福特汽車 (F) 2014 Q3 法說會逐字稿

Great day, ladies and gentlemen, and welcome to the third-quarter Ford Fixed Income conference call. My name is Katina and I will be your coordinator for today. (Operator Instructions) As a reminder, this conference is being recorded for replay purposes.

I would now like to turn the presentation over to your host for today's call, Mr. Steve Dahle, Manager, Ford Fixed Income Investor Relations.

Thank you, Katina, and good morning, ladies and gentlemen. Welcome to all of you who are joining us either by phone or webcast. A behalf of the entire Ford management team I would like to thank you for spending time with us this morning.

With me this morning 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 the management with us who are joining for the call today: Marion Harris, Assistant Treasurer; Brian Schaaf, Assistant Treasurer; Paul Andonian, Director of Global Accounting, and George Sharp, Executive Director of Investor Relations.

Before we begin I would like to review a few items. A copy of this morning's press release and Fixed Income slides that we will be using today has been posted on Ford'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 a non-GAAP basis and in some cases on a non-GAAP basis. Any non-GAAP financial measures discussed in 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.

Thanks, Steve. Consistent with prior quarters, today's presentation will cover Ford Credit's profit and credit loss performance; Ford Credit's funding and liquidity highlights; Automotive cash, debt, and liquidity; 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 Ford's global growth and value creation strategy, providing world-class dealer and customer financial services, maintaining a strong balance sheet, and producing solid profits and distributions.

Ford Credit had another solid quarter with pretax profit of $498 million, and net income of $718 million. The net income reflects approximately $360 million of favorable tax items reported in the third quarter.

Managed receivables were $110 billion at the end of the third quarter, up $7 billion from year-end 2013, and up $11 billion from a year ago.

The third-quarter loss-to-receivables ratio was 17 basis points, down 2 basis points from a year ago, while charge-offs were $48 million, largely unchanged from a year ago.

At September 30, the allowance for credit losses or reserve was $356 million, or 32 basis points, of managed receivables.

Managed leverage was 8.5 to 1 at September 30, equal to December 31, 2013. At the end of the third quarter, our equity was $11.3 billion.

On slide 2, Ford Credit's higher pretax profit this quarter compared with a year ago was more than explained by higher volume. This reflects increases in nearly all financing products, including non-consumer and consumer finance receivables in all geographic segments and leasing in North America.

As shown in the memo, pretax profit was higher than the second quarter, explained primarily by a lower level of insurance losses in North America which is included in Other.

For the full year, Ford Credit continues to expect pretax profit of $1.8 billion to $1.9 billion.

Our guidance for year-end managed receivables and managed leverage is unchanged.

Ford Credit now expects distributions to its parent of about $400 million, up from prior guidance of about $250 million. This increase is primarily driven by the favorable tax items that I mentioned earlier.

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

Year-over-year charge-offs were consistent, while the loss-to-receivables ratio was 2 basis points lower than a year ago.

Our quarter-over-quarter increases in charge-offs of $15 million and loss-to-receivables ratio of 5 basis points are consistent with normal seasonality. The loss-to-receivables ratio of 17 basis points is well below our 10-year average of 54 basis points.

The credit loss reserve was $356 million, down $12 million from a year ago, reflecting the continuation of low losses.

Slide 4 shows the primary drivers of credit losses in the US retail and lease business, which comprises about 72% of our worldwide consumer portfolio.

First, it is important to note that we remain consistent in our origination practices.

Over-60-day delinquencies were 15 basis points, down 1 basis point from a year ago and up 3 basis points from the second quarter.

Repossessions in the third quarter were 7,000 units, or 1.07% of average accounts outstanding, down 17 basis points from a year ago and up 9 basis points from the second quarter. The increase from the second quarter is below seasonal trend, and 1.07% represents -- our lowest third-quarter result on record.

Severity was $8,100 in the third quarter, up $600 from the same period a year ago and up $800 from the prior quarter. Both increases reflect lower auction values on repossessed vehicles, which declined about $700 more than our seasonal expectation. The declines in auction value was consistent with Manheim when adjusted to Ford Credit's mix of vehicles, with reductions especially pronounced in later model used vehicles which are typical of our repossessions.

Third-quarter charge-offs were down $3 million and LTR was down 5 basis points from the prior year. Both charge-offs and LTR were up from the second quarter, reflecting normal seasonality.

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

Lease return volumes in the third quarter were 17,000 units higher than the same period last year, primarily reflecting higher lease placements in 2011 and 2012 compared with prior years. The third-quarter lease return rate was 75%, up 6 percentage points compared with the same period last year.

In the third quarter our auction values for 24-month contracts decreased by about $950 while 36-month average auction values decreased by about $200 compared to the same period last year.

The differences in 24-month and 36-month auction value performance primarily reflects differences in mix and model year refresh timing.

Both our 24- and 36-month auction values decreased from the second quarter and the declines reflect the same industry trends noted previously.

We expect our auction values to decline further in the fourth quarter, consistent with normal seasonality.

Our worldwide net investment in operating leases was $20.9 billion at the end of the third quarter, up about $2.6 billion from year-end 2013 and up $3.6 billion from a year ago.

Now I will turn it over to Neil.

Thanks, Mike. Turning to slide 6, we are on track to achieve our 2014 funding plan. Year to date we have issued $24 billion.

In the third quarter we completed $6 billion of funding in the public term markets, consisting of about $4 billion of unsecured debt in the US, Canada, and Mexico, as well as our first-ever public issuance in Brazil. In the public asset-backed market, we completed over $2 billion in the US.

We also completed a RMB2 billion syndicated term loan in China for our wholly-owned credit subsidiary.

Additionally, in October we completed our second five-year US retail revolving ABS transaction, what we call FordREV, with proceeds of about $1.3 billion.

We ended the quarter with net liquidity of $27 billion, which was flat from the second quarter.

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 our projected 2014 public funding plan for Ford Credit, excluding our short-term funding programs.

We project full-year public term funding in the range of $26 billion to $29 billion, consisting of $11 billion to $14 billion of unsecured debt and $14 billion to $15 billion of public securitizations.

And we have completed $24 billion of funding year-to-date.

Slide 8 shows the trends in our funding for our managed receivables.

Receivables were $110 billion and we ended the quarter with about $11 billion in cash. Securitized funding was 39% of managed receivables.

We project year-end managed receivables of $112 billion to $115 billion and securitized funding as a percent of managed receivables in the range of 37% to 39%. This percentage will continue to decline over time.

Turning to slide 9, our net liquidity remains strong at $27 billion, about the same as the Second Quarter.

Ford Credit's source of liquidity includes cash, committed asset-backed lines, unsecured credit facilities, and the corporate revolver allocation.

As of September 30, our liquidity sources, including cash totaled $47.5 billion, up about $1 billion from the second quarter.

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

Slide 10 shows that automotive debt at the end of the quarter was $14.9 billion, $500 million lower than the second quarter.

Ford ended the quarter with net cash of $7.9 billion and automotive liquidity of $33.6 billion.

Earlier this week, Ford gave notice to holders of its 2016 convertible notes to terminate its conversion rights and redeem outstanding notes. This action will reduce automotive debt by about $800 million in the fourth quarter with no significant impact on cash flow.

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

The Company delivered its 21st consecutive profitable quarter and ended the period with strong liquidity. Automotive operating-related cash flow, however, was negative due to unfavorable changes in working capital, including product launch effects.

North America and Asia-Pacific were profitable, but pretax profits were lower than a year ago for all automotive business units except Middle East and Africa.

Company pretax profit was in line with expectation and consistent with the guidance provided at the September investor day of company full-year pretax profit of about $6 billion, which it reconfirmed earlier today. It was, however, lower than a year ago.

Looking forward, 12 of Ford's 23 global product launches are complete and the balance are continuing to progress, including the all-new F-150. These launches, along with the 16 planned for 2015, are expected to result next year in higher revenue, improved operating margin, and accompanying pretax profit of $8.5 billion to $9.5 billion.

For Ford Credit, we continue to deliver strong results that were better than a year ago.

Ford Credit receivables increased 11% from a year ago, ending the quarter with $110 billion.

Our consistent purchase policy and world-class servicing continues to result in strong portfolio performance.

Our diversified funding plan is on track as we completed $24 billion of public term funding year-to-date, and we had strong liquidity of $27 billion at the end of the quarter.

Ford Credit continues to deliver on its core elements of its Ford Support Strategy: outstanding products and services, strong balance sheet, and consistent profitability.

Now I will turn it over to Steve to start the Q&A session.

Thank you, Neil. With that, we will start the Q&A session. Katina, may we please have the first caller?

(Operator Instructions) Brian Jacoby, Goldman Sachs.

Good morning, guys. A couple quick ones. You did cover a lot of stuff on the earnings call, but part of it -- I didn't get a chance to hear all of it -- was related to some of the explanation around the cash flow in the Other category. There was a pretty big cash outflow there.

Can you just kind of quickly go over maybe some of the buckets there that led to that?

Brian, this is Stuart. When you say in the Other category do you mean the dividends and other items, the $1.6 billion?

Correct, yes.

Okay. So really there are two things in there, Brian. The dividends they were $0.5 billion in the quarter and then the balance of $1.1 billion is the conclusion of our share buyback program. So in total through the year that has been $2 billion, $1.1 billion of that in third quarter.

Great. And then, again I know you touched on this a little bit on the call, the previous call, but the working capital side you are saying that a good chunk of that is going to reverse in the fourth quarter. How much I guess of that is just related to obviously what's going on with the F-Series versus other items?

Brian, of the $1.5 billion, the majority of that is related to payables, lower production, the payables balances at quarter end, primarily in North America but also in Europe. And that is associated with the downtime we have taken at our plants including Dearborn truck as we change over to the new products. The balance of it is higher inventories.

As Bob said in the call, we expect the majority of that to reverse in the fourth quarter and so we will have a positive working capital in Q4.

Okay, great. Then last one; just it's more of kind of what was brought up around capital allocation and just looking out at your debt levels. I think it was mentioned on the earnings call that you are still going to review your target of getting debt down to $10 billion. Obviously, you pushed that target out a few years when you had the September 29 analyst day.

But I guess the question is it sounds like from hearing the earnings call that you are still kind of considering that and there could be further changes. Perhaps is it like over the next year you could reconsider that, or is it something more like longer-term you are thinking about how much debt the Company should have?

Just speaking as a credit guy, we would prefer you guys have low leverage at the manufacturing business, so that way when things get bad you are still able to invest in a product. But I'm just trying to think about with that comment meant. Is it still under review or you thinking more longer-term there?

This is Neil. If I go back to what we said at Investor Day and the reason we slipped the $10 billion target from mid-decade to 2018 was just natural maturities. When we set the $10 billion originally we had an expectation that rates were going to go up and we would have opportunity to buy back debt closer to par that it is presently. So as a result of that we slipped it out.

Our plans are to take debt down to $10 billion. I think Bob's comment this morning and what we are strategically looking at is when we think about leverage in total, not only debt but also the underfunded pension plan, and we think about what the appropriate leverage is for the business as it grows and as it gets bigger, we ought to reconsider the different aspects of it. We will be fully funded on our funded plans and at that point the business potentially could afford a little bit more debt. But it's not tomorrow.

Understood. Okay, that makes sense. Thanks for that. All right, that's it for me. Thank you.

Doug Karson, Bank of America Merrill Lynch.

Thanks, guys. I had a couple questions. I guess the first one is broader industry. I've been getting a lot of questions from investors about used car prices falling.

I mean look at Manheim, I think it's only down 1% or 2%. And then I also look at Autodata, which is not the best representation of incentive spending but kind of the only one we have, and it looks like it is significantly up. So there seems to be something kind of going on in the incentive world. I think Ford's was up somewhere around 20%, and that data may not be 100% accurate.

But, nonetheless, can you give me a little bit of flavor of what you are kind of seeing in this incentive environment, and if it's so going up why? What is really driving the used car price kind of fears?

I will handle the used car answer, Doug, and then Stuart can talk a little about the incentives. You are right that Manheim is down about 2% quarter over quarter, but remember that includes vehicles kind of one-year-old to about eight-year-old. It's actually a little bit more severe in the one to three-year-old range, which is going to affect us and other captives a little bit more.

But if you go back in time a little bit, remember used car prices stayed pretty high for a really long time. We all kept portending that they were going to come down and we actually started depreciating in advance of that in the third quarter of last year. And, in fact, they have come down.

So we continue to expect a little bit more moderation and we are planning for that accordingly in the Credit company. Stuart, if you want to talk about incentives?

In terms of incentive spending here in the US market, I think we are (inaudible) in terms of industry data we are down slightly on a year-on-year basis, about 2% or 3% in terms of our incentive spend against that very small increase for the industry as a whole. As we discussed on the call, particularly around F-150 as we manage our inventory as we go into the changeover of product, we have been very deliberate in the way that we have incentivized the outgoing model. We are limited in terms of the amount of production that we have and that allows us to maximize our margin in this environment.

I think the other -- there were mentioned on the call; I think one of the analysts asked and was correct in their assertion that the net pricing environment is stronger on utilities and trucks than it is on the passenger car segment.

Great, that's helpful. And then maybe just a quick question. You certainly probably touched on this during the call, but on the slide 14 for Europe, it looks like industry share of stock is kind of up and commodities and materials were supportive. The big drag was in I guess component pricing and other, so negative $302 million.

I kind of missed what that other was, the negative $137 million, and just maybe a little more color on the component pricing, some shortages. I just couldn't get that all.

Component pricing is the price of components that we supply to third parties, as well as to our joint ventures. And we adjust those -- most of those are priced on a cost-plus basis and as we see costs changes that are reflected in the contribution cost column or there are exchange impacts, we pass those prices through. So it is in the Other that we reflect those component price changes.

And that includes prices of components going to our Ford Sollers joint venture and you see on the right-hand side there the $83 million variance for Russia in total, which is across all of the individual bars; the majority of it would fall in this Other category.

And you can see we also had some prior-year gains, including some land sales last year, so obviously they don't repeat, and then we had lower cost and accessories profits. Then there are a number of things in Other that we are not breaking down further.

Okay, very good. Then just, finally, so I'm straight on South America, it looks like the first nine months there was a $975 million loss and the outlook for the full year is $1 billion. So is it safe to say that mathematically we are kind of approaching breakeven in South America next quarter?

Obviously, as you point out the math there, we expect a smaller loss in the fourth quarter in South America, consistent with our guidance of about $1 billion loss. And the improvement is really driven by the fact that we've launched the new Ford Ka there. We only had part of a quarter of production in the third quarter and we will have more of a full quarter in the fourth. And that's a very important product for us.

That's very helpful. The bottom of that slide 12 is balance sheet effects of $109 million. Is that currency?

Yes, yes it is and it's primarily in Argentina and Venezuela, so it's the effect of the currency changes on the balance sheet. We are doing that to breakout for investors to consider those separately from the operating effects, because they tend to be one-time in nature as they flow through, whereas the operating affects we are really focused on the pricing to recover those operating affects. We have less ability to do so on the balance sheet items.

Great. All right, that's it for me. Thank you very much, that was helpful.

(Operator Instructions) Eric Selle, SunTrust.

As usual, I am a little confused. I thought we all knew this was a transition year for you guys. Your stock has been down versus the market and a little confused by this.

I guess my question is how do you get the equity market to focus on your 50% profit growth in 2015 and the fact that you're free cash flow generation accrues to the equity valuation? You guys spent $1.6 billion on shareholders in the quarter and the stock didn't respond and your credit profile was flat. Have you guys gone back to the woodshed and tried to figure out how to shock the market? Because it seems like the market is acting irrational to the valuation accrual that you guys give the equity guys.

I guess I'm not sure exactly how to respond to that -- this is Neil --- but thanks for the question, Eric. I think our philosophy is to continue to communicate with our investors, with where we see the business, where we see it going, what are the key attributes associated with it.

We did the investor day. We were transparent on how we see the environment and how we see the business going forward, both in the near term but also clearly laying out a vision for the future. And our guidance for 2015 is a significant improvement over the 2014 levels. Our expectation is, as we execute that, we will get credit for it.

I guess another question on that same line is what milestones would you need to see/you did see in the quarter to unleash the free cash flow and equity? And then how do you balance that with the goal of becoming A-rated?

In a broad sense, if you go back to what we said in September, we've got a number of capital allocation calls. The biggest one is obviously to continue the growth in the product development world and we're going to continue to focus on that as we see ourselves growing in many parts around the world.

We also laid out pretty clearly in that pie chart that debt and pension is becoming a smaller piece of our capital allocation on a percentage basis than it had been before and shareholder actions are a bigger piece as we go forward compared to where it has come before. Again, we will prove it over time and we will get credit as that happens.

I unfortunately missed the analyst day because I heard glowing reviews of the 150, and you know I like getting out on that track, Neil, but did you guys give any buckets to bridge us to the 2015 guidance? And specifically, we can all do the production gains through ISM and all that, but have you guys specifically allocated what the F-150 launch cost hit is in 2014? (technical difficulty).

No.

Okay. That's all.

With no further questions at this time, I would now like to turn the call back to Mr. Steve Dahle for closing remarks.

Thank you, Katina. With that I would like to conclude today's call. Thank you all for joining us.

Thank you. Ladies and gentlemen, thank you for your participation in today's conference. This concludes the presentation. You may now disconnect. Good day.