Earnings Call Transcript - F Q4 2023

Operator, 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. After today's presentation, there will be an opportunity to ask questions. 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, Head of Investor Relations

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 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 on 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, President and CEO

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. 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 amazing technology. BlueCruise 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 BlueCruise are over 70%, the same for Ford Pro Intelligence. 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. 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 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. Our international operations have made a remarkable turnaround after a lot of difficult restructuring. It's the second year we made a profit. It's about a $3 billion turnaround compared to just three or four years ago. What would surprise people is what a juggernaut Ranger has become. It's a global franchise and 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. 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 recurring. I believe Ford Pro is where the industry is going, an integrated business between all three of those factors. 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. We're now on track for mid-teen EBIT margins at Pro. 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. The reason why that order bank is so strong is fundamentally different economic factors than our retail business. Look at North America. We're really dominant. We do really well on state and local government Pro sales. These are very profitable. 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. 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. 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? There's a couple of reasons. The first is our market leadership is a little 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. Commanding that share means that we are dominant in vocations like service construction, utility, and as I said, government. 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 Ford has a reputation with those customers. Our second big moat is upfitters. Every one of our landscapers, plumbers, electricians all upfit their Transits and Super Duties and Rangers specific to their vocation. We now have 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. 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. 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 now have 1,200 vans and Super Duties 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. 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 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. Two aspects of quality I want to highlight: the first is launch quality. That Super Duty launch 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 that cost us $1 billion of EBIT last year but it was the right trade-off for our company and 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, which is underway right now and it's really important for our company. The second area of quality we're seeing progress on is initial quality, measured in three months in service. That is highly correlated to long-term quality and warranty costs and we saw last year a 10% increase in that. It's the largest improvement in similar quality since 2016. 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. The next area I want to highlight is EVs. Now someone portrayed the change in the EV market as Darwinian. It could be a slow evolutionary change, but we think this has been a seismic change in the last six months. The catalyst for that change is a combination of EV manufacturers cutting their pricing by 20% across geographies and a tremendous amount of capital flowing into one segment, two-row crossovers. Our overall EV strategy has never been more relevant as this seismic change happens. We want to share our targets. Our next Gen 2 products will be profitable in the first 12 months of their launch, reaching mid to high single-digit EBIT margins over their lifecycle and delivering profits above Model e's cost of capital. We're adjusting our capital moving it from larger EVs to smaller EV products. Our first three Gen 1 products didn't have enough capacity. With EV growth and the COVID supply shocks and chip crisis, it's essential to assess vertical integration and new chemistries. Our overall EV business will grow this year with the Explorer launching in Europe and new commercial EVs being refreshed. We're aligning production and inventory for customer demand. We're also learning from EV customers on software quality, this is a critical area where I think we're ahead as a company. We are seeing big adoption variances by geography, and the power of choice at Ford is a big advantage for us. The best-selling vehicle in the U.S., the F-150, shows a diverse mix between hybrid and ICE. Hybrids will play an increasingly important role in our industry's transition and will be here for the long run. The journey on EVs is inevitable, and we have a bright future of EVs. Lastly, talent is key to making these breakthroughs operationally and financially. Our performance management system is fundamentally changing how we're running the company. Long-term incentives are now tied to shareholder value creation. Over to you, John.

John Lawler, Chief Financial Officer

Thanks, Jim, and good afternoon, everyone. We appreciate you joining us today. 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. To provide perspective, compared to last year, collectively, our core business units, Pro, Model e, and Blue grew, improving 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%, above the top end of our target range driven by underlying strength in both Pro and Blue. 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. 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. Revenue for the quarter was $46 billion, up 4% despite the strike's impact, which cost us roughly 90,000 units of production. Adjusted EBIT came in at $1.1 billion with an EBIT margin of 2.3%, again including the impact of the strike. Looking 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. With a margin of 12.4%, we're just shy of our mid-teen target. Ford Model E drove a 14% increase in wholesales in the quarter, a 2% revenue increase 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, which Jim addressed. 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 with revenue up 8%. All of our regions are now profitable and contributing to Blue's bottom-line results. 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, yet credit loss performance continues to normalize but remains below our historical average. 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 profiles of our segments. Here’s how we're thinking about 2024 guidance. 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 is expected to be between $6 billion to $7 billion and capital expenditures of $8 billion to $9.5 billion, flat to moderately up year-over-year. EVs are expected to be about 40% of our total capital expenditures, reflecting products already in flight. As we continue to adjust to market dynamics, we are scrutinizing every dollar and will continue to drive efficiencies, targeting the lower end of our CapEx range. For example, in 2023, we delayed our second JV battery plant, reduced the size of our new LFP plant in Michigan, and did not proceed with our JV battery plant in Turkey. Now further, we're 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. Our 2024 outlook also assumes a flat to slightly higher SAAR in both the U.S. and Europe, 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. From a planning perspective, we’re assuming lower industry pricing of roughly 2%, driven by higher incentive spending throughout the year. We expect this to be partially offset by top-line growth from the launch of new products. In addition, we’re assuming a $2 billion benefit from cost reduction initiatives that will offset higher labor and product refresh costs. Within the segments, we expect Ford Pro's strength to continue unabated with EBIT targeted between $8 billion to $9 billion, driven by continued growth and favorable mix, partially offset by moderated pricing. Model E losses are expected to widen to a range of $5 billion to $5.5 billion, driven by continued pricing pressure and investments in next-generation vehicles. Ford Blue EBIT to be about equal to last year at $7 billion to $7.5 billion, reflecting a balanced market equation, including the all-new F-150 impact. We expect costs to be flat as we compensate for higher labor and product costs with efficiencies. Lastly, we expect Ford Credit's EBT to be up slightly year-over-year to about $1.5 billion. Our performance last year reflects the momentum of our Ford+ plan. Capital discipline is driving our 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. 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.

Operator, Operator

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

Adam Jonas, Analyst

Hi, everybody. Jim, I want to talk to you about Ford versus Ferrari, which is 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 is called Ford Pro? I think we agree, people are ignoring the cash cow but I disagree with you, Jim. You said it's because of opaque transparency or opaque 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 assessment or what can your team do about this? I have a follow-up.

Jim Farley, President and CEO

There is a strong enthusiasm towards it. We have numerous opportunities and are actively pursuing them. I believe we will see significant changes in the industry due to the pricing power we are all encountering. We are building more OEM relationships and shifting toward a buy strategy instead of vertical integration, reallocating capital, and concentrating on smaller vehicles. Our EV customers are both robust and loyal to their vehicles, and it is essential for us to manage costs effectively. This presents a challenge during the transition. The positive aspect is that Ford has a high-volume hybrid business, and the timing of our next product cycle allows us to make substantial capital adjustments, reducing costs and enabling us to execute a dramatically different cost structure compared to our first generation. We are committed to achieving profitability within the first 12 months of all our launches and to ensuring Model E meets its cost of capital. I wouldn't assert this if I didn't truly believe it, as it brings numerous other benefits that I would like the team to elaborate on.

Marin Gjaja, COO of Model e

If we think about what the Gen 1 vehicles can do for us, we're building the EV business while also capturing compliance value. Each EV sold allows us to sell multiple high-margin ICE vehicles. A Lightning can offset roughly...

Jim Farley, President and CEO

Including Pro.

Marin Gjaja, COO of Model e

We are also building new customer-facing capabilities. We are satisfying demand where there are high levels of adoption. We have new dealer standards, changing the customer experience for shopping, ownership, and service to learn what it takes to serve these customers, both us and our dealers. We are developing a charging network through our dealers and together with Tesla. The adoption varies by geography. As Jim mentioned, across the West Coast, we're seeing 30% of the market in F-150 being EVs. The volume we're generating gives us a feedback loop for engineering. We have better insights on battery thermal propagation and the software and services these customers demand much more intensely than a typical ICE customer. We're learning to deliver those more efficiently and with higher quality. The lifetime value of both the customer and vehicle is significant. We have a 60% conquest rate on Gen 1, and the integrated services like BlueCruise we are offering go through the life of the vehicle.

Jim Farley, President and CEO

Anything else, John?

John Lawler, Chief Financial Officer

Yes, one of the important things, just on top of that, is that the segmentation matters here. The EV business needs to stand on its own and generate a profit and a return on the capital we invest. We're not there yet but that’s what we’re working towards. The compliance benefits we get are significant. We can sell up to a dozen high-margin ICE vehicles for every Lightning we sell. Our EV business has to stand on its own sooner rather than later.

Adam Jonas, Analyst

Thanks, John.

Jim Farley, President and CEO

Pro includes electric. Although electric is going slower for Pro customers, they're making decisions based on their unique duty cycles. Our January EV sales in Pro were higher than December.

Adam Jonas, Analyst

I appreciate that, Jim. I just have a brief follow-up on China. You seem very knowledgeable about the market there. With Ambassador Huntsman on the Board and a joint venture partner with Changan recently working on electric vehicles, how can Ford collaborate with Chinese partners to achieve its electric vehicle goals in a more efficient way? Thanks.

Jim Farley, President and CEO

Thank you. John here was the head of Ford in China and knows the Changan leadership well. We went on a trip last spring and it was really eye-opening for us, looking at the capabilities there. China is important as an export market for our very profitable overseas segments. We shouldn't overlook JMC which is key for profitable exports. We're taking a very different, lower-capital approach to EVs in China. We see the current EV landscape in China as volatile; we don't believe this is a good time to jump in with both feet. Our partners' platforms will lead our electrification in China, providing us insight into their capabilities. Our low-capital, profitable approach to the current EV explosion in China is appropriate.

Adam Jonas, Analyst

Thanks, Jim.

Operator, Operator

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

John Murphy, Analyst

Good evening, guys. Just a first question here, Jim, on EVs. As you look at the slowdown, we're hearing from dealers that they're seeing EVs traded in and customers buying ICE and hybrids instead. Hertz is also dumping 20,000 EVs and canceling or postponing orders. Both retail and commercial customers seem to be unhappy. What do you think is happening? Do you have the product to backfill if those volumes are lower?

Jim Farley, President and CEO

Thank you for your question, John. You can imagine with our choice portfolio being big on scaled hybrids, ICE, and EV, this is fundamental for us because we plan our capacity years out. Here’s what we found: Customers are doing the quick showroom math on hybrids. They can evaluate the breakeven between ICE and a hybrid quickly. However, operating cost efficiencies for mainstream EVs require changes, such as installing a charger at home. Some customers are uncertain about their savings on repairs versus gasoline, making the cost of ownership tougher to compare for EVs. The quick math is leading some customers to make choices favoring hybrids. Yet the good news is we have planned our 40% growth in HEVs years ago which means we have the capacity. We anticipate flexibility based on market dynamics.

Marin Gjaja, COO of Model e

We’ve observed dealers making margins comparable to their ICE vehicles over the last year, ensuring they are making money and are investing for the long-term. As Jim noted, there’s a big difference between consumer choices now and the Pro customers who are consistently buying in larger volumes.

Jim Farley, President and CEO

We have flexibility in our manufacturing capacity between ICE, EV, and hybrid. We want dealers to understand that we're in a better position than many other brands in this transition. Additionally, we want to talk about our progress on quality and emphasize customer experience.

John Murphy, Analyst

Sounds good. Thank you.

Operator, Operator

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

Rod Lache, Analyst

Hi, everybody. Jim, you said that the adoption curve for EVs is a bit shallower, but we’re still seeing $5 billion to $5.5 billion in losses in Model e, suggesting structural costs are likely higher in 2024 than 2023. Can you control and commit to when that business reaches breakeven, either through stronger demand or lower spending?

Jim Farley, President and CEO

We will not go to market with any vehicle unless we are convinced it will be profitable. We see opportunities to make adjustments in the short term. But yes, I know it's a huge turnaround and a big number. I believe John can go into losses in Model e to provide context.

John Lawler, Chief Financial Officer

The biggest issue in our Gen 1 vehicles is that revenue collapsed, and they are not cost-optimized. We put them through very quickly to market, and you're seeing the impact of that. We will continue to improve the cost structure of the Gen 1 vehicles. Our Gen 2 vehicles will not launch unless we can achieve profitability and returns on that capital. We know several competitors are already profitable, and it's essential we cross that threshold.

Jim Farley, President and CEO

We have many stakeholders at Ford so we want to clarify that we have optionality in capital spending. Most of that guide is related to EVs.

John Lawler, Chief Financial Officer

About 40% of our CapEx is directed towards EVs.

Jim Farley, President and CEO

We are working hard to be on the low end of that range because we think it is appropriate to run the business.

Rod Lache, Analyst

Can you commit to breakeven at a certain point that you said before that the Gen 2 vehicles come out in 2026, is that the timeline for closing the $5 billion gap? Will we see warranty costs starting to come down this year?

Jim Farley, President and CEO

We have Marin here, who leads our EV business. I think that question is for him regarding timing and warranty.

Marin Gjaja, COO of Model e

We're not prepared to commit to a specific timing on when we will reach positive EBIT. However, we expect to see improving gross margin quarter-over-quarter over the course of the year. We are currently making adjustments to inventory issues. We've reduced costs in our generation vehicles since their launch, and the market is presenting us with challenges.

John Lawler, Chief Financial Officer

Warranty costs are expected to remain about flat this year. We expect to see $2 billion in efficiencies, offsetting the impact of the UAW contract and refresh costs for 60% of products being refreshed this year.

Rod Lache, Analyst

Got it. Thank you very much.

Operator, Operator

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

Dan Levy, Analyst

Hi, good evening. Thank you for taking the questions. The guidance for this year is already in line with the mid-teen margin guide provided at your CMD last spring. How sustainable is this earnings stream? You have had something like $7 billion of price tailwind. What is the sustainability of these robust price tailwinds?

Jim Farley, President and CEO

The fundamental factors for our vehicle profitability in Pro will be durable for a while. We are experiencing demand driven by infrastructure, government projects, and manufacturing reshoring, which is significant. We've never seen a demand like this for Pro, and we're just getting started on aftersales. The opportunities present us with sustainability for the next couple of years.

Dan Levy, Analyst

Great. And as a follow-up, John, please help us understand the path to narrowing the cost gap versus your competitors in Blue?

John Lawler, Chief Financial Officer

We're starting to gain traction and that gap should start to narrow. It's a combination of efficiencies across our industrial system and material reductions.

Kumar Galhotra, COO of Ford

We're starting the year differently than 2023, having seen major inflationary pressures ease. Our supply chain is stable, allowing greater efficiency across our system and reducing freight costs. We're attacking material costs in multiple ways. By benchmarking designs, we can optimize cost efficiencies while keeping features valuable to our customers. This year will see a closing of that cost gap.

Dan Levy, Analyst

Great, thank you.

Operator, Operator

The next question is from Emmanuel Rosner with Deutsche Bank. Please go ahead.

Emmanuel Rosner, Analyst

Thanks so much. Are there green shoots that you can point to for increased conviction around some of these costs? Will these factors take time to materialize? Should we expect the $2 billion-plus in 2024?

Kumar Galhotra, COO of Ford

We have a very robust set of ideas we are executing from material cost, dealing with suppliers, and reducing waste in our system. We’ve spent significantly less on premium freight recently due to increased stability, which helps in our cost reduction efforts.

John Lawler, Chief Financial Officer

We ended 2023 in a better position with our supplier base. We'll continue to optimize our production process to yield efficiencies over time.

Emmanuel Rosner, Analyst

Thanks so much. Just a quick follow-up on volume outlook for this year, especially for Ford Blue. I'm curious where you see volume growth for this year.

John Lawler, Chief Financial Officer

We expect industry growth of about 16 to 16.5 million units this year. Our Blue day’s supply is close to our expected limits. We will continue to see top-line pressure but new products will contribute to improved mix and tailwind.

Marin Gjaja, COO of Model e

Our portfolio will be refreshed or new by year-end, increasing our potential volumes as well.

Operator, Operator

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

James Picariello, Analyst

Just wondering if you could help dimension EV volumes for this year associated with the $5 billion-plus in Model e losses. How are you thinking about Pro's profitability?

Jim Farley, President and CEO

We anticipate robust growth in Pro EV sales driven by the demand in our markets, especially in Europe with the two Transit vans coming online. The significant regulations are also supporting our EV growth, especially in urban settings.

Marin Gjaja, COO of Model e

We will also observe growth in retail EV sales as we will have products that were out of production last year and new launches like the Explorer in Europe will help drive significant growth.

John Lawler, Chief Financial Officer

A lot of the $2 billion involves efficiencies because of actions we've been benchmarking and measuring design innovations.

Operator, Operator

And the final question today comes from Ryan Brinkman with JPMorgan. Please go ahead.

Ryan Brinkman, Analyst

Thanks for taking my questions. Digging into the anticipated Model e losses, what is embedded within that from a variable contribution margin perspective? How do you expect that to progress throughout '24? Could we also check in longer term on the Model e margin target of 8% by the end of '26 annualized?

John Lawler, Chief Financial Officer

The 8% target is not realistic given the current dynamics in the market. Our focus now is on launching Gen 2 vehicles profitably and improving margins on Gen 1.

Marin Gjaja, COO of Model e

We need to be rigorous with capital discipline and ensure we launch Gen 2 vehicles only when they can be profitable. This will help us build a stand-alone profitable EV business.

Ryan Brinkman, Analyst

Very helpful. Thank you.

Operator, Operator

This concludes our question-and-answer session, and the conference has also now concluded. Thank you for attending today's presentation. You may now disconnect.