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

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 Cannis, CEO of Ford Pro. Today's discussion includes some non-GAAP references. These are reconciled to the most comparable U.S. taxes in the appendix of the 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 EPS and free cash flow are on an adjusted basis and product mix is volume weighted. A quick update some upcoming IR before I turn the call over to Jim. On Thursday, August 10, Ford prone will do a fireside sat at the Safer Automotive Conference in New York with Auto Brinkman. And on Wednesday, September 27, our Treasury, Dave Web, 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 call, and that's my mom, who has listened to every single one of our Ford Investor Relations call since I joined. She is a tough cookie and 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 refound our 120-year-old American icon and create a Ford that thrives at this exciting intersection between great vehicles and digital experiences. Now the world is changing fast, but I have never been more confident in our Ford+ plan. As you've heard me say, our intention is to match this exciting long-term vision for Ford with boringly predictable execution quarter after quarter, year after year. And that's the biggest takeaway from our second quarter: 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 fresh, appealing products to generate healthy revenues, healthy share and profits, while 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 easy. And we…

Thanks, Jim. On the power of our three customer-focused segments really starting this time through. In the quarter, we delivered an 8% increase in wholesale, 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 as we ramp EVs and expected lower core 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 morning, we declared our third quarter regular dividend of $0.15 per share. Our balance sheet remains strong. We ended the quarter with $30 billion of cash and over $47 billion of liquidity. We're recently upgraded by both Moody's and DBRS and demonstrating the 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 nonrecurrence of a onetime insurance settlement. That said, costs were flat, and we expect this to continue to improve in the second half of this year. Now importantly, Ford Blue continues to be profitable in every region, reflecting the disciplined capital allocation that has fundamentally derisked our global business. We're now really starting to see the results, a fresh, exciting product line-up that is driving both strong demand and price in key markets across the globe. And perhaps the strongest example of this is F-150, an incredible product, which many don't understand, effectively,…

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

Hey everybody. So first to Lynn's mother, Tony. 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 humour 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 want to say God bless you, Tony. 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. Losing $40,000 a unit on a model 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 thinking Audi and Volkswagen are turning to SAIC and Xing in China. There seems to be something a pivot going on in the industry where there's a willingness to work with competitors, your stuff with Tesla was your -- some of your peers seem to reluctantly follow you and you really showed leadership there. So I'm wondering if you could embrace or more of that collaborative approach to be -- remain relevant in EVs while also being more capital disciplined.

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

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

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

As far as the volume trade-off, Rod, is 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 filed about 120,000 EV. We're learning a lot about that elasticity between price and volume. It's actually not as different than ICE than we thought. So we have a lot of information that didn't have a year ago on the volume trade-off profit optimization, plus all the levers that John talked about on the 8%.

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

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

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

Great. And are there other levers in terms of flexibility on the plan where 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 and program development reuse. I mean one of your competitors earlier this week announced that one of their programs, which expected to cease, was being refreshed and with a function of sort of reuse of capital. So are there things you can do? Yes.

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

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

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 our company. Hybrid could be a serial hybrid. It just means a motor powers batteries. It could be a hybrid in the traditional sense that like the F-150 hybrid or the -- and the hybrids I'm referring to are not plug-in hybrids. They are vehicles without a plug.

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

My question, which is around the outlook for the bigger loss of Model E segment this year. And I guess the changed guidance reflects greater price competition. But as 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 profit that Pro and Blue back into the business, the accelerating electric vehicle development or other EV-related capabilities. And with regard to that breakeven on a contribution margin target for first-generation EDs, can investors now expect that at some point in 2024? And then finally here, 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 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 -- factors under your control that give you that confidence, leaning more on vertical integration and other levers that you might have identified, et cetera?

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

And I really want to mention something that I'm compelled to mention, which is in the U.S. right now, I don't know, 7% to 8% depending on the month. The intention by still 30% to 50%. There are plenty of consumers. The issue is price 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 2-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 learned from the per EV companies on cost and complexity. And now we have touted a company like Doug, where we're shipping almost 0.5 million 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 site products and doing the cost reductions in the meantime. And I think our strategy, the segments we compete, which is not visible to see yet, I think it's going to really differentiate Ford.

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

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

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

Yes. Just one thing. I understand I appreciate the math and doing the math that way. And you look at it, wow, it's a big number. You have to remember that there's a lot of investment going to ramp and put the footprint in as well that these vehicles are carrying. And we're -- we added quite a bit of capacity to make it work, 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 we're not going to have EV. 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 grow. And remember, we're working on our second generation and our third-generation vehicles. That has cost as well. So to attach all of it just to these vehicles, I don't think it's quite the right way to be thinking about that as we move forward, respectfully.

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

The last question today comes from Jim Picariello with BNP Paribas Exane. Please go ahead.

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

Yes. Thanks. So when you look at that for Blue on a half-over-half basis, we -- pricing held up much better than we thought through the second quarter, but we do have planned in the second half 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 dealers. So they're increasing their costs and warranty for the repairs. Their labor rates, et cetera, have gone up with inflation. And then the other thing we're seeing across the board, we saw it in the second quarter, but we see it through this quarter as well, is the cost we're seeing right freight costs. Although some of the rates are coming down. We're seeing constraints overseas. We're seeing rail constraints. So we're generally seeing 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 our half over half.

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