Q3 2019 Earnings Call
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.
Lines have been placed on mute to prevent any background noise.
After the speaker's remarks, there will be a question that answer session. If he would like to ask a question. During this time simply press Star then the number one on your telephone keypad. If he would like to withdraw question press the pound cake.
After the question and answer session, there will be closing remarks.
At this time I would like to turn the call over to lend and People's Tyson Executive Director of Investor Relations Lynn. Thank you Holly welcome everyone to Ford Motor Company third quarter 2019 earnings call presenting today are Jim Hackett, our president and CEO until stone, our Chief Financial Officer.
Joining us or Joe Hinrichs, President automotive, Jim Farley, President, New business technology, and strategy and Dave in the Cleveland CEO for credit.
Jim Hackett, well begin with a brief review of the quarter and progress against our strategic initiative.
Tim will follow with a more detailed look at our results and then we'll turn to culinary following Q and H.M. Hacker 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 ever earnings deck, which can be found one with the rest of earnings materials at shareholder Dot for Dot com.
Actual results may differ from those stated in 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 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 recorded.
Also our revised 2018 in 2019 results show how they were up here in the new reporting structure Investor Relations team as available. If you have specific questions about these changes now I'll turn the call over to Jim. Thanks Lynn.
So everyone.
Overall, the 14 delivered solid operational results in the third quarter World. 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 for executing in the now while transforming into a much more agile and customer centric company. They can win in an era of rapid change in innovation.
Our team is operating with urgency and a focus to meet these challenges.
Please turn to page four.
Touching briefly on the quarter, we generated positive adjusted free cash flow.
The year to date adjusted free cash flow was up 80% largely driven by improvements 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, and North America in Europe .
As well as mark to market gains in corporate other in another strong performance by Ford credit.
Year to date EBIT for automotive it was up 10% and company adjusted EBIT increased 6%.
Please turn to page five.
At the highest level or global redesign is about making choices to transform poured into a more fit and competitive company.
Simply put we are absolutely committed to improving execution.
Addressing underperforming throughout the company.
I will walk you through our business region by region.
In our North American business admits in intensified competitive environment.
We're in the middle of an extensive product renewal.
Mining you that we're significantly refreshing and growing our EPS UBI portfolio.
Introducing models like the completely redesigned Ford explorer in escape.
And our all new Lincoln Aviator Corsair.
I'm pleased to say that we are approaching now full production on the new explore and aviator.
This chronic renewal comes as we also phase out or most traditional sedans silhouettes.
Well again or intend isn't to give up customers in that sedan segment, rather to enhance their view affords 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 new Super duty pickup in the coming months and are all new F 150 next year.
When a few weeks, we're introducing battery electric vehicle. This design from the ground up to offer stunning performance gorgeous design in an incredible customer experience that is fully connected and updatable overtime.
We also have big plans for the long awaited rebirth.
Of the Bronco franchise.
Support is expanding into battery electric vehicles and rugged off road Sq. These challenging brands that have had those two growth areas to themselves for a longer now.
In total remind you that were 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.
Before team in Europe , it's making rapid strides in restructuring the business.
We have reset or revenue and cost base and a rationalizing our product portfolio.
Europe is now focusing on three business groups.
Drawn and growing commercial vehicle business.
Smaller and more profitable passenger vehicle business and a nice 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 habits on track to deliver against the new European 2021, Seo two targets.
Without penalties or fines, using new hybrid and electric propulsion choices.
We're clearly not satisfied with our standing China and the team is working exhaustively to return to profitable growth in this important market.
We're working to stabilize the business are now launching new products that are tailored to the needs of Chinese customers.
The same time, we're attacking cost reinvigorating, our dealer network and improving sales and market capabilities.
In South America, we're restructuring our operations to be far more asset light.
As you know we made the decision to exit or heavy truck business, we reduced our management employee base.
A full 20% and we downsized or regional headquarters and rationalize the dealer networks in both Brazil and Argentina.
Finally, we recently announced the formation.
Of our international markets group.
We will refer to this is I mg.
Which brings together 100 high potential emerged and emerging markets, including India, Australia easy on the Middle East Africa, and Russia. This is all under one leadership team.
Emerging markets are growing at almost doubled the rate of the global industry.
My 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 RMG will do now please turn to page six.
An important enabler of the strategy of the agreement we reached earlier this month with Mahindra a joint venture will help Ford profitably grow in India, and unlock the low cost product development capabilities, we need to grow in emerging markets.
For the benefit from Mahindra is lower cost platforms and value focused engineering.
May hinder on the other and we'll gain from Ford's global reach quality in technology and that includes the battery electric vehicle.
We're also taking strategic actions to prepare for to compete and lead in an industry that is being profoundly reshape 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 the connect to the world around them in ways the benefits customers.
With all elements of Ford Smart mobility now in one organization led by Jim borrowing we are sharpening our focus on where to play in 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 few things that I can share.
We're prioritizing investments in connected vehicle services that will improve the customer experience.
This will enable forward to transition from what has been historically largely product led offering.
Ever improving in much stickier suite of products accessories services and experiences all bundled together.
These investments have a sharp focus on customer data privacy and safety.
I will open new opportunities to realize value from connected vehicle data and deliver outstanding experiences for our retail and commercial customers.
We'll have more to say about all of this in the future.
As you know we're also developing mobility services like spend which is among the top three micro mobility companies in the us.
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 babies last month, we announced Austin as our third market for autonomous vehicle services.
Together with our go AI. We're 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 in Washington DC.
We're constantly learning from our expanding deployment of Avi technology and services.
This space is shifted into evolved significantly even since the formation of bar Avi LLC in 2018.
And we expected to remain dynamic in the coming years.
Our team is focused on building the successful sustainable scalable self driving vehicles service.
And to this and we remain focused on our plan for initial commercialization of a self driving service in 2021.
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 would suggest 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 cash flow over time in terms of warranty costs, we're feeling the downstream impact some products designed earlier in the decade.
We've taken extensive actions to improve long term quality and durability.
Including centralizing core engineering responsibility in bolstering our systems integration and design assurance processes.
These actions are already bearing fruit as we're seeing an improving trend in quality studies on our models.
Now, let me turn the call over to our CFO Tim Stone.
Thanks, Jim Hi, everyone.
Forged results this quarter demonstrate we're making progress on delivering on our commitments to customers and other stakeholders.
However, it's clear we are much more work to do.
We're focused on consistently improving customer experience and operational execution across our business.
We're making progress on a global redesign.
Second the tough choices to lay the groundwork for improvement and future growth.
Free cash flow profitability and returns on capital.
We're positioning for to lead and win through fitness.
For example, holding structural costs flat to down excluding pension and OPEB.
Informing the JV with Mahindra.
We're prioritizing meaningful opportunities for profitable long term growth in mobility.
And disciplined execution is driving strong results from for credit.
The third quarter, we generated 207 million, an adjusted free cash flow.
Year to date adjusted free cash flow was up 80% to 2.3 billion.
Puerto by lower capital expenditures higher distributions for for credit.
Continued improvement in working capital and auto business.
Adjusted free cash flows our most important financial measure.
We're committed to generating sustainable growth overtime.
Cash and liquidity of 22 billion at 35 billion remain above our targets.
We remain committed to investment grade credit ratings at a strong balance sheet.
Wholesales declined 8% in the quarter.
Primarily driven by Europe .
China and South America.
Revenue was down 2% largely as a result of foreign exchange.
Auto EBIT was 1.3 billion in the quarter, the margin of 3.9% as higher pricing and flat structural cost.
Pension and OPEB were offset by higher materials costs associated with product launches, our warranty expenses and adverse currency exchange.
Our strategic investments in mobility increased 40%.
As we continue to build out capabilities and connected services and autonomous vehicles.
But the ended this year, 100% affords new vehicles in the U.S. will be shipped with connectivity.
We are targeting 90% globally by the end of 2020.
For credit delivered another strong quarter.
Let's take a 9% increase in earnings before taxes.
Last metrics reflected healthy and stable consumer credit and auction values for off lease vehicles were slightly better than expected.
We now believe auction values, we will be down about 2% on average for the full year.
And receivables were 149 billion.
Corporate other of 18 million, excluding mark to market and other investment gains of 113 billion.
Putting 77 million from pivotal software.
On an adjusted basis company EBIT increased 8% to 1.8 billion and our EBIT margin expanded to 40 basis points to 4.8% driven by improvement in our businesses in China, North America and Europe .
Mark to market gains and corporate other and another strong performance by Ford credit.
Yes is 34 cents.
Tax rate in the quarter was 10.7%.
In the third quarter, we recorded 1.5 billion in special item charges.
Cash effects of about 300 million.
Actions related to our global redesign accounted for 1 billion in EBIT and a majority of the negative cash effects.
As expected most of the third quarter global redesign charges.
Before an impairment in India alluded to the plan formation or joint venture with Mahindra.
Special charges in the quarter also included 300 million and noncash pension Remeasurement losses.
And 187 million for an unfavorable customs ruling.
For the full year, we now expect to incur three to 3.5 billion of EBIT charges as a result of global redesign.
Negative cash effects of about one to 1.5 billion.
Let me touch in a few areas of the business in more detail.
North America wholesale units were down modestly.
Well I truly to ramp up of all new explore and escape.
Overlap of very strong production of F series third quarter of last year to compensate for the decline in production volume caused by the Meridian fire.
And our decision to exit low margin sedans.
Were largely offset by the favorable impacts of our new edge introduced at the end of 20 team and also Ranger.
As a reminder, we plan to start production of the new Super duty in the fourth quarter.
Revenue grew 5% supported by higher pricing and improved mix.
EBIT increased 3% for the margin of 8.6%.
Driven by higher pricing and volumes in the U.S., which were partially offset by launch related production costs and higher warranty expenses.
As a reminder, we expect to conclude our negotiations with the U.S. W. In the fourth quarter.
And I recognize the full impact of ratification related payments as part of our adjusted results.
In Europe Wholesales declined 15%.
Merrily because of our redesigned actions exit low margin businesses.
Putting discontinuation of the Cmax sedan.
Revenue, which was down 14%.
Or 9%, excluding the impact of currency.
It was also affected by the lower volumes.
At the same time, the benefit of Europe's redesign evident in EBIT.
Which improved 27% in the quarter.
This is the first time in three years, the forward as opposed to consecutive quarters of year over year improvement and European profitability.
This performance is attributable to lower structural costs.
Stronger product mix and higher profits from our commercial vehicle JV Ford auto saying.
And it was included the lower volumes that adverse currency exchange rates.
In China Wholesales declined 12% consolidated revenue was down 27%.
As improvements in mix and pricing were more than offset by lower volumes that component sales to the joint ventures in the country.
Our EBIT loss in China, narrow to 300 million, an improvement of 100 million year over year.
By lower structural cost a favorable market factors and consolidated operations.
This is the third consecutive quarter of year over year improvement in profitability in China.
As Jim mentioned.
We're working to stabilize our China business and working intensively to return it to profitable growth.
Dealer engagement and profitability are starting to improve.
And we continue to keep production the line to demand.
To ensure appropriate levels of dealer stocks.
Please turn to page 20.
While our third quarter results demonstrate positive improvements in the trajectory of some areas of our business. We clearly have a lot more work to do.
We were updating our outlook to reflect several headwinds have intensified since the last gave guidance.
The first is higher warranty, particularly related to coverages.
The second is higher incentives and plan to North America.
The third as China, due to lower volumes and JV profits.
Taking these factors into consideration.
We're now targeting a full year adjusted EBIT in the range of 6.5 to 7 billion.
Compared with 7 billion last year.
This implies a fourth quarter adjusted EBIT range, <unk> 0.6 to 1.1 billion.
We continue to expect strong market factors lower full year auto structural costs, excluding pension and OPEB and strength in Fourq credit.
We still expect adjusted free cash flow to be up for the full year driven by auto business.
We remain committed to driving growth in cash flow and profitability overtime.
We now expect a full year adjusted effective tax rate around 12% to 13%, which is lower than our previous expectation largely driven by more clarity on provisions in the U.S. tax cuts and job of 2017. This would yield adjusted EPS in the range of 120 to 132 compared with one third.
The last year relative to calls on capital for the year.
We expect capex to be about 7.5 billion.
Down year over year, reflecting benefits from a fitness initiatives funded pension contributions to be about 750 million.
Shareholder distributions to be about 2.6 billion, our guidance assumes no material change in the current economic environment, including commodities foreign exchange and tariffs are actual results could differ materially from our guidance due to risks uncertainties and other factors, including those details in our filings with SEC.
Before moving to Q and a couple of things encourage you to keep in mind as you think about Ford today and for the long term first our customers are forming and driving everything we do that's why 2018 and 2020 or such robust launch years for us in North America.
We are bolstering our winning portfolio vehicles personal what consumers want and need reallocating capital to those high return growth opportunities and carrying out changeovers are highest volume and most profitable vehicles and second.
Determent to always get better to persistently focus on or fitness.
Can you see improve our operating productivity, while we see increased headwinds in our fourth quarter of a bias for action and are intensely executing on the inputs that will enable us to capture the opportunities across our business will allow us to drive free cash flow along with long term growth in revenue and profitability, including adjusted.
EBIT margins, 8% or better and we remain committed to maintaining a strong balance sheet and holding investment grade credit ratings.
Now, let's open the call for questions.
Operator.
As a reminder, if he would like to ask a question. Please press Star then one on your telephone keypad two with strong question press the pound key once again to come into the queue Press Star then one.
Our first question comes from the line of John Murphy Bank of America.
Good afternoon, guys and thanks for the call stick a first question on to the rest of year range the fourth quarter even.
Even when you back out the VW bonuses it looks like you're doing a billion billion in half.
In the fourth quarter. So it seems like it's a little bit on a light light side and you very specifically highlighted a higher than planned incentives in North America I'm. Just curious you see something on the competitive in front, where pricing is getting much more difficult and it just kind of seems a little bit odd. After you just posted a 700 million dollar positive net price in the third quarter just doesn't.
During the match up with what you just did something change dramatically in the competitive environment.
Hey, John Jim Hackett, Let me ask Joe to.
Bring you up to date on that.
Hi, John Thanks for the question so.
You look at it the simple answer to question as I wouldn't say, there's anything dramatically changed in the and the environment at an industry level. Let me explain to you what's going on for example in a third quarter affords incented increase year over year was slightly lower than what the industry average was for the.
For the U.S. market in the third quarter, what's happening in the second half of the year, our incentives overall or slightly higher than we'd expected versus our plan for the year, that's largely driven by a couple of products. If you look at the Ranger launch this year, it's gone very well we had up we've been great gaining share every month.
This year I mean at 18% segment share in September .
But as you could expect the competitors haven't let us just grow that share without any fight. So we've seen a little bit higher incentives on ranger than we'd expected given the launch of the vehicle. This year still very optimistic about the product <unk> one appeal at one I QSR JD power, but at a time spend on that project spend little higher than we are expecting in the second half of the year.
You look at what happened in the summer months.
Question on F series was very aggressive and so in September we took some actions.
We saw our segment share enough on 50 come back up in September and so were had to take some actions there and edge is in a comparing competitive segment little more competitive this year than we had planned for the year. So that's kind of where you look at it but in general that's more us versus our plan for the second half of the year, but I was referring to the U.S. industry in the third quarter as a reference.
Point it sounds are still pretty much under control in the industry is behaving in a pretty rational way so far.
Okay, and then just a second question it and this might be little bit more for Joe or but Dino Jim Obviously love to hear your your view on this there was a lot of concern around the explore launching it sounds like it was a lot of a lot a lot of problems there, but it seems like you've got your arms around it or rent are ramping up pretty well just curious what was that story overplayed in the press and.
We all got a little bit too concerned about that in any are there any lessons that you've learned for product launches because obviously you have a ton coming down the pipe in the next 12 months.
From that process that you can apply going forward to kind of make sure. We don't have this kind of kerfuffle or issues going forward.
I should John as Jim and I think I should confirm you know that we have higher expectations for our performance in its my experience short time that I've been here the affords really.
Good at this and so.
Joe can add some color here, but the challenge the what I called the design problem is that led to ramp down or really profitable vehicle, we had to clear out. The plant you know literally bulldoze everything else build a new plant inside get it started and not drop any volume in the midst that so it was pretty aggressive.
And as I look at that you know.
I want him I want to win like that in the future, but we fell short in a few ways in fact, Joe just took.
My whole team through a deep dive on you know what we've learned from that I was very.
Impressed with kind of the granularity of what we do understand how the things that should have done better didnt.
But what I'm not concerned about is whether we get it and whether we have a grasp of how to get control of it.
Let Joe share with you because of course, we're getting daily updates the latest status, where we are unexplored yeah. Thanks, Jim Thanks, John So really important launch for us clearly.
Just to step back for a second.
You know just so far this year, we launched the Ranger on new in North America very successful launch.
Very unusual that it winded segment and I Qs in the first year introduction, we just launched escape and Corsair downloadable that launch has gone very well. That's got were ahead of plan actually on that launch. So the explore aviator launches kind of he is a very unique situation as as Jim said, we're disappointed in our overall performance in the and.
In the ramp up of the volume the products themselves are wonderful the aviators fabulous product the on half the sales of ex of its four so far ft and platinum and if you haven't driven an S. T I really challenging to do so it's a lot of fun and I guess, they won't give it back yet so you're right. So.
But back to the launch so Chicago's our oldest plant was launched 1924, it's very.
Very constrained as far as physical location as far as a land and area around the plant.
We simply put we took on too much we signed up for too much at launch we tried to launch on three crew, which we didn't even tried to do and we launched the eliminate 150 back in 2014, we launched the avionics for both the same time, we had the hybrid version of the exporter, we the police interception or we had black label aviators, we had all this content.
Simply put with the new with the product going from front wheel drive to rear wheel drive architecture onto Assembly line on new body shop, all those things at once we took on too much and we shouldn't habits are up and so part of the lessons learned is obviously go back to you know how we manage these launches and sequence them in a way that gives the team a chance to be sucks.
That's for our whole sales were down in the third quarter about 19000 explores year over year, but we also had an additional 6000 aviators that work in there the your previous year and so we feel really good about the fourth quarter. The last week or so we'd run about 59, J.P.H., we actually running on apart from our suppliers as we started to ramp up.
Well you know what used to run a 60 J P. Eight so we're just about it where we have been historically and that plant plus we had the show center the new additional line coming on line starting about six JP age by ended the month. So we actually feel really good about where we are right now it's been a lot of work and a lot to get here. The products look great. We have plenty a cup of the available inventory now.
On the dealers and we're excited about whether they're going to go from here.
For the rest of the launch as John .
But really launched looks good this year transit launch looks good this year Puma and Europe looks good.
We have a lot of work to do for next year's launches, but I feel good about where we are for the rest of the year. Okay. And then one quick last one on Ford Motor credit given the rate environment is shifting around on us in a direction nobody expected 12 months ago.
Yes, the credit downgrade it Moody's just curious as you're managing Ford Motor credit is.
Has anything changed the way you're thinking about the business and where are we on the shift of.
Getting better return on assets on sort of a constraint purposely constrained.
Asset base and could we see returns improve profitability read you improve as soon as next year based on sort of those actions. So so John Jim Hackett I'm Gonna handed the David Mcclellan.
No I isn't a former bank Gordon member managing through the crisis you know in this last decade, I'm really proud of the Ford credit.
Discipline in fact, our efficiencies improve.
You know, we arent using more leverage to improve return. So you know, we're very careful about that but David you can talk about.
And the Great news, we keep getting from Ford credit, Yes, John Hi, This is David.
So I'm I'm, echoing what Jim, saying I'm very comfortable with the.
The way the credit companies growing the portfolio looks.
Very strong I mentioned this in the last earnings call and I haven't seen any change in that.
We manage as you know we manage our business. We stated that we want to keep it around 250 billion.
We manage the leverage between eight to nine to one as Jim just mentioned.
You guys know a much equities employed in the business and you know that we expect to get we've made this quite public between 12% return on equity. So so when you do the math or our expected earnings should be a by about 2 billion.
This year, we've had you referenced that in your question we've had.
Good news interest rates versus what we expected to have seen not in that in our DMV numbers and the used vehicle.
The used vehicle performance has been better than we expected.
We've said noted we think that used vehicles will be done.
About 2% for the year, we're about 1.2% so far for the year.
I know that that's slightly different to what Manheim has said, but then I look specifically at the trend last year in are used vehicles I looked at what happened in the fourth quarter last year and most importantly, I look at the return mix and the Manheim is actually off the 2001 segmentation. So when you looked specifically at the Ford credit a return mix.
I feel comfortable the 2% is about right.
So again overall.
Yes, but has there been any shift in the portfolio. So far maybe away from dealer floor plan financing to maybe higher margin.
Retail business I'm, just trying to understand where we are in that show there. The floor plan the floor plan in the U.S. than they might differ from we do in the U.S. is pretty constant and we expect it to say stay there we do most of the floor plan in Europe .
We haven't seen a change in China.
Our our FICO is pretty constant on our sort of marginal business as you've seen over the last 10 quarters remained constant 6%. So we're not seeing any change.
Okay, great. Thank you very much.
John .
Our next question is going to come from the lineup Rod Lache Wolfe research.
Your body or am I right. Thanks for taking my question had a couple just on.
Q4 to follow on John's question, North America, let's be quite a bit lower than expected in the quarter and I was wondering is there an unusual warranty catch up impact in there how should we be thinking about warranty, which is up a lot over the past two years anything in there that shouldnt recur next year.
Okay, and then also on pricing I'm still puzzled by what changed relative to incentives.
Thinking about the market one of the biggest changes that's happened since.
Since your last call is that Gms had a strike in there in transit pipeline, it's basically emptied out so if anything with your biggest competitor declining to maybe 50 days of inventory I would think that the pricing environment gets better from here. So it sounds like you disagree I was hoping you can elaborate.
Thanks Rod.
This is like the Chicago thing I, just want to make it clear that the management team starting with me.
I understand the warranty as an opportunity for us to fix things that are under underlying challenges in our processes or the way we've done things.
It's my.
Early work.
Got involved in run in fact, when we met New York and our.
First gathering I talk to you about this that we attack the product development process with a lot of vigor.
And you understand the gestation period in the auto industry. So a lot of the improvement that we have made.
Jim Farley, Joe Hinrichs myself, how tight staying in getting the portfolio to generate all the new products that we're talking about coming with less capital committed.
That we that was plan when this new regime started 20 billion last.
I'm confident that the work the PD process has undertaken is going to generate.
Better performance.
However, with that said, Joe and I are committed to control of our business and you know we've been surprised ourselves by some of these things because these are.
Joe explain products and service no some that are longer three or four years out.
That of course, we have to deal for our customers with problems and we'll do that.
Theres also with the Dps six transmission, we made a decision as a team to remove any kind of question from ongoing ownership of the vehicles beyond really first ownership.
That the company would stand behind the performance of the products is a big Ford commitment.
To make sure that no one was suffering through that product challenge I feel really good.
From what the company can control that we've got to handle.
So let me just summarize by saying warranties getting a lot of attention.
And the first thing is that the PD process has been restructured into smart redesign How's work there was kind of leading the company, but the benefits of all that you know are in the next generation products. So Joe maybe you can comment like on these historical products, what we've learned yeah. Ron. Thanks. So if you look at it the bulk of the or the warranty.
The cost increases our North America.
18, multi year and before that are the model years, where you've seen and an increase in the higher time in service warranty claims than we had accrued for in a bit planning for.
Thats largely driven by some powertrain action some of those suppliers some of them our own.
As Jim suggested we've done a lot of rework on our our our product development process to make sure. We've learned from this them, but we have to get this bubble working through our system that we're seeing is here.
We're seeing really good progress in our 19 Molly year vehicles same point in time, including six months nine months and service those kind of things we feel really good about the progress we're making but we have this 18 miles per year in a few years before that working its way through the system on the way our process works of course, we accrue for forward models based on the experience we've been.
Having and so it takes a little while for that to work its way through the system, but that's what you're seeing so that is largely in north America from that perspective.
And that's why you said on U.S. incentives I just want to go back to what I was saying before on the first of all we haven't seen a markedly different approach by end of our competitors in the marketplace recently, we'll watch that very carefully of course.
Our somebody transaction prices are $3000 higher than the all new Ram and Silverado, even though our truck is couple of years older.
Well, we are watching as I said, you know there a couple of segments, where we saw some changes in the dynamics that we were Didnt plan for in the second half Ranger and edge were too and that was referring to.
But I also said the.
We saw in the third quarter. We've also seen in October so far the market's been pretty disciplined to your point and we're watching that very carefully but a little bit of the bulk of the guidance changes really warranty related just wanted to be clear somebody's. Other issues are also important but the warranty that we're seeing that we have to address from 18 mountaineer and before is really them up.
We already have what what's changed in North America.
Could you just clarify what the charges for pre existing warranty that that you're rolling through the numbers. This year and then just my last question as.
What signed should we be taking away looking at the international numbers and kind of thinking forward.
We see their savings here in Europe , China, and South America, but the volumes are down as well and those markets. So as you sort of looking at what's happening here.
Any color on how we should be thinking about the trajectory of improvement from here as we think about next year. The positives on costs, maybe higher compliance cost issues that kind of thing.
So right on.
On the go forward warranty you know what I asked what Tim and Joe have done in the the expectations for the year, they've given you that.
In terms of the way the years being.
Projected so we don't we don't go out beyond that of course, we have more normal reserved for warranty, but Tim I will let you add any color that might help.
No. It's exactly as you said and a from a warranty cost perspective, just to clear we do expect wants you to be up year over year.
Again as a key driver of are changing guidance.
The fourth quarter is accruals. We go through every quarter of course, and accruals are appropriate and reflect the a experiences we've seen the warranties today through that point in time.
And Joe you, Mike talked about the color in Asia, Yeah in international markets arrive, we've seen progress obviously this year in Europe and in China, I think the European team is really making a lot of progress on.
The redesign work has been in place now for quite some time feel good about about the progress we're making.
South America stealing some pressure from what's going on Argentina.
But the South America business continues to make improvements as well in their restructuring so both Europe and South America, our I really well on plan, well, where we want them to be on the redesign efforts.
On China.
Our sales have not come up as fast as we were expecting them to in the second half of this year part of that industry, but part of that's our own performance, we're really seeing the dealer network start into really.
You know grow their sales force there probably is returning so and our inventories really good shape. So we're watching that very carefully I think the wonder watches.
And just west of China industry, and and how how well do we do with our new models that we launch in the third quarter like the focus active the Justine ft line that towards the territory V. A number of products coming we need to show growth in our China volumes. So the volumes are down as you suggested part of that's intentional with some of the product changes we made choices we made in.
In north and you're up to get out of some of that volume and what the downsizing. We're doing in Europe , We got a focus and Fiesta I'm sorry in South America going to focus is you have to production.
That's by design, but I think hopefully you'll see from here forward, we can grow the business in China with the products, we have and you'll see continued improvements in the European business.
Okay. Thank you.
Thank you Ron.
Our next question is going to come from the line of Joseph Spak RBC capital markets.
Hi, Joe.
Hi, good good afternoon.
I guess I want to turn back to North America and tie back into the explore a little bit. So you mentioned host sales in North America were down slightly in the U.S. are up slightly I think that's pretty close to what you did from a production standpoint.
So I guess one quick question is art, we're all those explores that we read about the challenges about wholesale that this quarter our their vehicles at flat rock as has been reported and even if they are flat or are they are they are they wholesaled and I guess, if they if they were post elder set the dealers if you.
Just still doing rework on them is that also some of the cost that might be considered in the fourth quarter.
So Joe Hinrichs can clear this up I am not happy.
With the presses view of.
The way we work through this I mean, I'm just going to typically your fancy a little bit by having you understand how diverse supply chains are in the auto industry, we products come from all kinds of.
Trajectories in terms of what makes them up there is no companies that are vertically integrated anymore. So the way the reporter talked about how things are moved around and shifted as indication that the process was broken that's just not fair.
We were doing things because we were trying to take some of the pressure off this job per hours of JP H. that Joe talked about we could reduce some of the complexity that actually worked so that that laid out was painted as a negative was actually misrepresented and what he was saying to you is that the whole sales.
We're still down 19000 units, but that was worse.
Last quarter so.
We've made a lot of progress, but Joe and I don't know if you want to add more too.
Sure. So so Joe let me just be clear we shipped about so we ended the third quarters the data I'm, referring to shipped about 96000 units, we had about 9500 inventory.
Most of those are in Chicago, There's a couple of thousand still in flat rock.
Just a reminder, theres no physical space around the Chicago say flat so when we have any issue.
There's no place to put the vehicles if you ever gotten this outside Chicago, you know, there's no physical space.
But the <unk> some of the reports have been overly dramatized we've used to flat rock for many launches to be you do this in the past because it's not rock right. Now is working on one of one shift it has plenty of capacity. It has a lot of skilled people has a rail yard nearby.
And when you're doing software updates or even if you're doing some physical repairs to the vehicle or doing some inspections.
Having skilled people and having four space and space in the out in the yard to be able to do that as much more important to be able to do that with a good quality than trying to force it moving vehicles around because you have no physical space.
So.
We think we'll have all the inventory cleared out by the end of November ER, and we feel really good about that we have plenty of inventory out in the field now for both explorers and aviators in the dealerships.
A lot of that came on pretty quickly admittedly in September and October we've been shipping what we're actually in the last week, we shipped a little more than we actually built because we're actually starting to clear out some of those units. So we're shipping what we're building right now and we feel really good about the flow of that going forward.
Well, let me know, but we just don't we don't talk about it but we've leveraged flat rock a number of times over last five or six years on launches.
But unfortunately, the lost production that we had in the slower ramp up than we expected in Chicago led to people wanting to report on other things as well so our first and foremost approach of course to detect the customers and keep them.
Yeah keep them.
Well protected and I want to be clear about when your question. We don't recognize the vehicle that wholesale than in our revenue stream until their release with good quality and salable to that to the dealer into the customer. So all those vehicles that I'm telling you.
There are still on hold there are not wholesaled. Okay. We don't wholesale until were to their gate release with a quality to be able to be sold in fact that discipline still important because.
If we lose one customer can you imagine the future cash flow.
Loss of losing a customer so it's better that we get this right. The other thing Joe is if you follow the transit business or the F 150 business those have multiple factory. So when we're in the middle of launches with those vehicles.
As relief because of the way Joe Hinrichs can move things around so I'm just echoing what he said to you.
Is flat rock was not evidence of chaos. It was evidence of us making sure things were right.
Okay.
On the automotive free cash flow still higher year over year.
So in the quarter the Ford credit distribution was up and I think year to date now it's a 2.4 billion, which I think is only slightly below what you sort of kind of previously indicated for the year. So within that guidance. How are you raising the Ford credit distribution for this year, because maybe the performance of Ford credit is stronger.
And then Waller on cash flow just on maybe if you could provide an update on some of the cash with the redesign.
Cash flow, because again that what sort of light to the one and half to two you've indicated prior there's here unless there's a big fourth quarter. So Tim you feel those you've got this Tim.
So as it relates for credit the cash distributions tend to track with profitability for Ford credit and that's inconsistent overtime.
So that adds to the natural flow ever given specific Ford credit cash flow guidance.
But certainly factored into our expectation that we'll have growth and free cash flow and it's in part of the 80% growth we've seen a year to date so for this year.
On the special items the cash thus far in 2019 is 10.7 billion.
And we had said in Q2 that we expected wouldn't have to 2 billion of cash we've had a deferral in that similarly the.
Earlier in the respect expected to the tune a half the and cash so continue to refine our estimates of the cash ramifications from the.
Restructuring actions, we're taking and now expect one to 1.5 billion in 2018, again 0.7 of which has already occurred and that's going to adjust.
Just to be clear on on the on the Ford credit distribution, I guess versus what you thought after the second quarter embedded in the automotive free cash is the distribution higher and prior.
Yeah, we haven't given any specific.
Commentary on when and how the flows occur again, the track with profitability over time.
Okay.
Our next question is going to come from the line of Brian Johnson Barclays.
Yes, good afternoon.
So a couple of questions first vis-a-vis Ford credit since a lot of any other questions have been asked.
Little bit surprised by the cut and or the improvement and expected decline in auction values given some softness we saw in manheim overall in the quarters or something specific to that kind of lease returns that you've been getting or something that makes it a little bit better and then kind of issue.
To roll forward into next year, what's your expectation on that.
Yeah, Brian I'll turn that David but I.
I have to smile, because I'm really proud of the brand. So I do think that brand carries.
When you're talking about F 150 pickup trucks and things like that but David my right about that.
Sorry, sorry. Thanks. Thanks for the question I think I touched on it little earlier so.
We look we look at the performance year to date, which is Don just short of 2%.
And then I looked at the performance last year throughout the year on the trends actually over last few years and then what happened last year in fourth quarter.
And then specifically and importantly look at the return mix, which is what Jim was getting on.
If you look at the return mix remember Mannheim as often really historical mix. So if you look at our specific return mix I feel comfortable that the 2% number is about right.
Okay. Good and you know the second question as long as we're going into Ford credit Theres been a lot of negativity in the press around extended loan terms subprime.
Underwater trade ins being rolled into the loan which would imply port loan to values can you comment a just on the general industry trend there and be the Ford credit specific approach to that well again, Jim Hackett.
I want to warrant to you the way we run this company is what I'd like to talk about in its theres a lot of integrity in the way, we think about this balance sheet and the way we handle customers I don't really want to comment on others. There our practices that that you would see that we would not accepted Ford credit David.
Yeah. Thanks.
So that the.
Again.
What Jim said not to talk about aside Ford credit, but I can talk with some confidence, but the credit company itself the.
Business that we're putting on the books remains very strong we're fighting for the quarter 750, I'm, we're not we're not moving a tall and on any of the higher risk business that we're doing and then really to the heart of your question. We're not in the longer terms, we're not even if the average transaction prices going up we're not we're not seeing any movement on our our longer term business.
What's the mix of that the 84 months is only 3%.
Theres nothing that I'm, saying in the performance in terms of delinquency even that the the early early defaults known delinquent defaults are not moving 30 60 90 days are fine.
In our.
In our slides there is seasonality on the LTR, but that is simply seasonality just look at Two Q1 3 versus Two Q1 9.
The your prior questions about the disposal in terms of the residual values are pretty good. So I mean, we're staying diligent, but but I'm I'm comfortable and confident that what you're reading a book is not what you're seeing in the credit company.
Okay. Thank you.
Thank you.
Our next question will come from the line of Adam Jonas Morgan Stanley .
Hi, Adam Thank everybody Hey, Jim how are you good.
Good just two quick questions and Paul just your background noise.
I wanted to zone in on the.
The consolidated in China business, which my understanding is imported products.
It is I know very Lincoln heavy from the new apps into China, calculating a and operating margin loss of around negative negative 25 negative 30% that that territory.
Can you just think again justify or explain why why would you do that I guess is on the strike me as a business worth doing.
You have a choice do you have a choice and just.
Using that stops growing U.S. made cars into China, which for a variety of reasons of automaker. You know you think you've got to make where you where you.
You got to make resell and is that something you can stop doing or is there a story of you're trying to keep the blood in the patient the dealer lifeline kind of going in that.
And that can kind of beacon cycle out of that and stopped doing that that stuff yeah.
I think your your analysis as always is really good and.
You know I mean matching together so the way we ask Joe Hinrichs to plan with the tariff structure that is in its up its out it's down.
And so.
I do think that I'd been public that said a year ago. When asked about this I thought that there would be a resolution.
In the way that we'd have certainty in what I would say an equilibrium. If you remember that we could play in our business.
In Lincoln was responding really well to exports from here.
That is an example, where theres wasn't the patients so to speak the brand was growing as fast as anything in the in the country and we'd make commitments people make commitments to us.
So.
And I thought where you were going was also about the larger question of.
Of participation and trying to which is something I am still committed to I think this is there is a formula their business model that Ford can excel.
But Joe I don't know if there's any more if you remember Joe Hinrichs is now president of automotive also got a started in China. So he's had some he was on the ground there had experience, but the question Adam that no yes of.
Is there false are we doing fall swings here that aren't sustainable yeah. It's a very fair question, Adam and I recognize our consolidated operations in China are complicated because we have the Lincoln imported products said the some of the Ford imported products. We also had the cost structure afford owned entities and employees in China and then we have.
Our allocations that you know from the corporation in from Engineering et cetera are in the consolidated numbers. So it's a it's a.
Violation of a lot of things.
Suffice to say, we don't believe an export in vehicles at a contribution margin loss.
As long as the we don't have a spike in of import duties.
Our near term issue the solution to this largely as around localization plans for our business in China with very public about we have five more vehicles being planned to be locally assembled in the near term and includes Lincoln Corsair and the Ford explorer.
So a number of products are going to be localized next year, you're and a half which are really.
Influence this will help us be more competitive cost wise in the business in China, but also take away. Some exposure we've had some of the fluctuations and tariff. So we feel good about that plan as you know and you noted the Lincoln plan has been an import plan until now will be start localizing Lincoln Corsair, and then more to come from there which are really help with the so.
Their contribution margin positive there's lot of there's a lot of costs in that consolidated business.
But this will largely get taking care of by localization plans, we have going forward. Thanks.
Thanks, Joe and Jim and if I can just sneak in one one more on hybrids.
There seems to be those referendum going on a global autos were some companies are kind of canceling their hybrid programs and saying very openly that they view them as kind of regulatory cars and.
I kind of compliance vehicles that consumers don't really fully value, even if on paper, they make sense and they really complicated vehicles and it's.
Not a lot of capital will throw around and.
Others are moving right straight to he leaves and then some might say like you and Toyota or in a cap on hybrids or the real deal they got to be with us for a long long time and consumers value Bob.
Maybe Joe for you if I if I were to ask you kind of 510 years out you know you're in a long term business where product you're planning now.
Owning the on sale for north of five you're going after the on road for 10 or 20 years.
Longer term add on are you are you equally bullish on hybrids as you are on each of these.
Hi Force you to pick one you know really you know that 10, plus years, where the incremental $4 going to invest.
Yeah, Adam Thanks is a lot there. So you know when Jim Farley announced when it goes now you're a little more near and a half ago about $11 billion credit electrification.
We were all in all all parts of this discussion.
Yes, we see significant growth in our hybrid business over the next five years and part of that is.
We think that where consumers are today, where costs are today that makes a lot of sense for the economic choice of the consumer.
As you know, we're taking a portfolio approach. This isn't just about hybrids are plug in hybrids off about electric vehicles, starting with a very exciting vehicle next year and the other one is are coming after that so I think you are talking about a transition period, we think that hybrids will continue to be part of the equation for a number of years to come but our BV portfolio will grow by.
Annually over the course of time and that we think that ultimately is where this where this largely goes but we do we do think you see a role for hybrids in the portfolio remember we had questions. All the time about you know with the movement of sedans largely out of the North American portfolio, what happens if gas prices spike well again our portfolio approach.
Roche, which we've been consistent all along our new actually these all have.
Some kinda electrification as part of the each nameplate, we're launching so that we can offer solutions to customers. If we should see a spike in fuel prices are the things there's a number of.
Reasons, why it's important to us, but we are bullish on battery electric vehicles, we think of the towards the end of the decade that will be a significant portion of the portfolio electrification.
But we do still see hybrids as being an important part of the portfolio, especially in the near term, whereas no compromise no range anxiety for consumers.
Adam I Love when we had this exchange you or so ago.
I was I was doing the thing where I would bring up the computer industry as a proxy and we were saying can you convert that to thinking about automotive you remember when computing was.
We were moving from chip size, Pentium et cetera, and you would by the next generation computer based on that of course, that's been blown up in terms of the way the markets now respond to computing you know what apples done.
Terms of the I phone, we see the features and virtues rather than what's inside of it I think this is going to happen now in automotive a give Jim Farley and Joe lot of credit here as Ford was leading this way in other words all the all the rhetoric was around do you have electric vehicles or do you have hybrid vehicles and we got this exciting.
Thing coming in November that.
Going to take advantage Huh, I know and what it what I want you to imagine with me is the dialogues going to start to shift because the nature of the product is going to be whats talked about rather than the proportion of course, we're committed to that we've got this F series coming and that of course, you know we've been we've been working on a bad.
The electric inside of that and and imagine when the Bronco come to know how exciting talking about Ford products is so I just want to say that I love, where you're going with the question and I'm really excited about the way Ford's interpreting that.
And just a reminder, as battery cost improve or lower.
Hybrids also become more affordable not just about electric vehicles. So.
You know that becomes also part of the equation for the customer yes as long as the internal combustion part of the hybrid does not increase did not offset by it but I get your point John I do appreciate both you and answering the question. Thank you yeah. Thank you and so let me just close to say the third quarter results do have evidence of the global redesign.
When you heard the news about how Europe persistently now is improving as its driving these positive shifts but.
Make no mistake humility of the the work that we still have to do I'm still very confident in the team here and the progress at Ford Motor Company is making a we're focused on improving our fitness center outcomes. This driving a winning portfolio were four to find the strengths as Youve heard me just mentioned a moment ago to Adam improving mix.
And we're focused on laying groundwork to improve the trajectory of long term.
Growth in cash flow and profitability that evidence is really starting to show up in the previous calls you also asked this are you sure your structural costs aren't rising.
We really have attacked this and I think we have good good handle there and then a commitment by me personally that things that you would expect us to do better that we are addressing and we are so thank you very much for your attention. This evening.
Thanks, Keith This does conclude that Ford Motor Company third quarter earnings Conference call. Thank you for your participation and you may now disconnect.