Ford Motor Company

Good day, ladies and gentlemen. 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 third 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, you may press star, then one on your telephone keypad. To withdraw your question, please press star, then two. 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.

Thanks, Gary. Welcome to Ford Motor Company's third 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 are Marion Harris, CEO of Ford Credit, and Doug Field, Chief Advanced Product Development and Technology Officer for Ford Model E. 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 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 23. 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, Bank of America will host a fireside chat with John Lawler and Lisa Drake, our VP of EV industrialization and manufacturing engineering for Ford Model E. Now, November 7th, tech analyst Tony Saganaki will host a fireside chat with Doug Field at the Alliance Bernstein's Electric Revolution Conference in London. Now, I'll turn the call over to Jim Farley.

Thank you, Lynn. Hi, everyone. We really appreciate you being with us today. We introduced the Ford Plus plan for growth and value creation two years ago, and the investment thesis had three drivers. Leveraging our iconic vehicles, our strengths, both geographically and nameplates. Number two, add to that integrated hardware, software, and connectivity. into those vehicles, and then expand the total addressable market and unlocking value with Conquest EVs, new commercial vehicles, connected services and physical services, as well as mobility. So today I'd like to share a progress report on Ford's transformation, of course, update you on our autonomy strategy and our announcement, and of course, recap the quarter. Our ambition to be the leader in EV is already taking shape. In our home market, Ford Model E has now had an incredibly successful launch of three products. They're now in scaling, F-150 Lightning, Mach-E, and E-Transit. And each are attracting, interesting for us, almost all new customers. So this is growth. We're now the number two electric brand in the U.S., and we're just beginning with our scaling. Our decision to create blue for both ICE and hybrid vehicles has focused and energized our team to leverage what we do best at Ford. We have launched a string of hits that our customers not only love, but have lined up to buy, and we have so many more exciting products to come. We have made tough capital allocation and restructuring decisions like the one today, particularly in South America and our international market groups like India, and our results and cash flow, you can see in our results, have improved dramatically. Our balance sheet remains strong. We ended the quarter with nearly $50 billion in liquidity, even as we accelerate investments in connectivity and electrification. And what is perhaps the biggest untold story at Ford? We've successfully recruited a roster of an incredible talent from some of the world's best technology companies who are here to ship product. And they're supercharging our ability to design that software-defined vehicle and of course the software and services that go into those vehicles for the future. At the same token, And at the same time, we have still so much work ahead. Clearly, we need to continue to improve our competitiveness, not just on quality, but on cost and supply chain management. And our performance in China and Europe is not nearly as healthy as we'd like it to be. I can't overstate the sense of urgency we have to address these critical operating areas. I look forward to updating you on future calls. Now I'd like to share an important strategic shift in our autonomous vehicle strategy. Five years ago, we committed to invest a billion dollars in Argo AI to develop autonomous level four technology. In 2020, we completed the transaction that resulted in Ford and VW both owning the majority of Argo at equal levels. We still believe in level four autonomy, that it will have a big impact on our business of moving people. We've learned though, in our partnership with Argo, and after our own internal investments, that we will have a very long road. It's estimated that more than a hundred billion has been invested in the promise of level four autonomy. And yet no one has defined a profitable business model at scale. Based on the change in this outlook and our increasing promise and focus on level two plus and level three autonomy, we've decided to wind down the Argo business and impair the investment. We're working closely with Argo and VW on all the details. But here's what I want to focus on. Advancing level two hardware and software beyond what Blue Cruise can do today and ultimately enabling our customers to travel in very large ODDs or operating domains with their eyes off the road will give them back the single most valuable commodity in our modern lives, time. This has become mission critical for us at Ford. Ford has deployed Blue Cruise on many vehicles across hundreds of thousands of Blue Zone miles. We have strong technology partners working alongside us. And now we're going to bring in several hundred people from Argo, a brilliant collection of minds who've done a great job, who have done wonderful work in the L4 space. But their job and mission now is to help us create a differentiated level four Blue Cruise system. Yes, this is a huge addressable market and the potential for highly accretive new revenue streams tied to level three. But at the end of the day, this is about giving millions of people back time and eliminating the monotony of highway miles and stop and go traffic. And as for the future of true L4 autonomy, we don't expect there to be a sudden aha moment like we used to. Deploying L4 broadly, perhaps the toughest technical problem of our time, will require significant breakthroughs going forward in many areas. Reliable and low-cost sensing, that's not the case today. Algorithms that can operate on limited compute resources without constraining the operating time and domain of an electric vehicle. Breakthroughs in neural networks that can learn to operate a car more safely than a human, even in very complex urban environments. The muscles we have built with our new talent in broadly deploying a transformative Blue Cruise L3 system will ultimately be essential to the future of accessible driverless vehicles in everyday life. What's so exciting for me is that we are on the cusp of a transformational moment for Ford. We will introduce a lineup of not first, but second cycle EVs that are not only fully software updatable, and constantly improving, but they will generate an 8% plus margin. An amazing array of software-enabled services, not just Blue Cruise L3, but many others. Video services for safety and security. And we're already shipping a broad range of Ford Pro productivity tools and 100% uptime services for our commercial customers. That is a transformation for us. Let me now switch to the quarter. With Ford Model E, we're on track to reach our annual production rate of 600,000 EVs by the end of next year and 2 million by 2026. I'll say that close carefully. There is no change to our target. We're adding shifts to the Mustang Mach-E and F-150 Lightnings as we speak, and we're scaling production of E-Transit. In Europe, our all-new EV manufacturing center, Cologne, will be complete and turning out vehicles midway through next year. Our Ford Autosan JV in Turkey is not only scaling the two-ton E-Transit, But they're also going to be launching a brand new product, a one-ton e-transit custom electric, while breaking ground on a new battery plant that will supply for those transits. And in September, we're starting production. We've already started. construction of blue oval city in tennessee where we will build a new generation ev truck and batteries and at the same time we've already broken ground as well on the new blue oval sk battery plants plural in kentucky we're also further strengthening model e's ev supply chain Our team is making great progress in securing raw materials, importantly, the processing of those raw materials, and the battery capacity that we need. We expect the U.S. Inflation Reduction Act to have a wide range of positive impacts for both our customers and for Ford. What's not yet clear is the degree to which the IRA will drive customer demand versus offsetting our EV investments and growth. So let me touch on some of the potential benefits of the IRA. The first opportunity is our largest. the battery production tax credit of about $45 per kilowatt hour. From 23 to 26, we estimate a combined available tax credit for Ford and our battery partners could total more than $7 billion, with large step-up in annual credits in 27 as our JV battery plants ramp up to full production. The second benefit is often overlooked. I haven't actually read anyone in the media covering this, but it's super important for Ford, and that's the commercial EV credit. You know that Ford is the number one commercial vehicle brand in the U.S., and our commercial customers can now claim next year $7,500 per EV vehicle they buy with no restrictions on battery sourcing or manufacturing. Our preliminary estimate is that between 55% and 65% of all of our commercial vehicle customers will qualify. A third opportunity is retail. Ford EVs and our PHEVs remain eligible for the $7,500 tax credit until guidance is issued at the end of this year. Next year, we believe we'll meet the $3,750 critical materials credit requirement on certain Mustang Mach-E and F-150 Lightning models. In 2024, the rules will further restrict this critical materials credit, so we believe it's a fairly level playing field right now for all the OEMs as our supply chains of critical material extraction and course processing in the U.S. and FTA develops. The fourth benefit centers on the funding growth in our investments, such as geothermal energy credit, critical for Blue Oval City, the Department of Energy loans, grants to convert our domestic facilities to produce electric vehicles, battery plants, and other EV components. We're exploring all these capabilities and possibilities, as you can imagine. Now, as you know, We shared the new electric customer standards with all of our North America dealers last month at Vegas. That means a single, simple e-commerce platform, ultra-low vehicle finished inventory, non-negotiated pricing, and fast charges at all of our dealerships. Now early response from our dealers has been very favorable. Many are poised to invest to meet these new standards for electric vehicle customers. While other dealers will opt to specialize for Blue or for Pro. And there's real rewards for going first. Turning to Ford Blue. We view this business, Ford Blue, as growth. Last month, we unveiled the seventh generation Mustang. We showed the all-new amazing Super Duty and Churchill Downs in Kentucky. And these are all very well-executed products with incredible technology and upgraded electrical architectures with advanced powertrains, and they really set them apart from the competition. What you can't see is what we see. Our design studio is filled with new products and derivatives that will expand our hit franchises like F-150 and Bronco and Mustang and the new Maverick and the Explorer and the Ranger, all segments that were a leader among the leaders. And I can't wait to show you these new derivatives based on ICE and hybrid powertrains. Finally, let's talk about pro. In the US, customers trust us with more than 40% of the market for full-size commercial trucks and vans. In Europe, we're also the number one commercial vehicle brand. That's for seven years now, soon to be eight. Businesses of all sizes and types are using Ford Pro's vehicle as well as the suite of our services to lower their costs and improve their productivity. Now that includes multi-make fleets and fleets that are a mix of ICE and EVs. Ford Pro has a real opportunity to grow service and parts sales by offering better experiences like mobile service. We expect to have more than 1,200 mobile service units in operation globally by the end of this year. And they're driving significant dealer parts and service revenue. Actually, more than $10,000 per service unit per month. But the real game changer for us in the pro business is And parts and service growth is software. Software centered on productivity, telematics, security, and predictive failure of all components. In the third quarter, we saw our paid telematics for pro grow by over 40% sequentially for the third straight quarter. Our suite of Ford Pro software solutions keeps getting stronger and stronger as we launch new offerings like Ford Pro Fleet and the Pfizer Field Service Management software. Now, before I hand it over to John, let me end with this. We have many challenges as a company, and we're tackling them head on. That's clear from our third quarter results. At the same time, I'm so excited about the future we're creating with Ford+. We're building completely new businesses with the best of Ford talent and incredible new talent across not just Model E, but Ford Blue and Ford Pro. We're strengthening our product portfolio across the board, building on what we think is the strongest portfolio we've ever had. And we're tracking the scale to a global runway of 2 million EVs a year by 2026. And we're investing in growth. Taken together, this work statement is nothing short of refounding one of the world's most iconic companies to compete and win in a brand new era. There's no holding back. There's no looking back. There's no slowing down. In fact, we're accelerating our transformation. John?