福特汽車 (F) 2016 Q4 法說會逐字稿

Good morning.

My name is Kayla and I will be a conference operator today.

At this time I would like to welcome everyone to the fourth-quarter and full-year 2016 Ford Credit earnings conference call.

(Operator Instructions)

I would now like to turn the conference over to Karen Rocoff, Associate Director of Investor Relations.

Please go ahead, ma'am.

Thank you, Kayla, 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 this morning.

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 review a few items.

As a reminder, the scope of this call is limited to Ford Credit 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 press release and the Ford Credit earnings slides that we will be using 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.

These are reconciled to the most comparable US GAAP measure in the appendix to the slides.

Today's discussion also includes some forward-looking statements about our expectations for Ford Credit's future performance.

Actual results may vary, and the most significant factors are included in our presentation.

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

Please note that beginning next quarter we will be presenting Ford Credit's earnings in a file-only format.

We are making this change after several quarters of successful experience with fixed income investor and analyst outreach and to address the overlapping questions across the Ford and Ford Credit calls.

Best-in-class investor dialogue is our objective and we'd welcome the opportunity to extend our outreach where there is interest.

For those of you who also dial into the Ford earnings call, we will continue to include Ford Credit management in that call and, of course, welcome questions about Ford Credit or from the fixed income community.

The Ford Credit presentation will continue to be made available prior to the Ford earnings call.

Please feel free to follow up with me after the call if you have questions.

Thank you.

With that I would like to turn the presentation over to Joy.

Thank you, Karen and good morning everyone.

Today we are happy to report that we delivered on our revised guidance that we confirmed two weeks ago at the Deutsche Bank conference.

So let's go ahead and get started on slide 1. We remain committed to supporting Ford Motor Company's profitability around the world.

And here is our strategy to deliver on that commitment.

It defines how we originate, service and fund the business which you can see remains consistent from our prior calls.

Our originations in the quarter and full year remain disciplined as evidenced by the key metrics we will cover in the deck.

And on the servicing front for the second year in a row we earned the highest ranking for mass-market in J.D. Power's US Consumer Financing Satisfaction Study and Lincoln Automotive Financial Services ranked highest among luxury providers for the fourth year in a row.

Our cost efficiency continues to be industry-leading and our funding profile and balance sheet remain very strong.

So let's go to slide 2 and look at some of our metrics.

Here you can see our metrics for the fourth quarter with the chart at the bottom giving the full-year picture.

Managed receivables grew 8% year over year at $137 billion, in line with our plan.

Pre-tax profit for the quarter was a solid $398 million and full-year came in just under $1.9 billion, which is slightly higher than our revised guidance of $1.8 billion.

Our portfolio performance is in line with our expectations as credit losses continue to normalize in the US.

Now let me bring in Marion to bring in some more details on our results.

Thanks, Joy, and good morning everyone.

Let's go to slide 3 where we will see the factors that affected Ford Credit's lower fourth-quarter pre-tax profit versus 2015.

As previously guided in the quarter FCE Bank settled a pension deficit in a Ford-sponsored retirement plan and an offset to this expense is reflected in Ford of Europe's results.

Lease residual performance primarily reflects higher depreciation in North America related to lower expected auction values in our lease portfolio.

Favorable volume and mix was driven by growth in receivables globally and operating leases in North America.

Let's turn to slide 4 and our full-year results.

Ford Credit's lower full-year pre-tax profit compared with 2015 is primarily explained by an unfavorable lease residual performance and higher credit losses.

Favorable volume and mix driven by growth in receivables globally and operating leases in North America was a partial offset.

Lease residual performance primarily reflects higher depreciation in North America as we continue to expect lower auction values in the future.

And credit loss performance reflects higher charge-offs predominantly in North America.

Marion, let me just jump in here if I may.

This waterfall shows the trends that we've been highlighting for a while now.

We saw a significant increase in off-lease volume in 2016 across the industry with greater than 25%.

And as a result auction values declined, and that impacted our lease residual performance as you can see on the waterfall.

And as I mentioned earlier we continue to see credit losses moving toward the levels that we would more typically expect after a sustained period of historical lows.

Great, thanks, Joy.

Okay, let's go to slide 5 and look at North American financing shares and contract placement volume.

The decrease in 2016 full-year contract volume is more than explained by lower retail installment and lease financing share in the United States which reflects changes in Ford's marketing programs.

Let's go to slide 6 and look at the same chart for international.

2016 total contract volume increased from a year ago, primarily reflecting growth in China.

We are very pleased with our progress in China.

Our operation there achieved record 2016 contract volume as more consumers are choosing to finance the purchase of their vehicles.

The increased China volume was a result of higher retail installment financing share driven by Ford's marketing programs.

Turning to slide 7, on this and the following slides you'll see the proof point that our strategy delivers very robust portfolio performance.

To start here, our US average placement FICO and retail terms remain very consistent.

Moving to slide 8, our US retail and lease credit loss drivers.

So credit losses have been at historically low levels for quite some period of time and we continue to see credit losses increase towards more normal levels.

Delinquencies in the repossession ratio were up from last year but still at very low levels and severities have increased over the last number of years.

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.

So lower auction values accounted for about half of the severity increase in 2016 from 2015 with all of the other factors I just mentioned accounting for the rest of it.

Just before I go off this page, we've been talking about credit losses being somewhat higher this year than last year.

But if you look at the repo ratio, last year's repo ratio was the lowest on record for us and our over 60-day delinquency in 2015 was lowest on record.

So while they are up a bit they are off of our historical lows.

So let's turn to slide 9, this shows our worldwide credit loss metrics.

Our lost receivables ratio is higher than last year, reflecting those factors I just talked about in the US retail and lease business on the prior slide.

The credit loss reserve at year-end was higher than last year, reflecting credit loss performance trends and growth in retail receivables.

The reserve as a percentage of managed receivables was up 7 basis points from 2015.

Let's turn to slide 10 and US lease origination metrics.

A lot has been talked about this over the last nine months or so.

2016 full-year lease placement volume was down slightly compared with 2015, and as we all know industry leasing continued to grow in 2016.

Industry lease mix was up 2 points, Bob talked about this in the call earlier, while Ford Credit's lease mix was at 22% flat with 2015.

And that reflects the parameters of our leasing strategy.

So on slide 11 our 2016 US lease return volume was higher in 2015, up quite a bit from -- it was higher in 2016, up quite a bit from 2015, reflecting higher lease placements in recent years as well as an increase in return rate.

The higher 36-month leasees returning in 2016 reflect the shift towards longer-term leasing that we made back in 2013.

You can see that on the prior slide.

In 2016 our off-lease auction values were lower than 2015, reflecting higher return volume and lower auction values on smaller vehicles.

You can see we were down a little more than $700 year over year.

And that was about 4% which was consistent with industry.

Over the last several years we have seen the industry, the lease industry share grow and with rising industry volumes.

And as a result the supply of off-lease vehicles is higher and will continue to grow over the next several years.

And for this reason we continue to expect downward pressure on auction values and accounted for that in our plan.

Although Bob mentioned earlier we saw a pretty significant decline in auction values in the fourth quarter, not shown on this slide but back in the appendix we were down about $1,050 for 36-month auction values, which was down a little more than 6% and a bit more than the industry.

But for the full year, as I said, we were consistent with industry and we expect -- but we did see values stabilize in December and January.

So good trend recently.

Turning to slide 12 and funding.

Our strategy is still to maintain a very strong investment-grade balance sheet with ample liquidity to support Ford through economic cycles and market stresses.

Our funding profile is robust.

It's diversified across markets, channels and investors.

We ended the year with managed receivables of $137 billion as I mentioned earlier, or Joy mentioned earlier, and that was funded primarily with term debt and term asset-backed securities.

Securitized funding as a percent of managed receivables was at 37%.

And we continue to expect that the mix of securitized funding will trend lower over time.

However, the calendarization of the funding plan may result in quarterly fluctuations of this metric.

For the next slide, the funding plan on slide 13, in 2016 we completed $28 billion of public term funding.

And for 2017 we are projecting full-year public term funding in the range of $24 billion to $30 billion.

And we are already off to a very fast start.

As of January 25 we've completed over $5 billion in public term issuance.

Moving to slide 14, at December 31 our managed leverage was above our targeted range, reflecting growth in receivables and the continued impact of the strong US dollar.

But it is trending towards our target range.

Liquidity continues to be very, very strong.

We ended the year with $27 billion available for use.

With that I will hand it back to Joy for closing information and comments.

Thanks, Marion.

Let's go ahead and turn to slide 15.

You can see we had a solid performance in 2016 at $1.9 billion in pre-tax profit.

And as we guided at the end of the year we expect to deliver a solid pre-tax profit of about $1.5 billion for 2017.

This is lower, reflecting the higher depreciation expense related to our expectation of lower US auction values that Marion just referenced.

So let's just go to slide 16 and wrap up.

We are pleased with our results for the quarter and year.

We are a key profit pillar for Ford and we remain a strategic asset, consistently delivering value to our auto business around the world with class-leading services.

Our funding plan and strong balance sheet are well-positioned for 2017.

And we will keep executing the fundamentals to manage all aspects of our business.

Let me turn it back over to Karen and we will take some questions.

Thank you, Joy.

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 contact detailed in the Ford press release.

Kayla, may we please have the first caller?

(Operator Instructions) Eric Selle, SunTrust.

Good morning Marion, Joy and Neil.

I hope you are well.

And I really do appreciate your time.

On the consumer you've obviously seen vicissitudes in the economy and the political landscape over the last six months, but throughout that time we've seen a jump in consumer confidence which is highly correlated with auto sales.

Are you guys seeing any change in the consumer behavior over that period, any increase in dealer foot traffic or new loan applications or deeper lending?

Is there just -- have you guys seen any difference in the consumer or are they still Waiting for Godot to see what happens with this new regime?

So I will take that one, Eric.

I think since we've seen the consumer sentiment came in most recently higher we really haven't seen anything different than our current expectations.

So the traffic does remain as we had expected it would be.

So not a change there.

Clearly all the things that we are hearing being talked about with the new administration and some positive outlooks there it will take time to actually get into our business fundamentals.

So we stay steadfast on our planning because we actually haven't seen any new data to represent in our actual business any change to our outlook.

I would just add, you mentioned deeper lending, in the last couple of quarters we've seen not a dramatic decline but a noticeable decline in subprime lending across the industry.

And a couple of banks have been pretty vocal about that and I think from the data we see that's true.

So there has been a little back off on subprime lending.

I think my former employer was one of the main guys speaking out against it, but that's beside the point.

If you look on slide 5 you guys obviously decided to pull away from the lease market, but how much of that retail law share is lease?

I mean just bigger than a breadbasket, is that 90% of that 65% to 56%, or are you guys giving up some loan as well?

We are giving up some loan as well.

This really reflects the go-to-market with Ford.

And you will see over the last five years or so that number in the US has bounced around between I'll call it roughly 55% and 65%.

It's been up for the last number of years.

It was down this year, and this is just how we work with Ford and go-to-market.

And we expect it to bump around.

Okay.

And then and I do appreciate the long term.

That obviously gives us a perspective.

Your financing margin, I understand the loss provisions in the lease and the overhang and all that.

But the declining finance margin, that's a little bit more of the ragout of what is in there.

Can you guys talk about the drivers of that and then how we could look at that going forward?

Is it rates, is it the term structure, is it competitive pricing or all of the above?

That's a very good question and this was the largest number for the year in the fourth quarter.

You will notice that on slide 4 we have the $86 million in financing margin and for the fourth quarter it was $65 million.

So that was the biggest component.

It was actually an accumulation of things that got into that fourth-quarter number, And I would say the biggest of which would be higher short-term rates that we've seen as well as runoff of higher-yielding assets in Europe.

Then there's an accumulation of other things for example, there's some offset in derivatives market valuation.

Okay.

And, obviously, we can't assume this, but if we were, I mean that should stabilize if rates stabilize and the runoff of Europe will stabilize over the year probably.

Just to be clear, Eric, of the $65 million in the fourth quarter related to financing margin, when I say it was an accumulation of things, it was.

The biggest component of it was higher short-term rates but it was not the majority.

It was just the largest component of it.

So I wouldn't get overly excited about higher rates and the effect on margin.

You should see my bank stock because the investments are pushing this up to the levels SunTrust has never seen.

It's amazing.

So looking at -- and then just my next question is on the funding slide, you guys are reducing funding but I think you are looking to slightly up volumes.

Why is funding going down?

Is that ceding some of the market share in leasing or --

No.

At a high level let me take a couple of these.

I will start on the funding side first.

Treasury team has done a fantastic job of funding the business over the last number of years.

We borrow longer than we lend.

And as a result of that our balance sheet continues to be self-liquidating and has a good liquidity profile.

So even though the balance sheet has grown over the last number of years, what you will see is that the amount of term debt that we've done has been relatively flat.

And so that's one piece that's on the funding side.

On the other side, on the receivables side in 2017 we are not expecting much receivables growth.

As you know, we are not giving a lot of -- we are not giving explicit receivables guidance any further, but given the plateauing in the industry in the US we are not expecting to see much receivables growth.

And I'd say the majority of growth actually comes from international.

That's great.

And then my final one is, and I understand this auction values we are starting at a low base and we are normalizing, but when you look at the repo rates and how fast and how big the balances are in 2016, I remember 2008 when oil prices doubled in the first half and, obviously, there was a write-down in lease the book, but how do those repo rates compare?

It seems like a big number, and I know a lot of it is mix as well as the big balances and the early defaults.

But how do those rates, how do those rates compare to what we were looking at in 2008?

You know, it's funny you ask that, Eric, because I was thinking about this earlier.

As I mentioned in my comments, the repo rate in 2015 was our lowest on record at 98 basis points.

The highest in recent times was during the crisis in 2008 where it reached 3%, and on average it's been around about 1.8%.

That is great color, man.

I really appreciate it and I really appreciate you all's time.

Thank you.

Justine Fisher, Goldman Sachs.

Good morning.

The first question I have is on the residual outlook.

So can you remind us again what assumption you guys are baking in for 2017, and then also whether you think that there is more downside risk or upside risk to that assumption?

Well, what I can tell you is that as we look at the leasing environment and used vehicle prices in general, we continue to see growth in off-lease volume.

And with just supply and demand with higher supply you would expect lower prices and that is what we are planning.

We are not that I give a specific number.

I would just note that in 2016 we were about a little more than $700 per unit lower year over year.

But as we look at 2017 we are planning levels that are in that range.

And the difference, though, is in 2016 the declines we saw in auction values were predominantly related to smaller vehicles.

And I think for 2017 and beyond we are thinking about a broader decline in used vehicle values, as it relates to specifically the growth in leasing across the industry, not Ford specific, but the growth in leasing for full-size pickups in larger SUVs.

And Marion, if I could just add to that, those numbers are predicated on the volume of off-lease vehicle.

So you guys saw from 2015 to 2016 we had over 25% incremental supply in the auction market and we are anticipating another at least 15% supply based on the data we see around the industry.

So that is behind our guidance.

Okay, so it's still growth, but it's a moderation in the growth of that incremental off-lease supply?

Yes.

Correct.

Okay.

And (technical difficulty) the vehicles on your books similar to Ford sales breakdown between cars and SUVs and trucks?

No.

The short answer is that it is similar across the industry segment by segment.

And I would say generally speaking leasing is higher in passenger sedans and smaller SUVs and lower in trucks and vans.

So one of the reasons we have lower lease mix in the industry is that we have a richer mix of trucks and vans and a lower mix of luxury versus industry.

And so, for example, industry is going to be -- luxury has a very high mix and Ford's participation in luxury it's small relative to the industry.

But on a segment-by-segment basis we are relatively consistent.

Okay, great.

Thanks very much.

Mark Alter, Credit Suisse.

Thank you, good morning.

If the residual values are continuing to come down and are going to be broader, that sort of would imply that either lease cost per customer has to go up or the parent is going to put more marketing dollars against leases to keep that same.

Is it a mix or either one of those?

Yes.

And remember we set residuals and we've already set the residuals.

And you've heard Bob and Mark talk about our expectation for lower auction values is resulting in the cost of leasing going up.

And it makes leasing relatively more expensive than financing if you are trying to keep the same monthly payment for the consumer.

So we started reflecting lower auction values in 2016 and have been for some time.

And that's partially some of the reason we have taken down our lease mix.

And those costs are already reflected in Ford's guidance that was discussed earlier.

But for new leases?

Correct.

For new leases the cost of me leasing a car is going to go up versus financing?

Yes, all things --

All things being equal.

Okay, thank you.

Matt Stover, SIG.

Thank you very much for taking the question.

First, in international ops I was wondering, China right now is at about 19%, 20% of your mix.

Where could you take that?

Could you envision taking that to levels you see in Europe or how should we think about the growth of your penetration in China?

It's a good question.

Let me start by saying that the contract volume is more impressive than the receivables balance.

And part of the reason why is that the average term of financing in China is very short.

It's 24 to 36 months.

And the average finance amount is about 50% of the purchase price.

So you've probably heard this before, but many consumers come in and maybe the dealer sells them up from, I will call it, from an Escape to an Explorer but they came in prepared to pay cash for an Escape and then they bought the higher series vehicle and financed the difference.

So it's very short-term financing with very low loan-to-value.

And because of that the balance sheet size is relatively small.

As we look forward, we expect to that the consumer will continue to choose financing and we expect the loan to values to come up and so on.

So over a long period of time it will increase as a mix of the balance sheet.

But it's not going to be a dominant, and we don't see it passing, for example, Europe anytime soon.

But should we continue to see a growth in the penetration there?

Yes.

Yes.

Okay, so we haven't stabilized.

The second question, I don't want you to perceive this as a gotcha question, but I just want to clarify something.

As your competitors have considered your guidance with respect to residual values and the outlook for Ford Credit both for the fourth quarter and next year, there have been questions about whether or not you take different residual value assumptions relative to ALG or other third-party sources.

I was wondering if you could comment on the policy that you folks employ in North America and how your residual assumptions tend to scribe up versus ALG or another third-party source?

Well, I'll tell you what, why don't I start and then I will kick over to Joy on this.

So we do use proprietary models for setting residuals and not only setting residuals but forecasting them once they get into our portfolio.

We take ALG as an input, and it's a very important input to our residual setting.

But we do think that we have better information relative to our product and so forth.

And that has proven correct over time.

Now once we originate the lease and the lease comes onto the balance sheet we depreciate that lease to ALG values, so that it's not that we are not using the ALG, we are using the ALG values, it's just we use proprietary models to establish the residuals.

And I can tell you generally speaking the values that we would project or establish are not materially different than ALG's, generally speaking.

There are differences.

What I can tell you, though, is that during 2016 ALG lowered the values, their projected values, within our portfolio and that would have been the case across the industry.

Yes, I think you covered it well there, Marion.

The only thing I would add to that is when you are trying to do like-for-like comparisons I think you have to look at the actual return volume and look at, try to understand return volume assumptions, because that becomes key drivers of the actual results.

So that's one thing I would add to that.

Okay, thank you very much.

Brian Johnson, Barclays.

Yes, I want to follow up a little bit on the first question.

Because as the analyst noted, the regional bank stocks are up sharply on the anticipation of extended credit cycle, better net interest margin, yet I sense a lot of investors' nervousness still around Ford Credit and your own guidance kind of cautious.

Just drilling down on a few of the things within that.

First, can you give us just a history of how auto lending rates at the bank and the wholesale level, not including subvention, respond to increase in funding costs and what that would imply for net interest margins as we go through perhaps a plateau of sales in a higher interest rate environment?

Okay.

So this is Marion.

Let me start by saying, I think the observation about bank net interest margins expanding is a very good one.

Banks have lots of deposits and Ford Credit is a wholesale funded finance Company.

So, unfortunately, and we run a very matched book as well.

So we don't take interest rate risk, so you shouldn't think about risk to margin necessarily from interest rates rising.

However, what I would say is we also don't benefit from margin expansion like banks do because we do not have deposits to the level that banks do.

So in terms of pricing and what happens when rates go up, it's been quite some time since rates have gone up.

But hopefully when rates go up those higher rates get passed along to the consumer.

And is there typically a lag or --

Yes, there is typically a lag.

And, for example, we've seen rates go up quite a bit.

We've taken up some of our standard rate pricing.

But we have not seen that -- we have not seen all competitors follow, all bank competitors follow yet.

Okay.

And, second, you on the main call mentioned that the auction values stabilized a bit in December.

When you look at December and look at delinquencies as well as auction value, any evidence that the consumer confidence is resulting in better delinquency performance?

Well, as I mentioned earlier, delinquencies are still at very, very low levels.

15 basis points for 2016 is really, really low level.

What we see, and maybe I will let Joy comment on this, as well, is that the consumer is still very, very strong.

The difference that we started noting earlier, or later, in 2016 was that of those consumers that do go delinquent, which are very few consumers, more of them are headed towards loss.

And we think some of that may be from the lower auction values and perhaps they are a little further underwater and tend to walk away as opposed to trying to get the loan corrected.

Yes, I would just add to that Marion, and we talked about this a little bit in the third quarter that we see we've had several cycles and quarters of really good actually outperforming our expectations on our performance on our portfolio.

And when you get to that later stage in a credit cycle you expect to see more normalization.

That is what we were seeing.

To the degree that there is this new optimism post-election and that has, makes people feel better about things, we will look for some upside.

But the actual fundamentals that come from that to actually get actual extra dollars in the consumer pockets are a ways away from the things that are being talked about today.

So we are sticking to our guidance on where we are at with the continued normalization, but we will certainly welcome any upside.

Okay, thanks.

Philippe Houchois, Jefferies.

Yes, thank you very much.

My question, going back to slide 11 when you talk about your lease return volumes, I was curious the sharp increase in the 36-month duration lease is coming back.

Was your increase in those types of leases back in 2013 the industry standard?

Or were you ahead of the industry there, which may explain why you've been kind of the first one to warn about deterioration of credit and we still have to see some of your peers, especially GM, talk the same story?

Actually, when we made that decision back in 2013 we were looking at what the rest of the industry was doing and we were looking at the risk profile on the 24 versus the 36 and made the decision to go to the 36.

The rest of the industry was doing more 36-month leasing also.

So it was just aligned with the industry.

So there wasn't anything more behind that than just lining up with industry and looking at what we felt was the right price point in the market at the time to support sales.

Right.

So you've really caught up with industry behavior then, not lead it.

Okay.

The other question I have is totally different, but I know you said, again, you are not taking much deposits in terms of your funding sources.

As you know, your European peers have decided to become large deposit takers back about five to seven years ago.

You may do that in Europe as well, but why don't you take more deposits in Ford Credit in general as a more stable source of funds?

Well, the only place we would be allowed to take deposits today would be in Europe.

And we continue to look at that as an option, and we continue to study it.

And at this time we have made no -- we've made no decisions other than we are not proceeding at this time with deposits.

Yes, just to clarify, we do not have a bank charter here in the US where the largest volume of our business is.

And it's required to take deposits.

I understand that.

But European, your European peers didn't have bank charters, didn't have that many bank charters back five, seven years ago and they decided to go ahead and do that.

So technically you could actually go that route if you decided that was the right thing strategically?

One thing I do want to point out, though, is we do have an investment product in the US called Ford Interest Advantage which acts, has many of the same features as perhaps like a money market account and allows customers to have same-day withdrawals and things like that.

And that value it's like $6 billion.

You can see that on the funding slide on slide 12 called Ford Interest Advantage.

I see.

Okay, great.

Thank you very much.

That concludes the question-and-answer session.

I will now turn the call back over to Karen Rocoff for closing remarks.

Thank you, Kayla.

With that I would like to conclude today's call.

Thanks to all for joining this morning.

That concludes the Ford Credit fourth-quarter and full-year earnings call.

Thank you for participating.

You may now disconnect.