Ford Motor Company
Q1 2013 Earnings Call Transcript

Published: 10 Sep 2013

[Unidentified Analyst:]

Guys, I am not quite sure what it is about men and cars, but there is a fascination from cars, which was difficult to find elsewhere. Why I am saying that? Because Ford will present a new luxury concept car at this year’s Frankfurt Auto Show, the Vignale, and as an analyst, it is interesting to see that Ford Europe opted for approaching the European premium segment with an own model instead of bringing over Lincoln. I am not telling you something exactly new when I am saying that the European market is still tough. However, I note that Ford Europe sales have started to pickup again both in Europe and in Germany again, it’s still a challenging market. Let me welcome the next speaker Lyle Watters, who is CFO of Ford Europe. Lyle, maybe you can share with us what you see in the market and given that there are only three months to go also give us your expectation for next year.

[Lyle Watters:]

Thank you very much and good morning everyone. It’s my pleasure to be with you this morning to give you an update on Ford Motor Company and in particular Ford of Europe. By way of introduction, I was appointed CFO for Ford of Europe in April of last year having spent almost four years in Brazil as CFO of Ford South America operations. And today, I am really pleased to have the opportunity to talk both about our global plan, about our business in Europe, and specifically about how our product led transformation in Europe is progressing with the new and exciting products. I will also touch on our outlook and priorities going forward. You will probably recognize the next slide. It is our ONE Ford plan. It hasn’t changed and it’s as relevant today as it was about six years ago when we developed it. And the objective is straightforward is to serve all markets with a full family of best-in-class vehicles, small, medium and large cars, utilities and trucks, executed through our ONE Ford plan and delivering profitable growth for all. And although the external environment is uncertain and very challenging in some parts of the world including Europe, we continue to move forward on all elements of the plan. Turning to the next slide, the heart of the plan is accelerating development of the new products our customers want and value and we are continuing to strengthen our product portfolio in traditional markets while aggressively expanding in the BRIC markets and other emerging regions and markets around the world, including Middle East and Africa. And you may recall that we have announced we are establishing a new consolidated regional business unit to grow in this emerging region. At the same time, we are focused on our two brands, Ford and Lincoln and continuously improving the favorable opinion, perception and revenue they command among customers. But our product plan is based on providing customers with vehicles that consistently excel in four areas as what we call our four-pillar strategy, its quality, fuel efficiency, safety, and smart technology, and while offering excellence of these four areas, our objective is also to provide great value as perceived by our customers. In addition to product and brand initiatives, we are progressing our efforts to unlock the value of our increasing scale, optimize our global footprint, and improve its flexibility and further strengthen our balance sheet all driven by a skilled and motivated team. And the fact that we are now rated investment grade by all four major rating agencies is really further evidence of the continued progress the ONE Ford team is making in delivering the ONE Ford plan. And our plan is to maintain investment grade throughout the economic cycle. All of us at Ford remain laser focused on that ONE Ford plan to deliver profitable growth for all. Next slide, a full family of great products, as you can see here small, medium and large cars, utilities and trucks that customers want and the value is really central to that ONE Ford plan. And this year more than 85% of our volume will be on nine global core platforms with examples of nameplates for each platform shown on the slide. Next slide please. The benefits from this or more products, it’s a faster product cadence and better profitability. Optimizing platform count lets us increase volume per platform improving our engineering efficiencies and gain economies of scale for us and for our suppliers. Now, if we turn to Ford of Europe, Slide 5 shows how our product lineup will look primarily next year. The blue boxes highlight the new vehicles that will be launched over the next few months. And this slide demonstrates how our product portfolio in Europe including Russia is growing underpinned by our ONE Ford plan to accelerate the development of new and exciting products. Leveraging the ONE Ford global portfolio of products means we can bring more products to more segments even faster and the expansion of our product portfolio doesn’t stop there. There is more to come in the near future. So turning to industry, on the next slide, it shows how much the European car industry has declined from the peak in 2007 of over 18 million units. However, while the Euro area remains in recession, we are seeing some indicators that suggest the economic conditions may have begun to stabilize. Industry volume is also stabilizing and we expect the Europe 19 industry volume that we track to be the upper end of the 13.5 million unit range in 2013. And looking beyond 2013 the slide shows the industry outlooks from IHS and LMC who are automotive consultants and their forecasts are pretty consistent with our view of a modest recovery to around 15 million units by mid decade. Although segments – some segments of the industry will however grow faster, in particular, we see the SUV market in Europe increasing by a third over the next four years and Ford has a number of new products being added to the portfolio to participate in this opportunity. As always challenges remain in the external factors on industry, legislative and consumer pressure to reduce CO2 emissions and improve safety performance will add to the cost of new vehicles. And although some restructuring actions have been taken by several OEMs in Europe, significant overcapacity still remains in the industry. In addition, the EU’s push to establish what in our view, are unbalanced free trade agreements with many regions will further strengthen competition from plants outside of Europe. Let’s briefly recap Europe’s second quarter results. These results as you can see in the next slide please, they demonstrate that Europe is well on track in executing our transformation plan. It’s focused on product, on brand, and on cost. In the second quarter, wholesale volume and revenue each improved about 8% from a year ago. The volume increase primarily reflected the non-repeat of dealer stock reductions that occurred in 2012 and higher market share and then lower industry volume was a partial offset to that. Market share improved five tenths of a percentage point from 7.6% to 8.1%, that was more than explained by higher share of the retail market and the increase in revenue mainly reflected the higher volume. The pre-tax loss for Europe was $348 million and the operating margin was a negative 4.6% both improved from a year ago despite the lower industry and the restructuring costs of $181 million associated with our transformation plan. So, turning to the next slide, it shows the total market share for the 19 European markets we track as well as the passenger car retail market share of the retail industry of the five major European markets. And these five major markets represent about 75% of the 19 European markets. So, starting on the left, you will see the second quarter total market share was 8.1%, and that’s up five tenths of a percentage point from the same period last year more than explained by the strong sales of the new products that we have launched. The share was also up – also was up four tenths of a percentage point from the first quarter and our July and August sales, our July and the August sales that were announced today continue to show improvement in market share. An important element of our European Transformation Plan is the focus on retail sales to reduce the reliance on the short cycle rental and dealer self-registration sales. And this is key to our brand health, is key to residual values and margins. As shown in the right hand chart, the strategy is working. The share of the retail segment of the five major European markets grew to 8.3% in the first quarter and 8.4% in the second quarter. That’s 1.9 percentage points better than the same period last year. And through August, our retail share has increased now for seven months in a row. And our retail order banks are healthy and significantly higher than prior year. So Slide 9 looks at the three key elements of the European Transformation Plan that we announced in October and the plan focuses on product, on brand, and cost actions including capacity reduction measures to return the business to profitability by mid decade and deliver ongoing profitable growth. And I will discuss each of these important elements as we walk through the next slide. So Slide 10 shows that since October, there has been solid progress on our European Transformation Plan. We are on track on each of the three strategic focus areas of product, brand, and cost and on track to return to profitability by mid decade. We have launched 8 of at least 25 vehicles and more on this in a moment. Our brand is strengthening with improvements in market share, but also and importantly we have seen improvements in retail share as well as in fleet and in commercial vehicles. And consistent with our strategy, dealer stocks of new vehicles have been reduced in line with our plan and being maintained at the lower level. The improvement in brand is supported by improved communication and improved quality even through an unprecedented launch period for Ford of Europe. On cost, we are in the process of adjusting our manufacturing output to match the realities of the economic climate and industry in Europe, so that we emerge as a leaner and stronger business. We closed few plants in the United Kingdom in July and a large vehicle assembly plant at Genk in Belgium will close at the end of next year. And these actions will reduce our capacity in Western Europe by 18% that would result in gross savings of around $450 million to $500 million a year. In addition to these actions, of course, we have progressed on other cost efficiencies including salaried headcount reductions. So turning to the next slide, when we announced the product portion of our transformation plan in September of 2012, we said that we would bring 15 global vehicles to Europe within five years. We are accelerating our new vehicle introductions. I now expect to introduce at least 25 new vehicles in Europe in the five-year period from September 2012. And this is the most complete product expansion in the history of Ford of Europe. It will also give us one of the freshest, most exciting lineups in the industry, and position us for growth as the economic situation begins to recover. So now for a few slides on the specific products that’s already launched, in the next slide you will see the new Ford Fiesta, the best selling small car in Europe year-to-date and the new Ford Fiesta ST is now in full production. In fact, the press reaction to that car has been very positive and we have significantly increased production to meet demand. On the next slide, we have B-MAX with its ingenious easy access door technology. This car which is produced in Romania has quickly established itself at the top of the small MAV segment in Europe. And then turning to the next slide, demand both in Europe and other regions on Kuga has exceeded expectations for this smart utility vehicle. So, we have increased production this year to exceed 100,000 units in Europe for the first time and more than three quarters of customers and it’s a really point are buying the highest specification Titanium series. Kuga in Europe is the same as the Ford Escape that’s sold in North America, which is also setting all-time sales records. The Ford Escape is the first ever small utility to break through 150,000 sales in the first six months of the year and it’s on track to break its all-time sales record from 2012. Next slide. The all new Transit Custom is International Van of the Year 2013, and this is the first and only van in a segment to have achieved the maximum five-star safety rating in Europe. And strong demand for the new Transit Custom contributed to Ford achieving the highest commercial vehicle market share in Europe since 2007. Turning to the next slide, fuel economy and CO2 emissions are important factors in consumer choice. And with our new EcoBoost engine range, we have a strong and competitive petrol engine family. The One Liter EcoBoost has been named Engine of the Year for the second year running. And this engine will be launched in the Ford Fiesta in North America later this year. And we have recently started production of our new 1.5-liter EcoBoost engine in Europe, and this is an addition to the larger 1.6-liter and 2-liter EcoBoost engines already in production. So we are more than tripling production of the European vehicles with EcoBoost by 2015 to 1.3 million units. Petrol engines are installed in about half of all vehicles in Europe and we also have a fully competitive range of diesel engines available in all our vehicles. So turning to the next slide, there is more to come as we invest in areas that are right for growth. For example, I mentioned earlier that we expect the SUV market to increase by one-third over the next four years in Europe and we are targeting 1 million SUV sales during the next five years and that’s supported by the new Kuga and by the introduction of the EcoSport, the Edge and the Explorer in Russia. The commercial vehicle segment is also growing again in Europe and we plan to increase our share of sales with an expanded portfolio of all new commercial vehicle products. Our new Tourneo range of spacious and versatile people movers provides smart stylish and affordable people movers for families and users with active lifestyles and Mustang, the iconic American sports car is coming to Europe. We will have a stronger, more confident Ford brand with new-look dealerships and continued focus on retail sales. Cost efficiency measures will continue including the relocation of large car and C-MAX production next year to improve – to achieve improved plant utilization. On the next slide, we have more product launches to come over the next four to five months, including the new EcoSport, the Transit Connect, the Tourneo Connect and Transit. And we will have refreshed 40% of our total volume with our 2013 launches alone. And yesterday, we learned that the Transit Connect was named International Van of the Year for 2014. So with the new Transit Custom winning the award last year, this is the first time a brand has won this award two years in a row. So tough times don’t mean reducing our commitment to product, in fact quite the opposite, we are investing heavily now to position Ford of Europe for strong profitable growth of the economic conditions we cover. So on the next slide I thought I just provide you with some of the key Ford highlights of the Frankfurt Show. We continue to build our product portfolio and renewal through the Vignale and S-MAX concepts are making significant investments in our large car range and with a high percentage of our customers buying Mondeos and S-MAX at the highest specification levels. With all the options added, we also see an opportunity for even higher equipped vehicles in a segment that Ford presently does not cater to. So Vignale concept is unique upscale customer experience that responds to the demand for the high end products. And this is being demonstrated here at Frankfurt Show through the Ford Mondeo Vignale concept with its unique modern luxury design shoes. We plan to launch Vignale in Europe in early 2015 with both product and unique VIP ownership experience that customers increasingly value. And also at Frankfurt today we are unveiling our vision of a future sports activity vehicle with a new Ford S-MAX concept. And this concept builds on the style with our compromised resource of the popular current model with fleet design craftsmanship, smart technologies and a more flexible and luxurious interior. We are also expanding our technology story through further developments of the EcoBoost engines, SYNC expansion with AppLink, and Power of Choice including electrification. And we have announced that we will have three electrified vehicles in Europe by 2014 including the C-MAX Energi Plug-In Hybrid shown at the bottom of the right hand of the slide, the Focus BEV on sale now and the Mondeo Hybrid. Next slide please. So we are building the Ford brand and it’s one of the primary elements of the plan. A new product, excuse me, is absolutely key to that. We are also making great progress with more exciting and compelling communications and a disciplined sales strategy that protects and nurtures the Blue Oval. A big effort is underway to upgrade our dealerships. We are making them more customer-friendly in terms of technology and experience. And at the same time, we are completely redesigning our Ford website to improve the online shopping experience, which is vitally important to driving sales. We are continuing as I mentioned before to take this new approach to sales. We are putting more focus on retail and we are pulling back on rental and self registrations that can erode the brand and residual values. Retail sales to private customers from our perspective are the best indicator of the strength of our products and our brand. And as I mentioned earlier, our retail share has increased for seven months in a row through August. Next slide. Now, looking at the corporate total company level as we confirmed last month with our second quarter earnings report, we expect this year to be a strong somewhat better in fact than our expectations earlier in the year. Our guidance today is unchanged from our earnings announcement. In terms of financial performance, we expect total company pre-tax profit to be about equal to or higher than last year, automotive operating margin to be about equal to 2012, and automotive operating related cash flow to be substantially higher than 2012 including capital spending of about $7 billion. Moving to Slide 22 as was shown before, we continue to work toward our mid decade outlook, which is aligned with the – with our ONE Ford plan and our capital strategy. So hopefully in the few slides I presented this morning, you will see that we are not waiting for the external environment to return to profitability in Europe. With the ONE Ford plan and our transformation plan, we are taking the necessary actions in Europe on product, on brand and on cost. We are on track to return the business in Europe to profitability by mid decade and achieve ongoing profitable growth. So at this point, I just want to thank you very much for your time and attention and open up for questions in the time that we have remaining.

[Unidentified Analyst:]

Thank you very much. I think not many people can say that they are gaining market share running extra shift in this kind of market. So let’s go the Q&A please, got right at the back.

[Colin Langan:]

Colin Langan from UBS. Can you provide any color on how your inventory is looking in Europe currently and also on the pricing environment for yourself and the industry has it sort of stabilized at all?

[Lyle Watters:]

Sure. Well as you know, we took action on reducing inventory in the fourth quarter of last year, which is a really important and significant step for us. And I believe absolutely the right one. So from an inventory perspective, we are now running in Europe at about the levels we would expect to run through the balance of this year and through the business plan period. So nothing further to say on inventory reductions other than I believe we took the better pill, we took the actions we had to take in the fourth quarter. Regarding the pricing environment, I mean it remains tough, there is no question about it, and you all will know that, you all see that, but what we are doing in that environment and you can see it is we are moving away from the self registrations. We are reducing our levels there. And we are focusing our efforts on growing the retail and the fleet business. And year-over-year if I just look at August results that’s fleet and retail in particular combined that’s up by 10 points and that represents about 77% of our business. So we recognized the environment, it is competitive. The pricing environment will likely remain tough for some time to come, but it is the environment and in our planning assumptions we have modest pricing assumptions only. And our focus right now is to work the plan, build on retail, build the quality fleet business, and focus on improving our mix of business, and I talked about Kuga and a significant portion of that business being at the high-end spec and we are seeing more and more of a shift to that, which for us is providing the strength we need to help overcome the pricing environment.

[Unidentified Analyst:]

You?

[Erich Hauser:]

Thank you very much. Erich Hauser, ISI Group. Two questions for you. The first one is the Ford of Europe is presenting a strategy to push the market further up the premium end. Now, we have seen others in Europe trying to do the same and have failed, why would you think is Ford is going to be successful in achieving what others have not been able to achieve? And the second question really relates to your own personal background and other engagements you have got these days, you used to be CFO of the Ford’s Brazilian business and you are currently involved on the Board of Ford’s office down in Turkey and I was just wondering if you could share a few thoughts on what you are seeing in Turkey given that growth is slowing down? Do you think this is just normalizing or is it sort of the sign of something worse to come and how would you reap the Brazilian slowdown that you are experiencing right now?

[Lyle Watters:]

Sure, okay. On Vignale, and I take your point it’s a good one we are not launching a new brand in Europe. What we are doing is really looking at the trends and we are seeing more of the trend towards high-spec vehicles and ownership experience. And what Vignale does is provide us with the opportunity to move more into that segment and capitalize on that opportunity. So it’s not as though you are seeing huge significant investment in trying to launch a new brand in Europe. In terms of the other questions, your first one was on South America. South America has been a – it’s been a difficult environment for the last 12 months as you know. We have faced significant issues, primarily in Venezuela on our ability to mobilize dollars out of the region and we have also been working to find solutions and address some of the trade issues that have existed with Brazil, Brazil and Argentina, Brazil and Mexico, and so on. But the team is really focused on what we call the ONE Ford plan. We have moved some of our production on Fiesta from Mexico into Brazil to help deal with that situation. And we continued to invest under the ONE Ford plan to bring more new and fresher products into that marketplace. So I think its two things. One, the situation over time will improve, but the investments we are making in products under the ONE Ford umbrella will give us a competitive advantage in the very near future. And then on Turkey like many places in Europe, it’s undergoing a very difficult time at the moment. I think the unrest that we are seeing when we look at it is unlikely to have a major impact in Turkey. It’s a major cost base for Europe. So the devaluation in the currency there in my view will provide opportunity for us in Europe. So I see that as a positive for Ford and not a negative.

[Unidentified Analyst:]

Next question please. We move over to that side. Tom, please – no, Arnt go ahead, come on.

[Arndt Ellinghorst:]

It’s Arndt Ellinghorst also ISI Group. Thank you for taking another question from us. I have two questions. One slide six in your presentation, you are showing a quite remarkable recovery of European car sales. I think the projection is by an independent market forecast, is that your internal planning as well and if so, do you have more substance to that rather than just taking third-party numbers. So what is driving your confidence that Europe will increase over the next three to four years by give or take 30% at an annual growth rate 6% to 8%, which is very, very bullish to be honest? The second question is on Opel and we have seen some fairly unusual comments from Opel recently, they are saying that they are going to reduce list prices in Europe quite a bit in order to get away from incentives, is that something you would consider as well or how do you think about that?

[Lyle Watters:]

Okay, thanks for both of those. On the industry, yes of course, we have our own internal forecasts. And our internal forecasts are pretty much aligned with what you saw on Slide 6 with the external. To come to point if you go back to 1997-98 when we were at the peak of almost 18 million units, sometimes we forget how far we have come and how Europe has really contracted in that period from an industry perspective. So when we look forward and we do our own analysis internally and we talk to the external folks, what gives us confidence is well first of all some of the signs that we are seeing in the industry itself, but looking forward a lot of these leading indicators are suggesting that seems the situation in Europe has begun to stabilize and we will see modest growth in the future. And whether we look at PMI, whether we look at the consumer confidence index, whether we are looking at business confidence index in Europe, all of those indicators, those leading indicators are signaling an improvement in the – a modest improvement as we look forward. So I understand your question, I understand the concern, but I don’t believe that an industry of around 15 million units by middle of the decade is a non-realistic planning assumption. And as to your other question, I mean I really kind of stand here today and comment on the strategy of some of our competitors, but what I can do is and I absolutely believe this is the be single minded and focused on the strategy that we are taking. And I talked earlier I have mentioned it multiple times, the focus on retail so important to brand, so important to profitability, and then within that continue with the investment in new product bring that new product in, and work the opportunities on the series mix that we talked about. So it’s always dangerous when you get dragged on the road that you’ve just described, but we will as we obviously will continue to monitor the external environment, we will take the necessary actions, but first and foremost, we will stick to the plan and the strategy that is I believe working well for us in Europe.

[Unidentified Analyst:]

Next question. Austin, please.

[Austin Earl:]

Hi, it’s Austin Earl from Marshall Wace. I have three questions. I could perhaps take them one by one. The first was just about pricing, I understood what you are saying about the channels that you are using and the pricing is still tough, but is it possible for you to say whether it’s tougher or better than it was in the first quarter?

[Lyle Watters:]

I don’t see the pricing environment in Europe being any tougher today than it was in the first quarter of the year. I think it’s a pretty straightforward question, straightforward answer.

[Austin Earl:]

The second is also just alluding to prior question about the volumes in Europe returning to about 16 million, and would that given the capacity reductions and did I hear correctly that you said 18% that you are taking out. So despite 2016 does that sort of (inaudible) solve the European problem of overcapacity given the volume recovery and capacity reductions?

[Lyle Watters:]

Let me just take that in two parts. Firstly, I don’t believe the overcapacity in Europe will be solved by 2016, because the capacity in Europe in total is well in excess of 16 million units. However, from a Ford perspective and with the actions we have taken and we are under 70% utilization today by middle of the decade, we will be around the mid-80s in terms of capacity utilization and that is with a modest as I would describe it in modest improvement in industry through that period and the 16 million unit industry you quoted at the end of the plan period by middle of the decade it’s at 15 million is what the outlook is on industry. So I believe you will continue to see overcapacity in Europe for some time to come. Having said that, the actions we have taken in the UK, in Belgium go a long way for Ford of Europe and a major enabler for us to get to profitability by mid decade.

[Austin Earl:]

Last question was just on the 8% to 9% margin target, what does that mean in terms of return on capital employed?

[Lyle Watters:]

Well, the 8% to 9% margin capital, are you talking about Europe or the global?

[Austin Earl:]

Which of the 8% to 9% was referred as global?

[Lyle Watters:]

Yes. Within that the European just answered a couple of parts, we have the global number within the picture for Europe, which I can talk to you on, we are looking at an operating margin of around 6% to 8% in a similar timeframe through the end of the plan period.

[Austin Earl:]

And what’s the return on capital does that imply?

[Lyle Watters:]

Yes. I won’t give you a specific number, but it is in excess of our cost of capital.

[Unidentified Analyst:]

You stay over there.

[Horst Schneider:]

Hello. Horst Schneider from HSBC. I have got two questions please. First a follow up on your European volume outlook for 2014, it strikes me that you are little bit more optimistic, I think carmakers like Volkswagen and Renault, for example, which say that addressable cost is too optimistic for 2014, and I want to know besides the fact that the leading indicators are picking up, what do you see kind of in the order books and what is the level of visibility that you have? My impression was that market wise Europe was rather weaker in August, so I would like to know is that going to improve and could you maybe provide a more specific outlook also for the market for the fourth quarter this year? And then secondly it strikes me that you point out your market share gains and I want to know if you got any specific market share target to the middle of decades and how important is for your market share, so would you rather than cutback on your market share targets rather than sacrificing the profitability maybe?

[Lyle Watters:]

We’ll just take that last one first, as you talk about share, I am not going to provide market share targets for the middle of the decade, but I think it’s one metric, it’s one important one, but it’s not the only one, what’s more important I believe is that we look at the quality of share within that. And through a combination of new product introductions both in passenger car and in commercial and a focus – a real focus on retail share and a commitment to drive the series mix within that, I think all of those elements are important and really drive the bottom line of the business. So I won’t provide today an outlook for the middle of the decade on share in total for Europe. I think your other question was on 2014, you can see and I mentioned earlier it was on Slide 6 in fact that by middle of the decade we are looking at an industry of 15 million units. You can look at that glide path walking from where we are today this year we expect it to be at the upper end of the guidance we gave, which is 13.5 million and that path is pretty linear on the walk to 2015. And again, August it was a – it’s a smaller month in terms of volume. In Europe, we see September being much higher because of UK registrations, so I wouldn’t and we are not reading too much into one small month of industry in August, but likewise I don’t believe we are being overly optimistic or aggressive on our industry assumption for 2014.

[Unidentified Analyst:]

I hate to be the one who is calling off the discussion when it just get started the Q&A session going. Lyle, you talk about staying focused and unfortunately that is also what we have to do. So thank you very much for coming to Frankfurt to presenting your plan for Europe, much appreciated Larry and George, thanks for coming.

[Lyle Watters:]

My pleasure, thank you.