Ford Conference Call Notes
Board: Ford Motor Co.
My unedited, off the cuff thoughts on the call:
On to the earnings. What a mixed bag, huh? Very good news in NA, with a few notable exceptions. Margins in NA were strong. But, Ford is now openly admitting they are capacity constrained and that they mistimed the NA market improvement. Also, April sounds like it will be bad. I read a blurb that Ford's April numbers will be down, and I believe it was attributed to AutoNation (not sure). Anyway, the CC had this little zinger: April was tough, as Ford probably took too much incentive back to maintain pricing. It sounds like they can't get capacity on line fast enough, so they've accepted a share loss, and focused on improving net pricing by dropping incentives. I keep telling myself that's a good thing. And it is. But, it could mean some loss of mojo short term as the market focuses on monthly volume improvement by GM, Chrysler and of course, Toyota.
The other not so hot news, is that 2H will be better than the 1H. Why's that not so hot? Analysts spent a lot of time chewing on why... They really, really, really wanted to conclude that 2Q will be soft. And while Ford was not willing to give quarterly guidance, they didn't do a ton to dissuade that logic. The unusual cyclicality is due to a couple of factors. First, they have launches targeted to the second half. But costs associated with these launches will begin in Q2. So, product launch costs (which were low this Q; a bit of the reason for the modest upside surprise) will be larger in Q2, with no corresponding increase in volume for the new models not yet in dealer inventory. In addition, Ford is bring more capacity on line as they try to play catch up. That means elevated costs in Q2 as they try to build inventory for the 2H. That guidance may mean flat to downward pressure on share price, in anticipation of a so-so to bad comp on Q2. (Pure speculation on my part...)
Analysts also pressed to a lesser extent on why Ford was capacity constrained. Why'd the miss by so much in their capacity build? Ford was unwilling to agree that they missed by the market move by a lot. There was acknowledgment however, that they were behind the demand curve. One reason was that they didn't think that sales would turn as quickly as they did. The second reason though, was the product cycle cadence and its 2H schedule. They were caught up in building inventory as well as support of the new model launches. It sounds like there was some concern with respect to having too many irons in the fire, as well as pushing structural costs up too quickly in NA. Thinking in that context, it appears rational. From a retrospective perspective, driving costs in NA to maintain share, while European ops were not profitable would have been risky. While not said in so many words, my interpretation is that they chose to maximize margins in NA (over 11%; extremely strong) and give share to offset a horrible European market. It also sounds like this behavior will continue. Asked if they had capacity to put in, or if they had to reopen some plants and/or hire. Their response was that they had room by moving to 3 shifts and also by adding the ex-Mazda JV capacity into production.
There were questions on the AsiaPac drop off. They were believed to be temporary. A primary issue cited was the slow Ranger roll out. (Is this seeming too much of a pattern regarding slow ramp of new models? They've accelerated their product development time if I recall their PR correctly; are they getting a little ahead of themselves in bringing new product to production before all the kinks are worked out? I have no idea, and wold love feedback from the more knowledgeable insiders.)
Questioned on the explosion/fire in a German supplier's resin plant and its effect on supply of resin: immaterial. Apparently, Ford has been evaluating alternative materials in the first place and will shift utilization. Some of those alternatives are already in stock and being moved to production. They later reiterated that there would be no impact at all on production from the accident.
SA ops are unclear, but should improve. Pricing pressure is increasing as more manufacturers are targeting the market. Complicating visibility in the area is a brewing cold war on trade between Brazil and Mexico. Brazil and Mexico are getting upset about their trade balance, which could impact Mexican imports to Brazil. Ford imports Fiesta and Focus from Mexico to Brazil. Guidance was improvement, especially with a strong cadence of fresh product, highlighted by EcoSport and Ranger. But, visibility is poor, beyond a strong feeling of continued profitability.
EU is bad... Bad, bad. They've hunkered down similar to what they did here. They're repositioning sales into more profitable channels, focusing on retail at the expense of daily rental fleet. They're trying to avoid deterioration of pricing, which they're starting to see from other manufacturers in the EU. Worse than here is that the downturn is hitting more than just new vehicle sales; even service and parts sales are off. That may reflect how Europeans use their vehicles differently. Customers have more options to defer purchase or even repair, given less use in general, greater access to public transportation, etc. Who knows? But, it actually looks more challenging in a market that isn't as profitable even when it's going well.