Ford Motor Company (F) Earnings Call Transcript & Summary

Welcome and thank you for standing by. I would like to inform all participants that this conference call as well as the Q&A is being recorded and publicly webcast and will be publicly available. Parts of this conference call may also be reproduced in JPMorgan Research. If you have any objection, you may disconnect at this time. [Operator Instructions] This communication is provided for information purposes only. I would now like to turn the call over to Mr. Ryan Brinkman. Sir, you may begin.

Great. Thank you, operator. And yes, I'm Ryan Brinkman, JPMorgan's U.S. autos and auto parts analyst. Thank you for joining us for this special fireside chat with the leadership of Ford Motor Company. We're very happy to have here with us today, Cathy O'Callaghan, Ford's Chief Financial Officer of Automotive; as well as Hau Thai-Tang, Ford's Chief Product Platform and Operations Officer; and Lynn Antipas Tyson, Executive Director of Investor Relations. So Cathy, Hau and Lynn, thank you so much for doing this. We really appreciate it.

Good morning.

My pleasure.

Good morning. Okay. So let's start off with one of my famous multipart questions. It'd be about semiconductor shortage. I definitely want to spend most of the time on the call asking about strategic questions. But maybe you could -- first place to start is with a little bit of a deeper dive into this global semiconductor shortage situation than maybe there was time for on your last earnings call. So yes, a few questions around that. Firstly, I'm interested whether you think it is likely to impact various geographies or automakers differently. Some reports indicate the issue may be more widespread in China. So curious what you're seeing there. And secondly, it would be helpful to know if the chips are interchangeable at all between vehicles or if there's anything you can do to try to protect production of your most profitable or most important launch vehicles. Thirdly, there was some discussion on the call too, about supplier recoveries in the back half of the year. I'd love to know more about that if you think you're entitled to some sort of compensation, et cetera. And then lastly, the financial guidance for a $1.0 billion to $2.5 billion impact to full year results discussed on the call. It seems contingent upon -- like if a 10% to 20% impact to production in the first quarter were to spread and persist throughout the second quarter, what is your visibility into a similar impact in 2Q as in 1Q? Is a continuation throughout 2Q may be conservative? Based upon what you know now, how likely do you think it is that the second quarter could be similarly as impacted as the first quarter?

Okay. Thank you. It's Hau. I can get started and then maybe Cathy can add some points. We are seeing some variability between regions and OEMs, and it really comes down to the sourcing patterns of the individual companies and how much exposure they have to which Tier 1 suppliers. You guys may have heard that this is a cross-industry issue. But certainly, we are seeing that some Tier 1s have greater levels of exposure. So some of the variability that you're seeing across geographies and OEMs is really -- I think it can be accounted because of those sourcing differences. In terms of interchangeability, we do have some flexibility. So clearly, as we have a good understanding of where the constraints are, we are working to optimize our allocation across our more profitable vehicles. We're prioritizing where we have customer orders as well as keeping an eye on regulatory compliance considerations. So we are doing some of that. And that's happening both at the full module level. So for example, I can take one module that's constrained out of a lower profit vehicle line and potentially reuse it in a higher profit vehicle line. And then at the next level, we're looking at the microchip details and working with our Tier 1 suppliers to see if we can substitute microchips between modules that are constrained. And then the last kind of lever that we have is in some cases, depending on the module, we can build without and then update the vehicles later on when the supply is available. So a radio head unit would be an example of something that we can build without some modules like a powertrain module or a brake module. We don't have the ability to do that because we physically can't get the vehicles off the assembly line. In terms of supplier recoveries, clearly, we have commercial agreements with our suppliers that specify the average weekly production and max production that they have to protect to. We're working with all of our suppliers through the value chain, to understand where the constraints are. And then we'll have a discussion at the appropriate time on financial liability between all the parties. Your last comment -- question was really around what's the outlook for Q2. It's a very fluid situation, as we've mentioned. We know that through many channels of advocacy. We are seeing that the wafer manufacturers are increasing their allocation towards automotive and also adding in incremental capacity. Given the very long lead time in this particular commodity, we anticipate that we'll start to see some relief in the second quarter and then hopefully, give us some ability to recover in the back half. But it's still early days yet. So we have very good visibility through Q1, Q2. It's a bit more qualitative, directional that we expect to see some relief at this point in time.

Yes. And just to add on to what Hau has said is, given that this information is really fluid and we don't have great visibility beyond quarter 1, the information that we got from our supply base was supporting an assumption that we could lose between 10% to 20% of our planned production in the quarter. And so when we extrapolated that to the first half, we indicated last week that, that would impact adjusted EBIT by between $1 billion and $2.5 billion on that 10% to 20% scenario. And Ryan, that was net of some reasonable amount of cost recoveries that we could get as well as ability in the second half to recover some of the lost volume given the capacity actions that Hau mentioned.

Okay. Great. That's very helpful. Next up, it would be great to discuss maybe the recent trend in the outlook for North America operating margin. For the several years following the financial crisis of 2008, 2009, you averaged roughly 10% margin in North America, which was higher than arguably your closest peer. More recently, from roughly 2017 through 2019 prior to COVID, you averaged somewhat less than that, maybe about 7.5% or so, even as your peers improved their margin. And I realize there were some noncash costs that increased during that time, including pension and also higher D&A and assets that were previously subject to accelerated depreciation were replaced with new assets. And so maybe the change in underlying performance was somewhat less. Still though, there does seem to have been some deceleration there. On Jim Farley's first day as CEO, he forcefully reiterated Ford's target of returning to 10% margin in North America. So it's clear this is something that is important to management. Maybe you can just walk us through what contributed to the lower than targeted margin in recent years and then what the path is to getting to 10%. 4Q North America margin was better than expected but also noisy given the F-150 launch. But backing up just 1 quarter cognizant, you did print a 12.5% margin there in 3Q. So I'm not sure if maybe the path to 10% was somehow accelerated by coronavirus or maybe that was just a noisy quarter 2 and there's still more work to do. What are your thoughts?

Yes. Let me take that one, Ryan. Thank you. When I think about the levers that were discussed and really to get North America to 10%, there are a couple of things I'd point to. And first of all, as we highlighted the product portfolio, the decisions that we've made to transition our portfolio are really beginning to bear fruit. For example, we've already explained that converting our Michigan assembly plant and Hermosillo facility that used to build loss-making sedans to building Rangers, Bronco, Bronco Sport as well as the white space vehicle, will result in more than a $1.5 billion improvement in just those 2 plants compared to their running rates from prior periods. Of course, we just launched our F-150, and that launch went well in fourth quarter. It's obviously an incredibly strong product and that we think is going to continue to dominate this segment. And of course, we've just launched our Mustang Mach-E, which will be our first volume BEV and it's profitable. We're growing commercial vehicles, and we've got the new E-Transit coming later out this year, which will further build out what's already a really strong commercial vehicle business. That vehicle is going to have multiple wheelbase lengths, roof heights and use cases, and will really attract a very broad customer base. So we have a really strong product portfolio now. The other lever I'd point to is warranty. On a company basis, the warranty cost opportunity that we have in front of us is, I would say, about $1 billion to $2 billion. And obviously, North America is a big chunk of this. That opportunity, we're making really good progress in terms of the actions that we're taking to address warranty. And that opportunity will feather in over time according to our accounting processes. The team are really focused on addressing this, and there's a couple of areas that we're working on really around upfront design improvements, supply base and also in our manufacturing organization as well as now we have the benefit of our vehicles being connected. And that means that we can figure out vehicle issues much quicker than before, diagnose the issues quicker and also address them. And that will lead to overall customer -- improvement to the customer as well as ultimately our warranty expense. And the last thing I'd point to is really material costs, excluding commodities here from '16 to '20. When you look at that period, we've been adding in year-over-year material costs every year to the vehicles as we've been refreshing our product portfolio and improving the overall average age of the portfolio. And we expect, on a year-over-year basis, this trend to actually go into reverse. And starting 2021, we start to leverage the benefits of our modular catalogs and our flexible architecture. So overall, we've got good levers, and we think we're pulling all those levers right now. And I think that's why we are reiterating our 10% EBIT margin target for North America.

Okay. Helpful. Recently, we upgraded Ford shares from neutral to overweight. And a significant driving factor was what we saw as the strength of 4 new products, some of which you mentioned, but -- the F-150, the Bronco, the Bronco Sport and the Mustang Mach-E. So let's take a moment if we can to maybe discuss these products in a little bit more detail. I'd love your separate takes on the strategic, operational or financial considerations surrounding these models, starting with the F-150. So the F-150 is clearly your most important high-profit vehicle. What can you tell us about the status of the launch, the historical impact of F-150 launches on North America profitability, that is on volume and price and mix and how you think this vehicle will fare in the marketplace?

Yes. I can take that, Ryan. The F-150 is off to a great start as you and many of the listeners know that it was named Truck of the Year by the COTY journalists earlier this month, along with the Mach-E winning Utility of the Year. So that's huge validation of the product integrity. As Cathy mentioned, what's really significant for us, not only is this our highest volume and one of our more profitable products, it's really signaling our shift around changing the business model from a transaction model, where we're just selling you a vehicle and to now where we actually can have an ongoing relationship with the customer, leveraging the connectivity platform that's launching in these 2 new products. So in the F-150, we're able to really capitalize on that to respond to quality issues much faster. So Cathy mentioned $1 billion to $2 billion of annual opportunities on warranty costs. One of the things we can do is just being able to see issues as they're happening through the data that's coming off the vehicles, then cut them off much earlier to reduce the exposure in terms of the number of vehicles that are impacted, which is great for our customers in terms of customer satisfaction and Net Promoter Score, but it also is great for Ford in terms of reducing our warranty liability. We're finding that the teams, in many cases, are able to correct these issues through an over-the-air software update that's happening in the background, in many cases, without the customer being aware that we're doing it. So that's a huge, huge lever for us and an ongoing -- the ability then to create incremental value for the customer. So for example, on the F-150 and Mach-E, we've launched the vehicles with the hardware to do our next-generation driver-assist automated technology. We're calling it Active Drive Assist. It's a hands-free system that allows a customer to drive with their hands off but the eye is still on the road. And that's going to be launching later on this year as an over-the-air software update. The customers have the option of signing up to activate the system for $600 that gives them basically a subscription for 3 years. And then post that period, they can choose to renew and we would update the number of maps that are offered on there. So it's a great example of us shifting to a recurring revenue model, which I think is very significant in terms of our business. So yes, F-150 is off to a super start and the launch is going well. We've hit our ramp curve. Beyond the market acceptance from an industrialization standpoint, we've hit all of our volume requirements. And right now, if we just net out the temporary issue with the microchips, it's exactly as we had planned it in terms of our volume ramp-up.

Okay. That's great. I don't know if Cathy, you had any comments on the historical profitability impact of that vehicle and what to expect maybe there.

Obviously, we could be expecting it to be very strong. Obviously, F-150 is a critical part of our product portfolio and our profit base. And I just want to add to what Hau said. It's got off to a pretty strong start. We're building every vehicle that we can right now. The high series [ train on ] model year is accounting for a large chunk of the early sales mix. That's gone well so far, about 20.5% in our outgoing model. And our overall stock situation is pretty low right now. They'll be at the end of January. And transaction prices -- while, looking at the J.D. Power data, yesterday, transaction prices are very strong. So we're really pleased with the initial customer reaction as well as media reaction to the vehicle. So looking forward to this year.

Okay. That's helpful. And then just moving on to the Bronco, there were incredibly high expectations for the Bronco, given its illustrious history, the prices at which 50-year-old versions were transacting. And just all the anticipation in the magazines and on the fan forum, such as that, I'm guessing you probably felt a lot of pressure to live up to those expectations. And by all accounts, whether it be the response from the magazines or YouTube or as measured by the number of reservations, et cetera, it does look to be potentially a smash hit. How do you ensure that you follow through on the excitement? How do you view the launch? I did see the vehicle was delayed a little bit. Maybe you can provide some color there. And I know you don't typically talk about vehicle line profitability, but you have said some things about the profit improvement potential of the Ranger and Bronco combined compared to what passenger cars you previously built at that plant. Please, if you could just walk us through what are the various strategic and financial implications of this program.

Yes. I can talk to sort of the product elements, and then Cathy can comment on some of the financial implications she touched on earlier. So I would start by saying both the Bronco family of vehicles, Bronco as well as Bronco Sport and the Mustang Mach-E, implicit in there is Ford being very clear on doing a brand extension on our most iconic brands, so certainly Bronco and Mustang. But you're also seeing us doing it on things like the Raptor where we're extending it onto Ranger in addition to the F-150. So this is a very well-thought-through strategy for us. I think it's going to yield dividends in terms of the market reception. The product has been -- on Bronco, going back to Bronco, the demand has been exceptionally strong, as you highlighted. We're approaching 200,000 deposits for the product and the mix is quite high. So 60% of the deposits that we're getting are on the high end. So this would be in the Badlands and higher. And 65% are 4-doors versus the 2-door mix. So much richer mix than we had anticipated. Bronco Sport is in the marketplace today. Again, we've launched that on time hitting our volume curves, and it's been really well received. It's been a pleasant surprise by many people. Motor Trend did a back-to-back versus the Jeep Trailhawk and declared the Bronco Sport the winner. And it was also named the Detroit News Vehicle of the Year. So super excited about those products and again, the power of leveraging the brand. I don't know if Cathy wants to add anything around the financials other than -- I'll reiterate that Bronco, Bronco Sport and Mach-E are all incremental new products to our showroom that we don't have today, which is a huge tailwind.

Ryan, this is -- sorry, Cathy, just 1 second. You were -- we had the Sport on the lot when you did the Mach-E drive. What did you think about that?

I thought it looked great in person. I thought it looked a little Land Rover-esque, to be honest. I'd love to get a chance to drive one. I'm a Jeep Cherokee Trailhawk driver myself at the moment but maybe make a switch sometime soon.

Okay. Thanks, Ryan.

We'd take your order, Ryan. So just to sum up what Hau was saying, obviously, right, these 3 products are incremental to our portfolio. So obviously, we're thrilled about that. And as Hau indicated -- as I mentioned earlier on, when we basically converted our Michigan assembly plants and Hermosillo facilities from loss-making sedans to these much higher-end products, Ranger, Bronco, Bronco Sport and new white space vehicle, it's over $1.5 billion improvement versus those old products those plants used to produce and output. So obviously, we're very excited about that. And as Hau mentioned, these are high-end mixes that we're getting right now in terms of customer reservations as well as the accessories that we have. So I already commented that Mustang Mach-E is already profitable this year. So we're excited about what it's going to do in terms of the [ labor ] to get North America to 10%.

Okay. Great. And then just maybe just finish the conversation on products, a little bit more on the Mach-E. As Lynn mentioned, I was able to drive this vehicle recently. I wrote in a note that the experience felt more akin to driving a Porsche Macan than it did a Chevy Bolt or Nissan Leaf. So share with us what you can, please, about the early consumer or media response, whether you think it can serve as a halo vehicle for the Ford brand. And again, I think you don't typically talk too much about vehicle line profitability, but you have said some things about profitability, et cetera. Cathy, you just mentioned right now, already profitable. Maybe you could just talk about what that means. Is it an EBIT incremental or a gross margin basis? I'm not sure. And then also, whatever volume targets or capacity data that you are able to share, maybe you can revisit that, talk about export markets, including Norway maybe and then also the recent announcement about assembly in China.

Yes, Ryan. So the product has been really well received. It's our first true dedicated BEV product that comes off one of our 5 flexible architectures that Cathy highlighted earlier. And for us, it signals our intent in terms of really leading the electric revolution. So the Mustang brand certainly has helped us cut through the clutter because there's a lot of activity in this space. And then the early feedback from customers as well as the media has been just outstanding, including -- I heard the feedback from you through Lynn. It was named Utility of the Year, as I mentioned earlier, against some really stiff competition. And I just want to maybe -- we touched on this new electrical architecture and the over-the-air update capabilities. I just want to use this to showcase how we're working differently. So before we launched the vehicles, we had J.D. Power come in and evaluate the vehicle. They loved it, but they gave us some feedback around the sensor cluster and trying to make it more intuitive and easy to use at a glance. We were able to take that feedback and change the HMI on the fly and flash that into our preproduction vehicles. We heard some feedback from John McElroy, a well-respected journalist that under cold weather, the charging was taking too long. So we made a change to our algorithm to basically precondition the vehicle in cold weather. That's something that we're also updating over the air. And then some media feedback didn't like the brake modulation. And that's something that we can actually change the calibration through software, and we're doing a planned update for that as part of our -- one of the first gondolas that we're launching. So just signals a completely different way of working with the customers in terms of maximizing their experience so that their vehicle actually gets better over time rather than starts to depreciate. The -- we are exporting to Europe out of our Mexico plant. So the production there goes to North America as well as to Europe, including markets like Norway. And then as you mentioned, in China, we're localizing the production there. That's going to be very exciting because it allows us to maximize the cost structure of the landed cost in China. Initially, our planning assumptions around volumes were very conservative. And then we're looking over time to increase that capacity because the demand has been much stronger then we initially thought. So that's about it on the Mach-E. It's been really well received. And Cathy, I'll let you comment on profitability.

Yes. Thank you, Hau. Yes. We've always said coming out of the gate that we expect the Mustang Mach-E to be contribution margin positive. And we also expect it to be in a fully accounted sort of adjusted EBIT basis positive as well. So that's going to contribute to overall. As it's an incremental product, the portfolio is going to contribute to the overall return to the business.

Okay. Great. I'm a big fan of John McElroy's Autoline Detroit TV program. I think I've seen you on there before, Hau. And the investors on the call, too, should probably check that out, a lot of good insight. That's a good segue into electrification, this Mach-E discussion, just electrification generally, what your strategy is there. We talked about the Mach-E. You've also announced the E-Transit and an all-electric F-150. Where are we with those vehicles? And what's happening with Volkswagen and its MEB platform? There was some disclosure about additional EVs in your contract with Unifor too, the Canadian auto workers. Maybe you can tell us a little bit about that. And then also, in your earnings release this past quarter, there was this reference to doubling down on connected EVs with a $22 billion commitment through 2025, nearly twice what you'd previously committed. Maybe you're more limited in what you can say there, but it'd just be great if you can kind of tell us everything that you can about just what does that $22 billion buy you through 2025. How many models? What kind of models? What regions, et cetera? I'd love to hear more about your strategy generally.

Okay. Why don't I ask Cathy to start with a little bit more texture on the $22 billion, and then I can touch on some of the product-related questions that you asked initially.

Perfect. Thanks, Hau. So just to clarify, that $22 billion is for a combination of both R&D as well as CapEx and for the period 2016 through 2025. And when you think about that, that includes new dedicated BEV platforms as well as new top [ pads ] for our utility trucks and pickup. It does exclude any investments made directly by our joint venture partners, for example, Ford Otosan or CAS and it also excludes any vertical integration of our battery cells. And we can chat about that as well, what our vertical integration plans are, but there's more to come certainly in terms of battery cells. The other thing I just want to point out is that based on our strong balance sheet and our cash flow projections, we really think that we have financial -- sufficient financial flexibility here to actually accelerate our investments in BEV as we see this space developing, as we see customer needs evolving. So we have that opportunity as well.

Okay. And Hau, on the products?

Yes. So you touched on a couple of incremental products that are going to be coming online. Starting in Q4 of this year with the Transit battery electric vehicle, the E-Transit, we're calling it. And then -- so that's going to be launching in Q4 coming out of our Kansas City assembly plant. And then in Q1 of next year, it will be the F-150 BEV. So you can really look to us to build on the momentum of the Mach-E. These products will be on the new electrical architecture with the same connectivity and OTA capabilities. And then they really focus on unleashing improved productivity for our commercial customers, which we think is an area that really aligns to our strength, and it will allow us to differentiate the value that we provide to our customers. So yes, that's going on. And then you asked about the MEB. The way we're thinking about this is as the transition from ICE to battery electric vehicles play out, it's going to differ by region. And during this nascent period, scale and capital efficiency is going to be super important to get to the right cost structure, both fixed costs, including the engineering expense as well as getting to the right material cost. And in Europe, especially for the smaller, I'll call it, C-sized vehicles, which is very high-volume in that geographic market, and it differs than where we play in North America, for example, it was more -- much more efficient for us to leverage the scale of VW and their MEB architecture, both in terms of upfront engineering as well as material costs. So that's essentially the strategy we're using. And we believe we can still differentiate our products and services from VW and allow us to play to our strength in the marketplace.

Okay. And Cathy, you did walk us through the $22 billion investment in EVs. But maybe just a couple more questions probing around the financial aspect of electric vehicles, including -- is there any thought as to when EVs might have a similar all-in margin to internal combustion powered vehicles? And what are the challenges to profitability for EVS? And how do you plan to overcome those challenges? Is it just more about achieving economies of scale or technological progress with the passage of time? Do you need the JV with a battery company you discussed for cell manufacture? Or how do you just get to that point of making an attractive return on the $22 billion, et cetera?