Q1 2023 Ford Motor Co Earnings Call

Good day, ladies and gentlemen, my name is Gary and I will be your conference operator today.

At this time I would like to welcome you to the Ford Motor Company first quarter 2023 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.

If you would like to ask a question. During this time you May Press Star then one on your telephone keypad too.

To withdraw your question. Please press Star then two please.

Please note this event is being recorded.

At this time I would like to turn the call over to Lynn Antipas, Tyson Executive director of Investor Relations.

Okay.

Thank you Gary and welcome to the Ford Motor Company's first quarter 2023 earnings call with me today are Jim Farley, President and CEO , John Lawlor, Chief Financial Officer and also.

For Q&A as Marion Harris CEO of Ford credit.

Today's discussions include 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 Dot for dotcom.

Our discussion 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 25.

Yes, 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.

Want to make sure you've got a few near term IR engagements on your calendars on may 21st and 22nd well host our capital markets event in Dearborn, Michigan for the first time in over seven years, we're looking forward to welcoming representatives of the capital markets to our headquarters the event will feature unprecedented experiences, including one of the large.

Just displays of our global vehicle portfolio in recent memory and immersive presentations on our strategic plans of our three new customer centered business segments. We will also feature details of our software and services strategy, both retail and commercial as well as ample time to network with our senior leaders.

On may 25th Jim Farley with keynote at Morgan Stanley Sustainability Conference in New York City and on May 31st Jim will participate in a fireside chat with Tony Saganaki at the Bernstein Strategic decisions Conference also in New York City, now I'll turn the call over to Jim.

Thank you Lynn and Hello, everyone and thanks for joining us today.

Bottom line, the first quarter like this our team delivered a solid quarter, while making real progress on our Ford plus growth plan.

And I hope that becomes a trend afford boringly predictable when it comes to execution and delivering financials.

Extremely ambitious and dynamic and creating the forward of the future.

For the quarter, we saw growth across all of our key metrics. In addition, Ford throwing blue we're profitable in every region, where we operate.

Our balance sheet is strong we ended the quarter with close to 29 million $1 billion in cash even as we invest in growth and return capital to our shareholders.

With each quarter the passes I'm more confident and convinced and thankful we made the decision to create three separate customer focused businesses.

This is unleashed clarity speed and accountability across the company not to mention a whole new level of discipline on capital allocation.

So let me cover a few highlights.

I'd like to start with Ford probe I know many of you were surprised at the true size of the pro business in March when we recast our financials.

<unk> starts with marketing leader leadership in our vehicles across the world.

Tremendous scale and customer knowledge.

And we're layering on top of that the future of our industry and ecosystem of software and services and EV charging that we believe will be invaluable to our commercial customers.

And this will unlock tremendous loyalty and profitable growth.

Our strong order books in North America, and Europe , as well as all the demand signals, we can see for pro support our target to nearly double Crows EBIT this year.

In March we launched the all new Super duty in Kentucky, and Ohio.

It has received tremendous reception and its going to strengthen our franchise that is already the market leader.

Importantly, the Super duty is a platform for software and services that help our customers maximize their uptime accelerate their productivity and lower total cost of ownership.

I would also say the Super duty launch is a good case study for.

The disciplined approach, we're implementing across our industrial system <unk>.

Simply put we slowed the launch down significantly increased on road and in plant quality testing, we dispatch the large and skilled launch team to our plant. We added test vehicles, we drove millions of miles to prove out durability, and we deployed new technology and artificial intelligence.

To catch issues.

Basically we put all the pressure in the system to find and then prevent future quality issues, rather than speeding up the line to match our launch curve.

Short term patients. We believe that will result in long term gain for our customers and yes the company.

In the quarter for pro extended this leadership in true commercial vehicle categories.

Our share of the class one through seven truck in bands in the U S increased by one full share point to 41% share.

In Europe , we've already been the top commercial brand for eight years, now running and our share grew to more than 15%.

We also maintained our EV strength.

In North America, and Europe in the U S. E Transit is already has already a 50% market share in the quarter. We won a contract to deliver more than 9000 E transit vans to the U S Postal service.

Ford Pros paid software subscriptions rose, 64% in the quarter.

Including higher revenue per unit software sales like our telematics and charging software.

With these and all the other initiatives Ford Pro is developing into a resilient business certainly less cyclical than the broader automotive sector.

In Ford Blue the team is focused on capitalizing on a red hot product lineup.

Our opportunity to smartly grow extends to valuable franchises with great pricing power like the F 150, the new Maverick, the new Bronco and of course the Mustang.

We will grow our leadership position in pickups.

In off road and performance and an issue vs with all new derivatives. For example, we just introduced the bronco less than three years ago and already it's neck and neck in sales with the Jeep Wrangler and it has higher transaction prices.

We've also recently expanded the bronco lineup with exciting derivatives like the Bronco Everglades, the Bronco Raptor and the Bronco heritage.

Derivatives not only continued to.

Tribute to our growth, but importantly, they can also drive higher transaction prices and higher returns.

See these derivatives often have 80% pork commonality with the base models.

But their contribution margin percents can be 30% higher with a twofold increase in capital efficiency.

We also have one of the strongest product years coming for Ford Blue So its just beginning.

We have the new escape, including new hybrid it's just arriving in dealerships now.

Next week, we will reveal the all new Ranger and the highly anticipated Ranger Raptor.

That will be followed by an all new Mustang and high performance Dark horse Mustang This summer.

While I can't get into the details yet we.

We have more exciting news to share about two of America's best selling vehicles.

The F 150, and the explore later this year.

And on top of all that we have the Lincoln Corsair, arriving in dealerships now and of course, we just revealed the link as the Lincoln Nautilus.

Afford model he operates with the startup intensity to build a profitable EV business with a differentiated portfolio and a differentiated customer experience U S investors.

Now have true visibility into how Ford model ease profitability strengthens overtime.

Supported by volume driven operating leverage improvements in design and efficiency and of course lower battery costs. We're on track this year towards a contribution margin approaching breakeven in Mali.

And for our first generation products to be EBIT margin positive by the end of next year.

Wholesales were down in the quarter, which deleveraged our cost structure.

Part of the decline was planned as we brought Mustang Mach E production down for several weeks. So we could almost double the capacity and we are now hitting that 35 job per hour run rate in the plant.

Volumes were also impacted by the lower output at that 150 lightning.

We did the right thing.

And I congratulate my team many times by immediately stopping production and we and working with our battery supplier finding and then fixing the root cause of the fire that happened on the on the Ford property.

We're now shipping Lightnings again, taking new orders and increasing production to an annual run rate of 150000 units about double what we do now.

We're also revealing we revealed an all electric explore in Europe , which is now very well received.

We made progress a model <unk> in the quarter advancing our industrial system to scale Evs.

The site preparation is already underway for our L. P battery plant in Michigan.

And construction continues at the Blue Oval S. K Battery Park in Kentucky and of course Global City and Tennessee.

We now plan to transform our Oakville Assembly complex into our Canadian hub of electric vehicle and battery pack manufacturing.

We also continue to make progress towards locking in all the raw materials that we need to support our capacity targets in 'twenty six and beyond.

Martyrly as our center of excellence for technology, including software.

A good example of that is blue crews, which continues to be hit with our customers consumer reports rated at the top advanced hands free driver assist system on the market in the U S.

And that was just version 1.0 R.

Our latest release, which were otas to customers is version one point to it.

It automatically changes lanes with the tap of the turn signal and it delivers a much more natural driving experience hands free.

We also launched <unk> crews in the U K, our Mustang Mach E and became the first OEM to gain approval for hands free highway driving.

Speed anywhere in Europe , with more than and now Blue cruise has more than 70 million miles driven to date and we continued upgrade blue crews for customers with each over the air update.

Before I turn it over to John I want to share our thoughts on how the EV market is evolving in our eyes.

Easy to look at the landscape of the EV market as a monolith.

But we plan to be surgical about where we play and how we win with the right products the right cost structure and the right price points, we do not subscribe to a win vehicle share at any cost approach. We look at share of vehicles of course and share revenue. We also.

Look at share profits and share of the customer lifetime value and we believe this is the only way to ensure we drive appropriate returns our return on capital over time.

By 2025.

We now expect there to be 45, EV models to be up offered in the U S. In the small medium utility segment.

It would be a very saturated to row EV market.

Against this backdrop to ensure profitable growth. We know we have to have a fresh compelling offering with the right cost structure, something we continue to improve with the Mustang Mach E.

Two full EV powertrains once they enter.

But they are not brand loyal for their first purchase we capitalize on that by getting to the market early with the Mustang Mach E and a whole lineup and it continues to reward us with over 60% of the customers new to Fort.

We're seeing that the second EV purchase is much more loyal to the brand in these developed EV markets. So we're glad that we have all these customers in our digital and physical ecosystem.

We are aggressively lowering our product costs for current and next generation products, you'll find out a lot more in capital markets day, but in fact for Mustang Mach E from launch through the end of this year, we have reduced the bill of materials for Mustang Mach E like $5000 per vehicle.

Now in contrast to two world crossovers that we believe will be a very saturated market. We believe modeling can be highly differentiated in markets, where we know the customer well.

Like the three rural utility space and as I said, we'll share more about at our capital markets event. Later this month on our product strategy.

I had a chance along with John and most of our leadership team to go to China in the last few weeks and look at the EV market in a gamba go and see activity up close.

It's interesting to see how customers are no longer just attracted traditional luxury brands with evs or even hardware design anymore.

Outstanding hardware styling performance quality or just to give it in the EV digital marketplace today.

The best New brands are offering integrated digital retail lifestyle and experience that our software defined.

This is firmly in our sights for a second generation Evs.

This software as a differentiator plus a radically different cost structure and the ability to attract attach value added software and services gives us confidence we can compete and win in.

In unit revenue profit and vehicle share.

While delivering appropriate returns and.

And Ford probe is already there.

I'll wrap up by saying, we're pleased but we are not satisfied.

As I said solid execution, and some really thrilling progress advancing our Ford plus plan.

I look forward to seeing many of you in person in three weeks for a capital markets event, where we will go much deeper into our strategy and our progress Joan.

Thanks, Tim.

First quarter.

Wholesales were up 9% year over year, as we delivered $3 4 billion and adjusted EBIT.

Margin was eight 1% up 140 basis points.

Or blue and Ford Pro profit improved reflecting favorable mix and higher net pricing and as expected those benefits were partially offset with a loss in model E. As we invest in our clean sheet next generation EV and scale, our leading portfolio of first generation electric vehicles.

For the quarter, we delivered $700 million of adjusted free cash flow.

Proving consistent free cash flow from our industrial footprint combined with disciplined capital allocation provides us with significant flexibility to fund our growth while also consistently returning capital to our shareholders.

Our balance sheet remains strong we ended the quarter with close to $29 billion of cash and over 46 billion of liquidity and.

In addition, despite the recent market volatility we successfully completed the renewal of our 17 billion sustainability linked corporate credit facilities.

Yeah.

So turning to our customer focused business segments.

Wholesales up 6% Ford Blue delivered $2 6 billion in EBIT, I mean, with 10, 4% margin that was 400 basis points higher than a year ago supported by favorable mix and higher volume.

Our fresh and exciting product lineup continues to drive strong demand.

Wholesales for model E declined in the quarter, reflecting planned downtime that allowed us to almost double our production capacity the Mustang Mach E.

Now the profitability of any EV startup, including Ford model. He is highly leveraged to volume.

Importantly, holding volume constant.

Our first quarter EBIT margin would have been roughly flat compared to the fourth quarter at around negative 40%.

We expect Ford model EBIT margin to improve to around negative 20% in the second half of this year, reflecting stronger per unit contribution margin and significantly higher volumes. In fact, we expect model E contribution margin to approach breakeven this year and we continue to target positive EBIT.

Margin for our first generation vehicles by the end of 2024.

Ford Pro delivered an 18% increase in wholesales and EBIT improved $900 million to $1 4 billion for the quarter delivering a margin of 10, 3%. The improvement in profitability was supported by higher net pricing increased volume and favorable mix importantly, this was achieved.

A quarter when wholesales for Super duty were down both year over year and sequentially as we ramped up production of our all new version of this highly popular truck.

Ford credit delivered EBIT of $300 million down $600 million from a year ago, reflecting lower financing margin higher credit losses, and lower lease income all of which has been reflected in our full year outlook credit loss performance remains strong and is still below the historical average but beginning.

Normalized auction values remained robust, but down from their peak in the first half of 2022.

Ford credit liquidity remained strong at 26 billion.

5 billion from year end. In addition, despite volatile market conditions. The company has already completed 12 billion public issuance or roughly 50% of its 2023 funding plan.

Turning to our outlook, we continue to expect full year 2023 total company adjusted EBIT of $9 billion to 11 billion adjusted free cash flow of about $6 billion and capital expenditures between eight to 9 billion.

This guidance includes headwinds that reflect global economic uncertainty higher industry wide customer incentives as vehicle supply and demand rebalance lower past service pension income exchange and investments in growth such as customer service and connected services.

And tailwind driven by improvement in the supply chain are our higher industry volume with Sars of about $15 million and $13 million in the U S and Europe , respectively launch of our all new Super duty and lower cost of goods sold including materials and commodities.

Turning to the segments.

Blue to deliver full year EBIT of about 7 billion cost improvements and higher industry volumes will likely be offset partially by pricing headwinds as inventory stocks continued to normalize and industry incentives rise through the year, along with adverse exchange Ford model E to report an EBIT loss of <unk>.

One 3 billion, largely reflecting disciplined investment in new products and capacity.

We also anticipate Ford pros EBIT to nearly double to around 6 billion compared to our 2020 to resolve the gain is driven by improved pricing and volume, including the benefits from the launch over all new Super duty and EBT for Ford credit is anticipated to be around $1 3 billion.

Additionally, I hope that all of you are blocking time for our next capital markets event on May 20, <unk> and 22nd hearing Dearborn.

It will be an important couple of days as we update you on core plus strategy take a deep dive into financial targets and kpis for each of our customer centered business segments and talk about our capabilities and expectations for software and services.

The time, we're done I believe he will even be better equipped to value. The expected contributions of each of the segments to <unk> overall growth and return.

So that wraps up our prepared remarks, we'll use the balance of the time to address what's on your minds. Thank you operator, please open 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 telephone keypad. If you were using a speakerphone. Please pick up your handset before pressing the keys to withdraw your question. Please press Star then two.

Our first question comes from Adam Jonas with Morgan Stanley . Please go ahead.

Thanks, everybody, so Jim you've compared the current environment.

For Evs to the year 1913.

Saying that no one should really be surprised that Tesla is cutting price. So much and then I think you asked the question, maybe rhetorically who's going to Blink on growth. So if I put your own question to you Jim.

We will forward and blanked on growth.

Thanks, Adam.

It depends you know well first of all our first three evs are all very different in terms of pricing I think the lightens prices up $11000. Since we launched an E transits up.

You know a lot, so and and and of course, we're increasing production did you get that scale benefit. So the most important thing we've learned.

Three four years ago.

Is.

Be careful where you compete.

And we have selected where we compete extremely carefully we want to go after segments, where we have a great reputation, but theres a lot of conquest customers and we want to innovate beyond just the powertrain like pro power onboard.

And as well software, we now know the three shippable software stacks safety security productivity for pro and of course partial autonomy. All of those are really great hedges against the inevitable overcapacity in certain segments, we could see the overcapacity in the two row electric utility segment like.

Years ago, Adam literally like before we had finished the marquee development. We knew this was coming that's why we got a team together we brought down the <unk>.

The cost of the bill material by $5000, we aren't waiting for a minor change we're not doing things like we normally do and we continue to get the data off the vehicle to make the software better and better so the customers' vehicles get better every day.

So I would say.

The message from me as the CEO .

Is that.

We are not going to price just to gain market share.

We will always balance.

The profit.

Road map in the first generation products, it's pretty challenging because we didn't know what we didn't know four years ago. When we design them, but now we're two years in designing the second cycle.

And in capital markets Day, we will take you through why we believe that 8% margin is totally realistic. Despite all the pricing pressure that we will absolutely get because everyone wants to grow.

So I would say we are quite different than maybe some of the pure EV players cedar pricing just for growth, we will always balance that because we want us profitable EV business and we're pulling every lever we can and the first gen products. The second Gen is where we can really make hay.

I appreciate that Jim and just as a quick follow up.

Is that what Youre, saying is really landing well with me it's resonating.

But I just get a little nervous with the 2 million unit capacity target. They have hanging out there for the second half of 'twenty, six which I just my opinions a crazy high number can I get you to admit that volume targets and I think you are saying this and I don't want to preempt the capital markets day, but can I get you to admit that volume targets as does.

Success criteria alone really is the wrong thing to continue to perpetuate.

Jim.

Yeah absolutely.

Look we all have to plan our business professionally and scaling is important look what happened in first quarter for modestly we want that scaling benefit.

But you know that is not success in fact, I would say the more we study this our trip to China was a real Epiphany for our leadership team I would say the more.

The thing that I look for as the CEO .

The quickness of that loop is the fitness for differentiating brand and profit in the future for this.

New digital product category, we happen to call electric vehicles to me.

Yes volume is important.

But that quickness of that loop, which.

We're already under 10 million O T a.

We've now gained 65% more miles traveled on blue crews in three months we.

We were only 42 million miles three months ago, we're now at $70 million and the reason why that's growing so fast.

Is because we continued to do otas to blue crews to make it better and better.

On Ford Pro those shops, who are subscriptions are growing fast so to me.

Of all the Mets.

Metrics I look for.

As a proof point for our success in this new digital product category, we call Evs.

I think that's the one Adam I look for the close the best and we will always balance profit with scaling.

Thanks, Jim.

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

Hi, everybody.

Body I'd actually like to follow up on Adam's question I'm, just looking at the $900 million increase in structural costs in the quarter and I know that the investments that you're making are aimed at driving growth, but in the past when the industries experienced higher structural costs. It put a lot of pressure.

On everybody that had volume targets, which ultimately wasn't good for pricing.

And I know you said, Jim that Youre planning to target segments, where you've got strong pricing power and youre confident in conquesting customers, but can you just talk a little bit about whether you agree with that assertion.

That theres going to be pressure, even on Ford just given the magnitude of the structural cost increase that you are taking on.

And what kind of flexibility do you have any targets if.

Volume or pricing assumptions can come in a bit short.

Yeah, Let me sorry, you following up on Adam's question, let me start.

Start off on the cost there, yes, you're right. We did see our structural costs go up in the quarter on a year over year basis, as we continue to invest as Jim said in our <unk> and our digital architecture and our software.

I think for US a key part of that is bringing those structural costs down and blue overtime, and then driving efficiencies at our overall cost structure.

<unk> contribution costs and material costs warranty and freight et cetera, So that's where we need to see.

The term on our cost structure in those areas as well and then cost structure coming out of Blue as we can then continue to invest and Ian probe now of course, we have to do that at an efficient level.

So that it doesn't put that much pressure on the business, but Jim can talk about this more but as we're investing in the growth of Evs, we're not doing it where were proliferating. We're looking to be very focused on the segments, we're going into be very disappointed on the complexity and the number of top hats.

Models that we have.

Have the right footprint, the industrial plants need to have the right efficiency levels and we will talk more about that at our capital markets day, but were very very thoughtful of the fact that as that investment goes in it needs to be very efficient.

Okay.

And just maybe secondly, just.

Switching gears to your variable costs like a material freight and commodities were up a.

$1 three in the quarter or are you still expecting a 1 billion of savings and variable cost and $1 billion a billion and a half in commodities and that's the case can you also have superb.

Volume ramping later this year.

I just would be curious about whether you can give us a little bit more color on the first half to second half assumptions since.

Your full year guidance implies some.

Pretty meaningful decline.

And the year personal level, we're seeing right now.

So when you look at it from a cost standpoint.

<unk>.

Let's just unpack what happened last year.

When you look at the cost increases in 2022.

Only about 15% of that happened in the first quarter.

So on a year over year basis coming out of last year. This was a tough right. So you look at it sequentially. When you look at our cost on a sequential basis, our costs were down in the quarter.

And they were down significantly in blue.

They were up a little bit me they were about flat in pro.

So yeah, we have got to gain traction on the cost reductions for sure as we go through the second half of the year.

And youll start to see that come through in the second half overall when you look at it.

From a cost standpoint, we expect our total cost to come down the cost of goods sold to come down about $2 billion versus the two five and that's primarily reflecting the fact that commodities aren't coming down as quickly as we thought so that's where we see costs unfolding through the second half of the year.

Yes.

The next question is from John Murphy with Bank of America. Please go ahead.

Good afternoon guys.

Yeah.

First question on fleet, because that seems to be leading the volume recovery here early in 2023, I'm just curious how much of a tailwind that was for you and where that shows up.

In the numbers, whether it's only in pro or do we actually see some.

Something actually showing up on the on the Blue and east side and how much do you expect that to continue to sort of be a tailwind as you go through the course of this year and maybe even for the next year or two.

Yes, it's a big business is largely sitting in for John .

<unk> pro as we go through the year.

There is considerable pent up demand, we now have the new Super duty will be launching the transit in the second half of the year.

And we expect that to continue.

So that's where we see.

A bit of opportunity as we go through the year as we expect profits in pro double this year versus last year.

On Blue what we saw in the first quarter for Blue.

It was about flat pricing was up a 10th a strong mix really strong mix and some volume increases in blue in the first quarter and that strong mix was on F series and that's because last year, we had the <unk> issue, which kept our F series mixed down plus we were launching escaped this year in the first quarter.

So when you look at it that's where we see things unfolding when we go through the rest of the year on Blue we expect that.

That mix to come off that's not going to repeat itself.

As we run through the rest of the year.

On pro.

I want to highlight a few things John .

There was a huge.

Back order of vehicle pent up demand for small business in the U S and Europe that is still not even close to being satisfied.

So, yes, a lot of the bigger fleets.

U haul as you can imagine who they are.

Truck and van customers.

We've done a good job getting them the product they want they still want more a lot more and this is before we launch a new super duty and of course, the new transit in Europe . So there's a lot of pent up demand for large fleets, but most of the real profitable CRO business is small and medium sized business and they have been waiting.

Literally three to four years for their transit and Super duties. So the pent up demand we're seeing now.

Is really those customers and there is still a lot of pricing power and and lots of pent up orders for and especially now that we have brand new Super duty in transit in Europe , it's going to be even more intense to get those products. So.

The larger fleets, we've done a good job getting them more product, but there's a.

A ton of.

Pent up demand for pro vehicles, with those small and medium sized business, which is the heart and soul of the Tam.

And Jim if I could follow up follow ups on the pricing discussion there seems to be a change in the philosophy or the way that people are thinking about this particularly that new large competitor that is cutting price and that you can cut price on the front end and not make a lot of money on the hardware, but you can make a whole lot of money on the software and services on the back end. So youre not so worried about profit on the front end you worry you. Thank you.

Can make it up on the backend as you think about your business evolving.

Over time do you think in five years' time, plus that youre going to be sort of selling the vehicles hardware and making all the money on the back end I mean, how should we think about sort of the balance.

Of how the money is earned on vehicles going forward.

Will that business model I mean outside of maybe Tesla that business models lie that well at Ford right now on pro so when the answer to your question. Please understand that we are operating that kind of business, where our after sales and software is now.

Large 30 plus percent attach rates.

And I would say the answer is I am not giving any relief to my vehicle teams for software sales or any kind of margin advantage. They those products have to get to 8% on their own.

And we see the software and especially for pro the physical after sales those attach rates charging equipment.

Equipment that were seeing 30 plus percent attach rates, that's plus business for us that's an annuity we want to create and we do not want to commoditize our products.

That is not our strategy, maybe someone elses, but not ours and that's coming from a company that is already doing like we could do that now withdrawal, but we're not going to do that.

I hope that's clear.

Very helpful. Thank you.

The next question.

<unk> is from Ryan Brinkman with J P. Morgan. Please go ahead alright. Thanks for taking my question I read Jim that you recently said at a charity event in Detroit, we're going to have to rethink what the Ford brand means in a place like China. So where do you think you stand with regard to your China operations currently I mean, Lincoln It seems like a bright spot, but what.

Do you have for your operations in that market either in terms of the portfolio or margins or returns and what timeframe would you like to achieve those aspirations.

Well, thank you and I guess, that's the end of my charity work.

But.

You know.

We.

Throw in bluer profitable everywhere in the world, including China, but I'm glad you asked this question because we went to China to finalize our strategy as a leadership team and.

And I guess I would explain.

So our ice business there is profitable Lincoln's success.

But you have to look at China through the strategy lens is not a huge business for us.

And we believe that not only is it the biggest EV market in the world, but customers digitally or ahead of the rest of the world and so it's a really important market for us and what we really see in our presence there.

Is battery Tech did.

Digital experience for the customer and advanced product, both software and hardware integrated.

Our strategy going forward in China will change.

We're going to go to a much lower investment leaner more focused business in China with higher returns and I'll give you. An example, I don't want to lay out the whole strategy here, but since you asked the question.

Our partnership with J M. C is a good example, we are going to double down on our commercial business, including Evs in China. We also believe the GMC can be an export hub for affordable Evs and the ice commercial vehicles using the four distribution network for our pro business around the.

World, We have right.

<unk> dealers in South America, South Africa, and Australia, and Mexico Places, we can export.

And now we have a source of a fantastic affordable Evs and commercial ice products with GMC. That's an example of how we're going to approach China from now on we're not going to try to serve everyone it'll be a lower investment.

Leaner much more focused business in China.

And we're gonna have a team on the ground.

That will be global resources for the company because of how important the market is and the EV.

Okay, great. Thanks, and then just lastly, what is the latest you're seeing in terms of auto loan APR credit availability, maybe in light of some of the turmoil that we've seen in the banking sector in the U S. Saar has been very strong this year.

In line or stronger than your expectation for 15 million total Saar, particularly in light of the higher rates may be helped by the strong equity and used vehicles, but just curious if you're hearing anything maybe different at the margin from your dealers or customers or just how youre thinking about the auto finance market generally.

Yeah, Hey, Ryan it's Marion we have seen a number of banks pulling back from auto lending, which is kind of a hallmark of banks through difficult markets and that's created a bit of a pricing opportunity for us as well as improvement in sheer financing share for us so.

I don't see it getting a lot better over the coming months for four banks, but.

Credit availability is still there for customers and captives across the industry are going to continue to support.

<unk>.

Very helpful. Thank you.

The next question is from James Picariello with BNP Paribas. Please go ahead.

Hi, everyone.

First question on price. So its pricing overall is still expected to be neutral for the year. It sounds as though Blu is got to be negative for the full year as incentive spend picks up.

But yes can you just help unpack, how we should be thinking about this year's price for modeling and probe with Super duty.

Strength still to come.

Yeah, so overall for us or bridge.

From 'twenty to 'twenty, three we expect pricing for us to be neutral.

We still expect that to be the case would you expect the second half to see pricing.

Pressures, especially on blue as we see supply and demand normalizes.

Pro we believe there'll be pricing strength throughout the year and on a we see pricing being.

Slightly down on a year over year basis as well. So overall no change to what we had talked about at the teacher and we see pricing is neutral for Ford.

Okay got it and then.

Just to confirm you talked about 20% of minus 20%.

Margins for the second half is that right.

Contribution margin year.

Contribution margin.

Alright, Thank you I appreciate it.

Sorry, no no no total margin contribution margin positive total margin will be EBIT margin would be minus one.

Got it yeah. So that's my follow on to that.

That's what I thought you had said.

Can you.

Ridge, what the what the benefits are from a materials perspective scaling.

In terms of the buckets, maybe that you provided at the teaching.

What what helps get to that.

Minus 20% run rate for the second half thanks.

It's not different than what's in the teacher I mean, when you look at it we're going to scale through the year, we start to grow volumes.

I'll, let Pete battery coming in and then we have the design reductions that Jim talked about getting to about a 5000 dollar reduction our Marquis we have a significant reduction in play our lightning as well so it's the same buckets.

We talked about at the teacher.

Thanks.

The next question is from Dan Levy with Barclays. Please go ahead.

Hi, good evening, thanks for taking our questions I, just just one follow up on.

And that last question.

The contribution margin.

And I know you didn't disclose contribution margin at the teaching but at.

At the midpoint and if I look at what you disclosed in your deck, it's roughly negative $4000 contribution margin.

Right now.

Said a lot of this is alternative material reduction so.

I just wanted to understand how easily you can reduce content.

Cycle.

I know you said that there were some design changes that you can do but typically you see a more material content modifications at the end of a product cycle. So I just wanted to get a sense of your visibility on <unk>.

Content modification to get that contribution margin to breakeven.

So there's a couple of things you can do from a content standpoint.

To drive your costs down and one of them is we are using the digital connectivity of the vehicle to understand what features that customers find valuable.

And if theyre not using something that we have on the vehicle we can design that out.

The other thing we're doing is as Jim said, we didn't wait on marquee. So we started to put together what we thought of as bundled actions and some minor programs as we work through a model and we're launching those as we go through the year this year and into next year to get us to that $5000 reduction.

As a first mover.

We felt it was important to get to market quickly with readily admitted that the design and efficiency of our first generation products isn't where it needs to be and we're working on that those reductions now and we're taking all the learnings from that and incorporating it into our second generation products.

And we will talk more about that alright, a couple of weeks at capital markets day.

So yes, there's things you can do you just need to be thoughtful about it as you go through the product and where there's opportunities you bundle them together you do a minor launch you do a change and you go and that's what we're doing on <unk> and we're using the connected data to take out features that the customers don't value.

Great. Thank you and then as my follow up I, just wanted to touch on some of the earlier questions.

I will ask and this notion.

How youre looking at.

Volume.

And I think the message clearly youre, making.

Is that youre not necessarily your balancing volume with with profit.

<unk>.

But historically this has been a business that is dictated by volumes as dictated by.

Utilization and.

And if I read your comments correctly that you're focused on sort of unique segments and you want to sort of get out of the fray a little bit that would probably tell me that if youre punching at 4 million units a year now which is low versus actually where you've been historically that.

If you're focused on on these more premium segments or more unique segment that there could be a much lower volume going forward. So how.

How should we think about your volume more broadly I realize it's probably a better question for the CND.

How are you thinking about sort of structurally what type of volume you should look at in the future.

Yeah. Good question, so I want to make it really clear that.

Our growth strategy for the company is very aggressive and the focus is on conquest customers.

So we are we plan to grow and that capacity increase for E and pro.

Is mostly additive to the company's overall growth.

And what gives us confidence in that is.

Is that we are targeting conquest vehicles and software.

Customer categories that we know really well.

It's not lost on us that when we launched lightning almost all the full size pickup truck EV customers were new to Ford and new to this segment.

So what we learned in Lightning case segment traditionally has been 13% in the industry for pretty much my whole career.

Be much much bigger.

When you add new product features like a franck lockable storage for full size truck.

Zero emissions and the ability to power your house for three days a lot of new customers bought a lightening that never owned a pickup truck before.

And we intend to do that with three raw crossover and with a bunch of EV pro vehicles, which we think will be huge growth for us.

So you should expect that a lot of that capacity, we're putting in is for growth for the company, but we are not going to grow at any cost were going to manage that incremental new growth for profitability and growth together.

And we put a lot of thinking into our product strategy. What are the most important aspects of our product strategy is not to have too much top hat engineering, we want to have a lot of scale per top hat.

And again, we'll go into the capital markets day, as you said because I think it's best answered there with real examples where you can really see our strategy coming to life.

But we've learned a lot from lightning and for marquee.

Frankly, the number of new customers. We're seeing is very encouraging for us because of our capacity increase and we know that the second cycle of product can be radically simpler and lower costs.

Aside from the scaling effect and again, we'll lay this out in capital markets day for you and for everyone else.

Great. Thank you.

The next question is from Tom Narayan with RBC. Please go ahead.

Alright, guys. Thanks for taking the question just had two quick follow ups.

So for Blue it sounds like the downshift.

Kind of implied in the rest of the year is really coming more from mix and not prices, you're saying net neutral on price for the for the full year is that is that right.

Yes, so mix, we have very strong mix in Q1, we don't expect that to repeat as we go through the year.

And we do expect on a full year basis that we will see some pressures on pricing in blue on a full year basis as we go through the second half of the year remember, what's really important is to understand that run rate of price as you come out of the back end of the year because you have the accrual impact for all of the units that are in stock and then you have to take the.

Incentive levels from Q1 of 'twenty 'twenty, four and apply it to those units that are our in stock. So you got to think about that on a run rate business coming out of the end of the year, but overall yeah. It's.

For Glu, we definitely see that there'll be some pressure on pricing.

Okay and then another another follow up.

So.

On this question of attach rates, you're at 30% attach rate on pro which is amazing.

And just curious as you think about that is there an incentive perhaps to increase that attach rate, perhaps by sacrificing on price, presumably those subscription revenues come in it at higher margins or is the view now we're not going to you know at the end of the day, where you know we may we may.

These products and the subscription services or add on to enhance the product I mean, how do you think about that trade off.

Yeah.

It's a great question right now given the order bank, we see four for pros business.

The more we can invest in profitable high growth products that better.

But you should think it's a very important question, you're asking for pro because I don't think everyone would realize that the margins on software and the margins on parts are actually pretty similar.

So.

In the end of the day.

The customer.

Wants us to have fantastic products for pro but they're they're largely regulated.

Kind of box or pickup truck bed or whatever so so really for the customer the value is going to be the software the attach rates and and the experience they get with an integrated approach think about this future state, which we are executing too.

100% prediction of failure of components before they fail.

Okay, you sense of the vehicle to do that.

It's integrated in software the software gets better every day. So you can predict failure more precisely and for more components. The customer gets a vehicle that it never really goes out of service of your small medium size.

Our commercial pro customer, which is most of the Tam in Europe and U S.

Those customers you know they they take one vande down that's 20% of the revenue so they will pay.

Because they can drive more business with the vehicle, it's never off the road so think about <unk>.

Think about this not as a trade off between the vehicle profit the parts business and the software think about it from the customer standpoint, as an integrated approach where everything is designed for each other where you can't think of doing prognostics without a vehicle designed to do that or the fulfillment of the.

Parts business pre pillar pre picking the part before the customer even gets there so that they can do this service really quickly so the vehicles not off the road very long if it does need service.

So it's I don't really think we think of it from the customer standpoint.

A like trade for margin, we think of designing the whole system.

So that every piece of it adds value and you can't kind of think of.

The physical product or the software independently of each other.

Now it may turn out over time, let's say on the low part of parole.

Thats a software in the parts business more profitable for from the customer standpoint, we're designing the pro business, where they are inseparable.

Like the Prognostic example.

I hope that makes sense to you.

Yeah. It does thank you.

And the last question today is from Emmanuel Rosner with Deutsche Bank. Please go ahead.

Alright, Thank you very much.

So I think you announced a price cost on the Mach E.

Today.

And to your point, Jim I think this is a more competitive segments within all the various segments.

Can you maybe comment on.

The demand environment for lightning, there's I've seen some anecdotal evidence of some decent amount sitting on some dealers lots have I read that as you're planning to ship some to Norway, which it feels like the U S pickup market should have more demand than your ability to supply. So can you just maybe talk a little bit about you know where it lies.

<unk> demand is in general and whether it's sort of like.

Cost actions are needed and all that.

Bring down the price.

Well, there's only one or two in the market. So I can understand why maybe some people would look at it that way if they don't have a product in the market, but from our standpoint of lightning demand as is outstanding we've taken $11000 worth of pricing enlightening $11000.

And yes, thank goodness there.

We are seeing now some dealer stock for the first time in like two years for lightning.

And we're really excited about our cost reductions.

And of course, the software we're shipping to the vehicle like <unk> Who's one point too.

But the demand for lightning is really really strong.

I I look it bring a trailer every week because two years ago. It was like I don't know.

The most popular new vehicle and bring a trailer was.

Our lightning with four miles on it.

Someone was flipping and the prices have come down and they're basically at MSRP now so we're selling at full MSRP the demand is higher.

In fact, I would say that the pricing is higher than MSRP still.

And.

We're totally sold out in Norway like we are everywhere.

So this is.

This is a global segment, we believe Ford is clearly you know the number one pickup truck maker in the world and we're not going to just keep our pickup trucks in the U S.

It's a global market. So we feel great about the demand or else, we wouldn't be doubling production this year.

Thanks for that Jim and then just maybe one follow up for John So.

So if you could just.

Put a final point on the puts and takes for your.

Unchanged 2023 guidance I think you mentioned in terms of costs.

Our materials and freight maybe now it's 2 billion.

Benefit instead of $2 $5 billion are there any other big pieces, where which either more or less of a benefit or a headwind than you saw previously.

Yeah sure so.

We had shared.

What we thought the bridge was earlier this year. So as I said, we think pricing overall for us will be about neutral for the year.

We said that our Cogs.

Primarily material logistics, we had said that it would be about $2 5 billion. We think it's about 2 billion now thats, primarily due to commodities.

Not coming down as quickly as we had thought.

Volumes were up 9% in Q1, we expect to be about up about six ish percent for the full year overall.

So I think you can look at that and those are the three areas that are basically changed versus what we had bridges before we see past service pension at about 2 billion negative credit. We don't change there were about that one for now we're going to continue to invest in growth and then we saw exchange and other of about $1 billion.

So that bridge largely remains the same.

Except we got a little bit of movement between some volume and some commodity costs.

Perfect. Thank you.

Yes.

Excuse me. This concludes the Ford Motor Company first quarter 2023 earnings Conference call. Thank you for your participation you may now disconnect.

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