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Edited Transcript of General Motors Financial Company Inc earnings conference call or presentation 28-Apr-17 4:00pm GMT

Thomson Reuters StreetEvents

Q1 2017 General Motors Financial Company Inc Earnings Presentation

FORT WORTH May 9, 2017 (Thomson StreetEvents) -- Edited Transcript of General Motors Financial Company Inc earnings conference call or presentation Friday, April 28, 2017 at 4:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Steve Jones

GENERAL MOTORS FINANCIAL COMPANY, INC. - VP, IR

* Dan Berce

GENERAL MOTORS FINANCIAL COMPANY, INC. - President and CEO

* Mark Bole

GENERAL MOTORS FINANCIAL COMPANY, INC. - President, International Operations

* Chris Choate

GENERAL MOTORS FINANCIAL COMPANY, INC. - EVP and CFO

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Presentation

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Steve Jones, GENERAL MOTORS FINANCIAL COMPANY, INC. - VP, IR [1]

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Welcome to GM Financial's first-quarter 2017 earnings presentation. This is Steve Jones, Vice President of Investor Relations at GM Financial. With me today are Dan Berce, President and CEO of GM Financial; Chris Choate, Chief Financial Officer; and Mark Bole, president of our International Operations.

Before we proceed, I must remind everyone that the topics we will discuss during this presentation will include forward-looking statements, which are the Company's current views with respect to future events and financial performance. These forward-looking statements are subject to many assumptions, risks, and uncertainties that could cause actual results to differ significantly from historical results or from those anticipated by us.

The most significant of these risks are detailed from time to time in the Company's filings and reports with the Securities and Exchange Commission, including the annual report on Form 10-K for the year ended December 31, 2016. If one or more of these risks or uncertainties materializes or if the underlying assumptions prove incorrect, our results may vary materially.

If you have questions on the material discussed, please feel free to contact me. My contact information can be found on both the earnings release and at the end of the presentation slides. We will be posting a transcript of this presentation to our website.

I will now turn the call over to Dan Berce. Dan?

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Dan Berce, GENERAL MOTORS FINANCIAL COMPANY, INC. - President and CEO [2]

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Thank you, Steve. I'll start out on slide 3, which is highlights from our first quarter of 2017. GM Financial reported another strong quarter. We earned $260 million in pre-tax income for the quarter compared to $225 million in the March quarter a year ago.

The quarter was highlighted by record US penetration of GM retail sales, which were 50% in the quarter, up from 38% a year ago. GM had some down payment assistant promotions in the market during the quarter, which drove increased penetration of standard loans.

Our International Operations continued the dominant penetration of GM retail sales, highlighted by Latin America, which had penetration of 60%, up from 54% in the March 2016 quarter.

We grew our North American retail originations in the quarter to $4.8 billion, an increase of $2.2 billion year over year. And most of that growth occurred in the prime segment of the market. In fact, we originated $3 billion of prime loans in the quarter, up from $1.1 billion a year ago.

Credit trends remained stable, positively impacted by our mix shift to prime credit quality assets in the US. And our primary headwind remains used car values. US disposition proceeds on returned lease vehicles compared to estimates at origination continued to moderate during the quarter. We do expect used vehicle prices to decline about 7% year over year throughout 2017.

Our funding platform continued successful execution on many fronts. We issued $5.5 billion in public secured and unsecured debt securities in the quarter. And subsequent to quarter end, we closed our first US prime loan securitization, which we call GMCAR, for a total of $1 billion.

Turning to slide 4, key metrics for the quarter. As I said, earnings were $260 million compared to $225 million a year ago. Chris Choate will drill down on the earnings drivers a bit more later.

Our ending earning assets totaled $85.1 billion at quarter end, up from $64 billion a year ago. Most of the growth in ending earning assets happened in the US, primarily through our leasing program and through the growth in prime originations, which I just talked about.

Originations were $12.8 billion, up from $10.9 billion a year ago, driven by the strong loan growth in the US. Both internationally and the US and Canada, we remain very GM-centric, with 87.2% of our total originations being of a new GM vehicle in the March 2017 quarter. And you can see on this chart that credit metrics do remain quite stable, both internationally and in North America.

Slide 5 shows GM and GMF penetration statistics in North America. First of all, in the US, as I mentioned, our penetration in the March 2017 quarter was 50.4%, an all-time record, up from the previous record of 37.5%, which was a year ago.

Canada, our only product up there of predominance is leasing. We do have a small subprime business, but the penetration is mainly driven by leasing. And the fluctuations quarter over quarter are driven by the programs that GM Canada has in the market. We made good progress on the wholesale front, reaching 16.9% penetration in the US and 12.2% in Canada.

Turning to slide 6, we did originate $11.1 billion of loans and leases in the first quarter in North America. Again, most of that growth was in the prime sector. You can see that the prime loan and lease originations grew from 6.3% (sic - see slide 6, $6.3 billion) a year ago to $8.3 billion this quarter, fully three quarters of our total originations.

You can see that on the subprime side year over year, we actually had a slight absolute decline in origination. On the loan side, they were bit higher; lease side, a bit lower.

Turning to slide 7, which is retail loan origination. In North America, we did originate $4.8 billion of loans broken down into the column, the stack that you see here, which is $3.4 billion on new GM vehicle originations, $700 million on used vehicle originations through GM dealers, and $700 million at our legacy AmeriCredit business. Our total loan portfolio has now reached $24.4 billion.

One other thing I want to point out before I go into some GM penetration stats is that our AmeriCredit business did grow year over year by roughly $200 million, from $0.5 billion in the March 16 quarter again to the $700 million we originated March of 2017.

For the March 2017 quarter, we did originate 45% of all GM's new US loans less than 620, about a third of the loans more than 620, and our weighted average FICO came in at an all-time high for GMF of 703 for the quarter.

Slide 8 drills down a bit on retail loan credit performance. Our net charge-off rate for the quarter was 2.3%, down from 2.6% a year ago. That was driven by a more favorable mix of business, offset a bit by year-over-year declines in recovery rates.

Delinquencies showed a similar trend, down both sequentially and year over year, again driven by the favorable credit mix shifting to prime. Recovery rates were 52% for the quarter, down from 54% a year ago. Up a bit sequentially due to seasonal reasons, but we do expect recovery rates to continue to trend down year over year throughout 2017.

Our total portfolio now on a loan basis -- below 620 or so-called subprime represents 43% of the whole mix at March 31, 2017, down from 48% at calendar year end and 57% a year ago.

Turning to slide 9, lease originations. Lease originations in the US and Canada were $6.3 billion, down a bit from a year ago. Again, primarily GM had very good loan incentives in the market, which drove more loan originations for us. Our total portfolio of leases is now $37 billion in the US and Canada, comprising over 1.4 million contracts.

The lease portfolio is primarily prime. In fact, 94% has a origination credit bureau score above 620. And from a credit standpoint, the performance of the portfolio remains quite strong, with 99% of the leases are current.

And finally on my part, slide 10, we have shown excellent progress in commercial lending. We are now up to 829 dealers with $7 billion outstanding at the end of March. Floorplan represents roughly 90% of the portfolio, and we probably have as good a momentum in that business as we have had in quite some time based on application flow from dealers.

With that, I'm going to turn it over to Mark Bole.

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Mark Bole, GENERAL MOTORS FINANCIAL COMPANY, INC. - President, International Operations [3]

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All right, Dan. Thank you very much. For International Operations on chart 11, I'll start with our penetration statistics. At the top part of the chart, we talk about retail. Our European penetration in the first quarter of 2017 was 36%, which is very consistent with prior quarters.

As Dan mentioned, our Latin American penetration was more than 60%. A lot of that is a result of a very strong campaigns with General Motors in the first quarter of 2017. In the middle part of the chart, we show our wholesale dealer inventory penetration. We continue to finance almost 100% of dealer inventory in both Europe and Latin America.

If we turn to chart 12, we look at retail loan originations. Very stable origination trend in IO, really split relatively evenly between Latin America and Europe. You can see in the first quarter, we had $800 million of originations in Latin America and $900 million in Europe. The number of outstanding loan contracts at the end of the quarter, March 31, 2017, increased by 3% compared to last year, and the retail portfolio now stands at $11.6 billion.

Chart 13 takes a look at retail credit performance. You can see here that IO's credit metrics continue to be stable, with net annualized charge-offs at 100 basis points in the first quarter of 2017, exactly consistent with where we were in the fourth quarter of 2016. Delinquency levels remain very consistent as you look across the quarters with our prime portfolio in International Operations.

On chart 14, we take a look at IO's commercial lending, where 94% of this lending is in fact dealer inventory floorplan financing. Our dealer levels -- numbers remain very consistent at 2,138 in the first quarter, and we have total outstandings of $4.8 billion. You can see that for Latin America, about $1.5 billion of dealer inventory in the first quarter and $3.3 billion for our European operations.

My final chart, chart 15 for International Operations, talks about our Chinese joint venture. With our 35% equity stake there, we earned equity income in the first quarter of 2017 of $47 million, which was up over the first quarter of 2016 of $36 million. As it states here, that was due mostly to our strong loss performance and higher earning assets in that operation.

Retail penetration levels at 26% in the first quarter of 2017 were very consistent with prior year of 23%. Retail originations at $1.7 billion, and assets at greater than $11 billion at the end of the first quarter this year.

With that, I will turn it over to Chris to talk about our financial results of GMF.

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Chris Choate, GENERAL MOTORS FINANCIAL COMPANY, INC. - EVP and CFO [4]

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Thank you, Mark. I will begin on chart 16 with our earnings before taxes for the three months ended March 31. As Dan noted, total Company earnings for the quarter were up from $225 million a year ago to $260 million this year.

For North America, earnings were up from $116 million to 115 -- $158 million due to portfolio growth, partially offset by lower effective yield on higher credit quality assets, increased interest expense due primarily to higher average debt outstanding in support of that portfolio growth, and incremental operating expenses associated with the asset growth, investments in our prime lending program, and enhancements in our lease and servicing capabilities.

Earnings in our international segment decreased slightly from $109 million to $102 million, primarily due to higher operating expenses and increased loss provision, partially offset by higher net financing revenue and the increase in China equity income that Mark just referenced. We remain on track to double our 2014 calendar year earnings of $815 million when full captive penetration levels are achieved over the next several years.

I'll now turn to chart 17 and some balance sheet metrics. Our ending earning assets of $85.1 billion at March 17, up from $64 billion a year ago and $78.6 billion at the end of 2016. The composition of those earning assets continues to shift to a more prime-like credit profile, consistent with some of the mix trends Dan has already discussed.

The subprime loan portfolio represented approximately 12% of our ending earning assets at March 31, 2017, down from 17% at March 31, 2016.

Our total debt of $79.9 billion, up from $60.4 billion a year ago, has continued to shift in the direction of unsecured debt. Unsecured debt was 47% at the March 31, 2017, quarter from 46% a year ago.

Our liquidity at March 31, 2017, of $12.4 billion was down from December 31, primarily due to the timing of credit facility renewals and increased facility utilization associated with asset growth. The point is made here on chart 17 that our liquidity increased really immediately subsequent to quarter end by virtue of the $3 billion in US senior unsecured notes that we issued in April.

Continuing with balance sheet metrics on chart 18, tangible net worth of $7.8 billion at the March 17 quarter end, up from $7.5 billion at year end and $7.2 billion a year ago. As a reminder, the tangible net worth is net of accumulated losses on foreign currency translation, which amounted to $1.1 billion at March 31, 2017.

Our leverage ratio at 10.9 times, up from 10.4 at year end and 8.8 times a year ago, is consistent with the earning asset expansion and higher credit quality tiers. And at March 31, 2017, the applicable support agreement leverage ratio was 11.5 times, so we are under the applicable limit.

Funding activity on chart 19. The table at the left breaks out the components of the $77.9 billion of debt outstanding that I referenced on a prior chart. You can see that the International segment has $14.5 billion of that debt outstanding and our North American segment has $65.4 billion of the debt outstanding. At March 31, we had a total of $27.4 billion in credit facilities provided by 36 different banks.

As Dan noted, we were very active in the capital markets during the first quarter. We did three securitizations listed here: our GFORT 2017-1 US floorplan for $900 million; our AMCAR US subprime loan securitization for also $900 million; and our GMALT US lease securitization for $1.2 billion.

Subsequent to quarter end in April, we executed ECARAT UK retail loan securitization for $600 million. And as Dan also noted, our inaugural GMCAR 2017-1 US prime retail loan securitization for $1 billion.

We were also active in the unsecured senior note issuance across the quarter, issuing $2.5 billion in US notes during the quarter. And subsequent to quarter end, the $3 billion in US notes that I previously referenced in connection with my liquidity comments.

In Germany, our retail bank deposit program has $1.9 billion outstanding at March 31, 2017, up $300 million from the year-ago quarter. And, as always, we remained active in executing private amortizing securitizations, with two US transactions totaling $1 billion during the quarter.

Finally for me on chart 20, public debt issuances. This is a chart that we update cumulatively as we go through the year. In 2016, we had total public debt issuances of $21.7 billion split relatively equally between securitizations and senior notes.

In 2017, our forecast is for that amount to increase to $24 billion to $30 billion, with $11 billion to $14 billion of that being senior notes and $13 billion to $16 million being securitizations. In the first quarter, we executed $5.5 billion of public issuance, as both Dan and I have previously commented on.

As a reminder, we have a strategy of funding locally with flexibility to issue globally to support US funding needs and enhance investor diversification. Also as a reminder, we have numerous securitization platforms segregated by asset type and geography. This list is very similar to lists from prior quarters, with the exception, again, that we have now executed our first US prime retail loan securitization under the GMCAR platform.

Our global senior notes platform funds our operations in the US, Canada, Europe, and Mexico, where we expect to do five to eight issuances per year. And our total issuance in 2017 will be increasing this year, most notably because of the launch of our GMCAR securitization program. Otherwise, we expect our cadence to be reasonably similar to 2016.

I will now turn the call back over to Steve Jones for concluding remarks.

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Steve Jones, GENERAL MOTORS FINANCIAL COMPANY, INC. - VP, IR [5]

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Thank you, Chris. This concludes GM Financial's first-quarter 2017 earnings presentation. If you have questions, please feel free to contact me. As mentioned, my contact information can be found on both the earnings release and at the end of the presentation slides. Thank you for your continued interest and support of GM Financial. Have a nice day.