Ford Motor Company (F) Earnings Call Transcript & Summary

Thank you, everyone, for joining us on day 2 of the Barclays Industrial Select Conference, the autos track here. I'm Dan Levy. I lead U.S. autos research coverage, and I'm joined here by my colleague, Andrew Keches, who leads coverage of autos on the IG credit side. I'm very pleased to have with us, Ford, and actually very timely because a lot of Ford's success has been driven lately by Ford Pro. And we're very pleased to have with us Navin Kumar, who is the CFO of Ford Pro. So I'm going to hand it off to Navin, who's going to give just a very quick intro to those of you who aren't as familiar with Ford Pro. And then we're going to proceed with a series of fireside chat questions. So with that, Navin, thank you so much for joining.

Sounds good, Dan. Thank you for having me, and it's great to be here and meet everyone. So Ford Pro is a nearly $60 billion business within Ford that serves commercial customers with a one-stop shop of work-ready vehicles, service, software charging and financing solutions that makes running a fleet simpler and more productive every day. We are the market leader in this space. We serve every industry, every vocation, and we understand our customers' complex needs. These customers include small businesses, municipal departments and governments, larger corporates and enterprises as well as rental fleets. And our market leadership is driven by competitive advantages we've built up over decades, including deep relationships with hundreds of thousands of customers, an industry-leading vehicle portfolio of trucks and vans, all powertrains, internal combustion engines, diesel, hybrids, and an expanding electric vehicle lineup and the largest dedicated commercial service footprint of any brand. And that includes dedicated commercial vehicle dealerships, mobile service and a partnership network of over 500 upfitters and body builders. We're building on that by expanding our physical service and our software portfolio to continue to improve total cost of ownership and uptime for our customers. It's something they greatly value. And for Ford, this is high-margin, high-growth services business we're expanding into. And it further drives customer stickiness and loyalty. We're seeing progress in our business. It's manifesting in our financial results. We report that externally now. In 2023, we generated over $7 billion of EBIT and over 12% margins. That was driven by robust demand as well as a fresh product lineup, including the all new Super Duty. And in 2024, we're guiding to $8 billion to $9 billion of profit driven by continued growth of vehicle mix and partially offset by some net pricing adjustments. But we are also seeing really strong momentum on our software. We have over 500,000 paid subscribers. That grew 46% year-on-year, and we are seeing that trajectory continue.

So a lot to unpack there. So we're actually going to kick off with the question just with the ARS questions. And I think helpful to frame the sentiment on Ford because I think you're a very key part of the narrative going forward. So if we could just pull up ARS question number one, please. Get the timer going. Do you currently own the stock? I hope you own the stock. Okay, so opportunity...

Great opportunity.

A lot of opportunity to convert people here, okay? What's your bias towards the stock right now? Question 2, please. I think there's, I would say, in my discussions with people, some mixed sentiment. Okay. So polarizing the -- polarizing there. So...

It gets me more and more excited about this discussion.

Okay. Question 3, through-cycle EPS growth, I think this is an interesting one. And I think this is technically relative to the industrial universe, but I guess we can also consider this relative to autos. Again, another critical part for you to show the cyclicality. Okay, below peers. Okay, so you got to show your -- how your -- you can go against the cyclicality and then if we can just pull up...

Absolutely.

Question 6, the most significant investment issue for Ford. Yes, sorry, we're going to -- yes, there we go. I think a lot of points on the strategy that you guys are pushing forward. Okay, margin performance. And I think interesting to see on the margin performance side because the same time, there's a lot of strategic pushes within Ford, especially within EV. So actually, on that topic, why don't we just start here? This is a new segment relatively, right? We've been more accustomed historically to the regional segmentation. You changed your segmentation last year. I think, we generally understand, okay, split the business into ICE and EV. Blue and Model e, I understand. Pro was a little bit of an interesting development. Why break out Pro? And how is this resegmentation really change the way that you've run the business?

Yes. So our Ford+ corporate strategy enables a much more robust business model that collectively drives higher margins, lower cyclicality, lower capital investment and higher growth. And so as part of that strategy, we resegmented our automotive business into 3 business units that are customer-facing: Ford Blue, Ford Model e, and Ford Pro, really to drive that customer focus, that internal accountability and that external transparency through reporting the results. And for Ford Pro, this has been really, really great for us and our customers because the Pro customer is fundamentally different from the retail customer. These are rational customers that have a wide variety of use cases. So they're really looking for the right tool for the job to be done. We have a full vehicle lineup, and those vehicles could be modified and outfitted to meet our customers' needs. They look for total cost of ownership and operation through the lifetime of the vehicle ownership. And they're very more focused on maximizing uptime because if those vehicles are not operating, the customer is not generating business and they're not generating revenue. So what we did was we took multiple teams focused on commercial in that automotive business. We brought it together into one business unit. And then we built on that and augmented that to really serve our customers because we're in the business of selling productivity and uptime. So it's a services ecosystem, vehicle, software and physical service. And so now we have dedicated leadership focused on driving strategy, execution, and capital allocation. We have certain return targets and hurdle rates for the business and our offerings in the business. We have dedicated sales, business development, marketing and customer support teams working with our customers to scale our offerings with them and drive productivity. But really importantly, they're helping our customers transition into electrification and integrate electric vehicles into mixed fleets. And we have integrated software and service teams that are developing, deploying and scaling software to further optimize cost of ownership and uptime. But really importantly, Dan, what the segmentation really did for us is, it's helped with our recruiting. We've brought in external talent in software and in the digital space. We are digitally engaging with customers, and that's a customer lifetime engagement model. So we really had to bring in talent that's done this in other industries and other companies that have this expertise. And we blended that with Ford people who really knew the customer, know vehicles and know distribution, and that's been very powerful for us. So to just summarize, the segmentation is really great. It's driven focus, discipline and accountability, growth in services and recruitment, and also really focusing on the bottom line: financial discipline and capital allocation.

Great. Let's go a level further here. And I think people generally know when they think of Ford Pro, they just think of it as a fleet business. That could mean a variety of things. So if we just conceptualize, call it, the revenue pie chart, what are your sources of revenue? And even better yet, maybe what's the earnings pie chart? What are your sources of the $8 billion to $9 billion of profit that you're going to generate this year? Just help us understand the different components of the business. I think we generally know the core piece of it today is vehicle sales, but presumably a big part of that is Super Duty, right? But what are the other components of revenue today? So maybe break up the revenue and earnings pie charts for us.

Yes, I'll deconstruct it. So Dan, you're correct. The high majority of our revenue comes from vehicles. And within that, Super Duty, Transit, and the Transit custom that we sell in Europe are the majority of our vehicle revenue. The Super Duty and Transit Custom are all new and demand is strong. Super Duty has best-in-class towing, payload, torque, horsepower that really differentiates it versus the competition. It's won North America Truck of the Year. And this year, we have full production. Last year, we were launching the vehicle. We had a strike, so we gave up roughly $1 billion of profit. But in '24, you got full production. We're really excited about the Transit custom. It's all new. It's kind of like our Super Duty in the United Kingdom and Europe. And in the U.K., it's not just the #1 commercial vehicle sold. It's #1 vehicle sold in that market period. And EVs within that vehicle base, it's about mid-single digits, but that's growing, and customer adoption is growing. Another important way, Dan, to kind of deconstruct the vehicle side is from a customer and a segmentation standpoint because we're very diversified in terms of customer segments, locations. So we have this resiliency because we're so diversified. And I'll take the U.S., for example. So roughly 1/3 of our sales last year in the U.S. was the small businesses and retail customers that are in many, many different locations. 1/3 of our sales was to commercial customers that are larger companies, enterprises. So these are industrial companies, services, telecom, utility, construction, last-mile delivery and other sectors. About 18% was to state, local and federal governments, and really importantly in that is our police franchise. We're the market leader in police in the U.S. And these are modified versions of our F-150 and Explorer that we provide for police use cases, and about 15% goes into rental fleets. So very diversified. And Dan, you're absolutely correct. So we have a service parts business. And so we provide service parts for supporting repairs that our dealerships do as well as wholesaling those parts to larger enterprises and corporate that also have an in-house service capability and a software business. And on a revenue basis, that is less than 10% of our revenue, but it's high margin, and it's high growth. For example, our software business, we're getting gross margins over 50%. And that's a big part of what's going to drive our growth over the next few years. And by the end of 2026, we're expecting nearly 20% of our EBIT to come from service parts, services and software.

Maybe we could actually dig into that a little bit. So software and services are clearly 2 very important legs of the stool here. So what levers do you have to pull growth out of those over the next couple of years because they are going to be incremental from a margin standpoint. So just help us understand the story and the growth levers there.

Yes, that's a great question, Andrew. So we're on the leading edge regarding services for Ford and the company in total. Our customers recognize our offerings are addressing pain points for them, and they have the readiness to pay for those solutions. And for Ford Pro, this is driving deeper customer penetration, and we're growing our business beyond the point of sale of the vehicle. And the growth is really coming from a few critical areas. One, we are expanding our physical service capacity in partnership with our dealers. Two, we are being much more efficient with our overall service capacity. And three, we are expanding our software portfolio so that we're able to penetrate a larger customer and user-installed base. And I'll break each of those down. So on physical service, so right now, we have about a roughly 35% attach rate of service parts post warranty. And we're looking to grow that to over 50% by the end of 2026. We're going to be adding in North America over 3,000 dedicated commercial service base in addition to our population that we already have. And this will help us with servicing vehicles that are upfitted. They're heavier, they're bigger. And we're adding extended hours of service as well as technicians that are specialized in supporting and servicing these vehicles. And when we do that, we are also getting more efficiency out of these base through technology, technician training and design optimization of the service footprint. And mobile service is a big part of that, and mobile service is great. We get Net Promoter Scores that are 10 points higher in our Pro customers for mobile service versus the actual brick-and-mortar physical service because these vehicles are coming to a job site, and they're servicing multiple vehicles concurrently. And they could do 80% of the repair work that a physical site can do. So mobile service is a big part of that growth. And then on the software side, the 2 key drivers of our software growth is, one, our vehicles are connected. They have embedded modems. And by 2026, about 60% of our installed-base is going to be connected vehicles. So that's one driver. Second driver is the growth in our attach rate. We have about a 12% attach rate today, and we're looking for that to be close to 1/3 by the end of '26. And to just deconstruct what it is today, a lot of our 500,000-plus subscriptions is telematics data services for rental fleets and dashboards for small business. And our product pipeline includes adding functionality like video telematics, command and control features, and curated telematics data services, so that you can integrate this functionality into a company's fleet management systems. And that opens up the addressable market for larger enterprises, corporates, and governments. And just to give you an example like vehicle health insights is a big one, right? So knowing in advance like, "Hey, you may have a replacement item or a repair item," and then proactively servicing that will drive and boost uptime. And so this is a flywheel. We grow our software, we grow our attach rate with customers. That drives uptime and productivity for them. It drives more service business for us and it drives overall loyalty, which further reinforces our strong position on the vehicle side.

In terms of the portfolio today, you talked about getting to 20% of the portfolio from these 2 pillars. Where does that stand today roughly?

Yes. I would say it's probably in the low to mid-teens. So one way to frame it out is we said we have a 35% attach rate. Every -- on service parts, every point that grows, we add about $30 million of incremental EBIT to the business.

That's great. Now another aspect, I think, of this business that you've spoken about it being underappreciated, but I think that the market share of the business, I mean, you have a commanding lead even against your next closest competitor. Can you help us frame up that market share position? Why you've been able to hold it? And what are the moats that you see protecting that going forward?

Yes, Andrew. So it really starts with a superior product lineup with the Super Duty and Transit. We have a history of working with customers, understanding work product and developing and deploying features that really help them get the job done. And these aren't commodity products. So for the Super Duty, we have a full lineup, including trucks, chassis cabs, multiple powertrain configurations. We're the only one in the market with a crew cab, super cab, regular cab. So it's pretty comprehensive. Same thing on the Transit. It's a full lineup, vans, chassis cabs, cutaway variants. You can get multiple powertrain configurations, roof heights, lengths. So depending on the customer use case, they may want to prioritize garagability. They want to prioritize space in the vehicle or ride and handling. And so it's just a wide variety of flexibility. And that flexibility extends to being able to modify and upfit those vehicles with our upfitter partners. So when you take the vehicles and the ability to upfit them and you combine them with our national distribution and having the largest service footprint of any brand, those are the key moats. But I'm going to deconstruct that national footprint because it's not just about being national, it's about being local in that national. And so we meet our customers where they are to procure vehicles and to service those vehicles. Super important for small businesses that might be more hyper local as well as larger national companies, then they have multiple different job sites where they're managing the fleets in different ways. And you see that manifesting in our results. We have nearly 40% of the commercial Class 1 to 7 full-size truck and van market in North America. We're the market leader in key vocations of services, government, utilities, construction. We're also the market leader in small business. And like I mentioned, that's really about engaging the customer where they are and develop and cultivate those relationships over decades with our dealer partners.

Great. Let's go back to some of the more near-term dynamics because I think people were really surprised by the magnitude of positive revisions and strength in the Pro business, which is something people didn't understand. So a lot of the strength the last couple of years, if we just look at the earnings bridges from price. I think it's something like $11 billion of combined tailwinds between '22 and '23. I think you're talking to further tailwinds in 2024. Recognize a lot of this is from refreshed vehicles, Super Duty, this year Transit, but maybe you could give us a sense of how sustainable is this pricing? And what demand indicators are you seeing?

Yes. So Dan, we're confident it's sustainable. And the demand indicators in our business, our tailwinds are persisting. From a total industry -- vehicle industry standpoint, we're forecasting net pricing deterioration of 2% year-on-year as incentives grow through the year. But on the Pro side, we have modest escalation of incentives that's being partially offset by top line pricing. And we're able to take that top line pricing because we have this fresh product lineup. It's our most freshest product lineup in this space in over the last 2 decades. And importantly, we've also added features and functionality to these vehicles that is further optimizing total cost of ownership. So that's part of that top line pricing. For example, in Super Duty, we have an all-new digital upfit system, which makes it much more efficient to upfit these vehicles. And so there is also a content element to what's driving the pricing. And the business has fundamentally different characteristics in retail and is resilient. About -- in the U.S., 10% to 15% of vehicles in fleets is replaced every year due to high duty cycles. Nearly 1 in 4 fleets in the U.S. are all Ford fleets, a 100% of their vehicles are Ford. And as we're growing our services portfolio, that's going to drive further customer loyalty. And then the other leading indicator for us is like we look at our -- what are the orders coming in, and it's coming in significantly higher than supply, and pent-up demand is persisting. So for example, on the Super Duty, commercial customers in terms of their request for trucks and chassis cabs is coming in twice the amount we're allocating from a production standpoint to those channels. Dealers are coming in with retail requests that are greater than 2x what they've been provided. So we feel it's really robust. And then you take the macroeconomic factors, and there's definitely positives there for sure. Capital investment from state and local governments has been up $75 billion last year due to investment in infrastructure. We expect that to continue. Construction is growing, so are housing starts and completions. We're seeing telecom investment in 5G as well as utility investment in charging infrastructure and manufacturing onshoring into the U.S. So collectively, we feel really confident in our performance and the sustainability of that performance. And it's a combination of demand indicators, market -- macroeconomic factors and the strength of the product and service offering.

Let me double-click on some of those points here. I think one of the concerns sometimes people have with the core retail vehicle sales business is the cyclicality and maybe some of the, possibly you could say, volatility of pricing and inventories run too high, just some of the historical experience we've had. Would you say that this business does not really have the same -- there's always cyclicality, but this is maybe a smoother cyclicality. And maybe you could just unpack some of the pent-up demand, I think, we saw the last 3 years. Finally, in 2023, some of that fleet pent-up demand was released. But we had, prior to that, 3 years of unfulfilled fleet orders. So how large is that runway of pent-up, so cyclicality and pent-up demand.

Yes. We -- so yes, I agree with you, there's always elements of cyclicality and we are a very diversified business, right? So you have significant pent-up demand in parts of our business like small business where you're seeing a couple of years out runway, Dan. But at the same time, we mentioned, we -- 15% of our sales are going into rental. And rental travel sentiment, it varies, but it's starting to pick up again, right? So like the diversity of the business means that there's definitely pockets where you're going to see some headwinds. But because of the aggregate of where we play, it's overall really, really strong. To try to unpack any other further economic indicators that we're seeing that we see that are positive for the business. I think, small business sentiment, depending on the survey you see, it could be mixed, could be positive. But I think what's sustaining our business, to your point, Dan, is that solid pent-up demand. And in that small business space is where we have the vehicles that have pretty robust margins. But we are expanding into services like we mentioned, and that's going to also smooth out any cyclicality elements in the business, growing our service parts and our service parts retention, growing our software services. This becomes not just a vehicle play, but this is a -- we are selling an uptime ecosystem and this is a lifetime play. So that's also part of the dynamic that's going to happen here.

Let's talk about EVs, right? So the EV narrative has shifted in the past year in the U.S. But from your perspective, within the Pro segment and your customers, how are they thinking about EVs and total cost of ownership, their adoption rates? And then maybe to zoom out as you think about this business and running this business, how does the growth and presence of EVs down the road change how you're going to manage that business?

Yes, Andrew, I think it goes back to exactly what you said. Our customers are focused on total cost of ownership. Can it address the use case and is this the right tool for the job? And so when it comes to electric vehicles in Pro, we've seen areas where it's going better than expected, and the EVs are actually really effectively meeting the use cases. Specifically, with the e-Transit in the U.S., we actually have a higher mix of sales going into state and local governments and small business than we do on the internal combustion engine side. And that's because it's great for the use case fit as well as their ability to realize the incentives, including the Inflation Reduction Act. With larger corporates and enterprises that they are procuring the vehicles, but they are trialing it for longer. They're testing it out. They're underrunning different conditions and so they're scaling much more deliberately. And really importantly, and this is what we're learning is they're building out their charging infrastructure and support in advance of that scaling of EVs. So these are the insights we're getting. And what it really means for us is in the EV space, we have to be embracing and engaging our customers with a full EV solution. So that is vehicles. That is a full comprehensive suite on charging, charging at your depot or job site. Charging for home, access to public charging, software to integrate these EVs into mixed fleets as well as the consultative services to bring and help our customers integrate their electric vehicles and have a really great customer experience. So what we've learned since the start of '23, we do much more substantial dealer training and sales associate training so that they can engage with customers at a very local level, while we're engaging with customers more of an enterprise corporate level. So it's a multipronged approach. We're also partnering with utilities to simplify charging. Recently, in January, we announced a partnership with Xcel called 30x30 to deploy 30,000 commercial vehicle chargers by 2030 across their 8-state territory, and we'll see more of those partnerships emerge. But there's no 2 ways around it. The EV transition is really complex, but our customers are embracing it, and they've identified use cases where EVs work effectively. And as the capabilities grow and readdress the charging infrastructure, we're going to see more and more use cases that are addressable. And for us, it's really, really important because like to be here early to work with customers through that transition, it grows our product and services business. And for us, this is a really critical customer lifetime play.

We have a couple of minutes. I don't know if anyone in the audience has any questions.

The nature of the market that you're describing is a generally sophisticated buyer. Do you have some sense of how much the marketplace looks at their utilization of their fleet in a sophisticated way versus some of them who kind of look at their fleet as just being kind of a necessary evil into running the business?

Yes, it's a great question. I would say it's really, really high. All our customers are rational and sophisticated. And what we've seen is an evolution, right? The vehicles are getting smart, connected, and now electrified. And so they're looking at it in that complete sense. And whether it's a small business, they may have a couple of vehicles in the fleet because if those vehicles aren't operating, they're not making revenue in business or a larger company like who's integrating them into their logistics operations, there's a fair amount of sophistication that goes into a fleet purchase decision along with the services support. And so we don't necessarily see like, "Hey, I have to buy the vehicle," right? Like it is a very much a partnership engagement model. Our sales teams have decades of experience. So the people relationships matter, too, and that's a moat that we definitely don't under-appreciate because it is super, super valuable.

Great. Okay. No. We'll leave it there. Great. Look forward to seeing the narrative play out, Navin. Thank you so much.

Thank you, Dan. Thank you, Andrew. It was great to meet everyone.