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Ford Motor Co  (NYSE:F)
Q3 2018 Earnings Conference Call
Oct. 24, 2018, 5:30 p.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:

Operator

Good day. My name is Ian, and I will be your conference operator today. At this time, I would like to welcome everyone to the Ford Motor Company Third Quarter Earnings Conference Call. (Operator Instructions)

I would now like to turn the call over to Lynn Antipas Tyson, Executive Director of Investor Relations. Please begin.

Lynn Antipas Tyson -- Executive Director of Investor Relations

Thank you, Ian. Welcome, everyone, to Ford Motor Company's third quarter 2018 earnings call. Presenting today are Jim Hackett, our President and CEO and Bob Shanks, our Chief Financial Officer. Also joining us are Jim Farley, Executive Vice President and President, Global Markets; Marcy Klevorn, Executive Vice President and President of Mobility; Joe Hinrichs, Executive Vice President and President of Global Operations; and Brian Schaaf, CFO of Ford Credit.

Jim Hackett will begin with a brief review of our progress relative to the value creation framework we unveiled earlier this year which we now call creating tomorrow together. Bob will then review our quarter results in more detail and then we'll open the call for questions. Following Q&A, Jim Hackett will have a few closing remarks.

Our results discussed today include some non-GAAP references. These are reconciled to the most comparable US GAAP measure 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 discussions include forward-looking statements about our expectations for future performance. Actual results may differ from those stated. And the most significant factors that could cause actual results to differ are included on slide 35. In addition, unless otherwise noted, all comparisons are year-over-year. Company EBIT, EPS and operating cash flow are on an adjusted basis and product mix is on a volume-weighted basis.

Now let me to turn the call over to Jim.

James P. Hackett -- President and Chief Executive Officer

Thanks, Lynn and thanks everyone for joining us today. I'll briefly cover three topics before I turn it over to Bob for more detail and then we'll take your questions.

First, let me provide an overview of third quarter results and our 2018 guidance, which remains unchanged. And then secondly, I'd like to share with you specific detail on the progress we are making against our strategy to create value for all of our stakeholders. And then third, I want to provide a look ahead at a number of upcoming touch points we'll have with investors and provide an update on our mid-term guidance. So let's get started.

If you would please turn to slide 2. Starting with the quarter, top line grew 3% in the face of significant global sectorwide headwinds and our Company EBIT margin was sequentially unchanged despite substantially lower volume. Our North America performance was strong with an EBIT margin of nearly 9% and I have to say that the North American leadership team has done a great job optimizing every opportunity to improve growth and returns. And now we're heading into a really busy and exciting period of product renewal, which you'll hear more about.

I believe North America results demonstrate the early evidence that our fitness actions and commitment to focus on higher return opportunities are now taking hold and this is driving a more resilient business model. Within North America results this quarter, we achieved $1 billion mix improvement from our strong product line focus, including more F-150 and more Super Duties that had record transaction prices.

And additionally, the F-Series share of the full-size segment increased in the quarter and Ford continued to be the number one best-selling brand in the US. We also remain the number one selling brand for commercial vehicles in Europe. In fact, we gained commercial vehicle share reaching our highest quarterly share in over 25 years. In addition, we delivered record year-to-date sales of Ranger in Asia Pacific.

I'm delighted that our entire -- our earlier approximations that we can find that right winning portfolio has this positive news in the quarter. Our future work on our portfolio is directed at making this even better. In addition, Ford Credit quarterly results were the best since 2011. We delivered positive Company operating cash flow and we generated earnings per share of $0.29.

Our balance sheet and available liquidity remained at healthy levels. We are committed to maintaining a strong balance sheet and an investment grade credit rating. In the quarter, we had over $23 billion of Company cash and our target balance of $20 billion with liquidity over $34 billion.

Turning to the balance of the year, we are reaffirming our EPS guidance of a range of $1.30 to $1.50 and positive cash flow, albeit lower than 2017. So now let's go to page 3. This framework, which we have shown before illustrates our plan for creating value for our stakeholders.

At the highest level, the obvious strength of our F-Series trucks and our Transit family of commercial vehicles has positively driven margin in recent years. When I look back at these successes, there's not much I would have wanted to change. But it's clear these strengths probably masked weaknesses in the fitness of our overall business and also shrouded poor design elements of other areas of the business where we destroyed value. To be a great company, my message to everyone is we have to attack this opportunity.

In an answer to the question what have we been working on this past year, we've developed and implemented a plan to redesign the Company to dramatically improve the fitness of the overall business, address those areas of weakness I just pointed out and prepare Ford to win in a fast changing future.

Our mission is to build on our traditional strengths, while capitalizing on the sweeping changes brought about by propulsion technology, shared mobility and artificial intelligence that are all ushering in an era of smart vehicles for a smart world. Now this transformation is predicated on the best and highest use of our capital across four growth drivers. Earlier, I mentioned the efforts on creating and bringing to market a winning portfolio. So let me start with that.

At a high level, we plan to fortify and grow our leading position in trucks, our leading position in commercial vehicles and performance vehicles, such as the Mustang. Despite our heritage in SUVs, we know we're not the leader in this space, but we certainly are a solid player. Customers consistently rave about products like the Ford Explorer and the new Lincoln Navigator. This is a multi-billion dollar opportunity and we're moving with urgency to leverage our SUV expertise and brand image to become a global leader in utilities. This drives clear choices like our decision to phase out sedans over time in North America.

Not only are customers increasingly migrating to different silhouettes but also because of their lack of profitability, these traditional sedans destroy value. We can reallocate that capital to higher return opportunities. This decision means new entries in utilities trucks and white space vehicles with new silhouettes that will be more attractive to customers while delivering higher returns. Last week, my team and I hosted almost 4,000 North American Ford dealers in Las Vegas and we showed them how our lineup of nameplates will grow in the next five years versus where we are now. Overall, by 2020, we expect 75% of our line-up in the US to be new or refreshed.

In fact, I hope you saw the new Built Ford Proud ad campaign we launched this past weekend to support this product push. To deliver this fresh and more vibrant lineup around the world is not enough just to reallocate capital to higher return opportunities though. We also have to improve in two key areas, engineering efficiency and product line management and both of these will deliver huge benefits downstream.

You've heard Hau Thai-Tang, our executive over product development explain how we're moving to five flexible global architectures that will give us the ability to deliver more product faster and with that less capital. We believe that we can reduce the time it takes from sketch to showroom by 20% while improving capital efficiency by an additional 20%. In addition, we have implemented new product line management teams. Now these are agile cross-functional teams, they are responsible for product lines from end-to-end including P&L. This brings us much closer to our customers and their wants and needs. We have established clear lines of responsibility for every product line with the mandate to deliver appropriate level of returns.

The next area of focus is propulsion. And we use that term not to confuse you but because we're going to offer our dealers a portfolio of power trains to give our customers a variety of options. We have the internal combustion engine, we have hybrids, plug-in hybrids and all-electric. And yes, we are deploying -- we are redeploying capital and increasing investment in electrification. And I'm even more excited about the strategic view that we've developed here. We're going to electrify our most popular name plates like the F-150, Explorer, Mustang and Transit.

We'll leverage hybrids to deliver fuel economy and performance similar to the way we employed EcoBoost so

successfully in the past decade. For example, we currently offer hybrids on three of our US name plates. And by 2022, we will have offer hybrids or plug-in hybrid powertrains or both on 12 nameplates. We're developing a suite of fully electric vehicles that is aspire to have an impact like other exceptional nameplates you associate with Ford. An example is the performance utility vehicle coming in 2020 that has received early reporting from the press and yes, we will also offer fully electric commercial vehicles.

In fact, further on electrification, we will leverage partnerships with Zotye and JMC in China and Mahindra in India to deliver affordable electric vehicles at scale. As you know, our customers have an intimate trust in Ford Motor Company and we are confirming to them with all of this kind of news that Ford is committed as a company to meet the Paris Accord for CO2. And we love the challenge of doing it in a way that excites them, helps them get their work done, while supporting strong returns for Ford. We are making real strides in autonomous vehicles and are in a far better competitive position than we were only a year ago.

In August, we formed our stand-alone Autonomous Vehicles LLC. As expected and intended, we're receiving significant interest from potential partners and financial investors. And due to the trust our customers have in the Blue Oval, we're singularly focused on developing a profitable business model guided by safety.

Look for an event we have planned in Miami early next month to share much more about our self-driving system and business model innovation related to autonomy. And then with mobility, when we refer to mobility in our discussions, I want to be very clear. Mobility is all about wrapping software and services in new offerings to our customers.

We already made a financial commitment to build our transportation mobility cloud. This is an open platform through which Ford and its partners can deliver a myriad of products and services that will drive higher margins and recurring revenue streams that enable greater functionality and productivity for our customers. For example, yesterday Ford Commercial Solutions announced a partnership with Avis to connect more than 35,000 Ford vehicles in the Avis fleet. These vehicles will allow Avis customers to manage their entire rental experience through the Avis mobile app. Additionally, these Ford vehicles will provide valuable telemetry data in real time, including odometer, fuel level and vehicle condition updates, allowing Avis fleet to quickly process an information to prepare vehicles for customers. No longer will you have to record your fuel when you turn your car in. Now having provided that overview, I want to emphasize that we have extremely -- we've had an extremely productive quarter in terms of putting building blocks in place to support that strategy.

Let me share some key highlights here. In the US, our product defense started in earnest with the launch of the Edge and Edge ST. And just this past Monday, Joe Hinrichs and I celebrated the start of production for the new range of pickup in the United States, which will be on sale early next year. This all new focus is off to a strong start in Europe. And in China, we introduced the Territory SUV, which will be key to reaching new customers in second tier Chinese cities. In terms of autonomy, we just announced our second test city in the US, which is Washington DC. Now this will allow us to accelerate and build on the work we are already doing in Miami.

I was also a part of an announcement where we are teaming up with Uber and Lyft to support a concept called SharedStreets. This is a platform designed to leverage data to improve urban mobility. The data sets pledged by all three of us will provide the public and private sectors with new tools to reduce congestion and emissions, while improving the efficiency of city streets, making it easier and safer for everyone to get around. Let me add that our performance in China clearly has been disappointing. I can assure you the leadership of the Company has sworn the issue and we identified what is required for a turnaround plan.

Importantly, you read yesterday that we named a new CEO of Ford China. I'm excited about the hire of Mr. Anning Chen, whose background, believe it or not, includes a stint at Ford more than a decade ago. Anning's appointment allows us to reorganize our AP regions so that China is now a stand-alone business reporting directly to Jim Farley to ensure that we improve speed, execution and local expertise.

No doubt, you read about the fact that we've recently kicked off a redesign of our global salaried workforce. This is a new approach and it will improve costs. But that's only a secondary benefit. The sustainable fitness targets that I put out there ensure that we recognize that our organization must be more agile, accountable, flatter and faster. This is important to the kind of company we're trying to become.

This kind of fundamental change, especially in how we work and what we work on cannot be solely designed from the executive suite and executed top-down. The goals here are to flatten the organization and increase manager span of control. We've already had success at Ford and we have given people this type of approach and the chance to redesign their teams and how they work. This isn't a new experiment.

Finally, the North American team, for example, has set up energy rooms where cross-functional teams focus on specific product opportunities. We're smiling because there's no private offices, no endless power point, no faceless emails and no long meetings. It's been a revelation to see how fast they have moved to improve the business, evidenced by the strong margin you're seeing that North American has delivered in the past two quarters.

And yes to the question, we are racing to replicate this globally over the next few months and we plan to provide an update on the efficiencies we're getting from this in future calls. The transformation I've just shared with you is (inaudible) fraction of what we as a team have imagined and we clearly are executing.

For example, we previously told you that our marketing function needed an overhaul to become more fit, effective and modern, especially in terms of leveraging big data and technology. Well, we've taken action. Earlier this month, we announced key changes to bolster our in-house capability and we moved to a new agency model that will yield more creativity and substantial efficiencies. We're addressing real issues. We are moving quickly to redesign the business in support of our stated strategy.

With that progress, I know that you want to hear more about how we will implement the $11 billion restructuring plan which we highlighted in the second quarter as well at that time we talked about ongoing discussions with various strategic partners such as the one with VW and the partnership with Mahindra.

These are big pieces of the picture that I'm trying to paint and we're fully committed to sharing detail as soon as we can. But I can't allow to get ahead of the process. I assure you that the need to get our stakeholders up to speed is the priority for me and the entire Company. But I've committed to you that we will have several touch points with you in the coming weeks and months to get more specific detail of areas of important progress in AVs, the extensive fitness plans that we are now implementing and progress on our strategic partnerships.

So before I turn it over to Bob, let me touch on our medium-term targets. There are adjustments here given the dynamics of the environment I want you to pay close attention. We know that the underlying earnings power of the Company is at least at an 8% EBIT margin or better with a high-teen return on invested capital. I mean, we know this because 150% of our EBIT is already coming from products generating mid-teen margins with an ROIC above 40%. We've been transparent about this.

In April, on a call like this, we said, we believe we can hit an 8% EBIT margin and a high-teen ROIC by 2020. And at the time that was assuming reasonable economic conditions. We also said that our improved fitness would drive a more resilient business model at all points of the cycle, which I want to confirm we continue to standby.

Well, the news today is the current external environment has driven higher costs and uncertainty for the entire sector. And as we said last quarter, we had an unexpected deterioration in our business in both Europe and China. As a result of these factors, our current forecast shows we will not reach our EBIT margin and ROIC targets by 2020. However, as I tell you as I told the Board, we're not standing still. We're attacking everything that is in our control. We're working with urgency to redesign our business to operate more profitably. Our fitness initiatives are tracking as planned, our restructuring and strategic partnering initiatives are progressing and our reallocation of capital toward a winning portfolio of products and services is beginning to deliver results.

Our progress on these fronts gives us even more confidence that we are building a more resilient and vibrant high-performing Company capable over time of attaining EBIT margins of 8% or better with an ROIC in the high-teens.

So at this point, I'll turn it over to Bob and I'll be back to you in a moment to answer questions. Bob?

Bob Shanks -- Executive Vice President and Chief Financial Officer

Yeah, thanks, Jim, and good afternoon to everyone. I'd like to start my comments on slide 6, pointing out a few items from the Company key metrics. So first, we reported mixed results on the top line with Company revenue higher than a year ago, driven by strong product mix in North America. Wholesale volume on the other hand was down 10% and this was largely due to our joint ventures in China and Turkey. Market share also was lower, this was driven by lower share in China although we had share declines across all regions. And this reflects an adjusted effective tax rate of about 11%. Finally, net income was $1 billion. Now to put the quarter into context against recent performance, you can see on slide 7, that revenue was lower than in the past three quarters due mainly to lower volume. Now some of this is seasonal reflecting the normal summer plant shutdowns that occur in Europe and North America. Company EBIT and EBIT margin were essentially flat from the second quarter despite the lower volume and our positive Company operating cash flow was substantially higher than the second quarter and a year ago.

Now turning to slide 8, we see the absolute results for the Company across our reporting elements. Company EBIT was driven by auto and Ford Credit results with losses as expected in mobility and Corporate Other. The mobility loss was split about equally between investments and mobility services and our autonomous vehicle business. The increased loss from the year ago, also was driven about equally by higher investments in both those areas of our mobility segment. The Corporate Other loss consists of costs for corporate governance, mark-to-market adjustments on marketable securities and interest income. The year-over-year increase in the loss was due to higher governance costs and unfavorable fair market valuation adjustments to our marketable securities. The details of our automotive segment, which are shown on slide 9, highlight our performance in North America where we generated a healthy EBIT of $2 billion, which is higher than a year ago despite lower volume and higher commodity cost. This was enabled by strongly positive mix as our portfolio continues to shift more to trucks, utilities and vans. As a result, and as Jim mentioned, EBIT margin reached nearly 9%, which compares to an average first half margin of 7.6%. While we continue to see a combined loss in our auto operations outside North America, the loss slightly improved from the second quarter despite lower volume. This includes adjustments to dealer inventories in China that now have us positioned right where we want to be in terms of days supply.

In South America, the ongoing recovery in Brazil slowed due predominantly to external headwinds, including an 18% currency depreciation compared to a year ago and increasing inflation, including higher commodity prices. In Argentina, the peso lost 45% of its value compared to a year ago and annual inflation is running at 34%. Our team has responded with substantial price increases, resistance of inflation recovery by suppliers and continued reduction in structural costs. We also continue to progress our plans to fundamentally transform our longer-term operating model in the region.

Turning to Europe, we saw favorable market factors from a year ago related to new products such as EcoSport, Fiesta and Transit Custom. Our commercial business continued to be strong as well, delivering a record market share as Jim noted. EBIT, however, deteriorated from a year ago, largely due to unfavorable external factors affecting performance in Turkey and Russia, combined with launch-related costs from the new Focus. Our team is focused on accelerating actions to improve our near-term performance, while they continue to put in place the plans to substantially redesign our future business in Europe.

In Asia Pacific, the markets outside China, remained profitable, although lower than a year ago, generating a 9% EBIT margin. As in the second quarter, the EBIT loss in Asia Pacific was driven by China, reflecting a loss for our consolidated China operations, as well as at our China joint ventures. The losses were driven by the same factors as in the prior quarter, which is lower volume and lower net pricing. Compared to the second quarter, however, we reduced the loss in China by over $100 million or about 20%. We've made very good progress in addressing the underlying issues with more work to do. We're focused intensely on our sales turnaround plan for China, and we're now just at the beginning of a strong product launch cadence, starting with the all-new Territory SUV, the all-new Focus, and the new Escort. All of these models will make significant contributions to reinvigorating our sales growth in the first quarter next year.

We also expect to benefit as we move forward from the added focus of transitioning China to a stand-alone business unit within Ford, led by a strong Chinese leader with deep local knowledge and proven extensive operating experience. We also intend to strengthen over time our position in emerging markets, enabled in part by the creation of a business unit, largely focused on how to win in these challenging and growing markets.

Let's turn now to slide 10, Ford Credit key metrics. Ford Credit was an outstanding performer in the quarter, generating an EBT of $678 million, which was the best quarter in over seven years. This was driven by favorable volume and mix and favorable lease residuals. We saw our auction values rise 5% from prior year constant mix, and we now expect auction values for the full year to improve on average 3% at constant mix. We're very encouraged that US consumer credit metrics remain healthy. And in addition, Ford Credit's balance sheet remains strong with managed leverage remaining within the targeted range of 8 to 1 to 9 to 1.

The slide 11 reminds us of the strength and stability of Ford's balance sheet, featuring cash and liquidity levels in excess of our targets, and global funded pension plans that remain fully funded. Finally, we are reaffirming our guidance for full year Company adjusted EPS of $1.30 to $1.50 per share. So in addition to what Jim and I covered in the call, we have provided supplemental material in the earnings deck with more details and insights on the business.

So with that, what I'd like to do is to turn it back to the operator to start the Q&A.

Questions and Answers:

Operator

(Operator Instructions) Our first question is from the line of John Murphy from Bank of America.

John Murphy -- Bank of America -- Analyst

Good evening, guys. Jim just, in your comments, and the way you're discussing everything, all the actions you're taking at the Company, it kind of feels like the restructuring actions that you're talking about $11 billion non-cash, $7 billion cash, will be over a multi-year period, and maybe more of a rolling process as opposed to what some of us in the industry are used to as sort of a big bang outline of a plan and massive charges upfront. Is that possibly a correct characterization, and we're going to learn about this along the way, because $7 billion or $11 billion over a three to five-year period in the auto industry can get washed out in total to some degree. Just trying to understand, how you're thinking about this, if this is more of an ongoing rolling program as opposed to a big bang one.

James P. Hackett -- President and Chief Executive Officer

Yes, I think if I could have some license to think of the language a little differently, let me set this up for Bob, which is the way Bob and I think about this is I've come into the Company trying to assess the design of the business kind of at an underlying level. Design for, as you know John, reduced capital, higher margins but there is other things, clock speed, where we were talking about things moving faster. And when you think about that, I sit in your shoes and you say, hey, when will we know this? At what rate are you making these things happen? What I remind everybody is, we first have to find the areas that need the attention, we're through that. We then have to design the solutions for them. We're through a lot of that, but not all of it. And then we have to put them in place and perform. So if you're reading any hesitancy from me, it's not that we don't know where we're going or we don't know how to do it. It's that it's a massive undertaking that we have to have very thoughtfully orchestrated, because my experience in doing this is the worst thing we could do is disrupt our business and we are going to do that. So now the accounting of it and things like that, I'm going to turn to Bob and let him give your opinion on that.

Bob Shanks -- Executive Vice President and Chief Financial Officer

Yeah, I just want to supplement what Jim said. I think that's a perfect way of thinking about the way you expressed it John. I am very thankful for the question. When you think about the business, and even if you look at the quarter, we have a strong North America, can be and should be stronger, but it's now gaining momentum. We have a strong commercial business in Europe, despite the loss that we had in the quarter. We talked about big part of geography, in terms of the market outside of China and Asia Pacific at 9% margin. I didn't talk about MENA, but there we had I think 7% or 8% margin. Small market, but it's 1.3 billion consumers, and it is going to grow dramatically over the next 10 years. And we're already starting to see the ability to be profitable there. So it's the rest of the business, right. And that business has got to be fundamentally redesigned. The restructuring is an output of that or a result of it. It's not a restructuring play. It's a redesign play. The result is the consequence of this restructuring and it will unfold. There will be, I presume, spikes that'll be like a big thing that comes in this region at a certain point in time. And then, maybe it's a bit quiet for a while, and something else big as we now get to that next chapter of what's going to be an unfolding story. So I think that's a perfect way to think about it, which also I hope, I know it's frustrating, but I hope it helps investors understand why one can't sort of go to the last page of the book and look at the ending. It's got to sort of unfold. And that's -- and we'll share everything with you as we can as the things are announced.

James P. Hackett -- President and Chief Executive Officer

And John, just to confirm to you, you know that the point where you're examining these kinds of options, if there was expedient options or more big bang ways of doing things, yes, I was open to all kinds of ideas like that, that's what we've already plowed through. And so your understanding tonight should be just the way Bob and I are describing.

John Murphy -- Bank of America -- Analyst

And just to be clear the time frame is around five years in sort of what you're thinking here as far as what you know right now, is that about right?

Bob Shanks -- Executive Vice President and Chief Financial Officer

Well, I mean our business planning period is five years. There will be a lot that is completed in five years. But frankly, I think there will be some elements that go on a bit beyond that. And let me just give you a good example. We may have made recent investments in new products that a normal cycle would need to run for five years as long as those products are generating positive cash flow in sort of an incremental basis we will run them out. So we're not going to short cycle them to get expense of being able to demonstrate how strong we are taking action we want to generate cash. And so the consequences then of that rain out (ph) and not redeploying capital in that particular location or plant or segment could result then in something it takes place outside the period.

James P. Hackett -- President and Chief Executive Officer

And John, it would be -- it wouldn't be fair to say, it takes the full five years, right? So part of the reason we're going to have this, a gathering where Joe Hinrichs takes you through a deeper understanding of the fitness actions, is that you can see the range of things in terms of some of them are, what I call the now, near, far kind of clock. Some of them are now. Some of them are actually impacting now. I think we're trying to be really clear that North America's -- some of its results are from many of the fitness actions that we put in place a year ago. But you're also right that some are going to take longer because they're more complicated design challenges.

John Murphy -- Bank of America -- Analyst

Okay. And then just a follow-up on this. I mean, we are two years away from where you were talking about hitting 8% EBIT, and high-teens return on invested capital. Obviously market dynamics have changed dramatically more recently, so understandable. But just curious what kind of market dynamics you need to hit those numbers? I mean, are we looking at sort of -- is it sort of a mid-cycle thought process? I mean, just really trying to understand what you're thinking about there because it is a big change.

James P. Hackett -- President and Chief Executive Officer

Yes, I think it's really more around timing. We had expected to hit those types of numbers in our five-year planning period. Back earlier in the year, we saw the opportunity to do that earlier through the impact of the fitness actions, but subsequent to that we've seen more bad news on commodities, some related to policy, some not. We've seen issues on exchange, we've seen South America take another dip and so forth. So there is -- Turkey is another one, Russia. So, there are other issues. And then frankly, what we saw happen in Europe and in China that was unrelated to externals, we expect and are addressing them very aggressively, but as you kind of flow that through to 2020 that could still have some sort of negative impact versus what we had expected back in April. Tried for that not to happen, but based on looking at the numbers today, that's where we are and we've just got to disclose what we see and that's where we are. But certainly we're not backing off and we certainly see the ability to achieve the 8% margin and the mid-teen ROIC in the years ahead.

John Murphy -- Bank of America -- Analyst

Those targets are still there?

James P. Hackett -- President and Chief Executive Officer

Yeah.

Bob Shanks -- Executive Vice President and Chief Financial Officer

And -- this is the tough kind of leadership question, we have to keep our foot on the throat of our performance. So we are doing that. All of us are really happy actually about the momentum we're building as we adjust that target in that ironic. But we think it's important as we get a better handle on our business, so we share with you that we need to change the time frame on that.

John Murphy -- Bank of America -- Analyst

And then just one last quick one on market dynamics. Net price in North America, negative 3.18 (ph). So a little bit surprising to the downside. Obviously mix as a huge more than positive offset. Just curious what you're seeing in the dynamics in the North American market because some of the data we're getting externally is kind of positive and negative and it's a little bit unclear to understand exactly what's going on there.

James P. Hackett -- President and Chief Executive Officer

I think that's a fair question. Let me give that to Jim Farley.

James D. Farley -- Executive Vice President and President, Global Markets

Certainly in the utility and car markets, we're seeing more pressure because of availability. But it's really encouraging to see Ford's performance in full-size truck. Our transaction price is up more than market. Our share is up. It's never been a more competitive segment. Ford's lead continues to grow. And we've had meaningful product investment, new diesel Raptors being well received, new powertrains. So that all helped. I think the opportunity for us is as we refresh those utilities next year, we really accelerate our opportunity for pricing and mix. These are high-volume products for us with enormous car parks. And we're going off -- older vehicles to brand new vehicles I think will have the freshest utility lineup in the US here pretty soon. So as far as a background market, I think it's -- we're really in a bit of a different situation given the freshness of our products. So, great opportunity for us.

John Murphy -- Bank of America -- Analyst

Jim that's the Escape and the Explorer next year, is that correct?

James D. Farley -- Executive Vice President and President, Global Markets

Among others, we actually have more thinking. We have -- we have quite a few and of course we have 13 million pickup truck owners in the US and we're just about to launch a great new Ranger, which is a brand new nameplate. So, it's not just utilities, it is also pickup.

John Murphy -- Bank of America -- Analyst

Great. Thank you very much.

James P. Hackett -- President and Chief Executive Officer

Thank you.

Operator

And our next question is from line of Joseph Spak from RBC Capital Markets.

Joseph Spak -- RBC Capital Markets -- Analyst

Good afternoon. Thanks for taking the question. Maybe just a follow on some of the longer-term planning and some of the market dynamics that you didn't anticipate that caused you to take that down. Have you similarly built in some contingencies around potential variation your assumptions for the North America market or does that also assume that we remain roughly around the current levels?

James P. Hackett -- President and Chief Executive Officer

Yes. Thanks, Joe. I'm going to let Bob to add to this. But in my text, remember I made reference to resiliency more than once because one of the things we hope to convince you of is the design of the business has more resiliency in the downturn. So, it's my expectation that you wouldn't be modeling that the way you used to. But Bob how would you?

Bob Shanks -- Executive Vice President and Chief Financial Officer

Yeah, I guess from a couple of standpoints. Joe, one is -- and this has been our view for quite a long period of time, is that we do expect industry to decline over the next number of years. I mean, still be strong absent a recession, but the decline in part due to affordability for all these increasing transaction prices and ultimately the effect of rising interest rates on monthly payments. We also have not assumed that there is any material change in the level of commodity prices that we're seeing and that's hitting North America more than any other business units and that includes the bubble that we presently have in place. That's a result of some of the policy decisions that have been made. So that's not assumed to back off. So all those could be opportunities if that weren't the case. And then, of course, we do normal modeling, both variable and central cases around other scenarios that effective for (ph) each of our regions and as well as North America. So yes, there's something else that you had in mind, but that is sort of the present thinking around those assumptions.

Joseph Spak -- RBC Capital Markets -- Analyst

That's helpful. And then just the second question is, not to get too semantic (inaudible) I think there's a lot of investor concerns and questions over this. On slide 11 when you say committed to the regular dividend through the cycle, is that at current levels or just to continue to pay a dividend through the cycle?

Bob Shanks -- Executive Vice President and Chief Financial Officer

At current level.

Joseph Spak -- RBC Capital Markets -- Analyst

Okay, thank you.

Bob Shanks -- Executive Vice President and Chief Financial Officer

The regular dividend.

Joseph Spak -- RBC Capital Markets -- Analyst

Yeah, thanks.

James P. Hackett -- President and Chief Executive Officer

Yeah, and we want to emphasize that we don't know how we've lost control of the way that's been projected. But it's -- we've been consistent saying that we plan to pay the regular dividend in this five-year plan.

Operator

And our next question is from the line of Colin Langan from UBS.

Colin Langan -- UBS -- Analyst

Oh, great. Actually just a follow-up on that. I mean there's also questions about your credit rating. How important is it to maintain investment grade in your view, because I imagine the dividends and all those cash restructuring (inaudible) that aren't getting downgraded. How critical is that?

Bob Shanks -- Executive Vice President and Chief Financial Officer

Well, it's important. I mean, we've been there before, don't want to go back, but I mean the impact is largely on, firstly Ford Credit. The -- we have to fund them to the tune of over $40 million (ph) a year. And of course some of that is unsecured, some of its securitized. So, it impacts the size of the market that we have available for that funding and obviously, the cost of it. Now, ultimately Ford Credit is going to pass that cost along to Automotive. So, at the end of the day it sits in Automotive in terms of the impact. But it's important. It's not around -- I think it's an important thing. It's not around the balance sheet, it's not around the fact that we pay a dividend. It's around the operating performance of the business. That's very, very clear and talking with the rating agencies that even if we stop paying the dividend, that doesn't address the operating performance. So we're extremely focused. Going back to what Jim talked about around the EBIT margin, return on invested capital, we are extremely focused on getting this business back onto a stronger operating performance track, because that is the issue that the rating agencies are expressing concern around. Obviously, it relates to cash flow generation at the end of the day. But that is what we've got to focus on -- is that issue. It's not a dividend issue, it's an operating performance issue.

Colin Langan -- UBS -- Analyst

Got it. And just a follow up on the question on the 2020 target. Why not just push the targets out, I mean, because there's no -- unless I misread it there's no new target date. Any color on why this does not (inaudible) put it back to where it original was?

Bob Shanks -- Executive Vice President and Chief Financial Officer

Well, we haven't not done that. I mean we're just simply saying it's not going to be in 2020. Since we had put that marker out there and based on what's happened since then, we are compelled to share with you that we don't see at the moment a way to get there. So we're simply saying not in 2020, but as I mentioned in my earlier comments, certainly we're trying to get there as soon as we can. But I'm not going to put a time frame on it, because we (ph) will have to come back again and change it.

Colin Langan -- UBS -- Analyst

Got it. And then lastly on China. Any sense of when that stabilizes and any idea when it gets back to a profit? I mean, how should we think about inflection? Thanks.

James P. Hackett -- President and Chief Executive Officer

Well, again, I'll turn this to Jim Farley because Jim has been making a trip there almost every three weeks and you've heard about the news in the organization I've been talking to the partner. While we've been fixing Ford's problems, there's a lot going on in China. And Jim you might share what you are seeing in the last three months in China large.

James D. Farley -- Executive Vice President and President, Global Markets

Sure. First of all, this is such an important and urgent work by the team. The good news is we've addressed the error states we had, which is great. The stocks are down to 45 days, dealers are profitable again and our sell down units for these new products, the three that Bob mentioned were in fantastic shape. So I think, we are in really good foundation for the launch of these new products that come basically, as Bob said, in the first quarter. And these are high volume products for us. Anning is a very experienced operations reader. And we feel that the accelerated costs -- addressing the cost in the business is really essential for our profit turnaround in China. He has deep experience in purchasing, engineering and these are going to be keys to our turnaround in China for profit. The other one is profit line management, which has really yielded so much benefits here in North America. With these new launches, a launch mix and rates, series, feature content, we have a tremendous opportunity to drive better margins in China. So as far as the Ford team is concerned, this is all hands on deck as Jim mentioned and we are working urgently and as a team as you can imagine.

Colin Langan -- UBS -- Analyst

Want to talk about industry sales.

James D. Farley -- Executive Vice President and President, Global Markets

Yeah, industry as you know in the third quarter was down about 10% in China. To be honest, that's a bit expected because the previous two years there was a purchase incentive boost to the industry, which was eliminated this year. We saw a pretty big hangover in the first quarter. Industry demand came back, but it has not really recovered to last year's level in the third quarter.

As Bob said, there's a lot of speculation about incentives or not. Look our turnaround in China is really up to us. It's about our new products and our cost performance. But we definitely see a weaker market there. Some of it is external, some of it it internal, like the purchase tax I mentioned, but for us the opportunity is within our control.

Colin Langan -- UBS -- Analyst

Got it. All right. Thank you very much.

James D. Farley -- Executive Vice President and President, Global Markets

Thank you, Colin.

Operator

And our next question is from line of Ryan Brinkman from JPMorgan.

Ryan Brinkman -- JPMorgan -- Analyst

Hi, great. Thanks for taking my question. Thanks for the earlier color in China too. But I wanted to ask on Lincoln in China, specifically and on branding more generally. Relative to these tariffs that you're having to pay 40% now, where are you in terms of the localization of Lincoln in China? Can that all be accelerated? And then the more general branding question is, previously, I think it was seem at Lincoln would benefit in China from being associated with like the Limousines used historically by the American presidents et cetera, by its American branding. Just curious how you think American car brands are being perceived in China currently with some of the headlines this year. I see Chevrolet and Cadillac seem to be doing all right. So maybe there hasn't been too much change. But just wanted to check in to see if you're detecting anything at the margin.

James P. Hackett -- President and Chief Executive Officer

Well, the good news is -- great question, good news is we have not seen any sentiment change at the consumer level. In fact Lincoln is up about 3% year-over-year for us despite having to take pricing. So we see continued very strong demand, we watch the favorability of both the Ford and Lincoln brand monthly and we have not seen any change in the favorability of the brand as of yet. And this is a very important question about localization of Lincoln. We haven't been specific about the model, but one of the keys to our profit improvement plan for China will be accelerating our localization. We've already announced a Ford modeled Explorer as well as a Lincoln model and that's very key to our progress.

Ryan Brinkman -- JPMorgan -- Analyst

Okay, that's good to hear. Then I thought to ask too on Europe and WLTP, what has been the impact to your business there? How are you positioned relative to the other automakers in regards to that transition? And then just more generally in Europe, on the last call you talked about how -- maybe there hadn't been as much of a profit improvement from some of the recent launches over there. Just wanted to follow up to see if that was still the case and what your current plan might be to improve the profit in Europe short of the better contribution margin from new models, et cetera.

James D. Farley -- Executive Vice President and President, Global Markets

Okay. Well, WLTP has been a really large effect in Europe. As you know, it's had a pretty big industry effect. The great news is that Ford planned this very thoughtfully. We had no capacity issues, very little in our transition to 6.2. We are already through that transition. So Joe's team did a fantastic job and we don't really see any hiccups in our business due to that. But I know it -- obviously it has a big impact on the industry as a whole. We've seen -- we're kind of entering the second month of a hangover for the sell down of 6.1. But we're through that now as a team.

As far as Europe is concerned, Bob mentioned that we have such a gem in our LCD business, continues to get stronger actually for us. Our share goes up. Even if the UK, our leading market is down, we continue to make more progress. The opportunity for us in Europe is twofold for our profit turnaround. The first is cost in every part of our business and the team is really continues to accelerate that work and we're working with all of our stakeholders on that. The other one is addressing our mix deficit on our passenger cars. We just have been under representing the utilities, as Jim said globally, but especially in Europe. But that all changes as we launch a new generation of utilities in Europe and even add name plates next year and beyond. So I think the mix effect in cost will be key.

Ryan Brinkman -- JPMorgan -- Analyst

Okay. And then just very lastly on mix in North America. It looks like there are some very impressive gains there. Can you elaborate on the drivers? I think I heard SUVs, anything else, speak to the sustainability of that? And I just wanted to check too, because the line item there is called mix/other. What the other bit might entail and its sustainability?

James P. Hackett -- President and Chief Executive Officer

Yeah, it's almost nothing. It's almost all product mix and about 60% of it is that we're selling as a percent of our total sales we're selling more F-Series, more Navigators, more expeditions, more higher margin products and about 40% is that we're selling less of cars, but also the Escape. And I think that's -- the Escape one is an interesting one. We're going to launch a new Escape next year, and Jim might want to comment on it. We're actually taking conscious actions decisions to kind of pull back a bit on volume because we're trying -- not trying, but we're protecting, if you will, residual values and protecting the nameplate brand as we prepare for the launch of the new one. So as a result, less of those, so it's benefited us to the tune of favorable mix overall.

Do you want to comment on that? I think, it's a great example of -- I like the work we're doing around the product rooms.

James D. Farley -- Executive Vice President and President, Global Markets

We believe as the utility business in the US becomes a lot more competitive, given all the nameplates have been launched. Bob said, we really feel like there's two big bets for Ford. The first is differentiation where we're going to expand the number of nameplates into more differentiated like authentic off-roaders or really fantastic on-road urban crossovers, but the other one is to address our total cost of ownership. We feel that from models, like Escape, for them to continue to be great profit opportunities for the Company the residual value, the fuel economy performance of the vehicle, these are critical metrics for this leadership team. And as Bob said, we are actually taking some short-term share decisions on Escape to protect the transition to the new vehicle, as well as protect our residual value to minimize our variable marketing spend. And that's another reason why we've had this mix effect.

Ryan Brinkman -- JPMorgan -- Analyst

Very helpful. Thank you.

Operator

And our next question is from the line of David Tamberrino of Goldman Sachs.

David Tamberrino -- Goldman Sachs -- Analyst

Yeah. Great. Got a couple of questions here. I think, I'll start with 2018 guidance. You held the $1.30 to $1.50, but you bought your tax rate down from 13% to 10%. I think that implies a couple of hundred million dollars of EBIT where your guidance got lowered. It looks like that might just be South America instead of improving just being flat, but wondering if there's any other buckets that we should be looking at for that implied EBIT guidance reduction?

Bob Shanks -- Executive Vice President and Chief Financial Officer

We haven't adjusted our EBIT guidance reduction or guidance. We had a guidance on EPS and that is still within the range of $1.30 to $1.50. We've not provided any guidance on EBIT. So it is incorrect to assume that there is a reduction.

David Tamberrino -- Goldman Sachs -- Analyst

Okay. (multiple speakers) Follow-up on that later. Jim, on the fitness plans that you've outlined, about $25.5 million. I know, it's over a long period of time, maybe just wondering how much, if any, has accrued to the bottom line so far in this quarter.

James P. Hackett -- President and Chief Executive Officer

You're asking the question in the five-year plan what has happened in one quarter?

David Tamberrino -- Goldman Sachs -- Analyst

Well, I'm asking if there's -- just to see if there's been any traction with those cost savings initiatives dropping to the bottom line? Just that.

James P. Hackett -- President and Chief Executive Officer

Yeah, yeah. Okay. I just -- I am trying to get at how precise you want that to be. So this is where I guess I was a minute ago that we're seeing definite benefits now in our business. We said these were backend loaded because of the description I gave you a moment ago when I was reminding you how these processes get identified to be reengineered to be put in place to realize value in those four steps. So then more value comes in the future. But it is happening and I've cited for you in North America is where I'm seeing early benefits. There is a concept that we've called yield management, which is one of the '19 and that we're seeing real-time benefits there.

David Tamberrino -- Goldman Sachs -- Analyst

But nothing quantifiable?

Bob Shanks -- Executive Vice President and Chief Financial Officer

Yes, it's been for the year of several hundred million dollars. I wouldn't be more specific than that.

David Tamberrino -- Goldman Sachs -- Analyst

Okay. And then just lastly from me, since you've outlined the module architectures. I'm curious, how much CapEx has been already spent on that transition. How long that's been contemplated within the organization and if there's any incremental spend that needs to be done in order to get you there and transition the portfolio?

James P. Hackett -- President and Chief Executive Officer

Again, David, I'm sorry, but let me see if I can reframe that. So you realize that refreshing -- the freshening that we just have done that we're just launching, the kind of the capital that we have spent there tied to the new products is one thing (inaudible). And this concept of this architecture is all the new things that are coming after this most recent refreshing. And so we have in the five-year plan definite capital improvements. I think I mentioned that in the text.

David Tamberrino -- Goldman Sachs -- Analyst

You did, I just -- I'm asking because other OEMs have discussed developing module architectures and it's taken multiple years for them to get to that and deploy it. So the question really is how much of that has already been done or established and behind us versus going forward and needs to be spent while you're watching those products.

James P. Hackett -- President and Chief Executive Officer

Yes, let me tag team with Joe here because he, remember as part of his executive role, helped put this new architecture. And Joe, what's your sense?

Joseph R. Hinrichs -- Executive Vice President and President, Global Operations

Yeah, the way I would describe it is we're at the peak of our capital and we've acknowledged that in our previous discussions. We're going to see the benefits over the next several years as the new product programs that we're launching today get the full benefit of the architecture and module work. So you're accurate in saying and thinking that we'll get more benefit as the years progress, but we are starting to see engineering savings in the near term. On a capital basis, the capital reuse work we're doing with the module architecture work combined will save us significant amount of capital over the next several years.

Bob Shanks -- Executive Vice President and Chief Financial Officer

Yeah, the only thing I would add and Joe can tell me if I'm wrong, that I think David conceptually some of these things were piloted with our C2 platform, which is the new platform that underpins the focus of the new Escape that comes in and so forth. So a lot of it was piloted on that. That's already starting to go into our plans. So I think the learnings from that have just been further developed. So unlike some competitors who had huge changeover costs associated with going to a different approach we don't see that happening inside Ford and in fact, as Joe mentioned, we expect to see efficiencies moving forward.

Joseph R. Hinrichs -- Executive Vice President and President, Global Operations

(inaudible) we're timing it to the introduction of the new products. So we're doing this in a timely manner, but that product freshening that Jim Farley and Jim Hackett both talked about, it times nicely with the execution of all these initiatives.

David Tamberrino -- Goldman Sachs -- Analyst

Understood. That's helpful. Thank you very much, gentlemen.

James P. Hackett -- President and Chief Executive Officer

Thanks for the questions.

Operator

And I believe we have time for one last question. Our next question is from line of Itay Michaeli from Citi.

Itay Michaeli -- Citi -- Analyst

Great, thank you. Good evening. Maybe just one more on the 2018 guidance for Bob. Is there any bias in terms of the range on the EPS or kind of the factors that would cause it to be at the low versus the higher end of that? And then maybe just to confirm, you expect Q4 still have positive operating cash flow?

Bob Shanks -- Executive Vice President and Chief Financial Officer

So I'm not providing anything other than saying that we are very comfortable with the range that we've provided and expect the business to come in within that range at the end of the year. In terms of cash flow, I am not providing any guidance on cash flow other than for the full year which should still be consistent with the guidance we provided all throughout the year, which is positive, but down from last year.

Itay Michaeli -- Citi -- Analyst

Great. And then on North America I mean it looks like if I back out some of the recent recalls and some of the issues in Q2, you're running comfortably above 9%. And you talked about the product cycle you have coming in the next couple of years. I guess what will prevent North America from running even above the 10% you previously talked about in the next couple of years?

Bob Shanks -- Executive Vice President and Chief Financial Officer

Well, North America should, I mean that's one of the things that Kumar and the team are working on with their return to 10 initiatives. I mean at this point in the cycle, it should, but if you think about the headwinds that Ford has around commodities, that's about $1.5 billion this year. And the vast, vast majority of it sits in North America. So that alone is worth quite a bit of margin, if you will.

So I think if anything, you've raised the point around some of the increases we've seen recently in warranty costs. You think about that, you think about the commodities where we're investing and EVs, which of course has an impact and we're not selling them yet. All those things and then to see North America starting to pick up pace in terms of its margin, it's 9% or near 9% in the quarter is very, very encouraging because they really should be operating at that type of 10%-plus level at this point in time. They understand that, that's what they're working to achieve.

Itay Michaeli -- Citi -- Analyst

Great. That's very helpful. That's all I had.

James P. Hackett -- President and Chief Executive Officer

Thank you, Itay.

Operator

That concludes the question-and-answer session. I'd like to turn the call back over to Jim Hackett for closing remarks.

James P. Hackett -- President and Chief Executive Officer

Thank you very much. Just want to confirm quickly that we're moving with urgency to execute against this strategy. We are pleased with signs of our success. These early signs including strong results as we just talked about with the EBIT margin in North America of almost 9%. We're very, very happy with the strong balance sheet with over $34 billion in liquidity and we're making great progress on the product portfolio. We can emphasize that we had enough dealers last week with lots of applause supported that. The redesign of the business includes the strategic partnerships with VW and Mahindra, they're all on track. And finally, we look forward to sharing more about this global redesign of the Company. We are going to be coming to you more frequently including we're going to talk about these strategic partnerships in the near future. Thanks for your coverage and we look forward to our next call.

Operator

This does conclude the Ford Motor Company third quarter earnings conference call. Thank you for your participation. You may now disconnect.

Duration: 62 minutes

Call participants:

Lynn Antipas Tyson -- Executive Director of Investor Relations

James P. Hackett -- President and Chief Executive Officer

Bob Shanks -- Executive Vice President and Chief Financial Officer

John Murphy -- Bank of America -- Analyst

James D. Farley -- Executive Vice President and President, Global Markets

Joseph Spak -- RBC Capital Markets -- Analyst

Colin Langan -- UBS -- Analyst

Ryan Brinkman -- JPMorgan -- Analyst

David Tamberrino -- Goldman Sachs -- Analyst

Joseph R. Hinrichs -- Executive Vice President and President, Global Operations

Itay Michaeli -- Citi -- Analyst

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