Q4 2023 Ford Motor Co Earnings Call
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Operator: Good afternoon, and welcome to the Ford Motor Company 2023 fourth quarter financial results conference call. All participants will be in listen-only mode.
Conference Specialist: Should you need assistance, please signal a conference specialist by pressing the star key followed by zero. After today's presentation, there will be an opportunity to ask questions. To ask a question, you may press the star key, then one on your telephone keypad.
Operator: To withdraw your question, please press star then 2. Please note, this event is being recorded. I would now like to turn the conference over to Lynn Antipas Tyson, Head of Investor Relations. Please go ahead.
Lynn Antipas Tyson: Thank you, Gary, and welcome to Ford Motor Company's fourth quarter 2023 earnings call. With me today are Jim Farley, president and CEO, and John Lawler, chief financial officer. Also joining us for Q&A is Marion Harris, CEO of Ford Credit, Kumar Galhotra, COO of Ford, and Mehran Gaja, of Model E. 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.
Lynn Antipas Tyson: You can find the deck, along with the rest of our earnings materials and other important content, at shareholder.ford.com. Our discussion also includes forward-looking statements about our expectations, and actual results may differ from those stated. The most significant factors that could cause actual results to differ are included on page 25.
Lynn Antipas Tyson: Unless otherwise noted, all comparisons are year-over-year. Company EBIT, EPS, and free cash flow are on an adjusted basis. Included in our earnings deck this quarter is a table of our global wholesales for 2023. With nameplate detail by segment and major geography, this is a roll forward of the detail we shared with you last March at our teach-in on our new segmentation. Lastly, I wanna call out a few near-term IR engagements. Next week, February 15th, Jim Farley and John Lawler will participate in a fireside chat in New York with Rod Lache at the Wolf Global Auto, Auto Tech, and Mobility Conference. On February 22nd, Naveen Kumar, CFO of Ford Pro, will participate in a fireside chat in Miami with Dan Levy at the Barclays Industrial Conference. We do plan to run this call for about 15 minutes longer, so that'll take us to 15 minutes after the hour. We wanna leave ample time for your questions. Jim, I'll turn the call over to you. Thank you, Lynn. And hi everyone.
Speaker Change: Good afternoon, and welcome to the Ford Motor Company 2023 fourth quarter financial results Conference call.
Speaker Change: All participants will be in listen only mode.
Speaker Change: You need assistance. Please signal a conference specialist by pressing the star key followed by zero.
Speaker Change: After today's presentation there'll be an opportunity to ask questions to ask a question you May Press Star then one on your telephone keypad to withdraw your question. Please press Star then two.
Operator: Thanks for joining us. You know, last year turned out to be a fundamental year foundational year for our company. We launched some amazing, Pardon me, this is the conference operator. We've seen a little lost audio from the speaker's location.
Speaker Change: Please note this event is being recorded.
Operator: Please stand by as we regain, , , , , , , , , , , , , , , , , , , , , , , , , , , ,. Pardon me, this is the conference operator. We have rejoined audio with the main speaker location.
I would now like to turn the conference over to Lynn Antipas Tyson head of Investor Relations. Please go ahead.
James D. Farley: Sir, please continue. Hi everyone. I'm not sure where we got cut off, but I want to just highlight how important last year was, not only financially, but a foundational year for our team. Our power of choice and our powertrains really came through. And you can really see that on the F-Series, which I'll talk about in a second. Our global hybrid sales were up 20% last year, and we expect them to be up 40% this year. We're now the number one and number two best selling hybrid trucks in the US. Maverick is number one.
Speaker Change: Thank you Gary and welcome to Ford Motor Company's fourth quarter 2023 earnings call with me today are Jim Farley, President and CEO, and John Lawlor, Chief Financial Officer.
Speaker Change: Also joining us for Q&A is Marion Harris CEO of Ford Credit Kumar Gupta of Ultra C O O of Ford and Marin Gotcha.
Speaker Change: CLO of modeling today's discussion includes some non-GAAP references these are reconciled to the most comparable U S. GAAP measures in the appendix of our earnings deck, you can find the JAK along with the rest of our earning materials and other important content its shareholder dot for Dot Com. Our discussion also includes forward looking statements about our expectations actual.
James D. Farley: And we're the number three hybrid brand in the US, behind Toyota and Honda. But unlike them, our hybrids really sell best on trucks on our side. We launched some awesome tech. Blue Cruise just passed 150 million miles of hands-free use, but more importantly, the growth is up 25% quarter over quarter, and the gross margins for Blue Cruise are at 70 percent. The same for Ford Pro Intelligent and Boy Can Ford Do Work Vehicle.
Speaker Change: Else may differ from those stated the most significant factors that could cause actual results to differ are included on page 25, unless otherwise noted all comparisons are year over year company EBIT EPS and free cash flow are on an adjusted basis.
James D. Farley: The new Super Duty and Transit are off to great starts, as is the new Ranger. We are really focused as a team on the segmentation. You can see the speed, the accountability for results, and focus within the company. And our underlying business is getting better. As John will show, despite the UAW strike, our auto profits were up year over year. We've returned to investment grade.
Speaker Change: Put it on our earnings deck this quarter as a table of our global wholesales for 2023.
Speaker Change: With nameplate detail by segment and major geography. This is a roll forward of the detailed we shared with you last March at our teach in in our new segmentation Lastly, I want to call out a few near term IR engagements next week February 15th Jim Farley and John Lawlor will participate in a fireside chat and New York with Rod Lache Wolfe Global Auto Auto Tech and mobility conference.
James D. Farley: We have high hopes, and we have really solid conversion from profits to cash. We're returning capital to shareholders. We're declaring a regular and a special dividend.
Speaker Change: February 22nd Devine Kumar CFO of Ford CRO will participate in a fireside chat in Miami with Dan Levy at the Barclays Industrial Conference. We do plan to run this call about 15 minutes longer so that'll take us to 15 minutes. After the hour they want to leave ample time for your questions Jim I'll turn the call over to you.
James D. Farley: And we're getting much more discipline on capital, not just where we allocate capital but, more importantly, how much we spend and when. Our integrated services are really accelerating under Peter Stern. These are high growth, high margin, as I said, much less cyclical profits for us. We have one single leader, Kumar Guhaltra, in our industrial system, and he is laser focused on quality and cost.
James D. Farley: Thank you and hi, everyone. Thanks for joining us last year turned out to be a fundamental year foundational year for our company, we launched Mi.
James D. Farley: And our international operations have made a remarkable turnaround after a lot of difficult restructuring. It's the second year we've made profit. It's about a $3 billion turnaround compared to just three or four years ago. And what would surprise people is what a juggernaut Ranger has become.
Pardon me. This is the conference operator, we seem to have lost audio from the speaker's location. Please standby as we regain the signal.
Jim Farley: Okay.
James D. Farley: It's a global franchise, and it's our second best-selling name plate globally, just behind F-Series and ahead of Super Duty. Now John's going to go into last year's results. It was a solid year. But I want to be really clear, we are nowhere near our earnings potential for Ford Motor Company, and we are really positioned well this year for growth and profitability for revenues as well. I'm going to cover four key areas. The first area is Ford Pro. Nearly, it's nearly a $60 billion high-margin hardware, software, and physical services business, and most of that.
Jim Farley: [music].
Jim Farley: Okay.
Jim Farley: Yes.
Jim Farley: [music].
Jim Farley: Yeah.
Jim Farley: [music].
Speaker Change: Pardon me. This is the conference operator, we have rejoined audio with the main speaker location. Sir Please continue.
Speaker Change: Yes, hi.
Speaker Change: Everyone I'm not sure where we got cut off but I I want to just highlight how important last year was not only financially, but a foundational year for our team our power of choice in our powertrain is really came through and you can really see that in the F series, which I'll talk about in the second.
Speaker Change: Our global hybrid sales were up 20% last year, and we expect them to be up 40% this year.
James D. Farley: Revenue is reoccurring. I believe Ford Pro is where the industry is going, an integrated business between all three of those factors, and we're seeing it first there because customers use the vehicle more intensely and are more willing to pay for software. And we believe the attributes of Ford Pro are undervalued, but the performance will reveal that over time. And look at the performance last year.
Speaker Change: We're now the number one and number two best selling hybrid trucks in the U S. Maverick is number one and we're the number three hybrid brand in the U S behind Toyota and Honda, but unlike them or hybrids really sell best on trucks for our site, we launched some awesome tech.
James D. Farley: Ford Pro doubled its EBIT to $7 billion, despite a significant slowdown on super duty during the launch in the name of quality. And we're now on track for mid-teen EBIT margins at Pro. And you're going to see top and bottom line growth this year at Pro. We have the freshest product lineup.
Speaker Change: Bruce just passed the 150 million miles that began for us, but more importantly, the growth is up 25% quarter over quarter and the gross margins for Blue Kooser at 70 plus percent same for Ford Pro intelligence and.
Speaker Change: And boy can afford do work vehicles, the new Super duty and transit are off to great starts as is the new Ranger.
James D. Farley: Ford's work history in two decades is exceeding our supply, and the reason why that order bank is so strong is fundamentally different economic factors than our retail. What I mean by that is, look at North America. We're really dominant.
Speaker Change: We are really focused as a team on the segmentation you can see the speed the accountability for results and focus within the company.
Speaker Change: And our underlying business is getting better as John will show, despite the UAW strike or auto profits were up year over year.
Speaker Change: We returned to investment grade, we have higher ROIC.
James D. Farley: We do really well on state and local government procurement. These are very profitable, and last year, state and local governments increased their spending by $75 billion, or 16%, and a sizable portion of that is on infrastructure, and people need super duties and transit. Look at the build-out of telecom and 5G. It directly correlates to our robust revenues, and the same is happening in the manufacturing sector in the U.S. with reshoring or on-shoring manufacturing; viewers are clamoring for more pro allocation. They normally get only 50 to 75% of the volume they want.
Speaker Change: And we have really solid conversion from profits to cash.
Speaker Change: We're returning capital to shareholders, we are declaring a regular and the special dividend.
Speaker Change: Getting much more disciplined on capital not just where we allocate but more importantly, how much we spend and when our integrated services are really accelerating under Peter Stern.
Speaker Change: Our high growth high margin as I said much less cyclical profits for US we have one single leader Kumar go hold true on their industrial system and he is laser focused on quality and cost.
James D. Farley: And in Europe, it's the ninth straight year of Ford being the best selling CV brand, and we're just in the middle of launching the Super Duty of Europe, the Transit Custom, and the new Ranger is now ramping up. Why do we think we're undervalued in the professional market? Well, there are a couple of reasons why I'm doing this video. First of all, I want to say thank you to all of you for watching. I hope you enjoyed this video. If you did, please give it a thumbs up.
Speaker Change: Our international operations have made a remarkable turnaround after a lot of difficult restructuring, which is second year. We've made profit it's about a $3 billion turnaround compared to just three or four years ago.
Speaker Change: And what would surprise people is what a juggernaut Rangers become it's a global franchise and its our second best selling nameplate globally, just behind F series and ahead of Super duty.
James D. Farley: If you haven't done so already, please do so. I'll see you next time. Bye. The first is that our market leadership is a little bit opaque. We don't just lead in pro; we dominate. We're 40% of the market share of class one through seven full-size trucks and vans. In fact, for many months, our second place competitor isn't even half our size. Commanding that share means that we are dominant in vocations like service construction, utility, and, as I said, government. But our biggest success is in Tams, where the markets are Small and Medium-Sized Businesses and Tradespeople. That's the backbone of the U.S. economy, and boy, does Ford have a reputation with those customers. Our second big moat is upfitters.
Speaker Change: John is going to go into last year's results. It was a solid year, but don't want to be really clear we are nowhere near our earnings potential for Ford Motor Company.
Speaker Change: And we are really positioned well this year for growth.
Speaker Change: And profitability for revenues as well I'm going to cover four key areas. The first area is Ford probe.
Speaker Change: Nearly it's nearly a $60 billion high margin hardware software and physical services business.
Speaker Change: And most of that revenue.
Speaker Change: Revenue is reoccurring.
Speaker Change: I believe <unk> pro is where the industry is going and integrated business between all three of those factors and we're seeing it first there because the customer use the vehicle more intensely and are more willing to pay for software.
Speaker Change: We believe the attributes afford pro we're undervalued, but the performance will reveal that over time and look at the performance last year.
James D. Farley: Again, very difficult for investors to see, but this is really significant. Every one of our landscapers, plumbers, electricians, they all upfitted their transits and super duties and rangers specific to their vocation. So these up-bidders wound up being really important. We have already developed a digital up-bid integration system.
Speaker Change: Ford Pro doubled its EBIT to $7 billion.
Despite a significant slowdown on super duty during the launch and the name of quality and we're now on track for mid teen EBIT margins at probe.
Speaker Change: And youre going to see top and bottom line growth. This year in pro we have the freshest product lineup and Ford's work history in two decades, our order banks.
Speaker Change: We're exceeding our supply and the reason why that order bank is.
James D. Farley: And we share engineering specifications with all those upfitters. We've been working with them for decades, and they really trust Ford. They're even able to move their upfit equipment from old Fords to new ones. The third big moat is a growing one. It's software and our physical repair business. An example of that is that last year, we already had half a million active software paid subscriptions at Pro.
Speaker Change: So strong is fundamentally different.
Speaker Change: Economic factors than our retail business.
Speaker Change: What I mean by that is look at North America, we're really dominant.
Speaker Change: We do really well on state and local government pro sales. These are very profitable and last year state and local governments increase their spending by $75 billion of 16% and a sizeable portion of that is in infrastructure and people need super duties in transits.
James D. Farley: It's up 46%, and the margins are over 50%. In two years, we expect software and services to drive 20% of pro EBIT, and that's supported by two things, getting to 60% mix on our connected vehicles and a threefold increase in our tax rates for those paid subscriptions that I mentioned, which are only at about 12% today. One of the biggest advantages we have in pro that's hard for people to see is our physical repair network. It costs a lot of money to create, and it takes decades of time. And there's a lot of expertise in the US.
Speaker Change: Look at the build out of telecom and five G.
Speaker Change: Directly correlates to our robust revenues and the same is happening in the manufacturing sector in the U S with re shoring or onshoring manufacturing.
Speaker Change: Dealers are clamoring for more pro allocation, they normally get only 50% to 75% of the volume they want and in Europe. It's the ninth straight year of Ford being the best selling CV brands.
James D. Farley: We have 23,000 service bays that are busy seven days a week, 24 hours a day. And we're capitalizing on that advantage. Every day, we have new, very large service elite repair centers launching in the U.S. We haven't waited for brick and mortar. We now have 1,200 vans and super duty trucks that are outfitted for remote service to our fleet customers. The Net Promoter Score is 10 points higher because they don't have to come under the dealership.
And we're just in the middle of launching the Super duty of Europe, The transit custom <unk>.
Speaker Change: And the new Ranger is now ramping up.
Speaker Change: Why do we think we're undervalued and pro.
Speaker Change: Well, there's a couple of reasons. The first is our market leadership is a little bit opaque. We don't just lead in pro we dominate where 40% of the market share of class one through seven full size trucks and vans in fact, many months our second place competitor isn't even half bar.
James D. Farley: And this has effectively added 10% more capacity for our service. The bottom line is we have these amazing vehicles. We have a leading market share position. And we're now adding long-term durability to those products.
Speaker Change: Size.
Speaker Change: Now commercial commanding that share means that we are dominant in locations like service construction utility and as I said government.
James D. Farley: We have highly profitable alternative revenue streams in repair and software now. Ford Pro is really a magical breakthrough for our customers and our company, and I believe the industry. Quality.
Speaker Change: But our biggest success is in times, where the market's biggest small and medium sized businesses and trades people.
Speaker Change: That's the backbone of the U S economy, and Boyd as Ford have reputation with those customers. Our second big moat is up Fitters again very difficult for investors to see but this is really significant every one of our landscapers plumbers electricians, they all update their transits and super duties and Rangers.
James D. Farley: We don't have to go into the negative effects of that quality, but we've been addressing it for three years now, and we're starting to see progress. Our vision is that we want to give customers who buy our trucks and vans and our passion products, like the off-road Bronco, all of the long-term durability from companies like Toyota and Honda, but in the segments we compete in. We already have world-class quality in many parts of our company, and now we're seeing green shoots in North America. Kumar's leading this, and he's here for a Q&A to answer any questions, but there are two aspects of quality I want to highlight. The first consideration is launch quality.
Speaker Change: Specific to their vocation. So these are bidders wanted to being really important we now have already developed a digital outfit integration system.
Speaker Change: And we sure engineering specs with all of those of theaters, we've been working with them for decades, and they really trust board there, even though they are even able to move their upgrade equipment for all forwards to new fords.
Speaker Change: The third big moat is a growing one its software and our physical repair business.
Speaker Change: Example of that is last year, we already have a half a million active software paid subscriptions at pro it's up 46% and the margins are over 50%.
James D. Farley: That Super Duty launch I mentioned was a line in the sand for this management team. We intensified all of our testing and real-world problem-solving on Plant 4 with our suppliers and engineers. We slowed down the launch and avoided a cost us a billion dollars of EBIT we forgo last year, but it was the right trade-off for our company and our customers. The result is a launch spike that every launch. We think superduty is now similar to best-in-class in our industry, and we're seeing the benefits in the F-150 launch. That launch is underway right now, and it's a really important one for our company. The second area of quality we're seeing progress on is initial quality. Now, we measure that after three months in service, and that is highly correlated to long-term quality and, yes, warranty costs.
Speaker Change: In two years, we expect software and services to drive 20% of the pro EBIT.
Speaker Change: And that's supported by two things.
Speaker Change: Getting to 60% mix on our connected vehicles.
Speaker Change: And a three fold increase in our attach rates for those paid subscriptions that I mentioned, which are only at about 12% today.
Speaker Change: One of the biggest advantages we have in pro that's hard for people to see as our physical repair network. It costs a lot of money to create cost decades of time and Theres a lot of expertise in the U S. We have 23000 service base that are busy seven days, a week 24 hours a day.
Speaker Change: And we're pressing on that advantage everyday we have new.
James D. Farley: And we saw last year a 10% increase. That is the largest improvement and the same quality that we saw last time in 2016. It's the best in a long time, and we're committing to a similar improvement this year.
Speaker Change: Very large service of wheat repair centers launching in the U S. We haven't waited for brick and mortar.
Speaker Change: We now have 1200 vans and super duties that are outfitted for remote service to our fleet customers.
James D. Farley: Quality now factors into 70% of the short-term incentives for our management at Ford. And in the long term, it's even more important because we're measuring total shareholder return. We will share those KPIs and quality with you every quarter. The next thing I'd like to highlight is EVs.
Speaker Change: <unk> net promoter score is 10 points higher because they don't have to come into the dealership and this is effectively added 10% more capacity for our service. The Bottomline is we have these amazing vehicles, we have a leading market share position.
James D. Farley: Now some have portrayed the change in the EV market as Darwinian, that could be a slow evolutionary change, but we think this has been a seismic change in the last six months of last year, which will rapidly sort out winners and losers in our industry. Now the catalyst for that seismic change is a combination of EV manufacturers cutting their price by 20% across all major geographies, a tremendous amount of capital flowing, and a ton of new capacity into one single segment, the two-row crossover. Our overall EV strategy has never been more relevant as this seismic change happens, and we want to share with you our target. Our next Gen 2 product... will be profitable in the first 12 months of its launch, and that will mean that we'll get to mid, https://www.youtube.com.au, and here are Big Bets and Adjustments.
Speaker Change: We're now adding long term durability of those products, we have a highly profitable.
Speaker Change: Alternative revenue streams and repair and software now for <unk> is really a magical breakthrough for our customers and our company and I believe the industry.
Speaker Change: Quality.
Speaker Change: We don't have to go into the negative effects of that quality, but.
Speaker Change: We've been addressing it for three years now and we're starting to see progress.
Speaker Change: Our vision is that we wanted to give customers, who buy our trucks and vans and our passion products off road Bronco all of it.
Speaker Change: The long term durability from companies like Toyota and Honda, but in the segments we compete in.
We already have world class quality in many parts of our company and now we're seeing green shoots in North America Kumar is leading this and he is here for Q&A to answer any questions, but there are two aspects of quality I want to highlight the first is launch quality. That's super duty launch I mentioned it was align the sand for this management team we.
James D. Farley: We're gonna spend less capital on larger EVs, and as we've always said, we'll have a very small number of them. We're going to focus those large EVs on geographies and product segments where we have a dominant advantage, like trucks and vans. And those products will have breakthrough efficiency compared to our Gen 1 products, and they're going to be packed with innovations that customers are going to be excited to pay for. We're also adjusting our capital, switching more focus on smaller EV products. Now, this is important because we made a bet in silence two years ago.
Speaker Change: Intensified all of our testing a real world problem solving on the plant floor with our suppliers and engineers, we slowed down the launch and 40 to cost us a $1 billion EBIT, we forego last year, but it was the right trade off for our company and our customers.
Speaker Change: The result is the launch bike that every every launch has we think on Super duty is now similar to best in class in our industry and we're seeing the benefits in the F 150 launch.
Speaker Change: That launches underway right now and it's a really important one for our company. The second area of quality, we're seeing progress on his initial quality now we measure that in three months in service and that is highly correlated.
James D. Farley: We developed a super talented Skunk Works team to create a low-cost EV platform. It was a small group, a small team, some of the best EV engineers in the world, and it was separate from the Ford mothership. It was a start-up, and they've developed a flexible platform that will not only deploy to several types of vehicles but will be a large installation base for software and services that we're now seeing at Pro.
Speaker Change: Two long term quality and yes warranty costs.
Speaker Change: And we saw last year, a 10% increase that is the largest improvement in the similar quality that we saw last time in 2016, it's the best in a long time and we are committing to a similar improvement this year.
Speaker Change: Quality factors into 70% of the short term incentives for our management at Ford and the long term, it's even more important because we're measuring total shareholder return.
James D. Farley: All of our EV teams are ruthlessly focused on cost and efficiency in our EV products because the ultimate competition is going to be the affordable Tesla and the Chinese OEM, and Matt Betts, and all the right sizing of capital, and even delays to some of our products given the market realities. Better balance growth, profits, and returns for all. One of the things we're taking advantage of is taking some timing delays, rationalizing the level and timing of our battery capacity to match demand and actually reassessing the vertical integration that we're relying on and betting on new chemistries and Capacity. Our overall EV business will grow this year because we have the Explorer launching in Europe and, really exciting, many of our commercial vehicles launch with electric power this year as we refresh the lineup. We will also align production and inventory to meet customer demand.
Speaker Change: We will share those kpis on quality with you every quarter.
Speaker Change: Next thing I'd like to highlight as Evs.
Speaker Change: Now some of them for trade.
The change in the EV market is darwinian that could be a slow evolutionary change, but we think this has been a seismic seismic change in the last six months of last year.
Speaker Change: That will rapidly sort out winners and losers in our industry now.
Speaker Change: Now the catalyst for that seismic change is a combination of EV manufacturers cutting their price by 20% across all major geographies.
Speaker Change: And a tremendous amount of capital flowing.
Speaker Change: And a ton of new capacity into one single segment two road crossovers.
Speaker Change: Our overall <unk> strategy has never been more relevant as a seismic change happens.
James D. Farley: EV customers are also helping us in a very critical area of software quality. They really, really are teaching us a lot, and this is a critical place where I think we're ahead as a company. Well, why are we making these changes in our EV business and capital allocation? Well, because we learned as an early leader as we scaled EVs and hybrids simultaneously.
Speaker Change: And we want to share with you our targets.
Speaker Change: Our next Gen. Two products will be profitable in the first 12 months of their launch and that will mean that we will get to mid to high single digit EBIT profit margins over their lifecycle and that's going to deliver profits above model <unk> cost of capital and.
Speaker Change: And here are big bets and adjustments.
Speaker Change: We're going to spend less capital.
Larger evs and as we've always said, we will have very small number of those.
James D. Farley: The demand curve turns out to be for EVs very different. We've seen an explosive growth in EVs in 2021 and 2022, and we realized very quickly that our first three Gen 1 products didn't have enough capacity to support EV growth, but as well, importantly, the COVID supply shocks and the chip crisis itself, and Tesla's ability to make https://www.ford.com in supply as the COVID shock retreated
Speaker Change: We're going to focus those large evs on geographies and product segments, where we have a dominated advantage like trucks and vans.
Speaker Change: And those products will have breakthrough efficiency compared to a gen. One products and theyre going to be packed with innovations that customers are going to be.
To pay for.
Speaker Change: We're also adjusting our capital switching more focus on to smaller EV products.
Speaker Change: Now this is important because we made a bet in silence two years ago.
Speaker Change: We developed a super talented skunkworks team to create a low cost EV platform.
Speaker Change: It was a small group small team some of the best EV engineers in the World and it was separate from the Ford Mothership.
James D. Farley: We learned that as you scale EVs to 5,000 to 7,000 units a month, and you move into the early majority customer, they are not willing to pay a significant premium for EVs. This was a huge moment for us.
It was a startup.
Speaker Change: And they've developed a flexible platform.
Speaker Change: That will not only deploy to several types of vehicles, but will be a large install base for software and services that we're now seeing a pro.
James D. Farley: What we've seen, because we offer everything. Is pricing quickly converged to hybrids? after any benefit from sub, Now Tesla found out this first, but we were right behind that, and they were very exposed in our early majority, but we learned very quickly.
Speaker Change: All of our EV teams are ruthlessly focused on cost and.
Speaker Change: And efficiency and our EV products, because the ultimate competition is going to be the affordable Tesla and the Chinese Oems.
James D. Farley: And I want to say that no one will be immune to this reality. The most obvious indicator of this reality is looking at total revenue, not units for EV. Look at the U.S. market. EV total revenue was down in the second half of last year versus Q2. If you look at unit volumes, they were up. That is a really important insight we learned in being a first mover. The same thing happened in China. The same thing happened in Europe.
Speaker Change: And that bet.
Speaker Change: And all of the right sizing of capital and.
Speaker Change: And even delays to some of our products given the market realities.
Speaker Change: Balanced growth profits and returns for us.
Speaker Change: But one of the things, we're taking advantage of and taking some time timing delays.
Speaker Change: Is rationalizing the level and timing of our battery capacity to match demand.
Speaker Change: And actually reassessing the vertical integration that we're relying on and bidding on new Chemistries.
James D. Farley: Our data shows that EVs are a clear destination for many customers based on their unique duty cycle. It's going to take time, more than we expected, 18 months, but we are seeing big adoption variances by geography, and that's why the power of choice at Ford is so important and a big advantage for us. We're betting that choice and flexible manufacturing is going to get us successfully through this transition. For example, look at the best-selling vehicle in the United States, the F-150. We have the Lightning, we have the Hybrid in high volume, and we have the ICE choice. In Q4, in California, our mix was 50% Hybrid and EV F-150 and 50% ICE. A thousand miles away in Dallas, it was only 15% hybrid and EV, and 85% ICE. If you go around the world, you'll see the same variation.
Speaker Change: And capacities.
Speaker Change: Our overall <unk> business will grow this year.
Speaker Change: We have the explore launching in Europe, and really exciting many of our commercial vehicles launched with electric this year as we refreshed lineup.
Speaker Change: We will also align production and inventory for customer demands.
Speaker Change: EV customers also helping us in a very critical area of software quality. They really really are teaching us a lot and this is a critical piece.
Speaker Change: We're I think we're ahead as a company.
Why are we making these changes in our EV business and capital allocation well, because we learned as an early leader.
Speaker Change: As we scaled evs and hybrid simultaneously.
Speaker Change: The demand curve turns out to be for evs very different ice.
Speaker Change: We've seen explosive growth in Evs in 'twenty, 'twenty, one and 'twenty two 'twenty, two and we realized very quickly that our first three gen. One products, we didn't have enough capacity.
James D. Farley: Hybrids will play an increasingly important role in our industry's transition, and we'll be here for the long haul. Fiber just fits specific customer use cases. On a Maverick pickup truck, our hybrid is focused on mileage and efficiency, and they do the math very clearly, and they don't have to change the behavior. On the F-150 hybrid, they get the same benefits, even when they're towing on fuel efficiency, but we throw in pro power on board on top of that to displace a very expensive generator cost, and margins on hybrids are closer to ice, much higher than the The journey on EVs is inevitable, in our eyes. And we have a bright future for EVs. We're adjusting our capital, and we're giving customers choice. The last thing I want to mention is talent.
Speaker Change: With EV growth, but as well importantly, the COVID-19 supply shocks in the chip prices itself and tassos ability to make vehicles. Despite the chip crisis in 'twenty, one and 'twenty two and the zero cost of capital gave us too optimistic of a demand signal.
Speaker Change: At that time and it drove a temporary spike in supply.
Speaker Change: As the Covid shock retreated.
Speaker Change: We learned that as you scale evs to five to 7000 units a month.
Speaker Change: And you move into the early majority customer they are not willing to pay a significant premium for evs.
James D. Farley: None of these breakthroughs in our company, operationally or financially or in technical excellence and innovation, are going to happen without the right talent, and we've learned that the right talent is not sufficient. Over the last two years, it's been imperative that we go to a right performance management system. It's a fundamental change in the way we run the company. We now truly differentiate and reward excellence at Ford, and that matches our operation and our business delivery. It's a massive culture change. Evolving to a compensation and benefit structure weighed more towards variable compensation that is tied to our delivery business results is fantastic. You can't bring in and retain the best talent without making this change.
Speaker Change: This was a huge moment for us.
What we've seen because we offer everything.
Speaker Change: Is pricing quickly converged hybrids.
After any benefit from subsidies now tests have found out this first but we were right behind that.
Speaker Change: And they were very exposed to them.
Speaker Change: Majority.
Speaker Change: But we learned very quickly and I want to say that no one will be immune to this reality.
Speaker Change: The most obvious indicator of this reality.
Speaker Change: Is looking at total revenue not units for Evs.
Speaker Change: Look at the U S market EV total revenue was down in the second half of last year versus Q2.
Speaker Change: If you look at unit volumes they were up.
James D. Farley: And now, our long-term incentives and our short-term incentives are tied specifically to shareholder value creation. Over to you, John. Thanks, Jim. And good afternoon, everyone.
Speaker Change: That is a really important insight, we learned and being a first mover. The same thing happen in China same thing happened in Europe.
Speaker Change: Our data shows Evs are a clear destination for many customers based on their unique duty cycle.
John Murphy: We appreciate you joining us today. So 2023 was an important year as we continue to execute our Ford Plus plan. Our strong global product lineup, which is clearly resonating with our customers, delivered revenue of $176 billion, which was up 11%, marking our second consecutive year of double-digit growth. We delivered $10.4 billion in adjusted EBIT at the high end of our guidance, driven by continued strength in both blue and pro. Now to provide some perspective, compared to last year collectively, our core business units, Pro, Model E, and Blue, improved EBIT by $2 billion, or 26%. And this is after fully absorbing the roughly $1.7 billion impact of the UAW strike. Free cash flow was $6.8 billion, generating a free cash flow conversion rate of 65%.
Speaker Change: It's going to take time more than we expected 18 months ago.
Speaker Change: But we are seeing big adoption variances by geography, and Thats why the power of choice at Ford is so important and a big advantage for us.
Speaker Change: We're bidding that choice and flexible manufacturing is good and get US successfully through this transaction transition look at the best selling vehicle in United States. The F. 150, we have a lightning we have a hybrid and high volume and a nice choice in Q4 in California, our mix was 50% hybrid and EV F. One.
Speaker Change: <unk> hundred 50, and 50% ice.
Speaker Change: Miles away in Dallas, It was only 15% hybrid and EV, 85% ice you go around the world Youll see same variations.
Speaker Change: Hybrids will play an increasingly important role in our industry's transition.
Speaker Change: And we'll be here for the long run.
Speaker Change: Hybrid just fits specific customer use cases.
John Murphy: And this is above the top end of our target range and was driven by underlying strength in both pro and blue. Now both of these metrics provide a good litmus test for the effectiveness of our Ford Plus strategy. Our balance sheet remains strong with nearly $29 billion in cash and more than $46 billion in liquidity, and this provides considerable flexibility to manage our business as the industry continues to transform. With the improving trajectory of our business and strong free cash flow, we announced a quarterly dividend of $0.15 per share plus a supplemental dividend of $0.18 per share.
Speaker Change: On our Maverick pickup truck or hybrid is focused on mileage and efficiency and they do the math very clearly and they don't have to change the behaviors.
Speaker Change: On the F 150 hybrid they get the same benefits even when they are towing on fuel efficiency, but we throw in pro power onboard on top of that to displace a very expensive generator cost and.
Speaker Change: And margins on hybrids are closer to ice much higher than EV margins. The journey on Evs is inevitable in our eyes, and we have a bright future Evs, we're adjusting our capital and we're giving customers choice last thing I want to mention his talent none of these breakthroughs at our company operationally.
John Murphy: This brings our payout ratio to 50% for the year in line with our target to consistently return 40% to 50% of our free cash flow to shareholders. Let's take a closer look at revenue. Revenue for the quarter was $46 billion, up 4%. Despite the impact of the strike, which cost us roughly 90,000 units of production, adjusted EBIT came in at $1.1 billion with an EBIT margin of 2.3%, which again included the impact of the strike.
Speaker Change: We are financially or and technical excellence and innovation are going to happen without the right talent.
Speaker Change: And we've learned that the right talent is not sufficient.
Speaker Change: Over the last two years, it's been imperative that we go to a REIT performance management system.
Speaker Change: It's a fundamental change in the way we're running the company, we now truly differentiate and reward excellence at Ford and that matches, our operation and our business delivery, it's a massive cultural change <unk>.
Speaker Change: Evolving to our compensation and benefit structure weighed more towards variable compensation.
John Murphy: Now let's look at our segment. Ford Pro delivered another strong quarter with revenue up 11%. EBIT of $1.8 billion was up 25% with a margin of 11.9%. Full-year results clearly demonstrated the potential earnings power of this growth business. Revenue jumped 19%, and EBIT more than doubled year-over-year to $7.2 billion, an improvement of $4 billion.
Speaker Change: That is tied to our delivery business results is fantastic.
Speaker Change: You can't bring in and retain the best talent without making this change and now our long term incentives and our short term incentives are tied specifically to shareholder value creation over to you John.
John Murphy: Thanks, Jim and good afternoon, everyone. We appreciate you joining us today. So 2023 was an important year as we continued to execute our Ford plus plan.
John: Our strong global product lineup, which is clearly resonating with our customers delivered revenue of 176 billion, which was up 11%, marking our second consecutive year of double digit growth we.
John Murphy: And with a margin of 12.4%, we're just shy of our mid-teen target. The strengths Jim highlighted for Ford Pro are differentiated and drove strong results this year and have Pro poised for another strong year in 2024. Ford Model E drove a 14% increase in wholesales in the quarter, a 2% increase in revenue, and an EBIT loss of $1.6 billion. For the year, wholesales were up 20%, revenue was up 12%, and EBIT was a loss of $4.7 billion. Both the quarter and year were impacted by challenging market dynamics and investments in next-generation vehicles, both of which Jim addressed in his remarks. In the quarter, Ford Blue revenue was flat, despite the loss of roughly 60,000 units due to the strike.
John: We delivered $10 4 billion and adjusted EBIT at the high end of our guidance driven by continued strength in both blue and CRO.
John: I'll provide some perspective compared to last year collectively our core business units pro model in Blue improved EBIT by $2 billion or 26% and this is after fully absorbing roughly $1 7 billion impact of the UAW strike.
John: Free cash flow was $6 8 billion generating a free cash flow conversion rate of 65% and this is above the top end of our target range and was driven by underlying strength in both pro and blue.
Both of these metrics provide a good litmus test for the effectiveness of our Ford plus strategy.
John Murphy: EBIT was $813 million with a margin of 3.1%. For the year, Ford Blue grew again, with revenue up 8%. All of our regions are now profitable and contributing significantly to Blue's bottom line results. EBIT of $7.5 billion was up year-over-year with a margin of $7.3 billion.
John: Our balance sheet remains strong with nearly $29 billion in cash and more than 46 billion in liquidity and this provides considerable flexibility to manage our business as the industry continues to transform.
With the improving trajectory of our business and strong free cash flow, we announced a quarterly dividend dividend of <unk> 15 per share plus a supplemental dividend of <unk> 18 per share. This brings our payout ratio to 50% for the year in line with our target to consistently return.
John Murphy: The improvement in EBIT reflects the underlying strength of our product portfolio, dampened by higher warranty and UAW-related costs. Turning to Ford Credit, Ford Credit generated EBT of $280 million in the quarter and $1.3 billion for the year. As expected, full-year results were down year-over-year.
John: 40% to 50% of our free cash flow to shareholders.
John: Now, let's take a closer look at our performance revenue for the quarter was 46 billion up 4%. Despite the impact of the strike, which cost US roughly 90000 units of production adjusted EBIT came in at $1 1 billion with an EBIT margin of two 3%, which again included the impact of the strike.
John Murphy: Credit loss performance continues to normalize but remains below our historical average. Now, before I turn to guidance, I wanted to touch briefly on Capitol Alley. One of the benefits of our segmentation, in addition to increased transparency and accountability, is that we are now allocating capital based on the growth opportunities in the different risk and return profiles of our segmentation. This allows us to assign specific risk-adjusted hurdle rates for each of our businesses, driving greater accountability for returns on the capital we invest. So here's how we're thinking about 2024. For the full year, we expect to earn between $10-12 billion in adjusted EBIT.
John: Now, let's look at our segments <unk> delivered another strong quarter with revenue up 11% EBIT of $1 8 billion was up 25% with a margin of 11, 8% full.
John: Full year results clearly demonstrated the potential earnings power of this growth business revenue jumped 19% EBIT more than doubled year over year to $7 2 billion, an improvement of $4 billion and with a margin of 12, 4% were just shy of our mid teens target.
John Murphy: The high end of the range would be a record for Ford. Adjusted free cash flow of $6-7 billion and capital expenditures of $8-9.5 billion, flat to moderately up year over year.
John: The strength, Jim highlighted for Ford Pro are differentiated and drove strong results. This year and have pro poised for another strong year in 2024.
John: Ford model he drove a 14% increase in wholesale in the quarter, a 2% increase in revenue and EBIT loss of $1 6 billion for the year Wholesales were up 20% revenue was up 12% and EBIT was a loss of $4 7 billion, both the quarter and year were impacted by challenging market dynamics.
John Murphy: We expect EVs to be about 40% of the total, and this reflects products already in flight, including investments in EV powertrains supporting our next generation of products and our LFP battery plant here in Michigan. As we continue to adjust to market dynamics, we are scrutinizing every dollar and will continue to drive efficiency. Targeting to land at the lower end of our CapEx, For example, in 2023, we already started to take action. We delayed our second JV battery plant in Kentucky, we reduced the size of our new LFB plant in Michigan, and we did not proceed with our JV battery plant in Turkey.
John: Dynamics in investments in next generation vehicles, both of which Jim addressed in his remarks.
John: In the quarter Ford Blue revenue was flat despite the loss of roughly 60000 units due to the strike EBIT was $813 million with a margin of three 1% for the year for Blue grew again with revenue up 8% all of our regions are now profitable and contributing significantly.
Blues Bottomline results EBIT of seven 5 billion was up year over year with a margin of seven 3% the improvement in EBIT reflects the underlying strength of our product portfolio dampened by higher warranty and the UAW related costs.
John: Turning to Ford credit BARDA credit generated EBT of $280 million in the quarter and $1 3 billion for the year as expected full year results were down year over year credit loss performance continues to normalize but remains below our historical average.
John Murphy: And now, we are further adjusting installed capacity to match demand, reassessing vertical integration and new battery chemistries, adjusting Gen 2 products and potentially their launch timing to ensure they meet our criteria for profitability given the new market reality. Our 2024 outlook also assumes a flat to slightly higher SAR in both the U.S. and Europe, and our planning assumption for the U.S. is 16 to 16.5 million units. Non-recurrence of the UAW strike, full year of our all-new Super Duty driving both positive pricing and mix in Ford Pro, industry supply and demand normalizing, and now, from a planning perspective, we are assuming lower industry pricing of roughly 2% driven by higher incentive spending as we move through the year. We expect this to be partially offset by top-line growth from the launch of our new product. In addition, we're assuming a $2 billion benefit from cost reduction initiatives that offset higher labor and product refresh. Within the segments, we expect Ford Pro Strength to continue unabated.
Speaker Change: Now before I turn to guidance.
Speaker Change: I wanted to touch briefly on capital allocation.
Speaker Change: One of the benefits of our segmentation. In addition to increased transparency and accountability is that we are now allocating capital based on the growth opportunities and different risk and return profiles of our segments. This allows us to assign specific risk adjusted hurdle rates for each of our businesses dry.
Speaker Change: Giving greater accountability to returns on the capital we invest.
Speaker Change: So here's how we're thinking about 2024.
Speaker Change: Guidance for the full year, we expect to earn between 10 to 12 billion and adjusted EBIT at the high end of the range would be a record for Ford adjusted free cash flow of $6 billion to $7 billion in capital expenditures of eight to $9 5 billion flat to moderately up year over year.
Speaker Change: So let me double click on capital expenditures, we expect <unk> to be about 40% of the total and this reflects products already in flight, including investments in EV powertrain supporting our next generation of products and our <unk> battery plant here in Michigan as we continued to adjust to market dynamics. We are scrutinizing every dollar.
John Murphy: With continued strong demand for our leading products, we are targeting EBIT between $8 to $9 billion, driven by continued growth and favorable mix, partially offset by moderated pricing. For Model E, we expect losses to widen to a range of $5 to $5.5 billion, driven by continued pricing pressure and investments in our next-generation vehicles. We expect our first generation vehicles to improve their profits throughout the year. Ford Blue EBIT will be about equal to last year at $7.5 billion, reflecting a balanced market equation, including the impact of our all-new F-150. We also expect costs to be flat as we offset higher labor and product costs with efficiency.
Speaker Change: And we will continue to drive efficiencies targeting to land at the lower end of our Capex range for.
Speaker Change: For example in 2023, we already started to take action, we delayed our second JV battery plant Jackie we reduced the size of our new OSB plant in Michigan, and we did not proceed with our JV battery plant in Turkey.
Speaker Change: And now we are further adjusting installed capacity to match demand reassessing vertical integration and new battery Chemistries adjusting gen two products and potentially the launch timing to ensure they meet our criteria for profitability given the new market reality.
Speaker Change: Our.
Speaker Change: Our 2024 outlook also assumes.
Speaker Change: Our 20 <unk>.
Speaker Change: That to highly to slightly higher <unk> in both the U S and Europe and our planning assumption for the U S is 16% to $16 5 million units non recurrence of the UAW strike full year of our all new Super duty driving both positive pricing and mix and <unk> Pro <unk>.
John Murphy: And we expect Ford credit EBT to be up slightly year over year to about $1.5 billion. Now taking a step back, our performance last year reflects the positive momentum of our Ford Plus plan. Capital discipline is driving the right global footprint, a portfolio of products, and consistent cash generation. We continue to see growth opportunities and remain focused on delivering improvements in both quality and cost. Now that wraps up prepared remarks. We will use the balance of the time to address what's on your mind. Thank you.
Speaker Change: Industry supply and demand normalizing now from a planning perspective, we are assuming lower industry pricing of roughly 2% driven by higher incentive spending as we move through the year. We expect this to be partially offset by top line growth from the launch of our new products.
Speaker Change: In addition, we're assuming a $2 billion benefit from cost reduction initiatives that offset higher labor and product refresh costs.
Operator: 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 telephone keypad.
Speaker Change: Within the segments, we expect Ford Pro strength will continue unabated with continued strong demand for our leading products. We are targeting EBIT between eight to 9 billion driven by continued growth and favorable mix, partially offset by moderated pricing for model E. We expect losses to widened to a range of 5% to five.
Operator: If you are using a speakerphone, please pick up your handset before pressing the key. To draw your question, please press star, then two. Our first question today is from Adam Jonas with Morgan Stanley. Please go ahead. Hey everybody, uh, Jim...
Speaker Change: 5 billion driven by continued pricing pressure and investments in our next generation vehicles, we expect our first generation vehicles.
Speaker Change: To improve their profits throughout the year.
Adam Michael Jonas: I want to talk to you about Ford versus Ferrari, which is probably a great movie, by the way, and I think the good guys won. I remember a time when Fiat owned Ferrari. And I had a valuation of about $4 billion on it. Now, Ferrari is worth $80 billion today. And the business was totally ignored by investors when it was part of Fiat. Now Ford has a Ferrari, it's called Ford Pro, and I think, I think we agree that people are ignoring the cash cow, but I disagree with you, Jim. You said it's because of opaque, but I don't agree.
Speaker Change: <unk> blue EBIT to be about equal to last year at seven to seven 5 billion, reflecting a balanced market equation, including the impact of our all new F. 150, we also expect cost to be flat as we offset higher labor and product costs with efficiencies and we expect Ford credit.
Speaker Change: <unk> to be up slightly year over year to about $1 5 billion.
Speaker Change: Now taking a step back our performance last year reflects the positive momentum of our <unk> plus plan.
Speaker Change: Capital discipline is driving the right global footprint portfolio of products and consistent cash generation we.
Speaker Change: We continue to see growth opportunities and remain focused on delivering improvements in both quality and cost.
Speaker Change: Now that wraps our prepared remarks, we'll use the balance of the time to address what's on your mind.
Speaker Change: Operator, please open up the line for questions.
James D. Farley: I think it's because almost all the profits are funding this EV science project. Am I being unfair, Jim, with that kind of assessment? Or, you know, what can your team do about this? and a follow-up. The Bulletproof Executive 2013, But relative to EVs, there's a lot we can do, and there's a lot we're doing. I think you're going to see a lot of seismic changes in the industry because of this pricing power reality that we've all faced. More OEM relationships. You know, the EV customers are very robust. They really like the vehicles. They do not repurchase ICE or hybrid vehicles.
Speaker Change: We will now begin the question and answer session.
Speaker Change: To ask a question you May press Star then one on your telephone keypad.
If you are using a speakerphone please pick up your handset before pressing the keys.
Speaker Change: To withdraw your question. Please press Star then two.
Speaker Change: Our first question today is from Adam Jonas with Morgan Stanley. Please go ahead.
Adam Michael Jonas: Hi, Hey, everybody Tim.
Adam Michael Jonas: I want to talk to you about Ford versus Ferrari, which is probably a great movie by the way and I think the good guys one.
I remember a time when Fiat on Ferrari.
And I had evaluation of about four $4 billion on it now Ferrari is worth 80 billion today.
James D. Farley: They're very loyal, and they love the vehicles. So it's on us to get the cost right. That is the issue with the transition.
Adam Michael Jonas: And that business was totally ignored by investors when it was part of Fiat.
Adam Michael Jonas: Affordable Ferrari, it's called <unk> Pro and I think.
James D. Farley: The good news is that Ford has a high-volume hybrid business. The good news is Ford has a high-volume hybrid business, and the timing of a second cycle product gives us a chance to make a lot of adjustments in capital, bringing it down, including, and it allows us to execute them with a cost approach that's very different from our first generation, and I think, you know, all of our commitment to make money in the first 12 months of all of our launches. To have that kind of profitability in Model E, to return its cost of capital, I wouldn't be saying it if I didn't believe it. And it's also got a lot of other benefits, which I want the team to explain and that are really important to understand. Maureen maybe wants to go over those, or John. Sure.
Adam Michael Jonas: I think we agree people are ignoring the cash cow, but I disagree with you Chad you said, it's because of opaque.
Adam Michael Jonas: Transparency or opaque kind of metrics I don't agree I think it's because almost all the profits are funding. This EV science project it might be an unfair Jim with that kind of assessment.
Speaker Change: What can your team do about this.
Speaker Change: I have a follow up.
Speaker Change: Enthusiasm towards it.
Speaker Change: But relative to <unk>, there's a lot we can do and there's a lot we're doing.
Speaker Change: I think youre going to see a lot of seismic changes in the industry because of this pricing power reality that we bought faced.
Speaker Change: More OEM relationships.
Speaker Change: Different shifting to a buy versus.
Speaker Change: Build a vertical integration shifting in capital and generally more focused on smaller vehicles.
James D. Farley: Thanks, Jim. If we just think about what the Gen One vehicles can do for us, we're building the EV business. And at the same time, we need compliance value. As we mentioned before, the value of the credits that are generated allows us to sell these high-margin ICE vehicles. Each EV sold allows us to sell multiple high-margin vehicles. A lightning can offset roughly, including We're also building new customer facing capabilities.
Speaker Change: The EV customers are very robust they really liked the vehicles they do not repurchase.
Speaker Change: Ice or hybrid vehicles, they are very loyal and they loved the vehicles. So it's on us to get the cost right that is the issue with the transition.
Speaker Change: The good news is before it has a high volume hybrid business and the timing of our second cycle product gives us a chance to make a lot of it adjustments and capital bring.
Marion B. Harris: We're satisfying demand that is out there where there's high levels of adoption. We've got new dealer standards, changing the experience for the customer for shop and buy ownership, and service so that we're learning what's required to serve these customers, both us and our dealers. We're developing a charging network through our dealers and together with Tesla. Now, adoption varies tremendously by geography.
Speaker Change: Bringing it down including <unk>.
Speaker Change: And it allows us to execute them with a cost approach that's very different than our first generation and I think.
Speaker Change: All of our commitments to make money in the first 12 months of all of our launches.
Speaker Change: To have that kind of profitability model E to return its cost of capital I wouldn't be saying if it if I didn't believe it.
Speaker Change: And it's also got a lot of other benefits, which I want the team to explain and that are really important to understand.
Loren maybe want to go over those or John.
James D. Farley: As Jim mentioned, across the West Coast, we're seeing 30% of the market for the F-150 being an EV. That volume is giving us a feedback loop for engineering. We're developing these electric powertrains. We've got a better handle on thermal propagation.
Sure. Thanks, Tim if we just think about what the Gen. One vehicles can do for US we're building the <unk> business.
Loren: And at the same time, we need the compliance failure, we mentioned before the value of the credits that generated allow us to sell these high margin <unk> ETV sold allows us to sell multiple high margin vehicles, a lightning can offset roughly neutral including growth.
Marion B. Harris: And the software and services that these customers demand, much more intensely than a typical ICE customer, we're learning how to deliver those much better, much more efficiently, and with higher quality. I would be remiss if we ignored the lifetime value of both the customer and the vehicle. We've got a 60% conquest rate on Gen 1, and the integrated services like Blue Cruise that we can sell on these vehicles go through the whole life of the vehicle. Anything else? Thank you.
Loren: We're also building new customer facing capabilities, we are satisfying demand that is out there where there is high levels of adoption, we've got new dealer standards changing experience for the customer for shop and buy ownership in service. So that we're learning what's required to serve these customers both us and our dealers were developing a charging network through our dealers and together with Tesla.
John Murphy: Yeah, the only thing I would say is, Adam, one of the important things just on top of that is that, you know, the segmentation is really important. And we know that the EV business needs to stand on its own, right? We're very clear about that. And it needs to generate a profit as a return on the capital we're investing. Now, we're not there yet.
Loren: <unk> now.
Loren: Now the adoption varies tremendously by geography, as Jim mentioned across the West Coast, we're seeing 30% of the market and F 150 being in Evs.
Loren: That volume is giving us a feedback loop for engineering, we're developing these electric powertrains, we've got better handle on thermal propagation and the software and services that these customers demand much more intensely than a typical ice customer we're learning how to deliver those much better much more efficiently and with higher quality.
John Murphy: But that's what we're working on. The compliance benefit that we get, that's important, you know, we can sell up to a dozen ICE F-150s or other ICE profitable vehicles for every light, but we don't do anything with wooden nickels. We don't do any credits into EV or anything like that, because eventually, this business has to stand on its own sooner rather than later. And that's a really important point: it's clean.
Loren: I would be remiss, if we ignore the lifetime value of both the customer and the vehicle we've got a 60% conquest rate on Gen. One and the integrated services like Blue crews that we can sell in these vehicles goes through the whole life of the vehicle anything else. Thank you.
James D. Farley: By the way, pro includes electric, and although electric is going slower for pro customers, they do the math quicker than retail customers, and so actually, our January EV sales in pro were higher than December, which would never make sense, but we're seeing more and more pro customers go electric if their duty cycle makes sense, so even for pro, it's important for our success. I appreciate that, Jim. I just have a brief follow-up on China. You guys come across as very sophisticated in terms of having sophisticated insight into China. You got Ambassador Huntsman on the board. He's been there for years.
Speaker Change: I would say is.
Speaker Change: Adam one of the important things just on top of that is there.
Speaker Change: The segmentation is really important here.
Speaker Change: And we know that the EV business needs to stand on its own right, we're very clear about that and it needs to generate a profit and a return on the capital. We're investing now we're not there yet, but that's what we're working towards.
Speaker Change: The compliance benefit that we get that's important we can sell up to a dozen ICF won <unk> or other ice profitable vehicles for every lightning we sell.
Speaker Change: But that we don't do anything with wooden nickels, we don't do any credits into EV into a model or anything like that because eventually this business has to stand on its own sooner rather than later and Thats, a really important point it's clean.
James D. Farley: You have a JV partner with Chang An that's really kicking ass lately with EVs. So how can Ford potentially work with China, and Chinese partners, to help Ford achieve its EV objectives in a more capital efficient way? Thanks. Thank you. Well, the person right next to me, John, was the head of Ford of China and knows the Chang'an leadership really well. John and I went on a Gemba trip last spring, and it was really eye-opening for us.
Speaker Change: By the way also includes electric and oil.
Speaker Change: And although electric is going slower for pro customers is actually they do the math quicker than retail customers and so actually our January EV sales in pro we're higher than December which would ever make sense, but we're seeing more and more pro customers go electric if their duty cycle makes.
Speaker Change: So even for pro.
Speaker Change: For our success.
Speaker Change: I appreciate that Jim I, just have a just a brief follow up on China.
James D. Farley: I mean, as two leaders who looked at each other said, holy, Um, I think, first of all, China, as an export for our very profitable overseas markets, is really important, and actually, we shouldn't overlook the importance of JMC now. We have really profitable export businesses in China, ICE and EV. We're going to actually have a very different strategy than our competitors in China with a very low capital approach to EVs. We see the kind of bloodbath reality now in China for EVs, and we're watching that really carefully. We don't think it's a good time to jump in with both feet.
Speaker Change: Guys come across as very sophisticated in terms of having sophisticated insight into China, you got Embassador Huntsman on the board been there for years.
JV partner with Cheyenne, that's really kicking <expletive> lately with EV. So how can afford work potentially work with China.
Speaker Change: These partners to help for to achieve its objectives in a more capital capital efficient way.
Speaker Change: Thank you.
Speaker Change: Personally my next to me John was the head of Florida, China knows that Chung on leadership really well Jonathan Ireland.
Speaker Change: Two a gamba trip last spring and it really eye opening for US I mean as two leaders we look to each other.
Speaker Change: Holy Cow.
Speaker Change: I think first of all.
James D. Farley: In China with EVs, but we're allowing our partners' platforms to lead our electrification, and in doing that, we are learning a lot about the capability and the local IP there in China, and it's pretty breathtaking to see what we're learning. I think our approach of very low capital, profitable business is appropriate at this moment in time for this kind of EV explosion, but also bloodbath, and profitability. And I think we're also building a global capability team for digital experience, Battery and Sensing Tech, and product concepting in China that we'll use globally.
China.
Speaker Change: As an export for our very profitable overseas markets is really important now.
Speaker Change: And actually we Shouldnt overlook the importance of GMC now.
Speaker Change: We have really profitable export business from China.
Speaker Change: Ice and EV.
Speaker Change: We're going to actually a very different strategy I think our competitors in China with a very low capital approach to east.
Speaker Change: We don't.
Speaker Change: We see the kind of blood Bath reality now in China in Evs, and we're watching that really carefully we don't think it's a good time to jump in with both feet in.
Speaker Change: In China with Evs, but we're allowed we're allowing our partners' platforms to lead our electrification and in doing that we were we are learning a lot about the capability and the local IP there in China.
James D. Farley: I think even though that's not a profit or loss thing, we see it as a real capability globally. So our strategy is quite different, but I think it works for our company. Thanks, Jim. The next question is from John Murphy with Bank of America. Please go ahead.
Speaker Change: And it's pretty breathtaking to see.
Speaker Change: See what we're learning I think our approach of very low capital profitable business is appropriate at this moment in time.
Speaker Change: Sure.
Speaker Change: Of.
John Murphy: Good evening, guys. Just a first question here, Jim, on EVs. Obviously, that's a hot topic here. As we look at sort of the slowdown here, we're hearing from dealers, particularly from NATO last week, that they're seeing EVs traded in and folks buying ICE and hybrids, so they're actually swapping out of EVs and buying ICE and hybrids.
Speaker Change: EV explosion, but also a blood bath in profitability.
Speaker Change: And I think we're also building a global capability team for digital experience battery and sensing Tech.
Speaker Change: And product concepts in China that will use globally.
Speaker Change: I think even though that's not a profit or loss thing, we see it as a real capability globally. So our strategy is quite different.
Speaker Change: But I think it works for our company.
Speaker Change: Thanks, Jeff.
Speaker Change: The next question is from John Murphy with Bank of America. Please go ahead.
John Murphy: And then you're seeing Hertz dump 20,000 EVs and cancel or postpone orders. So both on the retail side and the commercial side, you're getting these stories that are following up with data that folks are really not happy with the product in the near term. I mean, what do you think is happening because the customers are not happy?
John Murphy: Hi, good evening guys.
John Murphy: Just a first question here Jim on on on Evs, Obviously, that's a hot topic here.
John Murphy: As we look at sort of the slowdown here, we're hearing from dealers, particularly I spent some time in NATO last week.
John Murphy: Theyre seeing evs trade it in and folks buying ice in Evs are actually swapping out.
John Murphy: I mean, it sounds like on the pro side, some folks might be with the product that they have right now. And if you think about your planning assumptions, maybe near term, just for argument's sake, say you have 100,000 fewer EVs. Do you think if you sell 100,000 fewer EVs at Ford that you have the ICE and hybrids to backfill for that, so you actually don't lose sales, and you actually may be a little bit more profitable in the short term? It's kind of a lot in that question, but you're trying to understand what you're seeing in the market, why things are failing here, both on the retail side and on the commercial side to some degree, and you have the product to backfill if those volumes are lower. John, thank you for your question. You can imagine with our choice.
John Murphy: Of Evs by ice in hybrids I should I say <unk> hybrids, and then Youre seeing hertz.
John Murphy: Jumping 20000, Evs and canceling and postponing.
John Murphy: So both on the on the retail side and the commercial side Youre getting these.
John Murphy: These stories, it's following up with data.
John Murphy: Folks are really not.
You are happy with the product sort of near term.
John Murphy: Or you think is happening because the customers are not happy I mean, it sounds like on the pro side, some folks might be.
John Murphy: The product that they have right now and if you think about sort of your planning assumptions maybe near term.
John Murphy: I don't just just for argument's sake say you have 100000 less Evs do you think if you sell 100000 less evs at Ford.
James D. Farley: Portfolio, being big on scaled hybrids, ICE, of course, and EV, this is a very fundamental question for us because we have to plan our capacity years out. You know, here's what we do: Customers are doing the quick showroom math on hybrids. They can quickly evaluate the break-even point between ice and a hybrid. On the showroom floor for an F-150, they know how much a Honda generator costs versus pro power on board, and they don't have to change the behavior. A lot of the operating cost efficiencies of EV for a mainstream customer require change, like installing a charger at home, or they're uncertain. For example, how much will I save on repair costs? How much will I save on electrons versus gasoline? You know, it's, it's harder to compare.
That you have the ice and hybrids to backfill for that so you actually don't lose sales and you actually maybe a little bit more profitable in the short term, it's kind of a lot in that question, but just trying to understand what youre seeing in the market why things were failing here both on the retail side.
John Murphy: And on the commercial side to some degree and do you have the product to backfill.
John Murphy: Those volumes are lower.
Speaker Change: You can imagine John you can thank you for your question you can imagine with our choice portfolio being big on scaled.
Speaker Change: Hybrid is of course in an EV. This is a very fundamental question for us because we have to plan our capacity years out.
Speaker Change: Here's what we found.
Speaker Change: Customers are doing the quick showroom math on hybrids.
James D. Farley: So we're just seeing the cost of ownership, which is interesting because the success of EVs in pro is a customer that does that math more brutally, and they use the vehicle at higher utilization. So they're looking at cost of ownership in a much, Clear Lens way, and therefore, some of them are doing the math and going easy. I think that math has always been there for HEV, but now more customers are interested in doing that, and we believe that customers are smart. Some people with duty cycles for EVs are going to do the math over time, and it's worth investing in. It's a really good business.
Speaker Change: Can quickly evaluate the breakeven.
Speaker Change: Between ice and a hybrid.
Speaker Change: On the showroom floor for an F 150, they can they can they know how much of Honda generator cost versus pro power onboard and they don't have to change their behavior.
Speaker Change: The a lot of the <unk>.
Operating cost efficiencies of the EV for our mainstream customer required change like installing a charger at home.
Speaker Change: Or they are uncertain, how much will I save on repair cost how much will I save on elektron versus <unk>.
Speaker Change: Gasoline.
Speaker Change: It's harder to compare.
Speaker Change: So we're just seeing the cost of ownership.
Speaker Change: It's interesting because the success of Evs and throw is a customer that does that math more brutally and they use the vehicle and a higher higher utilization. So theyre looking at cost of ownership and a much.
James D. Farley: But it's on us to get the cost right. So I just think we're seeing the math for an EV customer, a mainstream EV customer, is a little bit more opaque than what we see with hybrids. We're hearing, Maren, you want to say anything quickly about dealers?
Speaker Change: Clear lens.
And therefore some of them are doing the math in going to EV.
Speaker Change: Think that math is always been there for HEV, but now more customers are interested in doing that and we believe that customers are smart and some people would duty cycles for evs are going to do that math over time, and it's worth investing because it's a really good business, but it's on us to get the cost right. So I just think we are seeing.
Marion B. Harris: Yeah, I think what we're seeing with our dealers is they've been making margins comparable to their ICE vehicles in the last year. And in 21 and 22, we're actually doing better than on their ICE vehicles when pricing was really strong. So we feel really good about making sure our dealers are making money on this, and they're making investments for the long term. But I think that's something that we monitor closely. I think just building on Jim's point quickly, I would just say the big difference for consumers is they make that one choice every few years, whereas the pro customer is changing their fleet consistently, buying lots of vehicles, and they test, and they learn what the TCO difference is, that total cost of operation.
Speaker Change: A.
Speaker Change: The math for an EV customer mainstream EV customers, a little bit more opaque than what we see on hybrid.
Speaker Change: We're here.
Speaker Change: Darren you want to say anything quickly about dealers yes.
Darren: Yes, I think what we're seeing with our dealers as they've been making margins comparable to their ice vehicles from last year and in 'twenty. One 'twenty two we're actually doing better than on the ice vehicles when pricing was really strong. So we feel really good about.
Darren: Making sure our dealers are making money on this and they're making investments for the long term, but I think thats something that we monitor closely I think just building on Jim's point quickly I would just say the big difference for consumers as they make that one choice every few years, whereas the pro customer is changing their fleet consistently buying lots of vehicles and <unk>.
Marion B. Harris: And as far as manufacturing capacity is concerned, we plan that 40%. We may have some pricing room above that, and we've seen HEV pricing become more robust as we hit these capacity limits, but, you know, 40% growth is a big increase for us. We think we got it about right.
Darren: Test and they learn what the Tcl differences that total cost of operation and as far as the menu.
James D. Farley: That means like on an F-150, America's best-selling vehicle, we think 25% of the sales or America's best-selling vehicle is gonna be hybrid. And I think we're getting close to some of the all-hybrid nameplates out there that people think of when they think of hybrids with that 150. So we have a lot of flexibility; I think we're in good shape. Jim, just one follow-up. I mean, you're reported to or rumored to be doing a two week tour with your dealers around to your different dealers. I'm just curious, you know. Some of them are happy; some of them are, you know, annoyed at the EV stuff.
Darren: Manufacturing capacity, we plan that 40%.
Darren: Growth in <unk> years ago.
That is our capacity.
Darren: We may have some pricing room above that and we've seen actually ETB pricing.
Darren: Become more robust as.
Darren: As we hit these capacity limits, but 40% growth.
Darren: Big increase for US we think we've got about right that means like an F 150, America's best selling vehicle, we think 25% of the sales or America's best selling vehicles can be hybrid.
Darren: And I think we're getting close to some of the all hybrid nameplates out there that people think of when they think of hybrids. We've got 150. So we have a lot of flexibility I think we're in good shape.
Speaker Change: Jim just one follow up I mean, you reported two are rumored to be doing a two week tour.
Speaker Change: To your dealers.
Speaker Change: Around your different dealers I'm just curious.
Speaker Change: All of them are happy some of them are annoyed at the easy stuff. What is the what is the general message is going to be as you're going around to the all important channel.
James D. Farley: What is the general message going to be as you're going around to the all important channel? You know, and trying to, you know, get the troops in line and everything moving in the right direction on a distribution channel? A couple of key messages. First of all, I mentioned Ford Pro and what a profit juggernaut that is. We continue to need our dealers to invest in the brick and mortar of those remote service vans and accelerate that because that is the upside. We want to get to if we want to get to 20 percent of the profit for pro being attached services. It's going to have to come on the back of capacity in our dealers and vans. So invest in Pro.
Speaker Change: And trying to get the troops in line and everything moving in the right direction and a distribution channel.
Speaker Change: A couple of key messages first of all.
Speaker Change: I mentioned Ford Pro and what our profit Juggernaut that is we continue to need our dealers to invest in the brick and mortar in those remote service van and accelerate that because that is the upside we want to get to if we want to get to 20% of the profit for pro being attached services, it's going to have to come on the back of <unk>.
Speaker Change: And our dealers and Vance, so invest and throw the second thing is.
James D. Farley: The second thing is, you know, we have manufacturing flexibility between ICE, EV, and hybrid. So we want to make sure that they understand that we're probably in better shape than any other brand in this transition. The third message is we want them to understand our progress on quality, and we are going to press to be among the leaders in retailing, efficiency for our customers, remote pickup and service, doing more repairs for our retail customers remotely, and that takes investment on their side. We really want to step on the gas on customer experience, both ownership and purchase. And I think that has to come from the top. Jim Farley has to say to all those dealers who are private investors, "You know, we need your partnership right now." That's why I'm going on the tour. It sounds good. Thank you very much. The next question is from Rod Lache with Wolf Research. Please go ahead. Hi everybody.
Speaker Change: We have manufacturing flexibility between ice and EV and.
Speaker Change: And hybrid so we want to make sure that they understand that we're in probably better shape than any other brand in this transition the third messages.
Speaker Change: We want them to understand our progress on quality.
Speaker Change: And we are going to press to be among the leaders in retailing keefer.
Speaker Change: For our customer remote pickup in service doing more repairs for our retail customers remote and that takes investment and their side, we really want to step on the gas on customer experience, both ownership and purchase and I think that has to come from the top Jim Farley has to say to all those dealers who are prime.
Speaker Change: <unk> investors.
Speaker Change: We need your partnership right now.
Speaker Change: That's why I'm going on the tour.
Speaker Change: Sounds good thank you very much.
Speaker Change: The next question is from Rod Lache with Wolfe Research. Please go ahead.
Rod Lache: Hi, everybody.
Jim You said that you are discovering that the adoption curve for eases a bit shallower, but were still seeing five to five 5 billion of losses, and modeling, which implies that structural costs are probably higher and in.
Rod Lache: Jim, you said that you're discovering that the adoption curve for EVs is a bit shallower, but we're still seeing five to five and a half billion losses in Model E, which implies that structural costs are probably higher in 2024 than in 2023. So it sounds like you're committed, because you see the ultimate benefit and maybe also a little bit because there isn't much choice. So ultimately, the question is, can you control and commit to when that business reaches break even, either through stronger demand or lower spending? Because from here, a five billion improvement is pretty meaningful. Or do you have to do that because of the trajectory of ZEV and EPA and all the other things possibly exceeding where consumers are?
Rod Lache: In 'twenty 'twenty four 2023 so it sounds like Youre committed.
Rod Lache: Because you see the ultimate benefit and may be.
Rod Lache: Also a little bit because there isn't much choice. So ultimately the question is can you control and commit to win that business reaches breakeven either through stronger demand or lower spending from here 5 billion improvement is pretty meaningful.
Rod Lache: Or do you have to do that because of the trajectory of zev and EPA and all the other things, possibly exceeding where consumers are.
James D. Farley: Oh, well, we're not going to go to market with a vehicle unless we've completely convinced ourselves that it's going to be profitable. And that takes some timing adjustments, actually, and we see opportunity in the short term to make some adjustments. Um, but yeah, I know it's a huge turnaround, and it's a big number. John, maybe you want to go into the actual losses in Model E just to pick them apart a little bit, and then I think you'll see a little bit more about the opportunity we have with Gen 2.
Rod Lache: Well we are.
Rod Lache: We're not going to go to market with the vehicle unless we completely convinced ourselves that it's going to be profitable.
Rod Lache: And that takes some adjustments on timing actually and we see opportunity in the short term to make some adjustments.
Rod Lache: But yes, I know its a huge turnaround and it's it's a it's a big number John maybe you want to go into the actual losses in a model leads us to pick them apart a little bit and then I think youll see a little bit more about the opportunity we have with gen. Two yes. So the biggest issue we have in our.
John Murphy: Yeah, so the biggest issue we have in our Gen 1 vehicles, of course, is that revenue collapsed, and they're not optimized from a cost standpoint. We've put them through very quickly to get to market. And, you know, you're seeing that flow through, but I think, Rod, part of what you were getting at is that we have no choice.
John: Gen. One vehicles of course is that the revenue collapsed and theyre not optimized from a cost standpoint.
John: We've put them through very quickly to get to market.
John: <unk>.
Speaker Change: And you're seeing that flow through but I think rod part of what you were getting at is that we have no choice.
Speaker Change: And.
Speaker Change: We will continue to work on.
Speaker Change: Proving the cost structure of the Gen. One vehicles and as Jim said, our Gen. Two vehicles, we won't launch.
John Murphy: We will continue to work, http://www.ford.com, West. We can get to a profit as a return on that capital that we're investing there at the pricing environment that we now understand is reality. So, yes, it is very much the mother of all optimization modeling and work around the balance between how many EVs we sell, because we talked about the compliance benefits of that. For every Lightning, we can sell 12 ICE vehicles, you know, we can sell a number of ICE vehicles with every Mach-E. And so there's that balance. And then there's the balance of what we need to sell from the ICE standpoint, and how we can But there's also, and you'll see that in Arcade tomorrow, we are buying credits as they're available.
Speaker Change: Yes.
Speaker Change: We can get to a profit and a return on that capital that we're investing there.
Speaker Change: The pricing environment that we now understand is reality so yes. It is very much.
Speaker Change: The mother of all optimization modeling and work around the balance between how many evs, we sell because we talked about the compliance benefit for that for every lightning we can sell 12.
Speaker Change: Ice vehicles.
Speaker Change: We can sell a number of ice vehicles with every market we sell.
Speaker Change: And so there's that balance and then theres the balance of what we need to sell from.
Speaker Change: The ice standpoint, and how we can improve with atvs, there natural benefit too, but theres also and you'll see that in our K tomorrow. We are buying credits as they are available. So we have to optimize across all three of those frontiers and thats what were working on right now, but we know that we have to have this electric vehicle business stand on it.
John Murphy: So we have to optimize across all three of those frontiers. And that's what we're working on right now. But we know that we have to have this electric vehicle business stand on its own. www.larryweaver.com www.youtube.com.uk We talked about that, the Chinese, as well as Tesla, that are proud. We have to cross that fulcrum and get there.
Speaker Change: Zone.
Speaker Change: And be profitable because we know that there are competitors out there.
Speaker Change: We've talked about that the Chinese as well as Tesla that are profitable and we have to cross that fulcrum can get there and that's what our goal is so it needs to be a benefit of profitable business return on the capital plus the compliance benefit that we get from those and Rod we of stakeholder support which so we're not going to go a lot of details but.
James D. Farley: And that's what our goal is. So it needs to be a benefit of a profitable business, return on the capital, plus. The Bulletproof Executive 2013.
John Murphy: And Rod, we have a lot of stakeholders at Ford, so we're not going to go into a lot of details. But, you know, we have optionality even this year in capital spending. I mean, you know, a lot of that guide is EVs.
Speaker Change: We have optionality, even this year in capital spending I mean.
Speaker Change: A lot of that guide is Evs, John I don't know if you want to be specific by 40% about 40% last year and 40% of our Capex. This year and is EV and we're driving as a team to be on the low end of a low end of that range absolutely. Because we are working hard on our <unk> spend and I just want to make.
James D. Farley: John, I don't know if you want to be specific, but 40% of our CapEx this year and 40% of our CapEx this year are EVs, and we're driving as a team to be on the low end of that low end of that, Absolutely, because we are working hard on our EDC, and I just want to make sure we don't want to leave this call with the fact that this is totally baked. We are working really hard to be on the low end of that because we think it's appropriate to run the business this way. Can you commit to breaking even at a certain point?
Speaker Change: Sure we don't want to leave this call with the fact that this is totally baked we are working really hard to be on the low end of that range, because we think it's appropriate to run the business.
Speaker Change: Can you commit to breakeven at a certain point you said before that the Gen. Two vehicles come out in 2026. So is that kind of the timeline for closing that that $5 billion and then just as a follow up.
John Murphy: You said before that the Gen 2 vehicles come out in 2026. Is that kind of the timeline for closing that $5 billion? And then just as a follow-up, I think you're saying that you've got line of sight on warranty coming down. Will we see the variable cost disadvantage that you've highlighted in warranty and material starting to come down this year? I have the leader of our EV business here, Maren. So I think that question goes to you on timing and more.
Speaker Change: I think youre, saying that you've got line of sight on warranty coming down.
Speaker Change: We see the variable cost disadvantage that you've you've highlighted in warranty and material starting to come down this year.
Speaker Change: Or have the leader of our EV business year Lauren so.
Speaker Change: I think that question goes to you on timing and warranty yes.
Lauren: Yes, I don't think were prepared right now to commit to a specific timing on when we're going to be positive EBIT. We are going to expect to see improving gross margin quarter over quarter over the course of the year John mentioned some of the levers we're starting to pull and we will continue to adjust to the market realities, we've changed our <unk>.
Mehran Gaja: Yeah, I don't think we're prepared right now to commit to a specific time on when we're going to be positive EBIT. But we are going to expect to see improving gross margin quarter over quarter over the course of the year. John mentioned some of the levers we're starting to pull, and we will continue to adjust to the market realities. We've changed our production, and we have increased CNI as needed to address our inventory issues. And we're going to keep working on our costs. We've taken four to 5,000 out of the bomb on Mustang Mach-E since it was launched, and two to 3,000 out of Lightning, and the team continues to work.
Lauren: <unk>, we have increased C&I as need be to address our inventory issues and we're going to keep working on our cost we've taken $4 to 5000 out of the bomb on Mustang Mach E. Since it was launched in two to 3000 out of Lightning and the team continues to work.
Lauren: But the market has turned and it is going to be a challenge and I don't know that we can commit because we don't know exactly what's going to happen in the market in terms of warranty costs. Our generation one vehicles as we mentioned earlier have been incredibly valuable for us to learn about a set of issues around evs batteries and thermal propagation and we will continue to work on that.
Mehran Gaja: But the market has turned, and it's going to be a challenge. And I don't know that we can commit because we don't know exactly what's going to happen in the market. In terms of warranty costs, our Generation One vehicles, as we mentioned earlier, have been incredibly valuable for us to learn about a set of issues around EVs, batteries, and thermal propagation, and we will continue to work on that to lower our warranty costs dramatically for Generation Two. But we've got to deliver that in partnership with Kumar and the industry. Thank you.
To lower our warranty costs dramatically for generation, two but we've got to deliver that in partnership with Kumar and the industrial platform.
Lauren: Okay.
Rod Lache: So, Rod, the last part of your question was around, are we going to start to see costs go down? I would say that from a warranty standpoint, costs are probably going to be about flat this year. We're starting to see green sheets on quality improvements, but as you know, the way that works, there's a lag. And Kumar can touch upon this a little bit more, but this year we expect to see $2 billion of efficiencies flow through, and those efficiencies are in the material cost in the industrial sector, which is pretty much offsetting the impact of the UAW. But also, remember 60% of our global portfolio this year will be refreshed. And coming with that will be incremental costs that we have for new features, compliance, etc. So, what we should see this year is the efficiencies of $2 billion offsetting the UAW labor contract plus. The refresh costs of 60% of our products being refreshed. Got it. Okay. Thank you very much. The next question is from Dan Levy with Barclays. Please go ahead. Hi, good evening.
Speaker Change: Okay. Thank you so rod I think the last part of your question was around are we going to start to see cost turn.
Speaker Change:
Speaker Change: I would say that from a warranty standpoint costs are probably going to be about flat. This year and we're starting to see green shoots on the quality improvements, but as you know the way that works there is a lag.
Speaker Change: And Kumar can touch upon this a little bit more but this year, we expect to see $2 billion of efficiencies flow through.
Kumar Gupta: And those efficiencies are.
In the material cost and the industrial system.
Kumar Gupta: Pretty much offsetting the impact of the UAW.
Kumar Gupta: But also remember 60% of our global portfolio. This year will be refreshed and coming with that will be incremental costs that we have four.
Kumar Gupta: New features compliance et cetera, and so while we should see this year is the efficiencies of $2 billion offsetting the UAW labor contract plus the refresh costs of our 60% of our products being refreshed this year.
Speaker Change: Got it okay. Thank you very much.
Speaker Change: The next question is from Dan Levy with Barclays. Please go ahead.
Dan Levy: Hi, Good evening, Thank you for taking the question.
Dan Levy: Thank you for taking the questions. I want to go back to pro, and you know, your guide that you have for this year is already in line with the mid-teen margin guide you provided at your CMD last spring. So really, the question is, how sustainable is this earning stream? And specifically, I think you've had something like $7 billion in revenue from Pricetail last year; I think 11 billion if you aggregate over a two-year stretch. Now, I know this is partially driven by new products, but what is the sustainability of these very robust price tailings? Well, first of all, I try to explain the fundamental factors for our vehicle profitability and pro that's driving that demand will be here for a while.
Dan Levy: One of them back to pro and you're the Guy that Youre that you have for this year already in line with the mid Teen margin Guide you provided a chair CND last spring. So really the question is how sustainable is this earning stream and specifically I think <unk> had something like $7 billion of <unk>.
Dan Levy: This tailwind.
Dan Levy: Last year, I think $11 billion, if you aggregate over a two year stretch I know this is partially driven by new product, but what is the sustainability of these very robust price tailwind can experience.
Speaker Change: Well first of all I tried to explain the.
Speaker Change: The fundamental factors for our vehicle profitability and pro that's driving that demand will be here for a while it's basic.
James D. Farley: Basic infrastructure, government, state, 5G, onshoring, manufacturing, the manufacturing sector, we believe that that's very durable. And by the way, in Europe, we've been a top selling brand there for nine years, and we have very old products. So we haven't even seen the effect of Transit Custom and Ranger yet, but that's all coming our way. We feel that this is pretty robust. Profitability because we've never had the 20% attached rates. We've never had a half a million units of software with 50% margins.
Speaker Change: Basic infrastructure.
Speaker Change: Government state five G onshoring and you're factoring.
Speaker Change: The manufacturing sector.
Speaker Change: We believe that that's very durable.
Speaker Change: And by the way in Europe, we have been the top selling brand there for nine years, and we have very old product. So we haven't even seen the effect of transit custom and Ranger, that's all coming our way we feel that this is.
Speaker Change: Pretty robust.
Speaker Change: Profitability, because we've never had the 20% attach rates, we've never had a half a million units.
Speaker Change: Oh.
Speaker Change: Of software with 50% margins, we've never really focused on pro after sales. So we are now.
James D. Farley: We've never really focused on professional after sales. So we are, We're just getting started with this 20% of the profitability coming from attached services, and I think that totally changes the risk portfolio of our commercial business, um, and we, you know, this is a real, real opportunity for our community that we never had. I also believe that that attach rate is the kind of things that we'll start to see on the retail side of our business. Blue Software is now 70% marketed, and it's high volume, and we're just getting started with that optionality. What it will be five years from now, I'm not sure the timeframe of your question. It's hard to predict, but for the next couple of years, we're in a really good spot. Because the shovels are in the ground or about to get buried in the ground.
We're just getting started with this 20% of the profitability coming from attach services and I think that totally changes the risk portfolio of our commercial business.
Speaker Change: And we.
Speaker Change: This is.
Speaker Change: Real opportunity for our company that.
Speaker Change: We never had I also believe.
Speaker Change: That data attach rates are.
Speaker Change: Are the kinds of things that we will start to see on the retail side of our business.
Speaker Change: Blues software is now 70% margin is.
It is high volume now.
Speaker Change: And we're just getting started with that optionality. So.
Speaker Change: What it will be five years from now I'm not sure the timeframe Youre question hard to predict but for the next couple of years, we're in a really good spot.
Speaker Change: Because the shovels are in the ground or about to get in the ground. The one.
James D. Farley: The one other thing about PRO that we have to watch really carefully, which would have even more upside, is a return to a robust construction housing market, which has been really low in the last couple years. If that starts to fire up, we're going to even have more capacity. www. Flydreamers.com
Speaker Change: One other thing about pro that we have to watch really carefully which would be even more upside is a return to a robust construction housing market, which has been really low in the last couple of years, if that starts to fire up we're going to we're going to even have more capacity issues.
Speaker Change: On probe.
Speaker Change: Great. Thanks, and then.
John Murphy: Thanks. And then, as a follow-up, John, I want to go back to your comments that you just mentioned a second ago about industrial costs, and specifically, I think at the CMD, you talked about a $7 billion cost disadvantage versus your competitors in blue. So how do we contextualize the cost improvements that you're getting now versus the $7 billion? Is it safe to say that now this journey on sort of narrowing that gap is starting or still? There's still a lot more work to do. Just help us understand the path to narrowing that cost gap versus your competitors. Yeah, what I would say is that now we're starting to gain the track, and that gap should start to narrow.
Follow up John I wanted to go back to E Commerce.
Speaker Change: Comments that you just mentioned a second ago on.
Speaker Change: On the industrial costs, and specifically I think the CND.
Speaker Change: Talked about $7 billion cost.
Speaker Change: Vantage versus your competitors in blue.
Speaker Change: So how do we contextualize the cost improvements that you are getting now versus the $7 billion I mean is it.
Speaker Change: It's safe to say that now that this journey on sort of.
Speaker Change: Narrowing that gap is starting or is it still just there's still a lot more work to do and just help us understand the path to narrowing that.
Speaker Change: GAAP versus your competitors.
Speaker Change: Yeah, what I would say is that it is now we're starting to gain the traction and that gap should start to narrow.
John Murphy: And you know that that's part of the $2 billion. And so it's going to be across the industrial system, both in material and in labor. And I think Kumar can share some more details of how he's leading that and driving it. Yeah, thanks, John. Well, this year, we're starting very differently than 24 than 23. For example, a couple of fundamental different things.
Speaker Change: Andrew.
Speaker Change: That's part of the $2 billion.
Speaker Change: And so it's going to be across the industrial system, both in material and labor and I think Kumar can share some more details on how he is leading that and driving that yes. Thanks John.
Kumar Gupta: This year, we're starting very differently than 'twenty four 'twenty three for example, a.
Kumar Gupta: A couple of fundamental different things.
Kumar Galhotra: Last year, we had a lot of inflationary pressures and claims from our suppliers. Those have eased very substantially and are going to help us deliver the $2 billion that John talked about. The second thing is the supply chain is much more stable; that allows us to run our entire system much more smoothly and helps us remove a lot of waste. It also reduces a lot of our freight costs because we've been doing a lot of premium freight the last couple of years, so that'll help as well. And in terms of material, we're attacking it in like three different ways. One is where our designs are not efficient. So let me give you a bit of color and what those are, a couple of examples.
Kumar Gupta: Last year, we had a lot of inflationary pressures in claims from our suppliers.
Kumar Gupta: Those have eased very substantially and are going to help us deliver.
Kumar Gupta: To deliver the $2 billion that John talked about.
Kumar Gupta: The second thing is the supply chain is much more stable.
Kumar Gupta: That allows us to run our entire system.
Kumar Gupta: Much more.
Kumar Gupta: Smoothly and helps us to remove a lot of waste.
Kumar Gupta: It also reduces a lot of our freight cost because we've been doing a lot of premium freight last couple of years, so that will help as well.
Kumar Gupta: And in terms of material.
Kumar Gupta: Tacking it in like three different ways one is.
Kumar Gupta: Our designs are not efficient so let me give you it's a bit of color on what those just a couple of examples.
Kumar Galhotra: In one of our vehicle lines, we were using certain aero shields for fuel economy, and after a fresh eyes Kaizen review internally and some benchmarking, the team came up with a different way of delivering the same arrow and saving $40 per vehicle. So that's equivalent to about $10 million per year.
Kumar Gupta: And one of our vehicle lines, we were using certain <unk> for fuel economy, and the fresh eyes Kaizen review internally and some benchmarking.
Kumar Gupta: The team came up with a different way of delivering the same arrow and save $40 per vehicles. So that's equivalent to about $10 million per year.
Kumar Galhotra: Another category is where we're providing certain features to our customers where they're not finding a lot of value. And connected vehicle data here is very important because it helps us see what we're providing, whether the customers are using it or not. So one example is an auto park feature that lets the customer parallel park automatically. But very, very few people are using it.
Kumar Gupta: Another category is.
Kumar Gupta: Where we are providing certain features to our customers.
Kumar Gupta: Where they are not finding a lot of value and connected vehicle data here is very important because it helps us see what we are providing whether the customers are using it are not so one example is an auto park feature that lets the customer apparel Park.
Kumar Gupta: <unk>.
Kumar Gupta: Very very few people are using it. So we can remove that feature its about $60 per vehicle another $10 million for per year.
Kumar Galhotra: So we can remove that feature. It's about $60 per vehicle, another $10 million per year. We're doing very extensive benchmarking for our manufacturing, both internally because we have lots of good ideas within our system and externally at a station by station level. So just recently, one of the teams completed an analysis of about 50 stations and saved about $8 million. And I already mentioned freight.
Kumar Gupta: We're doing very extensive benchmarking for manufacturing.
Kumar Gupta: Both internally because we have lots of good ideas within our system.
Kumar Gupta: Externally at a station by station level. So just recently.
Kumar Gupta: One of the teams completed an analysis of about 50 stations and shaved about $8 million.
Kumar Gupta: And I already mentioned the freight. So these are the kinds of very robust ideas, we have in the hopper.
Kumar Galhotra: So these are the kinds of very robust ideas we have in the hopper, along with less inflationary claims, along with a stable supply chain, that's going to help us close that gap that John mentioned and save two billion. Great, thank you. The next question is from Emmanuel Rosner with Deutsche Bank. Please go ahead.
Kumar Gupta: Along with less inflationary claims along with a stable supply chain.
Kumar Gupta: Going to help us close that gap that John mentioned and safe 2 billion. This year.
Great. Thank you.
Kumar Gupta: The next question is from Emmanuel Rosner with Deutsche Bank. Please go ahead.
Emmanuel Rosner: Thanks so much. I was actually hoping to pick it up just where you left off on all that good color on the cost side. Are there any green shoots that you can sort of like point us to, to give us, you know, increased conviction around some of these costs? Obviously, in 2023, costs were still a fairly major drag, and that includes even in the fourth quarter. So, like any, in your reporting, any of these buckets that we should be watching in terms of what will actually provide the tailwinds? You know, $2 billion plus in 2024. It's just fundamentally the things I talked about.
Thank you so much I was actually hoping to pick it up just.
Emmanuel Rosner: Where you left off on all the good color on the cost side are.
Emmanuel Rosner: Are there any green shoots that you can sort of point us to.
Emmanuel Rosner: To give us.
Emmanuel Rosner: Increased conviction around some of these costs. Obviously in 2023 costs were still fairly may take Ryan and net increase even in the <unk>.
Emmanuel Rosner: Fourth quarter, so like any like.
Emmanuel Rosner: In your reporting any of these buckets that we should be watching in terms of what will actually provide a tailwind.
Emmanuel Rosner: $2 billion plus in 2024.
Emmanuel Rosner: It's just fundamentally the things I talked about we have a very robust hopper of ideas that we're very busy executing.
Kumar Galhotra: We have a very robust hopper of ideas that we're very busy executing stability and supply chain, removing a lot of waste and freight costs. So we spent a lot of money, all of us did, on premium freight. We're starting to see in the third quarter and fourth quarter a much more stable supply chain that allows us not to spend that premium and bring those costs down in 2024. Emmanuel, the other thing I would add to that is that when you look at 22 and 23, we were very much behind the curve with the supply base. catching up to where they were and understanding what was driving their inefficiency. And we spent a lot of time in 2023 getting out in front of that, and I would say that we ended 23 with the great work that Liz had done to be, and a very different place with our supply base. And now we're working together with them very proactively across the commercial industrial sector to identify fish, things that we can change to help them. And as Kumar said, design actions, etc., things like that, that will make them more efficient as well. So that's another bit of color to add. Thanks so much.
Emmanuel Rosner: Stability in supply chain and removing a lot of waste.
Emmanuel Rosner: And freight costs. So we spend a lot of ammonia all of us did in premium freight.
Emmanuel Rosner: We're starting to see in fourth third quarter and fourth quarter are much more stable supply chain that allows us not to spend that premium and bring those costs down.
Emmanuel Rosner: And in 2024.
Speaker Change: The other thing I would add to that is that when you look at 'twenty, two and 'twenty three.
Speaker Change: We were very much behind the curve with the supply base.
Speaker Change: Catching up to where they were and understanding what was driving their inefficiencies and claims and we spent a lot of time in 2023 getting out in front of that and I would say that we ended 23 with the great work that was done to be.
Speaker Change: And a very different place with our supply base and now we're working together with a very proactively across diverse industrial system.
Speaker Change: <unk> efficiencies and things that we can change to help them.
Speaker Change: And as Kumar said design actions et cetera, things like that that will make them more efficient as well.
Speaker Change: So that's another bit of color to add to that.
Speaker Change: Thanks, So much just a quick follow up on this.
Speaker Change: Should we.
John Murphy: Just a quick follow-up on this. Will these things take time to play out? I guess I'm looking at your fourth quarter walk, and midfield, and freight was still like a billion dollar headwind.
Speaker Change: These things take time to.
Speaker Change: To play out I guess I'm looking at your fourth quarter walk in Midscale and freight was still $1 billion headwind. So curious if you would number of quarters and then it would be a bit more backend loaded or if we could sort of would like to turn on the switch and see some of these benefits in 2024, and then secondly.
Emmanuel Rosner: I am curious if you would need a number of quarters and then it would be a bit more back and forth, or if we could sort of like turn on the switch and see some of these benefits in 2024. And then secondly, curious about your thoughts about the volume outlook for this year, especially for Ford Blue. I think some of the inventory days are sort of like towards the higher end of what you start being comfortable with. And so I'm wondering where you see the volume going. Yeah, so there is a lot in there.
Speaker Change: Curious about your thoughts about the <unk>.
Speaker Change: Volume outlook for this year, especially for <unk>.
Speaker Change: <unk> Blue I think some of the inventory days us.
Speaker Change: Towards the higher end of what you.
Speaker Change: If you start.
Speaker Change: Comparable with it so I'm wondering where you see volume growth for this year.
Speaker Change: Yes so.
Speaker Change: What I think you should see from a calendar standpoint on the cost for 2024 is that Youll see as Kumar said a lot of these are the design actions we've been working to identify a 2023 that have built up this.
John Murphy: What I think you should see from a calendarization standpoint on the cost for 2024 is that you'll see, as Kumar said, a lot of these are the design actions we've been working to identify in 2023 that have built up this cadre of actions we call the hopper. And those will start coming through on the model year turnover. So more towards the middle of the year, you'll start to see a lot more traction on those. Some of the manufacturing improvements, you'll see some out throughout the quarters, probably a little bit more of an even flow of those, I would say. Right, Kumar?
Speaker Change: Cadre of actions, we call the hopper and those will start coming through on the model year turnover, so more towards the middle of the year Youll start to see a lot more traction there on those.
Some of the manufacturing improvements you'll see throughout.
Speaker Change: Throughout the quarters, probably a little bit more of.
Speaker Change: An even flow of those I would say right Kumar.
John Murphy: And so that's where we are. When you look at our day supply, when you look at our blue day supply, retail dealer day supply is in the low to mid 50s. So it's at about the limit of where we expect it to be. So leaning back then into volume, you know, we expect the industry to be. For the year, we expect it to be about 16 to 16.5, so maybe up 3 to 4% for us from a wholesale standpoint. About that.
Speaker Change: And so that's where we're at when you look at our day supply.
Speaker Change: When you look at our Blue days' supply retail dealer day supplies in the low to mid fifties. So it's at about the limit of where we expect it to be.
Speaker Change: So leaning back that into volume.
Speaker Change: We expect the industry to be.
Speaker Change: For the year, we expect it to be about 15% to 16, five so maybe up 3% to 4% for us from a wholesale standpoint about that from a planning perspective, Thats where were at from a pricing perspective, we are planning to see about a 2%.
John Murphy: From a planning perspective, that's where we are. From a pricing perspective, we're planning to see about a 2% decline in negative pricing. And then when you step back and you look at that from an affordability standpoint, we think 2024 is the year where affordability is going to get back to pre-pandemic levels, where the monthly disposable income it takes to buy a vehicle should be back about 13% to 13.5%, which is what we saw before the pandemic. So, you know, we're going to continue to see some top-line pressure on blue. We've got new product coming in blue, which is going to give us some mix and some tailwind there. So that's going to be a positive for blue. And then I think Jim covered it off pro.
Speaker Change: Decline negative pricing.
Speaker Change: And then when you step back and you look at that from an affordability standpoint, we think 2024 is the year where.
Speaker Change: Portability is going to get back to pre pandemic levels were.
Monthly disposable income it takes to buy a vehicle should be back to about that 13% to 13, 5%, which is what we saw before the pandemic.
Speaker Change: No.
Speaker Change: We're going to continue to see some top line pressure on Blue, we've got new product coming in Blue, which is going to give us some mix and some tailwind there. So that's going to be a positive for both and then I think Jim covered off growth.
John Murphy: We're seeing incredible demand for Pro. And as you know, Manuel, those commercial orders come in two tranches. Half of them came in last year, so they're all set. The other half are coming through now, and we're continuing to see strength. Thank you very much.
Speaker Change: We're seeing incredible demand on pro and as you know Emmanuel.
Those commercial orders come in two tranches half of them came in last year. So they're all set the other half are coming through now and we're continuing to see strength there.
Speaker Change: Okay.
Speaker Change: Thank you very much that program is going to be freshened or new but by the year end.
James Albert Picariello: I hope that the portfolio is going to be freshened or new by the year. Great, I appreciate it. The next question is from James Picariello with BNP Paribas. Please go ahead. Hi, good evening, everyone.
Speaker Change: Great I appreciate it.
Speaker Change: The next question is from James Picariello with BNP Paribas. Please go ahead.
James Albert Picariello: Hey, good evening everyone.
James Albert Picariello: I'm just wondering if you could, you know, help to mention EV volumes for this year associated with the $5 billion plus in Model A losses. And then, with respect to Ford Pro's mid-teens margins this year, just curious on the impact tied to fleet demand for EVs beyond general companies. Of course, do you foresee a step up in pro-EV volume? Before the year, no Model E losses get more difficult.
James Albert Picariello: Just wondering if you could help dimension.
Volumes for this year.
James Albert Picariello: With the 5 billion plus and modelling losses.
Then.
Aspect of Ford Pros mid teens margins. This year, just curious on the impact tied to the fleet demand for <unk> beyond.
James Albert Picariello: These of course are do you foresee a step.
James Albert Picariello: The step up in <unk> volumes.
James Albert Picariello: For the year no modelling losses get more difficult. So just how are you thinking about the EV dynamic for pro profitability as well.
James D. Farley: So just how are you thinking about the EV dynamic for pro-profitability as well? On the retail side, I'll ask Mar to answer that. On the pro, absolutely, our EV sales will grow, not only because we're seeing more interest because the cost of ownership is advantageous for some fleets, but we're also expanding in Europe quite a bit our electric offering with our two transit vans coming online, and so that will definitely, and there are a lot of city closures and other kinds of regulations in Europe that's driving adoption for electric vehicles, especially vans specifically.
On the retail side I'll ask mark to answer that.
Mark: On pro absolutely our EV sales will grow not only because we are seeing more interest because of.
Mark: The cost of ownership is advantageous for some fleet, but we're also expanding in Europe quite a bit our electric offering with our two transit vans coming online.
Mark: So that will definitely and there are a lot of city closures and other kind of regulations in Europe, that's driving adoption for electric vehicles.
Mark: Especially van specifically, so yes, we will have very robust growth in our evs.
James D. Farley: So, yes, we'll have very robust growth in our EVs for Pro. Yeah, we expect growth in sales on the retail side as well. Remember, we had times where we were out of production last year on the Mustang Mach-E and F-150 Lightning.
Mark: Sure.
Mark: <unk>.
Mark: Yes, we expect growth in sales on the retail side as well remember we had times, where we were out of production last year on Mustang Mach E and F 150 lightning. So we will be overlapping those will see growth and then more importantly, we're launching explore in Europe in the second half of this year. So that's going to be a new offering that will help us grow so we expect to see.
Mehran Gaja: So we'll be overlapping those; we'll see growth. And then, more importantly, we're launching Explorer in Europe in the second half of this year. So that's going to be a new offering that will help us grow. So we expect to see substantial unit volume. John, I know you touched on this already, but are supplier cost reductions a core component of $2 billion in savings for the year?
Mark: The substantial unit volume growth.
Speaker Change: Got it.
Speaker Change: I know you touched on this already but our supplier cost reductions a core component of $2 billion in savings.
Speaker Change: For the year.
James Albert Picariello: Just wondering how, you know, commercial negotiations have progressed, and are there any areas that stand out in terms of, you know, opportunity? A lot of the $2 billion is again through the manufacturing system. So it's the industrial efficiencies that we've been working on. And then from a design and materials standpoint, it's mostly design reductions that are part of the $2 billion on a year over year basis. So it's those actions that we've been benchmarking and working on, similar to the ideas that Kumar had described, pretty much design-related, design, labor, and freight. Yeah. Thanks. And the final question today comes from Ryan Brinkman with J.P. Morgan. Please go ahead.
Speaker Change: Wondering how commercial negotiations have progressed.
Speaker Change: Are there any areas that stand out in terms of opportunity.
Speaker Change: <unk>.
Speaker Change: A lot of the $2 billion is again through the manufacturing system. So it's the industrial efficiencies that we've been working on.
Speaker Change: And then from a design and materials standpoint, it's mostly design reductions that are part of the $2 billion on a year over year basis. So it's it's those actions that we've been benchmarking and working on similar to the ideas with Kumar had described.
Pretty much design related.
Speaker Change: Design labor and freight primarily.
Speaker Change: Thanks.
Speaker Change: And the final question today comes from Ryan Brinkman with Jpmorgan. Please go ahead hi.
Ryan Brinkman: Hi, thanks for taking my question. I mean, obviously, a strong guide in aggregate digging into, though, the higher anticipated bodily losses of five, five and a half billion. You know, what is embedded within that from like a variable contribution margin perspective? How do you expect that to progress throughout 24? And then could we also check in a little bit longer term on how you're feeling about that model?
Ryan Brinkman: Thanks for taking my question I mean, obviously, a strong guide and aggregate.
Ryan Brinkman: Digging into though the higher anticipated bodily losses of 555, what is embedded within that from like a variable contribution margin perspective, how do you expect that to progress throughout 'twenty four and then could we also check in a little bit longer term on how you are feeling about that model the margin target up I think it's 8% by the end of 2006.
John Murphy: The margin target of I think it's eight percent by the end of twenty six annualized. Correct. You know, including after GM recently lowered their twenty-five percent EV margin target. And given that, I think you rolled out that eight percent before Tesla cut their prices and saw their overall margin actually decline to be basically in line with yours. If you're still targeting eight percent with the twenty four guide out there now, you know, it's really only twenty five. It's the mystery.
Ryan Brinkman: Annualized right.
Ryan Brinkman: Including after GM recently lowered their 25 EBIT margin target and given that I think you rolled out that 8% before Tesla cut their prices and saw their overall margin actually declined to be basically in line with yours, if youre still targeting 8% with the 24, our guide out there now.
Ryan Brinkman: It's really only 25, so the mystery. So it seems like quite a step up that over the course of 'twenty five and 26 I know you do expect a big boost from those second generation Gpus, you discussed earlier, but.
John Murphy: So it seems like quite a step up then over the course of twenty five. And twenty six, I know you do expect a big boost from those second generation EVs you discussed earlier. But, you know, in comparison to the mixed fuel models.
Ryan Brinkman: In comparison to the mixed fuel models, but is that just is that enough to get you to the 8% or are there other sources of improvement that need to layer in over 25, and 26, no vertical integration or what are those sources of savings and how are you feeling about that target. Thank you.
John Murphy: But is that just enough to get you to the eight percent? Are there other sources of improvement that need to be layered in over twenty five and twenty six? I don't know.
John Murphy: Vertical integration, or what are those sources of savings, and how are you feeling about that target? Thank you. Yeah, so I think it's clear given the dynamics in the marketplace and the way the top lines have come down significantly since we had put that out there that 8% is not on in the 2026 time period. So I think that's clear. I don't think anybody believes that by 26, we can bridge the gap from here to 8%.
Speaker Change: Yes, so I think it's clear given the dynamics in the marketplace and the way the top line.
Speaker Change: Come down significantly since we have put that out there that 8% is not on the 2026 time period. So.
Speaker Change: Thats clear I don't think anybody believes that by 'twenty six we can bridge from here to 8%.
John Murphy: You know, it's going to come down to launching our next generation of vehicles and improving the contribution margin, or gross margin, as Martin said, on the first generation as we go through the year, but Martin, do you want to add more color to this John? I think that's right. I think it's really the levers we're pulling this year to improve gross margin over time on Gen 1 and then really stick to the capital discipline and the operating discipline around launching Gen 2 only when they can be profitable and deliver the kind of returns we want. And over time, that'll build a standalone profitable EV business.
Speaker Change: It's going to come down to launching our next generation of vehicles and improving.
Speaker Change: The contribution margin gross margin as Martin has said on the first generation as we go through the year, but Martin do you want to add more color to that.
Martin: John I think Thats right I think it's really the levers we're pulling this year to improve gross margin over time on Gen. One and then really sticking to the capital discipline and the operating discipline around launching gen. Two only when it can be profitable and deliver the kind of returns we want and overtime that will build a standalone profitable <unk> business.
Martin: Thanks.
Speaker Change: Very helpful. Thank you.
Speaker Change: This concludes our question and answer session and the conference is also now concluded. Thank you for attending today's presentation. You may now disconnect.
Very helpful. Thank you. This concludes our question and answer session, and the conference is also now concluded. Thank you for attending today's presentation. You may now disconnect.
Speaker Change: Okay.
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Speaker Change: Paul.
Speaker Change: Okay.
Speaker Change: Sure.
Speaker Change: Okay.
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