Ford Motor Company (F) — Q1 2016 Earnings Call Transcript

All right. Thanks very much, Tiffany. Good morning and welcome, everybody, for the first quarter 2016 financial results. As normal, copies of the press release and the presentation slides are available on Ford's Investor website and the media websites. As always, the results discussed today include some non-GAAP references and those are reconciled to the US GAAP equivalent in the appendix to the slides. Also, today's presentation includes some forward-looking statements about our expectations for future performance. Actual results may vary, and those most significant factors are included in our presentation. Also, by the way, later today we will be issuing the 10-Q and Ford Credit will be hosting a call at 11:00 AM to review their results. Now presenting today and we'll have a few more comments, Mark Fields, our President and CEO; Bob Shanks, our Chief Financial Officer. Also participating are Stuart Rowley, Vice President and Controller; Neil Schloss, Vice President and Corporate Treasurer; Paul Andonian, Director of Corporate Accounting; and Marion Harris, our Ford Credit CFO. Before we dive in, we just made some changes to the presentation just to make it a little clearer for you, a bit of a more overall look to the business and highlight key points. And also, we just wanted to show you how we're continuing to focus on creating value and driving our long-term growth. So with that, Mark, ready to go.

All right. Thanks, Ted, and good morning, everyone. We have some very strong results to share with you today. In fact, an all-time record quarter for the company and very strong performance across the business. Our company pre-tax profit came in at $3.8 billion and that was $2.1 billion better than a year ago. Our net income was $2.5 billion and our operating earnings per share was $0.68. Both those results are more than double versus last year. Our revenue was $37.7 billion and that was up $3.8 billion, increasing 15% from last year at constant exchange and 11% as reported. We grew global market share from 6.9% to 7.1% and that was driven by improvements in North America, Europe, and our Asia Pacific regions. Our Automotive operating margin came in at 9.8% and that was a quarterly record, and Automotive operating-related cash flow was $2.7 billion and that was a record for the first quarter. We also provided $1.7 billion of distributions to our shareholders in the quarter as well. We had a tremendous performance across our portfolio of businesses. Here in North America, we achieved a record quarterly profit and a record operating margin of 12.9%. Looking at Europe, we earned $434 million in the quarter and that was up $476 million from a year ago. And this was also our fourth consecutive profitable quarter in Europe. Our revenue in Asia Pacific climbed 18% to $2.7 billion, and pre-tax profit more than doubled. And Ford Credit grew pre-tax profit and they delivered more than $500 million in the quarter. So all-in-all, a very strong start to the year, and given our strong start, we remain confident in our expectations to deliver another strong year in 2016. And we're taking the opportunity today to reaffirm the guidance for the company that we gave in January, which is to deliver performance equal to or better than last year's record. So now let's turn to slide four. And we are continuously focused on the four drivers of shareholder value that you can see on the screen here. That's about growth, returns, risk, and rewards. So first, let's talk about growth. Growth is strong and it's especially evident in our trucks, our SUVs, and as we pursue expansion into mobility. Second, let's focus on returns. We expect strong returns from our healthy mix, targeted increases in investments that will make the business stronger in the years ahead, and diversifying regional profitability. And this includes continuing our momentum in Europe and Asia, acting decisively in South America, reducing high-cost car capacity, of course increasing efficiencies across the business, and leveraging partnerships where we can. Third, let's turn to risk. Our risk profile is improving as we work to reduce our break-even levels globally with a focus on sustaining our robust structure in North America, strengthening our regional diversity, and maintaining one of the strongest balance sheets in the industry. And finally, let's talk about rewards. We're continuing to reward our shareholders with the payout of our regular dividend, plus a supplemental dividend, and we will remain absolutely focused on driving total shareholder returns and ensuring we maintain our regular dividend through a downturn. So looking at the first quarter on slide five, as I mentioned earlier, we made a lot of progress in all four focus areas. We grew our top line and announced our actions to continue to grow our core business, while expanding our business model into new areas of emerging opportunities around mobility. Our returns were strong, setting a number of records, as I mentioned earlier, and demonstrating very strong broad-based performance. In terms of risk, our business units outside of North America collectively were profitable and improved year-over-year. We also, at the same time, saw the progress we've made in improving our risk profile, which was recognized by ratings upgrades in the quarter by Moody's, S&P, and DBRS. And finally, in terms of rewards, we increased distributions with the addition of a supplemental dividend of $1 billion. Looking at slide six, among some of the other quarters, other highlights, we were recognized for the strength of our products, notably the F-150, as well as for our ethics as the only automaker on the list of the World's Most Ethical Companies. We continue progress in our journey to grow the Lincoln brand, and of course advances in new technologies and new mobility projects. So with that, now let's turn to our view of the global business environment and what's ahead. So looking at the global business environment on slide seven, conditions remain broadly supportive of growth in the global economy. This will be driven by the U.S.; continued modest recovery in the euro area; growth in the U.K., despite probably some increased volatility that we are seeing ahead of the June Brexit referendum; and continued growth in China, although at a slower pace than we've seen in recent years. We also expect conditions in Brazil and Russia to remain difficult through 2016. And before I turn it over to Bob, who will take us through some of the details of our performance, let me just underscore again the strength and the broad-based nature of the record quarter that our team delivered, the very strong start to the year and our expectations to deliver another strong year in 2016. So with that, Bob, do you want to take it away?

I sure will. So let's start the financial review here on slide nine by looking at the key financial metrics, both for the company and also the automotive and the financial services sector. Now, because I'm going to cover many of these metrics on subsequent slides, I just want to pull out a few things from this one. First, if I ask you to look at the year-over-year performance in the column to the right, just scan down that column and you can see everything is essentially positive and very, very positive versus a year ago. The one exception is special items. We did not have any special items a year ago. We have two that we are booking in this quarter. The larger of the two was at $186 million; relates to buyouts that were part of the UAW contract that we agreed in the fourth quarter. The remainder of the special items relate to charges associated with our exits from the Japanese and the Indonesian markets. If you go just above that you can see our operating EPS of $0.68. $0.39 better than where we were a year ago, so more than doubling that. And if you go down two lines to after-tax results or net income at $2.5 billion, again we more than doubled that particular metric. What's not shown on the slide is our tax rate that came in at 29.5%, which was lower than what it was a year ago. So with that, let's turn to the next slide and here we'll look at the company results. These are absolutes and we'll look at it by segment. To the far left, you can see the record profit of $3.8 billion. Going right beside that, we've got the North American result, $3.1 billion. Go to the far right, financial services came in very strong at about $0.5 billion, and within that Ford Credit was $514 million. We had the best result in Europe since 2008 at $434 million. We doubled our profit in Asia Pacific at $220 million, and then in South America we had a loss, as expected, and in the Middle East & Africa we fell into a loss driven by largely the external environment exchange. I will talk about that in a bit. And in Other Automotive, that's largely net interest expense. Now when you look at the operations outside of North America, the business units outside North America, we did make a profit there. It was nearly $400 million and that was more than $400 million better than a year ago. All right, let's go to the next slide and we will start going through the details of the automotive sectors starting with the sector itself. These are the key metrics and as you just scan across, you can see all of them very, very strong and all of them improved compared with 2015 first quarter. Starting at the left, we had strong growth in the top line, both wholesales and revenue up double digits. Revenue at constant exchange was actually up 15%. We grew our market share and that was in a global SAAR that also grew up 3%. And that was around North America, Asia Pacific, and Europe. Operating margin was a record at 9.8% up sharply, and then Automotive also set a record at $3.3 billion, again up sharply from where we were a year ago. All right. Let's go to the next slide and we'll look at what was behind the improvement. This is slide 12. A $2 billion improvement and, as you can see, it was driven largely by higher volume, favorable mix, and favorable cost performance, driven by favorable contribution cost. We did have negative net pricing, but within that $548 million decline there was a one-time stock accrual effect that I will talk about in just a minute. You will note in the callout box for volume and mix, mix and other we had over $1 billion of good news on product mix. And that was a theme that really drove performance, not only in North America, but also in Europe and in Asia Pacific. All right. Let's go to the next slide. Now we'll start going through the business units with North America. North America, of course, had extraordinary performance and it was very, very strong right across the board, very strong improvement in the top line at over 20%. Revenue about the same, market share was up in a growing industry, both for the region and in the U.S., and that was driven by two things. One, it was in North America, rather in U.S. and that was fleet sales. It was around SUVs, Transit, and F-Series, but also in Canada. We had very strong performance in Canada. We were up 1.5 points of share. That was driven by F-150 and by the Edge. Operating margin at 12.9%, a record, and then the $3.1 billion that we talked about earlier. So really, really strong performance in North America.

And just some – we've gotten some questions around fleet sales, and Bob mentioned fleet. There's just absolutely no change to our approach in fleet. Fleet is good business for us, including rental, commercial and government sales. We understand these customers real well; their use cases. Rental deliveries, as we've said before, were frontloaded this year. This is primarily due to the model year changeover, which in some of our vehicles was late last year, and based on rental company requests because, keep in mind, rental companies like to purchase their vehicles as close as possible to job one as possible. And for the full year, we expect our rental sales to be about the same as last year with the government and commercial sales up slightly, driven by the availability of the new F-150, because a lot of variants have now come on board. So we have good margins in the fleet business and, as you can see, they contributed nicely to a record performance in the quarter in North America.

Okay. Thanks, Mark. Let's go to the next slide, and we'll look at what drove the improvement in North America's results of $1.5 billion. As you can see here, it was higher volume, it was favorable mix, and it was lower cost performance. So it was very strong in some really key parts of the business. Within – there's three or four things that I want to call out here. If you look at the stock performance of $691 million in the callout box there for volume and mix, that is more than explained by the F-Series. This time last year, we were launching F-Series, F-150 rather, in Kansas City. Obviously, that's behind us now, and we're operating both Dearborn and Kansas City at three crews. So that's simply reversing what was an anomaly last year and making it more normal. So on a year-over-year basis, picked up that good news. If you go into mix, mix and other, about $0.5 billion, and that was actually favorable product mix. Again that was around returning to normal with F-150, but also a year ago we were launching the Oakville products, the Edge as well as the MKX. We are benefiting from the fact that that plant is now up and running. We've got normal supply of those successful products. If you go into the net pricing, this one is interesting. You can see the incentives and other of negative $1.2 billion. Half of that is a one-time stock accrual that is taking place and most of that, about 80% of it. Again it's driven by the anomaly of last year. Last year, because we were launching the F-150 at Kansas City, we had extremely low levels of inventory. We also had very low levels of incentives. So in the first quarter this year, of course we had normal supply. The incentives, while they are still lower than our domestic competitors, they're at what we would consider to be normal levels, and so that effect is reflected in the stock adjustment. So if you think about it, that's an accounting adjustment. It didn't have any effect in the quarter in terms of what incentives were given to customers. And so, if you take that out, we actually had somewhat positive, small, but positive net pricing. And then with the favorable mix that I talked about, we ended up having higher U.S. retail transaction prices. They were up about $1,500, if you exclude lease. Okay. Let's go to the next slide. We will look at South America. South America, the team is doing a great job in a very, very difficult environment. And this is really around Brazil, because we actually are very encouraged by what we're seeing in Argentina from the actions of the government, the new government has taken since it has come into power. Very, very positive and really bodes well for what we can see from that part of the region in the months and years ahead. But if you look at the metrics, we did have a sharp decline in wholesale, down 38%. Revenue was down 44%. Half of that actually was exchange. If you look at market share, we had a decline. As we pulled back from certain sales, it just didn't make any sense in terms of profitability, so we lost share, if you will, in an industry that was down. The results of that is we had a sharp decline in the operating margin, and we were able to keep the increased loss, if you will, to about $67 million. And we'll go through that on the next slide, please, slide 16. So this was really around industry volume. You can see that we had a negative industry volume, effective $91 million. That was Brazil itself down 29%. The team continued to do a great job on cost performance. Last year, we did over $400 million in terms of the cost performance. We did $76 million in the quarter and during the quarter, and there's not much effect from this, but during the quarter we did remove the third crew at Camacari, which is something I mentioned to the analysts and investors that were listening in on the Let's Chat call back in March. So, the team's still working to get more costs out because the environment is still very, very difficult. We still expect probably next year that we will start to see things bottom out, particularly from the commodity cycle, and start to turn around. Let's go to the next slide. That will turn to Europe, which is a great, great story. Europe, if you look at the metrics, wholesale volume up, while revenue as reported was flat. Actually up 6% at constant exchange. We had higher share in an industry that was growing. That share was driven in terms of markets by Italy, Germany, and Russia. In terms of product, it was basically SUVs and commercial vehicles. The operating margin was over 6%. And again that profit, that was the best that we've had since 2008. So very, very strong performance in Europe. Let's go to the next slide and see how we got there. The improvement of nearly $0.5 billion came from everything. Industry was favorable. The volume factors were favorable. The mix was favorable to the tune, within that $106 million that's shown on the slide, of about $300 million that was both product mix from what we've done around the products over the last number of years, as well as series mix and options. And then we had favorable cost performance, both contribution costs and structural costs. And even though it's not shown on the slide, even though the Russian market continues to be very challenging, actually Russia improved on a year-over-year basis as well. So the team, really delivering across all aspects of the business in Europe and you can see the results of that.

Just a little bit more color on Europe. If you recall, a central part of our European transformation plan that we last launched at the end of 2012 was continuing to invest in our core business of great product. And as you can see from the results here, it's really starting to pay off. Actually our average transaction prices in Europe on a year-over-year basis were up over $1,200 and actually our high series models and sports derivatives accounted for 60% of our Ford passenger vehicle sales. Things like Titanium, Vignale, ST versions of Focus and Fiesta, and even Mustang, which, I don't know if you caught this, but in March Mustang was the best-selling sports car in Germany, leading folks like Porsche 911. So this is really allowing us to accelerate our efforts in total. And many of the things that we saw in the North American turnaround we used as a blueprint for Europe and it's paying off.

Great, let's go on to the next region, Middle East & Africa. This is a region also that has many, many challenges external deal, geopolitical issues, weak currencies, a number of the markets are major oil producers and so they are suffering, if you will, in terms of the low oil prices. But within that environment the team basically held on wholesales. Revenue was actually flat, excluding exchange. As reported, it was down 9%. We held our own in terms of share and that was in a declining industry. It was down about 7%, 8%. But if you take Iran out, which actually is growing, and we don't participate in Iran, it was down over 20%. In that environment, we did move into a small loss of $14 million and that was largely driven by weakness of the South African Rand. We've got operations in South Africa and adversely impacted by the weakness of that currency. All right, let's go to the next slide and turn to the great story here in Asia Pacific. We had another strong quarter driven by new products. You can see wholesale is up 9%, revenue up 18%, 25% at constant exchange. Here we also grew share in a region that also was growing. The AP SAAR was up over 2 million units, as was China, so strong performance there, it was really driven by the new products that we have introduced. And China was one of the big factors there as well in terms of market contribution to the share. But we saw share improvement in Australia, New Zealand, South Korea, ASEAN, Australia so a lot of good things going on in terms of the market performance across the region. Our operating margin was over 8% and the pre-tax results at $220 million. On the lower right of the slide, slide 20 I'm on – I don't think I mentioned that – you can see the very strong performance we had from our China JVs that came in at $443 million. That was up sharply, over 20%, and they generated a margin of 16.4%. The other good thing about the performance in the region is that we had good news coming from China, but we also had good news coming from the other parts of the region: India, ASEAN, and Australia. So that was very encouraging.

I just came back from the Beijing Auto Show, and it was very interesting to see consumers are almost fervor for SUVs. You saw it not only in the exhibitors that were there, but just looking at the folks that were crowded around the vehicles. And I think the investments that we've made over the last couple of years to have a full lineup of SUVs – small, medium, and large is really great for timing of the market. At the same time, we introduced the Raptor. And I have to tell you, I literally had to, as we were done presenting, to run out of the way because of the people running up to the vehicle. I think that vehicle will do well, not only just from a sales standpoint, and it won't play a major role, but we will sell, I think, every one we can but what we'll do to continue to accelerate the perception of our brand.

Okay. Let's move on to another part of the business we absolutely love, that's Ford Credit. I should mention that today at 11 o'clock, and the details are in the press release, we are going to have a Ford Credit earnings call for the first time. And that will be led by Bernard Silverstone and Marion Harris. You will be able at get much more deeply into that part of the business. But we have that on some extra slides and data here are to support this call, so let's go through it. On slide 22, you can see contract volume was flat. We grew everywhere with the exception of the U.S., and that was largely driven by the type of marketing programs that we had in effect in the U.S. in the first quarter. Managed receivables were up. Pre-tax results over $0.5 billion, as I mentioned, and up. If we look at some of the metrics around U.S. retail and lease performance, we still had a very strong FICO score. If you look at the delinquencies, over 60 days they were only up 1 basis point; loss to receivables up 11 basis points. And those are levels that we still consider to be at the very low end of our historical performance, so very healthy. Let's go to the next slide and look at the improved results year-over-year of $31 million that was driven by a strong growth in all of our products and regions. We did have unfavorable performance in credit losses and also lease residuals. I kind of referred to the lease residual performance at Let's Chat in March and that was driven by a couple of factors. One, we had losses on units that came in during the quarter and we also have an expectation of lower auction values going forward. So we've had an impact in terms of accumulated supplemental depreciation and that is very much in line with what I said at Let's Chat about that metric coming in: bad news year-over-year, but less than $100 million. If you look at the credit loss, that was also impacted. There were two things there. Charge-offs increased related to severities, and then we also have increases to the reserves. Expectations, again, of the impact of lower auction values going forward, but also just the business being bigger. Let's go to the next slide. This is an added slide giving you some additional metrics around some areas that I know of interest from analysts and investors. On the upper left, if you look at the lease performance, the industry has been – we have been seeing increasing lease rates over the last number of years, but even during the last few quarters. And you can see in the first quarter, it was 32%. We have traditionally not been at the same level as the industry, which was the case. In the first quarter, we came in at 26%. Our expectations are that for the full year we will come in at a level that will be below that. Again, we are continuing to follow a proprietary modeling that we do of lease, making sure that we don't have any concentration of risk, whether it's geographical, product series, and so forth. We are very comfortable at the level of leasing, but that number will come down for the full year. On the bottom just beneath that, you can see our experience in terms of auction values at first quarter mix across all periods there. And you can see that we have seen a decline in both 24 months and 36 months auction values versus a year ago. We are up sequentially from the fourth quarter. We would normally have expected that increase to be higher. It hasn't occurred, and that is largely based on supply. We have, across the industry, more units coming back from the increasing rates of lease over the last number of years. We'll have about 200,000 units coming back this year. Demand, for us anyway, is still very healthy and about where it has been, we just have more units coming back. So we have assumed going forward, as I mentioned earlier, lower auction values. And that's built into our guidance. If you go to the upper right, you can see the retail contract placement terms, our experienced. Of course, this has been, again, an industry trend of longer-term placement terms, for us at least, over the last number of quarters. We are sort of around that 64-month level. We do have – we are participating in terms that exceed that and you can see that on the line. About 3% to 4% of our business has been at 73 months or higher, which is well below what the industry is at. And if you go below that, you can see our FICO scores. You can see we did have a decline in the first quarter. That is not unusual. We've gone back and looked at the last five years, and we generally see that happen, a lot of that is mainly due to the types of marketing programs that we have in place in the quarter, which tends to drive a little bit fewer customers to Ford Credit than to other alternative financing. Let's go to the next slide and we will look at cash. This is slide 25. I think the best thing to say about the very strong performance on cash flow is it just underscores the quality of the earnings. You can see the $3.3 billion of automotive pre-tax profit. Over 80% of that flowed right through the cash flow, so a very, very strong quality of earnings message there. With that cash flow, we had some pay down of debt, normal maturities. We did fund some of our funded pension plans. We're still on track to $1.5 billion for the year and then, of course, the dividends that Mark mentioned. In addition, in the quarter we completed the anti-dilutive share repurchase program that was about $145 million. Ended with very strong liquidity and automotive debt of about $13 billion. That is up a little bit from where we were at the end of last year. It was largely exchange and some non-cash debt changes.

Thanks, Bob. Slide 26 summarizes our industry and our GDP planning assumptions going forward. Again, all-in-all, we see conditions as being supportive of growth in the automotive industry sales globally and for the major markets that you see on the slide here. Our expectations for the full year industry sales by market are unchanged. I won't go through slides 27 and 28, but they show our guidance for each of the business units and our company guidance, both of which are unchanged. And just to provide some additional color on guidance, we are through the first quarter. We had a really good start to the year, and we'll continue to focus on delivering our guidance, which is equal to or better than last year's record. So just kind of bringing it all together on slide 29, the first quarter was an absolutely terrific start to the year for us. It was an all-time record quarter for the company. It was a very strong performance across our businesses. Our commitment remains to accelerate our pace of progress even further, and again focusing on those four key areas that drive creating value in the company: growth, returns, risks, and rewards. Importantly, we are building on our strengths as we expand our business model to be both an auto and a mobility company and also taking advantage of emerging opportunities through Ford Smart Mobility. Importantly, as we grow, we are committed to growing lean and focusing on profitability. So, I guess the bottom line is that we expect 2016 to be another strong year with sustained strong financial performance and returns and with continued strength into 2017. And I believe our results this quarter clearly demonstrate that our passion for products, our focus on innovation in all areas of our business, and driving improved mix – they are driving improved mix, a strong business structure, and of course exciting new technology that benefits our customers around the world, all of which is paying off with the record performance. So we're proud of our achievements, but with the full understanding that we have to continually earn them. We're excited about the future and we are confident in our ability to continue to drive growth, returns and rewards at lower risk across the entire company. So with that, why don't we open it up to your questions?

Thank you very much. Good morning and congrats on a great result.

Thanks, Pat.

I have a couple of questions, starting with the North America walk-in. Can you elaborate on the relationship between pricing and costs? At a high level, one might expect that with the newness of the portfolio, pricing would have remained strong as it did in prior quarters. I understand there was an inventory adjustment, but even considering that, shouldn't pricing have been higher? On a positive note, I was surprised by the significant benefits from reduced variable costs, especially given the new content. I would like to discuss that further and explore how we approach these aspects moving forward.

Yeah. I'll take that, Pat. So if you look at the pricing, you can see we did have strong absolute pricing of about $600 million and that was pretty much, if I take the stock accrual aside, that was pretty much offset by incentives. And again, I think this quarter, in terms of a run rate, is sort of more normal. Last year was the anomaly because of what was going on with the F-Series and the Oakville launch. And I think that really is influencing this because last year we largely did have – while we had the new product, we had very low levels of incentives because of how tight the inventory was at that time. So really what you've got is you've got F-Series, or F-150, which is an important product for us in terms of absolute volume, coming back to more normal levels but still better than our key competitors. So I think that's largely what is at play. We are seeing some benefit from the Edge and the MKX, although again Edge was in the first quarter of performance last year as well. So I don't think you're actually seeing so much in terms of brand-new product in this quarter versus the lack of that product in the year-ago period, which is maybe a little bit unusual in this particular quarter. In terms of the contribution cost, again I think it's the same factor. We didn't have as much in the way of adverse or increased product-related cost, new product cost, because we had F-Series largely in the quarter last year. Not a lot of volume, but it was there. Edge was there. So as a result, what you can see is the great performance the team delivers quarter in and quarter out in terms of material efficiencies flowing through.

And just one more thing in terms of what to expect going forward. Our teams, I think, are doing a really terrific job of really understanding the consumer and what costs should we be putting in products. And I think you're seeing that path in the mix in terms of the average transaction prices. And our average transaction prices are up more than double the rest of the industry. And that really comes down to understanding the customers and putting the right costs in the vehicles that drive revenue.

Understood. Could I squeeze one last one in just on production? I think there were some comments out this morning in the press about having to reduce production in the back half, just given the inventory situation. More on that?

What we really see in the second half is primarily around two other factors. One is normal seasonality. You've got, both here and in Europe – and in fact, in Europe you have more – the summer shutdown weeks. You also have the shutdowns that occur at the end of the year, so it's just normal to have less production, and therefore less wholesales in the second half than in the first half. It was a bit different last year because of the launches, but this is going to be a more normal year. Secondly, we've got the Super Duty launch that I referred to that will take place in the third quarter. While we'll be able to contain that in terms of down weeks within the normal scheduled summer downtime, you still have the launch curve, which is going to take some volume out. Which is one of the reasons why we're a little heavy on Super Duty stock today, because we have to anticipate that, make sure we've got enough inventory to get through that whole launch. So that's a key factor. In terms of tweaking the production for inventory, that's just going to be a normal process. We see ebbs and flows of demand in inventory and we will adjust as we go forward, but it's really those first two factors that are the key ones that are affecting us. There's not just in North America, but particularly in Europe too.

Got it. Okay, thanks a lot for the color and congrats on the quarter.

Pat.

Hi. Good morning. Congrats on the quarter. Thanks for taking my questions. You mentioned that warning you gave intra-quarter about the $100 million headwind to Ford Credit in 1Q from lower used car prices, impact of lease residuals, etc. Yet, your profit there was strong and it rose year over year. So can you talk some more about the tailwinds impacting that business that are allowing you to offset that headwind, whether just an increase in portfolio or something else? Then, as the year progresses, what is your outlook for both the headwind from used car prices and the tailwind from the offsetting factors?

Yeah, Ryan. Good morning. I think it's largely the same thing that I said at Let's Chat, which is we would expect to see sort of an adverse year-over-year from lease residuals in most of the quarters that we have ahead of us, if not all of them, although it will start to mitigate as we get towards the end of the year. So we think – and we built that in. As I mentioned in March, we do have an expectation of lower auction values and that's particularly on the car side of the business, but we haven't built that in. I think that will be on a year-over-year basis, the headwind, although again mitigating towards the end of the year. But that will be offset by strong growth of the business, not only in North America, but in other parts of the world as well. So I think that will be an offset. Again, the other thing I should mention is the team is really, really focused on cost performance. Our operating cost performance is the best in the business and that will continue to be something that will keep us lean and mean and enable Ford Credit to continue to generate the types of profitability that it has.

And then, Ryan, on your question on used car prices, obviously you've seen some of the Manheim reports. This is not a demand issue. The demand is there. It's really a supply issue as more of these three-year leases come off. We're going to watch it closely. Obviously, we've done a lot of the studies to see, are used car buyers actually cross-shopping with new cars. It's very small, it's in the single digits, but clearly it does have implications for trade-in values, so we're going to continue to watch that closely.

Okay. Thank you. Yeah, go ahead, sorry.

And then, Ryan, on your question on used car prices, obviously you've seen some of the Manheim reports. This is not a demand issue. The demand is there. It's really a supply issue as more of these three-year leases come off. We're going to watch it closely. Obviously, we've done a lot of the studies to see, are used car buyers actually cross-shopping with new cars. It's very small, it's in the single digits, but clearly it does have implications for trade-in values, so we're going to continue to watch that closely.

Okay. Thanks. Then just on the 6.3% margin in Europe, obviously that's really impressive. If I go back to your last Analyst Day in September 2014, it looks like you were guiding then for 3% to 5% margin by 2020. How sustainable do you think this improvement in Europe is? I understand it's a seasonally stronger quarter, but presumably as volume continues to normalize higher over time, does that now mean there's upside to your out-year 3% to 5% outlook?

Well, I think we're going to have a great year in Europe. And as we said, even though we are off to a very good start and I think we're going to continue to have a very good year, our objective is to make Europe a very sustainable and vibrant, profitable part of our business and achieving 6% to 8% operating margin. And that's what we are focusing on. Importantly, as we do it, we are seeing a lot of the things that we've done over the past couple of years pay off. On the cost side, as you know, we reduced our capacities. On the brand side, if you look at, for example, our channel mix in Europe, we're about 6 points above the rest of the industry in terms of channel mix of retail and fleet, which is good business for us. If you look at the investments we've made in our commercial vehicle brand, we are number one, the best-selling commercial vehicle brand. As I mentioned earlier, we're seeing very rich mix in Europe, which I think bodes well, particularly based on the experience we've seen over a period of time here in North America.

Okay. Thanks. Just lastly then, I'm curious with your planned new plant in Mexico and now with the really essentially complete intertwining of the U.S., Mexican, and Canadian auto markets, whether you have given much thought to the potential risk to your North American operations, and to the industry in general, from all of this weird rethinking on both sides of the political aisle of the benefits of NAFTA.

Well, I can't speak to what's being said on the campaign trail. Obviously, we have these trade agreements and I think, as we look at our business, we have made a big commitment obviously here to our facilities here in the U.S. You've seen some of the numbers in terms of backing that up. Not only just the absolute numbers of what, we've invested $10 billion over the last number of years and another $9 billion going forward, of which you saw some of that announced two days ago. But, clearly, we manufacture more vehicles here in the U.S. than any other OEM and employ more people. But at the same time, we are looking at our footprint and we are seeing what does it make sense for our business? And I think we have a good plan going forward to support our growth, despite some of the political campaign chatter right now.

Good morning, everybody.

Hi, Rod.

I had a couple of things. First, on North America. Obviously the Q1 numbers are up a lot and, as you said, the full-year earnings will be flat, which implies some, I guess, negative comparisons later in the year. And I think you alluded to some of those drivers. It sounds like a lot of it is related to the launches. So as we think about the pluses and minuses, the last year obviously you had a pretty significant number of launches. This year you've got the Super Duty, and I presume next year is going to be the same. So as you look out to 2017 are there some drags that are being incurred right now that you think might go away as we look further out?

Well, Rod, I think you kind of touched on a number. When you look at our Super Duty launch, we will have the full benefit of that launch in 2017. Couple of other things, we continue to see here in the U.S. customers migrating from passenger cars into SUVs. And when you look at our lineup and you look at the performance there, we think that continues to bode well for us. I think our work overall, as I mentioned earlier, are really understanding the costs that we're putting into the product to drive mix, will be important. So I would look at it – you could look at it and say, oh my gosh, the second half is going to be weaker and that's going to run into 2017. As we said, this is kind of a normal year in terms of the calendarization of our profits and sales, but the bottom line as we get into 2017, we see continued strength based on the foundational elements of the business: product, brand, and cost.

Okay. Can you comment on where you expect to end the year with respect to inventory days, to the extent that there is some – a little bit of an elevated level in the field? Is that something that gets corrected by the end of the year? And how should we be thinking about the outlook for the non-raw-material cost inflation going forward?

In terms of inventory, Rod, as I said back in March, our expectations are that you will continue to see the inventory levels come down, particularly as we get further into the higher selling seasons in the spring and the summer. And then towards the end of the year, we always end strong, usually with the end-of-year sales as well. So I think you'll see us very, very normal by the time we get into the second half of the year in particular. So I don't see anything unusual there at all. We are a bit heavy right now on Super Duty, as I said, and then of course with the very low volume January and February sales months, the visible, if you will, of the day supply look high, but we are actually quite comfortable with where we are. So I don't think you're going to see anything unusual other than what I just mentioned. In terms of the raw materials, I think I mentioned...

You mentioned non-raw materials.

Oh, non-raw materials. I think we have a very strong cost performance across the business this year in North America. You saw the positive news and the same thing with Europe. You will see seasonal cost increases in the second half and I think you'll see some cost increases, for sure, coming from the new Super Duty, which is normal. We'll have the product-related costs that will come through in the second half of the year, which is not unusual in and of itself, but also remember we haven't updated this product in 19 years. So we're going to be coming out with a product that's going to really set the standard and be something that we can sustain over the next 5 to 10 years.

Is that something that should be – should that be more benign than what we've been seeing with the F-Series and Edge and some of the other products that had a lot of content cost added, some of which was regulatory? Is there any color you can provide on the trajectory of that content cost related to regulatory?

We will talk more about that when we get to the launch itself. And we've got an Investor Day, which happens to be about the same time, so I think we'll provide more insight and texture at that time.

The only thing I would add on that, on the Super Duty, is just look at our performance on F-150, in terms of the content that we put in it and what it's driving in terms of revenue. Even in the quarter, the F-150, our average transaction price was up $1,700 year-over-year, so customers are really seeing that value. And that's the same approach the team is taking on Super Duty.

Great. Thank you.

Thanks, Rod.

Hi. Good morning, everyone. Two questions. The first one just on China, you reported a nice step up in the JV margin, which remains at a very strong level. What do you see as the sustainable margin for your China JV over coming quarters? And do you see improvements in mix and structural costs effectively compensating for lower net pricing or could margins move higher still?

Yeah, I think we'll see very strong results for the course of the year, George. I think the margins, I don't know if they will be at 16%, but they will be double digits. They will be very, very strong. I would suspect. It might be different by quarter because you get calendarization and volatility by quarter, but I think by the time we get to the end of the year, as we have shown in recent years we'll have very, very strong margins. I would add, when you look at that number and you look at the Asia Pacific results, you go what am I missing? The China JVs is not the total China profit for Ford. We incur engineering that we absorb and are reflected in the results for the region that we don't recover from the JVs until we actually start producing the vehicles years later. We're launching Lincoln. We've got other allocated costs that sort of, sit at the regional level that you wouldn't see there. So China very profitable for us and improving year-over-year, but I think you'll kind of see very strong performance in JVs over the course of the year. How are we offsetting the effect of negative pricing? That's through a lot of cost efficiencies through the business and then we have been benefiting also from the very, very strong mix that we have and I think that will continue through the course of the year.

Okay, thank you. And then also just with respect to Europe, I was wondering if you could give any indication on what Brexit, if it happens, might means for Ford given the importance of the U.K. market and your fixed cost basis and what strategy or plans do you have in place if it does indeed happen.

Thanks, George. Well, when you look at the issue around the Brexit, obviously the U.K. is a very important market for us and what's important for us as a business is stability, particularly stability in trade, and that's important because that allows us to continue to build a strong business in the U.K, for the over 14,000 folks that are part of the Ford team there. And that's why our position has been that it's beneficial for the U.K. to be part of a single market, a reformed EU. In terms of what may or may not happen, we'll apply the same approach in the U.K. as we do in every other part of the world. Our aim is to keep up our businesses globally competitive. So wherever that referendum comes out, we'll do that.

Good morning, guys.

Good morning, John.

Just a sort of a simple question on North America. I mean, when you look at the guidance of 9.5% or higher, that would, at the low end of the range, indicate a sort of, a mid-to-low 8% EBIT margin or pre-tax margin for the remainder of the year. As we think about this, and I know there's a lot of puts and takes and there's seasonality here, what I mean, should we kind of, focus a little bit more on the higher component of 9.5% or higher, or do you think that 9.5% is something we really should keep in our thought process?

Well, again, let me just restate what the guidance says. It's not 9.5%; it's 9.5% or higher. So we do see upside potential from where we were last year and so we just need to let the year play out. We're in the first quarter. There's a lot of moving pieces, a lot of things that we have to manage. We will have, as I mentioned, lower production, which is normal. In the second half, we will have a launch, which will have an effect in the second half with all the benefits to come later, as Mark mentioned. But we think that we'll come in at 9.5% or higher, and I know Joe and the team are working as hard as humanly possible to make sure that we continue to get everything out of that business unit that we can and they certainly did in the first quarter. So we feel super good about where we are in the quarter and we'll have an extremely strong year.

And we'll provide updates on this at the end of the second quarter when we do the second quarter call.

Yeah. That's very helpful and thank you. And then on Europe, you kind of alluded to Russia not being as big a drag in the quarter. I was just curious, if you could put Russia in context in the European business, sort of, size and potential stability and recovery there because it seems like the rest of Europe is firing on all cylinders and if that ever stabilizes, as you could even see some real upside to Europe.

Sure. To provide some context from a sales and market share perspective, our overall market share in Europe increased slightly to around 8%. In Russia, we managed to double our market share in the quarter compared to the same period last year, rising from approximately 3%. You can see how that impacts our volume. Looking ahead, we consider Russia an important market that we believe will recover over time. The investments we've made in product development, distribution, and our business structure should position us favorably for when the market starts to rebound, which we anticipate will occur as commodity prices improve.

Yeah. I think it is a really good point. That is one of the, sort of, on its own a big profit opportunity for us when the commodity cycle starts to turn.

Okay. And then just lastly on slide 24, you gave us some great incremental data here on financial services at Ford Credit. As we look at the, sort of, the slight extension in terms that are happening in the industry but don't seem to be happening for you and then also look at, sort of, the percentage of loans that are above 73 months. Can you talk about what's going on with credit scores and the consumer that's being offered extended terms? Because it seems like that's only occurring in high credit quality consumers. And also maybe, if you could just comment on prepayment speeds as you've seen an extension in terms, because I think they have been picking up.

I'll just give a high-level comment and then we'll let Marion supplement. What we are seeing and you touched on it, and I think we talked about it at Let's Chat, we are seeing these customers have very, very high FICO scores. These are really high-quality customers. The other thing that's interesting is we are seeing them come out of that contract early. They don't hang into the bitter end, if you will. And so we are also not seeing any signs here or in Canada, which is about 10 years ahead of us in terms of this trend, in terms of extending the trade cycle. So right now it just looks like these customers recognize it as being a good deal and they are taking it, but then they don't necessarily hold on to it as long as the contract would allow them to. So you're right in that the industry is higher. I think it is like a 17% mix or something like that. That's around these 73 months terms. We are not participating in that. We actually are offering in very small volume even 84 months. That's something that is out there as well, but again, I think you'll see us trending well below the industry as that trend continues. Marion, do you want to add anything?

No, I think you covered everything, Bob.

Okay.

Thanks, Bob. Slide 26 summarizes our industry and our GDP planning assumptions going forward. Again, all-in-all, we see conditions as being supportive of growth in the automotive industry sales globally and for the major markets that you see on the slide here. Our expectations for the full year industry sales by market are unchanged. I won't go through slides 27 and 28, but they show our guidance for each of the business units and our company guidance, both of which are unchanged. And just to provide some additional color on guidance, we are through the first quarter. We had a really good start to the year, and we'll continue to focus on delivering our guidance, which is equal to or better than last year's record. So just kind of bringing it all together on slide 29, the first quarter was an absolutely terrific start to the year for us. It was an all-time record quarter for the company. It was a very strong performance across our businesses. Our commitment remains to accelerate our pace of progress even further, and again focusing on those four key areas that drive creating value in the company: growth, returns, risks, and rewards. Importantly, we are building on our strengths as we expand our business model to be both an auto and a mobility company and also taking advantage of emerging opportunities through Ford Smart Mobility. Importantly, as we grow, we are committed to growing lean and focusing on profitability. So, I guess the bottom line is that we expect 2016 to be another strong year with sustained strong financial performance and returns and with continued strength into 2017. And I believe our results this quarter clearly demonstrate that our passion for products, our focus on innovation in all areas of our business, and driving improved mix – they are driving improved mix, a strong business structure, and of course exciting new technology that benefits our customers around the world, all of which is paying off with the record performance. So we're proud of our achievements, but with the full understanding that we have to continually earn them. We're excited about the future and we are confident in our ability to continue to drive growth, returns and rewards at lower risk across the entire company. So with that, why don't we open it up to your questions?