Earnings Call Transcript - F Q1 2025

Operator, Operator

Good day, everyone. My name is Layla, and I will be your conference operator today. At this time, I would like to welcome you to the Ford Motor Company First Quarter 2025 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, Chief Investor Relations Officer.

Lynn Antipas Tyson, Chief Investor Relations Officer

Thank you, Layla. Welcome to Ford Motor Company's first quarter 2025 earnings call. With me today are Jim Farley, President and CEO; Sherry House, CFO; and Kumar Galhotra, Chief Operating Officer. Joining us for Q&A will be John Lawler, Vice-Chair; Andrew Frick, President, Ford Blue and Model e and Interim Head of Ford Pro; Cathy O'Callaghan, CEO of Ford Credit; and Steve Croley, Chief Policy Officer and General Counsel. Today's discussion includes 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 want to call out two near-term IR engagements. May 28, John Lawler will participate in a fireside chat in New York with Daniel Roeska at the Bernstein Annual Strategic Decisions Conference. Sherry House will also attend. June 4th, Sherry House will participate in a fireside chat in New York with Joe Spak at the UBS Auto and Auto Tech Conference. Now, I'll turn the call over to Jim.

Jim Farley, President and CEO

Thanks, Lynn, and thanks to all of you for joining. I'm going to give you an update on the state of the business and on tariffs. Kumar is going to take you through our cost and quality progress as well as some of our mitigation for tariffs. And then Sherry is going to take you through the financial performance and guidance and hopefully, we'll have plenty of time for Q&A. Our underlying business continues to gain traction and perform well. We beat our original expectation for the quarter and before tariff-related impacts, we are on track and within our original full-year guidance range of $7 billion to $8.5 billion in EBIT. We had our best first quarter US pickup sales in over 20 years and we delivered sequential share growth in our home market. Additionally, we saw smooth execution of several major product launches in the quarter around the globe, and we continue to deliver progress against our cost and quality targets. On tariffs, Ford supports the administration's goal to strengthen the US economy by growing American manufacturing. We also support a level playing field globally for domestic and foreign OEMs. We appreciate the ongoing cooperation we've had with the administration. As America's largest auto manufacturer, our engagement with Washington is helping US policymakers better understand how their proposed policy changes would impact our industry and of course, our communities. Last year, we assembled over 300,000 more vehicles in the US than our closest competitor. That includes 100% of all our full-size trucks. While some OEMs have open capacity in the US that will partially match our footprint advantage, they have to absorb higher costs and invest capital, and that will take time. It's not as simple as just assembling more vehicles in the US. OEMs must also balance customer affordability, which means the ability to import parts tariff-free. Based on what we know now, our expectations of how certain details will resolve around tariffs, we've estimated the gross impact of tariffs for full year total company EBIT of $2.5 billion and a net impact of $1.5 billion. It's still too early to fully understand our competitors' responses to these tariffs. It's also early to gauge the related market dynamics, including the potential industry-wide supply-chain disruptions and the impact of Ford's domestic manufacturing advantages. And as a result, we've decided to suspend our guidance. It's clear, however, that in this new environment in which automakers with the largest US footprint will have a big advantage. And boy, is that true for Ford. It puts us in the pole position plus we have the largest value unlock even beyond that due to our improving cost and quality opportunities. Kumar?

Kumar Galhotra, Chief Operating Officer

Thank you, Jim. Before I walk everyone through how we are managing the business during this evolving policy landscape, I want to quickly highlight the progress we're making on cost and quality. Our industrial platform continues to deliver progress against our targets and we remain on track to deliver $1 billion in net cost reductions this year, excluding the impact of changes in tariff policy. We're also closing our competitive cost gap and efficiently leveraging our US footprint as a competitive advantage. We're improving our production stability and we're working to strengthen our supply base. We are achieving all this by shifting our focus to the key process inputs, which in turn deliver the desired outputs and those desired outputs, of course, are lower cost and better quality. Let me give you a few examples of what I mean by inputs in these processes. For example, we are doing thorough readiness assessments of every workstation in our assembly plants ahead of every launch. We are building a continuous pipeline of cost and quality improvement ideas. So, not only are we executing this quarter, we have a very clear pipeline for the next quarter and the quarter after that. We're doing rigorous in-plant audits to prevent defects from reaching our customers. We have created a comprehensive system of leading metrics that provide us early warnings if any of these outputs are at risk. So here are the results. We're on track to deliver year-over-year warranty savings. The warranty spikes during launch are now at industry-leading levels. We are on track to deliver greater than 10% improvement in repairs per 1,000, both for zero months in service and three months in service for 25 vehicles. Ford and Lincoln were the most improved brands in J.D. Power’s 2025 US Vehicle Dependability Study. During our launches in the first quarter, we lost zero vehicles versus our launch acceleration curves. We deployed 9.5 million OTAs in the first quarter to address customer concerns. We're not just improving cost and quality, the team is also in the trenches, taking actions to minimize the impact of tariffs on our business. In fact, their actions lowered the potential first quarter financial impact by nearly 35%. Here are some of the key actions we took. Vehicles shipped to Canada from Mexico via the US are now transported on bonded carriers, so they aren't subject to US tariffs. We've done the same for parts that merely pass through the United States. We are assessing where there are near-term resourcing actions to increase US content in our vehicles. We have stopped exporting vehicles to China, but we do continue to leverage China as a vehicle export hub to regions like ASEAN, Australia, South America, and others where trade relations remain favorable. Looking ahead, even though nearly 80% of our parts that we use in the US are USMCA compliant, we are looking for opportunities where it makes sense to develop local supply chains. Relative to adding manufacturing capacity in the US, for Ford, this is a continuation, not a course correction. Since 2020, we have invested $50 billion in manufacturing capacity and we have a lot of investments in-flight, including manufacturing and battery capacity in Tennessee, battery capacity in Kentucky and Michigan, and manufacturing capacity in Ohio. Thanks. Sherry, over to you.

Sherry House, CFO

Thank you, Kumar, and thank you to the team members supporting our first quarter product launches as well as those helping us mitigate the financial impact of tariffs. We are transforming Ford into a higher growth, higher margin, more capital efficient and more durable business. This was evident in our first quarter results. We delivered $1 billion in EBIT, exceeding our expectation of roughly breakeven for the quarter, driven by the team's continued progress on cost and strong net pricing in North America. When excluding the nearly $200 million impact of tariffs, this was our third consecutive quarter of year-over-year cost improvement. You'll recall that during the first quarter, we had planned downtime at several plants, most notably Kentucky Truck plant to support product launches in the rebalancing of US dealer inventory. As expected, this resulted in lower wholesales, which were down 7% and revenue of $41 billion, which was down 5%. The product launches were successful. And in March, we launched new versions of the Expedition and Navigator in North America and an all-electric version of Puma in Europe. We also began production of the new Ranger plug-in hybrid EV, which goes on sale in Europe and Australia during the second quarter. Now, on to a few highlights from the segments. Ford Pro continues to be a real competitive advantage and Ford Pro showed its resilience by delivering a solid quarter despite the planned downtime at Kentucky Truck plant and a normalization in industry pricing in more commoditized areas like delivery vans and daily rental. Demand for key products like Super Duty chassis cabs and transit wagons remains strong. In Europe, Pro grew its commercial brand leadership on the strength of transit custom and Ranger. And in North America, Pro is far and away the segment leader with over 40% share of the US Class 1 to Class 7 truck and van market. Pro continues to serve its customers in the way that they want to be served. In addition to adding new service elite base, mobile vans are driving growth in customer paid mobile repair orders, which are now 7% of all customer paid repair orders. On the software side, Pro's paid subscriptions, which deliver better than 50% gross margin, rose to 675,000, up 20% from a year ago, with outsized growth in higher value services like fleet telematics, driving 40% growth in average revenue per unit. Ford Model e remains focused on improving gross margin and exercising capital discipline as our battery investments scale and we deliver next-generation products that will generate profitable future growth. Model e continues to scale, and it more than doubled its first-quarter wholesale volumes, driven by the recent launches of Explorer, Capri, and Puma Gen-E in Europe. Model e's US retail sales grew 15% in the quarter, enabled in part by the success of the US Ford Power Promise campaign, which provides customers a home charger in standard installation. The campaign is currently seen an attach rate of 34%. Given the campaign's success, it is now being offered in Canada and Europe. Ford Blue earned a modest profit, reflecting the expected volume decline and adverse exchange due to the strengthening of the US dollar that impacted key markets like Canada and Australia, offset partially by higher net pricing in North America. Blue continues to benefit from disciplined revenue management across the portfolio, along with cost reduction work that Kumar highlighted. Blue's international operations were once again collectively profitable. Iconic nameplates such as F-Series and Bronco continue to lead their respective segments and Bronco sales grew 35%. Blue continues to see growing customer demand for its hybrids. In fact, our hybrid mix of global sales increased 250 basis points. Additionally, based on early sales data, the newly launched Expedition and Navigator have average transaction prices that are 18% and 23% higher than the outgoing model, respectively, and they are turning on dealer lots in less than nine days. Ford Credit delivered another solid quarter with EBT up significantly, reflecting its high-quality book of business, higher financing margin, and higher net receivables. Also in the quarter, Ford Credit paid a $200 million distribution to the automotive company. First quarter auction values increased 3% year-over-year and 4% sequentially, reflecting low used car availability. Ford Credit also continues to grow its active commercial lines of credit, making it a strategic asset for our Ford Pro customers. Now, on to cash flow and balance sheet. Free cash flow was a use of $1.5 billion, more than explained by unfavorable timing differences, net spending, and changes in working capital. Our balance sheet is strong with over $27 billion in cash and over $45 billion in liquidity as of March 31st, and in April, we renewed our $18 billion corporate credit facilities for another year. As we have said repeatedly, strong liquidity provides us with the flexibility to manage in this very dynamic environment, the capacity to make consistent shareholder distributions, and the optionality to invest in higher-return growth opportunities that truly unlock value. To that end, consistent with our commitment to return 40% to 50% of trailing free cash flow to shareholders, last week, we declared a regular second-quarter dividend of $0.15 per share, payable on June 2nd to shareholders of record on May 12. So, let's turn to our 2025 outlook. I am pleased with the progress the team has made on cost and quality. You saw green shoots of this in the first quarter, and we are on track to deliver $1 billion in net cost improvement, excluding tariffs this year. Excluding the impact of tariffs, we are within our previous EBIT guidance range of $7 billion to $8.5 billion. Based on what the company knows now and our expectation of how certain details and changes will be resolved related to tariffs, we estimate a gross adverse EBIT impact of $2.5 billion and a net adverse EBIT impact of about $1.5 billion for full year 2025. Given material tariff-related near-term risks and the potential range of outcomes, we are suspending guidance for full year 2025. These near-term risks include, among other things, industry-wide supply-chain disruption impacting production, future or increased tariffs in the US, changes in the implementation of tariffs, including tariff offsets, retaliatory tariffs, and other restrictions by other governments, and the potential related market acts, and finally, policy uncertainties associated with tax and emissions policy. We will provide an update on guidance during the Q2 earnings call. Before we go to Q&A, let me wrap with this. Our underlying performance, excluding tariffs, is in line with our original targets. Our US footprint is a competitive advantage as the industry navigates the impact of tariffs, and our strong balance sheet provides flexibility to continue to invest in profitable growth while managing industry dynamics. Thank you. Back to you, operator.

Operator, Operator

Your first question comes from Emmanuel Rosner with Wolfe Research. Please unmute and go ahead with your question.

Emmanuel Rosner, Analyst

Thank you for your insights on tariffs. I would like to know more about the $2.5 million in gross tariff headwinds. Can you break it down by categories such as how much is from complete vehicles, parts, or other sources? Additionally, does the 3.75% offset announced by the White House last week factor into the gross headwinds? Lastly, regarding the net impacts, what are the offsets?

Sherry House, CFO

Yeah, sure. So the $2.5 billion in gross costs is based on what we know now and our expectations of how certain details and changes will be resolved relative to tariffs. For us, we're estimating that it's roughly half parts and half imported vehicles. We have assumed that we would get credit for the US content in our vehicles that are going to be going over the border. So that is already assumed in this $2.5 billion. On the parts side, this is also inclusive of steel and aluminum. Now for steel and aluminum, that isn't just tariffs because in fact, 85% of our steel is already purchased domestically in the US and all of our sheet aluminum is purchased in the US. However, we do believe that there are pricing impacts that we will encounter. We have over 50% locked and hedged, but there are impacts, and that is included in our parts number. Additionally, there are tariffs on some parts that we import to China. So we have certain powertrains that go into China today. So this is what is comprising the $2.5 billion. And I think you had a question regarding the offsets and the offsets, the 3.75% is included in what we have come to with our $2.5 billion gross number. And our net number is...

Emmanuel Rosner, Analyst

That is great color. Go ahead.

Sherry House, CFO

And our net adverse EBIT impact is estimated at about $1.5 billion for the full year 2025, and that includes about $1 billion of offsetting recovery actions.

Emmanuel Rosner, Analyst

I was hoping you could give us a little more color on some of these offset actions. Is it price, is it costs? What's essentially assumed in this offset?

Sherry House, CFO

So the largest element of the offset is market equation optimization and I'll let you know what I mean by that. But we do have some cost mitigation examples in there as well, such as we said in our prepared remarks, vehicles shipped to Canada from Mexico via the US are now transported on bonded carriers, so they aren't subject to US tariffs, and we're doing similar actions on parts as well. Now, in the market equation optimization to come up with the $1 billion, we ran a range of market factor scenarios, segment-by-segment, channel-by-channel, vehicle-by-vehicle, inclusive of a competitive landscape. We varied inputs such as pricing, such as volumes, such as SAR and we considered that there are certain segments, for instance, where we have 100% of production in the US like our full-size pickup trucks, where competitors are much less than that. So we've taken all of these competitive dynamics as well as these inputs into consideration and have ran a number of permutations. When we triangulate on that, it comes up with this $1 billion, inclusive of some of the cost items that I mentioned.

Emmanuel Rosner, Analyst

Great. And then if I could have a follow-up on guidance, so you indicated that Ford would have been on-track excluding tariff for the initial EBIT guidance. Now obviously, Q1 was a stronger than expected performance to the tune of about $1 billion versus your previous expectations. Are there any negative offsets elsewhere that would have left you where your initial guidance is? Or are you just saying that you would have landed within the range?

Jim Farley, President and CEO

Yeah, it's a very solid start, Emmanuel. Especially our warranty, our negotiated parts, purchase prices, as well as the build material simplification. And frankly, very strong pricing for our new vehicles. We have so much more in front of us with the year going on. We're not going to give you any specifics within the range, but the team is off to a really great start. Obviously, our focus is on that execution for a fourth quarter in a row of year-over-year cost improvements and the results will speak for themselves.

Emmanuel Rosner, Analyst

Great. Thank you.

Dan Levy, Analyst

Hi, good evening. Thank you for taking the questions. I wanted to start first with a question on volume and inventory. If you could maybe give us a sense of how you expect volume to play out in the coming months, including volumes, your own volumes given the different dynamics? And previously, you gave us some guidance on inventory that you were going to get through your destocking by the middle of the year. Are you looking at your inventory any differently now that it's considerably more valuable than what it was before given the tariff dynamics?

Jim Farley, President and CEO

Yeah. Thank you, Dan. We've seen obviously a very strong industry performance through April and the first half is running over $17.5 million SAR right now. So we are running a lot of scenarios on price and volume impacts. In our assumptions, we do expect industry pricing related to tariffs at about 1% to 1.5% in the second half, with full-year pricing flat. With that, we now expect the industry SAR to run about 0.5 million units lower than our original plan during the second half of the year, around 15.5 million units. And the important thing around that is timing. If net pricing changes come from reduced incentive spend, it could happen more immediately. In other scenarios, it comes from topline pricing, which would be a little later this summer when inventory hits dealerships. And we're likely to see that probably happen around the June time period. We're measured in our approach to pricing for tariffs and really inherent in your question. We believe our footprint advantage offers us added flexibility to the changing market dynamic. Our current inventory levels allow us to be more opportunistic in the market. And if we find an opportunity to go for share, we will if it's profitable. We left April with a 56-day supply and dealer stock in a 66 gross supply. We're looking, as Sherry mentioned earlier, we are looking at this vehicle line by vehicle line, segment by segment, taking into account not only tariffs, but also stock levels, macroeconomic environment, and competitive pricing.

Dan Levy, Analyst

Thank you. As a follow-up, Jim, I'd like to ask about your efforts in software-defined vehicles. Specifically, there was a media report indicating that FNV4, your networked architecture, is being discontinued. Could you confirm if that is correct? Are the plans to develop your own technology or partner with someone? How should we think about the resource allocation for this, and what potential savings could we expect, considering a lot of this is impacting Model e?

Jim Farley, President and CEO

Well, thank you for your question. Our strategy hasn't changed. It's a very significant save for capital efficiency. We simply merged our two forward zone electric architectures into one. This is very important for the company because our software is going faster than we expected and the advanced electric architectures allow us to deliver software to the vehicles and customers in a more efficient way. We were very ambitious with our advanced electric architectures applying to ICE vehicles, not just advanced electric architectures for EV. So we brought that all together in FNV3. It's a great move for the company. Our Zone electric architecture is now going to be delivered on our CE1 of Skunkworks product. I think there's a major learning for the company that we could do it at a lower price point than FNV4 as well. This save also has a big impact on the cost of our future products. So all of our products will be more affordable now. In fact, we're targeting our next-generation products to be cheaper than our current outgoing products and a big factor of that is FNV3 versus FNV4. This will actually enhance our integrated services software revenue and profitability, this move.

Dan Levy, Analyst

Great. Thank you.

Adam Jonas, Analyst

Hey everybody. So Jim or Sherry, whoever wants to take this. In your estimation of the $1.5 billion net tariff headwind, you referred to potential supply-chain disruption, you didn't quantify it, but you referred to potential as a part of the reason why you also withdrew the guidance. I'm just asking very bluntly, are you seeing any signs of distress or interruption in the supply chain following the volatility and the implementation of the import tariffs to date? Just curious, like, as even after the end of the quarter, is it still all clear or are you seeing some disruption? I have a follow up.

Kumar Galhotra, Chief Operating Officer

Yeah, Adam, this is Kumar. From a supply chain perspective, there has been a lot of volatility in tariff policy, which could lead to disruptions. For instance, importing rare earth materials from China has become quite complicated recently, impacting not just us but the entire industry. It really wouldn't take much to cause some disruption in our production. Additionally, there are uncertainties surrounding tax and emission policies that could also lead to interruptions. Moreover, if we face a disruption while one of our competitors does not, or vice versa, that could definitely affect our volume and pricing.

Adam Jonas, Analyst

Thanks, Kumar. And just as a follow-up, in previous calls, when Ford has talked about its AI strategy, it included an emphasis on automation and robotics. I'm curious how your thinking on automation has evolved given the pressures to onshore more manufacturing and specifically, has your team explored humanoid robotics with your tech partners as many of your more tech-forward automotive competition both in the US and in China are doing? Thanks.

Kumar Galhotra, Chief Operating Officer

So, Adam, it's Kumar again. Regarding humanoid robotics, let me address that part of your question first. We're not working on that directly, but in our manufacturing system, we are collaborating with several partners on specific projects that utilize AI and can lead to significant cost savings. We're integrating AI into our product development system. For instance, we often use surrogate parts and then manually design many of those parts with AI, automating the design process to reduce the time required in product development. Let me give you an example. We have a Boston Dynamics robot at our plant in Valencia, Spain, where this experiment began. It has sensors that can detect visual, auditory, and tactile information, as well as identify oil leaks. It moves around the plant all day and has transformed our preventive maintenance approach, as it can detect issues well before a person could. We are implementing processes like this across quality, manufacturing, and product development using AI, which is enhancing our efficiency in all these areas.

Adam Jonas, Analyst

Thanks, Kumar. Maybe Lynn will let you use the dog and see if it gets along with her dogs. We can talk about that offline. Thanks.

Operator, Operator

Your next question will come from the line of Joseph Spak with UBS. Please unmute and ask your question.

Joseph Spak, Analyst

Thanks. Good afternoon. Sherry, you did mention that it looks like you'll be able to give guidance again with second quarter earnings. But you also started off by saying there's a lot of near-term uncertainty as it relates to tariffs, the economy, SAR, pricing, et cetera. So what really are you looking for here over the coming months to give you confidence to be able to put the guidance and outlook back in? Like, what do you expect to know that you don't know today?

Sherry House, CFO

I want to clarify my comments regarding the second quarter. We will provide an update at that time with the best information available then. I want to set the expectation that we will be discussing this again. There are several issues we are addressing, particularly the policy matters we previously mentioned, the clarification of their impacts, and the uncertainty surrounding tax and emission policies, as well as how customers will respond. This will be crucial for us as we enter the second half of the year and observe their reactions to potential price increases resulting from the tariff costs that both we and our competitors are facing. Additionally, we need to consider the competitive dynamics and how our competitors will respond. These are the critical factors.

Joseph Spak, Analyst

Thank you, and I apologize for the misunderstanding. Jim, I recognize that we have discussed some ongoing concerns regarding tariffs and trade. However, it appears that we have moved past much of the uncertainty for this year. There are still other regulations and policies, particularly regarding emissions, that seem to be addressed.

Jim Farley, President and CEO

Yes.

Joseph Spak, Analyst

So I'm wondering how you're viewing that as it relates to some of your powertrain investment, like what does it mean for the next-gen project and modeling more broadly, like you've clearly taken a lot of costs out of e and done a lot of work on the next-gen, but ultimately, you need volume. So how are you viewing that as part of the strategy?

Jim Farley, President and CEO

We are looking at the next phase. Tariffs are still unfolding, and we need to consider their retaliatory impacts, with Canada being a good example where we have made significant progress. The production tax credit and the Inflation Reduction Act are crucial for upcoming tax legislation in the U.S., and I believe we are close to a resolution. We have invested considerable effort in highlighting the significance of this for the Midwest states where manufacturing is being directed. Additionally, the consumer tax credits for electric vehicle purchases under the IRA will be substantial, but will need to align with the 2027 CO2 requirements set by the EPA and the California waiver, which could create some balance. While we cannot predict the exact outcome at this moment, this is another critical factor aside from tariffs. There will be a lot of global policy around emissions that will affect a global company like Ford. However, we are optimistic about the engagement we have with Ford, lawmakers, and the administration. They want Ford, a company that has invested in America, to succeed in this evolving automotive landscape, which increasingly operates at a regional level. As long as we continue to engage effectively with key decision-makers globally, I am confident that Ford will be positioned well against its competitors and for our customers. The impact of the production tax credit on us and the industry is particularly significant.

Operator, Operator

Our next question will come from the line of John Murphy with Bank of America. Please go ahead.

John Murphy, Analyst

Good evening, everybody. My question is about the indirect impact of tariffs and the potential for market share growth. There's a significant increase in demand as construction rises in the US, particularly with the reshoring of products like the F-150 and Super Duty, along with the increase in used vehicle pricing that benefits FMCC. Could you take a few minutes to discuss these potentials? They might not be fully considered in the net impact analysis, as your focus seems to be on the direct calculations rather than the broader implications, which could be substantial for you.

Jim Farley, President and CEO

The speed of our progress will always depend on our competitors, as Sherry mentioned. We've thoroughly analyzed the competition in every segment, looking at aspects like their brand names, production locations, tariff exposures, and past pricing strategies. We also considered when they would adjust their pricing and the timing of their inventory availability at dealerships, given their unique supply chains. We are confident that we've made a reasonable estimate with the $1.5 billion net, but it's clear that Ford, due to our manufacturing capabilities, has unique opportunities that few can match. While we don't want to rush, we currently have our best product lineup ever in North America. The F-150 and Super Duty models are newly updated, and we also have completely new full-size SUVs. Many competitors import into these segments, but we have a new Explorer as well, and our utilities are also newly designed and competitively positioned. Our inventory is healthy, which is why we didn't hesitate to launch our new employee pricing promotion immediately after recent events. This initiative has significantly reduced our dealership stock, and as Andrew pointed out, we're gaining market share. In fact, our market share increase in April exceeded that of March. We feel a positive momentum, and the employee pricing message resonates well with customers. You can expect Ford to aggressively pursue market opportunities. This strategy provides us with flexibility for potential upsides. For now, we are focusing on thorough analysis and a considered approach, and we are certainly investing in marketing to seize these opportunities.

John Murphy, Analyst

And then just a quick second question on pricing. I think you guys were saying net price for the industry up 1% to 1.5% in the second half of the year and that might dent demand down to 15.5%. That seems like a pretty high price and elasticity of demand, particularly given all the pent-up demand that's out there. So I'm just curious if I heard that correctly, and how you guys are coming up with that number, because that sounds pretty punitive as well.

Andrew Frick, President, Ford Blue and Model e

Thanks, John. It's Andrew. I want to follow up on my earlier statement. We're examining the run rates with the assumption of 1% to 1.5% and a flat full-year pricing. We're also considering some payback scenario based on what we've observed in the first half of the year. This is included in our projection of the run-rate against 15.5%. Our modeling has been done segment-by-segment, as Jim mentioned, and it also reflects how each segment responds to the pricing elasticity we've assumed.

John Murphy, Analyst

Is that's a pure light vehicle SAR estimate, not including medium and heavy, is that correct?

Andrew Frick, President, Ford Blue and Model e

Yes, that's correct.

John Murphy, Analyst

Okay. Thanks very much.

Mark Delaney, Analyst

Yes, good afternoon. Thanks very much for taking my questions. I'm hoping to better understand the linearity of the $1.5 billion net tariff headwind over the balance of this year and what percent mitigation you think you might be exiting the year? Because I assume as you have more time to implement some of these offsets, the level of headwinds may moderate as the year goes on. And I guess as you think longer-term, if there are not policy changes, do you think Ford can fully mitigate the tariff costs that it's seen with supply chain cost and/or price changes?

Sherry House, CFO

Yeah, thank you for your question. I would say there isn't really any linearity to speak to with respect to the tariff costs and our offsets. The offsets we're going to continue to manage as we go. We're going to be looking at the market factor scenarios that I mentioned, looking at SAR pricing volume, and we'll be adjusting on a real-time basis for that as we go.

Andrew Frick, President, Ford Blue and Model e

We continue to experience growth in our software and services business. We are on track to see an increase in the contribution of software and services to EBIT by the end of the year, supported by the addition of many physical services. We have the largest commercial network and are committed to investing in its expansion. We've been enhancing capacity in both our dealer network and mobile service network, with 66 operational Ford Pro Elite centers nationwide. Our mobile service units, totaling 4,600, are the largest in the industry, and this segment is also growing. We're observing a higher attach rate for service and parts among customers using our Ford Pro Intelligence solutions. Regarding the software service side, paid subscriptions have increased by 20% year-over-year, now reaching a total of 625,000 users. Telematics subscriptions rose by 80%, contributing significantly to a 40% increase in ARPU, as mentioned by Sherry. This trend is evident across our entire customer base, including small and medium businesses, as well as larger, more sophisticated fleets that are also increasing their utilization of our services.

Mark Delaney, Analyst

Our final question will come from Ryan Brinkman with JPMorgan. Please go ahead.

Ryan Brinkman, Analyst

Hi, thanks for taking my question. There was a reference to Ford Credit earlier in relation to tariffs, but I'd be interested to hear more about how Cathy and the team might be thinking about how the various potential impacts of tariffs on that side of the business land, including on origination volume of SAR declines on higher prices like you've insinuated. But also on the positive side with regard to lease residual or collateral values, maybe even default rate if consumers have more equity in their vehicles. How do you think these or other factors might play out? And are you looking at any scenarios where the net of them could prove positive for the credit side of the business, providing some offset to the headwind on the automotive side?

Sherry House, CFO

Thank you for the question. We've noticed higher auction prices, which reflect the industry's overall low supply of used vehicles. With the rising new vehicle prices due to tariffs, we anticipate that auction values may be supported in the short term. However, a potential economic slowdown in the latter half of the year could temper that support. Therefore, we see both positive and negative aspects affecting overall auction values. Regarding consumer health, as Jim mentioned, we've observed an increase in applications for longer-term financing. While a lower sales rate could lead to fewer overall contracts, we currently view the situation as relatively balanced. We will need to monitor the economic conditions in the second half of the year to gain clearer insights.

Ryan Brinkman, Analyst

Very helpful. Thanks. And then just lastly, is there an update you can provide on your business in Europe, including what traction some of the Model e launches there might be having relative to maybe rising competition from Chinese automakers or falling competition from Tesla? What progress you might be seeing on the restructuring program that you announced last fall? I realize you no longer report profit by geography other than in China, but where would you say you are in terms of the path to getting to where you need to be or where you would like to be in terms of profitability in that part of the world?

Andrew Frick, President, Ford Blue and Model e

We'll start with the reaction to the vehicle lines that you had talked about. We launched some of our electric vehicles this past year. We just recently launched the Puma Electric vehicle, which is off to a really good start. Our run-rate of our commercial business as a whole in Europe is really strong. In fact, through the first-quarter, we've increased our share by over 2.5 points. So as the leading commercial brand, we continue to perform very well there. We have a lot of flexibility in the market with ICE, hybrid, plug-in hybrid, and electric across our lineup, which allows us to really react to the market that's going on over there. In terms of the overall business itself, it's running at a better rate. We've seen an increase. We have some headwinds in some of the industry, although we've offset with share. We also had some just general exchange issues in the market over there.

Operator, Operator

This concludes the Ford Motor Company first quarter 2025 earnings conference call. Thank you for your participation. You may now disconnect.