$F Q2 2023 Earnings Call Transcript Summary

F

Jul 28, 2023

The conference operator, MJ, welcomed everyone to the Ford Motor Company Second Quarter 2023 Earnings Conference Call. Lynn Antipas Tyson, Executive Director of Investor Relations, introduced Jim Farley, President and CEO; John Lawler, Chief Financial Officer; Marion Harris, CEO of Ford Credit; and Ted Cannis, CEO of Ford Pro. Tyson also mentioned that the discussion includes some non-GAAP references, forward-looking statements, and mentioned some upcoming Investor Relations events. Lastly, she recognized her mother, who has listened to every single one of Ford's Investor Relations calls since Tyson joined.

Jim Farley welcomed Lynn's mother to the call and discussed Ford's long-term vision of combining great vehicles and digital experiences. He expressed confidence in the Ford+ plan and the strong growth, earnings, and cash flow from Ford Pro, Ford Blue, and Model E. Farley also mentioned the increasing competition and pricing pressure in the electric vehicle market, but expressed confidence in Ford's underlying trajectory and their focus on capital discipline and solid returns. He also raised their estimated EBIT guidance to $11 billion to $12 billion.

Ford is confident that it will be a winner in the EV market due to its product strategy, software, scale, and cost position. Ford has established EV nameplates in unique segments and is building EV brand loyalty. Ford has focused on fewer, higher volume models in the right segments to take advantage of its strengths and knowledge of customers. Ford has also moved early on LFP production in the U.S. and is offering Mach-E with LFP technology for sale in the U.S. Additionally, Ford's Blue Oval charging network will be the largest integrated fast charge network in the U.S. and Canada, providing customers with choice of ICE, hybrids, and full electrics.

Ford is transitioning from internal combustion engine (ICE) vehicles to electric vehicles (EVs). Ford is expecting to quadruple its hybrid sales in the next five years and is targeting to reach 600,000 annual production units of EVs by next year. The company is also introducing a new retail model for Model e and is balancing growth, profitability and returns as they move through the transition. Ford's F-150 is the best-selling vehicle in the U.S. and they are confident that demand for their ICE and hybrid vehicles will remain strong.

Ford has seen success in the first half of the year with its iconic vehicles, such as the Mustang, F-150, and Explorer, and plans to introduce new models such as the F-150 PowerBoost hybrid at the Detroit Show in September. The Ranger and Everest SUV have also been popular and profitable, and Ford is launching over 2,000 mobile service units by the end of the year. Ford is also focusing on reducing its cost structure and has launched a lean, disciplined operating system. Finally, Ford Pro is a $50 billion commercial business with the potential to become a hardware, software, and service company.

Ford Pro has seen significant pent-up demand in both North America and Europe, and their Super Duty sales have increased 28%. Ford Pro has a strong market share in the US and Europe, making it difficult to disrupt. Ford Pro is also leading the digital transformation, with over 550,000 paid and service subscribers and 50% gross margins on software services.

BlueCruise has seen a 44% increase in hands-free hours since the end of Q1. Ford has released three versions of the system, each with improvements, and they are investing in software and bringing in elite talent to revolutionize the experience of owning a Ford. They are working on safety and security, driver assist technology, and productivity applications for their vehicles. These applications will give customers the ability to monitor their surroundings, use driver assist technology, and have predictive failure components.

Jim is discussing the potential for Ford's BlueCruise service to bring in high-margin, reoccurring revenue streams. He also explains that Ford has done more than is required by their contract with the UAW to add jobs, move employees from temporary to permanent, and improve benefits. Jim's goal is to build a bridge to the future with their employees by working with the UAW leadership and their workforce in a spirit of problem solving.

Ford reported an 8% increase in wholesale, adjusted EBIT of $3.8 billion and an 8.4% adjusted EBIT margin. They delivered $2.9 billion of adjusted free cash flow and declared a third quarter regular dividend of $0.15 per share. Ford Blue delivered $2.3 billion in EBIT with a margin of over 9%, but EBIT declined modestly year-over-year. The F-150 product line-up is driving strong demand and price in key markets across the globe, and the Mach-E is also driving meaningful bottom line results for both blue and Mach-E.

Ford Pro's results have continued to accelerate, with a 28% increase in revenue and a doubling of EBIT to $2.4 million, resulting in a 3% margin. Ford's industry-leading transparency, product leadership, and customer insight has enabled them to quickly react to the dynamic pricing environment. Despite this, Ford remains committed to delivering an 8% EBIT margin target in 2026 through more efficient product design, cost efficiencies, and growth in software and services.

Ford Credit generated EBT of $309 million, in line with expectations but down from the previous year due to lower financing margin, nonrecurring credit loss reserve releases, and residual value performance. Ford Pro and Ford Blue have seen double-digit quarter-over-quarter growth in subscriptions with gross margins of around 50%, and the company expects total company adjusted EBIT of $11 billion to $12 billion, with adjusted free cash flow of $6.5 billion to $7 billion and capital expenditures between $8 billion and $9 billion.

Jim Hackett of Ford Motor Company gave guidance on the company's performance, which includes both headwinds and tailwinds. Ford Blue is expected to deliver an EBIT of $8 billion, while Model E is expected to report an EBIT loss of around $4.5 billion. Ford Pro is expected to approach $8 billion, and Ford Credit EBT is anticipated to be about $1.3 billion. Adam Jonas asked Jim if the losses in Model E can be grown out of, or if something more radical needs to change.

Jim Farley explains how the company's approach to platforms changed when they realized the complexity and cost of the second cycle products. They saw that the battery packs, gearboxes, motors, braking systems, wiring systems, and battery chemistries of their competitors were uncompetitive and had to change their approach to remain competitive. They are now executing their new approach and are confident they can beat their competitors.

Ford is not changing their strategy in China, as they have always been targeting certain segments with their local JV partners' platforms. They have also been pushing out EV targets, with the goal of offsetting additional prices with higher volume contribution margins. Ford is not fixated on hitting two million units by 2026, and they are confident in their ability to adjust investments in structural costs when necessary in order to meet their targets.

John Lawler and Jim Farley discussed their commitment to their 8% margin target for 2026 and the plans to transition from components to electrical components. They also discussed the elasticity model they are building due to their high volume of EVs and how it is not as different from ICE as they thought. Finally, Jim Farley discussed their plan to quadruple the number of hybrids and how it factors into their push to decarbonize.

Ford has seen an unexpected rise in the popularity of hybrid systems and has decided to continue investing in them. They have seen a mix of hybrid systems of up to 50% for the Maverick model. Ford also believes that ICE customers don't want to be left behind and want modern powertrains. Ford has multi-energy platforms that allow for flexibility in terms of electrification, partial electrification, and ICE. They will be introducing more hybrid systems, but they will not be traditional hybrids like the Escape Hybrid or Prius.

Jim Farley explains that Ford's strategy for electric vehicles (EVs) is to make 8% margin, regardless of the price point, and to allocate capital efficiently. They seek to execute products with efficiency and simplicity, while also upgrading electric architecture for software revenue and profits. Ford does not create greenhouse gas credits between their businesses, and they do not play games with allocating capital. They have created segments to ensure that all vehicles stand on their own, and their results will be transparent.

Jim Farley clarified that the term "hybrid" when used in the industry refers to a motor powering batteries, rather than a plug-in hybrid. Ryan Brinkman asked if the change in guidance for the Model E segment was due to price competition or a conscious decision to reinvest the higher-than-expected profits into accelerating electric vehicle development. He also asked if investors can expect a breakeven on a contribution margin target for first-generation EDs by 2024, and for more information on the 8% EV target for 2026.

John Lawler states that the adoption of EVs has happened faster than expected, which has impacted profitability. However, they have not changed their plan and are continuing to work through levers to build out the second generation of vehicles. They still have confidence in their ability to move towards a sustainably profitable segment in EV, and they are still aiming for an 8% target. Jim Farley mentions that while there are plenty of consumers, the price to pay has come down but is very lumpy.

Ford is focusing on the segments they know and understand, and they are also looking at customer acquisition costs and retention rates to ensure that they are investing in the right areas. They are monitoring the present value of customers and will not acquire customers at any cost. This strategy is intended to differentiate Ford and ensure a positive lifetime customer value.

John Lawler explains that while the math of the loss per car in Pro may seem like a large number, it is important to remember that there is also a lot of investment going into ramping up and putting the EV footprint in place. This investment, combined with the contribution margin and gross profit, is necessary for scaling and growing the EV business, as EVs are becoming increasingly popular.

Jim Farley clarified that the price decrease for the F-150 Lightning was not to create an order bank for the current production rate, but for the production rate tripling. John Lawler then answered a question from Jim Picariello about the $2 billion step-down in the guidance for Blue, noting that the UAW contract impact was a factor, as well as Blue volumes, pricing, and other factors.

Ford Motor Company experienced better than expected pricing in the second quarter of 2023, but expects some pricing pressure in the second half of the year due to increased volumes. They are also seeing inflationary pressures in the form of higher warranty costs, labor rates, and freight costs.

This summary was generated with AI and may contain some inaccuracies.