Ford Motor Company

Good day, ladies and gentlemen. My name is Holly, and I will be your conference operator today. At this time, I would like to welcome you to the Ford Motor Company third 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 this time, simply press star, then the number one on your telephone keypad. If you would like to withdraw a question, 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.

Lynn? Thank you, Holly. Welcome, everyone, to Ford Motor Company's third 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, Automotive, Jim Farley, President, New Business Technology and Strategy, and David McClellan, CEO of Ford Credit. Jim Hackett will begin with a brief review of the quarter and 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 comments today will 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. Actual results may differ from those stated, and the most significant factors that could cause actual results to differ are included on page 22 of our presentation. In addition, unless otherwise noted, all comparisons are year-over-year. As a reminder, in 2020, we will update the business units in our automotive segment and to align with changes to our management and reporting structure. To help you with this transition, our earnings deck appendix has a schematic of the changes, including where certain joint ventures will be reported. Also, our revised 2018 and 2019 results show how they will appear in the new reporting structure. The investor relations team is available if you have specific questions about these changes. Now I'll turn the call over to Jim.

Thanks, Lynn, and hello, everyone. Overall, the Ford team delivered solid operational results in the third quarter, while at the same time, we made further progress on the global redesign of the company. We know, though, that we have much more work to do. This is the mandate at Ford, executing in the now while transforming into a much more fit, agile, and customer-centric company that can win in an era of rapid change and innovation. Our team is operating with urgency and a focus to meet these challenges. Please turn to page four. Now, touching briefly on the quarter, we generated positive adjusted free cash flow. A year to date, adjusted free cash flow was up 80%, largely driven by improvement in our automotive business. In the quarter, we delivered $1.8 billion in company-adjusted EBIT. That was up 8%, supported by improvement in our businesses in China, North America, and Europe. as well as mark-to-market gains in corporate other and another strong performance by Ford Credit. In year-to-date EBIT for automotive, it was up 10%, and company-adjusted EBIT increased 6%. Please turn to page 5. At the highest level, our global redesign is about making choices to transform Ford into a more fit and competitive company. Simply put, we are absolutely committed to improving execution and addressing underperformance throughout the company. I will walk you through our business region by region. In our North American business amidst an intensified competitive environment, we're in the middle of an extensive product renewal, reminding you that we are significantly refreshing and growing our SUV portfolio, introducing models like the completely redesigned Ford Explorer and Escape, and our all-new Lincoln Aviator and Corsair. I'm pleased to say that we are approaching now full production on the new Explorer and Aviator. This product renewal comes as we also phase out our most traditional sedan silhouettes. Again, our intent isn't to give up customers in that sedan segment, rather to enhance their view of Ford's potential to please them and even a better vehicle. We also plan to protect and expand our leadership in pickups and commercial vehicles. Look for a new Super Duty pickup in the coming months and our all-new F-150 next year. In a few weeks, we're introducing a battery electric vehicle that's designed from the ground up to offer stunning performance, gorgeous design, and an incredible customer experience that is fully connected and updatable over time. We also have big plans for the long-awaited rebirth of the Bronco franchise. So Ford is expanding into battery electric vehicles and rugged off-road SUVs, challenging brands that have had those two growth areas to themselves for long enough. In total, remind you that we're in the process of replacing 75% of our North American lineup by volume by the end of 2020, dramatically improving the freshness, and appeal of our portfolio. The Ford team in Europe, it's making rapid strides in restructuring the business. We have reset our revenue and cost base and are rationalizing our product portfolio. Europe is now focusing on three business groups, a strong and growing commercial vehicle business, a smaller and more profitable passenger vehicle business, and a niche portfolio of profitable and brand-enhancing imported vehicles. So going forward, you will see us redeploy capital to build on our position as Europe's number one commercial vehicle brand. In addition, our country-specific product plans have us on track to deliver against the new European 2021 CO2 targets without penalties or fines using new hybrid and electric propulsion choices. We're clearly not satisfied with our standing in China, and the team is working exhaustively to return to profitable growth in this important market. We're working to stabilize the business and are now launching new products that are tailored to the needs of Chinese customers. At the same time, we're attacking costs, reinvigorating our dealer network, and improving sales and market capabilities. In South America, we're restructuring our operations to be far more asset-like. As you know, we made the decision to exit our heavy truck business. We reduced our management employee base by a full 20%, and we downsized our regional headquarters and rationalized the dealer networks in both Brazil and Argentina. Finally, we recently announced the formation of our international markets group. We will refer to this as IMGs. which brings together 100 high potential emerged and emerging markets, including India, Australia, ASEAN, the Middle East, Africa, and Russia. This is all under one leadership team. Emerging markets are growing at almost double the rate of the global industry. By 2024, one in three vehicles in our industry will be sold in these markets. Having the right business model to profitably address this opportunity is critical, and that's precisely what IMG will do. Now please turn to page six. An important enabler of the strategy is the agreement we reached earlier this month with Mahindra. The joint venture will help Ford profitably grow in India and unlock the low-cost product development capabilities we need to grow in emerging markets. Ford will benefit from Mahindra's lower-cost platforms, and value-focused engineering. Mahindra, on the other hand, will gain from Ford's global reach, quality, and technology, and that includes the battery electric vehicle. We're also taking strategic actions to prepare Ford to compete and lead in an industry that is being profoundly reshaped through connectivity, the sharing economy, automation, and new forms of propulsion. You can think of this as the smart vehicles for a smart world. We're scaling products and businesses that connect to the world around them in ways that benefits customers. With all elements of Ford Smart Mobility now in one organization led by Jim Farley, we are sharpening our focus on where to play and how to win across this broad mandate. We're not able to reveal all the work we're doing in this exciting and fast-moving era, but there are a few things that I can share. we are prioritizing investments in connected vehicle services that will improve the customer experience. This will enable Ford to transition from what has been historically a largely product-led offering to an ever-improving and much stickier suite of products, accessories, services, and experiences all bundled together. These investments have a sharp focus on customer data privacy and safety. They will open new opportunities to realize value from connected vehicle data and deliver outstanding experiences for our retail and commercial customers. And we'll have more to say about all of this in the future. As you know, we're also developing mobility services like Spin, which is among the top three micro-mobility companies in the U.S. With a footprint in 60 markets and growing and over 3 million rides a year to date, Spin is expanding Ford's reach in areas that we believe will contribute to an even stronger base for autonomous vehicle businesses. Speaking of AVs, last month we announced Austin as our third market for autonomous vehicle services. Together with Argo AI, we are currently mapping the city and will gradually increase the size of our fleet, like how we're rolling out operations in the first two cities, Miami and Washington, D.C. We're constantly learning from our expanding deployment of AV technology and services. This space has shifted and evolved significantly even since the formation of our AV LLC in 2018, and we expect it to remain dynamic in the coming years. Our team is focused on building a successful, sustainable, and scalable self-driving vehicle service. And to this end, we remain focused on our plan for initial commercialization of a self-driving service in 2021. And we will begin to scale that service once we're able to remove the safety driver from the vehicle. Before I turn the call over to Tim, let me address our full-year outlook. We are experiencing more headwinds than expected in our fourth quarter, especially higher warranty. As a result, we have lowered our adjusted EBIT guidance range to $6.5 billion to $7 billion, which suggests We will not grow adjusted EBIT this year as we intended. Of course, we're disappointed in this, but we're confident that we're laying the groundwork for sustained improvement in profitability and cash flow over time. In terms of warranty costs, we are feeling the downstream impact of some products designed earlier in the decade. We've taken extensive actions to improve long-term quality and durability, including centralizing core engineering responsibility and bolstering our systems integration, and design assurance processes. These actions are already bearing fruit as we are seeing an improving trend in quality studies on our models. Now, let me turn the call over to our CFO, Tim Stone.