Ford Motor Company

Ford Motor Company at Deutsche Bank Global Industrials and Basic Materials Conference

June 13, 2013 11:00 a.m. ET

Executives

George Sharp – Executive Director of IR

Matt VanDyke – Director of Global Lincoln Marketing, Sales and Service

Analyst

Rod Lache – Deutsche Bank

Presentation

Rod Lache – Deutsche Bank

Okay. Well, welcome, everyone. My name is Rod Lache. I'm the US auto industry analyst at Deutsche Bank. And I'm very pleased to welcome Ford Motor Company and Lincoln this morning. Ford has made no secret of its aspirations to grow Lincoln into a strong luxury brand. And I think it's pretty clear why the luxury market is so appealing.

Even though the volumes may not seem all that large by mass-market auto industry standards, 100,000 units in the luxury market could contribute $1 billion or more to an automaker's bottom line.

Leading Ford's effort to grow Global Lincoln is Matt VanDyke. Prior to his role at Lincoln, Matt played an important role of transforming the opinion of the Ford brand by leading global advertising for Ford and Lincoln.

Also joining us is George Sharp, George is, currently, Executive Director of Investor Relations. George has also had a long career at Ford within the Global Finance organization, including a stint as Vice President of Finance in Canada, Controller for Product Strategy, Competitive Analysis Manager and Director of Corporate Financial Analysis.

And with that, I think I will pass it along to George. Thank you.

George Sharp

Thanks, Rod. Well, good morning to everyone. It's is really great to be with you today. What I'm going to do is I'm going to start off with an overview of our ONE Ford plan and how it's fundamental to everything that we do today. And then, I'll conclude with a look at our 2013 planning assumptions and key financial metrics.

Then, I'm going to turn the discussion over to Matt VanDyke, and he'll take you through an update of our plans for Lincoln. And, of course, at the end, we'll have time for Q&A. So, let's get going.

So, here we go. Okay. Now, most of you should recognize this slide. At least, I hope you do. It is our ONE Ford plan. It hasn't changed and it's as relevant today as it was when it became our guide, quite a number of years ago.

Now, our objective, which is captured graphically in the chart – w at the bottom of that slide – is very straightforward; it's to serve all markets with a full family of best-in-class vehicles, small, medium and large cars, utilities and trucks, all executed perfectly through our ONE Ford plan, delivering profitable growth for all. And that's important – for all.

Now, although the external environment is uncertain, and in some parts of the world, it remains very challenging, we're continuing to move forward on all elements of our plan.

Now, the heart of the plan is accelerating the development of new products that our customers want and value. Now, we're continuing to strengthen our product portfolio in all of our traditional markets, while aggressively expanding it in the emerging markets around the world. At the same time, we are focused on our two brands, Ford and Lincoln. And we are continuously working to improve the favorable opinion, perception and revenue that they command amongst our customers.

Our product plan is based on our – providing our customers with vehicles that continuously excel in four areas. We call this our four-pillar strategy.

These areas are quality, fuel efficiency, safety and smart technology. And while we're offering excellence in all of these areas, our objective is to provide great value, as perceived by our customers.

Now, in addition to these product and brand initiatives, we're progressing our efforts to unlock the value of our increasing scale, optimize our global footprint and improve its flexibility and further strengthening our balance sheet. Now, all of this is driven by our skilled and motivated team.

Now, as I mentioned, a full family of great vehicles that our customers want and value is central to our plan. This year, more than 85% of our global volume will be on our nine global core platforms. And what we've shown here are examples of the nameplates associated with each of those nine platforms.

The benefits of this are more products, faster product cadence and better profitability. Optimizing platform count allows us to increase the volume per platform, improve our engineering efficiencies and gain economies of scale for us and, importantly, for our suppliers.

Now, most of you should also recall this slide. This is our mid-decade guidance that was first presented about two years ago.

Now in total, this represents our plan applied on an integrated basis across all of our business units, and we are continuing to work toward achievement of these targets.

Finally, as the last part of my section, I'd like to summarize our outlook for full-year 2013. As you can see in looking at the right-hand column, we continue to project strong performance this year and remain on track to achieve our 2013 plan in all areas, while, importantly, we continue to invest for the future.

Now, I'd like to turn the podium over to Matt VanDyke, our Director of Global Lincoln.

Matt VanDyke

Thank you, George. Good morning. It's a pleasure to be here with you and get a chance to share a little bit more information about the Lincoln story. I'll orient myself to advancing these slides here.

As Rod mentioned, for the last five years, I had worked on the Ford brand, primarily in the US, but, also, globally.

When I – that's actually when I joined the Company, it was about five years ago. When I joined the Company, the portfolio and the landscape was really quite different. At that time, Aston Martin, Jag, Land Rover, Volvo were all part of the stable of luxury brands that Ford had.

And then, as you all know, the ONE Ford plan really resulted in a laser focus on Ford, and, then, now, we have begun to turn our attention to Lincoln.

So, during that period of time, we also sunset the Mercury brand and we, now, within the Company, have extreme commitment and focus on really transforming the Lincoln Brand.

And for me, it's a great assignment. I've been working on it for about six months in the new role. We had previously not had someone that led marketing, sales and service for the Lincoln brand globally.

In November of last year, Jim Farley, who I work for, was appointed not just the lead of marketing sales and service, globally, for the Company, but he was given operational responsibility for Lincoln globally. And so, I'm reporting to him, as the marketing sales and service lead.

Prior to joining Ford, I spent 10 years working on the Lexus brand in the US, and also had some time working on Audi, while it was being transformed. So, for me, this is a perfect assignment, to jump into Lincoln, and I'm really excited to share the story of our journey and our plan with you today.

So, I'll will quickly cover a brief industry overview, talk to you a little bit about the customer, touch on our Lincoln plan, the product transformation, as well as something that's just crucial for us is the dealership experience. And that's really an area, where we need to differentiate ourselves.

I'll mention China, because that's of great importance to us and do a quick wrap-up to allow time for, hopefully, some good dialogue.

So, first, to jump in, this is a look at the global premium industry projections through 2017. And what you really can see here are a couple things.

One, the premium industry growth is projected and expected to outpace the overall industry growth, really beginning this year, through this five-year period. The other thing that is called out here is the importance of China. So, by 2017, China will be about 25% of the total global premium industry.

Now, we've also memo-ed North America, because the premium business in North America is very strong right now, and also projected to grow from about 2 million units this year to about 2.3 million units by 2017.

Another key consideration for us is what the overall industry segmentation looks like. And this is really a snapshot of 2006, so consider it pre-US recession segmentation, and then 2015. And a couple takeaways that I would like to share on this.

One, the purple band in the middle is really representative of the segmentation of large premium vehicles in the US. And what we would say is pre-recession, the luxury brands in the US were really defined by that large flagship car, the 7-Series LS, A-8, those type vehicles. And what we've really seen is a very fast and continuing trend towards smaller vehicles and different segments. And really those are highlighted in a couple ways.

So, the thin orange band below the purple line is actually small premium utility segment, which is absolutely on prior here and expected to continue to grow substantially. So, you can see how much growth really is represented by that on the bar chart for 2015. The top line is also another small premium car segment that is also growing fast.

So, the market is shifting quite rapidly here in the US. It's also trending this way globally to a large degree. And for Lincoln, our product portfolio, now, and with our plans in the future during this period of time, will cover over 90% of the segments in the US industry.

The target customer is extremely important for us to identify, because for Lincoln, we have to make a substantial change of who we've been attracting into our showrooms. This is our view of luxury segmentation in the US.

And the best way for me to really demonstrate our view of our product positioning and the kind of customers we intend to reach is really to share with you a short brand vision film. This is something that we don't use for customers. It's not a piece of advertising. But it really is a roadmap for our dealers, our key employees and stakeholders who work on the Lincoln brand. And it really touches on who this new target customer for Lincoln is and really how we expect to position the Lincoln brand.

But what you can see is the cultural progressive target that we are aiming for is the largest segment of customers in the US industry. And very importantly for us, these are folks who are very open to considering new brands. They are looking for personal, inviting brands with an extremely high degree of differentiated and outstanding personal service.

So if I could, let me briefly share with you kind of a vision video we have that will talk about the customer and our positioning.

(Video Playing)

We will no longer steal a dream. Now, will be our time for magic and wonder. We really can be the brightest star. And we'll do it by doing what we did in the beginning for our idea was never to be all famous to all people. Our idea was to be everything to certain people.

It is a belief that has led us to some of the most individual – another – cars in the planet; cars that broke the rules become monuments to movement. And if you are to pride today, you must continue to build automotive miracles in creating experience that is as undeniable as the cost of sales. And we must do it for a new distinctively different Lincoln driver.

The new Lincoln driver believes that life is a gift to be opened, and every life has the possibility of many lives. As a result, they are forever reinventing itself. Curiosity is part of our DNA; passion in ever fiber of your heart. We don't have borders. We don't believe in walls. And nothing can confine them.

Give them a giant space and stand back and watch them build a whole new world for they are the visionaries. They see a possibility, where no one else sees it. They're individuals, who want to affect our world, not many with them in it.

They believe that the best option must be beautiful and weather it profoundly with both the heart and the mind. This is what inspires them. This is what most and deeply and give them great joy. These are the clients Lincoln must affect with startling designs and unparalleled individual service because these are the people who we met. Lincoln is what we once were and will be again.

(End of Video)

Matt VanDyke

So, hopefully, as you can see, we have a very different plan for really how we portray our brand and how we speak to a different customer than the Lincoln of recent years.

As George mentioned at the beginning, there's been a very, very cohesive plan at Ford focusing on quality, green, or fuel economy, safety, and smart technology for the mass industry.

And for Lincoln, we have a different roadmap. The premium customers have different drivers that really impact their favorable opinion. And what we are completely focused on now and through our business plan period and beyond is really driving change for Lincoln in these key categories of quality, design and personal service.

And the chart really is oriented around what the most important favorable opinion drivers are in the industry. And what we have done here is really shown where Lincoln's opportunities are towards best-in-class performers. And quality is at the top of the list. And what often is interpreted is that quality is simply measured by the number of things gone wrong. The reality is quality really has multiple components. Things gone wrong is a huge part of it, as measured by things like JD Power, IQS and the like; but craftsmanship and then durability and reliability are also key contributors there.

So that's a major focus for us. The other is design, and certainly Lincoln currently is really known as design of old town car, old continental and cars of the past. And our aim is absolutely to use the dramatic new styling of the new products to reposition ourselves in customers' minds from a design perspective.

And then, personal service for us is going to be a critical differentiator. And I'll expand on that here in just a second.

The products must really lead our transformation. This is what the current product lineup looks like for us, also including in the bottom right-hand corner, the MKC concept that was revealed at the North American International Auto Show.

But the upper left, you have the MKZ; you have our utility vehicles; the two-row crossover, the MKX; Navigator, is a key part of our business still. Then, we have an MKS sedan and the three-row crossover, the MKT.

So, the beginning of the transformation of four all-new products in the next four years is really led by MKZ, which is really just in launch mode right now. It really – we've got full capacity and full availability in our dealer lots this spring, really starting in April. April, we had our best-ever month in the history of the nameplate for MKZ. Hybrid is really, really an unexpected – we knew it would be good. We didn't know it would be as well-received as it has been. It's really driving incredible conquest business for us, in particular, in the coasts.

In California, Texas, Florida, and up the East Coast, it's been very, very important for us overall. And really, people are just gravitating towards 45 mile per gallon, best-in-class, best-in-category performance on fuel economy, as well as an outstanding value. It's priced at the same price, as our entry-level gas model for MKZ, so it's really been encouraging to see the reception of the market to the new MKZ.

And then, as I mentioned, the MKC concept is really representative of a direction of where we will go next, again, launching four new products in the next four years.

I talked about client experience; and that being a key area, where we have to differentiate ourselves. Up until 2012, Lincoln dealers were not bringing price-of-entry services to luxury customers.

Things like car washes, when you're servicing your car, same-make loaners and the like, our table stakes in the industry. Those things are expected. We've really worked hard with our dealers in the last couple of years to get up to this level of service.

You see some asterisks on the chart. What that indicates is that we really implemented new programs with the dealers, so that their margins are tied to delivering this service. So, they're all in on this.

Right now, in 2013 and 2014, for us, it's not about just new cars and a new advertising campaign to launch each one of them. We have to get fundamental, structural transformational change within the dealerships to deliver on all of the new programs that we've won. You can see here a list of different people, process, facility initiatives, service initiatives that we have really to transform that very important customer client experience in the dealership because when we go out and do research, what we find is every luxury competitor has fantastic products, great marketing in the category.

What is being underserved though is personal service within the dealership, inside and out. And we really see that as an area of opportunity.

So, we have unique to Lincoln programs, like Lincoln Date Night, which is a 24 to 48-hour test drive of our product; an online concierge, where 24/7, you can interact with a live person, who'll help you through the shopping process; and other programs that are listed here.

Just as important is our focus on things like certified pre-owned, increasing our off-lease retention and lease-end values, and those are the things that we're very, very focused on working with our dealers to implement.

And then, as you can see, longer-term, as we increase our throughput, we're working together with our dealers, who are very committed to enhancing their facilities and, when appropriate, building Lincoln-dedicated facilities in order to better serve our customers.

Before I wrap, let me touch on China. China is massively important to us. Our plan is to launch the brand there in the second half of next year, so we're working right now to establish a dedicated and unique dealer footprint in the marketplace.

The retail environment will be very important in China, like it is in the US. And the brand values that I've talked about will really translate very well to our target customer in China, inviting, elegant simplicity, warm, comfortable environments will be very, very important for us there.

And we really have the chance to design the dealerships and the experience with a blank sheet of paper from the customer journey backwards. And here's a few images just to talk about that. I'll mention a couple of things.

I talked about the warm and inviting nature of the stores, and you can hopefully see that from some of these pictures. But there's other insights that we've been able to gather.

In the bottom left-hand corner, what you can actually see is what the service departments will look like. A key insight in China is that customers really want to understand exactly how vehicles are being repaired. They want to know that you're using a non-counterfeit replacement parts and things like that. So, having a very open and transparent service department that clients can look down on from a lounge is just one of the many types of things we're doing to understand the China market and present ourselves differently and provide a different experience overall for customers there.

So, too close, this is really the year that just starts the transformation of the Lincoln brand. It will be measured in years, not months. It's an extremely competitive environment here and globally. We've got outstanding competitors.

But we have incredible commitment from the Company. We've got many, many experienced leaders, like Jim Farley, who had great Lexus experience, as well as many of our key skill team leaders, who supported and worked on quality, manufacturing and others for the premier automotive group brands in Europe and elsewhere. We're launching four all-new vehicles in four years, beginning with MKZ. We'll differentiate on client experience, and we'll get busy in China next year.

So, with that, thank you so much for your kind attention. Love to join George for questions you may have.

Question-and-Answer Session

Rod Lache – Deutsche Bank

Perhaps we – thank you. So,there's no question that there's a great opportunity here in the luxury space, but it's –there's also also no question that it's very difficult to do. And the most recent example that comes to mind of a company that has invested a lot in trying to build luxury and what's been challenging is Cadillac; they did over 180,000 units in the US in 2000, and they did 150,000 units last year.

Could you just describe what some of the key initiatives are that you guys are pursuing, so that your outcome is more like the Lexus example, as opposed to the Cadillac example, where it just – maybe now it's starting to take off, but it just – is a very, very long-term and unclear roadmap to growth?

Matt VanDyke

Sure. Thanks, Rod. I think, you know, getting the product right is very, very important for us. I think that starts with a really deep understanding of customer needs and wants in the US and in key markets like China. I think one of the things that we've done is we've changed our approach, in terms of how we clinic and research the vehicles. We're very, very focused on research results in places like Pasadena, not necessarily Chicago, where we have great strength in the Midwest, with people previously accepting our luxury products, and really listening to the market needs in China overall.

And then, it's about translating those, leveraging the scale of the global platforms for Ford, and differentiating our vehicles with things like leading hybrid efficiency, unique features and aspects to the cars that are not found in other luxury cars. We've seen great reception to panoramic moon roofs that fully retract on the new MKZ that's in the market. And I think we can deliver on that in China very well as well.

And I think China's another opportunity. I think we'll be able to really use studying the market of the last five to eight years; what's happened with Cadillac? What's happened with others entering that market? What's gone right? What's gone wrong? And that's really defining our approach with our dealers; a small dealer network with the right throughput that can be very profitable there. And I think all of those things will ladder up to allowing us to do things a bit differently.

Rod Lache – Deutsche Bank

And just to clarify, the focus is going to be pretty much North America and China at this point, not anywhere else?

Matt VanDyke

Yes. Our first focus absolutely has to be US, and we'll quickly get into China, as I mentioned, the second half of next year. Beyond that, we absolutely are studying other growth markets, but our initial focus is on US and China. Thanks.

Unidentified Speaker

You mentioned that you were pricing the hybrid product in line with the traditional gasoline-fueled product. Why is that? Why not charge a premium for the premium benefit of mpg?

Matt VanDyke

Yes, it's a great question. I think what we really see, as a challenger brand, we have to go into the market differently and allow people to take a look at us for unique product offerings. We think hybrid is crucial to our success in order to change over our customer profile, by attracting more complex customers. As I mentioned, the demand for it is – we expected it to be strong and it's really outpacing our expectations in California and other places. It's over 50% of the demand overall.

The hybrid is very profitable for us, and we think it's extremely important to use that as a tool to bring new customers to the brand.

Rod Lache – Deutsche Bank

Maybe to ask the question from a different perspective, what encourages a customer to buy the traditional product for the same price?

Matt VanDyke

Well, I think that's where we are seeing just differences in customer taste and preferences. I think even at the same price, about half of customers are very, very happy and comfortable with a gas-powered vehicle. They simply like the driving dynamics of it better and the like. Our view is that we want to enable that choice as strongly as possible.

Unidentified Speaker

Can you talk about the dealer network and the investment the dealer needs to make? And are they going to be standalone Lincoln? Or are you going to co-locate them with a Ford dealership? And where are you with the footprint?

Matt VanDyke

Sure. You know, the dealer network is crucial for us on delivering, as I mentioned, a differentiated client experience overall. And the dealers have been with us on this journey in the US hand-in-hand. And our approach is to be, I think, very pragmatic with the dealers about the level of investment.

Our plan is not to walk out to every dealer and say, you need to build a new $15 million facility to be competitive with the Lexus store or Mercedes store across the street. It's about really using our size to our advantage and making proper investments, so the level of expectations when a customer comes into the service drive, they're not following a Super Duty in with a Lincoln product and things like that.

They have differentiated spaces within the dealerships for customer lounges and waiting areas and the like, but then we're really asking our dealers to focus on client experience. Increasingly, more and more customers don't necessarily even want to spend time in the dealership, so we're turning our attention outside the dealerships.

And throughput increases through our business plan period. There certainly will be justification for dealers separating their showrooms, where they're dualed with Ford. We have had a number of dealers very enthused with our plans, making those bets already and using property that they have to invest in stores and build new standalone Lincoln facilities.

But overall, I think once we get kind of those, as I mentioned, table stakes experiences right, which we believe we have done, differentiate ourselves this year and next on unique client experience programs, inside and very importantly outside the dealership, that will really be the third phase of where we turn our attention.

Rod Lache – Deutsche Bank

Can I ask maybe about what you're aspiring to be in terms of the size of the company? Maybe just give us a sense – I think you did about 80,000 units in the US last year. I don't recall what the number is in North America in total.

But if you are successful in five years or some point in the future, what kind of volume would this business be doing?

Matt VanDyke

Yes. I think – Rod, I won't give you a specific sales projection for five years out or anything. But what I would say is we fully expect to grow the brand here in the US with each new product introduction, and then certainly obviously in China entering a new market. We'll really measure our success by attracting new customers and overall growth. So, again, I wouldn't pin it down to a very specific number.

In mentioning the segmentation overall, there are segments that we're not playing in today that we can enter that are high-volume segments and growing fast. So, I think we'll be in very good stead when we consider what the volume is in the future compared to today.

Rod Lache – Deutsche Bank

Maybe a different way to kind of think about it is, presumably, the way you guys are investing is a little bit different than maybe some other luxury brands, because you have Global Ford and these platforms and technologies that you can leverage with maybe less investment than designing a wheel-drive...

Matt VanDyke

Right.

Rod Lache – Deutsche Bank

Luxury car from the ground up. So, what is sort of the – how should we be thinking about the difference here? Is there a way to think about your minimum volume per model? Is it – is there some kind of a number that you could say, look, we only need to do 20,000 units per model or something like that to actually make this make economic sense for the Company?

Matt VanDyke

Yes, I think the way for me to say it is that we do enjoy extreme efficiency, based on the global nature of the Ford platforms. And so, Lincoln has – had been profitable and we expect it to be increasingly so, given the opportunities to grow the volume here.

And, again, in China, on a per-vehicle line, yes, there is certainly, obviously, numbers we have to hit to make the increased investment to offer the technologies and differentiation from the global platform that we will be working on. That differentiation for Lincoln, historically, has not included all new top hats, different power trains, different technologies and features, and now it will going forward.

So, we believe that we can do that very efficiently. We've got very realistic and attainable sales projections and expectations in order to deliver the plan.

Rod Lache – Deutsche Bank

How many – you have six different models today. I think you showed in your slide. In five years, is that – is there a view on how many models or categories...

Matt VanDyke

Yes. So, five today. And then, I think the sixth picture, we are showing a concept that was directionally something we're very interested in, again, in the small premium utility segment.

And what we need to do is really go step-by-step into the largest segments, where we can get that volume, grow the throughput for our dealers and be efficient with our plan, and then, I think, continue to look at where those next opportunities are product-line wise.

Rod Lache – Deutsche Bank

Okay. Well, thank you.

Matt VanDyke

Thanks so much, Rod. Thanks, everybody.