Operator:

Good day, everyone. My name is Gary, and I will be your conference operator today. At this time, I would like to welcome you to the Ford Motor Company Second Quarter 2024 Earnings Conference Call. [Operator Instructions] Please note this event is being recorded. At this time, I would like to turn the call over to Lynn Antipas Tyson, Executive Director of Investor Relations.

Jim Farley:

Thanks, Lynn. And thanks for joining us. First, I wanted to thank our global team. Remaking Ford into a high-margin, high-growth, more capital-efficient and a more durable business is really hard work. It requires focus, collaboration and excellence. And I also want to thank our investors. We're committed to creating value consistently over the long-term, and we appreciate your support and input. Execution against our Ford+ plan allows us to break free from the low-margin, capital-intensive and cyclical attributes that have constrained auto -- legacy auto valuations for a long time. And this process does not happen in a straight line. We are absolutely a different company than we were three years ago. And our pace of change is intensifying. The creation of Ford Pro, Blue, and Model e have been a huge catalyst for transparency, accountability and more rigorous capital allocation. Our Ford Pro business is amazing. It's a high-margin business tracking towards $70 billion in revenue this year with further opportunities for profitable growth outside of vehicle sales, parts and service and software. And a good example of that is a recent decision by our team to add 100,000 units of capacity of Super Duty in Canada. It not only serves our customers, but it's capital-efficient and has very high returns for many years to come. As you know, we flipped our international operations many years ago from deep losses to now profits and positive cash flow with more opportunities ahead, and that includes China. We also took our product portfolio from too many generic vehicles and infused it with passion and purpose. We build out our iconic F-Series and Transit lines, as well as passion vehicles like Mustang and the new Bronco lineup, and sub-brands like Raptor and Tremor and Dark Horse. Few OEMs can offer a customer choice like Ford at our scale. Ford is number one in our home market for internal combustion. We're number two in EVs and have been for 2.5 years. And we are the number three hybrid brand in the U.S. But what's less visible, but incredibly important for investors is the foundational work underway in the company to move to software-defined vehicles and breakthrough digital experiences. And I'll talk about that later, but this will have significant operating leverage. Ford+ is on track. Today we reaffirmed our adjusted EBIT guidance for the whole year and raised our outlook for adjusted free cash flow. I'm going to comment on our EV landscape and strategy, software technology and services that are growing importance at Ford, our Ford Pro business and quality. On electrification, we've been very vocal about why electric vehicles are so important and a great choice for customers and businesses. Customers' usage data and cost of ownership data would indicate about 50% of customers who buy automobiles would be better served on buying an electric vehicle. Now there's a lot of misconceptions around EVs on the separate areas of costs like resale value and insurance, of course range and charging and battery life, and OEMs like Ford must do a much better job in educating our customers about the advantages that EV offers in terms of cost of ownership. As you know, we are the number two EV brand in the U.S. for over 2.5 years. That's a long time, and we've learned a lot and now we have used those learnings to sharpen our strategy. What we learned is that it's incredibly important to be transparent about Model e losses. Inside the company as well forces this forced accountability, and the result is our team is getting much more strappy and resourceful in terms of turning the business around. We are now more disciplined and have to be for capital and expense. And this means we will not launch vehicles at a loss that are not good for our business knowing what we know now about the reality of the market equation. And we clearly see China and Tesla as the cost benchmark. We also see excess capacity that will lead to more pricing pressures, which is in our business plan, more consolidation and many, many more partnerships. We see less vertical integration in some areas to relieve capital, and we see a lot of tough choices on footprint. Early majority customers are really different than the early adopters, particularly in retail. And we see a lot more openness to hybrids and extended-range electric vehicles we call E-REVs. We also see a divergence on electrification adoption between commercial and retail. Commercial customers focus on total cost of ownership. They use the vehicles much more intensely and they do not overbuy batteries that retail customers do. They're also investing in our Pro charging depots and our integrated software because they want to be smart about the cost of charging their vehicles. And I'm happy to say that our EV Pro contribution margin for our EV vans is now already positive. We also have learned a lot about the size of the vehicle. We believe smaller, more affordable vehicles are the way to go for EV in volume. Why? Because the math is completely different than ICE. In ICE, the business we've been in for 120 years, the bigger the vehicle, the higher the margin. But it's exactly the opposite for EVs; the larger the vehicle, the bigger the battery, the more pressure on margin because customers will not pay a premium for those larger batteries. And lastly, compliance. There is a lot of pressure on compliance. And the lower demand for EVs, especially the pricing, means that CO2 credits are now likely going to be needed for fleet flexibility and optionality and will be a critical strategy choice for any company. What are the success criteria's for EVs in the future? Well, the first one is to have the right mix of fully and partially electric solutions. This is imperative. You have to have a compelling product roadmap and you have to have very flexible manufacturing. A good example is our hybrid business. The global hybrid portfolio at Ford is on track to grow 40% this year across nine nameplates. And we really bet on hybrid trucks. In the first half of the year, our hybrid pickups, Maverick and F-150, grew more than three times the rate of the overall hybrid segment. Our F-150 hybrid with Pro Power onboard is a game-changer for our customers. Commercial customers have power on the run like job sites, and our retail customers have emergency power backup. And boy, have we seen that in Texas and all the other extreme weather events, how important that is for our customers. The second success factor is matching the cost of the Chinese OEMs and Tesla, especially on affordable EVs. Now when people hear about affordability and they think about small and unaffordable, I'd like to address that now. We are designing a super-efficient platform, leveraging innovation across our product development, supply chain and manufacturing teams. With no engine or drivetrain, a smaller vehicle can have a much roomier package, actually the interior package of a class above, with a small silhouette. That's a big advantage for customers versus ICE. And we're focusing on very differentiated vehicles priced under $40,000 or even $30,000. And we're going to focus on two segments

Operator:

[Operator Instructions] Your first question comes from the line of Adam Jonas with Morgan Stanley. Please go ahead.

Jim Farley:

Yes. Yes, we're -

Jim Farley:

Yes, we do. And I have to tell you that it's hard for people to understand those possible uses of capital, but we have so many exciting businesses to invest in. And Pro is a great example. I'm not going to get into specifics, Adam, but I think people will understand over time how many exciting opportunities there are at Ford. And I'm not just referring to vehicles, I'm referring to non-vehicle activities. We have 27,000 service base. There's lots of opportunities. And as I said, when you look at Ford Pro, I'll just deep dive on that one, and I'm so glad you asked this question, by the way. So Ford Pro is a very, very high percentage of our company's profit. Just look at the ratio between the overall company's EBIT in Pro and our guidance. And then think about our after-sales business, only 24% of our revenue comes from Pro-related vehicles. And we could spend a lot of time talking about this opportunity, but that's why I highlighted in my comments, there are so many places for us to grow Pro on the physical services. They're like 35% margin, but it's hard stuff, right? It's like bays and technicians and a lot of work. We have very exciting electrical architecture investments that we have to make in our future that will really change our ICE vehicles and their revenue potential. Because that revenue won't be just when we sell the vehicle, it will be over time, which we're seeing with Pro already. So I don't want to belabor the point. I'll just tell you there are plenty of opportunities. Anything else?

Jim Farley:

Yes.

Jim Farley:

Yes, great question and an important question for any OEM as the EV market evolves here. Look, we made the bet on CATL many years ago. It was a very important bet for our company to localize LFP cells in North America happen to be in Michigan. We're two years into that project. That is a signature partnership. CATL is the largest battery maker in the world, and they lead iron phosphate cost and reliability. That is a signature partnership that we launched many years ago that we've been working hard on, and Marshall is on track. Look what Volkswagen is doing with XPeng, and many others who are kind of taking a Chinese low-cost platform and using that. That's not our strategy. Our partnership strategy will be on the component side, going deep into the supply chain for IP that is critical and unique. I'm not going to get into specifics, but CATL is one example, and we're going to learn how to do that at the company. We believe that this is essential know-how for the company because the true fitness test for EV profitability will be on these small vehicles. And we have learned from our experience with Mazda and Kia and many others that we have to have this know-how in the company because it applies across all of our vehicles, not just EVs. And the lowest cost is the most important capability. We believe that many of our competitors will turn to their Chinese either independent companies or partners to basically use their platform globally. We learned a lot, not just from China, but from MEB. We've been scaling MEB. We know the cost of Volkswagen. They're one of the leaders in scale. And what we found in that trip and subsequent trips to China is that we have a very competitive battery with CATL, but many of the Chinese players in the lower-cost have very affordable batteries, but they don't have the most efficient design outside of the battery on the other EV components. And our team, the Skunkworks team, we might as well call it a big team now because it's no longer Skunkworks, we're betting on them as our affordable platform. They have really designed breakthrough EV components with our own design that we think are better and cheaper. And we have a very competitive battery localized with the IRA benefit. And the partnership discussion, I think, will -- we think will largely put out in larger vehicles. We think that's where the partnership -- big partnership opportunity really lies. In the commercial vehicles that I talked about, I'm not -- we have nothing to say right now, but this is -- we -- why is the partnership so important? Because the bigger vehicles have this kind of inverted cost, and the partners allow you to be more capital-efficient and have better returns. And that's why we think that the partnerships on larger vehicles will play out as vibrantly as affordable vehicles.

Bruno Dossena:

Yes, thank you for taking the questions. I was wondering if you could just contextualize what fundamentally within the organization you think is leading to these persistent warranty issues. And I realize partly it's because it was on a prior industrial system, but just given how frequently the surprise warranty issues keep popping up, how do you have visibility or how can investors really build confidence in an earnings trajectory when, every year the surprise warranty issues keep happening? Thanks.

John Lawler:

Yes. I think that, there's the lag that you're going to have between the quality improving and the warranty run rates improving. And so, the first step, as Jim said, is the quality improving and we're seeing that in the physicals now. And that lags, 12 to 18 months and we should start to see the warranty coming in. On the prior models, majority of what's coming through our FSAs, we're doing things to fix those quicker, get out in front of them, reduce, the impact of them, but we're working that every day. And it's an issue that the team is focused on, and the encouragement is that the quality is improving and that is the most important thing for the future of the business and the longer run rate of the business.

Bruno Dossena:

Okay, thank you. So maybe to step back, and I think this touches on Adam's Skunkworks questions, but when you compare Ford now to history, earnings are now significantly higher. But the capital base has expanded such that returns really haven't improved. And this isn't just Ford. This is most Western automakers. The earnings part of the equation is only partly in your control, but the structural costs are. So how are you thinking about the trajectory of structural costs from here, even simply, are they going up or down? And B, given this is a similar dynamic for a lot of automakers, and so many traditional automakers are investing billions in R&D, really trying to achieve the same thing with respect to EVs, make an affordable EV at scale to compete with Tesla and Chinese OEMs, why do you think the legacy OEMs are all doing this by themselves? And why aren't there more partnerships? Thanks.

Jim Farley:

Yes. And I would just emphasize that the ambition at Ford for partnering on EVs is record level high. We're not going to make any announcements in earning call, but this is absolutely a flip-the-script moment for our company. We have done partnerships like Volkswagen. We have learned how successful -- how to be successful with the one-ton Transit that includes an electric vehicle. We really see that opportunity in front of us. But we are not going to partner to the level where we delegate our future and the future fitness for cost competitiveness outside the company. We need -- and if we have a partner, we have to have that transfer function that John mentioned. I would only say that we need as an industry to start focusing equally on the one-time cost investment in the electrical architectures and the transition to digital products. Now the integrated services that we're finding, we have 765,000 paid subscriptions. They were different than our competitors who just basically do it for infotainment. We are basically, you know, productivity on Pro as well as BlueCruise. And to take that to the next level, make that business supercharged, we need to invest heavily in electrical architectures, not just on our EVs, but also in our ICE vehicles and hybrid vehicles. And that will be a one-time investment. And the benefit of that was what I was trying to highlight in my script, which is when the economy turns down, we still have those subscriptions. Our service business, customers turn to that even more in a downturn because they keep their vehicles longer, they have to do more maintenance. These are ways to kind of derisk our exposure to economic cycles. And we have to make OTA, the updated IVI system, the integrated services team, both B2C and B2B, our electrical architectures, these are all basic enablers that go beyond EVs. And the industry is going through that transformation too, and I believe Ford is in advance of others because we have more complicated platforms than Rivian and many -- and Tesla and many of the other OEMs. And because of that, we also have more scale. We have more complexity, but we have more scale. And I think that transition and kind of structural change in the industry is as big as the EV change. We're going to get to $1 billion of revenue, we think, next year on software. I wouldn't have thought of that two, three years ago.

John Murphy:

Good evening, everybody. Just to take it back to more sort of the core of the business. Jim, I just wanted to go through some numbers or kind of your take on the Ontario Super Duty capacity add. I mean, obviously, it's a big step-up in capacity for the Super Duty 100,000 units. It seems like current demand would certainly soak that up or absorb that reasonably easily. But I'm just curious, if you think we might be hitting sort of a peak in this truck, what's your sort of view on the ability to kind of sustain these high levels of demand and sell-through? How should we think about incremental margins on that? Because it seems like a $3 billion investment might have a payback of less than two years and then --

John Murphy:

-- spin out a lot of cash real quickly, so it might be a really, really, really good investment. So I was just wondering if you could talk about that and then also what kind of powertrains those trucks will have.

John Murphy:

Okay. And if I could sneak just one more in, maybe for Cathy, on the used residuals or the residuals at auctions. It seems like although down year-over-year, the last three quarters, they've stabilized and started to improve. And I'm just curious what your outlook is there and it just seems like the supply is going to remain relatively constrained in the used market, the late-model used market. So this might be a good guy, not just for Ford Motor Credit, but for resids and potentially, a lift or support for new vehicle pricing. So just what are your expectations there and what are you seeing in the market, Cathy?

John Murphy:

Great, thank you.

Dan Levy:

Hi, good evening. Thank you for taking the questions. I wanted to start first with a question on Pro where we're seeing these continued strong results and really pricing is doing a lot of the strength. So I understand all the bits about, pent-up demand and that's really helping and there's really a thirst for these products, but maybe you can help give us some color on the sustainability of this pricing -- product pricing. And specifically, A, how long is this tale of pent-up demand? B, how much of the pricing is contractual versus, let's call it more spot retail, which would be more subject to the market fluctuations? So any color on the trajectory of pricing in Pro given it's had such a strong run.

Jim Farley:

I wish there were car wars for commercial. Because if there was, we would see the product freshness at Ford be an outstanding situation for us. So aside from kind of the industry backdrop of the industry pricing and the demand, I think one of the most important decisions we made several years ago is to go full in on Pro. So we invested in a one-ton Transit, which is our profit machine in Europe. We invested in new Ranger globally. We invested in a brand-new Super Duty, including chassis, including multi-energy. We invested in new F-150. And we have all these new electric Transit, two-ton Transits. That was very intentional. We did it several years ago and now that will pay off, I believe, as we look into these multi-year contracts. And I -- for Ford at least, it's very important to understand how outsized the freshness of our lineup is at Pro. It's -- I've been here 16 years. I've never seen all of our core products updated within a 12-month period like this.

Jim Farley:

Yes, thank you. Obviously, Ford has had a lot of history -- a lot of experience and wisdom after 120 years of elections. And I would say think about our strategy this way. We believe that the fitness of the Chinese in EVs will eventually wash over our entire industry in all regions. And so we believe as a company, even if there were short-term adjustments we can make to a compliance-led, lower requirement lineup, we're not going to approach it that way. We really believe what I said, which is that many Americans would find an electric vehicle lowering their cost, not everyone, but a high percent. And we believe that to be fully fit globally, whether it's our Ranger business, our commercial business, anything really, we have to find a way inside the company to be fully fit with lots of partnerships on the supply chain side. And so this is a kind of enduring strategy at the company. It is not a strategy where we handicap the presidential election for the next one and the next one and see what we can get away with the EPA. That is not how we run Ford because Ford has -- Ford didn't go bankrupt. We have been enduring. And the only way we believe to be enduring is to make money on small EVs and commercial. And that's our bet. You'll see it play out in coming years. It's a big adjustment from our Gen 1 products. I'm glad, as I said, we scaled 2.5 years ago because we could learn about the reality of the market equation, which is just requiring us to be more fit and move faster. The EPA could certainly change, but it would take, as John said, several years for -- through legislation and lawsuits for that to change. So even from a compliance standpoint, we can't really count on administrations changing this way or that way. I've been to the Hill many times in the last month, talking to many Republican leaders of the country, and I always say the same thing to them. Please realize that there's a subset of customers that absolutely would save money, and they're also, absolutely, a group of customers who like partial electrification. And Ford's strategy is choice, manufacturing flexibility and choice. We are not going to bet student body left on this or right. We are going to give customers choice. We're going to be flexible manufacturing. That's why we want to be a first-adopter to an E-REV or whatever is next on partial electrification because we want to be first and best at that choice. But on EVs, we need to be fully competitive with BYD, Geely, even our own partner Changan. And the only way for us to have done that is through this small group in California.

Operator:

The final question today is from Ryan Brinkman with Barclays. Please go ahead.

John Lawler:

Yes, Ryan. I mean that's part of the issue is these are issues that are popping up in the field on these older models. The largest one coming through is on a rear axle bolt for vehicles that were engineered for the 2021 model year was when they were introduced. And if these things come through, at a higher time in service, we're made aware of them, we need to take care of our customers, we go out to fix them. And we have several of those types of things popping up on older models. We got a failed oil pump issue that's popping up on, 2016-launched vehicles. And so it's clear that we had a period of time where the robustness wasn't what it needed to be and that's showing up. And it is hard to predict on some of these units that have been out in the field for quite a while that one of these issues is going to show up, these longer-term durability and quality issues. But we need to work through that. And we do believe that overall, as we improve our near-term quality and that starts to show up in the field, that will allow us to, based on the rules that we have around how we do our accruals, bring down that overall accrual level. So these types of issues if they pop up will have less of an impact overall because our run rate on quality will be improving.

John Lawler:

Those are critical because when you look at some of these things, that have been out in the field for a while that have failed, they crossover -- let's say they launched in a '16 model year was the first year it was done. So it was designed and engineered in '13, '14, '15, launched in '16, and it's been out there for quite a few years. With the connected vehicle and having the digital electrical architecture and us controlling the software across all of the operating domains, we will be able to get signals off the vehicle early to tell us whether or not we're having an issue in certain components. And if we understand that early, we can understand the cause of that and then we can go out and minimize, reduce, get out there earlier and reduce the number of vehicles that are impacted and actually either do an over-the-air update, if we can fix it that way, or do a preventative maintenance type program for folks, which will be much cheaper than a field service action recall where you're replacing components and modules, et cetera. So there's a lot of advantages through that connected data that we'll be able to run through warranty -- the warranty system. That's more on the physical side. On the software side, we'll be able to understand, when things are an issue much earlier and we'll be able to fix them through over-the-air updates, which will be a much lower cost as we move forward.

Ryan Brinkman:

Very helpful, thank you.

Operator:

Good day, everyone. My name is Gary, and I will be your conference operator today. At this time, I would like to welcome you to the Ford Motor Company First Quarter 2024 Earnings Conference Call. All lines have been placed on mute to prevent any background noise. After the speaker's remarks, there will be a question-and-answer session. [Operator Instructions] Please note this event is being recorded. At this time, I would like to turn the call over to Lynn Antipas Tyson, Executive Director of Investor Relations. Please go ahead.

Jim Farley:

Thank you, Lynn. Hi, everyone, and thank you for joining us. The cornerstone of Ford+ is pretty straightforward, a more resilient business model, higher growth, higher margin, and more capital efficiency. And I would say, quarter one had a lot of great green shoots in that plan. It sets us up for a very strong 2024 and beyond. Before John goes through the quarter, I wanted to highlight four key strategic areas, how our growth drivers are changing, our progress in quality, the resilient Ford Pro business, and what we're learning on the electrification journey in quarter one. On growth, the portfolio changes we made and the restructuring we've done in our geographic footprint has really paid off for Ford. Several years ago, we normally would be reducing our volume and our mix and having good news on pricing. What's changed in the last year, and especially in Q1 you could see, is our top line and bottom line profitability are increasing, driven by improved volumes and mix. And we're actually seeing pricing headwinds. And that new portfolio and geographic footprint is really tremendous to see at Ford. There is no better example for this than the portfolio changes we've made in our truck and van business. Ford is the number one best-selling pickup manufacturer in the world. And our Ford Transit Cargo Van is the best-selling in the world. It's now our second best-selling nameplate at Ford. And our midsize Ranger, not our most affordable pickup, is a third best-selling vehicle at Ford. And together with the Everest makes up our profits outside of China, North America, and Europe. It's an incredible new franchise for Ford. These changes in our portfolio at all different sizes and price points in the truck and the van business has really played to Ford's strength. And it doesn't stop there. Our growth drivers are diversifying. We now have a vibrant software business and physical services business led by Ford Pro. You don't need to look very far beyond our mobile services. An example, Ford now has 3,500 or more remote service vehicles in our fleet globally. And last year, we did 2.4 million remote service experiences, both remote service and pickup and delivery. 40% of that was for Pro and 60% was for our retail business. Ford now has more than 700,000 paid subscribers for software. That's up 47% year-over-year. It's capital efficient, and the gross margins are more than 50%. Our quality is making real progress. Kumar and the team have really focused on key areas. Our '23 model year, three months in service, initial quality is 10% better than the previous model year. And we're seeing our current model year that we're selling for several months, another 10% improvement. That should put us in the middle of the pack. And many of our vehicles start to lead their segments in initial quality. But to bend the curve on warranty costs and customer recalls, we're really focusing on our launches. We're past the Super Duty launch now and well into the F-150 launch, and we made a lot of changes to improve and bend that curve. On the F-150 and others, we've delayed the OK2Buy three to six weeks. We've taken a lot of new testing regiments. Actually, we ended the quarter with 60,000 units in our plant stock, which hurt our first quarter but will benefit because we're shipping those now in our second quarter for all those quality processes. And what we're so far seeing is, we avoided about 12 recalls on F-150. And we're seeing the best performance on 3 MIS after a launch in a long time. And I'd like to be specific here. Normally, after a launch, we've seen about -- in the last five years about a 70% spike in our defects. The industry average is about 20%. And the Super Duty and Mustang launches were about that industry average 20% spike. And now, we're seeing with the F-150 even better performance at industry average. And boy, do we have a lot of launches in the second half to prove out this new launch process. What we're going to see long-term is fewer recalls and lower warranty costs because of this new process. I'm really proud of the team's progress on quality. And we have so much more to do. I'd like to talk quickly about Ford Pro. I mean, look at quarter one. We made $3 billion. That's how much we made the whole year in Pro two years ago. We're growing revenues, EBIT, EBIT margin, we're growing our volume. Our attach rates for high margin software and physical services are improving. And when you ask yourself, why is this different? Why would this business -- why would these profits be more resilient than our retail business? It comes down to three things. First is, the diversity of our customer base. About a third of our Pro customers are small business. Another third are large companies and about 20% more is governments, all different kinds. And the diversity of those customers and all three of them are driving a white-hot demand for our vehicles and services right now from infrastructure build out, roadworks, 5G, onshore manufacturing and re-fleeting for our key government fleets. One out of four of those fleets are all Ford, and boy do they trust our company. But more than anything, it's the breath and freshness of our new lineup at Pro that's driving our profitability. We have the freshest lineup we've had in 20 years in Pro. We have an all new Super Duty, an all-new Transit from top to bottom. And we have an all new Ranger and five plus plants around the world. These new products are really attractive to customers. And beyond that, we have the most diverse Class 1 to 7 lineup in North America, our key market. And that adjacency sales are important because customers buy different kinds of vehicles for us in the same fleet. But beyond that, in those fresh nameplates, we offer the best choice. We have cabin chassis and cutaway versions of our vans, different wheel bases and heights, the same on our pickup trucks. And we also have the most choice in terms of upfitters. We have 500 different upfitters across Western Europe and the US that prefer to work with Ford because of our experience with them. And it doesn't stop there. We've designed all of our commercial vehicles with a multi-energy platform. And that allows our customers to choose electric, partial electric, diesel, petrol, whatever choice on powertrain that best meets their cost of ownership. No one has this kind of lineup in our business globally. The third key area is the diversification and the completeness of our software and physical services experiences for our customers. Now, 13% of Ford Pro's profits in the last 12 years make up these attached services. And it's a big change for us. And what's really driving that is our advantage in physical service. We have the largest repair network you can find of any brand out there. And we're widening that gap. We've added 700 commercial service bays in the last year and more than 11 very large service lead centers with between 50 and 200 repair bays that are open 24/7 for our customers. None of our competitors offer this kind of extensive repair network. And it doesn't stop there. We have over 2,000 remote trucks and vans doing remote service for our Pro customers, no brand can match that either. And now we have over 560,000 active software subscriptions for our Pro customers, that's up 40%. And that Pro Intelligence business took many years to build. It requires advanced electric architecture. It's a really hard moat to copy. Long list short, Ford Pro is in for a great performance over the next several years. What did we learn on electric so far? Well, as you know, we're number two in our home market and electric sales for the last couple of years. And boy, we learned a lot. Since Capital Markets last year, we continue to adapt to and evolve our spending and our investment ramp for battery plants and assembly capacity for our EVs to match customers demand. And more importantly than all of that, match the price expectations. We're retiming our launches and our capital spending. In fact, this year we expected to spend about $10 billion as a company. We've now guided $8 billion to $9 billion. We'll probably be on the low end of that range. And we're being very consistent about our discipline on profitability. We expect every one of our EVs to make money in the first 12 months. And that is a very disciplined process. 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, but more importantly, to take advantage of new battery chemistry and formats to substantially reduce the cost of the batteries for that vehicle. We'll do everything it takes to be profitable in the first 12 months of our vehicles. And what's our bet as a company? Well, it's pretty simple. We're going to bet on commercial work vehicles where we do really well, where we know the customers, where we can innovate for them like Pro Power Onboard with partial and fully electric vehicles. But increasingly, our bet will be on our new small, affordable platform developed by our team on the West Coast. Why is affordability so important? Well, when we look at the connected car data from our EV customers, we notice that people live in the suburbs, urban customers, they tend to drive shorter distances, and those more affordable vehicles, more approachable, and we believe that's where the adoption of EV will go the fastest. And we believe we can compete in segments of small cars and vehicles, more affordable vehicles in a unique way that's Ford. 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%. That's telling us that the more affordable we can make great product, the more attractive it is to these mainstream EV adopters. And the last thing I'd say is, we're learning about the importance of choice. Our growth in the first quarter in hybrids is a good example. We grew 36%, we think the full year would be 40%, we're now approaching 400,000 units of volume for our hybrid business. And we're now number three in hybrids in the US. It's a big advantage. We've been in the business for more than 20 years. 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 margins. With that, I'll turn it over to John.

Operator:

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

John Lawler:

So let me clarify a few things, Adam, on that, is that it's not an option for us not to be compliant. If you don't comply with your ZEV or your greenhouse gas emissions requirements, you can't pay fines. What happens is you can't sell, and that's consistent across the industry. So it’s -- that's for all OEMs. All OEMs are under those rules. And so there's really three levers that we have. We can sell EVs and hybrids, we can sell fewer ICE, or we can contract to buy credits from another OEM. And when we do contract to buy credits, we will disclose that as we did in our 10-K at the end of the year. And so those are the three levers. And we, I would say, monthly, if not weekly, are working to optimize across those three levers to drive the highest profitability and the highest cash flow for the company. So to continue to sell the ICE vehicles, we are going to need to sell EVs, and we're going to optimize across the profitability. Now the most important thing, as Jim said, is we need to get the EV business to stand on its own, to be profitable, and return on the capital we've invested, and then all the levers will be accretive to Ford and we'll be able to make it really positive. So that's what we're focused on, and that's what I intended to communicate earlier today.

John Lawler:

Yeah, we disclosed last year in the 10-K that we had purchase commitments of $700 million.

John Lawler:

In the first quarter, there wasn't anything material. And as we go through the year, if it's the right lever to pull, as I said as we're optimizing, we will report it.

Jim Farley:

Thank you, Adam. And first of all, thanks for your report on Pro. I appreciate you taking the time to understand the business. Look, I mean, we -- as John mentioned, we have to make tremendous progress on Model e. It's a huge drag not just on Ford but on our whole industry, even for pure-play EV players. So -- and we're very clear-eyed about that. We're very committed to transparency. A lot of OEMs will handle EVs very different. We won't. It's like if we had an unprofitable regional business and we rolled it up and it wouldn't be transparent to investors, we would never do that. We're not going to do that with EVs, and we're not going to subsidize our Pro and Blue business by not being transparent about e. It's how we run the business. I think investors should understand for me as a leader is that we're going to build a sustainably profitable EV business with terminal value. And we -- and it needs to return the cost of capital on its own and not be subsidized as I mentioned. And the real turning point for us not only is our flat cost in Model e this year, but most importantly, it will be the profitability in our next cycle of products. And I'm proud of the work that our team has done to make the adjustments in our capital spending and to make sure that all of our next EVs are profitable. And the evidence will be there. And I think that is the main drag on the company right now as it will be for the whole industry. Blue is in really good shape. I wonder out loud, Adam, if everyone really understands the resilience of the Pro business over time. We're very profitable now, but we believe that this business will be profitable and durable for many years to come. And I'm not sure the full market understands that personally. I know you've gone through the business, understanding the demand, and I encourage everyone to understand and ask us more questions about Pro. Thanks.

Operator:

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

Jim Farley:

Hi, John. We made a lot of capacity decisions several years ago on hybrid, and I'm very thankful we did. For example, we just radically increased the capacity for F-150 that we're launching now up to 25%. And it takes, as you said, it takes a long time for suppliers to ramp to that capacity. It's not assembly capacity that’s a constraint. So that 400,000 is almost double what we did a couple of years ago. That was all very intentional. And we made the decision a couple of years ago to actually make hybrid more pervasive in our lineup, and we're actually now going to -- we've now committed publicly we're going to offer hybrid on all of our vehicles across our lineup. And of course, the capacity has to be there. But if you look at the pricing premium today, which is maybe the most important thing to look for because now that contribution margin for hybrid is covering the cost of the hybrid incremental material cost, that's really a meaningful development. And I think we're in good shape. Of course, our hybrid business is different than the others. We're number three in the US. Number one and number two is of course Toyota and Honda. But our hybrid capacity is in trucks. That's where most of our hybrid sales are in North America. And we don't see a lot of competition so far for that business. We'll see over time. So I feel really good about the decisions we made several years ago about our capacity expansion. Will it be more than 40% growth? It could be. And I think we have flexibility. Now we have really meaningful scale for our suppliers. A lot of our competitors will be starting from scratch.

Jim Farley:

It's true. The demand on Pro is fundamentally different than retail. There's no doubt about it. Our retail customers are not re-fleeting. They're not doing roadworks and 5G infrastructure build-out. I mean, these are all fundamental drivers. The ambulance market in the US, the average ambulance is 15 years old. I mean, they've been waiting for Transits for a long time. We're now increasing our capacity, which is great. But I mean, we're oversubscribed on the new Super Duty 2:1. So I wish I could say we got that right. We didn't, but we are expanding capacity. I think -- and we have this freshest lineup that we've never had. So we have this kind of double opportunity. Our lineup is fresh. We have the most choice. At the same time, our customers are in kind of white-hot demand that we saw in retail two years ago during the supply shock. And we're doing everything we can to increase our capacity for our customers. It's very frustrating for them.

Operator:

The next question is from Ryan Brinkman with JPMorgan. Please go ahead.

John Lawler:

Yeah. So, thank you. So we have our stated policy, as you said, 40% to 50% of free cash flow. Our balance sheet is strong. Our cash position, we ended the year strong. We're at $25 billion this quarter when we talked about the fact that our guidance for this year went up. So when we look at it, we believe that right now in the transition point for the industry, we would rather invest in accretive growth opportunities. And we've always said that if those opportunities don't come to fruition, then we'll need to look at other allocation decisions that we would need to make, but we're not there yet. So we're continuing to talk about this as a team consistently. But we think at this point, the position we're at, we're comfortable with, given where we're at in the transition. We'll pay out the 40%, 50% of free cash flow. The last couple of years, it's been at the high end of that range. And eventually, as we continue to execute on our Ford+ plan, if those accretive opportunities to allocate capital for additional accretive growth aren't there, then we'll look at other ways of returning that cash to our shareholders.

Operator:

The next question is from Bruno Dossena with Wolfe Research. Please go ahead.

John Lawler:

Yes. So we are -- I don't know, it's a cliche, I guess, laser-focused on the -- all the costs around Model e. And for the year, when you look at -- well, let's just take it back up a second. The last couple of years, when you look at Model e, we've actually reduced the cost of our vehicles significantly. On Mach-E, we've taken over $5,000 of cost out, but the revenue keeps dropping faster than we're able to take out the cost. And we're being very thoughtful about what we're putting in as far as structural costs, et cetera. And so we're going to continue to work on driving every dollar of cost out of the business in the near term. And if the pricing stabilizes and we don't see these significant reductions continuing across the industry, then I think that you could probably start to see some of those cost reductions flow to the bottom line. But so far, the last 12 to 18 months, it's just been a continuous march down on the top line, which is offsetting any of the savings we've had from a cost standpoint. So it's in our control. We have to take cost out. We know that. That's what we're marching towards. 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. And as Jim said, 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.

John Lawler:

Yeah. So you look at that, most of the cost this quarter was up in Ford Pro and is all related to the material costs for our new product launches, both the Super Duty and the Transit that we launched in Europe as well as manufacturing costs for the increased volumes that we're bringing across, as Jim mentioned. So that's what drove most of the cost increase in the quarter. We're on track to deliver the $2 billion of cost reductions we talked about at the beginning of the year of raw manufacturing costs, material costs as well as freight and overhead. And so you'll start to see that really gain traction as we move through the second half of the year. And that's when you'll start to see it on our quarterly results.

Itay Michaeli:

Great. Thanks. Good afternoon everyone. Just two questions for me. First, on back to Pro. With a $3 billion outcome in Q1, can you maybe talk about the puts and takes, if I think about the rest of the year? And maybe should we think about the full year at the high end of the range? And then going back to Model e, the press release did allude to EV costs improving going forward but an offset from top line pressure. I was hoping you could help to mention what you're assuming for EV prices the rest of the year. And as volume kind of responds to these price cuts, is there a level where Model e can still become contribution margin positive over the next 12-plus months?

Jim Farley:

On Pro, obviously, Q1, Pro is really structured not necessarily on traditional demand like retail. It's actually deliveries. So our delivery volume in Q1, it's kind of -- it's a cyclical business globally and we have a lot of strong delivery in the first quarter just because of the contractual agreements with our customers, including fleetail. And when you look at the rest of the year, we have shutdowns. There are a lot of other -- we have launches. There are a lot of reasons why we feel really comfortable even with the strong result in the first quarter, that our guidance is still accurate for Ford Pro, given all the puts and takes. But we'll revisit in the second quarter. We'll see how pricing lands. We're going to be doing quite a bit of fleetail business this quarter as well as looking at locking in pricing for some of our large corporate fleets later in the year. So we're going to learn a lot more this quarter on whether there's tailwinds or headwinds on Pro.

Operator:

The next question is from Joseph Spak with UBS. Please go ahead.

Jim Farley:

I would say we're seeing real benefits to our customers and the company, I believe, long term in taking this new approach to launches. It also requires our industrial system under Kumar to work differently, to solve problems, to do different kinds of testing and that goes into kind of our longer-term lessons learned. And we're now really spending a lot of time on long-term durability, which is an area where Ford has standards but maybe didn't look to lead the industry, which we now look to. And so we're not going to change our approach to these launches. We think this new more measured approach with more physical testing, a lot more time for problem solving for our team is the right approach for the company in the midterm and long term. We do have some very significant launches coming up. We have Explorer and Aviator as you mentioned, which are high volume in both North America. And in China, we have a new wave, we call Wave 2 for the one-ton Transit in Europe, which is super profitable. And we're going to be building and launching the higher-end derivatives of that. We have the Bronco in China. I mean, I can go on and on. We have a freshened Maverick and Bronco Sport coming and even more models than that. So given all that complexity, it's actually even more important for us to take our time. And it may, like quarter one, it may mean that in some quarter ends, we may have some company stock and [plants] (ph) to make sure that we do the right thing on quality. So our earnings may be a little bit lumpy. We'll see how that works out based on this new approach.

Jim Farley:

It's a good question. So I would say mostly, it's taking our current internal combustion engines and adding new hybrid components and doing the engineering to fit that. Look at the T6 platform. We had the Ranger. We had the Everest, we have the Bronco. That's an obvious candidate. We have our full-size SUVs, candidate. We have the Explorer platform. And I think we're lucky. We have the right engines. Some of them may have to go to an [action] (ph) cycle engine from a normal combustion cycle. We have the components in our system from the hybrid, the torque splitting devices that -- we do have to up the investment in some capacities like our hybrid transmissions, but we've made the decision to do that already and that's in our spending plan this year. I think we're in really good shape. It doesn't require wholesale inventing new powertrains. But it does involve some engineering and investment in capacity. I would say kind of modest investments, mostly in the capacity side and some engineering.

Operator:

The next question is from Colin Langan with Wells Fargo. Please go ahead.

John Lawler:

Yeah. So what you saw in pickups for us as we came out of the end of last year into the first quarter of this year here in the US is we built up stock as we knew we were coming into the launch. So we built stocks of '23 models. And then we were selling those down in the first quarter throughout the majority of the quarter. And that's why you saw, to stay competitive with our competitors that had '24 year model pickup trucks, we saw some top line coming down. So we had higher incentives to sell the '23 model year longer through the quarter. You see now that our '24 F-150s are at dealers and selling. They're turning in about seven days. You'll see, as you look at the data, that our average transaction prices are going up and our incentive spend is coming down because of the '24 year mix. So that's a big part of what moved it for us on pickup trucks. And it was -- because we're such a big player, it was moving in [Technical Difficulty]

Colin Langan:

And what about inventory levels? I think some of the data is showing in the high 90s ending up, March kind of coming down to...

Colin Langan:

And just as a follow-up, maybe color on industry pricing. What is sort of embedded in your guidance at this point? And how is pricing holding up, I guess, sequentially because I think some of the comps are a little tough with launches year-over-year?

Colin Langan:

Okay. Thanks for taking my questions.

Tom Narayan:

Thanks for taking the question. Jim, we heard from your guys' commentary that EV prices those drops stabilized, then the losses would lessen. But as we've heard from some of the earnings yesterday, Tesla, GM, it seems like the opposite is happening. It seems like OEMs are trying to make cheaper EVs and that pricing is really only going to go lower. I guess, how confident are you that you could reduce EV losses in this environment if EV prices just keep on going down?

Jim Farley:

We launched our first small SUV this year in Europe in Cologne, our Explorer to two-row crossover. It's a relatively small vehicle certainly in the U.S. And you can expect, as I mentioned several times, that our new affordable platform will be used for most of our volume in their next cycle of product. What's really exciting for us is that we see an opening in the market. 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. We believe that we can be profitable at $25,000 to $30,000 so it's a huge opportunity for Ford. And what we're learning with BlueCruise and our Protiviti software on Pro is that all those vehicles will be great platforms for software and services. And so we're really excited about that new more affordable vehicle lineup, starting with Explorer in Europe this year.

John Lawler:

Yeah, we're seeing the same thing. We're no different.

Operator:

Our final question today is from James Picariello with BNP Paribas Exane. Please go ahead.

John Lawler:

It’s already factored in.

John Lawler:

Yes. We expect high single-digit growth in the Model e, primarily with the launch of the Explorer, as Jim mentioned, in Europe. When you look at the average selling price with the math, it's difficult because of the quarter. So we had quite a few units in stock. And as we saw the competitive pricing in the industry come down, we took our prices down, too. So then we had to take the prices down of all units in stock equally, and that was about $300 million of impact there. So when you look at the tenth of revenue for the quarter for Model e, you need to add that $300 million in, if you want to do the math based on the wholesales in the quarter.

John Lawler:

Yeah. So majority of them are going to be towards the second half. I'm really encouraged by the progress that Kumar and the industrial platform are making around the design changes. And those design changes are trying to be implemented as we get the new model year changeover in the second half and as we bring vehicles online in the second half. So that's one area where I've seen tremendous progress by the Ford teams. They're working on those design reductions to come through. The other area we're seeing progress is in manufacturing, and Bryce and his team as they're working to drive efficiencies to help offset the increases we have this year based on the contract that we signed last year. So in both areas, I'm seeing green shoots there. And Liz is doing a really nice job on the supply chain side as well. We've got better systems and tools and processes. We're working more collaboratively with the supply base. She's changing the culture. And so across all three of those areas in the industrial platform between what Kumar is doing, leading the team with Bryce and Liz, we're seeing green shoots, and we're confident on the $2 billion this year, but mostly timed towards the second half.

James Picariello:

Thanks.

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.

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]

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

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.

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?

Jim Farley:

Including Pro.

Jim Farley:

Anything else, John?

Adam Jonas:

Thanks, John.

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.

Adam Jonas:

Thanks, Jim.

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?

Marin Gjaja:

Yes. I think what we're seeing with our dealers is they've been making margins comparable to their ICE vehicles in the last year. And in '21 and '22, we're actually doing better than their ICE vehicles when pricing was really strong. So we feel really good about making sure our dealers are making money on this and are making investments for the long-term. But I think that's something that we monitor closely. I think just building on Jim's point quickly, I would just say the big difference for consumers is they make that 1 choice every few years, whereas the Pro customer is changing their fleet, consistently buying lots of vehicles, and they test and they learn what the TCO difference is that total cost of operation.

John Murphy:

Jim, just one follow-up. I mean, you reported to a rumor to be doing a two-week tour to your dealers, around your different dealers. I'm just curious, I mean, some of them are happy, some of them are annoyed at the EV stuff. What is the general message going to be as you're going around to the all-important channel and trying to get the troops in line and everything moving in the right direction in the distribution channel?

John Murphy:

Sounds good. Thank you very much.

Rod Lache:

Hi, everybody. Jim, you said that you're discovering that the adoption curve for EVs is a bit shallower, but we're still seeing $5 billion to $5.5 billion of losses in Model e, which implies that structural costs are probably higher in 2024 than 2023. So it sounds like you're committed because you see the ultimate benefit and maybe also a little bit because there isn't much choice. So ultimately, the question is, can you control and commit to when that business reaches breakeven, either through stronger demand or lower spending? Because from here, $5 billion improvement is pretty meaningful. Or do you have to do that because of the trajectory of ZEV and EPA and all the other things possibly exceeding where consumers are?

John Lawler:

Yes, the biggest issue we have in our Gen 1 vehicles, of course, is that the revenue collapsed and they're not optimized from a cost standpoint. We put them through very quickly to get to market and you're seeing that flow through. But I think, Rod, part of what you were getting at is that we have no choice. And we will continue to work on improving the cost structure of the Gen 1 vehicles. And as Jim said, our Gen 2 vehicles we won't launch unless we can get to a profit and a return on that capital that we're investing there at the pricing environment that we now understand is reality. So yes, it is very much the mother of all optimization modeling and work around the balance between how many EVs we sell because we talked about the compliance benefit of that. For every Lightning, we can sell 12 ICE vehicles. We can sell a number of ICE vehicles with every Mach-E we sell, and so there's that balance. And then there's the balance of what we need to sell from the ICE standpoint and how we can improve with HEVs there, and that's a benefit, too. But there's also, and you'll see that in our K tomorrow, we are buying credits as they're available. So we have to optimize across all three of those frontiers and that's what we're working on right now. But we know that we have to have this electric vehicle business stand on its own and be profitable because we know that there are competitors out there. We talked about that the Chinese as well as Tesla that are profitable, and we have to cross that fulcrum and get there. And that's what our goal is. So it needs to be a benefit of profitable business, return on the capital plus the compliance benefit that we get from those.

John Lawler:

It's about 40% last year and 40% of our CapEx this year and is EV.

John Lawler:

Absolutely.

Rod Lache:

Can you commit to breakeven at a certain point that you said before that the Gen 2 vehicles come out in 2026, is that kind of the time line for closing that $5 billion? And then just as a follow-up, I think you're saying that you've got line of sight on warranty coming down. Will we see the variable cost disadvantage that you've highlighted in warranty and material starting to come down this year?

Marin Gjaja:

Yes, I don't think we're prepared right now to commit to a specific timing on when we're going to be positive EBIT. We are going to expect to see improving gross margin quarter-over-quarter over the course of the year. John mentioned some of the levers we're starting to pull, and we will continue to adjust to the market realities. We've changed our production. We have increased C&I as need be to address our inventory issues. And we're going to keep working on our cost. We've taken 4,000 to 5,000 out of the BOM on Mustang Mach-E since it was launched and 2,000 to 3,000 out of Lightning and the team continues to work. But the market is turned and it's going to be a challenge. And I don't know that we can commit because we don't know exactly what's going to happen in the market. In terms of warranty costs, our Generation 1 vehicles, as we mentioned earlier, have been incredibly valuable for us to learn about a set of the issues around batteries and thermal obligation. And we will continue to work on that to lower our warranty costs dramatically for Generation 2, but we've got to deliver that in partnership with Kumar and the industrial platform.

Rod Lache:

Got it. Okay, thank you very much.

Dan Levy:

Hi, good evening. Thank you for taking the questions. I want to go back to Pro and your -- the guide that you have for this year is already in line with the mid-teen margin guide you provided at your CMD last spring. So really the question is, how sustainable is this earnings stream? And specifically, I think you've had something like $7 billion of price tailwind. Last year, I think $11 billion if you aggregate over a two-year stretch. I know this is partially driven by new product, but what is the sustainability of these very robust price tailwinds you experienced?

Dan Levy:

Great. And then as a follow-up, John, I want to go back to your comments that you just mentioned a second ago on the industrial costs. And specifically, I think at the CMD, talked about a $7 billion cost disadvantage versus your competitors in Blue. So how do we contextualize the cost improvements that you're adding now versus the $7 billion? I mean, is it safe to say that now this journey on sort of narrowing that gap is starting? Or is it still just still a lot more work to do? Just help us understand the path to narrowing that cost gap versus your competitors' inflow?

Kumar Galhotra:

Yes. Thanks, John. Well, this year, we're starting very differently than '24 than '23, for example. A couple of fundamental different things. Last year, we had a lot of inflationary pressures and claims from our suppliers. Those have eased very substantially and are going to help us deliver the $2 billion that John talked about. The second thing is the supply chain is much more stable. That allows us to run our entire system much more smoothly and helps us remove a lot of waste. It also reduces a lot of our freight cost because we've been doing a lot of premium freight last couple of years so that will help as well. And in terms of material, we're attacking it in like 3 different ways. One is where our designs are not efficient, so I want to give you a bit of color on what those are, a couple of examples. In one of our vehicle lines, we were using certain aero shields for fuel economy and the fresh eyes Kaizen review internally and some benchmarking, the team came up with a different way of delivering the same aero and save $40 per vehicle. So that's equivalent to about $10 million per year. Another category is where we are providing certain features to our customers where they're not finding a lot of value. And connected vehicle data here is very important because it helps us see what we're providing, whether the customers are using it or not. So one example is an auto part feature that lets the customer parallel park automatically. Very, very few people are using it. So we can remove that feature. It's about $60 per vehicle, another $10 million per year. We're doing very extensive benchmarking for our manufacturing, both internally because we have lots of good ideas within our system and externally at a station-by-station level. So just recently, one of the teams completed analysis of about 50 stations and saved about $8 million. And I already mentioned the freight. So these are the kinds of very robust ideas we have in the hopper, along with less inflationary claims, along with a stable supply chain that's going to help us close that gap that John mentioned and save $2 billion this year.

Operator:

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

Kumar Galhotra:

It's just fundamentally the things I talked about. We have a very robust hopper of ideas that we're very busy executing. Stability in supply chain, removing a lot of waste, and freight cost. So we spent a lot of money, all of us did, in premium freight. We're starting to see in fourth -- third quarter and fourth quarter a much more stable supply chain that allows us not to spend that premium and bring those costs down in 2024.

Emmanuel Rosner:

Thanks so much. Just a quick follow-up on this. The -- should we -- will these things take time to play out? I guess I'm looking at your fourth quarter walk and mid-teen freight was still like a $1 billion headwind. So curious if you would need a number of quarters and then it would be a bit more back-end loaded? Or if we could sort of like turn on the switch and see some of these benefits in 2024? And then secondly, curious about your thoughts about the volume outlook for this year, especially for Ford Blue. I think some of the inventory days are sort of like towards the higher end of what you've historically been comfortable with it. So I'm wondering where you see volume growth for this year.

Marin Gjaja:

And that portfolio is going to be freshened or new by the year-end.

Operator:

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

Jim Farley:

On the retail side, I'll ask Marin to answer that. On Pro, absolutely, our EV sales will grow not only because we're seeing more interest because the cost of ownership is advantageous for some, but we're also expanding in Europe quite a bit our electric offering with our two Transit vans coming online. And so that will definitely -- and there are a lot of city closures and other kind of regulations in Europe that's driving adoption for electric vehicles, especially vans specifically. So yes, we'll have very robust growth in our EVs for Pro.

James Picariello:

And John, I know you touched on this already but are supplier cost reductions a core component of the $2 billion in savings for the year? Just wondering how commercial negotiations have progressed? And are there any areas that stand out in terms of opportunity?

Jim Farley:

So design, labor and freight, yes primarily.

Operator:

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

John Lawler:

Yes. So I think it's clear, given the dynamics in the marketplace and the way the top line come down significantly since we had put that out there that the 8% is not on in the 2026 time period. So I think that's clear. I don't think anybody believes that by '26, we can bridge from here to 8%. It's going to come down to launching our next generation of vehicles and improving the contribution margin, gross margin, as Marin has said, on the first generation as we go through the year. But Marin, do you want to add more color to that?

Ryan Brinkman:

Very helpful. Thank you.

Operator:

Good day, everyone. My name is Gary, and I will be your conference operator today. At this time, I would like to welcome you to the Ford Motor Company Third Quarter 2023 Earnings Conference Call. All lines have been placed on mute to prevent any background noise. After the speakers’ remarks, there will be a question-and-answer session. [Operator instructions] Please note this event is being recorded. At this time, I would like to turn the call over to Lynn Antipas Tyson, Executive Director of Investor Relations. Please go ahead.

Jim Farley:

Thank you, Lynn. Hello, everyone, and thanks for joining us today. I wanted to start by thanking the Ford team who worked tirelessly and creatively over the past several months to reach a tentative agreement with the United Auto Workers. I’m so pleased for our employees. This week, I was able to visit each of the struck plants. I was impressed by their preparation for start-up, and the feeling I got is people just want to get back to work. Once the deal is ratified, we will provide all of you a deeper look at the contract and its impact on our business. Right now, we’re focused on restarting three important assembly plants, calling back more than 20,000 Ford employees to work, supporting our suppliers as they restart, and shipping lots of Super Duties, Explorers, and Broncos to our customers. It’s been a challenging situation, for sure. Matter of fact, our business is never short of challenges, especially right now with the evolution of the EV market and new global competitors from China, as well as the technology disruptions. But I am more excited and motivated than ever. Our team is making tremendous progress every day toward building a Ford that thrives at the intersection of fantastic and iconic vehicles, terrific brands, and especially software and services. We are deep into the development of our future software platforms, which provide the foundation for rapid innovation and a profitable new software and services business and constantly improving experiences for our customers. We believe Ford+ is the right strategy to win in this constantly evolving industry transformation. We’re building a more dynamic and less cyclical company, and we are nowhere near peak profitability. We have the right team and talent, and we are in the process of building a culture of excellence and execution. In a moment, John will detail the quarter, which I would call mixed. The strength of our products and revenues and businesses defined definitely came through in our results. But at the same time, we were never negatively impacted by the strike, and our cost and quality remain a drag on our business. Now, last week, we made some important leadership changes. Kumar Galhotra as COO will now control the key levers for transformative change in our industrial system, powertrain, ICE, and hybrid products, vehicle hardware engineering, cycle plan, quality, supply chain, and manufacturing, and work in tandem, of course, with Doug Field, chief EV, digital, and design officer, to move us forward. I believe this will accelerate our progress on cost and quality, and I hope we get into that in the Q&A. These are my top two priorities. Overall, we see – we are seeing the clear benefits of creating three distinct growth businesses now with Ford Blue, Model e, and Pro. The story of Ford Blue comes down to product strength. Incredibly strong brands like Mustang and Bronco and Raptor, they have durable pricing power and real choice between gas and hybrid. Ford is America’s best-selling brand now through three quarters, even with the effects of the strike, and we have a wave of new products coming in the next few months, the new F-150, the Ranger, a brand-new Explorer, and Expedition and Navigator. In fact, close to 60% of our volume and revenues in the U.S. will be new and refreshed next year. I am so thankful we have kept our foot on the gas to freshen our ICE and HEV products as we enter a changing market. In Europe, we bring out new versions of Puma and Kuga or high-volume gas and hybrid SUVs, and the Ranger pickup and our Everest SUV that’s based on it continued to gain share in international markets. So, bottom line, Ford Blue will be strong and a growing business for years to come. We also remain bullish on Model e and our EV future, but clearly, the market is moving – is a moving target. I’m optimistic because customers are smart and are rational, and for many of them, EVs are a great choice. I’ve been spending a ton of time in our product development center with both Doug Field and Alan Clarke, and you should see the Gen 2 and Gen 3 EVs we’re working on. Our Gen 2 all-new full-size pickup truck, for example, is one of the most thrilling vehicles I have ever seen in my career. Let me be specific. Stunning performance like no truck has ever performed, building unexpected innovation for truck customers far beyond the normal truck attributes, a super flexible cabin that feels like a lounge or a tiny office. Take the wheels off this truck, and it’s still a mind-blowing product and a digital experience that totally is immersive and personalized. I’d take this truck seven days of the week over a Cybertruck. A great product is not enough in the EV business anymore. We have to be totally competitive on cost. Tesla actually gave us a huge gift with a laser-focus on cost and scaling the Model Y. They set the standard, and we are now making real progress on our second- and third-cycle EVs that are in the midst of being developed today as we get closer to the introduction. While our Gen 2 EVs were targeting to deliver an EBIT margin comparable to ICE by 2026, the dynamic changes in the market, pricing, adoption rates, regulations are forcing us to further reduce the cost of our EVs. The key levers to deliver this competitive cost structure are scaling, vertical integration, and batteries. So, let’s double-click on each of these three. On scaling, this is much more than building new facilities or scaling high-quality batteries or thermal propagation. We’re leveraging digital prognostic capabilities in our manufacturing lines to improve quality. We are also reducing complexity, and we are optimizing our vehicle design and engineering for manufacturability. Yep, we’re designing these vehicles for our manufacturing team. On vertical integration, this is the most fundamental change. We are insourcing batteries, inverters, scaling production of our drive units and gearboxes, and designing and producing unit castings in-house at Ford. In addition, on our next-generation utility vehicles, vertical integration will increase by nearly 50%. This level of integration, along with the new zonal electric architecture and designing in-house modules and battery cell to structure, will allow us to significantly reduce material cost. Now, none of this will be easy, and it has some risk, and you’ve seen our competitors struggle as they build out and ramp up these capabilities. So, we are so glad we started years ago on this journey. And finally, batteries. They’re the single biggest cost component of any EV. Our more energy-efficient Gen 2 products, we use extreme aero to get the very smallest batteries possible for competitive range. And with our LFP batteries, we’ll have the lowest or one of the lowest-cost batteries assembled in the U.S. Our overall EV priorities are very clear, disciplined capital allocation and investment that drives profitable, high-returning and enduring EV business, and we will constantly balance growth, scale, and profitability. These great EVs will be paired with modern shopping and buying experiences that are transparent or have non-negotiated pricing and a streamlined checkout and delivery that will come to life early in 2024. And this is also a significant cost reduction. I saved Ford Pro for the last because it’s a massive driver of Ford’s growth and profitability. Our competitors seem to be trying to cut and paste our strategy, but the reality is the moats we’ve built over many decades for our Pro business won’t be easy to cross. The network of literally thousands of local outfitters across Europe, North America, and China and customer-driven engineering we have for vehicles like F-Series and Transit is formidable across all those regions. Our commercial order banks are healthy. This may be a surprise to everyone. We see a large backlog of infrastructure projects. Thank you, 5G and roadworks. And we have very loyal customers. Fleet orders, for example, for the 2024 Super Duty are coming in faster than last year’s orders, and we expect strong demand to continue as more customers recognize what Ford has to offer in total. In addition to the new Super Duty, we are preparing to launch the new Transit Custom in Europe. Think of this product as a Super Duty for Europe. It’s a best-selling vehicle in the UK, not the best-selling commercial vehicle, the best-selling vehicle and the leading one-ton van in Europe. And it’s a key profit pillar for Europe and one of the reasons why we stayed there. When it comes to software and services, Ford Pro is the tip of our digital spear. Customers know and trust our vehicles, of course. And we’re building on this with software-driven services that provide businesses with data insights, vehicle access, even vehicle control, and functionality. This helps them drive productivity and efficiency in their fleet operations. And I’ve asked Ted Cannis to also lead our large and profitable aftersales business. His focus will increase our post-warranty service business and profitability. He’s already adding mobile service capability and delivering an effortless experience to both commercial and retail customers. There is so much upside in this aftersales, parts, repair, and collision business, especially with Ted leading it and for Ford Pro. I want to briefly touch on China where our strategy to turn our business around is gaining traction. The restructuring of our EV business there is nearly complete, and the internal combustion engine business is now profitable. We are now expanding China’s role to a profitable export hub, including Ford Pro. We’ve already exported a record number of vehicles so far from China to markets like Mexico, South America, and Asia. There is so much more opportunity ahead for us. Yes, the China market is extremely competitive in the middle, but Ford can succeed by staying asset-light, partnering where it makes sense, and competing in very narrow segments where we can clearly win like commercial vehicles, off-road vehicles, large SUVs, and Lincoln. Finally, I’m so pleased to have Peter Stern on today to share more about our newly formed Ford Integrated Services, which will create and market valuable software-enabled customer experiences across Blue, e, and Pro. Now, this is transformational because the cornerstone of Ford+, the plus in our plan, is creating incredible customer services and experiences enabled by not just hardware but software. There’s simply no one in the world better able than Peter, who is the driving force behind services at Apple, to build this strategically vital business for us. Peter, over to you.

John Lawler:

Thanks, Peter. Through the first three quarters, we delivered 9.4 billion in adjusted EBIT, a strong result that is indicative of our underlying run rate of the business. Now, given our year-to-date performance, we were on track to comfortably deliver our full-year adjusted EBIT guidance of 11 billion to 12 billion. With that said, the UAW strike created significant uncertainty regarding our full-year results, and even though we have reached a tentative agreement and our employees are starting to return to work, we have withdrawn our guidance for the year. This is in part because of the continued disruption in the industry with the ongoing strikes, the follow-on impact to our shared supply base, the ramp up of production in our plants and at our supplier partners, as well as other ancillary effects. And to provide some context, in the third quarter, the strike had an EBIT impact of roughly $100 million, and so far, the strike has trimmed about 80,000 units from our plant. This would reduce 2023 EBIT by roughly 1.3 billion. Once we have a ratified agreement and begin to ramp operations, we will be in a better position to update you on our full-year guidance. So, let me now turn to our third-quarter results, which was once again – it once again showed our Ford+ plan in action and the benefits of our diversified portfolio. Our leading Pro business and resilient ICE and hybrid products continue to deliver solid results that more than offset the investments we are making in our EV future. Our revenue remains strong, up 11%, reflecting a product lineup that resonates with customers, driving higher net pricing that remains resilient. Whole sales were flat, dampened by supply constraints affecting both F-Series and Transit production, additional unit holds for quality assurance, and the first UAW work stoppage for Ford in almost 50 years. Adjusted EBIT in the quarter was 2.2 billion with a margin of 5%. Both improved year over year. However, costs increased, underscoring the fact that we still have more work to do, especially on warranty expense and material cost. Adjusted free cash flow was 1.2 billion in the quarter, down year over year, driven by unfavorable working capital. Through the first nine months, we generated 4.8 million of adjusted free cash flow resulting in a conversion rate of 51%, in line with our target range. Our disciplined capital allocation continues to drive strong free cash flow, which will be critical as we adjust our spending to match the pace of EV adoption. We ended the quarter with over 29 billion in cash and 50 billion in liquidity, one of our strongest quarters ever, and this includes the new 4 billion contingent liquidity facility we put in place in August to help withstand uncertainties in the present environment. Now, turning to our customer-focused segments. Ford Pro generated EBIT of 1.7 billion and delivered a strong double-digit margin of 12%. Both metrics improved, driven by our Super Duty and Transit franchises that helped deliver a 16% improvement in revenue that’s reflecting strong demand and continued pricing power. In addition, we are launching a new version of our flagship product in Europe, the Transit Custom, which, along with the new Super Duty and F-150, will give Pro its freshest vehicle lineup in years. We also continue to see strong growth in both our new software subscriptions and mobile repair orders, up roughly 50% and 200%, respectively, for the quarter. Regarding Model e, our EV start-up incurred 1.3 billion of losses in the quarter, reflecting continued investment in our next-generation products and a more challenging market for our Gen 1 products. Given the dynamic EV environment, we are being judicious about our production and adjusting future capacity to better match market demand. For example, we have taken out some Mustang Mach-E production, and we are also slowing down several investments, including making a decision with SK On to delay the second BlueOval SK JV battery plant in Kentucky. And we have also said we are evaluating our BlueOval Battery Park Michigan plant to determine the best path forward. In fact, all told, we have pushed about 12 billion of EV spend, which includes CapEx, direct investment, and expense. The ultimate success of our EV transition will be driven by our Gen 2 and Gen 3 products, which will be cost-optimized and guided by the learnings of our first-generation vehicles that are currently in the market. Turning to Ford Blue. In the third quarter, we delivered EBIT of 1.7 billion, up 300 million, driven by lower commodity costs and higher net pricing that more than offset higher warranty costs. The higher warranty was driven by recalls and higher per unit repair costs due to inflation. Importantly, Blue continues to be profitable in all regions with a strong, fresh portfolio poised for continued global success. Hybrids also continue to be a success, a strategy we’ve had in place now for almost two decades. We are the clear leader of the hybrid pickup truck segment in the U.S, thanks to Maverick and F-150. We expect to extend its lead next year when we introduce our refreshed 2024 F-150 with more advanced technologies. The F-150 Powerboost hybrid not only offers a 25% improvement in CO2 emissions, but on average, they have more – they are more profitable than our highest-volume gas powertrains. And hybrids aren’t just limited to North America as we are launching a Ranger for Europe and IMG next year. Ford Credit generated EBIT of 358 million. As expected, our results were down year over year, reflecting lower lease residuals and financing margin and the non-reoccurrence of derivatives market valuation gains. Credit loss performance remains strong and below our historical average but continues to normalize. Auction values remain strong but are down sequentially, in line with our expectations. Finally, turning to software and services. We continue to see sustained quarter-over-quarter growth in subscriptions across all our business segments and, most importantly, at gross margins of around 50%. And our next-generation digital platform will enable a step function change in capability, allowing us to scale and deliver value to both our retail and commercial customers even faster. And as Peter highlighted, as we continue to build out our capabilities here, we expect it to be a significant source of future value creation. In closing, there’s obviously a tremendous amount going on in our business, but I’m confident in our Ford+ plan and the underlying run rate of our business. So, that wraps up our prepared remarks. We’ll use the balance of the time to address what’s on your minds. Thank you, and operator, please open the line for questions.

Adam Jonas:

Thanks, everybody. So, John, I know you pushed out the 12 billion of the direct and capital investment and other expenditure on EVs, but I guess I’m saying – I’m interpreting that as just temporary, that you still plan on spending it. So, my question is, how long can you keep allocating 10 billion a year, round number, to EVs?

Jim Farley:

Hey, Adam, thank you for your question. I just want to emphasize the importance of our Gen 2 and Gen 3 products because they’re very transformation in our profitability in EV. You know, we’ve learned a lot in Gen 1. We’ve reduced the material costs. We’ve got the learning loop on the software. We learned how to scale batteries. We have the LFP battery now. We’re starting to ship to customers, but there’s only so much we can do on Gen 1. On Gen 2, I said – as I said, we have a totally different approach from aero vertical integration designed for manufacturability. And there’s a lot of other things we can do beyond allocating less capital to battery plants, for example. We’ve learned a lot about derivatives like rally. We’re going to push services a lot more like Level 2+, Level 3 autonomy. And we really plan on even redesign or improving the scale of a components by working with other companies. And the other big breakthrough is going to be which we’re designing in parallel the Gen 3 products where we use the battery as a structural member of the vehicle. We go to low-cost sourcing, go to smaller vehicles. We maximize unit casting even more than we are and radical cost reduction in our distribution. I think the other thing that’s important to understand about Ford’s strategy on EVs is Pro. We actually followed a very different strategy for Pro using a multi-energy platform. So, we didn’t bet on pure electric vehicles for Transit, for example, and we’re now launching the Transit Custom in Europe, and that has diesel gas, and it will have eventually hybrid and pure electric. That’s a very different bet in our Pro. We’re even starting to export Pro vehicles from China to develop markets around the world that are pure electric. And that part won’t change our product strategy.

John Lawler:

Yes. You want me to jump in, Jim?

John Lawler:

There’s added costs as you’d expect for the battery and the motors, etc. But if you look at – let’s just take F-Series, for example. If you take the hybrid on average, they have a higher margin than our highest-volume gas versions because of the mix and what we have in the vehicle and the pricing we can get for the hybrid technology and the fuel efficiency that comes along with that. And one of the things we learned about hybrid, because we’re executing very differently than our first-gen hybrids, is we have Pro power on board. We have a lot of other attributes that people are willing to pay for, like F-150 powering a jobsite or your house as back up energy. That’s another advantage of having those batteries that maybe some of our competitors haven’t had the same pricing power. The F-150 now, a hybrid, is up 40% year over year, and we think the new F-150 new hybrid will be 20% mix, and it may be the best-selling hybrid in the United States. So, our hybrid strategy is a little different than our competitors because the work cycle for our products are different, but hybrid has a really big place. We’re trying to challenge ourselves, Adam, to execute hybrids, so they do more than just propel the vehicle for pricing power.

Operator:

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

John Lawler:

Yes. So, Adam, that’s exactly right. One of the things we’re – sorry, John. One of the things we’re seeing is that it’s not just the quality issues which are an important piece of this, and I think Jim wants to comment on that. But we’re also seeing tremendous inflation from the dealers on the repair costs. And that’s driving quite a bit of it. If you look at the increase that we had in the quarter for the warranty on a year over year, the 1.2 billion, and say that about 300 million of that was inflationary costs and roughly 900 million was the issue with warranties. So, that’s what we’re seeing there. And the issue around the quality that’s something that Jim’s going to be going to cover here.

John Murphy:

That’s great. Maybe I’ll just sneak in one follow-up. You know, EV demand is not materializing quite as robustly as we were expecting this year. Pricing is a little bit down. Costs are going to be up with labor. So, I mean, as you mentioned, EVs are going to become more challenging going forward. But when you think about like a program or a product like the Explorer that we have, at least in car, where it’s launching in calendar year ‘25 as a model year ‘26, and you might disagree or agree with that, but that product is coming at some point soon. That was an EV variant and an ICE variant we had and we were expecting, and it would have been sort of an expectation that maybe you would have crossed out that ICE variant and just had an EV six months ago. But now, actually, things have switched in the other direction. You might actually cross out the EV and just keep the ICE. I mean, how are you making these decisions right now with sort of these tectonic shifts going on? I mean, there’s data. There’s consumer groups and all sorts of stuff, but they’re incredibly difficult and impactful decisions that you have to make. What is the process, Jim, that you’re going through on these powertrain decisions as you’re going through the product launches over the coming years in planning?

John Murphy:

It’s very helpful. Thank you.

Dan Levy:

Hi. Good evening. Thank you for taking the questions. I appreciate, Jim, the commentary that you gave on warranty and just cost more broadly, but I wanted to ask the question maybe in a slightly different way. This is, obviously, as you pointed out, a lingering issue. I think you said at the CMD earlier this year, it’s a $7 billion cost gap versus your competitors for Blue. What exactly is the line of sight or how confident are you that these issues can be turned around? Just because these have been issues for some years. And specifically, in the context of your pivoting to new architectures here where there’s obviously going to be some uncertainty on your end, what gives you the confidence or the line of sight to actually turn around these cost headwinds?

Jim Farley:

And I would just complement that in two ways. On quality, our real test for our commitment, talent, all things that John talked about came together in the launches of our most important products like Super Duty. And I am so confident in our tackling these systemic issues because of what happened on our recent launches. The team doubled down on testing. They did the extra work on supplier quality and readiness in the factory and really tested the vehicle for failure. And we did something that Ford maybe hasn’t done in the past. We held the vehicle until it was right. And in the case of Super Duty, that was $1 billion-plus decision. And that was proof to me this team understands that quality is our top priority. That message was sent throughout the company. Everyone got the memo. On cost, on EV, I’m encouraged because we’re designing from scratch, and a lot of the talent we brought in approaches that cost is a pride point for them in designing it in. The real test for us as a leadership team beyond quality is going to be bringing our material cost and negotiated parts price cost down on our carryover ICE vehicles. That is going to be the test, and we believe we have more than $1 billion of ideas already in the hopper for this year, for 2024. And we got to deliver it on those ideas. They’ll test our standards from rust protection and NHV. They’re going to test our standards. They’re going to test our parts release process. It’s going to be – but it’s us to execute.

John Lawler:

I think it’s different for each of the business segments, right? We’re continuing to see incredible downward pressure on pricing this year on the EVs, right? But Pro, really strong pricing power right now. As Jim mentioned in his prepared remarks, we’ve got really good strength in the orders coming in for the model year. You know, we’re a good ways through the model year, and the pricing is held. And then when you look at the fresh lineup we have on Blue, we’re continuing to see the pricing hold for the most part. Now, are we starting to see that there’s some pressure on pricing? Sure. And we said there would be, but it’s been more resilient than we thought this year. That’s for sure, especially through the third quarter. But affordability, we’ve talked about this before. Affordability is an issue. Right now, it takes a consumer about 14% of their monthly disposable income for a vehicle. Pre COVID and pre the inflation that we’ve seen, it was about 13%. So, we think it’s going to revert back to that, and then we think it’s going to happen over the next 12 to 18 months. And so, to do that, it would be about a net price reduction of $1,800. But we also believe that part of that’s going to come through the OEMs in lower prices. But it’s also going to come through dealer margins because dealers are still transacting at a much higher percent of MSRP than they have in the past. And so, it’s going to be both of those. Now, we expected some of that to occur throughout the year. So far, it hasn’t much. And so, I think you’re going to start to see that come through as we move into next year.

Rod Lache:

Hi, everybody. I wanted to ask a couple things on EVs. I think that certainly – I mean, I don’t think – you’ve been saying that the deflation that you’re seeing in EVs has been steeper than you assumed. But I – obviously, your original plan assumed some level of deflation through 2026. I think it was even price parity with ICE in some cases, and yet you assumed 8% margin in that time frame. Am I correct in those assumptions that your ultimate view was that you would get to price parity with ICE? And if that’s the case, why – what do you need to do in order to push harder? Do you need to actually reduce prices even below ICE in order to achieve your plan? Or do you need to achieve even greater – a greater price premium?

Rod Lache:

Okay. So, that’s still your expectation, that you would get to an 8% margin and you would have a cost structure that reflects price parity with ICE?

Rod Lache:

Okay. And just secondly, I’m assuming that you still view vertical integration and batteries and LFP is critical to achieving your cost targets. Just given all of the issues around that, can you just – and some of the pauses or delays that you’ve got on some of these plants, can you just give us an update on what the trajectory is to achieving those lower costs in batteries, and how is your plan changing?

Rod Lache:

Okay. Thank you.

Emmanuel Rosner:

Thank you very much. So, I appreciate your candid assessment of the EV business and as well as all the actions that you detailed in terms of trying to reduce the investment and losses in the near term. At the same time, you rightly acknowledged that impacting change – affecting change on the first generation is not going to be the easiest. You know, more change would come in Gen 2, Gen 3. So, any way you can just frame for us how much improvement can we expect during this first generation? You’re now running at something like a $5 billion annual loss on Model e. Not that long ago, a few months ago, you still had fairly near-term targets to bring that to EBIT positive. Obviously, a lot has changed. But then you’re addressing these changes with your actions. So, where does it go from here? Does it get worse? Does it get better? Can something be done before Gen 2 and Gen 3 in terms of improving the losses?

Emmanuel Rosner:

Thank you. And then a quick follow-up on Ford Pro. Obviously, extremely strong business and very solid quarter, but at the same time, there was a little bit of a pullback in both volume and mix and margin in the quarter. So, can you just go over the factors that drove this and the prospects in timing for normalizing back up?

Emmanuel Rosner:

Thank you very much.

Operator:

Good day, everyone. My name is MJ, and I will be your conference operator today. At this time, I would like to welcome you to the Ford Motor Company Second Quarter 2023 Earnings Conference Call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question-and-answer session. [Operator Instructions] At this time, I would like to turn the call over to Lynn Antipas Tyson, Executive Director of Investor Relations. Please go ahead.

Jim Farley:

Well, first, mom, thank you for Lynn. Thanks to all of you for joining us on the May Capital Markets event, where we shared our vision to refound our 120-year-old American icon and create a Ford that thrives at this exciting intersection between great vehicles and digital experiences. Now the world is changing fast, but I have never been more confident in our Ford+ plan. As you've heard me say, our intention is to match this exciting long-term vision for Ford with boringly predictable execution quarter after quarter, year after year. And that's the biggest takeaway from our second quarter

Operator:

[Operator Instructions] Your first question today comes from Adam Jonas with Morgan Stanley. Please go ahead.

Jim Farley:

You're absolutely right. I would say, Adam, when Doug came on board and at the same time, we did a wider, especially Texas. And we really understood the BYD teardowns and even Changan, our partner in China. Our eyes were opened more than a year ago, and so we were fortunate that our new platform that non-semi are coming at a time when our traditional competitors have already designed and made their bets in the EV platforms. And I could tell you that, that moment was one of the biggest eye-opening moment in my personal career, where I realized we had completely changed our approach to platforms. The inverter technology, the efficiency in the system as -- of the vehicle, the massive complexity reduction and cost competitive reduction that we have to make in the second cycle products was just dramatic. The battery pack design that we see from our competitors is completely uncompetitive from what we saw and what we're now executing against. The gearboxes, the motors, how we thought about investment in braking systems and wiring systems, the diversity of battery chemistry like LFP, it was all just a moment when we all looked at each other and said, "We have to go left to beat the -- and compete with these competitors that make a really on EV." And so we're executing that. And as John said, Adam, the other epiphany was for us, and thank God we have Pro because it's come to fruition is the enormous cost but importance of upgrading the electric architecture so we could be a winner in spending software to the vehicle. This decision by Ford and the type of products to bundle new, simpler, more energy-efficient platform that compete in segments where we have a great reputation that we can still conquest with very simple top hat engineering and add to it an advanced electrical architecture where we can win the war of shipping software to the vehicle was our bet, is our bet. And we like our bet, and we think it's competitive. In the meantime, we learned about battery scaling, which is not easy in Georgia. We learned about how to build 10,000, 20,000 unit a month batteries in one facility in high quality. We learned about the thermal propagation that will protect our brands over time, and I'm very optimistic. However, in a place like China, you only have to the local our local JV partners' platforms because they are the best in the world in certain segments. Maybe not for a full-size truck or a large trial cross-sell. But for some segments, it may be perfect for us. So we're not changing strategy at Ford. We've always been on that strategy, including China.

Rod Lache:

I wanted to also ask a question about Model E. Just pushing out the EV targets, the volume targets make sense when we see contribution margins from volume being offset to additional price. But I was hoping that you might want to talk to us about kind of the longer term. What does it mean with regard to your 2026 targets? I'm glad to hear that you aren't fixated on two million units. What is your ability to adjust investment in structural costs when you have to make commitments to suppliers or to your infrastructure to be capable of hitting that? And are you still committed to the 8% margin target? A - John Lawler Yes. Rod, it's John. So we're not walking away from the 8% run rate in 2026. We've got several years to work that. It may look a little bit different than we shared at Capital Markets Day, but there's levers that we will. We don't necessarily have to spend at the same rate. Some of the battery factories to be flexible. The transition from components to electrical components is optional from a timing standpoint, so we can make those changes. And as Jim said, we've got the team working on that second generation of products, which is critical, and we have to work this in understanding whether pricing is settling and coming up with the right value equation. So we're not walking away from the 8% in '26, and we're going to continue to work on that.

Operator:

The next question comes from Dan Levy with Credit Suisse. Please go ahead.

Jim Farley:

Great question. I think how -- in general how we think about it is a year ago, two months ago, the industry thought of kind of this extreme hybrid and EV. What we now realize and being in markets like China, that there's an infinite number of decrease of electrification in between both of those. And the customers are very rational about buying an EREV versus a long-range PHAB versus a SERA hybrid for towing, customers are really acting pre rationally based on their duty cycle. So I would say a couple of years ago we decided to continue our hybrid investment in our heavier vehicles. And those hybrid systems are quite different, let's say, to Toyota Japanese OEM. And we have been surprised the popularity of hybrid systems for F-150. It's now north of 10% mix cost, and it's increasing. And what we've learned is that we have to tie. What the customer really likes is when we take a hybrid system that's more efficient in duty cycles, and then we add new capabilities battery like Pro Power Ford. We're seeing a lot in that combination of using the battery or something beyond just moving the vehicle. And that popularity, I mean we never thought we would be at 50% hybrid mix for Maverick. It was far beyond our expectation. And so we're just listening to the market. We believe that ICE customers, Blue customers don't want to be left behind. They want modern powertrains, and decarbonizing with them is just as attractive. That's one of the reasons why we separated the business because we want a Ford Blue and Pro. On Pro side, we're very lucky. We have a lot of great multi-energy platforms. So we have a lot of choices between electrification, partial electrification and ICE and the infinite number in between. The platforms are designed for that flexibility. So all I'm saying is you're going to see a lot more hybrid systems from us, but don't think of them in the traditional sense of an escape hybrid or Prius. They're probably going to come to light differently than the people think, and customers like that.

Jim Farley:

You mean capital deployment to EVs? Or can you be more specific?

Jim Farley:

I see. So we don't -- I want to be really clear about this. You -- all of you haven't yet seen our second cycle EV strategy or even the third cycle that we're working on, and I'm not going to tell our competitors about that right now. But I will tell you that it's very important to know that Ford strategy is not to build compliant vehicles that are very affordable for acquisition cost but lose lots of money. That's not our strategy when it comes to electrification. Our strategy is to make 8% margin irregardless of the price point, and we're going to allocate capital along those lines. So the pressure we're in ourselves is that we -- in future segments, we execute the product with rural efficiency and simplicity, and we upgrade the electric architecture for lots of software revenue and profits with great margins for all of our electric and our hybrid vehicles. And they all have to stand on their own in the segment report, and you will see all those results transparently. We don't create greenhouse grass credits between our businesses. We used to allocate capital. It was like $5,000 a vehicle. We're done. We're done with that. We don't play games like that. That's why we created these segments. And if we have a low-cost vehicle like some of our competitors have, it's not going to be a compliance set. It's on a vehicle that we convince ourselves we can make 8%. Maybe a lot of that is in software because we do need to build this installed base. I hope that's clear what our top-of-the-house strategy is and maybe how it's different than others.

John Murphy:

Just one really quick follow-up there, Jim. When you're talking about hybrids, are you talking about plug-in hybrids or hybrids that will qualify for the $7,500 IRA credit just that they have batteries that are large enough? I just wanted to make sure we understand that.

Operator:

The next question comes from Ryan Brinkman with JPMorgan. Please go ahead.

John Lawler:

Yes, Ryan. I think that in the absence of that question highlights the complexity and all the levers that we have to work with here, and so what I would say is we haven't changed our plan. What changed is that the adoption we're seeing with -- now that we've moved into early majority and the price premium of EVs has come off or normalized more quickly than we expected, and so that's impacting the profitability right now. But we're continuing to work through all of those levers as we build out the second generation of vehicles. And that path, that bridge that we had talked about, we had thought that prices would come down. It's sooner than we had thought. And it might be a little bit deeper than we had thought. But also as we get more and more confidence and gain more and more confidence in the products that Doug is creating and the combination of that product, both the physical hardware and the software and the experience and the ability to execute a completely optimized system of higher vehicle, that's giving us confidence in our ability to move towards a sustainably profitable segment in EV, starting with our second generation. So we're not walking away from that 8% target.

John Lawler:

All right. One thing, Jim. One of the other things that we are looking at, this is the future and this is about an installed base, and so we're also looking at these customers today in the acquisition. We know that once you bring them in, they're more loyal. We think about what the retention rates will be over second vehicle or a third vehicle. They come down over time. We also think about it from a modest software attach rate to these vehicles. And we very carefully look at the present value of that. And is it still positive given the acquisition cost of these customers to invest in the row? And so we watch that very closely. And we talked about that with the team. I'm not going to give you the specific numbers, but that's what we're thinking about. And I can tell you, if we get to the point where that lifetime customer value is there an acquisition cost, that's what we said. We won't acquire customers with any cost, and we know where those lines are for. And so that's one of the other things that we're using -- we're looking at this as we invest in our future.

Philippe Houchois:

I hear what you're saying, Jim, and it's very interesting. It makes perfect sense. But it seems now like compared to a few weeks ago, we saw you in Detroit, this is -- it's not a turnaround. It's not about, but it's quite -- it's like you had relation in BEV. And it seems like the last few weeks, I've shaken that contingents quite a lot. And I'm just trying to understand how much of this is a reaction to a more difficult environment to understand and how much is strategic. And you should have been strategic a while back because I look at competitors, whether it's Toyota or BMW, you have taken a more careful approach about this transition, the complexity and have a bit more flexibility. So just to sense the change of mood. Part of the question, if I do a simple math, the loss per car in Pro was about $32,000. There were 12,000 EVs -- sorry, in E. There were 12,000 EVs in Pro. Does it mean that there's a loss of about $250 million booked in Pro, which means that we've added, the margin will be even higher, something like 18%.

Jim Farley:

On the -- I'm not sure, but I think you're going referring to the Lighting price decrease, and I want to be really clear. We built about 24,000 electric vehicles at Ford in the first quarter. Our target for the quarter four is $100,000. That's four times. The ramp on F-150 in September is really significant. We always knew that we had to build an order bank that looked nothing like the original F-150 Lightning order bank because our production is tripling. And that's really critical for us strategically because we have a second cycle product coming, and it's going to be really profitable, and so that's really important to understand. We didn't cut the price the F-150 $100,000 to create an order bank for our current production rate. It's for a tripling. And oh, by the way, the F-150 price after the $10,000 decline is still above its launch price.

Jim Picariello:

Just looking at the guidance for Blue, now at $8 billion for the year. There's almost a $2 billion step-down, right, first half to second half. Can you just unpack what the key bridge items -- are there to the sequential step-down? I mean I know there's obvious sensitivity around what could be baked in for the UAW contract impact. But beyond this, how should we be thinking about for Blue volumes, pricing? Any other factors that stand out for the second half?

Operator:

This concludes the Ford Motor Company Second Quarter 2023 Earnings Conference Call. Thank you for your participation. You may now disconnect.

Operator:

Good day, ladies and gentlemen. My name is Gary, and I will be your conference operator today. At this time, I would like to welcome you to the Ford Motor Company First Quarter 2023 Earnings Conference Call. All lines have been placed on mute to prevent any background noise. After the speakers’ remarks, there will be a question-and-answer session. [Operator Instructions] Please note this event is being recorded. At this time, I would like to turn the call over to Lynn Antipas Tyson, Executive Director of Investor Relations.

Jim Farley:

Thank you, Lynn. And hello, everyone, and thanks for joining us today. I'd bottom line the first quarter like this. Our team delivered a solid quarter while making real progress on our Ford+ growth plan. And I hope that becomes a trend at Ford, boringly predictable when it comes to execution and delivering financials, but extremely ambitious and dynamic in creating the Ford of the future. For the quarter, we saw growth across all of our key metrics. In addition, Ford Pro and Blue were profitable in every region where we operate. Our balance sheet is strong. We ended the quarter with close to $29 billion in cash, even as we invest in growth and return capital to our shareholders. With each quarter that passes, I'm more confident and convinced and thankful we made the decision to create three separate customer-focused businesses. This has unleased clarity, speed and accountability across the company, not to mention a whole new level of discipline on capital allocation. So let me cover a few highlights. I'd like to start with Ford Pro. I know many of you were surprised at the true size of the Pro business in March when we recast our financials. Pro starts with marketing leadership in our vehicles across the world, tremendous scale and customer knowledge. And we're layering on top of that the future of our industry, an ecosystem of software and services and EV charging that we believe will be invaluable to our commercial customers. And this will unlock tremendous loyalty and profitable growth. Our strong order books in North America and Europe as well as all the demand signals we can see for Pro support our target to nearly double Pro's EBIT this year. In March, we launched the all-new Super Duty in Kentucky and Ohio. It has received tremendous reception, and it's going to strengthen a franchise that is already the market leader. Importantly, Super Duty is a platform for software and services that help our customers maximize their uptime, accelerate their productivity and lower total cost of ownership. I would also say the Super Duty launch is a good case study for the disciplined approach we're implementing across our industrial system. Simply put, we slowed the launch down, significantly increased on road and in plant quality testing, we dispatched a large and skilled launch team to our plant. We added test vehicles. We drove millions of miles to prove our durability, and we deployed new technology and artificial intelligence to catch issues. Basically, we put all the pressure in the system to find and then prevent future quality issues rather than speeding up the line to match our launch curve. Short-term patience, we believe that will result in long-term gain for our customers and yes, the company. In the quarter, Ford Pro extended its leadership in true commercial vehicle categories. Our share of the Class 1 through 7 truck and vans in the US increased by one full share point to 41% share. In Europe, we've already been the top commercial brand for eight years now running, and our share grew to more than 15%. We also maintained our EV strength in North America and Europe. In the US, E-Transit has already a 50% market share. In the quarter, we won a contract to deliver more than 9,000 E-Transit vans to the US Postal Service. Ford Pro's paid software subscriptions rose 64% in the quarter including higher revenue per unit software sales, like our telematics and charging software. With these and all the other initiatives, Ford Pro is developing into a resilient business, certainly less cyclical than the broader automotive sector. In Ford Blue, the team is focused on capitalizing on our red-hot product lineup. Our opportunity to smartly grow extends to valuable franchises with great pricing power, like the F-150, the new Maverick, the new Bronco and, of course, the Mustang. We'll grow our leadership position in pickups, in off-road, in performance and in SUVs with all new derivatives. For example, we just introduced the Bronco less than three years ago. And already, it's neck and neck in sales with the Jeep Wrangler, and it has higher transaction prices. We've also recently expanded the Bronco lineup with exciting derivatives, like the Bronco Everglades, the Bronco Raptor and the Bronco Heritage. Derivatives not only continued to contribute to our growth, but importantly, they can also drive higher transaction prices and higher returns. See, these derivatives often have 80% part commonality with the base models, but their contribution margin percents can be 30% higher with a two-fold increase in capital efficiency. We also have one of the strongest product years coming for Ford Blue. So it's just beginning. We have the new Escape, including New Hybrid. It's just arriving in dealerships now. Next week, we will reveal the all-new Ranger in the highly anticipated Ranger Raptor. That will be followed by an all-new Mustang and high-performance Dark Horse Mustang this summer. While I can't get into the details yet, we have more exciting news to share about two of America's best-selling vehicles, the F-150 and the Explorer later this year. And on top of all that, we have the Lincoln Corsair arriving at dealerships now. And of course, we just revealed the Lincoln Nautilus. Now, Ford Model e operates with a start-up intensity to build a profitable EV business with a differentiated portfolio and a differentiated customer experience. US investors now have true visibility into how Ford Model e's profitability strengthens over time, supported by volume-driven operating leverage, improvements in design and efficiency and, of course, lower battery costs. We're on track this year towards a contribution margin approaching breakeven in Model e and for our first-generation products to be EBIT margin positive by the end of next year. Wholesales were down in the quarter, which deleveraged our cost structure. Part of the decline was planned, as we have brought Mustang Mach-E production down for several weeks, so we could almost double the capacity, and we are now hitting that 35 jump per hour run rate in the plant. Volumes were also impacted by the lower output of F-150 Lightning. We did the right thing, and I congratulate my team many times by immediately stopping production and working with our battery supplier finding and then fixing the root cause of the fire that happened on the Ford property. We're now shipping Lightnings, again, taking new orders and increasing production to an annual run rate of 150,000 units, about double what we do now. We are also revealing -- we revealed an all-electric Explorer in Europe, which is now very well received. We made progress on Model e in the quarter, advancing our industrial system to scale EVs. The site preparation is already underway for our LFP battery plant in Michigan. And construction continues at the BlueOval SK Battery Park in Kentucky and, of course, BlueOval City in Tennessee. We now plan to transform our Oakville Assembly Complex into a Canadian hub of electric vehicle and battery pack manufacturing. We also continue to make progress towards locking in all the raw materials that we need to support our capacity targets in ‘26 and beyond. Model e is our center of excellence for technology, including software. A good example of that is BlueCruise, which continues to be hit with our customers. Consumer Reports rated it the top advanced, hands-free driver assist system on the market in the US, and that was just version 1.0. Our latest release, which we're OTA-ing into customers, is version 1.2. It automatically changes lanes with the tap of a turn signal, and it delivers a much more natural driving experience hands-free. We also launched BlueCruise in the UK, our Mustang Mach-E, and became the first OEM to gain approval for hands-free highway driving speed anywhere in Europe with more than -- and now BlueCruise has more than 70 million miles driven to date, and we continue to upgrade BlueCruise for customers with each over-the-air update. Before I turn it over to John, I want to share our thoughts on how the EV market is evolving in our eyes. It's easy to look at the landscape of the EV market as a mono lift. But we plan to be surgical about where we play and how we win with the right products, the right cost structure, and the right price points. We do not subscribe to a win vehicle share at any cost approach. We look at share of vehicles, of course, and share revenue. We also look at share profits and share of the customer lifetime value, and we believe this is the only way to ensure we drive appropriate return on capital over time. By 2025, we now expect there to be 45 EV models to be offered in the US in the small, medium utility segment. It will be a very saturated two-row EV market. Against this backdrop to ensure profitable growth, we know we have to have a fresh, compelling offering with the right cost structure, something we continue to improve with the Mustang Mach-E. We also found that customers are very loyal to full EV powertrains once they enter, but they are not brand-loyal for their first purchase. We capitalize on that by getting to the market early with the Mustang Mach-E and our whole lineup, and it continues to reward us with over 60% of the customers new to Ford. We're seeing that the second EV purchase is much more loyal to the brand in these developed EV markets. So. we're glad that we have all these customers in our digital and physical ecosystem. We are aggressively lowering our product costs for our current and next-generation products. You'll find out a lot more in Capital Markets Day. But in fact, for Mustang Mach-E from launch through the end of this year, we'll have reduced the building materials from Mustang Mach-E by $5,000 per vehicle. Now, in contrast to two-world crossovers that we believe will be a very saturated market, we believe Model e can be highly differentiated in markets where we know the customer well, like the three-row utility space. And as I said, we'll share more about at our Capital Markets event later this month on our product strategy. I had a chance along with John and most of our leadership team, to go to China in the last few weeks and look at the EV market in a gemba, go-and-see activity up close. It's interesting to see how customers are no longer just attracted to traditional luxury brands with EVs or even hardware design anymore. Outstanding hardware styling, performance, quality are just a given in the EV digital marketplace today. The best new brands are offering integrated digital, retail, lifestyle and experience that are software defined. This is firmly in our sights for our second-generation EVs. This software as a differentiator, plus a radically different cost structure, and the ability to attract -- attach value-added software and services, gives us confidence we can compete and win in unit, revenue, profit and vehicle share while delivering appropriate returns. And Ford Pro is already there. I'll wrap up by saying we are pleased, but we are not satisfied. As I said, solid execution and some really thrilling progress advancing our Ford+ plan. I look forward to seeing many of you in-person in three weeks for our capital markets event, where we will go much deeper into our strategy and our progress. John?

Operator:

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

Jim Farley:

Thanks, Adam. It depends -- well, first of all, our first three EVs are all very different in terms of pricing. I think the Lightning's price is up $11,000 since we launched, and E-Transit is up a lot. So -- and of course, we're increasing production to get that scale benefit. So the most important thing we've learned three or four years ago is be careful where you compete, and we have selected where we compete extremely carefully. We want to go after segments where we have a great reputation, but there's a lot of conquest customers. And we want to innovate beyond just the powertrain, like Pro Power Onboard and as well software. We now know the three shippable software stacks

Jim Farley:

Yes, absolutely. Look, we all have to plan our business professionally, and scaling is important. Look what happened in the first quarter for Model e. We want that scaling benefit, but that is not success. In fact, I would say, the more we study this -- our trip to China was a real epiphany for our leadership team. I would say, the more -- the thing that I look for as a CEO is not necessarily just the volume growth, it's actually how fast we use the data off the vehicle to make the customers' software experience better. That, to me -- the quickness of that loop is the fitness for differentiating brand and profit in the future for this new digital product category we happen to call electric vehicles. To me, yes, volume is important, but that quickness of that loop, which we're already on a 10 million OTA. We've now gained 65% more miles traveled on BlueCruise in three months. We were only 42 million miles three months ago, we're now at 70 million, and the reason why that's growing so fast is because we continue to do OTAs to BlueCruise to make it better and better. On Ford Pro, those software subscriptions are growing fast. So, to me, of all the metrics I look for as a proof point for our success in this new digital product category we call EVs, I think that's the one, Adam, I look for the close -- the best. And we will always balance profit with scaling.

Operator:

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

John Lawler:

Yes, Adam. Let me -- sorry, you're following up on Adam's question. So, let me, Rod, start off on the cost there. Yes, you're right. We did see our structural costs go up in the quarter on a year-over-year basis as we continue to invest, as Jim said, in our EVs, in our digital architecture and our software. I think for us, a key part of that is bringing those structural costs down in Blue over time and then driving efficiencies in our overall cost structure and contribution costs, some material costs, in warranty, in freight, et cetera. So, that's where we need to see the turn on our cost structure in those areas as well. And then cost structure coming out of Blue as we continue to invest in e and Pro. Now, of course, we have to do that at an efficient level so that it doesn't put that much pressure on the business, but Jim can talk about this more. But as we're investing in the growth of EVs, we're not doing it where we're proliferating. We're looking to be very focused on the segments we're going into, be very disciplined on the complexity in the number of top hats and models that we have, have the right footprint, the industrial plants needed to have the right efficiency levels. And we'll talk more about that at Capital Markets Day, but we're very, very thoughtful of the fact that as that investment goes in, it needs to be very efficient.

John Lawler:

Yeah. So when you look at it from a cost standpoint, let's just unpack what happened last year. When you look at the cost increases in 2022, only about 15% of that happened in the first quarter. So on a year-over-year basis, coming out of last year, this was a tough read. If you look at it sequentially, when you look at our costs on a sequential basis, our costs were down in the quarter. And they were down significantly in Blue. They were up a little bit in e, and they were about flat in Pro. So, yeah, we have got to gain traction on the cost reductions for sure as we go through the second half of the year, and you'll start to see that come through in the second half. Overall, when you look at it from a cost standpoint, we expect our total cost to come down and cost of goods sold to come down about $2 billion versus the $2.5 billion, and that's primarily reflecting the fact that commodities aren't coming down as quickly as we thought. So that's where we see costs unfolding through the second half of the year.

Operator:

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

John Lawler:

Yeah. The league business is largely sitting in Pro, John. We see that continuing through the year. We see Pro -- strength in Pro as we go through the year. There's considerable pent-up demand. We now have the new Super Duty. We'll be launching the Transit in the second half of the year, and we expect that to continue. So that's where we see quite a bit of opportunity as we go through the year, as we expect the profits in Pro to double this year versus last year. On Blue, what we saw in the first quarter for Blue was about flat pricing. It was up 1/10, a strong mix, really strong mix and some volume increases in Blue in the first quarter. And that strong mix was on F-Series. And that's because last year, we had the TICO issue, which kept our series mix down, plus we were launching Escape this year in the first quarter. So when you look at it, that's where we see things unfolding. When we go through the rest of the year on Blue, we expect that mix to come off. That's not going to repeat itself as we run through the rest of the year.

John Murphy:

And Jim, if I could follow up just on the pricing discussion. There seems to be a change in the philosophy of the way that people are thinking about this, particularly that new, large competitor that is cutting price. And that you can cut price on the front end and not make a lot of money on the hardware, but you can make a whole lot of money on the software and services on the back end so you're not so worried about profit on the front end. You think you can make it up on the back end. As you think about your business evolving over time, do you think in five years' time plus that you're going to be sort of selling the vehicles hardware and making all the money on the back end? I mean how should we think about sort of the balance of how the money is earned on vehicles going forward?

John Murphy:

Very helpful. Thank you.

Ryan Brinkman:

Hi. Thanks for taking my question. I read, Jim that you recently said at a charity event in Detroit, we're going to have to rethink what the Ford brand means in a place like China. So where do you think you stand with regard to your China operations currently? I mean Lincoln seems like a bright spot. But what aspirations do you have for your operations in that market, either in terms of the portfolio or margins or returns? And what time frame would you like to achieve those aspirations?

Ryan Brinkman:

Okay, great. Thanks. And then just lastly, what is the latest you're seeing in terms of auto loan APR, credit availability, maybe in light of some of the turmoil that we've seen in the banking sector in the US? The SAAR has been very strong this year, in line or stronger than your expectation for $15 million total SAAR, particularly in light of the higher rates, maybe helped by the strong equity in used vehicles. But just curious, if you're hearing anything maybe different at the margin from your dealers or customers or just how you're thinking about the auto finance market generally.

Ryan Brinkman:

Very helpful. Thank you.

James Picariello:

Hi, everyone. First question on price. So, is pricing overall is still expected to be neutral for the year? It sounds as though Blue is guided to be negative for the full year as incentive spend picks up. But, yes, could you just help unpack how we should be thinking about this year's price for Model e and Pro with the Super Duty strength still to come?

James Picariello:

Okay, got it. And then just to confirm, you talked about 20% -- or minus 20% Model e margins for the second half. Is that right?

James Picariello:

Contribution margin. Okay. All right. Thank you. Appreciate it.

James Picariello:

Got it. Yes. So, my follow-on to that because that's what I thought you'd sit. Can you bridge what the benefits are from a materials perspective, scaling in terms of the buckets maybe that you provided at the teach-in, what helps get to that minus 20% run rate for the second half? Thanks.

James Picariello:

Thanks.

Dan Levy:

Hi, good evening. Thanks for taking the questions. I just want to follow-up on that last question on the contribution margin. And I know you didn't disclose contribution margin at the teach-in. But just at the midpoint of if I look at what you disclosed in your deck, it's roughly negative $4,000 contribution margin right now, and you said a lot of this is on sort of material reduction. So, I just wanted to understand how easily you can reduce content mid-cycle of a product. I know you said that there are some design changes that you can do. But typically, you see more material content modifications at the end of a product cycle. So, just want to get a sense of your visibility on content modification to get that contribution margin to breakeven?

Dan Levy:

Great. Thank you. And then as my follow-up, I just want to touch on some of the earlier questions that were asked and this notion of how you're looking at volume. And I think the message clearly you're making is that you're not necessarily -- you're balancing that volume with profit. But historically, this has been a business that is dictated by volume. This is dictated by utilization. And if I read your comments correctly that you're focused on unique segments and you want to get out of the fray a little bit, that would probably tell me that if you're punching at four million units a year now, which is low versus actually where you've been historically, that if you're focused on these more premium segments or more unique segments that there could be a much lower volume going forward. So how should we think about your volume more broadly? I realize that's probably a better question for the CMD. But how are you thinking about structurally what type of volume we should look at in the future?

Dan Levy:

Great. Thank you.

Tom Narayan:

Hi, guys. Thanks for taking the question. Just had two quick follow-ups. So for Blue, it sounds like the downshift kind of implied in the rest of the year is really coming more from mix than not price as you're saying net neutral on price for the full year. Is that right?

Tom Narayan:

Okay. And then another follow-up. So on this question of attach rates, you have a 30% attach rate on Pro, which is amazing. And just curious, as you think about that, is there an incentive perhaps to increase that attach rate perhaps by sacrificing on price? Presumably, those subscription revenues come in at higher margins, or is the view we're not going to -- at the end of the day, we make these products and these subscription services are add-on to enhance the product. I mean how do you think about that trade-off? Thanks.

Tom Narayan:

Yes, it does. Thank you.

Emmanuel Rosner:

Hi. Thank you very much. So I think you announced a price cut on the Mach-E today. And to your point, Jim, I think this is a more competitive segment within all the various EV segments.

Emmanuel Rosner:

Can you maybe comment on the demand environment for Lightning? There's -- I've seen some anecdotal evidence of some decent amount sitting on some dealers' lots. I read that you're planning to ship some to Norway, which it feels like the US pickup market should have more demand than your ability to supply. So can you just maybe talk a little bit about where Lightning demand is in general and whether sort of like cost actions are needed in order to bring down the price?

Emmanuel Rosner:

Yes. Thanks for that Jim. And then, just maybe one follow-up for John. So curious if you could just put a final point on the puts and takes for your unchanged 2023 guidance. I think you mentioned in terms of costs for materials and freight maybe now a $2 billion benefit instead of $2.5 billion. Are there any other big pieces which are either more or less of a benefit or a headwind than you saw previously?

Emmanuel Rosner:

Perfect. Thank you.

Operator:

Good day, ladies and gentlemen. My name is Jason, and I will be your conference operator today. At this time, I would like to welcome you to the Ford Motor Company Fourth Quarter 2022 Earnings Conference Call. All lines have been placed on mute to prevent any background noise. After the speakers’ remarks, there will be a question-and-answer session. [Operator Instructions] At this time, I would like to turn the call over to Lynn Antipas Tyson, Executive Director of Investor Relations.

Jim Farley:

Thanks, Lynn, and hello, everyone. We appreciate you all joining us. I'll start by addressing the obvious. Our fourth quarter and full year financial performance last year fell short of our potential. And while we generated record cash flow, we left about $2 billion of profit on the table due to cost and especially continued supply chain issues. These are the simple facts and to say I'm frustrated as an understatement because the year could have been so much more for us at Ford. Now I know the question you must be asking, why Ford with that incredible product lineup, and all the restructuring overseas, why aren't you delivering higher profits and more competitive margins? And it's the right question. So [Technical Difficulty] while we're making progress, it's hard work. As with any transformation of this magnitude, certain parts are moving faster than I expected and other parts are taking longer. Now the first part of our transformation is to completely overhaul our industrial system. Product development, manufacturing and supply chain management to deliver better cost and quality, this is critical because it provides the foundation for everything else we do. It funds our future, that's second transformation, which we're aggressively building today. Building new and incredible new growth businesses like Model e and of course, Ford Pro are huge bet on commercial vehicles, which will be high growth, high margin, not just products but software and services business. Now the second transformation, the growth part is going better than I imagined. At this point in our journey, I did not expect to be number two in EV sales in the U.S. I didn't know that Lightning would be completely sold out. And I didn't predict that BlueCruise would be the best hands-free autonomy system in the market or the Ford Pro software sales would be growing off the charts. And that doesn't even touch all the incredible next-generation EVs and software platforms that will soon be entering the market. Bottom line, in a double transformation, we have to significantly improve our cost and our quality, but at the same time, grow to fulfill that huge promise in Ford+. And frankly, the first part of the transformation has not moved fast enough. Now this is what we should be known for. It's our legacy and will show we can do it again. We have deeply entrenched issues in our industrial system that have proven tough to root out. Candidly, the strength of our products and revenue has masked this functionality for a long time. It's not an excuse. But it's our reality, and we're dealing with it urgently. Over the past year, we have made sweeping leadership changes and brought in world-class talent to reenergize and rebuild a leading industrial organization. We've committed company-wide to implement a lean operating system that will scrub billions of dollars of waste out of our company. And we are shining the light on every inch of our legacy business with knowledge that we must do better every day. This has been humbling for both me and our team. That said, I've never been more convinced about our plan. I cannot wait to get into work every day because I'm so optimistic about our plan and what we are creating here at Ford. Now I respect our competition, but I would not trade our places with anyone. Why? Because we have a real strategy to grow. We have incredible products, both on the road and the ones you haven't seen in the pipeline. And I believe we now have a world-class leadership team, made up of new and existing talent ready to compete and win. These strengths will shine through. Ultimately, the proof will be in our results. That's exactly how it should be. We appreciate those who place their faith in Ford, and we are committed to creating value for all of our stakeholders. So with that, let me quickly cover some areas of focus. First, we remain committed to disciplined capital allocation saw this in the actions we took in Brazil and India and most recently in Argo. And now South America and IMG are healthy and generating sustainable profits. This work is never done and will continue to be the focus for us going forward. Our balance sheet, liquidity remains strong and our ability to generate free cash flow has really improved significantly. And this is allowing us to accelerate our investment in growth, of course, electrification, but also Pro and software, while importantly, also returning capital to our shareholders. And we now have created three distinct customer-facing business segments

Operator:

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

Jim Farley:

No, there is a lot more to go. And the industrial system at Ford is a huge opportunity for us. And we have spent the last several months really getting deep on where we need to go. So John, maybe you could share or feeling comfortable on sharing, but you're going to hear a drumbeat from Ford on this all during the year.

Jim Farley:

And Adam, I'd just like to add as the CEO, there's a lot of choices, they're all very consequential when it comes to the approach to do this. The most important thing for me is sustainable. When you look at Ford, we have cut in the past and it grows back or we have cut everywhere and not really focused on the industrial system. So for me, the approach that we're taking that's very different and very difficult is that it has to be daily work, gaps to competition, countermeasures, action plans for those countermeasures, constant evaluation of the effectiveness of those countermeasures, celebration of those KPIs and our status and daily management. It has to be a more fundamental approach than holding our breath or dealing with the output like people and getting into the real industrial systems efficiency. And that is a cultural change as a leader. It's a behavioral change. It is not just a program.

John Murphy:

Just kind of wanted to follow up sort of on a similar vein, short term and long term. Just for short term, when we think about the '23 outlook and you look at the $1 billion for decline in Ford Credit and take that as a reasonably given number, something in that direction and then $2 billion of lower past service pension income. That's a $3.4 billion headwind. But sort of at the midpoint of the range, you're talking about EBIT being roughly flat. So that sort of indicates a very significant $3 billion plus improvement in the core business, which is a lot to kind of believe when you're looking at sort of the headwinds and the issues that you just faced. I'm just curious if you can comment on that, maybe kind of walk us to how we get comfortable like we'll see a $3 billion plus improvement in the core business this year? I mean -- and how do you get these supply chain issues fixed when some of that are a bit outside of your control and what we hear from suppliers is volatility and schedules and it's not just specific to Ford, still pretty volatile?

John Murphy:

Okay. That's actually incredibly helpful. And just on the long term, I mean you mentioned, Jim, about scrubbing things foundationally and really getting to some costs there excess, and I appreciate the three areas you've highlighted. But as we look around the world, I mean, Europe is -- had fits and starts of making us all kind of excited that it's going to work and then it doesn't from time to time. And China, you kind of been chasing competition there, and it hasn't really paid out for you. But there are two very important parts of Europe and China that are very strong for you. Commercial vehicle in Europe is incredibly strong. So could we just strip Europe back to pure commercial vehicle and could China just strip back to pure Lincoln? Two places we know you're making money and cut out the other stuff so that you can actually fund the transition that you're talking about? I mean, just -- we kind of all dance around this stuff and you've headed in this direction with the global redesign, but there's real opportunities here to be really profitable.

Operator:

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

John Lawler:

Yes. So on the pricing, we do see the broad market coming in at about transaction prices falling about 5%. Some of that's going to come out of the dealer margins, of course. It's not all going to come from us. But we also have upside, Rod, with some of the launch of the new vehicles. We won't see as much of a price compression there. So, we see pricing net-net for us next year being about flattish. And so don't think about it as we're working through '23 as being a negative $1 billion. And then I would say that when it comes to the cost reductions, I think what we've got to start showing is, one, that we're getting leverage out of the business if we're growing the business that our cost of goods sold is growing at a much slower pace. And that as we're coming out with new vehicles, our cost per units are coming down, so our margins are improving. When you look at the design of our vehicles and you compare it to competition, I think if you go through those benchmarks and you go through those teardowns, you can see that there's a tremendous amount of opportunity for us to design out complexity. And you should see that coming through complexity reduction KPIs on our vehicles. I think that will be key. And it not only will be in the order combinations but also in the parts complexity in the number of parts. And what we'll be doing is as we move forward through this year, especially at Capital Markets Day, we'll be providing more details on those KPIs. But it's the key areas you should be seeing how much productivity we're getting out of $1 of engineering, and we should do something around that from a KPI standpoint because these are the areas that we need to improve.

Rod Lache:

So just to put a landmark out there, do you think a year from now will be looking at structural costs that are up or down, obviously, ex-pension because you have this $3 billion cost reduction plan? And then I have a second question just on Model e.

Rod Lache:

Yes. Okay...

Rod Lache:

Yes. I think I got the answer on that. Maybe just to switch gears on Model e, if I can ask Jim a question, you've got this target of 8%. And that 8% margin target presumably has some assumptions for where costs will go, but also where pricing is going to go. And just considering everyone's aspirations for growth in EVs, do you think you can stand by those pricing assumptions and maybe a different way of asking this is, do you think you can sell a $40,000 electric crossover with a 20% gross margin?

Operator:

Our next question comes from Ryan Brinkman from JPMorgan. Please go ahead.

Jim Farley:

Right. Yes, great question. We're going to see that on Pro first, and this year is a breakout year for Pro because we have brand-new products, both core in Europe and U.S. are most -- the highest volume, highest profit vehicles are all new. So, a very important year for us, I would say we absolutely have a fantastic business plan that's very specific about software and physical services. The biggest opportunity for us in the short term is the after sales business. Only 10% of our Pro customers do business with us, and we hardly do any financing with them. And so between financing and parts and service, we have enormous upside in the short term. And those are very profitable parts of our business. So I would think of it this way, Ryan. It's like software is starting to drive a closed loop where the customer wants to do more physical service with us. We have all those mobile units, more and more dedicated dealers and more of our commercial customers because of the use of the software is coming back and buying parts for us. And then the next level of performance is really going to be prognostics. When we could put predictive failure in all the vehicles, like you see on John Deere and Caterpillar, and then drive that into our physical repair facilities, we're going to see a much larger retention in parts and service. So I think the basics of the business are, these are profitable vehicles. We've got new ones coming out. We're going to grow that. We're -- I mean, we blew through our parts and service profits and revenue for Pro last year. It's almost like we can't even predict as this -- that software starts to really drive a different behavior for our customers, the growth in parts and service. But that's the monetization in the short term for these services in the integrated ecosystem. And then long term, the real game changer kind of like autonomy in the retail space is going to be that prognostics.

James Picariello:

So the third quarter negative pre-announcement had a narrative around it, right? It was very high mix on wheels inventory that you couldn't ship and the additional $1 billion of supplier costs. I know Adam hit on this in his question, but this quarter is missing that storyline. I know it was mentioned that you have line of sight to $2 billion in profit that you left on the table. But what could really turn around almost immediately in this first quarter in '23 here in terms of like what operational mishaps you know will reverse in the coming months and quarter, whatever the time frame might be?

James Picariello:

Okay. Understood. That's helpful. And then in terms of the earnings bridge for this year, with respect to materials and freight, that $9 billion headwind in '22. I know you mentioned you're baking in commodity prices to come down. But all in relative to that $9 billion this past year, what's assumed in the '23 guide here on this line item?

James Picariello:

At least $2.5 billion positive.

Operator:

Our last question comes from Itay Michaeli from Citi. Please go ahead.

John Lawler:

Yes. So I think what we would have to say is that given that we're moving to our segments for 2023, we're not going to be reporting the regions. And so we will give more color on 2023 by each of the business unit segments. And so I'm not going to comment on regions anymore going forward, unless there's a specific reason to do that within one of the segments.

Itay Michaeli:

Yes, sure. That would be helpful. Yes. Maybe pricing in Europe would be helpful as well.

John Lawler:

On the software side, we were guessing before, but now we kind of know what the first three shippable large TAM software revenue sources are for our industry. The first is partial autonomy, the second is safety and security and the third is productivity. And the star people in there, the early leaders definitely ADAS on pricing revenue growth. I mean, the growth we're seeing, the demand we're seeing for BlueCruise and all ADAS features is really driving a lot of software shipment. We're about to ship our second cycle of BlueCruise already, and we are really starting to see -- that is clearly what customers want revenue-wise. And I do believe in this first three, four years of software to the car that ADAS, that Level 2, Level 3 system, is really the most remarkable TAM. However, in the background, for Ford, the productivity software in Pro is really important. It's maybe unique to us, but it is a very important part of our software revenue, which we will lay out in May. You'll see more specifics on it, but it's very profitable. The customers love the data, and they have a higher demand for the data and the software than the retail customer. I think the slow burn, the one in the background that I'm super excited about is the third leg of the stool of safety and security, not like someone stole your car, but it's video content, a lot of it tied to insurance. So this is going to be a really interesting area. Kind of think of your cars and extension of your ring and all the safety and security you have in your house now, all that technology, the cars give me another note on that. It will go for everything from teenage drivers to all sorts of things and that video capture is going to be the essence. Another reason why we think our next electrical architecture is so strategically important for the Company because we want to embed that hardware and software and adaptability in the electric architecture so we can ship the software, better software than our competition on safety and security, even if it's a little fuzzy on what the features are today.

Operator:

Good day, ladies and gentlemen. My name is Gary, and I will be your conference operator today. At this time, I would like to welcome you to the Ford Motor Company Third Quarter 2022 Earnings Conference Call. All lines have been placed on mute to prevent any background noise. After the speakers’ remarks, there will be a question-and-answer session. [Operator Instructions] Please note, this event is being recorded. At this time, I would like to turn the call over to Lynn Antipas Tyson, Executive Director of Investor Relations.

Jim Farley:

Thank you, Lynn. Hi, everyone. We really appreciate you being with us today. We introduced the Ford+ Plan for growth and value creation two years ago, and the investment thesis had three drivers

Operator:

[Operator Instructions] Our first question today is from John Murphy with Bank of America. Please go ahead.

Jim Farley:

Thank you, John. The decision we made to reallocate our capital is a strategic one. It’s some combination of the margins we’re starting to see on our software, like Ford Pro, that’s really the first large shippable software. The usage patterns we’re seeing in BlueCruise, how much people use it and how passionate they are, and that’s before ICE off, the confidence we now have in delivering L2 -- Level 3; the access to public markets for Level 4 funding; the opaqueness, as John said, of the view to return capital, the invested capital in Level 4 and Level 5. And it’s some combination of that and a few other factors. But the biggest factor is our growing confidence in our talent, both the Argo talent and the team at Ford that Doug is building. And I’m sure in the investment conference that will be a big focus of his comments. It’s that combination, more than are we behind or we ahead, that informed us of this decision. And I think it’s one of the bigger moments for us as a leadership team. And we are so excited about the software we can ship to our vehicles. We see it in BlueCruise now. We see in a Ford Pro. And we see other software that we’re in the midst of. And the other key enabler is our growing confidence in landing a fully software-updatable vehicle as we launch our second cycle EVs. John, maybe it’s best for you to talk about the reallocation of capital.

John Murphy:

If I could just maybe just follow up on that. I mean there’s got to be a high level of confidence that you’re not going to be left behind as autonomy may develop over time. So I mean, a skeptic would say you’re throwing in the towel and you can’t keep up. An optimist would say you actually have confidence that you’ll be able to keep up and maybe surpass the competition over time. I mean, how would you couch it in that range?

Doug Field:

Sure, Jim. As you mentioned, this is going to be a really tough problem to solve. It’s the toughest problem of our generation. And I don’t think about it as capital constraints nearly as much as talent constraints. In the kind of projects that we are diving into at Ford and the kind of work that we’re doing, the constraint really becomes how many of the world’s best people can you get working on a problem. And that’s really the decision, in many ways, that is driving what we’re doing here at Argo is we are deeply passionate about the L3 mission. We have ideas of how it can work and how customers can interact with it that are really exciting, particularly when you add them to our next-generation EVs. So, this is the way we want to use that talent. And we think it’s the most meaningful way for them to impact the world.

Colin Langan:

Just a follow-up on the Argo, just to be clear. I mean, did you look for acquirers for the business? I mean, obviously, rather than taking a big impairment. And maybe a follow-up a little bit. What is your kind of time line for Level 4 that you’re looking at? I mean, do you think this is 20 years out at this point? I mean, I guess you had a comment with some sort of assessment before you made the decision.

John Lawler:

Yes. So Colin, when we looked at this, as Jim said, not only does it require the technology breakthroughs and the capital invested in the technology, but then in all the services and fleets, scaling across the country that would be required to get to a profitable business. We saw that five years plus the horizon being that far out before you could actually get to something that started to generate a meaningful business. And we see a much greater opportunity to impact more customers immediately with the L2, L3 technology and impact our business in a positive way in the more near-term time frame. So, that was part of the business discussion that we had with the team.

John Lawler:

Yes. I think it’s really two things. It’s the mix that we can see, vehicle line mix coming out of the supply base and then sterling. The exposure we have, as you know, we’re the largest commercial vehicle player in Europe from a brand standpoint, and we have a very strong presence in the UK. And so that currency change did hit us quite hard after the quarter closed. And so, when we look at that, one of the things that we’ve done, Colin, that I’ve done, is I spent a lot of time -- the team has -- the last couple of weeks, doing deep dive on-site reviews of the supply base. In fact, we’re approaching a deep review of almost 300 of those suppliers. And what we’re finding is that there’s a number of non-chip suppliers that are struggling to ramp production as the chip crisis eases. And it’s not easing tremendously, it’s easing slightly. We’re starting to see that. But then we’re seeing issues in non-chip suppliers. It has to do with the tight labor market, but it also has to do refining with many of the suppliers during the COVID time frame had not invested in maintenance or in their facilities and tooling, and so they’re not able to ramp as we expected. And that’s hit us in the fourth quarter on mix versus what we had expected. And so, it’s really the mix in the currency that’s getting to us and brought us down to the low end of our range.

Jim Farley:

Yes, pricing. Net pricing continues to remain strong. Exactly, pricing continues to remain strong.

Ryan Brinkman:

Are you able to dimension for us how much of the $1 billion of higher-than-expected supplier-related inflation costs incurred in 3Q actually relate to in-period expenses incurred by suppliers versus how much might represent a catch-up of prior period cost? To know that I think would help with understanding what portion of this headwind in 3Q that we should model as continuing into 2023 versus how much might be more onetime in nature?

Ryan Brinkman:

Okay. Very helpful. And lastly, I think at the time of the 2Q call, you considered it a bit too early to say whether commodity costs are likely to be a tailwind or a headwind next year. But with the subsequent decline now in spot prices, are you more confident that commodities are likely to be a tailwind? And are you able to dimension at all that tailwind or maybe compare it directionally in magnitude to the headwinds that you’re likely to face when it comes to non-commodity supply chain costs which do not seem to be deflating similar to commodities?

Operator:

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

Jim Farley:

Thank you, Rob. The early signs are coming in. It’s interesting. It’s lumpy. The commercial vehicle and EV demand is through the roof. We’ve seen literally no -- no change, if not an increase. And that includes commercial vehicles in Europe, which is interesting. Our order bank continues to grow. It’s multi, multi month. We continue to have to close out order windows for our commercial vehicles because of the demand. Same for EVs, as we’ve taken prices up. On the retail side in the U.S., what I see that’s different from last quarter is slight uptick on 84-month customer financing, and Marion, if you want to go into that, that’s fine. We’re seeing, obviously, an easing of used cars, which makes trade-ins, and those transactions that include trade-ins a little more challenging for customers for higher payments. We’re seeing -- the one that I watch the most is our turn rates for F-150. It’s our highest volume vehicle. And we’re starting to see some differences in turn rates between XLT and Lariat. It’s small right now, but it’s different. In the past, Lariat’s turned faster than XLT, and that’s reversed compared to the quarter. It’s really subtle right now. So, what I’d expect on pricing -- and you see some of our competitors come in with higher spending now on incentives. So, we’ve already accounted for some of that, as John has said in the past. What I would be looking for and what I think is important to watch for is the mix changes. The mixes of series and specifications within a profitable nameplate, like Super Duty or F-150 or mix shifts, obviously, between models. Rod, our lineup is so fresh right now. It’s very opaque for us. So, the only mix shift we’re seeing is within spec. Marion, do you want to mention anything about payments?

Rod Lache:

Thanks for that. And maybe just switching gears, Marion, I’m trying to understand your implicit guidance for Ford Credit. You brought the full year down a little bit, at least it optically looks that way from around $3 billion to $2.7 billion, but now Q4 looks like it’s quite low. I was wondering if you might be able to give us some color on where you expect to end the year in terms of loss reserves. At one point, you had, I think, post-COVID, taken the reserves up to 1.2% of managed receivables. Is that sort of something that you’re -- that’s implicit in these numbers, or is there anything else in there that’s driving that level of profitability?

Operator:

Your next question is from Mark Delaney with Goldman Sachs. Please go ahead.

Jim Farley:

Thank you, Mark. I think, Doug, is best suited to answer this. All I would say is that we’re timing the arrival in line with our second cycle of EVs and a fully updatable -- software-updatable vehicle. So kind of think of that ‘23 to ‘25 time frame is Ford completely refreshing its EV lineup globally, introducing fully updatable electrical architectures and in-house software development for controlling the vehicle, leveraging all of our experience of now we’ve done 5 million OTAs and on enhanced Level 2+ and Level 3 system. Over to you, Doug.

Jim Farley:

And we’re really excited about the Argo team helping us with that internal effort.

Mark Delaney:

That’s quite helpful. Thank you. And one more on EVs, if I could, please. You mentioned the myriad of ways that the IRA could potentially benefit Ford. And you reiterated the capacity ramp targets through 2026, I believe. But do you think over the longer term and perhaps out over the next 10 years or so, does the IRA change the gross amount of investment you want to make into EVs and how quickly Ford may shift toward EVs, especially in the latter part of this decade? Thanks.

Operator:

The next question is from Joseph Spak with RBC Capital Markets. Please go ahead.

Jim Farley:

Yes. Well, I wish we could go into the commercial negotiation with our battery partners, but I’m not going to go into it now. But you can imagine there’s lots of interesting discussions going on right now between, because we’re obviously in the middle -- I mean, some -- we’ve already inked a deal on our DAs, others are still in the mix. So, I wish I could cover that with you right now, but I don’t think that would be fair to our battery partners to go public with -- with how that’s going to benefit both of us. But you can imagine. I mean, I just think of it, generally speaking, as proportional to our investments. On the commercial EV, I have to say, the demand for the move to electric on our commercial customers is, in many ways, more robust than the retail side, even though we’re completely sold out in both, for the three products, the turn rates are just enormous, the order rates. But the profitability is different between a commercial EV and a retail EV. And we’re going to be breaking out our EV business and profitability soon. So this is going to be quite interesting for all of you and for us as we do that. So -- but I will tell you, this is a big help. This will really help the profitability of our commercial vehicle that are EV. And I think it will really stimulate the demand. The tricky part for us is, operationally, what do we do between now and the end of the year. That’s the tricky part for us operationally, is we have a lot of customers who are going to wait until next year to order a Lightning Pro or an E-Transit. But, I think for sure, this is just going to upset that equilibrium. We have to -- by the way, we have to -- we have this discussion inside the Company every day. How many Lighting Pros do we want to make and how many Lightning retail F-150 EVs do we want to make? So, it’s already quite spirited discussion. But I think this will help our profitability quite a bit even next year, which you will see. And we’re really excited about this change. I mean, having almost 65% of our customers qualify, including local municipalities, it’s a game-changer for our demand. John, anything you want to divulge about the negotiations?

Jim Farley:

Okay.

Jim Farley:

That is a very good question. So, obviously, we have this unique profile as a commercial company in EV, and we now have, I mean, literally all the commercial pickup truck business that’s EV, and we’re 90% plus on the van side. So, it’s a very important question for us. And we also think for affordability, back to Rod’s point, LFP is a very important technology, and all the IP is in China. So, this is a really dynamic situation. I think what you’ll see is that the tariff rules of the importing LFP batteries into the U.S. is still very favorable, so. And we have a really great contract with a particular LFP supplier to incorporate those batteries next year. So, I think, we’re in really good shape. The real billion-dollar question is when do you localize production of LFP in North America? And is that in the U.S. and Mexico? And where do you build the cells versus pack? And whose name is on the front of the building and all that. And we’re not going to go into that. But I will tell you that just given the reality of the tariff structure, we can import LFP from China economically now.

Operator:

Good day, ladies and gentlemen. My name is Chad, and I will be your conference operator today. At this time, I would like to welcome you to the Ford Motor Company Second Quarter 2022 Earnings Conference Call. [Operator Instructions]. Please also note, today's event is being recorded. At this time, I would like to turn the call over to Lynn Tyson, Executive Director of Investor Relations. Please go ahead.

James Farley:

Thanks, Lynn. Hello, everyone. The Ford team delivered a very solid second quarter in a challenging environment where we saw supply chain disruptions, a lot of new economic headwinds and uncertainty as a whole. Importantly, we achieved these results as we advance the Ford+ plan, which is the biggest opportunity to create value at Ford since we scaled the Model T. And at the core of Ford+ are 3 fundamental promises to our customers

Operator:

[Operator Instructions]. And the first question will come from John Murphy from Bank of America.

John Lawler:

Yes. So John, it is different, right? Ever since we've had COVID and coming out of COVID, the patterns just haven't held. When you look at the second half versus the first half, I think that would be the best way to help kind of frame this up. We do see continued volume, mix and pricing being strong on a half-over-half basis. And of course, we do expect to see commodities improve a bit as well in the second half on a half-over-half basis. And so volume, pricing and mix, let's say, in the $3 billion range. Commodities could be as much as $0.5 billion. But the inflation that we're seeing, that's going to continue to run through. And we're seeing that across the board from material costs, freight, fuel costs, et cetera. So we see that continuing, and that's up, as I said in my remarks, versus what we had talked about at the end of the last quarter. And then, of course, FMCC is going to be down slightly half over half, let's say, eight-tenths to $1 billion as they approach $3 billion for the year. We're also seeing headwinds in the second half, John, from currency, the dollar strengthening. And we have more revenue exposure overseas than we do costs. So we're going to see some of that happen as well. And then we're going to continue to invest in our growth, and that'll be an area of engineering. We'll also see increasing investments in connectivity and spending. And then, I guess, the last thing I would talk about just to make the half over half complete. We did have some onetime items come to us in the second quarter, roughly an insurance claim and a contract we renegotiated, which roughly would be maybe three-tenths, four-tenths headwinds. So that's basically how we frame up the half over half. And basically, what we're saying is that there'll be some headwinds and some tailwinds, but we're confident in our guidance of 11.5 to 12.5.

James Farley:

Thank you, John. We've always been really good on the truck side for those derivatives, but now our chances to expand that capability across all of our lineup. Ranger is a good example. We're launching it in Thailand. We just launched Raptor, Tremor. There's a lot we can do. Of course, Mustang is coming out. Maverick is our most affordable vehicle. You can only imagine the kind of things that we're cooking up in our design studio with Maverick. And then, of course, on what we really do well, Broncos, you can imagine high-end versions, all sorts of things. Everglade came out, very popular. And we do agree our E side -- we don't have to change the body to refresh Mach-E, for example. We are actually completely redoing in a good way our HMI and OTA-ing that to all of our EVs. But you can imagine with Mustang Mach-E all the cool things we could do. So -- and it is a sustainable advantage, and we're good at it. The tension point for us, though, is complexity. Ford is way too complex. So as we do this, we have to bring our complexity down to get our bill of materials kind of in line with competition. It's great that we have all this pricing power forward. We do have a fresh lineup. We have lots of cool ideas. But we're not satisfied with that because we cannot just continue to build this complexity in our business. So as we add those derivatives, we're going to have to -- we are planning much less complexity in our Blue business. And that is a theme that will run through Blue for years to come.

James Farley:

I think the way we look at -- yes. Good question. The way we look at this, John, is the days are kind of over where you have to change the upper body to build a supercar or to build an off-road car like kind of days are over, like, we don't have to do that anymore with these digital products, with EV propulsion, with the motors, the software. We can - we can really take our vehicles and make very different kind of vehicles off of the same body engineering. And that is a complete game changer for us in terms of capital intensity, i.e., lower. And I'm really glad you brought that up because I try to emphasize this. Like we have to be really careful in our industry, and I'm constantly -- we are constantly talking about this as a leadership team. We cannot have the complexity of top hats that we do on our ICE business. We have an opportunity as we go digital with these EVs to simplify our body engineering and put the engineer where customers really care. And it's not a different [fender] (ph). It's software. It's a digital display technology. It's a self-driving system and the AV tech. And of course, it's going to be, some cases, more powerful motors.

Adam Jonas:

Jim, the Bronco Raptor, so badass. I don't know if I put an order and now if I'll get it by the end of the decade, but maybe I'll try. Jim, this is one of the most positive Ford calls I can remember in a long, long time. Does Ford have too many people?

Adam Jonas:

All right. Appreciate that, Jim. Just one follow-up on the dealers. They're having an amazing time. Their new gross margins have more than tripled, and they're making dealer grosses that are, in many cases, higher than what you're making on selling the product, right? Like they're making more money selling the product that you -- the margin you're making on actually making the product. And all they're doing is just watching the things come off a truck, and they're presold. So I know you guys spent a huge amount of time on pricing at Ford. Is there anything you can do to help even the score a bit on price? Because when I ask the dealers, why isn't Ford raising -- or your peers are raising some of the invoice more, even they don't have a reason like we don't know why they're not doing it. And then they often say things that I don't believe, which is that you can't or you're not moving fast enough or the systems aren't there. So what are we missing?

Adam Jonas:

Makes a lot of sense.

Rod Lache:

So pricing has been a massive tailwind, and it looks like mix is becoming pretty powerful now, too. Can you just talk to us a little bit about the interplay between affordability and volume? Just especially in the environment that we're in right now and with still a lot of inflation on the horizon, do you think demand can return at this level of price? And are you willing to forgo volume to sustain contribution margins?

Rod Lache:

That makes sense. And then just secondly, can you just provide any color you can on what's happening from a supply chain perspective? Any thoughts on whether this Europe natural gas situation is something that is a major concern for you? And then lastly, any detail on the $3 billion of cost inflation in North America? It looked like a large number. Was there anything unusual in that number?

James Farley:

And on the supply chain, I'd to characterize it, I mean, chips are still an issue. Transparency is still an issue in the second quarter specifically. You know we had quite an issue in China with the Shanghai shutdown. And that affects -- that could have affected our North America manufacturing system. The team did a great job. We had a daily call. We worked every issue. We built a digital model of all our supply chain down to supply chain in, and it was really helpful. And we got through it. Like Rosana Rosana Dana said, if it's not one thing, it's another. It just feels like what's next. As far as we're planning everything we know could happen. The next possibility of the energy crisis in Europe, we played this out already. We've done our homework. We have about 550 active suppliers in what I would call the high-risk countries like Czech, Germany, Hungary, Austria and Slovakia. We think that the risk is between now and mid-'23 when they can manage through the energy issues. We have about 130 suppliers for our North America vehicle production in that 550 list, and we now have a 30-day buffer stock. So we are doing everything we can with the things we know. On the supply chain outside of -- we have labor shortages and all sorts of moving. The suppliers have been working nonstop during COVID, so machine maintenance and a lot of other things. We see the output of the stress in the supply chain. And obviously, their costs have gone up, too. And we're working through all of that with our suppliers. So I think we're well prepared for the things we can predict, but it's always a new day.

Emmanuel Rosner:

My first question, I was hoping to ask you about the topic of EV profitability. So Jim, during the quarter at an investor conference, I think you essentially gave some pretty good color on where Ford is standing right now. And I think you spoke about the cost of the Mach-E being a disadvantage of $25,000 to $27,000 versus a similarly [indiscernible]. So I guess my questions would be, how do you plan on offsetting this over time? I guess what is the strategy going forward? And should we worry about large losses from EVs in the near term over the next few years as the EV volumes increase materially over the next few years?

John Lawler:

No. In segmentation reporting, you'll see exactly where we're at between the 5 businesses. And Emmanuel, we know how important that is. So when we have our Capital Markets Day early next year, we'll unpack that in more detail, as Jim said, where we can spend some time on it and go through it and give it to do justice.

John Lawler:

Yes. So Emmanuel, we spent a lot of time on this, as you would expect us to be doing, modeling scenarios, looking at what that means for the business, looking at what we should be doing today to get out in front of any these types of issues if a recession were to come. But the way we're thinking about it is if you step back and look at where we're at today relative to where we've been as a company, heading into any -- what could be a potential downturn, right, we're in much better shape. You mentioned it from a demand standpoint. We have 3 years of pent-up demand, and we have a very strong product lineup. And so that's a positive. We're also at a point right now where incentives are low, right? They're in the single digits versus what normally, at this point in the cycle, we'd probably be in high teens. And so of course, as volume or demand comes off, there will be some pricing that will need to be given back. And that's a bit of a release valve, if you will. But it's really important for us to be thoughtful about that, not only Ford, but as an industry. And then the other thing I would say, and I mentioned it in my remarks, our business is very different than what it was in the past. Our ICE product, clearly, it's more -- our lineup is more profitable as we've exited unprofitable vehicles. But we've de-risked the overall business. We restructured our markets overseas. And I think a great proof point for that is the fact that between '18 and '21, we burned through $9 billion of free cash flow overseas. We're not in that position now. And we do expect this year, we're projecting that our overseas markets will be free cash flow positive. So we're just in a completely different position. We're modeling it. We're looking at it. We're getting out in front of things, as Jim said, that we can today. But it's a new day every day. But that's how we're thinking about it. We're clear-eyed. We understand what we're facing. We understand what could potentially be in front of us, and now we need to work it.

Colin Langan:

I just wanted to circle back to the first question going from the first half to second half. The outlook dividend point is about flat. You highlighted, I think, [indiscernible] volume. I think the commodities is over $1 billion in [indiscernible] Q1 and Q2. You highlighted about $1 billion of Ford Credit sort of -- that's about $3 billion is good news. You didn't quantify the bad news. [indiscernible], it doesn't seem like [indiscernible] be that material. Any sort of framing it, is that $3 billion inflationary cost predominantly in the second half? Is that [indiscernible]?

Colin Langan:

Okay. And to follow up, I know you clearly are going to give more details on the E perspective and how you're going to assess things. But you're talking a pretty dramatic increase in raw material costs. I think even in your comments, you indicated that only about 50% of the materials are going to be available to produce all the EV targets, which kind of would imply that prices of the raw materials would actually remain high. Should you be thinking about pulling back on some of the EV investments if the economics at this point are unclear?

Operator:

And the next question will come from Joseph Spak from RBC Capital Markets.

John Lawler:

So we had -- it's $1 billion higher than what we had talked about previously, Joe. So we're looking at about $3 billion for the year, and that's part of what we're doing. We're working to offset those inflationary costs, and that's something that we need to continue to work through. We're not all the way there, of course, but we're working on it, and we do have the rest of the year to go, and it is a significant focus of our team, as we've talked about. But the cost efforts are a significant focus of the team as we remake the company in Ford+. So that's a really important part of what we're doing. And so it's $3 billion for the year. We had said $2 billion. We've seen about another $1 billion come through, and it's across the board.

Marion Harris:

Joe, this is Marion here. Thanks for the question. You're thinking about it correctly. So if you go back to pre-COVID, and balance sheet was quite a bit larger, we were at about $145 billion at that time. We were at a run rate of about $2.5 billion, $2.6 billion of EBT. And so that was the normal level. Our balance sheet is somewhat smaller now. And so I think what you're seeing is a more normalized level of profits. We're back at our pre-COVID reserve level. We're not releasing reserves and the related to lease residuals, that's pretty much worked its way through its book. So you're seeing that more normal performance.

James Picariello:

Just for commodities, at current spot rates, just as a theoretical exercise, right, if we take into account the lagging effect to your P&L, can you just think about maybe directionally just what commodities -- what the commodities impact would look like for next year at current spot rates?

James Picariello:

Okay. Understood. And then just with respect to the cadence for the second half, I mean, how should we be thinking about the quarterly volume -- the volume ramp in the back half? And can you provide color on Ford's progress in shipping the [indiscernible] inventory, I think, totaled 53,000 entering the quarter?

Operator:

Ladies and gentlemen, this concludes the Ford Motor Company Second Quarter 2022 Earnings Conference Call. We thank you for your participation. You may now disconnect. Take care.

Operator:

Good day ladies and gentlemen. My name is Andrea and I will be your conference operator today. At this time, I would like to welcome you to the Ford Motor Company First Quarter 2022 Earnings Conference Call. All lines have been placed on mute to prevent any background noise. After the speakers' prepared remarks, there will be a question-and-answer session. [Operator Instructions] Please note this event is being recorded. At this time I would like to turn the call over to Lynn Antipas Tyson, Executive Director of Investor Relations. Please, go ahead.

Jim Farley:

Hello, everyone. Thank you, Lynn, and thanks for joining our first quarter 2022 earnings call. Yesterday, I was with Bill Ford and our incredible team at the Rouge factory, where my grandfather worked, to celebrate Job One for the F-150 Lightning. We were also proud as a team for delivering a truly breakthrough electric truck and delivering it on time as a launch. The excitement around the truck is like nothing I've ever seen in my career. In fact the power went out in the facility and we ran most of the presentation with F-150 Pro Power Onboard. While we have work ahead to fully scale production and fill an extraordinary order bank, both for our retail Lightning customers and Ford Pro, make no mistake, this is a very important moment for us at Ford. We're accelerating our significant transformation. We have the right plan called Ford+. We are putting in place the right organization. As you know on March 2, we announced our plan to form two distinct, but interdependent business units called Ford Model e and Ford Blue. Together with Ford Pro, these three automotive businesses allow us to clearly define and assign priorities, make the most of our existing strengths, but also build new strategic muscles and most importantly capabilities. Ford Model e is responsible for delivering clean sheet breakthrough EV designs, software advanced electric architectures, partial autonomy. And Ford Blue's mission is to deliver a more vibrant and profitable ICE business, a business that's going to serve in the short term as our profit and cash engine for the entire enterprise. So what have we learned since March 2? And what are we working on at Ford? In terms of Model e, first, it's very clear to us that battery capacity is the key unlock to our EV aspirations and propel our growth in the future. We're in good shape in the near term. In the medium and long term, securing raw materials, processing precursor and refinement and setting up battery production here in the US and around the world is a big work statement for us. Expect a lot of news from Ford in the future related to the vertical integration of our EV business. Second, we're getting after our talent gap in key areas, EV engineering, software and autonomous driving technology. We have a very good start already and we will continually be very aggressive on recruiting talent. Third, we're now deep into discussions with our dealer partners around the globe, but especially in North America on brand new standards that are required to launch a completely different customer experience that is leaner and better for our customers that we believe will not only be competitive, but superior to a solely direct model. We're drifting standards as we speak and plan to roll this out this year. Finally, we're crafting our EV future product pipeline and are focused on a small number of highly compelling, highly volume models in key segments where we already lead. I want to make this very clear. Some companies seem to be pursuing a strategy of trying to match model-wise volume with eight or nine top hats. That's not a winning plan in our view. We will focus on key volume nameplates, constrained capital, because we have it, but really to leverage scale and efficiency to reach and eventually exceed our 8% EBIT target for EVs. I want to be clear here that as we move forward, our EV designs will be progressive and they're going to be aimed at bringing new customers to Ford and Lincoln. They will not be electric versions of our existing lineup. Now in terms of Ford Blue, we will accelerate our restructuring and address our uncompetitive cost structure. We're going to attack complexity in areas such as powertrain. We can't wait. This work starts now. We will continue to invest in our ICE business, but in targeted ways to build our most popular and profitable vehicle lines, F-Series, Bronco, Super Duty and a few others. Another focus is quality. We made good progress on initial quality and launches. However, we continue to be hampered by recalls and customer satisfaction actions. This has to change. We must do more to aggressively address our engineering process and improve our robustness. Now, our Ford Pro business is on track. We see healthy growth in parts sales, mechanic repairs, growth in subscriptions for both charging and telematics and CV financing. Most importantly, we're making our customers' lives and businesses better. They're using data. They're improving their uptime and their bottom line. Supply chain constraints continue to impact our business, including some of our key profit pillars. That said, we're making progress on launching and scaling new products as you can see with Lighting. That said, our major focus now is accelerating a more fundamental change in our supply chain management to improve visibility through our entire value chain and secure supply, especially in places like semis and batteries. We're absolutely committed to unlocking value by improving our growth profile, our profitability and ability to generate sustainable cash flows from our automotive-related businesses. Our new targets include producing more than 2 million EVs in four short years by the end of 2026. That's about 70-plus CAGR. And we expect that by 2030 EVs will account for about 50% of our global sales. We have also reset our profit ambition. We are now targeting 10% company-adjusted EBIT margins by 2026. Now in terms of the first quarter, I would describe our performance as mixed. The appeal of our new products is really clear and customers demand is extremely strong, beyond the supply constraint of our industry. However, we are still grappling with persistent supply chain issues that prevent us from posting even stronger quarter. We're working to break constraints, whenever they exist to take full advantage of this incredibly hot product lineup. Both new EVs like the F-150 Lightning, but our iconic ICE vehicles as well. We remain committed to delivering our targets quarter-after-quarter, year-after-year earning your confidence along the way. And now, I'd like to turn it to John to take you through the quarter and our outlook this year.

Operator:

We’ll now begin the question-and-answer session. [Operator Instructions] And our first question will come from Rod Lache of Wolfe Research. Please go ahead.

Jim Farley:

Hi, Rod, thank you for your question. Obviously we're seeing on the commodity side steel, aluminum, copper, lithium, nickel. On the logistics side a lot of premium freight. We're seeing pressures on inflation from suppliers. So it's really across the board. I'll let John answer the pricing question, but I would say, we really have quite a bit of pricing we've recently put in the market. It's stuck. And in addition, we feel like we have a lot of cost upside as well in the company. I know that's not your question, but that's an opportunity. John?

Jim Farley:

Percent of revenue.

Rod Lache:

Thanks for that. And any color on the outlook for Europe for the rest of this year just given all of the macro pressures there? It looks, you've been posting pretty solid results there recently.

Rod Lache:

Thank you.

John Murphy:

Good evening, everybody. I just wanted to ask a question sort of on the growth side Jim. I mean the F-150 Lightning orders it sounds like they're mostly incremental buyers folks that haven't been Ford or F-150 buyers before. I'm just curious if you think that is just sort of a surge here at the launch of the truck or is this sort of 15% to 20% sort of incremental orders relative to the base F-150 something you think will stick around? I mean because obviously that's very powerful potentially to your earnings. And do you expect the profitability of this truck over time to have a variable margin that would be similar to the F-150? I think sort of being even a little bit more verbose do you expect the same kind of thing with the 250 350 which you'll launch in two or three years?

Doug Field:

Sure. To start with I'm really excited about what we're building off of in Ford strength. These are cost bases that I'm drooling over in terms of the future products. But when we talk about EV specifically, the first thing we have to do is really control the battery materials and the chemistry there the single largest build materials opportunity of course but the next is really obsessing over how we use those materials and chemistries. Energy efficiency is a religion and the team is really stepping up to this. Every single watt of consumption is now being tracked and optimized. And on the new programs changes in aerodynamics and drive unit optimization we're seeing dozens of miles of improvement in range. That's hundreds and even in some cases thousands of dollars of battery that we can take out. Finally I think really going after a true ground-up approach to how we build EVs. They're different than internal combustion vehicles. And you could take advantage of that and really change the number of – in our next F-Series EV factory we're going to have on the main line half the stations that we use today to build a Lightning. So I'm very optimistic with this journey that we have some really good ground to make up on margin.

John Murphy:

Actually can I just ask one follow...

John Murphy:

No. Keep going Jim. Sorry I had a follow-up on...

John Murphy:

Got it. And I'm sorry, a follow-up on the 53,000 units that are in inventory on wheels. Is that what we're seeing in this 21% increase in inventory on the balance sheet from the fourth quarter to the first quarter? And presumably, the cost has not been accounted for at all here and we'll see those vehicles flush out to the system in the second or third quarter when the chips become available. I'm just trying to understand John Lawler, the economics and what profitability boost may be from these vehicles flowing out. Could you just kind of explain sort of how you're accounting for this and what the benefit might be in the second and third or fourth quarter when they actually are finished?

John Murphy:

I'm sorry John, the costs are recognized in the first quarter results, but obviously the revenue is not? I'm just trying to understand this because, it sounds like it might have a big impact in sort of people's understanding of the cadence of earnings through the course of the year.

John Murphy:

Okay. Got it. Okay. Thank you, very much.

Colin Langan:

Great. Thanks for taking my question. As you mentioned, the EV battery costs have really dramatically increased. Has that changed your EV strategy at all? Do you think, you're going to need to maybe raise the pricing of the Lightning and the Mach-E? And what can you do about it or maybe switch to different chemistries, all out more hybrid? How can you address it if raw materials stay at these very high levels for that -- those battery materials?

Doug Field:

No. Ford, a number of years ago started Ion Park, which is a team of experts really focusing on chemistry. Lithium-ion phosphate, of course, we know from the industry is something that takes you away from the dependence on nickel. That will be a part of our battery, and we're also looking chemistries that give us an opportunity to be less dependent on the specific materials that everyone seems to be fighting over in the market.

Colin Langan:

Can you which two tells us please?

Colin Langan:

Yes. I was just going to say you mentioned you're able to do LFP or that's in the plan. I mean, how quickly can you switch because nickel is spiked now? I mean, I'm just kind of wondering how flexible and how quick you could adapt to that $2 million target by 2025?

Colin Langan:

Got it. And just second question, you mentioned in your comments about warranty costs and that was going to be a big driver of margins. It does look like it was up year-over-year. Is that just sort of a temporary blip in the quarter, or is there a structural issue that we're going to see some higher elevated warranty through the rest of the year? Hello.

Colin Langan:

Got it. Thanks for taking my question.

Adam Jonas:

Hey, everybody. Is Lisa Drake on the call?

Adam Jonas:

We've got great people on the call. We're good. First, I noted the Lilac Solutions partnership that's a really, really good call here and a lot of really great things. So we had great job there. If you could imagine that the entire metal and mining industry were listening to this call right now and they really should be. What would your message right now, Jim?

Doug Field:

No. I think that's the right list.

Marion Harris:

Hi, Adam it's Marion Harris here. The short answer is, no. We're seeing strength in delinquencies. They're up marginally versus last year but still well below anything we've seen. And a lot of that's on the back of strong used car values which we expect to remain strong for some period of time. And you're even getting into the gas price piece of this. One of the things we've been looking at is whether or not there is a change in auction values by segment. And we're not seeing any differences in prices or price movements for large SUVs versus smaller sedans. So the trends continue and we still feel very good about the Credit business.

Operator:

The next question comes from Dan Levy of Credit Suisse. Please go ahead.

John Lawler:

Yes. Dan, thanks. So price is the main offset there for the full year pricing offsetting the inflationary pressures that we're seeing. We are being very aggressive in ramping up additional cost efforts because we know that this is not going to -- we don't believe that the pressure on cost due to inflationary pressures is going to ease anytime soon. So we need to find more efficiencies. We need to improve productivity. And Jim and the team and we are working very hard on that. It's a priority for us. So the other thing that we have is in the second half of the year we do have volumes improving based on the better availability of someway as we see that through the system. So that's another big driver for us in the year. And we'll see that in the second half over the first half as that comes online. So Hau, do you want to talk a little bit about how you're seeing that and what we've been doing to manage that?

John Lawler:

And the other thing I would add is that, the demand, as Jim said earlier is very strong for our new products and that's encouraging for us. We just can't build enough of them and we see that demand continuing. Q - Dan Levy And the mix assumption within this?

Jim Farley:

Hau, do you want to comment on that specific comment because I – commodity, because I think it is really material.

Dan Levy:

Great. And then my second question is just as we think about the costs that are coming online, I think you've discussed in the past that really in your re-org that Blue is going to be what fund Model E. So in a good market, it's very easy to see how incremental profits from the core combustion business are funding your EV growth. But now that we have more costs that are coming into the system maybe you can give us a sense how you're looking at your growth investments. EV, I assume you're going to invest in that regardless of what the underlying market environment is, but maybe you can give us a sense of are there other growth investments that are maybe more discretionary that you can – if you need to pull back on or delay. How do you think about other growth investments?

Dan Levy:

That’s helpful. Thanks.

Mark Delaney:

Yes. And good afternoon and thank you very much for taking the question. The first is on the new structure Jim, about two months now since Ford announced the split into the different segments including Ford Blue and Model e. I'm hoping to better understand how employee reception has been. And for Doug Field perhaps specifically maybe you can talk about what is meant for your ability to get the right engineering talent. And are there any anecdotes or data points you can share?

Doug Field:

Thanks. Yes. We did think a lot about this and I had a great partner in Hau to figure out how we were going to take best advantage of Ford's deep capabilities that I have not access to in my prior roles. So, the organization is set up, where Ford Model e can't and doesn't build cars by themselves. We rely on an industrial platform that does great [Technical Difficulty] and Ford Model e contribute software [Technical Difficulty] systems back to Ford Blue. So, there's an interdependency that really helps the team work, I think. As far as attracting talent, I've been really delighted and surprised by the kind of talent that we can attract from tech. I think there's a certain amount of fatigue in the tech world and a lot of mature products out there. The opportunity to work on high technology, but do it in a brand that is so iconic in the United States and something that is so -- such a rich product like a vehicle is really attracting some great people. Finally, I think from a talent perspective, Ford Model e is also helping us really dig into the internal team and find great people who can step up take on different kinds of roles, be put in positions of authority and really help drive us forward. There are great people here.

Jim Farley:

Thank you. It really comes down to the commodities -- semiconductor-related commodities that have been hamstringing us. We, obviously, are spending a lot of money on premium freight and other things to work around COVID escalations in China. But really the second half of the year's production increase relates to those. So Hau I don't know if you want to add anything specifically.

Operator:

The next question comes from Ryan Brinkman of JPMorgan. Please go ahead.

Jim Farley:

Yeah. Unfortunately at this point, we're not going to comment on Rivian.

Jim Farley:

Thank you. Well, first of all Argo, and Ryan continue to make great progress technically on the SDS for Level 4 autonomy. We're very happy with the technical progress. Number two, we really see maybe different than others Level 2, Level 3 and Level 4 as two distinct products. Yes, Argo could help us with our semi-autonomous capability, but we feel like that would be a big distraction for them, which we do not want them distracted at all. And number three it's taking time. And this is expensive stuff. And so from our standpoint getting access to the capital markets is very critical to give us the flexibility to continue to fund this for many years to come. One thing I would say is we're very focused on partners that would be aligned strategically with Argo, use cases that would be very material in the deployment of Argo's technology. And we're getting more and more interested as a company maybe a bit of a strategic shift on goods movement. It's aligned with our commercial vehicle business and our customers feel they're getting more and more interested in middle mile specifically. I think that's a material update for Argo and hopefully that helps you.

Operator:

The next question comes from Joseph Spak of RBC Capital Markets. Please go ahead.

John Lawler:

Sure. On the redesign, there's efficiencies that we're seeing as we work through the redesign across each of the markets that we've restructured. And so you're starting to see that show up. There's also some timing differences in there as well where the work we're doing is let's say taking a bit longer to get to a solution or a final position with some of the counterparties we're working with. And we also announced the fact that we will be selling our [indiscernible] facility to AutoZone and that's going to allow to bring cash into that restructuring that we have there as well for global redesign. So, that's the short of it from that standpoint. The other point I think the question was around -- remind me what it was?

John Lawler:

Yes. Right. So, the lower CapEx--

John Lawler:

Yes. So, the lower CapEx that reflects no change in our intended investment in electrification or our fully networked architecture et cetera. It's just timing differences in this year relative to what we saw at the beginning of the year. So, you can still expect us to continually invest. We have the capital to do that. The balance sheet's strong. So, it doesn't reflect anything on where we see the business heading. It's just timing differences for the most part.

John Lawler:

Yes, it's more of working capital. Yes. Absolutely.

Marion Harris:

Yes. Joe, its Marion. Let me -- I'll just cover the guidance piece on Ford Credit. We said that the profits will be strong but lower. And that's reflected in the fact that we had large -- larger reserve releases in 2021 than we would expect in 2022. In addition to that, we had a lot more supplemental depreciation releases in 2021 than we would in 2022 related to the lease portfolio.

Marion Harris:

No, no. No.

Operator:

The next question comes from Emmanuel Rosner of Deutsche Bank. Please, go ahead.

John Lawler:

Yes. So I think what you see there is exactly that. There's no change to Ford Credit. We are seeing higher inflationary pressures. We are seeing higher top line pricing that's coming through, but we're also working on cost offsets as well. So I think it largely remains what we had talked about last time. We're just seeing higher inflationary pressures and higher pricing flow through.

John Lawler:

No. I don't think that it's as high as $2.5 billion, Emmanuel. It's -- there's growth in there, but it's not as high as that. I think that when you look at the walk relative to what we had provided last time, most of the inflationary pressures that we're seeing are being offset by a combination of additional cost reductions, pricing and mix that's flowing through, but it's not as large as that as what you had just indicated.

Jim Farley:

No. I mean, our -- absolutely not. I try to make that -- I'll say it twice. We are really excited about our growth opportunity in EVs. We have electric architectures to invest in, shop for OS, we have partial autonomy to invest in, full autonomy to invest in. That's all part of our Ford+ plan. It's essential to our move to always on. We obviously have lots of investments in building out our service portfolio for Ford Pro. We're not holding back on any of that. The cost drivers that we see are things like obviously manufacturing, as we simplify our ICE lineup. And as Doug said, really completely redesign our manufacturing process for EV. We have opportunities in sales and -- marketing and sales opportunity in engineering, as we simplify our lineup and of course warranty and other areas. So I think we're – we know exactly what we need to do.

Operator:

Our last question comes from Itay Michaeli of Citi. Please go ahead.

Jim Farley:

Yes. I mean we're not going to parse out the guidance. It's 11.5 to 12.5. It's a dynamic environment. We're working to offset all the headwinds and maintain the guidance. But as far as passing out where we sit within the guidance of 11.5 to 12.5.

Jim Farley:

And I'll just make it really clear on the overall company's automotive performance financial performance. The second half is very critical for us. It's just a very critical time for the company. We have the opportunity to build in volumes we haven't for a while. And we have a lot of great fresh products, a lot of costs coming in the business but second half is really critical for the company.

Operator:

This concludes the Ford Motor Company First Quarter 2022 Earnings Conference Call. Thank you for your participation. You may now disconnect.

Operator:

Good day, ladies and gentlemen. My name is Holly, and I'll be your conference operator today. At this time, I would like to welcome you to the Ford Motor Company Fourth Quarter and Full Year 2021 Earnings Conference Call. All lines have been placed on mute to prevent any background noise. After the speakers’ remarks, there will be a question-and-answer session. [Operator Instructions] At this time, I would like to turn the call over to Lynn Antipas Tyson, Executive Director of Investor Relations.

Jim Farley:

Thanks, Lynn. Hello everyone. Well, some may have described 2021 as a breakthrough year for Ford, I would simply portray it as a year of important progress for the company. We strengthened our base business last year and now expect to deliver even stronger results this year. And just as critical, we started moving with real speed and ambition to build a modern Ford. Our true breakthroughs are still ahead of us, like rapidly scaling production of our popular new battery electric vehicles, like turning Ford Pro a new growth engine for our commercial customers businesses and ours, like building our intelligent software platform to revolutionize our customers' experience. Even with the recent momentum, I know some observers may remain skeptical that a 118-year-old company like Ford will emerge as a winner in these disruptive times in our industry. And I'm okay with that. We're going to compete like a challenger, speak with our actions, prove ourselves over time. So let's dive into last year. As I mentioned, we have significantly improved our base business. In North America, our largest market, we have a very hot portfolio of new vehicles. We've now won awards of North America Truck and Utility of the Year for two years running. That's never happened by any company. The new Bronco, the Bronco Sport, the Maverick, the Mustang Mach-E all of them brand-new name plates for our lineup all, all of them kits. Last month, we launched E-Transit. In the spring, we're in the middle of launching F-150 Lightning. Few people ask us any more about why we phased out sedans and many more asking when they could take delivery of the new Bronco or Maverick or Lightning. So we're doing everything we can in our powers to increase our production and break constraints. We don't like making our customers wait and we're taking action to ensure that they don't pay unreasonable markups. We've also made progress outside of North America and this is very important. Ford has been a one-legged stool for too long. We stayed in Europe and South America and other regions, because we really believe we can create sustainably strong businesses in those markets. And we want to serve these customers with better, more connected and electric products and services. The deep restructuring in Europe and South America have put us in a position to grow profitability going forward. In China, we're now set up to play a much bigger role in the EV boom going on there. We've quietly grown Lincoln into a strong contender in the world's largest luxury vehicle market. In fact, China is now the number one Lincoln market globally. Our international markets group is profitable and we're now preparing for the important launch of our next-generation Ranger pickup this year. While we remain in the teeth of the COVID crisis and semiconductor shortages, our overall business is still in great shape. And at the same time, we're rapidly making progress on key aspects of the Ford+ plan. And for customers that means more distinctive products and solutions, more always on relationships with our brands and adding ever-improving user experiences. Now to deliver these things, we're building new muscles and that certainly includes scaling up our production of electric vehicles as I mentioned. We under-called the demand for our first wave of EVs. The Mustang Mach-E, the E-Transit, the F-150 Lightning. In the past six months, we doubled our 2023 planned capacity for EVs to 600,000 units a year. Now this required everything from working with SK and LG to increase battery supplies to knocking down walls at our Rouge electric vehicle center, while the mortar was still wet to make room to improve and build more Lightnings. Our team knows how to scale manufacturing and we're now harnessing that capability to ramp up production of EVs. We also have a task force dedicated to lowering the bill of materials for our bets above and beyond just the usual declines in material costs. For example, on Mustang Mach-E, in just the last month, our team found $1000 of opportunity per vehicle. And that's delivered through design simplification, vertical integration and leveraging our scale with supply chain as we ramp up production. And that team is just getting started. We plan to take full advantage of our first-mover position in the fully electric pickup truck market starting with Lightning, but there's much more to come. In the coming months, we'll break ground on the Blue Oval City electric truck plant in Tennessee. It will be the largest, the most advanced manufacturing complex in our history, and it will produce Ford's second generation of a full-sized electric pickup in high volumes starting in 2025. And at the same time, we have three large-scale battery plants in Tennessee and Kentucky, which will be coming on stream with capacity to produce enough battery cells for more than 1 million vehicles a year. This is in addition to our battery sourcing in China and Europe. We are well on our way to achieve at least a 40% mix of BEVs by 2030 with strong margins and equal to our higher market share in the key high-profit high-volume segments we compete. For example, the F-150 Lightning, if we had full production today to meet our current demand, we would rival the Model Y as the leading BEV nameplate in the U.S. market. We can't grow a profitable BEV business without a very healthy ICE business. And to do this, we're reducing complexity everywhere, while increasing, leveraging the benefits of our connectivity. Now this includes things like fewer top hats guided by customer demand and a judicious approach to vehicle content based on deep insights generated from that same vehicle data. We're also being disciplined with capital as we deploy that to our ICE products recognizing that as a mix of BEVs increases, we will continue to manufacture ICE vehicles but with a focus on optimizing cash returns. So our goal is to continue to improve our automotive EBIT margins. Let me say that again. Our goal is to continue to improve our auto EBIT margins even as we ramp up the mix of BEVs. In 2021, we began to bring our vision of an always on experience for retail and commercial customers to life. Our customers are realizing the benefits of our over-the-air software updates. But that's just the beginning. We're using our hubs in places like Palo Alto to attract more and more great software engineers and technology specialists. And we're fundamentally changing the culture of engineering inside Ford. The hardware will always be important, but the software and the embedded systems will define the next generation of our vehicles' experiences. I think customers will be amazed at the benefits as we move to central compute rather than the distributed compute we have across all the supplier-provided modules today. Our human-centered interface professionals are now in one single organization with authority over the in-car digital experiences, interfaces, screens and controls. And we're committed to providing an environment where software engineers can do the very best work of their careers. Before I turn it over to John, let me close, the velocity of change at Ford is increasing. We're not seeking half measures. Fear of change and risk has never served legacy automakers well in the past couple of decades. We're done with incremental change. We have a clear plan, a bias fraction and whatever-it-takes mindset. We're confident our strong base business will generate the capital we need to fund a very exciting future. We're recruiting incredible talent from outside the company to work with the best people from Ford. As excited as our customers are for that great portfolio we have in the market today, we can't wait to show them what's coming in the future. Now I'll turn it over to John, who will take you through the results for the quarter and our expectations for this year.

Operator:

Thank you. [Operator Instructions] Thank you. And our first question is going to come from the line of John Murphy with Bank of America.

Jim Farley:

Thanks, John. Yes, I don't want to speculate on rumors or speculate on the speculation in the press. But I will go back to something we said and I've said over and over again which is, running a successful ICE business and the successful BEV business are not the same. The customers are different. We think the go-to-market is going to have to be different. The product development process and the kinds of products we develop are different. The procurement supply chain are all different. The talent is different. The level of in-sourcing is different. And actually the rhythm of the business is different -- fundamentally different. So I'm not going to talk about speculation in the press, but I will tell you that the way we're operating the businesses acknowledges those differences. And I'm really excited about the company's commitment to operate the businesses as they should be.

Rod Lache:

Hi, everybody. I wanted to ask you a little bit about margins. As John said, it looks like you guys will hit 8% if you hit the high end of your target range. And Jim, you said that you're targeting improving margins from here. So maybe you can give us a little bit more color on that how we should think about it? I'm not sure that 8% is the benchmark anymore, just given how many years ago that's been and how many changes there are to the business. You're ramping up a lot of spending on engineering and spending up in EV infrastructure, but you're also going to grow the Ford Pro business. So maybe you can just give us some of the puts and takes how to think about it? And as part of it, if you might just give us a data point on where Ford Pro stood in 2021.

Operator:

Thank you. And our next question is going to come from the line of Sam Levy with Credit Suisse.

Jim Farley:

Thank you for your question. Perhaps the biggest gift for all the pain we're going through now in semiconductors is that we have very painfully learned the lesson that we cannot manage the supply chain for these key components as we have. In fact you could argue that in the change of transition to these digital electric vehicles that supply chain could be one of the biggest advantages a particular company has or doesn't have. The way we look at it is the key electric components memory chips semiconductors. I would break semiconductors into two types. I'll come back with GlobalFoundries in a second. Feature-rich chips that we still use a lot. A window regulator doesn't need to have a 4-nanometer chip. And the advance -- but we also have sensors power electronics for our inverters, the batteries themselves all the way back to the mine, the inverters of different battery. Chemistries itself have different raw materials and kind of ecosystems that support them. So this is a very important topic for the company. How different it is? It's really different. We need different talent at the company. We need physical inspection of the actual producers. We need direct contracts with them. We need to design the SoC ourselves. We need to direct in the case -- in some cases to even direct prefer build to print or actually use supplier XYZ to get out of where we've been. And this takes talent. It takes a different approach. It takes more resources. On GlobalFoundries, it's kind of the first big bet, but there'll be many, many more coming for us. We're very dependent on TSMC for our feature-rich nodes. Obviously, the capacity is at risk over time as the industry moves to more advanced nodes including us. And as I said we're going to need feature-rich nodes for many years to come. GlobalFoundries knows how to build them. They know to build them in the United States. We can partner with the government depending on the CHIPS Act to capacitize here. It will be a few years until we benefit from that but it's a really big thing to descale ourselves on the feature-rich chips from the current ecosystem that we depend on around the world. And I think GlobalFoundries is a really interesting deal when we get into the details. We have to put cash up when we participate. Those feature-rich semis will be used by other companies industrial companies, not just Ford. It's a really interesting deal. And I was talking to the US company. You can expect the same kind of thing on advanced nodes and all the other components I mentioned including more deals on the raw material for various types of battery chemistry. And this is a culture change at Ford. As I said this is part of the rhythm change between ICE and BEV.

Ryan Brinkman:

Hi, thanks for taking my question. Slide 20 shows you with $36.5 billion of cash and investments which might be a record, but it is certainly the most that I can remember and compares to I think like five-plus years ago you used to talk about wanting to have cash of something closer to in excess of $20 billion with like another $10 billion or $13 billion of more liquidity on top of that. I get that there's more uncertainty now with the pandemic and the chip shortage. And of course you're investing heavily for electrification. Despite those investments though, I mean you're still calling for $5.5 billion to $6.5 billion of FCF this year versus the dividend costs like $1.5 billion or $1.6 billion. So, with the current trajectory it seems like the record cash pile should only grow bigger in 2022. I'm just curious what your thoughts are on this whether you have any updated thoughts on the optimal capital structure over what time or under what conditions you might move towards that more optimal capital structure. And it being so far above the earlier targeted cash balance might influence how you go about deciding what to do with the Rivian stake once the lockup expires.

Ryan Brinkman:

Very interesting. Thank you.

Emmanuel Rosner:

Thank you, very much. Good evening. I wanted to ask you a little bit more detail related to two items in the 2022 outlook. The first one is your volume and mix assumption. In the fourth quarter when I look at the North American walk, your wholesale were up something like 60,000 units year-over-year, but the volume mix piece of your North American bridge was up only $100 million and that's despite what F-150 may be up like 34% year-over-year, if [Indiscernible] is right. And so just curious what's going on in terms of mix and why that contribution didn't really flow through to the EBIT. And how do you think about, as you grow your volume 10% to 15% in 2022, what kind of EBIT contribution can we expect from this? That's the first item. And then the second one is in terms of additional investment costs, so you've quantified a step-up in CapEx for 2022. I'm just curious if there are things in the income statement that you're able to quantify in terms of additional investments in technology that we should think about as we model 2022?

Operator:

All right. And our next…

Operator:

Thank you. And our next question is going to come from the line of Colin Langan with Wells Fargo.

John Lawler:

From a quarter-over-quarter basis and what – how the quarter developed, we hit the midpoint of the guidance. And one of the things is I think some expected volumes to be up higher than what we had guided. And just we had supply chain constraints hitting us this quarter. Omicron disrupted several of our key suppliers. They couldn't produce. They couldn't get us products. But net-net when you look at the fourth quarter relative to where we were third quarter, let's say as a proxy, volume and mix was up slightly. It was up about six-tenths. But then we had additional headwinds on commodities. We had some modernization costs that came through, specifically around our IT as well as connectivity as we're investing in those growth areas. And then we saw costs come through from inflation. We saw costs come through on transportation, on fuel, et cetera. So we're seeing some of those headwinds were hitting us in the fourth quarter. But demand was strong. If we could have met the demand and the production without the disruptions, you would have seen a stronger quarter. And so as we go into 2022, as we see those supply constraints ease, as we see the demand for our really strong product lineup, we see the top line growing. We see continued improvement in mix. We see continued improvement in price. And that's going to be much more of a tailwind versus some of the headwinds we're seeing [Technical Difficulty]

John Lawler:

No. I don't think that as we ramp up at the start with the launch this year that it's going to have a significant impact on what we see from a standpoint of our profits in North America. And then coming back I think one of the questions Colin you had asked that, I didn't touch upon was the fourth quarter or maybe it was Emmanuel earlier on the mix side is we did have lower Super Duty mix in the quarter and that was again driven by supply chain disruptions. There were vehicles that we weren't able to build and complete because of certain commodities that weren't coming through to get those vehicles down the line and done.

Brian Johnson:

Yes, good afternoon. I want to talk a little bit about dealer pricing versus your pricing. The Detroit Press ran some articles in January on taking action in some of the more egregious markups on EV. Yet if I look at the broader lineup, I see that per J.D. Power your revenue per unit is up about 3-point – 3,800, which clips to your $7.6 billion pricing you cited. Yet the transaction prices are up 5,600, meaning you're leaving about $1,850 of profit in the dealers' hands which would be about another $3.6 billion of profit. So just wondering kind of as you kind of go forward as the dealers, especially move to this simplified inventory model you're looking at how you're thinking about the balance between your invoice your revenue per vehicle and the actual transaction prices at the dealer level?

Operator:

Thank you. Our next question is going to come from the line of Mark Delaney with Goldman Sachs.

Jim Farley:

Thank you. So we've been hard at work at this for quite some time actually. We knew we were oversubscribed pretty early in the process and the team has been at it. We have been working. Really, the primary lift for us is battery availability. So we've actually been securing extra batteries for quite some time now. We have some manning options for Mach-E. So we will move close to 100000 units this year on Mach-E. That will be our big move this year. Next year, our big move will be Lightning going to 150000 units. I won't get into battery chemistries and all the details, but I'm really excited about the progress we've made so far in securing batteries. On the F-150 Lightning, we actually had a physical capacity constraint of the facility. And so we took the decision already to again redesign the facility so that we can accommodate the 150,000 units. We have great capacity on F-150 for the nonelectric components. So this is just a matter of the Mach-E getting the labor in place and getting the batteries, and the F-150 getting the batteries out of Georgia and redesigning the facility so we can get the final assembly done. As far as chips are concerned these battery electric vehicles and the supply chain are a strategic advantage for our company. So we will protect in the constraint where we will protect our battery electric supply production.

Joseph Spak:

Thank you. Jim, it's really refreshing to hear you talk about the two different businesses and how you're managing them and running them and planning for them separately. I guess so to the -- and it's also good to hear you think you would have more to wring out of the ICE business. But I guess the question is, as CEO of Ford which is managing those two businesses like to the extent, you are able to wring more out of ICE, does that give you leeway to accelerate or increase your investment in the EV business? Like how do you think about combining the two businesses back together in terms of the investment spend?

Operator:

Thank you. Our next question is going to come from the line of Itay Michaeli with Citi.

John Lawler:

Yes. Thanks. It's John here. So, when we look at our Mach-E profitability as we said, we are profitable from a Mach-E standpoint. We're seeing great demand. We're seeing strong mix. So, we've seen the profits improve. Importantly what else we're seeing is opportunities to continue to reduce the cost and reduce the complexity. So we're very focused on improving those margins. But overall, as we said in the past, our fab margins are not yet quite where we like them to be especially relative to our more profitable ICE vehicles. And so, we have to continue to do work there primarily around scaling, reducing the complexity as we move forward. So we're encouraged by what we're seeing on Mach-E so far, especially with the strong demand and the mix but there's other work that we need to do as well to continue to further improve those margins. And our expectation is that we're fully competitive on our BEV margins as we move forward and that's what we need to work towards.

Operator:

Thank you. Our next question is going to come from the line of Anindya Das with Nomura. Your line is open. Okay. Our next question will come from the line of Jeoffrey Lambujon with Tudor Pickering.

John Lawler:

In Europe, we expect profit improvement. We expect them to be meaningfully profitable in this year in 2022. And we're still committed and Europe is on track to deliver the 6% EBIT margin by 2023. They're continuing to move forward. They're seeing favorable pricing environment continue. They're accelerating into the BEV. The Mach-E is a very strong product for them. And again commercial vehicles, it's a strength of ours and we continue to see that grow next year and be a pillar for Europe, a strength for Europe. With IMG as you go into 2022, International Markets Group, we expect them to be down year-over-year but profitable. And that's going to be driven by two key things

Operator:

Good day, ladies and gentlemen. My name is Erica and I will be your conference operator today. At this time. I would like to welcome you to Ford Motor Company's third quarter 2021 earnings conference call. All lines have been placed on mute to prevent any background noise. After the speaker’s remarks, there will be a question-and-answer session. [Operator Instructions]. At this time, I would like to turn the call over to Lynn Antipas Tyson, Executive Director of Investor Relations.

Jim Farley:

Thank you, Lynn. Hello, everyone, and thanks for joining us today. Well, this month marks one year since we'd began executing our Ford Plus Plan. It creates growth, value, and it allows us to win in emerging area of electric and connected vehicles. We built a strong team that combines top leaders from Ford with world-class talent recruited from outside of our Company. Specific talents, specific people that are largely outside of our industry. This leadership team is committed to this plan and we're accelerating our progress. Ford Plus is not a tagline. It's not advertising. It's a larger, more ambitious way to think about our business and how we bringing value to our customers. We're creating iconic and distinctive products that only four can do. Increasingly, always on relationships with our customers and ever improving user experiences, all why creating value for our shareholders. We're fully invested in this future. And we're taking big swings. Key to the plan is harnessing the power of connectivity. We're designing a new generation of fully networked vehicles not delegated to our supply chain, but done inside the Company to revolutionize the experience of owning and operating Ford vehicle. That's embedded technology to unleash unlimited innovation. We're scaling the number of vehicles capable of over-the-air updates will be moving from 1 million vehicles today to 33 million by 2028. That scale. At the same time, we're moving aggressively to lead the electric vehicle revolution, substantially expanding our battery production as we speak today in the U.S. Infact, we already announced plans that will give us enough battery production to meet our mid-decade goal of a 141 gigawatts, which is enough to build more than 1 million battery electric vehicles a year and I think we'll need more. R7 billion investments in Blue Oval city in Tennessee in the BlueOvalSK park in Kentucky sets a new standard for scale sustainability, advanced manufacturing, and training the next-generation of technology leaders. At the same time, the billion dollars of investment in our electrified center in Cologne, Germany will allow us to go all electric soon. That center will be all electric by 2023. We're making final preparations to launch the F-150 Lightning. That defining 0 mission version of an America's best-selling vehicle for the past 40 plus years. Our all electric Mustang Mach-E is a hit with customers, not just in the U.S., but around the world, bringing a stunning number of new customers to the Ford brand. Over 90% of the Mach-E owners say they would recommend a Mach-E to other customers. Critical as a new-generation of battery electric customers make new brand choices. Our challenge now is to break production constraints and increase availability to meet this incredible demand both in North America and in Europe, and also in China, the biggest EV market in the world. where we are just starting production and Mach-E. We believe the global demand just for Mustang Mach-E could approach about 200,000 vehicles a year. We've created new organization, Ford Pro to change and power the future of work with compelling commercial vehicles, distribution, and services. While growing revenues to Ford. In a few weeks, we will start production of the new E-Transit, an electric version in the world's best-selling commercial van. And in the third quarter alone, FORDLiive, Europe 's new connected uptime center, which I wish you could all see for our commercial customers, helps customers in the UK secure additional up time, preventing about $8 million of lost revenue and associated costs for our valuable customers. We're reinventing icons like Bronco and creating new ones like Maverick. In fact, the all-new Maverick, 42 miles per gallon I might add, is the first standard hybrid pickup in the U.S. It's also America 's most fuel-efficient hybrid pickup. This is the strongest, most compelling lineup I'd ever seen from any mass market brand in my career. And we are creating a spring loaded future as we emerge from the cheap shortages and COVID constraints. And we continue to make important strides in the technology and go-to-market strategy for autonomous vehicles. In the Second Quarter, we told you about a new partnership with Argo AI and Lyft. And then the Third Quarter, we announced a new partnership with Argo AI and Walmart. This is Walmart's first ever multi-city autonomous delivery service. And it will be anchored in cities where we already have operations. Not the easiest miles in one city, but multiple cities and hard miles. In addition to making real progress on autonomy vehicles, operating domains, SDS, we fully support Argo AI 's aspiration to access public capital. To build this future, and generate the margins and cash flow. We need to fund Ford Plus; we had a turn around our automotive operations, and improve our competitiveness. Our results in the third quarter show we are making significant progress. In fact, Company-wide, we achieved an 8.4% EBIT margin, including 10.1% in North America. Those margins, I will remind you are in line with our targets for 2023. More importantly, our operations outside of North America are likely to post the best performance in 4 years. Please note the performance in South America, largely driven by our success of our global redesign. We've been able to achieve this while thoughtfully managing our supply chain for short-term sustainable improvements including semiconductors, and prioritizing high demand and high profit vehicles. And before I turn it over to John, a few thoughts. I believe we have the right plan to drive growth and unlock unprecedented value. You are already seeing favorable change in the slope of our earnings and cash flow. There's more to come. Given the strength of our business this year, we are increasing our full-year adjusted EBITDA guidance to between 10.5 and 11.5 billion. As we plan in earnest for next year, we're excited and energized about the opportunity in front of us and clear that we have so much more work to do to deliver on fourth potential. The word I would leave you with is focus. That competitive environment has never been more interesting and tough. And we intend to live up to our promise to compete like a challenger focusing on our top priorities to unlock Ford Plus growth with customers at the very center of everything we do. Now I will turn it over to John, who'll take you through our results for the quarter, our outlook for the full year, our capital allocation priorities, and our expectations heading into next year. John?

Operator:

[Operator Instructions] Your first question comes from the line of John Murphy with Bank of America.

John Lawler:

Yeah, so if you look at where we ended in September, we ended at about 20 days’ supply in the U.S. and we're watching it very closely from a day supply standpoint. In -- as we talked about last quarter, in our historical base supply was somewhere around 75 days. We're not going back there. As Jim said, we're going to be very disciplined and we expect to be in the 50 days’ supply when we're fully at full capacity and we're running and producing everything that we can, so that's gonna be the key. The other thing I would say, John, is that the move as we talked about in our remarks to having more of our sales come through orders, unlike orders in the order bank. That's really important for us to manage our day supply. So it's a less of a scrounge stock push through and its customer demand pull-through based on the orders and we had over a 100,000 orders at the end of the quarter and that's grown since then in our order bank and that play well for us in the third quarter.