Ford Motor Company (F) Earnings Call Transcript & Summary

Good day, everyone, and welcome to the BofA Securities Fireside Chat with Ford. Today's call is being recorded. And now at this time, I'd like to turn the call over to John Murphy. Please go ahead.

Thanks, April, and thanks, everybody, for joining us today. First and foremost, we hope everyone is well and safe during this global crisis that is unfortunately uniquely impacting all of us to varying degrees. Today, I'm hosting today's call with Doug Karson, our partner and lead credit analyst here at Bank of America. Doug has a lot to add to today's call so we're happy to have him. I'd also like to very much thank the Ford team for the opportunity to help get more information out to investors in this great time of uncertainty. But we'd also like to help everybody today really understand that this isn't just sort of downside mitigation but there are also opportunities to the upside for Ford. From Ford, we are very happy to have Jim Farley, Chief Operating Officer; Tim Stone, Chief Financial Officer; Marion Harris, Chief Executive Officer of Ford Motor Credit Company; Cathy O'Callaghan, Ford's Controller; Lynn Tyson, Executive Director, Investor Relations; and Karen Rocoff, Head of Fixed Income, Investor Relations. The format for the call will be a fireside chat. So Doug and I will pose a number of questions. We've organized these into 3 major topic areas really: the first being operations, the second being balance sheet and cap allocation and the third being Ford Motor Credit corp., which is often really a misunderstood point of strength for Ford.

So really to kick it off here, maybe to you Jim first. Really, at the moment and post first quarter, it doesn't appear that there was any real material major shift in strategy at Ford amidst the crisis around product, restructuring or CapEx. There's certainly some honing and some small delays here and there. And it seems like what you did in the last downturn, that you really are leveraging the balance sheet to really push the company forward and through the crisis. I'm just curious, as you hear that, do you think that's really a correct interpretation? Or is there anything else that's going on as you balance sort of the near-term crisis with the long-term success of the company? And also, you have this mantra or strategy of fix, accelerate and grow. And I wonder if you could, in the context of answering the question, really talk about that as well.

Sure. Thanks, John, and hello to everyone. So Ford is in a very important period, and having gone through '08/'09 on the leadership team, I would say this is quite a tremendous opportunity for us as well. We have a great portfolio of products that are just about to come out, especially in our most profitable market, North America. Are there adjustments to be made there? Yes. But the products we've talked about, the product strategy we're following has never been actually more important, especially our investment in commercial vehicles and iconic products like Bronco. Are there businesses that, now with COVID hangover, need to be freshened, relooked at, remade? And the answer is everything is on the table, as we said in earnings. We want to be aggressive during the crisis, let's just put it at that. We have no news to share today, but you can imagine, as Jim Hackett said, we don't want to overlook the opportunity the crisis has for our businesses. And that's not just our overseas business. It includes the changes we need to make in North America to get back to a 10% margin and potentially a lower industry next year. We are really accelerating the work on our launch fitness as well as quality. And on the cost side, the 2 areas we're focused most on in fixed -- these are all fixed. Part of the kind of fixed categorization would be material costs and warranty costs. We see in both areas a lot of opportunity. And that's the reason why an experienced industrial leader like Lisa Drake is now the COO in North America. She, with her purchasing and engineering experience, is a terrific executive to lead our improvement in cost not just to offset COVID but flow through into the years to come. On the accelerate side, we made a big announcement with Ted taking over commercial vehicles. We've always had the strength as a company especially in Europe, in Western Europe and the U.S. and actually in China, too. But it's always been treated, in a way, as a collection of nameplates with the exception of maybe having a fleet sales group. And what we learned in Europe over the last 2 years, where we created a general manager position and where we created commercial vehicles as a business, we really accelerated. Our share has been growing for the last 2 years with a carryover product in Europe, and we've had a lot of new initiatives like on our distribution area, our success in the camper business, et cetera. We're going to replicate that now in our biggest, most profitable market in North America, and we see huge opportunity to accelerate immediately there as well as a new connectivity group, bringing a seasoned leader from John Deere who's been on a 10-year journey on connectivity for both internal value creation and also external services. I'd say, John, the piece that maybe isn't so clear to everyone other than what -- how are we going to get these businesses back on their feet is the grow. It's so critical that Ford has a compelling growth plan beyond the products that we're really excited to grow the business in the short term. We see a lot of growth opportunities in commercial vehicles, especially pure digital ones, post kind of ICE/BEV products as well as growth in affordability. And that's something that we really want to take people through in more detail at the appropriate time. So you can expect us to be doing everything you can imagine to recover the lost demand and production. And hopefully, we'll get into start-up. But I hope that gives everyone an idea of what fix, grow and accelerate really means as well as the commitment that we will look at all of our businesses for sustained profitability.

That's very helpful. Jim, just one follow-up, the 10% North American margin, that is a run rate number that you're looking to get to, you said, potentially at lower volume than you may have been assuming before. I just want to make sure I got that right.

It's always been our target for the North America business. And clearly, that target -- we're just dealing with the reality of COVID now and the flow-through next year with all the headwinds. Now we don't know -- we'll talk -- I'm sure we'll get into the stimulus package in the U.S., but we're not managing our business assuming there's a stimulus package. We want to get to the cost level to get North America -- with this great new lineup of products that launch towards the end of this year, we want to be in a position to be that kind of profitability as the running rate absolutely even if the industry is slightly lower.

Okay. That's very helpful. I'm interested...

And this is Tim. I just want to clarify your run rate question. It's not run rate over time. Our target has been and remains 10% North America, 8% total company, and we're driving toward that.

Okay. So that's an absolute amount of run rate. That's the target. Okay. That's very helpful, Tim. And maybe as you think about the second quarter, you've outlined it as -- what presumably is the low point for the year and for many years, I'm sure, at $5 billion plus in EBIT losses. I'm just curious if you can give us some rough idea of how you're thinking about that, maybe by major market or really kind of -- obviously, there's a huge range around this, Tim. I understand it's tough to pin you down to specifics, but is that kind of the assumption that, in your major markets, you'll at least be up and running some time soon? And then also as we're kind of thinking about that, the -- maybe in as efficient way as you can, maybe describe the restart process, which hopefully will come in the second quarter, but obviously, that's still TBD. So maybe just how you're thinking about that number for the second quarter and then also how you're thinking about the restart process working as we go forward.

Sure. So maybe I'll start with the second quarter, and then Jim can give you some further color, as he did earlier today, on the return to work. So as it relates to the $5 billion, the $5 billion -- more than $5 billion EBIT loss reflects the output of what we're seeing from an input standpoint, which is, as of today, we still have all of our plants nonoperational, except for China. We have -- we're not yet in a position to be able to comment on when anything other than Europe will be getting back to production. But we're really happy with the fact that as we announced on Tuesday, Europe will be starting to phase back in and do so over the next couple of months. And we'll take a global approach to that and bring North America up as soon as practical as well. And again, Jim can go through the very, very thoughtful and deliberate process we're undertaking. But again, $5 billion is the output and reflects the scale of our business and the volumes that we typically produce in wholesale around the world and having been down from a production standpoint. At the same time, we're doing everything we can across the business to thoroughly assess and address the full breadth and depth of our operations, looking for opportunities to preserve cash or reduce or defer OpEx and Capex. That's why we're able to bring our CapEx guidance down, for example. The team's done a really great job of thoroughly addressing cost-reduction opportunities, and as we said, it's in the billions of dollars; in addition, of course, to -- just to come back to the earlier question, identifying opportunities to redesign the business and provide long-term potential as we come to the other side of it.

Just building off of Tim's question about the return to work. In North America, we're ready. I'll just kind of quickly tick through all the considerations. First and foremost is the safety of our employees. We have our GDI&A group modeling the virus' reality in all the 700 locations where we have facilities around the globe. Some of that data, we had to build; others, we could use existing data. We've been modeling how the virus would change to have our own start date in mind, but the safety protocols from air exchanges in our facilities, PPE, thank goodness that we're making a lot of it ourselves and we can source that ourselves, all the job redesign for every job at Ford Motor Company, all the ingress of the team members, the temperature checks, the testing in case anyone feels uncomfortable or has an elevated temperature, all the way through our common spaces, redirect traffic flow in all of our facilities and a lot of education of our team members. As Tim said, we've been up in China, and so we've been practicing and practicing. AAT sales just went up in Thailand. We've had all of our aftersales depots globally up and running. So we've been testing all of this, and we feel really comfortable on the safety standards in our playbook and the execution of those. On the supplier side, Tom and team has surveyed over 1,500 suppliers. It's very important for our capability to come up and run. And for the U.S. industrial system, obviously, the Mexican suppliers are really important as is the Michigan. In fact, I'd say, for our Midwest plants, please think of it as a connected ecosystem in that we will not move until all of the states are cleared, we can operate everywhere just because of the interdependency of our supply base and frankly, the internal stamping and powertrain work we do. So the dealers, we feel like, they're in good shape, but it's -- there's always something out there. You know about BorgWarner. We were the first brand down there and making good progress on the dealers. 96% of our dealers in the U.S. are open. Germany is now open. Southern Europe is opening as we speak. So in the major markets, it looks like the dealer opening won't be a gating feature. And we moved online aggressively, thanks to China. About 1/3 of our sales in China are now online and about 25% in the U.S. through our dealers. We're also doing large remote pickup and delivery for aftersales. We applied -- we encouraged all of our dealers in the U.S. to apply for SBA loans. About 80% have gotten their funding, yes. So the dealers, we believe, are in good shape. We have put a wave 0 into our facilities in Europe. That's a very important start-up process where we have team leaders, maintenance people going to facilities to start everything up. The government relations are really important and not only, obviously, the decision in Michigan but also in Mexico. Mexico is very important for our industrial system in North America. As well as our union partners, not just UAW and Unifor but also IG Metall in Europe who've been very supportive. And we have pretty much daily calls with our union partners to make sure everyone feels comfortable with our safety standards, get feedback from them, make adjustments. And it's been very helpful to have such a regular dialogue with the UAW, for example. So net-net, John, we're ready in North America. We have all the PPE, more than 1.5 million masks, shields, everything we need. All the processes are ready to go. It's just a question of a few of the other pieces to fall in place.

That's very helpful. And then maybe just one last operating question. I mean there's a lot of discussion around the potential demand stimulus, all-out scrappage program in Europe or Cash for Clunkers like we saw in 2010 here in the U.S. I'm just curious what you're hearing about that both in the U.S., China, Europe and maybe even in South America and how you think about that. I mean is that something that with your government partners you think your -- would be a good strategy and you're pushing that a little bit? It seems like the dealers are probably, at least just in the U.S., sitting on north of 500,000 units of inventory across the industry, not Ford-specific but across the industry, if we don't see a significant recovery in demand. So that would be a good clear-out mechanism. I'm just trying to understand what your thoughts are there. And is that something that you would advocate for to some degree?

We would absolutely advocate, and especially in the U.S., we insist on it. We think that the auto industry is a key part to our economy. Just the manufacturing alone is 6% of the GDP of the U.S. So a stimulus package for our industry is very important for the whole ecosystem. Even putting the OEMs aside for a second, the supply base, everyone, it's really critical. It's early days. There are lots of very healthy discussions. We're encouraged by the early discussions that we're having with the political leaders, our union partners and state government leaders. And obviously, from Ford's standpoint, we outproduced in the U.S. the second most pervasive producer of vehicles by -- last year by 492,000 units. So for us, U.S. made will be critical. There's a lot of discussion around the duration of such a package because, obviously, we're just starting the manufacturing system up. It should last for enough time where there would be upside to meet demand. We would rather have something upfront for customers instead of something they would have to wait. But anyways, we're very experienced in this. It's early days. It will be a bit of a moving piece but really confident that there'll be something to help our industry as well as maybe the background infrastructure build, that would be great for the economy. In Europe, things are a bit accelerated, I would say. Germany seems to be taking a lead, working with the VDA through our German team. It's clear that that's moving along nicely. And we're hearing both Spain and the U.K. are also looking at a kind of scrappage-type program, the specifics of which we just won't know for a little while. So John, I would say early days, but we're encouraged about the discussion and dialogue. And Ford especially in the U.S. is really integrated in the process.

Okay. That's very helpful. And then I was going to turn over to Doug to get into some of the balance sheet questions. Doug?

Yes. Thanks, John.

Are you on?

Yes, I'm on. Liquidity, capital allocation, I think, is on everyone's mind. I guess this question is for Tim. Ford just completed a historic $8 billion bond deal. Pro forma the deal, your cash balance reported $35 billion, well above the $20 billion target and also above the $30 billion liquidity target. But a lot's changed in the market. So how do you view this liquidity now in the new kind of COVID environment?

Yes. Thanks for the question. You're absolutely right, it's on everyone's mind and certainly ours as well. Besides our employees' safety and safety of our -- all of our partners, that's the #1 thing on our mind. But let me just start by saying that I feel good about where we're at from a liquidity perspective. As of last Friday, we were at $35 billion in total cash and liquidity. And that's because we've been proactive and taken a number of actions over the last month and continued to stay out in front of the present crisis, which has created a lot of uncertainty for many industries and businesses globally but also will create opportunity for us. So just to recap some of the things we've done over the past, say, 6 weeks. In March, we suspended the regular dividend, and that's not a decision we deliberated as you would expect. And that's about $2.4 billion per year. We've also suspended our anti-dilutive share repurchase program. That's about $0.2 billion last year. And then we drew down the entirety of our corporate revolver and supplemental credit facilities. Again, it's not something, on the corporate revolver front, that you do -- you take lightly, but we thought it was important for us with that focus on cash and liquidity. So that brought $15 billion of cash onto the balance sheet and provided additional funding confidence. And then just over a week ago, as you said, we issued $8 billion of incremental unsecured debt. This is opportunistic and further strengthening our liquidity, providing us with the added flexibility to continue to manage the crisis and also invest in our long-term opportunities. And then the team is, as we've talked about, aggressively pursuing additional operating actions to bolster our cash position. And as I said, that's comprehensive across the entire business. So yes, clearly, these funding actions result in higher interest costs. But right now, our #1 priority is making sure we have sufficient cash and liquidity to ensure we have the flexibility to manage our business for the near term and the long term. So as I highlighted on the call a few days ago, with the cash and liquidity that we have today, even assuming no incremental production, which we do not believe to be the case, we're comfortable we have sufficient liquidity to last through the end of the year.

Very helpful.

And Tim, maybe if I could ask one question around the free cash flow as you go through the course of the year and how you're thinking about it. I mean obviously, the second quarter is going to be a bit tough with the EBIT -- the fundamental performance given what's going on in the market and the working capital unwind. But as you think about sort of the ramp back up and what at least I would think of as somewhat of a recovery in industry volumes as we get to the second half, I mean, how do you think about cash flow through the end of the year? And could -- with the restart, right, and the rewind of the working capital, could you actually see some potential positive free cash flow in the second half of the year as that working capital heads back in the right direction for you?

Yes. Great. Thanks for the question. We did talk about this on the earnings call as well. I think it's important for folks to understand how the working capital dynamics work for the industry and certainly for us. And so we've spent a lot of time on this over the past several months. Regarding cash burn, it's also particularly unique, given the issue of this crisis, where the manufacturers paused, and that's not something that anyone's experienced thus far for a duration that no one's experienced besides holiday shutdowns and such. So what we've discussed is, as you think about the cash burn, there are 2 phases. The first is more severe, and that's driven by the 40 -- roughly 45-day runoff of our supplier payables. And we talked about, at any point in time, that's roughly about $13 billion. And they remain in place as long as we continue to produce. But when the production stops, as it did for us in the second half -- or latter half of March, the payables quickly went off as we paid them down. It's important for us to pay our supplier payables and support our suppliers. And it makes the initial cash burn particularly acute. So as I mentioned, we expect that to be completed on -- the supplier payables associated with when we are producing by early May. And so thereafter, what we have from an outflow standpoint is the cash burn associated with our structural costs, with our warranty, our incentives, and those are relatively consistent over time. So that's a significant reduction in cash burn once you get past early May. And then to your question, once you bring production back up, manufacturing's up and we're wholesaling, there's inherent leverage in our operating cycle. So the negative working capital cycle is a benefit when you're producing. And even with modest wholesales, our cash flow dynamics improve, significantly reflecting the restoration of those payables and the rebuild of our working capital. So we thought that was helpful to walk through it. I know it's a bit deliberate. But as you think about cash burn, that's how the business will work not only during this crisis but thereafter. And that's why we feel really good about the actions we've taken from a liquidity perspective because it gives us the flexibility to weather the uncertainties associated with COVID-19, if you have production come up or come down over time, which we hope is not the case, so if it comes back up, it stays up and stay up. But it's uncertain at this point. And then we can weather the crisis and come out of this, as I said, even stronger than before.

That's very helpful. I have a question regarding the kind of cash balance. If this crisis gets worse or it's prolonged, and hopefully it's not, and let's say it's unlikely scenario, but you acquire additional capital, additional financing, how do you view internally your secured financing capabilities? And then kind of as a separate question, how's Ford viewing some of the Fed programs that were really unprecedented, such as the primary market corporate credit facility, the PMCCF; and the secondary market facility, the SMCCF, as potential options?

Great. Well, let me start by just saying we're really pleased with how responsive Washington has been, the Fed, the treasury, been so proactive in responding to the present crisis and putting programs in place to provide certainty and confidence to the market and the economy more broadly. And regarding secured financing, we do have the ability to issue secured debt under our bank credit agreement and bond indenture. It's an option we consider over time, but we're really happy with the fact that we're not in a position right now where, again, even with no production through the end of the year, that we need to raise additional liquidity or cash with the $35 billion we had as of last Friday. So I wouldn't want to speculate on what we may or may not do in the future, but again, we're really pleased with the fact we're able to issue unsecured debt. And also, similarly, I wouldn't want to really get too much into the detail of any specific programs or our intent to utilize the federal programs that are in place. But we're clearly watching them closely, evaluating them as they're finalized and become fully operational because it's really important not just for Ford but the broader auto ecosystem for our customers and our suppliers and our dealers, and we're helping our suppliers and dealers navigate their way through those as well and be influential to the extent that we can. But again, we've been really proactive in charting our own course, and I feel really good about the actions we've taken thus far to bolster our liquidity and the position that we're in today.

And Tim, as we think about sort of your capital allocation priorities going forward, it seems like there's some drifting on CapEx in the near term and some other stuff's going on, on the cost side. But as we kind of march through the crisis and get to the other side, how do you think about these cap allocation priorities? And maybe kind of selfishly, from an equity investor standpoint, what are the metrics or the hurdles or whatever, the litmus test, might be that you're looking for, for ultimately maybe reinstating the dividend?

Sure. So I think one of the things that is interesting about the crisis is it's really providing additional energy for us, additional momentum to continue to do the things we've been doing. And we've talked about fitness and redesign not being initiatives over a certain time frame but rather being the way we run the business. And I think it provides additional focus on making sure we have disciplined capital allocation and -- more so than ever. But that's something we've been doing over the past few years. We've also been focusing on making sure that we're having efficiency in our CapEx and our operating expenditures. But the capital allocation, particularly, has been a fundamental part of the portfolio research, for example, and the broader business redesign and restructuring which -- and the portfolio, in particular, is focused on our franchise strengths. And so throughout this crisis, one of the principles we've been using is to make sure we're continuing to protect our product launches and our long-term investment opportunities because, at the end of the day, it all begins with product portfolio and it all begins, full stop, with the customer. And we have to do what's right for the customer for the long term for our capital allocation, not just during the crisis but always. So beyond that, we'll continue to focus on our balance sheet strength, ensuring we always have appropriate levels of cash and liquidity. We have a target, as you know, of $20 billion in cash and $30 billion in liquidity heading into an economic downturn. One could argue that according to papers' speculation, that may have started. We'll find out, I guess, next month. Make sure, again, we have appropriate cash and liquidity to manage the business. And then once that's been established and we're confident the business is back online, operational and we have sufficient visibility, we could look at other opportunities, including repayment of our corporate revolver, bank facilities. And then once that's repaid, we can consider reinstating the dividend as well as the anti-dilutive share repurchase program as soon as practical. Of course, it's always subject to Board approval.

And Tim, maybe just on...

I think just to emphasize -- sorry, John. This is Jim. I just want to emphasize the importance of doubling down on our product range that we've already committed to, as Tim said. Just want to emphasize how important and how convinced we are of our new product range that's coming out, and we really will do everything possible to protect those products as they make their way through the development system and the factory. There may be more interesting choices to make around BEV and ICE and growth. I just want to emphasize the ambition for the management team to grow our business, especially in CV. When you look at the new F-150, what it could do to our company, and our prospects in North America as we completely transform the technology of the vehicle, add a no -- a new sub-brand called Bronco, which we haven't had, to compete and offer customers a whole new lineup of Fords, and then the whole electrification lineup from the battery electric F-150 to Mach-E, we just -- these are really critical products for us. And there won't be any change to our commitment to them. But the growth will be key, and so are our capital allocation towards mobility and our strategy.

And maybe if I just add just one follow-up on this, the punchline on all of this capital that's being raised right now could almost be characterized as a working capital/bridge loan to get through this year to the other side, to make sure the funding of the business is sufficient to keep pushing forward and that we should think about it really in that context as opposed to any fundamental shift when you think about the cash structure over time. Is that a fair way to put a punchline on it, Tim?

I mean I think that's an interesting way to put it. I mean at the end of the day, we have to be mindful of exactly what you just said. We have to be mindful of the fact that we don't have sufficient clarity, certainly not when we raised the capital. And even today, we're not in a position to be able to say definitively when our production will be back up. We're also not in a position, given the nature of the virus, to be able to say how long it will stay up and to what degree. So we have to be prudent about making sure that not only do we have capital to fund working capital as it -- as we pay down from prior production or as we ramp back up production again if it were to stop but most importantly, to invest in our future, invest in the product portfolio, invest in many, many long-term opportunities because, again, we want to come out of this further down the path than we might have otherwise been and down that path to achieving our long-term potential.

Great. I think Doug, you had some questions on FMCC. Do you want to kick off?

Yes. Thanks, John. Ford Credit is certainly a meaningful partner. It's a lot of debt. It's where most of the debt of the company sits. So I guess maybe this question is for Marion, if you could just outline the strategic importance of FMCC for Ford given the crazy environment we're in. As a captive finance company, would you ever consider spinning off Ford Credit? Just give us some thoughts around the relationship and how it stands now.

Yes. Thanks, Doug. It's a good question. It's -- and these questions are coming back up. So I've been around the company for quite some time and have been in various parts of it -- of the company so I have a perspective. But once I finish my answer, I'd like to ask Jim Farley for his perspective as well. So from my view, I really believe that Ford Credit is a strategic asset, and I believe also that Ford's success is reliant upon Ford Credit. Ford Credit provides automotive financing to customers and dealers, and they do that through all economic cycles. That's why they're there, and that is critically important. That's not always the case with banks. We also drive higher customer satisfaction, and we drive loyalty at Ford. We buy a full spread of credit risk, and we do it with industry-leading cost and risk management. And the results speak for themselves. Over the last 20 years, we've delivered $44 billion in profits and we've paid $29 billion in distributions. And from my perspective, we have no intention of spinning off Ford Credit. Jim, do you have anything you'd like to share?

Well, just to emphasize a couple of points from Marion, after being in the business 30 years, different brands, I just -- I can't emphasize any more than he has how critical the captive is for Ford Motor Company. Yes, continuity, I totally agree. But the loyalty, it's just very clear that our industry is moving more and more towards a loyalty model. And especially for our B2B customers, this is really key, but also to support our dealers. When you look at -- the continuity, when you look at the stress the deal has been on under over the last couple of months, Ford Credit has been indispensable. And you can't do that with a marketing agreement. It has to be a completely interwoven operations like it is with Marion and the team. And I guess, in a way, the only other thing I'd add is the incredible operational efficiency that Marion holds his team to. It's a benchmark for our automotive operations as well. And it's so critical that we have this incredibly fit team that we can benchmark ourselves against in a lot of areas. So heck no.

Great answer. I guess while we're on Ford Credit, it's great to have the businesses connected. But on the other hand, what levers can Ford pull to extract value from Ford Credit, which could be meaningful for Ford? And I think bondholders at Ford Credit want to feel protected as well. I mean any thoughts about Ford Credit dividend-ing up to Ford? I guess expanding more would be to think about underwriting standards being changed or the relationship agreement you have. And recently, I think Ford Credit waived its $3 billion allocation to the revolver, so kind of the connectivity there about kind of protecting cash at Ford Credit.

Okay. Yes, I think, first of all, Ford Credit provides tremendous value to Ford already and not just directly to Ford but also to customers and dealers, including marketing programs and dealer consulting. And there are so many different ways that Ford Credit supports Ford overall. So on the financial side, the primary lever for getting, if you will, cash out of Ford Credit is distributions, and that's a function of the balance sheet size, our earnings and leverage. And as the balance sheet shrinks, Ford Credit can distribute its excess equity. And the rule of thumb there is for -- at a 9:1 leverage about -- for every $1 billion decline in receivables, we should be able to distribute about $100 million in distributions. On the underwriting side though, we already purchased a full spread of business, and that gives us the best mix of risk and enterprise profitability. And it's not something that we would look to change. Our underwriting practices have been very consistent for a long period of time, well dating -- well predating the Great Recession. So if we were to buy deeper or not as deep, it just would not serve Ford well. And then you mentioned the relationship agreement. I'm glad you did because that's been quiet for some time. We haven't gotten many questions on it. It's an agreement that's been out there for a very long time. And it's an agreement between Ford and Ford Credit that governs our interactions, and this agreement ensures that our intercompany transactions are done at an arm's length with arm's length terms but, importantly, that our financing activities are prudent and commercially viable. And so years ago, when Ford Credit was growing, we modified that agreement to allocate $3 billion of the corporate revolver to Ford Credit. And in March of this year, we modified that agreement to return the $3 billion back to Ford. We did this because Ford Credit had significant excess liquidity which we didn't need and we particularly don't need as the balance sheet is shrinking. It's best served back at the parent. Does that make sense?

Yes. I think it's very helpful. I guess the nature of Ford Credit has a self-liquidating balance sheet. And I think we've talked a lot about the liquidity of Ford. If you could just maybe highlight the liquidity picture at Ford Credit, how do you stand relative to your minimum liquidity target, maybe update us on that. I think it's $25 billion, but if you could just kind of share where Ford Credit stands in liquidity, that would be, I think, helpful to investors.

Yes. As a reminder for folks, we operate in Europe as a bank, and because of that, we have all the disciplines of a bank. We use those same bank risk frameworks within all of Ford Credit, the size of liquidity and capital and so on. So we make sure that our liquidity is sized to support Ford through all economic cycles, and we do that with the assumption that there would be no support coming from Ford. We plan for shocks and deep recessions. And because of that, our balance sheet, our asset quality and liquidity profile are very strong. Liquidity for Ford Credit is predominantly in the form of committed asset-backed securities capacity, ABS capacity, and cash. And we would expect to stay above our minimum liquidity throughout this year, even if we don't go to the unsecured debt markets. This is because our balance sheet is shrinking. And as it does shrink, we throw off liquidity. And so we don't have any issue meeting our liquidity target this year.

That's great, comforting. I get questions around the ABS market. I think a lot of unsecured bondholders are familiar with the market but don't have a lot of updated detail. Could you just shed some light on how that market has been with this great test that we've had with COVID? And maybe if you could look at the mix of future funding and how much would come from ABS and how much could potentially come from unsecured Ford Credit.

Yes. Well, as I said a little earlier, our balance sheet is shrinking right now so we don't have any urgency or need to tap the unsecured debt markets. And -- but we're going to continue to monitor those markets. But our view there is that our debt spreads are too high and don't reflect Ford Credit's underlying risk. ABS spreads are also quite wide relative to where they've been over the last number of years. But at the same time, base rates have also dropped significantly and the all-in cost of securitization hasn't changed that much. We still would view it as reasonable for lending activities. It has been -- that market has been disrupted somewhat, but we would expect it to return to normal, particularly as the ABS markets begin to understand the virus' effects on the underlying collateral and the economy overall. That being said, I would say that for Ford Credit, we have a tremendous liquidity in the form of our assets. We have substantial committed asset-backed security facilities that are very robust, and we proved that through the last -- through the Great Recession. And we have ready access to that, and we don't foresee any issues funding ourselves. I think the capital markets appreciate the quality of our receivables and our assets. And I would expect that as we come to market, that the market view on our assets hasn't changed.

And maybe my final question here on the kind of consumer health, the loan performance, residual value risk and what that can mean for Ford Credit and Ford Credit's dividend. I think you took a fairly meaningful increase in reserves, understandably so. But if you could just give us a picture of what you're looking at internally regarding COVID and how it's going to affect your customer base and the credit quality of those customers. And I think you're in a great seat to share that with us.

Yes. In the first quarter, we had about $700 million of adverse impacts related to COVID-19. Overall, the quarter -- the fundamentals in the quarter were quite strong. Credit profile was good. Our credit loss metrics were all very good. But those charges really predominantly reflected forward-looking adjustments in the credit loss reserves and as well as lease depreciation. And I would just say there's a lot of unknowns there. We use third-party models for -- as the foundation for our modeling for our critical accounting estimates. But it's a little bit like forecasting storm losses during the middle of a hurricane when you're sheltered in place. What I would say is that our first quarter credit loss reserve changes roughly aligned to our experience in the Great Recession. Time will tell on what the actual performance will be, and we'll make adjustments going forward accordingly but -- as we see what's happening in the economy, where unemployment is as well as our overall performance in our own portfolio. On the residual value side, we did not take any forward charges in the quarter. The only charge that we took for residual in the quarter was related to vehicles that were off-lease and awaiting sale at auction. As we change our outlook on what we think future auction values would be, that will actually flow through forward period earnings in accordance with lease accounting. But the tricky part here is we're still assessing what we think that impact is going to be. The auctions, for the most part, are still closed. And as they open back up, we do expect auction prices to be dislocated for some period of time. And it's difficult for us to say how deeply or how long this disruption is going to last. But we are fully confident that the auction markets will return to normal. And so we're not giving any guidance. As I said earlier, distributions are going to be a function of balance sheet size, earnings and leverage, so you could do your modeling there. But we also said that we expect the balance sheet to continue to shrink throughout the year.

That's good framework. John, do you have any follow-ups?

Yes. If I could sneak 2 in here. Tim, we're getting a lot of questions obviously as well around the balance sheet. And kind of like we were talking about sort of the punchline of this being sort of bridge financing. As you think about the -- at least that's how I'm characterizing it, but I mean, as we think about the balance sheet 2, 3, 4, 5 years out, as far as the setup for the balance sheet, I would imagine your targets are relatively similar to what we were looking at prior to this crisis as far as how much debt you can carry, how much gross cash you need, and the goal is to head back in that direction. Is that a fair characterization?

Yes, I think that's a reasonable way to look at it. We'll -- on the other side of this, as we'll do every step of the way, we'll continue to revisit, make sure we have the right targets for cash and liquidity. We'll do that. We believe $20 billion of cash and $30 billion of liquidity is the right target. So we're going to drive back to that and sustain that. And we're committed to a strong balance sheet. And we have to make sure in all scenarios that we're able to always be in a position to do the right thing for the long term, and for customers to invest in the business and never have any scenario we're foreclosing any of our long-term opportunities.

Okay. That's helpful. One other just actually quick question for Marion on FMCC. As far as forbearance of some of the loans -- or sort of loan payments, I should say, not the whole loan, on payments, I mean how is FMCC handling that? Is that something that's kind of awash because it's a 1- or 2-month hiccup in an individual loan? I mean what are you seeing there? And how does that get handled?

Yes. We've seen an unprecedented level of loan and lease payment extension requests. I mean in our -- we've never seen anything like this in our history. I'm sure all the banks and other finance companies would tell you the same thing. We've -- in the U.S., we've extended about 10% of our portfolio since mid-March. And our goal is to make sure that our customers can stay in their vehicles. And our extension practice has really proven effective over the year to help reduce credit losses and improve customer loyalty. It's going to be really interesting over the coming months how that's going to work itself out. And we are, as I'll tell you, as a management team, hyper focused on that on a day-to-day basis around managing through these extensions in the coming months. It's going to frankly depend on what the economic environment is like coming out of this, how high unemployment will be and even if unemployment is high, how much stimulus is in the market and how we work our way through this.

Okay. That's helpful. And maybe just a last question for you, Jim. I mean we kind of talked about this a little bit on the earnings call, but coming out of a crisis like this, there's a hyper focus on cost and execution and efficiency, tends to be very strong. And then also, the industry tends to have relatively solid mix. And given what you're looking at with your product portfolio on the F-150, the Bronco, what we saw last year with the Ranger and what you have coming in the coming years, it seems like that really plays right to your strength, not to mention low gas prices for the moment, which will help out trucks. So I mean as you look at the recovery, we see what we went through in '09, '10, '11. And then by -- I think it was '11 and '12, your North American margins were north of 11%. I mean it just seems like there's a lot of opportunity in front of you, presuming this -- we don't get hit for this for -- the virus, for an extended period of time, that when you get to the other side, Ford would be really profitable and really rebound in a way that would be similar to what we saw in the last cycle. I mean how do you think about the other side? And given that everything you've got lined up here seems to be moving in the right direction, obviously the market and the execution are questions, but it seems like you got a lot lined up and you got to go and knock it down, I mean how do you think about coming out of this and where we'll be in 2 or 3 years sort of broad brush?

Thanks, John. So right now, our focus is very much on controllable costs, as Tim mentioned. Warranty, material costs, these are really important. We can hold our breath on advertising and marketing, we can hold our breath on some facilities, but in the end of the day, material and warranty costs, those are great for our business during the crisis and far beyond. So our team is laser-focused. And our delivery is going to be our reputation, so we're really focused on the cost. We do believe that the Ford brand in the U.S. is positioned very nicely for a number of reasons. We have a huge commitment to America as a leading manufacturer here, and we're launching these great new products. So we really believe our brand will get stronger irregardless of COVID, but we think that's a really important investment for us. Back in '08/'09, I remember F-150, I just joined the company, was $25,000, and it's way north of $40,000 now. So on the pricing for the industry and upside there, I think that will be really down to our execution of our launches and of our brand. If there's a tailwind on mix and things in the industry, that's great. But our team is really focused on the controllables, which are the cost areas I highlighted as well as an incredible job on these launches. And I have to really complement the team when you look at F-Series. We've really learned a lot from Chicago. We've now staggered the launches between Kansas City and -- sorry, our 2 plants, F-150. We staggered the start-up to derisk so that we can get 1 facility right and then the second. We have moved out some of the new technology just a little bit beyond the launch like the hybrid. The builds are going really well on the new F-150, and we have a lot of -- obviously, a lot of new software because it's our first high-volume connected vehicle. So I think it's going to be the launches, our controllable costs and the brand health itself that will be the big driver of our opportunity in the coming years.

Great. And with that, we'd like to thank you, Jim, Tim, Marion and the rest of the Ford team for joining us today and the opportunity to host this call. Thank you, everybody, for joining us, and we're open if anybody wants to catch up to follow up after this. Thank you very much for joining us. I hope everybody stays safe.

Thank you very much.

Thank you.

Thank you.

That does conclude today's conference. Thank you all for your participation. You may now disconnect.