Ford Motor Company (F) Q2 2015 Earnings Report, Transcript and Summary

Good day, ladies and gentlemen and welcome to the Second Quarter 2015 Ford Motor Company Investor Relations Conference Call. My name is Katina and I will be your coordinator for today. At this time, all participants are in a listen-only mode. Later, we will facilitate a question-and-answer session. [Operator Instructions] As a reminder, this conference is being recorded for replay purposes. I would now like to turn the presentation over to your host for today’s call, Mr. George Sharp, Executive Director, Ford Investor Relations. Please proceed.

Thank you, Katina and good morning. On behalf of the entire Ford management team, I would like to thank you for taking the time to be with us this morning, so we can provide you with additional details of our second quarter 2015 financial results. Copies of this morning’s press release and presentation slides are available on Ford’s investor and media websites. Now presenting today are Mark Fields, our President and CEO; and Bob Shanks our Chief Financial Officer. Also participating are Stuart Rowley, Corporate Controller; Neil Schloss, Corporate Treasurer; Paul Andonian, Director of Accounting; and Mike Seneski, Ford Credit CFO. Also with us is Ted Cannis, who will be replacing me as head of Investor Relations effective next week. 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 this presentation and of course detailed in our SEC filings. Finally, any non-GAAP financial measures are reconciled to the U.S. GAAP equivalent in the appendix of the slide deck. Our Form 10-Q is planned to be released later today. With that, I would now like to turn the presentation over to Mark.

Thanks, George. Good morning everybody. What I would like to do is start out within overview and then Bob will walk us through the slides. The headline is that we had an outstanding second quarter. If you look at some of the highlights, we had the best automotive quarterly profit since 2000; the best quarter ever in North America; a second quarter record in Asia Pacific; strong continued results at Ford Credit; we roughly broke even in Europe; and we’re on track to deliver a breakthrough year that we talked about at the beginning of the year. As we rack up the numbers for the quarter, we achieved $2.9 billion in pre-tax profit, which is up 10% versus last year. Our net income was up 44% to $1.9 billion. Our operating margin, our automotive operating margin came in at 7.2%, which was up six-tenths of a point from last year. Our automotive operating related cash flow was a healthy $1.9 billion. Importantly our global market share grew for the second quarter in a row. Our wholesale volume was up. Now revenue was flat and that was due to the impact of the strong U.S. dollar on our international operations. And I would note that in the quarter we had no special items. As a matter of fact, in the first half, we had no special items in the company. Now as we go forward, we’re going to stay very focused on our three priorities, and these drive all of our folks including myself every day we walk in the door and it’s around accelerating the pace of progress of our One Ford plan; delivering product excellence with passion; and driving innovation in every part of our business. And I believe our results in this quarter show that the plan our people and our processes are delivering. If we look at the first half, we racked up $4.3 billion in profit and we expect a stronger second half. On the balance of the year, this year is in total remains very busy. We have 16 new vehicle launches. And I’m happy to say 12 of them have been completed. And importantly, we’re delivering on quality. And actually all regions across the globe are seeing strong progress on quality so far this year. And it’s really encouraging for us to see third-party validate the progress that we’re making on bringing great quality in our products for our customers. As we look at our business units, we expect particular strength in North America and that’s because essentially we’re benefitting from a full supply of new products like the F-150 and the Edge as well as Explorer. We now see the opportunity to be in the upper half of the 8.5% to 9.5% range in North American operating margin. Our new F-150 is a full production and customers love it. We’ve also completed the launches for Ford Edge, Ford Explorer and Lincoln MKX. In Europe, we’re equally busy. We’ve had several new products launch in the first-half including the all new S-Max and the new Fiesta in Russia. And in Asia Pacific, we fulfilled our promise of 10 new plants with the 10th plant opening during the second quarter. Now the balance of the year, we have four more new global vehicles to launch and they are all on track and it includes the Everest full-size SUV and the Taurus sedan in Asia and the F series medium duty truck which is going to be built in Ohio and the Mustang GT350, which will be built in our Flat Rock plant in Michigan. And speaking of our products, we couldn’t be more pleased with the customer reaction that we’re getting to our new products. In North America, the new F-150 is a smash hit; it has record transaction prices. And for those of you that saw that last week J.D. Power APEAL awards came out and the F-150 was the award winner for pickups. And also AutoPacific came out with their Vehicle Satisfaction Awards and the F-150 received the highest vehicle satisfaction ever for a full-size pickup. Our new Edge, well we had record sales in the second quarter; Explorer, in the second quarter, our sales were up 30%. In Europe, we’re gaining market share and that’s being led by transit. And as you know, we’ve basically redone our entire Transit lineup in the last year. Our new Mondeo and also our SUVs are doing well. In Asia Pacific, Escort is the fastest growing nameplate in the segment and it competes in the Sales-segment. Mustang is already the best selling sports car from a volume brand in China. And down in South America, the Mondeo now leads the segment in Argentina. So while we’re delivering today and staying very focused on that, we’re also intensely focused on the future because we believe that we really are in a period of change and disruption in the industry unlike we have seen in many, many years. And you can see that it manifesting itself in car sharing and autonomous vehicles, connected cars, and new mobility solutions. And rather than seeing that as a threat, we see that as a huge opportunity as a company. And we’re really encouraging our organization actually to disrupt our own business model and really take advantage of the spirit of innovation that we have at Ford, going all the way back to our founder Henry Ford. And our company vision is pretty simple: It’s to make people’s lives better. So, this is about nurturing our core business, but also embracing emerging businesses whether they be products or services. And earlier this year, we launched what we call Ford Smart Mobility. And this really is our plan to go to the next level in connectivity, mobility, autonomous vehicles, the customer experience and big data. And we launched 25 experiments earlier this year and now it’s really exciting because we’re moving now from experimentation to the start of implementation on a number of pilots. And I can assure you that as we go forward, we’re going to share more details in the coming months about the progress that we’re making. So stepping back, overall it was one of the strongest quarters in our recent history. It was a great first-half. The second half is going to be even better. And we’re now more confident than ever that we’ll deliver our breakthrough year. So with that, why don’t I turn it over to Bob?

Thanks, Mark. Just in terms of process first, I am just going to go through selected slides today, so I’ll be calling out the slide numbers of the deck that was published. So, follow me that way. Let me provide a bit of context first, and I am on slide four. If you go back to the beginning of the year, we laid out a year that was going to start slower and build momentum into the second half which we expected to be the strongest of the year and then ultimately to a breakthrough year. And I have to tell you, based on the good start to the year that we had in the first quarter and what is clearly outstanding results for the company here in the second quarter, strong first-half, we are clearly on a path towards a breakthrough year which includes a good performance that will build on what we have done here in the first-half, something that we’re really, really excited about. What I’d like to do now is start going through the details. I won’t touch on the details of this slide because Mark has touched on it. So, let’s just dive right into the sector results here on slide five. So, if you look at the upper left, you can see that we earned $2.9 billion in the quarter for the company on an operating basis. We had no special items in the quarter. We were up 10% from a year ago, and this was a third best quarter of company operating performance since we came out of the great recession. On the slide, you can see the automotive results were strong at $2.4 billion and financial services at nearly $0.5 billion with Ford Credit itself just over $0.5 billion. So both sectors contributed to the performance; and as you can see below the chart, both contributed to the improvement compared with the second quarter a year ago and both contributed to stronger results compared with the first quarter. Automotive fairly was the big driver between the two segments but both were positive contributors. Let’s go on now and look more deeply at the auto sector on slide six. Here are key metrics and if you start up on the upper right, you can see the $2.4 billion pretax profit in the quarter also up 10% and this was the best automotive profit that we have generated since 2000. Results were better than they were a year ago. They were also better than the prior quarter and in both instances, that improvement was due to favorable market factors. So that’s volume, mix and net pricing. The margin was strong at 7.2%. We did deliver higher wholesales up about 2% that was North America and Europe. Revenue was about flat and this was inclusive of just over $2 billion of adverse currency effects from translation of local currencies, revenue currencies into U.S. dollars. If you look in the lower left, you can see the SAAR was down on a year-over-year basis about 0.5 million units; this was driven by Asia Pacific which includes China which we’ll talk about later. South America was down as well as was Middle East and Africa. Our market share was up as Mark mentioned. For the second consecutive quarter, it was up a tenth to 7.6% and we saw improvements in South America and Europe and in Middle East and Africa. Let’s now go to slide eight and let’s look at the absolute of the sector in the quarter. Let’s start with North America which clearly was a driver of the overall performance. It was North America’s best ever quarterly profit. I’ve probably said that five times and maybe six times if I can do it again. But it was a fantastic quarter for North America. It also drove the year-over-year improvement and the quarter-to-quarter improvement. But there is actually a lot of good things that are happening in the operations outside of North America as well. Let’s look at them individually first. So, Asia Pacific had a record quarter for the profit. We did say potentially a breakeven result when we met with you last time but the team did a fantastic job of delivering a good cost performance in the quarter which generated the good results that we see today. And I want to call out Europe which even though was at about breakeven, there is a lot of positive things that we see both in external environment in Europe but also on our own performance that I’ll touch on in just a minute. If you take these operations collectively, the ones outside North America, they approached breakeven. So letting the North American profits essentially flow through and they collectively improved versus the first quarter and also versus the year-over-year results second quarter of last year. So, very, very pleased with the performance across the board, the breadth of it as well as the depth of it, particularly in North America. Let’s go on now and we’ll start going through the business units on the next slide which is slide nine and this is North America. The North America consistently has been profitable since 2010. It’s average to margin of over 9% and let’s jump right to the margin. Here you can see just a fantastic result of 11.1% in the quarter. And I want to highlight that North America did not benefit from positive year-over-year performance from F-150. F-150 is fairly doing very well but it was still in launch phase during the second quarter; we only reached full production very late in the quarter. Wholesales were actually down 25,000 units on a year-over-year basis in the quarter. So, this performance was a very broad-based performance which is one of the things that we feel so excited about when we look at North America. If you look at the profit, we’ve already talked about it being a record but I can do it once more, $2.6 billion; it was up year-over-year and quarter-to-quarter due to favorable market factors. Now, I’m not going to go through slide 10 which is the details of the year-over-year but if you look at the pricing performance, kind of unusually; you’ll see that we had higher pricing and that was not just F-150 that was across many products in the portfolio. We also have lower incentives. So, it was a very powerful quarter in terms of our pricing performance. Operating margin, I’ve touched on. Let’s go over and look at the top line. The top line was up; wholesales were up and that’s despite the decline in F-150 that I mentioned. And in terms of revenue that was up as well. And that did include headwinds from exchange on the revenues that we earned in Canada and Mexico. Looking at SAAR; SAAR was up on a regional basis and in the U.S. share was down however and this was due to the launch effects of the F-150. It’s not shown here but our retail of retail share of U.S. is actually up a tenth. In terms of the full year, we continue to expect our profits going to be better than it was last year. And as Mark mentioned, we clearly see the opportunity based on the first half performance to generate a return that’s in the upper half of the 8.5% to 9.5%. Mark, any comments on that…?

Yes. Let me just give some perspective on F-150 because obviously there is a lot of interest in it. First off, we are really excited and we’re seeing strong demand for the new F-150. It’s turning on our dealers’ lots of more than twice as fast as the segment as a whole. As I mentioned earlier, we’re seeing record transaction prices with lower incentives versus last year. The mix is rich. We talked about the third party awards that we were winning in that product. And more basically now, we are at full production at the plants and we expect to hit normal levels of inventory by the end of the third quarter. So, we could not be more pleased and confident where we are with the F-150.

Yes. It’s really a great performance and certainly something that’s going to drive the performance in the second half.

Yes, absolutely.

Okay, let’s go on to the next region; we’ll talk about South America on slide 11. So looking at South America, I mean the first thing you have to talk about is the external environment. It is very, very tough, particularly in Brazil. And we’re not seeing any good signs from recent economic indicators, fiscal actions in Brazil have been taken to improve the economy longer term and that probably means more pain in the short-term. So, no signs at this point of reaching bottom. Our team is managing very, very well and very proactively in this environment and we believe that they’re positioning our business for recovery, once it does occur. But again, no signs of a bottom and certainly we’re not talking about a recovery today. But having said that, certainly our One Ford product strategy is paying off; we saw strong share growth in the region and in Brazil once again that was driven by the all new car, but we also saw the Fusion leading its segment once again in Brazil and we saw the F-Series and the Cargo leading the semi-light and the light segments; also proud to say that the Argentina -- in Argentina that the Ford brand was again number two there in terms of market share. The loss in the quarter was $185 million that was a pretty good improvement year-over-year that was due to higher net pricing. Two elements of that: One is the fact that we’re recovering or trying to recover inflation which is very high in the region as well as the adverse operating exchange effects of the weak currencies but we did also see positive pricing from new product in particular, the car. The results were pretty much the same on a quarter-to-quarter basis. If we look at Wholesales that was down, that was due to the lower industries. And if we look at revenue that was down sharply as well, again due to lower industries but also exchange. In fact about two-thirds of the overall decline in revenue was due to the weaker local currencies. If we look at the full year, we continue to expect a loss but we expect that loss to be lower than what it was a year ago. Alright, let’s go on and we’ll go to slide 13 and we’ll look at Europe. Actually feel quite encouraged by what we saw in Europe in the quarter. We approached breakeven which is about where were, a year ago, as you can see here. We did do better on a quarter-to-quarter basis and that was due to market factors. But let me talk about some things that we think indicate that there are some positive things going on here and certainly make us feel that we’re on a good path towards profitability. If you look first at the external environment, we’re seeing modest but good growth in the euro area, stronger growth in the UK in terms of GDP. If you look at industry sales, we’re seeing growth in total Europe and that’s despite big decline in Russia and we’re seeing growth in Europe 20. Our wholesale volume is doing well, it’s up in total. If you look at share, in terms of total Europe, it was up in the second quarter; it was also up in the first half which isn’t shown here. If we look at Europe 20, it was flat in the quarter but it also was up in the first half. The revenue decline that was more than explained by exchange translation, so again on a local basis, we’re seeing growth in revenue. There are a few other things that I just want to highlight in terms of the results for you to think about. If you look at slide 14, which we won’t go to now, but you’ll see in the callout box for volume and mix that we took a hit in the quarter of about $150 million from the fact that in the quarter, stocks only increased by 1,000 units. Normally in the second quarter in Europe for seasonal reasons, we’ve got the plant shutdowns in the third quarter; they’ll have a stock build, which is what we had last year. So, on a year-over-year basis, we’re taking about $150 million hit in the quarter because we did not have that normal stock build. Several reasons for that, first of all, we had a pretty decent level of stock going into the quarter but during the quarter we had industry strikes in Turkey that affected our operations there, that limited the supply of transits back into our European operations and then very late in the quarter, we had launches of the all new S-Max and the Galaxy, which constrained supply of those products in the quarter. Another factor to think about is that in the quarter compared with the year ago, we had higher pension cost. These are lower discount rates that we saw at the end of last year that are increasing the amortization of losses related to our pension obligations in Europe. So, think of this as sort of a penalty for something that’s already happened in the past; it’s non-cash. The underlying run rate of the business is better. But I just wanted to call that out for your awareness. And then the last thing I guess, I’d mention is a year ago -- we talked about it year ago, we did benefit from a onetime reserve release associated with our Cologne investment agreement, so that did not obviously occur this year and we still delivered about the breakeven result that you see today. So we feel that the European transformation plan is continuing to progress. We clearly have to push even further on brand, product and cost but we do feel that we’re on track towards profitability. In terms of the full year, it’s not going to happen this year. We still expect the loss; it will be better than it was a year ago. I will say that we do think the second half results will be worse than the first half and that is due to normal seasonal factors. So with that what I’d like to do is turn to Mark to see if he’s got any comments on Europe.

Yes, just some perspective on the market in Europe. We remain cautiously optimistic on the continued industry growth in the second half. If you look at the channel mix, it’s fairly stable year-over-year. Commercial vehicles encouragingly are up more than passenger cars. And as you know that’s a good indicator for where the economy is going. Pricing, we’ve seen some modest improvement but incentives obviously still remain high. And it’s interesting; we’re seeing some trends in Europe that we saw during the North American recovery. In particular, we’re seeing some pent-up demand, obviously not to the same degree, but some of that pent0up demand. And we’re seeing a mix improvement. When customers are ordering their vehicles, they are ordering a more well-equipped and that’s exactly what we saw here in North America and that’s helped a bit of the pricing environment. So overall, we’re seeing some green shoots, but still we know we got a lot of work to do.

Let’s go on and I’ll talk about Middle East and Africa. This is our youngest and smallest business unit, I just want to remind everybody, this is a region that is 1.4 million consumers and it’s growing about 4% or 5% a year. And we’re very excited about what we’re doing here and what the team is working on to establish a good position for us as this region begins to take off. In the quarter, results moved from the small profit last year to a small loss this year and this was driven by essentially production timing differences. Most of the volume that we actually sell in Middle East and Africa is sourced from other regions. So as a result, we’ve got long order and lead-times since we’re going to get volatility by quarterly results and certainly really that’s what we saw this quarter. In terms of the full year, we continue to expect the results to be about breakeven. So, not a lot to talk about today on Middle East and Africa, but team is working hard to really position us for substantial growth here in the years ahead. Let’s go on to slide 16 and we’ll talk about Asia Pacific. So Asia Pacific, a lot of excitement here with record for the quarter, operating margin of nearly 8% and this was despite lower industry sales including lower industry sales in China. Also just want to mention that we also continued to incur cost in the quarter that is for growth that we’ll see in the future. We also just launched the Hangzhou, China and the Sanand, India plants. So, we had probably more cost of revenue if you will in the second quarter. We’re certainly going to see a lot of revenue coming down at those plants in the balance of the year. The profit did improve year-over-year and quarter-to-quarter. I want to highlight that that was actually due to operations outside of China. So, we saw a good improvement in ASEAN, Australia and India, and really excited to see the progress the team has made in these parts of the business. Because we’ve been talking about them for some time as areas that we are really focused on to try to get them moving forward in a positive manner. And the progress that team made here in the second quarter was very, very encouraging. For the region, wholesale volume, revenue and share were down year-over-year due to our consolidated operations -- I am sorry, actually share was down a bit. But within China, we saw wholesales about flat; share in the quarter at 4.7% was actually up a tenth and that equaled the record that we set in the third quarter of 2014. So good results in Asia Pacific; clearly some concerns around China and the slower growth, but for the full year we continue to expect strong results from Asia Pacific and expect those results to exceed those of last year. And Mark, you might want to say something about China.

Yes, let me just give some perspective on the China market because there is obviously a lot of discussion around it. It’s clear we’ve seen a market slowdown in the market there in the industry. We’ve seen commercial vehicles actually come down more than past year vehicles which again is a bit of an indicator to us. And that in turn is putting pressure on the likely suspects around pricing, but we’re also -- we’ve also experienced negative pricing in this market for quite some time, but it’s continuing now. But we have to put this market into perspective. This is -- it’s the biggest market in the world right now. By our forecast it’s going to grow to about 30 million vehicles in the next 5 to 10 years. So we’re still very bullish on China, but it’s going to go through its fluctuations and that’s what happens in emerging markets and we’re going to work our way through it in a positive way, and grow the business.

Let’s go on to the last of the business units and this one, Ford Credit. Once again, Ford Credit had a very strong quarter and as I mentioned, generated that profit of over $0.5 billion. It was an improvement year-over-year and that was due to higher volume that was driven by higher consumer receivables and also with leasing increase in North America. Mix was favorable. We also saw recurrence of large insurance losses that we saw a year ago due to storms in North America. Ford Credit’s business and credit conditions continue to be very healthy. Our origination practices remain consistent. Costs at Ford Credit are well-controlled and very much in line with expectations. Credit losses remain at historically low levels; delinquencies also remain low; and repossessions also are at historically low levels. So everything that we can see in the business looks robust and very, very positive as we look at the future. In terms of our full year guidance, we’re reconfirming that guidance and that includes the pre-tax profit that would be equal to or higher than in 2014. So with that let’s move on and look at automotive cash. We had very strong cash flow in the quarter, automotive operating-related cash flow you can see here of $1.9 billion. If you go back to the first quarter, we had some pretty large debt repayments and also we had some -- we had characterized most of our pension contributions in the first quarter and we said at that time that we would not see that as we move out the first quarter. So, we’re delivering on that promise because if you look at the $1.9 billion that effectively is flowing through to the change in our gross cash position other than the dividends in the quarter which were about $600 million and that balance is the compensation related share repurchase program. So, we ended the quarter with $20.7 billion of cash and marketable securities; subtract from that the automotive debt of $13.7 billion which was up a bit due to funding in Brazil; we ended the quarter with net cash of $7 billion. Liquidity was also strong at $31.7 billion. So why don’t we go now and move into the future and we’ll look at the business environment on slide 21. So, this is pretty simple. We are projecting a global GDP to grow in the 2.5% to 3% range; this is driven by the U.S., by China, the modest growth that we’re seeing in Europe, euro areas as well as stronger growth in the UK, little concerns still about South America as well as Russia; watching China closely but overall expect pretty good growth on a global basis. Now that is not translating into growth in global automotive industry sales this year which is unusual. And that’s largely because the strong growth in China as Mark and I both talked about that is not translating at least according to our point of view, into growth in China and also Japan which we haven’t talked about today; it is growing, but we expect the Japanese industry to decline in 2015 versus 2014. So with that let’s go on to slide 22 and now I’ll end my comments on planning assumptions and key metrics. We are upgrading our outlook for the Europe 20 industry; we’re taking that up to 15.7 million to 16.2 million units. We are downgrading China, as Mark talked about, to 23 million to 24 million units and then everything else of the other financial metrics on track. We’re clearly on a track to achieve our total company pre-tax profit guidance of $8.5 billion to $9.5 billion. So, just seven words to leave with you today outstanding quarter, strong first half, breakthrough year. And with that I’ll turn it over to Mark.

Thanks Bob. So, let me bring this altogether. Obviously our plan and our priorities are unchanged. And we’re on track to deliver our near and our long-term objectives and they have remained the same and that’s about being the top five in global sales, getting a better balance of profits and sales around the world, targeting 8% plus operating margins globally, being in the top quartile of total shareholders returns and then highly regarded by all our stakeholders. We have our three priorities on accelerating our pace of progress on a One Ford plan, delivering our product excellence with passion and of course driving innovation in every part of our business. And the way I described it is, it’s about having one foot firmly planted into today and staying riveted on the business and delivering today’s results. But also one foot firmly planted in tomorrow and taking the point of view on that future and rewinding back to the day and making sure we’re taking the decisions to maximize our success in that timeframe. So, we’re really pushing ourselves to think, to act and disrupt like a startup company. And that really means trying to anticipate customers’ wants and needs in that five, and ten, and fifteen-year down the road timeframe. The second quarter, I think it shows more proof that we have the right strategic framework; we have the right process; and importantly, the right team. And again, it’s one of the strongest quarters in our recent history. It’s a great first half. And we expect the second half to be even better. So with that why not we open to the phone lines.

Thanks Mark. Now, we’ll open the lines for about a 45-minute Q&A session. We’ll begin as unusual with questions from the investment community and then take questions from the media. Now in order to allow for as many participants as possible, please keep your questions brief and please avoid asking more than two. Katina, can we have the first question please?

Thank you. [Operator Instructions] Your first question will come from the line of Patrick Archambault, representing Goldman Sachs. Please proceed.

First, can we just get back to the supply of the F-150; I guess just a little bit more detail there. I think originally you guys were expecting to have that ramped up sort of midsummer and then I think it became late summer and now it’s more towards the end of the third quarter. What have the issues been and how much confident do you have just surrounding the fix that’s in place to try and get that supply up there? So that’s my first question, just an update on that.

Well to put it into perspective, I think we’ve always said that by the summer we would be at full production, late in the second quarter we’d be at full production which we are. And we’re on track to, as I mentioned earlier, to make sure our inventory is at normal inventory level by the end of third quarter because you know Patrick there’s a little bit of a lag time as we get both plants up to production fully that we have to then shift those to our dealers and then also to fulfill fleet orders. So, we’re on track with our launch as with always launches. We work with our suppliers to make sure it’s successful and we’re doing that. We’re very confident in the product and we couldn’t be again more happy with the kind of response we’re getting with it. We expect in the second half as we get up to stocking levels, we’ll fulfill more fleet orders and we expect our performance in the marketplace to grow.

So it sounds like the operational stuff is well in hand. Maybe that dovetails well with my next question which is just on the pricing, which was obviously very, very strong, both on the incentive side and the pure pricing. How do we think about -- maybe that’s sort of a Bob question, but how do we think about that being carried over into the second half? I know that -- I think you sort of launched with some of the higher trim level models, how to Dearborn [ph] first and I think some of the other stuff as less contended but just how do we think about those numbers being carried into the second half?

If I remember correctly, in the first quarter was at over 70% mix. I think it was a high series and I think we’re at 50% [ph] and I think normal rates, if you go back to the old model, was around 30%. We’ll have to wait and see where this settles out because the demand for this, particularly the higher series is quite strong. And as you saw probably was it this week we launched the Limited. So we got more to come that Limited coming in the winter; we’ve got Raptor coming next year. So, we’re not done plumbing every dollar of revenue we can out of that product. So, we’re very excited about that and the customers are demanding that. As we look at the balance of the year, we expect pricing to continue to be a strong factor in North America’s performance. We clearly expect North America to be stronger in a second half than the first. F series actually did not positively contribute to the bottom line in the quarter because of the fact that was in a launch phase, but we certainly expect in the third and fourth quarters on a year-over-year basis that it will be a positive contributor as we get, as Mark said, the stocks up to normal levels by the end of the third quarter, not just numbers of units but also the derivatives in the series and the mix and so forth. So, you will see strong pricing coming from North America and not just F series but even in the quarter. F series clearly was a factor but there was a lot of different product lines and we were able to generate incremental pricing opportunities on in the quarter.

Your next question comes from the line of Dan Galves who representing Credit Suisse. Please proceed.

Just sticking with North America, can you give us a little bit of perspective on pricing versus material cost ex commodities which was I think slightly negative year-over-year, if you take those two together? And also if you can talk about the warranty freight positive as well whether that was some sort of non-repeat or whether that’s a sustainable kind of improvement?

Yes, I’ll comment and if Mark has anything afterwards, he can supplement. If you -- I’d like to go back to what I said in the first quarter, because we actually I think got a very similar question then. I actually don’t think that’s the right way to look at, at the way that you phrased the question. We clearly are seeing product costs go up as we invest in the new products and we also see increases in the structural costs as we do, so because of the investments in the plants and so forth. But we’ll get revenue for that and we just talk about for F series but you also get positive mix and then you grow the business, you get volume as well. So, really what you want to look at in terms of what’s happen to the total contribution margin of the business is to look at what you are getting on volume, what are you getting on mix and what are you getting on pricing relative to the product cost and some of the structural costs that you build in to business. And as you can see in this quarter that is what generated the improvement year-over-year. And I’ll mention once again, that was not because the F-150. F-150 really comes on stream in terms of the positive effect in the third and the fourth quarters. And so that will simply add to what we’ve already seen here in the second quarter. So, to me it’s much more -- it’s a broader view of what we’re doing with new products and just looking just those two categories that you’d mentioned Dan. In terms of contribution cost, our contribution cost we had favorable performance year-over-year on warranty as well as on freight. And duties on warranty that was combination of things, it was the non-repeat of some large field service actions that we had last year; we also had some supplier recoveries against some of those actions and other actions as well it might have been in different periods. And we also, as I mentioned, have the good news on freight. And I think that was largely because we had a lot of premium freight last year that we didn’t repeat this year. So going forward, we expect that we’ll continue to have good performance on -- as Mark said, the quality is extremely positive not only in North America but around the world. But field service actions, they happen when they happen based on the data that’s in front of us and kind of hard to forecast that one. But right now, everything looks good.

Second question related to China, I mean great performance in the quarter with earnings up on flat revenue, flat wholesale volumes. Just checking like kind of if you could give us anymore detail on what you’re seeing in terms of pricing? How deteriorated versus -- is the pricing pressure worse today than it’s typically? And also it looks like inventory is up quite bit on a year-over-year basis; is that anything to be concerned about or is that are you at normal levels now? Thank you.

On the inventory, it is up and part of that is due to as we were launching some new products and localizing and we had some bridging stocks. But also as the market has come down, we’re implementing our process which is matching production to demand. So, you can see that in our production for the third quarter which is up healthy, it was up healthier and we’ve taken the appropriate actions to get the inventory in line. So overall, we feel pretty good about the inventory. And in terms of the pricing environment, as we mentioned, listen over the past couple of years, we’ve seen negative pricing in the 1% to 4% range and this year we probably see it in the 4% to 5% range. So, we’re seeing a little bit more and it depends on region and segment. But I think the approach from our team is -- and this is I think the silver lining of a little bit of a downturn in Europe. This is the first time our team is going through a downturn in Europe and we have some very experienced folks…

China.

Sorry, in China and we have some very experienced folks both in our operations there and in our JV partner and it’s a great learning opportunity, so that when it goes down we know how to manage through and we know the revenue in a declining market comes off fast. And that’s why the big effort on cost and that was one of the elements that drove our performance in the second quarter and our team will stay focused on that at the same time launching five new products in the balance of this year to drive our top-line.

And Dan, I just want to supplement. If you look at our guidance on production in the second quarter for Asia Pacific, we originally were at 395,000 units; last year came in at 362,000, so 33,000 units down. And back to Mark’s point, this was a reflection of the team acting very quickly and very proactively as we saw the softening and taking production out ASAP. That’s what we do anytime, anywhere that we see something like that happening, on the upside the reverse and the team really staying on top of what’s happening in the marketplace and protecting the level of dealer stocks that we should have.

The next question comes from the line of Itay Michaeli representing Citi. Please proceed.

I just want to go back to North America, really strong quarter, 11% margins; you mentioned you have the F-150 really contribute in the second half of the year. Adjusting that the second half margin guidance is maybe implied around 10% which is still pretty strong, but down a bit maybe from Q2, can you help us just walk through couple of puts and takes around the second half outlook as compared to the second quarter?

We’re going to have a fantastic second half and we had a really good second quarter. So, I actually kind of see the first half performance of 9.1% sort of going up a tick, if you will, as we go into the second half. And that will be aided by what I mentioned earlier in terms of the F-150 contributing positively in the second half versus the first half with the launch effect. So, I don’t know more to say, we’re going to go from really good grade. It’s hard to parse really fabulous performance.

And also within that we have to look at the market and there is a lot of discussion around the market being at a peak. I really term it as a plateau because when you look at what’s driving the market, it’s really around replacement demand. And in any mature market, about 80% of the industry in any given year is driven by replacement demand. And we know the age of the car park which is over 11 years old. So we think that bodes well. Within the market, we’re seeing actually incentives. We have to watch that closely because incentives are up year-over-year when you look at the U.S. market than actually been up every month. But interestingly, incentives are up every month on cars; they are actually about even to down on trucks. So that’s an area we got to stay focused on, but we expect our performance to continue to be strong in North America.

And then just my second question on Asia Pacific and again very good results, can you remind me what went right in the quarter? I think in the first quarter call, you talked maybe about I think breakeven second quarter on Asia-Pac, so maybe what went right there in the second quarter, if I missed it?

Yes, I just touched on that in my comments. Itay, it’s cost performance. Mark and I were sitting here three months ago, they looked more like a breakeven type performance, but the team did despite the production adjustments that we referenced earlier, the team did a great job on cost performance. The other thing that was great about the quarter is the performance improvements that we saw outside of China. So that was another big contributor, the improved results in ASEAN, Australia and India. As you know those are areas we’ve been focused on trying to get them moving forward in fastest manner and we did get traction on that in the quarter.

Your next question comes from the line of Colin Langan representing UBS. Please proceed.

I just want to understand why did you not take the total company guidance up, given you had $4.3 billion in the first-half, if you set the second half, at least earlier you set second half stronger. What keeps you cautious from picking it quite higher into that range?

Well, I don’t think we’re being cautious. We think that the range covers the likely outcomes if you think about the first half, we made $4.3 billion, so that gives us the opportunity to do what is at 5.2 [ph] in the second half, that’s a much stronger second half than the first half to be at the top end of the guidance. So I think we just feel comfortable that there is no need to change the guidance and we believe that at the top end, that covers the potential upside if you will that we’re looking at.

Should we still think the cadence being stronger in the second half for the total company or is that changed given how strong Q2 was?

I’m sorry. Could you say that again?

Should we still think that second half is stronger than the first half or is that changed given Q2…?

No. We definitely think the second half is stronger. I mean, if we just multiply the first half by two, we’re at eight, six [ph] and we think that we’ve got, as I mentioned, clearly upside opportunity in the second half and expect to deliver that.

And my second question, can you clarify the F-150 pricing? Obviously there is a local dealer advertising at $10,000 incentive. Has there been a change at all month-over-month in the F-150 incentive structure? Obviously it’s created a lot of headlines.

Colin, it did generate a lot of headlines. And as you know, incentives and rebates, they are normal part of the competitive environment and we use them to either encourage customers to buy more fully equipped vehicles or to finance it forward credit or to reward loyalty. But overall when you look nationally, our incentives on F-150 are around $3,800 or so. It’s down year-over-year. That $10,000 figure that was thrown out, part of it is based on incentives that are available on all vehicles that dealers can add up to and in some cases, some dealer associations, of those a small minority of them decided to add to that. So in some cases, it was $10,000 but overall when you look at our average incentive of around $3,900 and it being lower than the segment and much lower than some of our competitors, I think it reflects the strength of the product.

Your next question comes from the line of John Murphy, representing Bank of America. Please proceed.

Just to parse by results Bob just to understand North America little more. I hate to do this, but on slide 10 there is one number, the stocks positive 451; is that just a reversal of something that was unusual last year and we’re looking at more normal or is that an unusual benefit this quarter?

Now, what is was, as we grew stocks by 7,000 units within this quarter and in fact if you go to appendix 6, it’s pretty clear. I am sorry, we actually reduced stocks. We reduced stocks by -- actually for the region we increased stocks by 7,000 and we reduced in North America and the U.S. but we had increases elsewhere and last year, we actually had a decline. So it’s the absence of the stock reduction last year on a relative basis that’s generating the good news.

John, part of it is, the industry is growing. So clearly you expect our inventories to keep up. To Bob’s point, overall when you look at it, our inventory levels here in the U.S. are about 608,000 and that’s down from about 643,000 last year. So our day supply are about 70 and this time last year it was about 72. So, we feel good about our inventory levels.

But the number you’re talking about the 451, that’s a non-repeat of a stock reduction last year; it was a smaller stock reduction this year.

Yes. So, last year was a little bit more unusual, this year was normal. It’s really as what I trying to understand that’s the thing what’s going.

Yes.

And then staying on North America, I mean, Mark, you alluded to the medium-duty or the Super Duty launches that’s upcoming in Kentucky Truck and that’s not something getting lot of headlines but that could be a real big benefit above and beyond what’s going on with the F-150 on the truck side. Just to understand if you guys can talk about that a little bit and when sort of there might be a little bit of a weight in results because of that changeover and when the benefits should ultimately come because that could be a big part of the story as well?

Well, we’ll get into that more as we start talking about 2016 but focusing on 2015, obviously in the next month or so, we’re going be launching the medium-duty truck out of Ohio. And that’s a really important product because that only -- we have a lot of customers and have those products, it drives a lot of ancillary commercial businesses across our other vehicle lines. So, we’re excited about getting that up and running. And keep in mind that’s a product we’re bringing back and manufacturing here in the U.S.

Your next question comes from the line of Adam Jonas, representing Morgan Stanley. Please proceed.

Bob, first a quick one. Can you tell us current capacity utilization at Changan Ford, even roughly to the nearest 500 basis points?

No. We don’t provide that information publicly. The stock level -- the capacity is relatively well utilized but Hangzhou for example which we just launched that’s got about 250? 250, I think in that particular plant but we’re just launching it. So we’ve got the Taurus coming later, so there’s a lot of room for us to grow into that plant.

And Mark, just a follow-up, so I’ve checked the last four earnings call transcripts and I searched Ford like Apple and Google and Uber and actually none of them have come up in any of your prepared remarks or in the Q&A of the transcripts. I take on board fully what you said about trying to create the startup culture and disrupt yourself and that was very evident when we toured the research facilities in Palo Alto. So can you share with us management’s and the board’s, say high level thoughts on whether players like Apple, Google or Uber are actually emerging competitors, not just that represents an opportunity but could they also be competitors in designing engineering cars and the things that you do? Thanks.

We haven’t heard what Apple is doing. To my knowledge, they haven’t announced anything. But from our standpoint, you know our process, we’re always looking at the business environment. And we’re seeing folks like Uber, who knows what Apple is going to do or Google is going to do? First off, we think -- first off that it’s positive for the industry in terms of generating competition and innovation and that’s what’s driving us. But sure, we could see some of those players be competitors to us, in some cases they could be partners to us et cetera. We’re looking at the whole waterfront here. And we know there’s a lot of people that are interested in the automotive space and would like to extract some value out of that. We’re very cognizant of that.

Your next question comes from the line of Ryan Brinkman, representing J.P. Morgan. Please proceed.

You talked in your prepared remarks about tracking in the upper half of the 8.5% to 9.5% North American margin target for the full year. It seems pretty easily attainable now; so, you’re already at 9.1% in the first half, at least according to IHS you’re going to build 19% more F-150s in the back half than the first which by the math should help quite a bit. So, I understand there are lot of moving pieces, not just the F150. But does the 2Q result now introduce the possibility that you will not just be in the top out the North American margin target for the full year, which you already are, but you might be above it?

I think it’s more appropriate for us to cover -- I said on the upper half. We’re always working to do better but I think upper half is where we’re likely to land.

And this is really the same question. In last quarter’s earnings deck, you included a slide, not in this deck, that showed pre-tax results by quarter as a percentage of expected full year pre-tax profit ramping sequentially from 1Q to 2Q and then from 2Q to 3Q before it was flat in 4Q. I know the guidance today is stronger in the back half than the first half. Do you still think that results improve from 2Q to 3Q or whether that 3Q is a greater percentage of full year pre-tax profits than 2Q?

Well, the purpose of that slide, Ryan, was to demonstrate that unlike most years where the first half is stronger than the second half and oftentimes you will see the first quarter compete with the second quarter in terms of which one is the strongest, that was not going to be the case this year, we want to show that. Also what’s normal is the fourth quarter being the weakest and actually quite a bit weaker than most of the other quarters of the year. And we felt that the fourth quarter, have the opportunity to be much stronger than normal particularly because of the cadence of our launches. That’s still all true. And we still expect as a result, the second quarter to be strong and stronger than the first half. So, very consistent with what we’ve been seen, but didn’t think it was necessary to put the chart and since the half is over and we’ve only got two quarters go and within the “stronger second half” and expect to deliver that.

And then last question Europe, it was pretty good actually. It seems the biggest variance there was pricing. Can you talk about what’s driving that? I imagine Mondeo, S-Max, Galaxy coming through but some of the other drivers you’ve been working on maybe on channel mix, self-registrations, rental car or the [indiscernible] I’m just trying to understand, I know 3Q is going to be softer seasonally but does the year-over-year pricing tailwind remain with us as we progress throughout the year?

Yes, you’re actually spot on in terms of what drove it; there’s one other factor I’ll mention, but yes that’s new products doing very well. The team has been focusing on brand and the network and customer service and that’s translating into some incremental power in terms of pricing, particularly combined with the new products. The other thing that you didn’t mention that’s the factor, we’re now consolidating Russia. So somewhat similar to South America where we’re seeing some very positive pricing as we try to offset the effects of high local inflation and weak currencies, the exact same things going on in Russia where the team is doing the same thing. So, you’ve got that phenomenon also in this quarter on a year-over-year basis because of the consolidation of Russia but everything else you said is true. And I would expect as we go into the third and fourth quarters that we will continue to see positive pricing in Europe.

Your next question comes from the line of Emmanuel Rosner, representing CLSA. Please proceed.

So, I have a question on North America and the one on China. On North America, I would like to come back to the earnings walk on slide 10. So, I completely agree with your point that the increased I guess material cost results not only in better pricing but also better mix and market share and volume. I’m just curious how you see these material costs evolve over the rest of the year? I think in Q1, it was increase in cost of about $600 million and now it’s about $1 billion and then obviously more new F-150s coming is also more new materials in there. How would you see that evolve over the next couple of quarters?

I think, let’s look at it from a couple of different ways. I think you will see year-over-year increases that will start to mitigate because we had some of the products that are affected in the later quarters of last year. So, what I do think you’ll see as we go forward is that the effects will be largely mitigated sequentially. So, we have what we have. Some of that will continue to show up on a year-over-year basis, but sequentially we’re kind of where we would expect to be because the launches are behind us.

And then on China, so just would like to come back on the quarter’s performance; it was obviously an incredibly strong equity income quarter for in the 400 million which is although more remarkable in sort like the flattish volume environment, but also in Ford incurring all these costs from opening new plants. How sustainable do you view this performance in light of the dynamics that you described before in China?

We expect the operations to continue perform well. We actually expect the volume to be greater in the second half than the first half as we launch the new plant. We got the new launches coming -- product launches that Mark talked about. And some of those products, the Edge, three-row Edge, the Taurus, the Everest; those are going to be higher margin products. So I think that will fairly show up in the results. So I think we feel quite good about the performance in the second half relative to first half and overall for the full year. The one thing I just want to remind you and everyone else that’s listening in is when you’re looking at those equity after tax earnings, that’s not the total picture of China, that’s just the joint ventures. So, if you recall, I said that our year-over-year results for Asia Pacific actually were not driven by China even though you can see that improvement at the JVs; it was driven by the operations outside and that’s because we’ve got EU imports which are consolidated, we’ve Lincoln which we’re investing in which is consolidated, and you’ve got engineering that we’re incurring on behalf of the joint ventures that they will reimburse for later, once we start building those products that we’re engineering at some point in the future, will get that composition through royalty. So, when you take the total picture of China because of what was going on in the consolidated part of our business, it was actually down slightly. We had launch balance out of Edge as Mark talked about, we had balance out of export as we’re getting ready to launch the new Explorer, we have the investments in Lincoln and we have higher engineering for products we’re working on for the future.

Your next question comes from the line of Rod Lache, representing Deutsche Bank. Please proceed.

I was hoping just kind of a higher level question about China. Obviously one of the fears in the market is that just given the amount of capacity that’s coming on line that it could just be broadly for the industry a significant deterioration in profitability. It’s happened in other emerging markets, once growth in supply reaches or exceeds growth in demand. Can you give us a little bit more color on how does the earnings bridge look like? If you see 4% to 5% negative from pricing, what does every 1% imply for you as a headwind? And for every 1% change in volume, what does that do for you as a tailwind; how should we be thinking about the bridge and the levers that you can pull to mitigate that?

Well, let me just answer your question directly first and maybe provide a bit of color and then Mark could supplement. So 1% for is $90 million -- $100 million, but I guess the thing I would think about is if you look at our portfolio, we have actually a pretty rich portfolio. We have a very strong SUV portfolio, the Mondeo, the Kuga, the three-row Edge, the Taurus, the Everest, which is body-on-frame utility that’s going to come off at the same platform as our Global Ranger. These are pretty high margin products. And I think that probably puts us in a pretty good position because as you think about where the competitive pressures be, I’m sure it will be across the industry. But there will be a lot of that particularly at the lower end of the market particularly where you get maybe some overlap at the low end of the international brands with the indigenous brands. So, I think the place we occupy in the market is a pretty healthy place. We also have opportunities for cost reductions; the team is continuing to make improvements there. And as we mentioned, we’ve got Hangzhou plant coming on, but we’re only going to man the plant to the level of volume that we actually believe is appropriate and that we can deliver from the plant. So, I think that as we go in, knowing the softness in the market, I think gives us the ability to plan that very effectively. Anything you want to add?

Yes, the only thing I want to add Rod is when you look at the capacity coming on line at Hangzhou, as Bob mentioned, I mean it’s for products that are in pretty high demand. We’re localizing the Edge and obviously SUVs and a seven-seater SUV is in demand, the Taurus that’s coming or large sedan, it’s a pretty significant segment there that has pretty good revenues and Everest as Bob mentioned. But even the -- in the Escort, we launched that earlier this year and that is as I mentioned that’s the fastest growing model in the segment and it’s appealing particularly across the regions but particularly Tier 3 through 6. But across all this, as we look at the industry, look at the pricing et cetera, it’s not only a focus on the top-line, team is taking a very intense focus on the costs and the costs in the industry. And that is the benefit, if you will, of looking at an industry which we’re now calling flat to down and getting ahead of things. So we’re working both ends.

And that is what drove the performances in the quarter?

Yes.

Your next question comes from the line of Brian Johnson, representing Barclays. Please proceed.

I want to wish George Sharp farewell and hope you enjoy retirement. We will certainly miss him and his sense of history, shall I say. So I want to quote couple of things, just a little housekeeping for Bob on North America and then a broader question on China. On North America, you talked about the F-150 having no contribution. Is the way we ought to be thinking about is that the volume decrement was roughly equal to the pricing less material cost contribution?

On a year-over-year basis, it did not generate, if you will, incremental profits and that’s because the volume was lower. We also were in launch mode, so we had all the costs, the structural costs associated with the launch but didn’t have the plants producing at capacity. That will not be the case in the third and the fourth quarter. So when I look at the data for third and fourth quarter year-over-year for F-150, it’s a strong positive contributor to the bottom-line all in; and that’s what we’re trying to convey in terms of the effect it had in the first, second relative to the third and fourth quarters.

Okay. So, we can expect that change as we go -- get passed some of those launch costs as well as full volume?

Yes.

And second question on China is kind of Mark. You talked about disruptive innovations in mobility and at the same time you talked about China at some point getting to 30 million cars. I guess, when you think about where transportation could go in China, kind of ten years out. What’s the real argument for such a densely populated urban country getting to the levels of penetration you’d need for that? And are we going to look at kind of new mobility models as maybe kind of taking some of the wind out of those sales? And if so or even if not, how would you primarily with your upper-end -- mid-upper-end product line in China kind of participate in those new models in China?

I think when you look at the overall size of the market, keep in mind that the Tier 3 through 6 cities, these are cities that are still growing, still cities where people are coming from the countryside and moving in. You don’t have the license plate restriction that you do in some of the Tier 1 and 2 cities. So we think a lot of that is going provide the growth to that 30 millionish number in the next five to ten years and still be somewhat manageable. In terms of the overall -- the mega cities, the cities of 10 million or more, I mean there is a lot of debate around what is that going to mean to the size of the industry. And right now, there is no clear answers, because you could argue that car and ridesharing increases the asset utilization which could reduce the car park, but also on the other side more efficient utilization of those assets and a greater just overall access to mobility could actually increase the total miles driven which could increase vehicle sales. It will definitely increase service business, for example with the duty cycles that these vehicles going through. So that’s we’re looking at. And overall as we look at these experiments and pilots, we have our team focused on this. We’re looking at some of the innovative approaches, particularly in China which Baidu and Didi Kuaidi is implementing. And as I said, you’ll see over the next number of months and year or so, in terms of what we’re doing to create some pilots and create some business models out of this that not only can open new business opportunities for us but complement our existing business.

Your next question comes from the line of Joe Spak, representing RBC Capital Markets. Please proceed.

Mark and Bob, maybe just to follow on some of your recent comments, I think numerous times you’ve talked about how a lot of your growth in China needs to be driven from those Tier 3 to 6 cities. So maybe you could just give us a little bit more color as to what you are seeing the impact or what’s going on kind of in those cities right now, maybe what the growth is in those cities versus some of the larger cities.

We’re seeing, as we said, larger percentage growth in those cities. And again, part of it has to do with the fact that most of those cities don’t have the restrictions that you do in the larger cities around license plates and lotteries that they have for that. As we look at our business, if you look this year for example, 85% of our dealer appointments are going to be in the Tier 3 through 6 cities. And actually if you look at our wholesales in the quarter, our wholesales in those Tier through 6 cities, were more than double percentage increases than in Tier 1 and 2 cities. So, we think we’re well-positioned. The Escort as I mentioned is really resonating with customers there but also at the same time as Bob mentioned earlier, the full line up of SUVs that we have, small, medium and large we think will serve us well.

And so, maybe a quick one on South America, obviously a very difficult environment, it seems the product is responding well in that tough environment. I know you’ve taken some actions there in the past, is there anything more you can do? Are you rightsized for this level and is it just about a volume rebound at this point?

The team has done a great job of managing the environment. They have taken appropriate actions on capacity, headcount, personnel levels. We’ve also been working very hard on total costs. They’re looking as how we can -- obviously we were quite localized because we’ve been there for 80 years but we’re even trying to find further opportunities to shield the business from the weakening currencies. We are also working to try to get as much as we can in terms of mix of the products. So the teams doing everything they can but Joe, the environment is so difficult, it’s going to be tough I think for anybody to make sense out of that business in South America until the recovery takes place. As I mentioned in my comments, there aren’t any signs of that happening yet. So we’re just going to have to hunker down, continue to go after every dollar of costs that we possibly can but this really going to depend for the industry on a recovery and the external environment.

But I do think, we’re well-positioned, to your point, around our new products are resonating and we are growing share or 10% share in the region now. So, I think that bodes well. I mean put in a perspective before 2013, the nine years before, we were pretty strongly profitable down that region. I think clearly in the mid to long-term we expect that to return but we’re going to have work our way through difficult economic environment.

The next question comes from the line of George Galliers, representing Evercore. Please proceed.

I had a quick question just really to the strategic on China. One of your competitors just announced plans to develop common architecture in engines with its Chinese JV partner for a global car to be sold in emerging market. Obviously your platform and One Ford strategy is well flagged. How do you think about co-developing future product with your Chinese partner for sale in other markets not just in Asia but globally, is that something you’re already looking at or planning on looking at?

Well, as you mentioned, with our One Ford strategy, we have now gone from 27 platforms down to 9 and ultimately to 8. Obviously, we have a couple of partners in China, both Changan at CAF and JMC which is our commercial truck partner. And the bottom line is nothing to talk about at this point but of course as our relationship grows, we will look at those opportunities. We’re well positioned now. But as I said, as those relationships grow, could offer us the opportunity to do that.

And then also you mentioned the fact that you’re seeing stronger growth in the Tier 3 and smaller cities in China. Can you give any color on how your market share compares in those regions relative to the 4.7%, you have for the full market?

I don’t have the exact number in front of me but our market share in those regions is quite good relative to the more developed cities. We’re actually in the middle of the country in Chongqing and our performance is strong in the middle of the country; it’s good in the 3 through 6 cities. And I think that actually positions us well going forward.

Your next question comes from the line of David Whiston, representing Morningstar. Please proceed.

Mark, a question for you, going back to in your opening comments on disruption and how it’s an opportunity; one of those opportunities is for the industry to have more ubiquitous software updates and perhaps not have a customer go to a dealer at all. And so is that an opportunity -- certainly for convenience, but is that an opportunity for Ford to charge for those upgrades or do you expect the customer to get those for free or perhaps a combination? And related to that, is there a lot of opportunity for cost reduction potential on -- particularly on recall repair from these updates?

Well, obviously we’re thinking through the consumer experience as we go forward. And clearly with the things like over the year updates offers, as you mentioned opportunity to make customers’ lives easier and also opportunity as you mentioned to reduce cost for recalls, can’t get into specifics about how we’re going to approach that in terms of pricing et cetera. But our approach overall as we’re looking at our products and we’re looking at our services, the approach we’re taking with our marketing and our engineering communities, we want our people thinking about experiences and then subsequently how does technology enable those experiences and obviously then what we can price for it, but clearly a big opportunity for us to better satisfy the customer and also improve our business going forward.

With no further questions at this time, I’d now like to hand the call back to Mr. George Sharp for any closing remarks.

Okay. Thank you Katina and thanks everyone. We’re really glad that you are able to join us today.