福特汽車 (F) 2013 Q2 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the second-quarter Fixed Income conference call.

My name is Shequana and I will be your coordinator for today.

At this time, all participants are in a listen-only mode.

We will facilitate a question-and-answer session towards the end of this conference.

(Operator Instructions).

I would now like to turn the presentation over to your host for today's call, Ms. Molly Tripp, Manager, Fixed Income Investor Relations.

Please proceed, ma'am.

Good morning.

Welcome to all of you who are joining us either by phone or webcast.

On behalf of the entire Ford management team, I would like to thank you for spending time with us this morning.

With me today are Michael Seneski, Ford Credit Chief Financial Officer; Neil Schloss, Ford Corporate Treasurer; and Stuart Rowley, Ford Corporate Controller.

We also have some other members of management who are joining us for the call today including Marion Harris, the Treasurer; Paul Andonian, Director of Global Accounting; and George Sharp, Executive Director, Investor Relations.

Before we begin, I would like to review a few items.

A copy of this morning's earnings release and the slides we will be using today have been posted on Ford Motor Company's investor and media websites for your reference.

The financial results discussed herein are presented on a preliminary basis.

Final data will be included in our Form 10-Q.

Additionally, the financial results presented here are on a GAAP basis and in some cases on a non-GAAP basis.

Any non-GAAP financial measures discussed on this call are reconciled to the US GAAP equivalent as part of the appendix to the slide deck.

Finally, today's presentation includes some forward-looking statements about our expectations for Ford's future performance but actual results could differ.

The most significant factors that could affect future results are summarized at the end of this presentation.

These risk factors and other key information are detailed in our SEC filings.

With that, I would like to turn the call over to Ford Credit CFO, Michael Seneski.

Thanks, Molly.

Consistent with prior quarters, today's presentation will cover Ford Credit's profit and credit loss performance; Ford Credit funding and liquidity highlights; Automotive cash, debt, and liquidity; an update on our pension; and then we will wrap things up with a summary of the quarter.

Let's turn to Ford Credit's operating highlights on slide 1. Ford Credit remains key to our global growth strategy, providing world-class dealer and customer financial services, maintaining a strong balance sheet, and producing solid profits and distributions.

Ford Credit had another strong quarter, with pretax profit of $454 million and net income of $275 million.

Managed receivables were $95 billion at the end of the second quarter, up $4 billion from year-end 2012 and up $1 billion from the first quarter.

The growth from year-end 2012 was driven primarily by increases in net investment and operating leases and wholesale receivables.

Growth from the first quarter was driven primarily by increases in net investment and operating leases.

Second-quarter charge-offs were $32 million, up $15 million from the prior year.

The second-quarter loss-to-receivables ratio was 14 basis points, up 6 basis points from the record low of a year ago and well below our 10-year average of 67 basis points.

At June 30, the allowance for credit losses or reserve was $376 million or 39 basis points of receivables.

Managed leverage was 8.3 to 1 at June 30, 2013, unchanged from December 31, 2012.

At the end of the second quarter, our equity was $10 billion.

Slide 2 shows the $16 million increase in second-quarter pretax results compared with a year ago by causal factor.

The results are more than explained by higher receivables and financing margin, offset partially by lower credit loss reserve reductions.

The higher volume is explained by higher receivables in our North America segment, which were driven primarily by an increase in net investment and operating releases and non-consumer dealer finance receivables.

Higher financing margin is primarily explained by lower borrowing costs in our international segment.

The lower credit loss reserve reductions are primarily related to the consumer finance receivable portfolio in our North America segment.

And as shown in the memo, Ford Credit's pretax results decreased by $53 million compared with the first quarter 2013 due to unfavorable mark-to-market on the derivative portfolio and seasonal insurance losses.

For the full year, Ford Credit continues to expect pretax profits to be about equal to 2012 and distributions to our parent of about $200 million.

Ford Credit now expects year-end managed receivables of $97 billion to $102 billion, which is within our prior range of $95 billion to $105 billion.

Slide 3 shows our quarterly trends of charge-offs, loss-to-receivables ratio, and credit loss reserve.

Our second-quarter credit losses continued to be near historic lows.

Year-over-year charge-offs were up $15 million, primarily reflecting a wholesale charge-off in Europe and higher severity and lower recoveries in the United States.

Quarter-over-quarter charge-offs were down $13 million, reflecting lower default volume in the United States.

The loss-to-receivables ratio was up 6 basis points compared with the prior year.

The credit loss reserve was $376 million, down $30 million from a year ago and down $13 million from the first quarter, reflecting the continuation of historically low losses.

Slide 4 shows the primary drivers of credit losses in the US retail and lease business, which comprises approximately 75% of our worldwide consumer portfolio.

Over 60 day delinquencies were flat from the same period a year ago and down 4 basis points from the prior quarter.

Repossessions in the second quarter were 6,000 units or 1.06% of average accounts outstanding, down 13 basis points from the same period year ago.

This is our lowest repossession ratio on record.

Severity was $7,600 in the second quarter, up $900 from the same period a year ago and up $400 from the first quarter, reflecting lower auction values.

Year-over-year increases in charge-offs and LTR on the lower right hand box primarily reflect higher severity while quarter-over-quarter decreases primarily reflect lower repossession volumes.

Slide 5 shows the US Ford and Lincoln lease residual performance.

Lease return volumes in the second quarter were 12,000 units higher than the same period last year, primarily reflecting higher lease placements in 2011 relative to prior years.

The second-quarter lease return rate was 68%, up 9 percentage points compared with the same period last year, reflecting lower auction values.

In the second quarter, our 24- and 36-month average auction value declined about $400 and $1,000 respectively when compared to a year ago and both the 24- and 36-month auction values declined about $500 from the first quarter.

Our worldwide net investment in operating leases was $17.6 billion at the end of the second quarter, up $2.9 billion from year-end 2012.

With that, I will turn it over to Neil.

Thanks, Mike.

Good morning, everyone.

Turning to slide 6, we are on track to achieve our 2013 funding plan.

In the second quarter, we completed $5 billion of funding in the public term markets.

We have completed about $13 billion of public funding year to date.

Our second-quarter public term issuance included over $2 billion of unsecured debt in the US and Europe and about $3 billion of public asset-backed in the US and Canada.

We ended the quarter with $32 billion of committed capacity, up about $1 billion when compared to first-quarter 2013.

Year-to-date we have renewed about 60% of our committed capacity that is scheduled to renew this year.

Our funding strategy remains focused on diversification and we plan to continue accessing a variety of markets, channels, and investors.

We remain focused on maintaining a strong investment grade balance sheet.

Slide 7 shows the trends in funding of our managed receivables.

At the end the second quarter, managed receivables were $95 billion.

We ended the quarter with about $10 billion in cash and securitized funding was 45% of managed receivables.

We project year-end managed receivables at $97 billion to $102 billion and securitized funding as a percent of managed receivables at 44% to 47%, both within prior guidance.

We expect this percentage to continue to decline over time.

Slide 8 shows our 2013 global public term funding plan for Ford Credit excluding our short-term funding programs.

As I mentioned earlier, we have completed $13 billion of public term funding in the US, Canada, and Europe.

In addition, this week we priced a US retail ABS transaction, increasing the year-to-date total to about $14 billion.

We project full-year global public term funding in the range of $19 billion to $24 billion, consisting of $7 billion to $10 billion of unsecured debt and $12 billion to $14 billion of public securitizations.

Turning to slide 9, our liquidity remained strong at $22.9 billion, up $2.7 billion from the prior quarter, primarily reflecting higher committed capacity and lower utilization.

Ford Credit's source of liquidity includes cash, unsecured credit facilities, FCAR asset-backed commercial paper lines, and other asset-backed bank capacity.

As of June 30, we had $42.3 billion of cash and committed liquidity sources, up $1.5 billion from prior quarter.

Utilization of our liquidity totaled $18.2 billion and we ended the quarter with gross liquidity of $24.1 billion.

Capacity in excess of eligible receivables was $1.2 billion.

We remain focused on maintaining liquidity levels to meet our business and funding requirements through economic cycles.

Now we will summarize our Automotive sector cash and debt position at the end the second quarter, which is captured on slide 10.

Automotive debt at the end of the quarter was $15.8 billion, $200 million lower than the first quarter.

In April, we took advantage of favorable market conditions by increasing our revolving credit facility from $9.3 billion to $10.7 billion and extended its maturity from November of 2015 to November 2017.

As a result, we ended the quarter with net cash of $9.9 billion and automotive liquidity of $37.1 billion.

Next on slide 11, we would like to provide an update on our pension de-risking strategy.

In the first half, we contributed $2.8 billion to our global funded pension plans, including $2 billion in discretionary contributions to our US plans.

For the full year, we continue to expect contributions of $5 billion to our global funded plans including about $3.4 billion in discretionary contributions.

In the second quarter, we settled about $1.5 billion of obligations related to the US salaried retiree voluntary lump-sum program with $2.7 billion settled since the inception of the program last year.

As a result of the second-quarter settlement, we recognized a special item charge of $294 million, reflecting the acceleration of unrecognized losses in the plan.

The lump-sum program is about 60% complete and concludes by year-end.

Also we have continued to progressively improve our mix of fixed income assets in our plans with the objective of reducing funded status volatility.

As a result of the strategic actions we have been taking along with the recent increase in discount rates, the funded status of our global funded pension plan significantly improved as of June 30 compared with the end of last year.

As usual, we will provide a full-year update at the end of this year.

Now let's close with a summary of the second quarter.

The Company earned a pretax operating profit of $2.6 billion and net income of $1.2 billion.

Automotive operating-related cash flow and quarter-end liquidity were both very strong.

Among our business units, North America and Asia-Pacific Africa had record results.

We returned to profitability in South America and Europe incurred a loss, but it was improved compared to both the year ago and first quarter, as we continue to execute our transformation plan, leading to profitability by mid-decade.

We ended the quarter with Automotive net cash of about $10 billion and liquidity of about $37 billion.

Ford Credit had another strong quarter, with pretax profit of $454 million, net income of $275 million.

Managed receivables were $95 billion at the end of the second quarter, up $4 billion from year-end 2012 and up about $1 billion from the first quarter.

The second-quarter loss-to-receivable ratio was 14 basis points, up 6 basis points from the record low of the prior year.

Year-to-date, Ford Credit has completed $13 billion in public term funding and we are well on track to complete our full-year funding plan.

Ford Credit's liquidity was about $23 billion for the quarter, which is in addition to Ford's Automotive liquidity of $37 billion.

With that, I will turn it to Molly to begin the Q&A session.

Thanks, Neil.

With that, we will start the Q&A session.

Can we please have the first question?

(Operator Instructions).

Doug Karson, Bank of America Merrill Lynch.

Good morning.

I had a couple questions on Ford Company and then one or so on Ford Credit.

On Ford Company, on slide 26 under the planning assumptions and key metrics and it may have been discussed on the call and I missed it but there's a quality metric that was supposed to improve and it looks like it kind of got downgraded to mixed.

I just want to understand what was behind the quality metric.

This is Stuart here.

Alan covered that in his comments on the call, so our initial guidance was to improve in each of the four regions.

We've adjusted that guidance to mixed and that's because we now believe that our quality in South America, Asia Pacific, and North America will be about the same as 2012 as opposed to improved and Europe will improve.

So that's the change we made to our guidance.

Okay, great.

That's helpful.

In appendix 9 of 12, it talked about Automotive debt.

There was a memo the debt payable within the year was 1.2 and I see Ford Credit has an October $3 billion maturity coming due this year.

Is the sense that you refinance that in the capital markets or would you use cash or the balance sheet?

Have you thought about how to refinance some of that debt at this point?

I think you are comparing debt at Automotive with debt at Ford Credit.

The footnote in the appendix reflects the Automotive debt that matures in the next year.

Ford Credit would have its own separate balance sheet that would have -- it's in the neighborhood of $5 billion to $6 billion of debt that's currently payable within the year and so the maturity that you mentioned would be included in that.

Okay, that's helpful.

Then I guess on the timing of cash flows, I'm sorry if I missed this on the major call, but the $3.3 billion was a much higher number than I had expected and there's a timing difference of 1.2 located in kind of the middle of the cash flow walk.

Was there any color on what that $1.2 billion was?

Yes, this is Stuart.

There's a number of things going there, things like marketing and warranty accruals as well as the difference between cash payments and expense accruals on pensions and a number of other items like cash taxes.

The biggest piece has been warranty and marketing.

I would point you to the fact also that if you look at the first half, that was $400 million so we had [8/10] negative in quarter one, $1.2 billion positive in quarter two as the timing of those expenses and cash flows move around.

Importantly, it's 4/10 year-to-date so from the standpoint we'll get quarter-to-quarter movements in these balances as a result.

Right.

I know a lot of the discussion was in Europe and it's the last question I have -- and I don't have this many for Ford Credit because it seems like it was a very solid quarter.

In Europe, we are looking at a little bit of improvement here.

I think the number outperformed a lot of people's expectations.

When you look at the plan, like the volume outlook actually a little bit down on the high-end for 2013.

I know some share moving around.

But is the improvement that's expected in Europe, is some of it cost-driven?

Maybe if you could just highlight that a little bit and that's it from me.

We've improved our guidance from a loss of about $2 billion to a loss of about $1.8 billion.

There's as we pointed out three elements to our plan -- product, brand, and cost.

We are really making good progress across all three of those elements and new products are being well received.

They are supporting the improvement in retail share that we are seeing in the market.

Our quality is also improving and we are seeing that -- that assist our brand.

Then on the cost side, we are making good progress and we will close the two facilities in the UK this week.

We have reached agreement with our unions to proceed to close the facility in Genk, Belgium at the end of next year.

So we are driving all elements of the plan.

We are very pleased with the progress on all of the elements and they are all contributing towards our improved outlook.

I guess this one final one.

Have you guys had any more updated discussions with S&P about your outlook at positive and it's been there since I think last summer, so it's been about a year.

I was wondering if you had any kind of follow-up discussions with them?

Nothing out of the normal.

We tend to have conversations throughout the year and meetings throughout the year, but nothing off schedule.

Okay, thanks a lot, guys, good quarter.

Joe Spak, RBC Capital Markets.

Sorry about that.

Good morning and thanks for taking the call.

Just on Ford Motor, clearly some good progress in Europe, but it seems like at least on a year-over-year basis a large part of the improvement was the non-repeat of the destocking that occurred last year.

Can you just remind us is that -- I think that occurred all throughout the back half of 2012.

Maybe it became a little bit more normalized in the fourth quarter, but is that still expected to be a year-over-year benefit?

You are right that that was a contributor to our volume and mix, as was our improved market share and lower industries were a partial offset.

Our stock reductions this year, this is the change on the change in our stock reductions this year were less than they were in the second quarter of last year.

We progressively reduced our stock through the year in 2012.

We are at about our planned level now.

We are at levels that are below any historic level we have had both in terms of the absolute number of units and days supply.

So for the full year, the stock comparator will be favorable.

But as also will the market share, the market share contribution.

Right, right.

Okay, that's helpful.

And then just in North America, I realize you are reinvesting here and also clearly trying to expand some of the capacity on some of the key products that have been constrained.

That obviously has been weighing on results.

Is it able to quantify how much of that investment for expanded capacity is above and beyond sort of normal reinvestment in the business?

Are we through the worst of it?

Because the volume should start coming on I guess in the back half and maybe start absorbing some of that cost.

I think you need to think of it -- we are benefiting in the first half of this year from the capacity that we put in place last year.

We added capacity to a number of our facilities, incremental shifts.

However in 2013, we will continue to add capacity to support both the higher industry that we are seeing this year and we expect going forward as well as our improved market share.

We will be adding shifts at our Flat Rock assembly plant, a shift in the second half of the year for the Fusion and we have also announced that we are adding a shift at our Kansas City assembly plant for the F-Series.

So those are costs that will add to support incremental volume in the second half of this year.

We are also continuing to invest very strongly in our product, in our engineering for future growth as we move forward.

And we believe we are seeing the benefit of that -- those investments that we made last year and will continue to make in our bottom-line results for North America.

Okay.

Thanks a lot, guys.

Eric Selle, JPMorgan.

I guess the elephant in the room is treasuries have been soaring here in Fixed Income.

We have obviously been volatile a couple months and we haven't seen it hit volumes yet but could you speak generally on how rates would impact your balance sheet and profitability?

Let me start on the Automotive side, and then I'll have Mike jump in and talk about the Credit company because it does have different impacts depending on what areas of the business.

On the Automotive side, I think first and foremost it's what's the impact on the overall economy?

If rates are going up, that obviously signals a stronger -- presumably a stronger economy, which should help industry growth.

As long as -- I guess as long as it doesn't shoot up from a standpoint of sort of the shock effect.

So as long as it's a nice steady growth, Eric, it probably has a positive impact on GDP, which then has a positive impact on industry sales.

I think the other two pieces on the Automotive balance sheet, the biggest one being the benefit that that would have on the liability side of the pension plan on the present valuing of the liability.

Obviously there's a partial offset to that for the amount of assets we have invested which would obviously go down in value as a result of interest rates.

But net-net -- and we have actually provided sensitivities in previous presentations of somewhere between $2 billion and $2.5 billion for a 100 basis point change in rates to overall US funded status.

So we have given those sensitivities.

And lastly and you saw it a little bit in this quarter's earnings in net interest obviously even though we run a very short duration cash portfolio, rising rates do have an impact on the market value of that cash portfolio.

So net net as long as it's not a shock, positive industry, good news to the pension funded status would be a plus for the Automotive side.

Then on the Credit side, the impact on the present portfolio is going to be pretty limited because as you know, we have a term matched philosophy on our debt.

Obviously you're going to get noise in the value of your derivatives and repricing timing, but for the most part, the impact on the present portfolio is pretty muted, again in a consistent move upward as opposed to huge spikes.

As it relates to future placements, though, and the impact, it really depends on the competitive environment.

Obviously if rates are rising, that's passed on to consumers, it will mean higher costs to buy a car.

If not and they are not passed on, then that could be a bit of a margin squeeze and we will have to stay tuned to watch that.

I will say thus far there has been limited pass-through of pricing in the market.

That is great color.

I thought it was 1 basis point For $5 billion.

I'm just kidding.

I'm just kidding.

That was off the last call, sorry, sorry.

You guys gave us the 60 basis points loss-to-AR ratio in the last 10 years.

Did that include Triad or no?

You guys sold that in the 2004 I think?

I believe we have (multiple speakers) as a discontinued op, so yes, 67 basis points is our 10-year average.

And then I know you probably can't do this on the fly but maybe later on today, I'd love to get it ex the 2008, 2009 if possible.

Just to kind of get like a normalized number.

I've got it in my model but I just want to double check.

Moving on to Europe, you guys said that there's going to be restructuring charges of $1.2 billion.

Have you guys disclosed what portion of that is cash and then kind of how the cash is going to ferret out?

I know you have an 8 and then 400 charge cadence and I was just wondering how much is cash and then when is that cash going to hit?

I'd imagine when Genk is closed late next year, that's the majority of the cash, but I may have that wrong.

Yes, we haven't disclosed.

The majority of it will be cash over time.

We haven't disclosed timing of the cash payments and they differ by the type of employee and the nature of the separation agreements.

Is there anything generally you guys can speak on?

I know in the US it was basically a one-year payback on the buyouts.

Is there a general rule of thumb to apply to Europe?

Is it two-year payback or is there not really a good -- it varies by plant?

It varies by plant and by the type of the employee.

We haven't provided any guidance although I think we do have out some numbers, the numbers of separations and the total cost.

But I would say around 2 is probably not a bad estimate.

And remember in addition to the savings that we have that we will get from closing the facilities, there will be a reinvestment cost on the transition from the standpoint of moving the products from Genk to Valencia and Saarlouis.

So you get a capacity utilization bump and then don't you get a $0.5 billion depreciation benefit as well?

No, we've --.

I thought we talked about that on the last call.

There's about a $0.5 billion effect this year as we accelerate the depreciation of our existing facilities.

Going forward, we expect to see a number of benefits.

Obviously there are people no longer in the business, but they are very importantly around the overall utilization of our European manufacturing network as we consolidate into Valencia in the case of these products.

Okay, thank you.

Just one final question.

Looking at slide 8, the third column, kind of your forecast of funding, that's 2013.

Could you see that flip-flopping going two-thirds unsecured to one-third securitization?

In 2014, is there a -- could it flip that fast or is it going to be kind of a slow moderation that we've seen over the last couple of years?

I think, Eric, I will actually have you flip back to slide 7 because I think you can see the percentage of securitized funding as a percent of managed receivables has really been walking from 55% in 2011 to 48%.

We are at 45% at the end of the second quarter.

We are projecting to be between 44% and 47% at the end of the year.

And I think you can continue to see that migrate down more toward our target levels over time.

And so -- I think the mix that you've got here from a standpoint of unsecured and secured, given the maturity profiles of differences within each of those, shouldn't be too far off as you go into 2014.

That is great color.

Guys, thanks a lot for your time and I hate to be cheesy, but it was a very solid quarter.

Great work.

(Operator Instructions).

Brian Jacoby, Goldman Sachs.

Good numbers today.

I just had a couple quick ones.

Most of it was covered, but in the past you gave some data on FICO scores and so forth and a lot of us get questions from investors just around how much of the business being originated on the loan side at Ford Motor Credit is nonprime or whatever you want to call it below a certain FICO score.

Can you give us a sense in the first half of the year what perhaps maybe some of the lower quality or lower level FICO score business that you did at Ford Motor Credit?

Sure, Brian, it's Mike.

As you have seen through other agencies releasing data, the industry has seen a gradual increase in subprime loans so far this year.

Our data shows it up slightly year-over-year.

Although I know you guys get used to me saying this, Ford Credit has been very consistent in what we are originating.

We continue to be about 5% to 6% of our originations are higher risk.

Obviously that's a combination of FICO and deal characteristics, but we've been pretty stable in that 5% or 6% range.

Great, so no changes there and presumably as the economic cycle evolves, is it something that if the business looks attractive, could you take that percentage up or is it more so you want to keep it within that range?

Truthfully our goal is to be pretty stable.

That way our dealers really understand what it is we are going to buy.

I think the other measure that we use to make sure that we are really providing that value for our Ford dealers and customers is the amount of subprime Ford customers that we actually do buy.

The other metric that I usually share is that three out of every four Ford customers who buy -- three out of every four subprime customers who buy a Ford vehicle are generally financed by Ford Credit and again that's pretty stable through time.

We hope to keep that level right around there.

Okay, great.

I had one last one and it is just around -- I think Doug touched on it earlier but it's around the cadence of cash flow.

For the second half, generally your operating cash flow tends to be better but you have higher CapEx and I think you still have, what, another $1.4 billion of discretionary pension contributions planned for the back half.

So can you kind of give us a sense like the cadence still looks like second half should be pretty good.

Is it kind of a similar type of cadence to what we saw last year?

Because obviously you revised up your cash flow guidance and it pretty much looks like it's going to be a slam dunk, easy to do a lot better than last year.

But the magnitude of how much better seems to be pretty dramatic.

But unless I'm missing something in terms of -- is there anything else maybe on the cash use side in the back half, whether it be taxes or something that I'm missing?

That would be helpful.

I think you've touched on the major pieces.

Clearly we have upgraded our guidance to substantially better and as you noted, the first half is better than our full-year last year.

We haven't provided anything -- we are not quantifying that any further.

But the items you touch on, CapEx we guided to about $7 billion.

That would infer higher second half CapEx and as you just pointed out, the pension contributions also in the second half.

Great.

Again, good numbers.

That's it for me.

At this time I would like to turn the call back over to Ms. Molly Tripp for closing remarks.

Thank you.

So with that, I would like to thank everybody for joining us and we would like to conclude today's call.

Thank you for your participation in today's conference.

This concludes the presentation.

You may now disconnect and have a great day.