福特汽車 (F) 2017 Q2 法說會逐字稿

Good morning.

My name is Dorothy and I will be your conference operator today.

At this time, I would like to welcome everyone to the Ford Motor Company earnings conference call.

(Operator Instructions)

Thank you.

I would now like to turn the conference over to Ted Cannis, Director of Investor Relations with Ford Motor Company.

Please go ahead, sir.

Thanks very much, Dorothy.

Good morning and welcome, everybody, to Ford Motor Company's second-quarter 2017 earnings review.

Presenting today are Jim Hackett, our President and CEO, and Bob Shanks, our Chief Financial Officer.

Also participating are John Lawler, Vice President and Controller; Neil Schloss, Vice President, Corporate Treasurer, and CFO of Ford Smart Mobility; and Paul Andoninan, Director of Accounting; and Marion Harris, Ford Credit CFO.

The results discussed today include some non-GAAP references.

These are reconciled to the most comparable US GAAP measures in the appendix.

Today's discussion also includes some forward-looking statements about our expectations for future performance.

As you know, actual results may vary.

As a reminder, copies of the Ford and Ford Credit second-quarter earnings presentations and press releases are available on Ford's investor and media websites.

With that, I'd like to turn it over to Jim.

Thank you, Ted, and thank you for joining our call today.

You know, success for me today is to start my first call as CEO of Ford Motor Company to assert two important points as a baseline.

The first: Ford is a fantastic company with not only an incredible history, but I think a very bright future.

You know, I've had time leading another business in another industry.

And during that time, I often traveled to Silicon Valley.

It was so frequent that I did learn and understand the culture there.

In fact, it steeped into my thinking, optimism, innovation, and questioning the status quo.

Out there, being a young company is cool.

And in this realm, a company that is 114 days old is a hot item.

But what I also learned from all these experiences is that a company that has lasted 114 years is rare.

And it doesn't get there by luck, decree, or sticking with the status quo.

Rather, in the face of the facts that fewer than one in five startups succeed, a company that has persisted 114 years, well, it has had to remake itself many times.

When war engulfed the world or when gasoline was 100 times more expensive than when the industry started or when a pickup truck was reimagined to yield one of the largest collective gasoline savings in the car inventory park today.

In this way, Ford Motor Company is a jewel in the eyes of those who study long-lived businesses.

In the eyes of customers, who have seen us evolve, trust us and they love the Ford brand.

The second point starts with a humble underpinning that Ford can be a much better company.

We have an opportunity to be extraordinary in the way we relate to and deliver value to our customers.

In this way, we can deliver much more value, of course, to our shareholders.

Now I'd like to briefly update you on how we are approaching the work in the first 100 days and some of the earliest thinking as we develop our compelling strategy and plan.

And you will hear a reference that we are going to be coming back to you in the fall with more details on that strategy and plan.

Now, with the slides you will see graphics here that support my comments.

And I'm sure you're familiar with the fortify, transform, and grow strategic framework that was articulated over the past 12 months or so.

And that's on the right side of this slide.

What we are doing as a team in my first 100 days is unpacking that on the right with fresh eyes.

And we focused on a few early priorities.

Let me identify those for you.

Initially, we evaluated how to maximize revenue opportunities.

As you hear, there's a leveling in the business.

So by utilizing data modeling, we identified sweet spots between volume, mix, and price to help deliver higher transaction prices in an increasingly competitive market.

We are also evaluating and improving the fitness of the Company.

Now, I have been talking about this concept of fitness.

And of course, it includes cost, but it really involves taking a much deeper system or holistic view of all parts of the business to ensure that we are really as fit as we need to be to compete and win.

And win.

I want to emphasize that.

We are also evaluating capital deployment opportunities, something I've heard from many of you.

And we know we are going to be quicker and more purposeful with our decisions on where to play and how to win.

And that will affect the capital decisions.

We are also renewing our focus on innovation.

This is something that I humbly bring in this job.

This is something I care a great deal about.

One of the things that I did subtly was I elevated the Chief Technology Officer position reporting to me.

This was to reassert our leadership in critical technologies.

And we are building a more robust mobility business under Marcy Klevorn, who also has responsibility for as Chief Information Officer the computing in our business.

And we have a unique opportunity to merge the mobility and computing for future digital services.

We are transforming the culture and we are creating an environment to win.

This is going to be hard to describe without you following me around every day.

But it starts with a renewed recognition that we are in an incredibly competitive industry and the competition just doesn't relax because we're thinking through a problem, opportunity, or because we had a management change.

It's relentless.

Well, we have a talented team here at Ford.

And we believe we can be really competitive.

A team that we are working on empowering and reenergizing to grow our business.

So that work in those five points is well underway in that 100 days and I look forward to sharing more, as I said, with you later this year about detailed plans to make Ford even stronger and more innovative.

Not only built to weather the business cycles, but to win in future growth areas.

Okay, well, turning to the second quarter, I do believe we delivered a solid performance.

I'm really proud of our team; with all the change we went through, they did it.

But it needs to be said no one here is satisfied.

We know -- and I want to emphasize this -- we all know we have a lot of work to do.

And our entire team is focused on these areas of growing revenue, improving fitness, optimizing the capital deployment, and innovation in all parts of the business.

And having the spirit of an environment to win.

In order to improve the top and bottom lines, we are going to be focusing on these things in the quarters ahead.

On the next slide, I will share a few highlights from the quarter, if you happened just to be gone during the last quarter and you didn't know what was going on at Ford.

Some exciting things here are our F-Series, including the Super Duty, continue to perform extremely well.

And we look forward to the refreshed F-150 going on sale this fall.

This is our product that is so successful, we are going to be building on momentum here.

The quarter, we also had sales success in China in a number of areas, including the best-ever June sales for Ford Motor Company and the best-ever June and quarterly sales for the Lincoln brand.

This quarter in Europe, where we launched the all new Fiesta.

This is an important model for us in the region.

It's a very popular vehicle.

All the early reviews have been great.

We are also making important strides in quality.

We improved significantly to become -- listen to this -- the number-two-ranked non-premium brand in this year's J.D. Power Initial Quality Study.

It's our best result in the 31 year history of the Company.

I was really proud to hear about that, receive that, as I walked into my job.

And credit is due to all the hard-working folks at Ford for that accomplishment.

This quarter, we also made a decision: it was in the news that we would source the next-gen Ford Focus for the North American market from China initially.

This decision meets the preservation of capital and it's going to deliver significant savings.

At the same time, we were proud to announce further investment in the Kentucky truck plant.

This is going to build the new Expedition and Lincoln Navigator later this year, both very important new entries for us in large SUV segment.

I'm going urge all of you to take a ride in those.

I think you're going to be really surprised.

Well, now, I'd like to turn it over to our Chief Financial Officer, Bob Shanks.

He is going to take you through the second-quarter financials.

And then, of course, we will be happy to take your questions today.

Thank you again.

Bob?

Thanks, Jim, and good morning, everyone.

Thank you for joining us today.

We are going to start on slide 6 and I will just cover very briefly the headlines.

And then we are going to start diving through the results for the balance of the presentation.

So as you can see here, the Company did grow in the quarter.

Our adjusted pre-tax profit combined with a low effective tax rate generated an adjusted earnings per share that was $0.56.

That was up 8% from a year ago.

We did generate another quarter of automotive operating cash flow on the positive side, and we did generate a margin of 5.9% on the automotive business.

Let's turn now to slide 7 and look at the key financial summary.

And I just want to highlight several things here to bring out a bit more texture in terms of what happened.

So starting and focusing only on the second quarter at the top in terms of wholesales, we generated 1.7 million units in the quarter.

That was down 43,000 units.

55,000 of that was Europe, and within that, almost all of that was the Fiesta.

And we will talk about the impact of that when we get to the European section.

The revenue increase was 4/10.

Only 1/10 of that was on the automotive side of the business.

The balance was in financial services.

Going down further to special items pre-tax: $248 million charge.

That was related to write-offs that we took associated with the decision to deploy capital away from small cars and specifically the next-generation Focus in both North and South America.

And as you know, we have announced that we are going to put the next-generation Focus for North America primarily in China, with some derivatives also to come later from Europe.

Further down from there, you can see the provision from income taxes: $209 million.

You can see that's nearly $700 million better than the prior year.

Within that, there is $421 million of good news that comes from distributions that we've taken from overseas that bring with them foreign tax credits that we've realized on the balance sheet.

And what I will say right now is that for the full year, we expect to have additional actions that we'll be taking in the same space, different types of actions in different parts of the business, but with the same effect that will generate a tax rate for the full year of about 15%.

This result was a 10.2% effective tax rate in the quarter.

Because of that, and then combined with the Company pre-tax result of $2.5 billion, which was down about 16%, we were still able to generate an improvement on net.

You can see a $2 billion; that was up $72 million from a year ago.

Adjusted EPS, I touched on.

And then further down the page, you see liquidity, which is continuing to be strong and we will talk more about that later.

Okay, let's go to the next slide, slide 8. And here what I would like to do is just briefly talk about where the profits were earned.

So on the far left, you can see the total Company adjusted pre-tax profit of $2.5 billion.

$2.2 billion of that was generated by the automotive segment.

We had very strong results in financial services: $600 million.

And then in all other, that's primarily our treasury-related activities.

Think of that as net interest expense and portfolio gains and losses.

And then there's a very small piece of that that's related to the Ford Smart Mobility LLC.

When you look below the chart, you can see that the decline in the automotive segment drove the decline in the overall business.

We had a very nice improvement in the financial services and a small decline in all other that was largely around the treasury-related activities.

Let's move on to slide 9. And here what we are going to do is start looking at the automotive segment only.

So on the far left, it's a $2.2 billion of profit that we generated in that segment.

And then you can see right beside that the North American result.

So effectively every dollar that we earned in the automotive segment was earned in North America.

When you look to the right of that, you can see the ups and downs of the other regions.

They all net to breakeven, but I would highlight within that, we did generate our ninth consecutive quarterly profit in Europe and we had a good result in Asia-Pacific.

If you look below the chart, declines in North America and Europe on a year-over-year basis is what drove the decline in the segment.

All the other regions improved.

Now let's move further into the automotive segment and focus on our key metrics.

And we will just go right across the page.

You can see the top line and the first two metrics there.

The wholesales I've touched on, down 3%.

The revenue basically flat, as I mentioned.

SAAR is not shown on the page, but the SAAR for the global industry is estimated at about 93.2 million units.

That was up 4% and that was driven by increases in the industries of Asia-Pacific, Europe, and South America.

Market share at 7.4% was down 1/10, and that was driven by declines in North America, Europe, and Middle East and Africa, with the other regions going in a positive direction.

Then you can see the margin was down and the pre-tax result was down as well.

Let's go to the next slide.

And let's look at what was behind the decline in profitability: $641 million.

Basically it was 3 factors.

It was higher commodity costs, and we talked about that in the first-quarter call.

As you can see here in the second quarter an impact of $387 million, with that mainly being steel.

But we did have increases across the other commodities.

If you take that combined with the first quarter, we are at a roughly $600 million of increase.

We are looking about $1.2 billion for the full year.

So we expect to have about the same amount of headwind in the second half on a year-over-year basis that we've seen here in the first quarter.

Second factor is exchange.

You can see $154 million.

Most of that around Europe.

That is more than explained by weakness in the pound sterling and then also weakness in Asia-Pacific related to the Chinese renminbi.

And then the third factor, just to refresh your memories.

This time a year ago, we were telling you about a gain on a sale of an entity called OEConnection that generated a profit improvement of $150 million.

Obviously, this year on a year-over-year basis it's not occurring.

So those three factors explain what happened.

I don't want to leave the page, though, without highlighting the fact that our market factors were positive, over $200 million.

And within that, when you look at the callout box on volume and mix, look at the very, very strong mix that we generated.

Most of that being mix among in terms of products, but also some very good performance in terms of series mix and options, which is the strategy that the team has been deploying for some time now to drive the mixes of each of our individual products into the higher series.

And it's proving to be quite successful.

We did generate an improvement in that pricing for the segment and the year as well.

Let's move on now to the regions.

And we will start first as always with North America, and these are the key factors.

Starting from the left, wholesales were down just a little bit, about 8,000 units, 1%.

The revenue up 3%.

That was driven by the mix.

If we look at the SAAR, the SAAR for the region at 21 million units was down 0.5 million units.

That was fully explained by a decline in the US.

The US came in at 17 million SAAR.

And again, that was down 500,000 units.

Market share was down 1/10.

That was explained by the US and that was explained by lower fleet and that was explained by cars.

If we move over to margin, you can see we had a strong margin of 9%, but that was down from last year.

And then a profit of $2.2 billion, down 19%.

If we move to the next slide and look at what was behind the $0.5 billion decline in profitability, very similar to the automotive segment.

But I would call out just the two factors.

One: the higher commodity cost.

Most of the Company's commodity cost decline occurred here.

And then of course the non-repeats of the gain on the sale of the OEConnection LLC majority stake that we had.

I do want to highlight the engineering.

You can see the engineering here is up $126 million.

That was the increase for the segment as well.

And that was largely explained by the investments that we're making in shrinking our utility lineup and also a bit of the investment in our ADs.

Again, I want to highlight the market factors.

We had favorable mix: 217 million units.

Most of that was driven by Super Duty, so that was both the mix among effect as well as a very strong derivative performance within the Super Duty.

Then you can see we did have higher pricing as well in the quarter.

Okay, let's go on to slide 14.

Here what I would like to underscore again some of the metrics we've been sharing with you that demonstrate the disciplined approach we are taking to the business here in the United States.

But I just want to note that this is the same approach we take to our business everywhere in the world, not just the US.

But we will use the US to highlight the effect of that.

So you can see around transaction prices, our transaction prices in the quarter driven by strong mix, particularly Super Duty.

F-Series Raptor is in that as well; five times what the industry saw in terms of an increase.

If you look to the right, incentive as a percent of vehicle price over the last number of months, you can see that we've been around no increase.

And in fact, two of the three months, there was a decline, which drove a small decline for the quarter and that compares with an increase for the industry.

Then on the lower left, we ended the quarter at 79 days of gross supply for the US.

That was only up 1 day for the full year.

Our take on our stock levels are that they are in very, very good shape overall.

Okay, let's move now to South America.

And here, again, third quarter in a row we are seeing improvement on a year-over-year basis.

And the key metrics and right across the board.

And I think the thing that was very encouraging here is the SAAR for the region at 4.2 million units was up 6/10.

Half of that was Brazil.

Finally we've gotten to a quarter where Brazil is up on a year-over-year basis.

Now, a lot of that was direct sales, but the other economic metrics we are looking at in terms of PMI, inflation, exchange is stabilizing.

All of that is looking more favorable, although of course all of us are watching very closely the political developments there.

Looking at wholesales, wholesales were up 12%, revenue up 18%.

We had very strong performance by the Ka.

And that was evidenced in the market share, which was up by 5/10 of a point.

And again, completely driven by the Ka.

Margin improved, and you can see the pre-tax loss reduced by $80 million.

Go to the next slide, which is slide 16, and look at what was behind that improvement in the loss.

And you can see it's entirely driven by favorable market factors, both the volume.

And you can see that a lot of it was around the pricing.

The good news for me was around the cost.

Because we are starting to see a much mitigated level of inflation and the efforts of the team have been making in terms of reducing cost is now more clearly flowing through.

And you can see here that despite the fact we still have some inflationary pressures, costs were flat in the quarter.

A little bit of bad news on exchange, but even that is much less somewhat it has been.

So feeling much, much better about the direction of the business now in South America.

And certainly the work the team is done over the last several years to really thrift out, reduce, lean the business.

I think with the top line now starting to come back, I think a lot of that is going to flow right through.

If you go to the following slide in terms of Europe.

In Europe, all the key metrics are lower.

I will explain what is behind that.

I have already talked to the wholesales.

The revenue is down largely because of the volume.

The SAAR was actually up 20.7 million across the region.

That was up 9/10.

Within that, the UK was down.

So we are now finally seeing what we had expected to see from the effect of pricing and other effects across the economy, a slowdown in the UK industry.

So that was down 2/10 of a point of SAAR.

On the other hand, Russia, similar to Brazil.

Really excited to see this market starting to come back now in terms of some of the external metrics.

The SAAR was up 2/10 as well on a year-over-year basis.

When we look at share, the share was down 2/10 of a point.

That was more than explained by Fiesta.

So that's another one of these Fiesta launch effects that I will talk about shortly.

Within that, our commercial vehicles performed very, very well.

We once again on a brand basis were the number-one-selling commercial vehicle brand.

And we grew share in the quarter in addition.

When you look at margin and pre-tax results, both of them down sharply.

And if you go to the next page, we will talk about what is behind that.

So I am on slide 18.

So we were down about $380 million.

Almost literally half of that is related across a number of these factors due to Brexit.

The biggest impact is exchange, so a much bigger effect than actually is what is shown in the singular bar there directly related to Brexit.

We also saw the industry decline, which is buried within the -- in fact, the industry, as I mentioned to you, the industry was up, but you can see the industry dollars is down.

That's the effect of the UK because it's a high-margin market.

Then we had of course an offset in terms of pricing.

So that's buried within that small improvement net pricing.

We did also see launch effects of the all-new Fiesta, and that spread across a number of these factors.

So again, for those of you that don't know, Fiesta is our biggest-selling product in Europe.

This is an all-new product.

We are just in the launch phase.

The initial reaction from the media has been extremely strong on the product.

So very excited to get this to the market and give the customers the opportunity to enjoy it.

The third factor is commodity cost.

And you can see it out in the callout box for contribution cost of about $70 million.

So those three factors fully explain the decline.

When you look at the rest of the business, the other item I would like to highlight is once again, we had the year-over-year improvement in Russia.

In terms of what we expect for the rest of the year, we expect Europe to remain profitable, although it's going to be below the levels of 2016.

And it's basically the same story we've been talking about.

We think that the profits will be down about $500 million, $600 million -- about $600 million related to Brexit.

That probably is about the decline that we will see in total for the business.

In addition, you will see some headwinds from higher commodity costs, which will offset probably in other parts of the business.

Okay, let's go to the following slide, which is slide 19.

And now we turn to the Middle East and Africa.

And just to refresh your memory, we have been talking here about declining industries, declining performance for us in the Middle East.

A lot of this due to external factors related to geopolitical issues and the lower price of well.

That is continuing, although maybe some signs of it starting to mitigate when we look at some of the external economic factors.

When you look at wholesales, down pretty sharply: 37%.

Revenue was down because of the volume.

The industry was down about 12% of the markets where we participate.

You can see that our share was down 1.2 points.

That was almost fully explained by the Middle East, where we are still working through some performance issues.

And go to the right of that, you can see the margin down.

Yet for the first time now for a while, we're starting to see the loss reduce.

And that improved from $65 million a year ago to $53 million this quarter.

When we turn to the following slide, it's a small improvement.

But to me, the thing that's interesting and exciting about this is how we got there.

When you look at the cost factors, the team continues to do a really good job in the face of a lot of difficulties on the top line to generate cost savings.

The exchange is moving in our direction as well.

That's around South Africa and euro.

If you go to the far left, though, you see the impact of volume.

And it's across all elements of the business: industry, share, stock adjustments in line with that.

So a lot of work ahead of us on that, but we still continue to expect the Middle East and Africa to improve this year compared to 2016 due to lower cost, favorable exchange, and lower volume.

And a lot of -- that in fact, all of that improvement is going to take place in the second half of the year.

So I expect to see better results on a year-over-year basis in the second half of the year than what we have seen in the first half.

When you get to the following slide on Asia-Pacific, the last of our automotive business units, a lot of positive stories here.

Wholesales up 24,000 units or 7%.

That is all explained by China.

Circling back to the first quarter, we talked about some issues that we had in China in the first quarter and we were down.

We talked about improving in the quarter in China, and the team succeeded in that regard.

They've revised their go-to-market strategy.

I think we still have more work ahead of us, frankly, but we did generate an improvement year over year in terms of sales in China in the quarter.

But more work ahead of us.

And you can see some of that here on the wholesales to support that.

Our revenue was up on our consolidated activities.

Interestingly, that includes some of the activities inside China, including Lincoln, because those are consolidated.

In terms of SAAR, the SAAR was at 43.7 million units.

That was up 2.3 million; of that, China was 1.9 million.

So the industry has recovered from the first quarter and is growing quite nicely now.

When we look at market share, we were up 1/10.

And that was driven by JMC along with Lincoln.

And China -- it was all China that drove the market share.

Margin recovered nicely to about 4%, and pre-tax results at $143 million, an improvement of $150 million from a year ago.

On the lower right of the slide -- I'll spend a second on this.

So this is as we usually report our China JV net income.

So it's equity after-tax, what we get, was $195 million.

The margin was 10.7%.

Both of those were down, so let's talk about the profit.

I will explain it through the profits.

The profits were down, that we get, about $100 million.

The majority of that is due to lower investment incentives that we receive in China.

Most of that is due to just the timing of incentives this year versus the timing of incentives last year.

For the full year, we expect incentives to be a bit lower, but much less than what we are seeing in the quarter.

So this -- you need to think about this as not something you multiply 4 times.

We also had some headwinds related to the exchange that I mentioned earlier.

Go to the following slide, and we will look at the improvement of $150 million and what was behind that.

So you can see it was driven by favorable volume.

We also had favorable mix in the quarter.

It was offset in part by the negative net pricing in China that we continue to see.

But then we had favorable cost performance.

I've talked about the exchange.

And then within the other, that is more than explained by the timing and the lower level of investment incentives in the quarter that I referenced just a bit earlier.

If we think about the full year, we expect Asia-Pacific to improve.

That's no change from prior guidance, and that will be driven by favorable volume and mix and lower cost.

We still expect on a full-year basis industry pricing to be negative.

And we also expect to see unfavorable exchange due to the renminbi flowthrough as well.

Okay, that's it for automotive.

Let's move now to Ford Credit, where we've got some really great performance to talk about.

And you can see it here on the slide.

The business grew $8 billion in terms of managed receivables, and that was driven largely by retail financing globally.

And then the pre-tax result was up 55% at $619 million.

We will talk in a second about what was behind that.

But it was pretty broad-based when you look at what drove the improvement.

If you look at some of the portfolio metrics on this particular slide: very strong.

Average placement FICO at over 740, consistent more or less where it had been.

The delinquencies remain in a very, very good place.

And the loss-to-receivables ratio, while it's up, is certainly well within our expectations for where we are at this point in the cycle.

So overall, very robust portfolio performance combined with great bottom-line performance and growth.

If you turn to the next slide on slide 24, this is what is behind it.

You can see most of the factors are green and positive.

We had favorable volume and mix; that's the growth that we talked about.

The margin was favorable.

Credit loss reserve was good.

We actually did increase the reserve for credit losses in the quarter.

We just increased it much less so than last year.

Lease residuals are flat.

I think that's a victory.

That has been one of the biggest headwinds of the business now for quite a number of quarters.

But as has been written about by many of you and others in the media, we are seeing less of a downward draft on auction values than what we had expected, and certainly that's reflected here.

We still expect our auction values or residual values to fall on an average basis by about 6%.

But if you go back to what I said in the first quarter, I said about 6%.

That was a round down to 6%.

This quarter, it is a round up to 6%.

So even within that number, we are seeing some improvement.

Then you go to the far right, you can see other.

And we had a $90-million improvement in our derivatives, and this was based on favorable interest rate movements.

If you go to the following slide and look at some of our financing trends, again, this continues I think a similar story to what we talked about in the quarter.

We are seeing leasing pull back a bit.

And you can see that we came down, as did the industry.

And to the far right on the upper part of the chart, you can see what I was talking about.

In the quarter, we had a seasonally or a sequential increase for the second quarter in a row in terms of average auction values.

And on a year-over-year basis, down only about 4.5%.

Again, that is less than what we had expected -- or more than -- less than what we had expected.

If you go to the lower left in terms of severity, that's looking very healthy.

And we talked about the LTR.

So overall, what we are seeing is strong credit quality, strong business environment, and healthy consumer credit conditions.

And that's reflected in the really great results of Ford Credit.

Let's move on now to cash flow, looking at the automotive segment.

So in the middle of the page, you can see the $1.3 billion that we generated.

The one thing I would highlight is the negative impact of changes in working capital.

That was primarily in payables.

A lot of that associated with the launch of the Fiesta in Europe, so we had much lower production in the last 45 days of the quarter related to that.

We also had some inventory holds in other parts of our business for various reasons, which have subsequently unwound.

But at the end of the quarter, that had an impact.

The only other things I would highlight is that we are still on track to our guidance for capital spending, pension contributions, and also full-year shareholder distributions.

Moving on to slide 27, the balance sheet metrics.

The only thing I would comment here -- we can take questions later -- is everything is in great shape.

The balance sheet remains strong.

Ford Credit, well capitalized.

A lot of -- a good liquidity there.

In terms of pensions, we still expect by the time we get to the end of the year -- it's not reflected here.

But based on what we are seeing in terms of the key metrics that drive our pension funding obligation status, we expect it to improve from where it had been at the end of 2016.

Moving on to more of an outlook discussion, looking at GDP and industry planning assumptions.

GDP is unchanged in the second column from what we guided previously.

But on the right-hand side, industry is up a bit on a global basis.

We have taken the US down a couple hundred thousand units from prior guidance of 17.5 million.

That's really driven primarily by lower fleet sales.

Brazil up 1/10, Europe up a couple tenths, and China down a couple of tenths.

So some small movements up or down, but probably the one that's most noteworthy to you is the US.

A little bit softer than what we had expected, but that's driven by fleet sales.

Now let's spend a little bit of time on guidance because we are making a couple of changes here.

So as you guys all know that we have historically provided an adjusted pre-tax profit outlook for the Company.

We have then separately provided a tax rate.

So we are going to be moving from this point forward to a methodology which is used by others and is understood very well by you and the Street to use an adjusted EPS.

So you see that in the first column.

So our guidance for the year is $1.65 to $1.85.

To the right of that, importantly, is the tax rate that I referred to earlier.

Now to help you understand how to think about the guidance, if you take the last quarter guidance and you put it on the same basis, it would be $1.58.

That was the about $9 billion, 30% tax rate.

So clearly the range is higher, but it is driven by the tax rate.

So to help you further, if you were to take the top end of that range, that's effectively about the $9 billion.

It's a little bit less in an absolute sense than $9 billion, but that's effectively about the $9 billion.

And then beneath that, think about that as our view of potential risks as we think about market factors or cost performance over the balance of the year.

So it's not necessarily something that we see happening, but as we look at history from this point forward and we think about the environment that we are in, we are providing for various outcomes on both market factors and cost performance that takes us to the lower end of the range.

The other thing I would highlight is the tax rate.

And then the other thing that may be helpful to you, as we think about the second half of the year, we do expect the second half of the year to be lower than the first half.

That's based on seasonal factors, historical experience, but this year also related to the launch of the Expedition and the Navigator.

Those will be going through effectively launch the entire quarter.

Don't expect to see any wholesales until the beginning of the fourth quarter.

And then in terms of 2018, we've provided a view on 2018 ever since Investor Day back in September.

We have continued to share that with you at other events.

We are not doing that today because of the reassessment that Jim has us working on, and we will share more on the business later this year, as he said earlier.

And then on slide 30, this is our full-year guidance puts and takes.

It has been updated and reflects our latest thinking.

So if you have any questions on that, we can take that later.

Then finally on slide 31, our view of the key takeaways.

So a solid quarter; certainly a lot of excitement here as we progress our 100-day review.

The second one is around all the metrics we've shared.

Ford Credit: strong results.

The balance sheet in great shape.

Continuing to run the business in a very healthy way.

And of course, the guidance update that we just talked about.

So with that, Ted, I think we are ready to move into Q&A.

So with that, we'd like to turn it over to questions for the team here.

(Operator Instructions) Ryan Brinkman, JPMorgan.

Great, thanks for taking my question.

My first question is really on tax.

You touched on the drivers of the significant reduction in tax rate this year.

Firstly, is there anything you can say more about the change from 30% to 15%, which is pretty big?

And secondly, does the lower tax rate this year have the potential to impact future years?

And thirdly, is the change more to book taxes or will there also be an improvement to cash taxes?

And if so, how material could that benefit be?

Yes, thanks, Ryan.

It's a good question.

So in terms of tax, think about the effect that we are talking about as being 2017.

I would think when we get into 2018, we will move back to a more normal tax rate of around 30%.

Obviously we will update you on that when we provide the guidance for next year, but I would see that is something that we are doing this year.

So the other way to think about what's happening -- the tax team, who, as I said, has just done a great job, they had line of sight to the actions that we are talking about affecting 2017 that we would be taking in some of the years ahead of us.

But frankly, in anticipation of potential corporate tax reform -- and again, no idea when that happens.

But also not knowing what it is, the team recommended that we take these actions that we had planned to do perhaps later in our planning period and pull them into this year, which is what we are doing.

And I'm not going to get into specifics of the one action that we took in the quarter.

As I said, there will be others in the second half of the year.

But effectively they are bringing distributions back to the US.

Those distributions are bringing with them foreign tax credits, which we're then recognizing on the balance sheet.

So in terms of the impact on cash taxes, this is a book tax effect.

Would not expect it to have any near-term impact on cash taxes, but certainly at some point in the future it will.

So this is real in terms of both profit and cash, but the cash impact will be later.

Okay, thank you.

Then just lastly from me.

I'd like to ask on Ford Credit.

Obviously very strong in the quarter.

When you first guided to $1.5 billion for full year 2017 in November last year, in the absence [of anything] better, I just assumed $750 million in the first half, $750 million in the back half.

You have done $1.1 billion to date.

Can you say anything about the cadence of Ford Credit profits this year in order to help us maybe gauge how much better than $1.5 billion could the division be tracking for the full year?

And then just sticking with Ford Credit, the lease residuals, those tracking better.

Does that do anything to change your previously communicated outlook that prices would continue to fall through 2019?

Or some of the actions you are doing on rental cars or something else maybe helping you rethink that?

Yes, so in terms of cadence, we are not providing a specific number in terms of profit for the year.

It will be better.

Second half will be lower than the first half, so I certainly wouldn't take $1.1 billion times 2. That is not happening, but it will be better than the $1.5 billion.

And to the question that you had around how are we thinking about -- and let's not talk about auction values, but more residual values as a percent of a sales price.

Because we actually expect over time that those will rise and we want to focus on the percentage, if you will, residual values as a percent of that.

But we are still expecting, as I said, that's about 6% year over year, which would suggest a pretty sharper decline later this year in order to land in that spot.

So we'll have to wait and see if that happens.

Frankly, the team just gave me a report yesterday, you know, the latest weekly report, and things are still holding up well.

So we haven't seen the signs yet of anything happening.

We have certainly heard that -- we can expect to see some declines coming from the next-day LG update.

So we will have to work our way through that, but that is what we are kind of providing for in that guidance.

In terms of looking at 2018 and 2019, nothing has changed in terms of our expectations.

We are still expecting that residual values as a percent of vehicle price will be declining.

And we are building that into all of the new business that we are writing.

Very helpful.

Thank you.

Brian Johnson, Barclays.

Yes, just want to get underneath the puts and takes and revisions to the outlook.

It looks like with the tax credit benefit you will be taking that it appears that the midpoint of pre-tax seems to be, as you mentioned, coming down from the roughly $9 billion you talked about.

Can you A, confirm that?

And B, with the regions performing a little bit better this quarter, where is that up?

And with certainly Ford Credit now poised to contribute more, where do you sense an operating weakness is likely to come from?

Yes, so first of all, you shouldn't assume that our own point of view in terms of where the business is is at the midpoint.

But you are right.

I mean, you can calculate and figure out what the midpoint is and it would be further below the prior guidance of $9 billion than just a bit below, which is where the top end is.

But please don't assume that is necessarily where we are in terms of our own single-point estimate.

But to the point you are raising, we are looking at the business both in terms of market factors and cost performance.

We are trying to provide some recognition of the fact that we don't have control over everything.

And so there's two I'd highlight.

One is the commodity cost, which, as I said, will be up based on what we think right now about $1.2 billion on a year-over-year basis.

By the way, they were favorable last year by $900 million, so you can see how they can swing.

The exchange is another factor that obviously will be what it is going to be.

And then frankly, the other one is around warranty expense and the potential for recalls.

We don't forecast recalls.

In fact, we don't know -- I personally don't know about recalls or others until the team has done the work and the data supports an action.

And then we move and we move very, very quickly.

But as you are very well aware, we have seen some recalls that have had material financial impact over the last number of quarters.

And so this provides us a little bit of space for that as well.

But I would add, Brian, that a couple of things since the first-quarter guidance that has taken place -- actually three things -- very specifically that we've accommodated in this range.

One is higher incentives across all regions of the world.

Not really large in any one region, but when you add them up, it's a factor.

The second is higher warranty expense already in North America.

And that's related to coverages.

So not recalls, but coverages.

Normal 36 months, 36,000 miles, that sort of thing.

Also something [sum up] related to our extended warranty that we've provided on some of our components.

Then the last, which is an offset, which is what you raised, is a favorable view of what Ford Credit is going to bring to the business.

So those three together, you know, in an absolute sense, would take you a bit lower than $9 billion, but contained within the upper end of the guidance.

The rest of it is really a risk assessment.

And now a question for Jim.

I know you are still in the midst of this 100-day fitness assessment.

But one thing that jumps out at us is the gap in North American margins between Ford and GM, which now running around 300 basis points.

What's your observations of that?

Ford is still -- historically has traded at a premium to GM, partly thinking that the brand equity was stronger, the brands were better positioned.

But to the extent that is, it's certainly not showing up in the margins in North America.

So wondering if you have some points of view on that, and how just preliminary that might be addressed at the end of the 100 days?

Well, I think, Brian, it fits the early comments I made about fitness.

That notion means you are scanning for competitive improvements, people coming at you that you don't expect.

As we start talking about the future, we will be talking about competitors that are outside our industry.

So that kind of thing gets my attention.

I can understand it in ways with the SUV segment being so strong and our franchise being really strong in that same area.

And this kind of perspective that you are bringing up is something that we talk about.

So I can just confirm it's the kind of thing that doesn't go over the top of our head.

It's not something at all that I'm worried about addressing.

And I also have great optimism that when we talk to you about how we are going to address that, there is big opportunity there.

Just for all the listeners, and in regard here, we changed the organization on May 22.

So there were 19 direct reports in the last administration.

I have 8. And I'm an executive team that the speed in which they can address something like what you just talked about is a big improvement.

You wouldn't know that based on the data that you are looking at right now, but that's the promise that I hope to prove to you.

Hey, Brian, it's Bob.

The only thing that I would add -- and again, it's not to denigrate Jim's performance because I think what they are doing is quite impressive, I think.

But we do have to -- and you guys recognize this as well and they do as well.

There has been a lot of stock build.

So I think when you want to compare margins and that type of thing, you really have got to neutralize that effect on both sides.

And if you look at our business in the quarter, we actually had a stock decline in the quarter in the US.

In North America, we had a very small stock -- favorable stock change.

That was not the US, which is where the high margins are.

So that's the only caveat I would put is on an apples-to-apples basis, probably the gap isn't quite as large as what you said.

Okay.

And just final question around capital.

Are you open to bold moves around capital consumption ranging, whether it's from investing in product lines all the way to spinning out or joint venturing major parts of the business that consumes big chunks of cash?

Yes, I mean, you called it bold.

I think it's just part of the fitness cadence and discipline that I'm really trying to stress.

This is one of the most important things the leadership can do is making choices in a way that really preserves capital, gets the kind of returns that you would expect.

So of course, all of that is in the air up for grabs.

Okay, thanks.

Rod Lache, Deutsche Bank.

Jim, I'd like to just ask a couple more questions about the things that you are assessing in the first 100 days.

First of all, just on this innovation question, what do you think can change to accelerate the pace of innovation and the clock speed at a company like Ford?

And to make the Company more competitive in terms of speed and risk-taking with some of the tech companies that you've had quite a bit of exposure to?

Rod, this is the area that you probably have the most confidence.

I'm humble about what I'm about to say to you because I have to prove it here.

But surprisingly, in a company like Ford, all the talent is here, all the capability is here.

So I got to confirm that with you.

It's -- what happened in business history, there was a little bit of a shift in terms of the way that you understand the nature of the way people use products.

You marry that with really rigorous development processes and you have success.

And so the inference is that that front-end part, the way we understand use, think about that as building more value in products.

But there's also a reductive opportunity.

There is stuff that people don't care about in vehicles that we shouldn't have there.

And in the course of doing that, I want to confirm that this is one of the pleasant surprises I've had when I got closer to Ford from just being on the Board is they have mastery in key systems like the financial systems as an example.

They have mastery in the ability to engineer a product to market.

The quality metrics that you are hearing about, and there is an ongoing report of quality.

There's definitely change there.

So I want to leverage what got better over the last, say, seven or eight years in those areas and marry them with some of the innovation techniques that I won't go on about today -- I want to share all that -- that I understand.

And the way you walk away from that discussion is you realize that people all of a sudden are saying I like the Ford products better.

And they like them a lot now.

They are really popular.

The Mustang and F-150.

But I see opportunity in every area where we can be better.

So just to understand that a little bit better, is the management team, and you specifically, dissatisfied with what you see at this point in terms of the clock speed or the changes that you are seeing from an innovation perspective?

Well, this is the kind of question that could come up a few times a day.

So let me just step back and tell you.

One of the first things we did, going from 19 to 8, is we addressed what I call the point of view ownership.

Think of that as when you have a lot of things that are triangulating for attention and clarity, these are big decisions.

The simple notion that somebody owns that point of view is an empowering and freeing stance.

So we went through exercises together as a team to clear that up and we are already seeing the effect.

So we are speeding up decision-making.

We are speeding up the way that choices are clarified.

A neat consequence from that -- that was a word that Alan used to use, wasn't it?

Neat.

Neat and cool.

Neat and cool.

So a neat consequence of that is we've been able to free up time on the executives' calendars.

I just did the math last night.

It's about 30 minutes a day that when taken off of their calendars that were corporate requirements.

So when you work the hours these folks do and how hard they are working all over the world, that's found money.

And then that translates in ways -- the body language is now translating down to the teams that work for these folks.

So again, if you were following me around, we got some early momentum here.

It's too early to report in this quarterly call to you.

But you asked the question: how do I see that infiltrating?

And that is what you pick up in startup companies, in tech companies.

They haven't grown to the size of Ford, so they didn't have the kind of hierarchy that I inherited.

So they have some advantages in that regard that we don't have to cede that to anybody else.

We can bring those in and that's what we have begun to do.

Great, thank you.

And just lastly, a question on how you are thinking about capital allocation and the portfolio of businesses and products.

One of the biggest paybacks that we've seen over time in the industry is actually when the industry exits segments that have been -- the companies have been involved with maybe just -- maybe it's based on tradition more than anything else.

But they are obviously challenging segments.

And you could think about regions that have been challenging for many reasons -- many years and may be so for a long time.

Is this reassessment that you are looking at also that broad that you are questioning regions or segments and markets that Ford is currently in?

Yes, and I don't want to dismiss your question with this response.

You have got to believe the capability of the folks running the Company, including myself, don't fall asleep on that question.

There is other forces that tend to put that in a vice and hold it.

That's what you are accurate about.

You have to break that hold to say what is causing us to hang in there.

And every time if you look back with me that we hung in a market, it was because we actually took actions to improve and maybe it didn't work.

So I think the new reality that I can confirm to you is that we really have to ask ourselves what do we have to believe to get to the kind of returns that we expect and you expect.

And if we can't answer that, then we can't be there.

That's making the choice when you hear us talk about playing to win and where to play.

That is what that code means is that you are clarifying where you are going to put capital.

You've seen decisions from us already in the short 60-plus days that the new team has come together.

And the decision to put the focus in China is an example of that.

We saved a bunch of money doing that, and there is other things like that that will be forthcoming.

Great.

Thank you.

John Murphy, Bank of America.

Maybe just a first question here, Bob, on the guidance.

And just doing some real dumb guy's math here, it looks like at the high end of the range, which you are relatively more endorsing than the low end, you do about $4 billion in pre-tax in the second half of the year roughly.

And your guidance range, though, does kind of imply a pre-tax range of almost $1 billion.

So that $1 billion is against that $4 billion in the second half of the year.

I'm just curious.

You kind of highlighted these three factors.

But is there something else going on?

Or is it just a big recall, maybe around Takata, that you think might create incremental expense in the second half of the year?

Because it's just a big relative range to that remainder of the year.

Yes, I agree with you.

I think it is in part around some of the -- if I go back and look at the last year and a half in particular, we've had a number of material recalls that, again, for the reasons I mentioned, don't know about them and then they happen.

And not in the guidance because didn't know about them.

So what we are trying to protect for is the possibility of something like that.

Again, nothing that obviously has been acted upon because otherwise by definition we would have done it.

Takata is actually not relevant in that conversation I think, at least from our point of view, because we actually have gone back to the government and indicated that there is no facts or circumstances that would support us in doing something.

So we are having that conversation with them.

But it's really more around risk assessment of that, if something like that happening.

Also just looking at our historical experience in terms of market factors, what could happen in terms of market factors from this point forward.

Commodity is out there.

They've started to actually get a little bit better from the first quarter.

But that's a concern.

Exchange and other.

So it's really more around risk assessment.

That's the way I would think about it and not that there is something going on, there's something that we have in mind.

I think it is fair to say that at the moment, we are more towards the upper part of that range.

But we are just trying to protect for the potentiality of something of along the lines that you talked about occurring.

That's it.

Okay.

That's very helpful.

What I would expect when we get to the third quarter -- obviously the range will be a lot less and we will narrow it down and have a better feel for ultimately where we are coming out, for obvious reasons.

But this is where we are today.

Okay, that's very helpful.

And then just a second question on your mix being positive $310 million in the quarter.

I think you highlighted it goes far beyond just segment shift, but there's also a shift in vehicle lines as you are upselling the consumer.

I'm just curious how much of that do you think is sticky over time?

How much of that is very Ford-specific?

And are you getting into a higher set of customers that are willing to pay you mass-market luxury premium prices that will stick around for a while?

Well, this is something that we've had a lot of success in in North America.

It is a big part of the story here, both around product mix but also the derivative mix.

Stephen Odell and then Jim Farley in Europe made that a central part of the transformation plan there, and that's been extremely successful.

I mean, Jim is still pushing the team there.

But everywhere around the world for the dollars to be mined from that approach.

So I wouldn't say -- and I should mention also China.

We have also picked up over time a lot of good news there from bringing in the Edge, the Taurus.

We are taking the same derivative strategy in China, too.

So it's not just a single market that we are taking that approach because we know it works, it's successful, and customers actually love those types of products.

What I would say, though, just to condition you, when we look at the first half, we've picked up quite a bit of good news on mix on a year-over-year basis, about $700 million.

I don't see that happening in the second half.

In the second half, it is probably a bit flat to even maybe slightly negative.

And that's because on some of the big contributors of the more recent improvements, and particularly Super Duty, we start lapping ourselves in terms of when the product came in and the derivatives and the high derivatives at the beginning of the launch, etc.

I think Fiesta will give us an opportunity in Europe.

So I think that's one that we should look out for because I would expect that to follow.

But I do believe if you take it out longer than just the half, certainly Jim's view is that there's gold to be mined in them there hills and he's going to keep pushing us.

I would add, Bob, that coming in new, when I was on the Board, we got to tour that plant that was building the new F-150 with the aluminum underpinnings.

And when you drive that vehicle and you know its handling characteristics.

And I made reference to its contribution in this last year to MPG improvement.

It is the significant factor that's improved our goal, our march, towards a cycle plan more than any other vehicle in anybody's inventory.

But where I want to go is when I drove that vehicle for the first time and the kind of feeling I had, I believe the word spreads in this kind of industry.

And here we have a product that's now starting to be understood and very popular.

Then as I mentioned in my comments, the refresh is coming.

And as Bob is conditioning you, we know we've sold a lot of these vehicles.

But we are not -- we believe there is still a lot to be had and that's what's helping that transaction price go up.

I apologize.

Maybe just to follow-up on that.

I mean, the Expedition and Navigator launching next year.

I mean, if you make up some ground on GM and Ford, that might be a $1 billion to $2 billion opportunity.

Is that also -- I mean, off the back of the F-150 platform and similarly fuel efficient, is there a real big opportunity here when the Expedition and Navigator launch next year?

Or actually really hit dealerships next year?

We definitely see the Expedition and Navigator as an opportunity, both in terms of volume and certainly in terms of price -- transaction price, mix, and so forth.

That's a really big opportunity.

That's why I wanted to make sure that you understood.

Even the [all of them] was quite profitable, right.

So I wanted to make sure that when I was talking about the third quarter, you understood we are basically not wholesaling hardly any of those, old or new, in the quarter.

And then we will start filling the pipeline in the fourth quarter, and then of course it really will take off and take off in 2018.

And this is why I talk about the handling of those vehicles in my early comments.

You are going to have to drive one to feel what I'm talking about.

But there's a definite marked improvement.

I think competitively, it's going to be really interesting how they react to that.

We're looking forward to it.

Thank you very much.

David Tamberrino, Goldman Sachs.

Good morning and thank you for taking our questions.

The first one, just stick with the US market.

I think you brought down your assumptions from around a 17.8 million to 17.5 million total SAAR, so about 17.2 million light.

Wondering how you feel about the market going forward from 2017 into 2018 and 2019.

Are we in a plateau mode in the 17 million?

Should it grind lower into the 16 million?

That's kind of point one.

And then on the back of that, Jim, as you think about North America cycle peaking and coming down, what type of levers do you expect to pull to maintain profitability?

Are you going to be quick to pull out production?

Is it incentives?

Do you drive back more sales to the daily rental channel?

How are you thinking about navigating what looks like a cycle peak and decline from there last year, at least in North America?

Okay, Dave, let me take those and see if then Jim would like to comment.

So in terms of industry, we already -- we don't have it in this deck, but we had indicated in our prior guidance -- and I think it was 17.7 million the prior guidance -- that we would see a further decline in 2018.

So I think the way to think about it -- I know we are all kind of struggling with this to figure it out.

Because I see what you guys are forecasting, too.

Our view is that however you want to describe it -- an eroding plateau, I've seen that -- however you want to characterize it: very strong sales.

We don't see anything in terms of the economy, the health of the consumer, housing, oil -- the oil production is back up.

And that's had an impact on trucks for example -- that would suggest that over the next, let's say, two years that there's any kind of significant collapse or dramatic change we do think it's going to decline.

We think it will be a soft gradual decline.

What we are seeing this year seems to be more on the retail side probably -- or fleet side related what's happening with auction values.

A lot of that with rental.

But that seems to be the effect this year.

We will have to just wait and see when we go into the next two years or so what does happen.

But that's our view.

And what we will do is, as we always do, we update this monthly and we will share it with you kind of a real-time as we have the chance to get together.

But that's our view: it's declining, but it's still going to be very strong.

In North America, Bob, the belief is, David, that all the work we are doing for new products, these are going to be forthcoming.

So there's an improvement in the mix of products because of what we are inventing.

We see opportunities, as I mentioned a minute ago, in the F-Series with the refresh.

You've already acknowledged the Expedition and the Navigator.

Transit as well -- this is a product that has a very high share and has a big advantage in terms of people love what it can do.

So we are investing there as well.

So think of the North American product mix isn't sitting still.

The other thing that I would add in terms of things that we would think about as the industry softens a bit.

To me, there is no better time than to follow the principles of a disciplined approach to the business.

You have got to be even more disciplined.

You have got to be anticipating a bit more where the industry is going, where you see changes.

You got to act superfast.

And if anything, what -- and I know this is Jim Farley's mindset and Joe as well.

The other thing that we should do -- you don't wait for it to happen.

You've got to start leaning yourself down in the areas that you know will be affected by the downturn on the way towards what will be a downturn.

So, for example, stocks.

We do have targets on stocks.

But can we bring a little bit lower than the target stocks?

And can we like glide our way down a bit so that when the sharper downturn occurs that we are in better shape once it starts.

In earlier calls, Bob, I remember you were establishing that we were managing the days in inventory.

Let's be candid -- the world thought oh, there's something amiss here.

But as this quarter now in the industry plays out, we are real happy with our position right now in inventories.

We were managing that very well.

Understood.

I think that was clear.

And on the go-forward as we think about new Company kind of three pillars of autos that's changing -- mobility, electric vehicles, autonomous vehicles -- should we be expecting or naturally do we expect spend to continue to increase from here on all three of those?

I mean, is that the way that we or you are going to be approaching the business and somewhat expediting some of the things that were going on at Ford Smart Mobility at a total Company level.

And getting further into that electric vehicle platforms that were going to come out by 2020, further into the autonomous vehicle development, further into mobility?

When you are asking the question, Joe, are you thinking about incremental?

Or are you asking me the question can we get our total fitness to absorb?

Or excuse me, David.

Sorry.

Well, it's a mixture of both, right.

Because the spend seems like it should increase to bring forward the clock speed, if you will, or pull forward some of this.

But then again, against a backdrop of a declining North America market, how should we think about overall spend?

Yes, so I'm going to let Bob tell you the way we are planning that in the current numbers.

But I will just give you the way my body language is.

I want to question that you have to sit here and hear us say that the core business as we knew it, all the spending there is as fit as it needed to be.

And everything new has to be incremental.

I haven't bought that yet.

The only thing I would add, David, is that this year we expect in terms of CapEx, and we use that as the surrogate for what do you spend because there is engineering and other things.

But CapEx of about $7 billion.

When you look at our 10-Q, which will come out later today, we had guided over the next 5 years previously to $8 billion to $9 billion.

I think we are going to take that down to about $8 billion.

So I at the moment would see us moving up to that level after this year, not necessarily all next year.

But we will have to wait and see where that pans out.

But certainly that's about the level that we see the business running in terms of CapEx.

And one of the things that's interesting in that regard -- a lot of the things that we will do in some of the mobility spaces, digital services, they are not capital intensive.

We have to remember that.

Also, if you think about the actions that we took around the Focus for North America, we freed up $1 billion.

So part of this is finding smarter ways, which is what Jim was talking on, to deploy and allocate our capital.

Not just spend more.

Okay.

And finally, just in China, can you just talk to what you are seeing from a price-down perspective?

Has that accelerated since the first-quarter update?

And exiting the second quarter, how do you feel your inventories are, given a slower sales pace that we saw, at least in the second quarter?

Yes, the overall industry pricing accelerated in the second quarter, which I think we had expected.

I think we are still on track towards -- I want to say 5% for the full year.

And that seems to be pretty much in line with what we are experiencing ourselves.

So I think that seems to be the path that we are on.

We took a lot of actions in the second quarter to get our stocks in shape because of the issues, the sales performance issues, and also the lower industry that we talked about in the first quarter of the year.

So I think we are in pretty good shape right now.

And then going back to the earlier question that we had that you gave us around what do you do.

Jim is being really fast with Joe.

As soon as we see a sales miss or anything in the external environment that suggests that we need to take out stuff, we are doing it ASAP.

Understood.

Thank you for the time.

Joseph Spak, RBC.

Thanks for the time.

A question for Jim.

So one of the things you've mentioned is looking at capital.

It's come up a couple of times, and making sure that's used efficiently.

So along those lines, and as the industry migrates more towards xEV technology -- well, first, do you have a sense of how much of your current PP&E is related to internal combustion engines?

And I guess more importantly, what percent of that equipment do you think is flexible enough to be repurposed?

And as you make new capital decisions, are those purchases being made with a certain level of flexibility in mind?

I would say yes, yes, yes.

I don't know that I'm going to tell you some of the internal strategic things about that.

But remember, Ford's ability to produce an ICE engine and the kind of -- the engineering to bring that to the level of quality that I think is world-class is the same kind of talent that will allow us to bring these new powertrains.

And they themselves can carry the day I believe in the future with robust designs and better business models and better digital services.

There is more to the quest for profit than just what's it cost us to build the vehicle.

As we can stare at other competitors that are doing this.

And I'm not worried about the embedded cost.

Let me just state this for the record: I'm not worried about the sunk cost or the fixed cost we have in the old historical technologies frustrating us about thinking of the future.

It really doesn't matter.

We are going to do what we got to do to make the Company really successful.

And meet the kind of requirements that we have to meet and win the way you hear me talking about.

And I don't think about how many factories I have building gasoline engines.

Now, I know that if I flip that, it's you can ask -- and you are asking a really smart question, which is can you leverage capabilities at Ford?

And absolutely we can.

That's something that you will expect.

And as you go, well, what's an example right now?

Just think of the early investment we made in Chariot.

That a Transit platform that we know a lot about as we build the ride hailing and ridesharing service ideas.

And we are learning about users in those kinds of experiences that can backward-integrate into the way people just experience the Transit when they are not sharing it.

So there's lots of synergies in the future back to what we've already understood about our business.

Okay, thanks.

Look forward to hearing more about those opportunities.

Itay Michaeli, Citi.

Thanks, good morning.

Just maybe shifting gears to South America.

It looked like you've narrowed your losses a bit year to date, on plan with your guidance.

But I was hoping you could give us a little bit of a better view of how you are thinking about the second half in South America.

Where your breakeven levels there are.

And what the path there is to get back to profitability for Ford in that region.

Thanks, good morning.

The path is really going to be around what I touched on when we were going through the section, which is a recovery of the industry, firstly.

And the consumers.

So when we look at the second half of the year, we expect to see substantially better results on a year-over-year basis than what we saw in the first half of the year.

And much of that is going to be driven on the back of the industry, a little bit of mix, but also some pricing without too much impact of exchange based on how we see the market right now.

And cost being very, very well controlled with some inflation getting through, but very well controlled.

As we move forward, I think -- and as momentum continues in the economic recovery, again the leverage effect I think is going to really flow through quite quickly.

And then what the team also is working on, of course, is product.

We need to make sure that we've got a very robust and exciting product portfolio.

And in fact later this year, we are going to be launching the EcoSport, the midcycle change on that, which has been a very successful product there.

And we will also have coming a midcycle change on the Ka, which is in the highest volume segment in the region.

So those are the things.

But I think we are going to have to build on the product portfolio and bring more customers into the showrooms from that point of view.

And the team is working on that.

That's very helpful.

And then maybe a follow-up for Jim.

As you go through your 100-day review, can you talk a little bit more about the revenue opportunities that you are looking at?

And also maybe how Ford's investments in Big Data play into some of the opportunities, both within revenue and fitness that you described on slide 3.

Well, you led me to that answer in a knowledgeable way that our GDIA helps us.

This is a important thing that was invested in that's really been worth its value.

So it helps us understand demand in a lot more granular way.

It helps us understand pricing.

It's going to help us understand pricing even better.

So right now, we are looking, as I mentioned in my comments, the relationship between mix and pricing is where the revenue opportunities are.

That's probably as much as I want to share about it, because it's competitive.

But there is opportunity there.

And maybe I can just give you an example of what Jim was talking about.

For example, GDIA for quite some time -- we are probably most progressed in the US in terms of their ability to help guide us in terms of how we play volume versus mix versus incentives versus types of incentives.

The effectiveness of marketing, the fixed marketing, the advertising sales promotion.

So that we've got tremendously strong data and starting to move to the point where we can actually understand individual customers, not just the broader market, but individual customers.

But one of the good examples, and this plays a bit to what we've seen unfold across the industry but perhaps more so at Ford, which is around the cars.

As we have looked at the data, and we've looked at our own data and we've looked at the competitors', there's just not much elasticity on the cars.

So we can put more variable on it.

It's not going to do anything other than we spend more variable.

So that has enabled us to pull back a bit.

And in fact, I think in the second quarter, we pulled back on our incentives in an absolute sense, much less than an increase for the industry on cars, if I remember correctly.

And we have been able to take those funds and we have been able to allocate them to other segments and specific vehicle lines combined with an aligned advertising sales promotion approach.

But also Tier 2 marketing by the dealers and Tier 3 to be very aligned and very powerful around where we know the most elasticity is.

And then really drive hard.

So that I think has saved us incentives and it's probably given us some of the mix effect that we've had.

It's also I think given us a clearer view about the real underlying strength of the car business in general, but ours specifically.

That's very helpful.

Thanks so much for all that detail.

We will take one more analyst and then we will switch to the news media.

(Operator Instructions) James Albertine, Consumer Edge Research.

Hi, thanks for taking my question.

This is Derek Glynn on for Jamie.

Jim, in your view, can the success of emerging opportunities be complementary to the success of the core business or is this inversely related?

And similarly, recognizing it's still early days since the investment in Argo AI, what are your views on the strategic vision for that entity and the role it could play going forward?

Thanks.

The important secret in this, Derek, is that humans are in both of those models.

People use the products in the historic understanding of our industry and that's our target obviously in the future.

Even though, and I'm being a little facetious, but even though there is robots in the future, as you are talking about with Argo AI.

So robots are only going to be as effective as how they serve the humans.

This is a distinct position that I'm taking and I think is going to be a difference in the way Ford thinks about it.

So Bill Ford and I had a really intimate discussion about this when I started and the Board then later, which is the history of the Company is evolving itself over this long-lived life.

And not thinking about that it's in a regressive way unable to leave the last phase to the new.

I mean, we just got to do what we have to do to win and be successful in the future.

What tends to happen -- and you are hearing me preach here a little bit -- is we over-romanticize that future.

We overdramatize.

Bill Gates used to say you overestimate the arrival and you underestimate the impact of these technologies.

So we have to get ready for how disruptive they are.

But they probably aren't as soon as everybody is writing about them.

We're ready, though.

We are going to be ready.

And so Argo was an investment in that area.

John Casesa, our Head of Strategy, helped put this together.

And it was a really innovative idea, because to get that kind of talent inside Ford, the configuration of the entity in Pittsburgh allows us to have them be us and them be them.

They can be both together.

What probably wasn't known as deeply as you can read about today is that deep learning is a phase of artificial intelligence that's recent.

It's only three years really in its awareness.

And deep learning is kind of the special pixie dust.

The way these things are going to really perform, the ability to do that, is what we are targeting with Argo AI, to bring that capability into Ford.

There's very few firms in the world creating what we are talking about that have this capability.

So that promise is something that we have to come and show you.

But it's situating us really well to be ahead in that game eventually.

We are not there yet.

I wouldn't say we are number one, but we are at the top of the people working on this technology.

As we go into the media discussions, someone is going to ask me to calibrate that.

But you got to trust the way machine learning has evolved.

There are differences; there is elite players in it and then others that are kind of good at it.

We are going to be at an elite level with this capability.

Okay, thanks very much.

That was very helpful.

Dee-Ann Durbin, The Associated Press.

Thank you for taking the call.

Bob, a quick one.

What's the update on the buyout offers?

Are you getting what you need?

And if you don't get what you need, do you then consider layoffs?

And Jim, another quick one.

Just your take on Ford's stock price and what it's going to take to move the needle to get past the cycle fears that investors just can't seem to get over?

Thanks.

Okay, thanks, Dee-Ann.

So on the first one, based on the latest that I've seen, it's progressing well.

I think they have until sometime later this month -- someone's saying today -- to self-select.

So we will have to see what the final numbers are.

But I have been told it's going well.

Just for the analysts on the call, we will reflect any separation cost associated with that in the third quarter as a special item.

Don't know what that number is, but we will report it in the third quarter.

And regarding the share price, there is no CEO in the world that doesn't understand that that currency is not only how they are compensated, their teams are compensated, but is a scorecard for how well things are going.

But the way I think about that, it's a consequence.

It's not a leading indicator.

So this share price today does not reflect the team's activities that I believe we are going to embrace and deliver to you.

So that has to happen with dispatch.

And more importantly, what Bob and I talk about, Bill and I talk about, is a reliability where you expect things from us and that we build trust in a way we create value.

I've been in a business, been around CEOs that have that kind of command.

And so I long for that.

And that's my pitch, that the share price over time is going to reflect what we are able to get done.

And we plan on getting a lot done.

Thank you.

Brent Snavely, Detroit Free Press.

Hi, thanks for taking the question here.

I am wondering as the industry goes through this very big trend of car sales declining as SUV crossover and pick-up sales increase, if your review of capital allocation -- I mean, if you are looking at car lines.

And if there are cars in the US get risk of being eliminated as you add SUV models?

Well, I'm looking to Bob.

Because as I came into the job, I knew we were in the middle of that.

So I want to confirm we do.

That is one of the leadership responsibilities and there has been some decisions that have been in the air, so to speak.

But I'm going to let you [take that one].

Yes, I think what you are talking about is consumers are moving away from passenger cars into utilities and trucks.

They have been doing that for quite a long time.

They have been doing it not just here, but in all the major markets of the world.

And there's no sign that trend is going to continue.

So we will be responding to what the customers want.

That's around of -- the guidance we have already provided around investing more in utilities and investing more in trucks.

But in some markets, and for some reasons, cars will continue to be important.

We are just going to be very thoughtful about the amount of investment that we make there and make sure that it gives us an appropriate return.

So I think two examples that demonstrate that is the decision around the Focus.

So we will still provide a Focus to customers in North America, but we are going to do that in a way that is very capital efficient.

It saved us $1 billion versus what we had expected.

We will do so in a way that gives us a better return than what we would have done if we had just continued on the path that we had been on.

And we are going to look at all the individual vehicle lines with a very critical lens as we go forward because we've got to make a return on that investment.

Another example is in Europe B-Max.

The B-Max is a small multi-utility vehicle in a segment that's declining.

And we are going to be discontinuing that.

That is going to be replaced by the EcoSport to be built in the Craiova plant, which is going to be much higher volume, and it's exactly what consumers want.

It's a very big growing segment.

So we are going to do that type of activity right across the portfolio everywhere in the world in response to what consumers want.

And our desire to get an appropriate return.

And Brent, to add, you know the utility mix in the Company is high.

That continues.

And we are adding, of course, the Ranger and the Bronco coming.

There is other ideas that are coming in that category.

And for those who wonder, are you worried about over time that as fuel, let's say, starts to shift again or there's a different conscience about utilities, that's why Ford's investment in these aluminum understructures was so prescient.

That's why our ability to put hybrid and other kind of powertrains is going to be really important.

And so it lets us make an investment in this category that's been very profitable for us and future proof it a little bit because of the way we are thinking about their performance over time.

Is there any way you can speed up getting Ranger and Bronco to market and the EcoSport?

Or is that schedule baked in at this point?

Well, you get to come and help me twist arms.

I take it as soon as I can.

But the rigor of getting this done right I think is the thing that I will lean into.

We got to do it the right way.

So it's getting all the attention that it deserves to get here at the right price, right time, kind of equation.

Okay, thanks.

Christiaan Hetzner, Automotive News.

Yes, many thanks for taking my question.

I just want to ask really quickly what your views were about Europe, in particular, in terms of the number of brands competing, the complexity in the market, the role of diesel, upcoming CO2 emissions, targets, and of course Brexit.

How do you view the region?

Is it something that over the long term remains attractive for you?

And secondly, very quickly about the Fiesta launch.

How important -- is the Brexit affecting that, given that that is the most important market and the most important car in that market for Ford?

Thank you.

Well, let me start and then I will give it to Bob to add precision.

Because this is something I think about a lot.

I think every -- by the, way every CEO that competes in Europe in all industries have stepped back.

The industry that I was in before this had similar kinds of challenges to compete there.

What's top of mind for me is how strong the Ford brand is there.

So when you witness other things that have happened in our industry, the Ford brand is highly regarded.

I have learned the Mustang, for example, I think last year, Joe, was number-one sales in Europe.

And that was a decision by us to take that to market and look how well it did.

So there's reinforcement over and over again.

Jim Farley, who just came to head up all the markets for us, was just in charge of that for the last three years.

And we were able to make that profitable.

And now, Brexit was a twist in that.

I don't think any of us saw that.

If you were thinking of predictive exercises, the kind of things we are doing right now, we did not sit as a management team and say, hey, Brexit is going to happen.

And therefore your footprint is going to be under pressure.

But we now -- we are business people, so we are accepting that and we are deliberately now thinking about how to play to win there.

But I want you to know we are in Europe.

Ford can be really successful there.

We have got great response to the Fiesta.

I will let Bob tell you about that.

And so I am bullish on it.

But then we have got to address the issues that come from Brexit.

And the mobility play, as it had all this promise and it means lots of things to different people, has a real attraction in Europe.

There's some things there that we see them as early adopters of that we are trying to leverage.

So I want to leave the message that Europe is a place we are going to be.

The only thing I would add is that we do see opportunity for the Fiesta, as we touched on earlier.

It's our highest-volume product.

It's the fabulous product that we are bringing to the market.

And it's clearly it's going to give us an opportunity in 2018 and the latter part of this year.

I think a couple other points to think about -- PSA and even our own performance has demonstrated that one can make profits in Europe.

Now, all we have to do is make better returns in Europe.

And certainly we are very focused on that.

Although to be frank, probably the type of return that you get in Europe won't be what it is in the United States because of the structure of the market, the competitiveness, the products, and so forth.

But we do believe that we can get an appropriate return in Europe.

The other point I would make is around Russia.

There's Europe and there is Russia.

And Russia, clearly, we believe has the opportunity to first grow to potentially be the largest individual market within Europe.

But also to give us very good returns.

Although recognizing that we'll be more cyclical than probably the underlying European business itself.

So we still feel a lot of excitement about Europe.

We are very committed to Europe.

We think we can get the appropriate returns in Europe.

We are all in and we are working to improve the business in response to the curveball that Jim just mentioned around Brexit.

Thank you very much.

Matthew DeBord, Business Insider.

Good morning.

Two quick questions for Jim.

First is Jim, if you could just give us possibly a specific example of a Ford product in which you are applying some of this systemic design thinking that you spoke of earlier in the call.

And the second question is about Silicon Valley.

Do you think Silicon Valley is in trouble as far as its transportation and mobility initiatives go and might need trade at this point?

Might need the traditional car business to show it the way to bring some kind of value, monetize some of these opportunities?

Matthew, let me take the first one first.

The AV is a perfect candidate for the techniques that you hear me talk about and for all kinds of reasons.

Just to highlight for you, because we can look back with perfect hindsight and say who were the leaders in the computer industry -- Commodore, Atari, Digital -- at the time when I was young and PCs were starting to come out.

IBM came later.

And all four of them weren't going to win.

And most of what the history will show us was the use evolution of the science happened too late.

So I am trying to bring the discipline that says this technology is coming really fast and we've got to make it people-centered very early in our way of winning.

So let's use that, the leverage of that, as I look at your second question.

I would never -- it would be arrogant for me to say the Valley is in trouble in any kind of regard.

The kind of wealth it has created out there and value for shareholders.

But I think you've heard me say a few times I don't think we have to cede the future of transportation to them in ways that Ford isn't here.

I just don't believe that.

And I've been saying this in meetings I've had with analysts and press that they may need us more than we need them because the export of software is not as difficult as the export of the vehicle constructs that we've learned.

These vehicles have to protect people, save lives, and have to perform in extreme conditions.

So all that stuff that we have a lot of awareness about.

The concern that anyone would have is are we, were we asleep at the switch that we didn't understand them coming.

Of course we do.

In fact, there's Ford people that have been recruited into some of those businesses.

So I like the challenge of trying to prove to everybody that this technique I'm talking about, our capabilities married together make us a really good player in that future.

All right, sure.

Thank you.

This concludes the question-and-answer session.

I will turn the call back to Jim Hackett for closing remarks.

Yes, so I just want to thank everyone for joining us today.

I appreciate you being patient with me as I start the 100 days.

I want you to know every day I get up, I think about clarity and focus and delivering understanding about where we are going.

And so we look forward to meeting you in the fall with more information.

This concludes the Ford Motor Company earnings conference call.

Thank you for your participation.

You may now disconnect.