Ford Motor Company’s Q4 2023 Earnings Strong Despite Adversity Ford Motor Company’s Q4 2023 Earnings Strong Despite Adversity

Written By Michael Gary Scott
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Image source: The Motley Fool.

Ford Motor Company (NYSE: F)
Q4 2023 Earnings Call
Feb 06, 2024, 5:00 p.m. ET

Key Takeaways:

  • Challenging Year Proves Fundamentally Foundational
  • Pioneering Innovations and Growth Amidst Industry Disruptions
  • Global Robotics Market Trends and Revenue Predictions

Exceptional Adversity Through Exceptional Growth

Lynn TysonExecutive Director, Investor Relations

Thank you, Gary, and welcome to Ford Motor Company’s fourth quarter 2023 earnings call With me today are Jim Farley, president and CEO; and John Lawler, chief financial officer. Today’s discussion includes some non-GAAP references.

Actual results may differ from those stated. The most significant factors that could cause actual results to differ are included on Page 25. Unless otherwise noted, all comparisons are year over year. Company EBIT, EPS, and free cash flow are on an adjusted basis.

Our discussion also includes forward-looking statements about our expectations. Before you consider investing, bear in mind that the Motley Fool Stock Advisor analyst team just identified the 10 best stocks for investors to buy, none of which included Ford Motor Company. Always conduct thorough research before making investment decisions.

Included on our earnings deck this quarter is a table of our global wholesales for 2023. With name, flight detail by segment, and major geography, this is a roll-forward of the detail we shared with you last March at our teach-in in our new segmentation.

We do plan to run this call about 15 minutes longer, so that’ll take us to 15 minutes after the hour. We want to leave ample time for your questions. Jim, I’ll turn the call over to you.

Jim FarleyPresident and Chief Executive Officer

Thank you, Lynn. And hi, everyone. Thanks for joining us. Last year turned out to be a fundamental year — a foundational year for our company. We’ve launched some revolutionary products that have unquestionably redefined our industry.

Driving Growth in the Face of Adversity

Jim FarleyPresident and Chief Executive Officer

Last year was a critical turning point for us, not just financially, but also in laying the groundwork for our future. Our power choice and powertrains demonstrated remarkable performance, particularly evident in the success of our F-Series. Our global hybrid sales surged by 20% last year, with an anticipated 40% increase in the coming year. The U.S. market now sees us as the leading sellers of hybrid trucks, as our Maverick claims the top spot and we stand as the third best-selling hybrid brand in the country, behind only Toyota and Honda.

But our prowess extends beyond numbers and metrics. Our hybrids have significantly boosted the sales of our trucks, making us a formidable force. The success of our BlueCruise technology, surpassing 150 million miles of hands-free use, further attests to our exceptional innovation. With a 25% quarter-over-quarter growth and a staggering 70%-plus gross margin, BlueCruise showcases our unwavering potential in cutting-edge technology.

Fueling this growth are our incredible work vehicles, evident in the impressive launches of the new Super Duty and Transit, alongside the revamped Ranger. Our team is unswervingly focused on capturing market segmentation and improving our core business, making evident strides in the face of industry disruptions. Despite challenges such as the UAW strike, our automotive profits soared year over year, propelling us back to an investment-grade status. Our achievements also translate into tangible returns for our shareholders, underscored by our declaration of regular and special dividends, alongside a disciplined approach to capital allocation. These victories are emblematic of the substantial progress in our integrated services under Peter Stern, contributing to high-growth and high-margin profits, less bound to cyclical patterns. Our international operations, after strenuous restructuring, have achieved a commendable turnaround, securing profits for two consecutive years, marking a $3 billion turnaround in comparison to recent years. Surprisingly, the Ranger has emerged as a global powerhouse, becoming our second best-selling nameplate globally, an exceptional feat that sits just behind the F-Series and ahead of the Super Duty.




Ford’s Growth Potential in Ford Pro, Quality, and EVs

Ford’s Growth Potential in Ford Pro, Quality, and EVs

Ford Pro: Positioning for Growth

Amidst a steady financial year, Ford Motor Company’s CEO emphasized the immense untapped potential for earnings. The focal point of this year’s strategy, Ford Pro, stands as a pivotal pillar. With a thriving $60 billion high-margin conglomerate covering hardware, software, and physical services, Ford Pro’s predominantly recurring revenue has carved a distinctive pathway. The amalgamation of hardware, software, and services reflects a trajectory mirroring the industry, portraying a significantly favorable growth horizon.

Ford Pro’s Growth Trajectory

Last year saw Ford Pro doubling its EBIT to $7 billion despite the Super Duty slowdown during its launch. Anticipations are set for mid-teen EBIT margins, alongside robust growth prospects in both top and bottom lines. Ford’s freshest product lineup in two decades and overbooked order banks testify to the alignment of economic factors differing fundamentally from the retail business model.

Ford Pro’s Market Leadership

Domination in state and local government Pro sales, amplifying profitability, aligns with escalating government infrastructure expenditure, manifesting in a burgeoning demand for Super Duties and Transits. Tangible correlations arise in the telecommunications and 5G buildup, coalescing with Ford’s burgeoning revenues.

Undervalued Attributes and Dominant Moats

Market leadership that transcends mere leadership to a position of dominance, buoyed by commanding a colossal 40% market share among Class 1 through 7 full-sized trucks and vans, substantiates Ford’s prominence in vocational sectors such as service, construction, utility, and government.

Key Developments in Software and Physical Repair Business

With a burgeoning count of active paid subscriptions at Pro and ambitious software-driven EBIT projections, Ford anticipates its growing software and services arena to contribute 20% of its total EBIT within two years. Supported by an escalating mix of connected vehicles and substantial increases in paid subscription attach rates, Ford stands on the cusp of a significant digital leap.

Reinforcing Physical Repair Network

Capitalizing on its extensive physical repair network, Ford boasts 23,000 service bays across the U.S., buttressed by an innovative fleet of remote service-enhanced vans. These endeavors have splendidly catapulted Ford’s service capacity by an additional 10% while amplifying its net promoter score.

Quality Initiatives

Ford’s tenacious endeavors toward enhancing its vehicles’ long-term durability have culminated in laudable results and commendable quality improvements. With an intensified focus on launch quality and significant strides in initial quality, Ford is orchestrating a comprehensive transformation, underscored by the elevation of quality-centric KPIs as primary management incentives.

Pivotal Shift in EV Market

The landscape of the electric vehicle market has undergone a momentous upheaval, accentuated by profound price cuts, capital influx, and a surge in capacity deployment within the two-row crossover segment. Ford’s resolute EV strategy seeks to leverage this transformative phase, with a committed target to achieve profitability within 12 months of launching its next Gen 2 products, culminating in substantial EBIT margins over their lifecycle.


The Evolving Landscape of Ford’s Electric Vehicle Strategy

Reimagining Capital Investments

Amidst a transformative period for the automotive industry, Ford is recalibrating its capital allocation, steering resources away from larger electric vehicles (EVs) and directing a more focused approach towards smaller EV products. This strategic pivot comes as the company adapts to market realities and endeavors to strike a balance between growth, profits, and returns.

Lessons from Market Realities

Reflecting on the past, Ford’s CEO highlighted the lessons gleaned from their early foray into EVs and hybrids. Notably, the company discovered that scaling EVs to cater to the early majority customer segment revealed a significant preference for competitively priced vehicles.

Furthermore, the impact of the COVID supply shocks and chip crisis underscored the necessity for Ford to reassess the level and timing of its battery capacity. The CEO acknowledged that market dynamics, in conjunction with competitors’ ability to navigate challenges, have profoundly influenced their broader strategy.

Geographical Variances and Power of Choice

Emphasizing the importance of geographical nuances in consumer preferences, the CEO underscored the significance of offering a diverse range of vehicles, particularly citing the varying adoption patterns of EVs and hybrids across different regions. This underscores the significance of Ford’s power of choice in driving successful transitions.

The Role of Hybrids

While Ford remains committed to the inevitable transition to EVs, the CEO underscored the enduring role of hybrids, particularly in catering to specific customer use cases. Notably, the efficiency and cost dynamics of hybrids have been positioned as a compelling proposition, aligning with customer needs without significant behavioral alterations.

Talent and Organizational Shifts

Underscoring the pivotal role of talent, Ford’s leadership articulated the imperative of cultivating a performance-driven culture, centered around incentivizing operational excellence and business performance. This organizational realignment aims to bolster Ford’s capacity to attract and retain top-tier talent, aligned with the company’s evolving priorities and value creation.

Financial Performance and Dividend Dynamics

Notwithstanding the strategic shifts, Ford’s financial performance in 2023 offers a positive narrative, with robust revenue growth and the delivery of strong earnings. Notably, the company’s cash flow and liquidity position reflects remarkable resilience amidst industry shifts, underpinning its ability to manage transformations effectively. Additionally, the company’s commitment to shareholder value creation is underscored by a balanced dividend allocation approach, emblematic of its sustained focus on delivering returns to shareholders.



Ford Posts Record Earnings – 2024 Outlook Analyzed

Ford Posts Record Earnings – 2024 Outlook Analyzed

Strong Quarter and Full-Year Results

Ford delivered a strong quarter with revenue up 11%, and an EBIT of 1.8 billion, marking a 25% increase. The company demonstrated the potential earnings power of its growth business through a 19% revenue jump and more than doubled EBIT to 7.2 billion in the full year. Ford Pro, one of its segments, has shown great promise, with strengths that are driving robust results and positioning it for another strong year in 2024.

Challenges Faced by Ford Model E and Ford Blue

The Ford Model E encountered a 14% increase in wholesales in the quarter, and a 2% revenue increase but suffered an EBIT loss of 1.6 billion. For the full year, the segment faced a loss of 4.7 billion due to challenging market dynamics and investments in next-generation vehicles. Despite challenging market conditions and the impact of a strike, Ford Blue managed to achieve a flat revenue, with EBIT at 813 million and a margin of 3.1%, marking an 8% revenue increase for the year, which resulted in 7.5 billion in EBIT.

Dynamic Capital Allocation and 2024 Guidance

Ford has adopted a dynamic approach to capital allocation, taking into account the growth opportunities and the risk-return profile of its various segments. The company provided guidance for 2024, expecting to earn between 10 billion to 12 billion in adjusted EBIT, set an adjusted free cash flow of 6 billion to 7 billion, and targeted capital expenditures of 8 billion to 9.5 billion, demonstrating prudent financial planning amid market dynamics and cost efficiencies. To align with the market, Ford has adjusted its installed capacity, aiming to maximize profitability given the new market reality by prioritizing cost-effective actions.

Expectations and Strategies for 2024

For the year 2024, Ford anticipates a flat to slightly higher SAAR in the U.S. and Europe, planning for 16 million to 16.5 million units in the U.S. The company is also expecting lower industry pricing, driven by higher incentive spending, which is projected to be partially offset by top-line growth from the launch of new products. Additionally, Ford is targeting EBIT between 8 billion to 9 billion, driven by growth and favorable mix in Ford Pro, while anticipating losses to widen for Ford Model E due to continued pricing pressure and investments in next-generation vehicles. Moreover, the company expects Ford Credit’s earnings before tax (EBT) to increase slightly year over year to about 1.5 billion.

The Road Ahead

Ford’s performance in the past year reflects the positive momentum of its Ford+ plan, leveraging on capital discipline, a global product portfolio, and consistent cash generation. The company remains focused on delivering improvements in both quality and cost, while realizing growth opportunities.

Despite Ford’s achievements and promising outlook for 2024, the company encountered challenging questions regarding the allocation of profits within its segments during its earnings call. Analysts raised concerns about the visibility of profits and the allocation of funds towards the electric vehicle (EV) segment. An analyst, Adam Jonas, compared the undervaluation of Ford Pro to the historical undervaluation of Ferrari when it was part of Fiat, highlighting a potential need for clearer communication and strategic focus. Ford’s President and CEO, Jim Farley, responded affirmatively, emphasizing the company’s commitments to profitability amidst ongoing market transformations and shifting consumer preferences.

Overall, Ford’s financial performance and strategic positioning reflect a dynamic landscape peppered with both challenges and opportunities. The company’s ability to navigate through these intricacies while maintaining a growth trajectory showcases its resilience and adaptability, despite the competitive and transformative market environment. As Ford steers ahead with its 2024 outlook, the company is poised to demonstrate its commitment to delivering both economic value and innovation to its investors and customers.



Ford’s CEO underscores the importance of EVs and discusses strategic insights

Ford’s CEO underscores the importance of EVs and discusses strategic insights

Benefits of Gen 1 vehicles

CEO Jim Farley discusses the multiple benefits of Gen 1 vehicles, emphasizing the importance of the EV and compliance value. The credits generated from these vehicles enable the sale of high-margin ICE vehicles, providing a significant financial advantage for the company. Additionally, Ford is focussing on building new customer-facing capabilities to cater to the high levels of EV adoption and is investing in developing a charging network. Farley highlights the feedback loop for engineering and the learning process required to deliver top-quality service and products to EV customers.

Focus on profitability

Chief Financial Officer John Lawler emphasizes the importance of the EV business standing on its own, generating a profit and a return on the capital invested. While acknowledging the compliance benefits, Lawler makes it clear that the EV business must eventually be self-sustaining. The priority is on profitability and ensuring that the business does not rely on external support to remain viable in the long run.

Strategic partnerships and market insights

CEO Jim Farley and analyst Adam Jonas delve into the potential of strategic partnerships in China to help Ford achieve its EV objectives in a more capital-efficient way. Farley highlights the importance of China as an export market for profitable overseas sales, emphasizing a low-capital approach to EVs while learning from local capabilities in the region. The discussion also brings attention to the global capability team being built in China for digital experience, battery, and sensing technology, which will have implications beyond just profit and loss considerations.

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Market dynamics and customer feedback

Analyst John Murphy raises concerns about the market slowdown and customer satisfaction with EVs. He references stories from dealers and commercial entities trading in EVs for ICE and hybrids, as well as Hertz postponing EV orders. The market dynamics prompt a deeper discussion about Ford’s planning assumptions and the potential impact of fewer EV sales on the company’s overall sales and profitability.

Farley gives enlightening insights into the impact of the EV market dynamics, explaining the strategic positioning of Ford and the efforts to ensure a sustainable and profitable EV business. The company’s approach to EVs is pragmatic and adaptable, reflecting a keen understanding of the market dynamics and the evolving customer preferences. Ford’s leadership is focused on leveraging partnerships and learning from global insights to navigate the challenges and opportunities in the EV landscape. As the company continues to innovate and evolve, its unwavering commitment to profitability and long-term sustainability shines through.




Ford’s Path to Profitability: A Strategic Analysis

Ford’s Path to Profitability: A Strategic Analysis

Redefining the Auto Landscape

Amidst the dynamic landscape of automotive technology, Ford Motor Company is undertaking a formidable task of steering its ship toward profitability. In a bold strategic move unveiling its portfolio rich in scaled hybrids, internal combustion engine (ICE), and electric vehicles (EV), Ford’s President and CEO, Jim Farley, detailed the challenges posed by this transition in a recent conference conversation.

Customer Mindset and Operational Efficiency

Farley strategizes around fundamental yet intricate decisions, rooted in the paradox between consumer preferences for hybrid or EV models. He emphasized the key role of operational efficiencies and the shifting mindset of consumers, particularly in evaluating the cost of ownership and the impact on their behavior. The quick showroom calculus allows customers to discern the breakeven between ICE and hybrid models, while the opacity of cost ownership deters some from fully embracing EVs.

Marin Gjaja, Ford’s Chief Operating Officer, weighed in, divulging the positive margins dealers have been experiencing with hybrid and EV vehicles. This shift in margins, even exceeding those of ICE vehicles in recent years, underscores the brand’s commitment to driving profitability across its entire portfolio.

Envisioning Manufacturing and Market Growth

The predicament of measuring consumer preference for EVs encapsulates intricate pricing and capacity planning. Farley delved into Ford’s 40% growth in hybrid electric vehicles (HEVs), aligning this figure with the brand’s manufacturing capacity. Highlighting the ubiquitous F-150 as an emblem of this shift, he projected a significant portion of its sales to gravitate toward hybrid models. His calibrations exude a balance between planned growth and the need for adaptable strategies in an evolving market.

Dealer Dynamics and Customer-Centric Approach

Addressing the concerns of dealers, Farley outlined the pivotal messages to be communicated during an upcoming tour. His objectives range from bolstering investments in Ford Pro—a crucial component of future profits—to imparting a sense of reassurance on the brand’s manufacturing flexibility and relentless commitment to evolving retail experiences. With a clarion call for partnership, Farley’s emphasis on customer-centricity reverberates as a core ethos driving Ford’s transformation.

Cost Structure and Strategic Pivots

Equipped with insights into the challenges associated with profitability, Farley and Chief Financial Officer John Lawler candidly addressed the staggering losses in Model e, attributing them to revenue collapse and suboptimal cost structures of Gen 1 vehicles. Their unwavering commitment to recalibrate, optimize, and, most importantly, achieve profitability at the onset of Gen 2 vehicles underpins Ford’s meticulous drive toward a sustainable future.








Ford’s EV Push and Financial Strategy

Ford’s EV Push and Financial Strategy

Strategic Optimization for Ford’s EV Push

As Ford steers towards electric vehicles (EVs), the company aims to optimize its approach by balancing the need to sell internal combustion engine (ICE) vehicles and enhancing performance with hybrid electric vehicles (HEVs). This endeavor aligns with Ford’s forthcoming K report, highlighting the purchase of credits when available. The interconnected focus across these three domains crystallizes Ford’s current strategic pursuit.

Commitment to Profitability and Capital Spending

In a bid to ensure the sustainability and profitability of the electric vehicle business, President and CEO, Jim Farley, underscores the necessity for the EV segment to stand on its own feet. Farley acknowledges the company’s aim to reach a profitable threshold akin to Chinese and Tesla counterparts. This resolution echoes Ford’s determination to elevate its electric vehicle enterprise, not just for competitive parity but for its financial merit, including returns on capital ventures.

Growth in EV Capital Spending and Cost Management

John Lawler, Chief Financial Officer, details Ford’s substantial commitment to EVs, with approximately 40% of the previous year’s capital expenditure dedicated to EVs. Strategy sessions focus on steering spending towards the lower end of the considerable range to foster sustainable business mechanics. The company’s meticulous approach highlights a concerted effort to align capital allocation with evolving business dynamics.

Challenges and Efforts Around Profitability and Market Dynamics

When queried about the concrete timeline for breaking even in Ford’s electric vehicle venture, Jim Farley gestures towards the responsibility of Marin Gjaja, Chief Operating Officer, Model e, to address the timing and warranty concerns. Gjaja’s response underlines an expectation of improved gross margins while simultaneously navigating through market volatilities and operational adjustments. The company’s earnest endeavor is palpable amidst the challenges posed by shifting market dynamics.

Cost Efficiency, Warranty, and Material Improvement

Addressing the trajectory of costs and efficiencies, John Lawler discusses the anticipations around warranty costs and efficiencies inflow. The financial analysis emphasizes the initial stabilization of warranty costs with projected efficiencies paving the way for cost management. The nuanced discussion captures the intricate interplay between emerging efficiencies and ongoing commitments within Ford’s financial rubric.

Strategic Positioning and Sustainability of Earnings Stream

As Ford navigates its Pro segment and discerns the sustainability of its earnings, Jim Farley underscores the fundamental factors driving vehicle profitability with fortitude. The steadfast emphasis on essential infrastructure, technology trends, and operational prowess underscores Ford’s confident grasp of revenue streams. Farley’s strategic delineation underscores the company’s resilience and assurance in the longevity of its financial trajectory.

Market Dynamics and Future Horizons

With an eye on future prospects and market dynamics, Farley details the evolving interconnected landscape and potential realignments in construction and housing markets. The comprehensive approach positions Ford for an extended horizon, rooted in market tenacity and readiness for prospective market shifts. Farley’s outlook captures the strategic and forward-looking narrative embedding Ford’s financial strategy.


Efficiency Drive to Tame Costs and Enhance Performance: Ford’s Battle Plan

John Lawler, the Chief Financial Officer, indicated a turning point for Ford’s efforts to narrow the cost gap with its rivals. Lawler suggested that traction is building, and the gap should start to shrink. The $2 billion cost improvement plan encompasses the industrial system, targeting material and labor efficiencies.

Material and Labor Optimization

The Chief Operating Officer, Ford, Kumar Galhotra, underscored pivotal shifts in the cost landscape compared to the previous year. Ford has combated inflationary pressures, stabilized the supply chain, and slashed premium freight costs. Moreover, the company has implemented proactive strategies to optimize material usage. For example, by streamlining designs and eliminating features with limited customer value, Ford is harvesting sizable cost savings, such as $40 and $60 per vehicle, equivalent to $10 million each annually, respectively.

Supply Chain Stability and Waste Reduction

Ford’s gain in managing inflationary claims and improving overall supply chain stability has fortified the case for substantial cost reductions. Galhotra highlighted a more stable supply chain as a key driver in reducing premium freight. Additionally, Ford has dedicated itself to extensive benchmarking for manufacturing, as evidenced by $8 million savings from analyzing 50 stations.

Future Expectations and Projections

In response to an analyst’s inquiry about any forthcoming triggers for cost reduction, Galhotra reiterated Ford’s commitment to executing a robust pipeline of efficiency-improving projects. Lawler emphasized that the impact of these initiatives on Ford’s financials is expected to unfold gradually, with certain design actions materializing in the middle of the year and ongoing manufacturing improvements yielding more evenly distributed benefits throughout the quarters. Amidst this backdrop, Lawler offered insights into Ford Blue’s volume outlook, as well as affordability and pricing projections for 2024.

Furthermore, Ford’s proactive approach to the demand for its products was discussed, with Lawler underscoring the company’s readiness to celebrate new products’ contributions to its lineup and the sturdy demand seen for its Pro segment.



Ford Pro Expects Growth in EV Sales to Drive Profitability Despite Model e Losses

James PicarielloExane BNP Paribas — Analyst

Hey, good evening, everyone. Just wondering if you could help dimension EV volumes for this year associated with the 5 billion-plus in Model e losses. And then, with respect to Ford Pro’s mid teens margins this year, just curious on the impact tied to the fleet demand for EVs beyond companies, of course. Like do you foresee a step-up in Pro EV volumes for the year? You know, Model e losses get more difficult.

So, just how are you thinking about the EV dynamic for Pro profitability as well? Thanks.

Jim FarleyPresident and Chief Executive Officer

On the retail side, I’ll ask Marin to answer that. On Pro, absolutely, our EV sales will grow not only because we’re seeing more interest because the cost of ownership is advantageous for some, but we’re also expanding in Europe quite a bit our electric offering with our two Transit vans coming online. And so, that will definitely — and there are a lot of city closures and other kind of regulations in Europe that’s driving adoption for electric vehicles, especially vans specifically. So, yes, we’ll have very robust growth in our EVs for Pro.

Ford’s Plan for Growth in EV Sales

Marin GjajaChief Operating Officer, Model e

Yeah, we expect growth in sales on the retail side as well. Remember, we had times where we were out of production last year on Mustang Mach-E and F-150 Lightning. So, we’ll be overlapping those, we’ll see growth. And then, more importantly, we’re launching Explorer in Europe in the second half of this year so that’s going to be a new offering that will help us grow.

So, we expect to see substantial unit volume growth.

Cost Reductions and Savings Strategy

James PicarielloExane BNP Paribas — Analyst

And, John, I know you touched on this already, but are supplier cost reductions a core component of the 2 billion in savings for the year? Just wondering how commercial negotiations have progressed. And are there any areas that stand out in terms of, you know, opportunity? Thanks.

John LawlerChief Financial Officer

Yeah. A lot of the $2 billion is, again, through the manufacturing system so it’s the industrial efficiencies that we’ve been working on. And then, from a design and material standpoint, it’s mostly design reductions that are part of the $2 billion on a year-over-year basis. So, it’s those actions that we’ve been benchmarking and working on similar to the ideas that Kumar had described, pretty much design-related.

Marin GjajaChief Operating Officer, Model e

So, design, labor, and freight.

John LawlerChief Financial Officer

Yep.

Marin GjajaChief Operating Officer, Model e

Primarily.

Long-Term Margin Target Concerns

Ryan BrinkmanJPMorgan Chase and Company — Analyst

Thanks for taking my questions. I mean, obviously, a strong guide in aggregate. Digging into, though, the higher anticipated Model e losses of 5 billion to 5.5 billion, what is embedded within that from like a variable contribution margin perspective? How do you expect that to progress throughout ’24? And then, could we also check in a little bit longer term on how you’re feeling about that Model e margin target of, I think it’s 8% by the end of ’26 annualized, right? Including after GM recently lowered their ’25 EV margin target. And given that I think you rolled out that 8% before Tesla cut their prices and saw their overall margin actually like decline to be basically in line with yours.

If you’re still targeting 8% with the ’24 guide out there now, you know, it’s really only ’25 is the mystery. So, it seems like quite a step-up then over the course of ’25 to ’26. I know you do expect a big boost from those second-generation EVs you discussed earlier but, you know, in comparison to the mixed fuel models. But is that just — is that enough to get you to the 8%, or are there other sources of improvement that need to layer in over ’25 and ’26? I don’t know, vertical integration, or what are those sources of savings, and how are you feeling about that target?

John LawlerChief Financial Officer

Yes. So, I think it’s clear, given the dynamics in the marketplace and the way the top line come down significantly since we had put that out there that the 8% is not on in the 2026 time period. So, I think that’s clear. I don’t think anybody believes that by ’26, we can bridge from here to 8%.

You know, it’s going to come down to launching our next generation of vehicles and improving the contribution margin, gross margin, as Marin has said, on the first generation as we go through the year. But, Marin, do you want to add more color to that?

Marin GjajaChief Operating Officer, Model e

John, I think that’s right. I think it’s really the levers we’re pulling this year to improve gross margin over time on Gen 1 and then really sticking to the capital discipline and the operating discipline around launching Gen 2 only when they can be profitable and deliver the kind of returns we want. And over time, that will build a stand-alone profitable EV business. Thanks.

Ryan BrinkmanJPMorgan Chase and Company — Analyst

Very helpful. Thank you.

Operator

This concludes our question-and-answer session, and the conference has also now concluded. Thank you for attending today’s presentation. [Operator signoff]

Duration: 0 minutes

Call participants:

Lynn TysonExecutive Director, Investor Relations

Jim FarleyPresident and Chief Executive Officer

John LawlerChief Financial Officer

Adam JonasMorgan Stanley — Analyst

Marin GjajaChief Operating Officer, Model e

John MurphyBank of America Merrill Lynch — Analyst

Rod LacheWolfe Research — Analyst

Dan LevyBarclays — Analyst

Kumar GalhotraChief Operating Officer, Ford

Emmanuel RosnerDeutsche Bank — Analyst

James PicarielloExane BNP Paribas — Analyst

Ryan BrinkmanJPMorgan Chase and Company — Analyst