Ford Motor Company (F) — Q2 2020 Earnings Call Transcript

Thank you, Sedaris. Welcome everyone to Ford Motor Company’s second quarter earnings call. Presenting today are Jim Hackett, our President and CEO; and Tim Stone, our Chief Financial Officer. Also joining us today for Q&A are Jim Farley, Chief Operating Officer; and Marion Harris, CEO, Ford Credit. Jim Hackett will begin with some color on the quarter, and then, Tim, will talk about our results in more depth, and then we’ll turn to Q&A. Our results discussed today include some non-GAAP references. These are reconciled to the most comparable U.S. GAAP measures in the appendix of our earnings deck, which can be found along with the rest of our earnings materials at shareholder.ford.com. Today’s 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 operating cash flow are 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. Tim Stone; Hau N Thai-Tang, our Chief Product Development and Purchasing Officer; and Gary Johnson, our Chief Manufacturing and Labor Affairs Officer will participate. And then on Wednesday, August 15th, Kumar Galhotra, President Americas and International Markets Group will 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 of the way our team has performed during the COVID pandemic, which of course, has challenged every aspect of our business. But 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 industries, step up in the aftermath of the killing of George Floyd. And of course, hand-in-hand with others, there’s a deep outpouring of collective grief and frustration that moved us all very deeply. It was much more than a moment and a time that will fade but rather, we must make it a turning point for our society. Ford is committed to leading from the front with action to enable social mobility and economic success in the African-American community, including programs in which the company has invested for more than a century. The Ford Motor Company Fund in particular invests in a broad range of initiatives addressing social justice, racism, equality, and economic opportunity, and we’re looking forward to more opportunities to affect positive change. Now, in the past week since Mr. Floyd's death, I have met nightly with a small team of people to think as deeply as possible about what has not worked in the past that we need to address in the future. We’ve begun to map the experience of Black Lives at Ford and see areas where improvements and enhancement would go a long way to address many of the concerns that have been voiced. Ford is committed to leading from the front and taking action and the results will prove themselves over time. This is deeply a part of our culture and history in the Ford Motor Company Fund in particular has invested over many decades at the ground level to address issues of social justice, racism, equality, and economic opportunity, and we look forward to sharing much more of this 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, and second, meaningful progress on our plan to create a vibrant Ford Motor Company with exciting products that people want and well-positioned to capitalize on the new technology and trends that are transforming our industry. I couldn’t be prouder, as I said, of the optimism and the effectiveness our team demonstrated managing through and beyond the COVID crisis. From the start, I think Ford has 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 to build and supply much-needed personal protective and healthcare equipment. On all three accounts, the team performed exceptionally well under difficult circumstances. This strong execution enabled us to deliver much better financial results than we expected 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 our efficient restart as we followed our return to work playbook very closely. Our focus on safety also extended to our supply chain as we worked directly with our suppliers and logistics providers to minimize the disruption. In addition, our team also worked hard on costs, including CapEx, which helped reduce losses and cash burn in the quarter and these factors are what led to our outperformance. Another highlight of the quarter is our profitable Commercial Vehicle business. It continues to gain share globally. And Ford Credit remains a pillar of strength for our customers and it’s a competitive advantage. So we’re all proud to tell you that the balance sheet remains extremely solid and positions us to weather further disruptions and headwinds. Tim will provide further details in a moment on the balance sheet. Importantly, this intense focus on managing through the crisis has not knocked us off our mission to author our own destiny and shape the future of Ford. Since our last earnings call, we have revealed the all-new 2021 F-150 and are on our new Bronco family of vehicles. These vehicles along with the upcoming Mustang Mach-E 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 to enhance quality and constantly improve the ownership experience through fast 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 of deep focus on what customers want, a new human-centered design capabilities that helps us invent the unobvious features and capabilities customers will love and value. The new F-150 is packed with dozens of new innovative features and upgrades that we believe will make this the 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 F-150 on time, and with high quality, which of course, requires now changeover in our plants in Dearborn and Kansas City. An 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’s being the F-150, Ranger, and our SUVs exploring Lincoln Aviator and Corsair. The total share was up 20 basis points in the quarter to 14.5% and within that number our retail share was up 120 basis points to 13.3% as series gained 250 basis points of segment share to 33.3% Turning to the all-new Bronco. The outpouring of enthusiasm from the public immediately after the reveal earlier this month, candidly speaks for itself. Reservations for Bronco well, they surpassed even our most optimistic initial projections. Our entire team, like the over 150,000 customers who reserved one, are super excited about the Bronco. This family of vehicles has 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 brand for Jeep today. Initial customer demand for Bronco is 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 Mach-E, which will go on sale later this year and I had the opportunity to drive an advanced prototype recently in Ann Arbor. The experience was just stunning from start to finish. When you sit in the driver’s seat, everything is personalized. My profile automatically loaded into the Mach-E before I press the start button, seat position, screen colors, preferences, and Apple CarPlay were seamlessly integrated into the SYNC 4 system. I didn’t set off on drive in whisper mode. Now the drive was astonishingly smooth and powerful. And I used the one-pedal driving system, braking and battery regeneration were perfectly integrated. Then, I did switch on bridle mode. You can see me smiling and I can tell you the performance was pure Mustang. Sure-footedness is incredibly quick as I took curves. The experience was incredibly intuitive and 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 enjoy this same experience. When I see these products come to life, I feel better and better about our decision to reallocate capital spending from sedans to trucks and commercial vehicles and SUVs, was controversial at the time, it’s paying off. We have even more new products in the pipeline in areas where Ford is strong today and its whitespaces where we can earn stronger returns and grow share. Now these new products are critical to our target to reduce the age of our showroom in the U.S. by over 40% or more competitive 3.1 years by 2023. OEMs really with the highest replacement rate and younger showroom age have generally gained market share profitably. It’s a good place to be in. By several third-party measurements, Ford brand reputation is improving as well and we believe we have much more potential for improvement as we launch these new exciting products. I just want to take a moment and touch on our plan for electric vehicles. We’re about midway through our plan to invest more than $11.5 billion through 2022 and there’ll be more after that with an increasing mix of spending on all-electric vehicles. For bringing the power of choice to our customers with hybrids, plug-in hybrids, and pure electric, by the fourth quarter, we’ll have 15 electrified nameplates available to customers around the world and nearly 10% of our wholesales will come from some form of Ford electrification. We are deploying this technology across our lineup and price points to bring improved capability, fuel economy and emissions to as many people as possible just as we did with our EcoBoost technology a decade ago. Nameplates that will follow are all-electric are the territory in China, Escape and Kuga plug-in hybrids, which offer an estimated 100 mpg, and the F-150 PowerBoost hybrid, I just ordered one of these, as well as our Mustang Mach-E BEV. These will be followed by all-electric versions of our market-leading F-150 and Transit vans. Electric vehicles are also a big part of Lincoln’s future and you’ll see this unfold in the months and years ahead. As you know, in June, we finalized our strategic alignment with VW, which will accelerate execution of our commercial vehicle and electric vehicle strategy. This alliance also significantly strengthens Argo AI, which now combines unmatched expertise with the global reach of Ford and VW together. This positions Ford well as self-driving vehicles become a significant new source of revenue and profit in the years to come. Maybe the journey will be a long one, but Ford is now well-positioned 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 are aggressively reshaping our business and restructuring underperforming operations around the world, rationalizing our product portfolio to play to our strengths and attacking costs. Obviously, Ford isn’t immune to the effects of the pandemic, 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 will win in an era of smart vehicles for a smart world. With that, I’ll turn it over to Tim for more color on the quarter and our expectations for the remainder of the year. 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 of 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 SUVs, 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 of our global redesign and a more focused portfolio of fresh products for customers. We also demonstrated discipline in the management of our balance sheet and continue to maintain strong liquidity to ensure financial flexibility in these uncertain times. We ended the quarter with 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. In the second quarter, our 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. The restoration and production payables will continue into the third quarter, as we reach near full production in late June. On July 27th, 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 if global demand declines, or if there’s another wave of COVID-related plant closures. Looking at results in automotive, both wholesale and revenue are down due to the suspension in manufacturing. To give you some color on wholesales, earlier this year, pre-COVID, we had expected wholesale units to be about 800,000 higher than the 645,000 we reported in the quarter. Our decline in automotive EBIT was driven by the decline in volume. So this was partially offset by over a $1 billion improvement in both net pricing and cost. The cost improvement was a 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 warranty to be up for 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 was operating at about 95% of pre-COVID production levels by the end of the quarter. In addition to the improvements in share, as Jim mentioned, the North America team was laser-focused on minimizing the impacts 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 with North America, we brought production up efficiently. Market share declined largely driven by lower sales to rental companies and our global redesign actions last year to exit heavy trucks and unprofitable products such as Fiesta and Focus. However, both Ranger and EcoSport did well, as Ranger the number two midsize pickup globally gained share. Relative to profitability, this was the third consecutive quarter of improving year-over-year results as we continue to hone our cost position, including lower headcount and improve mix. In Europe, all of our plants came up successfully by May 4th. Profitability was favorably impacted by the benefits of our global redesign, as well as our 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 improvement in structural costs since the actions began during the third quarter of 2018. This includes a 10,000 position reduction in Western Europe, of which 7,500 reductions have been completed, a reduction of over 2,000 positions in Europe. The balance of the positions in Western Europe will be eliminated by the end of this year. We’ve also reduced costs by reducing our manufacturing footprint by six facilities down to a total of 17. Our sharper focus on product strengths allowed us to extend our leadership in commercial vehicles, as we reached 15.1% share in June, an increase of 220 basis points. We are on track this year to meet the new CO2 regulatory requirements for both passenger and commercial vehicles supported by our growing portfolio of electrified vehicles. For example, in the first half of this year, our new Puma MHEV reached 80% mix and Kuga PHEV and MHEV collectively reached 57% mix. Now on the horizon, about Transit, we are enjoying our Transit family's ICE and hybrid powertrains. In China, the only region to post gains in wholesales, wholesales were up double digits, as we enjoyed benefits from the newly launched Escape and Lincoln Corsair and strong commercial vehicle sales. Corsair, our first locally produced Lincoln products contributed to a 12% increase in sales from Lincoln and the all-new locally produced Aviator is launching now. China also posted its second consecutive quarter of share gain of 20 basis points to 2.5%, its highest market share since the third quarter of 2018. Our strength in commercial vehicles was supported by a 34% increase in sales at JMC, our JV partner, which gained 40 basis points of share. As with other regions through cost discipline, China has done a great job mitigating the profit impact of COVID. China’s focus on cash flow also delivered a step function change in working capital, driven by the benefits of localization, as well as CapEx efficiencies. In mobility, we continue to make investments to commercialize our Autonomous Vehicle business, including product development, engineering and testing. Our six test markets for Argo AI constitute what we believe is the largest active urban test footprint of any self-driving vehicle developer. As Jim mentioned, in the quarter, we closed on our new partnership with VW and Argo AI. This generated a gain of $3.5 billion, which was recorded as a special item. Argo AI, which is the self-driving system portion of our AV business, is now deconsolidated. Despite the deconsolidation, we do expect our investments in AV reflected in our consolidated mobility results to continue at similar levels for the reasons I noted earlier. In mobility we also continue to invest to build out capabilities and connected services, including our FordPass and Ford 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 sharper focus to also provide benefits to the enterprise to improve customer experience and quality. Ford Credit delivered a strong profitable quarter, demonstrating its uniquely compelling value for customers and competitive advantage. Our prudent actions in the first quarter ensured we were adequately reserved in light of the macro uncertainty created by COVID. Portfolio performance was strong, and delinquencies and charge-offs were at record low levels. Ford Credit provided extensions to about 11% of U.S. customers through May, an unprecedented move. Over 90% of these customers have resumed payments without delinquency and we are very pleased with the performance of this portfolio. Lease share remains below the industry average and off-lease auction performance was better than expected, up 3% sequentially and down 2% year-over-year. We began the quarter with close auctions, growing inventory and falling prices. However, in May we saw a healthy recovery in auction volume and 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 with current economic environment, continues steady improvement in the stability of the global automotive supply base and no further significant COVID-related disruptions to production or distribution. In the third quarter, we expect to be profitable with adjusted EBIT of $0.5 billion to $1.5 billion, reflecting the economic impact of COVID, weaker global demand for new vehicles, parts and services, and lower profit from Ford Credit. Our recent practice has been to comment on the upcoming quarter only, because of the significant launch activity in the fourth quarter, we thought some early color would be helpful. We expect adjusted EBIT to be a loss in the fourth quarter, driven by the volume impact of the new F-150 launch and lower ongoing industry volumes. Note that our major launches in North America have shifted to the fourth quarter in line with our COVID-related production disruption. We anticipate the downtime changeover and ramp-up will reduce F-150 wholesale significantly in the quarter. This launch impact will more than offset the non-occurrence of the 2019 UAW contract bonuses in the fourth quarter, which is worth roughly $600 million. Our new Bronco Sport and Mustang Mach-E are also launching in the quarter. The limited level of 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 to deliver excellent products and services for our customers. With that, let me turn the call back to Jim for a few comments before we move to Q&A.

Thanks, Tim. Yeah. 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 maintained robust safety protocols and aggressively mitigated production losses while effectively navigating a tenuous supply base, I mean, everything was in motion. We’re keenly focused on cost and cash discipline. Jim Farley led an effort here that’s just extraordinary. We are optimistic and ready for the production ramp-up of the F-150, the Mach-E as you’ve heard, the Bronco Sport and Bronco, all with the spirit of high quality and extreme focus on doing a great job there. We continue important investments. We didn’t stop spending on the future in commercial vehicles, AV, connectivity, and electrification. We did continue to implement our global redesign and portfolio refresh and we have measurable results to show that this is going very well. And as you just heard from Tim, we did a great job of this. We have a discipline management of our balance sheet and an extremely strong liquidity position from all the actions we took earlier this year. This ensures our financial flexibility, particularly as we know in uncertain times. So, Operator, with that, let’s move to Q&A, please.

Good evening, everyone. I have a question for Tim regarding the guidance you provided for the second quarter. Your results far exceeded expectations, with a projected EBIT loss of over $5 billion, yet you performed significantly better than that. I'm interested in understanding what changed and identifying the key factors involved. Additionally, considering price and cost as two significant levers, how sustainable are the benefits from those changes moving forward? So, in summary, what contributed to the change, and how lasting do you believe it will be?

Great. Ultimately, the performance in the second quarter comes down to operational execution by the teams. And if you look at our return to work, which is not only safely, but production in our wholesales, vehicle sales came with that and inventory management, really strong performance by the teams. We were near full production by the end of the quarter and we saw greater cost reductions and cash reductions than we had anticipated initially as well. Again, based on the keen focus on cost and cash. There was also a favorable pricing environment for products and mix. And Ford Credit auction values and credit losses overall indicated strong portfolio performance. So, I guess, at the end of the day, it all comes down to strong execution. And as it relates to the second part of your question again, how much sales is going to prevail in the year?

How sustainable is that level of outperformance? It seems much of it was due to specific execution factors. Do you believe some of these results might be temporary, influenced by austerity measures, or do you think this momentum will continue?

I think the operational execution is something we pride ourselves on and expect to work really hard to make sure it’s very sticky. We’ve got a lot of work ahead of us for sure in the back half of the year with some really important launches in the fourth quarter and we continue to drive improvements in the fixed accelerate grow areas that we’ve talked about. But as reflected in our guidance for profitability in the third quarter is, we’re going to continue to operate in an operationally excellent manner.

Okay. I have a second question, and I believe Jim Farley is here. Regarding the Bronco launch, there's a lot of excitement surrounding the truck, which I think is well deserved. There's also a lot of enthusiasm for the Sport this year. However, it appears this is just the beginning of something larger than just those two vehicles when considering the Bronco family. I'm trying to understand if we might expect a range of Bronco vehicles in the next four to six years that could resemble what Jeep offers. I'm curious about the potential that goes beyond what we currently know, as it seems there's much more to come.

Thanks, John. Hi. As Jim and Tim mentioned, the Bronco reception has been very positive. The reservation numbers are far beyond what we expected, and these are two broadly appealing nameplates in three body styles, which we currently do not have in our portfolio. We are not getting ahead of ourselves with Bronco. There is still much work to do to ensure we launch these products with world-class quality. Our ambition is to introduce over 200 accessories and create a sub-brand within Ford, similar to what we have achieved with the F-Series. We have a lot to accomplish, and that is our main focus. John, there are plenty of great ideas for Bronco at Ford Motor Company. We have a solid foundation to build upon with these three body styles. I would expect that, as we have always done, we will roll out the Bronco family in our own manner, tailored to our customers, where we see openings in the market for them to be excited, and we do see that opportunity available. Therefore, I wouldn't compare ourselves to other OEMs; our goal is to succeed by targeting specific customers that are currently underserved. Thank you.

Great. Thank you very much.

Hi. Good evening, everybody.

Hi, there.

My first question is trying to understand a little bit better how to think about the rest of the year? When I look at your cost performance in the quarter, maybe on slide 11, so $1.1 billion overall net basis, but $1.8 billion qualify this structural anyway to dimension for us how much of those structural costs are more temporary actions in the quarter, when you had shutdown for an extended period of time versus something that we could assume could continue on a year-over-year business going forward and then still about the rest of the year’s outlook? Anyway for you to dimension for us the magnitude of the impacts on the F-150 changeover either in terms of weeks of shutdown or units, anything that could be helpful to dimension?

So, Emmanuel, it’s Jim Hackett, I think I’m going to send that to Tim.

Thank you, Jim. Regarding our cost actions, we have been emphasizing the importance of fitness and business design. We will maintain our strong commitment to ensuring the business is well-designed with fitness as a key priority. We have implemented measures to preserve cash and reduce costs in light of the current environment. Additionally, we are exploring opportunities to learn from our experiences and identify areas for enhancing our fitness and redesign initiatives moving forward. This is reflected in our guidance for the third and fourth quarters. Please continue.

Sorry. The second part was around the F-150 changeover?

On the F-150 side, we believe it will have a greater impact than the UAW contract bonuses of $600 million. Beyond that, there isn't much more to add. When you consider that it is America’s best-selling vehicle for 38 years and is gaining share in its segment this quarter, it highlights its strong influence on our overall business. The transition and subsequent ramp-up with a successful launch will significantly affect the quarter, which we expect will be positive.

Thank you. I would like to hear more about your current views on the global redesign plan and how we might leverage this industry downturn to speed up the process. I recall you mentioned during your prepared remarks that you anticipate $1 billion in benefits by the end of the year. Could you clarify the basis for that figure? Is it in comparison to 2020 or 2019, or does it relate to the start of the program? Additionally, what are your latest thoughts on the prospects for accelerating this initiative?

As it relates to the Europe comment, by the end of this year we expect to have roughly a $1 billion improvement in structural cost actions since the beginning when was announced in Q3 ‘18 it’s cumulative. That includes the reductions of positions I mentioned 10,000 positions in Western Europe, 7,500 of which have been completed already, as well as 2,000 positions in Russia, as well as the reduction of the manufacturing footprint by six facilities on a total of 17. So, again, we’re going to review our center in order to look at opportunities to make sure we’re the right design for the business as we look out at the opportunities ahead of us and nothing incremental to announce at this moment. But to-date, we’ve incurred $3.9 billion of EBIT charges and $1.4 billion of cash. So you with $7.1 billion to go, up to $7.1 billion to go and charges up to $5.6 billion in cash. The other thing you know, continue to execute on the result as well, so nothing new to announce at this time, but you’re keenly focused on it.

Great. Thank you.

Thank you.

Thank you for the opportunity to ask questions. I have a couple. First, Tim, regarding the Q4 guidance and the potential return to losses due to launch costs, it seems many of your assumptions include the expectation of a weaker Q4. It’s not certain that you will definitely return to losses, as a lot could depend on stock performance. Can you provide some insight into the range of potential outcomes? Additionally, I’ve noticed that your interest expense nearly doubled in Q2, which has raised concerns among investors about its impact on earnings momentum. What measures are you taking to address this, and how soon can we expect to see improvements in managing interest expenses to ensure we maintain our operating leverage?

Sure. Let me begin with the interest expense. It has increased as we strengthen our balance sheet and ensure we maintain a solid cash and liquidity position, which is beneficial for us. Looking ahead, we are comfortable with our cash position and confident enough that we repaid about half of the outstanding revolvers drawn earlier this week. We will continue to explore opportunities to pay down additional debt, including revolvers over time as the business performs. While I can't disclose anything specific at this moment, we are definitely looking for ways to lower interest expenses and deleverage the balance sheet as debt levels decrease. We have good liquidity, with $40 billion available on our line of credit, so we feel secure in our cash and liquidity situation. For the latter half of the year, you can expect the interest expense to be around $0.5 billion per quarter. As for S.A.R, we achieved approximately 13.4 million units in the first half of the year, and we anticipate an improvement as the year continues. We will provide more details as the year goes on, but we see potential for further improvement as we move forward.

Thank you.

Hi, everyone. I wanted to go back to the question about costs. The $1 billion in savings from Europe is quite significant. However, when I refer to slide 11 regarding the financials in Europe, I notice that costs appear to be nonexistent. I assume this is due to your variable costs, primarily related to regulations, offsetting the structural cost savings. Looking at the bigger picture, there is a question regarding the $1.8 billion in structural costs. People are curious if a substantial portion of this may be permanent, and if some of it might be shifting from the first half of the year to the second half or possibly returning. Is there a risk that the structural costs might diminish, while the variable cost inflation we are observing, such as in materials or freight, continues?

Yeah. I guess what I want to say is that the team has been very focused on opportunities, not just during this time of COVID crisis, but before that to get more fit and improve our cost structure, you are seeing that 900 line results entering into the crisis. With the crisis, we’ve had an opportunity to further reassess how we work and what opportunities we have in our cost structure to demonstrate to ourselves, we can take swift action, again, the teams around the world has done a great job in all areas. We are 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, it shouldn’t be volume-related costs, but we’re going to get more and more fit over time.

Okay. And just a question on the launches that you’re talking about, you talked about the disruption, but obviously, there is 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 that you need a significant amount of pricing to offset higher variable costs there. And on the Bronco, is it conceivable that you could produce 150,000 units a year there or is that just beyond the capability or the scope of what’s possible?

So, Rod, it’s Jim Hackett. I’m going to ask Jim Farley, can you imagine the calls we’ve gotten about how many can you make? He has been working on that day and night, so I’ll give him that in just a second. But I want to make sure I’m tracking with you on Europe in the sense that, you understand that structural costs effort ahead of the pandemic looks to be really precious, doesn’t it and the absorption there without the volume is because of the effort that these guys have put forward. So I’m not worried that as you just portrayed that there is a variable cost kind of avalanche 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 are all trying to get back up to levels of efficiency where we start to enjoy some savings. So I just want to add that color to the way I think about variable costs. I understand why you were looking at the forecast, but I just step back and think about that. But Jim, do you want to talk about the Bronco, great news and the challenge.

Yeah. Thanks, Jim. Hi, Rod. So, maps, right down the street from our Dearborn headquarters is where we will make Bronco as in North America and then the Bronco Fords down in Mexico. As far as the Bronco that we’ve received over 100,000 reservations that operations to shift pattern, so we have some upside. We have a lot of work to do because these are reservations not orders yet. So we have a lot of work to verify that the mix is great enthusiasm and we still continue to get lots of reservations. So the team has multiple capacity studies, we do have some opportunity, it would commit to another shift which is a big deal for us. As you can imagine, but obviously the reception has been really positive and looks sustained. Now on F-150, we’re in the prototype build both in Kentucky and in Dearborn looks great. We’re on plan with the supplier readiness, manufacturer readiness and all the software, obviously this is a big milestone for OTA and lifestyle for us. So it’s important deliverable for the team. And we have a long way to go on the F-150 launch. But the team has made great progress. We’re finding issues and addressing them immediately. So we’re feeling like I would portray is on plan, and yes, there is upside for Bronco.

Great. Thank you.

Thank you. Tim maybe asked about the second half guidance you know this way. If there wasn’t a program delay, would you have basically issued the same guidance, just the cadence has been a little bit different?

It’s difficult for me to reverse what has occurred in the last few months. The delays we experienced were in line with the consequences of those production shutdowns. The teams worked diligently during that period to prepare us for the launch. Looking at the latter half of the year as a whole, we are essentially projecting a profit of between $0.5 billion and $1.5 billion. There has definitely been a shift to the fourth quarter due to those losses, particularly impacting the F-150's performance in that quarter.

Okay. Regarding cash flow and the balance sheet, you are paying back part of the revolver, and when you adjust for the June cash and debt levels you mentioned, you return to the December net cash levels. However, there will still be some losses in the fourth quarter, additional capital expenditures, and possibly more redesign expenses later this year. Although you typically discuss liquidity rather than net automotive cash or debt, how do you anticipate these factors affecting the balance sheet over the next couple of years? There still appear to be calls on the cash that I see.

Yeah. I mean, first, I want to emphasize for the third quarter, we expected cash flow to be higher than EBIT and the fourth quarter would be lower due to the timing of the working capital, social, the launches, and the 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 a COVID-related plant closures again and/or demand declines that would have $20 billion or more in cash. So, certainly, our base expectation is for more than that. And as we look out to the future, we’re focused on optimizing 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 pain downloads and credit, of course, but through paying debt, receiving the dividend and to dilute share purchases as well.

Thank you.

Thanks very much. My first question is on EV batteries and it’s kind of a question about make versus buy. So GM is making their own batteries with a joint venture in Ohio with LG. You’re not going that route in terms of owning the physical plant capacity. What drives that thinking? And specifically, there are a lot of options and this isn’t the only one, but Elon Musk has offered to sell batteries or like EV powertrain skateboards to other OEMs. Would you consider doing that?

Hey, Adam. It’s Jim. Thank you. It’s a question that when maybe a year ago, we started to see lines starting to arrange around, make versus buy, own versus source. So we had a deep discussion about this. I’ve met with a number of the people that are in the supply side of this and it was our estimation. In fact, our whole team went through a really deep dive on this six months ago that the supply chain has ramped up since EV his Gigafactory. And so there is plenty there that does not warrant us to migrate our capital into owning our own factory. There is no advantage in the ownership in terms of a cost or a sourcing as what Ford can draw on. So I just can confirm to you that it actually works. It works for us to go the path we are now. With that said, there are some challenges that are in that supply chain between themselves. There are some litigation that’s going on. We’re hopeful that they get settled quickly. It really doesn’t matter to us how it gets settled, but it may, it confuses some of the suppliers about their investments in some of their plants here in the United States, which is another way of saying the way the U.S. MCA would benefit as intended is to have these factories be built in the United States for supply of batteries and so we’re well positioned believing that will happen.

Thanks, Jim. I have a follow-up question for Jim Farley. Jim, thinking three years ahead, how significantly different do you anticipate Ford Motor Company will be compared to today? Could you share some of the major changes you want to highlight for everyone on this call tonight? Thanks, Jim.

Thank you, Adam. I would describe Ford’s transformation as a recognition of our strengths and the significant opportunities we have in those areas, with our commercial segment being a prime example. We have spent decades establishing the commercial ecosystem we currently have, which includes exclusive distribution, bailment, upfitters, and strong relationships with our customers, along with substantial expertise within the company. Looking ahead over the next three to five years, you can anticipate considerable changes in Ford’s commercial business. This will involve collaboration with Volkswagen in regions like Europe, along with advancements in the mobility transformation of our commercial operations. Ultimately, you can expect Ford’s transformation to focus on the areas where we already excel and possess capabilities, while we thoughtfully approach our business model and the development of an ecosystem that supports new growth opportunities. This approach is reminiscent of how we built our commercial business years ago, which presents significant potential for value creation and benefits for our customers. I believe this gives a clear insight into our perspective and a more refined geographic focus.

Thanks, Jim. Appreciate that.

Hi, good evening, everyone. Thank you for taking the question. I wanted to start with a question on Bronco here. And I know you don’t disclose your exact variable profit per unit, but maybe if you could just give us a sense from the perspective of variable profit per unit, how we should think of where Bronco potentially could stack up versus other vehicles in the Ford lineup? Obviously, it’s not going to be at the level of F-Series, I would think that’s been the case. But I would venture to guess though, that it could be right up there, maybe above an Explorer or just below an Expedition or Navigator. Just give us some sense of from a profit per unit standpoint, how we should be thinking about Bronco and the opportunity, because we know that your competitor in this area is doing quite well in that product.

Yeah. So my first reaction I’m thinking, thank God we made the decision, right? Because you know what it replaced in the facility where we’re making in some of the sedans we’re making money. So you got to think of that with Adam’s last question about the makeup of Ford and what’s going out and what’s coming in and product. And Jim, I’ll let you talk about some of our targets there.

Thank you, Jim. The real breakthrough for us with the Bronco was localizing the Ranger, which has been a highly successful global model in North America. We already have strong scale and performance with the Ranger in the U.S. The large Bronco and the C2 Bronco Sport are both based on existing platforms that we have successfully utilized multiple times. While we won’t disclose specific profitability details, you can infer the potential pricing our Bronco Top Hat could achieve compared to the Ranger. Additionally, we already have a strong operational scale for the industrial aspects of the product. The platform has been executed exceptionally well and has global reach just like the C2 for the Bronco Sport. We are optimistic about these models and the pricing premium we can achieve in the utility and off-road markets. This market is well established, and we have delivered successfully. It’s not just a possibility. From our perspective, as Jim noted, we have not only replaced the Focus with the Bronco and Ranger but are also transitioning from high-scale platforms like C2 and Ranger. We understand that these segments, when executed properly, are premium markets, so we are very confident about the margins.

And Jim, I want to mention that you've all seen our campaign about building more vehicles in America by Americans in the whole industry. We're hiring 2,000 to 3,000 additional people here in Southeast Michigan to build the Bronco. I know I get teased about this because it came up in a discussion with the President, but I was proud to explain that even in the middle of a pandemic with challenges in the job market, Ford will be hiring people to build this product. It’s really a great news story.

Thank you. That’s really helpful color. If I could just squeeze one more in on Elon just a question about EV budgeting, at least as you spent half of the $1.5 billion electrification commitment to a 22 and I believe that the starting point was 16. So it’s all us clearly your spend is more backend loaded. But obviously 2022 is not an end goal, and you’re going to be spending EV, as you’re just starting on the journey then. So is it fair to assume that if I assume, okay, so you still had $3 billion to $4 billion, $3 plus billion a year that the spend will only accelerate after 2022? So how to think of the electrification spend?

Yeah. Jim, do you want to take that one?

Sure. Again, appreciate your question. Obviously of the $11 billion we’re at the very tail end of Mach-E 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 MEB and the number of nameplates and so you can expect in ‘22 and beyond as we refresh our product lineup once again globally, that electrification will be a key component and so the spend will continue to play out. That figure was given a few years ago. So as you said, ‘22 seems like right around the corner, but we’re not done. And with the $11 billion, we have some really exciting products coming out like the F-150 and the Transit, and with the growth of package delivery and a large commercial customer network for F-150 we’re 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’ve characterized it fairly and accurately.

Great. Thank you. That’s helpful color.

Hi, thanks for taking my question. First on South America, I would have expected your losses there to grow considerably in 2Q given a 75% decline in revenue, but instead profitability improves slightly. Now it looks more of the help was 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 do you think you’re at the point now that if the volume returned 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 phased out of unprofitable vehicles. We ended focused production and Pacheco exited heavy trucks business, discontinued Fiesta, ceased operations at San Paulo manufacturing based off the Sigma engine production. But Jim has been really working hard on the restructuring to serve a dealer network better in terms of our customers improving the availability for the remaining dealers. So I think this is a story that’s still yet to be completed. But Jim, I want to let you answer why you think in the short-term we had this better than expected performance.

Thank you, Jim. The second quarter shows what I believe is the third consecutive quarter of year-over-year improvements, even though we are still experiencing losses. This reflects the progress we have made over the years to restructure our operations in South America. We have implemented significant cost control measures and reduced our workforce as expected. Additionally, during this quarter, we adjusted our pricing to align with the currency situation in that region. I think we were proactive in addressing the downturn caused by COVID, which has benefited us for some time. As Jim mentioned, we will continue restructuring our businesses until they are sustainable, so there is still more to accomplish. South America presents considerable challenges, but the team is performing well. We launched several new products a few years ago, which incurred costs, but we now have a strong and fresh product lineup. We gained a bit of market share in the second quarter, despite a slight decline compared to last year largely due to the discontinuation of certain vehicles. The remaining vehicles we offer are very well received. I would emphasize that we still have more work ahead of us, as Jim noted, but I must give credit to the team for achieving a third consecutive improvement in our profit or losses amid declining revenues.

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, the relationship with Changan distribution strategy, localization of Lincoln, et cetera? And then are the pieces or future product programs in place to continue to grow that share, which I think had been like 4% at one point, is there a 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 a while?

I’m pleased to share that the plan is proving effective. COVID helped us focus our efforts, and the strength in commercial vehicles was bolstered by a 34% increase in sales at JMC, which gained 40 basis points of market share. This marks the second consecutive quarter with a 20 basis point increase in share, which we see as the breakthrough we were aiming for. The Corsair plays a significant role here; it is the first locally produced Lincoln product and has set a new monthly sales record for us. It contributed to a 12% increase in sales for Lincoln, and now the new Aviator is following suit. I wish the entire board could have attended the review in October to discuss the progress, but due to COVID, travel is restricted. However, Jim Farley and Anning Chen, our President, have done an excellent job addressing that market.

Thank you.

Great. Thank you. Good evening, everyone. So just a couple of cash flow questions maybe for Tim. I think year-to-date, the working capital and timing differences has been a use of about almost $5 billion. I am curious if you can share roughly how much of that you think you might be able to recover in the second half of the year? And then secondly to that with the CapEx down from the original guidance, we expect that to be recovered next year, meaning CapEx will be higher than normal, as you kind of recoup some of the deferrals from this year.

Let me start with the last part first. Thanks for the question. We haven’t completed our planning process for next year yet. We have indicated for some time that we’re focused on fitness activities, which include both costs and capital expenditures to ensure efficient and effective allocation of resources. We’ll continue to emphasize this, and you can see some of it reflected in this year's capital expenditure results. Regarding fitness, you’ve noticed the fluctuations in product programs, but we’re pleased with our progress, showing a $1 million to $1.5 million decrease year-over-year. However, we don’t have additional updates for 2021 at this time. Concerning working capital, keep in mind that the dynamics in the second quarter involved production resuming during the shutdown period, where we had repayments and as production picked up, payables also started to increase again. The restoration of payables continued into the third quarter, which is why we anticipated third quarter cash flows will outperform EBIT, while in the fourth quarter, with the seasonal shutdowns and launches, particularly the F-150, cash flow will be lower than EBIT. So, you’re witnessing not only the benefits from our fitness initiatives and redesign but also improved underlying results in the context of the COVID environment, and this will continue to develop in the second half of the year and into 2021. We are very focused on all cost and cash opportunities. As we’ve mentioned before, we have a strong cash and liquidity position, and we are confident about our outlook moving forward.

Great. That’s very helpful. And if I could sneak one more in, I’m just curious, what are you seeing initially on the four promise campaign that you launched about a month ago? I am just curious if you’re seeing a fair bit of traction there?

Jim?

Yeah. I think, one of the really encouraging things for us leadership team, as Jim said, is we went out and promoted the reality that we’re the highest employment in the U.S. of all the OEMs and also our volume in the U.S. and that plus new products is really, we’ve seen a strengthening of our brand. The Promise campaign seems to do 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 mixed, but it’s great to see that moment behind the brand. The third quarter looks not to be dramatically different. We’ll continue to have good momentum, sales still lot to do. We have good supply situation and Ford in the 70-day range. And so the campaign seems to be doing really well, brands getting stronger, and we have product to sell.

Great. That’s all very helpful. Thank you.