Ford Motor Co

NYSE:F

Earnings Call Transcript 2021-Q2

[Operator]

Good day, ladies and gentlemen. My name is Holly and I will be your conference operator today. At this time, I would like to welcome you to the Ford Motor Company Second Quarter 2021 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. [Operator instructions] [Operator Instructions] At this time, I would like to turn the call over to Lynn Antipas Tyson, Executive Director of Investor Relations. Lynn hand it to you.

[Lynn Antipas Tyson, Director of Investor Relations]

Thank you, Holly. Welcome to Ford Motor Company's Second Quarter 2021 Earnings Call. With me today are Jim Farley, our President and CEO, and John Lawler, our Chief Financial Officer. Also joining us for Q&A is Marion Harris, CEO of Ford Credit. Today's discussions include some non-GAAP references. These are reconciled to the most comparable U.S. GAAP measures in the appendix of our earnings deck. You can find the deck along with the rest of our earnings materials, as well as content from our Capital Markets Day at ford.com.

Today's 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 21. Unless otherwise noted, all comparisons are year-over-year. Company EBIT, EPS, and free cash flow are on an adjusted basis and product mix is volume weighted.

A quick update on our upcoming IR events on Monday, August 2nd, Barclays will host a fireside chat with John Lawler and [Indiscernible] , our Chief Operating Officer for North America on Tuesday, August 3rd, Jefferies will host a virtual fireside chat with Alex Purdy, our Director for Business Operations for Enterprise Connectivity. And on August 11th, JPMorgan, we'll host of virtual fireside chat with Hau Thai-Tang, our Chief Product Platform and Operations Officer. Now, I will turn the call over to Jim Farley.

[Jim Farley, President and Chief Executive Officer]

Thank you, Lynn. Hello, everyone. And thanks for joining us today. Early in the second quarter, 2 months ago, we detailed our strategy for the future Ford. Put simply, our Ford Plus plan is focused on 2 things, really distinctive products that only Ford could do and an always-on relationship and experience for our customers that gets better and better over time. We're building on our foundational strengths, our iconic products, the uniquely appealing vehicles, our manufacturing excellence, and the industry's best captive finance Company. But we're now adding new capabilities and new talents, and we're investing in new businesses that will accelerate our value we create for customers and our investors.

We're committed to delivering a richer experience for our Ford and Lincoln customers, One that improves over time with things like our over-the-air software upgrades, data-driven experiences, productivity and uptime services for our critical commercial customers, charging software, and a lot more. Ford Plus also means introducing the industry's most compelling, high-volume, electric vehicle line-up and investing the capital and human resources required to design and build world-class batteries and electric Powertrain components.

And with Argo AI, we're well-positioned to launch and autonomous people and goods delivery business with significant future growth potential. But fundamental to transforming forward is to further strengthen our auto operations while we're also expanding our addressable market. Our commitment is to earn your confidence with strong execution quarter-after-quarter, year-after-year, delivering solid returns regardless of the challenges that we face with external environment like we did in the second quarter.

Despite the many headwinds from the semiconductor shortage, some of which were unique to Ford. Our teams skillfully managed our business and we generated a positive EBIT. And I could tell you that this outcome was far from certain at the beginning of the quarter. It required intense focus from our team, on cost, pricing and mix. The primary advantage we have right now is the strength of our product portfolio. And it's about to get a lot stronger. We stopped making me too products in declining segments few years ago.

And we unleashed our product development team to create emotional and distinctive products that only can come from Ford. The Mustang Mach-E, which is already the second best selling electric SUV in the U.S., was recently named Car and Driver Electric Vehicle of the Year after rigorous testing against 10 other great EVs, including the Tesla Model Y Performance, the Porsche Taycan, and the Audi e-tron. The demand for our first round of high-volume EVs clearly has exceeded our most optimistic projections.

The reservations for the F-150 Lightning have now climbed well past a 120,000 units. And 75% of those customers are new to Ford. We're now working around the clock to break constraints and increase our manufacturing capacity for these red hot new battery electric vehicles. We're working with LG Chem, SKI Innovation to increase our annual battery capacity for the Mustang Mach-E by 70%. And we're taking similar actions ahead of the launches of E-Transit later this year and the F-150 Lightning early next year.

The customer and critical reception to our new Bronco lineup has also been remarkable. In June, we started shipments to fulfill 125,000 orders we have for Bronco II and Ford models. And 70% of those Bronco customers are also new to Ford. And then there's the Maverick, pur upcoming hybrid pickup, that offers room for five, gets 40 miles per gallon in the city and is priced starting at less than $20,000, and customer already recognized the value of this product and the initial interest to our dealers is more than almost 80,000 orders.

Great products alone are not sufficient, though, to deliver Ford Plus. Always on means, we are regularly interacting with our customers on things large and small, and we're building new capabilities, like connected services, to enrich the customer experience and drive reoccurring revenue streams. We developed a proprietary software and hardware stack we called Blue Oval Intelligence to deliver updates to customers' vehicles over the year.

Some of our competitors can do it for their entertainment systems, we do it for almost all of our modules in the vehicle. For example, the Mustang Mach-E activation rates, the number of customers who opt into Connect us services like FordPass, are now over 95%. We have now updated more than 150,000 vehicles over-the-air just this year. And we expect this to top 600,000 vehicles by year-end. and by 2028, we will have 33 million OTA - capability vehicles on the road around the world. And we are mining the real-world data from these vehicles real-time to better meet our customer needs.

To me, this is the most important point. For example, driven by the vehicle data from the Mustang Mach-E and the F-150 already, we've identified $50 million in efficiencies just from warranty cost avoidance and other opportunities. We're also building out our global Ford Pro commercial business, which we expect to grow from 45 billion in 2025, from 27 billion in 2019. Last month, we announced our acquisition of Electriphi to help accelerate electric vehicle fleet adoption. By offering those customers the best-scaled depot charging experience for all commercial customers.

It's an example of how we're building out Ford Pro now. In mobility, we are now focused on planning and executing a phased deployment of EVs that will lead to large scale commercialization of Ford's EVs. Last week, as you've seen, we reached the industry first collaboration between Argo and Lyft, to deploy Ford Driverless Vehicles on the Lyft TNC network. This collaboration will enable commercial deployment at scale and demonstrate Ford Argo 's ability to connect into multiple TNCs or transportation networks.

And on the technology front, Argo, I'm really excited about this, introduced Argo Lidar, which will help us expand our autonomous services beyond the dense urban areas that most are focused on. This new lidar designed to be cost effective and manufacturing at scale will offer what we believe is the industry's longest distance sensing range of 400 meters with dark object detection for safe highway driving. Now, before John reports on the quarter, and our expectations for the rest of the year, let me give you an update on the semiconductor situation.

In April, we said we'd expect to lose about 50% of our planned volume in the second quarter, which then implied a loss in [Indiscernible] . In fact, we did better than expected. We leveraged the strong demand to optimize our revenue and profits. We're seeing signs of improvement in the flow of chips now in the third quarter, but the situation remains fluid, especially due to the delay in ramp up of one of our key suppliers, Renesas, that Ford is uniquely exposed to in the first half. Overall, after effectively managing through the first half, we are now spring-loaded for growth in the second half and beyond because of those red-hot products, pent-up demand, and improving chip supply.

Navigating these chip constraints has led us to make important permanent changes in our business model at Ford. We are modernizing our go-to-market strategy. What does that mean? We're placing greater emphasis on build-to-order sales bank, not just low stocks. We have learned that, yes, operating with fewer vehicles on lots is not only possible, but it's better for customers, dealers, and Ford. But we're also driving a significant increase in the number of customers configuring and ordering their vehicles online.

So we have better visibility to real demand using an order bank. This allows us to lower inventories, simplify our incentives, and reduce our order complexity in the industrial systems cost. For our customers, upside is that they more quickly get the precise vehicle they want. Now, this isn't theoretical. I hope we get into the Q&A. We're doing it right now as we speak. Relative to the supply chain, we made 3 notable changes. First, we are no longer relying heavily on a tier-procurement structure for transparency.

We are now engaging directly, for example, with the fabs on semiconductors and key points in [Indiscernible] for critical components, electronic components. With with closer relationships and more transparent exchange of information, such as technology roadmaps, we can integrate their know-how into our designs to better align supply and demand. Second, we're providing longer-term forecast to critical vendors so they can better understand and accommodate our requirements. And third, we are more comprehensively scanning for obstacles in our supply chain.

Risk mitigation actions include stockpiling of critical parts like semis, dual sourcing and design interchangeability in the case of single sources. These changes are all being applied to new technologies as well, including batteries, which are rapidly becoming a larger portion of our bill material at Ford. Our pending joint venture with SK Innovation, called BlueOvalSK, will produce EV battery cells and arrays, helping us secure supplies of batteries at competitive cost and performance levels really critical given our demand for our new electric vehicles. And now I'd like to turn over to John to take us through the results for the quarter and our outlook.

[John Lawler, Chief Financial Officer]

Thank you, Jim. So first I want to reiterate that everything we do and every decision we're making, including capital allocation, it's squarely focused on delivering our Ford Plus plan. And you'll see that as I share our key takeaways from the quarter, our full-year outlook, and describe how we're positioned for even stronger performance heading into 2022. And as Jim said, we delivered better-than-expected results, given the semiconductor constraints. Year-over-year, our automotive business improved across several key financial metrics as we overlap the industry-wide COVID-related manufacturing shutdowns we saw in the second quarter of last year.

Now, for a more accurate picture of our true trajectory in this present environment, we're focusing more on sequential comparison, and we think those are more appropriate. While wholesales were down 28% sequentially, our team's optimized from revenue and profit with disciplined incentive spending and mix management. We allocated chips to customer orders, new launches, and our more profitable vehicles.

In addition, the strength of our sales order bank gives us confidence in our ability to drive a more balanced performance of wholesales, revenue, and profit in the second half of this year, including sequential improvement in wholesales and share. So let's turn to our results. On a consolidated basis, wholesales and revenue were up 18% and 38% year-over-year respectively, and we delivered adjusted EBIT of 1.1 billion with adjusted margin of 4%. Outside of North America, our underlying trajectory continues to improve despite the impact of the semiconductors and that's driven by more focused product portfolios, geographic footprint, as well as, lower costs.

And Ford Credit continued to deliver strong performance with record quarterly EBT of 1.6 billion. And that's demonstrating why it's a strategic asset and critical to enabling Ford Plus. And our prime example is through the launch of a new service like Ford Pro FinSimple, which provides bundled financing for commercial vehicles, services and EV charging. And so it's another example of Ford Credit being a strategic weapon for us. Now, turning to the regions. North America posted a 40% sequential decline in wholesale due to the semiconductor shortage.

Now, as we managed the [Indiscernible] constraints, we focused our efforts on customer or customers ordering vehicles for future delivery. We exited the second quarter with our U.S. customer sold order bank up more than seven times compared to a year ago. And with new models to come, we are clearly poised for a rebound in North America when the semiconductor supply stabilizes and aligns with demand. On a year-over-year basis, EBIT was up 1.1 billion. Outside of North America, the turnaround of our operations remains on track.

In aggregate, EBIT improved 800 million year-over-year, but declined sequentially, mainly driven by Europe, where the semiconductor shortage caused wholesale units to drop sequentially by nearly 35%. The transformation in Europe continues as the region capitalizes on strength in commercial vehicles with Ford Pro, and a more focused passenger portfolio, including key imports. Europe has stepped up investments in electrification, including 1 billion for a new EV manufacturing center in Cologne, the launch of our E-Transit next spring, and a new all-electric light commercial vehicle from Romania.

In South America, our restructuring is on track. Our lean de-risked and asset-light business model is focused on our strengths with ranger, transit and key imported vehicles. The region introduced Bronco Sport and Mustang Mach-1 I in selected markets, and is preparing now for the launch of the new transit van in the second half of this year. In China, we continue to see improvement in key areas of focus, including Lincoln, commercial vehicles, electric vehicles, and with our portfolio of near premium Ford vehicles.

Lincoln attained its highest ever quarterly sales, was profitable, and also captured the number 1 spot in J.D. Power's luxury sales satisfaction ranking. unseating Audi, which had held the position for 11 years. In addition, 97% of Lincoln's volume is now produced locally, and commercial vehicles now account for 52% of overall sales mix in China. And finally, we are readying for the launch of the localized Mustang Mach-E later this year. Our international markets group, we delivered another solid quarter, leveraging its portfolio strengths with Ranger pickups and Everest SUV.

And we're continuing to assess our business in India and we'll have more to say on this later this year. Company-wide second quarter adjusted free cash flow was negative 5.1 billion. As expected, semiconductor-related volume losses had a greater impact on the free cash flow than EBIT because of adverse working capital and timing differences related to customer allowances from marketing incentives. Ford Credit did provide a partial offset with distributions of 4 billion in the quarter. Now, we expect working capital and these timing differences to normalize over time as the semiconductor supply is restored.

Cash and liquidity remained very strong, ending the quarter at 25.1 billion and 41 billion respectively. The strength of our balance sheet provides significant financial flexibility to navigate periods of stress, while also continuing to invest in growth in our Ford Plus plan. So now let's turn to the outlook. Based on the underlying strength of our business and present assessment of the semiconductor supplies through the second half, along with other factors, we have increased our outlook for full-year adjusted EBIT to between $9 billion to $10 billion.

Now this assumes about a 30% sequential increase in volume in our second half versus our first half, which is supported by the anticipated improvement in the supply of semiconductors. Our guidance implies we expect second-half adjusted EBIT to be lower than the first half of the year. And so we provided a bridge to help with this. And we've included that on page 19 of our earnings presentation.

So let me provide a little bit of color around this. Relative to tailwinds, we expect about 3 to 4 billion in favorable market factors and that of an increase in volume-related production costs for the higher volumes. Headwinds, right? We see headwinds coming through and we see pressure on contribution margin. We expect commodities to be up almost $2 billion, half-over-half.

Warranty costs are expected to be higher in the second half up about 500 million that we still expect full-year warranty expense to be down year-over-year. Relative to structural costs, about 1.5 billion in investments in modernization, consistent with what we laid out in May, including customer experiences, connectivity, IT, new product launches. Looking at Ford Credit. Based on current market dynamics, we expect Ford Credit to decline by about 1 billion as auction values begin to normalize and we also have a non-repeat of reserve releases that we had in the first half.

And lastly, we also have the non-recurrence of the 900 million non-cash gain [Indiscernible] we booked in the first quarter. And it's important to note that this gain also impacts our run rate heading into 2022. We are also increasing our full-year adjusted free cash flow target to 4 to 5 billion, supported by expected favorable working capital in the second half as production increases from an anticipated improvement and chip availability.

Now, as our operating results improve, so those are cash conversion, which we continue to target in the range of 50% to 60%, and the strengthened cash conversion in our balance sheet provides us ample financial flexibility to invest in growth, including in EVs; Ford Pro, our connected services and mobility.

And looking towards 2022, we are confident in the underlying trajectory of our business and excited to see the momentum continue as we leveraged one of the strongest product lineups in our history and continue to implement our Ford Plus plan. We're on a new path at Ford. We got a plan, the resources, and the result to build a better business. So now, I'll hand it over to the operator to open it up for questions.

[Operator]

[Operator instructions] Our first question comes from the line of Brian Johnson, Barclays.

[Brian Johnson, Barclays]

[Indiscernible] got a couple of questions. First, a little bit of housekeeping. but just thinking ahead to '22. If we take the second half exit rate of 3.5 billion, but also bear in mind that your first half is typically the stronger half of the year for Ford. Is there any read through for 2022?

[John Lawler, Chief Financial Officer]

Hi, Brian. Thanks. Yeah. I think the way we see it is that we've got strength in the underlying performance of our business. As we head into 2022, we also know that the product lineup is going to get stronger, right? We're just launching Bronco now. We've got F-150 Lightning next year. We have Maverick next year. And we also expect that we should get to more of a full line rate on our manufacturing of all our other vehicles in new vehicles that we've had this year. So we do see strength in the product line heading into next year. But what we also see heading into next year a few headwind s.

Ford Credit, we expect that to be more normalized to our run rate that we normally see, and that's because we see auction values coming down. And then we shouldn't -- we should see our credit reserves and our credit losses normalize as well. We also see that next year as volumes increase and stocks increase across the industry, we should see some pricing moderation.

Again, we also see commodities being higher next year as well. And we're going to continue to invest in our new product portfolios. We've got the launches coming in next year. We've got our Ford Plus plan. So we see that continuing as we head into next year as well. So, there are some headwinds, but the underlying strength of the business continues to be positive. And with that, we see that trajectory continuing into 22 and then on our way to the 8% EBIT margin for 23.

[Brian Johnson, Barclays]

Okay. And just a follow up, 1.5 billion 2H headwind from investments in modernization. Is that something new that was planned for this year, but maybe back-end loaded due to management focusing on the chip shortage or how do you think about that?

[John Lawler, Chief Financial Officer]

Well, that was planned, that's coming in. Part of that's due to the launches the vehicle with the launch costs [Indiscernible] advertising. But we're also investing in activity, the IT we need to put in place for the connectivity, as well as, customer experiences, digital experiences, user experiences with the vehicle. So we're continuing to invest to build out our Ford Plus plan.

[Jim Farley, President and Chief Executive Officer]

And we're not slowing down our modernization because of the chip situation; in fact, we're doing the opposite.

[Brian Johnson, Barclays]

Okay. And a question for Jim, as you look at the order book for the F-150 Lightning and And what's shaping up for the Bronco and the Maverick. Any sense of how many of those customers are, as you mentioned, [Indiscernible] Ford, but also maybe new to that segment. So for example, SUV buyers migrating to the Lightning due to the storage or the bi-directional charging or the features?

[Jim Farley, President and Chief Executive Officer]

Great question. Put simply, what we've learned about our very large order bank for Lightning is way over index on the coast. Almost 80% are new to Ford, with feature seeing 2 out of 5 are people who are going to trade in ICE pickup. which is very important because it indicates a move little bit faster to full-size truck BEV than maybe are our optimistic assumptions. And so I would say what we've learned so far is that the customers are largely new to Ford, but they aren't new to the segment. These are customers who really like these silhouetted vehicles. What is really interesting for me is some would portray to full-size truck industry as kind of a conservative customer. It's not what we're seeing, is the very large order bank for F-150 Lightning, they're new to BEV, and they are excited to move to BEV. And they are -- more than half of them are pickup truck customers.

[Brian Johnson, Barclays]

Okay. Thank you.

[Operator]

[Operator Instructions] Next question comes from the line of Rod Lache with Wolfe Research.

[Rod Lache, Wolfe Research]

Hi everybody. I just first wanted to clarify the answer that you gave to Brian's question. So you're going to be annualizing at 6 billion to 8 billion in the back half, and I think what a lot of people want to understand is, is that kind of a fair bridging -off point for us to think about what happens from here into 2022 and beyond. So did you assume some moderation of pricing already in that number? Is that level of investment kind of the run rate? And how should we think of about the incremental benefit from that run rate for Bronco, Maverick, for the warranty improvement in some of the international improvements that you're working on?

[John Lawler, Chief Financial Officer]

Hi, Rod. Thanks. So in the second half, we show the net number there for the volume net of the manufacturing production costs and other market factors. So what we are assuming is that in the second half of the year, particularly in the fourth quarter, we start to see some moderation in pricing due to the fact that we should see volumes in inventories and stocks coming up a bit. So that is something that we do have built into that number for the second half, particularly in the fourth quarter.

And then when it comes to 2022, Bronco is just getting up now -- up and running now, launched now. As Jim said, we have a hefty order bank there. And then F150 Lightning Maverick, they're launching next year. So our product portfolio is strong today, it's going to be even stronger next year. And so we see that contributing to the run rate as well. So I think coming out of Capital Markets Day, we talked about the trajectory of the business. 2022 being definitely stronger than '21 as we walk towards 2023 and the 8% EBIT margin that we plan to hit.

[Rod Lache, Wolfe Research]

And just secondly, really interesting comment about that sevenfold increase in your order bank and changing the way the vehicles are sold, can you just talk a little bit about what that actually means from a volume perspective? Because I don't think we've ever really known what your actual customer order bank actually what was the magnitude of that?

Maybe you could just tell us what that number was a year ago and any thoughts on what this actually means for pricing? Obviously, it's positive, but those units are not going to land on dealer lots for very long. So it would seem that it's really not a big reason that significantly boost incentives anytime soon if they're leaving lots very quickly.

[Jim Farley, President and Chief Executive Officer]

Thank you, Rod. Put simply, we're really committed to both going to an order based system and keeping our inventories between 50 and 60 days' supply. I've been here at Ford for 13 years. There were many years after the financial crisis where our day supply was 20, 30, 40 days. And in those years, the maximum retail order bank we had in the U.S. was 1 to 2 thousand a month. We're now at 70,000 units on our way to 80,000 units. That gives you the order of magnitude difference in the way we are looking at this order bank change for the company.

Lot of people in our industry are making big deal about the move online? Sure. But for Ford, we think there's massive benefit across all stakeholders for going to an order bank system. It put pressure on our industrial system to deliver quickly. It reduces our dealers costs more than just low day supplies, you mentioned. It allows us to significantly reduce our incentives. And I [Indiscernible] -- I don't know how much money we're wasting.

I know we're wasting money on incentives, I just don't know where. With an order based system, we will have much less risk of that. It requires us to dramatically reduce our order complexity as well. So there are a lot of enablers that have been put in place to move us to this new system and new go-to-market approach. I'd love to talk to you more about it, but I'll try to give you the high hard ones.

[Rod Lache, Wolfe Research]

Thanks. Makes sense. Thanks, everybody.

[Operator]

Our next question comes from John Murphy, Bank of America.

[John Murphy, Bank of America]

I just wanted to actually follow up quickly on that. Jim, you mentioned getting back to 50 days to 60 days supply. That sounds closer to normal than not, but you're also -- the way you're describing the order bank, it looks -- sounds like 20%, 25% of your sales would be built-to-order, the horseshoes and hand grenades. So I'm just curious how you decide where that balance lands? how you keep the inventory tight, your partners to dealership, happy, and selling and creating value for you.

But then also big part of the story is the tightness in the secondary market, and the used market, keeping [Indiscernible] high, which is helping the new vehicle pricing and it certainly helping out at Ford Motor Credit. So there's a seesaw fracture you get the benefit on both sides. Just how do you figure out where this should land and how you actually execute on it.

[Jim Farley, President and Chief Executive Officer]

Really good question. So the team has done a lot of work on this. I will try to answer it very simply. Our target is 50 days to 60 days supply. That means trucks will be a little bit higher. We have a lot -- about a third of our truck dealers [Indiscernible] , 5 trucks to them could be a 100-day supply, but they need 5 trucks for the local community. And for urban and suburban dealers, it will be less than that range. Different segments will have different targets. We actually did this post-financial crisis for a few years. And then over time, lost discipline. And this is quite important for this management team.

We have a weekly and monthly operations review, where we'll look at this very carefully by segment for each of the regions. That's the kind of soft wiring or management judgment. Going to an order bank, I would say is a hardwired way of reducing the stock. And I think it's going to take both for Ford to make this transition. It can't be just relying on management. keeping within that range.

We certainly will have an exception process to go beyond that, and there will be a pretty tough discussion with our operating teams. But I think what I'm more excited about is the hardwiring of going to an order-to-delivery order system, which actually our new launches gave us that gift. Because for Bronco, and Mach-E, and some of the other high demand vehicles, we moved the reservation system into an order bank system.

We then realized, my God, why don't we do this for all the vehicles, not just those vehicles. And that's when we had to put a series of incentives and more policy changes like order complexity reduction in the system to make it kind of the way we do things at Ford. I think it's going to require both changes.

[John Murphy, Bank of America]

Okay. That's helpful. And just a follow-up on that, current state of affairs of retail versus fleet mix. It seems like can you talk to the dealers, is an emphasis on retail. The dealers, certainly at your level, Just curious, if fleet comes back -- I mean, the demand is there, how are you balancing that --

[Jim Farley, President and Chief Executive Officer]

Sure, it is.

[John Murphy, Bank of America]

-- current days and go forward. I mean, because the demand is there, it's just some of it is getting fulfilled in the used market. They're going after auctions instead of ordering from you guys. So how do we think about that recovery go forward and where does it stand right now?

[Jim Farley, President and Chief Executive Officer]

Really good question. So it depends on the region. Of course, we're a dominant commercial brand in multiple regions like Western Europe and the U.S., even in China in certain segments. And we're seeing in Europe a very dramatic order bank on our vans. It is -- it is something I've never seen in my career. We're talking months and months and months of back orders. So the demand for our commercial vehicles in Europe is extremely strong and the order bank is months and months.

In the U.S. we're very fortunate that our commercial business is heavily focused on transit and Super Duty, and of course, F-150 is kind of mix. And so for those vehicle lines, transit and Super Duty, it's very easy to -- we don't have to prioritize between retail and commercial because those vehicle lines are almost a 100% commercial. The one that's challenging for us to balance is F-150. And we -- as you could see in this quarter, we're very carefully mixed managing.

But we are very respectful of the needs of our commercial customers. We know where our toast is uttered. And those customers are really important for us. In fact, we in discussions in them right now about the trade-off between feature content and availability. We have many commercial customers in the U.S. that have been waiting for months and months for the vehicle.

And we are discussing with them, would you be willing to take off feature content to get your vehicles now? And that's -- and you can expect us to be balanced about that discussion and negotiation and compromise. And it's -- we'll make the right call for the company and for the customer. But they are pushing us for availability now, even if it means lower future content.

[John Murphy, Bank of America]

That's very helpful. Thank you.

[Operator]

Our next question comes from the line of Adam Jonas, Morgan Stanley.

[Adam Jonas, Morgan Stanley]

Thanks. A great call so far. And Jim, I have to say, I did a Ctrl+F for the word hybrid in the [Indiscernible] and in the press release and I don't see it, man. No hybrid. It's a beautiful thing. So good. Yeah. But they're dead. They're gone. All right. My question on EVs, your BEVs. When do you think that they can be positive profit on a fully costed basis, not contribution. Like, when can they be profitable? And do you think it's 2022 is still too early for that? My first, and I have a follow-up.

[John Lawler, Chief Financial Officer]

Thanks, Adam. Actually, Mach-E is profitable. Contribution margin, positive and profitable on the bottom line today.

[Adam Jonas, Morgan Stanley]

Wow.

[John Lawler, Chief Financial Officer]

So we've seen strong demand for that. Yeah. So I think when we look at it over time, as we talked about [Indiscernible] , and we've talked about with you. We've got to ride that technology curve down. We've got to get to the $80 per kilowatt hour for the battery pack before the end of the decade.

We've got to scale the BEV content. We have commonality, and the top hats, and other components that will help us as well. And then, of course, we need to build on our services and such to really improve the profitability of the [Indiscernible] as we move forward. But I can tell you that Mach-E is profitable today.

[Adam Jonas, Morgan Stanley]

Wow, that's incredible at 50,000 type run rate for that to be correct. Okay. My follow-on question, Jim, is about always on and the order bank. I mean, really huge. Just really interesting when you combine the order bank system with always on, where you go connect -- can engage the consumer directly for services and F&I and insurance and the OTA. But I am talking to some dealers that are freaking out.

That some Darwinian forces could be at work where you're not, let's say, directly infringing on the franchise laws, but you're dancing close as you probably should given all the technological changes over the past 70 or 80 years since these laws came. So what's your message to them? What if order book goes to 80% of your units or the majority, and then the dealers are just these delivery centers? And then, you're going direct on all the other wonderful services. What's the message to the dealers?

[Jim Farley, President and Chief Executive Officer]

Great question. Well, we're going to have a couple of different population of dealers. We are going to have our professional dealers and the answer is a little different for them versus our retail dealers. We'll have our rural dealers and the answer is a little bit different for them than suburban and urban dealers.

The -- I would say the message we're giving to our team, our dealers is, look, we're going to have to work really carefully together, so -- because the customers are going to have a lot of questions on Ford BlueCruise, for example. So we want to make sure the dealers are very knowledgeable about these new OTA features, that are really meaningful in the use of the customer's life. That's one. The second one is service, service, service, service. Service.

That is the most important thing for us, is wiring a closed loop between the vehicle, the condition of the vehicle, the service capacity of the dealers, and the customer is going to be the most important ballet we're going to have to play together with the dealers. This is especially true for Ford Pro. And in fact, today, we already have 160 remote trucks doing service for our commercial customers at their business.

Warranty work, that's a good example of the evolution of the business model, where they're taking their Service Department from a fixed hub and going on the road with their service capacity. And those trucks have to be cooked into the vehicle data and the prognostics. Our parts legacy system to order parts and the dealers on dispatch system. That has to be a closed loop. So, all I would say to you is the orchestration and our benefit, our chance to win. Just like maybe targets, a chance to win versus online retailers is that in-person service, especially in professional customers.

[Adam Jonas, Morgan Stanley]

[Indiscernible]

[Operator]

Our next question will come from the line of Colin Langan with Wells Fargo.

[Colin Langan, Wells Fargo]

Great, thanks for taking my question, and congrats on a good quarter. Inventory levels. We've never seen them at these levels obviously before and obviously it's impacting your market share. Any sense of how much of that you think you could recoup and how much are you concerned may switch to other brands because people might only wait for so long?

[John Lawler, Chief Financial Officer]

Yeah. Hi, Colin. It's John. So I think what we're seeing here from a market share drop is completely related to the fact that our stocks reduced so much. We have the chip issue. We lost the volumes that we lost in the second quarter. We expect that as we work to improve the run rate and through the third quarter, we're very focused on maintaining this high turn rate, filling the orders that we have. As Jim said, we're going to continue to work on retail orders.

And continue to bring our customers along that way as well. So we think that we have a good chance to regain that share, especially with the strong lineup that we have. and so we see this as a temporary issue related to the chip issue and the volume and production we had in the quarter.

[Jim Farley, President and Chief Executive Officer]

And we will not cede truck leadership to anyone.

[Colin Langan, Wells Fargo]

Okay. [Indiscernible] touch on Connected Services. You rolled out Ford Liive in Europe on commercial vehicles. I -- I believe it's free right now. I mean, how is that rollout going? And when do you try to monetize that and get revenue out of these services?

[Jim Farley, President and Chief Executive Officer]

Great question. So we do -- we just launched FORDLive, as Jim mentioned, in the UK and Spain. We have 5 more EU countries covered by the end of the year to launch, so we're really excited about FORDLiive. What we've committed to so far is in the next couple of years by 2025, we expect our digital and charging revenue in Ford Pro to be about 1 billion dollars today. I wish we had more time to focus on this frankly.

We have about just under 200,000 unique subscriptions for our telematics and data services. We grew at about 20,000 units in the quart -- 20,000 subscriptions in the quarter. And we feel like that digital telematics and [Indiscernible] data like fuel tank information plus adding the charging services like Electriphi for Depot charging for our customers, our high-growth area with the revenue to that level in the next couple years.

The monetization of FORDLiive is really around our traditional parts business, which has very high margins and we have a very low share. So the opportunity for us upside is tremendous, post warranty. Even our commercial customers, we get very few of those customers. And so the real payoff for this closed loop is going to be much higher share post warranty of that very profitable business.

[Colin Langan, Wells Fargo]

Thanks for taking my question.

[Operator]

Our next question will come from the line of Ryan Brinkman with JPMorgan.

[Ryan Brinkman, JPMorgan]

Thanks for taking my question. One thing that especially stood out in your results, I think, is on Slide 6, where it shows that units wholesaled in the quarter rose 18% year-over-year, but that revenue was up by more than twice as much by 38%. So just a few questions around pricing and overall revenue per unit. I can see from the [Indiscernible] on Slide 9 that Net pricing helped EBIT by 1.9 billion or kind of 10% of last year's revenue, which seems suggests about the idea that half of the growth in revenue over unit volume into Q was driven by price and the other half by makes. Is that roughly correct? And what do you think the outlook is for continuing to grow revenue in excess of the change in volume?

[John Lawler, Chief Financial Officer]

Yeah. Thanks, Ryan. I think pricing is the majority of what was behind that growth. We had a very strong quarter relative to pricing as we saw, our inventory shrink. And we see the strength in the underlying demand of the products that we have. And so I think I would think about it more as pricing, a little bit of mix in there, but more of it is pricing.

[Ryan Brinkman, JPMorgan]

Okay, very helpful. And then just as a follow-up, we saw some estimates that your incentive spending in June in the U.S., it may have fallen like 50% year-over-year, leading the decline in industry-wide incentives. I'm curious how much of the decline in incentives do you think maybe driven by hot new products like the F-150, Bronco, Bronco Sport, Mach-E, et cetera, versus how much is the function of the low inventory environment or maybe just a general inflationary environment?

And to that end, it might be helpful to know if carryover pricing, which I think usually declines year-over-year, if that might also be tracking stronger and what your outlook is for incentive spending going forward, maybe in light of some of the comments you made earlier on the call about inventories and order bank, etc.?

[John Lawler, Chief Financial Officer]

that's a great question. I think we've been working [Indiscernible] this as you'd expect. It's a combination of all of the above, right? We have strong products. We see continued demand for those strong products, supply is well short of that, it's allowed us to continue to keep the pricing strong and improve the pricing in the second quarter versus what we had expected. And I think as long as the you see this imbalance between supply and demand, we'll continue to have stronger pricing power.

As we've seen through the first quarter and the second quarter. As we go through the year, when we start to see supply and demand normalize. we'll see some of this pricing come off a little bit in the fourth quarter and then we'll have to see how that runs through through next year. But given the strength of our product lineup and the demand we see, we expect to have a relatively strong pricing power for the near foreseeable future.

[Ryan Brinkman, JPMorgan]

Thank you.

[Operator]

Our next question will come from the line of Joseph Spak with RBC Capital Markets.

[Joseph Spak, RBC Capital Markets]

Thanks. Good afternoon. I wanted to get back to the investments in, in modernization and maybe frame that in the context of the 2023 view you laid out at the Capital Markets Day. How does that investment trend through those years as you think about the margin targets you laid out and there's an assumption that by the time you got to '23 or maybe a little bit later, there's a return on that investment, such that it becomes a neutral or even positive to the margin.

[John Lawler, Chief Financial Officer]

Yes, thanks. Of course. as we make our capital allocations and we make these investments, we expect that we're going to get a return on them. And that's all part of our walk up into 2023, the 8% margin. We're also continuing to work on cost reductions elsewhere. right? These are investments that we're making in our new products with the launches and connectivity and IT.

We've got advertising in there for these launches, and then, of course, customer experiences as I talked about earlier. But we're also driving cost reductions elsewhere as we continue to improve the business towards that 8% margin in 2023. So we'll invest in certain areas. We will see costs go up in certain areas, but we should also see cost coming down another areas, particularly material costs, et cetera.

[Jim Farley, President and Chief Executive Officer]

One particular area? of modernization that doesn't I don't think get enough attention in where we're investing as a Company. Certainly 30 billion in electrification, and the vertical integration of batteries and our, of course our investment on autonomy. I think you all know about where we're spending our money in the general categories.

The 1 I really want to highlight is the very significant investment in our embedded electrical architecture upgrade. This is really a significant move by Ford to not just invest in electrification, but move those products to fully digital updatable in all modules and go to a fully modern zonal electric architecture.

I'm not going to go through the details, but this is a very expensive transition, but it will enable a whole new capability for the always -on experience than even today's connected vehicles like Mustang Mach-E. And I want to highlight that because it often gets lost in the other categories of investment and monetization.

[Joseph Spak, RBC Capital Markets]

Okay, so just to clarify, so the EV spend is included in that bucket you mentioned?

[Jim Farley, President and Chief Executive Officer]

Yes. Yes. So when we talk about upgrading our electric vehicles, it's much more fundamental than just the investment, and the tooling, and the engineering of the electric vehicle and its components and propulsion. It also includes a completely new approach to an embedded software and hardware system.

[Joseph Spak, RBC Capital Markets]

Okay, And just -- and going back to the order bank, which is clearly interesting, that's -- it seems like an easier task, quite frankly, when you have great product like you do with the Bronco, the Mach-E, and the Lightning, which are -- seem well-received and also limited. I guess what I'm wondering is how are you going to sort of balance that with inventory as you think about like you're an explorer and your 4 or 5 of its product lifecycle or like is the plan to still keep inventories of the older products or more mature products tight such that you can still get some into the order bank or are there other plans to keep the product fresh throughout the lifecycle. That can lead to --

[Jim Farley, President and Chief Executive Officer]

Sure. We'll have ground stock for sure in dealers. And we obviously have to keep the vehicle fresh. More and more of that will be the digital freshness of the vehicle. But I would say if you look at our 60 plus thousand unit order bank in North America, a lot of -- not all of those are Bronco s and Mustang Mach-Es. We're doing this for our whole brands.

[Joseph Spak, RBC Capital Markets]

Thank you.

[Operator]

Our next question will come from the line of Philippe Houchois with Jefferies.

[Philippe Houchois, Jefferies]

Yes. Good afternoon. Thank you very much. I've got 2 questions. The first one, sorry, I'll go back on this order bank and inventory levels. To be honest, I'm a bit surprised you talking about 50 days to 60 days of inventory in the few Trump because that's done much lower than what we've had in the past. And I would've thought the order bank would actually enable to actually carry much [Indiscernible] inventory and we've seen that benefit to pricing. So I wonder if the 56 days is the first step, but do you think you can do better in the future? And along those lines and then maybe more on the Ford Credit side.

But when I look at European car companies, they carry more finished products on their balance sheet, the core balance sheet. And then [Indiscernible] to be less on the Cinco balance sheet, through the dealer receivables, where you guys are proxying. It's the opposite in the U.S.

And I'm just wondering if you look at a situation where you go to more order banking for your production. If you end up carrying more inventory on your Industrial balance sheet, which would increase your working capital requirement from an industrial standpoint, that was my first question.

And the second one, if I can ask, briefly on China. It seems like you're stalling a bit in China, and because you've localized lot more of Lincoln, more profit able. You had big losses I [Indiscernible] before, and side before. And I'm just wondering, can you comment maybe on what is happening generally in China? Is there -- there seems to be concern about how the Chinese brands are making good progress by some of the EVs launched by your competitors are not quite getting the love from customers that was expected. And I'm just wondering if you see a more difficult environment in China for you in the balance of the year into next year. Thank you.

[John Lawler, Chief Financial Officer]

Yes. I will take the working capital. Now, where we see the order bank helping us is we actually see it simplifying the industrial system because we'll know exactly what we're going to build. So we're actually working through that now and trying to use that to simplify and reduce things like working capitals. So I think if anything, it would have the opposite impact.

It would increase working capital. We use it to drive down working capital. And then on the day supply. What we've seen in the past is around a 75-day supply. So 50 day, it's a 25-day reduction. so we do see that as substantial. And, of course, that'll be different across the different vehicle lines. So we do see that as a substantial pull back in the day supply.

[Jim Farley, President and Chief Executive Officer]

And just remember, in Europe, just [Indiscernible] Ford of Europe, the cross-border issue in Europe is not so small. We have holding centers and lots of ways to manage the stock. We don't plan to implement that system in the U.S. It evolved over time and we have one country.

So I think we're getting -- our intention is, as John said, is not to handle it that way. In China, the team has made tremendous progress from a $1.5 billion loss hovering around breakeven now was slightly below that. And we're in a very important time for Ford in China. Lincoln is now profitable, and we just localized those models. We only launched Lincoln in 2015. I was there. So it's a recent phenomenon.

And we're just about to launch a whole plethora of brand new vehicles, like we're doing in North America today. So we're on the eve of the Mustang Mach-E launch localized, and then we have all these new vehicles, the Evos, I can go on a long list, and it will be just like what we're seeing in North America, full of freshness, and that will play out over the next couple of years. So China is very important for our profit plans.

I think the team has done a tremendous job in stabilizing our sales situation and improving our cost, and now And now it's going to be a growth story in China. We're just commercializing and industrializing the vehicles as we speak. And Mustang Mach-E, it's the first major one. Thanks.

[Philippe Houchois, Jefferies]

Thank you very much.

[Operator]

And our final question for the day will come from the line of Dan Levy with Credit Suisse.

[Dan Levy, Credit Suisse]

Hi. Good evening. Thank you for squeezing me in. First, wanted to just ask on the chip shortage and I fully recognize the situation is very fluid and your crystal ball was as good as anyone else's. But do you have a sense for how long it might take until you're no longer supply-constrained on production or something that's fully resolved, by your best guess by early next year or do you think that this -- there might be still some supply constraint lasting much longer and deeper into 2022. So just the baseline expectations around that.

[John Lawler, Chief Financial Officer]

So Dan Yes, I mean, I think my guess is as good as anybody is on this. We do see that the chip issue running through this year, and we could see it bleeding into the first part of next year. But I think we won't really have a good feel for that, until later in this year. We know that, as we've had discussions with the [Indiscernible] suppliers, they're telling us they're reallocating capital, they're increasing supply for automotive et cetera. But I think this is one of those things where we need to see the release coming through before we can really feel comfortable that we're out of the woods here.

[Dan Levy, Credit Suisse]

Great. I understand. And second question is just on ICE versus BEV. And clearly you're deemphasizing ICE, and presumably that means the investment is coming down. I assume that part of that 30 billion headline number you gave includes some reallocation from ICE to EV. But I think we also know right now that, and maybe this is just a function of the market, but ICE sales are extremely strong in the U.S.. It could remain the case for a while.

So what should we expect on margin for ICE vehicles, especially as some of that investment comes down? Is it possible that the outgoing margin on some of the ICE vehicles actually increases and you could potentially run into a negative mix issue as we -- as you start to pivot from ice to the beds?

[Jim Farley, President and Chief Executive Officer]

Yeah. It's a good question. Generally speaking, that certainly could happen. We don't know how the demand will shift. Obviously, our guess is 40% of [Indiscernible] , 240 gigawatt capacity by 2030. So we're busy making all that happen as you say, 40% is a lot -- is a lot higher than today and I think we have -- well, I know we have the right strategy for the Company. But so much of this transition is going to depend on government support, infrastructure buildout. And we need to be patient.

And I think agility will become a very important skill for the Company. So far, the first inning would imply that Ford 's number 1 in sports car is Mustang, we're number one in vans with transit, we're number 1 in pickups with F-150. We're electrifying all 3 of those in the next 6 months.

And so far, the demand is actually higher than we expected. So I don't know what's going to happen. We don't know what's going to happen. The support in China, but especially in Europe, has accelerated the BEV adoption in those regions. But as you say, we get into the next phase of expansion with a lot more product offering and all that capital pointed at BEV s, it's hard to say.

And it's hard to handicap the government's policy at a government level. over time. I think the most important thing isn't how much money we're spending, because that's necessary -- that's enough. It is our agility and the kind of execution of our BEVs and our management of the profitability of those vehicles, and that's where we're putting our energy.

The agility of our industrial system, our manufacturing, our focus on the profitability improvement and the vertical integration for key electric components, and and making our vehicles different and more competitive than others. I know it's a very general answer, but I don't think we know enough to answer your question.

[Dan Levy, Credit Suisse]

Understood. That's helpful, nevertheless. But thank you very much.

[Operator]

Thank you. And with that, this concludes the Ford Motor Company's Second Quarter 2021 Earnings Conference Call. We'd like to thank you for your participation. You may now disconnect.