Ford Motor Company (F) Q1 2011 Earnings Report, Transcript and Summary

Good day, ladies and gentlemen, and welcome to the First Quarter Ford Fixed Income Conference Call. My name is Chantellay and I will be your facilitator for today's call. [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. Shawn Ryan, Manager Fixed Income, Investor Relations. Please proceed, sir.

Thank you, Chantellay, 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 this morning are Bob Shanks, Ford Vice President and Controller; Michael Seneski, Ford Credit Chief Financial Officer; and David Brandi, Assistant Treasurer. We also have some other members of management who are joining us for the call, including K.R. Kent, Executive Director, Investor Relations; Brian Shoff [ph], Assistant Treasurer; and Paul Andonian, Director of Global Accounting. Before we begin, I would like to review a couple of 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. The final data will be included in our Form 10-Q. 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 U.S. GAAP equivalent as part of the appendix to the slide deck. Finally, today's presentation includes some forward-looking statements about our expectation 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 Vice President and Controller, Bob Shanks. Bob?

Thanks, Shawn, and good morning, everyone. Overall, our team delivered a great quarter of growth, profitability and positive automotive operating-related cash flow. Both volume and revenue were higher than a year ago and we earned a pretax operating profit for the seventh consecutive quarter. The results, in fact, were over 40% better than a year ago. In addition, each of our automotive operations was profitable, with results that were better than the first quarter of 2010. Financial services also was solidly profitable. We further strengthened our balance sheet by reducing debt during the quarter. And at the same time, we increased our overall liquidity and made further progress towards achieving investment grade. We also launched more great products our customers want and value, notably, the all new fuel-efficient Focus, in both North America and Europe. The impact of the tragic events in Japan continues to unfold and we're managing this on a day-by-day basis. Our first quarter performance is a step forward in our delivery of profitable growth for all, not only for 2011 but for the years ahead. We're investing for future growth and are focused on developing outstanding products with segment-leading quality, safety, fuel economy and technology. We're also adding capacity in emerging economies to increase dramatically our participation, while investing to build the strength of our brand around the world. While these actions and investments are increasing cost, all in line with our plan, they also are driving higher volumes, richer mix and stronger transaction prices. Slide 2 summarizes our first quarter business results compared with the year ago period. Vehicle wholesales were 1.4 million units, up 150,000 units or 12% from 2010. Revenue was $33.1 billion, an increase of $5 billion or 18% from 2010. For comparison purposes, we did exclude Volvo wholesales and revenues from 2010. Pretax operating profit, excluding special items was $2.8 million or $0.62 per share, an $827 million increase from a year ago. Net income attributable to Ford, including unfavorable pretax special items of $61 million, was $2.6 billion or $0.61 per share, a $466 million increase from a year ago. We ended the quarter with $21.3 billion of automotive gross cash and with automotive gross cash exceeding debt by $4.7 billion, an improvement of $13.7 billion compared with a year ago. Turning now to Slide 3, and a review of automotive gross cash and operating-related cash flow. We entered the quarter with $21.3 billion of automotive gross cash, an increase of $800 million from the end of 2010. This reflected positive automotive operating-related cash flow of $2.2 billion, mainly the flow-through of first quarter pretax operating profit of $2.1 billion. In addition, we had positive receipts of $1.3 billion from our Financial Services sector, including $900 million of Ford Credit distributions. Our cash flow before changes in debt and pension contributions was $3.6 billion. Net debt declined $2.5 million in the quarter, and we also made payments of $300 million to non-U.S. funded pension plans. Slide 4 summarizes our automotive sector cash and debt position at the end of the first quarter. Automotive debt was $16.6 billion, which is a reduction of $2.5 billion from year end 2010. This includes the full redemption of our trust preferred securities, offset partially by an increase in low-cost loans to support advanced technology. Our net cash as of March 31 was $4.7 billion and our automotive liquidity increased by $2.8 billion to $30.7 billion, including a $1.7 billion increase in our secured revolving credit facility. Slide 5 provides an update on the impact of the events in Japan on our business. Although we've had no -- and have no production facilities in Japan, we do have personnel, including dealerships, and we're pleased to report that none of them were harmed. We also have suppliers located in Japan with whom we have been working closely to assess their production and shipping capabilities and to minimize supply disruptions. During the first quarter, there was very limited impact on our production. As we look forward, we expect our Asia-Pacific Africa operations to be affected, to some degree, by shortage of components in the near term. However, we expect the impact on overall results to be immaterial. Should the supply of key materials or components from Japan be disrupted and an alternate supply not be available, we may have to reduce or temporarily cease production of vehicles in other regions. Slide 6 summarizes our first quarter status and our planning assumptions and key operational metrics for 2011. Despite the encouraging first quarter industry levels, we are maintaining our present guidance for North America and Europe. There's significant uncertainty related to recent global events that could have an impact on industry volumes in the coming weeks and months. In terms of our operational metrics, in North America, we've increased our J.D. Power dependability rating and ranking. However, we have some near-term issues, which we're addressing, leading to the overall mixed quality outlook for the year. We are on track to achieve quality improvements in all of our international operations. We expect U.S. and Europe market shares to equal or improve from last year's results, and we expect total company pretax operating profit to improve compared with 2010. Commodity cost and structural cost are each expected to increase by about $2 billion compared with 2010. The increase in structural cost is consistent with supporting higher volumes in the near term, as well as our plan to grow our business, strengthen our brand and improve our products through our business planning period. Although not shown, we do expect our structural cost as a percent of net revenue to improve compared with 2010. Based on first quarter performance and our expectations for the full year, we expect automotive operating margin to equal or improve compared with last year. Our outlook for automotive operating-related cash flow and capital expenditures remains in line with the most recent guidance. So overall, our performance is off to a really good start. We remain on track to deliver continued improvement for full year pretax operating profit and automotive operating-related cash flow compared with 2010. Based on the factors we've highlighted, the expected lower profit at Ford Credit, increasing commodity cost, seasonal factors that tend to favor the first half of the year, and higher investments and cost related to our longer term growth and brand plans, quarterly results in the latter part of the year may not be as strong as the first quarter. As the year progresses, however, we will take advantage of every opportunity to strengthen our business further. And with that, I'll now turn it over to Mike Seneski.

Thanks, Bob. We'll move on to Slide 7, which shows Ford Credit’s operating results and key metrics for the first quarter of 2011. As shown in the left box, our first quarter pretax profit was $713 million compared with a pretax profit of $828 million in the first quarter of 2010. You can see in the right box, our March 31 on-balance sheet receivables are $83 billion or about $5 billion lower than the same period last year. Charge-offs for on-balance sheet receivables in the first quarter were $55 million and the worldwide loss-to-receivables ratio was a very low 27 basis points. I'll speak more on this in a few minutes. At March 31, the allowance for credit losses or reserves for on-balance sheet receivables was about $700 million or 87 basis points of receivables. We paid total distributions of $900 million in the first quarter and expect to pay distributions of about $3 billion in 2011, up from $2 billion that was previously announced. We'll continue to assess future distributions based on our available liquidity and managed leverage objectives. Our managed leverage was 7.0:1 at March 31, 2011, up from 6.9:1 at March 31, 2010, an increase from 6.7:1 at the end of last year. At the end of the first quarter, our equity was about $10 billion. Slide 8 shows the change in first quarter Ford Credit pretax results compared with a year ago. Overall, first quarter results decreased $115 million. The decrease is more than explained by lower market valuation adjustment to derivatives, included in other, and lower receivables volume. As shown on the memo, Ford Credit's results increased $141 million compared with the fourth quarter of 2010. This was primarily explained by a lower provision for credit losses and, included in other, lower net losses related to debt repurchases and lower operating expenses. For the full year 2011, we continue to expect Ford Credit to be solidly profitable, but at a lower level than 2010, reflecting primarily the non-recurrence of lower lease depreciation expense and non-recurrence of credit loss reserve reductions of the same magnitude as 2010. We estimate the profit impact of these 2 items to reduce profits about $1.1 billion in 2011. Slide 9 shows quarterly trends of charge-offs and loss-to-receivable ratios for our on-balance sheet portfolio. The top box shows loss-to-receivable ratios for our worldwide portfolio and the U.S. Ford and Lincoln Retail and Lease business. The worldwide loss-to-receivable ratio in the first quarter is in line with the lowest level seen in the past 10 years and is down from the same period a year ago, reflecting primarily lower repossessions and lower severity in the U.S., as well as lower losses in Europe. Both worldwide and U.S. Ford and Lincoln loss-to-receivables ratios in the first quarter decreased from the fourth quarter 2010, reflecting lower repossessions and lower severity. Charge-offs from the first quarter were $55 million, down $78 million from the same period a year ago and down $46 million from the fourth quarter of 2010, reflecting the same factors just mentioned. Slide 10 shows the primary drivers of credit losses in the U.S. Ford and Lincoln Retail and Lease business. Repossessions in the first quarter were a very low 12,000 units or 1.98% of average accounts outstanding, a level we've only seen a handful of times in the past decade. Severity of $6,500 in the first quarter was $800 lower than the same period a year ago, reflecting improvements in auction values in the used vehicle market, offset partially by a higher mix of 72-month contracts. Severity was $400 lower than the fourth quarter of 2010, which is more than explained by improvements in auction value. Over 60-day delinquencies totaled 16 basis points in the first quarter, down 1 basis point from the same period a year ago and up 1 basis point from the fourth quarter of 2010. Bankruptcy filings totaled $9,000 in the first quarter, $1,000 lower than the same period a year ago in the fourth quarter of 2010. Slide 11 shows the lease residual performance for our Ford and Lincoln U.S. brands. Lease return volumes in the first quarter at 30,000 units were down 14,000 units from the same period last year, reflecting primarily fewer terminations and a lower return rate. The first quarter lease return rate was 62%, down 9 points compared with the same period last year. This return rate was up 1 point compared with the fourth quarter of 2010. In the first quarter, auction values for 36-month vehicles were up $1,140 per unit from the same period last year. Compared with the prior quarter, auction values were up about $1,000. Our worldwide net investment in operating leases was $10 billion at the end of the first quarter, down $3.3 billion from the same period last year. This decline reflected primarily the discontinuation of Jaguar, Land Rover, Mazda and Volvo financing, and lower lease placements for Ford and Lincoln brand vehicles in recent years. With that, I'll turn it over to David Brandi.

Thanks, Mike. We're on track to achieve our 2011 funding plan. In the first quarter, we completed $7 billion of funding, including $4 billion in the public market and $3 billion in private securitizations. We have completed another $3 billion of public and private funding in April. Our funding strategy remains focused on access to a variety of markets, channels and investors. In April, we completed the first issuance of $1.5 billion of 5-year notes under our new FUEL program. FUEL stands for Ford Upgrade Exchange Link notes. FUEL notes are backed by retail assets and exchanged to unsecured notes when Ford Credit's ratings improve to investment grade. We have ended the tenure of our funding by issuing 10-year unsecured term debt and completing the FUEL transaction. Our borrowing spreads have decreased, reflecting improved credit profiles at Ford and Ford Credit, strong investor demand and support of capital markets. While liquidity remains strong, we will maintain cash balances and committed capacity that meet our business and funding requirements. Slide 13 shows the trends in funding for our managed receivables. At the end of the first quarter, managed receivables were $85 billion. We ended the quarter with $13 billion in cash, including about $5 billion to support on-balance sheet securitizations. Securitized funding was 53% of managed receivables at the end of the first quarter. We are projecting 2011 year end managed receivables in the range of $82 billion to $87 billion, slightly higher than the prior estimate, due to exchange rates. Securitized funding, which includes the FUEL notes is expected to represent about 53% to 57% of total managed receivables. We expect this percentage will decline over time with our ability to obtain term funding from the unsecured markets on increasingly favorable terms, and the effect of the FUEL notes exchanging into unsecured debt. Slide 14 shows our 2011 term funding plan for Ford Credit excluding our short-term funding programs. Year-to-date we have completed $10 billion of term funding. About $6 billion of this was public funding in the U.S. and Canada, including about $2 billion of retail and wholesale securitizations and $1.5 billion of FUEL notes. We also issued about $2 billion of unsecured debt. In addition, we completed about $4 billion of funding through our private securitization channels across all regions, including our first securitization of wholesale receivables in Mexico. For the full year, we project public term funding of $18 to $22 billion, consisting of $7 billion to $9 billion of unsecured debt and $11 billion to $14 billion of public securitizations, including FUEL. In addition to the public issuance, we are projecting $8 billion to $11 billion of funding from our private sources. We have added flexibility at some private facilities allowing us to pay them down and tap them up to meet seasonal funding needs. This results in increased issuance assumptions, though the amounts outstanding under these programs will not materially change. Slide 15 details our liquidity programs and utilization. The top box shows Ford Credit's committed capacity, which includes unsecured facilities, FCAR asset-backed commercial paper lines and other asset-backed bank capacity. As of March 31, we had $46.6 billion of committed capacity in cash. After excluding securitization cash and adjusting for available assets, liquidity was $35.9 billion, of which $17.3 billion was utilized, leaving about $19 billion available for use. This equals 22% of our quarter end managed receivables. Available liquidity is about $4 billion lower than year end 2010, primarily explained by $3.7 billion of unsecured debt maturities and repurchases in the first quarter. Committed capacity at the end of the first quarter was $33.6 billion, $700 million lower than year end 2010. Our renewal strategy will continue to protect our global funding needs and optimize capacity. We ended the quarter with about $6.2 billion of excess committed capacity, providing a funding source for future assets and flexibility to shift capacity among markets and asset classes where most needed. In summary, we had a strong first quarter. Ford had a pretax operating profit excluding special items of $2.8 billion, net income attributable to Ford was $2.6 billion. We ended the quarter with automotive liquidity of $30.7 billion including $9.4 billion of available credit facilities. We reduced automotive debt by $2.5 billion, primarily reflecting the redemption of the trust preferred securities. And we ordered – and we ended the quarter with cash net of debt of $4.7 billion. And as Bob mentioned, Ford continues to manage its way through the events in Japan. Turning to Ford Credit. Ford Credit's pretax profit was $713 million and net income was $451 million. Ford Credit paid $900 million in distributions to its parent in the first quarter. It is on track to pay a total of $3 billion in distributions in 2011. Year-to-date, Ford Credit has completed $10 billion of term funding, including its initial FUEL transaction and ended the quarter with liquidity of about $19 billion. Importantly, we continue to progress to investment grade ratings that we intend to maintain through all economic cycles. And now, I'll turn it back to Shawn to start the question-and-answer session.

Thank you, David. Ladies and gentlemen, we're going to start the question-and-answer session now.

Yes. Your first question comes from the line of Doug Carson [ph] of Bank of America.

Thanks. A couple quick questions. The new FUEL note program, previously been successful in the market. Is this a program that you think it grow it’d be kind of a meaningful portion in the next year or two’s funding?

Well, of course, we hope it's time-bounded by our upgrade to investment grade ratings. But yes, so this has worked very well for Ford Credit. It certainly allowed us to tap into investors who require investment grade rating. And of course, FUEL does carry investment grade rating. So we're very pleased with the results and hope that there's future transactions.

Right. And then, your second question. The managed leverage still remains pretty low at 7x. And I'm kind of remembering in the past, there was a, I think a rough target to take that up pretty significantly. Is that still something that you guys are considering to bring that leverage up? Is there more...

I think over time we'd like to see it back to the 10 to 11 range that we typically run for the credit company. We'll take the leverage up step-by-step and the $3 billion distribution that we're projecting for 2011 will help achieve some of that.

Okay. And then I guess last question. This is broader, I'm not sure how deep you’ll even get or even if you'd address it, but -- competitor Ally is aggressively trying to diversify away from GM, and given that major manufacturers have captives, like Ford, it's not clear what path they would take. Have you seen them getting more competitive in the market? Do they have a bigger presence in non-GM business? Have you seen them kind of approach any of the Ford customer? Just kind of getting color away.

Look, we've been competing against banks and all others for over 50 years and been pretty successful at that. We're committed to financing Ford and Lincoln vehicles around the world. Our share is very good and has been very consistent. We go to the market consistently with the Motor Company. So to whatever extent competition acts, I think we're ready for it and our results are continuing to hold up.

Great. That's it from me, guys. Thank you.

[Operator Instructions] Your next question comes from the line of Brian Jacoby of Goldman Sachs.

A couple quick questions. One, this is around Ford Motor Credit. What, right now -- I mean, from the perspective of sub-prime or let's just call it, lower quality clientele within the portfolio. Traditionally, last few years, you've certainly have been more prime. Are you now kind of maybe going to get more into or back into some of the sub-prime? Or are you guys still pretty much committed to try and go after stuff that's over 700 on the FICO score? And then, along those lines, how do you see the industry right now? There's been some evidence that others have been dipping down farther into riskier credits. Is that a trend that you're seeing just broadly? Maybe if you could just comment on that and then I have 1 other question to follow.

All right. Well, as you know, Brian, we originate across the entire spectrum. And we do it consistently and we've done it consistently through time. It's something that our dealers expect, that the Motor Company expects and that our investors expect. We believe that we are able to go much deeper into the spectrum than others, and have been, and that hasn't changed for us, and we believe that's one of our competitive advantages. Regarding the industry, it is true that we have seen a little bit of change as other players get back into auto financing and a little bit stronger growth of what you might call, traditional sub-prime. For us, we haven't seen a change because our underwriting practices have stayed consistent.

Okay and then my follow-up question, it’s just around -- obviously, you guys are -- every chance you get, you make a comment about your goal of achieving investment grade ratings. And all of us are getting questions on how can Ford do it when they're still rated substantially well in high-yield category. But obviously, your debt reduction goals have been pretty consistent all along. What -- I mean, at this point, what is the -- any color on how you intend to, I guess, attack the capital structure in terms of what's next? I mean -- presumably -- I would assume that you guys are trying to go after bank debt. But maybe if you can just talk around how you're thinking about your revolver. I mean I know that has fall away covenants with respect to collateral. But, I mean, is it something that you kind of think you need to perhaps re-approach the banks and put in a new facility? Any type of, kind of, time frame on that just because if that is -- from talking to the rating agencies, I think that is one of several things that they consider, clearly, when trying to peg an IG rating for Ford.

Yes. Brian, I think we probably won't get into a lot of detailed specifics about all our future transactions. Obviously, if you look at appendix 9 of our deck here, that shows what our debt levels have been at the Motor Company and where they are today. And the progress that we've been making on that, I think, you can think that, that trajectory will continue in some form or fashion. And with respect to the agencies, I think, time will tell. Obviously, some investors are very confident in where we're going. Our spreads are much improved, certainly, from a year ago when maybe they were, let's call it, 400 to 450 over base rates and today let's call it, 200 to 225 over base rate. So we've cut those spreads dramatically and I think, in the minds of the investors, we're well on our way. So it's probably be a matter of time when we prove to the agencies that we are, indeed, an investment grade company.

Okay. All right. Agreed on that part and thanks for the questions.

[Operator Instructions] Your next question comes from the line of Eric Selle of JPMorgan.

With $31 billion of liquidity at the auto company and the desire to reduce debt, why did you guys go out and increase the revolver capacity by $1.7 billion?

That's a great question, [indiscernible]. I think we've learned over the years, when the market is offering you additional liquidity and I think in this case, it was clearly the market offering us liquidity, we're inclined to take that up. Liquidity has served us well and I think allows us great flexibility as we go forward.

And then, your existing bank facilities. Do they have the security fall away upon obtaining IG? Is that in the covenants?

Yes.

It is. Okay. And then secondly, looking at the distributions from Ford Credit. $3 billion, does that include the tax reconciliation?

No, it doesn't, Eric. That's straight distributions.

And is that typically a third quarter, as I remember, type event or is that fourth quarter? Or is there any specific thing on timing to that?

For the tax?

Yes.

It would probably be around the fourth quarter, most likely. Maybe in the third. We'll sort that out. Certainly, in the latter part of the year.

And similar to what we saw in the last couple of years?

It's going to be consistent with our required tax obligations based on our profits in the last year, couple years.

Okay. And then finally, looking at Ford Credit. You had good, good quarter, but I was somewhat surprised by the sequential drop in cash and then the ensuing impact on liquidity. Is there anything there? I mean, I think, cash was down like -- I think liquidity was down like $3 billion sequentially and cash was down like $2 billion. Is there anything there or is that just a timing issue?

Oh, I think we had sufficient liquidity knowing that we had some heavy maturities coming up in the first quarter and took care of those unsecured debt maturities. That's the primary reason for you to see the sequential change.

And 22% liquidity is still an awful big number.

That is right, that is right. Well, I appreciate your time and great quarter.

Your next question comes from the line of Mark Altherr [ph] of Credit Suisse.

Thank you. I apologize if you mentioned this briefly. On Slide 11, the 24-month lease returns. What was going on -- what's going on there that sort of dried up?

Basically, Mark, back in 2008, 2009, the Motor Company -- we go to market jointly with the Motor Company. And a couple of things happened: 1, our overall amount of leases that we offered in the market went out substantially; and 2, they primarily switched to offering 36-month. So we have a real dearth of 24-month contracts coming back really throughout the course of this year.

Okay. Thank you, thank you.

At this time, there are no further questions in the queue. And I would like to turn the call back over to Mr. Shawn Ryan. Please proceed.

Thank you, ladies and gentlemen. That concludes today's call. Thank you for joining us.