福特汽車 (F) 2016 Q3 法說會逐字稿

Good day. Thank you for participating in the Ford Credit third-quarter earnings conference call. (Operator Instructions). At this time, I would like to hand the floor to Steve Dahle, Associate Director, Investor Relations. Thank you, Mr. Dahle. I hand the floor to you.

Thank you, LaTonya and good morning, ladies and gentlemen. 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 today.

Presenting today are Joy Falotico, Ford Credit Chairman and Chief Executive Officer and Marion Harris, Ford Credit Chief Financial Officer. Also participating is Neil Schloss, Ford Vice President, Corporate Treasurer and CFO, Ford Smart Mobility, LLC.

Before we begin, I would like to remind everyone of a few items. The scope of this call is limited to Ford Credit's earnings. Automotive-related questions should be directed to the Ford Equity Investor Relations contacts detailed in the Ford press release. A copy of this morning's Ford press release and the Ford Credit earnings slides that we will be using today are available on Ford's investor and media website. Ford Credit's investor website also contains the slides.

The results discussed today include some non-GAAP references and these are reconciled to the most comparable US GAAP measures in the appendix to the slides. Today's discussion includes some forward-looking statements about our expectations for Ford Credit's future performance. Actual results may vary and most significant factors are included in our presentation.

Later today, we will be filing our third-quarter Form 10-Q. With that, I would now like to turn the call over to Joy.

Thank you, Steve and good morning, everyone. It's great to be here and thank you for joining us on the phone and the webcast. Marion and I will take you through our third-quarter results and key metrics and then we will be happy to take any questions. So let's get started on slide 1.

Here you can see we remain focused on the business fundamentals that underpin our strategy to profitably support Ford around the world. Consistency and discipline in risk management continue to support our originations practices. In the quarter, we originated 572,000 contracts and managed receivables grew to $134 billion.

Our servicing practices continue to produce high customer and dealer satisfaction and we continue to grow lean, focusing on operating efficiency. And our funding plan is nearly complete, and we will touch on that a bit later. Our liquidity remains strong at $33 billion for the quarter.

Now let's go to slide 2 where you will see some of our key metrics for the quarter. Here you can see our pretax profit was $567 million for the quarter and represented our best quarterly pretax result since 2011, and our receivables were up 10% as we continue to grow in line with our expectations. Our originations and servicing remain consistent and we continue to see US losses normalize from historical lows. You will see that in our LTR, which was up year-over-year, but a very solid performance at 45 basis points.

Now I will turn things over to Marion to take us through our results in more detail.

Thank you, Joy and good morning, everyone. On slide 3, this slide shows our profit variance. We improved our profits by $26 million versus last year's quarter and that's explained primarily by favorable volume, mix and market value adjustments for our derivatives. Partial offsets include unfavorable lease residual performance and higher credit losses.

The favorable volume and mix was driven by growth in all products globally. Lease residual performance reflects higher depreciation in North America related to expected lower auction values in the lease portfolio; we will come back to that in a moment.

Credit loss performance primarily reflects higher charge-offs as a result of higher defaults and severities in North America.

On slide 4, we have a summary of our financing shares and contract volume in North America. The decrease in total contract volume for the third quarter and first nine months of 2016 reflects lower retail installment and lease financing shares in the US.

Moving to slide 5, total international contract volume in the third quarter and first nine months of 2016 increased from a year ago primarily reflecting growth in China and Mexico. Our operations in China achieved record contract volume in the third quarter.

Marion, I just want to follow up a little bit on China and Bob mentioned this in the last call. When we entered the market back in 2005, roughly 5% of the consumers were financing their vehicle purchases. Now our share alone was 19% last quarter, so you can see that the auto financing market continues to mature quite nicely in China.

Thanks, Joy. So here on slide 6 are some origination metrics for Ford Credit in the US. As we've said before, Ford Credit uses proprietary credit scoring models and our underwriting practices have been consistent for years and consistency is the story for this slide. The average placement FICO score has been very stable.

We support customers across the credit spectrum and our higher risk business as classified at contract inception consistently represents about 5% to 6% of our portfolio and this has been the case for over 10 years. Our average retail term was largely unchanged from last year and retail contracts of 73 months and longer remained a relatively small part of our business.

Now, on slide 7, you can see in the top boxes that delinquencies and repossession ratio were up from the same period last year. Severities have increased over the last number of quarters and these increases include such factors as higher average amount financed, longer-term financing, shorter average time to repossession, lower auction values and higher principal outstanding at repossession. The lower auction values accounted for about half of the severity increase in the third quarter from the prior year with the other half explained by the other factors I mentioned.

Charge-offs and the LTR ratio were up year-over-year. This primarily reflects higher defaults and severity. The higher defaults reflect an increased default frequency, as well as growth in receivables. We expect credit losses to continue to increase modestly as they normalize towards our historical experience.

Now turning to slide 8, our worldwide credit loss metrics remain strong. The worldwide LTR ratio was higher than last year primarily reflecting the US retail and lease businesses covered on the prior slide. Our credit loss reserve was based on such factors as historical loss performance, portfolio quality and receivables level. The increase in credit loss reserve at the end of the third quarter compared with the second quarter reflected credit loss performance trends and growth in retail receivables. The third-quarter reserve as a percent of managed receivables was up in the third quarter of 2015.

Now on slide 9, we show lease origination metrics for the US. We manage our lease strategy very closely with Ford and given the significant industry growth in leasing and higher new vehicle incentives, we've lowered our projection on residual values, which makes the relative cost of leasing higher. Mark and Bob talked about that in the Ford earnings call just shortly ago. As a result, our lease share and lease placement volume in the third quarter were lower compared with a year ago.

Now, on slide 10, lease return volume in the third quarter was up from the prior year. This change reflects higher lease placements in recent years and an increased return rate. The higher mix of 36-month leases returning in 2016 reflects the shift towards longer-term leasing made in 2013.

Our off-lease auction values in the third quarter were lower than a year ago and slightly lower than the prior quarter. Our 36-month off-lease auction values were about $600 lower year-over-year. Our auction performance has been very consistent with the industry when you compare it with similar vehicle ages and segments, or to NADA wholesale prices. Looking forward, the increased supply of off-lease vehicles will continue to put downward pressure on auction values.

Turning to slide 11, our funding strategy continues to be to maintain a strong investment-grade balance sheet with ample liquidity to support Ford through economic cycles and market stresses. Our managed receivables were $134 billion at the end of the third quarter and were funded primarily with term debt and term asset-backed securities. Securitized funding as a percent of managed receivables was 33%.

We continue to expect the mix of securitized funding to trend lower over time; however, the calendarization of our funding plan may result in quarterly fluctuations. We expect the mix of securitized funding to be higher in the fourth quarter. An update to our funding plan is on slide 12. We now project full-year public term funding in the range of about $26 billion to $29 billion. And through October 26, we are already at the low end of that range having completed $26 billion in term funding and we are essentially done.

Of note, FCE Bank launched its new UK public retail securitization platform in October and this will be FCE's first public ABS issuance in the UK market, something we are pretty happy about.

On slide 13, at September 30, our leverage was slightly above the targeted range. This reflects growth in receivables and the continued impact of a strong US dollar, but it continues to trend towards our targeted range and our liquidity remained very strong.

Now, let's go to slide 14 and back to Joy to wrap up.

Thanks, Marion. So, as you have seen, we had a strong quarter and we've earned about $1.5 billion through the first nine months and we continue to expect our full-year pretax profit to be about $1.8 billion. We expect the fourth-quarter results to have a couple of items of note. We continue to expect higher supplemental depreciation in our lease portfolio and we also are reflecting our outlook for lower auction values that is impacting that. Additionally, FCE Bank expects a one-time charge of approximately $80 million related to a pension settlement and this offset will be reflected in Ford of Europe's results. Let's turn to slide 15.

So in summary, another very strong quarter for us, our best quarterly pretax profit in about five years. And looking ahead, we do continue to expect headwinds from lower auction values. We are well-positioned with our funding and balance sheet and we continue to consistently execute the business fundamentals as evidenced by our results.

Now I will turn it back to Steve and we will be happy to take some questions.

Thanks, Joy. With that, we will now start the question-and-answer session. As a reminder, we will take Ford Credit questions on this call. Automotive-related questions should be directed to the Ford Equity Investor Relations contacts. Latonya, may we have the first caller, please?

Thank you. Eric Selle, SunTrust.

Good morning. Thanks for the time. I'm just asking generally, you guys are the most forthcoming, largest guys and we've obviously gone through the cycle together so I obviously trust your opinion amongst everyone else. So want to get your opinion on two things that are swirling around the auto world. One, you spoke of some retail softness in the third quarter. Do you attribute that more to the economy softening or more to uncertainty around the election?

When you say retail softening, retail sales or something in the Ford Credit business, Eric?

Just the amount of the incentives that are being used to address some softening behavior there?

I think I would -- for that question, I think I would have you -- I would refer you to the Equity Investor Relations Group.

Okay. Looking at the competitive environment on the credit side, and it ties into volumes which may be auto, but really on the financing side, do you guys see credit profiles normalizing versus a very long period of being tight, the 2010 to 2012 and now we are normalizing the three-year portfolio, or do you see more of it as a worsening credit profile?

I guess I'm trying to ask you -- there's a Wall Street Journal article out today and I'm sure everybody on this line has gotten 10,000 calls on the auto cycle leading us into recession. And just my basic question is are these credit profiles normalizing for the cycle, or do you see us going into a worsening credit cycle?

It's a good question, Eric. We don't see it getting significantly worse. What we see is the credit environment continuing to normalize. Our credit loss experience has been, as you know, at near historic levels, for -- low levels -- for an extended period of time and they are increasing, losses are increasing, but they are only normalizing towards what we would expect to be more historic levels. They are still below what our models would have projected them to be.

That being said, I think for where we are in the cycle, we are starting to see indicators that we are in the late stages of the cycle, but there's nothing out there that's worrisome about credit losses getting significantly worse short of a recession. I don't know, Joy, if you have a perspective?

Yes. I would just add to that, and thank you, Eric, for the question, we are seeing the normalizing of credit trends that he mentioned. We still have good consumer delinquency performance. It still remains very strong and we do think that we are going to continue to see a little higher degree of defaults, but it's normalizing where we are at in that later stage of the credit cycle. So that's what the indicators are saying to us.

Yes. Maybe one other thing I would say. It hasn't been very pronounced, but maybe the right word is noticeable. We've seen a noticeable decline in subprime financing over the last two quarters, but it hasn't been dramatic. A couple of banks have been somewhat vocal about that in their calls.

Yes, my former employer to be one of them. And if I can sneak one more in on the demand side, from the securitization -- speaking of subprime -- talked to a guy recently that has sold off a BB slice for the first time in history. Are you guys seeing demand from idiosyncratic investors to be able to sell off some of those equity tranches that the rating agencies hold on the wholesale and retail side? Are you guys seeing rates come down to a point where you guys could potentially offload that exposure and it makes sense from your cost of capital? Has it gotten that hot, or are you guys still holding onto that?

Eric, this is Neil, and I think, from our perspective, we still think that's a good asset for us to just hold onto.

I agree. Neil, it's great hearing from you. I will turn the call over. I really appreciate your time.

(Operator Instructions). Mark Altherr, Credit Suisse.

Thanks. Good morning. I know you've got a lot of experience on credit losses in North America and Europe. With China growing, that's probably new even for them from a financing standpoint. How are you looking at reserving there with I guess very little history?

It's a good question. We do have very robust rules of the road on reserving policy, so we feel good about that. But let me talk more broadly about the financing market in China. So the average consumer in China -- traditionally, you've heard the stories, they pay with cash and what happens many times is they walk in and they want to buy a Ford Fiesta and the dealer does a really nice job and sells them a Ford Focus and they finance the difference between the Fiesta and the Focus.

So really what we see is a very low loan to value on the vehicle itself and so that the risk in the portfolio is extraordinarily low and we see that play out in our credit loss performance in the market. I don't know, Joy, if you have anything else to add?

Yes. I would add to that. We do have about 11 years of data. So you are right. We are just now getting to a maturity level where we can really do some good modeling there. But as Marion mentioned, the structure is very different. The terms are a lot shorter and there's significant down payments. We've had to factor that into our consideration set, but the portfolio there is performing as we would expect.

Okay. Thank you.

Thank you. At this time, there are no further questions. I would like to hand the floor back to Mr. Dahle for closing remarks.

With that, I would like to conclude today's call. Thanks to all for joining us this morning.

Thank you for your participation in today's Ford Credit third-quarter earnings conference call. You may now disconnect.