Ford Motor Company (F) Earnings Call Transcript & Summary

Hello, everyone. I'm Joe Spak, lead automotive equity research analyst here at RBC Capital Markets. And today, very pleased to have with us for the next session from the Ford Motor Company, Bob Holycross, he's the Chief Sustainability, Environmental and Safety Officer; and Dave Webb, the Treasurer of Ford. So gentlemen, thanks for joining us today.

Great to be with you, Joe. Thank you.

Yes. Thanks, Joe. I really appreciate it.

Perfect. So Bob, maybe to start, Ford has taken a number of steps to address climate change including the announcement of its Sustainable Financing Framework and your inaugural green bond issuance last November. How would you describe your company's ESG strategy? How has it evolved over the past few years? What are your priority focus areas? And maybe a comment or two on where this ESG push has really come from because we've seen different companies talk about different catalysts here, whether it's leadership, investors or other stakeholders.

Yes. Thanks, Joe. Yes, it's a great way to kind of kick off. So for Ford, our ESG strategy is really rooted around our broader company purpose, right, which is to help build a better world where everybody is free to move and pursue their dreams. And look, statements like that can seem lofty, but when you look at, really, a company like ours, more than 100-year history, in terms of influencing transportation, we take that to heart, especially when you look at the reach of our brand and our strategy. So everything in our ESG strategy and what we do around sustainability is how we can make a positive impact. And that is really rooted in people's ability to freely move. So sustainable transportation. And not just the vehicles on the road, but the whole ecosystem around how vehicles are built, how they operate and use, what services they provide, what does it mean for the broader workforce and the network that's dependent upon our products. And that has really driven up and down throughout the company. I mean you think about certainly, Bill Ford's leadership and the legacy the company has had in this space, it is really rooted in everything we do. And our Ford+ plan, which is centered around leading the electrification revolution and treating customers like family. It's embedded in every part of that. And it goes up and down the organization, all the way up through the Board of Directors where we have our ESG Sustainability and Policy Committee where these issues are reviewed and progress is monitored on a regular basis throughout the year, rooted in all the different reporting that we do in terms of transparency. But as you mentioned, when you think about what's happening now with this transformation the industry is going on, it really is about moving towards a 0 emissions transportation future. And that is how we are going to best get ahead of tackling the challenges around climate change. So our strategy is rooted in getting to carbon neutrality. That's by 2050, aligned with the science, aligned with the Paris Climate Accord, which Ford has been aligned with from the beginning, which is another important piece of this, right, in terms of consistency, clarity of purpose and targets and measuring progress along the way. So we're really excited about the journey that we're on and the ability that we have uniquely, as Ford, to get to scale, whether it's in battery electric vehicles or in the way that we manufacture our products and the services we provide to really make a difference.

Yes. And Joe, maybe I can jump in.

That's great to hear. Dave may be -- sure.

No, I was going to say, I think I was probably is going to say the same thing where you were going to take us. So maybe I can jump in and just touch briefly on our Sustainable Financing Framework because I think that was a pretty important effort of ours last year and I think a step in the right direction. And I think as we think about our Ford+ plan, it's really about bringing our corporate strategy, our sustainability strategy, which Bob and his team lead, as well as our capital market strategy together under a really integrated framework. And all of these things play a critical role, in our mind, in terms of how we think about growth and how we think about value creation. And it's all three of these things working together and coming under the Ford+ umbrella. And that's really why we chose to establish our Sustainable Financing Framework. We thought that the time was right, and we thought it was a great opportunity to bring these three swim lanes together. It's the first fully integrated framework of its kind that covers both an automotive OEM as well as its captive finance subsidiary. And it also covers all of the various markets that we issue in and the products that we cover. So both unsecured debt as well as securitization. And the framework really guides how we obtain financing to support environmental and social projects, including clean transportation, clean manufacturing, making lives better, community revitalization. So a real step forward there. And proud to say that we were able to achieve the highest possible rating, an advanced rating from second-party opinion provider, Vigeo Eiris. So a good effort in that regard. The other thing that maybe I'd highlight is we also, last year, tied our corporate and supplemental revolvers, so $15.5 billion of credit capacity across our global bank group to sustainably linked KPIs, making us the first automotive OEM to do so. And in fact, it's the biggest such facility in North America. So again, I think a really big step in the right direction there and evidence of our intent and our commitment to leading in this space.

Yes. That's great and helpful. And maybe to build off of that, is it possible to -- I know still in the earlier days of the framework. And you mentioned the Ford+ program, which again is maybe more from the business side. But how does the integration of this ESG sustainability -- the framework and some of the ESG targets you strive to achieve, how do you believe that's helping you -- helping forward from a competitive positioning standpoint?

Yes. I can start with that.

Maybe Bob, you start and then I can jump in with some additional color.

Yes. No, it's a great question, Joe, because as you know, sustainability targets and strategies and reporting have really gotten a lot of attention more prominently in the last few years. And in terms of competitive positioning, it can be a little bit hard for different stakeholders to sort that out. And for Ford, what we believe differentiates us is, we've been on this journey for a long time. We've been reporting around our progress and our strategy for sustainability for well over 20 years now. We do believe, competitively, it is what a variety of stakeholders are looking for. So not just in terms of our competitive position in the industry but what employees are looking for in terms of companies that they want to be a part of and that they want to work for. So especially attracting new talent into a lot of these new areas that we're getting into. This is a big differentiator and a competitive advantage for us. Customers are demanding more and more accountability from companies around their environmental footprint, their social initiatives and how they how they work up and down the entire value chain, whether it's with their immediate workforce or the supply base. And investors are looking at this very closely as well, wanting to understand, on behalf of their own constituencies, are the companies they're investing in progressing in the right ways in this arena? Are they being transparent? Are they putting their money where their mouth is? Are they advocating for policies that back up their sustainability strategy. So that, we believe, is the key differentiator in a very crowded space now is, are you really taking actions beyond just ambitious statements. And that's what we've been doing for the bulk of our journey.

Yes. And maybe just to add on to what Bob said there, particularly as it relates to Ford and how we think about our bank group as well as the investor community, folks and relationships that have been by our side for a very long period of time. And frankly, underpin our liquidity profile and what we need to do to effectively fund our business and cost effectively fund our business. What we're finding is that both our banks and investors are starting to make real capital allocation choices based on companies that are showing up and really leading in the ESG space and committed, deeply committed to that. And that's something that has always deeply personal to Ford Motor Company and something that we've been heavily invested in even at times when it was really difficult to do so. And so the huge interest that we saw as it related to the framework and the number of investors that we talk to on the back of launching that framework, the overwhelming demand we saw when we issued or went to market with our inaugural green bond and then the huge amount of receptivity from the global bank group as we transitioned our revolver to sustainably linked facilities, I think, are just 3 really important but early proof points on how important this transition is and how the external community is thinking about corporate participation.

That's a great segue maybe into your green bond, which you sort of danced around in a couple of questions and topics here so far. So last November, you priced a $2.5 billion green bond for your battery electric vehicle initiatives. RBC was a joint active book runner on that transaction. It was the largest green bond ever issued by a U.S. company. Maybe just spend or dive a little bit deeper into what made you want to tap that sustainable debt market? And then a little bit more color maybe on some of the investor response. I mean you mentioned the overall demand, but any sort of feedback you could give from that journey would be helpful.

Yes. So I can jump in, Bob. Obviously, you were side-by-side with us on that journey. So feel free to add any addition additional color commentary. But maybe first, before getting into the green bond itself, just a huge thank you to the RBC Debt Capital Markets team. Jack Sconzo and team have always provided tremendous support for the Ford franchise. And this certainly was no exception. It was a really important, really strategic landmark transaction for Ford. And so I was thrilled to be able to get it across the line. So as I mentioned, just going back to the start of the fourth quarter, effectively last November, we launched our Sustainable Financing Framework, which we thought was just a natural extension of Ford+ and frankly, a natural extension of our ESG strategy. And it's focused really on funding our ambitious BEV plans as well as some of the other items I mentioned, like clean manufacturing and frankly, building a better world. Importantly, this framework paved the way for the issuance of our inaugural green bond in November. That was a 10-year transaction. It raised net proceeds of $2.5 billion, which, as you highlighted, is the largest corporate -- U.S. corporate green bond issuance on record. And what I'd say is, frankly, we were overwhelmed by the level of investor response. There were over 350 individual investors that put orders into the book. The demand grew well north of $10 billion. So huge demand for the issuance, and it comprise all the big names in the investment community and the asset management industry, effectively a who's who of fixed income asset managers. The other thing that I'd highlight is we were able to price the bond at 3.5%. And so the deal priced well inside where we would issue a traditional unsecured transaction. Again, just highlighting that investors believe in the importance of these initiatives. Importantly, they also believe in our BEV strategy and are willing to partner with us on this journey as we transition from an ICE world to an increasingly electrified world. And so as we thought about our inaugural issuance, we wanted to make it as green and straight down the fairway as possible. And so as we thought about use of proceeds and how we were going to allocate those proceeds. It was focused on effectively our electrified vehicles, the products that are super exciting that we're bringing to the market today. So things like our Mustang Mach-E, our F-150 Lightning, our E-Transit and some other vehicles that have yet to be named. So we made this inaugural issuance as green as we possibly can make it. And going forward, as we think about our future electrification ambitions and further accelerating our efforts, this framework is going to be an important part of that process and will continue to be -- play a meaningful role, particularly as Ford makes the transition to an increasingly electrified world.

Yes. The only thing I would add to what Dave said, Joe is...

Maybe it might be helpful for...

Sorry. No, just again, around also like the intersection around the sustainability journey and how it kind of came to this. I think for us, throughout the company, being able to issue this green bond and set up the framework, as Dave described, is really the ultimate proof point that our strategy is resonating, to Dave's point, right, that we have the transparency and the accountability in it that gives the confidence for folks that are joining us and investing in this. So it was a real exciting kind of intersection for all of us in the company.

Yes. No doubt. Maybe it might be helpful for this audience, so just to -- that maybe don't look at Ford or auto on a day-to-day basis to briefly go over your battery electric vehicle strategy. I know you're investing over $30 billion. That -- it probably doesn't stop there because there's a -- I think that's by 2025 sort of time frame. So maybe you could sort of review the electrification strategy, what you're doing to the portfolio? And what about battery electrification strategy you believe differentiates you from your competitors because obviously, the rest of the industry is electrifying as well.

Yes, sure. Sure, Joe. So you hit the headline number. Yes, we're investing $30 billion by 2025 in BEVs frankly, the batteries that power them. So a big commitment on our part. And you're right, it's just the start. And so we're really looking to further accelerate our efforts. I'd say, regarding the strategy itself, the biggest difference between Ford and competition is that we're, frankly -- we're doing right now. We're building vehicles that -- and BEVs that people are lining up to buy. And we're going for volume and market share, not just number of nameplates because we think that scale, frankly, is really important. And our first 3 BEVs are huge hits with customers and intentionally focused on electrifying our iconic nameplates. So I mentioned it earlier, but the Mustang Mach-E, which was the Car and Driver EV of the Year, and is virtually sold out. The F-150 Lightning with 200,000 reservations already. The E-Transit, which we launched earlier this quarter and already has 10,000 orders, including from the likes of Walmart, and there will be other models to come. I think right now, to meet the enormous demand, we're rapidly scaling production and intend to have 600,000 BEVs by 20 -- by the end of 2023. And frankly, this is probably our biggest challenge right now, which is effectively breaking the constraints to meet this incredible demand, things like knocking down the walls of our Rouge EV Center, securing extra batteries from our partners, even stockpiling batteries where needed to ensure that we can meet the demand. I think the other thing that I would say, and I'm sure Bob has some perspective on this as well. What's really exciting is our BEVs, they are no compromise products. It's not a compliance play for us. The F-150 Lightning, for example, it's fundamentally a work truck. It's attractive to customers because of its payload, because of its performance, because of new features like onboard power that just aren't possible in a traditional vehicle. So it's not just the clean vehicle footprint that we're giving to our customer. It's the added capability, the added performance that comes along with, and I think that's a really important point as we think about differentiation. And then maybe lastly, in a few months, we're also going to be breaking ground on BlueOval City, and that will produce our next-gen BEV volume starting in 2025. And that in combination with the 3 new battery plants that we've announced in Tennessee and Kentucky. Our battery capacity will be expanded to 140 gigawatt hours, which is effectively enough to power 1 million BEVs per year. So this investment alone, again, is the biggest single investment in our history. And then -- and I think communicate signals how deeply committed we are to the space, to leading in this space and continuing to champion the transition to electrification. Bob, any other thoughts or points from your perspective?

Yes. I mean I think the other piece of it is also not just the vehicles themselves, but how they're built and the entire ecosystem around it when we think about our ESG strategy, not just from an environmental standpoint, but from a social aspect as well, right? This transition is touching every part of our business and every part of the value chain. So Dave mentioned the new investments that we're making in facilities, whether it's the expanded capacity in Dearborn for the F-150 Lightning and the all-new facilities that we announced in Tennessee and Kentucky. These are all going to be carbon-neutral facilities in terms of the electricity that's used to power them, in terms of renewable electricity. It's directly sourced. This isn't about buying credits in some other part of the world and using it as a green wash offset in some capacity. It is really around how we can directly have an impact in terms of getting to true carbon neutrality. We're going to need help along the way, obviously, from a variety of constituencies, but it is the vehicles and everything that Dave said, but it's also in the manufacturing of them. We're going in through the supply base as well in terms of how we set up these targets, around making sure we're doing this in the most sustainable way, and also in how we're transitioning our workforce and the new skills that are going to be required to deliver these vehicles, and the expanded opportunities for the workforce in terms of new services and other aspects of the business that are going to be new to us. So it really is a complete picture beyond just the excitement, which we are all very excited around the products themselves.

Bob, you mentioned the value chain and obviously, with BEVs, it completely changes versus the traditional ICE vehicles. I know you have a partnership with SK Innovation for some of the cell ventures. How do you -- how does Ford think about needing to move maybe even further down the value chain through some of the inputs for batteries, for argument's sake? And even if that's something you don't want to necessarily get really hands on with, what processes are in place to make sure the sourcing and procurement of the materials needed are done in an environmentally and socially responsible manner in line with the framework you've laid out?

Yes. It's a really important question, Joe, and it's top of mind for us, especially now with the scale that we're leaning into with the battery electric vehicle portfolio. So from a supply base standpoint, just in terms of how the framework we've set up around sustainable sourcing of materials or other aspects of the vehicles themselves. We have set up a whole supplier code of conduct in partnership with the supply base. So as we continue to source all aspects of the vehicle, transparency and reporting on the practices that are going to be used down through the value chain in terms of the materials themselves and other aspects is integrated into the terms and conditions for suppliers so that we have full line of sight in terms of what they're doing. We're partnering together with other third parties around responsible sourcing of materials. So the Initiative for Responsible Mining Assurance or IRMA is one organization that Ford has been a part of that helps in terms of best practices for this. The Responsible Business Alliance is another conglomerate of folks that are coming together and setting the industry standards in this space. So we have set out full transparency in partnership with our suppliers on how we're going to track and ultimately make sure up and down the value chain, this is being done in the most responsible way. And that is not just even on the front end in terms of the supply of the materials and ultimately to the assembly, but even what happens at the end of life of these vehicles. And you've seen the announcements that we've had in our partnership with Redwood Materials and then even most recently, the pilot program, where we're going to be supplying them with batteries from vehicles that we've actually had on the road for some time already, our focused battery electric vehicles and our hybrids, where they're going to continue to demonstrate how they can harvest materials out of batteries at end of life to help diversify the whole supply chain for the raw materials themselves, which, as we all know, is presenting a challenge, right, in terms of not just the ultimate amount of supply, but where it comes from, how it's handled so that we make sure we have a more diversified supply chain, whether it's for the U.S. in terms of its competitiveness or these different chemistries as you talked about, so that we're not entirely dependent upon one set of metals, whether it's cobalt, nickel, lithium. So we're constantly looking at how the technology is evolving in different battery chemistries that are going to help us diversify that. So there's not a predominant set of dependence upon one region of the world or one type of material. And so we can make sure it is done in the most environmentally and socially responsible way. So a lot more to come on that, but the framework that we've set up as part of our overall ESG strategy is not new, and it's going to serve us well in this space as well.

I recently had an opportunity to go to a Ford Pro event that the company put on. And what really struck me is that what you effectively do and make is a tool for so many small and large businesses really across the globe. And as those small and large businesses in the U.S and Europe are themselves trying to electrify their fleets and decarbonize, it seems like you have a really great opportunity here. So can you talk a little bit about the strategy with Ford Pro? And maybe some examples of how commercial fee customers can benefit from, whether it's the E-Transit or the F-150 Lightning, and really just even the broader Ford Pro ecosystem because it seems like this is a real opportunity to help a lot of your customers who may have similar climate goals as yourselves.

Sure, Joe, maybe I'll -- go ahead, go ahead, Bob.

It's -- go ahead, I'll let you start. Okay. Yes, as you can see, Joe, this is a real exciting topic for both of you and inside the company because this is where we see the greatest opportunity, right? I mean, what you talked about on the commercial side of it. So while everybody is excited around the performance of EVs in terms of their get up and go and fun to drive and whether it's the Mustang Mach-E and what we're demonstrating with the Lightning. For these commercial customers who have work to do, right, the opportunities this provides not only in terms of efficiency, cost of ownership, operating cost savings, the ability to do work in different ways that maybe they couldn't do before. You mentioned the opportunity you have to see Ford Pros, the commercial vehicles in action out in California, right, with wine growers and farming. The ability to take a truck inside a wine cave where you obviously can't idle an engine because of the surroundings, but you can have a battery electric vehicle because it's 0 emissions. But it's so much more than that, as you mentioned, right, whether it is the ability of a Transit van to move people and move goods in one capacity or the way that the Lightning can be modified to do the work more broadly beyond just last-mile delivery, which has gotten a lot of attention. And it's an important aspect, but it's really only about 10% of the overall commercial business and fleet. And so the differentiator for us is these vehicles, whether it's the Transits or the Lightnings, can be modified to do all kinds of different work that we know what our customers demand because of our significant share in this market, nearly 50% when you look at across the whole spectrum of commercial services. When you partner that with all the other connected services the vehicles provide beyond the operating cost or savings of being 0 emissions. It's another significant opportunity to have a true one-stop shop in terms of what Ford Pro can provide for these customers, right, whether it's the ability to do invoicing right in the vehicle because of the software that's provided, depot charging, that's unique beyond what retail charging needs are for these different businesses on site where they do work. All the other telematics that come around tracking and helping to keep these vehicles up 24/7, which is at the heart of how these customers need to run their business. So it is a huge opportunity and unique to Ford because of how we have the captive share of this market today.

Yes. And maybe...

One of the most interesting things -- go ahead.

No, go ahead, Joe.

Go ahead.

I was just going to say, I think the really amazing thing about Ford Pro is this is a business that we've led in for a long time, both in North America and Europe. Traditionally, it's been about the vehicle. But as Bob highlighted, it's increasingly about the ecosystem and the capability that we're bringing to these businesses. The businesses that form the backbone of the U.S., the North America and even the European economies. And so that's what we're really excited about is helping improve these businesses, helping improve uptime, helping deliver efficiencies that ultimately improve the bottom line for these customers. And overall, Ford Pro also has a role to play in helping them transition, transition from a product that has historically been ICE into one that is increasingly electrified. And that's something that we know isn't going to happen overnight, 10% to 15% of these customers transition -- kind of transition vehicles -- or 10% of the vehicle fleet transitions in any given year. So the need for integrated solutions that covers the full kind of swath of vehicles, both Ford and non-Ford, frankly, will be important. And so we think there's a real role for us to play in aiding the transition here as well from ICE to BEV.

Perfect. Well, there's a lot more we can obviously get to. I think, unfortunately, we are out of time. So we'll have to have you back for future conversations hopefully again next year. But gentlemen, thank you very much for joining us today. We really truly appreciate your insights into this certainly exciting and fastly evolving area of finance, but also certainly exciting times for Ford Motor Company. So thank you very much.

Thank you, Joe. It's a pleasure.

Thanks, Joe.