Q3 2020 Ford Motor Co Earnings Call
This time I would like to welcome you to the Ford Motor Company third quarter 2020 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. If you would like to ask a question. During this time you will need to press star one on your telephone keypad to withdraw your question press the pound key.
I would now like to turn the call over to Lynn antibodies Tyson Executive director of Investor Relations Lynn I hand, it to you. Thank.
Thank you so much Holly and welcome everyone to Ford Motor Company's third quarter 2020 earnings call presenting today are Jim Farley, our president and CEO, John Lawler, Our Chief Financial Officer also joining us for queuing is Marion Harris CEO afford credit.
Jim will have some opening comments John will talk about our third quarter results and then we'll turn to <unk>.
Our results discussed today includes some non-GAAP references these are reconciled to the most comparable U.S. GAAP measure in the appendix of earnings deck, which can be found along with the rest of our earnings materials at shareholder adopt for Dot com.
Today's discussion includes forward looking statements about our expectations and actual results may differ from those stated.
Most significant factors that could cause actual results to differ are included on slide 23, unless otherwise noted all comparisons are year over year company EBITDA EPS and free cash flow were on an adjusted basis and product mix as volume weighted a.
A quick update on our IR events over the next few weeks on Monday November 2nd Credit Suisse will host a fireside chat with John Lawlor, Marion Harris and Kumar go hold true for its president of the Americas in our International markets Group and then on November 10th Stuart Taylor Executive Director of Enterprise connectivity will participate and Deutsche Bank's auto Tech virtual comp.
Now I will turn the call over to Jim Farley Jim.
Thanks, Lynn and hi, everyone.
First let me say, how humbled I am and what a privilege it is to be the C O sport.
My family spend with Ford since 1916, well my grandfather started a Highland Park here in Michigan.
And then that moment or or family story really started to change for the better.
In countless people over have similar stories about Ford, we're a family company.
The leadership for Bill for all the way to the members on our factory floor.
I'm extremely motivated to help build a vibrant and growing forward.
Have a positive effect for generations to come benefiting all of our stakeholders.
No we've assembled a very talented leadership team to get this done.
A combination of strong lifetime and long time for people, who truly know our business, but we also have new colleagues.
Three very different experiences and know how and talent to the company.
To execute our plan.
We plan to continue to add to this bench.
<unk> capabilities in marketing technology in many other areas.
Over the past several months.
I've spoken to many of you.
I believe the plan, we now have and have developed and are now executing on.
Mines.
Well many of your expectations.
We're committed to creating Ford the gross profitably and generate sustainable free cash flow led by our automotive business.
We're going to allocate capital to the best and highest usage to drive sustainable value creation.
No no.
That plan, which was introduced to the 14 and many stakeholders on October 1st is very straightforward.
Among other things number one we.
We will compete like challenger.
Turning each customer with great products, but it's well services.
With rewarding ownership experiences.
Number two.
We're moving with urgency to turnaround our automotive operations improve our quality reduce our cost and accelerate the restructuring of underperforming businesses.
And third.
We're gonna grow again.
But in the right areas allocating more capital more resources more talent to our very strongest businesses and vehicle franchises.
Incubating scaling in integrating new businesses.
Someone then enabled by new technology like Argos class self driving system.
And expanding our leading commercial vehicle business, great margins, but now with the suite software services that drive loyalty and generate recurring annuity like revenue streams.
And being a leader in electric vehicle Revolution around the world.
But we are where we have strength and scale.
So now speaking about <unk> to start with.
We're developing all new electric versions of the F 150 in the Trent.
Two most important highest volume commercial vehicles.
Or industry.
These leading vehicles really drive the commercial vehicle business it for.
And were electrifying them.
We own work at Ford and these electric vehicles will be to work for you.
Extremely capable and with unique digital services and over their capabilities to improve the productivity and uptime of our important commercial customers.
The electric transit by the way will be revealed next month you heard about here first.
For all of our global markets we.
We believe the addressable market for a fully electric commercial van and pick up.
The two largest addressable profit pools in commercial or going to be massive.
And were going street at this opportunity.
Together, we think the accessible price points of these vehicles the productivity the capability the cost of ownership will be very compelling for one of them some of our customers.
Frankly Ford is not only in front of developing the electric trends in F 150.
We also have an unmatched dealer base to provide that anywhere service.
For great uptime for our customers, we had a great customer base with deep know how on the usage and expertise in the commercial vehicle business such as the largest upped bidder community. There is a period.
Also in the coming weeks, we will deliver the first Mustang maki to customers in the U.S. and Europe.
The reservations have been very strong for this vehicle.
And soon after it will go on sale even in China.
Now in 30 years of being in this wonderful business I have never been so pumped up about one of our one of the retail vehicles.
I recently had a chance to put a thousand miles on a marquee.
And that Mustang and that engineering team had a pride had vehicle out of my hands.
He just elevating the experience the way it drives the connected technology in the cabin the ingenious cloud enabled services. It's all in the heart of the market from a price point.
Such a large addressable market the two real crossover business.
And we have a real advantage, especially U.S. with the tax credit.
Now you're going to see our strategy of electrifying are leading commercial vehicles and are iconic high volume products expand very quickly afford.
It's also important to note there were building out our electric vehicle manufacturing footprint around the world.
And we now have four plants in North America alone, including an all new carbon neutral factory.
Going up at the Rouge plant as we speak a few miles from here.
We're also recently finalized an agreement with the Canadian Auto workers Union unit for the paves the way for future electric as she needs to be built by our team you know for Canada.
Now as we execute our plan my commitment to each of you is transparency.
Including purposeful measurable key performance indicators. So you can objective we track our progress.
We plan to provide you with more details about our plans, including financial targets in the spring.
With that let me briefly touch on the robust third quarter and what we have on tap for the fourth quarter.
When you look at our results they reflect the benefit of our decision two years ago to allocate capital to our strongest franchises, namely pick ups, a whole range of utilities across the world commercial vehicles and iconic passenger vehicles.
Additionally, we saw higher than expected demand for our new vehicles in the quarter.
At a time when inventories are really low following the virus related first half factory shutdowns.
Now this contributed to a very favorable pricing environment and mix.
Together.
These factors plus the strong performance from the Ford credit the strongest performance from Ford credit and 15 years led to a total company adjusted EBIT margin of 9.7%, that's 490 basis points higher than last year.
As an outcome of all this we generated $6.3 billion in adjusted free cash flow.
Throughout 2020, even during the industry wide shutdown of coal.
And as we prioritize the safety of our team.
We've been disciplined in preparing for high quality fourth quarter launch.
First of the 2021 a 450.
You live in it you could work in it you can sleep in it the Bronco sport. The first of many Broncos to come and my favorite the all new all electric Mustang Maki.
In fact, we used the n. unanticipated downtime to continue to validate the preparations for these important launch vehicles and in the case of the F 150, a methodical sell down and the changeover for our current model.
Well I'm proud of our team.
I'm delighted to say that we're in good shape in important areas of readiness for these launches.
Software hardware engineering is done supply and manufacturing readiness looks great. In fact, right now are all new F. One fifties rolling off the line in Dearborn, as we speak and production will soon start Kansas City.
And we're starting to build the Mustang Mckee and the Bronco sport actually early this week.
Before I turn it over to John I want to thank each of you for joining us today.
Despite the strong numbers in third quarter.
We know we havent fix the issues that have held us back in our automotive business. They include warranty costs, which remain unacceptably high.
I plan to be transparent and focused on both customer and shareholder value.
Proving out this business and our plan quarter after quarter year after year and now John John Let's take everyone through details.
Thanks, Jim first let me say, what an honor it is to be the CFO of this great company and you know I really cant remember a time when we've had this much opportunity to transform and grow our business.
And so it's incredibly exciting and delivering on that potential. It's an important responsibility all of us have to our customers and to our stakeholders.
Now to be clear our transformation and growth plan is predicated on delivering an 8% or better adjusted company EBIT margin.
And consistently generating free cash flow. So we can invest in accretive high return products and services.
And so my initial priorities to help drive this are one.
Help our team fix where dispose of underperforming parts of our business. So we can allocate capital to its best and highest use.
And to further strengthen our balance sheet.
We will make the tough decisions to improve our financial flexibility and assure that we have the resources to build and grow our business.
Now, let me summarize the third quarter.
As Jim mentioned, we had a strong quarter delivering a 9.7% company adjusted EBIT margin now that margin was driven largely by higher than expected vehicle demand.
Positive net pricing and favorable mix.
Inventories were limited because of the virus related shutdowns in the first half of the year.
North America, and China benefited from growth in both wholesales and revenue.
Well Europe, South America, and our International's market group, we're still affected by cobot related industry declines.
In addition, our performance continues to benefit from our portfolio refresh as we reallocate capital to our franchise strengths.
Ford Credit also contributed turning in its strongest performance since 2005 generating $1.1 billion in earnings before taxes with help from strong auction values.
Now before I talk about the rest of our business, let me put a record $6.3 billion of adjusted free cash flow in perspective.
Not only does it reflect the strength of our EBIT in the quarter, but as we indicated last quarter working capital recover sharply as we rebuild production to full capacity after a shutdown largely driven by supplier payables.
And the third quarter the payable build was completed and this was worth about 4 billion.
The strong cash flow in the quarter gave us the confidence and the ability to make a second payment on our corporate revolver.
Which we did on September 24.
So now we have fully repaid the entire 15 billion dollar facility.
And we ended the third quarter with a strong balance sheet, including nearly $30 billion in cash and more than 45 billion of liquidity, which puts us in vital which provides us with the vital financial flexibility we need.
Looking at North America.
Despite the difficult backdrop of coated before team executed well operationally, we optimized incentives for lower dealer stock levels, we maximize production and skillfully manage supply chains to meet stronger than expected customer demand. The region delivered an EBIT margin of 12.5% as a benefit.
It from top line growth of 8% EBIT improved by 1.2 billion supported by $900 million in net pricing and $400 million in favorable volume and mix.
Improvement in volume and mix reflects the effectiveness of our team and focusing on fords franchise strengths.
A few examples include F series F series gained 1.7 points to a share of more than 35% in the U.S.
Our mix of trucks and vans increased one point to 57%.
Our mix our utility mix increased three points to 35% with a very strong showing from explore and the mix of cars declined four points to just under 8%.
Total North America share increased one point to 13.6%.
In Europe, EBIT declined $300 million in the quarter and that was driven by lower volume in about $400 million in costs related to our cuteftp have battery supplier issue.
Yeah. Those expenses included pooling cost that are required to comply with the U.S new COO to emission standard this year.
Now, we said earlier that we anticipated meeting those new standards based on our product roadmap and the Cougar P. have was a big part of that expectation. So were working closely with our supplier to remediate the situation and minimize any inconveniences to our customers we plan to notify our customers in the coming days.
How and when we will repair their vehicles.
And had it not been for the Kuga issue Europe would have been profitable for the third quarter.
Now since Europe began its sweeping redesign of the regional business in 2018, the European team successfully rationalize the manufacturing footprint shifted resources to our leading position in commercial vehicles and dramatically lowered structural cost. This year. The Europe team is on track to deliver one.
Billion of annual structural cost reductions.
Now relative to mix, our commercial vehicle mix share increased by 50 basis points to 15.1% for the quarter and Sq vs accounted for more than 30% of our vehicle mix in Europe, nearly nine points higher than a year ago.
Turning to China.
Wholesale shipments in China were up 22% and that's the second consecutive quarter of year over year growth that reflects strong sales the best movies in commercial vehicles.
Our mix of EPS, you viz increased 13 percentage points to 36% and that was driven by locally built Ford explorer escape and Lincoln aviator in Corsair with Lincoln delivering its best ever quarterly sales in China and as planned over 65% of Lincoln vehicles are now produced locally following the end.
Production of the Corsair and the aviator in the first half of 2022.
Commercial vehicle sales mix increased 5% five percentage points to 45% and that reflects strong JMC sales up 38% versus prior year and that reflects the continued strong demand for light trucks bands and pickups. So overall the team delivered a third consecutive quarter of year over year share gains and Mark the second.
Second quarter of year over year improvement in EBIT, the best performance in three years.
In South America, we continue to focus on de risking the business the team they're delivered its fourth quarter in a row of year over year, EBIT improvement with aggressive pricing and structural cost reductions mitigating the ongoing pressure from inflation currency and the industry structural challenges.
And then I M. G RMG delivered a profit despite kobin related industry declines in wholesale which adversely affected the revenue.
A series gained share in our share with the Ranger pickup in Australia increased six points to 27%.
Profitability and I am also benefited from the work the team has done to lower structural costs.
And finally Ford mobility, which is building.
Fourth generation autonomous test vehicles with the latest self driving technology generated its first Avi related revenue from a fleet operations pilot in Austin, Texas at the same time, we are strategically expanding our spin scooter business in the us UK and Germany and generating strong revenue growth.
Now before taking your questions I'll make a few comments about the fourth quarter, which assumes no meaningful change to the current economic environment.
Continued steady improvement in the stability of the global automotive supply base and no further significant co good related disruption to production or disruptions since the third quarter.
Our guidance for adjusted company EBIT for the fourth quarter is between a loss of 500 million and breakeven.
Now we recognize this is a big change both sequentially and year over year, So I want to step through the key sequential drivers.
First we expect a reduction in wholesales of about 100000 units associated with the F 150 changeover.
Now this volume effect as a result of our measured production ramp up plan to ensure that every vehicle. We wholesale is gate released with the highest possible quality for our customers.
To put this in context, the approximate 100000 unit impact in the fourth quarter will far outweigh the effect of our UAE w. ratification bonus in Q4 of last year, which was worth about $600 million.
Second we also expect higher structural and other costs from the manufacturing launch activities for the Mustang Lucky and the Bronco sport.
As well as advertising launch activities for the new products, including the all new Bronco brand and higher material and other costs.
And we expect MBT from Ford credit to be lower sequentially, driven by strong, but lower auction values and lower disposal at auction.
With this fourth quarter guidance, we now expect full year adjusted company EBIT to be profitable for the year.
Other elements of our guidance for the year are unchanged with the with the exception of capital expenditures. We now expect a lower level for this year down between 1.2, and 1.7 billion versus 7.6 billion in 2019 and that reflects continued efficiencies.
Before we move to culinary I want to leave you with my key takeaways from the quarter.
We had better execution, choosing where to play and our restructuring is paying off.
These things intersected very nicely with the stronger than expected demand.
We know there is more to fix and we're carrying out a clear plan to do that as Jim mentioned.
And our balance sheet is solid with nearly 30 billion of cash in over $45 billion of liquidity.
Operator, let's open the line for questions.
Thank you as a reminder, if he would like to ask a question. Please press star one on your telephone keypad to withdraw your question press the pound key.
And our first question will come from the line of John Murphy Bank of America.
Good evening guys.
Thanks for all the info.
Congrats Jim <unk>, leading the call here.
Interesting stuff early days just a first question as you look at the strength in the third quarter, obviously, we do with great execution.
Yes.
Strategy around volume mix and pricing. It was helped by good industry dynamics Im just curious if you think about those three key factors once we get through.
Changeover the F 150 in the fourth quarter and might bleed into the first quarter of next year, how much of that you think will reverse and as you look at what you're producing.
At the moment and your focus shifted mix to a richer mix how much of this stuff can be how much of the benefit beneficial factors can be maintained going into 2021, or maybe just even on a run rate basis.
Targeting 20 getting to 21, specifically.
Yeah, Hi, John Thanks.
So when when you look at that.
And we look at the business this year really getting to the core of the run rates a bit difficult as you can expect given going down in the in the first half and then coming back up and then the launches we have for the quarter.
And so from a cost standpoint, we're going to continue to focus as we said on making sure that we can.
Really lean into what we need to do to improve the business improve the under performing parts of the business and then when it comes to the mix and the topline that we saw some strength that we had some wind at our back due to the though.
Strong supply.
Strong demand with the short supply so seeing that going forward, we've been seeing our mix improve into our strengths of trucks Cvs.
And our iconic nameplates and we continue to expect to push that.
But as far as a run rate and what we see into 2021, we're not ready to talk about that at this point and we'll come back and we'll have more to say on that early 2021.
We'll give you a read on the business then.
Maybe the problem that I mean, how much of that you think is somewhat transitory for market factors can get argue right now that the industry by him is pretty its relatively strong relative to peers.
Fears, but is not really in absolute terms quite quite that amazing. So it seems like there is an underlying.
Demand for stronger mix than we all may have thought 612, 18 24 months ago. So I mean as you are going after this this mix with this this improved product.
I mean is there something you're kind of seeing in the market, maybe just specifically even in the third quarter because an agent is really heady stuff that you're you're running anything that's a real positive.
It is a positive you see strength there the question is.
There was an imbalance in supply and demand and that gave us some of the tailwinds, but we also are seeing over time as we've done over the last two years made a concerted effort to shift into our strengths of commercial vehicles and trucks and you see that in Europe, you see that here I see that around the world.
So we do see strength, there's as far as how.
Our that extends and what that looks like we're not ready to comment on that now, but we do see strength there.
Okay, and then maybe just one last question on leased.
These deferrals I mean, how many leases that you differ in second quarter. It came back in the third quarter might come back in the coming quarters and sort of envisioning that you see auction volumes.
Auction values and say being very strong.
How long do you expect that to continue because it just seems like there's a lot of positive news on it.
These deferrals as well as what's going on the used vehicle market, that's helping out not just Ford motor credit, but the core business as well.
Hey, John this is through.
This is Marion Harris.
We did a bunch of payment extensions for loans and leases, but if you're referring to lease deferrals for lease end, where unit comes back to auction, we didnt really do many of those.
And we had a pretty big inventory of used vehicles going into the third quarter and as we sold those units into an improving market. That's really what was the real benefit from Ford credit if.
If you were talking about payment extensions, though.
Of the we extended about 11% of our retail loan and lease portfolio and of that about 99% of those have already made a payment and we're back to pre pandemic levels of extensions.
Okay. So as far as what you are selling at the auctions right now its normal run rate of lease returns flowing directly to auctions and no no as your flows are poles.
Tugs and pulls by you and.
Thats correct, we were back in normal inventory.
Great. Thank you very much.
And our next question will come from the line of Rod Lache with Wolfe Research.
Hi, everybody.
Congratulations on the performance in the quarter I hope it is a sign of things to come.
I had three questions for you number one.
Jim you've talked about 10% margin target for North America for some time and now you've shown that you can get there obviously keep for this launch phase will be a bit challenging but could you talk a little bit about.
You know, what you're thinking about as the timeline for getting to that kind of a target more sustainably.
Secondly, I noticed that the warranty cost moderated a bit at least the cost inflation moderated is that a sign that things are finally, peaking.
And then lastly.
Drumbeat of activity and electrification, obviously, its something everyone's hearing and.
Companies are laying out some pretty aggressive targets for cost reduction in volumes.
Maki looks great, but it's still a relatively low volume product can you just talk a little bit about what your thinking is and how you're thinking has evolved on.
Kind of volumes, you're you're anticipating or how aggressively you intend to move into electrification on some of those commercial products.
Yeah. Thanks Rod.
On North America.
I think it's really important for us to be clear.
Turnaround automotive operations.
And North America needs to absolutely be at 10 plus percent as.
As you can see from the pricing and the mix I think Ford is the strongest brand in the us industry mainstream brand on pricing and mix.
Our issue in North America is cost.
And growth.
On cost, it's really isolated to.
Material cost, which is tied to that higher pricing of course.
And warranty.
A warranty in the last few years coverages is up $1 billion to $2 billion, depending on the year.
And that is not okay.
So although it moderated in the quarter.
And we have taken a lot of actions on craftsmanship long term durability.
We we have a much bigger ambition to improve the quality of our vehicles.
We have taken a lot of countermeasures.
We will take time I'm happy to go into those if you'd like.
But I would say, our North America, 10%.
Is really a cost journey for us.
Because on the growth side, we have a whole new bronco lineup coming a brand new F series coming these are fantastic opportunities for us on the topline for the next many years to come so our journey to get to 10% is a cost.
On electrification I want to cover that one next because is quite important.
Theres been a lot written about the electrification every industry and Ford's bet is different.
We're betting on a full lineup of commercial electrified vehicles, we're building a plant.
At the Rouge, we are the number one nameplate in the U.S. industry, we sell over a million F series, we have an enormous customer base, who are looking to reduce the costs and so.
I'm not going to get into forecasting the volumes, but.
We really see in this first inning of electrification and it'll be a long game plays out over many years.
That we have tremendous volume opportunity, we're not going after the $100000 plus market. These are affordable vehicles. There. They are in the key price points in the U.S. the maki.
Between 45, and $70000 to row crossovers huge addressable market here in Western Europe, and commercial we're not planning a very exclusive small 1% of the addressable U.S. industry. We're talking about these vehicles being 10 plus percent of the revenue pool in North America.
At their price so they look great financially for us.
But I guess, we aren't looking at electrification for the proportion we.
We think the real change here.
Is the connectivity and to run a business state based on the data so the upgraded electrical architectures in the Maki and them the F 150 electric.
To me is the most important.
Because it allows us to reduce our costs inside the company and give customers totally different experience.
And your middle question.
Yes.
The warranty costs.
Is this a sign that you're you're starting to get your arms around that and that it's going to start you know that there's there's visibility on when that is going to start coming back down.
We have more work to do that's all say, we are not satisfied with the quality run rate.
It may be coming down, but that's not what we're targeting we're targeting a fully competitive level of warranty spend on coverages and that's you know that's.
Thats got lots of zeros next to it.
To do that.
Theres a couple of things the team has decided to double down on.
For suppliers, who ship us bad parts, we're going to have punitive financial I mean, if they're bad shippers for multiple times, we put more resources in our plants for supplier quality.
We have a lot more resources dedicated in the ton of transparency.
On quality issues that are open for more than 30 days and the company. It's a key metric that we drive our our management team too. So those are the kind of changes we made.
And I wouldn't say this quarters anything that we're proud of.
Okay, and just to clarify Jim.
You you didn't really provide a timeline on getting to sustainably.
The animal 10% or better margin, you said that you've got visibility on the revenue side. Then you stop work to do on the cost side.
So is there is there a line of sight for you one on that it seems like the product side and the revenue side for North America looks pretty powerful as you look out to next year.
Yes.
Okay, we'll follow up offline. Thanks. Thanks.
Our next question will come from the line of Emmanuel Rosner Deutsche Bank.
Hi, good evening.
Jim and John first congratulations on your new on your new role.
Jim certainly very encouraged by your.
Let them into a transparency enough measurable improvements.
So I guess in that spirit, when we look I guess that your performance in the quarter. Besides for.
The stronger demand pricing mix, which you commented on.
Are you able to point us to a measureable areas of underlying cost improvement that you've seen where there.
It is on these material freight.
You know we spoke a little bit you spoke a little bit about warranty on the structural side and the thing thats already bearing some fruit that you're excited about.
Or should we think about it's more as well.
Fortunately for the future.
Yeah, Hi manual thank you.
When you look at that when you look at the cost performance for the quarter you really look at what we talked about with Europe is all the restructuring they've done.
The head count that they've taken out there.
They are now approaching and they will approach this year that billion dollars as of a structural cost reductions and.
And so we saw that flow through that's coming through and that's going to continue to come through.
What the team has done in South America in restructuring the business down there getting out of low profitable vehicles.
The.
Selling it was how Bernardo plans.
And all the actions they've taken on their structure and head count. That's that's going to continue to flow through and then we saw good good performance out of international markets Group this quarter.
They were profitable and a lot of that most of that was driven on the back of structural cost reductions.
As far as what we saw here in North America, I think you know.
With the strength that we had in demand.
The short supply we saw some good news come through in areas that you'd expect like advertising et cetera. So we have to see how demand and supply balance out what happens there and as Jim said, we have a lot of work to do on on our cost structure here in North America, and that's going to be one of our key focuses.
So I guess, you gave a little bit of color on the no what needs to be done on the warranty side as well as to size up.
What is being done it can be done.
I don't need the quantification, but just in terms of.
What what is required to get the material and freight piece of it down looks like this is probably one of the two largest buckets on the cost side, yes.
So thanks, Thanks for your question.
On on the material cost side, it's it's kind of everywhere.
Good example would be we have proximity.
A key in your pocket to unlock the door you know in all four doors of the F 150.
When we look at the vehicle usage data, we found that people use the proximity sensor for the front two tours, we do not need a proximity sensor in the rear two doors are are are Jack on the F 150.
Looks like it will last about 50 years.
No that's not the case for our competitors. So it's everything from the way we package our features the actual building material.
And you know.
The team has been working through all these opportunities.
Since February we made progress, but we need to make a lot more progress, especially with the more expensive launch vehicles.
And I think the real enabler is going to be complexity reduction we've been talking about complexity reduction for as a company for quite some time as a key fitness.
For the leadership team, but we have a lot more work to do on complexity reduction and that will be a huge enabler for not only our our manufacturing operations, but also our material cost.
And then finally, there was no specific guidance on free cash flow for the fourth quarter.
I think the last at the last earnings call. The idea was that certain quarter free cash flow would be better than the bids, but fourth quarter worse than fourth quarter.
Any sort of sense, you can give us on how you're thinking but these quarters free cash flow and whether there will be some sort of timing or working capital payback from the strength that we've seen in the third quarter.
Well standpoint in the quarter, we got payables back to what we would say as a normal run rate.
And so from a standpoint of the guidance on the cash flow for the quarter for the fourth quarter, you know its going to.
Frankly, I had said down with EBIT.
It's going to be driven by EBITDA. So you know we haven't given a specific number on that and at this point I'm.
I'm not sure we were going to do that.
Okay.
Okay. Thank you.
Our next question will come from the line of Adam Jonas with Morgan Stanley.
Thanks, everyone, Jim I got I got a few questions for you I.
I think you mentioned the phrase that NVS look great financially I think when you're looking out that they seem to line up well financially.
Could you elaborate on that my my understanding is that he these present, a really great opportunity to de complex a fight the vehicle, even allowing for the expenses battery cost the things that you can remove from a navy and that way you can design a lot more efficiently relative to the Spider web of complexity of the internal combustion mechanism.
That is and it's a great opportunity am I correct in that assumption and I just didnt know one of the here if you could add some color to that hypothesis.
Sure, but thank you I guess the.
Three key messages for electrification strategy. The companies were going after very large addressable markets and profit pools, and we're playing to our strengths I'll come back to your question.
Second is to turn battery electrics into.
Into a digital kind of service model not just to propulsion system and that were in the first inning.
And the second thing is going to be quite.
Quite important for the company transition as well related to the cost a.
Initially several years ago, when we made these investments and decisions.
Now that the cost of the battery that the profitability of the vehicles is really challenging and what we found since then once.
Once we started to look at the real cost of C. O two of our internal combustion engine. When we started to look at.
In commercial terms offering by directional charging bringing charging to the job site and electricity job site, we started to realize that there's a lot more revenue opportunity.
A lot lower costs and marketing because of the connected services.
And of course, the cost the way how the team looked at the cost of our battery, we used kind of a temporary overcapacity situation to get very competitive cost and also cherry pick the best chemistry out there.
All of that kind of came together with.
A much more compelling financial.
Picture for these first cycle products.
I think thats, what I was referring to okay look at all in comparison to ice.
Also the revenue opportunity, we'd never we've never really.
When we got into the commercial world of electrification.
I think we are eyes were very opened and very informed by the aluminium investment in F. 150 that people are willing to pay in the case of light weighting more than just the light weighting fuel economy. Its a commercial vehicle for towing and payload when you think about bringing energy to the job site or bi directional charging for small.
Medium size business is kind of a game changer for them in terms of and for US revenue I hope that makes sense. Yeah. It does and you seem to have for even before you became CEO Express a lot of enthusiasm towards the software services the data opportunity for the company I think you said.
When do you want to run the business based on the data.
Can you be can.
Can you be specific on what what the what services get you most excited and when that can be material.
Yep.
Great question. So first of all it starts with the talent, we attracted that Alex pretty from gear, who went through the whole do your journey.
Moving to software and data we attracted gill.
Who is now our data analytics lead we now have we've had the talent onboard for no time, we really understand the opportunity I think to the extent the opportunity first came Adam with with internal the company you can imagine with our warranty spending have the data codes off the vehicle instantaneously, having AI models and.
Lies in all those data codes, how exciting that is to our frontline engineers.
How exciting it is to have that data to be available to all of our engineers on actually the bill of material and its usefulness for a company that has their expenses bill of material.
But then it became very quick.
For us, especially when we got out outside of Dearborn.
And listen to the opportunity on services that over.
Over the air updates.
Really relevant to the customer and in case of commercial they run their businesses off these vehicles, so dynamic routing telematics driver coaching to drive more.
More economically the people that have our small fleets. They just loved us because they haven't had that data before.
And we can see a day not too distant future with a full lineup of pure battery electric commercials, where we have a whole service business and that service business is charging it's small.
Enterprise solutions small medium sized businesses its repair a more affordable repair and upgrade of the physical vehicle.
And that's that's what we are busy doing that's our double transformation. One is to transform automotive operations. The other one is in a way to kind of disrupt ourselves.
That's great. Thank you.
And our next question is going to come from the line of Brian Brinkman with JP Morgan.
Hi, Thanks for taking my question.
Which relates to the upcoming EPS.
150 launch can you remind us of the timing and the impact you expect both in terms of the profit or margin headwind from the lower production during the changeover as well as benefit to sales mix or pricing subsequent to the rollout of the new version and how should investors think about execution risk. During the launch can you talk about your confidence level.
There and I know that I'll go according to plan and what steps that you're taking to mitigate the risk.
Coming in I'll answer the.
Last question first on the product launch.
We've done.
We spent a lot of time on these launches are very important as you as you understand it making sure we have all the design and engineering.
Ready to go we've made all the checkpoints the suppliers are ready manufacturing ready there we started up production we haven't we.
We haven't.
Discussed what we expect from a pricing standpoint, or what we expect from a margin standpoint of new truck and I don't think we want to talk about that today, but we did talk about is the fact that we are taking a very pragmatic ramp up plan to make sure that we deliver these with quality and that's.
Leading us to have wholesales on a sequential basis down about a 100000 units and thats whats impacting the fourth quarter.
But.
Getting any deeper than that I'm not sure we're going to get into that today as far as the pricing in the the cost impact of the vehicle.
And as far as the launch to complement John.
We are so excited about this new F 150, all new power trains best towing best payload it's.
It's the best F 150 River had and waiting to see the inside it's incredible to technology and customers are asking us for that.
Look we've completed the design phase the engineering phase, how and the team did a great job.
And we.
We then finished the supplier readiness in manufacturing.
Readiness.
My whole leadership team and myself went to both plants personally to review the launches a couple of times.
And we're now in high production starting.
Starting to ramp up curve at Dearborn, and Kansas City, we expect to start soon.
I think we don't know until we start.
Getting up that ramp curve.
What we're going to see but I'd say, one one of the.
Things I would complement the Ford team, how Linda cash the whole team was the way we use code.
During the cold shutdown, we didn't stop.
With the quality assessment of the launch and there was a lot of work done on the software, especially this is an all new electrical architecture us Theres a ton of new software.
And we use that downtime.
To to really prove out or capability.
And so you know, we're a long way from declaring victory.
It's a daily.
A huge global team working on the F 150 launch but.
We work through the launch so far.
We've made a lot of progress as a team and now we're into mass production so stay tuned.
Okay. That's great. Thanks, and then lastly wanted to ask about the strong net pricing that you've been enjoying in Europe and South America can you talk about how you think your net pricing is tracking relative to the industry in those regions and is the pricing strength more a function of the success of your company specific product launches or are there other more macro factors that play for example, as automakers worked off.
That offset lower Capex in South America et cetera, where are you in terms of your product Lifecycles in these regions and how should we expect pricing to track going forward.
Yes, so if you, let's just unpack that a little bit if you look at Europe.
We've had a strong shift into Rs movies, as we talked about earlier and with that has come pricing power relative to the other vehicle lines.
And we expect that to continue in Europe down in South America. You know the team is being aggressive and you are seeing product shift there that's driving some of the net pricing as well the strength in pricing because we're getting out of low profit.
Lower end vehicles, and we're being very focused on driving towards higher margin products like Ranger and some of the other strengths that we have in the region. So we're going to see that continue through.
Then we're in Europe, there, they're managing through revenue management and looking at everything we're doing the same thing here in North America. It's a focus we have put a lot of it's being driven by our strong mix.
We are seeing some pricing for product as new products coming out.
And that's flowing through as well so we're very focused on driving the top line as best we can but equally and more focused on the cost as Jim has talked about as we've talked about that's that's that's one of our main focus is keep moving forward on the top line really honed in and focus in on getting the cost right.
Very helpful. Thank you.
Thank you. Our next question is going to.
Come from the line of Mark Delaney Goldman Sachs.
Yes, good afternoon, and thank very much for taking the questions.
Jim and John you spoke to having urgency and achieving your goals and electrification that includes an electric F 150, and transit as few of the several electrified models that Ford is planning to bring to market over the next few years, hoping to better understand if the company plans to go beyond its 11, and a half billion investment target and electrification that is premier previously articulated and as for plan to incur.
Priests in particular number five models compared to its prior expectation.
Thanks, Adam.
I think the simple way to look at is we're kind of in the first inning of this transition of the industry to two battery electric future.
And we are deep into the planning for the second cycle of those products.
Competitive reasons, we're not going to share the cycle, playing with you, but you can imagine that.
You know, we're getting more and more excited about.
Electric future now we have some great ice products.
And we think that that market will still be robust.
But.
We're making our bets on iconic retail vehicles.
And electric is definitely something that we're more and more excited about in our capitals. Following we don't want to just be one of the many Oems.
To transition to electric we want to lead the electric change that's why we've committed to Paris, It's why we're standing with California.
And that's.
Our capital on and we feel that the way we're doing it forward is the most important message, which is commercial and work.
Those customers run their business on these vehicles. They are more attentive to cost of ownership vehicles have higher utilization and therefore, the lower cost of ownership of operation is more important to them and they are especially interested in the data.
And.
So I think although we could talk about general investment levels. The key message for Ford is more the segments.
That we're investing in and that this is not a potion story. This is an investment in the digitization of our business.
That's very helpful. Thanks, and let me comment to that because of the cooler recall the company want to have us fuel to compliance costs. This year.
Anticipating a similar level of cost in the fourth quarter EPS was realized in Threeq you and then perhaps more importantly can you discuss if you think this issue will be resolved in if there's risk to any of your other hybrid or by products.
So from a cost standpoint ill start with that.
As I said earlier, it's about $400 million.
For the quarter, we do expect some costs in the fourth quarter somewhere between $100 million to $200 million.
So that's the impact we see as it is today and that does also that includes the impact of the pooling.
Effort that we're going to have to undertake for passenger vehicles in Europe.
And the battery that is used in the Cougar P. have is not you.
So.
It's a supply.
Thank you very much.
And our next question will come from the line of Brian Johnson Barclays.
Thank you and congratulations to the Nucor team.
I wanted to drill down on the Europeans seem to compliance strategy, both on the light vehicle side and the LCB side. So first on the LCB side, which of course as you flagged earlier Sharon different standards is that on track and when can we expect and may be derived LCD.
[noise] platform for Europe.
Very specific question.
So thank you.
First of all we have a great plan for Europe, we were on track for our COO to target. This this year until the Cougar P. have situation came up with the supplier late in the year.
As I mentioned today its bit new new news, maybe not not as.
Maybe not as dramatic.
Dramatic is a $100000 retail off road or but.
The electric transit is a really big deal for Ford Motor Company. It's we're number one in the US were number one in western Europe and.
We think electrifying.
Products me really key and that will be a key part of our Q2 compliance that announcement.
So we.
We continue to see in Europe more city restrictions.
Many many of our major small medium size business owners are now asking for all electric solution and we also think.
The quality of the product will be a benefit for our European customers as well the Maki will be sold in Europe next year in volume and.
And so we have a great plan next year with the Maki and.
We have a number of hybrids coming out next year in Europe.
My hybrids could be specific but we really have a great lineup in Europe over 20 models, but what gets the leadership team really excited about Europe is the commercial vehicle business and the electrification of our high volume van.
Right I would concur on that so moving over to the light vehicle passenger car in CV market. It struck certainly as a split of opinion with many viewing plug in hybrids as a transition and million plus unit global.
Platforms is the way to go.
Hey, what's your thinking on that strategy and be as we kind of go into 21 22 can you flex between Patterson plug in hybrids.
Or even move to a more consolidated platform for Europe.
Oh, I think the flexibility between.
Battery electrics plug ins.
Is is not very high so.
We're really locked in.
As we should be so I wouldnt. This is not like vehicle mix or something like that all the battery supplies are slightly different and.
And also the lead time for changing battery.
Capacity is a lot longer than most other major components in the vehicle.
So I.
I would think about those capacities in terms of flexibility very different than I would.
Funnel ice powertrain.
Okay, and finally cave you disclosed or can you disclose who the pooling agreement is with it I think it will become a public record at some point in the year.
We're not going to do that today. Thanks.
Okay. Thank you.
Our next question will come from the line of Dan Levy with credit Suisse.
Hi.
Good evening thank.
Thank you.
Kim I wanted to sort out the.
The strategic question on how you plan to balance.
The near term industrial recovery in business alongside the longer term transition TV, how many and how you view the interplay of those two is.
He said he the development set.
Regardless of the pace and your near term recovery or should we look at pace of EDI development driven by the extent of near term recovery said you outperform on your near term target you can accelerate on TV and vice versa recovery is slower so what's the interplay of sort of near term recovery, but the pace.
And.
First of all for forward. Our plan is very simple turnaround automotive operations modernize the company and in a way disrupt ourselves launch high growth businesses like our CV.
CV services business or a go to market customer facing Avi business.
And so our calls on capital are much more complicated than just E b.
And vehicles.
We have 15000 software engineers Ford right now.
And that will grow so our calls on capital or software the credit company, obviously, but but increasingly its these services businesses.
And we need talent, we need cash.
And capital to support them.
It's all funded essentially by our core automotive operations and so the turnaround of automotive operations not just to.
Sure stakeholder.
Journey, it's it's actually the lifeblood of our.
Of our future.
Because it funds everything.
And so how we look at it is.
Getting our own automotive operations overseas to profit and then a solid sustainable return dealing with the issues of passenger cars in Europe, and South America, and India. The three problem kind of areas, we've had an automotive and getting our North America operations 10, plus percent is an absolute minimum for the.
A company to fund not just the electrification journey, but as well our move to services data and software.
Understood.
So help me understand that is far ahead.
You have these larger cost capital calls and presumably you have probably a priority list and then also a nice to have less in terms of your investment.
Does the pace of recovery at all impact.
The the way that you accelerate or decelerate spend on those.
Yes. These are great questions, if you don't mind.
I don't I think it's best if we take a pass that we talk about this next spring. It is such a fundamental question you're asking is such an important question for Ford I don't think that third quarter earnings is the right venue, we need to take our time and go to this with you and all of the key stakeholders at four.
Jordan I think you'll be.
Thank you I think you'll find it.
For all of us to be a lot wiser. If we just take more time and we have specifics for you.
Got it and then just a follow up on the concept of growth.
I know you're focused on top line growth I think it's also clear at the same time, you're likely willing to further sacrifice some of what maybe we can call.
Lower quality or more to commodity cost car volume. So question is I think we've already seen some structural volume decline in North America related to pass car and in Europe, as well, but could you give us a sense of maybe how much more we might expect to see volume decline in the coming years related to more commoditized.
Product or maybe said differently, which region do you think there is more room to go on the moving.
More commoditized less value add type volume.
Well. Thank you for your question, it's a very important one for us after several years of making really tough choices.
We now have the opportunity in North America to grow.
And I I I'll emphasize again that something I put in my speech and I.
I think is quite important for everyone to understand our ambition.
As John mentioned, our share F series grew our mix of EPS you Ve grew our car share is declining almost to below 10% now.
And our North America share increased one full point in the quarter.
And we have Bronco, we've never had before we have maki that weve never had before so and we're really excited about the profit potential for all those vehicles. So here we are in the Eagle Ford Motor company being able to execute well and grow in North America. When you look outside of North America, the growth that matters for us is commercial vehicles in.
In Europe.
The key growth metric for us in China, we have an opportunity to grow again, we just localized to explore in a whole Lincoln lineup. We haven't sold as many Lincoln's we did in September in 25 years, and it's because of China.
So we have a huge opportunity to grow in China.
We have an opportunity to grow with export models coming from a hindrance.
And I have to say.
We haven't talked a lot about this but I'll I'll leak it out.
And that is we have some really exciting affordable products for North America. They are going to help us grow profitably.
So I think what you'll see is China and North America.
Growth opportunities.
And the rest the world, we're really focused on where we can win with Ranger. So the commercial vehicles in Europe.
And you will see us.
Continue to grow.
The services business, along the way I hope if there's one message you would get from Ford.
From this leadership team is that.
We're really trying to think everyone asking everyone to think about growth at Ford is more the unit volume growth.
Want to grow our software business our services business.
Hope that because that's.
Thats helpful color. Thank you.
And our last question for the day will come from the line of Joseph Spak with RBC capital markets.
Hi, Thanks for squeezing me here at the end.
Maybe just two quick ones since we've touched on a lot.
I realize you are not talking about free cash flow for the fourth quarter and by the fourth.
Credit DVT year to date is 1.7 billion the distribution to only 1.1, I think youve committed in the past to Dividending all that out so should we expect the catch up in the fourth quarter.
Yes, I'm not sure.
I'm quite clear on the catch up is I think that we've been distributing.
From Ford credit on a regular basis throughout the year. So I wouldn't expect there to be anything out of the ordinary there Marissa Joe the.
The distributions from Ford credit are going to reflect profit after tax.
Balance sheet size and leverage is going to be what is going to be.
Okay and then.
Just lastly, Jon I saw in the media I think you made a comment about how it's too early to talk about the.
The dividend reinstatement I realised ultimately into its important decision but.
Open this up I guess to to Jim and John in each of your opinion should 40 paying a dividend over the coming years, given the transformation you're talking about.
If so what's what are really the parameters you're looking for for for reinstating that.
Yeah.
Thanks for the question, though I don't think you know this is the time to have that discussion I think we need to have that.
Framed up in our total capital strategy and calls on capital and where we're headed as a business and I think next spring would be the time to do that.
Thank you very much.
Thank you that will conclude today's Ford Motor Company third quarter 2020 earnings Conference call. We do appreciate your participation you may now disconnect.
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