Ford Motor Company (F) Q4 2017 Earnings Report, Transcript and Summary

Good day. My name is Ian, and I will be your conference operator today. At this time, I would like to welcome everyone to the Ford Motor Company Fourth Quarter and Fiscal Year 2017 Earnings Conference Call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question-and-answer session. [Operator Instructions]. Thank you. I would now like to turn the conference over Lynn Antipas Tyson, Executive Director of Investor Relations. Please begin.

Thank you, Ian. Welcome, everyone, to Ford Motor Company's fourth quarter and full-year 2017 earnings call. Presenting today are Jim Hackett, our President and CEO, and Bob Shanks, our Chief Financial Officer. Jim will begin with a brief review of our strategy and operating performance and then Bob will review the quarterly and full-year results in more detail. After Bob's section, we'll open the call up for questions. And following Q&A, Jim will have a few closing remarks. Our results discussed today include some non-GAAP references. These are reconciled to the most comparable U.S. GAAP measure in the Appendix of our earnings deck, which can be found along with the rest of our earnings materials at shareholder.ford.com. Today's discussion includes some forward-looking statements about our expectations for future performance. Actual results may vary and the most significant factors are included in our presentation. Also, all comparisons are year-over-year unless noted otherwise. Before we begin, I want to bring your attention to pages A25 and A26 of our earnings deck, where we have provided you with P&L metrics for fiscal 2015, 2016 and 2017 consistent with the new reporting format we will begin using with the first quarter of fiscal 2018. As we announced last week, we're making these changes to enhance transparency and better align with industry reporting. Now let me turn the call over to Jim.

Thank you, Lynn and good afternoon, everyone. I was looking forward to this call today not only to discuss our fourth quarter and full year 2017 results, but also to have a dialogue about our company and how we're managing both the near-term business while simultaneously building out a compelling vision for our vision. I'll start with some brief reflections on CES in Las Vegas and NAIAS in Detroit last week a and how they support our direction. In fact, I had a chance to catch up with some of you last week at the show in Detroit. I was really proud of how Ford brought to life our passion for great vehicles from the New Ranger, The Edge and The Bullet Mustang to the expansion of new unique EV strategy. Our ability to tap into the passion the people have for our vehicles is an advantage for us versus the tech world that might toy with cars and is connected to our vision for the future in a really profound way. At And both CES and the Detroit Auto Show, I found myself constantly sighting the world of human centered inside and to help to find the trajectory of our strategy. The importance of this is clear when you consider two major trends. First, cities which of course house people are becoming ever more congested. And the vehicles which more people in city infrastructures will become smarter than we could ever, ever imagine. Our opportunity to leverage the capability of the smart vehicles in smart environment to attack that congestion problem. This new transportation operating system can add tremendous value to shareholders and we can help people have a better more productive day. We also have the opportunity to improve logistics. Currently there is an inefficient operating system for good delivery as neither the vehicles nor the infrastructure is really smart enough. The growth of internet sales is compounding the problem I cited above of congestion. And that customers really prefer the convenience of buying over the web. Our early work with Domino's Pizza confirmed that people enjoyed getting deliveries from a robotic vehicle versus a human. It's apparent to us and the potential here is dramatic as we imagine a world where smart vehicles in a smart world not only improve traffic flow and reduce congestion but also improve logistics. Now let me turn your attention to slide 3. I want to be direct and assure you that as we map out this exciting winning future during times of what we see as profound change we and I are intensely focused on fixing the health of the core business today. I know this is foundational to our success. In last week, we provided guidance for 2018. Clearly, I and my team are not satisfied with this level of performance and we see 2018 with the opportunity to prove to you that we can sharpen operational execution, dramatically improve the fitness we're talking about and continue making the big decisions strategically on where to play, how to win and of course properly allocate capital. So, take your attention to slide 4. We continue to aggressively address the fitness of our business. This is both by resetting revenue and the taping costs in the short-term. But also redesigning our business to compete win in the future. We now can commit that we have multiple work streams up and running and we see significant potential benefits downstream which will dimension for you in the future. We think of operational fitness as much broader build in just cost cutting. It will certainly drive meaningful cost out of business, no question. It’s really important, because it’s ultimately the state of our ability to compete. Ford is a strong company, I’m proud of it. But we simply have not done and enough to truly be fit today. We have the opportunity now to make step change improvements across our business in areas like product development, manufacturing and marketing. To become more common in our platforms more efficient and more customer centric in our design thinking. We’re moving quickly in transformer business though much of this work will really begin paying off as you ask in 2019 and beyond. Okay. If you turn to slide 5, I’ll hit some of the highlights for the fourth quarter. Significantly, we developed and announced the plan that ensures all of new vehicles in the US are connected by 2019 and that goes to 90% globally by 2020. At the same time, we continue to advance on autonomous vehicle plan building our robust business model and making rapid progress in the technology or the capability of the vehicle. In the quarter, we were proud to announce that we will expand our investment and our workforce at our plant here in Flat Rock, Michigan, which will be our initial manufacturing hub EVs. And as we discussed last week at the auto show, we have dramatically expanded accelerated our EV, Electrical Vehicle plans with $11 billion investment. On the product side, we are posed to build on our success. Ford was the bestselling brand in the U.S. could be 8 straight year and our F-Series franchise marked its 41st year as America's bestselling pick-up and margin between first and second continued to expand. The good news is that our investment in new product in recent years were really start to come fruition in 2018. We have 23 global vehicle launches plan for this year more than twice as many as 2017. So overall, I’m positive with the progress, we’re making toward our vision of becoming the most trusted mobility company. Designing the smart vehicles for a smart world and clearly, we’re going to accelerate this work in 2018. Now, I’ll turn to Bob Shanks, our Chief Financial Officer for more detail on the quarter. Bob?

Thanks, Jim and good afternoon everyone. I don’t plan to go through any slides today. Instead, I just plan to make a few remarks to share our perspective on a quarter and the full year. Reconfirm the guidance for 2018 that we provided last week and then we’ll take your questions. Let me start by stating that 2017 overall was challenging including the fourth quarter. It’s also however was a year of progress and I’ll touch on that a bit more later. In the quarter, the topline improved with both wholesale volume and automotive revenue higher than a year earlier. The volume improvement was across all regions except Middle East and Africa. On 7% gain that we saw and revenue was due mainly to the higher volume. Company adjusted pre-tax profit was $1.7 billion, down $395 million from a year ago with a decline more than explained by the automotive segment. The lower automotive profit was due mainly to higher commodity cost and adverse exchange. But we also saw higher warranty costs mainly recalls in North America and Europe. Our automotive operating margin was 3.7% that was down 200 basis points due to declines in North America, Asia Pacific and Europe. Within automotive, the largest profit contributor once again was North America, where we earned $1.6 billion which was down $315 million. Operating margin was a 6.8% down 170 basis points. The year-over-year declines were due to effects from the Expedition Navigator launch and that was mainly lower volume and higher commodity and warranty cost. Outside North America in the automotive segment, results were a combined loss of $206 million with a profit in Europe about breakeven results in the Asia Pacific and losses in South America and EMEA. The combined loss of these operations was nearly $300 million greater than last year due to weak results in Asia Pacific and that was driven mainly by China as well as Brexit related effects and higher commodity and warranty cost in Europe. Ford's Credit on the other hand turned in another strong quarter earning $610 million up 53%. Every cause or factor with the exception of credit losses contributed to the better performance. Adjusted EPS in the quarter was $0.39 up $0.09. And that was driven by favorable tax filing which resulted in an adjusted effective tax rate for the quarter of 10%. Net income came in at $2.4 billion, that was $3.2 billion higher than a year ago due to significant remeasurement loss on pension and OPEB plans along with favorable tax planning. Automotive operating cash flow was $2.3 billion up $800 million from a year ago and that was the strongest quarterly cash flow of the year. Ford's balance sheet remains strong with cash and marketable securities totaling $26.5 billion, and liquidity at more than $37 billion. Let's turn now to the full year of 2017. Our automotive revenue grew 3% and that was driven by favorable mix, higher volume, with a consolidated operations and higher net pricing. Wholesale volume on the other hand including unconsolidated operations was about flat with lower volume in North America, EMEA and the Asia Pacific about offset by gains in South America and Europe. Adjusted company pretax profit totaled $8.4 billion, down $1.9 billion from 2016. This was driven by $1.2 billion of higher commodity costs, and about $850 million of adverse exchange, about $600 million of which was Brexit related as had been expected. The company's internal profit decline in the full year was within our automotive segment. Automotive operating margin was 5%, down 170 basis points due to North America and Europe. These two regions alone accounted for nearly 90% of the commodity cost and 80% of the exchange impacts we saw on a year-over-year basis. Adjusted EPS was $1.78 per share in the lower half of our most recent guidance and up $0.02 from a year ago. This reflects a 15.3% adjusted effective tax rate. Net income came in at $7.6 billion, up $3 billion from 2016, due to the significant lower remeasurement loss on pension and OPEB plans and favorable tax planning actions. Full year automotive operating cash flow came in at $3.9 billion down from $6.4 billion a year ago due to the lower automotive profit but also less favorable working capital changes. As we enter [ph] 2018, we expect external conditions to be mixed, with industry volume globally expanding to some extent in most markets exception of course would be the U.S. where we expect volumes to be lower, but still strong commodities and exchange continue to be headwinds. For 2018, we expect company revenue to be up to flat. This will be supported by 23 global product launches compared to 11 in 2017 as Jim just referenced. We see company adjusted EPS volume within a range of $1.45 to $1.70 assuming an adjusted effective tax rate of about 15%, which is similar to 2017. As using our new 2018 reporting elements that Lynn just touched on the top end of the range assumes an automotive segment that is about unchanged from 2017 despite continued headwinds from commodities and exchange. The drivers therefore of our outlook for a decline in adjusted EPS are lower profit at for credit and an increase loss at mobility. The Ford credit change is due to a lower financing margin as interest rates rise along with a valuation change for derivatives. For lower results at our mobility segment is driven our higher investments for autonomous vehicle program along with increased investments at Ford's Smart Mobility as we build capabilities and create future services opportunities. At the low-end of our adjusted EPS range reflects the normal volatility, we could see from recalls and further pressure from exchange and commodity prices. But it also recognizes potential challenges and fully delivering the recovery actions, we’ve developed and deployed to offset the adverse year-over-year impact of commodities and exchange. Now, I’d like to call out for your attention two slides. An EBIT margin bridge from 2017 to 2018 on slide 35. And on slide 32 a long-term view of commodity market price changes since the great recession and the impact that they had on our bottom-line. As the commodity slide indicates, we’ve always been transparent with investors on the drivers of our profitability including commodities. No matter if there are tailwinds or headwinds. And we’re doing a same now with the guidance, we’re providing for 2018. We are confident in the processes our team use and managing our commodity exposures and their impact on the business globally. And we have applied them consistently during inevitable highs and lows of the commodity cycle. As of the end of January, a little more than one-third of our commodity exposures for the full year already will be lock-in to fixed contracts, hedges or purchases made. I mentioned at the start, that 2017 was a challenging year yet we did make important progress to. The new organization and management team are operating very effectively. We established our vision our north star smart vehicles in a smart world that sets out of the path that were following. And we made important strategic and capital reallocation decisions. And Jim Hackett initiated and championed our global fitness reset and redesign initiatives, which are yield as he said significant opportunities that will improve the business going forward. So, we’re looking forward to 2018. This is an important year and our journey to redefine and reshape Ford to our fitness initiatives and the strategic decisions we continue to make to become the world’s most trusted mobility company. With that, turn it back to the operator, who will get us target our Q&A.

[Operator Instructions]. And our first question is from the line of Ryan Brinkman from JPMorgan.

Hi good evening, thanks for taking my questions. I think firstly just relative to the software year-over-year results in Asia Pacific. Can you talk to more about the drivers there by causal factor, particularly net pricing? I see that incentives were $210 million headwind versus $133 million last quarter. How would you rate the competitive environment in China and the relative competitiveness of your line up there? And then with the six new product launches in China, you've referenced on slide 33. Should investors think about the net pricing for you may be starting to improve in that market this year?

Just, so I'm going to let Jim Farley to handle this one.

Hi thank you for your question. It was a challenging year in China for us we were down in unit volume. We were down in unit volume 6%, but as you mentioned the real change in the market was incentives that affected our financials. Our average age of our product in China is about 4.3 years so we're at the very end of our cycle especially in the utility segment, where we're seeing a lot of new domestic players. We did orient our marketing in the second half of the year towards [cooping an edge] [ph] which we're responding. But the key is that in 2018 in the second half, we start a new wave of product launches in China. And we believe that freshness is going to be really important part of our growth story in China again. So, we did see a negative pricing last year especially in the fourth quarter. I think December was about 5%. So, the overall year was like 4% negative. But it was most acute in the utility segment especially for the older vehicles, which is where we are with our cycle plan. But very excited about our new launches in the second half of next year.

Okay that's encouraging thanks. And then just lastly if I may, you've provided a lot of new and helpful data on the impact of commodities. I'd be curious though, what your latest thoughts are with regard to commodity and currency hedging. So, you mentioned that your commodity exposure is about one third fixed for 2018. Do you think that the right proportion to try to fix going forward about one third? Or can you discuss is there any particular commodity too that might be providing a particular pain point in 2018 like aluminum for instance. And what coping mechanisms if any might be available to you?

I think as I mentioned in my comments, based on discussions that we've -- well actually I think mentioned that earlier so at the [indiscernible] excuse me what I said. So, what I was saying is that to the media earlier this afternoon is that we understand I think in good sense what competitors generally do. Because we talked to suppliers and we understand what OEMs as a matter of force do. And the feedback we get is that they apply the same tools that we do, fix contracts where it's appropriate for example, steel there is no forward market. You really can't hedge and so forth. So, we kind of tether in through fixed contractors that are staggered through the course of the year are shield contracts. So, you get some smoothening if you will in terms of the ups and downs of market prices. We hedge a number of currencies and we hedge out certain periods of time. But one thing I would note though is that I believe this is going to be true for everyone, is that these are non-designated hedges. And so, for those of you that don't know what that means that are listening in. it means that you can lock in an economic value at the end of the contract. But because they're not designated you actually have to mark to market in every quarter. So, you don't escape the volatility of whatever is happening in terms of market prices. So, it doesn't help you from that regard. So, we do that. And then lastly, we do have spot boys for some of the commodities which again I think is an industry practice for those particular commodities. What’s interesting, when you look at the special slide that we have included in slide 32, is we have said on Ford's business has been completely correlated to what’s happened to the commodity prices, and I would argue that’s going to be true for everyone because you may be able to delayed volatility through what’s you are doing in terms of your own contract plan or hedge or so forth but totally again the data just snooze out it doesn’t allow you to escape the overall trend of prices and as you can see on the slide that we provided, we have had some good years, we had some bad years, and interestingly, when you assume the results in the great recession through 2014 that team affected about $3.4 billion. You see slide there was a smaller downward commodity cycle at that point in time which we benefited from for two years, about 900 million each year and what we have seen in 2017 and 2018 as the global economy is growing pretty much synchronous, in a synchronus way around the world commodity prices are increasing and now we are about at the point in 2017, 2018 where we were in 2014 on a cumulative basis, and if you look at the trend of the prices, that’s about whether they have come back to. In terms of the effects as the slide indicates, two-thirds of the effect is largely around steel and aluminum and for those of you that are interested in the aluminum story because the strategy that we are pursuing on our larger pickups and on the SUVs, that’s less than 25% of our impact. It's really steel that’s the story and other metals, and aluminum is well, but it maybe not as much as all you had expected.

And our next question is from the line of Emmanuel Rosner from Guggenheim.

Hi, good evening everybody. First, I wanted to ask you about the investments in electrification, so I think the slides from the Detroit Auto Show, was showing that was going from 4.5 billion plan through 2020 now it's going to be 6.7 billion. But at the same time, it was not mentioned in the 2018 factor, so first which buckets will they be reported in, is that mobility, is that in their regional automotive and then second can you talk about what the cadence will be for the next few years in terms of the investments and if that’s a major factor in the earnings progression?

So, when you look at the cadence, I think the cadence is just going to be an ever-increasing rise I think in the investments, because it's going to be driven by the PE factory, that would certainly had accelerated made some choices around pointing ahead some of the AV, so these will be sort of the progressive increase over the course of time. And it will show up in automotive and it will show up in the regions in which those vehicles are sold, AVs are moving to mobility but everything related to EVs are staying within automotive.

Okay, that’s helpful. And then specifically on the mobility investment, the press sort of moved that similar type of question. Any way you could sort of like dimension the progression here, I mean you obviously said that 2018 would be larger. Any sense of size and then going forward that also keep going up like the electrification or do you see that sort of leveling off and being a positive factor beyond this year?

Yeah, the thing that’s we have seen about that is of course you will have an increase in the AV investment as we move through the program to launch product in sort of the 2021 period and that will show up there. We'll also have investments associated with what Jim talked about at Deutsche Bank around the infrastructure that supported the business operations, the terminals, that sort of thing. And so, I would see that increasing, there will be revenue obviously on that until we get to the point where the product and the services associated with that hit the market. On the other hand, while we're also making increased investments on the other part of Marcy's work for Smart Mobility which is think about as services, digital services. They are what you will start to see as we move through our business planning period as ever-increasing levels of revenue. And so, we actually can see the day even within business planning period where that part of our business is generating a profit and in fact quite a nice return. So, I think if you look at the two parts of the world a bit differently. But that part actually will start to contribute to bottom line I think over the five-year time period.

And right now, these aren't totally matched as you would imagine. The technology capability development for the AV is way ahead of certainly in '18 and kind of revenue projections and the services similarly Marcy's work is building out the capability. It's within the realm of what we've been believing would happen. I don't think there is big surprises here. And we felt that it was time to be transparent about it, because the core investments really will matter as you look across competitors, about people who are claiming that really be in this business and those like us that are inventing it.

Understood. And I guess in the name of transparency your character dimensions, the size of these increased investment in 2018?

Well, when we get to the first quarter, give me a quarter to think about that. But what you will see when you look at the bridge chart that as you collectively look at slide 35 as you collectively look at everything related to automotive, that's a pretty flat result. So, what you can see is mobility is the largest single reporting element in terms of impact on a year-over-year basis. And that's on those two investments. And I would just say it's I'd say it's roughly split between autonomy and growth and capabilities and services expenses we create those opportunities.

And our next question comes from the line of Adam Jonas from Morgan Stanley.

Thanks everyone. I've got a couple of questions about the fixed global fitness redesign initiatives. First of all, Jim, what are the fixed initiatives? Can you tell us tonight please?

Well we have a slide on 4 that I think as far as I want to go right now Adam and I'll explain the background. The slide on 4 is insight for you where I feel like the company overtime and this happens I think generally loses some of this fitness. So, I can take an example of a couple of them for you. We've talked about product complexity back in October, we started talking about that. We found the product where it had something like 30% of the sales and the 95% of the part count. And so, we what's taking the time and I know that I don't have forever with this, is we're going through and doing all the fact-based work to find out where the biggest opportunities are. And that's an example in complexity. We've been working as we've talked to you about product development. This is something that is an advantage for Ford that I think we haven’t fully realized, which is having this capability all around the world with real time technologies, how do we actually get the advantage of the clock and shared efficiencies, because we can average cost down given the capability we have around the world. We’ve been talking about marketing inside the company. The hope here is, if you stare at our advertising in the way that we buy media and things like that it doesn’t look like some of the companies that you follow in other industries that are using machine learning. I’ll stop there, because this night is not about those 6 projects. But I do want to tell you that the more time I have gotten with it, which is really October to now the more hopeful and clear its becoming to me about where we can find the kind of savings. And so, I’ve ask the team to work with me on to mentioning that for our investors. And because we needed not only for you to understand the power of it but I want to use it to prioritize for a second and third. Some of these are multi-year efforts, for example the enterprise systems that underpin, the different databases that we have in the company. There are things that I’ve done before in this area that really beneficial to speed the market with delivery and efficiencies around the world. So, let me start there say that’s…

I mean, so Jim, if I respect you don’t want to use tonight to talk about these initiatives. But I think a lot of the investment community on this call, this evening. This is the time, right. I know you haven't quite been a year obviously, you are still learning the organization. I think it would be -- it’s a fair question asked when or we’re going to know these 6. Because I ask your pretty straight 4 questions, you’re alluding to the 6 in your slide, you’re clearly not going to talk about them. That’s a problem Jim, when we going to be very clear and transparent about this so that we can -- investors and your associates at Ford can rally around the mission.

Yes. You don’t have to wait long, you just have to stand in line. So, you have to wait till our people know. And I don’t want to communicate to our people through the shareholder call. So, the way that we have that laid out is means that it comes pretty quickly, once we get the whole organization up to speed.

Okay. Then I won’t be specific and I will finish with a question is restructuring, perhaps restructuring that you have not announced to this point on the tables one of the many weapon, not your only weapon, but one of the initiatives at your disposal to execute on the 6 initiatives or some of them as you learn and are able to strategize upon them? Thank you.

Yes. And I think that’s a question we answered two quarters ago. We said that the impact of the redesign of things means that we’re going to have excess capacity in areas that we don’t need. I’m not going to tell you which parts of the company that is. But of course, we will address that when the time is right. But I also want to emphasize something here, which is in the design of fitness one of the things you have to do in addition to having you understand where we’re going and our people understanding that is that you can't disrupt the flow of the business. I can tell you legendary stories where certain enterprise systems were put in prematurely in the business was disrupted. So, what you will you be witnessing now in the way that we started this work. As we long identified, where we want to work. We’re now in the redesign phase we are now dimensioning the value we have assigned responsibilities, I am meeting with teams weekly, I just had a big meeting Friday, with people in the company and its getting close to the point, where I think we can start to bring you under the tent, but it's not tonight.

And our next question is from the line of Rod Lache, from Deutsche Bank.

Hi, everybody. My question is just kind of along the same line. So, I appreciate the long-term strategic objectives and initiatives, you are talking about, but the pretty high level and then I was hoping maybe you could at least give us a little bit of financial grounding towards that 8% long-term auto margin target, it's about 250 basis points higher than you are doing now, which would be 3.5 billion of improvement. So, my question is, is there at this point a specific bridge to get there and can you give us some idea of what the high-level buckets would be maybe not specifically on restructuring but when you are thinking about how much of this is net cost reduction. you talked about some gross horse buckets, how much of it is mix repositioning for your portfolio?

Yeah, let me take first shot at that and then if anyone else wants to chime in, they can. So, as I mentioned, I think and answer at your conference Rod, in our present business plan we actually see the business achieving the 8% margins towards the end of the business time period and it improves over the period. So, we actually and that’s all physically based. That is without $1 of the global business redesign efforts that Jim was just talking about. And why we haven’t provided specifics as Jim mentioned in his response to Adam and the question before, what we did say both Jim and I at the conference is that the early work on monetizing the opportunities that has just been developed thus far is more to come, it's really material in terms of impact on OpEx but also on CapEx. And we think it will be more as I said, so that would be incremental to what I just described. Now if you want to say that it's not unusual for business plan to be, looks like a hockey stick, I take a lot of comfort, we try these very realistic and 50-50 in our calls, but we know you can always anticipate the inevitable surprises that happen in this business, both externally but maybe internally. So, when I look at the opportunities of the find that’s already been these preliminary by the team it gives me more confidence in our ability to at least hit the levels that we are targeting if not do better. I would say that, a lot of that is around product, I think we have also talked -- you saw the big increase in product launches this year versus last year, I think Jim mentioned at Deutsche Bank, there is even more to come, when you look at 2019, 2020. So, I think that is going to help drive the top line. We do think there will be opportunities in terms of mix as we continue to work on that and revenue and then the good news on the cost side as well, we would expect costs to come up to some extent, come up some extent over that period. We are getting the appropriate amount of operating leverage from the top line and the amount of the increases isn’t as great as what we have seen over the last eight years. So, I think we are starting to get the balance right, the balance better with the fitness [ph] to be an opportunity on top of that.

Okay. And I guess just two other questions. When Jim Hackett said that we are going to start seeing this payoff in 2019 some of these initiatives. Can you just give us a little bit more color on what that means? And also, just the point of clarification on Asia. Jim Farley mentioned that you've got a lot of product coming on the back half of '18. So, should we be thinking that the results are pretty much what we see right now to the first half when you start to get some traction financially in the back half or is that more of a 2019 benefit?

So, let me answer that one first. We would expect, and then I say away from providing much as I can business unit guidance, and certainly conversations, but building on the comments that he made, we do expect the second half of this year to be a better half than the first half for Asia Pacific driven by those launches. So, they're not launches that are all I guess very end of the year. We actually will see effect in the second half of the year as well. And then what was your other part of the question? I forgot.

Jim Hackett was mentioning that we're going to start to see some benefits from your initiatives starting in 2019.

As Bob's spooling up to talk about what he has recorded, I want to reaffirm something. We've identified the fixed workstreams are up and running. And the benefits, we're talking about '18 and '19 some of them, the bulk of what I'm feeling from what I've seen comes a little later, because some of these are substantial redesigns. And I think that what we really need, what you're asking for the dimension of what the value of that is. And so that's just -- we're not ready to release that tonight. And it's not because we don’t know it or we're not working on it. It's as I said I want to have a plan to include the people in the company. So, I'm sitting here thinking identifying the 6 workstream for you might build more cred, that you're on the right things. But I think you've got a trust we got that part right. I think you really want to understand what the yield is going to be and that's a really fair question and when we plan on answering.

And our next question comes from the line of David Tamberrino from Goldman Sachs.

Wonderful thank you. Jim, I just want to follow up on couple of your earlier comments about your mobility partnerships. And you mentioned what you saw from the customers from the partnership with Domino's. but I'm more interested in what your partners have seen from that business. Is there been an increase and the products being ordered as a result. Is there any potential to see these developments convert into commercial opportunities and to deploy and for not just to be a test or demonstration? Ultimately my question is what's the feedback from your partners on the impacts to their business both from a cost and an incremental revenue generation standpoint?

I'm going to ask Jim Farley to add to this. But if you actually [Doyle] at Domino's just announced that he'll be stepping down in June. And so, this interview is online about their experience with Ford. He highlights it is one of the really big things he's excited about. So, I'm going to let you read between his lines on how he talking about their business. But they reupped as we expand soon in some other markets are testing Domino's has asked continue. So, Jim.

What they learned are couple of things. First of all, for those who spend a lot of the cost is local delivery. This is a really important leverage to lower the cost. Because the driver costs are meaningful. But equally interesting like companies like Postmates and others that we haven't announced yet. They are excited about the revenue expansion. So, let’s take like a local home improvement company. You can imagine that it’s a big revenue opportunity for them to have a fleet of automated vehicles to deliver work materials to the worksite. That’s one thing. The second area that maybe is surprised to us is the data they’re getting back. Suspension for the companies that are looking to grow their company. They are very interested and the data that comes back from the delivery. Where it is, exactly what was digitizing all that, so they can really forecast that revenue growth. Good example will be local home improvement. They know what this would if someone is framing out a house, maybe next will be installation. So, they kind of know what the business opportunity is based on the data, where it’s going in and what it is. I hope that makes sense.

I think you might have lost me a little bit within there. Maybe just as a follow-up to help clarify. I think what I heard was you are seeing some increased orders and increased demonstrations from your commercial partners here. At what point, do you think that could be or become into something more meaningful revenue generation from those partnerships?

Yes. I think we are answering the question, did Domino’s sell more pizzas. And that’s why I want to draw your attention to them. Now you are asking or realizing more vehicle business. Is that what you’re asking?

Yes. I am trying to understand if that partnership specifically is going to move towards more units being delivered or a significant commercial deployment for customers of yours from your feedback.

Yes. Right now, we’re still testing with them. So, I’m going to just give pointing back to their comments, they are very positive.

Understood. And just my second question for you tonight the launch issues with the expedition in the navigator. Have those been controlled or is there still going to be some issues heading the 1 to 18 P&L?

So, Joe Hinrichs is here. And I’m ask Joe to speak to the launches.

Here the expedition, navigator launch is going extremely well. In the fourth quarter, we got off to a little slower start than we anticipated due to some availability of some products on our suppliers. But the products been incredible received and feedback on the quality has been great and we’re building to plan right now and we plan to do that all year.

Okay. So, the issues have been fixed, what I heard?

Correct.

And our next question comes from the line of Brian Johnson from Barclays.

Yes. Couple of questions. First, when you came in Jim, you, I understand inherited the performance compensation, executive performance compensation plan that was in the March proxy. Consistent with what you’ve been saying about 2018 sounds like a transition year kind of stronger performance through 2022. How you’re thinking about the mix of short-term and long-term? How you’re going to be thinking about compensation recognizing of course it’s a board decision going forward?

I think what you’re asking is have we changed that we announced any compensation changes. So, is that what you ask to me?

Well or are you considering shifting for example the focus between short term and long-term it was 60-40 in last year's plan as part of the go forward plan?

I would tell you that I have had discussions with the compensation committee about the short term and long-term plans here at Ford and got their support that the vision that we are painting for fitness and quality improvements, the smart vehicles, smart world can be really supported by the leverage that we have with our share program and our long-term program. We have a performance share program that’s tied to shareholder return and a time invested stock that’s smaller portion of that, that’s what’s your reading in the proxy I guess.

Well that was [indiscernible].

Yes, so and look forward to news on this year, as we publish that.

Okay, because it sounded like you wanted to help it more towards longer term performance, is that fair?

Its already ahead of the market in that regards. So, I mean this is the kind of stuff that’s I think I just want to confirm with you that everybody I think is in the right place with alignment of the compensation and the plans we have.

Okay. second question, you talked in the 2018 guide, about mix improvements. Yet we certainly have at the auto show two competitors unveiling new pickup truck products, biggest in high segment that enjoyed strong ATP increases. So, are you thinking mix and price could improve in pickups despite that fresh competition, or you really talking about the other 20 some product launches around the world?

So great question. We are very fortunate because we are going in the year with essentially new F series as well as a very fresh separate duty and then we saw even in December our price, transaction prices stiffen in December. As Joe mentioned, we have the navigator expeditions, so part of the opportunity for us is definitely going to be those other launches. The first six months of the year when everyone is selling down their old model, we expect a very competitive environment. But over the second half of the year with the new products obviously there is going to be more pricing in the markets for the goodness of those. So, I think we are going to see on the pickup truck market a very competitive environment especially for the next six months, but we have been in that for a couple of months now. And we have been growing our transaction price in that more competitive market, example the 2017 sell down. As we go into the first six months, we would expect that competitiveness to be there and our performance to be there, but we have the addition now as Joe said of good availability for Navigator and Expedition and of course we have other vehicles coming as you alluded to in North America, for example a new Mustang as we go into the spring market. So, I think we’re really well positioned, it's been a combination of both.

And our next question is coming from the line of John Murphy from Bank of America Merrill Lynch.

Hi, good evening guys. I just a first question for you Jim. I mean as you going through the review of the company, you are looking at fitness as well as where you want to shift the product portfolio as well as your smart vehicle efforts and really sort of your total review here. I am just curious if you are coming across anything or think there is any way that maybe if you accelerated sort of spending and committed larger chunk of capital that you may either be able to accelerate the fitness of the company or potentially develop AVs faster. And I guess that will be sort of maybe sort of internal spending that might make a lot more sense or maybe even some acquisitions outside for technology.

Thank you, John. So, I heard really three different streams in that. Let's take the first one, stemming on AV. Right now, we're making a big commitment to that with the Argo AI investments and things that we're doing. And I do believe there is art and science at work here. So, I'm not sure more money is the answer there, we're looking at really a solid underpinning to the way we're writing the software for these vehicles so that as you have over the air updates and you have changes, we're not going to have a lot of problems in the future with updating kind of that capability. That's an example taking a long view in terms of getting that right. The other areas that you mentioned fitness, and that is a great, that's a really great question. Absolutely, if I saw a payback for fitness returns, Bob and I are really interested in short term pay less than two years kinds of things. We would be all over that. And so, nothing like that is being held up in any kind of bureaucracy. And what was the third area you mentioned?

No, in just smart vehicles. So, it kind of falls in AI but just in the smart vehicle efforts for the smart world in this granular plan?

And I think it you asked about acquisitions?

Yes, would any of these acquisitions pile in to any of this?

Yeah very, very open to that. Look for news as you will in that area, we're very interested in that. So, all three of those things I want you to feel like we're not capital constrained in the sense of moving faster. It's having the designs right. Having the right ideas, getting things situated to go. And I approved progress that we made which is hard to see from your perspective. As I walk into the job there was a lot of kind a backup of decisions that had been stuck for a while. And we've let some of that tension to help and gotten things moving. So, we're building an all new dedicated AV vehicle. And that platform is -- we now have that decided and working on that. So, I'm confident that if you are wondering if there is any hesitance on spending or time that's not the issue.

And then just Bob, as we look forward to 2018, I was just curious if you could sort of outline your view on used vehicle pricing for particularly for the U.S. market what that means for Ford Motor Credit because that was a big unexpected benefit maybe at least from my perspective in the second half of 2017, sort of how you're thinking about that for 2018 and what that means for Ford Motor Credit but also sort of your view on new vehicle pricing?

Yeah as you saw the Ford Credit's page in the deck, they benefited across broad parts of the business, but certainly that was a factor. For the full year they came in about I think on average to portfolio we saw a decline of about 3% which as you remember conversations that we had at the beginning of last year, I think is about half or so what we thought was going to happen. When we look at '18 in terms of the assumptions we've built in. we've assumed something around 4% on average.

Okay. Then if I could just sneak in one housekeeping on the raws. Is there any way that you could share mortgage raw material risks and pressure maybe with other partners in the value chain, particularly we maybe some of the suppliers or is there no way to really kind of shift around sort of this exposure and things aren’t going to change there?

Well, I think the area that you would look at it the indexing I suppose. Because in terms of the indexing one of the things that we, I think learned a long time ago is that, there was a point where, we would negotiate and try to withhold giving them good news, when the prices were low and then fight with them when the reverse with true. And I think we found that we were spending a lot of time and not giving a lot of long-term benefit. By focusing on that as opposed to working with the suppliers on their best innovations, their best designs, material cost reductions and getting the best cost as job one. So, we have deployed the indexing across the board on certain commodities as I said one quarter, one month in some cases, I think was 12 months. And we just feel that’s -- you’re not going to avoid the long-term trend and enables our team to focus on what we think as that are long-term play for us in terms of getting true low cost excluding the commodities.

And our next question is from the line of Joe Spak from RBC Capital Markets.

Bob, if I heard correctly the EV spend is included in automotive. So, if I look at slide 35 where you provided the bridge. I’m assuming that’s in the costs ex-commodities bucket. But you also have obviously a bunch of structural contribution costs with the Navigator/Expedition ramp, the EcoSport launch and just broadly more content increasing from connectivity and active safety. So, can you provide any sort of breakdown between electrification and sort of the more traditional structural contribution costs in that headwind for ’18?

Well, I’m not going to breakout EV, if I understand the question. But let me answer the question this way. So, when I look at that far of margin change around costs, including commodities, about half of that is depreciation, amortization. So, if you think about that that’s investment cost, across the whole business not just EV. Which to some extent is already behind us, because we spent some money and this was just the DNA of that. Some of which will be spent during the year and then the amortization begins. So, about half of that and then the other two pieces that make up the rest of it is essentially relatively modest increase in engineering and that is largely on EVs as part of that, but it’s also pretty much on trucks and SUVs as a reduction on car. And then the balance which as a smaller piece is around our launches, the increased number of product launches that we saw some of that will show up in higher launch costs. But the biggest piece like three quarters of it is around D&A and engineering with the D&A being the bigger portion.

Okay. And then just a housekeeping on the FX side. I mean in the past, I think one of the biggest cost as you talk about was pound, euro, which I think is actually moving in your favor here. But I just want to understand with the sort of FX component of that 1.6 billion you’re talking about?

Yes. The FX component is, a little less than half of that, will still be Europe, but that will be well down from what it was this year. And some of that is continued impact of our revenue exposure on a net basis to the sterling and a cost exposure to the euro. So, it’s actually more the cross rates between those two currencies than it is vis-à-vis the U.S. dollar. But, it will be coming down, which is what we had expected. And then, the rest of it is largely in South America and somewhat in Asia Pacific, not much effect in North America at all.

And our next question is from the line of Itay Michaeli from Citi.

So, just a first question on mobility and autonomous. I think you, as you plan to roll out the self-driving vehicles on your partner networks and your customers in 2019 and 2020, two questions there. Can you share when you think you’ll actually be able to run a true driverless, so actually removing the driver and getting the vehicles to that speed, as well as what the fleet size will look like Ford in 2019 and 2020?

It’s Jim Farley. So, as we announced, we are going to our first city this quarter. So, the fleet we have in the market is going to be business model like people driving the vehicle. Our goal is now just implementing the first cycle of new prototypes. And we won’t go in the specifics but 2018 is the year where you are going to see a lot of progress on our VDS and the vehicle being autonomous. But that’s going to be development work for the next several years until we launch in 2021. And we are going to be using existing products because we are developing an all new product which obviously won’t be ready until the prototypes -- Joe's team is building the prototypes, so for the next couple of years. The fleets over the next couple of years will expand but they are going to be different types of hybrid Fords and that will play out over the next 24 months. Our goal is to get people in the vehicles this year to see how our VDS works by itself. So, you’ll have a feel for how far -- how fast we are going with the VDS itself done by Argo this year. So, I think 2018, you will have a good chance to assess that in person. And we have a very concrete plan to roll out the prototype fleet of those autonomous vehicles over the next two years in multiple cities. So, please know that fleet will grow in size. We’re not going to be specific what it is, but it’s a very meaningful investment money wise, to build out all those prototypes. And of course, we had different cycles of prototypes that have updated not only algorithms and computing software but also perception equipment.

One thing I bring to mind, in Vegas, two weeks ago at CES, we had shared some blogs. There were people that were in vehicles in that test market, I think six or seven. And this lady wrote really telling article about how she got car sick and every one of them but not anyone of them completed a trip as advertised. And the reason I am doing this, I don’t want to talk down the capability because it’s very promising. But, I feel in the questions that you want to see for behind or ahead. And the way you are going to be able to judge that is the performance of the product. So, in this case, we are going to test. We are expanding I mentioned the Domino's test. We are -- our goal is actually building vehicles as well as Ford. And in doing that, you will have more to write about and understand the Ford performance. But, I also -- and holding the Company accountable for Ford performance here on the quality basis and people trusting us in this product. And that is the new world of the AV is that one test is getting there and then the other test is really of high quality. And I'm asking to think about both of those goals.

That's very, very helpful. Thanks so much. A quick, quick follow-up, just switching back to the financials on slide 35. I think, you alluded to a prior question, I’ll make sure I have it correct in my notes. But for full-size pickup performance and how that relates to the positive market factors. Can you share a bit of just kind of what you're looking at for Ford's full-size pickup North America, the F-150 platform in terms of your revenue and variable profits for 2018 plus 2017? And how that relates to the overall positive market factors?

No, Itay, we’re not going to provide that information.

Okay, great. Thanks so much.

And our next question is from the line of David Whiston from Morningstar.

Thanks. I heard a lot of talk from the team lately on fitness. And some examples such as too many vehicle combinations. And two-part question is I guess where is this weakness, regionally speaking, where is it? Is it pretty much all over the globe or is it really skewed to one or two regions? And also, why wasn’t this rectified more during Alan and Mark’s time?

Well, I’ll just take the second thing. You got to look at I’m here, because it wasn't, and that's as much as I want to comment on two really fine people I have a lot of respect for. But, I'd rather make the issue the Company's fitness than those two folks. And this problem that you're telling about, I mean, I just picked one for Adam, so he could be satisfied that we weren't just doing head fakes here that we really are working on the right things. That problem is all over the world. And underpinning was a nice try to try and get the more efficient model by building platforms around the world. We've learned a lot in doing that and we're going to be lot better as we adjust in that single category of complexity. We're not the only OEM that’s dealing with that problem, as I read. Now, the question is, can we be more clever in the way we address it and I think we can.

So, David, the only thing I would add is when I look at the business, North America has been operating at a very high level of margin for a long time, it’s starting to come off the level it had been at. So, I think you’re starting to see the impact of fitness because as it is affected by increasing regulatory costs, the commodity costs and so forth. I mean, we're not able to get the same level of margins that others may be able to do. So, I think that shows the gap, if you will, that we have to address in North America. Obviously, in the markets outside North America. If you go back and look at history, I mean we've done reasonably poor, I would say across the collection of those markets ever since the downturn. So, to me, the issue there clearly is the fitness issue, but it's probably as much as if not more than strategic issue in terms of how we’ve approached the markets, the business models we brought to bear, our expertise and confidence in some of those markets, the products themselves one Ford versus something that’s more regional, all sorts of things in that space. And that's something that we are actively addressing through the strategic work stream that we have underway.

David, it’s Jim again. These are moments for me to give your insight as well that this team, there is -- I went from -- Mark had 19 direct reports, I have 8. And you have three of the key leaders sitting here at the table with me that own all parts of this business. Joe Hinrichs and Jim Farley, there’s really just two people that have to deal now with that product complexity around the world. That wasn’t the case in the previous organization. So, that’s an insight for you about why should you have more confidence in our ability to address something like that as I’m inferring.

And our last question comes from the line of James Albertine from Consumer Edge Research.

This is Derek Glynn on for Jamie. Thanks for taking my question. So, you discussed partnerships you have in place with Domino’s and Postmates. Can you just provide an update from a regulatory standpoint as you pursue all these new initiatives and collaborations? What’s the dialogue been like with regulators? Do you see any near or medium-term hurdles in this regard?

I think -- let me just clarify, Jamie. You’re talking about the regulators oversight of AVs?

Yes, exactly.

Hi. It’s Joe Hinrichs again. I mean, you’re hearing this play out and a lot of the government debates and discussions are taking place. With our government affairs team, we’re optimistic that we’re going to get the support necessary to move this technology Ford on the AV front. I mean, when you think about it, everyone you talk to, realizes long-term benefits that Jim Hackett’s been describing as a potential for our Company and for others in the mobility space. So, we don’t see any obstacle at this point. Jim Farley talked earlier about, we’re going to make a lot of progress this year in the testing -- in the market. So, we’re not being held back from that. Obviously, we’re expecting over time to be able to advance the number of vehicles and locations. But that’s not holding us back right now, and we’re optimistic that the governments understand the opportunity here and are moving forward.

And at this time, I’m showing we have no further questions. I now turn it back to Mr. Jim Hackett.

Thank you. So, let’s close out the call today with some emphasis on key points that come through. 2017, I came here in June 1st, and in that six months, we worked extremely hard on resetting revenue and cost expectations for that year. And a lot of the underlying work that resulted in the performance we had, should not be unappreciated. The team did a really good job, really proud. Meanwhile, we reorganized the business, we had told you about streamlining the leadership team. We’ve written a new winning aspiration. We took important decisions. It was asked on this call to accelerating key areas. So, for example, in the connected vehicles, that’s a big investment. The AV strategy, I want to emphasize that’s on track and investments flowing there. And of course, you heard about the new EV plan, which Ford did not have a complete story about electrical vehicles, and we’ve gone from being incidental about that, it was a key part of our future. You’ve heard us talk about this fitness thing but it’s really starting to take hold in the Company. I mentioned this already. So, I’ll just emphasize the six work streams are up and running, they are staffed. The dimensioning is starting to come on and the dimensions are -- and values of that need to be shared with you and we plan to do that this year. Our approach to capital allocation is also evolving as well. We are working at markets -- looking at markets, excuse me, and the word play [ph] questions. We have already shared how we are shifting the vehicle portfolio around the world. I can attest to you that we have sped up decision-making. That’s going to continue in 2018. There is no wasting there in terms of waiting for things to get done. And you are going to see us make important capital allocation decisions. We have Bob Shanks who put together a Board plan for the year, for us to review strategy with the Board each quarter. That’s all something that wasn’t there before; it’s all been mapped out. We are also moving quickly to advance the smart mobility business and look forward to some announcements from Marcy’s organization soon in that space, exciting things that will be developed. So, you can see that as I stare back from June 1st to now, I have this feeling that I am really happy with the things that we have laid, the pipe we have kind of laid, not happy at all that we are not proving to you what that’s going to yield and really confident that you will be happy with us as we bring that forward. So, I want you to understand that I get how important that dimensioning is, I get how important this year is to prove this management team’s ability at a convert. And I look forward to proving to you that our vision is really going to make Ford an exciting brand in the future. Thanks for your time today.

Ladies and gentlemen, this does conclude the Ford Motor Company fourth quarter and fiscal year 2017 earnings conference call. We thank you greatly for your participation. You may now disconnect.