Ford Motor Company

Good day, ladies and gentlemen. My name is Chad and I will be your conference operator today. At this time, I would like to welcome you to the Ford Motor Company second quarter 2022 earnings conference call. All lines have been placed on mute to prevent any background noise. After the speaker's remarks, there will be a question and answer session. If you would like to ask a question during this time, please press star then one to join the question queue. Should you need to remove your question from the queue, please press star then two. Please also note today's 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.

Thanks, Chad. Welcome to Ford Motor Company's second quarter 2022 earnings call. With me today are Jim Farley, our President and CEO, and John Lawler, our Chief Financial Officer. Also joining us for Q&A is Marian Harris, CEO of Ford Credit. Today's discussions include 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. Today's discussions also include 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 22. Unless otherwise noted, all comparisons are year-over-year. Company EBIT, EPS, and free cash flow are on an adjusted basis, and product mix is volume-weighted. Looking at our IR calendar, we have two upcoming engagements. Tomorrow, BNP Paribas will host a fireside chat with John Waller and Kumar Galhotra, president of Ford Blue. And on August 10th, at their auto conference in New York, JP Morgan will host a fireside chat with Ted Canis, CEO of Ford Pro. Now I'll turn the call over to Jim Farley.

Thanks, Lynn. Hello, everyone. The Ford team delivered a very solid second quarter in a challenging environment where we saw supply chain disruptions, a lot of new economic headwinds, and uncertainty as a whole. Importantly, we achieved these results as we advanced the Ford Plus plan, which is the biggest opportunity to create value at Ford since we scaled the Model T. And at the core of Ford Plus, three fundamental promises to our customers, distinctive and breakthrough products and experiences, an always-on relationship with Ford every day, every hour, every minute, and ever-improving post-purchase user experiences powered by software. Today, I'll give you an update on Ford Plus and the early results of our decisions to reorganize the company into three distinct segments, Model E, Ford Blue, and Ford Pro. Now, let me start with the progress we're making to lead the electric vehicle and digital revolution. What's lost in the industry's arm race of claims regarding capital invested, the number of top hats we all have, the promises of future leadership is one fundamental question. Who is and will be the best position to design truly distinctive and appealing products that people actually love? That's the question. Now, we've been overwhelmed with the demand for our first generation EVs, the Mustang Mach-E, the Lightning, and the E-Transit. These products are in the market now, and we have strong multi-year order banks. We're selling them as fast as we can make them. And you can't say that about many of the EVs coming to market now. We believe that these great new products will enable us to grab an outsized share of the rapidly growing EV market, combined with our healthy and vibrant shares of our ICE and growing hybrid markets. This month, we expect to produce 14,000 EVs globally. That's significantly higher than just a few months ago, and we have a clear path to reach a run rate of 60,000 EVs by the end of next year. And that will lead to a foundation to 2 million by late 2026. In fact, our anticipated growth rate in EVs through 2026 is more than twice what we expect for the global EV industry in total. Now, securing the raw materials to produce batteries at scale is critical to our plan. It's estimated that at best, 50% of all raw materials required to meet the combined announced targets for all EV OEMs is actually available, 50%. And this is why speed to securing supply is so critical and strategic. So is diversifying our battery chemistries to increase our flexibility, supply and profit, and to support different customer use cases. Last week, we announced a series of MOUs and agreements to fulfill our ambitious needs that I covered, and we are working to complete definitive agreements where necessary. Our Model E team moved quickly to capture these opportunities. To summarize, we've added battery chemistries and secure contracts delivering 60 gigawatt hours of annual battery capacity, which will help us support fully the 600,000 units of that 2023 run rate of capacity. We now have lithium ion phosphate or LFP battery packs coming for the Mach-E sold in North America next year and for Lightning in early 2024, creating more capacity for these high demand products. We've secured 70% of the battery capacity needed to support 2 million units by the end of 2026. And we struck a new deal with CATL on strategic cooperation for global battery supplies, as well as deals for direct sourcing of critical battery raw materials in the US, Australia, Indonesia, and more locations. And we have a plan to localize 40 gigawatt hours per year LFP capacity in North America by 2026. These deals are a strong start as we fortify our EV supply chain that's aligned with our sustainability and human rights principles. Now let's talk about the progress we're making in building out an always-on relationship with customers and that ever-improving user experience enabled by software after the customer buys the vehicle. Now, along with the product execution, these are really the relevant, sustainable advantages we see to create, in today's hyper-competitive market, a difference where the real competition is not legacy OEMs, but pure-play EV companies including emerging Chinese players. For example, more than 55,000 Ford customers have already driven nearly 10 million miles with Blue Cruise, our hands-free L2 system. That's just one year after the capacity was launched and we started OTAing this to our vehicles. We're using the data we get through Blue Cruise to continue to improve the customer experience. And as it happens, you can imagine a significant ADAS revenue profit stream being created by giving customers the ability to work, watch a film, or even take a nap during a long trip in their Ford. While the financial benefits of ADAS are clear, as is our Ford Pro services stack, they're relatively small now, but we're rapidly increasing the number of digital vehicles on the road, as well as attach rates of the enabling services. And over time, much of the SAS revenue will be deferred on our balance sheet, providing an annuity-like revenue stream that is highly accretive, something this company and this industry has never seen. Now, before I turn to Ford Blue, let me talk briefly about our connected EV dealer model in the U.S. Changes in the market have compelled Ford and our dealers to revisit how customers shop, buy, and own. and how they will do this going forward. We're moving fast as the transition to these digital EV platforms allows us to help our dealers provide better customer ownership experience post-purchase, and in turn enables them to expand their revenue and profit pools, expanding and improving their returns. We're working with our dealers to create a retail model better than what's offered by any traditional OEM and better than the startups. who are now scrambling to develop sales and service networks to support customers in an attempt to sustain and grow share and UIO. In the U.S. alone, if we can help our dealers increase service loyalty by just 20 points, that's $2.4 billion incremental revenue for them every year. Now, since March, we've conducted more than 30 workshops in the U.S. and Canada, reaching hundreds of our dealers. I have personally been involved in many of these meetings. What is clear to me, but not yet visible to the market, is that our dealers are embracing this change. They know the competitive threat is real, and they want Ford and their dealership to lead and win. And we have more to share as this develops. Now, turning it forward blue, the team is motivated by this sharpening focus on our ICE and hybrid products. We've added new talent and leadership to drive performance and focus in our trucks, our great family lineup, and our enthusiast vehicles we're so proud of. We've revealed new vehicles like the Bronco Raptor, the Bronco Everglades, the F-150 Raptor R, which my kids think sounds great. In the third quarter, we'll unveil an all-new seventh-generation Mustang at the North America International Auto Show in Detroit. It is a stunning car, and I'm so excited to share it with the world. And also this fall, we'll be introducing an all-new Super Duty pickup, the workhorse at Ford, and it sets a standard in our industry. There's much more to come. Our design center is filled with new products and derivatives that will further strengthen our hit vehicles in the ICE and hybrid franchises like F-150 and Bronco and Maverick, the brand new Global Ranger that's launching in Thailand and our new Everest. In short, our hottest and freshest lineup in recent history is getting even better. Now, in commercial vehicle market, Ford Pro, our industry-leading global business, is leading the change into an electric, software-driven world. Other OEMs are talking about large numbers of future electric orders. We're actually taking orders for manufacturing and selling commercial vehicles now. Through the second quarter, we've sold more than 3,000 E-Transit in the U.S. That's a market share of 95% in the full-size electric van market, 95%. In fact, our next two competitors combined sold just 159 vehicles. Beyond the vehicles, We're also rolling out our Ford Pro charging commercial solutions and the very exciting and fast-growing eTelematics software solutions. And boy, are they paying off. And in Europe, where we continue to be the leading commercial vehicle brand, we're already received 8,000 orders for our two-ton eTransit, and our new one-ton eTransit Custom goes on sale next year. Now our Ford Pro software business is growing quickly. Paid telematics subscriptions globally have grown over 40% sequentially for the last two quarters. Turning to quality. We've made solid progress on initial quality as you've seen in the recent J.D. Power's IQS study and our launches have improved. However, we continue to be hampered by recalls and customer satisfaction actions. Yes, this affects our costs, but more importantly, it falls short on our most fundamental commitment to our customers. Quality is our number one priority. In fact, we recently brought on Josh Halliburton from J.D. Powers to head quality. Now, the team is focused on three critical areas, prevention, detection, and remediation. We've instituted more robust engineering sign-off processes for the vehicles that are in the product development factory as we speak. We're driving much more frequent alignment with our supply base on quality. And when identified issues, we take actions quickly to resolve them to protect our customer experience, including by making much more frequent use of over there updates. And boy, has that worked for us. We have more work to do in this space, and we will keep you updated. Overall, we're pleased with the progress this year, but we are not nearly satisfied. We remain clear-eyed and determined to move with speed and determination on a Ford Plus transformation. The underlying strength of our business supports our 2022 adjusted EBIT guidance range of $11.5 billion to $12.5 billion, unchanged from April. Before I turn over to John, I want to end with this. There's context that's critical to how we think about implementing our Ford Plus plan. Traditionally, the auto industry has cut costs, often indiscriminately, as an effect, of course, from lower auto demands through economic softness and shifts for customer preferences. What we're undertaking in Ford is totally different than that. We're reshaping virtually every aspect of the way we've done business for a century. And we're doing that for a new industry, based on new technology, new skills, and a new promise for customer value. And yet cost reduction will happen in our ICE business because that's primarily what is made up of Ford today. But we're modernizing to take out unnecessary costs, redesigning work, and strategically investing across all of our auto businesses, ICE and hybrid, then EVs, and then Ford Pro, while at the same time transforming every function that supports them. Tweeping strategic change generates interest and speculation in the media, which we understand. However, we're going to comment on Ford Plus actions we're taking and how they're going to strengthen our company on our own schedule. John? Thanks, Jim.