Ford Motor Company (F) Earnings Call Transcript & Summary

Hi, everybody. It's Rod Lache from the Wolfe auto team. Our next guest at the Wolfe Virtual Auto Conference really requires no introduction, but I'm going to give one anyway. I think if you asked any analyst that has followed the auto industry for a long time about Jim Farley, they would first tell you that there's -- there may not be a single executive out there that's got better insights into the automotive consumer. Jim gained that reputation, first at Toyota and as Head of their Lexus division during the 1990s and early 2000s. And then he cemented that reputation as Head of Marketing in Ford after he joined the company in 2007. But I'll tell you that people that have worked with Jim over the years, tell me 2 things. Number one is Jim is one of the most lucid executives out there, someone who is able to look at very complex problems, simplify them and come up with direct and thoughtful solutions. And I have to say that I've heard that again and again from people both inside and outside of the auto industry. And number two, there is no one out there that is more deeply and personally vested in the success of their business. At this point, I've had fortune to make both of those observations personally. In fact, we're just sharing an anecdote about it that really drove it home for me because in the past, we've had plenty of discussions about things that I disagreed with or agreed with. But I have to say that Jim always took those criticisms seriously. And it was very clear that he had very clear vision on what the company needs to do to fix those issues. So suffice it to say that we were very pleased to see Jim become CEO of Ford in October of last year. Clarity on what it's going to take to turn around the business and drive growth are always important. But at this point, it's absolutely critical, just given the disruption that the industry is facing. So Jim, I'd like to thank you for joining us, and I'm going to give you the floor for I bet, I think you wanted to make a few opening remarks.

Thank you, Rob. And thank you for your introduction. This is a very important forum for our industry, and it comes at a very important time for us at Ford. So thank you for the opportunity. Look, we've developed a compelling plan for the company. We're relentlessly working on our world-class team. And we've completely focused -- we're completely focused on turning around our automotive operations and also modernizing and even going as far as disrupting ourselves. So let me talk about those quickly. On fixing auto. First, we're committed to fixing our auto business. And I would say we're on a trajectory to get to that 8% long-term EBIT margin that we've been targeting finally. The building blocks are in place, including our global redesign, our new product portfolio in China and North America, especially, and our relentless focus on cost. In North America, our largest, most important business, we phased out unprofitable sedans. We developed really compelling new vehicles, like the Mach-E, both Broncos. There's actually more new products coming that you haven't seen even this year. We're also attacking costs. We are not competitive yet on cost. Warranty is a major opportunity, somewhere between $1 billion and $2 billion globally for the company. And obviously, North America has the largest chunk of that. In Europe and South America, where we have lost money for years and years, we put in place new business models that can deliver, I believe, a sustainable and healthy margins. Hopefully, we'll get into that. And in China, we've launched -- we're launching our refocused product lineup. We are now reigniting our sales. We're growing again in China in share and in unit volume, and our costs are continuing to go down. And we're obviously reassessing our business in India very, very carefully, given the new reality of the post-COVID world. And as well, freeing up resources for electrification and modernizing the company. Look, we're driving for stronger margins and healthy free cash flow for our business. That's going to give us flexibility to invest in future growth. In fact, we're confident enough in the underlying run rate of the business now that we're further accelerating our investments in growth. So let me talk a little bit quickly about growth, Rod and the participants. A simple way to think about Ford is we've been competing the same way for over 100 years. We design, manufacture, supply and integrate the supplier parts into a vehicle. We finance it, we market it and we sell parts for that vehicle. It's a transactional business. It's an episodic relationship with the customer, and it's been our core business for a century. And where we're moving is so exciting for me personally. We're still going to develop great products. Plus we're not going to really change our contract with the customer. And what does that mean? An always-on relationship with customers to grow and evolve over time, quicker and quicker loop using connectivity data, AI and new electric architectures and the digital products. In the case of BEV, where that feedback loop gets tighter and faster and faster, and we go to a loyalty model, essentially, from a conquest model. And the new model requires modernizing literally every part of our business. It's not just electric architectures of the vehicle. We have to modernize marketing to a loyalty model, reallocate our capital in our aftersales business to a loyalty model. There's so much to do and we're relentlessly and ruthlessly rooting out inefficiencies in our legacy systems. We're investing in new resources. We have about 5,000 direct software engineers. But more importantly, we have 15,000 people now in the company working in related fields of connectivity and data analytics. Yes, electrification is a significant part of our plan to modernize the company. It's an essential growth lever for us. We will be a leader, but we're going to be a leader in places where we have scale, where we know the customers really, really well, where Ford has an advantage. And case in point, I think, is we're the first company that's going to come out in North America with a full-size battery electric pickup truck and a full-size battery electric van. Some have one, some have the other, and I think we'll be among the first, if not the first, to market. And if you watch the coverage in Texas, we're not looking at electrification just for batteries empowering the vehicle. It's a mobile battery pack for our job sites. But more importantly, it's a transition to a loyalty model. And we have real scale in commercial. And we've talked a lot about this, but I think it's -- we haven't spent enough time talking about how we're going to use that scale to change this customer relationship. The addressable market we see in the near-term even for connected vehicles and services, telematics, selling data, maybe a fuel level data to rent-a-car or maybe telematics data for driver coaching for an owner-operator HVAC company and business productivity is $4 billion. It could be bigger. And right now, we just started. We have 120,000 -- actually, it's a 130,000 Ford Commercial Solutions subscribers today. The average revenue per customer is $10. So we have a lot of upside to get after that addressable market. I'm really proud of Ford Commercial Solutions. To me, that and the new quality loop using the error codes off the F-150 are really the proof point of our new contract with the customer and our new capability. We've invested heavily in these new electric architectures. We started with our highest-volume product, the F-150. The Mach-E and the Bronco will also have this new electric architecture. Obviously, it's OTA ability. That's fine, but really, the scale is tremendous. We're going to go from 1 million OTA-capable vehicles this year to 17 million by 2025. And 3 years later, it will be 32 million. So the scale -- and by the way, half, half of that 32 million is trucks and vans. In fact, we'll be sending incremental content updates to the new F-150 and the Mach-E in just about a month. And we're going to do that several times a year. And yes, we're addressing technical issues from the error codes we found off the vehicle that we're changing the vehicle's capability, but we're also going to update, over-the-air update, our first ADAS system, the driver assist system, it's our hands-free level 2 autonomy. That's going to be over-the-air update, too, to both vehicles soon. We even have a whole new trailer hitch assist experience coming OTA to the F-150 in the next couple of months. And that OTA capability is really one of the key capabilities for that quick feedback loop. So thanks again, Rod. Looking forward to getting into suggestions for Ford, and questions. We have a lot of work ahead of us. It's an enormous opportunity in transforming this great American company globally, and we're going to be a much stronger company as we make our way through this, but we are just beginning.

Thanks, Jim. And I do want to remind everybody that if you do have questions that you'd like for me to ask, there is a text box that you can enter any question, it'll just appear, those questions to me, and I'll ask them anonymously or try to weave them into the discussion with Jim today.

So there's a lot to unpack in what you just said. But I think maybe what I'd like to start with is just based on everything that you're working on right now, you're fixing the base business, getting it back to 8%, working on growth in electrification. You talked about $22 billion to be spent there. There's a big spend on AV and a large connected car opportunity. How are you defining success? So if you look out to 2025 at a high level, what would a successful outcome look like for you based on the base business and growth?

Great question. I think a couple of simple metrics. The first would be certainly getting our automotive business to that 8% run rate. That's what we're all working for. A lot to unpack there and to deliver, but that's a key marker. And the sooner we can do it, the more we can invest in growth. And next would be -- is to be a dominant player in the not just battery electric transition, but the digital transformation in the segments where we compete. So for me and my team, we want to look, in 2025, look up and say, okay, whether it's connected services, our addressable market, like I mentioned, or the scale of our business, the manufacturing scale, industrial scale, the amount of customer engagement that we're getting more of our fair share of that business in the digital -- I would call it, the new digital part of our business. I'd say the other big successful transition will be maybe the third big one is that by then, we should have stood up an AV business, a go-to-market piece, not just this technical capability or the vehicle integration, but actually a customer-facing service. And I would say that probably the biggest theme in all those changes from where we are today is services.

Okay. I'd like to just talk about some of these things individually. There's -- maybe just starting with EV. I just have to say that there's a lot of confusion externally about what Ford's EV competency really is and I know you've got the Mach-E in the market, and you've said that you're launching the E-Transit and the electric F-150. But at least externally, the impression that people have is that Ford is much more reliant on suppliers and partners. Magna for the original Focus electric, BorgWarner for the drivetrain on the Mach-E, or Volkswagen for EVs in Europe. Can you just talk a little bit more about the competency that Ford is developing in EV? What do you have in-house? What are the platforms that you're developing or drivelines or battery tech that you think are highly competitive?

Yes. Good question. Again, look, I think the key is we're in the first inning. Not going to see the future in anyone, but don't judge the company from the first day. So we already announced in-sourcing plans for e-motors and e-axis. In fact, the whole differential in e-motors that was at Van Dyke for the F-150 are all in-sourced now. We're making motors and stators for the first time. That's all in-house. We actually design our own inverter, but we're having a supplier build it for us because we think they have more capability. The $22 billion is just a number of platforms, the manufacturing changes, manufacturing facility changes. From a platform standpoint, I think we have some real know-how on pickup trucks and vans and 2- and 3-row utilities. So you can expect dedicated ground-up battery electric platforms that use all of our experience with customers in the pickup world, in the van world and in the 2- and 3-row crossover world. On power electronics, again, I think our know-how will be -- some will be in-sourced, like the design, and we'll probably transition more to in-source even in manufacturing, but beginning in the second inning here, inverters will be made by suppliers. The AI and ML capability of the company is really growing fast. It's of the reasons why we did the Google agreement because we have some know-how, but we need to accelerate that, especially in our industrial system. And so partnerships are going to be key for us, how do we make this e-mobility digital move. Well, I don't want people at Ford working on maps and navigation systems and content sharing. Google has a great platform to do that. I want our team co-creating and out creating our competitors for Bronco customers or commercial customers on top of those well-established, very efficient platforms to really differentiate us. And on -- I think on the platform side, think of it this way, for the segments that we're going after in BEV, like pickup trucks, vans and 2- and 3-row utilities, we're going to have our own platform. But when we don't have scale locally, and that's one of the big things we've learned with One Ford, is in Europe. If we don't have scale for a smaller than a 3-row utility, then we need to use someone else's efficient platform. And for battery electrics, platform sharing is a heck a lot easier. And it's really math. So using the MEB, converting our Cologne facility over to MEB, but creating a top hat and a digital experience on top of that, very efficient, to make it work for our brand is a smart move, not to be possessive or to have 6 different battery electric platforms and half of them being very small scale. We may use Chinese partner's battery electric platform that has great scale in China. But where we're really core, pickups, vans, 2- and 3-row large utilities that are -- dominate our U.S.-China business. We're going to do that ourselves. Is that clear?

It is. It sounds, though, that in some cases, they're not necessarily ground up -- correct me if I'm wrong, they're not necessarily ground up BEV platforms. They're adaptations of your pickup truck platform and others, is that correct? And maybe just you can speak to what is it after $22 billion of spending through 2025 on EV, what would you look at within Ford that reflects the benefits of that in terms of the vertical integration, the platforms or the volumes that you're aspiring towards?

Well, first of our platform strategy in many of those segments is very competitive data. So please do not judge us from the first execution. What we're working on ground up are ground up battery electric platforms, not multi-energy platforms, not an ICE platform with batteries in it. In some cases, we will do that. A battery electric Transit customer, we're getting inbounds now as a 50% player in the U.S., and we can come up with a great product for that. And it won't be just conversion of electric motors and batteries, we'll bring our PowerBoost technology for job site energy by directional charging, all those things, too. But what I'm talking about is separate from that, Rod. I'm talking about ground up battery electric optimized platforms in those segments. We will have, in the transition to that, plug-in products, hybrid and even ICE products that are as optimized as they can for BEV execution. But that wasn't my answer to your question.

Okay. Maybe just a different approach to this is just at a high level, how do you think about the financial implications of this? Clearly, your strategy is to pursue growth in the products that you have the strongest brand equity in. So F-150, Transit, hands down, Ford is the leader here. But the market will be competitive. And do you think that this is -- that these are -- that the EV versions of those products are going to be cost competitive with the benchmarks that we hear from other companies. Do you need to get that in order to maintain the kind of profitability that you're aspiring towards this 8% type of margin?

Well, absolutely. We have to get to $50, $80 per kilowatt hour. On the battery side, we have to have more efficient go-to-market strategies. That's a huge cost for us as an industry, going to a loyalty model will be much more cost effective. There's a bill material, there's a ton of work to do on the industrial system to get to cost levels. But I just want to kind of take the discussion up a little bit. We really see the transition to digital products, I'm resisting battery electric, as a real transformation of Ford, not because of motors and batteries, it's a service model. Our addressable market is going to change. And our ambition is not to compete for just contribution margin for vehicles and parts. Our ambition is much broader, as I said, and we want to be in the services business. And why do I say that? Well, we're at 50% of the commercial market in the U.S., we're about 15% in Europe. And on the high-end part of China, we're also dominant with Transit. And what we learned from that is that these vehicles are highly used, their charging requirements are different. They have different financing requirements as customers. They do depot charging. They want software products. They want affordable service with remote capability. It's a -- the service model is as big of a transition as the cost transition to battery electric. And I just want to emphasize that because, yes, at Ford, we need to be cost competitive, and we haven't in the ICE business. And we have to address that, absolutely. But the bigger change at Ford is that's necessary but not sufficient. For our plan at Ford to be sufficient, we want to be aggressive to get into the addressable market for services on top of a very cost-competitive product. And to do that, we are going to our scale customer relationships where we have the largest scale and most credibility with customers.

Let me ask you about that because that's a really interesting point that the population of software-defined, connected, upgradable vehicles that you sell, that population in the marketplace is about to explode because you're putting these capabilities on really high-volume products like F-150. And you commented to the 17 million out there by 2025. I just -- as you were talking, I just picked up my calculator and I said, okay, if 25% of those customers just pay $50 a month for something from Ford, that's another $2.5 billion of earnings that we don't see today in this company. It really -- it does move the needle even for a company of Ford's size. Can you just speak to that? Is that -- are you building headroom in your vehicles in order to provide features and upgrades that down the road for vehicles that you're producing today, down the road, you're going to be charging for certain things that add value that people are going to be willing to pay some nominal amount of money on a recurring basis for?

And we're starting now. Absolutely. That's how we design the F series. It's hundreds and hundreds and hundreds of thousands of units of scale. And now we're over there updating our highway ADAS system or a trailer tow hitch feature. And customers love those, and they're willing to pay handsomely. And when we bring the battery to the job site for our commercial customers, there's even more possibilities. But I wouldn't stop there. I would think about the physical services, too, from charging to repair and upgrade. One of the commercial -- being the commercial leader, you see a lot of things. A lot of people bought commercial ICE products because the government required them to upgrade because of emissions. With BEVs, that's all out the window. These vehicles could last a long, long time. And it's not just the digital services, although that is the stickiness, the glue and the relationship with the customer. There's a lot of physical services, financing products that we don't offer today. If you look at our financing penetration for commercial, it's half of what we are in retail. Those customers want to finance their chargers. They want to finance the real estate. They want to even finance the vehicle more than we do today. So yes. The digital piece is the one we're focused on now, and that's what we're learning. And I would say that the big gating feature on how fast we move there is not the technology. It's the company's capability. I have watched Ford Motor Company digest these error codes and figure out what's wrong or right with the F series and literally days versus months in the old system, and it is a new capability. And for me as a leader, I spend more time on the capability than on the technical investment because I believe that's the real change that's required.

So it sounds like in addition to additional revenue from services, I presume you're looking at other things like insurance using telematics data and a variety of other growth opportunities. There's a big opportunity in warranty and cost as well. Any sort of...

Material. Build material. We put a lot of stuff in our vehicles, and we have no idea how people use them. Now we know how they're using them. And so we can take content out that people didn't pay for. And -- but we have the cost in the vehicle, lots of opportunities we're finding on build material, especially.

So I'm a finance guy and a lot of people are listening in that are financially oriented people. We're just trying to put pen to paper on what does this look like? As you look out to 2025, you mentioned, I think, a $4 billion TAM. What incrementally -- if you were to say aspirationally, this is what we're trying to shoot for. Just from having connected cars between services and reduction in costs, is there some kind of high-level goal that you can speak to?

It's big. I hate to be so crass, but well, our experience today, we have 130,000 subscribers to Ford Commercial Solutions. I don't think anyone ever even knew that Ford had a software data telematics business. But we do. And we make about $10 per person, and we just started, it's like a year old or something. And it's growing like 20% or 30% a quarter. It's exploding. I don't know how to answer your question because we have a lot of work to do, and I'm excited to get to our investment, our session with all the stakeholders to kind of lay out the whole picture. I don't -- this is probably not the best venue to tell the whole story. But I think the addressable market is huge, and we know these customers really well. And we already started down the journey. And what we're seeing already is very encouraging. Not putting a lot of resources into it. We have 130,000 people that's growing quickly, subscribers that pay Ford every month for the data. Some of it, they just pay for data. The larger fleets, the Ford's real strength in commercial and why we do so well around the world is medium and small business. And those people are so underserved. If I were to take you on a ride along with our -- each of our Transits and our Super Duties, those people are running their business on sticky notes. They're very underserved. So they have a tremendous -- we have a tremendous upside for $10. I don't know how big it's going to be. That will be gated, as I said, by the company's capability, not the technology.

I want to maybe shift gears a little bit because I've gotten a number of questions about just new entrants coming into this industry. And I think everybody on this call appreciates the strength that Ford has commercially. And the strength that Ford has in a lot of consumer markets with brands that are iconic. But there's a lot of capital being raised right now by new entrants in the industry, at least $40 billion, more than that at this point over the past year or so. Does Ford's strategy have to change to accommodate some of the things that those new entrants are bringing to the table? One of the arguments, just in terms of distribution, is that there's an advantage to being able to sell directly because dealers cleave off 5 to 10 points of margin. It's a big number when a good company in this industry does 8% margin. So is that something that Ford can address?

Well, first of all, the answer to your question is there are absolutely things that Ford has to change. And as a CEO of Ford, the thing I think about mostly is talent. To attract the talent Ford needs to build this service capability and transition to a loyalty model is going to take resources, upside for those people and a clear mission. I mean, people come to Ford because they believe in the mission, but it's more than that. So I do think -- I would start with talent actually more than the distribution system. As far as how we'll work through that, we've -- I really believe that the disruption -- sorry, the modernization of our industry with these digital products that Tesla's led, now a lot more competition, a lot of new startups, as you said, coming in, really started on the retail side. And the retail side is a very different business model than commercial. And I would say most people do not know how different Ford's commercial model is. Our commercial dealers, I don't think anyone's ever asked me to visit one. We have 700 in the U.S., we have hundreds of Transit centers in Europe. They're in the low-cost rent district of any commercial in city. They have a totally different model. It's a multi-make service model, and these vehicles get highly used, and they wear out, and someone has to fix them. And body builders are incredibly important for commercial customers. It's different than retail. If you don't have a plumber, electrician build-out for the inside of your van, you're not going to sell to plumbers and electricians or florists or HVAC people. So body builders and our strength and bailment policies and deep technical relationship we have with the body builders, so they have access to our vehicles and can be ready when we launch them with and continually improve the build-out of those custom build vehicles, is super critical for commercial. So I would say, look, the commercial world, Ford -- there's a reason why Ford does really well because we built a whole ecosystem including physical repair and customization of the vehicle at scale that really no one else has. And I believe it's not so simple to do that digitally. But there are other areas where we absolutely need to change. And to me, the biggest change is to go from an episodic conquest model where we allocate advertising dollars, incentive dollars, renewal, trade out money for moving people in our product to changing the resources to an always on deep relationship with the customer using digital tools, I think, is the biggest change. And so that is a direct model. You're going to do business with your customers every day. And that's why the charging relationship is super important because they charge every day in the case of a BEV. You want that ecosystem to be super tight so that you know more and you could do more for the customer. Sorry, it's a general answer to your very specific question, but I hope it gives you a flavor for how we look at our competitiveness. We have to change, but we can't throw everything out.

Jim, just to be clear, you're not saying that you're going to get into the vehicle charging business. You're saying that it's just the connectivity within the vehicle and the platform is something that's going to interact with that ecosystem? Or did I -- can you just clarify what you mean by that?