福特汽車 (F) 2014 Q3 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the Ford's third quarter earnings conference call.

My name is Glenn and I will be your event manager for today.

(Operator Instructions) As a reminder, this conference is being recorded for replay purposes.

I would now like to turn the conference over to your host for today, Mr. George Sharp, Executive Director of Investor Relations.

Please proceed, Mr. Sharp.

Thank you, Glenn, and good morning.

Welcome to everyone joining us today either by phone or by webcast.

On behalf of the entire Ford management team, I would like to thank you for taking the time (technical difficulty) third quarter 2014 financial results.

Now presenting today are Mark Fields, our President and CEO, and Bob Shanks, Chief Financial Officer.

Also participating are Stuart Rowley, our Corporate Controller; Neil Schloss, Corporate Treasurer; Paul Andonian, Director of Accounting; and Mike Seneski, Ford Credit CFO.

Now, copies of this morning's press release and the presentation slides are available on our investor and media websites.

The financial results discussed today are preliminary and include references to non-GAAP financial measures.

Now, any non-GAAP measure is reconciled to the US GAAP equivalent in the appendix of the slide deck, and final data will be included in our Form 10-Q.

Finally, today's presentation includes some forward-looking statements about our expectations for Ford's future performance.

Of course, actual results could be different.

The most significant factors that could affect future results are summarized at the end of the presentation and detailed in our SEC filings.

With that, I would now like to turn the presentation over to Mark.

Thanks, George.

Today we will review our third quarter financial results, the details behind them, and our outlook ahead.

So let's get right into the first slide.

Our results this quarter are underpinned once again by our ONE Ford plan, which remains unchanged.

We are continuing to focus on all four elements of our plan.

They served us well and will continue to be our focus going forward.

We also plan to build on our success by accelerating the pace of progress throughout our business.

In many ways, we are just starting to see the full benefits and strength of ONE Ford, and we intend to maximize these opportunities going forward.

At the same time, we are passionate about product excellence and leading in innovation.

We are committed to building on our product strength today with even more new products and innovations that will deliver growth for our stakeholders and define our Company going forward.

So now let's turn to slide 2 for a look at the third quarter.

The third quarter was our 21st consecutive profitable quarter, and we ended the period with strong liquidity.

Automotive operating-related cash flow, however, was negative, due to unfavorable changes in working capital including product launch effects.

Third quarter wholesale volume and revenue declined year-over-year by 3% and 2%, respectively.

Market share, however, was higher in Europe and a third quarter record in Asia Pacific, where we once again delivered a record share in China.

North America and Asia Pacific were profitable, but pre-tax results were lower than a year ago for all of our Automotive business units, except Middle East & Africa.

Ford Credit delivered strong results that were better than a year ago.

Company pre-tax profit was in line with our expectation and consistent with the guidance we provided at the September Investor Day of a Company full year pre-tax profit of about $6 billion, which we are reconfirming today.

It was, however, lower than a year ago.

This is more than explained by three factors: lower volume, higher warranty costs, and adverse balance sheet exchange effects.

The lower volume was in North America, reflecting product launch effects and parts shortages due to supplier issues, and in South America where industry sales declined due to the deteriorating external conditions.

The higher warranty costs were mainly in North America and were primarily due to recalls.

And finally, the adverse balance sheet exchange effects were largely in South America and accounted for about one-third of the region's lower profit.

Looking ahead, 12 of our 23 global product launches are now complete, and the balance are continuing to progress, including the all new F-150.

These launches, along with the 16 planned for 2015, are expected to result next year in higher revenue, improved operating margin, and a Company pre-tax profit of $8.5 billion to $9.5 billion.

Let's turn to slide 3 to recap some of the quarter's other achievements.

Other third quarter highlights include the start of production of several products including the all-new 2015 Mustang and the Lincoln MKZ and MKC for China.

We also announced the new C-MAX, Grand C-MAX, and S-MAX in Europe.

We also announced that we are bringing 25 new vehicles to Middle East & Africa by 2016.

Seven Ford vehicles finished in the top three of their segment in the J.D. Power APEAL study, with F-150 and Super Duty F-250 and F-350 ranking highest in their segments.

We hosted the industry's first app developer conference, and we were active in job creation, including new jobs in Kansas City, Louisville, and Asia Pacific to support our growth initiatives.

Finally, we completed our previously announced share repurchase program that reduced our diluted shares by about 3%.

Now I will turn it over to Bob, who will take us through our financial results.

Bob?

Thanks, Mark, and good morning, everyone.

Let's start at the top on slide 4.

Third quarter wholesale volume was 1.5 million units, down 52,000 units from a year ago; and revenue was $34.9 billion, down $900 million.

Pre-tax profit was $1.2 billion, excluding special items, $1.4 billion lower than a year ago.

After-tax earnings per share at $0.24 were $0.21 lower.

Net income attributable to Ford including pre-tax special item charges was $835 million, $437 million (technical difficulty) year ago.

Earnings were $0.21 a share, down $0.10.

Pre-tax special item charges were $160 million in the quarter, reflecting separation-related actions, largely in Europe, to support our transformation plan.

Automotive operating-related cash flow was negative $700 million, and Automotive gross cash was $22.8 billion, exceeding debt by $7.9 billion.

Our third quarter operating effective tax rate, which isn't shown, was 31%, which is lower than our prior guidance.

We continue to expect our full year operating effective tax rate to be about 35%, assuming retroactive extension of the US research credit legislation in the fourth quarter.

In the first 9-month period, vehicle wholesales were up slightly from a year ago while Company revenue decreased by 1%.

First 9-month pre-tax operating profit, excluding special items, was $5.2 billion, a decline of $2.1 billion.

And net income was $3.1 billion, $1 billion lower than a year ago.

As shown on slide 5, both our Automotive and Financial Services sectors contributed to the Company's third quarter pre-tax profit.

As shown in the memo, Company third quarter pre-tax profit declined compared to the prior year and prior quarter, both more than explained by Automotive.

The key factors and financial metrics for our Automotive business in the third quarter are shown on slide 6. As you can see on the far left, wholesale volume and revenue decreased by 3% compared with a year ago.

The lower volume is more than explained by an unfavorable change in dealer stocks related to product launch effects and supplier parts shortages, as well as declining industry volume in South America.

Higher industry volumes in other regions were a partial offset.

Global industry SAAR is estimated at 86.7 million units, up 3% from a year ago.

And Ford's global market share is estimated at 7.4%, unchanged from a year ago.

Operating margin was 2.5%, down 4.5 percentage points from a year ago.

Automotive pre-tax profit was $686 million, down $1.5 billion.

As shown in the memo below the chart, first 9-month volume was up slightly from a year ago while Automotive revenue was down 2%.

Operating margin at 4.2% was down 2 percentage points.

Total Automotive pre-tax profit at $3.8 billion was down $2.2 billion.

The lower results were driven by North and South America.

All other business units improved.

Slide 7 shows the factors that contributed to the $1.5 billion decline in third quarter Automotive pre-tax profit.

The lower profit is largely explained by higher warranty costs, including recalls, mainly in North America, and lower volume in North and South America, as well as $166 million of adverse balance sheet exchange effects, mainly in South America.

All other factors largely offset each other.

As shown in the memo, pre-tax profit was $1.5 billion lower than second quarter, largely explained by lower volume, mainly in North America and Europe, as well as higher warranty costs in North America.

Slide 8 shows third quarter pre-tax results for each of our Automotive operations as well as Other Automotive.

North America and Asia Pacific were profitable, but the other business units reported losses.

Other Automotive reflects net interest expense, which we continue to expect to be about $700 million for the full year.

Now we will look at each of the regions within the Automotive sector, starting on slide 9 with North America.

North America continued to benefit from robust industry sales, our strong product lineup, continued discipline in matching production to demand, and a lean cost structure.

But our third quarter results were affected adversely by higher warranty costs and lower volume.

North America third quarter wholesale volume and revenue declined 8% and 6%, respectively.

This decrease is explained primarily by product launch effects, including 5 weeks of downtime in the quarter at the Dearborn Truck Plant for the F-150 launch and supplier parts shortages.

U.S. third quarter industry SAAR was 17.2 million units, 1.1 million units higher than a year ago.

Our U.S. market share deteriorated eight-tenths of a percentage point to 14.1%, reflecting a planned reduction in daily rental sales and lower F-150 share as we prepare for the new vehicle by continuing to balance share, transaction prices, and stocks.

As shown in appendix 7, our U.S. retail market share of the retail industry was 13%, down two-tenths of a percentage point from a year ago.

North America's decline in revenue is more than explained by the lower wholesale volume.

North America operating margin was 7.1%, down 3.8 percentage points from last year, and pre-tax profit was $1.4 billion, down $886 million.

Excluding the higher warranty costs, which were entirely associated with recalls, North America's operating margin would have been 10.2%.

As shown in the memo below the chart, all first-9-month metrics declined from a year ago with lower volume and higher warranty costs, including recalls, more than explaining the lower operating margin and pre-tax profit.

On slide 10 we show the factors contributing to North America's lower third quarter pre-tax profit.

The decline is more than explained by higher warranty costs and lower volume.

The warranty costs reflect the recent restraint control module recall announced last month, as well as reserve changes related to other field service actions.

As mentioned previously, product launch effects and supplier parts shortages drove the lower volume.

As shown in the memo, pre-tax profit was lower than second quarter, more than explained by unfavorable volume and mix and higher warranty cost.

Turning to full year guidance for North America, we continue to expect pre-tax profit to be lower than 2013 and operating margin to be at the low end of the 8% to 9% range.

All right, now let's turn to slide 11 and review South America, where we are continuing to execute our strategy of expanding our product lineup and have replaced legacy products with global ONE Ford offerings.

We are also working to manage the effects of slowing GDP growth, declining industry volumes in our larger markets, weaker currencies, high inflation, as well as policy uncertainty in some countries.

In the third quarter, wholesale volume and revenue decreased from a year ago by 21% and 17%, respectively.

The lower volume is explained primarily by a 700,000 unit decline from last year's SAAR of 5.7 million units.

This reflects the impact of the weakening economy in Brazil, import restrictions in Argentina, and lower production in Venezuela resulting from limited availability of US dollars.

Also contributing is a non-repeat of last year's stock build.

South America market share at 8.8% was down 4/10 of a percentage point, more than explained by the phase-out of Fiesta Classic.

The revenue decline is more than explained by the lower volume and weaker currencies.

Higher pricing was a partial offset.

Operating margin was negative 7.3%, down significantly from a year ago.

And pre-tax loss was $170 million, a deterioration of $330 million.

As shown in the memo below the chart, all first-9-month metrics deteriorated from a year ago, driven by the adverse change in external factors.

The first-9-month loss includes $426 million of adverse balance sheet exchange effects.

On slide 12 we show the factors contributing to the decline in South America's third quarter pre-tax results.

The lower results were driven primarily by lower volume and adverse balance sheet exchange effects.

As shown in the memo, pre-tax results improved compared with second quarter, more than explained by higher pricing and other effects associated with introduction of the new Ka in Brazil.

Ka has been well received by media, and initial reaction from customers is very encouraging.

For the full year, we continue to expect South America to incur a loss of about $1 billion.

Let's turn now to Europe, beginning on slide 13, where we continue to implement our transformation plan focused on product, brand, and cost.

Europe's wholesale volume and revenue improved from a year ago by 6% and 7%, respectively.

The higher volume reflects a 700,000 unit increase in Europe 20 SAAR to 14.5 million units, higher market share, and lower dealer stock reductions than a year ago.

Lower volumes in Russia and Turkey were a partial offset.

The focus on our transformation plan on improved product and brand led to great progress in the third quarter.

Our Europe 20 market share improved four-tenths of a percentage point to 8.4%.

This reflects two factors: a 0.5 percentage point improvement in our retail passenger share of the five major European markets to 8.8%, including the effect of our expanded SUV lineup; and secondly, a 2 percentage point improvement in our commercial vehicle share to 13%, reflecting the success of our full line of new Transit vehicles and continued strong performance of the Ranger compact pickup.

The increase in Europe's revenue is explained by the higher volume in the Europe 20 markets.

Europe's operating margin was negative 6.4%, down 3.6 percentage points from a year ago.

Pre-tax loss was $439 million, a $257 million decline.

As shown in the memo below the chart, all first-9-month metrics improved from a year ago.

Slide 14 shows the factors that contributed to the decline in Europe's third quarter pre-tax results.

The decline is more than explained by Russia, balance sheet exchange effects, and other factors including lower component pricing and non-recurrence of prior-year gains.

As shown in the memo below the chart, pre-tax results were lower than second quarter.

This is more than explained by lower volume due to Europe's seasonal plant shutdowns for summer holidays, unfavorable exchange, and higher costs including non-recurrence of a restructuring-related reserve release last quarter.

For the full year, we continue to expect a loss at of about $1.2 billion, an improvement compared with 2013.

Let's now turn to slide 15 and review Middle East & Africa, which is now its own geographic segment in order to facilitate better customer service and further expand Ford's presence in this fast-growing region.

Middle East & Africa's wholesale volume and revenue improved from a year ago by 9% and 5%, respectively.

Operating margin was negative 1.4%, 1 percentage point better than a year ago.

Pre-tax loss was $15 million, $10 million better.

As shown in the memo below the chart, first-9-month wholesale volume and revenue deteriorated slightly compared with a year ago, while operating margin and profit both improved.

For the full year, we continue to expect Middle East & Africa results to be about breakeven.

All right, let's now review Asia Pacific on slide 16.

Our strategy in Asia Pacific continues to be to invest for growth through both new and expanded plants, new products, and the introduction of Lincoln in China.

As shown on the left, third quarter wholesale volume was up 5% compared with a year ago and net revenue, which excludes our China joint ventures, grew 3%.

Our China wholesale volume, not shown, was up 10% in the quarter.

The higher volume in the region is more than explained by higher market share and industry volume.

We estimate third quarter SAAR for the region at 38.9 million units, up 1.8 million units from a year ago, explained primarily by China.

Our market share at 3.6% was a record for the third quarter and was two-tenths of a percentage point higher than a year ago.

This was driven by China, where our market share improved four-tenths of a percentage point to a record 4.7%, reflecting continued strong sales across our vehicle lineup.

Asia Pacific's higher revenue is more than explained by favorable mix.

Operating margin was 1.7%, down 2.9 percentage points from a year ago, and pre-tax profit was $44 million, down $72 million.

As shown in the memo below the chart, all first-9-month metrics improved from a year ago.

Slide 17 shows the decline in Asia Pacific's third quarter pre-tax profit.

It is more than explained by higher structural costs and unfavorable exchange, with favorable market factors being a partial offset.

The higher structural costs reflect our continued investment in products and growth, including five new plants that will come on line over the next 9 months, as well as the launch of Lincoln.

As shown in the memo, Asia Pacific pre-tax results declined from second quarter, with most factors unfavorable.

For the full year, we continue to expect Asia Pacific to earn a pre-tax profit of about $700 million, which is higher than a year ago.

Let's turn now on slide 18 to Ford Credit, which is an integral part of our global growth and value-creation strategy.

Ford Credit provides world-class dealer and customer financial services, supported by a strong balance sheet, providing solid profits and distributions to Ford.

Ford Credit's higher pre-tax profit this quarter compared with a year ago is more than explained by higher volume.

This reflects increases in nearly all financing products, including non-consumer and consumer finance receivables globally as well as leasing in North America.

As shown in the memo, pre-tax profit was higher than second quarter, explained primarily by a lower level of insurance losses in North America, which is included in Other.

For the full year, we continue to expect Ford Credit profit to be $1.8 billion to $1.9 billion.

Our guidance for Ford Credit year-end managed receivables and managed leverage also is unchanged.

We now expect Ford Credit's distributions to its parent to be about $400 million, up from our prior guidance of about $250 million.

This increase is driven by higher net income at Ford Credit.

Next on slide 19 is our Automotive gross cash and operating-related cash flow.

Automotive gross cash at the end of the quarter was $22.8 billion, a decrease of $3 billion from the end of the second quarter.

Automotive operating-related cash flow was negative $700 million.

This is more than explained by unfavorable changes in working capital, including the effects of the 5 weeks of downtime in the quarter at the Dearborn Truck Plant as we transition to the new F-150, as well as supplier parts shortages.

In the fourth quarter, we expect working capital changes to be positive.

During the quarter, debt repayments and pension contributions totaled $600 million.

Dividends paid were about $500 million, while Other items include about $1.1 billion related to the stock buyback program that we completed in the quarter.

Slide 20 shows that Automotive debt at the end of the quarter was $14.9 billion, $0.5 billion lower than second quarter.

We ended the quarter with net cash of $7.9 billion and Automotive liquidity of $33.6 billion.

Earlier this week, we gave notice to holders of our 2016 convertible notes to terminate conversion rights and redeem outstanding notes.

This action will reduce Automotive debt by about $800 million in the fourth quarter with no significant impact on cash flow.

This concludes our review of the financial details of our third quarter earnings, so now I would like to turn it back to Mark, who will take us through our outlook for the business environment as well as our 2014 planning assumptions and key metrics.

Mark?

Thanks, Bob.

Slide 21 summarizes our view of the business environment for 2014.

We project global economic growth to be in the 2.5% range, with conditions in Europe and South America of particular concern.

Global industry sales are expected to be about 87 million units.

U.S. economic indicators and industry sales have remained steady through the third quarter, consistent with economic growth in the 3% range.

In South America, Brazil is in a recession with election-related policy uncertainty.

Negative growth also is expected in Argentina and Venezuela, with ongoing policy and exchange risks.

In Europe, incoming data has weakened, with Euro Area GDP growth projected to be less than 1% this year.

Conditions in the UK, however, are more favorable, with growth projected in the 3% range.

Although not shown, the outlook for Russia is challenging and fluid, with very slow GDP growth, inflationary pressures, and weaker currency.

In Asia Pacific, China's economic growth is projected in the 7.5% range with the ongoing property market weakness reflected in our outlook for 2014.

Consumer sentiment supports continued growth in vehicle sales, but at a more modest pace in the second half.

With initial signs of improvement, growth in India is now projected to be in the 5% to 5.5% range.

Challenges remain, however, with high inflation and interest rates as impediments to stronger growth.

Overall, despite challenges in some key markets, we expect the global economy to grow in 2014 and be supportive of our projection for higher global industry volume this year.

Slide 22 recaps the guidance disclosed earlier for our business units, as well as for Automotive net interest expense.

Full year guidance is unchanged for all business units and consistent with our Investor Day outlook.

Our Company guidance for 2014 is detailed on slide 23.

We now expect full year industry volume of about 16.8 million units in the US, about 14.5 million units in the Europe 20 markets, and about 23.8 million units in China.

In terms of our financial performance, we continue to expect Automotive revenue to be about equal to 2013; Automotive operating margin to be lower than 2013; Automotive operating-related cash flow to be lower than 2013, including capital spending of about $7.5 billion; Ford Credit pre-tax profit of $1.8 billion to $1.9 billion; and Company pre-tax profit of about $6 billion.

2014 is a critical next step in implementing our ONE Ford plan to deliver profitable growth for all, including strong growth and much improved financial results in 2015 and beyond.

As we communicated at our Investor Day event, we expect 2015 Company pre-tax profit to be in the $8.5 billion to $9.5 billion range.

In closing, our ONE Ford plan is built on a compelling vision, comprehensive strategy, and relentless implementation, all leading to profitable growth around the world.

We are confident in the continued success of our ONE Ford plan and, in fact, are accelerating our pace of progress.

The third quarter was challenging, but we remain absolutely focused on implementing our plan as we work towards the end of the year.

This includes continued strength from North America, although down from recent years, as we launch 3 times the number of products as last year; a loss in South America, as we respond to a changed environment and continued risks in the region; continued execution of our transformation plan for Europe, even as we work through challenges, primarily in Russia; establishing our Middle East & Africa business unit; continued strong growth and profitability in Asia Pacific; consistent, solid performance from our Ford Credit operation; and positive Automotive operating-related cash flow.

So now let's open it up to your questions.

George, you want to lead us through that?

Thanks, Mark.

Now we will open the lines for about a 45-minute Q&A session.

We will begin with questions from the investment community, and then we will take questions from the media.

Now, as always, in order to allow for as many participants as possible within this time frame, please keep your questions brief and please avoid asking more than two.

Glenn, can we have the first question?

(Operator Instructions) Colin Langan, UBS.

Thanks for taking my question.

One of the big concerns coming out of the Investor Day was the profitability of the new F-150.

I was just wondering how we should be thinking about that, because you seemed reluctant to be very committed about how profitable it would be, but you also said it hasn't been delivered to customers yet.

Should we be concerned about the content that is being added?

Or is the uncertainty really reflecting that it hasn't been delivered to customers, so you don't have a good gauge of what the eventual pricing on the product is going to be?

Hey, Colin, thank you very much for the question.

Obviously, an area that continues to be on the mind of investors.

We are not going to get into specific margins or profitability of any particular vehicle line, but everyone knows how profitable the F-150 is to the Company and for the Company, and we expect that to continue going forward.

When we think about next year and the guidance that we gave for North America of the 8% to 9% -- and that triggered a lot of the questions -- we have to remind ourselves that we don't get both plants, Dearborn and Kansas City, up and running until we get into the second quarter.

So clearly that impact has an effect on what we are seeing for the margins of the whole business unit.

If I go back and look at the present generation of the F-150, we saw margins improve over the course of that product's cycle life.

We will have to wait and see what happens with the new one, but we have got lots of things planned on F-150 beyond what you are going to see when we come out.

And I think it will be very exciting.

Consumers are going to respond very positively to that, and we expect it to be a huge success for us and to contribute very significantly to the bottom line.

So I think that is about all I want to say on that.

But it is a great product and it is going to be very good for the business, and we think even better as we go through the business planning period.

Okay.

I guess my second question, there was an article in the Journal earlier this week talking about some potential issues that some of the (technical difficulty).

Can you give an update on how the launch is progressing, if there's any headwinds that are arising?

Yes, thanks, Colin; this is Mark.

As you know, launches are a complex thing, but we are absolutely on plan with the launch and it is progressing well.

As you know, we have had 8 weeks of downtime for the changeover at our Dearborn Truck Plant.

That was completed.

We now have started mass production, and we are exactly where we expected to be at this point.

The plant is off and running.

I was actually down at the plant earlier this week; our employees, they are all trained, they are excited, they are energized.

And we are confident that all of the preparations that have positioned us for a quality launch and positioned us to have vehicles in dealerships with initial sales by the end of this year as we planned.

Okay.

That sounds good.

Thank you very much.

Daniel Galves, Credit Suisse.

Good morning.

In the U.S., it looks to us like pricing on pickup trucks continues to be very strong, and pricing on the car side or the super-segment is a little bit weaker.

Is that your read of the situation as well?

Is there any way you can give us some broad strokes on what drove the positive year-over-year pricing in North America by segment?

I will take the first part of that, Daniel, and yes, I would characterize it as you mentioned.

When you look at the truck and SUV side of the business, the pricing has been good.

In our own case, even with -- let's use F-150 as an example.

Our outgoing F-150, our transaction prices are up, our incentive levels are below and well below some of our competitors.

When you look at the car side, if you look at what has happened with the segment shift, consumer preferences, they are moving more towards utility, and that is putting pressure on the car side of the business.

I think you are seeing a number of competitors who have capacity there get more aggressive in the marketplace.

And in our case, we're going to be balanced as we look at the marketplace in terms of the value and the incentives that we provide to our customers.

But, yes, I would characterize it as you mentioned it.

Bob, you want to -- might answer the second part of that.

Yes, when you look at -- and I am on slide 10, Daniel.

But when you look at North America's pricing and just the pricing element, the $340 million, the majority of that was actually on carryover vehicles.

We did have some good news on some of the products we launched in the first half, but it was mostly on carryover.

And to line up with what Mark said, that was more than explained by positive pricing on trucks and utilities.

We actually had negative pricing on cars.

So completely consistent with the scenario that he outlined.

Okay, got it.

Then just to follow up, do you expect those trends to continue?

How does the pricing on trucks manifest as the present F-150 and the new F-150 start to be at the dealerships at the same time?

And then on the daily rental side, can you tell us what part of the market share decline was due to daily rental?

And why are you deciding to decrease daily rental sales at this time?

In the first part of your question, yes, we expect the trends as we see the pricing this year to flow into next year, and that is -- part of the reason is we have guided to North America at the 8% and 9% margin next year.

Our view is we are going to continue to see a lot of competitiveness on the car side of the business, particularly with some of our competitors having some artificial advantages around currency and things of that nature.

When you look at -- but even with regards to that, our whole strategy around investing in product excellence, we have a number of very strong products coming out on the car side as we get into next year.

In particular, our Focus -- the best-selling car in the world.

Our new one is coming and will be in showrooms in the first part of next year.

On daily rental, as you have seen, part of our -- when you look at the eight-tenths of market share deterioration in the quarter, half of that was due to -- or four-tenths was due to the fact that we have throttled back on our sales to daily rental.

And part of it is because it's important that we are in that market, so consumers get experience with our products.

But the margins are lower, and you know our whole strategy of managing for maximizing our operating margins and profitability.

But we will continue to take a very balanced approach as we look at daily rental.

In the quarter, our daily rental sales were down about 32%; they only represented about 5% of our total sales.

And that is down from about 7.5% the year earlier, so that is the balanced approach we are taking on this.

Okay, thanks very much.

John Murphy, Bank of America Merrill Lynch.

Good morning, guys.

Just a first question on appendix -- slide 12, where you have your 2015 guidance reiterated.

As we think about that, there is a long way to go to get through 2015.

Are you considering any major actions?

Or what are the levers that you could pull to potentially influence this to the upside to put up maybe better numbers than what you are looking at here?

Well, John, I think we are being a little ahead of ourselves here.

We are still sitting very comfortably at the $8.5 billion to $9.5 billion.

We still have a lot of work to do to put that plan together for 2015, and we will be talking to you about that in more detail in January.

But I wouldn't go beyond that at this point in time.

Let's just focus today on (technical difficulty)

Okay; then a second question.

You highlighted supplier parts shortages in North America as a pressure on volume.

I was just wondering.

Is that something that is occurring in the short term?

Or do you think there are some real capacity constraints in the supply base that might hamper volumes going forward?

Well, we have seen -- we viewed it as short-term in nature.

And obviously in some of the instances, what we did to accommodate some of the suppliers that had some issues, we actually pulled forward some down-weeks to allow a couple of those suppliers to actually catch up.

So we feel we will be able to make up some of that production in the fourth quarter.

As we go forward, we are going to continue to stay close with our supplier partners.

It is a fact that the supplier community is running at or near full capacity, and that is why we are going to continue to work together with our purchasing team and our suppliers to make sure that we keep the plants running.

But for this quarter, we thought there were some unique issues that we have dealt with; and they are now resolved.

Great.

Thank you very much.

Brian Johnson, Barclays.

Thank you.

I have some question to Mark about a planning assumptions that you probably had that is not on your guidance charts, which is: where do you expect the price of gas to be, say, next year and then over the long-term?

What kind of assumptions around gas prices have gone so far into your product planning?

You mentioned this vis-a-vis Europe, but I am wondering if it applies to North America well.

With gas prices where they are, are you going to be able to recover some of the regulatory CAFE content costs?

Thanks, Brian.

Our view on gas prices -- obviously what we are seeing is that the supply fundamental or the supply growth fundamentals have outpaced the demand growth.

And we are seeing, obviously, the price of a barrel of oil actually go down.

Our view continues to be that over time the price of fuel will continue to rise.

Probably less so than we did in last year's business plan but nonetheless, still, it is a nonrenewable resource and that is going to play a factor in there.

Plus we also have to keep in mind where we are in terms of the global economic situation right now.

In a number of the markets around the world it's going through some troubles right now, and that is weighing on the growth of the demand for oil.

But our view is it will continue to go up, and that is why we are going to just continue to say focused with our product strategy of offering the very best fuel economy for our customers.

And then when you think about your comment around the regulatory requirements about improved fuel economy, clearly in Europe we have seen some instances where you can price for that regulation that goes in.

Here in the US our experience has been it is very tough to do that, and that is why we are going to stay very focused on what I would call the physical requirements of delivering those regulations at the most competitive cost.

Okay.

Would it be -- do you think your ability to price if we were at, say, $5, $6 a gallon in the US would be better?

And does that enter at all where you are in on your 8% to 10% margin range?

Yes, if you are dealing with $5 to $6 a gallon oil, yes, I think the dynamics change very greatly on what you can price.

Okay, thanks.

Rod Lache, Deutsche Bank.

Good morning, everybody.

Couple things.

One is -- in the past you have given us some data on material ex-commodities for North America.

Was hoping you can just provide that again.

Are commodities such as aluminum locked in on a longer-term basis?

Yes, actually the biggest issue that we had in terms of commodity prices in the quarter was in South America, because as you know that is priced in dollars; and with the weakening currencies that has been the biggest issue.

In the quarter in North America, we had about $115 million of higher costs associated with commodity prices.

And for the total Company it was actually about $190 million, $200 million; but again a lot of that in South America as well.

In terms of what we have got locked in, I think we have got probably now these contracts or hedges about 85% of our full year commitments are locked in.

Okay.

Then in South America, ex-the balance sheet adjustments, you did like a $60 million loss in the quarter.

I know you guided to in your Analyst Day substantial loss, but improved for 2015.

Doesn't sound like you are looking for a lot of improvement versus the run rate right now.

I was hoping you can elaborate on that.

And also another clarification on your comment in the analyst day.

There was a pie chart in your deck where you talked about calls on capital from 2014 to 2020.

Debt and pensions was part of that.

And if you look at your maturity schedule and pension contributions, it looks like there is maybe $13 billion associated with that through 2020.

Then next to that there was a sliver of the pie chart that look like it was roughly 2 times the debt and pension, which was shareholder actions.

Is that a right way to size that up?

Like roughly $13 billion for debt and pension and maybe $26 billion for shareholder actions as part of your plan.

(technical difficulty) as we look at a run rate in the fourth quarter.

Clearly, as part of our plan is to introduce our ONE Ford products, so we do expect some top-line growth, particularly around the new Ka, or Ka, that we are introducing into the marketplace.

B segment is the biggest segment in Brazil.

The product is off to a great start; we just launched it last month.

We do expect to get some price recovery for inflation.

We actually saw more of that in the third quarter in places like Brazil than we saw previously.

We are going to continue to work on our structural costs as we go forward.

So as we stand back and we look at South America for next year, we do expect some level of economic and industry growth; but also the launch of the global products tailored to that market will help.

Yes, and in terms of your question on the pie chart, I think all I will say on that, Rod, is that what we did say at the event is that in terms of pensions for 2015 and 2016 we are expecting contributions of about $1.5 billion a year to our funded plan.

And that would get us to the point where we believe -- in the aggregate it might be different plan by plan -- but that we would be fully funded.

Then thereafter, about $0.5 billion or so just for ongoing service costs and so forth.

In terms of the debt, Automotive debt, we said that by 2018 we would be down to about $10 billion.

That assumption assumes actually that we continue to pay that down a bit as things mature.

I am not sure that is where we will end up.

Neil is actually looking at what is the appropriate size of debt for the size of the Company that we expect to be at that point in time.

But that is what is in those numbers.

Then the balance, as you rightly said, is a much greater amount of capital allocated to shareholder distributions than what we have said in the previous 5 years.

I wouldn't put a number against that because it is further out and things can change, plus or minus.

But based on our present assumptions, that is certainly what we have in mind.

Thank you.

Pat Archambault, Goldman Sachs.

The response went a bit faint on the Latin America question I think that Rod had asked.

One follow-up is I just wanted a better understanding of what that balance sheet item was that was, I think, $109 million.

Is that just ongoing currency remeasurement?

Or was that a discrete item similar to what happened in Venezuela in the first quarter?

Just because that seems fairly lumpy and large.

Yes.

I mean it's actually very similar to what we saw in the first quarter, except it wasn't of the same magnitude.

In fact, I think it is interesting, and you are seeing it in many earnings reports in this period, is the effect of the stronger dollar on a lot of various companies.

And certainly that is what we saw.

But just to give you a feel for what happened, we had a 62% devaluation in -- I'm sorry a 48% devaluation in the bolivar, a 32% devaluation in the peso, about an 8% in the Brazilian reais.

And we have got net assets, and the value of those assets now in dollars given that change in the currencies gave us the $109 million effect that you talked about.

As Mark said in his comments, that is part of what we expect to see happening next year: currencies continuing to weaken.

And that will be one of the challenges that we face in South America, as we will have the positive effects you talked about, but you will continue to have high inflation.

There is no sign that is going to go away, and you will have these depreciating currencies.

Then, I guess, your guidance for South America that you gave at the analyst day for next year, that did contemplate like a further one-time sizable remeasurement impact for the bolivar; that's correct, right?

It reflected -- I guess I would say it differently.

It didn't assume some massive deval, and clearly that is something I think we all have to keep an eye on.

Because with what is happening to the US dollar and the impact -- I'm sorry, the oil rather, and what that could mean to the Venezuelan economy and their ability to defer what seems inevitable in terms of a massive deval -- that is something we have to watch.

We have not assumed that for next year, Pat.

We have assumed just a continued weakening of currencies.

But if there were a significant one-time deval by the government, that would certainly change the equation in terms of what the impact would be.

Okay, understood.

Then my second question is just on Asia.

You guys did forewarn pretty clearly that the cadence in the first half would be lower in the second half, would not be carried forward, because of a lot of those cost items.

It was a little bit -- those items were larger than I think some of us had modeled.

Just wanted to get a better sense of what the time frame was for some of those -- you have the launch of Lincoln; you have all these plants that are launching concurrently as you are adding capacity through the end of next year.

How should we think about the time frame on which that elevated expense plays out?

Well, I guess a general comment and maybe more specific on the quarter.

In general, if you go back to Investor Day -- and I think Dave Schoch had a slide that showed capacity over the next 5 years.

And I think we have got (technical difficulty) period.

Then we showed one bar that had greater than 2.7 that was undefined.

Because as long as we continue to grow -- and we expect to do that -- we will have to put in place capacity above and beyond what is even coming in right now.

So I hope that happens.

I hope we have to continue to invest in growth in the business, because that would just be good for the business.

But what we have got going on in the quarter though, we have got the five facilities that are under construction.

I think all of them either have a full complement of the hourly workers, for example, in place, or at least nearly so.

They are in the process of being trained, so we are carrying that cost.

We have begun some depreciation and amortization.

Not everything has been capitalized, but some of it has as the buildings have progressed.

Then in addition to those, we are adding a shift.

We just added a shift at our plant in Thailand.

There is another shift that is coming on this month in Chennai, and we have got a capacity increase that we are planning at the end of this 9-month period actually at one of our engine plants in China.

So not all new facilities, but certainly continued spending for capacity increases.

And that is at play here as well.

You mentioned Lincoln.

That -- we have been incurring those costs now for some quarters and continue to do so this quarter.

And to put it all into context, if you take the $173 million that you can see there of which almost all of it -- well, all of it is structural cost, about 40% of that relates to what I just described: the Lincoln cost as well as the costs associated with these plants.

And just to add, to put it in perspective, the context of growth, we got a few questions on, for example, our September sales, which were down two-tenths of a percentage point in China, and we had some questions around that.

Just to put that into perspective, the September sales were -- they were strong, they were steady, after a very strong comparison to 2013.

As Bob mentioned earlier, we had a record share in China in the quarter of 4.7%.

And year-to-date our sales were up 26% versus an industry that is up, I don't know, somewhere around 8%.

So as you look at the remainder of this year, we expect to be a bit down in the month of October, but you will start seeing it grow again.

And I would just -- I would think of it as it's not a pause in our sales growth; it is more of a pit stop as we position ourselves for growth based on the plants that Bob mentioned that are going to be coming on line next year.

Okay, understood.

It is a high-class problem to have those kinds of growth opportunities.

But I guess it does sound like fixed cost at least for the balance next year is -- I mean you guys have given some color already, but it sounds like it will continue at this pace of addition at least for the next five quarters or so.

Yes, and Pat, the only other thing I would add is -- and I have said this before -- I would expect it to be lumpy.

It is not going to be linear.

Some quarters it will have more impact than others.

Okay, great.

Thanks a lot for the color, guys.

Adam Jonas, Morgan Stanley.

Thanks, everybody.

Just two questions; first for Bob.

Bob, General Motors showed a chart at their investor day saying that their breakeven in the US at a fixed market share was around 10 million or 11 million units.

Wondering if you've made a similar calculation and whether you could confirm a similar order of magnitude breakeven SAAR.

Yes, same order of magnitude.

Okay.

Now in that analysis, can I ask what you have assumed for price down?

Or is that fixed, too?

I don't understand the question.

Meaning when you run a simulation of going to 11 million US SAAR, do you keep pricing at today's levels, or do you crush pricing?

What we -- we change a number of factors.

Pricing is not one of them.

Okay.

Okay.

In fact, one of the things that was interesting I think when we saw the downturn in 2008 and 2009, we actually saw pricing go up.

Right, okay.

Mark, next question for you.

If you wanted to -- and this is a question about a competitor's product and I am sure -- we know you guys have tested and torn apart and I would imagine you guys have all driven the Tesla Model S. I am just curious in your opinion, high level.

If you wanted to make a car like the Tesla Model S, in your opinion does Ford Motor Company have the engineering resources, tech, and talent, particularly the software talent, to do that?

Well, to your question, yes, we have driven the Model S. We have torn it down; we put it back together.

We drove it again, then we tore it apart.

Very familiar with that product, and I think our product development team is very familiar with the approach they have taken.

When we think about our products going forward, we have obviously a lot of experience, as you know from a number of our electrified powertrains and electrified vehicles that we have in the marketplace.

And the answer is, yes, I do (technical difficulty) talent.

Do we have to continue to add and complement that talent?

Absolutely.

Part of that is the growth we are going to see in our Silicon Valley operations, which is going to be growing significantly, so that we can attract that talent to our Company and complement the already-strong talent we have in those areas.

So then is it just that you are not there?

You can do it, but you -- is it intention to do something like that?

Or is it just so niche that you want to focus on the more mainstream stuff for now as the go-forward strategy?

Well, I think it is very consistent with our product strategy.

You know one of our pillars in our product strategy is from a technology stand we like to have smart technology in our vehicles.

You have seen that in a lot of the technology we have.

We are going to build on that.

We are going to make sure that we have the talent to deliver it.

Definitely.

Thanks, gentlemen.

Joseph Spak, RBC Capital Markets.

Thanks for taking my question.

Just to follow up a little bit on some of I guess the question, the topic that Patrick brought up earlier with Asia Pacific.

I guess specifically in the fourth quarter, you are sticking to about $700 million for the year.

You have done about $500 million this year.

And it sounds like, given the commentary, you're opening some more plants.

You would expect there would be some continued headwinds.

So can you just give a little bit of color as to what the offset is there that still would show a meaningful year-over-year gain?

Yes, we expect to have favorable volume and mix in the quarter (multiple speakers)

Okay, and that's from new product?

Well, we're actually -- it is new product; but it is also, as we said in the text that we were going through earlier, we just continue to see strength across the entire lineup.

So we expect that to continue in the quarter, Joseph.

Okay.

Then sorry if I missed this, but the working capital drag in the third quarter, was that mostly timing related?

Should we expect that to reverse out in the fourth quarter?

Yes, we expect to have positive cash flow in the -- or positive cash flow?

Of course positive cash flow.

But positive working capital in the quarter, and we do expect this to reverse.

This was really the impact of the launch effects as well as the supplier shortages that Mark talked about earlier.

So we expect that to reverse out in the fourth quarter.

Completely, or --?

Largely.

Largely?

Okay.

Thanks a lot.

Ryan Brinkman, JPMorgan.

Maybe one for Neil.

I know that you provide some sensitivities in your 10-K to help us gauge the impact of discount rates on the funded status of the pension plans on the PBO and the asset side.

I was curious, though, if given the recent decline in rates whether you have made any preliminary estimates of the potential impact on year-end status, and whether that is anything you could share with us today.

Then on a related note, maybe for Bob, could you comment on whether changes in interest rates or actuarial assumptions would be material enough to have any impact on your capital allocation strategy, which I think calls for cycling past large pension contributions, to make more room for return of capital to shareholders?

Thanks, Ryan.

I think from the standpoint of our de-risking strategy, the reduction in rates has been almost completely offset by returns.

So we are about a 1 percentage point change in funded status since our year-end position, so that is about $1 billion worse than we were at the end of 2013.

Yes, the only thing I would add to that, Ryan, is to me -- first of all your analysis that you did was actually very good and it was consistent with what we provided in the sensitivities.

It is just we have seen better performance in terms of assets and so forth, and of course our contributions.

But to me, the thing that is really encouraging about what we are seeing is with the big change of interest rates -- and particularly given the fact that in Germany, where that is our most underfunded funded plan, we have seen an incredibly big change in the discount rates -- that we are still about $1 billion worse only, I guess I will say, than where we were at the end of last year.

It just shows that the strategy is working.

I just wonder if we are getting the full recognition of that from investors.

Because the volatility that we would have had, if you go back 3 or 4, 5 years ago compared to where we are today, is much, much improved, which was the whole point of the strategy in the first place.

Right, thanks.

Very helpful update.

Then just my last question then.

I think on the 2Q call you were looking forward to the EPA releasing its mileage ratings for the F-150 potentially within weeks.

Would you have expected it by now, particularly given that the vehicle will be going on sale pretty soon?

What might be holding that up?

I know you said it will be the most efficient truck; but is there anything more you are able to share with us today about just the magnitude of expected improvement?

Thanks.

We expect and we have always expected the EPA labels to come probably sometime in the latter half of November.

So there is no surprise for us there, and we should have that then.

Okay.

Looking forward to it.

Thanks.

George Galliers, ISI Group.

Yes, good morning and thanks for taking my questions.

I have two questions.

Firstly, as you highlighted, the NAFTA margin ex-warranty was still at a very high level despite the model changeovers going on; and other costs were only negative $170 million during the quarter.

I was wondering if you could give some guidance on the cost cadence in terms of latter-stage engineering launch, [any] associated with the F-150 over coming quarters, and to what extent you can quantify that.

Then also just on China, you said that you expected sales to maybe be flat to down over the coming months due to capacity constraints.

At what point, based on your planning assumptions for Chinese end-market and your own share gains, do you see yourselves being able to supply -- for supply to actually match demand or exceed demand in China?

And at what point does that take place?

Is it middle part of next year or is it later than that?

Okay, why don't I take that first part of the question on -- as we mentioned, we will probably see our sales a bit down in the month of October.

I think you will start seeing some small growth in November, and I think you will start seeing some decent growth as we (technical difficulty) into next year.

As we get into the latter half of next year, I think as we bring on these plants with even more new products you will see even an accelerated pace.

Okay, and then in terms of, George, your question about structural costs -- and I think that was on North America; is that correct?

Yes, exactly.

Yes.

In the case of -- it was actually a pretty light quarter for us in terms of structural costs.

I would expect it to be much more of a factor in the fourth quarter, and that is in part seasonal.

We always have higher structural costs in the fourth quarter, and part of that is related to what happens to labor and overhead in inventory, given the fact that we have got the production -- the plants down at the end of the year.

So costs, labor and overhead costs come out of the balance sheet, go into the income statement; so that will be a factor.

But also we have got all the launches ahead of us that we have yet to complete.

That usually brings with it higher advertising and sales promotion expense as we start to then market the products; and of course the depreciation and amortization you talked about.

Then the other thing is that we are continuing to invest in terms of engineering, in particular, for products yet to come.

We talked about all the launches we have next year, so we will incur that expense as well.

So I would expect to see a much larger number on a year-over-year basis in the quarter and an increase quarter to quarter.

Great.

Very clear, thank you.

David Whiston, Morningstar.

Good morning.

Two questions, one on South America, one on Russia.

In South America, I guess I am just a little surprised to basically see that the implied guidance for Q4 is roughly breakeven to a small loss.

Are you expecting the market to bottom out there in fourth quarter?

Are you cutting costs to get to that number?

Or is it all a pricing inflation tailwind?

It is driven by the effect of the new Ka that we have just introduced.

We only very partially benefited from that in the third quarter.

But we are approaching full production of both the four-door and the five-door, so we think that will be the big driver of the results in the quarter.

In addition to also the new F-Series --

Yes, that's right.

-- we've introduced back into the marketplace after a bit of a hiatus.

So that will help as well.

Okay, thank you.

Then in Russia, obviously it's a very weak market there.

Are you seeing a lot of irrational pricing from competitors?

And is the Sollers JV holding the line on pricing or also buying share?

Well, overall, we are seeing some very aggressive pricing, particularly from some of our Japanese competitors as they take advantage of their currency.

But --

Russia?

No, that's Russia.

It's Russia?

Yes.

We are not seeing pricing in Russia.

No, competitiveness.

Okay.

Competitiveness.

So we are seeing -- I wouldn't say we are seeing hugely irrational; but overall with the market being down, it is getting very competitive.

Okay.

Thanks for taking my questions.

Mike Ramsey, The Wall Street Journal.

Good morning.

I wanted to ask an overall question that related to how is the auto market doing globally.

Mark, I think you mentioned that the world economies are struggling a little bit.

But can of give me a look at maybe in the next year a little bit, are we in a soft patch globally?

Or do you -- and are you forecasting or getting a little more concerned that we might be heading into a more dangerous period, or not?

Well, clearly there's a lot of things going on in the world.

But you have seen in Investor Day our view of growth over the business plan period, and we expect this to be a growth industry, and we are a growth company in that growth industry.

As we look at some of the various markets, you've seen our guidance for next year and the industry here in the US, which is up from what our expectations are for this year.

In Europe we expect very moderate growth, but a little bit of growth there.

Same thing in China.

And of course, down in South America, that is probably the softest patches we see with a lot of the uncertainties that we have talked about before.

But overall, standing back putting in context where we are, it is a growth industry and we are a growth business within that industry.

Okay, great.

Thanks.

(Operator Instructions) Phil LeBeau, CNBC.

Hey, Mark.

Quick question for you.

The pricing strength that you are noticing with SUVs and with the F-Series, you've been in this industry a long time.

Relative to when you have seen pricing power like this in the past, how does this stack up right now in terms of what you are seeing, in terms of the demand that is out there for SUVs and your ability to drive pricing?

Well, I think a couple of things.

One is, when you look at just the fundamental demand, you look at the age of the parc and it's -- what is the right term?

It is quite mature.

By our view, back in the 2005 timeframe, probably about high 30%s, 40% of the products out there -- cars, utilities, and trucks -- were 10 years or older.

We think that is more like about 50% now, and probably even skewed even higher on pickup trucks.

So from a demand standpoint, I think the replacement demand versus periods in the past is quite (technical difficulty).

Marry that against the production capacity that is out there in the industry.

Many folks including ourselves are running very high capacities.

I think when you look at those two elements I think it bodes well for pricing in those segments that will remain pretty good.

Then probably the last piece of it is just the new products that are coming into the marketplace; and in particular, our new products.

I think we are heading into a good pricing environment where our new Expedition, our new Navigator, our new MKC will allow us to take advantage of a very good situation going forward.

And that helps put into context our guidance for next year.

Fantastic.

Thank you.

Brad Wernle, Automotive News.

Hi.

My question is just related to the gross Automotive cash figure, which I have at $22.8 billion in Q3.

That is quite a steep drop from the second quarter.

Maybe you gave some of this, but what were the components that drove that drop?

If you could clarify again.

Yes, Brad, happy to help you.

$1.1 billion of that was the conclusion of our share buyback program that we announced back in May.

So that was the largest single piece.

We had $0.5 billion of dividends; $300 million of pension contributions.

Our debt came down by $300 million.

And then of course we had the negative operating cash flow that we talked about earlier in the call, which was driven largely by the negative change in working capital.

So that is the $3 billion.

Great, thanks.

Alisa Priddle, Detroit Free Press.

Good morning, gentlemen.

Mark, you have been very personally involved in all of these launches because you have so many.

I am just wondering; the problem with some of the parts shortages, could you give us some context as to whether that would have happened either way?

Or has your planning -- could it have been a lot worse if you hadn't had all of this extra planning?

Give us a sense of how this fits in with your whole strategy.

Yes, Alisa, just to clarify.

The production or the parts shortages that we've experienced actually were on current products, not on our new launches.

As I said, our new launches are going according to plan.

And with the existing production, that has been really some of the issues that we have had.

We have been able to resolve those issues.

We will be able to make some of that production up, as we mentioned earlier, in the quarter; not all of it.

But it has been on existing models, not the new launches.

Okay.

Then so do you feel that the extra planning you have done then has avoided this kind of thing happening as you launch?

Well, we are staying very close with our supplier partners as we launch all these new products, and we will continue to do so to make sure that we have successful launches.

Okay, thank you.

At this time, ladies and gentlemen, I would now like to turn the call back over to Mr. George Sharp for closing remarks.

Thank you, Glenn, and thanks, everybody out there are.

That wraps up today's presentation.

We are really glad you were able to join us.

Ladies and gentlemen, that concludes today's conference.

Thank you for your participation.

You may now disconnect and have a great day.