Ford Motor Company (F) Earnings Call Transcript & Summary

Hello, everyone. My name is Holly, and I'll be your conference operator today. I would like to welcome you to today's Ford Motor Company Capital Market Call. I would now like to turn the call over to Lynn Antipas Tyson, Ford's Executive Director of Investor Relations.

Thank you, Holly, and welcome to our call about our exciting announcement this morning. With me today are John Lawler, our Chief Financial Officer; Kumar Galhotra, President of Ford Blue; and Doug Field, Chief EV and Digital Products Officer, Ford Model e. Today's discussions also include forward-looking statements about our expectations. Actual results may differ from those stated. The most significant factors that could cause actual results to differ are included on Page 15 of the presentation that we posted on our on website this morning. Unless otherwise noted, all comparisons are year-over-year. Company EBIT, EPS and free cash flow are on an adjusted basis. Product mix is volume weighted. We'll start the call with a few comments from John, and then we'll open it to Q&A. In the interest of time, I would greatly appreciate it if you would limit yourself to just 1 question. We're going to have to end this call about 5 minutes early because we're going to be jumping to our global town hall where all of our employees will hear about all of this really for the first time. So now I'll turn the call over to John.

Thanks, Lynn. Good morning, everyone. So today's announcement is really the next logical step in the acceleration of our transformation under our Ford+ plan. We're reimagining, creating a world-class company that's designed to compete and win long term. And so what that means is that for the next 100 years, we are going to continue to grow and be a very strong company. Now creating new distinct businesses Ford Blue, Ford Model e, that's going to enable the best of both worlds. Ford Blue is our ICE business and it's built on iconic lifestyle products and will deliver deep manufacturing know-how and scale to the entire enterprise. Blue's focus will be on disciplined capital allocation, process simplification and dramatic structural cost reductions to optimize cash generation [indiscernible]. Looking at Ford Model e, it's designed with a clean sheet to attract new talent with autonomy to accelerate growth, deliver breakthrough EVs, while that while creating exciting new digital experiences for our customers. Combined with our leading commercial business, Ford Pro, as well as Ford Credit, we believe Ford now has the right organizational structure to compete, win against the very best, both legacy OEMs and new best startups. We are committed to driving long-term value for our customers, both retail and commercial, which in turn, will drive value for our shareholders. And with today's announcement, we reaffirm our '22 guidance of $11.5 billion to $12.5 billion in adjusted EBIT, which we attain the high end of our adjusted EBIT guidance, our margin would be at 8% 1 year earlier than our target. We shared our target to build more than 2 million EVs by 2026. That's about a 70% CAGR and EVs will account for more than 50% of our global sales by 2030. And we also reset our profit ambition. We're now targeting a 10% adjusted EBIT margin by 2026, which is 270 basis points higher compared with what we achieved last year in 2021. So with that, let's open up the line for your questions.

[Operator Instructions] And our first question is going to come from the line of Rod Lache with Wolfe Research.

I had a couple of things I'm hoping to fit in here. So it sounds like the separation of Ford Blue and Model e goes beyond product development to purchasing sales groups. Can you confirm that, that extends even to the different dealers -- the Ford electric dealers with different franchise agreements? What's the time line for building all this up? And I'm talking about all of the different functions within Ford Model E. And then lastly, most EV-focused companies spend years of investing. So profitability is kind of a long-term endeavor. Just at a high level, is this EV business profitable kind of in the investment time frame as you look out to 2026? Or is it generally through that time frame burdened by the investment stage?

Thanks, Rod. I'll start. It's John here. I'll start with the last one and then ask Kumar to talk about the dealers and Doug can talk about Model e. So as you would expect, we are investing heavily in our EV portfolio and our growth plan. It's higher than we had been expecting just last year, as we build this out. And so in the near term, our EVs will not be on a bottom line basis, EBIT positive. And as we start reporting these segments next year, you'll see that clearly. But we intend, as we get to our second generation of products, that those will have fully competitive margins and be EV positive. And so that will come over time and be EBIT positive.

And our next question is going to come from the line of Joseph Spak with RBC Capital Markets.

Holly, just one minute. We just want to finish up answering the other questions.

Kumar, do you want to handle that...

Yes, just respond to Rod's question about the dealers. The future for -- well, let me start with, we are pending on our dealers. We are going to stay with our dealer franchise model. Moving forward, we expect them to start getting more and more specialized. We already have some of this with our commercial vehicle centers for Ford Pro because those customers' needs are quite different than our retail customers. On the battery electric vehicles, those customers' expectations are quite different. The kind of experience that other battery electric manufacturers are providing, it's quite different than our experience. So over the next few months, we're going to be working with our dealer body with designing the experience itself and then equally importantly, the standards that actually deliver that experience. The dealers will have the option to opt into the new standards and the new experiences. And that whole process Rod, I believe, over next few months, I can't be any more precise than that, but certainly, before the end of this year should be wrapped up. So we will be very clear on the dealers who are Model e dealers. The other question Rod had was on something to do with Model e.

Rod, forget the question.

So I was -- just to clarify this, you -- the 2 things that you said. So John, the second generation becomes profitable, that's beyond the 2026 time frame, just to clarify that. And the question organizationally was it sounds like you are not having different franchise agreements. You're using your existing franchisees, but you're expecting them to opt in for different policies. So will only certain dealers carry electric vehicles? Are you trying to -- you try to just create something that is sort of legally different or no?

The key is the experience and the standards. Once we develop them, and we're going to work with them to develop the experience and the standards. Once those are developed, then the dealers will have the option to either opt in or not.

Okay. And the time line for standing this up, you're building a big group here within Model e in product development and so forth. What is the status of that group today? And what's kind of the trajectory of it?

Well, on the product development side, we are up and running, and this is just a different way for us to get all the people together and get them focused. The team's that built the Mach-E and the Lightning are here. We're building out that model. We have a number of people that have already started working on the second-generation vehicles. So we're not waiting at all. We can want to continue to recruiting and get the very best people in here, but my goal and house goal is we don't miss a beat.

And Rod, the clarification on the margins for Model e. The team will be working to improve the BOM cost, the material cost significantly on Lightning and Mach-E as it continues today. But the second generation vehicle start launching in '25 with the site in Tennessee. And those products, that second generation will be built up off a clean sheet, and we expect them to have fully competitive EV margins at that time. So really starting in that '25 time frame.

And our next question is going to come from the line of Joseph Spak with RBC Capital Markets.

I just want to go back to the, I guess, the [Technical Difficulty]

Lost Joe.

Between the ICE and EV. But I guess what I want to better understand is the exact level of the investment in that. Because to me, it seems like that part is structural. And the volume is certainly going to be variable and might be in your favor, it might not. But I want to sort of try to better understand the structural investment costs you think you're adding between now and 2026?

Okay. Joe, you cut out, so I missed part of it. I caught the back end of it.

Sorry, I can repeat.

Okay, can you repeat the first part of it? I caught the back end around the structural costs.

Yes. I guess just on the 300 basis points, right? So I get the $3 billion in lower ICE structural cost, I'm assuming there's some top line growth, then you think you'll get some conversion on that. But that part is going to be variable. So I guess what I want to understand is embedded in the 300, how much is sort of a negative structural investment part?

Right. So as Jim said, over the next period between now and '26, total investments planned right now for our BEV business are $50 billion. So that will be going into Model e, and that's the footprint, that's the products, that's direct investment in joint ventures, that's expense, engineering expense, et cetera. And then Ford Blue, we'll be investing in the products, as Jim talked about, where we believe that they will have continuing consumer demand over time. And -- but that will be at a much lower level than what we've seen in the past on our ICE products. So some of that investment will be a shift out of Blue into e, and then we'll be looking at reducing structural costs within Blue and that $3 billion will be all within Blue. And that's the way we should think about that and how we'll show that over time and the progress against that, it will all be in Blue while we invest in Model e. Does that clarify...

Is that $3 billion net-net? Or is that the gross savings on the ICE side?

That $3 billion is the gross savings in Ford Blue, right? When you look at the company in total, the overall umbrella, we're going to be investing about the same level overall. We'll be driving the efficiencies in Ford Blue. So $3 billion of structural costs coming out of Ford Blue, but we'll be investing in Model e. And so in 2023, we'll be providing you with discrete P&Ls for each of the divisions. So you'll be able to see the revenues. You'll be able to see the volumes. You'll be able to see the margins in e and you'll see the same thing in Blue. Then we'll be talking about the performance drivers for each of the divisions, as well as Ford Pro, Ford Credit. Ford Credit will continue to have a full P&L, balance sheet income statement, et cetera. And then we'll have Ford Drive as well as we've been reporting mobility today as a segment.

Our next question is going to come from the line of Adam Jonas with Morgan Stanley.

Can you hear me?

Yes, Adam. We can hear you.

So back to the dealers, Jim was saying no inventory. So I'm interpreting that as 100% order to delivery or -- and/or no haggle, one price. And you confirm that that's part of what you're going to be in addition to the capital improvements and the ability for the dealers to opt in on having the equipment to handle higher voltage, the safe and functioning and reliable way to service the e-vehicles, is that also going to include one price and a kind of full order to delivery type of approach? Is that the idea?

Yes. Adam, this is Kumar. As I mentioned earlier, we will be taking these experiences and creating standards for those over the next few months with our dealers, but those are the key tenets of that experience, yes.

Okay. Thanks Kumar for confirming that. And just -- does that mean that -- I'm thinking of agency models or some kind of fixed commission or something or I -- presumably, that's also -- and I know you're not at liberty to say the details all for grabs, but are we mistaken if we start to think about something that could involve a potential agency model as you work with the dealers on that strategy?

So Adam, I'll start and then hand it over to Kumar. I think we have to look at that differently around the world. We're already using the agency model in China with our Ford Blue Mach technology stores that we're opening up, select city stores. So that's an agency model. And the ability of the agency model is a lot more straightforward in Europe. Now in North America, I'll let Kumar talk about that because he's been working that very closely with the dealers and with the team.

Yes. For North America, we're going to stay with the franchise model, but with a very different, I know I just keep repeating myself, very different customer experience, very different standards, no inventory, great transparency for the customer. So we're building out that experience, but we're going to stay with the franchise model.

Well I mean you have to stay with. There's no -- am I mistaken that there's no choice. You legally have to stay with the franchise model. Is that correct?

That is correct.

Okay. And just last one for me. You're going to have separate P&Ls for Blue and for Model e. Will there also be separate balance sheets and equity that's accumulated?

No. So we will have EBITs and revenues and volumes, et cetera, for e, for Blue, for Pro. The only business unit that will have separate balance sheets and equity will continue to be Ford Credit. So there'll be no change in Ford Credit, but we're not going as far as to create separate balance sheets and equities for the segments.

Okay. Just to confirm, I didn't mean for external disclosure, but internally, this was how I meant the question, you're not thinking of internal capitalization of these businesses?

Not at this point, no. No, we're not going at this point -- I think you're asking is, are we going to the point where they're separately auditable, and we're not taking that step, we're setting them up as segments.

Yes. Or even separately investable from private -- the way that you or some of your peers can offer in excess for private investment in certain units, so direct investment like a GM Cruise example, for example. That was the spirit of the question.

Yes so, exactly. So as Jim had talked about, Adam, we unpacked that. We pushed and pulled on it. We spent a lot of time around it. And right now, we're just going to the segment level. We are not going to auditable -- and as you know, that is a much heavier lift from a reorganizing standpoint.

Our next question will come from the line of Colin Langan with Wells Fargo.

Just I know on the media call, you mentioned the spin is off the table, but I do get a lot of questions about a tracking stock, so a partial spin maybe 10%, 20% to sort of solidify the value of the modeling. Is that something that would be considered? Is that just had too much complexity? And one of the reasons I think people want something like that as start-ups to have pretty high stock comp to draw to get that tech talent. If you don't do something like that, how can you create structures that are similar to stock comp to draw on the top talent?

Yes. So at the start, we're going to go to reportable segments. And that's how we're going to manage it. We are not going all the way in the structure standpoint to auditable and investable, which is what would be required to do something like that. That's not our plans at this point. We believe that once we start reporting the segments that you'll be able to see the value creation amongst each of the divisions, and we feel that we should get credit for that. Understand, we had a lot of discussions about the point you're raising, but at this point, we are not going all the way through to auditable and investable.

And just one quick follow-up. I mean I guess everyone is going to be asking me how to frame the losses that are coming out of Model e. I mean what kind of color can you give there? I mean to sort of help us ballpark what kind of drag that is today on your core EBIT in terms of the investments there that are weighing into?

Yes. And so part of that is, as you'd expect, we have a lot of work to do to completely segment what's in Model e, what's that driving relative to what's in Ford Blue. And so that work is underway. What I will say is that our guidance and getting to the 8% EBIT margin by 2023 includes the investment. It includes the margin drag of Model e within that. And so the way to think about it is we're still committed and we're reaffirming our guidance to the 8%, that will include everything we're doing on Model e. And then from there, we will march towards the 10% by 2026 as Model e continues to build out more efficient models, lower material cost and starts to scale as well as we create a much leaner structure within Ford Blue, and we continue to improve that business and drive that for cash generation. So that's the way I would frame it up right now. And of course, as we go over time, Colin, as soon as we can, no later than the first part of '23, Q1 2023, we'll be able to start to provide a lot more clarity around e, Blue, Pro, of course, we do that for Credit today, and then we'll have the clarity around Ford Drive, which is our mobility business.

And our next question is going to come from the line of Emmanuel Rosner with Deutsche Bank.

One follow-up question on the 10% margin goal around 2026. So is it fair to assume that this would come from an even higher margin coming from Ford Blue, offset by lower margin coming from Model e? If that's the case, and obviously, starting from a starting point of 8% by 2023 or even maybe at the high end of this year. Any way to sort of like frame the gross cost savings you're targeting for Ford Blue? I assume that the $3 billion is a net number between what your -- the cost savings and then some of the additional investments? And would you sort of like help us understand how you're going to get to solidly double-digit margin within the Ford Blue business?

Right. So today, we're continuing to invest in Model e, and that's all co-mingled with our total results for the 8% we're driving towards. And Ford Blue, the significant structural cost reductions, the $3 billion structural cost reductions in Ford Blue, of course, drives for margins. But we're also looking at improving the contribution cost as well. If you think about it, as we reduce complexity, as we focus in on driving simplicity through our ICE business, that will also help the margins. So the margins will be higher on Blue. You'll start to see that next year when we report. And then over time, you'll start to see as we get to that second generation of bed vehicles, those margins being competitive as we launch those vehicles. So the other thing to think about is that we are going to grow our volumes by 2 million units. And that 2 million units is not completely substitutional. And so there will be top line growth there, and there will be the contribution margin that comes through that as well. So it's a combination of those 3 letters -- levers; higher volume, improvement in our BEV BOM cost, establishing a very efficient manufacturing footprint for our BEVs and then the structural cost reductions in our ICE business in Ford Blue, as well as simplicity, complexity reductions and driving for higher margins as we manage for cash in our Blue business.

Okay. I appreciate that color. And then if I could just squeeze a quick follow-up on a different topic, I guess, taking advantage of the fact that you're reiterating guidance for this year. Any initial thoughts on how to frame the operational risk from the terrible situation in Russia and Ukraine, either for the industry broadly or for Ford specifically, anything you're able to share at this point in terms of exposure or risk factor?

Yes. So I think the way we're seeing that start to shape up, and it's early days, as you know, is we have very little exposure to Russia or Ukraine. We had restructured our Russia business a couple of years ago. It's a small operation with Ford Sollers, and we're suspending that operation. But there is not a significant exposure impact to us of doing that. And we don't have a significant footprint in Ukraine. So there's not a lot of exposure there. Where we're seeing the exposure across the industry is in the commodities that are coming out of both Russia and Ukraine and what the impact will be in commodity prices. And we're seeing commodity prices rise currently compared to what we had been planning in our base for this year, and we'll have more -- be able to frame that up more when we get to our Q1 earnings, but we are seeing those come through. So I think we're going to see it through higher commodity prices and higher costs. Now if -- as the war continues and as it has more economic impacts globally, we haven't been able to frame that out what it might mean for the industry from a SAAR standpoint or what it might be from a global economic impact. So we're intensely focused on working that and understanding what those might be and as you'd expect we're working through the scenarios. But nothing to share on that today.

And our next question will come from the line of Ryan Brinkman with JPMorgan.

Just the fact that you're increasing and pulling forward the profitability targets today also, how much of that is coincidental or related to other factors versus related to today's reorganization announcement? Is the complexity and structural cost reduction at Ford Blue, is that driving the majority of the improvements to profitability targets? And maybe you can provide some examples of how you intend to reduce the complexity there. I don't know, maybe fewer engine and transmission combinations as that business is smaller as a percentage of total? Do you anticipate a net reduction in headcount and facilities over time? Or just more of a movement of those people and headcount from Ford Blue to the EV-focused business? And then just lastly, a housekeeping item. As these businesses gain their discrete P&Ls, will you then cease reporting geographic results at that time?

Yes. So I'll start with the last one, and then you'll have to remind me as I go through because I might forget some of which you had in there. Geographies are still going to be important to us. But we will focus more on the business units in '23 going forward as we report the business unit segments. But of course, if there's color that will add to understanding what's happening in the business units around the regions, we'll provide that. But it's not going to be the core focus any longer of how we report the way we're running the business. When you look at the growth plan and you look at moving from the 8% to 10%, what we know in detail is our plan to 8%, right, as you'd expect. If we can drive depending on what happens externally to the high end of our guidance this year, we'll be right about at that 8%, at that 8% margin. So coming off of that, what does it take to drive us to the 10%. And it's really the 3 levers that I talked about. It's the growth in volume. And while we grow that BEV volume, we have to improve the BOM cost, right? We have to improve the margins of those vehicles. And we have to make sure that we're putting the manufacturing footprint in at very efficient levels, so that we can achieve what I say are competitive margins with those that are out there today. And that is the [ remit. ] That's why the clean sheet of paper, that's why the focus that Doug is putting on insanely great EVs, but at really efficient levels of cost. And that's the challenge that great engineers love. They love to create simplistic, credible products at low cost, and that's what Doug is driving towards. And then when you look at our Blue business, we know that we have to take that business, lean it out, simplify it and drive increased margin there. And a big part of that will be the $3 billion of structural cost [indiscernible]. But we'll also be looking at increasing margins, lowering contribution cost. And I'll let Kumar talk about what he's doing and what he's thinking about simplicity and complexity reduction in that business.

Yes. What you mentioned as an example, the lower number of engines and transmissions and lower combinations, absolutely, that is one of the key complexity levers, but there are so many more, everything from colors, frames, the size of the screen we put in these frame panels. And once we start simplifying those, the ripple effect it has on the fitness is quite amazing. When you have less complexity, it immediately improves quality because there's fewer things to go wrong, there's fewer combinations to go wrong. So the quality -- and as I mentioned earlier, our warranty costs have to come down. If you reduce complexity, you are reducing investment you're making in your products because you're tooling up your parts. If you reduce complexity, you're simplifying the manufacturing process. You actually have to carry fewer of these parts right alongside the assembly line itself that improves our manufacturing costs. So complexity is really, really crucial. So we're going to do that, and then we're going to look at -- we are looking at all the other structural costs, for example, we're going to have lower advertising costs. The position that Jim announced earlier that Stuart Rowley is taking, he is going to focus on benchmarking every aspect of our business. So one of the big [indiscernible] invest in products, are they efficient, are they world class? If they're not, you need to take a bunch of investment out of there without [indiscernible] the product and improve the business. So it's a combination of all those things that's going to get Blue to be much leaner, much more cost efficient.

Our next question is going to come from the line of Jairam Nathan with Daiwa.

Kumar, just one question for you on retaining talent, morale on the Ford Blue side. How do you do that? And then I have just one more after that.

I'm sorry, John?

Morale on the Ford Blue side and then retail talent.

Morale on the Ford Blue side, Ford Blue is an incredibly exciting business. It is the business that's going to be the profit engine for the company for years to come. Secondly, the products that Ford Blue has are incredibly passion and emotional kind of products. And you should have the opportunity to speak with our teams who create these amazing products like the Bronco, the F-Series, the Raptors, the Mustangs, all of these teams literally, and not to be cliché, they bleed for Blue. So the morale is -- the team is looking forward to combining all that, combining the great products and the experiences with a culture that's going to be maniacal about being lean and about reducing costs.

The other thing I'd add to that, I really believe having been here for over 30 years that the ability to focus for the teams is going to be a huge morale booster. They will know exactly what their [ remit ] is, what they have to deliver, what their targets are. They'll be able to focus in a level of depth that they haven't been able to do. And many of our employees want that. They're spread too thin. They're trying to do many things. They can't be experts in what they're interested in being experts at. And now we have this focus through the 5 business units, they will know exactly what they need to do. They will know exactly what they have to deliver this year. And it will [indiscernible] that clarity that they've been looking at. So I think that's going to increase morale as we go through time this year, this set up.

And just secondly, a follow-up on the regional strategy. I just wanted to understand what specifically with China, the -- what kind of arrangement would you need to have with the JV there to kind of have the similar organization structure?

China is already there. They've got -- they've structured this way already. And in fact, we learned a lot from China as we were working on this. Ford Blue Mach technologies, that's our EV business in China and [indiscernible] that up and running. And we have now an agency model in our city stores that we're launching, which are pure EV stores. And that is for the Ford team that people are interacting with through the agency model with the dealers. And so China is already there. So you're going to see China stand and run the way it is today, and they're set up that is completely congress with what we're doing today with the rest of the company with Ford Blue Mach technologies. They have their ICE business. They have their distribution system set up. and they're off and running. And so we're learning as much as we can from China on how we do this.

And our next question is going to come from the line of Dan Levy with Crédit Suisse.

I wanted to go back to the question on just manufacturing, which I think was addressed partially during the last call. But maybe you could just talk about how the manufacturing split is going to work with between Blue and Model e. And maybe you could just provide a comment on how your labor partners have approached this plan, especially on Blue, which you signaled over time, could possibly see deterioration in volumes. I think the way most of us are interpreting Blue is over time, it's a nice business and over time, ICE is going to be minimized. So maybe you could just talk about the manufacturing side and how the labor unions have answered your plans?

So let me start -- this is Kumar. Let me start with the split that you guys are talking about. So right now, we have plants, let's just take North America, for example, we have 12 assembly plants and Cuautitlan is dedicated battery electric plant. This is the plant that makes Mustang Mach-Es. And then there are plants that are mixed. The Kansas City plant makes the E-Transit, and we have a separate plant in -- at The Rouge that makes -- that's going to make the F-150 Lightning. So overall, we want to maintain one manufacturing system. We have one contract with UAW. What the Model e team needs to be constantly learning from those plants. So the way we're setting it up is there will be a Director of Manufacturing that will be dedicated to the present production of these vehicles and will report jointly to Lisa Drake, who is the Industrial Lead for Model e and through our North American Manufacturing Head with John Savona. So that's how we're splitting up manufacturing for now. But as we build, for example, the plant in Tennessee, that's a dedicated plant. That will be a 100% Model e plant. And as we grow with these volumes and build more plants, those plants will report to Model e. The contract with the union, the collective bargaining is 1 contract. And that's how it's staying, and we have our next set of negotiations coming up in 2023. We're being extremely transparent with the union. We have a great relationship with them. Jim and I have walked them through this entire thing over the last several days. And from a pure contract perspective, there is no change between now and the next contract negotiation, which will bring -- which will begin in fall of next year.

And that will conclude today's Q&A session. I'd like to turn the call back over to the presenters for closing remarks.

Okay, Holly, thank you. This is Lynn Tyson. Any follow-up calls, please don't hesitate to reach out to the IR team directly, will be available for the rest of the day. Thank you.

This concludes the Ford Motor Company Capital Markets Call. Thank you for your participation. You may now disconnect.