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Ford Motor Company
(NYSE: F)
Q1 2024 Earnings Call
Apr 24, 2024,
5:00 p.m. ET
Key Insights from the Earnings Call:
- Strategic Areas Highlighted
- Growth Drivers Evolution
- Focus on Quality and Resilience
Setting the Strategic Stage:
Operator
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 first quarter 2024 earnings conference call [Operator instructions]. 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. Please go ahead.
Lynn Tyson
—
Executive Director, Investor Relations
Thanks, Gary. Welcome to Ford Motor Company’s first quarter 2024 earnings call. With me today are Jim Farley, president and CEO; and John Lawler, chief financial officer. Also joining us for Q&A is Cathy O’Callaghan, 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.
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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 19. Unless otherwise noted, all comparisons are year over year.
Company EBIT, EPS, and free cash flow are on an adjusted basis. Lastly, I want to call out a few of our near-term IR engagements. May 30, Jim Farley will participate in a fireside chat in New York with Toni Sacconaghi and Daniel Röska at the Bernstein Annual Strategic Decisions Conference. And June 11, John Lawler will participate in a fireside chat in New York with Emmanuel Rosner at Deutsche Bank’s Auto Summit.
Jim?
Jim Farley —
President and Chief Executive Officer
Thank you, Lynn. Hi, everyone, and thank you for joining us. The cornerstone of Ford+ is pretty straightforward, a more resilient business model, higher growth, higher margin, and more capital efficiency. And I would say Quarter 1 had a lot of great green shoots in that plan.
It sets us up for a very strong 2024 and beyond. Before John goes through the quarter, I wanted to highlight four key strategic areas: how our growth drivers are changing, our progress in quality, the resilient Ford Pro business, and what we’re learning on the electrification journey in Quarter 1. On growth, the portfolio changes we made and the restructuring we’ve done in our geographic footprint have really paid off for Ford.
Several years ago, we normally would be reducing our volume and our mix and having good news on pricing. What’s changed in the last year and especially in Q1, you could see, is our top-line and bottom-line profitability are increasing, driven by improved volumes and mix, and we’re actually seeing pricing headwinds.
And that new portfolio and geographic footprint are really tremendous to see at Ford. There is no better example for this than the portfolio changes we’ve made in our truck and van business. Ford is the No. 1 best-selling pickup manufacturer in the world. And our Ford Transit cargo van is the best-selling in the world. It’s now our second best-selling nameplate at Ford.
And our midsized Ranger, not our most affordable pickup, is the third best-selling vehicle at Ford and together with the Everest makes up our profits outside of China, North America, and Europe. It’s an incredible new franchise for Ford. These changes in our portfolio at all different sizes and price points in the truck and the van business have really played to Ford’s strength. And it doesn’t stop there. Our growth drivers are diversifying.
We now have a vibrant software business and physical services business led by Ford Pro. You don’t need to look very far beyond our mobile service as an example. Ford now has 3,500 or more remote service vehicles in our fleet globally. And last year, we did 2.4 million remote service experiences, both remote service, and pickup and delivery.
40% of that was for Pro and 60% was for our retail business. Ford now has more than 700,000 paid subscribers for software. That’s up 47% year over year. It’s capital efficient, and the gross margins are more than 50%.
Our quality is making real progress. Kumar and the team have really focused on key areas. Our ’23 model year three months in service, initial quality is 10% better than the previous model year. And we’re seeing our current model year that we’re selling for several months, another 10% improvement.
That should put us in the middle of the pack, and many of our vehicles start to lead their segments in initial quality. But to bend the curve on warranty costs and customer recalls, we’re really focusing on our launches. We’re past the Super Duty launch now and well into the F-150 launch, and we made a lot of changes to improve and bend that curve. On the F-150 and others, we’ve delayed the OK to buy three to six weeks.
We’ve taken a lot of new testing regimens. Actually, we ended the quarter with 60,000 units in our plant stock, which hurt our first quarter, but we’ll benefit because we’re shipping those now in our second quarter for all those quality processes.
The Rise of Ford: A Promising Future Unfolds
Quality Triumphs in Launch Performance
Amidst the automotive landscape, Ford has steered clear of about 12 recalls on the F-150, displaying the best performance on three Major Initiatives System (MIS) launches in years. The stark improvement in defect rates post-launch mirrors historical challenges in the industry, where a 70% spike has been the norm over the last five years, nearly quadruple the average rate of around 20%. Remarkably, Ford now stands shoulder to shoulder with this industry average for the F-150 launch, marking a significant leap forward in quality control.
Ford Pro: A Beacon of Financial Success
The financial horizon is aglow for Ford Pro, with soaring revenues painting a rosy picture. The $3 billion profit in Quarter 1 stands as a testament to the remarkable growth trajectory, outshining previous yearly returns. The key to this financial prosperity lies in the trifecta of customer base diversity, driving white-hot demand across multiple sectors, ranging from small businesses to government entities.
Product Innovation Fuels Profitability
Product innovation serves as the cornerstone of Ford Pro’s profitability surge, as a wave of appealing new releases floods the market. With a lineup refresh unseen in two decades, featuring revamped Super Duty, Transit, and Ranger models, customers are spoilt for choice. The most eclectic Class 1 to 7 selection in North America ensures unparalleled variety, with customizable options to cater to diverse fleet needs.
Service Excellence and Software Dominance
Ford Pro’s unrivaled service network, boasting over 2,000 remote service vehicles and 500 preferred upfitters, sets a new standard in the industry. The emphasis on software subscriptions has proven fruitful, with a substantial 40% uptick in active subscriptions. This meticulous focus on service quality and software innovation underscores Ford Pro’s commitment to customer satisfaction and long-term success.
Electric Revolution and Profitability
In the realm of electric vehicles, Ford is charting a strategic path towards profitability. By redirecting capital towards commercial work vehicles and affordable platforms, the company aims to tap into burgeoning market segments. The shift towards more accessible EV offerings, coupled with a focus on customer preferences, promises a new era of sustainable growth.
Financial Fortitude and Strategic Vision
Under the aegis of Ford+, the company’s global transformation is well underway, heralding a transition towards higher growth, margins, and capital efficiency. With a financially robust first quarter and a steadfast commitment to shedding outdated industry practices, Ford is poised to redefine automotive standards and drive innovation for years to come.
Unveiling Ford’s Financial Fortitude Amidst Quarter Challenges
Analyzing Fiscal Success Amidst Market Dynamics
Amidst the late quarter launch timing of the new F-150, Ford displayed remarkable resilience by delivering $2.8 billion in adjusted EBIT. The yielded margin of 6.5%, underscored the enduring potency of Ford Pro. While costs experienced a $1.2 billion surge, a deeper dive into the data reveals a lion’s share of this increase, $1.1 billion, was purposefully allocated to fostering growth initiatives by Ford Pro including novel product releases. Demonstrating a flat trajectory, costs associated with Ford Blue and Ford Model e remained stable. Profoundly, Ford is confidently steering towards delivering $2 billion in cost efficiencies for the entirety of the fiscal cycle. Though the adjusted free cash flow saw a usage of $500 million, primarily attributed to vehicle inventory adjustments, this spatial impact is projected to revert in the forthcoming quarter.
Reinforced Balance Sheet and Strategic Financial Movements
Marking a stalwart financial stance, Ford’s balance sheet remains fortified with a commendable sum of $25 billion in cash reserves complemented by nearly $43 billion in liquidity. In an additional display of corporate prudence, the renewal of the $18 billion corporate credit facilities was recently accomplished, elongating the maturation timeline by an extra year. This strategic financial maneuver empowers Ford with commendable flexibility, amplifying the potential for prudent investments in profit-generating avenues. Mirroring their commitment towards capital returns, Ford has declared a regular second quarterly dividend of $0.15 per share, payable on June 3 to shareholders enlisted on May 8.
Diverse Customer-Centric Insights into Fiscal Performance
Detailed explorations into the financial performance of Ford’s customer-centric segments accentuate the efficacy of the Ford+ strategy in fortifying the core business. Ford Pro manifested a substantial upsurge with a 36% spike in revenue coupled with a 21% increase in wholesales, culminating in a meritorious doubling of EBIT to $3 billion. This transformative performance was fueled by amplified Super Duty and Transit production, enriched Super Duty assortment, and escalated net pricing. Noteworthy is the burgeoning revenue stream generated by software and physical services, which accounted for approximately 13% of Ford Pro’s EBIT over the last year, propelling towards an envisioned 20% milestone within a proximal timeframe.
Resilience Amidst Market Challenges and Growth Trajectories
Despite facing market headwinds, Ford Model e confronted a loss of $1.3 billion, primarily attributed to pronounced pricing pressures within the industry that overshadowed stagnant costs amidst a 20% dip in wholesales. Evidencing strategic agility, corrective measures including price realignments were swiftly implemented to adjust inventory levels. Noteworthy is the discernible market traction observed, where retail sales witnessed a commendable 77% surge in the U.S. juxtaposed against an overall EV segment growth of 2.6%. Ford’s strategic maneuvers have significantly escalated total EV market share by 3.4 points to 7.5%, with the Mach-E emerging as the second best-selling e-SUV, second only to Tesla’s Model Y.
Projection and Strategic Financial Outlook
Manifesting a robust foothold, Ford’s forecast for the fiscal year remains optimistic with expected company adjusted EBIT in the range of $10 billion to $12 billion. As progress continues unabated, Ford anticipates scaling towards the upper echelon of this ambit, potentially setting a new corporate record. Upholding the trajectory of success, adjusted free cash flow forecasts have been revised upwards to a range of $6.5 billion to $7.5 billion, shored up by strong business fundamentals and moderated capital expenditures. A rigorous scrutiny of cash outflows is poised to accentuate efficiency, potentially positioning Ford at the lower band of the revised capex spectrum.
Embracing Challenges with Conviction and Strategic Adaptability
Cognizant of the evolving EV landscape, Ford is recalibrating its capex range to $8 billion to $9 billion, navigating the dynamic contours of the industry with finesse. Market projections for 2024 foresee a stable to marginally escalated SAAR in both the U.S. and Europe. With a nuanced approach, Ford is primed to capitalize on the full-year customer demand for the all-new Super Duty, propelling Ford Pro towards favorable market dynamics. Projections for segment outlooks consistently emphasize the pivotal role of Ford Pro, expected to drive EBIT within the $8 billion to $9 billion scope, underpinned by sustained growth and favorable product mix. Ford anticipates a controlled loss range of $5.5 billion to $5 billion for Model e, attributing the downturn to relentless pricing pressures and investments in fresh vehicle line-ups.
Embracing Momentum for Sustainable Growth and Market Advancement
Ford Credit has exemplified robust fiscal resilience with anticipated EBT of about $1.5 billion, showcasing marginal growth when juxtaposed with the previous year. The sterling performance of this quarter serves as a tangible testament to the promising momentum ushered in by Ford+. Strategic capital discipline continues to navigate Ford towards a secure global footprint, optimized product offerings, and consistent cash flow generation. Steeped in a culture of continuous enhancement, Ford remains ardently focused on delivering incremental improvements in both qualitative standards and cost-efficiency metrics. The trajectory is set, the strategy is sound, and the momentum is unwavering – guiding Ford towards a promising financial vista.
Remaining Agile and Adaptable to Address Investor Queries
As the financial narrative unfolds, Ford remains poised to address pertinent queries from discerning investors, encapsulating the essence of their strategic trajectories and financial fortitude. Through the lens of transparency and market astuteness, Ford is prepared to elucidate the nuances of their financial accomplishments and strategic imperatives, steering towards sustained growth and market leadership. With a robust performance narrative underpinning their financial statements, Ford is set to field queries, address uncertainties, and provide insights that affirm their steadfast commitment to delivering shareholder value, fostering growth, and fortifying their market stance. The stage is set for engagement, dialogue, and a shared journey towards financial excellence and market leadership.
Questions & Answers:
Operator
The first question today is from Adam Jonas with Morgan Stanley.
Adam Jonas — Morgan Stanley — Analyst
I got one question for John and one for Jim. John, you were just on Bloomberg saying EVs are needed to meet compliance regulations. Now iIt’s my understanding that Ford does not disclose penalties or ZEV credit purchases for Ford on clean air regulation. Can you confirm that? That’s not disclosed, right?
John Lawler — Chief Financial Officer
So let me clarify a few things, Adam, on that, is that it’s not an option for us not to be compliant. If you don’t comply with your ZEV or your greenhouse gas emissions requirements, you can’t pay fines. What happens is you can’t sell, and that’s consistent across the industry. So it’s — that’s for all OEMs.
The Intricacies of Ford’s Financial Strategy Amidst Shifting Industry Dynamics
Strategic Levers and Profit Optimization
In the realm of Ford’s financial playbook, there exist three pivotal levers adeptly maneuvered to enhance profitability and cash flow. The orchestration involves the adept selling of Electric Vehicles (EVs) and hybrids, a calibrated reduction in Internal Combustion Engine (ICE) vehicles distribution, and the judicious contracting for credits from fellow Original Equipment Manufacturers (OEM).
Transparency and Market Perception
Emphasizing financial transparency, Ford assures stakeholders that contracting for credits will be diligently documented and disclosed, as iterated in the 10-K filings. The amalgamation of these diverse strategies aligns with a continuous optimization process, conducted on a weekly, if not daily, basis to elevate profitability amidst market dynamics.
The Quest for EV Profitability and Value Accretion
Central to Ford’s trajectory is the imperative for the EV sector to independently achieve profitability, thereby validating the capital invested and fortifying Ford’s financial core. The lucid delineation by the Chief Financial Officer underscores the criticality of EV profitability intertwined with Ford’s overarching financial health.
Market Valuation Discrepancies and Strategic Understanding
Addressing the intriguing facet of market valuation, particularly concerning Ford Pro, the dialogue between Jim, the President, and CEO, and financial analysts delves into the divergence between intrinsic value and market perception. Despite the laudable performance of Ford Pro, the market’s valuation of Ford reflects a misalignment, igniting discussions on rectifying this chasm.
Ramping Up Hybrid Capacity and Navigating Competitive Terrain
Anticipating the hybrid-centric market shift, Ford proactively expanded its hybrid capacity to cater to burgeoning demand. Strategic decisions made years prior have positioned Ford advantageously in the hybrid domain, with ongoing commitments to embed hybrid technology across its product lineup. The prudent foresight mirrored in capacity expansion exemplifies Ford’s proactive stance in embracing market transitions.
Exploring Growth Avenues Through Fleet Demand and Market Dynamics
Pivoting towards Ford Pro’s opportunities, the discussion extends to the burgeoning fleet demand in commercial and governmental sectors. With a keen focus on releasing pent-up market demand, Ford Pro’s potential for continued success is underscored, paving the way for enhanced market penetration and strategic growth.
Ford’s Financial Fortitude: Navigating Challenges with Tenacity
Unveiling Ford’s Strategic Outlook
In the high-stakes world of business, companies like Ford must navigate through choppy waters with unwavering resolve. Jim Farley, President and Chief Executive Officer, pointed out the stark contrast in demand between Pro and retail sectors. Retail customers are not engaged in fleet renewals, roadwork, or the monumental task of building 5G infrastructure.
Farley shone a light on the aging ambulance market in the U.S., where the average ambulance clocks in at a whopping 15 years old, signifying a prolonged wait for Transits. Despite oversubscription on the new Super Duty by a factor of 2:1, Farley expressed the company’s dedication to expanding capacity.
The company’s comprehensive effort to enhance capacity comes at a time when Ford boasts its freshest lineup ever. The confluence of a revamped product range and surging customer demand reminiscent of the supply shock in retail a couple of years ago highlights Ford’s commitment to meeting customer needs.
Insights into Capital Allocation
Ryan Brinkman from J.P. Morgan prodded Ford executives for insights into their capital allocation strategy. The company reiterates its commitment to returning 40% to 50% of free cash flow to shareholders, signaling prudent financial management.
Chief Financial Officer John Lawler emphasized Ford’s robust balance sheet, underpinned by a $25 billion cash position. Lawler hinted at a cautious approach in the midst of industry flux, focusing on investing in growth opportunities while keeping an eye on returning cash to shareholders in case the anticipated opportunities fail to materialize.
Navigating Model e’s Financial Landscape
Bruno Dossena from Wolfe Research delved into the intricate financial landscape of Model e, probing Ford’s trajectory concerning cost optimization. Lawler discussed a relentless drive to slash costs associated with Model e, citing substantial reductions in vehicle costs over the past few years.
Despite the cost-cutting measures, revenue erosion has outpaced cost reductions, leading to a bottom-line struggle. Lawler acknowledged the need to maintain cost efficiency continuously and adapt to market dynamics to enhance the financial performance of second-gen vehicles.
Strategies for Overcoming Challenges
Dossena further questioned Lawler on the cost and pricing dynamics of Ford’s combustion, Blue, and Pro models. Lawler attributed cost upticks to material expenses for new product launches and increased manufacturing volumes, aiming to deliver $2 billion in cost reductions related to manufacturing, material, freight, and overhead costs.
The company remains steadfast in its resolve to optimize costs and bolster financial performance, showcasing resilience in the face of operational challenges and market fluctuations.
Itay Michaeli from Citi probed deeper into specific financial metrics, seeking clarification on Pro’s Q1 performance and projections for the years ahead. Ford’s commitment to meticulous financial management underscores its determination to weather storms and emerge stronger from adversities.
Ford’s Strategy for Achieving Contribution Margin Positivity
The Quest for Positive Margins
Amidst the dynamic landscape of the automotive industry, Ford is navigating a path towards achieving contribution margin positivity over the next 12-plus months. A journey not without its challenges, the company is strategizing to enhance its financial standing.
Unpacking Cost Projections and Competitive Pricing
Chief Financial Officer John Lawler delves into the intricacies of cost projections and pricing strategies. Despite facing a scenario where prices have significantly dropped, necessitating further price adjustments to remain competitive, Ford is resolute in its commitment to cost reduction to bolster contribution margins.
The Dynamics of Delivery Volumes and Adaptation
President and CEO, Jim Farley, sheds light on the unique structure of Ford Pro and the seasonal nature of its delivery volumes. With a focus on fleet business and pricing strategies, Ford is adapting to ensure consistency in its financial outlook despite market fluctuations. The company’s ability to navigate these challenges speaks to its resilience and adaptability in a volatile industry.
A New Approach to Product Launches and Quality Assurance
Jim Farley discusses Ford’s transformative approach to product launches, emphasizing a meticulous and measured strategy. By prioritizing enhanced testing and durability measures, Ford aims to set new industry standards and deliver high-quality vehicles to its customers. This shift in strategy, whilst ensuring long-term benefits, might impact short-term earnings intermittently but is deemed essential for sustained success.
Hybrid Portfolios and Strategic Investments
Addressing the evolution of Ford’s hybrid portfolio, Jim Farley elaborates on the incorporation of hybrid components into existing internal combustion engines. Balancing investments in hybrid transmissions and capacity enhancement, Ford strategically positions itself for growth without necessitating a complete overhaul of its powertrain systems, a testament to the company’s foresight and adaptability.
Strategic Market Considerations and Inventory Management
Discussing market risks and pricing dynamics, Ford’s leadership provides insights into inventory management and demand fluctuations. From inventory build-up to strategic selling approaches, the company navigates market complexities to drive sales while maintaining competitive pricing and inventory levels, showcasing a nuanced understanding of market dynamics.
The Ford Maverick: Navigating Supply Shocks and Pricing Pressures
Unicorn Status Amidst Challenges
The Ford Maverick finds itself in a supply shock, reminiscent of a speedy stallion navigating a sudden turn. This vehicle, marked as one of the fastest-growing in the Ford family, boasts an all-new F-150 with a hybrid option, propelling its momentum even as challenges loom.
Dealer Day Supply and Inventory Recovery
In the realm of inventory levels, Ford has displayed resilience. With a dealer day supply resting comfortably in the mid-50s, the company is effectively managing its stock levels amidst industry fluctuations.
Industry Pricing Landscape
Despite industry-wide pricing pressure, Ford remains pragmatic. Fiscal planning anticipates a 2% negative pricing trend across the automotive landscape, tethered to the concept of consumer affordability. The market, like a pendulum, swings between supply shocks and demand dynamics.
Electric Vehicle Outlook
The electric vehicle (EV) arena, once a beacon of high pricing and demand, now navigates normalization. Ford’s strategy aligns with a vision of EV prices mirroring traditional fuel options, presenting a balanced choice to customers weighed against their value propositions.
New Vehicle Lineup and Battery Cost Dynamics
Embracing innovation, Ford unveils a new, more affordable vehicle lineup with promising profit potential. The company’s plunge into the EV market heralds a shift towards economical propulsion choices, anticipating benefits from evolving battery raw material costs as lithium prices dip.
Stalwart Amidst Challenges
As Ford steers through a landscape marred by supply shocks and pricing pressures, the company’s resolve shines brightly. Like a seasoned captain navigating rough seas, Ford adjusts its sails, poised to weather the storms and seek the shores of success.
Unlocking Ford Blue’s Financial Call Discourse
Amidst the turbulent seas of financial calls, Ford Blue garnered insight from its executive voyagers navigating through choppy waters. Let’s navigate the ebbs and flows of their discourse with a discerning eye.
Fording Potential Risks and Paving the Way Forward
Is there a risk lurking in the shadows, ready to ambush Ford Blue’s guide due to lower launch volumes? Have the storm clouds of uncertainty been accounted for in the forecast already? Or does Ford stand as a sturdy ship, poised to weather any material slowdown that may come its way?
In response to these questions, the ship’s Chief Financial Officer reassured investors that the anticipated risks were already baked into the forecast, providing an air of confidence amidst potential turbulence.
Setting Sail On The ASP Journey
Steering the conversation towards the implied Average Selling Price (ASP) for the Model e, a curious analyst prodded for insights into the $10,000 to $14,000 range. In light of a sluggish volume start to the year, doubts loomed about the prospects for modest full-year growth for the Model e.
The CFO charted the course for an expected high single-digit growth in the Model e, propelled by the launch of the Explorer in Europe. However, the choppy waters of fluctuating industry pricing necessitated adjustments in Ford’s pricing strategy, leading to intricate calculations to navigate the revenue waters effectively.
Navigating the Cost Savings Voyage
Transitioning to the $2 billion material manufacturing cost savings target for the year, the analysts sought clarity on the progress made so far. The CFO highlighted a bulk of the initiatives set sail towards the second half, acknowledging encouraging headway in design changes and efficiency drives within the manufacturing realm.
Green shoots of progress were observed across various facets of the industrial platform, instilling confidence in achieving the ambitious cost-saving goal by year-end, albeit with a focus towards the latter part of the fiscal year.
Steering Towards Quality and Cost Pareto
Emphasizing the pivotal importance of balancing cost efficiency and quality enhancement, the CEO articulated a dual mandate to achieve continuous improvement across the design and industrial spectrum. Intentional efforts were underscored to fortify the ship’s hull with enhanced quality while trimming costs judiciously.
As the call drew to a close, the crew reiterated their dedication to cost rationalization without compromising on quality, signifying a steadfast commitment towards navigating the financial waters adeptly.
Concluding Thoughts
Throughout the call, Ford Blue’s team showcased a blend of strategic acumen and operational resilience in the face of market uncertainties. The insights gleaned provide investors with a beacon of assurance amidst the turbulent seas of financial discourse. As Ford Blue charts its course ahead, the commitment to prudent financial stewardship remains steadfast.