Ford Motor Company (F) Earnings Call Transcript & Summary

Okay. Great. So thank you, everybody, for joining. My name is Mark Delaney, and I lead coverage of Ford for Goldman Sachs. I'm very pleased to have Navin Kumar, the CFO of Ford Pro with us today. Thanks for joining.

Thank you, Mark, for the introduction. Good morning, everyone. It's great to be here. Just thought I'd spend a few minutes on Ford Pro. So a couple of years ago, we took multiple different groups in Ford, focused on commercial customers and brought them together to form Ford Pro, so that we could take a holistic end-to-end approach with engaging our customers on, vehicles, software and physical services. We've been publicly reporting the segment for the last 1.5 years. And I just want to start with 3 key things that you're going to see through the fireside chat. First, our customers -- our commercial customers are fundamentally different from retail customers. They're focused on total cost of ownership and uptime, and they want the right vehicle to get the job done. If a vehicle is down, it's costing them business and it's costing them revenue. Second, we are the market leader in the commercial space. We have over 40% market share in the Class 1 to 7 commercial full-size truck and van market in North America. And in Europe, we're the commercial market leader by brand with about 14% share. And if you look around where you live, you look around San Francisco, you will see our vehicles everywhere, from ambulances to first response fleets, to trucks at construction job sites to the bucket trucks repairing power lines. Often, it's going to have a Ford badge on the front of that vehicle. And third, the integration of hardware, software and cloud-based applications, it's really delivering a step function improvement in our customers' productivity and uptime. They're able to do more with their vehicles, operate those vehicles more efficiently. And from a service standpoint, our service is getting smarter and much more proactive to minimize vehicle downtime. For our customers, that's improving their bottom line. And for Pro, it is diversifying and growing our business into higher-margin software and services, which are more durable earnings streams. And yes, Mark, thanks for letting me do that introduction.

Yes, that's great. You mentioned some of the strong market share position that Ford Pro has. Maybe you can talk about how you think the company can sustain or grow this leadership position going forward?

Yes. So there are 3 key reasons for Pro's commercial vehicle market leadership. First, we have deep relationships with hundreds of thousands of customers built over decades. Our customers include small and medium businesses, large corporates and enterprises, government and that's federal, state, local, municipal and rental fleets. And we serve customers in all industries, all locations, and we work with our customers and clients to have a really deep understanding of their use cases so that we're providing the right vehicles to get the job done. Second, we have the widest and most flexible lineup in the commercial vehicle space, Class 1 to 7. This includes vans, trucks and chassis cabs. And chassis cabs are actually trucks without a bed that could be modified and updated for those use cases I mentioned earlier. And we pair this flexible lineup with a flexible powertrain lineup, and that includes gas and diesel internal combustion engines, hybrid and electric, supporting our customers' use cases. Third, we have an industry-leading commercial vehicle service footprint, dealer distribution and upgrader partnerships. We have over 1,400 dedicated commercial vehicle dealerships and 500 upfitter partners. And our dealer and upfitter partners are investing alongside us to serve solutions to our collective customers. It is the largest commercial service footprint in North America and Europe of any brand, and we serve customers at a very local level. So we're working with these customers where they work at their job site to help them procure and maintain vehicles. And to sustain that market share involves continuing to invest in and provide great customer-centric vehicles and get the job done, helping our customers integrate electric vehicles into their fleets to -- and grow electric vehicles in their fleets to drive better total cost of ownership and help improve their bottom lines and scaling our software and services ecosystem to provide differentiated vehicle uptime. We're building out a fast, reliable, data-driven service network that keeps vehicles on the road. And for Pro, this is a virtuous cycle. The more software subscriptions we have, the more data intelligence and analytics that flows into how our customers can operate their fleets more efficiently, how we could service the fleet more effectively and also make the software better and better. So for Pro growing our software across all customer channels and use cases really builds out an intelligence mode that sustains our market leadership and helps our customers improve their bottom line.

That makes a lot of sense. You mentioned some of the strong market share figures you have, 40% North America, I believe, mid-teens in Europe. You also talked about both commercially and government. Any areas you think you can actually take more share in? I know those are good numbers already, but any opportunities to grow?

Yes. I think the way we describe it is we have strong positions. But in certain areas, where we're the market leader, for example, chassis cabs and transit wagons, we definitely see persistent pent-up demand. And with chassis cabs, for example, you have investment in infrastructure, utilities, energy, oil and gas. So there's opportunities in select pockets of the business.

Okay. What type of margin can Pro have long term? And what are the key levers that could impact longer-term margins?

Yes. So in 2023, we provided longer-term margin guidance for Pro up a mid-teen margin, and we don't have an update to that. Before I go into the specific levers, it's important to understand that we want to sustain and grow Pro, which means investment in vehicle competitiveness, investment in electrification, software and physical services. So we won't deliberately in the near term, maintain a margin umbrella. We have strong product, and this includes our Transit and Super Duty lineup and Ranger in Europe, but EVs are growing in our mix and our first-generation electric vehicles are not profit-optimized. We are a market leader in commercial electric vehicles, and it's important for us to bring more customers into that electrification ecosystem and then grow EVs with them. It's key to sustaining our market leadership, Mark, to your earlier question. And really importantly, it's also key for us to be year-on-year compliant with multiple government environmental regulatory compliance programs. Our demand this year has been strong overall. It's been driven by pent-up demand in infrastructure investments, utility, telecom, like I mentioned, and we're seeing strong demand for chassis cabs and wagons, but we're also seeing some market weakness in areas like rental. And so for Pro, it's really important that we continue to invest and grow our software and services ecosystem, and we're making progress there. We presently have over 600,000 paid software subscriptions. We are growing our service capacity. We mentioned last year having over 100 dedicated service elite centers operational by '26, more presently at '32. In mobile, we've grown our mobile repair orders 100% year-on-year in the second quarter. And so we feel we're making progress. We're on a good trajectory. And growing our software and services ecosystem really helps deliver better uptime for our customers, improve their bottom line. And for us, it's about sustaining our market position on the vehicle side, growing into higher margin software and services and so diversifying and that will help deliver the margin longer term.

You mentioned software and services a number of times. Maybe we could speak a bit more on the software subscription growth at Pro and how Ford more broadly reaches the $1 billion revenue target in 2025.

Yes. So that about $1 billion software revenue target is for the total Ford enterprise, and that includes multiple categories. What I will unpack specifically is Ford Pro's paid software subscriptions, what is in that? How we've grown that historically and how we plan to grow that into the future. So we have over 600,000 subscriptions, and the majority of that is telematics, which includes features like real-time fleet and vehicle tracking, fuel analysis and vehicle diagnostics. And how we go to go to market with telematics is in 2 ways. One, we provide telematics dashboards where the data is synthesized into a customer-facing dashboard that a fleet manager can use to manage their business. And the second way is through telematics data services, where the data streams are provided through APIs that integrate the data into our customers' existing software solutions. And historically, how we've differentiated in this business and grown to the position we have today is that we're leveraging data that's coming directly off vehicles through embedded modems. So for our customers, they don't have to buy a third-party plug-in device, which is how this used to work historically. They don't have to install that device and minimize the servicing risk. So for them, right off the bat, it's improving their bottom line. And in the near term, what has happened in terms of our growth is twofold. We've had a combination of market expansion and product expansion. So we started this business a few years ago with telematics data services for rental and then we expanded with dashboard solutions for small business. We're now generating business from larger businesses as well as government as there's now customer pull for these solutions as customers are realizing the benefits of leveraging this embedded vehicle data. And then from a product standpoint, we've expanded our product lineup in the last year, and this includes video telematics and leveraging video data to deliver enhanced driver monitoring, driver coaching as well as leveraging that video data to optimize on incident reporting and claims management. We are doing more in remote command and control functionality with vehicles. We have a solution called Fleet Start Inhibit, where a fleet manager can remotely set permissions to enable and disable vehicles, and that helps them manage the fleet more efficiently. And we're expanding into fleet management software solutions, particularly for small and medium businesses, we're it's helping them automate tasks like driver management, vehicle inventory management, service scheduling, parts expense management. So helping them drive some efficiencies to operate their business as well as optimize on expense management for maintenance and repairs. The longer-term growth is going to come from expanding our software solutions across all our customer channels, more connected vehicles in our units and in operations, so in our installed base, taking our telematics to more telematics insight and control where we're providing an analysis and consulting with customers and helping inform them on how they can make their fleets more effective and efficient. And on the fleet management software side, bundling that with the telematics and taking the combination of vehicle diagnostics and fleet management software solutions so that you can drive more proactive service to minimize vehicle downtime and more advanced capabilities in our road map, advanced telematics with safety and security features, leveraging next-generation vehicle architectures, scaling depot charging solutions as we expand EVs in our mix, more managed maintenance and other productivity solutions.

I think you mentioned over 600,000 subscribers in Pro. I believe that grew over 40%. I imagine that's being driven both by more vehicles with modems as well as higher attach rates, maybe unpack that a little bit around what's driving some of that subscriber growth in terms of the number, you mentioned the features right there, but what's happening in terms of modems and attach rates?

Yes. So a part of it is exactly what you said, Mark. We got more connected vehicles in the installed base. But we're expanding with our product lineup, which is unlocking customer channels. Like I mentioned a few years ago, we started our rental. We expanded into small business, now we're getting more larger business and government business. And in Pro the way we've organized is we have a sales and distribution function. We have a software sales team. We employ hunter farmer models, and they're engaging with customers and winning business, onboarding and retaining the business. So you have a combination of retention plus adding new subscriptions. And we incentivize our sales team like any software company, annual recurring revenue targets, retention targets. So it operates very much like a SaaS company on that front.

Okay. Maybe you can talk about what ARPU from paid subscriptions is in Pro currently and where you see that going longer term?

Yes. So I'll take your question, Mark, in 3 parts. I'll give you a sense of pricing for these solutions from an industry standpoint because we're not public with that. Then I'll go into blended ARPUs for the business and where we plan to take that. The telematics dashboards are priced generally around $20, but this can -- at $20 a month. And this can vary based on the size of a fleet, their use cases. But that's generally what you see in the market, it could be higher if you're adding on video capability. On telematics data services, that's priced lower, and there's a range there. Rental companies. They want a more full data pipe that they ingest. Whereas there's other corporations that want more curation of the data and APIs. So the pricing starts with $5 and goes up from there. In terms of our blended ARPU, we're running at about $7 to $8 a month per subscription, and there's been historical growth there. As I mentioned, we started with data services for rental and now we've been growing the business with more small business telematics dashboards. And the near-term ARPU growth is coming from growth in that mix of telematics with smaller businesses, attach rates of video telematics and then the expansion of our telematics data services outside of rental in larger corporates and government. Longer term ARPU growth is going to come from the products I mentioned earlier on advanced telematics, depot charging, managed maintenance. One thing that's important to understand about the Pro business, we are driving a lot more bundling of our solutions this year between our telematics and our fleet management software. And we're seeing those proof points with customers in terms of what it's doing for their vehicle uptime. We have one customer, for example, at their job site using the bundled software plus mobile service. We're able to take vehicle downtime from an average of a few days to a few hours. You can imagine the potential as that scales. We have one fleet customer who used the combination of those solutions and took vehicle diagnostics and vehicle inventory management and is now much more proactively deciding when to replace vehicles. They were historically doing it just based on the age of the vehicle. And this is helping them save on expenses to procure new vehicles and the processes around that, plus is building loyalty for us. So we see great potential here, and it's both the subscriptions as well as a change in our ARPU as we change the mix of our offering over time.

Any one of those more important than the other as you think about the Ford Pro contribution to the overall $4 billion target? I mean, is it more ARPU, more growth in connected subscriptions totally?

So that's a great question because, well, we run our software team like a software business, right? You have annual recurring targets, you have gross margin targets, you have churn targets. But from an enterprise standpoint, it's a great question because we want as many vehicles connected, and we want us many vehicles in our ecosystem that could drive differentiation and uptime and productivity, which has dividends when it comes to vehicle loyalty and market share leadership and growing our service parts business. So from an enterprise holistic mix margin standpoint, it's about subscription growth. But then when we drive our software sales teams, we're also focusing on the ARPU piece, absolutely.

One of the things you didn't mention was ADAS, and that's a big ticket opportunity for a lot of car companies, maybe more on the consumer than the Pro side, but how impactful might ADAS be for Pro customers?

Yes, it's pretty impactful. And that's a good point because ADAS is included with the vehicle. So it's recognized in software in a different way. And I was focused on paid software subscriptions. But especially for many of our use cases in small businesses. And given our North America and Europe footprint, you'll see the value of ADAS in a lot of those use cases in cities in stop-and-go traffic, supplementing and augmenting the driver experience. So as our ADAS functionality gets better and better, and as BlueCruise progresses, we're going to definitely see more fleet applications. With larger customers, it's more deliberate integration, but there's concern about insurance and liability. And so that's where we're having the telematics becomes really powerful to inform on incident management, claim management, video analysis. So when you pair that with these ADAS offerings, that could help integrate that and scale that. But that will take a little bit more time.

I know uptime of vehicles has so many different variables that feed into that, but it's been a broader focus of Ford and Ford Pro. And as you're rolling out some of these things like telematics, ADAS, I mean, are you seeing any change in accident rates and uptime that you're able to then take that and go sell more products to different customers?

Yes, we don't have any data to share specifically at this time, but you definitely see improvements in the driver monitoring and the driver coaching Absolutely. And our financial like for credit business, they do have a partnership with a company called Pie and we're rolling out a commercial vehicle insurance. So we do leverage that data and flow that back into that activity. That's pretty small. It's been ramping in cities, but absolutely.

You spoke a bit on different powertrains already. Can you speak more on where EV and hybrid penetration stands in Pro and how that's different from the retail business?

Yes. So like I mentioned, our customers are buying on total cost of ownership uptime. And when it comes to powertrains, it's the same decision criteria and use cases. Additionally, with electric vehicles, we've seen customer interest driven by carbon targets for government fleets, business sustainability targets and also fleet regulations. For example, we're in California. They have the Advanced Clean Fleets regulation here. And for many fleets, that means a percentage of their fleet has to be zero emission vehicles and that percentage is growing with time. Our core Pro products are the F-150 Lightning for commercial applications and the E-Transit. And so to answer your question, Mark, I'm actually going to unpack the E-Transit further and show you what's happening in terms of adoption by different customer channels. So a little bit about the E-Transit. We launched that a few years ago. It's multi-energy. It was to get to market fast. So it was at about 120 miles of range, so it can address all use cases. And we've recently augmented that range this year. We report sales monthly, it's on our investor website. So you can actually see the E-Transit sales in the U.S. and our Transit sales. We sold over 8,000 E-Transits year-to-date. And that's about 7.7% of our total Transit volume. And so to answer your question, Mark, on the retail side, our EV mix is running about 3.5% to 4%. So from a mix standpoint, you're seeing a higher percentage. But then when we unpack that further, we grew E-Transit sales 76% year-on-year. About 2/3 of those sales are going to government, so state, local, municipal and the United States Postal Service. And 1/3 is going into businesses that tend to be in applications like general services and delivery. So when we look at state and local, we're seeing adoption due to incentives, use case fit. They tend to operate in a local geo zone and have lower mileage requirements and monetization of the Federal Inflation Reduction Act benefits. In larger corporates, we've gotten hundreds of hundreds of customers but the ramp has been more deliberate and methodical than we originally expected. And a large portion of that is the charging and they want to derisk charging before the scale. And what we learned on this journey over the last few years is that every job site is different, from the layout of the job site, to the power requirements, to the cabling needs, installer availability, it's almost like every job site is a snowflake. We have customers that are the same customers, multiple job sites and very different requirements, including local state permits, that varies. So it's been a lot more slower than we expected, and it's been a lot more deliberate of a ramp. And then you take that to small businesses, where they don't have a lot of flexibility to adjust their business for the EV. The EV has to fit their business. So there are some use cases where it works well, and there are some use cases where from a payload and towing standpoint, it's not a right fit, and they have the same charging challenges. And then in the rental space, we're not really seeing EV activity. It's the same charging issues, but they also have the complexity of a national charging footprint and challenges with chargers that you see on the retail side as well as charger uptime. So what are we doing about it? Well, we offer a comprehensive set of solutions, vehicles, charging, software, financing and consultative services to work with our larger accounts as they're integrating and scaling EVs. When it comes to small business through our journey and learnings, we're doing a lot more with our dealers in terms of education, training, simplifying the message and use case identification. But the big challenge is charging. And so we are now having more charging partnerships to go address that than we initially did this journey. That includes utilities like Excel, also local city like the city of Dallas, and bringing our solutions to market and working with partners to try to integrate that. But the bottom line is it is a more methodical and deliberate ramp-up of EVs and commercial fleets than we had initially expected going in.

Think about that charging bottleneck and some of the partnerships you're forming, can customers go to Ford as a single touch point and you can help to coordinate all those different pieces?

Yes. We operate as a one-stop shop. Now some of that we directly have like vehicles and financing and charging and software. On charging installations, that's something we're facilitating through partners.

Okay. And how do you think about getting paid for some of those capabilities like charging? Is that a service that you can charge for? Or is that more the cost of doing business?

We do charge for our charging software and our charging hardware solutions. But we do, to the concept of bundling, I mentioned earlier, make choices on how we think about discounts and bundles. And charging is about -- has about a 20% attach rate on our EV volume for the E-Transit presently. But if you strip out USPS, they're not using our charging solutions, that shows a higher attach rate overall on the EV installed base. So charging is absolutely a critical enabler for EV sales in our business.

I want to ask a follow-up on something you were mentioning around E-Transit and some of the and momentum you're seeing in there and better penetration than with retail, a little interesting because with consumer vehicles, big batteries are an impediment because they had cost but a big vehicle like Transit has a big battery, but it's still, in some cases, makes sense. How much of that is due to more incentives for commercial versus consumer? Or is it more around some of these other things like green targets that corporations may have that perhaps a consumer may or may not be as interested in?

It's a mix, Mark. Our customers are very rational. They want to pay for what they need to get the job done and they're focused on total cost of ownership. So incentives will factor into their calculus, their ability to meet the use case, payload. Towing is more for the F-150 Lightning. But that definitely factors in. And we deliberately designed the E-Transit to go to market and start growing this business. So there's just going to be some use cases where from a range standpoint, it's not going to fit. If you're in the middle of the country in Oklahoma and you're traveling 250 miles a day in oil and gas fields, it's not really where it needs to be at the moment.

I wanted to go next to an announcement the company made recently around the Oakville facility and the plan to add 100,000 units of Super Duty. What's giving the company the confidence to make that investment?

So Super Duty is actually a portfolio of vehicles, chassis cabs and trucks, gas and diesel engines. And it has best in class payload, towing, horsepower, torque that really sets it apart from the competition. It's our key work product. We're the market leader in commercial overall, but also we're the market leader in many locations like construction, utilities, mining, first response and more. And what gives us the confidence to have that flexibility to add that capacity is 2 -- there's 2 reasons they're nested together. The first reason is we have, as I mentioned earlier, high pent-up demand in chassis cabs. We are the market leader. We have the widest line up. It's about 25% of our Super Duty volume. And there's persistent pent-up demand due to investment in infrastructure and utilities and oil and gas and telecom. Second reason is we're running below replacement demand levels. With over 4 million Super Dutys on the road, an average age of a vehicle in 11 years, there's more headroom for growth, and that does nest in our chassis cab demand we're seeing.

That's helpful context to understand the investment. Maybe help us understand how modular it may be because I think it's not supposed to come online for a couple of years.

Yes, we're not sharing any specifics on that at this time. But the action does provide us optionality and flexibility as we're doing future Super Duty planning, and that includes on powertrain potential options beyond internal combustion engines.

Maybe talk about Ford Pro's opportunity to grow aftermarket revenue.

Yes. So the total aftermarket is a big opportunity. I think one of your peers actually put out a report that said for all OEMs and all dealers together, they're only capturing about 1/3 of the total profit potential. Now in Pro specifically, our service parts share for customer paid business for vehicles 0 to years old is around 35%. And we feel we have an opportunity to grow that materially. As I mentioned earlier, Pro customers are focused on downtime, and that cost the business when vehicles are down. So there's a preference for an OEM part because they know that's going to fit with the vehicle from a maintenance and repair standpoint. So what they really care about is -- do you have the part? Is the part quickly available and what's that speed of the repair or maintenance. And so these are the key decision criteria our customers are using to evaluate whether using our service or our parts versus competitors. And this is what we're working on. We are putting in more service capacity, including mobile service. We are growing our software business and we're linking that together to drive more proactive service. For example, using over-the-air updates, working with customers to do service when the vehicles are naturally down and not doing work. But it all starts with you have to have the capacity, which includes mobile, physical service, and there's a fair amount of our customers who actually do service in-house, larger corporates, government. And so there's -- using the same data and intelligence to facilitate and give insights to our dealers so that they know what parts are needed, those parts are available, and those parts are quickly going to our customers. So for whatever maintenance or repair they need to do, if they have it.

That makes a lot of sense. On the 2Q earnings call your CEO, Jim Farley, and CFO, John Lawler, spoke about wanting to have a strong balance sheet. And a part of that was for potential accretive M&A. Are there opportunities to deploy capital in Ford Pro?

Absolutely. In Ford Pro, we actually have a historical record of executing inorganic actions, partnerships, M&A, investment to deliver strategy and grow the business. some key examples. Our software is a curated ecosystem of applications that we've mostly developed in-house, but some applications are from third-party partnerships. In charging, we acquired a start-up and leverage this technology to build out our managed charging capabilities at depots and job sites. In physical service, we're working with our dealers to expand their capacity, hire more technicians, train these technicians, put in standards of service, and we're providing investment in capital to fund that expansion. And on the vehicle side, we've grown our relationship with Ford Otosan. And this is our adventure in Turkey that is co-owned by the Koç Group and Ford. And now presently, they manufacture the full Transit van lineup for Europe. So this is the Transit, the Transit Custom and the Transit Courier and the electrified versions of that project. We launched the E-Transit last year. We're launching the E-Transit Custom right now, and the E-Transit Carrier is going live in 2025. And we're going to continue to invest and deploy capital into Pro, the recent announcements regarding key vehicle actions for Pro and Super Duty and our next-generation van. I continue to invest to expand our service footprint and invest in our software portfolio and we mentioned that earlier. And that includes evaluation of any potential inorganic or acquisition opportunities. It's been part of our history to execute inorganic options within Pro and deliver the strategy, and that's going to continue to be the case. This is really important to providing more and more solutions to helping our customers optimize on uptime and productivity, delivering benefits to their bottom line and also sustaining our market leadership, diversifying our business. And we're going to use every tool organic or inorganic to execute.

As you think about making those kinds of investments, should investors be thinking about several more targeted investments that maybe help with capabilities or technology or perhaps larger somewhat more transformative M&A, capital allocation?

So a little background about me, I was actually an investment banker before I joined Ford. Your questions brings me back to a time 10 years ago. But I think when you're into operations, you're looking at opportunities on both fronts. As I said, our software ecosystem is curated. So there's other software applications out there, and we make deliberate decisions on whether we want to integrate from a third party, whether we want to acquire. And that will further augment experience. And then when you look at transformational partnerships, I think our Otosan joint venture is a perfect example of that. They're operating in Turkey, and we're sourcing vehicles from them. And so we do look at the future road map of vehicles, partnerships there and weigh that against certain considerations like how we're managing compliance in both markets.

Okay. Any capabilities you think might make sense to fill organically or inorganically as you think about Ford Pro?

Yes. I think a very tactical example is, you look at our vehicle lineup, and we have trucks and chassis cabs, but oftentimes, they're towing towing things. They're towing assets. So that's not necessarily part of the vehicle but is part of the customer experience. So that's a perfect tactical example of you'd want to have an asset tracking solution for the assets that are attached to our vehicles as well in our overall software. So we look at it at that type of level. But that's like the example of, hey, we have a capability gap. It's not necessarily pulling data off our vehicles because this isn't our vehicles. And so how do you bridge that solution so you can give the customer a more holistic experience.

Got it. Well, unfortunately we are out of time. Navin, really appreciate you joining us.

Great. Thank you for having me. It was great to be here. Have a good day, everyone.

Thank you.