The conference operator, Gary, welcomes participants to the Ford Motor Company Second Quarter 2024 Earnings Conference Call. Lynn Antipas Tyson, Executive Director of Investor Relations, introduces Jim Farley, President and CEO, and John Lawler, Vice Chair and Chief Financial Officer. Cathy O'Callaghan, CEO of Ford Credit, will also be joining for the Q&A portion. The discussion will include some non-GAAP references and forward-looking statements. Jim Farley thanks the global team for their hard work in remaking Ford into a high-margin, high-growth, and more capital-efficient business. He also thanks investors for their support and announces that the Ford+ plan is expected to break free from the constraints that have affected auto valuations for a long time.

The company has undergone significant changes in the past three years, with the creation of Ford Pro, Blue, and Model e leading to increased transparency, accountability, and capital allocation. The Ford Pro business is performing well and expected to generate $70 billion in revenue this year, with plans for further profitable growth. The company has also turned its international operations from losses to profits and positive cash flow, and has improved its product portfolio with iconic and passion vehicles. Ford is a leader in the internal combustion market and ranks highly in EVs and hybrids. There is also a focus on software-defined vehicles and digital experiences, which will bring significant operating leverage. The Ford+ plan is on track, with reaffirmed guidance for adjusted EBIT and increased outlook for adjusted free cash flow. The company's EV landscape, software technology, Ford Pro business, and quality are also important factors for investors.

Ford has been vocal about the importance of electric vehicles and believes that about 50% of customers would be better served by buying an EV due to lower costs. However, there are misconceptions about EVs that need to be addressed. Ford has learned from their experience as the number two EV brand in the U.S. and is now more disciplined and transparent about the costs of launching EVs. They see China and Tesla as cost benchmarks and anticipate more pricing pressures, consolidation, and partnerships in the industry. They also see a divergence in adoption of electrification between commercial and retail customers.

Ford is seeing success with their EV Pro vehicles, as they are being used more intensely and have a positive contribution margin. They have also learned that smaller, more affordable vehicles are the way to go for EVs in volume, as larger vehicles with bigger batteries put pressure on margins. Compliance is also a factor, as CO2 credits may be needed for fleet flexibility. The success criteria for EVs includes having a mix of fully and partially electric solutions, a compelling product roadmap, and flexible manufacturing. Ford's hybrid business is also doing well, with a 40% growth rate and a focus on hybrid trucks like the F-150 with Pro Power onboard, which provides power on the go for both commercial and retail customers. This was especially important during extreme weather events like in Texas.

The second success factor for Chinese OEMs and Tesla is affordability for EVs. This is achieved through a super-efficient platform and focusing on smaller vehicles priced under $40,000 or even $30,000. This fits the duty cycle of an EV and allows for leveraging the consumer tax credit in the U.S. Additionally, larger EVs require breakthroughs in cost efficiency, smarter segment choices, partnerships, and technology pathways. The EV journey has been humbling but has led to improvements in the company's overall fitness, including in their ICE business. The company is incorporating these learnings into their next generation of EVs launching soon.

Ford is leading the way in software technology and services for vehicles, with experience in updating powertrains, braking, and connectivity. They have a diverse portfolio and their vehicles are like general-purpose computers, capable of delivering AI and customized experiences. Ford is the top-ranked OEM for OTA capability in North America, and their Mach-E is evidence of their success in improving vehicle performance. Their vision is to create a powerful, connected robot-like vehicle that offers unique experiences, such as safety and security, to drive profitability and customer loyalty.

The Lincoln Digital experience with the Phoenix system has been successful in driving sales for the Nautilus, with a 48% increase in sales and a younger customer base. BlueCruise and ADAS technology has also been successful, with 415,000 enabled vehicles on the road and 213 million miles of hands-free driving. Ford's software technology and services have seen significant growth, with a 40% increase in paid subscriptions and a target of $1 billion in revenue next year. The foundation of Ford Pro is their robust lineup of ICE, hybrid, and EV vehicles, which have resilient revenue streams and a diverse customer range.

Ford Pro dominates in small and medium business, including tradesmen, and also has large customers such as state, local, and national governments. Their rental services are also profitable. The company is focusing on expanding beyond just vehicles, with their Pro Power Intelligence telematics offering. This includes real-time driver coaching for safety and vehicle controls to prevent theft and unauthorized use. Ford Pro has seen significant growth in paid subscriptions for their telematics services. They also have a big opportunity to grow their physical service business, which currently only makes up 24% of their after-sales revenue.

Bank of America estimates that the profit pool for maintenance, repair, and parts for vehicles outside of Ford's dealer network is $135 billion, which is 2.5 times the profit from vehicle sales and financing. Ford Pro has the largest physical and mobile service network in North America, and is expanding it further with Pro Elite centers and mobile service units. This will contribute to 20% of their EBIT by 2026. Ford has also improved in quality, jumping 14 points in the latest J.D. Power's Initial Quality survey and the Bronco Sport is named the best small utility in initial quality.

The company expects to see benefits in the future from their initial quality launch, but has seen an increase in warranty costs due to new technologies and inflation. They are confident in their strategy and have a strong team in place. They plan to prove their EV strategy and profitability on smaller vehicles. The company is focused on building a high-growth, high-margin, and more durable Ford.

In this paragraph, the speaker discusses their efforts to transform Ford into a more successful and profitable company. They highlight the strong performance of their automotive business and their focus on generating free cash flow. The quarter saw an increase in revenue and wholesale, driven by a strong product portfolio. However, higher costs, including warranty and manufacturing, offset some of this growth. The company remains on track to deliver cost efficiencies and is working to mitigate emerging headwinds. The speaker expresses confidence in the company's current state and attributes their success to their differentiated and strong global product lineup.

The company is making progress in improving their industrial system and shedding old behaviors. They are on track to meet their full year guidance and generating stronger cash flow. The Ford+ plan is working, as evidenced by their $3.2 billion adjusted free cash flow in the quarter and $2.8 billion in the first half. The company's balance sheet remains strong with a significant amount of cash and liquidity. They have declared a third quarter dividend and are confident in their business. The customer focus segment, specifically Ford Pro, has consistently delivered revenue growth and a healthy margin. Ford Model e, however, experienced a loss due to industry pricing pressures and wholesale decline, but cost savings helped mitigate the impact.

Ford has seen improvements in their profit outlook for 2025 due to cost reductions, increased revenue, and strong sales in their hybrid vehicles. However, their EBIT and margin were down due to higher warranty costs. Ford Credit also saw a slight decrease in EBT, but their exposure to EV residual risk is low. The company expects their adjusted EBIT to be between $10 billion to $12 billion and has increased their adjusted free cash flow guidance to $7.5 billion to $8.5 billion. They are also keeping their CapEx target range of $8 billion to $9 billion.

In this paragraph, the company outlines its outlook for the year, which includes a flat to slightly higher SAAR in the U.S. and Europe. They anticipate customer demand for their new Super Duty vehicle to contribute to better market factors. However, they also expect lower industry pricing and increased costs for things like warranty reserves and repair costs. The company expects their Ford Pro segment to continue to be strong, with an increased EBIT range, but they anticipate losses for their Model e vehicle due to pricing pressure and investments. They also expect their Ford Blue segment to have a balanced market equation and higher warranty costs. Overall, the company is focused on their Ford+ plan and driving improvements in quality and cost. They will take questions from analysts at the end of their presentation.

Adam Jonas asks Jim Farley about the stock market's response to Ford's performance and stock value. He questions why the Board refuses to authorize a share buyback if Farley believes the stock is undervalued. Farley explains that there are many exciting opportunities for investment within Ford, including the non-vehicle activities and the high-profit potential of Ford Pro. He mentions the potential for growth in Pro through physical services, but acknowledges that it requires hard work and resources.

The speaker discusses the company's investments in electrical architecture and their potential for increasing revenue over time. They have made partnerships with companies like CATL in China to localize LFP cells in North America and are focused on developing unique and critical components for their EV strategy.

The company believes that having the know-how for small electric vehicles is crucial for their profitability. They have learned from their experience with other companies that this knowledge applies to all of their vehicles, not just EVs. They have also found that many Chinese players have affordable batteries but lack efficient designs for other EV components. The company's team, now expanded, has developed breakthrough EV components that are both better and cheaper. The company is considering partnerships for larger vehicles as they have an inverted cost structure and can be more capital-efficient.

Jim Farley responds to a question about the persistent warranty issues at Ford, stating that the J.D. Power IQS is evidence of progress and that it takes time to reduce warranty issues. He also mentions that Ford does not release vehicles until they are satisfied with the quality, causing lumpy quarters, and that the root causes of the issues could have been caught at launch. He also notes that the company has put a lot of new technology in their vehicles, which can be difficult for dealers to diagnose.

The speaker discusses the impact of quality issues on warranty reserves and the efforts being made to improve quality and reduce costs. They emphasize the importance of not cutting costs at the expense of customers and the need to turn quality issues into positive experiences. The speaker also addresses the issue of structural costs and the need to improve returns in the long term.

John Lawler explains that traditional automakers are investing in research and development to compete with Tesla and Chinese OEMs in the EV market. He believes that the key to success lies in fundamentally changing the development process, rather than just forming partnerships. The Skunkworks team, with its unique talent and agile waterfall systems integrated design process, is focused on achieving efficiency and driving down costs. This approach has shown promise in surpassing even Chinese competitors.

Ford's CEO and COO discuss the company's partnership strategy for electric vehicles (EVs). They are highly ambitious in this area and have learned from past partnerships, but they will not delegate their future and cost competitiveness to outside partners. They emphasize the importance of having a transfer function within the company for successful partnerships. They also stress the need for investing in electrical architectures for both EVs and traditional vehicles in order to maintain subscriptions and revenue during economic downturns.

Ford is investing in expanding its Super Duty truck capacity in Ontario, which will help derisk their exposure to economic cycles. They believe that this investment will pay off quickly due to the high demand for these trucks, and they expect to reach $1 billion in software revenue next year. Ford's CEO also believes that their more complicated platforms and scale put them ahead of other OEMs in the industry's transformation. The next question from a Bank of America analyst asks about the sustainability of demand for Super Duty trucks and the potential for high margins and quick payback on the investment.

Ford CEO Jim Farley discusses the company's plans for their Super Duty line, which will feature a diverse powertrain and offer customers a range of options. The company sees potential in the infrastructure and 5G upgrade investments, particularly in their chassis business, which has been under strain due to high demand for their products in industries such as road construction and ambulance services. Ford believes that this demand will continue for years to come.

The speaker asks about the sustainability of strong pricing in Pro, and the CEO responds by stating that the demand-supply imbalance has been beneficial for the top line and has been running strong. The CEO also mentions that they expect auction values to continue to decline in the second half of the year.

The company expects some top line to come off as they move into the '25 model year, but they believe there are underserved segments like chassis that will provide stability. About 60% of their business comes from negotiated fleet contracts, which have remained strong. The company is seeing continued demand for both fleet contracts and smaller fleet customers. They are closely monitoring the situation for the '25 model year, but early indicators are positive. The decision to invest in Pro has been beneficial for the company, as they have new and updated products in their commercial line.

Ford is intentionally focusing on electric vehicles, especially in the Transit and two-ton Transit models. The company's Pro lineup has been updated in the past year, which is a significant accomplishment. The company's strategy for electrification is not dependent on the outcome of the presidential elections, as they believe that the demand for electric vehicles will continue to increase globally. Ford is committed to providing affordable electric vehicles for a large portion of the American population.

Ford believes that in order to be successful globally, they need to have strong partnerships in their supply chain. They do not base their strategy on political changes and instead focus on making money through small EVs and commercial vehicles. They have learned from their previous products and are now focused on being more efficient and agile. The EPA could change in the future, but Ford cannot rely on that and instead focuses on giving customers choice and flexibility in their manufacturing. They want to be a leader in partial electrification and need to compete with other companies, including their partner Changan, in the EV market.

The speaker, John Lawler, is responding to a question about the higher warranty performance and expenses in the current quarter. He explains that these issues are related to older models, specifically a rear axle bolt and failed oil pump, and that the company is prioritizing initial launch quality. He also mentions that they have a better handle on future costs, but there is still a potential for negative surprises in older vehicles.

The speaker discusses the challenges of predicting long-term durability and quality issues in vehicles that have been in the field for a while. They believe that improving near-term quality will help reduce overall accrual levels for these issues. They also mention the importance of controlling the software stack and utilizing over-the-air updates to troubleshoot and prevent warranty issues in the future. This will allow them to identify and address issues early on, potentially avoiding costly recalls.

The speaker discusses the benefits of connected data for the warranty system, as well as the partnership between Kumar and Doug in testing vehicles and addressing issues before launch. This has helped reduce warranty spend for the company.

This summary was generated with AI and may contain some inaccuracies.