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Ford’s Financial Strengths: A Robust Strategy for Future Growth

Diversified Powertrain Lineup Drives Sales

Ford’s hybrid pickup sales have skyrocketed, more than doubling in the past two years, capturing nearly 80% of the U.S. market share. While many competitors avoided entering the hybrid space, they are now in a race to catch up. Ford ranks as the No. 1 internal combustion engine (ICE) brand, the No. 2 electric vehicle (EV) brand, and the No. 3 hybrid brand in the U.S. Despite these strong positions, Ford’s financial results have not fully reflected its strategic advantages.

Warranties and Costs Challenge Profitability

High costs, particularly from warranties, have dampened Ford’s earnings potential. As the company addresses these challenges, the financial benefits for investors could be significant. Management incentives are closely tied to improving cost and quality, with 70% of bonuses linked to these metrics and over half of long-term incentives based on Total Shareholder Return (TSR).

Advancements in Electric Vehicle Strategy

Ford has learned important lessons from the Mustang Mach-E and reduced its cost by $5,000 per unit over the past two years. The Mach-E now trails only the Model Y in overall sales and transaction prices, demonstrating strong market performance. Ford has also broken barriers for mainstream ICE customers by joining Tesla’s Supercharger network, planning to distribute about 100,000 adapters by year-end.

Enhancing Customer Experience Through Dealerships

Ford’s dealers are becoming an essential asset in reaching mainstream customers. For instance, Tim Hovik and his team at San Tan Ford in Arizona sold 137 electric vehicles this past quarter, even in a state without zero-emission vehicle mandates. With all 3,000 U.S. dealers prepared to sell EVs and 7,000 trained EV specialists, Ford’s dealership network is positioned for growth.

Strengthening Commercial Fleet Services

Ford has distinguished itself in the commercial sector by offering tailored services to retail and commercial customers. Currently, 9% of Transit sales are electric, which is an increase of 1.5 percentage points from the previous year. An impressive 13% of Ford Pro’s EBIT now derives from repair services and software, with growth projected to reach 20% by 2026.

Expanding Service Network and Technology

The company is expanding its commercial service capabilities with over 4,000 new bays and 2,500 mobile service units expected this year. There has been a 60% rise in mobile repair orders, enhancing customer service efficiency. In terms of software, Ford Pro Intelligence subscriptions increased by 30%, totaling approximately 630,000, driving revenue growth of 50%.

Future Product Launches and Inventory Management

Ford is set to release four significant new products in the U.S., including the Maverick, Bronco, and all-new Expedition and Navigator. In Q3, Ford’s market share rose by 40 basis points to 12.6%, reflecting steady industry support. Although inventory levels exceeded targets, the strategy includes holding extra stock to boost sales amid upcoming launches.

Focusing on Cost Reduction and Warranty Improvements

Ford’s primary opportunity lies in lowering costs and warranty claims. The quality of new vehicles has improved, with a notable 31% decrease in defects over the last three years. Successful launches like the F-150 and Escape have seen minimal warranty claims, deviating from industry trends. The implementation of Over-The-Air (OTA) updates has allowed Ford to enhance vehicle performance while reducing warranty costs.

A Strong Competitive Position Moving Forward

As Ford looks ahead, the company feels confident in its competitive position, bolstered by a fresh lineup and an adaptable powertrain strategy. With the electric vehicle sector evolving, the groundwork is being laid for Ford to become a leading global player. A commitment to reducing warranty issues and costs will further enable Ford to realize substantial benefits for its investors.

John T. Lawler — Vice Chair and Chief Financial Officer

In Q3, Ford’s wholesales remained stable as revenue climbed by 5% to over $46 billion, marking the tenth consecutive quarter of year-over-year growth. This increase is thanks to strong truck sales, particularly in hybrids, and the successful launch of the new Ford Explorer and Lincoln models.

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Ford Reports Strong Financial Performance Amid Challenges

Quarterly Earnings Overview

Ford delivered $2.6 billion in adjusted EBIT, achieving a margin of 5.5%, a 50-basis-point increase from last year. This profit boost resulted from higher volumes and a more favorable mix, although it was partially tempered by anticipated pricing pressures in the electric vehicle (EV) sector and unfavorable currency exchanges. Generally, costs decreased during the quarter.

Confidence in Strategic Changes

“I have great confidence in today’s business and the changes that are underway,” a Ford executive stated. The company restructured its global product lineup several years ago to concentrate on customer segments where Ford excels, leading to steady revenue growth. Improvements to the industrial system and eliminating past inefficiencies have also contributed to enhanced free cash flow—an indication that the Ford+ plan is effective.

Adjusted free cash flow reached $3.2 billion for the quarter, totaling $5.9 billion year-to-date, with a cash conversion rate of 74%, well exceeding the targeted 50% to 60%. Ford’s balance sheet remains robust with nearly $28 billion in cash and $46 billion in liquidity. The company believes it is wise to retain extra cash amid industry uncertainties to enable investment in growth opportunities and maintain flexibility during economic fluctuations. Additionally, Ford has declared a fourth-quarter dividend of $0.15 per share, payable on December 2.

Shareholder Returns and Segment Performance

Ford aims to return 40% to 50% of adjusted free cash flow to shareholders. Since early 2022, it has returned over $10 billion to investors. In terms of segments, Ford Pro generated nearly $16 billion in revenue this quarter, marking a 13% increase. Wholesales rose by 9% due to strong demand for the new one-ton Transit Custom in Europe and Super Duty and 2-ton Transit vans. The EBIT for Pro was $1.8 billion, resulting in a healthy margin of 11.6%.

Ford Pro demonstrated resilience in delivering higher margins, achieving an EBIT margin of 14.6% year to date, aligning with long-term goals. However, Ford Model e faced a loss of $1.2 billion, despite realizing $500 million in year-over-year cost savings, which were balanced against industry pricing challenges. Global wholesales decreased by 11%, reflecting a focus on yield management and adjusting dealer inventory, although partially offset by the launch of the new Explorer EV in Europe.

Future Cost Efficiency Initiatives

The focus on cost reductions and capital efficiency aims to enhance profitability as Ford looks toward 2025. Ford Blue reported a 3% increase in revenue, although wholesales fell by 2% due to the discontinuation of low-margin internal combustion engine vehicles. Notably, North America experienced an 8% rise in volume, supported by key models like the F-150 and Ranger. Despite an EBIT of $1.6 billion and a margin of 6.2% being lower than last year, adjustments like reduced warranty expenses and increased pricing provided some offset.

Hybrid sales surged by 30% during the quarter, indicating a shift toward electrification, with expectations for hybrid models to reach a 9% share by year-end. Ford Credit reported EBT of $544 million, an increase of $186 million from the previous year, fueled by improved financing margins. Meanwhile, lease return rates are normalizing following historically low figures.

Outlook for 2024 and Beyond

At the start of the year, Ford expected a full-year adjusted EBIT between $10 billion and $12 billion. Thanks to a favorable product portfolio, this outlook has improved, and projections for the fourth quarter remain optimistic. The company anticipates achieving $2 billion in cost efficiencies while managing challenges like increased warranty costs and inflation in the Turkish market impacting Transit van production.

Ford now projects an adjusted EBIT of around $10 billion, factoring in lower-than-expected volumes due to supplier disruptions. Looking ahead, the company expects adjusted free cash flow between $7.5 billion and $8.5 billion, with capital expenditures set between $8 billion and $8.5 billion.

Segment Expectations

For 2024, Ford foresees stable vehicle demand, predicting a slightly higher annual sales rate in the U.S. of about 16 million to 16.5 million units. Ongoing demand for the all-new Super Duty is expected to support Ford Pro, with an anticipated EBITDA of about $9 billion driven by steady pricing on core products. Ford Model e projects a loss of $5 billion but highlights more than $1 billion in cost improvements. Ford Blue’s forecast EBIT stands at $5 billion, while Ford Credit’s EBT is estimated to reach about $1.6 billion, reflecting solid growth.

This performance illustrates progress on the Ford+ plan, showcasing capital discipline, a well-positioned product portfolio, and reliable cash generation designed to benefit shareholders.

Questions & Answers:

Operator

We will now transition to our question-and-answer session. [Operator instructions] Please hold as we assemble the queue. Our first question comes from Mark Delaney with Goldman Sachs. Please proceed.

Mark Delaney — Analyst

Thank you for taking my question. Pro EBIT was strong but did decline to 11.6% this quarter, despite being at 14.6% year-to-date. Could you elaborate on the reasons for this moderation in Pro EBIT during the third quarter? Also, what gives you confidence in sustaining mid-teens EBIT margins in the Pro segment going forward?

John T. Lawler — Vice Chair and Chief Financial Officer

Regarding this quarter’s results, we’ve observed…

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Ford’s Q3 Insights: Navigating Seasonality and EV Performance

In the latest earnings call, the seasonality affecting Ford’s second quarter and its impact on business operations took center stage. The company observed that rental business peaked in the first quarter but dropped significantly in the second quarter, with virtually no rental business reported for the current period. The operational shutdowns at production plants further contributed to this seasonal decline, as they run at full capacity.

Despite these seasonal fluctuations, confidence remains high in Ford Pro, which continues to show strong demand, particularly for the Super Duty and Transit models. Pricing has been stable, though some pressures are anticipated from the upcoming ’25 model year vehicles. Nevertheless, Ford is optimistic about ongoing sales potential and is committed to enhancing customer productivity through combined vehicle and service offerings.

Mark Delaney — Analyst

During the discussion, Mark Delaney inquired about the expected improvements in EBIT (Earnings Before Interest and Taxes) for the Model e segment in the upcoming year and how various cost and capacity adjustments might impact performance.

James D. Farley — President, Chief Executive Officer, and Director

James Farley responded by highlighting the positive momentum in Ford’s electric vehicle (EV) business in Europe. He noted that these vehicles are contributing positively to margins and are growing in significance within their product mix. The company is actively focusing on cost reduction efforts, especially for the Mustang Mach-E.

Farley acknowledged competitive pressures on pricing that all manufacturers face, particularly in Europe, where many competitors have high lease mixes. He viewed Ford’s new products as an asset that would bolster their position in the market over the next year.

John T. Lawler — Vice Chair and Chief Financial Officer

John Lawler reiterated that the company’s focus remains on continuous cost improvements for both current and future models. He emphasized the necessity of staying competitive in the face of evolving market dynamics and consumer expectations.

Farley added that upcoming measures to maximize benefits from the production tax credit could significantly reduce costs for existing EV products, with impacts expected from mid-next year into 2027.

Operator

The operator then facilitated a question from John Murphy from Bank of America.

John Murphy — Analyst

Murphy raised questions regarding warranty issues and asked if there was any clearer indication that past problems had been resolved. He expressed interest in the current warranty landscape for Ford vehicles.

John T. Lawler — Vice Chair and Chief Financial Officer

Lawler responded cautiously, noting improvements in key indicators for warranty issues, particularly for the 2024 model year, which showed significant quality gains compared to previous years. He discussed ongoing efforts to address lingering warranty concerns but acknowledged the challenges of forecasting future impacts on costs.

John Murphy — Analyst

Murphy also inquired about inventory and pricing strategies, especially in light of mixed reports from competitors experiencing inventory challenges.

John T. Lawler — Vice Chair and Chief Financial Officer

Lawler reflected on how 2023 had presented unexpected favorable pricing conditions for Ford, even as the broader industry faced a decline. He pointed to the potentially volatile pricing landscape as the year closes, with increasing inventory pressures becoming evident.

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Ford’s Outlook: Inventory Management and Global Market Insights

Sales and Inventory Strategies for the Future

Ford has seen growth in market share and increased sales this quarter. The company is focused on managing inventory effectively, especially with some vehicle launches planned for the first quarter of next year, which requires higher inventory levels through year-end. They aim to return to a run rate of 50 to 60 days of inventory by next year. However, the economic landscape is shifting, particularly in Europe, where consumer spending appears to be declining. The company remains cautious and is monitoring potential cyclical pricing challenges anticipated for 2025. Despite surprises in market resilience, Ford will evaluate sales performance as the year concludes before making forecasts regarding future pricing.

Considerations for the Electric Vehicle Market

Ford’s President and CEO, James D. Farley, emphasized that the current market is witnessing a shift toward smaller utility vehicles and affordable electric vehicles, which are boosting unit sales. The company is also observing changes in vehicle series mixes, which could affect next year’s performance. However, they remain optimistic about the truck and commercial vehicle segments, which continue to show strong sales.

Competitive Landscape in Global Markets

Next, Adam Jonas from Morgan Stanley inquired about competition from Chinese automobile manufacturers in Europe and worldwide. Although Ford does not provide detailed geographical results, they acknowledge the impact of aggressive growth from Chinese companies in various regions, including Europe. Notably, Chinese contributions add $600 million to Ford’s financial results this year, driven mainly by exports to Asia and South America. John T. Lawler, Ford’s CFO, stated that the company has maintained profitability in China due to a shift towards less asset-heavy operations.

Strength of the Ranger Model

James D. Farley added that the Ranger pickup has become a critical part of Ford’s success in international markets. It has risen from 13th place to second, trailing only the Toyota Hilux in popularity. In markets like Australia, Ford has even surpassed Toyota in sales. Nevertheless, challenges are present, such as rising competition with companies like Great Wall in China, which holds a significant share of that market.

Understanding Financial Adjustments

In response to follow-up questions from Adam Jonas, Lawler explained that forecast cuts of approximately $1 billion stem from various factors, including warranty costs that did not decrease as expected, foreign exchange issues, and supply chain disruptions resulting in missed production targets. Some declines are also attributed to a hurricane’s impact and supplier constraints affecting the most profitable vehicle models.

Future Planning Amid EV Transition

Lastly, analyst Daniel Roeska raised points about Ford’s broader strategy and targets in light of a gradual shift toward electric vehicles. Farley reiterated that controlling costs, particularly regarding warranties and service agreements, is crucial for their ongoing strategy. The team remains dedicated to adapting to market changes promptly, maintaining a positive view on overcoming potential pricing pressures.

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Ford Capitalizes on Hybrid Demand Amidst Competitive Landscape

Ford is positioned to face competition head-on, thanks to its early adjustments and upcoming second-generation products. This proactive approach could grant Ford a significant four- to five-year advantage over competitors.

Unexpectedly, the surge in popularity of hybrid trucks, particularly the F-150 and Maverick models, has opened a lucrative revenue stream for Ford. Unlike many competitors, Ford’s commitment to hybrids means they are often unable to meet the high demand.

The integration of innovative features, such as Pro Power Onboard, has further cemented Ford’s appeal in the market. This technology not only enhances hybrid efficiency but paves the way for broader hybrid offerings across the entire model lineup. The company is also exploring other electric solutions as development progresses. The skunkworks team has made impressive strides in designing a suitable platform, with an emphasis now on transitioning to large-scale production.

Ford aims to illustrate its capabilities in competing with companies like BYD. Furthermore, the launch of its Pro services marks a transformative phase, as the automotive industry shifts its focus to integrated services, aftersales, software, and more. However, challenges remain, including costs and quality issues tied to electric vehicles (EVs).

Executing electric architectures can be complex, and Ford has made considerable progress, having achieved 20 million over-the-air software updates. This capability will become increasingly important as the tech landscape evolves.

Amid notable challenges, Ford believes it is well-positioned for both the short and mid-term. Analyst Daniel Roeska sought clarity on shareholder distributions. Despite headwinds in the current environment and a slower-than-expected EV ramp-up, questions arose regarding strategy shifts in shareholder returns.

According to John T. Lawler, Vice Chair and Chief Financial Officer, Ford is committed to distributing 40% to 50% of its free cash flow but remains cautious amidst global economic uncertainty. Currently, Ford possesses $28 billion in cash, exceeding its minimum requirement by $8 billion. Lawler emphasized the rationale behind maintaining a strong cash position, highlighting the unpredictability of global economic conditions.

As they reassess cash allocation each quarter, Lawler noted that if risks diminish substantially, adjustments to shareholder distributions will be considered.

Analyst Joseph Spak inquired further about the 40% to 50% payout ratio, particularly given existing uncertainties surrounding warranties and market conditions. Lawler responded that Ford evaluates both current and future conditions when setting its payout strategy, but no immediate changes are planned.

James D. Farley, President, Chief Executive Officer, and Director, added that the potential of the services aspect excites the company. Ford recognizes the chance to have a substantial segment of revenue driven by Pro services, a rare opportunity in the automotive sector. While no specific plans were unveiled, Farley indicated a keen interest in nurturing growth within the services domain, which would require strategic investments.

Lastly, Joseph Spak asked about regulatory compliance costs related to European operations. In the latest 10-Q, Ford noted $3.8 billion allocated for regulatory compliance, highlighting differences in credit systems between North America and Europe, complicating compliance efforts.

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Ford Discusses CO2 Compliance and Cost Reduction Strategies in Latest Earnings Call

Understanding Compliance in Europe and North America

James D. Farley — President, Chief Executive Officer, and Director

Yes. When discussing CO2 compliance in Europe and North America, it’s essential to note the differences between heavy-duty and light-duty vehicles, including passenger cars. These categories vary significantly in requirements. In Europe, understanding these distinctions is particularly crucial.

Our commitment to compliance is steadfast. In addition to compliance for passenger vehicles, we are also focused on our heavy-duty compliance in both markets. This focus aligns with our excitement about our new lineup of electric and combustion small vans. Recently, we introduced our one-ton transit van, which is available as diesel, gas, or fully electric. This range gives us the best opportunity from an offering perspective.

Moving forward, it’s important to emphasize both zero-emission vehicle (ZEV) states in the U.S. and heavy-duty compliance, as these areas deserve specific attention.

Operator

Our next question comes from Emmanuel Rosner from Wolfe Research. Please unmute your line and ask your question.

Emmanuel Rosner — Analyst

Thank you. I want to start with your cost reduction program. This year, you aim for $2 billion in savings related to materials, freight, and manufacturing. You stated you’re on track. Can you share how much you’ve saved so far this year, and how much remains for the fourth quarter? Looking ahead, given the uncertainties for next year in volume and pricing, how do you see cost opportunities evolving as you approach 2025?

John T. Lawler — Vice Chair and Chief Financial Officer

Most of our savings have already been realized during the first three quarters of the year, particularly from design changes that coincided with new model launches. While some savings will still come through in Q4, our focus has mostly been on earlier quarters.

Emmanuel Rosner — Analyst

How do you envision moving forward?

John T. Lawler — Vice Chair and Chief Financial Officer

Our position is notably strong due to our cost competitiveness. However, the real challenge lies in determining the speed at which we eliminate costs. This effort represents the primary opportunity within our Ford+ strategy. At this point, we prefer not to provide specific cost expectations for 2025. We’ll offer guidance during our Q4 earnings update, outlining our cost goals.

We recognize significant opportunities in our cost competitiveness and are actively pursuing those pathways.

James D. Farley — President, Chief Executive Officer, and Director

As we approach the end of this year, our industrial team aims to launch another cycle of reducing material costs. Although we’ve made progress, we’ve also introduced new product costs, which creates additional opportunities for savings. This will be part of our focus as we head into next year.

We are also diligently monitoring EV Gen 1 costs, as well as warranty costs related to software and powertrain repairs. While we have improved manufacturing processes, more work lies ahead in North America, which includes addressing freight and duties.

Additionally, we are refining our supply chain strategies, collaborating with suppliers to ensure competitive negotiations and to address inflation fairly.

Operator

Our next question comes from Dan Levy from Barclays. Your line is open, Dan. Please proceed.

Dan Levy — Analyst

Thank you. I wanted to follow up on the earlier questions regarding costs. Approximately 15 to 18 months ago, you identified a $7 billion cost gap compared with competitors, predominantly attributed to material costs. You’ve mentioned achieving $2 billion in savings this year but also noted new costs. How do you assess your progress in closing that cost gap now? Are you as confident as you were when first presenting that goal?

John T. Lawler — Vice Chair and Chief Financial Officer

Dan, our understanding of the root causes affecting our cost structure has evolved significantly over the past 18 months. While we’ve made strides in reducing costs, we have not narrowed the gap compared to our competitors. Although we’ve accomplished some savings, the pace isn’t fast enough relative to their achievements.

We continuously analyze our financial performance after each quarter, examining our advancements against competitors. While we have progressed with material costs, warranty costs have increased. Structural costs related to average sale prices (ASP) and selling, general, and administrative expenses (SG&A) show mixed results. Additionally, inflationary pressures from our joint venture in Turkey have contributed to increased costs.

In short, we need to act more swiftly. Addressing warranty costs remains crucial, alongside continued efforts to reduce material and manufacturing costs.

It’s a challenging position to be in, recognizing that 18 months later, despite our efforts, the gap remains. As you noted, our competitors are also pursuing cost reductions, and we must elevate our pace to stay competitive.

Dan Levy — Analyst

Thank you for the clarification. I would like to ask about a comment made earlier by Jim…

Ford’s Innovative Approach to Lowering EV Manufacturing Costs

Exploring Key Achievements in Quoting and Sourcing

On the recent earnings call, James D. Farley, President and CEO of Ford Motor Company, addressed the company’s strategic plans for reducing costs in their electric vehicles (EVs). He emphasized the importance of having a competitive Lithium Iron Phosphate (LFP) battery for enhancing affordability, which is crucial in today’s market.

Farley highlighted a transformative shift in vehicle development, noting that Ford verified the design of each vehicle component much earlier than they traditionally would. In fact, they completed this process one to two years ahead of schedule. By evaluating different suppliers and challenging them directly, they discovered more accurate cost benchmarks for advanced components. This is especially important given the significant cost advantages held by competitors like BYD in the battery sector. To maintain competitiveness, Ford intends to innovate in areas such as inverters, gearboxes, and motors.

Simplifying Design for Better Cost Efficiency

The CEO explained that a key factor in achieving lower costs is the radical simplification of the vehicle’s design. Fewer components lead to a significant reduction in complexity, which naturally drives down costs. By rethinking the structure of the vehicle and collaborating more closely with suppliers, Ford has been able to create a streamlined design that is both easier to manufacture and less expensive.

Farley credited their new manufacturing strategies, which include a unique unit casting approach that reduces the need for stamping many parts. He believes that other companies might follow this lead but stressed that Ford’s commitment to simplicity and early engagement with the supply chain sets their process apart from the traditional development cycle seen in the automotive industry.

As the conversation drew to a close, Farley affirmed the progress made by the skunkworks team at Ford. Their focused efforts on simplifying production and involving suppliers earlier have the potential to reshape the landscape of EV manufacturing.

Call participants:

Lynn Antipas Tyson — Executive Director, Investor Relations

James D. Farley — President, Chief Executive Officer, and Director

John T. Lawler — Vice Chair and Chief Financial Officer

Mark Delaney — Analyst

John Murphy — Analyst

Adam Jonas — Analyst

Daniel Roeska — Analyst

Joseph Spak — Analyst

Emmanuel Rosner — Analyst

Dan Levy — Analyst

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