Q2 2019 Earnings Call
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 speakers remarks, there will be a question and answer session.
If you would like to hear ask a question during that time simply press star followed by the number one on your telephone keypad, if youd 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 Eddie past Tyson Executive director of Investor Relations.
Thank you Dan 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 Hendrix, President automotive, Jim Farley, President, New businesses technology, and strategy and David Mcclellan CEO for 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 keep running.
Following culinary Jim Hackett, we'll have a few closing remarks.
Our results discussed today includes 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 Dot for Dot 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 a dish 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 Linda 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'm 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 afford is driving positive shifts in our business.
We are improving our fitness or our ability to compete in 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 in vehicle market there under recent and persistent stress.
At the same time, we're actively working on the design and launch 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.
Let's 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 explore and police in their scepter utility as well as our new to market Lincoln aviator.
Now if you recall in Q1, we set 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 remained 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're fortifying our strengths improving mix and expanding our commitment to electric vehicles.
Second is fitness, so our ability to compete including advancing alliances such as those with VW and Mahindra.
Third is acceleration of our global redesign, which.
Well to ensure each of our regions.
In generating sustainable profitable growth and cash flow.
And fourth is smart vehicles for a smart world, we're 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 are now beginning to roll out our new portfolio powered by the dramatic shifts in capital allocations and trucks Sq These and performance vehicles, including the hybrid an all electric offerings.
This chart you see covers 2019 and 2020.
We're expanding our line up 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 as you be such as the new explore Ics gape.
Territory and Puma.
Rugged off road vehicles, like the Raptor and upcoming Bronco.
And our Mustang inspired.
B, that's going to be an s. UBI.
In fact in North America, we're driving down the age of our passenger vehicles show room by almost one half.
As we replaced 75% of our products by 2020.
Over time, the new models were adding for customers will more than make up for any share and volume loss 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 and Joe Hinrichs 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 plan to launch the explore the fleece 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 body F 150.
In fact, the explore 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 explore alignment with both hybrid and estee performance models.
And we're introducing a plug in hybrid version of that aviator.
Now to 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 this new products. These two new products is strong.
We are 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.
Explore police interceptor and aviator 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 and everything we do.
You can see that in the results from the most recent JD power us 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've 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 position the business in Europe for a 6% EBIT margin longer term.
These milestones include.
Number one a new operating model in organization, including three customer focus 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 a top commercial vehicle brand in Europe .
Including leadership in the pickup segment.
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 issue vs.
The third group well this is imports a niche portfolio by connick passenger vehicles, including the Mustang and explore.
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 for taking a minority stake.
And.
To improve manufacturing efficiencies, we have proposed or confirm 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 Seo to 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, the fourth strategic area that prepares forward for this new era in our industry.
I refer to this as smart vehicles for smart World.
Well this strategic area has benefited as I expected.
Early from Jim Farley is mix of automotive and entrepreneurial history.
He appropriately focused early on the conclusion of the negotiations with VW 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 the industry consolidation as daily, making 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 were Ford and VW announced the deal to develop commercial vans and medium size pickups for global markets.
This collaboration remains on course, and we're excited about the potential.
Two weeks ago.
BW CEO Herbert these and I said that our companies would expand this collaboration.
Now this included BW, joining us within investment commitment to Argo a high.
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 a ford and VW, we'll be able to reduce our respective investments and development costs for the future Avi businesses.
We will be able to co create common Avi standards, both now and in the future.
And we'll share valuable data with Argo helped build the best Visioning and mapping models.
Along with data utilization analysis for traffic and fleet management.
Second we'll share cost 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 our economy. We also announced we are extending our alliance to electric vehicles.
Afford will become the first additional automaker to use.
VW is in E B electric vehicle architecture.
We will leverage this architecture for high volume zero missions 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 maybe 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.
Well 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 2018 to 2020, a robust launch years for us as it bolster wondering portfolio for customers reallocate capital to higher return growth opportunities.
The next few 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 point 2 billion and adjusted free cash flow, which was 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 improvement in working capital and in auto.
The ability to generate sustainable growth and free cash flow over time is our most important financial measure and we're on our way to achieving this.
Wholesales declined 9% driven by China, lower industry and the launch related volume impact in North America.
As it ramped explore and police interceptor.
Interceptor by the way accounted for half of all police vehicle sales in the us last year.
And the new models, even more capable.
Although wholesales were down revenue was flat as strong mix and pricing supported by our franchise strengths were offset by lower volumes at adverse exchange.
Excluding the impact of exchange revenue grew 3%.
Auto posted its second consecutive quarter of EBIT growth something we have not achieved in over three years.
EBIT grew 19% up from 16% last quarter.
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 explore interceptor and the introduction of Lincoln's all new aviator as well as higher warranty.
Our strategic investments mobility increased by 46% as we continue to build out our capabilities, including mobility services.
Connectivity and autonomy.
For credit delivered another strong quarter.
Posting a 29% increase in earnings before taxes.
Favorable loss metrics reflected healthy consumer credit conditions.
At auction values for off lease vehicles performed slightly better than expectations.
We now believe auction volumes will be down about 3% on average for the year.
Receivables were flat and remained below our previously Thats kept 102.
Two $5 billion.
Corporate other expense of $286 million included a mark to market loss of $181 million for 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%.
EPS was 20 cents.
Excluding the pivotal loss adjusted EBIT would have been 1.8 billion EBIT margin would have been 4.7% EPS would have been 32 cents.
In the quarter, we recorded 1.2 billion in special charges.
With cash effects of point $2 billion.
As expected the vast majority of the charges in the quarter were associated with the Redesigns of Europe and South America.
This year, we continue to expect to incur $3 billion to $3.5 billion EBIT charges was negative cash effects of about $1.5 billion to $2 billion, reflecting a shift of about $25 billion to $1 billion in cash effects to 2020.
Lastly, we ended the quarter above our cash and liquidity targets with 23 billion in cash and 37 billion total liquidity.
Let me touch on a few areas of the business in more detail.
In North America as I mentioned, it was down a margin contracted by 30 basis points to 7.1%.
The region continued to deliver strong mix and that pricing supported by F series as well as our decision to exit traditional sedans.
This favorability was more than offset with a launch related declines in volume and higher warranty.
For additional perspective wholesales for explore interceptor were down by 72000 units year over year, which led to 7% overall decline in wholesales in the quarter.
As Jim mentioned demand for as far as strong.
With production already oversubscribed.
Ralph the wholesales is interesting to note that in the quarter sales of Ranger completely offset the decline from discontinued sedans.
Last quarter, we showed you the benefit of this intentional shift in our portfolio using our Michigan Assembly plant as an example.
Once this plant completes the transition from Sundance arranger, Embraco EBIT would have improved by over $1 billion.
In the U.S.R.S. use posted strong momentum in the quarter, including a 50% increase in expedition and this month based on healthy customer demand. We started to run additional capacity for expedition at our Kentucky truck plant.
By the end of this year on a volume weighted basis, we will have the freshest Sep lineup in the industry led by our all new explore and all new escape.
Also in the US sales of total pickups accelerated in the quarter, marking our best overall pickup sales performance since 2004.
F series continues to do well.
Maintain market leadership with the lowest incentive spend the primary competitors and the highest transaction pricing.
Ranger, which we launched at the end of 2018 more than doubled its volume sequentially. While also steadily increasing segment share to 14.2%.
Europe delivered $53 million EBIT in the quarter.
An improvement of 126 million year over year supported by a redesign actions.
Favorable market factors and about flat structural costs, excluding pension drove the improvement in profitability.
This is the first quarterly year over year improvement and profitability for Europe in two years.
Commercial vehicles were once again, a strength in the quarter as Ford remains Europe's number one commercial vehicle brand.
And as noted in our product roadmap, we will be launching an updated two ton transit in the second half of this year.
In addition forward remain the market leader in the UK with yes, the transit customer focus as a top three selling models.
And China consolidated revenue increased 48% year over year, driven by higher Lincoln volumes.
EBIT loss narrowed to $155 million, an improvement of $328 million year over year supported by improvements from consolidated operations and volume mix and pricing lower tariffs and structural costs as well as favorable exchange.
The team has taken action to stabilize sales was second quarter retail sales up 13% sequentially and aggressive reductions in inventory to improve dealer health.
In fact, our dealer inventory is at its lowest level in the past 18 months and we manage the run out of stage five effectively.
In addition, China has implemented initiatives ranging from enhanced capabilities with in depth Chinese market experience to strengthen in cooperation with joint venture partners.
Sales of our new Fourk territory as Youve me.
Accelerated in the second quarter.
Making it the best selling forward us you'd be in China. This year.
Now, let me turn to our updated outlook for the year.
Which focuses on growth and cash flow and profitability.
We continue to target an improvement adjusted free cash flow year over year driven by auto.
And we are now introducing a range for full year adjusted EBIT of between seven and $7.5 billion.
Compared with 7 billion last year, representing up to 7%.
Assuming a full year adjusted effective tax rate of between 18 and 20%.
Which would be up from 10% last year, we're introducing it just an EPS range of $1.20 cents to $1.35 cents compared with dollar 30 cents last year.
The tax headwind is worth roughly 12 to 16 cents EPS for the year.
Due to the cadence of product launches and normal seasonality, we expect our fourth quarter adjusted EBIT to be higher than the third.
Among other things these targets are based on the current economic environment.
Including commodities foreign exchange and tariffs.
Relative to calls on capital for the year, we continue to expect capex to be similar to last year at roughly $7.7 billion.
Funded pension contributions to be about $650 million.
And shareholder distributions to be about $2.6 billion.
A few final comments before we move to Q and a.
2019, and 2020, our robust product launch years for us as the bolt to bolster our winning portfolio for customers reallocate capital to higher return growth opportunities and execute changeovers, our most profitable and highest volume vehicles.
Our results this quarter and year to date demonstrate the trajectory of our business is meaningfully improving supported by our product portfolio global redesign and fitness initiatives.
We have many opportunities across our business to drive free cash flow long term growth in revenue and profitability, including EBIT margins, 8% or better.
And we continue to be committed to maintaining a strong balance sheet and investment grade credit ratings.
Now lets open the call for questions operator.
Ladies and gentlemen, as a reminder, if you'd like to ask an audio question. At this time you may do so by pressing star followed by the number one on your telephone keypad again Thats Star one to ask an audio question. Your first question comes from the line of Emmanuel Rosner from Deutsche Bank Emmanuel.
Hi, good evening everybody.
Good day.
So my my first question is.
About the second half.
Guidance implied by your full year guidance at the midpoint, if I focus on the EBITDA metric it looks like Youre Ebits youre guiding for an EBIT there would be down about a billion dollars between the first half and the second half and I was hoping you could maybe bucket. This for us into what the main drivers are a it seems like you are 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 floor by a billion dollars versus first half what drives that.
Yeah Emmanuel Thanks, It's Jim Hackett, and you know as I hand, I'm going to hand, this question to Tim, but I just want to tell.
The audience night that this Tim's first call is our CFO and he's he's really done a great job feathering into the Ford culture, bringing new prospective new questions.
And is become a great partner.
When we sat in front of you in January I remember thinking about how we were going to help.
The street see our year and you know sitting in front of US from my perspective is the CEO was an open question about the tariffs Joe can talk about the back and forth. There we were working on our corporate redesign. This is the white collar kind of effort and management reporting layers.
We had restructuring that you were just starting to learn about in in Europe .
And we were actively working on our own recovery of China. In fact, I just came back from there.
So from January to July you know I just want to report to you Emmanuel as you as you look at.
Those five issues, we've you know I'm really happy with the way the companys tackle each one of them and the progress we've made.
And you kind of teed up the good question and the right when I think about the second half of the year, which are these product launches.
So tonight I want to make sure that.
You see that this is this is a capability that we have to prove we're really good at and I have.
I have a lot of confidence that we are and you'll hear that we've tackled the toughest one first in exploring aviator.
But Tim maybe before Joe if if Joe wants to add color on the launch as you could just.
Talk about the guidance and how we worked ourselves to that you bet. So thanks for the question of annual as you said with the 4.1 billion.
In the books for the first half of the guidance range of $7 billion to $7.5 billion with growth up to 7% or half a billion implies 2.9 to 3.5 billion.
So you've been 4 billion excuse me in the second half.
And as we said on the call is due this cadence of product launches.
And then you can you can see in the.
Materials, we distributed on slide five the Wyndham portfolio slide.
Number of launches ahead of us as the remainder of this year and continue to ramp up on exploring aviator. We of course their escape who got to turn transit for example.
And then enormous normal seasonality as well. So for example in 2018, 56% of our profits came in in the first half of the year.
And.
As a reminder, again we had the.
Uhhuh W. negotiations, concluding this fourth quarter.
So we believe the guidance is appropriate.
Based on what we're seeing in the business and including the risks and opportunities and that was appropriate to provide a range for the for the year.
Joe do you want to add something about product launches and then a manual you said you had two questions. So we'll come down so quickly I'll add that we have super duty launch towards the end of the year, which is really important.
And the seasonality is really you know we have the European shutdowns and we have the.
North American shutdowns in the summer months, and then of course the holidays later in the year. So there is you at the annual seasonality. So its launches seasonality and you had any negotiations.
Thanks.
And that's very helpful. And then just sort of as a follow up would you be able to.
Give us a sense again second half versus first half how you think about it Oh, you mean, you mean reagents I assume that the bulk of the decline is North America at least based on the launches that you highlighted but is there any other region, where you expect to distribute a case then and in particular you know so mark anything else besides sort of like the launches that's a a bake a big buckets.
Yeah. Thanks, Thanks again some of the launches we talked about are happening in Europe . For example to turn transit and escape who is one of these launches around the world, but as want to comment before we get too far down the path here that beyond the guidance that we provided for the EBIT range of EPS range.
Most importantly free cash flow we aren't.
Going to be giving any further details on the inputs that go into the final output.
So for example regional guidance or.
Yeah, Mark macro commentary or commodities or exchange of tariffs and so forth. So.
I recognize that the change, but we also changed by providing EPS guidance range and arrange for EBIT. So I'm just sort of comment on that.
In response to a question.
Joe from Us unless you want to add.
Well, obviously the bigger the bigger launches are in North America, and you haven't noticed.
Leave it at that.
Great.
Thanks, Ben Thank you.
And our next question. This line of John Murphy from Bank of America Merrill Lynch John .
Good morning, Mrs are good afternoon Unavailing Smith on for John first question on the structural cost headwind in North America can you detail what these costs more specifically in the quarter and how you think about controlling our offsetting studies going forward, particularly ahead of the U.S. getting negotiations that you know and what could be labor cost inflation among other factors.
Yeah, one thing Tim can I sneak something in you know John Murphy and I have something in common I just had a brand new baby Grand daughter, and I guess, John just had a new baby girl. So Tom we want to send data.
Array for that in hope every mom and baby are doing well. So I mean, let's go back to great. Thanks. Thank you very much I appreciate vital congrats congratulations.
So on the on the structural costs.
North America.
Auto overall Saar is good auto rolls on EBIT increased 19%.
A year over year, that's up from 60%. The first time in over three years or two consecutive quarters of year over year growth and profit and that's driven by structural cost the commentary that I'd leave you with is structural costs are down ex pension and OPEB.
Overall, so as far as how that plays out for the rest of the year again, that's factored into our as one of the many inputs into our guidance.
Okay. That's helpful. And then second question on the year over year, China Walk as you think about the outlook for the rest of the year and particularly into 2020 do you view positive contribution from volume mix pricing cost and everything else is being sustainable, particularly in the face of a tough industry backdrop or one of these factors or other is going to be a bigger driver of profitability improvement.
Yes. So this this is something that.
We want to kind of emphasize we want to talk about his color on China. So Joe maybe you can feel that sure thing so clearly were.
We're glad to see the progress we saw in the first half of the year financially, especially on our consolidated results.
Do you think about China.
In the last couple of months, we had very aggressive sell down of the stage five admissions vehicles, especially in June .
So I think you start I know you will see some of the pay back in the second half of the year, especially starting in July for some of that so we're watching what's happening in the industry. There you know Tim mentioned earlier that we were at the lowest level of our dealer inventories.
In month, so we're feeling really good about where we are both with our stage five stage six transition and.
Dealer inventory overhang elements and we're starting to see an improvement dealer profitability. So we're pleased with that.
Our focus in territory proxy building momentum, we still have ways to go but they are building momentum and we have other products coming is.
As Tim referred to especially escape later in the year remember that year over year, we'll have we should we at this present state we have a lower tariffs than we had in the second half of 18 because of the import duties going into China, or 15%, which they were 40% in the second half of last year. So that's a right now that's the best positive year over year.
I think what we're all watching whats happening in the Chinese Ministry I wont go too much into it I think we're going to see how things settle down after the last couple of months of the stage five states six transition, but we do expect some pay back to that in the second half of the year. Thanks, Joe.
Great. That's very helpful. Thanks for the question.
And our next question is from line of David Tamberrino from Goldman Sachs David.
Yes, I'm going to keep picking at this point on structural costs. It was a positive tailwind of about 300 million in the first quarter now you've got a negative in the second quarter was negative in North America and negative in Europe .
Really want to unpack that and understand what the positive was ex pension and OPEB and if you expect that to be repeatable.
Do you expect to see that grow sequentially as we progress through the year after you've taken restructuring actions.
That is my first question.
Jim go ahead yeah.
So again as it relates to what's going to happen for the remainder of the year, that's factored into our guidance and go back to the contract structure costs ex pension OPEB were flat.
Or sorry down.
In the auto overall.
So what you're seeing there is us continue to execute on our fitness initiatives and the redesign and starting to see the early benefits from that in the in the overall EBIT results and the structural costs as well.
For the across the business.
But you can't share the magnitude that it was down ex pension OPEB and there is no incremental color on Europe , taking a step backwards from the benefit you saw in one Q.
No not at this at this point I mean, I think you can you can you can look at the fact that we continue to announce additional.
Redesign actions in Europe for example of Bridgend.
And then we continue to execute on our redesign initiatives and as those play out overtime, you'll see the benefits flow through the piano.
Okay. So then.
Asking that restructuring question I guess.
You've made some announcements more recently you finished the consultation process what are your partners within Europe .
When do you anticipate the ability to provide some color as to the potential cost savings that you should be seeing as a result of those actions.
The cost savings that we're expecting from the redesign and restructuring actions are factored into guidance for 2019, and as we go forward and give guidance for 2020, you'll see that reflected there.
Moving swiftly as is practical to execute on all the.
Redesign.
Initiatives that we have in front of us as we talked about we have had 1.2 billion in the quarter 1.7 year to date and charges. We still have ways to go to 2019 outlook is for three to 3.5 billion and then similarly from a cash standpoint.
Yes, those those are redesign and restructuring initiatives are also factored into the European long term target of 6%.
Okay. So nothing to share today on the recent actions.
On annualized cost savings not at this stage, but David you know Jim I would just.
Again, and my tour I, just was there and I came away where Europe's.
Performing in terms of this restructuring really well, we've we've actually been speeding it up so.
I want to make sure there's confidence that that work is is happening in the <unk> and proceeding well.
Okay. Thanks for that Jim.
Thanks for taking my questions Yeah.
And our next question is one of broadly chief from Wolfe Research Rob.
Hi, everybody.
Yes, I wanted to just.
Ask again about this.
Just the regional performance it doesn't sound like you want to talk too much about this with with any specificity but.
Seems logical that Europe , and Asia improvement should continue year over year, and what you're guiding to is a decline in north America related to launches.
But can you help us frame. This this international improvement there there have been a number of announcements that you've made and you continue to work through this restructuring.
How much of the the cost improvement that you're you're looking at it in China and in Europe are we already seeing reflected as a run rate in the Q2 numbers and maybe at a high level could you talk a little bit about what you still have ahead of you.
You bet, Sam let me start with.
What we've been seeing as you said so.
In Europe , we saw an improvement of $126 million in the quarter that.
Year over year, and that's the first year over year improvement we've seen in two years, that's a reflection of the redesign initiatives and the is focused on the customer.
Commercial vehicles passenger vehicle the imports from portfolio standpoint.
So positive $53 million profit in the <unk> and Europe .
And that's driven by the market factors and.
Commercial vehicles and structural cost declines expansion.
In China again loss of negative negative $155 million, but the EBIT improved $328 million year over year, and that's compared with Q1.
Momentum.
22 million improvement, so 22 to 328 and as Joe mentioned earlier, you know the dealer health is.
Much improved best has been and from an inventory perspective in 18 months and the.
China results were driven by Lincoln volume, the structural cost improvements and favorable exchange. So im pleased with what we've been seeing in Europe , and China and from a guidance perspective looking forward we.
Expected.
Seven to 7.5 billion and the EPS to be driven by.
Led by the North America, Europe , and China structural costs and market factors.
The key drivers.
Okay, but there is some additional state doesn't want to add to it yeah, sorry, Rod can I just add joint jump in here just on the Europe piece specifically.
There's been a significant number of announcements made this year and a lot of work by the team.
Most a lot of that cost comes out over the preceding quarters.
Because you know we just we announced the 12000 salary hourly agency positions that are going to be gone by EUR 20, but number those are still to happen. So that savings the isn't in yet and a lot of the plant restructurings, including a shift reduction or.
And other things that we have going on it doesn't happened yet so I think you'll see this play out over the next several quarters. Just a reminder, though as I said earlier.
The third quarter in Europe , typically the lowest quarter because of the shutdowns that we have in our plan. So just want to remind everybody that we're making very good progress on the structural costs in Europe , but we do have some seasonality to keep and keep in mind.
Okay. That's helpful and just switching gears. My second question is just if you could talk a little bit about how you're thinking about the the market for full size pickups.
It's from a volume perspective things look fine.
From a share perspective.
Ram is entering into the fleet market quite a bit that any kind of high level thoughts about.
What the prospects are for that market from your perspective.
Yes, sure, but we're very proud of the of the first half performance in our F series trucks strong mix as you noted strong net pricing.
And really for the first six months of the year very pleased with the results.
One thing we are seeing in the market as a the market well down a little bit in the first half a year on retail overall is up on commercial and that's actually helping on the F series I was so strong.
And you've just seen recent examples of how strong our truck products are in the marketplace.
I mean, just today and the JD power fuel results came out and unprecedented event. We won all three truck segments Ranger Effient fitting super duty, one their segments and appeal.
And that's against newer trucks in the case of F. 150. So you can imagine how proud our team is of that.
We have the lowest incentive spending the highest GDP as you know this.
But our brand our truck brands on F series continues to hold up very well and we're very pleased with the results and the truck.
Market itself well in times have been growing.
We're watching it very carefully we remain competitive but we also watch very carefully and maintain our discipline as we I was always done.
But actually you're seeing our business hold up pretty nicely and with all those considerations.
To take into account.
Okay. Thank you.
And our next question from line of Adam Jonas from Morgan Stanley Adam Your line is open.
Hi, everybody. Good evening first my first question is John Murphy is a grandpa.
No.
Tim back and Okay, Oh, sorry, Okay models off and I can get credit for being a good one Adam so throw the amounts of.
And congrats also to John .
So first first question is on a European C O two I.
I think I heard you right, you said that you're going to.
Make the C O two emissions.
Standards without any buying any credits and paying any penalties but.
My understanding is as those penalty start kicking in and 2020, when you need to get to 95 grams.
And you're not going to have a BV on sale. So I just want to confirm you you you think you're going to get to 95 grams without me.
Yeah. Adam This is Joe Thanks for the question.
It's getting a lot of attention so you're right in the regulations.
In Europe are not new to US we are planning for this really since 2013.
And you know we have built the cost of this into our.
Compliance into our business plans.
We'll do it with electrification and improvements to our ice powertrain said, both important parts of the compliance plan.
As we said we won't we don't anticipate incurring fines or purchasing credits assuming consumer demand is there for the new products.
I wouldn't assume that we won't have a BV in the marketplace.
We said electrification and improvement IC power trains are part of that.
But we're we feel very confident in our compliance plans and well you know we've been playing for this for quite some time.
Okay. I mean, it's just a big statement I mean, I think year over right around 120, yes.
That's a 95 and I, maybe you can import some of the.
And on maybe.
Levy's, but I imagine that would be pretty small volumes. So just it just stands out as we can take it offline stands out as a really big gap to cross in such a short time.
That's more an observation yeah I appreciate the challenge, but I want you to know we're planning to make it.
Okay.
And then second question. Thanks, John Second question is maybe for I don't know, Dave Mcclelland or Joe when you can take this on on X Ford credit side.
If I asked you, obviously, you know money and supply of money and availability of credit is historically still pretty strong maybe not as strong as it's ever been but still been a strong category.
I'm wondering if you see anything if I push you anything that you're seeing incrementally.
That might be a yellow light or a flickering greenlight.
In terms of credit quality at the margin or anything on the funding side or consumer behavior delinquency side at all obviously, there's some natural seasonality seasoning and cyclicality, but just wanted to know if there's anything that you thought was a little.
Suddenly.
Taking a look closer look at thanks, David.
It sounds like he's asking about PD ratings.
Customers and then as well.
Sources or.
So yeah sure Larry So Adam evening this is David.
Tim mentioned, Tim mentioned in his introduction that the.
The current environment with pretty healthy and if I. If I think about your question and look at our portfolio and look at the originations the strength of what we are seeing coming through the door still is still really strong or average ficos nearly 750.
And we're not we're not seeing any change in the higher risk mix of business, we're sitting at 5% on hasn't moved.
In fact, generally sub prime placements are lower quarter over quarter.
Theres no increase in term our average term 65 months in the industry 69, we're not seeing any growth maybe four months. So origination I don't see any flickering told is solidly green.
And then if I look at the performance of the portfolio the portfolio continues to perform well.
In fact quarter over quarter loss ratios have improved 60 day delinquency as dawn repossession rent is done.
And then even if I look at our leases, we've seen better than expected performance at auction.
We now at constant mix I think that the used vehicle prices only be done 3%.
So as Tim said, it's healthy I think yes to use your terminology its its solidly green.
Great David Thank you very much for a month.
Thanks, Adam.
And our next question is from the line of Colin Langan from Yes, Colin Your line is open.
Oh, great. Thanks for taking my question.
Just to start off I mean.
If you look at the guidance for global redesign costs, you're trending well below the full year.
Target the outlook.
Does that imply that there's still more major step coming through here and given the size of these targets does that mean something is going to be coming over the next few months, but any color there on how much more action we should be okay.
Yes, so it's Jim.
Colin So the way we're monitoring this is.
We took on the right. The you know the structure the management structure, what we called the bureaucracy. So we had four key goals in that.
Just report to everyone. We exceeded every one of them.
And.
But this quarter was heavier in terms of impact.
Of the cost of that than the first more implications with people.
And then in the restructuring Tim I'll, let you you talk about the flows there great. Thanks, Jim.
So there is a mess I mentioned earlier, we had $1.2 billion charges in the second quarter and then from a year to date standpoints 1.7 billion and charges.
And we're saying three to 3.5 billion for the full year. So certainly implies you have quite a ways to go yet.
For the rest of the year.
Further detailing that wouldn't it wouldnt be appropriate. This time, we have made the decision.
On the ideas, we have for the redesign.
But that against the total backdrop of $11 billion over the next several years.
All of which will provide us with opportunity over time to fundamentally improve continue to improve the underlying business and our cash generation growth opportunities and so forth and then from a cash standpoint.
We have had point 2 billion in cash this quarter and so far year to date point $4 billion.
And we're expecting wouldn't have to 2 billion.
For the year now last quarter, we thought of maybe closer to two and a half billion. So it has some deferral of point $5 billion to $1 billion.
Into 2020.
As you said.
In ways to go yet and lots of opportunity ahead to continue to redesign the business.
For for the future.
Got it and in the quarter commodity costs have really come down quite dramatically and I know your contract or lag, but are looking into the second half I mean is that kind of be a tailwind are you factoring in its alan to your guidance or any kind of any color there on a commodity.
Thanks, Colin so yet.
So another commodity front, we were up 2.2 billion adverse to the first half.
Beyond.
What we've seen thus far.
I was raised to macro trends are expectations, that's factored into the guidance. So there's no further comments or an offer for the back half the year.
Okay.
Thank you very much for taking my question.
You bet.
And our next question. This line of Ryan Brinkman from JP Morgan Brian .
Hi, Thanks for taking my question.
It's great to see on slide 40 in the appendix. So many EBIT drivers of consolidated operations in China have been positive year over year into Q amidst a tough industry with that said given the relative size of the consolidated and the non consolidated operations in China. It would seem the biggest opportunity for improvement is probably in the jvs, which were roughly flat year over year in Twoq can you give us some indication of what is happening within that relatively placid 4 million change in EBIT or equity income I imagine material volume declines maybe offset by cost and then I think you've downplayed expectations for much improvement in the Jvs this year and given the obvious industry headwinds and that the improvement will instead come from the consolidated ops, but going forward how much of a driver or do you think improving JV income could be when might we start to see some evidence of that.
I think thats, an excellent question and I want you know, it's something we talk about Joe.
Yes sure. So thanks for the question.
There is no question that in order for us to achieve the results. We're looking for over time in China, Our joint ventures.
Especially the Chung on for joint ventures, our needs to improve its performance.
I'd say that we have a lot of work to do you referenced the consolidated operations on improvements in the second quarter and first half of the year.
And part of it is the volume losses that we've seen and the due to sales, but also managing the inventory down to the lowest level in 18 months, we feel good about that but going forward. We've just rebuilt the marketing and sales organization over the last several months with some very good hires and some very good restructuring.
We're getting very strong participation with our joint venture partner, especially Chung on in re work, we're doing with our marketing sales organization and the dealer relations.
It's going to take some time to rebuild all of that but I would say that we're on a path that we've seen.
Over the last couple of months, we saw stability in our sales really for the first time and.
About 18 months or so.
As we have a lot of work to do part it will be cost of course, we have rightsized at least the manning part of our manufacturing Theres a lot more work to do given the lower volumes on the overall manufacturing footprint, but the biggest opportunity for us is to rebuild the the dealer profitability the dealer engagement and the marketing sales organization in the joint venture and.
I want to see how that how long that takes but we at we're making some good progress, but we think if it takes more time.
And then of course, the new products remember that.
We said they were going to localize five more vehicles, starting in 19 that will help the joint venture with a number of those products like explorer Lincoln course, there are about our built in the in the joint venture.
So some of that localization will really help the joint venture and of course, the new product launches we have over the next 18 months will help in the JV as well that's clearly our number one focus and you know I would just add it's it's not a.
Something we talk about a lot from this table, but there was a lot of turmoil and turbulence in the leadership in China for Ford.
We had somebody that resigned for personal reasons, we replaced that and then we had another change and so I want to tell you with my tour that Joe and I, we really feel good about the management team that's in place there and.
A lot of momentum.
Starting to build with them and.
Because long rezoning been adding started this in November November so not even close to a year and now really starting to gain some momentum.
So I just I just want to make sure that you guys here that.
So.
With the operator, I think its time for us to wrap up if it's okay. I'll go ahead and close with a few thoughts I just want to say that our second quarter results demonstrate that this global redesign afford is driving positive shifts in our business and may emphasize today that news in Europe is better and and the redesign that we took with the pure rock pure bureaucratic structure of the company as we met all the goals. There. So there is a lot of good news in this year of execution regarding that.
Thus, we are improving our fitness in the in that was a goal to make us more competitive.
We are driving a winning portfolio.
The logic as you know to to move out of the sedans and into products like Ranger are paying off.
And we see we see ourselves fortifying strength, improving mix and there is a really strong commitment as Adam asked us to expand that electric vehicle portfolio quickly.
And lastly, the trajectory of the company is improving.
We believe in strong in terms of growth cash flow and profitability. So let me. Thank you for your attention this evening and I'll turn it back to the operator.
Ladies and gentlemen, this concludes the Ford Motor Company second quarter earnings Conference call. Thank you for your participation you may now disconnect.