Ford Motor Co

NYSE:F

Earnings Call Transcript 2019-Q3

[Operator]

Good morning, ladies and gentlemen. My name is Lori, and I will be your conference operator today. I would like to welcome you to the Ford Motor Company Third Quarter 2019 U.S. Sales Conference Call.

At this time, I would like to turn the call over to Mark LaNeve, Ford, Vice President U.S.

Marketing, Sales and Service.

[Mark LaNeve, VP, U.S. Marketing, Sales and Service]

Thank you, Lori and good morning everyone and welcome to Ford’s third quarter 2019 U.S. sales call. It's good to reconnect with everyone and recap the third quarter and review our progress year-to-date. And talk about our position as we move closer to closing out the year and into 2020.

I'd like to begin by talking a little bit about the overall industry, which will take us into a review of Ford sales performance for the third quarter. Our transition progress as we transform our lineup and how we're positioned as we finish out the year.

Hard to believe we're already into October. It's been a really interesting year. And I think my main takeaway is that the industry continues to be -- actually quite solid, despite lots of issues flaring up in the news almost daily, that you would think would cause volatility or downside pressure, but we just haven't seen it. I’m convinced with the data that I've seen that the solid industry is being supported by the consumer who remains very confident. Unemployment is at historic lows, and we have real wage growth.

It has been my experience and despite all the noise when people have jobs, and they feel secure in those jobs and confident about the future then they're buying vehicles. Also, gas prices and interest rates remain at historically low levels. All of these tailwinds are combining to support our industry to 17 million plus level for what is now the fifth straight year. In fact, through September we believe the industry is running at a 17.5 million level, including medium and heavy trucks.

Let me make a special note though, and this is a quarterly call, but I do want to make a comment on just a month of September. I saw quite a few negative headlines yesterday reporting sales sharply down for the industry. But it's important to remember that in September of last year 2018, it was a five-weekend month which makes a big difference. And included Labor Day, which is a major selling holiday. September of this year 2019 was four weekends with no Labor Day, as calendar rise into August.

Both factors five weekend month, four weekend month, Labor Day, no Labor Day, both of them make a huge difference. And in fact, when you grow up the two months together August and September, which I believe you have to do, the industry was essentially flat year-over-year. In evaluating retail performance for the industry, we estimate that year-to-date sales were down about 3%, but the third quarter may very well post the positive number, in fact we're fairly confident it's going to be up 0.5% to 1% on a retail basis for Q3.

Obviously a Q3 gain will be a very positive sign for the industry. This comes against what we continue to see as discipline on the incentive front. Fleet sales continue to be strong this year with fleet volumes up about 5%. The rate of growth may have slowed a bit in the third quarter, but it's estimated to be unchanged in Q3 from a year ago.

While fleet often gets confused with just daily rentals, it’s important to remember that daily rental is only one component of fleet sales. Commercial vehicles are not only a large profitable component of the overall fleet industry, they're growing this year we see that growth continuing out into the future with Ford being the best-selling commercial brand in the country, we will benefit from this activity. The growth in the commercial space provides big opportunities for Ford, and I'll come back to that in a minute.

In the third quarter, Ford and Lincoln sales were up 4.9% or 29,000 units compared to last year. Actually, it's a number that we're okay with as we began describing to you late last year, and as recently as the past second quarter that this year was really a transition year as we really dramatically make that move out of cars it’s a year when it really accelerates and into an all new lineup of SUVs. This represents a strategic move by Ford to better serve our customers and their needs as they continue to favor the improved functionality and efficiency of today's trucks and SUVs.

The year-over-year declines in the third quarter came from the planned phased out of Focus, C-Max and Taurus and the large changeover associated with our all-new Explorer. One way to evaluate our sales performance during the transition is to exclude Focus C-Max and Taurus volumes. Combined the sales of these three vehicles represented 34,000 sales in Q3 of last year, and essentially zero this year, excluding these three vehicles our sales would be up 2% instead of down 4.9% relative to year ago.

Taking a deeper look at our overall SUV performance, outside of the planned changeover in Explorer, our current lineup of SUV saw a very strong quarter. Our entry level SUV EcoSport posted an 11% gain for the quarter versus a year ago. Expedition sales continue to be high up 48% in Q3. Year-to-date Expedition sales were 53% with almost half of the sales coming from a much younger mind demographic under 44 years old.

Sales in that demographic are up more than 70% for Expedition this year. Sales of the Ford Edge were up 19%, with just more than 36,000 units sold for the quarter. A good way to illustrate our continued strength in our SUV lineup is to analyze our combined Expedition, EcoSport and Edge sales. These vehicles all part of our newer SUV portfolio are running at full speed and combined sold 71,517 units in Q3, up 23%, over a year ago level.

This growth has been accelerating and compares favorably to a 14% increase in Q2 of these three models, represents really strong performance of our SUV lineup and momentum that we will build on as we move through the industry's freshest line of SUVs at year-end and into 2020.

Let me comment on Escape and Explorer two vehicles that are in middle of very important launches. It's important to remember there are two kinds of launches in our industry. The first and most common is when you make interior and exterior design changes, improve technology, and perhaps tweak the powertrain lineup, but do so on in existing platform.

These are far and away the most common in our industry and easier to execute as we can build prototypes and the new model on the same assembly system as the current model. In many cases, we do it at the exact same time. This is the launch that we have this year with Escape. We begin shipping and selling the all-new 2020 Escape last week and are really looking forward to this great new model that will compete in the heart of the biggest segment in the industry.

The other kind of launches when you completely shift to a new platform, with this kind of launch, you basically have to build an all new plant or pull out all of your existing equipment and install an all-new assembly center within the walls of the existing plant. As you remember this is what we were able to execute with all new aluminum alloy F-150 at two assembly centers back in 2015. It is this kind of ambitious launch that we've had this year with Explorer as we shift to an all new rear drive platform within the walls of our Chicago assembly center.

We knew that this kind of launch would mean downtime just as it did with F-150. We felt it was the right choice as we build our winning portfolio of SUVs and achieve the kind of differentiation to the competition we want and deliver the kind of world class Explorer that we know our customers will really love.

The good news is we're far along in the launch and now building sufficient inventory of all trim [ph] series and look forward to expanding our sales in Q4 and having a very strong 2020. Of the initial sales that we have had on the all-new 2020 Explore, we're seeing a very high take rate of the performance ST model in the high end Platinum and that's also a good sign. Bottom line with new Explore and new Escape now flowing into dealers, we're looking forward to when we have a much stronger performance of these two critical high volume models, and in effect transformer SUV lineup to the youngest in the industry.

Moving on to trucks, our truck business had another great quarter with sales accelerating in Q3. Our overall truck sales were up 9% compared to 7% growth in the second quarter, and a 4% growth rate in Q1, with just more than 300,000 total trucks and vans sold that represents our best third quarter performance since 2005.

For the year, through September, we have sold more than 900,000 trucks, putting us on pace to sell more than 1.2 million trucks this year, growing our business and further solidifying our leadership position.

Getting a little deeper into some of the truck numbers, total pickup sales including F-Series and Ranger had their best third quarter performance in more than a decade, with just over 240,000 pickups sold. Through September, F-Series continue to expand this leadership position growing our lead in the quarter from 148,000 trucks at the end of Q2 to 200,000 trucks at the end of September.

We've accomplished this with higher transaction prices and lower incentive spending, in fact one key data point is that F-150 continues to transact at prices over $3,000 higher than the all new RAM and Silverado. While F-Series expands its leadership position, Ranger grew its third quarter on sales of 26,211 pickups compared to 20,880 in Q2. Not to be left out, Ford van sales set an new all-time record in Q3, up 21% with sales of 65,288 vans.

We saw exceptional growth in sales of the world's best-selling cargo van the Transit, Transit sales increased 25% to 43,876. Sales of our smaller Transit Connect turn in sales of 11,537, a solid 49% gain over last year. Through September our overall van business is up 9% on sales of 180,599 vans. To be a leader in the vans segment and achieve this kind of growth is unprecedented.

It connects back to what I mentioned in some of our previous calls about the growing activity we are seeing in e-commerce and the need for delivery vehicles. When you have van leadership, changing market conditions can and do impact the business. In this case, our vans have become a major beneficiary of the growth in e-commerce and the increased need for package delivery vehicles of all kinds.

Moving on to Lincoln, we continue to push Ford on the momentum we've experienced all year along, the result of our strategy to focus on the ever expanding premium segment, SUV segment. Overall Lincoln sales in third quarter up 12%, with continued new product momentum, Lincoln SUV sales are up 19% on sales of more than 21,000 SUVs. This is Lincoln's best third quarter SUV sales performance since 2003, and we've only just begun to launch some of our long anticipated and the highly reviewed products such as Aviator and Corsair.

We are a partial quarter Aviator sales, which added about 1,899 more vehicles to the Lincoln line up in the quarter as, of course, that's an all new incremental model. We recently launched an all-new advertising campaign with Aviator with Matthew McConaughey, you've probably seen the television spots. In the first day we had a 270% increase in our gallery visits to Lincoln website. And the McConaughey spot delivered more than 22 million views on YouTube.

At the very end of the quarter last month we began sales of our first Corsair SUVs, this all new premium, our compact SUV that is replacing the MKC. We really love the momentum we're seeing at Lincoln particularly as we now are at the take off stage with our big hitters with both Aviator and Corsair coming to market. This will provide an extra lift for Lincoln in the fourth quarter and for all of 2020. It's certainly an exciting time for our Lincoln luxury brand.

With that, I'd like to turn the call back to Lorie to start taking some calls from the analyst community. Thank you all.

[Operator]

[Operator Instructions] Our first question comes from the line of John Murphy of Bank of America.

[John Murphy, Bank of America Merrill Lynch]

Good morning, Mark. Thanks for all the detail. Just a first question on the lease versus retail dynamic -- I'm sorry, the fleet versus retail dynamics. It seems like fleet really kind of took off in the spring of this year once people going to get sort of accustom to sort of the benefit of first year expensing on vehicles with the gross vehicle weight of 6,000 pounds or higher.

I'm just curious, how much you're seeing that benefit the fleet side of the house? And also is there some benefit in what you often affectionately referred to as fleetail [ph] where you -- I mean, you get great fleet sales or commercial vehicle sales that are baked into retail. I’m just trying to understand the benefit of this change in taxes, and then also how sustainable you think it will be?

[Mark LaNeve, VP, U.S. Marketing, Sales and Service]

John, thanks for the question. We didn't see any noticeable difference from the tax change Q2 to Q3. Our commercial business was up in Q2, is -- excuse me, in Q3 as it was in Q2. On a pure timing basis our rental business was down in Q3 and we ran stronger on rental. As we indicate, we run about 10% of total sales and it timed out that we'd have a stronger half one than half two.

But our commercial business was strong again in Q3 and by and large it was way down on -- the same reason retail was way down on Explorer, commercial was down on Explorer. So you factor that number up we'd have been up significantly in commercial and I didn't see any difference from the tax changes that you're indicating affect Q3 relatively to Q2.

[John Murphy, Bank of America Merrill Lynch]

Apologize, Mark, the benefit would have started in Q2 just on sort of the perception. I'm just curious, how much of a benefit you think this has had sort of year-to-date? And is this the kind of thing that's sustainable because it's a lot better or cheaper I should say for small businesses and fleets to buy some of your vehicles. Just curious if you see there's any general impact.

[Mark LaNeve, VP, U.S. Marketing, Sales and Service]

Yes, I think it's helpful, but I think we're mainly benefiting on the van business and we believe that main benefit is e-commerce and we've got a number of things working on some huge contracts in addition to the dealer fleetail being up sharply too, because of -- it's more than just Amazon that’s delivering products, which is those companies, large and small all over America.

So I think the tax is helpful, it's a tailwind, but I don't think it's a key driver I think it’s economic activity in the macro environment around everyday some that you used to go to store to buy getting shipped to it, and we're a major beneficiary with van leadership position.

[John Murphy, Bank of America Merrill Lynch]

And that fleetail business inside of retail, I mean, any sort of guesstimate as to what portion that is of retail, I know it's tough to glean is it 5 points, 10 points is it something like that, or is it something more or less?

[Mark LaNeve, VP, U.S. Marketing, Sales and Service]

We believe right around give or take a couple points 10%.

[John Murphy, Bank of America Merrill Lynch]

Got it. Okay. And then just lastly, I mean, there's a lot of concern around loan extension terms or extension of loan terms, but it doesn't seem Ford Motor credit is really playing so much in that game. Just curious, your view on what's going on there and how Ford Motor credit is approaching you for Ford?

[Mark LaNeve, VP, U.S. Marketing, Sales and Service]

We haven't really seen it with credit in terms of the things like the lookouts that you would look for our lease penetration is actually down in the quarter to below 20%, 19%. We've been very consistent in terms of the paper we’re writing at 84 months and below and our delinquencies and -- are really consistent and we haven't seen any spike at all. So from a standpoint of the credit worthiness and anything that you think would be an indicator of problems we just haven't seen, John, looks really good from the credit side.

[John Murphy, Bank of America Merrill Lynch]

Got it. Thank you very much, Mark.

[Mark LaNeve, VP, U.S. Marketing, Sales and Service]

Thank you, sir.

[Operator]

Our next question comes from the line of Dan Levy of Credit Suisse.

[Dan Levy, Credit Suisse]

Hi, good morning. And thanks for taking the questions. First, just wanted to ask about -- just the sell down or the cadence of sales and I think -- what you're pointing out that yes your sales are down, but part of this is in part planned, your Sedan sell down and just working through the old Explorer as you go to the new vehicle. So just wondering A, when should we expect the Sedan work through to be mostly complete? And as it relates to Explorer are we interpreting you correctly that now that you're mostly through your launch issue that we should now mostly be done with this large series of negative year-over-year sales for SUVs especially Explorer and Escape?

[Mark LaNeve, VP, U.S. Marketing, Sales and Service]

On explore, correct. We were very, very low inventory because we sold down the 19s. In the 20s, we just didn't have adequate inventory really to get what I would call more normalized level of Explorer volume in Q3. But we do have adequate inventory to adequately serve the market in Q4.

Escape will be doing both in Q4 we will be selling down in 19s and beginning to sell the 20s, which actually have started. So that is a much more normal launch where we'll have kind of a -- as the sell down to the 19s accelerates, higher percentage points will come in, and by the end of the quarter we will be selling -- the majority will be 2020 Escapes. But for the fourth quarter it's all 2020 Explorers. We're basically sold out in '19.

[Dan Levy, Credit Suisse]

Okay. So the declines, the year-on-year declines we should be mostly through those on the SUVs if that's correct?

[Mark LaNeve, VP, U.S. Marketing, Sales and Service]

Yes, sir.

[Dan Levy, Credit Suisse]

And then the sedans, at what point are we mostly through the sedan wind down?

[Mark LaNeve, VP, U.S. Marketing, Sales and Service]

By the end of 2020, we're through. We'll still be selling some level fusions and Fiestas into 2020, but it's winding down. And of course, this year we sold -- we really got impacted by Focus, there haven’t been any Focus sales in 2019, and Taurus and C-Max as well. Those are ones that really impacted us this year. It will be Fiesta and Fusion next year. But we'll unlike this year, we’ll have all-new Explorer, we’ll have all-new Escape, full year of Ranger in 2020, and then several incremental products that we've talked about new nameplates hitting the market. So it looks a lot different than it did in 2019.

[Dan Levy, Credit Suisse]

Thank you. And then just wanted to follow up and just ask a couple of questions on F-Series. And I see, for the quarter, F-Series down 6%. A, if you could just give some color and context on that decline. Is that more just cannibalization from Ranger? Also, I look at your incentive spend and I see it has picked up in F-Series looking at the pin data that it's been north of $5,000 incentive per unit for each of the past couple of months. Just some color on the sort of higher than normal incentive spend. And then just lastly, given what's happening to one of your competitors and potential issues they may have on inventory, is that something you would like to capitalize on?

[Mark LaNeve, VP, U.S. Marketing, Sales and Service]

Yes, to answer, Dan, the first part of it. With the launch of Ranger, we knew there would be some effect on F-Series. It's actually been right in line to slightly better than we've planned for. Overall pickup sales are up 6%. F-Series, yes, incentive spend has crept up, but it's still below our major competition, which are brand new vehicles and our transaction pricing because of our rich mix is $3,000 or more higher than the new vehicles from our two primary competitors.

So, we're not -- we manage F-Series for the long-term. So we weren't going to spend to chase some shared number. And we're fully utilizing all of our capacity, which is obviously critically important to health of our business.

So we feel good about where we are with F-Series combining with the impact Ranger has had in the market. We're transacting over $47,000, which is really good number. And we're going to remain disciplined and manage for the long-term both the health of the F-Series business, our residual values and the kind of trading values that our customers expect.

[Dan Levy, Credit Suisse]

Great. And then just competitively given the strike, is that something that you would potentially look to capitalize on or…

[Mark LaNeve, VP, U.S. Marketing, Sales and Service]

Well, we haven't seen any effect in GM's business. The overall pick up market had a really good month in September. GM and RAM, we had a good month, GM and Ram had good months. So we haven't seen any impact yet they had pretty good inventories heading into it. Now for the last -- the whole month of October it’d be a different story but, I'm not -- I can't handicap that.

So, we're going to be competitive, provide really good value to our customers have good deals for dealers to put together and keep an eye on what's going on with -- obviously with the GM strike.

[Dan Levy, Credit Suisse]

Great, thank you very much.

[Operator]

[Operator Instructions] Thank you. This concludes the Ford Motor Company third quarter 2019 U.S. sales conference call. Thank you for your participation. You may now disconnect.