General Mills: Squeezing Double-Digit Returns From The Stable Company (NYSE:GIS)


The coronavirus crisis is continuing to deepen, urging us to move our investments towards defensive sectors. The second wave of the virus is accelerating in the world, and another lockdown is probably inevitable. In the USA, daily new cases are surpassing April records, while South America is suffering heavily from the healthcare crisis. Europe is opening its borders for tourists from certain countries, which might cause the virus to spread in Europe again. Thus, we will analyze pandemic winner stock – General Mills (GIS) – to see how we can squeeze returns from the stock.

Data by YCharts

Though the company underperformed the S&P 500 (SPY) during the last decade, it was considerably outperforming the market averages during the March-May period of this year. The stock is positioned quite well, as it outperformed even the coronavirus winner Walmart (WMT) during the lockdown period.

General Mills

(Source: Food Business News)

Business

General Mills is benefiting considerably due to coronavirus crisis, as its at-home products represent about 85% of total revenues. The lockdown period contributed to the company’s sales, as in Q4 2020, organic growth was about 16%. The biggest driver of this growth was the North America Retail sector, which amounted to 59% of the company’s total sales and recorded 28% organic growth. The US Meals & Baking field recorded a whopping sales increase of 68%. At the same time, cereal demand increased 26% due to COVID-19-driven at-home food demand. So, the lockdowns created tremendous tailwinds for the company, and they can cause the top line to increase considerably.

General Mills Sales Segments

(Source: 10-K)

Even if lockdowns ease, the coronavirus cannot disappear that quickly, which means that lots of people will continue to stay at home voluntarily and lessen their restaurant visits. Many employers let their employees to work from home even after the mandatory lockdowns were eased, which can create another tailwind for General Mills. Thus, we can expect that the 2020-2021 period might be quite beneficial for the company, as it can eventually increase its growth rate, which was rather flat in the last 10-year period (1.4% revenue CAGR).

General Mills Revenue

(Source: Author’s Spreadsheet)

In the long run, General Mills cannot expect any dramatic changes in its revenues, as it is operating in mature industries with too high competition. The 2010-2018 period was too stagnant for the company, as the top line increased only at 0.9% CAGR. The company increased growth as it had entered a new field – the pet food industry. General Mills paid $8 billion for Blue Buffalo, which was experiencing double-digit growth after 2018. According to a study published by Allied Market Research, the industry would grow at 4.1% CAGR until 2022. The pet product sales are rapidly gaining share in the company’s total sales, as in FY 2020 the, industry represented 13% of total sales, while 2 years ago, it had only 8% share.

Dividends

General Mills has paid dividends in the last 120 years. Forward yield is 3.18%, which is considerably higher than the S&P 500 average yield of 2%. During the recent 20-year period, management was able to either increase the dividends or keep them stable. Even during the Great Recession, management continued to increase dividends. The only exception was in 2000, when the dividend decreased from $0.55 to $0.4125.

General Mills Dividends

(Source: Seeking Alpha)

The chart below indicates that the current dividend is quite safe. In FY 2020, the company paid only 32.5% of its operating cash flows in dividends and only 37.2% of its free cash flows (OCF minus CapEx).

General Mills Dividend Payout Ratios

(Source: Author’s Spreadsheet)

The real problem for dividends come from the debt burden, as in upcoming years, General Mills must service rather large amounts of debt. In the 2021-2022 period, the company must service $3.338 billion of debt. On an annual basis, it is about $1.667 billion of debt per year, which is about 73% of 2019 free cash flows and 51% of 2020 free cash flows. Nevertheless, the company might reissue a part of the debt burden in lower rates, as in recent months, the interest rates are declining rapidly due to huge quantitative easing programs.

General Mills Debt

(Source: 10-K)

Thus, we expect that the current dividend is safe, and company management will probably keep the dividends stable during these turbulent periods.

Challenges

General Mills generates 26% of its revenues outside the USA, which might become a headache for the investors. The coronavirus crisis might cause supply chain disruptions as countries might close their borders. Many products are produced in single locations, which further increases difficulties concerning supply chain operations during the crisis.

At the same time, the company might face uncertainties concerning exchange rate fluctuations. During the recessionary periods, the central banks are injecting horrendous amounts of “printed money” into circulation, which causes large fluctuations in the forex market. Now we witness new QE programs across the globe, which will probably cause unpredictable movements in the exchange rate market.

Valuation

Currently, the stock is trading lower compared to its 5-year median multiples. The P/E ratio is 15% less than the 5-year median, and the price-to-CFO ratio is 16% less than the 5-year median. The discount reflects the current uncertain market environment, as the coronavirus might cause lots of unpredicted headaches for the company. However, we don’t see here too much room for the stock to go higher, as market uncertainties will not disappear in upcoming quarters.

ChartData by YCharts

How to invest

General Mills is operating in a mature industry. The business is well-diversified and will probably continue to grow slowly. The coronavirus crisis might bring tailwinds for the company, which promises downside protection in the upcoming quarters. As a result, we will explore certain income-producing option strategies to benefit from the stock’s stability.

One of the simplest strategies – the covered call strategy – lets us possess the stock to enjoy the dividends and, at the same time, write a call option to also collect the premium. The January 15, 2021, call at $62.5 strike is trading at $3.4.

If you buy the stock at the current price and write the mentioned call, you will receive a 5.5% return from premium in just 5.5 months. On an annualized basis, the return is 12.39%. At the same time, investors might receive a 3.18% dividend, which will bring you a 15% return if the stock price remains flat or goes higher. Our price appreciation opportunity is capped at $62.5, which is 1.6% higher than the current price. The return is higher compared to the stock’s 5-year period annual appreciation of 7.3% and the average 3.5% of the dividend.

Another strategy, which we call cash-secured put, will let us sell a put to raise the premium. We will suggest selling January 15, 2021 put at a strike price of $60, which is trading at $4.3. If the stock goes higher, then you will get an opportunity to collect a 7.1% return from premium (16% annualized). If it goes down, then you will receive an opportunity to buy the stock at $55.7 ($60 strike minus $4.3 premium), which is 9.3% lower than the current price. This is a very beneficial approach, as the two outcomes are more beneficial than simply buying the stock.

Another great strategy also nicely fits the current situation. Selling both call and put options expiring at January 15, 2021 at a strike price of $60 gives us a premium of $9.1. At the same time, we can buy the stock at the current price. The strategy gives us a 14.8% premium for the 5.5 months (35.8% annualized) and gives an opportunity to collect dividends. If the price stays flat or goes higher, our return will constitute 32.5% on an annualized basis (29% net premium plus dividend yield). If the stock goes one standard deviation lower to $49.5, then our loss will be only about $12.9.

Conclusion

Our analysis indicates that the company is safely positioned in its industry, its dividends are quite safe, and we do not anticipate any dramatic dividend cuts in the upcoming years. We see great downside protection and little room for the stock to go higher. Thus, I have suggested certain option strategies that can generate double-digit returns from the current stock condition.

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.





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Wirecard North America seeks buyer, distances itself from German company By Reuters


© Reuters. FILE PHOTO: A man walks past the Wirecard booth at the computer games fair Gamescom in Cologne, Germany

(Reuters) – Wirecard North America Inc, a unit of German payments company Wirecard AG (DE:), on Monday said it has put itself up for sale, days after the troubled parent firm filed for insolvency. The U.S.-based unit, which was bought by Wirecard in 2016, said an investment bank is coordinating the sale process. The unit was formerly known as Citi Prepaid Card Services.

It did not provide further details but said Wirecard North America is a separate legal and business entity of Wirecard and is “substantially autonomous” from the German company, adding that it remains “self-sustaining”.

Last week, Wirecard filed for insolvency owing creditors almost $4 billion after disclosing a 1.9 billion euro ($2.14 billion) hole in its accounts that its auditor EY said was the result of a sophisticated global fraud.

The company said on Saturday it would proceed with business activities after the insolvency filing and an administrator was appointed on Monday.

($1=0.8895 euros)

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Fusion Media or anyone involved with Fusion Media will not accept any liability for loss or damage as a result of reliance on the information including data, quotes, charts and buy/sell signals contained within this website. Please be fully informed regarding the risks and costs associated with trading the financial markets, it is one of the riskiest investment forms possible.





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Ford Motor Company (F) Fireside chat hosted by Citi Research (Transcript)


Ford Motor Company (NYSE:F) Fireside chat hosted by Citi Research June 26, 2020 11:00 AM ET

Company Participants

Todd Eckert – Marketing Manager, Ford Truck Group

Craig Schmatz – Chief Engineer, F-150

Stuart Taylor – Executive Director of Enterprise

Lynn Tyson – Executive Director of Investor Relations

Conference Call Participants

Itay Michaeli – Citi

Operator

Good day, and welcome to the Ford Motor Company Call Hosted by Citi. Today’s call is being recorded. At this time, I’d like to turn the call over to Itay Michaeli. Please go ahead.

Itay Michaeli

Great. Thank you. Good morning, everybody and thank you so much for joining us. I hope everybody is doing well. I am Itay Michaeli from Citi. On behalf of the Citi auto team, I want to welcome you all to the call, and really thank Ford Motor Company for making this event happen. We’re excited to talk about the F-150 unveiling, which as you know just occurred last night.

Before we begin, a couple of just quick housekeeping items. First, we did send out legal disclosures. If you need those, just let us know and we’ll get those out to you. And second, the format of today’s call will be Q&A. So if you have any questions to ask, feel free to either submit them through our webcast or just email me directly, and we’ll try to get through all of your questions throughout the course of the call.

So with that, I’m very pleased to introduce members of Ford who will spend some time with us this morning, talking about pickups and specifically the new F-150. From Ford, we’re pleased to have Todd Eckert, he’s Ford Truck Group Marketing Manager; also have Craig Schmatz, he is Chief Engineer of the F-150; Stuart Taylor, Executive Director of Enterprise; and of course, Lynn Tyson, Executive Director of Investor Relations. Thank you all again for being here.

And to kick off the call, first, I’m going to hand it off to Lynn for some opening remarks.

Lynn Tyson

Thanks Itay, and thank you so much for hosting this. We’re so incredibly excited about the all new F-150, which is purposed to be the toughest and most productive and powerful F-150 ever. But before we go into Q&A, I just wanted to recap some of the things that we talked about last night during the reveal and then also just talk a little bit about launch execution. For those of you who are dialed in, we do have a presentation that is posted at shareholder.ford.com, we’re not going to be following it page by page but there’s great information in there about the functionality of the vehicle and some additional metrics around our leadership with F Series.

So with F Series as America’s best selling truck for 43 years, we’re always focused on serving our truck customers. And the new F-150 is really a testament to our mindset of continuous innovation and delivering these purpose built solutions to best serve the varying needs of our full size truck customers. The new, all new F-150 takes America’s truck choice to the next level with targeted best-in-class towing, payload, torque, horsepower and all new features to make customers even more productive, including new connected vehicle technologies, including bumper to bumper over the air updates and standard SYNC 4.

This is our first vehicle with our all new electrical architecture that allows us to read, write and provide over the air updates to key modules controlling the vehicle and this will allow the new F-150 to stay relevant over time continuing to meet and exceed the needs of our customers, especially our commercial customers. And then a completely redesigned exterior has a bolder and tougher new look and an all new interior provides more comfort, technology, functionality for truck customers, along with enhanced materials, more color choices and more storage.

This truck also features our all new classic group of PowerBoost hybrids with Built Ford Tough capability and as I mentioned, targeted best-in-class horsepower and torque and at least 12,000 pounds of maximum towing capacity and at least 700 miles of range on a single tank of gas. And then available from pro power on board, means customers can leave their generator behind and free of cargo space with up to 7.2 kilowatts of power built right into the truck.

There’s actually enough energy to power 28 average refrigerators, charge a full bed of electric dirt bikes, or run an entire job site worth of tools. And the new truck comes with a number of innovations and improvements over the previous generation with features, such as new territory work service, max reclining seats and new extended lines of running boards.

Now we’re laser focused on an outstanding launch execution. The setup of the plans for F-150 is completely different from that of last year where we gutted and effectively rebuilt in all these plants on an accelerated schedule, that’s not the case with Dearborn Truck in Kansas City, two of our best plants. We don’t have to change the body shop or stamping plants like we did for F-150 in 2014. We do not have a Lincoln variant to launch as we did for Explorer. And, as I mentioned, we’re going to be staggering the launch across our two plants, which derisk the changeover and gives us an opportunity to run our current F-150 at one plant where we ramp production of the new model at the other plant. We’re also staggering the launch of the hybrid to reduce risk.

Now, our shutdown because of COVID, we didn’t, that time did not go to waste. We utilized that manufacturing, that shutdown manufacturing period to resolve engineering issues and includes prior readiness, and our metrics suggests we’re in better shape than we were before the shutdown. We’re also leveraging connectivity on preproduction fleets to identify problems and validate solutions.

So with that, Itay, I’ll turn that, turn the call back over to you for QA with the team.

Itay Michaeli

Great, thank you, Lynn, for that introduction and all that, that detail. So, I wanted to start our session before we get into the new F-150 to talk about demand within the pickup truck segment. And the reason I bring this up is you know over the past several years, you know our team at Citi has documented trends that have clearly suggested and shown that U.S. pickup truck demand has both structurally and meaningfully expanded over the past 10 years.

And then the two trends we we often write about in our work is a rising install base or vehicle part combined with very strong used pickup truck pricing. And of course, in the new vehicle market we’ve seen this play out through consistent pickup truck sales outperformance and significantly higher ATPs, which by our estimates has resulted in record high full size pick up truck revenue.

So maybe a first question for Todd, what are your thoughts on these trends, as you observe these concurrent trends over the years, what do you think is really happening here? Would you agree that demand has kind of structurally increased? Love to hear your thoughts on that first?

Todd Eckert

Yes, Itay, thank you for that. Well, we’ve certainly seen growth in terms of both sales and average transaction prices as you’ve talked about with full size pickups and we really believe kind of at the core it’s about our customer, and need and value of vehicles and get work done and also serve a critical need in their lives. But what we find is that full-size pickup sort of essential tool, used to accomplish work and recreational activities that really quite frankly other vehicles simply cannot do.

So certainly trucks have evolved over time and F Series has really been at the lead of that as the best selling truck in America for the past 43 years. If you think back kind of to the earlier days of trucks, they’ve really moved from only being really considered to very specific work-related applications with limited choices in terms of features and content to now much broader application, certainly, like durability and capability remain at the core of customer want and need in a full size pickup, but there’s now more room for passengers. The ride better, fuel economy has improved, trucks really do now serve as a no compromise option for customers. And F Series has really has been at the forefront of that through our continuous innovation mindset and our commitment to delivering what our customers want, need and value.

I think another factor is the spectrum of choices has really increased in terms of series and cab, powertrain, package and equipment offerings. Really a core tenant of Ford trucks is what we call the power of choice. And a good example is our six series offering on F Series, where we provide customers the opportunity to purchase a truck that really best fits their needs. And just to give you an example of what I’m talking about, our six series lineup consists of, starts at our XL, which is really a base work truck largely for fleet but some retail application.

XLT is really our broadest range of offering. It’s really good. And Lariat is really our entry into premium and what we call premium done Built Ford Tough where we first introduced the leather and other more premium features. And then we have King Ranch, which we would describe as luxury with a bit more of a Western feel but very premium luxury materials and features. Platinum, a quite similar to King Ranch in terms of the offering, but more of a modern feel from the materials and the leathers that we use in that particular model. And then limited, which we really call the top of the line from an overall luxury perspective.

So between the choice and really now trucks becoming a no compromise option really led by F Series and certainly the all new F-150 is going to be another testament of that to dedicating and serving our full size pickup customers that’s really kind of what we see behind those trends.

Itay Michaeli

That’s very helpful, Todd. And maybe shifting to the current environment. We’ve seen pickup truck sales really outperform the overall market thus far through the crisis. And one reason that’s been cited for that is that pickups might have been initially less exposed to some of the most affected regions from the COVID crisis. What are your thoughts about what we’ve seen year to-date? I mean, would you interpret the recent pickup truck sales outperformance to kind of regional mix, or are you seeing in your numbers just more broad resilient demand really across the country?

Todd Eckert

Well, yed. And really, I think would contributed to both factors. One, kind of regional nature of COVID and how that hits, but then also just trust themselves in terms of how they, first from the COVID perspective, the virus and some of the resulting stay at home orders generally impacted the west and the north eastern regions of the country a bit more to a greater degree. And typically we sell a greater percentage of passenger cars and SUVs in those regions. While stronger truck markets like the Central Texas, and Oklahoma, and Southeastern part of the country like Georgia and Florida are traditionally stronger truck markets for us, they were less impacted from, on a comparative basis with regard to the stay at home orders.

Now, having said that, the other side of it is full size pickups and of course, led by Ford F Series are proving to be the most resilient market segment in the industry, as you said during this crisis. And we think a key reason for that is pickup trucks really serve as an important need, a functional purpose, they deliver the durability and capability that people need, especially in tough times. As I mentioned, they really become essential tools used to accomplish both work and recreation that other vehicles really can’t do. And for many customers, their truck is a tool of their business, their livelihoods, it really depends on it. So, we think that all kind of rolls up into the factors, and this is another proof point. In fact, F Series has been America’s best selling vehicle for 38 consecutive years and really kind of proving that the popular pickup trucks isn’t just a short-term trend.

Itay Michaeli

Great. And maybe one last one on the topic of just demand. Todd, again for you just looking ahead, what is your view on the pickup truck demand over the next I’d say one or three years? As you’re designing the new F-150, what do you think demand is going to be generally for this market over the next one to three years?

Todd Eckert

Well, we really think kind of in the, kind of the near-term and the 12 months, much of the demand we think for full size pickup really largely depend on the economy. If the economy has a deep but short down turn, we may not see a large negative impact on full size truck sales. If we have something longer and more protracted, then it would likely have an adverse impact on sales on full size pickups. Now, that’s not something we’re necessarily anticipating. But in the event that it did occur, obviously, the full size pickup segments, like most segments, would face some stronger headwinds.

And, although, we’re seeing some certain amount of uncertainty as demand and operations recover from the COVID and the shutdown, we think the relative resilience of pickups reflects the greater value that customers place, that customers place on these vehicles, which are more capable and versatile and efficient than ever before. And so of course, as you mentioned, with the all new F-150 launching this fall, we’re going to further build on the strengths that have made F Series America’s best selling pickup for 43 consecutive years and that’s been the case through booming economies and through recessions as well.

Itay Michaeli

Great. So maybe now shifting gears a little bit just to the new truck and as you’re designing a new vehicle and choosing kind of what to focus on. Maybe just give us a sense of your latest assessment of the profile of a typical full size pickup truck buyers and perhaps touch upon, the top three or five factors they tend to consider when purchasing a new full size pickup?

Todd Eckert

Sure Itary, thank you for that. And it varies a little bit, if you’re talking about full size in terms of light duty full-size pickup, like F-150 or heavy duty, like super duty. But in general, what we see as some of the main considerations for our customers in full-size pickup, first and foremost, DQR, durability, quality, reliability, are key buying consideration for our customers. Of course, capability, most notably the ability to tow and haul is consistent with our purpose built nature of F Series. Certainly, engine performance is another one, most notably in terms of torque and horsepower and the ability to get the job done.

We’ve also seen, as I mentioned from the trend perspective, interior room and comfort is important as well. Truck customers are spending more and more time in their trucks. So, the interior becomes a very important buying consideration for them. Of course, productivity. They’re always looking to get the job done and that’s whether it’s work or recreation, they want to do it more effectively and more efficiently. So, the ability to provide greater productivity is key. And then of course, value for money. Purchase price certainly is a factor but it’s really more about the attributes and content what’s offered at a particular price and do they see value in that offering. Those are really kind of the keys that we focus on when we’re looking at designing a new truck.

Itay Michaeli

That’s very helpful. And maybe as we turn to some of the new features. Maybe for Craig, you talked about the pro power onboard system that that was introduced with the new F-150. Maybe give us a couple of examples in the real world of how customers can use that system.

Todd Eckert

Sure, thanks, Itay. The system we call pro power on board is available 2 kilowatt offering, that’s on our optional gas engines, the 2.7 liter EcoBoost, 3.5 EcoBoost and 5 liter. We’ve got a 2.4 kilowatt version standard on the PowerBoost hybrid, full hybrid offering, as well as the 7.2 kilowatt. It’s capable of providing power for many larger appliances and even some job sites. For example like the 2 kilowatt system, you do mobile device charging, laptop charging, running copier printer all at once. On a 2.4 kilowatt, you could do same mobile device charging but have a mini fridge, large TV, large speakers, coffee pot, all at the same time.

But with the 7.2 kilowatt, you can really power a full job site. A compound miter saw, circular saw, hammer drill, or half horsepower air compressor, area floodlights, portable speakers. I mean, the capability there is just amazing. And on the move, you can still use the pro power on board to charge two batteries while driving down the road. So, it’s got a lot of capability, and I think it’s still a untapped need for our customers.

Itay Michaeli

Great. And maybe another topic we often get questions and we try to analyze whenever a new product is introduced is the new materials content on the truck and just the overall light-weighting strategy right now versus the prior strategy that the Ford took.

Todd Eckert

Yes. So, on the F-150, it’s going to continue to have high strength military grade aluminum alloy body, which has really proven to be best performing material to meet our Built Ford Tough standards and customer needs since 2015 model when we first introduced it. We still have proven body on frame design with re-engineered high strength steel, and it retains a significant number of characteristics, which have been developed and refined and proven overtime. We have incorporated select incremental weight phase action to offset the new feature content and hold the all new F-150 weight efficiency similar to the F-1 model, which is really an outstanding position for us continuing as we go forward. This very efficient weight status is made possible in large part due to the alloy body, allows F-150 to tow more, steer quicker and stop faster and deliver average gas mileage. So, our strategy is consistent from where we started off in 2015 and it’s a great efficiency story and delivers the kind of customer attributes or attributes our customers are looking for.

Itay Michaeli

Terrific. And maybe shifting gears to the electrical architecture that you referenced and maybe for Stuart. Actually, we’ve received a number of questions from participants on this, so there is clearly a lot of interest. So maybe first sort of can just talk about the changes made to the electrical architecture, the OTA functionality and how many of the domains in the F-150 will actually be eligible for frequent OTA updates?

Stuart Taylor

Hi Itay, and yes, thanks for the question. It’s good to hear that people are really interested in this. So all the things done is they’ve engineered what we’re calling the next generation of electrical platform. And that’s a substantial iteration on our existing already successful architecture. And some of that architecture does, what that new part does, it connects to the cloud, the mobile app and vehicle into, so like a single ecosystem. So really starting to talk about platforms. And what the platform adds is it adds this computational power, which is really the brains of the unit and then this architecture, which we would call out as the high speed communications and physical implementation in the vehicle. And that forms the backbone of this new capability and it starts with the all new F-150 and then we’ll roll across the fleet from there.

And what that enables and what that allows you to do, which is really you know what’s the interesting part of this is it allows you to do this really seamless end to end OTA and that, when you talk about domains it means large domain controllers can be updated. But also every other device, we say bumper to bumper can be updated within the vehicle. That allows you to give rapidly efficient deployment, for example, when you can roll them out quickly across the series of F-150, but it also allows you to add feature functions over the life of the vehicle. So you get this continuous improvement that’s either always at the forefront of the technology.

And then obviously, there’s going to be unmet needs that we don’t know yet. So, the customer insight part of this allows us then to build new capabilities ongoing through the life of the vehicle. Part of the building this platform as well that it enables is it allows you to build in some data analytics but also layering cyber security to protect our customers. So really important and overall to the way the system is designed.

Itay Michaeli

Terrific. And maybe on that, another question what we got is just talk about the kind of incremental benefits versus the costs of implementing kind of a much more advanced electrical architecture, as well as whether there’s a benefit to installation and manufacturability of a new system.

Stuart Taylor

If I understand your question correctly, the idea here is that this builds capability. So, making standard over the air update capability across the range is really important, that’s really the point about keeping the vehicle at the forefront of technology, adding feature functions in the future, really returning value for the customer. And then thinking about broader applications here, being able to product, to conduct rather for example preventative maintenance, or perhaps reduce repair trips, to provide improved performance. And this idea, particularly to our truck customers that’s really important is keeping the vehicle uptime, so maintaining uptime, making sure that it’s never down, so that it’s working as hard as we can possibly make it work, that’s where the real value is generated in adding a content like this.

Itay Michaeli

Perfect. Yes, that’s helpful. And then maybe to delve a bit more into those benefits, maybe if you talk about fleets. Ford has previously discussed the opportunities within a connected car fleet in terms of fleet management and data. And I know you’ve talked a lot about this in the commercial van business. But I’m curious to what extent the fleet management connected opportunity also presents itself for the all new F-150, and how should we kind of size up that opportunity going forward?

Stuart Taylor

Yes, it’s a good question, Itay. I think you had a couple of weeks back, Jim Farley was talking about the power of connected, he was talking specifically about our feature of telematic aspiration. So, of course, we sell a number of F-150 into small, medium and large fleets. So, it’s an important area of our business. With the new electrical architecture and the capability we’re building in, we will be offering the telematics solution on the all new F-150 for those fleet operators. And that allow the fleet operators to improve their operational effectiveness.

And so, we’ve built this telematics software directly in conjunction with those fleet managers. We took their input. We saw, determined what they were asking for, what they needed, what were their needs and then we designed our software around that. So, the software really gives you key insights into the operations of vehicles so you get things like vehicle health alerts, you get real time monitoring of the fleets and then you can start with your fleet optimization. You can geofence, you can geotrack the fleet, to ensure that the trucks are where they’re meant to be and [when] they are meant to be, and that’s important.

You can also monitor key attributes. So, this is part of the connectivity experience and key attributes of the truck. So you can understand things like driver behavior, you can look at fuel efficiency and you can start to, and this is really important. You can start to predict maintenance schedules. All of that builds into a story, it’s a package really, which comes and says, if I can start to do that, I can minimize my down time, I can maximize my uptime and I can maximize my usability. And then, what we’ll do overtime is we’ll do a continuous improvement on that capability. So, as we gain further insights with those fleet customers and things like future unmet needs, we’ll start deploying incremental additions to that suite of tools and we can do that now of course, because we’ve added OTA to this capability. So we can continue to update the trucks and the fleets in that manner.

Itay Michaeli

So, that’s helpful. And one question related to this that we got in is, do you kind of know that what is the rough size of the multiple truck owners? I mean how many people or companies are coming or buying multiple trucks that might be eligible for kind of fleet related services. Is that a significant part of the overall share of the F-150 pie, or maybe if you could size that that’d be helpful.

Stuart Taylor

Yes, Itay, unfortunately I don’t have that number at hand. I don’t know whether Todd, or Craig know that off the top of their head. First of all, I’ll try it up and see if both guys know.

Itay Michaeli

Yes, it’s just a question we got in is whether there are weight savings as a result of the new architecture, and if you could kind of elaborate on anything around the number of ECUs and kind of more detail on the domain controllers and maybe how many are using it and so forth, definitely lot of interest in this topic. So any additional color there will be great.

Stuart Taylor

So a little bit of color that’s we’ve shared. So, yes, we have moved to main architecture so this is in the languages, the consolidation of our number of devices into single compute center, and we’ve done that in a few of the domains for efficiency and also because the computational power is now available to do that. And that’s a significant efficiency in terms of engineering and design, which is good. And we talked about the OTA capability building end to end. So, our view of OTA is we have to have full bumper to bumper capability. And I think, the clear differentiator, this idea that most of the OTAs will be seamless and pretty much invisible to our customers.

And when we do larger OTAs like we’ll be adding next summer we thought publicly about adding ADA, which is a very large feature, this is active driver seat and that’s a much larger data and so that will require little bit of downtime. But the beauty of the way we structured this in design is that you can actually set a schedule to be updated. And so you can set this update as I say 3 o’clock in the morning when your trucks not being used and the OTA will happen overnight without it being an inconvenience to you. So those are really some of the features that clearly, and that’s been really important to us.

Itay Michaeli

Great, that’s super helpful. And another question we received on this topic, I believe it doesn’t just go through connectivity which you talked about more broadly, in particular on the connectivity and software side is how much of the work in content is being done in-house at Ford versus relying on some of your suppliers for that? We always hear mix strategies from automakers. Curious kind of what approach you took on the F-150 in terms of the electrical architecture, but probably you could talk about any other part of the vehicle architectures around?

Stuart Taylor

Sure. Yes, and again, so another good question, because there isn’t, there was opportunity here to really focus on things, which are brand important to us and important to our customers. And so we did elect on this particular project to bring the, some of the significant design in house. We’ve got a fairly substantial software team within Ford now that we’ve been growing over the last few years. It’s actually quite a pride point for us that this generation of SYNC, which is obviously been in the vehicles now for 12, 13 years and has been multigenerational, been a very popular capability.

Again, we’ve extended that capability here in SYNC 4 that’s going into the F-150 first. That development was all done in-house, so our in-house software development team. And that allows us to really focusing on customer needs, unmet needs, so we could add features like the pro-power on both screens, we could add zone lighting, things like those features, which are really truck specific and customer specific. We can focus on quality. SYNC continues to be at the front of the pack in terms of customer quality and acceptance, which is really good and we wanted to keep it there. So we invested heavily in that.

And also speed, our ability to work in-house on a product that’s complicated as this really gives us an element of speed. We still use a lot of supplier partners and they’re very important to us for a number of other systems in the vehicle. And we’ll continue to do that for the future. But this was a key strategic move as part of the architecture design to bring that piece of work in-house and it’s been really successful.

Itay Michaeli

Great, that’s very helpful. Maybe you mentioned that safety a few minutes ago, and definitely want to get into that as well, but actually we’ve received some questions on that. But maybe for Craig, I was hoping you can review some of the biggest changes in safety content on the new truck, both on the passive safety, as well as of course on an active safety side as well, kind of where are some of the biggest changes you’ve made in the new vehicle?

Stuart Taylor

Sure Itay. I can take that. Yes, the all new F-150s got improved crash structures and other improvements to continue raising the already high standards of safety in F-150. Now, the only thing better than protecting occupants during an accident is to provide them tools to reduce the severity or avoid the crash in the first place. So, a real big news here is that the all new F-150 provides advanced driver assist systems in the segment, the most drivers assist systems in the segment with more than 25 across the lineup.

So standard on every F-150 we’re offering pre-collision assist with auto emergency braking to help avoid collision in the first place, lane keep assist, rear view camera of dynamic edge support, auto-dimming high beams and auto on-off headlights. And we’re also providing 10 new driver assist features to 21, including class exclusive available intersection assist, which detects oncoming traffic while the driver is testing the left turn. If there’s a risk of collision with an oncoming vehicle, the vehicle will apply the brakes to mitigate or avoid it. And a few other examples of a new driver assist features includes intelligent adaptive cruise control, evasive steering assist, lane centering, reverse brake assist and post collision braking. Just all of these great technologies just help the driver avoid getting in a situation and avoid accidents.

Itay Michaeli

Yes, that’s terrific. And definitely want to delve into that a bit more, the level two functionality or I guess maybe it’s level two, two plus, you do have a driver monitoring system. So maybe you could talk more about that functionality on the new truck on the use of over the air updates. Maybe give us bit more of a deep dive into the level two features. And also within that if you talk about how just demand for ADAS and level two features defer if at all on the full size pickup trucks relative to other segments?

Stuart Taylor

Yes, sure. Let me take that one, Itay. So, I think everyone recognizes that the Co-Pilot 360 technologies that we’re putting in to the F-150 is really one of the most advanced suite of fibrosis technologies among full-line brands. We’re very proud of that. And so what we’re doing here with F-150 is we’re adding and improving the offering and including as you mentioned these level two functionalities, active drive assist, and this will allow us for hands-free drive mode on certain sections of [premium] freeway and divided freeway. So, very important feature and capability. So the way it does that is it simultaneously assists with longitude and speed, and lack of steering control of the vehicle. And that system uses the sequences of quite complex sensors, the advanced driving camera that monitors the eye gaze and the head position. This is really important, because this is what enables the hands-free drive mode.

And system obviously specifically calls for NHTSA [indiscernible] and IHS that tracking of driver’s eye movement and/or head position is really the most accurate way of providing this capability. And then as Craig was mentioning, you know when you package up all of the Co-Pilot 360 activities that are going on, we’ve got nine plus exclusive driver assist technologies, which is the most in the segment. And so we’ve got things like, I don’t know Craig mentioned all of these but certainly we’ve got auto hold calls, intelligent adaptive cruise control, we’ve got auto high beam, we’ve got lane centering assist.

One feature I’m really excited about is intersection assist 1.0, we’ve got evasive steering assist, post collision braking and then we’ve added in active path assist 2.0 and then obviously coming in the summer of next year, we’ll have the active drive assist. And then our plan for active drive assist, as I mentioned in the earlier comment is that we plan to offer that as an OTA capability next summer. We’re also going to for our dealer to be able to update it so he can make sure that if you’re more comfortable going to do that, we recognize that the over the air capability is very new to a lot of our customers, so we’re going to offer it both ways. But that will be one of the features that we will make available, and as you can see it will be a great add to the program and to the truck.

Itay Michaeli

Yes, that’s great. And maybe two questions on that. First, if you could talk about the different sensors that the ADA system is going to employ for level two functionality, and with the OTA next year, maybe just talk about how many highway miles that you initially intend on having the hands free functionality, as well as how do you see that evolving overtime?

Stuart Taylor

Yes, sure. So, the different sensors where we’ve added, let me see, we’ve added collar radars, we’ve added the driver monitoring camera that I spoke about and then we’ve upgraded the rest of the sensors that are in the vehicle. So, we’ve got, I mean 12 ultrasonic sensors now and we’ve got a front windshield camera, we’ve got a front and center radar and we’ve got rear corner radars, and those make up the whole system. And then the system through this new electrical architecture also utilizes other sensors that are in the vehicle. So, looking for things like yaw and roll acceleration, wheel speed. Now we wouldn’t formally class them as that two sensors, but because of the efficient architecture we have got, they can share the information around the vehicle. And so that’s really what makes up the whole of the active drive assist system overall.

And then I think you asked me about demand, right? So, demand for ADAS and level two capability. So I think one of the observation is spending so much time with our customers, particularly as we’ve gone through this program. We know that our customers use their trucks in many, many diverse ways. And as Todd was touching on, the versatility, the dependability and the reliability are really important for our customers in both work, rest and play. So, the customers are demanding new features from us because of the way they use them.

So, I think our Co-Pilot 360.2, which is what we’re launching on this program is going to prove a really popular and really value feature. So, we’ve really focused in what customers are asking for and then implementing in a way that they want it. I think from a over customer profile perspective Todd touched on this in the beginning, the capability, the safety, this idea of providing confidence on long drive is really, really important. And so, we’re going to continue to explore that space again and again, because I think it’s something that’s really valuable in Ford and in Ford F-150 like this.

Itay Michaeli

Terrific, that’s very, very helpful. So let me shift gear to talk about the interior and particularly the user interface, the cockpit electronics, the 12 inch center stack and the full digital cluster. Maybe talk about your approach there. What led to these decisions? What kind of customer feedback kind of led to these choices and kind of how you see that evolving even relative to some of your competitors?

Stuart Taylor

Yes, so Craig you want to [Multiple Speakers] first and then I will pick some of the electronics…

Craig Schmatz

That’d be great, Stuar. Thanks. I mean with the all new F-150, we have completely redesigned the interior. We’re finding even the smallest detail. The craftsmanship and fit and finish, and enhanced materials really resulted in interior our customers want to spend time in. I mean, we understand that many of our truck customers spend long days and sometimes nights in the trucks. So we provided features and technology to make them more productive and more comfortable in interiors. For example, we’ve created an interior work surface that offers a large flat work surface, makes it easier and more comfortable to work and even eat in a can and it’s available on both the console versions, as well as the 40, 2040 bench seat.

But we’ve got available max reclining seats to full flat nearly 180 degrees to make rest even more comfortable. And we’ve got new rear under seat lockable storage, extends the full width of the rear seat to be operated from one side of the vehicle when not in use or it’s flat, so our customers use our flat low core. We spent a lot of time with our customers’ observational research just really trying to understand those things better and give them kind of end solutions to allow them to better experience and spend the time to have the features and technologies, because we know they spend so much time in their vehicle. So a big part of that too is the technology and Stuart will take you to that now.

Stuart Taylor

Yes, let me pick up. I mean you guys have seen now some of the interior imagery. I mean it looks like a fantastic place to be. And so we’ve added new larger entertainment screens and they specifically up for in this segment we’ve asked, that the customers asked us for control knobs and buttons so that they can still use a lot of the functionality with the gloves on, really a valuable point. And in base models, we’ve still got an 8 inch. In fact, we’ve now cascaded the 8 inch down, so it’s the entry level. And then we’ve added a 12 inch display, which looks fantastic. On the XLT and then standard on Lariat and above, so it’s on over 50% of the volume now.

And then I think we’ve added what we’re calling, what our customer are telling us is purposeful technology. So the things that really mean something to the customer. And so you see things like trailer light check, trailer theft alerts, the onboard generator that Craig talked about available in the screen, so that you can actually monitor the circuit loads, and things like zone lightning. So these are really important for our customers. All of those are enabled through the screens that we’ve added. And we’ve also got to pair that. We’ve got a new 12 inch digital process and which has an information on demand section, it’s got some really impressive graphics work. And then some of the drivers [technical difficulty] allow, some images move around, it looks really good and we’ve got operate data and turn by turn navigation [technical difficulty].

And then of course, we talked about a little earlier the next in iteration of SYNC, SYNC 4 really from my perspective, our smartest and most powerful version SYNC yet. So we’ve got content in there like advanced connected navigation so that really allows real time routing, real time parking, real time traffic. We’ve also added weather and fuel prices to that. And we’ve added an all new connected natural language voice system, so that allows you to use much more conversational dialog with the vehicle and so that you can ask it pretty much anything. And then we continue of course as part of this the way we designed the screen and the controls is continuing to focus on something that’s been important from the first inception of SYNC right to now, which is really this idea of hands on the wheel, eyes on the road. So, making sure that our hands free voice control can control phone calls, music selection and much, much more. And so keeping that intention front and center to avoid driver distraction.

And then we’ve added other things like we’ve added wireless Apple CarPlay and Android. Also, this means you bring all of your favorite app choice to the vehicle. And so, there’s an awful lot we’ve added. We’ve also added a digital owner’s manual for the first time. So, we’ve skinnied down the paper owner’s manual, and now that is all in the screen and it offers you animations and how to in a digital owner’s manual. So really good add for getting to all of the feature content and understanding it is in the vehicle.

Itay Michaeli

Great, that’s very helpful. And maybe kind of taking it altogether one, couple of questions we received is, with all the new and improved features on the F-150 kind of how should we think about the overall content costs, and how do you kind of expect to price for that? And maybe within that, you could talk also about how you’re trying to manage trim mix on the new truck, maybe relative to the current trucks. So maybe if you just address those topics, kind of content costs relative to how to think about you’re covering that with pricing and perhaps also the managing of trim mix within that.

Lynn Tyson

Itay, it’s Lynn. I’ll just touch on pricing and then turn it to over the rest of the team. Clearly, there’s more content, more value add content, in the vehicle. And we’re also following, you know, where our customers are leading us relative to functionality and all those things. So, I wouldn’t, we haven’t talked about pricing on the vehicles yet per se, but I wouldn’t assume necessarily that these vehicles are going to be dilutive to the overall F Series portfolio from a margin perspective.

Itay Michaeli

That’s helpful. And maybe for the rest of the team on trim mix configurations, I know that that’s always really important to manage for you and you know, I think the price gap on full size pickup truck trim is probably the highest in the industry. So maybe you could just talk about, firstly importance of managing trim mix generally on the truck, and are there particular goals or objectives in terms of changing the trim mix on new F-150, just given that the new content and features that you’re introducing?

Lynn Tyson

Hey Itay, I’m sorry to interrupt, but it’s Lynn again. I just want to make two additional points. One is, as you know, we have some pretty significant work streams underway on general costs. So it’s number one. Number two, being able to have, to gauge what’s happening with the vehicle that have over their updates, there are benefits we believe we’re going to be able to derive at an enterprise level. We haven’t sized those yet but you can imagine if we have better visibility into things that are happening in the vehicles that not only help quality and warranty costs and all of those kinds of things. So, we’re very excited about how this additional connectivity capability will help us at the enterprise level.

Itay Michaeli

Yes, that’s clear, that’s definitely a super important point.

Todd Eckert

Itay, can hear me? This is Todd.

Itay Michaeli

Yes, absolutely.

Todd Eckert

With regard to your question on mix, you’re right. We do have a very broad range when it comes from a pricing perspective. And as Lynn said, we’re not talking about pricing today on the new trucks but we do have a broad range with the present trucks today and that’s really by design. It really comes back to the power choice that I talked about a little earlier, and making sure that we’re offering that truck for every customer. From XL all the way up to the limited as I spoke about. And so obviously with the all new F-150, it’ll be a attractive vehicle for a broad range of buyers, providing that value for the money across the overall offering with attribute and content choices that will meet the deferring needs of our very diverse customer base, that’s certainly core and it’s certainly been, that’ll be an approach that we used in the all new truck, it’s a hallmark of what we do today and certainly we’re going to be prepared to manage the mix in the all new F-150 in a similar way in order to meet the needs of our overall customers and their demand.

Itay Michaeli

Great. And then just before we go into a couple other topics, maybe for Todd and Craig, just when you think about kind of the most differentiating aspects of the new F-150, both in relation to the current vehicle, as well as the competition, kind of what will be the top view that you think is sort of most differentiating and potentially could still be differentiating, even as we think through the next, let’s say couple of years?

Todd Eckert

Well, the all new F-150 really cements our position as America’s truck leader. And with this proof of our commitment to continuously innovate to deliver purpose built solutions for our customers. It’s really the toughest most productive F-150 ever and it will be the most powerful light-duty full size pickup. We’re targeting best-in-class towing, payload, torque and horsepower. Those things that really matter for our customers. So the real key highlights I think will be the class-exclusive PowerBoost, both hybrid powertrain, those kind of best-in-class torque and horsepower, at least 12,000 pounds of max available towing capacity and the 700 miles of range on a single tank of gas, plus it’s got the best-in-class exportable power with the pro power on board up to 7.2 kilowatts.

The interior is as fantastic, right? Several new segment first productivity features, including the interior work surface, the max reclining seats and don’t forget about the working end of the tailgate with the tailgate work surface, clamped pockets, tie down and the power back there, the lighting back there, it’s all a complete solution. We’ve got trailer reverse guidance, which has been popular in super duty, now paired with pro trailer backup assist, both class exclusive features but combined together now in F-150. And finally, as Stuart mentioned earlier, new connectivity, the class exclusive OTA to keep the truck at the forefront of technology, standard SYNC 4 across the board and fleet telematics for our commercial customers, and nine class exclusive driver assist technologies, including that active drive assist coming third quarter next year.

Itay Michaeli

Excellent, that’s very helpful. So of course, one of the last topics that of course we’re going to cover is the EV and hybrid topics, and maybe we can kick off, maybe for you Lynn, just for those who maybe are a bit newer, just if you can review Ford’s hybrid and EV strategy overall.

Lynn Tyson

Well, I mean as a broad strategy, we do plan on having electrified versions, particularly in our franchise strengths and that cadence is unfolding even right now. We’re going to be spending more than $11.5 billion through 2022 on electrification, we’ve got the Mustang Maki later this year, and we’ve already committed to at all electric F-150 in the next 24 months. And then just furthering the kind of the strengths on the commercial vehicle side, we do plan on electrified version of the Ford Transit, which is the bestselling cargo van. We’ll have an all electric version of that in U.S. and Canada for the 2020, 2022 model year. So, I’ll turn it back over to the team.

Itay Michaeli

Great, thank you. And maybe for Todd if we can now talk about the EV pickup truck market. Obviously, there’s a lot of activity we’re seeing almost daily in the EV pickup truck market. How do you view the outlook for EV pickups. How you think that that market is going to progress let’s say over the next three to five years, and you can talk about where you think demand comes from perhaps the size of the market and how you see that progressing over the next five years?

Todd Eckert

Sure. And it little bit goes back as we’ve talked about really at Ford, we pride ourselves on understanding our customer and their needs. It’s really at the center of everything that we do, and providing a truck for every customer, as I just mentioned. So certainly electrical, electric vehicles in general have some tangible advantages over internal combustion engines, things like instant torque, potentially increased space created by the removal of ICE components, the potential to lower operating costs, just to name a few. As we see battery costs trend to trend down, continue to move down and EV infrastructure, which is so important to their proliferation, seen rapid growth and we think that will continue. The EV pickup market to us is a great opportunity to provide our customers.

With those enhanced capabilities, and provide them a more productive tool for all their customers and usage needs. Fleets as well really are signaling that commitment to sustainability and our base are starting now to see the total cost of ownership benefits that electrification can provide. So as electrified vehicles that become synonymous with technology, we know our customers expect smarter vehicles through continuous innovation in our next generation of products. So, we really do see electrification as the next evolution in truck technology, while still delivering on our truck for every customer proposition, of course with the durability and capability that our customers come to expect from go forward time. So, both PowerBoost hybrid and the all electric F-150, these will be key growth opportunities for us at Ford, especially as EV technology progressed.

Itay Michaeli

Great, that’s very helpful. And then as a follow-up, Todd. I think Jim Farley recently mentioned that you’ll be launching the BEV F-150 within the next 24 months. You know question we often get around that timing is how you think about that relative to the timing of some of your competitors in the EV pickup market that have talked about launching their BEV trucks earlier than that?

Todd Eckert

Well, honestly, Itay, I can tell you at Ford trucks, we’ve always been and we’ll continue to be focused on our customers, really understanding their needs and then meeting and exceeding those expectations, that’s really what we’re all about. The development of the F-150 BEV is no different. So, the F-150 BEV will be, as you mentioned, will be designed, engineered and manufactured with that in mind. And of course, we’ll make sure that it meets exacting and demanding standards Built Ford Tough at scale.

Itay Michaeli

Great, excellent. And then maybe as we think about kind of the goals for the new F-150, hoping we can touch upon that for anyone. But one specific question and maybe you could talk about maybe demand or trim mix is, and I think when you mentioned the launch cadence earlier in your opening remarks. How we think about there will be the current pickup truck inventory situation? I mean obviously it’s come down a lot, and how that might affect the cadence of the launch of the new F-150 if at all?

Lynn Tyson

Todd, you want to take that…

Todd Eckert

No go ahead. I can get that one Lynn, or if you want to…

Lynn Tyson

Okay, I’ll begin and then you can pick up. Our F Series supply was about 73 days heading into June. Normally, we’d like to have day, supply in the range of 90 to about 100 days. However, there are some dynamics happening with fleet and with fleet demand down, we can direct units to fill retail demand. And as you know, Itay, we are ahead of schedule being back up in the United States on full shift levels. So, we think we’re going to be in good shape with inventory relative to meeting customer demand.

Todd Eckert

Yes. And the one thing I would add to that, Itay, is that we don’t see the specific question, I believe if I heard it right, was the current pickup inventory affecting the F-150 launch cadence, that’s not a factor in terms of the inventory levels that would affect the cadence of the launch. And as Lynn said, I mean, we believe that we’re in good position with our present inventory levels and obviously, we’ll continue to work to maximize production throughout the end of the year. And as Lynn mentioned, obviously, aggressively prioritizing inventory to optimize the retail channel. Clearly, that’ll be important as we move through the year.

Itay Michaeli

Terrific, that’s very clear. Going back to EV pickups, we got an incoming question. So presumably the battery size of at least initially for an electric full size pickup trucks will be very large, tend to offer the required range. And in that context and you think it’s safe to assume that the pricing of the initial kind of wave of EV pickup trucks will be at the very high end of the typical range we see for full size pickup trucks? And maybe talk about kind of whether you see, at least maybe the first few years of the era of EV pickup trucks. Is it more of a luxury market, a personal end use market and maybe kind of how you see that evolving over time?

Lynn Tyson

I’ll jump in and then if the team has anything to add. I think Itay as we mentioned, we’re good 24 months off from an EV version of F-150. So, I think it’s too premature to talk about what that price point is going to be. I would just go back to the comments that the team has made, particularly Todd around innovating around what our customers need. And we have found that as long as we stay true to that, that we’ve been able to drive share while being able to generate appropriate margins on the products. I don’t know Todd or the rest of the team, you want to add anything to that?

Todd Eckert

No, I think you’re exactly right. We’re certainly a ways out from talking about, you know pricing and things of that nature, but that idea of continuous innovation, obviously, Lynn, that you mentioned that’s core, it’s a core tenant for us and Built Ford Tough, we’re always you know relentlessly pursuing innovation and anticipating the needs of our customers and delivering on those advances, and certainly you know that will be no different.

Itay Michaeli

Great, that’s helpful. And then before we kind of wrap it up, just going back to the goals for the new F-150, love to kind of learn, and this is for anyone of you, you know how you would define success, right? It could be, is it just have to be just you know sales or pricing, of course, but just customer feedback. And also as the truck launches maybe talk about how real time is your feedback, you know and how that goes around and maybe the decisions you make on going to market with trim mix configurations. So maybe just love to get a little bit more color and kind of defining success, and how you kind of manage that launch, and as you learn more feedback around customer demand for all the new features that you’re launching.

Todd Eckert

Yes, again, Itay, we won’t talk specifically about you know trim mixes and what we expect from that standpoint. But I think you know when we’re talking about mixes and how we’ll ultimately manage that, you know for us it really is this idea of going back to deep understanding of customer knowledge. And obviously we’re always consistently making efforts to better understand customers and how they’re utilizing our trucks in the real world. You know, we look at features, not only from the research and observations that Craig and Stuart have both talked about but certainly we want to understand features they prefer and which of them will aid, and in particular user experience that’s certainly how we go about looking at mix and looking about how we appropriately content our vehicles.

Obviously, we stay close to our dealer body as well. We’re watching order rates, so that we’re consistently looking at customer demand. And clearly, understanding our customers, delivering on their needs and enhancing their experience. It’s not just reserve for major launches or events but certainly a consistent approach that we use constantly within Ford Trucks.

Itay Michaeli

That’s terrific. Great. I think we’re just about out of time. First of all, I want to take the opportunity just to thank you all Todd, Craig, Stuart and Lynn, for the opportunity to do the Q&A. We certainly learned a lot. And yes, with that, yes, we really appreciate you coming on today and going through all these questions.

Todd Eckert

Yes, thanks for having us.

Itay Michaeli

Thanks again for doing this, and thank you everybody for joining us this morning. With that, we can go ahead and conclude the call. Thanks again to the Ford team, and thank everybody for joining us. Have a great day and have a great weekend.

Operator

Again, this does conclude today’s call. We appreciate everyone’s participation, and you may now disconnect.

Question-and-Answer Session

End of Q&A





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Margin Pressure Can Slow Down Fastenal Company In Q2 (NASDAQ:FAST)


FAST To Plateau In The Short Term

Fastenal Company’s (FAST) strategic shift towards increasing onsite locations and reducing public branches is in tandem with the economic deceleration and industrial activity contraction in 2020. In a bid to strengthen its technology side, it has acquired assets from one of its key onsite vendors. Since Q1, the company’s sales volume has picked up due primarily to the surge in healthcare product sales, while fasteners sales continue to shrink.

So, as a result of lower construction activities, its product mix has changed, which may affect its margin adversely. Although it has implemented various cost-cutting measures, it is unclear how effective the steps will be given the shift in its customer base. I think the company’s sales base diversification will pay off, while its margin will diminish in the short term. Also, the stock is relatively overvalued at the current level. So, expect the stock price to lose some steam in Q2 and start improving in Q3.

What Is The Daily Sales Trend?

Quarter-over-quarter, the sale of non-fasteners products continued to decelerate. While the segment grew modestly in Q4 2019, the daily sales of fasteners declined by 2.6% in Q1 2020. Sales to non-residential construction customers declined by 7.8% in Q1. On the other hand, the category that saw tremendous growth was the daily sales of safety products (18.4% up). Sales to healthcare organizations more than doubled in March.

According to the latest report available, the company’s daily sales have increased remarkably over the past couple of months. In fact, in May, its daily sales were the highest in the past year, led by a 136% year-over-year increase in the sales of safety products. Fasteners sales declined by 15% during this period. Despite the sales volume recovery, the falling share of fasteners, which are typically higher-margin, is likely to impact the sales mix and the margin adversely in Q2.

Analyzing The Margin Drivers

In Q1 2020, the company’s gross margin remained steady compared to the previous quarter. However, it did decline significantly compared to a year ago. Although variable costs remained stable, lower volume led to under-absorption of fixed costs, including truck fleet, manufacturing, and procurement operation. More importantly, the company’s product mix has deteriorated, i.e., lower-margin products are accounting for a larger share of the company’s product portfolio. Since the company operates a trucking fleet that requires a high fixed cost to maintain, it’s a drag on the company’s margin. The overall price level did not change much in Q1 compared to Q4 2019, and so, the price-cost factor was insignificant in Q1. While the mix change resulted in 65 basis points margin contraction in January, it widened to 90 basis points in March. The company’s management is uncertain as to how much it would impact the Q2 results. I think it would be safe to assume that the margin would remain low in Q2 as well.

Let us check out what the changed demand pattern under COVID-19 will mean for HDS. The safety product category was up by 31% in March following the company’s increase in global sourcing capabilities. Also, the company’s sales to healthcare organizations more than doubled in March, leading to a significant rise in the company’s revenues from government business.

The sharp fall in the company’s number of branches in March will result in natural workforce attrition, which will aid the company’s headcount reduction initiatives. Lower signings of Onsite branches will also reduce the company’s marketing-related costs. So, incentive compensation will decrease. Plus, the company will reduce employee-related costs by eliminating sales and travel-related selling. From Q4 2019 to Q1 2020, the company’s EBITDA margin inflated by 100 basis points to 22.6% after the company implemented some of these measures. However, if sales fall in Q2, as is expected by the management, it will result in under-absorption of fixed costs and can reduce the SG&A margin in the short term.

The Leading Indicators Dive

According to fred.stlouisfed.org, the U.S. real GDP decreased by 5% in Q1 2020. In comparison, the GDP grew by 2.1% in Q4 2019. The lower GDP growth is typically a bearish indicator for FAST. The ISM Manufacturing PMI improved marginally to 43.1 in May compared to 41.5 in April, although it continues to exhibit contraction in activities. Much of the decline was due to a decrease in the transportation equipment, petroleum & coal products, and fabricated metal products industries.

From data provided by the U.S. Bureau of Labour Statistics, the U.S. unemployment stayed sharply high in April and May after it remained historically low for several months in the previous months. High unemployment, typically, translates into lower demand for industrial products, and therefore, lower capex, which usually results in lower revenues and margin for industrial product providers like FAST. According to the U.S. Census Bureau, the new privately-owned housing units decreased by 20% in April 2020 compared to the 2019-average. The current fall indicates a slowdown in Fastenal’s end market.

Analyzing The Current Drivers

During Q1 2020, FAST closed 42 traditional branches compared to Q4 2019. The decrease in public branching also reflects the decline in U.S. GDP due to a fall in consumer spending, inventory investment, business investment, and exports. However, Q1 saw growth in housing investment and government spending. As the business conditions remain sluggish, investors should remain cautious regarding the outlook in Q2 and Q3, at least.

In contrast, the company continues to put faith in the success of the onsite platform, adding 115 locations (net of closures) during the quarter. While the fastener sales, which are typically cyclical, went up marginally in January and February, it went down by 10% in March due primarily to lower non-OEM, non-construction fastener sales. The dip exhibits the drop in activity in amusement parks, schools, and retail operations following the social distancing requirements as well as restriction of public access to its branches. Sales through the vending platform increased by double-digit in Q1. Approximately 20% of the company’s revenues are generated through sales through vending, while another 10% comes from the bin stock platform.

In March, FAST acquired assets from Apex Industrial Technologies. Investors may note that since 2010, the company has expanded its relationship with Apex, which provides access to the industrial MRO marketplace. The Apex transaction is expected to strengthen the vending platform technology. The management expects the current share of 30% of its revenues generating from this platform to double in the long term.

Dividend Yield

In January 2020, Fastenal increased its quarterly dividend by 14% to $0.25 per share, which translates to a forward dividend yield of 2.4%. Many of the company’s competitors, including DXP Enterprise (DXPE), HD Supply (HDS), and WESCO International (WCC), don’t pay a dividend. During Q1, it returned $196 million to shareholders through dividends and share buyback.

Cash Flows, Capex, And Debt

In Q1 2020, FAST’s cash flow from operations (or CFO) was $241 million, which was an 18% increase compared to a year ago. Higher revenues and an improvement in working capital led to higher CFO. In Q1 2020, the company’s capex decreased by 10% compared to a year ago, which led to a 28% increase in free cash flows (or FCF) in Q1. In FY2020, the company expects capex (at the guidance mid-point) to reduce by 44% compared to FY2019.

FAST also has a robust balance sheet, as I discussed in my previous article. As of March 31, its debt-to-equity ratio (0.17x) is lower than its competitors’ average (0.93x). Its competitors include HD Supply Holdings, WESCO International, and DXP Enterprise.

What Does The Relative Valuation Imply?

FAST is currently trading at an EV-to-adjusted EBITDA multiple of ~20x. Based on sell-side analysts’ estimates, the forward EV/EBITDA multiple is marginally lower, which implies slightly higher EBITDA in the next four quarters. Between FY2015 and now, the stock’s average EV/EBITDA multiple was 15.1x. So, it is currently trading at a premium to its past average.

FAST’s forward EV-to-EBITDA multiple is nearly unchanged compared to the current multiple as opposed to the expansion in multiple for its peers, which implies that the sell-side analysts expect the company’s EBITDA to stay unchanged compared to a fall in EBITDA for peers in the next four quarters. This should typically result in a marginally higher EV/EBITDA multiple compared to peers. The stock’s EV/EBITDA multiple is significantly higher than its peers’ (HDS, FERGY, and WCC) average of 9.9x. So, the stock is relatively overvalued at the current level. I have used estimates provided by Seeking Alpha in this analysis.

Analyst Rating

Source

According to data provided by Seeking Alpha, three sell-side analysts rated FAST a “buy” in June, while 11 of them rated it a “hold.” Three of the analysts rated a “sell” or “very bearish.” The consensus target price is $39.1, which at the current price, indicates ~6% downside.

What’s The Take On FAST?

FAST has started to reap the benefits from its current strategy of relying more on onsite locations while it reduces the reliance on the public branches. The company’s purchase of assets from one of its key onsite vendors indicate how its strategic decisions are affecting investment. The overarching story for the quarter has been a shift away from fastener sales to other healthcare product sales, particularly to the healthcare and the government sectors.

However, the shrinkage in the economic activities and construction activities have resulted in a product mix change, even though the pricing level did not change in Q1. Given the volume headwinds, I think the company’s margin will face pressure in the near term. To counter this, the company has implemented a slew of measures, including headcount reduction and decreasing marketing-related costs. It is unclear how effective the steps will be given the shift in its customer base. Since March, the PMI index suggests a severe slowdown, while the unemployment rate and spending on new construction have deteriorated. I think the company’s sustained effort to diversify the sales base will pay off, while its margin will contract in the short term.

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.





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Pension insurance deals boost UK company shares by up to 3%, says report By Reuters


© Reuters.

LONDON (Reuters) – Most London-listed companies that transferred pension obligations to insurance companies saw their share prices rise by up to 3% more than sector peers in the six months after completing the deals, a report showed on Wednesday.

Two-thirds of the more than 70 firms which transferred part or all of their defined benefit pension schemes to an insurer since 2007 saw a share price lift afterwards, the report by consultants Mercer said.

Pension payments in a defined benefit scheme are based on an employee’s final salary before retirement.

The share price rise ranged from 0.25-3% and tended to increase over the six-month period, the report showed.

“Defined benefit plans in some cases can be a drag on a company, to remove some of those elements is probably a positive,” said David Ellis, UK head of bulk pensions insurance at Mercer.

The deals surveyed by Mercer totalled 90 billion pounds ($114 billion) and 48 were for companies in the FTSE 100 () index.

Two-thirds of Britain’s company pension schemes are in deficit, following years of low interest rates which have slashed their investment income.

So-called bulk annuity deals enable companies to rid their balance sheets of the pension funds, which can be a deterrent to merger activity, but many companies cannot afford them.

Bulk annuity deals hit a record volume of 44 billion pounds last year, though 2020 is expected to be slower.

Legal & General (L:), one of the biggest players in the market, said on Tuesday it expected to have completed 3.4 billion pounds in deals by the end of June and was quoting on a pipeline totalling a further 25 billion pounds.

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