Ford Pro’s Potential and Ford’s Future Growth

Positioned for Profound Growth

Last year’s results marked a solid performance for Ford Motor Company, but the words of the company’s leader reflect a keen determination to reach for more. Ford Pro, a nearly $60 billion high-margin business, is shaping the company’s future growth. The business encompasses hardware, software, and physical services, with a significant portion of its revenue being recurring – a remarkable advantage. This entails a positioning that is truly industry-leading, marrying hardware, software, and services; this is a powerful stance that, over time, is poised to reveal its true potential. A highlight of Ford Pro’s performance is its doubled EBIT to $7 billion last year, despite a notable slowdown in Super Duty during its launch. The company is now on track for mid-teen EBIT margins at Pro, promising impressive top- and bottom-line growth. The underlying strength is evident in the overwhelming order demand, outstripping supply and reflecting a fundamental economic difference from the retail business.

Strategic Advancements and Market Dominance

The company’s stronghold in North America is unmistakable. The surging sales to state and local government Pro are notably profitable. Contributing to this is the substantial increase in spending by state and local governments, especially in infrastructure, where vehicles such as Super Duties and Transits are pivotal. What’s more, the expansion of telecom and 5G technology is directly correlated with a surge in revenues, while a similar trend is observed in the U.S. manufacturing sector, with a renewed focus on domestic or near-shore manufacturing. Demand from dealers for more Pro allocation is escalating, with current volumes falling short of their expectations. Encompassing a repertoire extending over two decades, Ford’s product lineup is spearheading the way, reflecting a historic high in terms of freshness and demand.

The Power of Market Leadership

Ford’s dominance extends far beyond market leadership, with a staggering 40% share of the Class 1 through 7 full-sized trucks and vans market. This commanding share underscores the company’s stature in vocations like service construction, utility, and government. Notably, Ford’s prosperous engagement with small and medium-sized businesses and tradespeople, the lifeblood of the U.S. economy, is bolstered by a strong reputation. Equally significant is the pivotal role of upfitters in the company’s ecosystem, which are often overlooked by investors. The reliance of landscapers, plumbers, and electricians on Ford’s vehicles, such as the Transits and Super Duties, tailored for their specific vocations, is indispensable.

Software’s Growth Trajectory and Moats

Underpinning Ford Pro’s growth trajectory is the burgeoning software and physical repair business. With 0.5 million active software paid subscriptions and a substantial 46% surge, Ford Pro’s assertive march into the digital realm is unmistakable, with the margins touching over 50%. The ambitious target of software and services driving 20% of the Pro EBIT in two years reflects Ford’s comprehensive strategy. Notably, the company’s physical repair network, featuring 23,000 bustling service bays across the U.S., underscores a formidable advantage. Complementing this is the company’s foray into remote service, with 1,200 vans and Super Duties now equipped for this purpose.

Quality and the Pursuit of Excellence

Facing the quality challenges head-on, Ford is embarking on a journey to deliver an unmatched level of long-term durability to its customers. This pursuit is evident in the company’s intensified testing, real-world problem-solving, and a deliberate slowing down of the Super Duty launch. A testament to this is the marked improvement in Super Duty’s launch quality, with a ripple effect extending to the F-150 launch, currently underway. A significant milestone is the 10% uptick in initial quality, laying the groundwork for a similar improvement this year. Quality now forms a substantial portion of short-term incentives for Ford’s management and will measurably shape the company’s long-term shareholder return.

Fording into the EV Market

Ford’s robust strategy in the electric vehicle (EV) market comes at a pivotal moment, characterized by a seismic shift in the industry. The confluence of EV manufacturers slashing prices and a surge in capital and capacity upend this once-staid segment. Ford’s resolve to make its next Gen 2 products profitable within the first 12 months of launch speaks volumes about the company’s preparedness. This will culminate in mid to high single-digit EBIT profit margins over the products’ lifecycle, eclipsing even the cost of capital. This prudent strategy aligns with the company’s vision of delivering enduring profitability.

Ford’s EV Strategy Taps Into Market Realities

Adjusting Capital Allocation

The corporate giant is making strategic shifts in its EV business and capital allocation. The focus is directed toward smaller EV products while maintaining a substantial presence in the markets for larger electric vehicles (EVs). The company aims to assert dominance in geographies and product segments where it has an edge, particularly in trucks and vans. Furthermore, Ford plans to introduce large EVs with breakthrough efficiency and innovative features that align with customer preferences.

Learning from Experience

Reflecting on their past moves, Ford acknowledges the need to fine-tune their strategies. The company highlights the exponential growth in the EV segment and the demand curve that differs significantly from internal combustion engine (ICE) vehicles. Recognizing that customers are not willing to pay high premiums for EVs, Ford has adjusted its approach to maintain a balance between growth, profits, and returns.

Market Realities

Ford’s insights into the market realities underscore that the pricing of EVs quickly converges with hybrids after subsidies, paralleling the experience of industry leader Tesla. Total revenue from EVs is a key focus, and Ford is attuned to the varied adoption patterns across different geographies, hence, the emphasis on offering a wide range of choices and flexible manufacturing.

Embracing Hybrids

Recognizing the enduring role of hybrids, Ford plans to integrate these into its sustainable mobility portfolio, catering to specific customer use cases and emphasizing factors such as mileage, efficiency, and cost-effectiveness. The company is confident about the future of EVs while recognizing the immediate potential and margins offered by hybrid vehicles.

Talent Management

Emphasizing the critical role of talent, Ford underscores the need for a shift in its performance management system, aligning compensation and benefits with business performance and shareholder value creation. The company recognizes the necessity of attracting and retaining the best talent to facilitate operational, financial, and technical innovation.

Financial Performance

Ford’s financial results for 2023 demonstrate a strong global product line that resonates with customers. The company reported revenue of 176 billion, marking a significant 11% increase compared to the previous year. Adjusted EBIT reached 10.4 billion, driven by the sustained strength in its core business units, Blue and Pro, marking a 26% improvement compared to the previous year. The company’s robust free cash flow of 6.8 billion, combined with a strong balance sheet, indicates the effectiveness of its Ford+ strategy. Ford’s commitment to consistently return 40% to 50% of its free cash flow to shareholders is evident in the announced quarterly and supplemental dividends.

The Shifting Landscape of Ford: A Look at the Financials

A Closer Look at Ford’s Financial Performance

As Ford grapples with the aftermath of a significant strike and a shifting market landscape, the automotive giant delivered its adjusted EBIT of 1.1 billion, featuring an EBIT margin of 2.3%. The impact of the strike was evident in these figures, necessitating a deeper analysis of the company’s segments and their individual performances.

Ford Pro: A Strong Quarter Amidst Challenges

The Ford Pro segment delivered another robust quarter, with an impressive 11% increase in revenue. Additionally, the EBIT of 1.8 billion, marking a 25% rise, depicted a margin of 11.8%. These results underscored the growth potential and earnings power of this segment, positioning it for a promising outlook in 2024.

Ford Model E and Ford Blue: Navigating Market Dynamics

The Ford Model E exhibited a notable 14% surge in wholesales during the quarter, with a 2% uptick in revenue. However, the segment incurred an EBIT loss of 1.6 billion. Despite the challenging market dynamics and investments in next-generation vehicles, the year saw a 20% increase in wholesales, a 12% revenue growth, and an EBIT loss of 4.7 billion. Ford Blue faced flat revenue during the quarter, with an impact from approximately 60,000 lost units due to the strike. Nevertheless, the segment achieved an EBIT of 813 million and a 3.1% margin. For the year, Ford Blue displayed an 8% revenue rise, marked by EBIT growth to 7.5 billion with a 7.3% margin.

Navigating Capital Allocation and Future Guidance

Amidst the evolving landscape, Ford focused on capital allocation, enabling it to assign specific risk-adjusted hurdle rates for different business segments, thereby fostering greater accountability in investment returns. Looking ahead to 2024, Ford set its sights on earning between 10 billion to 12 billion in adjusted EBIT for the year, aiming for a record performance. Additionally, the company anticipated adjusted free cash flow between 6 billion to 7 billion and capital expenditures of 8 billion to 9.5 billion.

Adapting to Market Realities

Addressing market dynamics, Ford emphasized scrutiny of every dollar, aiming to drive efficiencies and align capital expenditure with the lower end of the prescribed range. The company detailed various actions taken in 2023, including delaying the second JV battery plant and other strategic adjustments. These measures underscore Ford’s commitment to adopt a nimble approach and respond to the changing market reality.

2024 Outlook: Navigating Industry Dynamics

Looking ahead, Ford anticipated a flat to slightly higher SAAR in both the U.S. and Europe, with industry pricing projected to experience a modest decline driven by higher incentive spending. Despite this, the company expected top-line growth from the launch of new products, alongside a $2 billion benefit from cost reduction initiatives.

Segment-Wise Expectations

For 2024, Ford Pro’s strength remained a cornerstone, with a targeted EBIT between 8 billion to 9 billion, driven by continued growth and favorable mix, albeit partially offset by moderated pricing. In contrast, Model E’s losses were anticipated to widen to a range of 5 billion to 5.5 billion, primarily due to pricing pressure and investments in next-generation vehicles. Ford Blue’s expected EBIT was projected to remain stable at 7 billion to 7.5 billion, reflecting a balanced market equation, including the impact of the all-new F-150. Additionally, Ford Credit’s EBT was expected to exhibit a slight year-over-year increase to about 1.5 billion.

Challenges and Momentum in the Larger Context

Despite the trials faced, Ford’s performance in the prior year showcased the positive momentum of its Ford+ plan, driven by capital discipline, a strategic global footprint, an evolving product portfolio, and consistent cash generation. The company’s ongoing commitment to growth opportunities and a focus on delivering improvements in both quality and cost underpin its resilience in the face of industry challenges.

Conclusion: Embracing the Future

As Ford forges ahead into a new era shaped by changing consumer preferences and market realities, the company remains steadfast in its commitment to operational excellence, financial prudence, and growth-oriented strategies. Navigating the evolving landscape requires a comprehensive approach that addresses the unique dynamics of each business segment, fostering a climate of adaptability and foresight.

Ford’s Jim Farley Addresses EV and Hybrid Strategy

Customer Preferences and Calculations

During a recent conference call, Ford’s President and Chief Executive Officer, Jim Farley, addressed the critical aspects of the company’s product portfolio. Farley highlighted the challenge of planning production capacity for the company’s range of vehicles, emphasizing the importance of understanding customer preferences and behavior when making the choice between internal combustion engines (ICE), hybrids, and electric vehicles (EV).

Farley pointed out that customers are increasingly making cost-of-ownership calculations when considering vehicle purchases. He detailed the quick showroom math that customers apply when comparing the cost of ICE vehicles, hybrids, and EVs, particularly in terms of fuel and operational efficiency. According to Farley, while the benefits of EVs attract a certain type of customer more attuned to the total cost of operation, mainstream customers find the cost comparison between hybrids and ICE vehicles more transparent and easier to evaluate.

Dealer Performance and Long-Term Investments

Marin Gjaja, Ford’s Chief Operating Officer, Model e, presented an overview of the company’s dealers’ performance, underscoring their ability to achieve margins comparable to ICE vehicles, with some outperforming ICE margins in recent years. Gjaja stressed the importance of ensuring that dealers continue to earn profits and make long-term investments in the EV market, revealing the company’s efforts to monitor dealers’ performance closely.

Manufacturing Capacity and Flexibility

Farley addressed the company’s manufacturing capacity planning, highlighting the 40% growth in hybrid electric vehicles (HEVs) that was anticipated years ago. He emphasized the flexibility provided by the company’s manufacturing capacity, particularly between ICE, EV, and hybrid models, stating that Ford is well-positioned for the transition.

Engagement with Dealers and Future Direction

Responding to a question about engaging with dealers and the message he plans to convey during his upcoming tour, Farley outlined three key messages. He emphasized the significance of dealers’ investments in the company’s Ford Pro services and remote service van offerings. Additionally, he stressed the importance of manufacturing flexibility and encouraged dealers to recognize the company’s progress on quality and retailing. Farley acknowledged the need for partnership with the dealers and expressed his commitment to reinforcing the message during his tour.

Financial Projections and Future Outlook

When challenged about the structural costs and projected losses within Ford’s Model e business, Farley and John Lawler, the company’s Chief Financial Officer, reassured investors that Ford would only bring profitable vehicles to market. They emphasized the company’s commitment to working on cost structure optimization for the first-generation vehicles and the assurance of launching second-generation vehicles only when profitability can be achieved.

Ford’s EV Business and the Quest to Achieve Profitability

Addressing the Challenge of EV Profitability

Amidst an ongoing quest to attain profitability in the electric vehicle (EV) business, Ford finds itself at a pivotal juncture. The company’s top executives recently discussed the challenges and opportunities lying ahead during a call with analysts.

Determination to Drive Down Costs

John Lawler, Ford’s Chief Financial Officer, revealed that approximately 40% of the company’s capital expenditure in the previous year was allocated to EVs. This year, the company aims to be at the lower end of that expenditure range, reflecting their concerted efforts to control EV-related spending. In the pursuit of a sustainable EV business model, Ford remains resolute in driving down costs to align with industry demands.

Factors Affecting Profitability

Jim Farley, Ford’s President, and CEO, acknowledged that the company must strive for the EV business to stand on its own and be profitable. Aligning with competitors like Chinese manufacturers and Tesla, who have already achieved profitability in the EV segment, Ford’s goal remains fixed on crossing the profitability threshold in the EV space. The commitment to achieving profitability stands as a core principle for Ford and its stakeholders.

Navigating Warranty Costs and Market Volatility

Marin Gjaja, Ford’s Chief Operating Officer, Model e, highlighted the evolving market realities and shared a commitment to enhancing gross margins quarter over quarter. With ongoing efforts to reduce warranty costs, Ford aims to leverage its learnings from Generation 1 vehicles to dramatically lower warranty costs for Generation 2. Navigating the market’s unpredictable nature, Ford remains mindful of the potential challenges ahead in their pursuit of EV profitability.

Financial Efficiencies and Market Shifts

John Lawler emphasized the potential for $2 billion in financial efficiencies to materialize over the course of the year, offsetting UAW labor contract impacts and refresh costs for 60% of the global product portfolio. Ford continues to adapt to market shifts by aligning with quality improvements and efficiency measures to stay on course for its profitability targets.

Amidst Challenges Lies Opportunity

Jim Farley categorically outlined the fundamental factors driving Ford’s vehicle profitability, emphasizing the robust demand in the Pro segment. Asserting the sustainability of Ford’s vehicle profitability driven by fundamental factors, he highlighted the monumental opportunity presented by the evolving landscape. With the company’s focus on driving attach rates and after-sales services, Ford stands poised to capitalize on untapped potential in the commercial business sphere.

As Ford navigates the evolving EV landscape, challenges are met with a steely resolve, emphasizing the company’s resilience under market pressures. With a firm grip on costs and a strategic outlook, Ford remains steadfast in its mission to achieve profitability in the EV sector. The company’s approach reflects both a measured optimism and a pragmatic acknowledgment of the obstacles that lie ahead.

Ford’s Battle to Cut Costs and Improve Efficiency

Progress Made in Narrowing the Gap

John Lawler, the Chief Financial Officer at Ford, recently discussed the company’s progress in narrowing the cost gap compared to its competitors. He indicated that the company is gaining traction and expects the gap to start narrowing. This is part of Ford’s larger strategy to save $2 billion across its industrial system, encompassing both material and labor costs.

Strategies for Cost Reduction

Kumar Galhotra, Chief Operating Officer at Ford, elaborated on the strategies being deployed to achieve cost improvements. He highlighted the stabilization of the supply chain, reduction in wastage, and cutting down on premium freight costs. Galhotra also emphasized the meticulous approach taken to optimize material usage and eliminate unnecessary features, backed by extensive benchmarking of manufacturing processes. These initiatives form an essential part of the plan to save $2 billion in the current year.

Analyst Inquiry

During an analyst conference call, Ford executives fielded questions about the company’s cost-cutting measures and the expected impact on future financial performance. Executives addressed concerns about the timeline for realizing the benefits of these initiatives. Lawler emphasized that the results of their design actions would start manifesting in the middle of the year, while manufacturing improvements would exhibit a more even flow throughout the quarters.

Furthermore, Lawler outlined Ford’s volume outlook, with expectations for a 3% to 4% increase from a wholesale standpoint. He also provided insights into pricing expectations, anticipating a 2% decline. Tackling concerns about affordability, Lawler expressed confidence in 2024 being the year when affordability would return to pre-pandemic levels. He also highlighted the positive impact of new product launches in the Ford Blue segment and the robust demand for Ford Pro, particularly in the commercial orders segment.

Unpacking Ford Pro’s EV Strategy

Expanding EV Footprint

During a recent call with investors, Ford Pro’s executives discussed the company’s expansion in the electric vehicle (EV) market. The Chief Executive Officer, Jim Farley, highlighted the favorable cost of ownership as a catalyst for the company’s EV growth. He underscored the company’s plans to leverage the burgeoning demand for electric vehicles, especially in Europe, driven by city regulations and closures.

Robust Growth Projections

The Chief Operating Officer, Model e, Marin Gjaja, expressed optimism about sales growth, particularly the anticipated expansion stemming from the European launch of the Explorer vehicle. Gjaja pointed to substantial volume growth expectations, emphasizing the company’s projections for a surge in EV sales across both retail and Pro segments.

Cost Reduction Initiatives

Analyst James Picariello inquired about supplier cost reductions as a key element of the $2 billion in planned savings. Chief Financial Officer, John Lawler, explained that a significant portion of the savings would be driven by industrial efficiencies and design-related cost reductions.

Model e Losses and Margin Targets

When quizzed about the projected Model e losses of 5 billion to 5.5 billion and the company’s margin targets, Lawler was candid about the challenge of achieving the previously announced 8% margin by the end of 2026. Both Lawler and Gjaja stressed their commitment to driving gross margin improvements for Gen 1 vehicles while maintaining capital and operating discipline for the launch of Gen 2 EVs.

Reflecting on Market Dynamics

Analyst Ryan Brinkman drew attention to the competitive landscape, notably the downward pressure on margins following industry developments. Lawler acknowledged the market dynamics and underscored the importance of launching the next generation of vehicles to enhance contribution margins.

Forthcoming EV Paradigm

The discussion concluded with Gjaja highlighting the strategic levers being pulled to improve the gross margins on Gen 1 vehicles while reinforcing the company’s commitment to disciplined capital and operational practices in charting the path towards building a profitable EV business.