The operator welcomes participants to the Ford Motor Company's fourth quarter 2023 earnings call. Lynn Antipas Tyson, Head of Investor Relations, introduces the speakers and mentions that the discussion will include some non-GAAP references. She also mentions that the earnings deck and other materials can be found on shareholder.ford.com. The discussion will include forward-looking statements and a table of global wholesales for 2023. Upcoming IR engagements are also mentioned.

Ford Pro CFO Naveen Kumar will participate in a fireside chat at the Barclays Industrial Conference in Miami on February 22. The call will be extended to allow time for questions. CEO Jim Farley highlights the success of the company in 2021, with strong sales and growth in hybrid vehicles and the launch of new technology like BlueCruise. Ford is also excelling in the work vehicle market with the new Super Duty, Transit, and Ranger models. The company is focused on segmentation, speed, accountability, and results.

The third paragraph discusses the improvements in Ford's underlying business, such as increased auto profits despite the UAW strike, a return to investment grade, higher ROIC, and disciplined capital allocation. The success of their Integrated Services, led by Peter Stern, is highlighted, as well as the turnaround of their international operations. The surprising success of the Ranger is also mentioned. The paragraph concludes by mentioning John's upcoming presentation on last year's results and the potential for growth and profitability for Ford Pro, their integrated hardware, software, and services business.

Ford Pro's EBIT doubled to $7 billion despite a slow launch for Super Duty due to quality concerns. The company is on track for mid-teen EBIT margins and expects top and bottom line growth. The strong order bank is due to factors such as increased state and local government spending, the build-out of telecom and 5G, and the reshoring of manufacturing in the U.S. Ford Pro dominates the market with a 40% share in Class 1 through 7 full-sized trucks and vans, and is particularly successful in small and medium-sized businesses and tradespeople. However, the company's market leadership is not well-known, leading to an undervaluation of the brand.

Ford has three major advantages, or "moats," that make it a strong player in the economy. These include its reputation with customers, relationships with upfitters, and a growing focus on software and physical repair services. Ford's Pro division, which serves commercial customers, is expected to drive 20% of the company's profits in the next two years, thanks to its connected vehicles and paid subscriptions. Additionally, Ford's extensive network of service centers and new remote service options provide added convenience for customers and increase the company's capacity for repairs. Overall, Ford's strong market share and diverse range of advantages make it a dominant force in the industry.

Ford is focusing on long-term durability and alternative revenue streams in repair and software. The launch of the Super Duty was a turning point for the company, despite the $1 billion cost, as it led to improvements in launch quality. The company is also seeing progress in initial quality, which is correlated to long-term quality and warranty costs. They are committed to further improving this aspect in the coming year.

The management at Ford has placed a high emphasis on quality, with 70% of their short-term incentives tied to it. They also recognize the seismic change in the EV market and have adjusted their strategy to focus on smaller, more efficient EVs. They have developed a low-cost EV platform with a talented team separate from the main company. Their goal is to achieve profitable Gen 2 EVs within the first 12 months and deliver profits above Model e's cost of capital.

The company has developed a flexible platform for various types of vehicles and is focused on cost and efficiency to compete with Tesla and Chinese OEMs. They are rationalizing their battery capacity and reassessing vertical integration. The EV business will grow due to new launches and customer demand for software quality. The company has learned from their early leadership in EVs and is adjusting their capital allocation due to explosive growth in EVs, COVID supply shocks, and Tesla's ability to make vehicles despite the chip crisis.

As the COVID pandemic subsided, it became clear that customers are not willing to pay a significant premium for electric vehicles (EVs) as they enter the early majority stage. This was a valuable lesson for Ford, as they saw pricing quickly converge with hybrids after subsidies. This trend was seen in the US, China, and Europe, and Ford believes that offering a range of choices and flexible manufacturing will help them successfully navigate the transition to EVs. The success of the hybrid F-150 in different regions highlights the importance of catering to different customer needs. Hybrids will continue to play a significant role in the industry's transition to EVs, as they offer specific benefits for certain use cases.

In 2023, Ford continued to execute their Ford+ plan and saw strong performance in their global product line, with revenue of $176 billion and adjusted EBIT of $10.4 billion. This was driven by the success of their Blue and Pro divisions. They also emphasized the importance of talent and their new performance management system, which rewards excellence and is tied to shareholder value creation.

The company's core business units, Pro, Model e, and Blue, grew and improved EBIT by $2 billion or 26% compared to last year, despite the impact of the UAW strike. Free cash flow was $6.8 billion, exceeding the target range and demonstrating the effectiveness of the Ford+ strategy. The company's balance sheet remains strong with a significant amount of cash and liquidity. A quarterly dividend of $0.15 per share was announced, bringing the payout ratio to 50% for the year. Revenue for the quarter was $46 billion, up 4%, and adjusted EBIT was $1.1 billion with a margin of 2.3%. Ford Pro had a strong quarter, with revenue up 11% and EBIT of $1.8 billion, and full year results demonstrated the potential earnings power of this growth business. The strengths of Ford Pro are expected to drive strong results in 2024.

In the fourth quarter, Ford's Model E led to a 14% increase in wholesales, a 2% increase in revenue, and an EBIT loss of $1.6 billion. For the whole year, wholesales were up 20%, revenue was up 12%, and EBIT was a loss of $4.7 billion. This was due to market challenges and investments in new vehicles. Despite the strike, Ford Blue revenue was flat in the quarter, with EBIT of $113 million and a margin of 3.1%. For the whole year, Ford Blue revenue grew 8% and all regions were profitable. Ford Credit generated $280 million in EBT for the quarter and $1.3 billion for the year. Ford plans to earn between $10 billion to $12 billion in adjusted EBIT, with adjusted free cash flow of $6 billion to $7 billion and capital expenditures of $8 billion to $9.5 billion in 2024. This is based on their segmentation strategy and assigning risk-adjusted hurdle rates for each business.

Ford expects electric vehicles to make up 40% of their total products, with investments in EV powertrain and a focus on cost efficiency. They have delayed and reduced some projects and are adjusting their capacity and product launch timing to ensure profitability. Their outlook for 2024 assumes a flat to slightly higher SAAR, nonrecurrence of the UAW strike, and growth from new product launches. They also expect a $2 billion benefit from cost reduction initiatives. Ford Pro is expected to continue strong with an EBIT target of $8 billion to $9 billion.

The speaker, Adam Jonas, brings up the success of Ferrari after it was separated from Fiat and notes that Ford's Ford Pro division, which is similar to Ferrari, is being ignored by investors. He disagrees with Ford CEO Jim Hackett's explanation that this is due to a lack of transparency in metrics, and instead believes it is because the profits are being used to fund the company's electric vehicle efforts.

Jim Farley is discussing the potential of EVs for Ford and how they can help with the industry's pricing power reality. He mentions the need for cost adjustments and the benefits of Ford's high-volume hybrid business. Marin Gjaja adds that the EV business can also generate compliance value and allow for the sale of multiple high-margin ICE vehicles. They are also building new customer-facing capabilities.

Ford is meeting the demand for electric vehicles by implementing new dealer standards and improving the customer experience. They are also working with Tesla to develop a charging network through their dealers. The adoption of EVs varies by location, with the West Coast seeing the highest percentage of EVs in the market. This has allowed Ford to gather feedback for engineering and improve their electric powertrains. They are also learning to provide the software and services that EV customers demand more efficiently. Ford acknowledges the importance of the lifetime value of both the customer and the vehicle, with a high conquest rate and potential for integrated services like BlueCruise. The EV business must eventually stand on its own, without relying on compliance benefits or credits from other vehicles.

Jim Farley, speaking on behalf of Ford, discusses the success of electric vehicles (EVs) among Pro customers. He notes that while EV sales are slower for Pro customers, they are actually quicker at doing the math and their January sales were higher than December. Farley also mentions the importance of China as an export market for Ford and its partnership with Changan for EVs. He explains that they are taking a low capital approach to EVs in China and are learning a lot from their partners.

Jim Hackett, CEO of Ford, believes that their approach of low capital and profitable business is appropriate during the current EV explosion and market challenges. They are also building a global capability team for digital experience, battery and sensing technology, and product concepting in China. However, they are aware of the slowdown in EV sales and the trend of customers trading in EVs for ICE and hybrids. Hackett acknowledges that some customers may not be satisfied with current EV products, but believes that Ford has the capability to backfill any potential decrease in EV sales with ICE and hybrid sales.

The speaker discusses the importance of having a diverse product portfolio, including hybrids, ICE, and EV vehicles. Customers are able to easily compare the cost of hybrids to traditional ICE vehicles, but the cost of ownership for EVs is more difficult to determine. However, as more customers become interested in EVs, the company plans to invest in improving the cost of ownership. Dealers have also been making comparable margins on EVs to ICE vehicles.

The company is doing well with their electric vehicles and are confident that their dealers are making a profit. They believe that their hybrid vehicle production capacity is sufficient and they plan to continue increasing it. The company's CEO is going on a tour to meet with dealers and the main message will be to focus on the profitable Ford Pro division and invest in it.

The speaker discusses the need to increase profits for Pro attached services, invest in Pro, and maintain manufacturing flexibility between ICE and EV vehicles. They also emphasize the importance of quality and customer experience, and mention the $5 billion to $5.5 billion losses in Model e. The speaker acknowledges that the adoption curve for EVs may be slower, but they are committed to reaching breakeven for the business and will not launch a vehicle unless it is profitable.

The company is facing a major challenge with the collapse of revenue and high costs for their Gen 1 vehicles. They are working on optimizing their cost structure and finding a balance between selling EVs and ICE vehicles. They are also buying credits and know they need to make their electric vehicle business profitable to compete with other companies.

The speaker explains that the company is focused on achieving a profitable business and a return on capital, as well as compliance benefits. They mention that a significant portion of their capital spending is allocated towards electric vehicles and they are working to minimize this spending. The speaker also mentions that they are not able to commit to a specific timeline for reaching positive EBIT, but they expect to see improving gross margins throughout the year. The leader of the EV business mentions that they are adjusting to market realities and working on reducing costs.

Dan Levy asked a question about Ford's Pro division and the guidance for this year, which is in line with the mid-teen margin guide provided at their CMD last spring.

The speaker is discussing the sustainability of the company's earnings stream, specifically mentioning a $7 billion price tailwind and $11 billion over a two-year period. They believe that the demand for their vehicles will continue due to factors such as infrastructure and government support. They also mention new products and a focus on aftermarket services as factors contributing to their profitability. They believe that the attach rates and software margins will continue to increase, providing a strong outlook for the next few years.

The Pro division is facing capacity issues due to a slow construction housing market, but a return to a robust market could lead to even more upside. The company is also working to narrow the $7 billion cost disadvantage compared to competitors in the industrial sector, with a $2 billion improvement expected this year. This is due to easing inflationary pressures and a more stable supply chain, allowing for smoother operations and reduced waste and freight costs. The company is also addressing material costs in three different ways.

The speaker provides examples of inefficient designs and features that are being reviewed and removed in order to save money. They mention benchmarking and internal analysis that have already resulted in significant savings, along with plans to save $2 billion this year. The questioner asks for further evidence of cost-saving measures.

Ford executives discuss the markets that will provide a tailwind of $2 billion or more in 2024, including stability in supply chain, reducing waste and freight costs. They also mention improvements in working with their supply base to increase efficiency. These changes may take some time to fully play out, but they expect to see benefits in 2024. They also mention the volume outlook for this year, specifically for Ford Blue.

John Lawler discusses the company's inventory days and volume growth for the year. He mentions that the company has identified design actions for 2023 and expects to see more traction in the middle of the year. The company also expects the industry to grow by 3-4% and for affordability to return to pre-pandemic levels in 2024. Lawler also mentions that new product coming in Blue will provide a mix and tailwind, and that there is high demand for Pro.

The company has seen strong commercial orders and expects continued strength in that area. The portfolio will be refreshed by the end of the year. There will also be growth in EV sales for both retail and Pro divisions, with new offerings and increased demand driving this growth.

During a Q&A session, James Picariello from JPMorgan asked Ford executives about the $2 billion in savings for the year and if supplier cost reductions were a core component. Ford CEO John Lawler responded that a significant portion of the savings come from industrial efficiencies and design reductions. Jim Farley added that labor and freight were also contributing factors. Ryan Brinkman from JPMorgan then asked about the higher anticipated Model e losses and how they would progress throughout 2024. He also asked about the long-term target of 8% margin for Model e, considering recent developments with GM and Tesla.

In response to a question about reaching the 8% target, John Lawler and Marin Gjaja state that the current market conditions make it unlikely to achieve this goal by 2026. They mention launching new vehicles and improving gross margin as key factors, but acknowledge that it will take time to build a profitable EV business. The conference call has now concluded.

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