How Ford Made Record Profits Despite Low F-150 Sales
Sales of Ford's all-new Edge SUV were up 44% in the second quarter. Better yet for shareholders, Edge prices were very strong. Source: Ford Motor Company.
Before Ford reported second-quarter earnings on Tuesday, its lackluster U.S. sales numbers had raised concerns about the company's second-quarter profits. Ford's U.S. sales were up just 1.3% in the second quarter, and sales of key models like the F-Series pickups and Fusion sedan were down significantly.
Warnings from Ford executives to expect the bulk of the company's profits to happen in the second half of the yeardidn't help to boost expectations any. Was Ford setting the stage for a disappointing second quarter in North America?
As we found out on Tuesday morning, the answer was a resounding no. In fact, Ford posted an all-time record profit in North America, with an impressive profit margin.
How did that happen?
SUV sales helped, but that wasn't the whole storyIn an interview on Tuesday morning, I asked Ford CFO Bob Shanks if it was a matter of strong SUV sales offsetting the weakness in the F-Series and Ford's high-volume car models. Retail sales of Ford's Explorer rose almost 8% in the second quarter, and the all-new Edge has been selling very quickly. But he said it wasn't quite that simple.
Shanks said that on a wholesale basis, looking at Ford's shipments to its dealers during the quarter, Ford lost about 25,000 F-150s versus last year because of the ramp-up to full production. The two Ford factories that make the F-150 both required significant downtime to convert to making the all-new truck; both are now up and running at full speed.
Short supplies of the new 2015 F-150 led to a 6.5% drop in Ford's full-size pickup sales in the second quarter. But very strong pricing on the trucks Ford did sell helped to boost profits anyway. Source: Ford Motor Company.
Shanks noted that Ford also lost (again, on a wholesale basis) about 15,000 units of the Explorer. That's not all-new, but Ford has been rolling out a refreshed version, and that required a dip in production.
Ford's Edge is all-new, its factory was fully up to speed in the second quarter, and U.S. retail sales of the Edge were up big, about 44% during the quarter. But while wholesale shipments were up, it was offset by the drops in F-150 and Explorer shipments.
In other words, the retail sales gains posted by the Edge and Explorer in the second quarter didn't really help.
So what did help? Pricing.
How great new products translate into big profits The slide below is from the presentation that Shanks and CEO Mark Fields gave to investors and analysts on Tuesday. The graph compares Ford's pre-tax profit in North America in the second quarter to its profit a year ago, and shows how changes in certain key factors accounted for the difference.
Source: Ford Motor Company.
As you can see, increased sales volume helped, while increased costs -- many related to production and shipping of those new models -- hurt. But what really helped is "pricing."
Simply put, Ford is getting higher prices on new models like the Edge and F-150 than it did on those vehicles' predecessors a year ago. That's partly because the new models include price increases, partly because buyers are opting for higher-priced trim lines, and partly because Ford is able to reduce its incentives -- discounts -- on all-new models.
The difference can be significant. The average transaction price on the F-Series (which includes new- and old-model F-150s, as well as Ford's Super Duty pickups) rose from $42,700 in April to $44,100 in June as more of the new F-150s arrived at dealers. For the quarter as a whole, average transaction prices on the F-Series were over $3,000 higher than a year ago.
Multiply $3,000 per truck times almost 180,000 F-Series pickups sold during the second quarter, and you can start to see the power of stronger pricing. But Shanks hinted that the effect may have been even more significant on the new SUVs.
There may be even bigger profits to comeAs I said above, Ford's second-quarter pre-tax profit of $2.6 billion in North America was an all-time record, and it came with a very strong 11.1% operating profit margin.
Those are both signs of robust health in Ford's North American operation, despite the lackluster-looking U.S. sales numbers we've been seeing recently. But as good as they were, Shanks made it clear that things could get even better as the year goes on.
Shipments and sales of the Explorer and F-150 should be much stronger now that those factories are up to full speed. That will allow Ford's dealers to take full advantage of what appears to be very strong demand for both models.
Meanwhile, now that the launches are complete, Ford's costs should drop. Fields emphasized on Tuesday that 2015 will be a "breakthrough" year for Ford. As good as the second quarter was, the best may be yet to come.
The article How Ford Made Record Profits Despite Low F-150 Sales originally appeared on Fool.com.
John Rosevear owns shares of Ford. The Motley Fool recommends Ford. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.
Copyright 1995 - 2015 The Motley Fool, LLC. All rights reserved. The Motley Fool has a disclosure policy.