Ford Motor Company (F) — Q4 2016 Earnings Call Transcript

Great, thanks very much Crystal, good morning, and welcome everybody to Ford Motor Company's fourth quarter and full year 2016 earnings review. Presenting today is Mark Fields, our President and CEO; Bob Shanks, our Chief Financial Officer; and also participating are John Lawler, Vice President & Controller; Neil Schloss, Vice President and Corporate Treasurer and CFO Ford Smart Mobility; and Paul Andonian, Director of Accounting; and also Marion Harris, Ford Credit CFO. Copies of the press release and presentations slides are on our website as usual. The preliminary results discussed today include some non-GAAP references and these are reconciled to the most comparable U.S. GAAP measures in the appendix. It also includes some forward-looking statements about our expectations for future performance; actual results may vary and the significant factors are included in the presentation. Just as a reminder, Ford Credit will be holding a call at 11 AM to review its fourth quarter and full year results. With that, Mark?

Okay. Thanks, Ted, and good morning, everybody. At our Investor Day in September and again at the Deutsche Bank Conference two weeks ago, we said we were confident that we would achieve our second best full year company adjusted pretax profit, and we have. 2016 was a very strong year, and in addition to our second best full year company profit of $10.4 billion, we had a new record operating margin of 6.7% and our second strongest cash flow of $6.4 billion. The fourth quarter was also strong with company pretax profit of $2.1 billion. So in total, we delivered our seventh year in a row of strong results, with 2016 only being exceeded by our record performance in 2015. Of course, we will dig into the details in a minute, but first I'd like to turn to how we're creating value in our business. So, turning to Slide 4, we're continuing to focus on the four drivers of shareholder value: growth, risk, returns, and rewards. Looking at growth, we launched several key vehicles this year helping to strengthen our core business including the all-new Super Duty, which further solidified our long-time U.S. leadership in full-size pickup trucks. We also took a step forward in the transformation of Lincoln with the launch of the Continental and strong sales growth globally, including nearly tripling our sales in China. In terms of risk, we had strong performance in North America and combined profit for our operations outside of North America. Thanks to our de-risking strategy, our global funded pension plans held up well, and as a result, our globally funded pension plans are now nearly fully funded; our improved risk profile was recognized with ratings upgrades from each of the four major rating agencies. In terms of returns, a number of key metrics set records or near records, including a record profit in Europe of $1.2 billion and our second-best profit in Asia-Pacific. Our disciplined and focused approach to capital allocation continues to pay off as we continue generating a healthy return on invested capital that's well in excess of our cost of capital. Lastly, regarding rewards, shareholders benefited from our continued success and our strong cash generation as we distributed $3.5 billion, including our first supplemental dividend that totaled $1 billion.

Okay, thanks Mark. Let's start on Slide 7 with the key financial summary, and I'll just go down our fourth quarter and full year and cover some of the key metrics. So let's start in the first column with the top-line wholesales and revenue. You can see that we were down just a bit; it was 4% in both wholesales and revenue, and that was more than explained by a favorable stock adjustment in North America. Going further down, you can see our company adjusted pretax results in the quarter came in at $2.1 billion, which was down $478 million, and you can see that each of the segments that we report, automotive, financial services, and all other, which is primarily our treasury operations, were all down. Going further down, let's look at special items on a pretax basis of $3.2 billion, which was driven primarily by the announcement we made on January 20th of losses associated with the re-measurement of our global pension and OPEB plans, primarily driven by lower discount rates and just to remind you that’s non-cash. We also picked up a charge of $200 million associated with our decision to cancel our new plant in Mexico, primarily for our costs associated with returning the site to its natural state and compensating the state government for the costs incurred in terms of putting infrastructure on the site. We also picked up a bit of charges associated with the announcement we made earlier in the year around our withdrawal from the Japanese and Indonesian markets. If you go down further, you can see the net income or loss attributable to Ford in the quarter driven by the specials, which was negative $783 million, and then further down, our adjusted earnings per share came in at $0.30, which was in line with First Call and Bloomberg.

But before you continue, let me just mention that it's important to note something related to the next slide.

Yes, you want to talk about the next slide. So if I turn to Slide 10. And what Mark is talking about, if you look at the slide, you can see that we were down $146 million. The thing that really drove this was higher warranty costs. There were a lot of ups and downs, but the reason we called out warranty costs is because obviously they're not something that was expected. If you look at the callout box for contribution costs, you can see a negative $880 million that was driven by recalls, the largest one that we've had in many years, which really drove that—the door latch recall we had in the third quarter was nearly $600 million. I've got a couple other things to highlight; if you look at the callout box for volume and mix, we had a strong headwind during the year from stocks, adverse stock changes, so we had stock build last year and stock reductions this year, primarily in North America, Europe, and Asia-Pacific.

And just picking up Bob's comments around mix, I think it's really worth pointing out that the mix performance that we achieved last year was impressive compared with the prior year, which resulted in a year-over-year profit improvement for the automotive segment of about $2.4 billion, mainly in North America, Europe, and Asia-Pacific. As Bob mentioned, this reflects a deliberate and successful strategy to strengthen our brands and enrich the mix of our vehicles by focusing on the higher margin segments where consumer interest is particularly strong. We've also achieved greater sales of higher series derivatives like Titanium, ST, RS, and Raptor within our individual vehicle lines. I can assure you that this will continue to be an area of focus and an opportunity for us as we go forward.

Okay, thanks Mark. Now we're going to flip to our quarterly slide. From this point forward, the color and texture that I'll provide will be primarily on the fourth quarter. Again, in the Q&A if you have questions on the full year, please go ahead and ask. This is looking at the absolute for the quarter; you can see the $2.1 billion pretax results to the far left reflected a $2 billion automotive profit, with profits in North America, Europe, and Asia-Pacific, along with declines into South America, Middle East, and Africa, solid results in financial services, and again in all other primarily net interest expense.

And just to provide a point of clarity here, we've seen a very strong performance overall in North America during 2016. If you look at it fairly, our business is doing well, and we're aiming to further build on our success and market share gains.

Just a first question on one of the big swing factors in 2016 being the $1.2 billion stock adjustment. Obviously, that is a real thing; it's not one-time, but it does indicate maybe you earned a little bit more in 2015 than you would have otherwise and that you took that hit in 2016. So, the trajectory of earnings between '15 and '16 actually should be a bit better than what you are showing here. And as we look forward to 2017, your stock position, your inventories are relatively lean; I think it's very disciplined and good, but it does seem like there is a potential for you to particularly as we get through the second half of the year, to maybe build a little bit of the inventory if the industry comes through. I'm curious how you are thinking about this, and if that logic makes sense to you.

Well, I think you're right in the first part, but that was driven by the launch schedule and cadence that we had. So if you remember going back to '15, we were coming out of Dearborn and Kansas City for F-150s, so we were really building stock. We also had that pull ahead of rental into early '16 periods. So again, we had to build stock for that. We have been taking the adjustments through the year and you're right, but it was driven by launch cadence and rental timing as opposed to anything else. As we move into 2017, our stock levels are in very good shape, especially in North America, where there had been a lot of concerns expressed. We kept telling everyone that it was driven by the cadence of launches last year and what was going on with rental. We're actually in very good shape. So we have delivered on that; every other region looks fine. When we look ahead to this year, I think we just kind of hold that level. I don’t see any big plus or minus on this factor regarding impacts on the company; it might differ by business unit but likely not because I think everyone is in pretty good shape.

The only comment I would add is, if there is opportunity and there is more business out there, we'll build more. If we're short in any given month, we'll take adjustments. We want to keep those stocks really in shape and be able to react appropriately.

The first question is really for you, Mark. You've had a couple of breakfasts this week with President Trump. I really wanted to get a sense of your thoughts coming out of there on the policies and how they're shaping potential changes in the tax code. You clearly mentioned the prospects of an import tariff. Most clients that I speak to are either in one camp or the other that there is a 100% probability of a border tax adjustment; if that doesn't happen, we're going to see import tariffs. I'm curious as to—since you've spent the most time with the new President this week, what's your thinking coming out of both those meetings and what you've been hearing?

Well, I think first off it's a very positive sign from my perspective that literally his first two days in office he had morning meetings with manufacturing companies, including automotive companies. I believe he will be very focused on driving policies that drive investment and job creation in American manufacturing and automotive manufacturing, so I think that's going to be a big priority. I think obviously as Bob was mentioning earlier, tax reform is going to be a big priority. We need to look at the statutory tax rates; we need to look at the territorial tax system being proposed and how it will affect us. Our approach as a company will be to stay close to it and provide input. I believe tax reform will be high on the list. We did talk about what inhibitors exist to grow jobs, and your business—regulations were mentioned especially around finalized rule-making that pushed through at the end of the year on fuel economy, which is very important to strike the right balance.

My first question was just on raw materials. Clearly we've seen a move in the spot price for a lot of commodities versus the full-year average for 2016. What kind of assumptions do you have for raw material headwinds this year?

So that’s a really good question, George. What we saw in 2016 is an advance and improvement from commodities of about $900 million. Our planning for 2017—and our guidance for 2017 basically assumes that almost all of that reverses.

Just a quick one here. Alphabet and Waymo seem to have gone around to all the OEMs globally, including yourselves, to try to look for a way to work with you on sharing data, creating HD maps and helping your efforts in the autonomous driving revolution. I was curious if you could reiterate your stance on data sharing with suppliers like Waymo or Mobileye that want to help develop a common crowdsourced map. How do you weigh that versus do-it-yourself, and of course the value of the data?

In terms of our stance on data sharing, we’re open to working with partners where we can crowd source data that helps the system as a whole. It’s essential to consider the value of the data first and foremost, and we don’t want to be relegated to a contract manufacturer status, and that’s always at the top of our minds.

One question for Mr. Fields, you were obviously one of the first to stress the positive side of a Trump Presidency for corporate America. Can you say anything about how it feels never to know when you're going to have to deal with a significant market fallout from a Presidential tweet? What word would you use to describe your mood in this new normal?

I feel good, and the reason I feel good is because you talk about the external environment and being ready for changes. That’s how we've been running this business for years; we always look at our external environment. We’re proactive and act decisively in our strategy, so whether it’s a tweet or market disruption, we’re always ready.

In terms of the $500 million, that was the net savings related to the cancellation of this factory. We will save $500 million in capital by canceling it.