Q2 2023 Ford Motor Co Earnings Call

Good day, everyone. 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's 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.

If you would like to ask a question. During this time you May Press Star then one withdraw your question you May Press Star then two.

At this time I would like to turn the call over to Lynn on peoples Tyson Executive director of Investor Relations. Please go ahead.

Thank you M Jay and welcome to Ford Motor Company's second quarter 2023 earnings call with me today are Jim Farley, President and CEO and John <unk>, Chief Financial Officer also joining us for Q&A is Marion Harris CEO of Ford credit and Ted Kennedy CEO of Ford CRO.

Today's discussion includes some non-GAAP references these are reconciled to the most comparable U S. GAAP measures in the appendix of your earnings deck.

You can find the deck along with the rest of our earnings materials and other important content at shareholder Dot for Dot com.

Our discussion also includes forward looking statements about our expectations.

Actual results may differ from those stated the most significant factors that could cause actual results to differ are included on page 26.

Let's otherwise noted all comparisons are year over year company, EBIT EPS and free cash flow are on an adjusted basis and product mix as volume weighted.

A quick update on semi our upcoming IR events before I turn the call over to Jim on Thursday August 10, Ford CRO CFO intervene Kumar, we'll do a fireside chat at the Jpmorgan Automotive conference in New York with Auto Analyst, Ryan Brinkman and on Wednesday September 27th our Treasurer, Dave Webb will participate in a green financing path.

At the Goldman Sachs Global sustainability.

Before I turn it over to Jim I, just want to recognize one really important individual investor who is on the call and that's my mom, who is listening to every single month.

Our Ford Investor Relations call since I joined she's a tough cookie and always gives us.

Always gives us a good working all of our after we do the call. So I just wanted to say mom welcome to being on the call Jim I'll turn it over to you.

Well first a 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, a 120 year old American icon.

And creative afford that thrives at this exciting intersection between great vehicles and digital experiences now the world is changing fast.

But I've never been more confident in our Ford plus 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.

Strong growth strong earnings cash flow.

And progress on the fundamentals of our business, including software.

We are very bullish on.

The potential for growth.

Which had an outstanding quarter.

It's unique to Ford.

It's a true powerhouse.

At the same time Ford Blue is taking advantage of.

Fresh appealing products to generate healthy revenues healthy share.

And profits, while our model E continues to scale with popular.

First generation electric vehicles.

We're going to dive more into the electric vehicle market during Q&A, but clearly this transition to evs is dynamic and so much more than just a change in propulsion.

The number of global entrants is increasing even at the high end and the pricing pressure has dramatically increased in the past 60 days.

Despite these puts and takes we have confidence in the underlying trajectory of Ford's business.

Our portfolio of businesses is strong thanks to businesses like grow and Blue and we are raising our estimated EBIT guidance. This.

This year to <unk> 11 billion to $12 billion.

Operationally, we continue to be focused on capital discipline.

Solid returns, even as we face uncertainties in the external environment.

Ply chain disruptions are persistent but theyre now easing.

And we have more work to do to streamline and streamline our industrial system, reducing costs and improving quality.

While EV adoption is still growing the.

The paradigm has shifted.

Price premiums over internal combustion vehicles fell more than $3000 in the second quarter and nearly $5000 in the first half.

We expect the EV market to remain volatile until the winners and losers shake out.

And we are confident from our brand from our incredible product strategy, our software our scale and our cost position, we will be one of the winners long term.

Why does it why do I say that.

We moved quickly to established our <unk> fleets in the niche segments not like others.

The lightning the Marquis the transit.

We're building EV brand loyalists.

It's critical.

Many of our <unk> customers are all new to forward. This is a significant asset to forward given our new Gen two products and profitability that will be launching soon.

For Gen. Two we focused on fewer higher volume models in the right segments to take advantage of our strengths and knowledge of customers.

Even conquest customers.

For example work vehicles pickups for retail customers and spacious seven passenger Suvs.

I am so glad we didn't bet the farm on two real crossovers.

Like EV platforms like so many have.

We moved early on LLP.

Especially production in the U S.

Giving us a diversity of Chemistries and a cost advantage. We are now offering marquee with LNP technology for sale in the U S.

With the addition of Tesla supercharger, <unk> and the fast Chargers that our dealers are installed the blue oval charging network will be the single <unk> single largest integrated fast charge network across the U S and Canada.

And this blanket coverage from tens of thousands of fast Chargers is core to our strategy.

It helps us with smaller lower cost and faster charging batteries.

We have the flexibility to offer customers choice of ice hybrids and full electrics in the years to come.

Our hybrid offerings are extremely popular.

F 150 is the best selling vehicle in the U S for 46 years.

10% of all F 150.

And 56% of all Mavericks.

In the U S are sold as hybrids.

We are adding hybrid options across our ice lineup and we expect to quadruple our hybrid sales in the next five years and we're already number two in the market last year.

Starting January one.

We move to a new retail model for model.

Way ahead of our competition.

Again, a differentiated model that will deliberate non negotiated price a simple shopping and ownership experience.

And remote services for all of our customers.

This is critical to our conquest digital brands.

And finally with these new models.

We are nimble and we can adapt to the market fluctuations real time and you've seen this with both the marquee and the lightning as we are adding enormous capacity to meet our pent up demand.

We are optimizing for the long term value creation more than 60% of Mach E and half of lightning customers are new to afford these new customers have significant lifetime value potential beyond because of the shippable software.

But we are disciplined.

As we grow but we wont bear an unlimited cost to inquire those customers and build our installed base.

In line with that we are now targeting to reach 600000 annual production units of Evs by next year.

And we maintain flexibility on where we reach when we reach 2 million total EV global capacity.

Because we are balancing growth.

<unk> ability and returns.

At the same time, we believe demand for our internal combustion and our hybrid portfolio will be durable.

With the window of growth in Ford blue potentially longer and richer than most expected.

We've proven we can design and develop popular vehicles that stand out from the competition you regardless of their propulsion.

And we made sure Ford as profitable as.

As we move.

Through this ice to EV transition.

So let me cover a few highlights for each of our business segments.

The appeal and pricing power for blues iconic vehicles, those Mustang lineups the.

The Maverick the F 150.

The explores all those cool new derivatives from Ford.

These products remains strong.

As America's number one brand in the first half of this year also in the first half of this year, our best seller F 150 by.

By the way a 100% built in the U S that our competitors can't say grew.

<unk> grew almost three times the rate of the overall pickup truck market.

We expect our pricing and revenue power to continue in the second half.

As we have new launches such as Mustang.

And I would add that the pace of new product introductions at Ford will only accelerate from here.

We plan to introduce for example, and all New F 150.

And F 150 power boost hybrid at the Detroit show in September .

Now outside North America, the Ranger and its sister product.

The Everest SUV are the backbone of a much stronger more profitable international business.

The all new version of the Ranger, and Everest or more popular and profitable than the previous model.

And Ranger alone is now the truck leader in 18 separate large pickup truck markets around the globe.

Our after sales business continues to grow and.

And we are on track to launch over 2000 mobile service units by the end of this year.

That is unique to Ford.

Or blues other top priorities are to improve quality reduce our cost structure.

To do that we've launched the lean disciplined operating system that reaches into every one of our plants every part we buy every engineering decision. We make we are making progress but this is just the start of our culture change.

Turning to probe.

Which is proving to be a unique strength to Ford.

I mean.

What one of our competitors would give down for glu probe.

It's a $50 billion commercial business with the potential to become a high margin high multiple hardware software and service company akin to John Deere.

In the quarter volume pricing.

Page software subscriptions continued to accelerate as we capture significant pent up demand across multiple commercial sectors and vocations in both North America and in Europe .

We are now realizing the full benefits of our new Super duty.

Super duty sales in Q2 were up 28%.

And the strong demand for our flagship where product is going to fuel our earnings growth through years to come.

And our van business also continues to grow in the quarter and that's before the launch of the all new version of Ford Pros other key profit pillar the one ton transit in Europe .

Our share of the U S class one through seven commercial truck and van market is over 40%. This year. So far that is twice our nearest competitor and brands twice.

And it's a similar story in Europe , where the transit franchises helped make forward the top selling commercial brand for eight years in a row.

Ford Pro has all the attributes of the business that is difficult to disrupt.

Our combination of services software.

Dominant product and dominant market share.

Fitting.

And large dealer physical repair network.

We will not be easy to match Accordingly, we will continue to shift more investment to fuel <unk> growth.

And press, our advantage with full flexibility between EV and ice.

So.

Now, let's get to the biggest change in our industry.

And it happens start including with Ford probe because Ford CRO is at the forefront of this biggest changed the digital transformation.

Going to software and services as a differentiator.

We already have over or about 550000 subscribers paid subscribers and service subscribers.

And Ford CRO.

Is.

80% of those.

We are already seeing 50% gross margins on today's software services for example, telematics where customers are now paying $20 a month.

And Thats before we even introduced a fully networked architecture in the new vehicles that launched just in a year or two.

Moving to the next profitable software segment.

Since launch Blue cruise customers have travelled nearly one 4 million hands free hours across North America and that is a 44% increase since the end of Q1, 44% increase in three months.

In July we hit our 100 million miles driven.

Hands free with Blue crews our version one point <unk> was chosen by consumer reports earlier this year as the number one rated system in the U S and since then we've continued to enhance and accelerate launching two more versions of blue crews through over the air updates each significantly improving.

The drivers experience.

And we are now shortening the cycle time between these new versions.

As a company.

We're investing significantly in software.

But the bigger story is the elite talent, we've brought into Ford.

They are attracted by the opportunity to revolutionize the experience of owning and driving a vehicle for millions of customers.

Especially for an iconic brand like forward.

I really believe we have the industry's best minds working on this incredible digital Revolution.

And with that talent.

We are moving from our supplier controls firmware to our own fully networked electric architecture.

And this will reach across all vehicles.

Ice hybrids and Evs.

This is a key point.

Because it allows us.

To have <unk>.

Our higher installed base than just evs alone.

Think of the F 150.

There are three key applications sit on top of this new software platform.

The first one is safety and security we haven't launched yet boy are we working hard to launch it at.

It will give customers the ability to monitor the surroundings in their vehicle on job sites are at home. It will transform the experience of owning afford the second one of course is driver assist technology Blue cruises, just the beginning of our ambition.

And the third one is productivity like the telematics software that we sell a pro.

But we're not going to stop there right around the corner, we will have predictive failure components imagine our productivity gain for our pro customers, who never off the road because they know something is going to go bad before it does.

This is just the beginning these three applications.

These services will bring high margin reoccurring revenue streams that are less capital intensive and cyclical than our traditional vehicles sales.

To wrap up there is understandably a lot of the interest.

In the UAW contract discussions to begin two weeks ago.

We won't negotiate in public, but I would like to share our general approach and our belief system.

When it comes to building in America, and partnering with the UAW.

<unk> stands apart from all the other automakers and most other major industrial companies.

We believe as Sean and Chuck do.

The Ford should do our part to support the Middle class.

Create vibrant communities and build a strong American industrial base, everyone knows we're didn't go bankrupt and we didn't take a bailout.

But they may not know we added a significant amount of UAW manufacturing jobs in fact, thousands of jobs in the U S.

Since the great recession.

We've actually done more than is required by our contract to add jobs move employees from temporary to full time improved benefits.

And we're on our way to spending $1 billion to improve our factory working conditions.

It comes with some additional costs.

But for US this is not simply a number crunching exercise we believe over time customers will appreciate and reward our approach.

And our workforce will be more committed to delivering excellence through our transformation.

So although these negotiations promise to be challenging.

Our goal is to build a bridge to the future with our employees based on mutual trust and a spirit of problem solving with the UAW leadership and of course, our incredible workforce over to you John .

Thanks, Jim.

So the power of our three customer focused segments is really starting to shine through in.

In the quarter, we delivered an 8% increase in wholesale adjusted EBIT of $3 8 billion and an eight 4% adjusted EBIT margin.

The year over year improvement in adjusted EBIT was primarily driven by higher net pricing and volume, partially offset by higher costs as we ramp Evs and expected lower Ford credit profit.

In the quarter, we delivered $2 9 billion of adjusted free cash flow underscoring the improved performance generated from our industrial footprint. This consistency combined with disciplined capital allocation provides significant flexibility to fund our growth while also consistently returning capital to our shareholders.

We continue to target returning 40% to 50% of free cash flow to investors and earlier. This month, we declared our third quarter regular dividend of <unk> 15 per share.

Our balance sheet remains strong we ended the quarter with nearly $30 billion of cash and over $47 billion of liquidity.

And we were recently upgraded by both Moody's and DVR S again, demonstrating the improving trajectory of the business.

Now turning to our customer focused business segments.

With revenue growth of 5% for Blue delivered $2 3 billion of EBIT with a margin of over 9%.

Despite these strong results EBIT declined modestly year over year, including the non recurrence of a one time insurance settlement.

That said costs were flat and we expect this to continue to improve in the second half of this year.

Now importantly, Ford Blue continues to be profitable in every region, reflecting the disciplined capital allocation that has fundamentally derisk our global business. We're now really starting to see the results of fresh exciting product lineup that is driving both strong demand and pricing in key markets across the globe.

And perhaps the strongest example of this is ranger and incredible product, which many don't understand.

Effectively our F $154 50 equivalent outside North America, and that drives meaningful bottom line results for both blue.

<unk>.

Now turning to model E <unk>.

Revenue increased 39% year over year and more than doubled sequentially as we added capacity for both the marquee and the F 150 lighting.

Contribution margin and EBIT margin were both negative as pricing and volume pressures intensified and thats impacting all Oems given the rapid as dynamic changes in the pricing environment, we no longer expect to achieve contribution margin breakeven for our gen. One products this year.

The primary benefit supports industry, leading reporting transparency product leadership and customer insight is that we can quickly react to market realities.

We know that once a customer chooses in EV brand they stick with that brand over time.

So as we make pricing decisions and assess customer acquisition costs, we're not only weighing the immediate impact on profitability, but also how this transit translates to the lifetime value of that customer.

Despite the dynamic environment, we remain committed to delivering our 8% EBIT margin target in 2026.

And we have a real strategic benefit our second generation products are being developed now complete with all new digital architecture. So while the path to sustainable profitability may not look quite the same as we previously thought we're confident in our ability to deliver through more efficient product design cost.

Efficiencies and growth in software and services, which will continue to accelerate.

So as we've demonstrated over the last several years, we will continue to be laser focused on disciplined capital allocation and ultimately delivering a leading and profitable EV footprint that provides us with the flexibility to scale volumes based on customer demand.

Our fourth CRO.

<unk> results they continue to accelerate demonstrating the power of our portfolio approach for this quarter <unk> delivered a 22% increase in revenue driven by transit and our all new Super duty.

EBIT more than doubled to $2 4 billion, resulting in a healthy margin of over 15%.

The significant year over year improvement in EBIT reflects higher net pricing and increased volume both outstanding proof points of the strength of our commercial business.

And where can we continue to be encouraged by our leading market position in the U S and Europe , our strong order banks the upcoming launch of our new one ton transit is a huge opportunity to grow software and services and I'll talk more about this in a moment, but with over 450000 customer subscriptions and with significant.

Growth each quarter. This is a key pillar of our Ford probe business.

Ford credit generated EBIT of $390 million results were in line with our expectations, but down $550 million from a year ago, reflecting lower financing merger. The non recurrence of credit loss reserve releases and residual value performance all of which was already reflected in our full year outlook.

Credit loss performance remains strong and below our historical average, but is expected to increase in auction values remained robust but are down from their peak in the first half of 2022.

Before turning to our outlook, let me provide a little more context regarding software services.

And in my mind this is the real opportunity for value creation.

We are already seeing sustained double digit quarter over quarter growth in subscriptions across all of 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.

Regarding our outlook, we now expect full year total company adjusted EBIT of $11 billion 12 billion, primarily reflecting stronger net pricing in Florida and for Blue with adjusted free cash flow of $6 5 billion to $7 billion in capital expenditures between eight and $9 billion.

Our guidance reflects headwinds, which include continued global economic uncertainty and inflationary pressures.

Higher industry wide customer incentives and continued pricing pressure.

Increased warranty costs lower past service pension income exchange and cost associated with Union agreements.

<unk> include improvement in the supply chain and higher industry volume, our all new super duty and lower commodity costs now.

Now turning to the segments, we now expect Ford Blue to deliver full year EBIT of about $8 billion.

We expect higher volumes and stronger mix to more than offset any potential pricing headwinds.

For model E to report an EBIT loss of around $4 5 billion, largely reflecting the present pricing environment disciplined investment in new products and capacity and other costs we.

We also expect for pros EBIT to approach 8 billion with a significant year over year improvement driven by pricing and volume, including the benefit from the launch of the all new Super duty and Ford Credit's EBT is anticipated to be about $1 3 billion.

So that wraps our prepared remarks, and 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.

We will now begin the question and answer session to ask a question you May Press Star then one on your telephone keypad, if youre using a speakerphone. Please pick up your handset before pressing the keys to.

To withdraw from the question queue. Please press Star then two at this time, we will pause momentarily to assemble our roster and.

In the interest of time, please limit yourself to one question only.

Your first question today comes from Adam Jonas with Morgan Stanley . Please go ahead.

Hey, everybody. So first to lens mother, Tony I've actually never met you before but I feel like I know you and I have heard so many stories from your daughter, not just about your humor and your amazing Puerto Rican cooking, but also for your values and how you've always stood up for what is right. So I just wanted to say God bless you Tony.

And just one question Jim Thank you for showing the losses and model E. When nobody else in this industry has the courage to do so amongst the legacy peers.

Losing 40000 Bucks a unit a model obviously can't continue.

Is this something that you feel you can just grow your way out of or does something more radical need to change and I'm thinking Audi and Volkswagen are turning to SAIC and <unk> in China.

Either there seems to be something of a pivot going on in your in the industry, where there is a willingness to work with competitors your stuff.

Hello.

Some of your peers seem to reluctantly follow you and you're really showed leadership there. So I'm wondering if you can embrace or.

More of that collaborative approach to be remain relevant Navy as well, while also being more capital discipline.

You are absolutely right.

<unk>.

I would say Adam.

When Doug came on board and at the same time.

We did.

Model Y tear downs, especially Texas.

And we really understood the BYD.

<unk> Downs.

And even chung on our partner in China.

Our eyes were opened.

More than a year ago.

And so we were fortunate that our new platforms that no one's seen yet are coming.

At a time when our traditional competitors have already designed and made their bet on the EV platforms.

And I can tell you that that moment was one of the biggest eye opening moments in my personal career, where I realized.

We had to completely change 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.

From what we saw and what we're now executing against the gearbox is the motors.

How we thought about investment in braking systems and wiring systems.

The diversity of our battery chemistry like LLP. It was all just a moment when we all looked at each other and said we have to go left.

BP and compete with these competitors that make really good living on EV.

And.

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 and sending software to the vehicle.

This decision by Ford in the second cycle products to bundle this new simpler more energy efficient.

Platform.

But compete in segments, where we have a great reputation, but we can still conquest with very simple top had engineering and add to it in advanced electrical architecture, where we can win the war of shipping software to the vehicle.

<unk> 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 20000 union amongst batteries in one facility.

In high quality, we learned about the thermal propagation that will protect our brand.

Overtime.

And I'm very optimistic however.

In a place like China.

We may have to use our local.

Our local.

JV partners' platforms.

They are the best in the World.

In certain segments.

Maybe not for a full sized truck or a large three row crossover.

But for some segments. It may be just perfect for us. So we're not trained changing strategy forward, we've always been on that strategy, including China.

Thanks, Jim.

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

Hi, everybody.

I wanted to also ask a question about modeling.

Pushing out the EV targets the volume targets makes sense when we.

We see contribution margins from volume being offset by additional price, but I was hoping that you might people talk to us about kind of the longer term.

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.

Yes, Hi, Rob stone.

So we're not walking away from the 8% margin.

Run rate at the end of 2006, we've got several years to work that it may look a little bit different than what we shared at capital markets day.

But there is levers that we can pull.

We don't necessarily have to spend at the same rate some of the battery factories could be flexible the transition from ice 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 some time to work this and understanding where the pricing is settling in coming up with the right value equation. So we're not walking away from the 8% at this point.

<unk>.

We're going to continue to work that.

As far as the volume.

Tradeoff with profits.

Rod it's interesting the elasticity model that we're now building because because of our high volume we're at the middle part of the year. This year, we will build about 120000 Evs. So we're learning a lot about that elasticities between price and volume is actually not as different.

Then ICU, we thought so we have a lot of information, but didnt have year ago.

On the volume trade off profit optimization, plus all the levers that John talked about on the 8%.

Thank you.

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

Hi.

Dan Levy.

Thank you.

Wanted to ask.

Jim on a comment you made earlier.

The plan to quadruple your number of a hybrid.

Remember what the base plan is but just tying into maybe.

Rods question.

Wondering what part of your push to Decarbonize, where there may be a little more flexibility in where you can lever and how do you hybrid factoring is.

The push on hybrid incremental was that always part of the plan. How are you looking at the interplay between hybrid and Tvs.

Great question.

I think in general how we think about it as you know.

Year ago, two years ago, the industry thought of kind of this extreme between a hybrid and EV.

What we now realize and have seeing in market, especially like like China that there is an infinite number of degrees of electrification in between both of those and the customers are very rational about buying an E. Rev versus a long range P have versus the seara hybrid for towing.

Customers are really acting 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 than let's say.

And the Japanese Oems.

And we have been surprised frankly at the popularity of hybrid systems for F 150.

It is now more than 10% mix for us and it is increasing and what we've learned is that we have to tie.

What the customer really likes is when we've taken a hybrid system is more efficient certain duty cycles, and then we add new capabilities because of the batteries like pro power onboard we're seeing a lot of customers find that combination of all.

Using the batteries for something beyond just.

Moving the vehicle.

And that popularity I mean, we never thought we would be at 60% high.

Hybrid mix for Maverick was far beyond our expectation.

And so we're just listening in the market and we believe that ice customers blue customers don't want to be left behind.

They want modern powertrains and Decarbonising with them is just as attractive to us thats one of the reasons why we separated the business because we want a future proof glue and CRO.

On pro side were very Lucky we have a lot of great multi energy platforms. So we have a lot of choices between E.

Electrification partial electrification.

And ice and the infant number in between the platforms are designed for that flexibility.

So all I'm, saying is youre 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 most people think.

And customers like that.

Okay and are there other levers in terms of flexibility on the plan.

There.

Some elements can be deferred again, just a function of like you said listening to the market.

You mean capital deployment to two evs or.

Can you be more specific.

Capital deployment to EDF program development reduce.

<unk>.

One of your competitors.

Earlier, this week announced that one of their programs, which.

<unk> was expected to cease was being refreshed and was a function of sort of <unk>.

Reuse of capital so.

Are there things you can do yes.

So we don't we don't.

I wanted to be really clear about this.

You all of you Havent, 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 strategies to make 8% margin irregardless of the price point and we're going to allocate capital along those lines. So the pressure we're putting on ourselves.

Is that we inter segments, we execute the product.

Rule efficiency and simplicity and we upgrade the electric architecture for lots of software revenue and profits with great margins.

For all of our electric vehicles, and our hybrid vehicles and they all have to stand alone on their own in the segments that we.

Ah report and you will see all of those results.

Transparently.

We don't create greenhouse gas credits between our businesses, we use to allocate capital it was like $5000 a vehicle we were done.

Done with that we.

We don't play games like that that's why we've created these segments.

And if we have a low cost vehicle.

Like some of our competitors have it's not going to be a complaint CFO .

Assuming a vehicle that we convinced ourselves we can make 8% maybe a lot of that is on software.

Because we do need to build this install base.

I hope that's clear what our.

Top of the house strategy is and maybe how it's different than others.

The next question comes from John Murphy with Bank.

Just one really quick follow up there Jim.

Are you talking about hybrids are you talking about plug in hybrids.

Our hybrids that will qualify for the $7500 IRA credit just that they have batteries that are large enough I'm just just wanted to make sure we understand that.

Yes, I want to make it really clear.

The term hybrid is going to in our industry going to get a lot more complex.

Hybrid could be a serial hybrid.

Our motor powers batteries, it could be a hybrid in the traditional sense that like the F 150 hybrid or the.

And of the hybrids I'm, referring to are not plug in hybrids their vehicles without a plug.

The next question comes from Ryan Brinkman with Jpmorgan. Please go ahead great. Thanks. Thank you for taking my question, which is around the outlook for the bigger loss modeling segment. This year and I get to the changed guidance reflects greater price competition, but there is some portion of the outlook for a bigger loss may be driven in.

Part also by account.

<unk> decision to reinvest some of the higher than expected profit CRO and glue back into the business accelerating electric vehicle development or other EV related capabilities with regard to that.

Breakeven on a contribution margin target for first generation Evs can investors and I would expect that at some point in 2024, and then finally here just given the reiteration of the 8% EBIT target in 2006 could you maybe help us to more with the factors that continue to give you confidence in that target is it related at all to Jim's comments at the start of the call for it may be taken.

Under your control that gives you that confidence leaning more on vertical integration and other levers that you might have identified et cetera. Thank you.

Yeah, Ryan I think that.

The essence 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's changed is that the.

<unk> adoption, we're seeing with now that we've moved into early majority.

The pricing.

Premium of Evs has come off a normalize 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 sooner than we had thought 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 in the car.

The nation of that product, both the physical hardware and the software and the experience and the ability to execute with a completely optimized system. The entire vehicle, that's giving us confidence in our ability to move towards a sustainably profitable segment in evs, starting with our second generation. So we're not walking away.

From that 8% target.

And.

I really want to mentioned something out and compel dimension, which is in the U S. Right now pure evs are 7% to 8% depending on the month.

The intention to buy he's still 30% to 50%.

There are plenty of customers.

E.

The issue is the price they're willing to pay us.

Come down.

But it's very very lumpy.

Not consistent across all segments. So one of the most important levers that John is referring to.

Is what segment, we compete in with our second generation products.

That's why I said clearly that we are so thankful, we did not bet on two ROE crossovers.

We have bet on.

Segments that we know deeply deeply deeply.

And we now know what we know and we can't Unlearn, what we've learned from the pure EV companies on cost and complexity and now we have talent in the company like Doug.

Where we're shipping almost a half a million software to software that many software subscribers.

So.

There is real demand for these customers based on duty cycle.

It's up to us to get those second cycle products and doing the cost reductions.

In the meantime.

And.

I think our strategy in the segments, we compete which is not visible to you yet.

I think is going to going to really differentiate forward.

Alright, 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 and the acquisition cost of them.

We know that once you bring them in the more loyal.

We think about what the.

Retention rates will be over second vehicle or a third vehicle they.

They come down overtime, we also think about it from a modest software.

Attach rate to these vehicles.

Very carefully look at the present value of that.

And is it still positive given the acquisition costs, we have for these customers as we invest in the growth and so we watch that very closely.

And we talked about that with the team I am not going to give you the specific numbers, but that's how we're thinking about this and I can tell you if we get to the point where.

Lifetime customer value is it worth the acquisition costs.

What we said we won't acquire customers at any cost.

And we know where those lines are for us and so thats one of the other tools that we're using is we're looking at this as we invest in our future.

The next question comes from Felipe <unk> with Jefferies. Please go ahead.

Yes. Good afternoon. Thank you very much for it.

CECO skull.

I, just I hear what you're saying, Jim and it's very interesting.

It makes perfect sense, but it feels like compared to a few weeks ago. When we saw you in Detroit.

It's not a turnaround it's hard about but it's quite likely that religion in beds and it seems like the last few weeks I've shaken that contingent has quite a lot.

And I'm just trying to understand.

How much of this is a reaction to a more difficult environment, which I completely understand.

And how much.

So D J and then you should've been a statistic a while back because I look at some of your competitors, whether it's Toyota or BMW have taken a more careful approach about this position to complexity and having a bit more flexibility. So just two sides to the changeover mood.

And then if I can follow the question.

I do a simple math.

Loss per carton CRO.

It's about $32000 and with 12000 EV sorry.

There were 12000, Evs and CRO.

There is a loss of about 260 million booked in CRO, which means that without it the market with even higher something like 18%.

You.

Yes, just one thing as I.

I understand and appreciate the math and doing the math that way.

<unk>.

You look at it and say Wow.

It's a big number.

But you have to remember that there's a lot of investment going in to ramp and put the footprint in as well that these vehicles are carrying and where.

We added quite a bit of capacity through the second quarter.

And so.

We have to think about it that way as well we have to break it into what's the contribution margin what's the gross profit how much you're investing for the future. So that we can scale and grow this business.

Because we know evs are coming in.

Not like its a question of whether or not we're going to have easy. So we can do the math that way, but I'm not sure. It's the right way to think about how we're approaching this business because there is a lot of upfront cost to invest in that footprint. So that we can scale and growth.

And remember we're working on our second generation in our third generation vehicles that has cost as well.

So to attach all of it just to these vehicles.

I don't think is.

Right.

But quite the right way to be thinking about that as we move forward.

Respectfully.

On the I'm not sure, but I think you're referring to the F 150 lightning price decrease.

And I want to be really clear.

We built about 24000 electric vehicles at Ford in the first quarter.

Our target for the quarter four is 100000.

That's four times.

The ramp on F 150 in September .

He is really significant.

We always knew that we had to build an order bank that look nothing like the original F 150, Lightening order bank because our production is tripling.

And.

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 we didn't cut the price of the F 150 or 100000.

Because.

To create an order bank for our current production rate is for a tripling and Oh by the way the F 150 price. After the 10000 decline is still above its launch price.

Hi, everyone.

Just looking at the guidance for Blue now at $8 billion for the year. There is almost a $2 billion stepped down first half second half can you just unpack what the key bridge items. There are there to the sequential step down I know theres obvious sensitivity around what can be baked in for the UAW.

<unk> impact, but beyond this how should we be thinking about for glu.

<unk> pricing any other factors that standout for the second half.

<unk>.

Yes, yes. Thanks, so when you look at that for Blue on a half over half basis.

Yes, we pricing held up much better than we thought through the second quarter, but we do have planned in the second half, but as we continue to increase volumes in blue that we will see some pricing pressure there.

So we see that happening as we walked through we do have in the second half.

The ratification.

Which we see when we get to a new contract and remember for US all of that.

As in our quarter and our fourth quarter, we don't amortize that we take it as a.

A full charge in the quarter.

And then we're also seeing some inflationary pressures and we saw that in the quarter as well, we see that going through the second half primarily around warranty.

And thats with the costs that we're seeing come through the dealers.

So they are increasing their costs on warranty.

For the repairs.

Their labor rates et cetera have gone up with inflation and then the other thing we're seeing across the board we saw in the second quarter, but we see it through the second half as well as the costs, we're seeing on freight freight costs. Although some of the rates are coming down we're seeing constraints overseas. We're seeing rail constraints. So we're generally seeing some constraints around.

Freight and that's driving up costs as well there. So that's the combination of the puts and takes for blue as we go on a half over half.

This concludes the Ford Motor Company's second quarter 2023 earnings Conference call. Thank you for your participation you may now disconnect.

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