Ford Motor Company

Good day, ladies and gentlemen. My name is Ian, and I will be your conference operator today. At this time, I would like to welcome you to the Ford Motor Company second quarter 2019 earnings conference call. All lines have been placed on mute to prevent any background noise. After the speaker's remarks, there will be a question and answer session. If you would like to ask a question during that time, simply press star followed by the number one on your telephone keypad. If you would like to withdraw your question, simply press the pound key. After the question and answer session, there will be closing remarks. At this time, I would like to turn the call over to Lynn Antipas Tyson, Executive Director of Investor Relations.

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 Henrichs, President Automotives, Jim Farley, President, New Businesses, Technology, and Strategy, and David McClellan, CEO of Fork 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 measure 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 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 68. In addition, unless otherwise noted, all comparisons are year-over-year. Now let me turn the call over to Joe.

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. And I am pleased with the progress we're making toward creating a more dynamic, innovative, and profitably growing business. As our second quarter results demonstrate, 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 are under recent and persistent stress. At the same time, we're actively working on the design and launch of new products that will help us grow in this market. Now, additionally, the redesign and restructuring of our business in South America is on track as well. We view all of this progress with humility. The reason is that it's been my experience that the compounding positive effects of getting so many aspects of our business in shape does take more time. Yet at the same time, these disparate aspects build on each other, which allows us to reach our full potential as an outstanding business. But to touch briefly on some other 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 and Police Interceptor utility as well as our new-to-market Lincoln Aviator. Now, if you recall, in Q1, we said our first quarter results would be the strongest of the year, in part because of 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 major launch headwinds. And on a year-to-date basis, we delivered 2.1 billion adjusted free cash flow, which is up 80%. In addition, 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 in just a moment. Now, 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. It's our ability to compete, including advancing alliances such as those with VW and Mahindra. Third is acceleration of our global redesign, which was to ensure each of our regions in generating sustainable, profitable growth and cash flow. And fourth is smart vehicles for a smart world. We are scaling products and businesses that connect to the world around them in ways that benefits our customers. Let me touch on a few highlights of each of these. We're now beginning to roll out our new portfolio, powered by the dramatic shifts in capital allocations of trucks, SUVs, and performance vehicles, including the hybrid and all-electric offerings. This chart you see covers 2019 and 2020. We're expanding our lineup where the volume and profit is, where the growth is, and where the Ford brand excels. Of course, this includes pickups like the new F-150, Super Duty, and New Ranger, commercial vans like the new two-ton Transit, and SUVs such as the new Explorer, Escape, Territory, and Puma. rugged off-road vehicles like the Raptor and upcoming Bronco, and our Mustang-inspired BEV that's going to 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 in volume lost by the phase-out of sedans. while simultaneously improving profitability and returns. It's no small feat to deliver this many new products in such a short timeframe. I'm fortunate that I have a seasoned automotive veteran in Joe Henrichs at the helm of our automotive division. When you witness the extent of the work that was done, much of it like clockwork, we will complete our assignment to successfully launch these products. For example, the transformation of our Chicago plant to launch the Explorer, the police interceptor, and the new Lincoln Aviator was in some ways a bigger endeavor 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 over the next 18 months, combining an all-new high-volume platform along with what is effectively a new factory and a new body shop. We also launched our broadest ever Explorer lineup with both hybrid and ST performance models, and we're introducing a plug-in hybrid version of that Aviator. Now to achieve all this, we installed hundreds of robots, new technologies, and moved out the scrap metal equivalent of the weight of the Eiffel Tower. I'm pleased to say that the demand for these two new products is strong. We're selling these vehicles as fast as we can build them. In fact, we're now expanding our capacity in Chicago. So when you have a moment, do me a favor and click on the link on this page to watch a short video summarizing what it took to get our plant in Chicago ready for these key launches. I think you'll be positively impressed. Explorer, Police Interceptor, and Aviator are just three examples of our dramatic shift in capital allocation to higher return trucks, utilities, and crossovers. At the same time, we are working to lower the capital intensity of our business. Of course, we remain highly committed to quality and customer satisfaction in everything we do. You can see that in the results from the most recent J.D. Power U.S. initial quality study. For the first time ever, both Ford and Lincoln ranked among the top five auto brands in the U.S. I will expand a bit on our renaissance that is underway in Europe, where we made significant progress in the quarter. In early January, our team in Europe unveiled a comprehensive roadmap to improve or exit less profitable vehicle lines, address underperforming parts of the business, and improve profitability through efficiencies and a significant reduction in structural costs. In the first half of this year, our team did a tremendous job, achieving important milestones as they positioned the business in Europe for a 6% EBIT margin longer term. These milestones include, number one, a new operating model and organization, including three customer-focused business groups, each with a dedicated management team and bottom-line accountability. The first of the three groups is commercial vehicles, where we have reallocated resources to capitalize on our position as the top commercial vehicle brand in Europe, including leadership in the pickup segment. Now, over the next five years, we're targeting to double our profitability in commercial vehicles. The second group is passenger vehicles, which will focus on European-built cars and SUVs. The third group, well, this is 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 carried out separations. In Russia, we have completed the restructuring of our JV there, which includes exiting passenger vehicles and Ford taking a minority stake. To improve manufacturing efficiencies, we have proposed or confirmed the closure or sale of six assembly and component manufacturing plants in Europe by the end of 2020. In the midst of this restructuring, we've 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 pay any kind of penalty, and our alliance with VW to support commercial vehicle and electric vehicle growth. Now, if I can get you to turn to slide eight. Earlier, I mentioned a fourth strategic area that prepares Ford for this new era in our industry. I refer to this as smart vehicles for a smart world. This strategic area has benefited, as I expected, early from Jim Farley's mix of automotive and entrepreneurial history. He appropriately focused early on the conclusion of the negotiations with BW to broaden our collaboration. Now, it's important to expand to you today why we're so enthusiastic about this news. At a time when industry consolidation is daily making news, we believe we found a more thoughtful approach to collaborating in key strategic areas without adding the complexity of cross-ownership. It started back in January, where Ford and VW announced a deal to develop commercial vans and medium-sized pickups for global markets. This collaboration remains on course, and we're excited about the potential. Two weeks ago, VW CEO Herbert Deese and I said that our companies would expand this collaboration. Now, this included VW joining us with an investment commitment to Argo AI. This is one of the most capable autonomous vehicle platform developers as you know, based in Pittsburgh. The transaction with VW establishes an estimated value for Argo of more than $7 billion. Collectively, we believe we're on a path to create one of the most important autonomous vehicle platforms in the industry. Here's how our companies will work together going forward on autonomy. First, we will collaborate with Argo on the self-driving system, known as the SBS. That means the Ford and VW will be able to reduce our respective investments and development costs for the future AV businesses. We will be able to co-create common AV standards both now and in the future. And we'll share valuable data with Argo to help build the best visioning and mapping models along with data utilization analysis for traffic and fleet management. Second, We'll share costs and expertise so that we can each design and engineer unique, safe, and efficient self-driving vehicles. Third, Ford and VW, of course, will remain vigorous competitors and pursue independent go-to-market strategies using this common Argo SDS platform, with each of us designing and delivering unique experiences for our customers. In addition to our collaboration autonomy, We also announced 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 a high-volume, zero-emissions passenger vehicle in Europe, and this is 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 more expansive strategic relationship between Ford and VW is another important building block in the renaissance underway at Ford of Europe that I described earlier. With that good news, let me turn the call over to our CFO, Tim Stone. Tim?