Ford Motor Company

The conference is now in presentation mode. Good day, everyone. My name is Layla, and I will be your conference operator today. At this time, I would like to welcome you to the Ford Motor Company third quarter 2024 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, and if you have joined via the webinar, please use the raise hand icon, which can be found at the bottom of your webinar application. If you have joined by phone, please dial star five on your keypad to raise your hand. At this time, I would like to turn the call over to Lynn Antipas Tyson, Executive Director of Investor Relations.

Thank you, Ayla. Welcome to Ford Motor Company's third quarter 2024 earnings call. With me today are Jim Farley, President and CEO, and John Lawler, Vice Chair and CFO. Also joining us today is Kathy O'Callaghan, CEO of Ford Credit. Today's discussions include some non-GAAP references. These are reconciled to the most comparable U.S. gap 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 actual results to differ are included on page 20. Unless otherwise noted, all comparisons are year-over-year. Company EBIT, EPS, and free cash flow are on an adjusted basis. Lastly, I'd like to call out a key near-term IR engagement. On November 20th, John Lawler, Vice Chair and CFO, and Sherry House, VP Finance, will participate in a fireside chat with Dan Levy at the Barclays Global Automotive and Mobility Tech Conference in New York. Now I'll turn the call over to Jim.

Thanks, Lynn. Hi, everyone, and thank you for joining us today. I wanted to start by thanking our global team for their commitment to Ford Plus and to adding and creating value for all of our shareholders. I'd like to touch on an overview of our strategy and why we believe we're so well positioned versus the competitors in key areas. And John will take you through the Q3 results and full year outlook. Several years ago, we restructured our overseas operations and our global footprint is a key strength for Ford. We restructured in Europe, South America, India, and China. Collectively in 2018, those regions were losing $2.2 billion and burned $3.4 billion in cash. Now all of those regions are collectively profitable. We're going to continue to stay laser-focused on cost and getting leaner as a company, but our team won't be distracted by major international restructuring facing other OEMs, especially in China. And speaking of China, we've gone asset-light for a couple years, as we've told you. We have strong JV partners, and we have a growing export business. In fact, China and its exports are now contributing over $600 million to the company's EBIT this year. Another area of strength is our EV strategy, which I wouldn't trade for any of our competitors. We moved early. We've learned a lot on Gen 1 from our customers, the global market dynamics, and what it requires to be fit to compete. No doubt there's a global price war and it's fueled by overcapacity, a flood of new EV nameplates, and massive compliance pressure. In our home market in the U.S., no OEM is immune. Since Q1 of last year, EV volumes have grown 35%, while revenues in total are flat at $14 billion. That means the progress on volume has been fully offset by prices. We're expecting roughly 150 new EV nameplates to hit North America by the end of 2026. And some of our competitors are already resorting to very aggressive lease tactics, even on their brand new products, which creates huge residual risk and overhang and brand damage. What we're doing about these market dynamics, well, we're focused on cost. We've already reduced $1 billion in our EV costs this year. We remade our battery footprint. We trimmed our capacity by 35% in line with where we think the market will be in a few years. We accelerated the mix of our batteries, emphasizing LFP will be the first one to manufacture in the US, and that battery will leverage the IRA production tax credit. We're shifting new launches. focused on getting the products we do have in our ev portfolio profitable within the first 12 months and we're deep into the design and engineering of our next generation vehicles boy are we excited about these coming out in the next few years you know in 40 years in the industry i've seen a lot of game changer products but the mid-size electric pickup designed by our california team has got to be one of the most exciting It's incredible package and consumer technology for a segment we know well. It matches the cost structure of any Chinese auto manufacturer building in Mexico in the future. How do we know that? Because 60% of the bomb has already been quoted. Another advantage for us, obviously, is Ford Pro. It's unique because we're combining product strength with software and repair services all linked together. Don't be confused by other press releases on the ground game in the commercial market. Because what our customers see is that we have reach, a leading product portfolio, an incredible software portfolio, as well as gaining strength in our repair services. All of that driving sticky, reoccurring, high margin revenues. It turns out in Pro, our dealer network is one of our key advantages. In the US, we have the largest commercial vehicle network. and that's essential to drive those attach rates to services. And our software is also a competitive advantage. Our paid subscriptions delivered a growth of 50% in revenue, 30% just this quarter, and our gross margins are over 50%. There's incredible upside at Ford for our software to grow our install base, attach rates, and ARPU. Another strength is our diverse powertrain lineup. For example, in the U.S., the hybrid pickup sales at Ford have more than doubled in the past two years. We now have a nearly 80% market share of hybrid pickups. A lot of our companies shunned hybrids, and now they're scrambling, but it's going to take them years to catch up. Interestingly, in our home market, Ford is the number one ICE brand, the number two EV brand, and the number three hybrid brand. Taking a step back, clearly our strategic advantages are not falling to the bottom line the way they should. Cost, especially warranty, has held back our earnings power. But as we bend that curve, there is significant financial upside for investors. By design, 70% of the bonuses for our managers is tied to cost and quality, and more than half of our long-term incentives as leaders is tied to TSR. Let me double-click on the EV business. We applied lessons really early that we learned on Mustang Mach-E across our lineup. In the last 24 months, we've reduced the Mustang Mach-E's cost by $5,000 per unit. As you know, Mach-E is second to Model Y in the segment for sales and transaction prices, despite being in the market now for several years. And we continue to break down the friction or barriers to adoption for mainstream ICE customers. We're the first to join Tesla's supercharger network, and we'll be shipping about 100,000 adapters by the end of this year. We're the first to offer complimentary home charging and installation. We call it the Ford Power Promise. And we've seen a huge uptick in interest on our website from the power promise. But our dealers are also becoming a competitive advantage for mainstream customers. Take, for example, Tim Hovick and his team at Santan Ford in Arizona. In the quarter, one of the months, they sold 137 electric vehicles. And Arizona is not a ZEV state. These are incremental sales with solid gross profits for the dealers. And we're building on that know-how for the last couple of years in scaling and being number two across our whole U.S. dealer network. All of our 3,000 dealers are primed to sell EVs now. We have 7,000 trained EV specialists and 14,000 dealership hours have been spent on EVs now. Our dealer network has already installed 800 fast chargers across the US and Canada, and many more are on the way. Next year, we expect to improve the trajectory of Model E's business through cost, scaling, and we're not trading wooden nickels inside the company for emissions credits. That won't change the economics of our EV vehicles and the company as a whole. Turning to pro, we're the first OEM to segment our customers between retail and commercial. And it starts by having a great product lineup and leaning into the future. About 9% of transit sales are now electric vehicles in the quarter. That's up 1.5 percentage points from a year ago. Our super duty has more variants than any other OEM. And we're bundling vehicles and services to provide unique value for our customers. What I mean by that is about 13% of our EBIT for pro now comes from repair services or software. We think that will grow to about 20% by 2026. We have the largest service network in North America. We're on track this year to add over 4,000 commercial service bays and 2,500 pro mobile service units. That, by the way, is up 50% year over year. Our mobile repair orders are up 60% year over year. And now almost one out of 10 pro repair orders is done by a mobile service truck. Globally, Ford Pro Intelligence subscriptions rose 30% in the quarter. We now have about 630,000 subscriptions. As I said, that's a revenue growth of 50%. We're adding more and more product functionality and features that third-party software companies can't offer because it's tied to the product, including remote vehicle lock and unlock, limits to our top speed and acceleration. Yes, we are seeing more pricing pressure on Pro in the second half, but that was consistent with our original guidance for the year. Demand is also in line with our expectations. We're seeing pent-up demand for Super Duty cabin chassis and transit wagons. And then Ford Blue. Let me double-click for a second on that business. First, we have an incredibly fresh lineup across the globe. And we're going to add to that. We have four key U.S. launches on deck. The Maverick and Bronco will be launching in the fourth quarter with new derivatives and a freshened product. And we have an all-new Expedition Navigator launching early next year. In Q3 in the U.S., our share was up 40 basis points to 12.6%. Our ATPs in September were in line with the industry, and the Ford brand continues to transact higher than the average non-premium brand. Now let me unpack the inventory. We ended the quarter with 91 days of gross stock and 68 days of dealer stock. That's a little higher than our target range of 50 to 60 days, but the mix is really good. Now, we're intentionally holding extra inventory through the year end to protect sales during the Q1 launch activities that I mentioned. And adjusting for that, we're right in the target range for us as we start 2025 from inventory standpoint. The biggest opportunity of the company clearly is cost and warranty. We're attacking both of these and we will realize the upside. The biggest opportunity is warranty. And here's some evidence of things on the input metric side that are really improving. Our three MIS or three months in service quality is getting a lot better. 31% increase in the last three years. This year, the high-volume vehicle lines like F-150 and Escape had huge launches and really had virtually no warranty spike. J.D. Powers typically sees a 92% increase in defects during a launch. Our launch production losses have also been cut in half from the last year, and these are very large-scale launches like F-150 and Explorer. Another key improvement that we're seeing is our ability to OTA and improve our vehicles in the field. We've updated 4 million vehicles at Ford this year and 20 million total since we started doing OTAs. We can now update 30 different vehicle modules, well beyond the sink and infotainment modules. The OTAs on average save our customers five to six days waiting for repairs, and of course it lowers our cost of warranty. All improvements to warranty will take time to reduce our warranty expense, maybe up to 18 months, but we're moving the needle on all the inputs. Taking a step back, I believe we're in a very strong competitive position. We have a lean and profitable international business with no distractions. We have a fresh and appealing lineup, which will get even fresher. We have a strong and diversified powertrain strategy that gives customers choice and gives us the flexibility and reach. We're already on our second generation of electric vehicles. They'll be launching in the next couple of years. We'll reduce the losses short term on our Gen 1 products and set us up to be a global competitor in the long term. We have a vibrant, growing industry. software and repair business for Pro, and Pro is clearly a strategic advantage for the company. We're going to keep doing the hard yards to capture the tremendous upside in cost and warranty defects present to us, and we're going to bring it home for our valued investors. John? Thanks, Jim.