Ford Motor Company (F) Earnings Call Transcript & Summary

Good afternoon. Welcome back, everyone. I'm Joe Spak, lead autos analyst here at RBC Capital Markets. Very pleased to be joined now by Ford. With us today from Ford, we have Ted Cannis, who, I'm sure, many of you are familiar with. He's currently the CEO of Ford Pro; and Lynn Antipas Tyson, Executive Director of Investor Relations. Ted is going to give some opening comments, and then we're going to jump into Q&A. I would urge investors on the line, if they -- if you'd like to sort of get involved in the conversation, submit a question through the question box on your web app, and we can integrate it into the conversation when we get to Q&A. So Ted, with that, thanks for joining us today, and over to you.

Thanks a lot, Joe. Great to see you again, and hello, everybody else. So I'm just going to quickly do this stuff, just to set the ground. You can ask all the questions later. Here we are. And first of all, why is this so important to Ford? And why is it so unique to Ford? We have 43% share of the Class 1 through 7 commercial truck and van business in the U.S., which is huge. F-Series, no surprise, best-selling pickup truck for 44 years. And we've been leading the European commercial vehicle business for 6 years in a row. Transit, best-selling cargo van around the world. And we're not strong anywhere else, but we're always strong in Ranger everywhere else in the world. And this is what we're building on. This is the foundation of what we're creating, vehicles and services. But it starts right here, and nobody else comes close with this level of strength in the marketplace and the relationships we built with customers. So if you lay what is the Ford Pro vision? First of all, it's a stand-alone global services and distribution business within Ford. That was a big change for us, and we'll talk about that a bit more. It's a comprehensive set of solutions: vehicles and integrated services around the digital world. We're all going digital. The customers are, too, and they want an end-to-end set of solutions. They don't want a bunch of cobbled-up solutions from their partners. It's also battery electric [ vehicle ] and ICE, and this is really important. Most of our customers are managing both sets of vehicles for a long time, and they need a complete set of solutions. And most importantly, it's moving us into the service portfolio: digital platform, always-on, recurring revenues, that is a big change. If we go to the next one. So what is the composition of Ford Pro? Well, of course, it's the vehicles in the top-left corner there, both electric and internal combustion. It's a complete set of charging solutions, home and public depot. It's intelligent solutions like telematics. It's specialized service for commercial customers, and its specialized financing for small and medium business customers that combine it all together. That suite of services and a complete end-to-end ecosystem is a one-stop shop that our customers can go to. And it's going to make the whole process stickier and always on. If we go to the next slide. So part of this is building out the end-to-end shop via our own platform. There's a lot of opportunity for us to upgrade our game here, and this will just make our current position even stronger, upselling and cross-selling services that we haven't previously done. If you go to the next one, please? Now obviously, the game-changing is coming out right now. We are launching at the end of the year the E-Transit, on the right, and the F-150 Lightning next year. With these 2 combinations of over-the-air, completely digital vehicles ready to go for our commercial customers, where 40% of our customers buy both these products, we are ready to go. No one else from a mainline OEM has any of this kind of base and trust for these kind of vehicles to launch off a whole platform like this. And that is a key part of the transition. And when you look at the kind of vehicles we have, we've done things differently than the other guy. So you see here Transit with 3 roof heights, 3 body lengths. It comes in chassis cabs and cutaways because there are many different vocations: the guy who's a florist, or a cable van trying to garage at home. It's got to be garageable. It's got to fit. A delivery van has to do something else. You have to have the right vehicle for the job. A lot of people are only focused on the 10% of the transit cargo business. That is for delivery. But there is much more business out there, and we are going at it end-to-end from the beginning. If you go to the next slide. And it's not just that. We kept all the hard points in our products the same, both F-150 and in the Transit, so that all the upfits that they're using, internal combustion and battery electric, are easily transferable across their fleet. So all the investments they've made kit out: their plumbing truck, their HVAC van, their delivery, their other trucks that they have in their fleet. The suite of products around them, at high scale, are immediately adaptable to this business. So we're making that transition from BEV -- from ICE to BEV so much easier. And these qualified upfitters take time to strategically get those places, to make sure the upfits can work, to qualify them. And they're near our plants to minimize shipping and extra cost that it takes to get those to our customers. If you go to the next one. So obviously, what customers want in the commercial space is uptime. A fleet manager is panicked that the vehicle that's doing the work will stop working or doing whatever it's doing: fixing phone lines, delivering packages, making a delivery of storage or working on plumbing. They need their vans to keep up running or the pickups to keep going. And so having that geographic coverage for service, with dedicated service for those people, is key. And a key part of this is our Pro service. And not just the traditional ground facilities, we've advanced heavily into mobile service units. These mobile services, which will grow to over 1,200 by 2025, is going to be part of our strategy to grow parts revenue by over $750 million. It's a lot better for a commercial customer if you can go to their site and fix 10 vans versus them bringing 10 vans to the dealership and wasting all their employee cost and time and losing track of your vehicles. It's a win-win for both, and it's part of the extensive system of coverage that we're putting into place. If you go to the next one, please? Then it gets into the charging solution. So you have the vehicles. But if you're a fleet manager right now -- and I talked to many. Just the guy last week with the enormous fleet that buys from a major competitor of ours today, who is coming to Ford because of E-Transit, they don't know how to do the charging. They might have dabbled in 1 unit. But the complexity of having depot charging, multiple vehicles on-site, optimizing the flow of power across those vehicles when they come in during the day -- oh, can you go back on the dot, please? So the depot charging, when it goes across the site, they got 10 different vehicles coming in, in a day, you've got to try to maximize that charge. You got home charging, where the employee comes home, let's say, it's a cable van, and they have to split the bill between the house and the van. It has to be remembered to plug in at night, or you can't do work the next day. Or public charging, again, where you need to find access to our roaming network of chargers. We're bringing those end-to-end solutions, whichever combination -- and they tend to be a combination of all 3, public being the least desirable and most expensive. This is what we're doing. We see this growing to a -- for us, to over $1 billion in revenue by 2030. And that includes -- if you go to the next slide, our acquisition earlier this year of Electriphi, who is an existing depot charge command doing these public school buses, electric school buses, things like that, to manage that complex situation of depot charging. Where many vehicles are on a customer site, they come in, they're charged overnight, and they go out and run their shifts for the day. It is a complex equation of inbound demand and inbound supply of electricity at the right time of day rates, avoiding peak rates at renewables and other storage on site to optimize. Many customers get the van, and then they go, "Oh, where is my cost of ownership savings?" So if you go to the next one. So it's not just charging, it's the intelligence. So once we really started loading modems into the vehicles over the last couple of years, we now can offer deep, rich insights that only Ford can do with our combination of sensors, engineers and the holistic systems vehicle data to anticipate the vehicle issues on that vehicle. And to provide a constant list of vehicle health reports, trouble codes that come up and everything else that the driver needs and a fleet manager to manage their fleet of drivers, to optimize productivity and uptime. And if you go to the next one, and I'm getting pretty close to the end here. So what you also have is the financing. So Ford has always been super focused on retail financing, but this is about small and medium business financing, which we expect -- anticipate will grow from 10% to 25% of our business by 2025 and allows you to provide end-to-end bubble services like intelligence, charging, et cetera, in one financing package. Nice and easy. Kind of like when you come to taxing and you're digging around for all those bills and if somebody consolidates it, and makes it all easy in one. These are the kind of things that fleet customers want. They just want to do their job, roofing plumbing, whatever. If you go to the next one. And what you have here is, again, so we do at Ford Pro is it's all of that. It is vehicles plus services. It goes from a point-of-sale transactional event to an always-on suite of services that are continuing over time: intelligence, charging, repairs, mobile service. And with this, we see massive growth, as we indicated, from -- growing from $27 billion of revenue in 2019 to $45 billion in revenue by 2025. So with that as a quick pass-through of what it is, Joe, maybe I'll hand it back to you for questions.

Yes. Perfect. Thanks, Ted. And really early goal, we have the time today to talk about this. But I think, headed back to Ford's Analyst Day earlier this year, I think the announcement of Ford Pro as its own business, it seemed like one of the more interesting opportunities, and probably one that doesn't get -- it is maybe not fully understood or sort of fully appreciated. So I'm thankful for the opportunity now to dive into this. I guess, just to start, I mean, it's clear the commercial truck and van market is very large. Ford has a leading position. One of the things we hear about Ford and E-Transit is it is somewhat of a retrofitted vehicle versus maybe some other companies that are trying to build an electric vehicle from the ground up, similar to what you've done more on the Mach-E, which I know you were involved with, and the Ford Lightning. How important was speed to market there? And some of the other aspects you just talked about, like having all the upfitters sort of ready there to sort of help fleets make that transition to go with that type of architecture. And what does that mean for the future of the Transit program going forward? Does it eventually transition to a more holistic bottoms-up, ground-up electric vehicle platform?

So I think it's a great question. I mean from a customer standpoint -- and this is the important thing, you got to kind of remember you're a fleet manager. You're running hundreds of vehicles. If something -- if they can't do the job or if something doesn't work, the other departments in the company are now mad. Because they're not making revenue or they're not solving customers. You can't just wing it. So you have very nervous managers who are already nervous about electric. A lot of these things are coming down from the C-suite, from the Board, the CEO, CMO and the CIO, Chief Sustainability Officer. And in fact, the conversation has so changed from -- it used to be a fleet manager. So they're in a panic. So they first -- is it going to do the job I need. If you have a high-roof van, it won't go into a house. It just cannot, or a parking garage in a city. If you need the kind of a product that you have and you got up and said they're ready to go, they've got to fit. So far, what we had was when both -- with F-150 Lightning and E-Transit, yes, we could go to market faster. But it allowed to use the massive scale that we have to do the different derivatives that would exactly suit the customer to do their doing and make the transition to go electric so easy. And of course, we gave them things they've never had before. Of course, they're going to have lower maintenance costs and fuel costs that we've built in and Pro power onboard. But what we made it was them so easy -- and that's why we added the charging as well. Because if you make it -- take the fear away and walk them through it, they just want to get their job done to support the departments that they're working with. They don't want to be taking big risks.

So you mentioned Ford's strong position here. I think you said 43% of Class 1 through 7 commercial vehicles. It seems like Ford is on the earlier side here. So stands to reason that if we were able to look at share of electric commercial vehicles. At least, in the earlier stages, probably above 43% share, right? I'm curious to know, though, whether you think this is like sort of sustainable or not. As you sort of move into a more electrified market, do you think your share within that Class 1 through 7 can actually increase over time?

We think -- we were going to come out, guns ablazing. So we were going to be among the first, and we were going to take a leading position, no matter what. And because we know the customers so well, again, when they're looking at a suite of solutions, some companies are trying new technologies on wheels and all sorts of things out there that just make them nervous. We are putting in extra protection on the bottom player to do additional [ dancing ] and things underneath the body. The frame is the strongest frame we've ever made for the F-150 Lightning. Each of these things was chosen to give total peace of mind for these guys and to open it up from the beginning. And if you think about them -- of the choice set of a fleet company -- and we have 125,000 active customers in North America. So first of all, if you were able to build a product that didn't make them nervous, then you had to go out and reach one by one to all these customers to convince them that yours is better than the leading guy in the marketplace, who's come to head with end-to-end solutions. Then you'd have to be going that way, and I also will have chips, and I'm also going to be able to skip battery supply. These are mega things right now. What we provide is confidence in the product that's done all the hard work and testing, so you know it. We're going to stand by it 100%, and an entire network that can get serviced. I think there's a lot of fiction out there. And well, I know, it's just the powertrain that breaks. Trust me, with all other companies, it was just the powertrain that breaks. But there are other things in different vocational attributes, where we're all trying to do the right thing. And having that support to be uptime, uptime, uptime, and especially with more advanced products like driver assist and cameras, it's critical. And that's what they want, and that's what we brought them. And we're going to take that position early and often.

Ted, I think -- and I think you reiterated this even earlier in this presentation. You talked about Ford Pro revenue, which is about $27 billion, flat in 2019 and growing to about $45 billion in the middle of the decade. You just went through in your presentation a whole bunch of those different elements. The only one that -- to my knowledge, that you sort of concretely sort of called out a dollar amount is the parts portion, which is an incremental $750 million. Can you help us sort of bridge that $27 billion to $45 billion, along some of those buckets you just talked about, like charging digital services, financing, et cetera?

Well, certainly. Yes, the vehicles played a large part, which is part of the bill. And they're just a big number in themselves. So in North America, we see mix gains opportunities for us over -- for positive mix over the period. In Europe, we've got some new products, along with our joint venture -- our agreement with Volkswagen to really build out scale and have updated versions of the 1-ton Transit coming there shortly as well, which is a critical product for Ford. So we see a lot of opportunities to grow on the vehicle side. But what's the most intriguing part and, clearly, always the higher margin part, is these always-on services and products. So not just the $750 million in parts and service or the $1 billion that we expect in revenue growth because of charging, we just see a lot of opportunity to grow the software sales as well and to build out that whole piece as a complete loop. Now that they're digitally connected, now that they all have modems and we can provide deep insights that others can't, we can do more with that growth than others can. And so that's where we see the opportunities, really growing out the recurring revenues going forward and making a stickier business and a lot more robust to the economy.

Yes. Maybe on that front, to me, it seems clear that fleet managers who buy on the economics, on the cost of ownership, as opposed to retail dealers, who go into -- a dealership might make a decision more based on subjective factors, right? You have a -- it seems like similarly on the software side, on the connected services side, if you could show them that they could pay X dollars a month and there's an ROI on that, that connected services is more likely to have higher uptake initially on your business than maybe on the retail side. Would be curious if, one, if you agree with that. And two, like you mentioned -- let's put charging and some of those stuff aside because I want to get to that in a second. Like what are some specific examples fleet managers have told you that they're willing to pay -- we don't need to say the dollar amount, but X dollars a month to get this sort of functionality. Because that benefits -- there's a return on that, and there's a savings for me over time from paying that on a monthly basis.

So it's kind of a -- it's simple things. We had one fleet turn on their modems, they hooked up telematics. They have 100 vehicles in service. They went into them. And when they turned it on, instantly, they found that 20% of them had either maintenance issues that were not addressed or recalls. And took them to 4 dealerships -- he' is a Louisiana customer, and instantly through that. We had another guy who was turning on the telematics and got his records in, he had some new employees. The new employees had been overestimating their hours significantly. Saved $200 on the previous week alone. It was common, very happy with the product in that kind of case. I mean these kind of stories happen all the time. I was just looking. Like last week, we had 15 customers who came in from a construction company in Arizona, from an energy company in May, and here was 93 from a construction company in Ohio. And what you find is a lot of them is that it's like you're the family home. The engine light comes on and you're like, eh, I'm going to get to it. We've all been there. But yet, we do not. And what you have is when people are driving your vehicles all day, you don't know that they're not checking the engine light or something else is coming on. And what was originally a no-problem preventive maintenance, no downtime really, can be scheduled, becomes a mega-expensive problem and a hit to your business. So that's what they're seeing. They see a huge opportunity for prevention of lost opportunity. And we see that, and we've been very, very focused on uptime. Our Live centers in the U.K., for example, have been able to reduce uptime -- downtime by almost 60% and so we are -- we take these numbers, we calculate and we show them back to the customers about, here's the idea that you're saving and what you can do. And it's all math, which is the joy that you said earlier. And this is the same thing in electrification. It's a completely different question than retail. In retail, you go, "Wow, how far do you drive?" Well, 50 miles, back and forth to school or work." Okay. "How many miles do you need?" 500. What? When a fleet customer goes, "Well, how -- this -- this vehicle is driving 78 miles a day, and this one's 79 miles a day, and this one's 102." It's very easy. It's just math. They're business people like you and me, and they just match the product with the need. They don't buy more than what they need.

Okay. So maybe to sort of frame it another way, I think at back at the Analyst Day, Ford sort of hinted that, call it, a $20 billion service addressable market on connected services. It sounds like you're in agreement that maybe your businesses can be sort of the early adopter of it. So -- what I'm trying to get at is like it seems like there's a lot of overlap here between the numbers. Like how much of that $20 billion can accrue to Ford Pro, which is, again, part of that $27 billion to $45 billion lock?

Certainly, a part of it is in that $20 billion. So we are part of the team. But there's other big pieces that are important, like the Blue Oval, Cruise thing that we did with Mach-E, which is a high-value, added-on driver assist technology, hands-free on a highway. So it's all in because the company is so all in on connected.

Okay. So but -- so we're not going to get a how much of the $27 billion to $45 billion is more -- just specific to, let's call it, always-on or connected, like irrespective of what is actually driving that? I mean I guess what I'm trying to understand is how much is sort of vehicles versus some of these new or potentially higher-margin, more recurring revenue-type products.

Nothing additional or specific today, no.

Okay. Maybe on charging, just so I understand this. Like what exactly are you charging for on the charging side? Like how does that business model work? Are you charging for the electricity? Are you just offering some sort of monthly fee, where you're sort of helping them charge smarter? Or what really is -- when you say $1 billion of charging, how does that really work?

So a couple of key things in there. And not every solution is the same for every company. Some companies are all home charging for their employees, right? And then some are all depot, blah, blah, blah. The biggest part of the package right away is the software, especially on the depot charging side because it's kind of like a deep linear programming analysis. You've got multiple drivers coming in with different levels of charge on the batteries coming in. You've got multiple chargers and time-of-day rates that your particular utility have, which is very complex, because all the utilities are local and specialized rates. You have peak charges so you don't want to run over any of those. So it allows you to rebalance the load between who's coming in every day, the cost of energy that you've got sourced at your particular location and then plugs into the back-end systems that you have as your particular company, dispatching or routing and whatever else. That is what the sellers. So there's a fee for that. Some companies want to put in chargers. So we match up the chargers, which ones are suited best for the product because charging -- this is one of the complications of public charging. You can do something much more proprietary and bespoke if you have complete control over the chargers. And so you provide all that, intelligent range and the rest of it. Repair and maintenance chargers are notorious. They have firmware upgrades. They have their other challenges. So a fleet manager cannot have 10 vehicles and 1 is not working next day. So immediate response to provide here. And today, when other companies say that all they're doing is pointing you to service partners they have, not us. We are providing end-to-end. Any gap in the process, Ford is -- calls the ball. We have it. We own it, and we are responsible so that you can get complete comfort.

Yes. Maybe one of the other things we hear on sort of the connected services side and sort of opportunity is that a lot of these fleets already sort of use third parties for telematics or some other initiatives. And they're also sort of trying to, obviously, capture a bigger part of a connected pie going forward. And a lot of fleets are mixed OEM, if you will. So how does sort of Ford come at that angle for fleets where they have maybe vehicle -- some vehicles from you, but also some vehicles from your competitors? And what's the -- what's the opportunity for some of those third parties going forward? Or is this sort of -- you think more of that opportunity accrues to you now as -- because you're able to, like you said, offer a vehicle with a modem in data and services for the first time?

So I would say the answer will be -- is if you -- from us, it's better with Ford. So if you have the modem in -- which is if you've ever dealt with these EPIDs, they get lost and they get tracked. And the signal is not as clean as coming out of the modem, and you can't reach all the signals that are available in the vehicle via the EPIDs. So in our case, we're offering multi-make solutions. And this is not just the telematics solutions. This is also with the charging solutions. Because when we go on a site, they expect you to do their forklifts, they might have a Class 8, others. So multi-make there. And then same on the repair. We have one nationwide maintenance rate that supports all companies in that site. So we go to a site, and we'll fix the other guys' trucks and ours, too. So we're planning to penetrate the entire spectrum. Now there's opportunities with the Ford trucks because you get a higher level of fidelity OEM data than you can get with the rest. And you can do more things, command and control and others, that a third party cannot do. But because we're such a huge position in the marketplace, the scale for us to do it is that much easier.

Okay. So I mean, is it fair to say that, I mean, if this exceeds, your share within large fleets might actually increase because it becomes more seamless as they sort of rotate their fleets over time?

We believe that is definitely possible.

Okay. One of the questions that came in is from an investor is on the mileage of the E-Transit. I know this was sort of an issue when some of the other would-be competitors sort of came -- not an issue, but a topic that sort of came up in that the E-Transit initially has 120 miles of range per charge. And I think you've indicated that, that could cover like well over 90%. But the question is that, that might have alienated part of the Transit customers that does need larger mileage ranges because the variance of miles traveled can be large. So how should we think about mileage on Electric Transits in the portfolio on a go-forward basis? Do you plan to sort of address some of the mileage concerns?

Yes. I mean -- and so the key thing is, is that on the commercial data that we have, over 30 million miles of data, the average mileage on a Transit is about 74 miles. So with 126-mile range on low roof, 4-wheel base van, about 100 on the high-roof van, we know we can cover a vast majority of many customers' needs. And we know this because they're flocking to us, and we have a huge amount of interest. So it's -- I think it's different. Again, if you're a retail customer and if you're looking for all situations, no. If you think about it as retail, I might, if then, sort of have an application. It just doesn't happen to work. And these guys can map their telematics data pretty quickly, and they'll know, yes, or no, this will work for me. So it's actually -- that part of the conversation is the easy part. The longer part is getting everybody over how does the charging work, to be honest, but no shortage of interest. And we also said that we're not done with these plans on E-Transit either. We have more to say some other day. This is just wave one.

Yes. And last question and -- because I know we're coming up on the half hour. There was -- Ford put out a number of press releases today, some with respect to India, but there's another one about your leadership team. Can you just -- Ford is now this -- or Ford Pro is sort of now this global business within Ford. But we talked about $27 billion growing to $45 billion. It's a massive company. On a stand-alone basis, it will be quite a significant company by itself. So how do you, as sort of the CEO of the organization, go about attracting talents to your organization and leadership team?

So a couple of things. To be a startup within Ford, basically, to focus on one group of customers, commercial, which have different needs than the rest of the customers, is a real opportunity to get that pivot perfect, and to get the financials to run -- align that and to get the incentives and compensation around that. And when then you tell people that you're going to take a company that is #1 and the strongest it's been in all these markets, and you're going to make them go digital to be a Ford plus, in the plus, always-on, and that you're going to be at the front end of solving the climate change and in the most, in theory, commercially polluting side of the vehicles, the bigger, larger ones, who are being drawn by companies to make big sustainability changes. To be honest, it's super easy to attract. A combination of digital and on-demand economy, plus saving the planet, this is kind of like falling off a log, frankly. And naturally, [ that leads to breakeven ].

Okay. I mean -- one final -- yes. I guess, just lastly, can investors expect some KPIs or eventually some segment financials for Ford Pro going forward?

I think Lynn has said, absolutely, we should tell them nothing. That's what she mostly likes. I think Jim Farley's whole pitch would be a little dull if there isn't a financial look eventually coming out of it.

Okay. All right. Great. Well, Ted and Lynn, thanks for your time. Greatly appreciate it. Good seeing you again. And that will conclude the session. Thanks to all the investors who joined in. And thanks again, really appreciate your participation.

Thanks.

Thank you.

Take care.