Q2 2020 Ford Motor Co Earnings Call
Ladies and gentlemen, todays conference is scheduled to begin shortly please continue to standby and thank you for your patience.
[music].
Good day, ladies and gentlemen, my name is scenarios and I'll be your conference operator today at this time I'll, let to welcome you to be Ford Motor Company Second quarter 2020 earnings Conference call. All lines have been placed on mute to prevent any background noise. After the speaker's remarks, there will be a question and answer session. If you.
I'd like to ask a question. During this time you need to press Star one all your telephone keypad.
At this time I will like to turn the call over to land and people Tyson.
That could have director of Investor Relations.
Thank you sit area.
Welcome everyone to Ford Motor Company second quarter 2020 earnings call presenting today are Jim Hackett, our president and CEO and Tim Stone, our Chief Financial Officer.
Also joining us today for Q and aid, our Jim Farley, Chief operating Officer, and Marion Harris CEO Ford credit.
Jim Hackett will begin with some color on the quarter and then Jim will talk about our results in more depth animal turns to deter turned to.
A key M&A.
Our results discussed today include some non-GAAP references these are reconciled to the most comparable U.S. GAAP measure in the appendix ever earnings deck, which can be found along with the rest of earnings materials at shareholder does afford dot com.
Today's discussion includes forward looking statements about our expectations actual results may differ from those stated.
And the most significant factors that could cause actual results to differ are included on slide 23.
In addition, unless otherwise noted all comparisons are year over year company, EBIT, EPS and free cash flow or on an adjusted basis and product mix is on a volume weighted basis.
A quick update on two upcoming IR events first on Monday August 3rd RBC will host a fireside chat with US Tombstone hematite Tang are cheap product development number Sherman officer, and Gary Johnson, our Chief manufacturing and Labor Affairs Officer will participate and then on Wednesday August 15th Kumar Girl whole Trust.
President Americas in International markets Group, who participate in the Jefferies Industrial Conference now, let me turn the call over to Jim Hackett.
Thanks, Lynn and Hello to everyone.
In a moment I will share with you how absolutely proud I am aware team has performed during the cold would pandemic, which of course is challenge every aspect of our business.
Before I do I don't want this moment to pass without giving some important perspective on where Ford Motor company stands relative to racial justice.
I've been heartened, frankly to see our industry like other industry step up in the aftermath of the killing of George Laurie and of course hand in hand with others. There's a deep outpouring of collective grief and frustration that moved.
That's all very deeply with much more than a moment in time that will stay but rather we.
We must make it a turning point for our society.
Board is committed to leading from the front with action to enable social mobility and economic success.
African American community.
<unk>, including programs in which the company has invested for more than a century.
The Ford Motor company find in particular investing a broad range of initiatives addressing social justice racism.
Quality of economic opportunity and we're looking forward to more opportunities to affect positive change.
On the past week since Mr points that I.
I had met nightly with a small team of people to think as deeply as possible.
Out what is not worked in the past what we need to address in the future.
We've begun to map the experience of black lives afford and see areas where improvements.
In enhancement would go a long way to address many of the concerns that have been voiced Ford is committed to leading from the front end, taking action and the results will prove themselves over time.
This is.
Deeply a part of our culture in history. The Ford Motor Company Fund in particular has invested over many decades, the ground level to address issues of social justice races in the quality of economic opportunity and we look forward to sharing much more exists in the future.
Okay. So let me turn to the quarter, which I would summarize in two ways first strong execution in this challenging environment second meaningful progress in our plan to create a vibrant Ford motor company with exciting products that people want and well position to capitalize on the new technology and trends that are transforming our industry.
Yeah.
I couldn't be prouder as I said at the optimism and the effectiveness our team demonstrated managing through and beyond the cobot crisis.
Start I think Ford is distinguished itself on three principles protecting our team and doing our part to limit the spread of the virus safeguarding the health of our business and stepping up the building supply much needed personal protective in health care equipment.
All three counts the team performed exceptionally well under difficult circumstances.
The strong execution and able to deliver much better financial results and we expect to just three months ago.
For example, our team did a fantastic job safely restarting production and wholesale exceeded targets frankly, our focus on safety enabled are efficient restart as we followed a return to work play book.
Very very closely are.
Our focus on safety also extended to our supply chain as we work directly with our suppliers in logistics providers to minimize disruption.
In addition, our team also worked hard on costs, including Capex, which help reduce losses in cash burn in the quarter and these factors are what led to our outperformance.
Another highlight of the quarter is are profitable commercial vehicle business. It continues to gain share globally and Ford credit. It remains a pillar strength for our customers and it's a competitive advantage.
Overall I'm proud to tell you the balance sheet remains extremely solid and positions us to weather further disruptions in headwinds.
Jim will provide further details in a moment on the balance sheet.
Importantly, this intense focus on managed managing through the crisis is not locked to software mission.
Author own destiny in shape the future report.
Since our last earning call we have revealed the all new 2021 F 150 and are on our new Bronco family of vehicles.
These vehicles, along with upcoming Mustang Maki represent Ford's modern product vision highly desirable iconic vehicles packed with innovation and human centered design features and they're fully connected in ways that when hands quality and constantly improving ownership experience through faster over the air updates.
Let me give you some color on the F 150, the all new version. We showed in June was born from decades, a deep focus on what customers want new human centered design capabilities that helped us invent beyond hobbyists features and capability customers will love and got.
The new F 150 is pack with dozens of new innovative features and upgrades that we believe will make this a market leading truck for 43 years, and that's an even stronger proposition for our customers.
We're in great shape to launch the new one or the new F 150 on time and with high quality, which of course requires now changeover in our plants in Dearborn and Kansas City.
I will be important sell down of the current model is also going well as demonstrated by great news in our market share.
For example in the U.S., while sales decline, we performed better than the industry due in part to the strength from our trucks that being the F 150, Ranger and rescue bees, exploring Lincoln aviator and Corsair.
Our total share was up 20 basis points in the quarter to 14.5%.
Within that number our retail share was up 120 basis points of 13.3%. That's F series gained 250 basis points of signature to 33.3%.
Turning to the all new Bronco.
California enthusiasm from the public immediately after the reveal earlier this month candidly speaks for itself reservations for Bronco.
Well big surpassed even our most optimistic initial projections.
Our entire team like the over 150000 customers who reserve one.
Our Super excited about the Bronco fit this family of vehicles had big upside potential in the growing off road category and this is a category with a leading OEM, there's not been seriously challenged until now.
And we have proven credibility in this off road space with Raptor in particular, and we are the number one cross shop Green for GE today.
Initial customer demand for Broncos. So high that we are actively working to increase our annual production right now.
I also want to give you a quick personal story on the status of the marquee, which will go on sale later this year.
An opportunity to drive an advanced prototype recently and Ann Arbor.
Experience was just starting from start to finish and you sit in a driver's seat everything's personalized my profile automatically loaded into the Maki before I press, the star, but seek position screen colors preferences, Apple Carplay in ways, we're seamlessly integrated into the Singapore system.
Then set off on the driving Whisper mode now the drive was astonishingly smooth and powerful.
And I use the one pell dragging system breaking in battery regeneration were perfectly is integrated.
Then I did switched unbridled mode. You can see me smiling and I can tell you. The performance was pure Mustang sure foot is an incredibly quick as I took curves experienced was incredibly intuitive in the cluster tells you exactly what you need to know if nothing extraneous.
Yes, I left with a big Smile on my face because I know our customers will soon enjoyed the same experience.
When I see these products come to life, I feel better and better about our decision to reallocate capital spending from so that the trucks.
And commercial vehicles, and FCB was controversy over time, which paying off.
I've, even more new products in the pipeline in areas were four to strong today and in white spaces, where we can earn stronger returns and grow share.
And these new products are critical to our target to reduce the age of our showroom the U.S. over 40% or more competitive 3.1 years by 2023.
Oh, yes.
Really with the highest replacement rate and younger show room age have generally gain market share profitably. So good place to be in.
By several third party measurements Ford brand reputation is improving as well and we believe we are much more potential for improvement as we launch these new exciting product.
I just want take a moment touch on our plan for electric vehicles.
We're about midway through our plan to invest more than 11, a half billion through 2022, and there will be more after that with an increasing mix of spend on all electric vehicles.
We're bringing the power of choice to our customers with hybrids plug in hybrids in pure electric.
By the fourth quarter were 15 electrified nameplates available to customers around the world and nearly 10% of or wholesales Wolf come from some poor form skews me of electrification.
We're deploying this technology across our lineup and price points to bring improved capability fuel economy and emissions to as many people. It's possible just as we did with our eco boost technology a decade ago.
Nameplates that will fall are all electric heard the territory in China.
Our escape includes a plug in hybrids, which offer an estimated 100 MPG he and the F 150, Powerboost hybrid just ordered one of these as well as our Mustang Maki B B.
These will be followed by an all electric versions of our market leading that 150 in transit van.
Electric vehicles are also big part of Lincoln's future and you'll see this unfold in the months in years ahead.
As you know in June we finalized our strategic alignment alliance would be W.
Sure accelerate execution of our commercial vehicle and electrical vehicle strategy.
This alliance also significantly strengthens Argo a on.
Which now combines unmatched expertise with the global reach afford and BW together.
This positions for well a self driving vehicles become a significant new source of revenue and profit in the years to come.
80 journey will be along with Ford is now well position to run this race and compete like few others can.
Finally in a moment, Tim will provide an update on the progress of our global redesign.
We're aggressively reshaping our business and restructuring underperforming operations around the world rationalizing our product portfolio to play to our strengths and attacking cost.
Obviously Ford is an immune to the effect of the paying them.
Including the new vehicle market that has been waylaid by the pandemic.
But we continue to manage through this crisis, even as we continue to create a vibrant profitably growing company one that we're confident when in an era of smart vehicles for smart World.
With that I'll turn it over Tim for more color on the quarter and our expectations for the remainder of the years Tim.
Great. Thanks, Jim.
In addition to our operational execution this quarter in the face of unprecedented industry headwinds our results demonstrated progress as we fix areas. The business that have held us back in the past, including cost and launch execution.
An acceleration in areas of strength like commercial vehicles, and as youve fees as well as newer capabilities like connectivity.
Tangible progress in electrification and autonomous vehicles, both essential to our long term growth.
And lastly, the favorable impacts for global redesign and a more focused portfolio a fresh products for customers.
We also demonstrated disciplined management of our balance sheet and continue to maintain strong liquidity to ensure financial flexibility and these uncertain times.
We ended the quarter was over 39 billion in cash and liquidity, reflecting almost 10 billion of new debt in the quarter, including the 8 billion unsecured issuance we completed in April.
During the second quarter or working capital dynamics played out as we highlighted on our first quarter earnings call.
As production resumed in mid May our payables and cash balance recovered sharply.
Restoration of production payables will continue into the third quarter.
As you reached near full production in late June.
On July 27.
We repaid 7.7 billion of our outstanding 15.4 billion corporate revolvers.
We also extended 4.8 billion of our lines of credit.
From April 22 to July 23.
Our current liquidity of almost $40 billion is sufficient to maintain or exceed our target cash balance of 20 billion through the second half of this year even.
Even if global demand declines or if there's another wave of copel unrelated plant closures.
Looking at a result in automotive.
Wholesales on revenue were down due to the suspension and manufacturing.
To give you some color on wholesales earlier this year pre coven, we had expected wholesale units to be about 800000 higher than the 645000, we reported in the quarter.
Our decline automotive EBIT was driven by the decline in volume, but this was partially offset by over 1 billion improvement in both net pricing and cost.
The cost improvement was the net of four primary areas.
Lower structural costs due to suspended production.
And one time cost actions like reduced marketing both of which were partially offset by higher material costs for new products and regulatory compliance and higher warranty.
We do expect more TV to be up through the year.
Looking at our business units in more detail.
North America was shut down for six weeks in the quarter, but like the other regions manufacturing came up smoothly.
In fact, north America's operating about at about 95%, a pre cobot production levels by the end of the quarter.
In addition to the improvements and share the Jim mentioned North America team is laser focused on minimizing the impact of lower volume through the aggressive management of costs, including reducing facility costs media spend and the elimination of all discretionary spending.
The team also focused on yield management actions, which benefit both revenue and EBIT.
In South America, our plants were mostly idled in the quarter.
But as is North America, we brought production up efficiently.
Market share declined largely driven by lower sales to rental companies in our global redesign actions last year to exit heavy trucks and unprofitable products such as suggested focus.
However, both Ranger and eco sport did well as range or the number two midsize pick up globally gain share.
Relative to profitability. This is the third consecutive quarter of improving year over year results as we continue to hone our cost position.
Good and lower head count and improved mix.
In Europe, all our plants can have successfully by may 4th.
Profitability was favorably impacted by the benefits of our global redesign as well as are more focused approach.
On three customer segments commercial vehicles select passenger vehicles and imports.
Relative to global redesign we are on track to deliver by the end of this year roughly a 1 billion dollar improvement in structural cost since the actions began during the third quarter 2018.
This includes a 10000 physicians in western Europe of which 7500 reductions have been completed introduction of over 2000 positions in Europe.
The balance of the positions in Western Europe will be limited by the end of this year.
We've also reduced cost by reducing our manufacturing footprint by six facilities down to a total of 17.
Our sharper focus on products strengths allowed us to extend our leadership a commercial vehicles as we reached 15.1% share in June and increase of 220 basis points.
We are on track this year to meet the new CEO to regulatory requirements through a passenger and commercial vehicles supported by our growing portfolio of electrified vehicles.
For example in the first half this year, our new Puma M. have reached 80% mix and Kuga P. have an m. have collectively reached 57% mix.
On the horizon, a bed transit will join our transit family ice and hybrid power trains.
In China.
The only region to post again wholesales wholesales were up double digits as we benefited from the newly launched escape and linking Corsair and strong commercial vehicle sales.
Corsair first locally produced Lincoln product contributed to a 12% increase in sales from Lincoln.
And they all new locally produced theater is launching now.
China also posted its second consecutive quarter share gain of 20 basis points to 2.5% its highest market share since the third quarter 2018.
Our strength the commercial vehicles supported by 34% increase in sales at JMC.
Our JV partner, which gained 40 basis points of share.
As with other regions through cost discipline, China is a great job mitigating the profit impact of coven.
China is focus on cash flow also delivered a step function change in working capital driven by the benefits of localization as well as capex efficiencies.
And mobility, we continue to make investments to commercialize or autonomous vehicle business, including product development engineering and testing.
Our six test markets for Argo AI.
Let's see what we believe is the largest active urban test footprint of any self driving vehicles developer.
As Jim mentioned in the quarter, we closed our new partnership with VW and Argo area.
This generated generated a gain of 3.5 billion, which was recorded as a special item.
Our.
Just the self driving system portion of our HIV business is now deconsolidated.
Despite the deconsolidation, we do expect our investment to Navy reflected in our consolidated mobility results to continue at similar levels for the reasons I noted earlier.
Mobility, we also continue to invest to build up capabilities and connected services, including our Ford pass and for commercial solutions platforms.
In fact, we've centralized our enterprise connectivity team to accelerate the delivery of human centered connected experiences for our customers.
We expect this sharpened focus to also provide benefits to the enterprise through improved customer experience and quality.
For credit delivered a strong profitable quarter demonstrate uniquely compelling value for customers and competitive advantage.
Prudent actions in the first quarter insured and we're adequately reserved in light of the macro uncertainty created by coated.
Portfolio performance was strong and delinquencies and charge offs were at record levels.
Record low levels.
For credit provided extensions to about 11% of us customers through may an unprecedented move.
Over 90% of these customers have resumed payments without delinquency and we're very pleased with the performance of this portfolio.
Let me share remained below industry average.
And off lease auction performance is better than expected.
3% sequentially and down 2% year over year.
We began the quarter close auctions growing inventory falling prices.
However, EMEA, we saw healthy recovery and auction volume at prices.
At present, we forecast lower auction values for the full year of about 5% consistent with third party estimates.
Now, let me turn to guidance.
Guidance assumes no meaningful change the current economic environment.
Continues steady improvement in the stability of the global automotive supply base.
No further significant cobot related disruptions to two production or distribution.
And the third quarter, we expect to profitable.
With adjusted EBITDA point, 5 billion to 1.5 billion, reflecting the economic impact of coded weaker global demand for new vehicles parts and services and lower profit from foreign credit.
Our recent practice has been to comment on the upcoming quarter only because of the significant launch activity in the fourth quarter. We've done some early color would be helpful.
We expect adjusted EBIT to be a loss in the fourth quarter driven by the volume impact the new 50 launch.
And lower ongoing industry volumes.
Note that our major launches in North America has shifted to the fourth quarter inline with our cobot related production disruption.
We anticipate the downtime changeover and ramp up we'll reduce 50 wholesale significantly in the quarter.
This launch impact will more than offset the nonrecurrence of the 2019, Uli w. contract bonuses in the fourth quarter, which is worth roughly 600 million.
Well, the new Bronco sport I must say Mckee are also launching in the quarter limited level wholesales will not have a material impact on our fourth quarter results.
We also expect lower Ford credit profits in the fourth quarter versus last year.
All that said, we expect adjusted EBIT to be a loss for the full year.
I'm optimistic that we're well positioned for what lies ahead and to deliver excellent products and services for our customers.
With that let me turn the call back to Jim for a few comments for move today.
Thanks, Tim Yes, just a few comments I want to reinforce the following about the quarter and the second half of this year in the face of unprecedented sector headwinds operationally, we maintain robots safety protocols and aggressively mitigated production losses, while effectively navigating a tenuous supply base I mean everything.
Within motion.
We're keenly focused on cost and cash discipline, Jim Farley led an effort here. That's just extraordinary we're optimistic and ready for the production ramp up of the F 150, the Maki as you've heard the Broncos sport and Bronco, all with the spirit of high quality and extreme focus on doing a great job there.
We continue important investments, we didnt stop spending on the future in commercial vehicles, Avi connectivity and electrification.
We did continue to implement our global redesign and portfolio reef refresh and we have measurable results to show that this is going very well and as you just turn from Tim would do it did a great job with this we had a disciplined management of our balance sheet and extremely strong liquidity position from all the actions we took earlier this.
Year. This ensures our financial flexibility, particularly as we know we've been certain time, so operator with that let's move to Q in a please.
Okay. As a reminder to ask a question you need to press star one on your telephone keypad.
Your first question comes from the line of John Moran Murphy with Bank of America.
Good evening guys just to a first question Tim is as we look at sort of that the guidance you had given us on on the second quarter.
Are you kind of blew it out of the water here I mean, you're talking about a $5 billion plus EBIT loss.
And you came in well well better than I'm, just curious what changed and what are you thinking that the major factors are and then also I mean, if you think about price and cost would seem to be peak two big levers how sticky do those benefits be going forward. So really just what change and how durable is the change.
Great.
It ultimately the performance the second quarter comes down to operational execution by the teams and the you know if you look at a return to work we did so not only safely but production in our wholesales vehicle sales came with the inventory management.
Strong performance by the teams.
We were near full production within the quarter and.
Greater cost reductions and cash reductions than we anticipated initially as well again basic keen focus on cost and cash is also favorable pricing environment for products and mix and the Ford credit auction values and credit losses overall portfolio performance.
It was a strong.
So I guess at the end of this strong execution.
And as it is second part of question again was as it relates tumor says going to prevail, but.
Sure Yeah, how sticky is that that that sort of that outperformance because it does sound like a lot of it was was micro and and as you said just execution. I mean do you think some of that was sort of transitory in response to sort of austerity measures are house, how sticky is this.
I think the operational execution is something we pride ourselves on and expect to worked really hard to make sure. It's very sticky and we've got a lot of work ahead of us for sure in back half the year.
Some really important launches in the fourth quarter and continue to drive improvements in the fixed accelerant growers that we've talked about but soon as reflected in our guidance for profitability in the third quarter is we're going to continue to offer.
The operational excellence manner.
Okay and then just a second question I think Jim Farley is on we look at the Bronco launch.
Got a hype around the truck which is.
At least from my opinion is his well deserved a lot of excitement there around the sport as well.
This year, but it seems like there is this just sort of the start something much more than even just those two vehicles. When you talked about the Bronco family. So just trying to understand no will we be looking at something 456 years down the line, where there could be a portfolio of bronco vehicles, it makes or mirrors sort of more.
For what what GE pass Im just trying to understand what the potential is above and beyond what we know at the moment and it seems like there's a lot more on the horizon.
Thanks, John Hi.
As Jim and Tim mentioned, the Bronco receptionist and.
Very positive the reservation numbers are far beyond what we expected and these are two.
Broad appeal nameplates and free body styles that we don't have in our portfolio. Today. So we're not getting ahead of ourselves on Bronco, we have a lot of works due to launch these products to do with World class quality and don't forget our ambition is to launch over 200 accessories and really create a brand sub brand with.
Going forward like we have like S series so.
We have a lot to do and that's what we're focused on.
John There is no shortage of great ideas for Broncos at Ford Motor Company, but we have a great foundation to start with with these three named these three body style.
I would expect Ford like we've always done.
We've learned from S series over the years decades that that will roll out a family of Broncos like we're doing in our own way.
Targeted to our own customers, where we see openings in the market for customers to be thrilled and we do see that.
Opportunity in the market, so I wouldn't I wouldn't hold ourselves or benchmarked ourselves against another OEM. Our idea is to play to win by going after its specific customers. They are underserved. Thanks.
Great. Thank you very much.
Your next question comes from the line.
Roessner.
Deutsche Bank.
Hi, good evening everybody.
Hi, there.
My first question is trying to spend a little bit better how to think about the the rest of the year.
When they look at your cost performance in the quarter, maybe on slide 11, So 1.1 billion over on the net basis, but a 1.8 billion a qualified as structural and the way to dimension for us how much of those structural costs are.
More temporary reactions in the quarter when you had.
Shutdowns for an extended period of time versus something that we could assume could continue on year over year basis going forward and then still a but the rest of the years outflow.
And you will feature dimension for us.
The magnitude of the impact from the 50 change where either in terms of weeks of shutdown or units and missing data could be helpful to dimension.
So many of its Jim Hackett, I think I'm, assuming that the Tim.
Great. Thanks, Jim.
So as it relates the cost actions, we've been taking when talking about for sometime now is the focus on fitness and design of the business and so we're going to continue to be here passionately focused on making sure the rate design for the business and this is a priority and so certainly there are things that we appropriately.
We undertook to.
Preserve cash and reduce costs in response to the environment, but we're also.
Looking at opportunities to learn from this and identify areas to further accelerate our fitness and redesign.
Opportunities that are ahead.
So that's really what I'd have to say in that.
Otherwise essentially reflected in the guidance, we have the third and fourth quarters as we look out.
And Oh, let's turn to.
Got it.
That was in the second part was around the F. pick 150 changeover.
On 50 side, we try to do is characterize it is more impactful than you had W. Launch essentially of six sorry. Good W contract bonuses of 600 million so beyond that there's not much more weakness we can say.
Certainly when you have.
Americas.
The best selling vehicle for 30 years, and gaining share Thats series in the quarter you can see the popularity that vehicle quite meaningful to our overall business. So ramped down ramp back up for the successful launch will have a big impact on the quarter. It's why we're expecting that loss.
Okay. Thank you and then.
I was hoping to get action.
A little bit more from you or your latest thoughts on the global redesign plan.
And the opportunity to use.
This industry downturn potentially to accelerate says.
Hey, I guess internally say if the I think you mentioned during the prepared remark that you expect a billion dollars benefit by the end up the year I wanted to just first on the center what basis that is that for 2020 versus 2019 or is that since the beginning of the program and how to think about.
The opportunity to accelerate its what are your latest thoughts there.
Yes as relates to Europe comment.
But in this year, we expect to have roughly 1 billion dollar improvement in structural costs actions since the beginning.
Women as announced in Q3 teams, it's cumulative and that includes the reductions that physicians I mentioned 10000 positions in Western Europe, a 7500, which had been completed already as well as 2000 physicians in Russia as well as the reduction in manufacturing footprint.
Six facilities on a total of 17, so again, we're going to.
If you most inventories continue to look at opportunities to a mixture of the rate design to the business as we look out at the opportunities ahead of us and nothing incremental.
Now it's at this moment.
But to date, we've incurred 3.9 billion of even charges and 1.4 billion of cash. So it was 7.1 billion to go up to 7.1 billion to go in charges up to 5.6 billion cash.
The other thing as you continue to execute on redesign in South America as well so nothing new to announce this time, but you are keenly focused on.
Great. Thank you.
Thank you.
Your next question comes from the line fill up swap with Jefferies.
Yes. Good afternoon. Thank you very much but a couple of questions one is.
When I listen to you could seem about the Q4 guidance going back into lost because of launch costs. It seems like a lot of that assumptions. Obviously, we've got a Q4 and it seems like you does not set that you'll definitely going back into loss loss would depend on potentially on the Sox I wondered if you can commence and give us some kind of no.
Guidance on the range of outcomes potentially.
And my other question was also to you.
In terms of that you've done quite an impressive look in terms of snowden protecting cash and also study to de lever to capital structure.
I couldn't help Moody's single you interest expense almost doubled in Q2.
That was appointed discussion of the love, we'd let investors that the interest expense, we put into earnings momentum what are you doing and how quickly can you actually get the interest expense under control. So we can make sure we don't lose the opening that fits into the financial leverage.
Great. So let me start with the interest expense.
It has ticked up as we bolstered our balance sheet and ensure we have.
Not only strong cash position strong liquidity position and suits us very well and then as we looked out we felt we feel we feel comfortable with our cash position and are confident so.
So the such that we repaid and roughly half of outstanding revolver is that we drew down earlier this week and well continue to look at opportunities to repay additional debt couldn't revolvers overtime as the business performs and.
I mean anything announced at this time, but certainly we'll be looking at opportunities to reduce interest expense and the and de lever the balance sheet in that way.
As the debt levels come down of course, you have that $40 million liquidity as it depends a lot of the credits so.
Comfortable to our cash and liquidity position the interest expense for the back half the year, you can assume roughly half a billion dollars per quarter.
Reasonable expectation.
And then a question on SAR year to date. So it was about 13.4 million units at the first half and we see this improving throughout the year.
And.
Beyond that I think we'll have more colors year progresses.
We do see again, an opportunity for to improve as of year progresses.
Thank you.
Your next question comes from the line of Rod Lache with Wolfe Research.
Hi, everybody.
Well I was hoping just to revisit that question about costs.
That billion dollars since I've Europe savings, it's obviously, a big number but when I look at slide 11.
And on the bridge in Europe, and I look at cost they see zero.
And I'm, assuming that that's because your variable costs, mostly regulatory is offsetting years your structural cost savings.
So you know just taking a higher level look you know the question about the billion eight of structural costs and people are wondering whether that there's some significant proportion of that they could be permanent.
Some of that may be shifting from the first half the second half are coming back.
Yeah. This is there a risk here that.
Your.
The structural cost kind I get off go away, but the variable cost inflation that we see like material freight warranty that kinda states.
Yeah, I guess, what I'd say that in the team has been.
Very focused on opportunities not just during this time cobot crisis, but before that to get more fit.
And improve our cost structure, you were seeing that an underlying results entering into the crisis with the crisis. We've had an opportunity to do further reassess how we work and what are what opportunities you have in our cost structure and demonstrated to ourselves. We can take swift action. The team once again the teams around the world is agree.
Good job.
Yes in all areas.
We're certainly mindful of.
What you're suggesting that these costs come back into the cost structure.
In ways that are unwelcome, but we're going to do everything we can to make sure that well certainly their volume related costs, but said that we're going to get more and more fit overtime.
Okay.
And just a question on the launches that you're talking about you talked about the disruption, but obviously, there's some pretty big benefits potentially next year.
I was hoping you might just talk specifically about F 150, and what it would take to put that into the positive bucket.
Do you need a significant amount of pricing to offset higher variable costs, there and on the Bronco is it conceivable that you could produce 150000 units a year there or is that just beyond the capability or the scope of what's possible.
So Rob as Jim Hackett, I'm going ask Jim Parker and can you imagine the calls we've gotten round about how many can you make so he's been working on that that day and night. So I'll give me, Matt and just a second.
But I just I want to make sure I'm tracking with you on Europe in the sense that you understand that structural cost effort ahead of the pandemic looks to be really pressures doesn't it and the absorption there without the volume is because of the effort that these guys have put court so.
Hi, I'm not worried that that as you just portrayed that there was a variable costs kind of Oh, the launch that Smothers us I don't think that's going to happen right now we're not anticipating big inflation for example.
In fact suppliers you know, we're all trying to get back up to levels of efficiency, where we start to enjoy some savings. So I just I just want to add that color to the way I think about variable costs I understand why you were looking at the forecasts, but I just step back and think about that but Jim do you want to talk about the Broncos.
Great news in the challenge.
Thanks, Jim Hi, Rob.
So.
Matt.
Right down the street from our Dearborn headquarters is where we will make up Broncos you know.
In North America on and then the promise for.
Down in Mexico as far as to the Broncos that we've received.
Over 100000 reservations.
That operations to shift pattern. So we have some upside.
We have a lot of work to do because these reservations and orders yet.
So we have a lot of work to do to verify that the mix is great.
The Dcs and we still continue to get lots of reservation. So.
The team has multiple capacity studies, we do have some opportunity it would commit to another shifts which is a big deal for us.
You can imagine, but obviously the reception has been really positive and looks sustain now on F. 150, we're in the prototype builds both in Kentucky, and Dearborn looks great.
We're on plan with the supplier readiness.
Manufacturer readiness and all the software obviously this is a big milestone for OTI, a and lot of software for us. So it's important deliverable for the team.
And we have a long way to go on the 50 launch, but the teams made great progress for funding issues and addressing them immediately.
So we're feeling like I would portrayed is on plan and yes, there's upside bronco.
Alright, thank you.
Your next question comes from the line of Joseph Spak with RBC.
Thank you.
Tim maybe.
Ask about the second half guidance.
This way if there wasn't.
Program delay.
Would you are basically issued the same guidance just the cadence has been a little bit different.
It's hard for me to.
Really undo what's happened over the past few months.
The delays were having a commensurate with what would happen as results of the production shutdown and the teams throughout that timeframe did a great job getting is ready for launch in.
So I think the back if you look at the back half of the year in aggregate were essentially guiding to less than.
As a blend of 1.5 billion of profit.
And certainly there's been a shift to the fourth quarter as a result of those Los Angeles.
And the big impact net on 50 being in the fourth quarter.
Okay.
And maybe just.
On cash flow and the balance sheet.
So you pay that part of the revolver, if we if we pro forma that for.
June cash and debt levels you indicated.
You are sort of back to the December net cash levels.
But then you do have at least some losses right in the fourth quarter, there's more capex, there's a little bit more redesign cashless here and I still think more beyond this year. So.
I don't I know you sort of usually talk about liquidity not necessarily sort of net automotive cash or die, but how do you see that sort of playing out how do you see the balance sheets are playing out over the next couple of years because.
You know there's still are some calls on on the cash it would seem.
Yeah as a first I want to emphasize after the for the.
Third quarter.
We expect cash flow to be higher than EBIT in the fourth quarter be lower due to the timing of.
Yes, the working capital so should launches and seasonal effects.
As you look further out.
From a liquidity standpoint, we have of course confidence in our ability to repay the debt that we have we have net debt roughly equal to cash.
And what we said was that even in scenarios, where we have co related plant closures, again, and and or demand declines who would have 20 billion or more in cash so.
Certainly our base expectation is for more than that.
As we.
Yes.
We'll go to the future ER or books, and optimize our free cash flow driving toward our long term margin opportunities and with that will come even greater cash and liquidity opportunities for us to consider none of the paint LNG credit of course, but repaying debt reducing dividend.
And.
And to dilute share repurchases as well.
Thank you.
Your next question comes from a line of Adam Jonas with Morgan Stanley.
Thanks very much my first question is on EDI batteries, and it's kind of a question about make versus buy.
So james making their own batteries with a joint venture venture and Ohio with.
With LG here not going that route in terms of owning the physical plant capacity, what drives that thinking and and specifically there's a lot of options and this isn't the only one but you know Elon musk has offered to sell batteries or Avi powertrain skateboards to other Oems would you consider doing that.
Hey, it's Jim. Thank you you know.
It's a question that when when maybe a year ago.
We started to see line starting to to a range around make versus buy owned versus you know source.
So we had a deep discussion about this I've met with the number of the people that you know.
That are in the supply side of this.
And it was our estimation fact, our whole team went through a really deep dive on this six months ago.
At the supply chain has ramped up.
Since ilan built his gigafactory <unk> and so there's plenty there that does not warrant us to you know migrate our capital into owning our own factory. There is no advantage in the ownership in terms of cost or sourcing.
As as what Ford can draw on so I just can confirm to you that it.
It is actually works it.
It works for Us to go the path. We are now with that said there is some challenges that are in that supply chain between themselves or some there's some litigation that's going on we're hopeful that they get settled quickly it really doesn't matter to us how they get settled but it may it confused as some of the suppliers about their their investments.
In some of their plants here in the United States, which is another way of saying the way the U.S.M.C.A. with benefits.
As intended is to have these factories be built in the United States for supply of batteries and.
So we're well positioned.
Leaving that will happen.
Thanks, Thanks, Jim and then I got a follow up for for Jim Farley, Jim It and I'm asking you specifically, just because you're kind of.
Still I'll still consider you knew and your role a your new role.
If you think three years out.
How different how radically different is Ford motor company three years from now versus today.
Can you kind of what are some of the big big changes not the subtle stuff. The major stuff that you want to highlight to folks in this call Tonight. Thanks, Jim.
Sure.
Thanks.
Yeah, I would say I would characterize forwards transformation as we know what we're really good at.
And we have tremendous opportunity to grow in those areas.
And commercial is a great example, you know it took us decades to build the commercial ecosystem, we have today exclusive distribution bailment.
Offenders.
Deep relationships with customers.
Real deep know how on the company.
As we look forward in the next three to five years, you can expect Ford's commercial business to change a lot.
And part of that is cooperation Volkswagen places like Europe, but other parts it will be the E mobility transformation.
Of commercial so I would say Adam you can expect for its transformation to be in the areas that were already really get out we have capability and that we're humbly approaching a business model.
And the ecosystem.
Buildout for those new growth opportunities with the fresh set of eyes.
And just like we hit decades ago. When we built these businesses like commercial and a tremendous opportunity for value creation.
And for our customers, especially.
I think that gives you can taste for how we see things as well as much tighter geographic profile.
Thanks, Jim appreciate that.
Okay.
Your next question comes from the line of Dan Levy with Credit Suisse.
Hi, Good evening, everyone Hi, Thank you for taking my question.
Wanted to start with a question on Bronco here and.
I know you don't disclose your exact variable profit per unit, but maybe you could just give us a sense.
From the perspective variable profit per unit, how we should think of where bronco potentially could stack up.
Versus other vehicles in the four line up obviously, it's not going to be at the level of have series or I would think that being the case, but I would venture together so that could be.
You know right up there maybe above and explore.
Now or just below and expeditionary navigator, just give us consensus.
Some profit per unit standpoint, how we should be thinking about bronco many opportunities we know that your competitor.
In this area and doing quite well in that product.
Yes so.
My first reaction I think and thank God, we made the decision right because you know what replaced in the facility where were making in some of the sedans, we're making money. So you got to think of that with Adams last question about the makeup of Ford and what's going out and whats coming in and product, but Jim I'll, Let you talk about some of our targets there.
Sure. Thanks, Jim.
Appreciate the question.
The real breakthrough for us on Bronco was was the localization of the Ranger that very successful global arranger here.
In North America.
And we're already we already have very strong scale and performance with the Ranger in the U.S.
Large Franco and this you to base.
Broncos for or both based on existing platforms that we have executed many times.
And so we're not going to go into specific profitability, but you can imagine compared to arranger.
The kind of pricing that are that are bronco top hat would get.
And.
Obviously, we already have a great scale.
For the actual industrial part of the product so.
And again the platform has been very well executed it has global scale.
Asked us see too for the Broncos for.
And so we see these and the pricing premium we carry in the utility market the off road market.
It was pretty well known and I would say.
Very robust in terms of we've delivered.
Not it's not maybe.
So for our standpoint, as Jim said, we not only replaced the focus and the cases, roughly and Ranger, but we're coming off of very high scale platforms C and Ranger and.
And we know that these segments executed right.
The product you know our premium segments. So we're feeling really good about the margin.
And Jim you know I, just I want to sneak in because you've all seen our campaign about we build more vehicles in America a.
For you know by Americans.
In our in the whole industry and.
This this bronco is a look we're hiring people here in southeast Michigan to build the this product two to 3000 additional people so its a.
No I get teased about it because it came up in the discussion with the president, but I was I would just so proud.
To be able to explain that here we are in the middle of a pandemic with kind of challenges in the job market imports going to be hiring people to build this product. So it's really a great new story.
Thank you. That's that's really helpful color, if I could just squeeze one more in on.
TV and just a question on TV budgeting.
You release says you spent half of the 11 and filling in electrification commitment to 22.
And I believe that the starting point with 16th tells US clearly your standards more backend loaded.
But obviously 2022 is not in head goalie and you're going to be spending TV as you just starting on the journey that so.
Fair to assume that if I assume okay see still had.
You know three to 4 billion you know the three plus billion.
Here.
That to spend will only accelerate.
After 2022, so how touched how to think of the electrification spend.
Yes, Jim do you want to take that one.
Sure.
Again.
But your question you know obviously of the 11 billion were whereas the very tail end of Maki and our two commercial vehicles and they're really key for us the commercial vehicles, the transit electric and the F 150 electric.
We've announced the I may be a and then number nameplates and so you can expect in 22 and beyond as we refresher product lineup. Once again globally that electrification will be a key component and.
So this the spend will continue to play out.
You know that figure was given few years ago. So as you said 22 seems like right around the corner, but.
You know we're not done.
And.
With the 11 billion, we have some really exciting products coming out.
Like the F 150 in the transit.
And with the growth of package delivery and a large.
Customer commercial customer network RAF 150, where are seeing a ton of interest from customers on both of those but we have lots of passenger cars to come as well, we're not going to be specific more than what we've shared but I think you characterized it fairly inaccurately.
Great. Thank you that's helpful color.
Your next question comes from the line of Ryan Brinkman with JP Morgan I.
Thanks for taking my question first on on South America, I would've expected your losses there to grow.
Is that are built into Q, given a 75% decline in revenue, but instead profitability improved slightly off now it looks like more of the help us coming from price and cost, but how would you rate the progress of the restructuring in that region are there.
More cost savings to come from actions already announced but not fully implemented and you do you think you're at the point now that if the volume returns that you would already be profitable or are there more restructuring actions needed to get there.
Well I think Jim mentioned this and Tim did is that South America. The journey, there as compared to some of the other markets started we phase down of unprofitable vehicles. We ended focus production in Pacheco exited heavy trucks business discontinued Fiesta ceased operations at San Paulo.
Factoring made up of Sigma engine engine production.
Jim has been really working hard on the restructuring you know to serve a dealer network better for in terms or custom customers.
And improving the viability for the remaining dealers.
So I think this is a story to still yet to be completed but Jim.
I will let you answer why are you thinking the short term we had is.
Better than expected performance.
Thanks, Jim you know the second quarter marks I think the third consecutive quarter of year over year improvements.
Although still losses and it really reflects as Jim said the progress that we put in place many years ago to restructure South America, we have a lot of cost containment, we've taken a lot of head count out of the business as you would expect and we've also in the second quarter took a lot of pricing.
Which is consistent with you know the currency situation down there.
But I think allowing the team got ahead of of the downturn, we saw in the market with coded.
Thats been a big beneficiary for us for for a while as Jim said, you know we're going to keep.
Restructuring our businesses until they are sustainable so still more work to do South America looks pretty challenging.
But the team's doing a great job.
We had a slurry of new products few years ago, and there was cost associated with that so I think we are really good still fresh lineup, we gain loss share in the second quarter.
It was down about a point.
From last year, but but you know that was a lot to do with vehicles that we discontinued.
So the vehicles, we do have are very well accepted.
I just would portrayed as we are not we have more work to do as Jim said, but a really big credit to the team and weigh down revenues to have a third consecutive.
Improvement in our and our profit.
Or losses.
That's helpful. Thanks, and then just lastly, it seems like your market share in China is beginning to rebound of what would you primarily attribute the recovery to was it the products that relationship with Chang and distribution strategy localization of Lincoln etcetera, and then are the pieces or future credit programs in place to continue to grow that share, which I think had been like 4% at one point is their market share.
Target that you have in mind.
That is materially higher than where you are now such that you could continue to grow your sales in that country, even if the market sort of languishes for awhile.
Well I'm excited to tell you that.
The planned working there covert was a kind of help focus us but.
The commercial vehicles.
Strength was supported by 34% increase in sales, a JMC, which gained 40 basis points a share.
And the second it's a second consecutive quarter of share gain of 20 basis points, which is what you're hinting about we were talking about it.
In a way that this was the breakthrough that we were looking for a new Corsair is comes.
No. The middle this is the first locally produced Lincoln product and it breaks all records that we've had in one month for the sale of a product like that contributed to the 12% increase in sales for Lincoln and now the new aviators. Following on my only regret is that the whole board was going to be there in October I, just kind of review.
[music] the progress that you're noting and we we can't travel now because of coven.
That Jim Farley and wanting Chen our president they're done a really good job of getting our arms around that market.
Thank you.
Your last question comes from the line of imitate Kelly with Citi.
Great. Thank you good evening everyone.
Just a couple of of cash flow questions, maybe for Tim I think year to date.
Working capital and timing differences, it's been the use of about almost $5 billion curious if you can share roughly how much of that you would you think you might be able to recover in the second half of the year and then secondly to that with a capex coming down from the original guidance should we expect that to be recovered next to you have any capex would be higher than normal as you kind of.
Recoup some of the deferrals from this year.
Let me start to less or first thinks the question.
We haven't completed our planning process for next year yet.
We have said that we will get for sometime now that we're focused on fitness activities at Stendal includes cost, but also capex to make sure that were efficiently effectively allocating capital. So we'll continue to focus on that.
Seeing some of that reflected in the results.
Capex. This year. So fitness you also see an ebb and flow product programs.
We're pleased with the progress, we're making and 100 won't happen are down year over year, but again nothing for this year at this stage on 2021.
As far as working capital goes bear in mind.
Second quarter and working capital dynamic split out there we talked about.
Production resumed.
Of course during the.
Shutdown period, we had payables, we repaid in those production resumes as people start getting built back up.
But the root restoration of payables were continuing to the third quarter and that's one reason we said that.
The third quarter cash that we better than either in the fourth quarter.
Cash for the shutdown.
Seasonally and do you.
Launches that are happening, particularly for 50 is cash who would be lower than EBIT.
So I guess, what you're seeing is not only the benefits from our fitness in a redesign and our underlying results improving in light of the coven environment, but even underlying that they'll continue to play out.
For the back half of this year and then in the 21.
Very keenly focused on all in all costs and cash opportunities.
But as we've talked earlier.
In a position now were very strong cash position and liquidity position and we're comfortable that look as we look at.
Great. That's very helpful and if it can sneak one more and I'm just curious what what are you seeing initially on the on the four promise campaign. The launch about a month ago, just curious if you're seeing a fair bit attraction there.
Jim.
Yeah, Hi, thanks.
One of the really encouraging things for us leadership team as Jim said as we went out promoted.
The reality that were the highest.
Highest employment.
In the U.S. of all the Oems and also our volume in U.S. and that's.
Plus new products really we've seen the strengthening of our brand promise campaign seems to doing really well.
We had a great second quarter in terms of share performance in the U.S. retail as Jim said was way up full point.
And part of that was mix that.
It's great to see the momentum behind the brand.
Third quarter looks not to be dramatically different and continue to have good momentum sales still lots to do.
We have good supply situation for in 70 day range and so the you campaigns used to be doing really well brands getting stronger and we have product to sell.
Great. That's all very helpful. Thank you.
This concludes the Ford Motor Company second quarter 2020 earnings Conference call. Thank you for participating you may now disconnect.
Okay.
[music].