Ford Motor Company (F) — Q2 2019 Earnings Call Transcript

Thank you, Ian. Welcome everyone to Ford Motor Company's second quarter 2019 earnings call. Presenting today are Jim Hackett, our President and CEO; and Tim Stone, our Chief Financial Officer. Also joining us are Joe Hinrichs, President, Automotive; Jim Farley, President, New Business, Technology and Strategy; and David McClelland, CEO of Ford Credit. Jim Hackett will begin with a brief review of the quarter and our progress against our strategic initiatives. Tim will follow with a more detailed look at our results and then we'll turn to Q&A. Following Q&A, Jim Hackett 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 shareholder.ford.com. Today's discussion includes 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 68. In addition, unless otherwise noted, all comparisons are year-over-year. Now let me turn the call over to Jim.

Thank you, Lynn, and hello to everyone. As we meet today, we're a little past the midpoint of 2019, which we said would be a great year of execution for Ford. I am pleased with the progress we're making toward creating a more dynamic, innovative, and profitably growing business. Our second quarter results demonstrate that the global redesign of Ford is driving positive shifts in our business. We are improving our fitness, or our ability to compete, and the trajectory of the company is improving in terms of growth, cash flow, and profitability. We are making tremendous progress in Europe, which I will expand on in a moment. We are also seeing discrete signs of stability in our business in China, even as the economy and vehicle market there face persistent stress. At the same time, we are actively working on the design and launch of new products that will help us grow in this market. Additionally, the redesign and restructuring of our business in South America is on track as well. We view all of this progress with humility, as my experience has shown that the compounding positive effects of getting many aspects of our business in shape does take more time. Yet, at the same time, these disparate aspects build on each other, allowing us to reach our full potential as an outstanding business. I'll briefly touch on some highlights from the quarter. In Automotive, we delivered a 19% increase in EBIT, supported by a broad-based improvement in market factors led by North America, Europe, and China. We achieved these results even with the natural drag on profitability in North America from ramping three very important product launches in the quarter: our all-new Explorer, Police Interceptor Utility, and our new-to-market Lincoln Aviator. If you recall, in Q1, we said our first quarter results would be the strongest of the year due in part to the magnitude and cadence of these future product launches, as well as normal seasonality. Importantly, we delivered positive adjusted free cash flow in the quarter, significantly better than last year, notwithstanding the major launch headwinds. On a year-to-date basis, we delivered $2.1 billion in adjusted free cash flow, which is up 80%. Additionally, our cash balance of $23 billion and total liquidity of $37 billion remain strong and well above our target levels. Our year-to-date results support our target to improve both free cash flow and profitability this year. Tim will go into more detail about our results and perspectives on the full-year shortly. As we've discussed in the past, we're focused on four strategic areas for creating value. First is the winning portfolio, where we are fortifying our strengths, improving mix, and expanding our commitment to electric vehicles. Second is fitness, our ability to compete, including advancing alliances with companies like VW and Mahindra. Third is the acceleration of our global redesign, which ensures that each of our regions is generating sustainable profitable growth and cash flow. Finally, the fourth area is smart vehicles for a smart world. We are scaling products and businesses that connect to the world around them in ways that benefit our customers. Let me touch on a few highlights of each of these areas. We're now beginning to roll out our new portfolio, powered by the dramatic shifts in capital allocations toward trucks, SUVs, and performance vehicles, including hybrids and all-electric offerings. This chart covers 2019 and 2020. We're expanding our lineup where the volume and profit are growing, and where the Ford brand excels. This includes pickups like the new F-150, Super Duty, and new Ranger; commercial vans like the new two-tonne Transit; and SUVs such as the new Explorer, Escape, Territory, and Puma; rugged off-road vehicles like the Raptor and the upcoming Bronco; as well as our Mustang-inspired BEV, which will be an SUV. In fact, in North America, we're driving down the age of our passenger vehicle showroom by almost one-half, as we replace 75% of our products by 2020. Over time, the new models we're adding for customers will more than make up for any share and volume loss from the phase-out of sedans, while simultaneously improving profitability and returns. It’s a significant feat to deliver this many new products in a short timeframe. Fortunately, we have a seasoned automotive veteran, Joe Hinrichs, at the helm of our automotive division. The extent of the work being accomplished is, in many ways, like clockwork, and we will successfully launch these products. For example, the transformation of our Chicago plant to launch the Explorer, Police Interceptor, and the new Lincoln Aviator was more complex than the 2014 overhaul of our truck plants in Dearborn and Kansas City for our aluminum-bodied F-150. In fact, the Explorer launch is arguably our most complex one in the next 18 months, combining an all-new high volume platform with a new factory and body shop. We launched a broad lineup of the Explorer, including hybrid and ST performance models, and are introducing a plug-in hybrid version of the Aviator. To achieve all this, we installed hundreds of robots and new technologies while moving out the scrap metal equivalent of the Eiffel Tower. I’m pleased to say that the demand for these two new products is strong. We are selling these vehicles as fast as we can build them. In fact, we are now expanding our capacity in Chicago. When you have a moment, please click on the link on this page to watch a short video summarizing what it took to prepare our Chicago plant for these key launches; I think you’ll be positively impressed. The Explorer, Police Interceptor, and Aviator are just three examples of our dramatic shift in capital allocation toward higher return trucks, utilities, and crossovers. While we remain highly committed to quality and customer satisfaction, we’ve seen this reflected in results from the most recent J.D. Power U.S. Initial Quality Study, where for the first time ever, Ford and Lincoln ranked among the top five auto brands in the U.S. I’ll expand on our renaissance underway in Europe, where we've made significant progress in the quarter. In early January, our team unveiled a comprehensive roadmap to improve or exit less profitable vehicle lines, addressing underperforming areas of our business and improving profitability through efficiencies and a significant reduction in structural costs. In the first half of this year, our team has done an exceptional job in achieving important milestones as they position the business in Europe for a 6% EBIT margin long-term. These milestones include a new operating model and organization, with three customer-focused business groups, each with a dedicated management team and bottom-line accountability. The first group focuses on commercial vehicles, where we have reallocated resources to capitalize on our position as a top commercial vehicle brand in Europe, including leadership in the pickup segment. Over the next five years, we are targeting to double our profitability in commercial vehicles. The second group will focus on passenger vehicles, specifically European-built cars and SUVs. The third group comprises imports, a niche portfolio of iconic passenger vehicles, including the Mustang and Explorer. Importantly, we have largely concluded consultations with our social partners, and in the UK and Germany, we have executed separations. In Russia, we have completed the restructuring of our joint venture there, which includes exiting passenger vehicles and Ford taking a minority stake. To improve manufacturing efficiencies, we have proposed confirming the closure or sale of six assembly and component manufacturing plants in Europe by the end of 2020. Amidst this restructuring, we have also announced growth initiatives, including producing new all-electric vehicles and electrified options for all-new passenger vehicle models. These new vehicles will support our compliance with the new European CO2 regulations, which we expect to achieve without having to buy credits or incur penalties. Our alliance with VW will also contribute to supporting commercial vehicle and electric vehicle growth. If I could direct your attention to Slide 8, earlier I mentioned the four strategic areas that prepare Ford for this new era in our industry, referred to as smart vehicles for a smart world. This strategic area has benefited from Jim Farley's mix of automotive and entrepreneurial background. He has focused on concluding negotiations with VW to broaden our collaboration. It's important to share why we're so enthusiastic about this news. At a time of industry consolidation, we believe we found a more thoughtful approach to collaborating on key strategic areas without adding the complexity of cross-ownership. It started back in January, when Ford and VW announced a deal to develop commercial vans and medium-sized pickups for global markets. This collaboration remains on course, and we are excited about its potential. Two weeks ago, VW CEO Herbert Diess and I announced that our companies will expand this collaboration, which includes VW joining us in an investment commitment to Argo AI, one of the most capable developers of autonomous vehicle platforms, based in Pittsburgh. This transaction establishes an estimated value for Argo of more than $7 billion. Collectively, we believe we are on a path to create one of the most important autonomous vehicle platforms in the industry. Here's how our companies will work together on autonomy going forward: First, we will collaborate with Argo on the self-driving system, known as the SDS. This means that Ford and VW will be able to reduce our respective investments and development costs for future AV businesses. We will co-create common AV standards and share valuable data with Argo to build the best traffic and fleet management models. Second, we will share costs and expertise to design and engineer unique, safe, and efficient self-driving vehicles. Third, Ford and VW will remain vigorous competitors and pursue independent go-to-market strategies using this common Argo SDS platform, designing and delivering unique experiences for our customers. In addition to our collaboration on autonomy, we also announced that we are extending our alliance to electric vehicles. Ford will become the first additional automaker to use VW's MEB electric vehicle architecture. We'll leverage this architecture for high-volume zero-emissions passenger vehicles in Europe, designed at our Ford Engineering Center in Cologne, Germany. Ford of Europe will start building this vehicle in Ford facilities in 2023. We're also considering a second electric model based on this MEB architecture for our Ford lineup in Europe. This strategic relationship between Ford and VW is another important building block in the renaissance underway at Ford of Europe that I just described. With that good news, let me turn the call over to our CFO, Tim Stone. Tim?

Thanks, Jim. Hi, everyone. A few things to keep in mind as we discuss our results. First, both 2019 and 2020 are robust launch years for us as we bolster a winning portfolio for customers, reallocate capital to higher return growth opportunities, and execute changeovers of our most profitable and highest volume vehicles. Second, our global redesign and fitness initiatives are progressing well, improving the trajectory of future growth, cash flow, profitability, and returns on capital. Third, Ford Credit continues to deliver excellent results. And fourth, relative to auto, we continue to expect strong execution this year, especially in North America, Europe, and China. In the quarter, we generated $0.2 billion in adjusted free cash flow, a significant improvement from last year. This performance includes the impact of our launches in the quarter. On a year-to-date basis, adjusted free cash flow was up 80% to $2.1 billion, supported by improvements in working capital in auto. The ability to generate sustainable growth in free cash flow over time is our most important financial measure, and we are on our way to achieving this. Wholesales declined 9%, driven by China, lower industry performance, and the launch-related volume impact from North America as we ramped the Explorer and Police Interceptor; the Interceptor accounted for half of all police vehicle sales in the U.S. last year, and the new models are even more capable. Although wholesales were down, revenue remained flat, as strong mix and pricing supported by our franchise strengths were offset by lower volumes and adverse exchange. Excluding the impact of exchange, revenue grew 3%. Auto posted a second consecutive quarter of EBIT growth, something we have not achieved in over three years. EBIT grew 19%, up from 16% last quarter, and EBIT margin expanded by 60 basis points. These results were supported by strong mix in North America, reflecting our franchise strengths and strong pricing in every region. In North America, EBIT declined 3%, driven by the changeover of the Explorer, Interceptor, and the introduction of Lincoln's all-new Aviator, alongside higher warranty costs. Our strategic investments in Mobility increased by 46% as we continue to build out our capabilities, including mobility services, connectivity, and autonomy. Ford Credit delivered another strong quarter, posting a 29% increase in earnings before taxes. Favorable loss metrics reflected healthy consumer credit conditions, and auction values for off-lease vehicles performed slightly better than expectations. We now believe auction values will be down by about 3% on average for the year. Receivables were flat, remaining below our previously announced cap of $155 billion. Corporate other expenses of $286 million included a mark-to-market loss of $181 million on our investment in Pivotal. On an adjusted basis, both company EBIT and margin for the quarter were flat at $1.7 billion and 4.3%, respectively, and EPS was $0.28. Excluding the Pivotal loss, adjusted EBIT would have been $1.8 billion, EBIT margin would have been 4.7%, and EPS would have been $0.32. In the quarter, we recorded $1.2 billion in special charges, with cash effects of $0.2 billion. As expected, the vast majority of these charges in the quarter were associated with the redesigns in Europe and South America. This year, we expect to incur $3 billion to $3.5 billion in EBIT charges, with negative cash effects of about $1.5 billion to $2 billion, reflecting a shift of about $0.5 billion to $1 billion in cash effects into 2020. Lastly, we ended the quarter above our cash and liquidity targets, with $23 billion in cash and $37 billion in total liquidity. Let me touch on a few areas of the business in more detail. In North America, EBIT was down, and margin contracted by 30 basis points to 7.1%. The region continued to deliver strong mix and pricing supported by F-Series, and our decision to exit traditional sedans. This favorability was more than offset by the launch-related declines in volume and higher warranty costs. For additional context, wholesales for the Explorer and Interceptor were down by 72,000 units year-over-year, leading to a 7% overall decline in wholesales for the quarter. As Jim mentioned, demand for the Explorer is strong, with production already oversubscribed. Notably, in the quarter, sales of the Ranger completely offset the decline from discontinued sedans. In the U.S., our SUVs posted strong momentum in the quarter, including a 50% increase in the Expedition. This month, based on healthy customer demand, we started to run additional capacity for the Expedition in our Kentucky Truck Plant. By the end of this year, on a volume-weighted basis, we will have the freshest SUV lineup in the industry, led by our all-new Explorer and all-new Escape. Also, in the U.S., sales of total pickups accelerated in the quarter, marking our best overall pickup sales performance since 2004. SUVs continue to perform well, maintaining market leadership with the lowest incentive spend among primary competitors and the highest transaction pricing. The Ranger, which we launched at the end of 2018, more than doubled its volume sequentially, while steadily increasing segment share to 14.2%. Europe delivered $53 million in EBIT in the quarter, an improvement of $126 million year-over-year, supported by our redesign efforts. Favorable market factors, aided by flat structural costs, excluding pension, drove the improvement in profitability. This marks the first quarterly year-over-year improvement in profitability for Europe in two years. Commercial vehicles once again proved to be a strength in the quarter, as Ford remained Europe's number one commercial vehicle brand. As noted in our product roadmap, we will be launching an updated two-tonne Transit in the second half of this year. In addition, Ford remains the market leader in the UK with Fiesta, Transit, Custom, and Focus ranking as top-selling models. In China, consolidated revenue increased 48% year-over-year, driven by higher Lincoln volumes. The EBIT loss narrowed to $155 million, an improvement of $328 million year-over-year, supported by improvements in consolidated operations, volume, mix and pricing, lower tariffs, and structural costs, as well as favorable exchange. The team has taken actions to stabilize sales, achieving second quarter retail sales growth of 13% sequentially, along with aggressive inventory reductions to improve dealer health. In fact, our dealer inventory is at its lowest level in the past 18 months. The runout of Stage V emissions vehicles was managed effectively. Moreover, China has initiated various measures, including enhancing capabilities within the Chinese market and strengthening cooperation with joint venture partners. Sales of our new Ford Territory SUV accelerated in the second quarter, making it the best-selling Ford SUV in China this year. Now, let me turn to our updated outlook for the year, which focuses on growth in cash flow and profitability. We continue to target an improvement in adjusted free cash flow year-over-year, driven by Auto. We are now introducing a range for full-year adjusted EBIT of between $7 billion and $7.5 billion compared to $7 billion last year, representing up to 7% growth. These targets include continued strength in market factors and improved structural costs, excluding pension, led by North America, China, and Europe, alongside launch-related impacts and strength in Credit. As a reminder, we expect to conclude our negotiations with the UAW in the fourth quarter. Assuming a full-year adjusted effective tax rate of between 18% and 20%, which would be up from 10% last year, we are introducing an adjusted EPS range of $1.20 to $1.35 compared with $1.30 last year. The tax headwind is worth roughly $0.12 to $0.16 in EPS for the year. Given the cadence of product launches and normal seasonality, we expect our fourth quarter adjusted EBIT to be higher than the third. Among other factors, these targets are based on the current economic environment, including commodities, foreign exchange, and tariffs. With respect to capital calls for the year, we expect CapEx to be similar to last year at approximately $7.7 billion, funded pension contributions to be about $650 million, and shareholder distributions to be approximately $2.6 billion. A few final comments before we move to Q&A. 2019 and 2020 are robust product launch years for us as we bolster our winning portfolio for customers, reallocate capital to higher return growth opportunities, and execute changeovers of our most profitable and highest volume vehicles. Our results this quarter and year-to-date demonstrate that the trajectory of our business is meaningfully improving, supported by our product portfolio, global redesign, and fitness initiative. We have many opportunities across our business to drive free cash flow, long-term growth in revenue and profitability, including EBIT margins of 8% or better, and we continue to be committed to maintaining a strong balance sheet and investment-grade credit ratings. Now let's open the call for questions.

Hi, good evening, everybody.

Good evening.

So, my first question is about the second half guidance implied by your full-year guidance. At the midpoint, if I focus on the EBIT metric, it looks like you're guiding for an EBIT that would be down about $1 billion between the first half and the second half. I was hoping you could bucket this for us into what the main drivers are. It seems like you're flagging launches, in particular, but obviously the second quarter had quite a bit of that as well. So, maybe just from a high-level point of view, second half lower by $1 billion versus first half, what drives that?

Emmanuel, thanks. It's Jim Hackett. I'm going to hand this question to Tim, but I just want to tell the audience tonight that this is Tim's first call as our CFO. He has done a great job of integrating into the Ford culture, bringing new perspectives and questions, and he's become a great partner. When we sat in front of you in January, I remember thinking about how we would help the Street see our year, but sitting in front of us were open questions about the tariffs. Joe can talk about the back-and-forth there. We were working on our corporate redesign; this is the white-collar effort regarding management reporting layers. We had restructurings that you were just starting to learn about in Europe and were actively working on our own recovery in China. I just returned from there. So, from January to July, I want to report to you, Emmanuel, as you look at those five issues, I'm really happy with how the company's tackled each one of them and the progress we've made. You kind of teed up a good question in terms of the second half of the year, particularly about product launches. So, tonight, I want to ensure that you see that this is a capability we have to prove we're really good at. I have a lot of confidence in our abilities and you'll hear that we've tackled the toughest one first with the Explorer and Aviator. But Tim, before Joe, if Joe wants to add color on the launches, you could discuss the guidance and how we arrived at this.

You bet. So, thanks for the question, Emmanuel. As you mentioned, with the $4.1 billion already in the books in the first half, the guidance range of $7 billion to $7.5 billion—representing up to 7% growth—implies $2.9 billion to $3.4 billion in the second half. We said on the call that through these product launches, you can see in the materials distributed on Slide 5, the winning portfolio slide. There are several launches ahead of us through the remainder of this year, continuing to ramp up on the Explorer and Aviator, along with others such as Corsair, Escape, Kuga, and the two-tonne Transit, for example, as well as normal seasonality. In 2018, for instance, 56% of our profits came in the first half of the year, and as a reminder, we have UAW negotiations concluding in the fourth quarter. We believe the guidance is appropriate based on what we're seeing in the business, incorporating the risks and opportunities that factor into it.

Yes. So quickly, I'll add. We have the Super Duty launch towards the end of the year, which is really important, and the seasonality here is real. We have planned shutdowns in Europe and North America during the summer months, and, of course, the holidays later in the year. So, there is annual seasonality involved. Thus, it’s launches, seasonality, and UAW negotiations.

Yes. And that's very helpful. And then just as a follow-up, could you give us a sense of how you view the second half relative to the first half? I assume the bulk of the decline is in North America based on the launches mentioned. Is there any other region where you expect to see this trend as well, and particularly in North America, is there anything else beyond the launches that could contribute?

Yes, thanks. Some of the launches we've talked about are happening in Europe, for example, with the two-tonne Transit and Escape—many launches are planned globally. However, before we get too far into the specifics, recognize that while we've provided EBIT and EPS guidance, we’re not going to detail the inputs that shape the final output—including regional guidance or macro commentary regarding commodities or tariffs. But by providing EPS guidance and a range for EBIT, I am addressing your question.

Well, obviously, the bigger launches are centered around North America, and the UAW impacts are a consideration.

Great. Thank you.

Good morning or good afternoon. This is Aileen Smith on for John. First question on the structural cost headwind in North America. Can you detail what these costs were specifically in the quarter, and how do you plan on controlling or offsetting some of these ahead, particularly with UAW negotiations and potential labor cost inflation?

One thing, Tim, may I add something? You know John Murphy and I have something in common—I just had a brand new baby granddaughter, and I believe John just had a new baby girl. So, John, we would like to send out congratulations and hope every mom and baby are doing well.

That's great.

Thank you very much. I appreciate that.

On structural costs in North America, overall Auto was good. EBIT increased 19% year-over-year, up from 16%. This marks the first time in over three years that we have achieved two consecutive quarters of year-over-year profit growth, driven mostly by structural cost reduction. Our commentary is that structural costs are down, excluding pension and OPEB overall. As far as how that aggregates for the rest of the year, again, others will factor into our guidance.

Okay. That's helpful. And then my second question is about the year-over-year walk in China. As you consider the outlook for the rest of the year and into 2020, do you see positive contributions from volume, mix, pricing, and costs as sustainable? Or will one of these factors be a larger driver of profitability improvement?

Yes. This is something we want to emphasize. We want to discuss the situation in China. Joe, maybe you can elaborate on that.

Sure, thanks. So clearly, we’re pleased with the financial progress in the first half of the year, especially on our consolidated results. Regarding China in the last couple of months, we aggressively worked on selling down Stage Five emissions vehicles, especially during June. I expect we'll see some payback in the second half of the year, especially beginning in July. We continue to track developments in the industry closely. Tim mentioned earlier that our dealer inventories are at their lowest in 18 months, which comforts us. We're pleased with our progress in transitioning through Stage Five emissions regulations. Sales of our new Ford Territory SUV accelerated in the second quarter, becoming the best-selling Ford SUV in China this year. We still have work ahead, but we're progressing positively with upcoming products.

Thanks, Joe.

Great, that's very helpful. Thanks for taking my questions.

Yes. I want to delve deeper into structural costs. In the first quarter, it was a positive tailwind of about $300 million, while now you've flagged a negative performance in the second quarter—negative in North America and Europe. I want to understand this change, and do you expect to see these improvements recurring? What's your perspective on structural costs in both North America and Europe?

Tim, please go ahead.

Yes. Again, as it relates to the outlook, it's factored into our guidance. To clarify, structural costs excluding pension and OPEB are flat year-over-year. What you’re seeing is the continued execution on our fitness initiatives and redesigns generating early benefits in overall EBIT results and structural costs across the business.

But can you share the magnitude of the change you experienced in Q2 ex-pension and OPEB and provide any additional color on Europe that might indicate a step backward from the benefits observed in Q1?

No, not at this point. If you look at our ongoing announcements regarding redesign efforts in Europe, we anticipate continued execution on these initiatives. We recorded $1.2 billion in the quarter with $1.7 billion for the year-to-date in charges, and you still have a way to go. As discussed earlier, our 2019 outlook for the year is from $3 billion to $3.5 billion in charges.

So, you currently have nothing to share about the recent actions regarding annualized cost savings?

Not at this stage.

David, this is Jim. I want to reiterate that I visited Europe recently and observed that the restructuring is performing exceedingly well. We've been speeding it up, so I want to ensure there’s confidence that this work is progressing.

Thank you for your insights.

Hi everybody. I wanted to ask again about regional performance. It doesn’t appear you want to share too many specifics on this, but it seems logical that Europe and Asia improvements should continue year-over-year while your guidance reflects a decline in North America related to launches. Can you provide some frame of reference around improvements in China and Europe? How much of the cost improvements you are anticipating is already reflected in Q2 results, and at a high level, could you discuss what’s still ahead?

Sure, Rod. As mentioned, we saw an improvement of $126 million in Europe year-over-year, which marks the first year-over-year improvement in profitability for Europe in two years. This reflects the redesign initiatives focusing on customer needs, with a strong performance in commercial vehicles. In China, while EBIT loss improved to $155 million—$328 million year-over-year—our dealer health has seen improvement as well. Our efforts to stabilize sales are showing results.

Rod, this is Joe. I want to emphasize that for the joint ventures, especially with Changan, we still have work to do. The recent builds we’ve made in our marketing, sales organization, and dealer relations are reshaping the joint ventures for the better. We're excited to see potential positive impacts from new models and localization as we proceed.

You are seeing our business hold up fairly well given all considerations, and we are watching the market very closely.

Thank you.

Everybody, good evening. First, my question is on European CO2. I think I heard you right; you said that you will achieve the CO2 emission standards without purchasing credits or incurring penalties. But I understand these penalties for 2020 will arise when you need to get to 95 grams, which means having BEVs on sale. Can you confirm that you expect to make 95 grams without BEVs?

Yes, Adam, this is Joe. Thanks for your question. The regulations in Europe are not new to us—we’ve been planning for compliance since 2013. We've accounted for this in our business plans. Our compliance will rely on both electrification and improvements to our ICE powertrains. To address your concern, we don’t anticipate incurring fines or purchasing credits, assuming that consumer demand supports our new product lineup.

I appreciate your answer. It seems a substantial gap to bridge to that standard in such a short time frame, but I’ll take it offline.

I appreciate the challenge, but I assure you we are planning to achieve our goals.

Thank you, Jim. My second question is for David McClelland or Joe regarding Ford Credit. I recognize that historically, money supply remains strong, though perhaps not as strong as it has been. I'm interested to know if there are any incremental indicators signaling potential caution or shifts in credit quality, including consumer behavior or delinquency rates?

Sure thing, Adam. It sounds like you're focusing on PD ratings of our customers along with the funding environment.

Adam, this is David. Tim mentioned in his introduction that the current environment appears healthy. Looking at our portfolio or originations, average vehicle credit scores are still strong, nearing 750. We’re not observing any shifts in the higher-risk customer segment; in fact, subprime placements have decreased quarter-over-quarter. Our average loan term remains steady, and we’ve seen an improvement in our portfolio performance, with our loss ratios declining, and our 60-day delinquency and repossession rates dropping. In terms of lease outcomes, we have seen better performance than expected at auction. Overall, I believe the environment remains solidly green, as you termed it.

Thank you very much, David.

Thanks for taking my question. Regarding guidance for global redesign costs, I see that you are trending below the full-year target. Does this imply that there is still more major action coming through the year? Additionally, does this suggest that larger steps may be taken over the next few months?

Yes, it's Jim. So, the way we're monitoring this involved a structural management review to eliminate bureaucracy. We set four key goals in this review and I'm happy to report that we exceeded every one of them. This quarter had a heavier impact on costs than the first. There were more implications with personnel changes and restructuring. Tim, may I have you provide more details?

Sure. As I mentioned earlier, we recorded $1.2 billion in charges in Q2, totaling $1.7 billion for the year-to-date. We projected between $3 billion and $3.5 billion for the full year. This indicates that we have quite a way to go. Further detail would be inappropriate at this time considering we haven't finalized decisions for additional redesign initiatives. However, we estimate $11 billion in improvements over the coming years, allowing us to enhance our cash generation and growth opportunities. For cash management, we delivered $0.2 billion in cash this quarter, totaling $0.4 billion year-to-date, and we expect to reach between $1.5 billion and $2 billion for the year. We previously thought it might be closer to $2.5 billion, meaning we deferred around $0.5 billion to $1 billion into 2020. There is still much work ahead and a lot of potential.

Great, thank you for the insights.

You bet.

Hi, thanks for taking my question. It's encouraging to see so many EBIT drivers of consolidated operations in China being positive year-over-year in Q2 amidst a challenging industry backdrop. However, given the relative size of your consolidated versus non-consolidated operations in China, it seems the greatest opportunity for improvement might reside in the joint ventures, which saw nearly flat year-over-year EBIT. Can you shed light on the factors contributing to this lack of movement? I recognize there may be material volume declines impacting your costs. Additionally, any guidance around when we might notice improvements in the JVs would be helpful.

That’s an excellent question and one we definitely discuss. Joe?

Yes, Rod, this is Joe. It's absolutely essential for our joint ventures, particularly the Changan Ford JV, to enhance its performance if we're to reach our longer-term targets in China. We have pressing work to accomplish, and while we noted improvements in the consolidated results recently, part of this came from a decline in sales but also managing inventory down to the lowest levels seen in a year and a half. We're optimistic about our paths forward, especially as we've invested in restructuring our marketing and sales efforts in collaboration with Changan. This includes focusing on dealer profitability and marketing efforts with strong participation from our joint venture partner. Although much work remains, we are encouraged by recent momentum on our sales.

I want to emphasize that this is not an infrequently discussed topic at our table; we’re committed to watching what occurs in the market closely.

Okay, thank you for the insights.

Sure, let me close with a few thoughts. Our second quarter results demonstrate that the global redesign of Ford is driving positive shifts in our business. And I want to emphasize that the news in Europe is looking better. The bureaucratic restructuring we've undertaken with a renewed focus on our goals is yielding positive results and increasing our competitive capabilities. Furthermore, we are progressing toward a winning portfolio strategy; our decisions to exit traditional sedans in favor of stronger areas like Ranger trucks are producing returns. Lastly, we're observing an improving trajectory for the company regarding growth, cash flow, and profits. Thank you, all, for your attention this evening. I'll turn it back to the operator.