Lynn Antipas Tyson
Executive Director, Investor Relations at Ford Motor
Thank you, MJ, and welcome to Ford Motor Company's second quarter 2023 earnings call. With me today are Jim Farley, President and CEO; and John Lawler Chief Financial Officer. Also joining us for Q&A is Marion Harris, CEO of Ford Credit; and Ted Cannis, CEO of Ford Pro.
Today's discussion includes some non-GAAP references. These are reconciled to the most comparable US GAAP measures in the appendix of your earnings deck. You can find the deck, along with the rest of our earnings materials and other important content at shareholder.ford.com.
Our discussion also includes forward-looking statements about our expectations. Actual results may differ from those stated. The most significant factors that could cause actual results to differ are included on Page 26. 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.
A quick update on some IR -- upcoming IR events before I turn the call over to Jim. On Thursday, Ford Pro CFO Navin Kumar will do a fireside chat at the J.P. Morgan Automotive Conference in New York with Auto analyst. Ryan Brinkman, and on Wednesday, September 27th, our Treasurer, Dave Webb will participate in a Green Financing Panel at the Goldman Sachs Global Sustainability Forum.
Before I turn it over to Jim, I just want to recognize one really important individual investor who is on the call and that's my mom who has listened to every single month of our Ford Investor Relations call since I joined. She is a tough cookie and always gives us a -- always gives us a good working over after we do the call, so I just want to say Mom, welcome to being on the call.
Jim, I'll turn it over to you. Well, first Mom, thank you for Lynn. Thanks to all of you for joining us on the May Capital Markets event where we shared our vision to refound our 120-year-old American icon and create a Ford that thrives at this exciting intersection between great vehicles and digital experiences. Now the world is changing fast but I have never been more confident in our Ford Plus plan. As you've heard me say, our intention is to match this exciting long-term vision for Ford with boringly predictable execution quarter-after-quarter, year-after-year and that's the biggest takeaway from our second quarter. Strong growth, strong earnings, cash flow, and progress on the fundamentals of our business, including software. We are very bullish on the potential for Ford Pro, which had an outstanding quarter. It's unique to Ford. It's a true powerhouse. At the same time, Ford Blue is taking advantage of fresh appealing products to generate healthy revenues, healthy share, and profits while our Model e continues to scale with popular first-generation electric vehicles. We are going to dive more into the electric vehicle market during Q&A, but clearly, this transition to EVs is dynamic and so much more than just a change in proportion. The number of global entrants is increasing even at the high end and the pricing pressure has dramatically increased in the past 60 days. Despite these puts and takes, we have confidence in the underlying trajectory of Ford's business. Our portfolio of businesses is strong, thanks to businesses like Pro and Blue. And we are raising our estimated EBIT guidance this year to $11 billion to $12 billion. Operationally, we continue to be focused on capital discipline, solid returns, even as we face uncertainties in the external environment. Supply-chain disruptions are persistent, but they are now easing and we have more work to do to streamline our industrial system. Reducing costs and improving quality. While EV adoption is still growing, the paradigm has shifted. EV price premiums over internal combustion vehicles fell more than $3,000 in the second quarter and nearly $5,000 in the first half. We expect the EV market to remain volatile until the winners and losers shake out and we are confident from a brand and from our incredible product strategy, our software, our scale, and our cost position, we will be one of the winners long-term. Why does I -- why do I say that? We move quickly to establish our EV nameplates in these segments. Now, like others. The Lightning. the Mach-E, the E-Transit. We're building EV brand loyalists. It's critical. Many of our EV customers are all new to Ford. This is a significant asset to Ford, given our new Gen 2 products and profitability that will be launching soon. For Gen 2, we focused on fewer higher-volume models in the right segments to take advantage of our strengths and knowledge of customers even conquest customers. For example, work vehicles, pick-ups or retail customers, and spacious seven-passenger SUVs. I am so glad we didn't bet the farm on two-row crossovers or ICE-like EV platforms like so many have. We moved early on LLP, especially production in the US giving us a diversity of chemistries and a cost advantage, we are now offering Mach E with LLP technology for sale in the US. With the addition of Tesla Superchargers and the fast charges that our dealers are installed, the BlueOval Charging Network will be the strongest, single largest, integrated, fast charge network across the US and Canada, and this blanket coverage from 10s of thousands of fast chargers is core to our strategy. It helps us with smaller, lower-cost and faster charging batteries. We have the flexibility to offer customers a choice of ICE, hybrids, and full electrics in the years to come. Our hybrid offerings are extremely popular. F150 is the best-selling vehicle in the US for 46 years. 10% of all F150s and 56% of all Mavericks sold in the US are sold as hybrids. We are adding hybrid options across our ICE lineup and we expect to quadruple our hybrid sales in the next five years and we are already number two in the market last year. Starting January 1st, we move to a new retail model for Model e. Way ahead of our competition. Again a differentiated model that will deliver non-negotiated price, a simple shopping and ownership experience and remote services for all of our customers. This is critical to a conquest digital brand. And finally, with these new models, we are nimble and we can adapt to the market fluctuations in real-time and you've seen this with both the Mach E and the Lightning as we are adding enormous capacity to meet our pent-up demand. We are optimizing for the long-term value-creation, more than 60% of Mach E and half of Lightning customers are new to Ford, these new customers have significant lifetime value potential beyond because of the shippable software. We are disciplined as we grow, we won't bear an unlimited cost to inquire those customers and build our installed base. In line with that, we are now targeting to reach 600,000 annual production units of EVs by next year and we maintain flexibility on where we reach when we reach two million total EV global capacity because we are balancing growth, profitability and returns. At the same time, we believe demand for our internal combustion and our hybrid portfolio will be durable with the window of growth in Ford Blue potentially longer and richer than most expected. We've proven we can design and develop popular vehicles that stand out from the competition regardless of the propulsion and we made sure, Ford is profitable as we move through this ICE to EV transition. So let me cover a few highlights for each of our business segments. The appeal and pricing power of Ford Blue's iconic vehicles, those Mustang lineups, the Maverick, the F-150, the Explores, all those cool derivatives from Ford. These products remain strong. Ford was America's number-one brand in the first half of this year. Also in the first half of this year, our best-seller, F-150. By the way, 100% built-in the US that our competitors can't say grew almost three times the rate of the overall pickup truck market. We expect our pricing and revenue power to continue in the second half as we have new launches, such as Mustang. And I would add that the pace of new product introductions at Ford will only accelerate from here. We plan to introduce for example an all-new F-150 and F-150 PowerBoost Hybrid at the Detroit show in September. Now, outside North America, the Ranger and its sister product, the Everest SUV are the backbone of a much stronger, more profitable international business. The all-new version of the Ranger and Everest are more popular and profitable than the previous model and Ranger alone is now the truck leader in 18 separate large pickup truck markets around the globe. Our after-sales business continues to grow and we are on track to launch over 2,000 mobile service units by the end of this year. That is unique to Ford. Ford Blues' other top priorities are to improve quality and reduce our cost structure. To do that, we've launched a lean, disciplined operating system that reaches into every one of our plants, every part we buy, every engineering decision we make. We're making progress, but this is just the start of our culture change. Turning to Pro, which is proving to be a unique strength to Ford. I mean what one of our competitors would give down Ford Blue Pro? It's a $50 billion commercial business with the potential to become a high-margin, high-multiple hardware, software, and service company, akin to John Deere. In the quarter, volume, pricing, page software subscriptions continued to accelerate as we capture significant pent-up demand across multiple commercial sectors and locations in both North America and in Europe. We are now realizing the full benefits of our new Super Duty. Super Duty sales in Q2 were up 28% and the strong demand for our flagship product is going to fuel our earnings growth for years to come. And our van business also continues to grow in the quarter and that's before the launch of the all-new version of Ford Pro's other key profit pillar, the one-ton transit in Europe. Our share of the US Class one through seven commercial truck and van market is over 40% this year so far, that is twice our nearest competitor and brand twice. And it's a similar story in Europe where the transit franchises help make Ford the top-selling commercial brand for eight years in a row. Ford Pro has all the attributes of the business that is difficult to disrupt. Our combination services, software dominant product, and dominant market share, up-bidding, and large dealer physical repair network will not be easy to match. Accordingly, we will continue to shift more investment to fuel Ford Pro's growth and press our advantage with full flexibility between EV and ICE. Now let's get to the biggest change in our industry. And I have to start including with Ford Pro because Ford Pro is at the forefront of this biggest change, the digital transformation, going to software and services as a differentiator. We already have over or about 550,000 subscribers -- paid subscribers and service subscribers and Ford Pro is 80% of those. We are already seeing 50% gross margins on today's software services, for example, telematics where customers are now paying $20 a month and that's before we even introduce our fully networked architecture in the new vehicles that launched just in a year or two. Moving to the next profitable software segment. Since launch, BlueCruise customers have traveled nearly 1.4 million hands-free hours across North America and that is a 44% increase since the end of Q1, a 44% increase in three months. In July, we hit our 100 million mile driven hands-free with BlueCruise. Our Version 1.0 was chosen by Consumer Reports earlier this year as the number-one rated system in the US and since then, we've continued to enhance and accelerate launching two more versions of BlueCruise over their updates, each significantly improving the driver's experience and we are now, shortening the cycle time between these new versions. As a company, we're investing significantly in software but the bigger story is the elite talent we have brought into Ford. They are attracted by the opportunity to revolutionize the experience of owning and driving a vehicle for millions of customers, especially for an iconic brand like Ford. I really believe we have the industry's best minds working on this incredible digital revolution. And with that talent, we are moving from our supplier-controlled firmware to our own fully networked electric architecture and this will reach across all vehicles ICE, hybrids, and EVs. This is a key point because it allows us to have a far higher installed base than just EVs alone. Think of the F-150. There are three key applications that sit on top of this new software platform. The first one is safety and security. We haven't launched yet, but boy we are working hard to launch. It will give customers the ability to monitor the surroundings and their vehicle on job sites or at home. It will transform the experience of owning a Ford. The second one, of course, is driver-assist technology BlueCruise is just the beginning of our ambition. And the third one is productivity like the telematics software that we sell with Pro but we're not going to stop there right around the corner, we will have predictive failure components. Imagine our productivity gain for our programmers who never are off-the-road because they know something is going to go bad before it does. This is just the beginning, these three applications. These services will bring high-margin, reoccurring revenue streams that are less capital-intensive and cyclical than our traditional vehicle sales. To wrap up, there is understandably a lot in the interest rate in the UAW contract discussions that began two weeks ago. We won't negotiate in public, but I would like to share our general approach and our belief system. When it comes to building in America and partnering with UAW, Ford stands apart from all the other automakers and most other major industrial companies. We believe as Sean and Chuck do that Ford should do our part to support the middle class, create vibrant communities, and build a strong American industrial base. Everyone knows Ford didn't go bankrupt and we didn't take a bailout but they may not know, we added a significant amount of UAW manufacturing jobs. In fact, thousands of jobs in the US since the great recession. We've actually done more than is required by our contract to add jobs, move employees from temporary to full-time, improve benefits, and we are on our way to spending a $1 billion to improve our factory working conditions. It comes with some additional costs but for us, this is not simply a number-crunching exercise. We believe over time customers will appreciate and reward our approach and our workforce will be more committed to delivering excellence through our transformation. So, although these negotiations promise to be challenging, our goal is to build a bridge to the future with our employees based on mutual trust and the spirit of problem-solving with the UAW leadership, and, of course, our incredible workforce. Over to you, John.
