Q2 2024 Ford Motor Co Earnings Call
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Gary: Good day everyone. My name is Gary, and I will be your conference operator today. At this time, I would like to welcome you to the Ford Motor Company second quarter 2024 earnings conference call. All lines have been placed on mute to prevent any background noise.
Gary: Good day, everyone. My name is Gary and I will be your conference operator today.
Gary: At this time I would like to welcome you to the Ford Motor Company second quarter 'twenty 'twenty four earnings conference call.
Gary: All lines have been placed on mute to prevent prevent any background noise.
Gary: After the speaker's 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 1 on your telephone keypad. To submit your question, please press star then 2.
Speaker Change: After the Speakers' remarks, there will be a question and answer session.
Speaker Change: If you would like to ask a question. During this time you May Press Star then one on your telephone keypad to withdraw your question. Please press Star then two please.
Gary: Please note, this event is being recorded. At this time, I would like to turn the call over to Lynn Antipas Tyson, Executive Director of Investor Relations. Thank you, Gary.
Speaker Change: Please note this event is being recorded.
Speaker Change: At this time I would like to turn the call over to Lynn Antipas, Tyson Executive director of Investor Relations.
Lynn Antipas Tyson: Welcome to Ford Motor Company's second quarter 2024 earnings call. With me today are Jim Farley, President and CEO, and John Lawler, Vice Chair and Chief Financial Officer. Also joining us for Q&A is Kathy O'Callaghan, CEO of Ford Credit. Today's discussion includes some non-GAAP references. These are reconciled to the most comparable U.S. GAAP measures in the appendix of our earnings deck.
Lynn Antipas Tyson: Thank you Gary welcome to Ford Motor Company's second quarter 2024 earnings call with me today are Jim Farley, President and CEO, and John Lawlor, Vice Chair and Chief Financial Officer also joining us for Q&A is Cathy O'callahan CEO of Ford credit today's discussion includes some non-GAAP references these are reconciled to the most comparable U S. GAAP.
Lynn Antipas Tyson: In the appendix of our earnings deck, you can find the deck along with the rest of our earnings materials and other important content its shareholder dot for dot com or.
Lynn Antipas Tyson: You can find the deck, along with the rest of our earnings materials and other important content, at shareholder.ford.com. Our discussion also includes forward-looking statements about our expectations, and actual results may differ from those stated. The most significant factors that could cause actual results to differ are included on page 20.
Lynn Antipas Tyson: 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 20.
Lynn Antipas Tyson: Unless otherwise noted, all comparisons are year-over-year, company EBIT, EPS, and free cash flow on an adjusted basis. Now, I'll turn the call over to James. Thanks, Lynn, and thanks for joining us.
Lynn Antipas Tyson: Unless otherwise noted all comparisons are year over year company, EBIT, EPS and free cash flow on an adjusted basis now I'll turn the call over to Jim Thanks, Lynn and thanks for joining us.
James D. Farley: First, I wanted to thank our global team. Remaking Ford into a high margin, high growth, more capital efficient, and more durable business is really hard work. It requires focus, collaboration, and excellence. And I also want to thank our investors. We're committed to creating value consistently over the long term, and we appreciate your support and input. Execution against our Ford Plus plan allows us to break free from the low margin, capital-intensive, and cyclical attributes that have constrained auto legacy auto valuations for a long time. And this process does not happen in a straight line.
Jim: First I wanted to thank our global team remaking forward into a high margin high growth more capital efficient and a more durable business is really hard work.
Jim: Requires focus collaboration and excellence and I also want to thank our investors well.
Jim: We're committed to creating value consistently over the long term and we appreciate your support and input.
Jim: Execution against our Ford plus plan allows us to break free from the low margin capital intensive and cyclical attribute sort of constrained auto legacy auto valuations for a long time.
Jim: And this process does not happen in a straight line.
James D. Farley: We are absolutely a different company than we were three years ago, and our pace of change is intensifying. The creation of Ford Pro. Blue and Maude Lee has been a huge catalyst for transparency, accountability, and more rigorous capital allocation.
Jim: We are absolutely a different company than we were three years ago and our pace of change is intensifying.
Jim: The creation of Ford Pro Blue.
Blue and model, we have been a huge catalyst for transparency accountability and more rigorous capital allocation.
James D. Farley: Our Ford Pro business is amazing. It's a high-margin business tracking towards $70 billion in revenue this year, with further opportunities for profitable growth outside of vehicle sales, parts, and service, and software. And a good example of that is a recent decision by our team to add 100,000 units of capacity of Super Duty in Canada. It not only serves our customers, but it's capital efficient and has very high returns for many years to come. As you know, we flipped our international operations many years ago from deep losses to profits and positive cash flow with more opportunities ahead, and that includes China.
Jim: Ford Pro business is amazing, it's a high margin business tracking towards $70 billion in revenue. This year with further opportunities for profitable growth outside of vehicle sales parts and service and software and a good example of that is the recent decision by our team to add 100000 units of capacity of Super duty in Canada.
Jim: And the only serves our customers, but it's it's capital efficient and has very high returns for many years to come.
Jim: As you know we flipped our international operations, many years ago from deep losses to know profits and positive cash flow with more opportunities ahead and that includes China.
James D. Farley: We also took our product portfolio from too many generic vehicles and infused it with passion and purpose. We built out our iconic F-Series and Transit lines, as well as passion vehicles like Mustang and the new Bronco lineup, and sub-brands like Raptor, Tremor, and Dark Horse. Few OEMs can offer a customer choice like Ford at our scale. Ford is number one in our home market for internal combustion. We're number two in EVs and have been for two and a half years.
Speaker Change: We also took our product portfolio from too many generic vehicles and infused it with passion and purpose, we build out our iconic F series and transit lines as well as passion vehicles like Mustang and the new Bronco lineup and sub brands like Raptor in tremor and dark horse.
Speaker Change: Few Oems can offer customer choice like Ford at our scale.
Speaker Change: Ford is number one in our home market for internal combustion. We're number two in Evs and had been for two and a half years and we are the number three hybrid brand in the U S.
James D. Farley: And we are the number three hybrid brand in the US for what's less visible. But incredibly important for investors is the foundational work underway in the company to move to software-defined vehicles and break through digital experiences, and I'll talk about that later. This will have significant operating leverage. And Plus is on track.
Speaker Change: But what's less visible.
Speaker Change: But incredibly important for investors is the foundational work underway in the company to move to software defined vehicles and breakthrough digital experiences.
And I'll talk about that later, but this will have significant operating leverage.
Speaker Change: Ford Pluses on track.
James D. Farley: Today we reaffirmed our adjusted EBIT guidance for the whole year and raised our outlook for adjusted free cash flow. I'm going to comment on our EV landscape and strategy. Software technology and services that are growing in importance at Ford are Ford Pro business and quality. On electrification, we've been very vocal about why electric vehicles are so important and a great choice for customers and businesses. Customer usage data and cost of ownership data would indicate that about 50% of customers who buy automobiles would be better served by buying an electric vehicle.
Speaker Change: Today, we reaffirmed our adjusted EBIT guidance for the whole year and raised our outlook for adjusted free cash flow.
James D. Farley: Now there are a lot of misconceptions around EVs in the separate areas of cost like resale value and insurance, of course, range, charging, and battery life. And OEMs like Ford must do a much better job of educating customers about the advantages that an EV offers in terms of cost of ownership. As you know, we have been the number two EV brand in the US for over two and a half years. That's a long time.
Speaker Change: I'm going to comment on our EV landscape and strategy.
Speaker Change: Software technology and services that are growing importance at Ford, our Ford pro business and quality.
Speaker Change: On electrification, we've been very vocal about why electric vehicles are so important and a great choice for customers and businesses.
Speaker Change: Customers usage data and cost of ownership data would indicate about 50% of customers, who buy automobiles would be better served on buying an electric vehicle.
Speaker Change: Now theres, a lots of misconceptions around evs on the separate areas of cost like resale value, an insurance of course range and charging and battery life and Oems like Ford must do a much better job in educating our customers about the advantages that <unk> offers in terms of cost of ownership.
Speaker Change: As you know.
Speaker Change: We are the number two.
Speaker Change: <unk> brand in the U S for over two and a half years.
James D. Farley: And we've learned a lot, and now we have used those learnings to sharpen our strategy. What we have learned is that it's incredibly important to be transparent about Model E lawsuits.
Speaker Change: That's a long time and we've learned a lot and now we have used those learnings to sharpen our strategy.
Speaker Change: What we learned is that it's incredibly important to be.
Speaker Change: Transparent about model losses.
James D. Farley: Inside the company as well, this forced accountability, and the result is our team is becoming much more strappy and resourceful in terms of turning the business around. We are now more disciplined and have to be for capital and expenses, and this means we will not launch vehicles at a loss that is not good for our business, knowing what we know now about the reality of the market equation, and we clearly see China and Tesla as the cost benchmark.
Speaker Change: Inside the company as well forces this forced accountability and and the result is our team is getting much more strappy and resourceful in terms of turning the business around.
Speaker Change: We are now more discipline and have to be for capital and expense and this means we will not launch vehicles at a loss that are not good for our business.
Speaker Change: Knowing what we know now about the reality of the market equation.
Speaker Change: And we clearly see China, and Tesla as the cost benchmark.
James D. Farley: We also see excess capacity that will lead to more pricing pressures, which is in our business plan, more consolidation, and many, many more partnerships. We see less vertical integration in some areas to relieve capital, and we have a lot of tough choices on Footprint. Early maturity customers are really different from their early adopters, particularly in retail, and we see a lot more openness to hybrids and extended-range electric vehicles, which we call EREVs. We also see a divergence in electrification adoption between commercial and retail.
Speaker Change: We also see excess capacity that will lead to more pricing pressures, which is in our business plan more consolidation and many many more partnerships.
Speaker Change: We see less vertical integration in some areas to relieve capital.
Speaker Change: And we see a lot of tough choices on footprint.
Speaker Change: Early majority customers are really different than the early adopters, particularly in retail and we see a lot more openness to hybrids and extended range electric vehicles, we call E reps.
Speaker Change: We also see a divergence on electrification adoption between commercial and retail commercial customers focus on total cost of ownership the use of vehicles.
James D. Farley: Commercial customers focus on total cost of ownership. They use the vehicles much more intensely, and they do not overbuy batteries that retail customers do. They're also investing in our Pro charging depots and our integrated software because they want to be smart about the cost of charging their vehicles. And I'm happy to say that our EV Pro contribution margin for our EV vans is now already positive. We also have learned a lot about the size of the vehicle. We believe smaller, more affordable vehicles are the way to go for EVs in volume. Why? Because the math is completely different from ICE.
Speaker Change: More intensely and they do not over buy batteries that retail customers do.
Speaker Change: There are also investing in our pro charging depots and our integrated software.
Speaker Change: Because they want to be smart about the cost of charging their vehicles.
Speaker Change: And I'm happy to say that our EV pro contribution margin for our EV bands is now already positive.
Speaker Change: We also have learned a lot about the size of the vehicle. We believe smaller more affordable vehicles are the way to go for EV in volume.
James D. Farley: In ICE, a business we've been in for 120 years, the bigger the vehicle, the higher the margin. But it's exactly the opposite for EVs. The larger the vehicle, the bigger the battery, the more pressure on margin because customers will not pay a premium for those larger batteries. And lastly, compliance. There is a lot of pressure on compliance.
Speaker Change: Why because the math is completely different than ice and ice business. We've been in for 120 years, the bigger the vehicle the higher the margin, but it's exactly the opposite for Evs the larger the vehicle the big of the battery the more pressure on margin because customers will not pay a premium for those larger.
Speaker Change: Batteries.
Speaker Change: And lastly compliance.
Speaker Change: There is a lot of pressure.
Speaker Change: On compliance and the lower demand for Evs, especially the pricing.
James D. Farley: And the lower demand for EVs, especially the price, means that CO2 credits are now likely going to be needed for fleet flexibility and optionality, and will be a critical strategic choice for any company. And what are the success criteria for EVs in the future? Well, the first one is to have the right mix of fully and partially electric solutions.
Speaker Change: <unk> C. O. Two credits are now likely going to be needed for fleet flexibility and optionality.
Speaker Change: B a critical strategy choice for any company.
Speaker Change: What are the success criteria for Evs in the future with the first one is to have the right mix of fully impartially electric solutions. This is imperative.
James D. Farley: This is imperative. You have to have a compelling product roadmap, and you have to have very flexible manufacturing. A good example is our hybrid business. The global hybrid portfolio at Ford is on track to go 40% this year, across nine nameplates, and we really bet on a hybrid truck. In the first half of the year, our hybrid pickups, the Maverick and F-150, grew more than three times the rate of the overall hybrid segment.
Speaker Change: You have to have a compelling product roadmap and you havent have to have very flexible manufacturing are.
Speaker Change: A good example is our hybrid business the global hybrid portfolio at Ford is on track to grow 40% this year.
Speaker Change: Across 19, please and.
Speaker Change: And we really bet Ah Hi, Brian hybrid trucks in the first half of the year, our hybrid pickups Maverick in F $150 grew more than three times the rate of the overall hybrid segment.
James D. Farley: Our F-150 Hybrid with Pro Power on board is a game changer for our customers. Commercial customers have power on the run, like job sites, and our retail customers have emergency power backup, and boy have we seen that in Texas and all the other extreme weather events how important that is for our customers. The second success factor is matching the cost of the Chinese OEMs in Tesla. Especially on affordable EVs. Now, when people hear about affordability, and they think about small and unaffordable, I'd like to address that now.
Speaker Change: Our F 150 hybrid with pro power onboard is a game changer for our customers commercial customers have power on the run like job sites.
Speaker Change: And our retail customers have emergency power backup and boy have we seen that in Texas and all the other extreme weather events, how important that is for our customers.
Speaker Change: The second success factor is.
Speaker Change: Is matching the cost of the Chinese Oems and Tesla.
Speaker Change: Especially on affordable Ebs.
Speaker Change: Now when people hear about affordability.
Speaker Change: And they think about small in an affordable I'd like to address that now.
James D. Farley: We're designing a super efficient platform, leveraging innovation across our product development, supply chain, and manufacturing team, with no engine or drive. A smaller vehicle can have a much roomier package, actually the interior package of a class above, with a small silhouette. That's a big advantage for customers versus ICE. And we're focusing on very differentiated vehicles priced under $40,000 or even $30,000, and we're going to focus on two segments, work, and adventure. And why does this matter?
Speaker Change: We are designing a super efficient platform leveraging innovation across our product development supply chain and manufacturing teams.
Speaker Change: With no engine or drivetrain, a smaller vehicle can have a much roomier package actually the interior package of a class above with the small silhouette, that's a big advantage for customers versus ice.
Speaker Change: And we're focusing on very differentiated vehicles priced under 40, or even $30000 and we're going to focus on two segments.
Speaker Change: Work and adventure.
Speaker Change: And why does this matter.
James D. Farley: Well, the use case for smaller vehicles, affordable vehicles, means shorter trips, more urban locations. It fits the duty cycle of an EV. And affordability. Smaller batteries have an outsized impact on the cost and margin of the vehicle, and the consumer tax credit in the US becomes a much larger part of the sticker price of the vehicle.
Speaker Change: Well the use case for smaller vehicles affordable vehicles means shorter trips more urban locations.
Speaker Change: The duty cycle of an EV.
Speaker Change: And affordability well smaller batteries have an outsized impact on the cost and margin in the vehicle and the consumer tax credit in the us become a much larger part of the sticker price of the vehicle and that is supercharging, the lower cost of ownership that evs have already without it and.
James D. Farley: And that is supercharging the lower cost of ownership that EVs already have without it. And finally... We have the ability to leverage this platform across many top hats, which will drive scale and a large install base for our growing software base. And the last success criteria is to be really careful about your larger EVs.
Speaker Change: And finally.
Speaker Change: We have the ability to leverage this platform across many top hats, which will drive scale and large installed base for our growing software business.
Speaker Change: And the last success criterias to be really careful about your larger evs.
James D. Farley: For us, they'll be part of the picture, but success requires even more breakthroughs in cost efficiency, much smarter choices in segments, in our case, work and commercial. A lot of partnerships, and a lot of technological pathways. Overall, the EV journey has been humbling, but it has forced us to get even more fit as a company, including applying it to our ICE business. And that will pay off in the long run.
Speaker Change: For us there'll be part of the picture, but success requires even more breakthrough on our cost efficiency much smarter choices and segments in our case work and commercial.
Speaker Change: A lot of partnerships.
Speaker Change: And a lot of technology pathways overall, the EBIT journey, it's been humbling, but it has forced us to get even more fit as a company, including applying it to our ice business and that will pay off long run in the long run I am So happy we scaled two and a half years ago, and we have the option to incorporate those learnings into.
James D. Farley: I am so happy we scaled two and a half years ago, and we have the option to incorporate those learnings into our next generation of EVs launching in the coming years. I want to double-click on the software technology and services business.
Speaker Change: Our next generation of Evs launching in the coming years.
Speaker Change: I wanted to double click on the software technology and services business.
James D. Farley: Ford, alongside Rivian and Tesla, are really the only non-Chinese OEMs controlling software across all the vehicle domains. Most companies are doing OTAs on vehicle entertainment, but Ford now has multi-year experience with updating powertrains, braking, the fundamental performance of the vehicle, and connectivity. In the breadth of our portfolio, including F-150 and our pro business, the customer use case is clearly much more complicated than Rivian and Tesla. Our vehicles are increasingly general-purpose computers capable of delivering the type of application environment, AI for our customers, and user experiences that we expect from all of our digital devices. And this allows us to create powerful, connected, ever-improving personalized experiences, which I'll talk about.
Speaker Change: Forward alongside Ribena and Tesla are really the only non Chinese Oems controlling software across all of the vehicle domain.
Speaker Change: Most companies are doing otas on vehicle entertainment, but for now has multi year experience on updating powertrains breaking the fundamental performance of the vehicle connectivity.
And the breadth of our portfolio, including F 150 in our pro business. The customer use cases, clearly much more complicated than ribena and Tesla are vehicles are increasingly general purpose computers capable of delivering the type of application environment AI for our customers and user experiences that we expect from all of our digital.
Isis and this allows us to create powerful connected ever improving customized experiences, which I'll talk about.
James D. Farley: Many of you may be surprised that Ford leads on OTAs. According to the 2024 OEM OTA Capability Rankings in North America, we are the leader based on the quality of our updates. This is not how many updates we do, although we do a lot. It's about the ability to improve the fundamental performance and capability of the entire vehicle and all the modules in the view. And there's no better evidence than Mach-E. Longer range, better efficiency on the battery, faster 0 to 60 times, and better blue cruise performance. We've done it all with Mach-E for many years.
Speaker Change: Many of you may be surprised that Ford leads on Otas. According to the 2024 OEM OTA capability rankings in North America, we are the leader based on quality of our updates.
Speaker Change: This is not how many updates we do although we do a lot it's about the ability to improve the fundamental performance and capability of the entire vehicle and all the modules in the vehicle and there's no better evidence than marquee longer range better efficiency on the battery pack.
Speaker Change: Faster zero to 60 times better Blue cruise performance, we've done it all with marquee for many years now our vision is not.
James D. Farley: Our vision is not, It's not just a powerful computer on wheels; it's actually a robot. We will connect with these digital experiences, things that only a vehicle can really do, like safety and security and the other innovative use cases we shared with you at Capital Markets Day. These experiences that will drive higher profitability and creative revenue and are the reasons for customers to actually stay with Ford and Lincoln, and lower marketing costs are now becoming clear to us. One example of this technology on the retail side is our first implementation of the Phoenix system. We call it the Lincoln Digital Experience with our new panorama display and our new Nautilus.
Speaker Change: Just a powerful computer on wheels, it's actually a robot we will link with these digital experiences.
Speaker Change: Things that only vehicle can really do like safety and security and the other innovative use cases, we shared with you at capital markets day.
Speaker Change: These experiences that will drive higher profitability and creative revenue and are the reasons for customers to actually stay with Ford and Lincoln lower marketing costs are now becoming clear to US. One example on the retail side on.
Speaker Change: On the technology is our first implementation of the Phoenix system, we call. It the Lincoln digital experience with our new Panorama display and our new Nautilus. This experience is really a differentiator in the luxury space with Google maps, and Google assistance and enhanced core play.
James D. Farley: This experience is really a differentiator in the luxury space with Google Maps and Google Assistants and enhanced CarPlay. Our sales have surged for Nautilus by 48%. We now have much younger customers. And the biggest application for this technology is Blue Cruise and ADAS. It's a leading hands-free driving technology in America, we believe.
Speaker Change: Our sales of search for Nautilus, 48%, we now have much younger customers.
Speaker Change: And the biggest application for this technology is blue crews and Adas.
Speaker Change: It's a leading hands free driving technology in America. We believe we now have 415000 enabled vehicles on the road, that's a 25% increase in one quarter.
James D. Farley: We now have 415,000 enabled vehicles on the road. That's a 25% increase in one quarter. We have 213 million miles.
Speaker Change: We have 213 million miles.
James D. Farley: 3 million plus miles of hands-free driving now since launch. To better dimension our progress in software technology and services, in the quarter alone, total company paid subscriptions grew 40% to over 765,000 paid subscriptions.
Speaker Change: 3 million plus miles of hands free driving now since launch.
Speaker Change: To better dimension, our progress this software technology and services in the quarter alone total company paid subscriptions grew 40% to over 765000 paid subscriptions.
James D. Farley: Our integrated service revenue is now on track for double-digit growth this year. We are targeting a billion dollars of revenue next year for our software. This revenue has gross margins of 50 percent or more, which drives significant operating leverage and improved capital efficiency. Now the major part of this new software business is actually Ford Pro, so let me touch on that. The foundation of Pro is really simple.
Speaker Change: Our integrated service revenue is now on track for double digit growth. This year, we are targeting a $1 billion of revenue next year for our software.
Speaker Change: This revenue has gross margins of 50%, which drive significant operating leverage and improved capital efficiency.
Speaker Change: Now the major part of this new software business is actually for pro So let me touch on that.
Speaker Change: The foundation of pro is really simple, it's our vehicles are robust and fresh lineup. The freshness, we've ever had at Ford of ice hybrid and evs, including the all new Super duty, the all new Ranger globally.
James D. Farley: It's our view. A robust and fresh lineup, the freshest we've ever had at Ford of ICE, hybrid, and EVs, including the all-new Super Duty, the all-new Ranger globally, and the all-new F-150 that has just finished its launch. The all new custom transit in Europe and or two small bands in Europe, the new transit Connect and Courier, and the new extended range two ton electric transit we sell in both Europe and North America.
Speaker Change: All new F 150 that has just finished its launch.
Speaker Change: All new custom transit in Europe, and are too small vans in Europe, the new transit connect and Courier and the new extended range two ton electric transit, we sell in both Europe and North America.
James D. Farley: Now, what these brands and vehicles are seeing is resilient revenue streams based on a much longer tail of spending on the infrastructure by government and private enterprises. We also have a very robust and diverse customer range. We dominate small business and medium business with tradesmen, but we have very large customers. We have state, local, and national governments, and we have rental, which, by the way, is very profitable for professionals, in fact, in the US.
Speaker Change: Now what these rent these brands in vehicles. We are seeing is resilient revenue streams based on a much longer tail spending on the infrastructure by government and private enterprise. We also have a very robust and diverse customer range, we dominate in small business and medium business with tradesmen, but we have very long.
Speaker Change: <unk> customers, we have state local and national governments, and we have rental which by the way is very profitable for pro.
Speaker Change: In fact in the U S. One out of four of these fleets mom and pop.
James D. Farley: One out of four of these fleets, mom and pop, tradesmen all the way to large companies, one out of four of those fleets are US-based in the US or Ford only. But the big opportunity for pros is beyond view. And that's where we're focused. With Pro Power Intelligence, we have a highly differentiated telematics office. We offer real-time driver coaching, which provides significant improvements for driver safety and is now available in about half of our modem-enabled pro vehicles. This includes features like seatbelt and speed monitoring and harsh braking notifications.
Speaker Change: Tradesmen, all the way to large companies one out of four of those fleets are U S. In the U S or afford only.
Speaker Change: But the big opportunity for pro is beyond vehicles, and Thats where were focusing.
With pro power intelligence, we have a highly differentiated telematics offering we offer real time driver coaching which provides significant improvements for driver safety and now available in about half of our modem enabled pro vehicles. This includes features like seatbelt and speed monitoring and heartbreaking notification.
Speaker Change: <unk> pro.
James D. Farley: Pro Intelligence is also a platform for vehicle control. Our first foray, and it's a big deal, is Fleet Start Inhibit, which protects our pro vehicles from theft and also unauthorized use. We will expand these vehicle controls to speed control and acceleration limits in the near term. Currently, no third-party telematics solution can offer this functionality because it's related to the vehicle. We call it an uncrossable mode for our software business.
Speaker Change: Pro Intelligence is also platforms with vehicle controls our first foray its a big deal as fleet start inhibitor.
Speaker Change: Which protects our pro vehicles from theft and also an unauthorized use we will expand these vehicle controls to speed control and acceleration limits in the near term.
Speaker Change: Now no third party telematics solution can offer this functionality because it's related to the vehicle we call it unprofitable mode.
Speaker Change: For our software business.
James D. Farley: Over 4 billion miles have now been traveled in the first half of this year on vehicles equipped with Pro Telematics Insights and Controls, and our paid subscriptions for Ford Pro Intelligence grew 35% year-over-year, now including 610,000 paid subscriptions with triple-digit growth in telematics, fleet management, and charging depot software. Turning to physical service, which is the second big non-vehicle revenue profit for us at We have a massive opportunity to grow physical services apart. In the first half of this year, Ford Pro was only 24% of our after sales revenue.
Speaker Change: <unk> 4 billion miles have now been traveled in the first half of this year on vehicles equipped with pro telematics insights and controls and our paid subscriptions for Ford Pro intelligence grew 35% year over year.
Speaker Change: Now, including 610000 paid.
Speaker Change: Paid subscriptions with a triple digit growth in telematics fleet management and charging depot software.
Speaker Change: Turning to physical service, which is the second big non vehicle revenue and profit for us at pro we have a massive opportunity to grow physical services of parts.
Speaker Change: In the first half of this year Ford probe was only 24% of our after sales revenue. It is a huge upside.
James D. Farley: It's a huge upside. Bank of America estimated the profit pool for maintenance, repair, and parts, physical repair of the vehicle that escapes our dealer network is about $135 billion. That's two and a half times the profit dealers capture through vehicle sales and financing. This is a huge untapped market. Ford Pro already has the largest physical and mobile service network in North America, but for specialized commercial service, many of which are open 24-7 for our customers with specialty technicians, and we continue to expand that physical network to a competitive advantage by adding pro elite centers and mobile service units.
Speaker Change: Bank of America estimated the profit pool for maintenance repair and parts physical repair the vehicle that escaped our dealer network is about 135 billion. That's two five times the profit dealers capture through vehicle sales and financing. This is a huge untapped Tam.
Speaker Change: Ford Pro already has the largest physical and mobile service network in North America.
Speaker Change: But for specialized commercial service many of which has opened 24, 7% for our customers with specialty technicians, and we continue to expand that physical network to our competitive advantage by adding pro elite centers and mobile service units.
James D. Farley: We are on track this year to reach 27,000 commercial service bays by the end of this year. That is up 20% year over year. Growth will be led by EliteBase, the largest and most capable of those service bays for Pro, which will more than quadruple this year to 1,300. We are now on track to increase our mobile service units by 45%.
Speaker Change: We are on track this year to reach 27000 commercial service space by the end of this year that is up 20% year over year.
Speaker Change: Growth will be led by our lead base, the largest and most capable of those service base for pro which will more than quadruple this year to <unk> hundred.
Speaker Change: We are now on track to increase our mobile service units by 45% to 2500 service trucks and vans, that's 10% of our entire physical network <unk>.
James D. Farley: 2,500 service trucks and vans. That's 10% of our entire physical network. The mobile service network is incredibly important competitively. None of our competitors offer this kind of scale.
Speaker Change: Mobile service network is incredibly important competitively none of our competitors offer this kind of scale, we address many repairs limiting our downtime for our customers, we service multi make fleets, which helps us with our share garage. Unlike our competitors.
James D. Farley: We address many repairs, limiting our downtime for our customers. We service multi-make fleets, which helps us with our shared garage, unlike our competitors, and global mobile repair orders that generated from this fleet were up 115 percent in the quarter. Our focus on software and physical services expands the moat for pro, while helping our customers improve productivity and grow their business. Pro is on track to have software and physical services contribute 20% of our EBIT by 2026. On Quality, We're Making Progress with our latest vehicles. Ford jumped 14 points in the latest J.D.
Speaker Change: In global mobile repair orders that generated from this fleet is up 115% in the quarter.
Speaker Change: Our focus on software and physical service.
Speaker Change: Expand some moat for pro.
Speaker Change: While helping our customers improve productivity and grow their business.
<unk> is on track for software and physical services contributed 20% of our EBIT by 2026.
Speaker Change: On quality, we're making progress.
Speaker Change: With our latest vehicles for jumped 14 points in the latest J D. Power's 2024 U S. Initial quality survey, we went from 23rd in the industry to ninth Bronco Sport is now named the best small utility and initial quality outperforming 18 competitors.
James D. Farley: Power's 2024 U.S. Initial Quality Survey. We went from 23rd in the industry to ninth. Bronco Sport is now named the best small utility in initial quality, outperforming 18 competitors.
James D. Farley: Our launch and initial quality are leading indicators for warranty in the future, and we expect to see benefits in the future. We did see warranty costs increase in 2Q, of course, tied to new technologies, FSAs, and inflationary pressures for the Cost of Repair. We expect technology-related warranty costs to now normalize as technology matures and we deploy that great OTA capability to address known issues. We are confident we are on the right trajectory with a very clear and non-negotiable mission at Ford to deliver best-in-class quality. I'll close with this.
Speaker Change: Our launch and initial quality are leading indicators for warranty in the future and we expect to see benefits in the future. We did see warranty cost increase in <unk> of course tied to new technologies.
Speaker Change: Phase <unk>.
Speaker Change: And inflationary pressures for the cost of repair.
Speaker Change: We expect technology related to warranty cost to now normalize as technology matures and we deploy that greet OTA capability to address known issues were.
Speaker Change: We are confident we are on the right trajectory with a very clear and non negotiable mission at Ford to deliver best in class quality.
Close with this.
James D. Farley: The remaking of Ford is not without growing pains, but it is unlocking opportunities to serve our customers and grow in ways we never thought possible. My confidence comes from the fact that we have built a world-class team, and we are executing a compelling strategy. No other company has Ford Pro.
Speaker Change: The remaking of Ford is not without growing pains, but is unlocking opportunity to serve our customers and grow in ways, we never thought possible.
Speaker Change: My confidence comes from the fact that we have built a world class team.
Speaker Change: And we are executing a compelling strategy.
Speaker Change: No other company has Ford probe.
James D. Farley: We intend to fully press that advantage. No company has a more compelling product lineup with an attractive mix of ice and partially and fully electric options for both work and retail customers. We also know we have a lot to prove. We look forward to proving our EV strategy.
Speaker Change: We intend to fully press that advantage.
Speaker Change: Company is a more compelling product lineup with an attractive mix of ice and partially and fully electric options for both work and retail customers.
Speaker Change: We also know we have a lot to prove.
Speaker Change: We look forward to proving our EV strategy out that has become more realistic and sharpened by the tough environment.
James D. Farley: Thankfully, we scaled years ago. We are confident we can reduce the losses and sustain a profitable business in the future with everything we've known. We look forward to proving that we can be profitable on smaller vehicles as well, not just on EVs but across all of our powertrain choices. It's time to prove our recent quality gains are repeatable and will flow to the bottom line. There is plenty of work ahead, but the direction is crystal clear to us. We are building a high growth, high margin, more capital efficient, and more durable Ford. John.
Speaker Change: Thankfully, we scaled years ago, and we are confident we can reduce the losses.
Speaker Change: And sustain a profitable business in the future with everything we've known we look forward to proving that we can be profitable on smaller vehicles as well not just on evs, but across all of our powertrain choices and it's time to prove our recent quality gains are repeatable and will flow to the bottom line plenty of work ahead.
John: But the direction is crystal clear to US we are building a high growth high margin more capital efficient and more durable Ford John.
John T. Lawler: Thanks, Jim. And I want to thank the entire Ford team for their hard work and continued focus on executing our Ford Plus strategy. And more importantly, we are working aggressively to remake Ford into a higher growth, higher margin, and more durable business as, Frankly, a higher performing company. Our automotive business is solid and consistently generating strong free cash flow, which is a core ingredient to drive total shareholder returns over time. Now, in the quarter, we generated nearly $48 billion in revenue, with growth of 6%. Wholesale sales were up 2%, as our fresh and compelling product line gave our retail and commercial customers unmatched freedom of choice.
Speaker Change: Thanks, Jim and I want to thank the entire <unk> team for their hard work and continued focus on executing our four pillar strategy and more importantly, we are working aggressively to remake forward into a higher growth higher margin and more durable business as you said and frankly, a higher performing company.
Speaker Change: Our automotive business is solid and consistently generating strong free cash flow, which is a core ingredient to drive total shareholder returns over time.
Speaker Change: During the quarter, we generated nearly $48 billion in revenue with growth of 6% wholesales were up 2% as our fresh and compelling product line.
Gabe: Gabe our retail and commercial customers unmatched freedom of choice the quarter benefited from record transit wholesales as well as the completion of our all new F 150 loans, including drawdown of the inventory we had held at the end of the first quarter, we delivered $2 8 billion in adjusted EBIT with a margin of five eight.
John T. Lawler: The quarter benefited from record transit wholesales, as well as the completion of our all-new F-150 launch, including a drawdown of the inventory we had held at the end of the first quarter. We delivered $2.8 billion in adjusted EBIT with a margin of 5.8%, as higher costs were partially offset by the continued strength in pro. Costs were up year-over-year, primarily reflecting an increase in warranty reserves, higher new product-related material costs, and higher manual costs.
Gabe: As higher costs were partially offset by the continued strength from <unk>.
Gabe: Costs were up year over year, primarily reflecting an increase in warranty reserves higher new product related material costs and higher manufacturing costs.
John T. Lawler: Now, if you take a step back and look at our sequential revenue growth, Q2 saw revenue growth of 12% on a 9% increase in wholesales driven by higher truck volume and the strength of our product portfolio. Despite this revenue growth, EBIT was flat, reflecting primarily higher warranty and manufacturing costs related to inventory, which was driven by seasonality and the high volume long-term.
Gabe: Take a step back and look at our sequential performance Q2 saw revenue growth of 12% on a 9% increase in wholesale driven by higher truck volumes and the strength of our product portfolio.
Gabe: Despite this revenue growth EBIT was flat, reflecting primarily higher warranty and manufacturing costs related to the inventory, which was driven by seasonality and the high volume launches.
John T. Lawler: We remain on track to deliver two billion of material manufacturing and freight efficiencies over the full year, which will partially offset higher labor and product refresh. We are seeing emerging headwinds in warranty and inflationary pressures in Turkey, and we are working to mitigate them. And I have more confidence in today's business than ever.
Gabe: We remain on track to deliver $2 billion of material manufacturing and freight efficiencies over the full year, which will partially offset higher labor and product refresh costs, we are seeing emerging headwinds and warranty and inflationary pressures in Turkey, and we are working to mitigate these costs.
Gabe: I have more confidence in today's business than ever our strong global product lineup is differentiated in driving continued topline growth and we're slowly but surely improving our industrial system and shedding behaviors that have held us back in the past we're on track to deliver our full year guidance and we are generating stronger and more can.
John T. Lawler: Our strong global product lineup is differentiated and driving continued top-line growth. And we're slowly but surely improving our industrial system and shedding behaviors that have held us back in the past. We're on track to deliver our full-year guidance, and we are generating stronger and more consistent cash flow than just a few years ago, evidence that our Ford Plus plan is working. Adjusted free cash flow was $3.2 billion in the quarter and $2.8 billion through the first half, resulting in a cash conversion rate of 51%.
Gabe: Cash flow in just a few years ago, evidenced that our Ford plus player is working.
Gabe: Adjusted free cash flow was $3 2 billion in the quarter and $2 8 billion through the first half, resulting in a cash conversion rate of 51%.
John T. Lawler: Our $1 billion increase in adjusted free cash flow guidance for the year underscores our growing confidence in the business. Our balance sheet remains strong with close to $27 billion in cash and $45 billion in liquidity, providing considerable flexibility in a very dynamic environment. I'm also pleased to announce that we declared our third quarter regular dividend of 15 cents per share payable on September 3rd to shareholders of record on August 7th.
Gabe: Our $1 billion increase to adjusted free cash flow guidance for the year underscores our growing confidence in the business our balance sheet remains strong with close to $27 billion in cash at 45 billion in liquidity, providing considerable flexibility in a very dynamic environment.
Speaker Change: I'm also pleased to announce that we declared our third quarter regular dividend of <unk> 15 per share payable on September <unk> to shareholders of record on August seven.
John T. Lawler: Now, let me spend a few minutes summarizing the financial performance of our customer-focused segments and highlight how each of them is driving Ford Plus and making our business stronger. Ford Pro delivered a 9% increase in revenue on a 3% increase in wholesale. This segment has consistently delivered year-over-year revenue growth each quarter since we re-segmented our business. EBIT was a solid $2.6 billion with a healthy margin of over 15%, reflecting increased superduty and transit volume that is both capacity constrained along with higher net price.
Speaker Change: Now, let me spend a few minutes summarizing the financial performance of our customer focused segments and highlight how each of them is driving toward plus and making our business stronger.
Speaker Change: <unk> delivered a 9% increase in revenue on a 3% increase in wholesale segment has consistently delivered year over year revenue growth each quarter since we re segmented our businesses.
Speaker Change: EBIT was a solid $2 6 billion with a healthy margin of over 15%, reflecting increased super duty in transit volume that are both capacity constrained that along with higher net pricing.
John T. Lawler: Ford Pro is the prototype for sticky, high-margin, non-cyclical revenue. Pro's results this quarter continue to demonstrate consistency, predictability, and resiliency of this higher-margin growth model. Ford Model E generated a loss of $1.1 billion as continued industry pricing pressures and wholesale declines of 23% more than offset lower costs.
Speaker Change: Ford Pro is the prototype for sticky high margin non cyclical revenue <unk>.
Speaker Change: <unk> results this quarter continue to demonstrate consistency predictability and resiliency of this higher margin growth business.
Speaker Change: Gordon model E generated a loss of $1 1 billion as continued industry pricing pressures in wholesale decline.
Speaker Change: Sales declines of 23% more than offset lower cost our team's intense focus on cost delivered about $400 million in savings to the bottom line in the quarter key factors included reductions in material costs improved battery economics, and lower engineering. This builds on the cost reductions we have achieved since the launch of our first generation products, helping Tim.
John T. Lawler: Our team's intense focus on cost delivered about $400 million in savings to the bottom line in the quarter. Key factors included reductions in material costs, improved battery economics, and lower engineering. This builds on the cost reductions we have achieved since the launch of our first-generation products, helping to improve our profit outlook as we head into 2025. For Ford, Ford Blue revenue grew by 7% on a 3% increase in wholesales, led by growth in trucks and strong pricing.
Speaker Change: Prove our profit outlook as we head into 'twenty five.
Ford: Ford Ford Blue revenue grew by 7% on a 3% increase in wholesale led by growth in trucks and strong pricing wholesales were impacted by the launch of the explorer as we ended the quarter with about 21000 vehicles in inventory for quality checks EBIT of $1 2 billion and a margin of four 4% were both down year over year.
John T. Lawler: Wholesales were impacted by the launch of the Explorer as we ended the quarter with about 21,000 vehicles in inventory for quality. EBIT of $1.2 billion and a margin of 4.4% were both down year over year, mostly driven by higher warranty.
Ford: Year, mostly driven by higher warranty once again <unk> profitable in every region or.
John T. Lawler: Once again, Blue was profitable in every region. Our hybrid sales, up 34% in the quarter, continue to shine, and our global hybrid mix is now approaching 9%, up over two points year over year, with more products on the way. Ford Credit generated a DBT of $343 million, down slightly year over year. As expected, auction values declined by 9%, and lease return rates continued to normalize from historic lows.
Ford: Our hybrid sales up 34% in the quarter continued to shy at our global hybrid mix is now approaching 9% up over two points year over year with more products on the way.
Ford: Ford credit generated EBIT of $343 million down slightly year over year as expected auction values declined by 9% and lease return rates continue to normalize from historic lows credit losses, and insurance losses were also higher but mostly offset by an improvement in financing margin.
John T. Lawler: Credit losses and insurance losses were also higher, but mostly offset by an improvement in financing margins. We continue to originate a high-quality book with U.S. retail and lease FICO scores, again exceeding 750 for the quarter. Our exposure to EV residual risk is low, as EVs represent less than 5% of our lease portfolio. Now, let me turn to our As I referenced earlier, we continue to expect full-year company-adjusted EBIT in the range of $10 to $12 billion.
Ford: We continue to originate a high quality book with U S retail and lease FICO scores again exceeding $7 50 for the quarter, our exposure to EV residual risk is low as evs represent less than 5% of our lease portfolio.
Ford: So now let me turn to our outlook as I referenced earlier, we continue to expect full year company adjusted EBIT in the range of $10 billion to $12 billion in general, we see supply and demand for vehicles and balanced and industry dynamics, including market equations for our four segments are playing out similar to what we forecast at the beginning of the year.
John T. Lawler: In general, we see supply and demand for vehicles in balance, and industry dynamics, including market equations for our four segments, are playing out similar to what we forecasted at the beginning of the year. We are increasing our adjusted free cash flow guidance by $1 billion to $7.5 to $8.5 billion, supported by strong earnings and lower-than-planned capital.
Ford: We are increasing our adjusted free cash flow guidance by 1 billion to seven five to $8 5 billion supported by strong earnings and lower than planned Capex. We are keeping our capex target range of $8 billion to $9 billion and are focused on delivering at the low end.
John T. Lawler: We are keeping our CapEx target range of $8 to $9 billion and are focused on delivering at the low end. Our outlook for the year assumes a flat to slightly higher SAR in both the U.S. and Europe. Our planning assumption for the U.S. is 16 to 16.5 million units.
Ford: Our outlook for the year assumes a flat to slightly higher <unk> in both the U S and Europe, our planning assumption for the U S is 16% to $16 5 million units.
John T. Lawler: Full year of custom demand for our all-new Super Duty, contributing to better market factors for Ford Pro. Lower industry pricing of roughly 2%, driven by higher incentive spending as we move through the second half of this year. For Ford, we expect this to be partially offset by top-line growth from the launch of our new product. Warranty Reserve increases from software, higher repair costs, and. Our segment outlook anticipates continued Ford Pro strength, and we are increasing our EBIT range to $9 to $10 billion, reflecting further growth and favorable mix, partially offset by moderated price As expected, losses in the range of $5 to $5.5 billion for Model E, driven by continued pricing pressure and investments in new vehicles. And for Ford Blue, we are trimming our EBIT range to $6 to $6.5 billion, reflecting a balanced market equation and higher warranty.
Ford: Full year of customer demand for our all new Super duty contributing to better market factors for Ford Pro lower industry pricing of roughly 2% driven by higher incentive spending as we move through the second half of this year for Ford. We expect this to be partially offset by top line growth from the launch of our new products warranty reserve.
Ford: Increases from software higher repair costs and FSA or.
Ford: Our segment outlook anticipates continued strength and we are increasing our EBIT range to 9% to $10 billion, reflecting further growth and favorable mix, partially offset by moderated pricing as expected losses in the range of $5 to $5 5 billion for model E driven by continued pricing pressure and investments in new.
Ford: Vehicles and for Ford Blue, we are trimming, our EBIT range to $6 to $6 5 billion, reflecting a balanced market equation and higher warranty, we expect <unk> profit trajectory to significantly improve in the second half, reflecting higher volume with the F 150 explore and Ranger launches that we've just recently competed at our.
John T. Lawler: We expect Blue's profit trajectory to significantly improve in the second half, reflecting higher volume with the F-150, Explorer, and Ranger launches that we've just recently competed in, and we expect Ford Credit EBT to be about 1.5 billion double-digit growth year over year. You know, our performance this quarter demonstrates the positive progress on our Ford Plus. We're disciplined with capital, and we have the right portfolio of products, and we are delivering consistent cash generation to reward our shareholders.
Ford: <unk> capacity expansion and Bronco and.
Ford: And we expect Ford Credit's EBT to be about $1 5 billion double digit growth year over year.
Ford: Our performance this quarter demonstrates the positive progress on our four plus plan.
Ford: We're disciplined with capital and we have the right portfolio of products and we are delivering consistent cash generation to reward our shareholders. We are relentlessly seeking out new ways to make our business better and remain focused on driving improvements in both quality and cost.
John T. Lawler: We are relentlessly seeking out new ways to make our business better and remain focused on driving improvements in both quality and quantity. So that wraps up prepared remarks. We will now begin the question and answer session. To ask a question, you may press STAR, then 1 on your telephone keypad.
Speaker Change: That wraps our prepared remarks, we'll use the balance of time for questions. Thank you.
Speaker Change: We will now begin the question and answer session to.
Speaker Change: To ask a question you May press Star then one on your telephone keypad.
Gary: If you are using a speakerphone, please pick up your handset before pressing the keys. To withdraw your question, please press star then 2. Your first question comes from the line of Adam Jonas with Morgan Stanley. Please go ahead. Hey, everybody. Jim, you said that Ford is a different company from what it was three years ago, but The stock market really doesn't seem to agree with you at all on that. Stocks are down about 10%. After hours, and around $12 a share.
Speaker Change: If you are using a speakerphone. Please pick up your handset before pressing the keys to withdraw your question. Please press Star then two.
Adam Michael Jonas: The team just ran the numbers, Ford ranks 494 out of 500 companies, and the S&P on Jim, my first question is, do you think Ford's stock is good value? Then why does your board refuse to authorize a share buyback? And people on this call, I think they understand the reason, like the family element, but in your opinion.
Speaker Change: Your first question comes from the line of Adam Jonas with Morgan Stanley. Please go ahead.
Adam Michael Jonas: Hi, everybody.
Adam Michael Jonas: Jim You said that fourth a different company from what it was three years ago, but.
Adam Michael Jonas: Stock market really doesn't seem to agree with you at all on that stockpile of about 10%.
Speaker Change: After hours.
Speaker Change: $12 a share.
Speaker Change: And my team just ran the numbers for <unk> 494 out of 500.
Speaker Change: Companies in the S&P on PD.
Speaker Change: Jim do you. My first question is do you think <unk> stock is good value.
Speaker Change: Yes.
Speaker Change: Yes.
Jim: Then why does your board refused to authorize a share buyback and people on this call I think they understand the reasons like the family element.
Speaker Change: But in your opinion.
James D. Farley: If you're telling me the stock's a good value and it's in the bottom one percentile of the S&P, what's the plausible reason why? I don't really think you have better uses of capital than that. But, yes, we do. I have to tell you that it's hard, it's hard for people to understand those possible uses of capital, but we have so many exciting businesses to invest in. And pro is a great example. Um, you know, I'm not going to get into specifics, Adam.
Speaker Change: If you are telling me the stocks at good value.
Speaker Change: And it's like a bottom one percentile of the S&P.
Speaker Change: What's what's the plausible reason why.
Speaker Change: Do you really think you have better uses of capital.
Speaker Change: Yes, we do.
Speaker Change: And.
James D. Farley: But I think, I think people will understand over time how many exciting opportunities there are for Ford. And I'm not just referring to vehicles; I'm referring to non-vehicle activities. We have 27,000 service bays. There are lots of opportunities. And, as I said, when you look at Ford Pro, just do a deep dive on that one, that one, that one. And I'm so glad you asked this question, by the way.
Speaker Change: I have to tell you that.
Speaker Change: It's hard it's hard for people to understand those those possible uses of capital, but we have so many exciting businesses to invest in and pro is a great example.
Speaker Change: I'm not going to get into specifics, Adam, but I think I think people will understand over time, how many exciting opportunities there are Ford and I'm, not and I'm, not just referring to vehicles im referring to non vehicle activities.
Speaker Change: We have 27000 service space.
Speaker Change: There's lots of opportunities.
Speaker Change: And as I said when you look at <unk>, just deep dive on that one that one that one and I'm. So glad you asked this question by the way.
Speaker Change: <unk>.
Speaker Change: So.
James D. Farley: So, Ford Pro is a very, very high percentage of our company's profit. Just look at the ratio between the overall company's EBIT and Ford Pro and our guidance, and then think about our after sales business. Only 24% of our revenue comes from pro-related vehicles. And we could spend a lot of time talking about this opportunity, but that's why I highlighted my comments. There are so many places for us to grow professionally on the physical services. They're like 35% margin, but it's hard stuff, right?
Speaker Change: <unk> Pro is a very very high percentage of our company's profit just look at the ratio between the overall company's EBIT pro in our guidance and then think about our after sales business only 24% of our revenue comes from pro related vehicles.
Speaker Change: And we could spend a lot of time talking about this opportunity, but that's why I highlighted in my comments. There are so many places for us to grow pro on the physical services, they're like 35% margin.
Speaker Change: But its hard stuff right, it's like bays and technicians and.
James D. Farley: It's like bays and technicians and a lot of work. We have very exciting electrical architecture investments that we have to make in our future that will really change our ICE vehicles and their revenue potential because that revenue won't be just when we sell the vehicle; it will be over time, which we're seeing with Pro already. So I don't want to belabor the point; I'll just tell you there are plenty of opportunities. Anything else?
Speaker Change: And in a lot of work.
Speaker Change: Have very exciting electrical architecture.
Speaker Change: <unk> that we have to make in our future that will really change our ice vehicles.
Speaker Change: And their revenue potential.
Because that revenue wont be just when we sell the vehicle will be over time, which we're seeing with pro already.
Speaker Change: So I don't want to belabor the point I'll just tell you there are plenty of opportunities anything else okay.
James D. Farley: Just a follow-up on Skunk Works, your team has made a number of visits to China over the last couple years, including I think just a couple months back. I believe you were there. What are you learning from these trips, and specifically, I mean, you mentioned China along with Tesla, the cost benchmark, but do you think Ford can bring a low-cost EV to market profitably without help from your partners in China, or is China part of the solution? And if China is part of the solution, then what are you going to do about it? Yeah, a great question.
Speaker Change: Just a follow up on on Skunk works.
Speaker Change: Our team has made a number of visits to China over the last couple of years, including I think just a couple of months back I believe you are there what are you learning from these trips and specifically I mean, you mentioned, China, along with pass on the cost benchmark, but Ford can bring to market, our low cost <unk> profitably without help.
Speaker Change: From your partners in China, or China part of the solution and if China is part of the solution and what are you going to do about it.
James D. Farley: And an important question for any OEM as the EV market evolves here. Look, we made the bet on CATL many years ago; it was a very important bet for our company, to localize LFP cells in North America, which happens to be in Michigan. We're two years into that project. That is a signature partnership. CATL is the largest battery maker in the world, and they lead iron phosphate cost and reliability.
Speaker Change: Yes, great question and an important question for any OEM.
Speaker Change: As the EV market evolves here look.
Speaker Change: We made the bet on CTO many years ago. It was a very important bet for our company to localized <unk> T cells in North America happened to be in Michigan. We're two years into that project that is a signature partnership <unk> is the largest battery maker in the world and they lead iron phosphate.
Speaker Change: Cost and reliability that is a signature partnership that we launched many years ago that we've been working hard on and Marshalls on track.
James D. Farley: That is a signature partnership that we launched many years ago that we've been working hard on, and Marshall's on track. Look what Volkswagen is doing with XPeng and many others who are kind of taking a Chinese low-cost platform and using that. That's not our strategy.
Speaker Change: Look what Volkswagen is doing with <unk> and many others, who are kind of taking a Chinese low cost platform and and using that that's not our strategy. Our partnership strategy will be on the component side going deep into the supply chain for IP that is critical in <unk>.
James D. Farley: Our partnership strategy will be on the component side, going deep into the supply chain for IP that is critical and unique. I'm not going to get into specifics, but CATL is one example, and we're going to learn how to do that at the company. We believe that this is essential know-how for the company because the true fitness test for EV profitability will be on these small vehicles. And we have learned from our experience with Mazda and Kia and many others that we have to have this know-how in the company because it applies across all of our vehicles, not just EVs.
Speaker Change: <unk>.
Speaker Change: I'm not going to get into specifics, but <unk> is one example, and we're going to learn how to do that at the company.
Speaker Change: We believe that this is essential know how for the company because the true fitness tests for EV profitability will be on the small vehicles and we have learned from our experience with Mazda and key and many others that we that we have to have this know how in the company because it applies across all of our vehicles, not just evs and the lowest <unk>.
James D. Farley: And the lowest cost is the most important capability. We believe that many of our competitors will turn to their Chinese, either independent companies or partners to basically use their platform globally. We learned a lot, not just from China but from MEB. We've been scaling MEB.
Speaker Change: <unk> is the most important capability.
Speaker Change: We believe that many of our competitors will turn to their Chinese.
Speaker Change: Either independent companies or partners to basically use their platform globally, we learned a lot not just from China, but for <unk>, we've been scaling <unk>, we know the cost of Volkswagen or one of the leaders in scale and what we found in that trip and subsequent trips to China is that.
James D. Farley: We know the cost of Volkswagen. They're one of the leaders in scale. And what we found on that trip and subsequent trips to China is that we have a very competitive battery CATL, but many of the Chinese players in the lower cost have very affordable batteries, but they don't have the most efficient design outside of the battery on the other EV components. And our team, the Skunk Works team, we might as well call it a big team now because it's no longer Skunk Works.
Speaker Change: We have a very competitive battery to see ATL, but many of the Chinese players and the lower cost have very affordable batteries, but they don't have the most efficient.
Speaker Change: Design outside of the battery on the other <unk> components and our team the Skunkworks team, we might as well call. It a big team now because it's no longer skunk works, we're betting on them as our affordable platform.
Bruno Nikolai Dossena: We're betting on them as our affordable platform. They have really designed breakthrough EV components with our own design that we think are better and cheaper. And we have a very competitive battery localized with the IRA benefit, and the partnership discussion, I think, we think will largely play out in larger vehicles. We think that's where the partnership, the big partnership opportunity really lies. In the commercial vehicles that I talked about, I'm not, we have nothing to say right now, but this is, us. Why is a partnership so important?
Speaker Change: They have really designed breakthrough EV components with our own design that we think are better and cheaper and we have a very competitive battery localized with.
Speaker Change: With the IRA a benefit.
Speaker Change: And the partnership discussion I think we will we think will largely pay out in larger vehicles.
Speaker Change: We think thats, where the partnership big.
Speaker Change: Big partnership opportunity really lies in the commercial vehicles that I talked about I'm not we have nothing to say right now, but this is <unk>.
Speaker Change: Why is the partnership so important because the bigger vehicles have this kind of inverted cost.
Bruno Nikolai Dossena: Because bigger vehicles have this kind of inverted cost, and the partners allow you to be more capital efficient and have better returns. And that's why we think that the partnerships on larger vehicles will play out as vibrantly as the partnerships on affordable vehicles. The next question is from Bruno Dossena with Wolf Research. Please go ahead.
Speaker Change: And the partners allow you to be more capital efficient and have better returns.
Speaker Change: And that's why we think that the partnerships on larger vehicles will play out as vibrantly as affordable vehicles.
Speaker Change: The next question is from Bruno <unk> with Wolfe Research. Please go ahead.
Bruno Nikolai Dossena: Yes. Thank you.
Bruno Nikolai Dossena: Yeah, thank you for taking the questions. I was wondering if you could just conceptualize what, fundamentally, within the organization you think is leading to these persistent warranty issues. I realize partly it's because it was on a prior industrial system, but just given how frequently the surprise wars, up, have visibility? Or how can investors really build confidence in an earnings trajectory? When, you know, every year, are the surprise warranty issues? Thank you. I think the most important evidence, the JD Powers IQS, that that's a really big point of evidence for everyone. Our internal data, by the way, had been saying that for quite some time. It's now verified.
Bruno: For taking the questions I was wondering if you could just contextualize contextualize what.
Bruno: Sunday mentally within the organization you think is leading to these persistent warranty issues.
Bruno Nikolai Dossena: I realized partly it's because it was on a prior industrial system, but just given how frequently the surprise warranty issues keep popping up how do you have visibility or how can investors really built confidence in an earnings trajectory. When every year that the surprise warranty issues keeps happening.
James D. Farley: I think that that is clearly, Cutting the initial quality defects to a fully competitive rate where we're leading some segments will clearly bring our warranty down over time. As you said, it takes time, you've got to launch vehicles, you've got to get into the industrial system and make sustainable changes. The other one I would say is... As painful as it is quarter after quarter to have all these great launches. We do not release them until we're happy with the quality and that we've done all the testing, and it makes our quarters lumpy.
Speaker Change: Thank you.
Speaker Change: I think the most important evidenced the J D. Power's iqs that that's a really big point of evidence for every one of our internal data by the way had been saying now for quite some time.
Speaker Change: Now verified I think that that is clearly.
Speaker Change: Cutting the initial quality.
Speaker Change: <unk> to a fully competitive late right, where we're leading some segments will clearly bring our warranty down over time.
Speaker Change: But as you said it takes time you got to launch vehicles, you've got to get in the industrial system and makes us sustainable changes. The other one I would say is.
Speaker Change: As painful it is quarter after quarter to have all these great launches, we do not release them until we're happy with.
Speaker Change: With the quality and that we've done all the testing and it makes our quarters lumpy.
James D. Farley: It's challenging, but it will reduce warranty over time. When you look at the root causes for these issues, and I can go through the hundreds that we go through, it's very clear that these are issues many of which we could have caught at once, and that is what's happening now at Ford. We have to go through all these launches to find them.
Speaker Change: And it is challenging but it will reduce warranty overtime.
Speaker Change: When you look at the root causes for these issues and I can go through the hundreds that we go through it's very clear that these are issues many of which we could have caught at launch.
Speaker Change: And that is what's happening now it forward we have to go through all these launches to find these and over time, we're confident they come down the other thing we maybe made it more difficult in a way better for the company fitness Wise is we put a lot of new technology in our vehicles and that new technology is difficult for the.
James D. Farley: And over time, we're confident they will come down. The other thing we have made it more difficult in a way, but better for the company fitness wise, is we have put a lot of new technology in our vehicle. And that new technology is difficult for the dealers to diagnose when customers come in and say something's wrong with my sync system, they replace modules unnecessarily, etc., and that hits our warranty reserves. What we've found, though, is that this kind of fixing is different than mechanical fixes, where that OTA capability redirected to these defects can really reduce our cost outlays for the warranty against the warranty reserves.
Speaker Change: <unk> to diagnose when customers come in and say something is wrong with my my sinks system, they replace modules unnecessarily et cetera, and that hits, our warranty reserves, what we have found though.
Speaker Change: Is that this kind of fixing is different than mechanical fixes where that OTA capability redirected to these defects can really reduce our cost outlays for the warranty against the warranty reserves and we're working all of those cost curves everyday for each of our models.
John T. Lawler: And we're working all of those cost curves every day for each of our models. Yeah, I think that, you know, there's the lag that you're going to have between the quality improving and the warranty. Run Rates are Improving. And so, you know, the first step, as Jim said, is quality improving. And we're seeing that in the physical. And that lags, you know, 12 to 18 months, and we should start to see the, On the prior models, you know, majority of what's coming through our FSAs, we're doing things to fix those quicker, get out in front of them, reduce the impact of them, but we're working on that every day. You know, it's like that.
Speaker Change: John anything to add yes, I think that.
John: There is the lag that you are going to have between the quality improving and the warranty run rates improving.
John: And so.
John: It's the first step as Jim said is the quality improving and we're seeing that in the physicals now and that lags you know 12 to.
Speaker Change: 18 months, and we should start to see the warranty coming in on the prior models.
Speaker Change: Majority of what's coming through our FSA.
Speaker Change: We're doing things to fix those quicker get out in front of them reduce.
Speaker Change: The impact of them, but we're working that every day and.
Speaker Change: It's.
James D. Farley: It's an issue that, you know, the team is focused on, and the encouragement is that the quality is improving. And that is the most important thing for the future of the business and the longer run rate. But what we won't do at Ford is reduce our actual cash expense at the expense of our customers. We will fix these problems. We will do the right thing. I don't care if it costs us rental cars or whatever.
Speaker Change: It's an issue that the team is focused on.
Speaker Change: On the encouragement is that the quality is improving and that is the most important thing for the future of the business for the longer run rate of the business.
Speaker Change: What we won't do it forward.
Is reduce our actual cash expense at the expense of our customers. We will fix these problems. We will do the right thing I don't care for costs rental cars or whatever we want to turn these.
unknown: We want to turn these Quality Issues into positives for our Customer Experience. Okay, thank you.
Speaker Change: Quality issues into positives for our customer experience.
Speaker Change: Okay. Thank you.
unknown: So when we step back, and this touches on Adam's point, when you compare Ford now to history, earnings are now significant, but the capital base has expanded such that returns really haven't improved. And this isn't just Ford; this is most Western companies. The earnings part of the equation is only partly in your... but the structural costs. So how are you thinking about the trajectory of structural costs from here? Even simply, are they going up or down?
Speaker Change: So.
When you step back and I think this touches on Adams quick questions, but when you can therefore DAU to history earnings are now significantly higher.
Speaker Change: But the capital base has expanded such that returns really haven't improved and this isn't just for this is most western automakers.
The earnings part of the equation is only partly in your control, but the structural costs.
Speaker Change: Our.
Speaker Change: So how are you thinking about the trajectory of structural costs from here.
unknown: And B, given this is a similar dynamic for a lot of automakers, and so many traditional automakers are investing billions in... really trying to achieve the same, with respect to EVs, make an affordable. Why do you think... The Legacy OEMs are all doing great, and why aren't there more? Well, I would say that you have to think about how you're going to fundamentally change the development. I think that's the core thing. It's not necessarily just doing it with somebody else.
Speaker Change: Even simply or are they going up or down.
Speaker Change: And B given this is a similar dynamic for a lot of automakers and <unk>.
Speaker Change: So many traditional automakers are investing billions in R&D.
Speaker Change: Really trying to achieve the same thing with respect to evs, making affordable EV at scale to compete with Tesla and Chinese Oems.
Speaker Change: Why do you think.
Speaker Change: The legacy Oems are all doing this by themselves and why aren't there more partnerships. Thanks.
Speaker Change: Well I would say that.
Speaker Change: You have to think about how you're going to fundamentally change the development process I think thats. The core thing that's not necessarily just doing it with somebody else sure. We're looking to be as capital efficient as possible bring partners ships in for capital, but you can do that on components. So you can do that in other ways as.
unknown: Sure, we're looking to be as capital efficient as possible, bring partnerships in for capital, but you can do that on components, and you can do that in other ways as well. And we know. And we've done a lot of work understanding what has kept this industry kind of in that penalty box that Adam was talking about. We're not capital efficient. We're lower margin. We don't grow enough.
Speaker Change: Well.
And we know and.
Speaker Change: And we've done a lot of work understanding what has kept this industry kind of in the penalty box that Adam was talking about as you mentioned.
Adam Michael Jonas: We're not capital efficient or lower margin, we don't grow enough and.
unknown: And, you know, we're not resilient. It's a very cyclical business. And we're working to change that. We've walked through the areas that we're doing and are attacking to, you know, improve those key areas. But it's really about the efficiency of the design, and the Skunk Works team is doing something very different. That team is, you know, unique for a traditional OEM because of the talent on that
Adam Michael Jonas: We're not resilient and it's a very cyclical business and were working to change that and we've walked through the areas.
Adam Michael Jonas: We're doing an attacking to improve those those key areas.
Speaker Change: But it's really about the efficiency of the design in the Skunkworks team is doing something very different.
Speaker Change: That team is.
Speaker Change: Unique for our traditional OEM the talent on that team.
unknown: They're doing an Agile waterfall systems integrated design process, which no other global OEM has done. Traditional OEMs, and we're really working on that to be focused on what can happen from a tech standpoint as well. And that vertical integration really helps us drive down those lowest costs, and we're finding that there are ways to be more efficient in many ways than some of the Chinese by incorporating the technology that the team's able to bring forward and leveraging the know-how that they've had from the last products that they've put forward.
Speaker Change: They're doing an agile waterfall systems integrated design process, which no other global OEM has done.
Speaker Change: Traditional OEM.
Speaker Change: And.
Speaker Change: We're really working that to be.
Speaker Change: <unk>.
Speaker Change: Focused on what can happen from a tech standpoint, as well and that vertical integration really helps us drive to those lowest cost and we're finding that theres ways to be more efficient and in many ways than some of the Chinese by incorporating.
Speaker Change: The technology that the team is able to bring forward and leveraging the know how that they've had from the last products that they put forward. So I think theres a lot of opportunity for us with that team and the talent and the change in the process.
unknown: So I think there's a lot of opportunity for us with that team and the talent and the change in the process. Not only is it going to show up when we get to our affordable EVs that are going to come from But it's also important to understand that if you don't have that transfer function Jim talked about, the entire company isn't going to improve. And by doing it within the company with that team, we have a much higher probability of that transfer being successful.
Speaker Change: Not only going to show up when we get to our affordable Evs that are.
Speaker Change: We're going to come from them, but it's also important to understand that if you don't have that transfer function Jimmy talked about the entire company isn't going to improve and by doing it within the company with that team we have a much higher probability of that transfer function being successful yes.
James D. Farley: And I would just emphasize that the ambition at Ford for partnering on EVs is at record levels. We're not going to make any announcements on the earnings call, but this is absolutely a flip the script moment for our clients. We have done partnerships like Volkswagen; we have learned how to be successful with a one-ton transit that includes an electric vehicle. We really see that opportunity in front of us. But we are not going to partner to the level where we delegate our future and the future fitness for cost competitiveness outside the company we need. And if we have a partner, we have to have that transfer function that John mentioned.
Speaker Change: And I would just emphasize that the ambition at Ford for partnering on Evs is record level high.
Speaker Change: We're not going to make any announcements in earning call. But this is absolutely a flipped the script moment for our company.
Speaker Change: We have done partnerships like Volkswagen.
Speaker Change: We have learned how successful how to be successful with the one ton transit that includes an electric vehicle.
Speaker Change: We really see that opportunity in front of us.
Speaker Change: But we are not going to partner to the level, where we delegate our future and the future fitness for cost competitiveness outside the company, we need and if we have a partner we have to have that transfer function that John mentioned.
James D. Farley: I would only say that we need, as an industry, to start focusing equally on the one-time cost, Investment in the electrical architectures, and the Transition to Digital Products. Now, the integrated services that we're finding, we have 765,000 paid subscriptions. They are different than our competitors, who just basically do it for infotainment. We are basically, you know, productivity on Pro as well as Blue Cruise.
I would only say that.
John: We need as an industry to start focusing equally on the one time costs.
John: Investment in the electrical architectures and the transition to digital products.
Speaker Change: Now the integrated services that we're finding we have 700 765000 paid subscriptions they were different than our competitors, who are just basically do it for infotainment we are basically.
Speaker Change: Productivity on pro as well as blue cruise and <unk>.
James D. Farley: To take that to the next level, make that business supercharged, we need to invest heavily in electrical architectures, not just for our EVs but also for our ICE vehicles and hybrid vehicles. And that will be a one-time investment. And the benefit of that was what I was trying to highlight in my script, which is, you know, when the economy turns down, we still have those subscriptions. And our service business, customers turn to that even more in a downturn because they keep their vehicles longer.
To take that to the next level and make that business supercharged, we need to invest heavily in electrical architecture is not just on our evs, but also in our ICEE echols and hybrid vehicles and that will be at one time investment and the benefit of that was what I was trying to highlight in my script, which as you know.
Speaker Change: When the economy turns down we still have those subscriptions.
Speaker Change: Our service business customers turned to that even more in a downturn because they keep their vehicles longer they have to do more maintenance. These are ways to kind of derisk, our exposure to economic cycles.
James D. Farley: They have to do more maintenance. These are ways to kind of de-risk our exposure to economic cycles, and we have to make OTA. The updated IVI system, the integrated services team, both B2C and B2B, our electrical architectures, these are all basic enablers that go beyond EV, and the industry is going through that transformation too, and I believe Ford is in front of others because we have more complicated platforms than Rivian and Tesla and many of the other OEMs. And because of that... We also have more scale.
Speaker Change: And we have to make OTI.
The updated ibi system.
Speaker Change: <unk> integrated services team both <unk> b.
Speaker Change: Our electrical architectures. These are all basic enablers that go beyond <unk>.
And the industry is going through that transformation too and I believe Ford.
Speaker Change: Is is in advance of others, because we have more complicated platforms than revision and in many and Tesla and many of the other all the Oems and.
Speaker Change: And because of that.
Speaker Change: We also have more scale.
John Joseph Murphy: We have more complexity, but we have more scale. And I think that transition and kind of structural change in the industry is as big as the EV. We're going to get to a billion dollars of revenue next year on software. I wouldn't have thought of that two, three years ago. The next question is from John Murphy with Bank of America. Please go ahead. Good evening, everybody.
Speaker Change: We have more complexity, but we have more scale.
Speaker Change: And I think that transition.
Speaker Change: Kind of structural change in the industry is as big as the EV change.
Speaker Change: We're going to get to $1 billion of revenue, we think next year on software.
Speaker Change: I wouldn't have thought of that two three years ago.
Speaker Change: Okay.
Speaker Change: The next question is from John Murphy with Bank of America. Please go ahead.
James D. Farley: Just to take it back to more sort of the core of the business. Jim, I just wanted to go through some numbers or give you kind of your take on the Ontario superduty capacity. And, you know, I mean, obviously, it's a big step up in capacity for the superduty 100,000 units, but it seems like current demand would certainly soak that up or absorb that reasonably easily. I'm just curious, you know, if you think we might be hitting sort of a peak with this truck, what's your sort of view on the ability to kind of sustain these high levels of demand and sell through?
John Joseph Murphy: Good evening everybody.
John Joseph Murphy: Just to get back to more sort of the core of the business. Jim I just want to go through some numbers or kind of your take on the Ontario Super duty capacity add.
Speaker Change: Obviously, it's a big step up in capacity for the Super duty on a 1000 units. It seems like current demand would certainly soap that upper absorbed that reasonably easily but I'm just curious.
Speaker Change: If you think we might be hitting sort of a peak in his truck.
Speaker Change: Or you sort of view on the ability to kind of sustain these high levels of demand and sell through how should we think about incremental margins on that because it seems like $1 billion investment might have a payback of less than two years, and then correct spitting out a lot of cash real quickly.
James D. Farley: How should we think about incremental margins on that? Because it seems like a $3 billion investment might have a payback of less than two years and then, you know, spitting out a lot of cash real quickly. So it might be a really, really, really good investment. So I just wonder if you could talk about that.
Speaker Change: Really really good investment so I'm just wondering if you could talk about that and then also what kind of powertrain. Those trucks will have yep. Thank you. So powertrain wise it will be a diverse powertrain multi energy platform, we will I'm not going to get into specifics, but you can imagine what we've done with F 150 in and transit van we've gone too.
James D. Farley: And then also what kind of powertrains those trucks will have. Yep. Thank you.
Speaker Change: And all of our commercial vehicles are multi energy platforms. So we will offer customers. The choice that we think no other competitor will have.
James D. Farley: So powertrain-wise, it will be a diverse powertrain, multi-energy platform. We will, I'm not going to get into specifics, but you can imagine what we've done with the F-150 and transit van. We've gone to, and all of our commercial vehicles are now, a multi-energy platform. So we will offer customers a choice that we think no other competitor will have, and we believe we'll be a first mover, if not the first mover, in the multi-energy superduty segment. Look, we saw the $1.2 trillion investment in infrastructure and the JOBS Act. That is coming home.
Speaker Change: And we're we believe will be a first mover if not the first mover and multi energy super duty.
Speaker Change: Look we saw the $1 two trillion investment in infrastructure and the jobs Act.
James D. Farley: There's a 5G upgrade that's going on now. I think it's close to a $300 billion investment. I'm really glad you asked this question, John, because it's not obvious to people.
Speaker Change: That is coming home, there's five upgrade thats going now I think it's close to $300 billion investment.
Speaker Change: And I think what's I'm really glad you asked this question John because its not obvious to people the real part of our Super duty business that is that has been under constant.
James D. Farley: The real part of our superduty business that has been under constant supply strains is our chassis business. It's about 25% of our entire super duty business, but they are not pickup trucks that people use like you think in road construction. These are people with bucket trucks doing 5G upgrades, heavy construction, and that is the demand that we have not been able to fill. Ford is, and I'll give you an example. We dominate the ambulance industry in the US. Ambulances tend to use our super duty chassis business. The average age of an ambulance in the US is 15 years now.
Speaker Change: Supply strange is our chassis business, it's about 25% of our entire.
Speaker Change: Super duty business, but they are not pickup trucks people use like what you think in road construction. These are people with bucket trucks.
Speaker Change: Doing <unk> upgrades heavy construction and that is that is the demand that we have not been able to fill Ford is and I'll give you. An example, we dominate ambulance and U S. <unk> tend to use a super duty chassis business. The average age of an ambulance and the U S is 15 years now.
James D. Farley: They are all falling apart. We have not been able to service that industry, and now we can with this incremental capacity. And so it's an aged fleet, the chassis business. It's got a ton of investment in the tails to it still. And we lead in the industry because of our upfitter in the product. And now we're going to take the lead on the multi-energy part. That's kind of the story.
Speaker Change: They are all falling apart, we have not been able to service center industry and now we can with this incremental capacity.
And so it's an aged fleet the chassis business, it's got a ton of investment tails to it's still.
Speaker Change: And we lead in the industry because of our up fitter in the product.
Speaker Change: And now we're going to take the lead on the multi energy part.
That's kind of the story.
James D. Farley: And there will be a great payback. And we wouldn't be doing it at Ford unless we thought this demand would last for many, many years. And if I could sneak just one more in, maybe for Kathy, on the used residuals or the residuals at auction. It seems like, although down year over year, in the last three quarters, they've stabilized and started to improve. I'm just curious what your outlook is there, and it just seems like the supply is going to remain relatively constrained in the used market, the late-model used market.
Speaker Change: And it will be a great payback and we wouldn't be doing it at Ford unless we thought the suit.
John Joseph Murphy: This demand would last for many many years to come John Okay, and if I could sneak just one more in maybe for Cathy on the.
Speaker Change: The used residuals or the residuals at auction it seems like although down year over year. The last three quarters, they stabilized and started to to improve and I'm. Just curious what your outlook is there and it just seems like.
Speaker Change: The supply is going to remain relatively constrained in the used market of late model used market. So this might be a <unk>.
James D. Farley: So this might be a good guy, not just for Ford Motor credit, but for residents and potentially, you know, a lift or support for new vehicle prices. So just what are your expectations there, and what are you seeing in the market, Kathy? Yeah, so we're seeing auction values down about 9% this quarter, year over year, but up sequentially by about 3%. We're expecting auction values to continue to decline in the second half of this year.
Speaker Change: Good Guy not just for Ford motor credit, but for <unk> and potentially.
Speaker Change: A lift or support for new vehicle pricing. So just what are your expectations, there and what you're seeing in the market Cathy.
Kathy O'Callaghan: And we're also expecting our return rates to increase as well, in line with, Great, thank you. The next question is from Dan Levy with Barclays. Please go ahead. Hi, good evening.
Cathy: Yes, so we are seeing auction values down about 9% this quarter year over year, but up sequentially about 3%, we're expecting auction values to continue to decline.
Speaker Change: In the second half of this year and we're also expecting a return rates to increase as well in line with that.
Speaker Change: Alright, thank you.
Speaker Change: The next question is from Dan Levy with Barclays. Please go ahead.
Dan Meir Levy: Hi, good evening, Thank you for taking.
Speaker Change: Taking the question.
Dan Meir Levy: Thank you for taking the call. I wanted to start first with a question on PRO where we're seeing these continued strong results, and really Pricing is doing a lot of, So, I understand all the bits about, you know, pent-up demand, and that's really helping, and there's really a thirst for these products, but maybe you can help give us some color on the sustainability of this pricing, and specifically, A, how long is this tail of pent-up demand? B, how much of the pricing is contractual versus, let's call it, more spot retail, Pro, given it's had such a strong run.
Dan Meir Levy: I wanted to start first with <unk>.
Dan Meir Levy: Question on on Pro where we're seeing these continued strong results.
And really <unk>.
Speaker Change: <unk> is doing a lot of the strength.
Speaker Change: So I understand all the bits about.
Speaker Change: Pent up demand and that's really helping there is really a thirst for these products, but maybe you can help give us some color on the sustainability of this pricing.
Speaker Change: And specifically.
Speaker Change: How long is this tale of pent up demand and B, how much of the pricing is contractual versus let's call. It more spot retail, which would be more subject to the market fluctuations by any color on <unk>.
Jack: Jack <unk> of pricing.
Jack: Given it's had such a strong run.
John T. Lawler: Yeah, so when you look at the pro, we've been talking about the fact that demand, supply, and balance have been great for the top line, and it's been running pretty strong, right?
Speaker Change: Yes, so when you look at pro.
Speaker Change: We've been talking about the fact that.
Speaker Change: The demand and supply imbalances.
Speaker Change: Great for the top line and it's been running pretty strong right no surprise there.
John T. Lawler: We have been forecasting that we expect as we move into the 25 mile year that there will be some of the top line. And that's been our guide. So we understand that over time, that's going to get chipped away at a little bit here and there. But we also believe that there are very underserved segments like chassis that we're going to be able to provide product to where there'll be more price stability as we move forward.
Speaker Change: We have been forecasting that we expect as we move into the 25 model year that there will be some of the top line coming off.
Speaker Change: And that's in our guidance.
Speaker Change: So we understand that over time, that's going to get chipped away at a little bit here and there but.
Speaker Change: But we also believe that there are very underserved segments like chassis that were going to be able to provide product to whether there'll be more price stability.
Speaker Change: As we move forward, but we don't see prices collapsing.
John T. Lawler: So we don't see prices collapse. Now, when you look at our business, about 60% of it or so comes from the fleets, which are negotiated on an annual basis. Those have remained very strong the last couple of years.
Speaker Change: Now when you look at our business about I would say, 60% of it or so comes from the fleets, which are negotiated on an annual basis.
Speaker Change: Those have remained very strong last couple of years I've talked about in the past that.
John T. Lawler: I've talked about in the past that we'll start to see what the 25 model year contracts look like as we move through the third quarter. Initial indications are continued demand beyond what we can supply, but we'll work through that, and we'll have an update as we come through the third quarter. But we're seeing demand continue both on the typical fleet contracts as well as through the dealers when it comes to the smaller fleet customers, the fleet tail, as we call it, where they're buying two or three vehicles at a time.
Speaker Change: We'll start to see was the quantified model year contract look like as we move through the third quarter initial indications are continued.
Speaker Change: <unk> beyond what we can supply, but we'll work through that and we'll have an update as we come through third quarter, but.
Speaker Change: We're seeing demand continue both of the typical fleet contracts as well as through the dealers when it comes to the smaller fleet customers. The fleet tail, we call it where they are buying two or three vehicles at a time so.
James D. Farley: So we're watching this very closely, but so far, with 25 early indicators being positive, I wish there were a car wars for commercial vehicles because if there was, we would see the product freshness at Ford be an outstanding situation for us. So aside from kind of the industry backdrop of industry pricing and demand, I think one of the most important decisions we made several years ago was to go full in on pro.
Speaker Change: We're watching this very closely but so far with 25 early indicators are positive, but we need to.
Speaker Change: <unk> moved through that process much deeper before we can say, we're 25 is going to fallout I wish there were a car wars for commercial.
Speaker Change: Because if if there was.
Speaker Change: We would see the product freshness at four B and outstanding situations for us.
Speaker Change: Aside from kind of the industry backdrop of the industry pricing and the demand I think one of the most important decisions. We made several years ago is to go full in on pro.
James D. Farley: So we invested in a one-ton transit, which is our profit machine in Europe. We invested in a new Ranger globally. We invested in a brand new Super Duty, including the chassis, including multi-energy. We invested in a new F-150. And we have all these new electric transits, two-ton transits. That was very intentional.
Speaker Change: So we invested in a one ton transit, which is our profit machine in Europe.
Speaker Change: We invested in new Ranger globally, we invested in a brand new super duty, including chassis, including multi energy, we invest in new F 150, and we have all these new electric transit two ton transit that was very intentional we did several years ago and now that will pay off I believe as we look into these multi.
James D. Farley: We did it several years ago, and now that will pay off, I believe, as we look into these multi-year contracts. And for Ford, at least, it's very important to understand how outsized the freshness of our lineup is at ProWoods. I've been here 16 years.
Speaker Change: The year contracts.
Speaker Change: And I for Ford at least it's very important to understand how outsized the freshness of our lineup is pro it's Nick I've been here 16 years I've never seen all of our core products updated within the 12 month period like this.
James D. Farley: I've never seen all of our core products updated within a 12-month period like that. Great. Thank you.
Dan Meir Levy: That's helpful. As a follow-up, Jim, I'm wondering if you could just address the electrification strategy in light of the November presidential elections. We know, obviously, there's one candidate who's talked about pulling back on the EV mandate, and there could be some implications for IRA or the federal or California mandates. You know, I appreciate you've talked about the need to have flexibility. I think you even referenced earlier in the call that credits will play a role.
Speaker Change: Great. Thank you that's helpful.
Speaker Change: Jim I'm wondering if you could just address the electrification strategy in light of that.
Speaker Change #100: In November presidential elections, we know obviously, there's one key.
Speaker Change #101: <unk> talked about pulling back on the EDI mandate.
Speaker Change #102: And it could be some implications.
Speaker Change #101: Or.
Speaker Change #101: The federal or California mandates.
Speaker Change #103: I appreciate you've talked about the need to have flexibility.
Speaker Change #104: I think even referenced earlier on the call.
Speaker Change #104: That credits will play a role but.
Dan Meir Levy: But maybe you could give us a sense of, you know, where the strategy is. Is your strategy one that's more existential, and clearly with Skunk Works, it seems to indicate that it is, versus a strategy that is maybe one that's just more meant to reach compliance with a longer-term goal in mind. But maybe you can give a sense of how the strategy might change, if at all, depending on the outcome of the election. Yeah, thank you.
Speaker Change #105: Maybe you could give us a sense of.
Speaker Change #106: Where the strategy is is in your strategy. One that's more existential that clearly with Sculpsure seems to indicate that it is versus the strategy that is maybe one thats just more men to reach compliance with the long term longer term goal in mind, but maybe you can give a sense of how the strategy.
Speaker Change #106: Might change if at all depending on the outcome of the election.
James D. Farley: Obviously, Ford has had a lot of history, a lot of experience, and wisdom after 120 years of election. And I would say, think about our strategy this way. We believe that the fitness of the Chinese for EVs will eventually wash over our entire industry in all regions. And so we believe as a company. Even if there were short-term adjustments we could make to a compliance-led, you know, lower-requirement lineup, we're not going to approach it that way.
Speaker Change #107: Yeah. Thank you.
Speaker Change #108: Obviously <unk> had a lot of history, a lot of experience and wisdom after 120 years of elections.
Speaker Change #109: And I would say think about our strategy this way.
Speaker Change #110: We believe that the fitness of the Chinese in Evs will eventually wash over our entire industry in all regions.
Speaker Change #110: And so we believe as a company.
Speaker Change #110: Even if they were short term adjustments, we can make to our compliance led lower requirement.
Speaker Change #111: Lineup, we are not going to approach it that way.
James D. Farley: We really believe what I said, which is that many Americans would find an electric vehicle lowering their costs, not everyone, but a high percentage. So, this is a kind of enduring strategy at the company, a strategy where we handicap the presidential election for the next one and the next one and see what we can get away with the EPA. That is not how we run Ford because Ford hasn't gone bankrupt. We have been enduring, and the only way we believe to be enduring is to make money on small EVs and commercials. And that's our bet. You'll see it play out in the coming years.
Speaker Change #111: We really believe what I said, which is that many Americans would find an electric vehicle lowering the cost not everyone, but a high percent.
Speaker Change #111: And we believe that to be fully fit globally, whether it's our ranger business commercial business anything really we have to find a way inside the company to be fully fit with lots of partnerships on the supply chain side.
Speaker Change #111: And so so this is a kind of enduring strategy of the company it is not.
Our strategy, where we handicap the presidential elections in the next one the next one and see what we can get away with the EPA that is not how we run forward because Ford has.
Dingell: Dingell bankrupt, we have been enduring.
Speaker Change #111: And the only way we believe to be enduring is to make money on small evs.
Speaker Change #111: And commercial.
James D. Farley: It's a big adjustment from our Gen 1 product, but I'm glad, as I said, we scaled two and a half years ago because we could learn about the reality of the market equation, which is just requiring us to be more fit and move faster. The EPA could certainly change, but it would take, as John said, several years for that to change through legislation and lawsuits. So even from a compliance standpoint, you know, we can't really count on administrations changing this way or that way.
Speaker Change #111: And that's our bet youll see it play out in coming years.
Speaker Change #111: It's a big adjustment from our Gen one products.
Speaker Change #111: I'm glad as I said, we scaled two and half years ago, because we can learn about the reality of the market equation.
Speaker Change #111: Which is requiring us to be more fit and move faster.
Speaker Change #111: The EPA could certainly change, but it would take as John said several years four through legislation and law suits for that to change so even from a compliance standpoint.
John: We can't really count on <unk>.
Speaker Change #114: Administrations, changing this way or that way I have been to the heel many times in the last months walk into many Republican leaders of the country and I always say the same thing to them. Please realize that there's a subset of customers that absolutely we will save money.
James D. Farley: I've been to the Hill many times in the last month, talking to many Republican leaders across the country, and I always say the same thing to them: please realize that there's a subset of customers that absolutely would save money, and they're also a group of customers who like partial electrification, and Ford's strategy is choice, manufacturing flexibility, and choice. We are not going to bet the student body left on this or that; we are going to give customers choice, we're going to be flexible in manufacturing. That's why we want to be a first adopter, because we want to be the first and best at choice, but on EVs. We need to be fully competitive with BYD, Geely, and even our own partner Chang'an. And the only way for us to have done that is through this small group in California.
Speaker Change #113: And there are also absolutely a group of customers like partial explication and forward strategy is choice manufacturing flexibility and choice. We are not going to bed student body left on this right. We're going to give customers choice, we're going to be flexible manufacturing. That's why we want to be a first adopter.
John: To an E River Whatever's next on partial electrification.
John: Because we want to be first and best at that choice.
John: But on Evs.
We need to be fully competitive with BYD geely, even our own partner Chung on.
John: And the only way for us to have done that is through this small group in California.
John: Alright, thank you.
James D. Farley: Great, thank you. The final question today is from Ryan Brinkman with Barclays. Please go ahead. Hi, Ryan Brinkman from JPMorgan. Thanks for squeezing me in.
Speaker Change #115: The final question today is from Ryan Brinkman with Barclays. Please go ahead.
Ryan Brinkman: Hi, Ryan Brinkman Jpmorgan. Thanks for squeezing me in I wanted to ask on the warranty performance that led to the higher cost I remember a similar issue with higher warranty expense back in 2022, which you then tie to I think a transmission installed on vehicles some years prior while noting that the quality and vehicles built recently had improved so.
Ryan Brinkman: I wanted to ask about the warranty performance that led to the higher cost. I remember a similar issue with higher warranty expenses back in 2022, which you then tied to, I think, a transmission installed on vehicles some years prior, while noting that the quality on vehicles built more recently had improved. So, you know, I know you're prioritizing initial launch quality, including with the F-150 we discussed at length last quarter, but really, any color you could share would be helpful, such as whether the higher warranty provision this quarter relates to a discrete issue, like in 2022, or maybe you could share what age cohort of vehicles is driving the higher cost this quarter.
Speaker Change #117: I know you're prioritizing initial launch quality, including with the F. 150, you discussed at length last quarter, but any color you could share would be helpful as such as well.
Speaker Change #119: Whether the higher warranty provision this quarter relates to a discrete issue like in 2022, or maybe you could share what age cohort of vehicles is driving the higher cost this quarter and then with that new provision do you think you've got a better handle now on what future cost could be in and the provision in future quarters.
Ryan Brinkman: And then with that new provision, do you think you've got a better handle now on what future costs could be and the provision in future quarters could normalize lower as soon as next quarter, or how would you rate the potential for, you know, quality performance in older vehicles to maybe be surprise negative? Yeah, right.
Speaker Change #118: Normalized low orders in the next quarter or how would you rate the potential for quality performance and older vehicles to maybe surprise negatively again.
John T. Lawler: I mean, that's part of the issue is these are issues that are popping up in the field on these older models. The largest one coming through is on a rear axle bolt for vehicles that were engineered for the 2021 model year when they were introduced. And if these things come through, you know, at a higher time in service, we're made aware of them, we need to take care of our customers, and we go out to fix them.
Ryan Brinkman: Yes, Ryan.
Ryan Brinkman: That's part of the issue is these are issues that are popping up in the field.
Ryan Brinkman: On these older models.
Speaker Change #120: The largest one coming through as a rear axle bolt.
Speaker Change #120: For vehicles.
Speaker Change #120: Our engineered for the 2021.
Speaker Change #120: Year was when they were introduced.
Speaker Change #120: And it's these things come through.
Speaker Change #120: At a higher time and service were made aware of them, we need to take care of our customers. We go out to fix them.
John T. Lawler: And we're, you know, we have several of those types of things popping up on older models. We got a failed oil pump issue that's popping up on, you know, 2016 launch vehicles. And so it's clear that we had a period of time where the robustness wasn't what it needed to be, and that's showing up. It is hard to predict on some of these units that have been out in the field for quite a while whether one of these issues is going to show up, these longer-term durability and quality issues. But we need to work through that.
Speaker Change #120: And we have several of those types of things popping up on older models failed oil pump issue that's popping up on.
Speaker Change #120: 2016 launch vehicles.
Speaker Change #120: And so there is clear that we had a period of time, where the robustness wasn't what it needed to be.
Speaker Change #120: It's showing up.
Speaker Change #120: And it is hard to predict on some of these units that have been out in the field for quite a while that one of these issues is going to show up these longer term durability and quality issues.
John T. Lawler: And we do believe that overall, as we improve our near-term quality, and that starts to show up in the field, that will allow us to, based on the rules that we have around how we do our accruals, bring down that overall accrual level. So these types of issues, if they pop up, will have less of an impact overall because our run rate on quality will be OK. And maybe just to follow up on how your comments there might relate to what Jim was saying earlier about controlling the software stack from bumper to bumper with, you know, all the over the air update capabilities.
Speaker Change #120: But we need to work through that and we do believe that overall as we improve our near term quality and that starts to show up in the field that will allow us to.
Speaker Change #120: Based on the rules that we have around how we do our accruals, bringing down that overall accrual levels. So these types of issues. If they pop up we'll have less of an impact overall, because our run rate on quality will be improving.
John T. Lawler: But what will these new capabilities mean for your ability to troubleshoot or prevent, you know, warranty issues in the future? Those are critical, because when you look at some of these things that have been out in the field for a while that have failed, you know, they cross over, let's say they were launched in a 16 model year, the first year it was done. So it was designed and engineered and, 13, 14, 15, launched in 16. And it's been out there for quite a few years.
Speaker Change #121: Okay. Thanks, and maybe just to follow up on how your comments there might relate to what Jim was saying earlier about for controlling the software stack from a bumper to bumper from all of the over the air update capabilities. What did these new capabilities mean for your ability to troubleshoot or prevent.
Speaker Change #122: The warranty issues in the future those are critical because when you look at some of these things that have been out in the field for a while that it failed.
Speaker Change #123: They cross over let's say that launched at a 16 model year was the first year. It was done. So it was designed and engineered and 13 14 15 launched in 16 and it's been out there for quite a few years with the connected vehicle and having the digital electrical architecture and us controlling the software across all of the operating domains.
John T. Lawler: With the connected vehicle and having the digital electrical architecture and us controlling the software across all of the operating domains, we will be able to get signals from the vehicle early to tell us whether or not we're having an issue in certain components. And if we understand that early, we can understand the cause of that, and then we can go out and minimize, reduce, get out there earlier and reduce the number of vehicles that are impacted and actually either do an over-the-air update, if we can fix it that way, or do a preventative maintenance type program for folks, which will be much cheaper than a field service action recall where you're replacing components and modules, et ceter That's more on the physical side.
Speaker Change #123: We will be able to get signals off the vehicle early to tell us whether or not we're having an issue in certain components and if we understand that early so we can understand the cause of that and then we can go out and minimize reduce get out there earlier and reduce the number of vehicles that are impacted and actually.
Either doing over the air update if we can fix it that way or do a preventative maintenance type.
Speaker Change #123: Program for folks, which will be much cheaper than a field service actions recall, where you're replacing components and modules et cetera. So there is a lot of advantages through that connected data that we'll be able to run through warranty. The warranty system. That's more on the physical side on the software side, we will be able to understand.
Speaker Change #123: When things are.
Speaker Change #123: An issue much earlier, and we will be able to fix them through over the air updates, which will be a much lower cost as we move forward.
James D. Farley: On the software side, we'll be able to understand when things are an issue much earlier, and we'll be able to fix them through over-the-air updates, which will be a much lower cost as we move forward. During our launches Kumar and Doug have partnered in a way that hasn't been done at Ford for a while, at least where we are testing vehicles to failure and individual components to failure, which is not our launch standard, but we are now doing.
Speaker Change #123: During our launches.
Speaker Change #124: Kumar and Doug.
Speaker Change #125: Partnered in a way that hasnt been done afford for awhile east.
Speaker Change #125: Where.
We are testing vehicles to failure and individual components to failure, which is not our launch standard, but we're now doing that.
Speaker Change #125: And.
James D. Farley: We are also looking at the DTC codes off the vehicle, especially the powertrain DTCs, and running these vehicles at extremely high mileage, far beyond our standard for launch. And that has caught many, many issues in our industrial system that we've been able to correct before we release the vehicle. It's painful to have all these vehicles, you know, over quarter ends. But it's the right thing to do for the company, and it is. The only way we believe in addressing our warranty spend.
We are also looking into DTC codes off the vehicle, especially powertrain dtc's.
And running these vehicles at extremely high mileage far beyond our standard for launch.
Speaker Change #125: And that has caught many many issues.
Speaker Change #125: Our industrial system that we've been able to correct before we released the vehicles.
Speaker Change #125: It's painful to have all these vehicles over quarter ends.
Speaker Change #125: But it's the right thing to do for the company and it is.
Speaker Change #125: The only way we believe in addressing our warranty spend.
Speaker Change #126: Okay helpful. Thank you.
John T. Lawler: Very helpful. Thank you. This concludes the Ford Motor Company second quarter 2024 earnings conference call. Thank you for your participation. You may now disconnect. Okay Cole, you've got him, who who who who who who who who [inaudible] ?? ?? ?? ?? ??
Speaker Change #127: This concludes the Ford Motor Company's second quarter 2024 earnings Conference call. Thank you for your participation you may now disconnect.
Speaker Change #128: Okay call you've got them.
Speaker Change #128: Okay.
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Speaker Change #128: Sure.
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Speaker Change #128: Yes.
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Speaker Change #128: Yes.
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Speaker Change #128: Yes.
Speaker Change #128: Okay.
Speaker Change #128: Thanks.
Speaker Change #128: Sure.
Speaker Change #128: Yes.
Speaker Change #128: Okay.
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Speaker Change #128: Yes.
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Speaker Change #128: Sure.
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Speaker Change #128: Yes.
Speaker Change #128: Sure.
Speaker Change #128: Yes.