DEARBORN - Today the company reported guidance on expected results for the upcoming second-quarter financial report. Bob Shanks, executive vice president and CFO, provides insight and discusses the state of the business.
Q. Let’s begin by looking back for a moment. Can you remind us where we stood at the end of the first quarter?
A. We had a good first quarter and start of the year – with a strong pre-tax operating profit of $2.3 billion. It was also our eleventh consecutive profitable quarter. Our North America results were superb, including the highest profit since at least 2000 and a very strong operating margin. Ford Credit also had another quarter of solid profitability. South American profitability declined due to the increasingly competitive environment while we saw Europe operating in a very tough environment, incur a loss. APA posted a much smaller loss mainly reflecting continued investment in new products and facilities across the region.
Q. With a few days before we wrap up the second quarter, has the situation improved at all for our operations outside of North America?
A. What we are seeing today is a very strong North America and Ford Credit, and at the same time, increasing pressure on all other business operations. For the second quarter, we expect the company to be profitable for the twelfth consecutive quarter and to achieve positive operating cash flow for the ninth consecutive quarter, but operating profit is likely to be substantially lower than the same period a year ago.
Q. Why will operating profit be lower?
A. As I noted in our first quarter earnings call, we expect to see increased costs in the second quarter associated with new product launches, as well as additional capacity coming on line in North America and Asia Pacific Africa. Volume and revenue benefits will not be fully seen for these investments until the second half of the year. We do expect good results in North America and Ford Credit to generate a solid profit once again, but our operations outside of North America are under increasing pressure.
Q. So, do we expect to lose money in the second quarter outside of North America?
A. We do. Our loss for the second quarter for the combined results of South America, Europe and Asia Pacific Africa could be about triple the $190 million loss in these operations in the first quarter of the year.
Q. Is there a single reason for the deterioration?
A. No there is not. The issues we are facing outside North America are somewhat different by region. Let me break down the regions and the reasons for the loss.
In South America, not only are competitive and pricing pressures growing, but we also are faced with weakening currencies, and unexpected and adverse changes in government policies affecting areas such as trade and access to foreign currency.
In Europe, the situation has deteriorated significantly since we gave our guidance at the beginning of the year. Given our strong presence in Europe, we naturally find ourselves swept up in the very serious economic crisis impacting the region. This is now compounded by an intensifying competitive environment as manufacturers react to the lower consumer demand and excess production capacity. As a result, we have experienced a decline in margins, and we expect this pressure to continue for the foreseeable future.
In Asia Pacific Africa, we continue investing and paying for future growth, while not yet fully realizing the revenue of new products and facilities. While volume is up for us, our investment and growth costs are rising faster.
Q. Has Ford changed its full year guidance?
A. We expect to be solidly profitable for the full year and to generate positive operating cash flow, thanks to continued strong performance in North America and Ford Credit through the balance of the year.
We will provide a comprehensive update on our 2012 outlook, as usual, in our earnings announcement in the latter part of July.
Q. How could this affect our progress as a company?
A. We live in a changing world and our business changes quickly, but our team thrives in that environment. That’s when we do our best and perform at our best. So I think we should simply understand the business is going through change and that we’re going to deal with it. We’ve got a great plan that is perfect for us to handle these types of situations and we’ve proven in the past that we know how to address them and do so decisively. So, yeah, we have new challenges, but we’re going to come out stronger once we work our way through all of this.