Ford Motor Company (NYSE:F) Q4 2023 Earnings Call Transcript

Ford Motor Company (NYSE:F) Q4 2023 Earnings Call Transcript February 6, 2024

Ford Motor Company isn’t one of the 30 most popular stocks among hedge funds at the end of the third quarter (see the details here).

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. [Operator Instructions] After today’s presentation, there will be an opportunity to ask questions. [Operator Instructions] Please note this event is being recorded. I’d 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 Gauhotra, COO of Ford and Marin Gjaja, COO 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. You can find the deck along with the rest of our earning materials and other important content at shareholder.ford.com. Our discussion also includes forward-looking statements about our expectations. Actual results may differ from those stated. The most significant factors that could cause actual results to differ are included on page 25.

Unless otherwise noted, all comparisons are year over year. Company EBIT, EPS, and free cash flow are on an adjusted basis. Included on our earnings deck this quarter is a table of our global wholesales for 2023. With name, flight detail by segment and major geography, this is a roll forward of the detail 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 15, Jim Farley and John Lawler will participate in a fireside-chat in New York with Rod Lash at the Wolf Global Auto, Auto Tech and Mobility Conference. February 22, 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 about 15 minutes longer, so that’ll take us to 15 minutes after the hour. We want to leave ample time for your questions. Jim, I’ll turn the call over to you.

Jim Farley: Thank you, Lynn. And hi, everyone. Thanks for joining us. Last year turned out to be a fundamental year, a foundational year for our company. We launched some amazing [Technical Difficulty]

Operator: Pardon me, this is the conference operator. We’ve seen that we’ve lost audio from the speakers location. Please stand by as we regain the signal. Pardon me, this is the conference operator. We have rejoined the audio with the main speaker location. Sir please continue.

Jim Farley: 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 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 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, our hybrids really sell best on trucks for our side. We launched some awesome tech. BlueCruise just passed 150 million miles of hand-free use, but more importantly, the growth is up 25% quarter-over-quarter and the gross margins for BlueCruise are at 70%-plus, the same for Ford Pro Intelligence.

And boy, can Ford do work vehicles. 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 returned to investment grade, we have higher ROIC, 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, and we’re 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.

These are high-growth, high margin, as I said, and much less cyclical profits for us. We have one single leader, Kumar Galhotra on our industrial system and he is laser focused on quality and cost. And our international operations have made a remarkable turnaround after a lot of difficult restructuring. It’s the second year we 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. It’s a global franchise and it’s our second best-selling nameplate globally, just behind F-Series and ahead of Super Duty. Now John is 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. It’s nearly a $60 billion high-margin hardware, software and physical services business and most of that 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 the 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. 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 in Pro. We have the freshest product lineup in Ford’s work history in two decades. Our order banks are exceeding our supply. And the reason why that order bank is so strong is fundamentally different economic factors than our retail business. What I mean by that is, look at North America. We’re really dominant. We do really well on state and local government Pro sales. 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 in infrastructure and people need Super Duties and Transits. Look at the build-out of telecom and 5G, directly correlates to our robust revenues.

And the same is happening in the manufacturing sector in the U.S. with reshoring or onshoring manufacturing. 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 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 Pro? 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. We’re 40% of the market share of Class 1 through 7 full-sized trucks and vans. In fact, many months, our second-place competitor isn’t even half our size.

Now commercial — 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 market is biggest, 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. Again, very difficult for investors to see but this is really significant. Every one of our landscapers, plumbers, electricians, they all upfit their Transits and Super Duties and Rangers specific to their vocation. So these upfitters being really important. We now have already developed a digital upfit integration system, and we share engineering specs 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 Fords. The third big moat is a growing one. It’s software and our physical repair business. Example of that is last year, we already have 0.5 million active software paid subscriptions at Pro. It’s up 46% and the margins are over 50%. In two years, we expect software and services to drive 20% of the Pro EBIT. And that’s supported by two things: getting to 60% mix on our connected vehicles and a threefold increase in our attach 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, costs decades of time and there’s a lot of expertise. In the U.S., we have 23,000 service bays that are busy seven days a week, 24 hours a day, and we’re pressing 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 Duties 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 on with the dealership. 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. We’re now adding long-term durability of those products.

We have a 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, we don’t have to go into the negative effects about 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, off-road, Bronco, all of it, 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’s 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 Super Duty launch I mentioned, it was a line in the sand for this management team. We intensified all of our testing, our real-world problem-solving on the plant with our suppliers and engineers. We slowed down the launch and boy, did it cost us. $1 billion of EBIT we forego last year, but it was the right trade-off for our company and our customers. The result is the launch spike that 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. 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 in three months in service. And that is highly correlated to long-term quality, and yes, warranty costs. 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. Quality now factors into 70% of the short-term incentives for our management at Ford. In the long-term, it’s even more important, because we’re measuring total shareholder return. We will share those KPIs on quality with you every quarter. Next thing I’d like to highlight is EVs. Now someone 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.

That 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 and a tremendous amount of capital flowing and a ton of new capacity into one single segment, two-row crossovers. Our overall EV strategy has never been more relevant as the seismic change happens, and we want to share with you our targets. Our next Gen 2 products will be profitable in the first 12 months of their launch. And that will mean that we’ll get to mid to high single-digit EBIT profit margins over their life cycle, and that’s going to deliver profits above Model e’s cost of capital. And here are our big bets and adjustments. We’re going to spend less capital on larger EVs. And as we’ve always said, we’ll have a very small number of those.

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 focused on to smaller EV products. Now this is important because we made a bet in silence two years ago. We developed a super-talented skunkworks team to create a low-cost EV platform. It was a small group, small team, some of the best EV engineers in the world, and it was separate from the Ford mothership. It was a startup. And they’ve developed a flexible platform that will not only deploy to several types of vehicles but will be a large installed base for software and services that we’re now seeing at Pro.

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 OEMs. And that bet and all of the rightsizing of capital and even delays to some of our products, given the market realities, better balance growth, profits and returns for us. But one of the things we’re taking advantage of and taking some timing delays is 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 capacities. Our overall EV business will grow this year because we have the Explorer launching in Europe and really exciting, many of our commercial vehicles launched with electric this year as we refresh the lineup.

We will also align production and inventory for customer demand. 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. Why are we making these changes in our EV business and capital allocation? Well, because we learned as an early leader as we scale the EVs and hybrids simultaneously. The demand curve turns out to be for EV is very different than ICE. We’ve seen an explosive growth in EVs in 2021 and 2022, and we realize very quickly that our first three Gen 1 products, we didn’t have enough capacity. With EV growth, but as well importantly, the COVID supply shocks and the chip crisis itself and Tesla’s ability to make vehicles despite the chip crisis in ‘21 and ‘22 and the zero cost of capital gave us too optimistic of a demand signal at that time, and it drove a temporary spike in supply.

As the COVID shock retreated, 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 is a huge moment for us. What we’ve seen, because we offer everything, is pricing quickly converged to hybrids after any benefit from subsidies. Now Tesla found out this first but we were right behind that, and they were very exposed to early majority. But we learned very quickly, 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 EVs. 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, same thing happened in Europe. 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 ago. 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. Look at the best-selling vehicle in the 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-150 and 50% ICE.

1,000 miles away in Dallas, it was only 15% hybrid and EV, 85% ICE. You go around the world, you’ll see same variations. Hybrids will play an increasingly important role in our industry’s transition and will be here for the long run. Hybrid just hit 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 their behaviors. On F-150 Hybrid, they get the same benefits even when they’re toeing 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 EV margins. The journey on EVs is inevitable in our eyes and we have a bright future of EVs. We’re adjusting our capital and we’re giving customers choice.

Last thing I want to mention is talent. None of these breakthroughs in our company operationally or financially or in technical excellent 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’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 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.

And now our long-term incentives and our short-term incentives are tied specifically to shareholder value creation. Over to you, John.

John Lawler: 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+ plan. Our strong global product line, 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 grew, improved EBIT by $2 billion or 26%, and this is after fully absorbing 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%.

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+ 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. 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. 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 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. Now let’s look at our segments. Ford Pro delivered another strong quarter with revenue up 11%, EBIT of $1.8 billion was up 25% with a margin of 11.8%. 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. 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 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. EBIT was $113 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%. The improvement in EBIT reflects the underlying strength of our product portfolio, dampened by higher warranty and the 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. Credit loss performance continues to normalize but remains below our historical average. Now before I turn to guidance, I wanted to touch briefly on capital allocation. 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 different risk and return profile of our segments. This allows us to assign specific risk-adjusted hurdle rates for each of our businesses, driving greater accountability to returns on the capital we invest. So here’s how we’re thinking about 2024 guidance.

For the full year, we expect to earn between $10 billion to $12 billion in adjusted EBIT. The high end of the range would be a record for Ford. Adjusted free cash flow of $6 billion to $7 billion and capital expenditures of $8 billion to $9.5 billion, flat to moderately up year-over-year. So let me double click on capital expenditures. We expect EVs 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 in 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 efficiencies, targeting to land at the lower end of our CapEx range. For example, in 2023, we already started to take action.

We delayed our second JV battery plant. We reduced the size of our new LFP plant in Michigan, and we did not proceed with our JV battery plant in Turkey. And now we are further adjusting installed capacity to match demand, reassessing vertical integration in 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 SAAR in both the U.S. and Europe, and our planning assumption for the U.S. is 16 million to 16.5 million units, Nonrecurrence 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.

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. In addition, we’re assuming a $2 billion benefit from cost reduction initiatives that offset higher labor and product refresh costs. Within the segments, we expect Ford Pro’s strength will continue unabated. With continued strong demand for our leading products, we are targeting EBIT between $8 billion 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 billion 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 to be about equal to last year at $7 billion to $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 cost with efficiencies. And we expect Ford Credit’s 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+ plan. Capital discipline is driving the right global footprint, 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 our prepared remarks. We’ll use the balance of the time to address what’s on your mind. Thank you. Operator, please open up the line for questions.

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Q&A Session

Operator: We will now begin the question-and-answer session. [Operator Instructions] Our first question today is from Adam Jonas with Morgan Stanley. Please go ahead.

Adam Jonas: Hi, everybody. Jim, I want to talk to you about Ford versus Ferrari, which is way, 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’s Ferrari, it’s called Ford Pro? And I think we agree, people are ignoring the cash cow but I disagree with you, Jim. You said it’s because of opaque kind of 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. Am I being unfair, Jim, with that kind of assessment or what can your team do about this? I have a follow-up.

Jim Farley: [Technical Difficulty] enthusiasm towards it. 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, different shifting to a buy versus a build or vertical integration, shifting in capital and generally more focus on smaller vehicles. The EV customers are very robust. They really like the vehicles. They do not repurchase ICE or hybrid vehicles. 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. The good news is Ford has a high-volume hybrid business, and the timing of our 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 than our first generation.

And I think all of our commitments 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. Marin, maybe you want to go over those, or John?

Marin Gjaja: Sure. Thanks, Jim. If we just think about what the Gen 1 vehicles can do for us, we’re building the EV business and, at the same time, we need the compliance value. We mentioned before the value of the credits that generated allow us to sell these high-margin ICE vehicles. Each EV sold allows us to sell multiple high-margin vehicles. A Lightning can offset roughly…

Jim Farley: Including Pro.

Marin Gjaja: Including Pro. We’re also building new customer-facing capabilities. We are satisfying demand that is out there where there’s high levels of adoption. We’ve got new dealer standards, changing 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 the adoption varies tremendously by geography. As Jim mentioned, across the West Coast, we’re seeing 30% of the market in F-150 being in EVs. 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.

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 1 and the integrated services like BlueCruise that we can sell in these vehicles goes through the whole life of the vehicle.

Jim Farley: Anything else, John?

John Lawler: Yes. I mean, the only thing I would say is, Adam, one of the important things, just on top of that, is that the segmentation is really important here. 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. The compliance benefit that we get, that’s important. We can sell up to a dozen ICE F-150s or other ICE profitable vehicles for every Lightning we sell. But that — we don’t do anything with wooden nickels. We don’t do any credit into EV, into Model e 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.

Adam Jonas: Thanks, John.

Jim Farley: By the way, Pro includes electric. And although electric is going slower for Pro customers, it’s actually they do the math quicker than retail customers. And so actually, our January EV sales in Pro were higher than December, which would ever 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.

Adam Jonas: I appreciate that, Jim. I just have just 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, been there for years. You have a JV partner with Changan that’s really kicking [Indiscernible] lately with EVs. So how can Ford work — potentially work with Chinese partners to help Ford achieve its EV objectives in a more capital-efficient way? Thanks.

Jim Farley: Thank you. Well, person right next to me, John was the head of Ford at China and knows the Changan leadership really well. John and I went to a trip last spring and it was really eye-opening for us. I mean, as two leaders who look to each other said, holy cow. I think, first of all, China as an export for our very profitable overseas markets is really important now. And actually, we shouldn’t overlook the importance of JMC now. We have really profitable export business in China, ICE and EV. We’re going to actually a very different strategy, I think our competitors in China with a very low capital approach to EVs. So we don’t — we see the kind of bloodbath reality now in China on EVs, and we’re watching that really carefully.

We don’t think it’s a good time to jump in with both feet 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 their 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. I think even though that’s not a profit or loss thing, we see that as a real capability globally. So our strategy is quite different but I think it works for our company.

Adam Jonas: Thanks, Jim.

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

John Murphy: Good evening, guys. Just a first question here, Jim, on EVs. Obviously, it’s a hot topic here. As you look at sort of the slowdown here, we’re hearing from dealers, particularly I spent some time in NATO last week, that they’re seeing EVs traded in and folks buying ICE and EV. So they’re actually swapping out EVs and buying ICE and hybrids? And then you’re seeing Hertz dumping 20,000 EVs and canceling or postponing orders. So both on the retail side and the commercial side, you’re getting these stories. It’s following up with data that folks are really not happy with the product sort of near-term? What do you think is happening, because the customers are not happy? 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 sort of your planning assumptions maybe near term, I don’t — just for argument’s sake, say you have 100,000 less EVs? Do you think if you sell 100,000 less EVs at Ford, that you have the ICE and hybrids to backfill for that so you actually don’t lose sales and you actually might be a little bit more profitable in the short-term? It’s kind of a lot in that question, but just 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 do you have the product to backfill if those volumes are lower?