit losses, higher depreciation expenses, and an increased incidence of leasing versus buying among the consumer public.

Outlook and Implications

The US$100-million net profit for the quarter stunned Wall Street and sent Ford stock soaring over the course of the day yesterday, but the question remains: is this an aberration, or a genuine sign that Ford's turnaround is taking hold? The simple answer is: both. A closer look at the numbers reveals that Ford is doing decently nearly everywhere but the United States; not a new condition, it is the same situation currently facing GM. The United States was already a troubled market for Ford and GM as both companies fought to enact turnarounds, switching their truck-heavy line-ups to more passenger car-laden ones in the hopes of trying to recapture market share lost to baby boomers reared on Japanese-brand offerings. The ongoing recessionary headwinds in the U.S. market are only making a difficult situation just that much more challenging, but thanks to Ford's crossover-utility vehicles (CUVs) and a renewed interest in the Focus compact in North America by Gen-Y and millennial demographics, Ford is hanging on. But the company's improvement in North America has not come from better products yet; the improvement over the first quarter of 2007 has come from shrinkage and cost improvements. Before Ford can truly return to profitability globally, North America must again be a profit-generator, and not the shrinking sinkhole into which the company pours money.

Ford Credit is facing an especially difficult challenge going into the second quarter. Increasing costs for the captive finance division are cutting into profits, as seen by the decrease in net income from the first quarter 2007 to the most recent performance. The issue is the general economy, and the massive tightening of the credit market for car buyers to finance new purchases. Independent lenders are abandoning the segment, according to Ford, leaving dealers unable to get customers decent terms for new car purchases. Even mid-level buyers are reportedly having a difficult time finding attractive loan rates; this has led to captive finance companies for nearly all automakers stepping up to take on riskier loans and increase the incidence of leases, both of which eat into profits due to the higher provisions for credit losses that need to be booked.

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