Ford Motor Company (F) — Q1 2019 Earnings Call Transcript

Thank you, Ian. Welcome, everyone, to Ford Motor Company’s first quarter 2019 earnings call. Presenting today are Jim Hackett, our President and CEO; and Bob Shanks, our Chief Financial Officer. Also joining us are Jim Farley, President of Global Markets; Marcy Klevorn, President Mobility; Joe Hinrichs, President Global Operations; and Brian Schaaf, CFO of Ford Credit. Jim Hackett will begin with a brief review of our progress relative to our global redesign and then comment briefly on the quarter. Bob will follow with a more detailed look at our results. Today’s discussions include forward-looking statements about our expectations for future performance. Actual results may differ from those stated, and the most significant factors that could cause actual results to differ are included on slide 40. In addition, unless otherwise noted, all comparisons are year-over-year, company EBIT, EPS and operating cash flow 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 good evening to everyone. Before I begin the formal comments tonight, I want to extend a very warm welcome to Tim Stone who joined Ford Motor Company on April 15. Tim will assume the role of CFO on June 1, and we could not be more excited to have Tim join our team at such an important time in our transformation. I also want to take this opportunity to thank Bob Shanks. Bob has left an indelible mark on this company in his 40-plus-year career. As CFO, he's been relentless in driving for results and pushing the company to greater heights. He's also been a wonderful colleague, who has led with integrity. Now, this part's off script. As great a CFO as Bob has been for Ford Motor Company, he is an extremely wonderful human being. The world is a better place with Bob in it, and my team has decided to just for a moment here give him a standing ovation.

Cue a blushing face.

Yes. You can see Bob's blushing. Let me turn to our results, which we believe indicate positive momentum for Ford. Our strong results this quarter, as shown on slide 2, along with our recent strategic initiatives, illustrate two things. First, we have a solid plan to create value both in the near and long term. 2018 was a crucial year for Ford, as we outlined a fundamental redesign of our entire company to ensure we could strengthen our core business while making necessary investments for future success. We recognize that our industry is entering a phase of significant disruption and transformation. Second, we are taking action, moving decisively, and building momentum in our global redesign. 2019 is a year of action as we aim for sustained improvement across key metrics such as growth, profitability, cash flow, and returns on capital. Now, looking at slide 3, titled 2019 A Year of Action, I want to highlight some key enablers. We are strengthening our positions in trucks, commercial vehicles, and performance vehicles globally, while also enhancing our SUV lineup. We're implementing a unique approach to electric vehicles that leverages our strongest nameplates. As Bob will show in our results, these actions are already leading to an improved mix with higher average transaction prices and margins. If you look there at fitness, I've often referred to this as the state of our ability to compete. We are improving operating leverage, we're lowering our breakeven, and we have reallocated capital to higher return investments. For example, over our plan period, globally, we now expect to dedicate 91% of our capital to trucks, utilities, and crossovers. And we will achieve this while we also lower the capital intensity of the whole business. We expect these actions to drive higher operating cash flow and that will be led by Automotive. An essential part of Fitness for Ford is partnerships and to this end, we've advanced our alliances as you know both with VW and Mahindra. And yesterday, we were proud to announce a partnership with Rivian. Next, I want to focus on our global redesign. We are accelerating this. Our recent announcements in Western Europe, Russia, and South America, as well as the redesign of our global management structure show how we are rationalizing our cost structure, our portfolio, and footprint to ensure the company overall in each of our regions drive sustainable profitable growth. I want to touch on this a bit more in just a moment. Finally, as you look at the Smart Vehicles for a Smart World, we have the opportunity to help create a better transportation system that will improve lives. To this end, we made the decision to connect with modems virtually all of our new vehicles going forward and to leverage this connectivity to continuously improve our vehicles and services and create better experiences for our customers. We know this will build loyalty and deliver recurring revenue streams. By the end of this year, 100% of new vehicles sold in the U.S. will be equipped with those modems and by 2020, 90% of our new vehicles globally will also be equipped with modems. In parallel, we're laying building blocks in the form of platforms to help us realize the vision then of a Smart Vehicles for a Smart World. Examples include Autonomic's Transportation Mobility Cloud or we nicknamed it the TMC. This is the world's leading automotive cloud. Earlier this week, we announced a global agreement with Amazon for our TMC to be powered by Amazon Web Services. This is great news because it expands the availability of cloud connectivity services and connected car application development services for the whole transportation industry. In addition, we launched FordPass Rewards. Now FordPass has been downloaded 6.4 million times and we now have 3.8 million members signed up. We do expect the growth of these members to accelerate. We also announced FordPass Pro. This is for our fleet vehicle customers. Returning to autonomous vehicles. We've selected a third city for business operations in commercial deployment and we expect to announce the location later this year. Also, Argo AI recently received a license to test AVs in California, making it the fifth state we're now testing in. Our North American operation continues to move closer to its longer-term EBIT margin of 10% with action to enhance effectiveness and reduce costs. The North American business will also benefit this year from a significant wave of product launches that includes some wonderful badges for us: Ranger, Super Duty, Explorer, and Escape as well as exciting new entries for Lincoln. In fact, by the end of 2020, we will have replaced 75% of our current U.S. product lineup. We've also taken action to increase production of Expedition and Navigator in Kentucky for the second time to keep up with continued strong demand, so over 40% greater than what we had planned. We announced we're expanding the battery electric and AV capacity in Michigan. And we'll optimize costs by building the next generation Transit Connect for North America in Mexico instead of Spain. You can see the progress we're making in our first quarter results as North America drove a 2% increase in revenue despite lower industry sales and wholesale volume. And at the same time, it achieved a 90 basis point increase in EBIT margin to 8.7%. In South America, we’re moving to a more asset light business model. The team has made some significantly tough decisions. One was to exit heavy trucks and close our facility in São Bernardo. Through our collective approach and collaborative approach, we're working to minimize the near-term impact on all of our stakeholders. We've also been involved in the redesign of our European business as we have targeted a sustainably profitable business that delivers a 6% EBIT margin. Our future business there will be leaner, more focused and will capitalize on profitable franchise strengths in commercial vehicles and utilities. We plan to significantly reduce our cost base there by discontinuing loss-making product lines and adjusting our manufacturing footprint. For example, we've announced the closure of our Bordeaux France transmission plant. We've announced the restructuring of our JV in Russia. We've offered separation programs in Germany and the U.K., and we confirmed we'll phase out two of these products: the C-MAX and C-MAX Gran models later this year. If you look at slide 6, I want to just take you back to a decision we made a year ago when we announced our decision to phase out sedans in North America. Now remember, we want customers to understand the silhouettes that they prefer are the ones we're going to bring them. So, in fact, we don't intend to lose any of these customers long-term. But now in hindsight, it was absolutely the right call. I want to reinforce that decision because we expect to drive over $1 billion improvement in annual profitability from our Michigan assembly plant once we fully ramp production for the Ranger and Bronco that are now being built there. Okay let's look at slide 7 and here I want to cover the financial highlights and before I turn it over to Bob let me touch on the quarter. We delivered good results and this is consistent with our view now that we will deliver better company results in 2019 than last year. Against the tough quarterly year-over-year comparison, the company-adjusted EBIT and margin increased despite a decline in wholesales and revenue, while we increased investments for future opportunities in Mobility. On an adjusted basis, we grew EBIT by 12% to $2.4 billion. Margin increased 90 basis points to 6.1% led by 8.7% EBIT margin that I mentioned in North America. We also delivered EPS of $0.44, which we're happy with the big beat there, but were also up year-over-year. These results clearly demonstrate the benefit of our fitness actions, the hard portfolio decisions, and the aggressive business redesigns, all of which are still very much underway, and we expect more to be generated from all these actions. Lastly, we generated $1.9 billion in adjusted operating cash flow and ended the quarter above our cash and liquidity targets with $24.2 billion in cash and $35.2 billion in total liquidity. Needless to say, I and the team here are very encouraged by the strong start to the year. With that, let me turn this call over to Bob Shanks for his last quarterly review as Chief Financial Officer. Bob?

Thanks, Jim, and good evening to everyone. I'd like to start with four key points: First the results this quarter are high quality and driven by the key specifics of the business; second while top line metrics were lower than a year ago, the company's revenue decline was driven largely by exchange as strong mix and higher net pricing about offset the lower volume. And even though market share was lower, we're growing share in trucks and commercial vehicles and expect improved performance in utility segments as we launch new and in some cases new-to-market entries over the next couple of years. Third, company-adjusted EBIT, the best since the second quarter of 2017. This includes lower industry volume, continued those smaller increases and commodity costs including tariff-related effects; and adverse exchange. This $0.5 billion impact is net of pricing of about $100 million that we took in South America to partially recover the region's adverse inflationary and exchange effects. Fourth and most importantly, we saw progress in each of the three regions that drove the year-over-year decline in company EBIT: China, Europe, and North America. First in China, we incurred a loss of $128 million on lower volume. This was an improvement from the $150 million we lost a year ago which was by far the best quarterly result in 2018. In fact, to put the current quarter into further context, last year in the second through fourth quarters, our average quarterly loss was $465 million. So the improvement in China from a year ago was driven by our consolidated operations offset partially by lower JV equity net income. The main elements of the consolidated improvement were strong cost performance and favorable exchange, although we also saw favorable mix and achieved flat year-over-year pricing in a negative industry pricing environment. Importantly, we ended the quarter with dealer stocks in good shape and improving dealer profitability. While we have a lot of hard work ahead of us in China to return to sustained profitability, we are encouraged by the early progress Anning Chen and his team are making. So for the full year, we expect to build on the first quarter outcome and deliver a considerable improvement in profitability year-over-year although still a loss. In Europe, we were profitable but at lower level than last year more than explained by nearly $100 million of unfavorable exchange, most of which was a balance sheet effect. Within Europe's results, we delivered strong EBIT and healthy returns for our growing CV and truck business. This was offset partially by losses on passenger cars, although the latter continue to generate positive current period operating cash flow. As you are aware, Europe's business redesign is underway and progressing well, and we will have more to share with you as the year progresses. For the full year, we expect to deliver substantial improvement in profitability versus last year, driven by favorable mix, higher net pricing, and lower cost. Turning to North America, we achieved our best EBIT since the second quarter of 2018 and as Jim mentioned, a margin of 8.7% both improved from last year. The team achieved this through strong mix and higher net pricing aided by structural costs that were slightly lower than a year ago. From a product standpoint, North America's EBIT improvement was driven by our F-Series, despite new competitive challenges; Ranger as it came to market; and Transit, America's best-selling van. The region's EBIT also benefited substantially from the decision to exit traditional passenger sedans. The strong financial performance of F-Series was matched by robust performance in the marketplace. In the quarter and in the face of new competitive entries, F-Series customer sales and average transaction prices held strong from a year earlier while share of segment increased. And from here our plan is to strengthen our position further with the new Super Duty launching later this year, a new F-150 coming in 2020, followed by a BEV relatively soon thereafter. For the full year, we expect North America's EBIT and margin to improve from 2018. Now coming up from the regions to our automotive segment. We saw improved EBIT from a year ago. North America's performance flowed straight through to Automotive as the combined loss in regions outside North America was unchanged from the year earlier. However, this did represent a strong $630 million improvement from the fourth quarter. Within Automotive, cost was flat year-over-year. So as a result, we generated strong operating leverage in the quarter, which drove a higher automotive EBIT margin. For the full year, we expect automotive EBIT to improve, driven by gains in China, Europe, and North America. Now moving to Financial Services, Ford Credit delivered very strong earnings before taxes, in fact the highest in nearly nine years. All of Ford Credit's metrics were healthy including the continued focus on a lean, best-in-class operating cost structure. In the quarter, Ford Credit benefited from lower depreciation on vehicles in our leased portfolio and improvement in credit loss reserves, reflecting continued strength in consumer credit metrics. For the full year, we now expect EBT of Ford Credit to be about the same as in 2018. This includes a continued expectation for auction values to decline on average over the year by about 4% at constant mix. In our Mobility segment, we incurred an increased EBIT loss as we invested more as planned to build out our capabilities to win in the future with mobility services as we leverage the connectivity of our products, while also progressing our developments in autonomy. For the full year, we expect a larger loss in Mobility as we increase our investment in mobility services and as our AV efforts move closer to commercialization with a bespoke product in late 2021. Turning to company-adjusted operating cash flow, in the first quarter, we generated $1.9 billion with the majority coming from the Automotive segment. As mentioned, cash and liquidity balances at quarter end were well above our target levels. And speaking of liquidity, earlier this week, we extended our $13.4 billion corporate revolver and we also closed on a new $3.5 billion supplemental credit facility further strengthening our liquidity and providing additional financial flexibility. Unlike our corporate revolver, the supplemental facility is intended to be utilized and includes a $2 billion revolver and a $1.5 billion delayed draw term loan. We expect to fully draw the term loan over the course of 2019; however, the impact of any draws will be leverage-neutral after taking into consideration debt reduction actions we took late last year including a repayment of about $1 billion of higher-cost affiliate debt. Now, turning to special items in the quarter, this represented an EBIT loss of nearly $600 million with negative cash effects of about $100 million. The vast majority of the charges in the quarter were associated with the redesigns of Europe and South America. As you'll recall last year, we identified about $11 billion in potential EBIT charges for our global redesign actions with negative cash effects of about $7 billion, all through our plan period but primarily through 2021. This year we expect to incur $3 billion to $3.5 billion of the EBIT charges with negative cash effects of about $2.5 billion. We expect almost all of the EBIT charges to be treated as special items. Relative to our other costs and capital for the year, we continue to expect CapEx to be similar to last year, pension contributions to be about $650 million, and shareholder distributions to be about $2.6 billion. Now, before I turn it over for Q&A, just a few summary comments. Our view of the quarter is that it's a really good start to the year for the company. And while we expect our first quarter EBIT to be the strongest quarter of the year, that's due to seasonal factors and major product launches ahead, it does clearly put us on track to deliver better company results for the full year 2019. Due to our intense focus on improving fitness across the company, the work on our product portfolio, the redesigns of our business, and our disciplined approach to capital allocation, the business is now turning in a positive direction even as we continue to invest in future opportunities. We clearly have a lot of work ahead of us, but we have a solid plan and we're demonstrating the ability to effectively execute a heavy work statement while concurrently delivering stronger business results. Our opportunity and our firm intention in the months and quarters ahead is to build on the momentum we're generating and ultimately deliver returns that are among the best in our business on a sustainable basis.

Good afternoon, guys. Good evening, I should say. Bob, I just want to say congratulations. It's been a long great career, and I only wish I had something in the slide deck to measure and give you a hard time about, but the results were really good. So congratulations. But, Jim, just a first question. As we look at sort of the discussion tonight in the slides, it seems like you're leaning back a little bit more on product being the core of the company sort of here in the near-term and in the long-term, a little bit more than you have in the past. And in the past you've been a little bit more focused on sort of the future tech and the opportunity. Is something kind of shifting in your thinking here really maybe it's an 80/20 shift or something like that, because it does seem like product really is king and you're starting to really grasp that a little bit more in the near-term and the long- term opportunities are a little bit more long-term?

Thanks, John. No, I don't think there's any shift at all. In fact, if I take you back to this regime's arrival in June of 2017, one of the first things that we attacked was the product portfolio. In fact, this recent organization where Jim Farley and Joe take on respectively new roles, I've explained to the company that we weren't ready for this current organization back in June of 2017 because we had to get the product in shape. And Jim Farley and Joe did an incredible job in very fast order getting that turned around. If you think about the essence of that like is it in competition with the future, it's not because as we're turning the product around, we're thinking about the design of smart vehicles for a smart world. What do they have to actually be capable of doing to enable the future things that we're seeing, including autonomy, connectivity, and cloud-based interactions with cities? So, all three of these things are in our thinking.

Great. And then just a second question. I mean, price and mix were wildly constructive and positive in the quarter. But maybe if we focused on slide 25, and I don't know if this is for Joe or Farley. But you have a $1.259 billion positive on mix and price in the quarter, and we're still staring down the barrel of a lot of product coming out of. So I'm just wondering if you could maybe give us a little bit more detail about what the key driver is there? Is it the F-Series? Is there something going on with fleet or retail? Was there something really constructive maybe on the Super Duty side? Just a very big number and just trying to understand what's going on there?

Thanks, John. Look, F-Series is an incredible franchise, John. We gained share. We finished the quarter at 41% share of the pickup truck business. That's a nine-tenths increase. We had built a leadership position over the number two player by almost 100,000 units in the quarter. Our average transaction price was just under $48,000 for F-Series, and we have the lowest incentive spend for any of the major trucks. And that was a big fitness exercise for us in terms of yield management. One of the big strengths to your point in the first quarter was commercial and government. We saw 11% growth for us in the first quarter much higher than the industry. The sectors that drove that were telecom and utilities. We saw daily order rates grow. The strength of Super Duty is really one of the key facets for the quarter. And obviously, we also launched Ranger. In fact, with Ranger and F-Series together, we had our best pickup truck quarter in 15 years. So look, we have a lot to do; it's a very competitive market, but we have a great team, and we saw very strong demand for our product. And as Bob said, the product portfolio is chock-full of new product. We have the new Super Duty coming later this year and an all-new F-Series next year. So we've got a great franchise for connectivity services and automation as well. There's a very strong quarter for our trucks.

And maybe if I could sneak one last one in for Bob. There's been a lot of speculation about the potential downgrade at Moody's for your credit rating. But with what we've seen in this quarter, it seems like that may have been staved off. I'm just wondering if there's any kind of update in your perception as to what's going on there or maybe any update on the metrics we should be focused on as really kind of turning the ship on that negative review right now?

Yes, thanks, John. Obviously, that would have to come from the rating agencies. But we talk with them a lot. We believe that we understand very clearly the areas of improvement they're looking for. And it is on the operating side of the business. As I've said numerous times, it is not the balance sheet, it's not distribution, it's on the operating side. So I believe that while this is just a quarter, the fact that we saw the improvement in North America, we saw an improvement in China. Although again, lots of work ahead. We got to profit, which we hadn't expected in Europe, because a lot of that redesign is still ahead of us in terms of the impact of that and portfolio changes as well. I think that we are hitting the parts of the business that they want to see improvement in not just a quarter, we've got to do this quarter in quarter out. But I believe that's a nice step forward in terms of the things that they are concerned about.

Thank you for taking my question. Can you provide an update on the numerous announcements and restructuring efforts made this year? Where do we stand in terms of what we should anticipate for the rest of the year? Should we expect to see the benefits of these actions soon, or is there more to come on the plan?

Yes, Colin, I just want to emphasize, because this is important in the trust that I build with you guys is we've been very consistent with what we've started with the fitness initiatives in terms of our target and where we are. So I'll let Bob fill in the blanks, but there's not a lot of shifts here from what we've been talking about.

Yes, Colin, I think the way I would describe it is, while perhaps the areas where you'll be seeing impacts on the business from the actions that we take won't be new-new CEO for example we've talked about the redesign of Europe is underway, but we haven't given you much of the details behind that. Because we're in the process of the discussion with our social partners in terms of what that actually will be. We expect that to be completed sometimes around the middle of the year then we'll start seeing more specifics. So you'll get more details. I wouldn't say that's more announcements. It's just more details of what we've already announced. We have talked about the fact that we're still chatting with VW and Mahindra about different opportunities. So there again nothing new in terms of areas, but potentially more in terms of what comes out of those discussions. Obviously that would be something ahead of us. So I think it's more about more clarity and more details. And the way that I would further put into context what's yet to come, is the commentary I provided on the special items. We only have about $500 million in this quarter of the $600 million which relates to business redesign. And as I mentioned in my comments, we expect to see $3 billion to $3.5 billion of charges for the full year. So you're going to have a lot more happen in terms of actions that are then from an accounting standpoint it's going to hit the books. And that's going to be second, third, and fourth quarter.

That's very helpful. How about South America? I think in your past presentations you showed that there's profitability there is very tough but not many products in that region and profitable. When you have the plant closure, have we seen any benefits from that in the quarter? And should we expect more actions considering the challenges in that region?

Yes, I wouldn't necessarily assume that the announcement of the action on São Bernardo is the complete redesign of the region, because it's not. There's more and we'll announce things when it's appropriate to do so. You're not getting any effect of that action in the quarter other than the special items, because the plant is going to continue to run until towards the very end of the year. So there's no benefit today but we do expect to have a good benefit. I think we've indicated a payback of about two years from that action. So there will be more to come from the actions in South America. The thing to note there is Argentina has really been hit hard, with a very deep recession, extremely high inflation that's affecting the industry. We're pricing as much as we can, but we're frankly not keeping up with the inflation, nor the effect on the exchange rate. So that's sort of a unique factor in the shorter-term that certainly affected the business. Over time our history tells us we recover those effects but in the shorter term a bit of a challenge.

Okay. Thanks for taking my questions.

Great, thanks for taking my questions. Looks like the faster than many expected improvement in China was really driven by cost and exchange rather than volume. But JVs on the British side I know are shown as a single bucket. But Bob, you referenced volume being the main negative driver there. So, the question is really how to think about volume going forward for you in China? How should investors weigh? On the one hand a still very soft industry with on the other hand some pretty easy compares in the back half of the year. And now this new comment that dealer stocks are in good shape. So, are the product launches enough to allow you to grow in China even in the current environment?

Thanks for your question. Obviously, we're working really hard to stabilize our sales this year. We've launched a new product as you know and we've gotten very positive pricing. We do have opportunity for momentum in the second half of the year. But right now we're focused on stabilizing our sales. It's great to see the profitability improvement for the dealers and the stock. Stocks have come down, which is really a health measure for us. But right now we're looking at stabilizing our sales.

Yes. I would if I could add to that the way that I would think about the business, Ryan is we're really focused a lot on the dealer profitability and the margins they're earning. So we're being very thoughtful and very careful in terms of that particular part of the business. So we're certainly not pushing and driving for volume. We're really focused on profitability and their engagement. So that's the number one priority. So as a result of that, I wouldn't expect to see significant if any volume improvement necessarily. This is really more trying to get the margins back particularly at dealer level and get the business stabilized on the locally produced front. The thing that's interesting that you see in the bridge is the consolidated part of the business has turned around very, very sharply and very quickly. And that includes the imports of the Ford brand those products as well as Lincoln in fact profitable, frankly in the quarter and a substantial improvement year-over-year. So that part of the business that we control and have our arms around, we're making faster progress. We have a lot more work and are really doing a ground-up on the JV side.

Ryan, Jim Hackett here. I want to look ahead, especially regarding China. In response to John’s earlier question about our product strategy, I can confirm it is not a new direction. However, while we were refining our product lineup, I realized that our standing in China rose quickly from where we began to its peak. Initially, we understood the market well, but we lost that insight. This misstep hindered our ability to capitalize on the opportunities John mentioned. It seems your team is getting on track with the product portfolio, and we're applying the lessons learned to address our challenges in China. There’s a long-term opportunity we need to demonstrate to you, as our team is knowledgeable about the product situation, and we have strong leadership. I assure you that Ford will find better solutions in China than what we currently observe.

Okay. It’s very helpful. Thanks. And then just lastly for me, you've been warning about the sustainability of Ford Credit earnings for some time now only to see the profit there just continue to inflect higher. You've been anticipating normalization in used car prices from some of the data we're able to track. I thought we started to see that in 1Q but you continued to record these big off-lease gains. Does the 1Q profit there cause you to think any differently about full year credit profit potential?

In January, we mentioned that we expected our results to be lower than those of 2019 and 2018, and today I noted that we anticipate they will be around flat at approximately $2.6 billion. We do not foresee subsequent quarters performing at the same level as the first quarter. Last year's figure was $2.6 billion with $800 million earned. You can calculate that it will lead to a strong second, third, and fourth quarter, but it won't be at the same level as the first quarter based on our current observations.

Thanks. Hi, everybody. First, I want to congratulate Bob. Tim, Bob has raised the bar a bit for you. But don't worry, auto stocks typically increase by 8% to 10% after quarterly results, which is quite normal, so just get used to it. The first question is for Jim: are we at peak trucks?

Are we at peak trucks? What's interesting, and Jim Farley, I know I think is the one you're after.

Both Jim. I don't think so, because in the face of strong competition we're doing very well, Adam as you can tell. Jim mentioned our current position in the Series evolution, highlighting what we have been successful with and what we will offer in the future. Yes. We updated the F-Series about a year ago, which was great. However, we have strong products coming, which looks promising for our prospects. In the first quarter, Ford's performance in the commercial and government sectors was very encouraging. We observed significant growth in Transit for package delivery, telecom, and utilities that contributed to double-digit growth for Super Duty F-Series and Transit sales in the U.S. year-over-year. Our customers, as you know, are focused on cost of ownership and are very discerning. They seek the best capability while also looking for efficient vehicles, which is a positive indicator for us. Additionally, in the first quarter, we sold around 10,000 Rangers and are still ramping up production. There's strong demand, evidenced by an average turnover of about 18 days for Ranger, which adds to our F-Series sales. We have a fresh product lineup with more to come, and the strength of the commercial business is a promising sign.

Thank you for that. My second question is about suppliers. If global auto production remains stagnant and trucks don't generate as much additional profit as they have so far, how significant is the opportunity for smart redesign and rationalizing powertrain combinations that consumers may not care about or even notice? Can we negotiate better pricing or terms with suppliers who are often earning more than us and claim that OEMs will keep increasing content? Are they mistaken? Is there a chance for us to approach this differently, suggesting that we simplify and possibly reduce content? How substantial is this opportunity for us? Thank you.

Thanks, Adam. And you know I love the question, because like some of the comments tonight, this was one of the early things that we actually went after, which is in the fitness initiative. Joe Hinrichs, who’s going to take this, and I have long talks about product complexity and how getting that right would start to be the gift that kept on giving. So Joe, you might talk about our efforts there.

Sure. Thanks, Jim. Thanks for the question, Adam. I think certainly from our perspective one of the major fitness initiatives has been around capacity reduction, and we're continuing to see good progress there. It's not just de-contenting, but putting the right content in the vehicles, especially as we think about to contemplate the new vehicles that we're designing for the future. I think what you're also seeing of course is the alliances and the partnerships that are taking place give us broader scale. When we partnered with Volkswagen on van programs, we have the opportunity to get together both for engineering savings, but also from a capacity utilization and supply base and ourselves improvement there as well. So you're seeing a number of these partnerships start to come around, which are also helpful with how we work with the supply base for scale.

Thanks, everybody.

Great. Bob congratulations. First question as I think about the cadence of your net cost savings benefits you're achieving from Jim's fitness initiatives should we be really circling the structural cost improvement of $309 million in the quarter and the slide 23 walk? Or is there another level or a hidden layer of cost savings that you're already seeing achieved in the P&L?

Yes, that's a good question. I mean obviously every quarter is a bit variable, but I think the important message from today if you take from the quarter that applies to the full year particularly on structural costs is that they're not going up. And that's probably inclusive of headwinds on a lower level of income from pension and OPEB. As you know that's been declining for some time, declining again this year several hundred million dollars. So, that's inclusive of that. And that's an important element, because when you think about the contribution costs and material costs and we're making a lot of progress there for the earlier comments from Joe, there is an element of those increases that do come with the higher pricing and so forth. So, it's not just pure cost, it's costs that gives us the benefit. So, that structural cost capping if not slight reduction is going to make a huge difference in terms of our operating leverage which is what's driving the improvement in margin.

Got it. As a second question curious as to what the company's plans are and what it has embedded within its long-term 6% margin guidance for Europe in terms of spend to meet the CO2 emissions that are tightening?

Yes, thank you, David. This is something that we've talked a great deal about and I think I'm delighted with where Ford is relative to what's happened in Europe. I'll let Jim share more here.

Yes, great question. Obviously, earlier this month the European team shared our plans to expand electrification from mild hybrids all the way to full electrics and it's a really aggressive plan with 16 electric vehicles. One of the things that's just such a differentiator for us in Europe is our strength of commercial vehicles. And so although there are cost going in for electrification and CO2 compliance especially for 2025, we're in a really good shape to continue to nurture that commercial vehicle business which is really profitable and has more upside. For example in the first quarter, we gained almost half a share point in our commercial business. So, although there are more costs going in Europe as you say for the more stringent requirements in 2025 with the 15% reduction, we have the opportunity in the commercial side to continue to grow our profitability.

Okay. But no quantification of how much you think that's going to put incremental costs in your vehicles for the region?

No, not going to share that.

Bob, if I may a comment on the press release attributed to you in regards to the seasonal earnings with 1Q being the strongest of the year. Can you elaborate on that a little bit further? I think a lot of the investors will have a question on that.

Yes, typically the first or second quarter tends to be the strongest of the year. This year, however, we have many product launches scheduled after the first quarter. These launches present significant opportunities for us, but there are also some challenges, such as lower launch expenses and the need to amortize our investments, which can create a temporary drag on our performance. Additionally, in the third quarter, European plants were shut down for four weeks, leading to decreased production, while North America had shutdowns for one to two weeks, resulting in generally lower volumes. In the fourth quarter, the end-of-year holiday typically leads to us depleting our inventory, which means we have higher labor and overhead costs that will be reflected in our financial statements. While we anticipate strong quarters ahead, we want to make it clear that the first quarter should not be viewed as a consistent benchmark. Although it's a strong start and we are pleased with our progress, we must temper our expectations as we have significant work ahead. However, it's a positive way to begin our journey this year.

Appreciate all the colors. Thank you very much. Congratulations again, Bob.

Thank you.

Hello, everybody, and congrats Bob from us as well. Really enjoyed working with you over the years and I do wish you the best. I'm interested in just following up on some of the questions about China and the China plan. You had $160 million of structural cost reduction year-over-year in the quarter. And it seemed like a lot of the restructuring that you were pursuing actually started late in the quarter. There was a shift for example to Nanjing from Shanghai. Can you talk a little bit about what we should be expecting going forward? What the magnitude of the structural cost reduction could be to correspond with your plan?

I want to remind everyone that this discussion relates to the consolidated part of the business, particularly focusing on net engineering. This includes the engineering costs we incurred after accounting for the royalties we received from vehicle production. It covers both the Lincoln and Ford brands and involves the overhead costs for our team in Shanghai. Additionally, there is a segment related to component sales made to our joint ventures. I am not discussing the joint ventures directly, as the majority of our business is in the area just mentioned. Our efforts have been concentrated on rapidly reducing costs, and we are experiencing reductions in engineering and manufacturing expenses. This is part of Ford's streamlining for imported vehicles which is now benefiting our operations in China, especially as those vehicles are being sent over. We are also adjusting the size of the workforce in Shanghai, which presents future opportunities. The improvements are widespread and not limited to any single factor, and the results for the first quarter have been promising. I anticipate that throughout the year, this will significantly contribute to alleviating the losses we faced in China last year compared to what we are achieving this year.

So just to clarify is this the run rate of year-over-year cost reduction or do you anticipate that it actually increases from here?

I think it's pretty representative. It's going to be plus or minus.

Got you. And just broadly on strategy. Maybe this is a question for Farley. You're consolidating in almost every region to segments that have very strong brand equity. So in Europe, you're going to be mostly in commercial trucks in the Ranger South America presumably at some point a lot of it's going to be pickup trucks. And in North America, a lot of what you guys are emphasizing now is brand – is products with very strong brand equity that's established. China is obviously very different. There seems like there are a lot of new products. It's expanding pretty widely. Obviously, it's a tough market. It's a fragmented market and you're a 2% player there. So, could you just maybe from a 30,000-foot view just help us understand what you want to be in this region? How broad you want to be and what kind of investment you're willing to put behind that?

Well, thanks for your question. First of all, we have – I just want to reiterate the ambitions we have to grow our utilities business globally. We have a great opportunity North America and in Europe with our utilities. For China, the story is a growth story. I mean, as shared last week with his 30-30 plan in the next three years we have 30 new products, a lot of those utilities you can expect Ford to really lean into the utility space. If you see the success we've had in Territory, which is the new nameplate for us that's great. But we have the opportunity to localize a lot of utilities in China and also refresh the products that are at the very end of their life cycle. So you can expect China to be a growth story for Ford over the next several years as well as a lot of localization and a growth in our utility lineup.

Do you have a target market share or sort of size of the business that you'd like us to ultimately achieve?

No, I think it's best just – Rod just to leave it with our growth ambition. I mean, that's the most important.

Thank you, Rod.

Yes. Hi, team. This is Steven Hempel on for Brian Johnson. Just wanted to drill down a little bit further into the North American profit improvement here. Maybe just discuss, how to think about the sustainability of North American EBIT for the year and maybe discuss the quarterly cadence throughout. I suppose maybe a two-part question split-up between kind of cost including the launches. I understand, obviously launches are going to ramp up for the remainder of the year, but maybe discuss which quarters you expect to see the largest year-over-year headwind from those launch costs. And then secondarily, pricing which has been obviously key strong year-over-year tailwind now for the past two quarters maybe discuss that business and the key drivers of that North American pricing improvement in the quarter. Bucket it up, between F-Series yield management and any others as we might be missing.

Yes, I would describe it by saying that quarters can be somewhat unpredictable. However, as I look ahead based on current insights for North America, I believe every quarter should perform quite well. There may be some fluctuations compared to this quarter, but overall, I expect strong performance in each quarter. There are factors that influence this performance, both positive and negative, as I mentioned earlier. Generally, I anticipate solid results from North America throughout the year. The feature costs should remain relatively stable, and if we exclude the impact of the pension OPEB I mentioned earlier, they would be flat. While volume may not be as high, which could be challenging in some areas, the industry is progressing. Additionally, favorable mix and strong pricing will drive the business. With costs being flat, this will positively impact the bottom line. To remind everyone, we discussed this at Deutsche Bank. There is a new contract with the UAW this year, and typically in the fourth quarter, we incur a significant charge once ratification occurs, estimated at around $0.5 billion, which I mentioned back in January. This will be a unique, one-time event affecting the timing of results in North America this year.

And Steven, I got to slip this in because I don't know how close you've been to Ford. But the management team that's running North America is exceptional. Kumar Galhotra was put in that job and we're just reviewing today kind of their serial quarter-to-quarter-to-quarter kind of improvements that they've generated. In fact, he from a method standpoint was one of the first parts of the world to build this new flat agile structure with these energy rooms. This is all serious commitment to moving faster and moving collegially across the company, reducing bureaucracy and it's been copied. And now I just add that the people leading the other parts of the world have similar kind of talent. So when Bob just talked to you about the way to think about the rest of the year, I was thinking about the guy running it and want to make sure you know how solid he is.

Yes, that's definitely helpful. Shifting focus to South America profit, particularly the long-term outlook, it indicates that the payback for the current restructuring is expected to be roughly flat or breakeven, which represents an improvement from our current situation. However, how should we view the long-term potential of the business? Back in 2014, you set a long-term target of 7% to 9%, but I'm uncertain if that's still realistic considering you're exiting some businesses. Is it more reasonable to consider that Ford may completely exit South America and reinvest in higher margin businesses?

Yes. I believe our current position reflects the consistent message I've shared about whether we have the right or wrong design in these markets. We are actively addressing this in regions like Europe and South America. As Jim Farley has mentioned regarding our portfolio strategy, we are focused on improving our design for South America. There are future developments to look forward to, but these initiatives will help us establish a solid cost structure, which will be essential for achieving success in the markets where we aim to compete.

Thanks, and my congratulations, Bob. My first question is about China. Previously, you mentioned that the widening royalty was having an impact, particularly in the latter half of last year, along with some excessive structure in the Shanghai regional office. Could you discuss your perspective on how these two issues are likely to trend as we progress through 2019?

Yes, the net engineering actually is still going to be a substantial drag on the business in an absolute sense, but it will be less so than what it was in 2018. Obviously, part of that very much dependent on the volume, because that is what drives the royalties. And you asked me about the central admin costs. Is that what you're asking me?

Yes.

Yes. We would expect to see improvement there, probably more second half weighted than first half, as Anning's working through the redesign of his organization. But yes, there will be an improvement in that that will contribute towards the year-over-year lessening of the loss this year.

Great. Thank you. Good evening and Bob congrats. So I want to ask a high level question on North America. I think this is the third quarter in a row where you're growing EBIT with the declining SAAR. And clearly a lot of the investors with Ford start the analysis looking at the SAAR. When it seems like a lot of your profitability has been driven by the F-Series franchise and so forth, with the fundamental seem very, very different from SAAR and have for a long time. I guess the question is, as you think about how investors might appreciate results like this. What are the merits and the pros and cons to disclosing the F-Series franchise or the pickup truck franchise separately, to let investors see kind of what's the key drivers away from the SAAR itself?

We do have the option to do that. In fact, over the past year or two, we've made disclosures that highlight segments and high-performing products, such as trucks. We're beginning to showcase more information based on our product lines. I'm uncertain about where this will lead. One significant change in our organization has been to provide a stronger focus on product lines as part of our business structure. We now have central teams, scaled regional teams, and will enhance our product line focus. This was discussed by Jim and Bob at the recent conference. My comments have added more detail than we have shared in the past.

That's really helpful Bob and then may be got my follow-up, may be for Jim on the expansion in the autonomous development to other cities. Love to get a little bit more color on decision behind that. And the reason I asked because some of the other competitors seem to be consolidating testing in like one particular city just to kind make sure that they are able to kind of conquer that city first. So love to go understanding of kind of decision to expand that I think you mentioned California testing as well and kind of what's gone into that as well as if you have any kind of updated size of the testing fleet over the next maybe year or so.

Yes, I appreciate that, Itay. I'm going to ask Marcy Klevorn to assist me with this because we were just in Pittsburgh two days ago with Jim Farley, reviewing our development there. I want to mention what a fantastic team we have at Argo AI and take you back to Miami. When we invited investors and media there, we received a very positive response regarding the experience. It's important to note that we are testing in some very challenging areas. I don’t want to single out any competitors, but you could place their vehicles in locations where the weather is always mild, and there aren’t significant urban challenges; many people are retired, and the roads are fairly consistent. We have chosen some truly tough environments to demonstrate our capabilities. So Miami's going really well in Washington D.C. all of us on the call and the table have been in that city so you know the challenges. And in fact, the long-term viability of this capability is its ability to work in cities. And so that's why I think you're going to love the Ford position. Now to the direct part of your question in how we're picking cities and where we are going from here, I’ll let Marcy fill in what the plans have been.

That's a great question and as you say some are choosing to focus in a limited geographic location. And in that regard, it might be easier to wrap up pure like point A to point B miles. So we believe on Jim's comment is that complex miles are more important. And so we're picking cities as Jim side like Miami that are very complex to those at the Miami – they heard Senator Brandis's opening remarks, he said Miami was a black diamond city. It has so much going on in the city. And we embrace that and so those who participated or they read about it, saw that it was a Brandis that show that we could handle complex miles, different types of construction, different types of activity in the city, bilingual city and doing that well. And so now we’re on to DC. We've got a third city selected for deployment, which we'll announce later this year, but continue to really build out complex miles. And in conjunction with that what we also did was we partner with businesses, so we've announced the likes of Chris Meno of Walmart. We’re also partnering with local businesses to become a part of the fabric of the city. And that helps us learn how cities operate in urban settings, very important, it helps us learn how to monetize the autonomous vehicle in the future by working with local businesses and these big partnerships. And then finally it helps inform the SDS self-driving system software in addition. And that's really important, because over time as standard emerge and legislation takes place, pieces of that will have to be codified and those pieces in the SDS will become a commodity like happens over time in technology. And so because we're learning these complex situations, because we're learning how we might monetize working with these businesses, we will be left with some IP that will help us set us apart. And then finally to build on Jim Hackett's idea around human-centered design, it helps us really learn more about in these complex situations, how humans want to interact with the vehicle and helps us build those humans center used case into our thinking and into our assessment.

Yes. We laughed that if autonomy was only destined for the L.A. freeways, you don't have to deal with dogs and baseballs running across them and no need to recognize that. And so the argument that you see in the press about how intense the LIDAR commitment has to be is a function of that. It's our intent to have these things perform really safely as I've said. Another interesting thing is that we've been intentional about the way we think about the external environment in the vehicle relating to each other. And I've been on record at the CES talk a year ago, describing how cities are going to be communicating back to the vehicles and vice-versa. We're experimenting with that and all these tests. So there's a lot more in terms of the system's evolution that I think is going to be wonderful to talk about as we get there.

And to answer your second part of the question about how many vehicles, we'll have 100 on the road by the end of this year.

Yes, that will be great. Thank you for that. Any other questions? I’m just going to move ahead and give you a summary once more. Thank you. And before we close, again I want to welcome Tim. Bob, thank you for incredible service. I want to reinforce four key points. First, we have a solid plan to create value in the near and long-term. We believe we're gaining credibility with you that we're doing as we said. We also, as we said, this was a year of action and making these decisions, building momentum with the global redesign of the company as we target sustained improvement across key metrics. And we're mindful of growth, profitably, cash flow, and returns as we do that. Third, our results this quarter clearly demonstrate the benefit of our fitness actions, portfolio decisions that we've labored over, and the business redesigns. And we do want to assert that there's more to come there. And fourth, we want you to know that we really do believe we've delivered a solid quarter. It is not just one thing; it's across the board. And we now believe we're on track to deliver better company results for this full year and recognize in parallel that we have a lot of work ahead of us. So thank you for joining the call tonight.