The operator, Gary, welcomes everyone to the Ford Motor Company Third Quarter 2023 Earnings Conference Call. Lynn Antipas Tyson introduces the speakers, including CEO Jim Farley, CFO John Lawler, and President of Ford Integrated Services Peter Stern. Marion Harris, CEO of Ford Credit, will also be joining for the Q&A session. The discussion will include non-GAAP references and forward-looking statements. Lynn turns the call over to Jim, who thanks the Ford team for reaching a tentative agreement with the United Auto Workers and expresses his excitement to visit the struck plants and get back to work.

The company is currently focused on restarting assembly plants and supporting suppliers, but is facing challenges in the EV market and from global competitors. The CEO is optimistic about the future and believes their strategy, Ford+, is the right approach. They are working on developing software platforms and building a culture of excellence. The quarter's results were mixed due to the strike and cost and quality issues. Leadership changes were recently made.

Kumar Galhotra has been appointed as COO and will oversee key areas of the company's operations, including product development, quality, and supply chain. The company has three distinct growth businesses: Ford Blue, Model e, and Pro. Ford Blue is focused on product strength, with new and refreshed models coming out in the next year. The company remains optimistic about its EV future, with plans for Gen 2 and Gen 3 EVs in development.

The Gen 2 full-size pickup truck is an impressive vehicle with stunning performance, innovative features, and a flexible cabin. Ford is striving to be competitive on cost in the EV market, thanks to Tesla's focus on cost and scaling. They are working on reducing costs through scaling, vertical integration, and battery improvements. This includes leveraging digital capabilities, reducing complexity, and insourcing key components such as batteries and drive units.

Ford plans to increase vertical integration by 50% on their next-generation utility vehicles, which will help reduce material costs. They have been working on this for years and believe it will give them a competitive advantage over other companies. Batteries are the biggest cost component of EVs, but Ford's Gen 2 products use extreme aero and LFP batteries to reduce costs. Their overall EV priorities are disciplined capital allocation, high returns, and balancing growth and profitability. Ford Pro is a major driver of their growth and profitability, with a strong network of local outfitters and loyal customers. They also have a backlog of infrastructure projects and see potential for growth in the future.

Fleet orders for the 2024 Super Duty are increasing and demand is expected to remain strong. The company is also preparing to launch the new Transit Custom in Europe, which is a best-selling vehicle in the UK and a key profit pillar for Europe. Ford Pro, the company's digital services arm, is focused on providing software-driven services to improve fleet operations. The company's strategy in China is gaining traction, with the EV business nearly complete and the internal combustion engine business now profitable. China will also serve as a profitable export hub for Ford Pro, with a record number of vehicles already exported to markets like Mexico, South America, and Asia. There is potential for even more growth in the aftersales, parts, repair, and collision business, which is now led by Ted Cannis.

Ford is facing tough competition in the Chinese market but can succeed by focusing on narrow segments where they can win, such as commercial vehicles and off-road vehicles. They have formed Ford Integrated Services, led by Peter Stern, to create valuable software-enabled customer experiences. This is a crucial part of their Ford+ plan, which aims to provide innovative services to customers. Stern is excited to be a part of this team and has identified a portfolio of services that will improve the Ford customer experience and attract new customers.

Ford's focus on software and services will bring in new revenue and strengthen relationships with customers while maintaining the company's values. Examples of this include Ford Pro Intelligence, which increases productivity and reduces costs for commercial vehicle drivers, and Ford Stolen Vehicle Services, which provides theft prevention and recovery features for the F-150. These services have shown strong growth and there are plans for further expansion and development in the future.

BlueCruise, an advanced artificial intelligence system, is one of the most significant consumer applications of AI in the world today. It has been driven hands-free for 125 million miles and has shown a 10 times reduction in lane departures. The latest version, BlueCruise 1.3, is even better and has been rated the best hands-free system on the market. However, the company acknowledges that their plans for Integrated Services will not be easy and will require next-generation vehicles, a customer-centric portfolio of services, and improved customer relationship management. They also recognize the importance of their dealers and building long-term relationships with customers in the services space. This will require new people, processes, technologies, and measures of success.

The speaker discusses key metrics that will be used to measure the success of Ford's services evolution, and emphasizes the potential for increased profits. The other speaker, John Lawler, mentions the impact of the UAW strike on their full-year guidance, and the third-quarter results show the benefits of their Ford+ plan and diversified portfolio.

Ford's leading Pro business and ICE and hybrid products are performing well and offsetting investments in EVs. Revenue is up 11%, driven by a strong product lineup and higher net pricing. While wholesale sales were flat due to supply constraints and work stoppage, adjusted EBIT and margin improved. However, costs increased, highlighting the need for further improvement. Adjusted free cash flow was down due to unfavorable working capital, but remains in line with target range. Ford Pro segment saw improved EBIT and margin, driven by strong demand and pricing power for Super Duty and Transit franchises. A new version of Transit Custom is being launched in Europe, along with new Super Duty and F-150 models, giving Pro a fresh vehicle lineup. Ford's cash and liquidity position remains strong.

Ford is seeing strong growth in new software subscriptions and mobile repair orders, but incurred 1.3 billion in losses in their EV start-up due to investments in next-generation products and a challenging market. They are being cautious about production and investments in the EV space, pushing back about 12 billion in spending. The success of their EV transition will depend on their Gen 2 and Gen 3 products. In the third quarter, Ford Blue delivered EBIT of 1.7 billion, driven by lower commodity costs and higher net pricing. Blue continues to be profitable in all regions and is poised for global success. Ford is also a leader in the hybrid pickup truck segment in the U.S and expects to extend their lead with the introduction of the refreshed 2024 F-150.

The F-150 Powerboost hybrid has improved CO2 emissions by 25% and has been more profitable than gas powertrains. Ford Credit's results have decreased due to lower lease residuals and financing margin, but credit loss performance remains strong. The company's software and services segment continues to see growth in subscriptions and is expected to be a significant source of value creation in the future. The company remains confident in its Ford+ plan and its underlying business. The company has pushed out $12 billion in direct and capital investment for EVs, but still plans on spending it.

The speaker is responding to a question about the sustainability of allocating 10 billion a year to electric vehicles. They explain that they will match demand and capital needed and will adjust their strategy and decisions as the EV business develops. They also emphasize the importance of their Gen 2 and Gen 3 products in increasing profitability in EVs, mentioning improvements in material costs, software, battery scaling, and other techniques like rally and Level 2+ and Level 3 autonomy. They plan to work with other companies to improve component scale.

Ford is working on two major breakthroughs in their Gen 3 products for electric vehicles. One is designing the battery as a structural part of the vehicle, while the other is using a multi-energy platform for their Pro vehicles, including diesel, gas, hybrid, and pure electric options. They also plan to expand their hybrid offerings, which may have slightly higher costs but are still expected to be profitable.

The speaker discusses the higher margin of hybrid vehicles compared to gas versions due to their pricing power and fuel efficiency. They also mention the success of the F-150 hybrid and their unique hybrid strategy. The speaker then addresses a question about warranty and acknowledges it as a major issue, but notes that even with the added warranty costs, they are still within their expected range for EBIT. They express their commitment to addressing the issue and improving results in the future.

The speaker discusses the operational challenges facing the company, including both quality issues and inflation in repair costs. They highlight the need for improvements in cost reduction and supplier cooperation, as well as the complexity of their technology and lack of competitive tools.

The speaker discusses issues with inconsistent application of QOS within their manufacturing system and how it affected their plants and product launches. They mention progress made in the past 18 months, such as reducing complexity and improving quality, but acknowledge the need to address systematic issues. They also mention improvements in talent and strategic sourcing for EV components. The speaker is proud of launch progress and mentions the importance of slowing down launches for better results. They also mention progress made on material and express confidence in their new organization's ability to address long-standing problems at Ford.

The speaker discusses the current state of EV demand and pricing, as well as the challenges and decisions involved in launching new EV and ICE variants of products. They mention the company's strategy of targeting loyal customers for ICE and hybrid vehicles, and using a conquest strategy for EVs.

The speaker discusses Ford's strategy to focus on segments where they have a strong reputation, such as full-size trucks and crossovers, but also innovate with electric vehicles. They believe this will give them pricing power and attract new customers. They are flexible in their approach and have made good bets on both ICE and hybrid vehicles in case the EV market is not as fast as expected. They also have a strong international business and fresh products in markets where EVs are not feasible. Ford's strategy is different from others who are solely focused on EVs.

Dan Levy from Barclays asks Jim and John about the lingering issue of warranty costs and how confident they are in turning it around. John mentions a focus on excellence and execution within the company, with new talent such as Liz Door and Bryce Currie. Jim adds that they have a strong team, including Kumar, who understands the Ford system well and is driving foundational change. This is compared to the iceberg, with the focus being on the underlying issues rather than just the surface.

The paragraph discusses the importance of addressing underlying issues in order to improve quality and reduce costs in the automotive industry. The focus on talent and teamwork, as well as the recent launches of important products like Super Duty, demonstrate the commitment to improving quality. Additionally, the company is encouraged by the potential for cost savings in designing electric vehicles from scratch. The leadership team's ultimate test will be reducing material and parts costs for existing vehicles.

The speaker discusses the company's plans to test their standards and deliver on their ideas, which they believe will bring in over $1 billion this year. They also mention the strong pricing power in the Pro and Blue segments, but acknowledge that there is pressure on pricing and affordability is an issue. They believe affordability will improve over the next 12 to 18 months, with a potential net price reduction of $1,800.

The speaker discusses the impact of EVs on dealer margins and how they are still transacting at a higher percentage of MSRP than in the past. They expected some deflation to occur throughout the year, but it hasn't happened yet. They also mention their plans for EVs and how they assumed deflation and a price parity with ICE vehicles by 2026, but are facing pricing pressure in the EV segment.

The speaker believes that as time goes on, the premium for electric vehicles will decrease. The company has built this into their planning assumptions for their second and third-generation vehicles in order to make them more affordable. They are targeting an 8% margin and are working on reducing costs through factors such as battery size, efficiency, vertical integration, and scaling. Despite some delays and challenges, they are still committed to achieving their cost targets through vertical integration in batteries.

Ford is working on improving the chemistries of their batteries and plans to use LFP in their future EVs to reduce costs. They are also focusing on vertical integration and efficiency to lower costs. The company acknowledges that affecting change in the first generation of EVs will not be easy, but they are taking steps to reduce their current $5 billion annual loss on Model e. It is unclear how much improvement can be expected in the near future, but Ford is working towards becoming EBIT positive.

John Lawler discusses the changes that will be made to the Gen 2 products and the team's efforts to reduce costs and minimize the impact of lower prices on the Gen 1 products. He also mentions the strong performance of Ford Pro, but notes that there were some disruptions from suppliers and normal seasonality that affected volume. The decline in Ranger sales in Europe was due to the ramp up of the new model, but there was some improvement in Super Duty sales.

In the third quarter, Ford experienced some seasonality and fluctuations due to supplier constraints, resulting in slightly lower volumes. However, the pricing on Super Duty remained strong. Despite this, demand for Pro vehicles remains high and the order bank is robust. The company expects Europe Pro to continue performing well in the future.

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