Ford Motor Company (NYSE:F) Q4 2022 Earnings Call Transcript

Ford Motor Company (NYSE:F) Q4 2022 Earnings Call Transcript February 2, 2023

Operator: Good day, ladies and gentlemen. My name is Jason, and I will 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 speakers’ remarks, there will be a question-and-answer session. At this time, I would like to turn the call over to Lynn Antipas Tyson, Executive Director of Investor Relations.

Lynn Antipas Tyson: Thank you, Jason, and 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 Marion Harris, CEO of Ford Credit. Today’s discussion includes 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 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 15, 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 23, at the New York Stock Exchange, we will hold a teach-in about our new Ford+ 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 22, 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.

Jim Farley: Thanks, Lynn, and hello, 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 as 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 cost and quality, this is critical because it provides the foundation for everything else we do. It funds our future, that’s second transformation, which we’re aggressively building today. Building new and incredible new growth businesses like Model e and of course, Ford Pro are 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 BlueCruise 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+. 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 will 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 functionality 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 reenergize 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’ve never been more convinced about our plan.

I cannot wait to get into work every day because I’m 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 saw this in the actions we took in Brazil and 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 in growth, of course, electrification, but also Pro and software, while importantly, also returning capital to our shareholders. And 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 of 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 it 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 vehicle brand — commercial vehicle brand for eight years in a row. Let me bring this point home. Here in North America, whole market, Super Duty, our most important Pro vehicle, owns half the mining business. It owns half the emergency response business and have 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 of batteries. This year, Pro really gets going. We introduced our most important vehicle gets refreshed, the new Super Duty Pickup. And in Europe, the Super Duty equivalent, we have an all-new 1-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 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 opened 24/7. In fact, last year, mobile service repair orders increased 85% for us in Pro. 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 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 U.S. 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. An 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 in 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 bill of material. And in quality, we have work to do. Ford has been the number one in recalls in the U.S. 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 start-up intensity to build profitable EVs with differentiated industry-leading portfolios that customers are going to love.

Photo by Dan Dennis on Unsplash

In the U.S., 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 by the end of — 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, through our facilities in North America, we’re adding shifts, expanding our facilities, building out battery capacity and assembly capacity.

Construction is in full swing in Tennessee and Kentucky on our BlueOval City and our three BlueOval 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 electric 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 sat, better quality, lower bill material and lower manufacturing costs. When are 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 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 2/3 of our 3,000 U.S. dealers, and it’s based on a radical redesign on our customer experience.

Next January, we’ll be selling EVs at 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 BlueOval charging 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 BlueCruise, our driver assist hands-free technology, was just tested by consumer ports and judge 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 BlueCruise, 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 BlueCruise have now traveled 42 million hands-free miles. So we’re scaling incredibly rapidly. That’s a fourfold 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 is 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 are hitting the ground running. John?

John Lawler: Thanks, Jim. As Jim pointed out, our performance in 2022 was below our expectations, and our industrial platform is frankly not where we need it to be. The simple way I measure this is by looking at our cost of goods sold as a percent of revenue and then compare it to our competition. You’ve all done it. We’re much higher. And this speaks to the significant operating deficits we have in product development, manufacturing and procurement. And this is no different from the tough capital allocation choices we made on our geographic footprint and product portfolio. Choice is designed to yield higher quality growth and improved returns. And we are now applying that same level of discipline to our industrial platform with urgency.

Now on the positive side, our product portfolio has never been stronger. Our new vehicles are a hit with our customers. Our iconic vehicles remain market leaders, and we continue to make strategic and capital allocation decisions to drive growth, strengthen our competitive position and produce returns above our cost of capital. So turning to the year. We generated a record $9.1 billion in free cash flow, well above our cash conversion target of 50% to 60%. And importantly, most of the free cash flow came from the Automotive business, and this reflects more disciplined capital allocation, including the restructuring of our operations outside of North America, which until recently was a significant source of cash burn. Our balance sheet remains strong, and we ended the year with $32 billion of cash and $48 million of liquidity.

This, coupled with the improvement in free cash flow, provides us with ample flexibility to both fund our growth and return capital to our shareholders. In fact, today, we declared our first quarter regular dividend of $0.15 per share as well as a supplemental dividend of $0.65 per share, reflecting our strong free cash flow and the monetization of our Rivian stake, which is now nearly complete. Going forward, we intend to target distribution of 40% to 50% of free cash flow, consistent with our focus on total shareholder return. Now for the year, we delivered $10.4 billion in adjusted EBIT with a margin of 6.6%. And as Jim said, by better executing the things we control, we should have generated as much as $2 more in adjusted EBIT. For example, the instability of our supply chain and production plans caused us to not only deliver lower- than-planned volumes in the fourth quarter but also incur higher costs through premium freight and other supplier charges.

Now let me give you a quick overview of how our ’22 segments performed recognizing that beginning with our first quarter 2023 results will no longer have the automotive segments with regional breakouts. Now North America delivered $9.2 billion of EBIT, an improvement of $1.8 billion, driven by higher net pricing and increased volume, which was partially offset by higher commodities and other inflation-related cost increases. EBIT margin was 8.4%. We continue to maintain a healthy order bank, and the team is busy preparing the launch of the all-new Super Duty and our seventh generation Mustang later this year, and both of those are incredible products. In South America, we delivered a profit of over $400 million, and the region is now derisked and sustainably profitable.

In Europe, we were slightly above breakeven for the year, but as our fourth quarter results showed clearly below our target. Given the changing macroeconomic environment and demand environment in Europe, we will make the changes necessary to deliver a sustainable business that consistently generates returns above our cost of capital. Our core strength in the region continues to be our leading commercial vehicle business. In China, we posted a loss of about $600 million, driven by increased investment in EVs. Lincoln continues to be our profit pillar in the region, but clearly, we have more work to do to ensure our business is growing sustainable and delivering appropriate returns. Our International Markets Group earned more than $600 million, driven by the launch of the Ranger and our decision to exit India.

And similar to South America, the region is now primed for sustainable profitability. And finally, Ford Credit had another solid year, delivering EBT of $2.7 billion, which was down $2.1 billion from the prior year, reflecting lower credit loss and lease residual reserve releases, lower financing margin and lower lease return rates. Now given the continued uncertainties in the macro environment, I want to provide some context to how we’re thinking about 2023. For the full year, we expect to earn $9 billion to $11 billion in adjusted EBIT, and that assumes a SAR of 15 million units in the U.S. and 13 million units in Europe. We expect to generate adjusted free cash flow of about $6 billion and for capital expenditures to be between $8 billion to $9 billion.

Our adjusted EBIT guidance includes various headwinds and tailwinds and that we believe could impact our business in the coming year. And for example, when you think about the headwinds, they include an expected mild recession in the U.S. in moderate recession in Europe, higher industry incentives as supply and demand come back into balance. Ford Credit EBT of about $1.3 billion, and that’s about $1.4 billion lower than in 2022, reflecting unfavorable lease residual and credit losses and the nonreoccurrence of derivative games. We expect a continued strong dollar. We also expect about $2 billion lower past service pension income. And we’re also going to continue investments in growth, including in customer experience, connected services and CapEx as we build out our growth plan.

Now tailwinds include improvements in supply chain and industry volume, launch of our all-new Super Duty and then, of course, lower cost of goods sold, including efficiencies in materials, commodities, logistics and other parts of our industrial platform. Now before taking questions, let me briefly touch on our new financial reporting as well as plans for our next Capital Markets Day. On March 23, we’ll hold a teach-in at the New York Stock Exchange. And I’m really excited about this opportunity because it will be our chance to take you through how the new Ford+ segments will alter our financial reporting. The changes will include how revenue, cost products and assets are assigned to each segment. At the teaching, we’ll also share our recast financials for both 2021 and 2022, and we hope many of you join us at the New York Stock Exchange in person.

But we will also broadcast a webcast live, and will be — and will post a toolkit and other materials to orient you around all the materials and help you migrate your models. Now the teaching will not be a strategic update. That will come at our Capital Markets Day in Dearborn in May, when we’ll update you on our Ford+ strategy. We’ll do a deep dive into financial targets and KPIs for each of our new segments as well as for software and services. Now with this new level of transparency, which will be tracked and validated in our earnings materials and SEC filings, we think investors will be better equipped to value how each of our customer-focused segments is contributing to Ford’s overall growth and return profile. And as Jim mentioned earlier, 2023 is a pivotal year for Ford.

We have the plan, the talent and the product portfolio in place to take the Company to an exciting new level, one that is both differentiated from our past performance and our competitors. And going forward, our new segmentation will provide unprecedented levels of transparency and insight into all aspects of our business, making it easier to hold Ford leadership accountable for delivering superior growth and value for all of our stakeholders. Now that wraps up the prepared remarks, and we’ll use the balance of the time to address what’s on your mind. So thank you. And operator, please open up the line for questions.

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Q&A Session

Operator: We will now begin the question-and-answer session. Our first question comes from Adam Jonas from Morgan Stanley. Please go ahead.

Adam Jonas: I appreciate the humility and the self-criticism and the spirit of that on the cost and the execution shortfall. It’s kind of refreshing to see that. But when you begin the description about it and how frustrated you are, Jim, and how it’s not good enough, I was getting all excited to hear some details and there’s just not a lot here, okay? I’m just going to say, it’s not a lot of details at all about what exactly the problem is and what you’re doing about it and how much and get better this year? You can disagree if you want, that is my impression. I want to know what it is and because $2 billion on the table, frankly, that’s 130 bps of margin. I mean that’s going to go to the consumer anyway. So tell us that’s just the beginning, and there’s way more to go. Do we have to wait until May for that? Or is there anything else you can tell us to help model the Company in the year ahead and what you’re doing about it? Appreciate it.

Jim Farley: No, there is a lot more to go. And the industrial system at Ford is a huge opportunity for us. And we have spent the last several months really getting deep on where we need to go. So John, maybe you could share or feeling comfortable on sharing, but you’re going to hear a drumbeat from Ford on this all during the year.

John Lawler: Yes. So Adam, I think if you just step back and look at the three elements of the industrial platform, there’s opportunities across each. If you look at our product development system and in our engineering, the level of productivity that we have, so think about $1 of input and what you get out for that $1 of input is probably about 25% to 30% inefficient. So, we should be either getting more products through the pipeline or our cost should be significantly lower. Now we have to be very smart about how we go about doing that because we’ve got incredible products in the pipeline, and there’s a huge opportunity on that front, but we also have to balance the quality as well. And so, when it comes to our engineering, I think you should think about it that way, and that’s what we’re going after.

Our supply chain, there are issues across the supply chain. It cost us, as we talked about last year, at least $1 billion in premiums that we had to pay, increased freight premiums on chips, premiums on disruption that we called our suppliers because our schedule stability was probably worst in class and fixing that and the root cause it gets to that will drive incredible opportunities for us. And let’s say that for 2023, it should be at least an incremental $1 billion at least. And then when you look at our manufacturing system and you go through our plants, you look at the level of working capital we have in, you look at our production schedules, you look at the complexity and what it does for time that takes us to build a vehicle. And you understand just how inefficient that is.