Ford Motor Company

Good day, everyone. My name is MJ, and I will be your conference operator today. At this time, I would like to welcome you to the Ford Motor Company second quarter 2023 earnings conference call. All lines have been placed on mute to prevent any background noise. After the 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 one. To withdraw your question, you may press star, then two. At this time, I would like to turn the call over to Lynn Antipas Tyson, Executive Director of Investor Relations. Please go ahead.

Thank you, MJ, and welcome to Ford Motor Company's second quarter 2023 earnings call. With me today are Jim Farley, President and CEO, and John Lawler, Chief Financial Officer. Also joining us for Q&A is Marion Harris, CEO of Ford Credit, and Ted Canis, CEO of Ford Pro. Hello. Today's discussion includes some non-GAAP references. These are reconciled to the most comparable US GAAP measures in the appendix of your earnings deck. You can find the deck along with the rest of our earnings materials and other important content at shareholder.ford.com. Our discussion also includes forward-looking statements about our expectations. Actual results may differ from those stated. The most significant factors that could cause actual results to differ are included on page 26. Unless otherwise noted, All comparisons are year-over-year. Company EBIT, EPS, and free cash flow are on an adjusted basis, and product mix is volume-weighted. A quick update on some upcoming IR events before I turn the call over to Jim. On Thursday, August 10th, Ford Pro CFO Naveen Kumar will do a fireside chat at the J.P. Morgan Automotive Conference in New York with auto analyst Ryan Brinkman. And on Wednesday, September 27th, our treasurer, Dave Webb, will participate in a green financing panel at the Goldman Sachs Global Sustainability Forum. Before I turn it over to Jim, I just want to recognize one really important individual investor who's on the call, and that's my mom, who has listened to every single one of our forward investor relations calls since I joined. She's a tough cookie and always gives us – always gives us a good working over after we do the call. So I just want to say, Mom, welcome to being on the call. Jim, I'll turn it over to you.

Well, first, Mom, thank you for Lynn. Thanks to all of you for joining us on the May Capital Markets event where we shared our vision to re-found a 120-year-old American icon and create a Ford that thrives at this exciting intersection between great vehicles and digital experiences. Now, the world is changing fast, but I have never been more confident in our Ford Plus plan. As you've heard me say, our intention is to match this exciting long-term vision for Ford with boringly predictable execution quarter after quarter, year after year. And that's the biggest takeaway from our second quarter. Strong growth, strong earnings, cash flow, and progress on the fundamentals of our business, including software. We are very bullish on the potential for Ford Pro, which had an outstanding quarter. It's unique to Ford. It's a true powerhouse. At the same time, Ford Blue is taking advantage of of fresh, appealing products to generate healthy revenues, healthy share, and profits, while our Model E continues to scale with popular first-generation electric vehicles. We're going to dive more into the electric vehicle market during Q&A, but clearly this transition to EVs is dynamic and so much more than just a change in propulsion. The number of global entrants is increasing, even at the high end, and the pricing pressure has dramatically increased in the past 60 days. Despite these puts and takes, we have confidence in the underlying trajectory of Ford's business. Our portfolio of businesses is strong, thanks to businesses like Pro and Blue, and we are raising our estimated EBIT guidance this year to $11 billion to $12 billion. Operationally, we continue to be focused on capital discipline, solid returns, even as we face uncertainties in the external environment. Supply chain disruptions are persistent, but they're now easing. And we have more work to do to streamline our industrial system, reducing costs and improving quality. While EV adoption is still growing, the paradigm has shifted. EV price premiums over internal combustion vehicles fell more than $3,000 in the second quarter and nearly $5,000 in the first half. We expect the EV market to remain volatile until the winners and losers shake out. And we are confident from a brand, from our incredible product strategy, our software, our scale, and our cost position, we will be one of the winners long-term. Why do I say that? We move quickly to establish our EV nameplates in unique segments, not like others. The Lightning, the Mach-E, the E-Transit. We're building EV brand loyalists. It's critical. Many of our EV customers are all new to Ford's. This is a significant asset to Ford, given our new Gen 2 products and profitability that we'll be launching soon. For Gen 2, we focused on fewer, higher volume models in the right segments to take advantage of our strengths and knowledge of customers, even conquest customers. For example, work vehicles, pickups, for retail customers and spacious seven-passenger SUVs. I am so glad we didn't bet the farm on two-row crossovers or ice-like EV platforms like so many have. We moved early on LFP, especially production in the U.S., giving us a diversity of chemistries and a cost advantage. We are now offering Mach-E with LFP technology for sale in the U.S. With the addition of Tesla superchargers and the fast chargers that our dealers are installed, the Blue Level Charging Network will be the single largest integrated fast charge network across the U.S. and Canada. And this blanket coverage from tens of thousands of fast chargers is core to our strategy. It helps us with smaller, lower cost, and faster charging batteries. We have the flexibility to offer customers choice of ICE, hybrids, and full electrics in the years to come. Our hybrid offerings are extremely popular. F-150 is the best selling vehicle in the US for 46 years. 10% of all F-150s and 56% of all Mavericks sold in the US are sold as hybrids. We are adding hybrid options across our ICE lineup, and we expect to quadruple our hybrid sales in the next five years. And we're already number two in the market last year. Starting January 1st, we moved to a new retail model for Model E, way ahead of our competition. Again, a differentiated model that will deliver non-negotiated price, a simple shopping and ownership experience, and remote services for all of our customers. This is critical to a conquest digital brand. And finally, with these new models, we are nimble and we can adapt to the market fluctuations real time. And you've seen this with both the Mach-E and the Lightning as we are adding new enormous capacity to meet our pent-up demand. We are optimizing for the long-term value creation. More than 60% of Mach-E and half of Lightning customers are new to Ford. These new customers have significant lifetime value potential because of the shippable software. But we are disciplined as we grow. We won't bear an unlimited cost to inquire those customers and build our install base. In line with that, we are now targeting to reach 600,000 annual production units of EVs by next year. And we maintain flexibility on where we reach, when we reach 2 million total EV global capacity, because we are balancing growth, profitability, and returns. At the same time, we believe demand for our internal combustion and our hybrid portfolio will be durable with the window of growth in Ford Blue potentially longer and richer than most expected. We've proven we can design and develop popular vehicles that stand out from the competition, irregardless of their propulsion, and we've made sure Ford is profitable as we move through this ICE to EV transition. So let me cover a few highlights for each of our business segments. The appeal and pricing power of Ford Blues, iconic vehicles, those Mustang lineups, the Maverick, the F-150, the Explorers, all those cool new derivatives from Ford. Boy, these products remain strong. Ford was America's number one brand in the first half of this year. Also, in the first half of this year, Our best seller, F-150, by the way, 100% built in the U.S. that our competitors can't say, grew almost three times the rate of the overall pickup truck market. We expect our pricing and revenue power to continue in the second half as we have new launches such as Mustang. And I would add that the pace of new product introductions at Ford will only accelerate from here. We plan to introduce, for example, an all-new F-150 and an F-150 power-boost hybrid at the Detroit show in September. Now, outside North America, the Ranger and its sister product, the Everest SUV, are the backbone of a much stronger, more profitable international business. The all-new version of the Ranger and Everest are more popular and profitable than the previous model And Ranger alone is now the truck leader in 18 separate large pickup truck markets around the globe. Our after-sales business continues to grow, and we are on track to launch over 2,000 mobile service units by the end of this year. That is unique to Ford. Ford Blue's other top priorities are to improve quality and reduce our cost structure. To do that, we've launched a lien. disciplined operating system that reaches into every one of our plants, every part we buy, every engineering decision we make. We're making progress, but this is just the start of our culture change. Turning to Pro, which is proving to be a unique strength to Ford. I mean, what one of our competitors would give to have Ford Blue? Pro. Pro. It's a $50 billion commercial business with the potential to become a high-margin, high-multiple hardware, software, and service company akin to John Deere. In the quarter, volume, pricing, paid software subscriptions continue to accelerate as we capture significant pent-up demand across multiple commercial sectors and vocations in both North America and in Europe. we are now realizing the full benefits of our new Super Duty. Super Duty sales in Q2 were up 28%, and the strong demand for our flagship work product is going to fuel our earnings growth for years to come. And our van business also continues to grow in the quarter, and that's before the launch of the all-new version of Ford Pro's other key profit pillar, the one-ton transit in Europe. Our share of the U.S. Class 1-7 commercial truck and van market is over 40% this year so far. That is twice our nearest competitor and brand. Twice. And it's a similar story in Europe, where the transit franchises helped make Ford the top-selling commercial brand for eight years in a row. Ford Pro has all the attributes of the business that is difficult to disrupt. Our combination of services, software, dominant product, and dominant market share, upfitting, and large dealer physical repair network will not be easy to match. Accordingly, we will continue to shift more investment to fuel Ford Pro's growth and press our advantage. with full flexibility between EV and ICE. So now let's get to the biggest change in our industry. And I happen to start including with Ford Pro because Ford Pro is at the forefront of this biggest change, the digital transformation, going to software and services as a differentiator. We already have over or about 550,000 subscribers paid subscribers, and service subscribers, and Ford Pro is 80% of those. We are already seeing 50% gross margins on today's software services, for example, telematics, where customers are now paying $20 a month. And that's before we even introduced our fully networked architecture in the new vehicles that launched just in a year or two. Moving to the next profitable software segment. Since launch, BlueCruise customers have traveled nearly 1.4 million hands-free hours across North America. And that is a 44% increase since the end of Q1. 44% increase in three months. In July, we hit our 100 millionth mile driven hands-free with BlueCruise. Our version 1.0 was chosen by Consumer Reports earlier this year as the number one rated system in the U.S. And since then, we've continued to enhance and accelerate, launching two more versions of Blue Cruise through over-the-air updates, each significantly improving the driver's experience. And we are now shortening the cycle time between these new versions. As a company, we're investing significantly in software. But the bigger story is the elite talent we have brought into Ford. They are attracted by the opportunity to revolutionize the experience of owning and driving a vehicle for millions of customers, especially for an iconic brand like Ford. I really believe we have the industry's best minds working on this incredible digital revolution. And with that talent, we are moving from our supplier-controlled firmware to our own fully networked electrical architecture. And this will reach across all vehicles, ICE, hybrids, and EVs. This is a key point because it allows us to have far higher install base than just EVs alone. Think of the F-150. There are three key applications that sit on top of this new software platform. The first one is safety and security. We haven't launched it yet, but boy, are we working hard to launch it. It will give customers the ability to monitor the surroundings and their vehicle on job sites or at home. It will transform the experience of owning a Ford. The second one, of course, is driver assist technology. BlueCruise is just the beginning of our ambition. And the third one is productivity, like the telematics software that we sell at Pro. But we're not going to stop there. Right around the corner, we'll have predictive failure of components. Imagine our productivity gain for our pro customers who never are off the road because they know something's going to go bad before it does. This is just the beginning, these three applications. These services will bring high margin, reoccurring revenue streams that are less capital intensive and cyclical than our traditional vehicle sales. To wrap up, there is understandably a lot of interest in the UAW contract discussions that began two weeks ago. We won't negotiate in public, but I would like to share our general approach and our belief system. When it comes to building in America and partnering with the UAW, Ford stands apart from all the other automakers and most other major industrial companies. We believe as Sean and Chuck do, that Ford should do our part to support the middle class, create vibrant communities, and build a strong American industrial base. Everyone knows Ford didn't go bankrupt, and we didn't take a bailout. But they may not know that we added a significant amount of UAW manufacturing jobs, in fact, thousands of jobs in the U.S., since the Great Recession. We have actually done more than is required by our contract to add jobs, move employees from temporary to full-time, improve benefits, and we're on our way to spending a billion dollars to improve our factory working conditions. It comes with some additional costs. But for us, this is not simply a number-crunching exercise. We believe over time customers will appreciate and reward our approach. And our workforce will be more committed to delivering excellence through our transformation. So although these negotiations promise to be challenging, our goal is to build a bridge to the future with our employees based on mutual trust and a spirit of problem solving with the UAW leadership and, of course, our incredible workforce. Over to you, John.

Thanks, Jim. So the power of our three customer-focused segments is really starting to shine through. In the quarter, we delivered an 8% increase in wholesales, adjusted EBIT of $3.8 billion, and an 8.4% adjusted EBIT margin. The year-over-year improvement in adjusted EBIT was primarily driven by higher net pricing and volume, partially offset by higher costs as we ramp EVs and expected lower Ford credit profits. In the quarter, we delivered $2.9 billion of adjusted free cash flow, underscoring the improved performance generated from our industrial footprint. This consistency combined with disciplined capital allocation provides significant flexibility to fund our growth while also consistently returning capital to our shareholders. We continue to target returning 40% to 50% of free cash flow to investors And earlier this month, we declared our third quarter regular dividend of $0.15 per share. Our balance sheet remains strong. We ended the quarter with nearly $30 billion of cash and over $47 billion of liquidity, and we were recently upgraded by both Moody's and DBRS, again demonstrating the improving trajectory of the business. Now turning to our customer-focused business segments. With revenue growth of 5%, Ford Blue delivered $2.3 billion in EBIT with a margin of over 9%. Despite these strong results, EBIT declined modestly year-over-year, including the non-recurrence of a one-time insurance settlement. That said, costs were flat, and we expect this to continue to improve in the second half of this year. Now, importantly, Ford Blue continues to be profitable in every region, reflecting the disciplined capital allocations that has fundamentally de-risked our global business. We're now really starting to see the results, a fresh, exciting product lineup that is driving both strong demand and pricing in key markets across the globe. And perhaps the strongest example of this is Ranger, an incredible product which many don't understand. It's effectively our F-150 equivalent outside North America, and that drives meaningful bottom-line results for both blue and pro. Now turning to Model E. Revenue increased 39% year-over-year and more than doubled sequentially as we added capacity for both the Mach-E and the F-150 Lightning. Contribution margin and EBIT margin were both negative as pricing and volume pressures intensified, and that's impacting all OEMs. Given the rapid and dynamic changes in the pricing environment, we no longer expect to achieve contribution margin break-even for our Gen 1 products this year. One of the primary benefits of Ford's industry-leading reporting transparency, product leadership, and customer insight is that we can quickly react to market realities. We know that once a customer chooses an EV brand, they stick with that brand over time. So as we make pricing decisions and assess customer acquisition costs, we're not only weighing the immediate impact on profitability, but also how this translates the lifetime value of that customer. Despite the dynamic environment, we remain committed to delivering our 8% EBIT margin target in 2026. And we have a real strategic benefit. Our second generation products are being developed now, complete with all new digital architecture. So while the path to sustainable profitability may not look quite the same as we previously thought, we're confident in our ability to deliver through more efficient product design, cost efficiencies, and growth in software and services, which will continue to accelerate. Now, as we've demonstrated over the last several years, we will continue to be laser-focused on disciplined capital allocation and ultimately delivering a leading and profitable EV footprint that provides us with the flexibility to scale volumes based on customer demand. Now, Ford Pro. Ford Pro's results they continue to accelerate, demonstrating the power of our portfolio approach. For this quarter, Ford Pro delivered a 22% increase in revenue driven by transit and our all-new Super Duty. EBIT more than doubled to $2.4 billion, resulting in a healthy margin of over 15%. The significant year-over-year improvement in EBIT reflects higher net pricing and increased volume, both outstanding proof points of the strength of our commercial business. And we continue to be encouraged by our leading market position in the U.S. and Europe, our strong order banks, the upcoming launch of our new one-ton transit, and the huge opportunity to grow software and services. And I'll talk more about this in a moment. But with over 450,000 customer subscriptions and with significant growth each quarter, this is a key pillar of our Ford Pro business. Ford Credit generated EBT of $390 million. Results were in line with our expectations, but down 550 million from a year ago, reflecting lower financing margin, the non-recurrence of credit loss reserve releases, and residual value performance, all of which was already reflected in our full-year outlook. Credit loss performance remains strong and below our historical average, but is expected to increase. And auction values remain robust, but are down from their peak in the first half of 2022. Before turning to our outlook, let me provide a little more context regarding software services. In my mind, this is the real opportunity for value creation. We are already seeing sustained, double-digit, quarter-over-quarter growth in subscriptions across all of our business segments, and most importantly, at gross margins of around 50%. And our next-generation digital platform will enable a step-function change in capability allowing us to scale and deliver value to both our retail and commercial customers even faster. Regarding our outlook, we now expect full-year total company adjusted EBIT of $11 billion to $12 billion, primarily reflecting stronger net pricing in Ford Pro and Ford Blue, with adjusted free cash flow of $6.5 billion to $7 billion and capital expenditures between $8 and $9 billion. Our guidance reflects headwinds, which include continued global economic uncertainty and inflationary pressures, higher industry-wide customer incentives and continued EV pricing pressure, increased warranty costs, lower past service pension income, exchange, and costs associated with union agreements. And tailwinds include improvement in the supply chain and higher industry volume, our all-new super duty, and lower commodity costs. Now, turning to the segments, We now expect Ford Blue to deliver full-year EBIT of about $8 billion. We expect higher volumes and stronger mix to more than offset any potential pricing headwinds. For Model E to report an EBIT loss of around $4.5 billion, largely reflecting the present pricing environment, discipline investment in new products and capacity, and other costs. We also expect Ford Pro's EBIT to approach $8 billion, with a significant year-over-year improvement driven by pricing and volume, including the benefit from the launch of the all-new Super Duty. And Ford Credit EBIT is anticipated to be about $1.3 billion. So that wraps our prepared remarks, and we'll use the balance of the time to address what's on your minds. Thank you, and operator, please open the line for questions.

We will now begin the question and answer session. To ask a question, you may press star then one on your telephone keypad. If you're using a speakerphone, please pick up your handset before pressing the keys. To withdraw from the question queue, please press star then two. At this time, we will pause momentarily to assemble our roster. In the interest of time, please limit yourself to one question only.

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

Please go ahead.

Hey, everybody. So first to Lynn's mother, Toni. I've actually never met you before, but I feel like I know you, and I've heard so many stories from your daughter, not just about your humor and your amazing Puerto Rican cooking, but also for your values and how you've always stood up for what is right. So I just wanted to say God bless you, Toni. And just one question, Jim. Thank you for showing the losses in Model E when nobody else in this industry has the courage to do so amongst the legacy peers. um losing 40 000 bucks a unit on model e obviously can't continue so is this something that you feel you can just grow your way out of or does something more radical need to change and i'm i'm thinking audi and volkswagen are turning to saic and xpeng and china uh either there seems to be something a pivot going on in your in in the industry where there's a willingness to work with competitors your stuff uh with with tesla was was you know your some of your peers seem to reluctantly follow you and you really showed leadership there. So I'm wondering if you can embrace more of that collaborative approach to remain relevant in EVs while also being more capital discipline. Thanks.

You are absolutely right. I would say, Adam, when Doug came on board and at the same time we did the Model Y teardowns, especially Texas. And we really understood the BYD teardowns. And even Chang'an, our partner in China, our eyes were opened more than a year ago. And so we were fortunate that our new platforms that no one's seen yet are coming at a time when our traditional competitors have already designed and made their bet on the EV platforms. And I can tell you that that moment was one of the biggest eye-opening moments in my personal career, where I realized we had to completely change our approach to platforms. Inverter technology, the efficiency in the system of the vehicle, the massive complexity reduction and cost competitive reduction that we have to make in these second cycle products was just dramatic. The battery pack design that we see from our competitors is completely uncompetitive from what we saw and what we're now executing against. The gearboxes, the motors... how we thought about investment in braking systems and wiring systems, the diversity of battery chemistry like LFP, it was all just a moment when we all looked at each other and said, we have to go left and compete with these competitors and make a really good living on EV. And so we're executing that. And as John said, Adam, the other epiphany was for us, and thank God we have Pro because it's come to fruition, is the enormous cost but importance of upgrading the electric architecture so we could be a winner in sending software to the vehicle. This decision by Ford in the second cycle products to bundle this new, simpler, more energy-efficient platform but compete in segments where we have a great reputation but we can still conquest with very simple top hat engineering and add to it an advanced electrical architecture where we can win the war of shipping software to the vehicle was our bet, is our bet, and we like our bet, and we think it's competitive. In the meantime, we learned about battery scaling, which is not easy in Georgia. We learned about how to build 10, 20,000 unit a month batteries in one facility in high quality. We learned about the thermal propagation that will protect our brand over time. And I'm very optimistic. However, in a place like China, we may have to use our local JB Partners platforms because they are the best in the world in certain segments. Maybe not for a full-size truck or a large three-row crossover, but for some segments, it may be just perfect for us. So we're not changing strategy at Ford. We've always been on that strategy, including China. Thanks, Jim.

The next question comes from Rod Lash with Wolf Research. Please go ahead.

Hi, everybody. I wanted to also ask a question about Model E. Just pushing out the EV targets, the volume targets, makes sense when we've seen contribution margins from volume being offset by additional price. But I was hoping that you might be able to talk to us about kind of the longer term. What does it mean with regard to your 2026 targets? I'm glad to hear that you aren't fixated on 2 million units. But what is your ability to adjust investment and structural costs when you have to make commitments to suppliers or to your infrastructure to be capable of hitting that? And are you still committed to the 8% margin target?

Yeah. Hi, Rod. It's John. So we're not walking away from the 8% margin run rate at the end of 26. We've got several years to work that. It may look a little bit different than what we shared at Capital Markets Day. But there's levers that we can pull. We don't necessarily have to spend at the same rate. Some of the battery factories could be flexible. The transition from ICE components to electrical components is optional from a timing standpoint. So we can make those changes. And as Jim said, we've got the team working on that second generation of products, which is critical. And we have some time to work this and understanding where the pricing is settling. and coming up with the right value equation. So we're not walking away from the 8% at this point. And we're going to continue to work that.

As far as the volume trade-off with profits, Rod, it's interesting. The elasticity model that we're now building because of our high volume, we're at the middle part of the year this year, we'll build about 120,000 EVs. So we're learning a lot about that elasticity between price and volume. It's actually not as different than ICE, we thought. So we have a lot of information that we didn't have a year ago on the volume, trade-off, profit optimization, plus all the levers that John talked about on the 8%. Thank you.

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

Hi. Dan Levy with Barclays. Thank you. I wanted to ask Jim on a comment you made earlier about plans to quadruple your number of hybrids. Now, I don't remember what the base plan is, but just tying into maybe Rod's question, I'm wondering what parts of your push to decarbonize, where there may be a little more flexibility and where you can lever? And how do hybrids factor in? Is the push on hybrids incremental? Was that always part of the plan? How are you looking at the interplay between hybrids and EVs?

Great question. You know, I think how, in general, how we think about it is You know, a year ago, two years ago, the industry thought of kind of this extreme between a hybrid and an EV. What we now realize and have seen in markets, especially like China, that there's an infinite number of degrees of electrification in between both of those. And the customers are very rational about buying an E-Rev versus a long-range P-Hev versus a C-Rev hybrid for towing. customers are really acting pretty rationally based on their duty cycle. So I would say a couple years ago, we decided to continue our hybrid investment in our heavier vehicles. And those hybrid systems are quite different than, let's say, the Toyota and the Japanese OEMs. And we have been surprised, frankly, at the popularity of hybrid systems for F-150s. It's now more than 10% mix for us, and it's increasing. And what we've learned is that we have to tie... What the customer really likes is when we take a hybrid system that's more efficient with certain duty cycles, and then we add new capabilities because of the batteries, like ProPower on board. We're seeing a lot of customers find that combination of using the batteries for something beyond just moving the vehicle. And... That popularity, I mean, we never thought we would be at 60% hybrid mix for Maverick. It was far beyond our expectation. And so we're just listening to the market. And we believe that ICE customers, blue customers, don't want to be left behind. They want modern powertrains. And decarbonizing with them is just as attractive to us. That's one of the reasons why we separated the business, because we want a future-proof glue. and Pro. On Pro's side, we're very lucky. We have a lot of great multi-energy platforms. So we have a lot of choices between electrification, partial electrification, and ice, and the infinite number in between. The platforms are designed for that flexibility. So all I'm saying is you're going to see a lot more hybrid systems from us, but don't think of them in the traditional sense of an escape hybrid or Prius they're probably going to come to life differently than most people think. And customers like that.

Great. And are there other levers in terms of flexibility on the plan where, you know, some elements can be deferred? Again, just a function of, like you said, listening to the market.

You mean capital deployment to EVs or... Can you be more specific?

Capital deployment to EV program development reuse. I mean, one of your competitors, you know, earlier this week announced that one of their programs, which was expected to cease, was being refreshed and was a function of sort of reuse of capital. So are there things you can do? Yeah. I see.

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

The next question comes from John Murphy with Bank of America.

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

Yes. I want to make it really clear. The term hybrid is going to, in our industry, going to get a lot more complex. Hybrid could be a serial hybrid that just a motor powers batteries. It could be a hybrid in the traditional sense that like the F-150 hybrid and the hybrids I'm referring to are not plug-in hybrids. They're vehicles without a plug.

The next question comes from Ryan Brinkman with JP Morgan.

Please go ahead.

Great. Thank you for taking my question, which is around the outlook for the bigger loss at Model E segment this year. And I get that the changed guidance reflects greater price competition, but is some portion of the outlook for a bigger loss may be driven in part also by a conscious decision to reinvest some of the higher-than-expected profits at Pro and Blue back into the business via accelerating electric vehicle investments? development or other EV related capabilities. And with regard to that, you know, break even on a contribution margin target for first generation EVs, can investors now expect that at some point in 2024? And then finally here, you know, just given the reiteration of the 8% EV target in 26, could you maybe help us some more with the factors that continue to give you confidence in that target? Is it related at all to Jim's comments at the start of the call for it, maybe taking some time for the winners in the EV market to be sorted from the losers, reflecting your expectation that by 2026, the number of market participants could be less, and so therefore, pricing competition more rational, or is the confidence more, you know, factors under your control that give you that confidence, you know, leaning more on vertical integration and other levers that you might have identified, et cetera? Thank you.

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

And I really want to mention something I'm compelled to mention, which is In the U.S. right now, pure EVs are, I don't know, 7% to 8% depending on the month. The intention to buy EVs is still 30% to 50%. There are plenty of customers. The issue is the price they're willing to pay has come down, but it's very, very lumpy. It's not consistent across all segments. So one of the most important levers that John is referring to is what segment we compete in with our second-generation products. That's why I said clearly that we are so thankful we did not bet on two-row crossovers. We have bet on segments that we know deeply, deeply, deeply. And we now know what we know and we can't unlearn what we've learned from the pure EV companies on cost and complexity. And now we have talent in a company like Doug where we're shipping almost a half a million software to software, that many software subscribers. So there is real demand for these customers based on duty cycle. It's up to us to get those second cycle products and doing the cost reductions In the meantime, and I think our strategy and the segments we compete, which is not visible to you yet, I think is going to really differentiate Ford.

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

The next question comes from Philippe Hochoir with Jefferies. Please go ahead.

Yes, good afternoon. Thank you very much for letting me speak on this call. I hear what you're saying, Jim, and it's very interesting. It makes perfect sense. But it feels like compared to a few weeks ago when we saw you in Detroit, it's not a turnaround, it's a turnabout. But it's like you had religion in Bev. And it seems like the last few weeks, I've shaken that confidence quite a lot. And I'm just trying to understand how much of this is a reaction to a more difficult environment, which I completely understand, and how much is strategic. And then you should have been strategic a while back, because I look at some of your competitors, whether it's Toyota or BMW, have taken a more careful approach about this position, the complexity, and having a bit more flexibility. So just to sense the change of mood And if I can follow up the question, if I do a simple math, the loss per car in pro was about $32,000. There were 12,000 EVs in pro. Does it mean that there's a loss of about $250 million booked in pro, which means that without it, the margin would be even higher, something like 18%? Thank you.

Yeah, just one thing is I understand and appreciate the math and doing the math that way. And, you know, you look at it and you say, wow, it's a big number. But you have to remember that there's a lot of investment going in to ramp and put the footprint in as well that these vehicles are carrying. And we added quite a bit of capacity through the second quarter. And so... We have to think about it that way as well. We have to break it into what's the contribution margin, what's the gross profit, how much are you investing for the future so that we can scale and grow this business. Because we know EVs are coming. It's not like it's a question whether or not we're going to have EVs. So we can do the math that way. But I'm not sure it's the right way to think about how we're approaching this business because there is a lot of upfront cost to invest in that footprint so that we can scale and grow. And remember, we're working on our second generation and our third generation vehicles. That has costs as well. So to attach all of it just to these vehicles, I don't think is quite the right way to be thinking about that as we move forward, respectfully.

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

The last question today comes from James Piccirillo with BNP Paribas Exxon. Please go ahead.

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

Yeah, thanks. So when you look at that for blue on a half over half basis, you know, we pricing held up much better than we thought, you know, through the second quarter. But we do have planned in the second half that as we continue to increase volumes in blue that we will see some pricing pressure there. So we see that happening as we walk through. We do have in the second half the ratification which we see when we get to a new contract. And remember, for us, all of that is in our quarter, in our fourth quarter. We don't amortize that. We take it as a full charge in the quarter. And then we're also seeing some inflationary pressures. And we saw that in the quarter as well. We see that going through the second half primarily around warranty. And that's with the costs that we're seeing come through the dealer's. So they're increasing their costs on warranty for the repairs. Their labor rates, et cetera, have gone up with inflation. And then the other thing we're seeing across the border, we saw it in the second quarter, but we see it through the second half as well, is the costs we're seeing on freight. Freight costs, although some of the rates are coming down, we're seeing constraints overseas. We're seeing rail constraint. So we're generally seeing some constraints around freight, and that's driving up costs as well there. So that's the combination of the puts and takes for blue as we go half over half.

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