Ford Motor Company (F) Earnings Call Transcript & Summary

Hello, everybody. I'm Adam Jonas. I head up Morgan Stanley's global auto and shared mobility team. I'm delighted to have representing Ford Motor Company; Lisa Drake, COO of North America. This call is for Morgan Stanley clients and approved observers only, not for members of the press. For important disclaimers and disclosures, please go to the Morgan Stanley research disclosure website, www.morganstanley.com/researchdisclosures. The Q&A session will be conducted electronically. Please don't wait. I see there's well over 100 people in climbing, now about 150 people in climbing, that's fantastic. I know there's questions, don't be shy. I will do my best to get to them, but don't wait because this is only half an hour, and I'm already sucking the air out of the room. So with that, Lisa, thank you again for joining us. One, I think you wanted to share a couple of slides that help frame your key messages to investors at the top.

Yes. Thanks for having me, Adam. And luckily, my Investor Relations was kind to me and we only have two. So I'll keep my remarks brief, and we can jump right into the Q&A. And I know they're filed in advance on the Ford Investor website. So I'll just reference with slide. If we could just go to Slide 2, I'd appreciate it. So this is our high-level plan to win in the electric revolution. And I want to make it clear, it's not about just being competitive in the marketplace. All of the work that we're doing is really aligned to our core beliefs that this is the right thing to do for the environment. And it's wonderful to work for companies where these things are complementary to each other. They're not mutually exclusive. So we've mentioned this before, but I'll just restate our plan to win. It starts with our icons. Icons that no one else has, brands that no one else has. And they are in the heart of volume and profit segments. So these are not small niche products, and they're not being delivered at $100,000-plus price points. We're pricing these products so that they're affordable for anybody who wants to move into the EVs. Our tech stack, it's unrivaled, its scale is unrivaled. The types of experiences and services that we'll be able to deliver, especially now that we have Doug Field joining the organization, I think he's going to accelerate that work at a whole another pace. So we're really excited about that. Fit-for-purpose architectures, we don't believe one size fits all, battery cells and battery packs that will deliver what an F-150 Lightning customer wants are not the battery cells and battery packs that might deliver what a Mustang Mach-E customer wants or even our E-Transit and commercial customers who are way more sensitive to total cost of ownership. We have fully competitive battery costs and our other competitive advantage is the scale that we can generate across our total buy. When we talk about F-150 Lightning, there's over 4 million units that we source when we give an F-Series contract. And we do that together with our ICE and our BEV products, and we take advantage of that scale for the truck. And then we also have highly flexible manufacturing expertise. I'm so proud of the team. I get asked all the time about this, but our Van Dyke transmission plan is one of our best examples, where when we got out of the sedan business and the front-wheel-drive transmissions, we re-purposed those lines in advance to build the F-150 e-axles. And we're also going to build the hybrid transmission that we use in the Maverick off of those lines. So we have the added benefit that we have installed capacity, tooling is there, footprint is there, highly skilled workforce is there, and we know how to source at scale and build at scale. So for us, we're very excited to lead this revolution. And it's at a great point. I'm happy to tell the story today with you all. If we could go to the next slide. Just a few more points on this. And again, I only have 2 opening slides here, and I'd like to really get to the Q&A, but these are the key milestones in our strategy, very consistent with Capital Markets Day, $30 billion in our investment through 2025 on electrifying our vehicles. And this includes the vertical integration of our battery cell production, which I'm sure we'll talk about. It's really important to note that we are the #1 employer of UAW represented individuals in the U.S. And we plan to keep that title even as we transition into EVs, and we believe that there's a way to do that jointly with our partners as we transition out of the ICE into the BEV. And so I wanted to be clear that as we look at expanding our footprint, whether it's assembly or batteries that they will be a key partner with us in the transition. We plan to have equal or higher market share in the segments that we play in today. And frankly, the ultimate goal is total profitability. We look at the BEV share that we can gain and that's on the back of great F-150 and Mach-E conquest sales. Then you look at all the services and experiences with our connected vehicles and the size and scale of that fleet. And again, the expertise that we're bringing inside of Ford to accelerate that work. We believe there's a really clear path to profitability that's actually greater than ICE today. So with that, Adam, I just had the 2 slides, and I'm happy to answer any questions and get into the Q&A.

Great. Thanks, Lisa. There's a lot to get into here. But just to kind of rip the Band-Aid off the chip shortage topic, kind of can you share with us where we are on that? Any insights you're seeing on the tightness and kind of rate of change as it's affected your industry and Ford specifically quite hard.

Yes, Adam, I mean it's a really challenging environment and I have to take my hats off to the Ford team and our supply base is continuing down this path with us. It was exacerbated by these COVID-related shutdowns in Malaysia. So even though we were seeing now more incremental capacity coming on board, this latest Malaysia round that we talked about on our Q2 earnings is starting to rear its head, but we're prioritizing our vehicles. We have a very good allocation methodology that's global for Ford. And that also allows us to pivot because we do have a global methodology across the regions, but our guidance for the year is unchanged from July. So we stated back then that we thought we would be in an adjusted EBIT range of $9 billion to $10 billion for the year, and that's where we still think we're going to be. We don't have any change in guidance at this point.

So Lisa, you got, in addition, building up to your role as CEO of Ford North America, you have a ton of experience in purchasing and vehicle launching and supplier relationships. So would love your opinion on as Ford moves from being an ICE company to BEV, what are the key differences in how you approach purchasing and supplier relationships? And even issues like what Ford decides to in-source versus outsource, that make or buy decision. Can you help us understand, from your seat, how you see that evolving?

Yes. It's been a bit of a journey and a surprise, to be honest. The first thing I would state is that we're learning, we have to build in a lot more upside capacity than we thought.

That's good.

At first with the Mach-E, the success -- it is good. It's fantastic. It needs a lead time, as you know. And that's the lesson that we learned. We were able to pivot fairly quickly with the Mach-E. We were able to build more capacity inside the assembly plants where we make it and then our battery cell supplier LG Chem Solutions really came through with some incremental battery capacity. Those are the 2 longest lead as you can imagine. And then on F-150, based on the success of the reservations that we've seen, we are going to increase capacity there as well, both battery and assembly, but now we know for the future, obviously, those are only our first 2 programs. But as we're sourcing now, we're sourcing much higher on the upside of capacity. But it's important to note that we're not taking any ICE capacity out just yet. A lot of these products that we've launched are highly incremental for us, and that's another learning that we've had is we assumed substitution, but we're learning that we're reaching a whole different customer base. So I think that's the most important. Now in terms of EVs versus ICE, clearly vertical integration of batteries are most importance and not just the Blue Oval SK JV. If we're really going to unlock the cost equation on the batteries, we have to be fully down into the value chain. And that includes also recycling. So recycling of our scrap, recycling of end-of-life batteries, it's going to become less expensive than ground mining. It's going to allow better security of supply because we have access to it and frankly, better knowledge of ethical supply, which is incredibly important. So we have a lot of efforts underway to develop into that value chain even deeper with Blue Oval SK.

That's awesome. So Lisa, how about in terms of manufacturing and launching BEV vehicles versus ICE. Can you tell us a bit more, you alluded to preparing for upside surprise with the Mach-E, that's great? What have you learned from launching a BEV versus a traditional powertrain in addition to the upside capacity? More at a granular level, when you're converting an ICE plant to EV, what can be reused versus what needs to be like totally wiped and retooled?

So largely from a body structure perspective, the body shop can largely be reused. Top head to top head, they're different. There might be some structural pieces inside of the product that we have to change, use of some exotic materials, but by and large, it's largely a reuse. Same with the paint shop. So those typically can be highly reused. In final assembly, our belief and the way we've structured our business is that we build the EVs separate from our ICE products, trying to integrate them is way too difficult, way too inefficient. So we do sort of wipe the slate clean, if you will, on the final assembly. And you'll see that when we can get you into our REVC, which is where we'll build the F-150, a Dearborn Truck, what we've done is we've built our separate final assembly building that builds only the F-150 EVs, and it's highly, highly flexible, and we can expand the capacity, if needed. So we share a common body shop, paint shop, but we have a separate EV facility. And we think that's the way that you have to approach this as we launch into the EVs. The other thing we learned, though, is that it validated we're spending as much time on the off-board experiences, charging subscription services, Power Ups over-the-air updates. Our vernacular is very different than it was [Audio Gap] go inside of Ford and just BlueCruise coming out, one of our first big over-the-air updatable features. It's really exciting. And so again, I'm really happy to see Doug here. I think he's going to put us on a pace that was even faster than we were before. And I think we have all the capability here. He'll just accelerate it.

I'm glad you brought up vernacular. I mean one of the things with your vernacular that changes the word hybrid is not used as much. You still -- I mean I did a control F on your second quarter press release. I didn't see it at all. I told Jim about it. So I mean is it natural to see -- do hybrids just -- tell us how that planning works? Are we -- incrementally, it seems like it's more -- from the outside, it seems like it's more of a straight to BEV, hybrid has its place, but it seems like nowhere near as much as it did in 2-plus years ago? Is that incorrect?

Yes, I would say a bit. Not incorrect, but I think it's a matter of when you're looking at it. We went through our hybrid revolution back in 2004 to 2010. That's when we introduced one of the first lithium-ion hybrid vehicles well before everybody was still on nickel metal hydride and we went to lithium-ion on the Fusion Hybrid before anybody else. We have our own in-house transmissions at this point that we build for our hybrids. So for us, the reason we don't talk about hybrid is because it's such an innate built-in capability already. We know how to do them and do them quite well. So I think that's why you don't hear us talk about them as much. They're exceptional CO2 contributors for us. The cost of ownership is much lower, as you can imagine, because you just don't have the very expensive EV components to manage, and EVs aren't for everyone. There's a lot of folks that are still in rural areas that don't have access to charging, but they still want to be green. They still want to contribute. They still want great fuel economy and why not lead into hybrids where appropriate. I mean look at the Maverick, we just launched the Maverick with the hybrid to great success. So I think if you're just seeing that it's already built in, that's why we don't talk about it as much.

Okay. It's like no big deal. All right. So you mentioned that you're not taking out ICE capacity yet. Hold that for a second. Ford and a lot of established OEMs are tasked with having to invest in 2 extremely different powertrains at the same time, ICE and BEV, at least for the next decade or more, maybe 2 decades. Some investors think that, that it doesn't make sense long term to have one company tasked with having to support -- or have a foot in such totally different ecosystems. Why might that be wrong? And then kind of when could we expect Ford to actually start to shut ICE capacity?

So first, as I mentioned, there's still a lot of demand for the ICE products.

No doubt.

Even when you're at a 40% mix, you're at a 60% mix of ICE. So there's no view that we will not serve a customer base that we have today. So if we -- our view is we're going to serve every customer we have today and we're going to serve the new EV customers. Now because I mentioned body shop and paint shop, highly flexible, you can run both products down them. There's no reason to make any trade-offs there. Our final assembly strategy. We just build final assembly uniquely for EVs. And we were able to do it at Dearborn Truck Plant on the existing campus, Kansas City, on the existing campus. And frankly, an upcoming product where we'll have 2 assembly plants, one making an EV, one making an ICE. So we haven't had to make that trade-off. And we have a horizon available to us. I often joke, I live in 2024 to 2030, like my daily work is 2024 to 2030 conversation. And we can see what's coming, and we plan accordingly to that. And so we have a plan on what would ramp down and what would ramp back up. So right now, there is not a necessity for us to choose. There are decision points where we need to choose and we're choosing to lead in both because we can right now.

Got it. So Lisa, as we move into a generation of fully like software-defined vehicles with fewer parts, different parts, could we see radically different ways of making vehicles? How many parts go into an internal combustion car versus a BEV? And I realize that, that's moving pieces, particularly on the BEV side, but is there a meaningful -- where would you highlight the most meaningful differences? And then I asked that because you gave a clue where you think that EV profitability can exceed ICE. Last I checked, you guys make a lot of money selling ICE, particularly in this environment. So how does that happen? And how do you -- what level of input given that you're still so early with the -- in the journey of pure BEV gives you the confidence to think that you can generate a higher return on EV versus ICE?

So you have a couple of questions in there. I'll start with just how the technology is going to reshape the way we think generating efficiencies. And when we look at our fully networked vehicle architecture, there is no doubt that the way we put a car together in the assembly plant and final assembly will be dramatically different. Where we used to think about what goes in first, carpets or seats, the answer now is the power up, the power supply and essentially the domain controller that controls the whole network. The vehicle will be built around its electrical architecture in the future because that car has the capability of being so smart from the time it hits our final assembly. And the ability to manufacture with better quality, better cost, less labor is a wonderful opportunity that we're probably more excited about than anything else in manufacturing. And then the complexity is less. So we have over 30% market share today on F-Series, but we do it with 55 buildable combinations. If you think about the F-150 Lightning. F-150 Lightning launched with 1 cab, 1 box, 4x4 only. The only choice you really have are two battery packs and then you have some trim series in color. 130,000 reservations with effectively 1 combination and 70% of those new to Ford, new to pickups, new to Ford, new to the brand. That is what we are very excited about. We are now putting the F-Series franchise in a different segment. And as you mentioned, yes, we make a lot of money on our F-Series franchise and now we can expand it. In our view, F-150 Lightning is going to expand the F-150 franchise to a whole new set of customers and who have different reasons for buying the product. So that's what's most exciting to us about this revolution is finding new customers. And being first to market, to do that. With our F-150 Lightning launch, we will be first to market with a pickup truck EV at scale. And as you can see from how we're launching and our pricing, how we plan to maintain leadership and share when we launch.

So Lisa, your background is full of -- the F-Series has been a big part of your career, obviously, and you've been involved in so many aspects of putting those vehicles together and supplying them reliably. As you alluded, a lot of excitement around the F-150 Lightning. I -- am I right, a lot of investors think that you need to have a clean sheet approach, really start from scratch to get EV right all the way. To me, it seems that the F-series was designed to kind of really accelerate time-to-market. It's -- it uses of the existing frame and an exterior of, let's say, an F-Series and then it's all completely different inside. But is this the end state, like how might generation 2 of the F-150 Lightning change? Would it be more of a clean sheet and this is kind of you can use the learnings? Not just about manufacturing, but also the customer and those new segments to then feed that back in so that you can put together that second-generation F-Series Lightning later in the decade. Walk us through that kind of clean sheet, hybrid approach, not hybrid and powertrain, but you know what I mean, like reuse as you think about that segment?

Yes, I mean there's no doubt everything we're learning now even before we launch the product is going into next-generation planning. I don't have anything to announce or discuss here. I would just say, coming soon, we have some decisions we need to make and there'll be some future conversations about that. But there's no doubt it has inspired us to think differently and to think bigger and really dream what that F-Series franchise could look like in the future. So nothing here to announce today.

But you did invest to expand production of the F-Series Lightning, correct? I think to about $850 million investment. Tell us a bit about what that -- remind us how much that expanded capacity and when -- I see [indiscernible] remember 80,000 units. Remind us when what would be a realistic capacitized level to supply that vehicle?

So we haven't given capacity numbers, Adam, yet. There's been a lot of speculation about that. And we didn't give an investment number with that either. I think you're quoting the original investment that was at the Dearborn Truck Plant and the Roche. So more to come, but we haven't talked about our final capacity number or the investment that goes with it, but I would say more to come soon.

Okay. Let's look at parts of the EV strategy outside of the vehicles that you're most excited about. You mentioned recycling and end of life. That's a big one, I think. It's a big, big problem. It's one of these ESG problems that batteries create that seems like it's unaddressed. Tell us how you're thinking about that. I imagine as you're making vehicles, you have a lot of scrap at the factory itself and with your partners in SK -- Ford SK, that you'll be able to kind of start the urban mining, if you will, in the factory. But tell us how you're thinking and planning ahead for those end-of-life vehicles, which really probably own a significant number right now, but then it will creep up on you real fast. Let us know how you kind of close the loop on that to kind of bring sustainability to a level where even a lot of EV companies have not been able to address.

Yes. That, I would agree with you, very untapped space here. And you have to be, I would say, 5 to 10 years ahead of where this end game is going to be if you're going to be ready for it. And now is the time to do planning. So we really believe that the solution has to be closed-loop recycling. It has to be where either the scrap, whether it's from the assembly plant or more importantly from the battery cell plants that are popping up everywhere. That scrap plus these batteries end of life need to come back, they need to be -- the materials need to be ground. They need to be reused and we need to get them back into the value stream of cathode suppliers and even precursor suppliers, which are before cathode. That is really hard to do. Nobody has done it yet. But once you do it, then you don't have to worry about ground mining. You don't have to worry about does your product come from China or the DRC. You don't have to worry about offtake long-term supply agreements. The material you need is available to you because you bought it once. It's -- I'd like to call it an annuity. It just keeps -- it can keep recycling through the economy. So it's not just an ESG effort, but it's energy security, it's cost reduction and it's obviously ethical supply. It takes a long time to do this. And shortly, we will be talking about our next steps in this journey, especially now that we have the Blue Oval SK joint venture being formed. They will have steps beyond that to start talking about closed-loop recycling and not just selling scrap to somebody else to recycle. That's the easy thing to do. So we're very excited about that...

To capturing more of the value. All right. We'll stay tuned. Yes, we haven't seen many of the OEMs get into that yet, but it sounds like you guys are not trying to put words in your mouth, but it's something you're thinking about capturing more of the value, if I'm reading you correctly. So Lisa, on battery sourcing, under previous management, Ford had mentioned -- again, the world's changed in 2 years. So I'm not trying to like pack it into a corner or anything here. But that -- there was the supply chain had developed enough to really go third party and not have to make a lot of the vertical integration BEV. You've seen the whole arc of that change. I love your view on what drove that change. And tell us a little bit more about why SK? And what about SKI's value proposition or tech was most attractive to Ford?

Yes. There's no doubt. I mean when we sourced our first programs, we had 50,000, 60,000, 80,000 units of Mach-E. And at that time, it didn't make sense to vertically integrate. We just didn't have the volume. I'd say, it's that simple. Now that the volume is here, the scale is available, now it's the time to do it. So that was the change. In terms of the relationship with SK, our team -- and again, this goes back. Our dealers asked me once, how do we come out of the gate so fast? And I said, well, we were already -- we were training and ready. I mean our teams have had battery labs for decades inside Ford. Like I mentioned, we were one of the first with a lithium-ion battery in a production EV. It was a hybrid at the time, but -- so they tear down battery cells. They know every cell supplier. And SK, frankly, had a chemistry with their camp producer that was exceptional, and it really met the requirements that the F-150 Lightning had. We decided that was going to be a no-compromise truck. It was built for tough, and they had a chemistry of high nickel content chemistry that worked. They were also willing to localize in the United States, USMCA, and a truck that's built in America needed to have cells here. So it made a lot of sense to move forward with SK. They're very transparent. They are very easy to work with and cooperative and their cost structure was highly competitive. So it was the only choice, frankly, for the F-150, which is why we held on so long through the lawsuit that was earlier this year. But that said, we have other chemistries, and we talked about the lithium iron phosphate chemistry that really would be suited for commercial vehicles or any vehicle at this lower duty cycle. So -- and we still have LG Chem. LG Chem or LG Energy Solutions now supplies the Mach-E. So we have a lot of different cell chemistries and suppliers available to us and they're all for different purposes and different reasons.

Lisa, I got one from the audience here. I'll just read it. Daimler stated that they will not close the BEV-ICE margin gap until beyond the end of the decade. GM's expecting cost parity by 2025. Where is Ford and its belief about achieving margin parity? You say that you think it can be higher, but I don't know if you could put some levels of scale behind that. Presumably, it's not this year, I mean, just not fair. So when do those lines cross? Because that would be a very, very big. I would imagine at that point when they're more profitable, the Darwinian forces would then kind of start to decommission ICE as an industry.

Well, I mean, we stated before, even in Capital Markets Day that in the back half of the decade, and it was profit, it was profit parity. We have to be careful talking about cost parity and margin parity because a lot of this will be on the back of those incremental volume, services, experiences, the always-on connected services. So I think for us, we see it in the back half of the decade. Again, not a cost parity. I can see why maybe Stellantis would state that, but back half of the decade in profit, profit parity, which includes share.

Okay. We're reaching end of time, but I did want to let you go until I threw a few rapid fire questions at you, okay, Lisa. So first, can you give me a Jim Farley story because every time I ask people that -- who know him pretty well, there's always something I learn. So I wanted to give you a shot. And he's -- and he'll listen to this, so careful.

No, no, no. I mean I have to say, he always keeps it real. We were touring SK's facility in Atlanta a couple of months ago. CEO of SK's over. We're on our clean suits, getting all of our clean suits on to go into the plant and we had all of our hats and Jim puts his hat on backwards with the cap in the back. And all of the Koreans looked at him, and so they all turn their hats around, put they're hat on the back of the head. It just -- he knows how to lighten the mood. He knows how to connect with the team, and he's got great followership and it lightens the mood and it was just great. It's something that only Jim would get away with doing and it was light-hearted and well received.

A couple more. So you're a Michigan MBA, Go Blue. What's your favorite bar or restaurant in Ann Arbor?

Oh, wow. Well, I'd have to say -- yes. That was back in the day when I lived in Royal Oak, Michigan, and I drove to Ann Arbor. So I'm getting...

So you didn't hang out at Dominick's as much as maybe you wanted to.

No. But I will tell you, I'm a Steelers fan. So if you're in Pittsburgh, you go to [indiscernible]. As still I'm a die-hard Steeler fan, you got [indiscernible] Pittsburgh, how's that?

Oh, that's good to know. I'm going to take I think my Browns play -- I want to take my sons to Pittsburgh to kind of forget the real experience. So we'll get some Body Armor. Order some Ford F-150 kind of, I don't know, Armor and wear a hard hat. All right. Listen, we're going to break it there. Lisa, thanks so much for joining us, sharing your insights on this incredible transition that Ford's going through. It seems to have really resonated with investors, with -- of all kinds, not just institutional, but retail as well. Jim Cramer is a huge Jim Farley fan, and I think that it doesn't stop there. So we're going to leave it. And with that, we conclude the Ford Motor Company webcast at the Laguna 9th Annual Conference. Thanks again, Lisa.

Thanks, Adam.

Take care.