Ford's Q1 2024 Earnings Call

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[00:01:00] Good day everyone. My name is Gary and I will be your conference operator today.

[00:01:07] Hello everyone and welcome to Killawata podcast about electric vehicles, renewable energy, autonomous driving and much, much more.

[00:01:34] My name is Bodhi and I am your host. And on today's episode we are going to cover Ford's Q1 2024 earnings call.

[00:01:42] And I'm going to be honest with you. This one was a weird one, not weird and Elon weird.

[00:01:48] It was just weird in that it was more finance-y than Ford's earnings calls have been in the past when it comes to EVs.

[00:01:58] Normally they have some nuggets in there in terms of what's going on in the EV world or Ford's EV world anyway.

[00:02:05] This one was more of why are we losing so much money on EVs, which I still think is really important.

[00:02:11] And we still get some good nuggets, but it's on the financial side of the equation.

[00:02:16] Not so much what Ford's up to in the near future.

[00:02:20] So having said that, let's go ahead and start off with the legal disclaimer.

[00:02:24] Welcome to Ford Motor Company's first quarter 2024 earnings call.

[00:02:28] With me today are Jim Farley, president and CEO, and John Lawler, chief financial officer.

[00:02:33] Also joining us for Q&A is Kathy O'Callaghan, CEO of Ford Credit.

[00:02:37] Our discussion also includes forward-looking statements about our expectations.

[00:02:41] Actual results may differ from those stated.

[00:02:43] The most significant factors that could cause actual results to differ are included on page 19.

[00:02:48] All right, obviously that was edited down so that we just got the important bits in there.

[00:02:54] But if you are a Ford shareholder, I would encourage you to go back and listen to the entire earnings call because Ford Pro is knocking it out of the park.

[00:03:03] Ford E or Ford Model E is not knocking it out of the park at the moment.

[00:03:10] So let's go ahead and jump into Jim Farley's edited opening remarks.

[00:03:15] And again, I cut these earnings calls up so that they make sense for this show.

[00:03:20] But I still try and keep with the spirit and intent of what these folks are saying.

[00:03:26] So I'm not misrepresenting what they are saying.

[00:03:29] All right, let's throw it to Jim.

[00:03:31] What have we learned on electric so far?

[00:03:33] Well, as you know, we're number two in our home market and electric sales for the last couple of years.

[00:03:38] And boy, we learned a lot since capital markets last year.

[00:03:41] We continue to adapt to evolve our spending and our investment ramp for battery plants and assembly capacity for our EVs to match customers' demands.

[00:03:51] And more importantly than all of that, match the price expectations.

[00:03:56] We're retiming our launches and our capital spending.

[00:04:00] In fact, this year we expected to spend about $10 billion as a company.

[00:04:04] We've now guided eight to nine will probably be on the low end of that range.

[00:04:09] And we're being very consistent about our discipline on profitability.

[00:04:13] We expect every one of our EVs to make money in the first 12 months.

[00:04:17] And that is a very disciplined process.

[00:04:19] In fact, we delayed the launch of our three row crossover, which is a great product, two years, not only to match the slower growth in EV,

[00:04:28] but more importantly to take advantage of new battery chemistry and formats to substantially reduce the cost of the batteries for that vehicle.

[00:04:36] We'll do everything it takes to be profitable in the first 12 months of our vehicles.

[00:04:42] But increasingly, our bet will be on our new small, affordable platform developed by our team on the West Coast.

[00:04:49] Why is affordability so important?

[00:04:51] When we look at the connect-to-car data from our EV customers, we notice that people live in the suburbs, urban customers.

[00:04:59] They tend to drive shorter distances and those more affordable vehicles more approachable.

[00:05:05] And we believe that's where the adoption of EV will go the fastest.

[00:05:10] And we believe we can compete in segments of small cars and vehicles, more affordable vehicles, in a unique way that's forward.

[00:05:19] A good example was we learned a lot when we, in our more expensive vehicles, Mach-E, when in February we dropped the price 17%, our volume went up 141%.

[00:05:31] That's telling us that the more affordable we can make great product, the more attractive it is to these mainstream EV adopters.

[00:05:39] And the last thing I'd say is we're learning about the importance of choice.

[00:05:43] Our growth in the first quarter in hybrids is a good example.

[00:05:47] We grew 36%. We think the full year will be 40%.

[00:05:51] We're now approaching 400,000 units of volume for our hybrid business.

[00:05:56] And we're now number three in hybrids in the U.S.

[00:06:00] It's a big advantage. We've been in the business for more than 20 years.

[00:06:03] And what's really exciting for us is for the first time, some of our contribution margins on hybrids are above or at similar contribution margins than our pure internal combustion engine marches.

[00:06:17] Let's start with the stuff that I did not put in the clip, but he still mentioned in the opening remarks that should be addressed.

[00:06:24] First up, Ford had over 700,000 or has over 700,000 paid subscribers to their software service, which I don't know how much that cost.

[00:06:35] I honestly don't know if that includes somebody that bought a let's say a Mach-E and it came with three years of whatever that software package is.

[00:06:46] I don't know if they're counting that or if they're counting it as 700,000 people who are paying every month or every year for whatever software services they offer.

[00:06:56] But still 700,000 pretty good number.

[00:06:59] The Ford Model E division lost more than three billion dollars.

[00:07:04] So that's pretty terrible.

[00:07:07] But they lowered prices by 17 percent and they saw sales increase, which that's actually something you heard.

[00:07:15] And the Mach-E is second behind the Model Y. That's great.

[00:07:19] It's really far behind, but still, second is second.

[00:07:24] In terms of the EV stuff that you talked about, I do think and this may not be a popular opinion for some people in the community here,

[00:07:36] but I do think that delaying your small affordable platform by a couple of years is way better than rushing it and putting out a bad product.

[00:07:46] And then it's really hard to recover.

[00:07:48] So he did mention in the opening remarks and we'll get to it again at the end of this, but he mentioned new battery chemistries.

[00:07:58] I don't know what kind of battery chemistry is he's talking about, but somebody is going to ask him a question.

[00:08:02] So we'll find out a little bit more about that a little later in the show.

[00:08:07] In terms of giving customers choice, it seems like the hybrid is working out for them.

[00:08:14] He mentions that they sold 400,000 hybrids. That was not in Q1 2024.

[00:08:19] I'm guessing that must have been in all of 2023.

[00:08:23] I looked it up and they sold 38,421 hybrids in the first three months of 2024.

[00:08:31] And for point of reference, Ford sold over 20,000 pure electric vehicles in the same time period.

[00:08:38] So they're selling almost twice as many hybrids as they are EVs.

[00:08:43] Still not great numbers. If you add how many hybrids they're selling and how many EVs they're selling in the quarter, that's still less than 70,000.

[00:08:54] So it's not a great number, but you got to work with what you got, I guess.

[00:08:59] Let's go ahead and move on.

[00:09:01] We will now begin the question and answer session.

[00:09:04] Our first question doesn't really have anything to do with EVs, although the answer does revolve around EVs.

[00:09:10] But the first question is, why does the market value Ford so low?

[00:09:15] So why is Ford's value in the market so low?

[00:09:18] I don't know how to say that without sounding stupid.

[00:09:20] So I'm not going to say it again because I already said it like I was an idiot twice.

[00:09:25] The third time you'll stop listening.

[00:09:27] So let's go ahead and get to the clip before I squander away any confidence that you might have left over in my ability to host this show and sound intelligent.

[00:09:37] Ford Pro is kicking butt, okay?

[00:09:43] And at a 10 times EBIT, that business can be worth like double Ford's entire market cap.

[00:09:49] So the market's kind of implying that the rest of the business will be valued at negative many, many tens of billions.

[00:09:56] I've seen another way your stock – I mean this business is incredible.

[00:09:59] People would die to have this business.

[00:10:01] I think folks are aware – it's not a secret anymore, Jim – that people are aware of how good this business is.

[00:10:06] Yet your stock ranks 491 out of 500 companies in the S&P 500 on P.E. multiple.

[00:10:11] Now Jim, I know you don't like it and I know you don't agree with it.

[00:10:14] But can you explain why does the market value your company as one of the lowest multiple companies in the world in any industry?

[00:10:21] Try to rationalize that for me because it seems important that you as the leader of this organization understand that so you can address that problem.

[00:10:29] Thanks.

[00:10:30] Thank you, Adam.

[00:10:31] And first of all, thanks for your report on Pro.

[00:10:34] I appreciate you taking the time to understand the business.

[00:10:36] Look, I mean we – as John mentioned, we have to make tremendous progress on Model E.

[00:10:42] It's a huge drag not just on Ford but on our whole industry even for pure play EV players.

[00:10:50] So – and we're very clear-eyed about that.

[00:10:52] You know, we're very committed to transparency.

[00:10:54] A lot of OEMs will handle EVs very different.

[00:10:59] We won't.

[00:11:00] It's like if we had an unprofitable regional business and we rolled it up and it wouldn't be transparent to investors.

[00:11:07] We would never do that.

[00:11:08] And we're not going to do that with EVs.

[00:11:10] And we're not going to subsidize our Pro and Blue business by not being transparent about E.

[00:11:19] And it's how we run the business.

[00:11:20] I think investors should understand for me as a leader is that we're going to build a sustainably profitable EV business

[00:11:28] with terminal value.

[00:11:29] And we – and it needs to return the cost of capital on its own and not be subsidized, as I mentioned.

[00:11:38] And the real turning point for us not only is our flat costs in Model E this year,

[00:11:45] but most importantly it will be the profitability in our next cycle of products.

[00:11:50] And I'm proud of the work that our team has done to make the adjustments in our capital spending

[00:11:56] and to make sure that all of our next EVs are profitable.

[00:12:00] And the evidence will be there.

[00:12:02] And I think that is the main drag on the company right now, as it will be for our whole industry.

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[00:13:53] You know, when Ford came out with the F-150 Lightning, I thought, oh, well this is so smart.

[00:13:56] Because something like 70% of the parts are the same parts that you would use on the F-150 Lightning.

[00:13:59] But it's not.

[00:14:01] It's not.

[00:14:03] It's not.

[00:14:05] It's not.

[00:14:07] It's not.

[00:14:09] It's not.

[00:14:11] It's not.

[00:14:16] It's not.

[00:14:18] It's not.

[00:14:20] It's not.

[00:14:22] It's not.

[00:14:24] So the same parts that you would use on the F-150 Lightning ICE version, the same use you use on the gasoline version.

[00:14:30] That allowed Ford to keep prices low.

[00:14:34] Now when Ford announced the F-150 Lightning, they weren't exactly expecting a global pandemic.

[00:14:40] So stay with me here.

[00:14:42] But I thought, oh, that's a really good idea.

[00:14:44] They already have these suppliers that are giving them, tier 1 suppliers that are giving them these amazing deals on parts and stuff like that.

[00:14:53] This is a no-brainer.

[00:14:55] I really thought that Ford was going to be on the path to profitability, like in their EV division, in the Model E division.

[00:15:04] Simply because that sounded from a layman's standpoint, and maybe it was even from a business standpoint, a really good idea.

[00:15:12] Unfortunately, they found that it's harder to build an EV or harder to build an EV that's affordable than you really think.

[00:15:21] Especially when people are buying in the 20,000s a quarter.

[00:15:25] You need those numbers to be jacked way up much higher in order for you to hit the economies of scale so it makes everything cheaper.

[00:15:34] So they talked a lot about, in the earnings call, a lot about their current gin.

[00:15:42] And even Jim Farley just talked about it just now.

[00:15:49] I'm kind of curious if those numbers stay in the 20,000 to 30,000 every quarter, whether or not their current generation EV line, their current platform, will ever be profitable.

[00:16:05] So I'm going to say this in business speak.

[00:16:08] They can pull some levers and maybe pull some costs out of manufacturing and production, or they can raise prices.

[00:16:16] And right now it doesn't sound like anybody wants to pay higher prices for their EV.

[00:16:21] And I don't blame them. We just went through the pandemic.

[00:16:24] I just mentioned that a minute ago, but we went through basically two to three years of paying these outrageous prices.

[00:16:33] And we're finding out now that in some cases those prices were artificially inflated by certain businesses that were seeking to make money off of a global pandemic.

[00:16:45] Make more money than they would normally.

[00:16:48] So, and I won't get into how I feel about that, but you could probably guess.

[00:16:53] I'm not happy about it.

[00:16:55] But so bad. I'm such a terrible host.

[00:16:59] But anyway, my whole point of this is everybody we're all fatigued.

[00:17:04] Like rent is higher. Mortgage prices are higher.

[00:17:07] Interest rates are higher. Food is higher priced. Gasoline's up there.

[00:17:12] You know, it's just it's a lot of money.

[00:17:14] And if you're going to be selling a vehicle that starts in the forty five fifty thousand dollar range, it's a it's a big ask.

[00:17:21] So I can see where they would want to move to a next generation smaller platform that people can afford.

[00:17:28] And he mentioned, I think in his opening remarks, that based on the data they have, people don't drive all that far from their day to day routine, which honestly, I think Ford do.

[00:17:39] I don't think they needed data for that.

[00:17:41] That's that seems pretty reasonable that you are going to go to work and you're probably going to live in most cases somewhat close to your work, not in every case.

[00:17:49] But anyway, my whole point to this is that their current generation of product,

[00:17:58] I think it's going to be very hard for them to reach profitability.

[00:18:05] Not impossible, but it's going to be much harder for them to do that.

[00:18:09] They really need to work on those parts costs coming down.

[00:18:14] And we'll talk again about the battery material stuff a little bit later.

[00:18:18] They need to get the production prices down.

[00:18:20] They need to increase demand so they can hit some economies of scale and make that next generation or that current generation EV line profitable.

[00:18:30] But as it stands right now, it seems like Ford and other companies like GM and Stellantis are kind of up against a rock and a hard place right now.

[00:18:39] With any luck, they find their way out of it without having to cut off their arm.

[00:18:43] So I just watched that movie the other day.

[00:18:47] Let's go ahead and move on to our next question.

[00:18:50] Hi, everyone. Thanks for taking the questions.

[00:18:53] I wanted to ask in Model E, and I understand that the reaching breakeven depends on the timing of the launch of the next gen vehicles.

[00:19:04] But in the intermediate term, can you tell us how you're thinking about the trajectory of losses in E

[00:19:09] and specifically the potential to work down the structural costs associated with this business?

[00:19:17] Yeah. So we are. I don't know.

[00:19:20] It's a cliche, I guess, laser focused on all the costs around Model E.

[00:19:26] And for the year when you look at.

[00:19:31] Well, let's just take back up a second.

[00:19:33] The last couple of years when you look at Model E, we've actually reduced the cost of our vehicles significantly.

[00:19:38] On Mach E, we've taken over $5,000 a cost out.

[00:19:42] But the revenue keeps dropping faster than we're able to take out the cost.

[00:19:46] And we're being very thoughtful about what we're putting in as far as structural costs, et cetera.

[00:19:52] And so we're going to continue to work on driving every dollar cost out of the business in the near term.

[00:19:58] And, you know, if the pricing stabilizes and we don't see these significant reductions continuing across the industry,

[00:20:06] then I think that you could probably start to see some of those cost reductions flow to the bottom line.

[00:20:11] But so far, you know, the last 12 to 18 months, it's just been a continuous march down on the top line,

[00:20:18] which is offsetting any of the savings we've had from a cost standpoint.

[00:20:21] So, you know, it's in our control. We have to take costs out.

[00:20:26] We know that. That's what we're marching towards.

[00:20:28] And we're understanding the dynamics and the competitiveness of the market equation as we set up the cost structure for our second gen vehicles.

[00:20:35] And as Jim said, you know, we pushed out the three row SUV because we need more cost to come out of that for that to be at the margin levels we expect.

[00:20:44] All right. See my previous statement. I don't have anything else to add on this.

[00:20:49] So let's go ahead and go to our next clip.

[00:20:52] The next question is from Tom the rain with RBC. Please go ahead.

[00:20:57] Thanks for taking the question, Jim. We heard from your guys commentary that, you know, if EV prices those drops stabilized, then the losses would lessen.

[00:21:08] But as we've heard from, you know, some of the earnings yesterday, Tesla, GM, it seems like the opposite is happening.

[00:21:16] It seems like OEMs are trying to make cheaper EVs and that pricing is really only going to go lower.

[00:21:22] I guess how confident are you that you could reduce EV losses in this environment if EV prices just keep on going down?

[00:21:31] So, you know, when you look at it, it's clear that when the EV craze started, right, it was.

[00:21:41] It looked like demand was going to be well long supply, but that was with the early adopters and they were willing to pay a higher price.

[00:21:48] What we're finding with being in the marketplace is that EV prices are normalizing and our early majority customers are not willing to pay premium.

[00:21:57] And that's what we're seeing.

[00:21:58] And so we think that prices for EVs are going to normalize around where gas is and the consumers are going to weigh the value proposition of that propulsion choice either, you know, for their duty cycle.

[00:22:09] What works for them either is going to be an EV or a traditional ICE engine or a diesel or a hybrid.

[00:22:15] And, you know, pricing is going to have to be relatively consistent across all choices of propulsion and the customer will make a choice based on the value of that.

[00:22:25] And that's how we're building the business model for electric vehicles.

[00:22:29] I don't think that you're going to find that you're going to have electric vehicles well below gas prices unless there's so much capacity pushing.

[00:22:38] Again, the demand curve and it's an imbalance on that end of it.

[00:22:42] But eventually rational players will have to come to the marketplace.

[00:22:46] We launched our first small SUV this year in Europe in Cologne, our Explorer to two row crossover.

[00:22:53] It's a relatively small vehicle, certainly in the U.S.

[00:22:57] And you can expect, as I mentioned several times, that our new affordable platform be used for most of our volume in their next cycle of product.

[00:23:06] What's really exciting for us is that we see an opening in the market.

[00:23:11] We see a lot of brands having to launch compliance vehicles that lose money and they probably don't want to sell a lot of volume, but they have to.

[00:23:19] We believe that we can be profitable at twenty five to thirty thousand dollars.

[00:23:23] There's a huge opportunity for Ford.

[00:23:26] And what we're learning with Blue Cruise and our productivity software on Pro is that all those vehicles will be great platforms for software and services.

[00:23:37] And so we're really excited about that new, more affordable vehicle lineup, starting with Explorer in Europe this year.

[00:23:45] I don't have a lot to add to that other than I have a real concern with automakers relying so much on subscription pricing.

[00:23:54] There's definitely a way you can offer subscription pricing and do it in a reasonable and fair way and really add value to the person's car or the person's experience, I should say.

[00:24:08] And then there's what I think it was Mercedes or BMW was trying to do, which was to charge you for heated seats, which were already in your car.

[00:24:16] And you already paid for because those companies, I don't know which camera, which one it was.

[00:24:21] But those companies aren't going to sell you a car and take the price of the heated seats out.

[00:24:27] They're selling you that entire car.

[00:24:29] So I don't think Ford or GM is going to do this kind of thing, but it because I think it would be a huge customer revolt.

[00:24:39] But it does make me concerned for sure.

[00:24:44] All right, let's get to our next question, which happens to be our final question.

[00:24:49] Thanks. And maybe as a follow up, maybe this is something that can help here is battery raw mat costs.

[00:24:57] You know, we have lithium down like 80% since it peaked in 2022.

[00:25:02] Could you just remind us of how your contracts work?

[00:25:05] I think there's we've heard from some other OEMs that there's still some benefits to come that actually getting better given how contracts work.

[00:25:13] And you could actually see the benefits on battery raw mats later in the year.

[00:25:19] Yeah, we're seeing the same thing. We're no different.

[00:25:22] I would say that, you know, the biggest leverage on the battery costs is still going to be taking nickel out of them and those kind of things.

[00:25:29] You know, it's great to see the easing of some of the raw materials and that will definitely cascade into our business depending on our contracts.

[00:25:38] I think the most important thing strategically is to get to new chemistries that have a lot less expensive materials than them.

[00:25:46] And we see that right around the corner at Ford and we're changing our launch timing to take advantage of that.

[00:25:53] I'm really curious as to what they're talking about in terms of upcoming battery chemistries because right now lithium iron phosphate, they don't have nickel or cobalt.

[00:26:05] Now, there might be some battery chemistry out there where nickel and cobalt are are technically in it and their lithium iron phosphate batteries.

[00:26:14] Don't email me as a general rule.

[00:26:17] Lithium iron phosphate batteries don't have nickel or cobalt.

[00:26:21] So I wonder what they're talking about when it comes to the new battery chemistries that are going to take the nickel and cobalt out that aren't lithium iron phosphate batteries or LFP batteries.

[00:26:35] As always, we'll keep an eye on it.

[00:26:37] And if I come across stories or you come across news stories of new battery chemistries that are similar to the LFP batteries that are up and coming, let me know.

[00:26:48] My email is Bodie at 918digital.com.

[00:26:52] You can also find me on X at 918digital.

[00:26:56] And yeah, I hope you all had a wonderful weekend and I hope the rest of your week is really good as well.

[00:27:03] I will talk to you on Friday.

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[00:29:00] New friends and old stop by my barn for some conversation and great cooking.

[00:29:05] We talk about food, life and everything in between.

[00:29:09] Listen to Be My Guest, the podcast with me, Ina Garten, and join us wherever you get your podcasts.

[00:29:16] A cast helps creators launch, grow and monetize their podcasts everywhere.

[00:29:26] A cast dot com.