Ford - Earnings Call - Q2 2025

Executive Summary

• Record revenue of $50.2B; adjusted EBIT $2.1B as tariff headwinds ($0.8B net) and special items drove a small GAAP net loss; adjusted EPS of $0.37 beat consensus while revenue materially exceeded estimates.
• Full-year 2025 guidance reinstated at adjusted EBIT $6.5–$7.5B, adjusted FCF $3.5–$4.5B, capex ~$9B, with an expected net tariff headwind of ~$2B; prior guidance (Feb) was $7.0–$8.5B before being withdrawn in May.
• Ford Pro remains the growth engine: $18.8B revenue (+11% YoY), 12.3% EBIT margin; paid subscriptions up 24% to 757k and software/physical services now 17% of Pro EBIT on a TTM basis.
• Model e doubled revenue to $2.4B but posted a $1.3B EBIT loss as tariffs, next-gen EV investment, and battery plant launch expenses weighed; Blue EBIT was $661M amid pricing gains and cost improvement offset by tariffs and non-recurrence of F-150 stock build.
• Potential stock reaction catalysts: reinstated guidance despite tariffs, visible cost traction and Pro services mix uplift, and Aug. 11 event unveiling breakthrough EV platform ("Model T moment").

What Went Well and What Went Wrong

What Went Well

• Ford posted record quarterly revenue ($50.2B, +5% YoY) and delivered $2.1B adjusted EBIT despite ~$0.8B net tariff impact; operating cash flow was $6.3B and adjusted FCF $2.8B.
• Ford Pro executed strongly: $2.3B EBIT, 12.3% margin; paid subscriptions +24% to 757k and services drove 17% of Pro EBIT TTM, improving cyclicality and margins.
• Management highlighted sustained cost progress: “fourth consecutive quarter of year-over-year cost improvement, excluding the impact of tariffs,” and visible warranty/material cost reductions underpinning H2 improvement.

What Went Wrong

• GAAP results were hit by special items (fuel injector field service action ~$0.6B, EV program cancellation ~$0.3B, BlueOval SK write-down ~$0.2B), yielding a small net loss and EPS of -$0.01.
• Model e EBIT loss widened to -$1.329B on tariff costs and strategic next-gen EV and battery plant spending despite revenue doubling; margin at -56.4%.
• Tariffs remain a material headwind (net ~$2B expected FY), pressuring margins and elevating uncertainty; management only provided total company guidance due to segment variability.

Transcript

Operator (participant)

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 second quarter 2025 earnings conference call. All lines have been placed on mute to prevent any background noise. After the speaker's remarks, there will be a question-and-answer session. If you would like to ask a question during this time and if you have joined via the webinar, please use the Raise hand icon which can be found at the bottom of your webinar application. If you have joined by phone, please dial nine on your keypad to raise your hand. At this time I would like to turn the call over to Lynn Antipas Tyson, Executive Director of Investor Relations.

Lynn Tyson (Head of Investor Relations)

Thank you, Layla, and welcome everyone to Ford Motor Company second quarter 2025 earnings call. With me today are Jim Farley, President and CEO, Sherry House, CFO, Andrew Frick, President, President Ford Blue and Model E and Interim Head of Ford Pro, and Kumar Galhotra, Chief Operating Officer. Joining us for Q&A will be Kathy O'Callaghan, CEO of Ford Credit, and Steve Carley, 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 will be referencing non-GAAP measures today. These are reconciled to the most comparable US 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, Naveen Kumar, CFO of Ford Pro, will participate in a fireside chat with Ryan Brinkman at the J.P. Morgan Auto Conference in New York. Now I'll turn the call over to Jim.

Jim Farley (President and CEO)

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 multi-year 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 Blue effective, excuse me pro, effective October 1st.

Alicia is an incredibly talented and experienced business leader and her experience across automotive and 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 11th, it 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 commanded higher pricing, reflecting the strength of this incredible product lineup we have at Ford. 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. We will 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 have 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, makes 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, Ford Blue, and breakthrough technology that you will soon see on our forthcoming EV platform. Now on emissions, as America's top brand, we further are investing in giving our customers choice along their low CO2 journey. New investments in ICE, more efficient and performance Hybrids and full electric vehicles are all on tap at Ford we support a single durable national emissions standard to ensure sound industry planning.

We proposed reforms that are on the table now, give us greater powertrain optionality and reduce our need to buy CO2 credits. In fact, our commitments to purchase CO2 credits have already been reduced by nearly $1.5 billion. Further changes will balance standards and customer choice and has 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. 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. Finally, reaching world class vehicle quality remains our top priority as a team. Although we face challenges with our older vehicles, the quality improvements on recent model years shows 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 Lincoln 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

Andrew Frick (President Ford Blue and Model E, and Interim Head of Ford Pro)

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 one 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. 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. gross 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.

Kumar Galhotra (COO)

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're 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 cost. 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 the FSA 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 zero and three months in service metrics are tracking towards our strongest performance in over 10 years. The second part of warranty costs are FSA 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 1/3 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. There are early indicators that are encouraging. For example, the FSA costs for 2024 and 2025 model year vehicles are at least 50% better than 2020 and 2022 model year at similar time in service. Now I'll turn it over to Sherry.

Sherry House (CFO)

Thank you, Kumar. Ford's transformation journey is well underway and our objective to build a higher growth, higher margin, more 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 vast 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 the 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 percentage points, largely related to mix driven by the full year launch effect of the European Explorer and Capri models, and the newly launched Puma. Mach-E 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 in 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 the 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%-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 2nd to shareholders of record on August 11th. Let us turn to our 2025 outlook. For the full year, we expect company adjusted EBIT of $6.5 billion-$7.5 billion, adjusted free cash flow of $3.5 billion-$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 cost. 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 million-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.

Operator (participant)

We will now move to our question-and-answer session. If you have joined via the webinar, please use the raise hand icon, which can be found at the bottom of your webinar application. If you have joined by phone, please dial 9 on your keypad to raise your hand when you are called on. Please unmute your line and ask your question. We will now pause a moment to assemble the queue. Our first question comes from Emmanuel Rosner with Wolfe Research. Please unmute and ask your question.

Emmanuel Rosner (Analyst)

All right, thank you so much. First question is 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, you know, $2 billion of tariffs that were not in the initial guidance. What are the drivers by bucket of improvement versus your previous outlook? If at all possible, I'm curious about the EBIT, but also the free cash flow.

Sherry House (CFO)

Sure. Let me just first comment on the guidance. Our net tariff was estimated at $2 billion and our guidance came down $1 billion. 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-$4.5 billion. The $9 billion for CapEx is approximately the high, it's 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. We're really focused on sustainable improvement in warranty and material cost that will make its way into 2026 and beyond. Currently we have a very fulsome pipeline of opportunities to support that.

Emmanuel Rosner (Analyst)

Okay, I appreciate that. This is mostly, because that was already your target, this cost improvement $1 billion x tariff. Are you targeting a larger number now? I'm just generally trying to understand, you know, why sort of like the underlying performance better, I guess. Where do you expect that underlying performance better to materialize on a full year basis?

Jim Farley (President and CEO)

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, you know, some ins and outs on the $1 billion, but those are the real strong parts of the business that we see. Obviously the market equation for Pro is very strong.

Emmanuel Rosner (Analyst)

Okay, understood. Then separately, Jim, I was curious on the back of some of the recent changes in 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 softer regulations.

Jim Farley (President and CEO)

You're absolutely right. The EPA's, you know, decision and their posture has really changed a lot in the U.S. and you know, being number two to Tesla in EVs, we've learned a lot the last three years. Having a full range of truck hybrids, we've learned a lot. There's no doubt about it that we've had a change. Our EV spending and capital allocation pretty large, you know, pretty massively. You and a lot of investors hopefully will get a chance to come to Kentucky and 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 on 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 the customers today.

I'm equally excited about the changes we're making on 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-$70,000 all electric crossover. We think that that's really what customers are going to want long-term. You know, 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. 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 rulemaking will be finalized by December and in the short term we've already made mix changes. We've descaled our credits, our CO2 credits by $1.5 billion already. There may be more opportunities on the mix side for next year as we, 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.

Emmanuel Rosner (Analyst)

Great, thank you.

Operator (participant)

Your next question comes from Dan Levy at Barclays. Please unmute your line and ask your question.

Dan Levy (Analyst)

Hi, good evening. Thank you for taking the questions. 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. With that, you're now going to potentially find issues that on previous model. Year vehicles that maybe haven't been reported yet. Appreciate that the warranty coverage is getting better, but it seems like the recall piece is remaining a headwind 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'll need to report.

Kumar Galhotra (COO)

Yeah, thanks for the question Dan. As I mentioned, two big components, 60% coverages getting better, solid evidence there. FSAs have a much longer arc. Not all FSAs are directly tied to higher cost. For example, we've had a lot of software FSAs that are a lot cheaper to fix and there's some early indicators that the vehicles, for example 2023-2025 model year, are substantially lower in FSA costs than the previous 2022-2024 model year window. 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. I would say good improvement on the coverages side.

For example, 2025 second quarter was better year-over-year if we exclude that special FSA, and coverage costs are significantly down versus second half of last year. Mixed strong progress and more coverages, FSAs are still a bit opaque.

Dan Levy (Analyst)

Great, thank you. Maybe if I could just as a second question ask about your recent market share performance, which has been quite strong. Maybe you could just talk to a, $1 billion offset on the. Tariffs on the market factors how you're thinking about that between share and price? 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 that you've gained?

Andrew Frick (President Ford Blue and Model E, and Interim Head of Ford Pro)

Yeah, thanks Dan, it's Andrew. On the sustainability of our share, we do believe we'll be able to carry that performance into the second half. We've seen from an industry perspective, we saw a very strong first half of the year. We did start to see some pullback in demand, which we now expect to see a softer second half with a full year industry of around 16-16.5. In the world of pricing around that, we expect, as Sherry said, to see net pricing around flat full year. What we've seen in the retail side of the business is pricing has been a little bit higher, so we expect to see pricing up about 1%. On the commercial side, we've seen a little bit more pricing pressure, but our Super Duty pricing has remained really strong. Overall, we see flat net pricing, but our stock positions are in good shape.

As we look at the second half of the market, the industry where it is strong is in segments we do well in, and we think we'll be able to carry that into the second half of the year.

Dan Levy (Analyst)

Great, thank you.

Operator (participant)

As a reminder, please limit yourself to one question and one follow up today. Our next question will come from Mark Delaney with Goldman Sachs. Please go ahead.

Mark Delaney (Managing Director and Senior Equity Analyst)

Yes, thank you very much for taking the question. I also had a question around the changing emissions policy environment. I'm hoping you can better help investors to better understand how Ford is balancing the opportunity to see improved mix and lower costs as a result of the changing emission policies in the U.S. while also remaining competitive with your EV technology, including relative to the Chinese domestic OEMs that are increasingly selling their vehicles on a more global basis.

Jim Farley (President and CEO)

Thanks. Yeah, we're already reducing our credit buys. We are changing our mix towards the fourth quarter this year and we see a pretty big opportunity next year. As I said, multi billion dollar opportunity over the next couple years. On the EV side, I'm really excited to show everyone, you know, where we're going on our EV. We've been busy the last three years kind of in 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, you know, in the next year or two starting. You are going to see a lot of news from Ford on our EVs.

Our strategy is very simple. We believe the only way to really compete effectively with the Chinese over, over the globe on EVs is to go and really push ourselves to radically re-engineer and transform our engineering, supply chain, and manufacturing process. That will come to life soon. 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 the competitive set for our next generation of EVs. We see the Chinese companies like Geely, BYD, and that's how we built our vehicle, 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 Marshall, Michigan, and it's a big advantage for the company.

We're the first one to build it at scale. It also has the PTC. We're thankful that Congress upheld that. That's a key part of our profitability roadmap to transitioning these lower cost batteries. Can't wait to show you the product and the platform, so stay tuned.

Mark Delaney (Managing Director and Senior Equity Analyst)

Looking forward to it. My other question was on autonomy. Company made the decision to shut down Argo about three years ago given the time to market and returns considerations for robotaxi. Today there's a number of robotaxis now on the road. A partial and fully autonomous technology is improving. I am hoping to better understand where Ford stands on level three and level four technology. How important do you think partial or fully autonomous technology may be in driving the kind of recurring and more durable profits that the company is targeting. Thanks.

Jim Farley (President and CEO)

I see, you know, BlueCruise has done really well for us. The margins have held up. The pricing for level 2 and level 2 plus plus looks a lot more robust than a lot of the other ADAS features. I think we're off to the races, and we will continue to over-the-air update improvements to BlueCruise 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 three system and that will be a major moment for the company. We really believe this is the key opportunity for retail customers and we have the right team. All those Argo engineers who stayed at Ford, they've been really busy enhancing level two and building out a level three. Stay tuned. I can't wait to show everyone we are not going to be the first with a level three system at low speed, for example, that are out there today. We want a fully functioning level three high speed highway application with a really decent ODD where thousands, millions of customers would be able to use the system. On L4, we've been thinking a lot about our strategy after Argo.

You know 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. Ford Pro is a fantastic partner for fleet management of those large fleets. They're no different than our, you know, 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 four to some of our commercial customers in a van format. We'll have more news coming on that, but I suspect that's where we're really focusing on level four.

Mark Delaney (Managing Director and Senior Equity Analyst)

Thank you.

Operator (participant)

Our next question will come from Joseph Spak with UBS.

Joseph Spak (Executive Director and Senior Analyst)

Thanks so much, 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, you know, the tariff discussions 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 can 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? I guess basically, what is Ford really lobbying for in the conversations with the administration?

Jim Farley (President and CEO)

I think, to put it simply, Ford as the 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, you know, that gap between the bilateral, you know, 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 contacts 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.

Simplify especially parts tariffs and reduce that liability considerably, which would be upside for the company. You know, the reality is our competitors now all have to pay 15% import and higher for Mexico. They can't change the footprint anytime soon. Those tariffs were not around a year ago. This is an opportunity for Ford. Yeah, it may be, it may be less than 25%. 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.

Joseph Spak (Executive Director and Senior Analyst)

Thanks for that. I guess, just maybe sticking on policy. I heard you mentioned, I think you said you're going to scale back compliance credits by $1 billion-$1.5 billion. Did you mean yes purchases or is that, is that what you are like, what was, what are you, what were you planning to expense this year in the guidance and what are you planning to expense now? I know you did about $200 million last year. I'm just trying to think about how much of a profit tail and that could be in 2026 and beyond.

Sherry House (CFO)

Yeah, we've expensed about $200 million thus far and I think you could, you could think about that being a reasonable quarterly rate going forward. So not significant.

Jim Farley (President and CEO)

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

Joseph Spak (Executive Director and Senior Analyst)

Thanks so much.

Sherry House (CFO)

Sure.

Operator (participant)

Your next question comes from Federico Merendi with Bank of America. Please go ahead. Federico, your line is now open and you are able to unmute on your side.

Federico Merendi (Equity Research Analyst)

Good evening guys. Sorry about that. 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. I was wondering how does Ford balance the different commitment 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?

Jim Farley (President and CEO)

Yeah, thank you. Yeah, we really see the pure EV market in the U.S. seems to us very clear, you know, small vehicles used for commuting and around town, so to speak. We've been working really hard with our skunkworks project and can't wait to show everyone, you know, where that lands. Commercial, we've been, you know, the dominant player in commercial EV in the U.S. and we think that's going to be a robust business. We want to shrink the number of top hats. We've always focused and told investors we want to have a very simple lineup with not a lot of complexity in top hats. We have some of our competitors that have 10 or 15 top hats. That's not our strategy. We're going to have just a few. We've made the adjustments in timing we think to be in segments where we can actually make money on EVs. Globally we're focused heavily on partnerships.

Partnerships for EV we think is the right strategy. We believe that the supply chain and the platforms are quickly commoditizing. You cannot differentiate yourself, you know, on that aspect, especially for a vehicle. Now it is a little complicated with electric architecture. You got to work through that. We know how to do that now. We've been partnering with JMC and other brands globally for a while. We know how to do the, we think we know how to do the electric architecture with a partner. You should expect from Ford in these other regions where electrification is very important to partner where we need to. We will use PHEVs and other solutions for commercial customers that make sense for them. You know, based on the local registration requirements, I think we have a good strategy.

I have to say I'm very thankful that we move fast because we learned about the market changing maybe before our competitors and we can reload our capital and have the right plan planning for this new reality of pure EVs.

Federico Merendi (Equity Research Analyst)

Thank you, Jim. My second question would be on the mitigating factors for tariffs. From what we've heard, basically you, Ford and even other OEMs are kind of moving, some redesigning their vehicles and putting some content that was standard into optional with a new model here. From your internal analysis, how do you expect customer to react from these changes?

Jim Farley (President and CEO)

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

Federico Merendi (Equity Research Analyst)

Yeah, sure. With that. I mean that, let's say in model year 2025, you had a certain vehicle with a certain trim which had, 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 would have to pay up for that same content that last year was standard.

Jim Farley (President and CEO)

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

Andrew Frick (President Ford Blue and Model E, and Interim Head of Ford Pro)

We constantly look at our spec 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. We're using a lot of the vehicle off the data, a lot of the customer utilization rates to help us make those informed decisions.

Federico Merendi (Equity Research Analyst)

Thank you, guys.

Jim Farley (President and CEO)

Thank you.

Operator (participant)

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

Tom Narayan (Global Autos and Auto Parts Analyst)

Yeah, thanks for taking the question. First one, I know you guys did not give segment guidance, but just curious in terms of how we should think about offer modeling. If we look at the EV business, you know, we know the consumer credit is going away in September. That probably means, you know, maybe a stronger Q3, but then Q4 is negatively impacted. Just curious if that results in lower sales of EVs, the credit going away. Is that actually a net positive for the EV EBIT being that each car is still losing money, or is it that there is so much fixed cost associated that it would still be a headwind? Just curious how we should think about that dynamic.

Sherry House (CFO)

Yeah, you know, 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. Maybe you'd be leaning a little bit more heavily into Europe where the mix in the contribution margin is stronger or moving into ICE, you know, ICE products. You could calculate that you could have some uplift there on a financial basis if that was to play out as you described.

Tom Narayan (Global Autos and Auto Parts Analyst)

Okay. You know, we've been hearing from some of the European OEMs, some headwinds in the commercial vehicle side in Europe. Yeah, I guess it's 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 gaining I think three points of share there at Pro in Europe. How big of a headwind is that for you guys? Thanks.

Jim Farley (President and CEO)

You know, we are very successful in the one ton Transit business as well as the pickup market in Europe. You know, we have a brand new vehicle, literally it's brand new, and that's doing really well, as is a brand new Ranger. 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. There's another factor that's important on our financial performance. This is the 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 basis. Remember our cost basis in South Africa and Turkey, so they're very low.

The other reason is we're not only increasing our performance because of new products, we're also becoming more profitable on a margin basis because of our cost and that's a good thing for us.

Operator (participant)

Your next question will come from Daniel Roska with Bernstein.

Daniel Roeska (Senior Analyst)

Thanks for taking my questions. Maybe Jim, after the discussion on tariffs and the changing in 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. and that as you explained enables the lower compliance costs and probably a better mix over time. What do you think? Are those two awash played 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.

Jim Farley (President and CEO)

Yeah, it's a great question and I think it's a bit tricky at this point in time to handicap the ins and outs on that. I would say the emissions tailwind is pretty substantial both on Model E as Sherry said, but also on our Blue and Pro business and especially Blue which has taken the brunt of the electrification journey globally. I would say, you know, I think we're, you know, and that is not the reason why we increased our guidance. Our guidance was, as Sherry said, based on real cost traction. If you had to handicap the second half of this year or next year and what could go right, I mean depending on how the emissions works out, that's definitely a tailwind for Ford. I mean, look at the mix of our products with Pro and Blue and you know, that, that to be able to build what customers really want is going to be a financial tailwind for us.

Daniel Roeska (Senior Analyst)

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

Jim Farley (President and CEO)

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

Daniel Roeska (Senior Analyst)

Basically a very low tariff rate for imports into the U.S. basically. Because the market has been discussing going back and forth, will tariffs stay in place? Will they not stay in place? To me it seems like if we're now cutting deals with Europe and Japan and likely South Korea and then USMC on top of, I'm unsure whether the next administration would see any reason to change that. Again.

Jim Farley (President and CEO)

That is a really important question to answer. We increasingly see Europe, North America, and Asia becoming kind of regional businesses with trade tariff rates that are aligned for those three or four regions. I believe that is a very long-term change now because it is happening in multiple things, not just tariff. It is happening with electrification and CO2 requirements, and it will happen as well as the Chinese OEMs go global and start to localize outside of China, and they will pick their regions and the regions will pick them. I believe this is quite a fundamental change. We were just talking before the call started about how fundamental. Everything seems to be changing in the car business, and this is one of the actors. I do think USMCA negotiations can be very material for our North America health.

These tariffs feel like, especially the ones in Europe and Asia into the U.S., feel kind of long-term for us. Are they big enough to change, to radically change the footprint? You know, at this point in time it does not look like it, hard to tell. A lot of that will have to do with the administration's commitment to companies like Ford that committed to the U.S. production. You know, what is their, what is the, what is their point of view going to be with this $2 billion liability we have? Depending on, you know, again we are having very constructive conversations with them, being the most American company you can imagine. Depending on how that works out, you know, this could actually reverse, and we could get a sustained advantage being an American company. Stay tuned.

Daniel Roeska (Senior Analyst)

Brilliant. Thanks very much.

Jim Farley (President and CEO)

Thank you.

Operator (participant)

Your next question will come from Edison Yu with Deutsche Bank.

Edison Yu (Global Space and Aerial Mobility Analyst)

Hey, thanks for getting me in. First one, I wanted to ask about pricing. I think you called out some weakness on the, on the commercial fleet side. Curious if you can elaborate a little more on that. 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? That would be great.

Andrew Frick (President Ford Blue and Model E, and Interim Head of Ford Pro)

Hi Edison, it's Andrew. Good to hear from you. Just a little more texture on the commercial side. I think what we're seeing in there 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 and the van segments. 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. We are actually optimistic around that holding for the rest of the year, but it was mostly in the van segment.

Edison Yu (Global Space and Aerial Mobility Analyst)

Got it, got it. Thanks. Switching gears. I wanted to come back to a comment, Jim. Earlier on Autonomy, I think you mentioned that you could do something on the Ford Pro side providing service. I'm curious what kind of, what that would kind of maybe look like. Would you go to like a certain partner up with someone and does that kind of rule out any interest in actually producing some sort of integrated autonomous vehicle?

Jim Farley (President and CEO)

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, all these autonomous robotaxis. You know, the technology is fascinating. As far as making money off the business, you know, which we have to bet on our capital as leaders of the company, you know, we think that, you know, if these robotaxi fleets are, or large fleets, I'm not sure it's going to be a super profitable business. Someone's going to make money on owning those fleets and maintaining those fleets. You know, 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 those software that we sell that Andrew mentioned that's going at 24%, you know, 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, you know, more capital intensive investments. We have to be, you know, thoughtful about that. We are very intrigued about these robotaxi fleets, what they can mean for Pro. Our dealers over time get nothing to announce today, but I think you've heard what we said pretty clearly.

Edison Yu (Global Space and Aerial Mobility Analyst)

Thank you.

Operator (participant)

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

Colin Langan (Director and Senior Equity Analyst)

Oh great. Thanks for taking my questions. I just want to cover the guide implies an improvement first step into the second half. I think SAR would imply it's saying about flat. Tariffs are supposed to be about flat. What would drive that improvement in the second half?

Sherry House (CFO)

We would have some of our material cost items coming in in the second half. Also, a lot of the work that we put into place on warranty, working with the dealers, working on our time to repair. A lot of these things are also looking to be implemented in the back half as well. Also, you know, just some of the volume issues with Kentucky 1 shutting down in the past. You had the idled period. You are getting the now positive impact of not doing that and not having the destocking that we did in the first half. Okay.

Colin Langan (Director and Senior Equity Analyst)

You mentioned several times that I guess the guidance, the underlying guidance seems to improve because of cost. It's kind of surprising because you just had record recalls year-to-date. Can you parse that out? What is like what kind of actions are actually driving that cost that's better than what you expected back in January when you initially guided it? It feels like recall. I gotta imagine it's a bit worse. Right.

Jim Farley (President and CEO)

Just to be specific, as on recalls, we need to make it really clear to everyone that the number of recalls and the costs are not related. Half of our recalls this year are software. When we do a software recall, we can do an OTA. It's literally 10% of repairing something mechanical. You know, that's just, it's not, it doesn't work like coverages where it's a, you know, very correlated to the number of actions we have or defects. What we said before and it's, it's clearly happening, the manufacturing team is finding a lot of efficiencies year-over-year, more than we expected. You know, obviously in the billion dollars. We have all that broken down by function, by group, all the way down by plant in the case of manufacturing.

Bryce's team has been able to accelerate beyond even in the logistics area of savings in our manufacturing. The second would be, we have been more successful working with our suppliers on either getting a redesign part or a negotiated part. That's better and that's great to see. Oh, by the way, we have really nice pipelines for next year. Anything else to add, Kumar?

Kumar Galhotra (COO)

The coverages are improving as well.

Jim Farley (President and CEO)

The cost of our defect is also decreasing.

Kumar Galhotra (COO)

Let's be clear. 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.

Jim Farley (President and CEO)

For sure.

Kumar Galhotra (COO)

Yes, the answer is yes, but excluding the special item.

Colin Langan (Director and Senior Equity Analyst)

Okay. All right. Thanks for taking my questions.

Jim Farley (President and CEO)

Sure.

Operator (participant)

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