Ford Motor Company (F) — Q3 2015 Earnings Call Transcript

Thank you, Chantelle and good morning. Welcome to everyone joining us today. On behalf of the entire Ford Management team, I would like to thank you for taking the time to be with us, so that we can provide you with additional details of our third quarter 2015 financial results. Copies of this morning’s press release and the presentation slides are available on Ford Investor and Media websites. The financial results discussed today include references to non-GAAP financial measures, non-GAAP financial measures are reconciled to the U.S. GAAP equivalent in the appendix to the slides. Today’s presentation includes some forward-looking statements about our expectations for Ford’s future performance, actual results could be different. The most significant factors that could affect actual results are summarized at the end of this presentation and are detailed in our SEC filings. And now presenting today are Mark Fields, our President and CEO; and Bob Shanks, our Chief Financial Officer. Also participating are Stuart Rowley, Corporate Controller; Neil Schloss, Corporate Treasurer; Paul Andonian, Director of Accounting; and Marion Harris, Ford Credit CFO. Mark, over to you.

Great thanks, Ted. And good morning everybody and thanks for joining us. The overall headline is we had an outstanding third quarter and we remain on track to deliver a breakthrough year. Looking at the numbers, we recorded $2.7 billion in pre-tax profit which was more than double a year ago. We had $1.9 billion in net income which also more than doubled. Our automotive operating margin came in at 6.5%, which was up four points. Our automotive operating related cash flow was $2.8 billion and this resulted in a number of records for the quarter. We had a record third quarter pre-tax profit and a record third quarter automotive operating related cash flow. As we look at the business units, we had our best quarter ever in North America, we had the best third quarter at Ford Credit since 2011. We have not had a better third quarter in Europe since 2009 and South America improved despite the tougher external conditions that we’re seeing in the marketplace. Along with those results we also delivered strong top-line growth. Our wholesale volume was up 7%, our revenue was up 9% or 16% at constant exchange. Our global market share came in three-tenths of a point higher and that's the third quarter in a row of year-over-year global share growth. Along with this growth we also achieved sustained pricing power and that's really on the back of the strength of our new products. If you take a step back and look at the first nine months of the year it’s an equally strong headline. We earned $7 billion in pre-tax profit and $5.2 billion in automotive operating related cash flow and both are more than all of last year. Looking at our launches, 14 of our 16 new vehicle launches have been completed successfully and that's on top of the record 24 global launches we had last year. Importantly, our quality remains strong and it’s also improving in every region around the world. Turning to the F-150, it's performing extremely well in the marketplace and we also just revealed our all-new Super Duty, which will be coming in 2016. Looking at our third quarter F-Series sales in the U.S., it was our best sales in nine years. We continue to build on our strong truck franchise around the world. If you look at the Ranger, that’s the best-selling pickup in Europe, Australia, New Zealand, Vietnam and the Philippines. The Ford brand is the commercial vehicle leader in Europe and we recorded our best sales in 12 years there led by the Transit family. Even as we’re delivering in these results with one foot in today, we also have one foot in tomorrow, delivering emerging opportunities through Ford’s Smart Mobility. Smart Mobility is our plan to take Ford to the next level using innovation in connectivity, mobility and our year-to-date results our plan, our people and our process are delivering and importantly creating value for our stakeholders. As we go into the fourth quarter, close the year and go into 2016 and beyond we’re going to stay absolutely focused on our three priorities, which are accelerating the pace of progress on our One Ford plan, delivering product excellence with passion, and driving innovation in every part of our business. At this point I’ll let Bob take us through some slides.

Okay, Mark, thanks. On behalf of the 195,000 men and women around the world of Ford, I'm very pleased to take you through the details of what they accomplished in the third quarter. Let's start on Slide 4, on the upper left and let’s start with the top line. So we delivered a very, very strong performance on both wholesale volume and revenue as Mark mentioned, wholesale volume was up 7% and revenue was up 9%, 16% if you adjust for constant exchange. Looking at the operating results both the automotive sector and financial services contributed strongly to the third quarter record profit of $2.7 billion. We had earnings per share of $0.45, which was up $0.21. After two quarters of no special items, we have a positive special item this quarter of $166 million reflecting an investment that we have in an aluminum casting supplier named Nemak, who had an IPO in the quarter, so we revalued that investment in line with the IPO that generated this non-cash improvement of $166 million. Just for information going forward, we will mark-to-market this investment each quarter and will reflect the gains or losses in other automotive. This combined with the strong pre-tax results generated the after-tax result to net income of $1.9 billion which was up 129% from a year ago and earnings per share $0.48. For automotive cash flow, we achieved $2.8 billion, very strong and again, that’s the third quarter record. We ended the period with $22.2 billion in cash, automotive debt of $12.8 and net cash of $9.4 billion. Looking at the year-to-date results just a couple of highlights: On the pre-tax results, $7 billion generated so far is 10% higher than what we generated in all of last year on a pre-tax basis. Moving further down the slide lets go back to the operating related cash flow. Compared with all of last year, what we’ve done through the first nine months is already 44% higher so very, very strong performance through the first nine months of the year. Let me just close with a couple of comments on taxes, so let's talk about the quarter first. I have seen a lot of articles thus far that are highlighting the tax rate difference. Versus our first call estimate, we nailed the operating results, but came in slightly different on the tax rate; we originally guided to 34%, we actually came in at 33%, while the first call estimate was 32%, so that entirely explains the $0.01 difference from the first call estimate. For the full year, we are revising our guidance for the tax rate; we had been at 26% which was about where we were last year, but it looks like we are going to come in at about 30%. Let’s go on and look at the automotive sector in more detail on Slide 5. We can observe the wholesales were up 103,000 units 7%, revenue was up $3 billion that’s 9% again 16% after we adjust for exchange, the operating margin is up more than 2.5 times at 6.5% and we tripled our pre-tax results at $2.2 billion. On the lower left, you can see the global industry SAAR was up 1 million units that were driven by North America and Europe and global market share was up three-tenths of a point to 7.6%, again the third consecutive year-over-year improvement on a quarterly basis. That was broad-based, driven by North America, South America and Europe and if we go back and look at the year-to-date results, everything improved right across the board.

Just a couple comments on the F-150 because there is always lots of interest in F-150 and the bottom line is we are seeing very strong demand for the product. We’re continuing to see a rich mix, we see fast turn rates much faster than the segment average. The transaction prices are up $2800 year-over-year and higher than our two main competitors. Our retail market share in the quarter actually climbed above the pre-changeover levels and we believe there is more upside in our total share as we begin shipping more F-150s to our fleet customers during the fourth quarter and into next year.

Because of that, we’re expecting North America to have a very, very strong year with top-line growth and also full-year profits that will be higher than what we achieved last year. We are now revising our guidance on the margin to be at the upper end of our guidance at 8.5% to 9.5%, so really strong performance from North America driving the overall company. Let’s go on and look at South America and actually some really great things happening this year. Our team has done a wonderful job in a very tough environment of delivering a result that's actually a little bit better than what it was last year. If you look at the wholesale the wholesales are down 10% in industries that are down 20% for the region, 25% in Brazil, if you look at revenue, revenue is down 32% and almost all of that is exchange related. The operating margin is down due to lower revenue, but the pre-tax result actually came in slightly better than what it was a year ago. If you look at our share in the lower left, very strong performance both in the region and in Brazil that was driven once again by the very strong market reaction to the Ford call. If you look year-to-date performance we are down on the top line but better in terms of the financial results again based on what the team is done in this very tough environment. So hats off to the team in South America. Going to Slide 11, you can see that it was really driven by net pricing, most of that is to recover the effects of the inflation and also the depreciating currencies, but if you look on the volume and mix callout box you can see the big impact of the industry decline which was partially offset by the strong share performance the team has delivered. For the full year, we continue to expect to have a pre-tax loss that will be reduced compared with 2014, but we feel very good about what the team has done and clearly has positioned the business to recover very quickly once the external environment starts to cooperate.

Turning to Europe on Slide 12, again some good things to call out here very strong top-line performance, wholesales up 17%, the revenue was up modestly in dollars only 2%, but if you look at it again on an exchange adjusted basis up 16%. The operating margin and the pre-tax results improved by nearly 60%. Looking at the third quarter SAAR and shares, you can see very strong growth both at the regional level, but also in Europe 20. We did improved share across the region and had a small decline in Europe 20 which was driven by the launch ramp-up of the S-Max and the Galaxy, along with the aging of the Fiesta. On a year-to-date basis, we are seeing improvement in wholesales revenue off again that's more than explained by exchange and strong improvement in financial results. Let’s go to the next Slide and look at what was behind the $257 million improvement in Europe's results and again very similar to the automotive sector very similar to North America, on the back of great products and good go-to-market strategies you can see the improvement in volume and mix and net pricing more than offset by or partially offset by very modest increases in cost. If you look at “other”, that is largely explained by the consolidation of Russia. Overall again the team's doing a great job here having us moving forward in a positive direction, and we feel that we are very much on track to move towards profitability and will be talking about that more early in 2016. Just a couple comments as you look at our transformation plan, which we had in place for a while it's gaining momentum and we're confident that we're on track for a return to profitability in the region. If you look at the industry overall, it’s improving but it's still a bit of a two-speed recovery with markets like U.K. and Germany doing better than some of the southern markets. But that being said, it's improving. The commercial vehicle segment industry itself is performing well and Ford's commercial vehicle performance is doing extremely well. We were the number one commercial vehicle brand in the region for the quarter and also for the full year. There is still some muted pricing across the industry. But Ford's mix and rates are strong. I think all this has allowed us to not only grow our share but also improve the financial performance that Bob just brought you through.

Okay, thanks. Let’s go on Slide 14, and we’ll look briefly at the Middle East and Africa. We want to highlight here is not so much the financials, the absolute to relatively small. The results are near breakeven. But the team in Dubai is doing a good job, they’ve laid out an overall strategic framework for how we can participate in what's going to be a very important region in the next 5, 10, 10 years and starting to put the building blocks and actions in place in order for us to participate in that. In the quarter they did announce a partnership with a local company in Nigeria for us to start assembly of Ranger pickups relatively soon. For the full year, we expect to deliver about breakeven results. Let’s move on to Asia Pacific. Again looking at the key metrics here a little bit different than some of the other regions, we’ve look at the wholesales were down by 12% 40,000 units, 35,000 of that was in China. The revenue was flat in dollar terms but again adjusted for inflation it was up 12% and just remind you that does exclude the China joint ventures because they’re unconsolidated. The operating margin was down and the pre-tax results were generally in line with where they were last year. If you look at the Asia-Pacific SAAR that declined and it was more than explained by a reduction in the China industry SAAR. In terms of our share our Asia-Pacific share was down a tenth at 3.5% that was driven by Australia. In China you can see that we held our share at 4.7%, which equaled the quarterly record that we set a year ago. Looking below the bars you see the year-to-date results are basically downward across the board. Now let's look back; we do have the equity after-tax earnings and our China JVs, and they were down about 15%. We do have a pretty sizable stock adjustment. We took stocks down in the quarter and that was something that we talked about in the second quarter, we wanted to get our days supply inline with the decline that we have seen in the overall industry. We progressed on that, but the team did a good job of that and also did call the overall run rate of sales properly. We ended the quarter right where we wanted to be in terms of stocks, but it did affect profits on a year-over-year basis by about $130 million. The supplier constraint constrained our production and affected profits to the tune of about $60 million. Overall we think the team has responded well to the slowdown we have seen in China and we are expecting to have a very strong fourth quarter.

A couple comments on the China industry. We are seeing stabilization and as Bob mentioned, we do expect to lift from the stimulus package. We are seeing showroom traffic improve, we are seeing closing ratios improve and unquestionably we see this as a really good opportunity, because 70% of our sales have the engines that are eligible for the stimulus. Across Asia-Pacific as Bob mentioned we’re confident in a strong fourth quarter. Likely it's going to be a record due to the industry lift, the new products which happen to be good margin products, we are at optimal stocking level so we won't experience the destocking we have in the third quarter. The supplier constraint is behind us and the seasonal factor looks positive, so we feel really good about where we are heading in the fourth quarter and into next year.

Let’s go on to Ford Credit on Slide 17. Ford Credit again I mentioned it earlier, but very, very strong performance. The best quarterly results since 2011 at $541 million, driven by growth. You can see the $115 million in volume and mix, most of that is volume and we also benefited from favorable mix associated with leasing in North America. In terms of guidance for the full year, we continue to expect Ford Credit profit to be about equal to or higher than what it was last year. We have narrowed the range of our call for managed receivables to $124 billion to $127 billion still looking for $250 million of distributions from Ford Credit in the fourth quarter. We expect to temporarily see our managed leverage a little bit higher than the 8 to 9 to 1 target due to the translation effect of the strong U.S. dollar. I have touched on much of this so let me highlight once again the strong operating cash flow of $2.8 billion, you can see that was driven by the automotive pre-tax profits; we also saw good performance in working capital and also other timing differences. Looking down further on the page, you can see we actually had no pension contributions in the quarter to our funded plans. I talked about this earlier in the year I said that they would be – the contributions would be largely biased towards the first part of the year. We still have a couple hundred million dollars ahead of us that will be done in the fourth quarter ending the year with about $1.1 billion of contributions. We had $600 million in dividends in the quarter, $1.9 billion of shareholder distributions to date and since 2012, when we restored the dividend, we have had shareholder distributions of $8.5 billion dollars. Liquidity ended at $33.2 billion in the quarter, very, very strong. At the top you can see industry volume and if you look at the third column there you can see as we usually do at this point in time, we’ve narrowed our call to around a single point estimates so in the U.S. we are looking at 17.7 million units that would be up 5% from last year and in line with the year-to-date results. In Europe 20 about 16 million units that would be up 10% and again pretty much in line with the year-to-date results, and in the case of China, we were at 23 million to 24 million in the last call, we’ve narrowed that now to 24 million based on the actions the government has taken which would be in line with where we were last year and a little bit higher than the year-to-date results. In terms of the financial results on the rest of the page, everything remains on track and certainly I don’t want to not state the fact that we expect to see the company coming with the pre-tax profits within the range that we’ve had all year long of $8.5 million to $9.5 million. Overall very strong results for the quarter, for the year-to-date expecting a strong fourth quarter and the breakthrough year that we've been talking about since January.

And a couple of comments on the industry, the U.S. industry in particular before wrapping up. We would characterize the U.S. industry as healthy and barring any type of shock whether economic or policy related. We do see industry sales staying well supported at the current levels through the next few years, or in other words we expect it to be stronger for longer. Transaction prices are strong across the industry and for us replacement demand is back to its historical level of about 70% of industry sales and when you combine that with the vehicle park age, the oldest it’s ever been at 11.5 years, we think that bodes well. The labor market is steadily improving or seeing better wage and income growth and then when you look at the Full-Size Pickup segment, which is important to us here in our biggest and most profitable market, 50% of Full-Size Pickups on the road today are 10 years or older and actually 25% of them are actually 20 years or older. So as we stand back across our lineup we think we are very well positioned overall and also with the F-150 and the 2016 launch of the new Super Duty coming down the pike. Let me just sum it all up. We had an outstanding third quarter and as we mentioned it was a record third quarter profit with that higher wholesales revenue and market share and also better margin. We are formally on track to deliver the breakthrough full-year. For 2015, we expect North America to be very strong both in profit and substantial top-line growth with margins in the upper end of 8.5% to 9.5% range that we’ve guided to. As we look at Europe, we expect improvement in Europe, as we continue moving towards profitability, and will have more to say about that in January. Our Middle East and Africa business unit will deliver breakeven results. South America will deliver better results than last year despite the much tougher environment we’re seeing. Asia-Pacific is going to have a strong year particularly in the fourth quarter, likely a record fourth quarter with the new capacity and the products that are coming online in combination with the government incentives promoting smaller vehicles in China and of course continued strong and steady returns from Ford Credit. Looking at 2016, we expect a strong year with the momentum that we built in 2015.

My question, maybe first on Europe, I'm curious what you think the trend is going to be there between diesel and gas given the events since your last call. Can you talk about your mix of diesel versus gas in the region? Then I think, too, you have a higher mix of light commercial vehicles, which are generally diesel and are going to remain diesel, so can you maybe break that out for us without the impact of LCVs? I'm trying to understand if there were a shift towards gas in the region, if you would benefit from that. And then just on a similar note, I think there's an opportunity now for your prices in Europe to converge with Volkswagen's more quickly than maybe was earlier hoped for. That's a key long-term positive, but should we also worry that maybe their prices have to come down near-term pressure in the industry? Thanks.

Okay thanks, Ryan. First off, as a company we’re well-positioned to respond to wherever the marketplace goes. If you look at some of the statistics, our total sales in Europe are about 55% diesel, slightly less than the total industry. But when you break that out, our cars are about 44%, which is below the industry. We do have the capability to actually go up to about 80% gas engines. On the LCV side, probably about 97% of our LCVs are diesel, but we see that continuing strong. It's too early to tell what changes in the marketplace we will see; we have not seen any changes in terms of customer ordering, we've actually seen a little uptick in interest on diesel on our build-and-price internet marketing tool that we have out there. In terms of pricing, we’re going to continue to come out with best-in-class products, we’re seeing strong pricing particularly across our vehicle lineup. As you noted from what Bob described, our pricing was positive across Europe. In terms of what some of our competitors will do, we don't know; we are just going to stay focused on our plan and keep driving the business forward.

Okay, thanks. Then just for my last question, maybe on Asia-Pacific. I think the guidance earlier in the year was that the profits would inflect from the first half to the back half as you launch new products and leverage new facility investments. Since then you surprised with a really very strong Q2, but were softer in Q3; 4Q is going to be strong you say. I'm curious what the biggest differences have been, whether there was some sort of pull-ahead maybe from Q3 to Q2. And then just lastly, it looks like you actually increased your market expectation for China; now you're saying 24 million versus 23 million to 24 million? Can you talk about, specific to those incentives, what percentage of your vehicles qualify for them, whether you've seen an uptick in your own sales since they've been announced? Do you think that China has found a bottom here?

In terms of the quarterization, I think you'll still see a stronger second half than the first half. It’s going to be driven by the fourth quarter; I think we probably would have expected Q3 and Q4 to be a little smoother than what is turning out. But that’s due to the de-stocking action that we had to take in Q3. We did that through Q1 and Q2, but the industry continued to slow a bit ahead of us keeping up with that. We caught up in Q3. Looking forward to a very strong fourth quarter, we were affected by the supplier constraint that we didn’t expect. Some of that will get back in Q4 as well. So that's really what's behind the quarterization. In terms of the percentage of our vehicles available for the incentives, that’s about 70%. We’re seeing some stabilization in the passenger market and positive sentiment.

We’re seeing stabilization, and as Bob mentioned, we do expect to lift from the stimulus package. We see showroom traffic improving, closing ratios improve; it's a great opportunity, as 70% of our sales have engines which are eligible for the stimulus. Overall, we think we found a bit of a bottom in the passenger vehicles market, but there’s still some weakness in commercial vehicles.

It does sound like things have shifted, and there’s still going to be a stronger second half than first half, but we are seeing seasonal factors. I think it’s important to keep an eye on how the quarterly patterns develop. Overall, we think we are on track.

Thank you all for joining us on the call and we look forward to our next update. End of Q&A.