Ford Motor Company

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 third quarter 2023 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 Antipa-Tyson, Executive Director of Investor Relations. Please go ahead.

Thank you, Gary. Welcome to Ford Motor Company's third quarter 2023 earnings call. With me today are Jim Farley, President and CEO, John Lawler, Chief Financial Officer, and Peter Stern, President, Ford Integrated Services. 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. Our discussion also includes forward-looking statements about our expectations. Actual results may differ from those stated. the most significant factors that could cause results to differ are included on page 26. Unless otherwise noted, all comparisons are year-over-year. Company EBIT, EPS, and free cash flow are on an adjusted basis. Now I'd like to turn the call over to Jim.

Thank you, Lynn. Hello, everyone, and thanks for joining us today. I wanted to start by thanking the Ford team who worked tirelessly and creatively over the past several months to reach a tentative agreement with the United Auto Workers. I'm pleased, so pleased for our employees. This week, I was able to visit each of the struck plants. I was impressed by their preparation for startup. And the feeling I got is people just want to get back to work. Once the deal is ratified, we will provide all of you a deeper look at the contract and its impact on our business. Right now, we're focused on restarting three important assembly plants. calling back more than 20,000 Ford employees to work, supporting our suppliers as they restart, and shipping lots of Super Duties, Explorers, and Broncos to our customers. It's been a challenging situation for sure. Matter of fact, our business is never short of challenges, especially right now with the evolution of the EV market and new global competitors from China, as well as the technology disruptions. But I am more excited and motivated than ever. Our team is making tremendous progress every day towards building a Ford that thrives at the intersection of fantastic and iconic vehicles, terrific brands, and especially software and services. We are deep into the development of our future software platforms, which provide the foundation for rapid innovation and a profitable new software and services business and constantly improving experiences for our customers. We believe Ford Plus is the right strategy to win in this constantly evolving industry transformation. We're building a more dynamic and less cyclical company, and we are nowhere near peak profitability. We have the right team and talent. and we are in the process of building a culture of excellence and execution. In a moment, John will detail the quarter, which I would call mixed. The strength of our products and revenues and businesses defined definitely came through in our results. But at the same time, we were negatively impacted by the strike, and our cost and quality remain a drag on our business. Now, last week, we made some important leadership changes. Kumar Gahultra, as COO, will now control the key levers for transformative change in our industrial system, powertrain, ICE and hybrid products, vehicle hardware engineering, cycle plan, quality, supply chain, and manufacturing. He'll work in tandem, of course, with Doug Fields, chief of our EV digital and design officer, to move us forward. I believe this will accelerate our progress on cost and quality, and I hope we get into that in the Q&A. These are my top two priorities. Overall, we are seeing the clear benefits of creating three distinct growth businesses, now with Ford Blue, Model E, and Pro. The story of Ford Blue comes down to product strength. Incredibly strong brands like Mustang and Bronco and Raptor They have durable pricing power and real choice between gas and hybrid. Ford is America's best-selling brand now through three quarters, even with the effects of the strike. And we have a wave of new products coming in the next few months. The new F-150, the Ranger, a brand-new Explorer, an Expedition, a Navigator. In fact, close to 60% of our volume and revenues in the U.S. will be new and refreshed next year. I am so thankful we've kept our foot on the gas to freshen our ICE and HEV products as we enter a changing market. And in Europe, we bring out new versions of Puma and Kuga, our high-volume gas and hybrid SUVs. And the Ranger pickup and our Everest SUV that's based on it continue to gain share in international markets. So, bottom line, Ford Blue will be strong and a growing business for years to come. We also remain bullish on Model E and our EV future, but clearly the market is a moving target. I'm optimistic because customers are smart and they're rational, and for many of them, EVs are a great choice. I've been spending a ton of time in our product development center with both Doug Fields and Alan Clark. And you should see the Gen 2 and Gen 3 EVs we're working on. Our Gen 2 all-new full-size pickup truck, for example, is one of the most thrilling vehicles I've ever seen in my career. Let me be specific. Stunning performance like no truck has ever performed. ...ability and unexpected innovation for truck customers far beyond the normal truck attributes. A super flexible cabin that feels like a lounge or a tiny office. Take the wheels off this truck and it's still a mind-blowing product. And a digital experience that totally is immersive and personalized. I take this truck seven days of the week over a Cybertruck. A great product is not enough in the EV business anymore. we have to be totally competitive on cost. Tesla actually gave us a huge gift with the laser focus on cost and scaling the Model Y. They set the standard, and we are now making real progress on our second and third cycle EVs that are in the midst of being developed today as we get closer to the introduction. While our Gen 2 EVs were targeting and to deliver an EBIT margin comparable to ICE by 2026, the dynamic changes in the market, pricing, adoption rates, regulations are forcing us to further reduce the cost of our EVs. The key levers to deliver this competitive cost structure are scaling, vertical integration, and batteries. So, let's double-click on each of these three. On scaling, this is much more than building new facilities or scaling high-quality batteries or thermal propagation. We're leveraging digital prognostic capabilities in our manufacturing lines to improve quality. We are also reducing complexity, and we are optimizing our vehicle design and engineering for manufacturability. Yeah, we're designing these vehicles for our manufacturing team. On vertical integration, this is the most fundamental change. We are insourcing batteries, inverters, scaling production of our drive units and gearboxes, and designing and producing unicastings in-house at Ford. In addition, on our next generation utility vehicles, vertical integration will increase by nearly 50%. This level of integration allows, along with the new zonal electric architecture, And designing in-house modules and battery cell to structure will allow us to significantly reduce material costs. Now, none of this will be easy and has some risk. And you've seen our competitors struggle as they build out and ramp up these capabilities. So we are so glad we started years ago on this journey. And finally, batteries. They're the single biggest cost component of any EV. Our more energy efficient Gen 2 products will use extreme aero to get the very smallest batteries possible for competitive range. And with our LFP batteries, we'll have the lowest or one of the lowest cost batteries assembled in the U.S. Our overall EV priorities are very clear. disciplined capital allocation and investment that drives profitable, high returning and enduring EV business. And we will constantly balance growth, scale and profitability. These great EVs will be paired with modern shopping and buying experiences that are transparent, will have non-negotiated pricing and a streamlined checkout and delivery that will come to life early in 2024. And this is also a significant cost reduction. I saved Ford Pro for the last because it's a massive driver of Ford's growth and profitability. Our competitors seem to be trying to cut and paste our strategy. But the reality is the moats we've built over many decades for our pro business won't be easy to cross. The network of literally thousands of local outfitters across Europe, North America, and China, and customer-driven engineering we have for vehicles like F-Series and Transit is formable across all those regions. Our commercial order banks are healthy. This may be a surprise to everyone. We see large backlog of infrastructure projects. Thank you, 5G and roadworks. And we have very loyal customers. Fleet orders, for example, for the 2024 Super Duty are coming in faster than last year's orders, and we expect strong demand to continue as more customers recognize what Ford has to offer in total. In addition to the new Super Duty, we are preparing to launch the new Transit Custom in Europe. Think of this product as a Super Duty for Europe. It's the best-selling vehicle in the UK, not the best-selling commercial vehicle, the best-selling vehicle, and the leading one-ton van in Europe. And it's a key profit pillar for Europe and one of the reasons why we stayed there. When it comes to software and services, Ford Pro is the tip of our digital spear. Customers know and trust our vehicles, of course, and we're building on this with software-driven services that provide businesses with data, insights, vehicle access, even vehicle control and functionality. This helps them drive productivity and efficiency in their fleet operations. And I've asked Ted Canis to also lead our large and profitable after-sales business. His focus will increase our post-warranty service business and profitability. He's already adding mobile service capability and delivering an effortless experience to both commercial and retail customers. There is so much upside in this after-sales parts repair and collision business, especially with Ted leading it and for Ford Pro. I want to briefly touch on China where our strategy to turn our business around is gaining traction. The restructuring of EV business there is nearly complete, and the internal combustion engine business is now profitable. We are now expanding China's role to a profitable export hub, including Ford Pro. We've already exported a record number of vehicles so far from China to markets like Mexico, South America, and Asia. there is so much more opportunity ahead for us. Yes, the China market is extremely competitive in the middle, but Ford can succeed by staying asset light, partnering where it makes sense, and competing in very narrow segments where we can clearly win, like commercial vehicles, off-road vehicles, large SUVs, and Lincoln. Finally, I'm so pleased to have Peter Stern on today to share more about our newly formed Ford Integrated Services, which will create and market valuable software-enabled customer experiences across Blue, E, and Pro. Now, this is transformational because the cornerstone of Ford Plus, the plus in our plan, is creating incredible customer services and experiences enabled by not just hardware, but software. There's simply no one in the world better able than Peter, who is a driving force behind services at Apple, to build this strategically vital business for us. Peter, over to you.