Morningstar DBRS Confirms Ford Motor Company at BBB (low), Stable Trend

DBRS Limited (Morningstar DBRS) confirmed the Issuer Rating and long-term debt ratings of Ford Motor Company (Ford or the Company) at BBB (low). Concurrently, Morningstar DBRS confirmed the short- and long-term debt ratings of Ford Motor Credit Company LLC (Ford Credit) and its subsidiary, Ford Credit Canada Company, at R-2 (low) and BBB (low), respectively. The trend on all ratings remains Stable.

KEY CREDIT RATING CONSIDERATIONS
The rating confirmation reflects Ford's sound business risk assessment (BRA) as a major global automotive original equipment manufacturer (OEM) with a solid position in its local U.S. market. Moreover, in line with significantly stronger earnings generation in recent years, Ford's credit metrics and financial risk assessment (FRA) have improved to levels that provide some cushion in the context of the currently assigned credit ratings.

CREDIT RATING DRIVERS
Consistent with the Stable trend, Morningstar DBRS expects the Company's credit ratings to remain constant over the near to medium term. As with its peers, Ford is facing substantial costs and investment requirements associated with the progressive electrification of its vehicle fleet (in addition to the expansion of its software services). While the Company announced certain revisions and delays in its investment plans given the recent slowing momentum in the adoption of electric vehicles (EVs), Ford's ongoing investments, amid higher shareholder dividends, render positive credit rating actions rather unlikely. Conversely, significantly weaker earnings amid these high investments¿resulting in sizable negative free cash flow generation and thereby adversely affecting credit metrics¿could have negative rating implications, although this is mitigated by the Company's favourable FRA relative to its current ratings.

EARNINGS OUTLOOK
For 2024, Morningstar DBRS expects Ford's earnings to range from essentially constant to slightly higher levels year over year (YOY), noting further that the Company's 2023 operating performance was strong. Regarding Ford's key North American market, Morningstar DBRS estimates 2024 industry volumes to range from flat to moderately higher volumes YOY as pent-up demand (resulting from meaningful production interruptions over the past several years) becomes effectively depleted, with higher interest rate and inflationary pressures representing additional headwinds to sales volumes. Morningstar DBRS nonetheless notes that Ford's wholesales stand to benefit from the nonrecurrence of the 2023 labour strike. Amid this normalizing demand, pricing is in turn expected to soften, albeit from very firm levels. Ford's product mix, however, is likely to strengthen in line with planned product introductions, both in the Ford Blue (primarily the sale of internal combustion engine (ICE) and hybrid vehicles) and Ford Pro (fleet and commercial business) segments that represent the substantial majority of earnings. Regarding Ford Credit, Morningstar DBRS expects the segment's 2024 pre-tax earnings to slightly increase YOY.

FINANCIAL OUTLOOK
Morningstar DBRS anticipates Ford's cash flow from operations in 2024 to remain solid (significantly in line with 2023 levels) in line with ongoing firm earnings generation. However, despite Ford's recent downward revision of its planned capital expenditures (capex) this year, capex is estimated to moderately increase YOY consistent with substantial investment requirements given tightening emissions regulations. Dividend payments for 2024 are expected to decrease compared with 2023 levels, significantly reflecting a likely YOY decline in supplemental dividends (that totalled a high level of $2.0 billion in 2023). As a function of the above, free cash flow is expected to remain significantly positive in 2024.

Over the medium to long term, Morningstar DBRS expects Ford's operating cash flow to persist at solid levels. While increasing capex and dividends could result in a softening of free cash flow, these are nonetheless estimated by Morningstar DBRS to remain substantially internally funded over the foreseeable future, with Ford's financial profile benefitting further from its strong liquidity position.

CREDIT RATING RATIONALE
Ford's credit ratings are supported by its solid position in North America, with its competitive position being bolstered by its leading position in the light- and medium-truck segments, as evidenced by very strong sales of the Company's F-Series full-size pickup trucks through several model generations. High unit margins on these vehicles render the F-Series an important and quite stable contributor to automotive earnings. Morningstar DBRS notes, however, that the Company's dependence on North America for earnings generation is in turn rather high. Ford's captive finance subsidiary, Ford Credit, provides diversification benefits and plays an important role in supporting vehicle sales, with the segment being a source of significant and very stable earnings. Finally, Ford's liquidity position is substantial, with the industrial operations having a net cash position.

ENVIRONMENTAL, SOCIAL, AND GOVERNANCE CONSIDERATIONS
ESG Considerations had a relevant effect on the credit analysis.

Environmental (E) Factors
The following Environmental factors had a relevant effect on the credit analysis: Morningstar DBRS considered that the Environmental factor, specifically costs relating to carbon and greenhouse gas emissions, represent a relevant factor since Ford's products are subject to a wide range of regulatory scrutiny relating to (among other factors) greenhouse gas emissions and fuel efficiency. The Company has been actively working toward a plan to achieve carbon neutrality across its vehicle fleet, facilities, and suppliers by 2050. In addition, Ford plans to source 100% carbon-free electricity for its global manufacturing efforts by 2035. Although the E factor results in additional costs for Ford, these are suitably absorbed by the Company's strong financial profile and therefore do not result in any change in the credit ratings or trends assigned to the Company. (For further details please refer to the following commentary: "The Future is Electric: Climate Change and the Global Automotive Sector" at https://dbrs.morningstar.com/research/413419.)

Social (S) Factors
There were no Social factors that had a relevant or significant effect on the credit analysis.

Governance (G) Factors
There were no Governance factors that had a relevant or significant effect on the credit analysis.

A description of how Morningstar DBRS considers ESG factors within the Morningstar DBRS analytical framework can be found in the Morningstar DBRS Criteria: Approach to Environmental, Social, and Governance Risk Factors in Credit Ratings (January 23, 2024), https://dbrs.morningstar.com/research/427030

BUSINESS RISK ASSESSMENT (BRA) AND FINANCIAL RISK ASSESSMENT (FRA)
(A) Weighting of BRA Factors
In the analysis of Ford, the relative weighting of the BRA factors was approximately equal.

(B) Weighting of FRA Factors
In the analysis of Ford, the relative weighting of the FRA factors was approximately equal.

(C) Weighting of the BRA and the FRA
In the analysis of Ford, the BRA carries greater weight than the FRA.

Notes:
All figures are in U.S. dollars unless otherwise noted.

Morningstar DBRS applied the following principal methodology:

Global Methodology for Rating Companies in the Automotive Manufacturing and Supplier Industries (April 15, 2024),
https://dbrs.morningstar.com/research/431161

Morningstar DBRS credit ratings may use one or more sections of the Morningstar DBRS Global Corporate Criteria (April 15, 2024, https://dbrs.morningstar.com/research/431186), which covers, for example, topics such as holding companies and parent/subsidiary relationships, guarantees, recovery, and common adjustments to financial ratios.

The following methodologies have also been applied:

Morningstar DBRS Criteria: Approach to Environmental, Social, and Governance Risk Factors in Credit Ratings (January 23, 2024)
https://dbrs.morningstar.com/research/427030

Morningstar DBRS Global Corporate Criteria (April 15, 2024)
https://dbrs.morningstar.com/research/431186

The credit rating methodologies used in the analysis of this transaction can be found at: https://dbrs.morningstar.com/about/methodologies.

A description of how Morningstar DBRS analyzes corporate finance transactions and how the methodologies are collectively applied can be found at: https://dbrs.morningstar.com/research/431153.

The related regulatory disclosures pursuant to the National Instrument 25-101 Designated Rating Organizations are hereby incorporated by reference and can be found by clicking on the link under Related Documents or by contacting us at info@dbrsmorningstar.com.

The credit rating was initiated at the request of the rated entity.

The rated entity or its related entities did participate in the credit rating process for this credit rating action.

Morningstar DBRS had access to the accounts, management and other relevant internal documents of the rated entity or its related entities in connection with this credit rating action.

This is a solicited credit rating.

This credit rating is endorsed by DBRS Ratings Limited for use in the United Kingdom, and by DBRS Ratings GmbH for use in the European Union, respectively. The following additional regulatory disclosures apply to endorsed credit ratings:

The conditions that lead to the assignment of a Negative or Positive trend are generally resolved within a 12-month period. Morningstar DBRS trends and credit ratings are under regular surveillance.

For further information on Morningstar DBRS historical default rates published by the European Securities and Markets Authority (ESMA) in a central repository, see: https://registers.esma.europa.eu/cerep-publication. For further information on Morningstar DBRS historical default rates published by the Financial Conduct Authority (FCA) in a central repository, see https://data.fca.org.uk/#/ceres/craStats.

Lead Analyst: Robert Streda, Senior Vice President,
Rating Committee Chair: Timothy O'Brien, Managing Director,
Initial Rating Date: April 1, 1976

Information regarding Morningstar DBRS ratings, including definitions, policies, and methodologies, is available on dbrs.morningstar.com or contact us at info@dbrsmorningstar.com.

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