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.
As shown in the memo below the chart, first nine months volume was up slightly from a year ago, while automotive revenue was down 2%. Operating margin at 4.2% was down two percentage points. Total automotive pre-tax profit at $3.8 billion was down $2.2 billion. The lower results were driven by North and South America, all other business units included.
Slide 7 shows the factors that contributed to the $1.5 billion decline in third quarter automotive pre-tax profit. The lower profit is largely explained by higher warranty cost including recalls, mainly in North America, and lower volume in North and South America, as well as $166 million for the adverse balance sheet exchange effects, mainly in South America. All other factors largely offset each other.
As shown in the memo, pre-tax profit was $1.5 billion lower than second quarter, largely explained by lower volume, mainly in North America and Europe, as well as higher warranty cost in North America.
Slide 8 shows third quarter pre-tax results for each of our automotive operations, as well as Other Automotive. North America and Asia Pacific were profitable but the other business units reported losses. Other Automotive reflects net interest expense which we continue to expect to be about $700 million for the full year.
Now we’ll look at each of our regions within the automotive sector, starting on Slide 9 with North America. North America’s continue to benefit from robust industry sales, our strong product line-up, continued discipline in matching production to demand, and a lean cost structure, but our third quarter results were affected adversely by higher warranty cost and lower volume.
North America third quarter wholesale volume and revenue declined 8% and 6%, respectively. This decrease was explained primarily by product launch effects, including five weeks of downtime in the quarter at the Dearborn Truck Plant for the F-150 launch and supplier part shortages.
U.S. third quarter industry SAAR was 17.2 million units, 1.1 million units higher than a year ago. Our U.S. market share deteriorated eight-tenth of a percentage point to 14.1%, reflecting a planned reduction in daily rental sales, and lower F-150 share as we prepare for the new vehicle by continuing to balance share, transaction prices, and stocks.
As shown in appendix seven, our U.S. retail market share of the retail industry was 13%, down two-tenth of a percentage point from a year ago. North America’s decline in revenue is more than explained by the lower wholesale volume. North America operating margin was 7.1%, down 3.8 percentage points from last year, and pre-tax profit was a $1.4 billion, down $886 million. Excluding the higher warranty costs which were entirely associated with recalls, North Americas operating margin would have been 10.2%.
As shown in the memo below the chart, all first nine month metrics declined from the year ago with lower warranty – our lower volume and higher warranty costs including recalls more than explaining the lower operating margin and pre-tax profit.
On Slide 10 we show the factors contributing to North America’s lower third quarter pre-tax profit. The decline is more than explained by higher warranty cost and lower [Technical Difficulty] like the recent restraint control module recall announced last month, as well as reserve changes related to the other field service actions. As mentioned previously, product launch effects and supplier part shortages drove the lower volume.
As shown in the memo, pre-tax profit was lower than second quarter, more than explained by unfavorable volume mix and higher warranty costs.
Turning to full year guidance for North America, we continue to expect pre-tax profit to be lower than 2013, and operating margin to be at the low end of the 8% to 9% range.
Alright, 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 have replaced legacy products with global ONE Ford offerings. We’re also working to manage the effects of slowing GDP growth, declining industry volumes in our larger markets, weaker currencies, high inflation, as well as policy uncertainty in some countries.
In the third quarter wholesale volume and revenue decreased from the year ago by 21% and 17% respectively. The lower volume was explained primarily by a 700,000 unit decline from last year’s SAAR of 5.7 million units. This reflects 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. Also contributing is a non-repeat of last year’s stock build.
South America market share at 8.8% was down four-tenths of a percentage point, more than explained by the phase-out of Fiesta Classic. The revenue decline is more than explained by the lower volume and weaker currencies, higher pricing was a partial offset.
Operating margin was negative 7.3%, down significantly from a year ago and pre-tax loss was $170 million, a deterioration of $330 million. As shown in the memo below the chart, all first nine months metrics deteriorated from a year ago driven by the adverse change in external factors. The first nine month loss includes $426 million of adverse balance sheet exchange effects.
On Slide 12 we show the factors contributing to the decline in South America’s third quarter pre-tax results. The lower results were driven primarily by lower volume and adverse balance sheet exchange effects. As shown in the memo, pre-tax results improved compared with second quarter, more than explained by higher pricing and other effects associated with introduction of the new car in Brazil. Constant well received by media and initial reaction from customers is very encouraging. For the full year we continue to expect South America to incur a loss of about $1 billion.
Let’s turn now to Europe, beginning on Slide 13, where we continue to implement our transformation plan focused on product, brand and cost. Europe’s wholesale volume and revenue improved from a year ago by 6% and 7% respectively. The higher volume reflects a 700,000 unit increase in Europe 20 SAAR to 14.5 million units, higher market share and lower dealer stock reductions than a year ago. Lower volumes in Russia and Turkey were partial offset.
The focus on our transformation plan on improved product and brand led to great progress in the third quarter. Our Europe 20 market share improved four-tenths of a percentage point to 8.4%, this reflects two factors; a 0.5 percentage point improvement in our regional passenger share of the five major European markets to 8.8%, including the effect of our expanded SUV line-up. And secondly, a two percentage point improvement in our commercial vehicles share to 13%, reflecting the success of our full line of new Transit vehicles and continued strong performance of the Ranger compact pickup. The increase in Europe’s revenue is explained by the higher volume in the Europe 20 markets.
Europe’s operating margin was negative 6.4%, down 3.6 percentage points from a year ago and pre-tax loss was $439 million, a $257 million decline. As shown in the memo below the chart, all first nine month metrics improved from a year ago.
Slide 14 shows the factors that contributed to the decline in Europe’s third quarter pre-tax results. The decline is more than explained by Russia, balance sheet exchange effects and other factors including lower component pricing and non-recurrence of prior year gains.
As shown in the memo below the chart, pre-tax results were lower than second quarter. This is more than explained by lower volume due to Europe’s seasonal plant shutdowns for summer holidays, unfavorable exchange, and higher cost including non-recurrence of a restructuring related reserve released last quarter.
For the full year, we continue to expect a loss of $1.2 billion, an improvement compared with 2013.
Let’s now turn to Slide 15 and review Middle East and Africa which is now its own geographic segment in order to facilitate better customer service, and further expand for its presence in this fast growing region. Middle East and Africa’s wholesale volume and revenue improved from the year ago by 9% and 5% respectively.
Operating margin was negative 1.4%, one percentage point better than year ago, and pre-tax loss was $15 million, $10 million better. As shown in the memo below the chart, first nine months wholesale volume and revenue deteriorated slightly compared with year ago, while operating margin and profit both improved.
For the full year, we continue to expect Middle East and Africa results to be about [Technical Difficulty].
Right, let’s now review Asia Pacific on Slide 16. Our strategy in Asia Pacific continues to be to invest for growth through both, new and expanded plants, new products, and the introduction of Lincoln in China. As shown on the left, third quarter wholesale volume was up 5% compared with a year ago, and net revenue which excludes our China joint ventures grew 3%. Our China wholesale volume, not shown, was up 10% in the quarter.
The higher volume in the region is more than explained by higher market share and industry volume. We estimate third quarter SAAR for the region at 38.9 million units, up 1.8 million units from a year ago, explained primarily by China.
Our market share at 3.6% was a record for the third quarter, and was two-tenths of a percentage point higher than a year ago. This was driven by China where our market share improved four-tenths of a percentage point to a record 4.7% reflecting continued strong sales across our vehicle line-up. Asia Pacific’s higher revenue is more than explained by favorable mix.
Operating margin was 1.7%, down 2.9 percentage points from a year ago, and pre-tax profit was $44 million, down $72 million. As shown in the memo below the chart, all first nine month metrics improved from a year ago.
Slide 17 shows the decline in Asia Pacific’s third quarter pre-tax profit. It’s more than explained by higher structural cost and unfavorable exchange with favorable market factors being a partial offset. The higher structural cost reflects our continued investment in products and growth including five new plants that will come online over the next nine months, as well as the launch of Lincoln.
As shown in the memo, Asia Pacific pre-tax results declined from second quarter, with most factors unfavorable. For the full year we continue to expect Asia Pacific to earn a pre-tax profit of about $700 million, which is higher than a year ago.
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 distributions to Ford.
Ford Credit’s higher pre-tax profit this quarter compared with the year ago is more than explained by a higher volume, this reflects increases in nearly all financing products including non-consumer and consumer finance receivables globally, as well as leasing in North America.
As shown in the memo, pre-tax profit was higher than second quarter, explained primarily by a lower level of insurance losses in North America which is included in other. For the full year we continue to expect Ford Credit profits to be $1.8 billion to $1.9 billion. Our guidance for Ford Credit year end managed receivables and managed leverage also is unchanged. We now expect Ford Credits distributions to its parent to be about $400 million, up from our prior guidance of about $250 million. This increase is driven by higher net income at Ford Credit.
Next on Slide 19 is our automotive gross cash and operating related cash flow. Automotive gross cash at the end of the quarter was $22.8 billion, decreases of $3 billion from the end of the second quarter. Automotive operating related cash flow was negative $700 million. This is more than explained by unfavorable changes in working capital including the effects of the five weeks of downtime in the quarter at the Dearborn Truck Plant as we transition to the new F-150 as well as supplied part shortages. In the fourth quarter we expect working capital changes to be positive.
During the quarter debt repayments and pension contributions totaled $600 million. And dividends paid were about $500 million while other items include about $1.1 billion related to the stock buyback program that we completed in the quarter.
Slide 20 shows that automotive debt at the end of the quarter was $14.9 billion, $500 million lower than second quarter. We ended the quarter with net cash at $7.9 billion and automotive liquidity of $33.6 billion. Earlier this week, we gave notice the holders of our 2016 convertible notes, determine a conversion rights and redeem outstanding notes. This action will reduce automotive debt by about $800 million in the fourth quarter with no significant impact on cash flow.
So this concludes our review of the financial details of our third 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?
Thanks, Bob. Slide 21 summarizes our view of the business environment for 2014. We project global economic growth to be in the 2.5% range, with conditions in Europe and South America particular concern.
Global industry sales are expected to be about 87 million units. U.S. economic indicators and industry sales have remained steady through the third quarter, consistent with economic growth in the 3% range. In South America, Brazil is in recession with election related policy uncertainty. Negative growth also is expected in Argentina and Venezuela with ongoing policy and exchange risk.
In Europe, incoming data has weakened, with Euro area GDP growth projected to be less than 1% this year. Conditions in the U.K. however are more favorable with growth projected in the 3% range. Although not shown, the outlook for Russia is challenging and fluid, with very slow GDP growth, inflationary pressures and a weaker currency.
In Asia Pacific, China’s economic growth [Technical Difficulty] range with the ongoing property market weakness reflected in our outlook for 2014. Consumer sentiment supports continued growth in vehicle sales but at a more modest pace in the second half.
With initial signs of improvement, growth in India is now projected to be in the 5% to 5.5% range. Challenges remain however with high inflation and interest rates as elements [ph] to stronger growth.
Overall, despite challenges in some key markets, we expect the global economy to grow in 2014 and be supportive of a projection for higher global industry volume this year.
Slide 22 recaps the guidance disclosed earlier for our business unit, as well as for automotive net interest expense. Full year guidance is unchanged for all business units and consistent with their Investor Day outlook.
Our company guidance for 2014 is detailed on Slide 23. We now expect full year industry volume of about 16.8 million units in the U.S., about 14.5 million units in the Europe 20 markets, and about 23.8 million units in China.
In terms of our financial performance, we continue to expect automotive revenue to be about equal to 2013, automotive operating margin to be lower than 2013. Automotive operating related cash flow to be lower than 2013, including capital spending of about $7.5 billion. Ford Credit pre-tax profit of $1.8 billion to $1.9 billion and company pre-tax profit of about $6 billion.
2014 is a critical next step in implementing our ONE Ford plan to deliver profitable growth for all, including strong growth and much improved financial results in 2015 and beyond. As we communicated at our Investor Day event, we expect 2015 company pre-tax profit to be in the $8.5 billion to $9.5 billion range.
In closing, our ONE Ford plan is built on compelling vision, comprehensive strategy, and relentless implementation, all leading to profitable growth around the world. We are confident in the continued success of our ONE Ford plan, and in fact are accelerating our pace of progress.
The third quarter was challenging but we remain absolutely focused on implementing our plan as we work towards the end of the year, and this includes continued strength from North America, although down from recent years as we launched three times the number of products as last year; a loss in South America, as we respond to a changed environment and continued risk in the region; continued execution of our transformation plan for Europe, 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. So, George you want to lead us through that?
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 we’ll take questions from the media. Now as always, in order to allow for as many participants as possible within this timeframe, please keep your questions brief and please avoid asking more than two. Glenn, can we have the first question.
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