Ford Motor Co

NYSE:F

Earnings Call Analysis

Ford's steady growth, challenges, and future guidance amidst evolving markets

In the third quarter of 2024, Ford reported $46 billion in revenue, marking a 5% increase and the tenth consecutive quarter of growth. Adjusted EBIT reached $2.6 billion with a margin of 5.5%. Key drivers included a 13% revenue uptick in Ford Pro, representing close to $16 billion, and a robust performance in key models like the F-150 and Transit. However, rising warranty costs and inflationary pressures in Turkey constrained margins. Ford now anticipates adjusted EBIT of $10 billion to $12 billion for the year, while targeting adjusted free cash flow between $7.5 billion and $8.5 billion. The company aims to return 40%-50% of free cash flow to shareholders, amidst an ongoing focus on cost efficiency and product launches.

Quarterly Performance Overview

In Q3 of 2024, Ford reported $46 billion in revenue, marking a 5% year-over-year growth, supported by robust truck sales and the launch of new models such as the Ford Explorer and Lincoln Aviator. The company achieved an adjusted EBIT of $2.6 billion, reflecting a margin of 5.5%, which represents an increase of 50 basis points from the previous year. Profit improvement stemmed from higher volumes and a favorable product mix, offset by pricing pressures in the electric vehicle (EV) segment and adverse currency effects.

Cost Management and Cash Flow

Ford's adjusted free cash flow for the quarter stood at $3.2 billion, contributing to a year-to-date total of $5.9 billion, with a cash conversion rate of 74%, well above the target range of 50% to 60%. The company maintains a strong balance sheet with approximately $28 billion in cash and $46 billion in total liquidity, allowing for strategic investments in growth opportunities. Ford aims to return 40% to 50% of its adjusted free cash flow to shareholders; since early 2022, it has returned over $10 billion in dividends.

Segment Performance Highlights

The Ford Pro segment generated nearly $16 billion in revenue, up 13%, with an EBIT of $1.8 billion and a healthy margin of 11.6%. This segment is viewed as a stable revenue source, demonstrating consistent performance with a year-to-date EBIT margin of 14.6%. Conversely, the Ford Model E segment reported a loss of $1.2 billion, although it achieved $500 million in cost improvements. Meanwhile, Ford Blue's revenue grew by 3%, supported by rising volumes in North America despite slight declines in overall wholesales.

Guidance and Future Outlook

Ford's guidance for the full year expects adjusted EBIT to fall between $10 billion and $12 billion, largely influenced by anticipated higher warranty costs and inflationary pressures affecting operations in Turkey. For 2024, the company projects flat to slightly increased sales rates in both the U.S. and Europe, with specific expectations for U.S. sales between 16 million and 16.5 million units. The Ford Pro segment is expected to yield an EBITDA of around $9 billion, while the Model E is forecast to incur losses of approximately $5 billion.

Electric Vehicle Strategy and Market Position

Ford's approach to EVs includes a significant focus on cost reduction, with $1 billion shaved off EV expenses this year alone. The transition to lithium iron phosphate (LFP) batteries and strategic capacity reductions are part of this initiative. The company acknowledges pressures from a rapidly evolving market with approximately 150 new EV models anticipated in North America by 2026, leading to increased competition and pricing challenges. However, Ford's early involvement in the EV market positions it advantageously against rivals.

Emphasis on Warranty and Future Growth

Warranty costs remain a critical focus for Ford, with management committed to reducing these expenses, which have historically impacted earnings. Continuous improvements in manufacturing processes are also prioritized to enhance quality and reduce defects. The company recognizes substantial potential for future growth, particularly in the Pro sector and via new service offerings that help secure recurring revenue streams.

Earnings Call Transcript 2024-Q3

[Operator]

Good day, everyone. My name is Layla, and I will be your conference operator today. At this time, I would like to welcome you to the Ford Motor Company Third Quarter 2024 Earnings Conference Call. [Operator Instructions] At this time, I would like to turn the call over to Lynn Antipas Tyson, Executive Director of Investor Relations.

[Lynn Tyson, executive]

Thank you, Layla. Welcome to Ford Motor Company's Third Quarter 2024 Earnings Call. With me today are Jim Farley, President and CEO; and John Lawler, Vice Chair and CFO. Also joining us today is Cathy O'Callahan, 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 and other important content at shareholder.ford.com.

Our discussion also includes forward-looking statements about our expectations. Actual results may differ from those stated. The most significant factors that could cause actual results to differ are included on Page 20. Unless otherwise noted, all comparisons are year-over-year. Company EBIT, EPS, and free cash flow are on an adjusted basis.

Lastly, I'd like to call out a key near-term IR engagement. On November 20, John Lawler, Vice Chair and CFO, and Sherry House, VP Finance, will participate in a fireside chat with Dan Levy at the Barclays Global Automotive and Mobility Tech Conference in New York. Now I'll turn the call over to Jim.

[James Farley, executive]

Thanks, Lynn. Hi, everyone, and thank you for joining us today. I want to start by thanking our global team for their commitment to Ford+ and to adding and creating value for all of our shareholders. I'd like to touch on an overview of our strategy and why we believe we're so well positioned versus the competitors in key areas, and John will take you through the Q3 results and full year outlook.

Several years ago, we restructured our overseas operations and our global footprint is a key strength for Ford. We restructured in Europe, South America, India, and China. Collectively, in 2018, those regions were losing $2.2 billion and burned $3.4 billion in cash. Now all of those regions are collectively profitable. We're going to continue to stay laser-focused on cost and getting leaner as a company, but our team won't be distracted by major international restructuring facing other OEMs, especially in China.

And speaking of China, we've gone asset-light for a couple of years, as we've told you. We have strong JV partners and we have a growing export business. In fact, China and its exports are now contributing over $600 million to the company's EBIT this year. Another area of strength is our EV strategy, which I wouldn't trade for any of our competitors. We moved early. We've learned a lot on Gen 1 from our customers, the global market dynamics and what it requires to be fit to compete. No doubt there's a global price war and it's fueled by overcapacity, a flood of new EV nameplates and massive compliance pressure.

In our home market in the U.S., no OEM is immune. Since Q1 of last year, EV volumes have grown 35% while revenues in total are flat at $14 billion. That means the progress on volume has been fully offset by prices. We're expecting roughly 150 new EV nameplates to hit North America by the end of 2026. And some of our competitors are already resulting -- resorting to very aggressive lease tactics even on their brand-new products, which creates huge residual risk and overhang and brand damage.

What we're doing about these market dynamics, well, we're focused on cost. We've already reduced $1 billion in our EV costs this year. We remade our battery footprint. We trimmed our capacity by 35%, in line with where we think the market will be in a few years. We accelerated the mix of our batteries, emphasizing LFP. We'll be the first 1 to manufacture in the U.S., and that battery will leverage the IRA production tax credit. We're shifting new launches, focused on getting the products we do have in our EV portfolio profitable within the first 12 months. And we're deep into the design and engineering of our next-generation vehicles. Boy, are we excited about these coming out in the next few years.

In 40 years in the industry, I've seen a lot of game-changer products. But the midsized electric pickup designed by our California team has got to be one of the most exciting. It's an incredible package in consumer technology for a segment we know well. It matches the cost structure of any Chinese auto manufacturer building in Mexico in the future. How do we know that? Because 60% of the BOM has already been quoted.

Another advantage for us, obviously, is Ford Pro. It's unique because we're combining product strength with software and repair services all linked together. Don't be confused by other press releases on the ground game in the commercial market because what our customers see is that we have reached a leading product portfolio, an incredible software portfolio, as well as gaining strength in our repair services, all of that driving sticky reoccurring high-margin revenues. It turns out in Pro, our dealer network is one of our key advantages. In the U.S., we have the largest commercial vehicle network, and that's essential to drive those attach rates to services.

And our software is also a competitive advantage. Our paid subscriptions delivered a growth of 50% in revenue, 30% just this quarter, and our gross margins are over 50%. There's incredible upside at Ford for our software to grow our installed base, attach rates, and ARPU. Another strength is our diverse powertrain lineup. For example, in the U.S., the hybrid pickup sales at Ford have more than doubled in the past 2 years. We now have a nearly 80% market share of hybrid pickups. A lot of our companies shunned hybrids and now they're scrambling, but it's going to take them years to catch up.

Interestingly, in our home market, Ford is the #1 ICE brand, the #2 EV brand, and the #3 hybrid brand. Taking a step back, clearly, our strategic advantages are not falling to the bottom line the way they should. Costs, especially warranty, has held back our earnings power, but as we bend that curve, there is significant financial upside for investors. By design, 70% of the bonuses for our managers is tied to cost and quality, and more than half of our long-term incentives as leaders is tied to TSR.

Let me double-click on the EV business. We applied lessons really early that we learned on Mustang Mach-E across our lineup. In the last 24 months, we've reduced the Mustang Mach-E's cost by $5,000 per unit. As you know, Mach-E is second to Model Y in the segment for sales and transaction prices despite being in the market now for several years. And we continue to break down the friction or barriers to adoption for mainstream ICE customers. We're the first to join Tesla Supercharger Network, and we'll be shipping about 100,000 adapters by the end of this year.

We were the first to offer complementary home charging and installation. We call it the Ford Power Promise. And we've seen a huge uptick in interest on our website from the Power Promise. But our dealers are also becoming a competitive advantage for mainstream customers. Take, for example, Tim Hovik and his team at San Tan Ford in Arizona. In the quarter, one of the months, they sold 137 electric vehicles, and Arizona is not a ZEV state. These are incremental sales with solid gross profits for the dealers. And we are building on that know-how for the last couple of years in scaling and being #2 across our whole U.S. dealer network.

All of our 3,000 dealers are primed to sell EVs now. We have 7,000 trained EV specialists and 14,000 dealership hours have been spent on EVs now. Our dealer network has already installed 800 fast chargers across the U.S. and Canada and many more are on the way. Next year, we expect to improve the trajectory of Model e's business through cost, scaling, and we're not trading wooden nickels inside the company for emissions credits. That won't change the economics of our EV vehicles and the company as a whole.

Turning to Pro. We're the first OEM to segment our customers between retail and commercial. And it starts by having a great product lineup and leaning into the future. About 9% of Transit sales are now electric vehicles in the quarter. That's up 1.5 percentage points from a year ago. Our Super Duty has more variance than any other OEM, and we're bundling vehicles and services to provide unique value for our customers. What I mean by that is about 13% of our EBIT for Pro now comes from repair services or software. We think that will grow to about 20% by 2026.

We have the largest service network in North America. We're on track this year to add over 4,000 commercial service bays and 2,500 Pro mobile service units. That, by the way, is up 50% year-over-year. Our mobile repair orders are up 60% year-over-year and now almost 1 out of 10 Pro repair orders is done by a mobile service truck. Globally, Ford Pro Intelligence subscriptions rose 30% in the quarter. We now have about 630,000 subscriptions. As I said, that's a revenue growth of 50%.

We're adding more and more product functionality features that third-party software companies can offer because it's tied to the product, including remote vehicle lock and unlock, limits to our top speed and acceleration. Yes, we are seeing more pricing pressure on Pro in the second half, but that was consistent with our original guidance for the year. Demand is also in line with our expectations. We're seeing pent-up demand for Super Duty cabin chassis and Transit wagons.

And then Ford Blue. Let me double-click for a second on that business. First, we have an incredibly fresh lineup across the globe and we're going to add to that. We have 4 key U.S. launches on deck. The Maverick and Bronco will be launching in the fourth quarter with new derivatives and a fresh new product, and we have an all-new Expedition Navigator launching early next year. In Q3 in the U.S., our share was up 40 basis points to 12.6%. Our ATPs in September were in line with the industry, and the Ford brand continues to transact higher than the average nonpremium brands.

Now let me unpack the inventory. We ended the quarter with 91 days of gross stock and 68 days of dealer stock. That's a little higher than our target range of 50 to 60 days, but the mix is really good. Now we're intentionally holding extra inventory through the year-end to protect sales during the Q1 launch activities that I mentioned. And adjusting for that, we're right in the target range for us as we start 2025 from an inventory standpoint.

The biggest opportunity for the company clearly is cost and warranty. We're attacking both of these and we will realize the upside. The biggest opportunity is warranty. And here's some evidence of things on the input metrics side that are really improving. Our 3 MIS or 3 months in service quality is getting a lot better, a 31% increase in the last 3 years. This year, the high-volume vehicle lines like F-150 and Escape had huge launches and really had no virtually no warranty spike. J.D. Powers typically sees a 92% increase in defects during a launch.

Our launch production losses have also been cut in half from the last year, and these are very large-scale launches like F-150 and Explorer. Another key improvement that we're seeing is our ability to OTA and improve our vehicles in the field. We've updated 4 million vehicles at Ford this year and 20 million total since we started doing OTAs. We can now update 30 different vehicle modules, well beyond the sync and infotainment modules. The OTAs, on average, save our customers 5 to 6 days waiting for repairs and, of course, it lowers our cost of warranty. All improvements to warranty will take time to reduce our warranty expense, maybe up to 18 months, but we're moving the needle on all the inputs.

Taking a step back, I believe we're in a very strong competitive position. We have a lean and profitable international business with no distractions. We have a fresh and appealing lineup which will get even fresher. We have a strong and diversified powertrain strategy that gives customers choice and gives us the flexibility and reach. We're already on our second generation of electric vehicles. They'll be launching in the next couple of years. We'll reduce the losses short term on our Gen 1 products and set us up to be a global competitor in the long term.

We have a vibrant growing software and repair business for Pro, and Pro is clearly a strategic advantage for the company. We're going to keep doing the hard yards to capture the tremendous upside in cost and warranty defects present to us, and we're going to bring it home for our valued investors. John?

[John Lawler, executive]

Thanks, Jim. In the third quarter, wholesales were flat while revenue grew by 5% to over $46 billion. That's our tenth consecutive quarter of year-over-year revenue growth. This is supported by our compelling product lineup offering, freedom of choice to both our retail and commercial customers. The quarter benefited from strong truck sales, including hybrids as well as the launch of the all-new Ford Explorer and Lincoln Aviator. We delivered $2.6 billion in adjusted EBIT with a margin of 5.5%, up 50 basis points from a year ago. Profit improvement was driven by higher volume and favorable mix, partially offset by expected EV pricing pressures and adverse exchange. Overall, costs were lower in the quarter.

I have great confidence in today's business and the changes that are underway. Several years ago, we proactively restructured our global product lineup and tailored it to focus on customer segments we know best and lead in, which has driven consistent top line growth. We're also slowly but surely improving our industrial system and shedding behaviors that have held us back in the past. And our free cash flow is stronger and more consistent than just a few years ago, all evidence that our Ford+ plan is working.

Adjusted free cash flow was $3.2 billion in the quarter and $5.9 billion year-to-date with cash conversion of 74%, well above our targeted range of 50% to 60%. Our balance sheet remains strong with almost $28 billion in cash and $46 billion in liquidity. We continue to believe that it is prudent to have extra cash on hand during this unprecedented time in this industry that provides us flexibility to invest in accretive growth, execute strategic build-partner-buy opportunities and maintain financial flexibility during the next economic cycle.

I'm also pleased to announce that we declared our fourth quarter regular dividend of $0.15 per share payable on December 2 to shareholders of record on November 7. We target to return 40% to 50% of adjusted free cash flow to shareholders. Annually and including today's announcement have paid out over $10 billion to shareholders since the beginning of 2022.

Now let me turn to our segments. Ford Pro delivered close to $16 billion of revenue in the quarter, up 13%, another quarter of growth. Wholesales were up 9% aided by the launch of the all-new 1-ton Transit Custom in Europe and robust demand for Super Duty and 2-ton Transit vans. EBIT of $1.8 billion was up year-over-year with a healthy margin of 11.6%. Ford Pro continues to be our prototype for sticky, high-margin noncyclical revenue. Paid subscriptions, attach rate, and monthly ARPU were up in the quarter.

Pro's results continued to demonstrate the consistency and resiliency of this higher-margin growth business, underscored by their year-to-date EBIT margin performance of 14.6%, in line with our long-term target. Ford Model e generated a loss of $1.2 billion. We delivered $500 million of year-over-year cost improvement, which was offset by industry pricing pressures. Global wholesales were down 11%, reflecting our focus on yield management and balancing dealer inventory in North America, offset partially by the launch of the all-new Explorer EV in Europe. Our team is focused on delivering further cost reductions, optimizing the Gen 1 market equation and driving capital efficiencies, helping to improve our profit outlook as we head into 2025.

Ford Blue revenue was up 3% in the quarter while wholesales were down 2%, driven by discontinued low-margin ICE passenger vehicles. Although overall volume was down, North America volume was up 8%, driven by key nameplates like F-150 and Ranger. EBIT of $1.6 billion and margin of 6.2% were both down year-over-year due to adverse exchange and higher manufacturing costs, offset partially by lower warranty expense and higher net pricing.

Hybrid sales up 30% in the quarter, continued to shine, and our global hybrid mix is still on pace to approach 9% by year-end, up over 2 points year-over-year with more products on the way. Ford Credit generated EBT of $544 million, up $186 million year-over-year, driven by an improvement in financing margin and higher receivables. Auction values declined 1% and lease return rates continue to normalize from historic lows. We continue to originate a high-quality book with U.S. retail and lease FICO score, again, exceeding 750 for the quarter. Our exposure to EV residual risk is low, with EVs representing less than 10% of our lease portfolio in the U.S.

So let's turn to our outlook. When we began the year, we expected full year company adjusted EBIT of $10 billion to $12 billion. Since then, our product portfolio has exceeded our expectations, delivering favorable market factors, including mix through the first 9 months of the year, and we expect this trend to continue in the fourth quarter. This speaks to the strength of our key nameplates and the resilience of our commercial business at Ford Pro. We are also on track to deliver $2 billion of cost efficiencies within our industrial platform, offsetting expected higher labor and product refresh costs for the year.

However, 2 gating factors keep us from a record adjusted EBIT this year: higher-than-expected warranty costs and the impact of inflation at our JV, Ford Otosan in Turkey, which increases the material cost of Transit vans sold in Europe. While inflationary pressures in Turkey is outside of our control, increased warranty costs are within our control. We now expect full year company adjusted EBIT of about $10 billion, which includes lower-than-planned volume in the second half for Ford Pro and Ford Blue due to supplier disruptions. In general, we see supply and demand for vehicles in balance.

We continue to expect adjusted free cash flow of $7.5 billion to $8.5 billion with CapEx between $8 billion to $8.5 billion. Our outlook for '24 assumes a flat to slightly higher SAAR in both the U.S. and Europe. Our planning assumptions for the U.S. is 16 million to 16.5 million units. Full year of customer demand for Super Duty contributing to better market factors for Ford Pro, lower industry pricing of roughly 2%, driven by higher incentive spending as we exit the year. For Ford, we expect this to be partly offset by top line growth from the launch of our new products.

Our segment outlook anticipates continued strength in Ford Pro. We now expect EBITDA of about $9 billion with an improved market equation, including continued pricing strength on core products. An expected loss of about $5 billion for Model e, which is the positive end of our guidance range, driven by over $1 billion in cost improvements that were partially offset by continued pricing pressure and investments in our new vehicle platforms. And for Ford Blue, we now expect EBIT of $5 billion, reflecting a balanced market equation and higher product manufacturing and warranty costs, partially offset by cost efficiencies. And lastly, Ford Credit's EBT will be about $1.6 billion, a double-digit growth year-over-year.

Our performance this quarter demonstrates the positive progress on our Ford+ plan, capital discipline, the right product portfolio, and consistent cash generation to reward our shareholders. We are relentlessly working to make our business better, and we remain focused on improving both quality and cost. That wraps up our prepared remarks. We'll use the balance of the time to address your questions.

[Operator]

[Operator Instructions] Our first question comes from Mark Delaney with Goldman Sachs.

[Mark Delaney, analyst]

Pro EBIT was strong but did fall to 11.6% in the quarter although still at 14.6% year-to-date. Maybe you can talk a bit more around what led to the moderation in Pro EBIT during the third quarter. And what gives you confidence in that mid-teens EBIT margin in the Pro segment over the intermediate to longer term?

[John Lawler, executive]

Yes. So when you look at it, what we're seeing this year, like we saw last year, is seasonality in the second quarter. Now there's transparency around the commercial business that we didn't have in the past. And first quarter, we see the peak in the rental business. That falls off in second quarter. In fact, this quarter, third quarter, we had basically 0 rental business.

The other thing we see in the second half is we see the shutdowns that we see at our plants. And as you know, we run these at full capacity so we lose those units and we can't make them up. And that's the seasonality you're seeing and then you see that show up in the EBIT in the second half. things we have at Ford Pro ongoing is we're continuing to see, as Jim said, strong demand for our Super Duty and Transit, especially the chassis and the wagons. Our pricing has held up pretty strong so far this year. We are seeing some top line pricing pressure with the '25 model year vehicles as we expected, but we're still continuing to move forward.

And it's not something that we're concerned about at this point based on what we're seeing so far with the '25 model years. So again, the business continues to be strong. And I would tell you that we're really starting to gain traction on our overall process of how we're going to market. And we're selling the solution, right? We're selling the vehicle along with the services that come along with that, that's about improving our customers' business and giving them productivity, which helps them improve their profits. So all of that's coming together and it's leading to a continued strength in Ford Pro.

[Mark Delaney, analyst]

I just had 1 either for you or for Jim, around Model e. I think you said during your prepared remarks you'd expect improved EBIT trajectory in Model e next year. Maybe you can help us better understand how impactful some of the recent cost and capacity actions the company has taken might be within the Model e segment. And within your outlook for an improved EBIT trajectory within the Model e, how much of a risk might be rising CO2 requirements within Europe and just the broader pricing environment for EVs as you think about that improved trajectory?

[James Farley, executive]

Thanks for your question. Good news is we're starting to scale EV business in Europe. And those vehicles are contribution margin positive and they're becoming a bigger mix of our business. We are definitely getting traction from our cost-down efforts on our first cycle of products. And we're really focused on Mustang Mach-E. We've made a lot of progress and we have a lot more to make. So I think this is one of the benefits of having the segmentation broken out.

And no doubt about it, I think we tried to highlight in our prepared comments the growing risk for everyone on pricing, and no OEM is immune to that. And as I said, we're seeing some of our competitors have enormous lease mixes, like 70-plus percent. So that will play out, especially in Europe, as you said. There's a lot of pressure in Europe. Our products are brand new in Europe so that's a good thing and that will help us next year. Anything else, John?

[John Lawler, executive]

No, I just think that we're going to continue to focus on cost improvements in the current generation and the future generation. And that's -- having been in the marketplace as long as we have, that's really helped frame up the mandate we have for the California team around costs to be competitive. And what it's all going to hinge on us, as you said, Jim, that top line pricing pressure.

[James Farley, executive]

Yes. And to be specific on the cost, we really expect next year and the following years, a lot of progress in the production tax credit for our first-gen products. That's really one of the key levers for us. As we've been able to pretty quietly restructure our sourcing of our batteries, where they come from, who makes them to really maximize the PTC, and that will drive a lot of cost down for our existing products. And you'll see that come to fruition starting in mid next year and all the way through 2027.

[Operator]

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

[John Murphy, analyst]

Just a first question on warranty for maybe for both of you. And Jim, you kind of cited some pretty good positive data around J.D. Power, and some other sources. But I'm just curious if you're willing to, at this point, kind of ring the sort of the positive alarm bell that we're now kind of all clear on some of the warranty issues we've seen in the past, particularly last quarter. Or is there -- I mean, what is the certainty that we're through the worst of this?

[John Lawler, executive]

Yes, John, I wish I could answer that with certainty. We are seeing the leading indicators, the physicals, we're seeing improvement there, especially around our 3 months in service '24 model year is over 30% better than what we saw in '21 and '22. As Jim mentioned, our launch spikes, basically on Explorer and Kuga, we didn't see one. So those are good indicators that things are going to get better from an overall quality standpoint.

Now it's going to take time for that to flow through from a warranty standpoint. What I can't tell you is I don't and can't read and we're doing the best we can on this, and I know it's not satisfactory for you guys, is the FSAs and the older models. What could potentially hit us? And we're out looking at all the data we can. We're looking at everything to try to get out in front of any of those. And we're working to increase on our current models everything we can do to fix things through OTAs, get the repairs out there as fast as possible, cut off any issues that are in the plants.

So I think we're doing all the right things from a physical standpoint. I just can't tell you when that curve is going to bend for sure and how that's going to start flowing through from a cost standpoint. And we're doing everything we can to figure that out and get there and understand the transparency and clarity around that.

[John Murphy, analyst]

And then just a second question around pricing. I mean, in Blue, it was still, on a net basis, even positive in the third quarter. A lot of concern around might -- what's going on with your inventory, although it sounds like you've answered that question, but also inventory and what might happen in the broader market. So I mean, as you look at this and you think about pricing, you've got great product coming out now and into next year that should be a bit of an offset.

It seems like you have the inventory worked out. How do you think about pricing going forward in the industry? I mean, it keeps surprising and being relatively resilient and actually even positive for you guys. So I mean, how do you think about that going forward?

[John Lawler, executive]

Yes. So this year, top line, both pricing and volume, were a tailwind for us relative to what we had thought. The industry is down 2%. We are seeing increasing pressures as we come through the end of the quarter, into Q4 from a top line standpoint. Your guess is as good as mine, John, is what's going to happen and how deep some of our competitors are going to go that have an issue with inventories?

Yes, our inventories were higher but we also gained share in the quarter and our sales pace increased. So we think we're -- we've got a plan to manage our inventories. We've got a plan to get back to within the run rate of what we expect. We do have some launches in Q1 so we will carry some higher inventory for those vehicles through the end of the year. But next year, we plan to get back to that 50 to 60 days run rate for sure.

As we move into 2025, there's a lot of water that needs to flow under the bridge still between now and the end of the year. One of the things we're looking at is the consumers in Europe, it seems that they're pulling back a bit and spending less, so we've got to watch that. And I think many of you guys have written about the fact that are we heading into cyclical pricing headwinds? And is that going to show up in 2025? As you said, we've all been pleasantly surprised is how it's held up so far. But I want to see how we run through this quarter, how the year-end is coming along, how sales are at the end of the year before I can give you any call on what we think is going to happen with pricing next year.

[James Farley, executive]

And the only thing I would add on the pricing is really the mix. We continue to see customers move into small utility. Affordable side of EVs continue to be really fuel the unit growth. And we're even seeing some change in series mix. So those are all uncertainties that we have to handicap for next year. But I just encourage all of us to not just look at the top line or the discounting but also look at the mix and the segmentation. The good news is the truck segments and the Pro segments are holding up really well.

[Operator]

Our next question comes from Adam Jonas with Morgan Stanley.

[Adam Jonas, analyst]

So the Chinese have really been growing rapidly in Europe and rest of world as you've seen. I know you don't break out results geographically, but any color on any impact you might be seeing in Europe competitively or even in rest of world regions that you wanted to highlight? And specifically, I was kind of surprised you mentioned that China was contributing $600 million to your results this year. I'm curious how much of that was from the domestic market versus reverse exporting from China.

[John Lawler, executive]

Yes. Adam, I'll start with that and then I think Jim will cover the rest of your question. So we are profitable in China in and of itself in China. Jim mentioned $600 million of total profits, and that includes our exports primarily to the rest of Asia and South America. So going asset-light has allowed us to stay profitable within China. And then the export strategy primarily from our JV or JMC and exporting those vehicles to the rest of Asia as well as South America is driving significant profit in Ford Blue.

[James Farley, executive]

And Adam, for our revenue globally, Ranger has become such a key product for us. We are in so many markets. And the reason why we're profitable overseas in so many of those markets is because Ranger. When I came in the company, Ranger was #13. Now we're #2 to Toyota Hilux. And in many markets, like Australia, we outsell them. So that's where the pressure is going to show up for Ford's revenue.

Great Wall is now localizing in Thailand. They're 60% of the pickup market in China. They're a really sharp company with great products and great value proposition so we have a great strategy for that. But that's where we see it. In Europe, as you said in Europe, the passenger car market has been impacted but we really don't compete there. We really compete in the commercial Pro business in Europe. We don't see the Chinese being major movers. MAX is a little bit in the U.K., but they haven't really focused on the commercial Pro business.

The good thing there is that we have a multi-energy strategy for all of our Transits where we can offer customers whatever they want, including electric Transits, as I said, almost 10% of our products. So we're well positioned I think, in both locations for Ranger and Transit.

[Adam Jonas, analyst]

Just as a follow-up, John, you cut about $1 billion out of the full year outlook. You provide the detail by your reporting segments, but I was wondering if you could break down what compromised that $1 billion shortfall by factor if I gave you your costs versus your expectations? You mentioned warranty costs are down but not as much as you thought. You're not satisfied. FX and the supplier disruption, you mentioned you missed some units. I wanted to know if you could quantify that or any other factors by causal factor.

[John Lawler, executive]

Yes. I think, Adam, when you look at it, you've got to look at it on the full year versus where we're guiding down now relative to what we had in Q2, right? And what we got in Q2, we had the headwinds hit us quite hard from a warranty standpoint, and we are seeing inflationary costs in Turkey. So if you just step back on the full year, what's gating us from hitting the record profits is the fact that we have those headwinds that are offsetting the positives we had from a top line that we just talked about, the volumes and mix and pricing stronger than we expected.

Now coming out of the second quarter, what we've seen since then, which is gating us now to the lower end of our range is that we're seeing, and particularly in Blue, we're missing some volume and we're seeing some mixed headwinds due to some constraints we have with suppliers. And it's hitting our most profitable, highest profitable mixed vehicles. Some of that is we lost some production due to the hurricane, but we also have some issues with a certain supplier on their productivity that we're trying to work through. We believe we'll be through that by the end of the quarter, but that is hitting Ford Blue and that's what's pulling Ford Blue down now from a standpoint versus what we guided at Q2. Does that explain -- does that cover it?

[Operator]

Our next question comes from Daniel Roeska from AllianceBernstein.

[Daniel Roeska, analyst]

Maybe Jim, if you take a step back and think about Ford+ and the targets we've discussed in the past, I'm not going to hold you to 10% in '26. But could you still remind us of the stepping stones here for performance kind of in the medium term? And also give us a little bit of your view on how kind of the somewhat slower transition into EV might impact kind of what we've talked about in the past.

[James Farley, executive]

Thank you. Well, certainly, our focus continues to be cost and our biggest cost focus is warranty, coverages and FSAs. That is our -- that's always been our work at Ford. I'd say we approached it looking at the most systematic changes that we need to make in the industrial system, and I'm proud of the progress but we're not satisfied at all. And we have a lot of opportunity.

And going into maybe what looks like in our home market a little bit of a tougher pricing environment, that's upside for us as a company. And the management team is all focused on that and we're rewarded for doing that work. I would say the EV journey has been really interesting because as much as a slowdown, I'm really proud of the team reacting really quickly to it. Many of our competitors still have a lot of models coming out. And we made the adjustment really early and those second-generation products will be coming out.

In addition to that, we really learned the industrial fitness we have to have and the way the vehicle is designed, the design costs, the design for manufacturability, and that's all in our second-generation products. And I think that's a 4- or 5-year advantage for Ford. The other opportunity that kind of emerged maybe that we didn't expect was the popularity of hybrids, especially on trucks. Most of our competitors don't offer hybrid on an F-150 or a Maverick. And this has been a fantastic revenue opportunity for us. We frankly can't keep up with the demand.

And the reason why we focused our hybrids on truck is because we can innovate for the customer Pro power onboard using hybrid and other advantages than just more efficient propulsion. And I think that has encouraged us to put hybrid across a whole lineup and be more curious about other partial electric solutions, which we'll talk to you about. I would say the skunkworks team has over-delivered, at least in the design of the platform. Now we have to make it to high-scale production.

And I am so excited to show everyone their work because it really shows how a company like Ford can compete with a company like BYD. And I would say Pro has been a really interesting journey for us because I think it kind of shows the future of the auto industry with attached services, with more focus on aftersales and repair and software that's kind of tied to the vehicle itself, not just generic productivity software but software that actually is tied to the vehicle. And to do that, we need advanced electric architectures.

But there's been some challenges beyond cost and quality, obviously, and the slow uptake of EVs. Electric architectures are hard to execute. The software journey and the technology for the company is big know-how. We're already at 20 million OTAs. That's going to be a more and more important capability for the company. So there have been surprises, but I think we're -- as I said, we're really well positioned in the short and midterm.

[Daniel Roeska, analyst]

Great. And maybe, John, to follow up a little bit. If you kind of summarize, there's been headwinds in the short term. EV is going to look delayed so that ramp-up kind of certainly isn't happening maybe quite as fast demand [indiscernible] stability on the cash side. But could I push you a bit and ask, what would make you reconsider kind of the strategy on shareholder distribution?

Because we've seen a couple of your competitors can be a little bit more aggressive on immediate distributions, be it dividends or buybacks, right? But just as a what's the balance you're striking? And what would maybe move you, let's say, to increase the dividend again, for example, or to take other distribution actions? What could some of those factors be to tilt the capital allocation to its shareholders?

[John Lawler, executive]

Right. So we talk about this every quarter as you would expect. And our -- we're consistent in that we're going to pay out 40% to 50% of our free cash flow. And we do think it's prudent at this point in time to hang on to the incremental cash. We have $28 billion and $8 billion higher than our stated cash minimum that we need is $20 billion. And I think at this point in time, where we're at in the industry, where we're at in the overall economic cycle, the uncertainty around the globe, right now, it's the right thing to hang on to cash.

And I'm not saying there's going to be something that happens in the global economy. I'm not saying there's going to be some disruption. But were that to happen, we would be very pleased having this cash in hand. So we look at it every quarter. We understand that if we don't have a use for the cash or if the environment doesn't change, and we see that the risks that might be facing us diminish significantly, then we have to make sure that we handle that cash appropriately and either invest it or an accretive growth or pay it back to the shareholders. And we will look at that every quarter and we will adjust appropriately.

[Operator]

Our next question comes from Joseph Spak with UBS.

[Joseph Spak, analyst]

Jim, actually, if we could just pick up right there. I want to talk a little bit about the 40% to 50% payout because I hear you and Jim's confidence on the business, but I also hear on this call that warranty is something you still don't quite have a handle on and there's some uncertainty there. The U.S. market, it's hard to see how it becomes stronger. You talked about potentially a pricing cycling downwards, again not expecting it, maybe not necessarily but it's possible.

And if the industry stalls out, obviously, then there's working capital headwinds. We saw how fast free cash flow deteriorates at a competitor. You mentioned higher inflation. There's still some investment to be made. And I know you want to keep cash on hand for optionality. So when I hear you talk about 40% to 50%, it sounds to me like that's a retrospective view, but I'm actually wondering how much of a prospective view are you considering in that? And like why is 40% to 50% even the right number?

[John Lawler, executive]

Yes. Of course, we look at both prospective and as well what we're going to pay out for the year. So we set the strategy around that payout ratio, 40% to 50%. And we thought -- we think that's a good point to be at right now. And we do look prospectively as to where we see the environment changing, what's in front of us, where the outlook could potentially be, the risks, the potential headwinds, potential tailwinds, et cetera. So we do, do that.

It's just that at this point in time, we don't have anything to announce. But we're always evaluating it and we're always looking at it. We have the conversation every quarter as you would expect. And once we feel that it's the right time, then we will make a prospective change, a change based on a prospective outlook.

[James Farley, executive]

I would only add to John's comment that we're really excited about the Pro services. And we don't have anything to announce but we're always going to want to have some optionality not just for running the business but for strategic optionality to build our services business. I mean, when's a car company had a chance to get the profitability of a Pro business to 20% or 30% of its revenue being services? That is such a special moment for our company and, frankly, for the industry.

But that just doesn't come from organic growth all the time. Sometimes it takes investments in new kinds of services. I'm not going to go into that, but I just want you to understand that we're also thinking very carefully, like we have all of our strategy choices, like going asset-light in China, like restructuring our businesses, like the way we handled the Rivian investment. We're thinking very carefully about our Pro business and how to nurture those services beyond what we have today.

[Joseph Spak, analyst]

Maybe just as a second question, I want to go back to Mark's question on European compliance. I know last -- in the last 10-Q, you called out $3.8 billion for regulatory compliance, and I reread it this morning, it said for North America and Europe for current and future model years. But in Europe, it's really more of a -- there's no credit system is my understanding, right? It's a bilateral negotiation maybe for a pooling agreement. So is that what's being considered in that number? And between a potential pooling agreement and your new portfolio with the Explorer, Capri, et cetera, do you expect to be compliant next year?

[James Farley, executive]

Yes, yes. And the other thing to think about in Europe or in North America is, we tend to talk about CO2 compliance as like 1 thing. It's actually heavy-duty or light-duty as well as passenger car, and they're very different. And in Europe, that's really important to consider. So not only are we committed obviously to be compliant but we also have to think about our heavy-duty compliance in both markets.

And that's why we -- that's one of the reasons why we're so excited about, we have a whole new line of electric and combustion small vans. We just launched our main van, the one-ton transit that's available on diesel, gas, and fully electric. So we're obviously giving ourselves the best chance from an offer standpoint as well. But when it comes to CO2 compliance, I hope we start to double-click and not only look at ZEV states in the U.S. but also look at heavy-duty compliance because it's really -- it's quite different actually.

[Operator]

Our next question comes from Emmanuel Rosner from Wolfe Research.

[Emmanuel Rosner, analyst]

My first question is on the cost reduction program. So this year's outlook still includes $2 billion in cost reductions for material, freight, manufacturing. You said you're on track for those. How much is it year-to-date? How much do you still need to achieve in the fourth quarter? And then if we look forward, I know there's a lot of uncertainty into next year and you've discussed them in detail, both in terms of volume and pricing in, et cetera, but in terms of things you control, what is sort of like the size of the cost opportunity as you move into 2025?

[John Lawler, executive]

Yes. So on the efficiencies that we've brought through this year so far, most of it is through the first 3 quarters. So we do have some savings to come through in Q4 but most of it was through the first 3 quarters. Now you would expect that, right, Emmanuel, because there was a large part of that was on the design changes that we made with the launch of the model year. So most of that's come through.

[Emmanuel Rosner, analyst]

On a go-forward basis?

[John Lawler, executive]

So as you know as well as anybody, and you had identified this morning in your note, we have a tremendous opportunity, given our cost competitiveness relative to competition. The question is the rate and flow and how we bend that curve and pull that cost out. It is our #1 opportunity to unlock the potential of our Ford+ strategy. We understand that, and we're not going to give any numbers on '25 at this standpoint right now, right?

We're in our planning cycle. There's a lot of water, as I said earlier, to flow into the bridge before the end of the year. We'll give that guidance and we'll give you an update in Q4 earnings for '25 and what we're going after on cost from that perspective. But there's a -- you know this as well as all of you know this, that our cost -- our position from a cost competitive standpoint, we have a lot of opportunity there and we understand that, and we're aggressively going after it.

[James Farley, executive]

For the industrial team, what we're really focused on as we finish off this year and next year is another cycle of our material cost reduction. We had a really -- we've made a lot of progress here, but we also added a lot of new product costs as well. That all is opportunity for us on material costs. So this will be kind of the second rotation of that as we enter next year.

And of course, a double-click or special attention on our EV Gen 1 costs. On warranty, we're really looking at our software warranty costs and the cost of repairing modules as well as powertrain. That's really where the team is focused on warranty. Obviously, we made good progress on manufacturing, but we have a lot more work to do in North America, and that includes freight and duty.

And then we're looking very carefully at our cost on supply chain with our suppliers, working carefully with them to make sure that we have competitive negotiations and any inflation-related requests, that we're dispositioning those to be fair to both the supplier and Ford. And we have dedicated teams on all those areas. We benchmark our competitors from a process and talent standpoint, and that's where we're spending our time as a team.

[Operator]

Our next question comes from Dan Levy from Barclays.

[Dan Levy, analyst]

Sorry about that. Want to follow up on the prior line questions and just ask something a little different on cost. You mentioned or you discussed at your Capital Markets Day, I think it was some 15, 18 months ago now, that you had the $7 billion cost gap against your competitors, mostly on the material cost. You mentioned that you're getting the $2 billion of cost this year but you had other costs come into the system. Where do you think you stand now on narrowing that cost gap? Are you just as confident today that you can narrow that cost gap versus when you originally presented that target?

[John Lawler, executive]

Yes. So Dan, I think we're in a different position today versus where we were 18 months ago about really understanding the root cause issue of that and what it's going to take to make the changes to get that cost out of the system. And that's been a very fundamental change for us as a leadership team, honestly.

Our cost gap versus competition versus them has not closed. It's not to say that we haven't taken cost out, we have. We've taken cost out, but we're not doing it at a pace faster than our competition. So we go through every quarter. We update the analysis. We pull apart the financial statements when we get the Qs at the end of the year with the K. We look at the progress we've made versus the progress that our competitors have made.

And it largely sits. We've made more progress on material costs but we've gone backwards on warranty costs. We've made some progress on our structural costs, ASP, SG&A relative to competition, but other areas have offset that. We've had more inflationary costs because of our joint venture in Turkey with what they've seen with that business. So it's still a very strong business. It's still the lowest cost business. We've just seen this increase this year that we weren't planning for. So we need to move faster, bottom line.

And warranty needs to be a big part of that. We need to continue to make the progress on material costs, our manufacturing costs, overall structural costs, as well as driving down the warranty costs. So it's a humbling position to be in is that, as you said, 18 months later, we haven't closed the gap despite taking cost out. Our competitors are doing the same thing. They're taking cost out. We need to accelerate our pace to outrun what our competitors are doing.

[Dan Levy, analyst]

That's helpful color. Maybe as a follow-up, wanted to ask about a comment, Jim, that you mentioned earlier that on the skunkworks EV. You have confidence in the cost because you've already quoted 60% of the BOM. Maybe you could give us a flavor of sort of what pieces you've seen clear achievements on in your quoting or sourcing that are driving these material cost-outs versus maybe where the rest of the industry is, and that's enabling you to achieve what you think is structurally lower cost on the EVs?

[James Farley, executive]

Yes. So obviously, having a competitive LFP battery is really, really important. Competitive is a key word. The team took a totally different approach to developing the vehicle. And I don't want to get into too much detail, but I'm really proud that we basically verified the design of each part like a year or 2 earlier than we normally do. And we verified it from the supplier standpoint and ours by looking at a variety of different suppliers, even challenged our suppliers.

And that has been an eye-opening experience for us to see what really should cost is on a lot of these advanced components, especially because we think companies like BYD have an incredible advantage on affordability of batteries. So we have to make that up where our opportunity is on the EV component side, inverters, gearboxes, motors, et cetera.

And I think it's a combination of very new approaches to the actual design of the component as well as leveraging new suppliers as well as working way up front on the part design itself to get the cost out using the technology road map of the supplier. And that's where we're seeing a lot of the progress. Basically, the answer to your question is we radically simplified the vehicle. Like if you look at the number of parts in the vehicle, it is just a completely order of magnitude change.

And when you simplify the components to that level and you really move the design and supplier design phases earlier, you can integrate a simpler design with a better cost. That's the high hard 1 on the skunkworks team. Look, we've done a lot of manufacturing. We have a whole new kitting strategy for the vehicle. We have a unit casting strategy that massively simplifies the stamping of the vehicle. I think a lot of other companies will do that. But what I'm really seeing is an ethos of simplicity and a higher engagement with a broader supply chain earlier in the process than the typical for development cycle.

[Operator]

This concludes the Ford Motor Company Third Quarter 2024 Earnings Conference Call. Thank you for your participation. You may now disconnect.