Ford Motor Company (F) Earnings Call Transcript & Summary

Well, good afternoon, and thank you all for joining us. I'm Philippe Houchois, the autos analyst at Jefferies, looking at European and U.S. car manufacturers. And we're very, very pleased today to have Kumar Galhotra, who is the President for the Americas and International Markets Group at Ford. What I propose is, Kumar, I think you have a few introductory slides and comments for maybe 10 minutes or so, and then we'll get into a few questions that I have prepared. So over to you, Kumar, thank you.

Great. Thank you very much, Philippe, and good afternoon, everybody. I would like to start with our value creation framework. If you look at the very bottom of that slide, our people, our culture and thrust are foundational to this framework. And as you move up that framework, on the left, you see fitness and on the right, you see metrics that measure that fitness. So at a high level, becoming fit means addressing underperforming parts of our business. And this is not something we do once in a while, this is something we do regularly as a business. So we announced a redesign in 2020 -- in 2018, and that's a great example of how fitness works. And we did that for Europe, for South America. And we have made great progress in both of those regions. In South America, we are moving to a very asset-light model, which included closing our São Bernardo facility last year. We're reducing fixed costs in that region and globally. In North America, it's a very different story because we didn't need to fundamentally redesign the business. We had some very high-performing areas in our portfolio already. That's because we have leading products, iconic products like the F-Series, the Mustang, the Explorer, Transit. And with all of those, as we looked at that portfolio, somewhere around 2017, 2/3 of North America revenue and 125% of the EBIT was being generated by those high-performing products, which obviously then means there were some really low-performing areas in the portfolio as well. So we acted very quickly and began transforming our portfolio. We transitioned away from sedans into trucks and SUVs. And a really good example of that is our Michigan assembly plant that used to make Focus and C-MAX. It now makes the Ranger, and soon, it will be building the iconic Bronco. Let's move up from that line from fitness and look at our winning portfolio. We are growing our electrified vehicle lineup, including all-electric and hybrid powertrains that are exactly what our customer needs, and it also helps us in our longer-term transition to an all-electric future. We're building all these vehicles on 5 flexible architectures, and the outcome of this is going to be a very young, fresh portfolio. The age of our showroom is going to go down by 40%, to a very competitive 3.1 years by 2023. Let's go to the next slide. Now let's look at how all these drivers are underpinned by certain key areas that we are looking at through the lens of fix, accelerate and grow. I'm going to go through -- give you some examples of the items that are highlighted in blue. We're fixing the execution of key aspects of our business. We are accelerating actions where there is even greater opportunity. And we're growing nascent businesses that hopefully, eventually, become significant businesses over time. So I'll start with the fix part. Next slide. We have really heightened our focus on launch execution. The vehicles on this page are world-class, and our execution of these vehicle programs needs to be world-class as well. And we know how to do this. The vast majority of launches are done exceptionally well. Escape and Super Duty are recent examples. Ranger is another example. We launched that on our Michigan assembly towards the end of 2018. We've got great processes. We've got great people. For example, earlier this year, we appointed Lisa Drake as Chief Operating Officer of North America, precisely to bring more focus to product launches, warranty cost reductions and cost improvements. There have been some delays to these products, but those -- these launches, but those are very much in line with the amount of time we had to shut down our plants because of COVID. Other than that, the launches are very much on track. Let's look at the next slide, where we talk about another fix element. So COVID has changed all of our lives. We have had to adapt to new ways of doing things, including this conference. And some of our customers and some of us have been -- need a hand to get through these very challenging times. So in that spirit, our sales and marketing team reacted very quickly to our customers and dealers by launching remote touchless sales and service initiatives. Over 90% of our dealers now offer remote services. And we've dramatically increased adoption of digital dealer tools like AutoFi that enable increased e-commerce activity. Our team also launched the Built to Lend A Hand campaign. So when we talk to our customers and try to understand how COVID was affecting them, the #1 word that came up was anxiety. They were anxious about making payments. So we launched a Build To Lend A Hand campaign that could help them with those payments. And we followed that up with Built For America. That has worked very well in generating demand. Now let's look at a couple of things that we're trying to accelerate. On the next slide, connectivity is one of them. Today, all of our vehicles in the U.S. are connected, and by the end of this year, 90% of our new vehicles globally will be connected. Now we're going to continue to invest in this capability, including our FordPass and Ford Commercial Solutions platform. So connectivity really unlocks tremendous possibilities, both for the company and for the customer. Internally, we can use connectivity to drive down material cost, to drive down, MP&L costs, also to reduce our warranty costs. And of course, our customers can enjoy expanded services over the life of their vehicle because we'll be able to update the vehicles over the air. So we're going to launch over-the-air updates with F-150, and that's going to be quickly followed by Mach-E and the rest of our portfolio. Another place we're trying to accelerate, on the next slide, please, is our presence in our commercial vehicles. We have a very strong lineup. It provides a foundation to accelerate and expand our business. We are going to add EV versions of our commercial vehicles to meet the growing demand. Within the next 24 months, we will have the fully electric version of the world's best-selling truck, the F-150, and a fully electric version of the best-selling cargo van, the Transit. And along with that will come connected services. And these connected services lower the cost of ownership and provide improved asset management for our fleet owners. These are things like growing our telematics capability, fleet management for fleet managers, fuel monitoring, fraud detection, Glovebox services, accident notification, first notice of loss. You can schedule service from the vehicle. You can schedule the service to go to the dealer, or you can schedule the service so that a mobile van can come to your -- wherever your fleet is to service your fleet. So we're going to grow all of those businesses. And F-150, that's the best-selling truck in America for the last 43 years, is going to maintain its leadership in innovation and provide better services for contractors, for small businesses. And our F-150 is the first vehicle with our new electrical architecture that allows us to read and write on key modules in the vehicle, and it can provide over-the-air updates for our customers. Next slide, please? I wanted to just briefly touch on our alliances. We recently finalized the terms of our alliance with Volkswagen, which is going to provide greater scale for both companies, much improved and efficient technology development. We are expecting strong global industry growth and customer demand for commercial vans and medium pickups over the next years. And those are the areas we're going to cooperate with VW. And we are going to use the Volkswagen MEB architecture for battery electric vehicles in Europe. We're also going to cooperate on autonomous vehicles through investment in Argo AI. Both companies are going to use the Argo AI self-driving system. So think of that as the brain that drives the vehicle. But that system will be used to support distinct and separate self-driving services both companies are developing. On the Mahindra side, that is just a fantastic collaboration because Mahindra has expertise in value-focused engineering and has a very successful operating model in emerging countries. We have technical expertise. We have global reach. We have access to future technologies. So a combination of that is a very potent recipe for success. We will get access to low-cost engineering for development in India and a tremendous partner to make just the right smart investments in our emerging markets. And lastly, we are also partnering to enhance the software capabilities of our next-generation fully networked vehicle architecture. We're going to develop a commercial digital platform that enhances the productivity and the capability for our commercial customers. And on that, there's a lot more to come. So with that, that's the end of my presentation, Philippe, and happy to take some questions.

Nice. Thank you very much, Kumar. A very, very succinct presentation of your priorities. Thank you very much. I would like to start with Bronco, of course, because everybody's talking about it, to understand. It's unusual to resuscitate away a franchise as big as Bronco was. I'm sure you have put a lot of thought into it. And the initial reaction, of course, "Oh, this is a Jeep fighter, and this is going to basically show Jeep how it's done." But I suppose, in your thinking, it goes much beyond just in response to Jeep Wrangler. And so I would love to have your thoughts about how you see -- how you're going to position the business, how you're going to reattract customers to the brand and also possibly, how much of a family we should expect to come out of -- under the Bronco name?

Yes. The Bronco is -- it is a passion product. And those are very important products in our industry. They're very successful products. It is an icon. And whenever you're reimagining an icon, it comes with a huge responsibility. You can't mess it up. So what makes the Bronco, Bronco? Let's break it down in a few areas. First and foremost, the visual language. It has to be -- it has to both have a visual, very clear visual identity as a Bronco. And then it should also bring out emotions that the original Bronco did for our customers back in the '60s. So how do you tap into that? You have to focus in on what were the key design cues that made the Bronco a Bronco, that from a distance, you instantly see and get that feeling. It is the flat grille. It is the round headlamps. It is the open-air feel. It is those flat panels. It's that small little corners at the front of the hood. So the team started with what are those key cues and how do we bring them into the modern Bronco? Now you can't just copy them because then it will just look like the old Bronco. There lies the challenge. How do you take all that design language and bring it into 2020? And I think the Bronco team, design team just did an amazing job of bringing a modern Bronco to life. And then once you get in the vehicle, there's a certain level of expectation of capability from our customers. These customers love the outdoors. They love going out on trails. So it must deliver on that capability. So again, the team is -- has worked hard to provide uncompromised capability that's required by this vehicle. Another aspect of Bronco is customization. People see that as a reflection of their own personalities, and you have to provide opportunities for customers to be able to make their Bronco their own. And there, the team came up with something really, really clever. Throughout the Bronco vehicle, you'll see certain fasteners. So the bolt head on the fastener has the Bronco logo on it. If a customer sees that, that is a clear signal that if you unscrew that fastener, you can replace whatever part that is being held by that fastener and personalize it. And there are several of those little elements in the Bronco. You have to provide accessories. We're going to launch the vehicle with over 200 accessories so that customers can truly make the vehicle their own. The Bronco comes with -- the original one was all about simplicity. So it needs to have the latest technology but not technology for the sake of technology, it must be purposeful. So we took all of those elements into account to start building this vehicle. And it was an easy thing to do because there are so many passionate enthusiasts around the country, hundreds of Bronco clubs. We formed a panel of enthusiasts from those Bronco clubs. We consulted with them throughout the development, and we consulted with the dealers; of course, a lot of input from the customers. So we're going to launch the 2-door and the 4-door, both in the Michigan assembly plant, and the Bronco Sport. In this process, we also discovered room for a smaller, more nimbler, lower-priced vehicle in this off-road category. So that will be the third in the family. And we'll see how it goes. We're very focused on launching these 3. And then if there's room, we'll think about expanding the family.

Right. Okay. I'm just wondering as well, I mean, clearly, you have big volume ambitions, and you pointed out the customization. I was just wondering how are you going to manage the fact that you need to produce cars, put them into dealerships, but you want them to be personalized as well. So how do you manage not having too much inventory? Are you going to be relying on dealers to sell this equipment? How do you strategize that in order to produce volume but also personalize the car?

So yes. That's a great question, Philippe. So what we're doing there is, first of all, understanding which one of the accessories the people want the most, so have a very clear view of that. And then our industrial engineering team thought through, based on the expected take rate of those accessories, which ones could be installed right on our assembly line, which is where it might be most efficient; which ones could be installed slightly just right outside the assembly line at a, what we call, a modification center, but it is on factory ground so in the same, I should say, on the same campus because it's more efficient to install them there; and thirdly, at our dealerships, where we would ship them there and the customers can actually see even more opportunities at the dealership and say, "Oh, I ordered this and this from the factory. But now I see this one, and I'd like to order this." So those will be stocked at our dealers. And like I said, there's over 200 of them. And we will fine-tune it as we go along based on demand. And this is not something we're doing just for launch. We're going to continue building that business well into the future.

Okay. Switching to profitability. Q2 was a very, very big positive surprise for all of us, for you maybe to some extent as well. I was just trying to -- one number that was probably less discussed but very interesting to me was that there was a $1.8 billion reduction in the fixed cost base of Ford, and I assume a big part of your -- of that number came from North America that you run. And I'm just trying to understand. So you've had for a few years now this target of 10% profitability in North America. It is something we've seen your peers achieve even in difficult market conditions. And so I'm just trying to understand what's your road map in terms of timing, and why 10%? I mean why can you not go above 10% as you significantly expand the mix as well?

Sure. So we're obviously, like any good business, we're looking at the entire income statement. And let's start with our net revenue or transaction prices or net revenue per vehicle. The team's done a tremendous job there, both in terms of product competence and what I would call, yield management, having a better view of exactly what the customers want. So if you see our assembly plant as a constant factory, what is the best way to get the most yield out of it? So that -- we do that much -- in a much more sophisticated manner now than we used to. Now let's get into the rest of the income statement. Material cost, by far the largest portion of the income statement in terms of percent of revenue. That had slowly crept up for us. So for the last couple of years, huge effort going through part by part, system by system to get the material cost as efficient as possible. And then, of course, all these structural costs. How can we get more efficient in marketing? How can we get more efficient in purchasing? And all of those are starting to pay dividends in the sector, and the business is getting healthier. The only thing that I would say, Philippe, that has kind of -- was obviously unexpected, and the impact of it is it is too early to assess its impact as COVID because during COVID, we had to shut down our factories. The demand slowed down in March very sharply in retail. Fortunately, it rebounded fairly quickly and is getting healthier. The fleet took a lot longer to recover, but it is recovering. So given the fact that the uncertainty of COVID and how, next year, the industry will perform, it's difficult for me to put a precise target of 10%. But I assure you, we're working on every element. And it is that type of work that yielded the structural cost reduction that you mentioned in the last quarter.

Right. Of course, we have to talk about electrification as well, a big topic, of course. Just one kind of understanding is it seems like you've put a bit of distance between yourself and Rivian in terms of electric pickups. It's -- kind of a question, is there anything that you cannot do on your own? I mean you're pretty advanced in terms of getting the F-150 Electric on the market. So I think what were you learning when you decided you probably need less of Rivian going forward? Or any views on this?

So let's start at the bigger picture for the total company. So we've been very public about the fact that we're going to invest about $11.5 billion on electrification. And 2 really important products for us because we're -- our presence in the commercial arena is so strong, F-150 and Transit. So within the next 24 months, we're going to bring an all-electric version of the F-150 to market and then also an all-electric version of Transit. Of that $11.5 billion investment in electrification, $500 million we invested in Rivian. And we're really excited about that partnership. So the point I'm making is Rivian is a very important part of our electrification, but it is a part of our overall electrification strategy. We will continue to work with Rivian on a vehicle that's based on Rivian's skateboard, and that's something -- we will share the details of that when it's -- when the project is a bit more mature.

Right. And in terms of -- there's -- I think most OEMs -- I think a few years ago, OEMs thought maybe batteries are a commodity. I think that thinking is gone, but we see different degrees of involvement of OEMs in making their own batteries. And you seem to be a bit more cautious or taking time to decide whether you should integrate that competence more aggressively or not. Why do you think that is? Do you think that it's an issue of cost or it's an issue of staying nimble for technology? What is your approach on this, please?

Yes. At the moment, and this is kind of early in the game and I'm sure the industry and the supply base is going to evolve their thinking on this as we move along. But if we look at our present volumes, the present projections, and we look at the amount of, for example, R&D and upfront investment we would do in the cell technology, and if you look at what our supplier partners are investing, our view is, and we've done a lot of research on this, that by not getting into it at this moment on our own, we are really not at any significant disadvantage or any disadvantage in terms of having access both to capacity as well as technology. So we can get that, and we can work with our supplier partners, we've worked very closely with them, and satisfy our electrification needs for now. Can that change in the future? Sure. If conditions change, we would obviously relook at it.

Right. That makes sense. And in terms -- again, on electrification, so you have that agreement with Volkswagen. You just went through it for a few minutes. Now I was just wondering, is there a rationale -- you're going to be using MEB in Europe. Does it make sense to use the MEB platform for Volkswagen for an offering in North America? And I was wondering also is -- to what extent are you letting Volkswagen get more market share in some critical markets like commercial vehicles or mid-range pickups through that cooperation? And how are you keeping the competition at bay in those areas?

So these are always very interesting conversations, right, because both businesses want to get more efficient, but at the same time, protect their key areas. So our cooperation with VW on the truck and of van is outside of North America, and that's based on various factors. In terms of making the decision on platform sharing for battery electric vehicles, so many factors go into it. A key factor is the capacity installation. If we install a large enough scale of a particular electrified platform, which we are going to in North America, the attraction of the partnership is less because they can meet that scale on their own. On the other hand, in Europe, where we're going to be building electric vehicles and so is VW, it is a different equation that comes into play that's more helpful to both companies in terms of sharing. So there's -- right now, there's no plan to use the VW platform in the U.S., but there certainly will be in Europe.

Okay. One last question for me, going back to short term a bit, Q3. So you gave us -- so your team gave us a guidance of a profitable Q3, product launches, expansive launches in Q4. I'm just wondering, it's always amazing to me how much you can continue to gain share in transaction prices in F-150. Am I wrong in assuming that for all the difficulties of COVID, effectively low inventory probably means that you will be producing maybe more F-150s in the third quarter than maybe you thought earlier in 2020 just because of retail inventory and making sure that customers continue to get the product? So is that part of the optimism in Q3 that, actually, your production schedule for F-150 is higher than it was entering 2020?

Well, yes, let me put it this way. Because our plants were down for nearly 60 days, we're going to build every F-150 we can as fast as we can for the rest of the year, very critical, very, very critical. But in terms of inventory for the customer, I think the team has just done a phenomenal job of managing that. We had very healthy levels of inventory going into the shutdown. Throughout the shutdown, the team did some extraordinary measures of managing the inventory that we had, getting the right trucks and SUVs to the right states and the right market areas as fast as we could and implementing new tools so that we could actually trade vehicles between dealers at a record pace, which we did. So we managed it throughout the country because the COVID didn't sweep the country at the same time. When it was out in the east, the demand in the south was quite healthy as well. When it was out in the west, in the central of the country, we were still doing well. So we managed the inventory very effectively during that. And then thanks to just an amazing industrial system and manufacturing team, they brought the plants back up. And on one day, we restarted something like 28 factories and then hit our stride. And within a few days, we were building 95-plus percent of our pre-COVID volume. So inventories have done well. And the customers have what they need. I think dealers have what they need for the most part. There are still certain vehicle lines that are getting a little thin. But right now, it's our commitment to build every truck and car and SUV that we can.

Okay. Thank you very much, Kumar. Very helpful. I think we're running out of time. Unless you have one more last comment you want to make, but otherwise, I look forward to the Q3 numbers.

I look forward to Q3 numbers as well. And thank you for having me, Philippe.

Thank you.

Cheers.

Thank you, Philippe. Take care.

Bye.