福特汽車 (F) 2012 Q4 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the fourth-quarter Ford Fixed Income conference call. My name is Chanel and I will be your operator for today. At this time, all participants are in listen-only mode. Later we will conduct a question-and-answer session. (Operator Instructions). As a reminder, this conference is being recorded for replay purposes.

I would now like to turn the conference over to Ms. Molly Tripp, Manager Fixed Income Investor Relations.

Thank you, Chanel, 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.

With me today are Michael Seneski, Ford Credit Chief Financial Officer; Neil Schloss, Ford Vice President and Treasurer; and Stuart Rowley, Ford Vice President and Controller. We also have some other members of management who are joining us for the call, including Marion Harris, Assistant 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-K.

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. Actual results could differ materially from those suggested by our comments here. 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 including our annual, quarterly, and current reports to the SEC.

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

Thanks, Molly. Today's presentation will cover Ford Credit's profit, credit loss performance, funding and liquidity highlights including our outlook for 2013, Automotive cash, debt, and liquidity, an update on our pension, and then we will wrap things up with a summary of the year.

Let's start off with Ford Credit's operating highlights on slide 2. Ford Credit had another strong year with pretax profit of $1.7 billion and $414 million for the fourth quarter. Net income for the year was $1.2 billion and $268 million in the fourth quarter.

Managed receivables were $91 billion at year-end, up $6 billion from year-end 2011. Compared to the third quarter, managed receivables were $4 billion higher. The growth for fourth quarter and full year was driven primarily by increases in wholesale receivables and net investment, and operating leases.

Full-year charge-offs were $136 million, down $65 million from 2011. Fourth-quarter charge-offs were $49 million, down $3 million from a year ago. The full year loss-to-receivables ratio was 16 basis points, the lowest since we started tracking LTR more than 30 years ago. The ratio is 22 basis points for the fourth quarter.

At December 31, the allowance for credit losses or reserve was $408 million or 44 basis points of receivables. We paid distributions of $600 million for the year, managed leverage of 8.3 to 1 at December 31, 2012, unchanged from year-end 2011. Also at year-end our equity was $9.7 billion.

Slide 3 provides an explanation of the change in Ford Credit's fourth-quarter pretax results compared with 2011 by causal factor. The $92 million decrease is primarily explained by lower credit loss reserve reductions and lower financing margin as higher yielding assets originated in prior years run off. As shown in the memo, Ford Credit's pretax profit was $21 million higher than the third quarter.

Slide 4 provides an explanation of the change in Ford Credit's full-year results compared with 2011 by causal factor. In line with expectations, the $707 million decrease is more than explained by fewer leases being terminated, which resulted in fewer vehicles sold at a gain as well as lower financing margin.

For full year 2013, Ford Credit projects pretax profit of about equal to 2012, managed receivables at year-end in the range of $95 billion to $105 billion, managed leverage to continue in the range of 8 to 9 to 1 and distributions of about $200 million.

The next several slides we will be discussing annual key metrics as they relate to asset performance. The normal quarterly data slides have been included for your reference in the appendix.

Slide 5 shows our annual credit loss metrics for our worldwide portfolio over the past five years. Our charge-offs are down from 2011 primarily reflecting lower repossessions in the US and lower losses in all international regions, offset partially by lower recoveries in the US. The loss-to-receivables ratio is about one-third lower than 2011 and is the lowest on record.

Reserves and reserves as a percent of end of period receivables are both lower than a year ago as well as from the third quarter 2012, reflecting the decrease in charge-offs.

Slide 6 shows the annual trends of our US Ford and Lincoln retail and lease business, which comprises about 70% of our consumer portfolio. The upper left box shows the stability of our average placement FICO, reflecting our commitment to maintaining consistent underwriting standards through all business cycles.

The rest of the metrics on the page give you a sense of how the portfolio is performing. Over 60-day delinquencies remain flat. Looking at repossessions, similar to our loss-to-receivables ratio, our repossession ratio for 2012 was a record low at 1.35%.

Severity of $6900 in 2012 is in line with prior years and charge-offs and the loss-to-receivables ratio decreased from a year ago, reflecting primarily lower repossessions offset by lower recoveries -- offset partially by lower recoveries. Fourth-quarter metrics as I mentioned shown in the appendix, are broadly in line with prior quarters and full year.

Slide 7 shows the annual trends of the lease residual performance for our US Ford and Lincoln brands over the past five years. As we have been highlighting, lease returned volumes in 2012 were about 30% lower than 2011, reflecting primarily the lower lease placements in 2009. Our 2012 lease return rate was 62%, up 6 percentage points compared to 2011, reflecting a higher mix of 24-month contracts.

In 2012, our auction values for 36 months vehicles continued to increase, up $995 per unit from 2011 and up $580 per unit in the fourth quarter. The increase primarily reflects higher contented vehicles. Our worldwide net investment in operating leases was $14.7 billion at the end of 2012, up from $11.1 billion in 2011.

With that, I will turn it over to Neil.

Thanks, Mike. Turning to slide 8, we will walk through our full-year 2012 funding highlights.

The biggest news this year was that Ford and Ford Credit achieved investment grade from Fitch, Moody's, and DBRS. In addition to getting back the blue oval, these events have had a meaningful impact on our unsecured credit spreads.

We completed our 2012 funding plan, issuing $23 billion of public term funding which includes over $9 billion of unsecured debt. We issued our first public investment grade unsecured debt transaction since 2005. Additionally, we launched an unsecured commercial paper program in the US, which has grown to about $1.7 billion.

We ended the year with about $31 billion of committed capacity. Our liquidity remains strong and we will maintain cash balances and committed capacity that meet our business and funding requirements through economic cycles.

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 9 shows our trends in funding of our managed receivables. At the end of 2012, managed receivables were $91 billion. We ended the year with about $11 billion in cash and securitized funding was 48% of managed receivables down from 55% at year-end 2011, which reflected the FUEL note exchange and a greater mix of unsecured debt given our improved credit spreads following our upgrade to investment grade.

We are projecting 2013 year-end managed receivables in the range of $95 billion to $105 billion and securitized funding is expected to be in the range of 42% to 47%. We expect this percentage will continue to decline going forward.

Slide 10 shows the public term funding plan for Ford Credit excluding our short-term funding programs. As I mentioned earlier, we completed $23 billion in public term funding in the US, Canada, and Europe, which includes $9 billion of unsecured debt and about $14 billion of securitization. For 2013, we project full-year public term funding in the range of $17 billion to $24 billion consisting of $7 billion to $10 billion of unsecured debt, $10 billion to $14 billion of public securitizations.

So far this year in the public markets, we have issued $1 billion of unsecured debt and $2 billion of US wholesale securitization.

Turning to slide 11, we highlight Ford Credit's 2012 year-end liquidity. Ford Credit sources of liquidity include cash, unsecured credit facilities, FCAR asset-backed commercial paper lines, and other asset-backed bank capacity. At year-end 2012, we had $42 billion of cash and committed liquidity sources, down about $1 billion from the third quarter. Utilization of our liquidity totaled $21 billion and capacity in excess of eligible receivables was $1.5 billion in the fourth quarter.

Total liquidity available for use continues to remain strong at almost $20 billion, down about $1 billion from the third quarter and about $3 billion higher than a year ago. We continue to be focused on maintaining liquidity levels that meet our business and funding requirements through economic cycles.

Slide 12 summarizes our Automotive sector cash and debt position at the end of the fourth quarter. Automotive debt at the end of the year was $14.3 billion. We ended the year with net cash of $10 billion, $200 million higher than a year ago, and Automotive liquidity was $34.5 billion, $2.1 billion higher than a year ago.

Not included on the numbers on the slide is the $2 billion 30-year Automotive debt issuance that we completed earlier this month. This was the first US public issuance in about a decade and took advantage of favorable market conditions to issue low-cost long-term debt.

The proceeds will be used to redeem about $600 million of 7.5% callable debt with the remainder being contributed to our pension plan during 2013 to support our derisking actions. This action is consistent with our mid-decade target of Automotive debt levels of about $10 billion.

Slide 13 provides an update on our pension plans. Worldwide pension expense in 2012 excluding special items was $1.2 billion, $300 million higher than 2011. Special item charges were $400 million including $250 million associated with our US Salary Voluntary Lump Sum Payment program. As we previously announced, the program started in 2012 and will continue through 2013. To date we have settled about $1.2 billion of our pension obligation. The 2012 special charge reflects the acceleration of previously unrecognized losses in the plan proportionate to the obligation settled to date.

In 2012, we made $3.4 billion in cash contributions to our worldwide funded pension plans, up $2.3 billion compared to 2011. This includes $2 billion of discretionary contributions consistent with our previously announced derisking strategy. For 2013, cash contributions to funded plan are expected to be about $5 billion globally including discretionary contributions of $3.4 billion.

Worldwide, our pension plans were unfunded by $18.7 billion at year-end 2012, a deterioration of $3.3 billion compared with a year ago, more than explained by lower discount rates. Asset returns in 2012 for the US plans were 14.2%, above our expected long-term rate assumption. Going forward, our expected long-term return assumption for the US is 7.38%, down 12 basis points from a year ago.

Now let's close with a summary of 2012. Total Company operating profit was strong, with a pretax profit of $8 billion. Net income was $5.7 billion. Ford generated positive Automotive operating-related cash flow for the third year in a row. At year-end, Automotive gross cash was $24.3 billion and liquidity was $34.5 billion.

Ford and Ford Credit returned to investment grade with upgrades from Fitch, Moody's and DBRS.

Ford Credit had another strong year, with pretax profit of $1.7 billion. Managed receivables at Ford Credit were $91 billion at year-end, up $6 billion from the prior year and up $4 billion from the third quarter. Full-year charge-offs were $136 million, down $65 million from 2011. We completed our 2012 funding plan, issuing $23 billion of public term funding. Ford Credit liquidity remained strong at almost $20 billion.

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

Thanks Neil. With that, we'll start the question-and-answer session. Chanel, can we please have the first question?

Doug Carlson, Bank of America Merrill Lynch.

Thank you. I had a question about the non-cash amortizations that are going to be a drag in 2013. It looked like they were a positive in years earlier. You kind of went through some of those on the equity call and I wanted to kind of get a clearer understanding of how it will impact the cash flow?

They are non-cash, so those are reasons why we are giving guidance that our cash flow will improve versus a year ago. And our profits are flat.

Right so we are going to kind of have out performance in cash flow because it's a non-cash drag. (multiple speakers)

You kind of mentioned those -- I'm not really certain on the amortization of the assets. How is that a positive that's going away? I don't understand that.

So Doug, we previously impaired the assets in part in our North American business and the impact of that impairment, which was favorable to our depreciation and amortization expense, ran over a number of years. The last year that it had an impact was 2012, so that favorable effect goes away in 2013. It shows as a higher amortization expense in 2013, but it doesn't impact our cash flow.

Right, all right, I got it. I understand that now. That makes sense. The CapEx plan for 2013, would you guys repeat what that was?

About $7 billion.

$7 billion, so about $1.5 billion higher than 2012?

Correct.

Okay, and I guess the final question would be on the funding side. I was a little bit surprised to see that the unsecured funding is kind of flat year-over-year for 2012 to 2013. Do you think there's any kind of risk to the upside for unsecured funding at Ford Credit or do you feel very comfortable with that at $7 billion to $10 billion?

I think $7 billion to $10 billion is a range that we feel comfortable with now given our receivable forecast and the runoffs at those levels will allow us to continue to walk down our securitized funding as a percent of total consistent with the longer-term objectives.

To the extent that spreads improve and relative to the securitization we will continue to have that flex, but I think that's why we gave pretty good size ranges around both securitization and unsecured.

And my last question, thank you for that. The underfunded pension obviously grew, it looks like internationally it's at a pretty large number now and with rates where they are -- you just did a 30-year sub 5% coupon. Would there be any interest in financing some of that underfunded pension with debt? Are you going to kind of go with free cash flow?

Well, I think from our perspective the whole goal of funding the pension plan is a balanced approach, which obviously we took advantage of low rates and a good market to raise what we have done, which in essence increased -- allowed us to increase our pension contributions. So it's going to be a combination of cash, the debt we have done, interest rates over time going up globally and that will get us to the point where we feel comfortable and we will obviously manage the assets accordingly, as Bob said earlier.

Okay, great. That's it for me. I appreciate it.

(Operator Instructions). Dan Colonna, UBS.

Thanks for taking my question. Just to peel back a little bit off Doug's question on the pension, I think -- correct me if I'm wrong -- the mid-decade target for pensions to be mostly dealt with -- I'm not exactly sure if that means no underfunded status or a small underfunded status. If you can clarify that, that would be helpful.

Also I think the targeted to get Automotive debt down to $10 billion and with the issuance I guess we are closer to $16 billion, so could you guys help walk us to how we should think about the buckets of getting Auto debt down by about another $6 billion plus the pension situation, that would be helpful. Thank you.

Let me take the second one first, which is the debt walk walk down. And included in the $2 billion that we raised we are calling about $600 million of 7.5% callable debt. That will actually happen in the first quarter. So net is an increase of 1.4 and then if you look at their maturity profile, we have got the DOE loans that will continue to amortize. We've also got a couple of other government loans from the EIB that mature in I think 2015 as well as the converts which become callable 2014.

Then there is some other things that we have got as well that we can do to get our debt levels down to about $10 billion by mid-decade.

On the pension side, clearly the results in 2012 and the change in funded status in 2012 was driven all by discount rate reduction. We had good asset returns. We put contributions in and the discount rate change more than offset the good news that we would have gotten from asset returns and cash.

That's helpful. Then just to follow up on Europe and the change in the outlook and guidance, I think the original expectation was for $1.5 billion and now it's $2 billion. I guess there was some confusion that all the non-cash drags were not I guess well known to the market but it seemed like the delta in your guidance really came from the market.

Can you just walk us through what's happened since October and is this strictly a volume-driven assumption that caused the loss or was it a worsening of pricing? Thanks very much.

This is Stuart. Let me try to respond to that. So our previous guidance in Europe had been a loss equal to 2012 and as you saw we lost $1.750 billion in 2012. Our guidance was in excess of $1.5 billion. Our latest guidance for 2013 is for a loss of about $2 billion, so that's a deterioration of about $250 million. And the items that Bob referred to in the call, the single -- the largest factor is related to our outlook for industry volume in Europe.

In October, we guided for industry volume at or slightly below the 2012 level, which was 14 million units. That was in the high-end of our range of 13 million to 14 million. Our latest outlook is to be in the lower end of that range of 13 million to 14 million units, and that's consistent with what we saw as a running rate in the second half of last -- the fourth quarter of 2012, the SAAR in Europe ran at about 13.5 million units.

So we have taken down our outlook for the industry volume and that is the largest contributing factor to that reduction in our guidance for 2013. That's now baked into our numbers.

Two other items that we called out were the impact of pensions by the discount rate that we used at year-end was slightly more unfavorable than we had estimated back in October, so as a result, our recorded pension expense in 2013 will be higher than we estimated. That is a non-cash pension expense.

And then finally, the recent strength in the euro impacts our business first just the translation of the results from euros into dollars and also it has some negative operating effects. So they were the three principal factors with the major one being the lower industry volume.

Great, that's helpful. Last one for me is the delay of the Mondeo that Bob talked about on the Equity call, was that a market-driven related decision or was that having something to do with any other issues?

Dan, that was a decision that we made when we concluded to propose to close our Genk facility. The new Mondeo, which is the Fusion equivalent, was due to launch in Europe in the first half of 2013 in Genk. And we concluded to change that plan to launch that vehicle in Valencia. Given the employee consultation process that we will -- that we are going through and the time taken to relocate that product to Valencia in Spain, we deferred the launch of that vehicle by about a year.

The Mondeo is our largest passenger car vehicle in Europe and as a result, a new Mondeo is typically a significant driver to profitability in Europe. So one of the decisions we made as part of our transformation plan in Europe was to push that back a year or so. That was obviously a difficult decision to make and it's one of the investments that Bob referred to. It's a penalty that we are -- that we will see in 2013 but will support and improve business structure and improve results in the long term.

Very helpful, thank you very much.

Brian Johnson, Barclays.

Good morning. I actually want to ask Credit earnings question, having been on the Equity call. As you go forward to next year, you have managed receivables going up but in terms of the puts and takes keeping earnings flat, I'd like to get your thinking on a few drivers.

One, net interest margin; two, lease depreciation, lease residuals, how those come in; and then three, both the charge-off rate and then the impact potentially of weaker used car prices on that and obviously those affect leases as well. And therefore where you might think you want to wind up in end-of-period receivable, end-of-period loan-loss reserves?

Okay, that's was a multi-part question, Brian. I think the bottom line is as you look at our results, we ran a 16 basis point LTR this year, by far the lowest we have seen on record. And if you think about that going forward, our 10-year average is closer to 67 basis points. We obviously don't see it increasing to that level in 2013 but we do see credit losses increasing.

Remember if you remember the second quarter of 2012, we ran an 8 basis points LTR. We don't think we will see that again. So when you look at our profit call, it is primarily driven by an increase in credit losses which provides headwind against the managed receivables growth. Overall we expect margins to be pretty flat and from a reserve -- excuse me -- residual perspective, we don't expect much year-over-year news either.

So from a credit loss reserve perspective, that's going to go up because the credit losses are increasing plus the receivable levels are increasing, so the headwinds are solely in the credit losses and reserves versus the growth in the receivable.

Okay, that's helpful. And on the net interest margin just maybe because we haven't talked for awhile -- just help us how -- understand how overall the low rate environment fits in with where your net interest margin spreads are. We are certainly hearing noise out of the broader banking segment about the difficulty in making spread income now.

Yes, I think that has been one of our themes all year long is that we have got a lot of higher-yielding assets that continue to roll off the portfolio and we continue to put on a little lower yielding assets. I do think that the year-over-year level in margin is going to be a lot lower next year and hopefully we can start to turn the corner.

The other thing that we are keeping a good focus on is our operating costs. If you look at our income statement, you can see we brought our operating cost down over $70 million worldwide in 2012, which helps lead to one of our key goals is to be one of the most efficient in the business. So we are doing everything we can to stabilize that net interest margin despite the external environment.

And in terms of stabilizing, is it involve reaching deeper either into this near prime and subprime or your credit mix is judged by the FICO scores kind of is constant, so that's not --?

As I say every quarter, we have maintained our underwriting standards. Out of -- three out of every four subprime customers who buy and finance a Ford vehicle are financed by Ford Credit, so that lets us know that our standards are very consistent and we are there for the dealers. We are there for our customers. We are there for Ford Division, so we have not seen a change in any of our standards.

Okay, thanks.

Brian Jacoby, Goldman Sachs.

Thank you. I have a question more on the Automotive side around the CapEx. Now, historically if we look back a while back, the actual depreciation and amortization used to be somewhat close to CapEx and over the last several years, you have been spending a lot more than the D&A and it again reflective of a lot of the new product we've seen and so forth, and it makes sense.

But I guess for this year, for 2013, you are still what looks to be a pretty big jump in CapEx. And how should we think about sort of that relationship between CapEx and D&A? I mean last year, D&A was about 67% of CapEx. Should we think about it in a similar vein? I guess at some point is this the new norm where CapEx will probably continue to outpace depreciation and amortization or as the product cycle I guess matures, could eventually those two start to get closer together again?

Brian, this is Stuart. You are correct that CapEx was higher than depreciation and amortization expense in 2012. CapEx will be higher in 2013 and our guidance was about $7 billion and again, it will exceed depreciation and amortization expense. Of course there is a lagging effect between CapEx and amortization. We are at a higher running rate of capital investment. That's the investments in our new products, the capacity in North America, and our growth in Asia Pacific as well as some investments to execute our revised manufacturing footprint in Europe.

So over time, depreciation and amortization will [follow] that new level but it will lag over a number of years. We haven't provided guidance for depreciation and amortization as a percent of CapEx but it's a lagging effect.

Okay, then just another cash flow question and directionally if you can give us some idea on this, I understand you are not going to give specific guidance. But when you think about your Auto operating-related cash flow being higher in 2013, how should we think about the working capital component of that? Maybe -- it was a big use this year. Obviously Europe again -- or I should say last year it was a big use. In 2013, we are going to see production lower in Europe but obviously a nice increase in North America. How -- directionally how should we think about the working capital component there?

I think you should think of working capital as being favorable compared to 2012. As Bob mentioned on the call, we did have some higher inventories at year end than would be normal given some of our launch activity. We also had some units at our Genk facility in Belgium at year end. So they would not be normal levels of inventory.

Going forward into 2013 in terms of the payables impact, higher production in North America would be favorable -- in the fourth quarter of last year of course we had low production in Europe as we took our stock levels down, so that would have been a negative impact. But generally I would say favorable relative to 2012.

Okay, great. That's it for me, thank you.

Itay Michaeli, Citigroup.

Great, thanks. Good morning. So I just wanted to expand further on Brian's cash flow question because it seems like CapEx is $1.5 billion of a headwind but you do have the $1.2 billion of non-cash expenses to add back. That's still a net $300 million headwind to cash flow year-over-year assuming earnings are flat.

So just the question is what gives you the confidence maybe going back to working capital, timing differences, the cash flow can indeed be higher just given the CapEx spread for the year?

I think all of your observations are correct there. They are the elements. In total and net, we are projecting improved operating-related cash flow in 2013 compared to 2012.

Okay. Is it safe to assume that you think the operating-related cash flow can cover the pension contributions in the year? Is that a good way to think about how you got to the $5 billion of pension or are those two not very related?

We haven't given any guidance for total cash flow. We have provided some of the elements that we expect. So we don't have anything further to add on that.

Sure and just lastly I guess on going back to CapEx, is there any more color you can provide about where these incremental investments are going, just given that you've gotten past some of your major global launches and the market, the global industry is growing at a lesser pace in 2013? So why this sort of $1.5 billion jump -- maybe where that incremental capital is going for, where is the returns and things like that so we can think about that in the long run?

We've talked about our plans to maintain leading -- class-leading levels of product freshness in North America and so our product-related investments are continuing in North America to sustain the levels of performance that we've seen in the market here.

We did execute some capacity increases last year and this year we have announced that we -- additional -- introduced the Fusion at our Flat Rock plant here in North America. So North America is a piece of it and then of course in the Asia-Pacific Africa region, we have seven plants under construction. Some of those are in a joint venture activity, so they are not coming out of our operating-related cash flow, but some of them are wholly owned facilities and they include our new facility in India and our investments in Thailand.

So those would be -- there are other effects obviously elsewhere and they are some contributors.

Okay, that's very helpful. Thanks so much.

(Operator Instructions).

If there's no more questions, then I would like to conclude today's call. Thank you for joining us.

Ladies and gentlemen, that concludes the presentation. Thank you for your participation. You may now disconnect. Have a great day.