Ford Motor Q4 2022 Earnings Report

Ford Motor EPS Results

• Actual EPS: $0.51
• Consensus EPS: $0.60
• Beat/Miss: Missed by -$0.09
• One Year Ago EPS: $0.26

Ford Motor Revenue Results

• Actual Revenue: $41.80 billion
• Expected Revenue: $40.73 billion
• Beat/Miss: Beat by +$1.07 billion
• YoY Revenue Growth: +18.40%

Ford Motor Announcement Details

• Quarter: Q4 2022
• Date: 2/2/2023
• Time: After Market Closes
• Conference Call Date: Thursday, February 2, 2023
• Conference Call Time: 5:00PM ET

Ford Motor (NYSE:F) (NYSE: F) is an American multinational automaker headquartered in Dearborn, Michigan. Founded by Henry Ford in 1903, the company became an early pioneer of mass-production techniques with the Model T and the adoption of the moving assembly line. Today, Ford designs, manufactures, markets and services a broad range of vehicles and mobility solutions under the Ford and Lincoln brands, spanning passenger cars, SUVs, pickup trucks and commercial vehicles.

Ford’s business activities extend beyond vehicle production to include parts and aftermarket services, fleet and commercial sales, and automotive financing through Ford Motor Credit Company. In recent years the company has focused on electrification and connected-vehicle technologies, introducing battery-electric and hybrid models alongside traditional internal-combustion vehicles. Ford serves customers globally with manufacturing, assembly and distribution operations across North America, Europe, Asia Pacific, Latin America and other regions.

Leadership at Ford has combined legacy family involvement and professional management; as of the most recent publicly available information the company’s executive leadership includes Jim Farley as chief executive officer and William Clay Ford Jr. in an executive chairman role. Ford continues to balance its long industrial history with investments in new vehicle architectures, commercial services and digital capabilities to address changing consumer preferences and regulatory environments worldwide.

Ford Motor Q4 2022 Earnings Call Transcript

Key Takeaways

• Ford left about $2 billion in 2022 profits on the table due to cost and supply chain issues and is overhauling its industrial system with a lean operating system to eliminate waste.
• Under its “double transformation,” Ford ranks #2 in U.S. EV sales, with the Lightning sold out and BlueCruise hands-free autonomy system judged best in class.
• Ford Pro commercial vehicles drove strong growth and profitability, with software subscriptions up 70%, E-Transit holding 73% of the electric van market, and mobile service repair orders rising 85%.
• In Ford Blue, a fresh ICE lineup—including Bronco, Maverick and hybrids—helped the company gain U.S. market share, while F-Series remained America’s best-selling truck for the 46th consecutive year.
• Model E is ramping to 600,000 EVs in annual production this year (and 2 million by 2026) on a new, fully updatable electric architecture targeting an 8% EBIT margin.

Presentation

[Operator]

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 Q4 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 touch tone 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.

[Lynn Antipas Tyson, Executive Director of Investor Relations at Ford Motor Company]

Thank you, Jason. Welcome to Ford Motor Company's Q4 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.

[Lynn Antipas Tyson, Executive Director of Investor Relations at Ford Motor Company]

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 Lache at the Wolfe Global Auto, Auto Tech and Mobility Conference. On March 23rd at the New York Stock Exchange, we will hold a teach-in about our new Ford+ segment reporting. This event, featuring John Lawler and Cathy O'Callaghan, our Controller, will be webcast. 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.

[Jim Farley, President and CEO at Ford Motor Company]

Thanks, Lynn. Hi everyone. We appreciate you all joining us. I'll start by addressing the obvious. Our Q4 and full year financial performance last year fell short of our potential. 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, to say I'm frustrated is an understatement because the year could have been so much more for us at Ford. 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? It's the right question. Let me share my perspective. With Ford+ plan, we are executing a double transformation. While we're making progress, it's hard work.

[Jim Farley, President and CEO at Ford Motor Company]

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 second transformation, which we're aggressively building today, building new and incredible new growth businesses like Ford 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.

[Jim Farley, President and CEO at Ford Motor Company]

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 that Ford Pro software sales would be growing off the charts. 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 we'll show we can do it again. We have deeply entrenched issues in our industrial system that have proven tough to root out.

[Jim Farley, President and CEO at Ford Motor Company]

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. 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.

[Jim Farley, President and CEO at Ford Motor Company]

I respect our competition. I would not trade our places with anyone. Why? 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. 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. We are committed to creating value for all of our stakeholders. 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 and India and most recently in Argo.

[Jim Farley, President and CEO at Ford Motor Company]

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. 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. Let me cover a couple of highlights. I'm gonna start with Pro, my favorite, the not-so-secret weapon at Ford.

[Jim Farley, President and CEO at Ford Motor Company]

Ford Pro embodies all of our growth levers. 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. 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, 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. The requirements for all these customers are complex. They're not gonna commoditize.

[Jim Farley, President and CEO at Ford Motor Company]

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. We know these customers will pay for software that will enhance their productivity. Now, we're gonna 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. That's even before the $7,500 IRA tax credit that was announced and applies regardless of the location of raw materials or batteries. This year, Ford Pro really gets going.

[Jim Farley, President and CEO at Ford Motor Company]

We introduce our most important vehicle, gets refreshed, the new Super Duty, and in Europe, the Super Duty equivalent, we have an all-new one-ton Transit. 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 Pro.

[Jim Farley, President and CEO at Ford Motor Company]

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. 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 U.S. last year, and we expect 2023 to be another big, strong year of share growth.

[Jim Farley, President and CEO at Ford Motor Company]

Ford Blue is a growth business for the foreseeable future, with strong profits and robust free cash flow. 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 bill of material. 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.

[Jim Farley, President and CEO at Ford Motor Company]

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 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 Q4, our run rate of production was more like 12,000. 50,000 is a big growth. By the end of...

[Jim Farley, President and CEO at Ford Motor Company]

We are on plan for that 2 million units of incremental capacity by the end of 2026. 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 BlueOval City and our three BlueOval SK battery plants. In Europe, we're moving ahead with a new commercial vehicle battery facility in Turkey. 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 that 2 million unit run rate secured by the end of this year.

[Jim Farley, President and CEO at Ford Motor Company]

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 gonna 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 we start reporting according to these new segments in the Q4, you're gonna have complete visibility into 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.

[Jim Farley, President and CEO at Ford Motor Company]

This is only gonna accelerate when the new Ford Model e dealer program takes effect in January next year. This program has been adopted by nearly two-thirds of our 3,000 U.S. dealers. 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, and pickup and delivery for all customer experiences. We're also expanding BlueOval Charge Network at all of our dealers. We'll have dealer staff trained not only on software, but all the EVs. 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 Reports and judged the best hands-free autonomous system on the market.

[Jim Farley, President and CEO at Ford Motor Company]

Just let that sink in for a while, the best on the market. Have you not experienced BlueCruise? I challenge you to go out and do your side-by-side comparison with our two major competitors. 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 Q2 of last year. We have incredible software talent making this system better every day, including those 600 former Argo engineers who now working full-time at Ford on our autonomous systems. 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.

[Jim Farley, President and CEO at Ford Motor Company]

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, thrift and growth, and we are hitting the ground running. John?

[John Lawler, CFO at Ford Motor Company]

Thanks, Jim. As Jim pointed out, our performance in 2022 was below our expectations. 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, then compare it to our competition. We've all done it. We're much higher. This speaks to the significant operating deficits we have in product development, manufacturing, and procurement. This is no different from the tough capital allocation choices we made about our geographic footprint and product portfolio. Choices designed to yield higher quality growth and improve returns. 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.

[John Lawler, CFO at Ford Motor Company]

Our iconic vehicles remain market leaders. We continue to make strategic and capital allocations decisions to drive growth, strengthen our competitive position, and produce returns above our cost of capital. Turning to the year, we generated a record $9.1 billion in free cash flow, well above our cash conversion target of 50%-60%. Importantly, most of the free cash flow came from the automotive business. 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. Now our balance sheet remains strong. We ended the year with $32 billion of cash and $48 billion 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.

[John Lawler, CFO at Ford Motor Company]

In fact, today, we declared our Q1 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 distributions of 40%-50% of free cash flow consistent with our focus on total shareholder return. For the year, we delivered $10.4 billion in adjusted EBIT with a margin of 6.6%. As Jim said, by better executing the things we control, we should have generated as much as $2 billion 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 Q4, but also incur higher costs through premium freight and other supplier charges.

[John Lawler, CFO at Ford Motor Company]

Let me give you a quick overview of how our 22 segments performed, recognizing that beginning with our Q1 2023 results, we'll no longer have the automotive segments with regional breakouts. 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 for 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 de-risked and sustainably profitable.

[John Lawler, CFO at Ford Motor Company]

In Europe, we were slightly above breakeven for the year, but as our Q4 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 all-new Ranger and our decision to exit India. Similar to South America, the region is now primed for sustainable profitability.

[John Lawler, CFO at Ford Motor Company]

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 wanna provide some context to how we're thinking about 2023. For the full year, we expect to earn $9 billion-$11 billion in adjusted EBIT, and that assumes a SAR of 15 million units in the US 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-$9 billion. Our adjusted EBIT guidance includes various headwinds and tailwinds that we believe could impact our business in the coming year.

[John Lawler, CFO at Ford Motor Company]

For example, when you think about the headwinds, they include an expected mild recession in the U.S. and a moderate recession in Europe, higher industry incentives as supply and demand come back into balance. Ford Credit EBT of about $1.3 billion. That's about $1.4 billion lower than in 2022, reflecting unfavorable lease residual and credit losses and the non-reoccurrence of derivative gains. We expect a continued strong dollar. We also expect about $2 billion lower past service pension income. We're also gonna continue investments in growth, including in customer experience, connected services, and CapEx as we build out our growth plan. Tailwinds include improvements in supply chain and industry volume, launch of our all-new Super Duty, of course, lower cost of goods sold, including efficiencies in materials, commodities, logistics, and other parts of our industrial platform.

[John Lawler, CFO at Ford Motor Company]

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 23rd, we'll hold a teach-in at the New York Stock Exchange. I'm really excited about this opportunity 'cause it'll 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 teach-in, 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. We will also broadcast a webcast live and we'll post a toolkit and other materials to orient you around all the materials and help you migrate your models.

[John Lawler, CFO at Ford Motor Company]

The teach-in 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. 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. 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.

[John Lawler, CFO at Ford Motor Company]

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. That wraps up the prepared remarks, and we'll use the balance of the time to address what's on your minds. Thank you, and operator, please open up the line for questions.

[Operator]

We will now begin the question-and-answer session. To ask a question, you may press star, then one on your touchtone phone. If you're using a speakerphone, please pick up your handset before pressing the keys. To withdraw from the question queue, please press star, then two. At this time, we'll pause momentarily to assemble our roster. Our first question comes from Adam Jonas from Morgan Stanley. Please go ahead.

[Adam Jonas, Managing Director at Morgan Stanley]

Hey, Jim. Hey, everybody. 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. You know, when you, 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 gonna say there's not a lot of details at all about what exactly the problem is and what you're doing about it and how much can get better this year. You can disagree if you want. That's just my impression. I wanna know what it is and because $2 billion on the table, frankly, that's 130 basis points of margin.

[Adam Jonas, Managing Director at Morgan Stanley]

I mean, that's gonna go to the consumer anyway. 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, President and CEO at Ford Motor Company]

Thanks, Adam. No, there's a lot more to go. You know, the industrial system at Ford is a huge opportunity for us. We have spent the last several months really getting deep on where we need to go. John, maybe you could share what we're feeling comfortable in sharing, but you're gonna hear a drumbeat from Ford on this all during the year.

[John Lawler, CFO at Ford Motor Company]

Yeah. 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. Think about a $1 of input and what you get out for that $1 of input is probably about 25%-30% inefficient.

[John Lawler, CFO at Ford Motor Company]

We should be either getting more product through the pipeline or our costs should be significantly lower. 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. 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 ships, premiums on disruption that we caused our suppliers because our schedule stability was probably worst in class.

[John Lawler, CFO at Ford Motor Company]

Fixing that and the root cause that gets to that will drive incredible opportunities for us. Let's say that for 2023, it should be at least an incremental $1 billion, at least.

[Adam Jonas, Managing Director at Morgan Stanley]

Mm-hmm.

[John Lawler, CFO at Ford Motor Company]

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 it takes us to build a vehicle, and you understand just how inefficient that is. You bring that back through, that complexity back through the supply chain, and you talk about the number of changeovers that our suppliers have to make, to produce the complexity that we have and the time that adds to production and the time that adds to cost and the issues that it drives through. Those are just some of the tip of the iceberg of the things we're going after.

[John Lawler, CFO at Ford Motor Company]

If you go back and you look at it, as I said in my remarks, just you look at the math and you look at our cost of goods sold relative to our revenue, then compare that to traditional OEMs, let alone the new OEMs, you see the size of the prize that we're going after. You know what's changed, Adam, I think the answer is we just have to show you guys. I mean, that's where we're at. We have to deliver it. As Jim said, as we're taking this lean approach and getting into it, there's a very systematic way we're going at it now, we are very focused, we know that this is the number one thing that needs to get fixed in the first part of our transformation.

[Jim Farley, President and CEO at Ford Motor Company]

Adam, I'd just like to add, you know, as a CEO, there's a lot of choices. They're all very consequential. When it comes to the approach to do this, the most important thing for me is that it's sustainable. When you look at Ford, we have cut in the past and it grows back, or we have cut everywhere and not really focused on the industrial system. For me, the approach that we're taking that's very different and very difficult is that it has to be daily work. Gaps to competition, countermeasures, action plans for those countermeasures, constant evaluation of effectiveness of those countermeasures, celebration of those KPIs and our status in daily management. It has to be a more fundamental approach than holding our breath or dealing with the output like people and getting into the real industrial systems efficiency.

[Jim Farley, President and CEO at Ford Motor Company]

That is a cultural change as a leader. It's a behavioral change. It is not just a program.

[Adam Jonas, Managing Director at Morgan Stanley]

Thanks, Jim. Thanks, John. We'll connect later. Appreciate it.

[Jim Farley, President and CEO at Ford Motor Company]

Our next-

[John Lawler, CFO at Ford Motor Company]

Thank you.

[Operator]

Our next question comes from John Murphy from Bank of America. Please go ahead.

[John Murphy, Managing Director at Bank of America]

Good evening, guys. Just kinda wanted to follow up sort of on a similar vein, you know, short-term and long-term. Just first short-term, you know, when we think about the 2023 outlook, and you look at the $1 billion Ford decline in Ford Credit and take that as, you know, a reasonably given number, something in that direction, and then $2 billion of lower past service pension income, that's a $3.4 billion headwind. Sort of at the midpoint of the range, you're talking about EBIT being roughly flat.

[John Murphy, Managing Director at Bank of America]

That, you know, that sort of indicates a very significant $3 billion+ improvement in the core business, which is a lot to kind of believe when you're looking at sort of the headwinds and the issues that you just faced. I'm just curious if you can comment on that and maybe kind of walk us to, you know, how we can get comfortable, like, that we'll see a $3 billion+ improvement in the core business this year. I mean, and how do you get these supply chain issues fixed when some that are a bit outside of your control, and what we hear from suppliers is the volatility in schedules, and it's not just specific to Ford, are still pretty volatile.

[Jim Farley, President and CEO at Ford Motor Company]

Yeah. Thanks, John. It's a great question. That, that's exactly it. The headwinds are, you know, four and a half billion dollars-$5 billion, as we pointed out, we said we expect on the tailwinds, our pricing to be about neutral. The market forces, I think, are gonna drive average transaction prices down, you know, we think probably around 5%. That'll come some from the dealer margins but also, from higher incentives.

[Jim Farley, President and CEO at Ford Motor Company]

You step back from it, and we do have the new Super Duty, and we expect that to be a positive. We also have a very strong order bank on our commercial vehicles. We're looking at pricing being about flattish. We said volumes is a slight opportunity as industry comes along, so the rest of it falls into cost reductions. That's exactly right. When you look at those cost reductions, you have to see what's happening relative to the material. In material, there's two phases there. There's one, it's we do expect commodity prices to come off a bit, to improve a bit, but we also have significant opportunities in our material cost, and we have several initiatives going on to identify those efficiencies. We also have quite a bit of cost when you talk about schedule stability.

[Jim Farley, President and CEO at Ford Motor Company]

I don't have the exact data from the competition, but when I look at our schedule stability, there are significant opportunities through changes that we can take to improve that schedule stability, which will flow straight through to lower surcharges from the supply base, because they have to deal with that instability. There's cost that drives, as well as the significant premiums we paid in freight for expedites, air freight, et cetera, to just try to keep the plants going and keep our suppliers' plants going. Those are two immediate actions that we can take based on the inefficiencies we saw in 2022 that cost us the $2 billion. On top of that, we have to build to the core industrial platform, just productivity and efficiencies to drive even more improvements.

[Jim Farley, President and CEO at Ford Motor Company]

That's how we're thinking about it, and that's how we're going about it.

[John Murphy, Managing Director at Bank of America]

Okay, that's actually incredibly helpful. Just on the long-term, I mean, you know, you'd mentioned, Jim, about scrubbing, you know, scrubbing things foundationally and really getting to, you know, some costs that are excess. I appreciate, you know, the three areas you've highlighted. As we look around the world, I mean, Europe is, you know, had fits and starts of making us all kind of excited that it's gonna work and then it doesn't, you know, from time to time. You know, China, you've kind of been chasing.

[Jim Farley, President and CEO at Ford Motor Company]

Yep.

[John Murphy, Managing Director at Bank of America]

you know, competition there, and it hasn't really paid out for you. There are two very important parts of Europe and China that are very strong for you. Commercial vehicle in Europe is incredibly strong. Could we just strip Europe back to pure commercial vehicle and could China just strip back to pure Lincoln, two places we know you're making money, and cut out the other stuff, so that you can actually fund the transition that you're talking about? I mean, it just. You know, we kind of all dance around this stuff, and, you know, you've headed in this direction with the global redesign.

[Jim Farley, President and CEO at Ford Motor Company]

Yep.

[John Murphy, Managing Director at Bank of America]

There's real opportunities here to be really profitable.

[Jim Farley, President and CEO at Ford Motor Company]

No, you hit on it, I'm glad we're getting into some of the strategies. I mean, I would think of China business similar to what we've done in South America and IMG. Small but profitable. Focused. You know, we've been in the past in China, kind of small but focused on everything. Lincoln and our commercial with JMC is very profitable and an important business, but they have to make the EV transition. You know, I don't think you can be globally successful in the EV business if you don't compete with the Chinese. I mean, they're gonna come to Europe. They're already there. They're gonna come to the U.S. BYD is a powerhouse. Geely, there's so many others. We believe China is very strategically important for us.

[Jim Farley, President and CEO at Ford Motor Company]

To win there, we have to make those businesses transition profitably to EV. I would think of it as kind of small and focused, maybe even, you know, even more than in the past. You know, we have a great CV business, commercial vehicle business that now is getting electrified. We're, like, making that transition now. We have a new Ranger, the electric version of Transit, One-Ton Transit, and all of them. We have a new manufacturing site in Romania that's really scaling up now in commercial. We have a really strong business. The decision really is how much do we need? How many engineers, how many people do we need in Europe? How big of a profile do we need in passenger cars? That's the decision.

[Jim Farley, President and CEO at Ford Motor Company]

We've already, you know, electrified Cologne, and that's really the decision. It's not the right time to talk about where we're gonna go, but we know exactly our strength in Europe, and we know what we need to do. You won't have to wait long to hear from us on these things.

[John Murphy, Managing Director at Bank of America]

Okay. I've got more, but I'll get back in the queue. Thank you very much, guys. I appreciate it.

[Jim Farley, President and CEO at Ford Motor Company]

Sure. Sure. Thanks, Sam.

[Operator]

The next question comes from Rod Lache from Wolfe Research. Please go ahead.

[Rod Lache, Managing Director at Wolfe Research]

Hi, everybody. John, you said that in response to Adam's question, that variable costs would come down by at least $1 billion. At the same time, you're acknowledging that pricing could easily be more than a $1 billion negative for a $100 billion North American business with five points of average transaction price decline. Can you maybe give us a little bit more insight into that? Can you provide a few specific KPIs that would demonstrate progress on structural costs? They were up another $2 billion in 2022.

[John Lawler, CFO at Ford Motor Company]

Yeah. On the pricing, we do see the broad market coming in at about, you know, transaction prices falling about 5%. Some of that's gonna come out of the dealer margins, of course. It's not all gonna come from us. We also have upside, Rod, so with some of the launch of the new vehicles, we won't see as much of a

[John Lawler, CFO at Ford Motor Company]

Price compression there. We see pricing net for us next year being about flattish. Don't think about it as we're working through 2023 as being -$1 billion. I would say that when it comes to the cost reductions, I think what we've got to start showing is, one, that we're getting leverage out of the business. If we're growing the business that our cost of goods sold is growing at a much slower pace, and that as we're coming out with new vehicles, our cost per units are coming down, so our margins are improving.

[John Lawler, CFO at Ford Motor Company]

When you look at the design of our vehicles and you compare it to competition, I think if you go through those benchmarks and you go through those teardowns, you can see that there's a tremendous amount of opportunity for us to design out complexity. You should see that coming through complexity reduction KPIs on our vehicles. I think that'll be key. It not only will be in the order combinations, but also in the parts complexity and the number of parts. What we'll be doing is as we move forward through this year, especially at Capital Markets Day, we'll be providing more details on those KPIs. It's the key areas. You should be seeing how much productivity we're getting out of a $1 of engineering.

[John Lawler, CFO at Ford Motor Company]

We should do something around that from a KPI standpoint, because these are the areas that we need to improve.

[Rod Lache, Managing Director at Wolfe Research]

Okay.

[Jim Farley, President and CEO at Ford Motor Company]

Rod, some of the things I think about is the number of complexity, sequencing centers we have, our line side complexity, number of parts sitting on the side of the line, our inventory turns inside the plant.

[John Lawler, CFO at Ford Motor Company]

Yep.

[Jim Farley, President and CEO at Ford Motor Company]

On the supplier side, it's gonna be transparency. We have full transparency down to tier 3 in our supply chain. It's very important to operationalize better quality and cost. On the engineering side, you know, it's also indirect. What's the ratio of indirect to direct engineering that we're spending, i.e., the productivity, the productive engineering that's resulting in customer-facing products. Increasingly, I know this is gonna sound a little bit weird, but it's the software output. We are spending as a management team more and more time on our software platform and the cost of creating software and the complexity of software. That's something that we have a lot of KPIs. They're increasing quickly and are increasingly important for us.

[Jim Farley, President and CEO at Ford Motor Company]

It may not be significant for structural cost, but we have to be careful to add a lot of complexity in software.

[Rod Lache, Managing Director at Wolfe Research]

To put a landmark out there, do you think a year from now we'll be looking at structural costs that are up or down, obviously ex pension, because you have this $3 billion cost reduction plan? I have a second question just on Model e.

[John Lawler, CFO at Ford Motor Company]

Rod, I think it's beyond just structural cost. Our biggest cost element is our material cost. We will continue to invest in our growth-related investments, so connected services, the software, as Jim talked about. We're also continuing to invest, as you know, in our build out of our batteries, so our spending related costs are gonna go up. Volume will drive manufacturing costs, which is in our structural cost. There will be puts and takes on the structural costs. Our biggest opportunity is in our level of material cost that we have. It's the largest cost element on our income statement, and it's where we are most uncompetitive.

[Rod Lache, Managing Director at Wolfe Research]

Yeah. Okay.

[John Lawler, CFO at Ford Motor Company]

We're going after everything, but

[Rod Lache, Managing Director at Wolfe Research]

Yeah, I think I got the answer on that. Maybe just to switch gears on Model E, if I can ask Jim a question. You've got this target of 8%, and that 8% margin target presumably has some assumptions for where costs will go, but also where pricing is gonna go. Just considering everyone's aspirations for growth in EVs, do you think you can stand by those pricing assumptions? Or maybe a different way of asking you this is, do you think you can sell a $40,000 electric crossover with a 20% gross margin?

[Jim Farley, President and CEO at Ford Motor Company]

That is a very important question. The reality is we are structuring our portfolio to compete in very specific segments. The two-row crossover is, you know, turning out to be the Corolla Civic of the EV business. You know, the last thing we wanna do is commoditize our products by dropping their price. Just look at what happened to Henry Ford in the twenties and the early teens. That's exactly what we're seeing play out here. We didn't have to touch the pricing at all for Lightning and E-Transit because we picked the right segments. The real driver of our future profitability on Model E is these second cycle products. We didn't know what we didn't know when we designed these first three products.

[Jim Farley, President and CEO at Ford Motor Company]

We didn't know that our wiring harness from Mach-E was 1.6 km longer than it needed to be. We didn't know it's 70 lbs heavier, and that that's worth $300 a battery. We didn't know that we underinvested in braking technology to save on the battery size. We didn't know that we needed the world's best aerodynamicist to get the size of the battery smaller. Now we have learned a lot, and that second cycle of the product is in, you know, the factory right now being developed with, you know, a lot of new talent. I'm very optimistic about our 8% because we are not gonna be playing in the two-row commodity SUV market, because Ford's tried that in the ICE business. It didn't really work out for us.

[Jim Farley, President and CEO at Ford Motor Company]

We wanna play our hand, our strength, commercial, truck, larger vehicles. On the category side, we do not wanna have too many top hats because that costs a lot to engineer. We wanna have minimum choice for customers, but we wanna design the smallest possible battery for competitive size, and we wanna invest differently in our ICE business for radical simplification. You know, 30%, 40%, 50% less fasteners, no brackets in the vehicle. I can go on and on. We'll get into it in Capital Markets Day. I think we should expect all brands to protect growth when it comes to EV, and that for we have to expect negative pricing. That means software and other items like that become even more critical.

[Jim Farley, President and CEO at Ford Motor Company]

I can't wait to show you our new electric architecture because to me, that's the most critical strategic investment the company's making. Not our batteries, not the EV platforms, but our new, fully updatable electric architecture. 'Cause what we've learned on Pro is we can make real money on software.

[Rod Lache, Managing Director at Wolfe Research]

Great. Thank you.

[Operator]

Our next question comes from Ryan Brinkman from JPMorgan. Please go ahead.

[Ryan Brinkman, Automotive Equity Research Analyst at JPMorgan]

Hi. Thanks for taking my question. Maybe to follow up on that, I heard you say in the prepared remarks that revenue for software services and charging rose 70% year-over-year in 2022. I remember you discussing, like, a potential $20 billion market opportunity by 2030 with a lot of excitement around Pro at the last Investor Day target for 33 million connected vehicles in 2028.

[Ryan Brinkman, Automotive Equity Research Analyst at JPMorgan]

Have you dimensioned how large or profitable this business may be currently, or are you able to share any more, interim goals, such as what your expectations are for services revenue or services revenue growth, in 2023, or, you know, what the next catalyst might be here for this business, such as, I don't know, the number of vehicles launching with BlueOval Intelligence or anything else we should be monitoring?

[Jim Farley, President and CEO at Ford Motor Company]

Right. Yeah, great question. I We're gonna see that on Pro first, and this year is a breakout year for Pro, 'cause we have brand-new products, both core in Europe and U.S., our most highest volume, highest profit vehicles are all new. A very important year for us. I would say, we absolutely have a fantastic business plan that's very specific about software and physical services. The biggest opportunity for us in the short term is the after-sales business. Only 10% of our Pro customers do business with us, and we hardly do any financing with them. Between financing and parts and service, we have enormous upside in the short term. You know, those are very profitable parts of our business.

[Jim Farley, President and CEO at Ford Motor Company]

I would think of, think of it this way, Ryan, it's like the software is starting to drive a closed loop where the customer wants to do more physical service with us. We have all those mobile units, more and more dedicated dealers and more of our commercial customers because of the use of the software is coming back and buying parts for us. And then the next level of performance is really gonna be prognostics. When we can predict a failure on all the vehicles like you see on John Deere and Caterpillar and then drive that into our physical repair facilities, we're gonna see a much larger retention in parts and service. I think the basics of the business are these are profitable vehicles. We've got new ones coming out. We're gonna grow that.

[Jim Farley, President and CEO at Ford Motor Company]

I mean, we blew through our parts and service, profits and revenue for Ford Pro last year. It's almost like we can't even predict as that software starts to really drive a different behavior for our customers, you know, the growth in parts and service. That's the monetization in the short term for these services, in the integrated ecosystem. Long term, the real game changer, kinda like autonomy in the retail space, is gonna be that prognostics.

[Ryan Brinkman, Automotive Equity Research Analyst at JPMorgan]

Great. Thank you.

[Operator]

Our next question comes from James Picariello from BNP Paribas. Please go ahead.

[James Picariello, Head of U.S. Autos at BNP Paribas]

Hi, guys. You know, the Q3, you know, negative pre-announcement had a narrative around it, right? It was very high mix on wheels inventory that you couldn't ship and the additional $1 billion in supplier costs. You know, I know Adam, you know, hit on this in his question, but, you know, this quarter is missing that storyline. You know, I know it was mentioned that, you know, you have line of sight to $2 billion in profit that you left on the table, but what could really turn around, you know, almost immediately in this Q1 in 23 here in terms of, like, what, you know, what operational mishaps, you know, will reverse in the coming months and, you know, quarter, whatever the time frame might be?

[John Lawler, CFO at Ford Motor Company]

Yeah, I think it comes down to the key driver for the miss in the Q4 was the volumes. The volumes was on availability of key commodities, primarily chips, and the fact that many of our suppliers had equipment issues as they were ramping. We think we've worked through a lot of those issues on the ramp in our supply chain. As far as the rate and flow on the commodities, the chips, you know, it continues to be hand-to-hand combat, but, you know, we're putting corrective actions in place. We've got better pipelines from brokers and spot buys, and we're working very closely with our supply chain down to the tier two chip suppliers.

[John Lawler, CFO at Ford Motor Company]

It's execution, it's changes that we're putting in place on the rate and flow, and it's being more efficient in our scheduling and the stability of our production to reduce expedited freight, expedited costs at our supply chain, et cetera. Part of it's operational, part of it's what we're doing working with our supply chain partners, and part of it is, you know, getting through the hump on ramping up run rates, et cetera, throughout the system.

[James Picariello, Head of U.S. Autos at BNP Paribas]

Okay. Understood. That's helpful. Then in terms of the earnings bridge for this year with respect to materials and freight, that $9 billion headwind in 2022, I know you mentioned, you know, you're baking in commodity prices to come down, but, you know, all in relative to that $9 billion this past year, what's assumed in the, in the you know, the 2023 guide here on this line item?

[John Lawler, CFO at Ford Motor Company]

Right. If you look at that, it's at least two and a half billion dollars, depending on where we fall within the range of the guidance. I think that would be a start point, and then we would go from there. Of course, we're gonna be working to do better than that, but that's what we see so far.

[Jim Farley, President and CEO at Ford Motor Company]

At least $2 and a half billion positive.

[John Lawler, CFO at Ford Motor Company]

Yeah.

[James Picariello, Head of U.S. Autos at BNP Paribas]

Okay. Understood. Thank you.

[Operator]

Our last question comes from Itay Michaeli from Citi. Please go ahead.

[Itay Michaeli, Analyst of Autos Equity Research at Citi]

Great. Thanks. Good evening, everyone. Just two questions for me. First, I was hoping you could maybe talk about the regional outlook in your 2023 guidance. I know the segments are about to change, but hoping we could touch on the regions. Second, maybe for Jim, when we think about the software opportunity on your new electrical architecture on the consumer side of the business, where do you see the biggest opportunity there from a revenue perspective? Is it automated driving? Is it connected services? Curious what kinda is most interesting there.

[John Lawler, CFO at Ford Motor Company]

Yeah.

[Itay Michaeli, Analyst of Autos Equity Research at Citi]

On the regions?

[John Lawler, CFO at Ford Motor Company]

Yeah. I think what we would have to say is that, given that we're moving to our segments for 2023, we're not gonna be reporting the regions. We will give more color on 2023 by each of the business unit segments. I'm not gonna comment on regions anymore going forward unless there's a specific reason to do that within one of the segments. I think on the demand side, we see, you know, the U.S. around the 15 million range.

[Itay Michaeli, Analyst of Autos Equity Research at Citi]

15.

[John Lawler, CFO at Ford Motor Company]

Europe around 13. you know, we're gonna see more incentives in the U.S. we can go you know, through the demand side if that's, if that's what you're interested in.

[Itay Michaeli, Analyst of Autos Equity Research at Citi]

Yeah, sure. That'd be helpful. Yeah. Maybe pricing in Europe would be helpful as well.

[John Lawler, CFO at Ford Motor Company]

I think in Europe, we're gonna see continued pressure on the top line. We've got a 13 million unit industry. We think we still have such a strong order bank. We know we have a strong order bank on our commercial vehicles that we don't see as much pressure there. More of the pressure will come on the passenger side. You know, pricing in Europe, you know, incentives continue to be strong throughout this year. I don't think you'll see as much price compression in Europe as you've seen, you'll see in North America and the U.S. I think definitely for Europe, it's, it's the call on the industry and where do we think that'll be offset by the strength of the order bank we have on our commercial vehicles.

[John Lawler, CFO at Ford Motor Company]

Coming back to the US, as we said, a 15 million unit industry, we think prices are gonna come in the industry are going to fall. Transaction prices will fall about 5%. We think about that as about a combination of incentives and lower dealer margins. We're starting to see dealer margins come down now as our demand, you know, from the industry is easing a bit, and we're starting to see the inflationary costs come through with the pricing, and so we're starting to see those margins come off. I think through as we go through the year, particularly in the second half, you'll start to see prices come down through higher incentives by the OEMs. When you look at our international markets group, I think it's a little bit different there.

[John Lawler, CFO at Ford Motor Company]

Our key product is Ranger, and that's all new and that's launching, and so there's incredible demand for it. We think we have some pricing power there as well. I think there's puts and takes around the region if you look at it on a macro basis. I think it'll be more insightful as we talk about what's happening in each of the segments, and then specifically what's happening in Pro, Blue, and E in those segments around the world.

[Jim Farley, President and CEO at Ford Motor Company]

On the software side, we were guessing before, but now we kind of know what the first three shippable large TAM software revenue sources are for our industry. The first is partial autonomy, the second is safety and security, and the third is productivity.

[Jim Farley, President and CEO at Ford Motor Company]

The star pupil in there, the early leader is definitely ADAS on pricing revenue growth. I mean, the growth we're seeing, the demand we're seeing for BlueCruise and all ADAS features is really driving a lot to software shipment. We're about to ship our second cycle of BlueCruise already. And we are really starting to see that is clearly what customers want revenue-wise. I do believe in this first, you know, three, four years of software to the car, that ADAS, that level two, level three system is really the most remarkable, you know, TAM. In the background for Ford, the productivity software in Pro is really important. It's maybe unique to us, but it is a very important part of our software revenue, which we will lay out in May. You'll see more specifics on it, but it's very profitable.

[Jim Farley, President and CEO at Ford Motor Company]

The customers love the data, and they have a higher demand for the data and the software than the retail customer. I think the slow burn, the one in the background that I'm super excited about, is the third leg of the stool of safety and security. Not like, you know, someone stole your car, but it's video content. You know, a lot of it tied to insurance. This is gonna be a really interesting area. Kinda think of your car as an extension of your Ring and all the safety and security you have in your house now, all that technology. You know, the car's gonna be another node on that. It'll go for everything from, you know, teenage drivers, to all sorts of things, and that video capture is gonna be the essence.

[Jim Farley, President and CEO at Ford Motor Company]

Another reason why we think our next electrical architecture is so strategically important for the company, 'cause we wanna embed that hardware and software and adaptability in the electrical architecture, so we can ship the software, better software than our competition on safety and security, even if it's a little fuzzy on what the features are today.

[Itay Michaeli, Analyst of Autos Equity Research at Citi]

Perfect. That's all. Very, very helpful. Thank you.

[Operator]

This concludes the Ford Motor Company Q4 2022 earnings conference call. Thank you for your participation. You may now disconnect.

Participants

Executives

• Jim Farley, President and CEO
• John Lawler, CFO
• Lynn Antipas Tyson, Executive Director of Investor Relations

Analysts

• Adam Jonas, Managing Director at Morgan Stanley
• Itay Michaeli, Analyst of Autos Equity Research at Citi
• James Picariello, Head of U.S. Autos at BNP Paribas
• John Murphy, Managing Director at Bank of America
• Rod Lache, Managing Director at Wolfe Research
• Ryan Brinkman, Automotive Equity Research Analyst at JPMorgan