Ford’s Momentous Year: A Look into Q4 2023 Earnings Call Ford’s Momentous Year: A Look into Q4 2023 Earnings Call

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By Ronald Tech

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

Insights from the Earnings Call

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Key Points from the Prepared Remarks

Operator

Good afternoon, and welcome to the Ford Motor Company 2023 fourth quarter financial results conference call. All participants will be in listen-only mode. [Operator instructions] Please note, this event is being recorded. I would now like to turn the conference over to Lynn Atipas Tyson, head of investor relations.

Please go ahead.

Lynn TysonExecutive Director, Investor Relations

Thank you, Gary, and welcome to Ford Motor Company’s fourth quarter 2023 earnings call With me today are Jim Farley, president and CEO; and John Lawler, chief financial officer. Also joining us for Q&A is Marion Harris, CEO of Ford Credit; Kumar Galhotra, COO of Ford; and Marin Gjaja, COO of Model e. 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 earning 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 25. Unless otherwise noted, all comparisons are year over year. Company EBIT, EPS, and free cash flow are on an adjusted basis.

Included on our earnings deck this quarter is a table of our global wholesales for 2023. With name, flight detail by segment, and major geography, this is a roll-forward of the detail we shared with you last March at our teach-in in our new segmentation. Lastly, I want to call out a few near-term IR engagements. Next week, February 15th, Jim Farley and John Lawler will participate in a fireside chat in New York with Rod Lache at the Wolfe Global Auto, Auto Tech, and Mobility Conference.

February 22nd, Navin Kumar, CFO of Ford Pro, will participate in a fireside chat in Miami with Dan Levy at the Barclays Industrial Conference. We do plan to run this call about 15 minutes longer, so that’ll take us to 15 minutes after the hour. We want to leave ample time for your questions. Jim, I’ll turn the call over to you.

Jim FarleyPresident and Chief Executive Officer

Thank you, Lynn. And hi, everyone. Thanks for joining us. Last year turned out to be a foundational year for our company.

Highlights from Q&A Session

Operator

Pardon me, this is the conference operator. We’ve seen that we’ve lost audio from the speakers’ location. Please stand by as we regain the signal. Pardon me, this is the conference operator.

We have rejoined the audio with the main speaker location. Sir, please continue.

Jim FarleyPresident and Chief Executive Officer

Hi, everyone. I’m not sure where we got cut off but I want to just highlight how important last year was, not only financially but a foundational year for our team. Our power choice and our powertrains really came through, and you can really see that on the F-Series. Our global hybrid sales were up 20% last year, and we expect them to be up 40% this year.

We’re now the No. 1 and No. 2 best-selling hybrid trucks in the U.S. Maverick is No.1. And we’re the No. 3 hybrid brand in the U.S. behind Toyota and Honda.

But unlike them, our hybrids really sell best on trucks for our side. We launched some awesome tech. BlueCruise just passed 150 million miles of hand-free use. But more importantly, the growth is up 25% quarter over quarter.

And the gross margins for BlueCruise are at 70%-plus, the same for Ford Pro Intelligence. And, boy, can Ford do work vehicles. The new Super Duty and Transit are off to great starts as is the new Ranger. We are really focused as a team on the segmentation. You can see the [Technical Difficulty] and our underlying business is getting better. As John will show, despite the UAW strike, our auto profits were up year over year. We returned to investment grade, we have higher ROIC, and we have really solid conversion from profits to cash. We’re returning capital to shareholders, we’re declaring a regular and a special dividend, and we’re getting much more disciplined on capital, not just where we allocate, but more importantly, how much we spend and when.

Our integrated services are really accelerating under Peter Stern. These are high growth, high margin, as I said, and much less cyclical profits for us. We have one single leader, Kumar Galhotra, on our industrial system, and he is laser-focused on quality and cost. And our international operations have made a remarkable turnaround after a lot of difficult restructuring. It’s the second year we made profit. It’s about a $3 billion turnaround compared to just three or four years ago. And what would surprise people is what a juggernaut Ranger has become. It’s a global franchise, and it’s our second best-selling nameplate globally, just behind F-Series and ahead of Super Duty.



Ford Motor Company’s Forward-Looking Strategy

Driving Into the Future: Ford’s Ambitious Plans for Growth

Expanding Horizons with Ford Pro

The year ahead looks promising for Ford Motor Company as it capitalizes on the potential growth and profitability centered around Ford Pro. A nearly $60 billion high-margin hardware, software, and physical services business, Ford Pro holds the promise of reoccurring revenue and a pivotal role in shaping the future of the automotive industry. The company’s relentless pursuit in this area is set to pave the way for exponential growth and increased market dominance.

Market Dominance and Industry Leadership

Ford’s deep-rooted market leadership in Class 1 through 7 full-sized trucks and vans, commanding a staggering 40% market share, is just the tip of the iceberg. The company’s unparalleled success in serving small and medium-sized businesses and tradespeople, the backbone of the U.S. economy, further solidifies its stronghold in the commercial sector. Moreover, its strong relationships with upfitters and a growing software and physical repair business underscore its significant competitive advantages that are often overlooked but critical for long-term success.

A Leap Towards Quality and Durability

While the pursuit of superior quality and long-term durability is not without its challenges and setbacks, Ford’s unwavering commitment to addressing these issues is evident. With visible progress in launch quality and a commendable 10% increase in initial quality, the company is steering itself toward world-class quality standards. Furthermore, a renewed focus on quality, with up to 70% of short-term incentives tied to it, underscores Ford’s dedication to its customers and shareholders alike.

Embracing the EV Revolution

Ford’s ambitious foray into electric vehicles is in perfect alignment with the seismic change sweeping the industry. With a strategic eye on profitability, the company’s forthcoming Gen 2 products are poised to achieve mid to high single-digit EBIT profit margins over their lifecycles, signaling a paradigm shift and a push for profitable growth in the EV segment.



Ford’s Strategic Shift and Strong Financial Performance in 2023

The Road Ahead: Ford Adapts and Delivers Strong 2023 Financials

Strategic Pivot Toward Smaller EVs

Ford has announced a strategic shift in its business model, focusing on smaller electric vehicles (EVs) to align capital allocation with evolving market dynamics. The company aims to spend less capital on larger EVs and redirect their focus to geographies and product segments where they have a dominant advantage, particularly in trucks and vans. This shift is fueled by the development of a low-cost EV platform by a super-talented skunkworks team two years ago, marking a crucial entry into the EV market.

Lessons from the Market and EV Demand Realities

Ford’s recalibration in capital allocation also stems from valuable insights gained from the EV market, notably the explosive growth in EVs in 2021 and 2022. The company realized that the demand curve for EVs is discernibly different from internal combustion engine (ICE) vehicles. Despite witnessing a surge in EV unit volumes, Ford acknowledged that the prices for EVs rapidly converged to those of hybrids after factoring in subsidies. This shift has prompted Ford to adjust its approach to capitalize on the unique duty cycle of EVs.

Embracing the Power of Choice and Hybrid Vehicles

Amidst the EV transition, Ford emphasizes the power of choice, intending to cater to diverse customer preferences through flexible manufacturing. The company cites variations in EV and hybrid vehicle preferences across geographies, exemplified by the mix of EV and hybrid F-150 sales in different regions. Ford recognizes the enduring role of hybrid vehicles, underlining their importance in specific customer use cases and their potential to deliver high margins compared to EVs.

Financial Strength and Strategic Flexibility

Amid this strategic pivot, Ford has demonstrated robust financial performance in 2023, with a revenue of 176 billion, marking a second consecutive year of double-digit growth. The company’s core business units, Pro, Model e, and Blue, collectively improved EBIT by $2 billion or 26% compared to the previous year, reflecting the effectiveness of its Ford+ strategy. Ford’s commitment to returning value to shareholders is evident through its announcement of quarterly and supplemental dividends, aligning with its target payout ratio of 40% to 50% of free cash flow.

Key Financial Highlights

Despite facing challenges such as the UAW strike, Ford achieved a free cash flow conversion rate of 65%, exceeding the top end of its target range, driven by the strength of its Pro and Blue business units. The company’s resilient balance sheet, with nearly 29 billion in cash and over 46 billion in liquidity, affords Ford the flexibility to navigate the industry’s ongoing transformation and pursue its strategic initiatives.

Cultivating Operational Excellence and Talent

Besides its strategic realignment, Ford underscores the pivotal role of operational and technical innovation, underpinned by the right talent. The company’s focus on performance management and a compensation structure tied to business results reflects a fundamental change in its operational approach, with a keen eye on delivering long-term shareholder value.

Stay informed with Ford’s strategic maneuvers and resilient financial performance as the automotive landscape continues to evolve.




Ford’s Financial Outlook and Business Segments

Ford’s Road Towards Growth: Business Segments and 2024 Guidance

Quarterly Performance and Full-Year Results

Adjusted EBIT amounted to 1.1 billion, with a margin of 2.3% that took a hit from a previous strike. Ford Pro showcased its strength with an 11% increase in revenue and a 25% surge in EBIT to 1.8 billion, establishing an 11.8% margin. Full-year results demonstrated substantial growth with a 19% revenue jump, and EBIT more than doubling to 7.2 billion, a remarkable 4 billion improvement. The segment’s margin reached 12.4%, just below the mid-teen target, showcasing its robust potential.

Ford Model E encountered a 14% rise in wholesales for the quarter and a 2% revenue increase. However, an EBIT loss of 1.6 billion was recorded. The year witnessed a 20% hike in wholesales, a 12% revenue increase, and an EBIT loss of 4.7 billion, both affected by challenging market dynamics and investments in next-generation vehicles. Conversely, Ford Blue’s revenue remained stagnant in the quarter, with an EBIT of 813 million and a margin of 3.1%. Over the year, Ford Blue experienced an 8% revenue surge, and achieved an EBIT of 7.5 billion, marking significant growth with a margin of 7.3% across all regions.

Guidance and Capital Allocation

Focusing on the outlook for 2024, Ford expects an adjusted EBIT between 10 billion to 12 billion for the full year, with the higher end aiming to set a record. Adjusted free cash flow is anticipated to be in the range of 6 billion to 7 billion, while capital expenditures are expected to remain steady at 8 billion to 9.5 billion, possibly moderately increasing year over year.

Emphasizing capital expenditures, it is forecasted that approximately 40% of the total will be allocated towards electric vehicles (EVs), encompassing ongoing EV powertrain investments and the construction of an LFP battery plant in Michigan. In response to the prevailing market dynamics, stringent cost scrutiny aims to achieve adjustments within the lower end of the capex range, reflecting proactive measures taken in 2023 to delay specific projects and reassess capacity and product launch strategies to align with profitability.

Market Dynamics and Segment Projections

The 2024 outlook incorporates a flat to slightly higher Seasonally Adjusted Annual Rate (SAAR) in the U.S. and Europe, assuming a range of 16 million to 16.5 million units for the U.S. market, and the nonrecurrence of the UAW strike. Ford Pro is expected to maintain its robust performance, targeting a remarkable EBIT between 8 billion to 9 billion, fueled by sustained growth and favorable product mix, although somewhat negated by moderated pricing.

Conversely, Model E’s losses are expected to widen to a bracket of 5 billion to 5.5 billion, attributable to ongoing pricing pressure and investments in next-generation vehicles. Ford Blue’s EBIT is projected to remain relatively constant with a range of 7 billion to 7.5 billion, reflecting a balanced market dynamic, including the impact of the all-new F-150. Additional efficiencies are anticipated to offset higher labor and product costs.

Reflections and Future Prospects

Jim Farley, President and CEO, acknowledged the positive momentum of Ford’s Ford+ plan, attributing the performance to capital discipline, a well-aligned global footprint, diverse product portfolio, and consistent cash generation. The company remains focused on capitalizing on growth opportunities, while steadfastly committed to enhancing both quality and cost efficiencies. The company is poised to leverage the ongoing industry changes and remains determined to navigate the challenging transition with a high-volume hybrid business and profitability targets in sight for new launches.

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Conclusion

Ford’s determined push towards growth and profitability reflects a broad, strategic realignment amidst challenging market dynamics. The company’s decisive stance on capital allocation, continuous adaptation to industry changes and a forward-looking approach to addressing EV investments sets the stage for a resilient performance while undertaking substantial growth ambitions. As the year progresses, the viability of these strategic endeavors will potentially provide a glimpse into Ford’s potential for sustained success.




Ford’s Strategic Plans for Electric Vehicles Unveiled

Ford Shines Light on Electric Vehicle Strategy

Building the EV Business and the Compliance Value

Marin Gjaja, the Chief Operating Officer, outlined the significant benefits of the Gen 1 electric vehicles for Ford. Gjaja emphasized the importance of building the EV business while obtaining compliance value. He stressed that credits from EV sales enable the company to sell high-margin ICE vehicles. Gjaja also highlighted the expansion of customer-facing capabilities and the development of a charging network through Ford’s dealers and in partnership with Tesla. The company aims to cater to the growing demand for electric vehicles and is using the feedback from the market to improve its engineering efforts for electric powertrains.

Maximizing Lifetime Value and the Path to Independent Profitability

John Lawler, the Chief Financial Officer, reiterated the critical importance of the EV business standing on its own and generating profits and returns on capital. He emphasized the need for the company to achieve independence in the EV sector and underscored the focus on creating tangible value through EV sales without relying on temporary compliance benefits. The goal is to ensure that the EV business becomes self-sustainable in the near future.

Electrifying Pro Customers and the Chinese Market

Jim Farley, the President and Chief Executive Officer, noted the increasing interest in electric vehicles among Pro customers, detailing a rise in EV sales to Pro customers from December to January. He also emphasized the significance of Ford’s approach to the Chinese market, highlighting the company’s strategy of collaborating with local partners to drive its electrification efforts efficiently. Farley discussed the complexities of the Chinese EV market and underscored the company’s low-capital approach to EVs in China while leveraging the capabilities of local partners.

Understanding Customer Sentiment and Market Dynamics

John Murphy from Bank of America Merrill Lynch questioned the challenges associated with EV adoption and the reported trends of customers trading in EVs for ICE and hybrids. He sought insights into how Ford plans to navigate the evolving market dynamics and whether the company could offset potential declines in EV sales with robust ICE and hybrid offerings. Murphy’s inquiry illuminated the significance of evaluating customer sentiment and market trends as Ford charts its path in the electric vehicle landscape.


Ford’s Jim Farley Declares Confident Projections for Industry Evolution

Ford’s President and Chief Executive Officer, Jim Farley, recently spoke about the evolving dynamics of the automotive industry. The conversation delved into the comparative analysis of traditional internal combustion engine (ICE) vehicles, hybrid electric vehicles (HEVs), and electric vehicles (EVs). Farley conveyed a strong sense of optimism and strategic planning regarding Ford’s role in the changing landscape.

The Advantages of Hybrid Electric Vehicles (HEVs)

Farley stressed the importance of customers’ ability to make quick, informed decisions when evaluating the cost-effectiveness of hybrid and ICE vehicles in the showroom. He highlighted the tangible benefits of HEVs, pointing out that customers can readily compare the breakeven point between an ICE vehicle and a hybrid. He further emphasized that customers do not need to alter their behavior significantly when opting for an HEV, which contributes to the overall appeal and cost savings.

The Evolving Landscape of Electric Vehicles (EVs)

In contrast, Farley acknowledged that the cost comparison for mainstream EV customers is more complex and less transparent than that for hybrid vehicles. EVs necessitate behavioral shifts, such as installing home charging stations, which can impact the cost of ownership. The CEO noted that a customer’s decision to opt for an EV often involves a more brutal examination of the total cost of ownership, and the payoff from this analysis is evident in their increased utilization of the vehicle.

Potential for Profit and Dealership Margins

Ford’s Chief Operating Officer, Marin Gjaja, provided insights into dealership profitability, indicating that dealers had been able to achieve margins comparable to those of ICE vehicles. Farley outlined Ford’s commitment to investing in Ford Pro, stressing the importance of dealers’ involvement in the company’s growth. The CEO implored dealers to invest in brick-and-mortar infrastructure and remote service vans to capitalize on the potential profitability of Ford Pro services.

Future Manufacturing Capacity and Market Confidence

Farley expressed confidence in Ford’s manufacturing capacity, stating that the company had planned a 40% growth in HEVs years in advance. He projected that around 25% of F-150 sales could be hybrids. He emphasized Ford’s flexibility in adapting to the changing market while lauding the scalability and robust pricing of HEVs in the face of increasing demand.

Challenges and Optimism in the Electric Vehicle Segment

Addressing concerns about EV profitability, Farley assured that Ford would not bring any vehicle to market unless it was certain of its profitability. The company acknowledged the challenges faced with the first-generation electric vehicles, citing revenue collapse and unoptimized cost structures. However, the CFO outlined plans to address these issues and optimize the cost structure of Gen 1 vehicles while emphasizing that Gen 2 vehicles would only be launched if they could attain profitability.

Farley’s confidence in Ford’s position and adaptability in the rapidly evolving automotive industry was evident throughout the discussion. The company’s strategic planning, commitment to innovation, and focus on profitability underscore its readiness to navigate the changing dynamics of the market and emerge as a leader in the industry.



Ford’s EV Strategy and Financial Outlook

Ford Revs Up EV Business in Quest for Profitability

As Ford Motor Company charges ahead with its electrification efforts, the company’s leadership has provided insight into its strategy for achieving profitability in the electric vehicle (EV) segment. Amidst ongoing investment in EVs, the company is poised to navigate various challenges and capitalize on opportunities in the rapidly evolving automotive landscape.

Optimizing across Frontiers

As Jim Farley, President and CEO of Ford, outlined the company’s approach, he emphasized the need to optimize across the frontiers of internal combustion engine (ICE) sales, improvement in hybrid electric vehicles (HEVs), and the acquisition of credits. By balancing these elements, Ford aims to bolster its EV business to stand on its own and be profitable, while acknowledging the presence of formidable competitors in the market.

Commitment to EV Capital Spending

Chief Financial Officer John Lawler disclosed that approximately 40% of Ford’s capital expenditure last year was allocated to EVs, with a similar anticipated allocation for the current year. Farley highlighted the collective effort of the team to drive the EV spending to the lower end of the range, underscoring the company’s commitment to prudently managing its resources.

Ambitious Break-Even Goal and Production Adjustments

Addressing the timeline for achieving breakeven in the EV business, Farley expressed caution, citing the need to navigate market uncertainties. Marin Gjaja, Chief Operating Officer of Model e, noted the expectation of improving gross margin quarter by quarter and outlined ongoing production adjustments to address inventory challenges. Gjaja emphasized the team’s focus on cost reduction and highlighted the reduction in Bill of Materials (BOM) for certain vehicle models, while acknowledging the challenging market conditions.

Efficiency and Cost Management

Regarding warranty costs, Lawler indicated a proactive approach to lower warranty expenses for the next generation of vehicles. He also highlighted expected efficiencies in material costs and the industrial system, offsetting the impact of labor contracts and product refresh costs. While acknowledging the upcoming expenses associated with product refresh, Lawler underscored the anticipated efficiencies to balance the costs.

Outlook and Sustainability

Farley reaffirmed the fundamental factors contributing to vehicle profitability, underscoring the long-term viability of the demand drivers. He emphasized the potential for sustained profitability, particularly in the commercial vehicle segment, propelled by factors such as government investment in infrastructure and advanced technology adoption. The CEO also emphasized the potential for higher attach rates and software-driven revenue streams to reshape the risk portfolio of the commercial business.

Contextualizing Industrial Costs and Competitiveness

Addressing industrial costs, Lawler contextualized Ford’s ongoing efforts to mitigate cost disadvantages in the Blue segment compared to competitors. He acknowledged the complexities involved in aligning costs and efficiencies, highlighting the anticipated flow of efficiencies in the coming year to counterbalance labor contract impact and product refresh expenses.




Ford’s Cost-Cutting Measures and Future Outlook for 2024

Ford’s Cost-Cutting Measures and Future Outlook for 2024

Consistent Progress in Closing the Gap

In a recent conference call, Ford executives provided insights into the company’s efforts to shrink the substantial cost gap with its competitors. John Lawler, Chief Financial Officer, expressed confidence in the progress, indicating that the gap is expected to narrow as part of a $2 billion cost-saving strategy. This initiative, resulting from improvements in both material and labor across the industrial system, signifies the dawn of a new era for the automotive giant.

Kumar Galhotra’s Ingenious Strategies

Kumar Galhotra, Chief Operating Officer at Ford, shed light on a series of fundamental alterations in its approach. Emphasizing the formidable headwinds faced in 2023, he outlined the alleviation of inflationary pressures and a stabilized supply chain as pivotal factors contributing to the targeted $2 billion in cost reductions. Galhotra’s ingenuity was evident, with innovative cost-saving methods such as optimizing vehicle designs to extract efficiencies and evaluating customer values to eliminate non-essential features, culminating in significant savings.

Analysts seek Encouraging Signs and Future Prospects

As the conference call continued, analysts sought reassurance regarding the anticipated benefits of these cost-saving endeavors. As the financial experts delved into the details, there was a predominant eagerness to discern the concrete green shoots and the timeline for these savings to materialize. Furthermore, discussions veered towards inventory volumes and projections for the upcoming year, marked by an insightful exchange of ideas and perspectives.

A Promising Path to 2024

Assuaging investor concerns, John Lawler, in response to analysts’ inquiries, offered a glimpse into the trajectory leading up to 2024. Notably, he anticipated a phased realization of cost-saving initiatives, with design actions and manufacturing improvements positioned to yield visible results. Lawler also lucidly communicated the anticipated volume growth and pricing prospects, reinforcing an optimistic outlook for 2024 for Ford.







Ford’s Electric Vehicle Strategy: Analyzing the Earnings Call

Ford’s Electric Vehicle Strategy: Analyzing the Earnings Call

Introduction

Following the recent earnings call, Ford Motor Company’s strategic shift to electric vehicles (EVs) has come under scrutiny. Analysts have raised thought-provoking questions regarding the company’s performance, future prospects, and cost reduction measures. In response, the Ford leadership outlined an ambitious plan for expanding their electric vehicle portfolio and addressing key financial concerns.

Ramping Up Electric Vehicle Sales

Ford’s President and CEO, Jim Farley, conveyed optimism about the growth of EV sales, emphasizing the favorable cost of ownership and the company’s expansion in Europe, where stringent regulations are driving electric vehicle adoption. He highlighted the introduction of new electric offerings, such as the Transit vans, which are expected to significantly bolster Ford’s presence in the electric vehicle market, particularly in the commercial segment.

The Chief Operating Officer of Model e, Marin Gjaja, echoed these sentiments, expressing confidence in robust sales growth on both the retail and Pro (commercial) sides. Gjaja emphasized the upcoming launch of the Explorer in Europe as a pivotal move that is poised to drive substantial unit volume growth for the company’s electric vehicles.

Cost Reduction and Margin Improvements

Analysts delved into the specifics of Ford’s cost reduction initiatives, particularly focusing on supplier cost reductions as a core component of the projected $2 billion in savings for the year. John Lawler, Ford’s Chief Financial Officer, shed light on the company’s focus on industrial efficiencies and design-related reductions, outlining a strategic approach towards achieving the targeted cost savings.

When pressed about the setbacks in achieving the Model e margin target of 8% by the end of 2026, Lawler acknowledged the evolving dynamics in the marketplace, indicating that the previously set target may not be feasible within the specified timeline. However, he underscored the significance of launching the next generation of vehicles and cultivating capital discipline to build a sustainable and profitable EV business.

Investor Insights and Conclusion

The earnings call provided valuable insights into Ford’s intricate electric vehicle strategy, with each executive offering nuanced perspectives on the company’s path forward. Amidst the expectations of market volatility and amplified competition, Ford remains steadfast in its commitment to driving innovation, achieving cost efficiencies, and solidifying its position in the burgeoning electric vehicle landscape.

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