Ford Motor Company

Good day, ladies and gentlemen. My name is Jason and I'll be your conference operator today. At this time, I would like to welcome you to the Ford Motor Company fourth 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. To ask a question, you may press star then one on your touchtone phone. To withdraw from the question queue, please press star then two. At this time, I would like to turn the call over to Lynn Antipas Tyson, Executive Director of Investor Relations.

Thank you, Jason. Welcome to Ford Motor Company's fourth 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 discussion includes some non-GAAP references. These are reconciled to the most comparable US 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 24. 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. I want to call out a few near-term key IR engagements. On February 15th, Jim Farley and John Lawler will participate in a fireside chat in New York with Rod Lash at the Wolf Global Auto Autotech and Mobility Conference. On March 23rd, at the New York Stock Exchange, we will hold a teach-in about our new Ford Plus segment reporting. This event, featuring John Lawler and Kathy O'Callaghan, our controller, will be webcast. And I'm also pleased to share that our next Capital Markets Day will be Monday, May 22nd at our headquarters in Dearborn, Michigan. Please save the date. We'll have more information about this over the coming weeks. Now I'll turn the call over to Jim.

Thanks, Lynn. And hi, everyone. We appreciate you all joining us. I'll start by addressing the obvious. Our fourth quarter and full year financial performance last year fell short of our potential. And while we generated record cash flow, we left about $2 billion of profit on the table due to cost and especially continued supply chain issues. These are the simple facts. And to say I'm frustrated is an understatement because the year could have been so much more for us at Ford. Now, I know the question you must be asking, why Ford with that incredible product lineup and all the restructuring overseas, Why aren't you delivering higher profits and more competitive margins? And it's the right question. So while we're making progress, it's hard work. As with any transformation of this magnitude, certain parts are moving faster than I expected and other parts are taking longer. Now, the first part of our transformation is to completely overhaul our industrial system. Product development, manufacturing and supply chain management to deliver better costs and quality. This is critical because it provides the foundation for everything else we do. It funds our future, that second transformation, which we're aggressively building today. Building new and incredible new growth businesses like Model E and of course Ford Pro, our huge bet on commercial vehicles, which will be high growth high margin, not just products, but software and services business. Now, the second transformation, the growth part, is going better than I imagined. At this point in our journey, I did not expect to be number two in EV sales in the U.S. I didn't know that Lightning would be completely sold out, and I didn't predict that Blue Cruise would be the best hands-free autonomy system in the market. or the Ford Pro software sales would be growing off the charts. And that doesn't even touch all the incredible next generation EVs and software platforms that will soon be entering the market. Bottom line, in a double transformation, we have to significantly improve our cost and our quality, but at the same time, grow to fulfill that huge promise in Ford Plus. And frankly, The first part of the transformation has not moved fast enough. Now, this is what we should be known for. It's our legacy, and we'll show we can do it again. We have deeply entrenched issues in our industrial system that have proven tough to root out. Candidly, the strength of our products and revenue has masked this dysfunctionality for a long time. It's not an excuse, but it's our reality. and we're dealing with it urgently. Over the past year, we have made sweeping leadership changes and brought in world-class talent to re-energize and rebuild a leading industrial organization. We've committed company-wide to implement a lean operating system that will scrub billions of dollars of waste out of our company. And we are shining the light on every inch of our legacy business with knowledge that we must do better every day. This has been humbling for both me and our team. That said, I have never been more convinced about our plan. I cannot wait to get into work every day because I am so optimistic about our plan and what we are creating here at Ford. Now, I respect our competition, but I would not trade our places with anyone. Why? Because we have a real strategy to grow. We have incredible products, both on the road and the ones you haven't seen in the pipeline. And I believe we now have a world-class leadership team, made up of new and existing talent, ready to compete and win. These strengths will shine through. Ultimately, the proof will be in our results. That's exactly how it should be. We appreciate those who place their faith in Ford, and we are committed to creating value for all of our stakeholders. So with that, let me quickly cover some areas of focus. First, we remain committed to disciplined capital allocation. You saw this in the actions we took in Brazil, in India, and most recently in Argo. And now, South America and IMG are healthy and generating sustainable profits. This work is never done and will continue to be the focus for us going forward. Our balance sheet liquidity remains strong and our ability to generate free cash flow has really improved significantly. And this is allowing us to accelerate our investment and growth, of course electrification, but also pro and software while importantly also returning capital to our shareholders. we now have created three distinct customer facing business segments blue e and pro which have given us greater clarity and insights into each of these businesses and how we can improve each of them uniquely so let me cover a couple highlights i'm going to start with pro my favorite the not so secret weapon at ford ford pro embodies all of our growth levers and they capitalizes on our commercial vehicle sales leadership and scale to build a world-class ecosystem that delivers great value to our customers and profitable growth for us at Ford. In North America, our vehicle share is almost twice that of our closest competitor. And in Europe, Ford has been the number one commercial vehicle brand for eight years in a row. Let me bring this point home. Here in North America, home market, Super Duty, our most important pro vehicle, owns half the mining business. It owns half the emergency response business and half the utility business. And the requirements for all these customers are complex. They're not going to commoditize. And they require a partner who deeply understands these unique businesses and is dedicated to providing a mix of vehicles, but also services. that can improve uptime and total cost of ownership. And we know these customers will pay for software that will enhance their productivity. Now, we're going to future-proof this business by leading the commercial electrification solutions as well, both at E-Transit and F-150 Lightning today. E-Transit is already America's top-selling electric van with 73% market share. 60% of all of our U.S. fleet managers plan to add an electric vehicle within the next two years to their fleet. And that's even before the $7,500 IRA tax credit that was announced and applies irregardless of the location of raw materials or batteries. This year, Pro really gets going. We introduce our most important vehicle, gets refreshed, the new Super Duty pickup, and in Europe, the Super Duty equivalent, we have an all-new one-ton transit. And Ford Pro's high-margin software business will continue to grow, especially software for fleet management, telematics, and charging. Last year, these subscriptions for software grew over 70%, reflecting new software offerings, better platform for our software, and contracts. and growth in fleet charging attach rates, which are close to 50% now. We're also increasing our sales of parts and services via a network of 1,000 mobile service vehicles on the road in North America and Europe, and over 1,400 specialized commercial vehicle dealerships, many of which open 24-7. In fact, last year, mobile service repair orders increased 85% for us in Perot. And this improves the customer experience while importantly increasing the attach rates of our high margin parts business. Now moving to Blue, the team is focused and has delivered the freshest and most appealing product lineup in our industry. We know that typically the fresher the ICE portfolio, the greater the pricing power. So our decision to move away from sedans and commoditized utilities to vehicles like Bronco Sport and the Big Bronco, the Maverick, the Puma in Europe, and hybrid powertrains has really paid off. Ford gained nearly one point of market share here in the US last year. And we expect 2023 to be another big strong year of share growth. Ford Blue is a growth business for the foreseeable future, with strong profits and robust free cash flow. In F-Series, was America's best-selling truck for 46 consecutive year now, outselling its second place competitor by more than 140,000 trucks. We're launching even new pickups like the new Ranger here in North America and South America after we've already launched the new Ranger in Asia and Europe last year. In addition, Blue is going after billions of cost improvements from engineering to manufacturing, to our billing material. And in quality, we have work to do. Ford has been the number one in recalls in the US for the last two years. Clearly, that's not acceptable. We've overhauled our entire enterprise quality operating system. And we are already seeing improvements in initial quality for vehicles coming out of our plants here in North America. and Model E. It's operating with a startup intensity to build profitable EVs with differentiated industry leading portfolios that customers are going to love. In the US, our EV sales growth is twice the rate of the EV segment. And more than 60% of our Model E customers are new to Ford. The F-150 Lightning has been America's best-selling electric pickup since it launched. And the Mustang Mach-E remains a huge hit for our customers. We remain on track to reach our annualized EV production capacity of 50,000 units per month, or 600,000 units globally by the end of this year. For reference, in the fourth quarter, our run rate of production was more like 12,000. So 50,000 is a big growth. And we are on plan for that 2 million units of incremental capacity by the end of 2026. Now, to deliver this incredible growth, as we speak, throughout facilities in North America, we're adding shifts, expanding our facilities, building out new battery capacity and assembly capacity. Construction is in full swing in Tennessee and Kentucky, on our Blue Oval City. and our three Blue Oval SK battery plants. And in Europe, we're moving ahead with a new commercial vehicle battery facility in Turkey. Now, critical to our plan is securing the necessary raw materials for these batteries to get to that 2 million unit rate, especially lithium and lithium hydroxide and nickel. We expect to have 100% of raw materials we need for the 2 million unit run rate secured by the end of this year. Now we are deep in the development of our second generation EVs, including our next generation electric full size pickup, which by the way, is awesome. These EVs will be fully software updatable. That means a brand new electrical architecture, and they're going to be radically simplified. Imagine three body styles, each with volume potential of up to 1 million units and just a handful of orderable combinations. That's what we're doing at Ford for the second generation of products. And that means higher customer set, better quality, lower bill material, and lower manufacturing costs. When we start reporting according to these new segments in the fourth quarter, you're going to have complete visibility in the Model E's margin trajectory, and understand the key levers to achieve our Model E EBIT target of 8%. We're already making the customer buying experience better with less friction. Now, this is only going to accelerate when the new Model E dealer program takes effect in January next year. This program has been adopted by nearly two-thirds of our 3,000 US dealers and it's based on a radical redesign on our customer experience. Next January, we'll be selling EVs in high volume with virtually no inventory, a simple e-commerce platform for our customers, non-negotiated price set by the local dealer, and remote pickup and delivery for all customer experiences. We're also expanding Blue Overcharging Network at all of our dealers, and we'll have dealer staff trained not only on software, but all the EVs. Now, I've said before, software and experiences will be the key differentiator for our industry. I mentioned earlier that Blue Cruise, our driver assist hands-free technology, was just tested by Consumer Reports and judged the best hands-free autonomous system on the market. Let that sink in for a while. The best on the market. Now, have you not experienced Blue Cruise? I challenge you to go out and do your side-by-side comparison with our two major competitors. And at the end of last year, our customers using Blue Cruise have now traveled 42 million hands-free miles. So we're scaling incredibly rapidly. That's a four-fold increase in the millions of miles since the second quarter of last year. And we have incredible software talent making this system better every day, including those 600 former Argo engineers who are now working full-time at Ford on our autonomous systems. Now, before I hand it over to John, just a few things. Ford's a different company. Today, we're all about building a stronger customer-focused business that generates sustainable, profitable growth and returns above the cost of capital. While our 2022 results fell short of my expectations, I've never been more excited about our future because we have the right plan, the right structure to succeed, the best team on the field, and real strategic clarity. This year is about execution. It's time for us to deliver, and we will with relentless attention to our founding principles, drift and growth. And we're hitting the ground running, John.