Q2 2021 Ford Motor Co Earnings Call

Good day, ladies and gentlemen, my name is Holly and I'll be your conference operator.

At this time I would like to welcome you to the Ford Motor Company second quarter 2021 earnings Conference call.

All lines have been placed on mute to prevent any background noise.

For the speakers remarks, there will be a question and answer session.

If you would like to ask a question during this time.

For today's press Star then 1 on your telephone keypad to withdraw your question press the pound key at this time I would like to turn the call over to Lynn Antipas Tyson Executive director of Investor Relations Lynn hand, it to you.

Thank you Holly welcome to Ford Motor Company's second quarter 2.

Simply 1 earnings call with me today are Jim Farley, our president and CEO and John Lawler, Our Chief Financial Officer also joining us for Q&A is Marion Harris CEO of Ford credit. Today's discussions include some non-GAAP references. These are reconciled to the most comparable U S. GAAP measures in the appendix of our earnings deck, you can find the deck along with.

<unk> thousand 2 on our earnings materials as well as content from our capital markets day at shareholder day for Dot Com todays discussion also includes forward looking statements about our expectations actual results may differ from those stated the most significant factors that could cause actual results to differ are included on page 21.

Unless otherwise noted all comparisons are year over year.

For the rest of our company EBIT EPS and free cash flow are on an adjusted basis from product mix is volume weighted on a quick update on our upcoming IR events on Monday August 2nd Barclays will host Fireside chat with John Lawlor, and Lisa Drake, Our Chief operating Officer for North America on Tuesday August 3rd Jefferies will host a virtual fireside chat with Alex.

Pretty our director for business operations for enterprise connectivity and on August 11th J P. Morgan will host a virtual fireside chat with Hau Thai Tang, our chief product platform and operations Officer, now I'll turn the call over to Jim Farley.

Thank you Lynn.

Hello, everyone and thanks for joining us today.

Early in the.

Year quarter, 2 months ago, we detailed our strategy for the future for it.

Put simply our Ford plus plan.

Is focused on 2 things really distinctive products that only Ford could do.

And always on relationship and experience for our customers that gets better and better over time.

We're building on our foundational strengths our iconic products.

Uniquely appealing vehicles, our manufacturing excellence and the industry's best captive Finance company, but we're now adding new capabilities and new talents and we're investing in new businesses that will accelerate our value.

How do we create for customers and our investors.

We're committed to delivering a richer experience for Ford and Lincoln customers.

1 that improves over time with things like our over the air software upgrades data driven experiences.

Productivity and uptime.

Services for our critical commercial customers charging software and a lot more.

Ford plus also means introducing the industry's most compelling high volume electric vehicle lineup and investing the capital and human resources required to design and build world class batteries.

<unk> and electric powertrain components.

And with Argo AI, we're well positioned to launch an autonomous people and goods delivery business with significant future growth potential.

With fundamental to transforming Ford.

Is to further strengthen.

And our overall auto operations.

We're also expanding our addressable market.

Our commitment is to earn your confidence with strong execution quarter after quarter year after year, delivering solid returns regardless of the challenges we face with external.

External environment.

Like we did in the second quarter.

Despite the many headwinds from the semiconductor shortage some of which were unique to Ford.

Our team has skillfully managed our business and we generated a positive EBIT.

And I can tell you that this outcome was far from certain.

At the beginning of the quarter.

It required intense focus from our team on cost pricing and mix.

The primary advantage, we have right now is the strength of our product portfolio.

And it's about to get a lot stronger.

Adopt making me too products and declining segments for years ago.

We unleashed our product development team to create emotional and distinctive products that only can come from Ford.

The Mustang Mach E, which is already the second best selling electric SUV in.

We states.

Was recently named current driver electric vehicle the year after rigorous testing against 10, other great Evs, including the Tesla model Y performance, the Porsche taken and the Audi E Tron.

The demand for our first round.

The unites high volume Evs clearly has exceeded our most optimistic.

Projections.

The reservations for the F 150 lightning have now climbed well past 120000 units.

And 75% of those customers are new to Ford.

Now working around the clock to break constraints and increase our manufacturing capacity for these red Hot New battery electric vehicles, we're working with LG Chem SK innovation to increase our annual battery capacity for the Mustang Mach E by 70% and we're taking similar actions ahead of the launches.

Wearing of the transit later this year and the F 150 Lightning early next year.

The customer and critical reception to our new Bronco lineup has also been remarkable.

In June.

We started shipments to fulfill 125000 orders we have a <unk>.

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And 70% of those Bronco customers are also new to Ford.

And then Theres a maverick our upcoming hybrid pickup that offers room for 5 gets 40 miles per gallon in the city.

And as price starting at less than $20000 and custom.

<unk> already recognized the value of this product and the initial interest to our dealers as more than almost 80000 orders.

Great products alone are not sufficient though to deliver Ford plus.

Always on means we are regularly interacting with our customers.

<unk> on things large and small.

And we're building new capabilities like connected services to enrich the customer experience and drive reoccurring revenue streams.

We developed a proprietary software and hardware stack, we call Blue oval intelligence to deliver updates the customers' vehicles.

Customer for the year some of our competitors can do it for their entertainment systems, we do it for almost all of our modules in the vehicle for example on the Mustang marquee activation rates the number of customers who opt in to connected services like Ford pass are now over 95%.

We have now updated more than 150.

Thousands vehicles over the year, just this year and we expect this to top 600000 vehicles by year end.

And by 2028, we will have $33 million OTA capability vehicles on the road around the world.

And we're mining the real world data from these vehicles real time.

I'm to better meet our customer needs to me. This is the most important point.

For example.

Driven by the vehicle data from the Mustang Mach E and the F 150 already we've identified $50 million and efficiencies just from warranty cost avoidance in other opportunities.

We're also.

Building out our global Ford Pro commercial business, which we expect to grow from 45 billion in 2025 from 27 billion in 2019.

Last month, we announced our acquisition of electrifying to help accelerate electric vehicle fleet adoption.

By offering those customers the best scaled depot charging experience for all commercial customers. It's.

It's an example of how we're building out Ford probe now.

In mobility, we are now focused on planning and executing a phased deployment of ABS.

That will leave.

<unk> large scale commercialization of Ford Jv's last week as you've seen we reached the industry first collaboration between Argo and lift to deploy Ford.

Driverless vehicles on the lift TNC network.

This collaboration will enable commercial deployment.

<unk> at scale.

And demonstrate for net argo's ability to connect into multiple tncs, our transportation networks.

And on the technology front Argo I'm real excited about this introduced Argo Lidar.

Which will help us expand our autonomous services.

Lead the dense urban areas that most are focused on.

This new lidar.

Designed to be cost effective and manufacturing at scale will offer what we believe is the industry's longest distance sensing range of 400 meters with dark object detection for safe.

Highway driving.

Now before John reports on the quarter and our expectations for the rest of the year. Let me give you an update on the semiconductor situation.

In April we said, we'd expect to lose about 50% of our planned volume in the second quarter, which.

<unk>, then implied a loss in adjusted EBIT.

In fact, we did better than expected.

We leveraged this strong demand to optimize our revenue and profits.

We are seeing signs of improvement in the flow of chips now on the third quarter, but the situation remains fluid.

Especially due to.

To the delay in ramp up of 1 of our key suppliers Renesys that Ford is uniquely exposed to in the first half.

Overall.

After effectively managing through the first half we are now spring loaded for growth in the second half and beyond.

Because of those red hot products, pent up demand and improving chip supply.

Navigating this chip constraints.

Has led us to make important per minute changes in our business model at Ford.

We are modernizing our go to market.

Apache.

What does that mean, we're placing a greater emphasis on build to order sales bank not just low stocks.

We have learned that yes, operating with fewer vehicles on lots is not only possible, but it's better for customers dealers and Ford.

But we're also driving a significant increase in the number of customers configuring and ordering their vehicles online.

So we have better visibility.

To real demand using an order bank.

This allows us to lower inventories.

Simplify our incentives.

And reduced our order complexity and the industrial systems cost.

For our customers upside is the day more quickly get the precise vehicle they want now.

This isn't theoretical I hope, we get into the Q&A, we're doing it right now as we speak.

Relative to the supply chain.

Jane we made 3 notable changes.

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We are no longer relying on this heavily on the tiered procurement structure for transparency. We are now engaging directly for example, with the Fabs on semiconductors and key points in the supply chain for critical components.

In electronic components.

With with closer relationships and more transparent exchange of information such as technology Road maps.

We can integrate their knowhow into our designs to better align supply and demand.

Second we are providing longer term forecast.

On to critical vendors, so they can better understand and accommodate our requirements.

And third we are more comprehensively scanning for obstacles in our supply chain.

Risk mitigation actions include stockpiling of critical parts like semis.

Dual sourcing.

And design interchange ability.

In the case for single sources.

These changes are all being applied to new technologies, as well, including batteries, which are rapidly becoming a larger portion of our bill of material at Ford our pending joint venture with SK innovation called Blue Oval S. K.

We will produce.

PV battery cells and arrays, helping us secure supplies of batteries at competitive cost and performance levels.

Really critical given our demand for our new electric vehicles.

And now I'd like to turn it over to John to take us through the results for the quarter and our outlook.

Thank you Jim.

So first I want to read.

Everything we do and every decision, we're making including capital allocation, it's squarely focused on delivering on our Ford plus plan.

And you'll see that as I share our key takeaways from the quarter, our full year outlook and describe how we are positioned for even stronger performance heading.

Reiterate the 2022.

And as Jim said, we delivered better than expected results given the semiconductor constraints year over year, our automotive business improved across several key financial metrics as we overlap the industry wide COVID-19 related manufacturing shutdowns, we saw on the second quarter of last year.

Now for a more accurate picture of our true trajectory in this present environment.

We're focusing more on sequential comparison, and we think those are more appropriate.

While wholesales were down 28% sequentially, our teams optimize for revenue and profit with disciplined incentive spending and mix management.

We allocated chips to customer orders, new launches and a more profitable vehicles.

In addition, the strength of our sales order bank gives us confidence in our ability to drive a more balanced performance of wholesale revenue and profit in the second half of this year.

Including sequential improvement.

<unk> and wholesale and share.

So, let's turn to our results.

On a consolidated basis wholesales and revenue were up 18, and 38% year over year, respectively, and we delivered adjusted EBIT of $1.1 billion with adjusted margin of 4%.

In North America, our underlying trajectory continues to improve despite the impact of the semiconductors, and that's driven by more focused product portfolios geographic footprint as well as lower costs.

And Ford credit continued to deliver strong performance with record quarterly EBT of 1 point.

Outside 1 billion, that's demonstrating why it's a strategic asset and critical to enabling Ford plus.

I know a Prime example is through the launch of a new service like Ford protein simple, which provides bundled financing for commercial vehicles services and EV charging and so it's another.

Simple of Ford credit being a strategic weapon for us.

Now turning to the regions north.

North America posted a 40% sequential decline in wholesale due to the semi conductor shortage now as we manage the chip constraints, we've focused our efforts on customer or customers ordering vehicles for future.

For example, we.

We exited the second quarter with our U S customers sold order bank up more than 7 times compared to a year ago.

And with new models to come we are clearly poised for a rebound in North America, when the semiconductor supply stabilizes and aligns with demand on a year over year basis.

Delivered EBIT was up $1.1 billion.

Outside of North America, the turnaround of our operations remains on track in aggregate EBIT improved $800 million year over year, but declined sequentially, mainly driven by Europe, where the semi conductor shortage caused wholesale units to dropped sequentially by nearly.

35%.

The transformation in Europe continues as the region capitalizes on strength in commercial vehicles with <unk> pro and a more focused passenger portfolio, including key imports Europe has stepped up investments in electrification, including $1 billion for a new EV manufacturing center in Cologne.

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The launch of our E Transit next spring and a new all electric light commercial vehicle from Romania.

In South America, our restructuring is on track.

Our lean Derisked and asset light business model is focused on our strengths with Ranger transit and key imported vehicles.

The region introduced Bronco sport and Mustang Mach 1 in selected markets and is preparing now for the launch of the new transit van in the second half of this year.

In China, we continue to see improvement in key areas of focus, including Lincoln commercial vehicles electric vehicles, and with our portfolio of near premium.

Premium Ford vehicles.

Lincoln attained its highest ever quarterly sales was profitable and also captured the number 1 spot in J D. Power's luxury sales satisfaction ranking unseating Audi, which had held the position for 11 years.

In addition, 97%.

Sent of Lincoln's volume is now produced locally and commercial vehicles now account for 52% of overall sales mix in China.

Finally, we are readying for the launch of the localized Mustang marquee later this year.

Our international markets group, we delivered another solid quarter leveraging its portfolios.

<unk> strength with Ranger pickups, and Everest SUV and we're continuing to assess our business in India and we'll have more to say on this later this year.

Companywide second quarter adjusted free cash flow was negative $5.1 billion as expected semi conductor related volume losses.

<unk> had a greater impact on the free cash flow than EBIT because of adverse working capital and timing differences related to customer allowances for marketing incentives for.

For the credit did provide a partial offset with distributions of $4 billion in the quarter.

We expect working capital on these timing differences to normalize.

<unk> over time as the semiconductor supply is restored.

Cash and liquidity remained very strong ending the quarter at $25.1 billion and 41 billion respectively. The strength of our balance sheet provides significant financial flexibility to navigate periods of stress while also continuing.

Invest in growth in our Ford plus plan.

So now, let's turn to the outlook.

Based on the underlying strength of our business and President assessment of the semiconductor suppliers through the second half along with other factors.

We have increased our outlook for full year adjusted EBIT 2 between.

$9 billion to $10 billion now this assumes about a 30% sequential increase in volume and our second half versus our first half which is supported by the anticipated improvement in the supply of semiconductors.

Our guidance implies we are we expect second half adjusted EBIT.

To be lower than the first half of the year and so we provided a bridge to help.

Help with this and we've included that on page 19 of our earnings presentation.

So let me provide a little bit of color around this.

Relative to tailwind, we expect about $3 billion to $4 billion and favorable market factors.

Net of an increase in volume related production costs for the higher volumes.

Headwinds right, we see headwinds coming through.

And we see pressure on contribution margin, we expect commodities to be up almost $2 billion half over half warranty costs are expected to be higher in the second.

<unk> half up about $500 million, though we still expect full year warranty expense to be down year over year.

Relative to structural costs about $1.5 billion in investments in modernization consistent with what we laid out in may including customer experiences connectivity I T <unk>.

New product launches.

Looking at Ford credit based on current market dynamics, we expect Ford credit to decline by about $1 billion as auction values begin to normalize and we also have a non repeat of reserve releases that we had in the first half.

And lastly, we also have the non recurrence.

For the 900 million noncash gain on Arabian we booked in the first quarter and it's important to note that this gain also impacts our run rate heading into 2022.

We are also increasing our full year adjusted free cash flow target to 4 to 5 billion supported by expected favorable working capital on.

On the second half as production increases from an anticipated improvement in chip availability.

Now as our operating results improve so does our cash conversion, which we continue to target in the range of 50% to 60% on the.

Strength in cash conversion conversion and our balance sheet provides us ample financial flexibility.

To invest in growth, including in Evs Ford Pro our connected services and mobility.

Now looking towards 2022, we are confident in the underlying trajectory of our business and excited to see the momentum continue as we leverage 1 of the strongest product lineups in our history and continue to implement.

Ford plus plan.

We're on a new path at Ford has got a plan for resources and the resolve to build a better business.

So now I'll hand, it over to the operator to open it up for questions.

And as a reminder, if you would like to ask a question Press Star then 1 on your telephone keypad.

Our first question comes from the line of Brian Johnson Barclays.

And then I've got a couple of questions first a little bit of housekeeping.

But just thinking ahead to 'twenty 2 if.

If we take the second half exit rate of $3.5 billion, but also bear in mind.

Mind that your first half is typically the.

The stronger half of the year before is there any read through for 2022.

Hi, Brian Thanks, Yes, I think the way we see it is that we've got strength in the underlying performance of our business as we head into.

22, we also know that the product lineup. This is going to get stronger right. We're just launching Bronco now we've got F..150 Lightning next year, we have magnet Maverick next year and we also expect that you know we should get to more of a full.

Line rate on our manufacturing of all our other vehicles new vehicles.

20th we've had this year. So we do see strength from the product lineup heading into next year.

But what we also see heading into next year a few headwinds.

Ford credit, we expect that to be more normalized to our run rate that we normally see and that's because we see auction values coming down and then we shouldnt.

With that we should see our credit reserves in our credit losses normalize as well.

We also see that next year as volumes increase in stocks increase across the industry, we should see some pricing modern moderation.

Again, we also see commodities being higher next year as well.

And we're going to continue to invest in on new product portfolio.

<unk>, we've got the launches coming in next year, we've got our Ford plus plan. So we see that.

Continuing as we head into next year as well so the on.

Are some headwinds, but the underlying strength of the business continues to be positive and with that we see that trajectory continuing.

Into 'twenty 2.

We've been on our way to the 8% EBIT margin for 'twenty 3.

Okay, and just to follow up the $1.5 billion to H headwind from investments and modernization is that something new that was planned for this year that may be backend loaded on duty.

Management, focusing on the chip shortage or kind of how do.

We think about that.

That was plan, that's coming and part of that's due to the launches the vehicles.

With the launch cost comes advertising, but we're also investing in connectivity the it we need to put in place for the connectivity as well as customer experiences digital experiences user experiences with the vehicles.

So we're continuing to invest to build on our Ford plus plan.

And we are not slowing down on our modernization because of the chip situations in fact, we're doing the opposite.

Okay, and then a question for Jim as you look at the order book for the F 150 Lightning.

And what is shaping up for the Bronco in.

And the Maverick any sense of how many of those customers are as you mentioned they are on 5 new to Ford, but also.

Maybe new to that segment. So for example, the SUV buyers migrating to the east lighting due to the storage or the bidirectional charging on other features.

Great question I'll put simply.

What we've learned about our very large order bank for Lightning is way over index on the on the coasts.

Almost 80% are new to Ford what's interesting 2 out of 5 are people, who are going to trade in ice pick up.

Which is very important because it indicates a move a little bit faster to full size truck Bam.

Then maybe are optimistic assumptions.

On.

And so I would say what we've learned so far is that the customers are largely new to Ford.

They aren't new to this segment.

Is the customers really like these silhouetted vehicles.

But what what is really interesting for me.

Is it somewhat portray the full size truck industry is kind of a conservative customer that's not what we're seeing is these very large order bank for.

But 50 lightning.

They're new to Bev.

And they are excited to move to Bev and they are in.

More than half of them are pickup truck customers.

Alright, thank you.

Once again, if you would like to ask a question press star 1 on your.

Telephone keypad in order to allow us many callers as possible to ask a question management requests that you limit yourself to 1 question plus 1 follow up question and our next question comes from the line of Rod Lache with Wolfe Research.

Hi, everybody.

I just first wanted to clarify.

The answer that you gave to Brian's question. So.

Youre going to be Annualizing at $6 billion to $8 billion in the back half and I think what a lot of people want to understand is is that a kind of a fair bridging off point.

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For us to think about what happens from here into 2000.

And 'twenty 2 and beyond so did you assume some moderation of pricing already in that number is that level of investment kind of the run rate.

And how should we think about the incremental benefit from that run rate for Bronco Maverick the for the warranty improvement in some of the international improvements that Youre working on.

Hi, Ron things so in the second half.

So the net number there.

For the volume net of the.

Actually in production costs and other market factors. So what we are assuming is that in the second half of the year.

Particularly in the fourth quarter, we start to see some moderation in pricing.

Yeah.

Due to the fact that we should see volumes and inventories in stocks coming up a bit.

So that is something that we do have built into that number for.

The second half, particularly in the fourth quarter and then when it comes to 'twenty 'twenty 2.

Broncos, just giving up now up and running now launched now.

As Jim said, we have a hefty order bank there.

And then F 150 Lightning Maverick.

They are launching next year, so our product portfolio strong today is going to be even stronger next year.

And so we see that contributing to the run rate.

As well so.

Coming out of capital markets day, we've.

<unk> about the trajectory of the business.

2022, being definitely stronger than 'twenty, 1 as we work towards 2023 in the 8% EBIT margin that we plan to hit.

Yeah.

And just secondly, it really interesting comment about that 7 fold increase in your order banking and changing that.

Talked to vehicles are sold can you just talk a little bit about what that actually means from a volume perspective, because I don't think we've ever really known what your actual customer order bank actually what's the magnitude of that.

Maybe you could just tell us what that number was a year ago and any thoughts on what this.

That means for pricing, obviously, it's positive but.

Those units are not going to land on dealer lots for very long so it would seem that.

It's really not a big reason debt to significantly boost incentives.

Anytime soon if there, they're leaving lots very quickly.

Yeah.

Actually run put simply.

We're really committed to both.

Going to order based system and keeping our inventories between 50 and 60 day supply.

I've been here at Ford for 13 years.

There were many years.

I think after the financial crisis, where our day supply was 2030.40 days.

And in those years, the maximum retail order bank, we had in the U S with 1 to 2000 a month.

We are now at 70000 units on a weighted to 80000 units.

Gives you the order of magnitude.

<unk> difference in the way we're looking at this order bank change for the company.

Lot of people on our industry on making big deal about the move online sure.

But for Ford, we think there's massive benefit across all stakeholders for going to an order bank.

<unk> system.

Put pressure on our industrial system to deliver quickly it reduces our dealers' costs.

More than just low day supply as you mentioned it allows us to significantly.

Reduce our incentives.

And I guarantee us I don't know.

How much money, we're wasting I know, we're wasting money on incentives I, just don't know where.

With an order base system, we will have much less.

Risk of that at.

It requires us to dramatically reduce our order complexity.

As well.

For a lot of enablers that have.

That have been put in place to move us to this new system and new go to market approach.

I'd love to talk to you more about it but I've tried to give you the high hard ones.

Thanks makes sense thanks, everybody.

Yes.

So there. Our next question comes from John Murphy Bank of America.

I just wanted to actually follow up quickly on on that.

Jim.

You mentioned getting back to 50 to 60 day supply.

That sounds.

Closer to normal than not but youre also the way you're describing the order bank.

It looks sounds like 20%, 25% of your sales would be.

Build to order for horseshoes and hand grenades. So I'm just curious to hear how you decide where that.

Balance.

Lance how you keep the inventory tight your partners dealership happy.

We're happy and so on and create value for you.

But then also a big part of the story is the tightness in the secondary market.

The used market is keeping ours is high which is helping on the new vehicle pricing and certainly helping out of Ford motor credit. So I mean theres on.

Kind of a seesaw effect here you get the benefit on both sides.

How do you how do you figure out.

This should land.

<unk>.

And how you actually execute on it.

Yeah really good question so.

The team has done a lot of work on this I'll try to answer it very simply.

Our target is 50 to 60 day supply that means trucks will be a little bit higher we have a lot about a third of our truck dealers and C&D County.

5 trucks to them could be 100 day supply, but they need 5 trucks for the local community.

And for urban and suburban dealers that will be less than than that range.

<unk> segments will have different targets.

We actually did this post.

Financial crisis for a few years and then.

N overtime loss discipline.

And this is quite important for this management team, we have a weekly and a monthly operations review.

Where we will look at this very carefully by segment for each of the regions.

That's the kind of.

Soft wiring our management judging.

Judgment going to an order bank I would say is a hard wired way of reducing the stock.

And I think it's going to take both for Ford to make this transition.

It can't be just relying on management.

Keeping within that range, we certainly.

Certainly we'll have exception you know an exception process to go beyond that and there will be a pretty tough discussion with our operating teams but.

But I think what I'm more excited about is the hard wiring.

Going to in order to delivery.

Order system.

We.

Which actually are new launches gave us that gift.

Because for Bronco, and and marquee and some of the other high demand vehicles, we moved the reservation system into an order bank system. We then realized my God why don't we do this for all the vehicles not just those vehicles and that's.

That's when we had to put a series of incentives.

And more policy changes like order complexity reduction in the system to make it kind of the way we do things at Ford.

I think it is going to require both changes.

Okay. That's helpful and just to just a <unk>.

Follow up on that.

Current state of affairs of retail versus fleet mix I mean, it seems like you know if you can talk to the dealers is that emphasis on retail.

On the dealers certainly it at your level just curious at fleet comes back I mean, the demand is there right.

How are you balancing there is.

Current days and go for it I mean, because the demand is there.

Some of it's getting fulfilled on the used market writing, they're going after auctions instead of even ordering from you guys. I mean, how do we think about that.

That recovery go for it and we're stand right now.

Really good question. So it depends on the region of course, we're a dominant commercial brand in multiple regions like Western Europe.

Europe and the U S. Even in China in certain segments, and we're seeing in Europe, a very dramatic order bank on our vans.

It is it is something I've never seen in my career.

We're talking months and months and months of back orders.

So the demand for commercial.

Vehicles in Europe is extremely strong on the order bank as you know.

Months and months in the U S. We're very fortunate that our commercial business is is heavily focused on transit and Super duty and of course F..150 is kind of mixed and so for those vehicle lines transit and Super duty is very easy to.

We don't have to prioritize between retail.

And in commercial because those vehicle lines are almost 100% commercial the 1 that's challenging for us to balance is F 150.

And we as you can see in this quarter were very carefully mixed managing.

But we are very respectful of the needs of our commercial customers, we know where our toasted buttered.

And those customers are really important for us in fact, we are in discussions with them right now about the tradeoff between feature content and availability, we have many commercial customers in the U S.

Waiting for months and months for the vehicle and we are discussing with them would you be willing to take off feature content to get your vehicles now.

And that's and you can expect us to be balanced about that discussion.

And negotiation and compromise.

And it's.

We will make.

They've been off for the company and for the customer, but they are pushing us for availability now even if it means lower feature content.

That's very helpful. Thank you.

Our next question comes from the line of Adam Jonas Morgan Stanley.

Thanks, Great call so far.

The right Jim I have to say I did a control F for the word hybrid in the deck and in the press release and I don't see it man.

Hi, Brad its a beautiful thing.

So good.

[laughter].

Yeah.

Their debt Theyre gone.

Alright, Mike My question on Evs, right, you're be Evs, when do you think that they can be.

Positive profit on.

On a fully cost basis net contribution like when can they be profitable.

And do you think it's 2022 is.

Too early for that for my first 1 I have a follow up.

Yeah. Thanks, Adam actually marquee is profitable contribution margin positive and profitable on the bottom line today.

Wow, So we've seen strong demand for that yeah. So I think when.

When we look at it.

Over time.

Phil talked about a couple of markets day, and we've talked about with you always got to ride that technology curve down we've got to get to the $80 per kilowatt hour for the battery pack before the end of the decade, we've got a scaled the bev content, we have commonality on the top hats and other components that will help us as well and then of course, we need to build on our service.

As we do and and such to to really improve the profitability of the beds as we move forward, but I can tell you that marquee is profitable today.

That's incredible at a 50000 type run rate for that for <unk>.

That to be a correct okay.

My follow on question.

<unk>.

Jim is about always on and the order Bank I mean, I think this is really huge.

Just really interesting and when you combine the order bank system with always on.

And where you go kind of like can engage the consumer.

Directly for services in F&I on insurance.

On the OTA.

But I am talking to some dealers that are freaking out.

That's some darwinian enforces could be at work, where youre not let's say directly infringing on our franchise laws, but youre dancing close.

You probably should given.

Technological changes over the past 70 or 80 years. Since these laws came so what's your message to them.

<unk> order, but what if order book goes to 80% of your units.

For the majority and then the dealers are just these delivery centers and then you're going direct on all the other wonderful services.

What's the message to the dealers.

Great question.

We're going to have a couple of different population to dealers. We are going to have a professional dealers and the answers are little different for them versus a retail dealers will have a rural dealers and the answer is a little bit different for them than the suburban urban dealers.

On the.

And all I would say that the message, we're giving to our team. Our dealers is look we're going to have to work really carefully together. So because the customers are going to have a lot of questions on for Blue crews. For example, so we want to make sure. The dealers are very knowledgeable about these new OTT features that are really meaningful.

For in the use of the customers life.

That's 1 the second 1 is service service service service.

That is the most important thing for us is wiring a closed loop between the vehicle.

The condition of the vehicle.

The service capacity of the dealers and the customer is going to be.

Most important book.

L. A we're going to have to play together with the dealers. This is especially true for Ford probe.

And in fact today, we already have 160.

Remote trucks.

Doing service for our commercial customers that their business warranty work. That's a good example of the evolution of the business model, where theyre, taking their service department from a fixed hub and going on the road with their service capacity.

And those trucks have to be cooked into the.

For data and the prognostics, our parts legacy system to order parts and the dealers on dispatch system.

That has to be a closed loop, so all I would say to us.

The orchestration and our our benefit or.

Our chance to win.

Just.

Vehicle maybe.

May be targets.

On the wind versus versus the online retailers is that in person service.

Especially in professional customers.

Thanks, Jeff.

Our next question will come from the line of Carlos.

Like Langan with Wells Fargo.

Oh, great. Thanks for taking my question on congrats on a quarter.

Inventory levels, we've never seen them at these levels, obviously before and obviously, it's impacting your market share any sense of how much of that you know.

You think you can recoup.

And how much.

Colin are you concerned me switched to other brands as some people might only wait for so long.

Okay.

Yeah, Hi, Colin it's John so.

I think what we're seeing here from a market share drop.

It's completely related to the fact that our stocks reduced so much we have the chip issue. We lost the volumes that we lost in the in the second quarter, we expect that as we work to improve the run rate and through the third quarter. We're very focused on maintaining this high turn rate.

Filling the orders.

That we have as Jim said, we're going to continue to work on retail orders and continue to bring our customers along that way as well. So we think that we have a good chance to regain that share, especially with the strong lineup that we have and so we see this as a temporary issue related to the chip issue on the volume of.

Production, we had in the quarter and.

And we will not cede truck leadership to anyone.

Okay.

Maybe if we touch on connected services you rolled out for live in Europe on commercial vehicles I believe its free right now I mean, how.

How is that rollout going.

And when do you sort of try to monetize that and get revenue out of these services.

Great question. So we do we just launched for live as you mentioned in the U K and Spain, we have 5 more EU countries covered by the end of the year to launch so we're really excited about.

And life, while we've committed to so far.

Is it in the next couple of years by 2025, we expect our digital on charging revenue in Ford pro to be about $1 billion.

Today.

I wish we had more time to focus on this frankly.

For do you have about just under 200000 unique subscriptions for our telematics and data services.

We grew at about 20000 units in the core 20000 subscriptions in the quarter.

And and we feel like that digital telematics.

And and and.

Selling data like fuel tank information plus adding the charging services like electrify for for depot charging for our customers our high growth area with the revenue to that level in the next couple of years.

The monetization of.

Ford live.

<unk> is really around our traditional parts business, which has very high margins and we have a very low share.

So the opportunity for us upside is tremendous.

Warranty even on our commercial customers.

Net very few of those customers.

And so the real payoff for this closed loop is going to be.

Much higher share post warranty.

Of that very profitable business.

Well, thanks for taking my question.

Our next question will come from the line of Ryan.

Brian <unk> with Jpmorgan.

Thanks for taking my question, 1 thing debt, especially stood out in your results I think is on slide 6 where it shows that unit's wholesale in the quarter rose, 18% year over year, but that revenue was up by more than twice as much by 38%. So just a few questions around pricing and overall revenue per.

Unit I can see from the global walk on slide 9 net net pricing helped EBIT by $1.9 billion or kind of like 10% of last year's revenue, which seems suggests about the idea that like half of the growth in revenue over unit volume in total Q was driven by price and the other half by mix is that roughly correct and what do you think.

For the outlook is for continuing to grow revenue in excess of the change in volume.

Yeah. Thanks, Thanks Robert.

I think pricing is the majority of what was behind that growth we.

We had a very strong quarter relative to pricing as we saw our inventory shrink and we see the straw.

On the underlying demand of the products that we have.

And so.

I think I would think about it more as pricing a little bit of mix in there, but more of it is pricing.

Okay very helpful. And then just as a follow up we saw some estimates that your incentive spending in June in the U S. It may have fallen like 50% year over year.

Leading the decline in industry wide incentives I'm curious how much of the decline in incentives do you think may be driven by you know hot new products like the F 150, Bronco Bronco sport marquee et cetera versus how much is a function of the low inventory environment or maybe just a general inflationary environment and to that end it might be helpful to.

No.

If carryover pricing, which I think usually declines year over year, if that might also be tracking stronger in and what your outlook is for incentive spending going forward maybe in light of some of the comments you made earlier on the call about inventories and order bank et cetera.

Yeah. That's a great question I think you know we've been working on packing. This.

As you'd expect.

It's a combination of all of the above right. We have strong products. We see continued demand for those strong product suppliers well short of that it's allowed us to continue to keep the pricing strong and improve the pricing in the second quarter versus what we had expected.

And I think as long as the.

You see this imbalance between supply and demand you'll continue to have stronger.

Pricing power as we've seen through the first quarter and the second quarter.

As we go through the year, when we start to see supply and demand normalizes, we'll see some of this pricing come off a.

In the fourth quarter, and then we'll have to see how that runs through through next year, but given the strength of our product lineup and the demand. We see we expect to have a relatively strong pricing power for the foreseeable.

Foreseeable future.

Thank you.

Our next question will come from.

A little bit Joseph Spak with RBC capital markets.

Thanks, Good afternoon.

I wanted to get back to the investments in modernization and maybe.

On a frame that in the context of the 2023 view you laid out at the capital markets day, like how does that investment trend.

As you think about the margin targets you laid out and is there an assumption that by the time you get to 'twenty, 3 or maybe a little bit later or are there is there is a return on that investment such that it becomes neutral or from positive to the margin.

Yes of course.

As we make.

For locations and we make these investments we expect that we're going to get a return on them and that's all part of our walk up into 2023 in the 8% margin.

We're also continuing to work on cost reductions elsewhere right. These are investments that we're making in our new.

For new products with the launches on connectivity.

<unk> and at <unk>, we've got advertising in there for the punches and then of course customer experiences as I talked about earlier.

But we're also driving cost reductions elsewhere as we continue to improve the business towards that 8% margin in 2023. So we will invest in certain areas, we'll see costs go up in certain areas, but we should also see cost coming.

Coming down in other areas, particularly material cost et cetera.

1.1 particular area of modernization that doesn't I don't think get enough attention.

Where we're investing as a company certainly 30 billion in electrification and the vertical integration of.

And our of course, our investment in autonomy.

I think you all know about where we're spending our money and the general categories, but the 1 I really want to highlight is the very significant investment in our embedded electrical architecture upgrade. This is really a significant move by Ford.

Batteries and not just invest in electrification, but move those products to fully digital update a book and all modules and go to a fully modern zone, all electric architecture I'm not going to go through the details, but this is a very expensive transition, but it will enable a whole new capability.

The ability for the always on experience than even today's connected vehicles like Mustang Mach E.

<unk>.

I want to highlight that because it often gets lost in the other categories of investment on monetization.

Okay. So just to clarify so the EV spend is included.

In that bucket.

Sure.

Yes, yes, so when we talk about upgrading our electric vehicles.

It's much more fundamental than just the investment in the tooling and the engineering of the electric vehicle on its components and propulsion.

It also includes a completely new approach to an embedded.

Software and hardware system.

Okay.

And you know going back for the order bank, which is clearly interesting like that.

It seems like an easier task quite frankly when you.

You have.

Great product like you do with the Bronco other marquee and the light language or.

Seem well received and also limited.

I guess, what I'm wondering is.

How are you going to sort of.

No.

Balance that with inventory as you start to think about like a.

An edge on.

Explorer in year for 5 of its product lifecycle is the plan to still keep.

Inventories of the older product or more mature product tight such that you can still get some into the order bank or are there other plans to keep the debt product fresh throughout the lifecycle that net.

That can lead.

I mean.

We'll have we'll have ground stock for sure and dealers and we obviously have to keep the vehicle fresh more and more of that will be the digital freshness of the vehicle.

But I would say if you look at our 60 plus thousand unit order Bank in North America.

Got it.

All of those are Bronco and Mustang Mach east.

They're carrying on what we're doing this for our whole brands.

Thank you.

Our next question will come from the line of Philippe who Schwab with Jefferies.

Yes. Good afternoon. Thank you very much.

2 questions. The first 1 I'm sorry to go back on this order bank on inventory levels to be honest on im a bit surprised you're talking about 50 to 60 day, so inventory in the future because thats not much lower than what we had in the past.

And I would've thought on.

On the order bank debt will actually enable you to actually.

Carrie let's go on inventory and we've seen the benefit of that to.

Pricing, so I wonder.

And the statistic today is kind of a first step but do you think you can do.

But on the future and along those lines and then maybe more on the Ford credit side, but when I look at European car companies day carrying more finished products on their balance sheet. The core balance sheet, and then where it could be less.

Simple balance sheet through the dealer receivables or use that as a proxy.

The operating in the U S and I'm just wondering if you look at our.

A situation, where you go to more order banking for your production. If you end up carrying more inventory on your industrial balance sheet, which would increase your working capital requirements on any industrial.

Standpoint that was my first question on the second 1 second briefly on China. It seems like Youre stalling a bit in China, and and because you you've localized lot more zinc on more profitable.

Big losses on the consolidated side before and and I'm just.

Wondering can you comment maybe on on what is happening channel in China is there it seems to be concerned about how the Chinese brands that making good progress on some of the E vs launch by your competitors I'm not quite getting the love from customers that was expected and I'm. Just wondering if you if you see a more difficult environment.

For in China for you.

And the balance of the year into next year. Thank you.

Yeah, So I'll take the working capital Mountain.

We see the order bank, helping us is we actually see it simplifying the industrial some system because we will know exactly what we're going to build so we're actually working through that.

Now in and trying to use that to simplify and reduce things like working capital. So I think if anything it would have the opposite impact it wouldn't increase working capital we would use it to drive down working capital and then on the day supply.

What we've seen in the past is around a 75 day supply. So 50 days, it's a 25.

5 day reduction so we do see the C that is substantial and of course that'll be different across the different vehicle lines.

So we do see that as a substantial pullback in the day supply.

And just remember in Europe, just running Ford of Europe, you know the cross border issue in Europe is not so small we have holdings.

These centers in lots of ways to manage the stock we don't plan to implement that system in the U S.

It evolved over time and and.

We have 1.

Countries. So I think we can you know our intention is as John said, it's not the handle it that way in China.

You know the team has made tremendous progress from a $1.5 billion dollar losses, you know hovering around breakeven now or slightly below that.

And we're in a very important time for Ford in China.

Lincoln is now profitable.

And we.

Just look likes those models, we only launched Lincoln in 2015 I was there.

So it's a recent phenomenon.

And we're just about to launch a whole plethora of brand new vehicles like we're doing in North America today.

So we're on the eve of the Mustang marquee launch localized.

And then we have all these new vehicles evils I could go on a long list.

And it'll be just like what we're seeing in North America full freshness and that will play out over the next couple of years. So China is very important for our profit plans.

I think the team has done a tremendous job in stabilizing our sales situations.

And improving our costs and now its going to be a growth story in China, where just commercializing in industrializing the vehicles as we speak and Mustang Mach E is kind of the first major 1.

Thanks.

Thank you very much.

And our final question.

For the day will come from the line of Dan Levy with credit Suisse.

Hey, good evening. Thanks, Thank you for squeezing me in.

First wanted to just ask on the chip shortage and I fully recognize.

The situation is very fluid in your Crystal ball is as good as.

Anyone else's, but do you have a sense for how long it might take until you're no longer supply constrained on on production is this something that's fully resolved by your best guess.

I early next year or do you think that there might be still from some supply constraint lasting much longer and deeper into 2022, so just the baseline expectations.

<unk> Mark.

Yeah.

Yeah, So Dan Yeah.

Yeah, I mean, I think if my guess is as good as anybody's on this we do see that the chip issue running through this year and you know we could see a bleeding into the first part of next year, but I <unk>.

We won't really have a good feel for that until later.

<unk> for your we know that.

We've had a discussion.

<unk> with the for fab suppliers.

Telling us the reallocating capital, they're increasing supply for automotive et cetera, but.

And I think this is 1 of those things, where we need to see the relief coming through before we can really.

Bill.

We're.

Comfortable that we're out of the woods here.

Yeah.

Great understood.

And second question is just on ice versus debt and clearly you're deemphasizing.

Price and presumably that means the investment is coming down I.

Assume that part of that $30 billion headline number you gave includes some reallocation from ice to EV.

So I think we also know right now that and maybe this is just a function of the market, but sales are extremely strong.

Could remain the case for a while so it what.

What should we expect on margin.

As for vehicles.

Especially as some of that investment comes down is it possible that the outgoing margin on some of the ice vehicles actually increases and you could potentially run into a negative mix issue. As we are as you start to pivot from ice to the beds.

For yeah.

It's a good question you know generally speaking.

That certainly could happen, we don't know how the demand will shift obviously are our guesses.

40%.

Of our mix 240 gigawatt capacity by 2030.

So we're busy making on that happened as you say a.

40% you know it was a lot is a lot higher than today.

And I think we have well I know we have the right strategy for the company.

But so much of this transition is going to depend on government support.

Bert.

Infrastructure build out.

And we we need to be patient and I think agility will become a very important.

<unk> for the company so far the first inning would imply that.

Ford is number 1 in sports cars Mustang, we're number 1 on vans with transit where.

Number 1 in <unk> and pickups with F 150, we're electrifying all 3 of those in the next 6 months and so far the demand is actually higher than we expected.

I don't know what's going to happen, we don't know what's going to happen the support in China, but especially in Europe has accelerated the bev adoption in.

Those regions.

But as you say, we get into the next phase of expansion.

With a lot more product offering and all of that capital pointed of beds.

It's hard to say.

And it's hard to handicap the governments.

Policy.

At a government level over time I think.

The most important thing is and how much money we're spending.

Because that's necessary that's enough.

It is our agility and the kind of execution of our beds.

And our management of the profitability of those vehicles.

And that's where we're putting our energy the agility of our industrials.

Real system our manufacturing.

Our focus on the profitability improvement in the vertical integration for key electric components.

And.

Making our vehicles different and more competitive than others I know, that's a very general answer.

I don't think we know enough to answer your question.

Understood.

Nevertheless, the thank you very much.

Thank you and with that this concludes the Ford Motor Company second quarter 2021 earnings conference call, we'd like to thank you for your participation you may now disconnect.

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Okay.

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Okay.