Q4 2022 Ford Motor Co Earnings Call
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 fourth quarter 2022 earnings Conference call.
All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question and answer session.
A question you May Press Star then one on your Touchtone 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.
Thank you Jason welcome to Ford Motor Company's fourth quarter 2022 earnings call with me today are Jim Farley, our president and CEO and John Wall, 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.
The deck, along with the rest of our earnings materials and other important content, that's shareholder got Ford Dot 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 design weighted.
I want to call out a few near term key IR engagement.
On February 15th Jim Farley, and John Lawlor will participate in a fireside chat and New York with Rod Lache with Wolfe Global Auto Auto Tech and mobility conference on March 23rd at the New York Stock Exchange, we will hold to teach them about our new Fort plus segment reporting this event, featuring John Lawlor and chassis o'callahan, our controller will be.
Webcast.
And 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.
Thanks, Lynn and hi, everyone.
We appreciate you all joining us I'll start by addressing the obvious.
Our fourth quarter and full year financial performance last year fell short of our potential.
And while we generated record cash flow.
We left about $2 billion of profit on the table due to cost and especially continued supply chain issues.
These are the simple facts.
And I would just say I'm frustrated is an understatement because the year could have been so much more for us at Ford.
No I know the question you must be asking.
Way forward with that incredible product lineup and all the restructuring overseas why aren't you delivering higher profits and more competitive margins.
And it's the right question.
So let me share my perspectives.
With Ford plus plan, we are executing a double transformation.
While we're making progress it's hard work.
As with any transformation of this magnitude.
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.
It funds our future that's second transformation.
Which we're aggressively building today.
Building, new an incredible new growth businesses like model Lee.
And of course Ford probe are huge bet on commercial vehicles.
Which will be high growth high margin, not just products, but software and services business.
Now the second transformation the growth part.
Is going better than I imagined at this point in our journey I did not expect to be number two in EV sales in the U S. I didn't know that lightning would be completely sold out.
And I didn't predict the blue crews.
Would be the best hands free autonomy system in the market.
For the fourth pro software sales would be growing off the charts.
And that doesn't even touch all the incredible next generation Evs and software platforms that will soon be entering the market.
Bottom line in a double transformation, we have to significantly improve our cost and or quality, but at the same time grow.
Still that huge promise and Ford plus.
And frankly, the first part of the transformation has not moved fast enough.
Now this is what we should be known for.
Is there a legacy.
And would show we can do it again.
We are deeply entrenched issues in our industrial system that are proven tough to root out.
Candidly the strength of our products and revenue has masked this dysfunctionality for a long time, it's not an excuse.
But it's a reality.
We're dealing with it urgently.
Over the past year, we've made sweeping leadership changes and brought in world class talent to Reenergize and rebuild a leading industrial organization.
We've committed company wide to implement.
Lean operating system.
That will scrub billions of dollars of waste out of our company.
And we are shining the light on every inch of our legacy business with knowledge that we must do better every day.
This has been humbling for both me and our team.
That said I've never been more convinced about our plan.
I cannot wait to get into work every day, because I'm, so optimistic about our plan and what we're creating here at Ford.
No I respect our competition.
But I would not trade our places with anyone.
Why.
Because we have a real strategy to grow.
We have incredible products, both on the road and the ones you Havent seen in the pipeline.
And I believe we now have a world class leadership team.
Made up with new and existing talent.
Ready to compete and win.
These strengths will shine through.
Ultimately the proof will be in our results.
Exactly how it should be.
We appreciate those who place their faith and Ford and we are committed to creating value for all of our stakeholders.
So with that let me quickly cover some areas of focus.
First we remain committed to disciplined capital allocation.
You saw this and the actions, we took in Brazil, and India and most recently in Argo.
Now South American IMG are healthy and generating sustainable profits.
This work is never done.
Do you need to be the focus for us going forward.
Our balance sheet liquidity remained strong and our ability to generate free cash flow has really improved significantly.
And this is allowing us to sell to accelerate our investment in growth of course electrification, but also pro and software. While importantly, also returning capital to our shareholders.
And we now have created three distinct customer facing business segments Glu E and probe.
Would you given us greater clarity and insight into each of these businesses and how we can improve each of them uniquely.
So let me cover a couple of highlights.
I'm going to start with Pearl My favorite did not so secret weapon at Ford.
Ford CRO and bodies, all of our growth levers and the.
Capitalizes on our commercial vehicle sales leadership.
And scale to build a world class ecosystem that delivers great value to our customers and profitable growth for us at Ford.
In North America, our vehicle share is almost twice that of our closest competitor and in Europe , where it has been the number one vehicle brands commercial vehicle brand for eight years in a row.
Let me bring this point home here in North America, a whole market Super duty, our most important pro vehicle owns half the mining business you don't have the emergency response business and have the utility business and the requirements for all these customers are complex, they're not going to come out of the ties and they require partner deeply understand.
These unique businesses. It is dedicated to providing a mix of vehicles, but also services. They can improve uptime and total cost of ownership.
And we know these customers will pay for software.
That will enhance their productivity.
Now, we're going to future proof this business by leading the commercial electrification solutions as well.
E Transit and F 150 lightning today.
E Transit is already America's top selling electric vans.
With 73% market share.
60% of all of our U S fleet managers.
To add an electric vehicle within the next two years to their fleet and that's even before 7500 dollar I array tax credit that was announced.
And applied irregardless location of raw materials of batteries.
This year CRO really gets going.
We introduced our most important vehicle gets refreshed the new super duty pickup and the Europe . The Super duty equivalent we have an all new one ton transit.
And Ford Pros 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.
<unk> network of 1000 mobile service vehicles on the road in North America, and Europe and over 1400 specialized commercial vehicle dealerships many of which opened 24 seven.
In fact last year mobile service repair orders increased 85% for us in pro.
And this improves the customer experience will improve.
Portly, 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 fresh or the ice portfolio, the greater pricing power. So our decision to move away from sedans and Commoditized utilities to vehicles like brokers sport in the big Bronco, the Maverick the Puma in Europe and.
And hybrid powertrains has really paid off.
<unk> gained nearly one point of market share here in the U S last year.
And we expect 2023 to be another big strong year of share growth.
Ford Blue is a growth business for the foreseeable future with strong profits and robust free cash flow.
And that series was America's best selling truck for 46 consecutive year now of selling its second place competitor.
By more than 140000 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, glu is going after billions of cost improvements from engineering to manufacturing to our bill of material.
And in quality, we have work to do.
Ford has been the number one in recalls in the U S for last two years.
Clearly that's not acceptable.
We've overhauled our entire enterprise quality operating system.
And we are already seeing improvements in initial quality for vehicles coming out of our plants here in North America.
And model.
It's operating with a startup intensity to build profitable evs.
With differentiated industry, leading portfolios.
Customers are going to love.
In the U S. Our EV sales growth.
Is twice the rate of the EV segment.
More than 60% of our model these customers are new to Ford.
You have 150 Lightning has been America's best selling electric pickup since it launched.
And the Mustang Mach key remains a huge hit for our customers.
We remain on track to reach our annualized production capacity of 50000 units per month or 600000 units globally by the end of this year for reference in the fourth quarter a run rate of production was more like 12000. So 50000 is a big growth.
And by the end of <unk> and we are on plan for that 2 million units of the incremental capacity by the end of 2026.
Now to deliver this incredible growth as.
As we speak throughout facilities in North America, we're adding shifts.
Expanding our facilities building out battery capacity and assembly capacity.
Construction is in full swing in Tennessee, and Kentucky on a global city and our three global S. K battery plants in Europe , We're moving ahead with a new commercial vehicle battery facility in Turkey.
No critical to our plan is securing the necessary raw materials for these batteries to get to that 2 million unit rate is.
Especially lithium in lithium hydroxide and nickel, we expect to have 100% raw materials, we need the two 2 million unit run rate secured by the end of this year.
Now we are deep in the development of our second generation Eev's, including our next generation electric full sized pickup.
By the way is awesome.
These evs will be fully software update a bull that means a brand new electric architecture.
They were gonna be rep.
Radically simplified.
Imagine three body styles, each with volume potential of up to 1 million units and.
And just a handful of audible combinations.
That's what we're doing at Ford for the second generation of products and that means higher customer set better quality lower bill material and lower manufacturing costs.
When we started report when we start reporting. According these new segments in the fourth quarter Youre going to have complete visibility in the model EPS margin trajectory and understand the key levers to achieve our model EBIT target of 8%.
We're already making the customer buying experience better with less friction now this is only going to accelerate.
When the new model E dealer program takes effect in January next year. This program has been adopted by nearly two thirds of our 3000 U S dealers.
And it's based on a radical redesign on our customer experience.
Next January will 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, a remote and pickup and delivery for all customer experiences.
We're also expanding blue overcharging network at all of our dealers.
Have dealer staff trained not only in software, but all the EPS.
No I've said before.
Software and experiences will be the key differentiator for our industry.
Earlier, the blue crews or driver assist hands free technology was just tested by consumer reports and judge the best hands free autonomous system on the market.
Let that sink in for a while.
The best on the market.
No I have not experienced crews.
I want you to go out and do your side by side comparison with our two major competitors.
And at the end of last year.
Customers using two crews have no travel.
42 million hands free miles.
So we're scaling incredibly rapidly.
That's a four fold increase in the millions and millions of miles since the second quarter of last year.
And we have incredible software talent, making this system better everyday including those 600, former Argo Engineers now working full time at Ford on autonomous systems.
Now before I hand, it over to John .
Just a few things.
It is a different company today, we're all about building a stronger customer focused business.
To generate sustainable profitable growth and returns above the cost of capital.
While our 2022 results fell short of my expectations.
I've never been more excited about our future.
We have the right plan the.
The rate structure to succeed.
The best team on the field and real strategic clarity this.
This year is about execution.
It's time for us to deliver and we will with relentless attention to our founding principles.
Drift and growth.
And we are hitting the ground running John .
Thanks, Jim.
As Jim pointed out our performance in 2022 was below our expectations.
And our industrial platform is frankly, not where we needed to be.
The simple way I measure this is by looking at our cost of goods sold as a percent of Rona.
And then compare it to our competition.
We've all done it for much higher.
And this speaks to the significant operating deficits, we have product development manufacturing and procurement.
And 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 improved returns and we are now applying that same level of discipline to our industrial platform with urgency.
Now on the positive side, our product portfolio has never been stronger.
Our new vehicles are a hit with our customers our iconic vehicles remain market leaders and we continue to make strategic and capital allocation decisions to drive growth strengthen our competitive position and produce returns above our cost of capital.
So turning to the year, we generated a record $9 1 billion in free cash flow well above our cash conversion target of 50% to 60% and importantly, most of the free cash flow came from the automotive business and this reflects our disciplined capital allocation, including the restructuring of our operations.
Out of North America, which until recently was a significant source of cash burn.
Our balance sheet remains strong and we entered 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.
Today, we declared our first quarter regular dividend of <unk> 15 per share as well as a supplemental dividend of 65 per share, reflecting our strong free cash flow and the monetization of our <unk> stake, which is now nearly complete.
Going forward, we intend to target distributions of 40% to 50% of free cash flow consistent with our focus on total shareholder return.
Now for the year, we delivered $10 4 billion and adjusted EBIT with a margin of six 6%.
And as Jim said by better executing the things we control, we should've 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 fourth quarter, but also incur higher costs through premium freight and other supplier charges.
Now let me give you a quick overview of how our 'twenty two segments perform recognizing that beginning with our first quarter 2023 results will no longer have the automotive segments, where the regional breakout.
North America delivered $9 2 billion of EBIT and improvement of $1 8 billion driven by higher net pricing and increased volume, which was partially offset by higher commodity and other inflation related cost increases EBIT margin was eight 4%.
We continued to maintain healthy 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 derisked.
And sustainably profitable.
In Europe , we were slightly above breakeven for the year, but as our fourth quarter results showed clearly below our target.
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 EV Lincoln continues to be our profit pillar in the region, but clearly we have more work to do to ensure our business is growing.
Stable 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 prime for sustainable profitability.
Finally, Ford credit had another solid year, delivering EVP of $2 7 billion, which was down $2 1 billion from the prior year, reflecting lower credit loss and lease residual reserve releases lower financing margin and lower lease return rates.
Now given the continued uncertainties in the macro environment I want to provide some context to how we're thinking about 2023.
For the full year, we expect to earn nine to 11 billion in adjusted EBIT.
And that assumes a saar of 15 million units in the U S and 13 million units in Europe , we expect to generate adjusted free cash flow of about $6 billion and for capital expenditures to be between $8 billion to $9 billion.
Our adjusted EBIT guidance includes various headwinds and tailwind that we believe could impact our business in the coming year and for example, when you think about the headwinds. They include unexpected mild recession in the U S and a moderate recession in Europe .
Industry incentives as supply and demand come back into balance.
Ford credit EVP of about $1 3 billion and that's about $1 4 billion lower than in 2022, reflecting unfavorable lease residual and credit losses, and the non reoccurring of derivative gains we.
We expect a continued strong dollar.
We also expect about $2 million lower past service pension income.
And we're also going to continue investments in growth, including in customer experience connected services and Capex as we build out our growth plan.
Now tailwind include improvements in supply chain and industry volume.
Launch of our all new Super duty.
And then of course, lower cost of goods sold including efficiencies and materials commodities logistics and other parts of our industrial platform.
Now before taking questions.
Briefly touch on our new financial reporting as well as plans for our next capital markets day.
On March 23 March 23rd we'll hold our kitchen at the New York Stock stock exchange and I'm really excited about this opportunity because it will be our chance to take you through how the new Ford plus segments will alter our financial reporting.
The changes will include how revenue cost products and assets are assigned to each segment.
At the teacher will also share our recast financials for both 2021 and 2022 and we hope many of you of you join us at the New York stock exchange in person.
But we will also broadcast a webcast live and will be and we'll post a toolkit and other materials to Orient you around all the materials and helped you migrate your models.
Now the kitchen will not be a strategic update that will come at our capital markets day in Dearborn in May when we will update you on our fourth strategy, we'll do a deep dive into financial targets and kpis for each of our segments as well as for software and services.
Now with this new level of transparency, which will be tracked and validated in our earnings materials and FCC filings, we think investors will be better equipped to value each of our customer focus segment is contributing to <unk> overall growth.
And return profile.
And as Jim mentioned earlier.
23 is a pivotal year for Ford we have the plan the talent the product portfolio in place to take the company to an exciting new level. One that is both differentiated from our past performance and our competitors.
And going forward, our new segmentation will provide unprecedented levels of transparency and insight into all aspects of our business, making it easier to hold Ford leadership accountable for delivering superior growth and value for all of our stakeholders.
Well that wraps up the prepared remarks, and we'll use the balance of the time to address what's on your minds. So thank you and operator, please open up the line for questions.
We will now begin the question and answer session to ask a question you May Press Star then one on your Touchtone phone.
If youre 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 will pause momentarily to assemble our roster.
Our first question comes from Adam Jonas from Morgan Stanley . Please go ahead.
Hey, Jim Hey, everybody I appreciate the humility and the self criticism in the spirit of that.
It's kind of refreshing.
To see that but you know when you. When you began the description about how frustrating frustrated you or 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.
Just going to 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 getting get better this year.
You can disagree if you want and that's just my impression I want to know what it is because of 2 billion on the table frankly, that's a 130 bps of margin I mean, that's going to 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 any thing else you can tell us to help model.
The company in the year ahead, and what Youre doing about it I appreciate it.
Thanks, Adam.
I know theres a lot more to go.
And.
The industrial system at Ford is.
<unk> is a huge opportunity for us.
And we have spent the last several months really getting deep.
And where we need to go the John maybe you could share.
We're feeling comfortable in sharing but youre going to hear a drumbeat from forward on this all during the year.
Yeah. So.
Adam I think if you just step back and look at the three elements of the industrial platform theres opportunities across each.
If you look at our product development system in our engineering the level of productivity that we have so think about a dollar of input on what you get out for that dollar of input.
There's probably about 25, 30% inefficient.
So we should be either getting more product through the pipeline or our cost will be significantly lower now we have to be very smart about how we go about doing that because.
We've got incredible products in the pipeline and there's a huge opportunity on that front, but we also have to balance the quality as well.
And so when it comes to our engineering I think you should think about it that way and that's what we're going after.
Our supply chain there are issues across the supply chain it cost us as we've talked about last year at least a $1 billion.
In premiums that we had to pay.
Increased freight premiums on chips premiums on disruption that we caused our suppliers because our schedule stability was probably worst in class.
And fixing that and the root cause it gets to that will drive incredible opportunities for us and let's say that for 2023, it should be at least an incremental $1 billion at least.
And then when you look at our manufacturing system and you go through our plants. When 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 a time that it takes us to build a vehicle.
And you understand just how inefficient that is and then you bring that back through that complexity back through the <unk>.
Supply chain and you talked about the number of changeovers that our suppliers have to make to produce the complexity that we have in the time that that adds to production.
Production in the time that adds to the cost and the issues that it drives through so those are just some of the tip of the iceberg of the things we're going after COVID-19.
And then if you go back and you look at it as I said in my remarks.
You look at the math and you look at our cost of goods sold relative to our revenue and then compare that to traditional Oems, let Oems let alone the new Oems and you see the size of the prize that we're going after.
And 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 but.
As Jim said.
We're taking this lean approach and getting into it there's a very systematic way we're going at it now and we are very focused.
And we know that this is the number one thing that needs to get fixed and the first part of our transformation.
And then Adam I'd, just like to add.
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 it says is sustainable when.
When you look at Ford, we have caught in the past and it grows back.
Or we have cut everywhere and not really focused on the industrial system.
So for me the approach that we're taking that's very different.
And very difficult.
Is.
Did it that it has to be daily work.
Gaps to competition countermeasures.
The action plans for those countermeasures constant evaluation of the effectiveness of those countermeasures.
Celebration of those Kpis, and our status and daily management.
It has to be a more fundamental approach and holding our breath are dealing with the output like people getting into the real industrial systems deficiency.
And that is a cultural change as the leader.
A behavioral change it is not just a program.
Thanks, Jim Thanks, Tom Whoa Whoa.
We will come back later I appreciate it.
Our next thank you.
Our next question comes from John Murphy from Bank of America. Please go ahead.
Hi, Good evening, guys, just kind of wanted to follow up sort of on a similar vein.
Short term and long term just for a short term you know when we think about the 'twenty three outlook.
And you look at the the $1 billion for declining in Ford credit and take that as you know reasonably given numbers something that direction and then $2 billion of lower past service pension income, that's a $3 4 billion headwind.
Headwind, but sort of the midpoint of the range Youre talking about EBIT being roughly flat. So that you know that sort of indicates a very significant $3 billion plus improvement in the core business, which is a lot to kind of believe.
When youre looking at sort of the headwinds and the issues that you just you just faced and I'm. Just curious if you can comment on that and maybe kind of walk us through how we can get comfortable like they will see a $3 billion plus improvement in the core business.
This year, I mean, and how do you get the supply chain issues fixed when some they're a bit outside your control and what we hear from suppliers is no volatilities in schedules and it's not just specific to Florida is still pretty volatile.
Yes.
Yes. Thanks, John Great question, that's exactly the headwinds are four $5 billion to $5 billion.
As we pointed out and we said we expect from that.
Their wins.
Our pricing to be about neutral.
The market forces I think are going to drive average transaction prices down we think probably around 5%.
And that will come some from the dealer margins, but also.
From higher incentives.
And then you step back from it and we do have the new Super duty and we expect that to be a positive and we also have a very strong order bank on our commercial vehicles. So we're looking at pricing to be about flattish. We said volumes there was a slight opportunity as industry comes along so the rest of it falls into cost reductions and that's exactly right.
When you look at those cost reductions.
You have to see what's happening relative to the material and the material. There's two phases. There is one.
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.
I don't have the exact data from the competition, but when I look at our schedule of 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 is cost that drives us.
Well as with significant premiums we paid in freight for expedited airfreight et cetera to just try to keep the plants going in cheaper suppliers' plants doing so those are two immediate actions that we can take based on the inefficiencies. We saw in 'twenty two it cost us the $2 billion and then on top of that we have to build.
Through the core industrial platform.
Productivity and efficiencies to drive even more improvement. So that's how we're thinking about it that's how we're going about it okay.
Okay, that's actually incredibly helpful and just on the law on the long term I mean, you'd mentioned, Jim about scrubbing scrubbing things foundational Ian and really getting to some costs that are breakfast and I. Appreciate you know the three areas you've highlighted.
But as we look around the world I mean, Europe has had fits and starts of making us all kind of excited that it is going to work and then it doesn't you know from time to time in China, you've kind of been chasing competition, there and it hasnt really played out for you, but there are two very important parts of Europe , and China that are very strong for you.
So vehicle in Europe is incredibly strong so can we just strip Europe back to pure commercial vehicle and could China, just stripped back to pure Lincoln two places, we know you're making money and cut out the other the other stuff. So that you can actually fund the transition that you're talking about I mean, we kind of old dance around this stuff and you've headed in this direction.
The global redesign, but there's there's real opportunities here to be really profitable.
No.
Hit on it and 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.
We've been in the past in China kind of small but focused on everything.
And Lincoln and our commercial with GMC is very profitable and important business, but they have to make the EV transition.
I don't think you can meet globally successful in the EV business, if you don't compete.
With the Chinese I mean, they're going to come to Europe , they're already there they're going to come to the U S. BYD is a powerhouse gili theres. So many others and so we believe China is very strategically important for us.
But to win there we have to make those businesses transition profitably to EV, but I would think of it as kind of small and focused maybe mid maybe even more than the past.
And Europe is is definitely we have a great CV business commercial vehicle business that now is getting electrified. So we're like making that transition now we have a new ranger.
Electric version of transit one ton transit and all of them, we have new manufacturing site in Romania, that's really scaling up now in commercial so we have a really strong business and the decision really is how.
How much do we need how much.
How many engineers, how many people do we need in Europe .
And how big of a profile Dominion and passenger cars. That's the decision we've already.
Electrified Cologne and that that's really the decision it's not the right time to talk about where we're going to go we know exactly our strength in Europe .
And we know what we need to do so and you won't have to wait long to hear from us on on these things.
Okay, I've got more but I'll get back in the queue. Thank you very much guys I appreciate it.
Sure sure Thanks, Jeff.
The next question comes from Rod Lache from Wolfe Research. Please go ahead.
Everybody.
I think John you said that.
In response to Adam's question that variable costs would come down by at least $1 billion.
But at the same time, you're acknowledging at pricing could easily.
More than a billion dollars 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 or insight into that and.
Can you provide a few specific kpis.
That would demonstrate progress on structural cost they were up another $2 billion in 2022.
Yes so.
The pricing.
We do see the broad market coming in at about.
Transaction prices.
Growing about 5%.
Some of that is going to come out of the dealer margins of course, it's not all going to come from.
But we also have upside rod so with some of the launch of the new vehicles, we won't see as much of a price compression. There. So we see pricing net net for us next year being about flattish.
And so don't think about it as we're working through 'twenty three.
It's been a negative $1 billion.
And then 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 than that.
That as we're coming out with new vehicles or cost per units are coming down so our margins are improving.
When you look at the design of our vehicles and you compare it to competition.
I think if you go through those benchmarks when you go through those tear downs you can see that there's a tremendous amount of opportunity for us to design out complexity and you should see that coming through complexity reduction kpis on a vehicles I think that'll be key and it not only will be in the order combinations, but also in the parts complexity in the number of parts.
And what we'll be doing is as we move forward through this year, especially the capital markets day, we'll be providing more details on those kpis, but it's the key areas you should be seeing how much productivity, we're getting out of a dollar of engineering.
We should do something around that from the Kpis standpoint, because these are the areas that we need to improve.
Okay.
Right right for some of the some of the things I think about.
Some of the things I think about it as a number of number of complexity.
<unk> centers, we have.
Our line side complexity number parts sitting on side of the line.
Our inventory turns inside the plant.
And on the supplier side is gonna be transparency with full transparency down to tier three and a supply chain, that's very important to operationalize better quality and cost on.
On the engineering side.
It's also indirect.
The ratio of indirect or direct engineering that we're spending I E. The productivity.
Productive engineering.
That's resulting in customer facing products and an increasingly I noticed you can sell a little bit weird, but.
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.
And that's something that.
We have a lot of kpis to increasing quickly and are increasingly important for us. It may not be significant restructure cost, but we have to be careful to add a lot of complexity in software.
So just.
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.
Our cost reduction plan and then I have a second question just on.
Molly.
Yes, Ron 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 a battery. So our spending related costs are going to go up.
Volume will drive manufacturing costs, which is in our structural costs. So there will be puts and takes on the structural cost 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.
Yeah.
Okay.
Everything but.
Yeah I I.
I think I got got the answer on that maybe.
Maybe just to switch gears on modeling if I can ask Jim a question.
You have got this target of 8%.
And that 8% margin target, presumably had some assumptions for where costs will go but also where pricing is going to go and just considering everyone's aspirations for growth in Evs do you think you can stand by those pricing assumptions.
A different way of asking you that says do you think you can sell a $40000 electric crossover where the 20% gross margin.
That is a very important question.
Reality is we will we are structuring our portfolio to compete in very specific segments. The two real crossover.
Is turning out to be the accruals civic of the EV business and.
The last thing we want to do is commoditize, our products by dropping the price just look what happened to Henry Ford in the Twenty's and their early teens.
And 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 pick the right segments.
But the real driver of our future profitability on a model Lee is the second cycle products. We didn't know we didn't know when we design. These first few products, we didn't know that.
Our wiring hardest for marquee was one six kilometers longer than it needed to be we didn't know, it's 70 pounds heavier and that that's worth $300. A battery we didn't know that we underinvested in breaking technology can save on the battery size, we didn't know that we needed the world's best aerodynamic.
This is to get the size of the battery smaller.
And so now we have learned a lot in that second cycle of the product is in the.
The factory right now being developed with <unk>.
A lot of new talent.
So I'm very optimistic about our 8% because we are not going to be playing in the two real commodity SUV market.
Because that's because Ford stride that in the ice business didn't really work out for us.
We want to play our hand, our strength commercial truck.
Larger vehicles on the category side, you do not want to have too many top hats, because that cost a lot to engineer.
We want to have minimum choice for customers, but we want to design the smallest possible battery for competitive size and we want to invest differently in our ice business for radical simplification.
<unk> 30, 40, 50% less fasteners, no brackets and the vehicle I can go on and on we will get into at 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.
And that means software and other items like that become even more critical.
I can't wait to show you, our new electrical architecture because to me that's the most invest in most critical strategic investments the company is making none or batteries not the EV platforms, but our new fully updated will electric architecture.
What we've learned on pro as we can make real money on software.
Great. Thank you.
Our next question comes from Ryan Brinkman from JP Morgan. Please go ahead.
Hi, Thanks for taking my question maybe to follow up on that I heard you say in the prepared remarks that our revenue for software services and charging rose 70% year over year in 2022, I remember you're discussing a.
A potential $20 billion.
<unk> market opportunity by 2030 with a lot of excitement on pro at the last Investor day target for 33 million connected vehicles from 2028, but have you dimension. How large are profitable. This business may be currently Oh are you able to share any more interim goals such as what your expectations are for services revenue or services revenue grew.
Both 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.
It goes launching with Blue oval intelligence or anything else, we should be monitoring right.
Yes, great question.
See that on pro first and in this year as a breakout year for <unk>, because we have brand new products, both core in Europe and U S are most the highest volume highest profit vehicles are all new so it's a very important year for us I would say, we absolutely have a fantastic business plan. This is <unk>.
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.
And so between financing in parts and service, we have enormous upside in the short term and you know.
Those are very profitable parts of our business. So I would think of think of it. This way Ryan like software is starting to drive a closed loop with the customer.
Wants to do more physical service with US we have all of 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 going to be prognostics. When we can put predictive failure in all the vehicles like you see on John Deere and Caterpillar and then drive that into our physical repair facilities, we're going to see a much larger retention in parts and service.
So I think the basics of the business are these are profitable vehicles, we've got new ones coming out we're going to grow that.
We're I mean, we blew through our parts and service.
Profits and revenue for pro last year.
It's almost like we can't even predict as that.
That software starts to really drive a different behavior for our customers the growth in parts and service, but that's the monetization in the short term for these services.
In the integrated ecosystem.
Long term the real game changer kind of like autonomy in the retail space is going to be that prognostics.
Great. Thank you.
Our next question comes from James Picariello from BNP Paribas. Please go ahead.
Hi, guys.
So the third quarter.
Negative pre announcement had a narrative around it right.
Very high mix on wheels inventory that you couldn't ship and the addition of $1 billion in supplier cost.
I know Adam hit on this in his question, but this quarter is missing that that storyline.
It was mentioned that you have line of sight to $2 billion in.
Profit that you left on the table, but.
What could really turn around almost immediately in this first quarter.
First quarter and 23 here in terms of like what what operational mishaps.
You know will reverse in the coming months.
Or whatever the timeframe might be.
Yes, I think it comes down to the key driver for the Miss in the fourth quarter was the volumes.
And the volumes was on availability.
Key commodities, primarily chips and the fact that many of our suppliers had equipment issues as they were ramping.
I think we've worked through a lot of those issues on the ramp at <unk> and our supply chain.
And as far as the rate inflow on the commodities the chips.
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. So that's <unk>.
Execution.
Changes that we're putting in place on the rate and flow and 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, So part of its operational part of it is what we're doing working with our supply chain partners and part of it is.
Getting through the hump on ramping up run rates et cetera.
Throughout the system.
Okay understood and that's.
That's helpful and then.
In terms of the earnings bridge for for this year with respect to materials and freight that 9 billion dollar headwind in 'twenty two.
On this line item.
Alright, so if you look at that at least $2 5 billion, depending on where we fall within the range.
<unk>.
Of the guidance so.
I think that would be a start point and then we would go from there.
Of course, we're going to be working to do better than that but that's what we see so far.
So at least two and a half billion positive.
Yeah.
Okay understood. Thank you.
Our last question comes from attained Micheli from Citi. Please go ahead.
Great. Thanks, Good evening, everyone. Just two questions for me first I was hoping you could maybe talk about the regional outlook in your.
<unk> got inside of the segments are about the change, but hoping you could touch on the regions and then second maybe for Jim when we think about the software opportunity on your new electrical architecture on the consumer side of the business. What do you see the biggest opportunity there from a revenue perspective did it automated driving because they're connected services.
Curious what it is.
Interesting there.
Yeah. So.
On the regions, Yeah, I think what we would have to say is that given that we're moving to our segments for 2023, we're not going to be reporting the regions.
And so.
We will give more color on 2023 by each of the business unit segments.
And so I'm not going to comment on regions any more going forward unless there's a specific reason to do that within one of the segments I think on the demand side, we see the U S around the $15 million range Europe around 13.
You know, we're gonna see more incentives in the U S.
So we can go.
Through the demand side, if that's if that's what you're interested in.
Yes, sure that that'd be helpful. Yeah, maybe maybe maybe pricing in Europe would be helpful as well.
Yes, I think in Europe , we're going to see continued pressure on the top line, we've got a $13 million you didnt 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 or the pressure will come on the passenger side, but pricing in Europe .
Incentives continued to be strong throughout this year. So I don't think youll see as much price compression as Europe , as you've seen and you'll see in North America and the U S.
But I think definitely for Europe , it's the call in the industry and where do we think that'll be offset by the strength of the order bank. We have on our commercial vehicles coming back to the U S is instead of 15 million unit industry.
We think prices are going to come in the industry are going to fall transaction prices will fall about 5%.
If you think about that as about a combination of incentives and lower dealer margins, we're starting to see dealer margins come down now.
Demand from the industry is easing a bit.
And we're starting to see the inflationary cost come through with the pricing and so we are starting to see those margins come off and I think through as we go through the year, particularly in the second half youll start to see prices come down through to higher incentives by the Oems.
When you look at our international markets Group I think it's a little bit different there are key product is ranger and that's all new and thats launching and so there's incredible demand for it and so we think we have some pricing power there as well. So I think there is puts and takes around the region. If you look at it on a macro basis.
It'll be more insightful as we talk about what's happening in each of the segments and then specifically what's happening in CRO blue in E and those segments around the world 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.
Yes.
The second is safety and security and the third is.
Productivity.
And the star pupil and there the early leader is definitely a das.
On pricing and revenue growth.
The growth we're seeing the demand we're seeing for blue crews and all Adas features is really driving a lot of fun first shipment we're about to ship our second cycle of glucose already.
And we are really starting to see.
That that is clearly what customers want revenue wise and I do believe in this first three or four years of software to the car that aid us that level two level three system is really the most remarkable tam.
However in the background for Ford.
The productivity software and pro is is really important it's may be unique to us, but it is a very important part of our software revenue, which we will lay out in may to see more specifics on it.
But it's very profitable customers loved the data.
And they have a higher demand for the data and the software then the retail customer.
I think the slow burn the one in the background and I'm Super excited about is the third leg of the stool of safety and security not like some.
It's still your car, but it's video content.
You know a lot of it tied to insurance. So this is gonna be a really interesting area kind of think of your cars an extension of your ring and in all of the safety and security you have in your house now all of that technology.
<unk> give me another note on that.
It will go for everything from teenage drivers to all sorts of things in that video capture is going to be yes.
Another reason why we think our next electrical architecture is so strategically important for the company because we want to embed that hardware and software and adaptability in the electrical architecture. So we can ship the software better software than our competition.
On safety security, even if it's a little fuzzy on what the features are today.
Perfect Thats all very very helpful. Thank you.
Okay.
This concludes the Ford Motor Company fourth quarter 2022 earnings Conference call. Thank you for your participation you may now disconnect.
Yes.
Okay.