Good day, everyone. My name is Layla, and I will be your conference operator today. I would like to welcome you to the Ford Motor Company Second Quarter 2025 Earnings Conference Call. Now, I would like to turn the call over to Lynn Tyson, Executive Director of Investor Relations.

Thank you, Layla, and welcome, everyone, to Ford Motor Company's Second Quarter 2025 Earnings Call. With me today are Jim Farley, President and CEO; Sherry House, CFO; Andrew Frick, President of Ford Blue; and Model e and Interim Head of Ford Pro; and Kumar Galhotra, Chief Operating Officer. Joining us for Q&A will be Cathy O'Callaghan, CEO of Ford Credit; and Steve Croley, Chief Policy Officer and General Counsel. Today, Jim will provide a high-level overview of our performance and touch on the policy environment. Andrew will then cover market dynamics, followed by Kumar on industrial progress. Sherry will conclude with a detailed financial review and our updated guidance before we turn to Q&A. We'll be referencing non-GAAP measures today. These are reconciled to the most comparable U.S. GAAP measures in the appendix of our earnings deck. You can find the deck at shareholder.ford.com. Our discussion also includes forward-looking statements. Our actual results may differ. The most significant risk factors are included on Page 20 of our deck. 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 highlight a key near-term public IR engagement. On August 13, Navin Kumar, CFO of Ford Pro, will participate in a fireside chat with Ryan Brinkman at the JPMorgan Auto Conference in New York. Now I'll turn the call over to Jim.

Thank you, Lynn. Hi, everyone. The Ford team delivered a solid second quarter, including a record $50 billion in revenue that underscores the strength of our incredible products and services. Overall, we earned $2.1 billion in adjusted EBIT and delivered another quarter of year-over-year improvement in cost, excluding the impact of tariffs. For the full year, we now expect adjusted EBIT to be between $6.5 billion and $7.5 billion net of tariffs. I want to recognize our team as well as our dealers and our suppliers for working together effectively to drive our business forward around the world. Thank you. Ford Pro, our growth engine, best exemplifies our strength this quarter. We have transformed this business by diversifying our revenue streams. Over the past 12 months, aftermarket, which includes parts and software and services, contributed 17% of Pro's EBIT, closing in on that 20% target for next year. These high-margin recurring revenues make Ford Pro a less cyclical and more durable business. To accelerate that progress over our multiyear business plan, we are shifting capital towards Pro, partly funded by reallocating the resources on future EV programs. As I hope you saw earlier today, we're pleased to announce that Alicia Boler Davis will be joining Ford as the President of Ford Pro effective October 1st. Alicia is an incredibly talented and experienced business leader, and her experience across automotive, technology, logistics, and customer experience is exactly the right skill set that we need to accelerate Ford Pro's transformation towards software and services and, of course, greater profitability. Andrew Frick, who has done an excellent job leading Ford Pro on an interim basis, will continue to lead Blue and Model e going forward. Model e delivered a significant margin improvement in the quarter as the team continued to scale operations as we more than doubled the volume in Model e, while also lowering the material cost and driving other operational efficiencies. On August 11, that will be a big day for all of us at Ford. We will be in Kentucky to share more about our plans to design and build a breakthrough electric vehicle and a platform in the U.S. This is a Model T moment for us at Ford, a chance to bring a new family of vehicles to the world that offer incredible technology, efficiency, space, and features. In Ford Blue, U.S. sales in the quarter were especially strong. We gained share and committed higher pricing, reflecting the strength of this incredible product line we have at Ford. And as America's largest automotive producer and the best-selling brand in the U.S. in the first half of this year, we support a level playing field globally. We value our ongoing cooperation with the administration on trade policy and CO2 emission standards. We expect tariffs to be a net headwind of about $2 billion this year, and we'll continue to monitor the developments closely and engage with policymakers to ensure U.S. auto workers and customers are not disadvantaged by policy change. We've been working hard with the administration. We believe our cycle plan is right for this tariff environment for the coming years. The latest round of tariff policies, especially the deals in Japan and Europe and potentially South Korea, make our strategy even more compelling at Ford. Our bet is not to compete in high-volume generic segments that typically require overseas production for cost competitiveness. Instead, we are doubling down on what we do best: trucks, iconic passion products, Ford Pro, and breakthrough technology that you will soon see in our forthcoming EV platform. Now on emissions, as America's top brand, we further are investing in giving our customers choices along their low CO2 journey, with new investments in ICE, more efficient and performance hybrids, and full electric vehicles all on tap at Ford. We support a single durable national emission standard to ensure sound industry planning. We proposed reforms that are on the table now, giving us greater powertrain optionality and reducing our need to buy CO2 credits. In fact, our commitment to purchase CO2 credits has already been reduced by nearly $1.5 billion. Further changes will balance standards and customer choice and have the potential to unlock a multibillion-dollar opportunity over the next two years, primarily in Ford Blue, which has carried a lot of the compliance burden. The EPA's announcement this week will give us more flexibility with respect to our product mix and volume. Once finalized, this will provide further opportunities to improve profits next year and beyond. And finally, reaching world-class vehicle quality remains our top priority. Although we face challenges with our older vehicles, the quality improvements on recent model years show we are on a favorable trajectory. As Kumar explains, we are on track for our best initial quality metrics in over a decade at Ford. Ford is now the most awarded brand in J.D. Power's 2025 IQS study, and Link has improved two years in a row. We're proud of the progress, and we expect our warranty costs to decline in the years ahead. Andrew?

Great. Thank you, Jim. I will start with Ford Pro, where our disciplined customer-led investment strategy is paying off. Year-to-date, Ford Pro share increased 1 point in the U.S. and 3.2 points in Europe. This performance is driven by a diverse vehicle lineup and continued investment in the Pro portfolio. Delivering on uptime, the most important KPI for our customers is a shared mission that we have with our dealers. Over the past year, Ford Pro solutions have boosted customers' uptime by reducing repair time by 20%. As Jim mentioned, we have increased our capital spend on Ford Pro and our dealer network has done the same, investing $2 billion of their own capital since 2022, primarily to expand service capacity. And we have grown our global mobile service network by 18% to more than 4,700 units, enabling growth in service parts penetration. All of this translates to higher quality earnings, and connected vehicle data fuels that growth. Paid software subscriptions climbed 24% to 757,000, with average monthly revenue per unit, or ARPU, also growing 24%, driven by roughly a doubling of the telematics and fleet management subscriptions. Now let us look at our global business. In the U.S., our sales were exceptionally strong this quarter, growing seven times faster than the industry with market share up 1.7 points sequentially. In addition to the share gains, our transaction prices increased more than the industry average. We had our best quarter in 20 years for total trucks, driven by F-Series, Ranger, and Maverick. Full-size Bronco posted a record quarter, and the all-new Expedition and Navigator are off to a hot start, with sales up 44% and 115%, respectively. We also sold more electrified vehicles than our two main domestic rivals combined, with EVs and hybrids at close to 14% of our U.S. mix. The success of our 'From America for America' campaign allowed us to reduce our U.S. growth stocks by four-day supply. Building off that momentum, we entered the second phase of our 'From America, For America' campaign earlier this month, and our sales pace remains strong. Our dealer stocks are healthy. Our product portfolio is fresh, and we have new entrants like Explorer Tremor and F-150 Lobo hitting showrooms soon. We are confident our product lineup and U.S. footprint will continue to drive profitable growth opportunities. Outside of the U.S., our global portfolio has made year-to-date share gains in key markets such as Canada, Europe, South America, and the Middle East. China remains a strategic export hub, especially for growth nameplates like Territory, and the new Ranger PHEV built in South Africa has been well received in Europe and is now shipping to Australia. Lastly, Blue's international operations were profitable in all regions, including China during the second quarter. Now I'll turn it over to Kumar.

Thanks, Andrew. Our industrial platform is delivering tangible progress on our core priorities: cost and quality. We're making this progress by establishing key enablers, leading indicators, and output KPIs; enablers are the most important factor. For example, we have roughly doubled the number of our safety and technical experts. We have significantly increased testing to failure on critical systems like powertrain, steering, and braking. We are also monitoring more vehicles in the field through connectivity. Insights from these initiatives are also being incorporated into current production. This has contributed to some more recalls in the near term, but it is the right thing to do for our customers. Let's start with costs. We are still targeting to deliver a net improvement of $1 billion this year, excluding the impact of tariffs. A significant driver of these savings is material cost improvement actions, which will also flow through into 2026. It is important to note that in the second quarter, our costs would still have been down even if the special field service action or DFSA was included. Turning to quality, warranty is the largest component of our competitive cost gap. This is a major cost opportunity for us. There are two warranty costs investors should focus on. The first is warranty coverage. This is the expected cost to cover our bumper-to-bumper and powertrain warranties. Coverages make up about 60% of our total warranty costs. As the quality of our vehicles improves, the cost of coverage per vehicle should come down. In fact, we are already seeing this improvement. Our latest 0 and 3 months in service metrics are tracking towards our strongest performance in over 10 years. The second part of warranty costs are FSAs, costs associated with recalls and customer satisfaction items. We are not satisfied with the current level of recalls or the number of vehicles impacted. We are working to reduce the cost of these recalls. For example, we are leveraging AI solutions to improve parts traceability to help minimize the scope of recall units. Roughly one-third of our recalls over the past three years have been software-related, and we are addressing this head-on. We are using over-the-air or OTA updates to reduce customer inconvenience of having to take the recall units in for service. OTAs are a game changer. OTAs cost over 95% less than physical repairs. While OTAs and other process improvements are helping us make meaningful cost improvement, most of our recent FSA costs are tied to vehicles engineered several years ago, before we made all the robust process changes across our industrial system. As a result, the expected FSA cost improvement will not impact the bottom line as quickly as improvement in coverage costs. There is a lag effect until the majority of our car park reflects vehicles designed and built under the strengthened processes, but there are early indicators that are encouraging. For example, the FSA costs for '24 and '25 model year vehicles are at least 50% better than '20 and '22 model year at similar time in service. Now I'll turn it over to Sherry.

Thank you, Kumar. Ford's transformation journey is well underway, and our objective to build a higher growth, higher margin or capital-efficient and durable business is evident in our ongoing performance. Our global revenue grew 5% in the second quarter, outpacing wholesale growth of 4%. We achieved our fourth consecutive quarter of year-over-year cost improvement, excluding the impact of tariffs, and we delivered $2.1 billion in adjusted EBIT despite a net tariff impact of about $800 million. The durability of our business has also strengthened. The consistent positive performance across our industrial system helped us close roughly $1.5 billion of our competitive cost gap in material costs last year, and we have delivered year-over-year improvement through the first half of 2025 excluding tariffs. Now for some segment highlights: Ford Pro continues to demonstrate its structural advantages, a large growing share of U.S. and European vehicle volume complemented by the largest and growing service operations network. This fast network is helping us rapidly grow our high-margin software and physical services businesses. Pro's revenue grew 11% to nearly $19 billion. Its 12.3% EBIT margin is driven by a strong product lineup, disciplined pricing, and an increase in mix from our high-margin, capital-efficient services business. We feel confident about Pro demand in the second half supported by policy changes that should drive a recovery in small business activity. Ford Model e delivered solid top-line growth, with revenue more than doubling to $2.4 billion. Our margins improved nearly 44 points, largely related to mix, driven by the full year launch effect at the European Explorer, including pre-models in the newly launched Puma. Mackie and Lightning also improved their material costs in 2025. From a capital perspective, Model e continues to make targeted investments where we have breakthrough innovation, such as our next-generation EVs and where we have a distinct advantage, such as our LFP battery technology, launching in our new plant in Marshall, Michigan. Consistent with our goal to improve capital efficiency, we are actively pursuing options to maximize the utilization of all of our assets. You will hear more from us on this in the future. Ford Blue earned nearly $700 million in the quarter, reflecting profitable market share gains, higher net pricing, and cost improvement. This was overshadowed by the non-recurrence of last year's F-150 stock build following the new model launch and tariff headwinds, which drove lower EBIT and margin in the quarter. Ford Credit is a source of strength and a strategic asset for the company. In the second quarter, Ford Credit delivered $645 million of EBT, up $300 million, reflecting improved financing margin and receivables growth coupled with continued strong portfolio performance. Ford Credit also paid a $500 million distribution in the quarter, bringing total year-to-date distributions to $700 million. Total company adjusted free cash flow was solid at $2.8 billion. Our balance sheet is a competitive advantage. It's strong and getting stronger. We ended the quarter with more than $28 billion in cash and $46 billion in liquidity. And over the last week, we bolstered our liquidity with two incremental actions: a new $3 billion delayed draw term loan and a GBP 1 billion U.K. export financing arrangement. These transactions were proactive, providing flexibility to refinance the roughly $5 billion of debt we have maturing in 2025 and 2026, and at a cost that's significantly below a traditional unsecured offering. With these actions, our liquidity is historically strong, providing us with invaluable flexibility, including the ability to invest through an economic downturn and continue to fund growth in areas like Ford Pro, while some competitors may be forced to pull back. This strength, combined with a consistent free cash flow generation, is the foundation that allows us to consistently return capital to our shareholders. In accordance with our commitment to return 40% to 50% of trailing adjusted free cash flow. Today, we announced the declaration of our third-quarter regular dividend of $0.15 per share payable on September 2 to shareholders of record on August 11. So let us turn to our 2025 outlook. For the full year, we expect company adjusted EBIT of $6.5 billion to $7.5 billion, adjusted free cash flow of $3.5 billion to $4.5 billion, and capital expenditures of about $9 billion. Our updated guidance reflects a strong underlying first half performance across our three automotive segments and Ford Credit, including our continued improvement in costs. Our full-year outlook assumes a net tariff headwind of about $2 billion, reflecting approximately $3 billion of adverse gross adjusted EBIT impact, offset partially by $1 billion of recovery actions, primarily market factors. U.S. industry sales of 16 to 16.5 million units, industry pricing to be about flat; and lastly, a net cost improvement target of $1 billion, excluding the impact of tariffs. Given the potential range of outcomes related to how the net tariff headwind will play out by segment, we're only providing a total company outlook for the remainder of the year. In summary, our business transformation is well underway. We are laser-focused on capital efficiency and cost improvement, and our strong balance sheet gives us the power to invest through the cycle and act opportunistically. I'll now turn the call over to the operator for Q&A.

Our first question comes from Emmanuel Rosner with Wolfe Research.

First question is, I was hoping you could give us a little more color on the drivers of guidance change and improvement. In particular, you're obviously absorbing larger tariffs, $2 billion of tariffs that were not in the initial guidance. So what are the drivers by bucket of improvement versus your previous outlook? And if at all possible, I'm curious about the EBIT, but also the free cash flow.

Sure. So let me just first comment on the guidance. So our net tariff was estimated at $2 billion, and our guidance came down $1 billion. So our guidance illustrates the strong improvement in our business. We also kept our free cash flow the same versus the outset of the year at $3.5 billion to $4.5 billion, and the $9 billion for CapEx is approximately the high end of our prior guidance. The guidance is underpinned by the strong performance in the business, which is primarily in the cost area. As you know, we have a target of $1 billion of net improvement on a year-over-year basis. We're making terrific progress on that, as you're seeing in our numbers. And we're really focused on sustainable improvement in warranty and material costs that will make its way into 2026 and beyond. Currently, we have a very fulsome pipeline of opportunities to support that.

I appreciate that. So, since $1 billion of cost improvement was already your target excluding tariffs, are you now aiming for a higher figure? I'm trying to understand why the underlying performance has improved. Where do you anticipate this underlying performance will be by the end of the year?

We've seen it in manufacturing efficiency and our negotiated cost for parts. Those are two areas where we've accelerated past our own targets. There have been some ins and outs on the $1 billion, but those are the real strong parts of the business that we see, and also, obviously, the market equation for Pro is very strong.

Okay. Understood. And then separately, Jim, I was curious, on the back of some of the recent changes in the U.S. regulations and a more relaxed environment. Curious about Ford's appetite to potentially be more strategic about some of the spending on the EV side and whether there's actually room to potentially cut this back in any sort of material amount in the future once you get a chance to essentially assess the impact of these software regulations?

Well, you're absolutely right. The EPA's decision and their posture has really changed a lot in the U.S. And being number two to Tesla in EVs, we've learned a lot in the last three years and having a full range of truck hybrids. We've learned a lot and there's no doubt about it that we've had to change our EV spending and capital allocation pretty large, pretty massively. You and a lot of investors, hopefully, you'll get a chance to come to Kentucky. You're going to see the future of our EV platform shift from where our first-generation products are to now. We've definitely moved out launches. We canceled some products. We've made the right choices in terms of battery chemistry change like LFP in Michigan; I think we're very well positioned for the reality of the EV market with customers today. I'm equally excited about the changes we're making in our powertrain choice. We're kind of moving from being the dominant player in truck hybrids in the U.S. to offering EREVs, PHEVs, and a full range of hybrids across our lineup, especially our bigger vehicles. We think that's a much better move than a $60,000 to $70,000 all-electric crossover. We think that's really what customers are going to want long term. And we're investing a lot in more durable ICE powertrains. The good news is that we've always built our business around flexibility of the powertrain. So our manufacturing operations can adjust to these, and a lot of the EV spending that's come down has been reallocated to Pro, including Pro services. I think that's going to be great for our investors and great for the employees. We think the rule maker will be finalized by December, and in the short term, we've already made mix changes. We've scaled our credits, our CO2 credits by $1.5 billion already; there may be more opportunities on the mix side for next year, as you said, as we fully evaluate these opportunities. Not much is happening in Europe and the rest of the world; this is really just a big shift in the U.S. and a big opportunity for Ford.

Your next question comes from Dan Levy at Barclays.

First question maybe is for Jim, Kumar, one of you can opine on this. There was a blog post, Kumar, about two weeks ago on the back of your recall, and there's a comment in there that you're applying higher standards. But with that, you're now going to potentially find issues that on previous model year vehicles that maybe haven't been reported yet. So I appreciate that the warranty coverage is getting better. But it seems like the recall piece is remaining a headwind. So what confidence is there that the recall piece is going to improve, especially as there may be now with higher quality standards, additional recalls now that you need to report?

Yes. Thanks for the question, Dan. As I mentioned, two big components, 60% coverage is getting better, solid evidence there. FSAs have a much longer arc. But not all FSAs are directly tied to higher costs. For example, we've had a lot of software FSAs that are a lot cheaper to fix. And there are some early indicators that the vehicles, for example, '23 to '25 model year are substantially lower in FSA costs than the previous '20 to '22 model year window. But I think it's way too early to really draw any conclusions on FSAs yet because the longer arc is driven by our need to turn over the entire car park before you can clear out all the older issues. So I would say good improvement on the coverage side; for example, the second quarter was better year-over-year if we exclude that special FSA and coverage costs are significantly down versus the second half of last year. So mixed strong progress and more coverages, FSAs are still a bit opaque.

Great. Maybe if I could just as a second question, ask about your recent market share performance, which has been quite strong. And maybe you could just talk to, a, the $1 billion offset on the tariffs on the market factors; how you're thinking about that between share and price; and b, do you believe that your share is sustainable given we are now seeing some tariff relief? How committed are you to the current market share in the U.S.?

Yes, thanks, Dan. It's Andrew. We believe we can maintain our performance in the second half of the year. The industry had a very strong first half, but we're starting to see a pullback in demand, and we expect a softer second half, projecting an industry growth of about 16% to 16.5% for the full year. Regarding pricing, we anticipate flat net pricing for the year. In retail, pricing has been slightly higher, so we expect an increase of about 1%. On the commercial side, there's been more pricing pressure, but our Super Duty pricing remains strong. Overall, we expect flat net pricing. Our stock positions are in good shape as we approach the second half of the market. The segments where the industry is strong are areas where we perform well, which gives us confidence in maintaining our performance in the upcoming months.

Our next question will come from Mark Delaney with Goldman Sachs.

I have a question about the changing emissions policy environment. Can you explain how Ford is managing the opportunities for improved vehicle mix and reduced costs due to the changes in emission policies in the U.S., while also staying competitive with your EV technology, especially in relation to the Chinese domestic manufacturers that are increasingly selling their vehicles globally?

Yes, we're already reducing our credit buys. We are changing our mix towards the fourth quarter of this year, and we see a pretty big opportunity next year. As I said, a multibillion-dollar opportunity over the next couple of years. On the EV side, I'm really excited to show everyone where we're going on our EV; we've been busy the last three years kind of behind the curtain; no one could really see how we're allocating our capital and what our new EV strategy is. We are out of sync in a good way with our competitors who are now fully loaded with all their EVs, and they'll have to commit to them for a full cycle of product. Ours is coming out in the next year or starting. So you're going to see a lot of news from Ford on our EVs, and our strategy is very simple. We believe the only way to really compete effectively with the Chinese over the globe on EVs is to go and really push ourselves to radically reengineer and transform our engineering, supply chain, and manufacturing process. And that will come to life soon, and I'm excited to show everyone. This is the Model T moment for the company, as I said, and that will become clear for us. We really see not the global OEMs as a competitive set for our next generation of EVs; we see the Chinese companies like Geely and BYD. And that's how we built our vehicles, how we've engineered, what kind of supply chain we've used, and the kind of low content in our manufacturing. A key part of that is our LFP battery built in Michigan, and it's a big advantage for the company. We're the first one to build it at scale. It also has a PTC. We're thankful that Congress upheld that. That's a key part of our profitability roadmap to transition in these lower-cost batteries. I can't wait to show you the product and the platform. So stay tuned.

I'm looking forward to it. My other question is about autonomy. The company decided to shut down Argo approximately three years ago due to considerations regarding time to market and returns for robotaxi services. However, there are now several robotaxis on the road, and both partial and fully autonomous technologies are progressing. I would like to gain a clearer understanding of Ford's position on Level 3 and Level 4 technology. Additionally, how significant do you believe partial or fully autonomous technology will be in achieving the more sustainable and recurring profits that the company is aiming for?

I see Blue Cruise has done really well for us. The margins have held up. The pricing for Level 2 and Level 2++ looks a lot more robust than a lot of the other ADAS features. So I think we're off to the races, and we will continue to offer their update improvements to Blue Cruise, lane change, ramp to ramp. We have a lot of opportunities to increase the ODD, and I think that profit and those margins will stay strong for a few years until it starts to commoditize. We are making a lot of progress on our Level 3 system, and that will be a major moment for the company. We really believe this is the key opportunity for retail customers. We have the right team, all those Argo engineers who stayed at Ford; they've been really busy enhancing Level 2 and building out a Level 3. So stay tuned, and I can't wait to show everyone. We are not going to be the first with a Level 3 system at low speed, for example, that are out there today. We want a fully functioning Level 3 high-speed highway application with a really decent ODD where thousands, millions of customers would be able to use the system. On Level 4, we've been thinking a lot about our strategy after Argo. What looks very interesting to me is the service side of that. These are large fleets. They're going to need someone to adjust the instrumentation and repair those vehicles, and Ford Pro is a fantastic partner for fleet management of those large fleets. They're no different than our transit vans. There are some differences, but we think we're really well positioned to take advantage of the very profitable parts and service, as well as offering Level 4 to some of our commercial customers in a van format. And we'll have more news coming on that. But I suspect, that's where we're really focusing on Level 4.

Your next question comes from Joseph Spak with UBS.

Jim, I wanted to get your pulse on, I guess, (a) what you're hearing, but maybe more importantly, (b) what Ford wants in light of some of the tariff discussions that have been happening and what might happen with Mexico as Japan and Europe now got reduced tariffs. Because on the one hand, obviously, lower tariffs are going to help you, absolutely. On the other hand, it's a relative disadvantage for you versus maybe some of your competitors given your U.S. footprint. Maybe you could help us understand the range of outcomes on the USMCA negotiations that you're planning for. Should we think about a 15% rate or lower or is it more nuanced than that given the U.S. content requirements? So I guess, basically, what is Ford really lobbying for in the conversations with the administration?

I think to put it simply, Ford as a leading auto producer in the U.S. and the leading exporter with the most UAW workers. We're very clear with the administration. We want to simplify the tariffs so that we can make up for that gap between the bilateral import tariff rates and what we're paying in our tariff bill. Our tariff bill is $2 billion, and that's a net number. We see there's a lot of upside depending on how the negotiation goes with the administration. We're in daily contact with them. And at this point, I would say they're very productive conversations. We'll give you more news when we get it. But we have a lot of opportunity even as the most American company with a $2 billion liability, we have a lot of opportunities to simplify especially parts tariffs and reduce that liability considerably, which would be upside for the company. The reality is our competitors now all have to pay 15% import and hire from Mexico. They can't change the footprint anytime soon. Those tariffs were not around a year ago. This is an opportunity for Ford. Yes, it may be less than 25%. But I think we found with the administration, they're really committed to companies like Ford, and they are going to work hard to reduce that liability.

I wanted to clarify your comments on policy. You mentioned scaling back compliance credits by $1 billion to $1.5 billion. Did you mean purchases? What were your initial plans for expenses this year according to your guidance, and what are those plans now? I know you spent about $200 million last year, and I'm trying to understand the potential impact on profits for 2026 and beyond.

Yes. We've expensed about $200 million thus far. And I think you could think about that being a reasonable quarterly rate going forward, so not significant.

And on the credit side, it's very clear to us that the California situation has changed a lot, so we can descale our credit contracts and our purchases, and that will be material for the company. The most material for Ford in the end is going to be changing our mix. We have high demand for our Pro and larger SUVs right now. We have high demand for some of our non-electrified powertrains, and changing that mix is a multibillion-dollar opportunity in the next couple of years. So that's what's going to come through for the business. We just have to finalize the rule-making, which probably won't happen until the end of the year.

Your next question comes from Federico Morendi with Bank of America.

Just wanted to touch upon the electrification initiatives. And I understand that now the regulation has changed and the overall environment in the U.S. has shifted. But I was wondering, how does Ford balance the different commitments in the regions where it operates, like the U.S., Europe, and even China, in terms of capital investments on the electrification portion of the business?

Thank you. We have a clear vision for the pure EV market in the U.S., focusing on small vehicles for commuting and local use. Our Skunk Works project has been in development, and we’re eager to share our progress. In the commercial sector, we remain the leading player in the U.S. EV market, which we believe will be a strong business. However, we aim to simplify our vehicle lineup and reduce the variety of models we offer, unlike some competitors who have many options. We’ve adjusted our timelines to focus on segments where we can profit from EVs. Globally, we're concentrating on partnerships, as we find this to be the best approach. The supply chain and platforms are rapidly becoming standardized, making it difficult to differentiate based solely on those aspects. While electric architecture adds some complexity, we are equipped to manage it and have been collaborating with JMC and other brands on this front. In regions where electrification is crucial, we plan to partner as necessary and offer PHEVs and other solutions tailored to local regulations. I believe our strategy is solid, and I’m grateful for our ability to adapt quickly, allowing us to recognize shifts in the market ahead of our competitors and align our resources accordingly for the evolving landscape of pure EVs.

My second question is regarding the mitigating factors for tariffs based on what we've heard. Essentially, Ford and our OEMs are redesigning their vehicles and transitioning some standard features to optional in the new model year. From your internal analysis, how do you anticipate customers will respond to these changes?

Do you mean recontenting, or could you be more specific? I just want to answer your question the right way.

Yes, sure. With that, I mean, let's say, in model year 2025, you had a certain vehicle with a certain trim, which it had some standard content. From what we have heard is that the same vehicle in model year 2026 has some content that basically the customer will have to pay up for that same content that last year was standard.

Thank you for your question. Look, in the segments that we compete in: Bronco, F-150, or Super Duty and Explorer, we do very well in those segments. So we watch our competitors really carefully. We'll match them on specification. But we also know what customers want in our trim series. So Andrew, do you want to say anything about how we're changing our spec?

Well, we constantly look at our specs to customer wants, obviously, and that does change by segment, by vehicle line. We're also balancing the cost improvements that we're seeing across the vehicle lines as well. So we're using a lot of the vehicle off the data, a lot of customer utilization rates to help us make those informed decisions.

Your next question comes from Tom Narayan with RBC Capital Markets.

I'm aware you didn't provide segment guidance, but I'm curious about modeling. Looking at the EV business, we know the consumer credit is ending in September. This might lead to a stronger third quarter, but could negatively affect the fourth quarter. I'm wondering if this will result in lower EV sales now that the credit is disappearing. Does this create a net positive for EV earnings before interest and taxes since each car is still losing money? Or are there so many fixed costs that it would continue to be a challenge? I'm interested in your thoughts on this dynamic.

Yes. So as you get into that further in Q3 and Q4, if we were to pull back some of our U.S. EV production, most likely, you would be moving that into other areas. So maybe you'd be leaning a little bit more heavily into Europe, where the mix and the contribution margin is stronger, or moving into ICE products. So you could calculate that you could have some uplift there on a financial basis if that was to play out as you described.

Okay. And then we've been hearing from some of the European OEMs, some headwinds in the commercial vehicle side in Europe. I guess at a smaller piece of Pro, obviously, but just curious how you guys are managing that dynamic. I know in your prepared comments, you said you're gaining, I think, 3 points of share there at Pro in Europe, but how big of a headwind is that for you guys?

Well, we are very successful at the one-ton transit business as well as the pickup market in Europe. And we have a brand-new vehicle. Literally, it's brand new. And so that's doing really well, as is a brand-new Ranger. So we have this brand-new lineup. I don't know about the competitors and where they are in the age of their products, but it seems that Ford, our Pro business in Europe is very strong now based on our new V710, the one ton. And then there's another factor that's important on our financial performance. This is a first generation where we are building for other people. We have the Volkswagen pickup truck as well as their van off our platform. We're now starting to scale their platform, and that is really helping our cost base. And remember, our cost base in South Africa and Turkey are very low. So the other reason is we're not only increasing our performance because of the new products; we're also becoming more profitable on a margin basis because of our cost. And that's a good thing for us.

Your next question will come from Daniel Roeska with Bernstein SG.

Maybe, Jim, after the discussion on tariffs and the changing compliance regulations, if we take a step back, imagine tariffs stay in place, but you get a more streamlined emission standard in the U.S. So that, as you explained, enables a lower compliance costs and probably a better mix over time. What do you think are those two wash trade-off against each other? Or is that actually a meaningful positive tailwind if I kind of sum up the impact of medium-term tariff changes and medium-term emissions changes?

It's a great question. At this moment, it’s a bit challenging to predict the specifics. However, I would say the emissions benefit is quite significant for both Model e, as Sherry mentioned, and our Blue and Pro business, especially Blue, which has faced the greatest impact from the global shift to electrification. While that isn't the reason for our revised guidance, which is based on tangible cost improvements, if we were to consider the second half of this year and next year and what could potentially improve, the outcome of the emissions regulations could indeed be advantageous for Ford. The product mix of our Pro and Blue segments, aligned with what customers actually want, is likely to provide a financial benefit for us.

Yes, great. And maybe as a slide related follow-up, I'm going to ask you to take out the crystal ball to some degree. With each additional Paris deal that is trade deal that's coming in like Japan and Europe, would you agree that this kind of increases the likelihood that we will not return to a pre-2025 kind of policy landscape when it comes to global trade?

Can you explain a little bit more what you mean on the last part of that pre-2025?

Well, basically, a very low tariff rate for imports into the U.S. basically. And because the market has been discussing going back and forth about will they have to stay in place, will they not stay in place. And to me, it seems like if we're now cutting deals with Europe and Japan and likely South Korea, and then USMCA on top, I'm unsure whether the next administration would see any reason to change that again.

That is a really important question to answer. We increasingly see Europe, North America, and Asia developing into regional markets with aligned tariff rates. I believe this change is long-term as it's evident across various factors, not just tariffs, but also in electrification and CO2 requirements. Additionally, as Chinese OEMs expand globally and start localizing production outside China, they will choose their regions, and those regions will welcome them. I see this as a significant transformation. We were just discussing how everything seems to be fundamentally changing in the automotive industry, and this is one of the key elements. The USMCA negotiation is poised to have a considerable impact on our North American operations. The tariffs, especially those affecting Europe and Asia's imports to the U.S., appear to be long-term for us. Whether they are substantial enough to significantly alter our footprint right now is uncertain. Much will depend on the current administration's support for companies like Ford that are committed to U.S. production and their perspective on the $2 billion liability we have. We are engaging in very productive conversations with them, positioning ourselves as a quintessential American company. Depending on how things unfold, there’s a possibility we could gain a lasting advantage as an American firm. So, stay tuned.

Your next question comes from Edison Yu with Deutsche Bank.

First one, I wanted to ask about pricing. I think you called out some weakness on the commercial fleet side. Curious if you can elaborate a little more on that. And maybe just directionally, is that supposed to stay kind of a headwind through the rest of the year? Is that going to improve, become a smaller headwind? Some color there would be great.

Edison, it's Andrew. Good to hear it from you. Just a little more texture on the commercial side. I think what we're seeing in the pricing is the full-size pickup is remaining relatively strong, which is really good. The weakness that we've seen has actually been across the van business in the van segments. And there was a lot of competitive pressure that we saw coming out of the second half of last year and into the first part of this year. It seems to have stabilized, actually. So we're optimistic around that holding for the rest of the year, but it was mostly in the van segment.

I wanted to return to a point you made earlier about autonomy. You mentioned that there could be opportunities on the Ford Pro side in terms of providing service. I'm interested in what that might look like. Would it involve targeting specific parts for delivery to someone? And does this mean you're not considering developing an integrated autonomous vehicle?

It's early days. I mean, we're in the first inning of this rolling out. It is very exciting for me to be in the industry in 40 years and see all these autonomous robotaxis, but the technology is fascinating. But as far as making money off the business, which we have to bet on our capital as leaders of the company, we think that if these robotaxi fleets are large fleets, I'm not sure it's going to be a super profitable business, but someone is going to make money on owning those fleets and maintaining those fleets. This is a very congruous capability versus our service build-out for Pro. We have nothing to announce today, but this is quite intriguing for us as a company. We really feel like the fleet management opportunity is a big upside for Ford Pro. We're doing it digitally today. Part of that software that we sell that Andrew mentioned, that's growing at 24%, is fleet management software. It's very popular. Going into the physical fleet management is a different thing. It takes capital. It will require leasing and a lot of other more capital-intensive investments, so we have to be thoughtful about that. But we are very intrigued about these robotaxi fleets and what they can mean for Pro and our dealers over time. Again, nothing to announce today, but I think you've heard what we said pretty clearly.

Your final question will come from Colin Langan with Wells Fargo.

I just want to cover the guide. It implies an improvement from the first half into the second half. I think SAR would imply that flat tariffs are supposed to be about flat; what would drive that improvement in the second half?

Well, we would have some of our material cost items are coming in, in the second half. Also a lot of the work that we put into place on warranty, working with the dealers, and working on our time to repair; a lot of these things are also looking to be implemented in the back half as well. Also just some of the volume issues with Kentucky One shutting down in the past, so you had the idled period. So you're getting the now positive impact of not doing that and not having the destocking that we did in the first half.

You mentioned several times that the underlying guidance appears to have improved due to costs. It's somewhat surprising considering the record number of recalls year-to-date. Can you explain that? What actions are actually leading to costs that are better than what you expected back in January when you first provided guidance? It seems like the recall situation should be worse, right?

To clarify about recalls, it's important to understand that the number of recalls and the associated costs are not linked. Half of our recalls this year involve software. When we have a software recall, we can address it through an over-the-air update, which is only about 10% of the cost of fixing a mechanical issue. This situation does not operate like coverages, where there's a strong correlation to the number of actions or defects. Additionally, our manufacturing team is discovering significant efficiencies year over year, more than we anticipated. In our $1 billion breakdown, we have detailed data by function and group, extending down to individual plants in manufacturing. Bryce's team has been able to accelerate savings even in the logistics area related to manufacturing. Moreover, we have been more effective in collaborating with our suppliers to obtain redesigned or negotiated parts that perform better, which is encouraging. Lastly, we have promising pipelines for the upcoming year. Anything else to add, Kumar?

The coverages are improving as well.

So the cost of our defect is also decreasing.

So let's be clear. So recall costs, even though we've seen a lot of headlines, are actually not worse than you expected starting the year?

If you exclude that one big special item, for sure. Yes, the answer is yes, but excluding the special item.

This concludes the Ford Motor Company Second Quarter 2025 Earnings Conference Call. Thank you for your participation. You may now disconnect.