Ford Motor Company (F) Q1 2014 Earnings Conference Call April 25, 2014 9:00 AM ET
George Sharp - Executive Director, Investor Relations
Alan Mulally - President and Chief Executive Officer
Robert Shanks - Executive Vice President and Chief Financial Officer
Mark Fields - Chief Operating Officer
Stuart Rowley - Vice President and Controller
Neil Schloss - Vice President and Treasurer
Paul Andonian - Director, Accounting
Mike Seneski - Ford Credit Chief Financial Officer
Adam Jonas - Morgan Stanley
Brian Johnson - Barclays
Colin Langan - UBS
Ryan Brinkman - JPMorgan
Rod Lache - Deutsche Bank
Pat Archambault - Goldman Sachs
Itay Michaeli - Citi
Dee-Ann Durbin - Associated Press
David Whiston - Morningstar
Jeff Flock - Fox Business Networks
Karl Henkel - Detroit News
Mike Ramsey - Wall Street Journal
Alisa Priddle - Detroit Free Press
John Murphy - Bank of America
Good day, ladies and gentlemen. And welcome to the Ford first quarter earnings conference call. My name is Towanda, and I will be your coordinator for today. (Operator Instructions) I would now like to turn the conference over to Mr. George Sharp, Executive Director of Investor Relations. Please proceed, sir.
Thank you, Towanda, and good morning. Welcome to everyone joining us today either by phone or by webcast. On behalf of the entire Ford management team, I would like to thank you for taking the time to be with us this morning, so we can provide you with additional details of our first quarter 2014 financial results.
Presenting today are Alan Mulally, President and CEO of Ford; and Bob Shanks, Chief Financial Officer. Also participating are Mark Fields, Chief Operating Officer; Stuart Rowley, Corporate Controller; Neil Schloss, Corporate Treasurer; Paul Andonian, Director of Accounting; Mike Seneski, Ford Credit CFO.
Copies of this morning's press release and presentation slides are available on Ford's 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'd now like to turn the presentation over to Alan.
Thank you, George, and good morning to everyone. We are pleased to have the opportunity today to review our first quarter 2014 business performance, as we continue to move forward with the implementation of our One Ford plan.
Let's get started and turn to the first slide, please. Our One Ford plan shown here continues to guide everything that we do. We continue to aggressively restructure the business to operate profitably at the current demand and the changing model mix. Accelerate development of the 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.
Now, let's turn to Slide 2 to review a summary of our first quarter accomplishments. The company achieved its 19 th consecutive profitable quarter in the first quarter with a positive operating-related cash flow and continued strong liquidity. Once again, the topline grew with wholesale volume of 6% from year ago and company revenue improving about 1%.
We saw a higher market share in Asia-Pacific, where we achieved a record share in China. Among our business units, Asia-Pacific reported a record quarterly profit. North America, Middle East and Africa we're profitable and Ford Credit once again delivered solid results.
Europe reduced its loss substantially compared with last year, but South America incurred a larger loss. This year we'll feature the most product launches in our history and we remain on track with the 23 global product launches we announced late last year.
Overall, the company's results were solid, but the quarter was impacted adversely by several significant factors that are not representative of the underlying run rate of our business. Based on our solid start, we continue to expect the company's full year pre-tax profit to range from $7 billion to $8 billion. Our outlook for automotive revenue, operating margin and operating-related cash flow also remains unchanged.
Before turning to the financial details, let's recap some of our other achievements from the first quarter. As shown on Slide 3, we revealed several concepts and products in the first quarter, including the all new 2015 F-150, Figo and Ka four-door concepts. The new 2015 Focus five-door and Wagon, and the new 2015 Expedition and Lincoln Navigator.
We accelerate the momentum of our global transit line with the launch of the two-ton transit in Europe, the Transit Connect in U.S. and Canada and the Transit Custom in Australia. In Asia-Pacific, we expanded production of EcoSport to Thailand, making it the fourth plant globally to build the all new Urban SUV.
We announced an investment of $168 million at our Ohio Assembly plant for production of the all new 2016 F-650 and F-750 medium-duty trucks, beginning in spring of 2015. Also in the U.S., we announced an investment of $580 million in additional 650 jobs to build a new 2.7-liter EcoBoost engine Lima Engine Plant in Ohio to increase production of Super Duty and Kentucky Truck.
We also announced new automated driving research projects with MIT and Stanford University, as well as expansion of our Research and Engineering Center in Nanjing, China. And finally, in January, we increased our quarterly dividend by 25%, the second increase since restoring the dividend in January of 2012.
Now, Bob Shanks will now take you through the details of our first quarter financial results.
Thanks, Alan, and good morning, everyone. Starting at the top on Slide 4, first quarter wholesale volume was 1.6 million units, up 92,000 units from a year ago. And revenue was $35.9 billion, up $300 million.
Pre-tax profit was $1.4 billion, excluding special items $765 million lower than a year ago. After-tax earnings per share at $0.25 were $0.16 lower.
Net income attributable to Ford, including pre-tax special item charges of $122 million was $989 million, which was $622 million lower than a year ago.
Earnings were $0.24 a share, down $0.16. The pre-tax special item charges of a $122 million are for separation-related actions, primarily in Europe to support our transformation plan. You can find additional detail on Appendix 3.
Automotive operating-related cash flow was $1.2 billion, our 16 th consecutive quarter of positive performance. And automotive gross cash was $25.2 billion, exceeding debt by $9.5 billion.
Our first quarter operating effective tax rate, which isn't shown was 38%. Consistent with prior guidance, we expect our full year operating effective tax rate to be about 35%.
As shown on Slide 5, both of our sectors, automotive and financial services, contributed to the company's first quarter pre-tax profit. As shown in the memo, the year-over-year decline in company first quarter pre-tax profit is explained primarily by the automotive sector. Within automotive, lower results in North and South America were offset partially by an improvement of nearly $600 million from the other automotive regions. Compared with the fourth quarter 2013, company pre-tax profit was $63 million higher, more than explained by financial services.
The key market factors and financial metrics for our automotive business in the first quarter are shown on Slide 6. Continuing this quarter, we will report global and total regional industry SAAR and market share data to improve transparency and reflect the markets covered by each of our automotive business units.
As you can see on the far left and as already mentioned, wholesale volume increased by 6% compared with a year ago. Automotive revenue on the other hand was unchanged. The higher volume is more than explained by higher industry-volumes in all regions except South America, improved market share in Asia Pacific and a favorable change in dealer stocks.
Global industry SAAR is estimated at 86.5 million units, up over 3% from a year ago. Ford global market share is estimated at 6.9% unchanged from a year ago. Operating margin was 3.4%, down 1.8 percentage points from a year ago, and automotive pre-tax profit was $919 million, down $724 million. Lower results in North and South America more than explained the change in both metrics.
As mentioned the first quarter results include several significant adverse factors that we do not consider to be representative of the underlying run rate of our business that is shown here on Slide 7. In North America, these factors total about $500 million.
They include a $400 million increase in warranty reserves for field service actions, which include safety recalls and other product campaign related to 2008 through 2013 models as well as expense for 2001 through 2005 model vehicles. We also experienced premium freight and labor cost of about $100 million during the quarter related to harsh winter weather in the U.S., which disrupted our operations as well as those of many of our suppliers.
In South America, we saw significant currency devaluations across our major markets during the quarter. These are shown in Appendix 12. In addition to the operating effect of these exchange rate movements, we recorded charges of about $400 million related to the one-time balance sheet impact of these changes. Included is $310 million related to the Venezuelan Bolivar.
In total, these factors reduced pre-tax profit by about $900 million for the equivalent of $0.17 per share. They also account for a year-over-year decline in company pre-tax profit of $700 million as shown in the memo.
While similar factors could occur in the future, it's unusual for items like these to occur in this magnitude in the same quarter. Isolating these factors, provides a better understanding of what we believe to be the underlying run rate of the company and our North and South America business units.
Slide 8 shows the factors that contributed to the $724 million decline in automotive first quarter pre-tax profit, including the items just reviewed on the prior slide. The year-over-year decline in automotive pre-tax profit can be explained fully by the warranty and premium weather-related cost in the North America and the balance sheet exchange effects in South America. All other factors effectively offset one another.
Slide 9 shows the first quarter pre-tax results for each of our automotive operations as well as other automotive. Effective with this quarter, we're reporting results for Middle East and Africa, our new business unit that was formed to facilitate an increased focus on this important growth region.
To allow comparison, we've revised prior year financials and physicals for each of our other business units to align with this new reporting structure. Total automotive sector bottomline reporting, of course, is not impacted by this change. You can find detail on the revisions and appendices '14 through '16.
As you can see, North America reported a solid first quarter result, notwithstanding the factors discussed earlier, while Asia-Pacific's profit was a record for any quarter. Europe cut its loss by more than half from a year ago and by nearly two-thirds from fourth quarter 2013.
The automotive operations outside North America improved $265 million from a year ago, notwithstanding the larger loss in South America, mainly due to the factors discussed earlier. The change in other automotive from a year is more than explained by unfavorable fair value adjustment of our investment in Mazda. For the full year, we now expect net interest expense to be about $700 million, a $100 million improvement from our prior guidance, reflecting higher interest income.
Now we'll look at each of the regions within the automotive sector, staring on Slide 10 with North America. North America's first quarter pre-tax profit continue 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 wholesale volume and revenue declined 2% and 5% respectively in the first quarter. The volume decrease is more than explained by lower market share. This was offset in part by higher industry sales, including the U.S. SAAR of 16 million units that was 400,000 units higher than a year ago and a favorable change in dealer stocks. The decline in revenue mainly reflects the lower wholesale volume as well as unfavorable mix, lower net pricing and the adverse effect of a weaker Canadian dollar.
North America operating margin was 7.3%, down 3.8 percentage points from last year and pre-tax profit was $1.5 billion, about $900 million lower than last year's record profit. The adverse impact of $500 million associated with the warranty of reserve and weather-related premium cost, as noted earlier, is worth 2.5 percentage points of operating margin.
On Slide 11, we show the factors that contributed to North America's first quarter decline and pre-tax profit from last year. The deterioration is more than explained by unfavorable market factors and higher cost. The unfavorable volume in mix is explained primarily by planned reductions in daily rental sales and lower small car share, as well as unfavorable series mix and option take rates ahead of the launch of our new products.
Net pricing is lower, mainly due to Fusion and Escape, which had very low levels of incentives a year ago due to the launch of these models. The higher costs are more than explained by the unfavorable $500 million related to the factors previously discussed. As shown in the memo, pre-tax profit was lower than in first quarter 2013 more than explained by unfavorable market factors, including higher incentive spending, unfavorable product mix and lower industry volume.
Ford's U.S. market share trends are shown on Slide 12. Starting with the left chart, our total U.S. market share was 15.3% in the first quarter, down six-tenths-of-a-percentage point from a year ago, reflecting planned reductions in daily rental sales and lower small car retail share. Total F-Series share was unchanged from a year ago. Compared with the fourth quarter, our market share was down one-tenth of a percentage point.
As shown in the right chart, our retail market share of the retail industry was 13.5% in the first quarter, down five-tenths-of-a-percentage point from last year, explained primarily by lower small car segmentation and share performance as well as F-Series. F-Series results reflect our disciplined approach to incentive spending, as we manage inventory ahead of the launch of the new F-150.
Compared with the fourth quarter, our retail market share was down two-tenths-of-a-percentage point with losses on F-Series offset partially by Fusion and Escape. F-Series results reflect our disciplined incentive strategy as well as seasonal full-sized pickup segmentation trends. Turning to our full year guidance for North America, we continue to expect pre-tax profit to be lower than last year and operating margin to range from 8% to 9%.
Now, let's turn to Slide 13, and we 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. Now, however, we're also dealing with slower GDP growth in our larger markets, weaker currencies, high inflation along with political and social turmoil in some countries.
In the first quarter, wholesale volume and revenue decreased from a year ago by 8% and 18%, respectively. The lower volume is more than explained by a 200,000 unit decline from last year's SAAR of 5.9 million units. This includes the impact of import restrictions in Argentina and lower production in Venezuela, resulting from limited availability of U.S. dollars.
The revenue decline is explained primarily by unfavorable exchange and unfavorable volume and mix, offset partially by higher net pricing. Operating margin was negative 27%, down significantly and pre-tax loss was $510 million, a deterioration of $292 million. The balance sheet exchange effects discussed earlier account for about 75% of a quarterly loss.
On Slide 14, we show the factors causing a decline in South America's first quarter pre-tax result from a year ago. The decline is explain by unfavorable exchange, higher cost, mainly associated with economics-related effects caused by high local inflation and lower volume, mainly due to the weaker industry. Although net pricing was substantial, including some pricing associated with new products, it was not enough to offset the currency and inflation-related effects.
As shown in the memo, pre-tax results deteriorated compared with first quarter 2013, more than explained by unfavorable exchange. For the full year, we now expect South America to incur a larger loss than in 2013. Based on our present assumptions, we expect rest of the year to be about breakeven to a small loss.
Let's turn now to Europe, beginning on Slide 15, where we continue to implement our transformation plan and remain on track to achieve profitability in 2015. Europe's wholesale volume and revenue improved from a year ago, up 11% and 18%, respectively.
The volume increase is more than explained by higher industry volumes, reflecting a SAAR of 14.5 million units for the Europe 20 markets, up over 1 million units as well as favorable changes in dealer stocks and higher market share for Europe 20. The increase in revenue mainly reflects the higher volume and favorable exchange.
Europe's operating margin was a negative 2.5%, an improvement of 4 percentage points from a year ago and the pre-tax loss was $194 million, a $231 million improvement. The first quarter loss includes $76 million of restructuring cost.
Slide 16 shows the factors that contributed to the improvement in Europe's first quarter pre-tax results from a year ago. The improvement reflects lower cost, favorable market factors and favorable exchange. This was offset partially by lower joint venture results and royalties in Russia and Turkey, included in other. As shown in the memo below the chart, pre-tax results improved compared with first quarter 2013 with most factors favorable.
Our European market share trends are shown on Slide 17. Starting with the left chart, our total first quarter market share for Europe 20 was 8%, up three-tenths-of-a-percentage point from a year ago, reflecting improved share from Mondeo and Kuga. Although, not shown on the chart, the commercial vehicle share also improved in the first quarter driven by the new Transit Connect, as we continue to rollout our all new commercial vehicle range.
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 first quarter, down one-tenth-of-a-percentage point from the same period last year. Lower share reflects adverse segmentation changes, offset partially by improved performance for Fiesta and Kuga. We continue to focus on the quality of our market share and improving our sales channel mix, achieving a higher share of the fleet segment in the first quarter.
We're very pleased with the start to the year by our operations in Europe and the progress the team continues to make in implementing our transformation plan, notwithstanding external headwinds in Russia and Turkey. As a result, our full year guidance for Europe is unchanged. We expect results to improve compared with 2013.
Let's now turn to Middle East and Africa on Slide 18. In the first quarter, we wholesaled 51,000 vehicles in the region, 3,000 pure units a year ago. Revenue was $1.2 billion, a $100 million lower. The lower volume reflects lower dealer stock increases. The lower revenue was more than explained by the lower volume and unfavorable exchange, primarily due to a weaker South African rand.
Operating margin was 4.7%, up 1 percentage point from a year ago and pre-tax profit was $54 million, up $7 million. Our full year guidance for Middle-East and Africa remains unchanged. We expect resulted to be about breakeven.
Let's now review Asia-Pacific on Slide 19. Our strategy in Asia-Pacific continues to be to grow aggressively with an expanding portfolio of One Ford products with manufacturing hubs in China, India and ASEAN.
As shown on the left, first quarter wholesale volume was up 32% and net revenue, which excludes our China joint ventures, grew 19%. Our China wholesale volume not shown was up 45% in the quarter. The higher volume in the region reflects mainly improved market share. The higher industry volume also contributed. We estimate the first quarter SAAR for the region at 38.9 million units, up 1.9 million units from a year ago, wholly explained by China.
Our first quarter market share was 3.4%, seven-tenth-of-a-percentage point higher than a year ago. This was driven by China, where our market share improved nine-tenths-of-a-percentage point to a record 4.5%, reflecting continued strong sales at EcoSport, Kuga and Mondeo.
Asia Pacific's higher revenue is more than explained by favorable mix and the higher volume. Operating margin was 11.1%, up 12.4 percentage points from a year ago, and pre-tax profit was $291 million, up $319 million. Strong results in China drove the region's record profit.
The improvement in Asia Pacific's first quarter pre-tax profit from a year ago was explained on Slide 20. For the region, the improvement in profitability is more than explained by favorable volume and mix and the higher royalties from our joint ventures included in other. Higher costs including investment for future growth were a partial offset.
As shown in the memo, Asia Pacific pre-tax results improved from fourth quarter 2013, explained primarily by lower cost. For the full year, we now expect Asia Pacific to earn a higher pre-tax profit than the year ago, improved from our prior guidance of about even.
Let's turn now to Ford Credit, which remains, key to our global growth strategy providing world-class dealer in customer financial services, maintaining a strong balance sheet and producing solid profits and distributions.
Slide 21 shows the factors that contributed to the largely unchanged result from a year ago. Higher volume, reflecting increases in nearly all products globally was largely offset by unfavorable residual performance in North America. As shown in the memo, pre-tax profit was higher than in fourth quarter 2013, explained primarily by favorable lease residual performance as well as lower operating cost included in other. These changes are consistent with normal seasonality.
For the full year, we now expect Ford Credit pre-tax profit to be about equal to higher than 2013. This reflects improved financing margin performance. Our guidance for Ford Credit managed receivables and managed leverage and distributions to its parent is unchanged.
Next on Slide 22 is our automotive gross cash and operating related cash flow. Automotive gross cash at the end of the quarter was $25.2 billion, $400 million higher than yearend 2013. Automotive operating related cash flow was $1.2 billion with favorable changes in working capital and automotive profit offset partially by unfavorable timing and other differences as well as net spending.
During the quarter, we contributed $500 million to our global funded pension plans, down substantially from the last two years due to the recent improvements in the funded status of plans. Dividends paid in the quarter totaled about $500 million.
Slide 23 shows that automotive debt at the end of the quarter was $15.7 billion, unchanged from yearend 2013. We ended the quarter with net cash of $9.5 and automotive liquidity of $36.6 billion, both $4 million higher than yearend 2013. Although, not yet included in our total liquidity, we are in process of amending and extending our corporate revolving credit facility.
The facility which is presently $10.7 billion is expected to grow to about $12 billion. This will provide the company with additional liquidity as we expand our business globally and continues to show the great support we have from our global and growing bank group for the One Ford plan. Consistent with our capital and funding strategy, we've planned to allocate $2 billion to Ford Credit to support this liquidity. We expect to close this transaction later this month and will provide details in our first quarter 10-Q filing.
This concludes our review of the financial details on our first quarter earnings. So with that I'd now like to turn it back to Alan who'll take us through our 2014 outlook for the business environment as well as our 2014 planning assumptions and key metrics. Alan?
Thank you, Bob. Slide 24 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 projected to be in the 2.5% to 3% range, with industry sales still supported by replacement demand as a result of the older age of vehicles on the road. Near-term conditions have shown signs of improvement after some weakness in January and February data.
In South America, Brazil's economy is slowing due to high interest rates put in place to contain inflation. While the situation in Argentina and Venezuela remains volatile, with both economies facing unclear economic policy direction.
In Europe, an economic recovery is underway. For 2014, we expect GDP growth of about 1% in the euro area and 2% to 2.5% in the U.K. The European Central Bank left its policy interest rate unchanged at 0.75% in April and indicated that it will keep rates low for an extended period. The Bank of England also indicated that it will keep rates low until economic growth reduces excess capacity in U.K. economy.
And in Asia-Pacific, China's economic growth is expected to be slightly below 7.5% with several challenges, including excess capacity and excess debt. The government intends to be more focused on structural reforms and is willing to accept lower growth within a reasonable range of 7.5%.
Growth in India is expected to improve modestly to about 5% from last year, as high inflation and high interest rates remain impediments to stronger growth. Overall, despite challenges in emerging markets, we expect global economic growth to continue in 2014.
Slide 25, recaps the guidance disclosed earlier for all of our business units as well as for net interest expense. Other than South America, the guidance has improved or unchanged.
Our company guidance for 2014 is detailed on Slide 26. We continue to expect full year industry volume to range from 16 million to 17 million units in the U.S. and China to range from 22.5 million to 24.5 million units. We now expect Europe 20 markets to be in the 14 million to 15 million unit range, reflecting improved economic growth prospects and replacement demand.
In terms of our finance performance, we continue to expect automotive revenue to be about equal to 2013, automotive operating margin to be lower than 2013 and automotive operating-related cash flow to be substantially lower than 2013. This includes capital spending of about $7.5 billion to support new or significantly refreshed products and capacity actions.
We now expect Ford Credit pre-tax profit to be about equal to or higher than 2013. And we continue to expect company pre-tax profit to be in the $7 billion to $8 billion range, as we continue to create innovative products such as the all new F-150. Overall, we expect 2014 to be a solid year for the Ford Motor Company in a critical next step forward and implementing our One Ford plan to continue delivering profitable growth for all.
In closing, our One Ford plan is built on a compelling vision, comprehensive strategy and relentless implementation. Our One Ford plan continues to deliver profitable growth around the world and we are absolutely focused on building great products, creating a stronger business and contributing to a better world.
We delivered solid results in the first quarter, despite several significant adverse factors that are not representative of the underlying run rate of our business and challenges in several important emerging markets.
We remain on track in implementing our plan for full year 2014 including, continued strength from North America, although down from recent years, as we launched three times the numbers of products as in 2013; a loss in South America as we adjust to the changing environment and continued risk in Argentina and Venezuela; successful execution of our transformational plan for Europe, as we progress towards profitability in 2015, notwithstanding new challenges in Russia and Turkey; launch of our Middle East and Africa business unit; continue strong growth and profitability in Asia-Pacific; consistent solid performance from our Ford Credit operation; and positive automotive operating-related cash flow.
Now, we will be pleased to take your questions.
Thanks, Alan. Now, we'll open up 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 for as many participants as possible within this timeframe, please keep your questions brief and please avoid asking more than two.
Towanda, can we have the first question?
Earnings Call Part 2: