Ford Motor : First Quarter 2024 Earnings Transcript

Ford Motor Company

First Quarter 2024 Earnings Conference Call

Wednesday, April 24, 2024, 5:00 PM Eastern

CORPORATE PARTICIPANTS

Jim Farley - President, Chief Executive Officer

John Lawler - Chief Financial Officer

Cathy O'Callaghan - Chief Executive Officer, Ford Credit

Lynn Antipas Tyson - Executive Director of Investor Relations

PRESENTATION

Operator

Good day, everyone. My name is Gary, and I will be your conference operator today. At this time, I would like to welcome you to the Ford Motor Company First Quarter 2024 Earnings Conference Call. All lines have been placed on mute, to prevent any background noise. After the speakers' remarks, there will be a question-and-answer session. If you would like to ask a question, during this time, you may press "*" then "1" on your telephone keypad, to withdraw your question, please press "*" then "2." Please note, this event is being recorded.

At this time, I would like to turn the call over to Lynn Antipas Tyson, Executive Director of Investor Relations. Please go ahead.

Lynn Antipas Tyson

Thanks, Gary. Welcome to Ford Motor Company's first quarter 2024 earnings call. With me today are Jim Farley, President and CEO, and John Lawler, Chief Financial Officer. Also joining us for the Q&A is Cathy O'Callaghan, CEO of Ford Credit.

Today's discussion includes some non-GAAP references. These are reconciled to the most comparable U.S. GAAP measures in the appendix of our earnings deck. You can find the deck along with the rest of our earnings materials and other important content at shareholder.ford.com.

Our discussion also includes forward-looking statements about our expectations. Actual results may differ from those stated. The most significant factors that could cause actual results to differ are included on page 19. Unless otherwise noted, all comparisons are year-over-year. Company EBIT, EPS, and free cash flow are on an adjusted basis.

Lastly, I want to call out a few of our near-term IR engagements. May 30, Jim Farley will participate in a fireside chat in New York with Toni Sacconaghi and Daniel Röska at the Bernstein Annual Strategic Decisions Conference. And June 11, John Lawler will participate in a fireside chat in New York with Emmanuel Rosner at Deutsche Bank's Auto Summit. Jim…

James Farley

Thank you, Lynn. Hi, everyone, and thank you for joining us. The cornerstone of Ford+ is pretty straightforward, a more resilient business model, higher growth, higher margin and more capital efficiency. And I would say quarter one had a lot of great green shoots in that plan. It sets us up for a very strong 2024 and beyond.

Before John goes through quarter one, I want to highlight four key strategic areas: how our growth drivers are changing, our progress in quality, the resilient Ford Pro business, and what we're learning on the electrification journey in quarter one.

On growth, the portfolio changes we made and the restructuring we've done in our geographic footprint has really paid off for Ford. Several years ago, we normally would be reducing our volume and our mix and having good news on pricing. What's changed in the last year, and especially in Q1, you could see, is our top line and bottom-line profitability are increasing, driven by improved volume and mix, and we're actually seeing pricing headwinds. And that new

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portfolio and geographic footprint is really tremendous to see at Ford. There is no better example for this than the portfolio changes we've made in our truck and van business.

Ford is the number one best-selling pickup manufacturer in the world. And our Ford Transit Cargo Van is the best-selling in the world. It's now our second best-selling nameplate at Ford. And our midsized Ranger, now our most affordable pickup, is the third best-selling vehicle at Ford, and together with the Everest makes up our profits outside of China, North America and Europe. It's an incredible new franchise for Ford.

These changes in our portfolio at all different sizes and price points in the truck and the van business has really played to Ford's strength. And it doesn't stop there. Our growth drivers are diversifying. We now have a vibrant software business and physical services business led by Ford Pro. You don't need to look very far beyond our mobile service as an example.

Ford now has 3,500 or more remote service vehicles in our fleet globally. And last year, we did

2.4 million remote service experiences, both remote service and pickup and delivery. 40% of that was for Pro and 60% was for our retail business. Ford now has more than 700,000 paid subscribers for software. That's up 47% year-over-year. It's capital efficient and the gross margins are more than 50%.

Our quality is making real progress. Kumar and the team have really focused on our key areas. Our '23 model year has three months in service, initial quality is 10% better than the previous model year. And we're seeing our current model year that we're selling for several months, another 10% improvement. That should put us in the middle of the pack, and many of our vehicles start to lead their segments in initial quality.

But to bend the curve on warranty costs and customer recalls, we're really focusing on our launches. We're past the Super Duty launch now and well into the F-150 launch, and we made a lot of changes to improve and bend that curve. On the F-150 and others, we've delayed the Okay To Buy date three to six weeks. We've taken a lot of new testing regimens. Actually, we ended the quarter with 60,000 units in our plant stock, which hurt our first quarter, but we'll benefit because we're shipping those now in our second quarter for all those quality processes.

And what we're so far seeing is we avoided about 12 recalls on F-150, and we're seeing the best performance on 3 MIS after a launch in a long time. And I'd like to be specific here. Normally, after a launch, we've seen about, in the last five years, about a 70% spike in our defects. The industry average is about 20%.

In the Super Duty and Mustang launches, we're about that industry average 20% spike. And now we're seeing, with the F-150, even better performance than the industry average. And boy, do we have a lot of launches in the second half to prove out this new launch process. What we're going to see in the long term is fewer recalls and lower warranty costs because of this new process. I'm really proud of the team's progress on quality, and we have so much more to do.

I'd like to talk quickly about Ford Pro. When we look at quarter one, we made about $3 billion. It's how much we made the whole year in Pro two years ago. We're growing revenues, EBIT, EBIT margin. We're growing our volume. Our attach rates for high-margin software and

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physical services are improving. And when you ask yourself, why is this different? And why would this business…why would these profits be more resilient than our retail business? It comes down to three things.

First is the diversity of our customer base. About a third of our Pro customers are small business, another third are large companies, and about 20% more is governments, all different kinds. And the diversity of those customers and all three of them are driving white-hot demand for our vehicles and services right now from infrastructure build-out, roadwork's, 5G, onshoring manufacturing, and refleeting for our key government fleets. One out of four of those fleets are all Ford, and boy, do they trust our company.

But more than anything, it's the breadth and freshness of our new lineup at Pro that's driving our profitability. We have the freshest lineup we've had in 20 years of Pro. We have an all-new Super Duty, an all-new Transit from top to bottom. And we have an all-new Ranger in 5 plus plants around the world. These new products are really attractive to customers. And beyond that, we have the most diverse Class 1 to 7 lineup in North America, our key market. And that adjacency sales are important because customers buy different kinds of vehicles for us in the same fleet.

But beyond that, in those fresh nameplates, we offer the best choice. We have cabin chassis and cutaway versions of our vans, different wheelbases and heights, the same on our pickup trucks. And we also have the most choice in terms of upfitters. We have 500 different upfitters across Western Europe and the US that prefer to work with Ford because of our experience with them. And it doesn't stop there. We design all of our commercial vehicles with a multi- energy platform, and that allows our customers to choose electric, partial electric, diesel, petrol, whatever choice on powertrain that best meets their cost of ownership. No one has this kind of lineup in our business globally.

The third key area is the diversification and the completeness of our software and physical services experiences for our customers. Now, 13% of Ford Pro's profits in the last 12 years make up these attached services. And it's a big change for us. And what's really driving that is our advantage in physical service. We have the largest repair network you can find of any brand out there, and we're widening that gap. We've added 700 commercial service bays in the last year and more than 11 very large service lead centers with between 50 and 200 repair bays that are open 24/7 for our customers. None of our competitors offer this kind of extensive repair network.

And it doesn't stop there. We have over 2,000 remote trucks and vans doing remote service for our Pro customers. No brand can match that either. And now we have over 560,000 active software subscriptions for Pro customers. That's up 40%. And that Pro Intelligence business took many years to build. It requires advanced electric architectures and it's a really hard moat to copy. Long and the short, Ford Pro is in for a great performance over the next several years.

What did we learn on electric so far? Well, as you know, we're number two in our home market in electric sales for the last couple of years and boy, we learned a lot. Since Capital Markets last year, we continue to adapt and evolve our spending and our investment ramp for battery plants and assembly capacity for our EVs to match customers' demand, and more importantly than all of that, match their price expectations. We're retiming our launches and our capital

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spending. In fact, this year, we expected to spend about $10 billion as a company. We've now guided $8 billion to $9 billion; we will probably be on the low end of that range.

And we're being very consistent about our discipline on profitability. We expect every one of our EVs to make money in the first 12 months, and that is a very disciplined process. In fact, we delayed the launch of our three-row crossover, which is a great product, two years, not only to match the slower growth in EV but more importantly to take advantage of new battery chemistry and formats to substantially reduce the cost of the batteries for that vehicle. We'll do everything it takes to be profitable in the first 12 months of our vehicles.

And what's our bet as a company? Well, it's pretty simple. We're going to bet on commercial work vehicles where we do really well, where we know the customers, where we can innovate for them like Pro Power on board with partial and fully electric vehicles, but increasingly, our bet will be on our new small affordable platform developed by our team on the West Coast.

Why is affordability so important? When we look at the connected car data from our EV customers, we noticed that people who live in the suburbs, urban customers, they tend to drive shorter distances and those more affordable vehicles, more approachable. And we believe that's where the adoption of EV will grow the fastest. And we believe we can compete in segments of small cars and vehicles, more affordable vehicles in a unique way, that's Ford.

A good example was we learned a lot when we, in our more expensive vehicles, Mach-E, when in February, we dropped the price 17%, our volume went up 141%. That's telling us that the more affordable we can make great product, the more attractive it is to these mainstream EV adopters.

And the last thing I'd say is we're learning about the importance of choice. Our growth in the first quarter in hybrids is a good example. We grew 36%. We think the full year will be 40%. We're now approaching 400,000 units of volume for our hybrid business, and we're now number three in hybrids in the U.S. It's a big advantage. We've been in the business for more than 20 years. And what's really exciting for us is for the first time, some of our contribution margins on hybrids are above what similar contribution margins than our pure internal combustion engine margins.

With that, I'll turn it over to John.

John Lawler

Okay. Thanks, Jim. So our team around the globe is becoming more focused and adept at applying the Ford+ strategy, and we really did deliver a solid quarter. We are transforming Ford into a higher-growth,higher-margin, more capital-efficient and more resilient business. We're progressively shedding behaviors that have weighed down performance and valuation of legacy auto companies for most of the industry's history.

Our strong global product lineup is differentiated, offering customers freedom of powertrain choice and drove first quarter revenue of $43 billion, up 3%. Our revenue has grown in each of the last three years, and we expect 2024 to be no different. Wholesales were down 1%, more than explained by the late quarter launch timing of the new F-150. We delivered $2.8 billion in adjusted EBIT with a margin of 6.5%, reflecting continued strength in Ford Pro.

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Costs were up $1.2 billion, but if you double-click on this, you'll see that $1.1 billion of that was investments in growth by Ford Pro, including new products. Ford Blue and Ford Model e costs were roughly flat, and we're on track to deliver $2 billion of cost efficiencies for the full year.

Adjusted free cash flow was a use of $500 million, more than explained by the vehicles in inventory, and this impact will reverse in the second quarter.

Our balance sheet remains strong with $25 billion in cash and close to $43 billion in liquidity. And earlier this week, we also completed the renewal of our $18 billion corporate credit facilities, extending maturities by an additional year. Overall, our strong liquidity provides significant flexibility for us to invest in profitable growth. Consistent with our commitment to return 40% to 50% of adjusted free cash flow to shareholders, today, we also declared a regular second quarter dividend of $0.15 per share payable June 3 to shareholders of record on May 8.

I'll spend a few minutes summarizing the financial performance of each of our customer-focused segments. And there's evidence in every one of them of how Ford+ is making our business stronger. Ford Pro delivered a 36% increase in revenue on a 21% increase in wholesales. The segment has consistently delivered year-over-year revenue growth each quarter since we re- segmented our business. EBIT more than doubled to $3 billion with a margin of 16.7%, reflecting increased Super Duty and Transit production, richer Super Duty mix and higher net pricing.

In addition, over the past 12 months, roughly 13% of Ford Pro's EBIT came from software and physical services, on the glide path to reaching 20% in a few years. And this important revenue stream generates sticky and recurring gross margins in the 40% to 50% range. And as you can see, given the breadth and depth of Ford Pro's competitive moats, investments in growth drive tremendous operating leverage. The segment's results this quarter demonstrate the consistency, predictability, and earnings power of this growth business.

Ford Model e generated a loss of $1.3 billion as significant industry pricing pressure more than offset flat costs as wholesales declined 20%. In the quarter, we took action to bring down inventory levels. For example, after being at a price premium to competition in 2023, we lowered pricing on Mustang Mach-E in the U.S. by 17%, bringing us in line with the 2-row crossover segment. And as Jim mentioned, we did see elasticity with an improved mix of higher trends.

In the U.S., retail sales jumped 77% versus the total EV segment, which was up roughly 2.6%. Our total EV market share grew by 3.4 points to 7.5%, and Mach-E was the second best-sellinge-SUV, only behind Tesla's Model Y. The bottom line is that we're more competitive and doing well in the marketplace. We've reduced our stock levels significantly and the pace of sales has increased.

In Ford Blue, revenue, wholesales, and EBIT were down, all impacted by the F-150 production ramp and vehicles and inventory. EBIT margin was 4.2%, and our international operations continue to be profitable across the board. Ford Blue's global product portfolio remains strong and our hybrid sales continued to grow, up 36% in the quarter as we get the benefit of hybrid products planned years ago. Our global mix of hybrids is currently at 7%, up 2 points year-over- year with more products on the way. Additionally, China exports increased 33%, including

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Lincoln Nautilus, and that's consistent with our strategy to better leverage that asset-light footprint.

Ford Credit generated EBT of $326 million. In the quarter, the financing margin improved, and credit loss performance continued to normalize and remains below our historical average. Importantly, we continued to see a high-quality book based on strong FICO scores, which continue to exceed 750.

And as expected, auction values have declined by roughly 10% as lease return rates continued to normalize. So, we're beginning to unlock the huge potential for customers and all of our stakeholders with the Freedom of Choice made possible by Ford+. There's plenty of work ahead to fulfill that potential. However, the progress we've made so far is undeniable. We're delivering growth and profitability, sharpening capital efficiency and fortifying the resilience of our business.

Accordingly, turning to our outlook, we continue to expect full year company adjusted EBIT of $10 billion to $12 billion and are tracking toward the high end of this range, and that would be a record for Ford. We're raising our adjusted free cash flow guidance to $6.5 billion to $7.5 billion, supported by the underlying strength of the business and lower-than-planned CAPEX.

Our adjusted free cash flow guidance is consistent with our cash flow conversion target of 50% to 60%. We're tightening our CAPEX range to $8 billion to $9 billion as the team adjusts to the dynamic EV landscape. We're scrutinizing every dollar in driving efficiencies that we believe could land us at the lower end of this revised CAPEX range. Our outlook for 2024 assumes a flat to slightly higher SAR in both the U.S. and Europe.

Our planning assumption is for the U.S is 16 million to 16.5 million units. Full year of customer demand for all-new Super Duty contributing to better market factors for Ford Pro. Industry supply/demand normalizing.

From a planning perspective, we're assuming lower industry pricing of roughly 2% driven by higher incentive spending as we move through the year. We expect this to be partially offset by top-line growth from the launch of our new products. There's no change to our segment outlook, which anticipates continuous strength in Ford Pro, leading to EBIT of $8 billion to $9 billion, and that's driven by the continued growth and favorable mix, partially offset by moderated pricing.

As expected, loss in the range of $5 billion to $5 billion for Model E, driven by continued pricing pressure and investments in new vehicles, and for Ford Blue, EBIT of $7 billion to $7.5 billion, reflecting a balanced market equation and also cost efficiencies, offsetting higher labor and product costs. And we expect Ford Credit's EBT to be about $1.5 billion, up slightly year-over- year.

Our performance this quarter continues to demonstrate the positive momentum of Ford+. Capital discipline is driving the right global footprint, portfolio of products, and consistent cash generation. We continue to see growth opportunities and remain focused on delivering improvements in both quality and cost.

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Now, that wraps up our prepared remarks, and we'll use the balance of the time to address what's on your minds.

So, thank you, and operator, please open up the line for questions.

QUESTION AND ANSWER

Operator

We will now begin the question-and-answer session. To ask a question, you may press "*" then "1" on your telephone keypad. If you're using a speakerphone, please pick up your handset before pressing the keys, to withdraw your question, please press "*" then "2". Please limit yourself to one question and one follow-up.

The first question today is from Adam Jonas with Morgan Stanley. Please go ahead.

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Adam Jonas

Hey, everybody. I got one question for John and one for Jim. John, you were just on Bloomberg saying EVs are needed to meet compliance regulations. Now, it's my understanding that Ford does not disclose penalties or ZEV credit purchases for Ford on clean air regulation. Can you confirm that? That's not disclosed, right?

John Lawler

So, let me clarify a few things, Adam, on that. It's that it's not an option for us not to be compliant. If you don't comply with your ZEV or your greenhouse gas emissions requirements, you can't pay fines. What happens is you can't sell. And that's consistent across the industry. So that's for all OEMs. All OEMs are under those rules. And so, there's really three levers that we have. We can sell EVs and hybrids. We can sell fewer ICE or we can contract to buy credits from another OEM.

And when we do contract to buy credits, we will disclose that as we did in our 10-K at the end of the year. And so those are the three levers. And we, I would say, monthly, if not weekly, are working to optimize across those three levers to drive the highest profitability and the highest cash flow for the company. So to continue to sell the ICE vehicles, we are going to need to sell EVs and we're going to optimize across the profitability. Now, the most important thing, as Jim said, is we need to get the EV business to stand on its own, to be profitable and return on the capital we've invested. And then all the levers will be accretive to Ford and we'll be able to make it really positive. So that's what we're focused on. And that's what I intended to communicate earlier today.

Adam Jonas

Okay. But you did, so you do disclose, you did disclose, what was it?

John Lawler

Yes. We disclosed last year in the 10-K that we had purchased our commitments of $700 million.

Adam Jonas

And will that increase this year?

John Lawler

In the first quarter, there wasn't anything material. And as we go through the year, if it's the right lever to pull, as I said, as we're optimizing, we will report it.

Adam Jonas

I appreciate that, John. Just my follow-up for Jim, Ford Pro is kicking butt, okay. And at a 10 times EBIT, that business could be worth like double Ford's entire market cap. So, the market's kind of implying that the rest of the business would be valued at negative many, many tens of billions. Seeing another way, your stock, I mean, this business is incredible. People would die to have this business. And I think folks are aware, it's not a secret anymore, Jim, that people are aware of how good this business is, yet your stock ranks 491 out of 500 companies in the S&P 500 on PE multiple. Now, Jim, I know you don't like it, and I know you don't agree with it, but can you explain why does the market values your company as one of the lowest multiple companies in the world in any industry? Why? Try to rationalize that for me, because it seems

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important that you, as a leader of this organization, understand that so you can address that problem. Thanks.

Jim Farley

Thank you, Adam. And first of all, thanks for your report on Pro. I appreciate you taking the time to understand the business. Look, I mean, as John mentioned, we have to make tremendous progress on Model e. It's a huge drag, not just on Ford, but on our whole industry, even for pure Play EV players. And we're very clear-eyed about that. We're very committed to transparency. A lot of OEMs will handle EVs very different. We won't. It's like if we had an unprofitable regional business and we rolled it up, and it wouldn't be transparent to investors, we would never do that, and we're not going to do that with EVs. And we're not going to subsidize our Pro and Blue business by not being transparent about EVs.

And it's how we run the business. I think investors should understand, for me as a leader, that we're going to build a sustainably profitable EV business with terminal value. And it needs to return the cost of capital on its own and not be subsidized, as I mentioned. And the real turning point for us, not only is our flat costs in Model e this year, but most importantly, it'll be the profitability in our next cycle of products. And I'm proud of the work that our team has done to make the adjustments in our capital spending and to make sure that all of our next EVs are profitable. And the evidence will be there.

And I think that is the main drag on the company right now, as it will be for our whole industry. Blue is in really good shape. I wonder out loud, Adam, if everyone really understands the resilience of the Pro business over time. We're very profitable now, but we believe that this business will be profitable and durable for many years to come. And I'm not sure the full market understands that personally. I know you've gone through the business, understanding the demand, and I encourage everyone to understand and ask us more questions about Pro. Thanks.

Adam Jonas

Thanks, Jim.

Operator

The next question is from John Murphy with Bank of America Merrill Lynch. Please go ahead.

John Murphy

Good afternoon, guys. The freedom of choice is a great marketing tool to go out to market with, and I think it's reasonably or should be very effective. But Jim, as you think about this, as the market is shifting towards hybrids, at least in the near term, I'm just curious what kind of capacity you have to ramp up significantly in hybrids if the demand really is there. And if you think about the competitive threat really coming from Toyota with a lot of capacity on this side, is there risk that there's market share losses to them over time, or do you have the ability to really step up here? I think you mentioned something about 400,000 hybrids on an LTM basis, but can you do a whole lot more and really garner your fair share of the market?

Jim Farley

Hi, John. We made a lot of capacity decisions several years ago on hybrid, and I'm very thankful we did. For example, we just radically increased the capacity for F-150 that we're

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