Ford Motor Company (F) Q2 2012 Earnings Conference Call July 25, 2012, 09:00 a.m. ET Executives George Sharp - Executive Director, IR Alan Mulally - President and CEO Bob Shanks - EVP and CFO Stuart Rowley - Corporate Controller Neil Schloss - Corporate Treasurer Paul Andonian - Director, Accounting Mike Seneski - Ford Credit, CFO Analysts Brian Johnson - Barclays Capital Patrick Archambault - Goldman Sachs Rod Lache - Deutsche Bank Chris Ceraso - Credit Suisse Itay Michaeli - Citigroup Dee-Ann Durbin - Associated Press Nathan Bomey - Detroit Free Press Mike Ramsey - The Wall Street Journal Adam Jonas - Morgan Stanley Matt Stover - Guggenheim Ryan Brinkman - JPMorgan Karl Henkel - The Detroit News Keith Naughton - Bloomberg John Murphy - Bank of America/Merrill Lynch Presentation Operator
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» Ford Motor's CEO Discusses Q1 2012 Results - Earnings Call Transcript
I’d now like to turn the presentation over to your host for today’s call, Mr. George Sharp, Executive Director of Investor Relations. Please proceed.
Thank you, Katrina and good morning ladies and gentlemen. Welcome to all of you who are joining us today either by phone or by webcast. On behalf of the entire Ford management team, I’d like you to thank you for spending time with us this morning, so we can provide you with additional details of our second quarter financial results.
Presenting today are Alan Mulally, President and CEO of Ford Motor Company; and Bob Shanks, Chief Financial Officer. Also in attendance are Stuart Rowley, Corporate Controller; Neil Schloss, Corporate Treasurer; Paul Andonian, Director of Accounting; and Mike Seneski, Ford Credit, CFO.
Before we begin, I’d like to cover a few items, a copy of this morning’s press release and presentation slides we will be using have been posted on Ford’s Investor and media website for your reference. The financial results discussed today are presented on a preliminary basis. Final data will be included in our Form 10-Q that will be filed next month. The financial results presented are on a GAAP basis and in some cases on a non-GAAP basis. The non-GAAP financial measures discussed in this call are reconciled to the U.S. GAAP equivalent as part of the appendix in the slide deck.
Finally, today’s presentation includes some forward-looking statements about our expectations for Ford’s future performance. Of course, actual results could differ materially from those suggested by today’s comments. The most significant factors that could affect future results are summarized at the end of the presentation. These risk factors and other key information are detailed in our SEC filings, including our annual, quarterly and current reports.
With that, I’ll now like to turn the presentation over to Ford’s President and CEO, Mr. Alan Mulally.
Thank you, George and good morning to everyone we are pleased to have the opportunity today to review our second quarter business performance and the progress we continue to make in delivering our plan.
Let’s start by turning to Slide 3. In the second quarter we delivered our 12th consecutive quarterly pre-tax operating profit generated positive automotive operating related cash flow and ended the period with strong liquidity. Wholesale volume and revenue were lower than year ago. Operating results featured in excellent pre-tax profit and operating margin in North America and another solid performance once again at Ford Credit.
Results for South America were slightly better than breakeven while Europe and Asia-Pacific and Africa incurred losses. We continue to project strong total company full-year pre-tax profit, but now expect to be lower than 2011 reflecting automotive pre-tax profit about equal to or lower than 2011 due to the challenges in Europe and South America, and lower profit for Ford Credit but in line with our existing guidance.
We are continuing to implement our ONE Ford Plan; this includes aggressively restructuring to operate profitably at current demand and changing model mix, as well as accelerated development of new products that our customers want and value.
The ONE Ford Plan has been our roadmap to the successful restructuring of our North America business, the path we followed to the recent recession, the foundation of the dramatic improvement in our automotive balance sheet and the basis of our growth strategy for Asia-Pacific and Africa. It remains our guide as we address new challenges we face today.
Let’s look more closely now at the financial highlights of the quarter. Slide 4 summarizes our second quarter business results compared with the year ago. Wholesale volume was 1.4 million units, down 72,000 units or 5%. Revenue was $33 billion, a decline of 2.2 billion or 6%. Pre-tax operating profit excluding special items was $1.8 billion; about $1 billion lower than a year ago. Earnings were $0.30 per share, $0.19 lower than last year’s earnings per share, adjusted for the tax valuation allowance release.
Net income attributable to Ford increased as unfavorable pre-tax special items of $234 million was about $1 billion, a 1.4 billion decrease. Earnings were $0.26 per share, a decrease of net income is explained primarily by lower operating results and higher tax expense related to the valuation allowance release in the first quarter of 2011. Automotive operating related cash flow was $800 million, the ninth consecutive quarter of positive performance.
We ended the quarter with $23.7 billion of automotive gross cash, exceeding debt by $9.5 billion. This is a net cash improvement of $1.5 billion compared with a year ago. In the first half, both vehicle wholesales and revenue decreased by 4% compared with the same period a year ago. First half pre-tax operating profit excluding special items was $4.1 billion, or $1.6 billion decrease. Net income was $2.4 billion, a $2.5 billion decrease.
Shown here on slide five are the other highlights from the quarter. First Fitch and Moody’s upgraded our credit rating to investment grade, triggering the release of collateral security in our revolving credit facility including the Blue Oval. We starting selling the all new Escape North America and began producing the all new B-Max in Romania. In the U.S. we added third production crews in our Chicago and Michigan assembly plants and we added a second shift at our Kansas City F Series facility.
We also completed the sale of component businesses in Saline, Michigan and Sandusky, Ohio, leaving us with only one remaining ACH operation. We won the 2012 International Engine of the Year Award for the all new one leader EcoBoost, initially launched and focused in Europe and coming to the U.S. in the near future. In China, we launched new focus in our second Chongqing facility, with availability of sync in Chinese. We also announced a new $760 million assembly plant in Hangzhou that will support our plan to double production capacity of our CFMA joint venture to 1.2 million units by 2015.
In Thailand, we opened the Ford Thailand manufacturing facility in Rayong, increasing our annual capacity in that market to 425,000 units. Now I would like to turn it over to Bob, who will take us through more details of our financial results. Bob?
Thanks, Alan, and good morning to everybody. Let's start with slide seven which walks our pre-tax operating results to net income. As Alan mentioned, pre-tax operating profit was about $1.8 billion. Pre-tax special items were a negative $234 million including losses on the sale of the two ACH businesses he mentioned earlier, as well personal and dealer actions. Additional detail is provided in appendix three.
The provision for income taxes was $557 million, and net income attributable to Ford was about $1 billion. Consistent with prior guidance, we expect our full year operating effective tax rate to be similar to 2011. Let's now turn on slide eight to our pre-tax results by sector. Total company second quarter pre-tax profit of $1.8 billion consists of $1.4 billion for the automotive sector and $447 million for financial services.
As shown in the memo, total company pre-tax operating profit was about $1 billion lower than last year, with both sectors contributing to the decline. Compared with the first quarter 2012, total company pre-tax profit decreased by about $500 million, explained primarily by lower automotive results. Slide nine highlights the key market factors and financial metrics for the total automotive business. In the second quarter, wholesale volume revenue were lower than a year ago, explained primarily by Europe.
Pre-tax operating profit and operating margin were lower as well, more than explained by lower results in Europe, South America and Asia Pacific, Africa. As shown in the memo below the chart, total automotive first half pre-tax profit was $3.2 billion with an operating margin of 5.6%, both lower than a year ago. Volume and revenue also were lower in 2011.
Slide ten summarizes the $900 million decrease in second quarter total automotive pre-tax profit from 2011 by casual factor. The profit decline is explained mainly by higher cost related primarily to product and capacity launch this year, investment for future growth and higher commodity cost including hedging effects. Market factors including reduction in stocks and exchange were also unfavorable.
As shown in the memo, pre-tax profit decreased by $400 million compared with the first quarter more than explained by higher cost. More details on the quarter-to-quarter change are included in Appendix 6.
Slide 11 shows second quarter pre-tax results for each of our automotive operations as well as other automotive. Automotive sector profit of $1.4 billion is more than explained by North America. The combined loss for our other operations was $465 million which was somewhat better than our recent guidance. The loss in other automotive mainly reflects net interest expense and an unfavorable fair market value adjustment primarily on our investment in Mazda. We expect full-year net interest expense to be between $0.5 billion and $550 million.
Let’s turn now on Slide 12 to our automotive business in North America. Second quarter wholesale volume and revenue were roughly the same as a year ago and pre-tax operating profit at $12 billion was higher than a year ago, with operating margin at 10.2% also higher. This is a second consecutive quarter with profit exceeding $2 billion and operating margin exceeding 10%.
U.S Industry SAAR increased from 12.4 to 14.4 million units while our U.S. total market share was 15.6%, 1.7 percentage points lower than a year ago. As shown in the memo below the chart, North America first half pre-tax profit was $4.1 billion with an operating margin of 10.8 both higher than a year ago. Volume and revenue also were higher than 2011.
Slide 13 shows the $100 million increase in second quarter North America pre-tax results compared with 2011 by casual factor. Profits were $100 million higher than the strong results of last year; higher net pricing, improved contribution cost and other factors were offset partially by higher structural cost for growth. And on the favorable volume and mix including an adverse change in our U.S. dealer stocks. As shown in the memo, pre-tax profit decreased by $100 million compared with first quarter more than explained by higher cost, higher volume was a partial offset.
Our outlook for North America is unchanged, we expect significantly higher full-year pre-tax profit and operating margin compared with 2011 as consumers continue to respond to our strong product line up including a recently launched all-new Escape. Next up is the all-new Fusion which launches later in a year. In addition to exciting products, we remain committed to maintaining our competitive cost structure as we grow our business.
Side 14 shows our U.S. market share. Our total market share in the second quarter at 15.6% was down 1.7 percentage points from the same period last year. This is explained by lower share in both retail and fleet segments. The lower total share primarily reflects the impact of discontinued product such as Ranger and Crown Victoria. New competitive entrance in the small car segment and Japanese competitors, rebuilding inventories after the Tsunami impact in the second quarter of last year.
Our retail share of the U.S. retail industry at 13% was down eight-tenth of a percentage point from the first quarter reflecting five-tenth of a percentage point of share performance and three-tenth of a percentage point of segmentation changes. The share performance was driven by small cars and Ranger while the segmentation change was mainly in full size pickups.
During the quarter we continue to discipline approach, we have been using in recent years to maximizing the profitability of our sales and our revenue per unit, while foregoing marginal business that will leave us without adequate supply. As a result, we ended the second quarter with our inventory in great shape and an overall adequate data supply.
We have also been focused on adding capacity this year in several facilities to support the growing industry volumes and our new product launches. Specifically, we are adding 400,000 units of annual incremental capacity by the end of this year, with most of the actions launching in the second and third quarters positioning us well going into 2013.
Let’s turn now to South America on Slide 15. Second quarter wholesale volume and revenue decreased by 12% and 21%, respectively. In addition to the lower volume and favorable exchange was a factor affecting the net revenue recline. Pre-tax profit and operating margin were slightly positive declined substantially.
South America Industry SAAR and our market share were down slightly. And as shown in the memo below the chart, South America first half pre-tax profit was $59 million, substantially lower than a year ago. Volume and revenue also were lower than last year.
Slide 16 shows the $262 million decrease in second quarter South America pre-tax results compared with the 2011 causal factor. The lower profit is explained by lower volume, higher cost and unfavorable exchange. And although net pricing was higher, it was constrained compared with recent periods, by the more intense competitive environment. As shown in the memo, pre-tax profit decreased by $49 million compared with first quarter, more than explained by higher cost, mainly structural cost related to the developing and launching new products in the region.
Although we continue to expect South America to be profitable for the full year, we now expect the level to be substantially lower than 2011. This reflects increased competitive pressures, weakening currencies and changes in government policies effecting areas such as trade and access to foreign currency.
We are continuing to work out actions, to strengthen our competitiveness in this changing environment looking at all areas of the business to improve our operating results. These actions include fully leveraging our ONE Ford plan, including the introduction of an all new line-up of global products over the next two years. Starting with the launch of Ranger, EcoSport and Fusion in the second half of this year.
Slide 17 covers Ford Europe. Second quarter, wholesale volume and revenue declined 15% and 21% respectively, reflecting primarily lower industry volume and market share along with production adjustments to maintain dealer stocks and appropriate levels. Exchange was also a contributing factor adversely affecting net revenue. Pre-tax results and operating margins, went from a profit and positive margin in 2011 to a loss and negative margin this year.
Industry SAAR for the 19 markets that we track in Europe, decreased from 14.9 million to 14.3 million units. Our market share of 7.7% was down six-tenth of a percentage point, reflecting primarily lower passenger cars share and an environment of increased competitor pricing activity and our relatively higher price position. As shown in the memo below the chart, the first half Europe loss of $553 million compared with the profit a year ago. Volume and revenue declined compared with last year.
Slide 18 shows the $580 million decline in second quarter pre-tax results for Europe compared with 2011 by causal factor. Most of the change reflects unfavorable market factors. Volume was unfavorable due to lower industry share and associated stock changes. Net pricing was lower as the industry responded to excess capacity with higher incentives. Higher contribution costs also contributed to the profit decline.
As shown in the memo, pre-tax profit decreased by $255 million compared with first quarter, explained by unfavorable market factors and higher costs. Given the deteriorating external environment in Europe, we now expect our full year loss in Europe to exceed $1 billion. The magnitude of the loss will be affected by a variety of factors including the overall economic environment, competitive actions and our response to these developments.
We fully understand the seriousness of the situation in Europe and we view the challenges the industry faces as more structural than cyclical in nature. While we are affected significantly because of our strong presence in the region, we fully understand what it takes to be profitable and to generate an appropriate return on our investments. We have faced very challenging situations in other parts of our business before, and addressed them successfully to our ONE Ford plan.
We will do the same now in Europe, which is an important and valued part of our plans. We are reviewing all areas of our business in Europe to address the near-term challenges while ensuring we are building a strong foundation for the future. It is pre-mature to discuss details of what our plans may be in response to the situation in Europe, but we will continue to communicate our plans at the appropriate time with all of our stakeholders.
Now let's turn to Asia Pacific, Africa on slide 19. Second quarter wholesale volume and revenue improved 11% and 10% respectively compared with a year ago. Pre-tax results and operating margin on the other hand were lower. Industry SAAR increased from 27.6 million to 33.7 million units, and our share at 2.6%, declined three-tenths of a percentage point, reflecting Japan industry recovery, deterioration of the commercial vehicle industry in China, and lower small car market share in both China and India.
As shown in the memo below the chart, the first half Asia Pacific, Africa loss was $161 million compared with a profit a year ago. Volume was about equal to 2011 while revenue was higher.
Slide 20 shows the $67 million decrease in second quarter Asia-Pacific Africa pre-tax results compared with 2011 by casual factor. Market factors were strongly positive but they were more than offset by higher cost associated with new products and investments to support higher volumes and future growth as well as other factors. As shown in the memo, Asia-Pacific Africa pre-tax results improved compared with first quarter more than explained by higher volume.
Although we incur the first half loss in Asia-Pacific Africa, we do expect the results to improve in the second half due mainly to favorable volume and mix as we benefit from added capacity in China and Thailand and the new Focus and all-new Ranger.
Slide 21 covers 2012 second and third quarter production. In the second quarter total company production was about 1.5 million units, 49,000 units lower than a year ago. This is 25,000 units lower than prior estimate reflecting lower production in South America and Asia-Pacific Africa. We expect third quarter total company production to be about 1.4 million units up 69,000 units from a year ago more than explained by higher volumes in North America and Asia-Pacific Africa.
Although, third quarter production in South America is expected to be about the same as last year, this includes substantial production reductions in Venezuela and response to restricted availability of foreign currency. Compared with second quarter, third quarter production is down 45,000 units reflecting seasonal summer shutdowns in both North America and Europe.
Turning now to Slide 22, our Automotive gross cash and operating related cash flow, you can see that we ended the quarter at $23.7 billion in Automotive growth cash an increase of $700 million from the end of the first quarter. Automotive operating related cash flow was $800 million and our cash flow before financing related changes in dividend was $1.3 billion.
Net debt inflows in the quarter of $400 million includes drawdown of low cost loans for development of advanced technologies. We also made payments of $800 million to our worldwide funded pension plan in line with our previously disclosed long-term strategy to derisk our funded pension plan. Of this $0.5 billion reflects discretionary payment to our U.S. funded plan. Dividends paid in the quarter totaled nearly $200 million. In the first half, our operating related cash flow totaled $1.7 billion and gross cash improved $800 million.
Slide 23 summarizes our Automotive sector cash and debt position at the end of the second quarter. Automotive debt was $14.2 billion compared with $13.7 billion at the end of the first quarter reflecting additional draw downs of low cost loans for advanced technologies. We will make our last draw on these loans by August with payment beginning in September. We ended the quarter with net cash of $9.5 billion and Automotive liquidity of 33.9 billion, both increased when compared with first quarter.
Turning now to Ford Credit. Slide 24 shows the $166 million decrease in second quarter pre-tax results compared with the year ago by casual factor. The results are more than explained by fewer lease terminations which resulted in fewer vehicle sold at a gain and a lower financing margin. The decline in financing margin is explained primarily by the run off of higher yield in assets originated in earlier years.
As shown in the memo, Ford Credit’s pre-tax profit decreased by 414 million compared with first quarter. Ford Credit remains a strategic asset for Ford delivering high levels of quality and customer satisfaction with operating efficiencies that are among the best.
For full-year 2012, Ford Credit expects to project full-year pre-tax profit of about $1.5 billion and total distributions to its parent between $0.5 billion and $1 billion. Ford Credit now projects managed receivables at year-end to be in a range of 85 to $90 billion and managed leverage of 8-9:1 for the foreseeable future. This is a decrease from the prior target of 10-11:1 and is consistent with the goal of achieving and maintaining a strong investment grade balance sheet.
And with that I’d like to turn it back to Alan who will cover business environment and our 2012 planning assumptions.
Alan MulallyRead the rest of this transcript for free on seekingalpha.com