Ford Motor Company CEO Discusses Q3 2013 Results - Earnings Call Transcript
Ford Motor Company (F) Q3 2013 Earnings Conference Call October 24, 2013 9:00 AM ET
Executives
Alan Mulally - President and CEO
Robert Shanks - EVP and CFO
Mark Fields - COO
Stuart Rowley - Corporate Controller
Neil Schloss - Corporate Treasurer
Paul Andonian - Director of Accounting
Mike Seneski - Ford Credit CFO
George Sharp - Executive Director, IR
Analysts
Colin Langan - UBS
John Murphy - Bank of America Merrill Lynch
Rod Lache - Deutsche Bank
Patrick Archambault - Goldman Sachs
Itay Michaeli - Citigroup
Dee-Ann Durbin - Associated Press
Craig Trudell - Bloomberg News
Karl Henkel - The Detroit News
Mike Ramsey - Wall Street Journal
Deepa Seetharaman - Thomson Reuters
Joann Muller - Forbes
Operator
A very good day to you, ladies and gentlemen, and welcome to the Ford third quarter earnings conference call. [Operator instructions.] I would now like to turn the call over to George Sharp, executive director, investor relations. Please proceed. Thank you.
George Sharp
Thank you, operator, and good morning, everyone. 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 to be with us this morning so we can provide you with additional details of our third quarter 2013 financial results.
Presenting today are Alan Mulally, president and CEO of Ford, who is linking in from our Asia Pacific Africa headquarters in Shanghai, China and Bob Shanks, CFO. Also participating are Mark Fields, chief operating officer; 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 our investor and media website. Please note that the financial results discussed today are preliminary and include references to non-GAAP financial measures. Final data will be included in our Form 10-Q and any non-GAAP financial measures are reconciled to the U.S. GAAP equivalent in the appendix of the slide deck.
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 would like to turn the presentation over to Alan.
Alan Mulally
Thank you, George, and good morning to everyone. We are pleased to review our third quarter performance and the progress we continue to make in delivering our One Ford plan. Let’s turn to the first slide.
Our One Ford plan shown here is the foundation for everything we do. Across the Ford enterprise, we continue to aggressively restructure the business to operate profitably at the current demand and the changing model mix to accelerate development of new products our customers want and value, finance our plan and improve our balance sheet, and work together effectively as one team leveraging our global assets.
Our commitment remains to serve customers in all markets with a full family of best-in-class vehicles, small, medium, and large cars, utilities, and trucks, delivering profitable growth for all. We continued to make good progress towards this goal in the third quarter, which we will now review starting on slide two, please.
The company earned a record third quarter operating profit at $2.6 billion, our 17th consecutive profitable quarter. Automotive operating related cash flow was also a third quarter record, and at quarter end, liquidity was very strong. The top line grew compared with last year, with market share gains in all regions.
This was our fourth consecutive quarter of volume and revenue growth. The company’s pretax profit was driven by our best-ever third quarter results for the automotive sector. This reflects continuing strong results in North America and combined profit for the region outside of North America for the first time since second quarter 2011.
Within these results, Asia Pacific and Africa earned a record third quarter profit. South America was profitable, and Europe substantially reduced its loss compared with last year and the second quarter. Ford Credit also contributed solid results.
Based on our year to date results, we are improving our full year financial guidance. We now expect total company pretax profit to be higher than 2012, improved from our prior guidance of equal to or higher than 2012. We also now expect automotive operating margin to be higher than last year rather than about equal.
Before turning to the financial details, let’s recap several other achievements from the third quarter. As shown on slide three, we launched a number of products around the globe in the quarter, including the Fiesta ST in the U.S., Cargo Extra Heavy Duty and the Fusion Hybrid in Brazil, Focus in Argentina, Focus Electric in Europe, and the Mondeo in China.
In Europe, we further detailed our product acceleration plans. We now plan to introduce at least 25 new vehicles within the five-year period beginning September of 2012. This is up from our previously announced plan to introduce at least 15 new vehicles over the same period.
Among the new products coming to Europe and other markets is the Transit Connect. It was recently named the 2014 International Van of the Year, marking the second consecutive year Ford won this award.
In Germany, we revealed the S-Max and the Mondeo Vignale concepts, and we also announced plans to increase production of our award-winning one liter EcoBoost engine in our Cologne plant to meet strong customer demand.
In Sydney, we announced future plans for Ford of Australia, including 11 global vehicles by 2017. In India, we announced our intention to develop the country as a global production hub, exporting to more than 50 markets around the world. In August, we shared a comprehensive capital strategy with investors. Details of our strategy are available on our website.
And finally, we were upgraded to investment grade by S&P. With this upgrade, the four major rating agencies that rate us now report Ford and Ford Credit as investment grade with a stable outlook.
Bob Shanks will now take us through the details of our financial performance in the quarter. Bob?
Robert Shanks
Thanks, Alan, and good morning everyone. I’m pleased to share our third quarter results with you today. Third quarter wholesale volume was 1.5 million units, up 216,000 units or 16% from a year ago, and revenue at $36 billion was up $3.9 billion or 12%.
Pretax profit was $2.6 billion, excluding special items, $426 million higher than a year ago. After-tax earnings per share at $0.45 were $0.05 higher. Net income attributable to Ford, including pre-tax special item charges of $498 million was $1.3 billion. This was $359 million lower than a year ago. Earnings were $0.31 a share, down $0.10.
Special items in the third quarter included $250 million for separation-related actions, primarily in Europe, to support our transformation plan, and $145 million associated with our U.S. lump sum payout program as part of our pension derisking strategy.
We settled about $700 million of pension obligations in the quarter and $3.4 billion since the program began. The program is now about 80% complete and will conclude by year-end. You can find additional detail on the special items in Appendix 3.
Automotive operating related cash flow was $1.6 billion, a third quarter record, marking the 14th consecutive quarter of positive performance. Automotive gross cash was $26.1 billion, exceeding debt by $10.3 billion.
Our third quarter operating effective tax rate, which isn’t shown, was about 33%. We now expect our full year operating effective tax rate to be less than 30%, compared with 32% last year. This reflects a year to date tax rate of about 31% and a fourth quarter reduction in Ford Credit’s tax liability.
In the first nine months, vehicle wholesales increased by 14% from a year ago and revenue increased by 12%. Pretax operating profit, excluding special items, was $7.3 billion, a $1 billion improvement. Net income was $4.1 billion. This was $49 million higher.
As shown on slide five, both of our sectors, automotive and financial services, contributed to the company’s third quarter pretax profit of $2.6 billion. The memo below the charge shows that profit improved $426 million compared to 2012, more than explained by higher automotive sector results, driven by regions outside of North America.
Compared with second quarter 2013, total company pretax profit improved slightly, again driven by the automotive sector. Within financial services, Ford Credit’s results were higher in the third quarter than last year, while other financial services was lower. The third quarter loss was $64 million for other financial services, and this primarily reflects charges related to the sale of a portfolio of financed receivables that was not included in our sale of the Volvo auto business in 2010.
The key market factors and financial metrics for our total automotive business are shown on slide six. As previously mentioned, the record third quarter profit reflects continued strong performance in North America and a combined profit from the regions outside North America, including the record third quarter result in Asia Pacific Africa.
Total automotive third quarter wholesale volume and revenue were both up strongly from a year ago. The higher volume reflects higher market share in all regions, improved industry volume in all regions except South America, and favorable changes in dealer stocks in all regions.
The growth in revenue primarily reflects the higher volume, as well as the net pricing gains in all regions. Operating margin of 7% was 0.7 of a percentage point better than a year ago, and our best quarterly margin since second quarter 2011.
Automotive pretax profit was up $451 million, more than explained by favorable market factors. As shown in the memo below the chart, first nine months volume and revenue were higher than a year ago by 14% and 13% respectively.
Operating margin, at 6.2%, and total automotive pretax profit, at $6 billion, improved as well. The better results primarily reflect improved market factors across all regions, offset partially by higher cost as well as unfavorable exchange, primarily in South America.
On slide seven, we show the factors that contributed to the $500 million improvement in total automotive third quarter pretax profit. Favorable market factors, volume, mix, and net pricing across all regions were offset partially by higher costs and unfavorable exchange.
The cost increases mainly reflect investments in higher volume, like growth and new products, not only for this year but also the future, as well as restructuring related cost in Europe, higher OPEB expense in North America, and higher pension expense in Europe.
As shown in the memo, pretax profit was $200 million higher than the second quarter, more than explained by lower cost and higher net pricing, offset partially by lower volume due to seasonal plant summer shutdowns in both North America and Europe. You can find more details on the quarter to quarter change in Appendix 8.
Our third quarter pretax results for each of our automotive operations as well as other automotive are shown on slide eight. All regions were profitable except Europe, and all regions improved compared with a year ago, except North America, which was about the same.
Other automotive reflects net interest expense, offset partially by a favorable fair market value adjustment of our investment in Mazda. For the full year, we now expect automotive net interest expense to be at the lower end of our prior guidance of $800 million to $850 million.
Now we’ll look at each of the regions within the automotive sector, starting here on slide nine with North America. North America continued to perform very well, achieving a pretax profit of $2 billion or more and an operating margin of 10% or more for the sixth time out of the last seven quarters.
In the third quarter, this was driven by a strong industry and a robust full-size pickup segment, our strong product lineup, U.S. market share growth, continued discipline in matching production to real demand, and a lean cost structure, even as we invest more in product and capacity for future growth.
As you can see in the two graphs on the left, North America continued to grow strongly in the third quarter. Wholesale volume and revenue increased from a year ago by 13% and 12% respectively. The volume improvement mainly reflects higher U.S. industry sales, increasing from SAR of 14.8 million to 16.1 million units, favorable changes in dealer stocks, and higher U.S. market share. The higher volume drove the revenue increase.
North America’s operating margin, at 10.6%, was lower than last year, due primarily to cost increases, mainly investment and new products and growth, as well as the non-repeat of a couple of favorable items that we’ve previously disclosed.
Pretax profit was $2.3 billion, about equal to last year’s record profit. As shown in the memo below the chart, North America’s operating margin for the first nine months was 10.7%, 0.5 of a percentage point lower than a year ago, while pretax profit was $7 billion, up about $600 million. Volume and revenue both improved 15% compared with 2012.
On slide 10, we show the factors that contributed to North America’s third quarter pretax profit being unchanged from last year. Favorable market factors were offset for the most part by higher costs, including investment in new products. As shown in the memo, pretax profit also was unchanged compared with the second quarter.
Ford’s U.S. market share trends are shown on slide 11. Total U.S. market share and retail share of the retail industry both improved compared with a year ago. Both share metrics, however, were down compared with the prior quarter. Starting with the left chart, our total U.S. market share was 14.9%, up 0.1 of a percentage point from the same period last year, more than explained by F-Series.
Our share was down 1.6 percentage points through second quarter, explained primarily by lower Ford share of the fleet business, as well as lower fleet mix of the total industry, which is typical for the third quarter.
As shown on the right chart, our retail market share of the retail industry was 13.3%, up 0.6 of a percentage point from last year, reflecting F-Series, Escape, and C-Max. Our retail market share was down 0.4 of a percentage point from second quarter, reflecting primarily lower share of the small car segment and lower inventory availability of Escape.
We continue to have success with what we call the super segment vehicles. This is small vehicles and small to midsized cars, particularly on the coasts. Our super segment market share was up 0.5 percentage point in the quarter, compared to last year, with the coastal regions contributing almost all the improvement.
Our full year guidance for North America remains unchanged. We continue to expect higher pretax profit compared with 2012, and an operating margin of about 10%.
Now let’s turn to slide 12 and review South America. In South America, we’re continuing to execute our strategy of expanding our product lineup while progressively replacing legacy products with global One Ford offerings. Our new products continue to perform very well. Customer response to the Ranger pickup and refreshed Fiesta remains strong, while EchoSport and Fusion continue to be segment leaders.
In the third quarter, wholesale volume and revenue increased strongly from a year ago, with both up 22%. The higher volume reflects increased market share and favorable changes in dealer stocks. The higher market share, 8.4% improving to 9.5%, is more than explained by EchoSport, Ranger, and Fiesta.
South America’s revenue growth was driven by the higher volume and net pricing gains, offset partially by unfavorable exchange. Operating margin was 5.6% and pretax profit was $159 million. The year over year improvement in both metrics is more than explained by favorable market factors. As shown in the memo below the chart, volume, revenue, operating margin, and profit all improved in the first nine months compared with the same period last year.
On slide 13, we show the factors driving the $150 million increase in South America’s third quarter pretax results. Market factors more than explained the improvement, with our new products having a favorable impact on volume and mix.
The higher net pricing mainly reflects efforts to recover the adverse effects of high local inflation and weaker local currencies, along with pricing associated with our new products. As shown in the memo, pretax results were about the same as second quarter.
The overall environment in South America remains uncertain, but given the performance of our business in the first nine months, we now expect to be about breakeven to profitable for the full year. This compares to our prior guidance of about breakeven.
Let’s turn now to Europe, beginning on slide 14. In the third quarter, we remained very much on track in executing our Europe transformation plan. Europe’s third quarter wholesale volume and revenue improved from a year ago by 5% and 12% respectively. This is the second consecutive quarter of year over year top line growth.
The volume increase reflects higher industry sales, lower dealer stock reductions than a year ago, and higher market share. Europe’s market share improved 0.2 of a percentage point, from 7.8% to 8%. The increase in Europe’s revenue mainly reflects the higher volume.
Europe’s operating margin was a negative 3.5% and the pretax loss was $228 million, both substantially improved from last year, despite restructuring costs associated with our transformation plan. So far, we’ve seen our business in Europe improve sequentially in each quarter this year.
As shown in the memo below the chart, Europe’s first nine months operating margin was negative 5%, and the pretax loss was $1 billion, both about the same as a year ago, despite about $400 million of restructuring costs and lower industry volume. Volume and revenue were both up slightly from a year ago.
Slide 15 shows the factors that contributed to the $240 million improvement in Europe’s third quarter pretax results from a year ago. All factors were favorable, with the exception of other costs, which is more than explained by restructuring cost, shown in the memo to the right. Personnel separation related costs, which were significant once again this quarter, are captured in special items.
As shown in the memo below the chart, pretax results improved $120 million compared with second quarter. All factors were favorable, except volume and mix, which reflects mainly lower volume due to Europe’s seasonal plant shutdowns for summer holidays.
Europe market share trends are shown on slide 16. Total market share and retail share of the retail passenger car industry improved from a year ago, but were down slightly from the prior quarter. Starting with the left chart, our total market share for the 19 European markets that we track was 8%, up 0.2 of a percentage point from the same period last year, more than explained by strong sales of B-Max. The share was down 0.1 of a percentage point for the second quarter.
As shown in the right chart, our passenger car share of the retail segment of the five major European markets was 8.3% in the third quarter. That was up 1.3 percentage points from the same period last year. This improvement was underpinned by strong retail performance of B-Max, Fiesta, and Focus. The share was down 0.1 of a percentage point from the second quarter.
For the full year, we now expect our loss in Europe to be less than 2012. This is an improvement from our prior guidance of a loss about the same as a year ago, reflecting progress the company is making on our European transformation plans.
Let’s now review Asia Pacific Africa, on slide 17. Our strategy in Asia Pacific Africa is to grow aggressively with an expanding portfolio of global One Ford products, tailored for the region, with manufacturing hubs in China, India, and ASEAN. Implementation of this strategy continues to gain momentum.
As shown on the left, third quarter wholesale volume was up 35% and net revenue, which excludes our China joint ventures, grew 7%. The higher volume reflects mainly improved market share, with the higher industry volume and the favorable changes in dealer stocks also contributing.
Third quarter market share in the region was 3.7%, 0.6 of a percentage point higher than a year ago, and a quarter record. The improvement was driven by China, which isn’t shown, where our market share improved 0.8 of a percentage point to equal last quarter’s record of 4.3%, reflecting mainly strong sales of Kuga, EchoSport, and Focus. Asia Pacific Africa’s higher revenue primarily reflects favorable volume and mix.
Operating margin was 4.4%, and pretax profit was $126 million, both improved from last year due to favorable market factors. This was the region’s fifth consecutive quarterly profit. As shown in the memo below the chart, Asia Pacific Africa first nine months volume, revenue, operating margin, and profit all improved from a year ago.
The $81 million improvement from a year ago in Asia Pacific Africa’s third quarter pretax results is explained on slide 18. As we’ve seen in past quarters, top line related factors were favorable, offset partially by higher costs as we continue to invest for future growth. We also benefited from higher royalties from our joint ventures and an insurance recovery, both included in other.
As shown in the memo, Asia Pacific Africa pretax results were $51 million lower than the second quarter, more than explained by unfavorable volume and mix. Our guidance for Asia Pacific Africa is unchanged. We continue to expect to be profitable for the full year.
Turning now to Ford Credit on slide 19, we’re explaining the $34 million increase in third quarter pretax results compared with a year ago. The increase is more than explained by higher volume in North America.
The drivers of higher volume were an increase in leasing, reflecting changes in Ford’s marketing programs, as well as higher nonconsumer finance receivables due to higher dealer stocks. As shown in the memo, Ford Credit’s pretax results were $27 million lower than the second quarter.
Ford Credit remains key to our global growth strategy of providing world-class dealer and customer financial services, maintaining a strong balance sheet, and producing solid profits and distribution.
For the full year, Ford Credit continues to expect pretax profit to be about equal to 2012, but we now expect year-end managed receivables of about $100 billion, which is within our prior range of $97 billion to $102 billion, and distributions of about $400 million, which is up $200 million from what was previously planned, reflecting a fourth quarter reduction in Ford Credit’s tax liability.
Next, on slide 20, as to our automotive gross cash and operating related cash flow, automotive gross cash at the end of the quarter was $26.1 billion, an increase of $400 million from the end of the second quarter. Automotive operating related cash flow was $1.6 billion, more than explained by automotive profits.
During the quarter, we contributed $1.1 billion to our global funded pension plans, which included about $700 million of discretionary payments to our U.S. funded plans, all part of our pension derisking strategy.
Dividends paid in the quarter totaled about $400 million, and we continued our compensation related share repurchase program.
In the first nine months, our operating related cash flow was $5.6 billion, and gross cash improved $1.8 billion. We continue to expect automotive operating related cash flow to be substantially higher than last year.
Slide 21 shows that automotive debt at the end of the quarter was $15.8 billion, equal to second quarter. We ended the quarter with net cash of $10.3 billion and automotive liquidity of $37.5 billion.
This now concludes our review of the financial details of our third quarter earnings. Now I’d like to turn it back to Alan, who’s going to take us through our outlook for the business environment as well as our update of 2013 planning assumptions and key metrics. Alan?
Alan Mulally
Thank you, Bob. Slide 22 summarizes our view of the business environment. Overall, our outlook has not changed substantially. We project 2013 global economic growth to be around 2%, and global industry sales to be about 84 million units this year.
U.S. economic growth is projected to be in the 1.5% to 2% range, with industry sales supported by continued improvement in the housing sector and replacement demand as a result of the older age of vehicles on the road. Fiscal policy uncertainty poses a risk as negotiations on the debt ceiling and funding government operations have now been pushed out to the first quarter of 2014.
In South America, Brazil’s economy is relatively weak, with below-trend growth, while in Argentina and Venezuela there’s escalated risk, as both economies are weak, with unclear economic policy directions.
The euro area’s economic and industry conditions have begun to stabilize, and are consistent with a modest recovery that could occur in the near term. The European Central Bank has committed to keep interest rates low for an extended period.
In Asia Pacific and Africa, incoming economic indicators for China suggest stabilization, with growth in the 7.5% range this year. Growth in India, on the other hand, is below its full potential, due partially to elevated inflation, volatile currency, and high interest rates.
Overall, despite challenges, we expect global economic growth to continue for the remainder of this year. Our guidance for 2013 is detailed here on slide 23. We now expect full year industry volume of about 15.9 million units in the U.S., about 13.6 million units in Europe, and about 21.7 million units in China.
We project our full year market share to improve compared with 2012 in the U.S. and China, but to be about equal to last year in Europe. We continue to expect our retail share of the retail passenger car market in Europe to improve.
Our total company third quarter production volume, shown in Appendix 5, was about 1.5 million units, 187,000 units higher than a year ago, reflecting higher volumes in all regions. We expect total company fourth quarter production volume to be about 1.6 million units, 102,000 units higher than a year ago. This includes a reduction of 15,000 units from our prior guidance for North America.
The outlook for quality remains mixed. In terms of our financial performance, we now expect total company pretax profit and automotive operating margin both to be higher than 2012. We continue to expect automotive operating related cash flow to be substantially higher than 2012, including capital spending of about $6.5 billion to support our industry leading product refresh rates, the expansion and global deployment of our portfolio, and capacity actions. This compares to our prior capital spending guidance of about $7 billion.
2013 is on track to be another strong year for the Ford Motor Company as we continue to work toward our mid-decade outlook and deliver profitable growth for all.
In closing, our One Ford plan is built on a compelling vision, a comprehensive strategy, and relentless implementation. As the results we announced today made clear, our One Ford plan continues to deliver profitable growth around the world. We are absolutely focused on great products, creating a stronger business, and contributing to a better world.
We achieved record results in the third quarter, and we continue to expect strong results for the full year. This includes continued strong results from North America; South American results of about breakeven to profitability as we continue to introduce new global products to support product led growth over the remainder of the year, even as we work to adjust to an uncertain environment in the region; continued successful execution of our transformation plan for Europe, which is proceeding very well as we work towards returning to profitability by mid decade; strong investment for long term success in Asia Pacific and Africa, which already is being reflected in improved revenue, market share, and financial results; and consistent performance from our valued Ford Credit operation, which delivers world-class customer service and solid bottom line results.
Now we would be pleased to take your questions. George?
George Sharp
Thanks, Alan. Now we’ll open the lines up for about a 45 minute Q&A session. We’ll begin with questions from the investment community and then take questions from the media. In order to allow as many questions as possible within this timeframe, please keep your questions brief. Operator, can we have the first question please?
Earnings Call Part 2:
