Ford Motor Company (F) — Q1 2017 Earnings Call Transcript

All right. Thanks very much. Good morning and welcome everybody to Ford Motor Company's first quarter 2017 earnings review. Presenting today are Mark Fields, our President and CEO; and Bob Shanks, our Chief Financial Officer; also participating are John Lawler, Vice President and Controller; Neil Schloss, Vice President and Corporate Treasurer and CFO of Ford Smart Mobility; Paul Andonian, Director of Accounting; and Marion Harris, Ford Credit CFO. The results today include some of our non-GAAP references, these are reconciled to the GAAP measures in the appendix of the slides, but today also includes Ford's earnings material and Ford Credit's earnings material presentation, as we're no longer holding Ford Credit calls. So you have an all-in-one package here. Today's discussion includes some forward-looking statements about our expectations for future performance, while actual results may vary, and most of the significant factors are included in the presentation. So with that, what we'd like to do is pass over to Mark Fields.

Okay. Thanks, Ted, and good morning, everybody. Thanks for joining us. As you can see on slide 3, we're focused on three sets of strategic priorities and importantly taking the actions that will drive value for our shareholders as we expand to an auto and a mobility company. We are reallocating capital to fortify our core strengths, transform underperforming parts of our business, and investing aggressively but prudently in emerging opportunities. While we reallocate capital in each of these areas, that decision-making is being governed by where to play, where not to play, and how to win. So with that as a backdrop, I would like to take you through our first quarter results. In the first quarter, as you can see on slide 4, we delivered total company adjusted pre-tax profit of $2.2 billion, which was lower than our best-ever quarterly profit a year ago. Importantly, revenue was up, and that reflects a favorable mix. All other key metrics were down, and our adjusted earnings per share came in at $0.39. We're reaffirming that we will remain on plan for our full-year guidance, and we continue to expect total company adjusted pre-tax profit to be about $9 billion this year with stronger profits in 2018. Now, turning to slide 5, our strategic priorities are focused on the four drivers of shareholder value – growth, risk, returns, and rewards. Let me take you through each one of these. In terms of growth, we grew our top-line in the quarter with company revenue up 4%, driven by favorable mix. Here in the U.S., our average transaction prices increased by nearly four times the industry average. Lincoln sales continue to show improvement. They were up 24% globally in the quarter and that was 9% in the U.S. and 114% in China. In terms of risk, we're sitting at $28 billion in cash, which provides both protection in the current business environment but also reflects the potential for strategic acquisitions and other prudent investments in the years ahead. In addition, we remain fit for any future downturn in North America with a healthy breakeven SAAR at 11 million units in the U.S. And finally, in terms of risk, our global funded pension plans are nearly fully funded and de-risked. Ford Credit continues to be disciplined while at the same time being a very healthy contributor to our bottom line. In returns, we had $2 billion in cash flow in the quarter. We delivered our eighth consecutive profitable quarter in Europe. And we had our second consecutive quarter of year-over-year improvements across all key metrics in South America, including market share. Lastly, in terms of rewards, shareholders benefited from our continued success and also our strong cash generation, as we distributed $800 million in the quarter. This includes a supplemental dividend that totaled $200 million. Turning to slide 6, this summarizes the progress we're making on executing our strategic priorities. We're fortifying our profit pillars, including our leadership and strong global franchise in trucks. We've announced that we'll be launching an upgraded F-150 in the second half of the year and reintroducing the Ranger to North America in 2019. This introduction will help expand our 40-year leadership in full-size trucks, while entering the U.S. midsize pickup segment – a pickup truck segment with an addressable retail market of more than $12 billion. In utilities, we introduced the all-new Expedition, which is critical to capturing market share in the small but lucrative full-size SUV segment. We also announced the global introduction of the Bronco coming in 2020. In performance, we have a true global leader with our Mustang, which is now sold in 140 countries. Mustang was the best-selling sports car in the world in 2016. To reinforce our continued leadership and fortify that pillar in performance, our new 2018 Mustang is coming this fall. When it comes to transforming traditionally underperforming parts of our business, our transformation of Lincoln continues to gain momentum. We introduced the first all-new Lincoln Navigator in over a decade. We also announced plans to manufacture an all-new Lincoln SUV in China for the Chinese market, which will improve profitability and cash flow while allowing us to respond to market needs more quickly. Regarding emerging opportunities, we believe we've laid out our electrification strategy clearly, playing to our strengths and electrifying vehicles to provide more capability, productivity, performance, and better fuel economy for our customers. A prime example is our unveiling a couple of weeks ago of the industry's first pursuit-rated hybrid police car, which further cements our strong franchise among law enforcement and cities by delivering a hybrid vehicle that will power the high electrical loads of a police vehicle, while reducing engine runtime and emissions. With that as an overview, let me turn it over to Bob, who'll take us through the details of our business performance.

Okay, Mark, thanks. And good morning, everybody. On slide 8, that's where we'll start. As usual, Mark has already touched on a number of the metrics on the slide, and I will also cover some of the others later in the presentation. I want to focus my comments here only on the things that you will only see on this particular slide. Let's start first with the special items pre-tax sort of in the middle of the slide. You can see they came in at a favorable $24 million, which is $210 million better than a year ago. This is driven by the reassessed cancellation charges associated with the cancellation of our plant in Mexico. We booked that in the fourth quarter at $199 million, and we've taken that down by $46 million, thus the cancellations charges are now at $153 million. The balance consists of European separation costs. Year-on-year, the good news is lower separation costs associated with our European restructuring actions, as well as that $46 million improvement in the cancellation charge related to Mexico. The second point I want to make is around our adjusted effective tax rate, which came in at 28.6% for the quarter. This is 80 basis points better than a year ago and consistent with our full-year guidance of an adjusted effective tax rate of about 30%. Lastly, on the lower right of the slide in the text, we came in with an adjusted EPS of $0.39. A month ago, I guided to $0.30 to $0.35 based on what we were looking at at that time. The $0.39 difference is due to favorable timing of cost performance and wholesale volume, mainly in North America. We did see some good news in other parts of the business, so this reflects timing and we don't see it impacting our outlook for the full year. Let's move on to slide 9. Here we're looking at total company absolutes and the reporting segment absolutes. We have solid results for the total company, solid results for automotive at $2 billion, which made up the bulk of the company's results, and solid results in the financial services segment at $466 million, with Ford Credit at $481 million, which we'll cover later. We see a loss of $212 million in all other segments, mostly due to net interest expense on our automotive debt. The year-over-year decline of $1.6 billion in the quarter against last year's record results, is expected to be down by roughly $1.4 billion for the full year. The third quarter is expected to be the lowest absolute due to normal seasonal factors, plant shutdowns in the U.S. and Europe, and the launch of the Expedition and Navigator. Let's move on to the next slide, slide 10. Here we're looking at the Automotive segment's absolute results. We see a total profit of $2 billion, with profitable segments in North America, Europe, and Asia Pacific. Losses were incurred in South America and the Middle East and Africa. Considering these results against the quarter last year, we're expecting the majority of North America's full year profit decline and increased costs to have occurred in the first quarter.

Let me just make an additional comment and explanation point on cost. We're continuing our intense focus on cost. The reason for this is not only to be mindful of the current environment that we're in, but also to prepare us even more for a downturn scenario, which we've discussed in the past.

Let's move on to North America. Many of the things I discussed for the Automotive segment apply directly here. Key metrics are lower, with the exception of revenue, which continues to grow due to favorable mix. The industry was down about 300,000 units. Our market share decreased due to the U.S., where market share was down by 0.4, which was primarily driven by fleet decline. We expect North America to continue strong in terms of portfolio, but down from last year due to higher costs, with some efficiencies hopefully offsetting the impact.

Turning to slide 16, let's dive deeper into our disciplined approach to the marketplace. Our average transaction prices in the first quarter grew nearly four times faster than the industry, primarily due to the performance of the F-Series and the continued growth of Lincoln. We also continued our disciplined approach to incentives. While industry incentives grew, Ford levels were relatively flat as we successfully match production to demand. Our stocks in the U.S. are in excellent shape. We maintain a disciplined approach to matching production to demand. Our day supply tends to be slightly higher than the industry average due to our strong position in trucks, giving us a real strength.

Moving on to South America, this is a story of improvement. This is the second consecutive quarter where all metrics have improved. We generated positive revenue in the quarter through volume, pricing, and exchange. Our market share increased on the strength of the Ka and Ranger. We are seeing signs of improvement in the economic environment in South America. PMIs are looking better, consumer confidence is rising, and the Central Bank is cutting policy rates aggressively. We expect improvement in loss compared to last year driven by favorable market factors tied to the economic recovery.

In Europe, we had another profitable quarter, our eighth in a row. We feel very good about what's happening in Europe despite the effects of Brexit. Revenue was up, driven by volume and mix, and our share increased, especially for Cougar and commercial vehicles. The Ford brand was the number one selling commercial vehicle brand in the market. Moving on, the results were profitable though down year-over-year due to higher costs, some associated with the launch of the all-new Fiesta. We expect Europe to remain profitable, though below 2016 levels, with some key factors driving the decline being the weaker sterling and higher costs associated with the launch of the Fiesta and the EcoSport.

Let's move on to the Middle East and Africa. Here the main story is volume. The decline in volume affected every metric shown on the page. We saw a 12% decrease in SAAR and lower market share, primarily in the Middle East. For the full year, we expect Middle East and Africa to improve compared to 2016 due to lower costs and favorable exchange rates, albeit with lower volume being a partial offset. Most improvements are expected in the second half of the year.

Now regarding Asia-Pacific, this is two stories – China and the rest of the region. China faced a challenging quarter with the industry down 1.6 million units, impacting our performance. However, we maintained a profitable margin with $274 million. The rest of the Asia-Pacific region was profitable with all markets improving except India. We expect profitability in Asia-Pacific to improve versus 2016, driven by higher volume in the balance of the year.

Next slide, regarding Ford Credit. We've seen concern regarding auto financing trends. I assure you that Ford Credit feels well-positioned based on current knowledge and outlook. Business grew, with managed receivables up 6%, and pre-tax results fell only 6% to $481 million. The FICO score remains strong at 741, and while delinquencies are increase, they remain below historical levels. Overall, the portfolio performs as expected in current environments. Regarding cash flow, performance on cash flow has been strong. The automotive segment's pre-tax profit of $2 billion approximately flowed right through to operating cash flow. Capital spending was $1.7 billion, aligning with full-year guidance of $7 billion. Shareholder distributions were $2.7 billion, with a strong liquidity position.

Since our last discussion, we've updated expectations for industry sales across major markets. Brazil's sales will be slightly higher due to fleet sector performance. In Europe, we expect slight industry volume increases in 2017 and 2018, primarily across most EU markets. For China, we expect higher industry volume at 28.2 million units in 2017 and flat for 2018. However, we anticipate a slight decline in the U.S. this year but remaining at historically high levels. Overall company guidance remains consistent with previous guidance. We expect total company adjusted pre-tax profit this year to be about $9 billion, setting a foundation for a stronger result in 2018. This will be led by gains in our core business, including important high-margin vehicles like the Navigator and Expedition. F-Series should also continue to perform well in the market. Overall, we are on a good trajectory for the year aligned with our previously communicated strategy.

Great. Thanks for taking my question. On the last slide, you mentioned transforming the focus on luxury, small cars, and emerging opportunities. Can you provide any color on the timeline for getting those on track? There has been chatter around small cars potentially losing money. How do you plan to restore those to profitability?

Thanks, Colin. As you know, we are focused on our strategy of fortify, transform, and grow. For luxury, we've seen sales growth with Lincoln. In terms of small vehicles, we’ve focused on reducing complexity in models like Focus and Fiesta, along with low-cost production. We’ll keep you updated on progress.

To clarify, China made a profit in the quarter. Our various market segments are showing improvement, with the non-China regions also seeing profitability. The only major market not profitable was India, but it also improved overall.

Regarding trends in auto loans, do you expect to grow your asset base within Ford Motor Credit in light of possibly tighter credit from banks?

We are experiencing growth in managed receivables overall. Our role at Ford Credit supports Ford during both good and challenging times, and we believe we will continue to grow in a healthy manner this year.

The growth applies globally, but in the U.S., growth may not be large as sales plateau. While banks are starting to retreat from deep subprime lending, we have not yet seen that major retrenchment.

On the European profit segment, can you clarify expectations around net pricing for the region as we move forward?

In Europe, we expect to see improved pricing metrics in the back half of the year, particularly once we launch new vehicles. The net pricing should improve, reflecting our overall vehicle strategy.

In light of declining diesel demand, do you think companies might alter spending on technologies to incentivize diesel more?

Given consumer sentiment and regulations, we believe diesel demand will continue to decrease. However, we are prepared and investing in our technologies. Diesel remains important for commercial vehicles, and we have flexibility to adapt to changes in demand.

What's your perspective on GM's exit in Europe?

Regarding GM's exit from Europe, I think it opens up opportunities for us, as in the short term it will take out a competitor. But we will remain focused on our strategy in the region, where we have established strengths.

Do you think we are witnessing the last generation of internal combustion engines? When do you expect electrified powertrains to become more cost-effective than ICE?

While predictions vary, we expect that within the next 15 years, there will be more electrified options than ICE in the market. However, ICE will remain crucial for certain applications, and improvements will continue in traditional powertrains.

Are you considering sharing raw material cost increases with your suppliers?

We actively negotiate contracts with our suppliers on commodities, and we use indexing as a strategy. Commodity prices correlate with currency shifts, so we take a comprehensive view in managing costs.

Regarding the cash balance, are you conserving cash as we approach a downturn?

Our liquidity position is solid, providing us capital for core business support and potential strategic opportunities. We are well-positioned for any future downturn.

What's your expectation regarding the cadence of your earnings? Are the second half outlooks stronger than the first half?

The third quarter is expected to be the lowest absolute of the year. Calendarization is tricky, but generally we expect historical patterns of about 55-60% in the first half.