Highlights From Ford's Sales Conference Call: Inventories Not As Bad As They Seem?

Includes: AN, F
by: Jerry Marks

Yesterday Ford (NYSE:F) reported nearly an 8% increase in year-over-year sales, with retail sales up 5% and fleet up 15%. George Pipas, Ford’s head of sales analysis acknowledged right off the bat that the higher sales (from a year ago) was versus an easy comp (retail was down something like 30% last year at this time).

Let me address a few big issues that came up on the conference call. First, with respect to fleet sales. This month they benefited form the last of the Taurus volumes. But, Mr. Pipas said that with the Taurus coming out of sales to fleet customers (something like 275,000 units,) it may be until 2008 when Ford reports higher fleet sales. Jonathan Steinmetz of Morgan Stanley raised a good question on the conference call, which was if the domestic automakers (like Ford) are all walking away from this less profitable business, what do the rental car companies do? Two possibilities were raised. One possibility is that the car rental companies find other sources (i.e. foreign automakers maybe willing to sell more into the rental market.) The other possibility is that they lower their turn of vehicles, likely putting less vehicles through auction, which I think could help act as a stabilizing factor in used vehicle pricing.

But a number of questions/issues were also raised about production, incentives and inventories. Mr. Pipas pointed out that about half of the production cuts alluded to in a certain article (Automotive News suggesting Ford production down 12% in first half of 2007,) related to the company no longer producing Ford Taurus’ for the rental fleet. He also said they have been dialing back their incentives a bit since they ran the “clearance” sale around Labor day. Incidentally, this put Ford dealers with about 76% new 07 model year vehicles, and only 24% old model year vehicles. Usually, Mr. Pipas pointed out, it is great if you have 2/3rds of your inventory being new model year vehicles by the end of October. And to put this in some perspective. On the Group 1 conference call earlier this week, they indicated their Chrysler lots consisted of something like 85% to 87% old model inventory. So Ford’s dealers look to be in a little better shape as we turn the corner into the Winter/Spring selling season.

And then there is this inventory issue. Now last week I talked about how Mike Jackson criticized the way auto manufacturers calculated days supply (read Bill Cara's piece on this very issue). Now one reader pointed out that this was a nice way to focus everyone’s attention on something other than AutoNation (NYSE:AN) underperforming its peers. I still think AutoNation is making a number of investments (such as the shared services center) that will allow them to markedly lower their cost structure even further. But a lot remains to be seen as the company hires a new CFO.

In any case, when asked about Mr. Jackson’s comments at the Gabelli conference, John Zimmerman, Director of Investor relations said that the reason Mr. Jackson became so vocal on the issue was that if people don’t know there is a problem, then how can they try to fix it. I have to concur with Mr. Zimmerman. Far too often I have listened to automakers (particularly GM) just shrug off the inventory situation, as if it was just a minor inconvenience. I think inventory levels are the most telling sign of a manufacturers competitiveness both in their distribution base competitiveness, but also as a sign of how much their products are really in demand on the market place.

Nonetheless, I have to give Ford’s head of sales analysis (George Pipas) a lot of credit for dealing directly with the issue. First, as you may notice, Ford does not use days supply of inventory, an issue I was critical of even when I commented about Mr. Jackson’s comments last week. Days’ supply of inventory, while most of us from time to time will use this metric (because it is easy to use,) is a poor measurement instrument on many different levels. Importantly, as Mr. Pipas pointed out, how many selling days are there in a month? Is your store open Sundays? What holidays? How can we as an industry exclude certain days as days as not being “selling days” even though a store may very well be open (like Labor Day!) This is why I have always encouraged investors and industry participants to look at the total units in inventory versus where they were at a year ago. And I have to give GM and Ford’s industry gurus credit for similarly focusing analyst attention on this number (versus days’ supply.)

But something I wasn’t aware of is how the total inventory figures are computed. It’s funny because over the years I have had several conversations with Mr. Pipas about inventory levels, and yet I never bothered to ask him a simple question like what is included in this figure? Well, during the Ford conference call, Mr. Pipas said the figures they provide are gross inventory levels. This means the total units in stock (on the dealer showrooms,) and the vehicles “in transit.” Now some of those vehicles may be in transit to car rental companies, others on their way to the dealership. He said that the “in transit” component of their inventory figures represents roughly 2 weeks of production.

In other words, the actual units on dealer lots are ~100,000 units than the 622,000 units they reported at the end of October because those units are still “in transit.” Now I have a problem that it takes Ford 2 weeks to get a vehicle from the production line to the dealer (that whole pull versus push approach I keep emphasizing.) But it does debunk the idea that if we divide a retail sales figure (that comes from registration data which I also said I had problems with using,) by a “retail” inventory figure, we get a “true” dealer lot inventory level. I need to find out how the other automakers report their inventory (if done on a similar gross basis.) However, after hearing Mr. Pipas’ comments, it is pretty clear that the claim that Ford’s dealers are sitting on 105 days supply really doesn’t hold because more than 15% of those vehicles are still in transit.

Ultimately, we need to stop thinking about inventories in a days supply or even gross basis. True, this will take decades. But I continue to believe the industry is shifting toward having more base vehicles being delivered to a showroom on an almost “real time” basis, and then having it spend a few days in the dealers’ repair facility (or maybe even body shop) while they customize it to the customers’ feature preferences. But first, Ford needs to figure out how to get product to the dealership faster than 2 weeks.

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