Ford Motor Company (F) Q3 2020 Earnings Report, Transcript and Summary

Good day, ladies and gentlemen. My name is Holly, and I’ll be your conference operator today. At 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. [Operator Instructions] I would like to turn the call over to Lynn Antipas Tyson, Executive Director of Investor Relations. Lynn, I hand it to you?

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 and also joining us today for Q&A in Marion Harris, CEO of Ford Credit. Jim will have some opening comments, John will talk about our third quarter results 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 and actual results may differ from those stated. The 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 EBIT, EPS and free cash flow are on an adjusted basis and product mix is volume weighted. A quick update on our IR events over the next weeks. On Monday, November 02, Credit Suisse will host a fireside chat with John Lawler, Marion Harris and Kumar Galhotra, Ford's President of the Americas and our International Markets group and then on November 10, Stuart Taylor Executive Director of Enterprise Connectivity will participate in Deutsche Bank's auto tech virtual conference. Now, I'll 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 CEO of Ford. My family has been with Ford since 1916 when my grandfather started at Highland Park here in Michigan and in that moment our family story really started to change for the better and countless people over have similar stories about Ford. We're a family company. From the leadership a Bill Ford all the way to the members on our factory floor. I'm extremely motivated to help build a vibrant and growing Ford that will have a positive effect for generations to come, benefiting all of our stakeholders. Now we've assembled a very talented leadership team to get this done. A combination of strong, lifetime and long time Ford people who truly know our business, but we also have new colleagues. We had very different experiences and knowhow and talents to the company to execute our plan and we plan to continue to add to this bench with key capabilities in marketing, technology and many other areas. Over the past several months, I've spoken to many of you and I believe the plan we now have and have developed and are now executing on aligns well with many of your expectations. We're committed to creating Ford that grows profitably and generate sustainable free cash flow, led by our automotive business and we're going to allocate capital to the best and highest usage to drive sustainable value creation. Now that plan which was introduced to the Ford team and many stakeholders on October 1 is very straightforward. Among other things, number one we will compete like challenger, earning each customer with great products, but as well services with rewarding ownership experiences. Number two, we're moving with urgency to turn around our automotive operations, improve our quality, reduce our cost and accelerate the restructuring of underperforming businesses. And third, we're going to grow again, but in the right areas allocating more capital, more resources, more talent to our very strongest businesses and vehicle franchises. Incubating, scaling and integrating new businesses, some of them enabled by new technology like Argo, self-driving system and expanding our leading commercial vehicle business with great margins, but now with a suite of software services that drive loyalty and generate reoccurring annuity-like revenue streams and being a leader in electric vehicle revolution around the world, where we have strengthen and scale. So now speaking about EVs, to start with, we're developing all new electric versions of the F-150 into transit, the two most important, highest volume commercial vehicles are in our industry. These leading vehicles really drive the commercial vehicle business at Fort and we're electrifying them. We own work at Fort in these electric vehicles will be true work vehicles, extremely capable and with unique digital services in 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 and you heard about it here first for all of our global markets. We believe the addressable market for our fully electric commercial van and pick up, the two largest addressable profit pools in commercial are going to be massive and we're going straight 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 some of our customers and frankly, Ford is not only in front of developing the electric transit in F 150, we also have an unmatched dealer base to provide that anywhere service or great uptime for our customers with a great customer base, with deep know-how on their usage and expertise in the commercial vehicle business such as the largest updater community there is, period. Also in the coming weeks we will deliver the first Mustang Mach-E to customers in the US and Europe. The reservations have been very strong for this vehicle and soon after it will go on sale even in China. Now 30 years of being in this wonderful business, I've never been so pumped up about one of our -- one of the retail vehicles. I recently had a chance to put a 1,000 miles on a Maki and that Mustang and that engineering team have pride -- had vehicle out of my hands. They just elevated 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 row crossover business and we have a real advantage especially in US with the EV tax credit. Now you're going to see our strategy of electrifying our leading commercial vehicles and our iconic high-volume products expand very quickly at Ford. It's also important to note there we're 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, Unifor, that paves the way for future electric SUVs to be built by our team and 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 objectively track our progress. We plan to provide you with more details about our plan 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 a benefit of our decision two years ago to allocate capital to our strongest franchises, namely pickups, 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 that contributed to a very favorable pricing environment and mix. Together these factors plus the strong performance from the Ford -- the strongest performance from For Credit in 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 industrywide shutdown of COVID 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 F 150 to live in, you 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 use an 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. While 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, the hardware engineering is done, supplier manufacturing readiness looks great, in fact right now, are all new F 150s are rolling off the line in Dearborn as we speak and production will soon start at Kansas City and we're starting to build the Mustang Maki and the Bronco Sport actually early this week. Before I turn over to John, I want to thank each of you for joining us today. Despite the strong numbers in the third quarter, we know we haven't fixed the issues that held us back in our automotive business. They include warranty cost, which remain unacceptably high. I plan to be transparent and focused on both customer and shareholder value, proving out this business and are plan quarter after quarter, year after year. And now John let's take everyone to 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 can't 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 that'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 or dispose of underperforming parts of our business so we can allocate capital to its best and highest use and two, further strengthen our balance sheet. We will make the tough decisions to improve our financial flexibility and ensure 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 as 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, while Europe, South America and our international's market group were still affected by COVID-related industry declines. In addition, our performance continues to benefit from our portfolio of 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 our 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 recovered sharply as we rebuild production to full capacity after a shutdown, largely driven by supplier payables. In 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 facility and we ended the third quarter with strong a 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 COVID, the Ford team executed well operationally. We optimize 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 it benefited 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. The improvement in volume and mix reflects the effectiveness of our team and focusing on Ford's franchise strengths. A few examples include S-series. S-series gained 1.7 points to a share of more than 35% in the US. 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 Explorer and the mix of cars declined four points to just under 8%. Now in total, North America share increased one point to 13.6%. In Europe, EBIT declined $300 billion in the quarter and that was driven by lower volume and about $400 million in costs related to our Kuga PHEV battery supplier issue. Those expenses included pulling cost that are required to comply with the EUs and new CO2 emissions standards this year. Now we said earlier that we anticipated meeting those new standards based on our product roadmap and the Kuga PHEV was a big part of that expectation. So we're 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 on how and when we will repair their vehicles and had it not been for the Kuga issue, Europe would've been profitable for the third quarter. Now since Europe began its sweeping redesign of the regional business in 2018, the European team successfully rationalized 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 $1 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 SUVs accounted for more than 30% of our vehicle mix in Europe nearly 9 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 of SUVs and commercial vehicles. Our mix of SUVs increased 13 percentage points to 36% and that was driven by locally built Ford Explorer, Escape and Lincoln Aviator and 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 introduction of the Corsair and the Aviator in the first half of 2020. Commercial vehicle sale mix increased, 5% five percentage points to 45% and that reflects strong JMC sale, up 38% versus prior year and that reflects the continued strong demand for light trucks, vans and pickups. So overall, the team delivered a third consecutive quarter of year-over-year share gains and marked the second consecutive quarter of year-over-year improvement in EBIT, the best performance in three years. In South America, [audio gap] mitigating the ongoing pressure from inflation, currency and the industry structural challenges. And in IMG, IMG delivered a profit despite COVID-related industry declines in wholesale, which adversely affected the revenue. S-series gained share and our share with the Ranger pickup in Australia increased 6 points to 27%. Profitability in IMG also benefited from the work the team has done to lower structural cost. And finally, Ford Mobility, which is building fourth-generation autonomous test vehicles with the latest self driving technology, generated its first AV-related revenue from a fleet operations pilot in Austin, Texas, and at the same time, we are strategically expanding our spin scooter business in the US, the UK and Germany in 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 COVID-related disruptions 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 wholesale of about 100,000 units associated with the F 150 changeover. Now this volume affect is 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. Now to put this in context, the approximate 100,000 unit impact in the fourth quarter will far outweigh the effect of our UAW 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 Maki 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 EBT 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 exception of capital expenditures. We now expect a lower level for this year down between $1.2 billion and $1.7 billion versus $7.6 billion in 2019 and that reflects continued efficiencies. Before we move to Q&A I want to leave you with my key takeaways from the quarter. We had better execution, choosing word of play and our restructuring is paying off. These things intersected very nicely with the stronger-than-expected demand, we know there's more to fix and we're carrying on a clear plan to do that as Jim mentioned and our balance sheet is solid with nearly $30 billion of cash and over $45 billion of liquidity. Now operator, let's open the line for questions.

[Operator instructions] And our first question will come from the line of John Murphy, Bank of America.

Thanks for all the info and congrats Jim for leading the call here. Interesting stuff early days. Just a first question as you look at the strength in the third quarter, obviously there is great execution and some strategy around volume, mix and price that was held by good industry dynamics. I was just curious if you think about those three key factors once we get through the change of the F 150 in the fourth quarter and might bleed into your first quarter of next year, how much you think will reverse and as you look at what you're producing at the moment and your focus shifted next to a richer mix, how much of this stuff can be -- how much have been benefit of factors can be maintained going into 2021 or maybe just even on a run rate basis getting into 21 that would be great.

So went when you look at that and we look at the business this year really get into the core of the run rate a bit difficult as you can expect given going down in the first half and then coming back up and 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 leading into what we need to do to improve the business, improve the underperforming parts of the business and when it comes to the mix and the top line, we saw some strength there. We have winded our back due to the 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, SUVs and our atomic 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 will have more to say on that early 2021, we'll give you a read on the business then.

Maybe to follow-up on that, how much of that you think is somewhat transitory for market factors, can you argue right now that the industry volume is pretty -- is relatively strong relative to the peers, but is not really in absolute terms quite and quite that amazing. So it seems like there is an underlying demand for stronger mix than we all may have thought since 12, 18, 24 months ago. So as you're going after this mix with this improved product, is there something that you see in the market just specifically even in the third quarter because it's really heavy stuff that you're running into real positive.

Yeah it is a positive, we see strength there. The question is, there was an imbalance in supply and demand and that gave us some of a tailwind, but we also are seeing over time as we've over the last two years made the concerted effort to shift into our strengths of commercial vehicles and trucks and you see that in Europe and you see that here. I see that around the world. So we do see strength there as far as how far that extends and what that looks like we're not ready to common now, but we do see strength there.

Okay. And maybe just one last question on lease deferrals, how many recent did you defer in the second quarter that came back in the third quarter or might come back in the coming quarters and sort of envision when you see auction values I should 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 these lease deferrals as well as what's going in these vehicle market that's helping out now just Ford Motor credit but the core new vehicle businesses as well.

Hey John, so 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 ins where our unit comes back to auction, we didn't 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 for Ford Credit. 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're selling into the auctions right now, it's normal run rate of these returns flow into record auctions and no ebbs or flows or pulls by you.

That's correct. We're back in normal inventory.

And our next question will come from the line of Rod Lache with Wolfe Research.

Congratulations on the performance in the quarter. I hope it is the 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 Q4 this one phase will be a bit challenging, but could you talk a little bit about what you're thinking about as the timeline for getting to that kind of a target more sustainably. Secondly, I notice that the warranty cost moderated a bit, at least the cost inflation moderated. Is that a sign that things are finally peeking and then lastly, the drumbeat of activity in notification obviously is something everyone's hearing and companies are laying out some pretty aggressive targets for cost reduction volumes. The 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 your thinking has evolved on what kind of volume you're anticipating or how aggressively you intend to move into electrification on some of those commercial products?

On North America, I think it's really important for us to be clear. Turnaround on automotive operations in North America needs to absolutely be at 10% plus. 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. Our 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 have a much bigger ambition to improve the quality of our vehicles. We have taken a lot of countermeasures, they 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 gross side, we have a whole new Bronco lineup coming our brand new S-series coming. These are fantastic opportunities for us on the top line 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 it's very important. There's been a lot written about the electrification of our 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've been the number one nameplate in US industry. We sell over a 1 million S-series. We have an enormous customer base who are looking to reduce the cost 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 that plays out over many years that we have tremendous volume opportunity. We are not going after the $100,000 plus market. These are affordable vehicles. They're in the price point in the US, the Maki, the $20,000, $45,000 and $70,000 two real crossovers, huge addressable market here in Western Europe and in commercial, we're not planning a very exclusive small 1% of the addressable US industry. We're talking about these vehicles being 10% plus 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 propulsion. We think the real change here is the connectivity and to run a business based on the data. So the upgraded electrical architectures in the Maki and 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.

Yeah the warranty costs, is this a sign that you're starting to get your arms around that and it's going to start that there is visibility on when that's going to start coming back down.

We have more work to do, that's all I'll say. We are not satisfied with the quality of run rate and 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 got lots of zeros next to it. To do that, Rod there's a couple things the team has decided to double down on. For suppliers who ship us van parts, we're to have punitive financial. If there are bad shippers for multiple times, we put more resources in our plants for supplier quality. We have a lot more resources dedicated and a ton of transparency on quality issues that are open for more than 30 days in the company. That's a key metric that we drive our management team to. So those are the kind of changes we made and I wouldn't say this quarter is anything that we're proud of.

And just to clarify Jim, you didn't really provide a timeline on getting to sustainable 10% or better margin. You said that you've got visibility on the revenue side and you still have work to do on the cost side. So 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.

Our next question will come from the line of Emmanuel Rosner, Deutsche Bank.

Jim and John first congratulations on your new roles and Jim every encouraged by your commitment transparency and measurable improvements. So I guess in that spirit, when we look at I guess at your performance in the quarter, besides for the stronger demand pricing mix which you commented on, are you able to point us to measurable areas of underlying improvement that you’ve seen whether it is on these material freight. You spoke a little bit about warranty on the structural side, anything that's really bearing some fruit that you're excited about or should we think about it more as a opportunity for the future.

When you look at that -- when you look at that cost performance for the quarter, you really look at what we talked about with Europe is all the restructuring they've done, the headcount that they've taken out, they're now approaching and they will approach this year that billion dollars of structural cost reductions. 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, selling the Bernardo plant and all the actions they've taken on their structure and headcount, that's going to continue to flow through and then we saw 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 with the strength that we had in demand, the short supply, we saw one of our key focuses.

So I guess to get a little bit of color on what needs to be done on the warranty side and quality side, what is being done or can be done. I don't need a quantification, but just in terms of what does it require to get the material and freight, you show that's down, it looks like this is probably one of the two largest markets on the cost side here?

So thanks, thanks for your question. On the material cost side, it's kind of everywhere. A good example, we have a proximity, a key in your pocket to unlock the door and all four doors of the F150. When we look at the vehicle usage data, we found that people don’t use the proximity sensor for the front two tours. We do not need a proximity sensor in the rear two doors. Our Jack on the F150 looks like it'll last about 50 years. That's not the case for our competitors. So it's everything from the way we package our features, the actual bill material and 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 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 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 in the last earnings call, there was that quarter financial be better than the EBIT in the fourth quarter worse than fourth quarter EBIT any sort of sense you can give us on this quarter's free cash flow and whether there will be some of timing on eCapital payback from the strength that we've seen in the fourth quarter.

In the quarter we got payables back to what we would say is a normal run rate and so from a standpoint of the guidance on the cash flow for the quarter, for the fourth quarter it's going to frankly have said with EBIT it's going to be driven by EBIT. So we haven't given a specific number on that and at this point, I'm not sure we're going to do that today.

Our next question will come from the line of Adam Jonas with Morgan Stanley.

Thanks everyone. Jim I've got a few questions for you. I think you mentioned the freight that EVs look great financially I think when you're looking out that they seem to line up well financially. Could you elaborate on that? My understanding is that EVs present a really great opportunity to decomplexify the vehicle, even allowing for the expensive battery cost. So things that you can remove from an EV and that way you can design a lot more efficiently relative to the spiderweb of complexity of the internal combustion mechanisms that and it's a great opportunity. Am I correct in that assumption and I just didn’t know I wanted to hear if you could add some color to that hypothesis?

I guess the three key messages for our electrification strategy, the companies were going after very large addressable markets and profit pools and were playing to our strengths, I'll come back to your question. The second is to turn battery electrics into a digital -- quite important for the company to transition as well. Related to the cost, initially several years ago when we made these investments and decisions, the cost of battery that the profitability the vehicle is really challenging, what we found since then, once we started to look at the real cost of CO2 of our internal combustion engine, when we started to look at in commercial terms offering bidirectional 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 cost in 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 that kind of team together with much more compelling financial picture for these first cycle products. I think that's what I was referring to when you look at all-in comparison to Ice [ph]. Also the revenue opportunity, we never really when we got into the commercial world of electrification, I think our eyes were very open and very informed by the aluminum investment in F150 that people are willing to pay in the case of light waiting, more than just light waiting fuel economy, it's a commercial vehicle for towing and payload. When you think about bringing energy to the job site or bidirectional charging for small medium sized businesses kind of a game changer for them in terms of for us to revenue. I hope that makes sense.

Yeah it does and you seem to have for even before you became CEO, expressed a lot of enthusiasm toward the software services, the data opportunity for the company. I think you said you want to run that business based on the data. Can you be specific on what services get you most excited and when that could be material?

Great question. So first of all it starts with the talent. We attracted Alex Purdy from Deere who went through the whole Deere journey moving to software and data. We attracted Gil who is now our data analytics lead, we've had the talent on board for enough time. We really understand the opportunity. I think the opportunity first came Adam with internal of the company. You can imagine with our warranties, the data codes off the vehicle instantaneously having AI models analyzing all those data codes, how exciting that is to our frontline engineers, how exciting it is to have that data be available to all of our engineers on actually the bill of material and its usefulness for a company that has very expensive billing material. But then it became very quick for us especially when we got outside of Dearborn and listen to the opportunity on services that over the air updates that are really relevant to the customer in case of commercial. They run their businesses off these vehicles. So dynamic routing, telematics, driver coaching to drive more economically the people that have our small fleets, they just love this because they haven't had that data before and we can see a day, not too distant future with a full line up of pure better electric commercials. We have a whole service business and that service business is charging, its small enterprise solutions, small medium-size businesses, it's repair a more affordable repair and upgrade of this physical vehicle and that's what we're busy doing. That's our double transformation; one is to transform a automotive operations, the other one is in a way to kind of disrupt ourselves

And our next question is going to come from the line of Ryan Brinkman with JP Morgan.

Thanks for taking my question, which relates to the upcoming F150 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 the benefit to sales mixer 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 will go according to plan and what steps that maybe you're taking to mitigate the risk?

I'll answer the last question first on the product launch. We've spent a lot of time on these launches. It's very important as you understand and making sure we have all the design and engineering ready to go. We've made all the checkpoints and suppliers are ready, manufacturing is ready and we've started that production. We haven't discussed what we expect from a pricing standpoint or what we expect from margin standpoint of new truck and I don't think we want to talk about that today, but what 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 100,000 units and that's what's impacting the fourth quarter. But getting any deeper than that I am not sure we're going to get into that today as far as the pricing and the cost impact of the vehicle.

And as far as the launch to complement John, we are so excited about this new F150 all-new powertrains that's towing best payload, it's the best 150 we very had and we do see the inside, it's incredible, the technology and customers are asking us for that. Look we've completed the design phase, the engineering phase, Howard and the team did a great job and we then finished the supplier readiness and manufacturing readiness. My whole leadership team and myself went to both plants personally to review the launches a couple times and we're now in high production starting the 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 of the things that will complement the Ford team how Linda [ph] cash the whole team was the way we use COVID. During the COVID shutdown, we didn't stop with the quality assessment of the launch and there was a lot of work done on the software specially. This is all new electrical architecture. There's a ton new software and we use that downtime to really prove out our capability and so we're a long way from declaring victory. It's a daily huge global team working on the F150 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.

And then lastly wanted to ask about the strong net pricing that you've been enjoying in Europe and South America. Can 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 auto makers work to offsetting lower FX in South America etcetera. Where are you in terms of your product life cycles in these regions and how should we expect pricing to track going forward?

Yeah. So let's just impact that a little bit, if you look at Europe, we've had a strong shift into our SUVs as we talked about earlier and with that has come pricing power relative to the other vehicle life and we expect that to continue in Europe. Down in South America, the team has been aggressive and you're seeing products 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. And then in Europe they're managing through revenue management looking at everything we're doing the same thing here in North America. It's a focus we have and a lot of it's being driven by our strong mix. We are seeing some pricing for product as new product 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 one of our main focus is keep moving forward on the top line and really hone in and focusing on getting the cost right.

Thank you. Our next question is going to come from the line of Mark Delaney, Goldman Sachs.

Jim and John, you spoke to having urgency in achieving your goals, in altercation that includes an electric F150 in transit as few of the several electrified models that Ford is planning to bring to market over the next two years. I was hoping to better understand if the company plans to go beyond its $11.5 billion investment target in electrification as is previously articulated and does Ford plan to increase in particular number of bad models compared to its prior expectation?

I think the simple way to look at is, we're kind of in the first inning of this transition of the industry to battery electric future and we're deep into the planning for the second cycle of those products. Competitive reasons, we're not going to share the cycle plan with you, but you can imagine that 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 deftly 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're committed to Paris. That's why we're standing with California and that's our capital and we feel that the way we're doing it at Ford is the most important message, which is commercial and work. Those customers run their business on these vehicles. They're more attentive to cost of ownership, the vehicles of higher utilization and therefore the lower cost of ownership of operation is more important to them and they're especially interested in the data and so I think although we could talk about general investment levels, the key message from Ford is more the segments that we're investing in and that this is not a propulsion story. This is an investment in the digitization of our business.

Thanks and you commented that because of the total recall, you're going to have a CO2 compliance cost this year. Are you anticipating a similar level of cost in the fourth quarter as was realized in 3Q and then perhaps more importantly, can you discuss if you think this issue will be resolved and is there risk to any of your other hybrid or better products?

So from a cost standpoint, I'll start with that. As I said earlier it's about $400 million for the quarter. We do expect some cost 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 our passenger vehicle in Europe.

And the battery that is used in the Cougar PHEV is not -- so it's a supply [audio gap].

And our next question will come from the line of Brian Johnson with Barclays.

Thank you and congratulations to the new Ford team. I want to drill down on the European CO2 compliance strategy both on the light vehicle side and the LCB side. So first on the LCD side, which of course as you identified to our different standards, is that on track and when can we expect an MEB derived LCV platform for Europe?

First of all, we have a great plan for Europe. We were on track for our CO2 target this year until the Cougar PHEV situation came up with the supplier late in the year. As I mentioned today it's a bit new news maybe not as dramatic as a $100,000 retail off-road, but the electric transit is a really big deal for Ford Motor Company. We're number one in the US, we're number one in Western Europe and we think electrifying this products has been really key and that will be a key part of our CO2 compliance announcement. So we continue seeing more city restrictions. Many, many of our 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 are sold in Europe next year in volume 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 and mile hybrids could be specific but we really have a great lineup in Europe over 20 models, but the leadership team really excited about Europe is the commercial vehicle business and the electrification of our high-volume van.

I would concur on that. So moving over to the light vehicle passenger car and CV market, it struck assuming as a split of the pandemic with many viewing plug-in hybrids as a transition and million plus unit global EV platforms is the way to go. A, what's your thinking on that strategy and B, as we go into '21, '22, can you flex between BEVs and plug-in hybrids or even move to a more consolidated BEV platform for Europe.

I think the flexibility between battery electrics plug-ins is not very high. So we're really locked in as we should be. So I wouldn't -- this is not like vehicle mix or something like that. All the battery supplies are slightly different and also the lead time for changing battery capacity is a lot longer than most other major components in the vehicle. So I would think about those capacities in terms of flexibility very different than I would traditional ice power train.

Okay. And finally can you disclose or can you disclose who the pulling agreement is with and will become a public record at some point in EU.

We're not going to do that today, thanks.

Our next question will come from the line of Dan Levy with Credit Suisse.

Jim wanted to start out on a strategic question, on how you plan to balance the near-term industrial recovery, it's been a long cycle longer term transition to EV. How many and how you view the interplay of those two? Is piece of EV development that's regardless of the pace in your near-term recovery or should we look at pace of EV development by the extent of near-term recovery, so if you outperforming on your near term, you can accelerate on EV advice per se recovery? What's the interplay and near-term recovery in your EV development?

First of all for Ford, our plan is very simple, turnaround automotive operations, modernize the company and in a way disrupt ourselves, launch high-growth businesses like our CB services business or go to market customer facing EV business and so our calls on capital are much more complicated in just EV end vehicles. We have 15,000 software engineers at Ford right now and that will grow. So our calls on capital, our software, the credit company obviously, but increasingly it's 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 is not just a stakeholder journey. It's actually the lifeblood of our future because it funds everything and so how we look at it is getting out our 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 areas we've had in automotive and getting our North American operations 10% plus is an absolute minimum for the company to fund not just the electrification journey, but as well on move to services, data and software.

So help me understand as far as you have these larger cost -- capital call and presumably you have probably and then also it's nice to have it in terms of your investment. Does the pace of recovery at all impact the way that you accelerate or decelerate spend on those?

These are great questions. If you don't mind I don't -- I think it's best if we take a pass and we talk about this next spring. It is such a fundamental question you're asking. It is such an important question for Ford. I don't think the third-quarter earnings is the right venue. We need to take our time and go through this with you and all of the key stakeholders at Ford and 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.

And then just a follow-up on the comp factors of growth, your focus 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 global quality of more the commoditized pass card volume. So question is and we've already some structural volume decline in North America related to pass card in Europe as well, but did 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 products? Or maybe said differently, which region do you think there is more way to go or moving more commoditized that 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'll emphasize again that is something there I'd put in my speech and I think it's quite important for everyone to understand our ambition. As John mentioned, our share of SUV grew. Our mix of SUV 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 we've never had before and we're really excited about the profit potential for all those vehicles. So here we are on the eve of Ford Motor Company being able to execute well and grow in North America. When you look outside of North American, the growth that matters for us is commercial vehicles in Europe. The key growth metric for us in China we had an opportunity to grow again. We just localized the Explorer and the whole Lincoln line up. We haven't sold as many Lincolns that we did in September in 25 years and it's because of China. So we have a huge opportunity to grow China and we have an opportunity to grow to with export models coming from Mahindra and have to say we haven't talked a lot about this, but leak it out and that is we have some really exciting affordable products for North America that are going to help us grow profitably. So I think what you'll see is China and North America growth opportunities and the rest of the world we'll really focus on where we can win with Ranger, the commercial vehicles in Europe and you'll see us continue to grow these services businesses along the way. I hope if there is one message you'll 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 than volume growth. We want to growth our software business, our services business.

And our last question for the day will come from the line of Joseph Spak with RBC Capital Markets.

Maybe just two quick ones since we touched on a lot. I realize you are not talking about free cash flow for the fourth quarter but the Ford Credit EBT year-to-date is $1.7 billion, distribution $1.1 and I think you committed in the past defending all that out. So should we expect a catch up in the fourth quarter?

I'm not sure but 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. Marion?

Joe, the distributions from Ford Credit are going to reflect profit after tax, balance sheet size and leverage that it's going to be what's it going to be.

And then just lastly John, I saw in the media I think made a comment about how it's too early to talk about the dividend reinstatement. I realize ultimately it's a board decision, but I'll this up I guess to Jim and John in each of your opinion should Ford give any dividend over the coming years given the transformation you're talking about and if so, what are really the parameters you're looking for, for reinstating that?

Thanks for the question. I don't think 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. That will conclude today's Ford Motor Company third quarter 2020 earnings conference call. We do appreciate your participation. You may now disconnect.