Ford Motor Company (F) — Q1 2018 Earnings Call Transcript

Thank you, Jason. Welcome, everyone, to Ford Motor Company's first quarter 2018 earnings call. Presenting today are Jim Hackett, our President and CEO, and Bob Shanks, our Chief Financial Officer. Also joining us are: Marcy Klevorn, Executive Vice President and President of Mobility; Joe Hinrichs, Executive Vice President and President, Global Operations; Jim Farley, Executive Vice President and President, Global Markets; and Brian Schaaf, CFO of Ford Credit. Jim will begin with a brief review of the quarter and then cover a review of our strategy and updated financial targets. Bob will then review the quarterly results in more detail. After Bob's section, we'll open the call up for questions. And following Q&A, Jim will have a few closing remarks. Our results discussed today include some non-GAAP references. These are reconciled to the most comparable U.S. GAAP measures in the appendix of our earnings deck, which can be found along with the rest of our earnings materials at shareholderford.com. Today's discussions include some forward-looking statements about our expectations for future performance. Actual results may vary, and the most significant factors are included in our presentation. Also, all comparisons are year over year unless noted otherwise. Company EBIT and EPS are on an adjusted basis, and product mix is on a volume-weighted basis. Now, let me turn the call over to Jim.

Thank you, Lynn, and thanks, everyone, for joining us. Our goal today is to provide an update on fitness, share our strategic approach to creating value, and detail our updated performance targets. I said last October that the transformation of Ford had to start with getting the business fit. In fact, this preceded the ever-important strategic questions. We are improving our speed, decision-making, and execution. And today, we're ready to dimension this for you. I'm really proud of the work of our team and even more excited about the value we believe these actions will create for our stakeholders. Simply put, the items I want to detail for you are at the center of our value creation efforts. One, through our fitness and strategy work, we have gained clarity on where we need to focus. This includes answering questions on what we do with businesses not earning their cost of capital and identifying which underlying processes need to be modernized. Two, we have also gained clarity on our vehicle portfolio and where we want to play. In parallel, we'll leverage a suite of propulsion systems, which include internal combustion systems, hybrids, and battery electric vehicles, to give customers what they want, regardless of fuel prices. Three, I'm also pleased to share that our work to support our vision for smart vehicles in a smart world is starting to gel and is showing the potential to create long-term value. I will share more today on this emergent work. Now let me briefly review our first-quarter results, so please turn to page 2. Looking at the quarter, we delivered solid company EBIT and year-over-year improvement in company operating cash flow. Our balance sheet remains strong with $38 billion in liquidity. We made several important acquisitions, such as purchasing Autonomic, which is already leading development of our transportation mobility cloud, and we acquired TransLoc, a provider of transit system software for cities. Both acquisitions are critical to advancing our mobility strategy. In the quarter, we also strengthened our collaboration with Mahindra Group, and we're working to jointly develop new SUVs and electric vehicles for customers in India and emerging markets. Additionally, we've been building product momentum. We made investments in manufacturing to meet the surging demand in North America for our new Lincoln Navigator and Ford Expedition. These trucks are selling extremely well. We also introduced the EcoSport in the fast-growing sub-compact SUV segment. We reinforced our leadership in trucks and SUVs with the launch of the first-ever Ranger Raptor in Asia Pacific. This is a high-performance pickup unique to Ford Motor Company. We established our first proving ground for our autonomous vehicle business through a collaboration with Miami-Dade County in Florida and partners such as Domino's and Postmates. With them, we launched a series of pilot programs to build a business that moves goods efficiently and profitably in congested urban areas. I'm proud to tell you that we're on track with Argo AI to deliver a commercial-grade self-driving vehicle at scale in 2021 for the movement of people and goods. Finally, in the UK, we expanded our footprint in mobility by launching our Chariot commuter shuttle services in London. This marks Chariot's first expansion outside the U.S. Now, please turn to page 3, and let's dive into the highlights of our fitness and its impact on our overall business. Over our plan period, which covers 2019 through 2022, we've identified $11.5 billion of cumulative cost and efficiency opportunities. This is incremental to the $14 billion in reduced material and engineering costs we outlined last October. We've also identified opportunities to reduce the capital intensity of our business model by a cumulative $5 billion over the same timeframe in 2019 through 2022. After applying just the results of our fitness review, we expect our EBIT margin and our return on invested capital to bottom out this year in 2018. We also expect to meet our 8% EBIT target in 2020, which is two years earlier than our previous target of 2022. We expect to achieve a return on invested capital in the high teens by 2020. This reduction in capital intensity means our annual CapEx spend will peak this year at $7.5 billion and then decline. By 2022, we expect a balanced CapEx spend and depreciation and amortization aligned with each other. These targets assume continued healthy economic conditions, and if there is a downturn, we believe a more fit Ford will drive a more resilient business model. Now, let me turn to slide 4. Following the work of the past 11 months, we can provide a clearer view of how we plan to improve our returns. This reflects a profound refocus of our business. In this chart, we used our actual 2017 EBIT results to plot our business parts based on margins and return. The green bubble in the northeast corner represents the areas of our business that deliver 8%-plus EBIT and 10%-plus ROIC, generating $14 billion of profit, an operating margin of 16%, and a return on invested capital of 40%. This is a tremendous business, offering significant growth potential. In contrast, three parts of our business dilute our overall returns. The yellow bubble reflects marginally profitable areas that don't cover their cost of capital. The low-performing areas that lack the right margins or returns are shown on the bottom left in red. Investments we're making in new products for future growth are depicted by the gray circle in the middle—these initiatives are just beginning. The key point is we're going to nourish the healthy parts of our business and decisively deal with the areas that destroy value. When we can raise the returns of certain underperforming parts of our business via the fitness initiative we frequently discuss, or an alternative business model, we will pursue it, and then disposition the rest. Let's look deeper into fitness on page 5. We've identified $11.5 billion of cost and efficiency opportunities that will drive improved EBIT margin, and we expect to capture about one-third of this by 2020. Here are some key areas in marketing and sales, where we can enhance our digital capabilities and improve return on media investment through regionalization and personalization. In engineering, we're moving to five flexible architectures underpinning our vehicles, with a modular catalog strategy covering 70% of the vehicle's value. This will reduce the time from sketch to production by 20% and deliver significant new cost savings, contributing to complexity reduction in orderable configurations across the enterprise, from the supply base to manufacturing and our dealers. In manufacturing, we're redesigning our freight network using big data, alongside aggressive labor targets for our next-gen vehicles. Moving to page 6, our fitness work has allowed us to reduce the capital intensity of our business by $5 billion over our plan horizon from 2019 to 2022. We expect to invest $29 billion, down from $34 billion, achieving capital reduction through equipment reuse and additional benefits from the common modules mentioned earlier. To summarize, our framework on page 7 drives a more competitive, higher-return, and resilient business. Our industry undergoes a complete redesign of the traditional transportation system, with new roles for automakers. At Ford, we aim to lead this design, enhancing mobility and enabling human progress through freedom of movement. We will stay true to our 115-year heritage while transforming our model to capitalize on impending trends. It starts with smart choices. One focus is having a winning vehicle portfolio. By 2020, almost 90% of our Ford portfolio in North America will be trucks, utilities, and commercial vehicles, including their electrified versions. Given declining customer demand and product profitability, we will not invest in next-generation traditional Ford sedans for North America. Over the next few years, our car portfolio will transition to two vehicles: our best-selling Mustang and an exciting all-new Focus Active crossover arriving next year. Our commitment to new propulsion will see hybrid electrics added to high-volume profitable vehicles, including the F-150, Mustang, Explorer, and Bronco. Our battery electric vehicle rollout starts in 2020 with a performance utility, and we will have 16 battery electric vehicles by 2022. In enhancing desirability, we aim to deliver vehicles with the capability, performance, and interior design customers desire without the traditional fuel economy penalty. Additionally, we aim to develop a profitable autonomous vehicle service that offers a leading ride-hailing and goods delivery experience. Our partnership with Argo AI brings together a talented team, working hand in hand to build a strong AV business model. Lastly, our mobility experience aspires to create and scale a mobility platform and services driving new revenue streams for us. We see ourselves as not just mobile solution providers, but orchestrators of digital connections, from vehicles to streets to businesses and homes. This is an exciting endeavor enabled by our fitness initiative, initiating with improved operating leverage, an adaptive business model evidenced by our Mahindra agreements, and enhanced capital efficiency, all supported by a strong balance sheet we work hard to maintain. Before passing it over to Bob, I want to stress our commitment to take decisive actions driving profitable growth and maximizing long-term returns. We favor urgent action and are not merely exploring partnerships—we've taken tangible steps. We're planning an analyst meeting in New York this September, where we will elaborate on our strategy. More news about our transformation will appear in the coming months. Now, let me turn it over to our Chief Financial Officer, Bob Shanks.

Thanks, Jim, and good afternoon, everyone. I don't plan to discuss specific slides today. Instead, I aim to share details about our first quarter results, our perspective on them, company guidance for the full year, and highlight selected business elements consistent with our full-year outlook. As Jim mentioned, our first-quarter results were solid, aligning with our expectations and full-year outlook. Company revenue reached $42 billion, up 7%, driven by higher volume from consolidated operations, favorable exchange-related effects and higher net pricing. Revenue increased across all business parts except the Middle East and Africa, which remained flat, with Europe delivering the largest increase due to exchange benefits, higher pricing on new products, and recovering from Brexit-related impacts. Wholesale volumes at 1.7 million units were down 2%, attributed to lower volume in our unconsolidated China joint ventures, while volumes at consolidated operations rose about 3%. Industry SAARs were up globally and in every region, with the largest growth in Asia-Pacific, mainly in China. Ford's global market share was 6.5%, down 60 basis points year-over-year, with declines in all regions, primarily due to lower market shares in China, the U.S., and the UK. Company EBIT was $2.2 billion, down $335 million compared to last year, primarily driven by Automotive, which reported EBIT of $1.7 billion, down $443 million. Automotive's lower EBIT was largely caused by commodity cost increases of about $480 million, adverse exchange effects of about $240 million, partially offset by higher net pricing, especially in Europe, coupled with higher volumes and favorable stock changes in North America. North America domestic stock changes involved pipeline fill for the newly launched EcoSport and stock building for Focus. It’s important to note that total costs excluding commodities remained approximately flat versus last year. Commodities, driven primarily by metals pricing, have increased partly due to the market’s response to potential U.S. tariffs. Nearly half of our full year's exposure to commodity price changes has been locked in due to fixed contracts and hedges in place by quarter-end. Regarding Automotive, North America was the main EBIT contributor with earnings of $1.9 billion, down $195 million, resulting in an EBIT margin of 7.8%, down 1.1 points compared to last year, with year-over-year declines largely attributable to higher commodity costs. Market factors, including volume and net pricing, were positive; total costs excluding commodities remained flat. For the full year, we expect lower EBIT in North America due to higher commodity costs and increased spending related to business growth. We are dedicated to returning North America EBIT margins back to the 10% level from 2012 to 2016 averages through fitness initiatives and smart capital allocation to the SUV and truck portfolio, as Jim mentioned. 51% of North America’s portfolio on a volume-weighted basis will be new or significantly refreshed throughout 2017 to 2019, with benefits from fitness actions expected to enhance margins in North America next year. Outside North America, the Automotive segment incurred a combined loss of $203 million, with every region except Europe reflecting losses. This combined loss was $248 million worse than a year ago, primarily in Asia-Pacific. Asia-Pacific's loss of $119 million was driven by Ford China. While our China equity income was $138 million, it did not offset engineering costs incurred for future products, including Lincoln and next-generation Explorer localization, alongside losses linked to establishing and growing the Lincoln brand. Fortunately, the rest of Asia-Pacific supported our performance with improved results in India, despite a small loss. We anticipate a continued loss in Asia-Pacific in the second quarter, but with profits returning in the second half as we launch 16 new products. For the full year, EBIT will decline, shaped by weaker first-half performance, but we're confident the business will strengthen in the fourth quarter. Following our aggressive product growth plan announced last December, later this year will see the new Escort and all-new Focus launched, with 69% of the region’s volume being new or significantly refreshed between 2017 and 2019. As stated, we target 50 new vehicles in China by 2025, including eight all-new SUVs and at least 15 electrified models from Ford and Lincoln alongside the new Zotye Ford JV, which will introduce an all-new range of affordable all-electric vehicles. Transitioning to Europe, we reported EBIT of $119 million, which was $90 million lower than a year ago. Strong net pricing increases during the quarter were outstripped by lower volume and unfavorable mix due to adverse exchange effects from sterling and higher commodity costs. Volume and mix drops resulted from weakened industry activity and lower Ford market share, particularly in the UK, compounded by diminished demand for diesel passenger vehicles. However, we project an improvement in EBIT for Europe in 2018 due to a mix of new product launches driving higher net pricing, with 88% of products all-new or refreshed between late last year and 2019. In our Mobility segment, we faced a loss of $102 million, mainly driven by costs from autonomous vehicle development, although results benefited from a $58 million one-time gain on smart mobility investments. Adjusting for that gain, our quarterly loss would show a run rate of about $160 million, likely throughout the year, influenced by autonomous vehicle development expenses. Ford Credit experienced a robust quarter, earning $641 million, outpacing the previous year by $160 million thanks to broad-based growth in receivables globally. The portfolio remained strong with healthy consumer credit metrics, including an improved loss-to-receivables ratio. Auction values improved by about 1% at constant mix, and we now expect full-year average auction values to decline by just 1% to 2%. As of quarter end, Ford Credit's managed leverage stood at 8.4, in line with our 8:1 to 9:1 target, and we’ll maintain managed receivable levels consistent with quarter-end results. Our objective to balance receivables, funding requirements, liquidity, profitability, and distributions will enable continued auto sales support and maintain capacity for future Mobility initiatives. Consequently, we expect Ford Credit's EBT for the full year to be flat or lower than last year due to lower financing margins arising from rising interest rates, and while we anticipate auction values to perform better than we initially expected, they are still projected to decrease slightly year-over-year. Concerning EBIT margin, we realized 5.2%, a decline of 1.2 percentage points from last year due to performance in Asia Pacific, North America, and Europe. Our adjusted EPS for the quarter was $0.43, up $0.03 thanks to a lower adjusted effective tax rate, which stands at 9% after accounting for a $235 million capital loss carryforward benefit. Net income totaled $1.7 billion, $144 million or 9% higher year-over-year, predominantly due to the effective tax rate reduction. Company operating cash flow was $3 billion, up $1 billion compared to last year's figures, supported by Ford Credit's increased distributions. Our balance sheet remains robust, with cash and marketable securities totaling $27.6 billion and over $38 billion in liquidity. For the year ahead, our guidance estimates company revenue will rise modestly, with adjusted EPS between $1.45 and $1.70, positive company operating cash flow approximately equal to the previous year, pension contributions around $0.5 billion, capital spending of roughly $7.5 billion, and an adjusted effective tax rate near 15%. As reiterated, 2018 will be the trough year for company EBIT, EBIT margin, and ROIC, alongside peak capital spending. Now, let’s turn it back to the operator to kick off our Q&A session.

Thanks, everybody. Hey, Jim, first question is a Ford question. You made reference to the potential disposition of underperforming businesses. Could this potentially entail exiting a geographic region?

The short answer is we'll restructure as necessary and will be decisive. The decisions have many implications for stakeholders, so we're not ready to discuss specifics at this time.

Okay, but it sounds like it's on the table, all options on the table.

Yes, I want to affirm that.

Jim, my follow-up question is a bit more macro but relates to Ford indirectly. I'll let others ask about restructuring. What is your position, Jim, on raising the U.S. federal gas tax if the proceeds went to funding improvements in U.S. transport infrastructure?

That's a creative idea. The way I've been thinking about the transportation system in the future is that, if we cut and paste the old system as we do the kinds of things to modernize our infrastructure, we won't make the progress needed to address congestion and capacity issues in major cities. We definitely have to consider models where we're using cloud structures and smart vehicles to improve things. While I haven't fully considered how we would fund that, it’s clear in the models we're envisioning that cities could generate revenue through such a model.

Thanks, Jim.

Hi, everybody.

Hi, Rod.

I wanted to also probe your comment about raising profitability mentioned on slide 4. There were three buckets: fitness improvements, alternative business models, and dispositions. Can you elaborate a bit on what the alternatives might be, when we might see those deals, how long it would take to realize savings from those? And maybe— I know you're not discussing specifics about whether these will be regions or anything particular—but how big could these actions be? Are we talking about alternatives and dispositions for businesses generating a few billion in revenue, or are you reassessing tens of billions in revenue?

I’ll ask Bob to provide insight into planning, but I want to emphasize that we can easily identify what's wrong and the necessary responses for low-performing businesses, so I believe we're ready to move forward decisively here.

The focus is on capital allocation to generate incremental resources for the stronger business areas where we can achieve even greater profits and returns. If you consider my previous point, just as an example: the Lincoln brand only launched in China about 2.5 years ago, and it's grown significantly. Its reputation is improving, and it's achieving pricing points consistent with leading competitors in the segment. We're in the process of localizing our first Lincoln product, which will enable us to escape the 25% duties and reduce freight costs. This change will transform the business model. The second example centers around small cars and most of our MTV-type products; we’ve already indicated how we'll proceed in North America, where we won't invest in areas that don't make sense. However, partnering with Mahindra shows how we can present ourselves in markets where they are already successful, especially in SUVs. As highlighted, fitness will benefit various areas of our business. It’s a combination of all these factors, and every tool at our disposal is on the table to enhance underperforming parts.

Can you expand on the timing regarding when we might expect details about these alternative plans, deals, or dispositions? As a follow-on, restructuring of challenged businesses or plants could be costly. Do you believe addressing these challenges will fit within the $28 billion of cash you currently have, or through cash flow generation?

Regarding your first question, I don’t want to sound trite, but we will share decisions made as we progress, providing insights on our actions to address challenges in our business. On restructuring, we do expect to continue generating positive cash flow moving forward. Any restructuring costs may accompany cash inflow from subsequent improvements observed, making it not a zero-sum scenario. Addressing these challenges will take time, as seen in our last significant North American restructuring, which unfolded over several years.

The confidence I want to convey tonight is that decisions are not on pause; our planning remains focused.

Thank you.

Thanks for taking my question. Just to follow up on the recent comments about cutting the majority of cars in the U.S., could you provide insight on how large those losses are? Should we expect to fill that void mainly with SUVs? Any further discussion on this?

Jim Farley will handle the portfolio implications, and then Joe Hinrichs will discuss the industrial system supporting this.

Thank you for the question. In North America, we are developing new nameplates we currently lack and reallocating capital to utility body styles, which will see a wider variety of products. For example, we’re introducing more authentic off-roaders, building on our Built Ford Tough reputation, with the Bronco joining other new models. We're refreshing our entire lineup of traditional crossovers and SUVs, including new silhouettes that offer utility benefits without compromising fuel economy. So overall, we aim for a diversified passenger car business, albeit not traditional sedans streamlined for commoditization.

Looking at manufacturing, we have plans in place, and our North American plants currently operate at high utilization rates. We have a strategy utilizing existing plants effectively, replacing the Fusion production with a new vehicle. The electric SUV set for 2020 will also be built in Mexico. Our plans leverage our manufacturing capacity as we proceed.

Got it. Just a final question regarding the original commodity and FX guidance of $1.6 billion, which was around $700 million for Q1. Are you seeing it on pace, or have the steel tariffs disrupted that guidance?

I'll let Bob clarify that.

Currently, it appears we can expect $1.5 billion year-over-year for the full year. We incurred about $0.5 billion in Q1. Therefore, as we progress, you can anticipate this value to steadily minimize, as we’ve now witnessed two years of comparatively sharp increases. That’s our updated view.

Were the tariffs and the steel price increase incorporated into your original $1.5 billion number?

The tariffs are not included in the $1.5 billion. We'll have to see how this evolves, but we believe the steel impacts have mostly been priced into current estimates.

Okay, thank you.

Thanks for taking my question. Another inquiry regarding where you selectively compete. You maintained a strategic position in Russia amid its rough period due to its long-term potential. Markets like China are undoubtedly crucial for their immense potential. Regarding South America, how do you evaluate the current losses relative to the potential after implementing fitness initiatives? What’s your perspective on balancing that against the long-term automotive potential of the region?

I want to clarify our position: Russia has yielded benefits for us. Conditions there have improved, and I view it as a prudent regional presence, not merely an obligation. I will permit Jim to address the balance regarding South America.

For our business segments, North America’s aim is returning EBIT to 10%, while China’s goal is growth. Both have exciting new products en route. South America and Europe are improving, and we're reviewing our strategy with urgency. There is ongoing strong momentum in product launches, and Camaçari is currently maxed out in performance. We're aware that fundamental changes are needed, especially in South America.

Thank you, that was very helpful. One last question: Could you give a two-year outlook for Asia-Pacific? Your slide deck offers detailed insights, but I'd be curious about the main drivers behind the softened earnings there compared to previous years. For example, you made over $400 million in Q4 a few years back and close to $300 million in the fourth quarter of 2016. To what extent is this cyclical versus a more structural issue? Are you looking to target higher-end markets or select more profitable segments?

I'll hand it over to Bob, who can embrace some specifics. I believe your question hints at the importance of refreshing our product lineup. We are nearing the launch of several new vehicles in China, which will be crucial in revitalizing our presence. Bob?

I'll start by addressing outside of China, which has significantly improved over time thanks to rigorous efforts. The pressing concern lies within China, driven by several factors. One is the enhanced competitiveness of domestic brands as they’ve matured and offered attractive new products. We’ve struggled to keep our portfolio fresh amidst that pressure. Additionally, unfavorable pricing has stemmed chiefly from the rise of those domestic brands, leading to marked cost reductions to counterbalance some losses. As for any residual commodity cost increases, our China JVs have been working to address those. Moreover, as you pointed out, the adjustments following the Chinese government’s policy shift on the renminbi has contributed to a depreciation trend affecting our business relative to a previous appreciation phase.

In the first half of this year, we're at the low point of our product cycle in China. In the upcoming two years, we have a comprehensive revitalization plan. This includes the new Escort and Focus launches, accompanied by a strong SUV focus in our fleet. We are also optimizing our local operations, enhancing our business to adapt better to market demands.

That’s extremely helpful context, thank you.

Good evening, everyone. Just a first question for you, Jim. As you reassess the business, it seems you are increasingly formalizing your approach. As we weigh your thoughts on achieving scale, there is a noticeable shift in perspectives around economies of scale in structuring businesses. Given transfer pricing intricacies, how do you envision the theoretical and practical application of this? Must you stick around 6.5 million units, or could you adjust downwards?

In theoretical terms, to be a global company, you need to have platform advantages; otherwise, there's no scale. It's prudent to maintain these platforms while addressing local customer needs by adding regional characteristics. If we export products designed exclusively for North America globally, our confidence in that strategy diminishes. The good news is we can accommodate the requirements of consumers with our product shelf. If we cannot maintain these efficiencies, we must make necessary decisions, reflecting what you are implying. We need to keep our cost of capital aligned with expectations.

Got it. A follow-up question: Raw material costs seem to pose an ongoing challenge. Are you considering sharing more of these costs with suppliers? Previously, the balance of raw material responsibilities leaned more toward the suppliers’ side. Is there a possibility of nudging that balance back by possibly relinquishing steel but transferring other expenses to them?

It’s crucial to note that our materials costs fluctuate parallel to market forces. Our contracts are negotiated quarterly to reduce risk. We often shift some costs to Tier 2 wholesalers, while also taking on parts of the risks ourselves. During downturns, we typically benefit when costs decline. We remain stable but adjust for market volatility by negotiating strategically.

To reiterate, our raw material costs follow market trends, and we manage negotiations to balance risks. We aim to use flexible architectures that allow local market adaptation without sacrificing global benefit, leveraging local supply capabilities.

Great. Thank you.

Hey, how are you doing this evening?

Good.

Wonderful, just a follow-up question about the modular architectures and platforms you discussed. Are you pursuing a similar path as VW and GM, given that there required considerable CapEx upfront for development? Help elucidate on net incremental savings over the 2019-2022 period, differentiating which CapEx was anticipated from 2017 and 2018 budgets.

While it is essential to cite competitors, I want to emphasize that our approach in interpreting customer demands will distinguish us from others focusing mainly on cost efficiencies. Using these architectures to meet customer needs creates differentiation. As you pursue this financial evaluation, recognize that balancing cost and user experience is key. Joe, do you want to elaborate?

Yes, we foresee significant savings over the upcoming years thanks to this initiative, leading to reduced engineering spending alongside capital expenditures. It’s crucial to realize that accelerations in product development timelines are about more than just cost savings; speeding products to market is key as well. Jim Farley and his teams have great ideas, and we need to become more efficient in bringing those to fruition. This initiative is uniquely tailored to Ford but will undoubtedly reflect common elements across the broader industry. The importance of time and its associative cost impact are addressed in this assessment.

Understood. Finally, regarding your relationship with your JV partners, particularly with the recent move towards a single distribution channel in China, how do you perceive the potential changes in those relationships, assuming relaxed JV ownership trends by regulators in China?

Great question. Given our longstanding partnerships, we’re focusing on growing the business and improving profitability in China—changing the structure isn't how we're viewing the situation.

Our two existing JV partners play a crucial role as we venture into a third with Zotye. We’re early in assessing but don't currently foresee these partnerships falling out. We still have significant work in front of us to enhance our growth in the China market, and this remains a pivotal area of focus for the organization.

Very helpful. Lastly, will the new vehicle launches in China feature new technologies to compete with local brands that have quickly enhanced their ADAS capabilities?

Absolutely, all of our products in China will be connected, which is crucial for our strategy. We are collaborating with Alibaba on the in-car experience and connectivity, learning from the market leaders. Additionally, our commitment to Co-Pilot 360 represents a comprehensive ADAS suite to enhance our technology narrative in China.

We are actively engaging with partners in China, planning visits next week to explore potential opportunities. We'll ensure that we’re aligned with Jim and Joe’s teams to provide optimal in-vehicle experiences and launch our transportation mobility cloud in China. There’s a lot in motion, and we’ll soon have more to share.

Thank you all for attending this earnings call. To wrap up, I want to reiterate that we're planning our investor meeting for fall and will discuss further strategies then. We are committed to taking decisive steps driving profitable growth, maximizing long-term returns from all businesses. The fitness initiatives underway have identified substantial cost-saving possibilities, and while we don’t wish to disrupt the current cycle, we anticipate having impactful improvements post-launches over the coming year. Our capital allocation will focus increasingly on high-performing segments as we involve decisions to fix or restructure underperforming entities. Lastly, I'm incredibly motivated by our team's commitment and energy, which is pivotal for the future here at Ford Motor Company. Thank you for being part of today’s call.