Ford Motor Company (NYSE:F)hosted a conference call with investors and analysts to discuss Q3 2014 earnings results on October 24, 2014 at 11:00 a.m. ET. The following are the webcast audio and the associated transcript of the event…
Ford Motor Company (NYSE:F)
Q3 2014 Earnings Conference Call
October 24, 2014 11:00 AM ET
George Sharp – Executive Director, IR
Mark Fields – President and CEO
Bob Shanks – EVP and CFO
Neil Schloss – VP and Treasurer
Colin Langan – UBS
Daniel Galves – Credit Suisse
John Murphy – Bank of America Merrill Lynch
Brian Johnston – Barclays
Rod Lache – Deutsche Bank
Patrick Archambault – Goldman Sachs
Adam Jonas – Morgan Stanley
Joseph Spak – RBC Capital Markets
Ryan Brinkman – JPMorgan
George Galliers – ISI Group
Mike Ramsey – The Wall Street Journal
Good day ladies and gentlemen, and welcome to the Ford Third Quarter Earnings Conference Call. My name is Glenn and I will be your event manager for today.
At this time all participants are in listen-only mode, and later we will facilitate a question-and-answer session. (Operator Instructions) As a reminder, this conference is being recorded for replay purposes.
I would now like to turn the conference over to your host for today, Mr. George Sharp, Executive Director of Investor Relations. Please proceed, Mr. Sharp.
Thank you, Glenn, and good morning. Welcome to everyone joining us today either by phone or by webcast. On behalf of the entire Ford management team, I’d like to thank you for taking the time [Technical Difficulty] third quarter 2014 financial results.
Now presenting today are Mark Fields, our President and CEO; and Bob Shanks, Chief Financial Officer. Also participating are Stuart Rowley, our 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 our Investor and Media websites. The financial results discussed today are preliminary and include references to non-GAAP financial measures. Now any non-GAAP measure is 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. 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 our future results are summarized at the end of the presentation and detailed in our SEC filings.
With that, I would now like to turn the presentation over to Mark.
Thanks, George. Today we will review our third quarter financial results, the details behind them, and our outlook ahead. So let’s get right into the first slide.
Our results this quarter are underpinned, once again by our ONE Ford plan which remains unchanged. We are continuing to focus on all four elements of our plan; they served us 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.
So now let’s turn to Slide 2 for a look at the third quarter. The third quarter was our 21st consecutive profitable quarter and we ended the period with strong liquidity. Automotive operating related cash flow however was negative due to unfavorable changes in the working capital, including product launch effects. Third quarter wholesale volume and revenue declined year-over-year by 3% and 2% respectively. Market share however was higher in Europe and our third quarter record in Asia Pacific, where we once again delivered a record share in China.
North America and Asia Pacific were profitable where pre-tax results were lower than a year ago for all of our automotive business units, except Middle East and Africa. Ford Credit delivered strong results that were better than a year ago. Company’s pre-tax profit was in line with our expectation and consistent with the guidance we provided at the September Investor Day of company full year pre-tax profit of about $6 billion which we are reconfirming today. It was however, lower than a year ago. This is more than explained by three factors; lower volume, higher warranty costs, and adverse balance sheet exchange effects.
The lower volume was in North America, reflecting product launch effects and part shortages due to supplier issues, and in South America where industry sales declined due to the deteriorating external conditions. The higher warranty costs were mainly in North America, and were primarily due to recalls. And finally the adverse balance sheet exchange effects were largely in South America and accounted for about one-third of the regions lower profit.
Looking ahead, 12 of our 23 global product launches are now complete and the balance are continuing to progress, including the all new F-150. And these launches along with the 16 planned for 2015 are expected to result next year in higher revenue, improved operating margin, and a company pre-tax profit of $8.5 billion to $9.5 billion.
So let’s turn to Slide 3 to recap some of the quarter’s other achievements. Other third quarter highlights include the start of production of several products, including the all-new 2015 Mustang, and the Lincoln MKZ, and MKC for China. We also announced the new C-MAX, brand C-MAX and S-MAX in Europe. We also announced that we’re bringing 25 new vehicles to Middle East and Africa by 2016.
Seven Ford vehicles finished in the Top Three of their segment in the J.D. Power and Fuel Study with F-150 and super duty F-250 and F-350 ranking highest in their segments.
We hosted the industry’s first App Developer Conference, and we were active in job creating including new jobs in Kansas City, Louisville, and Asia Pacific to support our growth initiatives. Finally, we completed our previously announced share repurchase program that reduced our diluted shares by about 3%.
So now I’ll turn it over to Bob who will take us through our financial results. Bob?
Thanks, Mark, and good morning everyone. Let’s start at the top on Slide 4, third quarter wholesale volume was 1.5 million units, down 52,000 units from a year ago; and revenue was $34.9 billion, down $900 million. Pre-tax profit was $1.2 billion, excluding special items; $1.4 billion lower than a year ago.
After-tax earnings per share at $0.24 were $0.21 lower. Net income attributable to Ford, including pre-tax special item charges was $835 million, [Technical Difficulty] year ago. Earnings were $0.21 a share, down $0.10. Pre-tax special item charges were $160 million in the quarter reflecting separation related actions largely in Europe to support our transformation plan.
Automotive operating related cash flow was negative $700 million, and automotive gross cash was $22.8 billion, exceeding debt by $7.9 billion. Our third quarter operating effective tax rate, which isn’t shown was 31%, which is lower than our prior guidance. 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.
In the first nine months period vehicle wholesales were up slightly from a year ago, while the company revenue decreased by 1%. First nine months pre-tax operating profit excluding special items was $5.2 billion, a decline of $2.1 billion, and net income was $3.1 billion, $1 billion lower than a year ago.
As shown on Slide 5, both our Automotive and Financial Services sectors contributed to the company’s third quarter pre-tax profit. As shown in the memo, company’s third quarter pre-tax profit declined compared to the prior year and prior quarter, both more than explained by automotive.
The key market factors and financial metrics for our automotive business in the third quarter are shown on Slide 6. As you can see on the far left, wholesale volume and revenue decreased by 3% compared with a year ago. The lower volume is more than explained by an unfavorable change in dealer stocks related to product launch effects and supplier part shortages as well as declining industry volume in South America. Higher industry volumes in other regions were a partial offset.
Global industry SAAR is estimated at 86.7 million units, up 3% from a year ago. And Ford’s global market share is estimated at 7.4%, unchanged from a year ago. Operating margin was 2.5%, down 4.5 percentage points from a year ago, and automotive pre-tax profit was $686 million, down $1.5 billion.