Ford Motor Company (F) Earnings Call Transcript & Summary

Okay. We're ready to kick off our first presentation of the day. [ Meyer ], if you don't mind, please leave Jim Farley alone. Our first speaker of the day from Ford Motor Company may be the most highly anticipated at this conference. And to introduce this, I think I should just state the obvious. It's no secret that Ford has experienced a number of challenges over the past few years, challenges that have resulted in disappointing profitability and free cash flow. And those challenges ultimately led to management changes, they've led to strategy changes. But what's intriguing about this company from an investor perspective is that embedded inside the company, there should be a strong, profitable and cash-generative core. And to illustrate that, I snipped from one of Ford's presentations. It's something that they showed in early 2019, that the company's global truck and van business, at that point, was delivering $10 billion of EBIT. And of course, you know that Ford Credit has been in the zone of contributing something between $2.5 billion and $3 billion of EBIT. Even after we subtract about $1.5 billion of corporate overhead and spending on mobility, maybe $1.7 billion in 2020, Ford should have core business here that is in the zone of around $10.5 billion of EBIT. What we've seen, however, is a company that did $6.4 billion in 2019. So the simple math is that there may be a $4 billion problem here, but there may also be a $4 billion opportunity here. The good news for us is that we have access to the person who's been tasked to fix it. I've known Jim Farley for almost 20 years now, and I view him as one of the most thoughtful and one of the most lucid executives in this industry. So we're very pleased to welcome him here. Before I invite him on to the stage, let me just summarize a few of the points that we think investors, you guys, really want to see. This is more of a message to Ford than a message to you. The points are, first of all, we're hoping that Ford provides a candid assessment about the status of their turnaround and more transparency into why they expect only nominal improvement this year. And number two, and more importantly, if these problems are fixable, talk to us about why, how and the magnitude of the opportunity, how soon and what we should be looking for to build confidence in that. And with that, I'm going to pass it along to Jim.

Thank you. Good morning, everyone. That's usually like a 2-way thing.

Good morning.

Looking for some feedback there. Okay. I know it's early, I know it's early. But despite all of our challenges in the industry and at Ford, it's good to start the day with a smile, okay? Thank you, Rod. Rod is -- I would have the same list of complimentary things to say about Rod. It's a real honor to be with you, and the timing is pretty good. I'm very honored to serve as the COO for Ford. It's kind of a different company for me. My grandfather started in 1913. And I spent 20 years at Toyota, but yes, my whole family owes everything to Ford. So it's a really huge and humbling honor to serve the company at this time. All of you know theme of the conference is about disruption. I had the opportunity for about 8 months to step aside from the day-to-day auto business, build my contacts in the technology companies and really view our industry from a distance. And I have to say that transformation -- sorry, the disruption is in full swing at the consumer level. All you have to do is look at the TNC and micro-mobility miles and trips per day, and that's a great signal for people making different decisions with their pocketbook on how they get around. And so Ford's transformation is really a double transformation. It's a transformation, as Rod said, about our core business to get back to that profitable business that we owe our shareholders, but it's also an equally exciting transformation on new opportunities that are not on Rod's page. And so I want to be really clear. Go to the next slide. I got this job on the 7th of February, got my team together immediately, and we came up with a very simple frame of the work we need to do, which is a concrete plan that every employee and stakeholder can measure us against. And in that plan, we have to fix a number of things. You can see the list. We need to accelerate our work on a few things, and we need to have a more compelling growth story and plan. We have a great near-term growth plan with some new products that we'll talk about, but that should be just the beginning of our growth plan. So I'd like to spend more time, especially given the intro, on the fix part. So let's talk about that. My team was really clear. The 4 things that we need to fix to deliver on our potential this year and next year, especially with the new products that are coming in North America and China, is we need to lower our warranty spending. We spend about $5 billion. It's up $1.5 billion. Our quality is actually improving. If you look at long-term J.D. Power, 2017, I think we're the fifth brand in the U.S. industry now. Our short-term quality has been improving for several years. It's not where we want it to be, but our warranty spending is a big opportunity for us. And it's one of the big uncertainties that we have to risk-adjust, Rod, in our guidance. This is not on your chart. We have a very concrete plan now to work the warranty opportunity. And it's not just the numbers, it's actually how we work. And it's not depending on new capabilities like connectivity, which will be enormously important for us on warranty spending. It's actually good old-fashioned problem resolution quickly. And there are about 4 or 5 big areas where we're focusing. Number two is launch. For us to get to the opportunity that Rod mentioned, we have to get our launches right. And this is not just about the Explorer launch. We have literally more than 10 global, enormously important launches that will drive our business results this year and next, and they have to land well. And it's not just the industrial launch. It's the demand creation. Now back in '08, we used all of our ONE Ford products to rejuvenate our brand. Yes, we didn't take the money, but it was more than that, quality, green, safe and smart. We have the exact same opportunity to rejuvenate the Ford brand with these launches. So it's about demand creation as well. The third thing is cost. Especially interested in our industrial manufacturing cost, our material cost and our logistics cost. We have dedicated teams now working on each of those 3 areas. Material cost is especially important because our average price now is approaching $40,000 in the U.S. We are launching really nice and expensive product. We have a huge opportunity on material cost in North America. In sales and marketing, improving the brands. Ford is an iconic company even outside of the U.S. When you rejuvenate the product, you have a once-in-a-decade chance to improve the favorability of the brand, and that will drive revenue for us. And there are a lot of new tactics, like reservation system we're using on Mach-E. That really can help us a lot. Reservation system, the genius of that is not knowing -- not getting -- measuring the demand creation before you launch. The genius is for the industrial system. You know exactly what you have to build. It derisks the launches. The second area I want to touch on quickly is connectivity. We've invested a lot. And you can see what connectivity has done for companies like Tesla. Tesla scales, what, about 0.5 million units. We've upgraded electrical architecture and have a high-speed modem in the F-150 we'll launch later this year. We sell 600,000-plus F-150s. Can you imagine the value creation by using that data to catch quality issues quicker, to do reductive design on actually how people use our DAT safety and security systems? So the internal value creation, we think, is the #1 opportunity to monetize our investment in connectivity, but we have to accelerate our work as a team. It's a completely new muscle. From data formatting to getting self-serve tools in engineering's hands, so they can de-content vehicles or catch quality problems in hours instead of months, you really have to wire up the company differently. So connectivity, internal value creation is a big area where I will -- we will accelerate the company quickly. The second area is consumer experience. We spend billions and billions discounting our product and promoting it. Creating customer experiences that you don't charge for that are based on connectivity is a very different marketing model that's much more powerful. And building out loyalty circle, especially with our commercial customers, really will use that connected data to run their business. It's a tremendous opportunity that we need to accelerate at Ford. And yes, we have Ford Commercial Solutions, telematics business. We're just starting now. We're selling data to some of the rental car companies on fuel level. There's a monetized data business out there that is starting to emerge at Ford, but I would say the first 2 are the most important for our investors and our financial performance. I wanted to talk about what I consider the one thing that makes Ford different, and that is what Rod touched on, our global prominence as a commercial vehicle brand. It's very natural for us. We have excellence not just in the U.S. but around the world on commercial vehicles. You can see the growth rates over the last couple of years. They're far in excess of the market. And frankly, our products didn't change much during that period. The way customers buy the brand and see Ford is different. And to me, this is one of the single most marquee execution issues for us as a company and biggest growth areas as a company. As these customers, for example, electrify, what would Ford's strategy be? We've had 20%, 30% growth in Western Europe and the U.S. in our commercial business the last couple of years. And if you go to the next slide, I want to really tell you about how we're thinking of treating the commercial vehicle business differently at Ford and accelerating that work this year. And I'll just use the example of a van. Yes, we have great vans. Customers make that decision based on cost of ownership, upfitting capability, all those things. But what we haven't added is the digital services, the in-person service like 24/7 maintenance across the country in Western Europe, physical distribution, repairability of the vehicle 24/7 to eliminate any uptime -- downtime for our customers and ultimately, the transition to electrification for these customers. For me, this is the signature execution opportunity for Ford and growth opportunity for Ford in the coming years. We can go into that in more detail. I'll give you an example. We won last year International Van of the Year in the U.K. So what's a small award, right? It was for our PHEV Transit. Okay. So it didn't change, the product didn't change. Why did it win International Van of the Year? Because we electrified Transit, and we used the electrical architecture and the modem to turn on and off pure electric in the City of London, so that our customers could save thousands and thousands on their cost of operating the vehicle. By combining electrification and connectivity, we were able to really differentiate ourselves in the market. And we won International Van of the Year not because of the product but because of the data. This is the kind of opportunity that really presents itself now that we've never had as a brand, but it requires investment and new capabilities within the company. I did want to talk about the grow area because, beyond commercial, our electrification strategy at Ford is different. We're electrifying performance in large SUVS as well as our commercial lineup. And we're really excited about this transition as a company. I'm sure glad we bet on the Mach-E and not in the center of the market. The response has been overwhelming, frankly. And I think we're really well positioned especially in the electrification transition for commercial customers very well at the company. We'll have lots of choices between the F-150 and the Transit pure electric, and we're launching more upgraded electrical architectures of those vehicles, plus high-speed connectivity and a whole services business on top of it. Last thing I want to talk about quickly in the last minute or so I have is AV. I think AV is quite important. Our bet is a bit different. And all I would say is the ground operations in the city and the customer-facing business is the most important. Our approach is partnering, not to spin off a customer-facing business on our own. On the global redesign, all I would say is we're making good progress in Europe, China, South America and our smaller markets. I would say the 2 signature bets for us is the profit opportunity in North America in the next 2 years. If you want to talk about Ford's financial performance, it's all about North America and the recovery of China as well as the bigger strategic bet with Mahindra, not just on India but for export and emerging and mature markets. We have a very interesting partnering strategy, I think you're well aware of that, from Rivian. You heard from R.J., I think, yesterday. Mahindra, we're going to JV our business in India. Our entry product in the U.S., our most important market, is built in India. Customers love it. Quality is great. It's a profitable product for us. Just imagine more of those. So we have a great opportunity with Mahindra. But I guess what's not on the page, which is really important to me, is our relationship with the technology companies. There's a -- we're not going to stop with these 3 partners. There are a lot more we can do with partners beyond these 3. Okay. With that, I'd like to end my presentation, and we'll go into Q&A. Thanks.

Great. So we've been doing this as sort of a fireside format. So if you don't mind, I will join you.

Sure.

So I'd like to just start with just kind of high level. If you could talk a little bit about what your top 3 priorities are for the next 60 days. If you could talk a little bit about just this experience over the past couple of years, what you've observed and how you -- what you would have done differently. And I'd also like to weave into that, during the -- you were involved in the turnaround during the financial crisis. And during certain times, it seemed like things were kind of bleak. And the company actually accomplished a lot in a shorter-than-expected time frame. And if you have anything you can share with us about the ability to make some real tangible changes and impact relatively near term, top 3 priorities.

Okay. Yes. So top 3 priorities, pretty clear. We need to immediately fix the reliability of our cost performance and especially our launches. Warranty costs, an opportunity certainly. Material costs, we talked about in North America. That's a drag on our business because we're launching very, very expensive products. So the first one is to really fix our execution capability around launches, warranty cost and delivery and revenue. I would say that's #1. The second would be we need to accelerate the commercial vehicle work in the near term, run it like a business, a P&L. It's a collection of nameplates today. That's a big transition for us as well as accelerate connectivity. That's kind of my second big priority. We're connecting the F-150 and the Mach-E, totally 2 different products. And Mach-E connectivity is basic requirement for charging, finding charging station, charging -- paying for the charging, those are basic requirements for a BEV. But the F-150, connecting it with an upgraded electric architecture and using that inside the company is a game changer for Ford because of the scale. So that would be our -- as a team, our second priority. The third one is, after we have passed all these great new launches, the whole family of Broncos and new F-150 and a whole new generation of SUVs in China and the U.S., great story, just like it was in '08, '09. We -- I believe there are new opportunities for growth that we haven't pursued. And some of those, we'll be able to talk about and some, we won't. I think to answer your last question next, when I see Ford at its best is in '08, coronavirus, Thai floods, earthquake in Japan. When there's a threat, the team comes together, decisions get made quickly at the right level. It's very natural. Everyone at Ford Motor Company knows the situation we're in.

So there is a sense of urgency in crisis within the organization.

Yes. And I would say I can see it on the face of my colleagues, and it takes me back to about 10 years ago. And it's too early for me to share with you how I would handicap the output of that, but I have seen the look before.

Some of the things that you're talking about fixing, things like warranty and launches, I mean we all know what the cycle is in this industry with products that you're launching now that have been in development for 3 or 4 years. Does that mean that it's just going to be really hard, that this is going to take a while to start to tackle $1.5 billion higher warranty or launch issues or the cost of content that's coming into new vehicles?

It's too early for me to handicap it. But certainly, we've risk-adjusted our guidance this year for some kind of handicapping or judging that. I would say the launches are just a tremendous opportunity. Some of it will take time, but the launches are here. They're here in China and the U.S. They're big. They're huge levers on our profitability, especially in North America, and it worked really well in 2010.

From an external perspective, just because we all deal with relatively sparse information, we make judgments on things that may or may not be accurate from where you sit within the company, but I want to just pass along and get your feedback on this. The sense of the investment community is that there are new problems coming to light within the organization and maybe the company hasn't gotten its arms around the magnitude of it, and I'll give you sort of a high-level explanation for why. You're talking about nominal earnings improvement this year. We know that, last year, the Explorer launch didn't go well. We know how many units you missed, and that could be almost $1 billion hit that wouldn't recur. We know that, last year, there was a $600 million UAW impact that won't recur. We see average transaction prices actually going up nicely for Ford in the U.S., more than anyone else actually right now. There's the 12,000 people head count reduction in Europe. There's one at the 3 plants in South America. There's a number that begins with a B on the upside, maybe more than 1 B. Give us a sense of what are the mitigating factors that you see coming in that could actually rival the tailwinds, so that the net improvement is sort of just nominal.

Yes. I expected that question. I was going to answer it with a very pity list of headwinds that you may or may not have considered, but I think I'm going to answer that question a little differently. The -- I think we're at the moment in time at Ford where delivery matters, where our performance in the market matters, our profitability. I don't want to give you a long list of mitigating factors to those onetimers, like the new launches of more expensive products or Ford Credit may not have the year that it did last year. I think the most important thing, Rod, is that for -- the Ford team needs to have a very concrete plan that we share with the investment community with milestones, so you know if we're on track or not. That transparency is actually a big commitment for me, and I think that will help a lot. Number two, the launches are late this year. And so our profit leverage is really centered around those launches. And right now, we want to be thoughtful in setting expectations. So the team spends time on the right things, which is to launch those products correctly. Is there opportunity? Absolutely. I am so confident and so excited to come in to work because I feel the same sense of opportunity at the company that I did 10 years ago when I joined because we have this great new lineup. But it is execution, and I can't handicap that right now because it's something you have to just go do.

Is it your sense that -- maybe just on that topic, are there new problems kind of coming to light? Or does -- do you have a pretty good scope of what the issues are?

No, I -- it was really interesting. I literally got my team together for 6 hours the second day I was appointed. And the list was like that and crystal clear and across all the functions, those 4 areas.

Was that list something that was visible for quite a while? Or did that list of issues sort of materialize over the course of maybe the back half? Or how does...

Yes. I would characterize it more of the latter. Again, for the last 8 months, I've been really focused on the future, so I can't say I'm in all the meetings. But the real delivery issues, the vulnerability, the execution issues, now, that's tricky stuff in a big company, the transparency around that. But I would say, certainly, in the last -- I mean we had a great first quarter last year. We had a great first quarter. The stock got a big bump. I wouldn't say it's great. It was a really good solid quarter, but we started to see these issues, warranty cost, the quality of the launches, the cost. As the transaction price has gone up, what are we doing? We did a great job on the people execution in North America last year, smart redesign. But it's really material cost, logistics cost. Those things became, I think, quite clear to the team in the second half of last year.

Right. It sounds like more variable costs than fixed costs.

You betcha.

Structural costs are under control. It's the warranty, material, logistics.

I think when you look around the world, I mean Europe, South America, people in the U.S., we've been after engineering costs for a while in the company for the last couple of years. It's really the cost of products, moving them around, the manufacturing costs. Those are the areas where we're really focused, where it's clear -- we have opportunity clear.