Seeking Alpha recently held an interview with Ford (F) CEO Alan Mulally, who joined the automotive giant in 2006 and has since overseen a turnaround that brought a net profit of $20.2B last year. Below is a transcript of the interview.
In its 2011 results, which Ford released a few days prior to our interview, the firm reported that pretax operating profit rose 6% to $8.8B while revenue increased 13% to $136.3B.
Before we spoke to Mr. Mulally, we asked Seeking Alpha readers to send in questions that we could put to him. We’d like to thank you for the excellent response we received; we were unable to use all of the questions submitted, but for the ones we did use we have provided attribution as appropriate.
The transcript of the interview has been edited for length, grammar, clarity, readability and syntax.
The aim of any Seeking Alpha article and of this interview is that the reader will be able to make a better investment decision once they’ve read it. In saying that, however, I have two questions to kick off. What was your first ever car, and what car are you driving now?
I think my first ever car was a Chevrolet, 1960. Today, I drive a different vehicle each day - either one of our new Ford vehicles or one of our competitors’. The reason that I do that is that we made a commitment to our consumers five years ago that we would provide them around the world with a full family of the best-in-class vehicles. We even dimensioned it in terms of what the consumers really want -- quality, fuel efficiency, safety, smart designs like SYNC and MyFord Touch, and of course, the very best value.
So to ensure that we are honoring that commitment, I drive the competitors’ vehicles every night, as does the entire leadership team at the Ford Motor Company, because we benchmark the vehicles to make sure that every new Ford vehicle is best-in-class. Isn’t that fun?
I recently bought my wife a Ford Focus and I’m very impressed with the technology and everything about it. If you could take me inside the next 3-to-5 years, what luxuries or technologies can we expect from Ford that will keep consumers wanting to buy its cars?
A good place to start would be from our vision, which is to accelerate the implementation of Henry Ford’s original vision of opening the highways to all mankind.
In the mid-decade guidance that we recently provided, we said we aim to grow our sales from 5.3M vehicles in 2010 to around 8M in 2015 or 2016. And based on our One Ford plan of leveraging our global assets, we are also looking to grow our automotive operating margins from around 6% to between 8% and 10%.
Within the next couple of years, 85% of the entire volume will be on nine platforms worldwide. So you can see right there that our strategy is not just about increasing revenue, but also about growing the operational efficiency through simplification and commonality.
And to your point about your neat new Focus, I’ll just use that one vehicle. The Focus is on a new platform called C1, and off of that platform we’ll make 10 different top-hats. When you walk into a Ford showroom, you’ll be able to get the vehicle that works for you, and you’ll have the power of choice on what power train works for you, and whether you want a petrol, diesel, hybrid, plug-in hybrid or all electric; and of course, we’re also making that entire family of vehicles on the same production line so that we can offer these vehicles more affordably than anybody else.
So I think you’ll see a continuous improvement in the quality and the features of the vehicle, as you’ve noted. Every year, the fuel efficiency will improve, and we’ll continue to add safety features. And of course, the cars will have really smart designs that will make you a better driver, like SYNC and MyFord; and with our scale worldwide, you’ll get the very best value.
So I think that’s the roadmap: improving the internal combustion engine, more electrification of the entire platforms, and what you have in the power of choice. And then over time, I think you’ll see more biofuel alternatives, more hydrogen vehicles, and natural gas cars.
I’ve known a lot of local dealers for several years, and in 2005, when the economy and unemployment were far better than today, the dealers were rather unhappy. But today, they’re excited about Ford and the future. How far are you into your transformational plan, and how long is it going to take to complete?
(Readers who asked about Ford’s global strategy include sydneyrollock. In addition to addressing the question here, Mr. Mulally talked about Ford’s long-term program later on in the interview as well.)
We are right at the beginning really of capturing the tremendous value of this new Ford strategy. And what I mean by that is that, as you all know, we’ve gone through the toughest of times with the economy slowing down worldwide and fuel prices moving up. And during the worst of times, we’ve not only survived, but we have positioned the company now to profitably grow going forward.
And as we shared in our fourth quarter and year-end earnings release last Friday, this is now our third consecutive year of profitably growing the company. It’s also the third year in a row of increasing market share.
Regarding your comment about the Ford dealers, a couple of things that they are really excited about is that along with consolidating and restructuring Ford and our supply base to match the production to the real demand - which is why we’re profitably growing now - we also restructured the distribution network to dealers.
And so we have fewer dealers now. We have them in the right locations. Their throughput is up, their profits are up, and the latest data from the dealers says that their franchises now are the most valuable they have ever been in the history of Ford.
You mentioned that you made changes to meet demand so that the dealers have the right inventory on the lots? Is that a more of a process or technology?
That was more of a strategy, and what I mean by that is that as you know, the automobile industry in general considered all their costs to be fixed. And so even with an economic slowdown, they would continue to produce vehicles that were more than what the customers were demanding at the time. To sell cars they would have to offer discounts, so they ruined the residual values.
We took a strategy with our One Ford plan five years ago that we were going to take the lead and match our production to the real demand. We were going to take the tough action first. And so that’s why you saw us dramatically consolidate our operations through the recession, reduce our fixed costs, and improve our break-even point. And at the same time, we actually accelerated the investment in all of our new vehicles.
So one of the reasons you see us now growing the business year after year now is that our cost structure is right, our productivity is right, our quality is right, and we have the vehicles now that people really do want and value.
Mr. Mulally, people say that one of Ford’s biggest assets is you. Do you see yourself going on like Warren Buffett into your 80s as the CEO of Ford?
Well, I think my answer to that is that that I am absolutely honored to be serving at Ford, and I have no plans to change that. It’s been a fantastic experience to help Ford, and to focus on a new strategy based on great products and a long-term growing business that allows us to continue to invest in the future. So I am very happy to serve Ford.
What about CFO Lewis Booth? There were reports recently that he is going to retire in the first half. Can you confirm that?
No, no new news to report on any of our team members at this time. Lewis has had a wonderful career at Ford and continues to contribute at the highest level.
You mentioned during the earnings call that several factors affected the operations outside the U.S., such as commodity prices being high, the European turmoil, and natural disasters. However, guidance remains very high for the year. Would you consider lowering it to a level that is easier to achieve, irrespective of these external factors? You also talked about improving the business, with strengthening in Europe and South America being important. What are your goals in this respect for 2012?
(Readers who asked about guidance include Mercy Jimenez and Gussyboy151)
I think you really captured the year that we went through. It was just a tremendous performance in 2011, because of all the things that we dealt with.
It started with the terrible disaster in Japan, the tsunami, the earthquake, the meltdown of the reactor, and the shortage of parts that we had worldwide coming out of the region.
Then there was the Thai flooding, and what it meant to our supply base and the lost production; and then you add the slowing economy in Europe, as you pointed out, and also a slowing economy in South America and especially Brazil.
In addition, the commodities, as you mentioned, were substantially higher. We thought they were going to be about $1B higher than in 2010 but they turned out to be about $2.3B higher.
With all of that, we kept moving decisively to match our production to the demand, continuing to work our quality and our productivity, and we were able, at the end of the year, to exceed our guidance of total company profitability and automotive operating profit. Those are the two major goals that we laid out for 2011.
So when we look forward to 2012, we think that overall company profitability will be about the same and that we’ll be increasing our profitability in our automotive operations. We expect Ford Credit’s profitability to fall.
We also guided that we will continue to improve our operating margins in automotive. In addition, we believe that this year, the commodity increases will not be material. This is very important because all around the world most of the economies had been working in inflation, so even though for example the growth rates are lower in Asia-Pacific, they are much more sustainable now. This is very positive. They are still very strong, but much more sustainable.
The U.S. looks good with a solid recovery, albeit one that is slower than from past recessions. We noted that we see industry sales in the U.S. going from around 13M vehicles last year to between 13.5M and 14.5M.
In Europe, we forecast between 14M and 15M vehicles. Europe is clearly very much on our minds; our plan there is to match our production again to the real demand to maintain our best profitability, and to utilize our One Ford plan.
Ford recently received an upgrade in its credit rating. What do you personally want the credit rating to be? Do you have a goal for before you leave Ford, and how long do you think it’s going to take to achieve that goal?
(Readers who asked about Ford’s credit rating include TangoOscar, Bossy600 and FocalPoint Analytics.)
In addition, when do you think Ford will pay down its debt?
(Readers who asked about reducing Ford’s debt include DaltonImperial.)
Going back to our mid-decade guidance again, our goal for Ford Credit is that return on equity will be in the low double-digits. Our capital spending will be around $6B a year, and our total automotive debt will be around $10B. As you know, we’re at about $13B now, and over the last couple of years, we’ve repaid over $21B of the $23.5B that we borrowed, so we’re right on plan.
Would it not be worth paying that off as quickly as possible, maybe a bit earlier?
Well not necessarily, because interest rates are relatively low and we’re managing all of the uses of cash. The important thing is investing in new products and our new production facilities around the world. We’re also de-risking our pension.
With regards to the investment grade, we are operating very much on all of the parameters associated with having an investment grade.
The major overhang on us and a number of others is the economic situation worldwide. Our rating will be determined by the rating agencies, but we are very pleased to be one notch below investment grade today.
Another very important message for everybody is the fact that we have reinstated the dividend, and we noted that our plan is to be able to pay it through an economic cycle just like we have been through. If you look at where we ended up on automotive liquidity in 2011, with $32.4B, one of the main considerations is that as we go through the next cycle, we’ll be able to maintain the dividend.
Do you see yourself increasing the dividends in the next year or two?
Well that’s something that we’ll definitely consider based on the economic situation and where we are, because it’s just another very important use of our cash, but clearly where we are in the growth cycle worldwide will be a primary consideration.
What about buybacks?
(Readers who asked about buybacks include Bossy600.)
That’s always a consideration. Right now, we don’t have anything to announce about that, but we continue to look at the best way to manage our cash. Right now, that’s focusing on investing in the product, and investment in production worldwide to profitably grow while improving, or while paying the dividend and de-risking our pension plan.
You mentioned your production facilities around the world, and I know that the sustainability for the Rouge plant in Detroit has been at the forefront in terms of technology and being environmentally friendly. I’m curious to know if the plants in China, India, and Thailand follow the same guidelines?
Oh, absolutely, and the neatest thing about our One Ford plan again is leveraging our capability worldwide. As you know, John Fleming (Ford’s EVP of Global Manufacturing and Labor Affairs) leads all the manufacturing worldwide for Ford, and he is probably the most experienced and talented manufacturing executive in the industry. We have four plants that we’re developing in China, and we have two more new facilities in India and another one in Thailand.
The neatest thing about this is that we are positioned to produce the vehicles where the customers are located, so it’s not only close to the customers from a knowledge point of view, but also we can do it most affordably. And we’re using all of our global standards for the Ford production system in terms of quality and productivity.
As you pointed out, the Rouge Plant is just a shining example of that productivity. We make the F150s there, and I might just point out that the F150 has been the number one vehicle in the United States for 30 years and the number one truck for 35 years.
The building of new factories and your capital expenditure is very interesting given that the global economy is so uncertain. A lot of companies are holding back and yet Ford is going full throttle. Do you not worry about the huge amount of things that could go wrong this year in the economy, whether it’s Europe or Iran?
(Readers who asked about how Ford is reacting to the slowdown across the world include Yoni Jacobs of ChartProphet and HuskyFinancial.)
Well, I’ll take you back to the last five years. The reason that we have been profitably growing the corporation is the fact that we have been investing not only for the near-term but for the long term also. I mean, this is a long-term business and it starts with having a world class family of vehicles with the leading technology that people really want and value for quality, fuel efficiency and safety.
While our competitors have slowed their investments, we have actually been accelerating ours, which is why you see this best-in-class family of vehicles today.
So, our strategy is to continue to have the freshest, most complete show room around the world. And again, as things happen - just like we have over the last five years - we will move decisively to match our production to the real demand, but always with a focus on having the best family of vehicles available for the consumer.
We’re going to have to leave you guys. It’s sure nice to meet you and good luck.
Absolutely. Mr. Mulally, thank you very much for being interviewed by Seeking Alpha and two of the contributors. Thank you also to Jessica Enoch and Scott Monty from Ford’s communications department for helping to arrange this interview. And thank you to Mark Bern and Brian Nichols for taking part in this discussion.
Below are links to the other articles in this series: