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Ford Motor Company (NYSE: F)
Q4 2023 Earnings Call
Feb 06, 2024, 5:00 p.m. ET

Key Insights from Q4 2023 Earnings Call

• Executive Remarks
• Exploring the Q&A
• Dive into Call Participants

Executive Remarks:

Operator

Good afternoon! Welcome to Ford Motor Company’s Q4 2023 financial results conference call. Today, we’ll be exploring the company’s transformative journey over the last year with insights from Jim Farley, President and CEO, and John Lawler, CFO, along with a distinguished team of Ford’s executives.

These forward-looking statements will provide investors with unmatched clarity regarding the company’s expectations moving forward.

We’ll unravel extraordinary developments, including the company’s global wholesales for the year 2023, and imminent Investor Relations engagements. Buckle up for a riveting ride into the world of Ford!

Unveiling Remarkable Achievements

Jim Farley — President and Chief Executive Officer

Thank you for joining us as we reminisce over a pivotal year for our company.

Our global hybrid sales soared by 20%, and we anticipate a further 40% increase this year. Embracing innovation, we witnessed the phenomenal success of BlueCruise, surpassing 150 million miles of hand-free use with a remarkable 25% quarter-over-quarter growth.

The introduction of cutting-edge technology, coupled with robust sales performance, reflects our unwavering commitment to harnessing the potential of our products and services.

Undoubtedly, our dedication to superior quality and cost optimization has significantly enhanced our international operations, leading to a remarkable turnaround and substantive profitability. The turnaround is an astounding $3 billion shift compared to a few short years ago.

This remarkable success has elevated the global franchise of our Ranger, propelling it to become the second best-selling nameplate globally, following closely behind the F-Series and surpassing the Super Duty.

A New Chapter in Ford’s History

John Lawler, CFO

This journey underscores Ford’s unwavering resilience amid challenges. Despite encountering adversities such as the UAW strike, our auto profits demonstrated an impressive year-over-year growth, testament to the robustness of our underlying business.

The achievements signal a new dawn for Ford Motor Company, characterized by the return to investment grade, elevated ROIC, enhanced capital discipline, and the declaration of both regular and special dividends.

The acumen of our leadership in driving the acceleration of our integrated services under Peter Stern has unlocked new avenues for high-growth, high-margin, and less cyclical profits, heralding a paradigm shift in our industry landscape.

Strategically positioned at the epicenter of this transformative journey is Ford’s commitment to returning capital to shareholders while charting a prudent and meticulous course for capital allocation, with a profound focus on restrained spending and judicious timing.

Ford Pro: Driving Growth and Profitability in a Rapidly Changing Industry

Fueling Revenues in Pro

Last year yielded positive results for Ford Motor Company. However, CEO ____ states clearly that the company is far from realizing its earnings potential. _____ is optimistic about the positioning of Ford Motor Company for growth and profitability in the coming year, particularly in the four key areas at Ford Pro.

Dominance and Leadership in Pro Market

____ draws attention to the promising outlook for Ford Pro, a nearly $60 billion high-margin business with hardware, software, and physical services. The company’s strong market position is evident in its incredible performance in the past year, with Ford Pro doubling its EBIT to $7 billion despite facing challenges during the launch of Super Duty. The company is on track for mid-teen EBIT margins at Pro, coupled with expected top- and bottom-line growth.

The strategic focus on state and local government Pro sales, telecom, 5G buildout, and the manufacturing sector in the U.S. reflects Ford’s ability to capitalize on growing market segments. Ford’s strong market foothold is further exemplified, with the company being the best-selling commercial vehicle brand in Europe for the ninth consecutive year.

Undervalued Strengths and Moats

_____ elucidates on the undervalued strengths of Ford Pro, emphasizing the company’s industry dominance and market leadership. In Class 1 through 7 full-sized trucks and vans, Ford Pro commands a substantial 40% market share, showcasing its unrivaled influence across various vocations and customer segments, especially small and medium-sized businesses.

Moreover, Ford’s collaboration with upfitters underscores its formidable moats. The company’s commitment to digital upfit integration and shared engineering specifications with upfitters showcases the trust and reliability that underpin its relationships within this critical network.

The expanding influence of software and the physical repair business is another highlight, as Ford Pro sees a growing number of active software paid subscriptions, with expectations of software and services driving 20% of the Pro EBIT in two years. The company’s extensive physical repair network in the U.S., comprising 23,000 busy service bays and remote service capabilities, further fortifies its competitive edge.

Quality Amidst Challenges

Addressing concerns about quality, _____ underscores the company’s efforts and progress in this area. Ford’s rigorous approach to launch quality and its continual focus on improving initial quality have yielded positive results. The commitment to enhancing quality is reflected in the significant correlation between quality metrics and shareholder return, showcasing Ford’s strong emphasis on quality management.

Navigating the EV Revolution

As the automotive industry experiences a seismic shift in the EV market, including significant price cuts and capital influx, Ford’s comprehensive EV strategy stands poised to navigate and benefit from this transformative period. The company’s targets for Gen 2 EV products underscore its commitment to driving profitability and delivering returns that exceed costs of capital, thus positioning Ford as a significant player in the evolving EV landscape.

The dynamic landscape of Ford Motor Company’s business underscores the company’s resilience and strategic positioning to capitalize on emerging opportunities._____ optimistic tone reflects the company’s confidence in leveraging its strengths to drive growth and success in a rapidly changing marketplace.

Ford Navigates Changing Tides: Capitalizing on EV Growth and Adjusting Strategies for Superior Returns

Ford Motor Company recently announced a strategic shift in its capital allocation, signaling a renewed focus on the burgeoning electric vehicle (EV) market. The company aims to minimize capital expenditure on larger EVs and redirect resources towards smaller EV products. This bold move is indicative of Ford’s commitment to adapt to the evolving automotive landscape and optimize its position in the market.

Reimagining Capital Allocation in the EV Space

Declaring a departure from its previous approach, Ford is reorienting its EV strategy toward smaller products, strategically allocating capital to capitalize on the growing demand for electric vehicles. Emphasizing the significance of this move, Ford recognized the need to readjust its capital allocation to align with market realities and achieve a balanced growth trajectory.

The Evolution of Ford’s EV Business

Reflecting on its journey as an early leader in the EV segment, Ford acknowledged the evolving dynamics of the market. The company observed a paradigm shift in customer behavior, highlighting the disparity between demand for EVs and internal combustion engine (ICE) vehicles. This realization has prompted Ford to recalibrate its business model and optimize its resources for sustainable growth.

Lessons Learned and Strategic Realignments

Ford acknowledged the transformative impact of external factors, such as the COVID-19 supply shocks and the emergence of formidable competitors like Tesla and Chinese OEMs. The company embraced these challenges as learning opportunities, leading to critical insights into the pricing dynamics of EVs. Ford’s strategic realignments are a testament to its resilience and adaptability in a rapidly evolving automotive ecosystem.

Capitalizing on Market Variances

Recognizing the diverse preferences of consumers across different geographies, Ford underscored the importance of offering a diverse array of vehicle choices. The company’s strategic emphasis on flexible manufacturing and customer-centric offerings underscores its commitment to catering to unique market variances and enhancing customer satisfaction.

Financial Milestones and Forward Momentum

Acknowledging the financial achievements of the company, John Lawler, Ford’s Chief Financial Officer, highlighted the robust revenue and EBIT growth. The company’s resilient performance underscores its adherence to the Ford+ plan and signifies a promising trajectory for future growth and profitability.

As Ford navigates the dynamic automotive landscape, its strategic realignments and focus on EVs position the company for sustained success in a rapidly evolving market. The company’s astute capital allocation and unwavering commitment to customer needs solidify its standing as a key player in the automotive industry.

Ford’s Impressive Financial Performance Amid Market Challenges

Robust Revenue and EBIT Growth

Ford has showcased remarkable financial performance despite market challenges and adversities. The company’s adjusted EBIT stood at 1.1 billion, highlighting a significant achievement in the face of the impact of the strike. Ford Pro’s steadfast progress demonstrated a remarkable quarter, with revenue soaring by 11%. Meanwhile, Ford Pro’s EBIT of 1.8 billion represented a notable 25% increase and a margin of 11.8%.

Segment Performance Overview

The company’s full-year results unequivocally underscored the potential earnings power of its growth business. With a 19% surge in revenue and EBIT doubling year over year to 7.2 billion, a 4 billion improvement, Ford Pro’s margin closed in on the mid teen target, ending at 12.4%. The company’s confident stance on Ford Pro’s future highlighted the differentiated strengths that steered remarkable results this year. Ford Model E’s accomplished a 14% increase in wholesales in the quarter along with a 2% revenue increase. However, the EBIT suffered a loss of 1.6 billion. For the year, Ford Model E experienced a 20% jump in wholesales and a 12% hike in revenue, but EBIT suffered a loss of 4.7 billion due to challenging market dynamics and investments in next-generation vehicles.

Although Ford Blue’s revenue remained stable in the face of a loss of about 60,000 units due to the strike, it managed to achieve an EBIT of 813 million with a margin of 3.1%. During the year, Ford Blue witnessed an 8% growth in revenue across all regions, with all regions contributing significantly to the bottom line, resulting in an EBIT of 7.5 billion – a year-over-year increase with a margin of 7.3%.

Capital Allocation and Future Projections

Ford emphasized a strategic capital allocation approach, allowing for increased transparency, accountability, and the ability to assign specific risk-adjusted hurdle rates for each business. The company is committed to realizing adjusted EBIT expectations between 10 billion to 12 billion, setting a record for Ford at the high end. Additionally, the adjusted free cash flow is anticipated to fall within the range of 6 billion to 7 billion, with capital expenditures remaining flat to moderately up year over year between 8 billion and 9.5 billion.

Ford’s focus on fiscal prudence and EV investments is evident in the allocation, which is expected to reflect EVs constituting 40% of the total capital expenditure. The company’s proactive approach was reflected in the actions taken in 2023, delaying the second JV battery plant, reducing the size of the new LFP plant in Michigan, and not proceeding with the JV battery plant in Turkey. Ford remains committed to driving efficiencies and cost reduction initiatives, aligned with a comprehensive strategy to align the installed capacity to match demand, reassess vertical integration in new battery chemistries, and adjust Gen 2 products.

Notably, the 2024 outlook for Ford includes a flat to slightly higher SAAR in both the U.S. and Europe, with a U.S. planning assumption of 16 million to 16.5 million units. The company is also grappling with lower industry pricing, expecting a 2% decrease driven by higher incentive spending. Ford aims to offset this with top-line growth from the launch of new products, along with a $2 billion benefit from cost reduction initiatives that counterbalance higher labor and product refresh costs.

Analyst Discussion and Management Response

During the Q&A session, Adam Jonas from Morgan Stanley articulately drew a parallel between Ford Pro and Ferrari, emphasizing the underappreciation of Ford Pro and attributing it to the significant funding for the EV division. CEO Jim Farley acknowledged the issue and highlighted the transformative industry shifts necessitated by changing market dynamics. He stressed the importance of cost optimization in the EV transition, leveraging the company’s high-volume hybrid business to drive adjustments in capital and execution of a cost approach different from the first generation.

Ford’s performance in the last year mirrored the company’s commitment to its Ford+ plan, driven by capital discipline, and consistent cash generation. The company’s unwavering focus on growth opportunities and delivering improvements in both quality and cost underscored a positive momentum. Ford’s resilience and prudence amid market challenges indicates a promising trajectory, as the company remains dedicated to strategic growth and technological advancements.

Ford’s Electric Vision and Profitability Outlook

EVs, Hybrids, and ICE: Ford’s Strategic Balancing Act

In a recent earnings call, Ford’s management team discussed the delicate calculus involved in planning manufacturing capacity for electric vehicles (EVs), hybrids, and internal combustion engine (ICE) vehicles. The decision-making dynamics behind this strategic balance was laid bare during the proceedings as the company grapples with a rapidly evolving automotive landscape.

Customer Choice and Cost of Ownership for Hybrids and EVs

Jim Farley, President and CEO, emphasized the significance of customer decision-making whereby buyers can quickly evaluate the cost comparison between ICE and hybrid vehicles directly on the showroom floor, a process made simpler by the familiarity and maintenance advantages of hybrid technology. In contrast, adopting an EV involves more uncertainty and changes in behavior, such as setting up a home charger, which complicates the cost analysis for mainstream consumers. The company sees a growing interest in the ownership cost calculus among customers and believes that ensuring competitive pricing is essential for capturing the potential market demand for EVs.

Dealer Economics and Market Dynamics

Marin Gjaja, Chief Operating Officer, shared insights on the dealers’ financial performance, indicating that dealers have been achieving margins comparable to ICE vehicles and even surpassing them in certain periods. This signaled positive dealer economics and resilience amid inherent market fluctuations. However, the company acknowledges the importance of consistent dealer support given the prolonged choices made by consumers and the increasing focus on total cost of operation (TCO) by fleet customers.

Manufacturing Capacity and Pricing Strategy

Jim Farley articulated the deliberate planning for a 40% growth in hybrid electric vehicles (HEVs) years ago and how the company continues to gauge pricing dynamics amid increased demand. The strategic vision for the best-selling F-150 and its transition to hybrid technology underlines Ford’s market readiness and flexibility to align with evolving customer preferences.

Dealer Engagement and Strategic Imperatives

Addressing the planned dealer tour, Farley highlighted the critical messages intended for the dealer network. These included reinforcing investments in Ford Pro, underlining the manufacturing flexibility between ICE, EV, and hybrid vehicles, and emphasizing the company’s relentless pursuit of quality and retailing excellence. The tour aimed to galvanize dealer support and partnership in line with Ford’s strategic imperatives.

Profitability Outlook for Electric Vehicles

Responding to queries about Ford’s electric vehicle profitability, Farley and John Lawler, Chief Financial Officer, acknowledged the ongoing challenges related to structural costs and the need for optimizing the cost structure of current and future electric vehicle offerings. Stressing the imperative of launching Gen 2 vehicles only when profitability can be assured within the current pricing environment, the management team expressed confidence in navigating the complex interplay between EV sales and regulatory compliance considerations.

Ford’s March toward Electric Vehicle Profitability

Optimizing Across Frontiers

Jim Farley, the President, and CEO, at Ford, stated in a recent conference call that the company is working on optimizing across the frontiers of what needs to be sold from the ICE standpoint and improving with HEVs. Ford also made it clear that they are committed to making their electric vehicle business stand on its own and be profitable. Farley referred to the competition, comparing Ford to profitable entities like the Chinese automakers and Tesla. Their goal is for the electric vehicle business to be a benefit of profitable business and a return on the capital.

Capital Spending on EVs

John Lawler, the Chief Financial Officer at Ford, added that 40% of the company’s capital expenditure last year was allocated to electric vehicles, and this year’s budget is consistent with that figure. Jim Farley emphasized that the team is striving to position Ford on the lower end of that range, indicating the dedication to efficient management of EV spending.

Path to Break-even

A pivotal question was raised about the timeline for Ford to achieve breakeven, particularly with the Generation 2 vehicles expected in 2026. Marin Gjaja, the Chief Operating Officer, Model e, pointed out that they are not prepared to commit to a specific timing for achieving positive EBIT. However, Ford anticipates seeing an improvement in gross margin quarter over quarter. The company has been proactive in adjusting production, increasing C&I as necessary, and diligently focusing on cost reduction.

Quality Improvements and Cost Efficiency

Regarding warranty costs, John Lawler explained that these costs are expected to be relatively stable this year. Nevertheless, the company foresees $2 billion of efficiencies flowing through, offsetting the impact of the UAW labor contract and incremental costs for new features and compliance due to the global portfolio refresh. The Ford team is dedicated to achieving cost efficiency and driving qualitative improvements.

Sustainability of Earnings Stream

When questioned about the sustainability of Ford’s earnings stream, particularly in Pro, Jim Farley emphasized the fundamental factors driving the company’s vehicle profitability in the commercial sector. He expressed confidence in the robust profitability, citing the impact of certain products and features that are yet to unfold fully. Farley highlighted the potential of software and after-sales services as transformative factors for the company’s commercial business.

Industrial Costs and Competitive Position

Addressing the industrial costs, John Lawler acknowledged the $7 billion cost disadvantage versus competitors in Blue. He discussed the expected efficiencies to balance the impact of the UAW labor contract and the incremental costs related to the product refresh, underlining the company’s commitment to managing costs effectively.

The Ford team’s dedication to optimizing their approach across different frontiers and their proactive pursuit of cost efficiency and qualitative improvements reflect the company’s relentless pursuit of profitability. These efforts are crucial as Ford seeks to establish a strong foothold in the competitive electric vehicle market and sustain its commercial sector’s profitability.

Ford’s Recovery Roadmap: Cutting Costs and Unveiling 2024 Outlook

Overcoming Obstacles: Progress in Narrowing the Cost Gap

After facing a $7 billion gap compared to its competitors, Ford has embarked on a journey to close this chasm and regain its competitive edge in the market. The company’s Chief Financial Officer, John Lawler, emphasized the traction it has gained in initiating changes to narrow this gap, signaling an impending shift in the company’s financial landscape.

Operational Adjustments Yielding Positive Results

Chief Operating Officer Kumar Galhotra detailed the cost-saving strategies being put into action. Galhotra highlighted a reduction in inflationary pressures and claims from suppliers, stabilizing the supply chain, and eliminating wasteful expenditures as key drivers of Ford’s improved financial outlook. The company’s ability to run its operations more smoothly due to a stable supply chain has led to a significant decrease in freight costs.

Revamping Design and Streamlining Manufacturing

Galhotra revealed a three-pronged approach to addressing material costs, including the optimization of vehicle designs, elimination of features with low customer value, and extensive benchmarking for manufacturing efficiency. These proactive measures have already yielded substantial savings, such as identifying a more cost-effective aero shield design reducing expenditure by $40 per vehicle. Moreover, leveraging connected vehicle data to determine feature usage has allowed Ford to eliminate a redundant auto part feature, leading to savings of $60 per vehicle.

Analyst Inquiries and Forward-Looking Projections

Analysts, including Dan Levy from Barclays and Emmanuel Rosner from Deutsche Bank, sought further insights into Ford’s cost-saving initiatives and projected improvements. In response, executives detailed the anticipated calendarization of cost reductions throughout 2024, with design actions being implemented mid-year and more even-flow manufacturing improvements ongoing.

Industry Volume and Affordability Projections

Lawler provided an outlook for the automotive industry’s growth, projecting a 3% to 4% increase in wholesale volume. However, Ford anticipates a 2% decline in pricing. Emphasizing affordability, Lawler expressed the company’s optimism for 2024 to witness a return to pre-pandemic levels, making vehicles more financially accessible to consumers. Despite potential top-line pressures, Lawler highlighted the introduction of new products as a positive factor for Ford’s Blue division. Additionally, the company’s Pro division has experienced strong demand, particularly in commercial orders.

Ford’s Projections Show a Spark in EV Growth and Cost Reduction

Breaking Down the Conference Call

During a recent conference call, Ford’s leadership discussed their plans for the upcoming year, covering a range of topics including electric vehicle (EV) projections and cost-saving measures. The call provided a closer look at Ford’s strategies and gave insights into what investors can expect in the near future.

Anticipated EV Growth

One of the highlights of the call was Ford’s Chief Operating Officer, Jim Farley, shedding light on the company’s outlook for EV sales. The COO emphasized that Ford’s EV sales are set to experience substantial growth, particularly with the expansion of electric offerings in Europe, where regulatory factors are driving the adoption of electric vehicles, especially vans.

In addition to the European market, Ford’s Chief Operating Officer for Model e, Marin Gjaja, expressed optimism about sales growth on the retail side. Gjaja highlighted the upcoming launch of the Explorer in Europe as a new offering that is expected to aid in sales growth. These insights paint a positive picture for Ford’s EV segment, with substantial unit volume growth anticipated.

Evaluating Cost-Saving Measures

The call also delved into Ford’s cost-saving initiatives, with a focus on supplier cost reductions. Ford’s Chief Financial Officer, John Lawler, explained that a significant portion of the projected $2 billion in savings for the year would be derived from industrial efficiencies and design-related reductions. This emphasis on cost-saving measures reflects Ford’s commitment to operational excellence and financial discipline.

Addressing Model e’s Performance

The discussion also touched upon the anticipated losses associated with Model e. While acknowledging the challenges posed by market dynamics, John Lawler made a candid assessment that the original 8% margin target for Model e by 2026 is no longer feasible. However, both Lawler and Marin Gjaja reiterated a focus on improving gross margin over time and reaffirmed their commitment to building a standalone profitable EV business through capital and operating discipline.

Engaging with Analysts

The call featured interactions with several analysts, each seeking clarity on various aspects of Ford’s projections and strategies. From inquiries about EV margins to discussions on cost reductions, the engagement with analysts further showcased Ford’s transparency and willingness to address investor concerns.

Conclusion

Ford’s conference call provided a comprehensive overview of the company’s plans and performance expectations, resonating positively with the investor community. The insights shared by the leadership reflected a balanced approach focused on both growth opportunities and prudent financial management. As Ford continues to navigate the evolving landscape of the automotive industry, its commitment to innovation and efficiency remains steadfast.