Good day, ladies and gentlemen. 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 First 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. 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, and welcome to the Ford Motor Company's first quarter 2023 earnings call. With me today are Jim Farley, President and CEO; John Lawler, Chief Financial Officer; and also for Q&A is Marion Harris, CEO of Ford Credit. Today's discussions include some non-GAAP references. These are reconciled to the most comparable US GAAP measures in the appendix of our 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 25. 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. Want to make sure you've got a few near-term IR engagements on your calendars on May 21st and 22nd, we'll host our Capital Markets event in Dearborn, Michigan. For the first time in over seven years, we're looking forward to welcoming representatives of the capital markets to our headquarters. The event will feature unprecedented experiences, including one of the largest displays of our global vehicle portfolio in recent memory and immersive presentations on the strategic plans of our three new customer-centered business segments. We will also feature details of our software and services strategy, both retail and commercial, as well as ample time to network with our senior leaders. On May 25th, Jim Farley will keynote at Morgan Stanley Sustainability Conference in New York City. And on May 31st, Jim will participate in a fireside chat with Tony Saganaki at the Bernstein Strategic Decisions Conference, also in New York City. Now I'll turn the call over to Jim.

Thank you, Lynn. Hello, everyone, and thank you for joining us today. I would summarize the first quarter by saying our team had a solid performance and made significant progress on our Ford+ growth plan. I hope this sets a trend at Ford where we become consistently reliable in execution and financial delivery while remaining ambitious and innovative in shaping the future of the company. In the quarter, we experienced growth across all key metrics, and both Ford Pro and Blue were profitable in every market where we operate. Our balance sheet remains robust, with nearly $29 billion in cash at the end of the quarter, even as we invest in growth and return capital to shareholders. As each quarter goes by, I feel more confident and grateful for the decision to create three customer-focused business divisions. This has brought clarity, speed, accountability, and enhanced discipline in capital allocation throughout the company. To highlight a few points, let's start with Ford Pro. Many of you were surprised by the actual size of the Pro business when we revised our financials in March. Pro benefits from leading marketing for our vehicles globally, substantial scale, and deep customer insights. We're also integrating new industry advancements, including an ecosystem of software, services, and EV charging, which we believe will be essential for our commercial customers and will foster strong loyalty and profitable growth. Our order pipelines in North America and Europe, along with the demand we see for Pro, support our goal to nearly double Pro's EBIT this year. In March, we launched the all-new Super Duty in Kentucky and Ohio, which received excellent feedback and will bolster an already leading franchise. Importantly, the Super Duty serves as a platform for software and services designed to enhance our customers' uptime, boost productivity, and reduce total ownership costs. The launch also exemplifies the disciplined approach we are applying across our industrial system. We deliberately slowed the launch, significantly ramped up our quality testing on the road and on-site, sent out a skilled launch team, added test vehicles, and drove millions of miles to validate our durability. New technology and artificial intelligence were deployed to identify and prevent potential issues. We believe that this short-term patience will yield long-term benefits for both our customers and the company. In the quarter, Ford Pro reinforced its leadership in commercial vehicle categories, increasing our share of Class 1 through 7 trucks and vans in the US by one full percentage point to 41%. In Europe, we've been the top commercial brand for eight years, and our market share has risen to over 15%. Additionally, we maintained our electric vehicle strength in North America and Europe, with E-Transit capturing 50% of the US market. Recently, we secured a contract to deliver over 9,000 E-Transit vans to the US Postal Service. Ford Pro's paid software subscriptions grew by 64% during the quarter, driven by higher revenue from software sales like our telematics and charging products. With all these initiatives, Ford Pro is evolving into a resilient business that is certainly less cyclical than the broader automotive industry. In Ford Blue, the team is focused on leveraging our standout product lineup. We see great potential for smart growth in valuable franchises like the F-150, Maverick, Bronco, and Mustang, which have strong pricing power. We're committed to enhancing our leadership in pickups, off-road, performance, and SUVs with new derivatives. For instance, the Bronco was introduced less than three years ago, and it is now closely competing in sales with the Jeep Wrangler while achieving higher transaction prices. Recently, we expanded the Bronco lineup with exciting new variants such as the Bronco Everglades, Raptor, and Heritage, which not only drive our growth but also enhance transaction prices and returns. Currently, we are looking forward to one of the strongest product years for Ford Blue. We have the new Escape, which includes a Hybrid model, arriving in dealerships now. Next week, we will unveil the all-new Ranger, along with the highly anticipated Ranger Raptor. This will be followed by an all-new Mustang and the high-performance Dark Horse Mustang this summer. While I cannot go into specifics yet, we have more exciting announcements regarding two of America's best-selling vehicles, the F-150 and Explorer, later this year. Additionally, the Lincoln Corsair is now arriving in dealerships, and we just revealed the Lincoln Nautilus. Ford Model e operates with a start-up mentality to build a profitable EV business with a unique portfolio and customer experience. US investors will have a clear view of how Ford Model e's profitability will improve over time, supported by volume-driven operational efficiencies, design improvements, and lower battery costs. We are on track this year to achieve a contribution margin close to breakeven in Model e, with our first-generation products expected to become EBIT margin positive by the end of next year. Wholesales fell in the quarter, affecting our cost structure. Part of this decline was planned as we reduced Mustang Mach-E production temporarily to nearly double the capacity, and we are now achieving a run rate of 35 jumps per hour in the plant. Volumes were also affected by lower output of the F-150 Lightning. We made the right decision to halt production and work with our battery supplier to identify and resolve the root cause of a fire that occurred on Ford property. We are now shipping Lightnings again, taking new orders, and ramping up production to an annual rate of 150,000 units, about double our current output. We also introduced an all-electric Explorer in Europe, which has received positive feedback. We made strides in Model e during the quarter, enhancing our industrial system to scale EVs. Preparation is already underway for our LFP battery plant in Michigan, with construction ongoing at BlueOval SK Battery Park in Kentucky and BlueOval City in Tennessee. We are also advancing plans to transform our Oakville Assembly Complex into a center for electric vehicle and battery pack manufacturing in Canada. Furthermore, we continue to make progress in securing all necessary raw materials to meet our capacity goals for 2026 and beyond. Model e serves as our center of excellence for technology, including software. A prime example is BlueCruise, which has been very successful with our customers. Consumer Reports rated it as the best advanced, hands-free driver assist system in the US, even with its initial version. Our latest release, version 1.2, which we are delivering over the air to customers, allows automatic lane changes with a turn signal, providing a more natural hands-free driving experience. BlueCruise has also launched in the UK with our Mustang Mach-E, and we became the first OEM approved for hands-free highway driving across Europe. To date, BlueCruise has recorded over 70 million miles driven, and we continue to enhance it with each over-the-air update. Before I hand over the call to John, I want to share our insights on the evolving EV market. It's easy to view the EV landscape as a uniform increase, but we intend to be strategic about our approach, focusing on the right products, cost structures, and price points. We do not adopt a strategy of gaining vehicle share at any cost. We look at vehicle share, revenue share, profit share, and the share of lifetime customer value, believing this is essential for ensuring appropriate capital returns over time. By 2025, we expect about 45 EV models will be available in the US small and medium utility segment, creating a very saturated two-row EV market. Given this backdrop, we understand that to ensure profitable growth, our offerings must be fresh and compelling at the right costs, something we are continually improving, especially with the Mustang Mach-E. We've also discovered that customers are loyal to full EV powertrains once they transition, although they generally do not show brand loyalty for their first EV purchase. We are capitalizing on this by entering the market early with the Mustang Mach-E and our entire lineup, yielding over 60% of customers who are new to Ford. We observe that second-time EV buyers are much more brand-loyal in these developed markets. We are actively reducing product costs for both our current and next-generation offerings, with more details to come at our Capital Markets Day. For the Mustang Mach-E, we've achieved a $5,000 reduction in building materials from launch to the end of this year. Contrary to the anticipated saturation of two-row crossovers, we believe Model e can stand out in markets where our customer insights are strong, such as the three-row utility segment. As mentioned, further information on our product strategy will be shared during our Capital Markets event later this month. I recently had the opportunity, along with John and other leaders, to visit China to gain firsthand insight into the EV market. It is apparent that customers are no longer drawn solely to traditional luxury brands or hardware design in the EV space. Exceptional hardware design, performance, and quality are now expected in the digital EV marketplace. The competitive edge lies with brands that provide an integrated digital, retail, and lifestyle experience that is software-defined. This focus will be essential for our second-generation EVs. Leveraging software as a differentiator, along with an entirely different cost structure and the capability to offer value-added software and services, gives us confidence that we can compete successfully in terms of units sold, revenue, profits, and vehicle market share while ensuring proper returns. Lastly, I want to emphasize that while we are pleased with our progress, we are not satisfied. We are committed to solid execution and exciting advancements in our Ford+ plan. I look forward to seeing many of you in person in three weeks at our Capital Markets event, where we will provide deeper insights into our strategy and progress.

Thanks, Jim. First quarter, wholesales were up 9% year-over-year as we delivered $3.4 billion in adjusted EBIT. Margin was 8.1%, up 140 basis points. Ford Blue and Ford Pro profit improved, reflecting favorable mix and higher net pricing. And as expected, those benefits were partially offset with a loss in Model e as we invest in our clean sheet next-generation EVs and scale our leading portfolio of first-generation electric vehicles. For the quarter, we delivered $700 million of adjusted free cash flow; improving consistent free cash flow from our industrial footprint, combined with disciplined capital allocation, provides us with significant flexibility to fund our growth while also consistently returning capital to our shareholders. Our balance sheet remains strong. We ended the quarter with close to $29 billion of cash and over $46 billion of liquidity. In addition, despite the recent market volatility, we successfully completed the renewal of our $17 billion sustainability-linked corporate credit facilities. So turning to our customer-focused business segments. With wholesales up 6%, Ford Blue delivered $2.6 billion in EBIT and a 10.4% margin. That was 400 basis points higher than a year ago supported by favorable mix and higher volume. Our fresh and exciting product lineup continues to drive strong demand. Wholesales for Model e declined in the quarter, reflecting planned downtime that allowed us to almost double our production capacity for Mustang Mach-E. Now the profitability of any EV start-up, including Ford Model e, is highly levered to volume. Importantly, holding volume constant, our first quarter EBIT margin would have been roughly flat compared to the fourth quarter at around negative 40%. We expect Ford Model e EBIT margin to improve to around negative 20% in the second half of this year, reflecting stronger per unit contribution margin and significantly higher volumes. In fact, we expect Model e contribution margin to approach breakeven this year, and we continue to target positive EBIT margin for our first-generation vehicles by the end of 2024. Ford Pro delivered an 18% increase in wholesales. And EBIT improved $900 million to $1.4 billion for the quarter, delivering a margin of 10.3%. The improvement in profitability was supported by higher net pricing, increased volume, and favorable mix. Importantly, this was achieved during a quarter when wholesales for Super Duty were down, both year-over-year and sequentially as we ramped up production of our all-new version of this highly popular truck. Ford Credit delivered EBT of $300 million, down $600 million from a year ago, reflecting lower financing margin, higher credit losses, and lower lease income, all of which has been reflected in our full-year outlook. Credit loss performance remains strong and is still below the historical average but beginning to normalize. Auction values remain robust, but down from their peak in the first half of 2022. Ford Credit liquidity remained strong at $26 billion, up $5 billion from year-end. In addition, despite the volatile market conditions, the company has already completed $12 billion of public issuance or roughly 50% of its 2023 funding plan. Turning to our outlook. We continue to expect full-year 2023 total company adjusted EBIT of $9 billion to $11 billion, adjusted free cash flow of about $6 billion and capital expenditures between $8 billion to $9 billion. This guidance includes headwinds that reflect global economic uncertainty, higher industry-wide customer incentives as vehicle supply and demand rebalance, lower past service pension income, exchange, and investments in growth such as customer service and connected services. And tailwinds driven by improvement in the supply chain, our higher industry volume with SAARs of about $15 million and $13 million in the US and Europe, respectively, launch of our all-new Super Duty, and lower cost of goods sold, including materials and commodities. Turning to the segments. Ford Blue is to deliver full-year EBIT of about $7 billion. Cost improvements and higher industry volumes will likely be offset partially by pricing headwinds, as inventory stocks continue to normalize and industry incentives rise through the year, along with adverse exchange. Ford Model e is to report an EBIT loss of around $3 billion, largely reflecting disciplined investment in new products and capacity. We also anticipate Ford Pro's EBIT to nearly double to around $6 billion compared to our 2022 results. The gain is driven by improved pricing and volume, including the benefits from the launch of our all-new Super Duty. And EBT for Ford Credit is anticipated to be around $1.3 billion. Additionally, I hope that all of you are blocking time for our next capital markets event on May 21 and 22, here on Dearborn. This will be an important couple of days as we update you on Ford's strategy, take a deep dive into financial targets and KPIs for each of our customer-centered business segments, and talk about our capabilities and expectations for software and services. By the time we're done, I believe you will be even better equipped to value the expected contributions of each of the segments to Ford's overall growth and return. So that wraps up our prepared remarks. We'll use the balance of the time to address what's on your minds. Thank you.

We will now begin the question-and-answer session. Our first question comes from Adam Jonas with Morgan Stanley. Please go ahead.

Thanks, everybody. So Jim, you've compared the current environment for EVs to the year 1913, saying that no one should really be surprised that Tesla is cutting price so much. And then I think you asked the question maybe rhetorically, who's going to blink on growth? So if I put your own question to you, Jim, will Ford blink on growth?

Thanks, Adam. It varies. Initially, our first three EV models differ significantly in pricing. The price of the Lightning has increased by $11,000 since its launch, and the E-Transit has risen considerably. We're also boosting production to leverage that scale advantage. One key lesson from three or four years ago is to be cautious about where we compete, and we've chosen our target segments very carefully. We aim to focus on areas where we have a strong reputation and where there are many new customers. Our goal is to innovate beyond just the powertrain, incorporating features like Pro Power Onboard and various software capabilities. We've identified three essential software areas: safety and security, productivity for Pro, and partial autonomy. These innovations serve as solid protections against the expected overcapacity in specific segments. We anticipated overcapacity in the two-row electric utility market well before completing the Mach-E development, prompting us to gather our team and reduce material costs by $5,000. We're not relying on small changes; we're adapting our approach and continually improving software for our vehicles, ensuring they get better over time. As CEO, I want to emphasize that we will not compromise on pricing just to capture market share. Our focus will always be on maintaining a healthy profit roadmap during the initial generation of products, while also acknowledging the challenges we faced during their design. However, we are now two years into the second generation's design. At our Capital Markets Day, we will explain why achieving an 8% margin is realistic, despite the pricing pressures from competitors seeking growth. We differ from some pure EV manufacturers who prioritize growth over profit. We are determined to create a profitable EV business and are optimizing all aspects of our first-generation products, with the second generation providing greater opportunities for success.

I appreciate that, Jim. And just as a quick follow-up, because what you're saying is really landing well with me. It's resonating. But I just get a little nervous with the 2 million unit capacity target that you have hanging out there for the second half of 2026, which, just in my opinion is a crazy high number. Can I get you to admit that volume targets? And I think you're saying this, and I don't want to preempt the Capital Markets Day, but can I get you to admit that volume targets as the success criteria alone, it really is the wrong thing to continue to perpetuate? Thanks, Jim.

Yes, I completely agree. We all need to manage our business effectively, and scaling is crucial. In the first quarter for Model e, we saw the importance of scaling, but it's not the only measure of success. Our recent trip to China offered significant insights for our leadership team. As a CEO, I focus not just on volume growth, but on how quickly we can leverage vehicle data to enhance the software experience for our customers. To me, that speed of improvement is key for distinguishing our brand and maximizing profit in this emerging digital product category we call electric vehicles. While volume matters, the rapidity of our improvements is evident, particularly with our 10 million OTA updates. We’ve increased the mileage for BlueCruise significantly; just three months ago, we had 42 million miles, and now we’re at 70 million largely due to ongoing OTAs that enhance the system. Additionally, we’re seeing substantial growth in software subscriptions for Ford Pro. Of all the indicators I consider as a measure of our success in the EV space, that’s the one I prioritize most. We will always find a balance between profit and scaling.

Thanks, Jim.

Hi everybody. I'd actually like to follow up on Adam's question. I'm just looking at the $900 million increase in structural costs in the quarter, and I know that the investments you're making are aimed at driving growth. But in the past, when the industry has experienced higher structural costs, it put a lot of pressure on everybody to hit volume targets, which ultimately wasn't good for pricing. And I know you said, Jim, that you're planning to target segments where you've got strong pricing power and you're confident in conquesting customers. But can you just talk a little bit about whether you agree with that assertion that there's going to be pressure even on Ford just given the magnitude of the structural cost increase that you're taking on? And what kind of flexibility do you have to make the targets if volume or pricing assumptions come in a bit short?

Yes, Adam. To address your follow-up on Adam's question, let me start by discussing the cost. You're correct that we experienced an increase in our structural costs on a year-over-year basis this quarter as we continue to invest in our electric vehicles, digital systems, and software. A key focus for us is reducing those structural costs over time in Blue while enhancing efficiencies in our overall cost structure, including material costs, warranties, and freight. We need to see improvements in those areas of our cost structure. Additionally, as we keep investing in e and Pro, we must do so efficiently to avoid excessive pressure on the business. Jim can elaborate further, but as we expand our EV offerings, we aim to do so thoughtfully, focusing on segments where we can maintain strong pricing power and carefully managing the complexity of our product lineup and manufacturing capabilities. We will provide more insights on this at our Capital Markets Day, but we are committed to ensuring that our investments remain efficient.

Okay. Switching gears, your variable costs such as material, freight, and commodities increased by $1.3 billion in the quarter. Are you still anticipating $1 billion in savings in variable costs and $1 billion to $1.5 billion in commodities? If that’s the case, with the significant volume ramping later this year, could you provide more insight into the assumptions for the first half versus the second half? Your full year guidance suggests a substantial decline compared to the current levels.

Yeah. So when you look at it from a cost standpoint, let's just unpack what happened last year. When you look at the cost increases in 2022, only about 15% of that happened in the first quarter. So on a year-over-year basis, coming out of last year, this was a tough read. If you look at it sequentially, when you look at our costs on a sequential basis, our costs were down in the quarter. And they were down significantly in Blue. They were up a little bit in e, and they were about flat in Pro. So, yeah, we have got to gain traction on the cost reductions for sure as we go through the second half of the year, and you'll start to see that come through in the second half. Overall, when you look at it from a cost standpoint, we expect our total cost to come down and cost of goods sold to come down about $2 billion versus the $2.5 billion, and that's primarily reflecting the fact that commodities aren't coming down as quickly as we thought. So that's where we see costs unfolding through the second half of the year.

Thank you.

Good afternoon guys. Just a first question on fleet, because that seems to be leading the volume recovery here early in 2023. Just curious how much of a tailwind that was for you and where that shows up in the numbers, whether it's all in Pro or do we actually see something actually showing up on the Blue and in e side? And how much do you expect that to continue to be a tailwind as you go through the course of this year and maybe even for the next year or two?

The fleet business is primarily in Pro, and we anticipate this trend to continue throughout the year. We expect strong performance in Pro as the year progresses, driven by significant pent-up demand. With the introduction of the new Super Duty and the upcoming launch of the Transit in the second half of the year, we see ample opportunity. We project that profits in Pro will double this year compared to last year. In the first quarter for Blue, we observed relatively stable pricing, with a slight increase and a strong mix, particularly in F-Series, which was affected last year by the TICO issue. We expect some volume growth in Blue during the first quarter as well. However, we anticipate that this strong mix will not be sustainable throughout the remainder of the year, as it is unlikely to repeat itself.

On Pro, I want to emphasize a few key points, John. There has been a significant backlog of vehicles and a strong demand from small businesses in the US and Europe that remains unmet. While we have effectively supplied larger fleets like U-Haul, they are still seeking more product, even before we introduce the new Super Duty and the new Transit in Europe. There's considerable pent-up demand for larger fleets. However, the most profitable sector of the Pro business is small and medium-sized businesses, which have been waiting three to four years for their Transit and Super Duty vehicles. The current pent-up demand primarily comes from these customers, and there is still a notable pricing advantage and many pending orders. With the new Super Duty and Transit launching in Europe, the demand for these products will become even more pronounced. Although we have adequately supplied the larger fleets, there remains a significant amount of unmet demand for Pro vehicles among small and medium-sized businesses, which are central to our total addressable market.

And Jim, if I could follow up just on the pricing discussion. There seems to be a change in the philosophy of the way that people are thinking about this, particularly that new, large competitor that is cutting price. And that you can cut price on the front end and not make a lot of money on the hardware, but you can make a whole lot of money on the software and services on the back end so you're not so worried about profit on the front end. As you think about your business evolving over time, do you think in five years' time plus that you're going to be sort of selling the vehicles hardware and making all the money on the back end? I mean how should we think about sort of the balance of how the money is earned on vehicles going forward?

The business model we have is functioning well at Ford, particularly in our Pro segment. When I address your question, please note that we are operating in a manner where our aftersales and software have attach rates of over 30 percent. I want to clarify that I am not easing any expectations for my vehicle teams regarding software sales or profit margins. Those products need to achieve an 8 percent margin independently. We are witnessing positive results in software and, especially for Pro, the physical aftersales, with strong attach rates for charging equipment. This represents a significant business opportunity for us, and we aim to establish a recurring revenue model without commoditizing our products. That is not our strategy; it may be someone else's but not ours. We could implement this approach now with Pro, but we choose not to. I hope that makes sense.

Very helpful. Thank you.

Hi. Thanks for taking my question. I read, Jim that you recently said at a charity event in Detroit, we're going to have to rethink what the Ford brand means in a place like China. So where do you think you stand with regard to your China operations currently? I mean Lincoln seems like a bright spot. But what aspirations do you have for your operations in that market, either in terms of the portfolio or margins or returns? And what time frame would you like to achieve those aspirations?

Thank you for the question. Pro and Blue are profitable in every market, including China. We recently went to China to finalize our strategy as a leadership team. Our ICE business there is profitable, and Lincoln has been successful. However, it's important to view China through a strategic lens; it is not a major business for us. We recognize it as the largest EV market in the world, and its digital consumers are ahead of the global curve, making it a significant market for us. Our focus in China will be on battery technology, customer digital experiences, and advanced integrated software and hardware products. Our strategy will shift to a leaner, more focused approach with lower investment and higher returns. For example, our partnership with JMC will enhance our commercial business, including EVs in China. We also envision JMC as an export hub for affordable EVs and ICE commercial vehicles utilizing the Ford distribution network globally. We have strong Pro dealers in regions like South America, South Africa, Australia, and Mexico where we can export these vehicles. Moving forward in China, we will not aim to serve everyone; instead, it will be a more focused and efficient operation with a dedicated team on the ground to leverage global resources, reflecting the critical importance of the EV market.

Okay, great. Thanks. And then just lastly, what is the latest you're seeing in terms of auto loan APR, credit availability, maybe in light of some of the turmoil that we've seen in the banking sector in the US? The SAAR has been very strong this year, in line or stronger than your expectation for $15 million total SAAR, particularly in light of the higher rates, maybe helped by the strong equity in used vehicles. But just curious if you're hearing anything maybe different at the margin from your dealers or customers or just how you're thinking about the auto finance market generally.

We have observed several banks reducing their auto lending, which is typical for banks during challenging market conditions. This situation has created some pricing opportunities for us and improved our financing share. I don’t anticipate significant improvements for banks in the next few months. However, credit availability remains for customers, and captive finance companies in the industry will continue to support the original equipment manufacturers.

Hi, everyone. First question on price. So, is pricing overall is still expected to be neutral for the year? It sounds as though Blue is guided to be negative for the full year as incentive spend picks up. But, yes, could you just help unpack how we should be thinking about this year's price for Model e and Pro with the Super Duty strength still to come?

Yes. So, overall, for us, our bridge from 2022 to 2023, we expect pricing for us to be neutral. We still expect that to be the case. We do expect the second half to see pricing pressures, especially on Blue as we see supply and demand normalize. Pro, we believe there will be pricing strength throughout the year. And on e, we see pricing being slightly down on a year-over-year basis as well. So overall, no change to what we had talked about at the teaching. We see pricing as neutral for Ford.

Okay, got it. And just to confirm, you mentioned minus 20% Model e margins for the second half, is that correct?

Contribution margin, yes.

Got it. Yes. So, my follow-on to that because that's what I thought you'd sit. Can you bridge what the benefits are from a materials perspective, scaling in terms of the buckets maybe that you provided at the teach-in, what helps get to that minus 20% run rate for the second half? Thanks.

It's not different than what's in the teach-in. I mean when you look at it, we're going to scale through the year. We start to grow volumes. We have the LFP battery coming in, and then we have the design reductions that Jim talked about, getting to about a $5,000 reduction on Mach-E. We have a significant reduction in play on Lightning as well. So, it's the same buckets that we talked about at the teach-in.

Thanks.

Hi, good evening. Thanks for taking the questions. I just want to follow-up on that last question on the contribution margin. And I know you didn't disclose contribution margin at the teach-in. But just at the midpoint of if I look at what you disclosed in your deck, it's roughly negative $4,000 contribution margin right now, and you said a lot of this is on sort of material reduction. So, I just wanted to understand how easily you can reduce content mid-cycle of a product. I know you said that there are some design changes that you can do. But typically, you see more material content modifications at the end of a product cycle. So, just want to get a sense of your visibility on content modification to get that contribution margin to breakeven?

There are a few strategies we can employ to lower costs. One involves leveraging the vehicle's digital connectivity to identify which features customers find valuable. If certain features are not being utilized, we can opt to eliminate them. Additionally, as Jim mentioned, we didn’t wait for the Mach-E. We began implementing what we consider bundled actions into smaller programs while advancing with Model e, and we plan to launch these initiatives throughout this year and next year to achieve the $5,000 reduction. As a first mover, we believed it was crucial to enter the market promptly. We acknowledge that the design and efficiency of our first-generation products need improvement, and we're currently focused on making those reductions. We are applying the insights gained from this process to our second-generation products, and we'll share more details about that at Capital Markets Day in a couple of weeks. So yes, there are actions we can take, and it's important to approach this thoughtfully throughout the product development process. When opportunities arise, we group them together, implement minor changes, and proceed. This is what we are doing with Model e, utilizing connected data to remove features that customers do not value.

Thank you. For my follow-up, I want to revisit some previous questions regarding your approach to volume. It seems clear that you're focusing on balancing volume with profit. Traditionally, this business has been driven by volume and utilization. If I'm understanding your comments correctly, you're concentrating on unique segments and aiming to distance yourself from the mainstream, which suggests that if your current output is around four million units per year—lower than your historical levels—then focusing on these premium or unique segments might lead to even lower volume in the future. How should we broadly think about your volume going forward? I realize this might be a better question for the Capital Markets Day, but what is your structural perspective on the volume we can expect?

Yeah, good question. So I want to make it really clear that our growth strategy for the company is very aggressive, and it focuses on conquest customers. So we plan to grow, and that capacity increase for e and Pro is mostly additive to the company's overall growth. And what gives us confidence in that is that we are targeting conquest vehicles and software to customer categories that we know really well. It's not lost on us that when we launched Lightning, almost all the full-size pickup truck EV customers were new to Ford and new to the segment. So what we learned in Lightning's case, a segment traditionally has been 13% of the industry for pretty much my whole career can be much, much bigger when you add new product features like a frunk, lockable storage for a full-size truck, zero emissions, and the ability to power your house for three days. A lot of new customers bought a Lightning that never owned a pickup truck before. And we intend to do that with three-row crossover and with a bunch of EV Pro vehicles, which we think will be huge growth for us. So you should expect that a lot of that capacity we're putting in is for growth for the company, but we are not going to grow at any cost. We're going to manage that incremental new growth for profitability and growth together, and we've put a lot of thinking into our product strategy. One of the most important aspects of our product strategy is not to have too much top hat engineering. We want to have a lot of scale per top hat. And again, we'll go into the capital markets day, as you said, because I think it's best answer there with real examples where you can really see our strategy coming to life. But we've learned a lot for Lightning and for Mach-E. Frankly, the number of new customers we're seeing is very encouraging for us because of our capacity increase. And we know that the second cycle product can be radically simpler and lower cost, aside from the scaling effect. And again, we'll lay this out in capital markets day for you and for everyone else.

Great. Thank you.

Hi, guys. Thanks for taking the question. Just had two quick follow-ups. So for Blue, it sounds like the downshift kind of implied in the rest of the year is really coming more from mix than not price as you're saying net neutral on price for the full year. Is that right?

Yes. We experienced a very strong mix in the first quarter, but we don’t anticipate that trend will continue throughout the year. For the full year, we do expect to see some pricing pressures for Blue in the second half. It's important to consider the pricing run rate as we end the year because it will be influenced by the stock of units we have, along with the incentive levels from the first quarter of 2024 that will apply to those units. Overall, yes, we certainly foresee pricing pressures for Blue.

Okay. I have a follow-up regarding attach rates. You have a 30% attach rate on Pro, which is impressive. I'm curious if there might be an incentive to increase that attach rate by potentially lowering prices since those subscription revenues typically have higher margins. Or is the perspective that we won't do that? Ultimately, we create these products, and the subscription services are enhancements. How do you view that trade-off? Thank you.

It's a great question. Currently, considering the order backlog for Pro's business, investing more in profitable high-growth products is advantageous. It's important to note that the margins on software and parts are quite similar. Ultimately, customers expect exceptional products for Pro, which are primarily regulated vehicles. The real value for customers lies in software, attach rates, and the overall experience from a cohesive approach. Envision a future where we can predict component failures with complete accuracy before a sale. The vehicle's integration enhances software, allowing for more accurate failure predictions across a broader range of components. This ensures customers receive vehicles that rarely, if ever, go out of service. For small and medium-sized commercial Pro customers, particularly in Europe and the US, losing even one van can account for 20% of their revenue. Therefore, they are willing to invest in vehicles that remain operational. It's important to view this not as a trade-off between vehicle profits, parts, and software, but rather from the customer's perspective as an integrated system. Each part is interconnected; you can't consider prognostics without a vehicle designed for that or efficiently fulfilling the parts business before the customer arrives, ensuring quick service. We don't regard it as a trade from margin; instead, we design the entire system so that every element adds value, and the physical product and software are interdependent. Over time, it might turn out that software in the parts business is more profitable, but we are structuring the Pro business so that these components are inseparable, as illustrated by the prognostic example. I hope that clarifies things for you.

Yes, it does. Thank you.

Hi. Thank you very much. So I think you announced a price cut on the Mach-E today. And to your point, Jim, I think this is a more competitive segment within all the various EV segments.

Yes, yes.

Can you comment on the demand environment for Lightning? I've noticed some anecdotal evidence of a significant amount sitting on some dealers' lots. I read that you're planning to ship some to Norway, which suggests that the US pickup market should have more demand than your supply capability. Could you discuss the general demand for Lightning and whether any cost actions are needed to lower the price?

But there are only one or two in the market, so I can understand why maybe some people would look at it that way if they don't have a product in the market. But from our standpoint, the Lightning demand is outstanding. We've taken $11,000 worth of pricing on Lightning, $11,000. And, yes, thank goodness that we are seeing now some dealer stock for the first time in like two years for Lightning. And we are really excited about our cost reductions and, of course, the software we're shipping at the vehicle like BlueCruise 1.2. But the demand for Lightning is really, really strong. I look at Bring a Trailer every week, because two years ago, it was like, I don't know, the most popular new vehicle on Bring a Trailer was a Lightning with four miles on it, that someone was flipping. And the prices have come down, and they're basically at MSRP now. So we're selling it at full MSRP. The demand is higher. In fact, I would say that the pricing is higher than MSRP still. And we're totally sold out in Norway, like we are everywhere. So this is a global segment, we believe. Ford is clearly the number one pickup truck maker in the world, and we're not going to just keep our pickup trucks in the US. It's a global market. So we feel great about the demand, or else we wouldn't be doubling production this year.

Yes. Thanks for that Jim. And then, just maybe one follow-up for John. So curious if you could just put a final point on the puts and takes for your unchanged 2023 guidance. I think you mentioned in terms of costs for materials and freight maybe now a $2 billion benefit instead of $2.5 billion. Are there any other big pieces which are either more or less of a benefit or a headwind than you saw previously?

Yes, we previously shared our outlook for this year. We believe that overall pricing will be neutral for us this year. Initially, we projected our costs of goods sold to be about $2.5 billion, but we now estimate it to be around $2 billion. This change is mainly due to commodities not declining as quickly as we anticipated. In Q1, we experienced a 9% increase in volumes, and we expect to see an overall increase of about 6% for the full year. These are the main areas where our estimates have changed since our earlier outlook. We anticipate past service pension costs to be around a $2 billion negative impact. Our credit remains unchanged at approximately $1.4 million, and we will continue to invest in growth. Additionally, stock exchange and other factors amount to about $1 billion. Overall, the bridge remains largely the same, with some shifts between volume and commodity costs.

Perfect. Thank you.

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