Ford Motor Company (F) Earnings Call Transcript & Summary

Welcome to our next presentation representing Ford Motor Company. We have John Lawler, Chief Financial Officer. John, thanks for making the effort and -- the logistical effort, I know you've got a Board meeting coming up, you have some other things on your mind as well.

A few.

Okay. Yes, the topic on everybody's mind, of course, UAW. We're going to launch into that right now. No, I'm -- we're not actually, okay? So I'm telling the audience here, we are not going to entertain UAW questions given contract expiry on -- yes, more like hours, in a couple of days, September 14. So don't waste the opportunity to ask a better question that can actually be addressed. With that, Lynn, how did I do there?

Perfect, Adam.

So John, just any messages at the top you want to convey to the audience on the Ford story here?

Yes, Adam. A few comments just to orientate the audience around the industry on what's happening. So as you know, we are going through, this industry and Ford and the other OEMs, an incredible transformation change like we've never seen before. I've been with the company 33 years, and the aperture that's opening up is just tremendous. And so we'll unpack that a bit, I think, today, as we talk, of course. And then the other thing I would say is that when you have that what's changed, you need new leadership. And the team that Jim has brought in, the senior team, and then as we've populated down through the organization, we brought the best talent and -- talent, I don't think we would have been able to attract if the industry wasn't going through this level of change and we weren't doing some of the things that we're doing. And with the changes that we've made, our industrial business is now generating strong positive free cash flow. Last year, we were $9 billion, primarily from auto. That was not always the case in the past, as you know. And we're committed to delivering 40% to 50% of that back to shareholders, and we're aiming to deliver a ROIC of at least 20%. So with the aperture opening up in the business, derisking the business, derisking the assets, I think we have a really good opportunity here moving forward with the businesses that we have. And then, of course, we led by segmenting. We moved away from running the business by regions. We're now running it by customer groups. And that's a whole host of benefits that come with that, that hopefully, we'll talk about a little bit more. And then we have 3 great businesses in there, Pro, which is a $50 billion commercial business where it's the intersection right now between commercial, hardware and tech. We've got the ability to generate mid-teen EBIT margins; Blue, our iconic vehicles. We can do this with less capital, see ourselves in low double-digit margins; and then E, which is a BEV start-up buried within Ford. So there, we're a first mover with the vehicles we have today. Second generations, clean sheet of paper, 20% gross margins, 8% EBIT margins we believe we can get to, and that drives us to the 10% overall EBIT margin come 2026. So business is coming together, a lot of change in the industry, a lot of change at Ford.

A lot to talk about. Again, look forward to getting into this. So you can't improve what you can't measure. So let's start with the segmentation. Definitely a break from the rest of the industry, kind of showing investors what, I think, many already suspected and what many of your competitors are experiencing, which is, look, running -- starting an EV start-up is a lot of upfront losses and then also showing the transparency around the parts of the business that are generating some pretty outsized returns. So tell us what drove that decision? And how has it changed your decision-making and culture to be able to move a bit faster during this, I'm pretty impressed at the time?

Yes. The first thing I'd say is a benefit that came from that, that I wasn't expecting was the ability to attract the talent we are. If we hadn't done that, I don't think we would have been able to bring somebody in like Peter Stern to talk about integrated services because you can see how it all fits together. But when the leadership team, as we first started and we had the Ford+ strategy and Jim was working with the team, we kept asking ourselves, this isn't right. I mean these are customer groups. Each of these customer groups is different. They have different needs. We need to change how we're doing things to meet those needs. And so it didn't work inside. And if it didn't work inside, how are we going to explain the business. And so we looked at it and we looked at our options, and we said segment it. We're going to segment it differently. We're going to segment it around customer groups. And as we did that, we realized that it was going to change not only the way we could talk about the business and provide that transparency externally, but it would allow us the ability to actually think about the business differently. In consumer products companies, consumer companies, tech companies, they do this. And they usually do that to drive additional growth. And we also saw that we had one person for accountability, we had transparency and focus. And that's what we've seen since we've done that in the business, and it's really allowing us to move much quicker.

So on the talent side, then, your Gen 1 product, if you think about Model e profitability right now, a lot of room to improve, okay? We could say that way. And you're just being -- you're being upfront with it. And it seems like it had a -- it's in the process of getting a bit worse before it gets better, right, given the trend from the 2Q results. But when we follow up afterwards, I think your message if I'm summarizing correctly was, look, Gen 1 was designed before we brought in Doug Field and a lot of the talent. And so they -- that was kind of our first attempt to see, to learn and struggle. And they kind of looked at it, and then now Gen 2 will be the -- more the moment of truth and the measurement of, all right, this is what the new team can do. And that's all kind of pretty platitudinous stuff. But like in the -- through the eyes of the CFO and you're signing off on these, bet the company kind of investments here, walk us through how we get -- how we approach breakeven and how some of that -- how that -- the talent you've hired manifest itself in a real hard dollar improvement.

Right. As you said, the talent is critical. It's a different way of doing things. Converting an ICE vehicle to a BEV is not efficient. We see that. It's in our results today. These Gen 2 products are clean sheets. And we have Doug who is probably one of the best integrators of software and hardware, but he also understands how to build BEVs because he's done it before, and he's made profitable BEVs. And that's the difference. And so he's brought a whole new approach. Now in our Gen 2 vehicles, has he been able to change everything to the way it would be optimized? No, but we've already started Gen 3. And we have people like [ Allen, Clark, ] who are experts and have spent their whole life designing BEVs, working on Gen 3 and working with Doug on Gen 2. And so when you look at that walk, we had a walk at Capital Markets Day that showed that a big part of that improvement from our margins was volume and mix. And I think what people need to understand or what we need to do a better job explaining, because it's on us to do that, is that when we have a new product, and our next-gen vehicles are new, we put that all in product and mix. So that's a 54 -- roughly 54-point improvement when you get to the second gen because these are designed efficiently from the ground up. And one of the things that concerns yourself were there with that walk that people have communicated to us is that you only had a negative 4% pricing. So that was a negative 4% pricing on existing products, which are largely going away over this time frame. So the way we set this up, and I think it's important to understand this, how we set up the second-gen vehicles, is we know that we're moving from early adopters to early majority. Now early majority are unwilling to pay as much of a premium, right? And so we're starting to see those prices converge towards gas, and that's how we set the targets. So we set the target so that we'd be competitive in 2026 and beyond with gas vehicles. And then we said, okay, we want to get to an 8% EBIT margin. So we said, okay, what's the cost structure that we can afford, get to a 20% gross margin, and that's how we set up the entire equation. And that's what Doug and his team are working towards delivering when we launched the second gen of products.

So do you need -- clearly, you need -- you can't get that with Gen 1. Is 8%, do you need Gen 3 to do that? Or is it Gen 2...

Target is 8%. The targets that Doug has and what we're targeting marching towards is 8% of the Gen 2 products.

Okay. Now you've been in auto business for 33 years. You know the relationship between volume and fixed cost absorption, operating leverage. You pushed out some of the ramp, and it did affect that time horizon of middle, latter part of this decade. You reiterated the 8% target. So what would offset that then? How are you able to -- I mean, clearly, and I think you're demonstrating with that, that volume isn't the only arbiter of profitability, and we want to try to get people away from thinking about that. But kind of at the molecular level, what offset that? Because you're -- the volume is progressing a lot lower than maybe you would have thought of a year or so ago.

Yes. So that's the other key concern, right? One was, well, pricing is too high. Well, we've solved that and how we set the targets when we move forward. The other was volume. Breakeven was well below the $2 million that we had said. It was $1 million or less. And so we have some room in there. The other thing is that we're continuing to drive further efficiencies. The whole game for us in Gen 2 is really around driving the lowest kilowatt hours to get the range and performance that we need. And so it's really around battery chemistries. You've got LFP mix now that wasn't in the mix when we first set those targets. We were NCM. So now we have LFP coming into the picture. We've done incredible work, and that's the type of work that Allen and Doug has brought to us around aerodynamics and what it means for these vehicles and how you get -- you design the entire vehicle. And this was new, right? I've been in product development from a finance standpoint and around developing vehicles for 30 years. And the whole approach is different about a system design and systems designed to optimize and minimize the amount of kilowatts you need and so making that battery smaller and driving that and then leveraging the scale not only for the vehicles that we're building, but also the scale of the components that will be shared across the Blue platforms as well, trims, frames for seats, things like that. And so when you bring all that together, the team's working hard, and we're still marching towards that 8% target, and that's what we're committed to deliver.

John, I was talking with a pretty well-capitalized EV start-up, I won't say which one, but one that is familiar with Board. I'll leave it at that. And they said, look, in the opinion of this CEO, said, Ford bringing, the management team, particularly Doug Field, the team from the outside, okay. That Doug's main job was to try to find a way to take its hardware and software skills and to vertically integrate into those areas that could not even about the battery or electrification, but in the connected services and particularly in the kind of hardware-software integration around ADAS. It's a very specific thing. I don't know if you agree with that. I don't know if you agree -- you've been on record about the huge opportunity you have in getting a subscription model and have an always-on relationship with the customer. But how important is it for you to approach a vertical integration, let's say, like a Tesla or a BYD on that topic, on those skill sets versus working with a Mobileye or some of your established and trusted third-party OEM?

It's going to be a mix. There are some things that third parties do that they'll be best at that we can integrate in, but it is also critically important for us to control the software and to manage that system. And that's where Doug's comes in. It's that integration between software and technology and the hardware. And that's why we think Doug is one of the best at the world at it. And he's got a good team. He's built a good team internally. We're very pleased with where we're headed on L3 driver-assist technologies. We're very pleased at what he's doing around the fully networked vehicle, and what that is, is it's a distributed architecture, central compute. We control all the modules in the vehicle. So it's a digital product that can be updated over the air and allows us to provide those software and services. So I think it's going to be a combination of finding the best external systems or hardware that we can partner up with Doug and control that software. It's critical that we control the domain software to control the vehicle and being able to update it over the air.

John, I want to move to demand. First, broadly, I'm focusing on the U.S. and then kind of specifically on EV demand, okay? So how are you feeling -- what are you seeing from dealers on the U.S. auto consumer broadly?

Yes. I think it's mixed messages right now. Industry is still pretty strong, better than what we had expected this year. Consumers are seeing some pressure. But I would say that revenues are holding up pretty strongly. When you look across the industry, transaction prices are still in the 90%-plus of MSRP. Dealer margins are still much stronger than they've historically been. Incentives are still at very reasonable levels relative to history. And so I would say that we're continuing to move forward. We've always said at Ford that we expected to see some pricing pressure go forward because of affordability. We know that a consumer has to spend a higher percentage of their monthly disposable income on a vehicle, and we expect that over time to revert back to what it had been before the COVID pandemic. But I don't think anything is unfolding from that standpoint different than what we had been messaging or what we had expected from the standpoint of consumer and demand. Now let's see where the consumer goes, let's see where the balance sheet continues to go, and let's see what happens with jobs and income security.

Some dealers we've been talking to, including some Ford dealers, have been noting the increase in cash buying, cash purchases. One Ford dealer I talked to in the Northeast region, I don't want to say for residents in the whole country, but says, pre-COVID but maybe 10%, 15% of new and used volume combined as the franchise would be cashed, and now it's like 40%-plus. I don't know if that's consistent with what you're hearing at a time of kind of higher interest rates and historically high prices, that kind of affordability issue, how long can that last? Are these just wealthy families that bought out their leases and now that you have supply and that's kind of coming in and maybe we can't really rely on that to continue into next year? Or do you think something else has changed?

I don't know fundamentally that anything has really changed. What I would say is that credit is still able to service our customers. We're seeing -- we're not seeing credit business fall off dramatically. I would say that when you look at the consumer in general in purchasing vehicles, we're seeing extension a little bit in term loan length but not that much versus what we've seen historically. So I don't think that much has really changed out. There may be pockets around the country where specifically they're seeing something. But overall, on a macro basis, we haven't seen significant changes.

It seems like you've revisited the portfolio a bit, kind of trimming some of the wood here in terms of Edge, Escape, and Transit Connect, kind of not going forward with those products. So I just want to confirm that. Do I have that accurate?

Well, yes, I'm not going to confirm or deny that from a product planning standpoint. But what I will say is that we have been very specific, especially since Jim took over as CEO, that we will restructure what we need to and we will allocate capital to the highest and best use. And if we don't believe that we can get a return on that capital that's adequate, we will move away from those products as we've shown we have in the past with some of the things we've done with Sedans. We've restructured South America, restructured Europe, and we've restructured India. So we'll make those decisions if required, and we'll allocate to the highest best use.

Okay. Again, not -- I don't want to get near UAW conversation, but we're at a -- still a time of inflation. While material costs might be normalizing in certain areas and supply chains recovering, labor inflation is a theme. We're seeing it across a lot of industries. So just moving forward, just structurally, how does -- what are some of the things at Ford's disposal you could do to create more room or -- whether it's restructuring actions or things other than price, is it -- that you can cut, including some of your relationships with your suppliers and/or your dealers who are still enjoying these to, say, historically very, very high margins?

Yes, the dealers are. But I think they're coming down, and I think they'll continue to come down. One of the things I would say is that inflation has been high. It's moderating a bit. So whenever you have high inflation, you need productivity. So we need to drive productivity. That's going to be the main game for us and for our suppliers. And we'll work closely with the suppliers. We have opportunities to help drive that. We've talked about this in the past. Jim and I have talked about it numerous times, the level of complexity we have in the business. Our designs aren't as efficient as they need to be. We haven't always purchased as efficiently or set up the supply chain as efficiently as it needs to be. So our focus, Adam, over this year and over the next couple of years really needs to be about driving productivity as a hedge to that inflation that we're seeing and what comes through. And that's our focus is cost reductions, driving those cost reductions, getting as much top line as we can, new products, leveraging our iconic vehicles, et cetera, et cetera.

We're going to have some car dealers on the agenda in the next couple of days. And I'm pretty sure we'll see when they present. They're going to comment on disappointing EV demand in the United States and piling up inventory in reference to German EV, and I'm talking pure BEV as well as some of the U.S. You yourselves are seeing inventory rising for the Mach-E. Are you seeing EV -- the EV consumer get a little -- go through a bit of an adjustment phase or kind of flatlining a bit? And if so, why?

Yes. I would say that what we're seeing is the transition now to this early majority, the curve isn't accelerating as quickly as I think a lot of people expected. I think some of that is their willingness to pay less of a premium for the EV. I also think that some of the inconveniences that come with an EV, they're less willing to deal with that. So that means to me that the curve is going to push out a little bit, but we'll get there eventually. And that's what we're seeing. I mean think about the U.S. this year, EV sales are up 50%. So it's coming, it's here. It's just at what rate of pace and change is that going to unfold. And that's what we're looking at. We'll see it -- I think we're seeing it flatten a bit.

And you mentioned the H word in the second quarter call, hybrid, which was kind of -- I didn't expect to hear that, but it seems consistent with other OEMs, which is, look, if ICE is going to be here a bit longer than we thought because of that pushout, we need to make what ICE we do make as efficient as possible. And it seems like there's demand for those products. So how do you integrate -- how disruptive -- or what kind of time delay between your decision to say, all right, we're going back to hybrid? I mean walk us through that. And what's any potential impact on your mix and profitability?

The key there is -- I wouldn't say we're going back to hybrid. I think we're #3 in the U.S. now in hybrids, and it has always been part of our plan. But we haven't talked about it much because we were leaning into EVs, which is a new start-up piece of the business in Pro. And we haven't talked that much about Blue. Blue strengths really are the iconic vehicles that we have, where we can do these derivatives at low capital. And then we have both ICE and hybrid. That long tail and being able to provide our consumers a powertrain that fits their duty cycle, whether it be all full electric, hybrid or gas diesel, I think we're positioned really well for that. And so it's not moving back into a hybrid. It's leveraging that and then building on that tail as that extends and leveraging the hybrid technologies do that. I also think, Adam, that new technologies coming to the hybrid space are going to allow us to serve duty cycles differently. So it won't be the traditional just plug-in hybrid or full hybrid or EV. There'll be other types of hybrid technologies that are going to come along as well.

I mean like 129 or whatever miles for E-Transit. I'm sure you've learned a lot. But you've mentioned about batteries need to get smaller in vehicles. So walk us through then how you compensate for some of those inconveniences there in terms of -- is it -- I mean you can't -- the Tesla deal, obviously, got a lot of attention. We'll talk about that. But it seems like those -- the objectives of duty cycle by the smaller batteries might be kind of conflicting.

Right. So the idea is that you set your goal on what the duty cycle is. Let's just say, range, 300-mile range, at X miles per hour. So it's not about making the battery smaller and lowering that range. It's about making the battery smaller and being more efficient to hit that range through optimizing the rest of the vehicle. And that's what we're doing. And so as you bring the battery size down, which is the most expensive element of a BEV vehicle, an EV, but you can deliver that range through a more efficient complete design.

Okay. Let's talk about Ford Pro. I mean you alluded to it, $50 billion of revenue. I think it puts it near or within Fortune 50 companies in terms of revenue and EBITDA in that territory. It doesn't seem to be getting a lot of credit from the market right now. So what can your team do other than just execute to kind of change that?

Yes. I feel -- we feel that as well. And so I think the point there is we have to continue to execute and grow the business. And there's plenty of opportunities there from continuing to expand our penetration in software. Today, we have 550,000 paid subscribers for software. More than 80% of that is with Pro. Average revenue per month is about 9 -- $8, $9 a unit. So there's opportunity for growth there. The other area of incredible opportunity for Pro from a growth standpoint to consistently maintain these mid-teen targets is services. Our penetration rate on services is about 30%. It should be 50% or more. We're targeting 50% by 2026. That is an incredible amount of growth opportunity from a standpoint of both revenue and profits for the business. So I think it's to keep executing, it's to keep growing the business. It's bringing those margins through, generating the free cash flow and building out the moats that we have.

Last summer, I think it was -- you presented at Morgan Stanley at ESG conference, partly did. And later that day, you announced the pretty surprising to the market agreement with Tesla to cooperate on charging infrastructure. And the stock had a pretty -- like I think a 30% rally over the next 10 days. Why do you think that was?

I think consumers were excited about us providing a ability to mitigate one of the biggest pain points in electrification through the Tesla charging network, now with the charging network we have, all of our e-dealers putting in high-speed charges and now being part of the Tesla charging network. It brings a convenience for them because charging anxiety, range anxiety is real with this. Like I drive a BEV. And the fact that I'm going to be able to now leverage that charging network makes it much easier to go on a trip that's more than just going back and forth to work or around town. And so no capital required, part of a good network, provides convenience for our customers, solves one of their pain points, good decision for the customers, good decision for the company.

Questions for John? We have mics in the back or just speak up if you got a question. I'm patient. Actually, I'm not. Okay. I'll give you another chance in a minute here as we're coming up on time. The Chinese, a lot has been written and a lot of your OEM competitors who talked about how, and you have talked about how. We went to China. We met with the companies. We drove these vehicles. We talked to the designers, and we came back and we're like these are good cars, really good there. You followed up with it, the Changan joint venture. Tell us the potential there. The kind of that's -- without me putting the words in your mouth, how big of a shock was that? And what is the potential of working with Changan in EVs beyond maybe the Chinese domestic market? How much of it is just giving you a little more relevancy in that market versus something that could happen outside of China?

Yes. So for me, it was interesting because I spent 6 years in China. I came back to the States in mid-'16, after spending more than 6 years there. And you could see that that's where they were moving. The issue was with COVID, we were kind of isolated from China for a few years. And then we went back -- it was cooking, we went back, and their investments started to come to fruition. And so when we look at China, we look at it as an opportunity to have an asset-light business. We can -- we have 2 relationships in China. We have JMC, which is a commercial vehicle relationship, and we can leverage them when we are leveraging them for exports. And that's positive. And then to derisk the business, we can leverage Changan for electric vehicles in China. So we don't have to do it all on our own. And the infrastructure, the digital relationship in the vehicle, the digital hardware, the software, it all needs to be basically developed in China because it's unique to what the Chinese customers want. So we will leverage them. So it's an asset-light business. As far as what we could take from China, there's no plans to move vehicles from China to anywhere else other than from JMC on exports to ASEAN or lower-cost markets like South America, et cetera, where those commercial vehicles, low-cost commercial vehicles profitable for us and would help us in those markets as well.

What about in Europe? I mean you've stayed in Europe, you've dramatically restructured the business in terms of cost, footprint, the segments you're in. I think anyone who spent time in Europe, it seems like half of the country has been in Europe this past summer. You see the Rangers and you see, obviously, the commercial vehicles and the vans. But the products definitely changed there a lot. But your share is small, right? From memory, it's like 4% or something like this. It's 4% or 5%. That's -- there are many other European CEOs from my former life, that are like, once you get below there, you maybe need to consider different options. Now look, you made mix improvements and you've addressed some of the losses to a degree. But is there an opportunity for Ford to maybe provide more of an on-ramp to other partners that could benefit from your production capabilities and downstream distribution and service network, and I'm thinking specifically the Chinese?

No, I don't think so. I don't think that's where we're going to play. In Europe, we're going to focus on our commercial vehicle business. Our Ford Pro business, we have about 15%, Ford brand, the commercial business, very profitable for us, and that's where we're focusing. We have a partnership with Volkswagen, we talked about. We're Leveraging the MEB platform for the Explorer vehicle in Europe. So I don't see that being an area where we would spend our time or energy. We'll focus on commercials and our partnership with Volkswagen.

John, what do you think -- what is the future of the Chinese in Europe then? Well, I think I realize that the geopolitical -- there are issues there that will potentially...

I think they're coming to Europe. I think they're going to go in a big way to Europe. I think it's a market where there's opportunity for them. They're there already, and I think they're going to continue. And eventually, I think that's going to play out, and we'll see what happens. But definitely, they're heading into Europe.

Any final question for -- we'll do one quick one here, then we'll wrap up.

John, can you give your thoughts on input costs both on the electric vehicle side and also on the traditional side? Have they trended sort of in the last -- really the last quarter? And then as you look out over the next 3 to 6 months, how do you see input cost for you guys moving?

Yes. So we are seeing commodity -- some commodity prices coming down a bit. Overall, we still have a significant opportunity on input costs. Our cost structure is not as competitive as we need it to be. That's not new news. And we're continuing to work that. But we're seeing supply chains stabilize. We're seeing commodity prices come in a bit. So I would say that it's unfolding as we expected and as we've talked about.

Well, John, I appreciate you coming here and sharing the story. A challenging time but also a lot of opportunities. I kind of feel like your industry is in a position where maybe we're in a bad news is good, but also good news is good. I think the market is not giving you the benefit of the doubt clearly. There are individual parts of your businesses where you could justify well over 100% of the value of the company. And it's just -- I think in the history of -- the arc of Ford's history coming out of the GFC, you guys do your best work when people are betting against you when you're down. I'm hopeful things don't have to get worse for that to be proven out. But sharing some of the concepts of the cultural change and how you're resegmenting and the bets that you're making, and these are really bets the company -- like every bit is disruptive as a GFC or back when Henry Ford was bringing out the business...

Yes, it is.

Thanks for having to tell a story with us and look forward to other engagements.

Thank you, Adam. Appreciate it.

Thanks, John. Take care.

Thanks, everyone.