Ford Motor : Reports Fourth Quarter 2018 Financial Results Transcript

Corrected Transcript

Total Pages: 18

CORPORATE PARTICIPANTS

Lynn Antipas Tyson	James D. Farley, Jr.
Executive Director, Investor Relations, Ford Motor Co.	Executive Vice President & President-Global Markets, Ford Motor Co.
James P. Hackett	Marcy Klevorn
President, Chief Executive Officer & Director, Ford Motor Co.	Executive Vice President & President-Mobility, Ford Motor Co.
Robert L. Shanks
Chief Financial Officer & Executive Vice President, Ford Motor Co.

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OTHER PARTICIPANTS

David Tamberrino	Ryan Brinkman
Analyst, Goldman Sachs & Co. LLC	Analyst, JPMorgan Securities LLC
John Murphy	Adam Michael Jonas
Analyst, Bank of America Merrill Lynch	Analyst, Morgan Stanley & Co. LLC
Rod Lache
Analyst, Wolfe Research LLC

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MANAGEMENT DISCUSSION SECTION

Operator: Good day. My name is Deirdra and I will be your conference operator today. At this time, I would like to welcome you to the Ford Motor Company Fourth Quarter 2018 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. [Operator Instructions] After the question-and-answer session, there will be closing remarks.

At this time, I would now like to turn the call over to Lynn Antipas Tyson, Executive Director of Investor Relations.

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Lynn Antipas Tyson

Executive Director, Investor Relations, Ford Motor Co.

Thank you, Deirdra. Welcome, everyone, to Ford Motor Company's Fourth Quarter 2018 Earnings Call. Presenting today are Jim Hackett, our President and CEO; Bob Shanks, our Chief Financial Officer; and Jim Farley, President of Global Markets. Also joining us today are Marcy Klevorn, President Mobility; Joe Hinrichs, President Global Operations; and Brian Schaaf, CFO of Ford Credit.

Jim Hackett will begin with a brief review of our progress relative to the value creation framework. Bob will then review our quarter results in more detail, and then Jim Farley will talk about the actions we're taking to improve our performance in China and Europe.

After Jim's comments we'll open the call up for questions. Following Q&A, Jim Hackett will have a few closing remarks. Our results discussed today include some non-GAAP references. These are reconciled to the mostcomparable U.S. GAAP measure in the appendix of our earnings deck which can be found, along with the rest of our earnings materials, at shareholder.ford.com.

Today's discussions include forward-looking statements about our expectations for future performance. Actual results may differ from those stated, and the most significant factors that could cause actual results to differ are included on slide 47. In addition, unless otherwise noted, all comparisons are year-over-year, company EBIT, EPS and operating cash flow are on an adjusted basis, and product mix is on a volume-weighted basis.

Now, let me turn the call over to Jim Hackett.

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James P. Hackett

President, Chief Executive Officer & Director, Ford Motor Co.

Thank you, Lynn, and thanks to all of you for joining us today. If you would turn to slide 2, as we recap 2018 and look ahead to 2019, I would like to make a couple of points to start our discussion this evening. For Ford, 2018 will be known as the year between the business that wasn't designed right and the business that we know will win.

Certainly, it was a challenging year, in that we were hit by some headwinds outside of our control and frankly, poor performance in some parts of the business which we have now taken action to address. Importantly through 2018, was a year of progress where we laid the foundation for a much stronger, more resilient and more dynamic business, a business that we want to tell you can thrive now and in the future. So, I am really optimistic as we enter 2019. We have a clear vision, we have a solid plan, and we are in execution mode.

We're fortifying and building on our strengths to start and taking decisive action to address underperforming parts of the business. Some that you know about, for example, were our decision last April to phase out sedans in the U.S. and our restructuring in Europe that we announced recently. And Jim Farley will touch on this later, along with the action we are taking in China to restore profitable growth.

We are reorganizing and resizing our global salaried workforce, and we're retooling product development to bring more unique, customer-focused product to market more efficiently. We're leveraging relationship where it makes sense to be more cost and capital efficiency, hence, as our alliances with VW and Mahindra. Our work on AVs and Mobility is advancing quickly. We're connecting every new Ford vehicle in the U.S. to the cloud. And soon, these vehicles will talk to the world around them through the technology known as C-V2X. Through this, we will help usher in a new transportation system that reduces traffic congestion, accidents, and improves CO2.

Now let's turn to slide 3. I will cover our full financial metrics here. For the year, revenue grew 2%. We generated $7 billion in EBIT with a margin of 4.4%, and we delivered $1.30 in EPS. Now led by North America, Auto EBIT benefited from the largest improvement in market factors in seven years. This benefit was more than offset by commodity and currency headwinds and higher net product costs as we entered a major product refresh cycle. We also incurred higher warranty costs and the Ford-specific challenges in China and Europe, again confirming that we are addressing all of those. Importantly, in the face of all that, we generated $2.8 billion in company cash flow and we ended the year with $23.1 billion in cash and $34.2 billion in liquidity, both well above our targets.

I'd ask you to turn to slide 4. This is the strategic highlight slide. Now on every market, this team is focused on introducing a fresher, more targeted and appealing lineup that can compete and win in the marketplace. For example, in the U.S., over the next 24 months, we are refreshing 75% of the lineup. In that we're bolstering our strong pickup in commercial vehicle business, [ph] note a (05:52) $72 billion global franchise with 14% EBIT margin. In 2018, our F-Series outsold the nearest competitor by the widest margin ever. And our transaction prices were about $2,000 above segment average.

In the U.S., we recently started selling the new Ranger and early customer interest has been very strong. In Europe, we are expanding our profitable Transit Commercial Vehicle franchise that includes new services and revenue streams in that strategy. Now, given our brand strength and capability, we have the opportunity to create a similar stronghold in SUVs globally and we are moving quickly in this area. The new Explorer we revealed last week in Detroit at the Auto Show is but one in a series of world-class SUV that we're bringing to market. The Lincoln Aviator is another example. And I have to say we've been really pleased to see the experts note how superior the Aviator is to other brands that it competes against. We also launched the all-new Focus and Escort in China, and this is the first of many new products for China. Jim will hit on this area as well.

In terms of advancing our propulsion strategy, we introduced the new Explorer Hybrid, the first of our next-generation of advanced hybrids that provide no compromised blend of capability and efficiency. We will reveal a new fully electric utility later this year with, if I say so myself, stunning design, performance and technology. And we've confirmed that we have started early work on a zero-emissions version of the F-150.

In November, shifting to the press review of self-driving technology, we demonstrated how that technology will propel self-driving fleets in partnerships with cities and businesses to deliver people and goods in new ways with new business models. I was very happy with the reviews that that generated.

As we build out our Mobility business, note that we acquired the e-scooter company, SPIN. And this is to deliver first-mile and last-mile mobility solutions.

Lastly, the bottom-line impacts of our fitness initiatives on operating leverage will continue in 2019. I get asked about this all the time. Let me tell you that from 2013 through 2017, our Automotive structural cost increased by $1.7 billion per year on average. We've arrested this trend in 2018. We kept cost flat year over year, and we expect our structural cost to be flat again in 2019.

Before I turn it over to Bob, let me say in the coming months that of course you can expect us to share more specific initiatives related to the redesign of our global business. There's nothing more important than having you understand what's happening there. I want to confirm that plans are in place and that we're taking action. These announcements, though, have to come in a coordinated way as we work respectfully and constructively with our stakeholders.

Now, let me turn it over to Bob Shanks, our Chief Financial Officer. Bob?

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Robert L. Shanks

Chief Financial Officer & Executive Vice President, Ford Motor Co.

Thanks, Jim, and good evening, everyone. Before going through the details, I'd like to provide some context on the quarter and the year, and to keep it simple, I'll just focus on the full year, although my comments generally apply to both periods.

First off, let me reiterate what Jim said about our market factors. It's been a year of no global growth in industry volume and of relatively light new product action at Ford, we delivered very strong market factors, specifically strong mix and higher net pricing. We delivered 45% of this in the fourth quarter alone. It's probably fair to say that most folks didn't expect this from Ford, given our product refresh plan for the year. And you should note that in 2019, we have planned a more active year of significant product actions in growing segments.

Secondly, in 2018, we incurred headwinds of about $3.3 billion in four areas. These impacts are not indicative, for the most part, of the ongoing run rate of the business. The first, roughly $750 million in tariff-related effects. The second, $1.1 billion of increased commodity cost unrelated to tariff effects. The third, about $750 million of unfavorable exchange net of pricing were taken to partially recover some of this impact. And fourth, about $775 million related to the Takata recalls announced last year in North America.

Now, this $3 billion impact, we incurred a bit more than $1.9 billion in North America. North America's EBIT, however, declined year over year by only $450 million. This suggests to us that Kumar Galhotra and his team delivered strong improvements elsewhere in the business as they continue their aggressive work to return the region to a 10% margin.

South America absorbed about $400 million of these headwinds, yet it delivered a $75 million EBIT improvement from 2017. Again, this demonstrates to us that the efforts of Lyle Watters and his team to successfully pushback against these adverse trends, not to mention other inflationary effects not counted in the $400 million [audio gap]

(11:37), as they approach the fundamental redesign of the business in the region.

The two regions that essentially drove the year-over-year decline in Automotive and company EBIT, both for the full year and in the fourth quarter, were Asia Pacific, specifically China, and Europe. Asia Pacific took on about $400 million of the company headwinds, yet delivered a much deeper decline in results from 2017, $1.8 billion in fact. And Europe, Europe absorbed about $600 million of the headwinds yet saw a year-over-year decline of $765 million, and that was with the strongest product refresh among all our regions in 2018. These results underscore the urgency we have in addressing Ford's specific performance issues and executing fundamental redesigns of our business models in these regions to generate appropriate returns on future capital that we may allocate to them.

Finally, I'd be remiss if I didn't highlight, both for the full year and the quarter, the continued strong and stable results from Ford Credit.

So with that, let's turn to slide 6, the summary of our company key metrics. There's three things I want to highlight here. First, in the quarter, all key metrics were lower from a year ago with the exception of revenue, which benefited from strong mix in North America and higher net pricing across all regions, except China. Performance in China and Europe drove the year-over-year decline in most of the other metrics.

Second, company-adjusted EPS in the quarter was $0.30 per share, and this includes an adjusted effective tax rate of negative 4% driven by the favorable impact of U.S. tax planning and tax reform. Finally, company GAAP net income was a negative $116 million. This includes adverse special items of $1.2 billion. Two major items drove this. First, we incurred a negative non-cash pre-tax mark-to-market adjustment for our pension and OPEB plans that totaled $877 million. This was due to adverse financial market conditions that occurred late in the year.

The second was personnel separation charges of $262 million.

Now, turning to slide 8, favorable results in Automotive and Ford Credit more than accounted for the company-adjusted EBIT of $1.5 billion. This result was nearly $600 million lower than the year-ago period, explained mainly by a lower Automotive EBIT. In Mobility, we incurred a loss, as planned, driven by investments to develop our mobility services and autonomous technology businesses.

Next, looking at taxes, while total company taxes were low in the quarter, this compares to a positive absolute total tax effect a year ago, resulting in a large unfavorable increase in the impact of taxes. This largely reflects the non-repeat of favorable U.S. tax reform and tax planning effects a year ago.