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Ford ‘changing every part of our business’ in EV push, CFO says

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Ford CFO John Lawler joins Yahoo Finance Live to discuss company earnings, transitioning to a digitally-connected electric world, product expansion, consumer spending, laying off up to 8,000 employees to help fund EVs, EV profitability, reshaping Ford, and the outlook for the auto industry.

Video Transcript

[ELECTRONIC BEEPING]

JULIE HYMAN: Ford reporting much better than expected second quarter earnings on the back of strong demand for pickup trucks and its new electric vehicles. The auto giant is warning that inflation is going to remain a headwind. It probably has too many workers in some of its business lines. The shares up 2% right now.

And joining us is Ford Chief Financial Officer John Lawler. John, thank you so much for being here. I want to start not necessarily straight on the earnings here because you have been at the company, I think, for 30-some years, longer even than Jim Farley, the CEO. And Jim talked a lot on the call about how this is a different Ford, how he's trying to remake the company and think differently.

And as somebody who's been there for a long time, I'm just curious what you're finding is the biggest perhaps welcomed change that the company is undergoing right now.

JOHN LAWLER: Yeah, it is a tremendous transformation that we're undergoing. We're virtually changing every part of our business as we transition to a digitally-connected electric world. And what's really exciting for me is how the team is moving with speed, and being decisive, and looking to be out in front of things, and challenging the status quo, and really leaning into the fact that this is a tremendous opportunity for us as a company to provide incredible products, services, and experiences to our customers that we haven't been able to provide in the past.

And it's really exciting to be part of that change. And the team has done a great job managing through that in a very, very difficult environment over the last couple of years, coming out of COVID, supply chain disruptions, et cetera.

And it really shows, this quarter does start to show the strength of the changes that we've made and how the team is responding. And so it's just exciting. And it's an honor to be a part of it.

JULIE HYMAN: And one of the other things that Jim talked about was that in the past, whereas the company, when it came time to do layoffs, it just did kind of across the board layoffs, that this time, the company is going to be a bit more strategic about where those layoffs are going to happen. What more can you tell us about that? There has been a report out there that 8,000 jobs might be on the block. Is that something you can confirm for us or give us a little more detail on?

JOHN LAWLER: Well, I'm not going to comment on the speculation. What I can tell you is that many would look at our industry and say that in the past when there were reductions, they were pretty much indiscriminate. And that's not what we're doing here. We're working on reshaping the company to deliver our Ford Plus plan.

So there are some areas and some skills that we're going to have to reduce. There's other areas and other skills that we're going to have to increase. And we're going to continue to invest. We're going to continue to invest in our ICE products, our internal combustion engine products. We're going to continue to invest in our battery-electric vehicles, of course.

And then there's the whole digital structure and the digital architecture of a vehicle, which allows them to be connected and allows us to provide services to our customers. So we need to be very thoughtful about reshaping the company to deliver our Ford Plus plan. And that's what we're going to do as we move forward.

And we're going to have to do it on our schedule because we need to cadence this out in the right way, as we need to bring up skills and as we need to bring down skills.

BRIAN SOZZI: John, there's been a number of recalls this year for various products. Can you give investors any sense on how much of a warranty charge there might be this year? And then have you identified what is causing these recalls?

JOHN LAWLER: So from a financial perspective, the quality and the warranty and the recalls, that's all reflected in our numbers, and that's reflected in our guidance. We have to treat that up every quarter and make sure that we have appropriate reserves, which we do.

From a quality standpoint, we have work to do. Jim talked about it last night. We are seeing some improvement in our initial quality scores, IQS scores. You can look at those that are out there by a third party. But we have too many recalls and too much warranty costs for customer satisfaction actions.

And we're attacking that across every area of the company, from engineering and design, manufacturing, with our supply base, and then of course, just in the processes that we're following as a team. So everything is on the table with this. It's our number one priority, quite frankly. And we know that we need to get this fixed and we need to do it very quickly.

BRAD SMITH: Hey John, Brad here. I think the last time we spoke, we were discussing this breakup or at least the separating of the two entities basically in the ICE business and then additionally on the other side on the Ford-E, really looking at the EV side of the business. And so I'm just wondering, when you think about profitability and what that looks like as we're seeing this broader shift towards EVs and even now tax credits for some of the purchases for EVs in the future seemingly moving through Washington, DC as well, what that may look like for the profitability of Ford in this business.

JOHN LAWLER: So when you look at our business right now, we basically have an electric start up company embedded inside Ford. And that's in our results today. And that's in our guidance. And that's in our five-year plan. And next year, we'll start reporting-- we won't report automotive anymore. We'll report, as you said Ford Blue, which is our ICE business, Ford Model E, which is our electric business, and of course Ford Pro, which is our commercial business, and then on top of that, the credit company of course and our mobility business Ford Next. So we'll have five segments that will report.

There'll be complete transparency about how each of those businesses is performing. And we think that's a benefit not only for us internally and the way we run the business. But it's going to be a benefit for our investors as well to see what's happening within the electric business, within the internal combustion business, within the commercial business, et cetera. So we think it's going to be a big step forward.

It's part of our plan. We think it's an important part of our plan. And we're working right now very diligently as a finance team to do the work that needs to be done so that we can report those segments. And that'll start, again, as I said, next year.

BRIAN SOZZI: And John, how many more price increases do you think you could pass through in an environment that is slowing down? You look at GDP, and we've had two negative prints in a row.

JOHN LAWLER: So part of what's happening in the pricing environment for us in this industry is the fact that we've been in supply-constrained for the last three years. And we have an incredible amount of pent-up demand. And so pricing has been a tailwind for us. It was a tailwind for us last year.

But we are very aware of affordability and what the consumer can bear. We understand with the macroeconomic environment, that there are some issues surfacing there. And it could lead to changes in the macroeconomic environment that could hit us. But we're thinking about that. We're out in front of it.

But what I would say is that our company is positioned much differently than we have been in the past, as we're entering this phase of the economic cycle. We're much stronger from a product standpoint and margins. We restructured our businesses overseas. They're no longer burning the cash that they were in the past. We have very low incentives in the marketplace right now. We're not overstocked.

So we're in a much different position. We're a much stronger company heading into any downturn that might happen at this phase.

BRAD SMITH: John, just a brief follow-up on that. 70% of the battery capacity that you need to support 2 million units by the end of 2026 has already been confirmed at this point, or it's secured. But can you quantify what that type of cost looks like for the company and how you kind of stretch that out over time?

JOHN LAWLER: Yeah, so we had said that we were going to invest $50 billion in electrification. Any capital expenditures or partnerships that will form or capital investments that we need to make, that's included in the $50 billion that we've talked about for our investment in electrification. And then of course, if there's other elements of cost that come in, that's part of our plan. It's part of what we need to work through to get to an 8% margin on our battery-electric vehicles with the second generation of products starting about mid-decade.

And so that's all worked into the mix. We haven't started this. We're not just looking at it recently. We've been on this path for a while. We've been understanding where we're at from a standpoint of our financials for our battery-electric vehicles and where we need to head.

And it's all part of our plan. And so we're on it. We're working it. And it's really exciting to know that now that we've secured the capacity that we need to hit our run rate in 2023 of 600,000 units, we're well on the way to securing our capacity for the 2 million units in 2026. And now we're working our plan. And we're bringing it to life.

BRIAN SOZZI: We'll leave it there. Ford CFO John Lawler, always good to get some time with you. We'll talk to you soon.