Ford Motor Company (F) Earnings Call Transcript & Summary

Good morning, and good afternoon to all. Thank you very much for joining us for the Jefferies Industrial Conference. I'm Philippe Houchois, the auto analyst covering U.S. and European carmakers. We're very, very pleased to have Alex Purdy with us from Ford. He is Director of Operations for Enterprise Connectivity. And with that as well, we have Lynn Tyson, Head of IR; and Jeff Zelenick, [indiscernible] Officer. And I have to admit, Alex, I always now struggle to understand enterprise connectivity, so I look forward to our discussions. My understanding is you have a couple of slides for us to give us a message and explain what you do. And then from there, we can get into Q&A. If that's okay with you, Alex, it's -- the floor is yours.

Yes. No, that sounds great. Thanks very much for having me. I wanted to kick off with just a very short overview of our strategy for the future of Ford. I'm going to spend maybe 3 to 5 minutes, and then I want to spend most of the time on your questions, Philippe. So I hope this front part isn't too long. But like I mentioned, the future of Ford is really about Ford+, and we want to talk about the massive digital transformation that's occurring at Ford and really what that means for our business and our future. Ford is transforming from a traditional OEM business that really sold at a transactional level to a lifelong, always-on customer relationship that has meaningful connections throughout the life of ownership. This means the vehicle plus a series of new services, constant over-the-air updates, for example, safety and security offerings, media, digital contents, on and off-road navigation, uptime and productivity tools for commercial customers and then significantly enhanced charging plans with a FordPass app and more. These connection points are daily interactions with our customers. And our goal is to treat customers like family, deepening their loyalty with us. This is really delivered through 3 things that we outlined in Capital Markets Day. First is leveraging our foundational strengths, right? We've got the F-Series, the Mustang, the Transit, the Ranger globally, Puma in Europe, the Navigator and an expanding portfolio with Bronco family and, most recently, the Maverick. These nameplates are really good foundations for us to build services on top of that our customers love. We continue to improve these automotive operations. And we're the leader in commercial vehicles, the leader in North American truck, and the Mustang is the best-selling sports car on the planet. This, coupled with Ford Credit, which is the captive financing company, is also undergoing its own digital transformation to support both retail and commercial customers, really driving loyalty and repurchase. And as a part of Ford+, Credit is a strategic customer-facing advantage that we believe is competitive and sustainable for Ford in the long term. So that's really on the left-hand side. When you add these foundational strengths to the enhanced capabilities in the middle here, we think that this is what transforms Ford's offering. We've made some big investments to get us where we are today. Things like developing the fully networked vehicle with software update capability, putting modems in almost every vehicle for a number of years now. We've made tremendous progress in this middle stack, but this is a journey, and there is certainly more to do. It's been made possible through our tech stack, Blue Oval Intelligence, which enables our vehicles to be fully connected, updatable, software-defined. And those vehicles get better over time. We can update these vehicles using Power Ups, such as Ford's Blue Cruise capability, which is differential for many of our competitors who can only enter -- upgrade their entertainment features or entertainment systems. We can proactively update the vast majority of vehicle modules. And Ford is doing this at scale, really. These capabilities are in some of our biggest nameplates today like the Mustang, Mach-E, the F-150 and now the Bronco. We didn't start with just the luxury nameplates, but rather across the entire lineup. And that capability is going to be rolled out very broadly. These vehicles are connected to the cloud. And because of that, we're able to deliver unique features without having to change physical hardware. And that's a real advantage. When you add our foundational strengths to our enhanced capabilities, this really expands our TAM. And I'm going to spend a little bit of time on that, on this slide and the next slide. But this connected ecosystem really acts as a constant connection to our customers, helping create more lifetime value and lifelong relationships. This is core to the Ford+ business model transformation, which is capturing post-vehicle interactions with the customers and driving recurring revenues for Ford. This total addressable market and value creation opportunity is kind of why we're here today and to spend a little bit more time talking about that. This always-on relationship brings our customers closer to us and establishes this lifelong relationship. And we think that, that has significant value for Ford. In fact, we estimate that the potential share of revenue for Ford could be $20 billion by 2030. And this is really driven by our ability to continually offer new services through our tech stack. Connectivity touches every part of our enterprise, and we are realizing efficiencies across many parts of our business, things like warranty being able to identify an issue sooner and then actually being able to limit the number of vehicles that are affected because of early identification. And then fixing them very quickly over the air, saves us tons of money and improves the customer experience tremendously. We're being very purposeful about what we do in-house and where we're partnering. And that's really for 2 reasons. One is we want customers to have best-in-class services available in their vehicle, things that they use every day at home. But also, we want to leverage the scale and make sure that we're investing in the places where we need to deliver competitive advantage and leverage commodity parts of the tech stack. Between these foundational strengths and our enhanced capabilities made through connected services, we will enhance these relationships with our customers and provide services they value over the life of that hardware, the vehicle and then eventually into repurchase. So that's what I wanted to share upfront and happy to take on some more of your questions.

Yes. For question, apologies for not being able to participate on the camera. But the first question I had is how different is it -- I mean I assume a lot of your work is also work on the Ford Pro business, initiatives that you presented a few weeks ago. And how different is it to offer services to a commercial customer who is really probably demanding it and a retail customer, you probably compete with other services. So how do you carve out an offer that becomes visible to your customers where you probably more -- you lock in your commercial customers?

Yes. I think it's a great question. So clearly, there is significant opportunity with commercial customers, right? Commercial customers require productivity, uptime, charging management, and they care a ton about total cost of ownership. And that -- what makes them unique is that, that drives right down to the bottom line. And because of that, EV customers are willing to pay for services that add to that business value. The exciting announcement around Ford Pro and their productivity solutions are really designed to meet the needs of those owners, fleet managers and drivers across small, medium and large fleets regardless of how they use their vehicles. And so we really have got a wide set of vehicles across a lot of commercial use cases, and we've got significant share in there. And so it's a really unique opportunity for Ford that differentiates us. We already have a number of connected services for commercial customers in place already today. And we're extending these and scaling them, taking them global, making them more central to every part of our customers' use of those vehicles. And what's exciting is that as customers transition from ICE vehicles to BEV vehicles, the connected services that we're going to be offering are -- there's a real opportunity for us to solidify our role in those connected services as customers make that transition. We announced Ford Pro Intelligence as a key pillar of Ford Pro, and that included things like telematics and data services and small business productivity. And we've had some really good success. In fact, our telematics services subscriptions grew 10% in the last quarter alone, and that's because we're focusing on it. It's because our customers are asking for it. They see the value. Charging is key to our commercial customers, and we know that mixed fleets will be the norm for many of our customers to come -- for a number of years to come. And so we need to develop solutions that work across depot, public charging and home charging to seamlessly bring BEVs into their fleet. Because of that, Ford acquired Electriphi, a provider of charging management and fleet monitoring software that really developed advanced charging features and energy management experiences that were tailored really for this commercial customer. And so we're pretty excited about that. Lastly, we launched something called Ford Telematics Essentials, which is a complementary product that really focuses on vehicle health and uptime of those vehicles. We launched that in Q2 in North America and in Europe and are seeing some really good success about customers maintaining uptime and using this tool in order to proactively diagnose and solve issues with their vehicle before they even know it. So it's a really exciting time. And I believe your push there on commercial fleet is a really good place to highlight the importance of Connected Services with the Ford+ plan.

I was just doing -- a couple of times in your presentation, you mentioned keeping those software service and services data through the back of the hardware. But it's still kind of a life expectancy the hardest. I'm just wondering, as you increase software functionality and keep hardware fresher effectively for longer, how does it affect the pace of model development? How do you fresh the hardware to extend the life of the vehicle, for example? How do you -- the interplay, I guess, the hardware and software for life of the vehicle?

Yes. I think it's a great question. So clearly, over-the-air and software update functionality changes the way we think about development cycles. It's clear to all of us that we have to keep our vehicles fresh. What this new tool allows us to do, though, is that we can add new layers of freshness to that vehicle over the air and digitally without as much changes to the hardware. We continue to look very hard at how much and how fast hardware and physical design needs to be changed, and it's going to be a balancing act, certainly. We're going to have to spend resources on building out rich software competency at Ford at the same time as maintaining physical freshness. And as a result, the key hardware focus that we will be developing is on over-the-air update capabilities. So we've developed a proprietary software stack called Blue Oval Intelligence that really delivers our ability to update all of the modules on that vehicle. And this means that Ford can continue to drive revenue for that vehicle beyond the first purchase. And it can affect how frequently we would expect to have mid-cycle actions and interim actions over the life of a given product. I think we're interested in seeing the transition of the industry to more freshness focused on digital content. And we really expect that more and more of our time and attention will be focused on that digital freshness.

Right. Now on this -- when you -- the software stacks, how do you decide what is critical that you have to do in-house and what you buy in? Just wondering because I know you have a close connection with Volkswagen in Europe, including on the commercial vehicles and the transit. And Volkswagen seem quite heavy in the whole suite of competence. And how do you work with Volkswagen? Or what's your approach in terms of in-house versus buying into a more ready-made stack?

Yes. I think it's a great question. So we think about things in a couple of ways. The first is we have to have a platform that is modular and is very easy to build on top of. And so that modular fully networked vehicle architecture is what's already rolled out on the F-150 and the Mach-E and, most recently, on the Bronco. And that's a giant architectural leap forward for Ford. It's software first. It enables us to update nearly all of the modules in a vehicle. And we expect to continue to bring products to market on these advanced architectures. So that platform piece is really critical to get right, and we've made those investments. What is interesting, though, I think, is that we've tried to figure out which parts of the software stack we need to own and deliver and which parts we're quite happy to have a service provider help deliver. And so Ford and Lincoln customers, for instance, are going to be powered in North America and in Europe around with Google Automotive Services. And that's really focused at the commodity level. What that means is the operating system and core features around gas, which are maps, apps and digital assistance, are going to be delivered from Google Automotive Services. This is because they're uniquely capable of delivering those services. In addition to that, our customers are asking for them. Our customers want to have an open environment. And we think that by bringing those systems that customers use every day into their vehicle, that really helps Ford deliver a world-class experience. These are going to be started to be delivered in 2023. But what's interesting is because we aren't delivering parts of this commodity stack, we are able to invest time and attention on parts of the offering that are truly unique. And those unique offerings that Ford is going to deliver, it is something that will set us apart from our competition. It's things like driver assist technology, our BEV offerings, giving range confidence, improving stationary moments. It's off-roading and adventure for our icons. It's an insurance offering that I think truly differentiate us. And we see an opportunity to evaluate what parts of the stack or commodity over time. And so while Google Automotive Services certainly allows us to focus our efforts on the places where we're going to be differentiating it's a core area of where our customers wants to go, and so we're listening.

Right. Yes. And you have said global earlier. Just wondering, when you develop technologies, how much can you leverage the work you do in North America into Europe but also kind of into China? I'm just thinking about geolocation services may not be -- you may not access the same amount of data that you would like to in China compared to North America. So how much your soft development is scalable globally? Or do you have to kind of treat regions as separate entities?