Ford Motor Company (F) Earnings Call Transcript & Summary

Good afternoon, and I apologize for the delays and technical issues switching over from GM through their feed before. Very pleased, I'll dive right in, to have with us Kumar Galhotra, President of Americas IMG. He's responsible for the P&L of the Americas, parts of international, along with a newly established commercial vehicle business unit for the U.S. and Canada. He reported -- he reports directly to CEO, Jim Farley and has a track record, including VP for Product Development, APAC; VP, Engineering; VP, Lincoln; and Chief Marketing Officer and President of North America. I'm going to turn it over to Kumar, who has, I think, a couple of slides, and then we have a whole bunch of questions.

Thanks a lot, Brian, and thanks for having us. Today, I'm going to give a quick update on our launches, how they're going in North America, since we have a very important launch here, and also focus on the opportunity for growth in our commercial vehicle business. We are creating a Ford that grows profitably, generates free cash flow, and it's all led by our automotive business. And we're going to grow in the right areas. We will expand our leading commercial vehicle business. So we already provide great vehicles for our customers, but we're also going to offer holistic ecosystem of digital productivity solutions, solutions that actually drive loyalty and recurring revenue streams for us. We're going to lead in the electrification where we have strengths and scale. For example, the all-electric version of the Transit, the F-150 and the Mustang. The F-150 BEV that's coming in '22 -- 2022 will be a true work truck. And we are also growing by incubating, scaling and integrating new businesses, some of which will, of course, be enabled by Argo AI's world-class self-driving system. We are allocating capital resources and talent to our strongest businesses and to developing must-have products, must-have products like the Bronco. [ Dave Later ] was a fireman for 34 years. He recently retired, sent us a lovely letter. For years, he operated that Bronco you see on the right. It's a 1977 Bronco firetruck known as Brush II. He said it was chosen for its size, wheel base, cargo capacity and great offer of capabilities. The Bronco was finally retired in October of 2019. That Bronco you see there served for 42 years. So we're bringing the same enthusiasm and commitment to our new products as we did 42 years ago for that Bronco, new products like our 2021 F-150, the Broncos Ford and the all-new, all-electric Mustang Mach-E. So throughout 2020, even during the industry-wide shutdown, we -- that happened because of COVID, we prepared for the high-quality launches of all these products. In fact, we used the unanticipated downtime to continue to validate launch preparations and, in case of F-150, a very methodical sell-down of our current model. I'm delighted to say all the launches are in great shape. All the F-150s are rolling off the line in Dearborn, and production has started in Kansas City. We're also starting -- we've also started building Mustang Mach-Es and Bronco Sports earlier this week. Over the years, we've launched many, many generations of F-Series. We know what the launch ramp-up curve should look like. We're taking very appropriate, conservative approach. We know that every truck must be released with exceptional quality, and we're doing everything in our product to make sure that, that happens. We're accelerating the use of connected vehicle technology and data for early diagnosis and resolution for our launch issues. I'll share a couple of examples. A Mach-E engineer was able to remotely diagnose a low-voltage battery issue, isolate the root cause to a specific fuse, recommend the repair, and he did all this without ever physically accessing the vehicle. Similarly, during the F-150 launch, the power running boards were having an issue on one of our prototypes. Again, the engineer was able to pull all that data remotely, replicate the failure and identify effects without ever touching the vehicle. These types of technologies obviously help both in speed and quality of execution for our launches, and happy to say all the launches are in good shape. I'm going to now share some things about our commercial vehicles. We are the commercial vehicle leader in the U.S. We have 45% market share of Class 1 through 7. We are building our strengths to expand our commercial vehicle business by introducing electric versions, our F-150 and the Transit. On top of that, we will add a suite of software services that drive loyalty and recurring revenues. The 2 largest addressable profit pools in commercial vehicle are electric commercial vans and the pickup. We estimate the global van battery electric industry will grow to 1.1 million units by 2030. That is a compounded annual growth rate of over 50%. We own work, and these electric vehicles will be true work vehicles, extremely capable with unique digital services, over-the-air capabilities. They'll improve the productivity and uptime for our commercial customers. We are also North America's commercial truck and van leader. The transition of fleet vehicles to 0 emissions, especially for the fast-growing last-mile delivery, is critical to achieve our carbon neutrality goal by 2050. We are ready to lead this charge, starting with the all-electric Transit, all-electric F-150. It's good for the planet, and it's good for our customers. Our electrification strategy plays to our strengths, pickups, vans, performance vehicles, utilities, segments where we are strong, segments where margins are good. The all-electric F-150 coming in 2022 is a perfect example of this strategy. Our F-Series vehicles have been best-selling vehicles for 43 years, and all-electric F-150 will be a great addition to that portfolio. We know these customers very, very well. We listen to them. We observe how they use their vehicles. For example, we observed that many of them bring a generator to their work site to power their tools. The generator is generally large and noisy, so we designed the powertrain for both our -- the vehicle that we're about to launch, the hybrid electric F-150 and, of course, the battery electric that's coming to allow our customers to power their tools directly from the truck. Let's talk about vans. We revealed the all-electric Ford E-Transit last week. It meets or exceeds the needs of our commercial customers, maximizes productivity and uptime and reduces cost of ownership. We're going to offer a range of configurations that get the job done: cargo van, chassis cab cutaways. We'll offer 3 roof heights and lengths in North America. One of the really important things for fleets is, because a lot of them do upfits, to be able to move their upfits from their Ice Transit to the E-Transit. They'll be able to do so seamlessly because we've got the same interior box. We also have access to a lot of telematics data for these customers. So we analyzed 45 million miles of data to understand their daily routes. The -- and we designed the E-Transit to suit these needs, while delivering a total cost of ownership that's much lower. E-Transit has a targeted estimated range of about 126 miles in the U.S. and 368 kilometers in Europe. This is very tailored for those planned routes that I talked about earlier. It will be highly connected, 4G/LTE embedded modem, connected/embedded navigation, our SYNC 4 system. You can precondition the vehicle while it's still plugged in, gets over-the-air updates, 12-inch touchscreen and access to -- this is really important, access to Ford Commercial Solutions. And besides doing all that, it also has great physical space, improved cab access, wider walk-through capability, uncompromised cargo capacity. So all that work is done by putting the customer at the center. We're always putting our customer at the center. We deliver choice, convenience, value for our customers through services that actually improve their productivity. Our engagement with our customers goes beyond the initial point of sale and last throughout the ownership cycle. And these long-term partnerships allow us to gain the insights that we need to design better products, services, experiences, which ultimately deliver more value for our customers. To Ford, the value is returned both directly through subscriptions and indirectly through loyalty and better performing vehicles. We can provide real-time data and insights to the fleet manager about their vehicle. We can provide them data on geolocation, vehicle pellet, driver behavior, connected data and insights from the vehicle that help those customers go with 2 core needs. First is the safety and productivity of their employees, and second is improved uptime and low cost of ownership. Connectivity also allows us to curate daily experiences for our customers. It creates value for them, builds customer engagement and loyalty. We want our customers in our ecosystem, where we offer services across the total ownership cycle. This is especially true for commercial vehicles where our connected services become integral part of their businesses, helping them get the work done with great uptime, improved efficiency, fleet management; creates additional revenue opportunities for us, revenue opportunities throughout the ownership cycle. So the value of our ecosystem goes far beyond the vehicle itself. It includes over 600 commercial vehicle center dealers, more than 2,000 EV-certified dealers. All of these ecosystem parts keep our customers moving and productive. This transformation comes down to leveraging our greatest strengths: the trust and scale we've built with these fleet customers worldwide. We're taking our commercial vehicle business to the next level, aided by decades of relationship with hundreds of operators and thousands of dealers. Most importantly, we're entering the services business in a very meaningful way, launching loyalty building services that our customers will love and can't live without. Brian, that is the end of my presentation, and I would love to take some questions.

I just had to get by video back open exchange. Am I on video now? Good. Just want to follow up on that commercial vehicles strategy. You talked about the electrification. I think one thing confusing, and we actually have Rivian up next, your -- who you invested in. They have a very big contract with Amazon. Others in the start-up space talk about contracts with UPS and others. So as you think about your electric CV strategy, to what extent -- is it going to be focused on last-mile delivery and very big fleets versus what might be -- when I think about historically, a lot of your van customers, 4, 5 vans at a plumber or 15 vans at a -- at some sort of home service thing? So just help us understand, are you giving up the fleet opportunity to these start-ups? Or do you see large fleet opportunities as well?

No, Brian. We're not giving up the -- that marketplace to the start-ups. That is an important part of that segment. It is a part of the segment that is growing. But there is a very large part that is not last-mile delivery, and we have great relationships with those customers, everything from utilities, construction, small business people. So we will -- since we have long-term relationships with them and have a very substantive market share in those areas, we will continue to serve them. But of course, we will also serve the customers that are in the last-mile delivery space.

And in terms of data and services opportunities, how will that relate or replace a lot of the existing fleet management solutions out there in the telematics marketplace?

So it comes down to a couple of things. We -- first of all, as I mentioned, because of our market leadership for so long and long-term relationship with our customers, we know those customers really well, and we know their needs really well. Secondly, nobody knows the vehicle better than us because it is designed by us, and we architect the data that's available. So we can offer a one-stop shop for those customers in multiple ways. Obviously, the vehicle, financing through Ford Credit and then services where we can offer anything from driver training, geofencing. What we discover as we work with them, a lot of medium-sized fleets have a full-time person managing their keys because they're not sure which driver is driving which vehicle. We can totally, through telematics, have the vehicles -- have the drivers sign in and be very clear on which driver is driving which people. So we have an entire suite of services that only we can uniquely provide because of both the knowledge of the vehicle and access to data as well as the knowledge of our customers.

Okay. Let's move over to the electric F-150, and then I want to have a little time at the end for the core business. You've increased the production plans by the electric F-150 by 50%. Do the consumers or the fleet customers -- can you confirm, is this more of a fleet vehicle, know the pricing yet? And what gives you confidence in increasing the production plans?

So yes, thanks for that question, Brian, because after we announced that vehicle to be built at our iconic Rouge facility in Dearborn, the response was very, very positive from customers and from press. We have not shared pricing on that vehicle because it's too early to do so. But we do -- we have tested price elasticity with multiple customers, so we've shared with them what would be the appropriate pricing for their particular business. The response from all sectors was very, very positive, both fleet users as well as personal-use users. So based on their response, we started working on increasing the capacity immediately, and we had originally announced about 300 new jobs at that factory. We've announced since then that to meet the higher demand and increased capacity, we will be creating 200 more jobs that are incremental to the original job announcement.

Okay. And we just had GM talking about its plans to reduce battery cost 60%. Can you update us on your battery sourcing strategy? And also when do you see your all-in battery costs and the other components of electric vehicles reaching cost parity with internal combustion engine or narrowing the gaps significantly?

So battery production, let's talk about cell production. Obviously, we are assembling packs and batteries into the vehicle. The question is really about the cell. It is really a question of scale. It is very investment-intensive. And at a certain point, when the scale is large enough, we will absolutely relook at that decision. But for now, it makes more sense for us not to use our capital there because there's plenty of capacity available. That's one key decision point. Second is -- I should say, decision factor. The second is the technology itself is evolving. So if we don't invest large amounts of money today in lithium ion, it actually gives us more optionality later. So it's a combination of achieving scale, leaving optionality for the battery technology because it is evolving. And when we get to that scale, of course, we will relook at that decision.

Okay. And what's your strategy for in-sourcing versus outsourcing motors in power electronics? And particularly, you had an announcement to invest $550 million into the Van Dyke transmission plan. Does that imply that most of your -- all of your e-motors and E-Trans truck hauls will be made in-house at Ford?

Again, very similar to batteries, it depends on scale. We are starting to acquire a few components, as we announced, we're going to do at Sterling. But for the moment, it will be a combination of purchase and built in-house components.

Okay. In the time left, let's go back to the current business. You have a 10% North American EBIT margin target. You were certainly ahead of that for the last quarter. But does 10% -- does that imply that 10% is the upper limit? And kind of what gets us back to 10%?

I'd never said 10% is the upper limit. That's the target for now. As you mentioned, we had a great quarter, 12.5 point quarter in the third quarter, but third quarter was very unique. The SAAR was higher than any of us expected. Our manufacturing team did a phenomenal job of keeping the factories running, so that we have much higher wholesales than expected. And the teams have been working on all parts of the income statement, reducing material cost as well as the structural cost. A combination of all that provided a great quarter. 10% is not the upper limit, but 12.5 is also not the run rate. So we are striving to get to that 10% at a sustainable level as quickly as possible.