Ford Motor Company (F) Earnings Call Transcript & Summary

Good morning, everyone. I'm Joe Spak, lead auto analyst here at RBC Capital Markets. Very pleased to have with us today, Ford Motor Company. From Ford, we have Lisa Drake. She's the COO of North America, a newly created role, where she's focused on returning North America back to the 10% margin. We're also joined by Lynn Antipas Tyson, Executive Director of Investor Relations. Lisa, I think you have some opening comments and a brief presentation. So we'll go through that, and we'll head into Q&A. I highly encourage investors on the line today to participate. And you can ask a question in the Q&A box, and we'll ask those questions or weave it into the conversation. And with that, Lisa, thanks for joining us today.

Great. Thank you, Joe. So I wanted to start with first slide, if we could advance that please, which is our value creation framework, because it's the foundation of everything we do at Ford. And I wanted to highlight a few examples of this framework in action. First, at a high level, when we say we are becoming fit, it means that we're addressing the underperforming parts of our business. And this isn't a one-and-done exercise. We will be at this for quite some time. And it's a perpetual undertaking across all the teams throughout our company to continually improve our fitness. And some great examples of this include our decision to exit the traditional sedan silhouettes in North America at our Michigan assembly plant, which is right here down from Dearborn; for example, the Bronco and the Ranger are replacing the focus In the C-MAX. And with overwhelming reception we've had for the new Bronco, it's evident that this will be a very powerful transformation for us in North America. To deliver quickly on a winning portfolio, we've also reduced our flexible architectures down to five, and that will help us drive speed and efficiency in our product development process and essentially will bring newer products faster to the market. And in the U.S., we're targeting to reduce the age of our showroom by over 40% to a more competitive 3 years by 2023. So in the next slide, I want to talk a little bit in this presentation about Fix, Accelerate and Grow. And that's really what underpins the value creation drivers for us. First, fixing some of the gaps in execution that we have around few key aspects of our business, and that's around material, cost, quality and warranty; accelerating our actions where there's even greater opportunity; and then growing some of our nascent businesses that will become more significant over time. And I'll touch on the highlighted areas in the next few slides. So let's talk about North America. We see it as a growth business. Improvements in the overall North America business represent a huge opportunity for us to increase our margin. And as Joe mentioned, my role as the Chief Operating Officer of North America is to focus the organization on identifying and implementing fitness actions throughout the operational side of the business. That can be everything from efficiency of our product development and material cost work. It's our launch robustness, especially with the 4 launches coming up this year. And our ongoing quality and warranty performance. And we have the winning portfolio locked in. And now we need to sharpen our focus on the cost side to achieve the 10% margin. And as we continue to bring to market high demand products like the Mach-E, like the F-150 and Bronco, we'll not only continue to decrease the average age of our portfolio, which drives pricing and share, but then we'll use those new program opportunities to deliver our year-over-year cost improvement. And to put this in context, our business in North America generates roughly $100 billion of revenue per year. So a 10% margin is worth $10 billion of EBIT, which is a sizable opportunity for us compared to our recent performance. And again, that's why we think the North America business is a growth opportunity for us. So as I mentioned, this is a big launch year for us. And I can tell you that we've heightened our focus on launch execution. We've said previously that our major launches in North America have shifted to the fourth quarter, and that's in line with our COVID-related production disruption. Launches of the new F-150, the Mach-E and the Bronco Sport are already underway, and they remain on track. To be honest, the COVID shutdown provided us an opportunity for us to go even deeper on our readiness. And we took some time needed to button things up with our suppliers, and we came out more ready than before the pandemic hit. First, our Bronco Sport, which is being built in our Hermosillo assembly plant. In this plant, production of the prior sedan has balanced out, which allows us a singular focus on launching the new vehicle. And I'm pleased to say we've hit our job 1 on time, and now we're on track to start accelerating production of that model. Our 2 F-150 plant launches are staggered at Dearborn Truck and Kansas City assembly plant. And that allows us to learn from the first plant and implement any changes when we bring the second plant online. And those 2 plants are stalwarts of truck production for us. We're very excited about the launch status on F-150. And then as we learned from past launches, we'll also be staggering some of the feature rollout during the launches to reduce the complexity and enhance the focus on the high-quality early build. And it's really important to note that with the exception of the Mach-E, all of the vehicles we're launching this year are based off of existing platforms, which are in production today, and in some cases, have been for many years, and this further derisks the launch. And finally and most important, we're leveraging our connected vehicle data through the launch process to accelerate some of our testing and feedback, and I'll show you some examples of that in a few slides. If we can turn to quality on the next slide, there's 3 building blocks that underpin quality performance of a product. It's the design and the engineering of the product, it's the manufacturing and assembly and how well we build that design, and the quality of the parts coming from our supply base. And we've taken incremental actions in all 3 areas and not just for our new launches, but for our entire lineup. As part of the prior fitness changes, our product development team enhanced our focus on systems engineering under the leadership of Hau Thai-Tang to take us to the next level of design robustness and customer staff. Our manufacturing plants are implementing increased inspection and testing, and early indications are that these are holding even through the stress of COVID. And we've increased data transparency with our supply base. Again, it was accelerated by the need for alignment through the COVID shutdown and then the bring up of the supply base. But now we use it routinely to stay on top of performance and to cut issues off before they get to Ford and then, more importantly, to our customers. I'm very grateful to the supply base and how they've stepped up in how the work that we've done so well together through the industry has allowed us a quality restart. On the next slide, we'll talk a little bit about our material cost initiatives. And as I mentioned, in my role, my primary objective is to bring the skilled teams together to target material cost opportunities. These are things like eliminating spending on parts of the vehicle that matters the least to the customer experience. As an example, reducing costly hard buttons on items that are set once, like head restraint heights or adjustable pedal positions and moving to touch screen control; or delivering the same level of discernible rig noise or interior performance, but with far fewer steels and patches through more human-centered product decisions. And finally, we're really leveraging our analytical modeling and connected vehicle data to make sure we're investing in the features that customers want and being smart about how we engineer the vehicle. And I have a great example to share before we wrap up. On the next slide, almost without argument, material cost is one of the single largest levers that OEMs seeks to control. And we've been working on more efficient design solutions for several years as part of the modular catalog work where the most efficient designs are on a shelf, and then future programs use those building blocks as they build up their program content. And with the new launches, we're now starting to see the results of this as we bring our newer products to market with those best cost design. And this is the intersection of growth for us in North America. As we introduce these new products and the product refreshes, and we've lowered the age of our product showroom, we're simultaneously delivering continued cost savings, which results in the improved profitability we talked about. On the next slide, as I've mentioned, we're accelerating our efforts around leveraging our connected vehicles. Today, all of our new vehicles in the U.S. are connected to an embedded modem. And here are a couple of examples of how we're using connectivity inside of Ford. The first example is from the Mach-E, where an engineer, 30 miles away from the vehicle, was actually able to remotely diagnose low voltage battery issue, isolate the root cause to the exact fuse that was in the vehicle, and then recommend the repair, all without having to have access to the vehicle. And the second one is on our F-150 launch. We did have a power running board failure that was detected on of launch vehicle. And during COVID, when it was difficult to travel, the engineer was able to pull the vehicle data log and the error logs remotely through our connectivity with the F-150. They replicated the test -- the failure in a test vehicle, and they were able to identify a fix. So it's all about speed and quality of launch execution. And in the next slide is an example of how we've used connected data to reduce our material costs. Rather than surveying users about how often they lock or unlock their vehicle through a rear door, and that's our passive entry when you have the key FOB on you and the truck recognizes it and the door unlocks automatically, we actually just analyzed the connected vehicle data across multiple vehicle lines, and we found that our new F-150 that we're launching, the early development users weren't utilizing the feature on the rear door. So we removed the cost before the launch. And on a high-volume vehicle like F-150, this material cost reduction adds up to millions of dollars in savings. And we're pursuing many more opportunities like this passive rear entry example where we're listening with better fidelity to how customers are using their vehicles. The final slide is just some key takeaways. And hopefully, this has given you some insight into the improvements we're making in our North America business and our approach to delivering a 10% margin at the business unit. We have a refreshed portfolio, laser focus on the launch execution, which we are well into as we sit here in mid-September, and we have relentless focus on material costs and delivering what matters most to our customers while delivering material cost efficiencies around what matters least. We have a rising use of our investment in connectivity to help us with material costs, quality and launch. So with that, Joe, I'll turn it back over to you, and Lynn and I are happy to take any questions.

Thanks very much, Lisa. Maybe just to kick off the conversation, Ford recently announced that Jim Farley would take over as CEO in October. Can you just talk a little bit from your perspective as some of the differences between the 2 Jims and how do you expect Jim Farley to act on taking Ford forward with some of the initiatives you laid out in your presentation.

Yes. Thanks, Joe. I love both Jims. It's great. The transition has been very seamless so far. Jim Farley has started to move into his new position. But 1 of the things that Jim Farley did early on, even before the announcement, was the appointment of my position as the COO in North America. And he did that when he took over the Auto business back in February. And I really appreciate his focus on that North America business. I think it has great growth potential, and he understood that. And it goes back to that slide that I showed with those key levers, the profit from the portfolio freshness that we now have with those 3 incremental products, the Bronco, the Bronco Sport and Mach-E. Again, all white space for us, plus the brand-new F-150 this year. And when you couple that with the cost efficiencies that we're working on, that's where we feel like we'll really unlock the potential for the North America business. So with Jim Farley, I appreciated his focus right away on this sizable opportunities for us, and he's put a lot of time and energy into the resources that we need to go ahead and deliver that. So I'm really looking forward to his continued leadership as the CEO.

Thanks for that insight -- insider's insight. Maybe just to turn to the here and now. Can you just update us on the status of production globally here, or really North America, I guess, in third quarter. There's been off and on reports about some stuff going on in Mexico. I know that's maybe a little bit less relevant for you, but how has sort of the rebuild or the restart of production trended from the severe downtime in the second quarter?

Yes. It's -- I mean, this has been unprecedented, as you know. But it's amazing what this industry has been able to do, and we're very happy with our plant performance in North America. All of our plants are now at or near our pre-COVID levels of production. In fact, we're at 97% of pre-COVID levels. And when you think about what the industry in general, the supply base, the auto workers, the OEMs are going through to get to those levels, it's pretty fascinating. I have to say, our supplier partners are key, supercritical. And the good news is we've started to see a stabilization across the supply base now. Things aren't as sporadic as they were when we first started up back in May. But they're pretty fluid, as you can imagine. And we're monitoring everything very, very closely, especially in Mexico. Good improvements in Mexico we're seeing, but it's still a location that we should pay a lot of attention to.

Okay. And maybe to follow-on, obviously, an unprecedented situation in North America. Has going through this experience and as you begin to do some of your work and analysis as COO of North America, have your views on the breakeven levels in North America changed at all given this experience?

Yes. I think breakeven is a rather static measure. And what we've been doing, given how dynamic not only the volumes have been, but just our outlook on pricing ability, we've really just been looking at it from a stress test standpoint with multiple variables, including pricing. From a SAAR perspective, we were just under 13.5 million units through the first half of the year. And we do see this improving a bit in the second half. And the first half was the lower boundary of the full year. We stated that prior. And as I mentioned, we do expect some modest recovery in the second half.

Okay. You mentioned the F-150 launch and the Bronco launch, which is more white space, to your point. But on the F-150 launch, there's been some reports in the media that the units could be about $100,000 lower year-over-year. To us, that would seem to suggest about $1 billion profit hit. But maybe you could sort of help us a little bit more about some of the impact you expect here in the back half. And then has the slight delay in the F-150 changeover at all really sort of changed your view on when you could reach sort of more normalized levels of production?

Yes. Thanks, Joe. We haven't shared a volume estimate, of course. And there are a few really important things to note about this particular launch. First of all, it's a 2-plant staggered launch, which is a really big advantage for us. It's always an advantage more so in this space with COVID. It just allows us better ability and better predictability of the quality of the launch. One plant comes down to change over, and then the second plant continues to produce. And we use the input from the first plant into the second launch. The impact of production, that was planned and expected. It always is when you have to change over the assembly plants. So that's built into our plan for this year. And it really didn't change with the shift of the launch. We have a lot of carryover powertrain on F-150, and that helped us with our acceleration. You don't have as many bumps through the acceleration process, the more carryover the product it is. We don't have a new body shop like we had in prior years when we went aluminum. And Kentucky and Dearborn -- or sorry, Kansas City and Dearborn are some of our strongest plants. So I can only reiterate what we said in July, which was that F-150 impact to the changeover will more than offset the nonrecurrence of our 2019 UAW contract ratification, which was about $600 million. But we're not going to comment on volumes at this point. But as I stated, we feel confident that we're on track to the plan of our F-150 changeover.

Okay. Lisa, you mentioned sort of partly rollout is getting back to that 10% margin. And we're getting a bunch of inbound questions from investors and sort of some combination of 2021 potential and 10% margin. So I'll try to combine these 2. But as we sort of think about it, right, you look at 2019 North America margins, and there were a lot of one-off factors there including, as you mentioned, UAW, but also an Explorer launch that probably didn't go exactly to plan. You also had a warranty -- a bigger warranty headwind. And then 2020, we had a global pandemic. But as you start thinking about '21, you got the F-150 launch coming up. You got the Bronco and the Bronco Sport launch coming up. So is it -- I guess the question is, are there other factors we should think about for 2021? And is it possible to see a quarter or so of that 10% margin goal in '21, even if it's not for the full year?