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. 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 on some upcoming IR before I turn the call over to Jim. On Thursday, August 10, Ford Pro will do a fireside chat 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 calls 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 predictably boring 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, 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 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 standpoint, from our incredible product strategy, software, scale, and cost position, we will be one of the winners long term. Why do I say that? We moved quickly to establish our EV nameplates in unique segments, unlike others: the Lightning, the Mustang Mach-E, and the E-Transit. We're building EV brand loyalty. It's critical. Many of our EV customers are all new to Ford. This is a significant asset to Ford given our new Gen 2 products and the profitability that we'll be launching soon. For Gen 2, we've focused on fewer, higher volume models in the right segments to take advantage of our strengths and understanding 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 crossover ICE like EV platforms, like so many have. We moved early on LFP, especially production in the U.S., giving us a diversity of chemistry cost advantages. 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 installing, the Blue Oval 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 the choice of ICE, hybrids, and full electrics in the years to come. Our hybrid offerings are extremely popular. The F-150 is the best-selling vehicle in the U.S. for 46 years, with 10% of all F-150s and 56% of all Mavericks sold in the U.S. being 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 1, we moved to a new retail model for Model E, well ahead of our competition, again, a differentiated model that will deliver non-negotiated pricing, 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 market fluctuations in real-time, and you've seen this with both the Mach-E and the Lightning, as we are adding enormous capacity to meet pent-up demand. We are optimizing for 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 beyond because of the shippable software. But we are disciplined as we grow, and we won't bear unlimited costs to acquire 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 hit two 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 regardless of their propulsion, and we 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 Blue's iconic vehicles, such as the Mustang lineups, the Maverick, the F-150, and the Explorers, all those cool new derivatives from Ford, 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, the 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 to continue in the second half as we have new launches at Mustang. I would add that the pace of new product introductions for Ford will only accelerate from here. We plan to introduce, for example, an all-new F-150 and F-150 PowerBoost 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 the eighth largest pickup truck market around the globe. Our aftersales 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 reduce our cost structure. To do that, we've launched a lean, disciplined operating system that reaches into every one of our plants, every part we buy, and 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 for Ford. I mean, what one of our competitors would give to have Ford 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, and software subscriptions continued to accelerate as we capture significant pent-up demand across multiple commercial sectors and locations in both North America and 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. Our brand business also continued 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 Transit in Europe. Our share of the U.S. 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 help make Ford the top-selling commercial brand for eight years in a row. Ford Pro has all the attributes of a business that is difficult to disrupt. Our combination of services, software, dominant product, dominant market share, upfitting, and large dealer physical repair work 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 big change in our industry. And it happens to start including Ford Pro because Ford Pro is at the forefront of this biggest change—the digital transformation, moving to software and services as a differentiator. We already have about 550,000 paid subscribers and service subscribers, with Ford Pro being 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 the year or two. Moving to the next profitable software segment. Since launch, BlueCruise customers have traveled nearly 1.4 billion hands-free hours across North America, and that is a 44% increase since the end of Q1—a 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 BlueCruise through over-the-air updates, each significantly improving the driver's experience. We have now shortened 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, driving 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 electric architecture. And this will reach across all vehicles: ICE, hybrids, and EVs. This is a key point because it allows us to have a far higher installed base than just EVs alone. Think of the F-150. There are three key applications sitting 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 their surroundings in their vehicle and 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 that we sell to Pro, but we're not going to stop there. Right around the corner, we'll have predictive failure components. Now, imagine our productivity gain for our Pro customers who never go off the road because we know something is going to fail before it does. This is just the beginning of the applications. These services will bring high-margin, recurring revenue streams that are less capital-intensive and cyclical than our traditional vehicle sales. To wrap up, there is understandably a lot of discussion in the UAW contract negotiations that began two weeks ago. We won't negotiate in public, but I would like to share our general approach. When it comes to building in America and partnering with the UAW, Ford does it differently than most other automakers and 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 we didn’t go bankrupt, and we didn't take a bailout, but they may not know that we have added a significant number of UAW manufacturing jobs—in fact, thousands of jobs in the U.S. since the Great Recession. We have done more than is required by our contract to add jobs, move employees from temporary to permanent, improve benefits, and we are on our way to spending $1 billion to improve our factory working conditions. It comes with some additional costs. But for us, this is not simply a number-crunching exercise. We believe over time, customers will appreciate and reward our approach, and our workforce will be more committed to delivering BlueCruise 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 UAW leadership and our incredible workforce. Over to you, John.

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 costs 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, 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 one-time insurance settlement. That said, costs were flat, and we expect this to continue to improve in the second half of this year. Now importantly, Ford Blue continues to be profitable in every region, reflecting the disciplined capital allocation that has fundamentally derisked 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. Perhaps the strongest example of this is the F-150, an incredible product, which many don't understand: effectively, our F-150 equivalent outside North America, which drives meaningful bottom-line results for both Blue and Mach-E. Now turning to Mach-E. Revenue increased 39% year-over-year and more than doubled significantly as we added capacity for both Mach-E and the F-150 Lightning. Contribution margin and EBIT margin were both negative, with pricing and volume pressures intensified, impacting all OEMs. Given the rapid and dynamic gain on the pricing environment, we no longer expect to see contribution margin breakeven 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 reality. We know that once a customer chooses an AV 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 to the lifetime value of that customer. Despite the dynamic environment, we remain committed to delivering our 8% EBIT margin target in 2026, and we have a real strategic benefit. Our second-generation products are being developed to compete with a completely 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 a 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 based on customer demand. Now, Ford Pro. Ford Pro's results continue to accelerate, demonstrating the power of our portfolio. For this quarter, Ford Pro delivered a 28% increase in revenue, driven by the Transit and our all-new Super Duty. EBIT more than doubled to $2.4 billion, resulting in a margin of 3%. The significant year-over-year improvement in EBIT reflects higher pricing and increased volume—both outstanding results from the strength in our commercial business. 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 Transit, and a huge opportunity to grow our software and services, and I'll talk more about this in a moment. But with over 450,000 customer subscriptions and significant growth each quarter, this is a key pillar of our Ford Pro business. Ford Credit generated EBT of $309 million. Results were in line with our expectations but down $550 million from a year ago, reflecting lower financing margin, nonrecurring credit loss reserve releases, 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 some. In my mind, this is the real opportunity for value. 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%. 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 billion 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 exchange, and costs associated with union agreements. Tailwinds include improvement in the supply chain, higher invite volume, all-new Super Duty, and lower comps. 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 offset any potential pricing headwinds. The Model E is expected to report an EBIT loss of around $4.5 billion, largely reflecting the present pricing environment, disciplined investment in new products and capacity, and other costs. We 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 credited project. And Ford Credit EBT is anticipated to be about $1.3 billion. So that wraps our prepared remarks, and we'll use the balance of our time to address your questions. Thank you. And operator, please open the line for questions.

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 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 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 among 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 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 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 was coming at a time when our traditional competitors had already designed and made their bets in the EV platforms. I can tell you that this moment was one of the biggest eye-opening moments in my personal career, where I realized we had completely changed our approach to platforms. The inverter technology, the efficiency in the systems of the vehicle, the massive complexity reduction, and cost competitive reductions that we have to make in the second cycle products were just dramatic. The battery pack design that we see from our competitors is completely uncompetitive compared to 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 just a moment when we all looked at each other and said, 'We have to go left to beat the competition and compete with these competitors that make a real impact on EVs.' 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: the enormous cost but importance of upgrading the electric architecture so we could be a winner in spending software on the vehicle. This decision by Ford and the type of products that we bundle with new, simpler, more energy-efficient platforms competing in segments where we have a great reputation is a strategy we believe will yield great results. In the meantime, we've learned about battery scaling, which is not easy in Georgia. We learned about how to build 10,000, 20,000 units a month in one facility at a 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 will need to look to 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 crossover 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 in 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 and volume targets makes sense when we see contribution margins from volume being offset by additional pricing pressures. But I was hoping that you might want to talk to us about 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?

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 are levers that we will be able to adjust. We don't necessarily have to spend at the same rate. Some of the battery factories can be made 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 with the understanding that pricing is settling and we need to come up with the right value equation. So we're not walking away from the 8% in '26, and we will continue to work on that.

As far as the volume trade-off, Rod, that'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 filed about 120,000 EVs. We're learning a lot about that elasticity between price and volume. It's actually not as different than ICE as we initially thought. So we have a lot of information that we didn't have a year ago regarding the volume trade-off in profit optimization, plus all the levers that John talked about related to 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 your 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 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 balance between hybrid and EVs?

Great question. I think how—in general, we think about it is that a year ago, the industry thought of this extreme dichotomy between hybrids and EVs. What we now realize, having been in markets like China, is that there's an infinite number of degrees of electrification in between those. Customers are very rational about buying an EREV versus a long-range PHEV versus a Series Hybrid for towing. Customers are really acting rationally based on their duty cycle. So a couple of years ago, we decided to continue our hybrid investment in our heavier vehicles. Those hybrid systems are quite different compared to Toyota and Japanese OEMs. We have been surprised at the popularity of hybrid systems for the F-150. It's now north of 10% mix costs, and it's increasing. What we've learned is that we have to tie what the customer really likes to more efficient duty cycles, and then we add new capabilities to the battery, like Pro Power Ford. We're seeing a lot of success in that combination of using the battery for something beyond just moving the vehicle. That popularity—we never thought we would be at a 50% hybrid mix for Maverick—it far exceeded our expectations. And so we're just listening to the market. We believe that ICE customers, our Blue customers, don't want to be left behind. They want modern powertrains, and decarbonizing with them is just as attractive. That's one reason we separated the business because we want a Ford Blue and Pro. On the Pro side, we're very lucky to have many great multi-energy platforms, so we have 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’ll probably come to light differently than people think, and customers like that.

Great. And are there other levers regarding 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 was expected to cease, was being refreshed and is a function of sort of reuse of capital. So are there things you can do?

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’s 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 an 8% margin regardless of the price point, and we’re going to allocate capital along those lines. The pressure we put on ourselves is that in future segments, we execute products with 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 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 gas 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 going to be 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 about our top-of-the-house strategy and how it’s different from 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 referring to 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 ensure we understand that.

Yes. I want to make it really clear. The term hybrid is going to—in our industry—get very confusing. A hybrid could be a serial hybrid. It just means a motor powers batteries. It could be a hybrid in the traditional sense like the F-150 hybrid, and I’m referring to hybrids that 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 is around the outlook for the bigger loss of the Model E segment this year. I guess the changed guidance reflects greater price competition. But is some portion of the outlook for a bigger loss 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? With regard to that breakeven on a contribution margin target for first-generation EVs, 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 help us some more with the factors that give you continued confidence in that target? Is it related at all to Jim's comments at the start of the call regarding 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? Or is the confidence more based on factors under your control that lean more on vertical integration and other levers that you might have identified?

Yes, Ryan. I think that in the absence of that question highlights the complexity of all the levers that we have to work with here. What I would say is we haven't changed our plan. What changed is that the adoption we've seen—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 continue to work through all of those levers as we build out the second generation of vehicles. The path, that bridge that we had talked about: we had thought that prices would come down—it’s sooner than we had thought. It might be a little deeper than we had thought. As we gain more confidence in product that Doug is creating, the combination of that product, both the physical hardware and software, and the ability to execute a completely optimized system of higher vehicles, gives us confidence in our ability to move toward a sustainably profitable segment in EV, starting with our second generation. So we’re not walking away from that 8% target.

I really want to mention something that I'm compelled to highlight, which is that in the U.S. right now, I don't know, 7% to 8%, depending on the month. The intention very much remains 30% to 50%. There are plenty of consumers. The issue is that the price to pay has come down, but it’s very, very volatile. It's not consistent across all segments. One of the most important levers that John is referring to is which segment we compete in with our second-generation products. That's why I said clearly that we are thankful we did not bet on two-row crossovers. We have bet on segments we know deeply, deeply, deeply. And we now know what we know, and we can't unlearn what we learned from the pure EV companies about cost and complexity. And now we have celebrated a company like Doug, where we’re shipping almost 500,000 software— that many software subscribers. So there is real demand among these customers based on duty cycles. It's up to us to get those second cycle products out and perform cost reductions in the meantime. I believe our strategy—it’s the segments we compete in—which is not yet visible, I think it’s going to really differentiate Ford.

All right, one thing, Jim. One of the other factors we are looking at is the future, and this is about an installed base. So we are also looking at these customers today in the acquisition. We know that once you bring them in, they are 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. Is it still positive given the acquisition cost of these customers to invest? 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. I can tell you if we get to the point where that lifetime customer value exceeds the acquisition cost, we’ve said we won't acquire customers with any price and we know where those lines are for Ford. So that’s one of the other things we are using to inform decisions 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, it's not a turnaround. It’s not about—but it seems like you had relation in BEV. And it seems like the last few weeks, I've shaken that commitment 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. 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. We added capacity to make it work, so we have to think about it that way as well. 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 a question of whether we will have EVs. So we can do the math in that way, but it's not 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 we can grow. And remember, we’re working on our second generation and our third-generation vehicles, which also come with costs. So to attach all of this to these vehicles, I don't think is quite the right way of thinking about it as we move forward, respectfully.

I’m not sure, but I think you’re referring to the Lightning 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 to produce 100,000. That’s four times. The ramp on the 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, so that’s important to understand. We didn’t cut the price of the F-150 $10,000 to create an order bank for our current production rate. It’s for 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 to the sequential step-down? 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 Ford Blue volumes, pricing, and 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, pricing held up much better than we thought through the second quarter, but we do have planned for the second half as we continue to increase volumes in Blue that we will see some pricing pressure there. 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. We saw that in the quarter, and we see it through this quarter as well, primarily around warranty, which is the costs we're seeing come through the dealers. Their labor rates, etc., 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 costs related to freight. Although some rates are coming down, we're seeing constraints overseas and rail constraints. We’re generally seeing constraints around freight, and that’s driving up costs as well. So that’s the combination of the puts and takes for Blue as we go from half to half.

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