Good day, everyone. My name is Laila, and I will be your conference operator today. At this time, I would like to welcome you to the Ford Motor Company Third Quarter 2024 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.

Thank you, Laila. Welcome to Ford Motor Company's third quarter 2024 earnings call. With me today are Jim Farley, President and CEO, and John Lawler, Vice Chair and CFO. Also joining us today is Cathy O'Callaghan, 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 20. Unless otherwise noted, all comparisons are year-over-year. Company EBIT, EPS, and free cash flow are on an adjusted basis. Lastly, I'd like to call out a key near term IR engagement. On November 20th, John Lawler, Vice Chair and CFO, and Sherry House, VP Finance, will participate in a fireside chat with Dan Levy at the Barclays Global Automotive and Mobility Tech Conference in New York. Now, I'll turn the call over to Jim.

Thanks, Lynn. Hi, everyone, and thank you for joining us today. I want to start by thanking our global team for their commitment to Ford+ and to adding and creating value for all of our shareholders. I'd like to touch on an overview of our strategy and why we believe we're so well positioned versus the competitors in key areas, and John will take you through the Q3 results and full year outlook. Several years ago, we restructured our overseas operations, and our global footprint is a key strength for Ford. We restructured in Europe, South America, India and China. Collectively, in 2018, those regions were losing $2.2 billion and burned $3.4 billion in cash. Now, all of those regions are collectively profitable. We're going to continue to stay laser-focused on cost and getting leaner as a company, but our team won't be distracted by major international restructuring facing other OEMs, especially in China. And speaking of China, we've gone asset-light for a couple of years, as we've told you. We have strong JV partners, and we have a growing export business. In fact, China and its exports are now contributing over $600 million to the company's EBIT this year. Another area of strength is our EV strategy, which I wouldn't trade for any of our competitors. We moved early. We've learned a lot on Gen-1 from our customers, the global market dynamics, and what it requires to be fit to compete. No doubt there's a global price war and it's fueled by overcapacity, a flood of new EV nameplates, and massive compliance pressure. In our home market in the US, no OEM is immune. Since Q1 of last year, EV volumes have grown 35%, while revenues in total are flat at $14 billion. That means the progress on volume has been fully offset by prices. We're expecting roughly 150 new EV nameplates to hit North America by the end of 2026. And some of our competitors are already resorting to very aggressive lease tactics even on the brand-new products, which creates huge residual risk and overhang and brand damage. What we're doing about these market dynamics? Well, we're focused on cost. We've already reduced $1 billion in our EV costs this year. We remade our battery footprint. We trimmed our capacity by 35%, in line with where we think the market will be in a few years. We accelerated the mix of our batteries, emphasizing LFP will be the first one to manufacture in the US, and that battery will leverage the IRA production tax credit. We're shifting new launches, focusing on getting the products we do have in our EV portfolio profitable within the first 12 months, and we're deep into the design and engineering of our next-generation vehicles. Boy, are we excited about these coming out in the next few years. In 40 years in the industry, I've seen a lot of game-changing products, but the mid-sized electric pickup designed by our California team has got to be one of the most exciting. It's an incredible package and consumer technology for a segment we know well. It matches the cost structure of any Chinese auto manufacturer building in Mexico in the future. How do we know that? Because 60% of the BOM has already been quoted. Another advantage for us obviously is Ford Pro. It's unique because we're combining product strength with software and repair services all linked together. Don't be confused by other press releases on-the-ground game in the commercial market, because what our customers see is that we have reach, a leading product portfolio and incredible software portfolio, as well as gaining strength in our repair services, all of that driving sticky recurring high-margin revenues. It turns out, in Pro, our dealer network is one of our key advantages. In the US, we have the largest commercial vehicle network, and that's essential to drive those attach rates to services. And our software is also a competitive advantage. Our paid subscriptions delivered a growth of 50% in revenue, 30% just this quarter, and our gross margins are over 50%. There's incredible upside at Ford for our software to grow our installed base, attach rates and ARPU. Another strength is our diverse powertrain lineup. For example, in the US, the hybrid pickup sales at Ford have more than doubled in the past two years. We now have a nearly 80% market share of hybrid pickups. A lot of our competitors shunned hybrids and now they're scrambling, but it's going to take them years to catch up. Interestingly, in our home market, Ford is the #1 ICE brand, the #2 EV brand, and the #3 hybrid brand. Taking a step back, clearly, our strategic advantages are not falling to the bottom-line the way they should. Costs, especially warranty have held back our earnings power, but as we bend that curve, there is significant financial upside for investors. By design, 70% of the bonuses for our managers are tied to cost and quality, and more than half of our long-term incentives as leaders are tied to TSR. Let me double-click on the EV business. We applied lessons really early that we learned on Mustang Mach-E across our lineup. In the last 24 months, we've reduced the Mustang Mach-E's cost by $5,000 per unit. As you know, Mach-E is second to Model Y in this segment for sales and transaction prices despite being in the market now for several years. And we continue to break down the friction or barriers to adoption for mainstream ICE customers. We are the first to join Tesla's Supercharger network, and we'll be shipping about 100,000 adapters by the end of this year. We are the first to offer complimentary home charging and installation. We call it the Ford Power Promise, and we've seen a huge uptick in interest on our website from the Power Promise. But our dealers are also becoming a competitive advantage for mainstream customers. Take, for example, Tim Hovik and his team at San Tan Ford in Arizona. In the quarter, one of the months, they sold 137 electric vehicles. And Arizona is not a ZEV state. These were incremental sales with solid gross profits for the dealers. And we are building on that know-how for the last couple of years in scaling and being #2 across our whole US dealer network. All of our 3,000 dealers are primed to sell EVs now. We have 7,000 trained EV specialists, and 14,000 dealership hours have been spent on EVs now. Our dealer network has already installed 800 fast chargers across the US and Canada, and many more are on the way. Next year, we expect to improve the trajectory of Model e's business through cost, scaling, and we're not trading wooden nickels inside the company for emissions credits. That won't change the economics of our EV vehicles and the company as a whole. Turning to Pro. We're the first OEM to segment our customers between retail and commercial. And it starts by having a great product lineup and leaning into the future. About 9% of transit sales are now electric vehicles in the quarter. That's up 1.5 percentage points from a year ago. Our Super Duty has more variance than any other OEM, and we're bundling vehicles and services to provide unique value for our customers. What I mean by that is, about 13% of our EBIT Ford Pro now comes from repair services or software. We think that will grow to about 20% by 2026. We have the largest service network in North America. We're on track this year to add over 4,000 commercial service bases and 2,500 Pro Mobile Service units. That, by the way, is up 50% year-over-year. Our mobile repair orders are up 60% year-over-year, and now almost one out of 10 Pro repair orders is done by a mobile service truck. Globally, Ford Pro Intelligence subscriptions rose 30% in the quarter. We now have about 630,000 subscriptions. As I said, that's a revenue growth of 50%. We're adding more and more product functionality and features that third-party software companies can't offer, because it's tied to the product, including remote vehicle lock and unlock, limits to our top speed and acceleration. Yes, we are seeing more pricing pressure on Pro in the second half, but that was consistent with our original guidance for the year. Demand is also in line with our expectations. We're seeing pent-up demand for Super Duty cabin chassis and transit wagons. And then, Ford Blue. Let me double-click for a second on that business. First, we have an incredibly fresh lineup across the globe, and we're going to add to that. We have four key US launches on deck. The Maverick and Bronco will be launching in the fourth quarter with new derivatives and a freshened product, and we have an all-new Expedition and Navigator launching early next year. In Q3, in the US, our share was up 40 basis points to 12.6%. Our ATPs in September were in line with the industry, and the Ford brand continues to transact higher than the average non-premium brands. Now, let me unpack the inventory. We ended the quarter with 91 days of gross stock and 68 days of dealer stock. That's a little higher than our target range of 50 to 60 days, but the mix is really good. Now, we're intentionally holding extra inventory through the year-end to protect sales during the Q1 launch activities that I mentioned. And adjusting for that, we're right in the target range for us as we start 2025 from an inventory standpoint. The biggest opportunity of the company clearly is cost and warranty. We're attacking both of these, and we will realize the upside. The biggest opportunity is warranty. And here's some evidence of things on the input metric side that are really improving. Our three months in service quality is getting a lot better, a 31% increase in the last three years. This year, the high-volume vehicle lines like F-150 and Escape had huge launches and really had virtually no warranty spike. J.D. Power typically sees a 92% increase in defects during a launch. Our launch production losses have also been cut in half from the last year, and these are very large-scale launches like F-150 and Explorer. Another key improvement that we're seeing is our ability to OTA and improve our vehicles in the field. We've updated 4 million vehicles at Ford this year and 20 million total since we started doing OTAs. We can now update 30 different vehicle modules, well beyond the SYNC in infotainment modules. The OTAs, on average, save our customers five to six waiting days waiting for repairs and, of course, it lowers our cost of warranty. All improvements to warranty will take time to reduce our warranty expense, maybe up to 18 months, but we're moving the needle on all the inputs. Taking a step back, I believe we're in a very strong competitive position. We have a lean and profitable international business with no distractions. We have a fresh and appealing lineup, which will get even fresher. We have a strong and diversified powertrain strategy that gives customers choice and gives us the flexibility and reach. We're already on our second generation of electric vehicles. They'll be launching in the next couple of years. We'll reduce the losses short-term on our Gen-1 products and set us up to be a global competitor in the long term. We have a vibrant growing software and repair business for Pro, and Pro is clearly a strategic advantage for the company. We're going to keep doing the hard yards to capture the tremendous upside in cost and warranty defects present to us and we're going to bring it home for our valued investors.

Thanks, Jim. In the third quarter, wholesales remained unchanged, while revenue increased by 5% to over $46 billion, marking our 10th consecutive quarter of year-over-year revenue growth. This growth is supported by our strong product lineup and the choice we offer our retail and commercial customers. The quarter saw strong truck sales, including hybrids, and the launch of the new Ford Explorer and Lincoln Aviator. We achieved $2.6 billion in adjusted EBIT, with a margin of 5.5%, an increase of 50 basis points compared to last year. The profit growth was driven by higher volumes and a favorable mix, although it was partially offset by anticipated EV pricing pressures and negative exchange impacts. Overall, costs were reduced during the quarter. I have a lot of confidence in our current business and the ongoing changes. A few years ago, we proactively reorganized our global product lineup, focusing on customer segments where we excel, which has led to sustained top-line growth. We are also gradually enhancing our industrial system and overcoming past limitations. Our free cash flow is stronger and more stable than it was just a few years ago, indicating that our Ford+ plan is effective. Adjusted free cash flow was $3.2 billion in the quarter and $5.9 billion year-to-date, with a cash conversion rate of 74%, significantly exceeding our target range of 50% to 60%. Our balance sheet remains robust, with nearly $28 billion in cash and $46 billion in liquidity. We believe it is wise to maintain extra cash during this unprecedented period in the industry, as it allows for flexibility to invest in growth opportunities, execute strategic partnerships, and sustain financial flexibility through the next economic cycle. I am also pleased to announce a regular dividend of $0.15 per share for the fourth quarter, payable on December 2nd to shareholders of record on November 7th. We aim to return 40% to 50% of adjusted free cash flow to shareholders annually, and including today's announcement, we have returned over $10 billion to shareholders since early 2022. Now, let's discuss our segments. Ford Pro generated almost $16 billion in revenue for the quarter, an increase of 13%, marking another quarter of growth. Wholesales rose by 9%, bolstered by the launch of the new one-ton Transit Custom in Europe and strong demand for Super Duty and two-ton Transit vans. EBIT reached $1.8 billion, an increase from the year prior, with a solid margin of 11.6%. Ford Pro continues to serve as a model for high-margin, consistent revenue, with paid subscriptions, attach rates, and monthly ARPU rising in the quarter. Pro’s performance highlights the reliability and resilience of this higher-margin growth business, evidenced by a year-to-date EBIT margin of 14.6%, aligning with our long-term target. Ford Model e reported a loss of $1.2 billion, but we realized $500 million in year-over-year cost improvements, which were offset by pricing pressures in the industry. Global wholesales fell by 11%, reflecting our commitment to yield management and balancing dealer inventory in North America, despite the partial offset from the launch of the new Explorer EV in Europe. Our team is dedicated to achieving further cost reductions, optimizing our market strategies, and enhancing capital efficiency to improve our profit outlook as we move towards 2025. Revenue for Ford Blue increased by 3% in the quarter, although wholesales decreased by 2%, impacted by the discontinuation of low-margin ICE passenger vehicles. While overall volume decreased, North America celebrated an 8% increase, thanks to strong sales of key models like F-150 and Ranger. EBIT was $1.6 billion with a margin of 6.2%, both down year-over-year due to negative exchange rates and rising manufacturing costs, though partially mitigated by lower warranty expenses and increased net pricing. Hybrid sales surged by 30% in the quarter, and our global hybrid mix is on track to reach nearly 9% by year-end, up over 2 percentage points from last year, with more products in the pipeline. Ford Credit generated EBT of $544 million, an increase of $186 million year-over-year, driven by better financing margins and higher receivables. Auction values fell by 1%, and lease return rates are returning to normal from historical lows. We continue originating high-quality financing with US retail and lease FICO scores exceeding 750 for the quarter. Our exposure to EV residual risk remains low, with EVs making up less than 10% of our US lease portfolio. Now, let's discuss our outlook. At the beginning of the year, we anticipated a full-year company-adjusted EBIT of $10 billion to $12 billion. Since then, our product lineup has outperformed expectations and delivered favorable market conditions, and we expect this trend to continue into the fourth quarter. This reflects the strength of our key models and the resilience of our commercial segment in Ford Pro. Additionally, we are on track to achieve $2 billion in cost efficiencies within our industrial platform, compensating for higher labor and product refresh costs for the year. However, two key factors are preventing us from reaching record adjusted EBIT this year: higher-than-expected warranty costs and inflation impacts at our JV Ford Otosan in Turkey, which raise material costs for transit vans sold in Europe. While Turkey's inflationary pressures are outside our control, increasing warranty costs are manageable. We now expect an adjusted EBIT of approximately $10 billion for the full year, accounting for lower-than-expected volume in the second half for Ford Pro and Ford Blue due to supplier disruptions. Generally, we perceive a balance between vehicle supply and demand. We still project adjusted free cash flow in the range of $7.5 billion to $8.5 billion, with CapEx between $8 billion and $8.5 billion. Our outlook for 2024 anticipates stable to slightly increasing SAAR in both the US and Europe, with our US planning figures set at 16 million to 16.5 million units. Full-year customer demand for the new Super Duty is expected to enhance market conditions for Ford Pro, with a projected industry pricing decline of around 2% driven by increased incentive spending as we approach year-end. For Ford, we expect this to be partially balanced by top-line growth from our new product launches. Our segment forecasts indicate continued strength in Ford Pro, now projecting EBITDA of about $9 billion with an improved market environment, including ongoing pricing strength on core products. We anticipate a loss of about $5 billion for Model e, which sits at the better end of our guidance, led by over $1 billion in cost improvements that were partially countered by continued pricing pressures and investments in new vehicle platforms. For Ford Blue, we now expect EBIT of $5 billion, reflecting a balanced market equation and increased product, manufacturing, and warranty costs, though partially offset by cost efficiencies. Finally, Ford Credit's EBT is projected to be approximately $1.6 billion, marking double-digit growth year-over-year. Our performance this quarter showcases positive strides in executing our Ford+ plan: emphasizing capital discipline, maintaining the right product portfolio, and ensuring consistent cash flow to reward our shareholders. We are committed to enhancing our operations and remain focused on improving both quality and costs. That concludes our prepared comments. We will now take questions.

We will now move to our question-and-answer session. Our first question comes from Mark Delaney with Goldman Sachs. Please go ahead.

Yes. Good afternoon. Thanks very much for taking the question. Pro EBIT was strong, but did fall to 11.6% in the quarter, although still at 14.6% year-to-date. Maybe you can talk a bit more around what led to the moderation in Pro EBIT during the third quarter and what gives you confidence in that mid-teens EBIT margin in the Pro segment over the intermediate to longer-term?

Yeah. So, when you look at it, what we're seeing this year like we saw last year is seasonality in the second half. Now there's transparency around the commercial business that we didn't have in the past. And first quarter, we see the peak in the rental business that falls off in the second quarter. In fact, this quarter, third quarter, we had basically zero rental business. The other thing we see in the second half is we see the shutdowns that we see at our plants. And as you know, we run these at full capacity. So, we lose those units, and we can't make them up. And that's the seasonality you're seeing, and then you see that show up in the EBIT in the second half. The confidence we have in Ford Pro ongoing is we're continuing to see, as Jim said, strong demand for our Super Duty and Transit, especially the chassis and the wagons. Our pricing has held up pretty strong so far this year. We are seeing some top-line pricing pressure with the '25 model year vehicles as we expected, but we're still continuing to move forward, and it's not something that we're concerned about at this point based on what we're seeing so far with the '25 model years. So, again, the business continues to be strong. And I would tell you that we're really starting to gain traction on our overall process of how we're going to market and we're selling the solution, right? We're selling the vehicle along with the services that come along with that, that's about improving our customers' business and giving them productivity, which helps them improve their profits. So, all of that's coming together and it's leading to continued strength in Ford Pro.

Thanks for that. I had one either for you or for Jim around Model e. I think you said during your prepared remarks, you expect improved EBIT trajectory in Model e next year. Maybe you can help us better understand how impactful some of the recent cost and capacity actions the company has taken might be within the Model e segment? And within your outlook for an improved EBIT trajectory within the Model e, how much of a risk might be rising CO2 requirements within Europe and just the broader pricing environment for EVs be as you think about that improved trajectory? Thank you.

Thanks for your question. Good news is we're starting to scale the EV business in Europe and those vehicles are contribution margin positive, and they're becoming a bigger mix of our business. We are definitely getting traction from our cost-down efforts on our first cycle of products, and we're really focused on Mustang Mach-E. We've made a lot of progress, and we have a lot more to make. So, I think this is one of the benefits of having the segmentation broken out, and no doubt about it. I think we tried to highlight in our prepared comments the growing risk for everyone on pricing, and no OEM is immune to that. And as I said, we're seeing some of our competitors have enormous lease mixes like 70%-plus. So, that will play out, especially in Europe, as you said, there's a lot of pressure in Europe. Our products are brand new in Europe. So that's a good thing, and that'll help us next year. Anything else, John?

No, I believe we will maintain our focus on improving costs for both the current and future generations. Having been in the marketplace for so long has shaped our mandate for the California team to ensure cost competitiveness. Ultimately, everything will depend on the top-line pricing pressure, as you mentioned, Jim.

Yes. And to be specific on the cost, we really expect next year and the following years, a lot of progress in the production tax credit for our first-gen products. That's really one of the key levers for us as we've been able to restructure our sourcing of our batteries, where they come from, who makes them to really maximize the PTC. And that will drive a lot of cost down for our existing products. And you'll see that come to fruition starting in mid-next year and all the way through 2027.

Our next question comes from John Murphy with Bank of America. Please unmute your line and ask your question.

Good evening, everyone. I have a question regarding warranties for both of you. Jim, you've mentioned some positive data from J.D. Power and other sources, but I'm wondering if you feel confident enough to indicate that we are past the warranty issues we've experienced in the past, especially last quarter, or what is the likelihood that we have overcome the worst of this?

Yeah, John, I wish I could answer that with certainty. We are seeing the leading indicators, the physicals. We're seeing improvement there, especially around our three months in service. The '24 model year is over 30% better than what we saw in '21 and '22. As Jim mentioned, our launch spikes basically on Explorer and Cougar, we did see one. So, those are good indicators that things are going to get better from an overall quality standpoint. Now, it's going to take time for that to flow through from a warranty standpoint. What I can't tell you is, I don't and can't read, and we're doing the best we can on this, I know it's not satisfactory for you guys is the FSAs and the older models, where what could potentially hit us. And we're out looking at all the data we can. We're looking at everything to try to get out in front of any of those. And we're working to increase on our current models, everything we can do to fix things through OTAs, get the repairs out there as fast as possible, cut off any issues that are in the plants. So, I think we're doing all the right things from a physical standpoint. I just can't tell you when that curve is going to bend for sure and how that's going to start flowing through from a cost standpoint. And we're doing everything we can to figure that out and get there and understand the transparency and clarity around that.

I have a follow-up question about pricing. In Blue, it remained positive on a net basis in the third quarter. There's a lot of concern regarding your inventory, although it appears you've addressed that. I'm also curious about inventory at Stellantis and the overall market implications. As you consider pricing, you have excellent new products being released now and into next year that should help balance things out. It seems like your inventory issues will be resolved. How do you view pricing trends in the industry moving forward? It continues to be surprisingly resilient and even positive for your company. What are your thoughts on this going forward?

Yeah. So, this year, top-line both pricing and volume were a tailwind for us relative to what we had thought. The industry is down 2%. We are seeing increasing pressures as we come through the end of the quarter into Q4 from a top-line standpoint. Your guess is as good as mine, John, as what's going to happen and how deep some of our competitors are going to go that have an issue with inventories. Yeah, our inventories were higher, but we also gained share in the quarter and our sales pace increased. So, we think we've got a plan to manage our inventories. We've got a plan to get back to within the run rate of what we expect. We do have some launches in Q1, so we will carry some higher inventory for those vehicles through the end of the year, but next year, we plan to get back to that 50 to 60 days run rate, for sure. As we move into 2025, there's a lot of water that needs to flow under the bridge still between now and the end of the year. One of the things we're looking at is the consumers in Europe, it seems that they're pulling back a bit and spending less. So, we've got to watch that. And I think many of you guys have written about the fact that, are we heading into cyclical pricing headwinds? And is that going to show up in 2025? As you said, we've all been pleasantly surprised by how it's held up so far, but I want to see how we run through this quarter, how the year-end is coming along, how sales are at the end of the year before I can give you any call on what we think is going to happen with pricing next year.

And the only thing I would add on the pricing is really the mix. We continue to see customers move into small utility, affordable side of EVs continue to be really fueling the unit growth and we're even seeing some change in series mix. So, those are all uncertainties that we have to handicap for next year. But I just encourage all of us to not just look at the top-line or the discounting, but also look at the mix and the segmentation. The good news is the truck segments and the Pro segments are holding up really well.

Our next question comes from Adam Jonas with Morgan Stanley. Please unmute to ask your question.

Good evening, everybody. So, the Chinese have really been growing rapidly in Europe and rest of world as you've seen. I know you don't break out results geographically, but any color on any impact you might be seeing in Europe competitively or even in rest of world regions that you wanted to highlight? And specifically, I was kind of surprised you mentioned that China was contributing $600 million to your results this year. I'm curious how much of that was from the domestic market versus reverse exporting from China?

Yeah. Adam, I'll start with that and then I think Jim will cover the rest of your question. So, we are profitable in China in and of itself in China. Jim mentioned $600 million of total profits, and that includes our exports, primarily to the rest of Asia and South America. So, going asset-light has allowed us to stay profitable within China. And then, the export strategy, primarily from our JV, our JMC, and exporting those vehicles to the rest of Asia as well as South America is driving significant profit in Ford Blue.

Adam, Ranger has become a crucial product for our global revenue. We are present in numerous markets, and our profitability overseas in many of those markets is largely due to Ranger. When I joined the company, Ranger ranked 13th, and now it's second only to Toyota Hilux. In several places, such as Australia, we even outsell them. This is where we'll see pressure on Ford's revenue. Great Wall is now establishing itself in Thailand and holds 60% of the pickup market in China. They are a very competent company with excellent products and a strong value proposition. We have a solid strategy in place regarding this, but it's a significant factor. In Europe, the passenger car market has faced challenges, but that's not where we primarily compete. Our focus is on the commercial Pro business in Europe, where we don't anticipate the Chinese companies making a major impact. They have made some inroads in the UK, but their focus hasn't been on the commercial Pro sector. The positive aspect is that we have a diverse energy strategy for all our Transits, allowing us to provide customers with whatever they need, including electric Transits, which represent nearly 10% of our offerings. Therefore, I believe we are well positioned in both the Ranger and Transit markets.

Thanks, Jim. Just as a follow-up, John, you cut about $1 billion out of the full year outlook. You provide the detail by your reporting segments, but I was wondering if you could break down what compromised that $1 billion shortfall by factor if I gave you your costs versus your expectations. You mentioned warranty costs are down, but not as much as you thought. You're not satisfied. FX and the supplier disruption, you mentioned you missed some units. I wanted to know if you could quantify that or any other factors by causal factor. Thanks.

I think, Adam, it's important to consider the full year outlook compared to our current guidance in relation to our Q2 performance. In Q2, we faced significant challenges with warranty issues and inflationary pressures in Turkey. Looking at the full year, the factors preventing us from achieving record profits are those challenges that are offsetting the positive aspects we previously discussed, such as strong volumes, product mix, and pricing. Since the second quarter, we're now at the lower end of our range particularly because Ford Blue is experiencing a volume shortfall and mix difficulties due to supplier constraints. This is affecting our most profitable vehicle segment. We lost some production because of the hurricane and are also dealing with some productivity issues from a specific supplier that we're actively addressing. We anticipate resolving these issues by the end of the quarter, but they are currently impacting Ford Blue's performance compared to our Q2 guidance. Does that clarify things?

Our next question comes from Daniel Röska from AllianceBernstein.

Hey, good evening, everybody. Thanks for taking my questions. Maybe, Jim, if you take a step back and think about Ford+ and the targets we've discussed over the past, I'm not going to hold you to 10% in '26, but could you still remind us of the stepping stones here for performance kind of in the medium term, and also give us a little bit of your view on how kind of the somewhat slower transition into EV might impact kind of what we've talked about in the past?

Thank you. Our primary focus continues to be on managing costs, particularly with warranty, coverages, and FSAs, which has always been vital to Ford. We've been looking systematically at necessary changes in our industrial system. While I’m proud of our progress, we are not completely satisfied and see significant opportunities ahead. As we face what appears to be a tougher pricing environment in our home market, this could actually work in our favor as a company. The management team is fully committed to this effort, as we recognize our achievements through our rewards. The EV journey has been notably interesting; despite some slowdowns, I'm proud of how quickly our team has responded. Many competitors are still releasing numerous models, but we made early adjustments, and our second-generation products are on the way. We've gained valuable insights regarding industrial fitness in vehicle design, design costs, and manufacturability, all of which are incorporated into our second-generation products, providing us a significant advantage over the next four to five years. Another unexpected opportunity has been the rising popularity of hybrids, particularly in trucks. Many of our competitors don’t offer hybrid options for models like the F-150 or Maverick, which has resulted in substantial revenue for us, as demand is currently outpacing our production capabilities. We chose to focus our hybrids on trucks to offer innovations like Pro Power Onboard, which adds value beyond just increased efficiency. This success has encouraged us to expand hybrids across our entire lineup and explore additional partial electric solutions that we will discuss further. Our skunkworks team has exceeded expectations in designing a platform, and now the challenge is to scale production effectively. I am eager to showcase their work, highlighting Ford’s ability to compete with companies like BYD. The Pro initiative represents an exciting journey for us as it illustrates the future of the auto industry, with an emphasis on attached services, aftersales support, and vehicle-related software rather than generic productivity tools. Achieving this requires advanced electric architectures, but we face challenges beyond just cost and quality, particularly the slow adoption of EVs. Electric architectures are complex, and navigating the software journey is critical for our company's growth. We've already achieved 20 million over-the-air updates, which is becoming increasingly vital for us. There have been some surprises along the way, but I believe we are well-positioned for the short and mid-term.

Thank you for that. John, can you summarize the current situation? We are experiencing short-term challenges, and there have been delays with our electric vehicle ramp-up, which isn't progressing as quickly as anticipated. While you have shown stability regarding cash flow, I would like to ask what might lead you to rethink your strategy on shareholder distributions. We've noticed some competitors being more proactive with immediate distributions, such as dividends or buybacks. What balance are you aiming for, and what factors might influence you to increase the dividend or take other distribution actions?

Right. So, we talk about this every quarter, as you would expect. And we're consistent in that we're going to pay out 40% to 50% of our free cash flow. And we do think it's prudent at this point in time to hang on to the incremental cash. We have $28 billion and $8 billion higher than our stated cash minimum that we need is $20 billion. And I think at this point in time, where we're at in the industry, where we're at in the overall economic cycle, the uncertainty around the globe, right now, it's the right thing to hang on to cash. And I'm not saying there's going to be something that happens in the global economy, I'm not saying there's going to be some disruption, but were that to happen, we would be very pleased having this cash in hand. So, we look at it every quarter. We understand that if we don't have a use for the cash or if the environment doesn't change and we see that the risks that might be facing us diminish significantly, then we have to make sure that we handle that cash appropriately and either invest it for an accretive growth or pay it back to the shareholders. And we will look at that every quarter and we will adjust appropriately.

I would only add to John's comment that we're really excited about the Pro services, and we don't have anything to announce, but we're always going to want to have some optionality, not just for running the business, but for strategic optionality to build our services business. I mean, when has a car company had a chance to get the profitability of a Pro business to 20% or 30% of its revenue being services? That is such a special moment for our company and frankly for the industry, but that just doesn't come from organic growth all the time. Sometimes, it takes investments in new kinds of services. I'm not going to go into that, but I just want you to understand that we're also thinking very carefully like we have all of our strategy choices, like going asset-light in China, like restructuring our businesses, like the way we handle the Rivian investment, we're thinking very carefully about our Pro business and how to nurture those services beyond what we have today.

Thanks, Jim. Actually, if we could just pick up right there, I want to talk about a little bit about the 40% to 50% payout, because I hear you and Jim's confidence on the business, but I also hear on this call that warranty is something you still don't quite have a handle on and there's some uncertainty there in the US market, it's hard to see how it becomes stronger. You talked about potentially a pricing cycling downwards. Again, not expecting it maybe or necessarily, but it's possible. And if the industry stalls out, obviously, then there's working capital headwinds. We saw how fast free cash flow deteriorates at a competitor. You mentioned higher inflation, there's still some investment that needs to be made. So, and I know you want to keep cash on hand for optionality. So, when I hear you talk about 40% to 50%, it sounds to me like that's a retrospective view, but I'm actually wondering how much of a prospective view are you considering in that? And like why is 40% to 50% even the right number?

We consider both our future prospects and our annual payout. We've established a strategy targeting a payout ratio of 40% to 50%, which we believe is a suitable range at this moment. We also evaluate potential changes in our environment, including risks, headwinds, and tailwinds that may impact our outlook. While we don't have any announcements to make right now, we continuously assess the situation and have discussions about it every quarter. When we determine that it's the right moment, we will implement a change based on our future outlook.

I would only add to John's comment that we're really excited about the Pro services, and we don't have anything to announce, but we're always going to want to have some optionality, not just for running the business, but for strategic optionality to build our services business. I mean, when has a car company had a chance to get the profitability of a Pro business to 20% or 30% of its revenue being services? That is such a special moment for our company and frankly for the industry, but that just doesn't come from organic growth all the time. Sometimes, it takes investments in new kinds of services. I'm not going to go into that, but I just want you to understand that we're also thinking very carefully like we have all of our strategy choices, like going asset-light in China, like restructuring our businesses, like the way we handle the Rivian investment, we're thinking very carefully about our Pro business and how to nurture those services beyond what we have today.

This concludes the Ford Motor Company third quarter 2024 earnings conference call. Thank you for your participation. You may now disconnect.