Earnings Call Transcript - F Q3 2021

Operator, Operator

Good day, ladies and gentlemen. My name is Erica and I will be your conference operator today. At this time, I would like to welcome you to Ford Motor Company's third quarter 2021 earnings conference call. All lines have been placed on mute to prevent any background noise. After the speaker’s remarks, there will be a question-and-answer session. At this time, I would like to turn the call over to Lynn Antipas Tyson, Executive Director of Investor Relations.

Lynn Antipas Tyson, Executive Director of Investor Relations

Thank you, Erica. And welcome to Ford Motor Company's Third Quarter 2021 Earnings Call. With me today are Jim Farley, our President and CEO, and John Lawler, our Chief Financial Officer. Also joining us for Q&A is Marion Harris, CEO of Ford Credit. Today's discussions include some non-GAAP references. These are reconciled to the most comparable U.S. GAAP measures in the appendix of our earnings deck. You can find the deck along with the rest of our earnings materials and other important content at shareholders.ford.com, including some updated videos and proof points around our Ford Plus Plan for growth. Today's discussion also includes forward-looking statements about our expectations. Actual results may differ from those stated. The most significant factors that could cause actual results to differ are included on page 23. Unless otherwise noted, all comparisons are year-over-year, Company EBITDA, EPS, and free cash flow or on an adjusted basis, product mix is volume weighted. A quick update on our IR events for the balance of the year. We have five on Monday, the first, November 1st, will host a fireside chat with John Lawler and Hau Thai-Tang, our Chief Product Platform and Operations Officer. On the 18th of November, Barclays will host a virtual fireside chat with Ted Cannis, CEO of Ford Pro. In December on the third, Goldman Sachs will host a virtual fireside chat with Lisa Drake, our Chief Operating Officer for North America. On the third, Credit Suisse will host a fireside chat with Hau Thai-Tang. And finally, on the ninth, Deutsche Bank will host a virtual fireside chat with Alex Purdy, our Director of Business Operations, Enterprise Connectivity. Now, I will turn the call over to Jim Farley.

Jim Farley, President and CEO

Thank you, Lynn. Hello, everyone, and thanks for joining us today. This month marks one year since we began executing our Ford Plus Plan. It creates growth and value and allows us to win in the emerging area of electric and connected vehicles. We built a strong team that combines top leaders from Ford with world-class talent recruited from outside of our Company. This leadership team is committed to this plan, and we're accelerating our progress. Ford Plus is not a tagline. It's not advertising. It's a larger, more ambitious way to think about our business and how we bring value to our customers. We're creating iconic and distinctive products that only Ford can do, increasingly fostering always-on relationships with our customers and delivering ever-improving user experiences, all while creating value for our shareholders. We're fully invested in this future, and we're taking significant risks. Key to the plan is harnessing the power of connectivity. We're designing a new generation of fully networked vehicles not handed off to our supply chain, but created within the Company to revolutionize the experience of owning and operating a Ford vehicle. We're scaling the number of vehicles capable of over-the-air updates, moving from 1 million vehicles today to 33 million by 2028. At the same time, we're moving aggressively to lead the electric vehicle revolution, substantially expanding our battery production as we speak today in the U.S. In fact, we've already announced plans that will enable us to meet our mid-decade goal of 141 gigawatts, which is enough to build more than 1 million battery electric vehicles a year. We are also making a 7 billion investment in Blue Oval City in Tennessee and the BlueOvalSK Park in Kentucky, which sets a new standard for scale sustainability, advanced manufacturing, and training the next generation of technology leaders. Additionally, we're investing a billion dollars in our electrified center in Cologne, Germany, allowing us to transition to an all-electric model by 2023. We're preparing to launch the F-150 Lightning, which is a defining version of America's best-selling vehicle for the past 40 plus years. Our all-electric Mustang Mach-E is a hit with customers, not just in the U.S. but around the world, bringing in a stunning number of new customers to the Ford brand. Over 90% of Mach-E owners have stated they would recommend a Mach-E to others. This is crucial as a new generation of battery electric customers make brand choices. Our challenge now is to overcome production constraints and increase availability to meet the incredible demand both in North America, Europe, and China, the largest EV market in the world, where we are just starting production of the Mach-E. We believe global demand for the Mustang Mach-E could approach approximately 200,000 vehicles a year. We've created a new organization, Ford Pro, to drive the future of work with compelling commercial vehicles, distribution, and services, while increasing revenues for Ford. In a few weeks, we will start production of the new E-Transit, an electric version of the world’s best-selling commercial van. Furthermore, in the third quarter alone, FORDLiive, Europe's new connected uptime center, helped customers in the UK secure additional uptime, preventing about $8 million in lost revenue and associated costs for our valuable customers. We're reinventing icons like Bronco and creating new ones like Maverick. In fact, the all-new Maverick, which delivers 42 miles per gallon, is the first standard hybrid pickup in the U.S. and also America's most fuel-efficient hybrid pickup. This is the strongest and most compelling lineup I've ever seen from any mass-market brand throughout my career. We are creating a future as we recover from the chip shortages and COVID constraints, and we continue to make vital strides in our technology and go-to-market strategy for autonomous vehicles. In the second quarter, we informed you about a new partnership with Argo AI and Lyft. In the third quarter, we announced a new partnership with Argo AI and Walmart, which is Walmart's first-ever multi-city autonomous delivery service anchored in cities where we already operate. We're supporting Argo AI's aspiration to access public capital to build this future and generate the margins and cash flow we need to fund Ford Plus, turn around our automotive operations, and improve our competitiveness. Our third-quarter results demonstrate significant progress. We achieved an 8.4% EBIT margin company-wide, including 10.1% in North America. Those margins are in line with our targets for 2023. Our operations outside of North America are likely to post their best performance in four years, driven primarily by the success of our global redesign. We've achieved this while thoughtfully managing our supply chain for short-term sustainable improvements, prioritizing high-demand and high-profit vehicles. I believe we have the right plan to drive growth and unlock unprecedented value. You are already seeing favorable changes in the slope of our earnings and cash flow, with more to come. Given the strength of our business this year, we are increasing our full-year adjusted EBITDA guidance to between $10.5 billion and $11.5 billion. As we plan in earnest for next year, we are excited and energized by the opportunities ahead of us, yet we recognize that we have much more work to do to deliver on our potential. The word I would leave you with is 'focus.' The competitive environment has never been more interesting and challenging, and we intend to uphold our promise to compete like a challenger, centering our top priorities around unlocking Ford Plus growth with customers as the focus of everything we do. Now, I will turn it over to John, who will guide you through our results for the quarter, outlook for the full year, capital allocation priorities, and expectations heading into next year.

John Lawler, Chief Financial Officer

Thank you, Jim. In the face of continued industry-wide semiconductor constraints, we stayed focused on our plan, strengthening our portfolio and investing in opportunities foundational to growth and value creation. We delivered a solid quarter with $3 billion in adjusted Company EBITDA and a margin of 8.4%. Free cash flow of $7.7 billion was as we expected, up sharply on a sequential basis, driven by positive working capital effects from higher wholesales and EBITDA. We concluded the quarter with robust cash and liquidity, standing at over $31 billion and $47 billion, respectively. Across our automotive business, our playbook remained consistent as we optimized production for customer orders, new launches, and our most profitable vehicles. Our wholesales improved significantly on a sequential basis as chip supply for Ford improved. We also maintained disciplined incentive spending and mix management, which more than offset chip-related declines in volume on a year-over-year basis. Ford Credit delivered another solid quarter with $1.1 billion in Earnings Before Tax as auction values continue to remain strong and credit losses persist at near record lows. For the fourth quarter, we are assuming a sequential increase in wholesale. We also expect continued healthy mix, net pricing, and solid results from Ford Credit, although not as robust as the third quarter. Headwinds include inflationary impacts on commodities and freight, along with planned sequential increases in our Ford Plus modernization investments, which encompass customer experience and IT. Let me share some highlights from the quarter before I turn to guidance, capital allocation, and our preliminary view of 2022. With improved chip supply, North America wholesales increased sequentially by 67% as our team prioritized launches, customer orders, and high-margin units while minimizing the number of vehicles built that were waiting for chips. Demand remains strong for our exciting vehicles, with our order bank growing significantly in the third quarter, representing 28% of retail sales and reaching a high of 31% in September. Our overall customer orders increased over 50% from the second quarter to more than 100,000 orders, excluding Bronco. With a 10.1% EBITDA margin in the quarter, North America is now achieving a 9% margin year-to-date, just 100 basis points shy of our 2023 target of 10%. South America has registered its eighth consecutive quarter of year-over-year improvement in EBITDA, with the business run rate now approaching breakeven. The region also launched its new commercial vehicle organization with the introduction of a new Transit, which is manufactured in Uruguay. This Transit is the first light commercial van to market in Brazil, featuring connectivity as a standard feature. In Europe, the underlying trajectory of our business continues to strengthen, though the adverse impact from chips has masked this improvement. In the third quarter, we lost about 50,000 units from the business, which would have favorably impacted EBITDA. Our leadership position as the number one commercial vehicle brand continued in the quarter, alongside an extremely robust order bank. Lincoln has been performing well in China, extending its success in the lucrative luxury segment, with retail sales up 24% year-over-year. We've doubled Lincoln's share of the Chinese luxury market in the last 18 months. Our newly created BEV organization is set to open its first 13 direct-to-consumer Ford select city stores, with a total of 25 expected to open by year-end. Regarding our IMG operations in India, we made the difficult decision to cease manufacturing due to accumulated operating losses exceeding $2 billion over the past ten years. Going forward, we will focus on importing iconic vehicles, including EVs. Overall, our IMG operations had a solid quarter, leveraging strengths including the Ranger. As Jim highlighted, the underlying strength of our business supports our decision to raise the adjusted EBITDA guidance for 2021 to between $10.5 billion and $11.5 billion, despite a lower than anticipated improvement in chip availability in the second half of the year. Our updated guidance includes the $900 million non-cash gain on our investment in Rivian in our first quarter adjusted results. In the event that Rivian completes its IPO, we will record any gain on our investment and related adjustments as special items. Accordingly, we will adjust the $900 million non-cash gain from adjusted EBITDA in the first quarter to a special item as Rivian completes its IPO in the fourth quarter, which we will address in our fourth quarter earnings report on February 3, 2022. Our guidance for 2021 adjusted free cash flow remains unchanged at $4 billion to $5 billion, reflecting the elevated EBITDA, but less favorable improvement in working capital and timing differences. We expect free cash flow to increase with higher production levels and associated improvements in supplier payables and other timing differences. Moving to capital allocation, which is crucial to our value creation framework. Our capital allocation discipline has strengthened our core business and balance sheet, granting us the flexibility to invest in new growth opportunities as we implement our Ford Plus plan. Ultimately, this approach ensures we return value to our shareholders, both through share price appreciation and dividends. Today, we announced the reinstatement of our dividend, with our board approving a regular quarterly dividend of $0.10 per share for the fourth quarter of 2021. This dividend reflects our confidence in the improving run rate of the business and our capacity to fund all capital demands, including escalating investments in electrification and the trajectory of our Ford Plus plan. Between 2020 and 2025, we expect total capital expenditures of approximately $40-45 billion, averaging roughly $7 billion per year. Over the same timeframe, we plan to invest over $30 billion in BEV initiatives, dynamically allocated among CAPEX, expenses, and direct investments. We are confident we have the financial flexibility to increase our investments as BEV adoption accelerates. Now, I'll share our preliminary thoughts about 2022. Much like this year, it is likely we will encounter crosswinds that could drive varying outcomes. While it is early to provide financial guidance, we want to convey our thinking about next year, given the dynamic operating environment. Ford's underlying strengths make me highly confident we can build on our results in 2021. Our exceptional portfolio of products and services, combined with a substantial new product rollout, positions us well. Second, our industrial base provides significant flexibility as the adoption of electric vehicles accelerates. Third, due to the chip shortage, our wholesales are expected to fall significantly below our production capacity. Based on our current evaluation, we anticipate wholesales to grow by about 10% in 2022, although this figure is highly variable and changes weekly. Lastly, the effects of our global redesign, now largely complete, are apparent and significant. We've drastically reduced risks and streamlined our global footprint and product lineup, greatly enhancing our earnings and cash generation capabilities. For headwinds next year, the interplay between semiconductor-related constraints, volume pricing, and inflationary pressures is complex and will remain fluid. We expect commodity costs to rise by $3 to $3.5 billion, with an additional potential increase of $1.5 billion in 2022, largely driven by steel and aluminum, similar to this year. Other inflationary costs may also emerge, but it remains early to quantify. We anticipate that Ford Credit may face moderation as strong auction values get affected by a diminished inventory of vehicles and declining lease-end return rates. Importantly, we will continue to invest in our Ford Plus Plan for growth and value creation, particularly in customer-facing technology, connectivity, maintaining our always-on relationships with customers, and electrification. We believe the long-term returns on these investments will be substantial. This concludes our prepared remarks. If you perceive that the upfront portion of these calls has become more efficient, you are correct, as we've been very intentional in communicating what’s genuinely important, and our confidence in executing against those priorities and reporting timely.

Operator, Operator

Your first question comes from the line of John Murphy with Bank of America.

John Murphy, Analyst

Good evening, everybody. Thanks for making the call efficient. I think it's going to be tough to limit to one question, but I will. If you think about the 10% increase you are talking about in 2022 wholesales, and if we could focus on North America and just assume you're going to do about 2 million units this year in '21, give or take. We're only talking about 200,000 units of increase next year. There's just an assumption that the price and mix will deteriorate as incremental units are produced when the semiconductor shortage is alleviated. But given that that's still going to be a relatively low level of production, do you believe that the price mix is really going to come under pressure next year, and aren't we really going to stay in a very tight environment, with you selling through and not even building inventory if that's true, which means that pricing mix might stay very strong next year, and we still might see the benefits? Thanks.

John Lawler, Chief Financial Officer

You're right. It's going to remain dynamic, and that's what the interplay is going to be with volume increases for the industry. If they are higher, we'll probably see more pressure on prices. If they stay as they are today and we see a moderate increase, I think you're going to continue to see strong pricing and mix continue through next year. So that's where we have to stay disciplined and remain very focused on managing that well so that we can have, as you said, the play-through next year based on the overall volume standpoint, and we're focused on that.

John Murphy, Analyst

And just to follow-up on that. I think right now, based on the numbers, you have about 213,000 units in dealer inventory. Pre-COVID travel rate was about 650,000 units. You think about ultimately getting to a time where you can rebuild or restock that inventory. Where do you think that runs, and how much opportunity is there to maintain some of this mix and price discipline to offset any cost inflation and also invest in the future?

John Lawler, Chief Financial Officer

If you look at where we ended in September, we finished at about 20 days’ supply in the U.S., and we are monitoring it closely from a supply standpoint. In our historical base, supply was somewhere around 75 days. We are not returning there. As Jim said, we expect to be in the 50 days’ supply range when we are fully at capacity running and producing everything we can, so that's going to be the key. Another important point is the shift to having more of our sales come through orders rather than pushing stock, which is crucial for us to manage our day supply. We had over 100,000 orders at the end of the quarter, and that number has grown since then in our order bank, which has worked positively for us in the third quarter.

Jim Farley, President and CEO

$139,454 order.

John Lawler, Chief Financial Officer

As of today.

John Murphy, Analyst

To be exact, that's it sounds like you are on that and maybe if I could sneak one in just on cap allocation real quick on the dividend. I mean, why now? And I'll hop back in the queue.

Jim Farley, President and CEO

It’s the underlying strength of the business, John. We are not capital constrained. We can fund our growth initiatives. We know there will be opportunities that arise. We're focused on total shareholder returns, not just stock appreciation, but also the dividend. Given the strength of the business, the Board decided to restart the dividend this quarter.

John Murphy, Analyst

Great. Thank you very much.