Ford Motor Company (F) Presents at RBC Capital Markets Global Industrials Conference (Transcript)
September 15, 2020
Ford Motor Company (NYSE:F) RBC Capital Markets Global Industrials Conference Call September 14, 2020 10:40 AM ET
Lisa Drake – Chief Operating Officer, North America
Conference Call Participants
Joe Spak – RBC Capital Markets
Good morning everyone. I’m Joe Spak, lead auto analyst here at RBC Capital Markets. I’m very pleased to have with us today, Ford Motor Company. From Ford we have Lisa Drake; she is the COO of North America, a newly created role where she’s focused on returning North America back to their 10% margin. We’re also joining by Lynn Antipas Tyson, Executive Director of Investor Relation. Lisa, I think you have some opening comments and a brief presentation. So, we’ll go through that we’ll head into Q&A. I highly encourage investors on the line today to participate and you can ask a question in the Q&A box and we’ll as those questions [or leave it into the] conversation.
And with that, Lisa thanks for joining us.
Great. Thank you, Joe. So, I wanted to start with first slide, if we could advance that please, which is our value creation framework, because it’s the foundation of everything we do at Ford and I wanted to highlight a few examples of this frame work in action. First, at a high level when we say we are becoming fit, it means that we’re addressing the underperforming parts of our business and this is a one and done exercise.
We, you know, we’ll be at this for quite some time. It’s a perpetual undertaking across all the teams throughout our company to continually improve our fitness. And some great examples of this include our decision to exit the traditional sedan silhouettes in North America at our Michigan Assembly Plant, which is right here down street from Dearborn. For example, the Bronco and the range are replacing the Focus and the C-MAX, and with overwhelming reception we’ve had for the new Bronco it’s evident that this will be a very powerful transformation for us in North America.
To deliver quickly on a winning portfolio, we’ve also reduced our flexible architecture down to five and that will help us drive speed and efficiency in our product development process and essentially will bring newer products faster to the market and in the U.S. we’re targeting to reduce the age of our showroom by over 40%. So, more competitive three years by 2023.
So, in the next slide, I want to talk a little bit in this presentation about fix, accelerate, and grow. And that’s really what underpins the value creation drivers for us. First, shifting some of the gaps in execution that we have around some key aspects of our business and that’s around material cost, quality and warranty, accelerating our actions whether it is even greater opportunity and then growing some of our nascent businesses that will become more significant over time. And I’ll touch on the highlighted areas in the next few slides.
So, let’s talk about North America. We see it as a growth business. There are improvements in the overall North American business that represent a huge opportunity for us to increase our margins. And as Joe mentioned, my role as the Chief Operating Officer of North America is to focus the organization on identifying and implementing fitness actions throughout the operational side of the business.
That can be everything from efficiency of our product development and material cost work. It’s our launch robustness, especially with the four launches coming up this year, and our ongoing quality and warranty performance. And we have the winning portfolio locked in. And now we need to sharpen our focus on the cost side to achieve 10% margin.
And as we continue to bring to market high demand products like the Mach-E, like the F-150, and Bronco we’ll not only continue to decrease the average age of our portfolio, which drives pricing and share, but then we’ll use those new program opportunities to deliver our year-over-year cost improvements. And to put this in context, our business in North America generates roughly 100 billion of revenue per year.
So, a 10% margin is worth 10 billion of EBIT, which is a sizeable opportunity for us compared to our recent performance. And again, that’s why we think the North America business as a growth opportunity for us. So, as I mentioned, this is a big launch year for us and I can tell you that we’ve tightened our focus on launch execution. You know, we said previously that our major launches in North America has shifted to the fourth quarter. And that’s in-line with our COVID related production disruption. Launches of the new F-150, the Mach-E, and the Bronco Sport are already underway and they remain on track.
To be honest, the COVID shutdown provided us an opportunity for us to go even deeper on our readiness. And we took some time needed to button things up with our suppliers, and we came out more ready than before the pandemic hit. First, our Bronco Sport, which is being built in our Hermosillo Assembly Plant. In this plant, production of the prior sedan has balanced out, which allows us a singular focus on launching the new vehicle.
And I’m pleased to say, we did our job one on-time and now we’re on track to start accelerating production of that model. Our two F-150 plant launches they’re staggered at Dearborn Truck in Kansas City Assembly Plant, and that allows us to learn from the first plant and implement any changes when we bring the second plant online, and those two plants are stalwarts of truck production for us.
We’re very excited about the launch status on F-150. And then as we learned from past launches, we’ll also be staggering some of the feature rollout during the launches to reduce the complexity and enhance the focus on the high quality early builds. And it’s really important to know that with the exception of the Mach-E, all of the vehicles we’re launching this year are based off of existing platforms, which are in production today, and in some cases have been for many years. And this further de-risks the launch.
And finally, most important, we’re leveraging our connected vehicle data through the launch process to accelerate some of our testing and feedback. And I’ll show you some examples of that in a few slides.
If we can turn to quality on the next slide, you know there’s three building blocks that underpin quality performance of the product. It’s the design and the engineering of the product. It’s the manufacturing and assembly, and how well we build that design, the quality of the parts coming from our supply base. And we’ve taken incremental actions in all three areas and not just for our new launches, but for our [entire lineup].
As part of the prior fitness changes, our product development team enhanced our focus on systems engineering under the leadership of Hau Thai-Tang to take us to the next level of design robustness and customer stat. Our manufacturing plants are implementing increased inspection and testing. And early indications are that these are holding even through the stress of COVID. And we’ve increased data transparency with our supply base.
Again, it was accelerated by the need for alignment through the COVID shutdown and then the bring up the supply base, but now we use it routinely to stay on top of performance, and to cut issues off before they get to Ford and then more importantly to our customers. I’m very grateful to the supply base. Now they’ve stepped up and how the work that we’ve done so well together through the industry, as well as a quality restart.
On the next slide, we’ll talk a little bit about our material cost initiatives. And as I mentioned, in my role, my primary objective is to bring skill teams together to target material cost opportunity. These are things like eliminating spending on parts of the vehicle that matters at least to the customer experience, is an example reducing costly hard buttons on items that are set once, like head restraint heights or adjustable pedal positions, moving to touch screen control, or delivering the same level of discernible [wind noise] or interior performance, but with far fewer seals and patches through more human centered products decision.
And finally, we’re really leveraging our analytical modeling and connected vehicle data to make sure we’re investing in the features that customers want, and being smart about how we engineer the vehicle. And I have a great example to share before we wrap up.
On the next slide, you know, almost without arguments, material cost is one of the single largest levers and OEM seeks to control, and we’ve been working on more efficient design solutions for several years as part of the modular catalog work, where the most efficient designs are on a shelf, and then future programs use those building blocks as they build up their program content.
And with the new launches, we’re now starting to see the results of this as we bring our newer products to market with those best cost designs. And this is the intersection of growth for us in North America. You know, as we introduce these new products, and the product refreshes, and we’ve lowered the age of our product showroom, we’re simultaneously delivering continued cost savings, which results in the improved profitability we talked about.
On the next slide, you know, as I’ve mentioned, we’re accelerating our efforts around leveraging our connected vehicle. You know, today all of our new vehicles in the U.S. are connected through an embedded modem. And here are a couple examples of how we’re using connectivity inside of Ford.
The first example is from the Mach-E, where an engineer, 30 miles away from the vehicle was actually able to remotely diagnose low voltage battery issue, isolate the root cause to the exact fuse that was in the vehicle, and then recommend the repair, all without having to have access to the vehicle.
And the second one is on our F-150 launch. We did have a power running board failure that was detected on the launch vehicle, and during COVID when it was difficult to travel, the engineer was able to pull the vehicle data log and the error logs remotely through our connectivity with the F-150. They replicated the test – the failure in a test vehicle and they were able to identify it there. So, it’s all about speed, and the quality of launch execution.
And then the next slide is an example of how we’ve used connected data to reduce our material costs. Rather than surveying users about how often they lock or unlock their vehicle through a rear door, and that’s our passive entry when we have the key [indiscernible] and the truck recognizes it and the door unlocks automatically, we actually just analyzed the connected vehicle data across multiple vehicle lines. And we found that our new F-150 that we’re launching, early development users weren’t utilizing the feature on the rear door.
So, we removed the cost for the launch, and on a high volume vehicle like F-150, this material cost reduction adds up to millions of dollars in savings, and we’re pursuing many more opportunities like this passive rear entry example where we’re listening with better fidelity to how customers are using their vehicle.
The final slide is just some key takeaways. And hopefully this has given you some insight into the improvements we’re making in our North America business and our approach to delivering a 10% margin as a business unit. We have a refreshed portfolio, laser focused on the launch execution, which we’re well into as we sit here in mid-September and we have a relentless focus on material cost and delivering what matters most to our customers while delivering material cost efficiencies around what matters least.
We have a rising use of our investment and connectivity to help us with material cost, quality, and launch.
So, with that Joe, I’ll turn it back over to you and Lynn and I are happy to take any questions.
Q – Joe Spak
Thanks very much, Lisa. You know, maybe just to kick off the conversation, you know, Ford recently announced that Jim Farley would take over as CEO in October. Can you just talk a little bit from your perspective as some of the differences between the two Jim’s and how do you expect Jim Farley to act on taking, you know, Ford forward with some of the initiatives you laid out in your presentation?
Thanks, Joe. I love both Jim’s. It’s great. The transition has been very seamless so far. Jim Farley is starting to move into his new position, but one of the – I think that Jim Farley did early on, even before the announcement was the appointment of my position as COO in North America. And he did that when he took over the auto business back in February. And I really appreciate his focus on that North America business. I think it has great growth potential. And he understood that. And it goes back to that slide that I showed with those key levers, you know, the profit from the portfolio freshness that we now have with those three incremental products, the Bronco, the Bronco Sport, the Mach-E.
Again, all whitespace for us, plus the brand new F-150 especially this year. And we couple that with the cost efficiencies that we’re working on, that’s where we feel like we’ll really unlock the potential for the North America business. So, with Jim Farley, I appreciated his focus right away on this sizable opportunity for us. And he’s put a lot of time and energy into the resources that we need to go ahead and deliver that. So, I’m really looking forward to his continued leadership as the CEO.
Thanks for that insight, insider’s insight. Maybe just to turn to, you know, the year now, can you just update us on the status of production, you know, globally here or really North America, I guess, and third quarter, you know, there’s been often on reports about some stuff going on in Mexico. I know that’s maybe a little bit less irrelevant for you, but you know, how, I sort of the rebuild or the restart a production, you know trended from the severe downtime in the second quarter?
Yeah, it’s a – I mean this has been unprecedented, as you know, but it’s amazing what this industry has been able to do and we’re very happy with our plant performance in North America. All of our plants are now at or near our pre-COVID levels of production. In fact, we’re at 97% of pre-COVID levels, and when you think about, you know, what the industry in general, the supply base, the auto workers, the OEMs are going through to get to those levels. It’s pretty fascinating.
I have to say, our supplier partners are key, super critical. And the good news is, we’ve started to see stabilization across the supply base now. Things aren’t as sporadic as they were when we first started up, you know, back in May, but they’re pretty fluid, as you can imagine. And we’re monitoring everything very, very closely, especially in Mexico. Good improvements in Mexico. We’re seeing – but you know, it’s still a still a location, that we see a lot of attention to.
Okay, and maybe to follow-on the, obviously an unprecedented situation in North America as going through this experience, and as you begin to do some of your work and analysis as COO of North America, have your views on the breakeven levels in North America changed at all given this experience?
Yeah, I think, you know, breakeven is a rather static measure. And what we’ve been doing giving how dynamic not only the volumes have been, but just, you know, our outlook on pricing ability, we’ve really just been looking at it from a stress test standpoint with multiple variables, including pricing. You know, from a [SAR perspective], we were just under 13.5 million units through the first half of the year. And we do see this improving a bit in the second half. And the first half was the lower boundary of the full-year. We stated that prior. And as I mentioned, we do expect some modest recovery in the second half.
Okay. You know, you mentioned the F-150 launch, and the Bronco launch, which, you know is more whitespace to your to your point, but you know on the F-150 launch there’s been some, you know, reports in the media that the units could be about 100,000 lower year-over-year. To us, I would seem to suggest about a billion dollar profit hit, but maybe you can sort of help us a little bit more about some of the impact you expect here in the back half. And then, you know, has the slight delay in the F-150 changeover, you know, at all really sort of changed your view on when you could reach sort of more normalized levels of production?
Yeah, thanks. We, you know, we haven’t shared a volume estimate, of course, and there are a few, you know, really important things to note about this particular launch. First of all, it was a – it’s a two plant staggered launch, which is a really big advantage for us. It’s always an advantage more so in this space with COVID. It just allows us better ability and better predictability, you know of the quality of the launch. You know, one plant comes down to change over and then the second plant continues to produce. And we use the input from the first plant, you know, into the second launch.
The impact of production, it was planned and expected, it always is when you have to change over the assembly plants. So that’s built into our plan for this year and it really didn’t change with the shift of the launch. We have a lot of carryover power train on F-150. And that helps us with our acceleration.
You know, you don’t have as many bumps through the acceleration process. The more carry over the product it is. We don’t have a new body shop like we had prior years when we went aluminum, you know, and Kentucky and Dearborn – sorry, Kansas City and Dearborn are some of our strongest plants.
So, you know, I can only reiterate what we said in July, which was that F-150 impacted the changeover will more than offset the non-recurrence of our 2019 UAW contract ratification, which was about 600 million, but then we’re not going to comment on volumes at this point. But as I stated, we feel confident that we’re on track to the plan of our F-150 changeover.
Okay. Lisa, you mentioned as sort of, part of your role is getting back to that 10% margin, and we’re getting a bunch of in-bound questions from investors and sort of some combination of, you know 2021 potential and 10% margin. So, I’ll try to combine these two, but you know, as we sort of think about it, right, you look at 2019 North America margins and there were a lot of one off factors there, including, as you mentioned, UAW, but also, you know, an explorer launch that probably what didn’t go exactly to plan. You also had, you know, a warranty – a bigger warranty headwind and then 2020, you know, we had a global pandemic, but if you start thinking about, you know 2021 you got the F-150 launch coming up, you got the Bronco, Bronco Sport launch coming up. So, you know is it, I guess the question is, are there other factors we should think about for 2021? And is it possible to see a quarter or so, that 10% margin goal in 2021, even if it’s not for the full-year?
Yeah, so, we’re not giving any guidance today for 2021, but, you know, you hit on some of the things where we know we need to focus, you know, to hit that 10% that you’re talking about, it goes back to that slide. You know, with the key levers on the product portfolio freshness, you know, we’ll be at one of the freshest lineups we’ve had in quite some time close to just three years that cost efficiency metrics are starting to bear fruition. We’ve been working on material costs for several years, but we’ve been doing it with the intent of launching those inside of the [indiscernible] product programs when we will retool these parts in these plants anyway. So that’s starting to show up.
You know, again, I can’t comment on a timeline for the 10%, but fundamentally, the North American business does have the ability to achieve a 10% margin. We’ve done it in the past. So, we have to have laser focus, including the product launches that you mentioned. And, you know, we have the new Explorer, the Escape, and Super Duty last year, three major products for us in the U.S. Some of our higher margin generating products was the new F-150, and then we have these three incremental products that we mentioned before. The Mach-E, the Bronco, and the Bronco Sport, and then we didn’t talk about it much, but there’s another whitespace product coming next year, which is also again incremental for us.
So, when you couple all of that product freshness and these again are on the non-sedan silhouette type of vehicles where we do quite well in this market. And you couple that with the material cost progress. And then you add in the growth we didn’t talk about, you know, connectivity in the CD business, which is now you know, been stood up more aggressively in the United States with [indiscernible] you know, we see a path to 10%.
Okay. I want to dive a little into something you brought up a couple times now, which is the freshness of the lineup, but also, you know, the material and sort of content costs and I think it was your slide here. And might have been the sort of showed the two curves, is the, which, you know, material costs and I guess ages, is the implication that material costs, you know, really don’t start to become a bigger tailwind for you until that average fleet age starts to mature a little bit because, you know, you mentioned you’re really sort of refreshing the lineup going from, I think, sort of five to three years, but then it’s probably going to be until I would say, 23 or 24, where that age starts to level off and maybe you get some of the material cost benefits, is that fair?
It’s a little bit of both Joe. Obviously every year we have year-over-year productivity gains, both with design changes that we make to the current production model, as well as our commercial work that we do with our supply base. And, you know, we continue that every year, but when you want to make a fundamental step change in that material cost performance, it’s best to do it when you’re re-engineering full systems in the product, and that usually happens when you change over or introduce a new model.
So, you know, we continue on our material cost glide path year-over-year as any OEM would, but you get to see a bigger, more step function improvement, again, when you’re re-tooling not only the product, but also the assembly plant, you know, which is still you know, labor efficiencies go hand in hand [do a] process efficiency. So, that’s why when I’m talking about that intersection of that curve, it gets more in the sweet spot, you know, during those bigger product launches, but by no means and make no mistake every year we are working on material cost improvements on the current production lineup.
Great. Another inbound question from investors, you mentioned that some of the actions you’re doing on the F-150 in terms of, you know, removing content, you know, we also noticed that it looked like 2021 – the 2021 Model your Ford Explorer price was coming down. And so maybe you could talk a little bit about that, are you reducing content costs on the Explorer as well? And what’s the rationale there? Is it something you’re seeing from a competitive or value proposition perspective?
Well, that that price reduction was planned. And it’s largely because we launched with such a rich mix when we launched the Explorer, right out of the gate. So, we had that was built into the strategy. Typically, you know, when we take year-over-year, price reduction, they’re not typically related to the cost reduction. We try and take our material cost reductions in places where the customer doesn’t see it.
In which case, it wouldn’t be influenced – the pricing wouldn’t be influenced. In the case of Explorer, it was a new launch. There was complexity in the plant. We added labor into the facility to help us with the launch and we’re doing what we typically would do after any launch is work on natural productivity level. So, I wouldn’t associate that price strategy with [indiscernible] on the Explorer.
Okay. Moving on, maybe we can move over to some of the new products you showed, and I don’t think you showed it today, but in the past, you know, Ford has started showing this slide, which showed how, you know, over a billion and a half dollars of profit improvement from new product and Michigan Assembly and Hermosillo and I think the Bronco is certainly a piece of that. The Ranger was a piece of that. When you first started showing those slides, though, I think industry volume expectations were a little bit different, but since then I think you’ve also had probably a better than expected response to the Broncos. So, maybe you’re looking to increase capacity there if possible? I guess given all the puts and takes that you’ve seen in the industry, do you think that billion and a half number of profit improvement is still valid?
We should – so first of all, I want to make sure that the billion and a half is understood. That was a delta between the footprint that was there prior right focused in the C-MAX, which were to sedan silhouette type of products, and then the new footprint, which is the Ranger, and the Bronco. So that was the delta between the two. You know, the Bronco demand and the excitement – it is hard for me to even talk about Bronco without smiling too much. You know, we have over 165,000 reservations now with the Bronco. So, Michigan Assembly plant will be fully utilized. And then that is going to help us even if overall industry volumes are lower. The fact that we have a very efficiently fully utilized facility is what will underpin a good part of that 1.5 billion, you know, between the two products.
Also, part of that savings is in the fact that we’re going to reuse existing lines at Michigan assembly plant where the Ranger is today for that Bronco production. Again, you know, being as efficient as possible, and filling up a plant with high margin products. And all of that contributes to that $1.5 billion improvement. Certainly, you know, we will be looking at, you know, where we, where we get more Bronco capacity, but nothing to announce today. But again, that 1.5 billion was a delta and I think is probably still a good estimate.
Okay, great. Maybe since you gave us an update on Bronco orders, was wondering if you’re willing to update us on Mach-E orders and then maybe to follow-on, since you know we’re getting some questions about your electrification strategy there, just, you know any inkling of where you can go next on electrification within North America. And as you start seeing some of these competitor vehicles, electric vehicles coming out in North America, you know, are there plans to compete directly there or how you think about approaching electrification in North America?
Yeah, I’ll take the Mach-E question first. So, the first edition model, reservations sold-out in the first week of availability here in North America, which was great and also sold out Europe, by the way. Customers were invited. So we took the reservations, but now they’ve been invited to convert those at the end of June into new advice online reservation and we’ll fill the 2020 calendar your production. So, our production schedule right now is already full for the balance of the year. And we’re accepting orders right now still 2021 calendar year.
It’s really important to know that the $7,500 federal tax incentive still applies for new orders. And we’re hopeful that with that competitive advantage that, you know, we’ll fill the order bank for the 2021 calendar year quite well. And those, as you may know, we start delivery at the Mach-E late this year in the U.S. and then early next year in Europe. In terms of a more broad discussion about electrification, and I’m going to say, you know, somewhat North American centric here, but in general, we’re about halfway through, you know, we had announced that we were going to invest 11.5 billion.
We’re about halfway through that plan at this point. You know, we have some major programs where that we’ve already announced the Mustang Mach-E. We also have our all-electric F-150, and then the transit EV will also be coming in the next two years. You know, nearly 10% of our fourth quarter wholesale will have some sort of electrification this year to give you an idea of where we stand in. You know those names place globally. You know, we have an all electric territory in China.
We have our Escape and the Kuga in Europe a plug-in hybrid that we’re just launching in addition to the [ATV] that we already have. We also have the F-150 hybrid, which we call the F-150 PowerBoost to great reception when we unveiled it earlier this summer. And then also our Mustang Mach-E BEV, and then we also, as I mentioned, we have the F-150 EV and then the transit EV that follows.
So, we have a fairly large suite of electrification with hybrid plug-in, hybrid van, and pure electric, and again, about halfway through that electrification plan that we announced prior. You know, we have the alliance of Volkswagen, and that’s working out quite well for us. We’ll accelerate some of our commercial vehicle and EV strategy in Europe. And we still have our investment in our partnership ingredients. And you know, that will play a key part of our electrification strategy moving forward as well.
Great. Certainly a topic we could spend a lot more time on and hope to in the future. So, but we are out of time. Lisa, I really want to thank you for joining us today. Really appreciate your insight and color. Thank you.