The worldwide debuts of the Ford GT, Shelby GT350R and the F-150 Raptor at the recent NAIAS in Detroit, together with a plan to introduce more than 12 new “performance” vehicles to its global line-up in the next five years (including the unveiling of the new third-generation Focus RS in Cologne on 3 February) has emphasized the importance to the OEM of, in its own words, making a “commitment to vehicles that make people’s hearts pound”.
Following the unveiling of the company’s Q4 and full-year 2014 financial results and, more importantly, its outlook for 2015, an obvious question is whether financial performance is poised to rev up in the same way as the new performance products. For Ford’s senior executives lined up to deal with post-results conference calls with analysts and journalists, most notably CEO Mark Fields and CFO Bob Shanks, the answer was unequivocal. According to Fields: “2015 is going to be a breakthrough year for Ford, driven by our unprecedented 24 global product launches in 2014 and another 15 global launches planned this year. So this is our One Ford story and we are confident in its continued success.”
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A brief overview of Ford’s 2014 results, bedevilled as always by a slew of “special items” scattered throughout the four quarters, suggests results that met most forecasts, unsurprising in an era of carefully-managed expectations.
As forewarned, Q4 saw global wholesale volumes and revenue decline year-on-year – in the former case by 30,000 units to 1,580,000 and in the latter by US$1.7bn to US$35.9bn. Pre-tax profit dipped US$197m to US$1.21bn but, thanks to a thumping negative special item of US$1.18bn (versus US$311m in Q4 2013) and the non-repeat of a favourable US$2.1bn special tax item from Q4 2013, net earnings tumbled a little over US$3bn to just US$52m. This left 2014 wholesales at 6,323,000, down 7,000 vehicles year-on-year, revenue of US$144.1bn, US$2.8bn adrift of the previous year’s result, along with pre-tax and net profits of US$6.28bn (US$8.61bn) and US$3.19bn (US$7.18bn), respectively. Negative special items amounted to US$1.94bn in 2014, primarily reflecting a US$800m hit from parking the Venezuelan business outside of the consolidated accounts, and costs of restructuring in Europe (Genk and UK closures), up from US$1.57bn in 2013.
North America a driver; other world markets more challenging
Two things are abundantly clear. First, North American operations remain the driving force behind earnings performance, helped unquestionably by the cyclically strong light vehicle market in the US. Second, overseas markets, with the honourable exception of Asia Pacific, remain very challenging, most notably in Europe, where losses are proving stubborn, even in the face of the company’s so-called ‘Transformation Plan’.
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By GlobalDataDespite falling unit sales, revenue and profitability in North America in both Q4 and full-year 2014, the region’s contribution to overall financial performance is critical. 2014 revenue was US$82.4bn, US$4.1bn shy of the 2013 result, as wholesales declined 164,000 to 2,842,000, and the reported pre-tax profit slipped US$1.91bn to US$6.90bn. The 2014 operating margin was 8.4%, 180bp below the 2013 level, with the Q4 margin alone at 7.4%.
In essence, Ford paid a market share price for its new product introductions, especially in the final quarter and especially related to the arrival of the new (and crucial) aluminium-bodied F-150, preliminary sales of which only started in the final month of 2014. Q4 US market share was 14.3%, down 1.1 percentage points from Q4 2013 – largely retail related. This primarily reflected lower F-150 share as the OEM, in its own words “balanced share with transaction prices and stocks as the company launched the all-new vehicle.” Shares were also lower for several other products at the end of their product cycles as Ford transitioned to the new products launched in Q4 and early 2015. To give some colour to these developments, a drop of US$252m in pre-tax profit between Q4 2013 (US$1.8bn) and Q4 2014 (US$1.55bn) was driven by declining market share (US$478m) and increased structural costs, principally in the manufacturing/engineering area, (US$329m), with improved net pricing (US$430m) being the major offsetting positive.
In contrast to the strong, if declining, profitability in North America, South America, Europe and Middle East & Africa delivered a crunching combined pre-tax loss of US$2.24bn in 2014, up from US$1.54bn in 2013. Although Europe saw some improvement (loss of US$1.06bn, versus US$1.44bn), South America took a whipping (even allowing for US$426m of adverse balance sheet exchange effects, primarily related to the devaluation of the Venezuela bolivar in Q1), a loss of US$33m in 2013 rising to US$1.16bn in 2014.
Europe stays weak
Performance in Europe, where the Q4 2014 loss was still US$443m (US$529m) remains a significant challenge, despite the further advancement of the European Transformation Plan and some volume and revenue growth reflecting a slowly improving light vehicle market and small market share improvements, especially in the LCV sector. Although the 2014 operating margin in Europe improved to -3.6% (-5.3%), the margin was still -6.5% in Q4 alone, accompanied by falling market share (versus Q3). While direct comparisons with other OEMs are fraught with complexities, the fact that FCA was able to report a return to profitability in Europe in Q4 and appears confident of continuing in the black through 2015, highlights Ford’s ongoing weakness in the region.
Valuable as looking at 2014 results in the rear-view mirror can be, financial prospects for 2015 are now more relevant, especially to analysts and investors.
The question remains – can Ford rev up its earnings growth this year to take full advantage of its global One Ford strategy and deliver on the potential of its reinvigorated product portfolio. For their part, Ford’s senior executives appear in no doubt that the year of transition that was 2014 will evolve into a year of growth in 2015. In addition to Fields’ positive assessment that 2015 will be a ‘breakthrough year for Ford’, Shanks has been reported as saying: “This year [2014] was a transition year. We’re getting ready for a pretty big step forward in 2015. This is going to be a year of very strong growth. We’re expecting higher revenues, higher volume, higher profit margin, higher cash flow.” Probably at the risk of setting investors’ hearts pounding, he also added: “Everything that drives a share price in our industry will be better”.
There can be no doubt that Ford’s official outlook for 2015, based on its planning assumptions and key metrics is positive. Volume assumptions look for industry growth in North America (17.0m-17.5m in 2015, versus 16.8m in 2014), Europe 20 (14.8m-15.3m, versus 14.6m) and China (24.5m-26.5m, versus 24.0m), driving, as noted above, higher automotive revenue (helped by 15 global product launches), a higher operating margin and higher operating-related cash flow (all undefined). Total company pre-tax profit (excluding special items) remains forecast at US$8.5bn-9.5bn, versus the US$6.3bn reported in 2014. The 2015 operating margin in North America is predicted in the range 8-9%, a relatively weak H1 being followed by a much stronger H2, while the result in South America is forecast to be “substantially improved” and that in Europe to be “improved”.
F-150 is crucial in NA
Assuming continuing buoyancy in the North American light vehicle market, Ford’s performance in 2015 will undoubtedly rest heavily on the success, or otherwise of the new F-150. Now in production (with a third crew) at the Dearborn Truck Plant, part of Ford’s historic Rouge Center complex, and due to be followed by output at the Kansas City assembly facility later in Q1, the newly-crowned North American Truck of the Year has much resting on its shoulders. With combined total production capacity of over 700,000 units per year, Ford needs to ramp up sales quickly through 2015, not just in North America but in all 90 target markets globally. As might be expected, Ford executives remain bullish at this very early stage of the new model’s lifecycle. According to Fields: “We are exactly on plan where we expected to be with the F-150 launch. As you look at the market response, as we noted in December, we are seeing very strong demand for the F-150. If we track as we expected, we could have our best January since 2004 and we will see a material increase in terms of the 2015 F-150s as a percent of our total sales. The mix has been rich.”
As for Europe, the 2015 outlook still appears somewhat uncertain, despite the positive contribution to costs that the recent facility closures in the UK and Belgium should deliver – taking out around 18% of capacity and saving an estimated US$450m-500m per year in costs in the process. Ford is estimating Q1 2015 production in Europe of 440,000 units, a useful 58,000 improvement on the Q1 2014 level and significantly up from the Q4 2014 total of 328,000. Continued success of the company’s LCV range, especially the Transit, and strong performances from the Focus and new Mondeo will be needed to ensure better capacity utilisation. The European Transformation Plan is clearly the correct strategy with which to focus on product, brand and cost, but some key issues in Europe will remain beyond the company’s control.
Despite the European Central Bank’s recent commitment to a robust programme of quantitative easing, many political and economic uncertainties, and their broader impact on vehicle markets, remain. In fairness, Ford is taking a relatively conservative stance, projecting Euro area growth of just above 1% in 2015 (but 2.5-3.0% in the UK), but has also cautioned that Russian GDP is expected to decline sharply, with higher inflation resulting from lower oil prices, geo-political events and rouble devaluation.
Ford’s Russia bet poses considerable challenges
It is clear from comments made in post-2014 results conference calls that Ford’s bet on Russia as a growth market, while still held to be a sound longer-term strategy, poses considerable challenges in the foreseeable future. The negative impact of developments in Russia on European pre-tax profits in 2014 was indicated at US$348m, with US$121m of that total seen in Q4 alone. When queried about potential costs in 2015, Shanks commented: “You can see the year-over-year effect of Russia on Europe and it was in the US$350m area – all I will say is that the environment in 2015 is more difficult.”
In summary, Ford remains confident that 2015 will see financial performance rev up as it reaps the rewards of recent investments in product development and increased efficiency. But North America aside, where a growing market and new early-lifecycle products should deliver on promised margin growth, significant uncertainties remain. The timing of a return to profitability in Europe remains vague and the significant losses in South America need resolving with some haste. Until Ford’s overseas operations begin to deliver profitability somewhere approaching that enjoyed in North America, the rev limiter will remain set at a modest level.
See also:
US: Ford 2014 operating profit plunges $2.3bn
US: Venezuela woes cost Ford $800m pretax in Q4 2014
