Ford Motor Company (F) CEO Mark Fields on Q2 2014 Results – Earnings Call Transcript

Source: Seeking Alpha

 

Ford Motor Company (NYSE:F)

Q2 2014 Results Earnings Conference Call

July 24, 2014; 08:30 a.m. ET

Executives

Mark Fields – President & Chief Executive Officer

Bob Shanks – Chief Financial Officer

Stuart Rowley – Corporate Controller

Neil Schloss – Corporate Treasurer

Paul Andonian – Director of Accounting

Mike Seneski – Ford Credit, Chief Financial Officer

George Sharp – Executive Director of Investor Relations

Analysts

George Galliers – ISI

Brian Johnson – Barclays

Colin Langan – UBS

Patrick Archambault – Goldman Sachs

Adam Jonas – Morgan Stanley

Joe Spak – RBC Capital Markets

Ryan Brinkman – JPMorgan

John Murphy – Bank of America

Dee-Ann Durbin – AP

Emmanuel Rosner – CLSA

Rod Lache – Deutsche Bank

Itay Michaeli – Citigroup

Operator

Good day ladies and gentlemen and welcome to your Ford, Second Quarter Earnings Conference Call. My name is Kanti and I’m your operator for today.

At this time all participants are on listen-only mode. We will conduct a question-and-answer session towards the end of the conference. (Operator Instructions). As a reminder, this call is being recorded for replay purposes.

I would now like to turn the call over to Mr. George Sharp, Executive Director of Investor Relations. Please proceed sir.

George Sharp – Executive Director of Investor Relations

Thank you Kanti and good morning everyone. I’d like to welcome you and thank you for joining us today either by phone or webcast. On behalf of the entire Ford management team, I’d like to thank you for taking the time to be with us this morning, so we can provide you with additional details of our second quarter 2014 financial results.

Now, presenting today are Mark Fields, who became President and CEO of Ford earlier this month, and Bob Shanks, our Chief Financial Officer. Also participating are Stuart Rowley, Corporate Controller; Neil Schloss, Corporate Treasurer; Paul Andonian, Director of Accounting; and Mike Seneski, Ford Credit CFO.

Now, copies of this morning’s press release and presentation slides are available on Ford’s Investor and Media websites. The financial results discussed today are preliminary and include references to non-GAAP financial measures.

Now any non-GAAP financial measure are reconciled to the U.S. GAAP equivalent in the appendix of the slide deck, and final data will be included in our Form 10-Q. Now finally, today’s presentation includes some forward-looking statements about our expectations for Ford’s future performance. Of course, actual results could be different.

The most significant factors that could affect future results are summarized at the end of this presentation and detailed in our SEC filings.

With that, I’d now like to turn the presentation over to Mark.

Mark Fields – President & Chief Executive Officer

Thanks George. I’m really pleased to join you this morning and today we’ll review our second quarter financial results, the details behind them and our outlook ahead. So let’s get right into the first slide.

Our strong results this quarter are due once again to the success of our ONE Ford plan, which remains unchanged. We are continuing to focus on all four elements of the plan. They have served us very well and will continue to be our focus going forward.

We also plan to build on our success by accelerating the pace of progress throughout our business. In many ways we are just starting to see the full benefits and strength of ONE Ford and we intend to maximize these opportunities going forward.

At the same time, we are passionate about product excellence and leading in innovation. We are committed to building on the product strength today, with even more new products and innovations that will deliver growth for our stakeholders and define our company going forward.

Now let’s turn to slide two for a look at the second quarter. Overall, we delivered a strong quarter. We achieved our 20th consecutive profitable quarter and our best quarterly pretax profit since the second quarter of 2011.

We also delivered positive automotive operating related cash flow and ended the quarter once again with strong liquidity. Although second quarter wholesale volume and revenue declined 1% year-over-year, we achieved higher market share in Asia Pacific, driven by record share in China.

All automotive business units contributed to the company’s pretax profit, and all improved from a year ago, with the exception of South America. North America achieved record quarterly performance for pretax profit; Asia Pacific achieved a second quarter record; and Europe earned its first quarterly profit since the market dramatically declined three years ago. Ford Credit once again delivered solid results.

As we’ve said, this year is the most aggressive in our history for new product launches. We remain on track with our 23 global product launches. Our full-year outlook for the company pretax profit is unchanged, ranging from $7 billion to $8 billion. Our outlook for automotive revenue and operating margin also remains unchanged.

Today, we are improving our outlook for automotive operating related cash flow to lower than a year ago, from substantially lower, due to the strong cash flow generated in the first half. As we look forward, we expect the payoff of our investments this year will be a strong product line up, with higher volumes, revenues and margins in 2015 and beyond.

Let’s turn to slide three to recap some of the quarter’s other achievements. Both our Ford and Lincoln brands made strong improvements in the latest J.D. Power 2014 U.S. Initial Quality Study, with the F-150, Edge and Lincoln MKX ranking highest in their segments.

To support growth, we revealed several new products, including the all-new 2015 Edge, Focus ST and Escort in China. We also revealed a number of concepts, including the Ford Everest in China, the S-MAX Vignale in Europe, and the Ford Lightweight Concept, which showcases our commitment to light-weighting and advanced material innovation.

In China we launched our Lincoln brand, including the reveal of the MKX concept. We also began North American production of Transit from our Kansas City plant, and the Lincoln MKC from Louisville. In Europe we increased production of Fiesta in Cologne to meet growing European demand.

Ford Otosan, our joint venture in Turkey, began vehicle production from a new plant in Turkey. In China, we opened a new transmission plant with our joint venture partner, Changan Ford Automobile, and in Brazil, we launched a new engine plant. We reached agreement with the German Works Council to improve flexibility and efficiency at our Cologne plant, with the production of the next-generation Fiesta.

Currently, we are implementing a previously announced share repurchase program for up to 116 million shares to offset an up to 3% dilutive effect of potential convertible debt conversions and stock-based compensation.

Now, Bob Shanks will take us through the details of our second quarter results. Bob, you want to take it away?

Bob Shanks – Chief Financial Officer

Yes, thanks Mark and good morning everyone. Starting at the top on slide four, second quarter wholesale volume was 1.7 million units, down 17,000 units from a year ago; and revenue was $37.4 billion, down $500 million. Pretax profit was $2.6 billion, excluding special items, $44 million higher than a year ago.

After-tax earnings per share at $0.40 were $0.05 lower. Net income attributable to Ford, including pretax special item charges was $1.3 billion, $78 million higher than a year ago. Earnings were $0.32 a share, up $0.02.

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Pretax special item charges were $481 million in the quarter. These include the impairment of our equity investment in the Ford Sollers joint venture in Russia, reflecting the present outlook for the business, including a weaker ruble, lower industry volume, and adverse industry segmentation changes that negatively impact sales of Focus. Also included in special item charges are separation related actions, primarily in Europe, to support our transformation plan. You can find details on these charges in appendix three.

Automotive operating-related cash flow was $2.6 billion, our 17th consecutive quarter of positive performance, and automotive gross cash was $25.8 billion, exceeding debt by $10.4 billion. Consistent with our most recent guidance, our second quarter operating effective tax rate, which isn’t shown was 44%, reflecting calendarization effects, including the impact of regional profits.

We continue to expect our full-year operating effective tax rate to be about 35%, assuming retroactive extension of U.S. Research Credit Legislation in the fourth quarter. Our third quarter rate is expected to be about equal to our second quarter rate.

In the first half, vehicle wholesales increased by 2% from a year ago, while company revenue was about flat. First-half pretax operating profit excluding special items was $4 billion, a decline of $721 million and net income was $2.3 billion, $544 million lower than a year ago.

As shown on slide five, both our Automotive and Financial Services sectors contributed to the company’s second quarter pretax profit. As shown in the memo, the year-over-year improvement in company second quarter pretax profit is more than explained by the automotive sector. As mentioned, all regions improved except South America.

Compared with first quarter, company pretax profit was $1.2 billion higher, more than explained by automotive. The improvement over first quarter largely reflects non-recurrence of several significant adverse factors that we highlighted last quarter.

The key market factors and financial metrics for our automotive business in the second quarter are shown on slide six. As you can see on the far left and as already mentioned, wholesale volume decreased by 1% compared with a year ago, and automotive revenue decreased by 2%. The lower volume is more than explained by lower market share in all regions, except Asia Pacific.

Global industry SAAR is estimated at 87.3 million units, up 3% from a year ago. Ford global market share is estimated at 7.5%, down two-tenths of a percentage point. Operating margin was 6.6%, up two-tenths of a percentage point from a year ago and automotive pretax profit was $2.2 billion, up $66 million.

As shown in the memo below the chart, first half volume was up 2% from a year ago, while automotive revenue was down 1%. Operating margin at 5% was down eight-tenths of a percentage point and total automotive pretax profit at $3.1 billion was down $658 million.

Slide seven shows the factors that contributed to the $66 million improvement in second quarter automotive pretax profit. As you can see, lower cost and favorable market factors more than explain the improvement. Adverse exchange driven by South America was a partial offset.

As shown in the memo, pretax profit was $1.3 billion higher than first quarter, more than explained by favorable volume and mix and non-repeat of the significant adverse factors referenced earlier.

Slide eight shows second quarter pretax results for each of our automotive operations, as well as Other Automotive. North America and Asia Pacific were strongly profitable, with the former reporting a record quarterly profit and the latter a second quarter record.

Middle East and Africa and Europe also were profitable, while South America reported at a loss. Other Automotive primarily reflects net interest expense. For the full year, we continue to expect net interest expense to be about $700 million.

Now we’ll look at each of the regions within the automotive sector, starting on slide nine with North America. North America’s second quarter pretax profit continued to be driven by robust industry sales, our strong product line-up, continued discipline in matching production to demand and a lean cost structure, even as we continue to invest for future growth.

North America’s second quarter wholesale volume and revenue declined 5% and 3%, respectively from a year ago. The volume decrease is explained by lower market share and an unfavorable change in dealer stocks, offset partially by higher industry sales.

The U.S. industry SAAR of 16.9 million units in the second quarter was 1.2 million units higher than a year ago. Our U.S. market share deteriorated 1.2 percentage points to 15.3%, reflecting primarily a planned reduction in daily rental sales, lower F-Series share as we continue to balance share, transaction prices and stocks as we prepare for the new F-150; and lower Edge and Focus share.

As shown in appendix seven, U.S. retail market share of the retail industry was 12.9% in the second quarter, down eight-tenths of a percentage point from a year ago, explained primarily by lower F-Series, Edge and Focus.

The decline in revenue is more than explained by the lower wholesale volume and a weaker Canadian dollar, offset partially by favorable mix. North America operating margin was 11.6%, up one percentage point from a year ago and pretax profit was a record $2.4 billion, up $119 million.

As shown in the memo below the chart, all first-half metrics declined from the year ago. The adverse first quarter impact of $500 million associated with changes in warranty reserves and weather related premium costs explains the majority of the lower profit and operating margin.

On slide 10, we show the factors that contributed to North America’s second quarter increase in pretax profit. The improvement is more than explained by lower cost and higher parts and accessory profit. As shown in the memo, pretax profit was higher than first quarter, more than explained by favorable market factors and non-recurrence of the significant adverse factors experienced in the first quarter.

Turning to our full-year guidance for North America, we continue to expect pretax profit to be lower than 2013 and operating margin to range from 8% to 9%. Our guidance includes 13 weeks of production downtime this year for the launch of the new F-150, including the summer shutdown at our Dearborn and Kansas City plants. Three weeks occurred in the first quarter, and at the Dearborn plant, eight consecutive weeks are planned beginning in late August. The Kansas City summer shutdown in July and a few individual down days in the second half make up the remainder of the downtime.

Now let’s turn to slide 11 and review South America, where we’re continuing to execute our strategy of expanding our product line-up and progressively replacing legacy products with global ONE Ford offerings. We are also continuing to manage the effects of slowing GDP growth and lower industry volume in our larger markets, weaker currencies, high inflation, as well as policy uncertainty in some countries.

In the second quarter wholesale volume and revenue decreased from a year ago by 22% and 30% respectively. The lower volume is primarily explained by an 800,000 unit decline from last year’s SAAR of 6.1 million units. This includes the impact of the weakening economy in Brazil, import restrictions in Argentina, and lower production in Venezuela, resulting from limited availability of U.S. dollars.

South America market share at 8.8% was down three-tenths of a percent, more than explained by the model changeover of Ka and the phase-out of Fiesta Classic. The revenue decline is explained primarily by the lower volume and unfavorable exchange, offset partially by higher net pricing.

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Operating margin was negative 14%, down significantly from a year ago and pretax loss was $295 million, a deterioration of $446 million. As shown in the memo below the chart, all first half metrics deteriorated from a year ago.

On slide 12 we show the factors contributing to the decline in South America’s second quarter pretax results. All factors were unfavorable, with the exception of pricing, which did not fully offset the adverse effects of weaker currencies and high local inflation. As shown in the memo, pretax results improved compared with first quarter, more than explained by favorable exchange, mainly non-repeat of adverse balance sheet exchange effects in Venezuela and Argentina.

For the full year we now expect South America to incur a larger loss than we previously guided. Although we continue to expect higher market share and positive net pricing in the second half, as we launch the all-new Ka Small Car, we now expect the rest of the year to be about breakeven to a loss due to lower than expected industry volumes and weaker currencies. The volatility in the region, including potential currency devaluations, adds uncertainty to our short-term projections.

Let’s turn now to Europe, beginning on slide 13, where we continue to implement our transformation plan, focused on product, brand and cost, and remain on track to achieve profitability in 2015.

Europe’s wholesale volume was about unchanged from a year ago, while revenue improved 10%. Europe 20 SAAR was 14.4 million units, up 700,000 units from a year ago. This was offset partially by industry declines in Russia and Turkey.

Europe 20’s market share at 7.9% was down two-tenths of a percentage point from a year ago, reflecting primarily a reduction in rental and fleet share, as well as adverse industry segmentation in passenger car. Although not shown, our commercial vehicle share improved in the second quarter to 10.6%, up 0.5 percentage point from a year ago to our highest second quarter share since 1997. This was driven by our refreshed and expanded range of Transit products.

As shown in appendix seven, passenger car share of the retail segment of the five major European markets was 8.3% in the second quarter, down one-tenth of a percentage point from the same period last year, more than explained by adverse industry segmentation.

The increase in revenue mainly reflects higher volume in the Europe 20 markets and favorable exchange, offset partially by unfavorable mix. Europe’s operating margin was two-tenths of a percent, an improvement of 4.4 percentage points from a year ago and pretax profit was $14 million, a $320 million improvement. As shown in the memo below the chart, all first half metrics improved from a year ago.

Slide 14 shows the factors that contributed to the improvement in Europe’s second quarter pretax results. The improvement is more than explained by lower cost and favorable exchange. Partial offsets include lower results and royalties from our joint ventures, primarily in Russia, along with lower parts and accessories profit.

Restructuring costs were lower than a year ago, primarily due to a reserve release this quarter associated with our Cologne investment agreement and non-recurrence of a facility write-off in Genk last year. As shown in the memo below the chart, pretax results improved compared with first quarter, more than explained by lower cost and favorable market factors.

We are very encouraged by Europe’s first quarterly profit since 2011. This supports our unchanged full-year guidance for the region, which is for results to improve compared with 2013.

Consistent with the normal seasonality of sales and production, we expect our second-half loss to be higher than the first half loss of $180 million. Projected lower second half wholesale volumes of about 100,000 units include the effect of summer shutdowns in the third quarter and year-end shutdowns in the fourth quarter.

In addition, we expect higher restructuring related cost in the second half, including non-repeat of this quarter’s reserve release, and higher launch related costs with started production of the all-new Mondeo and the new Focus.

A final comment on Russia. The current environment clearly is difficult, but Russia remains a large and important market. We are working with our partner in Ford Sollers to develop actions to improve our business outlook going forward.

Let’s turn now to slide 15 and talk about Middle East and Africa, our newest business unit, which was created to better serve customers and expand in this fast-growing region. We are intensifying our focus and targeting opportunities for growth in small, midsize and large vehicle segments.

In the second quarter, we wholesaled 49,000 vehicles in the region, 3,000 fewer than a year ago. Revenue was $1.1 billion, $100 million lower. The lower volume primarily reflects lower market share, driven by increased competitive pressures on Expedition in the Middle East. The lower revenue is explained by the lower volume and unfavorable exchange.

Operating margin was 2%, up nine-tenths of a percentage point from a year ago and pretax profit was $23 million, up $10 million. As shown in the memo below the chart, first half volume and revenue deteriorated from a year ago, but operating margin and pretax profit improved.

Our full-year guidance for Middle East and Africa remains unchanged. We expect results to be about breakeven, with quarterly variability driven by factors such as the timing of production, the mix of vehicles, and long shipping time.

Let’s now review Asia Pacific on slide 16. Our strategy in Asia Pacific continues to be to grow aggressively with an expanding portfolio of ONE Ford products, with many factoring hubs in China, India and ASEAN. As shown on the left, second quarter wholesale volume was up 21% compared with a year ago, and net revenue which excludes our China joint ventures grew 9%.

Our China wholesale volume, not shown, was up 26% in the quarter. Higher volume in the region primarily reflects higher market share and industry volume. We estimate second quarter SAAR for the region at 39.6 million units, up 2.2 million units from a year ago, fully explained by China.

Our second quarter market share was a record 3.7%, four-tenths of a percentage point higher than a year ago. This was driven by China, where our market share improved three-tenths of a percentage point to a record 4.6%, reflecting continued strong sales of Mondeo, Fiesta and Kuga.

Asia Pacific’s higher revenue is explained primarily by the higher volume and favorable mix. Operating margin was 5.5%, up six-tenths of a percentage point from a year ago and pretax profit was $159 million, up $29 million and a second quarter record. As shown in the memo below the chart, all first half metrics improved substantially from a year ago.

Slide 17 shows that the improvement in Asia Pacific’s second quarter pretax profit is more than explained by favorable volume and mix. As shown in the memo, Asia Pacific’s pretax results declined from first quarter, more than explained by higher costs. These cost increases include a higher warranty cost and continued investment in growth, including costs associated with fixed plants, one that opened in China during the quarter, and five plants still under construction in China and India.

For the full year we continue to expect Asia Pacific to earn a higher pretax profit than a year ago. We expect full-year results will be strong for the region, with third and fourth quarter results down from the second quarter.

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Volume improvements will be more than offset by higher cost as we continue to invest for future growth, including the five plants still under construction in China and India, and the launch of Lincoln in China this fall.

Let’s turn now on slide 18 to Ford Credit, which is an integral part of our global growth and value creation strategy. Ford Credit provides world class dealer and customer financial services, supported by a strong balance sheet, providing solid profits and distribution to Ford.

Ford Credit’s lower pretax profit this quarter compared to a year ago is more than explained by a higher level of insurance losses from storm damage to dealer inventory in the quarter, which is included in other.

As shown in the memo, pretax profit was lower compared with first quarter, again, more than explained by the insurance losses just mentioned. For the full year, we now expect Ford Credit pretax profit to be higher than 2013, improved from about equal to or higher.

We also now expect year end managed receivables of $112 billion to $115 billion, up from our prior guidance of about $110 billion. Our guidance for Ford Credit managed leverage and distributions to its parent is unchanged.

Next on slide 19 is our automotive gross cash and operating related cash flow. Automotive gross cash at the end of the quarter was $25.8 billion, an increase of $600 million from the end of the first quarter. Automotive operating related cash flow was $2.6 billion. Automotive profit and favorable timing and other differences were offset partially by higher net spending and unfavorable changes in working capital.

During the quarter we contributed about $300 million to our global funded pension plans, down substantially from the last two years, due to recent improvements in the funded status of our plant. Dividends paid in the quarter totaled about $500 million and other items includes about $850 million related to the stock buyback program now underway.

Slide 20 shows that automotive debt at the end of the quarter was $15.5 billion, $300 million lower than first quarter. We ended the quarter with net cash of $10.4 billion and automotive liquidity of $36.7 billion. We completed in the quarter our corporate credit facility amendment and maturity extensions. The facility is now $12.2 billion, of which $2 billion has been allocated to Ford Credit.

This concludes our review of the financial details of our second quarter earnings. So now I’d like to turn it back to Mark, who will take us through our outlook for the business environment, as well as our 2014 planning assumptions and key metrics. Mark.

Mark Fields – President & Chief Executive Officer

Thanks a lot Bob. Slide 21 summarizes our view of the business environment for 2014. We project global economic growth to be in the 2.5% to 3% range, and global industry sales to be about 85 million to 90 million units. U.S. economic growth is now projected to be in the 2% range as a result of downward revisions to first quarter growth. We continue to expect improving conditions through the balance of this year and have seen economic indicators and industry sales recovering in the second quarter.

In South America, Brazil continues to face inflationary pressures despite higher interest rates and weakening economic growth. The situation remains uncertain in Argentina and Venezuela. In Europe, an economic recovery is underway, with expected 2014 GDP growth of about 1% in the euro area and 2.5% to 3% in the U.K. Although not shown, the outlook for Russia is challenging and fluid, with weak GDP growth, inflationary pressures and a weaker currency.

In Asia Pacific, China’s economic growth is projected in the 7.5% range. Recent incoming data suggest the economy is stabilizing. Growth in India is expected to improve modestly at about 5% from last year, as high inflation and higher interest rates remain impediments to stronger growth. The recent general elections in India have generated positive sentiment and opportunities for better growth in the near term.

Overall, despite challenges in emerging markets, we expect global economic growth to continue in 2014 and be supportive of our projection for higher global automotive industry volume this year.

Slide 22 recaps the guidance disclosed earlier for our business unit, as well as for our net interest expense. In summary, full year guidance deteriorated for South America, improved for Ford Credit, and is unchanged for the other business units.

Our company guidance for 2014 is detailed on slide 23. We now expect full year industry volume to range from 16.3 million to 16.8 million units in the U.S.; Europe 20 markets to range from 14.3 million to 14.8 million units; and China to be in the 23.3 million to 24.3 million unit range.

In terms of our financial performance, we continue to expect automotive revenue to be about equal to 2013 and automotive operating margin to be lower than 2013. We now expect automotive operating related cash flow to be lower than 2013, improved from substantially lower. This includes capital spending of about $7.5 billion to support new or significantly refreshed products and capacity actions.

We also now expect Ford Credit pretax profit to be higher than 2013, improved from about equal to higher than 2013. We continue to expect company pretax profit to be in the $7 billion to $8 billion range, in a period with an unprecedented number of global launches.

Overall, 2014 will be a solid year for Ford Motor Company and a critical next step forward in implementing our ONE Ford plan to continue delivering profitable growth for all. The payoff from in the 2014 launches and investments will be a strong product lineup with higher volumes, revenues and margins in 2015 and beyond.

In closing, our ONE Ford plan is built on compelling vision, a comprehensive strategy and relentless implementation, all leading to profitable growth around the world. We remain fully focused on continuing the success of our ONE Ford plan, in fact accelerating our pace of progress.

We delivered strong results in the second quarter, and we remain on track in implementing our plan for the full year, including continued strength from North America, although down from recent years as we launch three times the number of products as last year; a loss in South America, as we adjust to a changed environment and continued risk in the region; successful execution of our transformation plan for Europe, as we progress towards profitability in 2015, even as we work through challenges primarily in Russia; establishing our Middle East and Africa business unit; continued strong growth and profitability in Asia Pacific; consistent, solid performance from our Ford Credit operations, and positive automotive operating-related cash flow.

So now let’s open it up to your questions. George.

George Sharp – Executive Director of Investor Relations

Thanks Mark. Now we’ll open the lines for about a 45 minute Q-&-A session. We’ll begin with questions from the investment community and then take questions from the media. Now in order to allow us as many participants as possible within this time frame, please keep your questions brief and please avoid asking more than two. Kanti, can we have the first question, please?

Question-and-Answer Session

 

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