Ford Motor Q1 2022 Earnings Call Transcript

Quartr
Provided by Quartr
April 27, 2022

There are 16 speakers on the call.

Operator

Good day, ladies and gentlemen. My name is Andrea, and I will be your conference operator today. At this time, I would like to welcome you to the Ford Motor Company First Quarter 2022 Earnings Conference Call. All lines have been placed on mute to prevent any background noise. After the speakers' prepared remarks, there will be a question and answer session.

Operator

Please note this event is being recorded. At this time, I would like to turn the call over to Lynn Antipas Tyson, Executive Director of Investor Relations. Please go ahead.

Speaker 1

Thank you, Andrea. Welcome to Ford Motor Company's 1st to turn the call over to our Q and A earnings call. With me today are Jim Farley, our President and CEO and John Waller, our Chief Financial Officer. Also joining us for Q and A is Marion Harris, CEO of Ford Credit, Hao Tai Tang, Chief Industrial Platform Officer to turn the call over to Doug Field, Chief EV and Digital Systems Officer for the Model E. Today's discussions include some non GAAP references.

Speaker 1

These are to provide a brief update on our financial

Speaker 2

results and results. We will now begin the

Speaker 1

presentation of our earnings deck. You can find the deck along with the rest of our earnings materials and other important content to turn the call over to shareholders. Ford.com. These discussions also include forward looking statements about our expectations. Actual results may differ from those stated.

Speaker 1

To turn the call over to Steve. Thank you, to turn the call over to Jim.

Speaker 3

Hello, everyone. Thank you, Lynn, and thanks for joining our Q1 to turn the call over to our 2020 earnings call. Yesterday, I was with Bill Ford and our incredible team at the Rouge factory where my grandfather worked to celebrate job 1 for the F-one hundred and fifty Lightning. We were also proud as a team for delivering a truly breakthrough electric truck And delivering it on time as a launch. The excitement around the truck is like nothing I've ever seen in my career.

Speaker 3

In fact, the power went out in to provide a very clear understanding of the facility and we ran most of the presentation with F-one hundred and fifty Pro Power on board. While we have to work ahead to fully scale production and fill an extraordinary order bank, both for our retail to turn the call over to our operator. Thank you, Mike. Thank you, Mike. Thank you, Mike.

Speaker 2

Thank you, Mike. Thank you, Mike. Thank you, Mike.

Speaker 3

Thank you, Mike. Thank you, Mike. Thank you, Mike. Thank you, Mike. Thank you, Mike.

Speaker 3

Thank you, Mike.

Speaker 2

Thank you. Thank you, Mike. Thank you, Mike. Thank you. Our next question comes from

Speaker 3

We're accelerating our significant transformation. We have the right plan, Call Ford Plus. We're putting in place the right organization. As you know, on March 2, we announced our plan to form 2 distinct but interdependent business units to call Ford Model E and Ford Blue. Together with Ford Pro, these 3 automotive businesses to allow us to clearly define and assign priorities, make the most of our existing strengths, but also to build new strategic muscles and most importantly capabilities.

Speaker 3

Ford Model E is responsible for delivering clean sheet, Breakthrough EV designs, software advanced electric architectures, Partial autonomy and Ford Blue's mission is to deliver a more vibrant and profitable ICE business, A business that's going to serve in the short term as our profit and cash engine for the entire enterprise. So what have we learned since March 2? And what are we working on at Ford? In terms of Model E, first, to turn the call over to Bob. It's very clear to us that battery capacity is the key unlock to our EV aspirations and propel our growth in the future.

Speaker 3

We're in good shape in the near term. In the medium and long term, securing raw materials, processing precursor and refinement to Setting up battery production here in the U. S. And around the world is a big work statement for us. Expect a lot of news from Ford to introduce our Q1 results in the future related to the vertical integration of our EV business.

Speaker 3

2nd, we're getting after our talent gap to be in key areas EV Engineering, software and autonomous driving technology. We have a very good start already And we will continually be very aggressive on recruiting talent. 3rd, we're now deep into discussions with our diva partners to turn the call over to John to discuss our financial results around

Speaker 2

the globe, but

Speaker 3

especially in North America on brand new standards that are required to launch a completely different to provide a clear understanding of customer experience that is leaner and better for our customers that we believe will not only be competitive, superior to solely direct model. We're drafting standards as we speak and plan to roll these out this year. Finally, we're crafting our EV future product pipeline and are focused on a small number of highly to make compelling, highly volume models in key segments where we already lead. I want to make this very clear. Some companies seem to be pursuing a strategy of trying to match Model Y's volume with 8 or 9 top hats.

Speaker 3

That's not a winning plan in our view. We will focus on key volume nameplates, to constrain capital as we have it, but really to leverage scale and efficiency to reach and eventually exceed to take our 8% EBIT target for EVs. I want to be clear here that as we move forward, our EV designs We'll be progressive and they're going to be aimed at bringing new customers to Ford and Lincoln. They will not be electric versions to take a look at our existing lineup. Now in terms of Ford Blue, we will accelerate our restructuring and address our uncompetitive cost structure.

Speaker 3

We're going to attack complexity in areas such as powertrain. We can't wait. This work starts now. To We will continue to invest in our ICE business, but in targeted ways to build our most popular and profitable vehicle lines, F Series, to take a look at Bronco, Super Duty and a few others. Another focus is quality.

Speaker 3

We made good progress on initial quality and launches. However, we continue to be hampered by calls and customer satisfaction actions. This has to change. We must do more to aggressively address our engineering process to improve our robustness. Now our Ford Probe business is on track.

Speaker 3

We see healthy growth in part sales, mechanic repairs, growth in subscriptions for both charging and telematics to review our financial results and see the financial results. Most importantly, we're making our customers' lives and businesses better. They're using data, They're improving their uptime and their bottom line. Supply chain constraints to continue to impact our business, including some of our key profit pillars. That said, We're making progress on launching and scaling new products as you can see with Lightning.

Speaker 3

That said, to turn the call over to Bob. Our major focus now is accelerating a more fundamental change in our supply chain management to improve visibility through our entire value chain and secure supply, especially in places like semis and batteries. We're absolutely committed to unlocking value by improving our growth profile, our profitability and ability to generate sustainable cash flows from our automotive related businesses. Our new targets include producing to turn the call over to John. More than 2,000,000 EVs in 4 short years by the end of 2026.

Speaker 3

That's about 70 plus to turn the call over to CAGR. And we expect that by 2,030, EVs will account for about 50% of our global sales. We have also reset our profit ambition. We are now targeting 10% company adjusted EBIT margins by 2026. Now in terms of the Q1, I would describe our performance as mixed.

Speaker 3

The appeal of our new products is really clear Customers demand is extremely strong beyond the supply constraint of our industry. However, we are still grappling with persistent supply chain issues that prevent us from posting even stronger quarter. We're working to break constraints whenever they exist to take full advantage of this incredibly hot product lineup. To introduce our call to our call to our call to our call to our call to to turn it to John to take you through the quarter to conclude our outlook this year.

Speaker 4

Thank you, Jim. In face of ongoing industry wide supply chain disruption to turn the call over to Mr. President. In unremitting pandemic hurdles, we continue to execute against our 4th plus plan, including strengthening our product portfolio, investing in electrification to introduce our next question and answer session. In the Q1, to turn the call over

Speaker 2

to John. We generated $2,300,000,000

Speaker 4

in adjusted EBIT resulting in a margin of 6.7%. The year over year decline in total company profits was driven by higher commodity prices and lower volume and mix, to be partially offset by higher net pricing as we take top line pricing while remaining disciplined with our incentive spend. Importantly, Our operations outside of North America were profitable. Global wholesales were down 9%, to conclude with our guidance and reflecting the continued supply chain issues. However, our run rate of vehicle production in North America improved significantly to during the month of March and we ended the quarter with an extremely healthy order bank.

Speaker 4

In fact, in the U. S. Alone, Our order bank is primed to deliver about $17,000,000,000 in revenue. Ford Credit delivered another strong quarter. EBT was $900,000,000 reflecting strong lease residuals and credit loss performance.

Speaker 4

Free cash flow was $600,000,000 negative, more than explained by unfavorable timing differences and working capital deterioration to turn the call over to the operator's comments. Due to the higher inventory levels, which included about 53,000 vehicles on wheels completed but awaiting installation of components This includes our stake in Rivian, which was valued at $5,100,000,000 at the end of the quarter. Our strong balance sheet provides a solid foundation to continue investing in our 4 plus priorities. Now let me briefly touch on business unit performance for the quarter. North America delivered $1,600,000,000 of EBIT with a margin of 7.1%.

Speaker 4

Now this is down year over year as net pricing improvements were more than offset to provide higher commodity costs, higher warranty expense, unfavorable mix and lower volume. The volume and mix impact primarily reflects supply constraints unique to close the full size pickups and large utilities. South America continues to benefit from our global redesign efforts, delivering its to turn the call over to our 3rd consecutive profitable quarter and its highest quarterly EBIT margin in over 10 years. The region continues to focus on scaling its business for growth, to especially pickup trucks and commercial vehicles. In Europe, our operations delivered an EBIT margin of 3% to provide a 9% decline in volumes, the underlying trajectory of our business continues to improve.

Speaker 4

However, the adverse impact of the near term to turn the call over to John. Importantly, we continue to be the number one commercial vehicle brand in Europe. To note that the Transit has an extremely healthy order bank and we recently launched the all electric E Transit in Turkey. Ford Live continues to grow, helping our commercial customers improve vehicle uptime and ultimately their bottom line. And finally, Mustang Mach E is now being sold online in most major markets.

Speaker 4

Europe is building momentum towards a fully electric future, to be expecting to reach 600,000 vehicles by the end of 2026. In China, we posted a modest loss in the quarter. However, our cost to turn the call over to our operator. Thank you, Jim.

Speaker 2

Our first question comes from the line of David.

Speaker 5

Please go ahead. Hi, Jim.

Speaker 4

Good morning, everyone. I'm going to turn the call over to to turn the call over to Mark. Market share improved 20 basis points year over year and the all new Zephyr is off to a fast start. In the Q1, China also continued to make progress towards our electrification strategy. We opened 10 more customer experience centers, now 35 in total and made other investments to modernize our direct to consumer network.

Speaker 4

Our international markets group performed well in the Q1, continuing to be solidly profitable despite supply constraints and suspension of our joint venture operations in Russia. To turn the call over to Bob. The upcoming launch

Speaker 2

of the next generation Ranger remains

Speaker 4

on track. And in March, we unveiled the next generation Ranger Raptor in Everest. And finally, in Mobility, we continue to make steady progress towards scaled commercialization of moving people and moving goods. To In the Q1, we divested our investments in both TransLoc and SPIN, further rationalizing our portfolio with a focus on autonomous development. To now share with you our current thinking about the remainder of 2022.

Speaker 4

For the full year, our guidance is unchanged. We expect to earn between $11,500,000,000 $12,500,000,000 in adjusted EBIT, to extend the call to the operator

Speaker 2

for questions.

Speaker 4

This reflects year over year growth in wholesales of 10% to 15% and assumes that semiconductor availability will improve to turn the call over to our operator for questions. We also assume in our guidance that disruptions in the supply chain and local vehicle manufacturing operations Resulting from the renewed COVID related health concerns and lockdowns in China do not further deteriorate our supply chains. To now relative to adjusted EBIT. On a year over year basis, our range assumes significantly higher profits in North America to provide a brief overview of our financial results and our financial results. We also expect Ford Credit EBT to be strong but lower than 2021 And Mobility and Corporate Other EBIT to be roughly flat.

Speaker 4

Other assumptions factored into our guidance include: to turn the call over to Jim. First, we have a very strong order bank, as Jim mentioned, for our new iconic products, such as Bronco, Bronco Sport, Maverick, to turn the call over to Bob. Thank you, Mark. Thank you, Mark. Thank you.

Speaker 4

Thank you. Thank you. Thank you. Thank you. Thank you.

Speaker 4

2nd, pent up demand beyond our order bank, our continued strong pricing environment, including the benefit of pricing actions taken in the Q1 The interplay though between volume and pricing will remain dynamic. And third, to We expect commodity headwinds of about $4,000,000,000 which we expect to offset by improvements in net pricing and mix. 4th, we anticipate other inflationary pressures to continue impacting a broad range of costs. We are aggressively looking at all opportunities to offset this reality, including aggressively ramping up our efforts on additional cost reductions. And 5th, at Ford Credit, we expect auction values to remain strong as supply constraints persist.

Speaker 4

To provide a brief update on the call.

Speaker 2

However, as I

Speaker 4

mentioned, we anticipate strong but lower EBT reflecting primarily the non recurrence of reserve release, fewer returned off lease vehicles and more normalized credit losses. Our results in the quarter, to turn the call over to our financial performance. Our balance of year outlook and commitment to our medium term targets demonstrate the power of our 4 plus plan to turn the call over to Steve. As we continue to invest aggressively to drive growth and value creation. This includes devoting resources to customer facing technology, connectivity, to take our always on relationships with customers and electrification.

Speaker 4

We are confident the long term payback from these investments will be substantial. So that wraps up our prepared remarks. We'll use the balance of the time to hear your questions and address what's on your mind. And so thank you. Operator, please open the line for questions.

Operator

We'll now begin the question and answer session. To ask a question. To withdraw your question. And our first question will come from Rod Lachey of Wolfe Research. Please go ahead.

Speaker 6

Hi, everybody. Thanks for taking my question. First, I wanted to ask you about inflation. Price versus cost is obviously a pretty big drag here. And I assume that you would expect inflation to stick around for a while.

Speaker 6

I was hoping you might talk a little bit about how that's influencing your to make sure that you're in a position making, your internal messaging. What is in your view going to be the interplay between price and volume as volume and inventory starts to normalize, is there still pricing power after everything you've achieved over the past couple of years? And does this affect your margin targets.

Speaker 3

Hi, Rod. Thank you for your question. Obviously, we're seeing on the commodity side steel, aluminum, copper, lithium, nickel. On the to logistics side, a lot of premium freight. We're seeing pressures on inflation from suppliers.

Speaker 3

So it's really across the board. I'll let John answer the pricing question, but I would say, we really have quite a bit of to take the question and answer session. The to ask you to provide some color on the cost upside as well in the company. I know that's not your question, but that's an opportunity. John?

Speaker 4

Yes. So hi, Rod. From a pricing standpoint, so far we have seen pricing just about offset the inflationary pressures that we've seen. And so we've been aggressive with top line. We've been balanced with the incentives.

Speaker 4

We do expect the commodity inflation, as Jim said, to continue through the year. So the pricing that we've taken reflects that. And so I would say that we've been aggressive so far starting last year from a pricing standpoint. I would also say that the dynamic between the volumes and the pricing is going to remain in flux. And as we go through the rest of this year and volumes improve, we have assumed that In the second half, you would see increased pressure on your incentives, and that's assumed in our guidance.

Speaker 4

I would also say, Rod, that Right now, many of the dealers are transacting near or above MSRP across the industry. So that has to be a compression that's going to happen first on the pricing front, and we're watching that very closely. We've also taken actions where We can improve our pricing by work we've done with our dealers. So one of the things we did in the quarter is to We adjusted our floor plan adjustment to the dealers. In the past, we had paid them 1.5% of MSRP to cover the floor plan, the carrying costs.

Speaker 4

We've adjusted that to about 75 days of the actual cost, set actual cost up to 75 days. So that's been a benefit that's flowing through our pricing as well. So we see it as dynamic. We do agree that as volumes increase, It will be dynamic relative to incentives. We're not Pollyannaish about that.

Speaker 4

We've reflected what we think is appropriate in the second half relative to incentives to adjust for the volume that we see coming in, but we'll also be aggressive on pricing. If commodities keep going up, We'll be aggressive as we can. So I think it's going to be a dynamic play as we go through the rest of the year. I would say though that when we step back and we look at the pricing relative 2020 model year, what we've taken since 2020 model year, we'd have to increase incentives considerably to offset that pricing. On a run rate basis, they'd have to move from I think we're in single digits today, low single digits.

Speaker 4

They'd have to move up into like 16 15%, 16% to offset that pricing. So, and that's back in a time when we had extremely high inventories and we had a very to push through the process and we're not going to go back to that. We're going to be very disciplined with our inventory. Percent of revenue. Yes, as a percent of revenue.

Speaker 4

And so we're working costs, we're working all the angles.

Speaker 6

Thanks for that. And any Color on the outlook for Europe for the rest of this year, just given all of the macro pressures there. It looks You've been posting pretty solid results there recently.

Speaker 4

Yes, we expect those results to continue. We were in Europe hampered by the supply Chain reductions, but it was nice to see that even though we were hit by that, Europe did post a better than expected quarter for us. So we're continuing to do well in commercial vehicles. We launched eTrans, which has been very well received. Mustang Mach E has been very well received as well.

Speaker 4

So we do expect the business in Europe to continue to improve in the second half as the rate and flow of supply improves for them as well.

Speaker 7

Thank you.

Operator

The next question comes from John Murphy of Bank of America Merrill Lynch. Please go

Speaker 8

ahead. Good evening, everybody. I just wanted to ask a question sort of on the growth side, Jim. I mean, the F-one hundred and fifty Lightning orders, it sounds like They're mostly incremental buyers, folks that haven't been Ford or F-one hundred and fifty buyers before. I'm just curious if you think that is just sort of to take a look at the launch of the truck or is this sort of 15% to 20% incremental orders relative to sort of base F-one hundred and fifty, Something you think will stick around, I mean, because obviously that's very powerful potentially to your earnings and you expect either profitability of this truck over time to Have a variable margin that would be similar to the F-one hundred and fifty and to sort of be even a little bit more verbose.

Speaker 8

Do you expect the same kind of thing with the 250, 350 Lightning, We should launch in 2 or 3 years.

Speaker 3

Well, I didn't know we announced that, Well, thank you very much for your question. I'd like to maybe ask Doug to come in here to and talk about the levers we have on the profit side. But so far, it's very clear to us that the Lightning customers are incremental. And as you said, it's early days. We capacitized in the end of the day the facility that we were in is about 80,000 units, to almost double that by the end of next year.

Speaker 3

And I would say at this point, the customer profile is dramatically younger. It's in states like California and New York that we normally don't sell full size trucks. We do have some lots of orders in to

Speaker 2

take questions from the line

Speaker 3

of Alex. It's higher education that we see and what they're interested in is different about the truck. So I think it's very clearly so far incremental. Now when we get into volume production, 150,000 units, That may change. And we'll see that with the order as we order open the order bank again for the next model year this summer.

Speaker 3

Doug, do you want to highlight the opportunities you see maybe on F-one hundred and fifty Lightning, but More generically on our next product?

Speaker 9

Sure. To start with, I'm really excited about what we're building off of in Ford's strength. These are cost bases that I'm drooling over in terms of the future products. But when we talk about EVs specifically, the first thing we have to do is really control the battery materials and the chemistry. They are the single largest, Bill of Materials opportunity, of course.

Speaker 9

But the next is really obsessing over how we use those to take your questions. Energy efficiency is a religion and the team is really stepping up to this. Every single watt of consumption to is now being tracked and optimized. And on the new programs, changes in aerodynamics and drive unit optimization, we're seeing Dozens of miles of improvement in range. That's 100 and even some cases 1,000 of dollars of battery that we can take out.

Speaker 9

Finally, I think really going after a true ground up approach to how we build EVs. They're different to take advantage of that and really change the number of In our next series EV factory, we're going to have on the mainline half the stations that we use today to build So I'm very optimistic with this journey that we have some really good ground to make up on margin.

Speaker 5

To jump in the

Speaker 3

call. I just want to say On the Super Duty, obviously, that's a quarter of profitability as a company globally. And when we look at the customer usage, We just don't feel at this point that an electric solution, is going to be ideal for most of those customers. So our vehicles, plural, will be really focused on light duty and the lower end of super duty for sure, But not 250s, 350s, 450s, that's a whole different ball of wax. They require a lot of payload, Heavy batteries, that doesn't make sense.

Speaker 8

Got it. And then, Sean, sorry, a follow-up on the 53,000 units That our inventory on wheels, is that what we're seeing in this 21% increase to take a look at inventory on the balance sheet from the Q4 to the Q1. And presumably, the cost has not been accounted for at all here. And we'll see those vehicles flush out to the system in the 2nd or Q3 when the chips become available. I'm just trying to understand, John, Lalor, the economics to What's the profitability boost maybe from these vehicles flowing out?

Speaker 8

Could you just kind of explain sort of how you're accounting for this and what

Speaker 4

Yes. So John, that's exactly right. That's what's hitting us from a cash standpoint in the inventory increases is for the most part the vehicles on wheels, the 53,000 units. We have the cost for those in our results, but we have no revenue for them. And as they build out and we complete them in this quarter and into the Q3, we'll start to get the results for that for the bottom line.

Speaker 4

And they were primarily Our more profitable vehicles and it's primarily F Series and Explorer. So there's definitely an opportunity there that will start to roll through the bottom line once we start shipping those And the reason why we built those, John, because the modifications we need to make, we're to be very confident we can do that without compromising quality. But our production is fully subscribed, so we would have lost these units if we hadn't built them to set them aside until the chips are available.

Speaker 8

I'm sorry, John, the costs are recognized in the first quarter results, but obviously the revenue is not. I'm just trying to understand this because it sounds like it might have a big impact in sort of people's understanding of the cadence of earnings through the course of the year.

Speaker 4

No, the profits aren't recognized in the quarter, right? But the costs we backed out like for labor, etcetera, that's been all backed out. That's in inventory.

Speaker 8

Okay, got it. Okay, got it. Okay, thank you very much.

Operator

The next question comes from Colin Langan of Wells Fargo. Please go ahead.

Speaker 10

Great. Thanks for taking my questions. Yes. As you mentioned, EV battery costs have really dramatically increased. Has that changed your EV strategy

Speaker 11

at all? Do you think

Speaker 10

you're going to need to maybe raise the pricing of the light being in the Mach E? And what can you do about it or And maybe switch to different chemistries, roll out more hybrids. How can you address it if raw materials stay at these very high levels for that to

Speaker 3

Thank you for your question. Well, first of all, The demand for EVs right now is extremely robust at Ford. So we have the opportunity, we believe, for pricing. We're not going to get into those details now. But Doug said something very important, Colin, I want to emphasize, which is battery chemistry.

Speaker 3

We believe very strongly at Ford, the chemistry we have really key part of our protection against commodity price increases And frankly, the benefits to the customer. Doug, do you want to add anything?

Speaker 9

No. Ford, a number of years ago started to Ion Park, which is a team of experts really focusing on chemistry. Lithium iron phosphate, of course, to take questions. We know from the industry is something that takes you away from the dependence on nickel that will be a part of our future. And we're also looking chemistries that give us an opportunity to be less dependent on the specific materials that everyone seems to be fighting over in the market.

Speaker 3

So in the short term, we can increase And can you LFP? Yes, sir. Go ahead with your question. Sorry, Colin.

Speaker 5

Yes. I was just going

Speaker 10

to say, you mentioned you're able to do LFP That's in the plan. I mean, how quickly can you switch because nickel is like now. I mean, I'm just kind of wondering how flexible and how quick you could adapt for that That's your target by 2026.

Speaker 3

Yes, we've been working on LFP for quite some time. So let's just leave it at that. What I mean by that is engineering LFP solutions in our 1st generation of products, something that We see it as a big opportunity and to move quickly.

Speaker 10

Got it. And just second question, you mentioned in your comments about warranty costs and that was going to be a big driver of margins. It does look like it was up year over year. Is that just sort of a temporary blip in the quarter or is there a structural issue that we're going to see some higher elevated warranty through the rest of the year?

Speaker 12

Yes. Colin, thanks for the question. When we had our Capital Markets Day event, We signaled that we're targeting $1,000,000,000 to $2,000,000,000 of warranty opportunity by the mid decade. In 2021, We delivered $1,400,000,000 of that, so roughly 70% of that total opportunity. When you look at Q1 of this year, we had a deterioration.

Speaker 12

Some of that was just a non repeat of items that we recognized in 'twenty one that didn't flow through. This is still a huge opportunity for us. It's the number one priority for us as for my team as a to take a look at the Q1 of 2019. Our next question comes from the line of John

Speaker 2

to take questions. More importantly, because of the impact on our customers.

Speaker 12

So this is something that we're really focused on. And as Jim and others highlighted earlier, It's a huge opportunity for us to eliminate waste within the company and offset some of those commodity and headwind costs that we discussed earlier.

Speaker 10

Got it. Thanks for taking my question.

Operator

The next question comes from Adam Jonas of Morgan Stanley. Please go ahead.

Speaker 7

Hey, everybody. Is Lisa Drake on the call?

Speaker 4

No.

Speaker 3

No, but Doug's here today. Okay. I'll pass it on to her.

Speaker 7

We got great people on the call. We're good. First, I noted the Lilac Solutions Partnership, that's a really, really good call here and a lot of really, really great things. So, Brett, great job there. If you could imagine that the to higher metal and mining industry were listening to this call right now and they really should be.

Speaker 7

What would your message

Speaker 3

The message would be We need to work together and find good deals. That's what the message would be. That we know what we're looking for. We're focused on lithium and nickel. Those 2, We want to do smart deals that work for them and for us.

Speaker 3

And number 2, we want to move some of the processing to North America. And we're willing to invest capital to move the processing precursor work from overseas to North America For a variety of reasons. Doug, would you edit that list?

Speaker 9

No, I think that's the right list.

Speaker 7

The right list. And just my follow-up for credit side, You guys are massive, extraordinarily well managed portfolio in a market that at least historically You can react to oil shocks and economic pressures, of course, over time, and we're seeing some pretty crazy changes in the market. Just for the record, any sign of pressure in the portfolio in terms of delinquency, Loan losses, basically the strength of the consumer that you so very credibly to comment on as an economic indicator for this audience. Thanks.

Speaker 13

Hey, Adam. It's Marion Harris here. The short answer is no. We're seeing strength in delinquencies. They're up marginally versus last year, but still well below anything we've seen.

Speaker 13

And a lot of that's on the back of strong to use car values, which we expect to remain strong for some period of time. And even getting into the gas price piece of this, one of the things we've been looking at is whether or not there's a to take a look at the change in auction values by segment and we're not seeing any differences in prices or price movements to ask questions for large SUVs versus smaller sedans. So the trends continue and we still feel very good about the credit business.

Operator

The next question comes from Dan Levy of Credit Suisse. Please go ahead.

Speaker 11

To Hi, good evening. Thank you for taking the question. First question is just on the guidance. We know you're maintaining the guide $11,500,000,000 to $12,500,000,000 but you've also said you're guiding to now $2,000,000,000 to $2,500,000,000 of higher raw math. We know Europe is a choppier environment, China is a choppier environment.

Speaker 11

And then there is also other inflationary pressures That aren't in that raw mat guide. So I just want to understand what is the full set of offset to you've talked about price, but maybe you could just talk how that compares to maybe other cost offsets to provide a question and answer session that will allow you to maintain your guide

Speaker 4

despite those incremental headwinds. Yes, Dan, thanks. So price is the main offset there for the full year pricing offsetting the inflationary pressures that we're seeing. We are being very aggressive in to ramping up additional cost efforts because we know that this is not going to We don't believe that the pressure on cost due to inflationary pressures is going to ease anytime soon. So we need to find more efficiencies.

Speaker 4

We need to improve productivity. And Jim and the team and we are working very hard on that. It's a priority for us. So the other thing that we have is to take questions. In the second half of the year, we do have volumes improving based on the better availability of Sunrise as we see that through the system.

Speaker 4

So That's another big driver for us in the year, and then we'll see that in the second half over the first half as that comes online. So Al, do you want to talk a little bit about how you're seeing that and what we've been doing to manage that?

Speaker 12

Yes. Thanks, John. So as John mentioned in his remarks, in March, we had the highest production run rate that we've seen frankly in the last couple of quarters. That's the result of a lot of hard work to conclude with all of our suppliers at every level of the value chain to break constraints, ensure that we're getting our fare allocation as well as expediting freight to pull ahead some of the available supply. In parallel, the design actions that we've taken over the past year to design our way out of some of these constraints are coming online.

Speaker 12

And if you guys reflect on last year, many of our Wafer and chip suppliers started implementing capacity actions and those are also coming on in the back end of the year. So That's what's giving us the increased confidence around the guidance that John highlighted.

Speaker 4

And the other thing I would add is that The demand, as Jim said earlier, is very strong for our new products. And that's encouraging for us. We just can't build enough of them. And we see that demand continuing.

Speaker 11

And the mix assumption within this?

Speaker 4

The mix assumption is that we'll revert back to a normal run rate mix that we would expect to see. We were disproportionately hit in the Q1 by a to add a commodity module and Hal can talk more about that. He's better to talk about it than I am, than me, than I can. And the team has worked through that. So we believe we have that to resolve, so we should see a more normal run rate of our mix as we move forward.

Speaker 2

Kyle, do

Speaker 3

you want to comment on that Specific commodity because I think it is really material.

Speaker 12

Yes. So we had a wiper module that was deployed on our to take questions. Most profitable vehicle lines, as John mentioned, are large pickup trucks and utilities in North America. So We had limited ability to do any mix management and flex with other lower profit vehicle lines. That issue has been resolved.

Speaker 12

We've designed our way out of it. And again, we have a line of sight to not only support the back half of the year production, but also to address some of the vehicle on wheels with that commodity.

Speaker 11

Great. And then My second question is, just as we think about the costs that are coming online, I think you've discussed in the past to really in your reorg

Speaker 1

that blue is going to

Speaker 11

be what fund the model is. So in a good to market it's very easy to see how incremental profits from the core combustion business are funding your EV growth. But now that we have more to take your questions. Maybe you can give us a sense how you're looking at your growth investments. EV, I assume you're going to invest in that regardless of what the underlying market environment is, but maybe you can give us a sense of Are there other growth investments that are maybe more discretionary that you can if you need to pull back on to ask questions for the question and answer

Speaker 3

session. Our opportunity is really around our cost in our Blue business. That's how we look at it. In terms of investing, we need to invest in a fully networked advanced electrical architecture. We need to advance We need to invest in level 2 and level 3 autonomy.

Speaker 3

We need to invest in a new portfolio and changing our industrial system over to these electric digital products. To invest in our OS software that supports all of that. And we need we believe very strongly we need to invest in level 4 autonomy. So At this point in time, I don't personally see any discretionary our Ford Plus plan is so specific about where to invest That at this point in time, our real work that we need to do is to get after these inefficiencies and improve the productivity of our base to take your questions. That's really where we're focused.

Speaker 3

And of course, it's implied that as a management team, we need to make these investments as efficiently as

Speaker 11

That's helpful. Thank you.

Operator

The next question comes from Mark Delaney of Goldman Sachs. Please go ahead.

Speaker 5

Yes, good afternoon and thank you very much for taking the questions. The first is on the new structure. It's been About 2 months now since Ford announced the split into the different segments, including Ford Blue and Model E. I'm hoping to better understand how employee reception has to ask Ben and for Doug Field, perhaps specifically, maybe you can talk about what it's meant for your ability to get the right engineering talent and are there any anecdotes or data points you can share?

Speaker 3

I think reception has been terrific. We worked hard on this and we were prepared. We know we knew kind of What we needed to communicate to the employees and why this is necessary and why it makes sense. So I think the reception has been good. The proof in the pudding is going to be how this to execute and we're that's why I wanted to give an update actually in my comments on what we've done since March 2nd and so a lot has changed.

Speaker 3

Doug, over to you.

Speaker 9

Thanks. Yes, we did think a lot about this and I had a great partner in how to to figure out how we were going to take best advantage of Ford's deep capabilities that I haven't had access to in any of my prior roles. So, the organization is set up where Ford Model E can't and doesn't build cars by themselves. To provide product division interdependency that really helps the teamwork, I think. As far as attracting talent, I've been Really delighted and surprised by the kind of talent that we can attract to take a question from tech.

Speaker 9

I think there's a certain amount of fatigue in the tech world and a lot of mature products out there. The opportunity to work on high technology, but do it in a brand that is so iconic in the United States to expand in something that is so such a rich product like a vehicle is really attracting some great people. Finally, I think from a talent perspective, Ford Model E is also helping us really dig into the internal team And find great people who can step up, take on different kinds of roles, be put in positions of authority and really help to drive us forward. There are great people here.

Speaker 5

That's really helpful. My second question was on the volume outlook for 10% to 15% to take your questions. Wholesale growth, which the company has maintained, even though we've had unfortunately the war and also the new COVID restrictions pop up in China. So I'm hoping to better understand how Ford is still managing to that 10% to 15% growth and to what extent is the company taking incremental actions to find different Suppliers that perhaps you hadn't been expecting to have to do. And is it more that you're doing those sorts of things to still do 10% to 15% growth?

Speaker 5

Or is it to hear more about Ford suppliers not being overly impacted by these recent events. Thank you.

Speaker 3

Thank you. It really comes down to The commodities, semiconductor related commodities have been hamstringing us. We obviously are spending a lot of money on premium freight and other things to work around, COVID escalations in China, but really The second half of the year's production increase relates to those. So Hal, I don't know if you want to add anything specifically.

Speaker 12

Yes, Mark. So the 2 hotspots that you highlighted, Ukraine, Russia, I think we've done a really good job of managing that and minimizing any to large significant production risk, mostly because of our global sourcing patterns and we were able to get parts from other areas of the world. In terms of China, we're scanning the Shanghai area. We have about 50 Tier 1 suppliers there. Our focus is on our profit pillar to vehicles and as Jim mentioned, really leveraging expedited freight.

Speaker 12

We've secured fast Maritime shipment as well as airlift capacity to protect our suppliers. And then they're just starting to have a white list process to allow Supplies to resume production, so we're working with our teams on the ground in China to help those suppliers get partially operational. So, those actions we think will really help us. And as Jim mentioned, what's going to be gating us is to Semiconductors, a lot of these constraints are nested within that. So it comes down to the work that we're doing on the semiconductor supply.

Operator

Next question comes from Ryan Brinkman of JPMorgan. Please go ahead.

Speaker 6

Hi. Thanks for taking my question. As we near the, I think, 180 day lockup expiry on your investment in Rivian, how are you thinking about to ask questions available to you in terms of this investment going forward. Are you maybe more inclined to retain some or all of the stake given to take the recent decline in Rivian shares. And if you were to monetize it, how are you thinking about the use of any potential proceeds?

Speaker 6

Could you to maybe use them to accelerate your own electrification efforts or you may be already devoting all the resources necessary there and so would perhaps look to prioritize other opportunities. I don't know, maybe shareholder friendly actions. How are you thinking about these options?

Speaker 4

Yes. Unfortunately, at this point, we're not going to comment on Rivian.

Speaker 6

Okay, great. Let me try one on Argo then. I recall you saying on an earlier call that you're supportive of Argo AI's potential tapping of public equity. Is there any update you can provide there in terms of to know where Argo may be with that process or just what is the latest you're thinking about in terms of their overall strategy and trajectory? What has been maybe the early result of some of your trials of robo taxis on the Lyft network or in various cities beyond Miami.

Speaker 3

Thank you. Well, first of all, Argo and Brian continue to make great progress technically on the SDS for Level 4 autonomy. We're very happy With the technical progress. Number 2, we really see maybe different than others, Level 2, Level 3 and Level 4 as 2 distinct products. Yes, Argo could help us With our semi autonomous capability, but we feel like that would be a big distraction for them, which we do not want them distracted at all.

Speaker 3

And number 3, it's taking time, and this is expensive stuff. And so from our standpoint, getting access to the capital markets is very critical to give us the flexibility to continue to fund this for many years to come. One thing I would say is we're very focused on partners that would be aligned strategically with Argo, use cases that would be very material in the deployment of Argo's technology. And we're getting more and more interested as a company, maybe a bit of a strategic shift to take a look at our commercial vehicle business, and our customers feel they're getting more and more interested In Middle Mile specifically. I think that's a material update for Argo and hopefully that helps you.

Speaker 14

Yes, very helpful. Thank you.

Operator

The next question comes Joseph Spak of RBC Capital Markets. Please go ahead.

Speaker 15

Thanks so much. A couple of questions on to Cash, I noticed CapEx is now $7,000,000,000 was I think it was $7,000,000,000 to $8,000,000,000 before free cash flow is the same, EBIT still the same. So is the delta to maintain the free cash flow working capital. And then while we're on cash, it looks like redesigned cash is now $1,000,000,000 lower this year versus prior. And I think even the total amount you expect to spend on that is lower now.

Speaker 15

So can you just talk about what's going on there?

Speaker 4

Sure. On the redesign, there's efficiencies that we're seeing as we work through the redesign Across each of the markets that we've restructured. And so you're starting to see that show up. There's also some timing differences in there as well, to The work we're doing is, let's say, taking a bit longer to get to a solution or a final position to take your questions. And we also announced the fact that we will be selling our Cryovilla to take the facility to Auto San and that's going to allow to bring cash into that restructuring that we have there as well So that's the short of it from that standpoint.

Speaker 4

The other point, I think the question was around, remind me what it

Speaker 15

was The lower CapEx versus prior.

Speaker 2

Yes,

Speaker 15

Right. So the lower CapEx versus prior

Speaker 2

Yes.

Speaker 4

So the lower CapEx, that reflects No change in our intended investment in electrification or our fully networked architecture, etcetera. It's just timing differences to in this year relative to what we saw at the beginning of the year. So you can still expect us to continually invest. We have the capital to do that with balance sheet strong. So, it doesn't reflect anything on where we see the business heading.

Speaker 4

It's just timing differences for the most part.

Speaker 15

And then just the thought that the free cash flow remaining the same is a little bit more of a working capital drag then?

Speaker 4

Yes, it's more of a working capital. Yes, absolutely.

Speaker 15

Okay. And then I think you sort of made it quite clear The primary driver here of covering some of the higher cost is more advantageous pricing. Can you just parse some of the forward credit commentary a little bit? Because I think before you said it was going to be About $1,500,000,000 lower and now there's some language that says strong but lower. So is some of that also coming from some of that Makeup, if you will, also coming from Ford Credit.

Speaker 13

Yes, Joe, it's Mary. And let me I'll just cover The guidance piece on for credit, we said that the profits will be strong, but lower. And that's reflected in the fact that we had Larger reserve releases in 2021 than we would expect in 2022. In addition to that, we had a lot more supplemental depreciation releases in 2021 than we would in 2022 related to the lease portfolio.

Speaker 15

Did your expectation change versus what you communicated 3 months ago there?

Speaker 3

No. This year?

Speaker 12

No.

Speaker 15

Okay. Thank you.

Operator

The next question comes from Emmanuel Rosner of Deutsche Bank. Please go ahead. To

Speaker 14

Thank you very much. So John, last quarter you provided a very helpful walk towards the 2022 to Adjusted EBIT with some of the largest puts and takes. And so I was hoping you could maybe update some of the buckets here. So obviously commodities was expected to be $1,500,000,000 to $2,000,000,000 drag. Now it's $4,000,000,000 What is now The market factors versus the $6,000,000,000 from last time, 4th credit was going to be $1,500,000,000 drag.

Speaker 14

I seem to understand from the last question that this hasn't changed. Any other changes besides market factors? And can you just quantify

Speaker 4

Yes. So I think what you see there is exactly that. There's no change to Ford Credit. We are seeing higher inflationary pressures. We are seeing higher to top line pricing that's coming through, but we're also working on cost offsets as well.

Speaker 4

So I think it largely remains What we had talked about last time, we're just seeing higher inflationary pressures and higher pricing flow through.

Speaker 14

Okay. So versus the $5,500,000 to $6,500,000 in volume mix price benefit from last time, we could Basically add $2,000,000,000 to $2,500,000,000 to that, which is the pricing offset, the cost offset?

Speaker 4

No, I don't think that it's as high as $2,500,000,000 Emmanuel. It's there's growth in there, but it's not as high as that. I think that when you look at the walk relative to what we had provided last time, Most of the inflationary pressures that we're seeing are being offset by a a combination of additional cost reductions, pricing and mix that's flowing through, but it's not as large as that as what you had just

Speaker 14

Okay. On the cost piece of it, the Are you dialing back or sort of like prioritizing some of the modernization investments? Or is that largely left as is for this year?

Speaker 3

No, I mean our opportunity absolutely not. I tried to make that I'll say it twice. We are really excited about our growth opportunity in EVs. We have electric architectures to invest in, software OS. We have partial autonomy to invest in, full autonomy to invest in.

Speaker 3

That's all part of our 4 plus plan. It's essential to our to move to always on. We obviously have lots of investments in building out our service portfolio for Ford Pro. We're not holding back on any of that. The cost drivers that we see are things like obviously manufacturing as we simplify our ICE lineup and to As Doug said, really completely redesign our manufacturing process for EV.

Speaker 3

We have opportunity in sales and marketing and sales, opportunity in engineering, as we simplify our lineup and of course warranty in other areas. So I think we're we know exactly what we need to do.

Speaker 14

Understood. Thank you.

Operator

Our last question comes from Itay Michaeli of Citi. Please go ahead.

Speaker 14

Great. Thanks. Good evening, everybody. Just two quick ones for me and thanks for squeezing me in. First, you did talk about the cadence of earnings before, but just hoping we could revisit it in terms of kind of how to think about the adjusted EBIT for the to ask the question and answer session.

Speaker 14

And the second more housekeeping question is whether you can provide what

Speaker 4

Yes. I mean, we're not going to parse out to The guidance is 11.5% to 12.5%. It's a dynamic environment. We're working to offset all the headwinds to maintain the guidance, but as far as parsing out where we sit within the guidance of 11.5% to 12.5%.

Speaker 13

And then on the dividends, the dividends are a function of overall profits and balance sheet size and leverage. And in this case, you heard the guidance on profits and then for the balance sheet, we don't expect much growth this year just given where we are on vehicle So the majority of profits, we don't have a specific number.

Speaker 3

Just to make it really clear on the overall company's automotive performance, financial performance. The second half is very critical for us. It's just a very critical time for the company. We have the opportunity to build in volumes. We haven't to take a look at the Q1 and we have a lot of great fresh products, a lot of costs coming in the business, but second half is really critical for the company.

Speaker 14

That's all very helpful. Thank you.

Operator

This concludes the Ford Motor Company First Quarter 2022 Earnings to conference call. Thank you for your participation. You may now disconnect.

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Ford Motor Q1 2022
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