Ford Motor Company (F) Earnings Call Transcript & Summary

Good morning, everyone. Very pleased to have with us an opportunity to reflect on the Ford second quarter '21 results in a fireside chat format. We're pleased to have with us John Lawler, Chief Financial Officer; Lisa Drake, Chief Operating Officer, North America; and on the line as well in audio is Lynn Tyson, Executive Director, Investor Relations. The format for this session will be a fireside chat around some of my prepared questions based on a lot of dialogue with you folks last week, but also welcome questions from the audience. If you have a question, just e-mail me at brian.a.johnson @barclays.com, and I will work it into the conversation.

Want to start with just the 2Q '21 results. And in particular, the walk from first half to second half. You had a list of things that were driving it to get second half adjusted EBIT lower about $3 billion to $4 billion in second half versus first half. The factors you cited included: commodities, $2 billion headwind; investment modernization, $1.5 billion headwind; Ford Credit, $1.5 billion headwind; nonrepeat of the gain on a private stake in Rivian, $0.9 billion; and warranty. I'm wondering, John, if you could even, in particular, talk about the investments in modernization as well as anything else on that list that you think based as well on your post-earnings dialogues with investors that you want to elaborate further on.

Sure. Good morning, Brian. Well, when we look at that half over half, we know that, as we said, we got a 30% sequential increase in volumes, so we've got to take the first half and increase it for the volumes and what comes along with that. We also netted against that what we saw to be the manufacturing costs that are going to have to go in as we ramp up production. And then as you said, when you walk through, we have the other headwinds that we're facing. Commodities on a year-over-year -- quarter-over-quarter basis, sorry, will be up, and that's because that's the way that our contracts are going to roll off through the second half of the year. We've got about 40% of our contracts fixed. They roll off sequentially throughout the year so we don't face a cliff at any one point through the year. And so we see about 60% of those contracts renewing in the second half, roughly 40% renewed in the first half. So that's why you see the $2 billion in the second half versus the first half and a total commodity hit for the year of about $3 billion. When it comes to the investments in modernization, the one thing that we're going to be very clear about is we are not going to back off our investment in modernization and in our Ford+ plan, regardless of the chips. Our balance sheet's healthy. We've got $25 billion worth -- $25 billion in cash and we're going to leverage that to continue to invest. Now in that line item on modernization, it also includes the costs for the launches we'll have as we go through the second half. So as the Bronco launch continues, we've got the Maverick ones coming in. We've got the E-Transit launch at the end of the year. Well, it comes along with manufacturing costs when we launch. Also, we have the advertising that we'll put in for those vehicles as well. And then on top of that, we have the digital infrastructure, the IT for the connected vehicles and the services that we're building out and the experiences we're building out. And then we're also focused very intently on customer experiences, the digital experience our customers will have in the vehicle and the user experience across the ecosystem, either on our apps or when they're in the vehicle and making that as seamless as possible. So it's all consistent with the Ford+ plan. It's accretive. We'll get a return on that investment, and we're not going to slow it down because of the chip issue. We feel very strongly that we have to continue to invest in Ford+. And I will say that as we talked about at Capital Markets Day, the investment is in the plan as we walk up to the 8%. So we have investment in the plan this year and next year and in '23 for our modernization for the Ford+ plan, and that's all built in our walk to the 8% EBIT margin by '23.

What are you assuming, I have a question here on e-mail, about pricing in second half?

That's a great question. Everybody is asking about pricing in the second half. We see pricing continuing to be strong through the second half of the year. As we know, the impact that we've seen so far this year is a combination -- for Ford, it's a combination of 2 things. One, it's the supply-demand imbalance due to the chip issue; and number two, it's the strength of our new products. This has to be the best product lineup I've experienced in my 30 years at Ford, and we're seeing that underlying demand is very strong. So what we're assuming is that as we run through the second half, we see the pricing continuing to be very strong in the third quarter. But as volumes and production come back, and we start to get closer to more equilibrium with supply and demand, if you will, we do see that there may be some modernization -- moderation in pricing in the fourth quarter and into 2022. But we're going to be very focused, and we're watching this very closely, and we'll handle it in a way that optimizes our bottom line. So our assumption is that we see a bit of modernization in the fourth quarter, not a lot but some.

Okay. I want to return to the 2022 picture. In terms of the walk to 2022, I mean, return -- I want to drill down in pricing in '22, but kind of let's get our head around the walk that probably emerged as one of the biggest questions both during the Q&A on the call and certainly in my discussions and I imagine your discussions afterwards. So the math that everyone was running was if the second half guide is $3 billion to $4 billion, that would seem to only imply times 2, $6 billion to $8 billion in 2022. The consensus prior to the call was $11 billion. We noted that you typically have seasonality tilted towards first half, so if you could maybe discuss that. But maybe you could kind of go through the puts and takes, both in terms of the seasonality second half versus first half but also what the year-over-year -- of what the second half lost volume is and how that translated to annualized basis? And then I want to return to that pricing issue.

Okay. So yes, we'll have to look at it and need to take into account the first half-second half calendarization that we typically see. So first half's stronger than second half, so you need to adjust for that. And we raised our guidance to be between $9 billion and $10 billion adjusted EBIT for the year. So that, we consider the run rate of the business as we head into '22. When you look at the tailwinds for '22, it's really around a few things, primarily the product that we have coming. Bronco's just launching now. We'll have F-150 Lightning coming, Maverick towards the end of the year. And so on top of the new products, we'll have a full run rate for the products, the strong products that we have in the marketplace today. So we've got Mach-E, strong demand, sold out; Bronco Sport, sold out. And then remember, before we came into this year, at the end of last year, we had launched the [ Fresh and Depth ] series, and so we're seeing very strong demand for that as well. So we see tailwinds, right? We see a strong product lineup next year. And then on top of that, we're continuing to work the turnaround of our international regions. Europe is continuing on pace to get to 6% EBIT margin by 2023. We're working on the restructuring in South America. We've made great progress there. And then there's other actions that we're working in our international markets group that we'll have more to say about later this year. Now with those tailwinds, of course, we're also seeing some headwinds as we walk into 2022. We don't see auction values maintaining at these levels, so we see Ford Credit running back and coming back to a more consistent run rate with what we've seen in the last few years. So there'll be a reduction in our earnings power at Ford Credit. Higher commodity costs, we still see commodity costs increasing through the first half of next year, so there's a headwind there. We also have -- we'll see higher spending related to the new product portfolio that we're putting in place, and we'll continue to invest in modernizing in Ford+. Of course, we don't have the Rivian gain. And then this is all subject to the fact that we expect the chip shortage to be largely behind us. We could see it lingering into the first part of '22, but we do see that run rate of production being much higher than we saw in 2021. So a few headwinds. The underlying strength of the business is strong. And we see 2022, as we talked about at Capital Markets Day, being a step above 2021 on the way to our 8% EBIT margin in 2023.

And I think the chip shortage and the ability to get back to equilibrium, I know we're skipping ahead, at least in my outline to what I was going to ask Lisa, but it seems pretty central about the production and the pricing environment. So I guess my question is, how do we get comfort that the chip shortage might abate? Some of us were more hopeful for 3Q than is playing out. What can investors look for to see if the chip shortage is abating?

John, you want me to take that?

Yes. Let me just say one thing about the chip shortage, and then, Lisa, you can talk a little bit more about what you're seeing. The one thing, Brian, that's important to understand about Ford's situation with the second quarter is that we were disproportionately impacted due to the fire of our -- one of our key suppliers in their fab facility in Japan. And so if you look at the volume we lost in Q2, we lost about 50% of our planned production volume. About 75% to 80% of that loss was due to that one supplier and the fire that they had in their plant going down. They're back up and running. They're ramping up a little bit slower than what we had hoped, but they're ramping up. And so we should see the impact for chips -- the impact of chips for Ford being much less through the second half than what we saw in the second quarter. So the second quarter for us was an outlier. Now I'll let Lisa lean into what she sees from the chip standpoint around the entire industry and then excluding what we had with that one supplier in Japan, what she sees as we go through the second half. So Lisa, over to you.

Thanks, John. So as you mentioned, we were disproportionately impacted based on the Naka site in Japan that had the unfortunate fire. Our outlook for the second half, we think we'll have about 30% more production than we did in the first, and that's due to the transparency that our suppliers have now given us. We have longer windows of visibility into their production shipments. There's, as you can imagine, a task force that works 7 days a week around the clock to look at those production commitments. And we're seeing more healthy production commitments into the second half than we did before. So it's giving us a level of ability and confidence in our production program. I would also say that there's some recent COVID situations in Malaysia. And Ford, fortunately in this case, is less impacted than other OEMs in this case. We don't get as much wafer fabrication from Malaysia. Our operations there through our suppliers do some of the back-end work and the assembly work that's much more easily moved and relocated. So right now, the impact of the Malaysia COVID outbreaks and the continued situation there is hitting us less, we believe, than some of the others. So again, a better outlook in the second half. And again, due to some of the transparency that we're seeing and much longer production schedules that our suppliers are now submitting to us.

So when do you expect chip supply to, I guess, 2 questions, normalize to typical production levels, say, 2019? And do you think in '22, there's going to be enough slack in the chip supply to support an overbuild either at Ford or at the industry more broadly to restock inventories?

Yes, Brian, the situation, unfortunately, is probably going to be with us into the June of next year, first half of next year. Hard to tell. There's no crystal ball on this, but things keep getting progressively better. And also because as Ford Motor Company, we're more prepared to deal with the flexibility now of a shortage, whether it's more sharing across the vehicles, whether it's designing out of certain chips that have feature sets that we can't replace, whether it's having some of our products more flexible in terms of the mix rate of the features that we offer. This is the work that the purchasing and the engineering teams have been doing since January to allow ourselves more flexibility to manage it into next year. In terms of production, we're going to build every vehicle we can build next year. And one of the things that an OEM does when there's downtime is we're doing our preventative maintenance now while some of the facilities are down to allow us more time to produce next year, pulling ahead some of the tooling installs for maybe model year changeovers to allow us more capacity next year. One of the things that we pride ourselves on is we know how to squeeze out production and capacity when the demand is there and the demand is certainly there. So assuming that we get the chips, and also, we're building ahead on some banks of other non-chip-related components that may have been constraints for us in the past. We use this time now to build banks and build that supply to break all of those constraints that we otherwise might have had.

So if you think about 2022 in terms of constraints, let's just imagine a situation where chips are once again not a constraint. The question we often get is, how much unused capacity is there? How does it differ by segment? I probably frankly know the GM capacity utilization number is better, therefore, pickup truck plants where they're running 3 shifts that expand into Canada to a little bit more. But how does Ford set up for large pickup in -- at the Expedition Navigator plant for running over time, running through vacations or are those plants already maxed out? And then when we go to some of not -- we know the Bronco is going to be tight and so forth. But when we think of kind of the Escapes, the Explorers, the products that have been out a bit longer, is there room in those plants to make more?

So in terms of full-size pickup, full-size utility, Kentucky truck plant is one of the stalwarts of production. And any time we call on them to increase capacity, they're usually there. We don't typically book noncontractual overtime this far in advance. That's the overtime that's above and beyond the contracts with the UAW. Every time we've needed it, we've had incredible cooperation with the UAW to do that. So we have that ability in all of the plants actually to book that over time. In many cases, we can overspeed the lines as long as we give our suppliers advanced notice, which we're very good at doing. We can overspeed some of those lines for capacity. And then frankly, we've added capacity for Bronco, for the F-150 Lightning, also for the Mach-E. So where we see the demand is strong, we have the ability to continue to add, and we always find unique ways of squeezing out a bit more utilization.

So John, I want to go back to you now with what Lisa has said about capacity and thinking of some of the other OEMs who can maybe flex up, especially in the CV category. How do you think about pricing in '22? And maybe try to get granular, obviously, the launch products should enjoy good pricing. They're differentiated like Bronco and the Maverick. You mentioned the F-150. Maybe talk about that in terms of where competitors could be with capacity. And then I think a worry that comes up is, again, the Escape, the Edge, the Explorer, the things that are in more competitive categories, how pricing could evolve in there. And then kind of overall, what it means for Ford.

Yes. So we've been pretty clear that as supply and demand comes back into balance, there will be moderation. So we've built into our plans the assumption that as stocks build, we'll have some moderation across most of the segments. And that's built into our trajectory for 2022. And we're being very thoughtful about it. Of course, we'll see more moderation in vehicle lines that have more of a competitive environment, let's say, that we'll get back up to stock a bit quicker, that are a little bit older in their cycle life relative to maybe some of the competitors in their segments, et cetera. But overall, I think that when we look at like the F-150 next year, it's still coming off of a significant modernization or a significant freshening that we had coming into this year. And so there's significant pent-up demand for the F-150. We're seeing significant demand continuing for the F-250 and above, our Super Duty. And so I think that as you see that, it's going to moderate but we don't see it fully coming off where we are today. The other thing that we're working through, Brian, that we think is an important part of what's happening here is what we've learned coming out of the chip prices. And that is understanding how to operate the business much better at lower stocks. And we see this as an opportunity. And it's not necessarily that it's going to disadvantage anybody. We think it's a win for the dealers. We think it's a win for Ford, and we think it's a win for our customers. And as we lower the amount of stock that we have in place and we move to an order bank online ordering process, customers get the exact vehicle that they want. It puts pressure on the system to minimize that time between order and delivery, which is good for the customer, and it's good for Ford to improve that process and improve what we can do for the customers. We see it simplifying our incentives, simplifying the order complexity. We'll have a much better read on the demand of specific series and options of what customers want. And so I think that there's a lot of wins in there. Of course, the dealers have to lower stock, so lower floor plan cost that frees up capital at Ford Credit that we can take and use in other areas of the business with Ford Pro or additional retail financing. So we see a lot of benefit there. And so when we look at what's going to happen with pricing, we also see the change in the business model impacting that as well. So as I said earlier, in our walk to '22 and the improvement that we project to see over 2021, we have put pricing modernization in there, we have assumptions for that. We understand that as stocks come back and we're more in line with the equilibrium price and demand, we'll see the prices come down a bit. But we still see incredible strength in the underlying business and we see that flowing through into 2022.

Good. Well, I was going to go later into the change in the dealer model but as long as you've raised it, I want to talk about it now. So we spoke with one of your competitors, a Japanese transplant who said, 80% to 90% of the vehicles landing on dealer lots have been spoken for, either ordered or taken up, got ordered or reserved for a customer that was in transit. Is that ballpark similar for Ford?

Historically, we haven't seen that. We've been more of an operating model with our dealers where we stock the vehicles at the dealership, we're running 70, 75 days. Customer comes in, dealer has it on the lot, great. Dealer doesn't have it on the lot, they'll look for a trade with another dealer. And then I think the third order would have been a customer putting the order in and waiting for the vehicle to come. Right now, we're pushing to get to about 25% of our sales mix through orders, configuring and ordering vehicles online. So right now, I think it might be a little bit of a different situation across the industry, that orders are a much higher percentage of what's happening in the market today. But I think historically, it was much lower than that across the industry and I know it was for Ford. Lisa, anything you want to add to that?

They did note that this is -- they did note the 80% to 90% is just through the chip shortage. But I think they also -- they also probably likely, and I've known this from our channel checks, dealer inventory includes in-transit, and I've just monitored a few dealers. And it seems like anything in transit gets sold before it even gets there. So I think they included that in their 80% to 90% as opposed to sat in a lot and then got sold. But I'd love to hear your views, Lisa.

Yes, Brian, I think from an operations perspective, this provides a very unique opportunity that we haven't had in the past, to really continue to fortify some of the cost reductions that we've been working on to turn around the North America business. When we can see 25% of the orders in the bank, and that's the aspiration, we think we can get there with this adjustment now in these stock levels. Our ability to plan and lean out the supply base, to lean out our own inventory carrying costs, and as you can imagine, the number of parts supply and the material cost we have tied up, the capital we have tied up in inventory can be quite significant. So it allows us to lean that out in a really, really significant way. We're also using it to better learn about our complexity and what's really necessary. I think the F-150 Lightning was a big proof point for us. It's 1 cab, 1 box and 4x4 and we have 120,000-plus orders. So yes, there will be some trim series inside of that. But we're getting a better understanding from our customer on complexity. And that's not only going to help us in this year, next year on cost reductions, but we're leaning out the engineering we're spending on our future models based on what we're learning now in this shortage. So it's been a bit of a blessing in disguise for us from an operations standpoint. We have full commitment from our marketing and sales team to help use this, again, to really drive some serious cost reductions in the business.

So a few questions follow-on. First, obviously, if one wanted a Tesla, it's pretty easy to go online and click the app. Where are you in terms of actually being able to close a sale online without someone going into the dealer? And between COVID and now the chip shortage, have you evolved to have more and more kind of touchless closing, touchless deliveries?

So the answer is, yes, we have evolved. And we had to, obviously, last year when the COVID situation hit. And I think our dealers are finding that they have a hybrid customer base, some that want to transact online but there are some that still want to come in and "kick the tires" and see the product. And so they are doing a fantastic job trying to navigate through 2 different types of transaction methodologies and making sure we have both available. I can tell you that Jim Farley and Andrew Frick in the marketing and sales team, along with the dealers, fully understand the need to modernize. They're doing some great work in this space, probably something for a future conversation. But it's not lost on us, Brian, that this is the way of the future in terms of how customers want to transact their products.

Now I don't know, John or Lisa, either you around, but I'm struck by some moves Ford made back in 1999, the experiment with selling direct that ran into a huge wall of dealer noise, I would say. What's -- and the thing you could almost replay 20 years, people were ordering from Amazon back then. People were configuring Dell computers and Dell would not order parts, as Lynn knows, until the order came in. So what's going to be different this time and, in particular, around the reaction of the dealers?

So I would say, Brian, and I don't know if John wants to add anything to this, but first of all, I think COVID showed us that we can do it. We had to do it. We were forced in this situation, and I think it might have been a bit frightening otherwise, but the fact that everybody was able to pivot so well, I think, just gave people confidence and our dealers confidence that they actually could do it. I think the second opportunity is there are still so many touch points with the customers afterwards with our always-on capability. There are going to be many opportunities where the dealer can continue to engage with the customer base because we do plan to be always on. And that means abilities for dealers to maybe sell new subscription, sell new services. Customer comes in, they might need a hardware, a piece of hardware to upgrade to a whole new feature. Our vision is to make them a part of that solution. And if we can do that, it just changes the dealer from being the initial touch point to the dealer being a perpetual touch point in a way that the customer values. So I think that's the opportunity, and we're seeing more and more willingness of the dealer body to participate in that as we lean in.

The only thing I would add is -- sorry, Brian. The only thing I would add into that, our dealers are good business people. They understand that the industry is changing and it needs to move forward. And they understand how important Ford+ will be, as Lisa just said, with those consistent touch points. So they're right there along with us. They understand that this is an opportunity for both of us to really modernize the business model, lean into Ford+, and it's going to be good for both of us from a business standpoint.

And if -- as you kind of go ahead, I mean it's -- we typically model, and these numbers may not be quite right, about a 7% dealer concession that's kind of demonstrating a transaction price and quote invoice with net of incentives. How do you -- and now, of course, dealers have a lot of costs against that. I've talked to a dealer software consultant who -- whose vision of the future is dealers make less per car. Therefore, they have to become much more efficient. How are you thinking about that both in terms of Ford economics and in terms of your dealer economics?

Well, I think that one of the things for the dealers that's always been important is the service business, and through -- and for us, particularly in with the commercial vehicle business. And so you're going to see dealers and the focus that we have on service and Ford Pro and the focus that we're having on uptime and easy service, et cetera, that's an advantage for us. We see that as being a strong point, and we see that being very important for us to build that out with our dealer network. And so you're going to have dealers that are going to be very focused on Ford Pro and the services that are provided through that. Other dealers will potentially have more of a retail focus with our retail customers. But vehicles need to be serviced and that's been a strength. And then, of course, as Lisa said, they'll be leaning into the business model as we have this constant touch point with our customers, selling them services and experiences. That business model is going to expand for them as well as for us. So we have the business model that we have, dealers have been our partners. I know that Tesla has a different business model, but we find that there are positive strengths in the dealer network and continuing to have a strong partnership with the dealers as we look to have a holistic touch point with our customers and provide them the best services and experience as we can. And we think that as we develop the business model together, we're going to have competitive advantages there as well.

Okay. Let's kind of go back to the financials in 2022, and then I want to talk about some of the EV and commercial strategies. Commodity spot prices have yet to cool off. You talked about those keeping high into at least first half of 2022. Many of the suppliers are talking about other cost pressures that not necessarily were indexed. That premium freight comes up a lot, labor shortages, and hence, wage increases come a lot up. So how are you thinking about when a supplier comes to you and seeks above contract relief for inflationary factors that weren't necessarily part of the core commodity index made?

Lisa, you want to take that or do you want me to take it?