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

Thank you, Diedra. Welcome everyone to Ford Motor Company's Fourth Quarter 2018 Earnings Call. Presenting today are Jim Hackett, our President and CEO; Bob Shanks, our Chief Financial Officer; and Jim Farley, President of Global Markets. Also joining us are Marcy Klevorn, President of Mobility; Joe Hinrichs, Executive President of Global Operations; and Brian Schaff, CFO of Ford Credit. Jim Hackett will begin with a brief review of our progress relative to the value creation framework. Bob will then review our quarter results in more detail and then Jim Farley will talk about the actions we are taking to improve our performance in China and Europe. After Jim's comments, we will open the call up for questions. Following Q&A, Jim Hackett will have a few closing remarks. Our results discussed today include some non-GAAP references. These are reconciled to the most comparable U.S. GAAP measures in the appendix of our earnings deck, which can be found along with the rest of our earnings materials at shareholder.ford.com. Today's discussions include forward looking statements about our expectations for future performance. Actual results may differ from those stated. And the most significant factors that could cause actual results to differ are included on Slide 47. In addition, unless otherwise noted, all comparisons are year-over-year. Company EBIT, EPS and operating cash flow are on an adjusted basis and product mix is on a volume-weighted basis. Now, let me turn the call over to Jim Hackett.

Thank you, Lynn, and thanks to all of you for joining us today. If you return to Slide 2, as we recap 2018 and look ahead to 2019, I would like to make a couple of points to start our discussion this evening. For Ford, 2018 will be known as the year between the business that wasn't designed right and the business that we know will win. Certainly, it was a challenging year and that we were hit by some headwinds outside of our control and frankly, poor performance in some parts of the business, which we have now taken action to address. Importantly through 2018, it was a year of progress where we laid the foundation for a much stronger, more resilient and more dynamic business. A business that we want to tell you can thrive now and in the future. So I am really optimistic as we enter 2019. We have a clear vision. We have a solid plan and we are in execution mode. We are fortifying and building on our strengths to start and taking decisive action to address underperforming parts of the business. Some that you know about, for example, where our decision last April to phase out sedans in the U.S. and our restructuring in Europe that we announced recently, and Jim Farley will touch on this later along with the action we are taking in China to restore profitable growth. We are reorganizing and resizing our global salaried workforce, and we are retooling product development to bring more unique customer focused product to market more efficiently. We are leveraging relationship where it makes sense to be more cost and capital efficiency since as our alliances with VW and Mahindra. Our work on AVs and mobility is advancing quickly. We are connecting every new…

Thanks Jim and good evening, everyone. Before going through the details, I would like to provide some context on the quarter and the year. And to keep it simple, I'll just focus on the full year. Although, my comments generally apply to both periods. First off let me reiterate what Jim said about our market factors. In a year no global growth and industry volume and a relatively light new product action as Ford, we delivered very strong market factors specifically strong mix and higher net pricing. We delivered 45% of this in the fourth quarter alone. It's probably fair to say that most folks didn't expect this from Ford given our products' refresh plan for the year. And you should note that in 2019, we have planned a more active year of significant product actions in growing segments. Secondly in 2018, we incurred headwinds of about $3.3 billion in four areas. These impacts are not indicative for the most part of the ongoing run rate of the business; the first roughly $750 million in tariff-related effects; the second $1.1 billion of increased commodity cost unrelated to tariff effects; the third, about $750 million of unfavorable exchange net of pricing were taken to partially recover some of this impact; and forth, about $775 million related to the Takata recalls announced last year in North America. Now this $3 billion impact we incurred a bit more than $1.9 billion in North America. North America's EBIT, however, declined year-over-year by only $450 million. This suggests to us that Kumar Galhotra and his team delivered strong improvements elsewhere in the business as they continue their aggressive work to return the region to a 10% margin. South America absorbed about $400 million of these headwinds, yet it delivered $75 million EBIT improvement from 2017.…

Thank you, Bob and good evening. Let's turn to Slide 15. Before I dive into the actions we're taking in China and Europe, I would be remiss if I didn't put a finer point on the opportunity in North America this year, and our 10% EBIT margin target. Last year, North America delivered $2 billion in favorable market factors as was mentioned supported by positive mix and pricing from a largely carryover product line-up like F-series. And modest new product launches like the new Expedition, Edge and Navigator. This year, we're beginning our complete refresh of our North America line-up. As Jim mentioned, we're adding Ranger, which is off to a great start to our truck line-up; we have the new re-engineered rear wheel drive Explorer, America's all-time best selling SUV; we have brand-new and hybrid performance models of Explorer; we have a wonderful new three row aviator, which is a new name plate for Lincoln; and later in the year, we have the all-new Escape and Escape hybrid, which will be a new product in the largest U.S. segment in our industry; we even have at the end of the year another all-new Lincoln utility. So let's turn China. Obviously, China is the largest automotive market in the world and we think it could be twice the size of the U.S. by 2025. So getting our business back on track is essential, given our plan to grow both brands in China. Last year as we discussed you with you, we identified a number of operating shortfalls, including inadequate dealer profitability. We had access stock, especially of our high-volume C cars. And these deficits were exacerbated by the fact that we had not maintained a fresh line-up. In fact, all of our volume cars were in sell-down last year. Also,…

[Operator Instructions] Your first question comes from the line of David Tamberrino with Goldman Sachs.

Jim, the way you communicated how you think about 2018 as a year and 2017 as a year of planning from a redesign perspective. If we were to fast forward to the end of 2019 and maybe into the middle of 2020, will 2019 be known as an action year for Ford?

Unquestionably, David. And it's worth pointing this out that the time in I'm going to say in 2017 when we had our first investor conference to the beginning of 2018, we worked on the strategy. We addressed the product portfolio from stem to stern. You've just heard from Jim how important that was. We were constipated in product development. And when we did that, we updated the way we thought about car architectures and propulsion. So we addressed three big issues all at the same time, got our cycle plan in shape to taking costs out to boot. The second thing we did is we -- I was really pleased with the AV work with Argo. They really started at the same time in June 2017, so they've only been in real action in 20 months. So in that time that we are planning, we put a lot of work towards thinking about the evolution of the AV. I can just share that independently lots of people looking at this business and looking at all the competitors have rated Argo very high, not surprising given the talent that we have got there. And then we started tackle mobility. And you've heard me talking about David that the idea of building a cloud structure and connectivity, we had none of the vehicles really connected. Back when the call to action was being asked for. So we had to get that through product development and now the plan to monetize that. All those things are in shape. And then as a tour with you, if look at North America, its exemplary for me the way management team gathering to work and make all this stuff happened with Kumar has really gone very well. They ran into some headwinds that they frankly offset a lot of it and then some they couldn't. And then we had a footfall with warranty this year that Joe can explain more detail if that helps everyone understand that we've arrested we think a lot of the issues, and some of them were caused from the past that you just have to deal with. When I think about then in October '17 the call from very smart people following the industry, hey, what are going to do about these markets that are underperforming? Every one of them are being addressed. I also just want to confirm in China that I'm not happy with the way we performed there, but the lessons also showing the market moved on everybody and it's changed. So we just got to be world class dealing with that and you heard from Jim tonight and we can talk more about that what's going on in China. So that's my quick tour for you that from that thinking phase to the doing phase all those things I just said just from top of mind I'm not reading from a list, we're all over that.

And my question is a little bit more around the restructuring side, if we think about Ford footprint today and Ford footprint, or what it's going to start to look like by the end of this year. Will there be -- you're expecting material changes, is what you are implying?

Yes, so let's cover that. So on the white collar work, hard to explain but going very well is an attempt, I think it's a modern attempt, I said this at Deutsche Bank, to involve the leadership in architecting a new version of Ford that doesn't have as many levels and layers, less bureaucratic, more team oriented. We believe we will have that work behind us by April of this year. We started that last October. So it would've taken us five months. The Europe redesign is a little longer and we are going to start to seeing benefits later this year. You know and anyone who either follow industrial companies' paybacks in those parts of the world, because of strong social plans are four to five years on average but there is going to be some quick wins. And I think the confidence I can just cite this in our management team. We have a plan that’s starting to come together. I'm very, very excited about that turning out very well. There is more news coming on South America. It's not a lack of planning or consideration it's managing the constituencies and all the different interests. But you don’t have to wait long on that David, so you'll know more about the year there. The Russian alliance is under review. When I sat in the board room that that was done and we just did it again, and want to come back with given all these markets that Jim Farley had led to review of, we will be done with that. And you will expect then as you are looking at our forecast going forward it will clean, a lot of this will be behind us.

David, another way of thinking about that will help you I think what you're trying to get at is that our EBIT charges that we talked about $11 billion effectively they're almost nearly spent by the time we get to the end of 2020. And when you think about the cash effects of $7 billion done largely by the time we get to the end of '21, because there is a little bit of a lag as there often is between the recognition of the charge and the cash going out the door. So you can read from that that we've accelerated the plans from what we shared with you earlier in the year.

I think I would agree with that, thanks for the additional color, Bob. I guess my second question is really quarter related and go forward for China. Can you walk us through the headwinds for that JV income, which took another sequential step down to pretty seriously negative for 4Q '18? And how you think about the cadence to improvement if that's the level that we should probably start out in 1Q and as you launch new products and sell out that wholesales and dealer pipeline if that's going to turn around the business.

I’m going to ask Bob and Jim to tag team on that Bob.

As with volume, we also had negative net pricing as that’s been a feature in China for quite a number of years, but it was pretty simple and straightforward and the team actually delivered some cost improvements but not nearly enough to offset what we saw on volume. The volume was largely, I call it -- us also though as we all see in the fourth quarter in particular the industry really fell off very, very sharply. And Jim can maybe add to that.

So we certainly have line of sight for improvement narrowing our losses this year and as we localize several key models this year and next year and coming years, we see a great line of sight for very sellable profitable business in China. This year to give you a flavor, we have those more than 10 new products. Our dealer network as you mentioned is stabilized now and starting to grow in terms of profitability and engagement and a lot of those products coming in the second half of the year. I mentioned localization, those are really key, we have Explore, three new Lincoln's in three years. So the localizations really drive our profitability in next two years. Again, the teams have already started on very serious effort on material cost, as well as structural costs as well. We expect that to take hold in second half of this year and next year.

Are there any type of legacy costs outside of employment contracts that would impede Ford from fully exiting any particular region?

I would like to look at the riddle that there is a lot of variables in that consideration, and legacy cost would be one, David, but it's not the only thing that we thought about.

And your next question comes from John Murphy with Bank of America Merrill Lynch.

I just want to focus on one thing first on the big positive being mix and price. I mean in the industry has been more disciplined and I think it's been a bit better, particularly in North America as you highlighted. Just curious when we look at your aged products on a relative basis, what the key driver was that gave you just such significant strong pricing mix through 2018 in North America specifically and even in the fourth quarter? Is there stuff going on as [indiscernible] or other things there, what was the big driver there?

I am going to ask Jim to address that.

So relatively speaking, the F-Series is carryover vehicle, but it's still relatively new. One of the big drivers was the impact of super duty in North America is really an important positive. And I would say as well the team is really laser focused on yield management. We've got a lot of really positive news on the controllables for series mix, product mix through different allocations, different go-to-market strategies. And those are being worked in these vehicle line rooms that we are now institutionalizing. But I would say a lot of it was truck, because that was still relatively new and is still and a lot of it was controllable by the team.

Just a second question, I mean as we look at the cash flow in year, it was not the greatest this year. And then looking at the funding of the dividends, it was largely off the cash on the balance sheet. I think there is some concern in the rating agencies that if you don't get your plan workout and really try to cash flow around that your entity to pay the dividend off the balance sheet and then fund the restructuring from cash on the balance sheet. I mean from where you stand right now, the balance sheet looks like it's in great shape. So doesn’t seem like there is really significant risk, but the rating agency seems to be getting little bit concerned about this. Just curious how fast you can get the cash flow turns so you can fund the restructuring of dividend out of operating cash flow as opposed to cash in the balance sheet and really solve the riddle for rating agencies?

Yes, that’s getting a lot of attention, obviously. And I won't pretend to speak on behalf of rating agencies, but my interpretation of their concerns is that it's really operating performance. The balance sheet as you noted John is very strong, and we deliberately are running the cash and the liquidity at levels that are above our targets in part, because we saw this period of lower cash generation on the horizon and so we've been planning for that. But at the end of the day, what we as a team has to do is we've got to deliver stronger operating performance, and that operating performance include stronger cash flow. As we've mentioned, both at Deutsche Bank and today, we certainly see the opportunity for us to deliver on our plan this year and that include stronger cash generation. But again, it's an interesting -- it's not so binary. As I mentioned to someone the other day, if we didn't pay the dividend [ph] or we got $25 billion of cash. I mean, it's really a question, it's not that cash level it's the ability of the business to generate as we look ahead positive cash flow and we think that we're going to be able to do that to a degree that is above and beyond what we delivered in '18.

And I might want to risk with you on this, Bob, because David Tamberrino question and John's question are linked here, because when Bob points the simple approach to saying you got to improve the operating performance to build confidence. David your question about all those things that we were doing is totally intended to do that. And that's why the team started with we got to get new product in the system. The new product has been observed it can do better, but we have to fund all the development of that that's in some of our higher costs. But we're happy that a lot of this is through the system and the new stuff is going to becoming. So it's the intersection of all that hard work giving us a chance now to win with all these things in front of us coordinated and happening now. So that's why I would give us higher probably of improving operating performance, because of the mix and the kinds of things that we're bringing to bear here.

As you look at this and I mean you’ve been in this job, and there has been some frustration of either the plan, and there is a lot going on in the industry on AVs and EVs and what's going on in China. As you look at the North Star of where you need to go going forward, is it ultimately really just product cadence that is 90% of the gain and the rest is 10%. And we just went through a pretty tough period for Ford on the product cadence notwithstanding the barrel leased in North America and China and some big stuff coming at it. So is it really -- I mean that's very complicated stuff. But I mean is it really that simple though?

I get to look back towards the right with hindsight just like I feel I have to be studied that way. When I look in hindsight, I wouldn't have traded some of the product deferral that happens that cause some of the delays that we now are writing. So as I go forward, I have to look in the mirror and say I'm going to be faced with moments of truth, I'm not going to start product. So I do want to confirm what you said. But I think the challenges of competing in China and the challenges of competing in Europe, the challenges of competing in South America are also about design of business issues that we've addressed. They have to do with underlying car architectures. How complex the organizations can get, how big they can get, we don’t have the F-Series profitability in all those markets. And in a way that might have mislead us about some of the potential. So it's the combination of product and what I would say a model design that we've addressed.

And your next question comes from Rod Lache with Wolfe Research.

First, just a housekeeping item, I presume that the $700 million warranty item in the quarter was Takata and that the underlying North American performance excluding that was closer to 10%. Is that right?

The $700 million that I referred to was for the full year. There was a big chunk of it that was in the fourth quarter, but there was actually a couple recalls, there were some other costs associated with it that were spread through the year. So that was a full year. All those numbers I gave you Rod were all full year numbers. But it's true that that alone if you think about the revenues maybe 7/10 of a point of full-year margin in the case of just North America would have been up in the mid 8s.

Yes, but fourth quarter looks like you had a big number in it though on a year-over-year basis…

And just a chunk of that was Takata.

And just at a higher level, you're talking about an 8% margin presumably at some point beyond 2020. On your revenue base today that'd be $13 billion of EBIT. You are doing $10 billion in trucks and $3 billion in the Finco, so that kind of makes sense. But to get from here to there you need to improve by $5 billion or $6 billion. Obviously, people have been a bit frustrated by how long it takes to get some of these things together, the savings that you're working on. But I was hoping you can maybe flush out a little bit more on this on how we should be thinking about the cadence of improvement. So it sounds like the first thing that comes through is product, not so much cost savings. Can you maybe talk a little bit more about that and how that plays out in 2019, because it seems like there are some big products like Ranger that come out? And then as we look out to 2020, could those other elements, the savings and the exits from certain markets. Do those really start to move the needle materially in a year from now, or does that take longer?

I want to help shape this question and tee this up for Bob, because no doubt you've heard me talk about the structural costs for five years kept accelerating, and we arrested that. And that didn't take us long and we have actually turned it down to the second year. The structural improvements that we are making in the white-collar area, the way I have described the car architecture and what that’s going to do to product development is coupled with the inference that you make about once you get Europe restructured. Yes, you start to see a big improvement. And Bob, I know there's more to that that we are doing in addition to the things I just mentioned. But I want you to see that we are counting that as we talk to you. The frustration that I feel is felt is why is it take long to get that done and through the system. And I respect that. But it is what it takes to build an industrial model that we are talking about to do it the right way, not have it fall apart not to have big disruptions and so on.

Yes, so if you think about 2019, I mean clearly, we have got a lot that’s going to be going on, on the top line, including mix, pricing, all the product stuff, building on very strong performance in that part of the business in 2018 actually. So that would be something that you should expect to see from us in 2019. Coming with that will be some degree of net product cost investment as always the case with new products. But we do have in the year a continued improvement in the level of fitness initiatives. We said when we first started talking about that that would gain traction little bit in '18 or start to grow in '19. That certainly is the case that that is included in our assumptions and then that continues to progress as we go forward, because a good portion of that was related to material cost that we believe it will realize as we go into new model. So that certainly is something that you will see featured as we go forward. But I think your overall premise about there been a put aside external things that could come against us. Yes, we should be accelerating as we come out of 2019, because we will have gone through a big step forward in Europe. There will be other parts of the business that we will have been taking actions on. There'll be more that comes in 2020. Going back to the comment that I made earlier around the acceleration of the redesign restructuring affecting some of our key regions, all of that should bear fruit. And then very importantly, the improvement in China, because we had a very large loss in 2018 we expect that to reduce in 2019 and we’re moving very aggressively to get it back into profit. So that will really, really help. And don't forget the localization of some key imports into China which -- the effect of that is pretty amazing when you look at each of the Lincoln products and the Explorer in terms of going from what now are quite substantial losses for those imports to very attractive mostly business cases. So we have number of different things, Rod, that your overall premise of the business gaining traction, whether it's restructuring, redesign, fitness initiatives, localization, fixing things like in the case of China, all that starts to gain momentum as we move forward.

And let me sneak in that something like a simple metric, we don't want to spend beyond our depreciation rates today and capital. So we got to wash through some things that were already in the systems but we're designing the business so that it capital appetite drops in the future.

And your next question comes from Ryan Brinkman with JP Morgan.

Firstly, following your autonomous vehicle demonstration in Miami during the quarter. I’m curious where you think you are in terms of your autonomous capabilities, both in relation to your 2021 targeted commercial rollouts and relative to key competitors, such as Waymo or Cruise. Do think you are number one, number two, number three in autonomous, et cetera. And then Jim following on your comment in Detroit last week that you are open to investors in this area and have lots of interesting. I thought to ask what you would look for in a partner as it sounds like you might have some options.

I mentioned in my comments that I’m very proud of because of the interest in investors how our Argo has been graded. So it's a strong enterprise. You all saw that when it was down to Miami. And Marcy has worked really hard at this question of what partners make sense, how do we get one plus one equals three. I want to remark that you know last week we told that we signed an MOU to have discussions -- that’s not coming from here, we’re having somebody's phone that we started discussions with BW and nothing to report tonight. But Marcy, what else would you add to this effort.

So first of all to answer the first part of your question about how we’re feeling overall. Our message has not changed and our confidence level remains the same, which is we are on track to have a purpose built vehicle at scale by 2021. And we I think maybe somewhat uniquely have said all along it's a very difficult problem and we'll be riding in 2021. And we are also uniquely building the technology along with building a business. And as Jim referenced the Miami experience, we demonstrated how we are building the tech and the business side by side. It's very important. So when you see vehicles become available we have already figured out how we want to monetize them and establish key partnerships with Walmart whom we announced in November and already partnering with Postmates, Dominos and others. And as far as the partnership building on Jim's comment, we believe and I know many in the industry do as well as that there will probably be maybe 2, 3-ish kind of winners to us standing at the end of August, we are confident that we will be one of those. We will pick partners that help build that dominance and still building scale continuing to learn how to build businesses, et cetera would be something that we would look for in selecting a partner.

And your last question comes from Adam Jonas with the Morgan Stanley.

First to go back to the balance sheet and investment grade priorities that you communicated in Detroit. What is the higher priority, sustaining the current dividend or maintaining investment grade?

Adam, I think I was very clear at Deutsche Bank in terms of our overall financial strategy has starts with strong balance sheet and investment grade rating, maintaining our debt capacity and ensuing that our global funded pension plans stay funded and are de-risked. So to meet that is background zero. And then what you have to do and it goes to back to the earlier question that I think Dave asked, which is -- then the business has got to generate the cash flow that’s enabled us to fund everything else. Everything else includes the traditional business, the new business opportunities, that includes obviously the shareholder distributions. So I think that that's the foundation and that's certainly how we're looking at the business and running the business. The dilemma that we're facing is the rating agencies are concerned about the operating performance of the business and the trend that we've been on, and we've had lot of discussions within about that in the plans that we have in place to address that. At least my interpretation again from chatting with them is it's not a concern around the balance sheet per se in fact it's opposite, they made the same comments that I think some of you have made around the strength of the balance sheet. It's really around this performance. So again repeating what I said in Detroit based on our view of what the year -- we expect the year to be, we would expect to generate a stronger level of cash flow. We expect to be able to fund all of our business needs, including the regular dividend but we have to prove that. Just having more cash isn’t going to help we’re going to have to -- we already have most numbers targeting. We have to demonstrate businesses turning on operating performance level, including cash generation.

Adam, I just want to add, because we have had this conversation when we first met when you were thinking out loud with me when you are facing this buffet of issues that you have to deal with, and you are thinking about the cash question. I want you to think out loud with me how we've tried to hedge some of that in some of these alliance structures. In that it gives us pass to new product areas that we can share our cost and of course in the MOU and AV opportunity we can share cost in there. And none of those have really flowed through the planning yet, because they aren’t all security yet but those are highly likely things that will improve hedging what you might see as a risk there.

That concludes the Q&A. I'd like to turn the call back over to Jim Hackett for closing remarks.

I feel like Adam didn’t get to ask all his questions, I apologize for that. And we don't know what the noise is. So again, thank you for your tolerance of that, it's not coming from here. But I'd like to just say I think I feel good that we got most of our comments out. '18 was a year of progress in terms of laying the foundation for the global redesign of our business. It was all about sharpening the competitive so can better satisfy our customers while investing in the future. We aren't mortgaging that. Ford entered, this is my second point, Ford entered 2019 with a very clear vision and we're building momentum to improve profitability and returns. We're now in execution mode. Third, we're taking decisive actions in all underperforming parts of the business and we're allocating capital to higher return opportunities as you know what we did with the sedan issues this past year. In the coming months, you can expect us to share much more about specific initiatives in some of these areas that we're restructuring. Finally, the work we're doing today to create this healthy vibrant Ford for the benefit of all our stakeholders. And as I said earlier is going to allow us to invest in a future that will be even more rewarding than our mind for investors. We think this is a good time to invest in the ford. Our vision is to become the world's most trusted company, designing smart vehicles for smart world. And doing so, we have the opportunity to participate. This is an exciting thing and a new huge addressable market because of that. It helps create a better transportation and better world that will improve lives. Thank you all for joining us tonight.

This concludes the Ford Motor Company fourth quarter earnings conference call. Thank you for your participation. You may now disconnect.