The decrease in total Automotive pre-tax operating profit and operating margin was more than explained by lower results at Ford Europe, Ford South America, and Ford Asia Pacific Africa.
Ford North America
For the second straight quarter, Ford North America pre-tax operating profit exceeded $2 billion, and operating margin exceeded 10 percent. The increase in pre-tax results compared with strong performance in 2011 reflected higher net pricing, improved contribution costs, and other factors, offset partially by higher structural costs for growth, and unfavorable volume and mix including an adverse change in U.S. dealer stocks.
The company’s outlook for full year North America 2012 profits remains unchanged. Ford expects significantly higher pre-tax operating profit and margin compared with 2011, as consumers continue to respond to the company’s strong product line-up, including the recently-launched all-new Escape and the all-new Fusion launching in the second half of this year. Ford also remains committed to maintaining its competitive cost structure in North America.
Ford South America
Pre-tax operating profit and operating margin, while slightly positive, declined substantially compared with a year ago due to lower volume, higher costs, and unfavorable exchange. Although net pricing was higher compared with a year ago, it was constrained compared with recent periods by a more intense competitive environment.
Although the company continues to expect that Ford South America will be profitable for the full year, it now expects the level to be substantially lower than 2011, reflecting increased competitive pressures, weakening currencies, and changes in government policies affecting areas such as trade and access to foreign currency.
Ford continues to work on actions to strengthen competitiveness in this changing environment, looking at all areas of the business to improve operating results. These actions include fully leveraging the One Ford plan, including the introduction of an all-new lineup of global products over the next two years, starting with the launch of the all-new Ranger, EcoSport, and Fusion in the second half of this year.
Ford Europe’s results compared with a year ago largely reflected unfavorable market factors. Volume was unfavorable due to lower industry, share and associated production adjustments to maintain dealer stocks at appropriate levels. Net pricing was lower as the industry responded to excess capacity with higher incentives. Higher contribution costs also contributed to the profit decline.
Given the deteriorating external environment in Europe, Ford now expects its full year loss in Europe to exceed $1 billion. The magnitude of this loss will be affected by a number of factors, including the overall economic environment, competitive actions, and Ford’s response to these developments.
The company recognizes the seriousness of the situation in Europe, and views the challenges the industry faces as more structural than cyclical in nature. While Ford is affected significantly because of its strong presence in the region, the company understands what is needed to achieve profitability and to generate an appropriate return on investments.
“We have faced challenging situations in other parts of the business before, and successfully addressed them through our One Ford plan,” said Bob Shanks, Ford executive vice president and chief financial officer. “We will continue to use our plan as the guide to address challenges and opportunities in our valued European operations.
“We are reviewing all areas of our business to address the near-term challenges, while ensuring we build a strong foundation for our future,” said Shanks. “It is premature to discuss details of what our plans may be in response to the situation in Europe, but we will continue to communicate our plans at the appropriate times with all of our stakeholders.”
Ford Asia Pacific Africa
In Asia Pacific Africa, market factors were strongly positive compared with a year ago, but more than offset by higher costs associated with new products and investments to support higher volumes and future growth, as well as other factors.
Ford expects results to improve in the second half of 2012, due mainly to favorable volume and mix as Ford benefits from added capacity in China and Thailand and the all-new Focus and Ranger.
In the second quarter of 2012, Other Automotive reported a loss of $163 million, compared with a loss of $76 million a year ago. The loss mainly reflects net interest expense and an unfavorable fair market value adjustment, primarily from the company’s investment in Mazda.
FINANCIAL SERVICES SECTOR
Ford Credit continues to expect full year pre-tax profit of about $1.5 billion, and total distributions to its parent of between $500 million and $1 billion. Ford Credit now projects managed receivables at year end to be in the range of $85 billion to $90 billion, and managed leverage of 8-9:1 for the foreseeable future, which is a decrease from the prior target of 10-11:1 and is consistent with its goal of achieving and maintaining a strong investment grade balance sheet.
Ford Credit remains a strategic asset for Ford, delivering high levels of quality and customer satisfaction with operating efficiencies that are among the best.
The increase in the company’s anticipated production volume for the third quarter, compared with a year ago, is more than explained by higher volumes for Ford North America and Ford Asia Pacific Africa. Compared with second quarter 2012, the company anticipates that third quarter 2012 production will be down 45,000 units, primarily reflecting seasonal summer shutdowns in North America and Europe.
Going forward, Ford remains committed to all aspects of its One Ford plan, which is unchanged:
• Aggressively restructure to operate profitably at the current demand and changing model mix
• Accelerate the development of new products that customers want and value
• Finance the plan and improve the balance sheet
• Work together effectively as one team, leveraging Ford’s global assets
Ford also continues to work toward its mid-decade outlook by implementing its One Ford plan.
“We have made tremendous progress in recent years by executing the fundamentals of our One Ford plan,” said Mulally. “Our One Ford plan led the way through the successful restructuring of our North American business and the recent economic recession. It remains our guide as we work to sustain our strong Ford North America operations and grow our important Ford Credit business, while addressing the diverse challenges and opportunities we have in other parts of the world.”