Ford Motor Company (F) — Q1 2015 Earnings Call Transcript

Thank you, Mark and good morning. On behalf of the entire Ford management team, I would like to thank you for taking the time to be with us this morning so we can provide you with additional details of our first quarter 2015 financial results. Copies of this morning’s press release and presentation slides are available on Ford’s investor and media websites. Presenting today are Mark Fields, President and CEO and Bob Shanks, Chief Financial Officer. Also participating are Stuart Rowley, Corporate Controller; Neil Schloss, Corporate Treasurer; Paul Andonian, Director of Accounting; and Mike Seneski, Ford Credit CFO. Today’s presentation includes some forward-looking statements about our expectations for Ford’s future performance. Of course, actual results could be different. The most significant factors that could affect future results are summarized at the end of this presentation and detailed in our SEC filings. Finally, any non-GAAP financial measures are reconciled to the U.S. GAAP equivalent in the appendix of the slide deck. Our Form 10-Q is planned to be released this afternoon. With that, I would now like to turn the presentation over to Mark Fields.

Okay. Thanks, George and good morning, everybody. So, why don’t we just get ready to the first slide? As you can see here, our plan for profitable growth, and of course our focus as a business continue to deliver and they remain unchanged. It starts with accelerating the pace of progress of our ONE Ford plan, while at the same time delivering product excellence and driving innovation in every part of our business. Going on to Slide 2, you can see that the first quarter was a good start to the year in which our results will grow progressively stronger as we launch the new products and we continue to build momentum. And while wholesales were about unchanged due to major product launches and the revenue was down mainly because of the effect of the stronger U.S. dollar on our international operations, we grew our global market share and achieved profitability in four of our six business units. We are updating our guidance for the year for some of our business units and we now expect North America’s operating margin to be stronger than previously expected and that the loss in South America will be greater, but still an improvement from last year due to the deteriorating external conditions that we see there. We are also reconfirming that 2015 will be a breakthrough year for Ford, including company pre-tax guidance of $8.5 billion to $9.5 billion with automotive revenue, our operating margin and operating related cash flow to be higher than 2014. On Slide 3, as we talk about our plan to deliver profitable growth, you can see that we delivered in the first quarter, from several new Ford and Lincoln products and new plants and facilities to being named the only automaker on the list of the World’s Most Ethical Companies and growing our dividend, we are very pleased with our progress. So, with that, why don’t I turn it over to Bob and then he will take us through the details. So, Bob, why don’t you take away?

Thanks, Mark and good morning everybody. Let’s start at the top on Slide 4. Our first quarter wholesale volume was 1.6 million units, which was down 21,000 units from a year ago and the revenue was $33.9 billion, which was down $2 billion. Our pre-tax profit was $1.4 billion, $24 million better than a year ago and after-tax earnings per share at $0.23 or $0.02 lower. Net income attributable to Ford was $924 million that was $65 million lower than a year ago, more than explained by a higher operating tax rate this quarter. Automotive operating related cash flow was $500 million. It was lower than a year ago due to less favorable working capital changes and higher net spending. Automotive gross cash at the end of the quarter was $19.5 billion, exceeding debt by $6.1 billion. Our first quarter operating effective tax rate was 34% compared to 26% a year ago. The increase is mainly the geographic mix of our regional results. We expect our second quarter rate to be about 34% as well. And for the full year, we now expect our rate to be about equal to or higher than our 2014 rate of 26%. This outlook continues to assume the extension of U.S. research credit legislation in the fourth quarter. And as you can see on Slide 5 both of our sectors automotive and financial services contributed to our first quarter pre-tax profit and both improved compared with the first and fourth quarters of 2014. Let’s now turn to Slide 6, where you can see the key market factors and financial metrics for our automotive business. Stepping back first and looking at the full year, we expect to achieve strong top line growth as we leverage a growing global industry, as well as improve our global market share on the strength of our 24 product launches last year and the 15 we have planned for 2015. We also have more capacity coming online in Asia-Pacific in the second half that will drive incremental volume and revenue. We also expect improvements to the bottom line, specifically higher automotive operating margin and strong growth in automotive pre-tax profit driven by North America and Asia-Pacific with improved results in Europe and South America as well. We continue to expect most of the company improvement to occur in the second half. Focusing now on the first quarter, we estimate that global industry SAAR shown on the lower left was 87.5 million units, that was up 1% from a year ago. And as already noted we grew our global market share to 7%. Wholesale volume was down slightly from a year ago due to the effects of major product launches, which contributed to lower dealer stock increases and constrained our share growth. Our revenue was down 6% due to the unfavorable exchange effects of the strong U.S. dollar on international operations, as well as a lower volume. We are very pleased that our operating margin improved, which at 3.6%, was up two-tenths of a percentage point and that our automotive pre-tax profit of $936 million was essentially unchanged from a year ago. As shown on Slide 7, our unchanged automotive pre-tax profit was the result of higher net pricing, favorable exchange and favorable mix. Higher cost and lower volume were offsets. The strong net pricing mainly reflects new products in North and South America as well as partial recovery in South America of the adverse operating effects of the region’s weaker currencies and high local inflation. The non-repeat of unfavorable balance sheet exchange effects last year, primarily in Venezuela and Argentina, explains most of the favorable exchange. The good news on mix came from North America, primarily Super Duty, and in Europe, primarily Transit and Mondeo. The higher costs are driven principally by three factors: first, the effects of new products launched since the first quarter a year ago; secondly, new plants in Asia-Pacific launched over the past year or to be launched later this year; and finally, investments for future new products and capacity to support our growth beyond 2015. North America was the major driver of the lower volume due to product launch effects. As shown below the chart, automotive pre-tax profit improved over the fourth quarter 2014 because of lower cost and favorable exchange. Slide 8 shows automotive pre-tax results by business unit, along with other automotive, which is mainly net interest expense. Previously, we have guided that we expected automotive net interest expense to be equal to or higher than last year’s expense of $583 million. We now expect full year expense to be about $650 million, including the impact of the external debt of our Russia operation, Ford Sollers, which was fully consolidated as of March 31, along with incremental funding in Brazil. Before we move on to the business units, just a reminder here on Slide 9, we said back in January that we expect results in the second half of the year to be stronger than the first half due to the timing of our product and capacity launches. And as shown here, this is still the case. Now, what I would like to do is to take you through each of the automotive business units, starting with North America on Slide 10. We expect North America to have a very strong year in 2015 with substantial top line growth, higher pre-tax profit, and an improved operating margin. This is based on continued robust industry sales, our strong product lineup, including products launched last year and planned for this year, our continued discipline in matching production with demand and a lean cost structure. In the quarter, wholesale volume and revenue were down 5% and 2% from a year ago respectively. The lower wholesale volume reflects launch related declines of about 40% for F-150 and over 50% for Edge. All other vehicles were actually up 7%. The declines for F-150 and Edge resulted in lower U.S. market share, which was down six-tenths of a percentage point to 14.7%, as well as lower stock increases this year than in 2014. Higher industry sales reflecting the U.S. SAAR of 17.1 million units were a partial offset. Our lower revenue in North America was driven by the lower wholesale volume, as well as the adverse effects on our revenue in Canada and Mexico of the strong U.S. dollar. This was offset largely by higher net pricing and favorable mix. North America operating margin was 6.7%, down six-tenths of a percentage point from last year and pre-tax profit was $1.3 billion, which was down $160 million. Let’s now go to Slide 11 for a closer look at the factors behind the lower profit. As shown on this slide, lower volume for F-150 and Edge due to their launches explains North America’s lower pre-tax profit in the first quarter. All other factors essentially offset one another. We expect results in North America to improve substantially over the balance of the year as we benefit from a full supply of F-150 and Edge, as well as other new products we have yet to launch including Explorer and Lincoln MKX. As shown below the chart, North America pre-tax profit declined compared with the fourth quarter due to higher costs and lower volume. In terms of the full year guidance, we continue to expect North America to be strongly profitable this year at a level that will exceed last year’s results. Today, we are increasing our operating margin guidance from 8% to 9% to 8.5% to 9.5%. This reflects our strong confidence in the F-150 and our positive view of the product’s impact on our business now that the launch is successfully behind us. We also expect the recently launched Mustang, Transit, and Edge to continue to perform strongly, and we are very excited about the upcoming launches of the Explorer and the MKX. Now let’s turn to Slide 12 and talk about South America. The business environment in South America has deteriorated beyond our expectations with negative GDP growth, continued high inflation, further currency weakness across the region. The industry pricing environment is also difficult, particularly in Brazil where actions taken to date generally lag the combined adverse effects of the weaker currencies and high local inflation. Our strategy of replacing legacy products with ONE Ford products is bearing fruit. The new Ka is improving our market share in the region, which at 9.7% was up a strong 1.1 percentage points. In Brazil, EcoSport and Fusion continue to lead their segments. And as a result of the success of the F-series and Cargo, Ford led the light and semi-light truck segments in the first quarter. As we continue to sustain a strong product lineup, our team in South America is also focused on finding other revenue opportunities, reducing costs, continuing to match production to real demand and increasing local content to mitigate further the adverse effects of the weak local currencies. In the first quarter, our wholesale volume and revenue decreased from a year ago by 3% and 20% respectively. The lower volume resulted from a 1.1 million unit decline in industry SAAR, reflecting the impact of Brazil’s weaker economy and Argentina import restrictions. Our revenue decline resulted from the weaker currencies and unfavorable volume and mix. Operating margin was a negative 12.5% with significant improvement from a year ago, while pre-tax loss was $189 million that was an improvement of $321 million. As we show on Slide 13, South America’s profit improvement was due to favorable exchange, most of which reflects the non-repeat of last year’s unfavorable balance sheet exchange effects of $310 million in Venezuela. Although volume was effectively unchanged, we are very proud that our team was able to offset the effective lower industry volume by growing our market share as shown on this chart in the colored box for volume and mix. As you can see below the chart, the first quarter loss was about the same as in fourth quarter of 2014. For the full year, we continue to expect our pre-tax loss to improve from 2014, but the loss now will be greater than what we had expected due to the more difficult external environment. Let’s turn to Slide 14 and we will talk about Europe where we are continuing to implement our transformation plan focused on product, brand, and cost. We confirmed earlier this month our commitment to the Russian market, where we agreed to certain changes with our partner, Sollers that will allow both parties to continue to support the Ford Sollers joint venture in the near-term, while providing a platform for future growth in this very important market. As a result of these changes, we consolidated our Russian operations as of March 31. This had no effect on first quarter earnings. In the quarter, our Europe 20 market share improved two-tenths of a percentage point to 8.2%. The success of our full line of transit vehicles and continued strong performance of our Ranger compact pickup contributed to a 2.8 percentage point improvement in our commercial vehicle share to 13.3%. In fact, Ford was the leading commercial brand in Europe 20 in the first quarter. Our Europe wholesale volume improved 2% from the year ago, while revenue declined 11%. The higher volume resulted from a 1.2 million unit increase in the Europe 20 SAAR, which was 15.7 million units as well as from Ford’s higher market share. This was offset largely by the non-repeat of last year’s dealer stock increase. The strong U.S. dollar explains our lower revenue. Europe’s operating margin was a negative 2.7%, down two-tenths of a percentage point from a year ago and the pre-tax loss was $185 million, which was unchanged. Although results were about the same as last year, you can see on Slide 15 that there was a lot of variability among the factors. Higher industry share and favorable mix were offset partially by the non-repeat of last year’s stock increase. The lower net pricing was driven in part by the aging of selected vehicle lines, but a portion also resulted from higher incentive activity in the UK and Switzerland. This was driven in part by a more competitive activity that was triggered by a stronger pound, sterling and Swiss franc versus the euro that made sales in these two markets more attractive. In total, costs were about flat including the impact of lower discount rates on pension expense. As shown below the chart, first quarter pre-tax results improved from fourth quarter 2014 due to favorable market factors, lower cost, and favorable exchange. For the full year, we continue to expect Europe’s pre-tax loss to improve from 2014, including the consolidation of Ford Sollers. Now let’s turn to Slide 16 and review Middle East and Africa, where we are focused on building our distribution capability, expanding our ONE Ford product offering tailored to the needs of the markets in the region, and leveraging our global low-cost sourcing hubs. Our wholesale volume and revenue declined 8% from a year ago. The lower volume was the result of unfavorable changes in dealer stocks, while the lower revenue reflects the lower volume as well as the impact of the stronger U.S. dollar. Operating margin was 7.5%, which was 2.8 percentage points higher than a year ago, and pre-tax profit was $79 million, an improvement of $25 million. This was driven by favorable exchange. For the full year, we now expect Middle East and Africa to deliver about breakeven results, which is an improvement from our prior guidance of a loss somewhat larger than 2014. Alright, let’s now go to Slide 17 and we will talk about Asia Pacific. We are continuing our strategy in this region to invest for growth in incremental capacity, new products, and of course Lincoln in China. We expect Asia Pacific to have a strong year with the top and bottom line results improving substantially in the second half versus the first half due to added capacity and new products to be launched from the middle of the year, notably the three-row Edge, the all-new Taurus, Figo, the all-new Everest, the refreshed Ranger, and the all-new Lincoln MKX. As shown on the left, our first quarter wholesale volume was up 5% compared with a year ago, while our net revenue which excludes our China JVs declined 14%. Our China wholesale volume, which isn’t shown, was up 10% in the quarter. This reflects in part strong market reception to the all-new Escort, as well as Lincoln, which is off to an encouraging start with several of our China dealers already among the brand’s highest volume dealers globally. Our higher volume in the region was driven by a favorable change in dealer stocks, including recovery of stocks to targeted levels. We estimate first quarter SAAR for the region at 38.9 million units, which is unchanged from a year ago although we did see signs of slowing growth in China during the quarter. Our first quarter market share for the region at 3.4% and our China market share at 4.5% were both equal to first quarter records set last year. The lower revenue was a result of the lower volume from our consolidated operations as well as weaker currencies. Operating margin was 4.5%, which was down 6.6 percentage points from a year ago and pre-tax profit was $103 million, down $188 million. Our China joint ventures contributed $360 million to pre-tax profit this quarter, reflecting our equity share of their after-tax earnings. On Slide 18, you can see that the decline in Asia-Pacific’s first quarter pre-tax profit is explained primarily by higher structural cost. This reflects costs related to our plans to introduce 18 new vehicles this year and to bring online new capacity with four new plans. We will see the volume and revenue benefits of these investments in the second half. For the full year, we continue to expect Asia-Pacific pre-tax profit to be higher than 2014 with the improvements occurring in the second half consistent with the launch timing of new capacity and products. Let’s now discuss Ford Credit on Slide 19. Ford Credit is a strategic asset that provides world class financial services to our dealers and customers and is an integral part of our global growth and value creation strategy that maintains a strong balance sheet that provides solid profits and distributions to Ford. In the first quarter, Ford Credit continues to demonstrate solid growth supporting Ford, including the launch of operations in India. Origination practices continue to be consistent and costs remain well-controlled and in line with expectations. In the quarter, Ford Credit’s pre-tax profit was largely unchanged from a year ago. Favorable volume and mix primarily reflects higher consumer finance receivables globally and an increase in leasing in North America. Lower portfolio pricing drove the lower financing margin and the higher credit losses primarily reflect the non-repeat of reserve releases that occurred in the first quarter last year. As shown below the chart, favorable lease residual performance due to higher auction values in North America contributed to the higher pre-tax profit compared with fourth quarter 2014. For the full year, we continue to expect Ford Credit pre-tax profit to be equal to or higher than 2014 year end managed receivables to range from $123 billion to $128 billion and distributions to be about $250 million. We now expect managed leverage to be at the upper end of our range of 8 to 9 to 1 in the near term, because of the translation impact of the strong U.S. dollar. Next on Slide 20 is our automotive gross cash and operating related cash flow. Automotive gross cash at the end of the quarter was $19.5 billion. That was a decrease of $2.2 billion from the end of the fourth quarter. Automotive operating related cash flow was positive $500 million driven by our automotive pre-tax profit. In the first quarter, we had higher than normal levels of non-operating related cash outflows associated with separation payments, the one-time payment from us as the interest in AAI, which is our former joint venture assembly plant in Michigan, debt repayments and pension contributions. For the balance of the year, AAI will not repeat and quarterly cash outflows related to separation and debt payments and pension contributions will be on average much lower. Debt repayments in the quarter totaled $600 million and we made pension contributions of $800 million to our funded pension plans. We continue to expect contributions to funded plans for the full year to total $1.1 billion. We also made dividend payments of $600 million during the quarter. Slide 21 shows that our automotive debt was $13.4 billion at the end of the quarter, $400 million lower than fourth quarter. We had maturities in Europe and Asia-Pacific and continued to pay down U.S. Department of Energy loans. These reductions were offset partially by the consolidation of Ford Sollers external debt. We ended the quarter with net cash of $6.1 billion and automotive liquidity of $30.2 billion. Although not yet included in our total liquidity, we are in the process of amending and extending our corporate revolving credit facility. The facility, which is presently $12.2 billion, is expected to grow to $13.4 billion. The increase in the facility will be almost entirely allocated to Ford Credit to support its growth and liquidity plans. And with that, this concludes our review of the financial details of our first quarter earnings. So, I would like to turn it back to Mark. He is going to take us to our outlook for the 2015 business environment, as well as our planning assumptions and key metrics. Mark?

Okay, thanks a lot, Bob. So, let’s start on Slide 22 with our view of the business environment and we do expect this year to be a year of growth globally with GDP expanding in about the 3% range. And this will be driven by the U.S., China, although at levels lower than in years past and improved growth in the euro area, in particular, with the UK continuing to perform at a higher level versus the rest of the continent. The main areas of concern continue to be in South America, which as Bob mentioned continues to face difficulties and also Russia. We also expect the strong U.S. dollar and the weak commodity prices, including oil to continue throughout the balance of the year. So, all-in-all, we see conditions as still being supportive of modest growth in the global auto industry in 2015. So, let’s turn to our total company guidance, which you can see on Slide 23. And as both Bob and I have said, we do expect this year to be a very strong one for Ford Motor Company. In terms of industry sales outlook, we are raising our guidance for Europe 20, while we are trimming it back a bit in China. And industry sales here in the U.S. still look to be on track to be between 17 million and 17.5 million units. All of our other financial guidance at the company level remains on track to what we said back in January. We said we were going to see growth in automotive revenue compared with 2014, a higher automotive operating margin, higher positive operating cash flow, equal to higher results at Ford Credit, and a company pre-tax profit of between $8.5 billion and $9.5 billion. So, we feel good about our first quarter results and believe that they have us on track for the breakthrough year that we expect 2015 to be. And then, just to sum up on Slide 24, our plan and our priorities as a company remain unchanged and we remain on track to deliver our near and long-term objectives that we have laid out. And across Ford, we are accelerating the pace of our ONE Ford plan. We are delivering product excellence with passion and we are driving innovation into every part of our business. And all of this is supported by a day-in and day-out relentless execution on the operational fundamentals of our business. And I think nothing brings this to life better than the achievement by the Ford team in successfully launching the all-new F-150. And as we sit here today, the launches of our Dearborn and Kansas City plants are complete and we will reach full production during the balance of the second quarter. And earlier this month, the all-new F-150 SuperCrew, the SuperCab and the Regular Cab, all earned the U.S. government’s highest possible crash safety rating. And I think that adds to the F-150 strengths as the toughest, smartest and most capable F-150 that we have ever produced. And on top of that achievement, outside experts also project that the F-150 residual values will be higher than not only our outgoing model, but also well above those of our highest volume competitors. Looking at customer reception, well, I have to tell you the customer reception to the product has been simply outstanding. And it’s now clear that the bottom line contribution to our business from F-150 will be even stronger than we had originally expected. So, I think successes like this give us confidence in our five long-term objectives, which include being in the top five in global sales, creating a better balance of profitability and sales around the world, achieving 8% plus operating margins, being in the top quartile in total shareholder returns, and importantly, remain highly regarded by all of our stakeholders. So, we have the right strategic framework. I think we have the right proven operating process. And of course, I think we have the right team to deliver this, because Ford is a growth company in a global growing industry. And we are a proven innovator. In a period and a time here in the industry we are seeing rapid technological advancement than we have ever seen before. And we are operating the business for today, but also we are pushing ourselves to think and act and disrupt like a startup company anticipating customers’ wants and needs 10 and 15 years down the road. And both are absolutely core to our plan for profitable growth. So, with that, why don’t we open up the phone line for your questions? So, George?

Thanks Mark. Now, we will open the lines for about a 45-minute Q&A session. As usual, we will begin with questions from the investment community then take questions from the media. Now in order to allow for as many participants as possible within this framework, please keep your questions brief and please avoid asking more than two. Mark, can we have the first question?

Good morning guys and thanks for the new press release format, it’s actually incredibly helpful. First question, just on North America, if we think about what’s going on in the first half, it’s understandable that margins are a bit depressed and it’s certainly understandable that the bounce back in the second half of the year, but it looks like the second half would be somewhere in the ballpark of 11% plus or minus, is there anything that’s happening in the second half of the year other than these two launches that are abnormal that would inflate these margins, I am just trying to understand which part of the year is more representative of what we should be thinking about for margins going forward in North America?

Well, I think as you think about is there anything abnormal, no. I think as we talked about in the first quarter you heard Bob’s comments around their wholesale reductions that we have seen in F-Series and Edge. And as we get into the second half of the year, I think we are seeing great, really good acceptance to our new products, not only F-150, but Mustang, Transit. The Edge is still very early days, but it’s off to a great start and we have the Explorer coming. So I think barring any kind of external shock, if you will to the economy, what you will see us is running at kind of regular production rates. And John, to put that into perspective on margin, as we mentioned it’s very clear now that we are through the launch, mostly through the launch of the F-150 with a little bit of the acceleration, the final acceleration curve in the balance of the second quarter. It’s clear we are seeing higher revenues. We are seeing likely a richer mix, lower cost. And I think that’s than we originally expected as we launched last year. So we are growing the top line, which is allowing us to grow the bottom line. And if you look at the first quarter, if we ran at the kind of regular production rates, so if F-Series and Edge, we would have seen a margin of 10% or a bit above in the North America, so I think that’s our expectation as going forward. And that’s why we raised the overall guidance for the business unit.

And John what we also are seeing is the launch effects are largely in the first quarter, somewhat in the second quarter. There is not as much of an effect of launches in the second half of the year, which maybe is a little bit unusual. But that’s what you are seeing occur this year. We actually have a similar effect that’s taking place in the case of Asia Pacific where we have had a lot of costs in place right now to support the plants that we will be opening around mid-year, which will bring with them new product and new volume, new revenue, new capacity. So a very similar story in both markets in terms of the second half versus first half.

Okay. And then if I can just ask a second question around Europe, I am just curious as you look at the commitment to Russia, it’s different than what you are seeing from one of your other big competitors out there. And I am just curious what you are seeing in Russia that you think is different, is it a function of the potential growth in the market, your relationship with Sollers, product cadence, I am just trying to understand what’s different there. And also, as we think about that and in Europe in total, it looks like your second half should be better in Europe, much better than it does in the first half. And the first half looks like it’s running pretty well as well, so I am just trying to understand the cadence in Europe as well?

Well, John I will take the question on Russia and Bob maybe you can take the question on general Europe. But essentially, what we see in Russia is it’s a big and important market. Even at its reduced rate right now, it still is going to be one of the bigger markets in Europe. And we still hold the view that when the market stabilizes and ultimately recovers that this could be the – one of the biggest, if not the biggest market in Europe. And it’s important for us to be there. At the same time, we have been making a lot of progress on our presence there, obviously the joint venture with Sollers and we have invested as you know over the last couple of years where by the time we get to the balance of this year we are going to have a full lineup of vehicles that are localized for Russian customers. And although the market is difficult right now, everybody knows how difficult it is, I think we have done a good job in localizing our products. As we closed last year, we were probably about 40% localized and obviously, that's going to increase going forward. 99% of our sales in Russia are for vehicles that are actually produced in Russia. So when we look at the market environment, when we look at what we have done in terms of our product portfolio, in terms of localization. And to your point John, I think we have a very good working relationship with Ford Sollers, where we are both very dedicated to making sure that this business not only develops and succeeds. I think we are going to be very well positioned for future growth in Russia when we start seeing stabilization and ultimate growth. And that will have not only benefits for Russia, but also benefits for our European business. Bob, do you want to just talk about Europe?

Yes, in terms, I know what you might expect in Europe. Normally, John the second half is worse than the first half and that’s largely around the flat that you have got the plant shutdowns in the third quarter for about a month and then you have got the usual seasonal effect on the costs in the fourth quarter. I think this year, it could be mitigated just a little bit because we do have a number of significant products that are in the process of being launched or we will launch in the balance of the year and that will include the S-MAX, the Galaxy, the C-MAX, the Grand C-MAX are coming onboard. We have also got, I think the Mustang comes later this year, small volume Edge I think launch towards the end of the year. So it might be a little bit different. But I think you are probably going to see probably a little bit of worse performance in the second half versus the first half and that’s just normal seasonal results there.

Great. Thanks for taking my question. Just following up on Europe, can you help us quantify the impact of the Stollers consolidation when we think about it quarter-over-quarter on a pre-tax basis what kind of headwind will that be?

When you think about the Russian operations, the effects that we have been reporting all along up until I think the second – after the second quarter of last year when we wrote off the equity in Sollers, it isn’t just the Ford-Sollers JV, but we ship components there, we ship parts there, we are incurring engineering expense on behalf of Ford-Sollers for which we were receiving royalties. So now that we are fully consolidating, of course all of that just becomes intercompany, if you will. So while there will be some impact, I don’t think it probably is going to be quite as great as you might think because there was a lot of effect that was already in our consolidated operations before we picked up the JV. So you will just be picking up sort of the end market JV results. We do expect and I think we have talked about this already, Colin that we will have a greater drag on the business this year from total Russian operations than what we saw last year. But the good news is, I think with the change in terms of how we are going to work together, we are going to be able to move very quickly. Now, we have got a lot of new products that are coming. I think the last one is Fiesta, which is going to be a significant product for the marketplace. It’s really encouraging that some aspects of what have been very variable factors, like the ruble, at least for the moment appear to have somewhat stabilized and actually are settling at a rate that’s quite a bit better than what it was at the beginning of the year, which will help. So I think overall, we still feel like we are pretty much on track with what we had expected at the beginning of the year and already continuing in terms of our guidance for the European loss.

And my second question, any color on South America in terms of how we should think about the cadence throughout the rest of the year, any reason to think things are going to get worse or is this if you – is Q1 actually a more difficult start?

Well, again it’s a great question, Colin on what the crystal ball looks like. I think from our standpoint as you know we are changing the guidance based on the deterioration that we have seen in the external environment. And I think we are just going to stay focused on the things that we can control. And obviously, that’s continuing to put fresh products into the marketplace. Bob mentioned some of the market share gains that we have had. We are also in that very important market. The team is energized around as you can imagine further reducing costs, looking at more localization, looking at optimizing our footprint, those types of things. So as we go through the balance of the year, we will deal with the external environment. But stepping back, we do expect South America, it’s an important and attractive market as it has been in the previous decade. And we do expect it to be a positive contributor to our profits in the future, but the timing to profitability to be quite honest is going to be based again on the stabilization of the market, but also ultimately some improvement in the external environment.

Hi, good morning everybody.

Good morning.

Wanted to drill down a little bit on your net pricing in the North America on Slide 11, we saw some real encouraging signs on the gross pricing front with both pricing incentives netting $650 million or so, but a lot of it seems to be offset by your material excluding commodity. So, was there anything specific in the material performance this quarter or would you expect essentially material to become a large headwind as a result of the new product that’s coming out?

Thanks, Emmanuel. Yes, that’s a really good question. I am looking at Slide 11 here in front of me. And for those of you that have the slides if you could refer to that, because I think if you look at that picture and you just imagine on the volume and mix, which is pretty flat here, you imagine that being very, very strong. I mean, that’s what the year is going to look like. You are going to have a lot of strong positive growth on the top line mix as well. You are going to have very strong net pricing around the new product, but you are going to have higher cost, both contribution cost and structural cost and that’s what we talked about at the beginning of the year. That’s exactly the picture that we painted for North America, but that’s going to yield the very strong margins that Mark referred to in the balance of the year, which is going to give us that 8.5% to 9.5%. So, given a 6%, 7% in the quarter, that’s sort of – you can back into what that means for the balance of the year. We are going to have very strong margins, but that’s the picture of what the business will look like.

And just to clarify this, so right now, the pricing in material sort of like offset each other. So, I understand obviously, the pricing will become a larger benefit as your volumes ramp up. Would it still be – would you still expect it to be offset by increasing materials or are saying that materials increases is the magnitude that we are seeing this quarter, but pricing is upside?

Well, I think you will see stronger pricing, but I think what you have to look at is the pricing and the volume together as well as the mix. It’s not just one or the other, it’s those two, the first two bars there, which is volume, mix and pricing, you have to think about them all together, because the product is going to drive volume, the product is going to drive better mix. And then of course we are also going to get the pricing. So, all of those things together are going to drive the top line. And then the partial offset to that is going to be both the investments that we are making in the business on the structural or the fixed side and then of course the contribution cost, which is driven by the product cost that we are putting in.

Well, when you look at, you step back and you look at our performance in the first quarter, the industry was up about 3% and we were up a little over 9%, so almost triple that, but as you step back and look at the economy and we were just there obviously last week for the Shanghai Motor Show and spent the balance of the week there, we expect the economy, as we mentioned earlier, to be growing in about the 7% range. But you are seeing it obviously down from previous years, because you are seeing less demand for exports, but you are also seeing the shift from the economy that has relied on growth through industry and investment to one that’s shifting towards more service-oriented and consumer-led economy. So, I think that’s having some ramifications in there. And as you can expect, you are seeing a different play out in different regions around the country. For example, in Chongqing, where our headquarters is, I think the GDP growth there was about 10% last quarter and obviously less than other regions. We are seeing the industry as you saw from our guidance. We kept it down a bit. So, we expect some modest growth, but we are seeing signs of some slower growth. And you are seeing it in B and C segments, some of the smaller segments, as it gets more competitive there. And then also, we are seeing a bit of a shift as customers look at small SUVs.

Good morning, everybody. I wanted to follow up, first of all, on the Asia-Pacific question. You had obviously some cost headwinds in China and India as you have had in the earnings growth with China equity earnings up like 2% on volume, that’s up 10%. Could you just give us a sense of the magnitude of the headwinds that go away in China and India as you look out for the back half? And a question on pricing trajectory there, there has obviously been some mix commentary from some of the Germans. What’s the – at a high level maybe an industry level, what do you see as the trajectory of price deflation there compared to prior years?

Well, I will take a shot. And if Mark wants to supplement, he can. I want to go back and use the same approach I did on North America, because it’s simple and I think it portrays what we are seeing. If you look at Slide 18 which is the Asia-Pacific slide, what is really unusual when you look at this slide versus what we have seen in prior quarters is you normally would see a really big positive bar on volume and mix. And you can see it’s actually flat. So, we have seen negative net pricing as Mark said for quite a period of time. As particularly China matures, there is increasing productivity, competition intensifies, prices have been declining. And as you said, we have modeled that into our future plans. And so it’s consistent with what you are seeing here in the quarter. We have been putting cost in the business and that’s to support our growing business, not only for current quarter, current year, but forward years as well. And in this particular quarter, you are seeing a little bit of bad news on exchange, but really not material. So really, what’s missing Rod is the volume and mix, because we essentially were sort of flat for the quarter. And what we do think is going to change materially in the second half of the year with the new capacity coming on stream and the new products we would expect to see a very strong contribution in the volume and mix category. I think pricing will be helped by the new products, but I think some of the effects of the slowing industry that Mark talked about, plus the natural negative trend of pricing, particularly in China, probably is still going to be a play. And you will continue to see cost coming in the business as we move through the year. Although, I think it will start to mitigate when we get into the second half of the year on a year-over-year basis.

And I would just add, Rod as you look at the industry, I think some of the pricing pressure will be maybe more concentrated as I have mentioned in some of the small cars, B and C cars, because we are seeing a bit of the same phenomenon in China as we are in other parts of the world, this migration from passenger vehicles to small and medium-sized SUVs. So I think you will see it may be more pronounced in those segments. But again, as Bob mentioned the best thing to do is make sure you have fresh product in that environment which we will and we will deal with that. And also stepping back, as you know, the Chinese government is very conscious of the economic performance of the country. And I think they will be looking at that and hopefully implement measures that if they see a significant slowing, they will maybe take some actions. But nonetheless, I think that’s kind of the area you might see some of the more pricing pressure.

And just to clarify, Bob are you suggesting that basically, the cost inflation is going to be similar going forward, but you are going to see the volume benefit associated with that, is that essentially what you are saying?

Yes.

Okay. And then in Europe also a question on pricing, were you expecting pricing to be kind of in this ballpark, do you think that moderates as the market begins to improve and can you just refresh us kind of the bridge to breakeven from here?

I am sorry, you are referring to?

The European...

The European, yes. Well, let me talk about Asia Pacific first. I just want to underscore something that Mark said earlier, which is we do expect that we could see something around the breakeven in Asia Pacific in the second quarter. And that’s really because, as we look and get closer to the launches of those plants and the products, their launch costs will start to become even more material than what they have been. So that will probably be the story around the second quarter. But when you get into the third and fourth quarter, you are exactly right. We are going to see our expectations are that you are going to see very strong top line growth that you are not seeing in this particular quarter because of the factors that we just mentioned. When you get to Europe, Europe is a challenging market. We have made a lot of progress with our transformation plan. I think the share improvement is very, very encouraging. And we are doing that with healthy share. We actually are under-indexing in the short cycle segments rental and the demo sales. We are getting this the hard way. We are getting – with retail we are getting especially with commercial vehicles. I mentioned the number 2.8 points up, number one brand in Europe and not that long ago, we were what, number seven or something. I mean the improvement has been dramatic and the profitability of those segments is helpful as well. But we do have the impact of Russia. We talked about that being a material impact in terms of an absolute loss. We certainly are working very hard to improve that as we go forward. In the case of overall Europe, we are going to have to do more. While we are seeing the improvement in share in the particular quarter, we are talking about we have that impact on the stocks. I don’t want to pass that by because that was a little unusual. We usually will grow stocks in the quarter because we are preparing for the spring selling season and then you have got the plants shut down in the third quarter. We did not do that this quarter because we ended last year a little bit heavy on stocks. We have got ourselves in a really good position in terms of days supply we are at targeted levels as of the end of the quarter. But we did that by not building stocks if you will, in the quarter. So I want to make sure that you kind of pay attention to that when you look at that callout box on the variance slide for Europe because that was about $144 million. So that was a bit unusual. But as we go forward, we are going to have to continue to work the top line. We are going to have to continue to drive for greater share. We are going to have to work on the pricing. One thing I do want to underscore again in the quarter, that negative pricing you have to kind of look at the exchange good news because it was somewhat related in part because of what went on in Switzerland and the UK and the strength of those currencies relative to the euro. But it’s really around cost, we are going to have to take more costs out of the business and work on Russia in order for the business to continue to march towards profitability.

Yes. Good morning.

Good morning.

I want to return to North America, but talk more about the dynamics in the car market and how those might have progressed over the year and actually since you gave the Investor Day update, kind of specifically, you eliminated a shift for small or mid car where – for small car, where are small and mid-cars shaping up both in terms of volume and in terms of pricing environment and maybe as well as fleet dynamics versus what you thought and within your 50 basis point margin increase, are you actually contemplating a headwind from cars versus what you might have thought in the fall offset perhaps by the F-150?

Well, I think if you step back and you look at the car market, the highest level when you look at the industry, Brian you can see that the industry has – on a percentage basis has increased on trucks and decreased on passenger vehicles. And we have seen that pronounced obviously, in the C-car segment. And the C-car segment last year this quarter was about 20% of the industry. It’s now about 18.5%. So it’s down. Our share of Focus is about flat within that. But because of that reduction, that’s why we took the shift off. And so on the car side as – and we talked about in this back in January. We saw that shift and we expected and we factored into our plan a more aggressive, if you will environment on that, particularly given our competitors in terms of some of the products that they ship into the country here. And I think we will see it continue to be competitive going forward. The good news for us is as we see that shift into trucks and utilities, that’s the benefit for us because of our profitability on those vehicles. Well, stepping back as you know, we have been a leader in a lot of the technologies in the semi-autonomous technologies as well as the safety technologies, which are really propagated throughout our vehicle lineup depending upon the vehicle. And so I think we have been a leader in that regard. Clearly, we have seen some announcements from some of our competitors, namely you did mention Toyota in terms of price points. Obviously, as you know, we always look at our vehicle lines. We also do a lot of analysis on our competitiveness. So we will factor that in into our plans going forward. But stepping back, we have had a big commitment to technology and smart technology and delivering it in a way that provides value for customers, but also makes it available to millions of folks. So you will continue to see us do on that going forward.

Hey guys, sorry about that. The press release was good. A quick question on costs and I know that there has been a lot of emphasis on this already, but just that kind of demo down a bit more. So when you look at the cost increase in North America ex-material in the first quarter, I am just trying to understand that very simply, the run rate versus what you can price for and then Bob you had mentioned regulatory costs, how much of this cannot be absorbed in pricing and is just, you guys have to eat it and how much of this can be and will be absorbed by the consumer in this environment and how long will the consumer be willing to basically pay more and at what point do you see a bit more pressure on pricing in the future?

Yes. I don’t think it’s as simple as what you are portraying it. And I do understand what you are talking about. I don’t think you can separate the investments you make and delivering and providing customers really strong product, which is what Mark talked about, in terms of what that gives you with volume, what it gives you in terms of mix, as well as the opportunity to price for it. You really have to look at the all those factors together, John. And I know you know that, but you have to look at them altogether and understanding are you getting the appropriate sort of total revenue for that particular investment against those costs that you have put in as well. And I think, as you will see going forward in the year, in North America you are going to see a cost increase, it’s what we have talked about. And we do expect that going forward in the subsequent quarters, but you are going to see very, very strong top line growth both in terms of what’s driven by volume, what’s coming from mix and also what’s coming from of that pricing. So you really got to look at all of them together to understand whether or not you have got a good equation. And with the margins that we are talking about, it’s very, very clear that the North American business, the balance of all of those things together is actually giving us a very, very strong business.

Thanks everyone. That wraps up today’s presentation. We are really glad that you are able to join us.