Ford Cruises Through Top and Bottom Lines For Second Quarter FY2021

By Mike Le_29 Jul 2021_6:30 AM EDT

Ford (F) reported better-than-expected second-quarter results Wednesday night after the closing bell. Revenue of $26.8 billion (+38% YoY) exceeded estimates of $23.008 billion, and adjusted earnings per share of $0.13 (+$0.48 YoY) was a surprise compared to estimates of a $0.03 loss.

"Ford+ is about creating distinctive products and services, always-on customer relationships and user experiences that keep improving," President and CEO Jim Farley said in the press release. "And it's already happening - there are great examples everywhere you turn at Ford, and the benefits for our customers and company will really stack up over time.

In addition to the positive headline results, adjusted earnings before interest and taxes (EBIT) of $1.1 billion were much better than estimates of $250 million. Estimates were so down on Ford this quarter because the semiconductor situation worsened in April and management initially forecast it would lose about half of its planned production as a result. But as it turned out, Ford performed much better than expected as it was able to capitalize on the strong demand environment by lowering incentives and selling a favorable mix of vehicles.

Farley said the company is seeing "signs of improvement in the flow of chips now in the third quarter," but added that the situation remains fluid, especially because of delays by Japanese chip maker Renesas (RNECY), that Ford was uniquely exposed to in the first half.

"Overall, after effectively managing through the first half, we are now spring-loaded for growth in the second half and beyond because of those red-hot products, pent-up demand and improving chip supply," said Farley.

By region, North American revenue was $15.0 billion (+37% YoY), generating $194 million of EBIT -- well above estimates of $592 million loss -- for an EBIT margin of 1.3%. Higher prices were the key reason why profits were much better than expected. Ford was able to deliver a 14% increase in revenue per unit thanks to lower incentives and a favorable mix. While we know the Mustang Mach-E--Car and Driver magazine's electric vehicle of the year-is performing well, Ford is also seeing strong demand for its F-150 Lightning. Ford said tonight that it already has 120,000 reservations for the electric vehicle since its unveiling in May, and three quarters of those reservations are from customers new to Ford.

On warranties, management cited continued improvements YoY, though its expects costs in the second half of the year to be higher than the first half due to the non-recurrence of a warranty reserve release in the first half of the year. It's also worth mentioning that Ford's adoption of connected services has been positive for expenses. Ford is "mining the real-world data" from these connected vehicles in real time to better meet customer needs and unlock efficiencies. As an example, Ford said on the earnings call tonight that it has identified $50 million in efficiencies from warrant cost avoidance and other opportunities after analyzing vehicle data from the Mustang Mach-E and F-150. That's only the beginning, as Ford plans to update 600,000 vehicles OTA (over the air) by year end, up from the more than 150,000 so far this year.

Europe's revenue was $5.6 billion (+55% YoY), generating a EBIT loss of $86 million -- better than estimates of a $392 million loss -- for an EBIT margin of -5.1%. EBIT improved on a YoY basis, thanks to an improved mix of utilities, commercial vehicles, and cost reductions. Mustang Mach-E has retailed 7,000 year to date in the region, and Ford said 80% of those customers are new to Ford. Management also disclosed on the call that the Mach-E is currently positive with a positive contribution margin which is so impressive given the fact that the vehicle was a new product launch for Ford and will continue to sell extremely well.

Revenue from China was $0.6 billion (-31% YoY), which in turn generated a $123 million loss before interest and taxes, and for an EBIT margin of -22.3%. The resulting EBIT was slightly worse than estimates of an $88 million loss, but this was still the fifth consecutive quarter of YoY EBIT improvement. The Lincoln brand was profitable and recorded its best quarter quarterly retail sales result; 92% of Lincolns were produced locally in the quarter. Meanwhile, commercial vehicles sales grew and now represent a little more than half of Ford's total China sales. And Ford said preparations are well underway for the launch of localized Mustang Mach-E.

South America's revenue was $0.5 billion (+124% YoY), generating a $86 million loss before interest and taxes, which was better than the negative $94 million estimates -- for an EBIT margin of -15.9%. This was the seventh consecutive quarter of YoY EBIT improvement. The company said its previously announced restructuring efforts are on track.

International Markets Group revenue was $2.5 billion, generating earnings of $204 million before taxes and interest -- much better than estimates of a $85 million loss, for an EBIT margin of 8.3%. Management said they continue to assess their business in India, which historically has been unprofitable. They said they will have more to say on the region later in the year.

And, Ford Credit EBIT came in at $1.6 billion. That's a new quarterly record and nearly double the $858 million estimate.

Now let's talk about the company's full year outlook. Ford raised its expectations for full year adjusted EBIT by about $3.5 billion tonight, moving the new range to between $9 billion and $10 billion. This compares favorably to the consensus estimate of $8.47 billion. Importantly, Ford expects volumes will increase by about 30% sequentially from the first half of the year to the second. Although volumes are poised to increase, Ford expects this benefit will be offset by higher commodity costs (~$2 billion headwind), investments in Ford+, lower Ford credit earnings, and other factors. For these reasons, second half adjusted EBIT is expected to be lower in the second half of the year compared to the first. Ford also recorded a non-cash gain of $902 million related to its investment in Rivian during the first quarter, representing another reason why EBIT is expected to be lower. In total, Ford expects adjusted EBIT in the range of $3 billion to $4 billion over the second half of the year. That's a hair below estimates of $3.6 billion, but we would look past that because the company has had such a strong first half of the year.

In addition, management raised its target full-year adjusted free cash flow expectation to the range of $4 billion and $5 billion. That's much stronger than the current $1.577 billion estimate. Supporting Ford's FCF generation is expectations of a "favorable second-half working capital as vehicle production increases with anticipated improvement in availability of semiconductors." This robust free cash flow generation should continue to support Ford's investment in electric vehicle and autonomous vehicles.

Three months ago when the stock fell nearly 9.5% in a single day to $11.26 in response to management lowering its full year outlook due to the chip shortage, all the talk around Ford was that the second quarter was going to be terrible. The worry was Ford's manufacturing plants were going to be idled and rising commodity costs were going to chip away at the company's bottom line.

Instead, Ford delivered profits in the second quarter when the consensus view was for a loss. Not only will this positive surprise make investors feel more confident in management's ability to execute in tough industry conditions, but it should also add a layer of credibility to CEO Jim Farley's turnaround plans and the ambitious goals that were set at the Capital Markets Day a few months ago.

As a result of the better than expected quarter and raised outlook, Ford's shares are rising about 3.5% higher to $14.36 in after-hours trading.